Straight Outta Stockton - Anatomy of another Stockton “Deal”

In a previous post I made some bold general statements regarding how hard it is to find an even halfway decent deal on the MLS in Stockton, CA. As a sort of “follow up” I thought I could provide some infotainment to my fellow BPers by backing up my allegations with some analyses of a few Stockton Multifamily properties. While doing so I’ll use the property as an excuse to provide my often colorful and always verbose opinions on the different “types” of multifamily properties that can be found on Stockton’s MLS.

In case you missed my first post, which deals with an over-rehabbed overpriced property on Kelly Drive; you’ll find it: HERE

Da Straight Dope about “Acapulco Way”. 

Location: 8547 Acapulco Way, Stockton, CA 95210 - Current Price $168K (and dropping rapidly).

Figure 1: Here she is; the Jewel of Acapulco Way! Representing the 209!

Click here to see the listing with interior photos on RedFin.

To create a proper back drop for this review, please open up this link in a new window. Trust me it adds more value than a granite counter-top on a house flipping show.

The property we reviewed in the last post was clearly over-rehabbed and overpriced. This one definitely is neither. Judging from the exterior “8547 Acapulco Way” seems in average-for-Stockton-condition. The interior pictures look above average and the numbers look pretty darn good on paper!

So why is the already comparatively low price (currently $168,000!) of this property, which seems to be in pretty decent shape, dropping faster than the brass out of a Glock “for-tay”? And why does the seller seem more motivated than a night-shift 7Eleven clerk who's looking up the barrel of a sawed off 12 gauge? Before we get into that, why don’t we start with ‘da good’:

“Da Good”

This is a Duplex. Most Stockton duplexes are 3 beds and 2 baths, some are 2/2’s. This one however is a weird two story 2 bed, 1.5 baths and 1 car garage type of deal. How one can possibly need two stories to box-in 1000 square feet, two bedroom is beyond me but hey, a two bedroom is a two bedroom!

The building happens to be butt-ugly too. Here is something that would help you get over that: Rents are advertised as being around $800 per side which I feel is pretty reasonable for a small duplex. And being a duplex at $800*2, upwards potential would seem likely!

A total rent of $1600 p/m combined with an asking price of $168,000 brings you as close to the 1% rule as you currently going to get in Stockton a (somewhat) conforming property!

Yes there will probably be some back maintenance but you’ll find that on all these types of properties. With rents at almost 1% of the purchase price, cash flow is all but guaranteed. So this seems like a “righteous” deal right? Actually; I don’t think so.

“Da BAD”

Before I start ripping into this property let me “drop some knowledge” about da 209. Stockton is not exactly a retreat for the rich and famous. Shocker! And while there are better and worse neighborhoods, or more accurately blocks, Stockton as a whole is a little on the rough side. Rough as in: Stockton is usually voted in the top 20 most dangerous cities of the

Figure 2: Stockton, cesspool?

Does this mean that Stockton as a whole is a no-go zone where you need to constantly fear for your live? Where anyone would be crazy to invest? Absolutely not. Or at least I don’t think so. Actually I happen to believe, strongly, that opportunity is found off the beaten path. I think that fortunes are made on the frontier, not safely at home.

Keep in mind that it is this very frontier character that makes that Stockton one of the few places in the general vicinity of the Bay Area where you can, even now, buy properties at prices that would be outrageous in the Bay area, East Bay, or even in Tracy! If a little “rough” upsets you too much I don’t recommend investing in Stockton multifamily properties, period.

My own multifamily properties are in typical cookie cutter neighborhoods in North Stockton. I try to buy in locations that are a bit better than average. However this does not mean that I don’t have multiple properties that had bullet holes in the siding or garage doors. Also I do find the occasional crack-pipe or used condom in the yards. Gunshots can be heard occasionally even in the day time. At night kids will be spinning doughnuts in the intersections with their ’86 Mustang and occasionally lose control and land into one of your lawns:). Garages do get rammed by cars sometimes. One unit had a car end up half way in the living room when someone pulled into a garage that already had a car in itJ.

There was a drive by with 3 injuries around the block from 3 of my buildings and last summer I lend my ladders to police officers who were chasing a dread-locked subject through my yards tacked out with submachine guns and vests. That same day one of my sliders got smashed in.

A few weeks ago I went to do a home inspection and the inspector fished an old .45APC casing out of the yard. And if you want to know, I did end up buying that building. This brings me to my point; there is “not-so-good” and there is “BAD”. Not-so-good is why you get paid, BAD is what they can’t pay you enough for.

So back to the Jewel of Acapulco:). Acapulco Way around a very charming block of fourplexes, which have street addresses on “Santa Paula Way”, “Ponce de Leon” and of course “Acapulco Way”. It is what I consider a bad pocket of Stockton.

