Why It's Almost Impossible to "Lose Your Shirt" in California Multi-Family Investing

[Applause] [Music] as far as a sufficient number of people that want to live here that make good money and we rent the benefit of rent control is the tenants expect their rent to go up because they know what's allowable so they're already long ways on the property over a few years at 8 and 1 12% hi I'm twne lapa director of asset management with TR wealth and I'm joined today by Rachel gordano who's going to be our moderator and Bill muli the owner and president of TR wealth management for our p

odcast entitled why it's almost impossible to lose your shirt in California multifamily investing oh my God first of all I love that title that's incredible you notice that I said almost almost oh my God you guys I want to start with Bill because we've covered your success in California we've discussed it on other episodes but just for starters I want you to give us an overview of your success in California multif family oh you guys really want to hear about 40 years so I'm gonna have to condens

e this down the brief overview started as a spring chicken no it just I started young I went to college I was in infuenced by a professor he talked about how you can make big money in real estate and I was learning how small things could make large things happen I became educated in real estate I got a broker's license I tried to put it in practice right away flipping my first home I learned that I'm not a contractor I made money I went to work for a large real estate outfit I got some training

I have some advantages that investors that don't have a lot of real estate training or background or education don't have but I spent so much time time in sales trying to convince people that to sell their buildings versus what how to keep them how to run them how to trade them all kinds of different things I learned that most people bought one property and kept it for their lifetime and did really well um I said I want to do better than that and so I started buying myself in the early 2000s it

took me a long time almost 10 years 10 years I stopped my life waiting for something I wanted to do because I had no money I I I started real estate in a really hard market and I just I ended up buying a property and then that's where I made all My Success they call it a broker or a principal and I was I became a principal words a buyer not just a broker how multi family was it like a duplex or was it like an apartment building what are we talking like what's multif family kind a big it's a big

leap I did buy a house I flipped but really this was a N9 unit apartment building which is pretty to start yeah that's huge that's amazing cuz just from looking at different properties to invest in myself and my husband we immediately were like why would we invest in one when we can get like a duplex or we can get four like why would we not invest in a multi multif family because you can actually make more in the rent so I think that what you did with smart I know it's a risk but I think that's

just an incredible leap that's amazing you can just to add on to that you are smart enough to see that not everyone sees that because it's just they only can get what they can afford but you can actually it's more affordable to buy apartment units versus a home because who do they qualify when they buy an apartment building they really when they buy a home rather they just look at you as the only Sole Provider after tax money and if you're smart you don't want to pay too much in taxes so you don

't show a lot of income so unfortunately you don't do that buying a duplex has a second income Triplex third fourth Etc I think a good place to start is a one to four unit like four units Max you're still in the single family type lending single family rates are a little higher than multif family rates they didn't used to be that in the 90s and 2000s it used to be the other way around because they saw multif family as more risky because they thought that tennis didn't take care of the property n

ow they figured out wait a minute it's more risky to make a loan a bank to make a loan to a single person because they could lose their job same with buying a house you can make a lot of money flipping houses don't get me wrong I'm not poo pooing that but if that one person loses their job or falls on hard times or gets drug Edition or whatever happens to people depression whatever really happens then you got no nobody paying and 100% your income gone so you want to spread out that risk and buy

more units if you can as soon as possible I want to talk about risk with Dwayne because your favorite conversation Dwayne so many investors are avoiding California due to rent control and other regulations but you say California is still a viable alternative why looking backwards uh we just spent the the last episode we did talking about how Bill bought a building for $450,000 in the year 2016 years later he sold it for over 2.6 million so they always say with stocks or whatever hey past perform

ance is not a guarantee of future results but I think that is a useful indicator but then people say I don't rent control because California has a new rent control law keep in mind that first property Bill bot actually did have rent control so you can do well in a property that has rent control and actually our state law is CPI plus three and a half% or I'm sorry CPI plus 5% the CPI right now is three and a half so that means you could raise rent eight and a half percent you could move rents a l

ong ways on a property over a few years at 8 and a half per. so really that that law is not a showstopper so I think people tend to look at things and just dismiss and I think you got to really look at what kind of opportunities California has okay so another concern is negative population growth does this concern you guys does this concern you Dwayne you're going to love my answer yes yes and no so I've actually been doing some research on this for a Blog that I want to send out because I think

this is a fascinating topic and I can see why people are concerned about it so the thing is yeah we're getting net negative population growth in California thing is there's so many people here with a high net worth there's so many high-paying jobs that it's like you're talking about millions of people and we're losing a small percentage of them there's not enough housing units to go around as it is so really quite frankly it doesn't move the needle however people are leaving the state because o

