All Forum Posts by: Dan H.

 I do not see many pacific palisades owners being thrilled at high desert.  Maybe some of the other fire areas (such at Altadena) will like the high desert.

For those in pacific palisades, they are used to nice homes in nice locations.  I suspect a very large percentage of them will desire to stay coastal. 

Of course their options may be limited as there is not enough housing.  Some of those owners are very wealthy and can afford to pay above current market price, but the inventory is not that big.

a lot of speculation.  Time will enlighten to the realities but I see no scenario where coastal Southern CA does not have a significant housing shortage.  So anyone from OOS that considered moving to coastal Southern Ca, please hold off until things settle down.  no need to make a bad situation worse.

Best wishes to all but especially the fire victims.  

@Nicholas L.

Unfortunately James I am not convinced you are correct. We have had many large fires before. Yet the large coastal CA cities still have a housing shortage. I typically get multiple applications at my first open house charging top of market price. The rents are crazy. A few years ago core logic indicated the average rent increase for the year in this city for a SFH was $600/month. I had some increases higher than this average and I keep my good/best tenants a bit below market rent.

if no one came to San Diego, it would still take years to have enough housing.  The Los Angeles fires are likely to make a poor situation worse.  Some will leave the state, but many will be in search of housing in state that does not exist.   If I lived in and worked in Los Angeles and lost my home, I would first look in Los Angeles, then Orange County, then San Diego, then Santa Barbara.  None of those areas have enough housing.

i was forecasting a moderate year in terms of rent increase of $100/month average.  I suspect that is unlikely with the increased need for housing.   If I had an empty unit today, I think it would rent for at least $200/month more than a month ago.  I suspect this will increase as the people who lost homes do not want to live in hotels and, as the high season approaches, the hotels will be less inclined to provide reduced rates to the fire victims.

I hope no one from out of state decides to move to San Diego until this housing situation is stabilized.

i wish all the fire victims the best and success finding replacement housing.

I agree that most S8 do not meet my criteria even without considering the source of the income.

However, we have another policy that also works against S8.   We have only 2 criteria for the order we process applications: 1) nearest move in to the date unit is available to be rented 2) order that the completed applications are received.

If we had a unit for rent that would be rent ready Jan 15 and have multiple applications, the application processed first is the one who can move in the fewest days after Jan 15.  The inspection and approval process of s8 basically causes s8 applications to be lowest priority processing.  Note our policy on application priority maximizes our rental income.   Accepting the s8 with later move-in then other applicants would result in the loss of rental income.  When we collect the holding deposit, if the tenant does not move in as they have agreed they forfeit their deposit and their application is revoked.  In addition we do not accept any applications for longer move in than the remainder of the current month and the next month (so if tenant is unable to move in by march 1, they cannot apply until feb 1 as we are unwilling to go longer than that without rent and will hold another open house).

S8 needs to streamline their process if they want to increase their housing options.

Best wishes

 Many people cannot afford to live in the coastal Ca cities.  I have a friend that moved from San Diego CA to Michigan in the late 1990s.  He has indicated he wants to move back to San Diego but the cost would affect his quality of life.  He bought in Michigan when he moved there, but the property value is far lower than a similar purchase in San Diego would have achieved.  He probably could not buy a starter home for the value of his Michigan property that is fairly nice (on a pond and far nicer than a starter home in San Diego).

There is a reason more people choose to live in CA than any other state and it is not even that close.  However, informing others of all the reasons would be contrary to my desire to not encourage people to move to CA.

so CA $ucks.  There is no reason anyone should move to CA.

Best wishes

If you update to max number of conventional units, you will be able to add an ADU for each conventional unit. (3 convention units + 3 ADUs) * 3 lots = 18 units

In general adding one ADU is not a good investment because there is no more expensive residential development than a single, small unit. Adding 13 units has economy is scale. Your PSF will be much lower than it would be adding one small unit per lot.

One thing to note is more than 4 units or more than one ADU changes the financing that is available. It will make house hacking less attractive.

good luck

I see posts on CA insurance that appear to be ignorant to both the past method used to set insurance prices as well as the approach the current commissioner is advocating.

The current policy had insurers set rates based on past losses.  This does not work for the insurers because the rusk keeps increasing.  Basing insurance price on past losses does not adequately compensate for the future risk which is higher.  Result is insurers were leaving the state or at a minimum higher risk areas in the state.   

The current commissioner would allow insurers to use computer modeling of future exposure to set premiums, while requiring them to offer coverage in risky communities roughly in line with their shares of the market.  This was proposed before the current spate of horrendous fires n Los Angeles.  The issue is how do they model future risks.   I suspect if left to the insurers to model future risk, they will find the future risk to be very high. 

What I think is virtually certain, property insurance in California is going to go up substantially over the next few years.  It is also likely that property insurance nation wide will increase substantially.

Hopefully investors are performing conservative underwriting.   If insurance double or triples or worse, some RE cash flow will vanish.   I recently did an underwriting where I allocated $6k/year to insurance.   I fear I could be substantially too low.

Good luck and I wish everyone affected by the wildfires the best.

I have a salt water pool and spa.  The salt does nothing for ph.  It does eliminate the need to add chlorine but the chlorinators (Pentair IntelliChlor) have a fairly short lifespan.   I find the savings from not needing to add chlorine is instead spent on chlorinators.

