All Forum Posts by: Dan H.

@Justin R. I saw the news blurb on this but what was not real clear to me in the news blurb is whether these proposed regulations are for existing short term rentals or only new STRs. Our STR duplex (my other RE is LTR) has been a STR since 2000 or 2001 (purchased in 1999) and is in an area that is virtually all STRs (Mission Beach: 1 block from the beach).

If this applies to STRs that have been long established the entire market in Mission Beach will be thrown for a loop. Fortunately, our STR units calculate out OK even as LTR (mostly because they were purchased at greatly below current value) but not nearly as well as STR. Anyone who bought recently or in 2003 to 2008 in coastal Mission Beach will have issues with return compared to purchase price. Everyone will have huge reductions in cash flow and likely resulting property devaluation.

Thanks for any clarity you can provide.

I probably am not making friends here but I would not use a real estate agent for an off market property (and I am in California).  A real estate attorney will provide better protection.  How do I know?  I encountered a huge non-disclosure on a deal using an agent (>$60K provable non-disclosure: at the time it was biggest the broker had ever encountered).  My agent and broker were useless.  I needed to go to my attorney to get it handled.  The agent/broker got their commission but I wish I could have withheld it.  I asked for a discount due to lack of support and needing to use my own attorney but got none.  They likely knew I would not ever use them again even if they had reduced their commission so they had no incentive to reduce their commission.

I am not a big fan of most real estate agents and believe you only know if you have one worth paying when something goes wrong.  Anyone can handle the ideal closings.

I have paid real estate commissions for very little work by the real estate agent on listings from the MLS but there is no way I would use one for an off market property unless their commission was a fraction of the usual commission.

RE is full of trust but verify.  Make sure that you verify and do not take everyone's post as gospel.

Good luck

I know virtually nothing about the New Jersey market so keep that in mind with my response.

Where I RE invest (San Diego county) my worse performing RE is my ex-home.  This is even with favorable property tax situation due to prop 13 (A CA prop tax initiative that caps the amount property tax can increase).  This is because it was purchased to be a good home and not to be a good investment property.

Federal tax rules let you write off appreciation of a home that you occupy for 2 of the last 5 years (to some lifetime limit).  You will be giving this up but if you home has only appreciated $15K then this is not very relevant.

So compare your expected returns keeping your current home as a rental versus what you could obtain via a different property.  What I suspect you will find is that you can find a better rental investment than your current home.

Good luck

you can use conventional financing for BRRR. I have done it multiple times (helped by market appreciation) but here are the challenges:

- the sfr with the best repositioning (most sweat equity) opportunities are the ones that need major repairs and do not qualify for conventional financing. So the challenge is to find a REI that can qualify for conventional financing and still provide enough sweat equity to get your initial money out with a refinance loan.

- refinance appraisals in my area are very conservative.  I believe they are more conservative than purchase appraisals when an appraisal should be consistent regardless of what the appraisal is being used for. 

- on non-owner occupied (I.e. Investment property) refinance 70% LTV is typically highest LTV.

The 70% LTV implies to pull your money out you typically need sweat equity of 43% of purchase price. Example using simple numbers $70k purchase will require a refinance appraisal of $100k at 70% LTV to be able to get all of your initial investment out. Finding a property that provides an opportunity for 43% sweat appreciation that qualifies for conventional loan is very challenging.

So it is not as simple as Brandon seems to imply.  Also be aware of seasoning rules.  Typically a cash out refinance using a traditional loan requires a minimum amount of holding time.  Another hurdle in the brrr method.  

Good luck

I did not model the rent increases.  I showed it cash flows today (using market not rehabbed unit rents and my cap expense that many think is conservative).  I do believe because the rents have not caught up to the recent property appreciation (also shortage of supply and rising minimum wage) that rents will increase faster than inflation for at least 5 years but there are large studies that try to predict things like rent appreciation with varying degrees of success.   So mostly I am not trying to forecast an accurate future cash flow as much as provide me a feeling that the property is likely worth purchasing (maybe cash flow today would not warrant the purchase but just a small amount of rent appreciation would push it over the threshold).

