Well, we’re really getting down to the wire now. After I spoke to the last real estate agent about the property with the land lease, and determined that that was not a good idea, I was down to 10 days until our apartment building closes escrow. I’d better start seriously hunting for a new investment property!
As I explained in the last post, our apartment building currently has two loans on it: the primary bank loan, and a second loan through a different family partnership. Upon close of escrow, the primary bank loan will be paid off, but instead of paying off the second loan, I will be taking that loan with me to a new building. Effectively, the partnership will be paying off the loan by giving me the cash, and I will be taking over the loan payments on that loan. But that means that I’m paying interest on almost $600,000 of loaned money the day our escrow closes, so I want to line up a new investment property as soon as possible. I need some rental income to cover that new loan payment, stat!
I’ve already secured a home equity line of credit to cover me in cash my cash runs short after buying the new property. The HELOC is for $125,000, which gives me some breathing room when it comes to choosing which properties will fit in my price range. With that out of the way, now I can focus solely on finding a quality investment property, and I don’t have to sweat so much over the exact cost of the property.
What’s Available on the Market?
I’ve been preparing for this property search since late summer of last year, when we were first planning to sell our apartment building. I’ve been keeping tabs on new properties meeting my search criteria using Redfin. Redfin seems to be pretty good at picking up on MLS listings and changes within a short period of time. They claim to update every 15-30 minutes, so unless you have an MLS subscription, it’s probably the fastest way to find new properties and keep track of their sale dates and prices. I also like that Redfin shows a lot of data on investment properties, such as the number of units, the number of beds/baths in each unit, the rent for each unit, etc. Zillow and some of the other websites don’t include this information, which makes them basically useless when it comes to evaluating a rental property.
Using the Redfin data, I’ve compiled a spreadsheet listing all of the available properties on the market within my price range (for an example, look here), which includes a lot of data points that are relevant to the pricing of the building, such as cap rates, gross multipliers, the number of square feet, the price per square foot, etc. Since I started that spreadsheet, about six months ago now, I’ve tracked every property that’s come on the market that is even remotely close to my criteria.
Narrowing the List Down to My Favorites
It’s tricky to narrow down the choices, especially without getting emotion involved. I did it using several factors.
First, I sorted my list by net cash flow after anticipated expenses. The front-runners in that category are properties I should definitely take a second look at. I also added columns for pro forma rent and ran another cash flow calculation based on the pro forma numbers. If you’re calling B.S. on me for what I said in an earlier post about not using pro forma numbers to evaluate properties, let me clarify. What I said then was that you should not use the listing agent’s pro forma rent numbers when evaluating a list of potential properties. That’s still true. The difference here is that I’m filling in my own pro forma numbers, based on comparable rents in the area. The other difference is that I’m not doing my initial ranking based on pro forma numbers. I have eliminated the buildings that don’t make the cut, numbers-wise, and I am just looking to differentiate between the front runners now. The buildings that have the potential to generate more cash are obviously going to pull ahead in the rankings over buildings that are already maxed out at current rents.
How Old is the Investment Property?
Another criteria I’ve been looking at is the age of the available buildings. For some reason, it seems like 90% of the multi-family properties in Orange County were built in the 1960s. There are a few that were built earlier, and even fewer that were built in the 1970s or later. I’d like to avoid getting a building that was built in the 1960s. Why, you ask?
What the heck WAS that, you ask? A piece of scrap metal? Maybe if I show you where it came from:
Whoa. So yeah, that wasn’t a cheap repair. And it wasn’t convenient for the tenant, either. They lost the use of their kitchen for a few days. Thankfully, the timing was good, and this happened when we had a nearby unit that was “in between tenants” (i.e., vacant), so the tenants very kindly agreed to go use that kitchen instead for the few days of construction.
Anyway, the problem with buildings built in the 1960s, at least in my area, is that most of their plumbing is galvanized on the supply side (meaning the odds that it’s just about corroded away are pretty high) and cast iron on the drain side (meaning it’s just about rusted through like that piece of scrap metal you see above). Some buildings might be fine. For example, the plumber who fixed that big section of pipe did a video inspection of the pipe on both sides of the replaced part, and it looked okay. But the odds are not in your favor.
Some people who buy really old houses (around here that means 1920s or so) are better off because their houses are on a raised foundation. It makes getting to the plumbing to replace things a heck of a lot easier. But in the 1960s? No raised foundation. All the plumbing is buried in slabs. So unless you have a jackhammer and you’ve been just itching to replace all of your tenants’ floors anyway, it might be better to avoid a building built in the 1960s.
Plumbing problems aren’t the only bad thing that can happen to an investment property, of course, but for me, it’s pretty high up the list. You can ballpark the useful remaining life of a roof by taking a look at it. The same with the windows. But plumbing hidden in a slab, that’s all gambling. And unfortunately, I do not yet own a jackhammer. (But it would be a good writeoff…)
After narrowing down my list of potential properties, I finally landed on a favorite! Next time, I’ll tell you more about the one I chose.