All Forum Posts by: Christina Labowicz

@Arianna Crawford sounds like you have a good problem on your hands!
Your answer is discovered through a math equation. 

Compare what your current return on your equity is to what the potential return on your equity would be if you rolled it into something else. 

You can look at hotpads.com (craigslist, facebook marketplace, zillow) and get a sense for what homes like yours rents for and ask a local realtor what the value of your home would be right now. Subtract the debt that you own from the current value, you will find your equity. Now divide the NOI from the equity and you will have your current return on your equity, and compare that to if you rolled the same equity into a duplex or triplex.

If you are looking to build wealth, my hunch is your equity would be put to work better in a multifamily than a single family. If you are looking for "safe" cash flow, you could keep it as is. Alternatively, you could borrow against the property and use some of that equity to buy another property. 

@Sid Sriram

You can utilize the FHA loan 3.5% down for a duplex, but a triplex or fourplex will have to pass what is called the "self sufficiency test." which means that 75% of market rental income needs to cover your loan payments (which include payment, interest, taxes, insurance and mortgage insurance) so it is extremely difficult to find 3-4 unit deals that pass the self sufficiency test in San Diego County so a duplex (or duplex with an ADU or SFR with ADU) will be your main options. (Unless you have the VA loan, in which case, VA buyers don't have this rule to follow).

A trick I have found and proven that's easiest to get a launch into real estate investing is "flipping" 2-4 units. This is where you buy a property that is under-market rent and do turnovers to the units to achieve leading market rent in the area. You just increased the income, which means you increased the value for a buyer. You roll that equity into larger and larger deals. The higher you scale the more your return compounds.

I help new investors accomplish this as well as am doing it myself. I bought a duplex last year with this model and am going to be listing it within the month with the new rental rates and rolling it into a four unit building to do the same. I work with long term owners who own hundreds of units here in San Diego who started with a duplex following down this same path. Unlike my coworkers at my apartment brokerage I help new investors get into this game, so would be happy to connect further to discuss. I will private message you for more details. 

Best,

@Anthony San

We are 140,000 rental units short of the current rental demand and need to build an additional 20,000 units to keep up with new demand. Last year we built 6,000 units. We were in Covid, yes, but the previous year it still hung around 10,000 units short of building what additional units we needed to. Life Science and Biotech will keep drawing strong employment to San Diego.

Only the top 26% of the community can afford houses, which leaves the remaining 74% renters. 

My investor clients are all still buying properties, in fact they are buying now more than ever. There is a flight to safety which housing = safety, especially in San Diego where supply has not and will not meet the demand, for years and years to come. 

So, I think it's safe to say that if you buy now you will be better off than if you didn't buy, or if you waited around to see if the market "softens." The 35 year brokers at my apartment brokerage all joke about their clients always wishing they pushed the extra 1-2-3% to buy a deal they thought was "overpriced" and looking back its quadrupled in value. Our clients here in San Diego only regret the deals they didn't buy. 

Also, we are at the forefront of inflation so it's better to own a hard asset now rather than after. If you can owner-occupy it even better, since you can raise that unit's rent to market upon moving out in the future. If you have capital to do a "substantial upgrade" even better, because you can evict tenants and obtain leading market rent (once the state of emergency is over). 

More units is better than less. You can buy a single family home for $650,000 or you can buy two dwellings for $325,000 each. 

Feel free to private message me for more details. There's a lot more to it and I'd be happy to go through it with you.

@Anthony San

Hi @Kevin Phu, it sounds like you still have the VA loan on the first property that is now being used as a rental, is that right? Have you listed the house you and your wife are living in as your primary for the new loan?

With VA loans it is possible to take 100% of the value even at the new assessed value. So, you may indeed be able to tap into the equity while keeping the VA on it. $172,000 would be enough cash to purchase a duplex in San Diego County and, as you've experienced, it's hard to beat the appreciation here.

Let me know if you'd like a good lender resource here in San Diego. My contact is doing one of these 100% VA refinances as we speak.

@Shane Farmer PM sent!

Hi @Toby Johnson, I have an excellent lender for multifamily in San Diego. As you know from experience this is the first place to start. I'll private message you with more details. 

@Allen Scoging You mentioned you have 20% down, it sounds like you could use your 20% down to take to a suburb that would provide better cash flow and would not have to live there. 

I am in the San Diego market and we run investment summaries to show what the total cash-on-cash return is before and after principal pay-down. Some investors here will leverage 95% financing just to put their name on the deal and collect the appreciation. If they take a hit on being out of pocket monthly it's because they ran the numbers and, as long as the out of pocket is going towards principal pay-down (which our cash flow sheet depicts) then they'll be ahead when they sell, they'll get everything they put towards principal back in the sale and will have taken advantage of tax savings and appreciation. 

