Quote from @Becca F.:
Quote from @James Hamling:
Quote from @Becca F.:
Quote from @Mike D.:
Quote from @Becca F.:
Quote from @Dan H.:
Quote from @Becca F.:
Quote from @Dan H.:
Quote from @Becca F.:
Quote from @Dan H.:
Quote from @Becca F.:
Quote from @Mike D.:
Quote from @Becca F.:
Quote from @Mike D.:
Quote from @Becca F.:
This post generated over 100 comments...wow.. I agree with many of the comments about owning a higher quality asset in an appreciating market. I invest in the San Francisco Bay Area and Indianapolis metro area.
My appreciation and net worth from my California properties far surpasses my Indiana ones. For context my appreciating properties in CA and the Class A Indiana were acquired in 2013 or before. Class C Indy purchased in 2023.
I know a lot of multi-millionaires in the Bay Area who had middle class incomes (teacher, librarian, janitors, etc) who bought long ago (as in 2008 or going back to 1970s) with with just one or two rentals. This was when CA was more affordable and home prices weren't out of reach.
Example (not mine but someone I know):
- S.F. Bay Area home 3 bedroom, 2 bath 2100 sq ft (lower level living area brings it up to 2700 sq ft) purchased in 1960s for $68,000
- listed for sale in 2014 for $1.25 million, bidding war, sold for $1.71million.
- New owner renovates it, listed in in 2021 for $2.5million, bidding war sells for $3.078 million. Owner #2 made $1.368 million (minus commission and closing costs) in 7 years. That's a pretty good return to me.
I tried to read every single post but stopped on page 4. I didn't see anyone mention this but in California our property taxes go up a max of 2% a year (from Proposition 13 passed in 1978). Long time owners (primary home owners and investors) benefit from this but newer buyers pay high property taxes.
I had an Indy property management company do an analysis of my 3 homes. Class A could keep for appreciation, doubled in value but my property taxes go up significantly, 17% the last assessment (at this rate the property tax will surpass my California properties in a few years - not joking). For the Class C homes, he said I'm unlikely to get a good return unless I get a great tenant and they stay for a long time and the properties stabilize (repair calls reduce). The tenants will likely be lower income for a very long time. I sold one of the Class C and the other one is still rented. By the time the Class C appreciates enough I'll be over 100 years old.
If I was going to be cash flow negative from the start, I would have bought one higher quality asset instead of 2 Class C homes. To the OP, Mike D. meaning buying in Hamilton County suburbs (where my Class A) instead of east side of Indianapolis.
I think people who live in low cost markets do better investing there instead of investors who live 2000 miles away. I also think there are sub markets with lower cost markets and I recommended to CA investors to buy higher quality assets OOS not the cheapest house they can find.
Interesting insights and I am in a similar situation to you. I own property in California as well and choose to do most of my investing in the Midwest in spite of the higher (historical) appreciation and rent growth in CA. The reason comes down to return on equity. Many if not most of the people arguing against my ideas, some of them very, very loudly, don't use or understand this concept. Basically, you take all sources of gain (cashflow, appreciation, and principal paydown) divided by your equity in the property (at purchase it's your down payment, and later as appreciation takes place it's whatever the current value of the property is minus your loan balance) and that gives you a percentage showing your total return. I pretty much guarantee that that's higher in the Midwest UNLESS you put down a small down payment in CA and deal with huge negative cashflow. If I were writing my post again I would clearly define this concept at the start since many investors don't understand this and I was just assuming they all did.
If I were evaluating Class A vs Class C I would figure out the amount I need to put down to cashflow and then run an ROE calculation on both. Nothing wrong with Class A as long as you understand the difference in return and make a tradeoff you like. Its ROE will be much lower, but less volatile, less maintenance calls, less annoyance.
Yes, the outskirts of Indy such as Hamilton County give truly amazing ROE due to even better cashflow and lower property taxes than Indy and for some reason are neglected by investors.
Thanks for the feedback!
Mike, I didn't know you had property in CA. Do you mind sharing what counties your Indianapolis properties are in?
