All Forum Posts by: Arlen Chou

@Quinton Slay you are jumping the gun and you are also forgetting the #1 rule in investing with a spouse.  The combination of these two things is creating the dilemma you are facing.  

First of all you should look at the title of our post... girlfriend/fiancee.  You should be clear on which she is, because they are not the same.  More importantly, neither of those are the same as wife.  I am not saying that there is anything wrong with your relationship.  However, there have been MANY financial mistakes made by people thinking love is ever lasting...  Getting things straight with a financial partner is hard enough.  Throw into the mix a "relationship" and things can go sideways very fast.  If she is the ONE, talk about money and future goals with her and then get married AFTER you guys are on the same page.  How you reach those goals is something that can be adjusted along the way.  But long term goals should be fairly closely aligned.

The rule you are missing is "happy wife, happy life".  This phrase sounds so cliche, but it is 100% true.  I suppose in the 21st century it should be "happy significant other happy life" but it does not sounds as catchy.  If she does not come along for the ride willingly you will have problems.  

In my case, my wife wants nothing to do with REI. Its all on me, and I am cool with that because it is "my thing." I keep rule #1 in the forefront of my mind when making decisions and it keeps me out of trouble. It becomes a bigger issue if you try to force her into being an active participant AND she tries her best but her heart is never "in it to win it." This is how resentment creeps into a relationship, so be careful of that.

@Akshat Jain I suggest you start with more basic decisions prior to asking this this question.  You have not made it clear as to what your exact goal is nor your timeline.  In the business terms, you are talking about a product before you have made your business plan.  

• Are you married (you inferred to a "we") and willing to move into a 2-4 unit building?  
• Any kids?
• As an architect, I am sure you understand the potential timelines of permitting to completion.  Building in the Bay Area is always a longer process then just finding another property to purchase.
• Have you spent time looking for a contractor to do the work?  Most "good" and "fully licensed" contractors have a backlog of projects stretching months, in some cases years.  As an architect, maybe you have somebody or you are going to try and GC yourself, but that point is not clear in your post.

Your question is a worthy intellectual exercise.  I just feel you will get more substantive feed back if you give more details.

@Zoe Lee HELOC's are a great tool if you are disciplined enough to use them. Yes the rates move, but do some simple math and you will see the danger is not as large as most people assume. As a real world example, I have a HELOC this is currently at 2.75%, I know guys who have lower. For the sake of argument, lets say 30 year fixed rates are at 4%. How many times would the Fed rate need to raise for the adjustable HELOC rate to catch the fixed rate of 4%? It would take quite a bit of time and politics for rates to rise to that point. It should be more then enough time for you to refi out if you think the world is going to implode.

The important thing to keep in mind that a HELOC should NOT be considered a permanent loan vehicle. As @David Faulkner has pointed out, after you get the property you can then go and do a traditional refi on your new building and put the money back into the HELOC.

In essence, a HELOC is like a giant credit card. You have immediate access to money, so you can things quickly and delay all of the headaches associated with a traditional loan. You only pay interest on the money when you are using it.

I realize that this does not help your current situation. I only wanted to clarify the power of the HELOC for any future financial considerations.

@Shruti Jain it might help people to point you in the right direction if you gave some more details in your criteria.  Are you looking out of state because you don't think you can cash flow or is it because of the barrier to entry?  I realize that the appreciation vs cash flow debate is something that will go on forever.  However, I just want to highlight that San Jose will GAIN near 25,000 jobs in the near future just with 2 employers.  I am sure you know about Google building their mega campus.  To put this in perspective, Fremont only has a little of 200,000 people in the entire city!  The total amount of office space in San Jose will nearly double just for these companies that are expanding!

The Bay Area in general has always been economically driven, not housing driven.  Meaning, jobs out pace housing... this translates to a supply/demand curve that really supports the idea of higher prices well into the future.  It also means that rents will continue to rise.  Sure, nothing is 100% until it actually happens.  But in business, by the time it happens it is to late to get into the market.

The new BART stations are almost done, and I would bet a nice steak dinner that the San Jose stations will break ground shortly after these current stations become operational.  At that point, San Jose, Oakland and SF will be linked by mass transit.  You can imagine what that will do to housing and rental prices in bedroom cities like Hayward and San Leandro...

If it is a barrier to entry issue, then keep an eye for growth patterns like we see here at home.  Consider ALL of your costs, not just the price of the building before making a decision.  However, once you decide on a market you need to work on getting to scale.  There is nothing more vulnerable then an out of state property owner with a few little properties that have no serious potential for any appreciation and only a few hundred dollars of cash flow a month.  An owner like that will not be able to get enough mind share from a PM or vendors to ever take his/her needs seriously, and it will be very difficult to building up a war chest to handle capex emergencies.

Just a little food for thought...

@Sonya Antrobus there are may variables that actually play into this topic then meet the eye. First, you and your husband value time and money differently. That is something the two of you will have to negotiate between the two of you. On a REI cost basis, it is a little more complicated.

I WAS like your husband and I am slowly transitioning away.  In my market, GOOD "licensed contractors" are extremely difficult to get for small jobs... so to find somebody there is along search and vetting period.  I don't think there is any real benefit in getting somebody who is not licensed because you are still liable for their work.

I purchased 2 buildings for a total of eight 1 bed 1 bath units.  After buying the buildings I was strapped for cash, so I had to do the work myself.  My first unit took 3 months of working at night and weekends.  I have a W2 job, so part time was all I could manage.  By the 7th unit, I could do the same amount of work in 3 weeks: flooring, tile, kitchen cabinets, granite counters, plumbing fixtures, lighting fixtures, painting, etc.  Total cost of materials, including new SS appliances was less then $10k per unit.  If I had hired somebody to do the work it would have cost between $30k to $50k per unit.  In my case the numbers clearly told me it was better to do the work myself.

