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Long Term Rental Investment Strategy in Los Angeles
Photo by Sami-Abu Rumman, Long term rental rehabbed/owned/managed by BTRE

Long Term Rental Investment Strategy in Los Angeles

Long term rentals are a tried and true strategy, which creates stable and (more or less) passive income, as well as increasing cash flow over time. A Los Angeles Times Article found that the average rent in Los Angeles increased by 65% between 2009-2019. Owning property and renting it out is an income and wealth creating strategy which is as old as the concept of property itself. A long term rental is defined as any rental which is for a period of 1 year or longer. Typically, the goal of long term rentals is for tenants to stay as long as possible, to maintain as stable an income stream as possible, with as few gaps (e.g. tenant turnovers) as possible. Most if not all real estate portfolios which are geared towards generating long term wealth and income, contain properties which are long term rentals of one variety or another, whether commercial or residential. 

Markets for long term rentals are stable, data going back years and years is readily available, and the rules are pretty simple and clear. Find a place where people are going (population is increasing), where jobs are located (jobs are increasing) and where the price to rent ratio is above a certain number. (For discussion of Price to Rent Ratio, click HERE)

ADVANTAGES OF LONG TERM RENTAL

  1. Long term rentals are largely considered to be the most stable and predictable form of real estate income available. A good long term rental tenant may pay you rent for a decade, and you may never even hear so much as a peep from them. Or, you may get an east-to-deal-with maintenance issue once or twice a year.
  1. Long term rental income is available from many data sources. Rentometer.com has a relatively cheap and accurate (In many markets, not all!)  evaluation tool, and it is easy to research apartments.com, craigslist, zillow, and many other platforms which will show what property is being long-term rented for. Because of this predictability, it is relatively easy to underwrite long term rental deals. The costs associated with owning long term rentals (vacancy, management, etc.) are also relatively predictable, which again leads to more accurate and predictable underwriting and outcomes;
  1. Long term leases (1yr +) are considered actual income for purposes of lenders. One aspect of long term rentals that many don’t know is that, if you can show a bank a long term lease for $3000/month from a tenant, and show that the tenant has paid a month or two (and often you don’t even need to show that) then the lender will count a full $3000 a month ore on your balance sheet as income for you, for purposes of determining if you are eligible for a loan. It does not matter what your deductions or expenses are for that property- you get a clean $3000/month credited to your income.  Short term and mid term rental income does not get credited on your balance sheet the same way.You can get your short term rental income credited, but it is credited like normal income on a tax return, and it gets significantly reduced by various deductions and expenses. For this and various other reasons, long term rental income is the best kind of income for purposes of getting loans and credit. No other type of real estate income is treated so beneficially for potential loan borrowers.
  1. Long term rentals are largely immune to adverse economic forces, compared to other forms of rentals. Long term residential rentals are things that people always need, regardless of boom times, average times, or recession times. Especially in non-luxury, working class / middle class markets, the demand for rentals remains constant during recessionary times- and often, even increases, because people are not feeling secure enough to buy houses, and therefore, they rent. As an example, per LA Almanac,  in 2005, the median home price in Los Angeles was $585,000. By 2011, it had tanked to $306,950 due to the “great recession” of 2008. (!)  But what about rents?  Per LA Almanac In 2005, the median rent for a 2 bedroom in LA was $900.00 a month, and in 2011 – after the biggest real estate crash in recent history – rent for a 2 bedroom in LA was $1465.00!!! And now, in 2023- its over $2,200. The lesson here? In good markets- long term rents always go up, and almost never go down in any significant way.  It’s hard to lose in the long run, utilizing a long -term rental strategy in a good market.
  1. Easy to manage
  2.  compared to other rental uses. Both short and mid term rentals require constant tenant turnover, and constantly outfitting the house with the necessities of life, as well as catering to tenants needs, to varying degrees. Long term rentals require very little other than keeping the place functioning and in good order. If a rental is in good condition, you may go 6 months or a year or even longer, without ever hearing from a tenant, since long term landlords generally only hear from tenants when things break or malfunction. This can save landlords on property management costs also, since many long term rental landlords self-manage, thus saving themselves hefty property management fees. (Usually around 10% of gross rents.

