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Updated over 7 years ago, 03/30/2017
Rehab Multifamily Property for Part Time Out of State Investors?
Hello BP comrades,
My husband and I are new to BP. We are from L.A, both have full-time jobs. We're looking for out of state 5-10 units multi family property to start. There are a lot of books and forums talking about getting a property with rehab works. We understood that's where you make the big bucks. But as beginner part-time out of state investor, we are reluctant to deal with rehab. Does anyone have any experience in this?
Polly
Yes, I have experience with forced appreciation via rehabs. The best way to learn is by doing hands on, part time, in your local market, and often on your primary residence first. For a newbie, out of state is NOT a practical or realistic way to do it IMO. Yes, it is possible, but the risks are many and largely unknown as of yet to a novice investor. I would also add that these rehabs will take just as much effort, time, and money (less money actually if you self manage and do some yourself) ... the main difference is that you add 2x-3x to the value add profits generated by the same rehab in most cases compared to less expensive out of state markets. For example, +$10,000 NOI from rehab => $100k value add in an out of state 10 CAP market ($10k/0.1) but $200k value add in a local 5 CAP market ($10k/0.05).
Originally posted by @David Faulkner:
Yes, I have experience with forced appreciation via rehabs. The best way to learn is by doing hands on, part time, in your local market, and often on your primary residence first. For a newbie, out of state is NOT a practical or realistic way to do it IMO. Yes, it is possible, but the risks are many and largely unknown as of yet to a novice investor. I would also add that these rehabs will take just as much effort, time, and money (less money actually if you self manage and do some yourself) ... the main difference is that you add 2x-3x to the value add profits generated by the same rehab in most cases compared to less expensive out of state markets. For example, +$10,000 NOI from rehab => $100k value add in an out of state 10 CAP market ($10k/0.1) but $200k value add in a local 5 CAP market ($10k/0.05).
Can you explain your example? I found this post based on my keywords and I'm trying to understand what you are explaining. I understand that CAP rate is the cash flow you generate based off of NOI/your all cash investment. Why is it that the CAP market is usually better in-state? Is that based on doing repairs yourself? What exactly is the CAP market?
Originally posted by @David Campbell:
Originally posted by @David Faulkner:
Yes, I have experience with forced appreciation via rehabs. The best way to learn is by doing hands on, part time, in your local market, and often on your primary residence first. For a newbie, out of state is NOT a practical or realistic way to do it IMO. Yes, it is possible, but the risks are many and largely unknown as of yet to a novice investor. I would also add that these rehabs will take just as much effort, time, and money (less money actually if you self manage and do some yourself) ... the main difference is that you add 2x-3x to the value add profits generated by the same rehab in most cases compared to less expensive out of state markets. For example, +$10,000 NOI from rehab => $100k value add in an out of state 10 CAP market ($10k/0.1) but $200k value add in a local 5 CAP market ($10k/0.05).
Can you explain your example? I found this post based on my keywords and I'm trying to understand what you are explaining. I understand that CAP rate is the cash flow you generate based off of NOI/your all cash investment. Why is it that the CAP market is usually better in-state? Is that based on doing repairs yourself? What exactly is the CAP market?
The CAP rate defines how much a particular market is willing to pay for NOI produced by a commercial property in that market (Value = NOI/CAP). The higher the CAP rate, the lower that market values the NOI produced by the commercial property. So, in a market with a lower CAP rate (such as Southern California) you can actually make more money via value add by increasing the NOI of a commercial property, since that market values that increase in NOI more than in a high CAP rate market. The flip side is that a market will produce lower cash flow per dollar invested in a low CAP rate market on day one ... however, in markets that have high rates of rent increases the cash flow would increase every year the property is owned, and the market prices in that growth to some extent with the lower CAP rate. The other thing typically priced into that CAP rate by the market is the risk and quality, consistency, and volatility of the NOI ... you can see this in any given city where the CAP rate will increase for commercial properties that are older, more run down, and in the rougher side of town where collecting that NOI may be harder and less consistent. My point to all of this is to say and give examples of how you can make money investing in RE in any market, be it a low CAP or high CAP market if you understand how the various profit centers of REI work and are able to craft and execute a strategy that maximizes profits for those particular market conditions.
