All Forum Posts by: Dan H.

Questions:

- Did you have exclusive agreement? 
- did you bring this deal to your buyer?

I do not sign exclusive agreements (because of the variety of sources to the deals I purchase) but if you bring me the deal I would be sure you got compensated.  If you brought the deal to the buyer, your buyer would be a slime ball if he does not compensate you and hopefully your contract calls for you getting compensation in this case.

Good luck

In CA you can definitely add the ADU to the existing property but adding a hands off ADU in Southern CA is typically a poor to horrendous RE investment. I will place a list of reasons at the end of this reply, but the biggest is that ADUs add less value than the hands off cost to add the ADU.

more work and risk, but far better investment is to attempt to subdivide the lot. The more lots you can create, the better your likely return. Note this lot split may not be guaranteed by law (unlike the ADU addition which is guaranteed on virtually every SFH lot).

Here is a list of why adding a single ADU in single 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

 My belief is maintenance/cap ex is too low.   You also should include pm fees even if self managing.  This is because it takes time/effort and you deserve compensation for your time/effort.

It appears you used an appreciation rate of 2%.   This seems low, but needles has a history of poor appreciation.   It has achieved a 3% appreciation for this century.  I advocate conservative underwriting so I commend you on using 2%.

https://www.neighborhoodscout.com/ca/needles/real-estate

Using the numbers you provided, this property loses money for over 20 years even if the property is sold.   It appears to be a terrible RE investment.  

My questions, where do you think the profit will come from?  Is there any value add?  Why would you consider this purchase as an investment?

I believe investing in residential RE involves work and has risks.  Because of this the return from residential RE should far exceed passive options to justify the risk and effort.  In the case of this property there is negative return projected for over 20 years.   This is a bad RE investment.  

Good luck

Your underwriting shows a STR with a 0.75% rent to purchase ratio produces COC of 25%? does your underwriting include all expected sustained costs? I would not show close to that COC even if the unit was LTR. What allocation did you use for maintenance/cap ex? My underwriting at that rent ratio would depict large negative cash flow.

This likely is why my underwriting shows Florida units to not work while your underwriting somehow depicts this as producing a 25% COC.  

I do find it ironic that the numbers you provided above for San Diego that you indicated “isn’t going to cut it” was a 1.2% monthly rent to value ratio.   I indicated this ratio would have ok cash flow (not great but probably worth the effort to many investors) but in Florida you think a 0.75% ratio produces a COC of 25%.   Seems inconsistent.  

would you mind sharing the underwriting that depicts a 0.75% rent ratio STR in Florida producing a 25% COC? Over the last couple years I have done quite a few underwritings of units in Florida. Your rent ratio is a little worse than what I am seeing on nice well managed units with HOA (which may explain why my rent ratios are better). My underwriting shows all of these to have large negative cash flow. I have made a few offers that was about cash neutral but none have been accepted.

best wishes

 Seems like a great value add.   40 hours but likely a fair amount of expertise.   These are my favorite type of value adds. 

I had a purchase a few years ago that relied on a recently passed law to raise the value on this property significantly as the ramifications of the law became better known.   I helped pass on the info of the law passage every chance I got.   In less than a year my property value increased a few hundred thousand.   Of course I did not know for sure it would work out the way I hoped but it was a good purchase (with some risk) regardless (it had incredible cash flow for my market even without the equity gain).

I call these types of value adds sophisticated value adds.   The expertise surpasses the sweat in many sophisticated value adds.   You make your money based on your knowledge in sophisticated value adds.

great job

 It is 2 units.   That is the higher occupancy unit but the other unit’s rent is similar.   Its adr is less due to lower occupancy in the high season.

In addition, I suspect using your numbers 14.5% rent (not including cleaning and OTA fees) to purchase ratio ($144,800 rent for $1m) for the year would do great.

This property was purchased Dec 2021 for $1.2m (this was $150k below appraised value).   I did value adds.  It is likely near $2.1m today.   Rents (not including cleaning) will likely fall between $160k and $180k which seem low for value but reasonable for price paid. the two units together are ~1300’ so sustained maintenance and cap ex are small.  

value add had cost of ~$120k (one unit light rehab other unit extensive rehab).   So $1.45m for $2.1m valuation so $650k equity gain above costs.  

