All Forum Posts by: Jon Schwartz

Jon Schwartz has started 37 posts and replied 926 times.

Originally posted by @Account Closed:

Originally posted by @Jon Schwartz:

Originally posted by @Etienne Dubois:

If money was not an issue and i had 100,000 USD on the side to put for down payments, would investing in expensive cities like los angeles be a good idea because of the rental occupancy rate there, or would it be wiser to invest it in somewhere that has a lower occupancy rate but i can buy more with 100,000 in down payments.

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

"In the cashflow market, you'll earn a fantastic 15% cash-on-cash return but no appreciation."

Can you tell me where this 15% market is, here in 2020?

I can't! I was using exaggerated numbers to make my point.

0 Votes

Originally posted by @April Causapin:

Hello all! I’ve been looking for a property the past year. The last few have not panned out well but this time I found one that I truly like. There’s 2 homes, front is 2bed/1bath. Back 1 bed/bath. It’s been on the market since June and was listed at 588k. Last Friday, over the course of the past few months of reduction in price, 568, 548 respectively, it was listed at 499k. I looked at it yesterday with a contractor and he said it would take about 50-80k to rehab the place. I plan to live in the front unit but If I plan to rent it, it will rent for $1700, back house needs some update and would rent for $1300-1400. Seller will not do any repairs, looks like it would need roof to be done too so that’s extra 5k. what would be a good offer for this place? Would 460k be a good offer on this place? Planning to put 10% down and slowly rehab the front but definitely get the back ready for rental right away.

At 460k

Expenses would be 2,771 including mortgage, interest, PMI, taxes, trash, water, sewer, property manager, repairs, cap expense, vacancy rate while I live in the front house. Hoping to rent the back house for 1,400 which is the average based on rentometer.

Rehab and repairs- I’m going to stick to 60k.
downpayment: 46000

Closing cost: 9,200.

What do you guys think? It’s about 36 miles from Los Angeles. Last comparable I saw was sold for 580,000 on Oct 2019 but it was already all fixed up nothing to do. They listed it at 595 but sold at 580.

Would love any opionion

Hey April!

Not a bad LA deal.

Expenses, including reserves, are $2771 and rental income on the back unit is $1400, so you out-of-pocket while you live there is $1371/month. Cheap living! With rent on both units being $3100, you could move out anytime and cashflow $300+ per month.

If your comps are good, that means you'll be paying $60K to add $80K of value to the property. That's very good! It's not enough margin for a flipper, but it's positive equity that you're creating.

If looks like your total investment is going to be around $115K. Your cash-on-cash if you were to rent this property from day 1 is a little over 3%. Honestly, that's not bad for LA.

Are both units vacant now? Do you really like the neighborhood?

I'm going to message you. I finished my househacker calculator, and I think you'll it.

Best,

Jon

3 Votes

Originally posted by @Corey M.:

Originally posted by @Jon Schwartz:

Originally posted by @Etienne Dubois:

Let's just do some quick math:

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.

So, buy LA, my friend!

Best,

Jon

You're not taking into account mortgage paydown on the non-speculative, non-LA property. That adds to the ROI. Also where is one getting a 400k rental property in LA that is neutral cash flow after all expenses (10% management, 5% Capex, 5% maintence, 5% vacancy, 2%+ insurance (eq insurance is necessary, HOA fees since 400k definitely won't buy a house). So if you can find a $400k condo with 25% down and rent it for $2k/mo, you'd get crushed.

300k mortgage at 3.25% would be $1306/mo, leaving you $694/mo for expenses. Well, expenses would be:

HOA: about $400 (maybe more)

Management: $200

Capex: $100

Maint: $100

Insurance+eq insurance: $ 150/mo

Vacancy: $100

So $1050 in expenses.

So cash flow would be about $400 negative a month, and I think these numbers are ambitious. Anyone investing in LA needs to be making enough to cover thousands in negative cash per year. It may be worth it for appreciation, but remember back in 2006 when LA real estate was a sport, but then dropped 30%? That could be a killer if you can't hold on for a long time.

Just my two cents...

This is a little over $400K, but it cashflows:

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

Scroll up and find the post with all the maps. That's me explaining why this triplex is a good buy.

Best,

Jon

0 Votes

Originally posted by @Felix Andrei:

@Jon Schwartz regarding California I would be more concerned about businesses moving out, terrible policies, high taxation and an (almost?) bankrupt state, relying on foreign cash for real estate appreciation. What are your thoughts about these?

I think your fears are overblown.