Figure 3: Welcome to do hood - The Ponce De Leon, Acapulco, Santa Paula triangle.

Before I became more familiar with that area I once toured one of those fourplexes with a very friendly lady realtor. This was about 3.5 years ago and it was for sale for $175K or so. The units were nice town home style two story buildings. Anywhere else they would have been nice. Not here. The building was in horrible interior shape. There were holes in the security screen door that looked like someone took a fire-axe to the door from the outside. While I was studying those hack marks in the door I noticed lots of little dents and metallicy spots all over the inside of the security door, door frame and wall. It took me a moment to realize that it was a load of 7.5 bird shot. The pattern was about 4½ feet wide while the room from which the shotgun was fired was only about 12 feet deep. That is an enormously wide pattern that I have not seen since Apogee Games released DOOM. I am unsure what went down there but it must have involved someone trying to hack down the security screen door trying to get in while someone from the inside shot at said door with a sawed off shotgun. That property tour really helped to place that area in perspective in my mind. Any look around at the building and the people hanging around should have sufficed but this kind of cemented the feeling. It also helped the nice realtor lady realize that working with investors was not for her and she referred me off the next day:).

However, sometimes I need reminding. Like when the Acapulco property this post is about came on the market a while ago at $175K. I was really dying to buy something with cash flow. I knew better but I just had to drive it... So I did. Sat in front of it for a while and got reacquainted with the surroundings. That helped calm my greed. I invite you to do the same.

Really; go down Santa Paula and around the block a few times. Park for a while somewhere where you can look down the alley. Actually, just drive down the alley between Santa Paula and Acapulco Way. The later in the day the better! That will hopefully cure you of the illusion that numbers on a computer screen in Palo Alto tell you everything you need to know…:)

Figure 4: You wonder what they actually do with the HOA you need to pay...

“But, but, but…” I can hear you say already. “I will hire a great property manager so I don’t have to deal with any drama!” “I will just sit at home and wait for my checks to arrive. Property Management will take care of everything, that’s why I pay them between $64 and $80 per unit right?” Well, again, maybe that will work for you. However, in my experience drama is more contagious than genital warts and should be avoided in equal measure.

While it is highly unlikely that you will have people showing up at your home (Fun fact: unless you use a PO box etc. when buying the property, addresses of property owners are public record and can be found on the internet) their drama will spill over. Into your night’s sleep, into your wallet or, most likely, into both.

But how about tenant screening you ask? “I am just going to pick nice solid people!” To begin with, nice solid people are NOT going to want to pay $800 to live on Acapulco. Now let’s say you do find some great tenants. And they move in. Do you think they will want to stay there? Also, remember you did not screen the people that came with the property…

Final anecdote; this one on tenant screening, which we do a lot of. An applicant: very nice young lady, job young kids, single no records ok credit, not issues of any sorts. Applies and moves into one of my places. No problem at first. Within a few months she starts to see the baby-daddy again. Who turned out to be… Well, let’s just say that he is the type of young man who still has a lot of learning to do. For example where pants are supposed to go and that boxer shorts in general belong underneath the pants etc. He also has a record that would certainly have disqualified him from being on the lease. Anyway, now I have noise complaints of the other tenants, the police was by to settle disputes, all sorts of fun. Oh, and she is all of a sudden a total flake when it comes to paying on time. Can I start procedures to remove them? Yes, and maybe I will, but my point is that whatever happens next, it is going to be drama and it is going to cost me money. My point, screenings only go so far. Also remember that you did not screen the tenants that live in the building when you buy it.

Anyway I hope this explains why new and prospective investors should swipe left on this property. If nothing else you will have learned that if this video https://youtu.be/TMZi25Pq3T8 ever needs a Stockton remake, it can be shot in that alley between Santa Paula and Acapulco way. :)

Figure 5: Free Vehicular Acrobatics Show Every Night out front!

I need to grab a bullet proof vest traveling that triangle.  I was invited to a birthday party over there and declined because I had to wash my bald head. 

@Chris V. Hahaha You have to admit to at least not having many dull days while investing and living in Stockton! Good to hear you still finding ways to build your portfolio out in my neck of the woods. Are all of your units SFR?

Thanks for another great post @Chris V. I started looking at Stockton a few months ago as I think Sacramento is too far gone for cash flow. It doesn't seem hard to find cash flowing properties (even on the MLS), but a bit harder finding acceptable returns in neighborhoods I'm only starting to learn about. Some rules of thumb about areas have been helpful, also Trulia's crime mapper gives one an impression about gun violence and violent crime.

Originally posted by @Ryan Fisher :

@Chris V. Hahaha You have to admit to at least not having many dull days while investing and living in Stockton! Good to hear you still finding ways to build your portfolio out in my neck of the woods. Are all of your units SFR?

