I've been reading books and listening to the podcast non-stop for the past 18 months. I went to a realtor in Fresno looking for a multifamily to house-hack. Fresno can be a rough area, so there were only certain areas I was comfortable moving my fiancé into. After about 8 months I became frustrated that of all the deals I analyzed, the numbers rarely seemed to work. Of the few that did, they were quickly snatched up with all cash offers and my FHA financing was laughed at.
Ultimately I decided to look for an off-market deal. I have @Jason Pritchard to thank for this. He talked with me on the phone a few months back and offered some great advice.
I wanted to find a property in the Fresno High area, which is where I currently rent. For those not familiar with Fresno, it's full of buildings from the 1930's-1940's with charm and character, are generally maintained well by their owners, and is right next to the Tower District, which has a lot of restaurants, bars, and small shops, as well being the artistic and trendy area of Fresno. I'd call it a B class neighborhood with some A class properties on some of the nicer streets, and C class on the edges.
I pulled property records for every 3 and 4 unit building in this area, which came to about 60 properties. I then put the addresses into an app meant for delivery drivers to plot an efficient route for all 60 properties. Since I've been analyzing every muti and single family that has hit Zillow in this area for the past year, I had no trouble driving to each property and estimating what rent I could expect as well as what it would likely sell for should I choose to flip it (not my goal).
20 properties were taken off the list for safety reasons for my fiancé, leaving 40 nice properties. Next to each one, I entered an offer price that I knew would allow the property to cash flow.
Using this information I wrote 40 letters, and heard back from one. It's 1840 sqft triplex with two one bedroom units, a studio unit, and a detached 2 car garage. All units individually metered for electricity, and each unit has their own small back yard. I met the owner at the property the next week, and put it under contract that day. Here are the numbers:
Purchase Price: $250,000
Current Rent: $1750 ($475/$575/$700)
Estimated Market Rent: $2500 ($650/$850/$1000) - I believe this to be conservative
Because it was an off market deal, I ended up needing a lot of help with the contract so the bank would accept it. I used @David Greene loans, and honestly I couldn't have done the deal without them. They helped me with some problems with my original contract and walked me through the whole process.
California has rent control, which limits me to increasing rent by 5% annually plus inflation based on the consumer price index. For 2020 that was 1.4%, meaning I am limited to a max rent increase of 6.4% per year assuming everything stays the same. Assuming an annual 3% market rent increase, it will take me 9 years to get the studio to market rent, 10 years for the larger one bedroom, and 13 years for the middle unit (currently rented at $575).
My plan is to move in to the middle unit and live in it for one year. I'm choosing the middle unit because the tenant has been a problem tenant, it will take me the longest to get it up to market rent, and it needs to be remodeled which I want to do myself. Once I finish that, my plan is to look into turning the detached garage into a 4th unit. Currently it's just used as storage and there is ample street parking, so for the small value it currently provides I believe another unit will be a better use for it.
If everything works out perfectly, I will then refinance the whole property and pull out as much equity as I can.
Essentially, this is an off-market-deal/house-hack/live-in-flip/value-add/BRRRR. Have I missed anything else preached here? :)
All of this will require me to learn more about remodeling, permitting, zoning, and working with the city, which is an added benefit.
Next step is getting the middle tenant out. I'm trying to find a lawyer to help me with this, and my initial plan is Cash for Keys and then go from there. I will update as this project moves forward.
Really excited for my first deal. This is the first of hopefully many.
Any advice or questions welcome.
Excellent! Congratulations! We are also in the Central Valley, but I decided to invest remotely out of state. This state is killing me and I won't last much longer here. It sounds like you are doing well and prospering. So cool!
Nice work! While it will indeed take a bit of time to get to market rents if tenants stay, most will leave much sooner than 9-13 years (especially the studio and 1-bedroom) and then you can relist at market rents. This is essentially what we have done. Also, 2020 was a unique - 1.4% is on the low side, and I think it'll be closer to 7-8% yearly rental increases.
All of which is to say, I think you'll find that you will be reaching your market rents much sooner than 9-13 years.
Looks like you've put in the work and are on your way to your first big purchase. Just want to applaud you for the effort!!
Questions for you:
1. Did you use an agent to buy the off market deal? I know you mentioned David Greene's load team, but not sure if they also acted as your agent.
2. Have you started renovation? If so, what have you found to be difficult?
Please keep us updated and I'd love to follow through how your first grand purchase works out.
I did not use an agent. David Greene’s team helped me with the contract, but everything else I did myself.
I’ll let you know how the renovation goes. Next week I offer the tenant cash for keys to get into the unit.
Tom congratulations. Fresno is a great market. You will do well!
@Tom Conant Thanks for the update! Hope it goes well and looking forward to hearing more update!