All Forum Posts by: Dan H.

I agree with @Russell Brazil on more expensive units have less than 50% costs but ran the numbers from my most recent purchase (last Oct) using my cost estimates (the same cost estimates that I used in determining to purchase the property).  My purchase even with my estimated costs did not meet his criteria if using a PM (used average national full PM costs).  In reality we are the PM on this property and do not have that expense but agree that PM fees should be included in cost analysis.

I ran the numbers using the 50% cost ratio on my most recent purchase and came to 4.5%.  Seems poor.  However, the rent on the property is $3200/month.  Do you really think I will have $1600 expenses (50%)?  5% vacancy ($160), $400 maintenance/cap ex estimate, 12% PM ($384) , Misc $100 = $684.  Estimated expense to rent = 21%.  Run the same formula using 21% instead of 50% increases the number to 6.9% which still falls below OP 7.5% target.

Would I have paid this much in 2010 to 2014? No way. Do I believe the property is positive cash flow at 80% LTV? Yes. Do I think it is a lot of cash flow? No! Do I think it is a good investment? Depends. If I compare the expected return to the quality of RE investments from a few years ago then no. If I compare the expected returns to other investments available today, I think so but admit that it needs some long term appreciation (rent and property) for it to be a good investment. It is in San Diego county which has outstanding historical appreciation, a rental shortage, projected rent increases (every study), huge supply issues, rising minimum wage and wages in general, property tax protection, a cost to break ground on a SFR that is ~$100K. I think in 10 years it will be worth more than at purchase. I think less than 5 years from now the rent will be above the $3200. If I am wrong then it may not have been my best investment option.

Have I lowered my standards?  No doubt.  I would never have paid this much for this property 3 to 8 years ago.

Good luck

Seven of our units are actually extended family units owned by step dad. 3 of those units use professional PM (2 STR and one OOS). Of the other 4 units they are mostly managed by my brother except the finances. Basically everyone helps where they can but the official PM has to be my step dad for those properties because he is the owner.

We are not looking to take on additional PM duties or provide ownership interest in our units so I have not looked into it but based on your synopsis I would feel fine at a 5% stake. To me that still qualifies as owning. 

@Jeffrey Holst I think you explained it fine.  I am going to assume your cap ex estimate is in reality a maintenance/cap Ex estimate as I saw no maintenance (I combine these myself but use a much larger number).

My point was that your criteria leaves out the key variables related to quality of property and location.  I could achieve your numbers easier in a class D area than a class B area.  However, I am unsure that I would expect the actual returns on the class D area to be better than the actual returns on the class B area.  Projected returns and actual returns do not always match and my belief is that the lower class of the area the less likely projections match reality.  In addition, I expect the class D property to be a lot more work than the class B property.

>obviously if I have a choice between a A class at 1.75 and a C class at 1.75 I take the A class

This is my point.  If I used only your initial criteria to purchase I will mostly be purchasing in lower class areas.

What I suspect, but was not stated in your post, is that you use your criteria in only a certain class of areas/properties (maybe C+/B-) so that it works for you to be a quick initial screening process.  The point of my reply was that there area a lot of newbies.  They see rules like the 2% rule and think hooray I just found a 2% property.  What they fail to realize is that the properties that come the closest or exceed the 2% property are typically in the worst areas that most experienced RE investors avoid (exception for those that specialize in rough areas) .  I see your criteria could lead newbies to the same issue.  Newbies are typically the least prepared for lower class properties; the RE in lower class areas are work.

I am a big proponent of newbies investing local to where they are located regardless of cash flow and entry price. I realize Walnut Creek has a fairly high entry cost but some of that can be negated by house hacking a detached duplex. As owner occupied you would have a significantly lower down payment percentage and a lower rate. In addition, Walnut Creek has great historical appreciation which can help with ROI.

Do you know why a location like Walnut Creek has a high entry price?  1) it has a long history of appreciation 2) the demand is high with respect to supply 3) the investors expect a high return. 

