All Forum Posts by: Jeff G.

Work backwards from your goal.  It appears you want to retire at age 40 with $10K/month in income for the rest of your life (the Social Security Administration estimates that the average 27 year-old female will live to 83).  

So we open an annuity calculator and plug in those numbers.  As for interest, let's use the wildly optimistic 10% (which happens to be what Bernie Madoff promised investors in his ponzi scheme):

So you need to have $1.2 Million by the time you are 40 -- and that's assuming a 10% rate of return.  Use a more conservative 5% and you get $2.1 Million:

OK, so what kind of CAGR do you need to turn $22,500 into $2.1M over 10 years?

For comparison, here are the long-term rates of return from some of the greatest investors of our time:

Warren Buffett:  29% over 13 years

Peter Lynch: 29% over 13 years

Michael Burry: 22% over 8 years

Charlie Munger: 20% over 13 years

Bill Ruane: 18% over 13 years

This should illustrate how unlikely you are to passively turn $22K into $2M in 10 years (e.g. turnkey investing).  Of course, you'll run into no shortage of charlatans promising exactly those types of returns -- so buyer beware!

If the offer was unsolicited, my understanding is you could then use a 1031 to roll that $60k profit into another property, deferring taxes.  (Flippers do not get to use 1031 since their properties are considered inventory, but if your intention was the rent you're not a flipper).

For me, that makes this a pretty clear sell provided you can find another property quickly.

Using credit instead of cash for reserves is an aggressive option that can increase your investment returns, but it increases risk: will credit still be available if/when you need it? Issuers can cancel credit cards at any time, even if your accounts are in perfectly good standing. HELOCs have more consumer protections, but they can still be dropped through no fault of your own. For example, a bank may cut or eliminate your HELOC if the housing market drops and you no longer have as much equity. Or, more likely, it just won't be renewed when you were counting on it.

Could you still handle capex if your HELOC vanished? What if that S&P 500 ETF was also worth only 50% of your initial investment? Would the answer still be yes if you lost your day job? How about if a number of your tenants all lost jobs and were unable to regularly pay rent? Perhaps the stress might then start getting to you and lead to an illness & expensive medical treatments that weren't fully covered by insurance. Maybe all that at once was the last straw for your marriage.

Sure, all of those seemingly unrelated things happening at once might seem far-fetched, but they lined up for many folks in 2008-2009.  

In 1984 pyschologists Daniel Kahneman & Amos Tsversky showed how humans tend toward irrational risk-seeking when facing an expected loss -- a loss like holding cash (equivalents) during inflation.  Are you wanting to lever to achieve a greater expected return or because you can't accept that loss?

What are your plans for the 12 unit property?  

If you plan to buy and hold, then find out everything you can.  A general inspection & pest/fungal inspection is a good place to start.  They may spot a stain and recommend another specialty inspection like roof or plumbing.  Speaking of plumbing, if it is an old property, is it still on septic?  If so, you could be looking at tens of thousands to convert to sewer in the future.  Walk the property and ask the tenants if they have noticed anything or have complaints.  Is the present management responsive?  For instance, you may learn from a tenant that the building blows fuses easily in which case you probably want an electrician to see what's going on (old wiring not able to keep up with modern demands?)

You can also go down to the assessor's office, type in the address or apn, and view the title history (take a smart phone and just take pictures of the computer screen).  Make note of the tax rate and use it to estimate what the tax bill will be after the sale.

Then go a couple blocks to the building department and peruse the building file.  Take photos and/or make a list of when permitted work was done (don't be surprised if that "10 year old roof" was replaced in 1997...)  Sometimes you'll find complaints & violations in this file -- look for a pattern of long-term issues and/or neglect.

Check out the flood maps and see if it is on a flood plain.  Check out the city (re)development plan and see if they have any changes planned nearby.  For instance, there is an old 8-unit complex on 9th & Willow where the city/caltrans plans to put in a sidewalk.  This new sidewalk will eliminate all of the existing "off street" dirt parking and probably make the property less appealing for commuters.

Talk to your insurance agent and see how much insurance is going to run.

