All Forum Posts by: Dan H.

My family has been doing REI since the mid 1970s and I have always thought the prices have been high. The properties today I find more purchasable than in 1990. How can I say this? What was the interest rate in 1990? What was the average San Diego income? What was the max DTI? If you answer these questions you will understand my perspective.

So a small SFR that I purchased in 1993 for what seemed like an outrageous price of $167k today is worth ~$550k.

My point is the prices often seem high only to be later considered to have been a deal.  I suspect we will look back on these "high" prices as good values.  Why do I have this belief?   Because going back at least 60 years this has always been the case even if purchased at a market high time such as 1990.  

By the way $500k to $800k is a 60% increase.  

I am giving away one of my favorite ploys (tricks of the trade) here ...

Hopefully no one uses this trick of the trade to purchase a property that I am after. 😀

The properties I go after in my market typically have interior shown with approved offer only.  I do not desire rehabbed projects as I want some forced appreciation.  They are duplex to quads that have not been rehabbed (no flips) that are mostly purchased by investors.

I place an offer based on the description and photos that if the property was as described and shown in photos would be a pretty good deal but not a great deal, but I want great deals (every investor wants great deals).  I know it is very unlikely that the property is as described and shown in the pictures; in fact I hope it is a long ways from described and from the condition in the pictures.   The offer is either accepted or it is not but typically the investors I am competing with are making offers suspecting the property is not as nice as described and represented in the photos so my offer typically is competitive.  

If the offer is accepted then I get to see the inside.  Assuming that the property is not as described but not so bad as to be more effort than I want I do not pull the offer or give any indication that I will be seeking a reduction in the price.  Then I have my inspector examine the property.  He is extremely thorough.   His report would make my primary residence seem like it was neglected and a fixer upper.  If he finds a major issue such as large plumbing, foundation, or structural issue I bring in experts on those areas and get quotes.  All of this takes time and often I need to request extensions to the inspection period which I explain honestly: "my inspector has concerns about xxxx and recommends a xxxx expert perform an inspection on the xxxx".  This all takes time but when complete I am fully armed.  

I then disclose to the seller the long list of items and their associated retail costs (using contractor pricing) and make a new offer.  The time that elapsed has worked to my advantage.  The list of issues seems overwhelming and should be disclosed to any subsequent buyers.  Sometimes the seller flexes a lot and sometimes just a little.  If they do not concede enough I walk.  Except for the home inspection cost, it is easier for me to walk than it is for the seller to not sell.  Also if the seller discloses the list of problems to subsequent buyers they are not going to get their asking price or that close to it as the list looks overwhelming but most of the issues can be fixed by the handyman rather than using a skilled contractor.  If the seller does not disclose the issues they can be liable for the cost of any items they are aware of but did not disclose.  

My best discount was $48k on an initial offer of $351k for the property (duplex purchased for $303k).  

I refer to these ploys as tricks of the trade. It is important to get an offer accepted that if the property is as described still represents a good purchase investment. I have only one purchase since I have been doing REI that I did not post initial offer request a significant reduction. A duplex where one unit was very nice and the other unit was as described and well maintained but a bit dated but my inspector's report made the units seem like they needed a lot of work. The seller looked at the list and was not overwhelmed and basically indicated he would take care of the items including a backflow valve. I only got a $1.5k reduction on the property but it appraised $25k over his asking price ($26.5k more than I paid) and it had every little issue addressed. When the tenant moves out of the unit that was a bit dated we will rehab it for some forced appreciation (as it happens the pristine unit is on its 3rd tenant).

My ROE using the formula presented by @Matt R. in San Diego has historically been very good but the last couple of years not as good as the previous 4 or 5 years. 

This has been achieved due to various actions/decisions as well as market appreciation. 

I attempt to minimize equity. Most of my properties were re-financed in 2016. As long as the rates remain low I will refinance to pull equity out of when it makes sense. Due to this most of my properties are at or near 75% LTV.

The next big factor is the appreciation that allowed @Michael Swan to be able to 1031 his San Diego properties after they appreciated to other markets. The appreciation in San Diego has averaged a great return. 

In general, we purchase properties with sweat equity opportunities.  We look for at least 50% return on our sweat equity (I.e. A $15k rehab we want $22.5k net value for a $7.5k return.

Like all investors we seek below market purchases.   This is easier said than done (assuming you do not want to sit on the sidelines) but we have completed some below market purchases.  

Another item that contributes to my good ROE is a duplex that cash flows at an incredible rate due to rents of $200 to $350/day per unit (STR) and near 100% booking (so $400 to $700/day rent for both units). This is a managed property so we do not get all of the rent.

Another item is my long term rentals (excluding my ex-residence) were purchased for their income producing potential.  They are c class area duplex to quads that get conventional loans (low interest, long term).  They are not units I would choose to live but they are nice units for working class people and we rehab them nice enough that we target the preferred tenants of our potential tenant pool.  My ex-residence (nor my current residence if converted to a rental) cannot compete with the ROE on these investment purchases. I would be surprised if any condo in the county could.  

The conventional loans at the current rates produce better equity pay down than virtually any other time in history.  This ends up being significant but historically would have less significance. 

Add them up and San Diego has provided us a very good ROE over the years. 

Good luck. 

In general I agree that purchasing primary residence versus renting has arguments for and against.  However markets like coastal So Cal have a history of appreciation like few other locales.  In addition there is prop 13.  So I believe in So Cal it comes down to how long do you plan to live in your primary residence?   So Cal has had short cycles of depreciation.  You want to plan to own longer than any of those cycles.  

