Hello BP fam, we are supposed to pull our contingencies tonight/tomorrow for a quad in Long Beach CA. Given the state of the country under Coronavirus, I am really nervous about what the economy is going to do. This quad is a good deal however it needs a lot of work about $100k and it will be completely vacant meaning I’ll need to fill all 4 units as soon as I’m done. Which will be in about 60 days. It’s hard to guess what our country much less our economy will be doing in 60 days but it’s Keeping me up at night. Would you freeze the entire thing and hold off and potentially lose the deal? Or would you push forward? I’ve got estimates in place for construction and all my numbers ironed out but finding tenants to paymarket rents in a recession is what worries me most. I know I’m asking you to look in a crystal ball but I figured some experts on here might have some sage advice. Anyone with experience in the Long Beach market is greatly appreciated! Thanks in advance!!!

Originally posted by @Tammy Skeath :

Hello BP fam, we are supposed to pull our contingencies tonight/tomorrow for a quad in Long Beach CA. Given the state of the country under Coronavirus, I am really nervous about what the economy is going to do. This quad is a good deal however it needs a lot of work about $100k and it will be completely vacant meaning I’ll need to fill all 4 units as soon as I’m done. Which will be in about 60 days. It’s hard to guess what our country much less our economy will be doing in 60 days but it’s Keeping me up at night. Would you freeze the entire thing and hold off and potentially lose the deal? Or would you push forward? I’ve got estimates in place for construction and all my numbers ironed out but finding tenants to paymarket rents in a recession is what worries me most. I know I’m asking you to look in a crystal ball but I figured some experts on here might have some sage advice. Anyone with experience in the Long Beach market is greatly appreciated! Thanks in advance!!!

if it’s a great deal and you have the funds go for it. This situation will pass. If you are nervous you can always sell your contract to another investor but if it’s a great deal today it will still be a great deal in 6 months.

Not everyone's job is affected by an economic downturn. Medical, emergency services, law enforcement, prison guards, most govt. employees, military, etc. These people will continue to work and have income and they all need places to stay. So I'd move forward. Probably by the time your property is completed, this virus will be past us but the economic carnage may remain.

Thanks guys! @Greg Dickerson @John Teachout that’s what I’ve been thinking but the encouragement is appreciated. 

@Tammy Skeath   I agree.  I deal with a lot of investors everyday.  There is a lot of uncertainty, but just like the pandemics of the past, this will pass and things will recover.  

People are still out buying, selling, renting and moving.  Maybe lease up takes an extra month, but at the end of the day, if it really is a good deal, an extra month of vacancy won't effect things.

I don't even think a recession will affect the rentability of a unit if it's in an area where there are tons of single-family homes (which is almost all). When you own and hold multi-family properties or apartments, hiccups do come with a recession, but in many markets, it provides you access to better renters over the longer-term who are getting out of being homeowners. I always think of a potential deal like this when something similar is happening - if I walk away from this deal, will another savvy investor snap it up right away and will I be kicking myself later? A four-plex, even with repair, can be solid. Maybe having vacancies all through during this time is just what will work.

What is the class? A class "c" will probably have the bumpiest ride due to lower income folks being hit hardest by this.

Last recession vacancy went up to 10% but rents flatlined and did not go down nationally. Does your model still work with 10% vacancy and say a 10% rent reduction? Does your model still work with these new parameters?

You are wise to be concerned because the landscape has changed and no on knows what lies on the other side, and this is a perfect example of why you should buy value (financial cushion) and not count on appreciation in r.e.

@Tammy Skeath

I am not in California. But I'm looking at this and I'm wondering if I'm reading right here, given all the encouragement you're getting from capable people. This quad needs $100K in work and you plan on getting it all done in 60 days? And then you have to rent out the four units pronto? Looking at your profile, this is also your first major rehab, although last year you had a spec build done.

We know nothing about who you have working on this -- in the best-case scenario, it's the same people who did the spec build and you have significant experience working with them. Also in the best case, these people are really sure that $100K is going to do it for this place.What we do know, according to your initial post, is that "I’ve got estimates in place for construction and all my numbers ironed out..."

I suspect that the challenges of getting $100K of work done in 60 days during a time of pestilence in a place like California may be significantly more difficult than you're giving it credit for. If the circumstances were different and the quad was here in western Pennsylvania and needed that much work in the 60 upcoming days, I would be worried. Deeply worried. I think you're counting on an awful lot of things going well in the construction phase that might not necessarily do so.

I am looking at doing a minor rehab on a rental we just purchased out of state, in a small community. The local hardware stores are already running lean, what with China imports down. Last I heard, there was no drywall at the local HD. I can work around the little stuff, so it won't affect us too much. And our renters are well off retirees. 

There are great deals to be had during times like these, and people still gotta live somewhere. But for right now, we are not looking at properties that need a ton of rehab,  in communities where the renters are going to be struggling with paycheck to paycheck issues.  That's just our comfort level as very small, starting out noobs.

@Tammy Skeath The Covid-19 situation is not permanent, don't miss out on a good deal that will be profitable for you in the future for something like the virus that will soon be in the past. Good luck. 

Since this situation is morphing on a day to day basis, I don't have a lot of answers right now as to what the future holds. I do know that in just two weeks, we should be receiving rent on our properties and then I'll know a lot more than I do today. Our rentals range from B to C class. No section 8 or other "guaranteed" rents. Just a bunch of working people that live paycheck to paycheck. My guess is that we probably only have a few tenants that would have adequate savings to pay rent if they had a job disruption. This could get really "interesting" in a hurry. Meanwhile, we're hunkered down but have very little contact with other people in the course of our normal week other than activities that have been cancelled/postponed. Yesterday I moved firewood to the wood shed. Today I'm going to work on a refurb project. Just me and the radio... We just as of yesterday depleted all our financial reserves to purchase two properties (internal loans) so hoping this is short lived. We have a HELOC available if we need it. Hoping we don't.

