All Forum Posts by: Greg San Martin

Vacant apartment buildings are worth more.  In Berkeley, they are normally worth a lot more.  

There is a reason why market rents have grown faster in Berkeley than anywhere else. Rent board regs are a big driver.  Landlords know that the average rent increase per year is 2%.  So they are willing to keep units vacant until filled at or above market.  

The problem is that UC is under pressure by state and local government to stay locked down.  There are usually thousands more students moving into off campus apartments by now.  So watch vacancies and the timing of reopenings before buying.  

Stanford just issued a study showing that people in east coast cities average 26-27% with antibodies.  Whereas west coast cities average 3.5%.  City of Berkeley and state lockdowns have made Berkeley among the most vulnerable in the US to large new spikes.  The strategy is to stretch on again off again lockdowns as far into the future as possible until there is a vaccine that they can force everyone to take.  They are socialists, so it is easy for them to support extensions of rent holidays over the duration of their extended lockdowns.

How long would construction last?  Presumably next fall (2021) will have students back in class. But we may still be dicking around with lockdowns a year from now.  

Who knows how long state and local agencies will drive us into bankruptcy?  We have spent almost $100 billion on unemployment assistance statewide since lockdowns started.  UC says that nearly 20% of Californians received unemployment assistance in August.  Unspecified losses in sales tax, income tax and retirement penchant fund savings, and a potential foreclosure crisis since growing numbers of tenants have legally stopped paying rent.  If and when property values decline, or even before, cities like Berkeley look like they will go bankrupt unless they can aggressively tax homeowners. 

As long as democratic socialists are running state and local governments, it seems their primary target will be small rental owners.  Anyone who doubts that should check in with small rental homeowner associations in Oakland and Berkeley.  The local rent boards most certainly would rather run you out of business - anything to perpetuate the 40 year old housing crisis.  The crisis is the reason they exist and making the crisis worse (without being blamed) drives their revenues higher and higher.  Every. Single. Year.  The same is true for property taxes - a perpetual crisis with ever increasing home values drives up property tax revenues.  

I have spent a lot of time following Berkeley rent board rules and agree with someone else who said that Berkeley is a hard place to get started as a rental property owner.

Still, a vacant 4 unit building seems like a rarity.  Almost suspiciously so.  If they evicted anyone to make it vacant, you may have a rent ceiling.

If you also build 1 to 3 ADUs, then your appraised value may be run as a 5+ commercial rental rather than a 4- residential rental.  So, if you rented all 5 to 7 units at market, and then sold, it might fetch a surprisingly high price, even if the whole place was empty due to recently completed construction.  

Vacant apartment buildings are worth more.  In Berkeley, they are normally worth a lot more.  

There is a reason why market rents have grown faster in Berkeley than anywhere else. Rent board regs are a big driver.  Landlords know that the average rent increase per year is 2%.  So they are willing to keep units vacant until filled at or above market.  

The problem is that UC is under pressure by state and local government to stay locked down.  There are usually thousands more students moving into off campus apartments by now.  So watch vacancies and the timing of reopenings before buying.  

Stanford just issued a study showing that people in east coast cities average 26-27% with antibodies.  Whereas west coast cities average 3.5%.  City of Berkeley and state lockdowns have made Berkeley among the most vulnerable in the US to large new spikes.  The strategy is to stretch on again off again lockdowns as far into the future as possible until there is a vaccine that they can force everyone to take.  They are socialists, so it is easy for them to support extensions of rent holidays over the duration of their extended lockdowns.

How long would construction last?  Presumably next fall (2021) will have students back in class. But we may still be dicking around with lockdowns a year from now.  

Who knows how long state and local agencies will drive us into bankruptcy?  We have spent almost $100 billion on unemployment assistance statewide since lockdowns started.  UC says that nearly 20% of Californians received unemployment assistance in August.  Unspecified losses in sales tax, income tax and retirement penchant fund savings, and a potential foreclosure crisis since growing numbers of tenants have legally stopped paying rent.  If and when property values decline, or even before, cities like Berkeley look like they will go bankrupt unless they can aggressively tax homeowners. 

