All Forum Posts by: Dan H.

Ducting put in 30 years ago was single wall and very inefficient.  Typically the louvers are permanently stuck into position and often have multiple paint layers.  Even using your estimated cost and initially provided life span on those 2 items make clear that $100/month will not suffice.  Also if you get 50 years out of a rental kitchen that will be amazing (I think your initial provided lifespan is more realistic).  

Most landlords never  do the exercise of calculating a true estimated cap expense.  They use numbers sourced who knows where.  My spreadsheet has my cost estimate and a min and max lifespan (for kitchen I use 25 year max because cabinets need work by then and painting does not save as much over replacing as you may think especially when taking into account the lifespan of the painted cabinets versus lifespan of replaced cabinets) and the counters are usually in real poor shape before 25 years.    

I know what my spreadsheets tell me.  When I first did this exercise a few years ago I posted my findings on BP San Diego forum.  I was hoping for more discussion than resulted but in general landlords who had been in buy n hold many years were less surprised by the findings than ones who got in since the 2008 crash.  

You are not the only one to think my numbers are conservative but San Diego investors who participated in the post did not find my numbers to be excessively conservative for San Diego. 

I think posting a $100/month cap expense may impart on newbies that this is a realistic scenario. If you go through the effort and it shows a true $100/month cap expense estimate 1) great for you 2) yours will be significantly lower than anyone has shown me for SFR 3) any newer landlord should realize that you are extremely efficient, maybe doing all the work yourself, and to not budget this low. It is mostly for item #3 that I spent the time to show just your 2 fairly low expense items add up to $29/month with your initial numbers.

My worse actual cap expense to date on a rental (not an estimate but actual cost) was ~$30k foundation issues.  At $100/month this one expense could use 300 months (25 years) of your allocated cap expense.  

My worse actual cap expense on any property I own was $41k (in 2003 dollars) when the city mandated my residence hook to sewer rather than use septic (drainage in high rainfall years was shown to be inadequate with sewage rising to surface).  

Hopefully you never experience these extremes on actual cap expenses but they can happen. Newbie investors should use much higher cap expense estimates than $100/month for SFR (my primary point).

Good luck. 

No AC, just furnace?  Maybe a wall mount furnace with installation for $2k.  I cannot see installation of furnace with ducting for $2k unless you do the work yourself. 

 Your kitchen expense using your cost n life span is $21/month for the kitchen alone.  The furnace at $2k is $8/month. So those two items are $29/month cap expense using your costs n 20 year lifespans.  $5k will be a cheap kitchen but maybe if real small and done on a tight budget (definitely no granite).   That still leaves roof, flooring, windows, landscaping, fencing, hardscape, plumbing, foundation, bathrooms, stove, refrigerator, paint, framing, siding, etc.  Even if all your numbers are as cheap as a $5k kitchen I cannot see it coming in close to $100/month (you are almost at 1/3 of it on 2 long life items - flooring is often a killer, in my unit refrigerators are higher than one would expect).  

 I do not agree.   Thinking that cap should not start the moment after remodel is interesting and I have heard it before.   But what it implies is because everything is new I will not use a cap expense estimate but when the items then start to age you need to back load the cap expense estimate.  So you artificially show too low a cap expense estimate (maybe $0) after remodel and then an inflated cap expense after a certain aging.  When does this cap expense estimate start due to the aging?  Basically I claim the life has started at the moment the cap expense has occurred and not doing the estimate this way will yield interesting cap expense estimates.  

Now compare it with this way to do it.  Create a list of all cap expense items and placing current cost to address and your expected lifetime of item (ex HVAC $5k,15 years; kitchen $7k, 15 years; roof ... hardscape...; foundation, fence, windows, flooring, stove, refrigerator, hot water heater, paint, siding, landscaping, electrical, plumbing, etc).   Cost/life span In months produces cap expense estimate on that item. Add up all the cap expense items to get the unit cap expense.  It will show $100/month will not cover a sfr.  I know what the numbers show for my sfrs (hint 2x your estimate is significantly too low on my SFRS).  

Alternatively stay in REI buy n hold business long enough and with enough units and use actual cap expense costs adjusted for inflation. My family has been doing this since mid 1970s and I do not have enough data to feel comfortable using this method. But it could produce accurate numbers with enough units. I would think 500 units and 2 years if the units are wide range of ages (hardscape lasts a long time (30 years for asphalt, cement maybe 60 years) but is expensive, ditto foundations) could suffice.

If you do the exercise please let me know what your numbers produce.  