@David Faulkner interesting. Lots of new info for me in that explanation, thanks for the insight!
Hi Polly, I agree with David Faulkner .
I think it is crucial that you look to your local market initially. To me, this is important for the simple fact that it's easier to learn the process if you can be more hands on with the deal.
The process includes the purchase, rehab, lease up, stabilized management, and eventual sale of the property. Each stage requires a certain amount of oversight with the most occurring in the first 3 stages.
You are likely more familiar with the market where you live, which in turn, will help you make better purchasing decisions. If you are an active BP member (listened to the podcast or read in the forums) you have heard the term "buying right" and know the impact that it this has on the deal.
If you want to become an active investor, learning the process from purchase to sale is almost as important as making the profit. Refining your process over time is what will make your craft replicable for future deals and future dollars.
Originally posted by @David Faulkner:
Yes, I have experience with forced appreciation via rehabs. The best way to learn is by doing hands on, part time, in your local market, and often on your primary residence first. For a newbie, out of state is NOT a practical or realistic way to do it IMO. Yes, it is possible, but the risks are many and largely unknown as of yet to a novice investor. I would also add that these rehabs will take just as much effort, time, and money (less money actually if you self manage and do some yourself) ... the main difference is that you add 2x-3x to the value add profits generated by the same rehab in most cases compared to less expensive out of state markets. For example, +$10,000 NOI from rehab => $100k value add in an out of state 10 CAP market ($10k/0.1) but $200k value add in a local 5 CAP market ($10k/0.05).
David,
Completely agree with you on that, but there are more factors than just saying that. yes you can add more value to the property depending on where it is based on the CAP rate but how much more did it cost you to get that same NOI? in a 10 CAP area it may have cost you 75k to get that 10k NOI where in the 5 CAP area it may have cost you 150k to get that 10k NOI because of the difference in material you may need to use because that indicates a more desirable higher income purchaser. to say that all out of state investing is not worth it is not true, everyone needs to run the numbers to make sure they can make money, no matter where they invest.
Originally posted by @Patrick Liska:
Originally posted by @David Faulkner:
Yes, I have experience with forced appreciation via rehabs. The best way to learn is by doing hands on, part time, in your local market, and often on your primary residence first. For a newbie, out of state is NOT a practical or realistic way to do it IMO. Yes, it is possible, but the risks are many and largely unknown as of yet to a novice investor. I would also add that these rehabs will take just as much effort, time, and money (less money actually if you self manage and do some yourself) ... the main difference is that you add 2x-3x to the value add profits generated by the same rehab in most cases compared to less expensive out of state markets. For example, +$10,000 NOI from rehab => $100k value add in an out of state 10 CAP market ($10k/0.1) but $200k value add in a local 5 CAP market ($10k/0.05).
David,
Completely agree with you on that, but there are more factors than just saying that. yes you can add more value to the property depending on where it is based on the CAP rate but how much more did it cost you to get that same NOI? in a 10 CAP area it may have cost you 75k to get that 10k NOI where in the 5 CAP area it may have cost you 150k to get that 10k NOI because of the difference in material you may need to use because that indicates a more desirable higher income purchaser. to say that all out of state investing is not worth it is not true, everyone needs to run the numbers to make sure they can make money, no matter where they invest.
My point was that it is not the best strategy for a newbie to go out of state multi family. How as a newbie are you even going to run the numbers, having never invested in a multi family before? Google it? Ask the guys and gals trying to sell you property out of state? And that is just the tip of the iceberg to analyze the property ... after you get it you still need to manage the renovations, get good tenants in, manage the property, all from thousands of miles away with absolutely zero experience doing any of those things. Everybody says no problem, just hire people to do it for you ... but the reality check is that it is a problem, a big problem with big risks that newbies always tend to gloss over but usually end up learning the hard way. Yes, there are risks to investing local, all investments have risk, but at least there you have some control to correct your mistakes and learn hands on from them.