I did consider other cities and states but it would have taken months of research and I knew Indy best:
Tennessee: Nashville and suburbs Brentwood and Franklin (have visited before) - possibly, Memphis - no (was sent numbers by a turnkey company)
Detroit, St. Louis, parts of Ohio - no (optimistic numbers sent by turnkey company)
In the turnkey companies ads/sites they say "passive investing" LOL...if OOS investing is passive, I'm the Queen of England
I'm going to address the "grow your net worth twice as fast". Based on the Indy PM analysis, how would my net worth be growing by buying Class C properties on the east or west sides of Indy, if I'm -$300 to -$500 most months? Just as I thought it was stabilizing and received two months of full rent (minus PM fee), I get another repair notification the other day with a $385 repair. I really appreciate this Indy PM's honesty - he could have said, "hey just switch to my PM and I'll make it all better." It's possible I bought a lemon of a house but I'm not going to take anymore chances and buy 5 or 10 more of these types of properties.
I know this is a RE forum, but my net worth has grown more in the last 2 to 3 years from the S&P500 than this east side Indy home. I log into my retirement accounts and brokerage account and have more "cash flow" from these than 3 years of Indy rentals (the Class A and C combined). Yes I'm paying taxes on all this interest income and dividends but I have far less stress. I have a large amount of passive losses on these rentals which can only be unlocked by selling since I'm not a Real Estate Professional and can't offset my W2 income with these losses.
I'm going to try one more time with Nevada. If this doesn't work, I'll just add value to CA properties, raise rents and maybe keep the Class A Indy one and call it a day and invest in index funds, a few REITs, etc. The stress is probably taking years off my life and current happiness level.
Hmm, let's see. First off, I would never invest in class A if you're looking for cashflow, or at all. Class C small multifamily properties are the real meat and potatoes. I'm not here advertising for anybody to buy any real estate investment. It's hard to invest profitably at all right now with interest rates where they are. That said, I am currently in the process of growing my portfolio, so obviously I think it's worth it. These are my suggestions: a) pay the loan down until you can cashflow, b) audit your PM's maintenance expenses, consider dealing with other vendors, c) invest in small multifamily, d) be conscious of property taxes and consider investing outside the city of Indianapolis, where they are high.
I am currently getting around 15% returns on my stuff in Indy, including stuff that's paid down more than it needs to be, and it can be tightened up more to get closer to 20% while still cashflowing. If you are focused on cashflow, note that your total return will always be lower, and I myself accept this to have some cashflow. Total returns are always higher when you use enough leverage to barely cashflow. I wonder if you have calculated ALL your returns including principal paydown and appreciation.
Hope this helps.
I've talked to the PM and the Maintenance Coordinator multiple times and audited the financials. I feel that the repair requests are reasonable - again, if I were local, I'd go there and possibly do some of the repairs myself. I'm paying for a PM since there's no way I'm self managing Class C with this many issues and I'm paying for convenience. They're going to have trip charges built in the repairs invoices.
How are you getting 15% returns? Is this cash on cash or IRR? When did you buy these properties? Over the last 10 to 15 years or more recently?
On the Class A IndyI bought it in 2013 and did a cash out refinance during COVID (to help pay for renovations on my CA rental). On this cash out refi mortgage, my rental property calculator says I'm 1.35% cash on cash return at Year 4 (refi done in 2021), not including the cash I pulled out of it. On the IRR it's much higher over 45% so not sure if this number is correct. Another CA investor briefly calculated my return as about cash on cash return as 8%, if I use my original purchase price. I have about 45% equity on this home with the cash out refi loan now.
On the Class C I'm not paying down an extra $1 towards the mortage on this sinking ship. I'm not trying to be flippant but I could set up a stand at a Farmer's Market and bake cookies and sell them and cash flow more than this house. For cash flow I'm looking at starting a business, which is a lot of work with a W2 job.
With Nevada, my intention is to leave an appreciating asset to my kids and if they want to move into the home later or continue renting it out or leave CA and move into as my primary when I retire - lots of moving parts so my plan may not work after I look in Vegas. If I cash flow or break even I'd be ok, I'm increasing my net worth property wise but liquid cash wise, no.
Are you self managing your Indy rentals? How are you getting 15% to possibly 20% returns? If you pay cash and don't use leverage, you're locking up more of your money. Someone please explain this to me - my brain hurts from thinking about this.
