West of Wyoming: cash?

Question

Jay DeCima · Answer

Anita

As a buy and hold investor of over 50 years, I am not a fan of buying out of state (my opinion) and "MAYBE" making a little cash flow after mortgage, repairs, taxes, insurance, property management.

A "little bit" of cash flow and hoping for appreciation is not really going to make you feel like a real estate investor.

At my high point I had 250+ rental homes in Northern California, because I live in California.

Buying one at a time would have taken me too much time.  Plus, there will always be tons of competition for single family houses.

So I came up with a different way of buying.  I buy groups of houses 5+) on a single parcel.  Before you tell me you cannot do that in California, I can tell you I have many students doing it.

My way:

-5+ units (houses, duplex, non-conforming, even a mobile) on single parcel.

-Run down and poorly managed are a plus.

-Banks WILL NOT finance 5+ units in run down shape.  They will run from you if you try to apply.  Sellers of these properties know this and know they will probably have to carry the financing. THIS IS A TREMENDOUS BENEFIT TO YOU at time of purchase and later.  You create the terms with the seller.

-Because they are run down, the gross rent multiplier (GRM) you pay will be lower than if it was fixed up.  Let say you buy at a 8 GRM and fixed and looking good it would sell for 10 GRM.  Hold this thought and I will come back to it.

-Since it is run down, inevitably the rents are below market rents for a fixed house.

-My goal for myself or my students is to fix up the houses, raise the rents 50% over the next 24 months (remember they started off low).  Fixing will also raise the GRM by about 2 (see above).  This means an investor (if I sold) would pay more than when it was ugly. Raising the rents 50% and the GRM will just about double the value of the property. Run the numbers a few time to get a grasp on this very, very profitable technique.

I would try to spend time understanding this before you buy a Southwest ticket and fly away.

You have way more control of you investments when you control them.

Le me know if I can help.

Fixer Jay DeCima

PS: These properties will always be in older parts of town, not suburbs and not near ocean or Oakland.  Explore areas that are 50 miles away, they maybe 75 miles.

Andrew Martin · Answer

Anita,

I'm from San Ramon and having the same thoughts and issues that you have mentioning. I went to Boise recently to check it out in person, and found that house prices have risen higher than rents and I'm not going to invest out of state to "make" $200+- per month. One water heater kills a years cash flow.

I'm looking for more duplex's now as I find the cash flow to be better than single family (in most cases and in the one's I've investigated).

I'm going to do more digging around the Eugene OR area and see it that makes sense. I'm curios if anyone else has different suggestions.

Andrew

Dylan Vargas · Answer

@Anita Ahuja Welcome! Look in your back yard. Stockton/ Redding/Red Bluff/Modesto/Lodi etc. These areas have opportunity otherwise look outside the metro areas you suggest. How much cash flow are you looking for?

David Faulkner · Answer

While you are widening your search as others suggest, you should also look at North Korea ... I here there are some real good deals on real estate there with fantastic rent-to-value ratios so the cash flow is great. Why limit yourself? That's what you gotta do, because nobody ever makes any money on REI in CA, and if we do it is only 'cause we get lucky; again, and again, and again ...

Grant Greene · Answer

@Anita Ahuja, after you list Phoenix, you have the comment, "too hot right now."  If you're talking about the physical temperature, I don't blame you. Living six inches from the surface of the sun has its downsides. However, if your comment means you believe the market itself is "too hot" with other investors, I'll halfway agree with you.  Yes, there is a lot of activity, and the savvy investors are snagging deals before the slower ones, but there's still room for someone like yourself. Because rents are rising so fast here in Arizona (Phoenix and Tucson), this is a very good time to get a property that will cash flow.  I'm not expecting you to take my word for it. What I would like you to do is talk to my top LO who works with REI folks every day.  He'll be able to answer your questions and give you great direction.

Jake Leicht · Answer

Hi Anita, great post! I came across the same challenges that you are coming across. I found a pretty good solution for my $ and would be happy to talk shop. Please shoot me a message and let's chat!

Shane Avila · Answer

Account Closed  I second that.  Although prices are increasing, there are still deals to be had in the central valley.

Account Closed · Answer

I agree with @Dylan Vargas. Merced is one market close to you that you can find cash flowing deals.

Jonathan Twombly · Answer

@Anita Ahuja:  I'm curious what you mean by "rents too low."  Too low for what?  Rent in absolute terms is meaningless.  It's only relevant in relationship to the price of the asset and the expenses.  For multifamily, if you are at a 55% expense ratio or lower, you are going to make money, all other things being equal.  If you are making 8% cash on cash or better on your equity in your first year of operation, then you are in good shape.  If the rents are low, perhaps they are under market and can be raised, which makes you a lot of money, if you can buy on current rents (which you should be doing).

West of Wyoming: cash?

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