Tips for buying multi-family in Los Angeles.
Photo Credit: Unsplash
Investing in multifamily property can be a lucrative option for those looking to diversify their investment portfolios. Within Los Angeles, multifamily housing is highly sought-after, and with a high rate of newly constructed apartments, the multifamily housing scene is only increasing in potential. In fact, from 2013 to 2022, over 19,000 new apartment units were built downtown. If you are hoping to invest in multifamily housing in L.A., you must be aware of some key factors before getting started.
Multifamily properties come with a host of benefits, such as a steady monthly income, tax breaks, and a high rate of return on your investment. They can be rented, owned, made into investment pieces, and more. Plus, with many buyers shying away from homeownership due to soaring real estate prices, the demand for rental units in the city remains high.
Below is a snapshot of some of the aspects of buying multifamily property in Los Angeles.
Los Angeles is a market divided. In fact, some say as much as 96% of Los Angeles’ apartment buildings have fewer than 50 units. That means much of the area is devoted to smaller, multifamily properties dedicated to the growing demand for rentals. That demand is growing thanks to the increasing impossibility of single-family housing, which motivates many people to turn to renting instead. Recently, the demand from investors to move on multifamily properties has grown exponentially in the Southern California area, compelling many to consider multifamily as not just a viable option but a great one. This option can be increasingly lucrative, feasible, and simpler than headline-grabbing single-family home sales.
With that said, if you are planning to purchase multifamily property in Los Angeles, it’s essential that you are aware of legislation that will affect how you manage it.
Los Angeles’ RSO applies to rental properties built on or before October 1, 1978, including condos, apartments, townhouses, duplexes, hotel or motel rooms, and accessory dwelling units. Under the RSO, a landlord may increase rent to the market rate if the tenant moves out or is evicted for lease violation, per city attorney order, for failure to comply with a Tenant Habitability Plan, or for non-payment.
Assembly Bill 1482 attempts to mitigate the increasing rent throughout the state and generate affordable housing. Under the bill, residential real property owners are limited to a 5% rent increase per year plus the inflation rate, or 10% (whichever is lower). However, property built in the last 15 years is exempt from the rent cap. The bill applies to some units which are not already subject to the RSO.
Furthermore, landlords are prohibited from evicting a tenant without just cause if they have lived in a unit for over one year. “Just cause” includes nonpayment; nuisance, waste, or criminal activity; failure to sign a lease renewal; refusal to allow landlord to enter the unit; breach of contract; or if the landlord plans to renovate or is going out of business.
The renter eviction protections, which were put in place during the pandemic, will end on January 31, 2023. This means tenants who missed paying rent between March 1, 2020 and September 30, 2021 will have until August 1, 2023 to pay back their rent. Tenants who missed payments between October 1, 2021 and February 1, 2023 will have until February 1, 2024 to repay them. In addition, the existing rent freeze will end after January 31, 2024, meaning that landlords can once more increase rent on rent-controlled apartments starting February 2024.
California’s Proposition 13 ensures that the tax on a piece of property cannot be increased in leaps and bounds. The annual real estate tax rate increase on a piece of property is limited to 1% of its assessed value, and the value itself can only increase by a maximum of 2% per year unless the property has changed hands. This legislation keeps tax rates reasonable and relatively stable, which is good news for property owners.
Sponsored by United to House L.A., the “Mansion Tax” measure aims to raise funds for more affordable housing by imposing an increased transfer tax on high-value real property. The measure calls for a 4% Documentary Transfer Tax on sales of over $5 million and 5.5% on those exceeding $10 million.
Investors of multifamily property in L.A. often turn to the value-add strategy to improve their financial position. At its core, this means that when a tenant vacates their apartment, the owner can then rent out the apartment for market value.
For example, if a tenant had been living in an apartment for a decade and paying $900, once that tenant vacates, the unit can be listed for market rent. In this scenario, the owner could start renting the property for the current market value (i.e., $1,800), effectively increasing the value of the building and improving the property owner’s cash flow each month.
Los Angeles is a highly sought-after locale for real estate seekers across the country and worldwide, with many of them searching for a life of adventure and excitement among gorgeous scenery, fantastic moderate weather, access to the beach, entertainment and nightlife, and a dream job in technology or entertainment. For all these reasons and more, buyers of multi-family properties can rest assured that they are investing in a real estate landscape that forever promises appeal and value.
Within Los Angeles, the unemployment rate has steadily decreased over the past 10 years, from 11.1% in January 2012 to 4.0% as of September 2022. Los Angeles is a haven for young professionals and graduates seeking new jobs in the city, with major occupational groups like management; financial operations; legal services; educational instruction; arts, entertainment, sports, and media; healthcare; computer and information science; and sales being some of the main drivers. For example, management positions account for 7.2% of the L.A. workforce and pay 10% more than in the rest of the country on average. Arts, entertainment, sports, and media comprises 2.8% of the workforce and pays 37% more than in the rest of the U.S., while educational instruction pays 24% more. Legal professions also pay 22% higher in L.A.
Young professionals in these high-paying positions often seek out multi-family housing thanks to its convenience, amenities, and opportunities to save on housing expenses. According to the Orange County Register, Los Angeles is the 5th most expensive city for renting in the U.S., with an average rental cost of $3,229 per month. However, compare that with the average monthly mortgage of $4,546 for a home, and it’s clear why renting is often a popular option. Plus, with a predominant lack of available rental units and a vacancy rate of only 2%, housing is consistently in high demand and short supply within the city.
If you’re interested in learning more about diversifying your investment portfolio by purchasing multifamily property in Los Angeles, reach out to Henry Garcia for top-notch guidance you can trust.
Over the last 23 years, Henry Garcia has sold over 1 billion dollars in real estate. Henry has been able to build trust, rapport and a track record with many of LA's largest apartment owners. He's helped Sellers get top dollar for their properties. He's also helped Buyers find value add and off market opportunities throughout his career.