All Forum Posts by: Dan H.

Your STR is in a totally different class than my family's STRs (yours are much nicer) so maybe I am not qualified to remark.

The photos have already been discussed but I thought the Oceanside unit photos were pretty good (equivalent to the ones we use).  But the vista property had some grainy photos and I am unsure if one depicted a door off a frame of if that was a mirror or what. So I agree that there is room for improvement on the photos especially the Vista photos. 

The next thing that struck me is a nice large unit like the Vista unit has no king size bed.  I would swap at least one of the queens for a king and possibly 2 of them. 

I think your postings (mostly the photos) make your units look very nice and fun but could indicated things to do nearby.  

So is this question posted because your occupancy rates are low? Our family STR unit's are small (real small) and old but they are rented almost every day of the year due to their location (1 block from the beach). In the summer they rent for almost as much as the Oceanside place is indicating currently. So my point is that location is sometimes more important than the units and your posting did not do much to sell the location but the photos do a good job selling the units (but could benefit from better photos).

Hope this helps!  Good luck. 

Do you plan on staying in San Diego?

The OOS versus investing in So Cal is a heavily debated item on BP as is the related item of investing for cash flow versus renting for appreciation.  Typically the best cash flow locales have minimal appreciation and similarly So Cal has poor cash flow compared to many locales. 

I will state that historically San Diego has produced great ROI on RE investing.

However I believe you can succeed with a range of RE methods but I believe the one that will likely teach you the most is to self manage locale.  Similarly I am a fan of young investors house hacking (I did it when I was younger).  

So if you plan to stay in San Diego I recommend starting with a self managed detached duplex via house hacking.   It will not cash flow like the Midwest but it’s historical appreciation is vastly greater than the Midwest and it historically has better returns.  But the primary advantage is it allows you to self manage.  It also leverages your existing knowledge of the location.  

If you plan to move to another location I suggest you look to start there because of the knowledge I believe is to be gained self managing a RE.  

Good luck. 

 I did a land purchase once (6 acres with a nice view).  It did not work out that well for me.  In fact it is my worst performing RE purchase.  I did not lose money on it but the return probably barely exceeded inflation.  I considered keeping it forever but the sale was to make it open space so while I made in effect no profit the land is now open space forever (good cause?).

I know some people who have purchased land for less than they got paid, after the purchase, for the timber rights to part of the land.  The person who sold the RE obviously did not know how to get cash flow from it but my acquaintance did.

I definitely can see land being a good appreciation play but it is not an area were I feel I have an advantage and my one attempt was not exciting (exciting could be a big gain (things done right, luck, etc.) or a big loss (lessons learned), mine has no story: bought it, held it a long time (~25 years), sold it for a profit that when taking inflation into account was very small)).

I suspect you had some idea that the land examples above had a decent probability to increase in value.  What gave you this belief?  How hard it is to find such opportunities?  You have been at this a long time and seem very good at it.  Does it take a lot of the knowledge you have acquired over the years to identify such opportunities?  does it take a lot of time to identify the opportunities? 

Thanks

It is a subtle difference but I did not use the So Cal flipper shows to show that the return on rehab was better in So Cal than other parts of the country as much as to show that good/great returns can be achieved on the rehab investment in So Cal (which is not to say that other parts of the country also cannot have good returns on the rehab investment).  The shows consistently rehab achieving very good returns on their rehab expense.  Of course they are very good at what they do.

As for the refinance you need it to appraise high enough that you get your money out at the LTV of the loan terms (80% in your example). I agree that it may not be simple to get your entire investment (purchase investment and rehab investment) out but I have been able to get purchase investment out on every San Diego purchase except for my most recent purchase (it was not a forced appreciation play - no rehab) but as indicated I have also had some advantage of market appreciation because I typically do not evict so the refi is typically more than a year after closing. I also typically purchase a little below market price. I did 2 refi early this year (the last 2 that I did). Their appreciation let me cash out (not including full rehab costs) at 70% LTV (so even harder than your example). They both rose more than 50%. Again it was not all forced appreciation but most of it was.

I am certainly not stating every property would allow this.   You need to identify the properties that will produce a good return on the rehab budget (the type that the flippers are purchasing and making good money rehabbing).  Then you need to execute close to the rehab budget (I am always over).  And it helps if there is some market appreciation helping out the numbers.

Mostly on the MLS and mostly duplex to triplex.

However, I am not so sure I agree with the basis of your premise.  If I purchase a home that has forced appreciation opportunity and I pay appraised value it should work out. 

Are you saying that you believe that our return on the money spent for the forced appreciation is less than other parts of country?   If you are, I do not agree.  I will use that there is one major flipping show based in OC and a less major flipping show based in San Diego as evidence to the contrary.

If you are stating the entry cost is high I do agree but this is also reflected in the value of the refi so that is a net wash.  

What is necessary is to identify properties that have force appreciation significantly greater than the cost of the forced appreciation.  On the OC flipping show Flip and Flop they buy below value but where they do great is their return on the forced appreciation.   Most of their profit is typically on their forced appreciation (the reason for the rehab, if it was just buy below market and sell at market they would not bother with the effort of the rehab).  They also can rehab for significantly less than I can so their efficiency in their rehab helps their profit.  However as a buy n hold I do not need the same return as they require in order to get my initial investment out.

