Busy Bay Area business owner seeking to diversify through REI

Starting Out
9yFollow

Busy Bay Area business owner seeking to diversify through REI

Ethan M.
Rental Property Investor · Novato, CA · Member since 2016 · 12 posts · 7 votes

My wife and I are interested in diversifying some of the profits from our business through real estate investing.  I've been educating myself for several months, and am ready to make a move, but none of the deals I analyze seem worth the trouble.  I would be very grateful for any advice that experienced investors can offer.

A little more info:

  • We're considering investing out of state, as it seems challenging to cash flow here, but also due to the general regulatory (and litigious) climate of CA and especially the Bay Area.
  • I understand that there are likely great opportunities within driving distance of the Bay Area and that something local makes sense especially when starting out.  That said, finding these areas has proven challenging.
  • We're primarily interested in multi-family properties but have also researched turn key single family properties, vacation rentals, and even mobile home parks.  
  • My schedule ranges from fairly flexible to extremely busy.  Most of the time I won't be the person hustling the hardest looking for a great deal as our company (and our family) will stay my primary focus.  This obviously will eliminate certain strategies from consideration.
  • If we eventually build a portfolio of several medium to large multi-family properties my wife will assist with the management.
  • The multi-family market seems inflated at the moment so we're willing to be patient if needed.  The increased velocity of multi-family appeals to us.  Our medium to long-term goal is to net approximately $12-15k per month.  Making a couple hundred dollars a month on individual single family homes seems like a slower way to go than acquiring 150 "doors" through a few medium size multi-family properties.

Thanks in advance to anyone that takes the time to read this and share any wisdom you have!

2Reply
54 views

Most Popular Reply

Clayton MobleyPro Member
Birmingham, AL · Member since 2014 · 875 posts · 947 votes
9y

@Ethan M. Welcome to BP! You've already gotten some really good advice in a pretty short time. As usual, @Wes Blackwell has some stellar info to offer. Though I personally can't speak on the CA market (other than that A LOT of your fellow Californians are in the same spot as you), Wes always has great input, so I trust his analysis.

I also think you should heed the advice of @Yousif Abudra, especially regarding determining your goals (cashflow vs appreciation) and narrowing your field of focus. Sounds like you like the idea of MFR, but also have little time or inclination to do a lot of the deal-finding legwork yourself. Depending on the route you go, these two factors may be in conflict with one another, so you need to be really honest with yourself about what you can (and want) to devote to your investment on a daily basis. The answer will tell you a lot about the best direction for you right now - but things change so don't feel like whatever option you go for today has to be the only REI you ever pursue.

As @Ryan Landis rightly pointed out, there are some, let's say, less-than-scrupulous turnkey providers out there, but truthfully it is the simplest REI for people with limited time and experience that want or need to invest outside of a market they know well. If you do go this route, make sure you look for providers that do things in-house, so you don't have several third-party contracts to consider during your vetting process. Also look out for companies that are just advertising props owned by other companies - these people are mostly just middle-men trying to get a cut of someone else's product - they have no incentive to keep you happy long-term. I post a lot on this, so if you're considering TK, here's a link to a post on questions you should be asking to weed out the the charlatans, written for another CA newbie ;)

 https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca

@Mike D'Arrigo is also spot on that a lot of people wait and wait and wait for the perfect investment and miss out on building a portfolio of decently cash flowing properties. Narrow your focus and learn what numbers you need to see to feel comfortable, but don't make things harder than they need to be.

In terms of portfolio building strategies (regardless of which route you go - MFR, turnkey, self-managed SFR) @Kenneth Reimer's suggestion of learning about 1031 exchanges is great advice. Though they can be complicated, 1031s are a fantastic way to build your portfolio tax-deferred, and there's no limit on how many you can execute in your lifetime. Technically, you can keep exchanging investment props until you die, then leave your last prop(s) to your heirs, who will receive a stepped-up basis equal to the market value at the time of your death. It requires careful planning and strict adherence to a number of rules and regulations, but if you do it right, you get lifelong rental income for you, free equity for your kids, and no taxes. Of course, the estate tax could still be a concern, BUT irrevocable trusts are a great tool for mitigating that risk... but I digress.

If/when you get to that stage of your research (which might not be for a while), I'd suggest reaching out to a Qualified Intermediary here on BP (like @Dave Foster, for example) to make sure you get accurate info as it pertains to your specific situation.

Whew, ok, that's enough from me. If you have any questions about turnkey in general, the Birmingham market, or anything I've said here, feel free to reach out any time.

Best of luck!

Clayton

2Reply
See this reply in the discussion

8 Replies

Jump to latestLatest
  • Wes Blackwell
    Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    9y

    @Ethan M.

    There are a lot of people on this site in your same exact shoes. They live and work somewhere near the Bay Area and have great income, but are having a time making the numbers work on any local opportunities they come across. There is a post here like this daily, so don't feel alone haha :-)

    I won't speak on investing out of state, because each market will be different and it's not something I specialize in. If you've narrowed some locations down, I would try looking in the local forums here on this site and inquiring about the area from some local investors.

