All Forum Posts by: Dan H.

Quote from @Colleen F.:

@Dan H.  It also can be a code enforcement issue if local code has occupancy limits but that would just bring the town down on him.   And it is California so maybe you can have  large numbers in a 1 bed and no one cares 

 Correct that state and virtually all jurisdictions allow high occupancy.  The state rules are written so that you cannot place low max occupancy limits due to housing shortages in many of the large coastal cities.  The state therefore is fine with 5 people in a 1 br if the LL does not limit to less.  However, the state has issues if a LL sets an occupancy limit lower tha 2 * BR + 1.  The LL could have placed an occupancy limit of 3 on the 1 BR at initial lease signing.  However, seeing they did not, AB1482 prevents any substantial change of lease terms on MF units.  Therefore, the OP cannot at this time lower the occupancy to the 3 maximum that would have been allowed at initial Lease signing. 

There are a lot of rules in both directions due to housing shortage.  For example safe, unpermitted units are protected because the state does not desire safe units to be removed from the inventory. 

The OP should abide by an1482 and local rules and raise rents allowed per the rules or use one of the legal means to execute a no fault eviction (that I summarized in earlier post).  He purchased the property with the tenant.  If he did minimum due diligence, he should have been aware of ab1482 and any relevant local ordinances.  To purchase and then have sour grapes at the low rent that OP was aware of at purchase is not logical.  If he did not due minimum DD to be aware of AB1482 impacts, then it is similar to any other insufficient DD and you live with the consequences. 

@Frederick William were you aware of AB1482 when you purchased?

Good luck

Quote from @Bill B.:

Ps. California has a “2+1 rule” meaning 2 adults per bedroom plus 1 extra adult. I don’t know if they’re breaking the law or you are. But I’m sure you’d be held responsible if something happened because of illegal overcrowding in a property you owned. 

 You are interpreting the rule incorrectly.  That is the lowest max occupancy that seems commonly enforceable in the state even though finding a law that specifies this is a challenge.

However, if your lease does not state a max occupancy (which cannot be lower than (2 * BR + 1) the tenant can place 5 in a single BR.

@Frederick William does you lease have a maximum allowed occupancy?  It could provide means for a lease termination. It may sound mean, but 2 years ago I let a good tenant go because of a growing family.  They were about to go 2 over what my lease allows (and I gave them a warning when they went 1 over that I would not be allowing 2 over).   7 in a 2 BR was too many people.  5 in a 1 br is also 2 over my max occupancy.  You may have an issue enforcing this even if you have a limit in your lease because they have had 5 for quite a while.

I am assuming your unit is a MF because single family home is exempt from rent control (costa Hawkins).

Other options to break AB1482 (not sure if you have stricter local ordinance) are 1) move in a close family member.  Ab1482 is not clear on duration but locally (San Diego) is interpreting it to be for a year.  2) renovation extensive enough that tenant cannot reside in unit through the effort.  Abatement works.   Take down textured ceiling may suffice if it has asbestos.  City of San Diego explicitly states flooring replacement without abatement and painting does not suffice.  Find out what your jurisdiction dictates as requiring tenant vacating but I am fairly certain pulling down asbestos texture is will suffice.

If you do not desire these, then abide by the rent control increase.  In San Diego it is 8.6% for the current period.  Seeing it is based on local inflation rate, your max increase will likely be slightly different.  

Good luck

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

@Dan H.

I appreciate that, but let me explain why I don't do it.

Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.

I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.

Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.

I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.

In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.

 Is your house you ex-home?  The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices   A small MF would produce better cash flow.

I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow.   Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13.  Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.

Prices in southern CA has always been high.   From 2012 to 2021 was a lower point in affordability, but some people could not see it.   The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles).  I do expect a near term slow down that seems to have already started.   The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year.  I suspect the mid point is perhaps most accurate.  Regardless it has been fairly flat.  I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards.   I believe San Diego will continue to have long term appreciation above inflation.  In the short term, I make no claims and am expecting somewhat flat.

