All Forum Posts by: Dan H.

As an investor, A has concrete rationale rather than more abstract things such as like the area.  

If you invest using your head, A is the obvious choice.  

If you invest with your heart, B is the obvious choice.  

I suspect investing with your head is much more likely to be a good investment but sometimes you have to do what the heart wants.  Life is short!

Pick one that is right for you and never question the choice. 

Good luck

As indicated a sfr purchased at retail today would not cash flow and duplexes to quad purchased at retail would not have much cash flow if any. 

However a few years ago duplex to quad could have great cash flow upon purchase and even without forced appreciation rents went up about $100/month each year.  Then add any forced appreciation and you have the equity gain from the forced appreciation and the associated rent increase from the forced appreciation which is on top of the market rent appreciation.  I have a unit with $680/month higher rent than when purchased in 2014. 

You also have the market appreciation. In the last 6 years the lowest market appreciation year in my market was 8%, the highest was in the low 20s. Note if I purchase at 80% LTV and get 20% appreciation the year of purchase it is 100% return not counting any closing costs.

Finally you have return from purchasing below market.   In my market it is very challenging to purchase at 75% of value but a purchase at 90% of value has $30k to $100k instant equity.  In my case this is the lowest contributor to my profits (I.e. even 90% of market properties are tough to find and there is significant competition for these properties)   

So my return numbers include cash flow, forced appreciation, market appreciation, and any equity from below market purchase.    

Question: have you actually talked to coastal So Cal investors about their return? A SFR purchased at retail a short while ago would have experienced similar market appreciation and could have had similar forced appreciation. The only area the SFR is likely behind our RE is on cash flow (in general SFR have less cash flow than duplex to quad). My point is my investment returns are not far better than what I expect other coastal So Cal investors to have achieved. In addition I know of no way that they could not have experienced good return if they financed at 80% LTV.

Deferred maintenance typically implies forced property appreciation opportunity.  

Rent can be raised on one unit typically implies forced rent appreciation opportunity.  

Take care of the deferred maintenance then raise the rent to just below market rent if tenant is a desired tenant, to market if tenant is so-so, to above market if tenant is below average. The forced appreciation should net significant equity.  The raised rent should lesson your negative cash flow.  When the other lease is up you should be able to raise rent even in a market with flat rents because you have addressed the deferred maintenance.  

To me cash flow and equity gain both provide return.  

In addition you have equity pay down occurring.  With the current low rates and the price of LA RE this has to be greater than the $500/month negative cash flow that you were estimating.  

Except for starting with the negative cash flow this is exactly the type of properties I purchase.  I look for the trifecta: cash flow, forced appreciation, below market purchase.  I seldom get all 3.  It appears this RE has 2 of the 3 (below market and forced appreciation).  I would weigh that into your decision as cash flow is just one way to profit from RE.  

Good luck

I agree w @jay 

@Jay Hinrichs but want to add that I purchased a projected cash neutral re.  It was $20k to $40k below market and had some forced appreciation opportunity.  

Due to market appreciation the forced appreciation returned better than projected.  The property would be cash flowing at a projected $800/month but I took out $100k via refi so it cash flows a projected $250/month.  

I typically agree with @Andrew Johnson but I would not put additional money down to get it to cash flow 

Analyze whether you can afford the negative cash flow.  Analyze whether you can stomach a 20% decline because the prices can decline in the short term.  Analyze if you can weather a decade before having the appreciation.  These are hopefully worse case scenarios but they can and have happened.  

If you answer affirmative on each of those questions the next question is whether there is a better investment option available.

LA historically appreciates going back more than 50 years at rate higher than inflation and higher than RE in the average locale. This s appreciation includes market and rent appreciation. Prop taxes are capped. Historically we know anything that you would have purchased with financing in LA in the past would have produced outstanding ROI. do you think the future is likely to be different than the last 50+ years.

Good luck

From San Diego here. SFR purchased at retail have negative cash flow upon purchase. Duplex to quad purchased at retail have positive cash flow in certain markets and other markets are cash negative. That is the bad.

The good is my ROI on all my properties has far exceeded 12% annual average return on investment. My Good RE have exceeded 30% annual return on investment. Best probably has exceeded 50% annual return on investment.

Provides some perspective on investing in San Diego.  I would not bother for a 12% expected return.  Too close to S&P return.  

Good luck. 

You have experienced abysmal appreciation in San Diego in the last 5 or 6 years? Or are you referring to purchase that was completed in 2006 to 2010 in which case you purchased in the midst of the worst housing depreciation cycle in over 50 years? I am just perplexed at the dismal appreciation part of the post as San Diego has great historical appreciation and great recent appreciation. Case Stiller listed San Diego as the #3 appreciation market for 2017 (Way behind Seattle and just behind Las Vegas). It has been high on the annual list of appreciation for at least the last 5 years and is high on the list for total buy n hold ROI for this century. My point is that any abysmal appreciation achieved in san Diego likely has more to do with the timing than the appreciation of San Diego RE which is regularly near the top for appreciation for the year.

There is a recent forum thread .  It answers your question on the pros and cons with a lot of fact and opinion on both sides.  When I run the numbers I believe I can produce a better return with quads than any other buy n hold option but I believe MF (5+) scale easier and there is economy in volume.  There are posts in that thread that indicate MF 5+ provide a better return than duplex to quad but it is not what my numbers indicate to me for San Diego.  I do agree with most of the advantages listed in that thread for the 5+ and will likely transition there eventually to take a less active RE role.

Good luck

The OOS I referenced we sold quite a few years ago (after rehabbing it from the second hurricane that hit it). We own one OOS SFR on a lake in Alabama. Not nearly the destination of Gulf Shores AL but it has not been hit by any hurricanes either :=). We would sell it but it has not had a tenant turnover and takes no effort.

