Latest / Own More Doors / #23 Value-Add vs. Stabilized Investments (Cody Charnell)

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#23 Value-Add vs. Stabilized Investments (Cody Charnell) · Own More Doors

• 0:00
  SPEAKER_00: What's up, everyone?
• 0:01
  SPEAKER_00: Juan Weezar here with another Own More Doors podcast.
• 0:05
  SPEAKER_00: Thank you guys for tuning in, for subscribing, and uh thank you for following us.
• 0:09
  SPEAKER_00: I really love the numbers that we have so far.
• 0:12
  SPEAKER_00: I'm excited to have um broker here at Stage Real Estate, Cody Chardonnell with us today.
• 0:17
  SPEAKER_00: Cody, how are you doing, man?
• 0:18
  SPEAKER_01: I'm doing good.
• 0:19
  SPEAKER_01: Thanks for having me.
• 0:20
  SPEAKER_00: Awesome.
• 0:20
  SPEAKER_00: So, Cody, I'm just gonna hop right into this.
• 0:22
  SPEAKER_00: You know, it I just want to go over some terms.
• 0:26
  SPEAKER_00: You know, a lot of people, there's the value add investor, and then there's the I guess the opposite from that.
• 0:36
  SPEAKER_00: And and that type of investor might be someone buying a turkey, uh, a turnkey property, a uh a trophy property, or a property that is in such an amazing location.
• 0:47
  SPEAKER_00: Sometimes the numbers are aren't expensive uh aren't as great just because the unique uh is there.
• 0:55
  SPEAKER_01: Right.
• 0:55
  SPEAKER_01: Yeah, as brokers, we we see buildings kind of on a spectrum.
• 0:59
  SPEAKER_01: And the on the one end of the spectrum, like you mentioned, are the properties that are value add, that need updating, maybe have really low rents.
• 1:06
  SPEAKER_01: And on the other end of the spectrum, you have the trophy properties, and then there's everything in between, right?
• 1:11
  SPEAKER_01: Some investors love the trophy properties, like you said, just because they're easy.
• 1:16
  SPEAKER_01: Um, you don't have to come up with a bunch of cash after closing to renovate.
• 1:22
  SPEAKER_01: You don't have to deal with like vacating units and dealing with the rent controls, rent control laws.
• 1:27
  SPEAKER_01: Um, and a lot of people are willing to accept a lower cap rate for a building that's already fixed up because there's less risk there, right?
• 1:36
  SPEAKER_01: So you're you're buying something in a good location that's fixed up that doesn't need any work, um, you know, so you can accept a lower, lower return.
• 1:46
  SPEAKER_00: You know, a lot of people have this impression that, hey, I want to be the one that brings the value to it.
• 1:51
  SPEAKER_00: But you know, when you know, we quickly say cash for keys.
• 1:55
  SPEAKER_00: I mean, that that in itself is so difficult to do.
• 1:58
  SPEAKER_00: And I know we've covered this in one of our YouTube uh videos before, but this is not like a slam dunk, you're gonna go knock on someone's door, they're gonna negotiate with you on the spot, and everything's gonna be settled and everyone's happy.
• 2:09
  SPEAKER_00: I mean, that is that's not the reality.
• 2:13
  SPEAKER_00: And the other part is running crews and pulling permits and going to the city.
• 2:20
  SPEAKER_00: I mean, these things are a lot, a lot of work.
• 2:22
  SPEAKER_00: Now, we know I would say that the majority of investors are gonna consider themselves, and you know this.
• 2:28
  SPEAKER_00: I mean, they're gonna call you, they're gonna call me, and they're gonna say, I'm a value added, I'm the one value add investor.
• 2:33
  SPEAKER_00: And what they don't realize is that everyone's a value add investor until we get into a property like these.
• 2:40
  SPEAKER_00: And so, Cody, you and I are listing a 16-unit building and an 18-unit building both in Long Beach on First Street.
• 2:48
  SPEAKER_00: So um tell us about those properties, and and that's a perfect example of a stabilized trophy property, right?
