Newbie Advice to buy a multi family unit in SoCal

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Newbie Advice to buy a multi family unit in SoCal

Gaurav S.
Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote

I got introduced to BP yesterday and tried to read as much as I can but did not find some specific details for a beginner. I guess it depends what your goals are. So here are my details

I am 30 years old married with no kids. I work full time as an engineer and love my job.

Investing in stock market is my passion and I have done quite well. I am follower of Benjamin Graham/ Warren Buffett style value investing. Its getting hard to find value stocks nowadays in the market and hence I am thinking about buying real estate property.

I have around 150k in non-retirement account but I am not sure how much of that I will be willing to put into the RE investment.
Also I currently rent an apartment. So I was thinking of buying a multi-family unit and rent one unit for myself. This way I might be able to skip the property management costs.

Any property that gives 10% yield unlevered per annum including the cost I have incurred if I was renting would be a good deal in my opinion.

I have a 780+ credit score and should not have problem getting a loan.

So my question is how do I start ? I would like to buy the property in Ventura/Camarillo/Thousand Oaks area since I work in Santa Barbara. Is there a bird-dog I can hire to find such property for me ? What are the sequence of things I should be doing from today onwards to make this happen.

Thanks for your time
Gaurav

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Josh P.
Real Estate Investor · San Pedro , CA · Member since 2011 · 51 posts · 8 votes
15y

If you are willing to broaden your horizons to anywhere USA, then I would certainly do so.

For instance in Palm Springs, CA where I live, you can purchase multifamily properties for below replacement cost. I'm not sure what the demand for rentals is in the off season, though.

You will get benefit from an owner occupied situation in terms of lower interest, being able to bid on HUD+Fannie and not longer having to pay rent, but will these benefits offset the premium price you will be paying in your target area? Honestly, in your position, you could do both. And by both I mean get into an owner occupied multi unit, and invest in an area where the price per unit isn't so high, an area where you would actually have some monthly cash flow.

Just for kicks lets run some numbers on a specific listing I found on the Ventura county craigslist. ,

listed at 550k
income per unit 1,900
Monthly payment 3273.35 (5% 30 year fixed)

Thats with .7% property tax and doesn't count insurance.

So basically in a best case scenario, you would have to come up with 3273.35 per month plus insurance minus the
1,900 per month in rent.

Appreciation rates in Thousand Oaks over the last five years have been 5.25%, with an average annual rate of 1.05%.

Total appreciation in the last ten years has been 96.76%

Thats the reason, you're paying 550k for a duplex that would sell for replacement cost in my town. In my opinion, the price per unit in Ventura county still reflects the price increases brought about by last decade's real estate boom. I'm sure they have fallen somewhat since '08, but not enough to merit investing with a buy and hold strategy beyond your owner occupied unit.

If yo can find a multi unit in Oxnard that would actually cash flow and you don't mind the condition, location or commute then that would be even better. You would have a property that would be doing something for you beyond supplementing your new jumbo loan.

Last thing I'll say is this. I own a property in TX, a triplex I paid 55k for the property, exactly 10 percent of the asking price of the above example.

I did a cosmetic rehab for around 6k and rented out one unit as a furnished corporate rental.

I get rents of 2,200 per month. My mortgage, taxes and insurance on a 15 year note total around 760 a month. It is managed locally.

I don't have to worry about my property depreciating half its value. I don't have to worry about the economy taking a dive and people not being able to pay me rent that is sufficient to cover most if not all of my expenses.

You can't get those kinds of numbers in Ventura County where the prices are still crazy because of a few crazy years.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    Gaurav -

    Welcome to BP! A 780+ credit score and 150k in the bank puts you miles ahead of the average starting RE investor. Way ahead of where I started too.

    The areas you named are very expensive areas. I'd assume even the worst units in those cities sell well above 100k/unit.

    May I suggest Oxnard is worth checking out. Using the resources you have you may want to start with a 4-plex, you can get a great rate. I would also put down as little as possible 3.5% + closing costs.

    I would think twice about living next to your tenants, some people are better at it than others, but you'd probably only have to live there for 1 year and you could buy another 4-plex or your own house.

    You did not mention, but if you have good retirement holdings, you should consider self directing those funds and investing them in Real Estate or RE loans too.

    0Reply
  • Gaurav S.
    OP
    Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote
    15y

    Thanks for the reply.

    Yes I was also thinking about 4plex but if too expensive I might also get a 2plex with I living in one of the 2.

    Since I am a newbie how do I go ahead ? My intuition tells me to look online on mls or HUD+fanniemae foreclosures for owner occupied units.