I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house,  $500k/15 years is $2777/month.   I was expecting it to be higher, but that is still huge.  It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold.  The reality is you have made a lot more than that. 

Stuff to ponder.

Good luck

Appreciate you sharing that info. Just saying, most people expect appreciation to be above that in the Midwest over the next few years, and as we know cashflow is a lot better there too, so would that not be the stronger investment overall? It sounds like you might see more rent growth upside in SoCal, but I think the homebuyers are maxed out and the renters are too. Unless SoCal over the very long term becomes a playground for the wealthy and the working class is completely driven out—then rents may rise.

Yeah, the appreciation gain on that house would have been incredible. I could have hung onto it and used the growing equity to finance cash flowing investments elsewhere, but of course, hindsight is 20-20. I did hang onto it for a few years, cashed out and put my money in cash flowing investments. If I were willing to acquire property in someplace like Fresno (I’m really not), that would be a good place to repeat that strategy now.

I thought you had continued to hold the property.  You would have had outstanding cash flow over the hold if you had not extracted value and outstanding appreciation.   Note I regularly extract value (but have not since q2 2022), so my cash flow is modest (for the holdings - my cash flow is enough to live a comfortable life).

as indicated, Coastal CA has always been expensive.  I was hearing the same issue about affordability for decades including 2012 to 2021 when statistically the affordability was near the lowest for the previous 50 years.  Today the affordability is not good (worst since the 1980s in San Diego), but still not all time bad.   We know prices have risen significantly since the horrendous affordability of the 1980s.  I suspect some near flat years appreciation wise (I am underwriting 5 years flat) to bring the affordability down some, and then the appreciation to again beat inflation (underwriting with a long term appreciation at 3% (San Diego is near 6% appreciation for this century)).  Note I expect my underwriting to be on the conservative side in every facet.  

If you are going non local CA, look at Sacramento.   Also look at Merced over Fresno.  A few years ago, Merced had the fastest growing income in the country.  I suspect the income is still growing great.  It is by far the cheapest area with a UC campus.  UC campus injects a lot of money into the area and being the newest UC campus, it is still in more in a growing phase than the long established campuses.

good luck

Quote from @Mike Day:

@Dan H.

I appreciate that, but let me explain why I don't do it.

Here's an example of a place I used to own about 15 years ago, a house in LA that was worth $300k and rented for $2000/month. Today that house is probably worth $800k and rents for $3000, meaning its value increased by 2.7x while its rent increased by 1.5x. With this kind of lopsided growth, you'd be completely prevented from pulling out equity and using it to finance more purchases without being buried by negative cashflow. I could see using the appreciation on the California real estate as a generator of capital for investments elsewhere. It seems like that's what you may be doing. However, I don't believe that kind of appreciation is going to continue, so here I am mostly out of California.

I agree that rents have grown at higher rates in California vs. the Midwest. So if what you were going to do was put down a ridiculous chunk of cash on a property, never touch the equity and let it sit for a long time, you'd come out ahead doing that in California. However, you would basically not be able to use that equity to scale up your portfolio and I believe that the scaling is what would really provide great long-term returns.

Now here's an example of a place I owned in the Midwest at the same time. It rented for $800 a month and was worth $65,000. Today (I still own it), it's worth $150k and rents for $1600. Like in LA, the value went up more than the rent, but not a lot more, like 2.3x for the value and 2x for the rent. This means taking the equity out of one property and putting it in another is a valid way to grow your portfolio. I was doing this for a long time and am pausing only because of current interest rates.

I understand that a strategy of growing through ridiculous California appreciation rates was very profitable for a long time, but there's reason to think the party is over now. My understanding is that annual growth in Southern California has slowed to 3-4% at this point. Maybe inland California is the place to be now.

In San Diego the typical SFH investor purchase rent ratio is closer to 0.5% than what you depict and has not gotten worse at the same rate as you indicate for LA (it was not much better than 0.5% 15 years ago), but has gotten worse. I look at this as rents trail price change. Here is an example in the opposite direction, at the GFC values fell between 30% to 40% county wide (there were areas better and worse than this range), but the rents barely budged.