f things like regulations overcrowding High Cost of Living and I do think that from a public policy standpoint I'm not running for office but if I was I would be saying hey we we need to work on some of these things because they're making it harder to live here they should be making it easier but as far as a sufficient number of people that want to live here that make good money and will rent there's just there's no end inside as far as the supply of renters so we don't really concern ourselves

with that in the short term okay but Bill so you own and manage properties in the city of La and Greater Los Angeles so how do you navigate run control then Dwayne and I work together it's great that he has this research like I on one side I want to act like hey I care about everybody which I do but I'm not in a position to help everybody I can only help me and my investors and some things I do outside of that for to give back but I'm only one person what we do with rent control is there's some

benefits of rent control the benefits of rent control is the tenants expect their rent to go up because they know what's allowable so they're already baking in that my rent's going to go up such and such amount some areas are only 4% 3 4% a while back they Haled it for a few years so that was not good at all cuz then it just up the whole system but anyway so that's one thing the second thing is I made my first Millions on holding a property and rent control property as people moved out we modera

ted the rent it's getrich slow I got in the business to be get-rich quick but it's get-rich slow and you need another source of income other than just investing especially when you're just starting out no one just goes in and all of a sudden buys an apartment building and then they can live cash free I see a lot of people doing that but they're not living in California for sure they might be Liv in the back of a truck or something but anyway I don't know I I I I digress but for for also on rent

control is that people tend to stay longer so there's less turnover so that's less cost out of pocket after you buy and there's some really great areas in La where the the the housing is worth $44,000 a month in rent what Dwayne said is the reason why we're not scared is there's not an over Supply there's always an UND Supply no matter how many buildings they built they're all brand new and they cost to much ours is more affordable the housing stock is 1960s 70s and 80s they built something 2020

Great and has more amenities but they cost a lot of money to build and then they have to rent them for a lot so until they overbuild or figure out how to house all these people I have no fear that we have people waiting I feel bad for a lot of people because 90% of them don't qualify to come through our door I feel I don't know what's going on with them I feel bad about that but some of these people are moving out and I heard something about Texas like half the people are moving out and then ha

lf the people are moving back so I don't know Dwayne has the numbers but it's interesting everyone goes what's what's shiny and good right now but we have such a diverse economy here we have more than one type of business we have the ports and la and Long Beach and everything's trucked in near my neighborhood There's jobs and the people have them and I just want to help people get ahead by investing in real estate because if you bring home a normal paycheck after tax unless you're some kind of G

uru genius or or invent Nike or something weird you're not going to make it you're not going to make a lot of money so either get out or figure out how to invest uh in in real estate in a business something totally agree with that uh Dwayne I'm going to ask you about this cap rates in California are lower than almost anywhere else in the US which also tends to depress cash flows so how do you make investments work in California sure one thing is is make making sure to buy a building that has ups

ide rent potential which that's what we're always doing as we raise rents we're underwriting and predicting cash flows around three or 4% growing into as much as five or six% as we get into the middle years of our hold period so you can get some cash flow are we going to compete with what you could do in I don't know somewhere in the midwest maybe Salt Lake City what somebody could get on owning a a retail type Outlet somewhere in the middle of the country no but you you got to keep in mind the

cap rate is an adjustment for risk the reason why our cap rates are low is because uh California properties are less volatile there's less chance of them going down we actually look at it as an indicator of it being a quality investment okay so Bill from your experience in California multi family why would you choose it over other parts of the US why are you staying in California I know it best I like to pay a game I'm good at I know it for the last 40 years so how it kind of es and flows I know

what areas have gone worse or stayed bad and not improved I know that buying a really rough area for some people is okay but for me it's not because you can't collect your rent and you can get shot collecting it or whatever that kind of thing I don't go there and I think that what Dwayne said is very important by the way is risk adjusted we're great because we have so much appreciation potential and when I when we talk about four five or 6% cash on cash return there are models and there are act

ual deals that we're doing that are more but they're Morely they're mainly when they're already settled or we added value to them and we stabilized them and then we have benefi beneficial financing as long as you don't over leverage you shouldn't have a a problem we're not going to lose your shirt if you have good underwriting good tenants and you treat them and you pay attention to what you're doing so as long as you don't fall asleep at the switch don't answer the phone when someone calls that

needs to rent it those kind of things you're going to do fine with real estate so why the why this area people keep coming here okay I don't know it's because they want to be in Hollywood star I don't know it's because they're that we're we're certain they like San Francisco for the tech I don't really know why everybody comes here they love the weather they like the beach everybody lives within two miles or three miles or four miles from the beach they can get there quickly entertainment Capit

al Sports is good you can get a lot of that elsewhere and there's some a lot of places that I see kids going to college right now that are very exciting Dynamic they're moving very well they're appreciating very well but we're seeing them slow down we're seeing that they're getting too many people at once they're getting too much infrastructure they got to raise the taxes they haven't figured it all out yet this is a mature City Long Beach is a mature City LA is a mature City and it's got its pr

