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mlreits

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For the first time I'm getting into 5+ unit multi-family apartments, here's what I have learned.  

For multi-family apartments, lenders give the most weight to income.  Pro-forma is BS.  Banks do not lend based on pro-forma.  However, if you're willing to put 35% down, some lenders will overlook certain criteria and will give you a loan even though you have a slight negative cashflow provided that you can show the lender the income upside potential.

The borrowing cost is so cheap in my opinion.  We syndicated and closed on an 8-unit apartment building in late October with a loan amount of $950k at 4.0% for a 5/1 ARM amortizes over 30 years.  There was no points.  The only cost we had to pay was an appraisal at $1,500.  Here is the kicker, it was a non-recourse loan through Chase.  The interest rate would have been 3.9% for a recourse loan.

Due to the recent decline in interest rate, we got a quote for 3.7% from Chase for another property last week.  First Republic Bank quoted us 3.4% 5/1 ARM recourse loan at 70% LTV.

In general, lenders used about 40% for vacancy and expenses in their calculation/analysis for our area. So for a $1M building that generates $100k in annual income, the building has a 6% cap rate.  If leveraged at 75% LTV at 3.7%, you're looking at about 7.2% cash-on-cash return, but your IRR is in the teens due to principal pay down.  

With forced appreciation due to below market rents, your return is substantial.

For cash-out refinance on a cash purchase, Chase will give 85% LTV on purchase price + rehab.  If you paid $800k for the building and spent $200k on rehab, Chase will loan you $850k with 3 to 6 months rent seasoning regardless if the building is worth $1.2M after rehabbed.

I decided to go down this path because the SFH and condo markets have totally dried up.  I have some investors backing me up.  If you have any apartment buildings in San Jose between 8-15 units with the right GRM, please give me a holler and I will take them off your hand.  The investors want to acquire 100 - 120 doors/year for the next 5 years.  

Just want to share some info that I have learned with the SDCIA members on commercial lending.

mks_97, thanks for referring your friend to me.  I have your analysis spreadsheet.  It's very helpful. Seems like you spent a lot of hours putting it together.

I'd love to hear people who have experience with multi-family investing to chime in.  Commercial lenders/mortgage brokers are welcome to give us your opinion.

Cheers.

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Minh

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kaihacker

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Thanks for sharing Minh.  Way to get after it...sounds like you are making things happen.  
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Gene Hacker

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mlreits

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Gene,

Thanks Gene.  I didn't realize I was playing monopoly in real life until my loan officer told me this.  I feel like I have been fortunate in a sense that I have been able to stay a half step ahead of the market, where I shifted from trustee sales to pending short sales by going directly with the listing agents.  As of now, I still see some value in multi-family apartments through forced appreciation.  It's getting too speculative to buy SFHs and condos in my market now.  If my guess is correct, the multi-family apartment market would likely dry up in the by the end of 2014 too.  Rents have gone up 30% - 50% in the recent years.  The pace of rent increase should moderate quite a bit in the coming years in my opinion.  

I'm currently looking to acquire apartment buildings that are renting for a substantial amount below fair market, and apartment buildings that have high vacancy or a ton of deferred maintenance.  Downtown San Jose has rent control, but they are so pro landlord. Thus, petition to raise rent up to 35% is not difficult.  The whole process takes 3 -4 months.  I spent quite a bit of time looking into this.  People are scared of rent control, but I'm no longer one of those individuals.




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Minh

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Reply with quote  #4 
Great to hear this Minh. I know you will do very well.

