Property Manager/Broker of O’Neill Property Managment
Bruce Norris is joined again this week by Mike O’Neill. Mike owns O’Neill Property Management in Riverside, which has been open for business for many years. He has not only been a manager, but also a property owner and investor.
- What sparked Mike’s interest in working with the investment side of real estate?
- Were the properties he bought to hold purchased at a significant discount?
- Has there been a repetitive source of deals?
- Is it more challenging working with multiple units opposed to single units?
- What is one of the most important things when considering what property to buy?
- What are his thoughts on Section 8, and does he still work with it?
- What is the current percentage for vacancy rates?
Bruce asked Mike about the investment side of real estate and when this sparked his interest. Mike said it was when he was 17 years old, which is really early. Bruce only knew 2 other people who had this on their mind at this age, so Bruce wondered why he thought of this so early. Mike said he always like real estate, even when he was in high school. When he was a senior, he and his older brother bought their first rental together. He had worked full-time throughout most of high school and had saved up some money as well as his brother. They went in together and bought the house. They actually ended up buying 3-4 together before he went out on his own. Most of these purchases happened throughout high school and college.
Bruce asked him if he had anybody in his world, as far as a friend or anyone else, who started doing things this early. Mike said he did not know of anyone since most of them had other things on their mind in his school. Mike went to Riverside City College to get his grades in order before transferring to Cal Poly Pomona for his last two years. He chose this college because it had a very good business program that was geared more toward entrepreneurial and small business. There is a lot of this out here right now, but there was not a lot of this back then. It was a unique place where most of the professors were actually in the business world. It was from these people he learned a lot.
Bruce asked Mike what his mindset was when he was buying properties. He wondered if he was interested in keeping them from the start or if he was interested in making money from flipping it. He said he was interested in making an income. The first couple properties he bought were multiple units, and they did create some income. He did borrow some money and part of a down payment for the first one from his grandmother. However, even though he looked more at income in the beginning, he was not really looking far out initially as far as selling. He just wanted them to perform well, so he continued developing them and raising rents while he could.
Bruce asked Mike if he was ever in the buy/sell business during his career. He said he had sold two investment properties in his whole life. He held everything else he bought. He said he would be a good person to talk to about buying, but not about selling. Bruce said this is not uncommon and you are either wearing one hat or the other. Bruce did not do this. To much of his detriment he did not hold properties since he thought it was great to find something below market and turn it into a chunk of money. Hence the name “chunk money.”
It was not until someone Bruce really respected asked what would happen to your family if you got hurt that Bruce realized he was prepared to survived monthly on any continuous cash flow. This put the bug in his ear to say he would solve this issue. He regretted not thinking about this earlier because when Mike and Bruce were both involved in it, they were buying things at times during downturns. At these times you could be buying houses for $30-$50,000. To keep it would have been amazing. There is no doubt Mike landed on the right square.
Bruce asked Mike if he thinks most of the properties he purchased to hold have been bought at a significant discount. Mike said this was definitely a criteria that mattered to him. Most of the time he bought most of his properties during down markets and recessions. Sometimes he bought outside of them when it was a good yield. You want to make some money when you buy it, so if you can get a little bit of equity in the beginning it helps. It helps you keep your payment down, with your cash flow, and with a lot of other things. It will also help when you want to sell because the cost of sales will be there. If you do not have significant equity, they will eat up a bit of your profit.
Bruce asked if there has been a repetitive source of deals. He asked Mike if he talked directly to owners, or were most of the purchases done out of the MLS or auctions. Mike said he did not do any auctions, but he did do MLS, direct discussion with lenders and owners, and all kinds of things over the years.
Bruce asked Mike if the property management business had an obvious situation where he would buy a property from someone whom he managed. Mike said on occasion he would. Typically he tried to stay away from that, but if an owner called saying he needed to get rid of a property and was willing to sell it at a certain price, then he would work with them. However, he did not want to be in any situation that would be considered a conflict of interest, so he was very careful with what he got involved.
