All Forum Posts by: Account Closed

@Tommy C., @Vineet S., @Albert Ng, @DG A. and @Johnson H.,

If any of you want to meet me at 85 E Taylor St this Friday at 11am, I'll give you a tour of our buildings and share with you all the numbers. There's plenty of free parking there so we can just take one car for the tour. It's this building right here. You can't miss it.

Weekends are tough for me as I have family obligations, but there's a slot open on Sunday 12/9 between 10-11:30am if you want a free tour. I might be a little smelly as I would come straight from my morning tennis without taking a shower. I'll be sure to bring some cologne. Haha... 

Phil,

I'm surprised you didn't ask about the purchase price. I intentionally left it out to see if you would ask. ;-)

The first property is at 85 E Taylor St. This is an 8-unit building. We bought it in May 2016 for $1.86M. It was doing $10,345/mo then. It was supposed to do $171,600 in 2018 for us, but only did $163,600, which was a little surprising as we did over $167k in 2017. Three turnovers did it to us. It's projected to do $175k+ in 2019. We'll see.

We put 25% down and took a 75% LTV bridge loan at 4.5% with 1 point, semi-stabilized it, did a cash-out refinance 8 months later and got a new loan for $1.569M at 3.95%. While we were doing the cash-out refi, we got an offer from a 1031x buyer for $2.5M. We turned it down.

The 2nd property is at 232 S 10th St. This is also an 8-unit building. We bought it in July 2015. This was when the rent in our market has peaked. It was doing $7,825/mo then. It was supposed to do $151,200 in 2018 but did $147,700. Not too shabby. 

We put 25% down and took a 75% LTV bridge loan at 4.5%, semi-stabilized it, and did a cash-out refinance 1 year later and got a new loan for $1.155M at 3.49%. We got an offer shortly after for $1.8M. We also turned it down. We were going for another round of cash out refi on this building this year with a $1.5M loan, but rates are too high so we're sitting tight. The net cash flow on this one is just shy of $50k/year after debt service.

Both of these buildings are trophy assets to us given their location. While one building performs the best and the other performs the worst. I don't ever see ourselves selling them. 

The building we were conned to sell did even better. We bought 561 S 7th St in June 2014 for $1.188M and were conned to sell it a year later for $1.55M. We put $42k worth of work into it. It was doing $7,800/mo. We brought it to $9,605/mo within 6 months. Then in month 9, we got an offer for $1.55M. It's currently doing just shy of $14,500/mo. Our PM is still hanging it. Had we kept it, it would be doing 6.8 GRM. The interest rate on the building was 3% with First Republic Bank at the time we sold it. Argh..... Live and learn.

The formula for us is 9 GRM. This is where we typically can get all of our capital out of the deal. Anything lower and we can get more cash out of the deal. Yes, you can eat your equity.

With respect to the single units, it was an opportunity once in a lifetime to pick up those assets on the cheap. History has shown they have always been sold for around 0.5-0.6% rent to price ratio. If history is any indication, that $400k condo which rents from $2k/mo now would likely worth $600k when rent is $3k/mo. 

With respect to multi-family, you have to be patient. The agents and brokers will rank you on a scale. The whales get all the great deals even in this market. We believe we're one tier down from that so we get good deal. I share okay deals (10% discount...ish) with my close friends and neighbors. Then you always have the retail buyers and the 1031 exchangers who are willing to pay through the nose for the assets. 

The agents/brokers for multifamily are ruthless in general. Competition is fierced due to value-add where the value can be increased dramatically in a short amount of time. Valuation is tied to NOI so for a 5 cap, every dollar increase in NOI = 2x while for a 10 cap, every dollar increase in NOI = 1x. What the hell does that mean?

A building with a NOI of $50k is selling for $1M in our market. That's 5 cap or 5% ROI. That same building elsewhere is selling for $500k with a 10 cap. The market perceives markets with higher cap rate to be more risky thus they require a higher ROI to compensate for the risk. BP is so backward in so many ways I don't know where to begin. I figure @Mary M. would enjoy my frankness.  

Most of the 1% rule and value-add deals, that I see the guys who are doing them, are in the East Bay. There's such an enormous opportunity there. That market is gentrifying right in front of our eyes while San Francisco market has so much deep value assets waiting to be unleashed. We're just too lazy to go there. Too far.

