Need help analyzing my first deal - 1.4 million I would take 11% interest

25 Replies

Hello, 

I am looking to be partial owner of a property that is 2 blocks from the beach in Southern California. I would be sinking most of my earnings of $150,000 into this property to own 11%. The property would be purchased for 1.4 million. It is a large lot of 15,000 sq ft. Right now it has 4 units on it. Its possible to convert the front home which is on a popular street for commercial space into retail and get more rent. But as it stands now it may just be a rental. 

Purchase Price - $1.4 million All case ($150,000 my share for 11% interest)

Costs to rehab $100,000

Total of 4 stand alone homes 

Unit #1 - 2 bed 1 bath 780 sq ft - Estimated $1800 a month - $2000

Unit #2 - 1 bed 1 bath 500 sq ft - Estimated $1450 a month - $1500

Unit #3 - 1 bed 1 bath 500 sq ft - Estimated $1450 a month - $1500

Unit #4 - 1 bed 1 bath 540 sq ft - Estimate $1500 a month 

Projected Rent - $6200 a month

Property Tax Rate - 1.0612% or $14,840 yr - $1,236.67 per month

Estimated Insurace & Flood - $2000.00 a year - $167.00 per month

Property Management @ 8% - $496.00 per month

Electricity (Tenants pay???)

Water (Tenants pay???)

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There is the possibility of putting non-permitted rentable trailers in the back that will rent for $1500 - $1900 for a potential additional rents of $3000. The other potential is to convert from house and rent as restaurant for $3.00 a sq ft. 

Looking at this property that has a large lot and being close to the beach as a possibility. Please let me know what you think and what I am missing.

$1.4 million for your first deal.  Wow you really swing for the fences.  You say these rents are estimated.  Is this property vacant now?  If so why?   You forgot vacancy and Cap Ex in you expenses.  $6200 minus the expense you listed  and subtract another 8% each or so for vacancy and repairs gets you to around $3300 a month cash flow.  Your 11% would get you $4,300 a year or less than a 3% return.  Do you really want a 3% return on your life savings?  I'll pass, unless you can make these other "possibilities" a reality. 

11%= you have no real vote and you don't matter.  What if the other member/partners decide to just vote you out return-wise?  Minority interests in small businesses are extremely risky. So many other things you can do with $150k @David H. !

If you have 2 million net worth and are putting 150k of your cash from last years earnings in non-recourse then it's not that bad.

Cali is mainly a equity growth market.

Never pay on potential because if it doesn't happen you overpaid.

If the 150k is your total worth or close to it then it would be a NO. 

@David H

I personally would pass on this deal but keep in mind it's my OPINION nothing more.  Here's why.  The return on this is not enough for the risk.  The reason why I involve myself in bigger deals is because they are more lucrative not less.  Here's some numbers to compare. A low end condo I lend on in Santa Ana pp 150k.  My rate of return (debt) 13% plus 1 point.  Loan amount 130k.  My money is out within the year.  I don't like to park my money.  High end deal. Pp 850k.  Loan amount 130k.  EJV.  Sale price 1.250MM.  My profit 35.5k.  Total time 5 months.  Number of partners 4 (including rehabber).  

You also mentioned this is going to take up most of your savings which again makes me uncomfortable.  The only advantage I assume in this deal is there may be tax advantages but again I don't know.

Perhaps you could elaborate more on the exit strategy and experience of the team and others can weigh in.

Good luck

Too many cooks in the kitchen. I really wouldn't jump into that. You can invest out of state or further out and own your own deal and start off with a small multi-family, learn the ropes, establish some consistent cashflow, and work your way into maybe a partnership where you do big deals like this. Having one partner is difficult enough but more than that, it can get really messy, really quick. You could buy a duplex for 150k in raleigh or atlanta (outside the city a bit) or memphis or somewhere outside of chicago or dallas, and take in rents of $2,000 per month, every month and have it paid off free and clear. I just really think your money and the stress and risk would be a lot better in another place.

Originally posted by @Steve Vaughan :

11%= you have no real vote and you don't matter.  What if the other member/partners decide to just vote you out return-wise?  Minority interests in small businesses are extremely risky. So many other things you can do with $150k @David H.!

