Outlook for Mom-and-Pop Rentals and Investments

The news about rental properties can be confusing. When you try to research the rental market, it can be difficult to decide between residential, commercial, multi-family and single-family rentals. We’ve pulled together everything you need to know about the outlook for mom-and-pop rentals in the Los Angeles area and Santa Monica real estate.

Real estate can be a stable investment that increases in value, but location matters. Here is what you need to know about the current outlook for owning rental property.

It is true that real estate can experience price bubbles — they are just not as explosive as stock market bubbles. This is because real estate isn’t as liquid as stocks. You can’t dump, or transfer ownership, of real estate property by the minute. Stock investors could lose their fortune in a day. A real estate investor has a much longer view and time period to make adjustments for pricing changes. For example homes for sale in West LA will always have a great return between 7-10 years, will likely have a great return from appreciation in 4-7 years, but under 4 years it is hard to guarantee because of short term changes in the market, interest rates, pandemics, and any other thing you can imagine.

You might be wondering, “What about the housing bubble and crisis back in 2008?” That was caused by factors that are no longer applicable. There was a lot of subprime lending happening and mortgage payments being set that only covered the interest. Neither of these is happening now, especially at the scale that they were in the early 2000s. Real estate is a stable investment for those who can afford it. Our market has always functioned on the basics of supply and demand. There is far too much demand and no plans that are able to make up for the lack of it. This causes buyers to bid the price up over what the last home in the area sold for. Over time this effect compounds to keep the minimum home price in each year rising at a steady (and sometimes rapid) pace. Unless a million homes fall out of the air in Los Angeles, this will not change anytime soon.

The Los Angeles real estate, West LA real estate and south bay real estate (coastal real estate) areas specifically have proven over and over again that it is a solid investment that increases in value over time. Granted, as a real estate owner, you’ll also need to factor in the cost of managing the property. You will need to cover maintenance, insurance, and taxes, and you will need to have reserves to get you through the months when the property is vacant and not providing income. Most experts agree that preparing for the property to be empty 8% of the time is realistic in Los Angeles & Orange county.

Don’t forget, though, that you can raise your rental rates every year to keep up with maintenance costs and increase your returns. With the state rent control ordinance most properties can have a rental increase of 3-5% plus inflation each year to the tenants with a 30 day notice. Keep your property in good condition, find good tenants, and it’s practically guaranteed to appreciate in value with a proper analysis of the property beforehand.

Currently, Los Angeles is experiencing a housing shortage, which means there are more home buyers than there are homes for sale in LA to buy. This is especially true for first-time homebuyers. Entry-level homes are increasingly hard to come by and have the steepest competition because it is the lowest amount you can possibly pay to live in that area which we have already discussed is rising due to consistent lack of supply. New construction has focused on higher-end homes and there have not been enough entry-level homes built. Thus, the first-time homebuyer needs to plan, move quickly and prepare with the right real estate agent who can help them be aggressive with their tactics. This is good news for those who own rental property. Much of Los Angeles will not be able to afford to buy and will be locked into renting to stay where they live which provides an additional boost to the people looking to possibly rent from you. Los Angeles as a whole is always developing with tech companies, hotels, restaurants, and other industries that attract people here every year. Most of which will need to rent for at least a few years.

We’re in a seller’s market, which means the market favors the seller. You might be wondering whether this is a good time to buy an investment property. Should you wait until we are in a buyer’s market?

Due to the shortage of Santa Monica real estate and Southern California real estate in general, we could never hit a buyer’s market again. The average city has ½ - 2 months supply of homes and a buyers market is more than 6. There is just no way to know when or if that will ever happen again. It may come to a few areas that lose interest over time but the market here is separated into several segments and definitely won’t be happening everywhere unless we see a truly big calamity. What we do know is that interest rates will start to go up and they will likely not come back down to the current levels, so this is the time to invest now — the earlier the better.

People are still reeling from covid and their tenant issues which has caused the rental market to suffer a bit and in turn is now creating the best time to negotiate a great price on a single family or multi family rental. The best time to buy is always the time with the least competition, before the mainstream opinion says it's a good time.

Currently, home values are up about 15% nationwide, and rental rates are up a little over 9%. As it becomes increasingly difficult to find properties to buy — and to afford at the increasing rates — more people will need to rent. New construction is finally starting to focus on entry-level homes, but it will take several years or more to catch up to current demand, especially with the current shortages in materials and labor. It looks likely that rental rates will rise by double digits by the end of 2022. An increased need for rental units is a hopeful forecast for mom-and-pop rentals.

The bottom line is either you buy something this year, or you buy the same property next year at a higher monthly payment because the price, interest rate, or both have continued to go up.

When it comes to rental properties, location matters. There may be a lot of cheap property to buy in a downtown area that has lost a lot of business. Be forewarned, though, because that property will probably be difficult to rent. To ensure strong rental rates, you need to look for property that is in an area where people want to live. You may pay more for the property, but it is worth it. If you want to invest in property for short-term rentals, like AirBnbs, look at areas near travel attractions and entertainment venues. Travelers look for places to rent that are close to the attractions they traveled here to see.

Your best asset for finding homes for sale in West LA worthy of your investment is a local real estate agent who has experience with investment properties. They will have a pulse on the current rental rates, the current vacancy rates, and the areas that are hot for short-term rentals. They can help you prepare for what to expect when owning rental property.

Buying an investment property is different from buying your home, from financing to taxes. These are all things an experienced agent can help you with. When you find a good agent, be sure to stay in touch with them. They will get to know you, the types of properties you are looking for, and the areas that make sense for you, and they will keep their eye out for new properties that come on the market so you can continue to build your portfolio with real estate that makes sense for your investment strategy.

David Dippong has experience with selling and purchasing investment properties with a variety of clients in the Los Angeles & Orange County area. He is happy to answer your questions about how to start investing or how to add to your current portfolio. Contact David Dippong today to learn more!