All Forum Posts by: Arlen Chou

@Christopher Mooney Don't get me wrong, there are people who start out with no money and use "other people's money" to get into real estate. However, those cases are far and few between. Typically the OPM is from family members, to be clear there is nothing wrong with that. However, if family loans are not an option stacking cash has to be the first priority. Without cash, it is like going to war with no bullets. To put it in perspective, it is 100% true that a cash buyer has an advantage over a person who needs a loan. A person who already has a letter for a loan approval has and advantage over a person who doesn't. A person who at least has a down payment has an advantage over someone with no cash at all. Keep learning and keep up the grind. I wish you the best of luck.

-Arlen

@Kartik T. if you just ask for people to mentor you, the ones that will step up are the ones that want something from you. Typically guys who want to be paid for "coaching". That is fine if you understand that is road you are going down. If you want to find an actual mentor, go to meetups, reach out to individuals that are investing in the style you like and offer value to them. 

@Edwin Machado There is a meetup happening in Oakland at the end of the month. It is hosted by @Tyler Jahnke at Original Pattern Brewing. Very chill meetup with no pitching or sales, just REI people hanging out and talking shop. You might want to considering coming out.

@Pavan Muralidhara welcome to the REI world. There will always be tons of discussions on BP about local vs out of state. I have been on BP for 10 years, left for a few years and just recently came back. It is amazing to see that the fundamental discussions are still the same. 1% is just a general target that has been batted around for years, it use to be 2%. Most people say it can't be found in the BA and it is easier to do out of state. It is probably true that it is easier to find out of state, but it is incorrect to say that it can't be done in CA or more specifically in the Bay Area. I closed on a nice 6 plex in Berkeley this past December and I am helping my son close on one in a nice area of Oakland this month. I am also looking at a property is a nice area of SF that will also hit this number. I have also previously posted about other 1% deals, but those are from a few years ago.

I 100% believe both local and out of state strategies work. The difference is in the overall return vs the type/potential pain you are willing to deal with as you reach your investment goals. There is some basic overlap of issues, but overall the potential headaches are different. One of the primary issues all new investors deal with is "mind share" of your "team". It could be agents finding you deals, the title company, contractors, etc. If you are new or only have one property in a far off location, your team is not going to keep you at the "front of mind". The deals will go to other investors first and you will get the leftovers. You need to create mass before they start being proactive with you. If you are dealing with a local market, you can press harder on them to get things done and show them you are a real player. This is why you will hear many investors talk about "boots on the ground" and the need to have someone you can trust. It becomes even more critical if it is out the area. The flipside of that problem is that it is very difficult to find a property and negotiate it to a 1% deal level in the Bay Area. Decide, what type of pain you want to deal with and then focus on a market that fits your personality. 

There has also been some discussion about "class" in this thread. However, there seems to be a little bit of conflating of definitions. Building "class" is used in helping to define non-residential commercial and commercial residential buildings (5 units and up). When it comes to residential buildings (4 units and down), the "class" of building is not used, but instead most people refer to the "class" of the neighborhood. Keep in mind that "class" when it comes to neighborhoods is pretty subjective to the individual investor.

Good luck on your journey!

-Arlen

@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 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.

@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

 @Jack Jiang be careful of Airbnb at this time. Operators are getting hammered right now and many municipalities are coming down on the business model. The tax savings on an airbnb is a cool sidenote, but that is all it is. You don't make money by saving on taxes, you make money by building a business that needs to pay taxes. Tax savings strategies are are tools to keep more of what you make not to make more. 

Good luck!

-Arlen

@Jack Jiang The Bay Area is a different animal and the rules and strategy are different than the generic stuff on BP. I own properties in Berkeley, Oakland, Fremont, Milpitas, Mountain View and Los Altos. All of these sub-markets are different, your general strategy can be similar but you have to create specific game plans for each market. My general plan is "buy and hold". This translates to playing for appreciation, pulling cash out of the those properties and then re-deploying those funds. 

At the beginning of your investment journey you either need time or money. It is great if you have both, but generally people starting out have more time than money. This time, in a "buy and hold" strategy, needs to be converted into sweat equity. Further extrapolated, "pain = profits". This pain is going to be either in you labor, legal fights, tenant issues, but most likely a combination of all of them. If you are not willing to go through the pain then look for a different market.

If you are willing to deal with all of the headaches and fight for years, my experience has shown me that there is a pot of gold on the other side. But you will need to start in sub-markets that might not be where you want to live right now. There is no easy path. 

The good news is that you have a base to start from. As suggested, go with a HELOC and not a cash out refi. The reason is that, if you get a good lending rate, you can refill a HELOC by paying it down and then deploy the money again. I have written about my process on BP several times and you can look those up. But in general, I pulled a HELOC, used the money to buy another property, seasoned the property and got new debt on that building. I then paid down my HELCO. The benefit for me was that I looked like a cash buyer and made me more competitive during the bidding process.

Prices are not going to come down in the near future. Most people are locked into 30 year fixed rate mortgages under 4%. This alone will constrain the supply side for a long time. Even if the Fed drops rates, it will be in very small increments and will probably take years to get back to below 4%, if ever.

Regarding buying into syndications, I have invested in several out of state. I use this as my strategy to invest in far off markets. In the past, I have made some very good money. But keep in mind syndicators are in a world of hurt right now because of the rise in interest rates. Also keep in mind that your money is tied up in the deal until the GP decides to sell. There is less management pain for you, but there is also less freedom. 

Without knowing more about your situation it is impossible to give you a specific plan. But I can tell you what I did. Get roommates while you are young. Save money like your life depends on it, because it does, and live like a monk. I spent several years, focusing on building the strongest DTI ratio that I could. Everyone always wants to get into the hunt for a deal. The reality is that to be successful in winning the deal, the financial preparation before the hunt is more important.

Good luck,

Arlen

@Mak K. not Home Depot guys, actual centers that have people who are registered to do day labor type of work. This is substantially safer for both the person hiring and the person working, as both people need to register. Therefore, there is some small level of accountability. It is a good way to screen workers for the specific job type you need. You can probably google "day labor center" in or around the city where you need work and find an organization. You will probably need to provide tools, but sometimes they have their own tools. They might need to be picked up and dropped off, but many have their own cars too.

Good luck,

Arlen