Why I am building a rental unit on my property

I bought my Los Feliz home over 20 years ago. I never imagined that I would live in my house for 20 years, much less that it would increase in value by 400%. But today, I find myself in a position where my personal net worth is primarily in the house I live in. The challenge I face at this point in my life is that I need to generate income for my retirement and for this asset class, there are just a few limited ways to achieve this. Having so much in real estate equity limits my choices as to how to leverage this portion of my wealth to improve my quality of life and make the most of the time I have left.

I could sell the house, pocket the profit (after the IRS taxes my profit above $500,000), and put the money in the stock market, buy a rental property, or other investments that could provide additional income or wealth growth. But I like living in my house and my neighborhood, and truthfully do not want all my money in the stock market or in even lower appreciating assets. Also, I would have to find a new place to live and could never find a place in Los Angeles that I could buy or rent at my current mortgage, taxes and insurance costs.

But thanks to a new state law that became effective January 1, 2017, I can build a rental unit on my property and earn a monthly income for as long as the rental market exists in Los Angeles. These rental units on a single-family residential property are called accessory dwelling units (ADU’s). They can be attached to your home, or detached and can replace your garage in certain areas.

My home is a corner lot, adjacent to a fairly busy street. My house faces east and fronting a more traditional quite residential street. My garage is at the rear of my lot facing south opening on the busy street. Although the location is not ideal for the quiet enjoyment of my backyard, it is absolutely perfect for an ADU. This location allows me a unique opportunity to give up the back quarter of my lot to an ADU without having the tenants actually enter the area of the property I use. For the last 10 years, the garage has been used almost exclusively for storage.

So I have the ability for this kind of investment, and the right location, but it also financially seems like a wise investment. Based on my budget, and my projected monthly rent, I believe the amount invested will be fully repaid in just over 6 years. The addition to my property will also likely increase the value of the property, maybe not as much as the full amount invested but it will certainly increase my equity. I have wanted to own rental property for a while and this is a relatively easy way to enter the rental business.

One final factor is also at play with this decision. I have been active and engaged with the housing crisis we are facing in Los Angeles. I have learned a lot about the factors that have contributed to the rising rents and have concluded that lack of supply is the single most significant factor in the development of this crisis. I have advocated for more housing supply in various ways, but by actually adding to the housing stock in LA, I am putting my money where my mouth is.

I have, no doubt, considered the cons. I will have to manage a rental property and have tenants living very close by. And with tenants comes the potential for significant problems; from late night calls about plumbing problems to the worst-case scenario of hostility and non-payment of rent. Also, I am building a small house from the ground up, and the potential for cost overruns and delays are high. Even under the best circumstances, I will not likely see any rental income until 2020. Also, this type of investment is not liquid. If for any reason I need the money I have tied up in real estate, it could take months and I may have to sell at price less than I would like.
But all the arguments against are outweighed by the benefits I believe I will gain from this course of action. So, stay tuned if you are interested in ADUs, I plan further updates as I travel along this journey.

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Real Estate Market Statistics

Everyone has an opinion on the real estate market.  There is a surprising consensus on where the market is currently (it favors sellers) and less consensus on where it is going.

Every month I review the market stats for Los Angeles County and attempt to provide some guidance on how the market has changed from the prior month and prior year, both important benchmarks for determining if there is any change in the statistics that might be worth noting and may point to changes ahead in the market.   For the most part, the story has been the same; declining inventory (number of homes for sale), rising prices, and fast sales (low days on market).  But the last couple of months have seen changes in some of the data points that indicate some changes are underway that may slow price appreciation and result in a more balanced market between buyer and seller.

So I thought it might be a good time to review the statistical data points and explain them in greater depth.

When I review the market statistics I use a program provided by the Multiple Listing Service (MLS) called Infosparks. It is a tool that is easy to use and allows for a number of ways to parse the data points.  I first have to select an area to analyze.  For my monthly updates, I focus on Los Angeles County.  It is a fairly large area.  For example, there were over 16,000 homes for sale in June of 2018 in LA County, the City of Los Angeles shows only 2,600.  I choose the larger sample size to give a broader picture.  I also have to choose a property type.  Here I limit my analysis to single family homes and condos, eliminating Income property and leased property.

