All Forum Posts by: Rick Albert

You make money in real estate in four ways:

1. Cash Flow

2. Appreciation

3. Loan Buy Down

4. Tax Benefits

When buying in low cost areas, it can be difficult to achieve FIRE without high volume of units. That's what makes more expensive markets/price points interesting. A 3% increase in rent on a $3,000 a month rental is more cash in hand than on a $1,000 a month rental. The same logic applies to appreciation. Plus higher price points with leverage general means higher loan buy down.

There has to be a bigger picture. For example I have one property in the lower price point as a rental (triplex that is now worth around $225K). The intention is buy more and then sell off as a portfolio and go into these bigger properties. Of course this can change if you decide to move to a low cost area where this cash flow goes farther. In a few short years I could likely move to areas where the median home price is around $100K and likely get fairly close to retirement (although I don't want to).

Although you may not cash flow, I recommend starting with house hacking. That's what I did and because of the bigger numbers, I was able to get lines of credit against the properties to buy more. I now have 9 doors (including where I live) and plan on buying more. 

If you are thinking of buying a property straight cash, obviously the cash flow is higher, but harder to scale. If you are younger, then you have the time to take on less cash flow and bank on the above four points later on. If you are older and need the cash flow (retiring), then yes, paying all cash can make more sense. 

 Why put that contingency in place? It makes you look difficult and we already know that this seller is problematic. You have an inspection contingency. Just schedule two days. The first one is the walk through, the second is the actual inspections. You can push out the deposit if you want. This way your offer looks cleaner and you accomplish the same thing. 

My tenants park on the street and are fine with it. When we lived in the ADU we parked on the street.

Once we move out, I will likely pave the front of the house to create a Y-shaped driveway. The main house can park in front and the ADU tenants and park tandem down the driveway.

A couple of things:

1. You cannot do STR with ADUs. I'm pretty sure that is a statewide regulation since the whole point of ADUs was to build affordable housing.

2. There is something to be said to have two units on a lot. One insurance, one property tax, diversify vacancies (50% if one unit is vacant versus 100% for a single family).

3. I agree, the costs right now are likely around $125K plus for a garage conversion. 

4. From a cash flow perspective, I don't know anywhere in the country where you can get $2K a month in rent and invest $80K. Otherwise I would be all over it.

5. I have sold ADU properties, it has been a major selling point in a positive way. There are buyers looking for multigenerational living in addition to house hackers and investors. The last ADU property I sold, we had a lot of buyers come through looking to house their parents, uncles, etc. We sold with multiple offers and over asking. I will say it would have sold for more if we didn't sell it with a tenant in place in the ADU. We rent out our ADU, but you can design it for ultimate privacy, we did on our property. The only push back tends to be lack of storage and parking. We put plywood down in our attic and built a shed on the side of the house to compensate.

6. Statewide rent control isn't as bad as say Los Angeles Rent Control. If you plan for it, have strict rental criteria, vetting, etc, you will likely be fine. Plus it is 15 years down the road. You will be halfway through your mortgage, rents will hopefully have increased, and hopefully so will your property. You could always sell and do a 1031 Exchange elsewhere. Also (need to confirm) for Statewide Rent Control, just the ADU would be subject, not the house. In Los Angeles, the house will be subject to LA Rent Control if built prior to 1978.

7. JADUs are somewhat useless in my opinion. Go full board ADU.

@Slaven Slugic

There are a couple of things you can ask your insurance broker:

1. What improvements can you make to the property to lower your costs? New roof? Better drainage? Other?

2. Raise your deductible. There may be a big price difference between a $5k deductible versus a $10k deductible.

It depends on how much cash you have and your tolerance for doing work. If you want something more turnkey and very low price points, then you are looking at markets like Memphis where there is high crime. I invest in Birmingham and there are neighborhoods that would do well for cash flow on paper but then the neighborhoods are rough, which means my cost of maintenance is going to be higher (broken windows, stolen HVAC units, etc). Not saying don't do it, just saying it is a trade off.

It can be normal but it is silly on a practical basis. They want to know that you are a serious buyer. On the flip side, they should just say, "send me a pre-approval and POF and here is all of the information on the property, do you still want to see it?" That would be a better approach.

Go ahead and write an offer at whatever price you want. Then go in and renegotiate because you couldn't see the inside and didn't know of the condition, etc. 

I get the logic that you can write an offer assuming it needs everything. But everything would mean a tear down. You don't know the condition of the foundation, roof, termite damage (if it is a thing out there). Too many variables.

If it were me, I would low ball them, come to an agreement, and then do another round of negotiations once you can get inside and do your due diligence. 

There are flippers in every market.

I can't speak for Philly, but in Los Angeles, the preference for many flippers is the higher price point because the don't have a choice. Keep in mind the cost of raw materials (drywall, plumbing, electrical) are the same whether it is a $100K home or a $1,000,000. However, with the higher price points, your money goes farther because of the same costs.

How long did the $1.85M property take to sell? 

There are buyers at that price point, such as pro sports, doctors, tech, etc. With remote work, people are able to move all over the country and keep their high salaries. There may be an opportunity but you need to study the market.

I would just renew at the same rate if you have concerns. Let them bring up moving. If you offer a discount, they may ask for a bigger one. Not raising rent makes it look like you are a great landlord. Many expect a rent increase, not decrease.

You have a couple of options:

1. Why go JADU and not full blown ADU with it's own meter? I know it is more expensive, but depending on the situation might make sense for resale, etc.

2. You could charge per square foot. It isn't truly accurate but it is a start.

3. You could charge a flat fee on utilities with a clause that states if bills exceed $X, then you split based on square footage.

I've done all of the above and it has worked out.

Regarding the thermostat, you may want to put in a mini split for the JADU in case your tenants like one way but you like the temperature another.