The rental value is approximately $2550. At $2450, it will cover those expenses. The owner does not want to extend the debt for 30 years. She originally asked for 2 balloon payments. One in year 2, and another in year 5...
I was unsure of what to do so I created this offer
Who did you have check your underwriting? My underwriting would have this large negative cash flow for 7 years.
I would do a thorough underwriting but want to show using quick math the issue so I will use the 50% rule. Note the property tax will be -10% on the rent by itself.
Month 0 to 24: $2450 * 0.5 - $1573 =-$348/month
Month 24 to 60: $2450 * 0.5 - $1541 =-$316/month
Next issue is due to the low leverage starting at month 24, the ROI takes a beating.
With no appreciation, you will have less than 40% LTV and with modest appreciation you will have less than 30% LTV. Without the high leverage you reduce the top source of return in CA RE which is achieve via the appreciation on a high leverage property. At month 70 all leverage is gone.
My big question is why? The interest rate is not special nor is the 20% down (80% LTV). I locked a DSCR loan yesterday at 6.385%, 75% LTV. Why not 30 year term with a conventional loan? Can you qualify?
Final comment, it seems complex.
good luck
You make a lot of valid points but there are also a few things to consider when making the above analysis.
The first is: availability of raw land in SoCal. I am sure you are aware of this yourself but buildable land - where you can develop more than 1 unit is incredibly challening if not almost impossible to find. And even when it is found it is incredibly expensive and oftentimes unbuildable. Ive see some lots but the grade and slope is incredibly difficult and expensive to work with.
Second: Real estate cannot be analyzed by numbers only. While you are correct - financing, BRRRR application, return, appreciation (possibly) might be more beneficial when considering a seperate property vs ADU - but if you were to only analyze real estate based on numbers, then the best real estate is high risk class D section 8 rentals. Low cost, high rents, higher returns.
But as we all know - this is simply not what happens in practice. I think someone who adds an ADU to their exisiting investment property for 200k and rents it out for $1800/m will be in a much better position than someone buying OOS 200k class D rental or even class C.
Some of the reasons are:
- location - far easier to manage and likely in much stronger area. Trusting someone else an entire country's length away can become detrimental for the property and investor if improperly managed.
- risk - an investment property addition will be much easier to manage, likely in an area the investor already understands and has established and likely not in Class D neighborhood. This poses a more favorable position for the investor than getting involved in higher risk areas
- appreciation - yes you are correct, its likely not 1 to 1 investment to appreciation, but I still think your appreciation with additions/in law suites/ etc are going to take you further in the long run in SoCal than the 200k single in Alabama. A lot of upgrades like: finished basements, pools, spas, in law suites are not 1 to 1 but do improve the property.
- tax advantages - there are still tax advantages to building an investment ADU
Like all the points you hit on. But I think for a CA investor who is looking to invest 200k cash - they might be better off improving one of their existing rentals and getting the cash flow that way than looking OOS.
The logic that an investment that is better than another investment makes it a good investment is flawed but also not relevant here became the ADU addition is that bad of an investment.
The big issue is the size of the negative equity position usually exceeds half the cost. The negative position has often exceeded $100k.
Let's use your numbers along with the 50% rule with no financing with a 50% negative position. $100k negative, $900/month cash flow would take 111 months (over 9 years) to recover the negative position. Note with financing on the ADU, the cash flow would be lower and it would take even longer. This is why ADU additions in single count in single family zoned areas are a horrendous investment is CA.
Note the financing associated with an ADU makes the 1% rule insufficient to achieve sustained cash flow and your numbers do not even meet the 1% rule.
Then add the primary structure is now rent controlled, the level of effort in adding the ADU is extensive (probably more than a BRRRR that can produce infinite return), the calendar time it takes (1st expense is many months before first income), the poor finance options available, and what the ADU detracts from the primary.
If this the best RE investment that you can find you may be better off with investments that are not RE related.
good luck
@Dan H. Good points. I think new builds don't really work from an ROI standpoint, but if you can find properties that have easy ADU conversions then the value might be there.
I'm in MA and we just made ADUs legal by right, so I'm looking into the best ways to add value using them. A lot of our housing stock here has finished basements or in-law suites, so with something like that you can generate significant rental income for an inexpensive conversion.
In southern CA, even garage conversion ADU additions are typically costing more than the value added. Possibly already permitted outbuildings that already have plumbing such as workshops, offices, etc might be able to be converted to an ADU at a cost that does not result in the cost being more than the value added.
Building an ADU is a lot of work and can be a slow process. Most take near a year in southern Ca, but you hear of exceptions in both directions on that timeline.
