All Forum Posts by: Jay Chang

Real estate investing can take several forms, and the number of units in a property can have a big impact on your investment strategy, prospective profits, and management needs. The following are the fundamental distinctions between investing in 1-4 unit properties and 5-12 unit properties:

1-4 Unit properties,

1. 1. Residential Properties, Properties with 1-4 units are often classified as Residential. In comparison to Commercial loans, they are frequently eligible for residential mortgage financing with lower interest rates and down payment requirements.
2. 2. Property Management, Individual investors frequently find it easier to manage 1-4 unit homes. For day-to-day activities like tenant screening, rent collecting, and upkeep, you can self-manage or engage a property manager.
3. 3. Tenant Base, Because these residences are typically rented to individuals or families, they are subject to residential tenancy laws and regulations that differ depending on jurisdiction.
4. 4. Financing Limits, Due to lender constraints, investors may be limited in the number of 1-4 unit houses they can finance with standard residential mortgages.
5. 5. Exit Strategy, Selling to another individual or investor, or using the property as a personal residence, are common exit alternatives for 1-4 unit properties.

5-12 Unit Properties,

1. 1. Commercial Financing, Commercial real estate is often defined as properties with 5-12 units. Commercial mortgages, which frequently have higher interest rates and stricter qualification standards, are one of the financing choices available. If the deal is large enough, you'll get the best terms by using the agency loan, but 6 units won't be big enough.
2. 2. Property Management, Larger multi-unit properties can be more difficult to manage. To handle the extra burden, tenant turnover, and maintenance, many investors use professional property management businesses.
3. 3. Tenant Base, These properties cater to a mix of residential renters, but on a bigger scale, depending on location and property type, they may attract more business or corporate tenants.
4. 4. Regulations, Commercial properties must adhere to different rules and regulations than residential homes. You may be required to follow commercial building codes and regulations.
5. 5. Exit Strategies, For bigger multi-unit properties, exit alternatives may include selling to other investors, syndicating the property, or even converting it into condominiums or flats.
6. 6. Cash flow Potential, Due to several rent sources, larger multi-unit properties frequently have the potential for better cash flow. However, this can also imply more expenses and obligations.
7. 7. Risk Diversification, Having many units in a single property can help to mitigate the risk of vacancy. Even if one apartment is empty, the others may still provide rental money.

In summary, the primary distinctions between 1-4 unit properties and 5-12 unit properties are finance, property management complexity, tenant base, regulations, scalability, and exit alternatives. Both types of properties have advantages and disadvantages, and the decision is based on your investment objectives, risk tolerance, and available resources. To make an informed investment decision, you must extensively research and understand the specific market and property type you are contemplating.

Finding investors for land development can be a difficult but necessary aspect of the project's success. Here are some steps to take to locate investors for your land development project:

1. Create a Detailed Business Plan, Start by creating a comprehensive business strategy that details your land development proposal. Include details on the project's location, market analysis, project scope, deadlines, budgets, and estimated returns on investment (ROI). Before investing, investors will want to see a well-thought-out plan.
2. Identify your Target Investors, Determine the type of investors you want to attract. Do you want to attract individual investors, real estate investment groups, venture capitalists, or private equity firms? Your decision will be influenced by the size and scope of your project.
3. Network Within the Real Estate Industry, To meet possible investors, attend real estate conferences, seminars, and networking events. Building industry relationships might help you identify investors interested in land development projects.
4. Use Online Platforms, Connect with possible investors who might be interested in your project by using internet platforms such as LinkedIn, real estate investment forums, and crowdfunding websites. Look for local real estate developers who have done similar projects in the past, but I recommend getting the deal under contract with a due diligence period, so you can back-out if you don't get the financing needed.
5. Engage a Real Estate Broker or Advisor, Real estate agents frequently have contacts with investors. Hiring a reputed broker or advisor might assist you in gaining access to their network.
6. Pitch your Project, Make a convincing pitch presentation that highlights the most important components of your land development idea. Highlight the potential benefits, dangers, and your previous experience with similar projects.
7. Consider Joint Ventures, Collaboration with other developers or investors might help to share financial burdens and risks while attracting more funding.
8. Utilize Social Media and Online Marketing, To attract potential investors, have a strong online presence using social media and a good website. To develop credibility, share your project's progress and triumphs.
9. Consider Government Programs and Grants, Government initiatives and grants may be offered in certain regions to help with land development projects. Investigate whether any local or federal initiatives can give financing or incentives for your project.
10. Work with a Financial Advisor, Consult with financial consultants that can help you structure your concept in an appealing manner for investors and discover suitable partners.