As for the CAP example ... yes of course there are more factors that were not covered in the simplified example, some to the advantage of the high CAP market and some to the advantage of the low CAP market ... text books could be written on all those differences, but the point is that a skilled local operator can select a property and investment strategy to make lots of money in either type of market ... just because there is a low CAP rate does not mean your total profits will be lower, just like having a high CAP rate is of no assurance that your profits will be high. This is the point that many newbies do not understand and the point I'm trying to drive home. That and a new investor will learn about all those nuances much faster and with much lower risk by operating hands on and local as opposed to hiring out everything and leaving it all to the kindness of strangers in an out of state market they no nothing about except for what they read on the internet.
Originally posted by @David Faulkner:
Hi David, great point! A lot of info I came across emphasized a lot on how increasing NOI will increase the value, and I have not thought of the impact CAP have on Value. it is very valuable advise! Thank you!
Originally posted by @Alex Rogers:
Hi Polly, I agree with David Faulkner .
I think it is crucial that you look to your local market initially. To me, this is important for the simple fact that it's easier to learn the process if you can be more hands on with the deal.
The process includes the purchase, rehab, lease up, stabilized management, and eventual sale of the property. Each stage requires a certain amount of oversight with the most occurring in the first 3 stages.
You are likely more familiar with the market where you live, which in turn, will help you make better purchasing decisions. If you are an active BP member (listened to the podcast or read in the forums) you have heard the term "buying right" and know the impact that it this has on the deal.
If you want to become an active investor, learning the process from purchase to sale is almost as important as making the profit. Refining your process over time is what will make your craft replicable for future deals and future dollars.
Hi Alex,
thank you for sharing your own experience! It's valuable info for newbie like us. You are right, there are a lot of unknowns to do it the first time. Going out of state definitely will be more risky. I agree we should not give up on our local market in LA.
Originally posted by @David Faulkner:
Originally posted by @Patrick Liska:
My point was that it is not the best strategy for a newbie to go out of state multi family. How as a newbie are you even going to run the numbers, having never invested in a multi family before? Google it? Ask the guys and gals trying to sell you property out of state? And that is just the tip of the iceberg to analyze the property ... after you get it you still need to manage the renovations, get good tenants in, manage the property, all from thousands of miles away with absolutely zero experience doing any of those things. Everybody says no problem, just hire people to do it for you ... but the reality check is that it is a problem, a big problem with big risks that newbies always tend to gloss over but usually end up learning the hard way. Yes, there are risks to investing local, all investments have risk, but at least there you have some control to correct your mistakes and learn hands on from them.
As for the CAP example ... yes of course there are more factors that were not covered in the simplified example, some to the advantage of the high CAP market and some to the advantage of the low CAP market ... text books could be written on all those differences, but the point is that a skilled local operator can select a property and investment strategy to make lots of money in either type of market ... just because there is a low CAP rate does not mean your total profits will be lower, just like having a high CAP rate is of no assurance that your profits will be high. This is the point that many newbies do not understand and the point I'm trying to drive home. That and a new investor will learn about all those nuances much faster and with much lower risk by operating hands on and local as opposed to hiring out everything and leaving it all to the kindness of strangers in an out of state market they no nothing about except for what they read on the internet.
Hi David,
Thanks for bringing me back to earth! It is a good reality check! Yes, it is crucial how we manage our risk as a beginner investor. I agree Investing in local market will definitely be a less risky and more manageable choice. We need to re-think about our target and strategy for the local market.
We used to live in Orange County and moved to Diamond Bar a few years ago. Just curious, any reason why you focus on buy and hold SFR instead of getting into multifamily in CA?
