All Forum Posts by: Dan H.

I am a San Diego RE investor with a son starting on that journey ideally in San Diego.  I am too busy for any get together before BPCon, but maybe we (wife and/or I) can meet you at BPCon.

A lot has changed in the market in the last 7 years in real estate.   It is significantly more challenging today than 7 years ago.  This is everywhere, not just local.

NAR released data of certain cities from Nov 2021 of properties sold with an ADU versus without an ADU. San Diego was near the lowest value added by an ADU. It was less than $14k added value. Adding an ADU in many markets is a poor RE investment. In most markets it is a bad RE investment due to the initial negative equity position. San Diego is an extreme in the initial negative equity position. Let's stay that in the 4 years since the NAR data the value of local ADUs has risen 50% so less that $21k . A garage conversion ADU at $150k would be over $129k negative equity. Ground up at $200k would be $179k initial negative equity position.

If there is notable at the bottom showing values, try a different browser as it does not work correctly for me from Safari

https://www.nar.realtor/magazine/real-estate-news/study-adus...

Note the property tax increase will be based on what you pay to add the ADU and not the value added by the ADU. Example if you pay $200k for ADU, you can expect a property tax increase of between $2000/year to $2400/year even though the NAR data shows that the ADU on average added less than $21k of value.

Here is a list of why adding a single ADU in single family zoned areas in my CA market is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

Good luck

congrats on getting a purchase from 2024 to be working so good for you.   That was after the easy to find profitable RE purchase period.   I question if it is doing well, why not do it again?  

On to your question:
I know one fairly well known RE person (coach, lots of varied experiences over a lot of years, has a monthly meet up, etc) locally that does arbitrage. She started with MTR arbitrage and in spite of telling me it was doing well, has pretty much given up those units at their most recent lease end. She was up to a handful of arbitraged units between STR and MTR, but believe with giving up some/all the MTR she is at a couple/few units.

We have STRs in San Diego for decades. Their STR rent to current value ratio is not good implying if purchased today their cash flow would not be good. Their incredible return is achieved via appreciation which is not a source of profit for the arbitrager. In addition the arbitrager does not benefit from the equity paydown. The arbitrager basically has a job as a STR/MTR PM with a bit more upside, but tons more risk.

In addition as an owner of properties, I have never understood why someone would choose a low capitalized arbitrager over a licensed, insured, professional PM or an unlicensed co-host where the owner gets the upside.

I recognize it is a challenging time to be an RE investor, but I really believe arbitrage is not a worthwhile pursuit.    Too much effort and risk, not enough upside.

Good luck

Quote from @Chelsea Jeffers:

I appreciate that response. All of that makes total sense. 
The garage conversion was mainly started to create a space for me to live so I can rent out the main house so I am not carrying the mortgage alone and don’t have to resort to renting and paying someone else’s mortgage.

I do however hope that property values in this area will increase over time as I see a lot of growth in my area and diverse quality of housing on my street and surrounding streets. 
I have an appointment with an appraiser to provide a before and after in order for me to have a clearer picture of the position I am putting myself in. I just wanting to be sure I am heading in the right direction. 

>The garage conversion was mainly started to create a space for me to live so I can rent out the main house so I am not carrying the mortgage alone and don’t have to resort to renting and paying someone else’s mortgage.

the way the rent control law is being interpreted (which is not as intended), your main house will be rent controlled after adding the ADU if the house is over 15 years old. 

>I have an appointment with an appraiser to provide a before and after in order for me to have a clearer picture of the position I am putting myself in

I commend your due diligence and do not believe there is such a thing as too much DD.   Did you look at the table at the bottom of the link I sent.   It has the entry for Sacramento.   I used that entry’s data in the calculation I did above (it was a market specific calculation).    The appraisal data should be consistent with the NAR data allowing for some variance for localized areas in a market as big as Sacramento.   

 >I do however hope that property values in this area will increase over time as I see a lot of growth in my area and diverse quality of housing on my street and surrounding streets.

Sacramento appreciation has been quite good.  If it continues and you use leverage to multiply the return from appreciation, it should result in a good return for a long hold.  According to neighborhoodscout, Sacramento residential values has increased 264% for this century (9 out of 10 nationally).  Your market has historically done very well.   I suspect it will continue to do well on a long term basis.
https://www.neighborhoodscout.com/ca/sacramento/real-estate.

