How to Evaluate Apartment Buildings for Investment in Los Angeles

How to Evaluate Apartment Buildings for Investment in Los Angeles

As real estate investors and buyer who spend a lot of time looking at apartment buildings across Los Angeles, one of the most common questions we hear is: how do you actually decide if a building makes sense as an investment?

The easiest way to frame it is that buying an apartment building is a lot like buying a business. Every month there is revenue coming in from rents, and there are expenses coming out for things like taxes, insurance, utilities, repairs, and management. The value is in how much is left and if the net revenue makes sense relative to the purchase price.

We start with the income. Who are the tenants? Have they been there a long time, paying on time, or has rent collection been spotty? Is the market value of rent higher, and if so, are local rent-control rules going to limit that? Sometimes the issues is the opposite, with the current owner is collecting above what the market really supports, so it’s worth running the numbers on what the property would earn today if leases turned over.

Expenses are much easier to determine. In Los Angeles, property taxes hover around 1.25% of the purchase price. Insurance tends to run $.75 to $1.50 per square foot, depending on the building’s condition and age- recently rehabbed properties usually land on the cheaper end. Landlords often pay at least some of the utilities, there is usally a review of the seller's year’s worth of bills. Beyond that, factor in repairs, some downtime between tenants, and any management fees that are standard for the market.

Once we've mapped out income and expenses, we’ll see the cash flow at end of the month. The key question becomes: is that return worth the purchase price? If yes, the deal proceeds to contract signing.

And once the contract is signed, the physical property is inspected and the leases are checked. If everything looks good, the closing happens.

While the language can be a bit confusing, the concept is simple - a multifamily building is a cash flow generating business, and that is how it can be evaluated.

Do you have a Los Angeles Multifamily Property you are considering selling? Contact The Beverly Group to discuss our offer. We can close all cash on a schedule that works for you.