San Francisco Bay Area Multifamily Success

[Anthony Addessi]

Hi All,

I wanted to share one of my latest deals in Redwood City, CA that was a great success. It is a deal that on the day I bought it, I was the proud owner of a slum like property where tenants were not paying rent and a rehab was long over due.  Think missing tile in the showers and bugs coming out of the floor and dead cars parked in the yard.

Here is a summary of this investment.

• April 2015 – Purchased the property $1,000,000.
• June - August 2015 – Renovation ($110,000) completed and fully leased at market rents (EGI up 136%).  Renovation was a complete overhaul, new kitchens, new baths, new electrical, new plumbing, new floor, new doors, new paint, new fences, back yard clean up and more.
• October 2015 – Refinanced and pulled out cash (which allowed me to buy another property in 2016).
• August 2016 – Decided to put the property on the market for $1,500,000.

Yes that last bullet point was correct; I am going to be selling the tri-plex in the next couple of weeks. The plan was always to keep buying and refinancing, buy more and refinance…. as I am a buy and hold investor, but the market is so great right now I have decided to sell my tri-plex and 1031 up to more units.

Here is a list of pro/cons for the sale I went through while making my decision. I thought it would be nice to see discuss why people sell and why not to sell when the market is “hot”

Pro

• I am putting it on the market at $1,500,000.00 which would give the new buyer a turnkey property at 4% CAP. I am not sure even if the market continues to go up I could forecast a better time to sell.
• I can realize a +40% IRR over ~1.5yrs and 1031 that into a larger property. No taxes!
• From a value add standpoint, I am not sure there is much more I can do to increase the returns.
• I do not want refinance again as I feel it would eat up too much of the cash flow and would not leave me with more money. I always want to be able to take a 15-20% hit on rents and be cash flow neutral on all properties.
• My goal has always been to build out a large portfolio.

Con

• Right now I am realizing over 12% Cash on Cash return after the refinance
• I believe rents will increase 10% over the next two years on the street it is located due to gentrification.
• Property Tax Laws in CA (locked in at a lower basis)
• The property is truly hands off since construction; I have great tenants and have no issues.
• Finding the up leg of the 1031 will not be easy and if it is more than 5 units it will have commercial debt (not as favorable terms).
• Fees, commissions associated with the sale and purchase of new property.

I guess at the end of the day my decision to sell (if I can get my price, you never know) was based on taking the money now and investing in another value-add opportunity. I really enjoy building value and taking a distressed asset and bringing it back to life. Every deal I have done I have found something outside the box to bring extra value. I know a number of people talk about the Bay Area being too expensive or overpriced, but there are still deals to be done.

I look forward to hearing comments or thoughts.

[Amit M.]

getting back to your original question, your con list is pretty formidable IMO. Especially finding a decent 1031 exchange. If you can't do that and end up paying taxes, you're toast, so it's a risk. Or you end up overpaying for something just to make your timing window, which also sucks. As you know, most multis are overpriced in the Bay Area, so finding a gem under a time gun is risky.  Add to that the existing stabilized, easy to manage aspect, low tax base, and long term gentrification aspect, I'd be inclined to keep it. Basically if you own quality property in the Bay Area you should always lean towards keeping it, and work with your equity for new acquisitions. 5 buildings later that approach has worked like a charm for me :) So well, in fact, that I don't want more RE at this point. 

Your 3rd option is to refi (or get a HELOC if you can = flexibility) and pull more cash out. Especially now, you can still lock in a low rate. Yes you lower your cashflow after refi, but when you are starting out and have only 1-2 properties, you need to take some risk, and reasonable leverage is usually the best option. Use that cash to buy your next property. Once you own a few properties, you will have a lot more flexibility. The trick is making it to that stage ;)