All Forum Posts by: Arlen Chou

@Diana Nakano real estate investing in the Bay Area is a long game. The part that people don't realize is that the game is ever changing and they get hammered using fixed rules. There are basic parameters, like "location, location, location", or locking low interest rates is a force multiplier, or materials basically cost the same everywhere but labor expenses are vastly different based upon location.

I believe the percentage rules are a little deceiving. The question should be: are people buying 1% or 2% rule properties, or are they turning them into 1% or 2% rule properties over time. If it is the latter, how and how long does it take...

I think buying into a "rule" based property, in a major CA markets and probably any other major market is extremely difficult especially if you are buying on market deals. It might happen through an off market deal, but I would bet that most of those also get to one of the rules over a time of rehab and rent increases. 

I have personally reached 1% on several properties, but it took about 1 year on each property to reach that "rule". I do not close on deals that are cash flow negative, they must at least pencil out as breakeven. The real "juice" in this market is the appreciation. You can either ride the wave of appreciation or force it, and then pull money out via a refi and invest in another property to get more doors. This process takes time, but as you get more doors behind you the cycle of cash-out refi via appreciation accelerates. Also keep in mind that this process is much more tax efficient as you never have a taxable event. You technically could do a 1031 exchange from your SFR into something else, but in CA you create a situation where you have lost your low property tax basis on the property you sold and traded for a higher property tax with the new property.

Happy holidays and best of luck to you!

@Ronnie Galindo thank you for your service. 

I realize that in this day and age making moves quickly seems like what is suppose to happen. The reality is that the real estate game is about financial momentum. Until you have have some mass behind you the start can feel glacially slow. The reality is that you must either have money or time to invest to start off. 

The money can be your own money, an investors money or a loan, but you need some. That is typically where the idea of "there is always a way" falls into place or falls off the table. You already seem to realize this part of the equation. Without cash in the bank it is extremely difficult to get a loan, especially for an investment property.

Start off with a house hack. Getting a loan for your personal residence is substantially easier than a loan for an investment property. Try to get at least a duplex, but reach for a 4-plex if you can. What I say next might be a little controversial but if you don't have kids try to hold off. I have 2 and they really do drain the savings account. Rent the additional units out and build on your experience and rebuild your financial war chest. Rinse and repeat...

This process literally can take years and it will feel painfully slow. However, as you get momentum and mass on your side things do start to get easier and faster. I personally went down this road and appreciation has been a great generator of wealth for me. 

There are people who buy properties out of state and successfully get cash flow. So much trust has to be placed in the hands of the OS team. I personally have not done this so I cannot comment on the ease of this strategy. But again, there are many people that are able to do it. 

Keep in mind that everybody who comments on a strategy was either successful in it or is faking until the make it. Hardly anybody posts up about failing in a particular strategy, so take any advice, including mine, with a grain of salt. 

Good luck to you!

@Christine Lee is this a property you already own or something you are considering buying? If it is something you are already own, you might be in for a long journey... Like Ori has indicated, the level of pain will be highly relationship based. If this is something you are considering buying, you should probably walk away from this unless you or your team have some specialized skills and you can get a highly discounted purchase price. In this case creating the relationship with the inspector and the city might be easier and they might lead you down the path to get it compliant. You can go to them and just ask if the house is salvageable or it they thought it was a total loss. However, if you do buy it the process will probably still be painful, but it could be profitable if you can get all the pieces to align. 

@Annie Shao I am currently in the middle of a 1031 in the SF Bay Area. It is my first one and process has not been difficult. As @Danny Randazzo has stated it is all about the timing. You have only 45 days to submit 3 target properties. You can have more, but things get a little more complicated. This is more difficult than people imagine, especially when your properties are in a high value area like the Bay Area. If you go from your 3-plex here to out of state you will need to jump significantly in asset size or buy multiple properties. As an example, if your 3-plex sells for $1.5M here, you would have to close on 2 similar size properties in Boise. But you only have 3 properties on your list, so the pressure to win is heavier on you. Or you need to find a single larger purchase. The buildings on your list have to be almost a sure thing, or there is a danger of not getting the benefits of the 1031. I would suggest that you do your target market research before putting your building up for sale. In my case, I was already in contract for the new property before I sold mine. I just negotiated a long close on the upleg property and did a fast close on the downleg property. But I have to still scramble, because this upleg property does not cover my entire sale price of the relinquished property. I have to purchase 1 more property, but I only have 2 slots left on my list. Also keep in mind that you only have 180 days to complete the exchange period. Like I said, I am doing my first one. I am sure there are many people here who have much more knowledge in this space. Good luck to you!