I am a relatively new real estate investor as well...and agree with a lot of the advice on this thread...and would add the following.

1) make sure you have 3-6 months reserve in case you can't fill the vacancies.

2) if you dropped the rent below market ($100-$200/month) would you still be break-even or cash flow positive? 

3) have you considered registering the units for section 8? It might increase your rental pool, but you would need to really vet your tenants.

4) have an alternative exit strategy...sell, house hack, rent by the room, etc.

Thanks for posting, I am trying to close on a 3 unit as well, and have many of the same concerns.

Shawn
 

We tend to use hard money for many transactions and we proactively decided to bail on move-up rehab homes last Wednesday. The fear was that you could see that market dry up before we could move them or finish rehabbing. We didn't want to be left holding high end homes (for the area) paying high interest that did not meet a rental exit strategy so we backed out of those contracts. There was a realization that many people that went out of business 12 years ago were the custom builders and high end flippers and we didn't want to be sitting in that boat. This will also free up cash for entry-level flips and rentals that may become available as boomers and silent gen folks fail to weather the storm and their kids don't want their houses, so allowing us greater flexibility over the next year to snag these. 

Ride the storm out!  It's either not going to be the end of world (which, of course it's not) and you'll have a great deal under your belt or it will be and who cares at that point.

If you've done the math and won't go bankrupt if it's sitting empty for a month or two longer than anticipated then I'm not sure why to second-guess yourself at all; just keep going.  I would worry more about if you can get contractors to carry on, but I haven't heard of anywhere where they're not working still, so that shouldn't be an issue for the foreseeable future.

How long did it take to find this deal? What is the price? Perhaps run a test ad for your units coming up and see how the response is so you have an idea of what is ahead. Good luck! 

@Tammy Skeath you are worried about the virus, so it is fair to assume the seller is also worried. I would take it as an opportunity to negotiate. Tell the seller given the evolving economic disaster, the existing comparable properties do not apply for value. You are now taking on way more risk and you need to renegotiate the price. My guess is any seller with a vacant property under contract would be happy to negotiate to dump the property now. 

The biggest mistake I made during the last down turn was not noticing the game had changed. You are playing by old rules.

Thanks all!

@Joe Splitrock we did that and got a $50k credit on the initial offer. So the deal is solid. We would be cash flowing about 5% with all things included (MTI, vacancy rates 5%, and utilities etc) 

@Matt R. it was a pocket listing that thyme went to market at $800k we are at $750k

@Randall Weatherall I hear ya. Thx

@David Lee Hall, III very wise. This building is a C class. 

@Shawn Melis 1. Yes we’ve considered this and we could swing it with our rent from some other properties we have and from our personal income. 
2. Yes we would still be cash flow positive with a 10% decrease in rent 

3. We are really interested in Section 8 and are doing our homework. 
4. only other exit is to try and sell it after rehab. 

@John Teachout thanks for the input. We have a heloc we are currently tapping into to purchase this property. 

@Marlen Weber  thanks for the insight appreciate the optimism in the face of so much worry, currently...

@Gail W. I’ve checked with my contractors to make sure they have materials, so far everyone says no trouble on that front. 

@Jim K. I am concerned but also don’t want to let a good thing go bc of fear. California should bounce back... even if this sets us back a few months 🙏🏼  but I am trying to make sure all my bids are double and triple checked. Plus I’ve added a 5% contingency on construction bc it’s always more expensive in my experience. 

@Will G. it is a c class but Long Beach has chronic housing shortage so it’s more about how much will rents drop but the tenant pool is there. I set the rents at a fair price but I’m looking at figuring out what happens if the rents drop a bit although here in CA rents don’t drop too much they just may stay stagnant as they did during last recession. 

Thanks everyone!!! Really appreciate the feedback. 

@Tammy Skeath Welcome! Its all about the numbers. If its a true deal then nothing will matter and do it. If its a slim deal and numbers are real close well, be careful. The old saying, "you make the money when you buy" is appropriate here. Things will pass but if the number are there get on it. For me I have a "must be way below market value even after repairs" to leave a lot of wiggle room for exit strategies. Rents need to be the same in the event of an economic downturn. Good luck and keep us posted.

@Tammy Skeath the virus will pass and if it's a great deal now it will be a great deal again. If you have issues with vacancy in the height of the virus I'd do short term leases at really attractive rates to off-set your loss. In 3-6 months bump back to market rent rates! Excited for you!

I think sec 8 pays 2k+ a month for 2bds in LBC? Idk that might be your best bet.  Good luck!

Maybe the seller will agree to a 30 day extension? If you walk, what are the chances they find another buyer soon? And if it's already vacant, what's another 30 days for the seller to wait?

@Kiera Underwood thanks for the vote of confidence. I could use it! We pulled our contingencies and Gavin Newsom (governor just put a halt on all evictions) :/ 

@Dylan Vargas thanks! We are getting it for a value 🙏🏼

@Matt R. yes, very interested in Section 8.

@Ryan McKimm not a bad idea. I’m going to try and get an extension, at least for 15 days...

@Tammy Skeath have you listened to the podcast with Dr Joe? He is in D.C. and he rents to section 8 tenants, and tries to maximize bedrooms for max rent. I truly believe that to be a killer strategy, so maybe you can keep that in the back of your mind while you are rehabbing it.

@Ryan Proffit yes! I loved that episode!! Thinking about it a lot. Thanks!!

@Tammy Skeath not nearly enough information to determine if it’s a good deal or not. A 100k rehab won’t be done in 60 days