Some business is moving out, but Silicon Valley isn't going anywhere. The farms of California aren't going anywhere. Netflix (which has its largest footprint now in Hollywood) isn't going anywhere. You have to keep in mind that 1 in 8 Americans lives in California. To put things in perspective: California's GDP is almost twice Texas's GDP. So when a company moves from California to Texas, it has twice as much impact on Texas as it does on California.

What terrible policies are you referring to?

High taxation is a buzzkill, no question. I think a lot of us see it as the price to pay for sound environmental policies and worker protections and all the other things that all this tax money pays for.

Is California bankrupt? I did some quick googling and found that, at least currently, California's public debt as a percentage of its GDP ranks ahead of Kentucky, New York, Illinois, Connecticut, Rhode Island, Nevada, Hawaii, Alaska, Alabama, Colorado, Massachusetts, New Mexico, Pennsylvania, North Dakota, West Virginia, Texas, Washington, and New Jersey (source: https://www.usgovernmentspendi...). I'm sure California's finances are in the stinker right now, but what state has a pristine balance sheet at the moment?

Does California's real estate rely on foreign cash for appreciation? Chinese buyers are a serious power here -- so much so that catering to Chinese buyers is covered in agent education. But I think the biggest driver of appreciation is the vast undersupply of houses (source: https://www.ppic.org/wp-conten...). In markets like mine, Los Angeles, you also have physical barriers to expansion -- namely, the ocean and the mountains. So I think your take is off the mark.

Best,

Jon

2 Votes

@Nathan G., when the rodeo’s back in action? Actually, WY’s a pretty conservative state... did they ever shutdown the rodeo?

0 Votes

@Matt Morrell, sorry! Low cap rate market like LA! I type too fast sometimes....

0 Votes

Originally posted by @Nathan Gesner:

I think the big cities are having multiple issues. High taxes, heavily restricted due to COVID which is killing jobs and small businesses, employees can work from home, students can learn from home, riots and looting, increased crime, and more. Talk to anyone in rural areas and they'll tell you people from the coasts are moving in droves.

I think we're going to see record numbers for 2020.

Nathan, I've spent some time in Cody and even more time in Meeteetse, WY. If I could, I'd bail on LA for your neck of the woods in a heartbeat!

1 Vote

Originally posted by @Corey M.:

I live in CA where rents typically don't cover the price of a house/mortgage. I've lived in my place for 8 years and after a recent cash out refi, I pay about $2250/mo for my mortgage + taxes. If I rented it out, I could get about $3k per month. However, my expenses are another $750 or so (management, Capex, maintenence, insurance, eq insurance, hoa). Essentially I'd breakeven if I rented it. I'd also have to buy a new place at a cost of about $800k (160k down) @ 3% interest, and that new place would have all the typical tax breaks associated with a primary residence. Los Angeles property has been appreciating at about 8%/yr, and because of that, I'm trying to choose between renting out my residence and moving into a new one, or doing a passive investment in a turnkey. I have a f/t job and can't be active.

The turnkeys I've been looking at average about 18% IRR, and that includes appreciation, equity via house paydown, and net cash flow. Most of the places I'm looking at have about 2-3% annual appreciation. This IRR doesn't include depreciation.

So, with that $160k that I could use as a down payment on a new residence while renting out my current one, would it be better to do that or buy 800k worth of turnkeys with that $160k (~5 sfhs)?

My concern with renting my current house and buying a new one is that the cash flow could easily be negative on any given month AND I'd be taking on a new mortgage that is 50% higher than my current one. On the other hand, I'd be making LA level appreciation on both of them, which could be lucrative.

Thoughts?

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,

Jon

0 Votes

Originally posted by @Marlon Ribunal:

@Marlen Weber -Likewise! Happy to connect!

@Jon Schwartz - Thank you! There's a ton of info here that I haven't had the time to delve into yet. At this point, I am most interested in how people started with REI while still employed fulltime.

@Jonathan Oh - You had me at "data-driven"! I am in the data industry myself (currently working for a retail analytics software company). I sure have a need for your insights in the future. Please keep in touch!

Marlon, I work fulltime, and I'm investing in two ways:

1. I'm househacking a duplex. My family lives in one side, and we have tenants in the other. We actually moved into a really nice neighborhood when we bought this duplex, so while I'm saving on cost of living and building equity in the building, I'm really enjoying where I live!

2. I've partnered with operators in LA to be a part of active LA investments without having to do the work. Send me a message if you'd like some referrals.

Best,

Jon

1 Vote

@Todd Pultz, that deal sounds killer! I liked you by the way you write, and now I like you all the more!

