All Forum Posts by: Wes Blackwell

@John Cook -- is the property on the MLS? I can't find any fourplexes listed that match the criteria described... is a listing agent involved? Or are they trying to sell this without any agents being involved in the process? I couldn't find this on loopnet either, or craigslist.

Like @Avi Garg mentioned, have you talked with your lender about what your finance terms will be? 3.5% is generally reserved for FHA, 5% is typically minimum for conventional, and once you start getting into investment and non-owner-occupied properties you're looking at 20-25% easily. Bad news is that's a lot more down, but the good news is it will increase your cash flow. I would confirm with your lender what type of terms you will need to get the loan.

The first question you have to ask yourself is "Do I want the deal?" Like does it 'make you feel good in your tummy when you sleep at night' kind of want it? Does this property feel right with you on a gut level? Once you know the answer to that question, then you can start to approach the valuation of the property and make the deal happen. If your first reaction to that question is "Oh, well I don't know" or "Hmmm, maybe" then you've got a problem.

2-4 unit properties are usually appraised using a combined approach, as in "what did other similar properties in the area sell for, regardless of rents?" and "what was the GRM and income of properties sold nearby?" It's not as simple as Single Family Homes on one end and Commercial properties on the other. I would take a look at what the multifamily properties that sold for in the area had in regards to income and values. You can bet this guy is most likely asking above what the property is currently worth, so make sure you understand the comps and local multifamily market before signing on the deal. I'd be glad to help you since I can easily access this information through the MLS.

The vacancy gives me pause... because what if you purchase this thing, and then realize there's some issue that prevents you from being able to rent it until fixed? That could be a nightmare! The property would also be a lot more marketable if tenants were already in it, since that wouldn't be a question. @Sonny Ruckstuhl gave a great tip, and try to see if you can get this thing rented before buying it. Hell, what's to stop you from going door-to-door on the other nearby units and asking the tenants what they're currently paying? Then you'll pretty much know for sure what you can get. You might even be able to steal a tenant or two!

As far as the 2% rule, that simply doesn't fly here in California. It's simple math. There are some places in the US where it's possible to buy a $50,000 property that rents for $1,000 a month, which would be a phenomenal deal. But to match that here in the California you'd have to find a $400,000 property that rents for $8,000 per month. And if you ever find one of those, please let me be the first to know! I'd estimate less than 10% of all properties in California surpass 1%, and the highest I'd ever seen was about 1.25% but the property needed a lot of work. 0.70 - 0.80% is a lot more common for deals, with 0.90%+ being more rare. You're looking at 1.03% with this property, so I'd say at face value it looks like a deal. The average of every single 2-4 unit property currently listed on the MLS is 0.60%, so this property is definitely worth looking further into.

Hi @John Cook! Great question!

This isn't always actually the case. There are plenty of apartment buildings that push the entire cost of utilities onto the tenants. Ultimately, it's really just going to come down what the total cost is to the tenant compared to other units in the area. $1,000 rent + $500 utilities is the same as $1,500 rent and no utilities. It all depends how you want to package it.

If you're looking at apartment complexes, your real estate agent should be able to obtain this information for you to help you estimate cash flow, expenses, etc. But primarily this information should come from the listing agent and the seller. And you can simply ask them what they are or ask to see a copy of a bill (this would be during your due diligence period after an offer is already accepted and set to be negotiated further).

What I would do is start looking into some of the properties that are actively for sale and analyzing them and talking to the sellers / agents even if you have no intent to purchase. This will really help you understand the market and the available opportunities, which would allow you to more easily estimate the utilities costs for the properties. Think of it like "Look at 100 properties, buy 1."

If you need boots on the ground of the help of a local real estate agent to provide you with more information, just let me know. Best of luck!

Hi @Art P.! Great question!

First and foremost, are you working with a real estate agent? Or do you have direct access to the MLS? If not, you're completely missing out. Zillow, Trulia, Redfin, etc. were not designed with the real estate investor in mind, and are often missing the critical information you need to make a doo investment decision.

The reason I say that is that there are a TON of properties that will cash flow in this county. Of course, it's really going to depend on your financing terms, but I talk with multiple investors about 2-4 unit properties in this county every single day. Let's connect on here and I'll send you a list so you can see for yourself.

