All Forum Posts by: Gary F.

As a former resident of the bay area, I feel your pain. Make sure you add CapEx, Repairs, and Vacancy into your equation, these can be quite costly and will give you a more realistic grasp of what you may make. I usually budget 8% for vacancy and 15% for CapEx/Repairs.

Now, the rest is really up to you - if you buy that property you are going to be negative cash flow, even with your down payment. You should also consider what the current tax basis is on your current house, as you will be exchanging it for a much higher appraised value. Basically, you're speculating that prices are going to go up, which they may, but there is no guarantee and they are already unattainable or many people. Also, give consideration to if you really want to live in a duplex, which isn't as nice as living in a SFR.

And to clarify about Taxes, if you lived in Texas (Used to live in Dallas & Austin), you would pay more per appraised dollar, but there are many places in Texas where you can pickup a nice 3/2 for 100k - 200k. It isn't great for appreciation, but for your average person, the cost of living is quite low.

-Christopher

Hi, Christopher.

Thanks for the numbers to add in. So basically I need to factor in another 23% to operating costs. I'd be negative in that case.

And that higher tax costs, yes that's going to hurt the net profit.

Sheesh. I might as well just do a couple of trust deeds or buy something in the Central Valley. Hmmmmmm?

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Originally posted by @Chris Vail:

@Gary F. In your above example you are forgetting about your rent that you are not factoring into your return.

2,400 rent (3/1)

-2,800 costs

+2,000 for the 2/1(what your side would rent for if you weren't in it)?

=what the property will do as an investment

You also need to make sure you calculate all of your costs (vacancy, maintenance, capex, PM, ect.)

You will just be forgoing some of the profit by living in the unit but if you have a house payment now I would continue to act like you do and plow that into an account that you will use to purchase the next one or another investment.

Thank you, Chris.

Yes, true. Those other expenses are the reality I didn't factor in on paper.

And being that my current housing expenses are about $1700/month and going down, if I live in the 2/1, I'm essentially losing $300 and having to live next to my tenant and deal with the hassles.

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Another thing. I don't have to purchase a duplex. I'd actually rather not have to sell my home and live next to my tenant, but am prepared to do so if I can invest wisely this way.

I do have a 250k HELOC I was prepared to use for REI. But there's no properties at that price in the Bay Area that I know of. I could purchase in the Central Valley. Or I was even thinking of buying trust deeds from another company.

What of those options?

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Originally posted by @Abhay K.:

@Gary

To improve COC return (net income/cash deployed), keep minimal cash into the deal.

Remember if your leverage is 4x (you put 25% down), when property appreciates by 10%, your return on cash due to appreciation is 40%. Based on your cashflow needs, you may want to maximize leverage or maximize cashflow or choose a golden mean path :) where you target say 250/m cashflow and choose loan amount to meet that. Basically this has to do with your risk profile, your personal time value for money - do you need cashflow now? are you confident about appreciation? do you have reserves if market goes south for a few years?

Exit strategies refer to what do you do if planned outcome is not achieved. This is somewhat like a stop loss order in stocks.

e.g.

if area deteriorates I will ...

if units remain vacant beyond .... then I will...

etc.

Excellent advice again, Abhay.

Please forgive my lack of knowledge so some of my questions and comments may seem minuscule to you and others.

So, by putting less down I maximize the return on my down payment and also decrease my risk? By putting all of my home's net profit of $700 as a down payment, I'm overextending myself and decreasing the return on investment?

Two problems:

Assuming purchase price of $1mil on duplex

1) I probably won't qualify for a loan of more than $400 max on a $1mi property. So putting $600 down, I'd need a $400 loan. My monthly payments about about $2800/month (mortgage, tax, insurance but not including maintenance, vacancies, etc that I'm missing). Then I'm negative cash flow.

$2800 costs

$2400 rent

-$400

2) In this market, unless I have 100% cash or at least a large down payment and a prequal letter (my situation), I lose bargaining power and lose to other all cash investors. Is this correct?

Of course, my goal is for positive cash flow and hope appreciation happens. I don't know enough about how to predict appreciation but would sure like to know how.

My risk tolerance is low. I have no reserves should the market go south.

I've sadly never thought of exit strategies and don't know what the options would be other than try to sell.

So basically what I thought may have been a good deal (as presented in my first post, may not be? Phew, any help appreciated.

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I really appreciate the comments I'm receiving.

So the numbers don't look great? I was thinking since my monthly housing payment currently is about $1700 (mortgage, tax, insurance) that if I get $2400 rent I'm ahead. Since this duplex would be my and investment.

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Hi San Jose BPers

My name is Gary. I've recently joined BP and I live in San Jose. I hope to get know you all and look forward to meeting up.

I'm hoping to start in REI by purchasing a duplex soon. I can't make the 17th meeting but please add me to the list for future meetings. Thanks

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Originally posted by @Abhay K.:

Let us clarify some confusion about CA first.

-property tax rates are low 1.2-1.5%. Your 1mil property will be taxed at higher tax in texas (2.6-3.3%) and elsewhere.

-prop13 keeps property tax rate growth at 2%/yr while properties appreciate at 6+%. In other states each year your taxes go up if property appreciates while rents may not grow as much.

This means, if you buy and hold long term your property taxes will stay low even as appreciation allows you to cash out refi and get access to your capital.

Look at return on equity (ROE) metric when you have predominant growth from appreciation and not cashflow. principal paydown itself will be around 1k/m and that will reduce ROE. when this happens below a threshold you refi to cashout.

I think this could be a good investment. Are schools improving in this area? What are your exit strategies ?

Get a CPA to evaluate how your depreciation, insurance costs will be calculated in this case since you occupy a fraction of duplex. Keep separate expense record for rental unit.

Come down to @johnson's meetup in san jose on 17th to meet local investors. http://www.biggerpockets.com/forums/521/topics/206...

Good Luck.

Thanks Abhay.

Im new at this so any advice is appreciated. What do you mean exit strategies? Is that how to get out in a hurry?

The schools have moderate good scores. They're not Almaden or Cupertino I'd still it desirable for many parents.

I will definitely sign up for the Meetup group. It'll be to network with like-minded folks

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Hi, folks.

I'm in CA Bay Area, where rents and prices are very high. I'm considering selling my private residence which a RE agent said should fetch about $800k. Decent area duplexes (3/1 + 2/1) are about $1.0 mil. After selling my home and fees and all, my net profit should be about $730k, leaving about $270k loan. I plan to be owner/occupant in the 2/1 and rent the 3/1. So:

Est. Mortgage =$1300/month

Prty Tax (stupid high in CA)=$1200/month

Insurance =$100/month

Est. Total monthly costs=$2600

Est. Rent/unit= $2400 for the 3/1 unit

Given that this area, prices are rapidly on the rise, the equity should increase and could possibly stabilize in the next 2 yrs. Of course, I've no idea but I'm going in with that in mind. Even since 2013, prices have gone up about $100k on similar properties.

Ive read about the 50% rule, but in this area, unless you're Mark Zuckerberg or Larry Ellison, its next to impossible to put that much down. What do you folks think?

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$500 rent? Thats pretty good return on $24k. Is that $500/per side?

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I guess my primary can't be an investment until I:

1) Sell the home at a profit

2) Use the equity to make more money.

Just my $0.2

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All Forum Posts by: Gary F.

Gary F. has started 34 posts and replied 208 times.

Post: "Worth" It? (CA Duplex)

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Post: San Jose Meetup - Friday 7/17/15

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Post: Duplex

Post: Is your primary house an investment?