 Hi Ryan - Yeah Stockton is certainly never dull:). Good thing is that I don't need reality TV shows to make me feel better about myself:), actually I don't even have cable or anything. 

I don't own any SFRs (besides my own:). Just Duplex and Triplexes, I wish I felt I could afford to but SFR's in Stockton, but the CAP rate is just not there right now. Maybe other people can get deals so low that that Buy-and-Hold SFR is viable, but I unfortunately can't.

Even on this last round of multi families that I am closing on next week (two duplexes and a triplex) the numbers look rather dull. I really need to work on getting an off market deal pipeline because I have two mortgages left before I hit the 10 mortgage maximum, but at the rate the market is going up I think I am "out" at "market-prices"...:(

Originally posted by @Jake Weir :

Thanks for another great post @Chris V. I started looking at Stockton a few months ago as I think Sacramento is too far gone for cash flow. It doesn't seem hard to find cash flowing properties (even on the MLS), but a bit harder finding acceptable returns in neighborhoods

Hi Jake - Why don't we do this: Give me a current MLS property that you think has a nice cash flow to the point where you'd say: Yeah, I'd buy that. And I'll try and talk you out of it. Preferably here in the forum, but if you want through PM. CHALLENGE!:))

The thing is, I am kind of interested to see what the Stockton (which i watch VERY closely) market looks like through someone else's eyes:). Like I have mentioned in some other posts, I am currently closing on 3 MLS multi families, and frankly none of the 3 is a great deal:(.

@Chris V.  The last couple listings that had me nearly writing offers were two fourplexes on E. Walnut.  I had been watching them for a while, then the list price dropped 10% to $205k and $185k.  Stated rents were $2450 and $2200.

See the end result at the link below...

View Listings

I hadn't really considered North Stockton until your posts.

How about this one?  Google street view shows garbage and mattresses piled in the streets  Is this  a not good area or bad area?

https://www.redfin.com/CA/Stockton/6226-Porterfield-Ct-95207/home/19821824

Originally posted by @Jake Weir:
How about this one?  Google street view shows garbage and mattresses piled in the streets  Is this  a not good area or bad area?

https://www.redfin.com/CA/Stockton/6226-Porterfiel...

I would avoid Porterfield Ct. I looked at a triplex on that court a couple years ago and was surprised by how bad that one court was because the general area around it isn't bad. It's even in one of the more sought after school districts (Lincoln) in town. But the properties in that court were not well taken care of (some were even boarded up), and the court itself was littered with abandoned cars, piles of trash and way too many people looking at me with a seemingly worried look on their face. I'm not sure if they were concerned for my safety or worried about whether I was the police. But it didn't take long for me to decide to pass on the triplex. 

Originally posted by @Kyle J. :

Originally posted by @Jake Weir:
How about this one?  Google street view shows garbage and mattresses piled in the streets  Is this  a not good area or bad area?

https://www.redfin.com/CA/Stockton/6226-Porterfiel....

I would avoid Porterfield Ct. I looked at a triplex on that court a couple years ago and was surprised by how bad that one court was because the general area around it isn't bad. It's even in one of the more sought after school districts (Lincoln) in town. But the properties in that court were not well taken care of (some were even boarded up), and the court itself was littered with abandoned cars, piles of trash and way too many people looking at me with a seemingly worried look on their face. I'm not sure if they were concerned for my safety or worried about whether I was the police. But it didn't take long for me to decide to pass on the triplex. 

The property does not make the 1% rule based on the theoretical rents, however it comes close I'll give you that.. 

Note that it says "Great income potential! Get the right tenants and generate income monthly!" Now I suspect that is realtor speak for "Units are currently unoccupied" Current owner does not even want to deal with reoccupying property to sell it because ....". I hate the word "potential" in ads because there are implying I need to pay for "potential" that someone else was not realizing. I mean, if these are rental units, why are they not rented? 

Now you could look at this as meaning that you have a motivated seller who is just FED UP. And, speaking of sellers: it looks like the current owners bought it 3 years ago as a short sale for $120K. Looks like they paid cash that they mostly took out of a CashOut refi on their house. Then they cash-out refi'ed Porterfield in august of 2014 and took $154K out.  and bought two more properties in 2015. So it looks like they have plenty of equity and if they would sell it for $240K they would have "doubled" their money since 2013, which is nothing they should have to be ashamed to tell their friends about at the next BBQ. It seems like they are par time investors who buy REO and Short Sales and have at least 5 properties all over the place right now. Seem like they are doing a sort of BRRRR strategy. And if this property is indicative of the others they are going a great job:) Maybe you'll even find them here on bigger pockets:). None of the other properties they own fall into this particular asset class, so maybe they just don't like dealing with these sort of rentals anymore. Maybe you could help them solve that problem:). 

