All Forum Posts by: Dan H.

Note max leverage on a convention refinance is 75% LTV. Most ELOC on investment properties have similar constraints (when they can be found). It does not seem extremely bold to refinance to a 25% stake but I have not reinvested all of my RE profits back into RE so it is easy for me to say that.

I see your point on high rates could make it less desirable to take money out whether via ELOC or refinance but for the last over 20 years the interests rates have either lowered or been near historical lows. This could end at any time but it is also possible that a cash flowing property ceases to cash flow. In the last 20 years I am confident there are more areas that have ceased to cash flow (areas like Detroit if purchased near 2008) than there have been rate issues refinancing or using ELOC to get appreciation out of a property (because there have been no significant rate issues refinancing in the last 20 years as long as you qualify for the refinance (i.e. are not over extended)).

Anything is possible but what you point as an issue has not been an issue in a long time but purchases less than 10 years ago that cash flowed have ceased to cash flow (not in all areas but it did get some expert/experiences investors: Ever hear of Mike Butler?  He wrote a good/great book (Landlording on Auto Pilot) and was successful for quite a few years but his market was Detroit). 

Not in my opinion because the money that you acquire spends the same regardless of the source of the money. I have never understood the source of the money being much of a factor.  Money in my account is money to spend/invest regardless of if it came from cash flow or appreciation and that money provides financial freedom regardless of the source.  You are not the first person I have seen with your perspective but I simply do not understand it (not saying anything is wrong with your perspective but no one has been able to explain it to me where I understand their perspective).

But lets look at cash flow on the theoretical $300K triplex purchased 7 years ago and for simplicity no money is taken out to leverage elsewhere (I would never do this but it keeps things simple). Let's assume for simplicity that all the costs (PITI, vacancy, maintenance, misc, cap expense estimate) matched the rent. Assume the rent was $3K which 7 years ago 1% was easy to find on small San Diego multiplexes so this rent is likely lower than reality). However, a 1% San Diego property that is conventionally financed would have significant cash flow but for simplicity we will call it cash neutral. If the property is worth $650K today what do you think the rents have done? I suspect they did not double (otherwise it would still be easy to find 1% properties and it is not). But do you think it is reasonable that the rents are $4.5K? I do believe it is possible to find $650K non-rehabbed triplex in class c area with rents of $4.5K so I think that is reasonable. So in this theoretical case you would have close to $1.5K of cash flow (the reason I state close is vacancy is a function of the rent so the vacancy allowance should have increased).

Again I find this scenario very conservative as it does not leverage the appreciation and it started off with a 1% property that we made cash neutral (a 1% property in San Diego that got conventional financing is doing significantly better than cash neutral but it made this example simpler).

Not bad for an initial investment of <$20K especially because in this example we were conservative in every area except for maybe the current rent (i.e. we did not use any leverage beyond the initial loan, we had a 1% property show as cash neutral which it would definitely be cash positive). I believe the current rent estimate ($4,500) was not conservative or aggressive but pretty accurate to market depending on the class C area (pretty accurate to my class C investment area).

Note that as the property continues to appreciate the rents are likely to also appreciate so the cash flow on this property is likely to increase in this example where no equity is removed (again it is not what I would choose to do but it works for showing the potential cash flow).

Compare that to an location that has appreciation that is less than or equal inflation. What sort of rent appreciation are you likely to see? I would expect none in inflation adjusted dollars. Assume you used the initial $20K to purchase a non-owner occupied SFR investment property (typically requires 20% down) that was $90K (some of the $20K was used for closing costs in the previous example) that cash flows $500/month (darn good initial cash flow and probably not possible on a $90K property but lets be aggressive here). What is your expected cash flow today? Likely $500 plus inflation adjustment.

Property appreciation usually has a high correlation with rent appreciation. Therefore, if you did not refinance your San Diego purchase you would probably have better cash flow today, due to rent appreciation, than most other markets would have today on a property purchased 7 years ago.

to number #1: I do not try to distinguish one source of profit from another. If the money is in my investment accounts I care little if it came from cash flow or appreciation and to be blunt do not understand why anyone would care. I try to keep my properties at 75% LTV so if I had acquired one property in 2010 and it went up $350K I would expect that I would have pulled out close to 75% of the $350K but I would have leveraged it to purchase the other properties. For simplicity lets assume I did not leverage it toward other properties but put it into my investment account. My net worth on the one property would have increased $350K but I could typically only obtain 75% of the total so I would have ~$200K on the one property in my investment account. Obviously if I leveraged it to buy more RE that performed similarly it would be much higher.

to #2: I am a strong advocate of investing local.  If I lived in a different local that provided cash flow over appreciation I would start my investing local.  After I had some success I would re-evaluate if there were better options but I never recommend someone start their RE investing not local.  So #2 does not apply because I would not start investing somewhere I do not live.

