Value Add Investing in high COL area

[Sol Bier]

Hi All,

I’ve been interested in real estate for awhile while saving over the past few years, and looking to become more actively involved in RE investing and potentially doing this part time for the near term to see how I enjoy it. Right now I work in engineering, and have a stable high six figure income, and am young so have plenty of time to see capital appreciation. I’ve saved ~$500k so far in liquid assets to invest specifically for RE.

I’m looking for some general advice on investing strategies that fit my goals and strengths. Consider that I am am strong with financial modeling, excel and concepts of leverage & financing, and am less experienced with constructions and repairs and working with contractors. I'm based in the bay area.

My goals are the following

• Wealth generation. I’m less focused on passive income for now
• Ideally tax advantaged (if possible), since I am in high tax CA
• Something that can be semi-part time, that I can grow into a larger full time role. That means I am ok taking slightly lower ROI, whether that means hiring GC's for residential flip projects, focusing on larger multi family units where economics allow for full time property managers, etc. For the short term this means ~10-15 hours a week, but this can grow over time, but something that requires me onsite every day would not be a good fit.
• Learning ! I want to move up the value chain in RE. This means projects or properties that scale well (scaling SFRs BRRR for example may not fit this profile), and learning skills that can scale to more lucrative strategies (maybe developments).
• I am comfortable using leverage while investing
• A minimum profit per project should be high enough to warrant my time investment

Here are the investing strategies I’ve laid out, and I’d appreciate some advice on these on which you feel most lines up with my goals, if any of my assumptions in the bullet points are wrong, and if there are any strategies I missed. 

Residential:

• Single Family flips in CA/Bay area.
  • Upsides:
  • Absolute profit/COC can be high despite smaller profit margins as % of ARV.
  • Deal structures are fairly straightforwards
  • Could scale by hiring GC’s
  • Downsides
    • High tax rates
    • Seems harder to scale, and may require full time commitment ?
    • From a personal psychological perspective, the moat in flipping seems smaller since it is so popular which means more competition, though this may not be true at the ~$1M price point in CA.

MultiFamily/Apartments

• Upsides:
  • BRRRS can make more sense here, since I could use a property manager to manage the property
  • Can purchase larger units outside of CA and the deal sizes can be large enough to be worth my time (as opposed to being limited to single family flips in bay area)
  • More options for financing given underlying cash flow ?
  • Potentially easier repairs ?
• Downsides
  • In another sense harder to scale ? More unique situations in vacancy rate, can take time to bring properties back to performing

Commercial

• Upsides
  • Less competition ? Since higher price points and more unique
• Downsides
  • Tenant vacancies can last longer
  • Requires more sales and involvement during value add phase which may not align with my initial part time goals ?

New Developments

• Upsides
  • Even less competition and higher ROI since higher knowledge moat
• Downsides
  • Requires even more understanding of construction and zoning laws
  • More expensive
  • Completely full time ?

Alternatives (self storage)

• Self storage ?
• Unclear of upsides/downsides, would be interested in hearing these.

[Quito Keutla]

@Sol Bier you may want to consider participating in a apartment syndication as a general partner or a limited partner. As this will give you experience in the multi family space while keeping your day job. Happy Investing!!

[Johnson H.]

Sol, I like how your first goal is wealth generation and you will get that owning prime real estate in the Bay Area. I am a big proponent of directly owning assets here and those long term investors I know have tremendously benefited from the decades of price and rent appreciation that continues to occur and make them wealthy while they sleep soundly. 

I think you hit on some of the high points but in every strategy there are nuances and intangibles that are rarely talked about here on the forums. I wouldn’t worry about the repairs/construction as that can be learned over time. The main thing is to buy right. I tell newer investors that it’s easy to buy real estate, it’s hard to buy real estate and make money. In buying real estate, everyone makes money from the transaction and so every one is geared towards you closing. I have a lot of conviction owning multifamily here in the bay but I have some insight across all asset classes, if you like to discuss maybe we can have coffee or lunch to talk more. 

[Chase Louderback]

Hi Sol,

That's awesome that you have so much set aside for real estate investing at a young age.  Ultimately, that decision is up to you depending on how much time, risk and the type of investing you want to do.  

Flipping can up a lot of your time and like you said the short term capital gains can eat into those nice looking profits.  This also wouldn't give you any tax advantages like some of the other options you mentioned.  However, some people love it and have been able to set up businesses that are fairly close to being "auto pilot."

Multifamily/Apartments could give you the net worth increase by investing in value add opportunities, the tax benefits, and some cash flow.  With the amount you have set aside and your net worth you could be brought on as an LP, KP, and/or GP in the deal.  Based on your time allocation, desired tax advantages and wealth generation, this may be the best option for you.

