Is 6CAP 4+plex asking too much for in Larger Bay Area++?

Question

It's 2024, Rates have been eating at investors. 99% of listings have tenants underpaying rent by 50%. Sellers are giving 3CAP. Counties make it insanely hard to catch up to market rates.
Is it too much to expect a 6CAP?

What expectations are you guys aiming for? Please share the deals you've already executed.

Arlen Chou · Answer

@Muhammad Soroya I have been saying this for years, BP advice does not work in the Bay Area. This market and it's submarkets are a different beast. There are true 6 CAP and better deals out there right now, but you have to work hard to find them. The reality is that new investors will not get the phone calls from selling agents. Buyers who have a track record of closing get the calls first. That is just a fact of the BA.

Also the pain threshold, for the buyer, in the Bay Area must be substantially higher. If you want to find deals with upside potential, you must be able to move fast to lock the deal and be willing to fight to close.

Here is a current example:

My son is going through one of these right now. It is a 4-plex in the Adams Point area of Oakland. 3 minute walk to Whole Foods. All units are empty, and it is in really good shape for a hundred year old building. It also comes with a 3 car garage and a couple of usable patio/decks for the upper units. Contract price is $770,000 (asking price). Best part is that all units are empty and livable. This deal is a short sale and was on the market for about 24 hrs. We made the offer without seeing the same day we got the call from our agent. We could only do this because we know the area very well and know that the market value of the property is much higher.

Offer was made in October of 2023 and we were second inline, even though we made the offer the day the property listed. First place guy fell through, due to financing, in November and we took first position. Due to seller, his bank and his title company, we are still waiting to close. The downside is my son's cash has been tied up for months, but we own the contract and assuming we close, there will be an immediate $250k+ of application baked into the deal. I won't go to deep into short sales, but there are a ton of additional costs that are associated with a deal like this. However, the tax basis will be a low $770,000. Obviously this is an added bonus to the deal.

Don't get discouraged and keep looking. BP makes it sounds like everyone is hitting home-runs all day everyday. The reality is at the beginning of your journey you should be happy to get on base. Build up your team, prove to agents that you are a closer and they will bring you better deals. This is easy in some markets where properties are in the 6 digit range, much harder here in the BA.

I wish you the best of luck!

-Arlen

Arlen Chou · Answer

@Paul Merriwether Montecito Ave is a great location. My son's units are less than 10 minute walk to that Whole Foods. That market is actually much nicer than the one close to my home on the peninsula.

Yes, $770,000 is really low for the area, but my original point was that these deals do exist on the MLS in BA. It's not all gloom and doom here. I agree with you that OPM should be the end goal for every investor. The only difference, in terms of money in the pocket, between a slow flip strategy in low appreciation and a Hold/BRRRR strategy in an appreciating market is where the OPM is coming from. It can come from individuals or it can come from the bank. The goal should always to be playing with "house money" and stacking chips indefinitely.

That is great that SF's projections are $6k/month on 10 homes. We are looking at $5k/month of cash flow on this one property, but we plan to make cash flow go lower because cash-flow is taxable. In my experience, it is better to leverage the money out against a fixed rate loan and show less profit to lower taxes.

Different strokes for different folks. Everyone needs to find a process and a strategy that works for them. I am glad to hear that people are making the slow flip strategy work. I hope you continue to be successful too.

Paul Merriwether · Answer

@Arlen Chou >> Adams Point area of Oakland. << My first apartment in 1971 was a 1 bedroom furnished. I was paying $187/mth. The address was 162 Montecito Ave. just up the street from Fairyland. The Wholefoods store was a Cadillac dealership at that time. I think those units have been converted to condo's. $770,000 seems pretty low for that area. Yes that appears to be a great price. I'm going to assume they are 1bd units. If the SF's homes work out as planned just 10 homes @ $600/mth in month 61 will be producing $6,000/mth cashflow with NO maintenance / landlord issues except evictions if tenant buyers don't pay. 50 homes $30,000/mth. Scott did a count and he owns 178 homes. Homes purchased with OPM. Keep us abreast of your sons deal. I too felt it was a bad deal thus I sold for $23k. Yet Joey knew what I didn't and sold it in a matter of days for $79,000 on contract for deed. People eager to own a home in STL. Wishing your son & you continued success.

Arlen Chou · Answer

@Paul Merriwether I feel you, you bought a bad deal and you had to get out. This 4 plex that my son is working on has new appliances, with the blue film still protecting the stainless steel faces, new cabinets and is totally empty of trash. I don't know who pays $1200 to cut grass, but the yard work needed on this 4 plex is literally a couple hours of cutting and bagging. Maybe $100 if you pick up a worker at Home Depot, or free if my son puts in the sweat equity.