Paul
mlreits

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Thanks Paul. You have more faith in me than I have in myself. The multi-family apartments are hot here. After further research, it looks like I'm about 9-12 months late to the party. I would have bought these apartment buildings had I paid closer attention. Well, the investors that were willing to back me up didn't come along till this October. Finding deals shouldn't be too hard. I just have to put a little more effort into it. I'm currently reading the Multi-Family Millions book by David Lindahl. It's pretty good. I got some ideas out of it so I started scouting out apartment buildings in the Central Valley. I found one that has a 5 GRM. Wow!!!! It's listed for $2.3M and bringing in over $400k annually. Hope 2014 will be my breakthrough year. Fingers crossed.
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Minh

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abc

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What about other markets around the U.S. for multi-family?  It would be great to take profits from condo's and SFR's bought back from 2009-2012 in CA and find some undervalued market to re-invest in apartments or even SFR's.  I've been selling some condo rentals bought back a few years ago in San Diego and have wondered about where I could re-invest the profits.  I did think about Florida as a possibility.  Because this is a judicial foreclosure state & thus still has more distressed inventory, seems like it is still far behind AZ, NV and CA in their price recoveries.  


abc

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You might want to read some of Fixer Jay DeCima's stuff too.  He lives up in Redding CA and has been buying small fixer apartment buildings for 40 years I think.  He buys these junks and transforms them raising the GRM.   Also John T. Reed's "How To Increase The Value of Real Estate" is good too.  Reed bought apartment buildings back when he invested.  
larrywww

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The person whom you should really talk to is Sean O'Toole.  His characterization is that even the SFR market is just off the charts insane in the San Jose area.  His take is that alot of tech millionaires, who can afford to do so, are spending through the roof for trophy properties.  But don't confuse this with an investment, it's something closer to a personal lifestyle choice.   And so long as they can afford it, and they are only spending their own money, maybe there is no harm in it.  But Sean, who is extremely logical, I think, would caution you that the shrinking returns that are theoretically available are looking closer to speculation, from any reasonable standpoint. 

In an case, I don't really comprehend why you would want to buy apartments in one of the most overheated markets in California---maybe even in the US.  Wherever you live in California, there are places with more reasonable cash flows, usually inland, within 2-3 hours.  Why not look into that?  An apartment in Stockton (or wherever) is probably going to have a far better ratio of rent to purchase price, right?  Sean is very logical and the shrinking return you are getting on deals there---Well, is it really all that attractive?

Another issue is that you don't want a property that will turn out to be a management headache down the road.   Are the relatively small apartments you are buying able to afford a handyman?  (It would be better to have a handyman and a manager, BTW, but it doesn't sound like that's going to happen.)  You don't want to be stuck to a tar baby for the foreseeable future.

One final question I have for you is basically--where have you been?---and why are jumping on this type of investment now?  The last 2-3 years is when these purchases would have been far better deals---and I think this is true across the spectrum of investments.   Why try and hop a ride on a speeding train?   I don't see any evidence that the timing for your investment is really all that favorable.  Am I missing something?

You haven't actually said, BTW, what kind of returns you think you are going to find.
mlreits

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Quote:
Originally Posted by abc
What about other markets around the U.S. for multi-family?  It would be great to take profits from condo's and SFR's bought back from 2009-2012 in CA and find some undervalued market to re-invest in apartments or even SFR's.  I've been selling some condo rentals bought back a few years ago in San Diego and have wondered about where I could re-invest the profits.  I did think about Florida as a possibility.  Because this is a judicial foreclosure state & thus still has more distressed inventory, seems like it is still far behind AZ, NV and CA in their price recoveries.  




abc,

That's what I have in mind too. However, I was planning on doing Reverse 1031X to be on the safe side although it will cost a little more money. I've done a little research on other markets by talking to folks that buy and sell apartments in other states. Houston, Dallas, Austin, Denver, etc are hot. Atlanta is hot too. In general, the census is that most markets in the U.S. are hot. As usual, they see CA & NY buyers and oversea money bidding up prices in their markets. Deals could only be found off-market. I don't know much about the FL market.

Bruce said that FL and NV still have a ton of foreclosures in the pipeline. After doing some homework, I've decided to stay close to home. If the numbers don't pan out, I will sit and wait.