Good luck

Rent - PITI = cash flow? I wish. My properties have much better cash flow than I believe. Cap expense, mainrtenance, vacancies, mgmt do not affect cash flow? I have been using wrong formulas for years.

Seriously?

 How did you calculate an expected cap ex of $100/month?   I do not believe there is a location in the country that expected cap expense is below $150/month for sfr.  I have never seen a cap expense that used expected life and expected current cost even as low as $150/month for sfr.  The lowest I have ever seen was almost $150 for 2 BR apartment units but I could imagine slightly lower for apartment units (maybe slightly higher than $100/month for small apartment units in a locale with cheap labor).  

So did you calculate the $100/month estimate or is that what you have experienced so far?   If it is what you have experienced so far how long of a duration have you been tracking and over how many units?

I do not believe appreciation and cash flow are mutually exclusive but areas where appreciation is believed to be most likely reflect the appreciation odds in the price making cash flow more challenging.  Who wants to sell a house today that cash flows significantly and is expected to appreciate 10% or more this year.  That is why locales like So Cal can sell for the values they do because the appreciation is perceived as so likely. 

I want to see the reference showing me a locale has experienced 200% market appreciation in 3 or 4 years (I would be interested in investing in such a market). You can look up the market appreciation in San Diego in last 4 years. I think it will be in the 70% range with one year significantly over 20% and the lowest being 8%. So the $1m asset would have a worth of $1.7m on average in San Diego (statistical average). Some locales slightly better and some a little worse. In practice $1m properties, if sfr, are seldom LTR and typically STR. My family's STR property has rent over $150k annually and is worth maybe $1.2m (by the way purchased for $375k). So on a $1m sfr in San Diego STR would be the best investment strategy.

I agree your quote seems high.  

However your ducting is 30 years old and likely done.  For 900' I would not replace the ducting.  I would go mini split.  They have been popular in Europe a long time.  They would have no issues with 900' (I have a 1400' unit on minisplit as it had no attic).  So far the mini splits outlast the window style AC which do not last very long (I am buying better units than I used to but the old window units did not last 5 years).  The mini splits look nicer.  The outside part of unit is also small.  Saving new duct makes labor less. 

The one thing is if their filters are not cleaned when they should be the cost to clean when disassembly is needed is high so make sure they are examined annually.  

I hope to add mini splits to two of my units in the next year (from no ac and no attic).  

Good luck.  

My advice is different than all your previous advice.  In my units with decent/nice landscaping I have in the ad listing unit availability as a tenant that wants and is willing to maintain the landscaping as many rentals do not have decent/nice landscaping.   Some tenants want to live in a place with a decent/nice landscaping. 

I could evict the tenant for not maintaining the landscaping and would if the tenant was not worth keeping.  But if the tenant is otherwise good I keep them and charge them at move out for new landscaping.  Similar to anything else that they did not adequately maintain.  They are sometimes surprised to lose hundreds of dollars due to killing off grass.  Sod is expensive to purchase and lay.   The property is not being returned in the condition it was rented to them due to their negligence.  So of course they will be charged for returning the landscaping to a similar condition as when they moved in.  

If you take the advice of no/minimal landscaping your unit will be like most other units and will not look nice.   My units are all above average for their locale.  I target the upper end of tenants in those locales.  Part of the attraction is the attractiveness of the units which includes the landscaping.  Also having landscaping helps in appraisals for refinance or when it comes time to sell.  

I would have property manager talk to tenant so that they are fully aware that maintaining the landscape is the tenant's responsibility.  If they fail to maintain the landscaping they should not be surprised when they get charged for replacing the landscaping if they destroy it.  

Good luck

Like all of San Diego the initial cash flow is weak unless using STR. The profits are in the appreciation (rent and property appreciation). The only people to lose money in San Diego RE are those that were over leveraged and had to sell when the prices were depressed. This long-term, great track record, appreciation is built into the pricing.

My wife also went to high School in Escondido (San Pascal).  Her neighborhood was and still is nice.

 I agree the return based on initial cash flow is not great but San Diego RE in current market is not primary a cash flow investment but a rent and property appreciation market.  There appears to also be an opportunity for sweat equity in this property but I have only seen the property exterior. 

The RE is in an area that I would place as a C area and not near the coast (Escondido).   In B area near the coast the market rent would be above $2k for a 3/2 with 2 car garage.  

I am ok with C area but the property appeared that it would invite tenant issues.  I am more about land lording on auto pilot.   So it did not match what I was looking for.   I think it will sell for less than the current asking price (my guess is $725k) which would increase the calculated initial cash flow.