Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
This forum is for anyone coming to my Networking Summit who would like to talk about the Arizona market and start connecting before the Summit! (see website in signature).
@Patrick O'Sullivan reached out from the Phoenix, Scottsdale, Mesa, Tempe, Gilbert, and Chandler markets. (will be in touch about the details on the summit question Patrick)
I know @Yuliany W. is one of our local investors in that market. And @Johnson H. has some rentals there, although looking locally at Fairfield and Vacaville now - and maybe still Houston? I believe.
Patrick, can you find her a great deal on multifamily? What's the market like right now in Phoenix? Overheated like the hot summer sun? Or still some good deals to be found, selectively? Better deals on the periphery? How would you compare the areas?
Yuliany, Ask away! I'm sure Patrick would be happy to chime in.
Johnson, hopefully you can provide some perspective too ;
Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
12y
I am an AZ investor originally from the Bay Area and am familiar with both markets. I'd offer the following feedback on our current market in metro PHX:
The days of achieving the 2% rule AND appreciation are well behind us. Right now you will struggle achieving the 1% rule. Appreciation potential is speculative at best. You really MUST know what you are doing out here.
Be VERY cautious with the lower end 4plex properties in PHX. Our housing is very different than most of CA. The low end 4plex tenant is a different tenant in AZ than in CA. Remember that our average rents are already low. $700-$800 will generally get you into a low end but somewhat decent home. $600 will get you into a very nice condo with a ton of amenities. So that leaves the struggling rest of society to rent the $400-$500 2bd 4plex. To make matters worse, most 4plex communities in PHX are clustered next to each other. This means competition is vicious and there has been very little to no rent appreciation. The $500 2bd 4plex has been $500 since the 90s! Very different than the Bay Area. Tenants will bail to save $10 next door. Good luck with your screening process after you can't find a "qualified" tenant for 2 months. A "qualified" tenant doesn't look for a 1960s 4 plex in PHX, they either own or rent an SFR or a condo. This makes everything a challenge. Very unlikely to find revenue adds or value add improvements, forget water submettering and good luck consistently collecting app or late fees. Most owners I know face the vicious cycle of rent, evict (or midnight move) then capex followed by new lease to start that cycle all over. Every month there will be a surprise waiting for you; from the $500 water bill due to an unreported leak, sewer busting and the never ending AC repairs. That $2k gross rent and paper $1k cash flow is pretty much a pipe dream. Believe me that those 9-10% cap rates are not real. Last point on the low end 4plex market - most sellers are locals that bought 09-12 for literally $5-$15k per door. They are now reselling for $50k per door. They could not produce cash flow at the low basis and are now pushing their "investment" to the next guy. Most of that time the next guy is someone in CA thinking how could I go wrong at $50k a door. Get my point?
Seller financing does exist but its hard to find. Its probably not waiting on the MLS. I sold my 32 unit via seller financing to a BP member at a nearly 10% cap on actuals. It was a true win win sale. These deals can be found, I'm just not sure how they are found from a distance.
Metro PHX has run its course and the market is very dangerous right now. Most astute local investors are on the sidelines right now or have moved on to other markets. Inventory is very stagnant and I see much more downside than upside.
There are still opportunities in AZ but not in metro PHX so much. Unless your local and know each area , your chances of finding the right deal on Zillow or the MLS are pretty much non existent. Pinal County is adjacent to Maricopa county and its the 2nd fastest growing county in the US. There is still some cash flow in these markets but there are other challenges there. Generally, I would look to submarkets for cash flow before the metro. @Ben Leybovich - Ohio is starting look good:)
I'm not saying you cannot find a good small multifamily in PHX and I'm not trying to discourage in any way. I'm saying that your investment MUST to have the right combination of location and desirability to stand a chance of attracting the right tenants. If you can't attract the right tenant there is simply no money to be made here. My advice is to not be lured into the C class low end trying to get a paper non existent cap rate. Find a local that can guide you in street level warfare and look at the B class in areas not full of multifamily. Make sure you offer something nobody else does. Know your competitive advantage. I would take a desirable B class with a paper 6-7% cap that offers sustainable income and real value add opportunities than a C class showing a non existent 9-10% cap.