@Calvin Kwan I have no direct experience in this type of situation, but I personally would look in to a pressure treated or trex decking solution.  That seems like the easiest and least expensive method. Let us know what you end up doing.

@Ujwal Velagapudi let me try and clarify what I was saying. I have felt that too many new investors were coming into the market based upon the recent trend of appreciation and rent charts only showing a trend of going up. Graphs always move to the right, with positive stuff going up, hence my statement of going "up and to the right". In hot markets that have high prices, many people leverage to get into properties without a clear plan on how to raise rents or understanding what the floor of the rental market is for that market. If they don't have a plan to raise rents, they often have not considered what would happen if things went "right and down" on the chart. Meaning their cash position was light and they did not really understand what the floor for the rental market was for their area. 

I have not made an investment purchase since 2016 because I could not find something that would allow me to leverage my personal strategies that are based upon my personal resources. My last purchase was a 6-plex in Oakland. The funds used to buy the property were from a HELOC from my primary residence. The price was such that I could come close to the 1% "rule" with existing rents. I had a plan to increase rent by capturing rents on "free for all" parking spaces on the lot and also renting out a storage area. This simple move pushed me over the 1% threshold. The property is in East Oakland, but I had deemed this particular neighborhood to be safe and potentially up and coming. I knew that existing rents were far below market, but at the same time I knew that the tenants would not take "cash for keys" because they were essentially price locked into my unit because they would not have a place they could afford to go unless it was out of the state. Therefore, I knew it would be a waiting game. This was a game I was willing to take as I did not have any of my own money in the deal and I was hitting 1% and therefore cash flowing.

My units are all 1 b/b. My thought was that tenants would leave on their own due to life changes or an eventual down cycle in the economy forcing movement. The part that I did not realize was that a pandemic would be the catalyst for the movement of my tenants and that I would have the opportunity to make changes in 2020. Assuming I can move existing tenants by enticing them into upgraded units or that they will move out on their own, I expect that my COC and the value of my property will be substantially higher at the end of 2021.

I hope that this helped. Good luck to you!

@Charlie Imonah as most answers... it depends. It is hard to give advice when there are not enough details presented: what market is this in, is your price below market, what is the eviction process in your area, what does appreciation look like in your market, etc. 

Generally speaking the answer would be don't take tenants that are not paying. HOWEVER, in specific cases, it might be strategic to accept them. If this is a market, or near market deal and you have la ight war chest then you should probably step away. If you are in an appreciation market, and you have a good cash position, it might be good to alleviate the seller of their headache, but at a substantially lower purchase price. So like I said, it depends..

I don't know if this helps, but shoot out some specifics so we can help you more.

@Ujwal Velagapudi I own and live in the SF Bay Area. Looking past covid and focusing on real estate, it has been very interesting to watch what has been happening in this local market. The pandemic has really shown a light on real estate strategies and exposed investors who were too reliant on the "up and to the right" trend in both rents and appreciation. 

My purchase strategy was much more conservative, so I have been relatively unscathed until now. The one property that I have had some rent issues was underwritten with the anticipation that tenants would move out over time. I just did not anticipate that a pandemic would be the catalyst for tenants to move out. Because of rent control, I did not have an easy way to make units vacant for renovation and repositioning. Currently I am renovating a unit that I hope to complete and on the market by January 1. My target rent rate will be $600 ABOVE what the previous tenant was paying, but still BELOW the market average. The property was cash flow neutral at purchase and has apricated several hundreds of thousands of dollars since its purchase 4 years ago. As I have been doing construction, I literally have people walking in and asking when the unit will be ready for rent and asking if they can apply.

I agree with @Account Closed about the quality of life here. The weather is awesome, the ocean and the mountains are near and diversity of culture is literally second to none. Because of covid, traffic is completely manageable now. I cannot remember the last time I have been in bumper to bumper traffic.

