All Forum Posts by: Serge S.

@Ben Leybovich  a little past your bedtime? Thx for the compliment:)

I'm not saying stay away from C class actually. I'm saying that stay away from C class where a competitive advantage isn't clear. Something like a C class with 3 bds in a community of mostly SFRS and decent schools. Or a C class that offers amenities others don't like washer dryer hook ups or sq footage. I have a friend in the BP community that has been very successful buying small multi in Mesa. He has been able to convert a 16 unit from all 2bd to all 3s and lift it to the B class of the neighborhood. 

The big clue here is average rents. I look for a multi where average rents are sustainably above $600. Its usually because the units have desirability and are not in direct competition of low end. That becomes a race to the bottom.

I am an AZ investor originally from the Bay Area and am familiar with both markets. I'd offer the following feedback on our current market in metro PHX:

The days of achieving the 2% rule AND appreciation are well behind us. Right now you will struggle achieving the 1% rule. Appreciation potential is speculative at best. You really MUST know what you are doing out here.

Be VERY cautious with the lower end 4plex properties in PHX. Our housing is very different than most of CA. The low end 4plex tenant is a different tenant in AZ than in CA. Remember that our average rents are already low. $700-$800 will generally get you into a low end but somewhat decent home. $600 will get you into a very nice condo with a ton of amenities. So that leaves the struggling rest of society to rent the $400-$500 2bd 4plex. To make matters worse, most 4plex communities in PHX are clustered next to each other. This means competition is vicious and there has been very little to no rent appreciation. The $500 2bd 4plex has been $500 since the 90s! Very different than the Bay Area. Tenants will bail to save $10 next door. Good luck with your screening process after you can't find a "qualified" tenant for 2 months. A "qualified" tenant doesn't look for a 1960s 4 plex in PHX, they either own or rent an SFR or a condo. This makes everything a challenge. Very unlikely to find revenue adds or value add improvements, forget water submettering and good luck consistently collecting app or late fees. Most owners I know face the vicious cycle of rent, evict (or midnight move) then capex followed by new lease to start that cycle all over. Every month there will be a surprise waiting for you; from the $500 water bill due to an unreported leak, sewer busting and the never ending AC repairs. That $2k gross rent and paper $1k cash flow is pretty much a pipe dream. Believe me that those 9-10% cap rates are not real. Last point on the low end 4plex market - most sellers are locals that bought 09-12 for literally $5-$15k per door. They are now reselling for $50k per door. They could not produce cash flow at the low basis and are now pushing their "investment" to the next guy. Most of that time the next guy is someone in CA thinking how could I go wrong at $50k a door. Get my point?

Seller financing does exist but its hard to find. Its probably not waiting on the MLS. I sold my 32 unit via seller financing to a BP member at a nearly 10% cap on actuals. It was a true win win sale. These deals can be found, I'm just not sure how they are found from a distance.

Metro PHX has run its course and the market is very dangerous right now. Most astute local investors are on the sidelines right now or have moved on to other markets. Inventory is very stagnant and I see much more downside than upside.

There are still opportunities in AZ but not in metro PHX so much. Unless your local and know each area , your chances of finding the right deal on Zillow or the MLS are pretty much non existent. Pinal County is adjacent to Maricopa county and its the 2nd fastest growing county in the US. There is still some cash flow in these markets but there are other challenges there. Generally, I would look to submarkets for cash flow before the metro. @Ben Leybovich - Ohio is starting look good:)

I'm not saying you cannot find a good small multifamily in PHX and I'm not trying to discourage in any way. I'm saying that your investment MUST to have the right combination of location and desirability to stand a chance of attracting the right tenants. If you can't attract the right tenant there is simply no money to be made here. My advice is to not be lured into the C class low end trying to get a paper non existent cap rate. Find a local that can guide you in street level warfare and look at the B class in areas not full of multifamily. Make sure you offer something nobody else does. Know your competitive advantage. I would take a desirable B class with a paper 6-7% cap that offers sustainable income and real value add opportunities than a C class showing a non existent 9-10% cap.

@Ben Leybovich just closed today and found out one tenant has not paid since Dec! I'm going to RUBS the new tenants slowly while I test the market. Thanks for all the advice and input throughout, I honestly probably would not have taken the plunge without your late night pep talks. Next complex up is yours, keep looking. 

@Ben Leybovich we have discussed this topic at length and are in agreement that the best approach is to take it slow.

