30 month Multifamily Flip in Riverside CA.

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30 month Multifamily Flip in Riverside CA.

Jason Mak
Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes

Hello BP,

Just closed on a two year flip of a multifamily deal in Riverside CA.  I don't usually like to publicize my deals but BP has been a nice resource and I thought I would contribute with my experience and answer a few questions.  

Summarizing the deal (please note, I'm giving approximate numbers and dates):

July 2013 - Purchased an 81 unit apartment bldg in Riverside CA for $3.1mm equity.  At the time of purchase, the building was mismanaged and in bad shape - it was 60% occupied and collecting 30% of rents due.  

Immediately went to work with a large scale transformation including tenant management (evictions), capital improvements including roof, interior/exterior painting, landscaping, elevator, construction of leasing office, community outreach and many more items.  

December 2013 - Refinanced the building and took out $2.1m so at this time I had approximately $1m equity left in the building.  

Continued to operate the building for over 24 months and got the building up to 95% occupancy and relatively stabilized operations.  Over this time, between the rental income I earned and the capital expense that I ploughed into the building, I probably ran a loss of $100k so at this point, my equity in this building is about $1.1m.

Two months ago I sold the property for $5.5m.  After paying back the loan principal and commissions, netted proceeds of $3m or a profit of ~$2m.   

Roughly speaking my returns were 200% ROE / ~60% levered IRR

Although this was a nice deal and I made some money, there were some mistakes and lessons learned:

  • didn't pay attention to my loan prepayment and ended up having to make the decision to pay a hefty prepayment penalty when I sold the property
  • I am a licensed broker and in this market I probably should have marketed the property on my own.  However being busy with other deals and projects I opted to use a broker and pay the commission
  • Should i have sold?  I was lucky to find a 1031 exchange but in the event that I couldn't, I would be paying a hefty capital gain tax.  I'm also not buying into a particular exciting property but its closer to my target geographic area

Overall pretty happy with the outcome of this deal and looking forward to the next!

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Makenzie Kelly
Investor · Livermore, CA · Member since 2015 · 122 posts · 36 votes
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Holy cow!!  That is such a great accomplishment.  Kudos to you for sticking it out for the three years.  I just decided to take the leap into Multi-fam.  I have other commercial/office but Multifamily will be new for me.  I'm still on the hunt, but will keep looking.  =)  

It's posts like this that inspire me to reach just a little beyond my comfort zone and do a BFD...big fat deal.  You are a baller!  Love it.  Great job Jason...and I kinda like your last name too. 

Makenzie

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  • Al Williamson
    Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
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    Wow! Love it! Persistance pays again!

    2Reply
  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
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    Originally posted by @Jason Mak:

    @Matt R.

    Yeah man - people ask me all these questions and how to get started in RE and I always point them to BP but they rarely take my advice. Laziness? BP is such a great resource - you can get answers for almost everything including larger commercial deal questions

    I have no problem with out of state investing but I just like to know the geography more intimately.  I agree, there definitely is a cash flow trap - cash flow is easy to depict/maneuver on paper.

    Nice!

    That'll fill some stockings for the kiddies during the holidays.

    "Laziness?" - you mean people are lazy, really, awe I've never noticed... joking!

    I am newer to BP, and honestly until I started seeing it referenced in Quora a couple of times I'd never heard of it. I'm 25+ years on the commercial side of the business (mainly industrial) and I'll tell you what I only wish I had access to this type of information way back when.

    I was driven here because I wanted to learn more about investing in MF (never really have except as an equity partner that friends sourced, structured and closed) and found the forums and other info points interesting and helpful.

    So today I posted my first question on this site, as I found this fuggly building this morning, in SoCal, that is plumb dumb stripped bare, and I need to plug in a number for bathrooms and kitchens (ask me the cost of building out office space and I'll get you within $10 bucks, but I've never cost out kitchens and bathrooms) and no kidding, I had a number in less than five minutes.

    Impressive for a volunteer online community. I'll answer any questions on commercial office, industrial, retail, development. AMA!

    2Reply
  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
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    Originally posted by @Account Closed:
    Originally posted by @DL Martin:
    Originally posted by @Jason Mak:

    Two months ago I sold the property for $5.5m.  After paying back the loan principal and commissions, netted proceeds of $3m or a profit of ~$2m.   

    Wow. That is quite an accomplishment. 

    I hate that complex and everything about it. Trying to gain access after a shooting or stabbing is a nightmare. Kicking on the door and/or adjacent window until a tenant or resident drug dealer opens the door for you was pretty much the only way to gain access. (The KnoxBox key was so high that it was impossible to reach without a ladder). And the elevators are dreadfully slow. 

    On the positive side, all of the interior walls are concrete block which limits peripheral damage when shooting occur inside the buildings or tenants set their units on fire. 