He discusses an allocation of about $200/month sustaining maintenance/cap ex and I believe he self manages based on his role with the maintenance. 15% would not be good considering PM alone in his market would be charging at least 10% all inclusive (placing tenant, tenant renewals, inspections, managing maintenance, dealing with tenants including collecting payments and dealing with late and delinquent payments, etc.)
I also believe he maybe including the appreciation. I hope it is not including the appreciation for his sake.
I suspect you know this, but IRR is superior to COC on measuring the overall quality of an investment.
Have you calculated IRR on your CA property? I have one property that I have not done the calcs in real long time but the worse I have done calcs on is in the 70% to 80% per year. This is using to date actuals since purchase plus projections to the various exit times. this is better than my sustains projections which makes sense as I allocate pm in my projection but is not in my LTR actuals because we self manage the LTRs and because a lot of the large cap ex items have ever been replaced.
S&P has lifetime near 10% return. Investing in RE as owner (not including as LP, REIT, etc) should produce returns far greater than this because it requires significant more effort even with the use of a pm. If you are self managing, the value of the effort should be subtracted off the return because your time is precious and deserves to be compensated. I would highly recommend self managing property if the projected return is not significantly above 25%/year (6% to 12% is PM value, near 10% is S&P historical).
Inexperienced RE investors under estimate expenses, the value of the effssciated with self managing, and the effort involved with being the asset manager even with the use of a pm. They think 20% self managed is a good return; it is not.
best wishes
Based on the comments from the OP, it seems like he's including appreciation in his 15% return. Are you using 25%/year with IRR as the return, meaning it's better to self manage if it's lower than 25%?
I have 2 CA properties (one SFH, one multi-unit). I haven't done an IRR calc on them but the financials from the PM on multi-unit, my return is really good. I self manage the SFH.
I find the calculations with S&P500 and rentals to be challenging because it's not an apples to apples comparison. I don't get tax write offs on my index funds or stocks. It could very well be that my return on the Indy Class A is more than than 8% - it's doubled in value and I pulled out a cash out refi during COVID.
For Class C which I would never buy anywhere even in CA, being -$300 to -$500 is terrible for Midwest. If it was going to double or triple in value in 5 years, might be worth it but when I ran the rental property calculator out 20 years using 3% appreciation and 3% rent increase, using $3000 for annual maintenance (took -$300/month and multiplied by 10 months), could be more. My beginning IRR is negative then slowly increases to 0.7% at Year 10, 2.5% at Year 20. it's worse than I thought.
I just talked to an Indy agent and investor who confirmed that it's better to buy a higher quality asset. I've been on BP since 2022 but I had heard cash flow was pushed from 2008 to 2018ish. Look like some people are still operating in that mindset.
>
Are you using 25%/year with IRR as the return, meaning it's better to self manage if it's lower than 25%? if you are self managing and not achieving/projecting more than 25%/year IRR, why are you investing in RE? the reward does not justify the effort and risk. For me because I am spoiled from the RE market prior to 2022, I have hard time wanting IRR less than 50% and ideally much higher.
LTR pm fees vary by market. Typically he higher the rent point the lower the pm fee as a percentage of rent. But if we use an exclusive pm cost of 10% meaning including everything (tenant placement, lease renewal, tenant turn over, tenant interface (rent collection, late payments, delinquent payments, evictions, tenant drama, etc), handling maintenance, unit inspections, etc) and use an S&P lifetime of 10%, it means you are risking a lot of money and time to be an asset manager for 5% of additional return above S&P lifetime.
is it worth it for a projected 5% extra return? Not to me, but maybe to someone just starting their journey.
>
For Class C which I would never buy anywhere even in CA, being -$300 to -$500 is terrible for Midwest. I own some class c (maybe c-) in San Diego. 1) if I were doing it again I would try to have gone a little higher class 2) the c class tenants in San Diego pay their rent and typically take pretty good care of the units because of the housing shortage and difficulties getting decent unit at a fair price without a strong LL reference.
higher class means even better tenants. After a few years of holding the cash flow gap between the class c property and class b property is inconsequential compared to the other sources of return. This knowledge came with experience. So I have some class c units.
>I've been on BP since 2022 but I had heard cash flow was pushed from 2008 to 2018ish. Look like some people are still operating in that mindset.
