A little intimidating...How would you approach?

Question

Hello Multifamliers,

I'm a noob here on BP, although I've been in residential finance for over 10 years now (specifically mortgage brokering). I realize that continuous transactions are not sustainable (in terms of continuing to work for money as opposed to passive income) and I am getting started in multifamily investing (on the commercial side of 5+ units).

My dilemma is a common one that I think many would be investors face here in the Bay Area, specifically, San Jose/Silicon Valley.  I seriously cannot wrap my brain around prices in this area where 5 units sells for $1,000,000 at a minimum.

I have some money (but not $1MM down payment money) and was wondering where you would start if this was your backyard?  My thought would be to find some private investors.  I have a couple of relationships with lenders and they will go to 80% LTV, perhaps I could find 2nd position lenders for another 10%, and then down payment money?  Where does that come from?

Thanks in advance.

Jeff

Deborah Burian · Answer

You can likely buy a dirt cheap apartment in Oklahoma but buyer beware, there are a lot of really crummy boarded up apartment buildings here... the local wisdom is that California buyers come in because we're cheap, then go broke because the buildings were so poorly built to start with.

Wendell De Guzman · Answer

Jeff, you can syndicate a deal and raise the downpayment from friends & family. The deal has to be a good one though. Find a good deal and the money is easy to find. I might even invest with you if the deal is really good enough.

Having said that...I am a cashflow investor not a "I hope my investment appreciates" type of investor. If I can't get at least a 12% Cash-on-cash return, I will pass. Use the spreadsheet below. You can download it in the Fileplace. Here's the link:

http://www.biggerpockets.com/files/user/Mister4closure/file/wendells-simple-cashflow-analyzer

Account Closed · Answer

Hi Jeff,

Welcome to BP. $200k/door sounds a little steep, but not out of the ordinary. What kind of rents are these units currently bringing in? What's the potential rent are these units can bring in?  What's the current GRM? Potential GRM after stabilized?

You mentioned your lender can do 80% LTV. Does your lender take into account the current rent roll, or are they lending based purely on your relationship? What interest rate are you looking at for this loan? If you're looking to finance a 2nd loan and perhaps even the 10% down payment, do you believe the cashflow here can service all of those debt?

Jeff Trevarthen · Answer

Deborah Burian Buyer beware is right!  That's the greatest fear I have about investing outside of my area.  All the more reason for some serious due diligence.

@Jenkins Ramon That's what I'm thinking.  Otherwise this might be more money to raise.

Account Closed Umm...this is awesome.  Thanks so much for sharing your spreadsheet.  It's so much better than the one I built.

I'll keep everyone informed on my progress.  Thanks again for commenting.

Zoran M. · Answer

Account Closed - Thanks for sharing your spreadsheet.  I tend to build ones that are overly complex.  Love the simplicity!

Robert Musallam · Answer

Welcome to BP @Jeff Trevarthen Best of luck on your future investments!

Engelo Rumora · Answer

Thanks Jeff,

The areas of highest interest are actually the ones with the biggest stigmas attached to them.

Well at least by the media and other investors that follow every word the media has to say lollol

Michigan, Ohio, Indiana, Kansas, Missouri

These states offer some amazing value.

Thanks

Joe Fairless · Answer

@Wendell De Guzman man I love that spreadsheet - so simple and straight forward - thx for sharing!

Ramon Jenkins · Answer

" I could find 2nd position lenders for another 10%,

and then down payment money? Where does

that come from? Possible the current owner of property "

Current owner might be willing to carry a second for 10 % - 15%

Jeff Trevarthen · Answer

@Minh L. The units are renting for about $1250/month.  I think the rents in this area should be more like $1450/month.  (I've actually called nearby competitors and obtained their current rental rates). The cash flow on the property more than covers the debt service.

@Joe Fairless Definitely a good idea about the low income housing.  Thanks for commenting.   I'm also thinking about some other markets outside of California.  Cap rates in San Jose/Silicon Valley are between 5-6% for multifamily.  Crazy.

@Engelo Rumora What areas of the Midwest are you referring to? Texas, Oklahoma or north like Minnesota and Wisconsin? Or somewhere in between

@Michael Wolffs Cap rates are between 5-6% in my area of San Jose. Obvioiusly very tight, but I do see opportunities to bring rents up to market over the next couple of years.  San Jose's residential housing market is on fire and the affordability of a single family homes is terrible. So the demand for rentals is also really high.

Thank you all for your feedback.

Jeff

A little intimidating...How would you approach?

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