Multifamily investing in Utah

32 Replies

So I have been been reading a lot about investing in real estate and I'm  trying to educate myself as much as possible before I purchase my first property! I am really hoping that within the next year I can purchase a smaller multifamily unit. I was thinking either a duplex, triplex or a fourplex. I really like the idea of house hacking, I'm pretty sure thats what they call it; living in one unit and renting out the others. 

Anyway I have been looking on the MLS and it seem that nothing in and around the Provo/American Fork area meets the 1% rule. Is it possible to find a property that will meet this general rule? On one of the podcast I remember either Josh or Brandon saying that they won't purchase anything below the 1% rule. I wonder if I should have the same mindset with investing in Utah or are there exceptions to these rules when it comes to investing in certain parkers!

Im reading "The ABC's of Real Estate Investing" by Ken McElroy and he talks about cold calling owners and looking for properties if the MLS doesn't have what your looking for. Would that be a way of finding a property that meets the 1% rule in markets like Utah? Any advice would be greatly appreciated? Thanks!

In episodes 54 or 55 of the AskBP podcast, Brandon called the 1% rule more of a "test" than a "rule." I think that is a better way of thinking about it. It will vary on the market about what percentage test to follow. In my market, 1% (or 10% cap rate) is rare. In big cities, cap rates are shrinking. BPers from their areas can chime in to verify but I read that the going cap rates in LA, NYC, and San Francisco are something like 2-3%, which would translate to the 0.2% rule/test! Yowzah! The only way of determining your market is to see what property is selling for and to see what the going rates are for rents in the area. You can ballpark that the cost of expenses, without the mortgage will account for half of the rent (the 50% rule/test). And then you have to pay the mortgage. So then you can figure what you would be making a month in cashflow. I have a spreadsheet that does this all the math on one screen but you could use the BP calculator or write it out by hand. Once you have the cashflow, you can see what people are roughly getting (with a lot of assumptions), and see what the local market is doing

 I recommend checking out The Ultimate Beginner's Guide, if you haven't already. I found it to be a helpful, quick read.

@Spencer Keables  your chances of hitting that 1% rule here in Utah, especially in UT county are very slim. Not saying you can't do it, but you've gotta be super lucky to find one that's not a complete junker. 

Keep in mind the economy and housing prices here. Drastically different than Midwest and the southern states. Here in provo a 2 bed 1100 sq ft house near center st, built in 1950 is selling at 130k and rents for about $850-900/ month ($900 if your lucky), and taxes are $1000/ yr. In Cleveland or Birmingham that same house sells for 25-30k and rents for 650 and taxes are $400-$500/ yr. These numbers might vary 5% or so, but that's my experience in dozens of deals throughout all these markets.  

Take that 1% with a pretty big grain of salt, as it does not and will not apply to every area. If you're waiting for your 1% here, you'll be doing a lot of looking, and unless something drastic happens to our local economy, you're probably going to be looking (not buying) for a very, very long time, if not forever. 

Blair Poelman, Broker in Utah (#9299425)
Originally posted by @Matt Slakey :

In episodes 54 or 55 of the AskBP podcast, Brandon called the 1% rule more of a "test" than a "rule." I think that is a better way of thinking about it. It will vary on the market about what percentage test to follow. In my market, 1% (or 10% cap rate) is rare. In big cities, cap rates are shrinking. BPers from their areas can chime in to verify but I read that the going cap rates in LA, NYC, and San Francisco are something like 2-3%, which would translate to the 0.2% rule/test! Yowzah! The only way of determining your market is to see what property is selling for and to see what the going rates are for rents in the area. You can ballpark that the cost of expenses, without the mortgage will account for half of the rent (the 50% rule/test). And then you have to pay the mortgage. So then you can figure what you would be making a month in cashflow. I have a spreadsheet that does this all the math on one screen but you could use the BP calculator or write it out by hand. Once you have the cashflow, you can see what people are roughly getting (with a lot of assumptions), and see what the local market is doing

 I recommend checking out The Ultimate Beginner's Guide, if you haven't already. I found it to be a helpful, quick read.

