Buying A House In South LA, Part 5. Renting It Out.
It was never in my consideration to manage and rent my South LA house on my own because I'm not sure I know how to properly advertise the house, conduct showings and credit checks, and evaluate who will, or will not be a good tenant. Mainly though, I don't know enough about handyman work to handle repairs and complaints. I found a property manager through the recommendation of my tax accountant who happens to be a real estate investor as well. He co-owns a Class B office building with a property management company, Ray Roberts Realty, and both businesses are housed in the same building. Ray Roberts started the property management business, but his son, Mark Roberts is now fully involved in the family business. I hired Mark as my property manager. He charges me $175 per month, which seems a bit steep, but he said that he will give me more of a discount if I use Ray Roberts Realty for other property management needs. Not one to haggle, I agreed.
I listened to my contractor, Carmen, who has a friend renting a one bedroom condo in the same neighborhood as my newly renovated house, for $1400 per month. He thinks that my two bedroom, one bath house with a yard and a large garage should be able to fetch $2000 per month. I gave the information to Mark. He thought $2000 might be a bit high for South LA, but he said he would advertise a rent of $1950 and see what happens. After two weeks on the market, Mark informs me that we might have to lower the asking rent because he is not getting any quality renters wanting to see the property. He conducted several showings, but many of the potential renters were on Section 8 rental subsidy, some have no steady income, some have horrible credit, eviction records, and some make demands like having large dogs on the property that he thought would disturb the neighbors. We agreed to lower the asking rent to $1850, but after two weeks, still no qualified renters.
Even though I was not in a hurry, Mark was getting concerned about the fact that the South LA neighborhood may still have some stigma as being unsafe and renters with good track records don't want to rent out there. He said that we should lower the asking rent a bit more to attract quality renters. So we lowered asking rent to $1750. Soon after, we signed a one year contract with a good renter. It's a youngish couple who have a painting business. They could use the garage for storage. Their credit background was solid, and they seem to have a steady income from their business.
I have rented out the house to the new tenants for a year now, with no particular issues and a steady check that comes in every month like clockwork. After one year of this tenant, I came to appreciate how important it is to find the right tenants. A bad tenant might take several months to evict with no rent collection in the mean time. A rental price that is too high may drive the tenants away after a year when they have a chance to move, and I would have to incur costs associated with fixing up the place for the next tenant, vacancy and other money losing situations. So, overall, I am quite satisfied with how the rental is going so far.
To evaluate how the property is doing, I downloaded a calculator App from the Android Playstore called DealCheck which helps me plug in the numbers and calculates the CAP rate, ROI rate, Gross Rent Multiplier, all real estate lingo that supposedly evaluates that strength of the rental real estate investment. I researched a little bit on all the terminology and what they mean even though I can't say I understand all the nuances. But here are the results:
Most articles about real estate investment I've read declare that generally, a cap rate of 4% to 10% per year is a reasonable range to earn for your investment property. (Nolo.com). By this calculation, my 6.4% cap rate seems to make this property a pretty good investment. However, other articles set forth a 1% rule, whereby a $100,000 property should generate $1000 of rent, and a $200,000 property should generate $2000 of rent, and so on (affordanthing.com). By this calculation, my $218,000 property generating only $1750 in rent is only .8%, therefore not a great investment, although I seriously doubt that anything in Los Angeles' extremely expensive real estate market can realistically meet the 1% rule.
Conclusion? While I believe that my South LA real estate purchase doesn't reach my rent expections, the fact that it is generating a cash flow, and with the recent LA County Tax Collector's valuation of the property at $300,000 and the real estate website Zillow valuing the property at $380,000 indicating a significant appreciation of the property value already, I think, with my fingers crossed, that the investment is pretty decent.
If you have any insights on this investment, please feel free to comment below.
I listened to my contractor, Carmen, who has a friend renting a one bedroom condo in the same neighborhood as my newly renovated house, for $1400 per month. He thinks that my two bedroom, one bath house with a yard and a large garage should be able to fetch $2000 per month. I gave the information to Mark. He thought $2000 might be a bit high for South LA, but he said he would advertise a rent of $1950 and see what happens. After two weeks on the market, Mark informs me that we might have to lower the asking rent because he is not getting any quality renters wanting to see the property. He conducted several showings, but many of the potential renters were on Section 8 rental subsidy, some have no steady income, some have horrible credit, eviction records, and some make demands like having large dogs on the property that he thought would disturb the neighbors. We agreed to lower the asking rent to $1850, but after two weeks, still no qualified renters.
Even though I was not in a hurry, Mark was getting concerned about the fact that the South LA neighborhood may still have some stigma as being unsafe and renters with good track records don't want to rent out there. He said that we should lower the asking rent a bit more to attract quality renters. So we lowered asking rent to $1750. Soon after, we signed a one year contract with a good renter. It's a youngish couple who have a painting business. They could use the garage for storage. Their credit background was solid, and they seem to have a steady income from their business.I have rented out the house to the new tenants for a year now, with no particular issues and a steady check that comes in every month like clockwork. After one year of this tenant, I came to appreciate how important it is to find the right tenants. A bad tenant might take several months to evict with no rent collection in the mean time. A rental price that is too high may drive the tenants away after a year when they have a chance to move, and I would have to incur costs associated with fixing up the place for the next tenant, vacancy and other money losing situations. So, overall, I am quite satisfied with how the rental is going so far.
To evaluate how the property is doing, I downloaded a calculator App from the Android Playstore called DealCheck which helps me plug in the numbers and calculates the CAP rate, ROI rate, Gross Rent Multiplier, all real estate lingo that supposedly evaluates that strength of the rental real estate investment. I researched a little bit on all the terminology and what they mean even though I can't say I understand all the nuances. But here are the results:
| South LA Property Zip Code 90043 | ||
| Purchase Price | $200,000.00 | |
| Purchase Cost | $3,000.00 | |
| Rehab cost | $15,000.00 | |
| Total cost | $218,000.00 | |
| Gross Rent | $1,750.00 | |
| Operating Expense | $509.00 | |
| Net Operating Income NOI | $1,067.00 | |
| Cash Flow | $1,067.00 | |
| Evaluating Rental Using DealCheck App | ||
| Cap Rate | 6.40% | CAP=Annual NOI/Purchase Price |
| Cash on Cash | 5.00% | COC=Annual Cash Flow/Total Invested Cash |
| Return on Investment | 39.10% | ROI=All Cash Flows + Total Equity-Selling Cost -Total Invested Cash / Total Invested Cash |
| Rent to Value | 0.90% | |
| Gross Rent Multiplier | 9.50% | GRM |
Most articles about real estate investment I've read declare that generally, a cap rate of 4% to 10% per year is a reasonable range to earn for your investment property. (Nolo.com). By this calculation, my 6.4% cap rate seems to make this property a pretty good investment. However, other articles set forth a 1% rule, whereby a $100,000 property should generate $1000 of rent, and a $200,000 property should generate $2000 of rent, and so on (affordanthing.com). By this calculation, my $218,000 property generating only $1750 in rent is only .8%, therefore not a great investment, although I seriously doubt that anything in Los Angeles' extremely expensive real estate market can realistically meet the 1% rule.
Conclusion? While I believe that my South LA real estate purchase doesn't reach my rent expections, the fact that it is generating a cash flow, and with the recent LA County Tax Collector's valuation of the property at $300,000 and the real estate website Zillow valuing the property at $380,000 indicating a significant appreciation of the property value already, I think, with my fingers crossed, that the investment is pretty decent.
If you have any insights on this investment, please feel free to comment below.
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