L.A Dreamin’

Hi All,
sit down, grab a coffee – this will be long. I will try to cover the whole USA generally, but my main knowledge is L.A and a couple of other places. If you have questions I will try to answer as best I can.
First, to buy property here you need to have a ‘credit score’. To get one you have to have debt – car loan, credit card etc. and you have to have a history. From this everyone has a credit report, or score. The better your history, the higher your score, and the lower your interest rates are for housing loans and car loans etc.
When I arrived I paid cash for a car, as I was ineligible for finance (I knew this would be the case before I came), then opened a bank account and applied for a credit card, but was told by the bank I could not get a ‘normal’ cc for around 10 months. (I met an accountant here who told me to take out a loan on my fully owned car to get a credit score – yeah, right).
I could get a ‘secured’ cc which is exactly like a savings account where you deposit funds, then it is treated like a cc for the sake of your credit report.
I operated for the first 10 months without one, and never bothered to try and get one in the end as I saw what was happening in the r/e market here in L.A, and I have something going in Australia that I need funds for soon.
Basic Overview of L.A –
Average 3 bed house has doubled in price over last 5 years. L.A has had similar boom period to Australia – the average price for 3 bed house in greater L.A is now between $800k for demolition standard, to $2 mill. This is as of now. 3 months ago there was nothing for under $1mill that didn’t need a serious reno. When I first arrived 14 months ago in the height of the boom I enquired about an average 3 bed house near my apartment – $850k was the asking price – it lasted 4 days. At this time people were ‘flipping’ properties.
In the last 5 years real wages for the middle class have not gone up at all across the U.S, but rents have (and everything else). However they have not kept pace with the capital growth, so right now, even after the slump, the rent returns are pitiful (in my opinion).
To give you an example; a friend of mine is renting a 2 bed, 1 bath house in Cheviot Hills, L.A (similar to say; Glen Iris in Melbourne – nice area) for – wait for it – $4,000 per month! Yes, I know – he is mad and yes, I have told him so. He wanted room for the kids.
It has tiny front and back yards and a tiny, old wooden detached garage. Interior of house is very nice, but original.
The owner is trying to sell at the moment. It was listed 3 months ago for $1.4 mill. She declined an offer of $1.2 mill soon after, the last offer was $950k about a month ago, which is approx what she paid for it a year ago. Yes; she missed the boat – greedy.
Let’s crunch a few numbers:
$950k purchase price (could be more and I haven’t included closing costs).
80% loan @ 6.5% interest only (I guess) – $49,400 per annum.
Property Tax @ 1.1% of property value – $10,450 per annum (this is a USA wide tax).
Repairs/maintenance/insurance/management etc – 20% of rent – $9,600 per annum.
TOTAL COSTS PER YEAR – $69,450.
RENT INCOME PER YEAR – $48,000
Negative Cashflow – $21,450 per year. Ouch!
Now is a good time to buy if you are a capital growth investor, as the prices will go up again eventually, but the holding costs are a killer.
The only good thing about this situation is that there is still so much demand for housing in L.A that the rent will only keep going up, and the capital growth over the long term will always be very good.
The problem is the entry level is so high. Even a 2 bed apartment built around 1980 will be $500k , in a decent area, with no real depreciation allowances to soften the blow.
Across the nation foreclosures are exploding, but they don’t go much cheaper as there are tv ads every hour telling you where to find them. Same on the internet, but you need to subscribe to the sites. There are many properties coming on the market, hence the price drops, but they are still selling to investors who are cashed up and can shoulder the debt. The average family cannot afford to buy in L.A. anymore, and they are being squeezed out by the rents.
Everyone is moving here for the weather, the opportunity and the hype. It is actually an overcrowded pig-swill full of tossers and wankers and I can’t wait to leave and head for the desert. Or maybe San Diego – it’s nice there, but a similar r/e story.
Like Australia there are boom areas in other parts of the country, but, like Australia, the latest run of interest rate rises has killed a lot of the momentum. Places like Buffalo, Pittsburgh and areas near the great lakes which were underpinned by the struggling steel industry have great rent returns, but the capital growth is very limited, or even negative – like the population growth.
Another couple I know just moved back to Pittsburgh (to be near family), and are looking to buy a house there. They can buy a really tidy 3 bed, 2 bath house with an attached interior entry 2 car garage for about $120k and no-one is buying them.
These sorts of areas have high unemployment and are cold/freezing for 6 months of the year, so people are moving to the sun. All this creates higher vacancy rates, although there are some investors out there who own properties in Buffalo and the like, who would disagree probably.
I think that will do for now – it’s nearly midnight.
Looking forward to the discussions tomorrow.

Cheers,
Marc.
[email protected]