All Forum Posts by: James Kojo

I probably  should have put emphasis on the word "directly" in my statement: You can't directly capture forced appreciation in residential the way you can with commercial. Of course you're correct in saying that there are many value-add improvements you can do with residential which improve rents.

However, when commercial property is evaluated and underwritten, it's primarily evaluated by the numbers (NOI/Cap-rate), where as residential is valued via "comps", which is a lot more nebulous. So if you raise rents by $100/month on an 8-cap commercial building, you have now directly forced appreciation by (100*12)/.08 = $15,000, whereas on a residential, it depends a lot on what your neighbors last sold their properties for.

Of course, nothing ever works out that precisely in the real world, as caps also fluctuate, but caps are not as volatile as comps. Still, hopefully my example and explanation illustrates the concept.

Hope that helps!

James

@Lenny B. : Are you in a position to absorb 100% vacancy in these units? If so, your plan sounds fine. If not, then space them out.

Have a plan ahead of time of what rehabbing  you plan to do (scope of work), who will do it, the projected timelines, and who will manage it.

It sounds like you're in-line with the legal requirements. The tougher part will be the project management to maximize cash-flow during the rehab period (if that is indeed your goal.)

Hope that helps!

James

@Jordan Decuir : I'd be happy to swap war stories! Probably best done off-line. connect and PM me if you're up for it!

James

There's nothing especially "hard" about getting a commercial loan. I'm going through the process right now, actually.

The hardest part is finding the lender. For small stuff, you're dealing almost exclusively with local banks, so you either need to find a local broker who knows who will deals with OOS investors, or you need to get on the phone and start calling the banks directly. You can get referrals from your in-state network, or agents, or even here on BP. After you find one and establish credibility, then it's very similar: credit checks, appraisals, etc. 

The big difference is that you can (must?) use an LLC for commercial, whereas you can't with residential.

If you can find a deal that pencils out with 4 units and another one that pencils out with 6 units, I would be more inclined to start with the 4. Residential class is just a lot easier to do the financing and the insuring, and you're not getting much more scale at 6 units.

The downside is that you won't be able to directly capture any forced-appreciation on residential class (4 units and below.) LMK if you need me to clarify that point.

That all said, there's certainly nothing wrong with starting bigger. Real economies of scale are realized at 75+ units.

Hope that helps!

James

Depending on how sophisticated an operator the seller is, they may or may not care about the prevailing cap as much as they care about a bottom line number, especially if you're buying distressed or mis-managed, as high expenses and/or low income will skew the cap. I think it matters more to you as the buyer for your own underwriting.

How did I break into the multi-family space? I'll let you know when I get there! :)
But seriously, I'm relatively new to MFR, but I've been doing SFR for a long while, and I'm a life-long student who likes to share whatever little knowledge I have gathered. Hence my activity here in BP. I'm actually learning while I'm doing it.

There are multiple strategies for cracking a new market from soliciting brokers to direct marketing. I chose to go the broker route. Instead of listening to my amateurish attempts, there are 2 active members here in BP that also have podcasts. Check out @Todd Dexheimer's "Pillars of Wealth Creation". On episode #2, he talks about how he cracked the Cincinnati market. Also check out John Casmon's "Target Market Insights".

Hope that helps!

James

@Matt Shields : I know what you mean. I've had business dealings with exactly 3 general contractors, 2 of which ended in various levels of "disaster." As a result, any level of rehabs scare the bejeezus out of me. There has to be a business model in there somewhere that can mitigate those risks.

That said, it sounds like the general consensus is that my PM needs to be the person who manages that risk for me, since I can't be there myself.

James

This post is both pro-SJ and pro-Milpitas, but mostly pro-Milpitas since Bart is a near certainty.

I don't have any hard data on this, but my impression is that most of the appreciation for path-of-progress plays happen after the subject improvement occurs.

I recently read a book called "Zillow Talk", where it talked about certain retailers lifting the price of the neighborhood that they went into (Whole Foods, Starbucks, and even Dunkin Donuts!). I believe it said that the appreciation occurred the stores opened, not before.

With regards to both Bart and Google: consider this: There are usually only a few "early adopters" who will move and adjust in anticipation of a future benefit. The vast majority will only adjust as they feel the immediate pain and see the immediate solution. Further, you're catering to all potential future employees who benefit from those improvements, not just those who would benefit from it today. So basically, I'm arguing that that you don't have to be that early to benefit from path-of-progress plays. 

Lastly, I would like to echo a sentiment that has already been expressed in this thread: both cities are appreciation plays. If you're hoping to get cash0flow with 20% down, I'm guessing that ain't gonna happen.

Hope that helps!

James

 Hey Cosmo. If you're looking for ideas about out-of-state investing, see @Todd Dexheimer's latest blog post on the subject. If you want to talk specifics about what I'm doing, feel free to PM me!

James

@William Haltom:

If I go with outside bids, how do I go about getting those bids? Do I have one come up with the scope of work, and have the rest bid on that same scope, or do they each have to walk the property to come up with their own bids? I'm already disturbing tenants with inspections and walk-throughs, so I'd like to avoid having 3 more trips for contractors!

@Todd Dexheimer : when you say "3rd party contractor" are you talking about a GC or specialists?

Thanks!

James

@Sean Walton

Hey, Sean. I actually had 3 properties (recently sold 1 so I'm down to 2) in the Hiddenbrooke community of Vallejo. It's a golf-course community with it's own exit off the freeway, so it's a bit of a microcosm of Vallejo (i.e. it's not very representative.)

That said, there are definitely good and bad areas of Vallejo. I haven't given it a serious look lately, but i'm surprised that you can still get the 1% rule, as @Spencer Hilligoss mentioned. Spencer: which parts of town? Rougher or B-grade?

What I will say is that bay area housing has hit almost a crisis level shortage. I have colleagues in tech who make astronomical salaries who are looking for primaries. They are fighting tooth-and-nail to get their bids accepted, and there is not enough inventory coming online. With that in mind, I think a commuter play is probably a good idea. Just keep in mind, that even meeting the 1% rule, you're still probably betting on appreciation. If you look at the cash-on-cash for a 1%, it doesn't amount to much, whereas appreciation will either make or break you. If you want stable yield, you'll need to look elsewhere.

My final piece of advice: call a local PM to see what rents are up to in your area. I highly recommend Krystle Properties (tell them I sent you!) They are an excellent shop, and i've been with them for going on 5 years or so. However, I'm dealing with A-class luxury properties, so they may or may not be a fit for your property type.

I hope that helps! Feel free to connect up with me if you want to talk specifics!

James