All Forum Posts by: Dan H.

Quote from @Anthony Sigala:

I'm  looking for a mentor to guide me through my first deal(s). Hoping to close three rentals in 2025

 I think for most people a good RE based accountability group is a better investment.   Note good accountability groups are not cheap.  I know one that is $50k/year.   I know 2 people who are in this group and both believe it is worth it. 

Search this group for paid mentors and you will likely find many more negative comments than positive ones.  Do the same search n accountability groups and you will find few negative comments.  

A national accountability group will have experts in most facets of RE in most markets.  The members are typically happy and eager to provide assistance.   It is like having dozens of mentors.   Most of them are performing successful deals regularly.   When a deal goes bad it is usually easy to see some mistakes and there is usually multiple offers to help with the issues.  I think it would be a rare (and outstanding) mentorship that provides this same level of help.

Good luck

Quote from @Kevin Robert Highgate:

Hello Everyone,
Let me say it out LOUD . IM DONE !!!!! 9-5 !!!!! I do not want to do this anymore !!! I have been in the books and came accross Bigger Pockets, i would like to dive head first into real estate investing but the un known is a little scary. I own a single family home in Socal that my wife and i currently living in. I would to use my equity in my current home to start investing but my current property needs work, like a full rehab. Looking for a creative way to either turn my current property into a rental or a flip or any other way to make a profit. 

Does adding a ADU create value in a property vs. the price of the adu build?

Mostly a single ADU added in a single family zone area will add less value than the cost of the hands on addition.

Depending on the financing my underwriting with a high LTV (80% LTV) for $200k would be cash neutral at a rent point at about $2200 when allocating for all expenses without including any land value. There are many reasons that adding a single ADU in southern CA is a less than ideal RE investment (i will post a list at the end) but the negative initial equity is a primary reason as the initial negative equity position consumes the initial cash flow and can take many years to recover.

As for converting your home to a rental…. There are pros and cons but i believe for most properties the cons out weight the pros.  I have one of my ex-homes in my portfolio.  Here are the pros as i see it: easy (no purchase necessary, you know the property), likely prop 13 property tax discount, possibly below current rate loan.  The cons as i see it include loosing the 2 of 5 year cap gain exception, typically not an ideal rental because the emphasis at purchase was buying a good home for your family and not a rental with optimal return (my ex-home consistently has the lowest cash flow for equity in my RE portfolio), not disconnected enough from the property causes addition angst on damage and may result in over improvement.  At this time the interest rates may make keeping your existing home a better option than times when rates have not risen as substantially.  In normal times i would think selling is typically the smarter financial choice, but at the current time keeping may have a significant finance (due to low interest rate) advantage.

Here is a list of why adding ADUs 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.
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 n 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 @Michael S.:

@Elan Adler - great post.  I like that you pointed out all the positives and negatives for a fair balanced post that will help other investors evaluate future options.

I have been posting for a while on how hard the North Alabama market has become, and this post shows a good example of it. We bought only one residential property in North Alabama for a flip in 2024 - that's it. It's been so bad here, that I bought an STR in Indiana with another business partner in 2024 because there are minimal opportunities here - unless you have the ability and budget to extensively source off market properties here.

A few comments from my perspective (and after reading @Dan H. comments):

I agree with Dan, and view this as a negative cash flow property as well, given that more than 20% down was necessary to make it work with what I suspect is a non-commercial 30 year note given the interest rate.  Essentially it was necessary to "buy" cash flow with a higher down payment.  But that's typical with new builds here.

I think Elan was smart to list at 1800/month, but I do not agree it was under market - the fact that his rented quickly and there are others sitting for more than 100+ days tells you that 1800/month is exactly market value.

"Low insurance" is concerning to me, as Athens gets a LOT of high wind / weather / tornado activity for unknown reasons - they just got hit again last weekend.  I would caution on having a high deductible / inadequate coverage policy with a property in Athens.