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mlreits

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Quote:
Originally Posted by larrywww
The person whom you should really talk to is Sean O'Toole.  His characterization is that even the SFR market is just off the charts insane in the San Jose area.  His take is that alot of tech millionaires, who can afford to do so, are spending through the roof for trophy properties.  But don't confuse this with an investment, it's something closer to a personal lifestyle choice.   And so long as they can afford it, and they are only spending their own money, maybe there is no harm in it.  But Sean, who is extremely logical, I think, would caution you that the shrinking returns that are theoretically available are looking closer to speculation, from any reasonable standpoint. 

In an case, I don't really comprehend why you would want to buy apartments in one of the most overheated markets in California---maybe even in the US.  Wherever you live in California, there are places with more reasonable cash flows, usually inland, within 2-3 hours.  Why not look into that?  An apartment in Stockton (or wherever) is probably going to have a far better ratio of rent to purchase price, right?  Sean is very logical and the shrinking return you are getting on deals there---Well, is it really all that attractive?

Another issue is that you don't want a property that will turn out to be a management headache down the road.   Are the relatively small apartments you are buying able to afford a handyman?  (It would be better to have a handyman and a manager, BTW, but it doesn't sound like that's going to happen.)  You don't want to be stuck to a tar baby for the foreseeable future.

One final question I have for you is basically--where have you been?---and why are jumping on this type of investment now?  The last 2-3 years is when these purchases would have been far better deals---and I think this is true across the spectrum of investments.   Why try and hop a ride on a speeding train?   I don't see any evidence that the timing for your investment is really all that favorable.  Am I missing something?

You haven't actually said, BTW, what kind of returns you think you are going to find.


Larry,

I was busy raising money to buy condos, townhouses and SFHs. Back in 2011, 4plexes were selling for $650k to $700k and 8-plexes were selling for around $1.1-$1.2M. Condos and townhouses were selling for $150k to $175k. I was looking at historical data, and it appeared that condos and townhouses have a higher probability of outperforming 4plexes and 8plexes in appreciation in the short-term. So far, it turned out to be the right bet. These unit basically doubled in value while 4plexes are currently selling for $850k-$900k and 8-plexes are selling for $1.2M-$1.4M.

With respect to SFHs, I believe the prices are not outrageous based on historical data. We are at about FMV give or take 10%.

As I mentioned above, I believe we're a little late to the game, but not too late. Our goal is to buy underperform apartments in rent control downtown San Jose, do value-add, stabilize it and achieve an annual 10% cash-on-cash returns by year 3, with returns of about 3-5% in year 1 and 7-8% in year 2. Time will tell if we can get there. I'm confident we will succeed.


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larrywww

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Rent control?!!!!!!!!!!!!!!  What hath God Wrought?!  (Book of Numbers 23:23).

Yeah, I totally forgot about that little wrinkle.   These words are absolute poison to an apartment investor.   The reason I like real estate is that I do NOT have to depend on Wall Street or other outside hostile forces that will seek to control my destiny.  And for my money, I would NEVER put my fate in the hands of a bunch of clueless government bureaurcrats.   Santa Monica used to be one of the best places to invest in, and now owners there are so desperate that they fight tooth and nail just to take their properties off the market and maybe turn them into commercial properties where rent control doesn't hold sway.  Or simply install family members to get some value out of it.  Tenants in Santa Monica literally bequeath rentals to their children, confident that they do NOT have to worry about market forces as long as they hold on.   And this unwise approach has spread to Los Angeles, West Hollywood and, Yes, San Jose (and a few other cities).  Thankfully, not too many other places.  What rent control does is make available to the tenants a smorgasboard of legal tools to make life Hell for their landlord.  There are attorneys who have made tons of money on rent control (on both sides of the lawsuits) because the regulations have been so all encompassing and unbelievably complex.  And the widespread perception is that these rent control boards uniformly favor tenants, unless you can clearly prove you are observing the letter of the law, etc.

