All Forum Posts by: Dan H.

Great points. My most basic thought is that the money is made when you buy not when you sell. And in most cases a quality neighborhood is worth the premium. 

Hi all,
First time poster, long time listener of the various BP pods. 

I own a 2/1 condo in unincorporated Jeffco just outside of Golden, CO proper. Have had it for a year, and bought it to occupy with my fiancée before upgrading to an SFH.

Plan was to hang onto the condo with a tenant in it and hold for small cashflow and appreciation due to the desirability of Golden (we have a golden address and many don’t even realize we aren’t in the city). The average sale price in our zip was nearly $1 million at the time of purchase last year- it’s now down about 9% per Redfin. 

At this time last year-  units in the complex were renting for $1750/1800, which was about the same as my mortgage payment + condo fees. 

Today, similar units are renting as low as $1550-1600, while my mortgage + HOA fee is nearing $1950 monthly.

Obviously , the market has turned south AND the complex has increased monthly fees, along with adding a special assessment. The HOA is extremely incompetent- they only allow cronies of its president onto the board. The fee is $500 monthly for no amenities of any kind (the pool was filled in with concrete in the 1990's). The parking lot is riddled with potholes. The exterior stairways and landings are in very poor shape. abandoned / unregistered cars sit in the parking lot, homeless sometimes camp out, etc.

On top of this, our little sub market is being discovered. New luxury rental buildings have come online, one just broke ground half a mile away, and another is approved and will go up right next door (200 rental units). It is in a “path of progress” as far as being the cheapest area of a very expensive, desirable town. 

Choices are:

A. I paid $259k, and could realistically unload it for $225k today. 

B. Or I could rent it out and negative cash flow at roughly $325/month. 

My concerns: 

There is a real risk of a even higher negative cash flow after the next budget is rubber stamped. The complex also lost FHA status due to it having far more tenant occupied units than owner occupied (they don't official track this, violating their own by-laws).

 Conventional loans are still possible, but harder to get because the master insurance policy on the roof is inadequate.

Finally, reserves are very low.  The building is 50 years old and full of deferred maintenance.  Many owners bought a long time ago and aren’t involved in the management of the community.  

Short term rentals under 30 days aren’t allowed. Some owners appear to try advertising 30 day+ stays on various platforms. 

For a “TLDR”:

Should I keep a condo in a gentrifying area, but in a very troubled complex, and bank on future appreciation? This would lose $325 a month, and probably a lot more after the next budget is ratified. It would likely take years for my value to recover in real $ to the purchase price, let alone higher  

Or should I “rip off the band aid,” and unload a condo that negative cash flows and likely will for the foreseeable future given the state of the Denver market, as well as new, much nicer units being built in the immediate area?    I’d lose about $50k doing this. 

For what it’s worth, an agent thinks I should hang onto it. There are 8-9 other units in the complex for sale currently, all of which have had price cuts or fallen out of contract. 

Thank you for any insights you may have and sorry for being long winded. I felt the nuance of the condo issues were germane to the choice here. 

Hi BP Community!

Long time lurker, first time poster. I’ve appreciated the information this community has shared and hope to tap into the knowledge base to get guidance on leveraging our existing property.

My brother and I own a multifamily rental property that our father transferred to us in 2021. Because he transferred it to us, we are subject to potential capital gains.

Property is 4 units (duplex, house, cottage) with a remaining mortgage of $390K at a great rate (3.5% / 30yr fixed). Property appraised for $2.7M in 2021. Before taking over, our father had kept rents below market in favor of keeping long term tenants. We generate solid cash flow and our cap rate based on FMV is <3%. Property is in ok shape - built before 1990. The duplex and house are decent but I'm worried the cottage may require investment in the near future.

We both live in California, the property is in our name as joint owners. Our experience in real estate has been managing this property ourselves. The property is in Silicon Valley close to tech companies and is in a prime location where there is strong housing demand.

