Investing in multi-family - Looking for a mentor / advice.

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Submitted by saiine on August 14, 2018 - 5:54pm

I've thought a lot about my next step in real estate lately and continue arriving at purchasing multi-family (4-6 unit) outside of San Diego (and all of California for that matter).

From my research, cash flow on day 1 is much more likely in other parts of the country. I am specifically looking at Kansas City, Indiana and Atlanta.

My situation (late 30's, no kids, single, good income, 1 condo with about 150 in equity in San Diego, retirement portfolio is good).

I'm looking specifically at spending 50-80k (20% down and conventional financing) and hoping to net at least $250 per unit.

My long-term goal is within the next ten years to establish a portfolio of rentals that produce 10-15k in passive rental income.

While I am spending a considerable amount of time on BiggerPockets and other resources just trying to soak up knowledge, the pigs have never failed me in the past and have always offered sound insight.

Naturally, I wanted to come here and ask, has anyone gone down a similar road? Any thoughts or lessons learned you would like to share?

Thanks!

Submitted by OB Economist on August 16, 2018 - 8:30am.

The 20% down jumped out at me. Several years ago I looked into pulling equity out of my eight unit property. I never did. I could be wrong but it seemed, at the time, Chase was doing only 50% loans for non owner occupied.

Submitted by gzz on August 16, 2018 - 9:07am.

You won't get a 20% mortgage for a low end out of state investment property

Your expectations on returns, even if you could, are unrealistic.

The market is pretty rational. Buildings that appear to have really high cash flow have substantial deferred maintenance and/or are in declining rental markets.

Management of out of state low end apartments is a potential nightmare.

I suggest you look into buying another condo or house and renting your current one out. You will get a better mortgage that way.

Submitted by saiine on August 16, 2018 - 9:45am.

Thanks for your comments,

I was inspired by this post here: https://www.reddit.com/r/realestateinves...

He did an additional post worth checking out here: https://www.reddit.com/r/realestateinves...

gzz, can you expand on why my expectations are unrealistic?

Submitted by Myriad on August 16, 2018 - 12:54pm.

Hey, I bet it's the same guy that lied about how he got to a $1m.
https://finance.yahoo.com/news/anton-iva...
Lives in SD.

But you need to have 25% down for the better rates for an investment property.
Not sure about KC, but even in Denver, $200k will get you an older 2bd/bth townhome in an ok area. Nothing like a 4-plex.

Submitted by saiine on August 16, 2018 - 1:48pm.

Yes, that AMA is Anton. The Yahoo article is a little misleading, and he does address that in his AMA. At the time written, it states he only owned 2 properties (He now owns 35).

He also wrote dealcheck.io - which I suggest checking out.

Anyway, it's not just Anton who has been successful with real estate and particularly investment properties. His story sounds very similar to other stories I've read, and I am convinced my goal is feasible with hard work.

It certainly isn't easy, and having initial capital helps (as he did).

Anyway, I spoke with my lender today and was pre-approved. I should clarify that I am looking at 2-4 unit properties, which I have learned means conventional financing works. I misspoke earlier and said 4-6 unit.

My lender informed me he has many clients that have gone down this path.

Submitted by gzz on August 16, 2018 - 1:56pm.

You are hoping for a "passive" return of 10-15k on an outlay of 50-80k. That suggests a return of, at lowest, 12.5% (10k on 80k).

If there were a lot of investments like this, REITs that can borrow money easily at 5-6% would buy them all up. But they don't, because properties that suggest a double digit cash flow have serious risks, most commonly declining rental market and deferred maintenance. All over middle america there are completely abandoned apartment buildings. The reason they were abandoned rather than sold is that even at a price of 0, the rent doesn't cover basic expenses like tax and maintenance.

A Californian with 80k trying to get buy an apartment building out of state with no landlord experience is a target to get ripped off.

This is all academic though. It is just obviously a bad idea for so many reasons, and you are not likely to find financing.

Submitted by Myriad on August 16, 2018 - 2:24pm.

With $50-80k, it's better to invest in a REIT or some type of real estate crowdfunding. Less risk and don't actually have to manage the property.
With out of state property, you will have to fly out there to manage and do due diligence, even if you have a property manager.

Submitted by saiine on August 16, 2018 - 3:18pm.

