30 month Multifamily Flip in Riverside CA.

Investor · Riverside, CA · Member since 2014 · 351 posts · 220 votes

11y

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

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

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@Jon Klaus

Thanks Jon. I respect your work! I'm currently exchanging into a 24 unit closer to Los Angeles and an interest in a office building in the Los Angeles area - buying interest from my partner

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Gene Lee

Investor · San Diego, CA · Member since 2015 · 4 posts · 0 votes

11y

Hi Jason,

Thanks for sharing such great info and being so candid.

So you are able to split the 1031 exchange into more than 1 property? Also given theat you have only 6 months, did you already identify and have in contract for your next purchases before you marketed your appt unit? I am curious how to accomplish such large commercial exchanges in a tight timeframe.

I am considering getting out of industrial building and switching to commercial residential, and it seems it's very difficult to getting the timing straightened out. Would love your input.

Thanks again for sharing.

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Engelo RumoraBusiness Member

Investor · Toledo, OH · Member since 2013 · 4k+ posts · 2k+ votes

11y

Originally posted by @Jason Mak:

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!

Well done mate,

Some great profit figures :)

Have a great day.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

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@Gene Lee,

That is correct you may exchange from one to several or from several to one. When doing a diversification or consolidation exchange the IRS is not concerned with the number of properties but rather the amount. In order to fully defer all tax you must purchase at least as much as you sell (net sale - contract price less costs of closing but before mortgage payoff). Each exchange still has it's unique timing benchmarks that require close attention but moving your portfolio in both type and number is easily doable using 1031 exchanges.

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Kenneth HynesPro Member

Rental Property Investor · Easton, PA · Member since 2013 · 357 posts · 92 votes

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@Jason Mak

Great job and looks great. Can you share some of the other tips you did to attract a better tenant class once you started re-positioning the property . From what DL said , if it had a rough reputation beforehand, how did you go about getting better enants after evisting the problem ones.

better condition of units? new amenties ? improved security ?

again great work

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Jason Mak

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

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@Gene Lee

@Dave Foster 's response answers the question so I won't dive into it. But yes, the 1031 exchange and timeline must not be taken lightly and you should start thinking months ahead of time to plan your strategy. Start talking to brokers and lenders to let them know your strategy.

Some other ideas are to contractually give yourself extensions in case you need time to do a identify 1031 exchange.

Also, if you are making a huge capital gain, analyze how much your capital gain tax will be. Therefore, you also know how much you can afford to "overpay" for an exchange property. If you stand to pay $500,000 in capital gains taxes, then paying $2.1m for a $2m might not be such a big deal as long as that $2.1m purchase has long term potential.

Lastly (and on a similar note), there are tons of NNN deals on the market. They don't have magnificent cap rates but my worst case scenario for not being able to identify another multifamily was to simply purchase a NNN and collect the income.

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Jason Mak

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

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@Gene Lee

Thanks! It was an ongoing process but the landscaping, exterior paint, and security cameras were nice selling points and helped us "reset" our reputation.

It was also a matter of turning away bad applications that we would have once accepted once we evicted bad apples. It certainly takes time.

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Jason Mak

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

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@Kenneth Hynes

Thanks! It was an ongoing process but the landscaping, exterior paint, and security cameras were nice selling points and helped us "reset" our reputation.

It was also a matter of turning away bad applications that we would have once accepted once we evicted bad apples. It certainly takes time.

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Andrew Oladipo

Investor · Carol Stream, IL · Member since 2014 · 49 posts · 11 votes

11y

Interesting!!! Love the fact that you overcame other people fears. Great vision and dedication is how I will describe what you did.

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Kenneth HynesPro Member

Rental Property Investor · Easton, PA · Member since 2013 · 357 posts · 92 votes

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good info . was the neighberhood B or C ?

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John Monti

Real Estate Investor · Princeton, WV · Member since 2008 · 9 posts · 0 votes

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Very impressed with your accomplishments Jason, I look up to you!

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Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

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And that's how we do that :)

Outstanding, Jason!

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Chris Willis

Centreville, MD · Member since 2015 · 10 posts · 1 vote

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wow @Jason Mak great job on the rehab. Glad to see you were able to still manage a profit. Look forward to reading another project of yours in the future!

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Jason Mak

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

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@Kenneth Hynes - this was a C- neighborhood, hoping that it is at least a C now :)

@John Monti - thanks John "i'm blushing" but it takes some grit, and hitting the market with the right timing

@Ben Leybovich the great ben leybovich! thank you...for the comment...again, market timing on this deal was good...still had several misscues that I can hopefully avoid next time

@Chris Willis thank you Chris

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Jason Mak

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

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@Andrew Oladipo Thanks Andrew!

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Nelson M.

Rental Property Investor · Northeast PA · Member since 2015 · 39 posts · 6 votes

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Great job! I look forward to the day I can begin investing in commercial properties. Your story is very inspirational!

