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  • West Knoll Condominiums Address: 8535 West Knoll Drive West Hollywood CA 90069 Summary 8535 West Knoll is a 66 unit West Hollywood mid rise condo  built in 1974 in the Norma Triangle Neighborhood of West Hollywood. West Knoll has recently undergone some renovations in the hallways and lobby so it has a very up to date […]

  • A lot of people are wondering what is going to happen next with the real estate market! We know that the market has rebounded substantially from 2009 and 2010. We are close to the previous price peak in 2007. The question is- where are we heading next? I think we have 10%-20% more upside at the […]

  • You should get insurance on every building that you own. For a relatively small annual premium ($4,000 for a $1,000,000 Building) you can insure yourself against a total loss ($1,500,000 Loss – replacement cost). Multifamily Apartment buildings purchased with a loan are required to have insurance. 2-4 units are covered by residential insurance. 5 units […]

  • 1031 Exchanges also called ‘like kind’ exchanges and ‘tax deferred’ exchanges are a process investors can use to defer paying capital gains tax, that they would normally pay on an ordinary sale, until some future date. 1031 exchanges are for investors only; home owners have an even better option available to them- the homeowner’s capital […]

  • Depreciation is a loss in the value of an asset. The Federal tax code allows you to take a deduction for depreciation on assets used for business purposes (like real estate investment property) each year to offset your investment income and/or ordinary income. Depreciation can be taken for buildings, machinery, appliances, furniture, fixtures, cars, computers, […]

Blog >> Depreciation

Single Family Home Investment

Buying a single family home as an investment is the starting point for many real estate investors. Unfortunately, in Los Angeles, most single family homes don’t debt cover when being considered as an investment. The cardinal rule of real estate investing is: cash flow break-even or cash flow positive.

Homes have no correlation between their prices and the amount of income they produce. Therefore, it is common to see houses with 18-20 GRM and 2.5% cap rates or worse.

If the single family home doesn’t cash flow positive, you will have to come out of pocket each month to hold the property. When you lose money each month- that is a bad investment.

The only reason I can think of that an investor would be willing to do this is in the hopes appreciation will increase the value of the property greater than holding cost (4%/yr) + cost of sale (7-8%) expenses.

Single Family homes have a greater vacancy loss risk than multifamily properties because they only have one tenant. If you have a vacancy you will be losing 100% of your gross income every month the house is empty.

Single family houses are more management intensive than multifamily properties because they have multiple roofs, lawns, locations… etc. They don’t scale well.

A perk of single family homes is that utilities are separately metered. If a single family home can be purchased for a 11.5 GRM or less, and a Cap rate of 5% or more- they could make financial sense.

 

Let’s consider a real world example:

 

hancock Park Bungalow

2Br/2Ba Hancock Park Bungalow worth $800,000 and rents for $3,600. Property is purchased with 20% down at an interest rate of 4.38%. The Vacancy reserve is increased from the normal 3-5% to 15% ($6,500 or two months vacancy) because of the high vacancy loss risk. If you were to manage the property yourself, the property would negative cash flow $1,500/mo. (or $18,000 annually).

Hancock Park Bungalow example

What does the purchase price of this bungalow have to be to break even? The answer is $480,000!

Hancock Park Bungalow example 2