All Forum Posts by: Dan H.

Being an investor that is not risk adverse I take my money out when it makes sense to do so.  I agree that an investor that never takes the equity out does not have money to be utilized for other purposes but his net worth has increased.  It is similar to the stock investor that has portfolio that has increased but never takes the money out but reinvests it.  His worth has increased even if he chooses to never take the money out to spend it on other items.  

Even though I take equity out when there is enough equity to justify it I seldom spend the equity.  I either purchase more RE with the equity or otherwise invest it.  So from your description this profit does not count because I do not need it to live the life that I chose to live?   With equity being so easy to access I see little difference between profit achieved via cash flow, forced appreciation, or market appreciation.  

I RE invest almost exclusively in Ca and therefore do not need to worry about increased property tax.  Along with the market appreciation it has guaranteed that a coastal So Cal non rent controlled purchase will cash flow eventually.  

These posts make the decision to be black n White when in reality a lot of analysis determines if a property meets your investment criteria.  

My least cash flow purchase I estimated at neutral cash flow but it was an easy decision to purchase.  I showed about $100k forced appreciation.  I showed after the forced appreciation that I would have positive cash flow.  It played out better than I predicted even with an appraisal that came in lower than market (a common issue in my market on refis).    By appraisal we made $130k on our forced appreciation (helped a little by market appreciation).  The rents increased $1150 and now the RE cash flows about $1150/month.  

Similarly many of the posters discount market appreciation.  There is risk in relying on market appreciation but there could be great rewards.  If you are young and starting out taking this risk could rocket your finances.  Of course an analysis of probability of appreciation should be part of any analysis.   Investing in Ohio for appreciation has a lot different risk than investing in coastal So Cal for appreciation.

History indicates investing in coastal So Cal RE for appreciation is very likely to be a great investment for long term buy n hold.  Is it risk free?  No!   

Typically returns are proportional to risk.  The goal should be to find a risk level that is low for the potential return and a risk you as the investor can feel comfortable with.  Each investor needs to determine their comfort zone and invest appropriately.  

I look for forced appreciation opportunities with positive cash flow and likely high appreciation (the trifecta).  My investment returns have by far been mostly by appreciation.  Cash flow could not have produced this type of return.  My best appreciation increase on investment is approaching 2000% (approaching 20x my investment).  This particular property also has had great cash flow but minimal forced appreciation.   It was not a trifecta  

My point is there are many ways to make money in RE with varying risk.  Cash flow is not the only way to produce profit.  

 There is probably an acronym list on bigger pockets but ...

BRRRR: Buy rehab refinance rent repeat. It is a way that ideally pulls out your initial investment while increasing your equity. In practice it is not easy to get all of the investment back out via BRRRR but you can typically get a lot of it out.

MF: multi family. There is small multi family that is 4 or less units that qualifies for conventional loan like you single family residence (SFR) and commercial multi family which is 5 or more units and needs a commercial loan.

MF syndicators are entities that partner with individual investors to purchase typically large MF properties.  It should be less hands on than individual real estate investing but you have less control and are relying on the skill set of others.   Ideally they are well qualified.  Of course they also get some of the profit; sometimes a large portion of the profit.  

To tag an individual enter the @ followed by the name and a pull down should pop up for you to select the name from the list.  For some reason this does not always work fo me.  

I buy n hold in San Diego.  I have an ex-Home in my real estate (RE) investments.  I am still purchasing in San Diego (last purchase was in Oct).  I am a big advocate of San Diego buy n hold RE and I am indicating you should sell.  Because I am such an advocate of San Diego buy n hold and am advocating you sell I will be a little surprised if you get any response that indicate you should keep this property as a rental.  Smart move is to sell it before you lose your tax exemption.  

Good luck

 >Cities like San Diego have low cap rates/low cash on cash return. 

I challenge you to find one reputable source to corroborate this statement.  Guess where Case-Shiller ranked San Diego for profits in the last year.  Guess where Case-Schiller ranks San Diego for profits this century. 

Your statement sounds like it is fact but I can find multiple sources that run the numbers and indicate that your statement is not close to factual. 