In Los Angeles high grade mutlifamily are trading sub 4%. In Santa Monica one of our higher end markets a larger building complex sold at + $500,000 per unit. Admittedly I don't know the CAP rate as that was a private sale and the numbers have been confidential.

I've been getting properties going on the market in midtown and the upper east side NY and the numbers are surprisingly strong. Full 6-12 story walk ups with maybe a couple of units of street front retail are asking 3.5% CAP's.

It's a crazy time to be a buyer in some markets. A lot of the deals I'm seeing in Los Angels area where the CAPs are low are price for the HNW individual to buy and hunker down and earn something above CD's while they execute on a preservation of capital plan.

As real estate investors though we just need to continue to search for and find deals that put money in our pockets at a risk/reward return that is appropriate for the market and our individual circumstances. LA isn't Pheonix like Fargo SD isn't Chicagoland. They're all different with different market dynamics, unique rental characteristics and probably different investment yields.

You're from Rexburg. Have you considered investing closer to home? Utah is very hot right now with SE Idaho lagging behind. Might be worth looking into Rexburg/Idaho Falls areas for your first deal.

@Spencer Keables

 I would consider looking at the Midwest. I personally am from Cleveland, and the investment opportunities are endless. Whatever direction you go, good luck on your future REIs.

Awesome thank you for the responses everyone! I recognize that apart from reading books about real estate I need to start and learn more about the specific market that I will be investing in. Admittedly I don't know as much as a should about Utah's market and ill try to learn more as the time to move that directions comes. 

Ok so the cap rates in every market are different and in big cities they are shrinking as you said 

@Christopher Telles . So how do investors that are looking to buy and hold multi families make a profit? In Markets like these is it best to wait or just look elsewhere? 

I could invest in SE Idaho like @Brian H. said but this would be my first property and I would like to either live in it or be living close to it so I could manage it myself. I will most likely be moving shortly to Utah because there are many job opportunities there!

Ill definitely check out the The Ultimate Beginner's Guide a little more in depth like you said @Matt Slakey , thanks! 

@Spencer Keables

Spencer, I'm in the same exact boat you are. I'm a first time investor looking for a multi-family to live in and rent too. I've been looking for something in Provo/Orem that would give me some cash flow for the last two weeks. Almost every place I've found is above 220k and would be hard to squeeze money out of. I'm considering find a way to make some money from single families.

I'm eager to see what you find out. I have been looking for Provo guys doing the same thing I am so it would be great to meetup sometime with you and anyone else you know to talk real estate. 

@Bryce Young

 @Spencer Keables

Gents,

Most (but not all) properties in UT county that are zoned strictly apartment / duplexes / multi family are going to run a premium price.  There is A LOT, seriously, A LOT of money here in Ut County.  Plenty of cash buyers, so you're competing against big dollars that can pick up the really good deals before financed buyers can.  I've seen a seller take a lower offer because it's cash - cash is more likely to close, and close cast, and here in Utah speed is the name of the game. 

I'd recommend looking into the SFR's with accessory apartments. They are spattered around the county. Not all are legal and permitted, but that doesn't change the fact that they are still there and people still rent mother-in-law apartments for anywhere from $650 for a small 1 bed or studio, to $1000 for a 2 bed with a kitchen and living room. There's also a steady flow of basement renters here that quickly gobble up vacancies.

These properties range in price.  I've seen them as low as $150k in west orem, and as high $800k in highland.  This gives you the ability to live in your own rental property while offsetting the cost with that basement renter.  

A few caveats - 

1. wether permitted or not, if you're renting the basement of your SFR you really need to be judicious about who you rent to. The municipalities aren't big on walking around and actively looking for illegal basement apartment rentals, but if your neighbors complain to the city, you'll lose your renter and you're on the radar.