Sorry, but I think you just laid down the trump card that absolutely queers the deal from my point of view.  It's something really toxic in this investment discussion.  Like Kryptonite.  Or wolfbane.   It's a nightmare.  Don't even think about it.  Game over.   In my view, for most multifamily investors, the subject is officially closed.  Yes, I realize that rent control exists in alot of desireable areas where investors would otherwise like to invest.  But it is also true that is NOT so widespread as to prevent this type of strategy, if that is what you want to do.

(I'm not talking ideology here, because all investments are ultimately about dollars and cents.  But my suspicion is that once you add a wild card like rent control to the mix, you are asking the investor to basically write a blank check.  Because you can't predict the rules when they are subject to change.  I would venture a guess that there alot more tenants than landlords in San Jose, right?  In any case, I have never met an investor in a rent controlled jurisdiction who was happy with his/her investment.  Have you?  And, believe me, if you want to sell your property later, there are alot of investors who will not even consider buying in a rent controlled city under any circumstances.  In fact, right now is a pretty good time to move marginal inventory because of the shortage of inventory right now.) 

In any case, if you get a chance, talk to Sean O'Toole, the man is a master capitalist and he has invested in all manner of properties in his career.  And, best of all, he really doesn't consider other investors to be competitors any longer, since his service sells to all manner of investors.  The thing that I really like about Sean is that the man is just relentlessly logical, no emotion, he will be guided by the numbers, etc.  If you ran this scenario by Sean's relentlessly analytical mind, I tend to feel that he would inject a serious note of caution.

The problem is that if you pay too much for commercial properties---you will own it at least through the next market cycle---no easy exit strategies, except perhaps buying at the right price.  And there is no market timer like Bruce who will warn you when you are buying too close to the top of the market.  (The only firms that could actually tell you about commercial market cycles are the commercial real estate firms who have zero incentive for wanting to share that information---they would be discouraging future investors, something that would almost never happen, it would be destroying their bottom line, etc.).  Right now, in my view, ALL properties (commercial and residential) are quickly getting overpriced, especially in your market.  (There are some markets where residential is actually higher than the last runup, if you can believe that, and you just happen to be investing in one of those cities).

BTW, do you have an agent who is pushing these deals?  Keep in mind that the large commercial real estate companies have refined to a science the art of ensnaring commercial newbies in their "hot deals".  They play on your vanity, try to portray the soon to be owner as Masters of the Universe.  But if you don't have a seasoned apartment investors reviewing the deals, you may find yourself adopting someone else's problem.   If the calculations they are showing you involve anything less than 45% or possibly greater expenses, then IMHO you should not believe them. 

Also, most of these commercial real estate companies will double end the deal, represent both buyer and seller.  Do NOT believe that they are going to represent anyone's interest other than the seller's, even if they do get you some minimal concessions.  They want the deal to close---period---and they probably have already lined up what the seller is going to buy next, etc.  It does NOT matter if they can find comparable sales of properties at this point because the market may just be overheated with very little inventory, in which case the values may be unsustainable.    The buyer usually does NOT have another deal to offer them, so your interests will predictably be given short shrift, etc.  My advice is to keep in mind how ethically Goldman, Sachs and other Wall Street companies have acted, and you probably should NOT expect any higher standards from these characters.

But, Hey, it's your money and all that, right?






mlreits

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Larry,

Thanks for the warning. Your post reminded me of the issue I had with buying condos & townhomes in the earlier years due to hating paying and dealing with the HOA. Once I had overcome that matter and decided to move forward with the purchases, So far, I got better returns on appreciation on these properties than my duplexes. I'm getting some nice checks on these properties in the next two weeks.