What some developers are doing here is leveraging the affordability issue and getting permission to build additional ADUs by designating some as affordable or semi affordable units. The neighbors hate it. The pro development and affordable housing advocates use the term NIMBY, but I suspect it is the rare person that buys in a single family zoned area that would be thrilled to have 17 units (qp16 additional units added) in the lot next to them.
My initial protege was the land source on this effort. He made a lot of money and the developer is the “hated” villain but my initial protege knew what the land was going to be used for. If it was not him sourcing the land, it would be someone else. The issue is the laws should not allow this.
https://www.cbs8.com/article/news/local/working-for-you/new-...
Adding a single small unit is expensive residential development. Adding 16 small units can be very profitable, with enough profit for all those involved. My buddy sold for ~$500k over its existing use value and no contingencies and did not even convey existing tenant’s deposit. It was easy money (he had a partner so my buddy ended up with 50%). The value add was recognizing what the current regulations could allow the land to be used for (basically recognizing current land use did not optimize the value).
Good luck
This is old info as fortunately I have not needed this. It likely is out of date as to cost as this info is quite old (my guess is 5 years but it could be longer):
- Rent Recovery Service: offers flat fee service starting at $20. 3 letters start at $30. Reports to credit bureaus. Also offers contingency based collection but price was not obvious.
- AOA Debt Reporting Service: letter sent w 120 days to pay (with credit bureau reporting) after which it rolls over contingency plan with collection agency getting 38%.
I know I would not want the task for what they charge. If your tenant has a credit score worth maintaining they will not want an uncollected judgment to be on it.
Good luck
I'm not sure I understand your question. But I think this might help?
Zillow tracks all listings for all periods. When you re-list the property, it will restart the counter for "days listed" (assuming it is down for a reasonable period of time, I'm not sure their exact specification, I know we've been down for 24-48 hours and it did not restart). But, people will always be able to see the prior listing history under the Price History section of the listing. It will show when it was listed, at what price, and when it was delisted. I actually look at this section when I'm doing a market analysis. A property that has been on the market for months, with no price reduction, isn't a property I want to compare to. Clearly their pricing strategy isn't working for some reason.
If you are asking about taking it down because winter is slow... That depends on a lot of personal factors such as your finances. Can you afford to have zero possibility of a tenant for those months that you don't have it listed? Are you available to monitor the property during vacancy? (Ensure no trespassing/squatters/maintenance issues. I go to vacant properties at least weekly unless they are multi-family with active neighbors.)
Generally speaking, if a property isn't moving (and others in the area are), either you are priced too high or there is something lacking with your property. For example, I've had a couple of 3+ bedrooms sit for a longer period of time because they only had one parking space available (and no on-street options nearby). Almost nobody that wants a 3-bedroom has only one car, except the occasional single parent with small children, or solo professional that wants a home office and guest bedroom. That's a small pool to pull candidates from. We got a ton of leads, but the parking was the dealbreaker for almost everyone. The owners refused my advice to reduce price and they both sat vacant for months. (One went with another manager eventually, and the property is listed for $400/month less than we listed it, and the other finally got rented to a solo professional.) Are you getting leads? If not, price might be the first problem. If so, what is their feedback? Don't be afraid to ask them why they don't want to apply.
When I'm having pricing discussions with owners I work with, I always remind them: a month of vacancy costs your bottom line more than a unit filled with a rent reduction. For example: if your rent is set at $2,400 per month. One month of vacancy has cost you $2,400. If you reduce to $2,300 and are able to fill the property faster, yes, you are "losing" $100 per month, but even at that rate, it would take two whole years to equal the loss of the $2,400 vacancy month. People get stuck on "this is my bottom dollar rent" and shoot themselves in the foot refusing to make adjustments.
I hope that covers your question(s)
Thank you Cari. I'm guessing it's the winter and the location. It's a new suburb just starting out ,there are no large single family rentals ,it's mostly townhomes that are being rented out, which falls in 2500-2700$ . I'm priced up by another 1000$ considering the size of the home.
I did delist the ad and relisted in approximately 4 hours , to my surprise, the days got reset . Like you said , anyone can check the history, I do have cameras installed and I do check twice weekly, it's not too far from my primary home .
im a first time investor, is it ok to DM the listing to see if I'm missing something?
In most markets it is not a linear price increase. By this I mean much larger home do not rent for significantly more than the smaller home in that area.
Note 100+ days ago was late September. This means winter is not your only issue. You failed to rent it in October before the holiday season.
I am confident price is your issue especially if you are deriving the price off a poor comp (smaller unit, etc) and then applying arbitrary adjustments.