Have fun figuring it all out....Cheers!

@Phil Sharp,

To answer your questions, the ship for single units has sailed several years ago. I was picking up 2/1 condos in San Jose for between $117-$158k per door? Rents were $1,500-$1,600/mo at the time. I told my friends and neighbors about it. They didn't want to own condos so they went to Las Vegas, Arizona and Elk Grove to buy newer houses. These units are now renting for $2,100-$2,500/month, and they're worth $450-$550k/door. Real estate is about location, not newness and cheapness. This explains why a 2/1 shack in Palo Alto is fetching for $2.5M.

With respect to numbers on the 8 buildings where we have almost fully stabilized since bought in 2013-2017, the estimated gross rent for 2018 is $1.11M. Vacancy is 3%, and expenses are $399k. 

The worst performing building has an estimated gross rent of $163,600 with $67,400 in expenses before debt service.

The best performing building has an estimated gross rent of $147,700 with $35,900 in expenses before debt service. 

Estimated net cash flow after debt service is $152k. Estimated principal pay down is $199k. 

As the formula indicated in the above post, we can technically cash out $1M TAX-FREE while our net cash flow goes down to $92k/year with an approximately $60k/year increase of debt service. Who says you can't eat equity? The people who keep repeating this mantra are either clueless or they have something to sell you. 

The reason we haven't done cash out refinance because our current rates are 3.5-3.7% while the current market rates are 4.5-4.7%. Not worth the trade off. We're patient. We'll wait for the rates to tank in the next few years before we go for another around of harvest. In 5 years, our tenants would have paid down $1M in principal for us too. Tenants are our partners without shared equity. Treat them well.

One last thing I'd like to add is that I've witnessed people who are currently doing 1% rule or better in the current market environment in our Bay Area market. It's all value-add projects. These people do it full-time for a living. Once you live and breathe this market everyday, you can spot the opportunity miles away. 

Best of luck.

@DG A., another individual from Oakland reached out to me. Looking at the weather, Friday may work out best. Maybe I can connect you two and you guys can carpool? Meeting around 10:30am-11am works best for me. I have to leave at 2pm. That's my normal working schedule including lunch, 2-3x a week. ;-)

@Albert Ng, it's nice hearing from you. Let's wait for Daniel's confirmation, and we'll set something up. I'll keep you posted. 

@Mary M., It's great that you found a solid area to invest in. It was definitely a trade-off. As long as it worked out and you're happy with the results, that's all that matters. 

My number above is only for 1 unit. Times that by 10 and you're not doing too shabby. Times by 50 or 100 and you're dong quite well. The Bay Area has been treating real estate investors and homeowners really well. My older sister and I bought our first SFH together for $200k in 1996. My sister just graduated and I was still in college and worked on the weekends at the flea market. Equivalent rent was $1.2k/mo then. Our PITI was $1,650/mo. It's worth over $1M now. We bought our first investment in 1999 for $330k. Rent at the time was $1,800/mo. PITI was around $2,300/mo at the time. It's worth $1.2M now. The equivalent rents for both have more than doubled.

For Bay Areans and folks in expensive markets, just calculate the appreciation PER MONTH on these two SFHs and the rent growth. Don't let other lure you into cheap markets. They're cheap for a reason. If you're looking for cash flow, be a hard money lender (HML) or a private money lender (PML). Collect your cash flow without dealing with the three T's (Tenants, Toilets and Termites). If you want to build multi-generation wealth and great cash flow long-term, learn to crack the code and invest in your "expensive market". The yield will be 100x without the headache. Since our expensive markets are so lucrative, no one is going to hand it to you on a silver platter.

@Phil Sharp, I'll share the numbers on the next post later. It's time for me to go to the gym before I head out to meet my partner at 11am....ish this morning. Too much eating for the past few days. It's time to get back in shape although I gained only one pound when I stepped on the scale this morning. I have a challenge to get a 6-pack abs by year end. I'm getting there if I'm not there already. I'm a competitive guy. I have to win the bet. ;-)

@DG A., except Monday, all other days are open next week at the moment. Let me know which day works best for you and I'll meet you in downtown San Jose.

