What are the pros and cons of investing in multi-unit properties vs. single-family homes?

Multi-unit properties offer diversification with multiple tenants, potentially allowing you to live for free. However, in areas like Los Angeles, properties built before 1978 may be subject to rent control, impacting your long-term returns.

Should I use an FHA loan or a conventional loan for real estate investment?

A conventional loan is highly recommended for investment properties, especially in competitive markets. FHA loans are typically better suited for first-time homebuyers with lower income or credit, and often carry higher mortgage insurance and interest rates.

How should I search for investment properties if I'm not a realtor?

The Multiple Listing Service (MLS) is the primary tool. Set up auto-notifications for new listings or price reductions. Also, consider looking at properties that have been on the market for a longer time, as they may present an opportunity for negotiation.

What type of investment properties should I look for if I'm willing to do some work?

Focus on properties that require only cosmetic upgrades, such as new paint, floors, or updated kitchens and bathrooms. Prioritize good structural integrity and foundation, avoiding properties that need major repairs or additions.

How do I evaluate the financial viability of an investment property?

Analyze potential cash flow by subtracting mortgage, interest, taxes, insurance, repairs, and vacancy from rental income. When living in the property, add back tax write-offs and principal paydown to calculate your total return.

What non-numeric factors should I consider when evaluating a property?

Avoid streets with apartment buildings, commercial buildings, or heavy through-traffic. Look for quieter residential streets, as these factors can impact property values and desirability.

How can I determine what rent to charge for a property?

Craigslist is a great resource. Search for similar properties in the same neighborhood and compare their listed rental prices to get a good understanding of the market rate.

Is it advisable to invest in real estate out-of-state?

Personally, it's not recommended unless you have a very familiar out-of-state market and a reliable property manager. Managing remotely can be challenging, and being able to physically visit or understand the local market is beneficial.

How important is my credit score for buying investment property?

It's vital. Aim for a credit score above 740, ideally 760-780, to secure the best loan rates. Work on improving it at least two years prior to purchasing by managing debt, making on-time payments, and diversifying your credit mix.

Key Moments

Discussion: How to invest in Real Estate

Graham Stephan

Education3 min read28 min video

Apr 10, 2017|66,063 views|2,423|414

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Key Moments

TL;DR

Graham Stephan discusses real estate investing, focusing on multi-unit properties, financing, location, and property evaluation.

Key Insights

Focus on 1-4 unit properties for residential loans, avoiding commercial loans for >4 units.

Multi-unit properties offer potential to live for free and share costs, but be mindful of rent control laws (pre-1978).

Conventional loans are preferred over FHA for investment properties due to better rates and fewer restrictions.

Utilize the MLS daily for investments, analyzing both new listings and those on the market longer for opportunities.

Prioritize properties with good bones and structure, needing only cosmetic upgrades, rather than major renovations.

Choose investment locations by analyzing areas surrounding expensive or developing neighborhoods.

Evaluate rental income using Craigslist and consider both appreciation and cash flow, acknowledging LA's difficulty in finding cash-flowing properties.

Improve credit score significantly (aiming for 740+, ideally 760+) for favorable loan terms.

PROPERTY TYPE AND FINANCING

The discussion emphasizes investing in multi-unit properties (1-4 units) to leverage residential loans, which have more favorable terms than commercial loans required for five or more units. A down payment of around 20-25% is generally expected by banks for investment properties, translating to approximately $90,000 for properties in the Los Angeles area. While FHA loans might seem appealing for lower down payments, conventional loans are strongly recommended for investors due to better interest rates, lower mortgage insurance premiums, and less stringent debt-to-income requirements, especially in competitive markets.

MULTI-UNIT VS. SINGLE-FAMILY PROPERTIES

Multi-unit properties are favored for investment due to the diversified income stream from multiple tenants, reducing the risk of relying on a single source. They also offer cost-sharing benefits, such as one roof and shared exterior maintenance. A significant advantage is the potential to live in one unit while renting out others, effectively living for free. However, a critical consideration for multi-units, particularly those built before 1978 in Los Angeles, is rent control, which can impact long-term profitability. Single-family homes do not face this rent control issue.

