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kevintitus

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Reply with quote  #31 
You can also invest in granny flat in Sydney as it is very trending here. Investing in granny flat is a good option and have many benefits.
mlreits

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Reply with quote  #32 
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Originally Posted by larrywww

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?



Hi Larry,

As usual, I value your experience and inputs.  You're one of the reasons why I didn't invest out of state.  As I previously mentioned, San Jose rent control laws are loose and landlord friendly IMO.  In fact, we just exited this apartment building yesterday 6/12/15.  We bought it on 6/10/14 for $1.188MM, put $42k into rehab, and sold it off-market for $1.55MM.  The net profit is over $230k after all expenses including real estate commissions, pre-payment penalty, etc. 

The property address is 5.6.1. South Seventh St in downtown San Jose.  We brought rents from $6,900/month up to $9,605/month in a matter of months.  We have another building where we raised rent $512/unit, and it was approved.  The new owner of the building can use the same approach to raise rent or take the easy 8% annual rent increase this year. 

I tried to break into the Oakland market due to the spill over effect from San Francisco, but the rent control laws there are just a little too crazy for me.  However, it looks like others are much more savvy than me, and they're making it work.  All in all, every market has its niche.  One just has to know how to exploit it to their advantage. 

Thank you for your inputs.

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mlreits

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Reply with quote  #33 
And the journey continues........

Last month, my partner and I bought two apartment buildings.  One is a 7-unit building on South Fourth Street for $1.125MM.  This building has four 1/1 and three studios.  Current rents are just shy of $7k/month.  Using pass debt through, we will be able to bring rents to $8,737/month by August 1st.  Fair market rents for all units is about $10k/month so we're still 15% below fair market. 

The other building is a 6-unit on South Seventh Street.  We paid $1.175MM.  All units are 2/1 with two units have smaller layout.  Current rents are just over $7,200/month and will be about $9,800/month by August 1st after debt pass through.  According to our property manager, fair market rents are $2k/month for 2/1 units so we're still about 20% below fair market on these. 

We financed both of these building using a bridge loan since the rents are so low.  The terms were 4.75% IO payments for 18 months with 3-year balloon.  LTV was 75% with 1 point.  Chase previously said they could refinance both of buildings at 75% LTV at 3.75% with no points, or 3.4% with 1 point once we brought the rents up.  No rent seasoning is required.  How cool was that?

We might wait until August 1st, 2016 to refinance after we raised rents another 8%.  Hopefully, we would be able to pull some equity out of the deals, but who knows where the market would be then.  Only if I had a crystal ball.  Sigh.............However, we are open to selling both of these if the right offers come in between now and then.

As mentioned in another thread, my partner and I are in contract to buy an 8-unit building right across from SJSU for $1.225MM.  This is a trophy property IMO.  The kids inherited the building and want to cash-out since they got a stepped up in basis.  Tax free money, who wouldn't want that?  We're scheduled to close by the end of this month.  Once closed, I will be more than happy to share more info.  

We recently passed on a 12-unit apartment building at 45 N. 8th St.  Hence, it hit the market recently.  This building is very sick in terms of its conditions IMO.  I would be interested at $1.5MM, but no chance at the list price.  We were also presented with another 6-unit off-market building this week.  There's a very high probability that we will pass on it unless we can get it for very very cheap. 

Happy hunting everyone.

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mlreits

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Reply with quote  #34 
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,

I'm reading Emerging Markets by David Lindahl.  The book talks about how the real estate market in different parts of the country peak and bottom at different times.  Only if we knew how to move our money around the country efficiently.  I'm quite sure I'm not smart enough to figure this all out. 

What I learned is that emerging markets don't have to be out of state.  It can be right under your nose. An example that he used in the book was Donald Bren, who recognized the path of progress and bought undeveloped land in Orange County, which made him a billionaire.  Orange County is strategically between L.A. and San Diego.  Of course, one could buy and wait for years or even decades.  Who knows.  It's easy to see it in hindsight.

The same was said about about Fairfield for years or decades.  It's between San Francisco and Sacramento.  Can be it next?  Sure, but when would it happen?  I really like the Oakland market due to the spill over from San Francisco and its rapid gentrification, but having a hard time dealing with their rent control laws so I have abandoned looking at that market for now. 

