All Forum Posts by: Dan H.

I think a good tax person is worth their cost.  The amount saved can dwarf $6k.  To be blunt i do not know what my guy charges.  What i do know is i will convert $300k to roth at an estimated 23% fed this year.  What is that worth?   Lots of variables on that one, but more than a $6k charge.  Quite a few things go into making that happen.   In my case it was not as simple as wake up and do it.   Accelerated depreciation, taxable income forecasts, and running various numbers/scenarios.

Point is that tax planning/financial planning is not the area to skimp.   

good luck

Quote from @Saika Maeda:

Thank you all for your comments. I will for sure get the ADU permitted. When doing this, what's the best way? Should I go with this architect person to handle it? Or is it better to go directly to the city to get the permit process? Thanks!

 The ease a jurisdiction is to deal with varies greatly.  I had a recent permit take me over a year to get open.  The amount of tribal knowledge required was significant. I have had permits in other jurisdictions be quite easy.

My view is I would let someone familiar with the process do it unless you were planning on applying for many permits over time.  I equate it to installing a garage door opener.   Nothing is that difficult but there are a few things to know.  The first install will likely take over twice as long as a garage door opener installer would take.  It could be worth learning this if you were planning on installing more garage door openers in the not too distant future.  However, for most people they install a garage door opener and do not install the next garage door for many years.  They would be better off paying the professional to do it quickly and correctly the few times they will need a garage door opener installed.

Even though i open permits slightly regularly, when i open a permit in a new jurisdiction it typically has some unique quirks that i need to learn.  Different submittal process, different scheduling of inspectors, different process with the inspection.   It is always something.  My last one i requested a call so i could meet him at the site.  Never got the call but got a message that i needed signature page and plans at the site (i was going to bring them).  I had to reschedule.  When re-scheduling the person at the permit office stated they will never call even if it is written requesting a call.  This was in contrast to last jurisdiction where they always called whether i requested it or not. Just one of those quirks that if you know you know and if you do not know, you need to reschedule and get the permit resolved later.

Good luck

Quote from @Bruce Woodruff:

My worst story was while I was flipping a house with a converted garage (no permit). The Building Inspector insisted that I prove to him that the garage slab had the proper steel (rebar) size and spacing. So he said I could X-Ray it and jackhammer up a good portion of it. I kept the house for 5 years and finally called and requested the Chief Building Inpector. I made sure the inspection was scheduled for Christmas Eve. He passed me out of pity I think...

Point is - some building inspectors can be all-powerful. Regardless of law or code. I had Inspectors refuse to pass me on any inspection because I had defied them before.

 I recently moved an electrical panel for one unit of a duplex.  The Initial inspector stated i needed double ground by the panel so I put in double ground by the panel. The next inspector that came out, asked why I had put the grounding by the panel. I told him it was because the previous inspector told me I needed to. New inspector said that it should not have been required.

I agreed with the second inspector’s interpretation, I do not think I should have had to add grounds by the new panel when there were already double grounds where the drop came in. But it was easier to add the double grounds than it was to argue. So I added the double grounds.

Sometimes you have to pick your battles.  However, in the case of safe unpermitted units there is a state sponsored agency (HCD) that is tasked with getting jurisdictions to comply with the various laws regarding providing housing units.  HCD would likely squash any jurisdiction’s attempt to remove or limit a safe unit.

It is a good investment to get the unit permitted especially if it is close to the quoted price.

 

Quote from @Bruce Woodruff:

Quote from @Bruce Lynn:

You can only play games for so long.

Chances are your next door neighbor is an IRS agent and turns you in when your tenants blocks their drive or some other random event disturbing your IRS neighbor.

ADU catches fire and your insurance won't cover you, because it was an illegal and unpermitted structure.

The city inspector told the last guy not to build or rent it, and is now pissed and wants to make an example of you and just red tags the whole property and no one can occupy for the next 1-2-3 years while you wait for a hearing.

Then when you get the hearing, "staff" recommends you tear the whole structure down, and if you still want an ADU, you can apply for a permit and rebuild it.

Your tenant quits paying rent and won't move out and you can't evict them, because there is no valid lease and they're just your "roommate".

Probably a dozen other bad things can happen to you when you do stuff like this.  Maybe you like the risk, but good and great investors don't try stuff like you suggest.

Although @Dan H. states some good new legal points, the reality of this is closer (IMO) to what @Bruce Lynn is projecting. I have experienced some of these very circumstances, and in California. You really do never know who is living next door...or driving down the street after having a fight with their wife, or....well you get the point. 

Read this again - "You can only play games for so long"

 With the laws that the CA legislation has passed, you could piss off a city inspector and there is nothing they can do about a safe unpermitted unit.  HCD has no bite, but they would send a cease and desist letter to any entity that is trying to remove a safe unpemitted unit as their mandate is the protection of the various housing mandates from over zealous local jurisdictions.  Therefore, you as the property owner would have a state entity assisting in any battle over a safe unpermitted unit.  

