Nervous about closing on this property

[Christian Johnston]

I’m in San Diego. My goal with purchasing a property is to reduce my rent to 2k or less/month while starting my real estate portfolio.  I plan to hold the property indefinitely and to eventually refinance it for a down payment on another property down the road. It’s a $1.05million property with 4 units. 3,2,2,2 and brings in 7k rent. It’s in San Diego in a high appreciation area (Superba street). I’m getting a 4% sellers credit as well. Calculating out expenses for this property, looks like a negative 200-700 a month. It’s newly renovated and the vacancy rates are low in this area. So capex, repairs, and vacancy shouldn’t be a huge cost. My rent each month will be 1800, below my goal. I want to pull the trigger but wondering what BP thinks?

[Justin R.]

Hey @Christian Johnston - Part of investing is figuring out what to do in situation like this where different people give you different advice.  The thing is everyone is (likely) being truthful - you need to parse through it and figure out the angles and why people reach whatever recommendation they have.  Then weigh it accordingly.

Before I provide some data (that I hope you'll find useful), here's the context:

I own and manage a "handsful" of small MFRs in greater San Diego.  Multiple zip codes.  Working class tenants, two properties in locations that draw 4-year degreed "professional" folks.  Almost all major renovations to get them to great condition and desirability.  I feel comfortable telling my sister that she could model a RE investment portfolio using the following:   

1. Over the past 7 years, my expense ratio on 3-4 units has averaged 30.3%.
2. Over the past 3 years, my expense ratio on 3-4 units has averaged 27.6%.  This is the impact of rents rising faster than expenses.
3. I self-manage and pay myself a 6% all-in management fee.  This is just about market rate here.
4. To detail what's included in those numbers, here's a snippet from one property's 2020 budget (note this utilities are sub-metered and paid by tenants, which makes a big difference in property performance): 
5. A 0.7% rent-to-price ratio on a ready-to-rent property will generally make me enough cash-on-cash return to make it worth my while.
6. I target 0.8%+ after rehabbing or further developing the property.
7. These percentages are floors - the point of the game, regardless of what I start with, is to raise those 5-20 BPS in the first couple years. 

I didn't read through the rest of the thread, so no opinion on whether this property is a good pursuit or not.  My only two observations are:

• We need to make choices based on the concrete opportunities in front of us, not on theoretical opportunities.  If the property cuts your rent a bit, earns you equity over time, and teaches you something, it's providing value.
• If I were buying, I would want to be doing so from someone who flipped a property, has hard money on it, and is having an "Uh oh" moment looking at the horizon.  I know the feeling because I've got one property on the market at the moment.  :-)

Good luck.