 Hey Steve, 

I understand that when one owns majority shares in a business that they can vote to take the business in a different direction. But why would someone in a LLC opt to vote out cash flow. I guess what you are saying is they could do anything with the property if they wanted and I have no say?

Originally posted by @Vincent Crane :

Too many cooks in the kitchen. I really wouldn't jump into that. You can invest out of state or further out and own your own deal and start off with a small multi-family, learn the ropes, establish some consistent cashflow, and work your way into maybe a partnership where you do big deals like this. Having one partner is difficult enough but more than that, it can get really messy, really quick. You could buy a duplex for 150k in raleigh or atlanta (outside the city a bit) or memphis or somewhere outside of chicago or dallas, and take in rents of $2,000 per month, every month and have it paid off free and clear. I just really think your money and the stress and risk would be a lot better in another place.

 Hello Vincent Do you have experience investing outside of your area? That's unheard of in Southern California. What you propose sounds much better numbers wise than here. It would be primarily a long term hold, equity, with the potential to develop retail space and a much larger apartment complex. But that would be much further down the line, and way above at the moment my experience level. 

@Jeanette Adler - makes complete sense. Bigger deals should equate to larger returns. However, Im a beginner and I was thinking that this area is amazing, next to the beach, retail opportunities and a sizable lot for apartments. The rentals here get scooped up fast, but this would be 75% of my net worth. 

@David H. I would consider looking for your own 4 plex for that money. You may even consider moving into one unit. I have been seeing 4 units on the MLS between 650k in a not great area, to 850k in a ok area in Los Angeles. If your open to any area in So Cal then your chances of finding something just under 800k and putting 20% down are greater.

(617) 270-9592
Originally posted by @Randy Landman :

$1.4 million for your first deal.  Wow you really swing for the fences.  You say these rents are estimated.  Is this property vacant now?  If so why?   You forgot vacancy and Cap Ex in you expenses.  $6200 minus the expense you listed  and subtract another 8% each or so for vacancy and repairs gets you to around $3300 a month cash flow.  Your 11% would get you $4,300 a year or less than a 3% return.  Do you really want a 3% return on your life savings?  I'll pass, unless you can make these other "possibilities" a reality. 

 The property has been owned by a church and they didnt do anything with it. Lots of room for a value add, with a very tight rental market. It wouldnt be hard to rent these as they are two blocks from the beach. I didnt add in Vacancy and Cap Ex because I dont know how to do that? Any advice on this?

And you are correct the returns as is dont look great. I was thinking equity and possibilities down the line for retail / apartments. But what I am learning here is that isnt the best way to get into real estate. 

Originally posted by @Billy Maloney :

@David H. I would consider looking for your own 4 plex for that money. You may even consider moving into one unit. I have been seeing 4 units on the MLS between 650k in a not great area, to 850k in a ok area in Los Angeles. If your open to any area in So Cal then your chances of finding something just under 800k and putting 20% down are greater.

 Have you considered investing outside of California? Curious what people are doing who are smarter than me. I have listened to a bit of podcasts and its mentioned to be careful when you start making more money, which our business is. 

Is the property delivered vacant? If not, and this is a rent control area, you need to budget to relocate the tenants.

Concerned your insurance estimates are low. Regular insurance alone on a property of that value can easily be $1500-2000... and, if you're in a FEMA flood zone with four structures, I'd expect you'll end up considerably north of $2,000 / month.

Have you checked on the utilities? In LA, for a multifamily dwelling, it's very unusual for tenants to pay water / sewer... that's usually on the landlord.

Overall, I think the yield is sub-par. On the other hand, large lots with (partial?) commercial zoning near the beach are probably good bets over time. So, I think it's not a crazy deal. But you should get very comfortable with the rents / expenses... it's ok to do a deal with a low yield, but you want to go into it with your eyes open.

First off Im not smarter haha and yes I have already invested out of state for my first and only deal at the moment.  I bought a 5 br 3 ba for 150k in Memphis TN, so at that price imagine how many houses you could get a hold of with your money.  Im not a very experience investor so I bought my from a "turnkey" company.  Im now working on figuring out what my next step will be.  I still hold on to some hope I will find something more local while studying other markets. 