Dan, a comment you made that I don't concur with is the cap ex on a new build of 300/month, unless it was a low quality builder (I have no idea who the builder on this property is).  We bought a new build years ago (and sold it 3 years later when the market turned up) and our TOTAL cap ex was $550 over the 3 years.  The house had a warranty the first year that covered anything that came up, and we only had one issue with HVAC over those 3 years.  So my limited experience with a new build did not yield cap ex expenses with what you are proposing.  Maybe we got lucky in that department, or maybe it was just a quality built property.

Happy New Year and best of luck in 2025.

 >Dan, a comment you made that I don't concur with is the cap ex on a new build of 300/month, unless it was a low quality builder (I have no idea who the builder on this property is). We bought a new build years ago (and sold it 3 years later when the market turned up) and our TOTAL cap ex was $550 over the 3 years

Question: have you ever filled out a spreadsheet of cost and lifespan of each product of a property?  I will predict you have not.  At 3 years none of the costly items have hit their end of life.  Ideally you have not replaced roof, hvac, flooring, kitchen, bathroom, fencing, windows, foundation repairs, hard scape repairs, electrical, plumbing, etc.  everything has a lifespan and if you do not evenly allocate for those expenditures, you have not allocated for all expenses.  I will tell you that the $300 i used in the above is far less than i allocate in my market.   I took into account a likely cheaper labor rate but will say when we owned units in gulf shores that i was not encountering that low of a labor rate.  A underwriting that i recently completed on an offer we made i used $600/month maintenance/cap ex and believe it to be as accurate an allocation as i could predict (4/3/1, 3100’, class a finishes).

I use $300/month in my market on an attached 2/1/0, ~700’.  Again i believe it is my best estimate of actual sustained maintenance/cap ex in my market.

I did an estimate about 1,5 years ago on a emerald coast 3/2 condo with class a interior finishes and came up with $300 for just the interior (class a finishes cost more).  This spreadsheet was reviewed by our RE agent and his input was used on costs in that market.  So multiple eyes and local expert providing local cost and input on lifespan.

Here is an example that has a part that is more expensive in my market than other markets (unlike most parts that are the same everywhere, so in this case your cost should be significantly less due to both cheaper part and cheaper labor): $1600 40 gal water heater installed (this is good price for a plumber, a little high for a handyman) with expected life of 12 years (i have some that go 20 years and some that die in less that 10 years (mostly rheem die in less than 10 years), 12 years is fair life expectation.  $1600/12 years/12 months/year is $11.12/month.   Make a spreadsheet of items and life span and see what you calculate.  Also class of tenant plays a role.  In class c if rug is over 5 years old it probably needs replacing.  Same carpet in b+ area will get 10 years plus.

i stand by my sustaining maintenance/cap ex estimate and hope my response indicates why.  I invite you to perform the exercise and find what your cap ex allocation should be.

certainly $50/month for maintenance/cap ex and misc is not enough and this property is definitely cash negative when properly allocating for expenses.  

By the way the recent underwriting that i referenced above showed the purchase would be cash negative first year and sustaining for extended duration, but i still made a competitive offer. I have never done that before.   I am finding the market challenging especially as it relates to cash flow.  I do not do flips, so I am finding the market is more challenging than any time since 2008.

 Good luck

Did you use a realtor?  Did you consult with them on what to do? Did you use standard offer contract for your jurisdiction?  Why did the financing fall through?   Does the contract require arbitration or remediation?

I am only familiar with the contract in my state but items seller agrees to do based on inspection findings are their responsibility unless spelled out differently.  This includes if the property does not close.

Your agent should be holding your hand through this process.  They should explain what the offer contract states in this event. 

I suspect you are due your full EMD, but without going through the offer contract i am only speculating based on the standard offer contract that i am used to.

good luck

Am i the only one that sees this as having negative cash flow (not cash flowing)?   The first indication is you spent $290k for $1800 cash flow or a 0.62% monthly ratio.