Originally posted by @Polly Wu:
Originally posted by @David Faulkner:
Originally posted by @Patrick Liska:
My point was that it is not the best strategy for a newbie to go out of state multi family. How as a newbie are you even going to run the numbers, having never invested in a multi family before? Google it? Ask the guys and gals trying to sell you property out of state? And that is just the tip of the iceberg to analyze the property ... after you get it you still need to manage the renovations, get good tenants in, manage the property, all from thousands of miles away with absolutely zero experience doing any of those things. Everybody says no problem, just hire people to do it for you ... but the reality check is that it is a problem, a big problem with big risks that newbies always tend to gloss over but usually end up learning the hard way. Yes, there are risks to investing local, all investments have risk, but at least there you have some control to correct your mistakes and learn hands on from them.
As for the CAP example ... yes of course there are more factors that were not covered in the simplified example, some to the advantage of the high CAP market and some to the advantage of the low CAP market ... text books could be written on all those differences, but the point is that a skilled local operator can select a property and investment strategy to make lots of money in either type of market ... just because there is a low CAP rate does not mean your total profits will be lower, just like having a high CAP rate is of no assurance that your profits will be high. This is the point that many newbies do not understand and the point I'm trying to drive home. That and a new investor will learn about all those nuances much faster and with much lower risk by operating hands on and local as opposed to hiring out everything and leaving it all to the kindness of strangers in an out of state market they no nothing about except for what they read on the internet.
Hi David,
Thanks for bringing me back to earth! It is a good reality check! Yes, it is crucial how we manage our risk as a beginner investor. I agree Investing in local market will definitely be a less risky and more manageable choice. We need to re-think about our target and strategy for the local market.
We used to live in Orange County and moved to Diamond Bar a few years ago. Just curious, any reason why you focus on buy and hold SFR instead of getting into multifamily in CA?
Mostly personal preference on SFR over MF, that and the fact that when I was accumulating them, SFRs were what was on fire sale prices. There are pluses and minuses to every type of asset class ... here are a few for SFRs:
+ Higher caliber, more stable tenant base (families).
+Lower turnover and vacancy.
+There are more of them to choose from and more distressed inventory, so easier (but still not easy) to find a deal.
+If/when I sell, I can sell to a retail buyer at top retail price, not an investor at investor price.
-The units are spread around town rather than concentrated in one building.
-Difficult to scale up if you need/want to grow to a large scale operation.
-They don't typically cash flow as well on day 1.
-Value is more closely tied to market comps as opposed to the rental income (though this was a plus when I bought, but probably a minus in today's hot market).
Honestly, though, the buy and hold numbers in OC on SFRs would be really tough to pull off in today's market. You could go inland to the IE, buy seriously distressed at a discount, put a lot down, and/or house hack it, etc. to make the cash flow work out better, but I don't think it is necessarily the optimal strategy for today (I could be wrong) and I've been more of a holder or seller than a buyer of these as of late. MF numbers can still work I think. Flipping numbers look better (with hold as a rental as plan B). Or just working as a wholesaler or RE agent to take advantage of a hot market without risking a lot of capital. CA is a very dynamic market ... there are always good investment strategies to be played, but if you are a one trick pony you have to be either very very good at that one trick or very patient to wait for the market to be aligned with your strategy. Still beats the risk of going out of state, though ... I've done both over the last 15 years and have nothing to sell you either way.
Hi David,
Thank you for sharing your insights and experience on the SFR! It is very kind of you. We really appreciate it.
It is very informative! It is very true, it is tough to pull of the SFR investment in today's market in OC. Even going to the IE, it will require a big down payment to get a MFR. But we will definitely keep an open mind for the local market for MFR.
By the way, I talked to another lender whom has done a couple refinances for us today. She has had all our finance data from our last re-finance in 2016. It looks like we should have no problem qualifying for a 1-4 units residential loan in CA. If it wasn't you, we might have give up already. THANK YOU!
Polly