All Forum Posts by: Dan H.

I search for poway n RB duplex to quad but have yet to close.  The last one we offered on we came in aggressive with offer $20k over ask and did not get a response. 

So we are largely in escondido with a few others scattered about.  Escondido started because it was close to our home in Poway and provided better initial cash flow than most other locations in San Diego.  My most recent purchase (oct 2017) has positive cash flow at purchase.  A surprise has been how easy the tenants have been to manage and the appreciation.  Redfin shows our escondido market appreciated 17.5% in the past year (this is significantly higher than San Diego county as a whole).   In the last 5 years the lowest has been 8% and the highest over 20%.  

It also is an area where many of the units offer sweat equity opportunity.  If we purchase near retail but there is $50k sweat equity opportunity we are ok paying near retail.  

I suspect other blue collar areas can produce similar results so the deciding factor was close to us.  Of our 3 local properties that are not in escondido 2 have management (if I include my brother as a PM on the Pt Loma quad).  Escondido is 10 minutes away.   Easy to self manage those properties. 

I am not disagreeing the flipping is faster than BRRRR. However, flipping is a job. Quit flipping and there is no more income. Similar for wholesaling or RE agent/broker. They are jobs.

If you want to create a low effort income stream (I would not refer to even buy and hold RE as truly passive) then BRRRR is a good approach. My big concern is the RE you are starting with. I have one of my ex-homes in my RE portfolio. It is by far my worst performing property. Why? Because it was purchased to be a good home for me and my family and not to be the best investment RE. In general, SFR will never cash flow as well as duplex to quad.

What I did not see is your cash flow projections (ROE), COC projection.

I suspect that this property is not the best candidate for BRRRR (Refinance versus selling) but best to sell it. The best BRRRR are properties that project near top of market cash flow per cost, have a lot of sweat equity (the more trashed the more sweat equity), and ideally are in a rising area (ideally has both rent and market appreciation).

Good luck

I am very pro San Diego RE.  I am even more pro on newbies invest local.

In your case you live in a market that historically has produced one of the best ROI in the nation and you are considering investing OOS. Into what? If it is not a large MF what is the point?

Lets say somehow you end up with an actual cash flow of $200/month per unit (look at all cash flow projections with a critical eye as in general they are fantasy - many do not even include Cap ex estimates).  How many properties would it take to achieve what you are trying to accomplish?

Redfin placed my primary market appreciation at 17.5% last year.  This is at least the 6th year above 8% with a high above 20%.  Do the math to determine how many units I need to own in high cash flow OOS to match the profit from a single unit in my primary investing locale?

There is no path to riches via smaller volume purchases in high cash flow locales.  Sure 100 units purchased without any true MF (5+ units) at $200/month unit cash flow is good cash flow but even that will not index with inflation without sweat equity and it may not be enough cash flow to retire in San Diego with the life style you desire.

Local can leverage your local expertise.  Does not require building and trusting an out of state team.  Provides the possibility to self manage.  Self manage provides great learning opportunities.

Do you know anyone who has been invested in San Diego RE at least 5 years that has not done well?   Think hard and long about going out of state.  Realize the cash flow projections are mostly fantasy.  See how many of them come close to the 50% rule which I think is fairly accurate for lower rent values.  If the projections are not close to the 50% rule run because their numbers are fantasy and either 1) they are liars or 2) they do not know enough about true costs of small unit number expenses (apartments with larger number of units can do far better than 50% rule even with lower rent values - economy of scale) making them inept.

Get more experience local.  If you then go OOS (after having more experience and likely more capital) do not think small, go commercial MF.

BTW we have tried some OOS (not much: 3 units total) and it did not work great for us.  We did not lose money but we did worse than our worst local RE.  Even with a PM it ended up taking the most time of our RE investments.  We still own one OOS RE unit.

Good luck

I am very pro San Diego REI investing but I am even more pro for newbies to invest local (i.e. in your case OC).

There are a lot of similarities in San Diego RE and OC RE. The entry price is high in both but that is because of outstanding historical appreciation. This is both property and rent appreciation. Both markets historically beat in ROI of almost every other market. This is true if the duration is 5, 10, 20, 30, 40, 50, 60 years; it does not matter what number of years you want to start the basis at.