 Is your house you ex-home?  The thing about ex-homes is they are 1) purchased to be a good home for you and your family 2) typically cost more than investors would pay 3) have worse cash flow and cash flow potential than other choices   A small MF would produce better cash flow.

I agree the rate increase has created a new wrinkle, but my refis and purchases prior to q2 2022 still depicted positive cash flow.   Granted after a refi it was not good cash flow but I had just extracted a large amount of money tax deferred and the way the rules are today it is possible that extracted money will never be taxed (1031, step up basis at death). This positive cash flow was getting an assist from the property tax saving of prop 13.  Mostly I did value adds, so the refi allowed me to extract all my investment to be reused.

Prices in southern CA has always been high.   From 2012 to 2021 was a lower point in affordability, but some people could not see it.   The rate increase changed that but not to an all time high as the 1980s were less affordable in San Diego (and I suspect in Los Angeles).  I do expect a near term slow down that seems to have already started.   The appreciation numbers I have seen for San Diego vary from -0.5% to 4% over the last year.  I suspect the mid point is perhaps most accurate.  Regardless it has been fairly flat.  I have done my underwriting since 2022 as flat (0%) for 5 years, then 3% starting year 6 onwards.   I believe San Diego will continue to have long term appreciation above inflation.  In the short term, I make no claims and am expecting somewhat flat.

I cannot get past my lowest appreciating property is $2700/month and I have some over $10k/month. For your house,  $500k/15 years is $2777/month.   I was expecting it to be higher, but that is still huge.  It means if you had zero cash flow, no equity pay down, no tax advantages you still made 2777/month over your hold.  The reality is you have made a lot more than that. 

Stuff to ponder.

Good luck

1) cash

2) wait until removed from market/mls.  Related, high DOM with some price reductions.

3) offer immediately after a contract falls through

4) removal of contingencies

5) avoid over zealous markets

6) network: bird dogs, wholesalers, FSBO, etc. Goal is off market. my last 4 purchases were off market and my last under contract was off market.

7) auctions with sparse turn out (not my market)

8) start your own off market market campaign.   Letters, calls, seo, door knocking, driving for dollars, etc.   propstream, invelo (has free option with BP pro), etc.

Note I am not saying any of these is both easy and without risk.   My belief is that most inexperienced RE investors are best served purchasing using an RE agent off the mls.

Good luck

My comments: 

- other expenses seems a little low but may be ok because exiting at year 7 will be before large cap ex items start to heed to be replaced.

- $100k rehab in 2 months is very challenging but I did do a $100k rehab in just over 2 months just over a year ago.   I was on site every day and it was a lot of work.

- not sure the purpose of the hold is.   The cash flow is very little.  Rent $2200.  P&i $1331.  Expenses $708.  About $160/month cash flow.  Why not just flip and fully realize the value add as soon as you can?   This would optimize the return.   Basically $100k return (used 10% total selling cost including additional hold time) in 2 months (if you can actually perform at that speed) on $200k investment equates to $600k for a year or a 300% return.  Even if it takes you a couple months to sell, you are likely looking at over 100% return. The market price indicates that it is unlikely to have great appreciation.  Holding it for a couple hundred a month cash flow is going to diminish this return.  

Good luck

Quote from @Mike Day:

I think you’re kinda cherry picking certain areas to prove your point, but no big deal, we can disagree.

Yeah, I seem to remember us debating investments in various areas of the country in another thread. This is a topic that’s very relevant to me as I own a small amount of property in California and invest mainly in the Midwest. The reason is that cashflow in California is awful and even though appreciation was great in the past, and would have beat out many other areas of the country as long as you could tolerate the negative cashflow, I personally don’t think that’s going to continue to be the case so I keep my mostly passive investments mostly in the Midwest. Why should a passive investor turn to California now? Honestly, if you’ve got a good reason, I might change my view.

>Why should a passive investor turn to California now? Honestly, if you’ve got a good reason, I might change my view.

