Ben Lomond, CA · Member since 2016 · 338 posts · 337 votes
BP Community,
I am investigating the multi-family game and I am trying to figure out what types of investors are buying fully turn-key multi-family complex's in the Bay Area (San Jose/Santa Cruz - and surrounding cities/towns) ? I would like to know my target audience when I am rehabbing or advertising my property for sale.
Say I buy a value add 6-plex, restore it to a prime income producing property by increasing rents or decreasing costs etc.., and then I want to sell it and realize the difference in value. Who is my target buyer?? What types of investors want a property that has no immediate upside potential?
There's plenty of value add opportunities for multi-family in the Bay Area. And there are plenty of willing buyers ready to purchase your turnkey MF property. Many of these are 1031 buyers that need to act quick. You'll find that most of these are ok with a 5% cash on cash return (not me)
Your best bet is to link up with some of the commercial power brokers that specialize in multifamily. There are several in each of the core Bay Area markets. I use one that is based in Walnut Creek, and he has a constant flow of off-market value add and turnkey properties in the East Bay.
Doing this in the bay area is going to be extremely difficult and you're going to have to find an amazing deal for this to make sense. The returns when you sell the property are going to be very low and they will not make sense for most people. You may have to find an all cash buyer and they will be making 4-5% cash on cash return.
If you can find that kind of buyer then that would be perfect. In general, buying and selling turn key is very hard in the bay area due to the low cap rate.
What you are saying makes a lot of sense. So is the multi-family strategy in the Bay Area to buy super low (aka get an amazing deal) and then hold?
The high prices for multi-family here in the Bay Area have always seemed odd to me. For an asset that is valued based off of income it seems that there is hardly any multi-family deals that will cash flow even if you are able to "value add" in some fashion.
I guess I am really trying to figure out the game for multi-family in the bay area. Maybe it's more of a appreciation play paired with buying a super deal.
There's plenty of value add opportunities for multi-family in the Bay Area. And there are plenty of willing buyers ready to purchase your turnkey MF property. Many of these are 1031 buyers that need to act quick. You'll find that most of these are ok with a 5% cash on cash return (not me)
Your best bet is to link up with some of the commercial power brokers that specialize in multifamily. There are several in each of the core Bay Area markets. I use one that is based in Walnut Creek, and he has a constant flow of off-market value add and turnkey properties in the East Bay.
1. do a 3 mile radius search of properties that have sold in that area within the last year. 2. find the people who own those units. you can search 4 to 8 units. Contact the buyers and the agents representing the agents representing them. These are you leads who have done deals and agents who are connected to investors who are doing deals like this
What you are saying makes a lot of sense. So is the multi-family strategy in the Bay Area to buy super low (aka get an amazing deal) and then hold?
The high prices for multi-family here in the Bay Area have always seemed odd to me. For an asset that is valued based off of income it seems that there is hardly any multi-family deals that will cash flow even if you are able to "value add" in some fashion.
I guess I am really trying to figure out the game for multi-family in the bay area. Maybe it's more of a appreciation play paired with buying a super deal.
Yes if you can buy anything in the bay area at a good price then you should hold it.
But right now, I'm not sure if its possible to buy MFR at a very discounted price because its a sellers market.
Hi, Jonathan, I have a cash buyer that only invest in the bay area. He is looking for fix and flip and buy and hold properties. He has been investing in the Bay Area for over 10 years. When you run into anything that you don't end up buying yourself please send me a PM..
@Antoine Martel I agree with you, finding a deal in this market is not easy. I have a few leads I am pursuing right now that look promising but it's no easy thing. Thanks for the advice.
@Marcus Wallace I will keep that in mind, thanks for the mentioning it.
@Antoine Martel I agree with you, finding a deal in this market is not easy. I have a few leads I am pursuing right now that look promising but it's no easy thing. Thanks for the advice.
@Marcus Wallace I will keep that in mind, thanks for the mentioning it.
There are plenty of investors looking to acquire turn key multifamily properties in the Bay Area- more than i can sell to. Because they have no where else to go for yield.
As @Antoine Martel correctly mentioned, the difficult (not impossible) part is buying a value-add property at the right price and condition. And in the Bay area, the value-add strategy you have to use looks different right now than in the rest of the country. Looking to do a traditional rehab and raise rents so you can stabilize and sell it at a higher price - forget about it. Those are nearly non-existent in today's market.