Rent $1800 - PITIH $1480 - $180 (pm) - $90 (vacancy at 5% which is lowest i ever allocate in my underwriting and likely low per the OP description of a lot of new development) = $50 for all other expenses.

Maintenance/cap ex on 4/2, 2100’ will exceed $300/month even in cheap labor markets on sustaining basis.  Just because the costs might be in the furture does not warrant not budgeting for those known expenses

Then there is the misc costs of asset protection, bookkeeping, unexpected utilities (such as between tenants (tenant turn over) or failure not attributable to the tenant such as slab leak).  You are likely a sustained negative of at least $350/month. 

NeighbothoodScout shows appreciation for this century at 3.64% or ~$10.5k/year plus there will be equity pay down of -$2.7k. 

~$13200  (forecast equity increase) -$4200 (cash flow) = $9k First year profit ideally that will increase annually.  Note when i do underwriting for my purchases, i run significantly more conservative underwriting (since 2022 i have been depiction $0 near term (5 years) appreciation for one example.   In that market i would likely use 7.5% vacancy.).  

$9k/$72500=12.4% Rate of return (not including any closing costs which would reduce this return).   At least the return is beating historical S&P by a couple of percentage points.  But residential re is not passive.  It should be producing far better return than the passive s&p to justify the effort.

Good luck

Quote from @Joel Oh:

Quote from @Lauren Frazer:

I couldn't agree more!  We stick to just one platform and it's helped our ranking a ton. We also allow instant book but only to folks that have positive reviews.  Anyone else still needs to message us first.  It's working out great 

It is a bit sad to see how our seasoned hosts who new hosts trust the most don't see the outside of the old way. Airbnb/Vrbo both changed their system so much and they heavily penalize hosts who do not use their platforms. Airbnb wants hosts to use their service over other platforms and that is why they reward hosts who use Airbnb's own pricing system, smart lock, instant booking, accommodation... It is interesting how a lot of hosts here are continuously complaining about saturation and lower occupancy while refusing to adopt the new system. The fact is there are more money and guests than ever in the STR world and this is attracting bigger players who will crash existing hosts if they don't adapt to the new ecosystem. Glad your listing is doing well! Good luck on your journey!

>The fact is there are more money and guests than ever in the STR world

i think this is very market dependent.  In 2019 my occupancy for the year was above ideal but i like money too much to turn away bookings.  My mission beach units were over 95% for the year.  I fired my pm who got me by purchasing the pm i had hired and lost my 1000s of reviews during covid lock downs (so 2020 and 2021 were covid impacted).  2022 had a down time that affected the year.  2023 and 2024 the entire off season was worse than before covid.   In late spring through summer season i am virtually 100% booked.  I go there in january and 75% of the units are without guests.  In 2019 i only had handful of unbooked nights for the year and the area was active the entire year (there was no huge off season).  I am unsure if this lower occupancy is the result of increased interest rates or some other cause, but mission beach definitely has significantly less guests in the off season than in 2019.  All my units beat average occupancy without discounting rates, but the mission beach units are not performing like they were shortly before covid.   In 2019 my mission beach units had average revenue minus cleaning of ~$80k.  I suspect they will be in the $60k to $65k range for 2024 and the difference is market wide.

i can look at airdna and see guest count is down.   What i cannot determine is why.  Is san diego beaches less attractive in the off season than they used to be?

to the OP, i hope airbnb never decides to ban you from their network.  We have all heard horror stories of it happening and in these horror stories it is not the host’s fault.  I also hope airbnb does not continue to get less host friendly.   There are risks relying on a single OTA; too risky for my liking.   

hope everyone has a successful 2025. 

