Quote from @Randy Kinder:
Quote from @Dan H.:
Quote from @Bradley Buxton:
@Randy Kinder
Zillow has decent rental data—you can check what similar properties are renting for in your target area. Also check LoopNet and Crexi for multifamily listings.
Before committing to an agent, talk with several local ones to get a feel for the market. @Dan H. has strong experience in Southern California and might be a good resource.
Be cautious with listings: many agents post “market rents” or claim “upside potential” without sharing actual leases. Always ask for current rents and copies of leases—especially in small multifamily properties with mixed unit types (e.g., a studio, 2-bed, and 3-bed). Good underwriting starts with real numbers. Get inspections and sewer inspections.
Thanks for the call out.
I am in San Diego. It has similarities to OC but also differences.
RE investing is more challenging than it was a few years ago. I am in the camp the appreciation will be modest in the near term. I am also of the belief that high LTV MF with market rare financing will be cash negative. This implies that the investment should be viewed as a long term investment for it to achieve a good return.
2 recent national studies both showed that in virtually every large US city, it is initially cheaper to rent then to purchase. This is true for virtually all MF in OC purchased at high LTV using market rate financing.
If you plan to hold less than 10 years, you likely can do better in other more passive investments.
I am unsure what the OP knows about CA MF RE.
Are you aware of rent control? Do you understand some residences must get insurance from CA fair plan that is not fair for anyone? Do you understand the property tax readjusts at purchase? 1.2% is fairly safe for underwriting. Do you understand all the expenses and what should be expected? If you do not know what the 50% rule is, look into it. In San Diego a monthly rent to cost ratio of 0.7% for mls is fairly good, but will bleed cash at high LTV with market financing.
I am in negotiation on 6 units right now. It will be cash flow negative at purchase but likely is a better deal than 99.9% of the deals currently out there. This tells you what I think of the cash flow of the average RE investor purchase.
It is my view there are only a few paths in RE in my primary market (and most other RE markets) at this moment 1) patience. I am thinking years of patience. My market has historically out performed virtually all other markets. Over the long term I believe this will continue. Other markets have the same challenges as y market contrary to the posts from OOS agents. I am not that patient. 2) value adds. For the most part these require work and have risk but there are few markets that do better than my market via value adds. My last purchase is up over $1m above my costs in 3.5 years. 3) alternate rent models (rent by room, STR, MTR). These require work. Pay a pm and the profit is significantly reduced 4) alternative below market financing such as assumable, owner finance, wraps, sub to, etc 5) path of progress. Buy in areas that appreciation will far exceed the general market. It there a large major infrastructure development somewhere? In my market they recently completed a multi billion dollar Chula Vista bay front redevelopment. Already approved but early in the process are a large enhancement of a secondary airport (brown field) and the midway rising development which includes a new arena, retail, and residential development. With such large and costly development, these areas seem likely to out appreciate the general local RE market.
Do conservative underwriting. Recognize traditional rent ready LTR purchases with market financing it is likely a long term investment.
Good luck
@Dan H.
Thanks for taking the time to share from your extensive knowledge and experience. I also appreciate the "reality check" tone of your message, as it can be easy to get excited and overly optimistic about new opportunities like this.
I am new to CA MF RE, so I don't know a ton. I do know some of the things you were alluding to, and am generally aware that California loves to overregulate nearly everything which makes me more cautious than I otherwise would be.
I hear you loud and clear that high LTV MF with current market rate financing is currently expected to be a long game. I am hoping that a rate drop + refinance in the (hopefully near) future might occur and improve the picture - is that naive/unlikely? In any case, I am on board for the long / patient game.
Speaking of more passive investments, what's your take on trust deed investing compared to Orange County MF RE? That's another thing I have looked into recently, but the MF RE seemed like a better option assuming a hold period of > 10 years.
I did not know about the CA fair plan - that's good to be aware of and I will keep an eye on it.
Thanks for the advice you give at the end of the post concerning wise paths to take. I have added those to my notes and will keep them in mind. i didn't consider alternative below market financing - I will take a look at that.
Thanks again, and blessings to you.
>Speaking of more passive investments, what's your take on trust deed investing compared to Orange County MF RE?
I do not know about trust deeds.
However, let's go with my premise that when you first purchase it will be significant cash negative when including all expenses/revenue impacts (piti, cap ex/maintenance, PM (always include pm in underwriting even if self managing because your time has value and circumstances change), vacancy, bookkeeping, portion of asset protection (umbrella, LLC, etc, and miscellaneous (this includes things like unexpected utilities for example from a slab leak, not fair to charge the tenant (I recently had a $2k unexpected water fee for a water leak), legal fees for various consultations, eviction fee, or the recently mandated stair and balcony inspections, etc. it is a fairly small percent on a San Diego rent but would not be so small on a cheap Midwest rent). Add my expectation appreciation will be flattish for the near term. Since 2022, I have done my under writing with 0% appreciation for 5 years, then I use a little below historical market appreciation. The last 2 years this flattish has been quite accurate (2022 San Diego had ok appreciation so I was a year early in my flattish prediction). The implication is at 5 years you may have $0 return or even be negative. Then add in the selling costs to exit when you choose to exit (6% to 9% is common for San Diego if your not an RE agent). You can see why I am stating to expect at least a 10 year hold (any shorter, unless you use another besides patience of the list I provided, you are unlikely to achieve a return that justifies the effort.
By 10 years I expect the investment likely will look good. The leverage magnifies the appreciation. you also get equity pay down. Maybe by year 5 you have real cash flow (meaning enough to cover sustained maintenance/ cap ex) and all other expenses). will it look good compared to Mag7? S&P 500? Note those are more passive investments than residential RE. Residential RE should whoop passive investment options to be worth the effort. Whooping the other option’s expectations likely requires more than patience; it will require one or more of the other options I listed for good RE return.
My recommendation is before you make a choice, read a book on passive investing options. If you go with a syndicator, choose one that track record of success predates GFC.
Good luck
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