I would not use salt for an only a spa because the chlorine use is so low.  

Good luck

Quote from @William Taylor:

Quote from @Addy Chupa:

Hi William,

I ran some numbers using our tool, and I’ve included my thoughts below, along with two scenarios: one based on your exact assumptions and another with adjusted figures that I believe could make the deal work better.

Observations on Your Numbers

1. Utilities: Based on your calculations, it seems you’ve assumed the tenants will cover all utilities. This might be typical in your market, but it’s worth confirming to avoid unexpected costs.
2. Home Appreciation: You’ve estimated a 2% annual appreciation rate, which I feel is quite conservative. Personally, I wouldn’t invest in a market where appreciation averages only 2%. I aim for at least 4% to 5% as a benchmark. I recommend researching the average appreciation over the past 10 years in your target area to get a clearer picture.

As you know, in real estate, ROI comes from multiple sources:

• Home Appreciation: 
• Reno Appreciation: Value added through renovations or improvements (usually just in the first year).
• Initial Equity: The discount you achieve when buying below market value.
• Principal Paydown: 
• Cash Flow: 
• Tax Benefits: Savings from depreciation and interest deductions.

For a deal to make sense, at least three of these components—home appreciation, cash flow, and principal paydown—need to be strong. Appreciation, in particular, is crucial, while cash flow acts as the fuel to keep the property sustainable.

Your Scenario with 2% Home Appreciation

Here’s how the deal looks using your assumptions:

Year 1 Analysis

• Cash Flow: -$1,123
• Initial Equity: $51,000 (assuming a $249k purchase on a $300k market value as per your report).
• Home Appreciation: $6,000 (2% of $300k).
• Principal Paydown: $2,441
• Total Gain: $58,317
• ROI: 360.32% (on $16,185 upfront investment: 3.5% down payment of $8,715 + 3% closing costs of $7,470).

Year 2 Analysis

• Cash Flow: -$752
• Home Appreciation: $6,120
• Principal Paydown: $2,617
• Total Gain: $7,985
• ROI: 49.34%.

Year 3 Analysis

• Cash Flow: -$375
• Home Appreciation: $6,242
• Principal Paydown: $2,806
• Total Gain: $8,674
• ROI: 53.59%.

Year 4 Analysis

• Cash Flow: $9
• Home Appreciation: $6,367
• Principal Paydown: $3,009
• Total Gain: $9,386
• ROI: 57.99%.

Based on these numbers, you’d have negative cash flow for the first three years and only break even in Year 4, assuming a 2.5% annual rent increase.

Adjusted Scenario see second picture: Landlord Covers Gas and Water

In the second scenario, I assumed the landlord would pay for gas and water at $300/month while maintaining the same 2% home appreciation rate. For this deal to work under those conditions, the purchase price would need to be closer to $179k.

With your original assumptions 249k, the deal is marginally acceptable but not great, given the negative cash flow in the early years. If you need to cover utilities, the numbers tighten significantly, making a lower purchase price essential.

Let me know if you have any further questions or want to explore these numbers in more detail—I’d be happy to help!

Hi Addy, thank you for collaborating on this one with me! Your report shows that it would need a bit of a lower purchase price, and I like the numbers you used in comparison (for ex. higher Capex vs rent/maintenance). This is great info. Thank you for taking the time to do a deep dive. 2% home appreciation was also a fairly low estimate, it looks like in that area it is actually around 5-6%. Good catch there.

 I like to use the appreciation since the year 2000.  Here are my thoughts:

- last dozen years have been outstanding.   Using anything less than 12 years is only using the near best appreciation years ever.

- using year 2000 includes one significant property value decline. 
- neighborhoodscout includes the year 2000 in their free info

I would use 3% (it has 2.9% since 2022) long term appreciation.  My underwriting since 2022 has used 0% appreciation near term (5 years).  I want my underwriting to be conservative.

https://www.neighborhoodscout.com/mi/ypsilanti/real-estate

Good luck

 Can you get credit report without an SSN?  it may be jurisdictional specific, but it would certainly limit the sources for providing credit reports.  

Good luck

I have an accepted offer on a luxury cabin in the sierras.  There are few places that I think have a higher fire risk. I knew the fire insurance would be CA Fair Plan.  Now I question if I will be able to obtain fire insurance.  Fortunately I have all the standard contingencies.

I also question what is a fair price for insurance.   Much of the country is at high risk between fires, hurricanes, tornados, tidal waves, earth quakes, rising tides, etc.  the insurance companies are not charities; they deserve to make reasonable profit for providing the insurance.   Is the option government supplied insurance where taxes supplement the insurance?   Virtually everyone lives somewhere especially true for those that pay taxes (in CA property and income tax).  So those that pay taxes would benefit.

It seems likely further changes are coming to the insurance. If private companies continue to provide the insurance, I suspect we will see further increased premium costs which will need to be reflected in the rents tenants pay (all tenants: LTR, MTR, STR). Tenants in many markets already believe they pay too much (contrary to recent studies that show rent to property values have never been lower for the large US cities).

If my insurance costs are not double my current rates over the next couple years, I will be pleasantly surprised.  If the insurance costs doubles, I suspect this will be depicted in the market rents.   Everyone will have a higher cost of living.