All Forum Posts by: Dan H.

Quote from @Colleen F.:

@Dan H.  the median household size is not stated in your data however 1/4 of California households are single persons households (census data). Those individuals don't need a two bedroom (although I can't speak to if they could afford a 1 bed).   I couldn't determine how many were only two person households.   The rise in single person households could be driving a lower median. 

 One br: $2354

$2354 * 3 * 12 =$84,744.00 

So the median household income can afford this but 1) I expect the single earning household income to in general to be less than 2 or more earner households.  2) I suspect most single person households are younger people and making less than the median income.

What I see is the young people often decide to rent a multi BR with roommates to reduce their housing expenses.  My son rents a 3 br that he shares with his girlfriend and one roommate but they are in search of another roommate.   The rent for the unit is $4400 (it is in a class b+ area) so it would be $1450 per BR if all BR were equivalent (they are not all the same).   

I see a similar choice from single migrants.   They rent a multi BR typically not in great shape in a class C or D area and fill to maximum allowed occupancy (2 * BR + 1).   Common is 5 in a 2 br or 7 in a 3 BR.  Note these are typically small units for their BR count.  This amounts to the cheapest non-government supplemented housing option.  Many of these LL are the prototypical slum lords (but I have 2 such units and they are not in great shape but they are safe and cheaper housing).

Latinos are often content with multigenerational living.  They also often maximize the occupancy.

I have one tenant that rents her spare BR to a foreign exchange student.  It is our only approved sublease situation (we have quite a few roommate situations) .   I do not know what she gets in rent from the student.  This unit is in good shape, rehabbed in the last decade.

I have three 1 BR/studio units.  2 are occupied by seniors.   The third is a large 1/2, 900’ and has a middle age couple renting it (2 income).  All 3 of these are nice, but 2 are real small, units.

Housing is expensive in San Diego. If you want to live in San Diego you either need to be financially well off or be willing to make housing compromises.

Best wishes

Quote from @Matthew Irish-Jones:

@Dawson Burton I love the BRRR strategy and use it as an investor. I also have 15 years of experience, own a fully staffed property management company and a construction company. Even with those advantages I cannot take 100% of my money out on a BRRR and get infinite returns.

BRRR for beginning investors is very high risk. You are better off using a company like mine so you don't lose your a**, but we get paid for Realty, construct and management, so there are service fees all the way through making it harder to pull all your funds out. It's also very hard to get agents motivated to find a new investor a BRRR.
The real strategy with a BRRR is to get all new mechanicals and updated units.  If you do this and leave 25% in the property you are still ahead of the game.

The idea you will turn 100k into a million with the BRRR strategy is a fallacy.

 >The real strategy with a BRRR is to get all new mechanicals and updated units. If you do this and leave 25% in the property you are still ahead of the game.

This would be trapping at least as much or more than if you purchased a rent ready property. Note I can purchase rent ready SFH in great condition at 80% LTV and only have 20% plus closing costs trapped in the property. It also means you did not earn much for the effort and risk of the rehab.

The increased competition for RE has made the ideal BRRRR almost a unicorn find. I did two in Dec 2021 that I would have been very close to 100% of investment extract (depending exactly where the appraisal came in), but I chose not to do the extract because the rates I could get on a cash out refi (cash out refi have higher rates than no cash out refi) would be double my existing rate and be large cash negative cash flow at my underwriting.

However, if you are doing a cash out refi and your underwriting is showing that you are trapping more than 10% of ARV, I question if it is worth the work and the risk of performing the rehab. Maybe for simple cosmetic rehab (new paint and flooring only). I know I would not chose to do it, but maybe a younger go getter may decide it is worth the effort (and risk).

Brrrr are work.   They have risks.   The operator deserves good compensation for the work and risk.

Good luck

Quote from @Marcus Auerbach:

According to this, you need to be at least middle-class to qualify for one of our single family homes at 3x rent in Wisconson..

Average rent for a 2 br apartment in the city of San Diego is $3017. For a 3 br apartment it is $4298 (source apartment advisor). According to census San Diego median household income (which recently passed Los Angeles and is leaving it in the dust after being far below it forever) $104,321 (source census). SFH in general rent for more than apartments for Same BR count

2 BR: $3017 * 3 * 12 =$108,612.00 

3 BR: $4298 * 3 * 12 =$154,728.00 

This implies the median household income cannot even afford to rent the average 2 BR apartment.   They are over $50k short of being able to rent the average 3 BR apartment.

