All Forum Posts by: Johnson H.

Sid, sellers and agents have a range of ideas of what a property is worth. Most of the time, properties are priced at actual/current rents and agents also list a proforma of the property if all rents are at market rate. Sometimes properties are listed with vacant units and agents would put the market rate for that unit in the actual column. However, that could be market rate rent in as-is condition, market rate rent in a fully rehabed condition, or some number that is just plain wrong that is too high or too low. Once in a rare while, I dont even see a future rent number listed on a vacant unit which lowers the cap rate and GRM significantly so you have to do your due diligence to uncover a gem. Recently, I helped a friend uncover property taxes listed $10k+ higher than what it should be on the OM which made a good deal into a better one.

 My comment about the bay area being flush with cash is that buyers will continue to set up and buy which will allow for a soft landing for values where rents have been hit the hardest at this time. All bets are off if the tech sector gets hit hard with massive layoffs or there is a full blown recession. A good example is that I recently saw a building in SF sell for $3M+ for cash and I thought it was a great deal since it was 1990s construction. You may ask why would anyone pay all cash for a building. Investors have different reasons for buying. Maybe instead of keeping that money earning nothing at the bank, they put it in a property, get a decent yield and the tax benefits. Some buy property to pass it down to their kids. Maybe they will get a loan down the road. Another could be that they are doing a 1031x and decided to downsize and just buy with all cash. Or they just think they got a great deal and will sit tight for awhile and flip it later. In any case, paying all cash gives the new buyers a ton of holding power and peace of mind.

It is difficult to time the market to buy at the lows, I was lucky to start buying in 2010 but that was more luck than skill. If you see a good deal, buy and hold a building with upside and the bay area market will reward you in the long run based on history.

Once in awhile I do see properties that are hurting. One recently I saw a 12 unit building in rough shape with 2 vacancies, 1 not paying renter, 2 late pay but catching up and the rest with low paying renters. The location was outstanding and the listing agent listed the property very low so it went to an multiple offer situation. You may think this is a terrible situation but I loved the building and opportunity to turn around the building and there is so much intrinsic value with the property. However, I had several banks back out after hearing about the collections issues and I decided to not put an offer on it. I'm sure a high net worth individual backing a loan, someone using a hard money loan, or someone paying all cash (pretty common) is buying this $3M+ building. That is another problem as well, there is so much money waiting on the sidelines to enter into the market and invest. I have had many folks wanting to invest with me on buildings but I am so picky that my deal flow is low so there is more money than deals which is another reason I find it hard to think values will go down 25% (but it would be great if it did!). There is so much money in the Bay Area, especially now with all the IPOs and tech stocks being sky high, people take some of that money out and buy bay area real estate and also support out of state house prices haha.

Over the past decade, lots of young people have moved into SF and Silicon Valley for work putting up with the commute and high living costs for the fun and excitement of life here and the job opportunities of terrific tech companies. This is no longer the case now but I'm sure it will rebound again as there are downsides to working from home and young people want to socialize with others not just at work but after work as well. The new housing stock these past few years have been these new and expensive apartment buildings around the financial district of SF and renters put up with it so that they could walk to work. Now they don't need to walk to work so they are leaving for either cheaper areas of the city or out of the city all together. In addition, many of these folks are leaving these high price apartments and buying SFH in the Bay Area as they want the outdoor space and an home office which compounded with the lack of inventory are keep values stable. I would not be surprised once there is certainty around this pandemic, people will trickle back into the city again.

As for a virtual meetup, for some reason I don't have much interest in running one. Maybe this will change as this pandemic drags on but @Account Closed has been running a virtual meetup successfully these days, I would encourage you to join his meetup. 

Sid, I look at OM's for bay area apartment buildings everyday and as much as I want values to decline and metrics to compress so that I can buy, I am not seeing a significant decline in values or NOI's at this time. There are a few reasons for this, first is that depending on the city, rent control has kept rents low so many times a turnover of a unit will actually increase NOI and gross rents even during these times. These mom and pop apartment buildings are older stock now also subject to state wide rent control and many are mismanaged with below market rate rents so turnover is a net benefit to them as well. I also look for value add buildings so rent roll would be far below market anyway and not affected by declining rent. Through my network and reviewing OM's, I am not seeing much COVID hardship with tenants so NOI's havent fallen that much due to it. Finally, good buildings fairly valued are still being purchased quickly, with low interest rates as investors are searching for yield and taking advantage of debt in the 3s and even in the 2s in some rare instances.