You may want to bring in a professional to get this rented. They should be able to provide a market rent range. Note with over 3 months of vacancy, a professional that placed a tenant in one month would have saved you money.
Good luck
I no longer want to work as hard as I used to and I do not need to. I have more money than I will ever need and almost every toy I could want.
But when I was willing to work harder than I am now, I targeted good value adds. They are work and often have risk. But i was able to achieve the elusive infinite return on a majority of my RE and all of my investment RE that I purchased prior to 2020.
Infinite return has the benefit that the finances are not the hindrance to scale. The limit on scaling is your deal flow (mine never was that good) and time it takes to perform the value add (I got fairly quick for example, my last rehab did all new plumbing, electrical, and flooring. Redesigned a bathroom and kitchen with all new interior. added a new half bathroom. took down 6 walls including a load bearing wall. added 2 walls, added an eyebrow porch, removed an exterior door. Added 2 windows. Removed a fireplace. Added an electric fireplace. Added mini split. Painted 100% of the exterior. It took 2 months and 1 week, including unfurnished and furnish (so from guest out to guest in was 2 months and 1 week). The permits and architecture was done prior to start.).
For most people the finances are the limitation to scale. As indicated, I never had that issue due to the infinite return. My limit was deal flow, delegation, and limits to how hard I wanted to work (and I was working very hard). Was it worth the sacrifice? I have no w2 job, a lot of toys (need to get a plane), can do what I want, can assist my son to find his way in life (he is leading his 2nd rehab) and if I wanted I have generational wealth (I have given away a lot money the last few years). So probably, but I do not want anyone to think it was not a lot of work. I worked more hours than possibly anyone I knew.
If you do not want to work hard, then value adds may not be the best path for you.
Good luck
The 1% "rule" is just about dead everywhere outside of the midwest and some places in the south that are still relatively cheap. Price to rent ratios have skyrocketed everywhere and it's pretty unlikely rent will ever get to a point where it evens back out because at those levels it's just as cheap/cheaper to buy (not to mention most renters can't afford anything like that).
Well, of course - that's obvious - but most people in most places in the US are going to spend too much on their purchase because that's what's available. Years ago I bought houses for $25k in my market. Pretty easy to make 2% or more when you're spending that kind of money. These days I can't buy a lot for $40-50k. Any house here that's sub $100k, on or off market, is going to be so bad it will need $30-75k in rehab. Here once you start passing $1500 in rent your pool is getting pretty shallow. I'm sure I could go to some midwest markets or even some more depressed markets in my region and get better pricing, but that's out of my wheelhouse at this point in my life as I have no desire to learn new markets when I'm closer to the end than the beginning.
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Sure, obvious but over looked. A property is worth what a willing seller will take from a willing buyer.
Is it possible to buy a property in San Diego low enough to get 1% from it, yes. Is it possible to buy a property in Seattle low enough to get 1%, yes. And is it possible to buy a property in Chicago low enough to get 1%?, yes
Of course, if you look the right ways. And What does it take? It takes getting off the road everyone else is driving (the MLS) and putting some work into it. Using your smarts. There are wholesalers in every major city in the country and they are buying at 70% to 90% of value all day long, every day of the week. You can too, without being a wholesaler or an agent.
You can walk into a mall to a jewelry store and buy gold, which is simple, but you pay a huge markup. Same with houses and the MLS. Huge markup.
Most people choose to do things the easy way. But that wasn't the question, The question was CAN you do it, not HOW do you do it.
Just because someone is buying at 70 to 90% of value doesn't mean anything with respect to the 1% "rule". In my market, right now, most anything you bought at 70% of value still wouldn't meet that rule. I guarantee virtually no one is meeting that rule in SD because they're all on here looking to buy in Cleveland or Detroit because in that market price to rent ratios are so askew that buying at a 50% discount probably doesn't get you the 1% rule.
If we're going to just talk in hypotheticals, of course anything is probably possible anywhere but highly unlikely.
. You speak correctly that "anything is probably possible anywhere but highly unlikely" to you.
You are also answering a question that wasn't asked. Which is accurate by the way. Most people won't put in the work.
His question "The question being, does this still hold true for Arizona?"
My answer, yes I currently am buying a $165,000 property in Phoenix (not listed on the MLS) using one of my methods to find, using only $5,871 plus closing costs of my money. It will rent for $1,500 a month. It, will go up next year. I will be into it about $9,371 with closing and have a payment PITI including HOA of $1,205. I do not possess any special list. I simply know where to find the nuts; under the tree of course. I do have reserves to cover contingencies.
Let's just say, I'm satisfied with those numbers.