I do not know much about other commercial property investments aside from self-storage and Mobile home parks.  Either of those could work well for you too.  Hopefully this helps.  If you have any questions feel free to DM me.  I'm always happy to connect!

[Mike Taravella]

Hello @Sol Bier

Welcome to BP and congrats on taking action regarding real estate.

Given your position I would recommend learning about syndication deals. I would recommend the Best Ever Apartment Syndication Book by Joe Fairless and Theo Hicks. They discuss the full process on how to invest and what questions to ask. I would continue to network and read the forums within BP and attend real estate meetups.

I would also recommend taking the passive role so you understand how the syndications work. You can truly diversify by asset class, syndicators, and location to help diversify your portfolio, while gaining experience within each of the spaces. Then once you are ready you can chose which aspect and type of investing you prefer and join the active side (general partnership).

If you have any questions I would love to connect.

[Sol Bier]

Thanks guys. I've done some more digging and I am going to run numbers on flips, new construction in bay area and socal, as well as some cash flow places in TX. Obviously this will be a waste of time and inefficient, but I have time to really understand markets and get comfortable.

I may reach out to some wholesalers. My biggest strength right now is liquid cash on hand and network of high net worth individuals to tap into. Weakness is obviously inexperience, so still learning before i start tapping into said network. 

I'm not sure I am interested in syndicates. What exactly is the benefit of this besides saving me time ? The risk reward doesn't seem compelling, not only am I not learning anything, I also am assuming a similar amount of risk as an equity stakeholder with less upside. 

[Kyle McCorkel]

@Sol Bier

Welcome to BP from one engineer to another. I’ve been a buy and hold investor for almost 4 years now. I like that it seems that you are super analytical which I can relate to. On the other side of the coin, don’t let let that hold you back from taking action after an appropriate amount of education.

My interests and strategies have evolved, but I would definitely recommend buy and hold for you for a number of reasons, such as the great tax benefits. I would start with a small, local deal - something that doesn’t eat up all your capital and will give you a chance to learn.

BRRRR is the superior buy and hold strategy but it is extremely difficult to find deals to make the numbers work. I'd imagine it's a whole other level of hard in the Bay Area.

I've done out of state turnkey with varying success. If you do that I'd recommend visiting the area, meet with the team, and view some properties. And buy it truly turnkey - don't try to be fancy right off the bat and do a long distance BRRRR. It's much easier to manage the rehab if you are local.

I agree with your thoughts on syndication - you aren’t learning as much. I say start in your own personal portfolio, learn the game, and invest in syndications later once you can walk the walk and talk the talk.

[Ian Ippolito]

@Sol Bier,  nice to see you doing your research first and coming up with a strategy. Here's my personal opinions:

1) Personally I would not recommend that a newbie to real estate even consider doing new development. It's not just an issue of requiring more understanding of the process (although that is a big hurdle to climb). The biggest issue is that this is the riskiest of all the real estate strategies (opportunistic) even for very experienced operators, because of all the unexpected and unforeseen things that can go wrong. And second, these take time to complete, and if we are near the end of the cycle, a lot of these run the risk of having issues and also going bust. That's fine if you have a high net worth and it would not be a big deal, but it doesn't sound like that's your situation at this stage where you wouldn't care. If that's so then I don't think this is a good choice for you.

2) In my opinion, commercial is also a bad place to start. It's not just an issue of tenant vacancies lasting longer. It's an issue of the entire asset class being more vulnerable to downturns (they go down harder and faster they take longer to recover).  Again, if you have a high net worth and you don't care about the risk of a property sitting vacant for a while and being a money loser, it would not be an issue. But I don't think that's your situation currently.

3) alternatives: self storage. The advantage of self storage is that in the past it has been even more recession resistant than multifamily (which itself was more recession resistant than commercial). The disadvantage is that everybody knows this and so there has been a lot of new supply and it is questionable in some markets whether it will do as well next recession as the last. So it's not a no-brainer and requires experience and expertise to navigate correctly. This is a specialty type of real estate investing, and not something I would recommend a newbie jump into right away. If you are liking the asset class , I would recommend going through a syndicator, who should have years more experience than you can ever hope to acquire (if you select them properly).

4) multifamily: you asked if it is harder to scale. Actually this is much easier to scale to mammoth operations than single-family houses. If you are interested in scaling issues, do some research on the public REITs that are multifamily versus single-family homes and you can learn more.

[Erik K.]

