All Forum Posts by: Andrew Herrig

@Alan E. I used to post my rentals on Craigslist, but I don't bother anymore. I just post on Zillow/Trulia/Hotpads and get plenty of propspective tenants. It may still be useful for lower end properties. There is so much garbage to sort through on Craigslist, it is almost unusable to me these days.

That said, I did get a buyer for a wholesale property off of Craigslist that turned into a repeat buyer for several of my deals, so it still has its place as a potential lead generator.

@Jacob R. It is too late now, but if you purchased the house within the last 2 years it is pretty easy to protest your taxes based on your purchase price. You just have to show them your closing statement.

If you purchased prior to last year and you are living in it, you should have a homestead exemption in place that will cap your tax increase at 10% per year.

What does the $627/mo represent? That implies a tax value around $350k if you have homestead exemption or around $280k if you don't.

@John Clark You are not going to get anywhere close to a 10% unleveraged return on a 1% rule rental. If you use the standard rules of thumb (1% rent per month, 50% expenses) that is a 6 cap.

I don't think your expenses are too far off overall. Because of high property taxes, it is difficult to cash flow on a 1% rule rental.

I don't know about other parts of Texas, but DFW is not really a cash flow market anymore unless you are in the C and D neighborhoods.

@Steve O'Keefe Looks like you've made a decision on what to do, but I wanted to throw my two cents in. As has been brought up several times in this thread, I think ROE (return on equity) is the metric you really want to look at for your situation. The question is, what kind of returns can you make if you put that equity to work in another investment?

In a perfect world, where you don't care about risk, you would leverage everything to the hilt (75-80% LTV) and keep as little equity as possible tied up. Then you could invest the equity you successfully freed up from a cash out refi into other assets that generate a return greater than the mortgage rate (which shouldn't be hard to do in the current low interest rate environment). So you would do a cash out refi on your houses to a 30 year mortgage at 75-80% of value and reinvest the money into other rental properties, syndications, stocks, bonds, whatever.

However, we don't live in a perfect world, and everyone has to determine how much risk they're willing to take on. For me, I don't ever want to leverage a property up to the point it no longer cash flows. If you have to come up with cash out of your pocket every month just to pay the mortgage, you are at high risk of default should anything go wrong (lose your primary job, big repair bill, extended vacancy, etc.) And it looks like from your numbers you are at about a breakeven cashflow right now, so I wouldn't recommend increasing your leverage anymore.

There are two main components to your return - cash flow and appreciation. So taking your numbers at face value, you've got roughly $500k of equity earning approximately a 0% cash return. If you look at the Case Shiller data, San Diego has appreciated around 5.5% per year since 2000. So if you expect that to continue, on a combined property value of $925k that would be $51k per year in appreciation gains, for an overall return of (0+51)/500 = 10.2% per year.

That's not a bad return, but it is 100% dependent on the rate of appreciation, and my crystal ball is pretty fuzzy as to what that's going to look like in the next 5-10 years. But if you don't need the money now, San Diego is probably as good a bet as any to outpace the national home price appreciation rates over the long term.

The other option is to cash out and put your $500k of equity to work somewhere else, maybe in turn key properties in the Midwest where appreciation is a more modest 2% (every city is different - I used Chicago to come up with 2%), but your return is weighted more to cashflow than appreciation (less risky). Let's say you can get 10% cash on cash return from your $500k, using it to make 25% downpayments on $2M worth of real estate. So now you are bringing in $50k per year in cashflow and $40k per year in appreciation, for an overall return of (50+40)/500 = 18% per year.

Of course these are just examples with very rough numbers. Things change year to year as your equity position changes and you pay down mortgages. But the point I'm trying to make is that you are in a great position regardless of your decision as long as you don't overleverage and can at least achieve breakeven cashflow.

Hope that helps as you think through your decision. I have been thinking about this a lot myself. For my own portfolio, I am starting to selectively sell off some of my houses that have appreciated a lot in recent years (and where the ROE is therefore pretty low) and moving that money somewhere I can get better cashflow. But I also like the market I'm in (DFW) as it has strong economic fundamentals, so I'll probably keep some of my rentals here even if on paper I could increase my cashflow elsewhere.