We're exploring the best ways to leverage our property and are especially focused on opportunities that can generate wealth and a one-time ROI. That said, we're also interested in hearing creative ideas—especially if they could provide strong, sustainable cash flow over the long term.

Here are some of scenarios we’ve been contemplating:

Option 1: Develop the land and build 6 (or more) multifamily units. I'm thinking of townhomes 3BR/3Ba ~1500 sqft. We're zoned for that many units at a minimum as I have spoken to the city. I have seen lots of similar size and zoning develop projects like this. We realize this would be a huge undertaking and we would need to bring in a lot of expertise to help lead development. I have spoken to a couple of lenders and it seems our biggest challenge would be bringing ~20% of construction costs to the table as capital. Broad strokes, I believe this scenario has the biggest ROI potential from one project however this will come with big challenges including capital, expertise, and risk.

Option 2: Pursue the same as Option 1 but just entitle the land and sell it / reinvest.

Option 3: Explore subdividing the lot and build individual SFRs? I am not sure about zoning restrictions for something like this. My understanding is SFR construction is less expensive. Would this be any different from Option 1? I am not sure what our financing options are for this scenario.

Option 4: Leverage the equity via HELOC/cash out refi for further real estate investment. I believe we have a lot of leverage here so we could grow the portfolio significantly. I've read about DSCR options and feel like we could easily qualify and bring capital to reinvest elsewhere.

Option 5: Same as Option 4 but house hack a multifamily property for my brother to live in as a primary residence.

I’d love to hear your thoughts on the different ways we could approach this. If anyone is open to connecting, I’d appreciate the chance to talk it through. We don’t feel we are leveraging our situation to its maximum and with so many options, it’s been overwhelming. It would be helpful to get a reality check on what makes the most sense so we can narrow in on a strategy.

Thanks so much for taking the time to write such a thorough and educative response — I really value insight from someone who’s actively operating in the San Diego market.

For context:

• I knew about rent increase limits going in, but didn’t expect to have to drop my rents as much as I did at the start. When I first listed, demand wasn’t strong enough and I wasn’t attracting favorable tenants. On top of that, I started having people break in to squat at night, which pushed me to secure tenants quickly.

• I landed at about 12.5% below my projected rents. Thankfully, the tenants I ended up with have been great — they do STR/MTR rentals themselves (I allow subleasing).

• According to Rentometer, my units are still under market. I’ve also tried the BiggerPockets rent estimator, but the confidence interval was low. If there’s a more reliable local rent comp tool you’d recommend, I’m all ears.

• My $9,300 monthly total is the actual all-in payment, but I round to $10K for analysis to account for property tax increases, landscaping, and now the new trash fee.

• The property is in Grant Hill — not the easiest neighborhood, but it's still pulling STR/MTR demand (budget-conscious visitors to SD, mostly).

• I was also banking on more favorable interest rate cuts along with continued appreciation — both of which didn’t play out as quickly as I expected, throwing off my original projections.

Regarding your question on my underwriting prior to purchase — can you clarify what you mean specifically? I want to make sure I’m understanding/learning fully.

I’m willing to put more capital into the property if it means shortening the negative cash flow period. From your experience:

• Have you seen STR or MTR operators in similar neighborhoods pull enough premium to materially close this kind of gap?

• Any value-add plays short of a full ADU build that have actually penciled out recently?

• Strategies you’ve seen for bridging cash flow in a soft rent market without over-leveraging?

• And if you were in my shoes, would you stay the course, avoid major changes, and just let time do the work?

Really appreciate your perspective — this kind of detailed, reality-based feedback is gold.

I’ve got a 2-unit in San Diego that’s bleeding cash:

• $10K/month all-in expenses (mortgage + MI + other costs)

• $7.5K/month in rent income

• Locked at 5.5% interest

• Can’t raise rents for another year, and local rents are trending down

Even with future rent bumps, I’m years away from breaking even.

