Rocklin · Member since 2017 · 115 posts · 37 votes
Hi BP,
I am still new at this whole investing. In my other post, I had decided to go for an SFR and aim for an appreciation in Sacramento area.
I have not found a property yet. However, as I was looking around, I saw a lot of multi family units for sale with tenant occupied.
Looking at the numbers , the majority of them makes good cash flow (in my opinion).
I also looked at Stockton after reading @wes blackwell 's post. The cash flow is even greater for multi family units.
So, Why are these for sale???????, If it does making that much cash flow every month. I dont understand why people are selling it.
I appreciate the insights on this.
Thanks!
Tony H. Well, there are a vast array of hypotheticals:
1.) They bought for appreciation, believe Sacramento maybe have peaked and want to 1031 to a new market.
2.) They bought the SFR (or duplex) as an entry point and want to sell (1031) into a 5+ unit on the same market.
3.) The homes are in rough areas where projected rents are far different than collected rents.
4.) You are underestimating the totality of expenses that go along with the subject properties.
5.) They bought the property to improve and flip (i.e. they just aren't buy-and-hold investors).
6.) It was grandmas home, she passed away, and the kids don't a.) want to be property mangers or b.) would rather sell (than rent) grandmas house.
I'm sure I could think of a few others. The reality is that it's likely all of these and more scattered across the market.
Tony H. Well, there are a vast array of hypotheticals:
1.) They bought for appreciation, believe Sacramento maybe have peaked and want to 1031 to a new market.
2.) They bought the SFR (or duplex) as an entry point and want to sell (1031) into a 5+ unit on the same market.
3.) The homes are in rough areas where projected rents are far different than collected rents.
4.) You are underestimating the totality of expenses that go along with the subject properties.
5.) They bought the property to improve and flip (i.e. they just aren't buy-and-hold investors).
6.) It was grandmas home, she passed away, and the kids don't a.) want to be property mangers or b.) would rather sell (than rent) grandmas house.
I'm sure I could think of a few others. The reality is that it's likely all of these and more scattered across the market.
Hi Andrew Johnson thanks for the info. I was thinking of more like investors are liquidating in hope for the downturn to buy more. But who knows!
Some of these 'good cash flow' properties have been on the market for some time. Some are even more than 30-45 days.
Is it really that hard to sell multi units?
I have sold a fourplex and a few SFR in the past year. They all had good cash flow. The market is hot so I'm pulling out of the area and moving the money into 1031 exchanges and loans. It's a good time with the market as hot as it is.
I've regretted everything I've sold. But I've done it to cash out and buy bigger and better properties.
Properties that have good cash flow sell every day. That doesn't indicate anything other than an owner has some reason to sell.
I've also bought properties that "on paper" did awesome but were not managed well (which is why I ignore a advertised "CAP"). I buy it. Fix operations. Get NOI where it should and buy sell it to someone that wants a turnkey deal.
Then off to the next.
@David Hutson - do you find it difficult to use a 1031 in such a hot market? I've found identifying potential properties nearly impossible as quality deals don't last...how do you make it work?
I listened to this week's podcast. They talked about" culling the herd" which I think i want to do. Basically, get to 20 cashflowing properties (or whatever number works for you), then swap out the weakest for stronger properties over time. All my properties cashflow right now, some better, some worse. But, selling off one that cash flows $200/mo ( and I'm usually a little under market by design) and replacing with one that does $500/mo makes sense.
Another reason is they need a pile of cash. If you're unemployed the $500/mo helps, but the money in hand may be better. This is even more true with a mortgaged property and tenants that aren't paying, the owner can take a liability and get cash.
A lot of investors are entrepreneurs. They may have built a great cashflowing property and now want to move to another venture.
Sometimes the sellers just want to change direction or their targets have been met. Other times there may be balloons involved (I had a seller-financed triplex owned by a trust that was expiring) or higher rate mortgages exist but refinancing isn't worth the $3500 or the pain. Just 10 years ago 6.5% was a great mortgage rate and I still have about 4 of them. Guess which ones I'll be selling next?
