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
11y

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

    @Amit M.

    I can't agree with you more.  You certainly live a good life and your portfolio and profits supports it.  Especially in this market, I can't preach quality over quantity enough.  

    While operating and doing this Riverside property I coined a new investment metric, ROBD - Return on Brain Damage.  Sure, there was money to be made but it was also a lot of work, stress, and travel.  Would I do it again?  Sure - but will definitely have an eye on the risk adjusted return on brain damage.  :)

    Another story - I once owned a very nice cash flowing hotel in LA metro area.  Great cash flow but the return on brain damage was horrible so I got rid of it.  The hotel is doing great now but I'm happy I took my money off the table and can concentrate on more pleasant projects.  
    @Amit M.

    1Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Jason Mak also consider yourself lucky that your project turned out so successful. Imagine the "ROBD" if the returns were marginal!

    Probably the closest I came to a (low?) ROBD return was during the Great Recession. I had a 3 unit building that was gutted and entitled for a significant expansion, which of course took 2 years to entitle this being San Fran. Right when I'm ready (late 2008), bamo, banks (and loans) go nuclear. Nada, zero, zip. I had to pool family money (by selling one unit to my sister at a great deal; she's a school teacher, so I didn't mind helping her out :)  I used this just to renovate the existing space (never mind the addition) so I can turn the property around. Man I was pissed off for a long while about that one. But fortunately the market turned around significantly, this neighborhood (Mission district) blew up big time, and the project turned into one of my $1 mil plus projects a few years later.  If I was in a lesser area who knows where things would be, even now. 

    Oh, a quick story about an acquaintance- talk about a low ROBD!  She was doing quite well on modest flips. Did about 6 successfully. Then she went for the more expensive, more involved, higher end flip. Took her 9 months and she lost about $40k. The notion that she would have been better off just watching daytime TV and eating Bon Bons is infuriating. Working to loose money really blows!

    How about you Jason- how did you fare during the Great Recession?  Was your ROBD challenged? (Love that term btw :)

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

    Thanks for sharing your experience with your development project and glad that it finally worked out for you as well as benefited your sister!

    My portfolio certainly experienced challenges during the great recession - I'd be lying if I told you that it didn't.  The biggest challenge I encountered was with a hospitality investment of my family.  We owned a hotel and during the recession business was poor and we had to fire the property manager and self-manage.  Oh how that was difficult, making payroll, dealing with maintenance, hiring/firing employees, dealing a hotel flag, you can only imagine.  It was a dark time and I constantly had to remind myself "it will get better!".  I think a lot of real estate investors became confident int their abilities with multifamily when the times were good and jumped into other asset classes without much experience and got hosed.  Happy to say that we were able to persevere through the recession and ended up selling the property last year for a nice profit.  Still the Return on Brain damage was not worth it!!
    1Reply
  • Casey Murray
    Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes
    11y

    @Jason Mak - these are crazy numbers dude, congrats. Based on your experience, do you prefer a certain class of investment over others (i.e. multi-family, commercial industrial, office, hotels, etc.). Being able to pass on expenses to tenants in a commercial property with a NNN lease is seemingly a competitive advantage over multi-family (unless you have separate meters assigned to each units) and hotels. Just curious given your wide array of investments in your portfolio.

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

    @Casey Murray

    Thanks Casey.  That's a great question.  On a large scale, office and retail as maintenance is pretty simple and I've personally had good tenants who paid rent (obviously this is attributed to location, quality etc).  You are also dealing with businesses, not families, so there usually is a straightforward and practical way to solving issues.  Hotels can be very profitable in a bull market but unless they are large (+100 - where you can outsource management), they are very management intensive.  You are essentially running a business now with many employees and more liability.  However, the ability to raise and lower prices on a daily basis allows you to make good cashflow when times are good.

    However, in the end, if I could - I would still stay with the recession proof nature of multifamilies.  Unfortunately, everyone is trying to get in this game making it difficult to get a good deal.

    0Reply
  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Jason Mak your comments above are interesting, given your direct experience with these asset classes  they are interesting, because my gut has told me the similar things- hotels are management intensive and akin to running an active business, and office/commercial can be much more hands off.

    The two things I question with commercial/office are 1- you basically need to refi them every 7-10 years, so susceptible to interest rate changes.  2- at least in SF, the way people make big bucks in commercial is all about lease timing.  If you can buy an empty building during a recession then strike new leases at a premium when demand is high, you will make strong cashflow and add substantial appreciation quickly.  If you get stuck with low, long term leases you are basically handicapped for a long time!  This is especially protracted as I believe that most commercial leases allow for subleasing. So even if the firm has outgrown its space, it can sublease, pocket the difference, and move on to greener pastures.  But to achieve the former you need 1- to be able to finance that vacant (or mostly vacant) building and 2- be able to carry it until the good times arrive, all requiring a lot of money upfront, I'd think.

