All Forum Posts by: Brent Seehusen

Here's the situation:  There's a 32-unit apartment building originally purchased in the 1970's by three business partners.  As the years have gone on, those original owners have passed away and the building has passed down to their children.  Now some of those 2nd generation children are at an advanced age and passing away so ownership is passing to the third generation grandchildren, resulting in smaller and smaller ownership stakes for each succeeding generation as it gets split between more people.

One of the 2nd generation owners with a 5% ownership stake recently passed away, leaving 1.67% ownership to each of his three children (the 3rd generation).  It's getting to the point that these fractional ownership interests are too small and the beneficiaries would rather just cash out than hold for the long haul.  What are the options for liquidating these small ownership shares, assuming none of the other owners in the building want to buy them out?

Hi @Scott Choppin - thanks for chiming in!

1. The city is Bellflower.  There are many large lot sizes in this city, and lots of other people have done something similar to what we are considering.  The main difference is that it is probably less common to subdivide the lot and sell them off individually, although I've seen some examples of this on Zillow.  Most are held as multi-unit detached rentals.

2. The existing house is 1,650 sq ft so the plan would be to build two more of that size, give or take.  That excludes the attached two car garages which we would want to build on the two new houses as well.  Should I include the garages in the square footage when discussing construction?

3. This is where my expertise is lacking.  My FIL is figuring $200 sq ft for construction costs to be conservative, but I believe he is excluding permit and impact fees.  I want to put together a REALISTIC spreadsheet including all fees and soft costs before we make a decision, but I'm not sure how to estimate those things.  Just through basic research online, it looks like construction costs in LA averages $160-$200 sq ft. excluding permit and impact fees.  Would you agree with that?

@Roberto Gutierrez  Thanks.  Yeah, I'm going to start modeling out carrying costs and other expenses that we might not be accounting for to get a better picture.  We haven't designed the houses yet, but I'm estimating 1,600-1,800 sq ft.

I guess what I'm having the hardest time estimating is the assorted fees involved.  

Hi @Scott Choppin,

I have an opportunity to partner on a deal with my FIL on a property near Long Beach.  

He wants to acquire his neighbor's property which is a 17,000 sq. ft. lot with an existing 1,650 sq. ft. house and add two more houses, subdivide the lot into three parcels, and sell the houses off individually.  The one existing house needs a cosmetic rehab as it currently has a late 70's decor, but I believe it is well-maintained.

The estimated numbers look something like this:

Property acquisition:  $700k

Construction cost:  $750k ($350k for each new house, plus $50k cosmetic rehab on the existing house)

Sales price:  $1.8M ($600k per house)

So the profit would be $350k. Unlevered ROI = 24%

Obviously, these are just rough back-of-the-napkin numbers, but does this look like a deal you would consider?

Neither of us has new construction experience, but my FIL has extensive rehab experience and is used to dealing with contractors.  He has many connections in this area.  My background is more in the buy and hold realm and I would be a mostly passive partner if I joined the deal.

I'm trying to run the numbers and decide if this deal makes sense to pursue further or not, but it's hard to know what I don't know.

Any thoughts or advice you could provide would be appreciated!

I have a unique opportunity to consider. A friend of mine is co-owner in a drug rehab clinic that operates in Southern California. Currently, they have three locations, all of which are houses within SFR neighborhoods. They are looking to expand by either acquiring or leasing more houses.

A house has come up for sale next door to one of their existing houses, and due to the convenience that would provide from an operational standpoint, they want to open up shop there.  The problem is their capital is tied up, so I've been asked if I would like to purchase the house and then lease it back to them.

Here are some pros/cons that I can think of:

Pros:

• -We haven't agreed to a rent amount, but it will be above market rate.  How much above market will be the determining factor whether I want to move forward or not.
• -There will be zero vacancy from my perspective as a landlord.  They will be housing the recovering addicts two to a room with a max occupancy of six patients.  My rent will be paid by the rehab center and not the actual residents so I'll have no vacancy or turnover costs.
• -They will pay for most maintenance, excluding large capital intensive items.  We may go 50/50 on those larger items.
• -The rehab has it's own liability policy that I believe will add me as a named insured (I need to verify this.)
• -Possible long term lease of 3-5 years.
• -Possible sale to the rehab clinic in the future.  Again, could be above market value depending on how badly they want it at that time.

Cons:

• -The clinic could shut down if the city/state passes new laws. Right now, this type of arrangement is perfectly legal (clinic within SFR neighborhood), but that could always change.
• -The insurance market could change by denying/reducing coverage to addicts, putting this clinic out of business.

The way I see it is even if the clinic shuts down and they break their lease, I could always rent it at market rate to a normal family, or I could just sell the property. So what am I overlooking here? Do I need my own liability insurance? LLC? Are there some lease terms that are common for commercial real estate that I should try to get included?

On it's face, this deal looks good but I don't know what I'm overlooking, and I still need to agree with them on the rent amount.  A lot hinges on that.  If I can't get a substantial premium above the market rate, it's not going to work out.

 Hi Martin,

Sorry I'm late in answering this question.  My first year in 2015 had high turnover due to inherited tenants and some long gaps in between occupants.  I think my vacancy rate for that year was around 25% which was painful.  Since then, in 2016 and 2017 the vacancy has been much lower (under 10%) so that makes things much better.

