All Forum Posts by: Dan H.

Regardless of the condition you should not expect to purchase it for $100k. In San Diego that is approximately the cost to break ground on a SFR ($100k for permits, surveys, etc.). I recognize that this seems absurd but it is ballpark accurate.

This places the lower bounds on a value of an SFR above $100K assuming that it is not a complete teardown. So $100K would be ripping off your cousin (again assuming it is not a complete teardown).

I do not know what your finance situation is to be able to offer a fair price and perform the rehab but if you are unable to offer a fair price due to finances maybe your cousin would partner with you.  It could also help if you are planning on managing this effort from Mesa AZ.

Good luck

Do you know for sure that the poly B piping has not already been replaced?  1991 was 27 years ago.  Poly B typically lasts less than 15 years. 

If it has Poly B piping from 1991 I think a $5K credit is reasonable as it is way past its expected life and the cost to replace on a home not currently being rehabbed will likely be more than $5K and intrusive.  It will leak and it could be very soon as if it is from 1991 it is past when I would have expected it to have first started leaking. 

Walls will need to be opened with runs behind counters and through attics.  Sometimes showers need to have the tiling removed.  By far the easiest time to do this replacement is when the unit is being rehabbed prior to cabinet installation and bathrooms being remodeled.

We recently suffered our 3rd slab leak in the last 4 years.  This was on a larger unit.  It cost ~$4k just to fix the slab leak; we did not replace all of the pipes just bypassed the hot water section that contained the leak.  We may have decided to replace all the piping but we had a shower that would have needed a new tile job as both sides of the wall have tile.

Good luck.

There are locations in the Midwest that I can purchase a SFR for less than it would cost me to build the SFR. The land is virtually worthless. The house burns down I may be able to sell the land but certainly it will not be for much money. The last time I was in southwest North Dakota (admittedly not recently) there were decent homes abandoned as the area had a receding population. So even land with an SRF on it could be virtually worthless. Similar how much do you think you could have sold an SFR in Detroit for in 2008? How much rent do you think you could get in Detroit for an SFR in 2008? The Silverdome stadium sold for just over $0.5M (cost $55M in 1975 dollars to build which was over $200M equivalent worth when it sold for $0.5M). That included the land and the structure.

Land can approach worthless and so can structures.

I will agree that the stock market and crypto currencies appear to be able to fluctuate faster than RE.  However that is in both directions.  The stock market and Bitcoin have done exceptional if you look at their performance over the last year.  So they dropped a lot after rising a lot.  They are still up a lot for the past year and about even for 2018 (basically even for the last 1.25 months).

In addition the stock market is less hands on then RE even RE that uses a PM (3 of our units we use a PM). 

To get money out of a publicly traded stock is easy, you sell it with a commission that is minimal compared to selling RE commision. 

I have my RE investments and I have my stock investments. If I did not believe my RE investments would produce a better ROI than the stock investments I would not have the RE investments as they take more effort. So both RE and stocks have produced good returns but stocks take less effort and ideally RE produces the better returns (it has for me even though stocks have done great).

There is optimistic and nothing is wrong with that as long as reality is factored in.  

There are quite a few items that make this difficult but I will address a couple:

- Conventional refinance on a duplex is typically limited to 70% LTV. So if it appraised at $1m there would only be $700k coming out. $800k in and 2 closings.

- if mortgage is $5.2k, insurance and prop tax will bring PITI to ~$5.35k. What would the rent on the rented unit be? Remember PITI is a long ways from full actual costs.

- if it can pan out that I could be all in at $800k for a property valued at $1m it would be tempting to sell unless I could get rents at over 0.7% value to rent ratio.  So I would need rents at over $7k month to consider keeping it as a rental. 

So without the complete numbers it is difficult to analyze if this has any chance to be viable but regardless there are going to be challenges.  

Good luck

We have an LLC but we do not rely on it for liability protection and none of our RE assets are in the LLC. The LLC is mostly just an $800/year name for our use that makes it superficially appear that there can be some separation of liability but it is unlikely to hold up to any scrutiny.

We use an umbrella insurance coverage for our liability protection. Our coverage amount is high enough that it is unlikely that we will ever exceed the coverage. An umbrella coverage is almost dummy proof. you do not need to worry about things like commingling of personal assets and LLC/corporate/trust assets. Of course the coverage is not free but it does provide peace of mind. Also to increase from a couple million to a 10 million coverage is not super expensive; i.e. the coverage costs are not linear.

The insurance carrier that most of our RE assets are insured with would not provide us an umbrella coverage (deemed us too risky) so we had to go with another carrier (a carrier that did have a couple of our properties insured with so not a completely new carrier, just not our preferred carrier).

I suspect that the reason you do not see these in any of the calculators is that it is not linear per property.  After you set much of this up for the first property the costs for subsequent properties is fairly minimal.

Good luck

I primarily agree with your point but I do think W2 workers instead of PM can work but probably is more hands on than using a PM but ideally provides better  profit.  We have considered going this route but to start to go this route takes time.  Any employee turnover will result in further time being needed.

Do you think using a PM to manage 20 SFRs is a little work as managing a PM to manage a 20 unit apartment? I lean towards no but have no experience to base my opinion on. The PM we use for the 2 STR units actively involves us in all repairs but they probably do this because a majority of their clients prefer this.

Do you think using a PM to manage 20 SFRs will be the same cost as using a PM to manage a 20 unit apartment?  Again I suspect not especially if the PM of the 20 unit apartment is a live-in PM.