As long as democratic socialists are running state and local governments, it seems their primary target will be small rental owners.  Anyone who doubts that should check in with small rental homeowner associations in Oakland and Berkeley.  The local rent boards most certainly would rather run you out of business - anything to perpetuate the 40 year old housing crisis.  The crisis is the reason they exist and making the crisis worse (without being blamed) drives their revenues higher and higher.  Every. Single. Year.  The same is true for property taxes - a perpetual crisis with ever increasing home values drives up property tax revenues.  

I have spent a lot of time following Berkeley rent board rules and agree with someone else who said that Berkeley is a hard place to get started as a rental property owner.

Still, a vacant 4 unit building seems like a rarity.  Almost suspiciously so.  If they evicted anyone to make it vacant, you may have a rent ceiling.

If you also build 1 to 3 ADUs, then your appraised value may be run as a 5+ commercial rental rather than a 4- residential rental.  So, if you rented all 5 to 7 units at market, and then sold, it might fetch a surprisingly high price, even if the whole place was empty due to recently completed construction.  

I am totally unfamiliar with Berkeley's condo conversion process.  But, I'll bite.  I suspect the strategies in Berkeley, Oakland, and SF are similar - make it so difficult to be a successful landlord that landlords will gladly pay exorbitant "fees" (i.e., taxes) to do condo conversions.  I speculate. 

The City of Berkeley's most recent annual condo report, dated December 2019, is located here.

Table 1 shows prima facie that Berkeley's condo conversion ordinance effectively prohibits condos in Berkeley.  There was one application (for a triplex) filed in 2019 and two applications approved for a total of 4 units.  I am pretty sure that at least hundreds of Berkeley landlords would want to exit the housing provider business if condo conversions were not effectively prohibited.  

Table 2 (see link) shows that the one triplex applicant in 2019 paid $60,000 in fees for two units.  $30,000 does not seem bad for me if I am selling one unit for $1 million.  But unfortunately, the math does not work that well.

The City codes in Berkeley are located here.  I scanned these codes for a few minutes and found the following:

So, if I were allowed to sell all of my units for $3,000,000, the 8% tax (i.e., "affordable housing mitigation fee") would be $240,000.  Or if I sold one unit for $1 million (more likely), I'd pay an $80,000 fee. 8% really does not seem too bad for me, but would I still be able to 1031 the proceeds?  If not, then I'd have to pay tax on about $700,000 in gains and I am not married so only the first $100K would be zero tax (i.e., the sold unit would be about 40% of the property value and 40% of $250K is $100K). So roughly $200K in taxes on the gain.  I think when all costs were factored in, I might end up paying 35-40% of the sales price in fees to the city and tax collectors.  So, I too would just say nyet to Berkeley condo.  

Please elaborate on how you made condo conversions work in SF.   

Thanks to all for great input!  I summarize the input as follows:

SELL vs HOLD & HACK

Nobody thinks selling/exchanging right away is a good strategy (what was I thinking?).  Some believe I should hold it permanently while others think I should wait until the hacks are complete to decide.  Dan notes that I need to carefully consider the real estate tax consequences of selling given California's favorable Prop 13 rules.  Amit's chart is worth a thousands words (each telling me the same thing: stop worrying about home values).  I found more reading and pics from same source:

https://www.bayareamarketreports.com/trend/3-recessions-2-bubbles-and-a-bab

And one excerpt (the table) from that great link Dan provided:

CONVENTIONAL vs JUMBO REFI/CASHOUT vs SECOND LOANS

The consensus is that I should get what I can with a refi/cash out. Amit observes the important difference between rates on residential vs commercial properties, and suggests retaining the last residential loan rather than a commercial loan. Amit goes on to suggest that a HELOC or second loan can then be used to tap into even more equity than a conventional loan might allow. Given the prospects for low interest rates over the long term, that seems like really great advice.

