Hi all,
Recently I just realized one of my rental properties had a ridiculous appreciation in just 2 years. I purchased the property "A" in 2015 and in two years my current property has appreciated 100%! The current rent is also 2.5x what I'm paying in P&I. I'm currently don't know what I should do!
I do understand that cash flow is king and appreciation is queen. I'm currently working full time and just bought another a rental property "B" this month and planning to renovate the property "B" this weekend (July 4th). I don't know if I sell the property "A" what's the possibility of me hitting/ finding a property like that again.
If I do sell property "A" I don't know if my DTI will let me buy another property for investment. Buying property "B" this month they used my rental "A" as a source of income as well.
What would you guys do if you guys are in my shoes. I do greatly appreciate all your input.
Thanks,
Jimmy
Hi all,
Personally, I have 1031 exchanged in 2015 and 2016 all my pricey San Diego single family properties that have also doubled in value. I too believe the party can only last so long.
However, more importantly I have traded in approximately $5,000-$6,000 a year cash flow for apartment complex path to financial freedom. I have gone from $60,000 cash flow per year to our current $120,000 cash flow and rapidly rising every year. I expect to be earning over $200,000 cash flow in the next 12 months. I still have a pricey condo left here in San Diego that I purchased with about $34,000 down in 2011 for $116,000 and am putting up for sale for $270,000-$290,000. I will trade that $5000.00 cash flow for about $20,000-$24,000 cash flow per year for a 24 unit apartment complex in Ohio.
I started with 10 condos purchased in 2011 and 2012 in San Diego for the true Multifamily Apartment complex business model. Since 2015 I have forced appreciation on 6 apartment complexes and increased the value of the apartment complexes approximately $400,000 in the last 18 months. Those pricey condos in San Diego all had HOA fees that I had zero control of. I would advise all that have incredible appreciation to read Multifamily Millions by David Lindahl, Loopholes of Real Estate by Garrett Sutton, and listen religiously to a podcast called Lifestyles Unlimited Inc. based in Houston Texas. The founder Del Walmsley has been doing the Multifamily business model for over 25 years and listening to his podcasts and going to his 2 day workshop in Houston was life altering for me, when combined with that amazing Multifamily Millions Book and Loopholes of RE book too.
I love how apartment complexes are valued primarily by the Net Operating Income and is not at the mercy of comps. I have the ability to manage my property manager to spend wisely and increase the money coming in by providing the best product, best service at a great competitive price for my tenants.
Now I presently provide value for 86 residents and realize that soon it will be 109 residents on my way to over 1000 residents. I also know the rule that you are paid based on the value you provide. By having 1000 front doors in the future I will be providing value to over 1000 residents and by providing value to more people, I get greater tax deferred cash flow on my way from current cash flow $120,000 to $750,000-$1,000,000 cash flow per year.
The single family business model won't get me there. Plus, could you imagine having over 100 single family. That would be 100 roofs, furnaces, hot water heaters, plumbing, AC, garage, driveway, insurance, etc.... There comes a point where the natural progression is to move to true Multifamily (5 units or more in one complex) and eventually have two or three 300 or greater unit complexes.
Swanny
@Jimmy Ho In my person experience elbow grease = forced appreciation. If what your doing is working for you, don't worry about what everybody else is doing. Remember Prop 13 is the friend long term buy and hold investors here in CA. It is something that most people who push out of state investing gloss over. Where in the CV are your properties? I see you are in Milpitas, are you doing the PM yourself?
@Jimmy Ho The mistake that 99% of Real Estate Investors make is not being over leveraged - even zeroed leveraged properties will go down in worth when markets correct - which means they can not avoid losses.
Following the GFC the smart share investors learned their lesson and now protect their portfolios with option protection. Property Investors can do the same - but maybe they prefer to be thrill seekers? Or do they think there is a way to defy gravity.
The BHP with no protection will see their properties rise and fall with the tides.
Warren Buffet on record as saying Only when the tide goes out can you tell who was swimming naked
very few companies or individuals use options to hedge. The risk premium costs too much. Plus if you are a buy and hold investor, it makes 0 sense to hedge for an event that shouldnt matter to you if you plan on holding thru any downturn.
In an earlier post you talk about leverage. Yes in an up market leverage drastically improves your returns, in a down turn it does just the opposite. Its not just sufficient to talk about returns in the finance/math class you told another poster to take, you have to factor in a risk adjusted return.
A highly leveraged portfolio opens you up to the risk of not having enough cash flow to service the debt in a GFC.
@Bart H. Cost of Options is expensive - so too is the loss of capital when things tank, There are ways to hedge using options very cheaply - around 4% of what you insure.
Note: you do not need 100% insurance as it is unlikely a property will go down in value to zero. So decide how much insurance you want. $100,000 or $200,000 might be all you need - depending on the value of your properties.
People insure their houses against other risks, such as fire and storm, and their incomes. It is a simple choice of whether to risk losing $100,000 or paying $4,000 or less after tax
If you have borrowed money it makes more sense to take insurance as loans can be called in or interest rates zoom. In either instance you might be forced to liquidate in a hurry in a down market.
For Cash Buyers there is an economic cost of not leveraging - far greater than the cost of interest on loans and options combined. The Economics of BHP are daft!
Thank you for your input Jack! I'll definitely keep that in mind if there's an opportunity out there.
