Good Deal / Bad Deal ? Orange County SoCal

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Good Deal / Bad Deal ? Orange County SoCal

Matt InouyePro Member
Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes

Hi BP Community,

So I am pretty new here and I apologize if I haven't quite got my head wrapped around some of the RE metrics and/or correct forum to even start this thread.  

But a potential value-add opportunity came by my wife who is an local RE Agent. We are considering making an offer. The offer is in SoCal - Santa Ana / North Tustin area so I fully understand that my CoC returns and cap rates wont be "great" compared to out of state opportunities. However we are wanting to build some properties that are local. We have 3 properties up in Sacramento which have had their fair share of management challenges for us just starting out even though cash flow is great up there (or at least was when we purchased).

We are looking at this through a BRRRR mindset, but there seems to potentially be a flip exit as well.

Stats:

$464,000 Purchase Price (1450 sq ft 4/2)

$45,000 Estimated Rehab

$570-580K ARV (based on sold comps in area)

$2900-3000/mo rent

$20/mo garbage

$40/mo insurance

$420/mo taxes

$200/mo (estimated for vacancies and low capex/repairs since we are essentially gutting everything minus HVAC)

$2120/mo P&I - Owner financed at 10% down @ 4.5% on a 30/5 balloon.

I plugged these data points into the rental property calculator here on BP and the CoCROI numbers were pretty poor (barely better than risk free 10 year).  But looking for the opinions of investors who might have more experience with the particular area of SoCal.  It barely cashflows, but there's quite a bit of equity.  Again brand new so go gentle.

Big Time Mahalo in advance

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Pratik P.
Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes
10y

Hi Matt, 

I'm not a house flipper but I know that most flippers look for deals that are 

70% ARV - minus repairs - holding costs, etc.

Buying at 80-90% wouldn't make sense from a flipping perspective. 

If you're doing buy and hold, you would need to to a different type of analysis where you would factor in monthly PITI, repairs, vacancy rates, cap ex, etc. I'd say if you're cash flowing $200 after all the expenses, then you probably have a good deal!


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  • Mike L.
    Commercial Real Estate Broker · Tustin, CA · Member since 2010 · 51 posts · 26 votes
    10y

    How did you come up with the $45k rehab number?  Did you get contractor estimates?  I'm not saying it's wrong; I'm just curious.  Since you say you are gutting everything minus HVAC, that number sounds like it could be a bit low. 

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  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    10y

    @Mike L. Yes, we had four contractors come in and bid the project.  We also bid the HVAC and both came in around $6K.  Technicians gave approximate life of 2-3 years

    Perhaps I am looking at this wrong... but right now in OC there doesn't seem to be anything cash flowing on MLS. So the fact that I could get even a $100/mo after all expenses plus some equity seemed pretty good for the area. Again probably not as good as out of state but I haven't yet developed teams out of state.

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  • Rick Snow
    Investor · Sacramento, CA · Member since 2015 · 65 posts · 33 votes
    10y

    A 90% ARV is too high. Especially if you're financing. What's your goal? Flip? Rental?

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  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    10y

    @Rick Snow,

    our first thought would be a buy and hold. What do you mean by 90% of ARV is too high?

    so it would be $46K down + $45K rehab + $3K closing costs = 94K initial.

    do you mean that at 94K initial investment / $570K ARV would be too high? What is a better ratio to strive for. Thanks in advance and I appreciate any knowledge you can pass along.

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  • Pratik P.
    Flipper/Rehabber · Sacramento, CA · Member since 2016 · 807 posts · 815 votes
    10y

    Hi Matt, 

    I'm not a house flipper but I know that most flippers look for deals that are 

    70% ARV - minus repairs - holding costs, etc.

    Buying at 80-90% wouldn't make sense from a flipping perspective. 

    If you're doing buy and hold, you would need to to a different type of analysis where you would factor in monthly PITI, repairs, vacancy rates, cap ex, etc. I'd say if you're cash flowing $200 after all the expenses, then you probably have a good deal!


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  • Sergey TkachevPro Member
    Investor, Agent, CPA · West Sacramento, CA · Member since 2009 · 690 posts · 262 votes
    10y

    @Matt Inouye, Your purchase price of $464k plus $45k rehab is about 90% of the $570k ARV, which is very narrow and thus risky. Even though the rule of 70% is widely, in parts like Socal closer to 80% is realistic but once you get to 90%, you're at high risk of unexpected expenses eating all your profit.

    You mentioned you the property has a value add potential - what is the value add specifically?  Normally a regular rehab is not necessarily considered a value ad.

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  • Rick Snow
    Investor · Sacramento, CA · Member since 2015 · 65 posts · 33 votes
    10y

    Hey @Matt Inouye if you're financing, 70% is a golden rule. 70 includes rehab. If your ARV is $570 a safe bet would be $399 all in. $513 all in is tight (not impossible) on a 570. Those margins are really set aside for seasoned investors who buy cash and can run multiple contingencies if something goes wrong.

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  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    10y

    @Sergey Tkachev, Hey thanks man for taking the time to explain.  I've been trying to soak up and retain as many of these "rules" as possible.  Also the "value add" is turning it into a 4/2 instead of a 3/2.  I know that many consider the 3/2 to be the bread and butter of buy and hold, but 4/2's in the area seem to be priced higher along with increased rents.  Obviously more occupants will produce a little more wear and tear than a 3/2 but trying to put as much laminate, tile and other tenant proof material as possible.