Now it's the rent control issue that I had overcome. You couldn't get me to look at rent control properties in the early years, but I have come to love rent control properties. I believe it's a niche that I can exploit to my advantage, but god knows. Not to get into all the details, but San Jose is so landlord friendly in my opinion. There's a debt pass through where you could raise rent up to 35% on all of the existing tenants; there's an 8% cap on annual rent increase, or 21% rent increase every two years, etc...... I believe I can work with the City of San Jose rent control guidelines. Of course, San Francisco, Oakland, Berkeley are a totally different animal.

I've learned so much from reading spreadsheets, pro-forma, expenses between 28%-32% from the listing agents of Marcus & Millichap, et. al. So much B.S. in their financial spreadsheet that I don't know where to begin. My goal is to seek out off-market deals by doing direct mail. Once rehabbed and stabilized, the buildings should have an 8 GRM or less. I may not get to my end goal of acquiring 500-600 units with OPM in the next few years, but I will take what the market will give me. I will sit out if the numbers don't add up. People lie, but numbers don't lie.

Great suggestion, I will shoot Sean an email to get his opinion.

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mlreits

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Finally, we're in contract to buy a 6-unit building for $1.188M.  Building is currently in good shape.  Current rent roll is $91k.  All units are $400 below fair market rent in its current average condition. You can get an additional $100-$150 if you completely renovate the units. Here are some numbers.

Property tax = $16,600/year (revised based on our purchase price)

Insurance = $1,800/yr (got two quotes for $1,766 and $1,781)

Estimated Legal fees = $2,000/yr  ($800 for LLC, $400 for CPA & whatever else)

Utilities = $7,800/year (P&L showed $7,600)

Repair, Maint & Reserves = $6,000 (P&L showed very low numbers)

Estimated Vacancy = 5% (only 1 unit was vacant for a short amount of time in early 2013)

Property Management = 5% (our currently property manager's fee)

All units are fully occupied. 4 units are university students. 2 units are long-term tenants, 12 & 20 years. The intention is to bring each unit up $250 - $300/month in the 1st year & another $50 - $100 in the 2nd year.

As each tenant moves out (if they move), we will renovate the unit and bring it to fair market rent. The rental market is so tight now, and we have a waiting list of tenants so renting them shouldn't be an issue.  We have contractors that can complete the rehab in 2 weeks for each unit.

70% LTV at 3.0% interest rate with 1 pt. It's a 5/1 ARM with 10-year balloon amortizes over 30 years.

The game is rigged in favor of the aristocracy.  This deal is possible because of cheap financing.  The reason we were able to obtain this interest rate is because my partner is a high networth individual.  This deal wouldn't have penciled out for an average Joe getting financing at a fair market interest rate. 

I would love to get some inputs from the veterans on my numbers above.  Low, high, unrealistic, etc.

Thanks.


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Minh

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With your current rents this appears to be a blah return.  A little over 4% CAP and 1 3/4% ROI.  You leverage won't help your ROI until your CAP is past 5%.  With another $300 per unit your CAP goes to around 5 2/3% and your ROI a bit over 7%.  Much better.

I suspect your student tenants will leave with a $250 rent increase and no rehab.  Maybe even your long term tenants.  You could give rent increases to your worst tenants first and hope they move.  Then you can rehab and offer the new and improved units to your better tenants.  Then rehab their units once they are out.  Big rent increases are a good way of creating vacancies.  For the record my last three rent increases as a tenant were 50%, 100% and 50%.  A polite way of saying get the heck out.  Since I knew my neighbors, not one unit rented for more than a 25% increase after the rehab. 

The 5/1 ARM and 10 year balloon could explode on you depending on how conditions are in the future.

Good Luck with your project and your rent increases.

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Rick,

Thanks for chiming in. Blah return indeed at the current rents, but we can only take what the market will give us. If we can get 6% cash on cash return after year one, we're happy. Actually, our goal is to replace the current students with young families on our waiting list as the students move out. That should cut down quite a bit of vacancy in our opinion.