Historically there is a horrendous relationship between initial cash flow and the actual cash flow over the hold. 

Case Shiller used to publish an overall residential return for large cities for this century.  It has been quite a flew years since I have seen it published so I suspect it is something they are no longer doing.  What is showed was the best cash flow markets over the long hold aligned closely with the best appreciating markets.  The top 3 overall return was San Francisco, Los Angeles, and San Diego.  These cities were also very high on the top cash flow markets for a purchase in the year 2000.

A handful of years ago BP did a similar study but only going back I believe it was a little less than 10 years (I think it might have been 8 years).  In that span, the large coastal CA cities had risen from near the bottom in cash flow at purchase to typically a little above the middle (not great, but less than 10 years).  This was with the numbers having a significant error as related to property tax (they kept the at sold property tax percentage (a little over 1%) as the property appreciated when they should have used a 2% increase.  This made the actual cash flow in the CA markets significantly higher than depicted in the BP data.  Maybe with this corrected, the cash flow would have been near the top quarter (I did the fix for San Diego, but do not remember exactly how much it helped).

You may be able to find one or both of these studies.

What has been shown going back many years is the good initial cash flow markets historically have poor rent growth.   Math tells you that the higher rent growth will eventually have the higher cash flow over the hold.  I invite you to look at Cleveland's rent growth and compare it to San Diego's.  Then look at the market appreciation rate.  You will see a relationship.  You will also understand why San Diego had the better cash flow over long holds.

I believe RE is a long investment unless you have a real active role (flips, development, etc).  Initial high cash flow markets do not produce good cash flow over long holds because their rent appreciation is typically poor (worse than inflation).

What do you think of these thoughts?  Something to ponder.

BTW I feel most RE markets are currently challenging.  It was easy prior to Q2 2022 in my market.  I could have purchased virtually any RE and made money in the near term.  Now requires more effort to make money in the near term or more patience than I have for my investments to produce a good return. 

Good luck

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.

my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).

the property completed stabilization 3 months ago.  Today the rents are $7.5k above piti (or $4k above my sustained expense projection).   I am also up about $1m above purchase and rehab costs.

i use total return to determine the quality of an RE purchase.   I can handle sustained negative cash flow.   Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment?   Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did).  The accelerated depreciation returned nearly 40% of my investment in year 1.   Would it be a bad investment if it was still negative $6k/month?

note this works best if you can do this minimizing the risk.   This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).

cash flow gets taxed annually.   Other sources of re return are tax free or tax deferred.   This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form.  We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).

just some things to ponder.

@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.

Good luck

I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.

It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.

>It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents.

there are many forms of appreciation.  

Forced appreciation with proper underwriting, I believe is way more certain than cash flow.   At the great GFC there were many markets that cash flow changed significantly in the negative direction.  Detroit, Las Vegas, much of Florida and Arizona.   Granted there were many markets that the cash flow did not change significantly.   In my market values fell significantly, but rents held (there were a lot of markets that GFC did not noticeably affect cash flow).   The issue is without knowing what causes the next event like a GFC, you cannot determine which markets will be most negatively affected.  It could be my market or your market.  The cash flow is not certain.

market appreciation with proper research is not random.   There are indicators that make it significantly likely that appreciation will exceed inflation over the long term.  Similar there are markets (mostly the highest initial cash flow markets) that the indicators indicate market rent is unlikely to keep up with inflation.

smart investing weighs the risk versus reward.   Research can provide some insight into what can occur and the associated risks.

i strongly advise anyone from being overly leveraged such that a GFC event or Covid event places their investment in jeopardy.   However, I do not think cash flow is required to meet this condition.   My cash flow is pathetic (by design) for my valuation and what I owe (and I have the highest debt to income of anyone I have ever heard of, currently I owe ~$550 to every dollar earned in 2024), but I suspect no one would think I am at high risk of not being able to absorb a GFC like event.   This ability to absorb extreme events is due to things other than my cash flow (diversification).

if I offered $10 for rolling a 6 on a 6 sided die, but you had to pay me $1 per roll, you likely would be willing to do this as long as I was willing to do it even though your chance of winning on any one roll is one out of 6.  This is because the reward more than justifies the risk.  