    HUD+Fanniemae have special 15 day period in which only owner occupied people can bid on the properties.

    But my problem is I am not too familiar with the area as well as what to look for when buying a rental property. I am sure I will learn along the way but it would be nice to have someone trustworthy and experienced to hand hold me through my first transaction at the beginning.

    Regarding retirement account I do not feel comfortable putting all eggs in one basket for now. Maybe in future.

    Can someone recommend a real estate agent or a person who can help me finding a property that might be a good deal.

    Or buying in Ventura County just doesn't make sense and I should just broaden my horizon to anywhere in US.

    I was thinking if I buy in Ventura County I already have a tenant i.e. myself :)

    0Reply
  • Josh P.
    Real Estate Investor · San Pedro , CA · Member since 2011 · 51 posts · 8 votes
    15y

    If you are willing to broaden your horizons to anywhere USA, then I would certainly do so.

    For instance in Palm Springs, CA where I live, you can purchase multifamily properties for below replacement cost. I'm not sure what the demand for rentals is in the off season, though.

    You will get benefit from an owner occupied situation in terms of lower interest, being able to bid on HUD+Fannie and not longer having to pay rent, but will these benefits offset the premium price you will be paying in your target area? Honestly, in your position, you could do both. And by both I mean get into an owner occupied multi unit, and invest in an area where the price per unit isn't so high, an area where you would actually have some monthly cash flow.

    Just for kicks lets run some numbers on a specific listing I found on the Ventura county craigslist. ,

    listed at 550k
    income per unit 1,900
    Monthly payment 3273.35 (5% 30 year fixed)

    Thats with .7% property tax and doesn't count insurance.

    So basically in a best case scenario, you would have to come up with 3273.35 per month plus insurance minus the
    1,900 per month in rent.

    Appreciation rates in Thousand Oaks over the last five years have been 5.25%, with an average annual rate of 1.05%.

    Total appreciation in the last ten years has been 96.76%

    Thats the reason, you're paying 550k for a duplex that would sell for replacement cost in my town. In my opinion, the price per unit in Ventura county still reflects the price increases brought about by last decade's real estate boom. I'm sure they have fallen somewhat since '08, but not enough to merit investing with a buy and hold strategy beyond your owner occupied unit.

    If yo can find a multi unit in Oxnard that would actually cash flow and you don't mind the condition, location or commute then that would be even better. You would have a property that would be doing something for you beyond supplementing your new jumbo loan.

    Last thing I'll say is this. I own a property in TX, a triplex I paid 55k for the property, exactly 10 percent of the asking price of the above example.

    I did a cosmetic rehab for around 6k and rented out one unit as a furnished corporate rental.

    I get rents of 2,200 per month. My mortgage, taxes and insurance on a 15 year note total around 760 a month. It is managed locally.

    I don't have to worry about my property depreciating half its value. I don't have to worry about the economy taking a dive and people not being able to pay me rent that is sufficient to cover most if not all of my expenses.

    You can't get those kinds of numbers in Ventura County where the prices are still crazy because of a few crazy years.

    3Reply
  • Lee G.
    Developer · Boise, ID · Member since 2009 · 168 posts · 112 votes
    15y

    If you are willing to live in it, you can get an FHA loan and put very little down. In Ventura County, the loan limit on a 4plex is a little more than $1.4MM.

    I did this for my first property and it's worked great... My cash on cash returns are ridiculous and I got great hands on experience that has saved my butt countless times.

    Lee

    P.S. Go Gauchos! :-)

    0Reply
  • Gaurav S.
    OP
    Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote
    15y

    Thank you everyone. All good advice.

    Its a no brainer to buy a property in texas compared to California. But since I have never been to Texas wouldn't it be difficult to get my arms around doing this. Even if I use a property management company how do I select where to buy ? How do I know if I buy a particular property the renters will come or if its a good deal or not ?

    I think I will first try to buy something in Oxnard. Atleast in worst case I can call it my home even though its not profitable.

    Can anyone recommend a real estate agent or someone who knows more about Oxnard area.

    I am willing to invest around 120k in this. Every bit of that is hard earned money so I hope you understand my uneasiness in putting this money at risk. That is why I would like someone to refer an experienced trustworthy person who can help me at this.

    Thanks,
    Gaurav

    0Reply
  • Gaurav S.
    OP
    Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote
    15y

    Also how do I go about setting up my finances. Should I purchase this property through a LLC in which I am a investor/partner.

    In the worst case scenario i.e. if I can't find tenants and property is worth less than what I owe on it.........what happens ? Can the bank come after my assets if I directly but it...or is it like a owner occupied home where you handover the keys and walk away.