Instead, you'll need to be more creative such as buying a property in a rent controlled city, paying $50-100k per tenant to buy out them out, then renovating and raising rents before an exit. Or do condo conversions. Or convert to assisted living.
Thanks, this is a great insight and what I was trying to getting at. I want to invest but I also want to know my target audience. More importantly, I learning that CA, and more specifically the Bay Area, is a much different animal than what you hear about in the majority of BP Podcasts and forums.
Yes! @Yousif Abudra is spot on @Jonathan Pflueger, the short term, existing construction, multifamily strategies that are working now in the Bay Area (I stress short term) are more complex and surrounding the rent control ordinances of the city that you are purchasing in. Every situation is different based on current use, past use, tenant protection status, vacancy, construction date, the rent board annual rent increases and a variety of other factors.
You can then get into other strategies that involve converting to TICs or Condos as many have done to add value other than the traditional buy-rehab-resell strategy. The idea behind that is that the price per unit as a TIC or Condo is greater than the price per unit as a multifamily home. Not as easy as it sounds due to loads of red tape, but it is possible in certain scenarios.
Ultimately in this market those who are buying units that are "turn-key" are trading a low risk, low return asset for the hopes of huge appreciation. Simply a different strategy. Some prefer AAA bonds, some prefer junk bonds. Both have their advantages, disadvantages, amount of return and risk.
@Jonathan Pflueger all jokes aside, everyone else that is paying a lot of money for properties that literally can barely pencil sometimes with Property Taxes, Property Management and Insurance alone.
I think people get caught up a lot on the BP requirements. There are a ton of people in the Bay Area that view real estate as a safe place to store cash that produces better returns than a savings account. Cash offers are not uncommon which I know you know. Also, a programmer/dentist/doctor/venture capitalist might just want to pick up a little apartment building. Their expectation of what will happen might be different than yours. Also, a lot of people buy in the "path of progress" here, or because they want to be in the Bay for the next 30 years. If you are taking that approach, maybe they are getting a steal.
You make an astute observation there Ryan. I find myself getting caught up on the BP requirements for what constitutes a good investment here in the bay area. I am in the process of developing my buying strategy and figuring out who my end users are has been a little bit of a challenge. Ultimately, I would like to buy and hold but not every good deal fits a good buy and hold criteria (unless you are playing the 10-30 year game like you mentioned and you can weather any downswings).
Even fix and flips in this area can be dangerous because there are not as many exit strategies as there are in other parts of the country and holding costs are high - in other words you do not have the option of renting out your fix and flip SFR usually without taking a significant cashflow hit. Granted our market is primed for sellers so maybe this ends up canceling out any negatives.
Don’t mean to sound discouraging, but I think it’s extremely challenging for a new player to “fix and flip” apartment buildings in prime Bay Area locations. 1- you need a lot of money to start. 2- many more experienced players with significant broker connections are looking to do the same thing. 3- it’s very tricky in any city with rent control (you really need to know what you are doing if you don’t want to loose your *** off ;)
As for your question who buys these turn key properties, that’s easy: rich people. Could be someone who made a lot of money in industry looking to diversity their investment portfolio, you typical wealthy foreign buyer who want to own dirt in a prime location, successful RE investors coming out of a 1031.
@Jonathan Pflueger all jokes aside, everyone else that is paying a lot of money for properties that literally can barely pencil sometimes with Property Taxes, Property Management and Insurance alone.
I think people get caught up a lot on the BP requirements. There are a ton of people in the Bay Area that view real estate as a safe place to store cash that produces better returns than a savings account. Cash offers are not uncommon which I know you know. Also, a programmer/dentist/doctor/venture capitalist might just want to pick up a little apartment building. Their expectation of what will happen might be different than yours. Also, a lot of people buy in the "path of progress" here, or because they want to be in the Bay for the next 30 years. If you are taking that approach, maybe they are getting a steal.
Certainly, if you want "a safe place to store cash that produces better returns than a savings account", that's hardly a very high bar to set yourself!
So then, has it become: pay cash for anything in the Bay that's better than a 1.5 cap?...
I don't feel discouraged and I appreciate your input. I work in San Jose and live in the Scotts Valley Area, just over the hill from San Jose. I mostly plan on focusing on the Scotts Valley side of the hill due to my intimate knowledge of the area. With that said, this side of the hill is nearly just as expensive and competitive as the the San Jose side so your insights still stand.