To #3: It depends on what you consider map out.  It is easy for me to see and prove that the original triplex would have more than doubled in value (I have a duplex that was not purchased 5 years ago that has doubled in value without any rehab).   Do you think it would be a challenge to leverage over $300K in profit (from just the one unit) into two additional small multiplexes?  In other words I tried to be real conservative on my estimate.  I reality I believe an aggressive investor would have at least 4 small multiplexes and maybe 5.

To #4: No I do not think the appreciation will continue at that pace and I think some of it was from the rebound.  So lets use some real examples of real long term appreciation in San Diego (all either mine or family purchases and all but one still owned).  1970: $19.5K, today ~$550k.  1977: $71K, today ~$800K. 1992: $167K, today ~$550K.  1999: $490k, today $1.3M.  2004: $751K, today ~950K, 2012: $302K, today ~$600K.  2013: $490k, today ~$700K.   I am leaving one purchase from ~2002 out because I do not recall the price paid as well as leaving out the acquisitions in the last couple of years (too recent).  Some of the purchases were purchased near market highs (1992 and 2004 both were down ~20% at one time) but they have all done well.  That is because San Diego has over 50 years of long term appreciation but in that time there have been cycles of depreciation.  So I do not attempt to know where San Diego prices will be 5 years from now (short-term) but I am quite confident that 15 years from now the prices with have appreciated more than inflation and more than most other locations.

First I want to commend you on realizing that there is a cap expense and that if you do not attempt to estimate it across every month your not providing an accurate cash flow forecast.  As soon as I rahab a unit the lifespan has started on everything I just replaced.  If I do not take the cost divided by(expected life span in months) starting at the first month I would need to do something like this later on: cost divided by (expected remaining life span in months).  What it would do is artificially make the early months that I included no cap expense look better than reality and it would make the months after including the now inflated cap expense look worse than reality.  You should attempt to estimate the actual cash flow as accurately as you can but realize sometimes that 10 year water heater will last 10 years and a month and other times it may last 20 years (so it is all your best estimate).

A couple/few years ago I filled out a cap expense spreadsheet for my expected lifespans and costs.  My units are in San Diego (one exception) and therefore the costs might be higher but so will some of the life expectancies (virtually no water damage, minimal heat related issues, ... basically a mild climate).  My spreadsheet showed that cap expense here (and I admit I tried to error on conservative) was ~$250/month for a 2/1 attached unit.  Kitchens in San Diego have around $50/month cap expense (a lot to go wrong in a kitchen (refrigerator, stove/oven, garbage disposal, dish washer, plumbing, etc.) and typically need full rehab at 15 to 20 years).  Another way to look at it is spending $7K (today's dollars) rehabbing a kitchen every 15 years provides $7000/(15*12) = $39/month expense.  Granted 15 years is the beginning of my life span time frame for the kitchen rehab  (ideally I want 20 years out of a kitchen rehab) but that $39/month did not include the items that are very likely to not last 15 to 20 years.  Who has a 20 year old refrigerator and if they do are they saving money or losing it due to energy use and repairs?  ditto the dishwasher or garbage disposal.  Maybe you can get 20 years out of a stove/oven but I would not want to rely on it.

Then add in big expenses like roof, foundation, plumbing (whole house re-plumb), electrical (whole house re-wire), hardscape (driveway), windows, etc. on top of the smaller expenses like landscaping, fencing, painting, water heater, flooring (carpet is cheap but does not last - other options cost more but likely result in lower cap expense: We have no carpets in high traffic areas), etc.

I will be surprised if anywhere in this country could have a true expected cap expense of $125/month. My expectations, without actually trying to calculate it, is that it would be challenging to have a cap expense below $200/month anywhere in this country for a detached 2/1 SFR that has a yard.

Therefore your fairly low cash flow estimate I expect is higher than the estimate should be.  If you subtract off at least $75 from the cash flow would it be worth the effort/risk?  That is something only you could answer.

Good luck.

If you house hack using a FHA it would take almost $20k including closing costs (maybe a little less). With $10k you would need to find non traditional finance options such as owner financed which is difficult without committing to above market rates.

I do not understand your belief. 7 years ago you could purchase a triplex in c area in San Diego for $300k. Assume you house hack the purchase using FHA at a cost of <$20k including closing costs. It likely would have been close to 1% rule. If you used the cash flow you could save for an additional purchase. the San Diego appreciation those years was between ~10% and just over 20% (last couple of years around 8%). Using the cash flow and any extracted appreciation you could purchase another multiplex unit. I think that it would not be a stretch to think you could have acquired 3 small multiplexes in the 7 years. The initial unit would be ~$650k today. The other properties would have experienced similar appreciation rates.

