Where do landlords actually make the most money (profits) ?
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Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y@Matt R. I'll take a stab at answering the question as to having the highest total profits....
Any area that has something unique to offer that people want will have high appreciation because of basic laws of economics. Add to that many of those areas were hit pretty hard with the 2008 crash, and therefore had a tremendous opportunity to rebound. As such they had incredible gains in that period of time since then in both appreciation and rental growth. I believe going forward coastal towns will still always provide the greatest appreciation opportunities due to the fact that there is a very limited supply of coastal properties. History has proven that even pre crash.
To @David Faulkner 's point(s) - I don't think it's that people are appreciation haters, I think people go after the cash flow (and the areas that provide cash flow) because purchase prices are lower and they can move quicker along the path. They are looking for financial freedom in the shortest window, not just net worth on a balance sheet. I doubt I could have obtained financial freedom in under 7 years given a very meager starting position if I were investing in LA and San Fran; mainly because the amount needed for down payments and not having the cash on cash return to immediately funnel back into the machine.
If financial freedom is the goal and you're an average investor starting with say just $25k, cash flow on cheaper properties is the way to go. LA/San Fran/etc is out of reach. $25k isn't going to get you anywhere in those markets. They'd have to diligently save for another several years just to get one property. However; if you are looking for long term wealth building and net worth growth, those types of areas are definitely where you want to be in.
Now that I have reached my goal of financial freedom, I don't know that I'll be investing my own money in these plays much going forward. My plan is to begin stockpiling some cash reserves over the next few years. Then the next time one of those types of markets takes a hit hopefully I can pick up a house or two and get some awesome appreciation and net worth building and be able to be a part of getting the highest total profits. But even with all I have that will take quite some time of saving up to get even one decent property then.
97 Replies
- Victorville, CA · Member since 2017 · 22 posts · 20 votes9y
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
There is so much misinformation on this site it is crazy.
Here are the facts;
For total profits, cash flow plus equity since 2009 the top 3 locations are San Francisco, San Jose and LA.
Since 2000, that is LA, SF and San Diego.
For the sake of discussion... why do you think that is the case?
You stated there is so much misinformation on this site, can you prove this as a fact or is this simply your opinion?
And if there is so much misinformation on this site why ask the opinion of the users on this site if it is filled with misinformation?
Good point. This source is Zillow senior editor for the since 2009 portion and CoreLogic NYSE symbol CLGX for since 2000.
can you please provide links to the quotes.
That market research info is google able. Are you surprised by the results? This is not really some unknown secret. If I get a chance I will dig the links up as I have posted these links on BP before.
No its no surprise I just want to see your source and its context. For example I as a us investor can advocate for the 1031 exchange say its the best thing for investor but a Canadian investor can come on here and say these forums are full of misinfomation because 1031 exchange doesn't exist in Canada and we are all full of crap. There is a difference with info that works in my market vs. not working in yours vs. these forums are full of misinformation. For example your making claims that pertain to the market your working that may not neccasarily work in others which is why you will find opossed opinions due to the difference in the markets. Now having said that you have yet to provide proof of your claim and examples of said claims to prove your point, all I see is difference of opinion on how to do the same thing.
Originally posted by @Levi T.:
@David Faulkner LOL - Your comical. One again, you and @Matt R. are ogling over top ranking, not returns on the very bases of your argument of equity growth. Once you two get done watching hot tub time machine, let the rest of us know how 1980's worked out for you, and please open a portal for the rest of us to go back in time, and join you. Until that point, we have to stay in the world of reality, and that reality does not make you a winner if your buying in a lower performing market over the last 5 to 6 years, at the most expensive prices just because your returns would have been amazing if you got into a market in 1980's. Your making less money, but don't want to except that fact, and just want everyone else to join you.
The rankings I mentioned are for total profits since 2009 and 2000. Profits being the averages of cash flow plus equity. I am not sure I get your point other than some areas have higher percentage growth. When you already have 18 million residents in greater LA the growth rate is not going to be the same compared to some much smaller markets. Now the market is still growing overall so growth is important but does not tell the whole story. You can always pick any 48 month history and build some picture but that would be an incomplete picture for many buy and hold types.
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
Originally posted by @Jorge Contreras:
Originally posted by @Matt R.:
There is so much misinformation on this site it is crazy.
