All Forum Posts by: Dan H.

@Kendra Mattson

Do you have assets that you can use to bump you over the 20% equity if the appraisal comes in low so that it does not reflect 20% equity? I would much rather pay into equity than pay towards a PMI that I will never use.

The posts that indicate to get an unofficial appraisal from an RE agent is good advice and RE agent appraisal should be free (or worded better, provided in hopes of attaining good-will so that if you list your RE in the future you would consider listing it with them).  However, realize that, in general, the RE agent appraisal will be based on what they believe the RE can sell for and typically refinance appraisals come in less than purchase appraisals.  I would think you would need a RE agent appraisal that shows 25% equity to have a pretty good chance of getting a refinance appraisal that reflects 20% equity.

Good luck

@Jose Angel dominguez

I forecast conservative.  I use higher vacancy rate than I have yet experienced.  I use conservative maintenance/cap expense estimates.  I use far lower than San Diego historical property and rent appreciation numbers.  Using those conservative numbers, what I look for is an investment that has a solid chance to outperform other investment options including compensating for any extra effort involved in RE investing.

For example, the S&P 500 has a historical return of ~10% and is very passive. I would not consider investing in RE unless it is projected to outperform the S&P 500 (and any other passive investment option) by enough to warrant the additional effort of owning RE. When I started out the amount that the RE projected return needed to exceed more passive investment options was significantly less than it is today. As Kevin indicated I have never projected a 70% (or that close to 70%) return on any of my RE investments. Any RE investment that is not projecting greater than 10% ROI likely means that investing in the S&P 500 is likely to outperform the RE investment and take less work.

My actual return on investment (ROI) of my San Diego buy n hold residential RE has far out performed my conservative projections (100% so far). We likely have one that has returned in excess of 70% annual return. This is due to great rent and property appreciation. I would not want to forecast as though that same level of appreciation is going to continue forever.

Any investment decision should consider projected ROI, risk, and effort involved.

So the questions should be "What can I invest in that is likely to produce a better ROI than San Diego RE?" I account for Buy n hold RE not being as passive as some other investments in this question. "What is the risk?". "How much effort is involved?".

If you cannot think of anything likely to produce a better ROI that San Diego RE then you should consider the other 2 questions and determine if San Diego RE investing is the best path for you.

Good luck

@Dante Anderson

Some thoughts:

• I believe HELOC interest cannot be written off if used to purchase another property but refinance interest can be written off. "The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer's home that secures the loan." This implies that many instances where HELOC previously was a decent choice it no longer is a good choice.
• HELOC, in general, are variable rate. Interest rates are still historically low compared to normal but have been rising.
• I do not know who ran your numbers but at $2300 your rent to equity is pathetic and I can say with confidence that you are missing some cost items which I suspect the most likely is a cap ex estimate. For this to be a good ratio in San Diego you would need a rent of $3.8K. I derived this number by using a 0.70% rent to equity ratio (a good ratio for San Diego - not super easy to find) and then added your HOA cost. This property will not be close to break even at $2300/month rent. If you have a PM state otherwise, do not hire that PM as they do not have a basic understanding of rental costs. So are you prepared to supplement the costs of this property with the expectation that appreciation will be enough to still provide a worth while ROI?
• I have an ex-home of mine in my rental portfolio.  It is by far my worse performing RE.  Why?  Because it was purchased to be a good home and not necessarily the best RE investment.

@Kevin Fox suggestion is the correct suggestion but the issue is that it is challenging to find RE in San Diego that cash flows upon purchase that does not have significant warts or require a significant value add.  So what he states is a lot easier said than done if you do not desire to supplement the initial finances.  Realizing the challenges of finding positive cash flow San Diego RE, are you willing to supplement a new RE purchase for eventual cash flow?  Do you believe you have the experience to pull off a significant value add?  Maybe Kevin can help you find the San Diego RE property that has positive initial cash flow (not easy).