I cannot see cash flow on a $20k REI having produced ~$350k not including any reinvestment of the profits. Of course the smart investor in both markets would realize the profits and reinvest resulting in much greater than the $350k profit in San Diego.

Building processes and a good team takes time.  In addition the team needs to be maintained. 

At one time I had a good team but due to turn over my team is not asgood right now.  In particular, I suggest finding a good handyman.  This is where my once good team is now barely OK and I should spend some time to improve as my great ex-handyman is now a competitor (owns 5 units in my exact markets).

Managing properties can get easier but even once it gets easier it will not stay that way on its own.  However, it takes less effort to create/keep a decent team than it does to do this with no team or a poor team.

Team for maintaining (not including acquiring) buy n hold rentals should include: handyman (use him do everything he is qualified for as it will be cheaper than contractors), plumber (for items beyond the handyman), HVAC, painter (my painter on larger jobs is faster and price competitive with the handyman), popcorn ceiling remover, laborer, gardener, cleaning crew (low cost and good that can be booked on a week or so notice), mortgage broker (even in not acquiring you want someone looking at lower rates as well as potentially pulling money out), RE lawyer, a tax person.  Currently my team can use improvement at handyman (I consider a good, trusted handyman as very high on the list of important team members: I currently have a so-so, trusted handyman that seems to not like to work and is unorganized but typically not that busy and a good handyman that is so busy that he cannot handle any popup tasks) and probably a mortgage broker (I was not satisfied with my last refinances).

Similar for the processes.  You will get better at tenant turnover.  You will learn the best ways to deal with delinquent or missed rent payments.  By your 3rd or 4th rehab you will have some trusted contacts and have learned what works in a rental rehab and what does not work (carpets in high traffic areas are work on every tenant turn over).

If this is overwhelming than maybe being a landlord is not for you.  You could still be invested in RE by either using a Property Manager or by investing in REITs.

On the positive, you are invested in a traditionally high ROI market where a single property has a good chance to provide more profit than 5 properties elsewhere. The property is local allowing you to manage it to the extent that you choose.

Good luck and do not stress too much.

Do you look at what duplexes have actually sold for in the San Diego county (versus the prices on the MLS)? I see them sell in my market area near $400K fairly regularly (over $200K/unit on a duplex to quad implies either rehab, larger than 2/1 or large 2/1, or over paid for property). My ex-protégé purchased a detached duplex that had a 3/2, 2/1 and 3 single car garages for $427K fairly recently. I was presented a duplex (2/1, 2/1) in the last month that was decent size (>2000') at $405K that if I made an offer on my offer would be below $400K. I have never paid as much as $400K for a duplex but prices are going up so my next duplex purchase may be my first above $400K.

You can still find duplexes below $400K but they are getting a little harder to find.  Triplexes at less that $600K are a little easier to find.

San Diego does have properties that cash flow (I have been presented 3 in the last month) but do not cash flow like other locations.  

However, the ROI on financed coastal So Cal buy n hold units exceed virtually every other local whether you go back 10 years, 20 years, 30 years, 40 years or 50 years. This historically great ROI is why coastal So Cal RE commands the high price.

Due to this historically great ROI I do not understand So Cal residents choosing to invest out of state. I do realize that there are many So Cal investors that succeed investing out of state but the only coastal So Cal buy n hold RE investors that I am aware or that have lost money were over leveraged and forced to sell (or foreclosed) when the markets were depressed. Historically it has been difficult to lose money on So Cal coastal buy n hold properties.

Good luck  

The issue with owning the truck which results in a high DTI while living at home is that it shows no sacrifice and prioritizing success lower than giving up the good, easy living. No decent mentor will choose to have such a protege.

My last protege worked as a janitor while going to school to get his BS in engineering while supporting his family.  He worked as my handyman after hours and on weekends.  He constantly was requesting more work and he did great work with great pride in his work.  Basically he was exceptional (especially if I included the fully story - his story could be made into a movie). 

Today he owns 5 rental units in San Diego county, lives in a nice home and drives a corvette.  He made sacrifices to improve his life. Now he is living the good life.  

There are many people who want to learn from mentors. They are willing to make sacrifices far greater than selling an expensive truck to reduce DTI and to show commitment.

OP may succeed in RE but I think it is unlikely. He is unlikely to get a decent protege due to not showing enough commitment. He is unlikely to get as early or as large a start as possible due to too high DTI. Basically his decisions are handicapping his chances. He is competing with others who would make much larger sacrifices to succeed.