All Forum Posts by: Dan H.

@Melissa Justice covered the options fairly well except

1) no need for the 1031 due to still qualifying for the owner occupied gains exclusion

2) the only reason the rental would cash flow is 1) the high equity position 2) the far below market interest. With $270k of equity even a money market can get at least $11k/year with a lot less work. In addition, I am unconvinced that the rental has positive cash flow even at $2100/month rent (meaning I am pretty sure it does not) when properly allocating for all expenses (PITI, vacancy, maintenance/cap ex, PM (allocate for pm even when self managing as your time has value), HOA?, misc (asset protection, book keeping, one off things like utilities associated with a slab leak, etc). The reality is a property worth $375 that can rent for $2100 max is always going to be a poor rental.

Using 50% expenses (50% rule)

2100 (rent) - $1050 (expenses other than mortgage) - $2047 = negative $997

You can see even at a 40% expense ratio, this would be negative)   Even at 30% expense ratio this is negative.   Same for 25%.

At 20% expense ratio (hopefully you being an agent you know how unlikely it is to have sustained 20% expense ratio)

$2100 - $420 - $2047 = negative $367/month.

I would sell using your OO gains exemption and invest the money in the best investment you can find and I think that is unlikely to be another property or paying down your current OO loan.

I know bigger pockets has become largely RE related, but it is possible that RE will not be the best option for everyone at all times.

good luck

The city will not collect.  The social host ordinances require proof that the LL knew or should have known the fireworks would be set off.   The jurisdiction has to prove this.

if the LL knew, then they deserve the fine.

Nothing about nothing.

Rent minus piti does not equal cash flow especially on an MTR. 

How did you derive a rent of $3k/month?   Does that rent include vacancy such as would be included if you used average daily rate (ADR)

You have utilities, maintenance/cap ex including on tne furnishings, PM (always include it even if self managing because your time has value), potential vacancy, increase in insurance cost (STR/ MTR insurance typically costs extra), and miscellaneous.

Your cash flow will be significantly less than the $1500 that was rent minus PITI.

However, if the house is bigger than you need then there is opportunity.  You can do as you proposed or you can house hack renting out the unused bedrooms.   Both will provide additional return from your existing home.  

Good luck

I have hired countless contractors over the years.   My biggest mistake that I have repeated (apparently not learned from) is when to fire a contractor.   I have made this mistake a few times.  I know contractor is not performing to my expectations.  Contractor always has excuses and states the job will be done soon.   They miss their new deadline with more excuses, promises to do better, and another optimistic finish time.

The reality is firing a contractor involves work and conflict.   The current contractor often makes new promises when getting fired but they have already demonstrated that their promises mean $hit.   Then there is the effort of hiring a replacement contractor.   It is not a pleasant task.

Therefore, I understand why the contractor was not fired.   

My properties are local and I would tell the contractor to sue and I will counter sue for breach of contract and the costs associated with that breach.  I would expect nothing to happen.

I think it is very unlikely that any contractor brings you to small claims over $200.   Local or OOS.

Have you heard the phrase if you have the money to solve the problem, you have no problem?

you are OOS, it is only $200, if you pay it you do not have this hanging over you.   If you pay it be sure you get a text or email stating $200 is the entirety of what is owed.  Then pay it and sleep well with this issue closed for such a small amount of money.  It is just not worth causing any concern.

Good luck

I see some good answers but none that was the first thing that came to my mind.  I will get to it after telling a bit about my path.

I am a natural engineer.   I go into a poorly designed anything and I can see the design flaws like few others.   I studied software and initially loved my job.  I was good at it.   Most of my career I was the youngest or 2nd youngest at my grade.   I was one of 3 named architects on a subsystem on the 2nd most complex jet ever.   I made a lot of money in engineering but after enough years I lost the passion.   I stayed on for another handful of years taking reduced roles because 1) the passion was not the same 2) to spend more time with my family.  I then “retired”.

As I was losing this passion, I came on a different passion.  It was to see investment opportunities that others were missing.   For years before I retired as one of the highest paid engineers at a large aerospace company, I was making more in these investments than I was from my w2.   

The first clearly identified opportunity was when fracking first started to be a wide spread word, we acquired $300k of mineral rights where fracking was not yet in place.  The valuation was based on current production and projected reserves without any value based on increased near term extraction due to fracking.   This was basically every dollar we had outside of retirement accounts and my home.  In hindsight I should have liquidated my retirement accounts and paid the penalty and taxes.   First year distribution was ~$200k.   It was probably over 10 years before it had appreciable decline and today I get maybe $40k/year.  This was like printing money and seemed almost certain to me.