Quote from @Andres Murillo:

Quote from @Dan H.:

Quote from @Andres Murillo:

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

You cannot calculate rent by subtracting off the rent of the ADU.  That does not include any expenses, vacancy, etc.

similar rent minus PITI does not equal cash flow.  If you use 50% rule, rent/2 - P&i equals cash flow.   When including maintenance/cap ex, vacancy, pm, misc he will have little, and possibly negative, cash flow.

if he invested almost $250k to add less than $150k of value (assume some of the current value came from the home appreciation), there is no cash flow until the initial negative equity position is recovered.  so he has an initial negative equity in excess of $100k.

so -$100k / (a very small cash flow when properly allocating for expenses and vacancy) equals years before there is any cash flow.  This negative equity position is one of many reasons that adding ADUs in a single family zone is not typically a good RE investment.

OP whatever you decide to invest in, make sure you do thorough and conservative underwriting. 

good luck

You’re right in that the level of underwriting I presented wasn’t institutional level - but for your average person just starting out, institutional grade analysis often makes the thought of investing overwhelming. That’s why the BP community is filled with would-be investors. I like the concept of making investing accessible and achievable. 

These are some of the best investments moving forward in SoCal. The Private Equity and Institutional investor is playing the ADU game - I'm working with them. Currently underwriting 35 SFHs being purchased as a portfolio by a PE Firm in order to push rents via ADU developments. They aren't balking at a "negative equity investment" when finding such great cash flow from the ADU investment.

What i am seeing from the most experienced So CA RE investors is the opposite. The industrial buy and hold buyers have virtually dried up in San Diego. I am seeing little buy n hold because the cash flow is not there. The ADUs that the most experienced are adding leverage bonus density program or other such rules to add multiple units and for the most part they exit. Even the smaller more experienced flippers are typically not adding a single ADU. I find single ADUs are mostly being added by people with minimal RE investment experience often without a clue as to the value that will be added by the adu addition. Many times they do not realize the adding of the adu makes their existing unit rent controlled. Basically they often are added by people who do not do thorough and accurate underwriting.

The value of commercial MF has fallen nationally. This is because the dwindling cash flow due to the increased rates has resulted in higher cap rates. Note it often is not a result of significant NOI change (excluding some markets where a lot of new units have been added).

3 recent studies show it is cheaper to rent than own in virtually all of the largest US markets.  Owning has advantages that LL does not such as no vacancy, typically lower maintenance/cap ex versus being occupied by tenants, and often property tax breaks. 

What this implies to the typical RE investor is obtaining significant cash flow is a big challenge right now and relying on other RE profit sources (such as a value add and not doing a value subtract) may be a more certain path of generating returns.  

Good luck

Quote from @Joel Oh:

Quote from @Dan H.:

The reason that i would never suggest a single OTA is the all eggs in one basket risk.  What happens if the OTA start $crewing the hosts?   What happens if the OTA goes bankrupt?  If all your bookings come from a single OTA, do you have a business?  It certainly has a large dependency; you are at the mercy of that one OTA.

In addition, unless you are at ideal occupancy, alternate platforms can fill some holes.  In 2019 i was at ideal occupancy but none of my STRs are at ideal occupancy today.

Do what you want with regard to the number of OTAs, but i plan to never be associated with a single OTA.  My advice is to not focus on one OTA, but to be sure to be listed on multiple OTAs.

best wishes

 It is a Wallstreet myth that you should not put all eggs in one basket to sell their portfolio. Almost every single successful business owner found a strong competitive advantage and used it to focus on one thing to be the best at it. Business should start to extend only because there is nothing left to eat in the market not because you are losing in the competition.

 If you are worried about Airbnb or Vrbo screwing over the hosts, I think you are in the wrong business. OTA business doesn't exist without the hosts and screwing hosts will be the last thing they would do. (Weeding out bad hosts is a different story)

You should expand to a different OTA only because you are too big to be on single platform, not because you can't find enough customers with current system. If you are seeing a lower occupancy, that is happening because you are out of the current ranking system. There are more customers than ever right now on any platforms. This should give you an idea that your business model is outdated, and you lost your competitive advantage. Your role should be finding the reason for customers to buy your product instead of worrying about Airbnb goes bankrupted. 