2. permit or not, you are not allowed to rent a SFR with an accessory apartment without it being owner occupied - so you have to live in 1 of the units. Doesn't mean people don't rent both units as a duplex, but again, if your neighbors complain, you've got a problem and you'll lose at least 1 of your renters and probably have to deal with some fairly unreasonable turds at the zoning dept and probably get threatened with a fine.

Cheers guys, hit me up if I can help you out with anything. I've done my fair share of deals and I'd be happy to answer any questions and get you guys headed down the right paths for you.  

Blair Poelman, Broker in Utah (#9299425)

I really liked the part of this thread where we were cold calling landlords, we should get back to that!

On one hand, we need to acknowledge that it's not always ideal to invest where you live. That said, there is still tremendous opportunity in all of Utah's markets. You seem like young guys, and I imagine you're in this for the long haul. Think about why you want a 1% property. You want a return on your investment, right? Well one way to get that same rate of return is through flipping. Or wholesaling. There are what I would consider a lot of REO properties sitting on the market in Utah right now, and they're the type of property that you could resell for a 12% return (1% monthly, like we're looking for.) I concede that you're not going to be able to pick up 1% deals off of the MLS very easily, but that doesn't mean we have to give up and start buying illegal rental properties either.

Also, let's not be romantic about living in our investments. I invest where the numbers make sense, sometimes that's been in my rentals, others it's been in my own house. I had one experience where I hired a local property management company because I was frustrated with the tenants in my other units knowing that I was the landlord and I was living right next door. The management company knew about this, but it didn't take more than just a few weeks until the company started answering tenants questions with "I don't know, why don't you ask the owner?" And straight up giving the tenant my number. Not enjoyable! It made me feel very unprofessional. Sometimes it's nice to have that separation.

If I were to do an SFR property that would probably be one of last resorts. @Skyler Smith you said that you hired a local property management company for one of your rental properties. How much does it cost for management companies? Would they cost a certain percent of what I would be cash flowing on my property? Basically I'm wondering if I didn't do the house hacking thing would be worth it to purchase a triplex or fourplex that is further away and find a property manager?  

Also I just want to thank you guys; @Skyler Smith, @Blair Poelman , and @Matt Slakey for your responses, they are really appreciated!  Im obviously new new to the real estate game and the post you guys leave are very helpful! 

@Spencer Keables  

Plan to pay between 7-10% of gross rents to a management company. There will be additional fees, depending on the company. Cleaning fees, quarterly inspections, placement fees, and others are all possible. Aside from giving out my number at the drop of a hat, the company I hired was quite capable, even though the relationship only lasted a few months. If you end up getting a property in a market like Logan or Cedar where the 1% rule is easier to get, you'll probably want to get property management. If you invest in Ogden or another market where the 2% rule is much more common, I would highly encourage it. Be sure that if you elect to not have in house management, you don't get "outhouse" management! 

http://www.biggerpockets.com/renewsblog/2015/05/07...

Property management is a big deal and necessary for investors to really think about. When I started, I was pretty much shooting from the hip (I did read The ABC's of Property Management, also by Ken McElroy) and just learning as I went. It was stressful and I was working 50 hours at my other job, so I wasn't able to dedicate much time to it. I had rented from this property management company before, so they were my first choice. I was in over my head, and they helped get a tenant out that I was having trouble with. After I sold the subject property I decided to take over management of my other units and still manage my own properties now. The systems I've created for myself are very effective, and once I have enough units that I can't handle it all I'll hire someone and keep the management in house. As I continue to refine my internal systems and outsource things like grounds maintenance, it gets me closer to a turnkey operation that I can delegate to an employee.