@Phil Sharp, let me know whenever you're back in the Bay. To follow up on the point that Llewelyn mentioned above and let me borrow a saying from Wayne Gretzky "A good player goes where the puck is while a great player goes where the puck will be." Let me give you an illustration.

If you look at high appreciation markets like the Bay Area, how much has your property appreciated in value MONTHLY since you bought it? If history is any guidelines, an asset that rents for $2k/mo today would appreciate more than $2k/month over the long-term. 

You mentioned cash flow from day one. We don't care if an asset is cash-flowing from day one. Our question is how long does it take for us to get it to cash flow positive? 3 months or 6 months? How much reserves do we need to set aside to get there? How much equity would we gain once we got there? How much equity would we gain once we've fully stabilized the asset? Does it worth our time and efforts? 

We have a building where we were cash flowing negative $5k/month. Within 8 months, it went from negative $5k to positive $4k while the value of the building increased by $800k. The $5k/month negative mainly went into principal pay down. When we restructured the loan and did a cash out refi, we got all of that principal back. 

We don't have millions to deploy to work for us, and it takes a decade or even few decades to save $1M bucks. So we need the value-add, forced appreciation, BRRRR approach in order to acquire more assets. If history is any indication, A unit, that rents for $2k/month today, would likely rent for at least $3k/month in a decade. All things being equal, that $1k/mo/unit is purely cash flow as most of your expenses and debt service would likely stays the same.

Here's the kicker, $1k/mo of cash flow can service $200k worth of debt all things being equal of course. This means you can do a cash out refi on this building in 10 years and pull out $200k if you want to. That's 16.5 years worth of cash flow that you're taking upfront tax-free/deferred. Year 11, you repeat on building #2. Year 12, you repeat on building #3. You never have to sell these cash cows. For this reason, most multifamily buildings in our market don't hit the market every generation. You read that right, every to 30-40 years, or they get suckered into selling by Marcus & Millichap agents/brokers. 

At $200/month of faux cash flow per door on OOS stuff, how many doors do you need to own to achieve your financial goal? Where would rent be in those low to no appreciation markets in a decade? How much would those assets worth in a decade, or two, or three? 

We're living in one of the most profitable markets, and seeing our Bay Area folks take their hard earned money and squander it in no appreciation and even declining markets is heart breaking. Some of us try to save as many souls as we can, but it seems like everyone has to learn his/her own lesson unfortunately. 

You have a chance to build multigenerational wealth with Bay Area real estate. Figure it out and jump in as soon as you can. Your kids will thank you later when they sell it off and collect the money tax-free. ;-)

Happy Thanksgiving to everyone.

@Mary M., Congrats! That was very wise of you for scoping things out 6 months and moved there. You didn't give up control, which is critical in real estate investing. Some of our buildings are also doing better than 7 cap after stabilized. We didn't get 7 cap at purchase though. It takes some work to get there, but that's where the value-added and earned equity came in. No one here is going to hand a 7 cap asset to us here in the Bay. 

@Phil Sharp, let me make you an offer and see how serious you want to learn this stuff. If you have time, come to my market (downtown San Jose) next week. I'll give you a ride in my Tesla and show you all the buildings we own. This way, you get to understand why certain assets are priced the way they are. I've given a tour to at least a couple handfuls of local BP members here. One BP member actually rents 3 units from me and runs his AirBnB biz. He's been traveling the world for the last 2.5 years while managing these units in addition to another 16 units in the Bay remotely. 

If you want a copy of our P&L statement for the buildings, I'll give them to you too. They come directly from our property manager so we're not fudging anything. I hope you will walkaway with a different mindset about Bay Area real estate after our conversation before you decide to take the path of least resistance and buy OOS.

Happy Hunting.

Hi Phil,

Be very careful if you want to go out-of-state (OOS). There's a high chance you're going to be buying yourself a lot of headache and grief in the hope for faux cash flow. As Master Oogway wisely said "One often meets his destiny on the road he takes to avoid it." I have two friends, one went through this painful experience and another one is swearing up and down right now. One bought 2 duplexes through someone on this thread. He paid $155k and $185k for the duplexes with $2,200 and $2,400/month in rent, respectively. What could go wrong right? Well, he sold both of them this year and took a $200k loss after several years of owning them. If you're interested in reading the full story, check out fifighter dot com. I hope you can connect the dots...