@Joel Owens great feedback as always. I am leaning towards using a private co RUBS within a month and leaving the rent as is. I would RUBS the water, sewer and trash and recoup close to $2k after bad debt. That would cover more than half of my utility cost. My total prices will still be competitive.

@Account Closed local comps in this area cap at 5-8% on proforma asking price and sell closer to 6-10% on proforma. I do not see much trading at actuals.

Hello BP Nation - I am happy to report that I will closing on a 56 unit complex this week. I will post more details regarding numbers but the short of it is as follows:

56 unit, class B building in class B area, submarket of PHX (Pinal Co), 50 2bd/2ba 1000 sq feet w washer/dryer hook ups and 6 3/2 1300 sq feet units. Cost was approx $35k per unit and average rents are around $600.

This is a quality 1986 complex, well built and maintained w approx $100k max in deferred maintenance. 92% occupied at time of closing and I'm purchasing at roughly a 8.5% cap on actuals.

The reason I liked this project was the relatively easy value add that would bring the project to a 12% cap and over 16% cash on cash within 12 months. These include:

Approx $5000 in loss to lease. Last landlord has not raised rent on the most seasoned tenants. New tenants are paying $640 but there are 15 tenants paying in the low $500s. One unit is used as an office, another as storage both of which will be put into service.

Property tax is over assessed by $24k. I will be fighting the assessment which says the building is worth double what I paid and appraised value. Per my lawyer, this should be a slam dunk.

Submetering - currently landlord pays for water, sewer and trash. I will be submetering and recovering approx $40 per unit after bad debt.

So ... my question to you guys out there is how aggressively would you go after the rent increases and submetering. Submetering will cost each tenant approx $45-$50 per month. My concern is raising rent simultaneously could lead to tenant loss and turnover. Would you do it slowly upon natural turnover or do it at all once? The loss to lease number is big so its hard to see that unrealized. I've done a detailed competitive analysis and nobody on the market has the sq footage, washer dryer hook ups and is charging less than $650 plus $30 RUBS. I will still have a competitive product after the increases. All leases are currently month to month. There is a lot of development and population growth in the city and demand is there.

I'd love to hear some successful war stories and strategies.

I was recently having a debate with my friend @Ben Leybovich regarding the best decade for quality of construction. For these purposes lets disqualify anything 1990+ and limit it to the 50s, 60s, 70s and 80s. Newer is not always automatically better and there will always be varying quality or workmanship.

So ... assuming constant quality of actual construction and buying a 50+ unit apartment complex with NO deferred maintenance (I know its not possible), what would you prefer and why? I definately have my own opinions and I will share those later so as not to influence the debate.

@Mark Whittlesey Try Diana at Washington Federal 480-633-5547. Let her know Serge sent you:)

@Kirsten Walstedt Pinal County consists of Florence, Coolidge, Casa Grande, AZ City and Eloy as the main cities. The demographics favor Casa Grande and Florence. Both these cities have a stable job base. Casa Grande is growing rapidly with a lot of development in the works. There has been little to no new supply of housing in the county and population is back to growing around 1.5% a year. The lowest priced housing can be found in Coolidge, Eloy and AZ City but I generally avoid those cities as I'm not very fond of the tenant or employment base in either of those cities. Best of luck!

@Toby Johnston

@Bob E. is right on. It really depends on your goals. If your looking for a safe long term retirement play type of investment I think you can't go wrong with the demographics of Gilbert or Chandler. At those prices your purchasing near rebuild cost in a location that is growing, has high median income and strong rental demand. Population growth and inflation will take care of you long run and you will have quality tenants and easy management. What you won't have is cash flow.For that you will need to look outside of Maricopa county. I like Pinal county and there is still opportunity there but you really need to know the neighborhoods. Otherwise, Maricopa county is no different than Stockton, Pittsburg, Antioch, Richmond. Might as well stay in the Bay for similar returns. The time for great cash flow has passed the East Valley and I would not come this way looking for cash flow.

@Toby Johnston $150k-$200k in Chandler or Gilbert will buy you a newer 1990s-2000s sfr most likely 3bd with a little bit of rehab. It will rent for $1000-$1500 max. Not sure if you meant the 2% rule rather than the 50% rule but it will not come close to the 2% rule. Your realistic yields will be around 5% if you leverage. Probably better than the bay area but nothing to write home about. 2% rule homes are all but gone even if your looking at class C-D warzones which I would not consider if I were out of state. PM me if your looking for more specific local information. I work the east valley and am pretty in tune to our market.