Even at a conservative rent rate, this thing will easily cash flow as is, all day, everyday starting on day 1 not on month 61 like your example. Comparables in the immediate area are at $1.25M. The built in appreciation is easily over $400k on day one.

As for financing, I would argue that my son's deal is better than the slow flip strategy you reference. For ease of math let's assume the LTV for the Oakland property is a meager 50%, or $385,000. After seasoning the property, he can refinance the loan at another 50% LTV, at $1,250,000 and get $625,000 out of the property. He returns his original cash and comes out ahead $240,000. Keep in mind that the $625,000 pulled out is non-taxable because it technically a lone and actually has tax benefits. Compare that to the buying and selling of properties where all proceeds are taxable. At the end of this BRRRR my son ends up with no money in the deal and an infinite cash return. I don't believe that $240,000 in cash to fund the next deal and infinite cash flow is  a waste of time.

Paul Merriwether · Answer

Why in the world is a 6% CAP RATE in today's world a good deal? When you can get 5.30% om 12mth CD's? NO tenants, no repairs, no closing costs, no rent control just passive income for putting your money in a CD. If a 6% cap was good before rates JUMPED. And rent control hadn't increased, how can it be good now with rates almost triple? Rents have not soared. Maintenance costs have SOARED!  Lets not forget costs to the tenant that moves out.

Paul Merriwether · Answer

@Arlen Chou  Read Scott Jelinek's Slow Flip book or his audio. Amazon. Why? I bought a foreclosed home is Saint Louis for $31,200. I called to insure it. I had to replace the roof $6k & cut the grass $1200. It was filled with crap that cost ne another $3,000. All said and done I was into this home for approx $45k. STL CTY has a occupancy inspection requirement. This home would never pass. Bottom Line I had to get rid of it. I sold to one of Scott's students for $23k. Within 2 days he sells it for $69k & gets $3000 down seller financed. So why waste time & money on Oakland 4plex when that student bought over 100 homes last yr with the same simple process! Their goal finance their homes OPM, pay them off within 5 yr's to collect the cashflow starting in mth 61.

Melanie P. · Answer

@Muhammad Soroya A cap rate is set every time a transaction closes. Bear in mind that you may not always have the data necessary to know the true cap rate of a sale. Cap rates remain in constant flux, but similar properties in the same market should trade around an average, which itself is trending up or down over time.

Cap rates should increase as sellers adjust to present day market realities.

Muhammad Soroya · Answer

Yes of course the old saying "location location location". I understand cap rates are not fixed or mandated to be a strict number. Cap rates are essentially a reflection of people's expectations, and are typically on a leash by market rates. A person can be selling a property with a NOI of $100k and ask $4m, the CAP rate will reflect that their expectations are too high (for an investor at least) and all the market factors, location, comps, fed rates, will put their expectations on a leash (or justify it). I'm curious about that Stanford property. But take your Oakland prop at 10cap. Oakland has always been a higher cap rate for many decades as significantly more risks (gangs, break ins, graffiti), tenants squatting, vandalism. And to be frank, while it should be closer to a 15cap, its rare to even see a 10cap. Def not turnkey. For some reason their expectations are around 5cap which is a complete joke IMO.

With loan rates close to 8 you would think that should push cap rates higher. When rates were 2.5 just a few year ago cap rates were still 2.5 to 3, there very little change since then.I'm hoping other investors can shed light on their expectations as buyers. Are you guys settling for a 3cap in Stanford or a 6cap in Oakland? Collectivly, are investors like "yah these sellers are still high on crack, just wait it it out longer" or "There plenty of 'quality' 6-8cap in the greater bay area that's up for grabs you just gotta look *here*"I feel like I'm missing something because shit is just not adding up. Esp when listening to BP in the car. Another question I have for you guys, whats the point of going off proforma cap rates. My mentality is go off current cap rates. I've seen firms like marcus and millichap pitch 6CAP but in reality its only 3CAP, It's funny their proforma is pitching market rents, but their client is selling with rents that are tied up by county regulations at 50% of market rents, and it will take decades to get to the market rents.

Melanie P. · Answer

Perhaps. Perhaps not. Fourplexes comp with their surrounding residential real estate. They do not trade on strict cap rates. There is a four plex listed across from Stanford that's sub 4. On the other end you can buy a 10 cap duplex in Oakland.

You cannot expect any particular cap rate. The best time to make money in real estate is when you buy real estate. Accordingly, you should gather data to support offers other than list price and when you make the offer, if it's low, politely explain your reasoning. Sometimes you get a seller to listen.

Is 6CAP 4+plex asking too much for in Larger Bay Area++?

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