If you were in a low appreciation but high cash flow market I would recommend you invest local. The cash flow is easy to access but is unlikely to produce the ROI of the historically high appreciation market.

The primary reasons that I am a big proponent of investing local are 1) the learning opportunity that comes with self managing a property. This knowledge if so valuable. As Rich Dad Poor Dad indicates the knowledge is priceless and there is no way investing OOS with a PM you obtain the same type of knowledge 2) requires less reliance and trust on others. You are in control. You will be much better prepared to build that killer team for OOS after you have acquired certain knowledge that is best learned hands-on 3) Local provides the potential for owner occupied which has better loan terms (lower down payment and lower rate). 4) Local provides you the best opportunity to be an "expert" on the area.

So if I were you I house hack a detached duplex acquiring as much knowledge as I could. After I have a little experience I would consider if I was ready to take on the challenges of OOS RE investing.

Good luck.

My strategy would be to hold it until at least the market is no longer depressed.  Try to never sell in a depressed market.  You try to purchase in a depressed market.   Most depressed markets have been less than 5 years in the high appreciation cities.  Do not over leverage and there will be no reason to sell in a depressed market.

Interesting thought but I will propose something for you to consider: A class 4 BR/ 2 BA, 2000' in an A class area provides a 1.3X and a different 4 BR/ 2 Ba, 2000' in a class C area, class C property produces the 1.5X.  Both are geographically in the same vicinity.  The A class property has $1K "cash flow" (using your definition of cash flow) and the C class has $1K "cash flow".   So your criteria would have the class C being the one that would be purchased.  Which do you think is likely to produce the better actual cash flow?  Note in reality I am likely underselling the "cash flow" of the class A property because to produce 1.3X on an assumed much higher purchase price it would produce better than the same "cash flow" as the C property (otherwise it would not have achieved 1.3X).

Many of the repair costs are similar for an A property versus a C property.  Basing maintenance/estimated cap expense on purchase price or rent price has flaws.  In general the A property will have better tenants likely reducing damage and wear and tear.  In additon the A class property will have nicer quality items providing longer expected life times (what is the life span on travertine tile: 50 years?).  The A class will require nicer kitchen, bathrooms, flooring, etc. so there is definitely an increased cap expense estimate partially offset by increased life spans.  However, items like plumping, hot water heater, foundation, structure, etc. are very similar regardless of the class of the property.

BTW I did an analysis of my RE and only 1 property that I owned more than a year did not meet your criteria today.  I suspect most did not meet the criteria at purchase. 

Just hoping for appreciation is for people who do not want to bother to study historical data, supply and demand, vacancy rates, income increases, cost of building new supply, population growth, etc. There are markets that in over 70 years do not have one 10 year span anywhere with a net decline. Some of these markets it costs >$100K to break ground on a new SFR. I can say with a lot of confidence that I can research a market and provide more basis for it having a higher RE value 10 years from now than a Midwest market can provide convincing evidence that their rents will not fall like Detroit did in the Great Recession. I do not consider investing in these types of markets any more speculation than investing in a Midwest cash flow market.

As for getting money out ... You certainly do not need to sell. You can try to find Equity Line of Credit but they are getting more challenging to find on rental properties. however, as long as rates continue to be low a refinance works for getting money out of a place that has appreciated (either marked appreciation or forced appreciation). Refinance is a key R in the BRRRR process.

I agree with the posters that indicated 12% COC is not enough in a 0% appreciation market. It is too close to the returns of S&P 500 to justify the effort. Because there is no compounding (i.e. the rent is unlikely to increase) my return on the S&P 500 (with compounding) will surpass the cash flow RE property given time.

One thing to note that I did not see mentioned above is the 0 appreciation market typically has 0 rent appreciation. This in effect means that the return is decreasing by the inflation rate. The high appreciation market may have 3% COC upon purchase but if the property appreciation is 6%/year you can expect that the rent will appreciate. 5 years from now when the RE has appreciated ~34%(assuming the projected appreciation actually occurs) you can bet the rent will be higher than at purchase and that the cash flow will be higher than at purchase.

