I have been reading about investing in Class C multifamily in Phoenix lately... When I google what is out there on the Phoenix market, not looking good to me?? The properties all look very run down in poor locations.... Any one has real experience and success with Phoenix?
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
9y
Hi Diane,
Please allow me to throw in my 2 cents. You have to view it from the seller's perspective. If you own a building in an A or B neighborhood and it's producing 8% - 12% CoCR almost trouble free, what would make you want to sell it? Nothing. There's no motivation to sell.
As you already have seen, higher cap rates come in crappier neighborhoods, and that is true across the whole country. There is no unicorn. If you want higher yield, you'd have to take higher risk and earn that yield.
Let's take a look at an example. You're a value investor. You buy an under performing building for $1MM. You put $500k into rehab, and it's worth $2MM. You now have the option of doing a cash-out refinance at 75% LTV and takes out your initial investment. If the building is producing 10% CoCR after the cash-out refinance, would you sell or would you keep it?
Since you got all of your money back, the CoCR is actually infinity. Say if you get 10% ROE, that's $50k/year. If you can rinse and repeat 5 times, you're home free. However, if someone comes along and offer you $2.5MM, would you sell it? At $2.5MM price, your ROE is only 5%. Well, not so fast.
Let’s throw in a curve ball and say your market appreciates at an average 5% annually like our Bay Area market, and history has shown that in the last 45+ years. That's $125k/year in appreciation for a $2.5MM asset that you only get 5% ROE, would you still sell it?
Sometimes, we're too short-sighted for our own good and only look at the yield NOW. Stay away from C class assets. It's not what it seems.
Investor · Phoenix, AZ · Member since 2013 · 193 posts · 37 votes
9y
It just depends on the areas, but of course if the property is in a poor location than more than likely the property will be in bad shape. Are you looking to buy?
Broker · Phoenix, AZ · Member since 2015 · 151 posts · 55 votes
9y
Class C are going to be older, and most thst are available are around I-17 and in older parts of Phoenix, tempe and South Scottsdale. If you're looking for a portfolio of condos there are several of those being floated around on and off market. Depends on what area of town you are looking for?
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
9y
"Phoenix Market" - just to be clear, the greater metro area of phoenix is probably 90 miles east to west and 60 miles north to south. There are a lot of people, and each area has its own flavor.
Class B for under 1.5M exists, but you're going to have to hustle to find it. I'm putting together my own class B portfolio in a few condo buildings around scottsdale, as i cannot find anything that I like all under one roof. Passive investments here in B/C Class I think are asking for trouble unless you know, (not think, KNOW) that you have a good manager.
I am looking more at a "per door" price when I evaluate these, rather than overall price. Gives me a better idea of IRR.
Care to give me a couple of address of B and C that is currently on loopnet in city of "Phoenix"? I have a hard time telling the difference between B and C, if you have got a spare second that is..... Thanks
Breaking down the city by ZIP is arduous, but there are 2 basic categories of stuff you find online:
1) Garbage with 10+ cap rates. You can make money, but there is drama and your management needs to be top notch
2) Nicer stuff with 6% or worse caps.
I only invest in my own neighborhoods in scottsdale because I live there, enjoy some maintenance work, and work here as well. I'll be the first to admit it limits my investing but I'm OK with it. I've managed pretty solid 12% caps on my condos with a little creativity, and being close to home is my zen.
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
9y
You're quite welcome, let me know if you need more info. My day job does a lot of projects in the west valley, lots of investment there, I just don't like the area and stay away.
Do not mean to offend any of your wonderful phoenix residents, but when I compare class C between different cities, such as Denver or Austin etc, Class C in phoenix looks more rundown, for lack of better words to describe it.....a few I am watching now on loopnet around indian school road...
So if you have $1.5M to spend on B today in phoenix/scottsdale area, what kind of cash flow can you expect before debt ? Any quick rough estimate? I did not mean to ask you to spend tons of time to calculate the details... Just a ball park guessitimate?
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
9y
If I had 1.5m to spend, I'd grab a combo of B/C stuff around Old town or Arcadia Lite, both commercial and residential. If you do it right, you'd be looking at about a 11-cap before debt, maybe 15-17K, maybe higher, but unicorns aren't always real. Despite what everyone says about this being an uber-hot market, people will negotiate, if you do it right. @Diane G.
Just don't be scared to get things into escrow and then hammer them down like a tent peg. I don't care what the agent says, mechanical stuff breaks, sewer lines clog, and the agent is usually long gone about 45 seconds after they cash their commission check.
Rental Property Investor · Scottsdale, AZ · Member since 2016 · 296 posts · 243 votes
9y
Oh, and about being "run-down", @Diane G., yes in certain parts of town I agree with you. Lots of drab colors here, and lots of stuff that was built very fast.
On the other hand, well-done desert architecture, landscaping, and vibrant colors are awesome, and frankly a very easy way to distinguish yourself from the million or so "meh" properties around the valley.
