Investment Analysis 4-Unit West Adams

Investing in multifamily real estate can be lucrative, especially when you find the right property with a clear strategy for maximizing returns. This 4-unit property in West Adams, Los Angeles, offers a solid investment opportunity with a carefully planned 5-year holding period, structured rent increases, and a profitable exit strategy through a conservative 5% cap rate at the time of sale.

This analysis provides a straightforward breakdown of the property’s financial performance over the next five years. It’s also packed with practical tips to guide first-time investors through the critical aspects of multifamily investing—covering everything from managing operating expenses to boosting cash flow and planning a profitable exit. Whether you want to expand your portfolio or make your first real estate investment, this property could be your path to success.

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?? Summary

• Purchase Price: $1,149,000
• Down Payment: 25% ($287,250)
• Loan Amount: $861,750 (30-year fixed, 7% interest)
• Rent Growth: Transition to market rents in Year 1, followed by 3% annual increases
• Exit Plan: Sale in Year 5 based on a conservative 5% cap rate
• Total ROI: 221%
• IRR: 28%
• Cash Flow: Positive starting in Year 2

?? Key Financial Metrics

Year 1 Rent Transition

• Starting Actual Rent: $5,559/month
• End-of-Year Projected Rent: $9,700/month

Tip: When buying multifamily properties with under-market rents, increase rents to improve cash flow. ??

Mortgage and Expenses

• Monthly Mortgage Payment: $5,734
• Annual Property Taxes: $14,362 (1.25% of purchase price)
• Insurance: $2,500/year
• Maintenance: 5% of income

Tip: Always budget for expenses like property taxes, insurance, and maintenance, as they can eat into your cash flow. ??

Cash Flow

• Year 1: Slight negative cash flow (-$4,724) due to rent transition
• Year 2 onwards: Positive cash flow, increasing each year. Year 5 cash flow = $22,899/year

Tip: Don't panic if the first year has negative cash flow; improvements and rent increases can quickly turn things around! ??

Sale in Year 5

• Sale Price: $1,834,140 (based on 5% cap rate)
• Real Estate Commission: 5% ($91,707)
• Net Proceeds After Sale: $935,079

Tip: When planning a sale, factor in real estate commissions to avoid surprises in your final net proceeds. ??

?? Total Return Breakdown

• Total Initial Investment: $310,230 (Down Payment + Closing Costs)
• Total Cash Flow (5 Years): $61,114
• Net Proceeds from Sale: $935,079
• Total Return: $996,193
• ROI: 221%
• IRR: 28%

??? Tips for First-Time Investors

?? Down Payment & Loan

Your down payment (25%) is $287,250, reducing the loan amount to $861,750. A larger down payment means smaller mortgage payments, making it easier to manage cash flow.

Tip for First-Time Investors: A bigger down payment helps with cash flow, but don’t put all your money into it—keep some reserves for unexpected expenses.

?? Operating Expenses

Operating expenses usually take up about 30% of your rental income. Expect to pay for property taxes, insurance, maintenance, and management fees for this property. For Year 1, the key costs are:

• Property Taxes: $14,362/year
• Insurance: $2,500/year
• Maintenance: 5% of income

Tip for First-Time Investors: Estimate expenses higher to avoid surprises. Please always include a buffer for repairs and upkeep.

?? Cash Flow Management

In Year 1, cash flow might be slightly negative (—$4,724) as you raise rents to market levels. By Year 2, cash flow turns positive and grows, reaching $22,899/year by Year 5.

Tip for First-Time Investors: Negative cash flow in the first year is common when improving rents. Stay on track with rent increases and budget for unexpected costs.

?? Exit Strategy

The plan is to sell the property in Year 5. Based on a 5% cap rate, the property could sell for $1,834,140, leaving $935,079 after paying off the loan and agent fees.

The cash-on-cash return at the property sale is 321%, reflecting both the ongoing cash flow from rental income and the profit from the sale.

Tip for First-Time Investors: Always plan for selling costs, like agent commissions. Monitor market trends to maximize your profit when it’s time to sell.

?? Final Thoughts

This property shows strong investment potential, with a total return of 221% over 5 years and an IRR of 28%. Cash flow is slightly negative in Year 1 but turns positive from Year 2 onward, with substantial equity gains upon sale. First-time investors should focus on managing operating expenses, planning for rent increases, and understanding the importance of exit strategies for maximizing profits.

Ready to dive into multifamily investing? This property offers a balanced cash flow and equity growth over time!

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Feel free to reach out if you're interested in buying, selling, or just chatting about real estate in Los Angeles! Whether you're looking for the perfect beachfront property or exploring more budget-friendly options, I'm here to help. Let's find the ideal place for you! Please feel free to contact me here.

Michael Abraham, REALTOR | DRE# 02242095. | [email protected] | (323) 719-8585