Quick Tips for Buying (And Profiting From) Los Angeles Investment Real Estate
How would you like to give yourself a 10% pay raise annually? 20%? All while controlling a saleable asset that’s historically been proven to be recession proof, and a hedge against inflation? It may not be as hard as you think! Let me show you how this works!
Some quick definitions:
- Cash Flow: Total Monthly Income – Total Debt Service. ($1000 per month rent – $600 mortgage and $200 Utilities = $200 per month Cash Flow. Multiply by 12 for Yearly Cash Flow.)
- Cash-on-Cash Return: Yearly Cash Flow/Total Cash Investment. (Property Cash Flows $3500 for the year divided by the $10,000 cash you have invested = 35% Cash-on-Cash Return!)
- Capitalization Rate (Cap Rate): The Rate at which an investment property earns money. It is calculated by taking your Net Operating Income (NOI) divided by the Purchase Price. Example: A Property is purchased for $100,000. This property brings in $1200 per month in rent ($14,400 for the year.) It costs $325 per month to maintain, or $3900 for the year. The NOI is $875 ($1200 – $325) per month, or $10,500 for the year. $10,500/$100,000 = 10.5% Cap Rate.
Investment Property Buying Basics
Let’s say you find a 3 Bedroom, 2 Bathroom Single Family Residential property (the absolute most desirable!) that you would like to buy, and rent out. You buy this property for $500,000 and it rents for $3,000 per month. If you pay cash for this property, you’re looking at a 7.2% Cash-on-Cash Return! Compare this to the 1-2% (maybe?) interest you’re getting in your savings account! Of course, you will realize a much higher Cash-on-Cash Return, but less Cash Flow if you finance the property – it all depends on your available cash and ability to obtain financing.
How about Cap Rate? Our example property is renting for $3,000 per month, and costs $200 per month to maintain. Our NOI is $2,800 per month x 12 months = $33,600. $33,600/$500,000 = 6.7% Cap Rate. Overall, this is a very good investment.
Lastly, when crunching the numbers for an investment property, buy only for Cash Flow – Appreciation is a bonus. That’s not to say there won’t be Appreciation. From 2000-2010 (which includes the worst Real Estate Bubble this country has ever seen) the median prices have actually gone up!
Investment Property Tips
- Look for cap rates over 5% – preferably closer to 10%
- Keep in mind that there will be ongoing emergency and annual maintenance, so build in a little bit of padding as you calculate your take-home pay
- The more units in your investment property, the better. If you own a single family home, and your tenants move out, you could be without rental income for months before it’s filled again. In a multi-family complex, you’ll likely continue to bring in income, even if one unit is vacant
The Long Term Bonus
We’ve crunched some numbers based on “today’s” expected numbers. Statistically, rent rises roughly 5% each year, which means that the $3,000/mo you’re receiving today will be closer to $3,800/mo 10 years from now. If you paid cash or locked in a 30-year mortgage, your holding costs will remain the same. This means you’ll be making more and more money each year!
At the same time, your property will probably be worth more. Perhaps you can refinance to reduce your monthly payments or take money out and buy another investment property! Perhaps you can pay off your property quicker, and drastically improve your cash-on-cash return!
If you have any other questions, or would like to get a list of potential investment properties available in your area, contact me through this website or call me at (310)926-2386.
This article was originally published in a slightly different format here.