Possible moves I’ve thought about: 

- Short-term rentals

- Expanding the units (lot space available), or adding a second story (to create more units). 

I don’t have blueprints, so building would mean paying to get plans drawn.

What would you do in my shoes? Looking for any and all creative, outside-the-box ideas.

@Dan H.

100% agree with you, but say it in a different way, not as well as you.  

The San Diego and Austin properties will maintain or increase in value over the long term.   The Memphis properties I saw in the $150,000 range will decrease in value.   

Tied to their value changes will be their relative rental income increase and decrease.

The problem in this discussion is the Memphis market, it’s good.   When I looked online you can buy decent “B” class properties for $150,000 and get the $1,500 rental. Any house where I’m at for $150,000 you’re not getting $1,500 for rent.    The problem with the Memphis properties is those types of houses and neighborhoods will deteriorate into “C” class properties.  Thus as you note their relative rental income will decline and not compete with San Diego and Austin Longterm.

OP and others change the figures as you see fit.

"Why markets with low appreciation grow your net worth twice as fast"

First of all, we don't do housing, so all of you folks are the expert compared to our endeavors.  Our business metrics are 100% Cash on Cash on the low end, or we don't do the deal, with an expectation of 400% Cash on Cash on a normal deal, over a 3-year period.  Example:  If we invest $350,000, we expect $1,400,000 plus our original $350,000 back at the end of 3 years.  Or we can hold and get great monthly cashflow on our Self Storage and can always sale later.  But this is Forced Appreciation and not Market centric.  (Don't contact me).

Will go back to your numbers, plus add another market:

Austin  $400k; $2,200 rent per month.  Houses and not Apartment units.

Memphis $150k; $1,500 rent per month.

San Diego $1,200k;  $6,000 rent per month.

I did some googling in the above markets.  For those purchase prices and those rental rates.  Quality of houses are relatively the same at those purchase prices.  Austin is newer 90's to current; Memphis is older 70's 80's; San Diego is even older, say 60's to 80's.  Actually, amazed that you can buy a nice house around Austin for $400,000.  Rural Iowa where we are at it will cost $600,000 minimum for a similar house.

A.  Just pure math on just the rent versus cost, the Memphis example is better from a Cash Flow standpoint.  Keep in mind the listings I saw are "B" properties and not what I would call "C" properties.  If I used the Austin ratio of $2,200/$400k on the Memphis $150k that would be $825 per month rent versus the $1,500 in your example.  Means you would have $625 per month (revenue, not cashflow) to invest elsewhere or paydown compared to the Austin property.  About the same for the San Diego property.

B.  Appreciation markets didn't do a lot of research but will throw some figures out for discussion.  You change with local boots on the ground info.

If your calling Austin and San Diego as high appreciation markets say use 6%.  If you call Memphis a low appreciation market, say 3%.  The problem is Inflation.  If you use a flat 3%, the Memphis property doesn't keep up.  So, your Net Worth doesn't keep up.  So, if that is a low appreciation market, you have to increase your Net Worth with increased Profit generation and not Appreciation.  It is next to impossible to double your Net Worth in that scenario.  Unless you do a Value-Add approach, you can't get there using a Low Appreciation property, especially against Inflation.

If you use the appreciation difference on a 6% versus 3% or a 3% diff.  The Austin property at $400,000 would generate $12,000 more per year.  Divided by 12 months= $1,000 per month.  If you reduce that to the Memphis investment figure of $150k, 150/400 times $1,000= $375 per month comparable excess appreciation on the Austin property, before tax impact.

C.  So, we looked at Revenue versus Cost and then Appreciation.  The Memphis property generates "Current Taxable additional revenue (not cash flow)" of $625 relative per month, versus the Austin "Higher Appreciation (not cashflow)" of $325 per month.  Again, these are before tax effect, which would lower the Memphis figures "Current income, higher tax rate" versus the Austin "Lower Capital gain rate and time value of deferred payment".  The Memphis property assuming you reinvest the "Current" additional cash flow versus the Austin deferred Capital gains, should perform even better with REI returns.