    What if I am staying in one of the units ? Do the rules change in that case.

    How do you guys do it ?

    0Reply
  • Sally Foo
    Involved In Real Estate · San Jose, CA · Member since 2009 · 2 posts · 0 votes
    15y

    Here is a suggestion. What you should do is work with a Real Estate Agent who can help you find a 4-plex for a maximun amount of $160,000 with a minimun rental income from each unit for $800. You can pay all cash or put down 30% with a loan amount of $112,000. $112,000 mortgage would have a monthly mortgage payment of less than $800 per month. You will have at least $3,200 cash flow, if you pay all cash. Or $2,400 cash flow with a mortgage. This will help you pay your mortgage on your own place somewhere else that is better. ... Just use $2,000 to pay your personal mortgage, insurance, maintenances, ... etc.. The rest put it in a saving account for emergency.

    Keep in mind, investment properties are being rated for the loan qualification, not the person. ... My co-worker is doing this successfully.

    0Reply
  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    If you are going to take advantage of financing you will probably need to leave it in your name. Which should be fine.

    The chances of a lender coming after your assets is next to 0. With all the melt-down that is going on now, I have not heard of any scenarios where they have.

    Find a good agent and go look at a lot of properties.

    0Reply
  • Jake Kucheck
    Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
    15y

    Gaurav,

    It really depends on your strategy with the property. Since you mentioned Warren Buffett and Benjamin Graham, I'm assuming your model is not to fix and flip, but rather to buy and hold, and make sure that you are buying good value. In real estate, there are two things that comprise value- appreciation and yield (similar to the stock market). Appreciation is simple (what someone would pay for your property - what you bought it for - what you spent on repairs= appreciation). Yield is more complex. You'll want to read all about the 50% rule before determining what an acceptable yield is to you.

    What actually matters very little is where the property is located in proximity to its owner. Unless you plan on living in it (which it sounds like you are considering, but I would give this a lot of thought as well), it is far more important that you select a good tenant and good PM than the property be close by.

    What you get as a bonus with RE that you don't get with stocks is tax advantages, which your CPA should be able to help you clarify and pinpoint ways to maximize.

    While properties where I am are usually more an appreciation play than a yield play, there are a few high-yield properties to be found in the more "up and coming" areas. The thorough investor has an appetite for both, and in most cases, will use leverage to diversify across these two strategies.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y
    Originally posted by Sally Foo:
    Here is a suggestion. What you should do is work with a Real Estate Agent who can help you find a 4-plex for a maximun amount of $160,000 with a minimun rental income from each unit for $800. You can pay all cash or put down 30% with a loan amount of $112,000. $112,000 mortgage would have a monthly mortgage payment of less than $800 per month. You will have at least $3,200 cash flow, if you pay all cash. Or $2,400 cash flow with a mortgage. ...

    Sorry, but the math in this quoted excerpt of a post seems to be broken.

    Let's try to give just a bit more reality to it (and I will be FAR from totally realistic, but it will give you an idea of what needs to be addressed). 4 units rented at $800 each = $3200 per month in rent coming in; this assumes that the OP isn't living in one of the units (but he seems to want to, so this number will be lower for him). To say that leads to "at least $3,200 cash flow" is CRAZY! That sort of statement ignores ALL OTHER EXPENSES - you will have at least property taxes to deal with. So that amount has to be lowered. 50% rule of thumb for expenses should be reviewed (lots of posts on BP cover this rule, so please search).

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    15y

    Good catch Steve, I voted twice, I must have special voting priveleges...lol.

    Good advice above, are you dead set on being a landlord? Might look into transactional funding.

    If you are going to be a landlord, you definately do not, under any circumstances, want to live with 24 tenants, may be 3 others. If I did live on site, I would get a manager (or act as if you were the manager) and never let anyone know you were the owner. Managers must follow the rules set by the owner, owners can do anything they want, like take late rents or ignore other infractions.

    1Reply
  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    15y

    Gaurav,

    I was in your position a few years ago. I bought a 3-plex, owner-occupied, and went from there.

    As to whether you want to live with your tenants is a decision you really need to think over; I didn't mind simply b/c I was so busy with work that I was hardly there. Your situation may be different.

    Also, if you are a true "value" investor then that means you're going to look for fixers. Fixers = difficulty with traditional financing. So, you better get familiar with all the various ways to get creative with real estate acquisition.

