Latest / Own More Doors / #70 Top 10 Questions Before Buying Multifamily (Investing Guide)

Transcript

#70 Top 10 Questions Before Buying Multifamily (Investing Guide) · Own More Doors

0:00
SPEAKER_00: This is my advice is buy at the highest cap rate possible.
0:03
SPEAKER_00: Even if it's in a rough area, it's fine.
0:04
SPEAKER_00: Just get professionally managed and just wait and just hold on.
0:07
SPEAKER_00: When cap rates drop, the value goes up.
0:08
SPEAKER_00: Congratulations, you've built equity.
0:10
SPEAKER_00: Here are the top 10 questions every investor should ask before buying their first five plus multifamily unit.
0:17
SPEAKER_00: I'm Juan Weezar with Sage Real Estate.
0:18
SPEAKER_00: And I'm Cody Charnell.
0:20
SPEAKER_00: And today we're going to do a deep dive into the top 10 questions you should ask when buying your first five unit or more.
0:27
SPEAKER_00: So if it's an eight unit, 10 unit, or 20-unit building.
0:29
SPEAKER_00: So let's get let's get started.
0:31
SPEAKER_00: So the question number one: what is the true in-place net operating income, also known as NOI?
0:37
SPEAKER_00: Right.
0:37
SPEAKER_00: Why is that important?
0:39
SPEAKER_01: So the value of a multifamily property is based on how much money it generates.
0:44
SPEAKER_01: So there's a couple of metrics that we throw around all the time.
0:48
SPEAKER_01: Cap rate is the one that is a measurement of net operating income.
0:54
SPEAKER_01: So it's important because we want to know how the property is valued compared to other properties that have sold in the market.
1:02
SPEAKER_01: So make sure you're getting a fair deal or a good deal.
1:06
SPEAKER_01: NOI is also very important when it comes to financing because the way a bank lends to you the commercial loans for five unit and up buildings, they're really limited by the net operating income that they produce.
1:23
SPEAKER_01: So they the bank basically forces you to put enough money down so that the property is cash flowing right out of the gate.
1:29
SPEAKER_00: So just one important thing, I'm just gonna add this in.
1:32
SPEAKER_00: So there's gonna be the current net operating income, and then you're gonna see a second category, and it's called pro forma.
1:37
SPEAKER_00: So pro forma means um if if the building is generating the income that it should be generating, you now have this like uh best case scenario, um figures, which is categorized under performa.
1:52
SPEAKER_00: The lender just know it's not gonna go off for performa.
1:54
SPEAKER_00: Okay, you might look at it because it's important for you to know that could be your guide, um, your roadmap to where you want to get to.
2:02
SPEAKER_00: That's not where you're at today.
2:02
SPEAKER_00: So the lender's gonna lend on actual, so the actual in-place uh net operating income is critically important.
2:08
SPEAKER_00: Let's go to question two.
2:09
SPEAKER_01: So, how do current rents compare to market rents?
2:12
SPEAKER_01: And why is this important?
2:14
SPEAKER_00: Okay, so when you're buying uh, say an eight-unit building, a 10-unit building, you want to talk about rent role.
2:19
SPEAKER_00: What's a rent role?
2:20
SPEAKER_00: It just simply says, here's units one through 10, and here are all the rents.
2:24
SPEAKER_00: And so what we do is uh once you become a little more knowledgeable, you look at the rents and you're like, are these the rents the maximum that they could actually get?
2:32
SPEAKER_00: Okay.
2:33
SPEAKER_00: If they're not, now we're looking at performer rents.
2:36
SPEAKER_00: So what is performa?
2:37
SPEAKER_00: Well, I just covered that.
2:38
SPEAKER_00: It's best case scenario, what could these units generate?
2:41
SPEAKER_00: Now, in some cases, they could generate um a lot higher rent, but they need to be remodeled.
2:46
SPEAKER_00: And so, anyhow, you're gonna have your actual rents, which is the rent rule, and then you're gonna have the performer.
2:51
SPEAKER_00: Again, focus in on the actual rents for now.
2:53
SPEAKER_00: That's gonna be my recommendation.
2:55
SPEAKER_00: Um, that's what they're gonna be based on.
2:57
SPEAKER_00: Um, knowing, and this is, you know, I see Cody do this all the time, is Cody will look at it and say, Hey, did you know that the rents are so low that you could actually increase them by, I'm just gonna make this up 30%, 28%.
3:08
SPEAKER_00: Well, now we have what we call upside and rent.
