San Diego Housing Bubble News and Analysis

From what I know 1 to 4 units can be financed like owner occupied and/or residential properties. Once you get above that it changes.

I dont know if there are any state laws regarding this ?
1 to 4 units is considered "residential"

FNMA loans are available nationwide on 1 to 4 unit properties, with 1 unit owner occupied OR as rental property.
You need 25% down for the best pricing on rental property.

It is possible to pay up front and get 4.375% 30 YR Fixed, even on rental properties OR you get a higher rate on rental property without paying the pricing hits.

Conforming loan limits on 3 units is $645,300.
On 4 units it is $801,950.

It's not unusual in may parts of the country to find 4-plexes from $150K-$250K that rent for $1600-$2400 gross rent per month.

FHA can go as low as like 5% (maybe even 3.5 but I have only seen it as low as 5) for 2-4 units.

If there are 3 or 4 units then the market rent times the FHA area vacancy factor (which is not the same as the actual vacancy rate) must carry the units.

For example if the market gross rent (as determined by the appraisal) is 5000 per month (irrespective of the actual rent) and the FHA factor is 10%, then the PITI can't be more than $4500. I think there is some room for error with regard to the "T" and the "I".

Thanks for the useful replies everyone. So it looks like 2-4 units are tied in with residential home prices more than with commercial property prices?

HLS, I agree that other parts of the country seem to offer better ROI that CA. I don't know why San Francisco is rated as the rental mecca. Very hard to find any decent cap rates there, even in places like Oakland.

Most investors I know that look into the four plexes and under earn the best cap rates out of state.

Anyone know some good places to look for those magical ROI fourplexes? (e.g., particular towns in Texas?)

I know Surveyor and 4plexowner are people you may want to email and ask about that. There have been old posts about this subject way back when. It takes work... alot of work. One thing you really want to look at are demographics of the target city... is it growing or shrinking, what are the employment drivers, things like that. I know Surveyor has places out of state, dont know about 4plex

I've done a little leg work on this, and initially thought that Texas was going to be good, but the rental market relies too much on the potential buyer pool, and I was looking for a more traditional renters market, with a steady source of renters, and a market less volatile that in soCal. Boston has some lovely buildings, many appear to built as multi-family units, and a reliable source of renters. Buildings are cheaper to buy, rents high, so cap rates are tempting, but it is very seasonal. The downtown apartments and condos, some of which are beautiful, are more expensive and offer smaller returns. Philadelphia is another possible candidate. New York probably has lots to offer, but it's just too big unless you already know it well. I've found that the best judge of current cap rates is listed properties with leases still in place. Redfin seems to provide more of these financial details than some MLS listings I've been receiving.

A company called Marcus and Millichap provide free reports. You just have to register http://www.marcusmillichap.com/Services/... They give a brief but useful breakdown of cities' rental markets.

The hardcore CRE investors I know seem to like Loopnet. One acquaintance purchased a 40+ unit apartment complex in the Midwest.

http://www.loopnet.com/

Unless you can get reputable management (and probably nnn leases) I can't really see the revenue offsetting the hazard and risk associated with out of state units.

Unless its a really shitload of revenue.

My two bits.

The hard core CRE people I know laugh at loopnet. Any decent deals are gone long beofre ever reaching it.

I agree about loopnet. About 7 years ago we considered going multifamily and we used loopnet. Every property we found there was already swarmed on. The thing that we found was that you need to know your market and know it well. You cannot find out about Memphis or Atlanta from behind a terminal in San Diego.

outta here

I've been too busy with my day job to really deal with my properties, but here are some observations:

There has been a lot of investors in Texas over the past few years. When California started getting too expensive and started going down, many investors went to Arizona, Las Vegas, and finally Texas. Texas is not as susceptible to bubbles as California, but my view is that it is probably too expensive and has been too inundated with investors. I'm not up on the statistics either - Texas I believe has seen some drops in value but not enough to offset the amount of investor interest. Anyways, I do not have any properties there so I do not have any first hand information.

For my property (4 units) in South Carolina, for some reason it is doing very well. I bought it for $232k in 2005. Although the value has not moved much (I haven't been watching the property values either so if it has gone up in value, it's possible, but I doubt it), it has been giving me about a positive cash flow of around $200/mo. The first year of course was not good, but once the economy stabilized a bit, it's been fully rented and it's made money. =shrug= Only problem is that the property taxes get assessed every year and I have to usually challenge them and tell them that hey the economy sucks please stop increasing the property values. The property management for this property seems to be really good. They did charge a lot of stuff to me in the first year, but they've been quiet on the charges for the last year. Maybe they fixed every thing.

