BRRRR Strategy Question
Member since 2021 · 21 posts · 8 votes
BRRRR Strategy Question
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesAccording to case shriller (reputable source) the return on San Diego small residential buy n hold is number 3 in nation for this century. How can this be?
Historically there is a terrible relationship between initial cash flow and long term cash flow. This is not by accident. The RE market is efficient. The price is based on multiple parameters. Two of the most key parameters are expected risk and expected appreciation. The market with the higher rent appreciation will always eventually have the better cash flow (assuming no refinance and rent appreciation exceeds expense increase). It is simple math. Every one of my San Diego RE purchases exceeds 1% market rent to purchase ratio.
I suspect much of that $200k equity came via appreciation. San Diego had ~25% appreciation in the last year. I have quite a few local properties. My worst appreciating has appreciated over $1.9k/month over the hold period. I have multiple properties that have appreciated over $4k/month over the hold period. These are all non-commercial residential (<5 units). My worst appreciating property has from appreciation alone provided a better return by far than the high cash flow markets. Neighborhood scout shows San Diego a 10/10 appreciation nationally for this century.
Prop 13 is an under appreciated benefit to Ca RE investors. We have properties that our cash flow would be almost $2k/month less if not for prop 13. That adds up to almost $24k/year for one property.
The Difficulties of out of state investing include minimal market knowledge, difficulty building/maintaining the team, no option to self manage to save money, and harder to do heroics if needed from a far (we once had an OOS duplex get hit by hurricanes 1 year apart. Both times required us to go there to get work done).
You live in historically one of the best residential buy n hold markets in the US. You have accumulated $200k in equity I assume mostly via appreciation. I suggest you calculate your monthly return from appreciation. I suspect it will exceed my worse case $1.9k/month. Why would you consider a different market?
Good luck
34 Replies
- 5yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Yes.
- 5yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
To expand on my short answer....why wouldn't you look where your money goes farther? You can buy multiple houses instead of one, and although the rents are not as high they are higher than you would proportionally expect. For example, a house in SD that sells for $500k rents for $2500 mo. Other cities the same house sells for $200k and rents for $1800.....
- Member since 2021 · 21 posts · 8 votes5y
Bruce, Agree. I need to get more comfortable buying out of state. Have you purchased out of state or do you mainly focus in the Prescott Area?
- 5yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Originally posted by @Bryan Contreras:
Bruce, Agree. I need to get more comfortable buying out of state. Have you purchased out of state or do you mainly focus in the Prescott Area?
I want to be hands-on to select the property, renovate the property, furnish the property, rent the property, manage the property, clean the property , Etc.... So I personally want everything local.
With that in mind, I did my research and relocated out of California where I could do the above.....not saying you have to move, but many do. When you include the COL in your figures, it amounts to a small fortune you are losing by staying in CA.
YMMV
Good luck!
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
According to case shriller (reputable source) the return on San Diego small residential buy n hold is number 3 in nation for this century. How can this be?
Historically there is a terrible relationship between initial cash flow and long term cash flow. This is not by accident. The RE market is efficient. The price is based on multiple parameters. Two of the most key parameters are expected risk and expected appreciation. The market with the higher rent appreciation will always eventually have the better cash flow (assuming no refinance and rent appreciation exceeds expense increase). It is simple math. Every one of my San Diego RE purchases exceeds 1% market rent to purchase ratio.
I suspect much of that $200k equity came via appreciation. San Diego had ~25% appreciation in the last year. I have quite a few local properties. My worst appreciating has appreciated over $1.9k/month over the hold period. I have multiple properties that have appreciated over $4k/month over the hold period. These are all non-commercial residential (<5 units). My worst appreciating property has from appreciation alone provided a better return by far than the high cash flow markets. Neighborhood scout shows San Diego a 10/10 appreciation nationally for this century.
Prop 13 is an under appreciated benefit to Ca RE investors. We have properties that our cash flow would be almost $2k/month less if not for prop 13. That adds up to almost $24k/year for one property.The Difficulties of out of state investing include minimal market knowledge, difficulty building/maintaining the team, no option to self manage to save money, and harder to do heroics if needed from a far (we once had an OOS duplex get hit by hurricanes 1 year apart. Both times required us to go there to get work done).