Here are the facts;
For total profits, cash flow plus equity since 2009 the top 3 locations are San Francisco, San Jose and LA.
Since 2000, that is LA, SF and San Diego.
For the sake of discussion... why do you think that is the case?
You stated there is so much misinformation on this site, can you prove this as a fact or is this simply your opinion?
And if there is so much misinformation on this site why ask the opinion of the users on this site if it is filled with misinformation?
Good point. This source is Zillow senior editor for the since 2009 portion and CoreLogic NYSE symbol CLGX for since 2000.
can you please provide links to the quotes.
That market research info is google able. Are you surprised by the results? This is not really some unknown secret. If I get a chance I will dig the links up as I have posted these links on BP before.
No its no surprise I just want to see your source and its context. For example I as a us investor can advocate for the 1031 exchange say its the best thing for investor but a Canadian investor can come on here and say these forums are full of misinfomation because 1031 exchange doesn't exist in Canada and we are all full of crap. There is a difference with info that works in my market vs. not working in yours vs. these forums are full of misinformation. For example your making claims that pertain to the market your working that may not neccasarily work in others which is why you will find opossed opinions due to the difference in the markets. Now having said that you have yet to provide proof of your claim and examples of said claims to prove your point, all I see is difference of opinion on how to do the same thing.
These are not my claims and the info is published by Zillow and CoreLogic. If you disagree with those folks that is ok by me. I am not trying to convince you and you can use or dispute, that is your choice we can understand.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @David Faulkner:
In fact, I will go one step further and go against the grain of this post by saying that the argument that one market is better than another is a nonsensical one ... some are better for some things and worse for others, and a skilled local REI operator will know what these better and worse things are and tailor an investment strategy optimized for those conditions ... I have no doubt that a skilled REI operator in KC will have better returns than an unskilled one in SD, and visa versa
This is the best thing anyone can take away from this thread. It's not really about the market, it's about YOUR PERSONAL SKILL AND KNOWLEDGE IN REI.
I would even say that a skilled investor in SD will have better returns in KC than an unskilled KC investor in KC, and vice versa.
I main purpose of this post was to share some returns info for the new Cali folks. Just about everytime they post saying they want to invest here they will get 10 responses from BP self appointed experts trying to sell them on some far away market and make a buck off their ignorance. Always included with those jokers responses is how the returns in LA or other Cali location are really bad. Nothing is further from the actual truth historically.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @Matt R.:
I main purpose of this post was to share some returns info for the new Cali folks. Just about everytime they post saying they want to invest here they will get 10 responses from BP self appointed experts trying to sell them on some far away market and make a buck off their ignorance. Always included with those jokers responses is how the returns in LA or other Cali location are really bad. Nothing is further from the actual truth historically.
Gotta love all the self appointed experts that just purchased their first property this year! LOL
Interesting that I tend to see extreme ends of the spectrum. Many investors are all-in for cash flow, others all-in for the appreciation markets. Like others have mentioned, I'm assuming it's different strokes for different folks. I'm a newbie but I am planning on acquiring in both types of markets. Maybe as I get familiar with the pros/cons of both I will tend to gravitate heavily towards a single strategy but I don't see why i couldn't plan to acquire properties in both types of markets.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes9y
Much of the BP debate on cash flow vs appreciation assumes two falsehoods (1) cash flow gets consumed by management challenges and cap ex over the long haul and (2) appreciation is speculative. For many investors, markets, or properties, these two assumptions are absolutely true. For many other disciplined investors, these two assumptions are absolutely false.
Let's take our unique skills and interests coupled with our market opportunities and make the best of them.
I have both cash flow and appreciation plays, with GRMs ranging from 7 to 13, and both strategies can be very successful. And @Steve Vaughan I feel that forced appreciation is the biscuit AND the gravy.
Originally posted by @Joe J.:
Interesting that I tend to see extreme ends of the spectrum. Many investors are all-in for cash flow, others all-in for the appreciation markets. Like others have mentioned, I'm assuming it's different strokes for different folks. I'm a newbie but I am planning on acquiring in both types of markets. Maybe as I get familiar with the pros/cons of both I will tend to gravitate heavily towards a single strategy but I don't see why i couldn't plan to acquire properties in both types of markets.
