All Forum Posts by: Dan H.

I would argue that where ever you park your assets has some risk. If I park my assets in an FDIC insured bank account the risk is that inflation outpaces the growth leaving me with less purchasing power. If I invest in RE the risk is that the RE depreciates. If I invest in stocks there is the risk of a market crash. If I invest in bonds there is a risk of default and bonds becoming worthless.

We have been investing in RE a long time and I believe we have done better on our RE investments than we would have achieved on any other investment option that we would have considered.

Also I do not feel that it was a stroke of luck for the purchases we have made including those between 2011 and 2013.  We know our market.  We know its history.  We understand the supply and demand and its impact to prices and rents.   

BP is a site largely dedicated to RE investors in its various forms. Are these investors hoping for luck?  I would hope by being on this site they are educating themselves and not relying mostly on luck.

I do not agree with your statement that all over leveraged people believe that they are not over leveraged.  In 2002 to 2007 I knew many "home buyers" including some investors that knew they were over leveraged but were under the false belief that homes were not going to decline significantly any time soon.

But I agree with the point that you are trying to make that those who are over leveraged for some reason think that it is not going to negatively impact them or that the risk is worth taking given their belief of the small odds of it negatively impacting them.  We know some of them suffered significant consequences from the risks they took.

I do not know what percentage of BP users think that current conventional refinance rules that refinance to 70% LTV is risky but I suspect it is a very small percentage. The current conventional loan market is also very different than the loan market in 2004 to 2007 where you could get loans based on stated income (I call these loans liar's loans) at up to 95% LTV.

I am confident that most BP Users would choose to refinance at 70% LTV if they could take $100K out of their primary residence without a significant interest rate increase. This is because BP Users are investors and are looking to grow their wealth. I do realize this is not all BP users and that some BP Users are more aggressive in their risk levels than other BP investors. I know there are BP Users that are willing to take risks that I would find to be too risky for my liking.

I believe 70% LTV is not conservative or aggressive and if I could refinance using conventional loans at 80% LTV without significant interest rate increase I would use that option (so I am a little more aggressive than the current conventional loan rules permit).

I am not suggesting to over leverage but to not take advantage of the leverage that the current (conservative) conventional home loans allow is being financially conservative.  I understand people who invest conservatively.   Whether that is staying away from growth stocks in their 401Ks/IRAs or not leveraging their primary residence.  Maybe they sleep better with the conservative investments.

My view is that the current conventional refinance loan that will only go to 70% LTV is pretty conservative. In addition, there is no cheaper loan for most people than the conventional loan on a primary residence. This is because the interest is typically lower than any other loan source and the interest is a tax write-off (granted with the new tax laws less people will be itemizing to write off that interest).

I will not digress to the advantages of leverage in building wealth other than to say leverage has additional risks but can build wealth faster and conservative investments are safe but less likely to build significant wealth. I do not view 70% LTV to be aggressive or to be over extended. 70% LTV is my target LTV across all my RE but I am typically closer to 50% LTV across all properties because I only refinance when it is financially beneficial (I.e. I will not finance into a significantly higher interest rate and I typically only refinance if I can pull out close to 6 digits).

My point is that if not leveraging the equity in your primary residence makes you feel comfortable then do not leverage the equity. However, there are many investors on BP that are looking to build wealth and willing to take the risk associated with a 70% LTV refinance (which I consider to be low risk but some may view differently) to leverage their primary residence equity into other investments (maybe a buy n hold rental property).

I have no fear of my current leverage and I last refinanced my primary residence just over a year ago.   In Oct I purchased our most recent RE investment acquisition using funds from our recent refinancing including the refinance on the primary residence.  I could have purchased that RE investment without having previously refinanced my primary but the cost of the money for the down payment would have been greater (because loans on the primary residence is the cheapest money most people are going to find).

Good luck

I use refi over HELOC because I like the safety of the fixed rate. The refi typically is capped at 70% LTV which implies that you likely have more equity in the Re after refinance than when initially purchased. In addition, the money pulled out via the refinance is now yours which is a different/better scenario than likely when the re was initially purchased. So you are typically less leveraged than you were upon initial purchase and you have more wealth created from the refi than you likely had upon initial purchase. So your primary is at less risk than when initially purchased and your cash out can be used for other investments that ideally produce good return.

RE leverage is the largest means that I have used to acquire my RE investments.  In the last couple/few years virtually all my RE has been refinanced to leverage the equity for other (often RE) investments.  

In this loan environment it is difficult to leverage more via refinance/HELOC than the max leverage possible upon initial primary home purchase. However if you find a way to get over extended you need to realize the associate risk especially if your primary residence is part of that over leverage.

They have gone up a lot more than 7% per year on average.  The lowest year (2016) they went up 7%.  

When you sell to yourself you pocket the gains. These gains can be used to invest elsewhere including if desired into more RE investments. It is little different than the Refinance in BRRRR. It can get your initial investment out of the property greatly increasing the ROI.

In San Diego you can definitely rent a SFR for less than the cost of retail buying. However, if you buy with a fixed rate loan your home expense is mostly fixed or nearly fixed (prop taxes have increases capped due to prop 13). Rents have gone up over 25% in the last 3 years. A recent USC study forecasts San Diego rents will rise another $121/month by 2019. In the last year I have raised the rents of over half my units by $100/month.

https://timesofsandiego.com/business/2017/10/11/usc-study-average-rent-in-san-diego-to-rise-121-per-month-by-2019/

So if 3 years ago you decided to rent in San Diego because it was "cheaper" your rent has gone up on average greater than 25% and is projected to go up another $121/month on average. So the rent that was cheaper when the decision was made to rent a few years later has increased versus the SFR home purchase costs have mostly not risen (certainly have not risen anywhere close to the same amount).

