All Forum Posts by: Dan H.

It can be mathematically shown that on average there is no place in the Midwest that on average has produced a better ROI for financed buy and hold RE than San Francisco, San Diego, Los Angeles for 5 years, 15 years, 20 years, 30 years, 40 years, 50 years. To indicate an investor can find a better ROI on average in the Midwest is simply misleading for they have not (you can run the numbers - the numbers do not lie (pick from the years indicated and take the best Midwest locale and run the numbers against the worst of the 3 CA cities listed).

Your statement is false and can be proven to be false.

I will even help you out. You pick the Midwest city and provide the numbers for one of the years listed and I will do the work for San Diego over the period from those listed above. I will let you choose the percent financed within reason (how about up to 70% LTV?). We both use average appreciation (rent and property) for the locale and average percentage cash flow on day of purchase. For simplicity no reinvesting of profits as it will not change the results. I think we both know the ROI numbers will not be close.

Of course past performance is not necessarily an indicator of future performance. 

The vinyl outlet/switch covers are hard to destroy and therefore worth the extra cost on rentals.  I do realize this is a very small aspect of the costs but I do recommend switching to the vinyl.  Of course it will do nothing for the missing ones. 

As other have indicated I use the composite plank flooring.  Very scratch resistant and the scratches are not very obvious.  It is possible to dent but I suspect a dent would have resulted in a cracked tile.  Replacement due to the planks is not extreme.  So as everyone has indicated ditch the carpet.

I will say the PM is responsible for getting good tenants but they can only do so much.  Did they do a credit and criminal check?  Did they call employers?  Did they call previous landlords?  If they did they did a good job of checking the tenant.  Even if you do everything correct in screening the tenant you can get a bad one so I do not want to blame the PM for the bad tenant without knowing their screening process. 

Are you paying for inspections?  If you are then maybe some of this should have been caught earlier.  If you are not maybe inquire as to the cost to perform an inspection every 6 months.  Realize that inspections cost money as the inspection takes a bit of time but coordinating the inspection and the drive to the unit add to the timeline.  I would not be surprised if the cost for the inspection is a couple hundred dollars (I would be surprised if it was less than $100).

It could be that you have a PM that did their job (and his response seems to show that he understands your concerns and is doing some items to lessen your pain) and you got unlucky to have gotten a bad tenant as your first tenant.  I will say that eventually it happens to most landlords. 

The part that scares me is that your cash flow is so low that $2800 expense (after subtracting the deposit from the costs) wipes out 1 year and 5 months of cash flow.  So your cash flow is less than ~$165/month not counting repairs/cap expense and vacancy?  That is likely a problem unless you are expecting appreciation (rent and property appreciation).

Good luck

If your rent is just a few dollars more than PITI then you are significantly cash negative unless you are counting your equity pay down. You need to allocate for cap expense, maintenance, and vacancy. You may also want to allocate for property management.

I have spent real effort calculating cap expenses. I can state with a lot of certainty that the cap expense cost is higher than you are thinking. A hot water heater in my market is $8/month cap expense ($1200 replacement with 12.5 year lifespan). A kitchen is almost $50/month cap expense. In my market a detached unit should use at least $250/month cap expense/maintenance. So not including equity pay down you are likely at least $250/month negative. Fortunately rates are low and equity pay down is significant so you likely are not really loosing money if the market was flat. Add in the appreciation and it may have been a pretty good investment. But it needs to be compared to other investments. Both hands off investments as well as other similar REI investments. I think you can find better RE investments in your area than your ex-home. However, I know I can do better than my ex-home in my area and yet I keep my ex-home but my rent is $1060 greater than my PITI + $380/month equity pay down). So while it is my worse performing REI property it does have good cash flow (just not as good compared to value as my other REI). So logically I can make a good case for your ex-home not being a good REI investment (as I can also with my ex-home) but I do understand keeping it (against all logic).

Good luck

>Ouch, Torrance lost 3000 employees, and that's got to be a significant loss for the state and local tax base, too.

Ca population increased 3rd most in 2016.  The coastal areas are some of the most dense locations in the US.  3000.   The population of Los Angeles county is almost 10,000,000.  So 3000 jobs is 0.03%.   I suspect that as those 3000 jobs left more than 3000 came to Los Angeles county.  