The reason there aren't that many foreclosures is because it's way too easy to simply list your home on the market and sell it for full price in less than a week if you get behind on the bills. The big foreclosure crisis happened when a ton of homes hit the market all at once, everybody was upside down, and few people could buy. But in the market today, you can unload a troublesome property in less than a week. And the reason so few of the are 2-4 units is because even if the owner runs into some financial trouble, they still have several tenants generating income, so they're a lot less likely to fall behind.

@Mike David -- Here's how I would break down the possible rental scenarios and overall market:

• Single Family Home -- Probably going to be your best quality tenants, much more likely to be a family with kids instead of a single individual or a couple. Much more likely to treat the home like it's their own, probably saving to buy a home someday. You will get the most rent per unit for a single family home, because you can offer a yard, garage, maybe a pool, and more privacy. Cash flow wise, it's probably gonna be tough unless you have a large down payment. But seeing as it's an investment property your lender is probably going to require 25% down anyway, although you can get better returns with more units.
• Duplex -- a great option for someone looking to live in one side and rent out the other, because it can cut your mortgage payment in more than half in some scenarios and make for a significant monthly savings. But, if you're going to fully rent it you have a chance to possibly see a little cash flow every month. The way to compare these to fourplexes is to take into consideration that duplex that costs $400k will be in better shape and in a better neighborhood than a fourplex that costs $400k. Now onto...
• Fourplexes -- if you're comparing this to a duplex that costs exactly the same, you'll have a lower quality building in a lower quality neighborhood, but I guarantee the property will perform better financially. More units = more cash flow. But under a certain budget, these properties are going to be in more challenging neighborhoods. That doesn't mean you can't still find great renters and have a nice property, just know that it will be more challenging than having a fourplex in the hot part of town that costs twice as much.

VALUING 2-4 UNIT PROPERTIES

Appreciation is hard to project for single family homes, let alone 2-4 units. Appraisers take a combined approach to appraising 2-4 units, and it's sort of a blend between single family homes, and commercial buildings.

On one hand, these properties are still purchased with conventional financing, just like a single family home. So the appraisal value can be determined by what similar properties nearby are selling for, not matter how much or how little a property generates in income. Some properties will lose you a ridiculous amount of money, but still sell for a ton of cash. These are best suited to people who plan to live in one of the units and significantly reduce their monthly obligation to the mortgage by the supplemental rental income.

On the other hand, metrics like the cap rate, GRM, etc. are taken into consideration as well, much like commercial multifamily properties (5+ units). But, it's not so cut and dry as commercial properties where it's really all about the numbers. So, you really have to take both into consideration when making an investment decision.

For example, I know of a duplex for sale in East Sacramento (nice A/B neighborhood) that's $800,000 and will lose you $15k per year in rents if you even pay 25% down and rent both sides. But, it's in East Sac, and will appreciate along with East Sac, and you'll have little trouble with crime rates, tenants or vacancies.

But, I also know of several fourplexes for sale in the 95815 and 95838 zip codes, which is Del Paso Heights and North Sacramento (NOT so nice neighborhoods, C/D at best) that cost less than $300k and will cash flow at $1,000+ per month with 25% down and fully rented. Yet, you'll have more problems with crime, tenants, and vacancies.

So, the question you gotta ask yourself is what's the better investment? Is your goal cash flow and return on investment? Then look at a fourplex in not-so-nice a neighborhood (there are plenty of options in between the best and worst neighborhoods, by the way). If your goal is a larger appreciation amount in a great neighborhood, purchase the duplex...

REAL ESTATE CYCLES

Just don't purchase it now. The time to buy that duplex was in  2009-2010 when it would have cost you $250-350k. Not the ridiculous $800k they're asking (probably overpriced by $200k, but I digress). California, more than almost any other state, is really all about buy low and sell high. Cash flow is just the icing on the cake. What's a measly $100 a door per month in cash flow when you can get $100k+ appreciation in 5 years?