Hi Gzz,

Perhaps I was not clear. My goal is to acquire multiple properties to earn that amount of passive income in the next decade.

I would be starting with 1 property at a target price point between 50-80k. I would try (after all expenses) to profit $200 monthly.

I'll share my thought process here, and if I am way off or my assumptions are wrong, please chime in.

A purchase price of 80,000 with 20% down at 4.5% that rents for $1150. (This is realistic based on some of the properties I have seen)

Principle, Interest and Taxes 484.00. Accounting for 10% vacancy ($115), 25% banked for capital expenditures ($287), 9% property management ($100), I am looking at $164 net. I can get that to $200 if I put a little more down.

The thought is that I would then rinse and repeat this approach. Throughout the next decade, I will certainly learn to recognize better deals, perhaps a flip or purchasing larger units, negotiating lower property management expenses, etc.

Deferred maintenance is a valid point, and that is what I classified as capital expenditures above.

Appreciate your insight - let me know what you think.

Submitted by saiine on August 16, 2018 - 3:19pm.

Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?

Submitted by Myriad on August 16, 2018 - 4:36pm.

saiine wrote:
Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?

Well, it's a matter of how much do you trust your property manager. I hear plenty of horror stories. Are they really spending the funds on maintenance? How are the tenants? Does the property meet city codes? Illegal activities? - what if the property manager is involved?

Stuff you would/can do by driving by a local property is not possible.

Submitted by FlyerInHi on August 16, 2018 - 10:35pm.

Myriad wrote:
saiine wrote:
Myriad,

Assuming I have a team on the ground / property management company. Why would I need to fly to the property?

Well, it's a matter of how much do you trust your property manager. I hear plenty of horror stories. Are they really spending the funds on maintenance? How are the tenants? Does the property meet city codes? Illegal activities? - what if the property manager is involved?

Stuff you would/can do by driving by a local property is not possible.

So true Myriad.
I built my portfolio over the years and I'm still remodeling. I still have 2 more to do. I did thorough gut jobs and update of my properties so I will hopefully not have to do it again until I die.

It’s not as easy as people think. You can't buy deplorable properties and have reliable tenants and cash flow. A plumber service call is easily over $200. There goes the profit.

Submitted by sdsurfer on August 23, 2018 - 12:59pm.

If it was me, I'd start with one out of state unit before I go for 8 of them. Get a feel for owning out of state and how the relationship with your management company is going to be before you make the larger investment. I know so many people that have been talking about investing in multi-unit properties "because the price per unit is better", but I'd think the expenses/maintenance are higher too.

Submitted by FlyerInHi on August 23, 2018 - 6:30pm.

sdsurfer wrote:
I know so many people that have been talking about investing in multi-unit properties "because the price per unit is better"

Hummm... It depends where. I have been looking in Nevada and the price per unit on 4 plexes are higher because buyers can actually get 30 year mortgages whereas single condos have to be paid cash.

Submitted by saiine on August 24, 2018 - 11:07am.

Thanks,

Yes my plan is to start with 1. I realize a lot I will learn a lot with the first few properties, and likely make some mistakes.

I found a mentor out in Las Vegas who I have connected with who seems extremely bullish on the Vegas market. Looking forward to learning more from him.

I'm not in this for the short game, I am looking 10-15 years down the line - but I have to start somewhere.

sdsurfer wrote:
If it was me, I'd start with one out of state unit before I go for 8 of them. Get a feel for owning out of state and how the relationship with your management company is going to be before you make the larger investment. I know so many people that have been talking about investing in multi-unit properties "because the price per unit is better", but I'd think the expenses/maintenance are higher too.

Submitted by FlyerInHi on August 24, 2018 - 11:19am.

Saline, be careful of the “mentor”. Nobody does it for free.

I own properties in Vegas. It’s not like San Diego at all. Vegas is a very transient city with a lot of riff raff. When you buy a cheap property, be careful who you rent to.

Avoid North Las Vegas and North East of Downtown and areas near the East beltway.

Submitted by saiine on August 24, 2018 - 1:39pm.

Thanks Flyer,

Do you care to share any additional words of wisdom specific to Vegas? Trying to learn all I can and it sounds like you have experience.

Thanks!

FlyerInHi wrote:
Saline, be careful of the “mentor”. Nobody does it for free.

