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Wednesday, September 28, 2016

Eastside Property: The economics of an Echo Park bungalow court

Photo from LoopNet

Only a few years ago it would have been hard to imagine that the gentrification of Echo Park would have crept down from the hills and into the 1400 block of Echo Park Avenue, where pedestrians once had to walk around an obstacle course of abandoned mattresses and sofas as gang members in white knee-high socks stared down passersby. The block of mostly 1920s Spanish-style apartment buildings still has its share of litter and tagging but investors have discovered the block, attracted by the potential to hike rents in an area  just down the street from new restaurants, bars and shops.

Last year, after new owners purchased a 12-unit Spanish-style apartment building in the middle of the block,  newly renovated one-bedroom apartments in the same building were listed on Craiglist at $1,40o a month – without off-street parking. Now, a few doors away at 1450 Echo Park Avenue, a bungalow court with seven homes painted in different colors has been put up for sale at $1.19 million.  The monthly rents for the two-bedroom units in 1921 building  currently range for between about $604 and $1,515 each. The property will probably need work and a buyer will need to come up with at least a down  payment of $300,000.

Is this Echo Park bungalow worth that kind of investment and trouble?  The sales brochures for the property suggests that the rents on each of the 744-square-foot bungalows could be raised to $1,600 a month, generated more than $11,000 a month in total rent. Says the brochure:

This is a very high rental demand neighborhood, as shown by the current high rents and nearby development.

Existing tenants are protected by rent control laws, which would require the owners to buy out residents if the units are to be re-rented out at much higher rates. But where is the renter paying $604 a month going to find another two-bedroom bungalow to rent at the same price?



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54 comments

  1. Tenants can only be relocated for a short list of reasons. Wanting higher rent isn’t one of them.

    And an owner can only relocate one unit for themselves (and are supposed to re-offer it to the prior tenant upon move-out.)

    Not a fan of “rent stabilization”. Just familiar with it.

  2. There is no law to prevent a new landlord from offering a family a lump sum, say $10,000 to move. A family that pays $604 a month may be very eager to take a deal like that. When that landlord puts in a tenant that pays $1200 per month, his property has increased in actual value a lot more than $10,000.

    Some of you may call that “forcing out families” to gentrify the neighborhood, but when rent control keeps rental way below market, it strikes me as good economics. Rental properties are investments, which some tenants, and some landlords, easily forget.

  3. Rent control should be abolished.

    Hopefully this area continues to improve.

    • Jeezy H Christy-Christ

      the streets are now littered with hipsters and trustfund-babies who will eventually have to also move out when it becomes to pricey for them as well, just like it happened in Silverlake.

      15hundred a month or more for an area in which bullets still fly freely doesn’t seem to be much of an improvement.

      • Better littered with them than the previous littering of people.

        • Jeezy H Christy-Christ

          sounds like something a hipster would say.
          those soul-less PBR drinking thift store obsessed coffee junkies are a f’n eyesore – just that like st*pid unicorn up the avenue.

        • Alvarado Resident

          kitten face, are you implying that some human residents of echo park are trash? i don’t know if that’s a hipster thing to say, but it’s definitely an all-around, horrible thing to say.

        • Jeezy H Christy-Christ

          come on Mr.Hipster (aka: KittenFace) … cat’s got your tongue

          • I think kittenface is implying that the folks living in the 7 unit property now are gang members. And they are, and they’ve been involved in numerous shootings on our street and I also think it would be better to have hipsters in the neighborhood than gang members.

  4. JS,

    I agree with you all around.

    But tenants often do the math and realize that they’ll eat that money up in just a few months of market rent. I’ve offered $12,000 and had it turned down.

    But, if someone was thinking of moving anyway, it would make the difference.

  5. @Yang Na Local – You are right and I am not a fan either. $14,000 is the steepest payout to relocate a tenant based on certain qualifications. From the buyer’s end, that’s a ridiculous amount and IMO would most definitely defray relocation and higher rent elsewhere.

    @JS – I can’t be certain (because my research was conducted several years ago while looking into buying a duplex), but I recall reading that if the Los Angeles Rent Stabilization folks caught wind of bribery, the landlord would be in violation (of what I am not sure). On a different note, I have however seen listings in Santa Monica where the condo was $300,000, but the private remarks stated that the tenant with lifetime renter’s rights could be bought out for $60,000. Santa Monica and WeHo operate under their own rent control guidelines apart from Los Angeles.