I question how long you have had STRs.  The reason i ask is airbnb consistently has gotten less host friendly continuously since inception (i have had my STRs on airbnb since their year 1).  There are various degrees of screwing the host, but every change that is less host friendly is screwing the host to some degree.  Death by 1000 cuts.

virtually everyone recognizes that placing all eggs in one basket elevates risk.  If you do not recognize this i cannot help you, but i suspect most readers can recognize the risks of having all eggs in a single basket.  I also suspect that most can recognize having occupancy gaps filled by an alternate OTA is a positive outcome. 

you can stay on a single OTA if you desire or you can follow the advice of the experienced posts that suggest otherwise.  I leave it to the reader to determine what path is correct for them. 

i will continue to advocate for direct bookings and being on multiple OTA platforms.  my goal is have all bookings be direct and not be reliant on any OTA. 

good luck

Quote from @Andres Murillo:

Quote from @Pearse Cafiero:

Hi Everyone, 

Trying to figure out the best way to go about getting my first rental property. Ideally was thinking a duplex, triplex, or quadplex to get started and use an FHA loan but I also have a private lender that can possibly help with up to $200k worth of a down payment. I want to find something local (Los Angeles area), move in, do small renovations to possibly build up more equity, do a 1031 exchange, and find something better.

Thoughts? Suggestions?

 Hey Pearse! This is one of the most common challenges in the LA County community on BP. "How do I get started in CA?" The answer is based on your goals.

Short-term goals are tough. AB 968 will make it more difficult for first-time investors to "flip" our quickly "house hack" homes since anything resold within 18 months. There aren't many "short-term, get rich quick" type investment options in SoCal today. 

If your goals are long-term - this market will offer a ton of appreciation and steady renter demand. I helped a client purchase an SFH fixer with a detached garage. We renovated the SFH and converted the garage to a 2-bed ADU. The ADU will bring in around $2800 net per month. That brings his payment down from $4300 to $1500. Very affordable for him and his girlfriend. When they move out they'll rent the SFH for at least $3500. He'll have at least $2k per month in positive cash flow and tons of equity when it's time to find the next home in some years. For less than a $250k investment he'll cash flow about $24k/year down the road. That house was purchased for about $750k and is likely worth about $900k now that the ADU is up. Tons of equity. Long-term cash flow.

You cannot calculate rent by subtracting off the rent of the ADU.  That does not include any expenses, vacancy, etc.

similar rent minus PITI does not equal cash flow.  If you use 50% rule, rent/2 - P&i equals cash flow.   When including maintenance/cap ex, vacancy, pm, misc he will have little, and possibly negative, cash flow.

if he invested almost $250k to add less than $150k of value (assume some of the current value came from the home appreciation), there is no cash flow until the initial negative equity position is recovered.  so he has an initial negative equity in excess of $100k.

so -$100k / (a very small cash flow when properly allocating for expenses and vacancy) equals years before there is any cash flow.  This negative equity position is one of many reasons that adding ADUs in a single family zone is not typically a good RE investment.

OP whatever you decide to invest in, make sure you do thorough and conservative underwriting. 

good luck

My lease has a sublet fee (2 weeks is guest by lease more than 2 weeks in a year is sublet) that is costly enough ($100/night per person which is about what a cheaper hotel is here) that makes sure tenants do not have others move-in without informing us. I suggest your next lease have such a clause and that you make sure you can find the lease (but i have also somehow lost a lease recently).

For where you are now, without a signed copy of lease i believe your options are limited.  I would get the new tenant to apply and process it per your criteria.  If he qualifies, create a new lease with all adult occupants (and a sublet provision) and get it signed and place it in a known location.

good luck