>Company after company is announcing moves like this.

Yet the state’s population continues to increase even with very little coastal property left.  Companies leave, companies come.  State keeps getting more people every year.  

ELOC on rental properties are non-trivial to find.  A few years ago I researched them and found a few in maybe a few hours of searching/calling.  

Refinance of rental properties typically cap at 70% LTV.

In places with historical appreciation that approximately matches the inflation rate it matters less on leveraging your RE investment. However your REI is in a historically high appreciation market that appreciated ~10% last year.

You do not indicate the value of the SFR but I will use $500k for example purposes. So you $250k equity on $500k value at 10% appreciation returned $50k or 20% on your equity. However if you only had $50k equity in the SFR (probably not achievable via traditional refinance of a rental property) then $50k of appreciation is a 100% return on the equity.

My point is leverage provides the best return in historically appreciation markets.  

I regularly refinance our San Diego REI to leverage the equity even if it is being leveraged in the stock market and not REI. So I take money out of the properties via refi and place it in my investing account. Then when an RE purchase presents itself I pull the money out of the investment account as needed for the purchase. I place the least amount down I can taking into account the interest rate.

Good luck

All the other posts act like finding properties $50K below an appraisal is easy.  In my market it is not.  In addition you do not indicate why the appraisal was performed but in our area refinance appraisals are conservative.  Also in my area an appraisal from a year ago would not reflect the 10% appreciation in the last year.

So $50K below market might mean $40K of equity above costs after adding purchasing costs.  In my area $40K of instant equity would be solid but it does not provide the complete picture.

I would calculate expected cash flow using conservative numbers. Make sure you include PITI, vacancy, cap expense, maintenance. Consider including PM costs.

Then do a comparison of a recently sold duplex in the same area (and ideally close to the same price but you can account for price difference at the end if you need to) doing the same cash flow estimate.  The reason to use a duplex is duplexes are typically purchased by investors.  Investors hopefully are somewhat smart in their purchase and an investor considered it a good purchase; one they expect to make money on.

If the cash flow is about the same or better than the duplex then you are likely near the top of your area on cash flow.

Note that if you have $40K instant equity but the duplex cash flows a few hundred more each month then the duplex with no instant equity will be the better long-term buy n hold.

If the purchase shows to be a good investment they you need to figure out the way to finance it.  Can your father-in-law finance it requiring less than 20% down?  Maybe you can take on a more experienced partner?  Maybe you can borrow from your 401K?  Only you know what options are available but if it is a good investment you want to find a way to make the financing work.

Good luck

My cap expense spreadsheet placed hot water heater at $8/month.  Price $1200 (parts and installation to CA code: I have done 2 in the last 6 months using a reasonable priced licensed plumber (it would be cheaper to use a handyman so if that if you intend to use a handyman maybe $1000)).  Life span average 12.5 years (my range was 10 to 15 years so middle was 12.5).  1200 (price)/150 (expected lifespan in months) = $8/month.

Do the same for you HVAC: Your cost $15K.  Lifespan 15 to 25 year for a middle of 20 years.  Cap expense estimate 15000 (cost) / 240 (expected lifespan in months) = $62.5/month. 

So unless you think my cost is off or lifespan is off the cap expense on the water heater and HVAC is $70/month.  The kitchen as I previously indicated is ~$45/month.  So water heaver, HVAC, and kitchen = $115/month.  This still does not cover flooring, bathrooms, walls, interior electrical, interior plumbing, etc.. 

As indicated I have no units were my exterior is covered for me but none of my units fall significantly below $250/month (I believe the lowest was just above $230) estimated cap expense.  I can see without exterior there will be significant savings on your cap expense costs.  However, I think it would be shortsighted to think that the items we have not placed in your cap expense would add up to less than $25/month.  So I would use at least $140/month cap expense (unless you disagree with either the cost or lifespan in the examples).  The numbers are only as good as the input but the numbers do not lie.