3:11
SPEAKER_00: I'll let you take it from there.
3:12
SPEAKER_01: Yeah, so the upside is important because, like I mentioned previously, the value of these buildings is based on the rent that they generate.
3:18
SPEAKER_01: So if you're buying something, you're buying a building that has upside and rent, you capture that upside.
3:24
SPEAKER_01: Congratulations, you've just increased the value of that property.
3:27
SPEAKER_01: So uh it's important to know both, right?
3:31
SPEAKER_01: So your financing is going to be limited by current rents.
3:34
SPEAKER_01: Um, it's also gonna show you how the building will operate right when you close, the upside or market rents, um, that kind of dictates where you can go.
3:43
SPEAKER_01: So we look at both for clients.
3:45
SPEAKER_00: And then just one other thing.
3:46
SPEAKER_00: I mean, if you're if you know, hopefully you're working with a real estate broker, someone who uh is a specialist in the area, someone who specializes in selling multifamily in the area that you're looking to buy, that's gonna be our recommendation.
3:56
SPEAKER_00: Do not go with someone who sells single family homes that says, oh yeah, I could do that.
4:01
SPEAKER_00: Don't go with that person.
4:02
SPEAKER_00: They're not in the business of guiding you, they don't even understand the type of financing that's out there because it does change when you're four units and above.
4:09
SPEAKER_00: So that's my recommendation.
4:10
SPEAKER_00: But I did want to mention um if if you're looking at several properties and and and one has potential for a massive increase in rents, that might be the one you decide to go with.
4:21
SPEAKER_00: Um, all things else um kind of being equal, because there's there's you could reposition that property much quicker versus someone that that's already maximizing the rents.
4:30
SPEAKER_00: And so when we're looking at a building, we don't just look at one, we're looking at several.
4:33
SPEAKER_00: Well, which one is the best for you?
4:34
SPEAKER_00: And so that will be a strong uh candidate for we should focus in on this one for this reason.
4:39
SPEAKER_00: Question number three Um, what is the real expense ratio?
4:43
SPEAKER_01: Basically, the expense ratio, when someone says that, they're referring to the percentage of expenses versus like all of the income that's coming in.
4:54
SPEAKER_01: So uh 30 to 40 percent is kind of typical for what we see.
4:58
SPEAKER_01: Uh, what's included in that expense ratio are things like property taxes, insurance, um, repairs and maintenance, management, um, you know, city licensing and permits, lawn care, pest control, all that kind of stuff.
5:13
SPEAKER_01: So let's say you had a building that produces$100,000 a year in gross rent, and your expenses for the year are$30,000$30,000.
5:24
SPEAKER_01: Um, that's you know, 30% of your total income.
5:28
SPEAKER_01: So we would say the building has a 30% expense ratio.
5:31
SPEAKER_01: And this kind of ties into what we were talking about previously.
5:34
SPEAKER_01: This will dictate um how much uh the bank is willing to lend to you.
5:40
SPEAKER_01: Um and you know, when we're analyzing buildings, sometimes we see buildings that have a crazy high expense ratio, and we see ways where we can optimize, you know, and lower expenses.
5:52
SPEAKER_01: And by lowering expenses, you increase your net operating income, you increase the value of the building.
5:57
SPEAKER_01: So not only do you want to look at the the rents and if there's upside in the rents, but you also want to focus on expenses and see if there are ways that you can decrease expenses and make it a more efficient and more profitable building.
6:08
SPEAKER_00: Yeah.
6:09
SPEAKER_00: Um, what when I first got into real estate, we we just kind of the the rule of thumb in Southern California, say 20, 15 years ago, was like, ah, just go with 30% expenses.
6:18
SPEAKER_00: Um, because sometimes when you see a property on the market, or if just say, like a neighbor says, hey, I'll sell you my 10-unit building, great.
6:25
SPEAKER_00: You could take their rents and you could back then you could say, well, if everything's sub-metered, meaning that that the utilities are passed on to the tenant, um, you could say, well, for now, back of a napkin analysis go at 30%.
6:40
SPEAKER_00: What we've seen through the years now is that expenses are much higher.
6:43
SPEAKER_00: A lot has to do with um um repairs are much higher, um, hiring experienced plumbers, electricians, that's gone up, insurance has gone up.
6:52
SPEAKER_00: Uh, there's a lot of extra expenses.
6:54
SPEAKER_00: And so we've seen where the rule of thumb was 30, now we're 35%.
6:58
SPEAKER_00: So in some cases where the rents aren't that high, guess what?