@Cameron Marmon I am in a similar situation with a condo I used to live in but is now a rental. This is the last year to sell for tax-free gain. Mine actually does cash flow a little bit, but the ROE (return on equity) is pretty low. I bought it for $110k in 2012, it's worth somewhere around $200-220k now. Rents for $1650 (which doesn't seem like too bad of a ratio, but you have to add in the $350/mo HOA payment). I decided to sell this summer because I have other things I can invest the money in and get a higher return. It was a tough decision as I have emotional attachment to it, and just really like the area. I think it will appreciate well over the years. But even factoring all that in, it is the absolute worst performer in my portfolio in terms of ROE.

I think the real question is - if you sell it, what are you going to do with the money? Since you are effectively making a negative return on your $100k of equity, I would assume it wouldn't be hard to beat that with other rental properties or even stocks/bonds in the long term. You can still find 1% rule buy and hold properties that would break even cashflow-wise, but the tenants would be paying down the mortgage and you would have the benefit of future appreciation.

@Kusum Chanrai Why are you wanting to invest in DFW? I invest here because I live here, but if I was out of state, DFW would not be on my short list of markets to target. DFW has strong growth and good economic fundamentals, but also a ton of competition. Why will you be able to make money here when so many locals fail? (Not saying you can't make money, but what is your competitive advantage?)

I assume you are talking about Networth Realty. If this is your first investment property and you don't have local market experience, I would be extremely careful. Run your own numbers and get a second and third independent opinion before you pull the trigger.

As others have said, $250k is not going to work as a buy and hold. If you can target flips under $300k ARV they are flying off the shelves. But everyone else knows that too, so there is a ton of competition and slim margins for flips in that price range. For a buy and hold, I would be looking in the $100-150k range.

@Preston L'Ecuyer I think your latest post may have swung a little TOO conservative. I don't think your original analysis was too far off other than accounting for property management. As others have said, you can certainly self manage, but you don't want a house losing money every month if for some reason you can't or don't want to manage in the future.

The 1% rule is breakeven at best in DFW. The property taxes are killer (25% of gross rents in your scenario - mine are similar). I have several rentals in Dallas and one in Indiana. Even though I self manage in Dallas and have a PM in Indiana, the expense ratio for the house in Indiana is way lower than Dallas and I get way better cash flow. Probably less appreciation potential, but that's the trade-off.

There are still deals to be had in DFW, but cash flow is getting squeezed, especially in the B neighborhoods and up. I am starting to selectively sell off some of my rental properties and put that equity to work somewhere else earning a higher return.

@Andrew Neal I don't own any AirBNBs, but have done a little research. It seems like the best return would probably be on properties in Arlington area near Cowboys stadium, Rangers ballpark, Six Flags, etc.

@Steven Atkins What makes your budget $250-300k for a MF house hack? You can find some duplexes in the Richardson area near 75 for $350k or so. I have a duplex near 75/635 that's worth about that.

What is the draw to buying a new build as an investment? Appreciation play?

@Michael K. To add on to the discussion regarding timing the market - if you are buying for cash flow, trying to time the market adds no value. As mentioned above, if interest rates continue to rise that will do more to impact your cash flow than a drop in price.

DFW has a strong and growing economy, adding new people and jobs every year. Unless we have some kind of systemic 2008-type event, I don't see prices falling. Certainly we won't continue seeing 10%+ growth every year. The higher interest rates along high property tax rate will have some impact on suppressing continued price increases just due to lack of affordability of the monthly PITI payment.

The question is really are you buying for cash flow or appreciation? Cash flow should be relatively stable regardless of economic conditions (barring disaster). Appreciation is anyone's guess and can be impacted by economic conditions, interest rates, neighborhood favorability, etc. I would argue that you should never buy something with negative cash flow just for the appreciation potential.

Given that, if I find a property now that cash flows in a stable neighborhood, I am going to buy it now, not hope prices fall and I can get a "deal" later. Too many variables to make predictions about the future.

All that said, I find it hard to find properties that meet my cash flow criteria in Dallas these days. I am starting to sell off a few properties that have appreciated a lot over the last few years as it doesn't make sense to hold them anymore. Your criteria will probably be easier to meet as you are also looking at it as a primary residence.