All Forum Posts by: Allan C.

Most of the replies have been to get a PM or put systems in place, but I'll share another perspective. You may not need scale as much as efficiency. Why not buy more expensive assets so you have same returns with less doors? This should be win-win and your 10 yr older self will appreciate it down the line. 

I've purchased all of my properties while out of state or out of country. Out of state is usually easier as mobile notary will often work. Out of country requires a trip to US embassy.  

@V.G Jason I'll disagree with you here. Despite higher interest rate environment, there's reasonable probability inflation will still continue - thus increase hard asset valuation. If OP can lever-up while maintaining adequate reserves, he will be in better position than buying with heavy cash position.  

As we agree, the key is to not over-leverage. 

Quote from @Evan Coopersmith:

@Allan C. That's exactly what I needed, thank you. I accept the need for a competent PM and the reality that competence typically ain't cheap. It seems there are plenty of ways to be penny-wise and pound-foolish. 

When you allude to "real wealth-drivers," to what are you referring? Long-term fundamentals? Micro-local patterns?

Wealth-drivers are appreciation, debt pay-down (ie. principal payments) and tax shielding.

Since you're analytic savvy, run some high level amortization schedule scenarios to see how much equity you gain through annual principal payments. Most people focus on cash flow, and while that's nice, it doesn't build wealth. Many people don't realize that you gain as much or more net worth through debt pay-down, and while it's less liquid than cash flow, over a 5-10 yr hold period it's considerable if you buy in the right areas with the right asset class. You can surely buy cheaper properties and obtain the same debt pay-down, but now you've got 5x the head-ache, so right asset class is more about efficiency when it comes to debt pay-down.

Tax shielding is similar concept in that more expensive properties directionally give you more building basis to depreciate, which means less net income to tax. Again you can buy more properties in lower asset class area, but it's less efficient.

There are many threads about appreciation, so i won't repeat it here, but my guidance to you is to think through the difference between appreciation and inflation. They ultimately look the same when it comes to property value, but the fundamental drivers are different. It doesn't matter if you already have assets, but it makes a difference when you're looking to make new purchases. You have many people who say midwest markets are now appreciation markets, but I disagree with that statement. Midwest has inflated over the past 5 years (as everywhere else), indexed to cost of new construction. Appreciation is driven by demand outstripping supply, and cost of new supply.  Some of it can be temporary, but ideally you'll want to be in markets where it can be sustained (ie. have barriers to entry).

@Evan Coopersmith penny-pinching is an easy way to crash. If you plan to manage remotely, then find a good PM or have a trusted team that can inspect your property regularly - and be ready to pay them. I also recommend buying in a B-class neighborhood so you can learn the ropes with an easier tenant class. Most folks chase paper-returns and overlook the real wealth drivers in REI.

I get the desire to own outside of Chicago proper, but instead of going to another state altogether, why not invest in one of the burbs? As an new investor you should consider which factor is higher risk - proximity or market dynamics. 

While I fully invest remotely these days, I wouldn't start new in REI in a remote market until learning the ropes in my local market. There are a lot of ways to crash and burn, so increasing the odds of succeeding long term should be your highest priority. you can always sell your local assets once you're comfortable managing rentals and ready for a market that better-suits your criteria.

btw, kudos for being self-aware of your limitations. That pragmatism will help you mitigate risks as you understand the different components of managing rentals  

@Chris Shon Michael is right in that your GA LLC should be registered as a foreign entity in CA, thus encumbering you to the CA FTB fee. If one of the LLC members lived in another state and that person acted as managing member then you can avoid the FTB fee, but looks like you both reside in CA.

@John Friendas back to Jay's comment, it shouldn't matter if you plan on purchasing another property soon after. If the rental property income covers the debt, then it shouldn't have an adverse affect on DTI. Try some math examples to convince yourself. Let's say you currently have DTI of 30%. If the rental property has a DTI of 25%, by definition your blended DTI will be <30%.

You'll only worry about loans under your name as you reach 10 properties financed under your personal name. By that point you should be looking for other loan products anyway. 

Ignore the folks telling you to wait 2 years to avoid capital gains. If you move for a valid reason like new job, you can pro-rate your gains exclusion. Since you're at 1.5 yrs, you get $375k excluded (75% of $500k). 

I would also think twice about selling if you're in CA. Depending on location, your appreciation will likely exceed your loss of capital gains exclusion, if you can handle the cash flow loss for a few years. 

I've sold while in your shoes before, and I've also held with large negative CF. Both times I was happy with the decision, so I think either decision will be fine, pending your location. 

Quote from @James Wise:

Do people still buy property in California for any reason other than the weather? Seems like everything else about California sucks. High taxes. Soft on crime. People just stealing whatever and whenever they want. Homeless people living in tent cities pooping on the streets etc.....

Why do people still go to California?

It mid-70 deg today, so while half the country is dealing with the vortex i hung out at the beach. In the summer while the other half of the country is dealing with sweltering heat, i'm still hanging at the beach. Weather aside, I started investing in CA 10 years ago for diversification, but also because it still has sound investment fundamentals. 

The weather is better, there's way more to do, quality of living is better, and the diversity of food is hard to beat. I've lived in many cities across the US and around the world, so I've tried to remove as much bias as I can. I also invest in the midwest and sunbelt, so I'm not partial to one location for investment purposes. And while better quality of life and more things to do may not be important to you as an individual, it will still attract/retain general population over time. 

yes CA business laws here are tougher to navigate, but that creates a barrier to entry. I believe that all businesses reach equilibrium, so returns should not be better in any other state/city than the other once you normalize for effort, risk and barriers to entry. Think about this - the metro city that I invest in has a greater population base than every other state in the US, aside from TX and FL. That is intrinsic demand in a diverse economy that will likely never go away. Supply side is also limited by regulations and cost efficiency. 

People talk about net migration, but I also think that may be transient. I think US, like most other developed economies, will face base population decline over time. To offset that decline, we will increase immigration to maintain GDP. And people aren't immigrating to the US with aspirations to live in OH (despite my family doing so). While CA seems expensive to rest of US, it isn't that expensive compared to many other countries around the world. 

To invest here you certainly need liquidity, and need to also understand investment analysis. You can't simply use year-1 cash flow, COCR or other simple metrics. You need to use IRR modeling since cash flows are not evenly distributed. And yes, you'll likely also run negative CF in early years. A typical MF property that I purchase runs negative $20k for the first few years. So i'm negative $50k before my CF turns around (part of that is principal), but once it turns the positive CF is significantly greater than other regions. And while most people "don't bank" on appreciation, I do for the fundamentals noted earlier. Over a 15 yr hold period, i've seen my CA IRRs beat all my other locations.

I think most people who've seen appreciation over the 5 years are mixing inflation with appreciation. I also think the migration patterns post covid aren't sustainable, so places with true appreciation like ID and MT may flatten out. Employment is increasing in some midwest and gulf coast cities, but land is plentiful in those areas and you can keep building, so asset value will be indexed to construction costs (ie. inflation more than appreciation). Everyone who bought 5+ years ago is doing well, but going forward you need to keep in mind fundamentals driving supply/demand.