7:01
SPEAKER_00: Having 40% expense ratio or higher um wouldn't be like this um uh uncommon thing.
7:09
SPEAKER_00: Now, what I want you to know, if you look at two properties and one has a 40% expense and one has 35%, don't think the one that's 40% is is a worse investment.
7:17
SPEAKER_00: It simply means it's probably being a bit mismanaged or someone's not doing proper accounting.
7:23
SPEAKER_00: And so, all in all, when we're looking at real estate, a couple things.
7:26
SPEAKER_00: We want to increase its revenue, we want to decrease the um the expenses.
7:30
SPEAKER_00: And so just looking at something across the board, don't don't don't jump the gun gun and and and say, well, that the expense ratio is too high on that one.
7:39
SPEAKER_00: Just look a little deeper into it and figure out why that is.
7:42
SPEAKER_00: And again, if those are things that you could change once you're the owner.
7:47
SPEAKER_00: Um, and also when you're getting these types of uh these types of loans, the lender is gonna look at the expenses.
7:52
SPEAKER_00: The lender will tell you this one has it why are its expenses so high?
7:57
SPEAKER_00: They will catch it as well, which is kind of a benefit.
7:59
SPEAKER_00: So let's go to the next question.
8:00
SPEAKER_01: What deferred maintenance is common when you're looking at apartments?
8:04
SPEAKER_01: And you know, what are some real costs to fix this stuff?
8:08
SPEAKER_00: So deferred maintenance.
8:09
SPEAKER_00: So that's a common question.
8:10
SPEAKER_00: When we list a property, someone's gonna say, it looks like it has a lot of deferred maintenance.
8:13
SPEAKER_00: What does that mean?
8:14
SPEAKER_00: Uh it means that when you're looking at a building, you're like, man, it looks like those eaves, so those are the things that are like right on the bottom of the roof.
8:21
SPEAKER_00: Looks like the eaves have like a lot of termite damage on them.
8:24
SPEAKER_00: Looks like the roof, it's on its last leg.
8:27
SPEAKER_00: Um, you know, just the the perception is that the property is gonna need work.
8:32
SPEAKER_00: That's deferred maintenance.
8:33
SPEAKER_00: And so um it's important that when you're looking at a building, if if something has a lot of deferred maintenance, then you better be getting a really good price.
8:40
SPEAKER_00: Okay.
8:40
SPEAKER_00: If it doesn't have a lot of deferred maintenance, because you you're looking at a building, you see fresh paint, they replace a lot of the fascia, you see a new roof.
8:48
SPEAKER_00: Uh, you could tell that they replaced the plumbing because you could see from the water spigots that it's copper.
8:53
SPEAKER_00: Um, you see a sewer clean out that was just installed, you could tell because the cap is new.
8:58
SPEAKER_00: And so there's certain things that are gonna tell me that one has a lot of work, that one doesn't need a lot of work.
9:03
SPEAKER_00: And so for the one that doesn't need a lot of work, it's probably gonna sell for more.
9:08
SPEAKER_00: It definitely should.
9:09
SPEAKER_00: And so, anyhow, it just kind of depends on the type of investment that you're looking at.
9:12
SPEAKER_00: Doesn't always mean that if you're looking at a property and and if you're looking at what's known as a value add opportunity where you're buying uh a distressed property that's in rough shape, but but but you're getting a low price in return, but you have to put in the sweat equity, um, that's okay too.
9:28
SPEAKER_00: So that's kind of how I would answer that question.
9:30
SPEAKER_01: Yeah, no, I think I think those are all good points.
9:32
SPEAKER_01: In Long Beach, we have kind of several different eras when there was a lot of building going on.
9:38
SPEAKER_01: So you'll see a lot of construction from the 20s, a lot from the 50s and 60s, and a lot from 70s and 80s.
9:44
SPEAKER_01: So um, you see different materials that were used at that time uh in those different eras, and you see buildings that you know all across the spectrum of how well they've been maintained.
9:55
SPEAKER_01: And um when when we're working with clients, sometimes they ask us, you know, how much should I account for for repairs and maintenance and you know, fixing things uh when we're just doing our preliminary analysis, and it's really hard to say.
10:10
SPEAKER_01: Um, this comes up once you get access to the building, which is usually after you've submitted an offer, you go in with your professional home inspector and um you see what's going on.
10:20
SPEAKER_01: Uh it's it's pretty funny, but sometimes we get good surprises.
10:25
SPEAKER_01: Like a lot of owners who've owned buildings for many years, they just don't remember what's been done to the units.