Anyway, I would have to drive this property again and see what feeling I get about that neighborhood today. At $240K I might be persuaded to like this... What I also like is that the tenants pay all the utilities.

Even if the neighborhood is a bit rougher, I think that by now I have the infrastructure and experience to deal with that as long as it not straight up gansta.  Again, if it were me I would go and drive it first and ask around a bit. 

So in summary, this *might* be a reasonable deal, if the price was lower, and I think 15% is not unreasonable to ask for. Only if you think you'd want to deal with it of course. You could even offer $220K and see what happens.

By the way, I always go into google streets for every year they have pictures for. below is for March 2015.

Figure 1: March 2015. Notice weeds growing a foot high in the gutter. Also note the two gentlemen in the foreground who are clearly having a constructive discussion about the best way to improve your credit score. Or maybe its about the best routes to take to work in order to avoid commuter traffic and be on time every morning.

Figure 2: I think that ancient peoples believed that leaving trash out in front of the house brought prosperity and good luck on the annual buffalo hunt.

Figure 3: If it is up to the residents of Porterfield there will be many Buffalo this season!

Originally posted by @Jake Weir :

@Chris V.  The last couple listings that had me nearly writing offers were two fourplexes on E. Walnut.  I had been watching them for a while, then the list price dropped 10% to $205k and $185k.  Stated rents were $2450 and $2200.

See the end result at the link below...

View Listings

.

Yes, at $165K that sounds like a good deal. Even though they are 1 bedroom units. By the way, it is very possible that the units needed a lot of work. I should ask Dave, who I see was the selling realtor, I am sure he'll remember.

That actually is a good example of the point that I have been trying to make with my posts: Until not too long ago Stockton was FULL with deals like that. So full that it was normal! But you can not use those as comps anymore. That property on Walnut went pending in December or January and closed in early February. Prices on conforming multi family property have been going up a a steady clip in Stockton. By and large they have now fallen below the 1% bottom. 

Like I said in my first post on this, I really feel we are seeing a turning point. And that is 1% without taking repair costs into account. Because ALL those things need work. Some more than others,  but nothing even close to 1% is truly turn-key anymore.

My point is that deal likes that have disappeared. And this is a really recent phenomenon. That why I put on my "CHALLENGE!!!:)" "Show me a good deal currently Listed on the MLS".

For me personally it was/is very frustrating because I have been wanting to get more properties for about a year now, but though all kinds of mishaps (long story) I was delayed and delayed again in getting the financing lined up. By the time I had everything in order and money burning in my pocket the deals were.... GONE!:((( I still bought 3 properties that I will close on next month, but if I would have had the money 6 months earlier I could have saved like 25% and actually bought no-brainers.:((

@Chris V. Just curious, do you self manage your properties or hire PM? Wondering when the number of units in your portfolio increses beyond 10+, even if they're in your town, seems difficult to handle daily tenant drama plus if you have full time day job in the tech in SF bay areas.

Originally posted by @Sam Y. :

@Chris V. Just curious, do you self manage your properties or hire PM? Wondering when the number of units in your portfolio increases beyond 10+, even if they're in your town, seems difficult to handle daily tenant drama plus if you have full time day job in the tech in SF bay areas.

 Hi Sam - Like all answers, it really depends. I'll try and answer it from my perspective. I am serious about growing in the multi family sphere. I have added on about 4 units every year. I have a regular professional type job. If you have those same aspirations I recommend you budget for, and use a, property manager. 

That being said, I must admit that what I do is kind of a hybrid; while I have paid property management on all my property's, but if there is any sort of turmoil I step in pretty hard. When I feel I need to be I can be very hands-on and I am have been more involved that I probably should be according to some. I have regretted the times I left a serious problem to the PM's discretion. By being so hands on, I think I have build up some pretty deep knowledge and affinity pretty fast. 

Also, I have a very strong vision on how I want my customers to be treated. This often miss-aligns with what property managers are used to providing. What I think is often glossed over by PM's and in property investing discussions is that land-lording is a customer service industry! Tenants are customers with options and rational and irrational motivations and while I might be the McDonalds of the property market, I need to keep enticing them lest they go to Burger King, In-n-Out Burger or wherever else that is not

 While I could seriously write a full length post about my bad experiences with property management, but I am not looking to cut their role out of my chain. Unless maybe you have one single family property with long term tenants I feel you need a first line of defense. How else are you going to grow? 

Imagine that you are a big software company. You are not going to have your programmers pick up the phone when customers call to report that their screen just froze up. You are going to have a support desk for that. But if it turns out that there is a serious bug in your software the support desk is not fixtured to handle that and they need to escalate it to the development department. This is like that. In theory anyway:))

Guys, I am looking for a reasonably priced, licenced roofer in Stockton. The rains are wreaking havoc and patching is eating into cashflow