DISADVANTAGES OF LONG TERM RENTAL

  1. It is hard to cashflow in the first year or two of long term rentals. Because long term rentals are such a tried and true investment strategy and long term rental properties are so highly sought after, such properties are usually priced fairly high vis a vis the rents, to where the cash flow will be, if a buyer is lucky, at a break even point when they purchase. Often times, in more desirable areas, the buyers of long term rental properties will have negative cash flow in the beginning- sometimes very much in the red– and the buyers then need to figure out ways to raise rents, find new tenants, rehab the properties to add value/get higher rents, etc.  

My personal experience with long term rentals is, every single deal I have gotten, I felt I was overpaying in the beginning, and then 5 years later, I am always amazed at how cheap the deal was that I got. (So far, there have been no exceptions to this.) 

Luckily for our buyers, here at Bigtown, one of our specialties is maximizing rents from long term rental properties, through various strategies like common area improvement rent increases, value adds, and other methods of exempting properties from rent-control laws (see below). Also, long term rentals can be turned into mid term rentals, and often can be made to cash flow sooner that way. The upshot though, is that good long term rental properties are almost always pricey, with rare exceptions (off market deals, etc).

  1. Strict Tenant Protection Laws (in CA) can make long term rentals much less profitable- and the laws are constantly changing, usually in favor of tenants.

 

Los Angeles City has always had a Rent Control Ordinance, which sets limits on rent increases (usually 3% per year), as imposes rules limiting reasons that tenants can be evicted. For example, when a tenant’s lease is up, a landlord under LA rent control cannot simply give the tenant 30 days notice to vacate- the tenant gets to stay, as long as they continue to pay rent. There are very strict rules on what landlords can do to get rid of tenants who are complying with their rental terms.  Landlords can move into the unit themselves, or move a family member in (usually elderly parents)- but even this is subject to restrictions. For example, if a tenant has been in a unit over 10 years and is over 62 years of age- they cannot be removed for any reason, (Other than if they fail to pay rent or breach the lease in some way), is by moving into the unit themselves, moving a family member in (elderly parents for example). If there are multiple units available, and the landlord wishes to displace a tenant for one of the allowed reasons- the landlord usually has to displace the most recent tenant. Landlord does not have a choice of WHICH tenant he wants to target (because usually landlord will target the lowest rent paying tenant, which is not allowed). Also, a landlord must pay tenants hefty relocation fees if the landlord wants a tenant to leave. Click here to see a summary of LA City Rental Rules from the Housing Department.

And, Los Angeles City is not the only place with rent controls. Santa Monica has them,  West Hollywood has them, and many other major cities in CA have them.  And, to make matters harder for landlords, in 2021 California passed State-Wide rent controls in the form of the Tenant Protection Act which enacted state-wide caps on rent increases, in addition to many other things which put landlords in a weaker position.

Landlord Tenant law and renter protections are a far deeper topic than can be addressed here. Luckily for Bigtown Clients, our legal background and experience with LA Rent control and with dealing with eviction courts here in Los Angeles enable us to keep our clients out of trouble and to provide our clients with the best advice on these issues, to maximize the value of their investments.

  1. Long Term Rentals yield less Rent than most other uses. The stability and predictability of the Long term rental strategy does come at a price- residential long term rental monthly income is typically less than just about any other property use. Short term rentals, mid term rentals, other commercial uses (sober livings, assisted livings, other commercial uses) typically all pay better.

At the end of the day, the long term rental strategy is the backbone of most vast real estate empires. But, some may argue that this is because the other forms of rentals have simply not been around as long (Short Term, Mid Term, Vacation), and access to information and online platforms of various varieties (digital nomad platforms, daily office rental platforms, you name it, it’s out there) will change the way things are rented.  But at the end of the day, people will always need a place to live, and thus, long term rentals will never cease to be a strong strategy to build longterm income and wealt.

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