Those buildings not subject to rent control are new construction apartment buildings which has rents all at market rate before COVID and I know those are hurting in SF now. So your logic actually applies to a REIT like Avalon Bay who owns new construction buildings with no rent control and pushed rents considerably higher in the past years with a stock that now trades 36% lower than pre COVID. Your logic also applies to a building that has previously all market rate rents but those are rare and usually not the greatest purchase because there is no value add component.

However, real estate does not move as fast as the stock market so I think there will be some opportunities in the future but not as significant as your line of thinking. There has been some price declines on older buildings in SF but they started off with high listing prices and are coming back down to earth. There are still deals to be had and I know investors still picking up assets at great prices. They are not day one cash cows but that is not the play here in the bay area anyways. 

You definitely want to choose the right tenant for your in law, especially since it will fall under rent control. I would include in your ad the future move in date to screen applicants. People are still moving around and renting units in SF so don’t worry about that but it is taking a bit longer to rent units out so posting ads on CL and Zillow early on is what I would do. 

I think units in the top tier luxury and prime areas of the city are getting hit a little bit harder than the mom and pop B and C class units without amenities that are under rent control. With the city closed for now and the option to not just WFH but work from anywhere people are leaving the city for the time being. However, once SIP is lifted and the city is open for fun and leisure, the renters will come back in especially at the higher price points.

These rent surveys arent telling us the incentives to keep renters and lure new tenants in either which the luxury apartment buildings are doing right now too with up to two months for free compared to mom and pop landlords that just usually lower the rental price. They can also throw in free parking, uber credits which they use to do, etc to keep the rental rates higher.

On the sales side, SFH that is move in ready is moving briskly on the west side the city so the layoffs and the stock market volatility does not seem to have affected sales much. However, fixers seem to be moving a little slower as flippers pulled back a bit or waiting for better pricing for improved risk/reward scenario. There does not seem to be much new MFH 5+ unit inventory on the market in the city but those listings have come out have the same pricing as before covid. I am working on a 14 unit building in Berkeley so there is still value out there in this market, just got to look hard and buy with a margin of safety.

I have a 95% LTV HELOC at prime minus 1% with 3.99% floor with SDFCU on my primary. They are not interest only but you pay interest with 1% of principal a month. Took almost two months to close but it was worth it. Anyone can join.

Hi Rich, I like option 3 the best as it's a 10/1 ARM that's not much higher than option 1. The breakeven on option two on the cost will take more than just a few years. The rates between option 1 and 3 is not much more to get another 5 years fixed. Who knows, maybe rates will be lower again and you can refi. Which lender is this, the rates are really good!

If you like to be hands on and create equity through value add, you won’t like OOS as it’s too far from your control. As for putting money to work in the stock market, I like to refer people to the bogleheads forum as they have really smart people over there. It all depends on your risk tolerance, age, job safety, and the rest of your financial situation. This coronavirus seems to get worse every week but I do know that Bay Area real estate and the stock market will be up 10, 20, 30 years from now which is why my partners and I are looking at multifamily locally. 

You make money when you buy in real estate. Make sure you got a great deal wherever you invest in and no need to rush into anything. 

Yi, welcome to BP. Congrats on your success in your Bay Area investing. I’m sure by now you have a lot of providers sending you messages trying to sell you on OOS investing since you have a nice pot of money to invest. Everything looks good on a proforma but reality is a different story. I would ask yourself if you need the cash flow to live on. If not, I would stick to the Bay Area and build wealth through the rent and value appreciation the area has provided for the past several decades. 

I made money buying OOS as I was lucky to start buying in 2010 but I doubt I would have the same gains if I bought today. My focus has been investing locally and the local investors I know are quietly making a killing. They are not on BP much because they usually don’t have anything to sell and the small syndications get filled up quickly. Good luck either way you go. 

Matt, welcome to BiggerPockets. You asked what is the worse that can happen and it would be that the inspector tells you to remove everything done without permits. The main thing is that there isn't a kitchen which is positive as they would most likely ask you to remove the stove at the minimum. In addition, it does not sound like you want to legalize an in-law space, it is just space on the first floor that was converted from basement/garage space to living space without permit a long time ago, very common situation in SF.

If I were you, I would call up a couple of contractors that do business in SF and ask what they would do if they ran into this. Either Yelp or looking through GC's permits on Buildzoom would be a great starting point. Also, with so much construction in the city, you could just walk up into a house being remodeled and see if the GC is there that you can talk to. They would know the pulse of what inspectors are looking for these days.