My perspective has really changed since I started to learn about investing in apartments. Basically, we want the owner to be happy with the sale price, the broker to be happy with his commission, and we are happy with the purchase price regardless if the deal is on or off-market. If only 1 or 2 parties are happy with the deal, someone else probably got short-changed, which is not how we want to conduct our business as well as our reputation.

As presented on the deal above, the purchase is blah, but we are happy with the potential. The seller is happy that he got the price he wanted, and the listing agent is happy because he made a little more money than usual.

Sometimes you have to pay to play. Additional inputs from others are welcome. I'm still learning.

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Reply with quote  #16 
You really learn a lot from it ,in fact i am planning to invest in multifamily apartments however i don't have yet some knowledge about it and i heard some people who did not succeed when they invest in multifamily ,my friend before goes to velkasaneeraus or debt restructuring when he experience being un success in investing world.
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Reply with quote  #17 
If you've already closed on this deal, forget reading the rest of this post.  

If not, first know that I've got about three decades worth of experience in this niche.  FWIW


You've got to be thinking about your exit strategy.  It's always about making money when you buy.  Otherwise, it's not an investment, it's a piggy bank, or worse, it's a gamble.

I ask myself, what is my likely buyer going to look like?  Is he going to be trading up (1031) from a duplex, triplex, or what?  Is he trading down?  Is he trading out?  What are most six-plex buyers looking like in my neck of the woods, at this price point, and cap rate (appreciation rate and market demand)?  Once I've answered that, I can consider what the best exit strategy is for this particular property. Ie:  Leave it alone and milk it for cash flow?  Reposition it?  Tear it down, and build something else?  What?


Meanwhile, if you had to sell quickly, from my perspective, you're screwed like a prison orphan. 

Few buyers can get the financing you're talking about, and if they could, they're not gonna buy this small.  Just saying.


That means the next buyer better have the same financing advantages you have, and less upside potential requirements, otherwise few can afford to buy your building, at the cap rate, financing, upside, and price you'll need to call this a successful investment, say in five years, etc.

So, financing is everything for you, AND your buyer, too. 

Meantime, you're looking at short term gains only.  Those are so miniscule it's scary.  Not to mention it's only six units!!!!  That's like the "worst size" in a low-cap market, that you could possible want to invest in.  I think the only thing worse would be a duplex...  And that of course is why your next buyer is a former duplex investor... anything's better than 'that' he thinks to himself. 

Meantime again, my first assumption was that you're investing for appreciation, not actual cash flow.  Since your cash flow is so slim, and the cap rate so tiny. 

In fact, so slim and tiny, that everything hinges on the cheap financing, that you acknowledged was the reason there's any cash flow at all, in the first place.


So, the main issues I see are ...marginal upsides in cash flow, being upside down on the resale for a long time, and having few buyers with the same financing advantage, in order to over-pay like you did.

Why upside down?  Because the price you're paying today is based on the financing that enabled the price you paid, not the market.

No wonder the agents and other professionals are having multiple orgasms over the price you're willing to pay! 

It's because nobody in their right mind (said in the nicest way possible) would do this, and nobody in their right mind CAN do this.

Again, your potential buyer is gonna be a mom-and-pop operator trying to trade out of a SFH, or duplex, using a 1031 exchange.  He's gonna be selling his property under the same market conditions as you are trying to sell.  But he can't overpay, unless he first 'oversells.'  How likely is that to happen?

Now, if you really wanted cash flow, then you want to buy where there's actual, meaningful, lower-risk cash flow.  And for starters, that's not buying in 4 cap farms...  I mean really!!!!

I have to assume you're in an appreciation market, because of the high competition, low vacancy factor, and resultant low market cap.  That's fine, as long as that's what you're after. 

But you seem to be going after cash flow, in an appreciation market.  These really don't mix well in the short term.  Eventually you'll experience higher amounts of both.  I would rather have extreme amounts of one, or the other.  The money seems to come faster, when I focus on one over the other. 