I own properties in Vegas. It’s not like San Diego at all. Vegas is a very transient city with a lot of riff raff. When you buy a cheap property, be careful who you rent to.

Avoid North Las Vegas and North East of Downtown and areas near the East beltway.

Submitted by FlyerInHi on August 24, 2018 - 2:08pm.

So hard to generalize.
I am bullish on Vegas, long term. Vegas is trying to diversify and be more like Phoenix + gambling + conventions.

But we are due for a recession and Vegas is vulnerable to a downturn in discretionary spending; so you might be able to buy something at the next bottom. Rents are high now but there’s a lot of new construction so a recession may see rent drops.

Next recession, I will be buying in Riverside, San Bernardino, Moreno Valley, closer to San Diego.

Submitted by DataAgent on August 25, 2018 - 11:15pm.

I like Las Vegas too. It has huge growth potential.

However, the water situation in Las Vegas seems quite bleak. Millions of people (and growing) depend on Lake Mead for water. The 'third straw' could literally drain Lake Mead like a bathtub. How long till that bathtub empties?

Submitted by FlyerInHi on August 26, 2018 - 9:04am.

DataAgent wrote:
I like Las Vegas too. It has huge growth potential.

However, the water situation in Las Vegas seems quite bleak. Millions of people (and growing) depend on Lake Mead for water. The 'third straw' could literally drain Lake Mead like a bathtub. How long till that bathtub empties?

The third straw at the bottom of lake mead actually gives Vegas priority over the water ahead of California, Arizona and Mexico. It does not draw more water but it’s insurance iin case water levels continue to drop.

BLM will auction more land in the south 15 almost all the way to Primm. So sprawl continues unabated. A lot of middle to high end housing. No affordable housing so rents continue to rise at the bottom.
Even UNLV will build market rate “luxury” housing on its land.

Submitted by phaster on August 26, 2018 - 12:36pm.

FlyerInHi wrote:
DataAgent wrote:
I like Las Vegas too. It has huge growth potential.

However, the water situation in Las Vegas seems quite bleak. Millions of people (and growing) depend on Lake Mead for water. The 'third straw' could literally drain Lake Mead like a bathtub. How long till that bathtub empties?

The third straw at the bottom of lake mead actually gives Vegas priority over the water ahead of California, Arizona and Mexico. It does not draw more water but it’s insurance iin case water levels continue to drop.

BLM will auction more land in the south 15 almost all the way to Primm. So sprawl continues unabated. A lot of middle to high end housing. No affordable housing so rents continue to rise at the bottom.

Even UNLV will build market rate “luxury” housing on its land.

I’ve been following the topic of climate change ever since I was a student at UCSD back in the late 80's and early 90's where I learned drought in the region can last longer than a human life time AND that there have been two long term drought events that happened in the past 1200 years,... which in geological time, is akin to a blink of an eye

www.TinyURL.com/AncientDroughts

Quote:

The American Southwest: Are We Running Dry?

https://www.youtube.com/watch?v=Y37c5kWGzsE

So its not out of the realm of possibility that another century long drought happens AND the key indicator to watch is the water level and "trend" line

http://mead.uslakes.info/Level/

Quote:

Falling Lake Mead Water Levels Prompt Detente in Arizona Feud

The Colorado River, which supplies water to 40 million people from Denver to Los Angeles, has been gripped in the driest 19-year period on record, according to officials from the Bureau of Reclamation, a multistate agency that manages water and power in the West. With low snowpack and warm conditions again, runoff from the river this year is only about 40% of the long-term average, prompting renewed concerns over the water level in Lake Mead.

The risk of the reservoir falling below 1,025 feet by the year 2026—a level once thought unthinkable—has risen to 40%, according to new estimates by the Bureau of Reclamation. Because the lake is funnel shaped, water officials worry it could decline even faster once it gets that low—triggering even bigger cutbacks.

Arizona, Nevada and California in 2007 had agreed to undertake a series of cuts from the river, under Interior Department guidelines for when Lake Mead dipped below 1,075 feet. For example, Arizona, which has the lowest water rights on the system, agreed to curtail roughly one third its annual use, or 320,000 acre feet. (An acre foot is the amount of water used by an average family of five in a year.)

The intensity of heat and drought since then has prompted the states to prepare the new drought plans, to leave more of their water in the reservoir. Arizona, for example, would under the new plan instead reduce its use by 512,000 acre feet.