Question - you said you started out with a commercial unit while working full time, did you have enough money saved up for a big down payment? How was the financing process for a first time investor looking to start off with commercial units? I ask because that is something I'm also interested in doing but I'm only at about 55k at my full time job with little cash saved up and I doubt I can get financing for a commercial unit just yet until I can at least have it backed up by a couple of multifamily units, but I could be wrong.. Any thoughts or suggestions are appreciated.

Looking forward to reading about more of your projects!

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John Monti

Real Estate Investor · Princeton, WV · Member since 2008 · 9 posts · 0 votes

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@jason mak yes, Im trying my best to get to the next level with my business. I'm now looking for an investor that wants to loan me enough to get my warehouse going. Currently all my sales are online but the business makes easily $15-$20k a month. It is a good cashflow coming in, I'm just trying to scale to the next level. Commercial real estate investments are on my list of things to do.

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Account Closed

Pasadena, CA · Member since 2015 · 73 posts · 11 votes

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@Jason Mak

Excellent work! This is definitely an impressive transaction.

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Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

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@Jason Mak with your 1031 exchange, is your goal to acquire higher class properties to hold long term? Do you foresee better appreciation in your new apartment complex? I'm also assuming it's easier to manage as well. I know of a lot of investors which make good equity in turn arounds, then seek to exchange into more stable and higher class buildings. Is that your case here too?

Also, you make a good point about willing to spend a bit more on an exchange deal, as you are saving more on the tax deferment. I've always wondered how people manage exchanges in hot markets. It's easy to sell, but boy it must be stressful trying to close a good deal in a short timeframe- and I guess that's the point- you may not get a killer deal, but if you get the quality of property you want, and plan to keep it for the long term, the premium you paid gets amortized.

I'm fortunate that with my projects I don't need to do any exchanges; the gentrification is so intense in SF that the market allows you to transform class C apartments into class A condos. Meaning, the market supports it; all you need to do is successfully deal with crazy rent controlled tenants, strict planning/building codes, archaic condo conversions, city politicians that cater to tenants and hate developers and investors, etc., etc. ;~) It's like hunting for elephants here- every deal is long, complicated and arduous. But done right and you hit a couple of home runs, it's a life game changer.

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Joe Bertolino

Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes

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Thank you for sharing. I aspire to do deals like this once I reach that level of experience and capital. You did made a huge impact on that neighborhood and cleared $2m... that has to feel good.

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Jason Mak

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

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@Nelson M. hello Nelson - yes it is difficult. My first multifamily purchase was in 2003 so times were a lot different back then. I had some money saved in but also got family members to invest with me. Keep on saving, learning, and starting small. Find partners and mentors and keep your reputation clean and you'll get there one day. Best of luck

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Jason Mak

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

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@Amit M.

Hi Amit - thanks for commenting - I always enjoy reading your posts.

Yes you are absolutely right. As you know, the market is crazy so when you sell high to buy high, the true benefactors are the agents in the middle (you can say I lost a few 100k in equity by paying commissions and fees). However, I was personally motivated to sell this project in Riverside to trade up geographically and in quality. It was also difficult to give up 81 units in my portfolio but I had to remind myself that while I was downsizing in terms of # of units, I was upgrading in terms of quality of asset that I can see myself holding long term.

SF is a crazy market but as you say, a few good deals can be lifechanging.

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Jason Mak

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

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Originally posted by @Amit M.:

@Jason Mak with your 1031 exchange, is your goal to acquire higher class properties to hold long term? Do you foresee better appreciation in your new apartment complex? I'm also assuming it's easier to manage as well.

To answer this question Amit, I don't envision that I'll get the same rate of appreciation in my replacement property but its a long term hold and I feel pretty comfortable with it. The goal would to acquire higher class properties for long term.

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Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

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@Jason Mak thanks for the compliments- good to know you have appreciated some of my past missives :)

And don't I hear you about the challenge of trading down in # of units! I think it's hard for most RE investors to not get caught up in the # of units, and overall $$$ held in portfolio. Let's be honest, it's rather cool saying you own 100+ units or have an RE portfolio of $20-30 or even more million. It definitely sounds successful. But we also know that the reality is that your equity position and quality and stability of portfolio are what really matter in the long run. Plus many people own large portfolios as part of a group, yet imply it's all theirs.

In my case after 10 years of active investing all I own is a paltry 11 units! (And...two are currently illegal and another, a condo, I live in!) But I know that I am playing in a blue chip market, plus doing all my own investments, so the # of units owned is going to be low. I also take solace knowing that of the 6 projects I have done, 3 have been solid home runs (two $1 mil+ in equity profits, third about half a mil), 1 was an ok long term flip (hello hellish 2008-2010), and my 2 current investments are in line to turn about $700k each over the next two years. Plus my wife and I have been able to live comfortably off the rental income since 2004, while keeping blue chip properties long term. So of course I have nothing to complain about, except that I can't brag about a large portfolio :) And, my deal flow volume is usually low, leading to extra time on my hands like posting on BP.

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30 month Multifamily Flip in Riverside CA.

30 month Multifamily Flip in Riverside CA.

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