Big Town Real Estate

Big Town Real Estate
Is buying a house in Los Angeles a good idea?

Is buying a house in Los Angeles a good idea?

Is it a good time to buy  a house in Los Angeles? Now, with all the things going on (Insert lots of naysaying things which are always happening). Am I buying at the top of the market? I get that it’s a good investment but is NOW the right time to buy real estate? Maybe I should wait to buy a home?

If you are anything like me, no matter how many times you do it, every time you send that final huge bank wire to buy a property, you feel it in the pit of your stomach. “Is this thing I bought going to tank in value, and leave me broke?” “Am I going to die, broke and humiliated from this?” The answer is NO you are not- but we get the psychology of real estate, and we are here to help, and to tell you “It will be ok.” But why will it be ok?

First, an anecdote: Ask anyone who has owned a home in Southern California for more than 10 years, what is the best investment they ever made. Other than those who bought Bitcoin for $10.00 (A pox on them!), I bet that 95% of them will say “My house”.  The numbers to support this reality are as follows:

Median home price in Los Angeles County in the Year 2000:          $221,340

Median home price in Los Angeles County, August 2023:                $882,000    (Note, this is after ’08 crash)

Median home price in Orange County in the Year 2000:                  $322,046

Median home price in Orange County, August 2023:                        $1,310,000. (WHAT!!!!)

Source: LA ALMANAC

Many/most of the So-Cal Counties are the same – even after the big crash of 2008, real estate has 4x’ed in value since the year 2000- or provided an overall annual return of 13.57%. (Calculation courtesy of ChatGPT)

This means, if you bought a home in 2000, even after the big crash of 2008- your home has 4x’ed in value. That’s pretty good. Real estate always goes up in value over the long haul.*

But, if you bought stocks in 2000 those would be worth 4x what you paid for them too.  (S&P 500 is up close to  4x since 2000) But remember- real estate returns are leveraged returns – so 4X is more like 10X. This is the power of real estate.

Leverage essentially is the idea that I only put down a small percent of the buy price of my house,  and use the bank’s money for the rest- but when the asset appreciates, I get 100% of this appreciation. This is leverage. I put in a little, and I get a lot more than I put in. Like pulling a lever.

So, if I bought my hypothetical $322,000 house in O.C. in the year 2000, it did NOT cost me $322,000.00 out of pocket. I may have come in with 5%, 10%, or 20%. Let’s even say I put in some repairs. $75,000.00 to close, and $25,000.00 in repairs, so let’s even say I put in $100,000.00.  It looks like this:

HYPOTHETICAL HOUSE IN O.C. YEAR 2000

My cash investment:       $100,000.00

Asset Value (Year 2000): $  322,000.00   (Note, my $100k bought a $322k asset)

Asset Value (Year 2023):$1,310,000.00

My Equity (Year 2023):   $1,200,000,00 (approx.) (Calculations from ChatGPT)

(I have 12x’ed my initial $100,000.00)

And imagine if I only came in with $50,000.00 or $75,000.00 – easily possible—since coming in with 10% or less is common- then I have 16x’ed, or even 25x’ed!!

If I bought stock in 2000, it looks like this:

HYPOTHETICAL STOCK PORTFOLIO PURCHASE YEAR 2000

My investment:                $100,000.00

Asset Value (Year 2000): $100,000.00

Asset Value (Year 2023):$587,000.00 (Assuming 8% return, which is slightly above average for stocks over this time, and taking into account compound interest, Calculations by Nerdwallet Compound Interest Calculator)

My Equity:                          $587,000.00

(I have only 5.87x’ed my initial $100,000)

This is the power of leverage using real estate investing, and why real estate is, in my opinion, the best investment. Where else can I put down 5-20% to buy something, which always appreciates over time, and then keep 100% of the appreciation on that thing? Why would I buy a 5-6x investment, when I could buy a 12-20x investment? And by the way: I and my family, can also live in my investment.

And consider this:  Why I can buy real estate at a 5%, 10%, or 20% down payment, but I cannot buy any other asset on this basis? This is because the bank lending the money knows that the value will increase over time also, and they are not worried about the risk of losing their money. Try getting a loan from a bank to buy stocks- never happen.**

Combine this with tax incentives (ask your accountant, but basically, you can write off the lions share of your mortgage payments and deduct them from your taxable income, but again- this is NOT tax advice- consult your accountant) and you have the best asset class in the world.

So is it the right time to buy a house or buy real estate? The answer is almost always YES, because over time, real estate seems to always go up in value, and provide leveraged returns.

The real question should not be- is it a good time to buy, but rather, how can I get more? (At least that is always the question that I ask.)

There are answers to this question, and I will provide some in future articles.

-Richard Evanns

*: This is not a guarantee of anything as to any particular person or transaction, this is only opinion. Every situation is different, and certainly, money can be lost in real estate.

**For all the smartypants’ looking at this saying “what about margin” – I am aware there are narrow exceptions to this, sometimes margin accounts are allowed at 1.25 : 1 leverage, but never 4:1, 5:1 or 10:1 the way that real estate is.

 

For more information on why buying a house in Los Angeles is always a good idea, contact Big Town Real Estate today.

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