We own 19 units (9 properties) in San Diego county which does not have rent control but 2 of the units are short term rentals (STR) and San Diego has been working to restrict them so it would be risky to invest in San Diego relying on STR. SFRs purchased at retail are cash flow negative so we have not purchased an SFR in many years. Duplex to quad in working class areas can cash flow at close to retail upon purchase. We rehab on initial tenant turnover so our rent increase has been ~$100/unit per year (helped significantly by the units that have been rehabbed). In addition we BRRRR the rehabbed units. We have not been able to get out full purchase and rehab expense, unless helped by market appreciation, but we typically get out the initial purchase expense and part of the rehab expense. So BRRRR does not work for us quite as well as it does for Brandon Turner. The rent increase helps the cash flow significantly a few years after purchase but would not be available in an area with rent control. I also would not rehab a unit where I could not raise the rent appropriately.

I do not know much about LA rent control but I would not purchase where there is rent control.  With rent control the cash flow is difficult.  Property appreciation is great but it is not as easy to access as cash flow and accessing it reduces your cash flow (i.e. payments rise because you owe more on the property).  Also if interest rises then there is a built in penalty to access the appreciation.

>even if I house hack its more than my rent.

How have you determined this? The reason I ask is in my market SFR on the MLS versus SFR that have sold are close to the same price. However for duplex to quad, which are typically purchased by investors, there is a huge difference between prices you see listed and the price of units sold. For duplex to quad in my market you must only looked at sold units. Looking at anything else will provide a false impression. I do not know if your market is the same.

If you could purchase a detached duplex that does not have rent control that has some forced appreciation available via a rehab you could use the BRRRR method to ideally get out much of your initial expense. Seeing that you would be living on-site you could do a lot of the work yourself saving money making it more likely that you could get out your full expense rather than that we can pull out (we typically hire out almost all of the work).

Good luck

Birddogging does not pay that well in my market and typically is only paid upon completion of sale.  I suspect this is something that varies by market.  It does not have any risk though.  It should be easy to find people that would be interested in a good lead; you can probably get quite a few by visiting a local RE group.  I tell people all the time that we pay for leads resulting in a closed deal.  The problem of course is so few close.  However if I had someone provide me a couple of good leads that for whatever reason could not close I would get them some token item of appreciation (maybe an Amazon gift card) but so far no one person has given me more than one lead.

Wholesaling is more difficult and if you do it ethically (willing to close even if you do not obtain a buyer prior to closing) then more risk. It definitely has more potential reward. However, in my market I see wholesalers that either do not know how to analyze cash flow or are being deceitful and wholesalers that cannot accurately calculate ARV or are deceitful. Most wholesalers I look at a couple of their "deals" and never look at them again because either they are incompetent or deceitful and either case I do not want to deal with them. So if you go the wholesale route make sure you know how to run the numbers and that the deal offered really is a decent discount otherwise your buyer list will dry up.

There are many people who have built significant wealth in RE.  It is still occurring.  You can do it if you work hard and find the right area to complement your strengths.

Good luck and hang in there.

Your question is how to start and it indicates you have already decided on OOS 2-4 units.

My question is have you considered house hacking local a detached duplex. Here are a list of advantages (not in my order of importance) 1) FHA (lower down = reduced entry cost). 2) self managed (saves ~12% annually in PM fees and provides the best opportunity to learn). 3) Expertise in the market (you live in LA and know the areas of LA). 4) Does not require the trust of a team that OOS investing requires. 5) Historical appreciation (both rent and market: There are few locations in the country that has historically produced the ROI for buy n hold of LA. You live in one of the top ROI locations anywhere and you are looking to invest OOS. Do you realize international investors who literally can invest anywhere in the world they desire often choose to invest in LA? Do you think they are stupid? I suspect and history has shown that they are smart to invest in LA). 6) Prop 13 (We invested OOS a couple of times. Our bigger OOS investment had a few issues but the first issue to hit our cash flow was property taxes that were increasing faster then the STR rents). 7) Owner occupied in addition to the lower down typically has lower rates that help increase cash flow 8) High rent units (The disadvantage of low rent units is the percentage of the rent consumed by maintenance, cap expense, and miscellaneous charges). 9) house detached duplex starts you small (one rental basically right next door: Is there an easier way to start?).

How many reasons do you need to reevaluate and give a good long look at house hacking a detached duplex?

If you do decide to go OOS I agree with Andrew Johnson to pick a location that you like.  We did that very right on our OOS investment I reference above.  It was at Gulf Shore Alabama which is a nice area (when not getting hit by hurricanes: Our biggest issue).  It is drivable to New Orleans which is a fun city.  We got hit by two hurricanes and had to go there both times for fairly long stays to get work performed by our contractors after the hurricanes (everyone needed work performed yesterday - the one most on top of it typically got their work done first).  I do not advocate buying OOS and not visiting it unless you have a large RE portfolio and can afford to have some go into disrepair.

Good luck

 I realize you use the word “feel ...” but you realize every reputable study shows that Ca historically whoops Memphis in return on buy n hold.  Refer to Case Shiller for returns of coastal So Cal compared to Memphis.  All 3 top cities for buy n hold return this century are Ca cities.  

To suggest Detroit has out produced Ca for any moderately lengthy duration is ignorant of reality that can be shown with a few minutes of research.  

Are you aware of the appreciation in coastal So Cal or San Fran over the last 3, 5, 7, 20, 30, 40, 50 years? Research appreciation for Los Angeles, OC, San Diego, San Fran. Research historical ROI on buy n hold for those same cities.

I realize BP is full of opinions and many are incorrect but this one is so extreme I felt obligated to point it out.