    But as far as investing in your backyard goes, that I can definitely speak on. Right now middle and lower class families are being squeezed out of the Bay Area and are moving to Sacramento and the Central Valley (Stockton, Modesto, Fresno, etc.) 

    This is particularly true if they are Millennials, which is something I've written more about here:

    People who are stuck in the Bay Area with nowhere local to invest have an opportunity to get in front of this migration and see some good appreciation and rent growth heading into the future. 

    Sacramento was recently projected by Realtor.com to be the #4 Hottest Metro Market in the nation with an appreciation of 7.2% and sales growth of 4.9%. Yardi Matrix has predicted we will also be the #1 rental growth market in the nation in 2017 with 10% year-on-year growth, and 8.5% growth next year.

    For some anecdotes, in the past couple months I've met a handful of clients who are all young couples that are professionals in their late 20's & early 30's, and are leaving the uber-expensive Bay Area and are looking to settle down here in Sacramento where housing is more affordable.

    Sacramento offers enough of a "big city feel" for Bay Area residents and has several colleges, major sports teams, an international airport, etc. So there's little incentive to stay in the bay when their money goes so much further out here and they can get the same nightlife, restaurants, etc.

    The lack of those "big city" features is what keeps the rest of the central valley lower on the list, as they simply aren't as desirable of places to live (who looks forward to moving to Stockton?)

    Every week I analyze every single 2-4 unit property from Placer County all the way down to Merced County, and can tell you there are some great opportunities to cash flow out here.

    If you hand-pick the best 75-80 properties out here, this is what you can roughly expect:

    Price: ~$270k
    25% Down: ~$68k
    Gross Monthly Rents: ~$2,200
    PITI @ 5%: ~$1,450
    GRM: ~10.31
    1% Test: ~0.82%
    Gross Annual Yield: ~9.90%

    If this is in Sacramento, in two years your numbers could look more like this:

    Value: ~$305k (+6% annual appreciation)
    Added Equity: ~$35k
    Gross Monthly Rents: ~$2,625 (+10% this year, +8.5% next year as projected)
    PITI @ 5%: ~$1,450
    GRM: ~8.57
    1% Test: ~0.97%
    Gross Annual Yield: ~11.67%

    Now, I do not have a crystal ball, and obviously you should make decisions based more on what things are and not what they could be. But those are the projected numbers to provide an example of what could be possible. 

    Each property will be different, economies change and so do policies and politics, and you must do your due diligence before making a decision. There are no guarantees.

    Also, you may find a better place to invest out of state. Perhaps some other investors can chime on good markets to look at and consider nationwide.

    1Reply
  • Yousif Abudra
    Real Estate Investor / Syndicator · San Ramon, CA · Member since 2015 · 93 posts · 91 votes
    9y

    @Ethan M.

    You're probably drinking from a fire house looking at and analyzing deals when your schedule is more flexible, and then everything goes quiet for a few weeks when you get busier at work/life.  I work with a number of investors from the Bay Area who are also trying to find deals that generate cash flow.  I would suggest a few things to think about:

    • Determine if you are after cash flow, appreciation, or both
    • What cap rates are you looking for?
    • Will your wife be acting as the property manager, or will she be managing the manager?
    • I'd suggest focusing on one asset class - whether that be turnkey, SFH, MFH, mobile homes, etc. It can get exciting looking at everything that comes up, but you won't know a good deal from a bad one unless you start to reveal dozens of similar deals.

    Feel free to read some of my posts related to CA markets and out of state investing - you may find those helpful.  If you need help talking through or analyzing a deal, I'd be happy to help you out with a few. 

    Best, Yousif

    1Reply
  • Kenneth Reimer
    Rental Property Investor · Sacramento, CA · Member since 2016 · 267 posts · 214 votes
    9y

    @Ethan M. Ethan, you're coming into RE in an interesting time. When speaking of multifamily investments, the value of the buildings you analyze will of course be capitalized given the NOI and the market cap rates. That being said, the threat right now is getting in at a certain cap rate, having them rise, and then selling when cap rates have decompressed. Your idea of staying patient is a great factor to your situation. However, I would definitely analyze the opportunity cost of your cash. Many people in higher tax brackets are able to get into a deal that wouldn't make sense for others since the tax benefits are much more important, given their income levels.

    If time is one of your factors, multifamily is definitely a good option to consider. The underwriting of a deal that "makes sense" will have third party management factored in. This will allow you to act as the asset manager and oversee the operation, whether or not your wife is interested in the property management.

    As for hunting for deals, you'll most likely need to build a relationship with a broker, given your time constraint. Many people use mailing campaigns, cold calls, and good ol' fashioned door knocking as a way of finding deals, but that doesn't seem plausible for you.

