Real Estate Investment Memo
Introduction
Los Angeles region has seen a rising economy in the last few decades besides being hit hard during the recession period. A real estate investment worth $400,000 is to be carried out in the region. The equity worth is to be used in the purchase of a multi-family apartment located in Los Angeles city, 5460 White Oak Ave. The sole intention to acquire the apartment is to make a profit out of it and ensure that the initial investment doesn’t blow up. The property buildup set up is to run from year zero to year eight. The sale of the apartment will be in the seventh year. The estimated monthly rental fee is around $2,500 per month. Considering the location of the apartment, the target clients are employees working in the nearby industries or individuals who want to enroll their kids in the nearby preparatory, junior, and high school institutions available. The sale price of the property is $319,900(Trulia 2020).
The broader economy of Los Angeles
The post-recession figures in Los Angeles are encouraging to any investor. The city has seen employment base growth of over three million people in the past five years. The projections also were expected to exponentially get boosted to over 300,000 non-farm jobs created plus additional other job categories close to 130,000 jobs in the city (Cooper, C. Ph.D. Sedgwick, S. M 2015). There’s the existence of a variety of industries as per the city’s zoning, the industries available fall under categories of; construction industries which have an estimated job creation base of over 230,000 jobs; there’s also the manufacturing sector. Also, another economic point of interest is the presence of leisure and hospitality services with a job base of close to 750,000 jobs created. The trade industry, entertainment sector, and the health providers also make up the general economy of the city (Cooper, C. Ph.D. Sedgwick, S. M 2015). The sectors make the $400,000 investment a worthy venture die to the already available population assumed to be in need of a place of residence.
A brief history of the neighborhood and profile of potential tenants
After a well-planned property search, inspection, and picking procedure, the apartment of interest is apartment 5460 White Oaks Ave Unit D205. The neighborhood is a calm place with a lower crime rate making it a suitable place of residence. The property is located in areas around the Balboa sports center, and a golf course is also in the vicinity. There is the existence of schools starting from elementary schools, middle schools to high school. This makes it a suitable place of residence for families with young families too. The place is well interconnected with road transport amenities as the majority of the population around commute by car. The presence of well-connected roads as the main means of transport makes it convenient to access nearby shopping malls, those working in the nearby industries are also facilitated with an easy commute to and from work. With the zoning laws in place, the area is free from pollution and is characterized by clean air. The potential residents to this property are people working in the industries in the city, those people in need of enrolling their kids in the nearby schools visiting individuals who can lease the rooms when around the area engaging in sports and other recreational activities.
Property current zoning/ any salient zoning regulation
The property in focus falls under a lot size of 9.33 acres and is 990 square feet. Considering this is a multi-family property, the above specifications make it meet the threshold set for a Zone R-3; Limited density multiple residences. The property overlay allows access to recreational facilities like the golf course. The existence of zoning legislation in the city of Los Angeles that’s; the residential zoning, industrial zoning, commercial zoning, and the industrial zoning ensures that each and everyone makes up in the economy is carried out in its required places, these makes the place a high demand area for settlement as there’s no pollution by industries and other related pollutants, the clean air is convenient for human residence.
The investment’s financial assumptions
The investment in context is an apartment located in Los Angeles city, 5460 White Oak Ave. The apartment sits on 990 square feet are, and the cost per square foot is $323 per square feet. The property sale price listing is at $319,900, which falls within the investment budget of $400,000. The buildup set up for the investment is that it will run for a period of seven years, that’s from year zero to year 8, the sell is set to happen on the seventh year. The assumed target tenants are those individuals working in nearby industries. The investment protocol is to purchase the property and hold it and later sell it at a higher price, but in between, it will be offered as a rental apartment.
From the projections, the expected estimated gross revenue will be a monthly rent of $2,000 to be paid by the tenants. That amounts to the total gross revenue of $30,000 per year. The operating expenses will include; interest rates expenses, security expenses, expenses incurred in the provision of amenities like water and light power, among others. From the choice of the property, there will be minimal capital expenses, the available investment equity is $400,000, and the building costs $319,900 since it is a newly renovated structure, no extra renovation expenses will be incurred after the purchase putting the capital expenses flatly at $319,000.
The amount in question here is a $400,000 debt acquired on a fixed term of seven years with an interest rate of 3.36%. The cost of debt in this context will be arrived at by taking the total amount to be paid as interest and dividing it with the total debt of $400,000. With an interest rate of 3.36%, the annual total debt service would be $13,440 per year. On a fixed term of seven years, the total payable interest rate would be $94,080. To get the cost of debt, $94,080 is divided by $400,000, giving a cost debt of 0.2352.
Besides this investment with an investment capital of $400,000, the second alternative forgone would be apartment 11401 N Topanga Canyon Blvd number forty, with a sale listing price of $175,000 a monthly rental cost of $1,680 per month. That comes down to also an annual gross revenue of $20,060. With a fixed seven-year debt, the payable interest rate would be $13,440 per annum from a gross revenue on $20,060; still the apartment investment would give a positive net profit value assuming other operating expenses are included in the payable rent amount.
Conclusion
To be able to carry out a successful property investment with the $400,000 debt that has a fixed term of seven years and an interest rate of 3.36%, proper selection of investment property needs to be done. Considering the chosen property in the context above, the property is deemed to be a successful venture considering the projections made about Los Angeles as a whole. The Los Angeles market is considered active and on high demand for better quality housing property. Also, the Los Angeles zoning legislation in place gives room for growth of the real estate industry, precisely the residential sector.
References
1.Cooper, C. Ph.D., Sedgwick, S. M. (2015). Los Angeles: People, Industry, and Jobs 2014-2019. Institute for Applied Economics 44 S. Flower Street, 37th Floor, Los Angeles, CA 90071
2.Trulia, 2020.Encino CA, Listed Property [Online]. Available at: https://www.trulia.com/p/ca/encino/5460-white-oak-ave-d205-encino-ca-91316–2078387420[Accessed 12 May 2020 ].