All Forum Posts by: Dan H.

 ELOC on investment properties are not easy to find but 4 or 5 years ago I was able to find a few.  Instead I refinanced so I did not actually go the ELOC route.  

It took me a few hours of research and maybe 10 calls to find a few places that offered a ELOC loan on my rental properties.  A few places that used to offer them were no longer offering them so those offering them seemed to be less than previously.  

If you find a place still offering ELOC on rental properties please let me know as I think I am making 2 offers this week that may stretch my finances a bit.  

Good luck

I am a bit surprised this works.  We PM in mostly C class area (some B class area)  B  class units in San Diego county.  The buzz of having lots of people looking at the unit creates a sense of urgency.  We get a lot of people stating they will submit an application but in practice maybe 10% of those that do not apply on the spot but indicate they are going to apply actually turn in an application. 

If we only showed it to submitted applications we would not have the buzz.  We would be typically be showing it to very small groups (probably one perspective tenant at a time).  Of course if we wanted to charge below market rent we could get more applicants.  

We do charge an application fee that only gets charged if we start processing their application (if they are second to have complete application but first applicant meets our criteria we refund their (the second applicant) application fee).   Maybe we would get more applications if we did not charge the fees but I suspect we would get a lot more unqualified applicants that would require our time to determine that they are not qualified. 

Our process has worked for us in that our units are typically rented at market rent after a single open house.  

1% in coastal So Cal is currently virtually impossible to find and typically not necessary to have positive cash flow.  So if you wait for 1% in coastal So Cal you may be waiting a long time. 

Value add is the best way to find properties that can make sense in the very short-term.  Long term the appreciation historically has been a sure thing (going back more than 60 years).  

Coastal So Cal is different than most other markets.  The price points are set by a market that recognizes the historical long term appreciation and the minimal supply and strong demand.   It's just different and takes some getting used to.  

This property (duplex) was priced where it was tempting ($357K) but I passed because I was unsure the locale would support any forced appreciation via rehab. It is located in Escondido, Ca.  Basically the street was busy and the density was a little high.

Market rent not rehabbed:  $1300 or $1350 for non rehabbed detached 2/1 with a small yard and 1 car garage in that area.  Per Unit so Times 2 for total rent of the duplex.  Rehabbed in same area, but maybe not that exact location, would have rent at $1500.

Cap expense: Use $450/month cap ex (many think this is high but it is what I would use for that property).

Vacancy: 5% vacancy ($130: I actually have significantly lower than 5% vacancy but use 5% in my calculations).

Management: self managed $0 (We only use management on our STR).

Maintenance: $80 maintenance.

Property tax: 1.25%/12 prop tax = $370 (1.25% is a little high but better too high than too low)

Insurance: $65 (I get good insurance rates - newbie probably needs to use $80 to $90).

Utilities: $0 (Tenants pay all utilities).

30 yr conventional loan at 80% LTV at 4 3/8%: $1427.

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Not rehabbed:

Rent: $2600 to $2700

Cost: $450 (cap ex) + $130 (vacancy) + $80 maintenance + $65 insurance (Many should use a higher number) + $370 (prop tax) + 1427 loan = $2522

Cash flow without principle pay down: $78 to $178 per month

Cash flow with principle pay down (principle pay down starts at $385 - goes up a bit each month): $463 to $563 per month

Cash flow without including principle pay down is not great but it is getting hard to find good cash flowing properties.

I am also very confident of continued rent increases in the near term (next 5 years). Why?

• Rent have not caught up to the property appreciation. Rents lag in both directions the property values.
• Minimum wage is increasing.
• Supply and demand. Simply there is not enough housing and building costs are high, land is limited.
• Every study is forecasting continued rent appreciation.

So the small cash flow is likely to increase annually for at least the next 5 years.

If this property was located somewhere else (even just a couple of blocks away) I would have purchased it as it would have had forced appreciation opportunity and had cash flow.

If you do not count principle pay down in the cash flow then the cash flow is typically low on day 1. 

 I have purchased properties that were cash neutral because they were priced a little below market but mostly because I was convinced that there would be both property and rent appreciation.  Those properties have done well. In Mar 2014 i purchased a duplex for $390k that I believed had value of $450k, but appraisal put at $415k, but was projected no cash flow.  Today all of initial investment has been pulled via a refi and it is cash flowing fine (rent is $3200 but market rent is $3400).  

Today I am less confident of market appreciation but I am still confident of rent appreciation.  I have yet to hear of any study indicating otherwise and the factors I listed previously support on-going rent appreciation.  

So if I purchase a cash neutral San Diego duplex today I would expect it to flow $100 to $200 a year from now, $200 to $400 two years from now.  Beyond 2 years it gets harder to forecast but I expect rents to rise over the next 5 years.  

I will post my analysis from last weekend on a different post but I am not indicating it cash flowed good on day 1 compared to some OOS locales.  

 These are my opinions and may not fully jive with Matt's opinions. 

I consider timing the RE market akin to timing the stock market.  There are people who can do it consistently but most people fail miserably.  Are we at the top of the market?   I do not know but I know the long term appreciation trends of So Cal are very positive.  I have purchased near market highs in 1993 and 2004.  Both depreciated close to 20% at the low.  Both have been great investments.  The 1993 purchase was $167k, fell to ~$140k, today is worth ~$550k.  The 2004 purchase was $741k, fell to ~$620k, today is ~$925k. 