Thank you for your input Steven! I'm extremely happy with my purchased. Congrats on reaching 700 post, that mean you have contributed a lot to the community (what goes around comes around :)))
I didn't mean to say all the real estate agents are bad at pricing, but I don't think real estate agents the most reliable source of data. Lenders only go by the appraised value of the property by a license appraiser for a reason. I bought the property 160k, repaired 20k, misc 7k. Hired an appraiser estimate 370k, cash flow ~$600 a month.
Thank you for your input Hunter! That's what I'm afraid of and even though I'm not looking to retired anytime soon but the equity is like a shinning object syndrome that's hard not to pay attention to. It does takes a lot of discipline to play it off and I'm trying lol.
Thank you for your input Lesley! Honestly I don't need a large amount of money at the moment because I just purchased a property and having to focus too many things all at once will be extremely difficult to focus. Like @Arlen Chou had mention I'm also afraid it's most likely not always greener on the other side. Once I've settled with my new property that I just purchased I'll than see what are other opportunities out there.
Thank you for your input Jason! If I have cash in the bank instead of the equity would I buy this property today? "NO" the reason is for me if I would buy this property today the number wouldn't make sense to me and I wouldn't have enough cash flow that I want. Also not everyone is the same and for me the price at the moment is too expensive to buy as an investment property.
I would buy an apartment complex with the equity BUT the investment property that would sustain enough cash flow for me would be too far for me to manage the property myself. I would have to hire a property manager and I've interview a lot of property managers they don't have our (investors) interest in mind all they want is list it at below market value and collect the fees.
Thank you for your input Justin! I've played your scenario already and if I do refinance the cash flow on my property wouldn't be enough for me to justify it as an investment property. I understand where you are coming from because more properties can/ potentially have more cash flow but the risk is a lot higher (if I get layoff and don't have enough income to sustain all my properties).
Thank you for your input Dan! If I would refinance my cash flow would take a hit and that for me wouldn't make sense for my cash flow to call it as an investment property. My interest rate on this property is 3.625% for 30yrs fix. I've called around and I've not seen any lender that can match it as an investment property.
My investment properties are in Modesto and Stockton. Yes I live in Milpitas and I do the PM myself. I was fortunate enough to have family friend that guide me through the process and he had been manage properties himself for over 30yrs+. I still have a lot to learn about property management but I'm taking one step at a time. I want to learn the in and out of real estate because I've interview a lot of property managers and they all seems to not have our (investors) mind at heart so I decided to manage properties myself :)
Thanks for your input Bart! I couldn't have said better myself and I do greatly appreciate your input.
You are correct numbers make all the difference and since we are not seeing the real deal it is very difficult to determine the value of holding compared to selling.
I never trust a investors guestimates on cash flow.
I thought his numbers were conservative on vacancy (I have never had a year as bad as 5% vacancy between all units) but way too low on cap expense. My calculation for San Diego shows a attached 2/1 has cap expense of ~$250 and just the kitchen is ~$50/month. Another way to look at it is what is the lifespan of a kitchen rehab? I like to think 15 to 20 years. If the rehab is $7k and the lifespan is 15 years the rehab cost is real close to $40/month. Add in all the items that are unlikely to last 15 years like refrigerator, dish washer, paint, garbage disposals, etc. and you can see why a kitchen alone cost ~$50/month. I would be surprised if there is anywhere in the us where a sfr with yard has a cap expense significantly below $200/month.
However I think his cash flow estimate is better than most I have seen. He allocated a lot to vacancy and maintenance. So I do not expect his actual cash flow will be significantly off.
@Jimmy Ho you are clearly mistaken regarding the appraiser vs real estate agent situation. You said the bank uses a licensed appraiser for a reason, well for one in most cases a law requires it, the other is the bank wants an unbiased 3rd party opinion, meaning someone with no skin in the game at all. "Licensing" to be an appraiser is no indication of being able to value a property. Sometimes buyers are willing to pay more than it's worth for some reason, that's where the appraiser comes in, to prevent a bank lending more money than it's actually worth. So it has nothing to do with them being better at valuating property, it's the law to have it be unbiased. Not to mention most appraisers I meet are also agents. There's a good chance the appraiser you used also has a license to sell real estate as well.
With all that said it's not very hard to get a general idea what your home is worth. Hiring an appraiser to find out what your Home is worth is a waste of money in my opinion. You can start with your Zestimate and go up or down depending on Condition and other intangibles that zillow wouldn't know about. Then find out what your neighbors are selling for and you should be pretty close.
Getting an appraisal to find the value is like pulling the cart before the horse. The market determines the value, then an appraisal is used to support that value, or not. How about a show of hands from anyone who purchased a property well below market value, yet magically the appraisal lands right on that same price you and the seller agreed to? It's not magic, it's the purpose of the appraisal, to support the value the market determined, not the other way around.
Anyway I didn't mean for such a long post but I hope it helps anyone who may have had the same misconception that appraisers can determine what a Home is worth. They cannot. The market does. They can only provide data to support it, or maybe not. Iv lost count of the times Iv had sellers list their home for X ($100k) and it fails to sell for 5-6 months so they decide to refinance instead and the appraisal comes back at Y ($120k).
To answer your origanal question though, If it would actually sell for $370k, I would sell out immediatly and sit on your cash waiting for the bubble to burst in your market. A market doubling in 2 years is just silly, and cannot continue at that pace.