Good luck

I agree this is the way appraisals should be done but I have seen many/most that do not look at actual market value.  The big example in my market is extra BR.  Typically the appraiser values a BR at $5K but the market on sold properties seems to have a closer to $20K value for a BR.  All it takes is looking at aggregate of 3 BR sold versus 4 BR sold trying to find similar footage.  If you look at just a few properties there could be all sorts of reasons for the price difference but when you examine all the comps and you see market rate for a BR is close to $20K but the appraiser is using $5K it makes apparent how unskilled many of the appraisers are (not all).

I had an appraiser once that used a $10K upper on a duplex versus a triplex.  I appealed and got the appraisal raised by $60K on that one adjustment (which was still lower than market would indicate: In the entire market there is no unit that values as low as $70K, not a single one going back far over a year).

In addition, in my market it seems that refinance appraisals are lower than purchase appraisals.  The value of a refinance property should be similar to the value that is established because a buyer is willing to pay the negotiated amount on the non refi property.  Of course the appraiser finds comps that somewhat justify the appraisal but when you look at all the comps you can tell that either they selectively chose the low ones or the appraiser used value adjustments that are very difficult to justify (such as valuing an entire unit at $10K).

Basically I have dealt with many inept appraisers and very few that are not.

The appraisers run away when I appeal their appraisal; literally the last one disappeared mid appeal (left his job and the local market area).  He was so inept I wanted to see him justify some of his appraisal but leaving the market was the easier path for him but left me in a difficult spot.

I basically tell people in my market that a big risk of the BRRRR method here is the refinance appraisal. You can walk every similar comp on the market and believe you have a good indication of what the appraisal should be and the refi appraisal will come in low probably 9 out of 10 times.

Maybe your market has better appraisers.

@Jon Khalil I wanted to clarify something that @Ali Boone indicated.

She indicated that "you aren't likely to find any {cash flow} in SoCal". The more accurate statement is that it is challenging to find initial cash flow investing in coastal So Cal with high LTV numbers.

Here are why I go with the clarification:

1) If you purchased virtually any buy n hold property in coastal So Cal 5 years ago and are getting market rent today it would be cash flowing quite lucratively.

2) If you have low LTV virtually any property will cash flow. Your Return on Equity (ROE) could be horrendous and you would not be leveraging your assets but your cash flow would be fine.

3) It is possible in many coastal So Cal areas to achieve small cash flow on retail duplex to quad units.  I see them semi regularly but most do not meet my purchase criteria.

4) There are a lot of SFR. With so many SFR there are people who acquire these properties significantly below retail. So if you can purchase significantly below retail you can obtain positive initial cash flow.

Most So Cal buy n hold RE investors are relying on continued property and rental appreciation.  Historically this has proved very reliable long term but especially the property prices have experienced short periods of depreciation (virtually always less than 5 years) and longer periods of stagnation.

I make no claim as to continuing property appreciation as I could make a decent case for the RE market entering a period of stagnation, the market continuing to appreciate, or the market to depreciate some.

However, I am still confident of rent appreciation in my purchase area (San Diego) for at least the next few years:

1) rents lag property appreciation. 2) vacancy rate is real low. 3) cost to add more than ADU is high - it costs around $100K to break ground for residential in San Diego (permits, surveys, etc.). 4) Minimum wage increases already approved. 5) one of the best weather climates in the US. 6) rising population: one recent study had San Diego as 13 highest population increase of large US cities. 7) geographically constrained: Constrained by Mexico to the South, Pacific to the West, Camp Pendleton to the North, and the East quickly gets harsh. 8) good and varied employment: Hard to imagine an employment category melt down that could impact the range of employment in San Diego. 9) environmentally diverse from mountains to desert to beach to happening urban center.

Last weekend I sent out 2 rent increase notices. Both are under market and even with the increase will still be under market (they will still be more the $100 below market). The property (both increases are two units at the same property) already cash flows pretty good but will cash flow even better in a couple months when the rent increases go into affect.

Good luck

I was the best wrestler on my high school team and had a few lame offers to wrestle in college (I tore my ACL so that path was gone) and wresting has many lessons that can be applied to life.