Bruce next asked him if he ever had a seller carry back financing, which Mike said he did. In the older days, that was the way it was done a lot of the times. This was especially true if interest rates were high on loans or difficult to obtain. They would get owner carrybacks, and they worked out well for both sides. Bruce asked about when he would look to pick up the next rental property and what type of property he would pursue. He said he would buy multiple units; and at this point where he stands he would rather do it in houses and have something with 3 or more bedrooms, 2 or more bathrooms, a 2-car attached garage, and a front and back yard. In most cases he would want it to be built after the 50s, usually from 1960 on, because you have more modern construction and less issues. He would not want to buy a 100-year old house. This is what he typically looks at when deciding what to buy.
He usually does not want to buy too big a house. Why buy a 3500 square foot house when a 2,000 square foot house is only going to rent for $200 less. Bruce also asked about yard size, which Mike said hopefully not too big. In Apple Valley, everything is a half acre, and Bruce found there was an amazing amount of things somebody could find to put into a half acre. This is really not pleasant. Those rural properties can be a handful, and obviously he does not want them to have anything in their backyard except lawn furniture and chairs. He does not want them to have any other furniture or cars, and this is something on which he is very tight within both his company and the properties he owns.
Bruce asked Mike if he has noticed more challenges with multiple units. Bruce said he has never owned apartments buildings because when he lived in one, he counted the days to get out of there. He did not want to own a property where anybody who lived there would make it their goal to leave. However, Mike has owned apartment buildings, so Bruce wondered what his experience has been with them as far as renting. Mike said you will be okay if you put good tenants in there. At the same time, it is more work, no doubt about it. Instead of dealing with one family in a house, in a fourplex you are dealing with four families.
Multiple units can be a good investment, but the small, multi-unit market is somewhat limited. They have not been building many new fourplexes or even 8-plexes, although he would still buy it if it was the right deal. One of the problems with things such as 4-units is that there are a lot in the area. Bruce can think of areas in Riverside, Moreno Valley, and San Bernardino where this has gone very wrong. However, it did not matter what he would have done personally because when the area caved in during a recession, they became dangerous-looking. You would not be able to rent that property to a great tenant because it would not be on their plate and they would not even want the area. This is one of the detriments of owning a 2-4 unit.
Mike said location is important. If you are buying in a somewhat rundown area, you are taking a risk. If you are buying blocks and blocks of fourplexes, you better make sure they are being maintained well. However, they can create problems in your building, even those that were brought in by somebody else. Mike said he is not a big fan of being in these big projects of units. He has some, but they were done earlier on when he was first starting. It was generally recommended to stay away from these large areas of multiple units because some people do not really keep an eye on their properties, and this can cause a lot of issues.
Bruce asked as far as apartments go, has he had a different experience with a studio versus a 2-bedroom. Mike said studios are harder to rent and to get rent increases. You have a different type of person who is basically living in one room. A one-bedroom is a little easier, while a 2-bedroom is easier than that. On the contrary, when you have 3 and 4 bedroom apartments you have difficulties there because you are talking about the number of people living in a somewhat small area. This is why Mike said he would stick with the 1 and 2-bedroom places.
Bruce asked if there is any difference between a condo and an apartment. Mike said condos would be easier, especially with having central control. You would not have some of these independently owned buildings that are so close together, and condos have a lot of similarities to houses. They tend to be a little more upgraded than apartments. They tend to get a little more rent and little more quality.
Bruce asked Mike how aggressively he raises rents when somebody who has been in there for three years has had everything be really good. Bruce asked if it is more important to keep the stability or to maximize the rent. Mike said it is actually both; however, you do not want to not raise the rent because you may end up suffering down the road. Every dollar you collect in rent, besides what you need to pay your current expenses, will see a higher cost the longer you are there. This comes with the property coming vacant at some point, including things it will need like paint and carpeting.
What Mike tries to counsel his owners on is whenever the market is improving, you want to raise the rent every year but you do not want the large increases that would cause the tenant to leave. Most of the rent increases are in the 3-5% rent area.
Bruce asked Mike what his feeling was about Section 8. Bruce asked if he has experiences with this as a property manager and if he would consider it as a property owner. He said yes and no. He has had experience with it, but they no longer work with Section 8 anymore since it is too difficult. They make you sit at the property all day long and will not even make an appointment whenever you have a move in. Sometimes it will be months before they do an inspection and look at the properties. Mike believes they have become way too beau acratic and used to serve a lot more people than they do now. They have become a lot more administrative and a lot less helpful.