This is why it's important to understand Real Estate Cycles when investing here. Here's a graph to help you grasp the concept and understand where we are currently at:

Currently, Sacramento and most of California is somewhere between an early and late stable market. Money was cheap for a real long time after the recession, but is now starting to creep up and is projected to go up several times next year. Plus, California is super low inventory. It's all about supply and demand. Most counties would've needed to build 10,000 new housing units per month for the past three decades to keep prices on par with the rest of the country.

So, you have lots of people who want to buy because money is cheap to borrow, and few homes for sale. Supply and demand. Housing prices keep climbing because almost every sale is a multiple offer scenario, which means buyers have to keep bidding above asking price if they want the home. This is part of the reason why the Sacramento-Roseville metro area was projected by Realtor.com to be the #4 hottest metro market in the nation next year.

If you're going to buy now, my advice is to plan on 12-36 months of solid appreciation and then plan to make your exit. There will be a rush near the peak of the market, and that's when property values will be the highest they will be for the next 10 years. Here's a graph of San Francisco's historical high-tier home values to show you the roller coaster ride we're on:

We go up, and then we go down, and then we go up even higher, and come back down again. And the cycle repeats over and over and over again.

Granted, we don't have all the crazy loan shenanigans going on this time, and people are still licking their wounds from the Big Bubble, so the climb to the top won't be so steep, and the fall to the bottom won't be so dramatic. 

But, home prices and interest rates can only go so high before they push too many people out of the market, and then all the new inventory hits the scene and existing houses can't compete (why buy a 50 year old house when you can have a brand new one for the same price?), and then suddenly favor shifts into the direction of buyers, and sellers start making concessions just to get their home sold (like lowering their price). 

HOW TO GET RICH

My advice, buy something that cash flows now and that you're comfortable with (neighborhood, crime rates, etc.) Do what you can to maximize the rents and hold onto that puppy for a couple years. We're set to 7.2% appreciation here in Sacramento next year (probably a little too aggressive of an estimate though, 5% is more reasonable) and in a year from now that same $400k property could be worth $428k or more. You might even get an additional 5% the year after that and now we're really talking.

Then, sell at the peak of the market -- that's where I come in ;-) -- and hold onto your profits until we hit the bottom a couple years later. That's when you come in and buy as many properties as you can, hold onto them for 7-12 years and repeat the process all over again. And before you know it you're wealthy. I know of an investor who bought 100 homes in Sacramento in 2010, and he just sold them all for $100-150k profit EACH. Granted, he had to have the money to buy 100 homes in the first place, but still. Read here to see how the Blackstone private equity fund spent $196 million dollars and bought 1,100 homes in Sacramento in 2011-2012. They're still sitting on most of them, and best believe they are gonna sell at the peak and repeat this strategy ten-fold at the next bottom of the market. You should join them!

If you want to know more about the Sacramento market, or even just the central valley in general and what kind of properties and returns are possible here, just reach out and message me. I'd be more than happy to share my knowledge and information with you to help you make the best possible investment decision. Best of luck!

Hi @Eugene Khalim! Great question!

I would suggest checking out Meetup.com and searching in the career and business section for groups within 25 miles of Stockton related to the term "real estate." Here are a few to get you started:

• San Joaquin County Real Estate Mastermind Group
• EPIC Real Estate Investors Network
• Stockton Real Estate Club
• Gateway Wealth Solutions Network
• Central Valley Wealth Builders

I have a buddy who does A LOT of deals in the area -- @Jake Leicht -- so perhaps connect with him and maybe you can do some deals together. I'm from Stockton as well, so if you ever want to talk shop or need the services of an agent, just let me know! Best of luck!

Hi @Noah Mellor! Great question!

I probably speak with an investor from the Bay Area every single week who has the exact same problem. They're making good money, but investing nearby seems almost impossible with such high prices. What's a guy to do?