Homes for Sale:  This is the number of homes for sale on the market as of the last day of the month.  This is the Inventory of the real estate market.    Because there is not a lot of new construction in LA county, the number of homes for sale is directly related to people deciding (or being forced by circumstance) to sell their home.  This factor alone, the discretion of the seller to sell or not., means the number of homes for sale is driven both by broader economic trends as well as the individual decisions of thousands of people living in LA.

Like much of the real estate market, there is a seasonality to the number of homes for sale; there tends to be the highest number of homes for sale during the summer, and the lowest during the winter holidays.  That said there have been declines in the number of homes for sale, year over year for the past 4 years.  The peak inventory in 2014 hit in July with 25,000 homes for sale.  2017 saw a huge drop to a peak in July at 19,500.  In July of 2008, there were over 66,000 homes on the market.  Of course, the market was beginning to tank at that point and prices dropped precipitously as homes did not sell.  So keep that figure in mind.  Inventory would have to grow by 400% before we see the same dynamics at play that caused the market crash in housing prices in 2008.

Closed sales:  This is the number of homes sold during the calendar month.  For June 2018 there were almost 7,000 homes sold in LA County.  This represents almost half the inventory of homes for sale.  We are seeing sales lag a bit from 2017 but over the course of the last 10 years, the number of homes sold does not change all that much; July 2008 saw 6,200 homes sold, the peak was in August 2012 with 7,500 homes sold.  This fact supports the contention that the number of buyers in the market at any given time remains fairly constant, it’s the number of houses for sale that drives the most important data point: median price.  The more inventory in relation to the number of buyers, the lower prices will go.

Pending Sales:  This is the number of escrows that open during the month and ties closely with the number of sales.  For example, there were 6766 pending sales in May 2018 and 6,911 closed sales in June 2018.  This data point is a leading indicator that sales are increasing or declining.

 

Days on Market:  This is the median number of days a home is for sale before an offer is accepted and the house goes into escrow.  This is a very key data point as it shows that homes are selling quickly or slowly and thus if prices are rising or falling.  For the past five years, the number of days on market is lowest in the summer and has been peaking between 17 & 21 days.  Compare that to summer 2008 where the number of days on market was 50.  Again look to days on market to tell you if the market is changing to favor buyers.  Just like the number of homes for sale, days on market has a very long way to go before it reaches the time it took to sell a house during the height of the recession.

 

Month’s Supply of Inventory:  This is the measure of how many months it would take for the current inventory of homes on the market to sell, given the current pace of home sales. For example, if there are 600 homes on the market and 100 homes selling each month, there is a 6 month supply of homes for sale.  It is generally considered a Seller’s market if the Month’s supply number is below 6.  Currently, in LA County, the month’s supply is 3.2 indicating it is still a solid seller’s market.  The month’s supply in January 2008 was over 17 indicating a strong buyer’s market, and it dropped to a balanced level in 2010 and has been below 6 since January 2012.  However, this past June, the month’s supply shot up from the prior month to 3.2.  Look for this number to steadily rise in order to see a real change in the market.

 

Median Sales Price:  The difference between the Median Sales price and the average sales price is important.  The average sales price is all of the homes sold averaged out.  This can inflate the numbers, particularly if there are a handful of homes that sell in the high 8 figures.  The Median sales price is the sale price in the middle of the data set when you arrange all the sale prices from low to high. The median sale price, then, represents the figure at which half of the properties in the area sell at a higher price and the other half at a lower price.  In June the Median Sales price in LA County was $650,000.  The average was $942,000.  I prefer the median number as it seems more accurate in terms of what the market is telling us.  The median sales price has been climbing steadily since it bottomed out in January of 2012 at $302,000, up 115%.

 

There are a few other data points I look at; the number of new listings, the price per square foot and the percentage of last list price.  These data points can further refine the view of the market, especially the number of new listings.