Real estate is about control and leverage. By going OOS, you're giving up control. Saj is killing it in East Oakland while my partner and I are doing it in San Jose. 1% rule is not possible at purchase for our market, but we get there in 2-3 years with our strategy. No one is going to hand you their cash cow money minting machine. You have to work and earn it. Once you get there, do cash-out refi, get your capital back, buy more, rinse and repeat. We're up to 76 doors on multifamily, and that doesn't include the single units we own separately. 

Unlike others, we don't have anything to sell so there's no hidden agenda. We just want our fellow Bay Areans not having to suffer the pain and grief others who got suckered into. Everything in life has a price. Something is expensive for a reason so is something cheap. It's a rewarding journey if you can break the code. The barrier of entry is high so are the rewards. 

Have fun figuring it all out. 

Hi Jean,

Welcome to BiggerPockets. You remind myself of 20 years ago when I was doing the same thing....running analysis and everything came back with negative cash flow. I traveled to several states looking for my hidden treasure, and that was when I realized everything in life has a price. We're sitting on the treasure without realizing it. Fortunately, I dodged the bullet of investing out-of-state (OOS) only to learn later from the REI veterans that OOS investing is where CA investors go to lose money.

If you’re studying accounting, I recommend getting your CPA as that would open more doors for you financially. If you’re going to Berkeley or East Bay State, hit @Account Closed up. He’s doing fantastic in Oakland and can share his insights on investing in the East Bay. If you’re going SJSU or SCU, hit me up and I’ll share with you my insights on how we do it here. The stakes are high so are the rewards. 

You and the two posters above reminded me of this quote from Winston Churchill “A pessimist sees the difficulty in every opportunity while an optimistic sees the opportunity in every difficulty.” I’d like to congratulate you for making up your mind about staying local and investing in the Bay. I have no doubt you’ll do great in your life.

Happy Sunday. 

Sunday,

Congratulations! You literally created something out of nothing. You had the guts to move forward. It's not easy, but it's worth it. 

The reason I agreed to meet you and plugged you into my network was because of your introduction. You have the right attitude and work ethics. I have more people inviting me to lunch and dinners than I know what to do with. See, I invited you to lunch and had someone paid for our lunch. ;)

I told Johnson I'd meet you regardless. You reminded me of someone who I met on BP. He's 5 years older than you who used to make $8.50/hour. After a few short years in real estate, he made $1M last year, and his wife bought him this car. He loves the roaring sound of this car. It's unfortunate I couldn't convince them to buy a Tesla.

It's true that your network = your net worth. It takes time and efforts to connect with the right people. When you do, the sky is the limit. Keep up the intensity. As Steve Jobs said "Stay hungry, stay foolish."

Cheers.

Simon,

Everyone is talking about cash flow while your condo has appreciated over $2,800/mo in the last 5 years assuming you bought it in 2013 without any cash flow. Appreciation is the most passive income one could ask for. 

It sounds like the Denver market has all characteristics of Bay Area real estate. However, I hate owning anything with HOA just like other Joe's so I'm neutral on whether or not you should sell or keep it. I used to own a couple handfuls of condos and townhomes. I'm down to a handful now and looking to unload all of them eventually. I will only keep apartment buildings and SFH to pass down to future generations.

It's so unfortunate you couldn't get anything in our market in 2013. It goes to prove how competitive our market has been even as we came out of the Great Recession. I had to fight hard to get deals between 2009-2013 so I can relate. I stumbled my way through a couple of deals before I got it figured out. IMO, you didn't employ the right technique to land a deal in 2013.

To prove my point, I got this condo a couple months ago for $355k. Rehabbed it and in contract for $540k. There was a $550k offer with $400k down, but I didn't take it because I didn't get a good vibe from the buyer's agent. Scheduled to close next Friday. 

https://www.redfin.com/CA/Union-City/109-Camino-Pl...

I bought another one and in contract to buy another one small deal like this. They'll hit the market in the next couple of months. Deals can be had in any part of the market cycle. One just has to know where to look. Keep learning. You'll get there.