All Forum Posts by: Dan H.

I do not have experience with basement conversions but the egress rules have gotten stringent enough that I will be surprised if you will be able to do it.  Even existing bedrooms I am required to lower the window sills to meet the egress rules.  So placing a bedroom in a basement I suspect will be problematic.  I am unsure if the egress rules is San Diego county, state, or other level.  

Good luck.  

I am very pro investing in CA.  SD, LA, OC, SF have been the best investment markets in the nation over the last decade (likely the last 2, 3, and 4 decades).

So my suggestion is you continue to save and house hack where you want to live (likely Bay area for you) into a duplex using an FHA (assuming you can use an FHA). Your cash would go fairly far with an FHA loan but if an FHA is not available my suggestion is the same but you would have to save for longer. You will learn a lot going this route. You will be in historically the best REI market. You will be leveraging your money well (especially if using an FHA).

I am not stating that it is not possible to invest well outside of where you live. You would need to do your research, find the right team and market, and likely (historically) not do as well as my suggestion (SF duplex house hack). Out of state REI can out perform most investment choices but there is risk (I think all REI has some risk even if in CA has historically worked great past performance is not necessarily and indication of future performance).

Good luck

I would like to make it but have prior commitment.  

 I own 10 investment units in 5 properties (my family has another 7 investment units in 3 properties) so I can still get traditional financing.  So I have never needed to bundle but I do believe you have the right idea to bundle.  I suspect there are far better experts on this subject than me.   Hopefully a qualified expert will respond.

Good luck

@Connie Stainbrook

I agree with @Account Closed on the value of keeping a CA appreciated property due to prop 13.  I have a home that I pay ~30% of the property tax as my neighbors who have purchased recently (I purchased in 1992).  I have no property with the Prop 13 tax delta that your property has.  If I did I would look very hard about selling it and any decision to sell would take into account the lost value of the prop 13 benefit.  You are likely being taxed at less than $1M on a property worth $2.1M for an annual tax savings of $13,750 (I used 1.25% tax level which will be close to accurate).  So you are saving over $1K/month in Prop 13 tax savings.  You should calculate that into any decision to sell.  If the numbers still indicate that it is best for you to sell, then sell.

I have created posts (responses on threads) on the benefits of investing in So Cal.  I include the Prop 13 benefit.  The family had a property in Alabama that the property taxes went up faster than the rents significantly reducing our cash flow.  If we sold then it would have been great but we sold after getting hit by 2 hurricanes and the property loosing much of the value that we had previously been taxed on.

I just want to be sure that you include your Prop 13 benefit in any decision to sell the property.

Good luck

I have purchased properties at near market highs in 1992 and in 2003. Both had depreciated more than 15% after I purchased them (maybe more than 20%). Both are up significantly today. I look at it as there will be ups and downs but So Cal coastal (San Diego, OC, LA) has limited supply. It has always trended up over the long haul. Market valleys I look at as opportunities but I do not shy away when we may be near a market high. No one knows that we are at a market high. Trying to time it is like timing the stock market which data shows most people do terribly. When the REI market is low most people fear it going lower. They do not purchase due to this fear. So there is always an excuse to not invest and some then look back a few years later and realize that they should have bought then and now is not the right time because we may be near a market high (for them back a few years ago was not the right time either; the right time for them is always some time other than now).

My family and I have only sold a single property for reasons other than 1031 exchange and even that property I would not classify as a mistake (and it got hit by 2 hurricanes: it obviously is not So Cal, a duplex in Gulf Shores Alabama that was beautiful).  You know how many properties that I have passed on that I would have profited significantly from (passing on them was a mistake)?  I suspect it crosses over 100 (my top excuse is lack of time).  Everyone can find an excuse for not purchasing but my experience is that I do fine (most would say far better than fine) on every So Cal purchase.  Even the property in Gulf Shores with 2 hurricanes we made a profit (not like our So Cal REIs but a little profit).

My point is that there will always be risk but if that risk always prevents you from getting started then you also are potentially missing opportunities.

Good luck

>my yearly cash flow after mortgages + escrow is approximately $30K on all my homes. 

Your definition of cash flow does not match mine as I include vacancies, maintenance, and cap expense in my cash flow numbers.  As long as you realize that you are not including those expenses and that in reality your $30K cash flow is significantly less when taking those into account all should be fine.

I think you could benefit from reading up on cap expenses just to make sure that you have full realization of these costs.  The cap expenses are coming.  You point to your heirs eventually getting the properties and doing as they please but someone (you, your heirs, or an eventual buyer) will eventually get hit with cap expense costs.

>Appreciation means nothing to me as I'm not selling and I don't do 2nd mortgages

I have only one property with a second and that is because the second loan is artificially low (it is at 3%).  It does not mean that I do not take equity out of the properties as I see fit.  I refinance the first loan with another first loan.  I can then use the money from the refinance as I desire but I typically use the bulk of it for further investments.  I try not to let my equity in any property get too high because it is not leveraging the asset but I will not refinance into a significantly higher interest rate (I do not need the money bad enough to want to pay more interest for it).

Good luck

@Jack Slattery Not to point out the obvious but rent - (mortgage + escrow) does not equal cash flow. In my market that unit is negative cash flow on my calculations (not by much). For self managed I use 5% vacancy + 5% maintenance + $300 cap expense for average size rental SFR (think ~1000'). I believe San Diego cap expense is higher than most other markets so maybe $200 cap expense is appropriate in your market. Using San Diego cap expense I get 750 - 414 - 75 - 300 = ($39). If cap expense is $200 in your market then positive $61. Without good prospect of appreciation (hopefully value and rent will both appreciate) I would not purchase that property at positive $61; not worth the effort to manage unless there is going to some positive appreciation.

Good luck

@Alain Perez-Majul  I will justify it in San Diego by stating every property I have owned at least 3 years has done significantly better than 9% annual return (100% of the properties not an average of the properties).  I have not calculated my average return on those properties but I suspect it is likely over twice the 9%.  This is even using what some believe is a high cap rate (I believe it to be close to accurate) of $300/unit per month.  Look at the numbers for San Diego, LA, SF.  I have not been an exceptional in this market; pretty much everyone who has owned at least 3 years has done better than 9% annual return.

It seems you are prepared for some negative cash flow.  I agree with your assessment of Poway school district especially the elementary schools.  There is not a school district in the state that is as large or larger that performs better on the standardized testing.

I have purchased properties in San Diego county since 1992.  I have purchased near market highs (as well as near market lows).  Every San Diego property that I have owned at least 3 years (including those purchased near market highs) is worth more than $100K above purchase price.  I suspect @Thomas S. does not understand the So Cal market or the demand.   Add in PUSD and I cannot imagine it depreciating long term.  As I suspect you are aware PUSD residences sell fast and even at the worse of the housing crisis they sold fairly fast.

Just be prepared for some negative cash flow (not too much: it will be slightly positive until large expense).

A little over a year ago I placed an offer on a duplex in Poway and did not mess around.  I went in immediately at asking + $30K.  The realtor did not even acknowledge the offer as apparently we did not make the list of offers to even confer with.  Sad part is that I was willing to pay more but was not given the chance (I thought my offer would at the very least get an opportunity for a subsequent offer).  If I had purchased it at $50K over ask I would still be up as the property has appreciated that much in the last year.  There simply are no multiplexes in PUSD that hit the market (I believe none have hit the market in the last year).

Good luck