All Forum Posts by: Derek Daun

Do you expect to run into any problems with financing the construction if the down payment comes from a HML? I've read it can be an issue since neither lender would want to be relegated to 2nd position on the property.

1. Determine how much money you have to start
2. Determine how much time you're willing to commit to this new part time job
3. [ ...... All the actual technical details you need to learn outlined by everyone else above and below....]
4. Choose market and strategy
5. Calculate probable worst case scenarios and exit plans
6. Decide based on 1, 2, and  5 above that you still want to do this 

I definitely wouldn't buy it at that price, and I'm a fan of the idea that if you wouldn't buy it, why should you keep it. 

A lot of people are saying 75% is the max LTV with a big banks for investment properties. I've had no problem getting 80% at Wells Fargo and Chase, and at least Wells Fargo offers 85% as well. Interest rates are obviously slightly higher with higher LTV.

I love to hear other investors keep that opinion! 

Seriously though, I'm guessing you don't get to Midtown very often. Walk buy the Marrs building at K & 20th any Thursday, Friday, or Saturday evening, and it's hard to say Sacramento hasn't become a self supported trendy place to live. Realistically, Sacramento is just too far away from the Bay Area to become a bedroom community. Those Bay Area transplants are coming here to live. Yes, some of them commute once or twice a week, but the majority either work remotely, or in most cases have jobs right here. 

I've lived in central Sacramento since I moved here 11 years ago. Back then you would be right; my roommates would head to the "city" every weekend. Every. Single Weekend. If you wanted to go out, that generally meant diving it at Old Tavern or Zebra Club. That started to change around 2008 or so. Suddenly more and more people were sticking around. There were bars and restaurants of a different caliber. New developments. The food became an attraction in itself. My generation stuck around Midtown if we could afford it, and every year there's a new class of new grads coming as well. Not to mention the retirees simplifying their life style with modern downtown condos. Now a days, you're more often hearing people complaining about Bay Area housing refugees than you are to hear people striving to move to the coast. There is simply just not enough housing to go around in the central core.

And I haven't even mentioned the downtown/Kstreet Mall/Stadium yet. I'm not fully sold on the endeavor, it seems to be more likely to work than not. We'll find out in the next couple of years though.

But like I said, I fully encourage you to continue thing that, and make sure to tell all your investor friends the same. And when you finally realize the lost potential, I'll even sell you some of my SFRs; they won't be cheap though. :)

@Mohit Madaan

I agree with your math as a worst case scenario, and if you're talking about many places in CA, the current market would make me question investing locally (Although you didn't adjust the out of state calculation for worst case scenarios of bad management, or  bad tenants leading to zero or negative cash flow)

The truth is I over simplified the appreciation calculations; I'm not really banking on overall market appreciation, but gentrification. I buy on specific streets, of specific areas that I think will be improving drastically. I worked backwards to get to that 6% appreciation number, starting at a very pessimistic future value of 200k. Realistically, the value in five years is more likely to be much higher, even if the market drops. That's why I decided to stay in state after seriously considering going out.

I wouldn't trust those numbers for other areas in CA, even around here. Like you said, it could happen, and is maybe likely, but not guaranteed.

Looks like Joe beat me to it as I was typing out my answer.

Rough number comparison:

Midwest strategy

• Invest 30k in the Midwest. Leverage 5:1 with 80% loans = Three 50k houses for total purchase price of $150k. Mortgages = 120k. You make $100/door after expenses. In five years your loan will be down to about 111k, and your properties might be worth 160k. Equity = (160k - 111k) = 49k. Add in the 18k in profits, and you're up to 67k in capital. Cash over cash ROI = (67-30)/30 = 123%. Not bad, about 17.5% annual ROI. That assumes you're hitting 100/door number. And you might not.

Sacramento

• Same 30k investment. Leverage 5:1 and get one 150k property. Rent for 1300/month. Don't plan on guaranteeing any cash flow right away, but it will pay for expenses. You should be able to generate more cash later as rents are likely to continue to increase. In five years that property is worth 200k. (Annual 6% increase). Mortgage also = 111k. Equity = 89k, Cash over cash ROI = 196%, about 24% annual ROI.

Not taking out student loans for my first two years of undergrad.

I worked my butt off nights and weekends during high school and summers, much at low wages, to pay for my first two years out of pocket. If I had instead taken out the federal loans, I would have been in a much better financial position when I exited grad school. I likely would have been able to buy a second property in 2011 instead of just the one. My portfolio could be double what it is now.

Also, Kevin Johnson's mayoral term ends in three months; allowing him to resume Oak Park development after a 8 year hiatus. Think what you may about KJ, but he takes the Oak Park area personal. His political connections, financial connections, and ambitions can only have grown since 2008, and I wouldn't be surprised if his work up to now is dwarfed by his future plans.

It depends on what your definition of house hacking is. If you're looking for the traditional definition; where rents from the rental units cover the entire mortgage including your unit; you're not likely to find that around here. If you expand the options of house hacking, though, you'll have more options. 

For me, I bought a high water bungalow with a partially finished basement, and completed the basement into a rental unit. This is more of subsidizing my mortgage cost such that I can live in a premium neighborhood and have greater leverage and appreciation relative to my out of cost expenses.  Plus I had the instant added value from the remodel to start out with, and the continued increase in value as I slowly restore the outdated property.