I'm selling my least favorite houses as they come open and first-time buyers are owner-occing them. Change in purpose. I also prefer multi's now. Change in direction.
Tons of reasons as @Andrew Johnson mentions. The key to buying with instant equity is finding the sellers that have a pain point of some kind. Distressed owner situations. Help them as you help your balance sheet. Good discussion!
Also, a lot of these multi units that I am interested in have tenants occupied. It says do not disturb tenants.
It sounds crazy to me to buy something without looking the inside condition.
Is that normal?
Do you buy tenant occupied property without looking the inside?
Tony H. Many have answered you question with very legit scenarios however what I would say to you right now that I would not buy for a appropriation because the market is too hot & I believe value are at the top and going to come down and fast but you should buy for cash flow. If the market tanks and the sky falls and your properties are making you money you're not going to care what the value is, the value is that it's making you money. Always, always and only always buy for cash flow, everything else will take care of itself in due time.
Agree with a lot of what was said above.
Tony H. My situation was described above by Andrew Johnson
I'll go into a bit more. I'm selling a property right now that cash flows a bit more than 100k a year. My initial investment was 35k.
It's appreciated a million more than a paid for it.
Problem is I want to do the same thing....but something and build value. I've been doing that for ten years with smaller properties. at this point I've gotten tired of refinancing every few years for 100k. I want to buy something big and repeat what I did in the past. Only way I can see at this point is to sell.
@Tony H. - Not direct answer to your question but very important while buying. I go to investment groups meetings find everyone selling you something. I changed my pitch from buying to selling I find myself standing in a corner.
My brother in law had problems with good cash flow. He lives and invests in CA, though he has a 1BR paid up condo in NYC for his daugher who goes to college here.
To start with, he's a doctor, his wife is bank exec, together they make over $400K a year. She got a promotion recently some their income could reach $500K.
My mother in law is into REI, so the whole family started investing in earnest 30 years ago. He invests mainly in San Francisco, and about 10 years ago, when he did REI for 20 years, rising rents had cause the cash flow to be intolerable. Don't we all wish we had that problem? Because in CA, when you add federal income taxes to state income taxes, it's one of the highest in the nation.
What did he do?
He 1031 the properties he had into other properties, in higher priced areas, where the appreciation is greater, making sure he start off with no cash flow once again. Cash flow is good if you could keep most of it. When you push all the upside of your REI into appreciation, they can't tax you till you sell. If you keep it long enough, leave it to your heirs, with the stepped up basis, you escape capital gains taxes all together.
After the 1031, the properties he owned was in the neighborhood of $3 million. CA also RE went through robust appreciation in the last 10 years, over 50%, so trading cash flow for appreciation was the right call. If he didn't do what he did, he'll be half a million or more poorer.
He could live like the rich and famous, but he doesn't. He just doesn't believe half of his cash flow goes to taxes.
Just want to add, you have to be in the top 1% to understand why having too much cash flow is bad. The rest of us just couldn't wrap our head around it. Just ask Mitt Romney about the stupid 47%. LOL.
So, Why are these for sale???????, If it does making that much cash flow every month. I dont understand why people are selling it.
I appreciate the insights on this.
Thanks!
Like many investors I work with they might just want to be done with the daily hassles of property management.
Also, if their assets are all in one geographic location, there can be that ever-present “what if’s” nagging the owner. What if there’s an earthquake? What if the tenant leaves?
Leslie Pappas with a pretty good return, why cant these investors have property manager takes care the majority of the work?
I know it reduces cashflow, but if they have multiples, i see it is still worth the costs.
Thanks for all others who replied. I am interested to see a few multi units. However, most of these have tenants. And the listing says do not disturb tenants.
Does that mean that I wont be able to see the inside condition?
Thanks again.
1.) Your analyses. Is the cash flow really that great? As a current Stockton property owner I keep a close eye on the market and I would argue the current cash flow is not that great. Unless you compare it with places where there is no cash flow (like the East Bay). It might be the best place for cash flow that you can physically drive to, but I'd say that its definitely not the best place in the country for ROI on your money right now.