Los Angeles has lower rent, but they now have significantly lower household income (when I was a young worker, Los Angeles salaries were much higher than San Diego and it was called locally as the sunshine tax).   Their numbers I would guess are about the same for affording rent.

It is not good for tenants, but the property values are so high that the rents cannot be much lower (I guarantee the property owners at high LTV are typically large negative cash flow at purchase). The only way the high rents associated with high property costs benefits the landlord is it makes for higher quality tenants and with patience the rents increase while typically the mortgage is fixed. So eventually there will be positive cash flow if no value is extracted.

Note this does not seem sustainable but 1) the rents have been high in San Diego forever.  In ~1990 my now wife rented a 1 br at $650/month.  It seemed crazy high as minimum wage then was $3.35/hour (vs $17.25 today).   2) I suspect the rent to value is near an all time low meaning the tenant has rarely rented more value for their rent amount than now.  In that respect the tenants are getting a good value   3) MF are rent controlled.  Tenants once they are in a MF unit have a cap on their rent increase.  They can typically stay as long as they desire with constrained rent increases.

 housing in San Diego is expensive whether it is to purchase or to rent.   However, it is currently noticeably initially much cheaper to rent than to purchase.   Apparently we are still paying the sunshine tax but now Los Angeles is also paying a similar sunshine tax.

Southern ca is expensive.   Fortunately, there are also opportunities for those with vision, willing to take appropriate risks, and work smart and hard.   The average person is unable to meet all these criteria.  They therefore struggle to afford to live in southern CA. 

I once long ago risked virtually every somewhat liquid dollar (so not my home, 401k, job, or family) on an investment.   First year cash flow was over 65% of my investment.   I had the vision and took the gamble.   It paid off big time and I still am getting cash flow of near 10% of our initial investment amount (in inflation adjusted dollars it is much less than 10% but we already achieved crazy returns on that investment).  By the way, I told some people my rationale on the investment.  Not one wanted to invest.   After the opportunity had gone to a normal type opportunity (so a few years later) one of those people asked if I thought it was still a good investment.   I told him that the cost was 4x what it was when I purchased (my $300k investment was worth ~$1.2m and had paid us around $600k in 3 years)  and that other opportunities could probably out perform it.   He was eager to invest in the opportunity only after it had produced crazy returns but by then it was priced appropriately for its expected return.   That is most people.   Unwilling to take calculated risks.  It is why many people on BP will never buy an investment property.  What is worse a bad investment or no investment?  I can make a case for either.  What is better a mediocre investment or no investment?  I lean toward the mediocre investment.  My definition of a good investment at purchase is not solely based on return.   It is based on the risk adjusted return which includes best and worse case scenarios.   If there is only 10% chance at a killer return (50%+) but the worse case scenario is I lose 5%, even if the worse case will happen 25% of the time, that is a good risk adjusted return.

Good luck

Quote from @Mike Dymski:

This one post summarizes tens of thousands of other posts on what most of us investors should know and do.

 I suspect there are at least as many posts in BP to buy initial cash flowing properties regardless of the areas’ outlooks. Think of all the posts suggesting Midwest markets with declining population, poor tenant base, and not robust economies.

Fortunately, the tide has been turning.  A few years ago on BP those that were prioritizing market outlook over initial cash flowing properties were far in the minority.  Today the OP’s view is gaining support and my crazy posts on initial cash flowing properties to be the worst indicator of overall property return no longer seem so crazy.

I agree with virtually everything the OP stated.  The one exception is I would rather buy the class b property in the class A area than vice versa but I question if this was what amounts to a typo.

unfortunately, I think it is mostly the newbies that succumb to the initial cash flow trap.   They see other newbies and those that benefit from the sales in such markets advocate for markets with good initial cash flowing properties and it seems correct to them.

My view is that if we only pulled BP users with net worth of at least 8 digits on the importance of initial cash flow, it would be way down the list of criteria.

Hopefully those that most need the info in this thread give it the thought that it deserves.

Best wishes

Quote from @Ryan Jenkins:

Hi @Jaron Walling. This is great. Thank you!