    • Cristi, I agree that offering a tenant under rent control seems like bribery, but I’m nearly 100% certain that it’s not legally considered bribery if the tenant volunteers to vacate for $$. However, to be on the safe side, the landlord should have the tenant sign a “voluntary vacate” contract.

  6. As a renter, I really like rent control. I don’t want to be forced to look for a new apartment every year because my landlord decides to raise my rent when the lease is up.

    • HipsterSheepLandlord

      Rent control also makes your landlord less likely to improve the property because he can’t get higher rents for a nicer place. This isn’t theory but rather fact. It helps slumlords and hurts those of us who like to beautify our rental properties.

      Overall, it is an awful entitlement policy. The LAHD is also a terrible terrible body of government. They should institute a prerequesite that everyone there has owned a property at one point.

      PS I hate slumlords, but in a free market, they have to make their places nicer or they get lower rents… why would we involve the gov’t? This policy sounds just fine! Remember guys… people can only charge what others are willing to pay… getting in the way of that is a losing battle.

      • I agree with you that people can only charge what others are willing to pay. I pay a lot for my place, because it’s a very nice building with a great property management company. They take great care of the building and property. They respond to any issues I have had very quickly. And the landlord is within his rights to raise my rent a small percentage each year. But he can’t arbitrarily and significantly raise it.

        Obviously, if I’m in the same unit 10 years from now and they believe can get more money if I move out, they might not be as motivated to keep me happy. But they will have enjoyed years of occupancy. It costs them if I move out and they can’t rent the unit.

        And I strongly disagree with you that there should be a pre-requisite for LAHD to have owned property at some point. Owners’ interests aren’t the only ones that need to be represented.

        • You are so obviously a renter with that mentality and lack of logic.

          Rent control is a socialist program that should be abolished!!!

          • How does it lack logic?

          • Your lack of logic is this:
            “…I’m in the same unit 10 years from now and they believe can get more money if I move out, they might not be as motivated to keep me happy. But they will have enjoyed years of occupancy. It costs them if I move out and they can’t rent the unit.”

            If you stay in a place 10 years and the owner can only raise your rent 3% per year and market rents are trending up at 5% to 7% (which is the norm) then it costs the owner 2% – 5% for you to stay…

            If your starting rent is $1500 per month the first year the loss is 18000 x 2% = $360. on the low end.

            If you compound the basis loss with the increase cap over 10 years, it equals loosing over $8000. over the term of your lease. CONSERVATIVELY! Realistically it is more like $13,000.

            But don’t take my word for it. Read this article you are posting on. the proof is right there. Why do you think some of the rents are as low as $604 per month?

        • HipsterSheepLandlord

          Almost every landlord has been a renter, but few renters have been landlords… bottom line.

          I rented my whole life until i started investing in property, and see both sides of the coin… if you haven’t had to deal with the LAHD, you don’t know how bad they are. I may have had a singularly bad experience, but it left a foul taste in my mouth. Whatever you do, don’t buy a property in “REAP”… it may seem like a deal 😉

          • Your experience is not isolated! They are absolutely impossible to deal with…

            It seems they enjoy watching you suffer their bureaucratic “process”

          • Chiming to agree. LAHD isn’t the easiest group of people to work with. I was there a few hours ago and was told that by 2:30PM on Fridays most of the employees had left for the weekend….

          • I am currently going through hell – and I’m not prone to hyperbole – with the LAHD. The inspector found a few small issues within my units themselves, and I have no problem fixing them, but he also mentioned a few building-code-related issues that have nothing to do- whatsoever – with tenant safety, and the issues aren’t even related to the tenants’ units.

            On that note, a landlord filed – and won – a lawsuit against LAHD that states, in a nutshell, that they can’t cite landlords for matters relating to building code (such as how many legal units are allowed on the property – or asking for certificates of occupancy for laundry rooms); they should only be focused on issues of habitability. The LAHD is seriously overreaching by citing landlords on building-code issues. And try going through the plan-check process with the Dept. of Building and Safety. It’s enough to turn this fairly-progressive guy into a Libertarian.

            http://www.fairhousingcoalition.com/?p=343

          • James,
            I can not thank you enough for posting the link about the LAHD!!! We have had endless nightmares because of them…

            We plan to take this to AAGLA and propose a class action against LAHD to recover the “fines” proposed for non-compliance. They were total bullshit violations but more importantly NOT THEIR JURISDICTION IN THE FIRST PLACE!!!

