All Forum Posts by: Ike Ekeh

Hello BP Forum Participants-

My family is in search of a San Francisco/Bay Area based trust attorney (preferably familiar with real estate portfolios) to help guide us through the process of setting up a trust to hold real estate assets. Also, if anyone has experience from the operator perspective on this process, that too will be greatly appreciated.

Any experts out there on ADUs in San Francisco? I am seeking guidance on the permitting process of additional units, the steps it takes to get additional units permitted & the estimated costs of acquiring permits. I have virtually no knowledge on the subject so any insight would be extremely helpful. Also, if you know any useful resources I can utilize to learn about the process, please link to it!

@Ori Skloot

Any idea of an estimate on the budget for the soft costs? Especially permitting?

@Kristine Libby

Did anyone reach out to you regarding the ADU permit process? I'd appreciate any insight you gained on that piece of the puzzle.

@Embert Madison jr

On the front end I'd like to say that I'm glad you started this thread and am pleased with the discourse so far. Affordable housing is a huge issue in that region, this state and the country at large and some of the smartest business minds, legal experts & politicians have yet to come up with a viable solution. With that (and at the risk of "piling on" or repeating points previously made by others) I'd like to add the following:

You make valid points when discussing the local politics of the city but the economic principles still stand. Yes, the city could not put its "head in the sand" and tried its best to be proactive with this issue, but if it spent more time educating its constituents on why the economics of rent control don't make sense instead of trying to appease the masses with what looks like a solution, the people would be better off in the long-term. Again, the economics of this simply cannot be refuted. The people should be trusted to understand and synthesize that as fact as opposed to being fed short-term band aids for a systemic issue.

Continuing with another economic principle, consider Opportunity Cost. You are indeed correct that the increase of rental income by 6% per annum will add incremental value to a property. But the investor putting capital at risk for that marginal gain could easily realize a much larger gain if they simply invested the same time and effort in an area that isn't subject to growth restriction. Not to mention invest in the local economy of that other region while doing so because they will have a vested interest in the success of that area. The bottom line is flight of capital from a region has rarely been healthy for a local economy and an argument can't be made that a rent control ordinance wouldn't cause just that.

Lastly, you are correct, the property taxes from SFHs outweigh that of commercial/industrial buildings so stagnation may not become an issue. That said, we can be certain that decline in growth of property taxes assessed will occur. No argument can be made that a city will benefit from less taxes being paid to it. That loophole you alluded to will be fortified because the value of commercial property will artificially be depressed, that can only be worse for the city.

Again, you are spot on with the political implications in that something HAD to be done, but that's not to say that something wrong had to be done. @Paul Choi made some good points on alternative measures that can be taken to fix the housing shortage issue, it would be great to see a city advocate for growth in housing stock as opposed to regulation of current supply

It would be interesting no get an idea of the average/median age of multifamily housing product in the Sacramento area. One issue I can foresee arising (if the average building date of MF deals in the area is from the 1960s - 1980s) is the continued dilapidation of multifamily product with this new law in place.

Investors who follow the business model of buying older, mismanaged properties that have had stagnant rental rates with the goal of deploying sizeable amounts of capital for renovation will begin to abandon the region. The only way that business model works is if you can subsequently increase rents to current market levels which adds appraised value to the property and allows you to exit or refinance. For properties with rents that are well below 94% of current market value, the ceiling on rent increases detracts from the value proposition of the deal.

I think this will also make it difficult for working (middle) class housing stock to grow. Given the arbitrary rule of property built post-1995 being exempt from controlled rent, that class of housing will see outsized appreciation in rental pricing due to the increased demand from upper-middle & upper-class renters who desire (and are willing to pay for) Class A homes. Builders & renovators will hone in on that post-1995 product knowing they will see much better returns from supplying that housing stock. Meanwhile the lack of investor interest (discussed in my point outlined in the previous paragraph) in pre-1995 property will lead to lack of property upkeep, not to mention the lack of natural tenant turnover (because a tenant is incentive-ized to remain in a rent controlled unit) needed for a growing population/renter base to flourish.

A few more ancillary ramifications could be: stagnation in property taxes collected by the city due to lack of property value growth, decline in lower income and working class housing being built due to lack of project feasibility, deterioration and/or flight of the business community surrounding areas of older property because of lack of available housing.

Would love to hear your thoughts @Russell Brazil @Account Closed

@John Hickey

I want to congratulate you on completing your mission and achieving the goal you outlined in your post. I also want to join you in scoffing at doom & gloomers who contributed to this post over the last TWO YEARS with high conviction that the market was soon to crumble. I understand the need of healthy skepticism, but also realize the opportunity cost of sitting on the sidelines. Given the numerous positives REI contributes to wealth building, continuous investing at any point in the economic cycle can still be a net positive. Until Elon Musk invents a crystal ball, timing the market will never be a viable, long-term strategy.

@Larry Fullard

Congrats on getting pre-qualified, very important step to start REI.

In regards to the discussion of Cashflow vs Appreciation, the real answer is that having both is the key to success. That rings even more true when your dealing with <5 units given the valuation determinants used by your lender. 

Cashflow is incredibly important to pay the bills. You want to find a deal that throws off enough $$ to cover your debt, insurance, taxes, repairs, management. This is important because you want the property to pay for its self and also net you a return on your investment. When you underwrite you'll probably apply some conservative %s to account for these expenses and come out with what you estimate will be your monthly cashflow. In reality your monthly expenses may fluctuate considerably (especially if you find a good value-add deal) and your returns will not be a smooth as predicted, especially for the first few years.

This is why finding a deal with appreciation prospects is important as well. Cashflow pays the bills and is a prerequisite with REI, but appreciation is what will make you wealthy. In the small multifamily space (1-4 units) this is even more important because the ideal loan package with the lowest interest rates and longest terms will be a simple residential loan. The valuation on the underlying property for these loan packages are based solely on comps with little consideration for the cashflow the property is earning. If you plan to refinance or sell the property you are subject to the economics of your location at the time. So you'll want to find a deal that will increase your equity during the time you own it.

Regarding inspections, definitely insist on an inspection clause in the contract to buy the property.

Regarding underwriting, not sure how much your CPA will charge you to underwrite the deal on your behalf, but you are better off learning this skill on your own for two reasons:

1. As an investor, you have to be confident in knowing what is or isn't a good deal for you. The best way to gain that confidence is learning how and practicing underwriting as many deals as you can. 

2. Even though your CPA is paid to have your best interests in mind, it's still you that has to sign the loan and manage the deal, so you should take the reigns on underwriting responsibilities.

I would suggest reading some of the many books out there that teach you how to underwrite, many of which are published by BP

Hi @Raj Kothari -

Congratulations on the success with your investment! I happen to have worked with several individuals in your situation. Someone who has had success with smaller real estate deals is looking for a more passive option with professional management in place. I'll send you a private message to discuss further.

For those of you who are flippers in the Phoenix area (full disclosure: I am not, I prefer the buy & hold investment model), there is a silver-lining to be had with this news: 

Regardless of how "low-ball" the offers Zillow makes are on average, the high-volume flipping business model would not yield much success in a flat or declining market especially if capex upgrades are minimal. Zillow is a large operation with the resources to have well-trained economists on the payroll. The fact that they determined Phoenix to be the ideal market to undertake this endeavor leads me to believe that the economics of the area will lead to more organic property price appreciation.

I'm interested to see which other markets they dive into with this business model, those future metros may also be considered favorable investment zones for flippers as well as buy & hold investors.