These market specific data points tell the story of what is happening in the local real estate market.  But real estate is driven by broader economic trends, and those data points, like average wage growth, the rate of inflation, interest rates etc. are more broadly tracked and can give some guidance on where the analysts see the direction of the real estate market going.  But Like politics, all real estate is local.  In a city or county the size of LA, there are trends in the market that are quite different than the nation at large, and certain areas in LA also have vastly different real estate markets.  If you are thinking of buying or selling a property, it pays to understand the market.  And when you are ready to hire a real estate agent to represent you, ask them about the market data, if they can’t speak intelligently about market statistics, it is likely that they spend more time counting their commissions than trying to understand where the market is heading.

Timing the Market: Should I list my home over the holidays or wait until spring?

Ask any almost real estate agent if you should list your home for sale during the holidays or wait until some better time, you will get an empathic response; sell now!   The answer is easy for the agent, it’s a slow time of year for Real Estate agents and they need the commission checks.

Aside from agent need, there are a few valid reasons to list over the holidays; a lot of homes come off the market during December and there is much less competition.  Buyers are still out there; some have to move, others may need to buy before the end of the year for tax purposes, are among the most common reasons buyers are active during the holidays.

But timing when to list your home for sale is a decision to be made only by sellers who do not really have to sell.  If you have a new job that requires you to move to another city, or you are about to get foreclosed, then you are not really able to time the market. For this seller, there are few reasons to put off to January what you really need to do now.  And as an upside, you will have the benefits of selling over the holiday. Buyers out there around the holidays can be more serious about their decisions and may be less likely to drag their feet or suffer decision anxiety.  If you do decide to list during the holidays, don’t leave the decorations in the attic; you can enhance the appearance of your home with tasteful holiday decorating.

But the larger question about how to time the market is a serious issue with a lot at stake.  There is seasonality to real estate sales.  In Los Angeles, over the past three years, the number of homes for sale has peaked each year between July and September.  The lowest number of homes for sale has traditionally been December.  Things pick up after the first of the year, and slowly climb to their peak and then fade.  The graph looks like this;

graph

Those  who are thinking of selling for other reasons; moving to a larger home, downsizing, taking profits etc,  you need to examine your reasoning, map out your plan of action, then move forward according to what makes the most sense.  There is data that supports early May as the best time to list your home for sale, but the increased competition can offset whatever statistical gains that the data identifies.

Just keep in mind, if you are thinking of selling, and then buying another property in the Los Angeles real estate market, the most important element of the timing decision is to avoid getting caught as a buyer in the heated summer market.  Whether you are moving up or downsizing you will face stiffer competition from other buyers and sellers in the market over the summer.

If you want to discuss timing with a real estate agent who will listen and offer pros & cons without pressure, contact LAandymay.

 

www.LAandymay.com

Is it better to buy or sell your home first?

page cut out from a vintage 1956 issue of an architectural magazine etsy

When selling your home in order to buy another home, the question of which to do first comes up immediately.  Should I sell my current home first or should I buy my next home then sell?  This can be a tough decision to make.  If you currently own a home and are considering a move, you need to first examine the reasons you are moving.  Are you relocating for a new job? Have you out grown your current home?  Are you downsizing empty nesters?  Having a clear goal in mind will help make the decision of what to do first easier.  For example, if you own your home outright with no mortgage, it’s much easier to buy first as you do not have to pay two mortgages and you will be in a better position to decide which of your belongings fit in the new place and which need to be tossed out.

Pros of Selling First

Not paying mortgages on two house

You know exactly how much you have to spend on your new home.

You’re not tempted to take a lower offer because you are not the under pressure of multiple mortgages and the desire to get into your new home

 

Pros of Buying First

You don’t have to move twice, once to a temporary rental after your current home sells, then again to your new home.

You will be less likely to rush to choose your new home and possibly miss out on a better deal.

Not stuck in a temporary situation like a rental that could add stress to your daily life.

 

But right now, in Los Angeles and many other sought after urban areas, it’s a seller’s market, and that almost necessitates selling first. Unless you have a boat load of cash, or access to a bridge loan, you have to sell your home before you buy your new one in order to compete for the property of your dreams.   If you make your offer on the new home contingent upon the sale of your current home, you will likely find your offer at the bottom of the pile.

