Los Angeles is the preferred North American destination for international real estate investors, according to the CBRE Global Investor Intentions Survey. Other popular North American cities/regions include Dallas/Fort Worth; New York; Washington, DC; and Atlanta. It’s the second year in a row that Los Angeles made the top of the list after unseating San Francisco two years ago. That Californian city is also on the list, but it’s down at number 6.
Los Angeles and the Real Estate Cycle
It’s pretty clear why Los Angeles sits at the top of the list. It’s at a good point in the real estate cycle. While other markets have seen huge increases in rents, Los Angeles was late to the recovery game. That means there is still room for rents to increase in the city. It’s always good news when there is room for growth in real estate. Growth means opportunity in the world of real estate.
In addition, property prices are still reasonable in Los Angeles, at least by an international standard. The prices in LA are lower than they are in San Francisco, which contributed to San Francisco’s fall from the top spot. That doesn’t mean sellers are giving the property away, but you can get property at a fair price when you buy in LA.
Los Angeles has a lot of property available, and offices are the hot commodity right now. Multifamily residential buildings and warehouse distribution centers sit behind office space. Hotels, shopping centers, and industrial properties are generating some interest, but these properties lag quite a bit behind the others.
This shouldn’t be a surprise. The commercial real estate market has been sluggish at best. The market looks to rebound to a degree this year, but it’s not expected to heat up too much in 2018. However, if you find a commercial real estate property that looks like a worthwhile investment, don’t be afraid to move forward. Commercial real estate is also seeing good returns. It’s just not as hot as the other options.
Is LA Immune to the Real Estate Bubble?
Even as international real estate investors get excited about Los Angeles, some locals are worried about the rising costs of real estate in the city and beyond. Southern California home prices have risen to bubble-era heights, and that’s created some murmuring among homeowners and real estate professionals alike. Is the bubble getting so big that it will eventually burst?
While the prices in LA are more attractive than in other parts of Southern California, they are anything but low. In September 2017, the median home price in Los Angeles County was $575,000. That price might not make international real estate investors blink, but it’s still 9.5 percent higher than it was at the same time last year. It’s also a full $25,000 more than it was when it peaked in 2017.
The gap between California and other states is growing, leading people to think that California could be creating its own unstainable real estate bubble. If that’s the case, what will happen?
Economists cite the lack of new homes as the reason for the gap. Developers haven’t kept up with job and population growth in the state, and that’s created more competition than in other states. Competition increases home values.
Developers aren’t doing this to drive up the prices. California has tighter environmental regulations than other states, and that makes it more difficult to get new developments off the ground. Neighborhood opposition is also a serious issue in the state. When you combine those with some other factors, it’s easy to see why it’s so hard to build new developments in California.
The state is fighting back, though. Gov. Jerry Brown signed some bills to address the issue. The bills will remove some development restrictions, making it easier for developers to build more houses. The hope is that prices will go down once new houses hit the market.
California is doing its best to correct its course, and the state likely doesn’t have much to worry about in regard to the housing bubble. This isn’t the same housing bubble that burst in 2007. Risky lending created that bubble. That’s not the case this time.
This time around, the economy is improving, and that is causing housing prices to soar. Also, the supply is low, so the prices go up even more, and low mortgage rates have caused more people to buy homes.
You also have to consider inflation. Although home prices are higher than they were in 2007, they actually aren’t when you adjust for inflation. In fact, the median price of homes in Southern California sits around 13 percent below the peaks in 2007 when you adjust for inflation. That doesn’t mean the prices won’t reach the peak in the future, but as of right now, the prices are still technically below those prices. That means you can breathe a sigh of relief and go ahead and invest in Los Angeles real estate. It’s impossible to promise a safe investment, but this one looks pretty secure for years to come.
Population and Housing Prices – Can California Keep Its Residents?
The housing bubble might not burst, but California could lose some residents anyway. UC Berkeley conducted a poll earlier in 2017. More than half of the respondents said they’ve thought about moving so they could find a more affordable place to live. A quarter of the respondents said they would probably have to leave the state behind to find an affordable home. That makes sense, considering there is such a big gap between California real estate prices and those in other states.
That’s only part of the problem. The high real estate prices have hit the business world, as well, and that’s when things can start to get ugly. It’s getting difficult for employers to recruit people from other states. That’s caused a slowdown in job growth for the state of California. If this continues to be a problem, California’s economy could suffer. That would be bad news for real estate investors, but it doesn’t look like anything to worry about in the near future.
