There is a strategy in the “income property” game that is becoming very popular with a number of investors out there. It is particularly good, especially if one is a “40-something,” or younger. It goes like this:
Find an income property which scores high in the “charm and character” category and the “location” category, especially if the location hasn’t yet been fully discovered but is very much on the rise. Some examples would be Boyle Heights, Lincoln Heights and others that are a bit east of Silver Lake and Echo Park, yet very close to downtown.
It may not be cash flowing very nicely right now due to having long-term tenants in a rent-control location who are paying well below market. But, as long as it is not leaving you negative cash flow every month, and is a location and a property that can fetch substantially higher rents, it could be a very good buy. Consider it an investment into the future, but a very, very worthwhile one. Let’s use the actual numbers of this specific Lincoln Heights property to illustrate this strategy:
Buy the property for $850K. It is currently getting about $4800/mo in income, which is just about what your monthly expenses will be including mortgage, property tax, insurance, water, trash and maintenance set-asides. The current market rent for this property is $1150/mo per unit. Multiply that by the number of units (7) and you have a little over $8000/mo. So now, all you have to do is: (a) increase the rents by 3% every year, as is your legal right, and/or (b) keep an eye out for any tenants who you may be able to relocate in any one of a number of ways. Once that unit is vacated, clean it up, as needed, and then get a tenant in there at current market rent ($1150/mo.) Before you know it, you have a property that is giving you great return in a very secure, positive location. In this particular example, you are looking at an eventual cash on cash return of approximately $3280/mo or $39,360 per year. Even allowing for additional capital outlay of, say, $50,000 over time for relocation fees and/or upgrades, that still puts you at approximately 13% cash on cash return, and a property which you would have caused to dramatically increase in value.
OK, there you go. If you want help securing this property or anything like it, please get in touch with me right away.