(617) 270-9592
Originally posted by @Moses Kagan :

Is the property delivered vacant? If not, and this is a rent control area, you need to budget to relocate the tenants.

Concerned your insurance estimates are low. Regular insurance alone on a property of that value can easily be $1500-2000... and, if you're in a FEMA flood zone with four structures, I'd expect you'll end up considerably north of $2,000 / month.

Have you checked on the utilities? In LA, for a multifamily dwelling, it's very unusual for tenants to pay water / sewer... that's usually on the landlord.

Overall, I think the yield is sub-par. On the other hand, large lots with (partial?) commercial zoning near the beach are probably good bets over time. So, I think it's not a crazy deal. But you should get very comfortable with the rents / expenses... it's ok to do a deal with a low yield, but you want to go into it with your eyes open.

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Hello Moses,

I did not get a quote on this property for insurance. I asked my partner who is going to put down the 1.25 million cash what he estimated these to be and put them in the calculator here. He said $2,000 a year.  However, I myself thought they were low but didnt expect them to be 2,000 a month and would be a huge problem. 

The property is delivered vacant. It was owned by a church and currently sits empty. No rent controls in this area so I am good there, but just a few critical unknowns, because, well I am just not as educated yet in this space. 

Where can I become better and finding out utilities, sewer, electricity for a property? Do I have to get this information from the seller or is there another way that you do this (Calling utilities etc... I need to get better at doing my due diligence and getting a process.)

Zoning is mixed use commercial - apartments / retail. 

I mis-typed... Not $2,000 month. If I had to guess, I'd put insurance in the $3000-3500 / year range.

You can and should ask the seller for all utility bills. However, you should not rely on what he tells you. Instead, you should: 1. Count water, gas, electrical meters at the inspection; and 2. Call all of the utility companies and ask.

In general, you should create a spreadsheet which you fill out for each deal before making the go/no go decision.

I am not going to disagree with the more experienced investors here. Random thoughts from a far this looks like a vacation rental or at least one or two units allocated for that could get the cash flow going.The future value is where the jackpot might be. What would 24 condos be worth there? or luxury apts or mix use? The initial cash flow I am not as concerned about considering the infill future part of 15,000 sqft nearest the beach. ( Mission Beach area I am thinking) 1 mil seems like a bargain for the land alone. IDK the details so random infill location thoughts yes. If this is off market I bet you could flip that to some SD vrbo dudes real quick. It sounds like it could produce 200k annually as straight vaca business. I would disagree that this is not the best way to start. Location is primary and fundamental. That part you nailed it. Good luck!

Originally posted by @David H. :

 The property has been owned by a church and they didnt do anything with it. Lots of room for a value add, with a very tight rental market. It wouldnt be hard to rent these as they are two blocks from the beach. I didnt add in Vacancy and Cap Ex because I dont know how to do that? Any advice on this?

    And you are correct the returns as is dont look great. I was thinking equity and    possibilities down the line for retail / apartments. But what I am learning here is that isnt the best way to get into real estate. 

 I budget for a 4% vacancy rate, but I think that is too low for most situations.  I have mostly long term tenants, so I have been lucky with that so far.  I think others budget for a 8 to 10% vacancy rate.  You might want to check with landlords in your area to see what vacancy rates are in your local market.  Repairs, maintenance and Cap Ex would depend on how old the property is, how well your rehab is, and what the quality of tenants will be.  I used 8% in my post which would be $125 per unit per month.  Most months you will spend very little, but one call for an AC repair and you could easily be out $500.  You have to budget for that as well as for big ticket items like a new roof, new hot water heater, etc.  My average is more than $125 per unit, but I figured with a $100,000 rehab you were going to start off with all new appliances and you might get away with 8%. 

You just have to decide what your goal is.  If speculation is what your looking for, then consider it.  But if you're after cash flow, it's not there.               