    As to how to start, I would start with committing some time to driving around cities that you're thinking about. Learn neighborhoods like the back of your hand. Talk to people. From there you can really focus on an area or two. In addition, knowing what you want and where you want it will make it that much easier for you to "pass" on a deal that doesn't meet your needs/wants. To me that is less time wasted and more time for you to focus on what you're trying to get to.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    15y

    Oh, if you are going to live in one unit, and use an owner occupant loan to buy, then you will need to be the real owner (so no LLC in that case).

    0Reply
  • Gaurav S.
    OP
    Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote
    15y

    Thank you everyone for all the great advice. I agree about subtracting insurance + property tax + maintenance but 50% rule seems to be crude. It will vary with age of property, the type of tenants,etc. etc.

    I will start looking at MLS listed income properties in Oxnard/Ventura area and see if the ROI from rent would be worth the asking price.My hunch right now is that it won't.

    If not, then either I have to buy a fixer upper or start looking all over US. Doing a fixer upper as my first purchase seems daunting but finding a property anywhere else in US seems even more daunting.

    Has anyone bought their first property outside of driving distance ? How did that work out ?

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    15y

    Yes, its crude. Its beats the pants off of "cash flow = rent - PITI", though. Every new investor thinks this rule is crazy pessimistic. Until their tenant trashes their property and moves on in the middle of the night. Then they say "help, my tenant bailed out and I can't make my payment". Its all just part of the business. Plan for it, and you'll do fine. Assume the best, as a bunch of people want you to do, and you're going to fail. J Scott wrote a nice explanation of why this rule actually works recently.

    Maintenance, insurance, and taxes are just the start. You will have vacancies, a roof every 20 years, a new sewer line every 50 years (keep that in mind for that 40 year old house). Every now and then a tenant will leave a mess. You will have "make ready" expenses every time a tenant moves out. These are real expenses that you really will have.

    Consider starting with SFRs. If this business doesn't work out to be your cup of tea, its easy to sell SFRs and move on.

    It VERY HARD to buy off the MLS and get a deal. Anything that's a deal gets snapped up very quick. Plan on a significant investment of time and MANY (dozens) of offers to buy something. Don't fall into the "gottadoadealitius" syndrome. The goal here is to make money, not to own real estate.

    2Reply
  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    15y
    Originally posted by Jon Holdman:

    Beautifully said!

    0Reply
  • Roumany Samhakson
    Real Estate Investor · Carol Stream, IL · Member since 2011 · 4 posts · 0 votes
    15y

    Hi Gaurav,

    All the advice given so far has been great. I've been learning just by reading the replies. I have two rental properties myself (1 is a duplex in TX and the other is a condo in CA) and I'm looking to add to the mix this year.

    The way I acquired the TX property was when I took an job promotion near the border of OK/TX. I decided to buy in the area. Being a newbie at the time it really helped that I was buying in the TX market and not the CA market. Even though I didn't make the best decisions I am still positively cash-flowing the units.

    It's really not that hard to buy out of state. It helps if you have friends or family in that state so it can give you a reason to buy there and then later on you can write-off the trip expenses because you are going to manage or maintain the property. It all seems like more of a hurdle at first because you haven't done it yet, but it is well worth it. With the money that you would save in a different market you will pay for your trips many times over.

    As far finding properties in CA, I would get involved with other RE investors and network. Try to find those wholesalers or bird dogs that have properties lined up that aren't listed on the MLS. I think you'll have a tougher time finding the "value" deals on the MLS. And as someone else posted the goal is to make money so don't get into this thinking "it's ok if I lose a little money". It should never be ok. Would you buy stocks to lose a little money?

    0Reply
  • Gaurav S.
    OP
    Homeowner · los angeles, CA · Member since 2011 · 57 posts · 1 vote
    15y

    I have absolutely no intention of loosing money (does anyone :roll: )

    So it would serve my best interests to go into this with open eye and rational mind. I have made a small excel sheet that I can use to evaluate a property. The variables that go in it are loan related terms,inflation,rent, commission on sale, repair expense. Will improve on it as time goes by.

    To look for properties where I have relatives/friends is a very good suggestion. I will start asking around.

    "As far finding properties in CA, I would get involved with other RE investors and network. Try to find those wholesalers or bird dogs that have properties lined up that aren't listed on the MLS. I think you'll have a tougher time finding the "value" deals on the MLS."

    What is the best place to find a bird-dog ?

    Regarding the tax benefit my understanding is that you can depreciate the cost of the home minus the land every year to reduce your tax basis and hence save on tax. But when you sell the home the tax you owe is calculated using the lower depreciated price of the property and hence you might owe more tax at that time. Is this explanation correct ?

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