Posted by ray@lcorn on October 30, 2010 at 11:13:03:
dave,
Don’t overlook the point made in the post above regarding “purpose built”. What he is referring to is that many 3- and 4-plexes are converted SF residences. A property actually built as a multi-unit is generally more valuable than a conversion.
Whatever the case, independently verify that the building is in code compliance for the number of units with the local building/zoning department.
ray
Advice from Ray or any heavy hitter - Posted by Dave
Posted by Dave on October 27, 2010 at 04:11:45:
I have a friend that wants to buy his first deals and has been managing a couple of duplexes for me for about 2 years now he has 20k in cash on hand that he has saved over the last 18 months. He works full time has helps me from time to time on my properties in that market. He is in his mid 20’s and his dilemma is this he isnt sure if he should buy an older well placed triplex for about 40k with his 20k or if he should wait and get another 10k saved up and go after a nicer 4 unit brick building. He wants cash flow.
I couldn’t give him a straight answer other then buy a well placed building what ever you buy so you can sell if you ever need to. Will there be that much difference between him buying the 4 unit vs the 3 unit in terms of resale? The 4 unit apt buildings at about 70k that appraised at 170k during the boom he is looking at are amazingly cheap. The return is slightly better because he will be leveraged a little more on the 4 unit. If you where starting out would you buy the bigger 4 unit or would you go even larger with 20k to play with?
The rents on the 3 unit and 4 unit are pretty close per apt at about 475 per apt. I told him this is a question of how he feels about risk. In this down market should he be looking to leverage this 20k even further then a 4 unit apt building? Need advice from any heavy hitter imagining you where starting out as a 25 year old guy again in this market.
Re: Advice from Ray or any heavy hitter - Posted by michaela-CA
Posted by michaela-CA on October 28, 2010 at 12:42:16:
I’m not a heavy hitter (own 15 units free and clear right now), so take my answer for what it’s worth.
Just some things that jump out off the top of my head.
You mention the choice of a tri-plex NOW or a 4-plex sometime LATER, when he has saved up for more money. It’s easy to keep putting things off, always looking for better conditions.
So, my suggestion would be to buy NOW, and again later.
let’s say he were to buy a triplex now and live in one unit. He might be able to get owner-occupant financing, which would allow him more leverage, using less of his cash. Then he could buy something else once he has more money saved up.
In general I would say to rather find a deal now, instead of waiting another year. Because in a year he might think: If I save another 10 or 20K then I could buy a 10-plex.
Just my thoughts
Michaela
Re: Advice from Ray or any heavy hitter - Posted by AmotoXracer
Posted by AmotoXracer on October 28, 2010 at 10:22:57:
All other things being equal, Its been my experience that “older” generally means more trouble and being “purpose built” is always better. So if the 4 unit was built as a 4 unit then buy that. If not, then tell him to buy the one in the best condition.
Re: Advice from Ray or any heavy hitter - Posted by ray@lcorn.com
Posted by ray@lcorn.com on October 27, 2010 at 11:29:39:
Dave,
Not knowing the comparative market position of the two projects makes it hard to call.
For example, my first instinct would be to go for the 4-unit based on the lower risk profile, i.e. more units equals reduced effects of vacancy/collection loss, and the ability to spread fixed costs (insurance, taxes, etc.) across more units, hence a lower break-even occupancy. (Albeit this is a one-unit difference, but the principle is the same).
However if the triplex has better location, condition, marketability, etc., then the lower cost per unit could mean better upside potential. I’d suggest you help your protege analyze the two opportunities based on the whole picture of market, condition and potential upside.
Saleability at the end of the hold period is also a function of the above factors, plus available financing. IN this case the 3 or 4 unit are treated the same, meaning the residential mortgages of the GSE’s, HUD, etc. apply up to 4 units. At 5 units it becomes a commercial loan. (I could be out of date on this… if someone knows the current regs please chime in.)
ray
Hello to an old friend and super-savvy dealmaker! - Posted by ray@lcorn
Posted by ray@lcorn on October 30, 2010 at 11:23:27:
Hi Michaela!
Good to hear from you! Hope CA is treating you well.
I reference to the heavy hitter comment… I think you’re too modest. You’ve been in this biz long enough now to prove you’re a survivor. In my opinion that’s high praise, and especially well-deserved in this environment.
Reminds me that the bright sides of downturns is that it gets rid of the riff-raff and wanna-be’s. The people left in the RE biz now are the real deal. I like that, and I’m noticing the forums are starting to have the feel again of the late 1990’s, with true dealmakers back in the game. Thanks for stopping in!
best regards,
ray
Re: Advice from Ray or any heavy hitter - Posted by dave
Posted by dave on October 30, 2010 at 05:18:23:
Thanks for the info on the 3 vs 4 unit subject. We talked about it and he is going to write on the 4 unit since its 4 units under one roof and its brick and 10 years newer construction. They were 55 and 65 years old and both were forclosures properties.
The properties both existed in neighborhoods close to where he lived that was an older middle class. neighborhood that is safe and is a stable environment.
I am shocked at the deals out there right now if you have a little cash to buy.
Re: Hello to an old friend and - Posted by michaela-CA
Posted by michaela-CA on October 30, 2010 at 13:42:31:
Hi, Ray,
thank you for your nice words. I’m definitely a survivor and I’m doing well. But the reason I would never consider myself a ‘heavy hitter’ in the way that the poster was looking for is that money just isn’t so much of a motivation for me. To me it’s more fun to come up with creative ways to make the deals and when I’m doing good financially I don’t have a lot of motivation to keep working and working - lol. So, I do little deals here and there and I’m now accumulating rental properties, when I swore years ago that I’d never want to be a landlord again. Heck, the market changed and opportunity is there, so I’m going for it
You’re right that the change in the market has separated the wheat from the chaff. The business sounds a lot easier from the outside/the guru talk, than it is and the ones that are willing to adapt to the current market moves will be the ones surviving.
I hope you’re doing well. I spoke to Ed a couple of days ago and it’s quite interested what he had been working on with Terry.
Happy Halloween!
Michaela