All Forum Posts by: Chris Ruud

Some numbers I think we can all agree on: Reading this thread in its entirety is 10000% entertaining.

If it's in irreparable condition, would the land itself sell for more than 200K?  You could potentially put 20K into tearing it down and making it attractive to a builder. 

Thanks everyone, all makes sense.

@Cody L.  Right??  I admit I'm relatively new to this, but checking probably 100 different properties across 5 different suburbs of LA, monthly rents seem to be consistently 0.5 - 0.6% of the purchase price.  Which is making me realize how important it is to begin using methods of locating properties that are off market.

I've been reading about the 50% rule (a quick way to estimate expenses being 50% of gross rental income) and have tried to apply it to properties for sale and it always comes out consistently too high.  The numbers I'm coming up with are that expenses are around 30-35% of gross rent.  I just want to make sure I'm not missing something or being unrealistic.

In my area near Los Angeles, it would be realistic to find an average SFR for about 500K and have rent come in around 2500-2800/month. Assuming rent of 2700 here is what I'm calculating monthly expenses could be:

10% repairs and capex - $270

5% vacancy - $135

3% insurance - $81

17% property taxes - $450

Which comes out to 35% total.  Is there something I'm missing?

@Bradley De comarmond  Thank you for the balanced and informative answer! 

@Thomas S. I respect your position but I'm not sure how me conservatively assuming property values and rental rates will at least match the rate of inflation is speculating. I've also given some pretty awful scenarios (appreciation of only 1% etc.) and I still calculate 7% IRR, and calculations based more on history being more like 10% IRR. How can you say 7-10% IRR for 40 years straight (not to mention future cash flow) is not investing?

Everyone's points about possible large capex expenses needed early on are right on, and yes I can see I should start off with a big cushion to not be in danger of not being able to make mortgage payments.  I think I would be tempted to put that cushion (say it was 25K of extra cash) towards a down payment, which actually would raise the cash flow, but I can see the value in being prepared especially with a property that's brand new to you.

@Ryan Evans That's a good point with the value of even a small monthly cash flow over the course of 30 years.  The idea of investing out of state for my very first investment just doesn't sit well with me for whatever reason.  That's actually why I started this thread.  Even though cash flow might be higher out of state, I was feeling like I'd rather take lower initial cash flow for more comfort.  Just want to make sure it would at least make sense to do very long term. 

@Jim Schock Yes I was purposely being very pessimistic with my appreciation and rent increase percentages. From what I see, a reasonable historical rate of appreciation is 3% and also about 3% for rent prices. At those calculations I'd actually have almost a 10% IRR after 30 years, which is close to the stock market. The big difference for me is that after I pay off the mortgage I'd essentially be cash flowing at whatever the cap rate is (so probably around 5-6% for a SFR), and correct me if I'm wrong but as far as I know even dividend stocks wouldn't give anywhere near a 5-6% return. I'm mostly thinking of consistent retirement income. Doesn't real estate seem more solid too? Maybe it's just because it's "brick and mortar" but it seems to be less risky than the stock market.

@Jim D. I think he is saying that if you buy a house for 500K and literally sell for 500K you are losing money because inflation has made that 500K worth a lot less.  And that's totally right, but I think it's safe to say that appreciation will at least match the rate of inflation right?  

@Carlos Powell Just one most likely, or maybe two houses to hold onto for life.  From everything I'm reading it seems like experienced investors are saying that even during the recession their rents didn't go down much.  I can understand a sudden influx of supply (new construction) causing rental rates to fall, but many of the areas I'm looking in are almost built to capacity.  Are there any other risk factors that would force rents to go down significantly over the long term? 

@Thomas S. I appreciate what you're saying.  I'm able to save a sizable percentage of my income that would be a cushion in case something came up, and I guess I've always thought worst of the worst case scenario I could quickly sell the property if I could see financial trouble coming.  Plus in a more realistic scenario, rental rates would go up and within a few years I would have cash flow to potentially cover those costs.

@Alex J.  That's great to hear you've found properties that are cash flowing in LA.  Honestly you're one of the first people I've seen on this forum from LA that is saying that...seems like everyone here just accepts that no cash flow is just a fact of LA.  Are you only talking about MF though?  Or you also get that with SF?  Do you manage those properties yourself?  What is your vacany/maintenance/tenant quality/headache in those lower income areas?  

I was actually calculating maintenance and capex in my original equation too, but just for the sake of argument let's say there's an additional unexpected 100K capex cost somewhere along the way, and let's also assume there is awful appreciation of only 1%/year, and rents rise only 2%/year, while all of my costs follow inflation at 2%/year (That's pretty bad!) but by my calculations in the end I would still profit over 900K even after the unexpected capex cost, with an IRR of over 7%. I'm not saying that's an amazing investment, but I'm just not seeing where the huge risk is. Even if there was zero appreciation, that would be far far away from financial ruin. I still get cash flow after a few years as rents rise, and especially after paying off the mortgage the cash flow would be considerable. I just wouldn't have cash flow for the first few years.

I don't grasp how having immediate cash flow vs having to wait a few years for cash flow makes or breaks a long term investment.  I'm not trying to be argumentative here, just trying to understand.  Maybe I'm just illustrating that my investment objectives are different from a more active or fast paced investor?

It's great to see that there are so many people in my area who are thinking the same as I am regarding cash flow.  I find myself attracted to @Sandra B. perspective of having high end properties that don't attract headache tenants.  If your cash flow is higher on a C-level property but you have to deal with drama constantly, is it really worth high stress for a few hundred bucks a month in cash flow?  Not to mention A+ properties/areas will probably appreciate much more.

And even if you have a property with zero cash flow, you are "paying yourself" each month by building equity, and even a $1000/month property tax bill will really only wind up costing you $700-800/month after tax deductions.  So the way I see it a "zero cash flow" property will actually raise your net worth easily 30-40% of whatever your rent is.

With this frame of mind, is it really that crazy to buy property in very high priced coastal communities, such as Santa Barbara, Manhattan Beach, etc?  What about factoring in that high priced areas tend to have high income residents that most likely would be more attracted to purchasing rather than renting?

John, thanks and yes I've thought about investing elsewhere.  I guess from a numbers perspective, if I have 100K to invest, it does make sense to put that 100K towards down payments on 3 properties in Texas or Florida, and be cash flowing instantly, as opposed to 1 down payment here in California and not be cash flowing.  

I guess the question is then, for a new investor does that extra initial cash flow make it worthwhile to go through the stress of investing out of state, as opposed to near me?  Totally subjective I know, but I guess that's what I need to think about.

Val, I would have savings right off the bat, and also make enough money from my "day job" to continually have more savings.  I'm also factoring in expenses in my original scenario (which is somewhat realistic), where Total income - Total expenses = 0.

Would still love to hear what others think.