All Forum Posts by: Dan H.

Originally posted by @Dr. Jordan E Smith:

@Brigham Pyron Yes certainly. I have heard 10% of rent is a good figure to set aside for maintenance and vacancy. Maybe 15% for higher turnover units such as multifamily units. Would you agree? I would not wish to make an investment without positive cash flow as this is our entire goal. 

I think you would loose your shirt. in cheaper locales I believe in the 50% rule. Cost not including PITI will be 50% of rent. Cap ex is higher in small occupancy RE than most people estimate. It is where many of these cash flow estimates fall short.

For high occupancy RE such as apartments the cap ex estimate is typically more accurate and lower.  There are numbers available for these buildings.  I have seen numbers based on region with estimates based on actuals from a high number of properties (i.e. apartment associations).

I have never seen the same type of data for 1 to 4 unit properties but I have my spreadsheets which shows just a water heater has a cap ex estimate of $8/month.

Originally posted by @Thomas S.:

This is a much more difficult question to answer than most investors care to admit, or maybe even understand. Cash flow being based on NOI after all expenses and debt repayment is in fact not based on yesterday or today it is based on the life of a property long term. For this reason no investor will know their cash flow until the day they sell a property.

Investors will build future expenses into their calculations but if you ask what their real cash flow is they will likely state a exaggerated number based on yesterday.

The best you can do is guestimate based on educated math. I personally would not consider any thing below $150/door but will generally target a higher return knowing long term is entirely unpredictable beyond a guestimate.  

You should base cash flow calculations using a hypothetical 100% financing. This improves your accuracy in calculating true cash flow. Equity buys a separate cash flow stream from the property. Investors including income generated by equity in cash flow calculations are artificially inflating their numbers and this will contaminates the properties income calculations.

Any investor can inflate cash flow by throwing their own cash at a property.

As stated your ROI is what is of greatest importance. You must keep in mind that as a mortgage is paid down and appreciation occurs your investment increases reducing your ROI. Appreciated value of a property minus any debt owing as your actual investment.

I understand what you are trying to indicate but ROI is not based on current value but purchase value. I have seen ROV (Return on Value) used for what you indicate but I do not know how standard that terminology is but ROI is fairly well defined as being based on the cost of investment.

I believe if you finance the property you should find a way to write off 100% of the cash flow income.  If you hold high equity positions it will be more difficult to write off all of the cash flow.  The goal for high income earners should be a net $0.   A net negative for high income earners does not result in a tax refund but gets "banked" against future RE profits. 

Avoid needing to "bank" the write off to use against future profits.  A net positive results in tax; no one likes to pay taxes so do not show a net positive.

In addition, you should be able to defer 100% of the appreciation income.  Defer the appreciation income until death and get it reset for your heirs. 

Ideally never hold a RE property beyond it depreciation term.

The tax rules really are fairly friendly to RE investors.

I am not anti paying to get educated in RE.  My issue is that it is via phone.  A lot of RE is local.  For example investing in the Midwest is about cash flow.  Investing in coastal So Cal is about value plays and appreciation.

After the local factor there is the number of ways to make money in RE: flipping, buy and hold SFR, buy and hold residential multi- family (2-4 units), buy and hold commercial multifamily (5+ units), buy n hold retail, notes, value plays, wholesaling, new development, etc. Is the mentor going to be an expert in the method that is best for you?

If you could find a successful local mentor that specialize in your market and that is an expert in the REI specialty you desire that could save you mistakes and help you complete a few smart purchases (anyone can make stupid purchases) it could easily be worth $12K.

My issue is that I suspect this phone mentor is not an expert in your market otherwise he likely would be able to meet you in person.  I suspect he has significant experience in only one or two of the RE investment specialties and may have no experience in the best RE specialty for you.

I agree with all the replies that indicate look for a local mentor that is successful.  Do what is necessary to become his protégé even if that means pay them in either money or free labor.

Good luck

Originally posted by @Sri Voodi:

5 years - this is the period that dates back from the sale of the property. I assumed you wanted to sell the property. Sorry made it sound like all doom and gloom

So, I am basically toast, eh?  - No keep living in the property till you get to a point where you lived in the property for 24 months in the past 5 years FROM the SALE OF PROPERTY date. So if you can live the whole 2019 for 12 months and decide to sell in early 2020, you wouldn't incur capital gain taxes. So basically you lived whole of 2014(12 months) and 2019 (12 months) to satisfy 2/5. Hope I'm clear around this time

Your math is not correct.  If the OP moves there in beginning of 2019 and lives there a full year it would be the start of 2020.  Going back 5 years: 2019, 2018, 2017, 2016, 2015.  No part of 2014 qualifies.  If they live there all of 2020 then we are at the start of 2021 but the owner occupied the house for 2019 and 2020, perfect.

if the owner moves in basically at the end of this year they have to live in the house 2 years after moving back to the place because the months have fallen off.

So the owner to get any credit for his previous occupancy must move in this year.  If he moved in July 1 and in 16 months put the place on the market with a 2 month escrow (18 months total occupancy) he would have 18 months from current occupancy and July to December (6 months) from previous occupancy. 

