All Forum Posts by: Dan H.

@Michael Swan I understand what you are doing and suspect you will do well with your strategy.  I have read many of your past posts and the posts on this thread.

I posted earlier in this thread some of the info you seek including my expected cash flow (not nearly what your out of state is), my ideal LTV (70%, but not quite achieved), etc.

I refer to historical returns.  It seems like you are trying to time the RE market with the belief that San Diego appreciation is near a peak.  It is not easy to time the market.  Those that do often miss the most significant market increases.

So you have 1031 exchanged various San Diego properties into better cash flow locales because you believe San Diego may be at a peak.  You invest in properties that have opportunity for rent appreciation (i.e. either has gotten behind market market or needed a little TLC to maximize rents or both).

So you increase the rents and seeing it is MF the value increases and therefore your equity has increased.  So you have a quick equity increase with good cash flow which is very good.  But then what?  Your markets are not in traditional appreciating markets.  Is your profit going to be solely the cash flow (which would not be bad) or are you going to 1031 exchange these properties for other properties that provide the opportunity for rent increases?

For San Diego there is significantly less cash flow available but the same opportunity to purchase MF and raise rents for the initial equity increase.  But while your recent purchases cash flow well they traditionally do not have much market appreciation based solely on rising values (and you have already raised rents to market).   While in San Diego the cash flow is significantly less but historically there is the property appreciation.  The rents typically appreciate similar to the property values. 

Different paths that ideally both provide profit. We will not know for a decade or so which was the better path but hopefully both paths provide good ROI.

Between my family and I we have been in buy n hold since the 1970s. We have tried out of state but not out of state MFs (so we have not tried your path). We currently only have one out of state unit (SFR that is lake front in Alabama). Our RE are, except for the one SFR, all in San Diego county (Mission Beach, Pt Loma, Bonita, Claremont, Poway, and Escondido).

Good luck

I agree with @David Faulkner reply but thought I would respond to the ROI statement in OP.

San Diego residential real estate rose 10% in the last year (source Trulia). So if you purchased a cash neutral financed buy n hold RE investment in San Diego a year ago with 80% LTV (20% down) you would have had ROI of near 50%. It is verifiable fact that few locales have returned better ROI on financed buy n hold than San Diego for virtually any duration (1 year, 3 years, 5 years, ..., 50 years).

Rent appreciation typically corresponds with property appreciation.  So the cash flow neutral property purchased a year ago that appreciated 10% likely had about the same appreciation in rent and now has some small cash flow.  Fast forward 5 years and the property that was cash neutral could have significant cash flow.  

Another benefit of investing in California is the property tax protection provided by prop 13.  

I believe in the long term San Diego will continue to have better ROI on financed buy n hold than virtually all other locales. Note San Diego RE has always appreciated long-term but there have been many short-term depreciation cycles but it has always recovered and continued to appreciate.

Good luck

I do not see that big a difference between profit achieved via appreciation vs cash flow.  Trulia shows San Diego residential real estate rose 10% last year.   If I placed 20% down on a cash neutral property a year ago I made 50% profit.  Current median price is $522k.  If my purchase was median i would have made ~$50k on a single tenant at a cost of about $100k.  this is a good return on investment.  

I realize that it is possible to also have a good return on investment in better cash flow areas but historically there are few locales that have had the ROI of San Diego financed buy n hold including the last year. Last year there were those who thought San Diego RE was over priced but it continues to appreciate. Trying to predict the market high is as difficult as trying to predict the stock market high.

So I am content holding my San Diego buy and hold RE with its smaller cash flow but great history of property and rent appreciation. 

@Michael Swan you seem to be doing very well with your RE investments and you are knowledgeable about various RE investment strategies so you are likely making sound investment decisions.  

However, historically San Diego has out performed better cash flow locales.  

I personally know RE investors in San Diego that have lost money in RE investing but everyone of them invested outside San Diego.  I personally do not know any RE investors that have lost money on financed San Diego buy n hold but it would be possible if they had to sell at a market decline. 

There are many ways to make money investing in RE.  History tells us how things have occurred but does not necessarily indicate the future.  The best RE investment going forward will not be known until it is in the past.  However, it is unnecessary to have the best investment; it is sufficient to have good investments.  

San Diego financed buy n hold has historically been a good investment. Will the future be different? I have about the same RE equity as you indicated in your post and my family has a little more than double what you indicate and all except one SFR (lakefront in Alabama) is in San Diego county. So I am expecting San Diego to perform long term similar to how it has historically performed.

Good luck.  

I have a real example that is unfortunately for is not a 7 digit profit but is a 6 digit profit.  

I purchased a SFR in 1992 near the market high at $167k. In depreciated into the low $140k. Today the SFR is worth ~$530k (it has not been appraised in a while). I realize inflation has changed the value of the dollars ($530k is worth a lot less than $530k was worth in 1992).

