All Forum Posts by: Daniel Frye

Hi @Ray Alvarez, you're thinking about this correctly. I would add that no matter what you decide to invest in, go higher on your expenses than any broker is going to tell you. The real world operating expenses are always higher than pro forma, and costs are increasing now, especially insurance.

I would look at submarkets outside of downtown as well, given the lack of people working in offices downtown for the forseeable future, restaurants and bars essentially closed, the appeal of downtown is not there right now. Especially when you consider the rent you can save by moving to North Park/South Park/Golden Hill. Then if you go a little further out, La Mesa, Lemon Grove etc.

The other thing to consider is the eviction moratorium. You need to be very careful in buying a single unit because if the tenant becomes impaired, or just decides to not pay then you are out of luck. For that reason, multi units provide much more resiliency. They still have the risk of multiple tenants not paying though. But if you don't have the cash to buy a multi unit (even duplex or 4plex, doesnt have to be a 10 unit deal) then you should try to reach out to people to co-invest with you. You achieve economies of scale with multi unit acquisitions. You have one roof to replace on an apartment building, but 4 renters paying you. Rather than 1 roof to replace on a townhome but only 1 renter paying you. Same thing for landscaping etc. Granted sometimes HOAs pay for roofing and landscaping but you get my drift.

My two cents would be check out North Park. You can find great single family homes in that area. Better for pets as you can more easily walk the streets. It is also safer in terms of being further away from the homeless population. The main homeless areas start just a couple blocks east of Petco Park.

I would look at Imperial Beach, Chula Vista, East San Diego markets (city heights, lemon grove, la mesa, etc.)

Look through those areas and those around them, see what the price points are for listed properties to get a feel. Then when you decide on a few areas you'd like to look at further, find the most active real estate agents in those areas. Reach out to them and explain exactly what you are looking for, the more details you give them the more they can help. I would also suggest speaking to a lender now, even though you are a ways away from coming out here if at all. If you can get financing in line, or at least be given some guidlines from your lender as far as how much debt you are eligible for, that will help the agents in finding something suitable for you. With small deals like this, financing plays a huge role. If its not enough leverage, you might not be able to make the down payment, if its too much leverage, 1 vacancy might cause you to have to dip into your regular income to service the debt. 

@Jared Bigman great insight. For tenant retention purposes, I am building in flat rents YoY on renewals. Over the long term, yes I agree rents will rise. Trying to take the temperature of folks to see if there are any thoughts of significant rent decreases in short term.

@Dan H. Interesting thoughts. Yes there is of course lack of housing, and much of what exists in C class areas have still not been renovated/repaired as they are owned by older owners. Still opportunity here and there on those deals. I would be interested though in your perspective when it comes to rents rising but RE values falling (in terms of multifamily.) That would require a massive cap rate expansion here for that dynamic to come about. Haven't done the math but I would think that would at least require typical cap rates here to jump to the 7%+ range. I'm just not sure what would cause that at this point. I suppose it would be a mix of, rent increasing through inflation pressure + massive decrease in investor demand.

Do you see investor demand decreasing to the point where cap rates rise to 7%+? That would create a whole lot of underwater properties. Especially considering how many renovated properties have traded the last few years at ~4% caps.

Hello all,

I am underwriting an acquisition of an apartment portfolio in San Diego. It is a unique opportunity to purchase from a distressed seller with almost all units completely renovated. In a normal world, this would make all the sense in the world even with flat rents for a period of a few years!

But now, I am unsure how rents will respond year over year. That is my main concern. I believe rents will grow over the course of a 10 year+ holding period due to our normal supply/demand issues here, typical inflation, as well as (my perspective) further inflation due to increased money supply eventually working its way into the real economy.

In talks with a couple property managers, they think there is a possibility of rents dropping 3-10% year over year from 2020-2021. What do you all think? And what other underwriting assumptions are you rethinking when looking at multifamily acquisitions in the current market?

@Nick Hu Trying to understand the impact this will have on my business... if a tenant is on a month to month lease subsequent to a 12 month lease rolling over, as an owner will one be able to issue a 60 day notice to vacate? Or does the "just cause" eviction apply to issuing notice to any tenant and any time regardless of their lease status?

Hello!

I don't often post here at BiggerPockets but thought I would chime in to share the story on my first real estate investment.

I actually found the listing for the deal on BiggerPockets at the end of 2016. It was an 11 unit mulitfamily property in Rancho Mirage, CA which is near Palm Springs to give those unfamiliar a general idea. The deal was originally listed for $1,450,000. We ended up negotiating down the price to $1,378,000 after all the inspections and back and forth. After this first negotiation, I thought to myself what in the world have I gotten into, that was way harder and fell almost fell apart more times than I thought a deal should. We ended up closing in late January 2017 after a couple of extensions. I inherited a fully occupied building that was renting for about 40% less than market rents in the area. The plan was to fully renovate each unit and the exterior completely. I'm talking new cabinets, flooring, fixtures, lighting, paint, counter tops, appliances, pool resurfacing, facia repair, exterior paint, new patio deck, the whole nine yards in other words. 

This process was eye opening as I acted as the general contractor in a sense, finding subs for each trade during the renovation. This process took about 6 months all the way through as the tenants month to month leases expired in a staggered fashion ending in May of 2017. I had engaged a property management firm early on in the process and they leased the property up within about a month and a half. By the end of 2017 we had a full building and were looking to refinance. I was able to use a LOC in order to buy the property all cash, so we ended up putting permanent financing on it at the beginning of 2017 in order to pull most of the cash out and pay down the LOC. We ended up with about $480,000 invested in the deal at that point.

During this time, the property was putting off about a 6.5% cash flow, with rents still a bit under market. I decided to keep them below market rates so that if we decided to sell in the near term, it could be truthful marketed as a property with upside in rents. Its amazing how often brokers pitch properties that way when they are anything but, I digress. During this period, Jan '18 to June '18, my strategy changed due to a host of factors and I decided the best move would be to sell this property and realize the gains that had occurred through the reposition. The property went under contract for $2,025,000 at the end of 2018 and closed on Dec 28th 2018. The return worked out to be just over 37%. 

Beyond this deal, I have completed the repositioning of a 15 unit multifamily property with plans to sell mid year 2019 and am managing a luxury condominium development in Coronado, CA. Along with a group of partners, I am about to close a construction loan on a mixed use development (residential condos + a commercial component) on the 101 in north San Diego county. 

Thanks to BiggerPockets for all the advice along the way!

Hi Jesus, I sympathize with your situation. San Diego being the attractive place to live that it is, it has tons of people swarming to it putting in offers. You will find people debating until they are blue in the face whether we are at the top of the market, close to it, or just past it, but the reality is that we are unarguably very deep into the current business cycle. One of the signs of that is the sort of "fear of missing out" buying that is happening in many areas of San Diego. You can see it in any other desirable locale be it LA, SF, Orange County etc. 

We all have different perspectives, but my thought would be to learn as much as you can about multifamily investments and then buy one out of state or in another area of California (inland empire etc.) that can give you a decent cash return on your investment. It is paramount in this environment that you "buy right" which is to say never pay over asking price. Easier said than done of course but that is the only real way to protect your money. You also must identify a property that with some work, can rent for more than it currently does. When you go to sell, your property value will have increased due to the income it produces having increased (this assuming the cap rate is relatively stable, which is another topic in and of itself.) Using this as the slow and steady framework for building your net worth is the basis of pretty much any real estate strategy. Let me know if that made any sense.

Hi Erin, I'd like to take a look at the investment summary.  Shoot me a message at [email protected].

That makes sense.  Thanks for the input!