Rent versus appreciation: in my market rent appreciation has consistently lagged behind property appreciation and so far that is holding true for this appreciation cycle (rents also lag behind when property depreciates).  In 2012 the 2% rule was possible in San Diego.  I think today 1% is a tough find (very tough find?).  What this tells me is that rent is likely to keep rising even if property values stagnate.  Adding to this view is minimum wage is rising and we continue to have minimal supply but huge demand.   I fell confident that, short of something catastrophic, rents will rise for the next 5 years. 

For those that do not believe there are cash flowing deals in So Cal there are as I get presented them slightly regularly.  About a month ago I posted numbers on BP of an RE that I evaluated.  It cash flowed with what many view to be conservative cap expense numbers (if interested search my old posts).  I evaluated one last weekend that also cash flowed with conservative cap expense numbers (San Diego county cash flowing properties are out there).  Maybe if someone requests I will post my numbers from last weekend's evaluation.  

I always recommend new investors start local and self managed for the learning opportunity.  I understand OOS can be tempting. Good luck with whatever you choose. 

A couple/few years ago I attempted to do this for my San Diego Properties using my standard size unit.  I took each item that was likely to need to be replaced and put a life span range on it.  Some items had more than one entry.  For example I have found casement windows (mostly from the 1950s) seem to have a longer lifespan than the aluminum sliders from the 1960s/1970s.  Similar HVAC versus unit with just a furnace have different replacement cost (furnace is cheaper than HVAC) and lifespan (furnace lifespan is longer than HVAC).  Even within just heating there are wall heaters (cheaper) versus whole house furnace (more costly but last longer than wall furnaces).  Also room HVACs have a large cap expense due to their short life in my rentals (I recently have started buying better units in hopes that they last longer justifying the additional cost).  I also placed my associated cost of replacement with me not doing the work.  Some of the estimates was performed at contractor labor and some at handyman labor.  This included everything I could think of including fencing, hardscape, Refrigerators, stoves, etc. as well as the more obvious items of flooring, paint, roof, stucco/siding. 

I then used the mid point of the lifespan range as the life expectancy. 

My numbers came out just slightly worse than what Justin indicated.  The surprising number was the estimated kitchen cap expense.  Going from memory it was over $40/month. 

I posted my cap ex calculated range on the San Diego BP forum for comment. It got less comments than I would have liked.

I do realize that by extending a kitchen rehab to 30 years makes a big difference compared to 20 years and therefore the cap ex numbers can be made better but at what cost?  Can a 30 year old kitchen get the same rent as one not as aged? Will the unit appraise as high for refinance to leverage?  Note if I can get $100 more rent for the newer kitchen it does help defray the cap ex costs.  If I spend $10K on a kitchen rehab but it helps increase the value by $10K (I usually strive for $15K for $10K invested) and gets me additional rent then that is the time to consider a kitchen remodel.  BTW my estimate on painting cabinets versus replacing cabinets came to not much difference because the painted cabinets need re-painting earlier than the replaced cabinets need replacing.

My family has had rentals since the 1970s.  We have never had to do heavy replacement of a significant amount of the structure.  However we have had to do sill plate throughout an entire structure.  A lot of structure can be done for the cost or replacing the sill plate and keeping the structure.  We have had a $30K foundation issue (our second biggest single cap expense).  We have had to totally re-plumb two units.  Roofs.   Just about everything.  Sure you may never need to tear down the walls but there are lots of repairs that will need to be made eventually and if these costs are not factored in on a monthly basis then your estimated profit is likely a fantasy.

@Michael Halow

>This post was just removed for "self Promoting" I didn't think I was self-promoting at all! These moderators are terrible!

I have seen both too harsh removal (which I agree with you that your post does not seem very self promoting) and not harsh enough removal (typically turnkey providers that are advocating turnkeys where they are providers).

if I was a moderator I would error on the side on not removing posts that are not clearly in violation.

As to your question on good markets to market, I only know that San Diego seems to have a lot of competition.  For that reason I would think it is unlikely to be a good market to market.  I would suspect OC and LA would be similar with stiff competition (so possibly Riverside or inland empire have less competition).

I will take a stab that Justin can either confirm or indicate I am incorrect: Cap Ex.

There are certain costs that do not scale primarily with rent or purchase price.  Cap Expense being a big one.  A 3/2 B class property in a C neighborhood will have virtually the same cap expense as the 3/2 B class property in an A neighborhood assuming both units are located in the same general area (similar labor costs).   I could make the case that the unit in the C neighborhood is likely to have a higher cap expense than the same unit in the A area (typically C area tenants do not care for the property like A area tenants).   The 3/2 in the A area will cost more and rent for more and with the same cap expense it does not need as high a rent to price ratio to show the same level of return as the C class property (and this from someone that has most of my units in C to C+ areas).

The less expensive a property is the more cap expense is a profit killer.  For <$50K properties the cap expense is a huge profit killer.  A $50K RE unit price to rent ratio of 1% is not very good (pass).  A $500K RE unit price to rent ratio of 1% could be outstanding (purchase).

" that meet our purchasing criteria"

I assume should read "We buy houses that meet our purchasing criteria"