I do not know your current living situation but knowing that I am pro investing local this is what I would do: 1) Look for a detached duplex local (in OC) that has sweat equity but can still qualifies for an FHA loan. 2) Purchase the detached duplex using the FHA loan (at 5% of FHA down your $50K will go a long ways) and house hack the duplex living in the more thrashed unit 3) Rent the "bettter" unit while referring to yourself as the Property Manager (not the owner) 4) while you live in the more thrashed unit I would work on earning the sweat equity (rehab the place) 5) when done rehabbing the more thrashed place I would consider if I want to keep the tenant of the other unit. If I do, I give him an opportunity to rent the newly rehabbed unit just below market rent. If I do not desire the tenant or he does not want the increased rent I look for a new tenant for the rehabbed unit. 6) I move into the not rehabbed unit and start rehabbing it. 7) when I am done rehabbing it I refinance it pulling out hopefully all of my invested money (using contractors I usually get my down and part of my rehab cost but if you are doing much of the work yourself I think you may be able to get out all of your invested money 8) Use all that knowledge you have obtained to do it again with less mistakes trying for that homerun investment (I think most experienced So Cal RE investors have the Homerun deal: the type of deal you can potentially retire on).

Here is also something you may not know: Commercial RE loans (5+ units) are more based on the numbers of the property than the numbers of the investor.  Granted you would need to find some partners because in the OC market it is too competitive to find the deal that would allow a low down payment option.  I point this out not because I think this is where you should start as much as pointing out the loan qualifications are different.

You live in a market that has historically produced some of the best ROI numbers in the nation and you are looking to invest elsewhere. Think about what you know of OC and San Diego appreciation. What was the rent when you were young? What did your parents pay for their first home? What did homes cost 5 years ago? 10, 20, 30, 40, 50 years ago?

BTW I have purchased near market highs twice.  Both look great investments today.  Do not get over leveraged so that you need to sell when the market is depressed and historically you will do great.

I have also purchased an RE at near cash neutral.  I cash flows great today.

My point is that I know the arguments against investing in So Cal but I have first hand experience with most of the arguments and it has always worked out great for me.  Here is the final case: My money goes to what I preach.  My last close Oct 2017.  I continue to look, make offers, and occasionally close on So Cal RE.  I expect to make an offer this month or early next month.

Good luck

@Ross Y. 

Most of my rentals are in escondido.  I agree with your assessment of the market as it seems to have highest rent vs purchase in ok or above area in San Diego.  Old Escondido is nice.  Have you gone to Cruising Grand?

As for your last question: I am used to it all being handled as part of the escrow.  The prorated rent, the deposit, etc.  I doubt you can keep deposit from the front tenant to pay the back tenant his deposit back unless the deposit was meant to be for both units.  You may need to eat this one. 

I have little time but would like to network more than I have.  Maybe a mutual drive by each other’s Escondido properties at some point in the near future.  

Good luck

I am not an attorney but my family and I have been landlords a long time.  Knock on wood, we have never had to complete an eviction.  

Here are issues to consider: 1) a granny flat cannot be legally rented without owner being resident.  This may mean in effect the 30 days notice to primary may automatically apply to granny flat. 2) I believe there is never an abandonment if they are not arrears of the rent.  It does not matter that they are moved out.  3) they legally have 30 days.  You cannot start eviction until after that time.  

Unfortunately evictions in CA are sometimes difficult.  However there also is a low rate of evictions because rental demand is so high that most landlords do not accept tenants who have been evicted.  This means that a tenant who is evicted will have issues finding a nice place to live and therefore they want to avoid being evicted. 

Do not change the locks without consulting an attorney. Do not take possession of the unit early without consulting an attorney.  

Unless an attorney tells you otherwise I believe your hands are tied until 30 days after closing.  Ideally everyone has vacated but if not you should immediately start eviction.  You may also want to consider cash for keys.  

Not to scare you but there is a thread on BP of an experienced Ca landlord that has been attempting an eviction for years. I have not read it in the last 6 months so maybe his nightmare eviction is over.  

Good luck

 By value your statement is not true.  It has been a few years since I saw the numbers so I do not remember them exactly but Ca was near the top (or the top) in OOS ownership by value for all properties.  However I suspect most of that value is in commercial properties and are large investors. 

 I personally use a lower vacancy number (5% which so far is greater than what I have ever experienced if I do not include rehab time in vacancies) and a significantly higher maintenance/ cap expense but know that I use a higher number for these expenses than many investors.  To be more precise I use a cap expense number higher than most investor but I have spent time calculating it.   I filled out a spread sheet of various expense along with range of life span.  Then used the midpoint of life span to get the cap expense.   Example if new water heater p,us install is $1200 and expected lifespan is 150 months (12.5 years) then monthly cost of water heater is $8/month.  