    I am amazed that you had the guts to take that on and I admire your determination to see it through until a successful sale. 

    At $68,750 per unit, I do not envy the new owner. 

    Congrats on a job well done.

    DL

    So you lived in this building?  For reals?

    I'm no stranger to ghetto and war zone properties.  But if the OP made $2M by being willing to take on the stabbing/shooting building, doesn't it make you wonder what else is out there.....right under our noses?  Or in your case, right under your mattress?

    "doesn't it make you wonder what else is out there.....right under our noses?" Absolutely hit the nail square!

    The best deal I ever bought was a building in South Central Los Angeles (when it was still 'south central Los Angeles, and not "South LA"). For the first five years of ownership one of my line item expenses was "roof repair - Bullets". But that sucker payed out a 34% IRR over a ten year hold.

    I like ugly buildings, scary areas, and neighborhoods whose rep is socially challenged. When I'm looking at those opportunities I know there's gold in them there hills.

    3Reply
  • Serge S.
    Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
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    @Jason Mak well played! I have a similar strategy and have been lucky enough to hit on a couple big ones as well. I agree with your lessons learned. I'm currently sitting in a similar position where I've added the value and created the equity and cash flow on a 56 unit. The issue is that cannot find an adequate replacement and with prepayment fees and taxes it is hard to make sense of a move sideways. These type of deals do exist but not as much today. 

    1Reply
  • John O.
    USA · Member since 2014 · 43 posts · 13 votes
    11y

    Very impressive! I know of a property with similar pre-update status here in San Diego that was for sale on the MLS earlier this year. Not sure if it sold or not. Let me know if anyone is interested and I'll dig up the address.

    Would be a tough one with the city's just-cause eviction laws, but I like the area and invest there myself.

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    Originally posted by @Account Closed:

    Hey @Jason Mak

     Thanks for sharing!

    If you don't mind me asking, how long have you been in this business and what sort of trajectory did you follow to end up working with large apartment units and hotels? Did you start out with single family flips and build your way up? I only ask, because large apartment complexes and hotels are a long game goal of mine, and I'd appreciate some insight on your own personal experience.

    Alex.

     Hi Alex, I started with a small apartment building while working full time and eventually left corporate America to take over a small portfolio and began working with other various partners to buy larger project buildings.  I was lucky to find friends and family with capital and an RE mindset to invest.  Surrounding myself with RE savvy folks was instrumental.  I honestly wish I had learned of BP a lot earlier on.

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    @Account Closed

    Mind you my first apt purchase was in 2003 when you could still find an apt in LA for under $1m

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    Originally posted by @Monique Correia:

    @Jason Mak thanks for sharing your experience.  And congrats on producing and completing such a great product In the face of adversity.  

    Can you share any of your gross costs, including money spent on evictions, marketing and rehab?

    Thanks Alex

    without diving into my books, here are some general costs that I put into this building.

    - Evictions - spent on average $500-$800 per eviction - since i outsourced it to an eviction company.  Probably did about 8 evictions

    - Capex - probably spent $250k-$350k

    - $40k on exterior painting, $40k on new roof, $30k on elevator control and refurbishment, between $500-$1500 on unit turnovers (they were small units)

    - $20k-$40k on landscaping etc

    - Marketing wise, very light- mostly advertised on craigslist and just put up a big sign however we did give rental concessions (1 month).

    hope that gives you an idea - sorry I can't be too detailed without diving into my books

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    1Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    Originally posted by @Serge S.:

    @Jason Mak well played! I have a similar strategy and have been lucky enough to hit on a couple big ones as well. I agree with your lessons learned. I'm currently sitting in a similar position where I've added the value and created the equity and cash flow on a 56 unit. The issue is that cannot find an adequate replacement and with prepayment fees and taxes it is hard to make sense of a move sideways. These type of deals do exist but not as much today. 

    Yeah - I was motivated to make a sideways move on this property because I was able to exchange into a nicer building closer to my house, but otherwise, I would have just been happy sitting on this building.  Sounds like you would be fine sitting on your 56 units building if you like the quality of product and location.  I certainly paid up the nose in fees, commissions, etc, transacting.

    Honestly, I have spoken to other investors and they always regret selling!

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    11y
    Originally posted by @John O.:

    Very impressive! I know of a property with similar pre-update status here in San Diego that was for sale on the MLS earlier this year. Not sure if it sold or not. Let me know if anyone is interested and I'll dig up the address.

    Would be a tough one with the city's just-cause eviction laws, but I like the area and invest there myself.