• 2:59
  SPEAKER_01: Yeah, so these are interesting deals.
• 3:02
  SPEAKER_01: So, like you mentioned, they're on First Street and Long Beach, which is a great location, you know, Alamitos Beach.
• 3:08
  SPEAKER_01: You can get to the beach in 30 seconds if you want, um, it's just a short distance away.
• 3:14
  SPEAKER_01: And the sellers of this building are your value add investors, so they've already done all of the work to fix up the building to get rents up to the top of the market.
• 3:24
  SPEAKER_01: So this is a great building for some, or these are great buildings for somebody who wants something that they could just hold on to, no hassle.
• 3:31
  SPEAKER_01: You know, they'll get their tax benefits, they'll get some cash flow, and they'll be able to take advantage of you know all the long-term benefits of owning real estate.
• 3:39
  SPEAKER_01: And uh what I can say is we've seen a lot of deals that are quote unquote fully stabilized, but I think this or these two properties are about as high-end as you can get, right?
• 3:52
  SPEAKER_01: So these guys took the buildings all the way down to the studs, they replaced all the major systems, all of the interiors re-done with high-end finishes.
• 4:02
  SPEAKER_01: And between these two properties, they spent over$2 million upgrading these buildings, which is an insane amount of money to spend.
• 4:11
  SPEAKER_01: Um, or I guess it's not insane, but it's it's much higher than we typically see.
• 4:15
  SPEAKER_01: So um, I guess that just speaks to the quality of work that they did to these buildings.
• 4:20
  SPEAKER_00: Right.
• 4:21
  SPEAKER_00: Um, Cody, so so these two properties are like, you know, kind of sandwich in between obviously close to the beach, close to downtown, close to Alamitos Beach, and and they're they're just in two, I mean, in in one of the best areas, one of the best rental markets that we have.
• 4:40
  SPEAKER_00: Um, and we've priced these to be at a five percent cap.
• 4:44
  SPEAKER_00: Talk to us about why just explain to some people what what's a five percent cap and why would that be important to somebody?
• 4:51
  SPEAKER_01: So um a five percent cap rate basically means if you were to buy this building and pay all cash for it, you would make five percent on your money.
• 5:01
  SPEAKER_01: Um, so basically the building after you collect all the rents, pay all your expenses, you'd be making a five percent yield, right?
• 5:10
  SPEAKER_01: On on the money that you you put down to buy the building, right?
• 5:14
  SPEAKER_01: Um, so yeah, that's that's one of the main metrics that people will look at when they're investing in multifamily property.
• 5:20
  SPEAKER_01: So um another important metric is gross rent multiply gross rent multiplier, which doesn't really tell you anything about how much cash flow you're going to make, but it's another metric that kind of compares the income of the building to the price, right?
• 5:35
  SPEAKER_00: Yeah, I I think if someone were to ask you, Cody, hey, what's the going cap rate right now?
• 5:40
  SPEAKER_00: You know, it's it's it, you know, it's the end of 2024, we're heading into 2025.
• 5:45
  SPEAKER_00: What what are you seeing?
• 5:46
  SPEAKER_01: So it's one of those answers that people don't like, right?
• 5:49
  SPEAKER_01: It's a it depends answer.
• 5:52
  SPEAKER_01: And so it depends on where you're investing.
• 5:54
  SPEAKER_01: So the nicer neighborhoods in Long Beach, the more stabilized buildings, you're probably looking at a five to a five and a half cap um for buildings that you know are less well located and worse condition.
• 6:08
  SPEAKER_01: You could see up to like six and a half, maybe even higher than that in some rare cases.
• 6:12
  SPEAKER_01: So that's your range.
• 6:13
  SPEAKER_01: I would say five to like six and a half is usually what we see.
• 6:16
  SPEAKER_00: Right.
• 6:17
  SPEAKER_00: Um, the one thing that I I absolutely love about these buildings, and you and you touched on it, you know, because there are more value add investors, they are not bringing in value and holding on to the buildings.
• 6:31
  SPEAKER_00: They're that they're adding value.