Also could it be that you are underestimating the capital expenditure that you are going to have investing in lower income cash flow property? Nobody likes to admit this but CapX is hard to predict over a shorter period of time and is a real, real cash flow killer...
2.) Return on Equity. This one took me a few years to figure out myself..:) I was always looking on cash on cash returns... So here is a real example: I have some properties where I am getting a cash on cash return of almost 20% per year now. Great right?
Or, maybe not... Since property values have gone up so much since I bought it, my return on equity in the property is down to about 3%... So is keeping that property the highest and best use of my equity...? Heck, I can private lend that equity into first mortgages at 12% annualized and have a 99% passive investment (buy and hold at anything less than a huge scale is not so passive). Or I can stick it into a syndication with experienced partners and get 8% preferred with an outlook of getting up to 30% Cash on Cash over the run time of the project...
3-99,999,999) :) Why does anyone do anything?:) There are a million reasons why people do anything, but you you really care? If it is a good deal for you, that fits your criteria and passed due diligence, buy it!:) The only reason why you might care is because it might help you structure the deal in a way that makes sense for both parties, but if you are looking for on-market deals, good luck with that:).
Final thought; try not to think of a property sale as a zero sum game (with a winner and a looser). Everyone is at a different place in life and therefore has different needs and wants. If I am a 70 y/o multi millionaire who wants to spend more time with his grand kids, my priorities are going to be different from those of a 29 y/o who just found out the rat race is BS and is willing to do a lot of work to get out of it.:)
Also, a lot of these multi units that I am interested in have tenants occupied. It says do not disturb tenants.
It sounds crazy to me to buy something without looking the inside condition.
Is that normal?
Do you buy tenant occupied property without looking the inside?
Hi Tony - Yes, that is exactly how it works with income property. It is not like buying a private residence where you go and tour lots of properties with a realtor...
In the residential income market you put in an offer "Pending Inspection". The first time you look inside is after you have it under contract and show up with an inspector that costs you about $500 or so.
The good news is that if there is anything at all you don't like you can back out, and you will only loose the money you pay to the inspector, and maybe the respect of your realtor:). This is business, not pleasure:)
Thanks Chris V.
And all others who patiently answered my noob questions lol.
I have been on the edge of the pool, i should probably take a step forward.
Leslie Pappas with a pretty good return, why cant these investors have property manager takes care the majority of the work?
I know it reduces cashflow, but if they have multiples, i see it is still worth the costs.
When it comes to popular California markets you can get terrific appreciation, but not great cash flow. My average client is pulling a 2%COC on their own before we start helping them. So a PM is not an attractive option. Also, they have been managing the property for quite some time and it's what they're comfortable with.
What is usually comes down to is the seller has other plans for the money. Maybe he has medical bills he needs to pay off, maybe he wants to take the profits and start a bakery, or maybe he just doesn't want to be a landlord anymore so he's selling the property.
Like @Chris V. said, don't worry about that too much (unless the seller gives you reason to believe that they are hiding something). Just focus on the deal itself and whether or not the numbers make sense to you and meet your requirements.
Also, if you're ready to take the next step forward you probably need to begin working with an agent. They can pull MLS Data for you, get you in to see some of those properties where they allow showings, and will be able to answer most of your basic real estate related questions.
Plus, you'll need one should you find a property you want to put an offer in on anyway, so it's better to get the conversation started sooner rather than later.
@Wes Blackwell Yep! I already have an agent. I am having him to look into a duplex in Citrus Heights this Friday.
He said the seller's agent already received multiple offers, but the duplex has been on the market for 54 days now. So, it sounds like those offers are in limbo?
If you're finding lot of good cash flowing multifamilies in Sacramento, I suspect you are leaving out a number of expenses in your analysis. Feel free to post an example of what you're looking at, but here's a quick example:
6336-6338 Bonham Circle; Citrus Heights
$295,000 plus it needs ~$30k capex
Rents are currently $2175, and could be $2400 after updates.
Expenses:
$250k loan, 15 year fixed @ 4.6% = $1950/month
Water/sewer/garbage: $200/month
taxes: $300/month
So this example is already negative cashflow before maintenance & management.