All Forum Posts by: Ryan L.

@Ryan L. appreciation and cash flow tend to exist on opposite ends of a spectrum and your investment strategy should move along a sliding scale between the two based on a variety of factors. For the sake of brevity, I would say this:

We're in a phase 4 market- the peak. Within the context of the current market cycle, properties are at or near a peak value. They've already "appreciated", and they've appreciated quite a lot in the last 7-8 years. We're due for a shift in that trend, in which case, if you get stuck with a property that doesn't cash flow you're going to 

1: not make any sort of appreciation profit for a long time bc you bought at a peak

2: enjoy negative cash flow while you're not making your appreciation money, or possibly losing more money to depreciation. When the market does start to finally appreciate again, the majority of your appreciation will only be a recuperation of your losses. All while you're still not cash flowing. 

I think in all honestly that this is a losing strategy under current market conditions, and have seen this strategy employed many times by investors I work with. Most of them end up selling, with a few in ugly situations lose a property to the bank. 

I think your best bet is holding off on investing altogether.. OR investing in high yield, low volatility property that is a little more crash-safe while you wait for the market to be more opportune for an appreciation play. The investors with the greatest success play nice with market cycles skillfully.  

Of course, this means you'd have to go out of state. Which isn't really scary like everyone used to think it was. 

yup right now being the bank is one of the better plays while we wait for the market to reach an equilibrium.  but now that I say that something happens in SD and prices sky rocket.

Like SF is poised to sky rocket again according to an article in the Atlantic journal..  7 or so new IPOS  so 10 to 15 billionires created in SF and how many thousands of over nigh millionaires and only 4k homes sold last year in the entire city of almost a million..  I would take negative in the SF peninsula as long as it was =modest no more than 1k a month.

Ryan, you can find the right agent, lender and GC by networking at your local Real Estate Investors Association and ask people there specially the officers of the REIA.

You can get into trouble though when you settle for negative cashflow just to own a rental property. As others pointed out, if the market changed and you're projected appreciation is not only gone but goes the other way, you will lose money and it will be a lot. Ask me how I know. ;)

Read my story (it's 3 parts but here's Part 1 first so you will know what I mean by my statements above)

https://www.biggerpockets.com/forums/55/topics/690349-from-bankruptcy-to-1-000-units-part-1-thru-the-dark-tunnel

I'm assuming you didn't spend Easter Sunday reading through all my previous posts on BP ... ;-) ... So just to be clear: I'm a huge advocate for wealth building through capital appreciation. The last thing I want is 100 doors that pay $700 in rent? Why? Because doors don't pay rent - tenants pay rent. And tenants are the riskiest part of the business... I want to avoid tenants so I avoid risk (and headaches). I'll get a higher IRR with less headaches and risk by having 20 doors that pay $2000/m in a gateway market, but those details are rehashing old threads.

Point being: I'm invested in our market because of the long term appreciation, which is largely a function of our public policy and desirability.  When you add in the ocean and southern border, the reality is you've got half the land supply options most other markets have.

That's why RE is so expensive here and why it's likely to continue being so. BUT, that doesn't mean you just by anything and win. For me, anything I buy here has to have a current free cash flow of 5%+ on invested capital, 10%+ annual earned income, and 20%+ projected total ROI using historic inflation/market appreciation. If you break that down, Im expecting approximately:

50% of total return from market appreciation

25% of total return from amortization

25% of total return from current free cash flow

Sorry - got off track from your original question.  :-).  I (and many other) full time investors regularly have people invest alongside us on projects we do.  We use other people's capital so we can do more projects.  There's a continuum of formality - one one end, there's REITs you can buy through eTrade.  On the other end is an individual RE investor who is your friend or you know through your network.  In the middle is hedge funds, crowdfunding platforms, and syndicators.

It's just a matter of picking how much risk you want to take.  Often you have the choice of being in a protected first lien position for 8% return or an exposed 2nd or 3rd position for, say, 10-15% return.

Remember, you can always buy a tax-free CA municipal bond - the most boring and stable investment possible, pretty much - and get a 4% return while paying zero tax.  So, that's a baseline.

