All Forum Posts by: Dan H.

RE buy n hold rentals purchased to be your home are typically not very good buy n hold RE investments. How do I know? I have one of my ex-homes in my rentals. It is by far my worst performing REI. It makes sense because I purchased it to be a good home for my family and me. My other REI purchases I made because they made good investments.

You do not say what year you purchased the property or what your LTV is but there has been significant recent property and rent appreciation. For it to be negative cash flowing after the recent appreciation likely means it was a poor buy n hold rental property (but maybe a very good home).

I suggest you at least look at if you would be better off investing the money elsewhere. Maybe 1031 exchange it to a better buy n hold rental or DST or ? I will be very surprised if the property and rent appreciation of the last few years can continue. This implies that if it is not cash flowing now it could be a while before it has positive cash flow. You likely have made quite a bit of money on property appreciation but this seems unlikely to continue at the same pace. As a final item, I find most small or more recent buy n hold investors under estimate cap expenses. This implies there is a decent chance that your negative cash flow is greater than you believe it to be.

Good luck

@Matthew Livesay

What I have seen on code enforcement is that it varies significantly based on the area.  Normal heights seems to allow obvious code infractions.  Cities like Poway raise a stink if the recreation vehicles are not parked per the rules.  I even experienced a violation because of a firewood pile being too big (yes they have a rule on maximum size firewood pile).  It would be best if all the structures/units were permitted but if they are not the next criteria is to evaluate if your unit is more out of compliance than virtually all of the other RE.  I was in Normal Height a few months ago and a flipper was creating a granny flat that he knew the purchaser was going to rent out as a separate unit.  He pointed out the both properties next to him already had this violation and was not being enforced.

I think house hacking a duplex to quad is a great way for younger people to start on REI. You will learn so much. I have 2 recommendations: 1) make sure you understand cap expenses prior to purchase. Many inexperienced investors believe their investment cash flows when in practice it will not. Cap expenses are a much bigger hit than vacancy and maintenance. Without knowing the size of the 3 detached units I would use $750/month for cap expense. More if they are bigger than typical rental size and a little less if 1 BR units or studios. 2) Make sure your comps are of sold properties. for duplex to quad do not use listings. In my area of expertise there is a huge difference between duplex to quad listing prices and sold prices. In my area virtually every duplex to quad that has sold in the last 6 months cash flows (@Lee Ripma).  The listings do not reflect this but the sold units do.

Good luck

Was the RE previously your residence?   The reason I ask is that the cash flow is very poor for a property purchased as an burn hold rental investment in 2011.   

In general RE purchased as homes are not as good buy n hold rentals as properties purchased as buy n hold rentals.  How do I know?   I have my previous home in my rentals and it is by far my worst performing rental.  

I suspect you would do better 1031 exchanging it for a better buy n hold rental property.  Before doing anything look at your savings as a result of prop 13 and be sure to weigh that into your decision.  

By the way I am a fan of the local RE market.   If you financed the property your returns would clobber any area that was only only relying on cash flow.  In the long term this has always been true but short-term has various cycles and you must be able to withstand any short-term value decline.  

Good luck.  

The plumbing for the laundry will heavily depend on what plumbing is near to the proposed laundry hookup as well as potentially the foundation type.  Is there hot, cold, and sewer hookup close to the proposed laundry hookups?  Do you plan on gas and electric (240v) dryer hookups?  Can your existing panel handle a new deadicated 240v circuit?  Is there a raised foundation?  is the wall for the proposed hookup an interior or external wall?   If it is an external wall is it acceptable to you to have the plumbing/electric conduit on the outside of the unit?  All of these have an impact on the expected cost.   If you need a new circuit panel with a new sdge drop then I suspect the cost will exceed the benefit.  

Good luck.  

 My issue with out of state is if it is a good deal why are the local buyers who are experts not snatching up this property?  I hold this belief in all out of state RE including Kansas City, Memphis, or Essex County New Jersey. 

My family has purchased out of state but we do not any more.  We do better investing were we are the experts which is our local market.  We can self manage or at least have good oversight of the management.  

Also even if you choose a good PM things change.  Management companies get purchased or managers move on.  

If there is a large scale disaster I can say from first hand experience that you will be hard pressed to have your units needs addressed before any of the local investors.  

Finally you got to love Prop 13 if you are a CA RE investor. We have owned out of state units were the prop tax increased faster than the rents. A duplex that cash flowed good at purchase barely cash flowed a few years later.  It would have been ok if we sold at these increased evaluations but 2 direct hit hurricanes later with months of vacancies and the property was no longer worth its purchase price after we had paid taxes at the higher evaluation for a couple/few years.  

Out of state RE is full of potential problems.   

CA buy n hold RE historically has great returns.   Southern Cal financed buy n hold historically has some of the best returns in the nation but you are looking to invest elsewhere.  

Good luck

I never try to predict the short-term RE market as it is similar to timing the stock market and is easy to not time optimally.  History indicates long-term San Diego has always appreciated.  

Unfortunately the recent interest rate increase has in effect significantly raised the price on financed buy-n-hold RE.  