Probably simplest to think the OP needs to live there 2 years after moving in to get the tax savings.

@Mike A. Another option to defer the taxes would be a 1031 exchange.  Make sure you read up on all of the criteria as doing it incorrectly could be an expensive mistake.

Good luck

I believe the OP could have worded his post differently but I think I understand his sentiment.  Examples:

My hairdresser twice has been short on her rent payment (I am not her landlord) and has requested a loan to pay her rent.  She needed the entire rent amount.  I heard both times how she got into the situation and well bad stuff happens but there should be a reserve but this is not the most frustrating part.  The first time we indicated it would be paid via haircuts and it took a long time (rents are not cheap in San Diego).  So the second time we agreed to payments.  She made one payment so the loan is once again being paid off in haircuts.  This is not the most frustrating part.  She is still giving us free haircuts but she told me they bought a pair of used jet skis to enjoy.  This part I find frustrating not because I necessarily think that she should have used the money to pay me back but because I strongly believe she still has no reserve and that instead of purchasing jet skis she should either have the money as reserve or paid me back what I lent but definitely not have purchased jet skis.

I go into one of my tenants homes and they have a flat screen TV in every Bedroom and the living room.  That is not the part I find most frustrating.  What I find frustrating and wasteful is I have never seen one of them off and most of the time no one is watching them.  You may think I am exaggerating but I am not; never seen them off and most have no one in the room.  This family qualifies for reduced utilities but it is still wasteful.

I have a handyman that I hear all the time about their tight financial situation and yet there is literally a constant list of lower priority items (items that I indicate he can do when he gets the chance) that he can work at any time to obtain additional money.  Mostly these items go undone.

I have another tenant that seems to be into collecting old cars that are almost worthless.  They have 2 drivers in the house and I believe 6 cars that only 2 are decent.  The others are not nice enough models to warrant restoration.  They could sell them for hardly anything and would be better off.  There is no reason to maintain, insure, and register the vehicles that they do not need.

I have quite a few more examples.

For some of the people who live with no reserve or appear to be barely getting by you can see poor decisions that keep them from improving their financial situation.   Some of these are easy.  For example how hard is it to find a cheaper means to have fun then jet skis?  How about go hiking or fishing?  Not into hiking how about a scenic drive or going to the beach without a jet ski?  Note there is the cost of the jet ski and the maintenance cost.  Or how hard is it to turn off a TV when it is not being watched.

I am not advocating not having fun.  Everyone needs to have fun.  But I advocate smart financial decisions and if you do not have a decent reserve then limit the fun to cheaper activities, do not be wasteful, etc.

Originally posted by @Caitlin Bigelow:

@Dan H. that does sound exciting. Can't wait to hear more about it! Best of luck.  What neighborhood is it in?

 Escondido but I am starting to think we may pass on it.  Will likely make final decision tomorrow.  

My value adds have been rehabs with potentially bathroom modifications/additions.

The one we are currently analyzing is an order of magnitude larger and more risky but I would be partnering with another known San Diego BP member (who at this time I am not naming).  

He is bringing some experience I do not have.  I am bringing some knowledge he does not have.  We both would bring capital.  

Because it is outside my usual domain I find it both exciting and scary.  We will likely make a decision early next week.  If I proceed I will probably create a thread for it as their are many items that make it interesting.

We may even have a San Diego BP open house which there have not been one in many months.

Originally posted by @Caitlin Bigelow:

@Dan H. what would you consider to be a good rent to cost ratio? 

 0.75% is a good rent to cost ratio in San Diego if it is in a decent area with no  landlord headaches.  I can cash flow at that ratio even if I choose to have a PM.  It also is not easy to find.  My last purchase was at 0.72% but also had a ~$20K value add.  With enough value add I would  purchase a property projected at cash neutral.  In fact, I am analyzing one now that  has very little cash flow (basically is projecting cash neutral) but we are trying  to calculate the value add to determine if to move forward.

Hope this helps.

Good luck

Typically because the land is already purchased the rent to cost is very good on an ADU compared to purchasing a new property. The rent to cost ratio has a direct correlation with cash flow; all things equal the property with the better rent to cost ratio will have the better cash flow.

For example a purchase of a SFR to quad in San Diego at a rent to cost ratio of 0.75% is good. This would mean that a property that was purchased for $500K would get at least $3750 in rent. Properties like this that do not present a landlord headache (i.e. decent area, not too high density, adequate parking, etc.) are not easy to find. If they are SFR they are below retail. Most of the duplex to quad you see that meet this rent to cost ratio have one or more items that disqualify it from it being something I would purchase.

However, seeing the land is already owned and it is to be better leveraged it seems to be fairly easy to achieve far better than a 0.75% rent to cost ratio on rented ADU buildings. Realize it is not really an apple to apple comparison because in the one case you are purchasing the land while in the second case you already have purchased the land.

Because the land is already purchased for the ADU, it is very unlikely that her investment dollar can produce better COC via a full property purchase than building and renting the ADU.

Good luck