Right on. I think what some newer folks might try to understand is that for REI initial cash flow is not always the same as total profits. In a non REI business, cash flow usually equates to profits. In REI cash flow is one element of total profits. Some locations have other factors that will outperform cash flow alone. I may have mentioned before, REI hedge fund managers know this but many new to REI seem to skip over that part.
- Contractor · Lexington, SC · Member since 2015 · 62 posts · 50 votes9y
Originally posted by @Mike Dymski:
Much of the BP debate on cash flow vs appreciation assumes two falsehoods (1) cash flow gets consumed by management challenges and cap ex over the long haul and (2) appreciation is speculative. For many investors, markets, or properties, these two assumptions are absolutely true. For many other disciplined investors, these two assumptions are absolutely false.
Let's take our unique skills and interests coupled with our market opportunities and make the best of them.
I have both cash flow and appreciation plays, with GRMs ranging from 7 to 13, and both strategies can be very successful. And @Steve Vaughan I feel that forced appreciation is the biscuit AND the gravy.
I'm a newbie and definitely not qualified. But just to add to Mike Dymski's point, buying right goes a long way towards forced appreciation also.
Correct me if I'm wrong, but if you buy right, cash flow and forced appreciation become easy to realize.
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes9y
@Matt R. this is all about supply and demand and the three rules of real estate, location, location, location.
There are lots of people in California. Many moved there for the great climate, so the climate creates more demand. In San Jose, the tech industry created job demand and higher salaries help push up housing prices. Look at the new economy and the role that tech companies play. There is huge demand on skilled workforce such as engineers and software programmers. Salaries are high, so people can afford to spend decent money on housing. As California has gotten more developed, there has become a shortage of land. Environmental regulations has made it harder and more expensive to build. That drives up new construction costs and limits supply of new housing, driving up existing housing. Even where land is available, it may be far outside the city with a longer commute. People seek a location close to work, which means existing housing. This makes the land beneath a house worth more than the house itself.
Of course the swings in values are much more volatile in California than they are in many places. My market didn't see anywhere near the drop in values during the housing crash and our population grew every year as people moved in for jobs. As recovery occurs, we also don't see the swings go as high. Land is cheap where I live and values are partially constrained by new construction costs.
As long as you get in and out at the right time in California, there is no doubt it is a great market. Of course there are other factors in a business. Taxes in California are higher than other parts of the country and it is not a landlord friendly state. This means although rents are higher, so are costs of doing business. Also the price of entry can be steep on properties. You can buy properties for $100K in many parts of the country, but not likely the case in California (not right now at least).
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Joe J.:
Interesting that I tend to see extreme ends of the spectrum. Many investors are all-in for cash flow, others all-in for the appreciation markets. Like others have mentioned, I'm assuming it's different strokes for different folks. I'm a newbie but I am planning on acquiring in both types of markets. Maybe as I get familiar with the pros/cons of both I will tend to gravitate heavily towards a single strategy but I don't see why i couldn't plan to acquire properties in both types of markets.
I think there is an important point to be made here ... I think it is dangerous to invest all-in for JUST appreciation and equally as dangerous to invest all-in for JUST for cash flow, no matter what sort of market you live in. I live and invest in a so called appreciation market. Does that mean that I ignore cash flow? No. If I lived in a so called cash flow market, does that mean that I should ignore appreciation? No. I think you need to consider both, and how they combine with other factors (tax savings, mortgage pay down, etc.) to form your TOTAL return. The best way IMO to combine ALL sources of profit into a single analytical framework is to project out the financials and planned exit and calculate the IRR ... this is still far from fool proof, but at least it allows you to look at BOTH cash flow AND appreciation, and other factors in combination, and not in isolation and fixed forever in time as with CoC, CAP rates, etc.
Also, both cash flow and appreciation are not steady, and not linear ... they both go up and down over the short term in unpredictable ways. The market could crash tomorrow eating your appreciation for several years. The roof could spring a leak and eat your cash flow for several years. Both are very difficult to predict and control in the short term. The best you can hope for is to factor in the long term average, assess that over long hold periods where it has a chance to average out in a more predictable way, and hold for the long term so it does in fact average out. As a backup plan (or several) you need to maintain cash reserves, equity, and cash flow margin in order to keep multiple profitable exit strategies open in case your projections are off. For example, I prefer to only buy great deals where I can force appreciation in the short term ... this gets me built in equity day 1 so that I can sell at profit at any time if I need or chose to as a plan B, even if plan A is to hold as a rental. These sort of risk management analysis and strategies IMO is the sort of thing that tilts the odds in your favor from speculation into the realm of investing, and what separates the professional investor from the amateur, regardless of the market. Sadly, though, your ability to do this practically as a newbie in a far away out of state market is greatly diminished, which is why I constantly advise against it. I hope this perspective helps.