    With multi family in good locations, it not only seems more stable rent wise, but if you find a nice value added property, the turn around (like you did) is what will give you the big reward in a relatively short time period.  I've toyed with the idea of getting into small commercial, but for reasons mentioned above have never pulled the trigger. But I keep toying with the idea; maybe during the next slowdown when a lucrative commercial opportunity comes up...

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

    @Amit M.

    Hi Amit!  Yes, you are absolutely right.  The nature of the leases in office/retail certainly adds a level of complexity and risk in underwriting office/retail - especially when dealing with larger buildings, larger tenants, etc...  Small strip centers with a diversity of smaller tenants may enable you to offset that risk and you can move them in and out more easily (similar to apartments) - intimate knowledge and a good local network is hugely important here.  Don't forget that Tenant Improvement is a big business so this is not exactly a business that one can wander into undercapitalized.  

    That being said, the reason why I have taken interest in commercial is that I prefer to be in quality locations and there just aren't any multifamily plays which is making explore other asset classes.  

    Multifamily is also a natural progression from single family - so I think you will see on biggerpockets that this is the focus.  I have plenty of friends who have been in retail/office all their life and wouldn't touch multifamily with a 10 foot pole!  To them the liability of dealing with tenants, petty maintenance, and frequent turnover is scary, not to mention the comparatively low cap rates.

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  • Gary Nakauchi
    Forum Troll · Mesa, AZ · Member since 2015 · 17 posts · 6 votes
    11y

    Thank for sharing and congratulations!  I live in a Lewis Operating Corp Housing Facility, In Rancho Cucamonga, and aspire to get a golf cart and clip board of my own, sometime next year (That's what upper management does when they come through).  I'm still planning on leaving Ca for AZ or NV for my real estate projects, because I'm somewhat lazy, somewhat inexperienced and somewhat undercapitalized for California life.....  

    BUT, I just really wanted to say thank you for sharing the story.  It was courageous and bold, and I love the brain damage return concept.  I would have never known it possible to do that, right next door.  I also noticed one of the posters was a podcaster, Serge I think, so when's your podcast coming up?  

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  • Amit M.
    Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Jason Mak I hear what you're saying about your friends trading asset classes. But if you're dealing with class A multi family, with good management in place, I suspect it's an ideal hold as well. 

    The metrics are a bit different in San Francisco, as everything is close in, and commercial and residential are often mixed in with each other. The exceptions are larger downtown buildings and large office complexes, which are mucho expensivo and usually owned by pension funds, asset holding cos, etc., and usually not by individuals.  The key to individual  investors here, in my opinion, is to turn around smaller properties where you optimize income, value, and tenant class. Given the overall desirability of the city and proximity to larger buildings, the asset classes pretty much blend in, meaning well positioned smaller buildings can be as profitable and desireable as formal "class A" mega buildings. In the city there is less of a dividing line. 

    So far I have dealt mostly in residential, although I do have a basement space atop a triplex that I rent out informally as "office" space in a desireable area. A Silicon Valley telecom firm doing business in the city needs an SF address to do business here, so they use it as a satellite office, and it gets very little physical use. But they get to bid on SF projects that way. A win-win, so I want to keep them around as tenants. 

    I'm considering mixed use, although you definitly need deeper pockets as even on desireable retail streets, vacancies take awhile to fill- every landlord is trying to max their per square foot rent as they lock in 5 year leases. One area went from $3-4 PSF to $8-10 PSF in a matter of 2-3 years!  It's insane. The owners are all deep pocketed, and would rather wait and leave it empty for 6-8 months until they get the ideal tenant. I'm not used to operating like that!  With residential, I always have quality tenants  lined up to rent a vacancy. I'm not really set up to have multi month vacancies yet; can't wrap my mind around it...yet at least. 

    I'm not sure how your experiences relate to that, but feel free to comment. Cheers. 

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

    @Gary Nakauchi

    Hi gary, how has your experience been with Lewis Homes?  Do they provide quality?  Also, how do you like living in Rancho Cucamonga?  Is it truely the Beverly Hills of the Inland Empire?  I've always been pretty impressed by the how nice the City maintains its infrastructure there and the developments, though homogeneous, are quite beautiful.

    Don't have a podcast coming up but happy to answer questions for other BP members on the forum.

    0Reply
  • Gary Nakauchi
    Forum Troll · Mesa, AZ · Member since 2015 · 17 posts · 6 votes
    11y

    Hey Jason and BP Forum Members! I love this site, have all my keywords set up and follow tons of Forums. This really is a unique place, and the podcasts that Brandon and Josh give are absolutely amazing and packed with value. I'm on 40 of 130 or so....

    For those of you that don't know, it's a truth based exaggeration that "Lewis Owns Ranch." There are many Lewis Apartment Complexes, parks and community events. Lewis used to and probably still does build homes. I have no idea how truly large the comany is, but now I'm interested....

    I've grown up in a Lewis Home in Covina starting in 1980. It was a nice 3/2, did Finance/Real Estate Law at Cal Poly, and ended up in an mid/upper level Lewis Operating Corp apartment in Rancho, the Carmel. Never thought till now, but I'd guess I live in a B+ or A- Community.