“It’s hard to understate how big of a haircut that is,” said Drew Beckwith, water policy manager at Western Resource Advocates, an environmental advocacy group in Boulder, Colo. “The challenge for Arizona is who within Arizona is going to be taking the cuts.”

https://www.wsj.com/articles/falling-lak...

WRT the third straw

Quote:

...People who worry about those issues sometimes focus their scorn on Las Vegas, which appears culpable mainly because, of all the cities that draw water from the river, it lies the closest to its banks. But, in actuality, Nevada was so thinly populated when the river was divided up that its allotment is very small—just two per cent of the total—and it actually takes less than that, primarily because Las Vegas has some of most stringent water-conservation regulations in the country.

...Just as proximity makes people think that Las Vegas is the principal cause of the decline of Lake Mead, it also makes them think that any further decline in the lake will be a problem mainly, or even only, for Las Vegas. But that isn’t true, either. When the pumping plant for the third straw is completed, Nevada will be the only lower-basin user with the infrastructure required to draw lake water from below the level known as “dead pool”—roughly nine hundred feet above sea level, the elevation of the lowest openings in the four intake towers on the upstream side of Hoover Dam. Approximately a quarter of the water remaining in Mead is below that dead-pool line and, therefore, untappable by users below the dam. The chance that the lake will drop that far anytime soon is small—it’s more than a hundred and eighty feet below the current surface—but in 1998 few people thought the lake would ever drop to where it is today.

“If Mead falls to nine hundred,” Mulroy continued, “nothing goes downstream from Hoover Dam.” That would mean that the river’s two largest users, Arizona and California, would get nothing, and some of the most productive agricultural land in the country would turn back into desert. “But Southern Nevada will still be taking water out of the lake, because the new intake is at eight-sixty”—eight hundred and sixty feet above sea level, forty feet below the lowest Hoover intake.

https://www.newyorker.com/tech/elements/...

My own reading of the tea leaves is a perfect storm is brewing, so given climate change,...

https://www.piggington.com/climate_chang...

and fiscal mismanagement,...

www.TinyURL.com/InvestorWarning

its going to be interesting to see what ends the party

Submitted by FlyerInHi on August 26, 2018 - 1:38pm.

Can we not build a big pipeline to bring water from the Mississippi or Canada? Something on a Hoover dam scale, but proportionately bigger in relation to the size of the current economy.

Seems to me Arizona is most vulnerable to a long term drought. I have not studied the issue, so I’m not sure.

Personally, I think agriculture is the culprit. We should just import our food from places/countries with better growing climates. Water should be allocate economically to the highest GDP producing cities first. Feed the golden geese.

Submitted by FlyerInHi on August 26, 2018 - 2:41pm.

Investors are really bidding up multi family properties in Vegas. $100k per unit for old complex. The new ones are going close to $300k per unit.

https://www.reviewjournal.com/business/h...

Submitted by DataAgent on August 27, 2018 - 9:41pm.

FlyerInHi wrote:
Can we not build a big pipeline to bring water from the Mississippi or Canada? Something on a Hoover dam scale, but proportionately bigger in relation to the size of the current economy.

The third straw cost almost $1B for a 3 mile pipeline. Las Vegas is about 1500 miles from the Mississippi River. Forget the cost, who would have the authority to build such a pipeline across 4 states?

Thinking big, why not build a pipeline to the CA central coast and grab all the Pacific Ocean water you could get? Just add a couple of desal plants and NV would never have to worry about water again.

Submitted by FlyerInHi on August 27, 2018 - 11:13pm.

DataAgent wrote:
FlyerInHi wrote:
Can we not build a big pipeline to bring water from the Mississippi or Canada? Something on a Hoover dam scale, but proportionately bigger in relation to the size of the current economy.

The third straw cost almost $1B for a 3 mile pipeline. Las Vegas is about 1500 miles from the Mississippi River. Forget the cost, who would have the authority to build such a pipeline across 4 states?

Thinking big, why not build a pipeline to the CA central coast and grab all the Pacific Ocean water you could get? Just add a couple of desal plants and NV would never have to worry about water again.

That's what the federal government did with Hoover Dam and projects like the Tennessee valley authority. Either that, or let the places in bad geographical locations die off naturally.