What I have learned after checking out several markets is that every market has its own challenges.  Things might look good on paper, but you end up losing money after all said and done.  Lots of investors lost money investing out of state so it's not all roses.  I had a talk with an engineer couple recently, who invest out of state.  They initially wanted to buy at least 10 properties, but stopped at 3.  Their comment was....it feels like everyone is getting paid except us.  [biggrin]

Happy Hunting!!!

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mlreits

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Reply with quote  #35 
Quote:
Originally Posted by rickencin
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.


Rick,

You're making me feel much better with your rent increases.  [biggrin]

This has been our experience on the two buildings that we did the debt pass through.  No one has left..............yet.  This includes one building where we raised rents $512/month/unit.  That's a 48% rent increase according to the tenants when they filed the petition.   

This ARM product is very interesting to say the least.  I haven't experienced it yet and hope it doesn't blow in my face.  Now that I'm on the verge of adding 10.5 doors (my share) under my belt on the recent acquisitions, I'm planning to sell some of my smaller holdings to raise liquidity and probably pay-off my house.  At least I would still have a roof over my head when the ARMs exploded on me.  With that said, I love this new apartment reposition niche.  I will only hold the trophy properties and don't mind selling others for the "right" price.  

Cheers.

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Reply with quote  #36 
Quote:
Originally Posted by Paul
Great to hear this Minh. I know you will do very well.

Paul


Paul,

Initially, I was hoping 2014 would be my record year, but it looks like 2015 might be the year.  Although we have been turning down deals, we're still having some cooking in the back burner.  It has been a rewarding journey to say the least. 

Are you still in SoCal or happily enjoying your new life in NC?  At this stage in my life, I value time more than making money although it doesn't sound like it.  We were able to plug into a couple of brokers in our farm so deals are coming to us now.  We stopped doing direct marketing since we don't want to step on their toes. 

Best of luck in NC.

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mlreits

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Reply with quote  #37 
So my partner and I closed on an 8-unit building in early July for $1.225MM.  The building is right across from SJSU.  Gross rent was at $7,825/month when we bought it.  One of the tenants moved out shortly after, and we re-rented his unit right away for $1,945/month, which brought the rent up to $8,570/month.  We filed for debt pass through petition and expect the gross rent to be $10,700/month by October 1st based on our previous experiences.

We received an unsolicited offer from an agent on our 4th St building for $1.5MM three weeks ago.  We paid $1.125MM for it in mid May.  We're just not ready to sell it yet due to tax consequences.  Gross rent was $6,900/month when we bought it.  New gross rent will be $9,637 effective next month.


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Reply with quote  #38 
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Reply with quote  #39 
I was talking to a mortgage broker this week.  The problem with multifamily is that mortgage rates are going up----he doesn't believe Bruce's scenario of a 2% rate is going to turn out to be true----he believes that mortgage rates are heading up, up, up----which theoretically means, I guess, that it is going to be harder and harder to get top dollar for a multifamily.


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Reply with quote  #40 
Quote:
Originally Posted by larrywww
I was talking to a mortgage broker this week.  The problem with multifamily is that mortgage rates are going up----he doesn't believe Bruce's scenario of a 2% rate is going to turn out to be true----he believes that mortgage rates are heading up, up, up----which theoretically means, I guess, that it is going to be harder and harder to get top dollar for a multifamily.




If you had to make a bet on the mortgage rate prediction in the coming years between this mortgage broker and Bruce Norris, who would you pick? [wink]

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larrywww

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Reply with quote  #41 
The mortgage broker: Rates are going up, which means we aren't going to see 2% mortgage rates.

Which means to me, that if you want to sell any of your multifamilies (or other asset classes dependent on financing), now might be a very good time.  After all, with declining yields---how low will a new buyer accept if interest rates are rising? 

I think that in past real estate cycles Bruce Norris has been reliable in making predictions about real estate---at a time when one could rely just on real estate trends to do so.

But his latest report relied alot on general economic factors---the impact of Brexit and other economic threats, etc etc.
In introducing his report, Bruce Norris he would cover the following topics (among others):

  • What does China‚Äôs economy and national debt look like now?
  • What is their healthcare system like?
  • What does the Euro zone deflation refer to?
  • What tax law changes could we see in the coming years?