Everyone I talk to has told me to invest out of state. They say its cheaper, lower risk, and just easier to break into. I hear this all the time and yet I still want to invest in my backyard. I did my first deal about 6 months ago and it turned out great. I had to get a little creative, but I believe, after a few tweaks, I can replicate the process moving forward.
The trick, as I see it, is finding my niche in a very investor wealthy area - this has been my challenge so far. I only see opportunity every time someone tells me I should be investing out of state. The more people that invest somewhere else the more opportunity I have here. Granted, its hard as heck to find a great deal here, but when you do the pay-off is huge. I firmly believe it's about creating opportunity and if I can't compete with the ultra wealthy and experienced investors I am going to find a niche that gives me an advantage or at least allows me to lend value to those sort of investors so I can tag along until I make it.
Anyways, just my two cents and worth about as much as that. Thanks for your input, it really helps to shape my view of the market and analysis going forward.
@Jonathan Pflueger you end up having to pass on quite a bit more out here than other places for the exact reasons you brought up. My general take here is that you should avoid base hits, and really focus on triples/home runs if you can. Sure, you might flip one property a year with this type of discipline, but it should be enough to keep you away from any real issues and unlike other parts of the country, you can make $100K+ on that deal without needing to worry as much about how to make it pencil.
@Brent Coombs understood, but as you know people usually want to invest in areas they know. The vast majority of the Bay Area investors know that it is one of the most desirable areas to live in. Any foreign investor knows SF/Bay Area is a major hub. Sure, you might not get as much "house" as other parts of the country, but that is not what people are living in the Bay Area for.
Oh, by the way, a value add 1.5% cap will make a killing for an investor here. Think about it, buying an apartment complex in the Bay Area and bumping rent by ~$1K a month across different units at a 1.5% cap rate just made you almost $800K+. And bumping a complex of units by a few hundred bucks each is not that hard... The trick is the investor just better be ready to lose their shirt if they can't manage the payments on their own :)
Suggest you look at may be Salinas and downtown Hollister area. The entire south Bay duplex starts ~1M, 4 plex at 1.5M. Even those former drug infested Victorian near San Jose State is fetching >1M. 100% sold at or over asked price even in East SJ.
The demand is strong most low end MF are gone first week. If you are brave you can try downtown Oakland or San Leandro. Most investors have their own contractors when you purchase there are tenants inside and you inherit them also. If you want a discounted MF that will not happen anytime. 5 years ago they were going 400K. People thought prices were high. Now priced at 1.1-1.3M some real boring duplex that have deferred maintenance are snatched up quickly to hoard people's wealth. They have cash income because they have no loans.
Most MF is cash transactions. A friend sold her 2.5M Cupertino deluxe SFH rental and got a aging 4 plex in central SJ next to I-280 freeway. She can not afford finding anything with what is left and is in Fresno looking right now.
If you go to Stockton, Monterey, Fresno, Sacramento, Tahoe you are competing with same investors from SFBA who had similar idea as you.
I like your line of thinking and appreciate your insights. You described my situation perfectly when you said "My general take here is that you should avoid base hits, and really focus on triples/home runs if you can." This is my exact strategy and so far has paid off well.
I wish @Brandon Turner and @Joshua D. would do a few more podcasts that specifically focus on investing in ultra high priced markets for small time guys like me. Maybe some smarter minds than me could come up with a "2%" rule for the Bay Area - something that concentrates around cash flow with an emphasis in the appreciation game.
@Jonathan Pflueger there are a few guys that do it well (@Account Closed is very successful). I am not sure if he has any rules in place, but he definitely doesn't pay market value.
I like your line of thinking and appreciate your insights. You described my situation perfectly when you said "My general take here is that you should avoid base hits, and really focus on triples/home runs if you can." This is my exact strategy and so far has paid off well.
I wish @Brandon Turner and @Joshua D. would do a few more podcasts that specifically focus on investing in ultra high priced markets for small time guys like me. Maybe some smarter minds than me could come up with a "2%" rule for the Bay Area - something that concentrates around cash flow with an emphasis in the appreciation game.
@Brandon turn
@Brandon Turner and @Joshua dorkin are bright guys but they're not miracle workers. The 2% rule is never going to be applicable in the Bay Area. The Bay Area is strictly an appreciation play.
@Mike D'Arrigo I think @Jonathan Pflueger might have been looking for something closer to "~$0.70 on the dollar that lets you get to 1%+ in the first 12 months." That IS doable :)