Good luck

RentRedi was free with BP pro when we (mostly the wife) started using it.   It may still be free with BP pro.  The support has been good but it takes time to setup and there has been some glitches (so do not expect perfection).  

I use Asana to track/coordinate repairs but do not have tenant access.   The issues get reported via our Google voice (either text or call), then I create the asana task.   It is more customized in function than a spreadsheet.   Again not perfect, but it works.

good luck

Quote from @Chelsea Jeffers:

Hey BP community,

I own a property in the Tallac Village neighborhood of Sacramento. I'm considering converting my detached 400 sq ft garage into a legal ADU so I can live in it and rent out the main house. I am overwhelmed dealing with contractors as I am going about this alone with a full time corporate job. I've contacted a couple adu companies and their pricing is up there.

I want to make sure this isn’t a case of overspending for limited upside. Any advice or lessons learned would be hugely appreciated!

Thanks in advance 🙏

In most CA markets the valuation of the ADU creates a negative equity position. Per NAR data (Nov 2021) the average property with an ADU sold for $75k more than the average price of properties without an ADU. In my San Diego market hands off garage conversions are ~$150k depending on various things. With lower grade finishes and other budget conscious decisions you can get a little lower. On the opposite, it can be quite a bit more expensive. If I add 15% to the ADU valuation for it being almost 4 years old it is $85.5k. Basically a $65k negative initial position.

https://www.nar.realtor/magazine/real-estate-news/study-adus...

As you noted, adding an ADU is a lot of effort, but there are additional reasons that an ADU addition is not an optimal RE investment. Note you existing home becomes rent controlled if it is over 15 years old (which I am confident was not the intent of senator Weinstein and the 15 year exempt limit).

Here is a list of why adding a single ADU in single family zoned areas in my CA market is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

Good luck

Quote from @Joel Bongco:

Quote from @Dan H.:

My belief is you are entering a challenging RE market.   Prices are high, rates are high and rents have not kept up. 2 recent studies show it is cheaper to rent than to own in virtually every large market in the US.  Note landlords have increased costs on owner occupied. In particular vacancy and associated tenant flip, increased maintenance/cap ex (it is a very rare tenant that will care for a property like the owner, and in many markets owner occupied pay less property tax.

As indicated it is a challenging RE market.  I believe you need one or more of the following to have a good rental:

- Below value purchase.   This implies off market as mls purchases are retail purchases.

- value add

- alternative financing

- low LTV/leverage

- alternate rent model such as STR, MTR, Rent by room

- patience

All of there either have risk, require work, negatively impact return, or take time (I am not that patient)

Which of these do you think you can successfully pull off on an OOS purchase.   Definitely there are increased risks and challenges OOS.

I like the show Renovation Aloha   Have you seen it?   Flippers on Oahu.  

You do not state how active you desire to be in you REI, but if you are willing to put in some sweat equity, I suggest you take @Joel Bongco up on his generous offer.   I have made the same type of offer in my local market on occasion.   I am surprised how seldom my offer is accepted.  Just seeing the numbers can be enlightening    Before/after photos for the value add also could be educational.

Regardless I recommend all newbies to start in the home market or at least a market they know like their home market. REI is challenging enough without the added risk of starting in an OOS market.

good luck

 Aloha Dan! Spot on!  I too am surprised why people don't take up the offer and see how the sausage is made.  BTW, mileage may vary and its not as easy as it is portrayed on TV.  Hawaii is a super tough market, especially Oahu -  the permitting process is slow as molasses.  Thus many investors are flocking to the Big Island where it is cheaper and the permitting process is faster or just opting to do out of state investing.   I've also got a couple of  multi family units in Los Angeles which is also extremely difficult from a Rental,  RSO and LAHD perspective.   

 Renovation Aloha makes the permit process seem so easy compared to southern CA.  In many of the episodes they take covered space and incorporate it into the property adding PSF.  TV I suspect.

After the last BPCon I offered to tour and show numbers on a purchase that was completing last unit of rehab that was nearing a valuation of $1m above purchase and rehab costs.   Maybe 10 showed some interest.   Only one stopped by but not long enough to get significant info.   Like a drive by, little exaggeration. 