            As rondon says, Who’s with me?!!!

          • chinatown monastery

            HSL – You present yourself as an expert on property – and you bought a property in REAP? Ha! Got what was coming to you.

    • If the landlord raised your rent every year to a level which did not reflect market rates, he would not be able to rent to anyone because the unit would be priced out of the market.

      Its called free market capitalism. This system works with the vast majority of our society’s trade practices, but as is quite often the case, by butting into this issue the government has done more harm than good.

      Rent Control is a bad idea because over time as the costs associated with maintaining a safe and stable living environment go up (as we’ve witnessed in the recent past) the rents (allowable rates) do not keep up. The building owner is forced to defer maintenance costs and this is what causes “slumlords”.

      The only area government should be allowed to dictate price is with the section 8 voucher program.

      • The costs associated with building maintenance and upkeep are not tax deductible?

        • Tax deductible means you get a small percentage of your tax credited. I doesn’t make the maintenance free.

          • Ok. I also thought building owners are permitted to temporarily raise rents in rent-controlled properties for major rehabilitation costs. I’ve never owned a rental property, so I’m not sure, but I thought that was the case.

          • HipsterSheepLandlord

            Allison, the rehab rent increase policy is filled with red-tape and can be done, but not easily. An attorney is pretty much essential as well to make sure you don’t get sued for doing one of the 100 required steps incorrectly. After paying for meals and an alternative place to live for the term of construction, you are limited to a 10% rent increase, which as you can imagine, can amount to nothing on a long term tenant.

  7. I lived in a two bedroom apt in a four-plex on Princeton Ave for 6 years. It had a great view, room for a home office, I liked it, and when I moved in it was $1050.

    Ownership of the four-plex changed hands 3 times, and the fourth owner opted to ‘non-fault’ evict me. She claimed that she wanted to live in the unit I was renting, but I learned she could also — after 6 mos(?) living there herself — move out and raise the rent for new tenants to move in.

    On the plus side, she gave me 60 days and had to pay me $10,000, due to rent control. I felt kind of invaded, having to up and move out of an affordable apt I liked and hadn’t planned on leaving anytime soon; but, of course, $10K out of the blue was pretty fucking good compensation for the hassle.

    I was lucky to find a nicer place I like even more in a duplex down by the lake ~1 mile away. I definitely benefited from rent control, but its key beneficiaries are seniors: the highest $ payouts go to those over 65 who have been living in the same residence for the longest periods.

    • Mark, my understanding is that under a no-fault eviction, the owner (or his or her close relatives) has to live in the unit for a minimum of 24 months, after which he or she can only rent the unit for the same rate as it was previously, plus the allowed yearly increase (currently 3%). In other words, if a L.A.-rent-control landlord evicts in order to move into the unit, after two years the rent isn’t “decontrolled.” I’m guessing that the landlord gave you $10,000 as a relocation fee but didn’t go through the process with LAHD, which requires an additional $500 fee to LAHD and lots of paperwork.

  8. But, if the landlord raises the rent the small percentage he’s entitled to, it’s more than enough to avoid being a slumlord and to adjust for inflation.

    Not saying I agree with rent control, but it does seem to work for the most part.

    And, btw it’s very easy for a new owner to strong arm people out of the apartments, if the investors/new owner wants to. This happened to me. When my old apartment building was bought at the height of the housing boom, in 2007, in Silverlake, by a large investment company, out of nowhere I got a 3 days notice to vacate. I was fully within my rights to stay, but it would have been a long hard fight, and would have cost a lot of money in lawyers fees, So I bailed.

    • Fortunately, the LAHD only has jurisdiction over buildings built prior to 1978. I’m guessing this was the case with you because you would have been “entitled” to stay or a buy out.

      The LAHD is worse than the mafia.

  9. @ Mark – Or families. Dependents increase the payout. The landlord has to live in the unit longer for at least two years (based on the current policy – RAC Regulation 613.04.2).