Originally posted by @Joe Splitrock:
@Matt R. this is all about supply and demand and the three rules of real estate, location, location, location.
There are lots of people in California. Many moved there for the great climate, so the climate creates more demand. In San Jose, the tech industry created job demand and higher salaries help push up housing prices. Look at the new economy and the role that tech companies play. There is huge demand on skilled workforce such as engineers and software programmers. Salaries are high, so people can afford to spend decent money on housing. As California has gotten more developed, there has become a shortage of land. Environmental regulations has made it harder and more expensive to build. That drives up new construction costs and limits supply of new housing, driving up existing housing. Even where land is available, it may be far outside the city with a longer commute. People seek a location close to work, which means existing housing. This makes the land beneath a house worth more than the house itself.
Of course the swings in values are much more volatile in California than they are in many places. My market didn't see anywhere near the drop in values during the housing crash and our population grew every year as people moved in for jobs. As recovery occurs, we also don't see the swings go as high. Land is cheap where I live and values are partially constrained by new construction costs.
As long as you get in and out at the right time in California, there is no doubt it is a great market. Of course there are other factors in a business. Taxes in California are higher than other parts of the country and it is not a landlord friendly state. This means although rents are higher, so are costs of doing business. Also the price of entry can be steep on properties. You can buy properties for $100K in many parts of the country, but not likely the case in California (not right now at least).
Ultimately if you are looking for total profits as a buy and holder, your first sentence is really what needs to apply. In some areas the land becomes so valuable that a whole other level of land use comes into play. This happens everyday in high demand low supply locations. Not many of those type folks are on BP so we don't commonly get the first hand accounts of how that next level stuff goes down.
Cali still has sub 100k stuff...it is just not that profitable when compared to the rest. Figure if if is sub 100k in 2017, "Houston, we have a problem"
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Originally posted by @Joe Splitrock:
@Matt R. this is all about supply and demand and the three rules of real estate, location, location, location.
....................As long as you get in and out at the right time in California, there is no doubt it is a great market. Of course there are other factors in a business. Taxes in California are higher than other parts of the country and it is not a landlord friendly state. This means although rents are higher, so are costs of doing business. Also the price of entry can be steep on properties. You can buy properties for $100K in many parts of the country, but not likely the case in California (not right now at least).
I think many new investors share my concern about trying to buy in California: Timing (whether it's calculated or luck) can make such a material difference on the performance of your investment. I'll give an example loosely based on my only rental (duplex) purchase back in 2012 assuming 20% down:
2012 Purchase: Experienced ~ 45% price appreciation and ~ 30% rent appreciation over 5 years.
Purchase Price: $350k
Rennovation costs: $30k
Market Value after Rennovations: ~ $415k
Current Market Value: ~ $600k
Current Market Rents: $3,400/month
Conclusion: I feel pretty good now because of the price/rent appreciation. I am cash flowing pretty well and have a good amount of equity.
BUT what if I made the same moves back in 2007: In the same neighborhood, prices decreased ~ 40% from peak to trough, rents maybe appreciated ~10% but experienced higher vacancy rates
"Made up 2007" Purchase:
Purchase Price $350k
Rennovation costs: $30k
Market Value after Rennovations: ~$415k
Market Value as of 2012: ~$250k
Market Rents: $2,850/month
2012 Conclusion: Crap, on paper, I have zero equity in spite of my initial "forced appreciation" and have nothing to show for my $30k rennovations. Market rents have gone up slightly but I'm still burning negative cash flow and am scared to death of a large repair/capEx item or vacancy issue coming up.
I am absolutely cherry picking extreme points in time of the historical market cycle for so cal, but the idea of the second scenario does scare me. If I was looking in a cash flow market, I would not be nearly as reluctant to acquire additional properties. This might be a bit off topic but I just wanted to share a crazy beginner's psychology of buying in an appreciation market vs cash flow market.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes9y
People - you need both. The IRR just doesn't pencil out with some CF and some back end equity. I am very glad to see that @Mike Dymski and @Matt R. are willing to keep pushing the truthful perspective. I've kind of burnt out...