I do not consider it as a game when the state laws protect safe unpermitted units and with ab2533 (that goes into effect Jan 1), the legislation has demonstrated that they desires these protections to continue.

The reason to get the permit is not because something bad is likely to result from a safe umpermitted unit. The reason to get the permit is it is a smart investment in terms of the value added, appreciation, etc. Who would not want a legal, permitted unit for $8k or anywhere close to that (i believe the $8k is likely optimistic)? Cheap hands off legal ADU garage conversions in coastal So Cal start at ~$120k (if all goes well). Once it is legal, it appreciates at full value. It is a simple value add.

Get the permit and enjoy an easy value add (assuming it is close to $8k).

good luck

Quote from @Bruce Lynn:

You can only play games for so long.

Chances are your next door neighbor is an IRS agent and turns you in when your tenants blocks their drive or some other random event disturbing your IRS neighbor.

ADU catches fire and your insurance won't cover you, because it was an illegal and unpermitted structure.

The city inspector told the last guy not to build or rent it, and is now pissed and wants to make an example of you and just red tags the whole property and no one can occupy for the next 1-2-3 years while you wait for a hearing.

Then when you get the hearing, "staff" recommends you tear the whole structure down, and if you still want an ADU, you can apply for a permit and rebuild it.

Your tenant quits paying rent and won't move out and you can't evict them, because there is no valid lease and they're just your "roommate".

Probably a dozen other bad things can happen to you when you do stuff like this.  Maybe you like the risk, but good and great investors don't try stuff like you suggest.

 In CA none of those should happen because the state legislature has passed regulations (sb13 & ab2533) protecting safe unpermitted units. A jurisdiction cannot tear down or take off market a safe unpermitted unit for at least 5 years. You can get some insurance on unpermitted units, a lower coverage amount than for a permitted unit and will have difficulty rebuilding it as a permitted unit at the covered amount (which makes sense because its value is less than a permitted unit).  Because the legislature has passed protections for unpermitted units, a tenant should not be able to make any claim if it is a safe unpermitted unit.

i agree with your sentiment on getting the ADU permitted, but not for the reasons you stated. There is an area in San Diego (city Heights) where almost every property has an unpermitted unit. The city has chosen not to address the issue for decades, long before sb13 & ab2533, because they did not want to remove safe units from the market (at least not in city heights). I think it is very unlikely if at any time soon that the state allows a jurisdiction to require the removal of safe unpermitted units (it likely would mean the end of the housing crisis).

A legal ADU is worth more and will be easier to get rebuilt if destroyed. The laws allow it. The cost stated is so low compared to property value. It is an easy decision to get it permitted.

Quote from @Michael Baum:

Hey @Dina Schmid, so legally a bedroom requires a closet and an egress window. If the loft has those, then it would be considered a bedroom.

So they have it listed correctly.

I would want a window that has egress if I was going to STR the property.

I don't see a problem listing it as a 3br on VRBO and AirBNB if there is a sleeping area.

 Definition of bedroom varies.  CA rules do not require a closet but some jurisdictiins in CA require a closet.   Unless grand fathered, bedrooms require egress.  Similar, there is rules for footage to count as living space.   One requirement is ceiling height.   This combined with minimum footage for a bedroom means many lofts do not quality in CA as a bedroom

Different states will have different requirements for what constitutes a bedroom.  However, i am unsure those requirements extend to the OTAs.   I suspect the guests via their reviews will dictate what constitutes a bedroom.  

Good luck 

Quote from @Sonia Vanegas:

hello, 

I have a signed lease agreement with my current landlord starting from Nov 8th 2024. The situation is regarding a mutual agreement both the landlord and myself made regarding the painting of two rooms within the property we are renting to a neutral color (rooms are currently purple and lime green). The agreement reached was the landlord would lower $100 of the rent (current rent: $3100) in exchange for us to paint the two bedrooms. They agreed and we have signed a lease for the total rent of $3100. There is a clause in the lease regarding the painting of the house. Yesterday, the landlord stated that it was their impression that we had agreed to painting not only the two rooms but extra rooms as well and now they are saying they are going to void the clause and raise the rent back to $3200, or we have to paint extra rooms not agreed upon. I am looking for advice on how to proceed with this and what my legal rights are as a tenant in the state of Washington.
Here is the clause that they are trying to void, and have mentioned that we are the ones not upholding the clause as an excuse to void. 

PAINTING. Per the mutual agreement between the Lessor and the Tenant, the Lessor has agreed to reduce the monthly rent from $3,200 to $3,100, allowing the Tenant to repaint portions of the house at their own expense. The areas to be painted and the choice of colors will be agreed upon by the Lessor before painting begins.

The areas designated for painting should be painted thoroughly to ensure that no previous color is visible. The painting should be completed within three months of the move-in date, and the Lessor will inspect the work to confirm it meets these standards.

