Investing in a Los Angeles rental property can be a great way to generate income, build equity in an appreciating asset, and even achieve long-term wealth and financial freedom. Those are just some of the rewards. However, it’s important to understand that investing in rental property carries with it inherent risks as well. Before you invest, it’s important to assess the pros and cons of buying into a rapidly changing real estate market.
To make the most informed decision for your goals and objectives, explore the risks and rewards associated with investing in rental property and decide on your own personal investment goals. This will set you on a path that leans more towards the rewards and away from the risks.
Every investor is different. Every investor has a different tolerance for risk and a different definition of success. That’s what makes this industry so interesting to Los Angeles property managers like us.
We’ve put together some general risks and rewards that we at Bell Properties believe every investor should be aware of, whether you’re buying something for the first time or steadily growing an impressive portfolio of rental properties.
Investing in Los Angeles Real Estate: Here are Your Rewards
Let’s talk about investment rewards before we get to the risks. They’re more fun.
Your expectations are likely high when you’re getting ready to invest. That’s good; they should be.
Make sure you’re not diving into the real estate waters without a plan. We’ve seen a lot of new investors fail because they seem to simply grasp at whatever properties happen to be available in their price point. Don’t buy just anything. Instead, be strategic and intentional. This will help you realize your rewards a lot faster.
Those rewards you seek as an investor will inspire your investment goals. Are you looking for cash flow? Do you prefer appreciation? Are the tax write-offs and benefits that come with owning rental properties a helpful way to reduce your tax liability? Maybe you’re looking for all these benefits while your tenants pay down the mortgage you’ve taken out to pay for your investment.
There are some great rewards that all investors are likely to reap, especially in the Los Angeles market.
One of the best reasons to invest in residential real estate is that you have a steady and recurring income stream every month. Even if you’re not earning enough to walk away with positive cash flow every month, the rent you collect is still income, and it’s still contributing to your long term earnings.
When your property is occupied, your tenants pay rent. That rental income will contribute to your mortgage, your insurance, property taxes, and other expenses associated with the property. As you build more equity, pay down your mortgage, and increase your rents, you’ll eventually be earning more in rent than you spend every month. That positive cash flow is a huge benefit to investing. It may take some time to get there, especially in our expensive market, but you know that it’s coming. The longer you hold onto your asset, the more money you’re likely to earn from it.
Another reward to think about is that rents in Los Angeles are high.
Los Angeles Investment Property Appreciates in Value
The rate of appreciation earned on your Los Angeles rental property will typically outpace annual inflation. We’re in a strange period right now where mortgages are more expensive and buyers are hesitant. There are always market corrections, and those shifts are sometimes uncomfortable, but when you own a well-located rental home and keep it in good condition, you’ll see the value of that asset continue to climb and eventually, you’ll sell it for an impressive profit.
You Have a Physical Property
Real estate is tangible. This is an investment you can touch. You can even live in it, if necessary. It’s not like a stock, which has a value that can potentially plummet to zero. The investment property you own is a physical asset and it usually comes with land. There will always be value in what you own, and that value will increase as you make improvements and upgrades to meet the demands of the market.
Tax Benefits as Rewards
You can deduct property management fees and other professional fees as well as mortgage interest, maintenance expenses, and other costs associated with your property. Make sure you confirm everything with your tax professional or CPA.
The depreciation expense that you can claim reduces your taxable income, which is a huge benefit to investors. The IRS currently has the depreciation period for residential real estate set at 27.5 years.
Maintaining Control of a Valuable Asset
You never know how stocks are going to perform in the market and you cannot do anything to influence the value of your bonds or mutual funds. But, you can make improvements to help your rental property grow in value. You can start charging more for pets, you can make upgrades and renovations, and you can offer resident benefits that your tenants are willing to pay for.
This is another reward to investing that isn’t always considered: you maintain total control over your asset and what is done with it. You always have more of a say in how your real estate investments are performing. You cannot control the market, but you can control how you diversify your portfolio. There’s less uncertainty and more of a defense against inflation.
Investing in Los Angeles Real Estate: Understand the Potential Risks
There’s so much talk about the benefits of investing. And there should be. But, sometimes, the sales pitch comes on pretty strong. Yes, there are some great ways to make money. However, it’s not a get-rich-quick scheme. You need patience. You need to understand the long-game. You need to know what you’re doing.
It’s actually pretty easy to make an expensive mistake, even if you’re an experienced investor. You need to be prepared for the amount of money your investment will cost.
Here are some of the challenges and potential risks to plan for when you’re investing in Los Angeles:
You Need Money to Buy the Real Estate
You can invest in stocks and bonds for a minimal deposit. It doesn’t take more than a hundred dollars to get started, maybe even less depending on what you’re buying into. You can set up automatic deductions from your bank account that are immediately invested so that the recurring investment doesn’t require much work from you.
Real estate, however, requires some money in the bank. You’ll need to make a down payment if you’re planning to finance your purchase. That down payment needs to be enough to make your lender comfortable. You’ll also need some funds for closing costs. There will likely be repairs and remodeling that are needed before the property is ready for the rental market. Some capital will be required.
Are you financially prepared, and are you willing to risk that money that you’re handing over? Because it’s a lot. And, not only do you have to buy the real estate, you need to have the funds required to maintain it. Tenants will report minor repairs and major problems. How will you pay for the leaking kitchen sink, the new water heater, and the air conditioning that goes out in the middle of a hot summer?
Real Money Takes Time to Earn
If you want to make real money, plan to buy and hold your property for as long as possible. There is really no strategy in which you’ll buy a rental property and then be thousands of dollars ahead by the time you collect your first rent check. It doesn’t work that way when it comes to residential real estate investments.
Legal Requirements to Renting Out Los Angeles Properties
A lot of the risk that comes with real estate investing has to do with the tenants who are living in your property. They’re well-protected by state and federal and local laws, and you need to know and follow those tenant protections.
Fair housing laws require you to treat every applicant and tenant consistently. That seems easy enough, but we’ve seen property owners make fair housing mistakes simply by using the wrong language in their advertising. You’ll need to know the difference between a pet and a service animal. There are security deposit requirements and a legal eviction process that needs to be followed if you decide to remove a tenant. Evictions are harder to accomplish than ever before, and most property owners will need to have just cause to evict or plan to pay a large relocation fee.
Tenants come with their own risk. If you don’t screen properly or you run into a problem with your residents, you could find yourself trying to collect late rent, paying for excessive property damage, and managing ongoing tenant conflicts and disputes.
A professional Los Angeles property manager can help you balance the risks against the rewards. When you have the experience and resources of a management company, you can expect that your risks and liabilities will be minimized while your opportunities are maximized.
We can help. Contact us at Bell Properties for all your Los Angeles property management and investment needs.