    @Rick Snow, also thank you for taking the time to explain the flip-side of the business.  Like I was mentioning, we have never done one, much less know what margins to look for.  It just seemed that if rents didn't come through we might be able to exit at break even to a very small profit.

    Thanks to both of you and we also do have some properties up in the Pocket area of Sacramento.  Would love to continue our dialogue and get to better know some of the local Sac Investors as well.

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  • Rick Snow
    Investor · Sacramento, CA · Member since 2015 · 65 posts · 33 votes
    10y

    Hey Matt for rentals. As long as you can turn a profit after your debt service has been paid then you should be golden. Make sure you have a home warranty/insurance and a good tenant and you'll be fine. If you've got anything under contract in the pocket area DM me. I'll definitely take a look at it. Good luck out there. Rick

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  • Sergey TkachevPro Member
    Investor, Agent, CPA · West Sacramento, CA · Member since 2009 · 690 posts · 262 votes
    10y

    @Matt Inouye, sure, glad to share my thoughts :). I just moved to Sac from Huntington Beach last year, been in OC/LA area most of my life. Based on what I know from OC, it sounds like it will be pretty hard to cashflow the SFR at that price, you are likely to go negative once you consider all the true costs. But it's not impossible. Is your plan to refinance after the 5 year baloon? What if you can't refi at that point? Make sure you have a backup plan. It might be a better potential for a flip if you go the value ad route (or rental), you just have to figure out what the ARV (or monthly rent) is if you turn it into a 4/2 and take the additional expense into consideration.

    Feel free to reach to me about Sacramento as well :)

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    You are on the right track but not there yet with this property and those numbers. I agree with those that say 10% margins are too thin for it to be a profitable flip. If you were to sell, you would likely incur 10% transaction fees (perhaps a bit less, but not much, since your wife is a RE agent) ... so, that 10% flip profit would likely get eaten up by transaction fees ... and that's if everything goes perfectly according to your plan, which let's face it, when does that ever happen? Most flippers wouldn't touch this deal at those numbers, and would want ~$410 purchase or lower, and/or do more value add by adding square footage if the neighborhood and comps could support it to bring their return up significantly. However, I doubt that price would work if this is an MLS listed property ... that would likely be for an off market property purchased with cash/hard money loan.

    I understand that you are planning to buy and hold, and you may be able to squeeze a slight cash flow if your numbers are correct, but I always like the property to work as a flip AND be cash flow positive (or at least neutral) ... one is for plan A and the other for plan B. The idea being have a short term profit from value add locked in and some cash flow so you can hold from a position of financial strength through the market ups and downs and let that marvelous long term SoCal appreciation and rent increases do the heavy lifting from there.

    When you say owner financed with 10% down, are you meaning that you will live there as a primary residence for a bit? If so, this is a great option if you can comfortably afford to carry the mortgage and expenses on your income, but what is up with the poor rate and balloon? You should be able to get a much better rate and a 30 year fixed unless your credit is jacked up or there is some other factor I am missing?

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  • Matt InouyePro Member
    OP
    Investor · Irvine, CA · Member since 2014 · 73 posts · 24 votes
    9y

    @Sergey Tkachev, @David Faulkner, @Rick Snow, @Pratik P.

    I just wanted to thank you fine gentlemen for spending some time a few months back to explain different aspects of the deal I was mentioning above.  I also wanted to give you an update of how it turned out... many lessons learned both good and bad. 

    So here are the final stats:

    • Purchase: $464K (4/2 SFR)
    • ARV for the house actually came in at 610K (vs. 570K est.)
    • Rehab came in at 50K and 2 weeks longer (vs. 45K anticipated)
    • rent was right at $3000/mo
    • debt service: $2120/mo. (but we've negotiated to drop below $1820 after 5 years and it will be locked for 30 years - no more balloon)
    • all other data point were the same as above

    Al in all... initially it was a flat deal as many of you pointed out ($100/mo CF) but after our renegotiated debt service I feel it turned out to be a so-so deal for SoCal (almost $300/mo CF with $95K equity).

    I will definitely be trying to look for something with even more meat on the bone next time. 

    Thanks again for everything you posters do.  And if anyone starting out is reading this... take those next steps and keep learning form the great posters on BP

    Aloha,

    Matt

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  • Sergey TkachevPro Member
    Investor, Agent, CPA · West Sacramento, CA · Member since 2009 · 690 posts · 262 votes
    9y

    @Matt Inouye, thanks for sharing the update with us!  It's definitely good to hear how something ends :).  And glad to see you have CF, although tight, that's actually not bad for SoCal.  Just make sure you retain the renters and minimize any major expenses that can cut into the CF.  Since it's rehabbed, I assume there is not much that will like need repairs in the near future - the only possible repair expense is if tenants leave damage to the place so make sure proper due diligence is carried out in regards to tenants.  

    Once again, congrats on this deal!

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  • Rick Snow
    Investor · Sacramento, CA · Member since 2015 · 65 posts · 33 votes
    9y

    Hey @Matt Inouye. To quote the A-Team "I love it when a plan comes together". That deal was thin but you made it work. Expensive money to control the deal then refinancing is how a lot of deals are done.  The trick is to control the numbers (run them against best and worse case scenarios) and always be negotiating for a better position.  

    Congratulations. I'm proud of you man. 

    Glad I could help. If you need help reviewing any other deals reach out to me

    Rick

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