Spencer Keables , I am also a SLC, enthusiast as I worked there for a few years out of college and my wife has family there. This was before I had any RE experience or interest. I now work for a multifamily company so my post is based on larger properties than you mentioned. I was shocked watching a national multifamily conference from Marcus and Millichap where SLC was trading at such incredibly low cap rates. There was NYC at around 4.0% some of the other "Sexy 6" as they call them ( Boston, DC, Seattle, Los Angeles, and San Francisco.) Salt Lake City was right there at like 4.8% I almost fell out of my chair in disbelief. --------------------------------------------------- As for your 1% or 2% maybe your not looking for the right opportunity. What if you found a deal that was not at 1% but through renovation and upgrades you could release the units to meet that rule. Quick example the first deal I ever closed for my company was a 3 unit in South Side of Pittsburgh. I cold called the owner and worked the deal off market. We paid $197k when total rents were $1,400 a month. All units were 2/1's. We invested about $7,500 per unit in renovations and framed in a doorway so now the units were 3/1's. Each unit rented at $1,200 the first year and now $1,250. Purchase Price plus renovations: $219,500 or .7% based on rents at purchase. One year later monthly rents $3,600 or 1.96% almost 2%. It's basically how a house flipper purchase a house right, you negotiate based on what you currently have, but your plan and execution makes the deal OK, GOOD, or GREAT. I was in SLC for Christmas and let me tell you there is a TON of Opportunity there if you see things through a different lense. My friend was telling me he was renting a few blocks away from Desert Edge (close to 500S 500 E) a 2/1 for $650, and 4 blocks away a new class A building renting 1 Bdrms for $1,150. That's is a GIGANTIC spread, you should be able to upgrade your 2/1 with all the latest accessories and top of line finishes for about $12k per door. This 2 BDRM would rent at minimum for $1,000 (again I don't know the market, just going of past experience and feel). But it's a fair assumption assuming you invest the money on the rehab. What would happen to your ratios if rents almost doubled? As someone mentioned if anyone in SLC is interested in talking about prospecting and cold calling I am all ears, this is what we specialize in and are quite good at it. Let me tell you a lot of dilapidated 5-25 unit buildings in downtown SLC, buildings look old, just as I am sure their owners are, old and tired. I have kicked the idea with my boss about a call center, I know I can train people and get deals going quickly, if nothing we could wholesale some multis and make a quick buck. If anyone is interested let's chat.
Sorry for the run on post, apparently the BP APP on IPhone doesn't keep the spacing. My apologies.
Originally posted by @Juan Maldonado:
Spencer Keables , I am also a SLC, enthusiast as I worked there for a few years out of college and my wife has family there. This was before I had any RE experience or interest.

I now work for a multifamily company so my post is based on larger properties than you mentioned. I was shocked watching a national multifamily conference from Marcus and Millichap where SLC was trading at such incredibly low cap rates. There was NYC at around 4.0% some of the other "Sexy 6" as they call them ( Boston, DC, Seattle, Los Angeles, and San Francisco.) Salt Lake City was right there at like 4.8% I almost fell out of my chair in disbelief.

---------------------------------------------------

As for your 1% or 2% maybe your not looking for the right opportunity. What if you found a deal that was not at 1% but through renovation and upgrades you could release the units to meet that rule.

Quick example the first deal I ever closed for my company was a 3 unit in South Side of Pittsburgh. I cold called the owner and worked the deal off market. We paid $197k when total rents were $1,400 a month. All units were 2/1's.

We invested about $7,500 per unit in renovations and framed in a doorway so now the units were 3/1's. Each unit rented at $1,200 the first year and now $1,250.

Purchase Price plus renovations: $219,500 or .7% based on rents at purchase.

One year later monthly rents $3,600 or 1.96% almost 2%.

It's basically how a house flipper purchase a house right, you negotiate based on what you currently have, but your plan and execution makes the deal OK, GOOD, or GREAT.