Rents $160k (using lower end or my expected rent range), piti $79,584, so $80,416 to cover expenses not included in the piti. 

It seems like the numbers have worked out fine.

By the way the other property I purchased in Dec 2021 has over $1m of equity over cost.  When I purchased it there was large negative cash flow (rent was $6.2k/month).   Rent now is just over $200k/year, piti $113.7k/year.   Also seems to be doing alright.

I agree that since q2 2022, RE is more challenging. This is nationwide as the rates have increased everywhere. In Florida the insurance/HOA has also increased substantially. I would do either of those Dec 2021 purchases at today's rates, but granted my piti numbers would be much higher and therefore my cash flow would be much less. Note I would still have the equity gains. I suspect I would have very modest positive cash flow (I have not run the numbers).

Good luck

 Did you know CA has the highest ratio of investor owned residential homes in the country (source Core Logic)?   I am not stating CA do not invest outside CA, but I am stating that more residential homes are owned by percentage in CA than any other state.  Of course CA gets a fair amount of international investors.

If it is un-investible then I and a lot of investors have made a big mistake. I think it is virtual certainty that I have not made a mistake in this area. Look at my STR listing that I referenced in this thread. It was originally purchased by my family for $375k. I expect rents on that duplex, not inclusive of cleaning and OTA fees, to be near $160k this year (my calendar on one unit is in an above post but I expect to have 2 days of vacancy between now and end of August on that unit). Do you see any way this could be a mistake?

I do believe you an do fairly well in San Diego with the right location and the right management but that RE investing is more difficult everywhere than it was prior to q2 2022. By the way I have looked at STRs in Florida and have made offers. I will say with the increased HOA and/or insurance costs over the last few years, the numbers are tough to work in Florida. I expect to have near term cash flow with realistic sustained expenses in Florida requires either a below market purchase or a good value add. In San Diego, in the STR space, you can find rent ready units at retail that can work with the right location and management.. Granted most units will not meet both these requirements so it is select properties.

Good luck

@Gash Nookala

There is a forum topic on BP dedicated to San Diego RE investing but I did not see anything on this trash fee.

There are also numerous RE meetup organizations and some of them had the trash fee covered.  For example AOA had a short article in the email newsletter.

However , the trash was well covered in local social media and traditional media.   The UT ran multiple stories on the bait and switch and had what voters approved by less than 0.5% was very little like the final signed off law.   Similar for essential San Diego and times of San Diego.  Social media (nextdooor, facebook, etc) had numerous threads/posts on what home owners could do to protest the fee (protest period ended early this month).  I posted on maybe a dozen Nextdoor threads on the final day of the protest period that it was the last opportunity to voice a protest. 

The protest requirements are crazy difficult.   No protest counts as a yes vote.   Only form of protest that counted was a letter that the protestors had to address the envelope and place a stamp as the city was not about to make it easy to protest through online means or by providing an addressed envelope.  The requirement was that a majority of the valid voters needed to protest to stop the fee.   I think the protest did fairly well to get about 25% of the eligible voters to protest.   Note this is a significantly higher number than is required for a recall.   I believe, as it is executed today, it to be a near impossible criteria; it is the only threshold I am aware of the requires a majority of the eligible voters to vote and all uncast votes count in favor of the initiative.

If you are unaware here are measure b discrepancies from passed to what was implemented:

- fee proposed was $23 to $29 per month.   Initial fee proposed was $54/month, but ended up getting reduced to $44.

- the calculation for the initial cost included a fee processing budget.  This implies a periodic bill like virtually all other utilities. To save monetary the city decided to add the fee to the property tax bill.  Note if you do not pay your property tax, you lose your property versus most utilities you do not pay for, the worst that can happen is your utilities are turned off.

- the passed measure indicated the charge would be cost of service only.   The cost being charged includes building a reserve trash fund.   Much of the reduction from $54 to $44 was slowing down the collection of this reserve fund.   San Diego has a poor history of “borrowing” funds that have been allocated for other purposes.  This reserve might as well be looked at as a general fund emergency source.