Trust me - anything nicer rents fast. One of my favorite parts about landlording in PHX/Scottsdale is that many landlords really run crap-looking properties, and with a little creativity, are easy to beat from a sales standpoint.
Hmm, that does NOT sound right to me.... Even in Bay Area today, you can get a SFH for $750K and rent for $3100 ( I have one, so I know the exact numbers)... And with SFH, only expense to landlord is property tax and insurance, which add up to $5K a year....
Gross rent of $$37200, net rent $32,200.... That is better than the 11cap that you mentioned....
For 1.5m, I imagine you can get 25 units and rent for $550 per month, so that that is $165,000 in gross rent annual.... Of that, you only net 15-17K? What did I miss?
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
9y
Hi Diane,
Please allow me to throw in my 2 cents. You have to view it from the seller's perspective. If you own a building in an A or B neighborhood and it's producing 8% - 12% CoCR almost trouble free, what would make you want to sell it? Nothing. There's no motivation to sell.
As you already have seen, higher cap rates come in crappier neighborhoods, and that is true across the whole country. There is no unicorn. If you want higher yield, you'd have to take higher risk and earn that yield.
Let's take a look at an example. You're a value investor. You buy an under performing building for $1MM. You put $500k into rehab, and it's worth $2MM. You now have the option of doing a cash-out refinance at 75% LTV and takes out your initial investment. If the building is producing 10% CoCR after the cash-out refinance, would you sell or would you keep it?
Since you got all of your money back, the CoCR is actually infinity. Say if you get 10% ROE, that's $50k/year. If you can rinse and repeat 5 times, you're home free. However, if someone comes along and offer you $2.5MM, would you sell it? At $2.5MM price, your ROE is only 5%. Well, not so fast.
Let’s throw in a curve ball and say your market appreciates at an average 5% annually like our Bay Area market, and history has shown that in the last 45+ years. That's $125k/year in appreciation for a $2.5MM asset that you only get 5% ROE, would you still sell it?
Sometimes, we're too short-sighted for our own good and only look at the yield NOW. Stay away from C class assets. It's not what it seems.
Lol... thanks... I know, the more I researched, the more skeptical I am with C, especially when I think of the hassel/work/headache that comes with C tenants... Almost seems no money is worth it... I might have swinged to far with that comment... Lol
Broker · Phoenix, AZ · Member since 2015 · 151 posts · 55 votes
9y
@Diane G. Along with the hasel/work/headaches, C class doesn't fair as well in market fluctuations. That is why I'm a fan of B class properties. When markets improve, you may lose tenants that move up to A class properties, but you also get those in C class that want to upgrade. In a down market, you get the opposite effect (A class tenants may downgrade to save money to your B class properties.) Demand always seems to stay steady, where as it doesn't seem to as well for C and A class.
Also B class properties are easier to unload. If you buy a great B class property in a great area, your pool of buyers is greater. With Phoenix area being such a hot market, these can be a challenge to find. I've talked with owners of these types of properties along the central corridor (between the 7s, 7th ave and 7th st), and most of them do not have plans on selling anytime soon, as they perform great and market only shows slight slowdown in increases for the foreseeable future.
Investor · Phoenix, AZ · Member since 2015 · 37 posts · 14 votes
9y
It seems you're confusing CCR with Cap Rate. Net rent of $32,200 on a property worth 750k is a cap rate of 4%. A 10 cap rate on a 750,000 property would be Net rent of 75,000 per year.
CCR is cash on cash return, so if you have a 25% down mortgage at 4% you might have a substantially higher CCR, say 32,200/187,500=17%, but you need to subtract your debt service and that would of course reduce the $32,200 substantially (about 20k actually), so CCR would be 12k/187.5k=~6% CCR
Investor · Phoenix, AZ · Member since 2015 · 37 posts · 14 votes
9y
@Account Closed
You've stated the case for high cost REI well, but appreciation is not a given.
As to Class C not being what they seem- the key is buying right and taking it step by step. I currently have a Class C sfr in Birmingham that I acquired through a non-performing note that has a CCR for me of over 24% and an IRR for a number of exit strategies over 48%.
Downside is the free cash flow is only about $5000/yr with a management company. So if you need $250 to be "home free" you would need 50 of these as rentals. Fortunately my "home free" # is substantially lower than yours. ;-)
For a different point of view- if I had 1.5M to invest, I might consider a portfolio of Performing Notes paying 9% as mailbox money, no tenants or toilets. 9% on 1.5M is $140,000. Less appreciation potential, but a bird in the hand (cashflow). Occasionally these do turn into actual real estate and can provide you with the jazz of working through a challenge creatively. In the price band I invest in, this would be a portfolio of 25-100 notes, so well diversified, and an investment that you have a complete picture of and a huge amount of control/influence on your outcomes.