• 6:32
  SPEAKER_00: That means that there's an equal amount of turnkey investors, because there has to be, right?
• 6:38
  SPEAKER_00: If everyone's coming in and everyone's fixing properties up, doing cash for keys, um, putting in new plumbing, new electrical, new roofs, new windows, et cetera.
• 6:49
  SPEAKER_00: And that's what they did with 1230, uh, 1237 and 1221 East First Street.
• 6:54
  SPEAKER_00: They've done all that.
• 6:55
  SPEAKER_00: And so for someone to do that, and for you know, there's there's a lot of companies out there, investors that that will do this, but there has to be the takeout investor.
• 7:04
  SPEAKER_00: And when I say takeout investor, that's someone who's gonna buy the asset from from the value add investor.
• 7:10
  SPEAKER_00: And so there has to be an equal amount, but that specific investor is is willing, in this case, to sometimes take a slightly lower cap rate.
• 7:22
  SPEAKER_00: Because when you say that, hey, it's gonna be less less of a hassle, you may not be getting, hey, um half of my electrical uh or half of the electricity in my unit just went out.
• 7:36
  SPEAKER_00: Or, hey, I think there's a leak from the bottom of the faucet.
• 7:39
  SPEAKER_00: Or, hey, the unit upstairs, I think there's a leak in the shower because I could see it getting uh wet.
• 7:44
  SPEAKER_00: Like those are the types of things that most buildings that you buy, those are the things that happen.
• 7:49
  SPEAKER_00: And I and I say this because just on one of my buildings today, Cody, tenant called, I own it, and she said half of my power is gone.
• 7:56
  SPEAKER_00: And I might try this.
• 7:57
  SPEAKER_00: And she's like, I did, and they didn't do anything.
• 7:59
  SPEAKER_00: So then I have to go down there.
• 8:01
  SPEAKER_00: And I just think when if you're buying a property that someone has made sure that the electrical and the plumbing and the roof and the windows and and all those things are new, you don't have to deal with those things.
• 8:13
  SPEAKER_01: Right, yeah.
• 8:14
  SPEAKER_01: And that's that's a great situation for a lot of investors, right?
• 8:18
  SPEAKER_01: So, you know, you can make money in the short term by doing these value add deals and fixing things up, but it's a lot of active work and a lot of upfront money that you're having to invest, right?
• 8:32
  SPEAKER_01: But for the majority of investors, um, you know, holding something long term is really where you make the money.
• 8:37
  SPEAKER_01: So if you can buy something with decent leverage in a good location that's going to appreciate over time, you're still going to make plenty of money.
• 8:45
  SPEAKER_01: I mean, real estate, it's not all about the cash flow.
• 8:48
  SPEAKER_01: Cash flow is great, um, but you also get tax benefits, you get, you know, principal pay down on the loan, you get appreciation.
• 8:55
  SPEAKER_01: And when you're using financing, you leverage that, which there's a multiple effect on the appreciation rate.
• 9:02
  SPEAKER_01: And then lastly, you get cash flow.
• 9:03
  SPEAKER_01: So when you add up those four elements of return, you know, you can make a substantial amount of money by buying a stabilized building and just making life easy for yourself.
• 9:12
  SPEAKER_00: And and not have to deal with all of the all of those things that could go sideways.
• 9:16
  SPEAKER_00: And and the work when a property is is a true value ad.
• 9:22
  SPEAKER_00: I mean, sometimes you're working on that property for over a year.
• 9:25
  SPEAKER_01: Oh, for sure.
• 9:26
  SPEAKER_00: For sure, especially if you're having to pull permits.
• 9:28
  SPEAKER_00: And if the city sees you're doing work without a permit, they're gonna they're gonna um they're gonna red tag you, and then you have to completely stop the work and go get the plans.
• 9:36
  SPEAKER_00: And so that that wasn't the case here with um 1221 and 1237, he's first.
• 9:40
  SPEAKER_00: I mean, they you know they did everything properly, but you know, Cody, I re uh just last week I was in in San Jose.