    I'm at $1662 rent for a 2000+sq ft 2/2, second level of 3 story apartment complex. Directly across the street is Homecoming, where they are nearly $1000 more per unit for the same size, but offer private community "themed" courtyards, an better gym "Equinox" style clean, and farther refined landscaping. I would guess that's A++.

    On one side of my complex is an equal to Carmel complex, and the other "other" side has a B to B- community.

    Lewis Homes is tremendously prominent in the area, from the Victoria Gardens Mall Libraries to the parks, to the police. My neighbor is a retired detective and when he's bored he likes to rip on management for petty issues like highschool/college trespassers at our pool, but warns that they have a deep relationship everywhere in the city.

    My rent slowy inches up by about $20 a year. They used to replace light bulbs for free, now tenants have to buy them. There was a $150-300 incentive to resign leases early, but that changed to a "raffel to win a "$150 off" if tenants resign early. Water/sewer/trash seem to be billed per month and divided by building.

    Maintenance Team is very responsive and there is general offsite night management that handles all the local Lewis Communities.

    I've had minor issues with management over the years but that's to be expected anywhere. Rancho is the nicest general area out here, but West Fontana does have some very nice newly developed homes, Sierra Lakes. My neighbor moved there and claims $100k+ equity in the past couple years, which Zillow confirms. =)

    Yes, I think it is the Beverly Hills of the IE, thanks for asking because without taking an inventory, I'd overlook and asset I had. I suppose Claremont could be nominated as the Pasadena of the IE, but it's still LA County....

    RANDOM REAL ESTATE MIND BARF....

    Pasadena has a home inspectors review before a house sale, Rancho does not. Nor does Rancho have commercial inspections on routine basis.... Sorry.

    I have met many wonderful professionals in my complex, and about 50% of the seem to be involved in the criminal justice/law enforcement field. I don't know why, they don't seem to know each other.

    I truly appreciate people like Jason posting, because I grew up in the area and was mesmerized by the "No Money Down" Real Estate Books, and now 20 years later found BP and can implement some of the ideas I was sold, with networks and experience from other areas of life.

    Here's a quote from Gary Keller's book:

    "The best outcomes are the result of a big plan powered by persistent effort over time"

    For anyone interested, I'm still moving to Arizona to do live in flip with 50% of my own $, no timeline because mortgage/taxes/ins are roughly 1/2 of my current rent. Work from home, no wife, no kids, so bye bye Lewis, thanks for the experience. In 2 years I'll be in a small multifam, but I want to be in the area to find the deals.

    I plan on syndicating between Ca investors who "can imagine" driving to Phoenix but never will, and cheaper cash flowing multifams in AZ, when I get my golf cart and clip board to manage the management companies and live in AZ. My network is already in place and more investors will only stabilize prices and make the market more liquid, some come on guys, the more the merrier!!!

    Or you can apply to be my AZ roommate so I can house hack with you.... =)

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    10y

    @Gary Nakauchi

    Thanks for the update on Lewis Homes.  They are indeed a big and successful company and may not be able to provide the level of service that some mom and pop landlords can, however I've gotten to know them over the past few months and they seem like good people.  Hope you are doing well in AZ.

    0Reply
  • Bhekizwe M.
    Bulawayo, Zimbabwe · Member since 2015 · 1k+ posts · 253 votes
    10y

    Thank for sharing @Jason Mak.inspiring for the aspring

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  • Kendra Gedeon
    Developer · Fairburn, GA · Member since 2015 · 44 posts · 6 votes
    10y

    @Jason MakThank you for sharing! This is truly inspiring! Have you found your next deal? I am extremely interested in multi-family housing and would enjoy hearing more about how you got to the point of purchasing this property.

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  • Rod HanksBusiness Member
    Insurance Agent · Dallas, TX · Member since 2013 · 743 posts · 462 votes
    10y
    Jason Mak Congratulations!!!!!! You are the man! Thanks for sharing!
    Rod Hanks Insurance4.9155 Reviews
    WebsiteView Page
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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    10y

    @Kendra Gedeon Hi Kendra - thank you for the nice words.  I did exchange to another deal.  It's not as big of a rehab as this deal was and its a more stable deal (i.e. not a fix and flip).  I am working through it so if I do update it, I'll make sure to update!

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    9y

    thanks @Rod Hanks

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  • Celia Chu
    Real Estate Agent · Claremont, CA · Member since 2015 · 10 posts · 3 votes
    9y

    thank you for sharing your experience and being one of the few commercial broker that is so forthcoming is nice.   Your knowledge and experience is invaluable. In my own experience-just trying to ask about their listings on loop net - the commercial broker are not forthcoming.  

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  • Jason Mak
    OP
    Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
    9y

    @Celia Chu 

    You are most definitely welcome.  I have learned a lot from the bigger pockets website so I try to return the favor.  I agree, trying to talk to many local brokers off of loopnet is no fun...there is a lot of attitude out there!

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