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Updated about 6 years ago, 10/30/2018
CA prop 10 opinions
Originally posted by @Johann Jells:
That's an interesting point. I've heard a lot about how sitting on low taxed vacant land is bad for tenants and buyers, it keeps inventory low and prices up. There's some cranks who say a flat property tax , just on area not improvements, would be the best thing to insure the most productive use of land.
Count me as one of the cranks. LVT is great for developers and active investors that build and reposition buildings for a living. Not so great for people that want to clip coupons.
Originally posted by @Seth Borman:
It's a fascinating idea, but it would mean the tax, assuming there was a reval that apportioned the current total by lot sq ft, would be so high that the pressure to build vertically would be tremendous as the revenue from the densest is made up by the less dense. That's also assuming a heterogeneous property mix where there's already a fair amount of mid and high rise.
Originally posted by @Ali Boone:
Originally posted by @Account Closed:
Originally posted by @Eduardo Zepeda:
You CAN cash flow in California. I've bought two properties in the last 18 months in the Bay Area. They are both cash flow positive. They were not, however, easy to "get" and required skillful negotiation. I'm zealously looking for my third, regardless of what happens with prop 10. I believe that when you buy right, you can invest profitably in any market, at any point in a cycle, with any pending legislation.
Agreed - there are several ways to cash flow in CA, even in the Bay Area it's definitely possible.
Don't bother trying to convince @Ali Boone. She sells/markets turnkey rentals for turnkey providers so she benefits by touting OOS investing and by making false claims that cash flowing in CA is impossible...even though there are several markets where it's possible to do so.
Ali, I could show you 15 properties in Sacramento, Vallejo, Stockton, and even Oakland where you could cash flow on Day 1. I don't make any money by doing so, but would be glad to educate you so you can stop with the false claims.
I'm actually a very easy person to convince. Not sure why the hasty claims. Sure, I'd love to see some properties that cash flow. I've actually asked people several times who say they've found cash flow to show me a property or two and they never do. And I'm far from the only person on here who says there isn't cash flow. And for the record, I'm usually talking specifically about SoCal since I don't know directly about properties elsewhere.
There's really no need to be an *** right out of the gate.
For properties located in primary markets, instead of a dichotomous characterization of a property either cash flowing or not cash flowing, wouldn't it be more appropriate to measure the degree of cash flow? I mean, almost ALL properties will cash flow as long as you put enough money down. I've just put an offer on two multiplex residential properties in Los Angeles that will cash flow very nicely for me.....but I didn't really find a diamond in the rough. I'm just putting down a good amount of money. And as the tenants move out (God only knows when that will be), I'll be able to rehab and bring the rents up to market (as long as Prop 10 doesn't pass). The increase in rent vs. rehab costs is where the true value-add will come in.
With that said, please.....no to Prop 10!!
Originally posted by @Johann Jells:
Originally posted by @Seth Borman:
It's a fascinating idea, but it would mean the tax, assuming there was a reval that apportioned the current total by lot sq ft, would be so high that the pressure to build vertically would be tremendous as the revenue from the densest is made up by the less dense. That's also assuming a heterogeneous property mix where there's already a fair amount of mid and high rise.
Yeah, basically you'll see lots going vertical all over. Which is good for the tax base as well as tenants, who get more choice.
Originally posted by @Joseph M.:
If everyone that owned commercial property that they are renting out has their taxes hiked way up they will raise rents .
"Everyone" won't have their rents raised. Just the long tenured owners. Rents won't go up over market, instead you'll see asset values fall, forcing redevelopment.
Originally posted by @Joseph M.:
I was thinking gentrification both in terms of retail and residential . Currently commercial landlords that have owned a long time have low taxes , they might be fine renting out to the mom and pop business for years and years or maybe using the building as storage or some other use . Not every landlord is actively seeking out the best use. Many don’t want to deal with the hassles of redevelopment etc if they don’t have to . But if they are hit with a big take hike if Prop 13 for commercial is repealed then it’s going to set a fire under them to do something .
Yeah, that last sentence is the whole point. I'm confident that the net benefit is greater than the net harm.
Hmmmm, you mean something called a cap rate? People in the small residential market seem to forget that in the larger multifamily world cap rate is the by far the most important metric, since as you correctly say cash flow is dependent on down payment.