oblems it's got traffic um but you can also move to what they call the BBS right suburbs and a lot of people have so and a lot of people are working outside their houses you know uh in their houses outside of work now so there's a lot more this podcast is coming from a podcast it's not coming from a a central studio and so I just think California is great because there's always somebody there to take their place to rent the property there's always somebody who wants to pay more um and that's hel

ping uh increase the values increasing the cash flow and the returns so it's very solid okay so Dwayne are there any advantages to California multif family that make it better than any other place in the US yeah one thing that's for certain is you don't have to worry about the risk of people developing a whole bunch more units near your apartment community and then taking your tenants because there's just very limited land left in a lot of these areas that we buy in you you can't really develop

a new building unless you find something that you can tear down now I think that's one of the we don't really do development because it's a higher risk profile but if we could get the right kind of resources together I think uh we'd see a huge advantage in you take a building that's really old and poorly maintained buy it for the land scrape it uh put state-of-the-art units on it and we could make some really high returns that way it's just that you got to be able to get through that whatever it

is what is it Bill one or two years of development process and you can get hung up in the city with permits you got to be able to wake that out um before your investment starts to pay off so that's one thing also we're always seeing buildings that people aren't properly managing so when we buy them there's a lot of potential for improvement and moving rents up and Bill this is going to surprise you but I'm thinking why don't we make these take these buildings and do a sustainability angle make

them green buildings put in electric vehicle Chargers and make it something that's friendly to people that are working from home because working from home is not going away or some people work a flex schedule where it's part commuting and part staying at home so we can if we can offer them units that have those kind of amenities I think we can get a rent premium Bill I know Bill's sitting there thinking oh my gosh it's going to cost a fortune no you know I'm going to give a Dwayne answer a yes a

nd no on that I'm so prudent with my budget I don't come off that way to people but we talked about this but I'm so prudent once I take in a property that I have a budget of course I've gone over it before but I take away from someplace else I don't go to my investors and say give me more money and capital calls I try to stick to what I can do of course life throws you wrenches all the time but the thing is I try to do that I try to give more open space Green Space people want Outdoors are to ba

rbecue have a dog whatever I have people over I'm trying to this is not very technical but try to get different kind of switches and Outlets so they can plug their phones in and put that right by the landing when they come in and I do little things like that I've done a lot of research and done some trying to get some more one of the things I do is I do a thing called rubs and that's actually asking the tenant to pay a portion of their trash and utilities their water and what that does is that a

ctually makes the tenant conscious of how long they're showering if they're washing their car with the water if they're doing too many cycles of dishwash wash and when they get a leak they call me right away to fix it versus if I pay it they don't call me so they're like wow you shifted the cost on to the tenant that's so bad in in some of my buildings that was $2,000 a month or something for water and I split over 20 people it's $100 but the thing is that's also in addition to rent so I bring d

own the rent to cover for that because once we don't need any rent control as soon as I charge too much for rent everybody tells me they're not coming to my unit and I sit there vacant we don't need this rank control I they're just protecting and buying votes for the three three million people that are in it in Los Angeles I'm all for helping people but they have to give incentives for landlords to put money back in the properties or they're just going to get worse and worse condition and just c

ompletely stopping everything is not the solution there's they're working it out there's but they need to have Advocates on both sides but California is just super no competition not enough housing everyone wants to live here High Cost of Living sure sure so you got to get that professional tenant and to be honest we're looking for the tenants that can pay and stabiliz the property because you buy an income stream you don't want to buy someone that I don't know if I can pay the rent or not it's

hard there's people at 30 40 and 50% of their paychecks go to rent it's very difficult but there's ways of doing it right they can go into a single or one bedroom they don't have to have a spare bedroom for their office unless they want it can afford it blah blah blah but so is that where the title of this episode it's impossible to lose your shirt in California multi family came from or like where where does that phrase come from why is why do you say it go ahead Dwayne and I'll tell you my tak

e on it so that was my idea and certainly if you buy a property and you overpay tremendously for it you take on way too much debt and let's say it's got some code violations a foundation problem you can lose your shirt then but assuming that you pay you do your homework look at your comps and pay a market rate for it and you can see on paper that hey it pencils out the rents will pay the mortgage that nobody else is going to be able to come out with a bunch of units for half the price because th

ere's no place to develop it we're almost a million units behind in how much housing we need here so you're going to be able to get tenets and we don't have the thing where we're getting overbuilt some of the markets in Texas where rents are plummeting right now because they overdid it and they'll stabilize it's not like that they're if you bought in Texas you're doomed or something but the next couple years are going to be tough and you have to be able to ride that out with us we don't really h