You live in historically one of the best residential buy n hold markets in the US. You have accumulated $200k in equity I assume mostly via appreciation. I suggest you calculate your monthly return from appreciation. I suspect it will exceed my worse case $1.9k/month. Why would you consider a different market?
Good luck
- Member since 2021 · 21 posts · 8 votes5y
Hello Dan, thank you for the thoughtful reply. You've given me some points to think about.
Yes, the appreciation is from the single property in Chula Vista. Bought in 2018 for $491K and his it's easily worth $620k. I purchased a condo downtown next to the ball park early this year. I own two properties and have owned a total of 3.
Yes, agreed, appreciation here in San Diego is one of the best. My dilemma is that if I continue to buy here in San Diego, it would have to be every 4 years at 25% down. I guess I could house hack and move into the next one as my primary residence. How did you develop the capital to get passes that that third property purchase? I know you're well beyond that, but do you remember that point in your journey?
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Bryan Contreras:
Hello Dan, thank you for the thoughtful reply. You've given me some points to think about.
Yes, the appreciation is from the single property in Chula Vista. Bought in 2018 for $491K and his it's easily worth $620k. I purchased a condo downtown next to the ball park early this year. I own two properties and have owned a total of 3.
Yes, agreed, appreciation here in San Diego is one of the best. My dilemma is that if I continue to buy here in San Diego, it would have to be every 4 years at 25% down. I guess I could house hack and move into the next one as my primary residence. How did you develop the capital to get passes that that third property purchase? I know you're well beyond that, but do you remember that point in your journey?
I grew up in Chula Vista. I think West Chula Vista is a market likely to out perform the average San Diego market. If I lived closer to Chula Vista, I would be looking to buy in west Chula Vista.
Like many people my first rental was my ex home. I purchased the new primary residence home using appreciation from the first property. This approach can only scale fast on years like 2020 that have ~25% appreciation which should not be relied upon.
However after that initial rental we have mostly done BRRRR. with the rehab and appreciation, the only property I have any investment still trapped in is my last purchase from 8 months ago. The last property was not purchased as a BRRRR, it was in too good shape for a brrrr.So with value adds and appreciation, it is easy to extract the initial investment and scale. Key is the successful value add as just relying on the appreciation can be too slow (not in 2020, but most years do not appreciate like 2020.
Btw Your monthly appreciation using your numbers, without knowing exactly the month of purchase, so using exactly 3 years: $129k appreciation / 3 years / 12 months per year = $3.58k appreciation per month of holding (as indicated my worse property (our ex-home) has achieved over $1.9k/month appreciation, total of over $600k of appreciation). Do you know what good cash flow on a Cleveland SFR is? A few hundred is considered good. Note that is over $3k less than what you have achieved from appreciation alone.
Also of note that property that has appreciated over $600k has prop 13/savings of ~$6k/year or ~$500/month.
Was this initial purchase a great purchase? I paid full retail taking into account the finance terms. There was nothing special about the purchase. It likely is my worse RE purchase, yet it was a great purchase. Virtually any purchase would have done great.Good luck
- Investor · Cambridge, MA · Member since 2017 · 195 posts · 106 votes5y
One option could be refinance your current home that cash flows only $100/month and increase that cashflow to maybe $200/month or more and take out the rest of the equity you can put and then buy other investment properties.
- Member since 2021 · 21 posts · 8 votes5y
Thank you Dan. And thank you Allen.
I think I'm going to keep the house and cash out refinance then come up with the remaining money through saving. I can do this within 1.5years then I can begin the magic of BRRRR out of state.
- Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes5y
@Bryan Contreras it's debatable but OOS BRRRR is probably one of if not the riskiest strategy to employ successfully from my research. Sure it's doable. If you go that route find a boots on the ground partner looking for capital. My $.02 Good luck!
- Member since 2021 · 21 posts · 8 votes5y
@Brian Gerlach, have you tried BRRRR out of state? What was your experience like?
- 5yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Bryan Contreras I guess the real question is why are you waiting...you can grow your portfolio 10X faster and build more wealth in a handful of Midwest markets than CA...I get the arguments, but in reality, there is no comparison. Own a $1.2m 4 unit in beautiful SoCal, or a $1.2m 20-unit building in the Columbus, Oh. metro market...would you prefer $7,000/mo in income or $16,000/mo...