When I started there was no BP or other reliable RE forum.   I would have loved to see the numbers and improvements of a project that made the investor near $1m.   I would have attempted to learn all I could from that person.   Especially if I knew the same month he acquired another property that has value ~$700k above purchase and rehab costs.  It was a very good month.

I like that you made the offer to do a walk through with the OP and to show the numbers.   The numbers are more indicative of the level of success than the finished product. A beautiful product that does not net much implies a lot of effort for little gain.. Seeing both provides a fairly complete picture.

mahalo!

My belief is you are entering a challenging RE market.   Prices are high, rates are high and rents have not kept up. 2 recent studies show it is cheaper to rent than to own in virtually every large market in the US.  Note landlords have increased costs on owner occupied. In particular vacancy and associated tenant flip, increased maintenance/cap ex (it is a very rare tenant that will care for a property like the owner, and in many markets owner occupied pay less property tax.

As indicated it is a challenging RE market.  I believe you need one or more of the following to have a good rental:

- Below value purchase.   This implies off market as mls purchases are retail purchases.

- value add

- alternative financing

- low LTV/leverage

- alternate rent model such as STR, MTR, Rent by room

- patience

All of there either have risk, require work, negatively impact return, or take time (I am not that patient)

Which of these do you think you can successfully pull off on an OOS purchase.   Definitely there are increased risks and challenges OOS.

I like the show Renovation Aloha   Have you seen it?   Flippers on Oahu.  

You do not state how active you desire to be in you REI, but if you are willing to put in some sweat equity, I suggest you take @Joel Bongco up on his generous offer.   I have made the same type of offer in my local market on occasion.   I am surprised how seldom my offer is accepted.  Just seeing the numbers can be enlightening    Before/after photos for the value add also could be educational.

Regardless I recommend all newbies to start in the home market or at least a market they know like their home market. REI is challenging enough without the added risk of starting in an OOS market.

good luck

Quote from @Adrian Lammersdorf-Scioll:

Thats a hefty pre approval. I'd highly recommend looking into getting a fixer upper sfh (single family home) with an ADU (additional dwelling unit) and living in the ADU while renting out the rooms individually as a padsplit. I don't know if padsplit operates over there, but if not just put the rooms on zillow, and FB marketplace and screen/meet every applicant and have them sign a standard lease agreement. To get contractors to fix the house ask recommendations from local investors. Easy way to do that is find recently renovated properties, search the owners or companies that fixed them and send them a text or call asking who they used.

Hope this helps!  Take the dive and don't wait, or get analysis paralysis!

In San Francisco area $700k can purchase few of the properties and likely will need some work.  Median home price is almost $1.5m.  

@Jessica Yuan you are entering RE at a challenging time were a lot of long time investors are sitting on the sidelines when it comes to but and hold.

You will qualify for a little more if you but a multi family as part of the rent goes to the income qualification. It it enough to qualify for a MF in San Fran area?

House hacking is your best option.   Why pay rent to someone else?   House hack can include roommate situation.   Note it will still be a long game.

If you plan on owner occupying, have your RE agent send you properties with assumable financing.  This can result in a rate less than half of the current market finance rates.

Next up is network. Go to RE meet ups. Talk to other RE investors. My last 4 purchases have been off market without any RE agent involved. If it is on the MLS, you will pay retail. The way to get a discount in RE is to buy off market. Recognize that virtually all off market properties involve work and/or have risk.

Good luck

Quote from @Chris John:

@Bryn Kaufman

I think you're pretty correct.  Obviously, many disagree with us, which is fine.  I looked into syndications, but was immediately turned off by the prospect of paying the management finder's fees, management fees, exit fees, etc.  They can't lose even if the syndication is a giant failure.

I also looked into commercial real estate around 2021 or 2022.  When it was explained that the loans would adjust at 5 years, had a 20 year amortization, etc. I was out.  It seemed obvious that rates were as low as they could possibly get, rents had gone up like crazy, and that the potential issues of that loan rate resetting in five years were problematic.  I'm not very smart, but I could see the writing on the wall.  I'm not sure how these syndicators missed it.  Oh wait, that's right.  They got finder's fees, management fees, exit fees, etc.  