Real Estate Broker · Phoenix, AZ · Member since 2010 · 52 posts · 12 votes
12y
Thanks again J. @Yuliany W. my contact info is in my signature or you can message me through BiggerPockets. Let me know how I can help.
The market is a big overheated right now but as of recently turned into a buyer's market. As of right now, there isn't an abundance of deals, but they still come up from time to time and should as time goes on. I help find deals for both small investors buying a single rental home, to investment funds writing on 2-5 homes per day, to buyers looking for 2-50 units, both value-add and turnkey.
Investor · Bay Area, CA · Member since 2011 · 92 posts · 69 votes
12y
@J. Martin Nice to meet you. I mainly invest in Phoenix and Scottsdale. But my brothers invest in Tempe, Chandler, Mesa and Scottsdale. We are always looking for low maintenance MF. We are also open to partner up (the 3 of us) to buy something bigger.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
12y
I target properties in South Scottsdale for flips, and deals are few and far between right now. The good news is that from what I understand a lot of the big hedge funds have moved out as prices have stabilized, which means a bit less competition. We had a healthy year over year return from 2013 - Today, but nothing compared to the previous 18 months.
@Eleanor V. just hopped on the Summit thread, and is looking for off-market seller-financed 4plex deals in Tempe/Mesa/Scottsdale area of AZ. Do you run across anything like that?
It seems like maybe the 5+ units are more likely to have seller financing with them than the 4 and under.. Eleanor, are you interested in 5+ multifamily (MF) also? Are you trying to get conventional 30yr fixed financing on the portion that's not seller-financed? (So you want 4 units or under..)
Or if you're planning on using seller financing anyway, and not worried about not having 30yr fixed rate financing, it might be more advantageous to creep into the 5+ units. Less $/ft, and rents/ft aren't usually too much lower.. Just IMHO. Patrick, is that the case out there? That's what I usually see here.. Of course, the price is usually a bit higher with seller financing also.. depending on circumstances, and note rate..
I do come across a higher percentage of 5+ MF deals offering or willing to take seller financing. You will pay more for the property going the seller financing route than cashing out the seller through conventional financing or paying cash. That's the way it is in our market today. A dollar today is worth more than a dollar tomorrow. Seller financing deals are typically 25%-40% down (I've closed a lot of these) so unless there is some other reason why a buyer can't get a conventional loan, I recommend exploring a conventional loan because then you have some leverage on the price.
There are no second mortgages in our market, so whether you go the seller financing route or conventional loan (I have a great lender I work with) you won't be able to get a loan on the part the seller won't finance. A frequent saying I've repeated many times to investors... in order to invest in real estate, you have to INVEST.
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
@Patrick O'Sullivan - For a B class area with a stabilized building for 5+ units, what kind of cap rates are you seeing these days? I looked around last year and I found 7 cap to be average and that wasn't good enough for me.
Thanks for asking. I was curious too.. @Patrick O'Sullivan , I'm even more curious what GRM you are seeing properties trade at as a starting point.. Everyone's cap rate calc seems to be a little different.. Thanks for sharing :)
Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
After rehab on these vacant unit at my E Oakland 4plex I just bought, the GRM on my purchase + rehab cost will be just over 7X, with cap rate about 8-9%, and leveraged cash flow returns just over 10%, by my estimates. 2 leases signed at target rents already with one left to go.. Nice built-in equity, and I think good additional appreciation prospects with higher rents in the future..
E Oakland Fixer: GRM: ~7X Cap: ~8-9% CF: ~10% (leveraged)
There are still some seller's out there reaching for the moon. I've seen it range as low as 6.5% for a recently well renovated and stabilized building to 7.5% on a building that would be stabilized but not recently renovated. On occasion you can do better, but those get snapped up quickly.