The last property I bought was in Alabama in 2006 and it's pretty much the same story. First year sucked, but things are stable now and it's giving me cash flow. It's also a 4 unit and I bought it for $115k. I've had a few vacancies on it, some questionable tenants, but it's doing ok. I personally can't understand how someone can't make the rent when the rent costs $400/mo., but oh well.

So yes, the properties out of California can make you money and stuff (and it's certainly better to buy a property for $115k vs. $800k). But like you've seen here, there are a lot of risks and I can't really say I would recommend out-of-state investing because there are so many moving parts you have to get into motion and a lot of hassles that would bother many people here. Also, this type of investing will tend to bother your significant other (as it has done to mine).

But like there are several type of stocks, there are several types of real estate properties and areas to invest.

High risk, high reward - California, New York, Hawaii. Properties here are very expensive, but vacancies tend to be low. Most of the money made here are through appreciation, not through cash flow.

Negative appreciation, but cash flows: rust belt areas like Ohio, Indiana, Illinois. These areas do cash flow and the properties can be cheap, but they do not hold their values well and will often lose their value.

Areas inundated with investors: Arizona, Las Vegas, Georgia, Florida. Avoid these areas. Although Georgia is probably not as bad as the other areas. The "dumb" investors (the ones who do not do any research and just go where everyone else goes) go here.

Steady appreciation, some cash flow: Tennessee, Kentucky, Missouri, Idaho, Iowa. These areas can provide some appreciation and some cash flow but are as slow as molasses. Not sexy but some people love boring.

I haven't been looking for properties myself (too busy with my day job), but my observations seem to indicate that there is a lot of pressure on the commercial rental properties (5 units and up). These properties are not usually federally backed and so you have to get private funding for them and the private funding has been extremely difficult to get. So as a result, if you are able to find a good property, you can drive the price down quite a bit and if you are able to find some funding for it, there is quite a few coin you can make.

Of course, the caveat is that those properties have bigger headaches than the regular 4 unit and less residential properties. I have one and it was a $#!!$^%&&@ hassle to find funding for it.

But as they say, high risk high reward. At least that's the theory.

Hope this helps.

edit: I use loopnet myself but yes, most of the deals are already gone before it hits loopnet. However, I use loopnet as a guide as to what properties can be valued at in the area that I'm looking for and what rents are being used. Unfortunately if you want the deals, you will have to develop a relationship with the realtors in the area first and they will bring you what deals they have. Buying a property out of state is not the same as Amazon.com...

Marcus & Millichap are also good, but you should develop a rapport with them first and then they will bring you the deals.

That was a great breakdown, thanks surveyor. It's clear that there are so many places to choose from, the task is a bit daunting. I've been watching the +5 unit CRE to see if there are deals yet or whether it's worth waiting a year. Some of the bigger buildings would probably require a full time caretaker/handyman on site, but the returns on the face of it look tempting, maintenance/management notwithstanding. Then there's the "all your eggs into one basket question." I had assumed Marcus and Millichap were into institutional investors only?

No, M&M also targets small investors. If you talk to them, they'll send you the information. Just like a lot of realtors, they won't turn you down. It's just that their portfolio of properties consists of a lot of commercial and not a lot of SFRs and condos.

As for choosing the properties, it's just a question of choosing an area (which involves research), see if it fits your needs (cash flow? appreciation? half-and-half?), and then seeing if the properties in that area can give you what you want and if you can get them at a good price.

My own strategy usually involves investing in properties that are near universities and military bases. While students and enlisted people are not the greatest tenants, usually there is a lot of support staff that goes along with them, and those are the people I target.

If you are going to be dealing with out-of-state properties, you really do need a property manager. Believe me you wouldn't want to deal with that crap yourself. Of course, the problem is that you have to find a good one. Some investors prefer a live-in property manager, some prefer a business. I've had successes and problems with both so I can't tell you which way to go.

My personal guess is that there are a lot of small investors (who have invested in +5 unit properties) in trouble and they have overleveraged properties. However, they are like the high end SFRs in San Diego, where they are better able to withstand market difficulties. So finding a deal can be hard, but not impossible. To find them you will need a good investor-realtor and/or M&M. Still, commercial residential properties between 5 units and $1million do not have a lot of investors so that is a factor on your side. With the lending problems nowadays, it is very difficult to get a loan and some investors have no choice but to try to sell the property because they cannot find someone to give them a loan.

My two cents.

I actually prefer the smaller 3-4 unit properties, and fewer tenants paying higher rents. It just seems to me the more renters you need to collect from, the greater the probability of problems occurring. To be honest I haven't seen that many 5 units for sale, but was curious just from the point of view of CRE declines I keep hearing about. Anyway, I'll certainly follow up Marchus and Millichap.