Essentially, there are three options:

1. Invest in the Bay Area: High prices, low returns. But, it's close by and you really know the market (or have an agent who does). The high prices are simply because of supply and demand. A whole lot of people want to live in California, but we don't have enough housing to satisfy them. Alameda County would have needed to build 13,456 per year for the past three decades to keep prices on par with the rest of the country! But -- the problem is California is ridiculously expensive to build new construction, as you'll have tens of thousands of dollars spent on permits before you even break ground. LOTS of regulation and fees aren't helping to satisfy the demand either. It would've been great to buy back at the bottom of the market, because you would've experienced all the awesome appreciation @Johnathan Alesso spoke about. California, more than almost any other state, is all about buy low and sell high. Considering that the Bay Area has a 45-60% chance of being in a bubble right now, I wouldn't advise investing in the local area. Much better returns are to be had elsewhere.
2. Invest in the Central Valley (or just Sacramento): Thousands and thousands of people are moving out of the Bay Area every year, and out of state or the central valley of California is where they're heading. Specifically, Sacramento. We are projected to have 18,000 people move here from the Bay Area next year. Good news for investors is that the demand for housing will come along with them, and so rents will continue to rise as Sacramento becomes one of the top rental markets in the nation. To make it even better, we are projected to be the #4 hottest metro real estate market in the nation next year. That means you could buy now, experience 5-7.5% annual appreciation for the next couple years, sell at the peak of the market, and then sit on the money until it all comes back down and you can buy at the bottom of the market 5-7 years from now and get $150,000 of appreciation per property in the next few years after that. Cha-Ching!
3. Invest Out of State: This brings it's own set of complications. Mostly, having boots on the ground to service the property. You'll need property managers, contractors and repairmen, and most importantly someone you can trust. The other difficult part is knowing where to invest. You've got 49 other states to choose from, and probably know nothing about the local economy, job market, real estate market, etc. Makes it a lot more difficult, but it can be done. You'll have to spend some time educating yourself first and then start building a team in the area. Hard to do remotely, probably best to make as much contact as possible long distance and then spend a week or two in the area looking at properties, interviewing agents and property managers, etc.

My advice to Bay Area investors? Invest where you know, or somewhere within a few hours' drive. There are PLENTY of properties here in Sacramento that can give you a positive cash flow of $750 per month, and you don't have to fly 9 states away to find them. You just need the right agent who is working with other investors like you everyday and totally understands your goals and what you're looking to accomplish ;-)

If you ever want more information about Sacramento or the greater central valley real estate markets, just reach out and let me know. No matter what you decide, best of luck!

Hi @Simon Stahl! Great question!

Ask your agent to look on the MLS listing for the "Commission to Selling Office." From what I understand, the information on the MLS essentially acts as a contract between agents. So if it says they're offering 2.5% to the selling office, your agent will get the commission they deserve. If Hubzu or the listing agent tries to pull any shenanigans, the Sacramento Association of Realtors has a mediation department that handles situations like this. Don't worry, your agent should be protected. Best of luck!

Hi @Dan Lovin! My buddy @Tim Kunz is an investor-friendly contractor and he might have someone on his team that can help you out at a great rate :-)

If you're putting your property on the market after a quick touch-up, I'd love to chat sometime for 15 minutes and show you what other sellers are doing to sell their home quickly for top dollar. Even if you just want a second opinion on the home's value, don't hesitate to reach out. Best of luck!

@Hugo Luna -- I'm afraid that @Gordon Cuffe nailed it on the head. I'm betting you've got 12-36 months of appreciation before things start to taper off and go back down hill again. It won't be the crazy wild west like last time, but interest rates and property values can only go so high before the supply surpasses the demand and the market shifts into the favor of buyers and sellers start competing with each other by lowering prices.

You could purchase a small multifamily property here in Sacramento for $300k or less, see a positive cash flow of $500 per month, have the tenants pay the down the property for you and still make money when you sell it in a couple years at the peak of the market. That's the way to play nowadays, not go negative and cross your fingers that the market goes up. That's how everyone got taken out last time.

Anywhere in Sacramento, Stockton, Modesto, etc. But honestly, you can find flippers everywhere, even in the Bay Area!

The best advice is to network with other investors here on Bigger Pockets, and go to local real estate investing meetup groups and associations on Meetup.com. Meet people face to face and make a connection, and in no time you'll find the perfect person to partner with.

Profit split is all going to depend on the deal and your partner. Since you're just starting out, you won't be bringing too much to the table other than money or credit, so don't expect the lion's share of the profits. What's most important is that you make some good connections and learn about the process.