The South LA Strategy

Just had lunch with a potential buyer (hi Bill!) who’s thinking of dumping around $1MM into LA apartment properties. He is comparing the opportunities available here with those available in Vegas, Florida, Phoenix and other depressed markets. He’s looking for a very high, 10+% cash-on-cash yield with room for lots of appreciation.

Obviously, getting to those numbers in the LA market is tough. Because employment is pretty stable in LA and vacancy is therefore low, the prices of buildings rarely get low enough to allow an investor to get the kinds of returns he needs.

Rarely, but not never. As we were talking, I kept coming back to the strategy my friend Larry R. turned me on to in South LA. The details are here, but here’s an over-view of the concept:

  • Buy an REO 3-4 unit property in South LA for cheap, maybe $60-70k / unit
  • Renovate to a decent but not high standard
  • Enroll in Section 8, where the government pays 90% of the rent for low-income tenants
  • Sit back and collect 10+% unlevered returns, or lever up with a reasonable mortgage and do even better
  • Wait for properties in the area to appreciate and then sell

The reason I don’t do these deals myself is that I need to deploy larger amounts of capital in each deal in order to make the economics of my fund work. But I think that someone with some a bit of experience who is not afraid of slightly rougher neighborhoods could make a small fortune fairly quickly doing this.