Los Angeles real estate comes with a lot of opportunities for investors. When you own a piece of property here, you can expect excellent appreciation and growing property values. When you use that property as a rental investment, you can expect high and recurring rents and a consistent pool of tenants as well.
That doesn’t mean investing here is all reward and no risk.
There’s plenty of risk, starting with the strict California rental laws. It’s very easy to make an expensive legal mistake. That can leave you struggling to keep your investment profitable.
Whether you’re planning to invest for the first time, thinking about buying property here, or looking at ways to grow an established investment portfolio, we want you to have clear expectations about how the Los Angeles market is likely to treat you.
Here are the risks and rewards of investing in Los Angeles real estate.
Investing in Los Angeles Real Estate: Rewards
The rewards you seek as an investor will inspire your investment goals. Are you looking for cash flow? Do you prefer appreciation? Are rental properties and their losses and write-offs a great 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 investors are likely to reap, especially in the Los Angeles market.
- Los Angeles Real Estate is Valuable
Los Angeles real estate appreciates over time, and for most investors, they’re earning more on their real estate investments than they are on stocks and bonds. That’s because the rate of that appreciation will typically outpace annual inflation. We’re in a unique period right now and there are always market corrections that can be 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.
Real estate is tangible. 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. That’s always going to be profitable.
The equity build-up in LA properties usually rises a lot faster than in the rest of the nation. This is a huge reward when we’re talking about the value of your investment property.
- Rental Incomes are Increasing in Los Angeles
Investing in real estate offers you many different paths forwards towards building wealth. If you decide to invest so you can rent out your property, you can expect a steady income stream every month. 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 in Los Angeles. It doesn’t always happen right away, but you are actually making money as soon as you buy Los Angeles property.
- Opportunities for Leveraging Your Los Angeles Asset
You wouldn’t borrow money to invest in a mutual fund, but you can do that with real estate. You can even use a self-directed IRA to make a real estate investment if you don’t have a lot of cash at hand. Mortgages are more expensive now, but they’re still a great way to acquire property. This allows you to use someone else’s money to buy your property. The debt works in your favor and increases your ROI.
- Tax Benefits to Los Angeles Rental Property
There are numerous tax benefits to owning Los Angeles real estate, especially if you’re renting out the property you own. Rental property owners are required to declare the income they earn on the rent they collect when filing taxes, but you’ll also have the benefit of deductions and depreciation. 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.
- Investing Flexibility
You have more control over your asset when you invest in real estate. You can live in the property yourself, you can rent it out to tenants, and you can even renovate it to a higher value and re-sell it.
With your real estate investments, you have more of a say in how they’re performing. You can make renovations. Raise rents. Replace tenants. Diversify a portfolio. The market will shift and you’ll find a few surprises, but there’s a lot less uncertainty with real estate investments than with other types of investments.
Los Angeles Real Estate: Risks
Risks come with any investment. When we talk about real estate, the biggest risk is choosing the wrong property. Maybe it’s not in great condition. Maybe you can’t find anyone to rent it. Maybe you discover mold or a leaking roof or a bad foundation after the fact.
Here are some of the challenges to expect when you’re investing in Los Angeles:
- It’s an Expensive Market to Enter
It takes a minimal deposit to begin investing in stocks or mutual funds. Real estate, however, requires some money in the bank. You’ll need a down payment if you’re planning to finance your purchase plus closing costs. There will likely be repairs and remodeling that are needed before the property is ready for the rental market. Los Angeles real estate is not cheap. You’ll need a good plan for how you’ll pay for this purchase.
- Legal Risks and Los Angeles Real Estate
A lot of the risk that comes with real estate investing has to do with the act of renting your property out to tenants. There are a number of federal and state laws that govern your relationship and the condition in which you’re required to keep your property. Fair housing laws require you to treat every applicant and tenant consistently. California’s state laws go further than the federal laws. You’ll also need to understand security deposit returns and just cause eviction requirements.
- Renting to the Wrong Tenant
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.
Let’s talk through some of your own risks and rewards. We’ll take a look at your investment goals and give you some good advice on how to have a successful investment experience. Please contact us at Earnest Homes.