Of course, an ideal situation would be to cover all expenses and put some cash in your pocket each month, and there are certain suburbs that are more likely to do so (C class), but not all investors are willing to go to those areas especially when owner-occupying, so the latter is still a good option if living there and location is priority. Although, it sounds like a good situation for you if you have 20% down is to just buy a duplex in a C class suburb and continue renting. 

Hi Gabriel, 

In a general sense, the rentability of the units will be easier with a garage, but a garage will only generate about $5K-$10K in additional value each, whereas if you convert the 2 garages into a 1BR ADU, with market rent in Bay Ho, call it $1700 monthly and $20,400 annually, would increase the value by the multiplier of that income (call it 17GRM for Bay Ho), would increase the value from an income standpoint by $346,800.

If you get permits and do all the legwork to convert the garage but do not have the unit "rent ready" then you are leaving money on the table for someone else to cash in. 

Feel free to reach out to discuss further. 
It would be advantageous to run the numbers and see if it's better to leave that unit vacant or if your return would be greater by establishing a strong rent prior to the sale, as well as what the best strategy is for the new capital, which I'd be happy to go through with you. 

Best,

Christina Labowicz, Apartment Advisor

ACI Apartments

Hi Jason, 

Have you utilized an FHA loan already?

FHA 3.5% down would be a good loan program to use so you can save any remaining capital on improvements.

In a general sense, flipping to raise capital to put into larger deals is a good path towards financial freedom. 

Investors in San Diego in the multifamily world used to do this by purchasing a property with under market rents, raising rents to market and rehabbing the units that move out. Because the owner raised the income, they simultaneously increased the value. They would do this until they have enough capital to put towards a larger deal and hold it for longer term, depending on their investment strategy, and return to "flipping" multifamily in order to save for their next big deal. 

With rent control and various other layers of law now in place, it has made this strategy more difficult, although not impossible. 

The simplest starting method for a person with little starting capital, from my perspective here in San Diego, is to utilize a 3.5% down FHA loan (and/or VA, if you have it), seek out properties that are slightly under market rent, give termination of tenancy to the unit with the biggest delta of rent vs. leading rent in the neighborhood, move into that unit while you renovate it, and then rent the unit at leading market rent a year or so when you move out. By this point, your property will have appreciated some, you've increased the income and increased the value. Maybe if you're lucky you were able to negotiate with the other tenants to get those units up to market rent as well, further pushing the value upwards (of which there are a few tricks, although the deal would need to make sense without this factor as it is not guaranteed. There is also an ordinance in place that prevents termination of tenancy for owner occupancy purposes until 60 days after the state of emergency has lifted, which is expected to be cleared within the year and would just need to work around this as well).

Once this is accomplished, you can then decide if its better to let it sit as is and generate its own appreciation and rent increases, or exchange the profit into something larger. We run 10 year projections on deals so you can tell which strategy would be a better play in the long run. 

Feel free to reach out for further inquiry or discussion!

Best,

Christina Labowicz, Apartment Advisor 

ACI Apartments

Hi @James Hedgecock and @Dan H. (who I already know is knowledgable), I'm happy to see you are taking advantage of the ADU play here in San Diego.

I am shopping for my first investment purchase. After thinking long term investment strategy I landed on the ADU plan, except the purchase and construction of ADUs. There are a plethora of SFR so not as limited to homes with current ADUs, but are limited to land size and purchase price that makes sense for cash flow after. I did come across a great lender who can do the funding on this. They fund initial purchase, construction loan, and then refinance afterwards. I am curious what your lending looks like after the fact, James. I typically work with 2-4+ investors/owners so really haven't come across many people capitalizing on the ADU laws, I would love to collaborate at some point!

My timeline for this strategy is about a year out. My partner and I have our eye on a triplex that we will house hack the next 6-12 months and cash flow once we move out (based on 41% expenses), its (2) SFR + (1) studio. We are purchasing that VA, and then once we move out and get tenants in will use FHA to purchase a SFR with a lot size big enough to support the ADU, get a construction loan, etc. According to my lender this is a doable plan. (Although I am still unclear how long we need to show tenant income before using it to qualify towards the FHA purchase, my lender has lead me to believe it will nonetheless nullify the VA debt as the income from the property will cover and then some), so can at least be back to square one with purchase price.

Like I said the investors I work with are years ahead of me so curious your thoughts on these details.