All Forum Posts by: Corey M.

Gavin, Gavin, Gavin...

 First, to quickly address your counter example: A $100K house bought in cash and rented for $500/month is going to generate $6000/year in cashflow max. You're talking about a 5% return with almost no risk. You're saying that this $100K house has "almost no risk" of incurring more than $1000/year in maintenance and vacancy. Sure!

Now on to your gripping takedown of investing in LA:

Firstly, you don't make money in LA buying a condo. Secondly, you don't make money in LA by doing ten minutes of research and buying anything anywhere. The Los Angeles MSA has over twice the population of your entire state. A little more effort is required to invest here.

Let's take this listing as an example:

https://www.redfin.com/CA/Los-...

I know, the purchase price is $459K, which puts us over the $400K limit. My original post was demonstrating simple math between appreciation and cashflow, and this price point is in the ballpark of a $100K down payment, so let's proceed.

What numbers do you run on this listing? Here's what I get:

Rental Income: $2865

PITI (at 4% interest): $2206

Maint & Capex (10%): $287

Prop Mgmt (5%): $143

Vacancy (4%): $115

CASHFLOW: $114

PITI includes property taxes (1.27% annually in LA) and insurance. We don't mess around with escrowed taxes or insurance when we put 25% down, my friend.

So this inexpensive LA property cashflows. But we're not buying for cashflow, right? We're buying for appreciation. This property is just below downtown LA, an area which was been massively gentrified over the last decade. Nowhere in LA is growing faster (and becoming expensive faster) than downtown LA. (Obviously, yes, COVID will put a slowdown on that growth, but I think we'll be back in track in 12-18 months.)

Let's look at some maps!

All of the below maps were made with Census Bureau data, which you can download yourself at data.census.gov. I use Tableau to make my maps. The most recent annual data from the Census Bureau reflects 2018's data collection, so the range we're looking at is 2013-2018 (numbers reflecting 2019 will be published in October, and I can't wait to update these maps!). All of these maps represent census tracts in Los Angeles; census tracts are the smaller geographically area that the Census Bureau tracks.

Here's household formation 2013-2018:

The bright green areas to the north of the subject property are downtown LA. Lots of people moving in! The subject property's census tract is a spot of orange surrounded by green. That's a good thing! Because look at this map of renters who have moved in within the last one year:

As you can see, now the green area extends down to our subject property. New renter households abound! And this is what we want -- more renters moving in means more demand means higher rents means more expensive buildings.

What's interesting, though, is that prices are lagging move-ins. Here's median home price growth, 2013-2018:

As you can see, at the very top of the map, the northern area of downtown LA has already seen robust home price appreciation. Our little census tract and the areas around it have not. Fantastic! We've identified the cusp, the edge of the path of progress. We're right on target!

That's the kind of analysis required to make money in LA real estate, and it's this kind of analysis that mitigates the risk such that one is not playing roulette.

@Todd Pultz, gotta ask, is this still speculation at best?

Thanks guys!

All the best,

Jon

Curious how you came to 2200ish with insurance and taxes at 4%. That's not right. The p+I would be about 1900 alone. A 500k house would have about 6000 in taxes per year (500/mo). Insurance is easily $1500/yr ($125/mo) and probably more since you need eq insurance. 

So just loan, insurance and taxes are much more like $2500.

Also a 500k condo would be garbage in LA. A SFV house would be in a D neighborhood. I don't disagree with you on the potential appreciation, but if this guy has $100k to invest, he better be prepared to take on $6k+ of negative cash flow annually. This isn't necessarily a bad bet, it's just one that inherently involves risk. Now, if I knew I had a guaranteed income of $200k year at my regular job, then I'd definitely take a $6k hit/yr and bet on LA long term appreciation. But you have to be able to hold for a long time to increase the odds of getting the appreciation you cite. 

Etienne, I'd invest for appreciation in a market like Los Angeles. If money's not an issue at present, and you want your money put to best use, invest in a place like LA (and I vote specifically for LA).

Let's just do some quick math:

Let's say $100K is going to be 25% down payment on one or several properties. In your appreciation market, you'll receive no cashflow, but the building will appreciate 5% per year. In the cashflow market, you'll earn a fantastic 15% cash-on-cash return but no appreciation. All financing terms are identical. Let's remove costs associated by buying and selling. To further simplify, let's say there's no principal paydown (since it will be equivalent in both examples).

What's your investment horizon? Let's say seven years...

 In seven years, in your appreciation market, you'll own a property worth $562,840. You borrowed $300k to buy it, so you profit in year 7 is $262,840.

In the cashflow market, after seven years, you will have made $105,000 in cashflow. You'll have no profit in the sale of the building because it didn't appreciate.

Now, cashflow-lovers are going to make the following argument: cashflow is money-in-hand whereas appreciation is speculative.