I am pro San Diego buy n hold but recommend you sell.  Here is some of my rationale: 1) you currently qualify for the exemption on cap gain.  It will not be long before you no longer qualify this.  2) you rent to value ratio is 0.42%.  This value helps determine the type of cash flow that can be expected.  In San Diego a good ratio is >0.75%, pretty good 0.7%, alright 0.65% (I have never purchased one this low).  This is to be expected because you chose your house to be a good home and not necessarily to be a good rental investment.  My worst San diego investment RE is my ex-Home for exactly the same reasons. 3) you are out of state.  Fortunately you likely know people here you can trust but even so owning out of state has hurdles that owning local does not have.  

Compound interest equivalent happens with RE appreciation so I am unsure what you are trying to communicate with that statement.  I do agree that stocks can be more hands off than RE typically is but I have known some stock investors who spend more time on their stocks than it would take to manage a decent amount of RE assets.

I have used margin on occasion (mostly to avoid selling stock when I have removed capital from my investment accounts) but I do not consider it equivalent to conventional financing on RE for a couple of reasons: 1) The RE conventional loan rate is much lower than the margin loan (conventional RE loan is typically over 3% lower than a margin loan) 2) The loan on a buy n hold is paid by the renter (i.e. out of the cash flow) and not out of the appreciation versus the stocks the margin payoff is only materialized via the stock when the stock appreciates more than the rate on the margin loan.

For example if I purchase a stock on a margin loan of 7% (which is a preferred rate for larger margin loans or better customers) I require the stock to go up more than 7% to obtain any profit. However, if I purchase a cash neutral home at 80% LTV then a 7% appreciation materializes a ~33% return on the investment (not taking into account closing costs). This 33% return is regardless of the interest on the RE loan because the loan is accounted for in the rent collected to make the cash neutral. In practice, RE investors seldom invest in RE that is projected to be cash neutral which implies that in practice the rent collected covers the loan and creates some positive cash flow that is in addition to the RE appreciation.

Do you know if this was taking into account the leverage of RE financing? At 80% LTV, a 5% RE appreciation is a 25% return on the invested capital (not taking into account cash flow, closing costs, etc.).

I do realize that there are many locations that appreciation does not exceed inflation but there are many places where appreciation greatly exceeds inflation.

I could easily understand stocks beating SFR RE if leverage were not being accounted for but with leverage factored in I do not see it. I have had certain years where my return on the invested capital have approached 100% on many of our properties (but we are mostly invested in a location with historically outstanding appreciation).

I would be very surprised if President Trump did not always 1031 into another "like" investment.  In addition, as the multiple bankruptcies show, he keeps much of his business assets separate from his personal assets (i.e. all 6 bankruptcies were Trump's Companies and not personal bankruptcies).

Check with your accountant/tax expert but when you die the RE value would be reestablished so if you heirs sold when you die then they would not pay any gains.

So I will add to my statement that I do not ever expect to pay taxes on my RE profit and I do not expect my heirs to pay taxes on any RE profit. 

In addition, I currently have a backlog of income tax credits.  Income over a certain limit cannot write off certain losses and basically maintains a income tax credit (not sure of the legal name for it) that if I would otherwise need to pay taxes on some of the RE in the future that I would not need to pay the taxes but would use the accumulated income tax credits.  This income tax credit (not necessarily related to RE) is why the one year of President Trump's tax return that was released showed that he would not be paying taxes in the next few subsequent years because he had so much income tax credit.

Fortunately for RE investors the tax laws are written to encourage RE investing.

>whereas in real estate you pay taxes on your profits.

How many people do you know who pay taxes on their RE profit?  I believe it is a very small percentage of RE investors and even a smaller percentage of the successful RE investors pay taxes on their RE profit.

I fully expect to never pay taxes on my RE profit.

Are you indicating in most places you purchase the land and the structure for less than it would take to build the structure?  If you are then you are indicating that the asset has depreciated - significantly depreciated.

If this is what you are indicating, your cash flow needs to compensate for the depreciation that historically has occurred.  So your actual cash flow is your cash flow - average monthly depreciation.

>there will always be value in land.

Really? Always? What do you think a SFR sized empty plot was worth in Detroit in 2008? I suspect you could not get a buyer for the price of a tank of gas. That is why the Silverdome was only worth $500K. Without the Silverdome what do you that land would have sold for? Stating that it will have value in 50 years is contradictory to the word always. It may or may not have worth in 50 years but will it be worth something always?