All Forum Posts by: Arlen Chou

@Scott Kinsel this is a great play, I do the same thing with industrial space in the SF Bay Area. My manufacturing business leases space from my LLC. As @Cason Acor had indicated, it probably will not be possible to get the SBA loan in the name of your LLC, but it cannot hurt to ask. I don't have a SBA loan in place on my industrial buildings, because I keep the property separate from the manufacturing business for tax and liability issues. As for rates and terms, that will depend substantially on your business and your profitability and your relationship with your banker. Typically, I have seen rates to be slightly higher than commercial residential loans that I have received, but not by much. Good luck to you!

@Michael Barger it sounds like you already have it all figured out, but you are looking for validation to drop out of school. We have all been indoctrinated with the idea that a college degree is THE way to a successful future. That might have been true decades ago, but the reality of your chosen path is that everything you need to be successful in REI exists on the internet.

College is required if you want to go into a specialized field that requires "certification". To be a doctor you have to be certified. To be a lawyer you have to be certified. There is nothing that says to be successful in business or more specifically in REI that you have to be certified. A business degree does not really mean that a person knows what the hell they are doing...

If a person wants to go out and become an employee a degree is helpful. This is only because there are very few ways for companies to weed out individual applicants, so they rely on the antiquated notion that a college degree is an indicator of professionalism or potential. Another potential benefit of a degree would be access to a strong alumni association. This can be very helpful. However, I believe that this is only the case for top-ranked schools. This might be an elitist view, but I think it is the reality of the market place.

Classes on finance and account could be helpful. But you can learn all of that on your own too. 4 years is a long time to be on the sidelines getting a piece of paper that probably is not useful. Most of the real estate investors I know do not have a degree in anything that relates to real estate. The few that use their degrees in REI all went to school for finance/accounting and they run their own books.

Personally, I don't use my liberal arts degree in either my tech-based job/company or in my real estate investing. The college experience was great and I learned a lot about personal interaction and the world outside of the little town I grew up in, but that was literally back in the days of the dial-up modem...

I have an 18-year-old daughter and a 17-year-old son and I have told them the same thing I have said here. You can accomplish a TON of stuff in the same 4 year period if you are willing to drive yourself and be focused. But you have to make that commitment and go into it that knowing you will miss out on the "college experience". Unless college is a stepping stone to a specialized degree, it really is just a 4-year vacation/place to hide from the real world.

Very simply put; college WAS the only place to get knowledge, and knowledge was power. In the 21st century, almost all the knowledge of humanity is in the palm of your hand (cell phone). Moving forward, success is not going to be knowledge-based, because everybody has access to the same knowledge. Success will come from experience and self-motivation.

Like I eluded to earlier, I think you already know the answer... Good luck to you on whatever path you decide to travel. 

@Tyler D. I think you need to do a deeper dive into the history of the Bay Area market, and maybe that will sway you one way or the other. If you look back to what people have been saying in each of the past 4 decades, and probably longer, the masses of people have been saying the exact same words as you posted. Most people fear the market is at its peak because they have not done the research. Fear is based upon not knowing... Maybe we are at a peak, but depending on a persons time horizon it may or may not matter. Consistently the successful OG REI people I meet in the SF Bay Area are people who got in and have held for a long time. They weather the down cycles through good fiscal management and reap the benefits on the up swings. I am not advocating you go out and buy because I don't know your specific financial situation in detail. However, I will tell you that I sold 1 property last month but I used those funds to pick one up next month, and I hope to close on another one in January. I wish you the best of luck on your journey.

@Forrest Faulconer It has been touched upon by @Jay Hinrichs and a few others in this string, the issue of the primary residence purchase is really a subsection on the discussion of equity vs cash flow debate. From a financial perspective, it makes no sense to purchase a primary residence if there is little to no appreciation potential. This appreciation could be in the form of a market location or forced appreciation via sweat equity, etc. 

However, if you purchase a property that can appreciate AND you take advantage of that appreciation via cash out refi's or HELOCs to purchase investment properties then it is definitely an investment. Additionally, unless this will be your "forever home", look at the property as you would any other investment property. Look for appreciation and rentability and understand your exit strategy for the property. 

To you address your question directly, my previous primary residence was an investment. I purchased a 3b/2b in a nice part of SF Bay Area and added over 1k sqft. I lived in it for 14 years and turned it into a rental for 1.5 years prior to selling. I went into the house knowing that I would either sell it or rent it, so the build finishes and budget were appropriate to that strategy. During my time in that house I did several cash out refi's and a HELOC. This money was used to purchase multiple rentals in the SF Bay Area that cash flow AND have appreciated. Upon exit I took advantage of the $500k exemption and because it was a rental I am doing a 1031 exchange into other properties. I have received some questions about the ability to use this strategy, but I have checked with both 1031 exchange specialists and CPAs and I am satisfied with their positive input.