The Table of contents for Bruce's Report is as follows:
  1. 20 Appraised Properties
  2. Affordability
  3. Sales & Inventory
  4. Lending
  5. Interest Rates
  6. Employment
  7. Trustee Sales
  8. Residential Construction
  9. Commercial Real Estate
  10.  Retired Readiness/Family Budgets
  11.  Demographics & Migration
  12.  Pensions and Retirement Promises
  13.  National Debt, Social Security, and Medicare
  14.  The Presidency and Past Financial Outcomes
  15.  Oil
  16.  Changes Coming Due to Technology
  17.  Rentals
  18.  Where We Are and How We End
  19.  Wild Cards  
  20.  Major Timing Takeaways 

order-now.png

As you can see, there are a number of general economic matters discussed----not at all narrowly a report about real estate.

 I consider that making predictions about the economy in general and upcoming tax legislation affecting real estate in the US is way more complicated than his past reports.  If one thinks about the track record of Bruce Norris, it has been limited to predicting the trajectory of real estate prices in California----not general economic conditions.  An Bruce Norris only has a high school education---if he wants to predict macroeconomic events, he will certainly need more than that to play on that level.

Also, I  think you may have the wrong idea about Chapter 19---Wild Cards----it asked like 10 questions which may severely impact real estate----but I don't think it gives definitive answers.
That is alot of caveats for just one report----and there isn't a prediction when real estate will crash---not even after the 10 years.

To my way of thinking, if one assumes that the fate of real estate depends on imponderable questions such are covered in the chapter Wild Cards---to me that is equivalent to saying that that this cycle we simply can't predict where things go from here.

The point is that this report is very different from the ones Bruce gave in the past.

The fact that "Wild Cards" mentions 10 different issues---as to which Bruce isn't even hazarding a guess at this point----isn't that just a complicated way of saying "I don't know".

Not disrespecting the effort, but where does it leave us?
Finally, Bruce says this is a 10 year report----maybe because he is getting out of the report business until further notice.  But does anyone believe you can predict what happens 10 years in advance?  When Bruce said in December of 2005 to get out of the market he wasn't predicting that far in advance----the wheels started to come off in 2006 (maybe different depending on your location in California).  But it wasn't a long term prediction---like this purports to be.

Also, in regards to the proposed tax changes, it's a little conjectural whether Congress will have the votes to enact them into law---although I agree these are relevant questions to ask.

During past reports, Bruce has never given predictions about interest rates, inflation, deflation, stagflation, or the economy in general.  Even those exceptionally qualified to make predictions about such macro economic areas don't really have an impressive track record.  It's a shame that to predict the real estate market during this market is going to require predictions on such events, because it makes the outcomes inherently less predictable.  And my guess is that Bruce Norris would agree to such caveats, etc

And so, I am also skeptical about the extent to which one can make predictions about the economy in general---and Warren Buffett doesn't believe anyone can tell us when we are going to hit a recession.

And I don't think Bruce really comes down that hard on the 2% prediction or the more sensational idea of negative interest rates----basically he has a chapter called "Wild Cards" where he discusses 10 different factors that might impact real estate----but I don't think he really comes down that hard on this prediction, but states that it might happen and impact real estate.  So, unless you attended his 3/4/2017 report (or have later gotten a copy of it), I am not sure it's accurate to say he specifically predicted this.

Finally, Bruce says this is a 10 year report----maybe because he is getting out of the report business until further notice.  But does anyone believe you can predict what happens 10 years in advance?  When Bruce said in December of 2005 to get out of the market he wasn't predicting that far in advance----the wheels started to come off in 2006 (maybe different depending on your location in California).  But it wasn't a long term prediction---like this purports to be.

That is alot of caveats for just one report----and there isn't a prediction when real estate will crash---not even after the 10 years.

Having said the foregoing, I am not seeking to persuade others that Bruce's predictions are necessarily incorrect---my feeling is that no one can really telll.  So, this is just what I  believe---I am not at all saying this has been proven to any kind of certainty.

And I also think that the report is valuable irrespective of whether Bruce gets it right about 2% mortgage rates, etc---although it is very material to the current question.
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Reply with quote  #42 
Quote:
Originally Posted by mlreits


If you had to make a bet on the mortgage rate prediction in the coming years between this mortgage broker and Bruce Norris, who would you pick? [wink]



Doesn't take anything but a real estate license to be a mortgage broker so my answer to this question would be "it depends on who the mortgage broker was and their background".....

Hope everyone is doing well!

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