ave those kind of swings so I'm saying if you do your homework and you're reasonable and you take care of the property it's pretty hard to come out negative on this and lose your money and Bill you could probably test to this you've done 70 of these right yeah even a dummy like me can do [Laughter] it really had sales pitch there but you know what I keep getting lucky every year for 30 years that's what people think but the thing is just if you take care of it do the things he just said uh ask q

uestions ask the professionals pay a little money for tax work pay a little money for the inspector every money I've ever spent in spending it for an inspector to tell me what's wrong I've anticipated the budget or I've asked the credit from the seller I've made tenfold from that so ask the experts and rather than take all the risk by yourself and invest with someone like us or invest with another person that you that's a little bit ahead of you in the game and learn and play your position and g

et partners that's good too but to be honest a lot of people have just come here bought a building held it for a while and done excellent I'd rather them buy a house or or any type of investment than not to invest at all there's better ways to invest but the point is this if you don't invest you're not going to take care of yourself in the end and you need to do that you need for retirement you need for extra income you need for lifestyle changes when you get kids when you get cars when you get

let go or whatever happens in Life or you get sick most people don't have enough money to take care of themselves cuz putting a parent in an old folks home good luck there it's a lot of money and I don't think a lot of people have money for that I really don't so then Dwayne what do you see as future opportunities for California investing I talked about the development I talked about creating kind of a lifestyle experience in an older building so our rent growth is paused a little bit we had thi

s huge acceleration coming out of covid it was a rebound thing and rents went crazy and like 2021 and then they slowed down so one of the opportunities I see right now is buy property now while the Market's still a little bit cool and we're looking at good projected economic growth for the country over the next 10 years interest rates are stabilizing and I would say we're always saying it's a good any time is a good time to invest but I think the timing is particularly good now and then Bill wha

t about you do you have anything else to add I agree with them totally we're getting our hands on A6 and half million property two blocks from the beach we're loving that right now that's a great deal that we're sending to our repeat clients we're looking at more deals we look at I don't know 100 to 200 deals before we buy one and and then we underwrite a lot of those some of them have already sold because I always pick the best ones and someone else wants to buy them they're not always going to

me but we're underwriting a lot of deals to find the best ones I think the biggest criticism is where's the next deal bill that was great you did that for someone else what do you got for me and I think they got to be patient we had a gentleman call us that three months ago called us and said hey I want to invest right now we're like Hang on we're trying to find the right deal for you cuz you want to buy and hold so we need a nice one and now we have one called them back and all of a sudden he'

s thank you for making me wait but a lot of people come to me a lot of people come to me and they got money burning a hole in their pocket my mom just died I got all this money I got to spend it right now hang on hang on figure out what you want to do with it have a financial plan for it or it could be gone at Vegas tomorrow so so our Market's just been really good for a long period of time I think it's going to continue to be good it es and flows like any kind of Market there's never a straight

line up like the like the graphs indicate they move so you never know where you're on the curve smart D's got some great things to say that it's a good time to buy we thought the interest rates were going to be much higher than they are they're already starting to pull back they might pull the other way if the deal can't stand on its own right now I'm not buying it I'm not waiting for somebody to the winds to blow a different direction it's always nice it's always nice when they do but you got

to plan for expect expect the best but plan for the worst and we do that we do a lot of underwriting to say what happens if we take too much loan out here oh what happens if we don't get those rents what happens if the property goes down generally it's like a stock you wait for the dividends to come in which is the cash flow and then you don't have to sell it even if the price goes down and the way I protect the downside is I'm always buying the best deal in the market because I've been a broker

a long time I know my area really and I adjust for these factors and I I say no to a lot of deals like a I'm not a total um ground dweller but I but I do have grit and I know what prices they're selling for and Brokers bringing to me and I go you're going to sell at this $3 million building for 28 or less and I'm generally right I'm not always right but when I when they sell the Brokers come back go how' you know that I go because I know what I'd buy it for because I'm a buyer and I'm always kn

owing when I buy something what I can sell it for that's because I began in a wholesale and a retail kind of mindset from a young boy so that that's why where other people are doing it they're not got my experience so they're just buying and hoping and wishing things happen there's no mystery why we do well we work hard and we make small incremental changes in a lot of different areas I love that Dwayne do you want to wrap it up sure let me throw out a a couple really quick statistics that I cam

e across when I was looking into this blog so California and New York have the highest number of young High income residents that's people between the age of 26 and 35 earning greater than $200,000 per year so some people might be leaving California but we have a ton of professionals making good money and as far as just how much wealth is here California has the highest average net worth except for the state of Connecticut we're number two in the United States we will continue to be big Believer

s in California we're biased we live here but we do know that it's uh a good economy and a great place to make money in real estate if you want to learn more about our company see our track record and some case studies on investments we've done over the years look us up at www.tr wealthmanagement.com and thanks for joining [Music] us