When you're investing in commercial real estate, appreciation matters, but it is not the sole determinant of value...you can stay trapped in small residential MF in CA where you are limited by market appreciation due to valuation based on comparable sales, or create your own wealth with a value add play in a larger C-class MF property in almost any Midwest market.
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brandon Sturgill:
@Bryan Contreras I guess the real question is why are you waiting...you can grow your portfolio 10X faster and build more wealth in a handful of Midwest markets than CA...I get the arguments, but in reality, there is no comparison. Own a $1.2m 4 unit in beautiful SoCal, or a $1.2m 20-unit building in the Columbus, Oh. metro market...would you prefer $7,000/mo in income or $16,000/mo...
When you're investing in commercial real estate, appreciation matters, but it is not the sole determinant of value...you can stay trapped in small residential MF in CA where you are limited by market appreciation due to valuation based on comparable sales, or create your own wealth with a value add play in a larger C-class MF property in almost any Midwest market.
>there is no comparison.
This is the only part of this post that I agree with. Coastal California has historically whooped Columbus in residential buy n hold return. I challenge you to find any reputable source that shows differently over a long (>10 years) hold (Case Shiller, neighborhood scout, Zillow, etc).
Properties purchased in coastal Ca 10 years ago that had lower cash flow than the cheaper midwest properties would today have cash flow that whoops those markets (assuming no extraction of value). In my market (San Diego), the average rent has increased ~$100/month year over year on average for the last 10 years (source Rent Cafe). This implies rents have increase ~$1000/month in the last 10 years. Rent cafe shows current average rent in Columbus is $1035 (about the same as San Diego rents have risen in the last 10 years).
I do recognize past performance does not necessarily imply future performance. Maybe the next 10 years will be different than the last 10 years. however, coastal California buy n hold residential RE has produced great return for over 50 years.
- Member since 2021 · 21 posts · 8 votes5y
@Brandon Sturgill,
Thank you, I appreciate your input.
I have to wait because my tenant's lease is up in March next year. Then I'll be able to sell the house and use the money to BRRRR OOS.
I'm also in the learning phase and want to gather as much information as possible to properly develope my risk register. That way I'll be able to develope my business plan and management plan.
More to come.
Thank you
- 5yLucas MartinezBusiness MemberDeveloper · Santa Barbara, CA · Member since 2021 · 81 posts · 48 votes
I agree with @Dan H., coastal California is some of the best buy & hold real estate in the world...if you can afford it. California gets a lot of hate on these boards, but the returns can be massive when you consider the rapid rate of appreciation. Yes, properties in the Midwest will cash flow better early on. But over the long haul there is no comparison between Columbus and San Diego.
But for someone early on in their RE investing career, it could make sense to generate income & capital OOS with the eventual intention of coming back into the coastal CA market. If you don't have the cash, it can be a very slow go to build up a portfolio here.
- 5yBlake ParkBusiness MemberReal Estate Agent · Columbus, OH · Member since 2020 · 126 posts · 121 votes
@Bryan Contreras Yes, sell it and start investing in Columbus OH. Cash flow is higher.
- 5yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Dan H. why does everyone in San Diego drive an old Honda Civic, sleep til 10am, and wear pajamas to the coffee shop...the simple answer is that everyone in San Diego that owns a home pulled equity and is living off it...let's talk in 15-years and we'll see how this plays out.
- 5yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Lucas Martinez how would you rate Denver or Austin to San Diego?..can you see where Columbus is heading...my primary doubled in value in 3-years...it will double again in the next 5...same story with my investment properties...you won't be able to buy a home in Columbus for under $600k in 15-years...every structure in this city is valued at 40-50% of value...coastal Cali is beautiful, but the combination of the environmental factors and natural disasters and decreasing rate of affordability mean you're about capped...so, you become a city of working class poor that sell their soul to the devil to afford rent in shared apartment and a bunch of affluent self-centered a$$holes in McMansions...sounds awesome.