@Sol Bier I was in a similar situation when I left the Bay Area and started investing in SFR in Jacksonville. I have since found that multifamily syndication was the best way for me to achieve long term wealth. As @Ian Ippolito stated this asset class does scale incredibly well with a good business model.  And if you're involved in the GP you can get amazing returns and easily turn $500K into $100M over the next 20 or 30 years. 

After your hold period you can either refinance and cash out your investors and keep all the cashflow or sell the asset and buy a larger property.  Here are a few resources that helped make the decision to focus on this strategy:

• Joe Fairless and Theo Hicks Best Ever Apartment Syndication Book
• Jake & Gino
• Michael Blank
• Old Capital Podcast
• Neal Bawa

Good luck on your journey!

[Arlen Chou]

@Sol Bier there are a bunch of meet ups in the area that might help you out. There is one in Oakland tonight hosted by @Brenda Chen.  Also there is a big 2 day summit next month in Oakland hosted by 

@J. Martin

[Brenda Chen]

you are amazing @Arlen Chou!!! :) thank you for the mention.

Super excited for the Summit hosted by J, too. Gonna be awesome.

[Frank Wong]

Originally posted by @Brenda Chen:

you are amazing @Arlen Chou!!! :) thank you for the mention.

Super excited for the Summit hosted by J, too. Gonna be awesome.

 Hey Brenda,

Where is the meetup tonight in Oakland? 

[Brenda Chen]

@Frank Wong It's at Make Westing in Oakland! :) Here's the link: https://www.meetup.com/sfbayre/events/257964835/

[Sol Bier]

Thanks for the replies everyone. Ian I agree with you 100% on what you've said. I'm going to ignore commercial obviously, not ready for that yet. Self storage seems more like a somewhat actively managed business despite having RE fundamentals, so I will ignore that for now.

That leaves SFR, Multi Family, and new construction. New construction again just seems out of my comfort range, though something I am interested in down the line.

As of now, I am going to focus on the following in order of preference:

1. Multi family in Inglewood/Torrance. I am bullish on that area given the new NFL construction, and imo LA is more diversified from a tech bubble burst than SF.  I will also likely be moving to LA from SF at the end of next year, so it would be nice to focus in socal. Bonus points if in OZ, as I have some co-investors who have large capital gains that they want to roll over into OZ zones.
2. Single family flips in the bay area. I'm really not seeing much value (I haven't looked in east bay yet). Price have been pushed up a lot. I am looking at San Jose area, but even these flips the comps are hard to run since yearly appreciation alone is pricing current flips at homes that are currently finished being flipped. However I have some people I can partner with and it is closer
3. Multi family in Houston. I have a family member there who knows the area and can commit to more actively managed properties there. 
4. New construction in Inglewood/Torrance area. Again this is likely way too complex for a new investor like myself, but still interested in learning for the future. In this scenario I actually like the market risk, since projects started now would be completed as NFL stadium and gentrification will accelerate in that area. 


If anyone has wholesalers or off market deals for any of the above, my inbox is open ! 



Originally posted by @Ian Ippolito:

[Account Closed]

@Sol Bier

Added additional Upsides in the category I know -  the MultiFamily/Apartment section

• Upsides:
  • Tax Advantages (Cost Seg, Bonus Depreciation, Tax-Free Cash-out Refis
  • Can align with an experienced team and learn as you go
  • Attractive Non-recourse Agency Debt
  • Syndication allows you to scale while giving LPs a great alternative investment option 
  • Done correctly the B & C class workforce housing space (a high demand product) has the ability to weather the storm during recessions

Hope this was helpful.

Don't hesitate to reach out

Dino

[Nick Marrs]

Sol,

I would recommend either adding square footage or investing in a new multi-family  development in the Inglewood / Torrance area (my office is located in Torrance and I worked at the stadium, so I know the area well).

In general trying to get an existing multi-family at a deal and have it return a nice cash-flow without any work being done to it is difficult these days given the expensive prices.

The building code has recently given affordable housing density bonuses, allowing you to add more square footage and units to an existing multi-family property (up to 50% more total units if you have 15% affordable housing units). The Opportunity Zones from the recent tax overhaul are also allowing investors to pay no capital gains tax if you own the property for 10 years (for new multi-family developments).  New construction isn't difficult -- your architect/engineer will handle all the plan review process and get you your permit, and construction costs for multi-family are much less than what you can sell it for (roughly $200-$250/SF to build vs $400/SF to sell for instance). I'm happy to fill you in on the new-construction process so you can wrap your head around it -- there's huge opportunity for developers. A ball-park figure I've seen for rent vs value is $1/SF increase in rent will being about $13/SF in appraised value.