10:31
SPEAKER_01: So sometimes we'll go into a building where it doesn't look great on the outside, but the inside is beautiful.
10:37
SPEAKER_01: Or, you know, um, on a building that I just bought, uh the owner didn't know what kind of plumbing was there.
10:42
SPEAKER_01: We went in and it turned out to be all re-plumbed with copper plumbing.
10:45
SPEAKER_01: So um this stuff all comes up during the inspection.
10:48
SPEAKER_01: And you know, we've seen hundreds, if not thousands, of units.
10:52
SPEAKER_01: Um, and so we have a pretty good idea of what to look for.
10:55
SPEAKER_01: So we'd be happy to help anyone out there.
10:58
SPEAKER_00: Okay, question number six What is the cap rate on the in-place numbers?
11:03
SPEAKER_00: Or just what's the current, I guess the way that I would ask it is what's the cap rate on actual rent?
11:07
SPEAKER_01: The equation for cap rate is your net operating income divided by the price.
11:13
SPEAKER_01: So um right now, cap rates, well, actually over the last few years, they're kind of in flux and um they change sort of depending on what category of building you're looking at.
11:25
SPEAKER_01: So for five plus unit buildings, we saw a huge increase in cap rate, which means that prices for those properties went down.
11:33
SPEAKER_01: Um, so great time to be buying.
11:36
SPEAKER_01: Um and like we've sort of touched on previously, there's your current cap rate and your pro forma or market cap rate.
11:43
SPEAKER_01: So it's important to look at both.
11:45
SPEAKER_01: And the reason that we focus on this metric is it's a data point where we can compare the building that you're interested in buying versus what else has sold in the market.
11:56
SPEAKER_01: So um, if everything in this neighborhood is selling at a 6% cap rate and you're buying this one at a six and a half cap rate, maybe you're getting a great deal.
12:05
SPEAKER_01: Or maybe this one just has a lot of deferred maintenance and so they've discounted it.
12:08
SPEAKER_01: So um it's it's one thing that we use just you know to signal to us if this is a good deal or not, or if we should look further.
12:16
SPEAKER_01: But what else would you add to that?
12:18
SPEAKER_00: You know, some some investors, cap rate is the and all be all.
12:22
SPEAKER_00: That's the most important thing.
12:23
SPEAKER_00: I think with K uh with Cody and I, it's it's one of the six measurements that we look at.
12:28
SPEAKER_00: Uh, you know, I mentioned my 621 formula and so, but the six is six different benchmarks that we're looking at.
12:32
SPEAKER_00: So cap rate isn't uh important.
12:34
SPEAKER_00: We we do it's a quick way for me to compare.
12:37
SPEAKER_00: So let me tell you in Long Beach right now, for the last 12 months in the five plus market, the average cap rate based on co star numbers, 5.9.
12:47
SPEAKER_00: Okay, like Cody said, cap rates have been going up.
12:50
SPEAKER_00: As cap rates go up, values come down.
12:52
SPEAKER_00: So another way to look at cap rates is that it could be viewed as the return on the investment if you buy something cash.
12:59
SPEAKER_00: Okay.
12:59
SPEAKER_00: So if you're a buyer, you want to have the highest cap rate possible.
13:03
SPEAKER_00: Now, also, um, it it lets you know whether you're in line with like if you're buying a building right now in Long Beach and you're in the fours, like 4.9, and and and you call us up and you're like, hey, I'm looking at this building, and we would say, well, what's the cap rate?
13:17
SPEAKER_00: 4.9.
13:18
SPEAKER_00: Uh like a light would go off in my head.
13:21
SPEAKER_00: I'm like, why are you settling for such a low, low cap rate?
13:25
SPEAKER_00: Now there might be reasons for it.
13:27
SPEAKER_00: It doesn't mean it's a bad thing, but right off the bat, I'd be like, hey, that's too low because the average is 5.9.
13:32
SPEAKER_00: And listen, if you're working with a broker, they better know these numbers off the top of their head.
13:35
SPEAKER_00: They better know the market this well because um you have to know like what are other investors settling for?
13:43
SPEAKER_00: And if they're settling for a 5.9, congratulations.
13:45
SPEAKER_00: You're like every other investor for an average property.
13:47
SPEAKER_00: There are some investments we're looking at where um the properties are not in the best location, but in order to motivate investors like us to buy them, well, we want a seven cap.
13:58
SPEAKER_00: That is possible, that's happening now in Long Beach and slightly higher too.
14:01
SPEAKER_00: Now, that's not in our best areas, because our best areas, you're gonna have a lower cap rate.