Talk to the existing property management and get a feel for them to see if they deserve your business in the future.  Get all the leases and take a look at the rents and terms.  See if that property management company is keeping up to date on the latest laws (for instance, look to see if a newer lease still requires the tenant to replace batteries in smoke detectors -- it's now the California Landlord's responsibility).  Try to get a payment history -- do any tenants have a history of paying late?  If there are any below-market rents, how long must you wait before their lease expires?  Is the turnover rate reasonable?  Obviously turnover will be higher if it is student housing, but if tenants rarely renew their lease find out why.

Check out the property management statements for the last few years -- is it really cash flowing?  If there have been any big repairs, see what was done & get a copy of the receipts.  Were permits pulled?    If it hasn't been under property management, do the owners keep good records?  Do you feel they are being honest and forthright?

Good luck!

How much of that $9,000 is penalties & interest from previously unpaid taxes?

Ah good catch, looks like you would need the full 60 days

You only need to give 30 day notice.  CA offers an exception for when an owner occupant first buys a property:

Landlord's notice to end a periodic tenancy

A landlord can end a periodic tenancy (for example, a month-to-month tenancy) by giving the tenant proper advance written notice. Your landlord must give you 60 days advance written notice that the tenancy will end if you and every other tenant or resident have lived in the rental unit for a year or more.201 However, the landlord must give you 30 days advance written notice in either of the following situations:

• Any tenant or resident has lived in the rental unit less than one year;202 or
• The landlord has contracted to sell the rental unit to another person who intends to occupy it for at least a year after the tenancy ends. In addition, all of the following must be true in order for the selling landlord to give you a 30-day notice

1. The landlord must have opened escrow with a licensed escrow agent or real estate broker, and
2. The landlord must have given you the 30-day notice no later than 120 days after opening the escrow, and
3. The landlord must not previously have given you a 30-day or 60-day notice, and
4. The rental unit must be one that can be sold separately from any other dwelling unit. (For example, a house or a condominium can be sold separately from another dwelling unit.) 203

The landlord usually isn't required to state a reason for ending the tenancy in the 30-day or 60-day notice (see "Thirty-Day or Sixty-Day Notice"). The landlord can serve the 30-day or 60-day notice by certified mail or by one of the methods described under "Proper Service of Notices".204

http://www.dca.ca.gov/publications/landlordbook/moving-out.shtml#landlordsnoticetoend

It is possible to have 0 appreciation, negative CCR, and positive IRR if the loan's principal was reduced by an amount greater than the cash on cash loss.

@Mark A. Since you have a background in equities, you're probably already familiar with IRR as it relates to discounted cash flow analyses. It requires a number of assumptions, so remember the wisdom of Carveth Read: "It is better to be vaguely right than exactly wrong."

Think of a speculative bet on appreciation as an asymmetric trade with a large possible upside and a known, and limited, downside.  In that sense, CoCR merely reflects whether the trade will have a positive or negative carry in the meantime.

Finally, and with apologies to Buffett, it is better to buy a wonderful property at a fair price than a fair property at a wonderful price.

First, I see the same thing in California and understand the frustration.  

However, not all of these investors are speculating on bigger idiots coming along to buy their properties at higher prices.  Some are intelligent investors with radically different goals than you.  For instance, if you are a high earner, especially if you live in a high tax state, you get to buy a property for relatively little money down, get tenants to basically pay off the loan, and in the meantime you get to deduct not only the actual expenses, but also this imaginary expense called residential real estate depreciation. 

(Residential real estate doesn't depreciate -- it at least holds its value)

So while investors may break even on a cash basis (perhaps even lose slightly), their tax savings more than make up for it -- especially if they plan on retiring elsewhere & using 1031's to move their eventual capital gains to a lower tax state.

Plus they also make their income stream more robust.  Disruptions abound, and there is no guarantee that today's high earning XYZ profession will even exist in 5 or 10 years.  

"Is it fair to assume that these prices will revert back to normal investor levels at some point?"

I think there is at least as good of a case to be made that inflation will rise to meet these prices (similar to stagflation in the 70's).  Inflation has historically spiked after war-time spending ends:

While we're still a nation at war (US special operators were active in 138 countries last year!), we'll eventually have to pay the piper and it's a whole lot easier for governments to pay debts in dollars that are worth less and less.  We probably would have seen more inflation already if not for the great recession.  But we may be turning a corner from the recession -- we've just had 6 consecutive month over month rises:

All of that means there is a good chance you'll be able to pay today's loan with tomorrow's cheaper dollar (while drawing a rental income stream that rises alongside inflation)