For LA RC not much difference to existing and would still need to be changed to effect anything for future. Opens doors for other cities to update but that can be a can of worms for most politicians. It is not going pass either so there is that and or if it does, nada happens as it becomes political suicide unless in Santa Monica or SF maybe.
Originally posted by @Seth Borman:
Originally posted by @Joseph M.:
If everyone that owned commercial property that they are renting out has their taxes hiked way up they will raise rents .
"Everyone" won't have their rents raised. Just the long tenured owners. Rents won't go up over market, instead you'll see asset values fall, forcing redevelopment.
Do you invest in RE in So Cal? What do you define as long tenured owners? Average SFR in San Diego have raised ~$152K in the last five years. Commercial property appreciation has been similar. In the last year SFR have gone up in San Diego ~10%. Assuming a similar appreciation rate for commercial would mean that even an owner who purchased a year ago would experience a ~10% tax increase. I guarantee you that the Property investors will raise rents when their expenses rise and that when they raise rents in the volume of everyone who has owned for greater than a year, it results in a raise of the market rent.
I have not seen RE values fall for other increased expenditure costs such as an increase in interest. The owners just pass the costs on to the tenants. Can you think of an increased expenditure that has caused a significant RE price decline in Coastal So Cal?
I believe rents will rise if property taxes increase. I believe the RE investors will not need to take a reduced profit for an increased expenditure that is likely to impact such a large percentage of the market investors. I reference interest rate rises and the associated rent increases as my rationale for my belief. I also reference that as RE prices increase rents increase. Increased expense results in increased rent.
@Jonathan Taylor, Even if Prop 10 doesn't pass, consider it a wake up call for owners to get their current rents up to market rate AND do necessary repairs so those rent increases are justified. If you are under contract and there are tenants in place, see if your realtor can get them to sign a new lease with new rent (recommended increase no more than 10 percent) and terms prior to closing the deal. If you are near closing escrow the seller should have already provided you with copies of leases, tenant ledgers, and contact information.
In Sacramento, our City Council is working on establishing a rental advisory board who will set the rent increase limit, and decide what terms are grounds for evicting a tenant, etc. I've been advising all my owners who own rental property within City limits to raise rents now and do needed repairs to justify those rental increases. Rental owners in County should do the same because anything the City imposes, the County is likely to follow.
Originally posted by @Dan H.:
Do you invest in RE in So Cal? What do you define as long tenured owners? Average SFR in San Diego have raised ~$152K in the last five years. Commercial property appreciation has been similar. In the last year SFR have gone up in San Diego ~10%. Assuming a similar appreciation rate for commercial would mean that even an owner who purchased a year ago would experience a ~10% tax increase. I guarantee you that the Property investors will raise rents when their expenses rise and that when they raise rents in the volume of everyone who has owned for greater than a year, it results in a raise of the market rent.
I have not seen RE values fall for other increased expenditure costs such as an increase in interest. The owners just pass the costs on to the tenants. Can you think of an increased expenditure that has caused a significant RE price decline in Coastal So Cal?
I believe rents will rise if property taxes increase. I believe the RE investors will not need to take a reduced profit for an increased expenditure that is likely to impact such a large percentage of the market investors. I reference interest rate rises and the associated rent increases as my rationale for my belief. I also reference that as RE prices increase rents increase. Increased expense results in increased rent.
You can guarantee that commercial property owners will raise taxes, but when push comes to shove they can only charge market rates. You are asserting that the increases in expenses will be borne by the tenant rather than by the owner in the form of an increased cap rate.
Expenses here are a fraction of what they are in other places. Usually in a non rent controlled property they are only 25-30%. Property taxes are a large chunk of that, but even if they went up 10% you are talking about expenses going up a few percent.
Now, what I see here that I don't see elsewhere is people buying at inflated prices and waiting for time to give them a profit. Rents go up at 3-5% per year in rent controlled properties and 7% in NRC properties. Property taxes go up at 2%. I see people buying properties and waiting 7-10 years for them to start cash flowing. Getting rid of Prop 13 would end that nonsense.
I don't know what other expenses have performed like. Everything is pretty cheap here compared to Seattle. In fact, I'm amazed at how cheap water and labor are here.
