Be Aware of Pros, Cons Before Buying a Rental to Live in
Want to live almost rent- and mortgage-free?
You may be able to do it--assuming you have a hefty down payment, you’re willing to give up some privacy and you’re lucky enough to find a duplex or small apartment building that generates a nice rental income to help cover most of the mortgage.
Before you rush out, however, be aware that this is no sure investment. Indeed, getting the money together for the down payment on several units is beyond the reach of many prospective buyers. And, this is one of the toughest markets ever for apartment owners in the San Fernando Valley, with rents down and vacancy rates up.
Some buyers who are willing to give up the privacy of a single-family residence or condo, however, can find that buying a small multiunit residential property and living in one of the units is a good way to build investment equity.
Mike Monteleone of real estate brokerage Monteleone & Associates in Sherman Oaks reports increasingly brisk activity in the sale of duplexes and other small residential income properties in the San Fernando Valley. The number of these buildings that sell to owner-occupiers “has been increasing every month,” he said.
Last year, Monteleone sold a five-unit building in Sherman Oaks to a couple for about $550,000. With a $80,000 down payment and a $30,000 second mortgage carried back by the seller, and assuming the other units were rented, the couple only had to come up with $700 a month out of their own pockets for the mortgage.
Now, the building has been fixed up a bit and the rents are up, so the couple is living in their unit pretty much for free, Monteleone said. The apartments have turned out to be such a good investment, he said, that now the couple can consider buying a single-family home for themselves. Like many landlords, though, the couple is worried about what happens if one or more of their units become vacant.
On Erwin Street in Van Nuys, Monteleone sold two homes on one lot to four investors for $220,000. One of the investors is living in one of the homes and paying his share of the mortgage, while the other unit is basically breaking even, with the rental income covering the mortgage. All this was done with just a 10% down payment.
Monteleone also reported that he has clients who are in escrow on a $190,000 triplex in Van Nuys. With just 12% down, the $23,000 in projected annual rents is enough to cover the mortgage and provide the buyer with a 17% cash-on-cash return. Once again, though, rental income is not a sure thing: Some apartments can sit vacant for months.
Indeed, according to a survey last year, the Valley’s apartment vacancy rate was 11.3%, a sizable jump from 7.4% in 1991, according to the Apartment Owners Assn. of Southern California. And dealing with a vacant apartment is only one of many problems that a prospective duplex or apartment building owner has to face.
“There aren’t that many people who will buy an apartment building and live in it these days,” said Steve Waterman, a broker with RE/MAX West Realty in Woodland Hills. “I have not done a lot of owner/user transactions recently.”
Part of the reason is a generally lousy market for real estate in the San Fernando Valley. And other factors have worked against the sale of duplexes and other small apartment buildings, he said.
Most buyers don’t have the larger down payment usually needed to buy a more expensive multiunit property. Also, Waterman said, not everybody is ready to deal with the problems that come along with being a landlord. “It takes a certain type of person to buy these buildings. You have to deal with more complaints than if you’re an absentee landlord,” he said.
Many prospective landlords are also concerned that rents have been decreasing. Rents have dropped anywhere from 5% to 25%, depending on the building and the area, Waterman said. Apartments that rented for $950 in North Hollywood when they were new three or four years ago, he said, are now renting for $750 a month--or less.
Another reason the market has been less than active is the lack of new construction. “They haven’t built new duplexes and small apartment buildings in most neighborhoods for many years,” Waterman said. “If there were newer buildings in good locations with modern amenities, there would be more sales,” Waterman asserted. The way things are now, he said, most of the buildings that sell to owner/occupants are in older areas of Reseda, Van Nuys and North Hollywood.
Despite all the drawbacks to owning a small-income property, Waterman said, now may be the time to think about just such an investment. “It may make more sense to buy them, now that many are being sold that generate a positive cash flow,” he said. “You have to build yourself a margin, however, in case rents continue to fall.”
Leon Gersh, an agent at Exclusive Realtors in North Hollywood, said he sees a steady flow of primarily foreign-born buyers looking for duplexes and small apartment buildings in which to live. Gersh said he recently sold a $350,000 duplex in North Hollywood to a family that’s living in one unit and renting out the other. Thanks to $1,100 paid by the tenant every month, the owners are able to live in their unit and pay $700 a month from their own pockets for the mortgage.
There’s a catch, of course. The buyers had $70,000 as a down payment--or a 20% down payment, which is a lot more than is required for most single-family houses.
Buyers interested in more than four apartment units also can’t generally qualify for the same type of loans available on small properties. Lenders will usually charge a higher interest rate and require about a 30% down payment for buildings with more than four units.
Because most people have trouble putting together hefty down payments, the market for apartments has been very weak, Gersh said. A staggering 90% of the duplexes he’s recently seen sold have been bought by foreign-born buyers.
Max and Bella Gruber have lived among their tenants for 30 years. The Grubers have lived in their 28-unit apartment building in Toluca Lake since it was built in 1964. “I have good tenants and they don’t bother me,” Max Gruber said. “Knowing that I’m here, they feel more safe and secure.”
Gruber prefers a real hands-on style of management. “When you depend on managers, they don’t always run the business the way you’d like it. I want to control my investment and screen every tenant,” he said. “And, as the owner, I try harder to please and retain the tenants.”
The Grubers have grown very comfortable in and accustomed to their 2,200-square-foot-unit. It’s just as comfortable as a home, Gruber said, except that it’s probably a much better investment. Nothing’s perfect, though. Four of he Grubers’ units are vacant, which has obviously curtailed their rental income. “There’s been lots of overbuilding in the neighborhood,” he lamented.