I was in SLC for Christmas and let me tell you there is a TON of Opportunity there if you see things through a different lense. My friend was telling me he was renting a few blocks away from Desert Edge (close to 500S 500 E) a 2/1 for $650, and 4 blocks away a new class A building renting 1 Bdrms for $1,150. That's is a GIGANTIC spread, you should be able to upgrade your 2/1 with all the latest accessories and top of line finishes for about $12k per door. This 2 BDRM would rent at minimum for $1,000 (again I don't know the market, just going of past experience and feel). But it's a fair assumption assuming you invest the money on the rehab.

What would happen to your ratios if rents almost doubled?

As someone mentioned if anyone in SLC is interested in talking about prospecting and cold calling I am all ears, this is what we specialize in and are quite good at it. Let me tell you a lot of dilapidated 5-25 unit buildings in downtown SLC, buildings look old, just as I am sure their owners are, old and tired.

I have kicked the idea with my boss about a call center, I know I can train people and get deals going quickly, if nothing we could wholesale some multis and make a quick buck. If anyone is interested let's chat.

I like how you're always looking for opportunities, Juan! It's great hearing your perspective on things. ^^ 

@Daniel Ryu , thanks Daniel. As for the deal you helped us underwrite, we are having some major issues with the owners giving us all the financials necessary to go to our lenders, but the deal is still alive.

Right across the street the new development is renting a 2/2 for $1400, they are going fully furnished and 100% student housing, however with our projected 2/1.5 rents at $925 again a huge spread and we feel comfortable we will get them after renovations.

Let's keep discussing opportunities, particularly what we spoke about a fund in Korea. I wonder if there is anyone on BP from Korea with a law back ground. That would be useful.

Steer clear of Ogden. Lots of dirt bag tenants trolling around there. And if you ever come across a swindler named Shawn Watkins, run. He's been sued for taking people's money and has lost or stolen somewhere between 3-4 million by squandering it away on crappy deals in Utah. He's a class A scumbag who lives and trolls somewhere north of Salt Lake.

Thanks @Juan Maldonado for your comment! I hadn't put any thought into renovating a potential investment property, just always thought I would find something ready to go, but I would be all for taking this approach if the numbers make since. That one thing that I love about BP and connecting with so many people with so many different views on investing. Like I said I'm not afraid to do cold calling do find a good deal. I would love chat sometime. 

Account Closed! Working around 50 hours a week and trying to invest in real estate! It sounds pretty intense, but doable. Ill pretty much be shooting from the hip like you were saying because the only experience that I have in real estate at this point comes from a few books, BP podcast and the forums.

All your guys's responses have been very helpful and have given me a few different perspectives to think about. Thanks again!

@spencer 

@Spencer Keables a couple thoughts: 

- maybe try to expand the search to outlining suburbs - I suspect there are 1% areas close to where you live but they might be in a little less polished neighborhoods 

- have you tried working with a real estate agent? 

- I would also call the owners - that's a good idea too 

@Spencer Keables , if you would like lets set up a call, not sure what your schedule is like. I am also going to send you a PM so we can connect, I want to show you an example of a heavy value add deal we are currently doing in San Antonio, I think you will enjoy it.

Originally posted by @Juan Maldonado:

@Daniel Ryu, thanks Daniel. As for the deal you helped us underwrite, we are having some major issues with the owners giving us all the financials necessary to go to our lenders, but the deal is still alive.

Right across the street the new development is renting a 2/2 for $1400, they are going fully furnished and 100% student housing, however with our projected 2/1.5 rents at $925 again a huge spread and we feel comfortable we will get them after renovations.

Let's keep discussing opportunities, particularly what we spoke about a fund in Korea. I wonder if there is anyone on BP from Korea with a law back ground. That would be useful.

Glad I could help. It was a lot of fun and I enjoy working with numbers. 

I hope you guys can take it down. 

I'm excited to see how it all works out. 

I'm still working on things out here in Korea as we discussed. I'll keep you posted on any progress!

I'm in the same boat as Spencer except I live in the northern NJ (NY outskirts) area. It's real tough to find deals here and I'm looking for a duplex I can move into while renting the other unit. 

