All Forum Posts by: Dan H.

Quote from @Jack Cottrell:

Quote from @Dan H.:

Quote from @Jack Cottrell:

I'm a complete noob. I'm planning to put in my first offer on my first rental on a SFH in Kansas City in the next day or two.

$140k offer

8% interest rate

20% down

8% management fee

5% vacancy

5% maintenance 

5% cap ex

I haven't gotten insurance costs yet but it's been suggested that I plan for $2k per year. 

Once I plug in all those numbers, I'm pretty close to breaking even. I have the ability to put 25% down or more to increase cash flow. I just want some outside eyes to help me understand if this deal is what I should expect to find as I build my portfolio.

I plan to buy and hold long term. I am expecting to do 3-4 deals per year until I get to 20 properties or so and then snowball the debt so they are all paid off by retirement. 

Am I ok with this plan to ride up the appreciation, mortgage pay down and rising rents? Or is this type of deal that you savvy investors out there would scrap and try to be more aggressive? Any thoughts are appreciated!

At $1350 rent:
- sustained maintenance/cap ex will far exceed 10%
- I will be surprised if you can find someone to manage this one unit at $108/month.  Jaybe if you had a few units this can be achieved.  
- 20with the unit being empty and in need of some TLC, 5% vacancy will be too low.  

a property that cost $140k has not had appreciation that has kept up with appreciation.  These properties typically do not have rent growth that keeps up with inflation.  This implies the return has to be via cash flow but you indicate with your numbers it is pretty close to break even.  This means with my numbers it will be cash negative.

how will this help you scale to 3 to 4 deals a year to get to 20 deals?  I see this making it hard to scale.

question: how come your rate is so poor?  Do you have a good credit score?   If not, work on Improving it before purchasing an investment property.  Better rate would help your cash flow.

i would pass,  more relevant is I recommend you pass on this purchase.

good kuck

Hi Dan, thanks for the reply. I appreciate you working through all the various points you mentioned. 

Is it a common issue for beginners to get a PM on board with only 1 property to manage to start? I don't know how to avoid it. The plan is to buy more this year, but I can only do one deal at a time. Do managers that advertise 8% only do 8% when there's a bundle of doors to manage?

I have a 780 credit score and no debt besides my personal residence. What kind of rate should I be able to get right now?

I have enough to put 25 or 30% down. But I'm gathering that this may be a fools errand if the house is not appreciating. I'm in it for the long haul so if it doesn't work on a small scale, it won't work on a large scale. 

The general advice I'm hearing is that if I want what I'm looking for, then avoiding a C property is the route. Would you agree? I can afford to invest in B properties with larger down payments but I guess it means I may be doing more like 2-3 deals per year than 3-4. 

Look at the PM contract and verify the 8% is all inclusive and that there are not additional charges for placing a tenant, resigning a tenant, inspections, and dealing with vendors/contractors.  At that percentage on that rent amount I suspect it is not all inclusive, but I do not know that market.  My expection is at that rent point, all inclusive Pm would be at least 10%. 

You have a good credit score. no one, including my score, is going to be much higher. Are you using a mortgage broker? Who quoted 8%? I locked last week at 6.385%, 75% LTV, 2 year PP, 2 pts on a DSCR. I expect conventional to be lower than DSCR. I suspect without the 2 pts I would be at ~6.625% to 6.75%.

What I recommend most is accurate, conservative underwriting.  Class C is more work than class B, but if managed well can do great.  Class B is less work but less initial cash flow.  Do class b for less risk and less effort.  I think I would recommend people start class b but I recognize the challenges to get the numbers to work.  If I was starting over, I would go higher class than I started with.  Back when we started virtually everything had positive cash flow but I was lured by the seemingly higher cash flow associated with class C.  My last 2 purchases and the luxury cabin I am under contract currently are all at least class B.  

Good luck

Quote from @Drew Sygit:

Take a look at this graph:

What do you see?

What RECENT "buy" opportunities do you see in the overall market?

When do you think it was more difficult to find a "deal" on real estate, in 2011 or 2019?
How about today?

It's pretty easy to see that real estate proces peaked around 2007-2008 and then crashed during the Great Recession.
Around 2011-2012 prices started to recover and got back to their pre-Crash highs around 2015-2016, but really 2018-2019 when adjusted.

So, why are newbies reading books written BEFORE 2019 and thinking that you can still successfully invest using the EXACT advice in these relatively "old" books?

Yes, some of the basic principles in ANY book can still be applied to any time.
Napoleon Hill's book, "Think and Grow Rich" written in 1937, is still a good read for it's basic ideas.
Yet, you have to adapt those ideas to the modern world!