In addition the San Diego real estate has appreciated at least 7% every year since 2012 with a high year of ~20%.

In the San Diego market purchasing has been a better financial decision in virtually all cases in the last 5 years as long as you did not need to sell shortly after purchase.

I realize coastal So Cal is not a typical market.  However, it does point to that there is not a decision to rent versus buy that holds in every market or every situation.  The decision has to weigh things like longevity of purchase, appreciating or depreciating market, cost of loss of mobility, rent versus purchase cost, comfort of owning versus freedom of renting, etc. 

I would personally chose to purchase even if it had a small cost over renting as I like knowing that no one can force me to move, that I will enjoy my upgrades for as long as I desire, that my costs are mostly fixed, etc.

The census bureau shows CA had the 3rd largest population increase in 2017.  This population increase is to a state that already has housing shortages in the San Fran area and coastal So Cal.  If it was not for people leaving, the population would have increased more and the housing shortage would be even greater.

Top 10 States in Numeric Growth: 2016 to 2017

https://www.census.gov/newsroom/press-releases/201....

Not everyone will be able to afford to live here (or other expensive states) and the best decision for those people may be to move elsewhere.  I understand the decision and wish them the best.

So far for everyone that has left CA there has been more than one moving to CA.  That is why the population of the state continues to increase.

The lesson, be careful of what the numbers really are indicating.  A lot of people leaving in the case of CA does not imply that the state population is decreasing (CA population is still increasing in greater numbers than all but 2 states).

If I were not a landlord I would be all for many people leaving the county that I live. FWIW my belief is the county would be a nicer place to live with less people. First, there would be enough housing; recently (in the last few days) there was a fire in a SFR that had 20 residents (mostly children).

I went tide pooling on New Years, -2 tide.  The line of cars to get to the tide pools was significant enough to close the road to the tide pools.  Similar too many people for local snow (in the local mountains), desert wild flowers, etc.  You can literally head to the mountains to play in the snow and spend hours in traffic.  Hopefully this is scaring off some potential immigrants to CA :=).

I included the reference to the census numbers if anyone wants to look at the other states info.

The replies contain a lot of good advice.  

I agree with @Mike Warder that cap expense as a percentage of rent does not make sense.  Same for maintenance.  

What my calculations show is in low rent areas like much of the Midwest expenses run ~50% of rents but in high rent areas such as coastal So Cal expenses run ~30% of rent.   The difference is mostly in the cap ex/maintenace as a percentage of the rent is less in the high rent areas.  

Regardless of the numbers you use for maintenance and cap expense you must have the means to cover for murphy’s Law.   For example It is possible to get a large expense such as a slab leak in the first month of ownership.  You must be able to pay to get it fixed even if pay means put the repair on your credit card and pay it off over the next few months.  

My point is items break sometimes at inopportune times (no one’s fault).  Sometimes these repairs are not cheap (such as a slap leak).  I have experienced 3 slab leaks in the last 4 years at an average cost over $5k.  Hopefully you do not encounter any large expenses until long after purchase but you need to be prepared in case you do.  So make sure you are not financially over extended. 

Good luck

 The issue is that vacancy is both a function of amount of time it takes to get property ready to rent and the time it takes Tenant to be able to move in.  Good tenants need to give 1 month notice at a minimum.  Be leery of tenants that can move in tomorrow.  Do their current landlord not require notice?  Do you want a Tenant that does not give notice?

I always ask why the Tenant is looking for a new place but if Tenant states they do not need 1 month I scrutinize and attempt to verify the situation.  Unfortunately What I find is in general the best tenants need at least 30 days before they can move in.    The tenants that can move in tomorrow are too often problem tenants.  

Good luck

San Diego and OC already do not have positive cash flow upon retail SFR purchase. Without rent increases SFR purchased at retail make no sense as rentals.

Rent control will result in every SFR rental being sold as soon as current lease is up. In addition no one will build new apartments in this scenario. This will result in a rental shortage.

Assuming San Diego implements rent control, the rental demand in nearby cities will increase as the San Diego rental units decline.  So renters will be required to move further from their desired location to nearby cities that do not have rent control (Chula Vista, Escondido, El Cajon, etc).  

Most of my units are in Escondido and out of our 7 San Diego units 2 are STR (and will remain so as long as regulations permit). I would sell the San Diego SRF as soon as it's rent fell enough below market rent. I would raise rents above market on the San Diego quad units as soon as rent control is announced realizing a shrinking supply will result in the units getting rented shortly if current tenants depart due to the increased rent. With the reduction in number of San Diego rental units driving up the demand on my Escondido units, I would raise rents of all Escondido units.

In other words, it could prove to be quite lucrative to my cash flow.  

Who would lose: 1) current SFR renters: those in SFR will have units sold and those units exit the rental market 2) future renters: there will be no supply. Current tenants will be hesitant to upgrade to ownership or nicer rentals due to their rent controlled rent and no one will desire to build additional rental units. 3) those only invested in apartments in the rent control area and not invested in cities close to the rent control city. They will likely raise rent prior to the rent control being implemended but eventually the rent will fall below open market rent.

The rent controlled units will receive minimal maintenance and decline over time.  

Who wins: mostly landlords in nearby cities (I.e. me).