How to maximize triplex return (will pay for consultation)

Question

I have a triplex in West Sacramento. Class D+, C- ish.

2bd 1ba, 2bd 1ba, Studio

1,580 sq ft building. 10,302 sq ft Lot.

All units empty. Appliances, carpet, and all other traits are old.

I would like to find out how to maximize this investment. Add an ADU? Rent it all out with minimal repairs? Renovate then rent out? Do section 8 for all 3 units? Cash out refinance and buy another property vs keep low interest mortgage?

I am willing to pay for consultation if you have experience with transforming rental units.

Cathy Bui · Answer

Hi @Leo Ray, although I could do the research, I didn't have the time so I wanted to trade money for time. Luckily I was able to find individuals who gave me guidance. I definitely have a lesson learned about the neighborhood class. It's not worth the hassle. I would say the appreciation was still worth it however. The stress and complications were unnecessary and it's something I will note for the future. I didn't want to include too many details on this public forum but many of those things you listed makes sense to document in case I wish to ask for advice in the future. There are many experienced folks on this forum such as yourself and I am grateful for it!

@Dan Heuschele, I realize now that an ADU is not worth it in this area for the reasons you shared. I recently brought on a new property manager and hopes it goes well. For now the plan is to renovate, but not excessively and just rent it out at a fair price. I hope to secure the property, make it a decent place to live compared to the surrounding neighborhood, and hold onto it until the right time to potentially sell for 1031.

Dan H. · Answer

I have concerns if you are a new RE investor and the property is in a c-/D+ area.  This class of property is best operated by people experienced in these markets.  I suggest you hire a PM to operate the units.

Do you have quotes for rehabbing the units?  Do you know the ARV after rehab?  Is the property a candidate for a BRRRR?

I would suspect an ADU would be a poor RE investment in that category of area.  It will add less value than the cost to add the ADU.  The initial cash flow goes toward recovering this negative position.  The debt for ADU additions is typically far worse than acquisition debt.  There is no income during ADU construction so there is a period where investment is not generating income.  ADUs typically detract from existing units by taking yard, garage, increasing density, etc.  prior to building an ADU, make sure you know the value the ADU will add.  This will provide an idea of the initial negative position and amount of time it will take for the cash flow to recover the initial negative position.

Good luck

Leo R. · Answer

@Cathy Bui the type of property you describe and the strategies you mention are all fairly straight-forward, and the info on these topics is abundant and mostly free or very cheap (forums, podcasts, youtube videos, articles, books that only cost a few bucks)...unless you're signing up for some type of long-term, in-depth coaching program, it's probably not necessary to pay someone for this info...

Regarding this specific property:  you say the triplex is class D+ to C-  ...is the neighborhood also D+ to C-?   Personally, I steer clear of anything lower than a B-, because lower grade properties and areas just cause way too many problems, the appreciation is usually not there, and the cashflow just isn't worth the hassle...if the area is C or lower, I'd be thinking about selling the property...

If it's in a higher grade area (B- or higher), then I'd be thinking about doing some sort of value add.

However, you haven't provided enough info for us to give you much detailed feedback...

For instance, what will the property currently rent for, and what is your current debt service on the property? How much money do you already have in this property? What is the property worth if you sold it today?  How much would it cost to add an ADU, and what would the new rent be if you did that? How much would it cost to do a reno, and then what would the new rent be? What are your current debt terms? (you said the current mortgage is a low rate, but didn't provide details). How easy/difficult would it be to find new tenants with the property the way it is, and how easy/difficult would it be if you rehabbed the property? What types of tenants does this property attract, and how much work is it to manage this property? Do you self manage, or have a PM? If you have a PM, how much is that costing? etc., etc., etc.

If you give us specific data/info like that, the forums can usually provide you with some pretty useful feedback...

Good luck out there!

Cathy Bui · Answer

Thank you Scott and Daniel for the advice. I am grateful for the wisdom!

Daniel Zapata · Answer

Winter is generally a tough time to get tenants if you want decent rents. If you can float the property for a while, I would consider doing some renovations and have it rent ready by the Spring. You can take the time to install LVP flooring, durable appliances, etc. Just make sure to not over-renovate to the point of diminishing returns. I like to renovate a little better than the other units in my area so mine stand out a little more.

Re:refinancing: you should run the numbers on those different scenarios and see if you're comfortable with the expected cash-flow + benefit of leveraging this property into others.

IIRC, you cannot deny any Section 8 renters so it's more a matter of them applying vs you allowing it.

Scott Scoville · Answer

Hey Cathy,

Sounds like you have some great options. I'm an agent and investor in Sacramento. I also self manage my properties. I'd be happy to jump on a call and discuss this with you. DM me.