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I started recently looking to purchase another investment property…and after over a month of looking, I can’t find a SINGLE deal that makes sense to buy. Now my strategy when investing in Los Angeles is that the property should at minimum break even, preferably throw off a little extra cash flow each month, my costs on that property will be FIXED, meaning the mortgage payment won’t change, I watch the values increase over time, rents increase, and after 3-5 years I start cash flowing a little more. 10 years I start making some decent money, and when the property is paid off, that’s a TON of equity and money I have at my disposal. This is a 30-year play. I’ll end up making more money in equity and appreciation than I ever will from rents, and I can offset those properties against the other ones that make money.
However, current prices mean that finding a property that even breaks even is becoming a very difficult task, and I’ve yet to find a good investment that cash flows. Because of this, I’ll hold off investing in real estate until I find the property that works. What does this mean for the real estate market? Well, CNBC recently released an article with the headline that “Southern California home sales DECLINE!” The article, summed up, says that we’ve seen 10% fewer sales in the last 12 months…but, prices have continued to go up, even as inventory also increases.
If I can speak from both a real estate agent perspective, a home owner perspective, and a real estate investor perspective, it’s this…it’s not shocking that sales have decreased. This just means that less inventory is being sold and as people hold on to their properties, it’s natural that sales decline. At the same time, we’ve seen prices continuing to increase…over 7% in the last 12 months. But the issue comes here:
First, existing homeowners don’t want to sell because they don’t want to give up their low mortgage. If they sell their home, their goes their 3% mortgage interest rate, and they’d be buying something else paying 4.5%. This is a big reason people aren’t selling, and why they’re more likely to keep their home long term.
Second, people like me are having a difficult time finding something that’ll make money. As an investor, whatever I buy, I need to be sure I can make money from it – both from renovations AND rents. And right now, I’m not finding anything…so makes sense, if I don’t buy something, neither are hundreds of other investors…and sales volume drops.
As more inventory comes on the market, I think it’s reasonable to expect that the ones that are FORCED to sell will lower their price and sell. As more comes on the market, there’s more to chose from, and buyers can afford to be a little more selective. We’re seeing a tail end of flippers and new constructions coming up that were started 2 years ago and just now being finished, hence an increase in inventory.
So with this, the take away is that you need to have patience and wait for the right deal to come along. Don’t rush into something, don’t force the numbers to work if they don’t, and be ok to hang on the sidelines until you find something that fits your criteria. This is how I’ve operated my real estate investing career over the last 7 years and how I will continue to run my business in the future. Patience, running the numbers, and knowing when to jump at the right opportunity. That’s the best you can do, and that’s exactly what I hope you do to.
For business inquiries or one-on-one real estate investing/real estate agent consulting or coaching, you can reach me at GrahamStephanBusiness@gmail.com
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