Stupid is free - all can have some :)
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
- Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes9y
@Thomas S. The reason certain areas in California experience seemingly abnormal growth simply has to do with demand and supply in some of those markets.
Think of it this way.. Canada as a country has a land area of about 3.85 million square miles which is larger than the US (about 3.7 million square miles); but there are only about 35 million people living in the referenced area there in Canada.
The State of California in contrast has a land area of 163,696 square miles but almost 40 million people living in it. You have more people in California than in all of Canada squeezed into such a small space. Heck, this might even explain the earth quakes.
When you have a situation where in some areas in CA, they technically have no buildable land and have to tear down a structure to build anything new, factor in just based on population there is likely to be more millionaires and billionaires in CA than in say North Dakota or Vermont... prices will have a way of going up.
You have a scarce resource (land) in a 'free market' where the primary method of determining who gets what is the price mechanism. Its the invisible hand (Adam Smith), not entirely irrational exuberance.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
So as far as achieving financial freedom in 7 years; you're saying your annual income needed because you would refinance a property (or the 3-4 that you have after 7 years). Pull out cash to add to the cash flow to cover your annual living expenses? Bold strategy. Max leverage til you die I suppose and hope that values don't drop when you're planning to refi and hope that interest rates don't jump a ton.
That's why people look at them as being very different (albeit two sides of the REI coin). Appreciation and equity in a property is completely dead until you either sell it or refinance because that's the way it only gets into your account. Cash flow is monthly money actually in your account that you can spend.
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
So as far as achieving financial freedom in 7 years; you're saying your annual income needed because you would refinance a property (or the 3-4 that you have after 7 years). Pull out cash to add to the cash flow to cover your annual living expenses? Bold strategy. Max leverage til you die I suppose and hope that values don't drop when you're planning to refi and hope that interest rates don't jump a ton.
That's why people look at them as being very different (albeit two sides of the REI coin). Appreciation and equity in a property is completely dead until you either sell it or refinance because that's the way it only gets into your account. Cash flow is monthly money actually in your account that you can spend.
Note max leverage on a convention refinance is 75% LTV. Most ELOC on investment properties have similar constraints (when they can be found). It does not seem extremely bold to refinance to a 25% stake but I have not reinvested all of my RE profits back into RE so it is easy for me to say that.
I see your point on high rates could make it less desirable to take money out whether via ELOC or refinance but for the last over 20 years the interests rates have either lowered or been near historical lows. This could end at any time but it is also possible that a cash flowing property ceases to cash flow. In the last 20 years I am confident there are more areas that have ceased to cash flow (areas like Detroit if purchased near 2008) than there have been rate issues refinancing or using ELOC to get appreciation out of a property (because there have been no significant rate issues refinancing in the last 20 years as long as you qualify for the refinance (i.e. are not over extended)).
Anything is possible but what you point as an issue has not been an issue in a long time but purchases less than 10 years ago that cash flowed have ceased to cash flow (not in all areas but it did get some expert/experiences investors: Ever hear of Mike Butler? He wrote a good/great book (Landlording on Auto Pilot) and was successful for quite a few years but his market was Detroit).
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Thomas S. I am one of those califorina idiots and proud of it.. easy 7 figure profits just on appreciation over the last couple decades well it all spends.
@Account Closed all though your geography and population numbers are spot on .. Canada has some of the most expensive properties on in the western hemisphere.. Just look at Vancouver BC.
And the fact is you can buy properties at reasonable prices in CA ... just not usually within 30 nautical miles of the ocean.
As for price crash's in 07 t0 09 the biggest I saw were FLA I bought brand new homes at auctions in Fort Meyers area for under 40k each and these homes sold 2005 ish for 200k each
I personally sold one of my OREO's in Atlanta suburb for 37k it had appraised when I made the loan at 155k.. Vegas got hammered ... PHX central CA... Portlandia not so much except top of the market were HIgh end homes say 2 to 3 million were trading at 50% off.. but 300k props went down maybe 10%
so it just depends...
