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?
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.
your case sounds very interesting... can you share a little bit more detail on it, such as how exactly did you acquire it, and why only $5K/yr cash flow? I was under the imrpession the C should all be cash cow with limited to none appreciation potentials... thanks
Happy to expound- we got the property by buying a non-performing note on the property. Bought the note not the real estate. Then took possession from the non-paying borrower- total investment 11,600. +$5000 to rent ready status- 16,500. So my $5k/yr cash flow is on a free and clear property that I've got $16.5k in- 30% CCR. Small score, need 50 to net $250k/yr. but 50*16.k is only 850k. Think that through- 250k annual income (deduct whatever reserve you want) on a one-time investment of $850k. I'll milk that cash cow. ;-)
Again, learn the language- CCR (Cash return on Cash invested) is different than Cap Rate. Cap rate is annual NOI/equity (price if you're buying turnkey). So the property above has a value of 40k (instant equity for us of 40k-16.5k=23.5k), so Cap Rate- 5k/40k= 12.5.
Sorry if I came across trying to dig into your privacy... Absolutely not the intent... Just got curious by your case and trying to understand more if you don't mind...
1. what kind of property can you really buy for $11.6K?
2. is this a so called "pre foreclosure"
3. who did you buy the note from? Thanks for the educating....
Didn't have any notion of privacy issue. All good.
1) There are TONS of decent houses in the Red States that you can buy for low 5 figures. Just talked to a BP member in Missouri who can buy whole blocks of decent houses in St. Louis for $2k-10k per house. These will rent for $400-600 per month. Doing due diligence before the buy can keep you clear of "problems." But that's not my business model. I like to avoid tenants and toilets as much as possible. I don't buy real estate, I buy the mortgage.
2) Not a pre-foreclosure- those are usually deals from current owners who are about to lose their house. Can be a great way to buy cheap, but that also not my business model.
3) We bought this note from Colonial Funding Group. We have several sources including BP members who have done seller-financed deals and want to recapture their equity by selling the notes. I do sell our notes to informed investors- as you are becoming ;-) Notes come in two flavors- performing and non-performing. Performing is very passive mail-box money, no tenants and no toilets, yields 6-9%. Non-performing always take more creativity- Best case (Option 1) is to get the borrower to "reperform." No toilets. Double the ROI we can get on a performing note purchase. That's maybe 40% of the NPNs we buy. Option 2 is to take possession of the house nicely (borrower moves out, negotiated cash for keys.) That's what happened in this case. Option 3 is a foreclosure- more expensive and longer. With either Option 2 or 3 you end up with real estate and the headaches and active investment. But often this give our portfolio a real kick in the ROI. Buy for 30 cents on the dollar, Option 1- reperform and sell note for 80 cents on the dollar, Options 2 or 3- take possession and resell a tenanted turnkey property to a turnkey investor like yourself for three times my investment.
My contact info is in my profile, call if you want to know more.
Fred - i went to your website and created an account to see your inventory... But after I logged in all my personal info on your "investor intake form", it just turned dead......How do I receive your inventory info from here? thanks
Thanks for your interest- we don't automate the Inventory reveal, I left a message on your phone. I need to get to know your goals and skills to show you the right next steps.