I did purchase a new primary residence that I consider a life style purchase, AKA a liability. I purchased an expensive property in the SF Bay Area, but it literally checked off everything on my "want list". Will I see appreciation on this property? I am sure I will over a long time horizon, but I doubt it will come close to the performance of my last home. The new home was move in ready, with zero forced appreciation ability.

In the end the purchase of a primary residence can either be a liability or an asset, like any other purchase it depends upon what the buyer does with it. The cool thing is that you get to chose.

@Matt Nico sorry if I misunderstood your initial post incorrectly. It sounded like the appraiser was not aware that the property was converted to a duplex and that is why he said it was non-conforming. I would assume that appraiser would verify that the property they are reviewing matches the legal definition of that property and count the rooms etc. If the documents show a duplex with a 4/3 and an in-law unit then he should have completed the appraisal. I am sure this will all get sorted out. Good luck to you.

@Sherry McQuage That is easy:

1) Don't buy stupid sh*t and save your money to get ready for the deals

2) Learn from books, but more importantly learn from people

3) And the 1 universal truism to all real estate investors, start as early as you can.

The sooner a person does #1 and #2, the sooner he/she can tackle #3

@Matt Nico the issue is not necessarily with the appraiser. Is the property truly "non-conforming"? Does your in-law suit not have a bathroom? Basically, did you convert the house into a legal duplex or did you go rogue on it and how rogue did you go? It kind of sounds like you did this without permits and you are asking the guy to overlook that fact. What @Russell Brazil is alluding too is that you might want to consider converting it back to a 5/3 to get your loan and if you really want to walk the hairy edge or what may or may not be legal, convert it back to your 4/3+ configuration later. Keep in mind, I am not an attorney nor a contractor so this is not in anyway legal or professional advice. Just because you can do something does not mean you should. Your bank may frown on this practice if they were to discover this. Keep in mind that you did create yourself a digital "foot print" by posting this question...

I kind of think the appraiser did you a favor. He did not call you out by creating a low appraisal based upon the non-permitted work he found and he gave you your money back. If he had completed an appraisal, it might have stopped your refi dead in its tracks. He could have really screwed you.

@Peter Eberhardt you live in a great "backyard" and you are in a great position to lock in great interest rates. I attended UCSD and still miss the SD area to this day! Putting politics aside, due to covid there will probably be a down cycle in real estate prices in 2021. There cannot be a continued up swing in prices on rental properties as more and more service level people get laid off. Additionally, rentals around shut down universities cannot be enjoying the same level of occupancy as pre-covid. I personally believe that will put pressure on landlords who jumped into the market over the past few years leading to forced sales in the near future.

The question then becomes, do you believe those areas will come back a few months or years down the road. If you do, your moves should be to lock in the best rate you can on your current property. Then find your next property and get another loan as a primary residence and house hack it. I don't know if you are married or if you have kids, but the only time you can really plan to house hack is when you are young and single. Maybe push into the first few years of a marriage if your SO will go along with the program. For most people it is really not possible after they have kids.  

My point being this might be a great time to build on a base of appreciation based properties that you can protect with low interest rates and plan to move to cash flow properties later in your REI strategy. Depending on your financial situation, you might look for a duplex, triplex or fourplex. Just remember this strategy is predicated on your view of future appreciation in your "backyard". But again, I think you live in a great backyard.

I wish you the best of luck!

@Prithvi Sri I am in exactly your position right now. I sold a primary, in the Bay Area, that was converted to a rental and planned for a 1031. Additionally I am using @Bill Exeter and his team for the exchange. I met Bill at @J. Martin real estate summits a few years ago. Bill was very knowledgeable and his team has been very responsive. 

I wish you the best of luck!

@Stephen Swanson your criteria states that you are looking for something that is in "good to rehabbed" shape, so theoretically your CAPEX should be low. BUT that is really based upon the stuff you can see on an initial walkthrough. Not all rehabbers are created equal. Some will put in new appliances and paint the place up to look nice, but they covered up things like dry rot, old knob and tube wiring, and rusty galvanized pipes. With experience, you will be able to spot these things on an initial walkthrough. Personally, I will look under the house at the foundation and also either get on the roof or through up a drone to look at the roof. Among many things, I look at how the cabinets are attached to the walls, the detail of the plumbing repairs, how flat the floors are, etc. Based upon experience, I figure out time and materials and throw on an additional 20% to my guesstimated cost.

The "rules of thumb" are made to be generic because there really is no way to make a specific rule to the vastly different conditions of buildings in any given market. Sorry, I can't give you a simple numerical figure to this complex question. But at the beginning of your REI journey, you really need to have a good inspector or GC or somebody with lots of hands-on experience to check things out for you. They can advise you on costs and priorities of repair and then you can figure out your budget.

I wish you the best of luck!