- 5yLucas MartinezBusiness MemberDeveloper · Santa Barbara, CA · Member since 2021 · 81 posts · 48 votes
@Brandon Sturgill So in your world everyone in San Diego drives their old Civic to their McMansion that they don't really own anymore and then they sit around at their coffee shops being self-centered a$$holes? Ok got it. Sounds realistic.
San Diego median HHI is significantly higher than Denver, Austin or Columbus. California generates almost 15% of US GDP and has the most high paying jobs of any state. And yes, our "commie" government has to come up with solutions for creating more affordable housing for the working class, but they are providing opportunities for real estate investors in doing so (new ADU laws, for example). Yes, Denver, Austin and Columbus are all on the upswing. But there will always be more demand than supply in coastal California. They aren't making any more coastline. What does Columbus have that other midwest cities don't? What will create the persistent demand that outlasts the temporary boom?
I'm not ragging on any of those 3 cities...I like them all, and I'm not going to tell anyone they're making a bad investment by going there. But that's exactly what many people on this board say about Coastal California, which is what I take issue with.
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Blake Park:
@Bryan Contreras Yes, sell it and start investing in Columbus OH. Cash flow is higher.
I challenge you to show me one reputable source that shows this to be true for holds over 10 years. I want sources!
I agree initial cash flow is superior. This is because of the efficiency of the RE markets. The market price is based on numerous parameters. Two of the key are expected risk and expected appreciation (property and rent). Assume we are referring to a nice area in Columbus without any significant risks, why is it cheaper than a San Diego investment property. It is largely due to the expected appreciation of each market. San Diego is expected to appreciate more than Columbus and for long term historically always has out appreciated Columbus (source Neighborhood Scout going back to start of this century). it is simple math that the higher rate of appreciation will always produce the better cash flow given enough time.
San Diego cash flow historically has been better than Columbus for long term holds.
Your statement, to be historically accurate, should have been "sell it and start investing in Columbus OH. Initial cash flow is higher." This would definitely be true today (on average) and probably true for most, if not all, of the recent past.
The reality is that on long holds the cash flow has historically been better in San Diego than Columbus and the property appreciation in San Diego has produced far better return than the San Diego cash flow. The average appreciation in San Diego from the start of COVID (Feb 2020) through July has been $190K (17 months) or over $11K per month (Source CAR). Neighborhood Scout has San Diego as 10/10 in national appreciation this century, last 10 years, and last 5 years.
How Did You Do If You Bought Right Before The Pandemic? | CaplyGood luck
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Brandon Sturgill:
@Dan H. why does everyone in San Diego drive an old Honda Civic, sleep til 10am, and wear pajamas to the coffee shop...the simple answer is that everyone in San Diego that owns a home pulled equity and is living off it...let's talk in 15-years and we'll see how this plays out.
I am not sure who you know in San Diego. San Diego has a robust job market with many good paying jobs.
For me I have pulled equity from many properties. I recently refinanced 8 properties in one day (6 hours of signings). I could easily sleep until 10 AM if I wanted to. It is not what I desire, but if I did desire it I could do it. Not sure the point there. If your point is many San Diegans have made a lot from their properties, that it true. Isn't that the goal of the investors on BP? Is that not your goal?
You can go back as short as 1 year or as far back as 50 years and San Diego is out appreciating Columbus (Source Neighborhood scout going back 21 years). In the last year, 5 years, 10 years, and 21 years San Diego is 10/10 nationally for appreciation. Why do you think the next 15 years will be different? I could see it if Columbus has been having a better recent rate of appreciation than San Diego, but that is not the case.
In addition, the predictions I have seen for San Diego appreciation in the near term have it continuing to be near the top of the nation. I recognize these predictions could be wrong, but can you find any reputable source that is predicting Columbus will have better appreciation than San Diego?
I think you may be expressing your honest opinion. I suspect you have not researched the San Diego market and do not know the forecasted appreciation going forward and likely are only slightly knowledgeable of the historical appreciation (you know it has been great but likely did not know that it almost 25% in the last year).
Good luck
- Member since 2021 · 21 posts · 8 votes5y
Take it easy gents, we are all professionals here and have many similar interest.
Lets understand that we all have different backgrounds and development so lets respect each others view points. No need for hostility and belittlement.
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