I do not need cash flow from one property for my living expenses as I have my cash flow from previous RE purchases and my other investments.  I would take your scenario 2 every time.  Not only would I, I basically have.  Most of my RE investments have been in a high appreciation area that provides minimal cash flow (compared to Midwest locales) upon purchase.  I will add they cash flow outstanding today.  One purchase cash flows annually more than I invested at purchase and it was not a cheap property with a real cheap down payment; how is that for cash flow?

I will add that even historical high appreciation markets have RE declines (typically less than 5 years from peak to new peak). Anyone who invests anywhere has to be prepared for market depreciation. If you have minimal cash flow you need to be sure that you are not relying on appreciation to meet your financial commitments.  Selling when the market is depreciated is the only way for investors in some of these high appreciation markets to have lost money.  Any RE investor needs to make sure that they are not so leveraged that they may need to sell when the market is depressed.

Good luck

Note I am not an expert on LLCs but I pay for experts to provide us guidance.  Based on that guidance I will describe what we have done.  Realize your own experts may provide you guidance that leads to a different decision.

In CA the LLC is $800/year. We pay the fee but we do not expect that it provides any real asset protection because our properties are not owned via the LLC. So we pay the $800/year for the name H3 Properties LLC and because superficially it looks like the properties are in an LLC. If the appearance of being in an LLC prevents one law suit it is well worth the cost but it may not ever prevent a law suit. If a law suit is filed we are not relying on the LLC for any asset protection.

We use an umbrella insurance coverage for our asset protection. It is easier to use as LLCs have requirements like separation of assets (personal and LLC assets are to be separate) in order to not be pierced for asset protection. Typically SFR to quad are purchased via conventional financing. Good luck trying to get conventional financing for a property being purchased by an LLC.

For asset protection an umbrella coverage is almost idiot proof.  To raise the coverage amount the cost of coverage goes up slowly (I.e. $10M coverage is no where close to 10 times the cost of $1M coverage).  We have enough coverage that we cannot fathom a lawsuit seeking more damages.

Good luck

Have you considered just adding a subpanel with a submeter?   I suspect there is a small number of electrical runs from the primary unit to the secondary unit.  Run them to a metered subpanel.   I have had subpanels added but not a metered subpanel.

I do not know how much a submeter is but I know that the inverter for my solar has a submeter (I.e. I can find out how much power I generated as well as how much power I used).

Of course the utility company would not read the submeter.  In some locations in Germany they have a meter for water for entire property and a submeter for water for the garden/yard.  The sewer fee is based on water that is not for the yard (water into house - water used for yard).  The property owner reports the water use on the submeter.  I suspect there is an occasional verification that the reported submeter water is accurate. 

Good luck

I thought it was a fair approach as people with large yards in US where sewer fee is based on total water use pay more sewer fee than what they use.

I am not anti-stocks; I consider stocks to be the easier money.  However to significantly beat the indexes takes a lot of time doing research that does not interest me.  To beat the indexes you are not only are competing against investors such as yourself but you are competing against asset managers whose full time job is to try to beat the indexes (and they only have mixed success doing so).  So most of my stock is in index funds.

For me RE is more hands on but I also have more passion in that area.  In my locale of expertise for my selected product I am one of the experts.  The appraisers for example typically have not seen most of the comps; I have.  I can tell when a product in my wheel house in my locale hits the market the amount of time it will take to sell.

Some of my stock assets are due to using stocks to place RE profits waiting for the next RE purchase ...

My ratios: Stock: 43%, RE: 43%, North Dakota Mineral rights: 8%, Cash and bonds: 5%.  For my age I am high risk investments (i.e. my stock holding is much higher than recommended with respect to bonds).  

Basically invested evenly on stocks and RE as percent of our net worth. 

I have made significantly more money from my RE investment per dollar invested but I have also spent significantly more time on RE investments per dollar invested.