BTW, I'm not saying that you can buy at an 11 Cap, for example, when the market cap is 4.  I'm just saying buy where market caps are 11, and where you can succeed in getting cash flow, without depending simply on weirdly advantageous financing.

If you just have to buy in a 4 cap neighborhood, you're gonna pay out the nose, good financing, or not.  It's just that your "good" financing seems to skew your decisions, and cause you to pay more than you ought to.  And paying more than you ought, naturally undermines your cash flow potential by the same measure.

OK, that's my sermon.

You know I want the best for you, right?  No part of this post is meant to insult you, or your decisions, because ONLY you know what's best for you.  We're all different in our tastes, needs, and wants.  And I can't presume to know all about your rationale, or basis for your decisions.  So take it for what it's worth.


That all said, if you've already pulled the trigger on this puppy ...then never mind. [said in Gilda Radner's voice]
 
    

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mlreits

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Reply with quote  #18 
Hi Jay,

Thank you very much for your inputs. Even though I closed on this 6 unit building last month, I still read your entire post. Don't sweat it. I find it constructive. I'm not as creative as you so my profit margin is just average, and I'm ok with that.

So far, I've been happy with the decision. We spent $8,200 to renovate one unit and brought it up to fair market rent of $1,700/month. We're currently renovating a 2nd unit and will also bring it to fair market rent.

I don't see a reason why we would want to sell it in a hurry. This is a buy-and-hold with a decent IRR. I don't see myself selling it unless some motivated buyer came along and offered me a phenomenal price. Otherwise, why sell?

I find my market here is quite unique. If we put anything on the market at a fair market value, it will sell within 15 days so I'm not sweating it. At least not yet. [biggrin]

Thanks Master Jay.

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Reply with quote  #19 
Quote:
Originally Posted by mlreits
I don't see a reason why we would want to sell it in a hurry. This is a buy-and-hold with a decent IRR. I don't see myself selling it unless some motivated buyer came along and offered me a phenomenal price. Otherwise, why sell?


This seems to be the predominate attitude in my market among sellers and may at least in part explain the low inventory. Even at 4 caps, sellers are not that motivated to sell because where else are you going to put your money? I have the exact attitude with my multi-families. I would never buy a 4 cap myself, but I am not interested in selling at a 4 cap either with the cash flow going nicely.

The distressed sales are greatly diminishing and I think there are a lot of investors who have held for a while who are just not interested in selling, even at the high prices.
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Kingside,

Thank you for your confirmation.  That's the exact attitude about the sellers in my market too.  We sent 2 letters to the owner of the building next door and asked him to sell us his building.  We finally got a call from him last week.  He said the only time someone is selling is because Marcus & Millichap agents convince them to.  Otherwise, why would you sell?  We also found out that he's the VP of Colliers International.  [biggrin]

Basically, he said the seller of our building was an idiot.  Well, not in those exact words.  In my opinion, the only thing that the seller did right was paying the capital gains and not 1031X into a Burger King building in Greenville Texas. 

One thing that I have learned about investing in Coastal CA is that you buy and wait, not wait to buy, especially when it comes to income producing assets.  I see people complain about not being able to find buildings for sale with 15% to 20% IRR.  Well, give me a reason why any seller getting those kinds of returns would want to sell.  

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Reply with quote  #21 
Who's managing this new project?
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Who's managing this new project?


We have a property manager for the apartment buildings.  His name is Louis Melo with Atlantis Properties.  I understand that he's managing over 1,400 units in the Bay Area.  So far, he's doing a good job.

With respect to the mobile park, I understand that there is an existing on-site property manager. She gets to live for free plus a fee of $600/month.  My buddy, who is a bank examiner, is taking the lead on this deal.  He's much more thorough and conservative than me in my opinion.

All opinions are welcome Jay.

