Los Angeles has long been a hotspot for real estate investment. For those considering diving into the multifamily housing market, Los Angeles offers a particularly compelling opportunity with some of the best areas to invest in. Here’s why investing in apartment buildings in Los Angeles makes so much sense.

Robust Demand

With a population exceeding 4 million and a diverse, ever-growing workforce, the need for apartment living is substantial and persistent. Several factors contribute to this robust demand:

  1. Dynamic, Diverse Economy: LA’s economy is as dynamic as its cultural scene. From entertainment to tech, finance to healthcare, the city is a hub of diverse industries. This economic diversity attracts a wide range of people families looking for convenient, desirable living options.
  2. Amazing Weather and Geography: There’s no other city in America that combines amazing year-round weather with convenient access to beaches and mountains.
  3. Cultural and Lifestyle Appeal: The city’s world-class restaurants, bars, museums, galleries & concert venues attract young people from all over the country.

Limits on Supply Growth

While demand remains high, growth in the number of apartments in Los Angeles is unusually slow:

  1. Zoning Regulations: LA’s zoning laws are among the most restrictive in the country, limiting the ability of developers to build new apartment complexes. These regulations are designed to preserve neighborhood character and manage density, but they also contribute to fewer units being built each year.

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  1. Permitting Delays: If you have a piece of land on which you would like to build a market-rate apartment building, you will currently have to wait nearly 24 months to get permits.
  2. Development Costs: Everything costs more in LA than it does in most other parts of the country, and that emphatically includes labor for construction.
  3. Geographic Constraints: The city's geographic layout, including its mountains and coastline, further restricts the areas available for new development. This natural limitation enhances the value of existing properties and stabilizes rental demand.

Together, robust demand among educated, affluent tenants and severe limitations on growth of supply make for very low vacancy rates, which have given LA apartment owners the ability to increase rents faster than inflation for decades.

Prop 13: An Investor’s Best Friend

When buying investment property, local government acts almost like your silent partner, helping itself to a generous portion of your income every year, whether you like it or not.

In 1978, incensed by property tax increases that were running 10+% annually, California voters slammed on the brakes by passing Proposition 13:

  1. Importance of Property Tax: Traditionally, property tax is the single largest expense that multifamily owners pay every year (larger than insurance, repairs, management, etc.)

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  1. Prop 13 Slows Tax Growth: Prop 13 sets property tax at ~1% of your purchase price and, importantly, limits property tax increases to a maximum of 2% per year. This is true even if your rents and/or the value of your building increases by more than 2%.
  2. Increasing Profits: Over time, as rents grow faster than your largest single expense item, your profitability improves, leading to growing cash flow.

Prop 13 is why we and other owners in LA are so insistent on holding on to our properties, rather than selling them: All else equal, every year we own, the properties get more profitable.

Conclusion

If you’re looking to buy and hold apartment buildings, LA is a great place to invest. You can count on strong demand and limited supply to give you pricing power. And you can count on Prop 13 to keep the government from taking too large a slice of your profits.

Ready to take a closer look? Reach out to Adaptive Realty to learn more!