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.