Can the landlord void the clause, and what happens if the clause gets void? would that void the current lease? if that voids the lease do we need to vacate that same day?

The clause states "portions of the home" and "rooms need to be agreed upon by the lessor" can they use this to void the clause and increase our rent?

I would really appreciate any information/advice on how to deal with this situation. 

“The areas to be painted and the choice of colors will be agreed upon by the Lessor before painting begins.”.  This seems pretty clear that LL gets to select the area(s) to be painted and the color.  

”The areas designated for painting should be painted thoroughly to ensure that no previous color is visible. The painting should be completed within three months of the move-in date, and the Lessor will inspect the work to confirm it meets these standards.”

This implies that the LL gets to determine that the paint job meets his quality expectation.

”Per the mutual agreement between the Lessor and the Tenant, the Lessor has agreed to reduce the monthly rent from $3,200 to $3,100, allowing the Tenant to repaint portions of the house at their own expense.”

this is not as clear as it could be, but could be interpreted that the rent is $3200 if the tenant does not paint the areas that the LL specifies to the quality that meets the LL quality expectations.

 I think this was written very much in favor of the LL, but the tenant and LL agreed to the lease terms.  I believe $1200 spread over 12 months for painting 2 rooms is a little high (i just paid $4k for painter to texture walls and paint (prime and paint) walls and ceilings in 1350’ unit), but not as outrageously high as some posts imply. 

I would attempt to negotiate with LL the scope of work required for the discount.  I would change the quality requirement so that it is not solely determineD by LL. If an agreement can be reached, great.   If not, i hope you can live with purple and lime green walls.

Good luck

I agree get the permit but …

@Bruce Woodruff & @Jonathan Greene likely are unaware the state legislation keeps passing laws to protect safe, unpermitted units.  Initially SB13 provided protection for 5 years for unpermitted units that pre-date the ordinance.  The pre-date was to discourage further unpermitted units be added to the inventory.  But of course there were unpermitted units added after SB13 and the state wants to be sure that local jurisdictions do not remove safe unpermitted units so ab2533 extends the unpermitted unit time limits that were in sb13.  It certainly sets an interesting precedent as it means if you add a safe unpermitted unit today, it may be protected in the near future so that safe units are not removed from the market. They’re done for a while actually most of college is done for a while. Lotta people have finals before Christmas and.

However, get the permit.  I suspect it will add more than $8k of value.  In addition, you will not be relying on the legislature to continue to protect safe unpermitted units.  I do fear your cost may be higher than you predict and may result in a property tax increase.

good luck

Quote from @David Martoyan:

@Dan H. Interesting perspective, Dan! How do you see the cash flow issue evolving in your market? What Are there creative strategies investors are using to offset those negative cash flows? 

3 recent national studies show that the rent to value ratio is at an all time worse (what they really studied was cheaper to rent than buy, but there is strong correlation).  Combine that with rates that are near high for this century.  3 things could solve this 1) RE prices fall (that would be bad for me) 2) rents increase a lot without RE prices increasing similarly (this would be bad for tenants) 3) rates fall a lot.  This likely means at least a recession (and would be bad for most).  I do not see any of those scenarios as likely and therefore see poor/negative cash flow at max LTV refi continuing for some time.  I view this as a brrrr hurdle and why i have not purchased for brrrr since Dec 2021.

so what can be done about it?   I will answer as it relates to traditional BRRRR, in the general case there are additional options.  1) Do not perform maximum cash extract.  This equates to purchasing the cash flow.  To me the cost of purchasing cash flow is too high, better off being cash negative 2) alternate rent models: mtr, str, rent by room.  Note all these require more effort than traditional LTR.  

the rates increases have really impacted BRRRR.  recognize this.  Possibly pivot to other investment strategies or use alternate rent models.  By the way my last purchase to rehab was a quad that 2 units are STR.  Seems promising but it is not.  The STRs after all associated costs (including PM) are underperforming LTR at market rent.   So my cash flow is poor for my equity position (it would be poor even if they were all LTRs, but better than it is with 2 STR and 2 LTR).  My equity position is up ~$1m above cost in 3 years (so i did fine even with poor cash flow, it was not negative beyond year 1).  I point this out to point out that alternate rent models will not always out produce LTR rent model.

Good luck

My handful of syndications that have closed all did well.  They all closed more than 2 years ago.    I do not have my numbers as well organized as @Greg Scott but my estimate is upper 20% annual return on average.

The 3 i am currently invested in, one seems likely to produce an outstanding return (High risk, high reward), one is conservative and is performing to projections, and one i have significant concerns about but has not had a capital call.   It has not made any distributions and the communication i would rate as poor.  It also had a change of one of the GPs in the sponsor name (i heard unofficially there was a divorce, sponsor name has been changed to reflect the person no longer being associated).   I fear a loss of investment capital, but am holding out some hope.

It is my opinion that RE investing is more difficult than a few years ago due to the cost of capital and its effect on the market.