I have been on BP almost exactly 10 years with a profile (this month is my 10 year anniversary). I was a lurker for a while, but not long (maybe 2 months). My view about appreciation being so much more critical in the wealth building was very much in the minority back then. I did not have as much RE assets then as now (I was not yet to 8 digits), but if we only pulled the users that were at 8 digits or on their way to 8 digits in RE, the appreciation would have been king even back then. The tide has definitely shifted. Back then investing for appreciation was called in many posts not investing. I posted multiple times definitions of investing. People viewed it as gambling. Some/many viewed cash flow as certain. It was also around the time I first saw the case shiller rankings on residential return since 2000. It was interesting not because the top of the list was all appreciation markets, but because those markets also ranked highest in the cash flow. There were now stats. Circa 2018 BP put out its ranking since I believe 2010 residential return. The calculations had a big flaw for CA in that the prop tax did not take into account prop 13, but it showed the appreciation markets had high appreciation but it showed the cash flow in just 8 years went from bad to ok (my market was near the middle in cash flow in just 8 years). I viewed the BP data at confirmation of the case shiller data as the appreciation markets were climbing on the cash flow and given more time would continue to rise. Now there were 2 sources that basically showed the same thing (except 8 years was not long enough to fully replicate the case shiller data). Case Shiller very recognized source as their case shiller index some still look at as the gold standard for appreciation (it emphasizes same property sales) .
Today most BP users recognize the wealth building of the appreciation. They realize gains from appreciation are tax deferred even if extracted via a refi or ELOC. The gains from cash flow get taxed annually. Prior to the rate increase, I actively worked at keeping my leverage high. It was mostly to leverage the money on other investments to maximize the return. However, it had the side benefit of minimizing cash flow which minimizes my taxes. I claim my cash flow is modest, especially after accounting for depreciation. Seeing I am not thrilled at the prospect of doubling my rate, I have been less active in maximizing my leverage and my cash flow is slowly increasing. The lower leverage impacts my return, but so would a higher interest rate.
This thread demonstrates how much the BP user community has moved from cash flow is king to appreciation is where the real wealth is created.
Good luck
I went and re-calculated my numbers for Class A and C Indy. For Class C, I re-entered the maintenance as $1500 (-$150 x 10 months) to be optimistic, so 50% of my original maintenance costs of $3000 a year, still using 3% appreciation and 3% rent increase. I'm using the premise of this property should "stabilize" and I won't be losing $300 to $500 most months for 10 years straight, now I'll have new HVAC, new water, new roof, the longer I hold onto this house. HVAC and roof estimated to be 6 to 8 years old by inspector in 2023.
Class C: IRRs at Year 2 (current rental year) -8.7, Year 5: 3.6%, Year 10: 6.7%, Year 15: 6.94%, Year 20: 6.51%
For Class A Indy: I used original purchase price (from 2013) then I switched it to the cash out refi amount in 2021 and put 0% down but put in the actual closing costs. I've already replaced the HVAC and water heater when I lived in that house in 2017 and 2018 so I didn't factor those in. I put in $1000 for annual maintenance and 17% increase for property taxes (the percent could be less after the COVID years of overvaluation)
Class A IRR: Year 1 (2021) NA, Year 2: -11.7%, Year 5: 49.7%, Year 10: 45.8%, Year 15: 42.2%, Year 20: 40.5%
I'm self managing Class A now. On appreciation and rent increases, it's not linear, some years it's more than 3% but could be less other years. So looking at this, I should sell Class C and keep Indy Class A and not try to sell it and buy in Nevada?? Is there something I'm missing?
In all markets, how sure are we of appreciation? And increasing rents in the lower cost "higher cash flow" markets? If people are losing their jobs especially someone making $40k, they're not going to be able to pay higher rent in these Midwest/South markets. What if we have WWIII, recession, depression, or another 2008 style crisis? We're looking at in hindsight. Anyone who owned property in California in 1960s to 90s didn't know it would appreciate this much in 2018 to 2025.
>Is there something I'm missing?
It appears that your maintenance/cap ex is a WAG. Using actuals will result in wide fluctuations in the allocation. Having a year without a large cap/ex will look good. A year without a large cap/ex will look bad. For example if you expect the roof to last 25 years and it’s. 8 years old, here is the cap ex on a $10k roof replacement: $10000 / (25-8) /12 =$49.02/month.