What I find is the best return on rehab costs are the properties most in need of a rehab.  If a kitchen is a little old but functional it will not return as much on rehab as a property that has a destroyed kitchen (cabinets busted, counter burned or broken, floor in real bad shape).  Same for other parts of the property.  Note if I am replacing cabinets I do not care that the cabinets are destroyed versus just old but the unit with a functional kitchen that is old likely appraised higher and therefore likely cost more (all other things equal) than the one with the destroyed kitchen.

I recently placed offers on 2 duplexes.  One duplex was thrashed (both units) and presented a good opportunity for forced appreciation (unfortunately that is the one that fell out of escrow) and one duplex that is in a nicer location but only one of the two units would likely provide a good return on the rehab (I suspect I will close on that duplex next week).  The other unit of the duplex is far from perfect but it is not bad enough to provide a good return on rehab.  The forced appreciation opportunity on this property is less than ideal due to only one unit having good forced appreciation opportunity but I liked the location, the cash flow was good for San Diego (meaning it was pretty poor compared to the Midwest), and it was below market price (I think ~$30K below market but the appraisal showed much less below market but I know this market better than the appraiser) so it looks like I will soon own another duplex.

Good luck

Your profit is an example of what the OP was indicating but he was indicating long term but for it to be true long term it has to be true in many short terms (certainly not all). Basically in a year you may have been slightly cash negative but your market appreciation has been ~$50K. At 20% down your initial investment was likely ~$85K (including closing costs) and you made ~$50K market appreciation since last year. In addition, you have had equity pay down that, with the current low rates, is significant. That is a very good ROI even if you were losing a few hundred a month with negative cash flow (I am not saying you were negative cash flow as I do not have many of the numbers but you were at risk of being negative cash flow).  You did great!

In addition you have learned a lot.  On the next purchase you will know more and be more accurately able to project cash flow.  You will know how to deal with tenants.  You will likely have some trusted contractors for various repairs.  You will likely have a better understanding of leverage.  This will help your next purchase to also be successful.

Good luck

I find San Diego to be great for BRRR. I base this on good return on rehabs. Just look at the various flipping TV shows in So Cal. In addition in recent years there has been great market appreciation. So if the rehab by itself is not enough to get your initial investment out via refinance maybe it got the necessary bump via the market appreciation.

I do a modified BRRR as I typically rehab upon tenant turnover (assuming tenant is worth keeping). One refi appraisal came in way lower than my projection (actually 2 but one I appealed and got an $80k upper). Every refi including the one with the bad appraisal (from my perspective) has alllowed me to recoup my original investment.

So I find San Diego to have been an easy locale for BRRR.

Your rent to cost ratio 0.57%. You likely require a favorable rate for this to not be cash flow negative. Did you run the cash flow numbers including PITI, cap expense estimate, maintenance estimate and vacancy estimate?

This purchase likely is relying on appreciation (rent and property) to provide a good return.  

I am not saying this is a bad investment but hope you ran the numbers and are aware of its cash flow.  I purchased a property in 2014 that was cash neutral.  I knew it had forced apppreciation opportunity via rehab and I expected it to have both short term rent appreciation and short term property appreciation.  It has performed better than my projections.  

In my market today I still have confidence of short-term rent appreciation but have no confidence of short-term property appreciation.  Fortunately, similar to the OP, the long term appreciation in my market is significantly above inflation going back more than 50 years.  Therefore I am very confident of long term property appreciation in my market.  

Hopefully you ran all the numbers and properly calculated the appreciation opportunities.   

Good luck

San Diego 9th in occupancy and 5th on rent appreciation.  It is good to be a landlord in San Diego.  

Pick the best Midwest city you can find for the duration from the list. Let's say that 0.5% rent to cost advantage for the cash flow (i.e. if using today I would claim 0.7% to .75% is not too hard to obtain in San Diego (in fact I am closing on one right now in that range) and suspect Midwest large city not war zone maybe can get 1.25%. In 2012 you could get 1% properties in San Diego (I purchased a 1.05% duplex in 2012) but I suspect Midwest you could have got 1.5% properties. Appreciation on rent and property is a simple internet search. You pick from the list of years depicted. Assume 70% LTV (I have never done that low LTV on an initial purchase but it helps the Midwest case) but it will not matter as the ROI will not be close.

An example: duplex (4/2, 3/1) purchased in 2012 met the 1% rule but in addition I got a great rate so it would have cash flowed good at 0.65%, purchased for $302.5K with 80% LTV. Appraisal late 2016 places value at $550K (We upgraded one kitchen cheap (free cabinets) and put in split HVAC into both units so maybe $15K cap expense). Rents started off at $3200 and today is at $3600 but are $250 to $300 below market. If you think this is some super deal compare the appreciation on this purchase compared to San Diego average appreciation (rent and property) and you will find it was a decent deal but has not done significantly better than average for San Diego (I suspect my actual rent increase will be below San Diego average rent appreciation - Neither tenant has turned over which is primary reason rent is noticeably below market).

So the challenge is open. Find a Midwest city that with its documented average rent appreciation, average property appreciation, average cash flow that produces better than an average San Diego purchase at 70% LTV for any of the durations listed.

It will not happen. Again this is looking back in time and does not necessarily mean that the midwest will not produce better ROI than San Diego in the future. However, when it is true for such a wide range of years why would it not continue to be true going forward if using a long duration?