So if you really want to sell your home to buy a new one in the current hot  LA property market, keep in mind  that although you will benefit as a seller,  you will join all the other buyers competing for the low inventory of homes for sale at this time.

One way to work the seller’s market in your favor is to have the buyer agree to make the closing contingent upon finding and closing on your new home.  Buyers may be reluctant to agree to an open ended closing but might agree to an extended closing of 60 or 90 days.

Another tactic is to close on the house you are selling but rent back from the buyer until you have found your new home.  Again there are buyers who might find this option appealing especially if they have to sell their home as well.

As a final resort, you can always put you stuff in storage, and move to a short term rental.  It may be disruptive to your daily routine but it could also be viewed as a vacation, especially if you pick a place with a pool!

As soon as you feel you’re ready to get serious about moving, begin talking to a real estate agent.  You need an agent who will work with you on the best course of action, at your pace with your interests in mind (like me!).  Have the agent prepare a comparative market analysis for your home to give you a professional estimation of what your home will sell for and what you will net from the sale.  Then reach out to a Mortgage lender to discuss your financing options and how much new home you can afford.  Have your real estate agent set up searches based on your search criteria & start looking for your dream home.  Once you have found something you feel you would make an offer on, you know it’s time to put your house on the market and begin the search in earnest.

Know your motives, your desires and your personality type, hire a good realtor, and jump into the process.  It will be stressful, but it can be fun and exciting and in the end you can make your dreams come true.

www.LAandymay.com

Contact Me at: andymay@yahoo.com or txt or call 213-713-0385

Top 5 home buying myths in LA

The truth: it IS a seller’s market right now and that poses real challenges to buyers looking for a home.  But whether you are a first time buyer with limited funds or a seasoned pro looking for your dream estate, you need to keep in mind, not all common knowledge is 100% accurate

  1. I cannot afford to buy a house in this market: While it may be true you cannot afford the exact house in the exact neighborhood you have been dreaming about, sometimes close enough works.  Look outside your ideal location to find the house you can afford.  Can’t afford Silver Lake, try Altadena…  Consider condos, fixer-uppers or short sales… Work with an agent who can help you think outside the box and provide advice on locations and alternatives that will allow you to get the most for your money.

 

  1. I will get a better deal if I don’t use a buyer’s agent, its best to approach the listing agent and let her represent me in the transaction.  The thinking is, if the seller’s agent accepts the buyer as a client, he makes the full commission and is more likely to cut a deal with the buyer.  But keep in mind the buyer does not pay the agents, the seller does.  The listing agent is hired by the seller and has a fiduciary duty to the seller.  The half of the commission they would traditionally split with the buyer’s agent is not going to be handed over to the buyer.  It’s more likely the agent will keep the full commission and walk away happy to have found another misinformed buyer.

 

  1. It’s a housing bubble in LA and I should wait until the next downturn to buy. The truth is the signs present in the last bubble are not present today.  Pricing is at historic highs, but you could be waiting quite some time to catch the market on the downside. Your home is an investment you can live in.  Trying to time the market could leave you wasting more money on rent and loosing potential appreciation, than the possible future gain from buying when everyone else is selling.

 

  1. You need to have 20% for the down payment. There are a variety of ways buyers can reduce the amount of money required for the down payment; qualified borrowers can make down payments as low as 3% with private mortgage insurance, or the FHA offers a low-down option payment of 3.5% for people with imperfect credit histories.  In addition to these and other loan programs, there are sources of monies you may not have considered such as taking a loan from your retirement plan or you may also withdraw cash from an IRA for a home purchase.  Working with a real estate agent and loan officer early in the process will put folks on your side who want to help you make your home buying dreams happen.

 

  1. El Sereno is the next Highland Park. There are a number of locales that are being pushed as the next hot neighborhood but there is no one specific neighborhood that everyone agrees will become the next place the hipsters are moving to.  You can get great deals in “up and coming” neighborhoods throughout LA and with the guidance of an experienced real estate agent you should not find yourself in a place you are unhappy living.