Northern California Investor with Some Questions

11 Replies

Hello BP,

My wife and I are looking to secure our financial freedom through Buy and Hold investing. We have been researching real estate investing for a couple of years now and recently joined the BP forum after the recommendation from a friend of ours. 

We have been devouring the guides, pod casts and perusing the forums as much as possible. After soaking in all this great information, we have some questions:

Currently, we are looking for multifamily units in the Central Valley (Sacramento, Stockton, Modesto, etc) and there appear to be some rentals that cash flow nicely. Does anyone have any experience with this strategy in these areas? 

There seems to be quite a bit of podcasts and forum posts about folks buying multiple (even tens) of rental units a year. I have noticed that most of these folks are buying in the Midwest. Is this realistic for investors in California?  How are these folks managing to purchase all these rentals?

Thanks all!

> Currently, we are looking for multifamily units in the Central Valley (Sacramento, Stockton, Modesto, etc) and there appear to be some rentals that cash flow nicely. Does anyone have any experience with this strategy in these areas?

From the financials I've seen of my clients, multi unit in modest income areas are indeed the winners in our area. Keep in mind that what I see isn't the results of 50% rules or 70% rules or any of that, but a combination of appraisal reports' operating income section and actual tax returns and actual lease agreements and the like.

> There seems to be quite a bit of podcasts and forum posts about folks buying multiple (even tens) of rental units a year. I have noticed that most of these folks are buying in the Midwest. Is this realistic for investors in California?

It depends in part on how your income from your day-job is. Once you've had a property for a few tax years, we look at your actual rent and actual expenses when we do our math to determine impact on DTI. If it's a recent purchase, we're forced to take market rent at 75% of value and then subtract PITI to determine how it impacts your DTI. Good day-job income can make up for this latter wonky calculation.

On top of that, there is of course the issue of you having the cash on hand for the subsequent down payments and PITI reserves.

Further, a lot of these folks that are in and out of deals uber fast are using a combination of cash and hard money financing. 

@Daniel Erdman

Do you own your own home? If not, an FHA mortgage can be a great starting point, up to 4 units. If you do own your own home with a mortgage history, than 75% of the potential rental income will count as income until the property appears on your tax returns, which will then be used to calculate income. I have many clients that have large retirement funds and are pulling money from that account to use as the down payment on property.

Here is some more info on financing and down payments to help you get started;

You can borrow for up to 10 conventional mortgages. You have the option of a 15, 20 or 30 year term.

For A Fixed Rate Purchase, Investment properties, Mortgaged property 1-4;

  • A SFR requires a LTV of 85%
  • A MFR requires a LTV of 75%
  • A minimum credit score of 620

For A Fixed Rate Purchase, Investment properties, Mortgaged property 5-10;

  • A SFR requires a LTV of 75%
  • A MFR requires a LTV of 70%
  • Minimum credit score of 720

Here are some answers to FAQ as well;

1. For all 1- to 4-unit investment property transactions, cash reserves equal to six (6) months PITI for the subject property are required.

Cash Reserves Required For Other Properties Owned by Investor;

  • If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home
  • If the borrower has 5-10 mortgages, An additional six (6) months for every other investment property and second home.

2. Gift funds are not allowed on Investment property transactions.

3. Escrows for taxes and insurance are required unless otherwise approved by the underwriter.

4. Loans for investment properties are not eligible if the transaction includes non-arm’s length and/or at-interest characteristics

5. Investment property transactions cannot close in trust.

6. Maximum 2% sellers concessions is allowed!!

Maximum loan amounts for areas that are not considered high cost are; (high cost area financing applies to primary residence only)

1 unit - $417,000

2 unit - $533,850

3 unit - $645,300

4 unit - $801,950

Fannie Mae/Freddie Mac High Cost area limits are the same as FHA for 2015. VA is the same as FHA for 2015.

Here is a link to look up maximum conventional financing limits.

http://www.fhfa.gov/DataTools/Downloads/Documents/...

Daniel,

Not only is it possible to buy and hold in the Midwest, it makes a lot of sense and it's very easy. We live and work in the Kansas City area and are getting excellent ROI, you will be stepping into equity the moment we complete the rehab. You get so much more for your money here that California, it would be difficult to justify not atleast going over the numbers. I would be happy to discuss our services, and how simple the process it is for you.

Jason

Originally posted by @Chris Mason :

> Currently, we are looking for multifamily units in the Central Valley (Sacramento, Stockton, Modesto, etc) and there appear to be some rentals that cash flow nicely. Does anyone have any experience with this strategy in these areas?

From the financials I've seen of my clients, multi unit in modest income areas are indeed the winners in our area. Keep in mind that what I see isn't the results of 50% rules or 70% rules or any of that, but a combination of appraisal reports' operating income section and actual tax returns and actual lease agreements and the like.

> There seems to be quite a bit of podcasts and forum posts about folks buying multiple (even tens) of rental units a year. I have noticed that most of these folks are buying in the Midwest. Is this realistic for investors in California?

It depends in part on how your income from your day-job is. Once you've had a property for a few tax years, we look at your actual rent and actual expenses when we do our math to determine impact on DTI. If it's a recent purchase, we're forced to take market rent at 75% of value and then subtract PITI to determine how it impacts your DTI. Good day-job income can make up for this latter wonky calculation.

On top of that, there is of course the issue of you having the cash on hand for the subsequent down payments and PITI reserves.

Further, a lot of these folks that are in and out of deals uber fast are using a combination of cash and hard money financing. 

 Chris, 

If you wouldnt mind, could you share what some of your clients cash flow in these areas?

Thank you!

@Daniel Erdman Have you looked further north?  I am in Redding, California and prices are significantly less than the areas you are speaking of, but rents have increased over the last few years.  Not only have rents increased, but the renters have improved.  If you would like to know more about the market here please let me know. I could send you some numbers.  You definitely get more for your money.  

@Jason Hawk I'd like to hear more about the Midwest myself.  This year I'd like to learn about new markets for my clients and for myself. I like lending in other areas depending on licensing, but it's difficult unless you work with someone you can trust to give you information about the market, supply and demand, good areas and bad, etc.  Also, is there much a flip market there?  What do the numbers look like?  Would it be a good investment market for my flip clients that are willing to look throughout the nation?

@Daniel Erdman if you would like to message me about your criteria I can let you know my feedback and if there are properties that fit your needs.  There is opportunity, but it often goes fast when the numbers are good.  Let me know price range, return needed, etc.

I think it is realistic. The areas that you mentioned did drop dramatically in the down turn. You need to be conscious of that and make sure the market is a strong rental market. Stockton can get a bit dicey. Try and stay near schools if possible and factor in if you are mostly going to renting to students or wage earners. Location, loactaion, location!!!

Originally posted by @Daniel Erdman :
Originally posted by @Chris M.:

... 

 Chris, 

If you wouldnt mind, could you share what some of your clients cash flow in these areas?

Thank you!

Kind of a big no-no for me to get that specific. If I did, you might be able to identify the property or individuals involved. 

I would hypothetically treat your info with the same level of confidentiality.

I can be general (as I was in my post), but will not get as specific as you request,

Hope you understand.