There are legal challenges to this bait and switch.  This will, cost the city money but far less than what they will be collecting from the trash fee.  At least one council member is on public record as admitting this is nothing like what the voters passed.   His comments will help the case against the fee.   However the initiative was written with the cost being a projected cost and the vote was for actual cost.   Even though the accounting for the projected cost included a billing department, there was nothing in the initiative stating how the fee would be collected.   The initiative says the cost will be actual cost of trash collection.  Is building a trash reserve actual cost of the trash collection.  Not a lawyer but seems in the gray area.   Even if the reserve fund gets struck down, the actual costs are significantly higher than what was estimated in measure b.

I am convinced the only reason it passed the city council is because the city was grossly over budget for the next fiscal year and had to cut numerous services and raise numerous fees.  If trash was still from the general fund (which would be the case if the council did not approve this bait and switch), then further cuts or fee increases would be required.

However, this level of bait and switch breaks voter trust.   The voters are going to be very leery of voting for any future tax increase.   They should be, the council passing this shows that they cannot be trusted to implement what the voters voted for and if they get a voter approved tax increase they will modify it to meet their desires regardless of it being very different than what the voters (barely) approved.

I have 7 city of San Diego trash fee impacted.  ~$500/year * 7 is $3.5k. My numbers are not tight so I still do fine but $3.5k is a lot of money that I would rather enjoy than pay for trash that was previously paid via the general fund that was largely paid by property taxes.   They did not reduce anyone’s regular property tax to reflect the trash fee was now not coming from the general fund.  I pay a lot of property taxes , I think I was already paying enough property tax to include trash pick up.

Good luck

Besides just being wrong on humanitarian reasons,  I consider this high risk for multiple reasons: the primary reason is the tenant is in a nothing to lose position.  You taunt them and your ac gets stolen, cement down the sewer, cabinets busted, flooring ruined, etc.   they know where at least one of your properties is and they can likely find out where others are.

Assuming you will collect from an evicted tenant is not something I would suggest even if you have all the evidence and are fully in the right and get the judgement.   The tenant may have nothing to collect.   They usually do not choose to not pay rent and get evicted.   What can you collect from someone that has virtually nothing?

I try to treat my tenants right.  I try not to screw people in any way.  I do not believe in karma but I do believe relationships sometimes pays dividends.   Right now I am having an issue with a slime ball.   i suspect he took on someone that has much more bite than he is prepared to handle.   I hate slime balls, but I cannot take on other people’s slimeballs.   Do not be a slime ball.

Good luck

Our lease allows up to 4 inspections a year.   If the tenant is taking proper care of the unit, we do one inspection a year.   This inspection breaks the findings into 3 categories 1) not normal wear and tear which is fixed and charged to tenant.  2) normal wear and tear that will be fixed and paid for by LL 3) items that are normal wear and tear but will not be addressed at this time.   Mostly these are items that will not be addressed until unit turnover.

By addressing the first two on this list it implies things like broken windows, vanities, counters, cabinets are paid for early (leaving more deposit for items that happen near end of lease).   It also allows us to address items that help protect the unit.   Why do tenants lose so many fire and CO detectors?    So at least once a year most repairs are done to the unit.

Besides saving the deposit for late happening breakage, it also helps with the tenant turnover timeline.   I do not do as @Wesley W. suggested as I do not show the unit before the tenant flip.   Doing so would make it challenging to get market rent.   But I can often start showing a place 3 days after move out (I start advertising about 2 weeks before move out but no showings until the unit is in a state to allow me to get market rent).   I usually place a qualified tenant in the first open house.   My experience shows that each open house in general gets less turnout (virtually only happens to me if tenant breaks lease in off season - all of our leases are written to not end in the off season).  Note that finding a tenant in an open house does not imply only a 3 days after tenant leaving vacancy.  Our vetting of tenant takes around 3 days if tenant is responsive (a week if not real responsive).   The new tenant usually cannot move in immediately.   I suspect my median vacancy for tenant turn over is about 3 weeks.

Good luck