@Juan Maldonado that's very interesting. I've seen just a few cheap houses but they all need major repairs and I would need financing for it. Would you encourage or advise against financing for repairs to generate cashflow?

Originally posted by @Nelson M. :

I'm in the same boat as Spencer except I live in the northern NJ (NY outskirts) area. It's real tough to find deals here and I'm looking for a duplex I can move into while renting the other unit. 

@Juan Maldonado that's very interesting. I've seen just a few cheap houses but they all need major repairs and I would need financing for it. Would you encourage or advise against financing for repairs to generate cashflow?

 Hey Nelson,

I guess it really depends what you want. If your are talking about a higher return, then obviously YES. Funding the repairs will also help you not have to come up with so much money out of pocket. Here I am assuming that you are financing through a bank, not friend or private investor. If you finance repair through a bank then the repair money is typically held in an escrow account. Where an inspector comes out and checks that the works is done. They may also require the you only work with specific type of GCs (licensed, union) that could also drive up cost.

In the multifamily space lenders are currently incredibly aggressive. We have been offered loans up to 85% Loan to Cost, which greatly reduces how much of your own money you bring to the closing table.

In your typical case I would suggest doing a 203k loan. I am currently under contract on a duplex and that is the loan I am pursuing. There you can roll your repair and renovation costs into the mortgage, and its an FHA loan so you only have to come up with 3.5%.

Here is a calculator I made, just find the limits to your county and play around with it.

https://www.dropbox.com/s/py9u3smr5nfbvel/House%20Hacking%20Sheet%20-%20BP%20Version.xlsx?dl=0

I created a post with the instructions but can't find it. Not sure if it was taken down. 

Originally posted by @Juan Maldonado:
Originally posted by @Nelson Molina:

I'm in the same boat as Spencer except I live in the northern NJ (NY outskirts) area. It's real tough to find deals here and I'm looking for a duplex I can move into while renting the other unit. 

@Juan Maldonado that's very interesting. I've seen just a few cheap houses but they all need major repairs and I would need financing for it. Would you encourage or advise against financing for repairs to generate cashflow?

 Hey Nelson,

I guess it really depends what you want. If your are talking about a higher return, then obviously YES. Funding the repairs will also help you not have to come up with so much money out of pocket. Here I am assuming that you are financing through a bank, not friend or private investor. If you finance repair through a bank then the repair money is typically held in an escrow account. Where an inspector comes out and checks that the works is done. They may also require the you only work with specific type of GCs (licensed, union) that could also drive up cost.

In the multifamily space lenders are currently incredibly aggressive. We have been offered loans up to 85% Loan to Cost, which greatly reduces how much of your own money you bring to the closing table.

In your typical case I would suggest doing a 203k loan. I am currently under contract on a duplex and that is the loan I am pursuing. There you can roll your repair and renovation costs into the mortgage, and its an FHA loan so you only have to come up with 3.5%.

Here is a calculator I made, just find the limits to your county and play around with it.

https://www.dropbox.com/s/py9u3smr5nfbvel/House%20...

I created a post with the instructions but can't find it. Not sure if it was taken down. 

 Thank you for your prompt response! I appreciate it. 

Yes I would be doing it through a bank, unless that doesn't work out for some reason. Either way I only have about 10k to offer for a DP so if the bank doesn't give me the whole amount I'll have to look for the rest from a private lender. 

As for the 203k loan, thanks for this helpful information. I read something about it before and thought it might be what I needed but I wasn't sure what kind of criteria banks use as far as accepting 203k loans vs traditional loans (both FHA). Are the loan terms usually similar in both types? I think that due to my market's circumstances, doing this will have to be my strategy in order to invest successfully.

@bryce young and @spencer keables we should go to lunch sometime to talk about real estate im new to this and live in provo. Id love to talk about the numbers and also how to find good investment multifamily properties

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