Keep in mind that locating the suitable investors may take some time and effort. Prepare to show potential investors the potential profitability and benefits of your land development project, and be transparent and professional in your dealings with them. Seek legal and financial guidance as well to verify that your investment agreements and contracts are properly-structured and in accordance with applicable laws and regulations.

The accountability for covering additional expenditures incurred as a result of the city's and/or the architect's oversight or errors might vary based on specific circumstances, contractual agreements, and local rules. Here are some general thoughts:

1. Contractual Agreements. Conditions of the owner's (or project developer's) contract with the architect, as well as any contracts with the construction team, are crucial. The contract may specify who is responsible for design flaws, omissions, or oversight. In some scenarios, the architect will reduce their fees or give a refund to the Owner. Unfortunately, most of the time, the Owner has to absorb the additional costs.
2. Professional Liability Insurance, (also known as errors and omissions insurance) is frequently carried by architects to cover costs resulting from design faults. If the architect is at blame, their insurance may reimburse some or all of the extra costs.
3. Municipal Liability, If the city or local municipality is responsible for permission or inspection errors or oversights, they may be held liable for some of the increased expenses. Pursuing legal action against a government organization, on the other hand, can be complicated and may require special procedures and constraints. Very rarely do people sue the City, so this is a very unlikely case.
4. Change Orders, If errors or omissions are discovered during construction, the parties may negotiate contract modification orders to compensate for the increased costs. This could entail the owner, architect, and construction staff all collaborating to develop a solution.
5. Mediation and Legal Action, Disputes about who should cover the additional costs may lead to mediation or legal action in some situations. The facts, contractual agreements, and applicable legislation will all influence the conclusion.
6. Owner’s Responsibility, The project owner is responsible for ensuring that the project is finished according to their standards. If the overlook or error does not obviously rest on the architect or the city, the owner may be responsible for the additional expenditures.

To reduce the risk of errors and to provide a process for addressing and resolving concerns that may arise, all parties involved (the owner, architect, contractors, and local authorities) must maintain clear communication and documentation throughout the project. Legal counsel and insurance specialists may also be called to assist in determining culpability and resolving any issues. These challenges are frequently resolved through discussion and may vary from case to case. Legal and contractual details serve a key influence in determining who eventually compensates for additional costs incurred as a result of oversights.

Investment Info:

Large multi-family (5+ units) commercial investment investment in Los Angeles.

Purchase price: $11,600,000
Cash invested: $4,000,000

A 31-unit ground-up apartment with 41 total bedrooms in the heart of Koreatown. It's currently in construction and is projected to generate >45% IRR on the project level.

What made you interested in investing in this type of deal?

This project is located at a very good location. We bought the project with the building permit, so the project was ready to start construction right away. We also have a prior relationship with the architect and like the design. Based on our projections, the project IRR will be about 45% after we sell in 2025.

How did you find this deal and how did you negotiate it?

We found this deal through a broker. It fell out of escrow with the previous buyer, so we bought it at a discounted price.

How did you finance this deal?

We bought this project with cash. We're using construction loan for the construction.

How did you add value to the deal?

By doing ground-up construction and optimizing the design

What was the outcome?

The project is currently under construction with our own in-house GC.

Lessons learned? Challenges?

We closed the escrow at a bad time because of the banking crisis, which significantly delayed our construction start date. It took us 5 months to get construction financing.

Investment Info:

Small multi-family (2-4 units) commercial investment investment.

