An Inspection of the Orange County Apartment Market

Irwin “Tres” Trester spent more than a year looking for income property before buying a four-plex in Huntington Beach.

“The advantage I was looking for was cash flow. … Going from a (rental) house to a multi-familyseemed like the right way to go,” he said. “And the place to go seemed to be Orange County.”

 

Like Trester, a lot of people are looking to invest in real estate as an alternative to a roller-coaster stock market and low-yield CD’s.

While most bargain-hunters are shopping for houses or condos to use as rentals, some agents advise that investors consider small apartment buildings instead.

Two- to four-unit buildings often generate more rental income than a similarly priced house. And properties with four units or less qualify for the same type of loans as single-family homes and condos. Commercial loans are required when the number of units hits five or more.

The down side, of course, is the headache of becoming a landlord. There’s maintenance, repairs, chasing down rent and dealing with leaky plumbing and plugged toilets at all hours. Not to mention the current problems due to rising vacancies and falling rents.

You can hire a property management company for a percentage of the rent to deal with those hassles, but only if you get a good one.

“It was more of a chore,” recent San Clemente buyer David Snyder said of his first apartment building. “There’s a lot more maintenance involved.”

Still, agents argue that the fit is right for some people. And since prices are falling, the timing is right as well.

“What you need to do is buy income property and let other people pay it off,” Huntington Beach agent Mike Thornton told a group of potential investors at a recent seminar on buying four-plexes. “I like four-plexes. They’re kind of easy to understand. The banks like them.”

Agents differ over how hot the “multi-plex” market is right now.

Thornton and “Old Town Al” Ricci, another agent specializing in this market, maintain that the multi-plex market is “on fire” right now.

But Bill Webster of Vanguard Investment Properties, another multi-family expert, disagreed.

“The market is not on fire. But it should be,” he said. “It’s a perfect time to buy. It really is because the interest rates are so low and the values are so low.”

As with the house and condo market, many people bought small apartments at the peak of the market, only to lose their shirts — and their properties — to foreclosures and short sales.

According to Steve Thomas of Altera Real Estate, almost one in four of the 421 two- to four-unit buildings listed for sale in the Orange County is either a foreclosure or a short sale, or a property offered for less than the loan balance.

High levels of distress translates into lower prices for buyers. According to Webster, units that once sold for more than $1 million now are listed for $800,000 or less; $750,000 buildings are going for under $500,000.

But Webster said many investors are staying on the sidelines, waiting for prices to drop further. Rules limiting the number of multi-family loans an investor can have has limited the number of deals being made as well, he said.

Still, buyers are out there. According to Thomas, 147 small apartment buildings went into escrow in March.

Thornton, the Huntington Beach agent, drew a group of 17 potential investors when he pitched small apartment buildings at an Irvine hotel recently. In Thornton’s view, “negative cash flow” is really “wealth insurance.”

“These tenants pay the mortgage for you,” he told his audience.

Jeff Busche, 47, of Huntington Beach seemed convinced.

“My mother owns real estate, so I’ve seen how her investments have gone over the years, and they’ve done pretty good,” Busche said. “Single-family homes, I think they’re good (investments). … But with a four-plex, if one of your tenants moves out, you only lose 25 percent (of your income).”

Trester said that he had one tenant move out soon after he bought his Huntington Beach four-plex in October. He lowered the rent by $25 a month and charged just $25 for the first month to draw a new tenant to fill his vacancy. He also rejected a suggestion that he raise rates for the coin laundry on his property.

“I think prices are still tumbling. (But) the vacancy factor is increasing. In that little area I bought in, the word is people are moving out. They’re moving in with relatives, they’re moving in with friends, or they’re leaving the country,” Trester said. “It’s a great time to buy, but at the same time, you’re running the risk of a higher vacancy factor.”