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Reply with quote  #23 
That's a great piece of information Mlreits! Glad you shared it here.
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Reply with quote  #24 
Well IMHO id take a lower CAP rate in a location that's closer to me than a significantly higher cap rate on a building that is far away (even a couple hours).

We purchased an 11 unit building in Palm Springs at 3.5x grm last year and it's just a pain in the ass.

I love the area, it's a cool building but you just get bent over a little more when your far away which ends up eating into that "potential" return.)

In addition understanding the market is super important and doing that long distance is much harder.

For example here in San Diego there is an area named Kensington which is super nice but if you cross over the blvd it's a totally different market.

You wouldn't know that living far away.

We just closed on 16 units about a mile from the ballpark in a gentrifying neighborhood called Sherman heights a couple weeks ago

We bought it at a low cap rate but the deal had super low rents and at the date of close it was worth about 300k more.

We will do work on the place, get the rents up to market by having nice places and either refi or sell.

This deal is so much nicer because it's close and although the Palm Springs deal has more cash flow there is an absolute value I out on my time that many don't consider when investing out of the area.

BTE I originally happened to be representing/helping a buyer who after I negotiated an incredible deal ended up getting cold feet. I let him know I really thought it was a good deal but I think he just thought I was doing the broker thing. I said "you REALLY should buy this but if you don't I want you to assign it to me ok? And he said sure until he realized I was serious and then wanted to buy it and was about to close.

Keep it up Minh, your a smart guy and I'm sure you'll do fine.

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*btw not BTE - damn smart phone

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Quote:
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. For example here in San Diego there is an area named Kensington which is super nice but if you cross over the blvd it's a totally different market. You wouldn't know that living far away.  


Well said.
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Finally, we're in contract to buy a 6-unit building for $1.188M.  Building is currently in good shape.  Current rent roll is $91k.  All units are $400 below fair market rent in its current average condition. You can get an additional $100-$150 if you completely renovate the units. Here are some numbers.


So we closed on this 6-unit building in June.  The unit mix is five 2/1 and one 1/1.  We brought 3 units to fair market rent.  The 1 bedroom is now $1,550/month.  The 2/1 are now $1,700/month.  Effective November 1st the remaining 2/1 units will be $1,600/month. 

As previously mentioned, we petitioned for a debt pass through and the City of San Jose allowed us to increase rents up to $478/month/unit.  They required us to give the tenants a 60-day notice for the rent increase, and that was what we did. 



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We just closed on a 4plex last Friday for $930k.  We're very happy with this deal.  It's a beautiful Mediterranean building on a beautiful tree-lined street.  It's 3 short blocks from Japan Town, which is a very popular area for young professionals and retirees.  This area is just hot, hot, hot.  The 70-year old seller inherited this building from his parents so basically it's tax-free money for him. 

Current rents are $1,075/unit.  LTV is 65% at 3.05% interest, 5/1 ARM with 10-year balloon, amortizes over 30 years.  We have petitioned for a debt pass through with the City of San Jose.  One bedroom units are expected to rent for $1,700-$1,800, and 2-bedroom units are expected to rent for $2,100-$2,200/month.  We will see how much the City will allow us on this building. 

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Reply with quote  #29 
Whats a debt pass through? Is that related to rent control? I have never heard that term.
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Sean,

The previous owner owned the building free and clear.  When we bought the building, we obtained a mortgage for $831,600 at 3% interest rate.  Also, our new property tax basis is also higher.  The CSJ has a formula to calculate on how much additional debt that we have to service.  Based on this formula, we were able to increase $478/month/unit. 

Based on my understanding, The City of San Jose has very lose rent control. They have a cap of 8% annual rent increase.  If you don't increase rent in one year, you can increase it 21% every two years.  You take your pick.

Oakland, Berkley and San Francisco rent controls are crazy.  We were looking at a $4M building in SF where the rents varied from $435 - $1,800/unit.  If you can kick these people out, you can get $3k/month/unit.  Crazy.

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