• 9:47
  SPEAKER_00: I went to a real estate event, and they said some interesting things.
• 9:51
  SPEAKER_00: They said that um nine out uh um nine out of the uh 11 elections, okay.
• 10:00
  SPEAKER_00: So nine out of out of 11 recent elections, this is what has happened.
• 10:04
  SPEAKER_00: So the first part is um real estate sales increase.
• 10:08
  SPEAKER_00: This is like regardless of who wins, okay?
• 10:10
  SPEAKER_00: So sometimes people are gonna say, hey, well, what's gonna happen with the market, right?
• 10:14
  SPEAKER_00: So one of the things is hey, the sales are gonna increase, prices are going to increase, right?
• 10:20
  SPEAKER_00: That's a plus.
• 10:21
  SPEAKER_00: And interest rates are gonna take a small a small dip.
• 10:25
  SPEAKER_00: Now, I know we haven't seen it just right now.
• 10:27
  SPEAKER_00: I mean, you know, we're uh literally less than seven days from the election, and this is regardless of who wins, it doesn't matter.
• 10:33
  SPEAKER_00: But typically those are the three things that happen.
• 10:36
  SPEAKER_00: What do you think happens?
• 10:37
  SPEAKER_00: What do you think?
• 10:38
  SPEAKER_00: What kind of advice do you give someone who's who's who's an investor out in the market?
• 10:43
  SPEAKER_00: And and this is what I'm telling you that hey, historical trends are showing us that this is what's happening.
• 10:49
  SPEAKER_01: So if you're somebody who's looking to buy a building and you know that these are the trends, I would say it's in your interest to get into the market sooner than later, right?
• 11:00
  SPEAKER_01: So if if we're expecting prices to go up, you obviously want to get in earlier.
• 11:05
  SPEAKER_01: Um you know, so that's that's the real basics of it.
• 11:08
  SPEAKER_01: But I just um on a personal note, you know, we're doing sales all the time, we're dealing with buyers, we're dealing with sellers, and I can tell you a lot of people have been sitting on the sidelines just waiting to see what happened with the presidential election.
• 11:22
  SPEAKER_01: Um there's not gonna be any immediate change from a policy perspective, right?
• 11:28
  SPEAKER_01: I mean, it's still gonna be a couple months before new presidents um signed into or sworn in, and even longer than that for for him to get anything done, right?
• 11:39
  SPEAKER_01: So we're not gonna see any short-term policy changes, but it's just a sentiment thing.
• 11:43
  SPEAKER_01: I think people they're nervous, they they fear the unknown, and then once you know the election results are in, people are like, okay, we can get back to business.
• 11:52
  SPEAKER_00: So got it.
• 11:54
  SPEAKER_00: Um, let's talk about 1221 and 1237.
• 11:56
  SPEAKER_00: So we have a 16, 18 unit building, we're at a 5% cap.
• 12:01
  SPEAKER_00: Um, what type of financing is there right now for this type of property?
• 12:06
  SPEAKER_01: Um, so these these are over five units, so you have to use commercial financing.
• 12:10
  SPEAKER_01: So for people who aren't familiar, um commercial lenders will there's there's two limiting factors for those loans, right?
• 12:20
  SPEAKER_01: So the first is LTV.
• 12:22
  SPEAKER_01: So you most lenders say you have to put down a minimum of 25%, and then there's also a debt coverage ratio.
• 12:29
  SPEAKER_01: So most lenders right now want you to hit a 1.2 debt coverage ratio.
• 12:33
  SPEAKER_01: So basically what that means is they're making you put enough down on the building so that it cash flows out of the gate.
• 12:38
  SPEAKER_01: Okay.
• 12:39
  SPEAKER_01: Yeah.
• 12:39
  SPEAKER_01: So commercial loans um are typically funded by you know small local banks.
• 12:46
  SPEAKER_01: Um, there's also bigger players like Chase.
• 12:48
  SPEAKER_01: Um, but those banks will usually hold the loans on their books, and the interest that they're making on the loans, they'll use that to pay interest to their depositors.