The Great Recession saw RE Prices in my market go down ~40% but rents barely moved in either direction.   Interest rates fell.  The purchase was not whether it could make cash flow, but how much cash flow.   Seemed obvious to me it was a great time to purchase RE and it was.  I wish I had 1) purchased more 2) taken a little less cash flow for better areas.

I never invested in crypto, but after trump backed crypto it sure seemed like a near certainty that icrypto would go up in the near term. I missed that seemingly obvious opportunity.

Now to my point, all of these were a passion for me.   Granted as some point I lost the passion for engineering (my company made many generous offers including as few as 12 hours a week to retain me).  

I have made more than 7 digits net worth in 3 very diverse routes that all were not drudgery (not counting the last couple years as an engineer).

Virtually no one gets paid to do nothing.  In addition, identifying an opportunity is only as valuable as you are in a position to take advantage of that opportunity.   If I had more money, I would have acquired more mineral rights.  Maybe if I had more money, and definitely if I had a crystal ball, I would have bought more RE between 2010 and 2021.

You need to identify a way to make money that is at least not drudgery and ideally is a passion.  Getting paid to do something you enjoy doing is a lot better than getting paid to do something that you hate.  In addition, the money you save can be used to take advantage of identified opportunities.

My current view on traditional residential RE is that it is challenging.    The population is aging.   Leveraging anything that benefits from an aging population could be a good opportunity.   Something to think about.   I recently committed $100k to such an investment.  I am looking at further opportunities related to an aging populace.  Note to take advantage of this potential opportunity likely requires assets.

good luck

I think she is the n a difficult sell position.   Did she buy these as owner occupied?  How is her equity position so low.

Sub-to is full of risks.   As a seller, I would only consider sub-to a stranger if 1) I was teamed with someone with significant experience. 2) I was desperate with few options. 

is your girlfriend using a PM or co-host? If not, is your girlfriend up on the various STR tools such as dynamic pricing, techniques to improve rankings, great cleaners and handymen? Each of these can effect revenue as it is important to achieve optimal Pricing (look to optimize the average daily rate (ADR) which is a function of rate and occupancy). If her process is not optimized, a good co-host/pm could increase owner revenue.

Have you looked into amenities?   Spas are good in many at increasing occupancy which improves ADR.   It is not a low cost option and you will want to calculate the break even time.   If it takes more than a few years to break even, do not proceed.   Any other amenity that could increase occupancy?  I am putting up a sign at one of my units that is distance to famous beaches (instagram opportunity). One of the signs will say Mission Beach 100’.  I contracted with a lady to make the sign then she had a serious medical issue so it has been all summer waiting, but I want her to have the work when she is healthy, so …   Ideally it makes the stay more memorable for the guests   Bonus if the unit gets tagged on instagram and it results in even a single additional booking  

Good luck

Quote from @Freddy T.:

Quote from @Dan H.:

@Bill B.

@nicholas L.

I will say the numbers on his mortgage payment do not make sense to me I show conventional 30 year should be less than $1k/month.   But assuming the numbers are correct …

If the mortgage (it sounds like this is mortgage only and not PITI) is $80 more than rent, this is negative many hundreds of dollars each month.

If we use 50% rule:

1650 - 1650 * 5 -1730 = negative $905/month (less if mortgage was actually PITI).

That is large negative cash flow and not something to ignore or treat similar to a real $100 positive cash flow.  

I especially believe this to be the case on a $190k SFH. That price indicates historically the property has not kept up with inflation. There will not be any $1k/month appreciation to compensate for this large negative cash flow. In my market, the average appreciation would easily cover that negative cash flow, but that is not the case here.

If OP keeps this property, what is the source of the projected return?  Not cash flow any time soon.   Not appreciation if the historical appreciation is a reflection of future appreciation.  

RE is not passive.  To own RE without achieving return that is in excess of passive options is not something I would recommend. 

OP, I suggest you sell and move forward more educated and more cautious.  

Good luck

 It has appreciated over time. It was sold for 91,000 in 2020 and has appreciated since then. Originally it was going for 200,000 and I was able to bring it down to 190,000. The question is, has it hit a peak? Will it go for more in the future?

When I look at historical appreciation 1) I do not look at periods as short as 5 years 2) I especially do not look at periods as short as 5 years when they have had an event as impactful to housing prices as Covid.   

asking price means little.   The market determines retail price.

historically a property that was worth $90k in 2020 or $199k today has not kept up with inflation.  Take out the Covid associated price increase and this property is lucky to be worth $120k (but properties in many areas had a Covid run up in price and Covid did occur resulting in a huge increase to the money supply).

good luck

@Bill B.

@nicholas L.