14:06
SPEAKER_00: And so a lot of times people will contact us and they'll say, hey, I'm buying in Ohio, what's a good cap rate?
14:11
SPEAKER_00: We're not gonna know that answer because cap rates are market derived.
14:14
SPEAKER_00: They're derived by previous properties that have sold and it's being determined by investors.
14:19
SPEAKER_00: And so we are watching this closely.
14:21
SPEAKER_00: Um, one of the strategies right now, from a cap rate perspective, um, this is my advice, is buy at the highest cap rate possible, even if it's in a rough area, it's fine.
14:30
SPEAKER_00: Just get it professionally managed and just wait and just hold on.
14:34
SPEAKER_00: Because what's gonna happen is we expect interest rates to drop.
14:36
SPEAKER_00: Uh, as interest rates drop, cap rates will drop.
14:39
SPEAKER_00: When cap rates drop, the value goes up.
14:41
SPEAKER_00: Congratulations, you built equity.
14:42
SPEAKER_00: So that's just my advice there.
14:44
SPEAKER_00: Uh, let's go to the next question.
14:46
SPEAKER_01: So, what type of financing is available for five plus unit buildings?
14:50
SPEAKER_00: The most common type of financing is just gonna be your your traditional commercial financing.
14:56
SPEAKER_00: And so, one thing that's important with this type of building, different from a four-plex or a duplex, is that um you can't just say, hey, with 30% down, you could buy any 10-unit building out there.
15:05
SPEAKER_00: That's not true.
15:05
SPEAKER_00: Why is it not true?
15:07
SPEAKER_00: Because lenders at this level go off of what's known as a debt coverage ratio.
15:11
SPEAKER_00: And so they want to make sure that the property is profitable.
15:14
SPEAKER_00: And so um, if one building is uh, if its income is not high enough, that property, the lender might come back and say, you need 45% down on that property or 40%.
15:24
SPEAKER_00: If you're buying um a different property, they could say, hey, you could buy that one with 25% down.
15:29
SPEAKER_00: And so um it's very important that when you're looking at a property, um it just all that matters is how much money do you have to invest and what debt coverage ratio can you get to to be able to make those numbers work.
15:43
SPEAKER_00: Make sure that you're working with a someone who specializes in these types of loans.
15:47
SPEAKER_00: You send them the offering memorandum or you send them the rents, and they they will come back and say, hey, uh that specific property we could lend up to this amount.
15:56
SPEAKER_00: And then you kind of do the math.
15:57
SPEAKER_00: Okay, I have that down payment or I don't.
16:00
SPEAKER_00: If you don't have the down payment, um, you know, you you contact uh Cody and I and we're like, well, hey, let's let's help you lower the price, let's help you negotiate that down so that you couldn't meet that metric.
16:09
SPEAKER_00: That's gonna be the most common, common way.
16:13
SPEAKER_00: Um, there is on value add transactions where you do get hard money loans, that's temporary financing at a much higher rate.
16:21
SPEAKER_00: That is probably not for the first time person, because now you have um a ticking clock, and if you're experienced, great, you could work within that time frame.
16:30
SPEAKER_00: If you're not, it's gonna add extra pressure.
16:33
SPEAKER_00: What would you say when it comes to financing?
16:35
SPEAKER_01: Um, some other important things to note about commercial financing is you can't, well, you can get 30-year fixed on some very kind of funky products, but for the most part, most investors are using three, five, seven, or 10-year fixed loans.
16:51
SPEAKER_01: Um, these loans have prepayment penalties typically, uh, and the rate that you're gonna get is gonna be less than what you'd see on like a residential 30-year fixed loan.
17:01
SPEAKER_01: So you're getting a little bit better cash flow, um, but a little bit um different loan term.
17:06
SPEAKER_01: So three-year fixed, and then it goes adjustable after that.
17:10
SPEAKER_01: Uh, there's also bridge loans that are available.
17:13
SPEAKER_01: So um, you know, these are designed for value add deals.
17:18
SPEAKER_01: So you can buy something with loan money down where they kind of ignore your debt coverage ratio, but um, you know, high interest rate, kind of like a way to get you from where the property is now, so you can get rents up, get it operating well so it qualifies for a better commercial loan.
17:33
SPEAKER_01: And and just um, I guess to back up and give you a broader picture of the commercial loan market, these loans are offered by a bunch of different regional banks.
17:43
SPEAKER_01: So um terms change from one lender to another.
