Sri is a multifamily investor based in the Bay Area. She started doing real estate in 2014 with a 12-unit complex in Dallas, Texas. Now, she focuses on buying and selling properties in the East Bay doing heavy renovations on each unit. Today we find out her story about getting into multifamily properties and how lucrative it has been for her.
Sri’s husband found himself unable to walk one day when he went to work. After meeting with a doctor, they found out that in 5 years, he would become disabled. This pushed Sri to find an alternative source of income that could replace her husband’s salary.
For Sri, investing in single-family homes didn’t make sense in terms of helping them reach the financial freedom they want. She heard about some investors who had multifamily properties but weren’t earning enough.
So after doing research, she decided that they needed to find the maximum number of units they can get in a reasonable market.
Being a first-time property buyer, they faced some difficulties and were unaware of some things.. Their first property purchase was the 12-unit complex in Texas which they purchased for $720,000. They took a loan from Wells Fargo which required them to make 30-35% downpayment.
They put in $140,000 in the renovation. Sri shares that they always do heavy renovations which include adding accessory dwelling units (ADUs), cash for keys, and layout changes. After 1 and ½ years, they sold it for $1.55 million.
The key to investing out of state is to find a good broker and good property manager.
After selling the property in Texas, they decided to invest in California where they discovered hard money. They would typically get a hard money loan of 9% for 18 months with a loan-to-value of 80% then later they’d go to a commercial lender to refinance with a 5-year loan of 4.27% with a loan-to-value of 70-75%.
Rent control is a big problem in Oakland. But Sri believes that you can take a unit from negative cash flow to positive cash flow. Also, there is an advantage as properties with low cash flows can be purchased at a discount.
When it comes to converting an under-market, tenanted property, and bringing it back to being lucrative there are steps that Sri follows.
The first is to offer cash for keys to the current tenants so that the unit becomes vacant. Next, she does a layout change where the unit is gutted.
The purpose is to bring up the rents for that unit by adding value. One example is when Sri converted a studio with a kitchen into a junior 1-bedroom unit.
Investing in California is more for equity since capitalization rates are a lot lower. But for every dollar you spend in the property, the property is actually worth more.
One thing Sri looks for when she searches for property deals is what she calls a true value-add property. These are properties that are way below market rent. Those with vacant units are a good thing, but they tend to be priced higher.
Usually, she would put into a contract that they can start the cash for keys negotiation even if they haven’t closed yet. Usually, half the tenants are open to it.
Sri would typically pay between $10,000-30,000 for cash for keys. While it’s a lot, it’s important to think of the multiplier effect of the increased rental income and the higher value of the property you’d get later.
When they purchase a property, it takes around 1 ½ to 2 years from purchase to when they sell it. Sri likes to do a “Flip, Flip, BRRR” as a way to grow her money exponentially so that she would have the capital to buy a larger property that she would hold onto for cash flow.
She usually holds on to the unit once she reaches $100,000 a year in net positive cash flow.
There’s a lot of risks that an investor would need to take if they choose California. So investors shouldn’t hesitate to look out of state.
It’s also important to consider that there are differences in valuing residential and commercial properties. The basic premise is that the moment you cross the 5-unit mark, it’s now a commercial, multifamily property.
It’s a lot easier to have a property manager with an in-house contractor to do work on your property. This allows you to truly be a passive investor.
Once you have 3 months or so of stabilized rents, you can put the property on sale or refinance it
One of the deals Sri closed on was a 5-plex in Oakland she bought for $1.25 million in 2018. She put in $180,000 in renovation which included exterior and roof work, adding storage units, adding windows, holding costs, and the $15,000 cash for keys she paid to 1 tenant.
The 1-bedroom unit there would make $2,500 a month with 3-bedroom units raking in $3,000 a month. She later sold it for $1.73 million with a 5.5% capitalization rate and 14% cash-on-cash.
After selling a lot of their Oakland properties last year, they built up capital to find a different deal. Sri’s been looking into splitting a land and rezoning. She sees rezoning as high risk but also high return.
She found out that you can buy a piece of land that is basically 2 parcels with one zoned for a hotel and the other zoned for multifamily. Now, she’s looking to close on a 115-unit hotel that she is converting into multifamily.
Based on the highest and best use concept, some old hotels make more sense to be placed into a long-term lease. The key is to find one where the purchase price is low, the unit number is high, and the market can support the rent.
Her budget per unit is $10,000-12,000 and since it’s a garden-style hotel, she won’t need to make drastic changes and will just need to put in a sprinkler system, parking spaces, sewage, and kitchens.
Banks already know it’s a good deal, so Sri gets 80% loan-to-cost from her lenders.
Execution is the most difficult. You have to be on top and not allow yourself to be spread too thin. You lose when you’re forced to sell at a time you don’t want to sell.
Go the extra mile and take a step beyond what people are saying.
Put everything into a spreadsheet in order to make a decision.
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