Too many newbies seem to think they can blindly follow "old" advice in today's real estate market and be successful.
Many, basically get taken advantage of by those in the industry that have an incentive to keep newbies blind to new realties, just to keep their good times rolling.

What many newbies have figured out is that they can't make the numbers work on rental purchases in their states - like California, Arizona, New York, New Jersey, Washington, etc.

What they have NOT figured out is that if they go to cheaper markets, they aren't being shown Class A rentals to buy.
Most are being encouraged to buy Class B-minus rentals and below, but no one corrects them about their mistake of using Class A assumptions on these rentals:

When a newbie gets smacked with reality via their losses, they then can only suck it up until time improves their mistake or dump at a loss.

So, my question is, why can't we all do better and grow our industry with integrity?

> Many, basically get taken advantage of by those in the industry that have an incentive to keep newbies blind to new realties, just to keep their good times rolling.

If someone poses an inquiry on this forum, I provide my honest opinion (which it typically that the investment is unlikely to provide a return that justifies the effort & risk).  However if I was an agent, broker, GC, etc I do not feel that it would be my responsibility to verify the underwriting.  I do believe if the potential investors asks for an opinion, if you provide your opinion it should be an honest opinion and not necessarily what will achieve the commission.

>my question is, why can't we all do better and grow our industry with integrity?

I do not agree that most people are not acting with integrity.   It is my opinion it is a small percent that do not act with integrity.

Do thorough and conservative under writing.  Be cautious.   Not investing is better than a bad investment.

Good luck

Quote from @James Hamling:

Quote from @Jesse Rivera:

I disagree about buying in CA. If you know where to look and have the right time, you can find properties that cash flow. And you get some decent appreciation as well, unlike the midwest where appreciation is minimal. 

What?! 

"...unlike the Midwest where appreciation has been minimal".

Is that a joke? You can't be that clueless.... can you? 

Or do you think 100%+ appreciation in <10yrs is "minimal"?????? 

 I think 

1) 10 years that includes recovery from GFC and the Covid pandemic is not a long enough duration

2) I think for those 10 years, 100% is not that special

3) I think many Midwest markets did not experience the appreciation you depict.

There are Midwest markets that have pretty good long term appreciation but there are also many Midwest markets that have appreciation that has not historically kept up with inflation.   There are many people on this site pushing those locations that have not historically kept up with inflation.

Btw I advocate all newbies start local even if their local market has not kept up with inflation.  I believe a local investor can do well on cash flow leveraging their local knowledge in those markets.

Best wishes

Quote from @Jack Cottrell:

I'm a complete noob. I'm planning to put in my first offer on my first rental on a SFH in Kansas City in the next day or two.

$140k offer

8% interest rate

20% down

8% management fee

5% vacancy

5% maintenance 

5% cap ex

I haven't gotten insurance costs yet but it's been suggested that I plan for $2k per year. 

Once I plug in all those numbers, I'm pretty close to breaking even. I have the ability to put 25% down or more to increase cash flow. I just want some outside eyes to help me understand if this deal is what I should expect to find as I build my portfolio.

I plan to buy and hold long term. I am expecting to do 3-4 deals per year until I get to 20 properties or so and then snowball the debt so they are all paid off by retirement. 

Am I ok with this plan to ride up the appreciation, mortgage pay down and rising rents? Or is this type of deal that you savvy investors out there would scrap and try to be more aggressive? Any thoughts are appreciated!

At $1350 rent:
- sustained maintenance/cap ex will far exceed 10%
- I will be surprised if you can find someone to manage this one unit at $108/month.  Jaybe if you had a few units this can be achieved.  
- 20with the unit being empty and in need of some TLC, 5% vacancy will be too low.  

a property that cost $140k has not had appreciation that has kept up with appreciation.  These properties typically do not have rent growth that keeps up with inflation.  This implies the return has to be via cash flow but you indicate with your numbers it is pretty close to break even.  This means with my numbers it will be cash negative.

how will this help you scale to 3 to 4 deals a year to get to 20 deals?  I see this making it hard to scale.

question: how come your rate is so poor?  Do you have a good credit score?   If not, work on Improving it before purchasing an investment property.  Better rate would help your cash flow.

i would pass,  more relevant is I recommend you pass on this purchase.

good kuck

Quote from @Alan Asriants:

Quote from @Dan H.:

Quote from @Alan Asriants:

Hey Carlos, all depends on your lot size, what kind of unit you can build there and the rental return you can get. 