They would be right that cashflow is money-in-hand in that you get it regularly, not as a big lump sum at the end. This makes the early cashflow payments more valuable than the later appreciation harvesting. However, if money is not a current concern, as is the case in this example, the actual value of those earlier payments is lower. To be really nerdy and mathy about it, you can use a much lower discount rate when analyzing the value of future earnings.

However, is appreciation speculative? In the Midwest, yes. In cities that have populations under 1M and might or might not be ascendant, absolutely. But in an international gateway city with a longterm average appreciation rate of 6.7% going back to 1975 -- meaning this longterm average incorporates the five recessions that have occurred since? Appreciation is far less speculative than Midwestern investors make it out to be, and to the extent that it is more speculative, the reward is much greater.

So, buy LA, my friend!

Best,

Jon

@Corey M.

See bullet 3 below

Source: https://www.nerdwallet.com/art... $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

- The house wasn’t your principal residence.

- You owned the property for less than two years in the five-year period before you sold it.

- You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)

You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.

- You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.

You are subject to expatriate tax.

No, you can’t keep the $250k exclusion if you rent it for more than 3 years. You cloud however, move back into it for 2 years sometime in the future...this wouldn’t give you the full exclusion, but it would be a pro data share exclusion based on the years occupied verses the years as a rental. So how long you’ve already owned it would help determine if this would makes sense. This assumes the 121 rules don’t change between now and then. 

@Corey M.

I like to decouple living in real estate from investing in real estate. Then you can think of RE purely as an investment. 

The issue I have with turnkeys is that they are often sold at or above market value in C to D areas. These areas may provide cashflow but they won't provide market appreciation and the turnkey company has already taken all the forced appreciation. 

There is a company that master leases SFH and uses that as a platform for a coliving company. The reason I like the model is that you are in A and B areas which actually have market appreciation. You also don't have the hassle and risk that you have with the traditional turnkey route with the master lease.

If you're looking at overall ROI it can be hard to beat CA. If you are wanting cash flow then you won't get it when you buy in CA (but will after time). I was very sold on cash flow by BP starting out. I now look at IRRs not cash flow and invest in CA. I also still hold a rental portfolio out of state.

Cash flow makes you free and appreciation makes you rich. What do you care about? 

Hey @Corey M..

The $750 a month seems kind of high, is it a condo, newer built? Even if you can make some income in LA, thats a good start. The most important thing is that you do buy another property and build your empire of properties. Like @Jon Schwartz mentioned, buying a duple or triplex would be a great investment. There are other areas in Valley that could offer this. 

It's likely more than $750. If I can rent it for $3k, management would be $300/mo, Capex plus maint would be $300, insurance would be about $175/ mo (w eq insurance). Vacancy would be another $150. So actually, I think it's more like $925/mo in expenses. I suspect I'd be, at a min, negative cash flowing $250-300/mo. The question is, is that worth it?

Where in Valley can one get a cash flowing duplex? Why would anyone invest out of state if that existed and you could not only cash flow but also get CA appreciation? 

Yo Corey,

 Fellow Californian here. (Don't listen to advice from out-of-staters. They don't know what they're talking about vis-a-vis CA!)

It's a bummer that the cashflow on your current place would be so thin. What are you calculating for property management? I'd forego property management entirely if it's one home with one tenant. I'm currently househacking a duplex with a tenant in the other unit; I work full-time, and managing the property is no problem at all.

Where are you finding turnkeys that have an 18% IRR? I wouldn't believe those numbers, man! Turnkeys are notorious under-performers. I'd think you'd have more luck breaking even on your LA home than on a Midwest or Southeast turnkey.

One thing to keep in mind: if you do rent your house, you can sell it anytime in the next three years and still take the capital gains exemption. So there's not much risk in renting it. If it's cashflow negative for a year, sell it. I bet anything you lose in cashflow will be made up for with a year's appreciation.

Have you considered buying and moving into a duplex? It's a really powerful way to supercharge CA appreciation and build equity. I'm sooo glad I made the move last year.

Best,

Hey Jon,

I realized I actually miscalculated and I'd be cash flow negative about $8k/yr. Given LA appreciation, I think I'd still offset that on a 650k house with appreciation, even if it was 2%. But I'm not sure if this is a great way to invest.

Re the ROI, most turnkeys can easily do 15%, I believe. REI Nation, for example, which uses pretty conservative numbers and sometimes above-market pricing can still do so. The combination of cash flow, appreciation, house paydown equity, and depreciation makes it pretty hard to go below 15%, even with a yearly appreciation of 1 or 2%.

Re house hacking a duplex, I never really thought about that, but in the area I'd want to live (studio city/Sherman oaks), I think a duplex would run at least $1.4mm. And I definitely don't want to manage my own properties. I can't be taking calls in the middle of the day to deal with a broken toilet. So even if I had a duplex I'd probably hire someone.