Bruce also has friends in the business with rentals, and most of them have decided not to do this either. He has had some Section 8 rentals himself, some that worked well and others that did not. Mike guessed Bruce had not had any of these types of rentals for several years, which Bruce confirmed. This is typically what happens. You have a not good experience and think it is not necessary. If it is necessary to use Section 8, then you have probably bought the wrong property. Mike said housing authorities are serving fewer and fewer people each time. He hardly gets a call from anyone asking if they rent. They want to make sure they stay full, so they gear whatever people they have to their projects they own. He does not see them as a big player in the rental market at any price range.
Bruce asked Mike how proactive he is on major maintenance. Mike had told Bruce it seemed like it was his year to replace roofs or air conditioning units. Bruce asked Mike about most of the properties he has and if he has a plan in mind to take care of a certain thing one year even if it is not urgent. Mike said on the properties he owns, as they come vacant he is upgrading almost all of them. He is putting in new cabinetry, ceramic tile, and new countertops. It has been a long-term plan of his to upgrade the overall quality of his properties. They were not that bad as they could have had linoleum on the floor or the original cabinets. It’s possible they have been rented out so many times that textures were replaced, which makes them look brand new. Mike did this on a lot of his properties when they became vacant, which does not happen too often right now. This is something he has been doing for the past 7-10 years.
Bruce asked Mike what the percentage would be for vacancy rates right now. He said he only has 3 vacant rentals in his portfolio, so it would be well under 1%. It is a good time to be a landlord and think about buying a property if it is a good deal and a good time to hold it. He does not see the future where rents will not be going up every year in the next few years. He does not see a future where real estate prices will not normally be heading upward. They are not replacing or growing their housing stock at the rate it should be. Whenever they are buying and flipping, they may want to think about buying and holding on some of them.
Bruce said with his clientele, there are definitely people who had a business plan to keep a lot of their properties, especially during the downturn. They have hit home runs because they were buying them at under $80 grand. Now it is $250. In 2008-2009, we had the mother of all downturns, and Mike said he wished he had bought more properties. Bruce asked Mike what the timeframe was when he was buying quite a bit. Mike said he started buying in the 80s pretty rapidly and into the 90s. It started slowing down again after the mid-90s, but during the downturn he bought about 6 properties. Since then, the last property he purchased was about in 2010. He did not really buy anything in the past 5-6 years, and he thought maybe it is time to take another look. However, it would have to be a good deal.
Going back to the management side, Bruce asked what percentage of the rentals have financing on them. Bruce asked if the rules of financing could change where they could finance a lot more than 4 properties, and would this change what they did? Mike said the vast majority of his clients had loans on their property. Some of them withheld them long enough that they paid off their loans, but the vast majority of them do it. A lot of them refinance these loans if they thought they could pull out cash and use it to go buy another property.
Mike has looked at Bruce’s business model regarding the hard money loan business and the servicing, and he has the other side of the coin with management fees. Yet he is an investor who owns properties. Bruce asked Mike what he would say to somebody who wanted to own a business some day and not just own a few rentals. Mike said if he had to do his life over again he would have bought more rentals, especially during the Great Recession. There were some other bad times in the late 70s-early 80s when a lot of the owner financing was happening. He would have bought more, and the people who wanted to get into real estate should not over-leverage themselves. You want to make sure you have enough sufficient capital in case some things go wrong. However, he is all for it if they want to get into the business of real estate.
As lenders, one of the things they sometimes have to put the brakes on is somebody who is a great finder. They can find a lot of things, but they do not have the mechanism to exit them as quickly as they find them. Eventually you have to look at their books and tell them they are done and need to sell. One of the hardest things in the business is to have some balance. The more property you own, the more liquidity you have to have. There will be a day when something goes wrong, which is usually the case.
Thank you for joining us for Bruce’s interview with Mike O’Neill. For more information, you can visit his website at www.oneillproperty.net or give him a call at 951-684-7510.
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