Jim confirmed that Jumbo refis are difficult right now but suggested that I keep looking. He identified HSBC as one bank that I could investigate.  I might not need a jumbo refi with cash out until all construction is completed, rents are seasoned and cash reserves are mature.  Time may loosen up the purse strings on jumbo refis.  

CONDOS

No input.  This seems like a no go any way given that local rules effectively prohibit condos.  

OUT OF STATE vs IN-STATE INVESTMENTS

Dan noted that no investments are likely to produce the return in Berkeley over the past 20 years.  I agree but I can hear the hips of the San Andreas fault creaking under my house at night.  One earthquake could convert my $2 million in equity into a default and bankruptcy.  I do not expect the same return if I stay in Berkeley.  Nor do I need the same return if I leave Berkeley or California.  My goal is to diversify my investment from a single basket (currently) so that I reduce the risk of losing everything.  When and if Martial law is declared following the big one, I MUST be able to move to one of my future properties in Boise, Raleigh, Provo, Phoenix, Charlotte, Portland, Seattle, etc., and watch the great recovery from afar.  Over a term of less than 20 years, Jim observes that I could do better than 3-4% in many locations.  For example, Jim says I can get 8-10% cap properties in the Charlotte metro that will have much stronger cash flow and still appreciate at 3-4% per year.  Coincidentally, about 20 years ago, I walked all over Charlotte looking for real estate.  It was one of the few places I have been that felt like home.   

UPDATED STRATEGY

Based on input thus far, here is my updated strategy:

• Use cash and a construction loan (if needed) to build and rent a 4th conventional unit
• Refi at conventional rates (original mortgage + construction loan + up to $900K cash out for a 4-plex)
• Build and rent 2 ADUs using cash out
  
• Build and rent basement ADU with HELOC, construction loan, or cash out
• Start an ADU building business (there are at least 1,000 homeowners like me in Berkeley - I will meet each one)
• BRRRR small properties or syndications to cut my teeth with any remaining cash out
• Consider whether selling or exchanging makes sense once all rents are seasoned
• Use accumulated cash flow to buy smaller properties or syndications to establish teams in key cities
• Keep my eyes peeled for jumbo cash out loans to enable much larger RE investments down the road
• Shield all RE investments from liability stemming from potential catastrophic losses to highly leveraged triplex in California

Lastly, it will take a while but I intend to report back with successes and lessons learned as I move down my bucket list.  

Thanks again to all who contributed,

BRRRRzerkeley Greg

Thanks Whitney Hutten for that relevant podcast! If financing does not work, I may have to sell and we may end up traveling similar paths in different timeframes. I look forward to hearing how well your BRRRR'vestments weathered the Pandemic (in a follow up podcast or offline). I think David Greene and Brandon Turner may agree that Covid increases the relative attractiveness of residential vs commercial investing. It would be nice to learn how well BRRRR portfolios and strategies perform in the wake of the Pandemic.

Selling would require a 1031 to avoid a $600,000 tax hit. I am concerned that an exchange might limit my reinvestment options (making my first BRRRR investment more risky than this noobrrrr feels comfy with). A 1031 with almost all of my equity and net worth would presumably limit my cash flow potential, too, like an IRA. Would it?

Perhaps my first thought was wrong.  I initially thought I should cash out as much as possible into an out of state investment or syndication and then use the new cash flow to finance a series of house hacks back at the triplex.  Perhaps the better strategy is to house hack first and then use the cash flow from that hack to invest out of state or to get a better cash out loan.  Is there a good rule of thumb, analysis, paper or podcast on this gating choice?  Opinions please.

My triplex property is on a lot large enough to allow a 4th conventional unit under existing zoning.  That 4th unit would increase the cash out ceiling by $300K under Fannie Mae's lending guidelines (increase from $600K to $900K cash out).