• 12:59
  SPEAKER_01: So they're they're putting their depositors' money to work, right?
• 13:02
  SPEAKER_01: Right.
• 13:02
  SPEAKER_01: So um there's a variety of different banks out there who would lend on this.
• 13:06
  SPEAKER_01: Um there's actually a really interesting lender right now.
• 13:10
  SPEAKER_01: Um, you can reach out to us if you want to know the name, but they're offering better rates than just about anyone.
• 13:16
  SPEAKER_01: And um last I checked, they were doing 5.25% interest rate um for a building like this.
• 13:24
  SPEAKER_01: And I think everyone else is closer to 6.1 to 6.5.
• 13:28
  SPEAKER_01: Wow.
• 13:28
  SPEAKER_00: Wow.
• 13:29
  SPEAKER_00: Um, one of the other um one of the things that we've seen, well, two things.
• 13:34
  SPEAKER_00: One, Cody, talk talk to us about the um the added depreciation benefits that that you've seen um you know from that's been happening the last couple years, where where like savvy investors are buying buildings and for this specific reason, or this is one of the benefits.
• 13:56
  SPEAKER_01: Yeah.
• 13:56
  SPEAKER_01: So um when Trump was in office previously, they passed the Tax Cuts and Jobs Act, I believe.
• 14:04
  SPEAKER_01: Um, I could have that name wrong, but basically it's it's Trump tax Trump's tax plan.
• 14:09
  SPEAKER_01: And part of the tax plan was bonus depreciation.
• 14:12
  SPEAKER_01: So if you're buying a piece of real estate, um basically you can front load a lot of that depreciation expense and take it in the first year.
• 14:21
  SPEAKER_01: Okay.
• 14:22
  SPEAKER_01: So part of the tax plan is that it's phasing out.
• 14:25
  SPEAKER_01: So this year it dropped down to 60% for bonus depreciation.
• 14:30
  SPEAKER_01: I think next year it drops down to 40%, and then I think it goes away entirely.
• 14:35
  SPEAKER_01: So um people who can take advantage of this can get a huge depreciation right off, right?
• 14:43
  SPEAKER_01: Um, for a lot of investors, you can only use losses on passive investments for passive income.
• 14:52
  SPEAKER_01: But if you can qualify as a real estate professional, you can use those passive losses against active income.
• 14:58
  SPEAKER_01: Okay.
• 14:58
  SPEAKER_01: So what I I have a bunch of clients who've done this where it's one spouse who's earning a ton of money and the other spouse is like a stay-at-home spouse, and the stay-at-home spouse will get their real estate license, they'll do enough hours to qualify as a real estate um real estate professional.
• 15:17
  SPEAKER_01: And by doing that, they can use all the money that the one spouse is making at their high-paying job, they'll buy a piece of real estate, they'll use this bonus depreciation.
• 15:26
  SPEAKER_01: And because the the non-working spouse is a real estate professional, they can use the losses on their real estate to write off against all of the couple's income.
• 15:36
  SPEAKER_01: So it can it can make a huge difference tax-wise.
• 15:40
  SPEAKER_01: Like you can save a lot, a lot of money by doing this.
• 15:43
  SPEAKER_01: So um, yeah, this is gonna be one of the the last couple years here where you can take advantage of bonus depreciation unless some new law passes.
• 15:52
  SPEAKER_00: Um which could potentially could potentially happen, yeah.
• 15:56
  SPEAKER_00: Could potentially happen.
• 15:57
  SPEAKER_00: Yeah.
• 15:58
  SPEAKER_00: Um for anyone listening in and is maybe thinking that you know, you're either in a 1031 exchange, meaning that you you sold something that's most likely inferior to what we're selling here, um, but you're but you're you're you're wanting to defer paying taxes.
• 16:16
  SPEAKER_00: Investors use a thing called 1031 exchange, and they pretty much move the profits from a prior um investment into something like what we're selling here today.
