Opportunity in Burbank

Address: 1723 Landis St. #204, Burbank, CA
Bedrooms: 2
Bathrooms: 2
Size: 1,064 sq. ft.  

Burbank is an upper middle class city in Los Angeles County. It is home to numerous media firms such as Nickelodeon, Disney, and Warner Brothers. It has good public safety ratings and is patrolled with its own dedicated city police. While the schools are not as highly ranked as Arcadia, it is one of the more desirable locations in the county, being within 15 miles of downtown Los Angeles and major employment areas in Glendale and Pasadena.

This condo unit was built in 1993 and appears to be in decent condition. Here are some pictures to give you a visual:

The numbers below indicate a high return on investment. Most portfolio managers wouldn't be able to maintain a 20% ROI year over year. From an investor's perspective, this property makes sense.

Listing price: $156,000

Down payment (20%): $31,200

Expected monthly rental income (based on Zillow.com rent estimate): $1,686

Monthly mortgage (30 year fixed @ 4%): $598

Monthly maintenance and repair budget: $100

Monthly vacancy budget: $100

Monthly HOA dues: $200

Monthly property tax: $175.50

----

Monthly profit: $512.50

Annual return on down payment investment (not including mortgage principal gain) : 20%

Bad buy in Torrance

Address: 22821 Nadine Cir. Unit A, Torrance, CA
Bedrooms: 2
Bathrooms: 2
Size: 1,117 sq. ft. 

Like Arcadia, Torrance is another upper middle class area with good schools and public safety. Torrance is also located fairly close to the ocean, so temperatures stay mild even during the summer months. Los Angeles  and Orange County are both within a 30 minute drive.

But also like Arcadia, this property is an example why the popular mantra, "location location location" doesn't always constitute sound investment advice.The pictures show that the building is on the older side for a condo, but the unit looks clean with an updated kitchen.

..the numbers however, don't look too encouraging.

Listing price: $359,000

Down payment (20%): $71,800

Expected monthly rental income (based on Zillow.com rent estimate): $1885

Monthly mortgage (30 year fixed @ 4%): $1371

Monthly maintenance and repair budget: $100

Monthly vacancy budget: $100

Monthly HOA dues: $269

Monthly property tax: $403.90

----

Monthly loss: $358.89

To make matters worse, this is a senior community so the potential for finding renters is severely limited. With that said, the rent (from Zillow.com) might be optimistic.

A bad investment in Arcadia

Address: 18 Fano St. #6, Arcadia, CA
Bedrooms: 3
Bathrooms: 2.5
Size: 1,801 sq. ft.

Arcadia is an upscale neighborhood that boasts highly ranked schools. But the prestige of the zipcode does not necessarily mean that every property there is a good buy. Arcadia, like some other affluent, well established neighborhoods in Los Angeles county, remain overpriced relative to historical norms. This property on 18 Fano St. was sold for $558,000 at the peak of the housing bubble in 2005, yet it is currently listed for $579,000. Many of the "lesser" neighborhoods in LA and OC have come down roughly 40% from the 2005/2006 peak.

This is a fairly new property that probably won't require as many big ticket repairs as those that are 50 years old, but that does not hide the fact that the numbers just don't add up.

Listing price: $579,000

Down payment (20%): $115,800

Expected monthly rental income (based on Zillow.com rent estimate): $2540

Monthly mortgage (30 year fixed @ 3.875%): $2211

Monthly maintenance and repair budget: $100

Monthly vacancy budget: $100

Monthly HOA dues: $150

Monthly property tax: $651.38

----

Monthly loss: $672.38

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

----

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

----

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.