I will say the numbers on his mortgage payment do not make sense to me I show conventional 30 year should be less than $1k/month.   But assuming the numbers are correct …

If the mortgage (it sounds like this is mortgage only and not PITI) is $80 more than rent, this is negative many hundreds of dollars each month.

If we use 50% rule:

1650 - 1650 * 5 -1730 = negative $905/month (less if mortgage was actually PITI).

That is large negative cash flow and not something to ignore or treat similar to a real $100 positive cash flow.  

I especially believe this to be the case on a $190k SFH. That price indicates historically the property has not kept up with inflation. There will not be any $1k/month appreciation to compensate for this large negative cash flow. In my market, the average appreciation would easily cover that negative cash flow, but that is not the case here.

If OP keeps this property, what is the source of the projected return?  Not cash flow any time soon.   Not appreciation if the historical appreciation is a reflection of future appreciation.  

RE is not passive.  To own RE without achieving return that is in excess of passive options is not something I would recommend. 

OP, I suggest you sell and move forward more educated and more cautious.  

Good luck

Quote from @Nicolás Eduardo Larach León:

Quote from @Dan H.:

You reference is flawed: 

“The price-to-rent ratio compares the median home price and the median annual rent in a given area. (You’ll remember that the median is the midpoint, where half the numbers are lower and half are higher.)”

Do you believe there is any large market anywhere that the median rental is as large as the median home price?   It is not.

Do 1% traditional LTR rent ratio properties exist?   Yes but they are easiest to find in the worst areas of he historically poor appreciation areas.   Is this what you want to own?

Note rent versus purchase price leaves out many variables that are relevant.   Financing plays a role.   Rent growth and appreciation play a role.

I believe for a positive cash flow you need one or more of the following:

- below market value purchase.   Many investors are purchasing far below retail.  These are not typically available on the mls.

- significant value add without associated refinance.

- lower leverage/LTV. Virtually all properties cash flow at 0% LTV.

- alternative financing.  Assumable, owner financed, sub to, etc.

- alternate rent models such as STR, MTR, rent by room. Each of these have their challenges but if done correctly can increase the potential revenue.

- patience: fixed mortgage combined with rent growth implies that virtually all properties will eventually cash flow if no value is extracted.  Note I am not this patient.

Everyone of those options requires work, has risk, and/or takes a long time.

good luck

 Thanks for the thorough answer, very interesting points made. I agree that below market value purchase will help. I'm meeting people to understand where they found such deals because in my area even bank repos go at market value.

Similar most larger wholesalers sell at a price that is very tight. They know exactly the min profit that their most aggressive buyers are willing to pay. They price at this price point. One national wholesale recently advertised an ARV $100k more than my calculated ARV. It has not been listed post rehab yet. One of our ARVs is way off, in a few months it will be revealed whose ARV was more correct.

You typically need to purchase direct from owner or investor to get a discount that justifies RE investing.   Occasionally smaller wholesalers/birddogs provide deals.  These off market purchases often has risk and/or requires work.   These are often inappropriate for newer investors.

I do not know your current living situation or REI experience, but I believe the most likely REI to work for most newer REI is to buy a small MF (less than 5 units) via a below market assumable loan. This eliminates competition from bigger RE investors. This is a search your agent can set up for you sending candidate properties into your inbox. Bonus if the units needs some light rehab for some sweat equity.

Recognize in this RE environment that REI is challenging. It is unlikely to provide life changing benefits in the near term.

Good luck

You reference is flawed: 

“The price-to-rent ratio compares the median home price and the median annual rent in a given area. (You’ll remember that the median is the midpoint, where half the numbers are lower and half are higher.)”

Do you believe there is any large market anywhere that the median rental is as large as the median home price?   It is not.

Do 1% traditional LTR rent ratio properties exist?   Yes but they are easiest to find in the worst areas of he historically poor appreciation areas.   Is this what you want to own?

Note rent versus purchase price leaves out many variables that are relevant.   Financing plays a role.   Rent growth and appreciation play a role.

I believe for a positive cash flow you need one or more of the following:

- below market value purchase.   Many investors are purchasing far below retail.  These are not typically available on the mls.

- significant value add without associated refinance.

- lower leverage/LTV. Virtually all properties cash flow at 0% LTV.

- alternative financing.  Assumable, owner financed, sub to, etc.

- alternate rent models such as STR, MTR, rent by room. Each of these have their challenges but if done correctly can increase the potential revenue.

- patience: fixed mortgage combined with rent growth implies that virtually all properties will eventually cash flow if no value is extracted.  Note I am not this patient.

Everyone of those options requires work, has risk, and/or takes a long time.

good luck