So pro primary ownership includes interest and prop tax write-off, not paying rent, principle pay down, 30 year fixed owner occuppied loan is best loan most of us will ever get, long term historical appreciation going back at least 60 years, prop 13.  

So anti-primary includes restricts mobility due to mortgage which may cause missed opportunities, your home is unlikely to be as good buy n hold investment rental as a property purchased for that purpose.  Any others?

In San Diego, if you plan to stay in your home for a decade or longer, I would definitely purchase in large part due to the historical appreciation. Shorter durations could result in not enough benefit to cover selling costs.  

In general, I am not pro turning a primary residence into a rental property due to primary residences are purchased to be good homes for yr family and not good rentals.  I have an ex-primary residence as a rental and even with a good prop 13 advantage it is my worse performing property. 

Good luck

@Nick Allen

>what part of town was that duplex/quad? just curious.

Look at my profile.  It is where all but one of my rentals are.  I do not want to make it too easy to add competition 😀.  Ask your REA for a list of all duplex to quads sold in that area in the last year.  I suspect you will be surprised by what you see.  In general, they sell for less than $200k/unit.

I suspect the duplex and quad would cash flow positive with current conventional rates with a 30 year loan. The 6-plex would require a commercial loan which typically carries more risk (fixed rate is typically shorter) but would cash flow if interest rates stay close to their current level. I have eliminated the 6 plex from consideration. The duplex is not listed (off market offer). The quad I believe is on the MLS.

Good luck

@matt r. Makes a good case for investing in San Diego but the historical high appreciation goes back a lot further than the year 2000. You can go back at least 60 years and find San Diego long term appreciation for financed buy n hold has a better ROI than areas that rely primarily on cash flow.

However along the way there have been some short depreciation cycles so you must be able to with stand a potential depreciation cycle.  

As for timing the market and believing it is at a high is similar to trying to time the stock market. Statistics show those that try to time the stock market on average do worse than those that simply ride the market. For my own experience I have purchased twice in San Diego near market highs. In 1992 I purchase a SFR for $167k. It fell to ~$140k. Today it is worth around $550k and has the advantages of prop 13. In 2003 I purchased a SFR for $741k. It fell to ~$640k. Today it is worth ~$940k. The only people to have lost money on financed San Diego buy n hold RE are those that sold when the market was depressed (mostly people over leveraged).

There are people that state cash flow is better than appreciation but I give no credence to this as I care about the total profit and do not care if it came from cash flow, appreciation, or both.    

Also for the price of the properties that your REA is showing you I would consider looking on your own or getting another REA.  In the past couple weeks I have seen a duplex for $405k, a quad? at $640k, and a 6 plex at $799k.  

Good luck

Our units which have 4 or less on a meter we bill the tenants based on the size of unit.  For example we have a duplex with a 4/2 and a 2/1.  The 4/2 pays 60% of the bill and the 2/1 pay 40% of the bill.  In practice they are each paying less than they would if they each had their own meter because the meter and individual sewer charges are high in Escondido. 

We have one property that our tenants are 2 of 8 units on the property.  We pay the water for those tenants.

Here is a BP thread on sub-meters in San Diego.  I, in particular, like @Justin R. suggestion.

https://www.biggerpockets.com/forums/91/topics/406...

Good luck

 If you used a conventional loan that purchase could cash flow after the lease expires.  Loan payment would be ~$1500.  In San Diego the prop tax would be slightly higher than $300/month.  That leaves ~$800/month for insurance, vacancy, maintenance and cap expense.  It certainly does not have significant cash flow but in San Diego I would consider the purchase as the property value and rent is likely to appreciate.  So the small cash flow is likely to increase as rents appreciate.  

The low loan rates allow higher price to rent ratios still provide cash flow.  

I am not an expert but I have looked into converting a traditional driveway (pull in, back out) to a through driveway (in Poway, not in San Diego).  If there is no structure with the parking I have not heard of a setback requirement or at least no one indicated such for my driveway conversion.

My driveway conversion did not require a curb cut because there is no curb anywhere.

My wife did most of the leg work but I think she was expecting the contractors to be cognizant of the local rules so that the plans were unlikely to be rejected by the city.

I used the term "looked into" because we got some quotes for this effort so long ago that the quotes would no longer be good and have not done the work (the quotes were much higher than I was expecting but it was a lot of hardscape).  So I have not actually gone through the process of having plans reviewed.  We plan to resurrect this project soon.

Good luck

I agree late fees must be charged otherwise you will have a tenant that prioritizes rent behind everything that does charge a late payment.  We have a short grace period for late payment but many tenants treat this grace period as when rent is due.  However when they are delinquent on their rent and request a couple days we point out that we have already given them the 5 days in the grace period and that rent was due on the first. 

We do believe in tenant goodwill equity so we have forgiven the late payment for long-term tenants that have not been late.  However this equity runs out real fast with a couple of late payments.  

For tenants that do not have this goodwill equity we immediately file eviction notice per legal requirements for non-payment.  In CA the evict for non-payment does not allow for late fees.  We collect the late rent or the eviction proceeds.  If they pay the rent then the eviction for non-payment is satisfied but they still owe late fees.  We then serve them normal notice per law (30 days if less than 12 months, 60 days if over 12 months) if they have not paid the late fee.  So far everyone who paid the rent has paid the late fee.  

This lets the tenant know we are serious about getting the rent paid on time.  The goal is to have the tenants prioritize the rent above their other financial obligations.