Building an ADU is not like building a structure on a vacant lot. It is usually difficult to take money against it from the bank, it might not be a 1:1 value add - meaning if you invest 100k into an adu it might not raise your value by 100k

That being said, it can be pretty lucrative especially in expensive and sunny CA - since building lots are no where to be found and existing real estate returns are very poor.

My partner builds these units. In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m. 

Even in philly in D class area it is tough to hit the 1% rule. Here you are basically hitting it without needing to manage a property in another location. IMO those numbers make a lot of sense.

I think its better of an investment than trying to buy OOS. If you need me to connect you to him I am happy to do so

 >In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m.

I am unsure how you think this can recover a negative equity position any time soon.  Let’s look at some numbers:  

1) does not meet the 1% rule. In San Diego at the current rates for a purchase loan (which has better rates than an ADU additions) at high LTV, I show 1% does not cash flow on a sustained basis. This will be negative cash flow if using sustained maintenance /cap ex. It will be a while before the negative equity starts to be recovered. Then many years for the equity position to be recovered.

2) let’s go no financing and use 50% rule so $900/month after sustained expenses.  $10800/year towards the negative equity position.  The negative equity often exceeds $50k but even if I use $25k (it would be rare to have this low of an initial negative equity position), is nearly 2.5 years to recover.   After which they invested $190k for $10800/year return or 5.6% (not even discounting for the 2.5 years to recover the initial negative equity).  Non-passive to achieve this level of return.

Add the addition of the ADU makes the main unit rent controlled if over 15 years old.the work to add an ADU likely exceeds the effort of a brrrr that can achieve infinite return

Experienced investors are adding multiple ADUs by leveraging items like bonus density, committing units to affordable housing, etc.   these can produce good returns but best chance for success is for those that have experience in this area (I am a partner on an effort adding 8 ADUs, but it is not performing to the initial underwriting (underperforming) and it is an experienced team).

good luck

 I get it, but not everyone has the opportunity of scale and building multiple units. Just not enough inventory to support the demand in CA. 

For many it could be a decent strategy to invest their money back into their property.

Its the same thing for doing a renovation. Sure don't do the renovation, rent it for 200/m less, and maybe that 30k investment won't pay off until year 10, but you're still investing back into your property, improving it and adding value. By this logic investing in a new roof also doesn't make sense. Ah screw it, you can sell it for the same amount right. Its not like a 30k roof will improve my property by 30k right? not everything is 1:1. 

You can finish your basement and add a bathroom. Ok it might not be 1:1 but it will add additional revenue. It is a tax write off. It is in fact an improvement. 

I think you're really against the strategy and that is ok, but for some people it can be a decent opportunity. Also why are you deducting 50% for expenses? 

What would you rather do?

>Its the same thing for doing a renovation. Sure don't do the renovation,

I only do renovations that project a return of 2x the cost of the renovation. This 2 to 1 ratio is required because 1) they are work and my time deserves to be highly compensated. 2) big rehabs have some risk. My last rehab was projecting far better than a 2 to 1 return which was fortunate because we went way over budget (my worst over budget by far ever).

>By this logic investing in a new roof also doesn't make sense. Ah screw it, you can sell it for the same amount right. Its not like a 30k roof will improve my property by 30k right? not everything is 1:1.
Typically a new roof only makes sense to protect the asset. I have never done a new roof to add value for the refi on a brrrr because it will not add the necessary value.

>for some people it can be a decent opportunity.

I have yet to see an underwriting that holds up to my scrutiny that shows that adding a hands off single ADU in single family zoned area that projects a return that justifies the effort and risk.

>Also why are you deducting 50% for expenses?

1) 50% rule is a well accepted generic approximation 2) hundreds of underwriting has shown it to be fairly close for my underwriting for a SFR purchase in San Diego. Note at "standard" MLS market rent to price ratio, the property tax alone is ~20%.

>What would you rather do?

I have made a lot of money doing BRRRR and the majority of my purchases have achieved the infinite return. However, my under writing due to the recent rate hikes shows large cash negative after a high LTV refi to extract the equity so I am not currently actively pursuing BRRRRS and I find this is true for many of the local investors that were doing brrrrs a few years ago. Some of them have converted to flips, but I do not do flips because it is a job (stop flipping, stop earning). My current purchase (closing in February) is a luxury cabin that will be an STR. Projected annual income is 20% of the purchased price. I am also a partner on adding 8 ADUs on a property. I am a big fan of sophisticated value adds such as lot splits, coop/tic, leverage laws for multiple unit additions. After the luxury cabin, I will likely do it again in a different market. By year end I will tackle a MF, value add with my son that would be sweet if we can swing the coop/tic (handling the finance challenges is the hurdle) so he ends up with a unit at below 50% of retail. Note these are only residential options.

