Please rate my deal- 8 units in Long Beach 4.8% CAP

Long Beach, California
Multi-Family and Apartment Investing
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Please rate my deal- 8 units in Long Beach 4.8% CAP

DongHui Patel
Member since 2021 · 95 posts · 30 votes

$2.415M Purchase Price

Down Payment: $750k (including closing costs)

70% LTV

Area: C  but gentrifying 

Condition: B- 

Potentially subject to LA COUNTY RENT CONTROL 3% cap. But historically raising 6-10% annually. 

Rental Revenue (At Market)= $195k Annual (excluding vacancies/bad debt/concessions)

              Vacancies: 5%

              Bad Debt assumption: 1%

             Concessions: 0.5%

I am assuming that expenses are running: 

12k for property management

30k for taxes

10k for maintenance and repairs

6k for insurance

7k for utilities (not reimbursed)

4k reserves

-------

69k total expenses

-------

Net operating income: 116k

After debt service and capex reserves, I am assuming net income would be around 5k annual for the first year. Going up thereafter.

I am concerned with 

1) Do these cash flows make sense at all? Considering it is in CA. CoC = 1-2% to start with with a conservative Pro-Forma.

2) The minute the rent control comes into place the deal starts to make no sense. 

3) There is a value add play to create 2 new studio's here- ADU's in garages. Additional $1600 per month rent per ADU. I dont know if the city will ever block these.

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Ben Lin
Member since 2021 · 53 posts · 34 votes
4y

Hi @DongHui Patel

Depending on your age. If youre still young, hey I think Long Beach is the only cheap coastal area in SoCal with almost 500,000 residents. The area will continue to gentrify and more and more people will move in to the city. Who knows in a few years it may even look like Venice Beach. And dont forget, the Olympics is coming to Long Beach (and LA) in 2028. So I am pretty sure the city will be so much nicer before 2028.

You need to find out if the property is rent controlled or not. Rent controlled buildings are pain in the butt I must say. LA Housing Department checks and inspects your building every 4 year and you have to pay yearly fees as well. During inspection they will find something for you to fix. Something is always not up to the code as the codes are always changing in CA. And if your tenants are not paying, well you're looking at 6 - 12 months to get them out if you have a good lawyer.

But if you're not so young, investing that 750K somewhere OOS would bring you a lot more cash flow each month. You can easily cash flow about $5000/ month or more if you find the right property OOS. And for me I dont really like multi families with more than 4 units. I rather buy several multi families than purchasing one multi with 2.4 million dollars. That's a lot of money. In the Mid West you can buy 20-30 units with that kind of money and generate 7-9 percent possibly more. You also spread your risks with smaller multi family.

At the end of the day, do what works for you best. Other people will give your their opinions but you know your situations best. Calculate the numbers very carefully and follow your heart. 

Good luck to you!

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  • Tristan Gardner
    Rental Property Investor · Mansfield, OH · Member since 2021 · 129 posts · 89 votes
    4y

    I think it really comes down to your goals. Personally, I can't do a 1-2% CoC or invest in Cali

    Y'all have those crazy appreciation markets over there so that could make up for a lower cash flow when you exit

    0Reply
  • Danielle Jackson
    Phoenix, AZ · Member since 2021 · 504 posts · 282 votes
    4y

    The rent control piece would be a deal breaker for me. 

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    4y

    Aside from the CA landlord laws being so bad, the numbers you posted are basically a pipe dream. I do not know of any apartment building that can operate at a 35% OE ratio. Typically you will see about 50% for all expenses including vacancy factors and the balance is what is left for debt service and profits. I would not expect any more than $100k in NOI on this deal, then run your financing and see where it comes out. You will be a lot closer to reality.

    Podcast Guest on Show #130
    0Reply
  • Ben Lin
    Member since 2021 · 53 posts · 34 votes
    4y

    Hi @DongHui Patel

    Depending on your age. If youre still young, hey I think Long Beach is the only cheap coastal area in SoCal with almost 500,000 residents. The area will continue to gentrify and more and more people will move in to the city. Who knows in a few years it may even look like Venice Beach. And dont forget, the Olympics is coming to Long Beach (and LA) in 2028. So I am pretty sure the city will be so much nicer before 2028.