If you realize this one cap ex is ~$50/month, it shows $150/month is far too low if it is intended to be maintenance and cap ex on a sustained basis (if it truly is maintenance only and you have a different cap ex budget it could be ok but I suspect that is not the case). Also why did you use 10 months and not 12 months in your calculation? If you use 12 months, your allocation is $1500/12= $125/month. Another approach is you do not allocate for a sustained hold cost and realize when you go to sell you will either sell below full market price or have selling costs that include significant cap ex/maintenance. Regardless you will pay for the maintenance/cap ex in some manner, either you pay for them or you give a discount at selling.
>In all markets, how sure are we of appreciation?
My view on appreciation is anything can happen in the short term. Few people forecast the GFC, COVID, Tech bomb, etc. since 2022, I have done my underwriting with zero appreciation for 5 years because I am expecting modest appreciation in the near term (and 2024 had modest appreciation in my market). For long term appreciation I use a number a little below the neighborhoodscout published appreciation for my market for the century. Note this century had the tech bomb, GFC, Covid. It has not been event free. Shorter durations could magnify a single event. It is my belief my market is likely in the long term to come close to the appreciation that it has experienced over the last 25 years.
Reality is no one really knows. Use the history, metrics, etc to derive conservative estimates. Recognize especially in the short term, anything can happen. The next large GFC can happen this year or in 50 or more years.
good luck
I used $1500 to be more conservative on the maintenance but I think it's higher. My original calculation I used -$300 x 10 months = $3000 since I do have at least 2 months of the year with no repairs.
The rental calculator asks for an annual expense not monthly. I just put $3600 for annual maintenance (-$300 x 12 months). I even reduced the property tax increase to 10% a year (not 17%) My highest IRR is 4.05% is at Year 17. I find these calculators a bit problematic because like you said, you're not replacing an HVAC/water heater/roof every year, the cap ex/ large expense makes the numbers worse.
There's no way to sugarcoat it. The numbers, 80% of my investor friends, and my stress level say to sell the Class C and not hold onto it for 10 to 20 years hoping it'll get better.
I really disagree with buying more cheaper properties and I feel it's better to have fewer high quality properties to grow net worth. Some people on BP are going to buy more sub $200k (or whatever the low cost number is in your market) properties that "cash flow" - more power to them. I say we check back in 5 and 10 years and compare notes.
Sure, you can sell out of C class. It's your money! I can tell you with 90 percent likelihood, without seeing any numbers other than what you've already given, that your overall gain would be greater in this than your other investment, and the reason you can't cashflow is because someone sold you on unrealistic numbers. You just need to pay it down more. People repeat that A class is better and appreciation is better without knowing why. I refer them all back to my first post, it shows exactly why it's not true.
Mike I respectfully disagree with you. I know out of privacy you don't want to post zip codes or numbers (rent, mortgage payments, repair costs, etc) of specific properties. My own experience in Indy shows this, Class A bought in 2013 has appreciated, low interest rate, good IRR.
With Class C bought in 2023 I had two honest Indy agents and a PM tell me that these properties that my return isn't going to be great. Sure if you hold onto a property for 20 to 30 years it'll appreciate. If I bought 10 Class Cs some of them might do better than my current one, and some worse.
I'm not taking that risk, which is a gamble for me and will consume so much of my time. My higher risk strategy: go play some slot machines when I'm in Vegas, buy some crypto (haven't invested in this so far) and 5,000 shares of NVDA (that one's done well for me so far).
I think this topic has been argued to death. Neither of us will agree and it's perfectly fine, just like I wouldn't try to talk my non-RE friends into buying rentals.
I like the 5,000 NVDA action, but I'd argue it's a very low risk strategy, not high, especially when add in using the wheel method.
Selling covered calls 5 strikes OTM, is on average $10k-$12k per month at an average risk of about 18-20% of having shares assigned.
If keep margin use less than 60%, it would take a GFC/COVID level market melt-down to get in any trouble.
No tenants, no toilets, no capex, and time requirement is all of 15min a month and as-much-as 1hr a year with CPA.
Tax's suck, that's the big hit, Uncle Sam.
$450k, net about $134kyr........ 5hrs a year..... Just sayin.
We're at 284 comments before my comment now that I'm typing. Your comment posted 3 times...strange.