Realize that not including the PM means you are taking on a job that is worth $1790 * 12% = $214.   There are two reason this is important.  1) if you ever choose to use PM this is the expected cost which will reduce your cash flow 2) you in effect are doing work worth this amount.  This implies the return on this investment should not count the cost of the PM because this is money that you are earning and should be paid to yourself.  This is different than investment return which is gain that is more passive such as with the use of a PM.   So my view is that whether you plan to use PM or not, the expected cost should be subtracted when calculating cash flow.  In reality, I run my numbers both ways if I plan on self managing so get 2 cash flow numbers realizing that one includes cash flow from a job that we are taking on.  

Good luck

Some thoughts:

• Deal analysis is best done local.
• Deal analysis must include expected tenant class (Class B is a lot different than Class D).
• Investors should always strive to obtain below ARV. I realize in hot markets it may be difficult but I would be hesitant to call a purchase where cost is above ARV ever a deal.
• I would like to see the break down on monthly expenses better broken out.  My view is a lot of newbies under estimate on-going cap ex.  I did numbers on just a water heater at $8/month cap expense.  I see a lot of cost estimates that leave off cap ex estimates with various rationale.  One of my favorites is everything is rehabbed.  Of course we all know the life of the newly rehabbed items starts as soon as placed in service and if that cost is not evenly distributed then it will build up at the end eating up potentially years of "cash flow".  I can not see if it includes PM costs.
• Monthly cash flow of $266 is not great. What are the odds that it increases? decreases? Does not go up even at the rate of inflation? If this is self managed you are taking on a job that a PM would charge close to $200 for (PM on SFR I have read is ~12% when including all costs such as re-up, find new tenant, contractor add-on, inspections, and monthly fee). So if the $266 is cash flow not including PM then you have your money invested for less than $100 when accounting for the value of the work for PM responsibilities.

In my market at a rent to cost ratio of 0.75% or greater I can be cash positive but on a 4/2, >2100' I would have a rent or ~$3200 in class B areas.  Higher rent makes fixed costs items a smaller percentage of the rent.

In summary, I think there are a lot of things to consider when you evaluate a property (class of tenants, appreciation/depreciation odds, other investment options, etc.).  Many of the things to consider are not obvious with the numbers provided.

Good luck

I suspect on average you will achieve greater wealth accumulation on your VA RE than the higher cash flow properties in Memphis. Knowing that the units are $40 to $60K what sort of appreciation do you think they have had in the last 20 years? How about in your lifetime? Do you think their appreciation could have averaged faster than inflation?

As my replies indicate I am not a fan of investors from high price areas investing in small occupancy RE in the higher cash flow locales. Assume you can turn your $110K asset after selling costs into 3 Memphis units that each cash flow $200/month after realistic PM, cap ex/maintenance estimate, and vacancy estimate (a bigger challenge than it may seem because maintenance and cap expense do not vary that significantly base on the rent as much as the unit profile (number of bathrooms, square footage, etc.); cheaper rents have a higher percentage of the rent needed for cap ex/maintenance. Those 3 units will produce $600/month or $7200/year. A 5% appreciation on the VA property will produce $550 appreciation. Year 2 with an appreciation that historically is not greater than inflation the Memphis RE will produce $7200 (slightly more with inflation but $7200 purchase power). The VA home will compound its appreciation and because it is experiencing RE appreciation greater than inflation the rent will go up. You can see in just a few years how the VA property can easily be a bigger boost to your net worth than the Memphis properties.

Now realize that even with a PM the scaling of the number of units implies more work and effort.  3 units is unlikely not to be more work than 1 unit (assuming similar asset class - Class not lower than C+; I only recommend expert in slums try the D+ and below rental units).

I would not choose the historically low appreciation markets but if I did it would only be for MF+.  100 units at $200/month cash flow can be significant even if the cash flow only increases at the rate of inflation; this likely provides a very nice life but probably not financial freedom especially if you are living in San Diego.  500 units with that cash flow most people would have financial freedom.  Seeing the number of units financial freedom requires I hope makes you realize the difficulties in achieving this using small occupancy properties in the virtually zero appreciation markets.

Good luck