Submitted by gzz on August 29, 2018 - 9:44am.

Big Ag is less than 5% of the economy in Cal and the SW, but uses 80% of the water, which it pays close to nothing for.

If there is ever a serious drought, the majority living in metro areas will claim that water. As they should, because it is a public resource they are willing to pay for more money for.

For this reason, Vegas will never run out of water needed for its service-economy growth.

Submitted by Myriad on August 29, 2018 - 1:58pm.

The state should focus on building a massive water distribution and storage network before wasting money on LA-SF HSR. Whereas the HSR only really benefits city dwellers, water is needed by pretty much everyone, especially inland farmers.
One could make the argument that agriculture that comes from CA (quantity & value), having enough water for farming is of national importance.

https://www.sfchronicle.com/news/article...

Submitted by FlyerInHi on August 31, 2018 - 10:29am.

Urban dwellers produce more GDP per capita.

If agriculture is of national importance, the federal government can foot the bill.

Plus, it's not an either or choice. We can do everything all at once.

Myriad, you are not consistent. On the one hand you argue the HSR should be market driven and sustainable by user fees. So why not have all users of water pay the same price per unit of water? The revenue could then be used to build infrastructure.

Submitted by phaster on August 31, 2018 - 3:58pm.

DataAgent wrote:
FlyerInHi wrote:
Can we not build a big pipeline to bring water from the Mississippi or Canada? Something on a Hoover dam scale, but proportionately bigger in relation to the size of the current economy.

The third straw cost almost $1B for a 3 mile pipeline. Las Vegas is about 1500 miles from the Mississippi River. Forget the cost, who would have the authority to build such a pipeline across 4 states?

Thinking big, why not build a pipeline to the CA central coast and grab all the Pacific Ocean water you could get? Just add a couple of desal plants and NV would never have to worry about water again.

Myriad wrote:
The state should focus on building a massive water distribution and storage network before wasting money on LA-SF HSR. Whereas the HSR only really benefits city dwellers, water is needed by pretty much everyone, especially inland farmers.

One could make the argument that agriculture that comes from CA (quantity & value), having enough water for farming is of national importance.

https://www.sfchronicle.com/news/article...

BINGO!... the reason its a dumb idea to build a water way that goes up and over the continental divide is,... financing cost($) and basic physics (i.e. real e$tate cost$ once a route is selected, amount of concrete needed, power requirements to pump water once the structure is built, etc.)

in general the BIGGEST problem w/ basic infrastructure is its boring, in other words people only miss it when its gone,... on the other hand a fancy choo choo train is something that politicians and career bureaucrats can do a ribbon cutting ceremony w/ joe six pack and the family

FYI actually threw in some money into a start up a few years ago that was going to do a water project in the central valley,... unfortunately the preferred stock offering didn't raise the min required so my money was refunded,...

Quote:

Solar Thermal Desalination Now Underway in Water-hungry California

...The controversial Carlsbad desalination project’s latest projected cost is now $1 billion.

It will suck in 100 million gallons of San Diego’s seawater a day and force it through a series of filters to produce 50 million gallons of water a day using high-pressure reverse osmosis.

A modest solar thermal desalination alternative now quietly undergoing permitting inland would produce 5 million gallons of water, about one tenth of that of Carlsbad, but at a much lower cost of just $30 million, using a solar distillation process.

https://www.renewableenergyworld.com/art...

https://www.prnewswire.com/news-releases...

actually thought if the pilot solar desal plant worked in the central valley, the next logical steps would be solar desal in the imperial valley along w/ perhaps a inlet from the sea of cortez going toward the salon sea area (which is a natural "sink")

Quote:

How water from Mexico can save the Salton Sea

...Filling the Salton Sea with imported water from Mexico is not a new idea. The proposal has been around in one form or another since the 1970s. While the idea has a track record of inspiring excitement, support hasn’t translated to funding.

Previous studies – including by the U.S. Bureau of Reclamation and the Salton Sea Authority – deemed it too costly to pull off.

But the tides have changed.

At the beginning of 2018 the Imperial Irrigation District is set to cut off flow of water from Colorado River into the Salton Sea, as required by the 2003 Quantification Settlement Agreement. Once that happens, the lake's decline is expected to accelerate.

https://www.desertsun.com/story/news/env...

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