Always interested in alternative financing as it is the easiest way to cash flow at high LTV in markets with good historical appreciation.

@henry Clark has posted on BP exact detailed steps to create a self storage facility.  The value of the info he provided cannot be understated.

Residential RE is more challenging then a few years ago, but there are a lot of ways to make money in RE.   However, make sure your underwriting is conservative and accurate.  For any effort make sure you know the value that will be added.  The value added should be significantly greater than the cost of the effort to compensate for the effort involved and the risk. 

Good luck

Quote from @Alan Asriants:

Hey Carlos, all depends on your lot size, what kind of unit you can build there and the rental return you can get. 

Building an ADU is not like building a structure on a vacant lot. It is usually difficult to take money against it from the bank, it might not be a 1:1 value add - meaning if you invest 100k into an adu it might not raise your value by 100k

That being said, it can be pretty lucrative especially in expensive and sunny CA - since building lots are no where to be found and existing real estate returns are very poor.

My partner builds these units. In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m. 

Even in philly in D class area it is tough to hit the 1% rule. Here you are basically hitting it without needing to manage a property in another location. IMO those numbers make a lot of sense.

I think its better of an investment than trying to buy OOS. If you need me to connect you to him I am happy to do so

 >In his recent project he was able to build it for under 190k - 1 bed 1 bath unit with about 450sqft and it is going to rent for $1800/m.

I am unsure how you think this can recover a negative equity position any time soon.  Let’s look at some numbers:  

1) does not meet the 1% rule. In San Diego at the current rates for a purchase loan (which has better rates than an ADU additions) at high LTV, I show 1% does not cash flow on a sustained basis. This will be negative cash flow if using sustained maintenance /cap ex. It will be a while before the negative equity starts to be recovered. Then many years for the equity position to be recovered.

2) let’s go no financing and use 50% rule so $900/month after sustained expenses.  $10800/year towards the negative equity position.  The negative equity often exceeds $50k but even if I use $25k (it would be rare to have this low of an initial negative equity position), is nearly 2.5 years to recover.   After which they invested $190k for $10800/year return or 5.6% (not even discounting for the 2.5 years to recover the initial negative equity).  Non-passive to achieve this level of return.

Add the addition of the ADU makes the main unit rent controlled if over 15 years old.the work to add an ADU likely exceeds the effort of a brrrr that can achieve infinite return

Experienced investors are adding multiple ADUs by leveraging items like bonus density, committing units to affordable housing, etc.   these can produce good returns but best chance for success is for those that have experience in this area (I am a partner on an effort adding 8 ADUs, but it is not performing to the initial underwriting (underperforming) and it is an experienced team).

good luck

>Is it worth building Adu's in Orange County / Long beach ?

In general it is not worth building a single ADU for a variety of issues but the largest is the cost to add the ADU is typically far greater than the value added by the ADU. This creates a large negative equity position. This negative equity position consumes the initial cash flow to re over the negative equity position. It often takes many years to recover the negative equity position. I invite you to search this forum about ADU appraisals. Building a single small unit is the most expensive residential development..

Here is a list of why adding a single ADU in dingle family zoned areas in my CA market 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.
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.

Good luck

Quote from @C.S. Bryson:

The rental value is approximately $2550. At $2450, it will cover those expenses. The owner does not want to extend the debt for 30 years. She originally asked for 2 balloon payments. One in year 2, and another in year 5...

I was unsure of what to do so I created this offer

 Who did you have check your underwriting? My underwriting would have this large negative cash flow for 7 years.

I would do a thorough underwriting but want to show using quick math the issue so I will use the 50% rule.  Note the property tax will be -10% on the rent by itself.

Month 0 to 24: $2450 * 0.5 - $1573 =-$348/month

Month 24 to 60: $2450 * 0.5 - $1541 =-$316/month

Next issue is due to the low leverage starting at month 24, the ROI takes a beating.
With no appreciation, you will have less than 40% LTV and with modest appreciation you will have less than 30% LTV. Without the high leverage you reduce the top source of return in CA RE which is achieve via the appreciation on a high leverage property. At month 70 all leverage is gone.

My big question is why? The interest rate is not special nor is the 20% down (80% LTV). I locked a DSCR loan yesterday at 6.385%, 75% LTV. Why not 30 year term with a conventional loan? Can you qualify?