17:47
SPEAKER_01: Some lenders have preferences about you know what types of building they'll lend on, what types of borrowers they want to work with.
17:54
SPEAKER_01: Um and you know, there's there's different requirements depending on which lender you work with.
17:58
SPEAKER_01: So working with a loan broker who has experience with a lot of the different banks in your local area, um, they'll be able to shop around and get you the best deal.
18:06
SPEAKER_01: So that's something that that we recommend to our clients.
18:09
SPEAKER_00: Awesome.
18:09
SPEAKER_00: Thank you.
18:10
SPEAKER_00: Okay, question number eight is there real value add or is it just a cosmetic renovation?
18:16
SPEAKER_00: So just answer the question like, what what value add really means?
18:20
SPEAKER_01: When somebody comes to us and says that they want a value add deal, what that typically means to me is hey, I want to buy a property that needs some work, um, that has low rents, that I can go in and renovate and increase the value significantly.
18:33
SPEAKER_01: So a lot of people talk about burr deals, it's it's in the same vein.
18:37
SPEAKER_01: So um there are definitely still value add deals out there.
18:41
SPEAKER_01: Uh, because the the five plus market has declined recently, you know, it's been difficult for people to take this on because you're buying something and the prices are decreasing.
18:53
SPEAKER_01: So you have to get a huge discount on the front end to kind of make up for that risk where the market could keep going down a little bit.
18:59
SPEAKER_01: It seems like things have leveled off, so we might see an uptick in people wanting those types of deals again.
19:06
SPEAKER_01: The typical life cycle that we see with apartment buildings is someone buys a building, they hold on to it, they get old, they want the building to be easy for them so they don't increase rents, and then eventually they get to a point where they don't want to manage the building anymore, or you know, they pass away, their heirs inherit the building, they don't want to manage it anymore.
19:26
SPEAKER_01: That building hits the market.
19:28
SPEAKER_01: So we see those, you know, low-rent buildings that have been in the same family for a lot of years.
19:33
SPEAKER_01: So I think there's always going to be those opportunities, and um those are some of my favorite deals to work on.
19:38
SPEAKER_00: So, so when it comes to value add, just be careful out there.
19:41
SPEAKER_00: Uh, real estate brokers, and listen, we're real estate brokers, so we're we're we're in the business of marketing.
19:46
SPEAKER_00: A lot of real estate brokers consider everything they're selling a value add deal.
19:50
SPEAKER_00: But the question is, is it a really value add deal?
19:52
SPEAKER_00: So let me just give you guys an example.
19:54
SPEAKER_00: If if a broker calls me and says, hey, we have this value add deal, okay, light bulb goes up, okay, I'm all ears.
20:00
SPEAKER_00: And and then I want to know how much upside in rent.
20:03
SPEAKER_00: If they tell me 8%, I almost want to hang up.
20:06
SPEAKER_00: And I'll tell you guys why.
20:08
SPEAKER_00: Right now in Southern California, for the most part, you could raise rents by 8%.
20:12
SPEAKER_00: So if that is the only upside is what I'm allowed to raise rents by, that's not an upside to me.
20:18
SPEAKER_00: Upside would be double-digit increases, right?
20:20
SPEAKER_00: And so um the question is when a broker calls you and they have this um this uh value add deal, we have to make sure that there is really value add and it's not just uh a marketing ploy to try to get you hooked.
20:32
SPEAKER_00: Because, like Cody said, most investors want value add.
20:35
SPEAKER_00: Why do they want that?
20:36
SPEAKER_00: Because they want to, they know that for the most part, real estate goes up in value, but they want to uh maybe make it go up in value even more because they're buying it at a discount.
20:46
SPEAKER_00: So just be careful out there.
20:47
SPEAKER_00: Is it a real value ad?
20:48
SPEAKER_00: Ask your broker.
20:49
SPEAKER_00: Is it a real value add or are you just selling me something that's already stabilized?
20:53
SPEAKER_00: So that would be a question that I would ask.
20:55
SPEAKER_01: So who's the likely buyer when I go to exit this building?
20:59
SPEAKER_00: You know, a part of my 621 investment formula is that that number one is my exit strategy.
21:05
SPEAKER_00: And so I'm I'm currently so, so Cody, I'm I'm currently submitting offers right now on on eight and 10 unit buildings because I'm in the process of trading up.
21:12
SPEAKER_00: Okay.
21:12
SPEAKER_00: And so as I'm looking at this 10 unit building, hopefully everything works out.
21:16
SPEAKER_00: I'm looking at it, yes, I'm gonna own it for the next potential five, seven, 10 years.