Tips for Investing in a Hot Real Estate Market
Even with some causes for concern, it’s no secret that Los Angeles is a hot market. As long as international real estate investors are interested in the city, it will continue to bring in a lot of money. The more interest, the more competition, though, so you might be unsure of how to begin investing in the market. Investing in a hot market is a bit different than investing in an average market. You have to work a little bit harder to find deals, but the payoff is well worth it.
Follow some tips to find the best deals in Los Angeles and other hot markets.
Be Smart with Your Competitive Offer
Los Angeles has a hot real estate market, meaning property owners typically get lots of competitive offers for a single property. In slow markets, owners are often open to negotiation. However, in hot markets, they usually look through all the offers and choose just one. If you aren’t smart with your offer, it won’t get selected.
That means you need to submit your best offer the first go around. Make an offer that you would not change. If it is selected, you can move forward. If it isn’t selected, you will know that you made the offer you wanted, and the property was not a good fit for you.
Add an Escalation Clause to the Offer
Making the perfect offer can be nerve-wracking. Will your offer be enough? Will you just miss it by a thousand dollars or two? That can be heartbreaking when you’re trying to pick up the perfect investment property.
Avoid this problem by adding an escalation clause to your offer. This clause is often used in situations where the buyer is expected to receive multiple offers. This clause allows you to outbid everyone else. Essentially, it says you will pay so much more than the highest offer, but it does contain a cap.
An escalation clause might state, “Buyer agrees to pay $2,000 more than the highest offer the seller receives. The offer will not exceed a sales price of $550,000.”
If the seller receives a bid of $548,000 or below, the escalation clause will kick in. If the buyer receives an offer above $548,000, the person who submitted the clause won’t be on the hook.
It is important to note that the clause comes with some drawbacks. For example, this clause removes your negotiating powers. You can’t throw in a counteroffer or negotiate the price. You have done that already with your escalation offer.
This is especially tricky in California, where the seller can make different counteroffers to different buyers. That means the seller has lots of options when he or she receives multiple offers.
Even with that drawback, these offers still give buyers an advantage in a competitive market. This is especially true if you plan to bid on lots of properties. You might not have time to deal with offers and counteroffers, and you want to make sure you get at least some of the properties. This type of offer can help. You will likely pick up a property or two if you use this tactic.
In a competitive market, you have to find a way to stand out. Sellers love it when people make cash offers. They don’t have to worry about appraisals, and they don’t have to worry about the buyer getting turned down before the property closes. In fact, sellers love cash offers so much that some will take a lower price just to get paid in cash. That’s a great way to get a deal on a piece of hot property.
Keep in mind that if you pay in cash, you have the option to refinance later. That means you just need the cash upfront. Then you can take out a mortgage on the home after you close.
Think Long Term
The hot real estate market is exciting, and that can bring out our competitive spirit. You might think about getting all the property you can, and that means you could forget to plan what to do with it once you receive it.
With rents on the rise in California, many investors are buying property and then renting it. They are getting both single-family and multifamily properties for this purpose.
That’s a great investment, but you have to think about the details before jumping in and getting a property. For example, how are you going to find renters? What type of vacancy advertising are you going to use?
When you get applications, how will you determine if potential renters are a good fit? You’ll need to run a tenant background check and pull a credit report. Then, you will know if the potential renters are likely to pay the rent and follow the rules.
You need to think beyond that, as well. Property management is a time-consuming process, so you will need to come up with a plan ahead of time. Consider hiring a property manager and using property management software to organize everything. That will take a lot of stress out of the equation.
Get a solid plan in place before you bid on your first property. Then you will be ready to take on the responsibility.
The Bottom Line
Now is a great time to invest in Los Angeles real estate. Property prices might be rising, but it doesn’t look like the bubble is going to burst. The properties should stay strong for years and years to come.
Be smart before you begin the process, though. Think about the tenant screening process, and go over all the details so you will be ready. Then, make an offer, build your portfolio, and start making money on your investment.
About the author
Matt Angerer is the Founder and President of VerticalRent. He enjoys writing on a variety of topics that help Landlords, Property Managers, and Renters across America. He is particularly interested in helping renters understand their local marketplace, pick the best places to live, and find an awesome roommate. Since 2011, VerticalRent has grown to service over 100,000 landlords and renters across America.