Yeah I was mentioning out of state. You'd get better returns buying a turnkey duplex out of state and owning it free and clear, that's a lot of money to spend and you can definitely get a safer deal with a lot less risk. Like there's duplexes in many second tier cities where you can get a small multi family for that, that would be a lot less risky.

What I find attractive about real estate investing is being able to leverage your money.   You can put down 10 or 20 percent, and control the entire property!   You could put  down 200K on a million dollar property, and control the entire property.  All of the rent proceeds would be yours, and all the appreciation would be yours. 

In this case, you have not leveraged anything.  You would be putting down about 10 percent, and that is what you would be getting -- a 10 percent interest.   If you are going to invest in real-estate, then leverage your money!

@Vincent Crane I guess I would respectfully disagree a midwest 2nd tier duplex is going to return more percentage than a San Diego beach location. This would be a first. Total returns include equity gains. The top five Cali areas where landlords made the most money"returns" since 2009 are SJ, SF, LA, San Diego and Riverside. Those are also the top five for the nation. I know the bp vibe is 2%. This is not normally how investments are evaluated. I am sure there are great opps all over but I don't think a 2nd tier duplex has a chance of better returns or less risky unless there is a pot of gold in the duplex basement:)

Updated almost 3 years ago

Percentage was the wrong word...I meant mula:)

@Steve Vaughan

and on the flip side minority partners for the major partners are a pain as well and very risky. the worse dust ups I have ever gotten into is when like a bonehead I gave what should have been staff a small ownership interest in the company... that is something I would never do again.. they can wreak havoc and don't really have an interest.. this person at least is putting in real cash.. in an LLC with spelled out operating agreement you can't really just vote to not pay someone.. He would need to protect himself in that regard.. a solid buy sell agreement would be necessary

@Matt R

Well with equity definitely, I was just speaking from a cashflow perspective. As much as I'd love to have the equity and appreciation a SD beach house has to offer 30 years from now, I couldn't afford it, and it wouldn't cashflow until it's paid off and then I'd need all that equity to pay for my retirement, I'd like to see some cashflow before then. Also since 2009, the west coast has the most valuable houses so as the market recovered they gained back a lot of the equity they lost from the crash, so that's a big part of it as well.

@David H. do yourself a favor and search "cashflow vs appreciation" on BP forums. There are a lot of insightful comments, but the upshot is "cashflow pays the bills but appreciation makes you rich."

I'm not in the SD market (I invest in SF) but your deal sounds like it has ALOT OF potential. The future development could be a game changer for you, especially if eventually you could build condos there. The commercial store idea is also interesting. I also like the idea of doing partial or all airbnb rentals there- 2 blocks form the beach is killer vaca rental potential. 

You do have a lot to learn though!  Is it only 1 partner?  Is s/he experienced in real estate?  If so that could be a great combo for you to learn from. The vaca rental would absolutely give you killer positive cash flow. But it is work to manage it, and you need to be efficient at it. Do you work full time?  If so, you guys may need to offload that to a 3rd party. If you have the time and desire to learn, offer your partner to take on and manage the vaca rental, but make an agreement that you will get compensated, as its a lot more work than long term rentals. 

Don't get caught up in the short term return in cash flow  this deal has potential, but you have serious work to do wrt: is the partnership a good one?  What is the path and development potential?  How could vacation rentals (or partial) play a role?

If those 3 questions at least reasonably check out, I'd take this over a turnkey in flyover states any day!

@Amit M 

Thank you for your perspective. I learned a lot by researching cashflow vs appreciation. And yes after reading all of that, this deal would have been great had it been a couple years down the line.

Turns out others wanted this property and it boosted the purchase price and reduced my ownership interest. I wasnt ready to put in 150k of my savings for an ownership interest under 10%. Even that number was hard to swallow.

But what I did realize is currently I am looking for properties that can cover my expenses, and eventually down the line I will shift or sell off assets to look towards cash flow. But that thought process alone was helpful.

To answer you questions the partnership seemed good, but there were some questions there that I couldnt clear up. As the partner wanted to do more rennovations and I wasnt sure by him putting in money how that would also affect my ownership interest. To many unknowns. The development potential was great, you could put in a small hotel or apartments. Would have been fun with great retail space down below.

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