STRATEGIES FOR FINDING INVESTMENT PROPERTIES

The primary tool for finding investment properties is the Multiple Listing Service (MLS). It's recommended to check listings multiple times a day when actively searching and to set up email alerts for new listings and price changes. Analyzing both newly listed properties, which attract the most competition, and older listings that have been on the market for an extended period can uncover opportunities. Properties that have sat on the market may be overpriced, have poor photos, or other issues that can be exploited for a better deal.

EVALUATING PROPERTY CONDITION AND LOCATION

When seeking investment properties, the focus should be on homes with good structural integrity and floor plans that require only cosmetic upgrades, such as paint, flooring, landscaping, and minor kitchen/bathroom renovations. Avoid properties needing major structural work or additions. Location is also key; invest in areas adjacent to highly desirable or rapidly developing neighborhoods, as prices tend to rise in these surrounding areas as they become more affordable alternatives. Driving around neighborhoods to get a firsthand feel for amenities, new developments, and overall atmosphere is highly recommended.

FINANCIAL METRICS AND RENT EVALUATION

Evaluating potential investments involves analyzing both appreciation and cash flow. While areas like San Bernardino or the Inland Empire might offer higher cash-on-cash returns (6-10%), they typically appreciate less than prime Los Angeles areas. In Los Angeles, finding cash-flowing properties is challenging; areas with high appreciation may yield lower immediate cash flow. For properties intended for personal residence, consider the 'lifestyle cost' and factor in tax write-offs (mortgage interest, property taxes) and principal paydown as part of the total return. Rental rates can be accurately assessed using platforms like Craigslist by searching for comparable properties in the target area.

PROPERTY MANAGEMENT AND CREDIT IMPROVEMENT

While some investors use property management companies, initially managing properties yourself is advised to learn tenant management skills. A hybrid approach, using trusted contractors and handyman services as needed, can also be effective. Building a network of reliable plumbers, electricians, and handymen, often found through Yelp, provides support. Crucially, improving credit score is vital for securing favorable loan terms; aim for a score above 740, ideally 760+, by managing debt responsibly, paying bills on time, and maintaining a low credit utilization ratio. A diverse credit history also strengthens loan applications.

Mentioned in This Episode

●Software & Apps

●Companies

Real Estate Investment Cheat Sheet

Practical takeaways from this episode

Do This

Aim for 1-4 unit properties for residential loans.

Put down 20-25% for investment properties.

Consider multi-unit properties for diversification and potential to live for free.

Prioritize properties with good bones and structure, needing only cosmetic upgrades.

Investigate areas surrounding expensive, developing cities.

Drive around target neighborhoods to get a feel for them.

Analyze properties for both cash flow and appreciation potential.

Factor in tax write-offs (mortgage interest, property taxes) and principal paydown as returns when living in a property.

Avoid streets with apartment buildings, commercial buildings, or heavy through-traffic.

Use Craigslist to research local rental rates.

If investing out-of-state, get a reliable property manager.

Manage your own properties initially to learn the skill.

Work on improving your credit score to above 740 (ideally 760-780) at least two years before buying.

Maintain a low credit utilization rate and a diverse credit mix.

Avoid This

Do not stretch yourself too thin with low down payments (e.g., 3-5%) on investment properties.

Be mindful of rent control laws, especially for properties built before 1978 in Los Angeles.

Do not rely solely on FHA loans for investment properties in competitive markets; opt for conventional loans.

Do not expect properties in prime, expensive areas (like Beverly Hills Flats) to cash flow significantly.

Avoid short sales in the current market due to inflated demand and prices.

Do not invest out-of-state without a trusted property manager and thorough familiarity with the area.

Do not underestimate the importance of a good credit score for securing favorable loan rates.

Common Questions

Generally, banks prefer 20-25% down for investment properties. While some may accept less, it's advisable not to stretch yourself too thin, especially in competitive markets like Los Angeles.