How to get a multifamily (5+ units) in California financed?

Question

Introduction

Hello, I am new to bigger pockets and this is my first post. I have been listening to the podcast on YouTube for a while now and it has inspired me to get my first property in 2017 ( my primary residence which I house hack by Airbnbing . In 2020 I bought my second home in Las Vegas and Airbnbed that ( 1 month plus). At the start of 2021 I bought a 4 plex in Las Vegas and its been cash flowing. 5 months later in 2021, I closed on another single family in Henderson which I am also airbnbing. In 2022, I just pulled 350k out of my first home and is ready to buy a larger deal.

Problem

I am mainly looking in California close to where I live because I want to put my daughter in a great school district. The problem I am having is price and competition. All the single family and multifamily houses in those areas have large number of competitions thus I decided to go into 5+ units. The issue I am facing with these is that the lenders I have do not qualify the property if the debt service ratio is not less than 80%. I am okay with using the HELOC to put 20% down, but that is the max I am able to put. These house are extremely over valued and the sellers do not want to reduce the price. If I am somehow able to get a property, I still will not be able to raise the rents since the rent control rules in California which caps it at 5% plus inflation per year. You also cannot kick out the tenants unless they agree, and you pay for their relocation.

Question

How do you guys navigate these above changes. What should I do? Any advice helps

Sebastian Marroquin · Answer

Sorry if I am repeating…

Have you consider buying maybe 2 or 3 units in CA: and then building 2 ADU’s on them.

This way you can keep the loan as residential- you can maybe even do a primary loan purchase or not depending on your wants and needs. And you have enough capital to buy the property for about $1 million to $1.5 with a 10% to 20% down payment and then build the ADUs : new construction 800 sq ft. Then refinance the property and pull some of your investment cash out or not…

I just sold a 3 unit property in Pasadena, CA for $1.1 : will help the buyers renovate the 3 units for about $20k each ($60k total) and will help them build the 2 ADUs to make it “5 units”

1600 sq ft new construction : $350k all in and each will rent for about $2500 (2 bedrooms and 2 baths)

That’s $5k rents for new : and $1800 x3 for the 3 units : $5,400

That’s $10,400 rents gross

Mortgage for the $1.1 is : at 15% DOWN : $165k DP and mortgage payment : $5,500

Gross profit : $5k (let’s just assume a 50% net) : $2,500 profit

New Value for home: about $1.5 to $1.8 ($400k/$700k increase)

Refi for $1.3 (80% of $1.5 ARV)

Mortgage: $7,200

Rents : $10,500

Still in the green and you get back your down payment plus 200k (so cash in the deal about $150k)

A lot of unknowns in this one with the refinance value… but you get the point.

I have not seen any 5 unit properties in Pasadena selling for less than $1.6 to $1.8.

This can be done in many cities. Depending on property

Joshua McIntire · Answer

Hi, these are many of the reasons we are looking out of state.  The eviction laws have become so bad you can’t get tenants out of a rental.  You would also need to put down 30-50% just to break even on cash flow.  CA investments seem to bank on appreciation and that is now capped with statewide rent control which handcuffs you further.  Maybe look towards inland empire.

Danushka Abeyasekera · Answer

Thanks for your response. I agree it's insane with these new laws. I have been looking inland, however I want to be in the local school districts,  do you suggest rent while I invest elsewhere?

Danushka Abeyasekera · Answer

Could you please put me in contact with this person. Thanks alot in advance

Susan Chagalian · Answer

The ADUs have evolved and are changing and evolving even more.  I was recently introduced to a gentleman who owns a company where they build ADUs in SoCal.  They can add these units to a single-family or even 2-4 units?  And as far as cash flowing it will all depend on how you purchased the main property, the location, etc.

Gordon Cuffe · Answer

@Danushka AbeyasekeraHave you tried to find off market properties in your desired area?  look for wholesalers in the area you are focusing on and get on their lists. The properties will need work but it is a way to get a off market property and below value.  It is crazy how different CA markets are compared to the midwest. I just funded a deal for a client on a 12 unit apartment in kansas city for 640k. He only had to put 20% down.

Danushka Abeyasekera · Answer

@Gordon Cuffe, I have not. I am in some Facebook groups and most of the deals they have are not very good. If there are good wholesalers let me know and I would love to talk to them. Yea Midwest is amazing, I need to get rid of my fear of location and the unknown.

Sebastian Marroquin · Answer

@Jonathon Hunt

I would start with Realtors that are good and architects : they both should have good people they work with.

If you need a good realtor out there let me know: my network of Realtors are everywhere :)

Jonathon Hunt · Answer

@Sebastian Marroquin Thanks for the advice and wish you much success; you're value proposition is a good one. I'll see if I can start putting together a list of builders (starting with yelp).

Sebastian Marroquin · Answer

@Jonathon Hunt word of mouth: interviewing multiple contractors and always having a second and third option. I put the teams together and the clients come in and plug into my system. They do have to hire each team member and the contract is between them, but I do bring the team in for them. If I were you, I would ask around or go on yelp and see who has the best reviews then I would ask them how much they charge per sq foot and then I would go from there. (I think that at around 200$ to $250 per square foot, you should get quality work. Anything less than that, and they either do not know how to bid right or they will not finish your project.

How to get a multifamily (5+ units) in California financed?

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