All Forum Posts by: Carlos Carbajal

@Chris Elkendier

Good answers here already. Pointing out the obvious but yes you generally realize the best returns in real estate when using leverage (debt) esp when your tenants are paying off the debt for you.

I have been a full time STR investor and property manager for 6 years now. Here are my observations:

- I operate in SF Bay Area and Sedona AZ

- in both markets the amount of STR units has exploded which has brought down the overall rates and created some more vacancy in slower periods

- More and more regulation is happening every year. Most voters (with the help of hotel lobby) will choose to restrict STR rentals especially if it's not your primary residence. You mentioned Palm Springs. Non- resident vacation rental permits are no longer being accepted for vacation rentals there.

- STRs are much more management intensive than LTRs. Can be more fun too, but much more work for sure

- Once you factor in all expenses on an STR (utils, consumables like towels and linens, extra cleanings) it's not always more profitable than an LTR. You'll want to make sure that the STR has a large profit margin over an LTR esp if you have a property manager you are paying.

Good luck!

@Brian G. 

San Francisco, Palo Alto, CA and Sedona AZ

@Dean Lynch

Here is the system I use:

Default = 4 or 5 night minimum for high season

The general idea is the further out in the time the higher the number of minimum nights.

So, using the above as a guideline any vacancies I have in the next 14 to 30 days I drop to 3 night minimum

Any vacancies I have less than 14 days out I drop to a 2 night minimum.

If you have a default 2 night minimum you will see a lot of your weekends getting booked up far in advance leaving you with weekdays to fill at lower rates.

I do not recommend allowing 1 night rentals.  Too much trouble and too much risk of partiers.

@Karl McGarvey

I manage 10 units on the beach in Pacifica, CA.  Most of them have beachfront views, a few do not.

Without a doubt the ones with the views book more often at higher rates. I am almost certain you will make more net income off of the unit with the view.

@Nathan Speary said it best "You don’t want to be forced to compete on price; which you’ll have to do if you can’t compete on views."

I would also recommend a drone photo showing how close to the beach you are something like this:

@Brandon Sowers 

I commend you on looking at this in a way that is going to help the tenant move ins easier.

I'll share an interesting data point with you.  I live in the San Francisco Bay Area where we have some of the highest rents in the United States.  Let's say you go and rent an apartment in a sparkling modern building in downtown San Francisco.  $3500 a month for a 1 bedroom would be very normal.

Now you would think you would be putting down at least $3500 deposit, right? Nope.  If you've got a good income and a good credit score your deposit is more like $1000.

Why do these very sophisticated PM firms like Essex and Prometheus offer such easy low-cost move-ins?  

It's because they've done the math and calculated the risks. Over a large volume of tenants its better to make sure your building has generous move-in conditions (because your competitors sure do) especially when the building is new and getting it filled to 100% as quickly as possible is the #1 goal.

These larger PM operators have found that good credit scores + good income means = low risk for damages or non payment of rent.

Now the question is can this work in lower income properties?  I think the answer is yes. I think 50% of the first months rent is perfectly reasonable deposit if there is good credit scores (700+) and good income. 

I don't know what the laws are in Texas, but in California the owner can take possession of any deposit held by the property manager at any time.  The stipulation is of course that the money must be returned to the tenant upon move out less damages.

I hold security deposits in a trust account on behalf of my property owners but if they decide they want to take possession of those funds then the law says I must do that.

@Jitin Chopra is this for single family homes or apartments?  Furnished or unfurnished?

@Duane Johnson "Worth it" means many different things to many different people which is part of what makes real estate investing interesting.  Some people will look at a building and see a dump with a low return on investment while others will see a huge opportunity to renovate and make great money.

For this triplex here are some questions to ask yourself:

• Do I believe in the local economy (this is important as I believe any real estate investment is fundamentally a bet on the local economy)
  
• Do I think rents are going to steadily rise over next 5 to 10 years?
• Do I think this particular area of town will improve over next 5 to 10 years?
• Do I think the existing rents are about market rate or is there room to raise them?

Let's assume these number are all correct and the cap rate is roughly 6%.  Personally, I think 6% cap rate is OK but only if I think there is some significant upside over the next 5 to 10 years either through higher rents or adding units. Does the zoning allow for more units?

You have probably heard how the stock market has historically bested real estate over long holding periods. This has some truth to it if you are paying cash for real estate. Real Estate usually beats the stock market once you factor in "leverage" which is exactly what you are doing by getting the property financed.

That's a long-winded way of saying put as little down on the property as possible while still making sure it comfortably has positive cash-flow.

Here are 2 scenarios assuming you can buy at $285K

1. 20% down @ 4% interest
Down payment = $57K
Net Operating Income = $1620 per month (per the screen shot you posted)
Debt Service = $1400 a month including taxes and insurance
Cashflow = $220 per month
Cash on Cash Return = 4.6%

2. 10% down @ 4% interest
Down payment = $28K
Net Operating Income = $1620 per month (per the screen shot you posted)
Debt Service = $1662 a month including taxes and insurance
Cashflow = -$40 per month
Cash on Cash Return = 0%

After running these numbers the triplex doesn't really look like such a great investment to me. At least not at this price.  Even with 20% down I am only making 4.6% on my cash invested.  

I feel conflicted about late fees.

I think the balance most owners (myself included) want to strike is to:

a) make the late fee large enough to be a deterrent

b) small enough that it doesn't create a big financial burden for the tenant.

Since I am in Northern California the rent by itself is already a huge financial burden for many tenants. 

I have some single family homes in Vallejo, CA and I charge a $50 late fee. I've found this isn't much of a deterrent.

On some more expensive property in Pacifica that I manage I charge 5% as a late fee and that seems to be more of a deterrent.

In California you generally cannot charge more than 5% for a late fee as a matter of law.

@Peter Lee this Bulletin 400 from the city of San Diego is outdated as new state laws around ADU's went into effect on Jan 1, 2020 rendering much of this information wrong.

The maximum setback cities are allowed to enforce is now 4 feet. Yes, 4 feet - just enough to allow safety if someone needs to jump out a window.

Also, this bulletin says a Companion Unit and a Junior Unit are not allowed together.  This is now legal across the state for single family homes.

Here is a good article going over all of the new laws which are all in your favor as a property owner :)

https://patch.com/california/oceanside-camppendleton/new-san-diego-adu-bills-what-they-mean-you