    The ability to scale your operation with multifamily is incredible, but just not an option for many people. If you're looking to net $12-15k per month, I would say that multifamily will get you there sooner (given the nature of economies of scale). To educate yourself further, consider looking into 1031 exchanges; many investors have used this strategy to snowball their efforts every couple of years into larger buildings/more units. 

    Let me know if you have any questions! Happy to help.

    Kenny Reimer

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    9y

    @Ethan M. It would help to know what your criteria is and what you consider a "deal". If it's a 12% CAP rate and a bunch of built in equity on a rent ready property then you're not going to find that most likely. But you can easily find long term, steady cash flow on out of state investments in markets like Indianapolis and Kansas City. Too often, I see people waiting for the brass ring that continuously eludes them while prices are going up and returns are coming down and they never pull the trigger on good investments right under their nose. Personally, instead of looking for the home runs, I think it's better to go for the doubles and triples while slowly building wealth. There's a good book by John Schaub titled "Building Wealth One House at a Time" that you might want to check out. We sell turn key properties to a lot of people in the same position as you in CA and other high cost markets that are building portfolios generating significant cash flow and doing it without waiting around for some elusive deal to come their way. I'd be happy to talk to you in more detail if you'd like.

    0Reply
  • Gustavo Munoz Castro
    Specialist · Bothell, WA · Member since 2014 · 268 posts · 80 votes
    9y

    @Wes Blackwell, the digital mayor of Sacramento! I love the analysis you put down on this thread, please PM me for some further questions I have, thx!

    0Reply
  • Ryan Landis
    Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
    9y

    @Ethan M. real estate is the way to go! Not sure what your business is but some people will actually look at getting an SBA loan and getting into their own place (just throwing that out there - I am sure you know this).

    In terms of multifamily, great strategy. I am biased, but I would try and stay away from the Turn Key stuff on average (not all are bad, some are great, just find a great one). Your PM will make your success if you go anywhere other than your backyard. Get an idea of these fees upfront. Others will mention that it is 10% and 1 month lease up fees in some market - that is much different than what I charge my clients in the Bay - so people just sometimes don't quite "understand" the market before they jump in! Also factor in insurance (flood) and taxes if you go out of state - you might not be used to those here.

    0Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    9y

    @Ethan M. Welcome to BP! You've already gotten some really good advice in a pretty short time. As usual, @Wes Blackwell has some stellar info to offer. Though I personally can't speak on the CA market (other than that A LOT of your fellow Californians are in the same spot as you), Wes always has great input, so I trust his analysis.

    I also think you should heed the advice of @Yousif Abudra, especially regarding determining your goals (cashflow vs appreciation) and narrowing your field of focus. Sounds like you like the idea of MFR, but also have little time or inclination to do a lot of the deal-finding legwork yourself. Depending on the route you go, these two factors may be in conflict with one another, so you need to be really honest with yourself about what you can (and want) to devote to your investment on a daily basis. The answer will tell you a lot about the best direction for you right now - but things change so don't feel like whatever option you go for today has to be the only REI you ever pursue.

    As @Ryan Landis rightly pointed out, there are some, let's say, less-than-scrupulous turnkey providers out there, but truthfully it is the simplest REI for people with limited time and experience that want or need to invest outside of a market they know well. If you do go this route, make sure you look for providers that do things in-house, so you don't have several third-party contracts to consider during your vetting process. Also look out for companies that are just advertising props owned by other companies - these people are mostly just middle-men trying to get a cut of someone else's product - they have no incentive to keep you happy long-term. I post a lot on this, so if you're considering TK, here's a link to a post on questions you should be asking to weed out the the charlatans, written for another CA newbie ;)

     https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca

    @Mike D'Arrigo is also spot on that a lot of people wait and wait and wait for the perfect investment and miss out on building a portfolio of decently cash flowing properties. Narrow your focus and learn what numbers you need to see to feel comfortable, but don't make things harder than they need to be.

    In terms of portfolio building strategies (regardless of which route you go - MFR, turnkey, self-managed SFR) @Kenneth Reimer's suggestion of learning about 1031 exchanges is great advice. Though they can be complicated, 1031s are a fantastic way to build your portfolio tax-deferred, and there's no limit on how many you can execute in your lifetime. Technically, you can keep exchanging investment props until you die, then leave your last prop(s) to your heirs, who will receive a stepped-up basis equal to the market value at the time of your death. It requires careful planning and strict adherence to a number of rules and regulations, but if you do it right, you get lifelong rental income for you, free equity for your kids, and no taxes. Of course, the estate tax could still be a concern, BUT irrevocable trusts are a great tool for mitigating that risk... but I digress.

    If/when you get to that stage of your research (which might not be for a while), I'd suggest reaching out to a Qualified Intermediary here on BP (like @Dave Foster, for example) to make sure you get accurate info as it pertains to your specific situation.

    Whew, ok, that's enough from me. If you have any questions about turnkey in general, the Birmingham market, or anything I've said here, feel free to reach out any time.

    Best of luck!

    Clayton

    2Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free