In RE it is reward (total return) versus risk and effort that determines a good investment.

good luck

I wasn't talking about forced appreciation. If there's a clear path to increasing profitability, and you have a vision and the skills to pull it off, that's different. But it actually sounds like this guy just wants a passive investment and he's relying on interest rates coming down to cashflow. Hopefully it happens, but if rates stay where they are and this is his second property and it wipes out the profits from the first, then what?

Also, I will defend my statement that cashflow is more stable than appreciation, talking now about market appreciation. To have a 15% drop in cashflow from vacancies increasing and rents decreasing would be incredibly rare. You said it yourself, even in the great financial crisis they barely went down. Any greater is not even really worth planning for because you're going to be looking for guns and food, not fiddling with your investments. However, we have all seen greater drops than that in our lifetime in property values.

I am mainly a passive investor and I believe the poster was using that approach as well so that's the framework of my feedback. Passive cashflow is more reliable than passive appreciation.

 >To have a 15% drop in cashflow from vacancies increasing and rents decreasing would be incredibly rare. You said it yourself, even in the great financial crisis they barely went down. Any greater is not even really worth planning for because you're going to be looking for guns and food, not fiddling with your investments. 

What I stated was many markets did not have much cash flow decline (including my market), but there were markets that had huge cash flow declines.   Detroit was perhaps the worst, but I know an investor who had what appeared to be a decent diversification of rentals that somehow was only in markets that cash flow took a beating (Detroit, Arizona, Florida, and one apartment building in Illinois).   She had to liquidate at a huge loss.   You do not know which markets will get hit.  You do not even know that the hit will not be all markets.

My market going back to the start of the records, has never experienced any RE value decline over any 10 year period.   I would not rely on past performance to dictate future performance, but the same items that resulted in that appreciation exist today including large supply constraints, diverse economy, outstanding climate, etc.    I think it’s appreciation outlook for 10 years I would rate as higher than Cleveland’s market rent keeping up with inflation (resulting in reduced cash flow).    We know going backwards my statement would be true seeing 100% of the time my market has appreciated over a 10 year period.

So here is a question for you, would you rather invest in Cleveland units at positive $300/month cash or San Diego units at negative $300/month per unit?   I know what I would choose.   I have given $600/month rent increases in the past as that is what the market was showing as average rent increase.  Tenant was expecting a large increase as market rents had increased similarly.

As indicated, I strive to minimize my cash flow as I desire to minimize what I pay in taxes. I rather have my return from the other REI sources (none of which get taxed annually).

Good luck

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Someone once advised me never to create a negative cashflow property and I think it's good advice. Because ultimately, why are you doing this? You want freedom, right? That much monthly negative cashflow limits your options and will continue to be an issue for years with ordinary rent growth.

my last RE purchase had rent ~$3500/month less than piti and my underwriting showed negative $6k/month when including all projected expenses (including piti, sustained maintenance/cap ex, vacancy, pm allocation, misc).

the property completed stabilization 3 months ago.  Today the rents are $7.5k above piti (or $4k above my sustained expense projection).   I am also up about $1m above purchase and rehab costs.

i use total return to determine the quality of an RE purchase.   I can handle sustained negative cash flow.   Let’s pretend this was still negative $6k/month, but my value gain was over $10k/month (which it has been) and my equity paydown is $2500/month (which is nearly correct), would it be a bad investment?   Let’s say I used cost segregation to realize $175k in year 1 tax savings (which I did).  The accelerated depreciation returned nearly 40% of my investment in year 1.   Would it be a bad investment if it was still negative $6k/month?

note this works best if you can do this minimizing the risk.   This implies that you are not over leveraged, ideally well diversified (like many on this forum I have a large percentage of my investment in RE, but I am diversified enough to be fairly low risk).

cash flow gets taxed annually.   Other sources of re return are tax free or tax deferred.   This implies there is motive to minimize cash flow if it can be realized in a tax advantaged form.  We actively minimize our cash flow to increase return elsewhere (where it does not get taxed every year).

just some things to ponder.