For me the wild card is the political climate of the state. As I type this we are technically under a "stay at home" order. I personally have been lucky as my W2 is considered an "essential service", so I have been out and about during the past 9 months. The issue is that the CA government has thrown the economy under the bus in an effort to control the spread. Putting aside personal feelings on the effectiveness of general lockdowns vs. more focused measures, I believe the real question is if small businesses can survive the changes the government is imposing. Basically, will the economic harm being created by the lock downs be worse than the disease itself? That is a personal conclusion that people have to decide for themselves. But from an economic standpoint the evidence is pretty clear but businesses are starting to rebel...

People will adapt to our new reality with or without covid. Putting aside the global warming debate, I believe that the weather and the location of the SF Bay Area will EVENTUALLY bring people back. The one thing in real estate that we all know to be true is that "you cannot change the location". If an investor has a long game strategy, then I believe the biggest asset to the SF Bay Area market, has not changed. 

To answer your last question directly, I am closing a non-residential property on the 21st of this month and I hope to get into contract on another by the end of this month. The only reason I am buying now is that I am doing a 1031 out of a SFR. If I did not have to pull the trigger I would wait until the end of 2021.

@Account Closed you are asking a very complicated question that cannot be answered in a single post, but I will try to point you in the right direction. 

Most new founders will focus on the business plan, the product, the service, the team, etc in a meeting. A seasoned investor will know very quickly if there is potential for the product/service and if they like the team. Assuming the investor doesn't reject the idea or the team, he will move very quickly into trying to figure out what is the upside for himself. The key issue, from his perspective, is what does he get out of it. What is the exit for the investor? When is the exit for the investor? I obviously have not seen your pitch deck, but I would guess if your batting average is 0 right now, either you idea is not notable or your exit for the investor is not clear.

That is where I would start. I wish you the best of luck!

@Bryan B. I feel very sorry for you. I had to handle a similar issue here in California for my parents. The guy is actually on BP... are you reading this Darryl? The so-called contractor was doing work for my parents. I stayed away from the project because it was their home and they had worked with him on past projects. Long story short, his contractor license was not valid, there was no written contract, there was no timeline, there were no permits pulled, the list of issues goes on...

Once I got involved, I got the project permitted and completed. The legal portion took a long time, but I won and my parents received a good-sized settlement. I did have to threaten a lien on some properties he owned, but the check did finally show up.

Here are the basic steps I took:

1) I handled all communication via email. Anything that was discussed in person or over the phone was verified in an email.

2) I went to the city and I was honest about the situation. They could have really dinged me on the permit issue with fees and penalties. But they worked with me and I got my permits in place.

3) I went direct to the subs. They can be your best allies in getting your project completed. Assuming they are professional, they will work with you to get things done correctly. I am not sure what the process is in TX, but I asked all subs for the release of lien notices upon direct payment. Basically, I took over as the GC.

4) In parallel to the above steps I interviewed new GC's and I eventually brought somebody else on board. 

5) As a third rail, I engaged with a real estate attorney to start the mediation process. We thought he would take our offer to pay for materials already used and we would move on. However, he fought us through the contractor license board and the court system. In the end, we moved from offering to pay a few thousand dollars to receiving a six-figure check.

The point is that you need to build a case. You give a crook enough rope and they will hang themselves. Document everything: dates, times, who was present, emails, text messages, checks cashed. You need to document, not just the above items with the contractor, but with the subs, the permitting office, onsite workers, everybody.

Dishonest players understand that the legal system is not built on right vs wrong, it is based on who can handle the pain of time/money lost in the fight. Only at the end is a win or loss decided, most individuals will cave-in before reaching the final verdict and the dishonest guy walks away.

I have had to fight 2 contractors in different cases. But they both tried the same thing: drag out the process and see if I would just go away. Both times I won because I was in the right, but more importantly because I had the documentation to prove it. 

You have 2 immediate jobs: get the project done by somebody who is competent and make sure the other guy knows that you will go all the way in the fight. Never go into a fight half-hearted or you are guaranteed a loss. This is going to cost you time and money. The money should come back if you win in court or negotiate things in mediation properly. If you don't have the time or money, do not let the other guy know that. Never show your weakness in a fight. I sincerely wish you the best of luck. Don't leave us hanging, let us know the outcome when you get things all sorted out.