  10. HipsterSheepLandlord

    I have to say, this thread really makes me feel better about EP than the average set of replies on this site… I like balance in the community. Less lynch-mob’y, more libertarian.

  11. “gang members in white knee-high socks” LOLZ

  12. Rent control is great. I moved into this neighborhood specifically for rent control and 15 years later I am reaping the rewards of $700 a month rent with a view. And landlords can’t slumlord. You just cal LAHD and open an investigation if they do. I made a wise real estate investment. My landlords, however, did not. They are saddled with three more just like me in their building.

  13. I’m torn on one hand I’m against dictating what someone can do with their private property in principle.

    On the other hand we live in a society that has to be bound by communal rules to some degree. I don’t like the idea of a family having to uproot, move kids from schools, move farther from work, farther from family members etc because a neighborhood is more popular. I don’t think that’s good for society.

    The whole socialist argument is BS imo. There are a ton of socialist(ish) laws that are probably necessary in an ideal society.
    “ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.”
    could be applied to police, firemen, social security, food stamps, schools and on and on.

    The capitalist philosophy that a person can only charge what someone will pay may be good but I think implied in concept is free will and choice that applies more to goods like a car where a person can just walk away if they don’t like the price. Something as fundamental as where you are going to live is not the same as buying a product or service imo.

    Anyway why stop at rent control why not remove ALL socialist tendencies out of renting not just rent control. In theory two parties should be able to agree on anything they want. there would be no need for lease contract, no eviction notice needed, the landlord could keep the property in a dilapidated condition if they wished.

    Taking it one step further there would be no need for construction standards. I mean why can’t people live in extremely dangerous conditions for a lower rent if they wish. If they where willing to give up their rights to social services like fire and rescue (that would cost the community) why can’t someone live or work in extremely dangerous conditions.

    I might add we did have a less socialist country then events like a the 1911 Triangle Shirtwaist fire that killed 145 people happened. I mean couldn’t those people just refuse to work in building that don’t have adequate safety precautions.

    Just making a point that these laws where enacted for a reason and the issue is more complex than just letting people do whatever they want even if they own something. I do think a reform is in order I mean I’m not against real estate investors making a profit but there is a balance between private profit and living in a society.

    • Mark,

      I appreciate your depth of thought in the matter but it is obvious that you are coming from the perspective of never have been a landlord governed by the LAHD.
      I agree with you that some regulation should be required. As a matter of fact, when the LAHD was established, the goal was to protect tenants from hazardous living environments such as faulty smoke detectors or pest infestation for example. The system was simple. The landlords funded the program through a per unit fee, the inspectors were paid to verify the safe living conditions.

      However, this bureaucracy has morphed into an unchecked mafia style money grab for the city of Los Angeles! It may seem like an exaggeration but there are countless stories of properties being eventually confiscated illegally through their REAP program. This is a program that they make absolutely impossible to recover from because they choke off the land owners income by forcing the renters to pay the LAHD a reduced rental rate while the property owner gets a very small portion (if any) while in REAP. Do you get that???? They force the money stream to them rather than to the property owner?!!! WTF???

      You don’t need to be a mathematician to figure out that if the property owner relies on the rental income to pay the mortgage and expenses which are now choked, then the repairs mandated by the LAHD will be very difficult if not impossible to complete.

      As a small time investor (I only have two duplexes living in one) and having dealt with this agency I can tell you that it desperately needs reform. So, the question is How? How do you go to the government which collects and relies on the fees and FINES they collect and tell them to reform?

      It is the classic fox guarding the hen house.

      • I’m with you actually. in general whenever revenue generating is part of a reform program it that program it time becomes an abberation. Unions and parking enforcement come to mind along with these rent control laws. I definitely am in favor of more favorable reform for landlords. As a renter I’m not against landlords making a profit even a really big one. But as you said this has nothing to do with equity. I don’t think people should accept this just because as renters they benefit from it. Its a slippery slope to let this go because it doesn’t affect you personally because tomorrow it will be an unjust law that affects you.

        Having said that I’m not against rules like rent control outright eiher.