Under new state law (California), I am allowed to put in two detached ADUs and a third ADU in my converted walk-in basement. The 3 ADUs would be ministerial permits (no neighbor approval required). Assuming pre-covid rents return by early 2021, each of those new units would cash flow nicely with the first rent check. All of these units would have separate entrances and no hallways, no shared central heat or air, no shared bathrooms, etc. (i.e., no infection corridors).

There are risks with holding the triplex.  For example, tech employees and Cal students could decide to leave Berkeley and never come back. Rents might decline.  If I spend too much time or money house hacking, I may miss really great buy opportunities in 2021 and 2022.  It is not clear yet whether a 3- or 4-plex with a few ADUs would be appraised as a residential property or as a commercial property.  ADUs may substantially limit the pool of buyers due to FHFA guidelines (see a different post in the future on this issue).  The maximum cash out at conventional rates might not be enough to complete the planned construction.  Local governments in the Bay Area have governance issues and seem far more likely to go bankrupt.  They may go on a rental property tax binge to bail themselves out.  Credit could become tighter even if rates stay flat.  And the x factor is that Covid makes all of these risks and others more volatile and harder to predict.  

Assuming I go with a house hack first, then what do you think of the following strategy?  Get a construction or hard money loan for $600K (presumably feasible).  Build and rent the 4th unit + 2 detached ADUs (the basement unit would have to wait to be developed due to cost).  The big financing questions remain: How long after my first rent checks were deposited would a bank be willing to refinance my mortgage + my construction loan(s) (combined total of $1.15 million)?  What is the risk that they would decline my refinance loan?  

After converting the triplex into a 6-plex and increasing free cash flow to $10,000 per month (assuming pre-covid rents and vacancy rates), what are my chances of qualifying for a jumbo refi with cash out? What income threshold, DTI and/or other criteria would I need to meet to qualify for a jumbo refi with cash out? Qualifying for a jumbo refi with cash out would help me achieve my primary objective, which is to increase my LTV at the triplex to well north of 50% so as to bankroll my out of state investments (and perhaps some in state investments, too).

I have held a triplex in Berkeley since 2002. It was the third property I purchased. It has about $2 million equity and a $550K principal balance. It is like a very extended BRRRR. I am finally ready for the refinance step (with beaucoup cash out) but have a somewhat unique problem: too much equity. Admittedly, not a bad problem to have.

The first mortgage broker I spoke with told me a cash out jumbo was not practical at this time, and that under a conventional refi, the most I could cash out would be $600K (at 44% LTV). I was hoping to cash out about $1.3 million (at 70% LTV). I want that other $700K or more.

I think conventional FHFA loan limits are specified here:  http://www.loanlimits.org/california/

My plan was to cash out and start investing in out of state rental properties.  I also co-own a nearby single with siblings.  My share of the equity is about $500K.  

Aside from selling my triplex via 1031, what are my options for maximizing cash out? Are there any clever ways to liberate my equity as cash? Condoing is difficult in Berkeley - has anyone put a "C" into BRRRR?

My appreciation in advance for your responses to this, my first post.

The best and most recent example of local government action that demonstrates the risks of rental property ownership in the East Bay (Berkeley and Oakland) is the City of Oakland's sneaky removal of exemptions from rent and eviction controls for duplex and triplex owner-occupants.  

A voter-approved measure effective in January 2019:  

1. removed exemptions for owner-occupied duplexes and triplexes; and
2. allowed the city council to add limitations to the law without an election.

Owner-occupied duplexes and triplexes were previously completely exempt from BOTH rent control AND eviction control.  Those exemptions made 2-3 unit properties in Oakland attractive for investors.  

The voter measure removed the exemption from eviction control for small property owners.  That was somewhat of an inconsequential loss because at the time, there was no restriction on rent increases.  So, if you had a tenant living under your roof that was a lot more work than normal, you could simply reset the rent to an appropriate level since rent control did not apply.  

But notice the second provision in the voter-approved measure.   When the voters ceded their right to approve future changes, they gave away the farm.  