You are telling me that increases in expenses, asset values or interest rates make rents rise. That's not how math works. At a given cap rate an increase in expenses means asset values fall. Increases in interest rates mean asset values fall.
And yes, I invest here. I've worked in MF acquisitions and am now flipping houses.
Originally posted by @Bobby Nilsen:
Ali check this one out 738 S 10th st, San Jose, CA. This was a flip for us but it cash flowed once we stabilized it and it would have been a great keeper if we didnt need the cash. We used the money from that one to buy another fourplex in San Jose that was cash flowing on hard money. We refinanced and pulled some money out. Cash flowing properties are possible even in the craziest markets.
Hmm. Why do you say that would cash flow?
By my underwriting, that property would have about $59 in free cash flow ... for the ENTIRE YEAR. And that assumes you're cleaning up the landscape - er, concrete - and all utilities are billed back to tenants, there's no pest control, and no trash expense. That's a current ROI of 0.01%.
If I wanted to underwrite as loose as possible and ignore the management expense allocation and capex allocation, I could get to a 2.69% current return and a 6.63% annual earned ROI. But, that's not really real.
I wouldn't say that's an example of something that "cash flows".
I wouldn't (and don't) argue against the claim that cash flow is possible in high-value CA urban areas ... but I would say people (including myself) have to earn it rather than just buy it. Mainly, I'm just interested in what definitions you're using to claim that this property would "cash flow".
Sorry to OP for going off-topic. If Prop 10 passes and some municipalities enact versions of rent-control, I'm afraid I'm in @Seth Borman's boat - rents won't go down, but cap rates will rise (meaning values will fall).
Originally posted by @Seth Borman:
Originally posted by @Dan H.:
Do you invest in RE in So Cal? What do you define as long tenured owners? Average SFR in San Diego have raised ~$152K in the last five years. Commercial property appreciation has been similar. In the last year SFR have gone up in San Diego ~10%. Assuming a similar appreciation rate for commercial would mean that even an owner who purchased a year ago would experience a ~10% tax increase. I guarantee you that the Property investors will raise rents when their expenses rise and that when they raise rents in the volume of everyone who has owned for greater than a year, it results in a raise of the market rent.
I have not seen RE values fall for other increased expenditure costs such as an increase in interest. The owners just pass the costs on to the tenants. Can you think of an increased expenditure that has caused a significant RE price decline in Coastal So Cal?
I believe rents will rise if property taxes increase. I believe the RE investors will not need to take a reduced profit for an increased expenditure that is likely to impact such a large percentage of the market investors. I reference interest rate rises and the associated rent increases as my rationale for my belief. I also reference that as RE prices increase rents increase. Increased expense results in increased rent.
You can guarantee that commercial property owners will raise taxes, but when push comes to shove they can only charge market rates. You are asserting that the increases in expenses will be borne by the tenant rather than by the owner in the form of an increased cap rate.
Expenses here are a fraction of what they are in other places. Usually in a non rent controlled property they are only 25-30%. Property taxes are a large chunk of that, but even if they went up 10% you are talking about expenses going up a few percent.
Now, what I see here that I don't see elsewhere is people buying at inflated prices and waiting for time to give them a profit. Rents go up at 3-5% per year in rent controlled properties and 7% in NRC properties. Property taxes go up at 2%. I see people buying properties and waiting 7-10 years for them to start cash flowing. Getting rid of Prop 13 would end that nonsense.
I don't know what other expenses have performed like. Everything is pretty cheap here compared to Seattle. In fact, I'm amazed at how cheap water and labor are here.
You are telling me that increases in expenses, asset values or interest rates make rents rise. That's not how math works. At a given cap rate an increase in expenses means asset values fall. Increases in interest rates mean asset values fall.
And yes, I invest here. I've worked in MF acquisitions and am now flipping houses.
Increased expenses do not effect NOI if the increased cost is passed to the tenants. Examine significant interest hikes in the past and property values and you will see a correlation. I do agree it is counter intuitive but it is there.
I do not understand why you think the elimination of prop 13 would result in better cash flow or a shorter duration to cash flow. Also your 7 years for positive cash flow is likely only accurate for the least experienced RE investors. If I do not project at least 20% short term return, I am not interested and my conservative ROI estimates so far have always under predicted my ROI.
