All Forum Posts by: Paul Choi

 Oh cool, close by!

Agree on the barriers to entry to commercial properties.  They are very real as brokers, lenders, etc will not take you seriously if you don't have a track record.  These are for small/mid sized deals like 14+ units, $1.5mil+ acquisitions. More difficult as you go up in size...50-200 units, $5mil - $10mil deals as the buyer pool you are competing with shifts.

If you want to get into these deals, best to partner up by either bringing capital or experience.  People think they can bring in sweat equity/time but larger multifamily is so automated with various teams already doing the work that there is little value in doing things yourself (ie. rehab, self manage, etc.). In some ways it could hurt performance and value of the asset.

DM me if you want to chat more or grab coffee.

I skipped SFH and went straight into MF,16 units for my first deal almost 2 years ago. You have property managers contractors, etc giving you better prices if you have 100 units to work on. And pricing gets better as you grow your unit count. For example, you have all 100 unit in 1 city but in 4 different properties, and is still easier to manage than 100 SFH in 4 different cities, etc.

Scale is one thing but also risk mitigation is a benefit with larger deals.  you banks are your friends and they fact check your underwriting to make sure the deal makes sense.  If they see problems with the numbers, the inspection, appraisal, etc, they will tell you flat out or "hint" you with bad terms on the debt.

Take this how you will, but Blackstone recently has cleared their position of their SFH rentals that they have been accumulating over the past years. I interpret this as cashing in and seeing how the SFH market will do in the next 12-24 months.

https://therealdeal.com/2019/11/21/moving-out-blackstone-sells-remaining-stake-in-invitation-homes/

OOS could be a profitable investment but I prefer to invest in commercial multifamily within a few hours drive - Stockton, Sacramento, etc. So that I can touch and be abit more hands on in my REI. Even though we have a team of property managers, contractors, etc, nothing beats being able to drive by the property on a weekend to check up on it.

Hey Travis,

Mostly through commercial broker relations.  They have off-market listings that they share with buyers that they know that can close and/or have done prior deals with.

In California and in some appreciating states, cash flow is slim but possible over time. Sometimes it may not cash flow for the first year as value add work is being done and working towards stabilization. If played right, the biggest gains is through appreciation of the value through increase of NOI and rehab.

Even with the new rent control laws, Sacramento is great and has opportunities.  Closed on a 14 unit earlier this year and under contract for a 11 unit.  Looking to pick up some more and larger ones.  Made some exits in the Stockton market (30+ units) and shifting capital.  Underwriting has changed abit with the metrics but still decent as long as the deal pipeline flows.

A few thoughts (with 10-100+ unit MF asset class in mind):

5% + CPI is generous, yes. But ONLY if current rents are market. 15% or more below current rents, your timeline to catch up just got longer. Which means that on the acquisition side, turnkey MF properties at market rents will be priced to perfection with low caps. MF properties that are mis-managed, way below market rents, value-add - owners of those properties got royally screwed. Investors previously underwrote those deals with aggressive timelines and rent increases. That timeline just doubled or tripled, killing IRR and investment prospects. Buying activity will reduce significantly unless sellers adjust their prices down.

As most have said, this will worsen the housing problem and supply side for various reasons.  Existing MF properties will rise in value but again, only those that are close to market rents.

Lenders will see this - agency debt, big banks, etc. Large metros in California (Bay area, Sacramento, etc.) are typically Tier 1, providing the best interest and LTV options. They will still lend of course but depending on NOI, LTV will decrease for value-adds. More cash will be needed to close these deals, weeding out some buyers and reducing demand.

Again, mom and pop owners who have not kept up with rents and were being "nice" to their tenants with reduced rents got royally screwed. Their asset value just plummeted since future buyers cannot raise rents to catch up with market and capture equity. They will calc in a stretched timeline and in most cases, better ROI is available else where. Institutional asset managers are typically ok since they stay on top rental rate trends.

Rental increases are a guarantee now as landlords want to make sure that the gap between the market rents and their rents doesn't get too wide.  If the hole they dug themselves into is too deep, it's going to take a tremendous amount of effort and time to get themselves out.  And time is money.