    You need to find out if the property is rent controlled or not. Rent controlled buildings are pain in the butt I must say. LA Housing Department checks and inspects your building every 4 year and you have to pay yearly fees as well. During inspection they will find something for you to fix. Something is always not up to the code as the codes are always changing in CA. And if your tenants are not paying, well you're looking at 6 - 12 months to get them out if you have a good lawyer.

    But if you're not so young, investing that 750K somewhere OOS would bring you a lot more cash flow each month. You can easily cash flow about $5000/ month or more if you find the right property OOS. And for me I dont really like multi families with more than 4 units. I rather buy several multi families than purchasing one multi with 2.4 million dollars. That's a lot of money. In the Mid West you can buy 20-30 units with that kind of money and generate 7-9 percent possibly more. You also spread your risks with smaller multi family.

    At the end of the day, do what works for you best. Other people will give your their opinions but you know your situations best. Calculate the numbers very carefully and follow your heart. 

    Good luck to you!

    3Reply
  • Dushyant Ravi
    Lender · Irvine CA, United States · Member since 2019 · 58 posts · 35 votes
    4y

    I am assuming payroll is being lumped into R&M. I usually see that broken out at least in the bigger properties I finance as a banker. There is also G&A, advertising expenses. 

    0Reply
  • DongHui Patel
    OP
    Member since 2021 · 95 posts · 30 votes
    4y
    Quote from @Will Barnard:

    Aside from the CA landlord laws being so bad, the numbers you posted are basically a pipe dream. I do not know of any apartment building that can operate at a 35% OE ratio. Typically you will see about 50% for all expenses including vacancy factors and the balance is what is left for debt service and profits. I would not expect any more than $100k in NOI on this deal, then run your financing and see where it comes out. You will be a lot closer to reality.


    I dont know if thats quite true. For units of this size (8 units) avg expenses are in line with some other properties actuals. In fact theyre almost dead on with actuals from similar vintage buildings my friends own in the area. When we start to get to units of much larger size, the expenses % shoot up to 50% ish in my experience. Are you taking CAPEX reserves above the NOI line in your calculation? In which case, yes youre right.

    However CAPEX is not supposed to be factored into NOI.

    0Reply
  • DongHui Patel
    OP
    Member since 2021 · 95 posts · 30 votes
    4y
    Quote from @Dushyant Ravi:

    I am assuming payroll is being lumped into R&M. I usually see that broken out at least in the bigger properties I finance as a banker. There is also G&A, advertising expenses. 


     This is a 8 unit, not that big. so marketing and g&a arent really justified split out, grouped with the PM Expense.

    0Reply
  • DongHui Patel
    OP
    Member since 2021 · 95 posts · 30 votes
    4y
    Quote from @Ben Lin:

    Hi @DongHui Patel

    Depending on your age. If youre still young, hey I think Long Beach is the only cheap coastal area in SoCal with almost 500,000 residents. The area will continue to gentrify and more and more people will move in to the city. Who knows in a few years it may even look like Venice Beach. And dont forget, the Olympics is coming to Long Beach (and LA) in 2028. So I am pretty sure the city will be so much nicer before 2028.

    You need to find out if the property is rent controlled or not. Rent controlled buildings are pain in the butt I must say. LA Housing Department checks and inspects your building every 4 year and you have to pay yearly fees as well. During inspection they will find something for you to fix. Something is always not up to the code as the codes are always changing in CA. And if your tenants are not paying, well you're looking at 6 - 12 months to get them out if you have a good lawyer.

    But if you're not so young, investing that 750K somewhere OOS would bring you a lot more cash flow each month. You can easily cash flow about $5000/ month or more if you find the right property OOS. And for me I dont really like multi families with more than 4 units. I rather buy several multi families than purchasing one multi with 2.4 million dollars. That's a lot of money. In the Mid West you can buy 20-30 units with that kind of money and generate 7-9 percent possibly more. You also spread your risks with smaller multi family.

    At the end of the day, do what works for you best. Other people will give your their opinions but you know your situations best. Calculate the numbers very carefully and follow your heart. 

    Good luck to you!

    @Ben Lin This is very sound advice. Are you based in LA area? 

    0Reply
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