Originally posted by @Dan H.:
Increased expenses do not effect NOI if the increased cost is passed to the tenants. Examine significant interest hikes in the past and property values and you will see a correlation. I do agree it is counter intuitive but it is there.
I do not understand why you think the elimination of prop 13 would result in better cash flow or a shorter duration to cash flow. Also your 7 years for positive cash flow is likely only accurate for the least experienced RE investors. If I do not project at least 20% short term return, I am not interested and my conservative ROI estimates so far have always under predicted my ROI.
I don't think that it will increase cash flow. I think it will increase cap rates. That means that for a given NOI buildings will become less valuable.
That said, the larger effect will be to kick millions of SF of un and underdeveloped land onto the market. A glut in land will force land prices down and make it a hell of a lot easier to build new buildings.
Since I would rather make my money from value add or development than turn key investing I don't see the problem here.
Originally posted by @Bobby Nilsen:
Ali check this one out 738 S 10th st, San Jose, CA. This was a flip for us but it cash flowed once we stabilized it and it would have been a great keeper if we didnt need the cash. We used the money from that one to buy another fourplex in San Jose that was cash flowing on hard money. We refinanced and pulled some money out. Cash flowing properties are possible even in the craziest markets.
I would have to agree No on 10. Who knows what would happen if it passes. I’m in the bay are and some cities here are pretty much doing what they want already. Mountain View enacted rent control and then made it retro active. Landlords were having to set rent to a past years avg and had to refund tenants.
Ali
Are you serious? They made it retroactive and the landlords had to refund the tenants the backpay? How is that even possible?! And I hear you, Santa Monica is similar. They are their own municipality so tend to make their own rules also. Omg, I can't believe that retroactive bit! And agreed on Prop 10....I think the most concerning thing is how open it leaves the rules that could get created. And likely none of them will help the housing crisis in the way people are pitching it will.
Cute property. I could only find the purchase price and the gross rents. With the gross rents it was at 6.5% so what was it with the nets? Can't quite picture the cash flow on that one. But if it worked, cool! Sounds like you have a good gig going on up there.
Originally posted by @Tony Kim:
For properties located in primary markets, instead of a dichotomous characterization of a property either cash flowing or not cash flowing, wouldn't it be more appropriate to measure the degree of cash flow? I mean, almost ALL properties will cash flow as long as you put enough money down. I've just put an offer on two multiplex residential properties in Los Angeles that will cash flow very nicely for me.....but I didn't really find a diamond in the rough. I'm just putting down a good amount of money. And as the tenants move out (God only knows when that will be), I'll be able to rehab and bring the rents up to market (as long as Prop 10 doesn't pass). The increase in rent vs. rehab costs is where the true value-add will come in.
With that said, please.....no to Prop 10!!
Huge no on 10! Of course it would be the year I finally cave and buy a property in LA...
Well yeah, anything can cash flow depending on how much you put down. More of what I care about is the cash-on-cash return. How much you're making on your money. If you can buy a property for cash and with no mortgage, I'm all for it just about anywhere, especially in CA with the appreciation potential. But that's not the case for most. And saying whether something cash flows or not is important because the investor needs to know if they will be forking money out every month to pay for the property, and if so, how much? Because they need to know if they can pay for it or not. It also goes into strategy because if there's negative cash flow per month, where will the profit come from? It can come from somewhere, but a smart investor needs to know where.
To echo what's already been said by some, your cash flow potential will be a function of your debt service, if any. Of course, if you buy a property all cash with no financing, you will almost certainly "cash flow" assuming that your operating expenses aren't greater than your effective gross income, or in other words, that your NOI is positive and your cap rate is greater than 0%. So to standardize what it may mean to "cash flow", for me, in my target market(s) in the greater Bay Area I seek out deals that produce me at least a ~5-7% cash on cash levered return if/when stabilized. This assumes a 75% LTV. It all depends on the deal, though. I find that cap rates can be very deceiving because these depend on how the seller either operates the property, or what their "proforma" says (usually a very blue sky), and if you're dealing in the 1-4 unit space, this can be all over the map with some less sophisticated sellers leaving out basic opex items like property taxes (I've seen it!). Thus, I often look at the current gross income to calculate my internal "acquisition cap rate" because I know how I would operate the property and roughly what my expenses will be, especially if I have experience in that particular submarket.
