All Forum Posts by: Fay Chen

I'm not an expert. I include closing and rehab cost in my calculation. But I don't find CAP rate useful since I plan to finance my purchases. I calculate COC, Return On Investment, and sometimes Return On Equity. Sounds like CAP rate is just unlevered ROI.

I bought a drug house and asked the seller to evict the tenants by close of escrow. The seller was concerned about the same thing -- what if the deal doesn't go through, blah blah blah. I told him that if I walk out after removal of the contingencies, he gets to keep my 10K of deposit. He can look for new tenants with that 10K.

I wanted everything to be done by close of escrow. If you want the tenants out, then put it in the escrow instruction. I physically drove by to confirm the place was vacated before I authorized the close of escrow. Once the money goes to the seller, what do you have to hold him accountable besides his words?

I'll be there.

I'm not an expert on insurance. If you convert it into a residence, then it's technically a residence. I have the wrong kind of insurance on my rental too. I have an owner's policy, but I actually lease it out. From what I've learn on the forum, you want to have the right policy. If something happens, you will be covered.

Forgot to mention, I had to get a business license in my city for the rental as well, because my neighbor reported me... My city was cool. Some may not. I recommend building a good relationship with your city inspector. Mine helped me a lot during my remodel.

I recommend getting a sub-meter if your utility company allows. That gives you the option to billl your tenant for utilities and better track the expenses.

When I converted my garage, I found out that I must have a working garage or a carport. So if I converted my garage to a living space, I would have to build another designated garage/carport. Otherwise, the lender is not going to want to finance it as a regular mortgage. So it would be difficult to sell.

You also may want to check the zoning and what that allows. It's usually not a problem if you stay low key. But if someone reports you or if you want to sell the place, you may have to convert it back.

Every city is different. Those are just what I've seen.

I would approach it as a math problem:

1). Outline your options and plans. Hold: how long do you plan to hold? If it keeps appreciating, are you going to keep holding on the property? Then what are you doing to do with the equity? Sell: What are you going to do with the money? Are you going to re-invest it? In what kind of investment? What is your goal in real estate?

2). Research: estimated appreciation for your property, realistic expected return on the potential new investment, local inflation, growth...

3). Put everything on a spreadsheet: income, expenses, appreciation, depreciation, amortization... Don't forget to account for re-investment of your equity (if that's what you plan to do). 

4). Compare different options. What's going to give you the most ROI, ROE? What's the most efficient use of your asset/equity? How about projected out to 2 years, 3 years, 5 years or 10 years?

Since I don't have a bunch experience, I usually do extensive research and just let the numbers talk. Hope this helps.

@Steve Vaughan, that's a valid point. It's definitely easier to deal with one PM than multiple. Even for backups, it'll be easier to find a couple more PM in one city than to find a several PM's in 3 different states.

In my recent research on investing out of state (for buy and hold), I came across an interesting topic and would like to start a discussion. The question is simplify or diversify?

Simplify -- buying in one area (city, county, or state). Find one good management company for all your properties.

Diversify -- buying in different areas, use multiple management companies.

I think for a large portfolio (20+ properties), diversification will help stabilize the investment. But for a smaller portfolio or someone who's just starting out buying 5 homes, does it make sense to diversify? What are your thoughts? What did you do?