The point however is that a peak that resulted in close to 20% decline in value today looks like a bargain.  If we are at a peak and decline (know one knows) I have a lot of confidence that in the long term the price will not only rebound but increase.  Why do I have this confidence?  1) it always has.  In the last 50 years there has been many years were values have declined but they have always rebound and increased. 2) supply n demand: San Diego has best climate in continental US and compares with the other best climates in the world.  We have good jobs/economy.  It is a very desirable location to live. As for supply it is constrained on west by ocean, on the south by Mexico, on the north by Camp Pendleton, and on the East by a quickly harsh climate.  

The only people who have lost money in financed buy n hold residential real estate in San Diego in last 50 years are those that sold at the wrong time. Maybe they were over leveraged or could not stomach a decline. Maybe being a landlord was not something they wanted to do. Note purchasing at an unoptimal time such as my 1992 purchase would not result in loss and in fact if financed at 90% LTV (easy to do for owner occupied but in reality I put 20% down) would have cost maybe $20k (20% likely cost ~$36k). That $20k would have resulted in well over $450k of equity. I pulled out my equity in 2002 and in 2010 so my initial investment is no longer in that RE and the equity has been leveraged for other investments (those two refinances were used exclusively for other buy n hold RE investments but my more recent refinances have not yet been placed into RE investments).

So historically San Diego has always appreciated long term. San Diego is a very desirable locale with limited supply. The appreciation is significant when financed with high LTV. The rents appreciate with the value. The equity from appreciation and principle buy down can be leveraged (typically through refi or something like a HELOC) for further investments.

Good luck. 

By the way I have made the same non-post mistake.  The message sometimes wants the poster to hit "post reply" twice. 

 The mud wrestling incident happened quite a few years ago so I do not remember what sort of compensation we received (that is the family's only property that we use a property manager so less hands on). I suspect we got compensated for damage but I suspect not compensated for time unit was unavailable while fixing the yard. 

The front yard is small with a walk way that split the yard at about 1/3 and 2/3.  The 2/3 side now has a raised platform of Trex like material (can get too hot for bare feet).  So the area that can be made into a mud pit now is maybe 5'x10'.  I am sure they can still do it but it would be smaller.  

I should have subtracted off another $100/unit for maintenance/misc items.  This is fairly close to accurate as the handyman is typically between $50 to $70 unit month and then there are times I need to hire the specialist labor (HVAC, certain plumbing, certain electrical). 

Therefore after subtracting the $100 I forgot to subtract off: $120/unit or $288 unit if including principle pay down. 

There are caveats that I will mention at the end. 

Rent - PITI is $566/unit.

Rent - PITI + principle buy down is $732/unit.

I do not concentrate on actual cash flow as much as anticipated cash flow.  This is because actual cash flow could be fine until some huge cap expense such as foundation and sill plate issues at same time $28k (my largest single cap expense so far). 

So my projected cash flow is 

$566 - $80 (vacancy: 5% of rent which has been close to accurate if including rehab vacancy time) - $270 (cap expense: $250 attached, $300 detached) = $220/unit. 

If including principle pay down $220 + $166 = $388/unit. 

Caveat: I try to have properties close to 70% LTV. However for various reason some properties are lower than 70% LTV. I have one duplex that due to interest on original loan is at ~45% LTV. Typically the lower your LTV the better your cash flow (if not it is not a good rental). So my cash flow is elevated due to some properties not being that close to 70% LTV with the 45% LTV significantly helping the cash flow (both units are rented below market but rent is $3200 and PITI is $1407)

One other item about large cap expenses: see if it is covered by your insurance before taking on the expense.  I have had slab leaks that we have covered.  However we had a slab leak that was significantly more costly than normal for a couple of reasons (the manifold would have required destroying a bathroom that had been rehabbed about 1 year previously so it was cheaper to replumb the entire duplex.  It ended up being covered by our insurance. 

Good luck. 

I think trying to predict the top of the market in RE is as difficult as picking the top of the market in the stock market.  I think you are just as likely to be incorrect as correct.  

Having stated this I have not purchased in 3 years. I was all set to purchase 1 or 2 small MFR this spring when the interest rates rose significantly. With the rate increases the cash flow is less. I do not bother unless I can expect cash flow of at least a few hundred a unit self managed.

Managing units is work.  A RE investment must return enough better return than other more passive investment options to justify the effort.  

Note when I was first starting I was willing to have less cash flow than I am willing to have today.  

Also I do my cash flow estimates with what many think is very conservative cap expense estimates (which I believe are fairly accurate and not that conservative) of $250/month attached, $300/month detached. 

Good Luck. 

if the last visitors were in November it currently is not cash positive.  Also watch for unpermitted work as most garage conversions are not permitted.  

One BR units are significantly less valued by investors than 2 BR.  It is in part that you will be managing a unit with a lower rent potential.  The size of unit has less to do with the effort managing the unit than the number of units.  

Basically do your research prior to purchase.  

Good luck