I suspect we have both seen various forecasts for San Diego rent appreciation (Zillow will even take a guess (it is much more than a guess?) )at it per property.  The forecasts vary quite a bit and their track record is that when rents appreciate a lot the estimates are typically too low and when rents are flat (especially when they first go flat) that the estimates are too high.

10 years out is too far out for me to feel comfortable venturing a guess but I suspect rent appreciation for at least 5 years unless something like an economic melt down.

For me it was a duplex.  The contractor would not install the windows not to code.  So my choice was to find a contractor that would be willing to install not to code and risk a fine, not do the BR windows, or do new framing to enlarge the BR windows (the most expensive option).  I went with the most expensive option but it did irk me that I would be OK leaving the old windows but making the unit nice I could not use the same size windows.  Using the same size (old size) windows was not making the units less safe than it currently was.

The code certainly discourages upgrading small bedroom windows which leaving the old windows is less efficient, less nice, and does not provide the egress to current code.  Basically my point is the same size new windows (which would not be to current code) would still be an improvement over the old windows that also did not meet egress code.

Property tax at 1.25% (typically a little conservative) would be almost $2k month.

I would place cap expense on this RE at more than $500/Month (but use $500 for calculations below).  Many people will think I am conservative with this but I do not agree.

Vacancy at 5%.

Insurance: I have no units in Santa Monica but I will use $150/month but I am sure others could provide a more accurate number.

Maintenance: I have no units with this mix but I think $150/month might be close.

Utilities for laundry room and ?: Maybe $50/month if they are not separately metered (more if separately metered).

8900 - 7200 (PI: using your number but not sure what interest you used on what down payment to know how real this number is: non owner occupied has small rate premium) - $500 (cap ex) - 445 (vacancy) - 150 (insurance) - 150 (maintenance) - 50 (utilities) = 405/month if self managed.

10% Property management: would provide 405 - 890 (PM) = -$485 using a PM.

So it may have cash flow if self managed but not a lot.

Good luck

I am pro San Diego investing like @Kevin Fox but I do not believe properties pencil out well with their current rent to value numbers (even in the small percent of listings that he implies).  Sure you may be able to find some that cash flow by the thinnest of margins but I believe most that project to cash flow are depict cash flowing due to under estimating the cap expense costs and that with realistic cap expense estimates the best do not have cash flow that warrant the effort .  Do you want to property manage a unit for less than $50/month?  Note that PM typically charge ~10% by the time all charges are added on (So a cheap $1200/month not rehabbed 2/1 unit in class C area will result in a ~$120 PM cost yet current cash flow has you earning less than 50% of that amount - The Property Management is not getting super rich with what they charge and you will be getting much less.  There is no way to make a lot of money on that cash flow and property management is work (they earn their fees dealing with certain tenants).

Does this mean that I am not looking in San Diego?  No I continue to look.  If I found the right property that cash flows using my cap expense estimate (or maybe cash neutral) I would consider purchasing it (Kevin).  Not for the measly cash flow.  Not because I am that certain that property appreciation will continue (it is very tough to time the market perfectly).

What I have a lot of confidence in is continued rent appreciation.  Why?

- rent appreciation lags property appreciation.  It has not caught up with property values or anywhere close to it.

- supply and demand.  San Diego RE prices are heavily dictated by supply and demand and there is a rental unit shortage. That shortage is not likely to go away soon because the cost of construction is high and the space available for construction is limited.

- minimum wage is rising.  This will make the current rents more affordable and will therefore result in moving up and increased rents

This implies that a property that is cash neutral today is likely to be cash positive $100/unit next year and likely $200 unit in 2 years. 

I also look for sweat appreciation opportunities.  So ideally I get a cash positive/neutral place that is a little run down and with below market rents.  I ditch not ideal tenants immediately and rehab the units for hopefully 50% appreciation on cost of rehab (i.e. a $20K rehab results in at least $30K value increase) and raise the rents to market on a rehabbed unit. 

