All Forum Posts by: Austin Fruechting

Note max leverage on a convention refinance is 75% LTV. Most ELOC on investment properties have similar constraints (when they can be found). It does not seem extremely bold to refinance to a 25% stake but I have not reinvested all of my RE profits back into RE so it is easy for me to say that.

I see your point on high rates could make it less desirable to take money out whether via ELOC or refinance but for the last over 20 years the interests rates have either lowered or been near historical lows. This could end at any time but it is also possible that a cash flowing property ceases to cash flow. In the last 20 years I am confident there are more areas that have ceased to cash flow (areas like Detroit if purchased near 2008) than there have been rate issues refinancing or using ELOC to get appreciation out of a property (because there have been no significant rate issues refinancing in the last 20 years as long as you qualify for the refinance (i.e. are not over extended)).

Anything is possible but what you point as an issue has not been an issue in a long time but purchases less than 10 years ago that cash flowed have ceased to cash flow (not in all areas but it did get some expert/experiences investors: Ever hear of Mike Butler?  He wrote a good/great book (Landlording on Auto Pilot) and was successful for quite a few years but his market was Detroit). 

Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor.  Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source.  You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).

But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).

Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).

Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).

Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).

Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.

Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.

to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.

to #2: I am a strong advocate of investing local.  If I lived in a different local that provided cash flow over appreciation I would start my investing local.  After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local.  So #2 does not apply because I would not start investing somewhere I do not live.

To #3: It depends on what you consider map out.  It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab).   Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes?  In other words I tried to be real conservative on my estimate.  I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.

To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound.  So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned).  1970: $19.5K, today ~$550k.  1977: $71K, today ~$800K. 1992: $167K, today ~$550K.  1999: $490k, today $1.3M.  2004: $751K, today ~950K, 2012: $302K, today ~$600K.  2013: $490k, today ~$700K.   I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent).  Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well.  That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation.  So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.

I main purpose of this post was to share some returns info for the new Cali folks. Just about everytime they post saying they want to invest here they will get 10 responses from BP self appointed experts trying to sell them on some far away market and make a buck off their ignorance. Always included with those jokers responses is how the returns in LA or other Cali location are really bad. Nothing is further from the actual truth historically. 

In fact, I will go one step further and go against the grain of this post by saying that the argument that one market is better than another is a nonsensical one ... some are better for some things and worse for others, and a skilled local REI operator will know what these better and worse things are and tailor an investment strategy optimized for those conditions ... I have no doubt that a skilled REI operator in KC will have better returns than an unskilled one in SD, and visa versa

I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.

I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.