I had planned to purchase at least one small multiple this winter/spring but with the recent rate increases I have not even though I have seen some that are cash positive with an opportunity for some forced appreciation.  Maybe my expectations are jaded due to just 5 to 6 months ago I could have made much better purchases.  

So I would not be surprised if I do not make my planned purchase (or if I do make the purchase).  I do think it is not as optimal purchase time as 6 months ago to 6 years ago largely due to the rate increases. 

Good luck

I read the article and the author includes RE operated as a non-passive pursuit as a business (it may be in the article comments).  This implies if you are doing forced appreciation, actively leveraging, performing profitable flips, etc then you can make significant money because you in effect have made RE a business.  The passive investor will need some good luck.

My first buy n hold that was mine was from 2003 (my family has had buy n hold since the late 1970s)and I have a fairly good paying 9-5 job so I did not start from scratch.  However, I started investing in RE in earnest in 2012.  The purchases made in 2012 and 2014 have done fabulous.  So it somewhat depends on the definition of a lot of money.  Do I expect the same returns going forward?  I wish but I do not.  Do I think it was luck?  Not so much luck even though I could have made poor purchases and did quite well.  I do not consider it luck because I was very confident the local RE market would appreciate.  I mostly purchased properties that had an opportunity for forced appreciation

(one exception and it was priced a little below market at a time that I had no time for a rehab and desired a near zero effort property).

So if RE is your chosen path then run it like a business.  Think about forced equity.  Think about leverage.  Realize there are risks and know when the risk is worth taking.  These are ideas that are common to many business pursuits.  RE as a business is not much different.

Good luck.

@John Arendsen

If you were flipping it what would the asking price be (ARV)? I understand not flipping it but I am trying to determine what the forced equity increase is.

You appear to be doing a lot of upgrades but I am shocked at the $75K cost of the transition.  That is a significant cost for 432'.  I have never done a rehab that costly per square foot and I am typically shocked at the cost of my rehabs (always more than I expect).

Are you planning to refinance it to pull out some/all of the $200K invested?  The numbers seem tight.  Are you thinking the profit is in the forced appreciation and any appreciation due to market appreciation going forward?  If you finance the full $200K at 30 years your payment will be about $1K + $1K pad rental + taxes + insurance + vacancy + cap expenses.  To be blunt I have no clue as to taxes, vacancy, insurance and cap expenses on this type of home so my WAG would be $250/month (I have no idea how accurate this is but I know this is significantly less than I would use for a detached studio standard home) for a cash flow of $250/month.

Ideally the forced appreciation is real significant.  Am I missing something in the expected profit?

I second it sounds like a fun project.

Like many of the responses I would network prior to the purchase.

After having some of the network I would house hack a duplex to quad with potential forced equity gain (i.e. not one that has already been rehabbed) using an FHA loan with as little down as I could. I would skimp and save until I could obtain the necessary down payment with a little buffer. I would do much of the maintenance and rehab myself. I would use this to educate myself on purchasing properties, managing properties, maintaining properties, rehabbing properties. I would leverage this knowledge to continue to grow my business if I decided RE was the path I still desired after having experienced it on a fairly small scale.

Unlike some responses it would have to be local.  No more than 1 hour away.  There are so many reasons for this but I will start with contacts and expertise. 

It is easy to go to local RE meetups if within an hour.  This is a great way to obtain multiple contacts which in the long haul you will need.  My best handyman ever is now a RE competitor.  My trusted contractor has pseudo retired.  My trusted electrician is having emotional issues.  it is important to have contacts and nice if they are at least 2 deep contacts. 

As for expertise it is real tough to exceed the local knowledge.  If the locals are not purchasing the RE asset you need to question why.  My family has tried out of state and while the properties were awesome, there were issues that were due to out of state and we now own only a single out of state unit that will likely be placed on the market when the current tenant gives notice.  I do not even glance at a property that is more than an hour away.  It does not matter if it is supposedly a great deal.  If it were such a great deal how come a local investor more familiar with the area has not purchased it?

To summarize I would 1) network to obtain contacts 2) skimp and save for down payment for FHA loan 3) house hack a duplex to quad locally that had some opportunity for forced equity gain 4) use the duplex to quad to learn about dealing with tenants, maintenance/repairs, rehabbing (forced appreciation), various laws, etc. 5) If after experiencing buy n hold if I still think it is the path for me I would repeat.

I am an advocate of So Cal RE investing but I suggest you sell. I would not purchase that property as an investment.  Those who are stating this unit will result in a little negative cash flow do not have a good concept of  rental expenses including cap expenses.  If your mortgage includes escrow for taxes and insurance the negative cash flow will be $150 to $350 (rent differential) + $160 vacancy (5% vacancy ($80) + 50% of $1600 every 20 months ($80/month)) + $100 maintenance + $250 cap expense.  I show negative cash flow of $660 to $860 each month.  That is bleeding cash.  

Recent appreciation in So Cal have easily exceeded this amount but I would not want to rely on such appreciation.   If you were slightly cash negative that would be different.  However with this negative cash flow you need decent appreciation just to have your investment returns be even.  

So this advocate of So Cal RE investment is strongly encouraging you to get out.  This property, as a rental, could literally bankrupt you.  

Good luck