The Oakland City Council promptly adopted a moratorium on rent increases.  They did so without any opportunity for public input.  They then proceeded to conduct a rulemaking to impose rent control on duplex and triplex owners.  That rulemaking concluded about a month ago.  So now, owner-occupied duplexes and triplexes (except for units that are exempt as new construction, as defined by Costa-Hawkins) are fully regulated instead of fully exempt from rent and eviction controls.  Most homeowners that were aware of the City's plans to adopt rent control expected to have some time before their exemption were fully revoked.  But the city's strategy was to revoke those exemptions before the homeowners could make any adjustments.  

There are likely thousands of owner-occupied duplex and triplex owners in Oakland who probably still do not know about this - i.e., that they have TOTALLY lost what previously was full control over who gets to remain under their roof, how long they get to stay, and what rent they will pay now and in the future.  Very few of the affected homeowners recognized that the new rules would lock their rents at existing low levels and that the tenants they currently had might become permanent.   Those who failed to act are less likely to be able to cover long term costs.  

The clever maneuver by the Oakland City Council locked existing below market rents in place but did so in a way that most certainly will prevent many homeowners from making a fair return on their investments and will cause others to lose money on their investments.   So, investors should keep an eye on any court actions resulting from the rules slipped into place by the Oakland City Council.   

In Oakland, the annual CPI rate for rent increases effective July 1, 2019 through June 30, 2020, is 3.5%.  This not as bad compared to Berkeley, where the annual increase for more than a decade has been 2% or less.  

Since duplex and triplex homeowners are much more likely than apartment building owners to rent at below market rates, the new city rules in Oakland seem clearly to have been designed to intentionally punish those homeowners who had been renting at the most affordable rates.  Ironic?  The City of Oakland also recently won a Superior Court ruling in Owens v City of Oakland that validates the city's regulation of room rentals in owner-occupied single family homes.  

Because so few professionals and homeowners understand what just happened in Oakland, I think the pricing in Oakland does not reflect the horrendous nature of the new policies on 1-3 unit properties.  

I would tend to agree that Oakland and Berkeley are no fly zones for real estate investors.  I intend to invest in small multi-family properties (2-4 units), but will add a layer of "regulatory armor" around any local investments based on what applies now and what the tea leaves tell me will apply in the future.  Key word: future.  

I have owned real estate for over 25 years and multifamily properties for 20 years.  I still feel like new real estate investor.  I am most interested in developing a system or joining a team to identify and invest in off-market small multifamily opportunities.   

Here is a helpful article about the state of stated income loans in 2019:

https://mymortgageinsider.com/stated-income-loans-make-a-comeback-7284/

I know someone with a HELOC for $650,000. He says he got that loan about 3 years ago based solely on equity.

I am surprised there is not a more robust discussion on this topic.  Had I not had access to stated income loans back in the day, I would not now have millions in equity.  In fact, I might still be renting.  

I found one lender that may do stated income HELOCS. I have not called to confirm.  Has anyone heard of or done business with this company: nshomefunding?

https://www.nshomefunding.com/products/stated-income-loan/

Their terms do not make clear whether their advertised stated income loan is available as a HELOC or just as a 'lump sum on day 1' loan:

• Approved property Types: Residential properties such as; Investment Condos, SFR, 2-4 Unit.
• Commercial properties such as; Multi-family, Mixed-Use, Retail, Office, Warehouse, self-storage, & Auto Repair
• Self-Employed or Salaried Borrowers.
• Up to 70% Loan-To-Value.
• Minimum Fico Score is 650.
• 3 & 8 Year Fixed Rate ARM programs available each with principle & interest payments amortizing over 30 years. No Balloon Payments!
• No Tax Returns, No W2s & No Pay Stubs needed.
• Asset Verification IS required for Purchases, but NOT for Refinances
• Can close in the name of an LLC or Corp.
• Loan amounts ranging from $100,000-$3,000,000. (Exceptions made for higher loan amounts on a case by case basis)
• Conditional Loan Approvals issued within 24 hours

California SB 50 died today.