Final comment, it seems complex.  

good luck

Quote from @Alan Asriants:

You make a lot of valid points but there are also a few things to consider when making the above analysis. 

The first is: availability of raw land in SoCal. I am sure you are aware of this yourself but buildable land - where you can develop more than 1 unit is incredibly challening if not almost impossible to find. And even when it is found it is incredibly expensive and oftentimes unbuildable. Ive see some lots but the grade and slope is incredibly difficult and expensive to work with.

Second: Real estate cannot be analyzed by numbers only. While you are correct - financing, BRRRR application, return, appreciation (possibly) might be more beneficial when considering a seperate property vs ADU - but if you were to only analyze real estate based on numbers, then the best real estate is high risk class D section 8 rentals. Low cost, high rents, higher returns.

But as we all know - this is simply not what happens in practice. I think someone who adds an ADU to their exisiting investment property for 200k and rents it out for $1800/m will be in a much better position than someone buying OOS 200k class D rental or even class C.

Some of the reasons are:

- location - far easier to manage and likely in much stronger area. Trusting someone else an entire country's length away can become detrimental for the property and investor if improperly managed.

- risk - an investment property addition will be much easier to manage, likely in an area the investor already understands and has established and likely not in Class D neighborhood. This poses a more favorable position for the investor than getting involved in higher risk areas

- appreciation - yes you are correct, its likely not 1 to 1 investment to appreciation, but I still think your appreciation with additions/in law suites/ etc are going to take you further in the long run in SoCal than the 200k single in Alabama. A lot of upgrades like: finished basements, pools, spas, in law suites are not 1 to 1 but do improve the property.

- tax advantages - there are still tax advantages to building an investment ADU

Like all the points you hit on. But I think for a CA investor who is looking to invest 200k cash - they might be better off improving one of their existing rentals and getting the cash flow that way than looking OOS. 

The logic that an investment that is better than another investment makes it a good investment is flawed but also not relevant here became the ADU addition is that bad of an investment.

The big issue is the size of the negative equity position usually exceeds half the cost.  The negative position has often exceeded $100k.

Let's use your numbers along with the 50% rule with no financing with a 50% negative position. $100k negative, $900/month cash flow would take 111 months (over 9 years) to recover the negative position. Note with financing on the ADU, the cash flow would be lower and it would take even longer. This is why ADU additions in single count in single family zoned areas are a horrendous investment is CA.

Note the financing associated with an ADU makes the 1% rule insufficient to achieve sustained cash flow and your numbers do not even meet the 1% rule.

Then add the primary structure is now rent controlled, the level of effort in adding the ADU is extensive (probably more than a BRRRR that can produce infinite return), the calendar time it takes (1st expense is many months before first income), the poor finance options available, and what the ADU detracts from the primary.

If this the best RE investment that you can find you may be better off with investments that are not RE related.

good luck

Quote from @Tyler Munroe:

@Dan H. Good points. I think new builds don't really work from an ROI standpoint, but if you can find properties that have easy ADU conversions then the value might be there.

I'm in MA and we just made ADUs legal by right, so I'm looking into the best ways to add value using them. A lot of our housing stock here has finished basements or in-law suites, so with something like that you can generate significant rental income for an inexpensive conversion.

In southern CA, even garage conversion ADU additions are typically costing more than the value added. Possibly already permitted outbuildings that already have plumbing such as workshops, offices, etc might be able to be converted to an ADU at a cost that does not result in the cost being more than the value added.

Building an ADU is a lot of work and can be a slow process. Most take near a year in southern Ca, but you hear of exceptions in both directions on that timeline.

What some developers are doing here is leveraging the affordability issue and getting permission to build additional ADUs by designating some as affordable or semi affordable units.  The neighbors hate it.  The pro development and affordable housing advocates use the term NIMBY, but I suspect it is the rare person that buys in a single family zoned area that would be thrilled to have 17 units (qp16 additional units added) in the lot next to them.

My initial protege was the land source on this effort.  He made a lot of money and the developer is the “hated” villain but my initial protege knew what the land was going to be used for.  If it was not him sourcing the land, it would be someone else.   The issue is the laws should not allow this.

https://www.cbs8.com/article/news/local/working-for-you/new-...

Adding a single small unit is expensive residential development.  Adding 16 small units can be very profitable, with enough profit for all those involved.  My buddy sold for ~$500k over its existing use value and no contingencies and did not even convey existing tenant’s deposit.  It was easy money (he had a partner so my buddy ended up with 50%).  The value add was recognizing what the current regulations could allow the land to be used for (basically recognizing current land use did not optimize the value).

Good luck