Check references! Check credit!

There are good and bad tenants, and there are good and bad landlords. If you are the investor and thus the landlord, we will assume that you will act in good faith and practice ethical business practices for your tenants.

But what if you get a bad tenant?

THE most important step of the landlord/tenant relationship is to THOROUGHLY check the background of your rental applicants. If you do not do your due diligence on this critical step then prepare yourself on suffering significant financial losses. If you get a bad tenant then you are at the mercy of California's lengthy eviction process.

Signs of trouble:
- the applicant is reluctant on disclosing the requested information on the application, such as social security number, previous landlord references, etc
- the applicant cannot/refuses to pay for the application fee
- the applicant says that his/her credit score is low, but because they were screwed by a friend or an unfortunate once in a lifetime occurrence is the culprit
- the applicant wants to pay you several months of rent up front in lieu of a rental application/credit check
- your gut tells you something's wrong

Glendale condo

Address: 501 East Palmer Ave Unit A4, Glendale, CA
Bedrooms: 3
Bathrooms: 2.5
Size: 1,199 sq. ft.

Glendale is an upper middle class suburb in Los Angeles County. It is centrally located, bordering Los Angeles to the south, Burbank to the west and Pasadena to the east. This unit looks like it may require some minor work/cleanup but nothing substantial to make it move in ready.

Listing price: $216,000

Down payment (20%): $43,200

Expected monthly rental income (based on Zillow.com rent estimate): $1,850

Monthly mortgage (30 year fixed @ 3.875%): $813

Monthly maintenance and repair budget: $100

Monthly vacancy budget: $100

Monthly HOA dues: $225

Monthly property tax: $243

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Monthly profit: $369

Annual return on down payment investment: 10%

Note that the annual return on the down payment investment does not account for any gain in equity via monthly mortgage payments. Adding up the equity makes this an even more attractive purchase from a financial standpoint.

Mission Viejo

Address: 22863 Via Cereza, Unit 3B, Mission Viejo, CA
Bedrooms: 3
Bathrooms: 1.75
Size: 1,173 sq. ft.

Here is a potentially good condo investment. It won't turn heads from an aesthetics standpoint but it appears to be able to fulfill its basic duty as a rental property. The unit does not appear to require too much work before renting out to a tenant. Mission Viejo is located in south Orange County and has highly rated public schools and low crime. There is plenty of open space and parks scattered around the city, making this a family-friendly option for both renters and owners.

Listing price: $175,000

Down payment (20%): $35,000

Expected monthly rental income (based on Zillow.com rent estimate): $1,820

Monthly mortgage (30 year fixed @ 3.875%): $658

Monthly maintenance and repair budget: $100

Monthly vacancy budget: $100

Monthly HOA dues: $340

Monthly property tax: $153.13

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Monthly profit: $468.88

Annual return on down payment investment: 16%

Note that the annual return on the down payment investment does not account for any gain in equity. Adding up the equity makes this an even more attractive purchase from a financial standpoint. Most investors would be happy to find a stock portfolio that can yield 16% annually.

Why analyze such a small section of California?

It's simple. Knowledge is local. There are some great real estate reads out there in the blogosphere that talk about the housing market as a nationwide phenomenon. While individual locales are not immune to national headlines, they exhibit unique characteristics that distinguish them from other markets.

The Greater Los Angeles Area (namely, LA and Orange County) experienced feverish real estate appreciation during the first half of the 2000s, just as the nation as a whole. However, the ripple effect of the subsequent crash was not felt equally at all corners of the country. California has countless factors that may have influenced his own housing tumble as well as countless other factors inherent in the state that may affect a recovery. Two examples of this are Proposition 13 and the fact that California is a non-judicial foreclosure state, depending on the type of home loan.

I will focus on condos and townhomes because my own research and observations lead me to the conclusion that they represent a better overall deal than single family residences in the current market. Further analysis to bolster this claim will follow.

Q&A

Q: Is housing a bad investment?

A: Yes and no. 

Q: How does this blog differ from other housing related blogs out there?

A: The scope of this blog is quite narrow. It will explain various investment scenarios pertaining to condominiums and townhomes in Southern California. More specifically, condos and townhomes  in Los Angeles and Orange counties. Note that the content on this site does not constitute professional financial/investment advice. The content will lay out a combination of facts and observations for the reader to discern and draw conclusions from.

Q: Has the housing market finally bottomed out?

A: Various data reports from various sources indicate that some locales might have bottomed. But as always, nothing is ever certain and data never paints a complete picture.

Q: Why condos and townhomes and not single family residences?

A: Condos are townhomes share more similarities with apartment rentals than single family homes do. The readily available apartment rental ads for various apartment unit sizes give us some benchmarks to work with. Also, condo and townhome units are always part of home owners associations (some single family homes are too), simplifying the recurring cost analysis. There are many other reasons that will follow in subsequent posts.

Q: Why Los Angeles and Orange counties?

A: Personal experience though personal residence.