     Thanks John!  San Diego would probably be a little too far for me though I love going down there.  Good thing about Riverside county too is that it has some relatively landlord friendly eviction laws compared to LA county.  Best of luck and surfs up

    0Reply
  • Manolo D.
    Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
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    @Jason Mak Great job! And the way it is described, you've had some good rates on repairs/capex too. 200% in 2 years? Very interesting enticement invitation. Congrats!

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    11y
    Originally posted by @Manolo D.:

    @Jason Mak Great job! And the way it is described, you've had some good rates on repairs/capex too. 200% in 2 years? Very interesting enticement invitation. Congrats!

     Thanks Manolo.  Very nice appreciation in Ca these last few years 

    0Reply
  • Juan Cristales
    Investor · Willis, TX · Member since 2014 · 245 posts · 124 votes
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    @Jason Mak, that's a very impressive project! Thank you for sharing the story as it is inspirational to those of us who have not done a commercial deal, especially at that caliber. I do have a related question though. If one was to go with the "friends and family" method of funding, how would you structure that? Create an LLC and have everyone "contribute" their portion? Feel free to point me in the direction of where to find out more information about that if the answer is too lengthy to type. Thanks!

    0Reply
  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    @Juan Cristales

    Thanks Juan

    For a project like this ( larger size ) , definitely create your own llc to acquire the property.  Then everyone can contribute their portion.  However, keep in mind that the person "doing the work" will be spending a lot of time and effort on the project so they should be compensated for that.  This can be in the form of either a management fee and/or incentive management fee.  

    0Reply
  • Juan Cristales
    Investor · Willis, TX · Member since 2014 · 245 posts · 124 votes
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    @Jason Mak

    Thanks for the info!

    @John O.

    Hey John, I'd be interested in checking out that property in SD you were talking about! Thank you! 

    0Reply
  • John O.
    USA · Member since 2014 · 43 posts · 13 votes
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    Originally posted by :

    @John O.

    Hey John, I'd be interested in checking out that property in SD you were talking about! Thank you! 

    Please PM me for the info.

    0Reply
  • John O.
    USA · Member since 2014 · 43 posts · 13 votes
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    @Juan Cristales

    0Reply
  • Account Closed
    Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
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    @Jason Mak

     congrats on a nice turn around deal.  exceptional market timing as well :)

    0Reply
  • Siraj Ahmed
    Investor · Morton Grove, IL · Member since 2015 · 44 posts · 5 votes
    11y

    What an inspiring post for people who are looking to get into multi-family buildings, like me. Although, I will probably start with a 6 unit!

    Thanks for sharing @Jason Mak

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    @Account Closed

    Thanks Sean.  Yes, Market timing was crucial and certainly helped me overcome several miscues.  Better be lucky than good!

    1Reply
  • Jim Keller
    Investor · Riverside, CA · Member since 2014 · 351 posts · 220 votes
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    Originally posted by @Jason Mak:

    @DL Martin  I didn't know you were familiar with that property.  Yes, when I bought it, it was literally inhabitated with drug dealers and prostitutes so there was a lot of $$$ spent on legal fees to evict.

    Funny you mention shootings because when I bought it, one of the hallway windows did in fact have a bullet hole.  

    One thing we did get done there was getting very involved with the Riverside police station and letting them know that our intent was to clean the area up, in fact we went as far as getting the property certified as a Safe Housing by the city of Riverside and had a police officer assigned to our building.  We were able to get before and after 911 call records and it was nice to see the dramatic decrease.

    For "rougher" tenants, the concrete walls definitely make a big difference.

     Mark,

    I'm late entering the Riverside market, but have done very well on flips over the last 18 months.  I have 4 going right now and have completed another 10 projects from Moreno Valley to OC.  I see more than anything your timing could not have been better, can you talk about the economic factors that made this such an easy decision to jump in and take on this huge deal.  I understand you had the cash but what we're some of the key things that pushed you to spend the money on this deal.

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
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    @Siraj Ahmed  Thanks Siraj and best of luck.  6 units is a great place to start!

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    11y

    @Jim Keller

    Hi Jim - Certainly

    I underwrote the initial purchase very conservatively.  I ignored any pro-forma analysis that the broker provided.  My offer/purchase price was assuming that I would operate and run the business at its current occupancy and rent levels with little improvement (of course I was confident I could improve on this).  I would say it's hard to find a deal like this but the sellers were distressed at the time and I had cash.  

    I also liked the scalability of the building.  Since all 81 units were located in one building, that meant that all investments (roof, painting, landscaping, elevator, etc..) benefit 81 units as opposed to dispersed buildings.  Same for management.

    Finally, i liked the area, I knew rents were growing and UCR had a housing shortage among other things.  Felt confident that my downside holding multifamily in SoCal was pretty limited.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
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    Thanks for sharing this nice win, Jason.  You mentioned you exchanged into another property. 1031X?  What kind of property did you buy?

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