Still, there can be management difficulties in the high desert.  I've had several tenants break their leases early.  A lot of young Marines move to 29 from out of state and they can be kind of fickle since they don't know the area.  Once they get here, they might want to move to a different part of town or back on base.  I've had issues with tenants getting dogs in violation of their leases.  I've had one roommate get a restraining order against the other, and then they both move out.  Luckily, my property manager handles these issues.

The best tenants are actually not Marines in my experience, but the people that live in town and work off base.  My two longest running tenants fit this profile, one is a pharmacist and the other is a caregiver.  These types tend to be long term renters that have chosen to live in 29 Palms for one reason or another, and aren't likely to move away any time soon.

I've also been getting some applications lately from people moving to 29 that are seeking cheaper cost of living, but their incomes or credit scores are just too low to qualify for $550 per month rent.  I've turned down 3-4 applicants recently because they simply don't meet the requirements.  I've never had to turn people away like that before now.  It could be that the extremely high housing costs in LA/OC/IE are pushing people out and forcing them to look in the cheapest locations possible.  It's something worth watching to see if it's part of a larger trend.

I think you can still cashflow in this market, but it's not as good as when I was first buying.  The two duplexes I own were purchased for $64k and $69k respectively.  Now I see duplexes going for $90k-$120k or more.  Meanwhile, rents have not gone up, but actually decreased slightly since my first purchase.  That makes it more risky to buy right now.  Even when I had 25% vacancy, I was able to cashflow but at today's prices that would be impossible.  Also, I can afford to wait for the right tenants like I've been doing.  Somebody with slimmer margins might have a harder time with that.

Lastly, I will say I think 29 Palms will continue to increase in value as long as the larger California market is increasing in value.  Eventually, I believe that it will stop and reverse.  California has a history of housing downturns and anytime somebody says "this time is different" you know the crowd is buying into hype.  During a downturn, working class areas always get hit the hardest.  People don't have the savings to weather a downturn like those living in higher cost areas.  So while I agree that 29 has some resemblance to Midwest cashflow markets, it's also prone to downturns as it still sits in California.  29 Palms got hammered hard in the 90's downturn and the mid-00's downturn.  So be mindful of that and watch your risk.

@Account Closed said: "When I entered the MFH, I use GRM rather than cap rate because cap rate can be manipulated."

This is a simple but great piece of advice.  Thanks for sharing that!

@Erica Muller @Michael Peach

I'm sure Florida is different, but the left coast Disney (aka Anaheim) just gave STR's 18 months to cease operations. Apparently the hotels ganged up with the teachers unions to get this pushed through the city council. The unions got involved because they want more kids living in the neighborhoods, which equals more school funding. I have an acquaintance that has been doing STR's in this area for decades, long before the likes of AirBnB were around, and this has got to be devastating for him. Well, the houses he owns have appreciated handsomely over that time, so I guess it's not all bad.

You need to first decide what kind of returns you are targeting.. How much do you need to make it worth your while?  Then decide how passive vs active do you want to be.  Generally, the more passive options like lending will have moderate returns but very few headaches.  Standard rentals will be slightly less passive, but can return more than lending if bought prudently.  Short term vacation rentals are the least passive, but have potentially very high returns.  Flipping/wholesaling also have high returns but are not considered passive at all.

I own a couple of properties in 29 Palms that were purchased a couple years back and the returns have been good, but they have had some headaches with turnover and prolonged vacancy.  It's definitely not as passive as the rental I have in Orange County which basically manages itself and rarely, if ever, needs attention.  Lower income tenants are just going to have more issues.

The problem with buying 29 Palms today, along with almost any 2nd-tier area in CA, is that declining interest rates have driven prices up to the point that returns just aren't enticing. I haven't been able to find any deals on rentals that meet my minimum threshold of 17% CoC. Everything is either priced too high or the few properties that are priced to sell have a ton of deferred maintenance & capex needs.

Unfortunately, we are at the point in the RE cycle where acquiring properties is difficult and most investors that have been doing this awhile are positioning themselves for an eventual slowdown - either by paying off debt or deciding when to liquidate their holdings.  The newbies jumping in at this moment in time are going to have a hard time finding good deals and may take a bath during the next phase of the cycle if they compromised on the returns they were willing to accept.

@David Faulkner said exactly what I was thinking, but did a better job of articulating it than I would.

@Bryan Lloyd you are probably making more in appreciation per month than you would in cash flow somewhere else.  You have to decide if cash flow is your primary objective, or maximizing total return is your objective.  I know we all have the same dream of living off passive income, but appreciation can get you there much quicker. 

I don't agree that the market is topping out, particularly given the recent drop in mortgage rates post-Brexit.  If the market is topping out you will start to see signs like a noticeable slowing in sales, increases in unemployment, and dramatic increases in days on market.  Right now prices are expensive but that doesn't mean the demand isn't there; Prices are expensive precisely because of strong demand.  Price drops will only occur if something disrupts that demand (like a recession), or if something causes supply to spike.  Nobody should expect a crash like the last one because that was a credit-driven event, not a normal cyclical recession.

Your best move might be holding onto the Santa Monica condo for the long term appreciation, and if you really want to increase cash flow, get a C/O Refi or HELOC to invest out of state.