Are you investing in Dayton, where you live? Does it worry you that Dayton city hasn't seen population growth since 1959 and that the MSA's population peaked in 1970 (sources: https://en.wikipedia.org/wiki/..., https://worldpopulationreview....). Barring a strong counter narrative, those stats make me think "No wonder doors are so inexpensive" and "No wonder Todd doesn't put much stock in appreciation" and "No, thank you!"

Speaking of our speculation back-and-forth, I totally understand and respect your point of view, but I disagree. I think it's important for an investor to intelligently and conservatively factor all metrics into an investment decision. Otherwise, the investor might not be making the best investment.

For example, most business plans I've seen for multifamily value-add involve an expectation of tenant turnover. If one said, "Well, I'd rather be wrong to my benefit than to my detriment" and underwrites no tenant turnover, they might turn down an opportunity that's actually fantastic given the natural rate of tenant turnover. As investors, we have to consider all pieces of the puzzle.

Now, on to my strategy... Thanks so much for checking out my profile! I'm glad we connect as fathers. Let me tell you a little bit more about my scenario, connect it to the original poster, and then go into a deal or two.

I've built a successful career in the film industry; real estate investing isn't meant to be another job for me. I don't do it for cashflow; I do it to build wealth. I firmly believe that wealth is borne of equity -- derived from both forced and natural appreciation -- and that cashflow is your buffer to protect your equity.

(A quick metaphor: LA real estate is the Amazon of real estate. Amazon trades at an extremely high price-to-earnings ratio. It's like an expensive LA building that barely spins off any cashflow. And Jeff Bezos is the richest person on earth by owning just 11.2% of the company.)

I just turned 39, and given the ageism in my industry, I might be facing a more challenging environment in as little as ten years. My goal is to replace my income in ten years. I don't need any of that income between now and then. I might not need any of it in ten years, but I like to plan ahead!

I dug into the numbers, and my plan is to build equity in a high cap rate, high rent market like LA for most of the next decade, then sell those assets for cashflowing properties in the Southeast or Midwest. Running the numbers and looking at the ten-year supply-and-demand projections, LA is great for my plan!

When I saw this post, I clicked on the poster's profile. He's a 19-year-old in Hong Kong with $100K asking where to invest in the US. I get the impression that his situation is similar to mine: he doesn't need cashflow right now, and he's investing for longterm wealth. The numbers support investing smartly in a high-appreciation market over a cashflowing market, especially if the investor is overseas and has limited control of his assets.

Okay, back to my situation...

I'm not saying the only strategy worth pursuing is to buy and do nothing. No way! Nor do I limit myself to a single strategy. Lemme tell you about my two most recent deals...

Last year, I bought and househacked a duplex in an extremely nice part of Los Angeles. My wife wanted to move here, but I absolutely did not want to have the kind of mortgage required to live here. So I did some digging, found a couple of a really well located multifamily-zoned areas, and lo and behold, a wonderfully situated duplex hit the market.

We bought it, created $150K in equity by renovating it, and moved it. At this point, using conservative projections well below the longterm average, the forced appreciation, principal paydown, and natural appreciation on this property will pay for my daughter's college tuition. When my daughter goes to college, I'll refinance the property to pay for her school, and the property will still cashflow. We can move out at any time now and property will still cashflow. And we pay less now to live here than anybody else on the block is paying to live here.

(Side note: we also contribute the annual max to a 529 for my daughter's college tuition. I'm not literally going to bank my daughter's future on one asset in one market!)

One more:

I partnered with others to buy a fourplex for $1.6M and put in about $590K in renovation and carrying costs to convert each unit from a 2/1 to a 3/2. We project the post-reno, tenanted building will be worth $2.75M -- and that's a rental comp assumption, not an appreciation assumption. The plan is to refinance or sell, whichever makes the most sense.

Value-add is more complicated in LA because of tenant protections, but where there is friction, there is opportunity!

So, yeah... I don't really have a strong point to wrap this up with. Just wanted to explain myself. Hope you're well!

All the best,

Jon

6 Votes

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All Forum Posts by: Jon Schwartz

Jon Schwartz has started 37 posts and replied 926 times.

Post: I have 100,000 and i dont know where to put it...

Post: 2 single family homes, should I buy?

Post: I have 100,000 and i dont know where to put it...

Post: I have 100,000 and i dont know where to put it...

Post: Will rents go down and vacancies go up?

Post: I have 100,000 and i dont know where to put it...

Post: Will rents go down and vacancies go up?

Post: Renting out Primary residence or Turnkeys in CA

Post: Hi I'm Marlon, a newbie from Long Beach, CA

Post: I have 100,000 and i dont know where to put it...