Please understand that I'm not saying all are bad, but I'd rather be in stocks and mutual funds if I'm going to be relying on someone else because of the liquidiy that you mentioned.  30 year fixed and personal ownership are where it's at, imo.

 I agree that many residential syndications are struggling if they formed in the last few years.

However, virtually no residential syndication is offered without a value add opportunity.  They are not typically expecting market rent to appreciate.   They are also not typically expecting market property valuation to increase.  One thing I always check is the expected cap rate at exit.   I expect it to be no higher than the acquisition cap rate.   If it is not, it depicts an aggressive underwriting.

Evaluate the operator (I believe the operator is as important as anything), the plan (especially the value add and the underwriting), the asset category as well as the asset(s), the location, the market, the financing including rates and other terms, the risks.

The increased rates make RE more challenging but does not mean there is not RE opportunities.  There are a lot of offerings that are not residential based.   Not office space has also taken a recent beating.   Industrial, storage units, hospitality, recreational, the list is very long.

By the way 2 of the syndications I have joined in the last couple/few years appear to be struggling.  One is residential and one recreational.  I personally believe I will be fortunate to recover my initial investment.  

What I would like to see is these people posting about the high risks post when they first joined a syndication.   It is my belief that virtually all would have entered since 2020.   They entered at a difficult time for many syndications.   I think those that have invested for a while recognize with returns that for years was typically at least double the S&P are less likely to be complaining about a rough period.

Good luck

Quote from @Bryn Kaufman:

I was shocked to learn that I might lose 90% of my passive investment with Open Door Capital, run by Brandon Turner.

I did not realize passive Real Estate investing is so much riskier than the stock market.

I was foolish enough to think it was safer when I made my investment.

For stock market investing, one is always looking at the risk vs. reward for every investment, every trade.

In the stock market, if you lose 1%, or 10% or whatever percent makes you uncomfortable, you can always pull your money out and wait until conditions are more favorable, unlike passive Real Estate investing.

In the stock market, if you are in an index fund, you know it will eventually recover. Unlike a passive Real Estate investment that goes bad, there might be no hope of recovery.

Also, the risk-to-reward ratio of simply putting your money into an S&P index fund seems much better. As a comparison, even if you held on through the COVID crash, you lost 34% (not 90% or 100%), and 8 months later, you recovered.

Also, you can put in the exact amount of money you want, so things like dollar cost averaging can help mitigate risk if you think the market is high. Compare this to passive Real Estate investing, where your entire investment has to be made at one time.

Summary of passive investing: You can lose all your money, you can't pull out your money if you feel things are not going well, you can't control the size of the loss, your money is gone for many years with no access, you have to put in a large fixed amount of money at one time, and you are counting on perhaps one or two people, rather than relying on the strength of the best businesses in America.

So my question is, does passive Real Estate investing make sense with such a huge risk?

In my opinion, as I go through this experience, I would say no. I would never put money into a passive Real Estate investment again.

Maybe there are others who disagree, but that is my opinion.

 Accredited investor is suppose to convey a certain level of knowledge.  I do not fault you for investing with ODC, but I do fault you for not understanding how leverage plays into the investment and can potentially result in a total loss.

Every syndication declaration states the expected hold and options to extend, the illiquidity of the fund, that investors can lose all of their investment, the expected level of leverage, etc  

ODC has never been in an RE slowdown market.   This pretty much applies to every sponsor that has started since 2010.  

Until recently RE syndications performed outstanding. From 2010 to an exit in 2012 it seemed like every RE syndication was achieving 20%+ IRR. I know one investor that averaged over 60% return.

I will say 2 of the 3 syndications I have joined recently appear to be struggling.  One had around a dozen exits all over 16% return (some far over) prior to this offering but is struggling.  

There are sponsors that have gone through the GFC and everything since then without ever losing a dollar of their LP investment. Some of these sponsors virtually always (maybe always) have produced 20%+ IRR while having the tax advantages associated with RE.

Brandon turner gets LP investors based more on his name than his track record.   I believe multiple of his funds are struggling.   It is a tough time to be a sponsor; he has zero experience with a tough residential market like today

I am sorry your investment did not work out, but I see a lack of ownership in your role.


good luck