On the slot machines in Vegas I was being sarcastic and funny but I could win some money, who knows 😁
I've been heavily buying tech index funds and 5 individual stocks, but balancing it out with bonds and other types of stocks. REITs aren't doing that great for me - apartment complexes are decent return but I bought those in 2018, self storage I bought when the value was higher and its declined.
I'm still trying to figure out covered calls. I think to watch a tutorial at least 5 times.
I've heard of selling stocks then re-buying them later for tax harvest loss reasons so the gains and paying tax isn't as high. Need to ask a CPA how that works.
For my peace of mind, I'm not trying to buy 20 properties and have 100s of units. Four or five high quality properties is good for me.
I have no idea why BP did that multi-posting, I sure as heck didn't intend it. I've noticed it a lot more glitchy as of recent, something with cloudflare pop's up rather frequently. I just added BP to be exempt in some of my security protocols and that seems to have helped.
What I am speaking of with options is not what your speaking to. What I am referencing is called the wheel method.
The wheel method, done correctly, following the simple standard practices, greatly amplifies returns at little to no increased risk.
An option is just that, an option to buy or sell. One can buy, or sell, a purchase option.
So picture you like a certain company, call it NVDA for example reasons. Now say NVDA is trading at $100. You plan to buy 100 shares this week, just part of your normal actions, right.
Your choices are that you could just buy those shares at $100, or, you could sell a put option (a put is the option to sell a stock. buying one is buying the rights to sell to someone else. selling one is selling the rights for someone else to sell it to you) you can sell a put option at say 100 for say 10 per share for let's say 2 weeks out.
See this is a method for how you can "buy" a 100 stock, for 90.
There is an "if" part to this. Because if the stock stays similar price, or goes up, no, you wont get exercised which is to say you wont get sold those shares. But no matter what happens, you get to keep that 10 per share you sold that put option for. So it's a "gamble" on will you or wont you get the shares.
Now keep in mind, you like the company, you have plans to own shares regardless. You would have bought them at 100. So, if it get's exercised, great, you just got them for 10 less then you would have. If not, great, you got to keep that $ and now you get another shot.
The generalized timeline for this is every 30 days.
Now, on the other side of wheel method is what to do for the shares you do hold. We do a similar approach, we sell a covered call. That is we are selling the right for someone else to buy it at a higher price in the future.
Again, lets say you sold that 100 put, got paid 10 on it, price dropped to 85 so you got the shares so now you have those stocks at average price of 90. So what you do now is sell a covered call at say 110, and for that someone pays you 10 per, again.
If price only goes up to 100, or 105, great, you keep the 10 plus keep the shares.
See, with the wheel method what your really doing is selling the gambles, not making them yourself.
Picture if did this with real estate. Say you buy a place for 100k, and a friend says "i bet that place is worth 200k in a year". Imagine you tell them "ok, let's make that bet. Pay me 10k today, and I will sell you the right to buy it at 180k for 1yr".
That is how stock options work, and the same kind of betting people are making on them, both those selling, and buying the bets.
In real estate I think it's a very untapped market. I bet if a person explored it, a lot of tenants would be very interested in purchasing a purchase option. I am thinking about adding this in, testing it out.
Historically most purchase options on real estate have been what I'd call ITM options, so they have been rather spendy. I believe I can make them a lot cheaper, by being slightly OTM. And for me, i want to do them OTM anyways because that is what I'd be most open to selling at.
My thought isn't just of a cash-grab on this, it's more tenant phycology. If tenant holds a purchase option, my thesis is they have skin in the game, they have a reason to care, to take care of the property, to care for it like its there own, because it could be, they have something to work for, to reach for, to invest themself for.
My pie in the sky hope is it even phases over into other areas of their life, how they work, save, make purchase decisions, because I helped give them something of significance to work towards thats real, they could actually do this thing, be a home owner, it's real, they have a option to purchase not just the idea of "oh some day".
Now say I got 10 properties I do this on. Say I charge just $2,500 for that purchase option, 3yr term, say I factor a 12% net profit on sale spread for myself for sale price.
Now, I got $25k, cash in my hand. My worst case is, I "only" get 12% plus whatever I got from rents etc etc over the time. I have deployable use of that $25k, which will also be earning me more $. Tenants who got skin in the game, so lower issues, less maintenance, less turnover......
Outside the box thinking is where outsized returns happen.