It's the early stages of buyer's market here, so I believe there is going more opportunities out there.
You can get better CAP rates in other markets, but there is also a reason why for that, whether it's population growth (or lack of), economy, general desire to live there, etc.
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
@J Martin - With your cap rate so high at 8-9, why is your leverage cash on cash return only 10%? Is it because you have a higher down payment and you are spending a ton on rehab lowering your return?
@Patrick O'Sullivan - Thanks for confirming the cap rates from what I have seen. I still follow the Phoenix market on a daily basis and have seen prices cool, which would be good for the next run up. If you see any deals in the North Phoenix area along the 101 West of 51, or East Mesa close to the 202, please shoot me a msg. Thanks!
One example for you, I have a listing in escrow at $160,000. It's a 4-plex, rents are $2,000/mo. No deferred maintenance, C building in a C area. That's a 6.67 GRM. Cap rate in the 9% range.
Another example for you, a 4-plex in a great part of Phoenix, C building (recently renovated) in a B area sold for $280,000, rents were $2,700/mo cash, so 8.64 GRM. Cap rate I'd estimate in the 7% range.
These are turnkey options. You can do better if you look for distressed properties where you can add value like you did in your above example.
Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
@Johnson H. , Those are ball-park using % expenses. I think CF will be closer to 12%, but didn't want to post that, then be wrong later.. lol. All utilities individually metered, and being paid by tenant. I'm just paying trash, and master meters. Putting in a coin-op washer and dryer.. So that should hopefully provide some convenience, and pay for the master meters, exterior lighting, landscape water, laundry utilities, and machines hopefully. (Avg about $100/mo in quarters on my other 4plex. Much cheaper to operate than that..)
Like @Patrick O'Sullivan alluded to though with the properties with great cap rates in AZ, there aren't a lot of them. I feel the same way about this 4plex I got.. I would not want to promise these exact returns to an investor, because they would be far and few between.. But I only need 1 or 2 great deals a year to grow my passive income pretty significantly..
As long as there is appreciation, I don't mind some lower CF/cap rate. I own about 6K sq ft right now, just shy of $1MM in gross assets (extra $1k if you count my car lol), so any little increase is BIG for me..
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
@J Martin - After the 4plex stabilizes, would you do a refi cash out to increase your cash on cash return? FYI, after you have that 5th mortgage, you cannot conventionally do a cash out refi. I have had that told me over 30 times after I purchased a place for cash and needed to do a cash out refi after a year. I went with a portfolio lender that was able to cash me out, now after six month I am refinancing again into a conventional loan without a cash out.
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
12y
@Patrick O'Sullivan - For those 4plex's that rent $500 a unit, it seems like there is a huge amount of competition for these types of renters because there are so many of these units available in the Phoenix area. I have seen marketing tactics from first months rent for free, no deposits, and free TV's just to get someone in the unit. What's your take on the vacancy rate for these types of rental units?
Overall vacancy rates have improved year over year. Rents have been ticking upwards as well, even on the $500/unit C class units. I see no deposit more common on the C class properties but some owners give tenants items like a free TV's or a gift card to Walmart to entice them in. The overall market is below 7% now, so in looking strictly at C class, it's going to be higher, likely in the 8-10% range.