21:22
SPEAKER_00: But then I want to know who is gonna want this property once I'm done with it, right?
21:26
SPEAKER_00: Because my goal is I'm I'm buying this from a business perspective.
21:30
SPEAKER_00: I want to make the property better.
21:32
SPEAKER_00: I want to be a great housing provider, that's important to me.
21:35
SPEAKER_00: Um, I want to make sure that this property is in good shape.
21:38
SPEAKER_00: I want to maximize its income.
21:39
SPEAKER_00: You know, listen, in the world of real estate, the higher the income, the higher the value.
21:43
SPEAKER_00: So as I'm looking at a property, is does this have uh characteristics that I think someone else is going to want from me from an exit perspective?
21:52
SPEAKER_00: So let me tell you what I like about it.
21:54
SPEAKER_00: It has a newer roof, has all new windows.
21:57
SPEAKER_00: They're large, large units, large.
22:00
SPEAKER_00: Units.
22:00
SPEAKER_00: There's some parking, doesn't have a lot of parking.
22:02
SPEAKER_00: Um, and then it's got a laundry room that's currently not even being operable.
22:06
SPEAKER_00: So I'm seeing opportunities.
22:07
SPEAKER_00: Now, what I did say is the units are remodeled, that's gonna be my job.
22:11
SPEAKER_00: The bathrooms are not remodeled, that's my job.
22:13
SPEAKER_00: Um, and why they don't have laundry set up, that's fine.
22:17
SPEAKER_00: I can't criticize the last person, you know, it was their business, they're gonna run it the way, they're gonna run it, but I'm looking for opportunities.
22:23
SPEAKER_00: But as I'm looking at this, I'm like, who's gonna want this building?
22:26
SPEAKER_00: It's on a corner location, which I do like.
22:28
SPEAKER_00: So there's certain things that when I look at it, I'm like, I like it today, but I'm I'm I'm also projecting out to the future.
22:36
SPEAKER_00: Well, who's gonna want to buy it from me?
22:38
SPEAKER_00: And hopefully buy it where where we make a profit, right?
22:40
SPEAKER_00: I mean, and that's the reason why we're doing this.
22:42
SPEAKER_00: And so that's how I think when it's when when I'm thinking exit buyer.
22:46
SPEAKER_01: Yeah.
22:47
SPEAKER_01: Uh there's always gonna be buyers for multifamily, in my opinion.
22:51
SPEAKER_01: Um, when we're working with people who aren't you know familiar with multifamily investing, uh, sometimes they'll ask, man, if these are such great investments, why are people always selling them?
23:01
SPEAKER_01: There's always so many properties on the market.
23:04
SPEAKER_01: And the reason is because you know, people have opportunities to move up.
23:08
SPEAKER_01: So um, you know, the building that Juan owned, the triplex that he mentioned, or the triplex that he sold earlier this year, um, he owned that for many years.
23:17
SPEAKER_01: It was great for him.
23:18
SPEAKER_01: He built up a lot of equity in that property and he exchanged it into this new building.
23:23
SPEAKER_01: Um, that doesn't mean that his triplex was a bad deal or that he didn't, you know, that someone shouldn't buy it.
23:30
SPEAKER_01: Um, that that new buyer who runs at triplex, they're probably gonna do the same thing where they're gonna hold on to it for a few years and then they'll be ready to trade up.
23:38
SPEAKER_01: So um, yeah, I think there's always gonna be buyers from multifamily who are doing that and everyone's kind of stepping up together.
23:45
SPEAKER_00: Got it.
23:45
SPEAKER_00: Um, and this last question, this will be our last question, is is what laws, regulations, local risk apply to and um I would say city or to the county or to the state.
23:55
SPEAKER_00: Um, how do you answer that question?
23:57
SPEAKER_01: It seems like here in in California, this is always in flux.
24:01
SPEAKER_01: Um, we have tight supply on multifamily property, and we have a majority of renters here in the city of Long Beach, but kind of all throughout LA.
24:11
SPEAKER_01: So um politicians have to take care of their base of voters.
24:17
SPEAKER_01: So we see things like new rent control laws coming in.
24:20
SPEAKER_01: Uh we also see things like um, you know, different building requirements.
24:26
SPEAKER_01: So City of LA wants to make it mandatory to provide AC.
24:31
SPEAKER_01: Um, so you know, you see changes like that.
24:33
SPEAKER_01: We just had a law pass where now property owners have to provide refrigerators for each apartment.
