All Forum Posts by: Dan H.

As @Ralph R. indicate #2 is likely to result in negative cash flow.

You did not indicate the worth of the property but I am assuming $200K profit with only 6 years left on the mortgage implies low leverage).  So I am assuming the house is not worth ~$1m.

#3 and #4 are not leveraging your money.  If you are in a capital preservation mode which is typically reserved for the very wealthy were it can make sense but it does not seem right for your post.  In addition, you have quite a bit of equity to be cash flow breaking even (against #3).  Because you are not leveraged you need a large appreciation for a decent return on that investment (versus if you only had 20% equity then 5% increase produces a 25% return for the year but at a 50% equity 5% produces a 10% return for the year)

Of your choices, #1 using a 1031 seems your best choice but you are not a beginner RE investor and it is not clear where you live as your primary is not in So Cal.  So I question why limit yourself to So Cal (and I am a big advocate of  So Cal newbies start locale)?  Definitely I recommend you leverage that money better than you currently are and only #2 (which likely produces negative cash flow) and #1 leverage that money to any extent.

Good luck

I do not know if we are at the price peak but what I do know is

1) the peak is very hard to predict

2) virtually every past peak in San Diego would seem like a value today

3) That rents typically lag property appreciation,  That combined with the current rental shortage and wising minimum wage make it seem highly likely that San Diego rents will appreciate for quite a while.

4) I recommend all newbies start local, self managed, ideally house hacking.  The local and self managed is primarily for the learning opportunities.  Local is where your expertise is and requires less trust of your team.  Those learning opportunities can be leveraged later to prepare you for bigger and better RE investments (either local or non-local).

I purchased near market highs in 1993 and 2004 (both purchases were down near 20% at one time).  Both those purchases look great today.  Make sure you are not over extended and need to sell when the market is depressed and you will likely have a successful investment even if purchased at a market peak.

Good luck

 I believe we are in agreement on likely good intentions but with some flawed logic.  I suspect education on the dangers of changing things related to electrical would have been more beneficial.  

 The rents were 2000 pound (almost $2600) for 2 BR units. Is that low income apartments?   Serious question.  Maybe it is in London.  I had not heard it described elsewhere as low income apartments.  

I suspect someone replace 15a circuit when th 20a circuit, over loaded the 14g wiring not rated up to 20a and not triggering the incorrect 20a circuit breaker resulting in a fire.  

To ensure no one could break code by putting 20a circuit on wiring that could not handle 20a they made rule that would make is so that it could not occur.  If my theory is correct someone broke code resulting in this.  Such a person who would break such a code (use wrong size circuit breaker) is not more likely to use 12g wiring because the code calls for it rather than the cheaper 14g.  

So I suspect the intent was good but the thinking behind the intent was flawed.  

By the way when I was younger working to restore houses for sale it was not irregular to see pennies used instead of fuses in the old panels. I think education could help rather than codes in some cases.  Again assuming my theory was correct it is possible the person putting 20a switch were there had been a 15a switch was trying to address it constantly tripping because circuit was overloaded and unaware what he was doing was dangerous (or even that different gauge wiring is used in a house). 

 I reference the Oakland fire as building code are needed to help ensure safe housing.  

Having said this it seems strange that I can keep my old small windows that met code when built (but no longer meet egress code) but if I replace them I need to meet the new egress code requiring larger windows.  So my choice is old, poor, crappy, energy inefficient windows or larger (supposedly safer for egress) energy efficient new windows that require new framing, drywall, paint, etc.  Clearly new energy efficient windows of the same size would be an upgrade and no more dangerous than the existing windows.  I was tempted to keep the old windows in the bedrooms and replace all the other windows.  

 I suspect being a GC can save you some money. 

I never assumed you were new at this but I am assuming that you have not actually filled out cap expense estimate spreadsheets on most of your units.  

$5k kitchen remodel at 20 years is $20.83.  $2k furnace at 20 years is $8.33 for a total $29.  I used the lower range of your lifespan.   Maybe I should have used the middle.    

I never indicated my foundation issue was not caught at inspection (it was) but also you do not know if the unit was owned 30 years before encountering the foundation issue (not in this case). 

My step brother had a foundation issue that was over $20k that was not caught at his inspection and occurred ~15 years after purchase.  His home and all homes in his area were built on infill sea sand.  Within just a handful of years of the first house in his area having the issue the cement in foundation failed due to sea sand on every house in the community.  When he purchased it (15 years before his problem surfaced and more than 10 years before any of the properties had issues) it would have been very difficult to catch by inspection.  

nothing on a new house will last forever.  If you purchase a unit with 10 year old furnace and use 25 year life span your cap cost for the furnace and $2k replacement you should be using 15 years of the life left (expected cost per month until replacement). 