Had I had to use a bank, I would have had to put down 20% for $33,000, plus closing and my payment on the remaining would be $1400 PITI including HOA.
I am working on two others in the $350,000 range with the same ratios. These I might assign to others. There are properties people, just put in the work.
Not to state the obvious but purchase at $165k with $1500/month rent is not a 1% ratio. You have a 0.91% ratio. This could be a good ratio for that market, but it is not a 1% ratio.
@Anthony Sigala my view is the markets that it is easiest to find a 1% ratio are unlikely to be markets where you will achieve good cash flow over a long hold. Rather than concentrate on the initial cash flow, concentrate your effort on markets that have indicators of strong rent growth. In general these are either growth markets or markets short housing that has significant hurdles to adding additional housing.
My market has been a poor initial cash flow market forever. The definition of poor initial cash flow has changed with time. Just a few years ago, poor meant not much positive cash flow. Today poor means negative cash flow. However every one of my purchases from 10 or more years ago in my market have current market rent of at least a 2% ratio. The power of rent growth.
Good luck
The 1% "rule" is just about dead everywhere outside of the midwest and some places in the south that are still relatively cheap. Price to rent ratios have skyrocketed everywhere and it's pretty unlikely rent will ever get to a point where it evens back out because at those levels it's just as cheap/cheaper to buy (not to mention most renters can't afford anything like that).
Well, of course - that's obvious - but most people in most places in the US are going to spend too much on their purchase because that's what's available. Years ago I bought houses for $25k in my market. Pretty easy to make 2% or more when you're spending that kind of money. These days I can't buy a lot for $40-50k. Any house here that's sub $100k, on or off market, is going to be so bad it will need $30-75k in rehab. Here once you start passing $1500 in rent your pool is getting pretty shallow. I'm sure I could go to some midwest markets or even some more depressed markets in my region and get better pricing, but that's out of my wheelhouse at this point in my life as I have no desire to learn new markets when I'm closer to the end than the beginning.
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Sure, obvious but over looked. A property is worth what a willing seller will take from a willing buyer.
Is it possible to buy a property in San Diego low enough to get 1% from it, yes. Is it possible to buy a property in Seattle low enough to get 1%, yes. And is it possible to buy a property in Chicago low enough to get 1%?, yes
Of course, if you look the right ways. And What does it take? It takes getting off the road everyone else is driving (the MLS) and putting some work into it. Using your smarts. There are wholesalers in every major city in the country and they are buying at 70% to 90% of value all day long, every day of the week. You can too, without being a wholesaler or an agent.
You can walk into a mall to a jewelry store and buy gold, which is simple, but you pay a huge markup. Same with houses and the MLS. Huge markup.
Most people choose to do things the easy way. But that wasn't the question, The question was CAN you do it, not HOW do you do it.
Just because someone is buying at 70 to 90% of value doesn't mean anything with respect to the 1% "rule". In my market, right now, most anything you bought at 70% of value still wouldn't meet that rule. I guarantee virtually no one is meeting that rule in SD because they're all on here looking to buy in Cleveland or Detroit because in that market price to rent ratios are so askew that buying at a 50% discount probably doesn't get you the 1% rule.
If we're going to just talk in hypotheticals, of course anything is probably possible anywhere but highly unlikely.
In Dec 2020 I purchased a 1% property in San Diego. At that time, 0.75% with my underwriting was showing positive cash flow in my market at 80% LTV for class c. It was a near unicorn find. It was off market, I paid a local bird dog $20k for helping to get it to the close and even including that $20k at market rate it met the 1% rule.
Today my underwriting would not have a 1% ratio with 80% LTV as positive cash flow in class C. It may be sufficient for small positive in class b (probably not - likely still negative cash fliw) and would be cash positive in class A.
And 1% ratio is still a near unicorn find in San Diego. But if it was possible in Dec 2020, it is likely possible today.
Hey jay, appreciate your insight. I see what you mean about offering a higher return to a potential investor, especially if they are not familiar with my character/experience in the industry.
Don't you think 75/25 to the gap funds investor is a bit extreme? Or were you using that more for an example? I think you bring up a good point of considering offering higher returns to investors if I have to begin to search outside of my network.
But my original question from the post still remains, where would you recommend I search for people interested in an opportunity like this?
Holding is currently challenging.
However, value add with a sale is not as implacted by rates. Many experienced investors are humming a long similar to prior to the rate hikes. these investors are expecting returns far higher than 10%. I regularly get sent underwriting on value adds in excess of 20%.
I do not do work intensive value adds to flip so my acquisitions have slowed significantly
good luck