Avoid the 5 biggest mistakes LA apartment investors make

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Here they are, in no particular order:

1. Misunderstanding rent control – You’d be amazed at how many inquiries I get from people whose big idea is to buy a building with cheap rents, fix it up and raise the rents. Good idea, right? Not if you don’t have a plan for relocating the tenants. Tenants in all pre-1978 buildings are protected by rent control. You need to understand your rights and theirs BEFORE you buy the building.

2. Failing to scope the sewer line – If you buy an older building in LA, particularly one in a hilly area, and you don’t scope the sewer line, you deserve whatever you get. Most of the old ones were made of clay. Roots grow into them and stop the sewage from draining. So you get clogs or worse in your building. It costs $300 or so to scope a line… which is a small price to pay to avoid a $10,000-15,000 problem.

3. Failing to get estoppels – You’d be amazed at how few brokers demand estoppels. Here’s the deal: If you don’t confirm the rents via signed estoppels, you’re relying on the seller being honest with you about the rents. Are most sellers honest? Yes. Are some not? Yes. So trust, but verify.

4. Over-leveraging – Almost everyone in real estate gives in to the temptation to use as much debt as the bank will lend them. When the market is down, that’s not a bad play, because leverage magnifies outcomes. But, if you buy with a lot of leverage when prices and rents are high – watch out! Depending on how much you paid and how much debt you used, a 10-15% drop in rents can wipe out your cashflow and make it hard to service the mortgage.

5. Over-paying – No matter how much you push and prod the numbers, it doesn’t make sense to pay 15x the rents unless you have a great plan for how you’re going to raise them (quickly). And yet I watch people do this every single day. When you over-pay like that, you end up having to pay to own the building… which is exactly the opposite of how these deals should work.

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