Did you acquire your real estate license? I’m curious how you’re getting comps without it?

In addition to the tools already mentioned there is PropertyHub and Pennymac.

Use the tools to get potential comps.  Eliminate the poor comps to derive your own valuation.

The 2nd to last offer I made had a very different valuation from Pennymac than the other tools I use.   In this case pennnymac was wrong, but sometimes the outlier is correct.  I was able to determine why the Pennymac value was so off as I eliminated many of their potential comps for a single reason.

Do not rely on the tools’ estimate.  Especially do not rely on a single tool’s estimate.

good luck

NAR data published Nov 2021 shows in San Jose homes with ADUs sold for $164k more than homes without ADUs. That is a much higher value than the data depicted for my San Diego market ($13k of value difference between homes with ADUs and those without ADUs). The San Jose increase was not enough of an increase in value to recover a hands off ground up the ADU addition costs. It depicts that ground up ADU additions appear to be starting with a negative valuation (cost more than the value they added).

Use comps of homes with ADUs in your area to get current valuation of your home with an ADU. I suspect you will discover that adding a ground up ADU will result in a negative position that needs to be recovered before any realized cash flow. It is one of a plethora of reasons why adding ADUs are typically a poor RE investment.

Here is a list of why adding a single ADU in single family zoned areas in my CA market, San Diego, is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU. According to NAR data homes with ADUs sold for only $13k more than homes without ADUs in my market.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

This study released by NAR is slightly dated (from Nov 2021) but has a table of property values with an ADU and value of properties without an ADU for many of the larger cities (look at the table at the bottom) . If you subtract the value of homes without an ADU from the value with an ADU you obtain an average valuation of ADUs for your city. Compare this with the cost to add the ADU subtracting off any loss of garage for garage conversions and you have the average value added by ADUs. In my San Diego market, an ADU added $13k of value on average, but a hands off, quality garage conversion is ~$150k. Ground up addition is obviously more. In addition before the summer of 2025 there was not a cap on number of ADUs that could be added. I question if the multiple ADU additions were eliminated if San Diego would have lost value when adding an ADU.

I wish the study indicated what percent of the ADUs in each city was a garage or other existing space conversion. I also wish it noted how many ADUs were added to the property. In virtually all southern CA cities, the cost added is significantly less than hands off grounds up ADU addition. In most of the So Cal cities, the average cost added is below the cost of a nice garage conversion. Note in some markets in the US including some in So Cal (Torrance), adding an ADU lowers the value of the property (property was worth more prior to the ADU addition).

https://www.nar.realtor/magazine/real-estate-news/study-adus-can-add-35-to-home-s-value.

good luck

Quote from @Sarah Fisher:

My name is Sarah Fisher and I'm interested in buying land in the San Diego area. I'm looking to learn more about real estate in this local market and understand all the details and options involved. Mostly I'm just looking to learn things from people who know them and ask questions for right now. 

San Diego has been my market and I have historically been very optimistic about San Diego RE investing.  

However since q2 2022 I believe buy and hold for is more challenging.  This is not only true for San Diego, but nation wide.  

The current rates and property price compared to rents means that a high LTV purchase will have initial negative cash flow and likely large negative cash flow.   Rent control on MF limits rent increases.   It could take many years to get positive cash flow.

i do believe with patience San Diego RE is likely to produce a good return.  I am not that patient.   So I concentrate on value adds to generate near term returns.

i believe in 10 years after purchase you will likely be glad you purchased the 

my son is 22 years old.   He is trying to find a path in San Diego RE.   He made an offer on a flip last week but the seller is in denial so I suspect it will not work.  It is challenging for him to obtain a good return like everyone else.

good luck

The type of eviction that you refer to does not require relocation assistance.

Have you looked at the eviction rate in San Diego (using the typical definition and not using it for an end of lease termination of lease)?  how Low is it?   The eviction rate is also one of the lowest in the county (the lockout rate is below 1 in 1000 rentals).  My family and I have had rentals for 50 years and have yet to not collect any money while the tenant occupied the unit.  Not $1 not collected.  

This is not because all the units are class a.  Our units go from class A- to class C-.