Thanks so much for the specific examples! I think those numbers would look pretty attractive to a lot of CA investors.. It's nice to see your GRM/cap numbers align.. Sometimes I see sellers around here say 5% cap, don't even include the GRM, and it's 20X+! lol
@Johnson H. , I would definitely consider it! I'm trying to get $50K cash-out refi on my Richmond 4plex right now - partially to free up for another big FHA deal some day, and the cash doesn't hurt for the next deal.. I love 30yr money at these rates. And only have my signature on 2 conventional promissory notes, so far. I still think we're in a good part of the cycle to increase leverage. The question is, when to stop and, and when to reverse and deleverage.. One of my favorite quotes - that I actually heard from one of your now-colleagues, is:
"If cash is king, then leverage is god." lol I apologize for the god reference. But I like the quote. It make me laugh a bit. But there's a lot of truth to it. I have 6K square feet, so every $10/ft increase is $60k in equity. I couldn't get anywhere near any of that without leverage. And definitely not my first deal w/ $12K down, and seeking $50K cash-out, after $150Kish in appreciation.. Not too shabby! And like god giveth, he can taketh away! I even wrote a blog post about a while back!
Btw, do you know Jason Huang? He was my former colleague at DFI, then moved to Atlanta as a capital markets specialist for the FRB, then recently got transferred to SF in your office, and is on a dedicated or somewhat-dedicated un-named regional bank in FiDi. I had drinks with him and a few other former colleagues the other week.
I will introduce the two of you if you haven't met already. I'm going to organize a happy hour with us, FRB, and FDIC one of these days in FiDi when there's a lot of people in the office.. maybe office meeting day.. Should be fun! There's a lot of good/fun people! (But I'm not working until after 4th of July, so sometime later ;)
Part of the reason I did 4plexes (& my 2 SFH on one lot deal) is so I can limit the count of my loans also. More $ per loan.. And less addresses to manage.. More efficient.
BUT,
I recently met @Kyle Chuang , who provides non-conventional loans for those who have gone over their limit. It sounds like there's a securitization market for these loans also. And he said the rates aren't crazy higher Not sure if they are doing cash-out.. and to what extent..
Kyle, any input for Johnson on this? Maybe you two can get in touch and see if you can meet each other's needs..
One example for you, I have a listing in escrow at $160,000. It's a 4-plex, rents are $2,000/mo. No deferred maintenance, C building in a C area. That's a 6.67 GRM. Cap rate in the 9% range.
These numbers are spot on for the 4 plex that I own in Phoenix. The thing is that I am seeing better deals in Tucson right now, higher rents, lower purchase prices, same quality.
I personally have come to believe that Phoenix multi-family is over priced. There are better deals to be had in Tucson.
One example for you, I have a listing in escrow at $160,000. It's a 4-plex, rents are $2,000/mo. No deferred maintenance, C building in a C area. That's a 6.67 GRM. Cap rate in the 9% range.
These numbers are spot on for the 4 plex that I own in Phoenix. The thing is that I am seeing better deals in Tucson right now, higher rents, lower purchase prices, same quality.
I personally have come to believe that Phoenix multi-family is over priced. There are better deals to be had in Tucson.
Anthony, thanks for jumping in and confirming the numbers Patrick was talking about in his deals. What do you think about the longer-term trends, demographics, jobs, etc, for Tuscon vs Phoenix?
Patrick, do you look at anything in Tuscon? What do you think about that market?
Have you two considered the Tuscon market? Or more fixed on the specific areas you are looking for now? I don't know much about it, but looking forward to learning from these locals ;)
In terms of economy and demographics, it is no comparison, Tucson is after all much smaller than Phoenix, however I do believe that Tucson will continue to grow, just at a slower pace. While not as large as Phoenix, the economy is diversified enough to be healthy and for there to be steady growth.
Keep in mind that I am a cash flow investor who believes in long term buy and hold. I know that right now cash flow is better in Tucson, and it seems like real estate is cheaper, yet the rents are about the same. I don't know exact figures in terms of vacancy rates for the area.
Investor · Bay Area, CA · Member since 2011 · 92 posts · 69 votes
12y
@J. Martin How long have you been investing in Tuscon? What's the turnover like? Is it easy to find new tenant? I know that you mentioned you're a cash flow investor. However, I'm curious about appreciation. I'm also more focus on cash flow but if I can get appreciation at the same time, that will be great.