However, for me, similar to @Jay Hinrichs , it was a parent but not my Dad but my Mom.  My Dad worked a government job and had some good success considering where he started from (not as much success as the Poor Dad from Rich Dad, Poor Dad but also no where near the education of Poor Dad).   However, my Mom was the entrepreneur.  She purchased empty land (did not pan out great but showed the entrepreneur) while still married to my Dad. 

My parents split and after that is when she really started displaying her entrepreneur spirit. She rode her bike an hour to work and an hour home to save money. She was making less than $10/hour in the early 1980s. She used the savings to build wealth. She purchased a SFR rental that she leveraged into other rentals and she started her own electrical contracting business. I believe her and her new husband never had a combined W2 over $50K yet she built up quite a bit of wealth. She was generous with her time and money. She was the rock of the family and a lot of people. All this from a 1st generation immigrant who came here with nothing and never earned much from W2 jobs.

Of course, she is missed.  My brother never recovered from her death.  Her husband in many ways has not recovered.  It has been almost 10 years.  She told me on her death bed that her biggest concern was my brother and had me promise her I would take care of him if/when needed.  I never imagined that it would be right away (he was just over 40 at the time).

Getting off subject, I learned the entrepreneur spirit from my Mom but mostly applied it much later than I should have.  I want to teach my son similar lessons which is also similar to the lessons of the Rich Dad, Poor Dad books.  So if he answers this question in 20 years I hope I at least get consideration as the #1 contributor to his success.

In San Diego most established landlords will not accept a tenant that has ever been evicted.  Therefore the tenants know if they are evicted they will forever have a hard time finding a rental.  This helps the tenants want to not get evicted.  

We have served eviction notices but never have had to evict.  Maybe we have been lucky or maybe we screen our tenants well or maybe some of both.  

My point is with the vacancy rate being so low, tenants do not want an eviction on their record as it will forever impact their ability to rent.  

 Wells Fargo told us that our business account will not be able to accept cash deposits starting prior to June 1 (do not remember exact start date of new policy but it was before our next rents were due) from people who do not have a Wells Fargo account. Not sure if other banks will be setting the same policy.

 Wells Fargo indicated that our business account will not be able to receive cash deposit from people not listed on the account prior to the start of next month.  We have been using this feature for years and are now trying to find the best alternative.  

This policy will likely result in us transfering at least some of our account from Wells Fargo.  

This thread was perfect timing for us. 

We have been having tenants deposit directly into our bank account for years.  We only accept payment sent to our PO box or deposited directly to our account.  It has worked great and as another poster indicated anytime you write a check you are providing someone you account number so I never was worried about that.

A few days ago Wells Fargo (our current bank) sent us a notice that they no longer (starting before next months rents are due) are accepting cash deposits from people not listed on the account.  We did a little research to find out how many of our tenants have made at least partial deposits in cash and we found out 4 tenants regularly make entire payment in cash and that most of the other tenants who deposit directly to our account have made at least partial payment in cash at least once in the past year.

We called a couple national banks and they have a similar policy as Wells Fargo is enacting.  We called the largest local Credit Union (SDCCU) and was told they still accept cash deposits to accounts the depositor is not listed on.  If we do not find a better alternative we will need to change accounts to SDCCU (which has a good reputation (much better than Wells Fargo which has a terrible reputation), it is just a pain to switch).

So we are trying to figure out our options ideally in the next few days because if we have to switch banks there is a fair amount of work (our Property payments are all automated: mortgage, water, trash, etc. as well as we have to get the new payment method to all of our tenants that use the direct deposit).

We did consider Paypal but some of our tenants are not IT literate (even though they pay a lot for rent they do not have extra money for smart phones or PCs).

I will talk to my property management partners about the option of not switching banks and requiring the tenants to send money orders to the PO box.  Google indicated that Walmart charges $0.70 for up to $1K in August 2017.  Seems like a reasonable cost but slight hassle for the tenant.