D. CAPEX- The Austin houses are a lot newer than the Memphis or San Diego properties thus will have less Capex. The San Diego house CAPEX will be smaller on a percentage basis due to its high cost relative to the other two markets. If you use a CAPEX of $300 per month across the board, the San Diego property is better on a percentage basis.

E.  Tenant Turnover-  Both the Memphis and San Diego properties are similar older properties and would have higher turnover and cost.  The Austin properties I saw were a lot newer and nicer and I would say less turnover and damage.  But again, you folks are the experts in housing.  Figures?????

F.  Will we see a similar market in the future?  Our house cost $135,000 to build in 1991.  2,100 sqft ranch with full basement, all brick.  Today I would say low end $600,000 to $700,000 value.  If I used the $600,000 figure and a 6% appreciation factor over 30 years it would be worth $3,446,000 in future dollars.  So, let's compare.  $600k/$135k= 4.44 multiplier; $3,446k/$600k= 5.74 multiplier.  I don't see my house even if new construction increasing at that rate over the next 30 years.  At 5% it would be $2,593k.  $2593k/$600k= 4.32 multiplier.  Which would be the appreciation we have seen in our market for our type of house since 1991.  

The San Diego market even though the house is already old, I would expect its location to maintain and increase in value (Ocean/weather).  Same for Austin.  The Memphis properties I looked at and their neighborhoods will age worse than the other two locations, losing relative value.

Talking out both sides of my mouth.  Above I said I didn't see future inflation or appreciation being as high as it has been since we bought our house in 1991.  Tried not to bring the US economy into play till now.  I actually expect Inflation and Currency expansion to be even greater in the future.  We have to fund the Baby Boomers for the next 30 years.  Fund both our National Debt and our Unfunded National Debt, plus in the near term their interest rate will double.  We will have to expand the US cash supply.

Which will be great if you already own.  Your asset value will increase, and your debt value will decrease with inflation.

If I was a new investor with limited resources the Memphis property would be the best property by far due to cashflow relative to Cost.  Longterm 15 to 30 years I would go with the San Diego and Austin property if I had the capital.  Their value will not degenerate like the older Memphis property and their neighborhoods will.

Can the lower Appreciation property grow your net worth Twice as fast.  I won't hold the OP to Twice as fast, since it makes a nice Post Title.  But it all depends on what you do with the additional $625 per month in revenue generation (not cash flow).  Plus, you have to make enough to cover the relative devaluation of that older neighborhood.

Which of the above investments is the best and which will increase your Net worth the most.  

I don't know.  We don't do housing***** except in Belize we are building a 30x30; with 10 x30 porches on both ends with a full verandah top.  Hopefully come in around $40,000.  My Plantation managers father will live in it.  Otherwise, we will rent out to Expats for $800 per month, non-tourist location. 

Cost $40,000 Rent $800 per month.  Property tax $60 per year, income tax (Belize, still have to pay full US tax) maybe $50 per year Belize, no Capital Gain taxes, Maintenance little- concrete building, insurance- $200 per year.  Let me get back to our building and see if we can hit our numbers.

Putting center I Beam up.  Will pour the Concrete beam around the edges on Saturday.

 Yes, I am an accredited investor. I also have a lot of money with Brian Burke, whom you mentioned.

I never did syndication investing before, and had no idea I could lose 90% of my money.

Like all investments, I probably got a warning that I could lose all my money, but I figured that is more of a generic thing everyone says to cover their legal liability. I would imagine all syndication investments have that warning.

I appreciate your wish of good luck, but that has already expired with the one Open Door Capital deal.

Hopefully, other deals I am in will do better, but again, if I knew the risk was 90% I never would have put a penny in any deals, and I hope those reading any of this thread never invest in any deals for that reason.