All Forum Posts by: Dan H.

 I go to a meet up in San diego called private lending masters.   It is comprised of people who lend money, those that want money and those that want to learn more about RE.   It is perhaps my favorite meetup that is not associated with a larger group (such as SDRE, NSDRE, SDCRE).

For the most part the lenders only lend on non owner occupied ADU, at low percentage of ADU addition costs because they know that usually the value extract will be significantly less than the ADU addition costs. It is discussed at most of these meet ups I go to (usually in the networking that is before and after the organized meeting). So this is common thought and why it is a real challenge to get debt secured by the ADU value add at higher than 50% of the addition cost.

There are exceptions. My wife has an acquaintance in InvestHer that does flips in beach areas of Orange County that often adds ADUs. Most flippers will only add the ADU if there is already under utilized living space (not garage conversions but craft rooms, bunk house, etc) to convert. However, she seems to do great adding ADUs on select properties in super high value area. Note this does not imply that these are the typical home. Most ADU additions will get valued far under hands off cost of the addition if garage conversion or especially if ground up addition.

Good luck

I never do cash for keys. I do not desire to reward tenants for poor behavior.

I explain the consequences of an eviction to the tenant. I explain they will have difficulty renting a quality unit, that I will ding their credit, that I will attempt to garnish their future income to recover what they owe. They believe I will do what I state because I have always done what I told them I would do.

My market has a low vacancy rate. Poor tenants cannot obtain quality housing. My tenant requirements includes no evictions, ever. No excuses accepted

So far with a combination of good screening and good luck, I have never needed to evict a tenant.

When the time comes to evict our first tenant, I will hire the best lawyer and let the expert take care of it. I will add the cost of the eviction to what tenant owes, and if the cost is not recovered I will consider it a cost of doing business.

What I will not do is pay a bad tenant to leave so that another landlord gets stuck with having to deal with a bad tenant that I have rewarded for their poor behavior.

In addition if I paid a tenant to $crew me, it may cause me to lose sleep. Sleep is precious. I would rather not pay the tenant, pay a lawyer, lose some rent but not lose one wink of sleep allowing the bad tenant to get money from me.

Do not do cash for keys.

Good luck

ADUs additions in single family zoned areas add less value than the hands off cost of the ADU addition. You will likely get what you consider a poor valuation from any appraiser that a lender will use. Small units in single count are expensive development.

The negative equity position is one reason (there are many reasons) why adding an ADU is one of the worse RE investments.  

Good luck

I have crazy high DTI (like 80 to 1) but large reserves, crazy high credit scores, and fairly small revolving credit card balances ($20k to $30k but paid off each month).

I have yet to be turned down for a credit card. I highly suspect that DTI is not an automatic disqualifier. If it was, I could not get a credit card.

How are your reserves and credit score?   They may have played a role in your credit card denial.  

Good luck

Ab1482 does not apply to SFR owned by an individual or couple. You do not have to pay him for no fault eviction (terrible name) because ab1482 does not apply. You must give him 60 days notice seeing he has been a tenant over 1 year.

Note if prop 33 passes, SFR can become rent controlled. No on prop 33!

Good luck

 If they can agree on current value then equity calculation is easy.  Assuming 50% ownership, new partner pays current owner 50% of the equity. Current owner indicates they can use some of the equity. They both get 50% of income and pay 50% of the costs.  The current owner reduces their risk. 

For self visits, they can decide on what cost or no costs.  

They also need to address exit options and items without a consensus opinion. 

by the way, we have placed a handful of offers with what my wife refers to as her baby investor.  So far none have been accepted, but we have a a working agreement.  Our agreement has exit of one partner can buy at 8% discount if other partner wants to sell but is not obligated to buy.  If other partner does not choose to purchase the other partner interest the property is sold.  we also have free visits (my thought is partner will likely use it more (offers have been to Emerald coast and they live in Minnesota and I live in San Diego - who do you think will visit it more?) but they are likely to be working visits).  

Good luck

I do not see what you have to lose with this partnership.  

1) you are tired of dealing with guests.  Partner can or you can hire a pm

2) property has not enough equity to heloc or sell at return but prospective partner is willing to buy into the partnership. 

3) even if the partnership ends up being short lived, there is an opportunity for further appreciation in that span.

4) you fear the risk of a poor season.   This partnership splits the risk.  Assuming 50% partner, you have halved your risk. 

What is the downside?
make sure a lawyer reviews the agreement.  

Good luck

I am often the contrarian but the best actual cash flow over a hold is not the markets listed above.  Some of them may be good markets for initial cash flow   There is a poor correlation between initial cash flow and this is not happenstance.  RE market price is based on many parameters, but two of the biggest (maybe the 2 biggest) is property appreciation and rent growth and those 2 typically have a tight coupling.

Assuming fixed rate loan and rent growth at least even with other expense growth, the higher rent growth market will always eventually have better cash flow than the lower rent growth market regardless of the initial cash flow. 

This implies high rent growth markets like my San Diego market will have higher cash flow for long holds than those cheap Midwest markets that have good initial cash flow. 

My market at high LTV retail Purchases (MLS) currently has large negative cash flow, but I think it is highly likely that the total cash flow in 10 years will exceed a similar size investment in the cheap Midwest markets.

In addition, you will have appreciation far greater than those cheap Midwest markets. 

In summary the best cash flow for a long hold will be markets with best rent growth and these are typically markets with the poorest initial cash flow.  

This may seem like an extreme, crazy concept, but historically the data supports this belief.   Cities like San Francisco, New York, San Diego have experienced the best cash flow on long holds.  

Good luck

San Diego County vacancy rate surged to 6.36% in Spring 2024, up from 3.9% in Spring 2023. Within the region, the City of San Diego also experienced a rise in its vacancy rate to 4.22%, compared to 2.64% last year. The increase in vacancies can be attributed to the addition of new properties to the market and higher than usual vacancy rates in older properties.

https://www.socalrha.org/news/2024-vacancy-and-rental-rate-s...

Note LL, location, and property all have an impact on actual vacancy. If you have a commercial residential property (>4 units), the value is based on NOI. in such case, optimizing rent justifies longer vacancy. In non-commercial residence (<5 units), the vacancy is large impact to cash flow s as nd it typically is worth having rent not at the top of market. Similar, average rent in san diego is noticeably higher than $100/day. It makes sense to hire help to shorten tenant turnover time.

Good luvk

In CA, the tax increase is capped at a maximum of 2% so it will definitely be less than 5%.  

A near 1% property in coastal So Cal is a rare find. Because of this, I suspect his ARV is close and that he has near the equity he indicates (a very good buy in this market).

However, cash flow is not rent minus PITI. Even if everything is new, their lifespan has started. Cash flow should be after best estimate of expenses and maintenance/cap ex will be needed. Even if there has been no vacancy, vacancy needs to be allocated as there will almost certainly be a vacancy.

At the current interest rates, 1% ratio likely is unlikely to have positive cash flow at a high LTV.

This does not imply that this purchase is not a home run in this market.  

Good luck