I also will add that my sister-in-law has a condo near SDSU. The HOA fees were expected to cover the exterior. However, they are re-doing the exterior and have not collected enough or banked enough HOA fees to cover this exterior cap expense so there is a supplemental charge to each owner that was approved by the HOA. So exterior maintenance expense that she thought was covered by her HOA fees did not end up being fully covered. Hopefully your HOA is better managed.

The numbers definitely show $50/month for cap expense is not sufficient (that is way too low).  I have seen people who because an item is new that they do not count it in the cap expense but I see no way to logically do that.  Would you take the $15K HVAC and at year 15 use a $125/month cap expense because it should fail between year 15 and 25 and not prior to that?  If you did this you would show no estimated cap expense for a while but then an inflated cap expense on an item when it was in its projected failure period.  The result would be a non consistent expect cash flow estimate.  I find it simplest to start the life span count down when installed and estimate its monthly replacements cost across all months of the life of the item.

Again I am not trying to be discouraging as I think it is great you have started your REI pursuits. I think you will learn a lot and that your purchase if you hold it long term will do great.

Good luck.

@Ray Lai

Just to let you know your cap expense is way low.  I have no town houses and do not know if all your external is covered but I can tell you that my spreadsheet places cap expense on a kitchen at about the $45/month you are estimating total.

I am not trying to be discouraging because I think it is great that you have started and that often that is the biggest hurdle.

Good luck

@Laura C. I am not house hacking this but here is an example that I am close to closing escrow on that would have been a good house hack. A detached duplex 3/1/1, 2/1/1 in San Diego county for $442K. Current rent is $1900 and $1400. Both rents are fairly close to market in their current condition (not rehabbed) so I have little room to increase the rents. They are in a nice location in working class area. Most of my REI purchases have been at 80% LTV but for this one the rates made it so that 75% LTV was beneficial. Rate is 4.625%. PITI is ~$2200 (PnI = $1704). If I was house hacking I would not need to put 25% down and I would be able to get a better rate but for this exercise I will use my numbers mostly because I have already worked out my numbers (it is easier for me because I have the real calculations that I have already performed). PITI will be ~2200/month. If I rented the 3/1/1 and lived in the 2/1/1 I would be living in the unit for $300 ($2200 - $1900 = $300) rather than actual rent of $1400. This simplifies things somewhat because as the owner I have vacancy (I use 5% but have never had a vacancy rate that high) and maintenance and cap expense (I used $300/unit = $600 in my calculations). So $300 (rent delta) + $600 (maintenance and cap ex) + $95 (vacancy: 5% of $1900) = $995/month to live in a $1400 unit (savings of >$400/month). Equity pay down starts at $426/month. So now I am >$800/month ahead of renting the unit. Ideally both the rent and property appreciates but if not $800/month is OK return in large part because I have good confidence of my numbers.

Hope this helps and good luck.

I agree with @Andrew Johnson but will add one item to his good list of reasons to invest in Iowa near your family.  

When you go to your OOS investment areas to build team, find properties, deal with any unexpected issues, etc. you will get to visit family.   Most Midwest cities only have a few places worth seeing (they are not high tourist locations).  It is nice to have family to visit and maybe they can assist with some of the minor issues/problems that could pop up.

Good luck

@Ashley L. I purchase that property in a minute in my market.  I think those in higher cash flow areas are used to what is a good deal in their market (i.e. cash flow market).  Versus in higher appreciation markets I would rate it as forced appreciation (your property does excellent), instant equity (your property does excellent), expected property appreciation (you believe your property seems likely to have good appreciation and I am assuming have done your homework), expected rent appreciation (you believe your property seems likely to have good rent appreciation) and finally initial cash flow (your property does OK but there are many locations in the country that do better).

It is not arguable (as in mathematically it can be proven) that historically financed buy n hold in appreciating markets return better ROI than low appreciation markets that provide far better initial cash flow.

I do recommend that you do the full calculation of expected cash flow taking into account mortgage payment,

taxes, and insurance (PITI), vacancy, maintenance, and cap expense. I have used spreadsheets to calculate estimated monthly cap expense and it shows me that cap expense is higher than all except the mortgage (assuming high LTV such as yours).

Good luck on what looks to me to be a very good investment.