As a real estate investor in one of the most dynamic rental markets, Los Angeles, you are naturally thinking of ways to grow your returns. One great way to increase your rental income is by diversifying your real estate investment portfolio. If you choose your properties thoughtfully, based on your financial goals and risk-readiness, every new asset can be a stepping stone towards building a strong portfolio.
In a market like Los Angeles, multi-family properties are especially a good way to strengthen your investment. In 2021, LA multifamily investment amounted to $4.2 billion, exceeding the average for the last five years. Development continues at a steady pace, with over 30,000 units under construction at present.
This shows consistent scope for growth with multifamily real estate investment, something that new investors should be quick to take advantage of. Let us take a look at how you can diversify your real estate investment portfolio with multi-family properties in Los Angeles.
1. Set Investment Goals for the Multi-Family Property
Setting precise goals is like drawing a map to a successful real estate investment portfolio. It helps you get clarity on how many and what kind of properties you are planning on acquiring within the next 5-10 years. It sets the right tone for your strategy, allowing you to find opportunities that are compatible with your goals. As you plan to invest in a multi-family property, try to compare options that offer stable rental incomes, and have high desirability, like duplexes, townhouses, or condominiums.
2. Choose The Right Location
Los Angeles market trends show that apartments at different locations offer different kinds of rental benefits. So, you need to explore the type of multi-family property that has the benefits you want to offer to your tenants, besides adding value to your existing properties, before making an investment. For instance, if you already have a single-family property in Los Feliz, consider investing in a bigger property like a multi-family property in a locality like Silver Lake. Choose neighborhoods that have shown steady growth over time, even if they are in secondary and tertiary locations.
While real estate reports show that Los Angeles is a seller's market, you can still find plenty of suitable multi-family properties from which to choose. This applies to nearly all localities in Los Angeles, including high-end neighborhoods like Bel Air, Brentwood, or Beverly Crest, or in affordable neighborhoods like Encino, Korea Town, or Studio City.
3. Decide How You Will Finance Your Multi-Family Property
Effective financial planning is crucial to setting realistic goals and avoiding any unforeseen losses. Some financial prerequisites for purchasing a multi-family rental are:
Getting pre-approved by a mortgage lender
Being prepared for a down payment of 20% or more
Check if your credit score is high enough and taking essential steps to improve it
Estimating your margins
Calculate the costs of investing in a homeowner’s insurance, landlord’s insurance, and a home warranty
Calculate the unexpected costs of property management
When you set your sight on diversifying your portfolio, some properties are easier to finance than the others. The prices of single-family properties, or even small vacation rentals, are lower than multi-family properties.
However, it is also true that banks are more willing to invest in multi-family properties, making it easier to secure even large amounts required for the purchase. Considering the multi-family rental benefits like predictable income, and low risks of foreclosure, lenders are typically more amenable to finance such homes. Hence, you can diversify your portfolio with easy financial backing.
4. Lower the Risk of Investing in a Multi-Family Property
To enhance your investment portfolio, you will need to take calculated risks. Invest in high-risk properties only after conducting an accurate estimation of your expected income and expenses. Know the fair market value of a home in which you are interested. Also, estimate if your rental income can cover the net operating costs like mortgage payments, insurance taxes, maintenance, and property management fees.
We recommend that you avoid investing high-risk neighborhoods initially, till you find your feet and stabilize your income from other properties. Even if you find a great multi-family rental at a reasonable price in unsafe or undesirable neighborhoods like Watts or Chinatown, investing in such a property can be a risk. The crime rate in such locations is high, so the risks of vandalism, thefts, or squatters in your investment can’t be overlooked.
One way to lower the risks of investing is by choosing the kind of property that has the highest demand. Reports show that the Westwood, Mar Vista, Mid West City neighborhoods are popular for multi-family properties in Los Angeles. Despite a slow market in recent years, multi-family properties have shown qualitative and quantitative development in LA County, reducing the risk of vacancies.
5. Acquire More Units to Improve Your Cash Flow
As a smart investor, you should be looking forward to purchasing different units to get occupied by different tenants, and increase your cash flow. Create a mix of single-family and multi-family investments to ensure that you consistently have different types of renters. This way, you can be assured of a steady revenue, even if there are vacancies or any additional expenses. Acquiring more units can also give you hands-on experience in handling tenants, and make property management easier for you. It also helps you prepare for your next investments.
6. Hire a Property Manager to Offload Your Responsibilities
While real estate investment is a great source of passive income, landlords need to dedicate a great amount of time and energy to managing properties, and handling tenants. If you purchase a multi-family property, hiring a property manager can be financially sensible. As the management company handles all your time-consuming tasks, you can find more time on hand to focus on scoping new properties, acquiring new assets, while your current properties stay in safe hands.
7. Utilize the Tax Benefits of a Los Angeles Multi-Family Property
While no investor likes to hear the word ‘depreciation’ due to maintenance costs, repairs, and declining demand for the property, depreciation can be an advantage during tax season. The depreciation-caused expenses that deduct your home’s net operating income reflect on the income statement. Hence, they reduce your tax liability. Study the tax benefits offered for different types of homes, and especially depreciation.
As multi-family homes are bigger and used by different tenants, you might have to bear more expenses due to depreciation. These account for extra deductibles when documented well. You should stay updated with such cost-savers to build a profitable investment portfolio.
Section 1031
The Internal Revenue Code Section 1031 exchange can be used when you are selling and consecutively purchasing a property. The benefit of the 1031 exchange is that if you meet the requirements, you do not have to pay the sales tax while buying a new property.
Provided, both the properties, the one you are selling, and the one you are investing in are considered like-kind by the International Revenue Services. Another key benefit of Section 1031 for investors trying to build a portfolio is that it helps you get sales tax exemptions even if you sell a single-family unit, and are buying a bigger multi-family property, as both are considered residential rentals.
Diversifying your real estate investment portfolio can be a challenging task. However, if you take the right steps, and choose the right kinds of properties, you can gain some far-fetched returns. To make the most out of the opportunities that come your way, work with a professional property management company like Bell Properties. They know the real estate market in Los Angeles through and through. They can tell you what type of property is best to diversify your portfolio, considering your goals, and financial readiness.
Work with the most trusted property management company in Los Angeles, Bell Properties. We have been managing Los Angeles properties since 2005 and have helped investors make profitable decisions for over 16 years. We aim to help every homeowner reach their investment goals faster and better.
For more information on how to diversify your real estate investment portfolio, contact us at Bell Properties.