24:40
SPEAKER_01: So um I don't think any of these are are you know things that would cause me to get out of the market completely.
24:47
SPEAKER_01: It's just you know, you always have um changes like this that make make things a little bit harder.
24:54
SPEAKER_01: And I think they also create opportunity because as it becomes a little bit more difficult in one way or another to be a property, you know, property investor, real estate investor, um, you'll have people exit and it gives you opportunities to buy more, um, maybe negotiate a little bit harder on your deals.
25:11
SPEAKER_01: And as long as you have a strategy for navigating these changes, you're gonna be just fine.
25:15
SPEAKER_00: So a couple of things that I would say.
25:17
SPEAKER_00: One of the questions that I always get asked is Um, man, it must be a bad time to own multifamily in California.
25:24
SPEAKER_00: And I'm like, uh, what makes you say that?
25:26
SPEAKER_00: Well, there's rent control, there's these anti-landlord laws.
25:29
SPEAKER_00: Um, every year they're limiting on how much you could raise rents.
25:32
SPEAKER_00: Uh, sometimes they'll pass um um laws that that make it harder to evict a non-paying tenant, all these things, right?
25:41
SPEAKER_00: And so Cody and I continue to watch the market.
25:44
SPEAKER_00: And at no point, you know, as all this stuff gets passed and passed, and just it does get a little more difficult.
25:50
SPEAKER_00: Um, we've not gotten to the point where we're used to change.
25:53
SPEAKER_00: Change sometimes is good.
25:54
SPEAKER_00: Sometimes we need these protections out there.
25:56
SPEAKER_00: So we're not anti-everything.
25:58
SPEAKER_00: Yeah, in a perfect world, having not having rent control might be a good thing, but we learn how to maneuver it.
26:03
SPEAKER_00: But having rent control does not stop appreciation in the Southern California market, doesn't stop it at all.
26:09
SPEAKER_00: It doesn't mean that you can't raise rents, it just means that you have to be knowledgeable, you have to be working with a brokerage company that knows what they're doing and they know how to work within the uh rules.
26:17
SPEAKER_00: But to Cody's point, some people, enough's enough.
26:20
SPEAKER_00: They've owned real estate for 40 years, they made a lot of money, and now adding more laws on top of them is just too much.
26:27
SPEAKER_00: And then they contact us, we sell the building to who?
26:30
SPEAKER_00: Because that's the other question I get.
26:31
SPEAKER_00: I'm fed up with this building.
26:33
SPEAKER_00: Who the heck is gonna want to buy this from me?
26:35
SPEAKER_00: I'm like, the younger version of you.
26:37
SPEAKER_00: The younger version of you is gonna want to buy this building.
26:39
SPEAKER_00: You know, I'll ask them, how much money did you pay for this building?
26:42
SPEAKER_00: How much did you make through the years of owning it?
26:44
SPEAKER_00: Well, I had really good, but I'm sick and tired of it.
26:47
SPEAKER_00: I'm like, great.
26:48
SPEAKER_00: The next person is gonna pick it off your hands, they're gonna invest, make it better, and then hopefully be telling the same story once they're fed up with the building.
26:54
SPEAKER_00: So it is a natural cycle.
26:56
SPEAKER_00: So I hope this video was beneficial.
26:58
SPEAKER_00: Make sure you guys check out Cody Chardel, check out his YouTube channel.
27:02
SPEAKER_00: Uh, if if we could work with you, if we could help you, please let us know.
27:06
SPEAKER_00: I will tell you this, just as a closing thought, 2026 is gonna be a great time to buy five units or more.
27:12
SPEAKER_00: Both Cody and I have been doing it this year, next year will be even better.
27:15
SPEAKER_00: I do expect uh interest rates to drop.
27:17
SPEAKER_00: There's gonna be lots of inventory, lots of opportunity.
27:20
SPEAKER_00: And so if you're looking to grow, you're looking to scale, I'll tell you this if you have an investment house, an investment um condo, duplex, triplex, fourplex, we call us because you need to know that uh you could sell that at the top of the market and you could buy um say an eight unit or a 10 unit building at at the bottom of the market.
27:38
SPEAKER_00: Okay.
27:38
SPEAKER_00: So very rarely do you get to sell at the top and buy at the bottom, but this is the reality of our uh economic environment at this moment at this moment.
27:46
SPEAKER_00: Cody and I are boots on the ground.
27:48
SPEAKER_00: Please reach out to us.
27:49
SPEAKER_00: Make sure to like, comment, and subscribe.
27:51
SPEAKER_00: Until next time.