Why Affordable Homes are a Better Investment than Luxury Homes in Los Angeles

Luxury homes may be sexier than modest homes, but data shows that they typically aren’t the better investment. Data shows that affordable homes typically outperform luxury homes as investments. 

This phenomenon is worth a closer look. So let’s figure out why affordable homes are generally a better investment than luxury homes.

One quick note before we begin: There is some debate about what constitutes affordable and what constitutes luxury. For the sake of this article, anything under the median home price in LA ($1,005,000 as of August 2024) is considered affordable, while anything over $5 million is considered luxury.

Because affordable homes are accessible to households with less income, there is a larger buyer pool for lower-end properties. 

According to 2023 census data, 40.8% of LA households earn $100K or more annually. Assuming a 20% down payment, these households could afford a home with a purchase price of up to around $625,000. Luckily, many buyers are selling their current homes, giving them a larger down payment and allowing them to purchase properties around the $1 million median. 

Only 16% of households in Los Angeles make upwards of $200,000 per year, making it much more difficult to find buyers who can afford a house priced at over $1 million. 

There are no tracked statistics on how many people in Los Angeles make enough money to afford a luxury property, but it is a safe assumption that the number is far below 16% of households.   

Because there is more demand for modest homes, they appreciate faster than luxury properties.

The median price for luxury properties (as defined in this Douglas Elliman study as the top 10% of the market) actually decreased by 10.5% in Q1 2024 compared to Q1 2023. During the same period, the median home price in LA increased by 13%!  

With a larger buyer pool and greater demand, affordable homes sell faster than luxury properties. 

While the time it takes to sell a property varies significantly by location, market conditions, and property specs, it generally takes luxury homes around 96 to 147 days to sell. For comparison, the median number of days spent on the market in LA is 47. 

Greater demand can drive up prices. And faster sales can save you money on holding costs. Both of these factors can mean a better ROI (return on investment) on affordable homes than luxury properties. 

But there’s another big reason lower-priced homes provide better returns: the Mansion Tax. 

In April 2023, the so-called Mansion Tax went into effect in Los Angeles. Formally known as Measure ULA, this initiative levies a 4% charge on all property sales above $5 million and a 5.5% charge on sales above $10 million. So if you sell a $6 million home in LA, you’ll pay $240,000 in extra expenses. Naturally, this severely cuts into your profits from the sale. 

The potential downside of choosing affordable homes over luxury homes is that you have to complete a higher volume of deals to earn the same amount of money as you could on fewer luxury deals. And you might not have the time or patience to handle that yourself. 

That’s where Gatsby Investment comes in!

We make affordable residential real estate investments accessible to investors who prefer passive returns to hands-on involvement.

Traditionally, investors only pooled funds for high-value commercial deals like office buildings and large apartment complexes. If you wanted to invest in a smaller deal, you had to fund and manage the entire project yourself (perhaps with the help of a mortgage lender and/or property manager, but you would have been the owner, solely liable for the project’s success).

With Gatsby, you can buy into a real estate syndication deal for as little as $25K, and have the entire project professionally managed by our real estate experts.

Take advantage of affordable real estate trends without the hassle. Invest with Gatsby today!