So why is this?  Certainly the pain to evict plays a role but look at the delinquency rate for San Diego.  It also is also one of the lowest in the country.   So this would lead one to conclude it is not primarily related to the PIA of doing an eviction.   No it is because of the housing shortage (vacancy is historically below 5%).   Our policy to rent our units is no evictions ever.  We require strong LL references and the credit report cannot have any indication of ever having not paid the landlord.   All the large home providers also do not accept any tenant that has ever been evicted.   The tenants recognize if they have been evicted or have an adverse LL issue on their credit report they will find it difficult to obtain a decent house to rent forever.  Therefore our tenants pay their rent on time and take care of the units.

Look at the stats.  It shows San Diego has high quality tenants and virtually no evictions.

good luck

@Becca F. I read the OP’s original post.  It was not clear to mo that his properties are in San Diego or CA.   My response will assume OP is invested in So Cal.  

What he seems to be burned out on is nearly my path in San  RE except I have mostly small MF but I will address some of his questions/comments.

>I don't have as much appetite for single family homes due to the work involved in getting loans and meager cashflow, expenses, low return, etc etc.

I question how someone in So Cal market is getting low returns.   my worst appreciating property has appreciated over $2700/month.   My best appreciating has appreciated over $10k/month.  I suspect virtually all non commercial MF purchased more than a couple years ago to fall between these 2 numbers.

There is poor correlation between initial cash flow and actual long term cash flow. The reason for this is that RE market prices are based on numerous criteria. Some of the big ones are expected appreciation, expected rent growth, and risks. In most markets, the market with the highest rent to price ratio is the lowest class areas. This is because of the risks and effort to have rentals in that market. Similarly, the markets with the best initial cash flow typically have poor historical appreciation and rent growth. The properties with poor initial cash flow often have good/great historical appreciation. Rent growth has a strong relationship to appreciation. The better appreciating property is likely to have the better cash flow over a long hold..  All my properties have rent to purchase cost ratios above 1%, many over 2%, and one over 4%.   My cash flow is modest only because I have extracted value.   My cash flow would exceed virtually all other markets if I had not extracted money out of the properties.

Residential RE is not passive.  You can make it more passive by using a good PM.  It still is not passive.

>I would like to grow my portfolio/business, but not sure what is the best approach since I have maxed out conventional loans

Usually around the time you run out of conventional loan options you recognize other loan options. I have 10 conventional loans, but I also have crazy DTI (over 800 to 1). I cannot get conventional loans but have not found it to be a huge hurdle. DSCR loans and portfolio loans are good for near stabilized properties.

>I am in a high price area where there are not many rentals with any cashflow and I don't like betting purely on appreciation

See my earlier comment on initial cash flow vs the cash flow over the hold.   The market with better rent growth will always have the better cash flow with enough time.   A lot of investors look at the initial cash flow and do not recognize the inverse relationship of initial cash flow to actual cash flow over a long hold.   If I had not extracted cash out of my San Diego properties, how do you think my cash flow would compare to high initial cash flow markets like Cleveland, Detroit, Toledo, etc?   I think the answer is obvious.   

>Should I sell some of my rentals

If you properties where purchased before q2 2022 you likely have a below current market interest rate and artificially liw property tax due to prop 13.   I think if you have burn out, you could hire a PM and likely do better than you can do on a new acquisition.

>What is the next step?

I suggest you seek your passion going forward.   You can succeed or fail in any of your proposed paths, but you are more likely to succeed and enjoy the path more if it is a passion.   For me I have come to recognize that I enjoy building wealth.  I enjoy identifying opportunities, optimizing those opportunities, and seeing my net worth grow.   I also enjoy researching syndications and benefitting on a passive basis (but my recent history is not good (2 of the 3 I have entered in the last few years appear to be doing poorly).

good luck

I agree that looking for a tenant 50 days out is hindering your chance of getting a qualified tenant.

However, I see an issue waiting also.   Each month starting with July until January gets harder to find a qualified tenant than the previous month.   Many schools start in August.   Families want to have completed move in prior to the start of school.   By November you enter the holiday season.

All my LTR leases are written to expire in late spring or early summer.   It is something for you to consider moving forward.   I have had a tenant break lease Dec 1 before.   I live in a mild climate area but still took until January to have my accepted qualified candidate and then had to wait for their move out date.   It was February before move-in.  Fortunately the tenant that broke lease paid the December rent.

Good luck