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South Bay Income Property Plays as the Market Rotates from Single Family Homes

This week’s blog post is a piggyback on last week’s blog titled, “Real Estate Value Plays as the Market Rotates from Single Family Homes.”

If you listen to my podcast, I have been pounding the table on condos and income properties as undervalued real estate assets thanks to the pandemic. No one wants to share an elevator and small hallways, or take the risk of tenants invoking their COVID-19 rental rights and not paying rent.

As a result, single-family home prices have soared, and condos and income properties have lagged. That is beginning to change as we re-open, and I believe the window is closing to jump on these “value assets.”

Last week’s blog post in its entirety covered condos, so this week, I am going to give you a couple of examples and ideas for income properties. Below will be a delicious cash flow example that will surprise you, along with a newly listed “covered land play” if you prefer growth over cash flow.

Let’s get started…

Walteria No-Brainer for Cash Flow

A charming duplex in Walteria was on and off the market, thanks to struggles during the pandemic. Located on a lovely street, the owners re-listed early in 2021 but this time, vacated the 3-bedroom unit to make it an option for owner occupants.

This property was one of my top picks for clients chasing single-family homes who were constantly losing out to multiple offers. Instead, I urged them to owner-occupy one of the units, obtain favorable financing as a primary residence, and enjoy the property. Down the road, you could fix up both units and tenant them at market rates to achieve a cash flow position.

Take a look at how the numbers shake out:

*This is assuming 20% down and interest only financing at 3.5% on $1.4 million price*

  • Single-family home numbers:
    • $3,267/mo. mortgage payment
    • $1,342/mo. property taxes
    • $150/mo. insurance
      • Total PITI: $4,759/mo.
  • Walteria duplex numbers:
    • $1,745/mo. rental income (from one unit)
      • Less
        • $3,267/mo. mortgage payment
        • $1,342/mo. property taxes
        • $200/mo. insurance
          • Total PITI: $3,064/mo.

Obviously, the duplex is more appealing since one is bringing in rental income from a tenant. Sure, you do not have a backyard or the privacy of a single-family home, but if you are unable to compete in this market, then why not sacrifice for a few years? Enjoy the property’s front yard, save on overhead, and then reap the rewards of a tremendous long-term investment opportunity.

If you save your pennies over a few years and update both units, market rents will bring in excellent rent whenever you decide to operate the property as an investor. These are the numbers after a couple of short years improving the property:

  • $6,000/mo. rent
    • less
      • $3,267/mo. int-only
      • $1,342/mo. property taxes
      • $200/mo. insurance
      • $200/mo. maintenance costs
      • $200/mo. common area utilities
      • $100/mo. gardener
      • $100/mo. miscellaneous expenses
        • Cash Flow: $591/mo.

Pretty awesome.

Where in the South Bay can you put 20% down, slowly reinvest into the property while you live there, and then move out and cash flow with ease? And, not to mention, Walteria is a fabulous pocket with Ward being a great street.

That all said, the above numbers can only be done as an owner-occupant to start. And, oh boy was it a great opportunity for whoever landed it. A roof over your head and a retirement plan in and of itself to hold over the decades.

Unfortunately, it is in escrow now and not to one of my clients, despite my best efforts. And, word on the street is that it is getting over-asking as the seller will vacate the second unit for an additional fee.

If you had pushed on this one a month or two earlier, there would have been a likely discount and even better numbers.

There will be only a few more like this one until we officially reopen. And, buyers should be ready to pounce ASAP when those properties come to market.

Manhattan Beach Flat Walkstreet Covered Land Play

I want to highlight a newly listed duplex in Manhattan Beach on the flat walkstreets for those taking the other side of the coin and investing for growth, rather than cash flow.

This duplex is a covered land play that will offer more rental income than your typical tear-down beach bungalow. It is a way to try and break even (with a significant down payment, which is standard for Sand Section real estate), and play the appreciation game as new construction homes continue to grow in value.

For reference, I have included flat walkstreet newer home sales below to demonstrate the value of the dirt.

These homes are around 4,200 square feet. At a construction cost of say, $500 a square foot, that is around $2.1 million to build. If you tore down the duplex today, you would be all-in at $5.4 million.

Not good, but not terrible. That is the result of paying a bit more for the additional income from the duplex over a tear-down bungalow.

These are some of the recent sales that could be considered dirt value as well:

You can see our subject duplex property is in-line with those numbers.

Now, you need to be careful for a few reasons…

  1. The subject property’s location does not compare perfectly with some of these sales.
  2. Building costs are increasing rapidly so the price may need further discounts.
  3. A duplex is getting harder and harder to tear-down and build a single-family home these days (you may have to include a J-ADU to comply with your build) due to lack of housing…another reason for caution.

Although this duplex on the surface looks compelling, the above “buyer beware” items are reason why there is still loads of research to be done before deciding what price is right for this duplex as a medium to long-term covered land play.

Do your research or find someone you trust that can!

Conclusion

Income properties are still undervalued today, but not for long as tenant COVID-19 protection laws begin to sunset. Investors will no longer be nervous about collecting rent and they’ll find that low interest rates have not increased the values at the same pace as single-family homes.

There are some additional great income property examples on the market now, but I have to withhold from the blog due to client pursuits.

That said, if you want cash flow, there are select areas of Torrance, Lomita, Hawthorne, and Gardena, and in some exceedingly small cases, Redondo Beach (one just sold on Prospect Avenue), that can and absolutely will be amazing buys.

On the appreciation and covered land play side, this is a way to pick-up close to dirt value real estate while getting paid more than you normally would. And, then you let low interest rates drive the high-end markets higher, over the long term, and reap your appreciation rewards with new construction if you are willing to take on the work and risk.

See you next week.

DRE: 01779425