• 16:25
  SPEAKER_00: And so if anyone's listening, if you're in the the medical field and you want to learn more about the uh bonus depreciation, so if anyone's interested in previewing the properties, we do have some units available.
• 16:37
  SPEAKER_00: We could walk the outside, we'll walk inside of the units and see the beautiful courtyards.
• 16:41
  SPEAKER_00: Um you know, Cody, a lot of people that I help, they're they they they have me list their properties because a lot of times they need a lot of work.
• 16:53
  SPEAKER_00: And a lot of times the rents are low.
• 16:55
  SPEAKER_00: And sometimes they just don't want to do the work to get the property cleaned up and maybe stabilized and get it to be worth a little more.
• 17:04
  SPEAKER_00: They're happy with the profits that are there, but most times what they're doing, and in some cases, they're they're selling and in some cases they're buying like a like a triple net lease, which pays like a 5% cap or something around there, um, to get out of the management game, to no longer have to deal with um collecting rents and that kind of stuff.
• 17:23
  SPEAKER_00: But with the property, you know, with properties like this, and we know we factored in property management, meaning that someone could buy them and and hire a professional manager.
• 17:32
  SPEAKER_00: In fact, these are so big that we require uh we would recommend that you do a property manager.
• 17:37
  SPEAKER_00: From my opinion, this is almost like a triple net.
• 17:41
  SPEAKER_00: Now, I get it that it's the you know, they're not necessarily paying your taxes and that type of thing, but um investors are known to go and say, Hey, I want less work.
• 17:51
  SPEAKER_00: I don't want to do the heavy lifting anymore.
• 17:53
  SPEAKER_00: I've already done it.
• 17:54
  SPEAKER_00: And I think with these two properties, it's the perfect example of that.
• 17:57
  SPEAKER_01: Yeah, definitely.
• 17:59
  SPEAKER_01: You know, it's it's really common to see that.
• 18:01
  SPEAKER_01: Like if you think about an investment lifecycle, a lot of people, when they're younger, they're maybe have more time on their hands, they're willing to do a little bit more heavy lifting, right?
• 18:12
  SPEAKER_01: So those people buy stuff, they fix it up, they hold on to it for a while, and then over time, maybe they get a little bit behind on rents.
• 18:20
  SPEAKER_01: Um, they want to make their lives easier for management.
• 18:22
  SPEAKER_01: And then, you know, a bunch of years go by, they're older now, their rents are low compared to what the market's charging.
• 18:29
  SPEAKER_01: Um, their building needs work, um, and they want less work, right?
• 18:35
  SPEAKER_01: So, like you said, they end up exchanging it to something easier.
• 18:38
  SPEAKER_01: So a building like this would be great in that situation.
• 18:42
  SPEAKER_00: All right, folks.
• 18:42
  SPEAKER_00: So there you have it.
• 18:43
  SPEAKER_00: Uh, we just wanted to cover the difference between kind of a fully stabilized asset or the other term that we're gonna often hear um is is your value add type deal.
• 18:53
  SPEAKER_00: So if you hear value add, it needs work.
• 18:55
  SPEAKER_00: If you hear stabilized, you you're probably gonna get a property that um should be in good condition, should have really high rents already.
• 19:04
  SPEAKER_00: So you don't have to start from the bottom.
• 19:07
  SPEAKER_00: Um and and so it it this kind of all depends on who you are as an investor and what type of product you're looking for.
• 19:14
  SPEAKER_00: So, all right, folks, I hope you guys enjoy today's show.
• 19:16
  SPEAKER_00: Cody, I'm gonna give you the last word.
• 19:19
  SPEAKER_01: Yeah.
• 19:19
  SPEAKER_01: So if you're an investor who wants something easy that you can hold on to for a long time, feel good about owning, um, I think these are great options.
• 19:28
  SPEAKER_01: So uh definitely reach out to us if you want more information.
• 19:31
  SPEAKER_01: And like one said, we'd love to show them to you and um hopefully get you into your next investment.
• 19:37
  SPEAKER_00: Awesome.
• 19:38
  SPEAKER_00: That's all for now.