  14. As a landlord, I am really happy when I have good tenants. I would rather keep good tenants than raise the rent. Bad tenants are nightmares. The city allows us to raise the rent incrementally every year. During the housing bubble a lot of folks got into the landlord game thinking they could just kick out existing tenants because they had bought the place. A huge amount of completely unqualified people got into the game and their ignorance hurt a lot of people. If you have studied the city housing policies then you factor in what you can get for rents, exactly how much you would need to offer the existing tenants to leave (which is very clear and widely available on line.) I remember reading ads for buildings pre-2007 that claimed that you could actually afford the jacked up price of a building after you vacated the building and the rents were hiked up. I even called “eviction lawyers” who thought a new buyer had the right to kick everyone out. It was all incredibly stupid. People got greedy, and some of them made a lot of money and others got stuck holding the bag after the pop. Those who most resent the city policies, which I think are fair and clear and not unreasonable, are those who were duped and learned the hard way what the laws are, and are now calling them stupid. If you bought an overpriced building without knowing the laws, it isn’t the laws fault.

    • Serge,
      What would be great is if the interpretation of the law was followed consistently and not subject to one particular inspector having a bad day. Or I hate to say it, a racially biased inspector.

      I bought a property owned by the same Latino family for 30 years prior. Checked the LAHD records website for violations on this property. NONE. Additionally it was inspected by two different inspectors from the bank (who has the biggest skin in the game by funding the mortgage on the property) and FHA which insures the standards for a safe living environment are met prior to funding the property. I’d say that’s pretty sufficient due diligence. Our first inspection the LAHD inspector suddenly found major issues with the property. The ONLY thing that had changed about the property was the owners.

      I’m not saying the industry does not need regulation. It needs fair, consistent, and jurisdictional relevant regulation.

      As a fellow landlord, I would encourage you to read this judgment (link below provided by james in a previous post) recently won by a landlord which says that LAHD is and has been over stepping/abusing their authority.

      This is bureaucracy needs reform now.

      http://www.fairhousingcoalition.com/?p=343

  15. Rent control is great in some regards bit here’s the real drawback to be considered. If you are middle class and want to own a property in LA you most likely have to consider a duplex or multi unit property as single family homes tend to be our of financial reach. With rent control you can’t buy any place that has renters in it paying less than market value, otherwise you can’t afford a 400-800K mortgage (remember – we’re talking multi unit properties like the one mentioned in the article). Who can afford it? Corporations and real estate investment firms. And those are the people buying up all of the properties in our neighborhood. There are less and less middle class, working class and families buying properties in EP and more corporations owning everything. They are the only ones who can sit on a large mortgage for a year or 2 and have been known to try to push out under-paying tenants. In the long run that hurts both tenants and anyone who wants to buy a home of their own.

    Again, it’s good in some regards but, to me, this is the real issue we should be discussing.

  16. I’ve lived down on EP Ave. for many years on the same block as the 7-plex for sale. The current owner of that 7-plex is a CLASSIC SLUMLORD. The folks that live there have been great neighbors and NO, they are not all gang members. Most of them are kind, hard working folks, but the landlord has been unfair and unkind to them. I am so happy he won’t be the landlord there anymore, but I truly hope the tenants are taken care of and treated with respect. I have so many good memories of all the kids that have grown up there and have moved on. They would run through the yard, would have water balloon fights, share their flaming red hot cheetos with me, goof off in the front yard. Really great kids like any other neighborhood. Most of the families down in EP lowlands are just hard working people, not gang members.

  17. HipsterSheepLandlord

    Alex, to relate your post to the rest of the thread, RSO will only decrease the chances of a quality landlord buying that building FYI.

  18. Of course, if you want to keep down rents without opening up the abuses rent control can cause, the only way to do that is to increase supply (and that means increasing the supply of studios and one-bedrooms without parking, and not just three bedrooms with two parking spaces, which aren’t going to be cheap no matter how many of them there are).

  19. Maybe some landlords just made some bad greed choices.
    Maybe they should think of an apartment building as a long term investment rather than a get rich quick scheme. Over the long haul they’ll get rich.

  20. anotherhipsterlandlord

    The Rent Control Law hurts the people it’s supposed to protect.
    – Pushes landlords to rent at the highest possible rent because it’s hard to raise prices later.
    – Pushes landlords to rent to hipsters because they are more likely to move after 2-4 years compared to families and old people who tend to stay for ever.

    The best way to keep rents reasonable is to increase density. Allow for “mother in law” units in single family residences, waive parking requirements, keep Building & Safety laws reasonable.

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