BTW a week ago I posted my calculation on a MLS property that my calculations show cash flows - so there are definitely some on the MLS that cash flow. It was not the right property for me and it did not have great initial cash flow. But 2 years from now the cash flow should be significantly better than I depict as current cash flow in my calculations.

To summarize, I believe very few properties on MLS cash flow enough to warrant purchase at the time of purchase (effort versus cash flow) but 1) rents are very likely to increase 2) there are often value opportunities in rehab and raising rents. Any property appreciation is bonus and I believe very few will pick the peak correctly.

End result, I am still looking in San Diego (for the right RE) and hope to buy 4 duplex to quads in the next 2.75 years (@Kevin Fox, others).

When you purchase MF of >4 units you should be given the previous year's actuals from the seller.  Verify it to the best of what you can.  Then Use it!

In San Diego the prop tax will reset sometime significantly (always based on selling price).  You can determine this quite accurately.  Get new insurance quotes prior to closing.  Maybe the seller has 10 properties and 500 units bundled together for a savings that you can obtain.  So the insurance you should have an accurate number on. 

Get quotes for property management. Compare it to what the seller disclosed. Property Management expense should be real accurate. Realize utility prices especially water are rising fast in San Diego. Call the utility companies. Rate increases are typically approved long before they go into affect. So utilities typically can be predicted fairly accurately. The seller will provide actual vacancy rates. If the units are below market rent you will initially have higher vacancy rates as you raise rents to (near) market rent. You can discuss with property managers what vacancy rates they are experiencing (this should also be done to somewhat verify the seller's claim on vacancy rate). If you are trying to raise the NOI it could very well fall before it raises even when you are doing everything correct.

Realize in general units that have not been rehabbed will need increasing amount of maintenance/cap expense until rehabbed (i.e. older units have more things to fail than new units).  Also cost associated with labor continue to increase in San Diego.  When you walk the units (walk every unit) note the condition of things.  Often there are the same things aged in many units.  When you walk the primary structure look for big items (roof, foundation, etc.).  Use an inspector but depending on number of units he will not inspect each unit (maybe he will if it if 10 units but if it is 50 units you will not want to pay for him to inspect each unit).  Maintenance/cap expense I believe is the hardest area to get an accurate first year forecast but you have the sellers expense reports (use them).  The expense reports along with what you find in the inspection and walk through will hopefully give you a somewhat accurate forecast of maintenance/cap expense costs in the first year.

For <5 units then I use 5% vacancy for self managed and have yet to have a year where, not counting rehab time, I was that close to 5% (always way under). If you are not going to manage it then 10% for property management (or get quotes) and raise the vacancy percentage a little (my only not self managed 1 to 4 units are a duplex STR which means I do not have an accurate vacancy percent for LTR to provide if you are using a management company). I do a cap expense estimate on each property (current cost/lifetime remaining in months = cap expense for the item). Example you purchase a SFR (I realize you are looking at MF but I am using this only as a simple example) with a HVAC that is 15 years old. Your HVAC cost for that size SFR is $5K (there is often a premium in summer) and that you believe HVAC have on average a 20 year life span (this is the number that I actually use for SFR HVAC - furnaces last a lot longer). The cap expense for this item is $5K/60 (i.e. 5 years of life left). $83/month. Many people think my cap expense estimate numbers are conservative (way high). I hope they are correct that my estimate is way high but I believe they are as accurately forecast as feasible. Cap expense for me is much higher than maintenance. I will indicate that I believe for small number of attached, fairly small units (my attached average 2 BR /1.5 BA) that $250/month per unit (I know it seems high) is about what my cap expense estimate numbers indicate. My maintenance is all over the place and does not seem to have much indicators of which units will be high (it is sometimes attributable to the tenant but not always) but fortunately average to a fairly low amount. Handyman is cheaper than contractors (mostly the plumber) but will result in times that you pay the handyman to look at the problem and the contractor to fix the problem but you need to pay both. I suspect if you budget $75/unit for maintenance (2-4 units) you will be fairly close. My handyman cost is about $50/unit average. The contractors are sporadic but probably total about 50% of my handyman cost if averaged out.

Good luck