After those units I went after 3 more small studio units.  Same basic work as above, but the commute to get to the buildings was farther.  Through those units I started to transition to using a day labor "handyman".  I knew how to do the work, and I knew the level of finish I could complete in a given amount of time.  I would start the work next to the guy so he could see I knew what I was doing, and then transitioned out and just managed the job.  It cost me a little more in dollars because I was paying somebody to work for me.  However, I pulled my own permits as the owner so still no need to pay a contractor to be the middle man.  My cost increase was about 15% compared to the 1/1's I did myself.

My point being, maybe you just need to ween your husband off of swinging the hammer.  I had to consciously do that for myself, because I enjoyed the sense of accomplishment of doing the work, but I knew my time was better spent doing other things.  I am sure that once your husband realizes that it is much easier to supervise people doing manual labor he will still get the feeling of accomplishment at the end of the project and you will have gotten the unit done faster ;-)

@Shruti Jain your question, along with appreciation vs cash flow, are very polarizing topics on BP.  You might as well ask about creationism vs evolution... hahaha! That is how passionate people are about their opinions on these topics.

Focusing on the topic of real estate investment, I personally believe that people need to spend more time analyzing their personal investment philosophies, temperaments and skill sets before ever looking for a deal... find your "unfair advantage". Other then what you have posted here, I know very little about you.  Therefore, any advice I give to you about strategy would be based solely on assumptions and my personal bias. Basically my advice would be useless.

My comment about taxes can be considered or ignored by anybody reading my post, but it is based on facts that apply to everybody equally, so I don't feel bad putting it out there. I try to refrain from making blanket statements about which strategy is better, because there are many people in REI that use many different strategies that are successful. Don't follow one path because somebody else told you it was the best way to go. Ask 10 different real estate investors and you will probably get 30 different answers on how to make money...

I personally invest locally, just because that is what I like and it works for me.  I believe that prop 13 is an "unfair advantage" for California investors.  For me personally, appreciation has been a game changer in my personal finances.  Will it always be there... maybe.  But for the last 30 years that I have been watching the local market the chart has gone "up and to the right".  

I also swing my own hammer and I also manage some of my properties.  Are those the "best" things to do with my time?  Probably not, but I like it so why would I care if somebody else thinks its not the right thing to do?  I think it is great that some people have 200 doors and get $100 per door of cash flow in a fly over state.  But unless they are going to give me that money, I really don't care what the other guy is doing because it does not effect me directly.

I have sat down with individuals, and discussed their personal situations.  After finding out more about them I have encouraged some to stay local, others to go out of state, I believe it really depends on the individual.

Find your "unfair advantage" and build a strategy around it and live with your plan.

@Shruti Jain don't worry about not thinking about the tax implications of your decisions.  Most people do not take it into account until it is to late.  This is particularly true for people living in CA.  They just consider the price of properties compared to what they see around them.

In a nut shell, proposition 13 limits the amount your property taxes can increase on a yearly basis.  Therefore, if you own a property in a high appreciation area like the Bay Area, your property may double in value in a few years.  However, your property taxes might only rise 2% per year during that period.  Therefore, you own a very expensive property but your taxes would get comparatively lower over time.  Couple that with cash out refinancing along the way and you end up pulling a ton of money out and limit your overall tax exposure.  Of course this works best in areas that have historically high appreciation rates.

Conversely a state like Texas, that does not have state income tax has relatively high property taxes that can increase drastically from year to year. 

Prop 13 is one of the corner stones of buy and hold investing in CA.  Anybody living in CA and considering investing out of state should seriously looking at the tax implications of their decisions.  I believe that it would be counter productive to live in a high state income tax location and invest in a high property tax state.  If you are not careful, you could end up paying way more taxes then you really should...

@Shruti Jain although Texas has some nice opportunity on the property side, do some deep dive research into the tax consequences, for all of the states you are considering.  

As an example, Texas does not have state income tax.  However, because you live in California, you will still have to pay state income tax here plus you will have to deal with property taxes in Texas.  Since your property will not be in CA, you will not get the benefits of Prop 13 that you have enjoyed until this point.

Do you research beyond the market and the property.  If you don't you could end up passing all of your new profit, in the form of taxes, to a city or state government.  Just food for thought...

@Jason Monroe thanks for details on your thought process.  However, I am still not understand where the win is for you on a business side.  I am sure that the tenant is happy with the money that you offered and I believe it is a win for him.  But I am trying to understand how your business will absorb the high cost for the C4C + cost of renovations + vacancy during the renovations.  Can you explain at what point you expect to recoup the cost of the C4C?  Like I said earlier my costing model would never allow me to do a C4C any where near that dollar figure.  Are you a buy and hold guy or are you trying to do a fast reposition and flip the property?

Thanks,

Arlen

@Jason Monroe just curious as to where your building is located.  I assume that this is the 9 plex that you reference in your profile.  Can you run through the math of your building?  If this is your 9 plex are you budgeting $25k per door or are there other units at market already?  What is your per unit renovation budget?  

I am curious because I purchased a 6 plex in Fruitvale last year.  $678k total(ten minute walk to BART with over a dozen off street parking spaces) and I think I got a rocking deal... If I apply your C4C number plus ball park renovation costs, it does not pencil out for me.  

I am currently near the 1% rule, but I have been thinking about C4C on my building.  I am just trying to figure out why your math works but mine does not.

Thanks,

Arlen