Purchase price: $3,800,000
Cash invested: $320,000

A 3-story co-living ground-up project with (32) rooms in Hollywood/Silverlake area. 10-minute walk from the LA metro. This project is currently in construction and will finish in Q3 next year

What made you interested in investing in this type of deal?

This is our ground-up project with our own construction team. We purchased this lot almost a year ago because of its location. It's very close to the Hollywood/Sunset metro station and the hospitals. We expect 50%+ IRR on the project level and 30% IRR for our limited partners

How did you find this deal and how did you negotiate it?

We found this lot through a local broker.

How did you finance this deal?

We bought the lot with cash and financed the construction with a construction loan.

How did you add value to the deal?

design development and currently construction.

What was the outcome?

Currently still in construction

Lessons learned? Challenges?

1) We did some design adjustments towards the end of the design phase to give the co-living rooms more privacy.

2) This lot is sloped and requires retaining wall. Slot cutting will take a long time, so we are hoping that we can finish the foundation before the rainy season starts.

If you have a traditional IRA with post-tax contributions (often referred to as a non-deductible IRA) and the value of the IRA is less than what you initially invested, you may be wondering about the implications of withdrawing or transferring the money. In this situation, there are some important tax considerations to keep in mind:

1. No Penalties on Contributions: Since you made post-tax contributions to your traditional IRA (meaning you didn't take a tax deduction when you contributed), you won't face the usual 10% early withdrawal penalty, even if you withdraw the contributions before age 59½.
2. Tax on Earnings: If your IRA has earned any interest, dividends, or capital gains over the years, and you withdraw those earnings, they will be subject to ordinary income tax. However, if the value of your IRA is less than your total contributions, there may be little to no earnings to tax.
3. Tax Reporting: When you withdraw funds from your traditional IRA, the financial institution will typically provide you with a Form 1099-R, which reports the distribution. You'll need to report this on your income tax return. If you're under age 59½, you should use IRS Form 5329 to indicate that the withdrawal is not subject to the early withdrawal penalty.
4. Consider a Roth IRA Conversion: If you want to reinvest the money elsewhere and you have minimal or no earnings in your traditional IRA, consider converting the traditional IRA to a Roth IRA. This can be a tax-efficient way to move your money and potentially allow for tax-free withdrawals in the future. Keep in mind that you'll need to pay income tax on the pre-tax earnings and contributions converted to the Roth IRA in the year of the conversion.
5. Consult a Tax Professional: Tax rules and situations can be complex, and it's always a good idea to consult a tax professional or financial advisor who can provide personalized advice based on your specific circumstances.

In summary, if you have a traditional IRA with post-tax contributions and the value is less than what you invested, there may not be significant tax consequences or penalties for withdrawing or transferring the funds. However, it's essential to consider the tax implications of any earnings in the account and to explore options like a Roth IRA conversion if it aligns with your financial goals. Consulting with a tax professional or financial advisor can help you make the best decision for your situation.

Nice to meet you Ryan. You might be able to find a co-living operator. Try Bungalow, Tripalink, and coliving.com. I personally wouldn't do LLC for just one SFH, because depending on the state, the cost could be substantial. However, if you have more than a few SFH, then I definitely recommend forming a LLC in case you get sued by one of the tenants. The bank might ask for a loan guarantor. You should talk to a mortgage broker to clarify this.

@Victor Ong Let's connect. I'm curious which operator you're using for your properties and how they're doing? I think Art District is an interesting area to do this type of development. Most of our projects are in USC and West LA area.

I'd think cities with lots of renters and low affordability are the best for co-living projects. For example, low income to rent ratio, high rental growth, and high renter ratio, etc. I'd stay close to urban areas and try to target university students or young professionals who are trying to save money.

What are your strategies?

We are located in Los Angeles and are looking for a general contractor in San Francisco to partner with. It's a small multifamily project in SOMA, about $5 mil hard cost. Does anyone have a good contact that specializes in this type of projects? We are currently working on entitlement and design and want to engage a GC for cost analysis and possibly hire when the project is ready to break ground.

Thanks in advance!