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Short Summary
Main recommendation: Be patient when investing in real estate, do not buy a property just to get started, and only buy when the numbers make sense, ideally at a price where you at least break even on cash flow. Graham Stephan explains that Los Angeles is difficult for cash flow, that he has been unable to find a deal that works, and that he will not force a bad purchase even though he wants to get back into the market.
Key Points
- Graham bought a duplex in Mid Los Angeles last year and a property in West Los Angeles the year before, and plans to repeat the renovate-and-hold approach with a third purchase.
- Los Angeles properties can gain large equity while still losing money every month on cash flow, which is why he treats break-even as the minimum goal.
- He lost two properties he loved by looking before he was pre-approved and before he had the funds ready, so he now only looks at properties once he can close.
- After a month of searching, he found no deal that made sense, including a $750,000 property that had seven offers and needed about $100,000 in repairs, putting his break-even near $825,000 with renovations.
- Graham's view of the CNBC report on Southern California home sales is that low sales volume reflects existing owners holding low mortgage rates, buyers unable to find cash-flowing deals, and rising inventory.
Details Worth Noting
- Concrete instructions: Do not look at properties until you are pre-approved and have the money to close, because Graham lost two strong deals by looking too early.
- Concrete instructions: Set your break-even number before making offers. Graham's rule was to calculate the maximum price he could pay including renovations and still break even, which for the $750,000 property was about $825,000 including $100,000 in renovations.
- Concrete instructions: Consider renovating existing units to increase income, but only if the tenant chooses to leave. Graham cited a unit where roughly $80,000 to $100,000 in renovations could add about $1,000 per month, but he said he would never force someone out.
- Concrete instructions: When searching out of state, budget for a property manager and make sure you understand the local market. Graham said he would only be comfortable taking that risk if he expected a 5 to 10 percent return while paying down the loan.
- Graham's long-term model is a 30-year hold: breaking even early, cash flow after about five to six years, strong returns around year ten, and a fully paid-off property after thirty years.
- He examined Amazon's top 20 investment cities and found that even the best deals in those areas were mostly just breaking even.
- He noted a 3.5 percent, thirty-year mortgage for existing owners would be costly to give up for a new loan around 4.5 percent, which he cited as one reason owners are not selling.
Bottom Line
Real estate can still be a strong long-term investment, but in a high-priced market like Los Angeles, patience and strict break-even math matter more than rushing to buy.