If you want to invest alongside someone, network and find someone you trust first ... Then worry about what exactly they're investing in.  The valuable part is the skill and network needed to find and execute a deal - find someone who has that and then ride the wave with them.

Or, do it yourself.  The first one won't be great, but if you've got the skill and can build the network, no reason you can't do well operating your own money.

Good luck.

For the amount of money you're going to spend in CA you could buy several properties or one larger property out of state. Or you could put your capital into a passive investment that pays 6-10% cashflow per month with the same or higher IRR.

I personally think CA is going to pop, that's why I left years ago.

Good luck.

 I do not consider myself a professional investor even though much more of my wealth has come from investing than from my W2 job. I work a W2 job close to full time.  The wife “retired” around 5 years ago and qualifies as an RE professional.  I have considered retiring from the w2 job and may after I complete my current task.  

 I recommend starting RE investing while having a job.  The job provides a safety net but also makes it easier to obtain financing.  Also it typically takes a while to make significant money from RE.  

As for resources... search BP for house hack or BRRRR and you will get lots of hits. I believe the term BRRRR originated from BP employee Brandon Turner. House hacking is what the rich kids used to get income in college when their parents purchased the house to rent out rooms while going to college but there are many other forms. It ranges from renting spare rooms, to renting units in a multiplex, to AirBnB the ADU in the back yard. Regardless, BP has a ton of info on both house hacking and BRRRR.

Good luck

No, you shouldn't.  Your money needs to be earning at least 8% per year with little to no downside risk.  If it's not, it's not doing its job.

Buying property right now that won't have a theoretical positive IRR (much less an 8% IRR) beginning in Year 5, even in the best case scenario, is ... irresponsible.

You can easily loan your money to someone you trust in the real estate world and earn 8% on it while doing no work and taking little risk.  IMO, that's the base case you should be measuring against. 

Some things to consider include house hacking, BRRRR, or combining the two.

I will cover the combined...   House hack of a duplex.

Advantages: High LTV requires minimal cash. Owner occupied is best loan terms. Sweat equity will provide an early boost to ROI. Sweat equity will reduce or possibly eliminate the negative cash flow.

Duplex in need of rehab purchased at high LTV. Move into more thrashed and rehab in place. After complete, move to other unit, rent rehabbed unit at top of market price (just rehabbed), rehab second place. Ideally for every $1 invested in rehab you achieve at least $2 of value. So if you spend $50K on the rehab, you should strive for at least $100K value add for an equity increase of $50K. This $50K should provide a great boost to the early ROI. When both units are rehabbed you could refinance prior to move out (when still owner occupied) and repeat the process (the last R). Or you could decide it is a great place to live and continue to live there while having a tenant in the other unit paying down you loan (increasing your equity).

BTW: the low/zero appreciation markets do not produce great ROI without going to large unit counts. If you decide to not purchase in San Diego, look for a market that has historical appreciation above inflation and some cash flow (a hybrid market).

Good luck.

Hi Ryan - At this point in the San Diego market, in my opinion I would not take negative cash flow and "speculate" only on appreciation with that type of timeline. I would either get a larger down payment or partner up with another or invest in another market out of state like you said, if your comfortable with it.  Just my thoughts

Ryan,

I would try to stay away from negative cashflow specially in your first deal.

I understand you get more appreciation but how many deals can you do if each of them are negative cashflow? If that was my thinking, I would never have acquired over 1,000 apartment units.

If I were you, here's what I am going to do.

1. Look for properties that you can add value - properties that need repairs, right in San Diego. Most newbie investors and owner occupants won't touch these houses so you're not competing and paying market value.

Since these properties need work, they will most likely, sell at a discount. Once you renovate the property, you can rent them for POSITIVE cashflow since you bought them below market.

2. To make this happen, you need 3 things:

a. Real estate agent who is investor-friendly and will look for houses listed below market and have not sold for more than 30 days

b. Hard money lender so you can acquire properties that need repairs

c. General Contractor - who works with real estate investors, specially landlords

Makes sense?