Again I just want newbies (not implying you are a newbie) to determine their estimated cap expense and not to use $100/month unless that is what the calculations show is appropriate. 

Ducting put in 30 years ago was single wall and very inefficient.  Typically the louvers are permanently stuck into position and often have multiple paint layers.  Even using your estimated cost and initially provided life span on those 2 items make clear that $100/month will not suffice.  Also if you get 50 years out of a rental kitchen that will be amazing (I think your initial provided lifespan is more realistic).  

Most landlords never  do the exercise of calculating a true estimated cap expense.  They use numbers sourced who knows where.  My spreadsheet has my cost estimate and a min and max lifespan (for kitchen I use 25 year max because cabinets need work by then and painting does not save as much over replacing as you may think especially when taking into account the lifespan of the painted cabinets versus lifespan of replaced cabinets) and the counters are usually in real poor shape before 25 years.    

I know what my spreadsheets tell me.  When I first did this exercise a few years ago I posted my findings on BP San Diego forum.  I was hoping for more discussion than resulted but in general landlords who had been in buy n hold many years were less surprised by the findings than ones who got in since the 2008 crash.  

You are not the only one to think my numbers are conservative but San Diego investors who participated in the post did not find my numbers to be excessively conservative for San Diego. 

I think posting a $100/month cap expense may impart on newbies that this is a realistic scenario. If you go through the effort and it shows a true $100/month cap expense estimate 1) great for you 2) yours will be significantly lower than anyone has shown me for SFR 3) any newer landlord should realize that you are extremely efficient, maybe doing all the work yourself, and to not budget this low. It is mostly for item #3 that I spent the time to show just your 2 fairly low expense items add up to $29/month with your initial numbers.

My worse actual cap expense to date on a rental (not an estimate but actual cost) was ~$30k foundation issues.  At $100/month this one expense could use 300 months (25 years) of your allocated cap expense.  

My worse actual cap expense on any property I own was $41k (in 2003 dollars) when the city mandated my residence hook to sewer rather than use septic (drainage in high rainfall years was shown to be inadequate with sewage rising to surface).  

Hopefully you never experience these extremes on actual cap expenses but they can happen. Newbie investors should use much higher cap expense estimates than $100/month for SFR (my primary point).

Good luck. 

No AC, just furnace?  Maybe a wall mount furnace with installation for $2k.  I cannot see installation of furnace with ducting for $2k unless you do the work yourself. 

 Your kitchen expense using your cost n life span is $21/month for the kitchen alone.  The furnace at $2k is $8/month. So those two items are $29/month cap expense using your costs n 20 year lifespans.  $5k will be a cheap kitchen but maybe if real small and done on a tight budget (definitely no granite).   That still leaves roof, flooring, windows, landscaping, fencing, hardscape, plumbing, foundation, bathrooms, stove, refrigerator, paint, framing, siding, etc.  Even if all your numbers are as cheap as a $5k kitchen I cannot see it coming in close to $100/month (you are almost at 1/3 of it on 2 long life items - flooring is often a killer, in my unit refrigerators are higher than one would expect).  

 I do not agree.   Thinking that cap should not start the moment after remodel is interesting and I have heard it before.   But what it implies is because everything is new I will not use a cap expense estimate but when the items then start to age you need to back load the cap expense estimate.  So you artificially show too low a cap expense estimate (maybe $0) after remodel and then an inflated cap expense after a certain aging.  When does this cap expense estimate start due to the aging?  Basically I claim the life has started at the moment the cap expense has occurred and not doing the estimate this way will yield interesting cap expense estimates.  

Now compare it with this way to do it.  Create a list of all cap expense items and placing current cost to address and your expected lifetime of item (ex HVAC $5k,15 years; kitchen $7k, 15 years; roof ... hardscape...; foundation, fence, windows, flooring, stove, refrigerator, hot water heater, paint, siding, landscaping, electrical, plumbing, etc).   Cost/life span In months produces cap expense estimate on that item. Add up all the cap expense items to get the unit cap expense.  It will show $100/month will not cover a sfr.  I know what the numbers show for my sfrs (hint 2x your estimate is significantly too low on my SFRS).  

Alternatively stay in REI buy n hold business long enough and with enough units and use actual cap expense costs adjusted for inflation. My family has been doing this since mid 1970s and I do not have enough data to feel comfortable using this method. But it could produce accurate numbers with enough units. I would think 500 units and 2 years if the units are wide range of ages (hardscape lasts a long time (30 years for asphalt, cement maybe 60 years) but is expensive, ditto foundations) could suffice.

If you do the exercise please let me know what your numbers produce.  

Good luck