For the last few years real estate and good investment seemed to be at opposite ends of the spectrum but that thinking may be changing. The last 9 months saw a major shift in the residential housing market in the Beach Cities and nationwide. A decline in inventory coupled with increased demand and low interest rates has produced a decided upswing in our local real estate market.
Among the market segments seeing increased interest in the Beach Cities is the residential income market. Over the years consumers who bought residential income properties bought for future appreciation not immediate income. Income units in the Beach Cities have always been long term investments not short term. If you wanted immediate cash flow then you bought outside of the coastal areas. "Real" investors laughed at folks who paid 15-18 times gross to be near the water and saw low cash on cash returns. Those folks aren't laughing today.
When the market crashed a funny thing happened... the value of residential income properties in the Beach Cities held up a lot better than places east of Hawthorne Blvd. In fact small residential income properties have been very solid investments for their owners. Four unit buildings in North Redondo are a hot commodity and are selling fast and at a premium. The same is true for most income properties in Manhattan, Hermosa,South Redondo and El Segundo.
There are a number of reasons for the relatively stable income property market but some of the major ones are... fewer rental units are available making rents high, low bank interest rates on CD accounts, volatility of the stock market and concern about the stability of money market accounts.
Twenty-five years ago there were lots of rental units.. legal and otherwise in Manhattan Beach, Hermosa Beach, Redondo Beach and El Segundo. Most of us likely rented a few of them when we first moved to the South Bay. Over the years there have been a lot of changes to the rental market in the Beach Cities. Older beach homes with "income" units were razed to build new single family homes or 2 on a lot townhomes in Manhattan and Hermosa. In North Redondo small homes or duplexes on multi-family zoned lots were torn down and replaced with townhomes. In South Redondo many of the older "beach units" built from 1900's-1930's disappeared taking numerous rental units with them. The same is true in El Segundo where adorable bungalows are disappearing fast.
This is not a trend that is likely to stop any time in the future. No one is building new residential income units. As the Beach Cities become more affluent the demand is for owner occupied properties that may become upscale rentals in the future. The trend means there will be fewer and fewer affordable rental units available which will push rents higher and higher making income units very attractive.
While the recent housing market crash saw prices decline in the Beach Cities, those declines were minor compared to other parts of California. Many who predicted losses of 40%-60% in the Beach Cities found themselves very disappointed. The uptick in prices in the last 6 months while nothing near 2004-2006 levels indicates a recovery is on the way.
Builders are looking for properties to buy and income properties on big lots are going as fast as they hit the market. One 8 unit in South Redondo was appraised at $1.8 million last year as an income unit... it closed escrow a few weeks ago at $3.8 million as a 6 unit building site. Buying for appreciation isn't always a bad thing.
Interest rates for income properties are very attractive to potential investors. You are going to need cash for a down payment. If you are looking at 4 units or less you might get by with 20% down but realistically you should have 25%-30% put aside for a down payments well as a reserve to cover expenses. If you are looking at 5+ units then the building income must cover at least 120% of expenses. For consumers buying an income property may make more sense than bank CDs or the stock market if you are willing to hold the property for the long term.
Historically owning small ( 10 units-) residential income property has been a place where individual investors can purchase a larger property with a smaller amount of cash. Over the long term most owners of small residential units in the Beach Cities have done well on the purchase. If you are considering buying income property you should plan on owning it for a minimum of 7-10 years. If you are looking for a short term investment then buying rental property in the Beach Cities is probably not right for you.
If you are considering purchasing an income property now might be a good opportunity. Many folks who have owned units for a long time are thinking about selling and taking advantage of the 15% long term capital gain rule before it changes in January.