We are in the process of selling 75% of our MF assets in California, taking profits off the table and looking at other states for investment and we are almost complete with that process.  We will buy again in California after things settle and for the right deals.

Here's a recent article of SF vs Seattle, not about rent control, but about the supply side and how Seattle was able to tackle the housing issue.

https://www-sfchronicle-com.cdn.ampproject.org/c/s/www.sfchronicle.com/bayarea/heatherknight/amp/They-re-getting-it-done-What-SF-can-14308325.php

Good points and great to keep the discussions going!  Some 2 cents I would like to add:

"So first, if a landlord raises a low-income tenant's rent 16% in two years, there's no way that person can afford that increase because they are on a fixed income. Therefore the tenant will be forced to move out. Now our benevolent landlord can raise rents to whatever they want. So value add positions will still occur, it just may take a different approach. Where some see lemons, others make lemonade."

Value add acquisitions will now take longer to implement the strategy. From a landlord/investor's perspective, non-rent controlled unit can be managed and massaged to fit the business plan strategy for that property. For rent controlled units, yes 16% is alot over 2 years, but may not be for properties that have servery below market rents upon acquisition. What would have taken 2 years will now take 4. IRR takes a hit, exit strategy will have to be revised, and so on. For a small property like a 10 unit, it can be worked out but I was mainly thinking about 80-200+ unit MF properties. Millions dollar swings if strategy is not implements right.

"Fifth, I agree that supply issues are generally the cause of out of control rents. But, this rent control ordinance doesn't constrain new properties because they are exempt from rent control. So long as it pencils out, savvy investors will simply knockdown a lot with a small home on it and build multis. Or they'll take a 16 unit and make it a 32 unit...."

Yes, rent control affect new properties - new inventory that has been slated to start or developers planning on starting.  With prices of labor, materials, soft costs such as permits, the only thing developers can build is Class A here in California.  Almost 0 of Class B and C are being built...the workforce, more affordable rental housing.  The fact that the City of Sacramento has implemented rent control sets the tone in the neighborhood.  It sets precedence.  Developers, who want to build, who want to provide more housing, who want to help with the housing crisis, is faced with multiple head winds and resistance in California.  A business climate that makes it so hard to even build.  The permit and planning review process in most California jurisdictions is absurd when compared to other states.  You have to spend huge amounts of capital before even lifting the first shovel.  

And then adding rent control to the mix.  Buildings built after 1995 (I think) are exempt but not sure if it's a rolling clock.  If it's not, maybe it will be revised to one later.  That affect exit prices of developer before they consider building.  Investors always plan out exit before they start and try to anticipate how political perspective will help or hurt their pro forma.

Rent control is detrimental to the rental market so what's the solution?  Build more housing. Demand is there, fix the supply.  Lower permit costs, speed up the planning review process, green light development, get on the side of developers and landlords who want to help address the housing shortage.  You don't need an advanced degree from Econ 101 to understand the solution.  

Rent control will make things worse, no doubt.  Inventory shortage will grow, non-rent control units rates will increase, properties with rent control unit will be fall behind in maintenance and upkeep.  It's been proven time and time again across multiple cities.  Like @Russell Brazil said, it's Econ 101.  It does not address the SUPPLY problem.  It forces private market to subsidize public agenda, and that's never good.  The market and investors will create a path around rent control to make money.  Areas in rent control will fall apart.

6% + inflation seems like it's generous. And it is for MF units that are currently charging market rents.  But value-add assets where the owners failed to raise rents in the past because of laziness, low debt and expenses, etc will be screwed.  The value of their properties just diminished and they have alot of catch up to do if they plan on selling it.

One thing it guarantees is that landlord will raise rents every opportunity they can get, regardless of what their current rents are.  That rent control cap took away that piece of mind that they can raise rents later when they want to sell.  Tenants should expect rent increases guaranteed from now on....and that's not good for those who have been enjoying lower rents from mis-managed properties.

Haven't done that before since we're mainly interested in mid-sized deals, ie. 20-60 unit MF in the $2mil to $10mil range. Most folks entering in the REI market are looking for 1-4 units.