Landlording is landlording its a business you run it like any other.. what many fail to realize with some markets is the lack of liquidity.. that's were high priced markets are usually better bets.
just try to sell a 100 house portfolio of C class in any major mid west metro area... there will be little to no profit above cost.. Multi different story of course.
- Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes9y
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
Originally posted by @Dan H.:
Originally posted by @Austin Fruechting:
I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.
I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.
So many questions if you want to go down this path...
1) And what annual passive income would you be at in 7 years?
2) What if you can't house hack for your first one because you don't live there? Where are you in 7 years with your $20k starting cash?
3) Even if you do live there and house hack, have you mapped out to know exactly where you would be in 7 years? Or is it just your guess that "it would not be a stretch to have acquired 3 small multiplexes in 7 years." Is that house hacking every property after refinancing the previous to a traditional mortgage once appreciation has created enough equity to do so? Or is that buying the next ones with a traditional investment loan?
4) Do you think that appreciation level of 10-20% annually is going to continue? Or was a lot of that the rebound from the crash? What happens when you plug a more realistic long term appreciation factor and not simply one that would have great market timing?
to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.
to #2: I am a strong advocate of investing local. If I lived in a different local that provided cash flow over appreciation I would start my investing local. After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local. So #2 does not apply because I would not start investing somewhere I do not live.
To #3: It depends on what you consider map out. It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab). Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes? In other words I tried to be real conservative on my estimate. I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.
To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound. So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned). 1970: $19.5K, today ~$550k. 1977: $71K, today ~$800K. 1992: $167K, today ~$550K. 1999: $490k, today $1.3M. 2004: $751K, today ~950K, 2012: $302K, today ~$600K. 2013: $490k, today ~$700K. I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent). Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well. That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation. So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.
Question #1 was the entirety behind my initial post about the fact that I was able to retire in under 7 years. So if you're not addressing the issue of passive annual income to achieve financial freedom then you missed the point of my initial post and all of the above we are talking about two different things.
Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor. Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source. You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).
But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).
Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).
Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).
Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).
Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.
Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.
So as far as achieving financial freedom in 7 years; you're saying your annual income needed because you would refinance a property (or the 3-4 that you have after 7 years). Pull out cash to add to the cash flow to cover your annual living expenses? Bold strategy. Max leverage til you die I suppose and hope that values don't drop when you're planning to refi and hope that interest rates don't jump a ton.
That's why people look at them as being very different (albeit two sides of the REI coin). Appreciation and equity in a property is completely dead until you either sell it or refinance because that's the way it only gets into your account. Cash flow is monthly money actually in your account that you can spend.
Note max leverage on a convention refinance is 75% LTV. Most ELOC on investment properties have similar constraints (when they can be found). It does not seem extremely bold to refinance to a 25% stake but I have not reinvested all of my RE profits back into RE so it is easy for me to say that.
I see your point on high rates could make it less desirable to take money out whether via ELOC or refinance but for the last over 20 years the interests rates have either lowered or been near historical lows. This could end at any time but it is also possible that a cash flowing property ceases to cash flow. In the last 20 years I am confident there are more areas that have ceased to cash flow (areas like Detroit if purchased near 2008) than there have been rate issues refinancing or using ELOC to get appreciation out of a property (because there have been no significant rate issues refinancing in the last 20 years as long as you qualify for the refinance (i.e. are not over extended)).
Anything is possible but what you point as an issue has not been an issue in a long time but purchases less than 10 years ago that cash flowed have ceased to cash flow (not in all areas but it did get some expert/experiences investors: Ever hear of Mike Butler? He wrote a good/great book (Landlording on Auto Pilot) and was successful for quite a few years but his market was Detroit).
I wasn't saying 75% LTV is a bold place to be. I was just saying that counting on a cash out refinance every couple years to be your income to live on is a bold plan.
There's a lot of hypothetical talk, so lets get to brass tax.
Are you financially free with enough passive income to live without working? If so, what did you start with? What did you have when you hit that goal? How quickly did you reach that goal? If you aren't there, why aren't you if it's as easy as you're stating it is within 7 years even if you only started with $20k?
I started with around $20k and am financially free purely off of the cash-flow and it took me less than 7 years.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes9y
Originally posted by @Mike Dymski:
Let's take our unique skills and interests coupled with our market opportunities and make the best of them.
Yep. Just as the great philosopher James Brown once sang:
Cause you got to use just what you got
To get just what you want-a
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