@Antuan C. I would be leery about expecting a significant rate reduction. It may never happen When rates first increased, lots of investors were discussing improving their numbers when the rates lowered. In my view the rates have never lowered enough to justify the costs of a refi. In addition, you will not get 95% LTV on a refi and likely will need to bring significant cash to any refi.

Good luck

I definitely would not contest that making cashflow negative moves can be fine and desirable if you already have all the cashflow you need, however for an investor still working to gain financial freedom, it's typically a bad idea as it's a setback on that initial stage of the journey. My assumption is OP is not already a multi-millionaire, but if they are, my advice would change.

It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents. This becomes a debate about equity vs. cashflow but the real point is that in OP's case, if this is say their second property, they should be focusing on cashflow and shouldn't make this move.

>It's not a hot idea to be relying on appreciation for the unearned income a beginning investor needs as it is much more variable than cashflow from rents.

there are many forms of appreciation.  

Forced appreciation with proper underwriting, I believe is way more certain than cash flow.   At the great GFC there were many markets that cash flow changed significantly in the negative direction.  Detroit, Las Vegas, much of Florida and Arizona.   Granted there were many markets that the cash flow did not change significantly.   In my market values fell significantly, but rents held (there were a lot of markets that GFC did not noticeably affect cash flow).   The issue is without knowing what causes the next event like a GFC, you cannot determine which markets will be most negatively affected.  It could be my market or your market.  The cash flow is not certain.

market appreciation with proper research is not random.   There are indicators that make it significantly likely that appreciation will exceed inflation over the long term.  Similar there are markets (mostly the highest initial cash flow markets) that the indicators indicate market rent is unlikely to keep up with inflation.

smart investing weighs the risk versus reward.   Research can provide some insight into what can occur and the associated risks.

i strongly advise anyone from being overly leveraged such that a GFC event or Covid event places their investment in jeopardy.   However, I do not think cash flow is required to meet this condition.   My cash flow is pathetic (by design) for my valuation and what I owe (and I have the highest debt to income of anyone I have ever heard of, currently I owe ~$550 to every dollar earned in 2024), but I suspect no one would think I am at high risk of not being able to absorb a GFC like event.   This ability to absorb extreme events is due to things other than my cash flow (diversification).

if I offered $10 for rolling a 6 on a 6 sided die, but you had to pay me $1 per roll, you likely would be willing to do this as long as I was willing to do it even though your chance of winning on any one roll is one out of 6.  This is because the reward more than justifies the risk.  

In RE it is reward (total return) versus risk and effort that determines a good investment.

good luck

Quote from @Antuan C.:

@Mike Day

Thank you Mike, I agree with you cashflow is king. I don’t like to play the appreciation game.

However, in this environment is so hard to find a cash flowing property with 5% down. So I have been thinking on using the cashflow from the other properties to cover the negative cashflow until cashflow improve or until I can refi.

The property doesn’t require much work <8k. Roof and water heaters are brand new, property is about 15years old from the same owner.

Most duplexes in the area are running over 100k more

 >I agree with you cashflow is king.

When I started on BP, this was the common sentiment.  I advocated that appreciation is king and cash flow (due to it having no tax advantages) should be minimized.  The BP sentiment on cash flow being king has changed significantly more to my perspective with time.   Mostly it is the less experienced investors that are still under the belief that cash flow is king.

Here is something to consider, when was the last time you saw an experienced syndicator offering that did not include a significant appreciation play?   

Cash flow can help pay the bills, but appreciation is where the wealth creation can occur. 

My worse appreciating property has appreciated $2700/month over its hold.  I have properties that have appreciated much more than $2700/month.  $2700 is more than many markets average rent.   The initial rent on this unit was less than $1k/month.   

Some things to ponder.