My numbers in San Diego show the same thing that you are seeing. I show the best numbers/expected ROI to be a quad followed by a triplex followed by a duplex followed by SFR and then true multiplex (5+ units). Unlike @Michael Swan I am comparing units in the same location (all units in San Diego) versus Swanny is comparing San Diego SFR to Ohio MF which is a bit of an apples versus oranges comparison. I suspect the reason he did not invest in San Diego MF is that the expected MF ROI did not exceed his San Diego SFR ROI (and note my analysis shows that he would have had better ROI with San Diego Quads to duplex versus his SFRs (condos and SF houses)).

I do believe in the argument that the true MF are easier to scale. We are at near our maximum that we can handle with our current processes. We actively manage 12 units, family manages 4 units, 2 units use PM for STR, 1 unit uses PM for OOS. So my belief is somewhere at ~20 units working it as a part-time responsibility starts to have impacts on life style. Note I am not stating any unit takes much time but 19 units add up to more time than I wish. The amount of time we spend is likely less than 10 hours a month on average and most months (those without tenant turnover) are likely 2 to 3 hours a month. So my complaint about the scaling is as much about the lifestyle we choose (leaves very little time for managing RE) as much as about the time it takes. If we had a 20 unit apartment there would be a single, likely live-in, PM for all units and I suspect it would be about the effort of 1 or 2 self managed units (maybe average 2 hours/month).

At some point we will likely transition to true MF but we know our niche well and it has produced outstanding ROI for us. So we are not planning the transition to true MF in the near term (maybe 5 years from now we will only be looking at MF).

Related to the supply and demand item is evictions.  San Diego has a very low rate of eviction.  is it because it is hard to evict and landlords will use other means to get the tenant to leave or is it because San Diego has such great tenants?  My view is that it is due to both.  If you get evicted in San Diego you will forever have difficulty renting a unit in San Diego.  The vacancy rates are low enough there is no reason a landlord ever needs to accept a tenant that has been evicted.  We accept no tenant that has been formally evicted with no forgiveness for number of years.  If you have ever been formally evicted you cannot be a tenant in our units.

I also have not formally evicted anyone but if I needed to get a tenant out of a unit I would try many other methods first including paying them a small amount to vacate.  The formal eviction would be my last resort.  The CA tenant protections make evictions not a good option for CA landlords.

San Diego's low vacancy rate helps ensure that tenants, in general, take care of the property.  If the vacancy rate was such that rentals were easier to find I believe we would not get tenants that are as willing to take good care of RE that they do not own (depends a bit on class of area and unit).  I have found even in C areas a good tenant screening can get a good tenant in San Diego.

@Andrew A. I like the thoughts you put into your OP.  I have no knowledge of the Cleveland market to have an opinion on your observations about those tenants (but I still gave your post a vote).  The low vacancy rates in San Diego explain why the San Diego tenants need to take care of their rental units even in the class C areas.  Class C area in San Diego likely costs ~$1300/month for a small 2/1 which may or may not have an affect on the care the tenant provides.

@Jaideep Reddy if you want someone to make a good case for investing local connect with me and ask. There is little chance you will achieve the ROI investing out of state (OOS) in the higher cash flow markets than has historically been achieved investing in San Diego financed buy-n-hold RE. The numbers can convince virtually anyone that this is the case.

@Elizabeth R. I suspect the same is true for people living in New York. I suspect the ROI on your New York RE historically puts the Midwest ROI on financed buy n hole to shame.

Even if the number did not indicate for Jaideep to invest in San Diego (but the numbers most certainly show investing San Diego has produced significantly better ROI than the Midwest) I still would advocate starting local and self managed. This is because this is the market you know and can leverage that knowledge into smart purchases. This is the market where you need to trust strangers the least. This is the market where you can drive over to see the RE easily. This is the market where you can self manage and learn the most about managing buy n hold which is valuable even if you later decide to hire out the PM duties. This is the market where it will be easiest to make on-going RE connections that can help with your future success.

If you still choose to invest out of state thoroughly vet the cash flow numbers.  I have seen turnkey providers that do not allocate anything for cap expense with various rationale.  That have PM costs without any property inspections (which is OK if the owner is local but for OOS the PM needs to include property inspections).  That have PM add a fee for every maintenance expense (so the maintenance cost gets slightly inflated).  That have RE typically in an area where the property and rent appreciation historically is not greater than the inflation rate.  And with all these deficiencies the show a cash flow of something like $500/month that in reality likely produces negligible cash flow when including cap expense and real maintenance numbers (I actually would never purchase a unit if I was projecting only $500/month cash flow a couple years after purchase). 

In summary do your homework, vet the expenses, make sure a cap expense allocation is included (even if RE has just been rehabed the lifespan of all components has started), find out exactly what is included in the PM costs and if that is the full extent of the PM fees (i.e. is there a markup on contract/maintenance work, are inspections included, etc.).

Good luck

I am not disagreeing with you that  he should be able to do better with another investment as his rent to value ratio is poor for an investment RE even in high appreciation markets. 

However, his market appreciation is effort free of any significant effort versus your approach to improve the property and gain some forced appreciation is significantly more effort.  Some investors will chose this approach ( @Michael Swan ) while others would rather leverage historical appreciation trend that goes back at least 50 years (requires little effort).

If he desires the more passive route of riding market appreciation he should still sell because his ex-home purchase was not purchased to be a good RE investment (it was purchased to be a good home to his family) and that by searching for a good RE investment rather than a good home he can find an investment that will out produce his ex-home.  In addition if he sells soon he gets the owner occupied tax savings that vanishes for him this summer.

If he desires a more active role in his RE investments he can seek out RE that has forced appreciation opportunities. These can be true multiplex (5+ units) buy n hold, SFR to quad, in state or out of state, buy n hold or flips, etc. Relying on forced appreciation opportunities for much of the ROI is making RE more of a job than those that use market appreciation to produce a significant portion of the ROI.

I am not saying one approach is right and one is wrong just that the correct choice is an individual choice based on their life style, time commitments, etc.