All Forum Posts by: Dan H.

>Escondido tends to have stronger year round demand but tighter regulations

I am unaware of a single residential regulation in Escondido that does not apply to the entire state. For reference I have around 20 units in Escondido. They have no local rent control (ab2482 applies) and no STR regulations that I am aware of.

I believe the market is challenging everywhere.

It is my belief a high LTV MLS purchase in Escondido without a value add will have initial negative cash flow for quite a while (likely years). The appreciation historically been too high to suggest an unleveraged purchase as the return decreases. So it is only a good RE market if you do one or more of the following:

1) you can get alternative financing

2) buy significantly below retail (meaning not on the mls)

3) can do a value add

4) can be more patient than I am.  
5) alternate rent models. In Escondido, I believe the top producing rent models (better than MTR and STR) is rent by room. There are a lot of single men immigrants that need lodging.

My last 2 purchases in Escondido were off market and one of those had a value add.  Ideally combine some of the above. 

Escondido has perhaps the best rent to purchase price in San Diego county, however it likely will still have initial negative cash flow. Traditionally Escondido has produced a good return (I have made a lot of money in Escondido - see my profile for slightly dated info on my Escondido properties (my profile may be missing an Escondido quad)), but it has got more challenging with the higher financing cost.   

To be blunt, without one or more of the above I would not purchase in Escondido at this time.  I am not patient enough, but I have confidence in 10 years an Escondido purchase will look good (are you that patient?).

I grade the traditional rental markets in Escondido between class b- and c-.  There are areas above class b- but they are not the typical rental market.  

If you have any questions on the Escondido RE market you can PM me.   I believe I started purchasing in Escondido in 2012, have near 20 units, have done quite a few brrrr there, have purchased 2 times off market there, so a wide range of experience in that market.   I know someone who MTR arbitrage there but mostly is exiting, so not profitable enough for her.  In short, I know the market fairly well and likely as well as anyone on BP.

Good luck

 >it happens sometimes, in lower end houses mostly,

This is the opposite of what I see in my market.   The most expensive areas have the highest added values for the rehab cost. 

A year ago I did a rehab of a unit and added a half bathroom out of existing space in an area we’re psf is ~$2k.   Per the comps that half bathroom added ~$50k of value.  I suspect adding the half bathroom in that market was maybe 30% more than a cheap Midwest market (virtually all in the labor cost) but added over 5x the value.   If I added the same half bathroom in my market in an area were psf was $600, it may have added at most $15k.  

Best chance in my market to do a full extract of investment is the highest PSF areas because the value adds add the most value for the price

I agree you need a large rehab for a full extraction of investment.  New flooring and paint will not be nearly enough.  The rehab I added the half bathroom, I removed 5 walls (including one load bearing) and added 2 walls.  we removed an exterior door, added 2 windows, complete new kitchen, new existing bathroom, new electrical and climbing, added a mini split AC, and added an eye brow porch in addition to new flooring.  It was not a small rehab.  

Good luck

Adding an ADU for family is ok, but adding an ADU as an RE investment in San Diego SFH zoned area is typically about the worst RE investment. see the link at the bottom to see NAR data from Nov 2021 shows an ADU addition in San Diego added less than $20k of value on average. This is the largest and most recent study that I am aware of. This valuation will result in at least 6 digits of negative equity for a hands off ADU addition. Here is a list of why adding a single ADU in single family zoned areas in my CA market is typically a poor RE investment:

1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.

2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.

3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).

4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.

5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.

6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.

7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.

8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?

9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.

10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return than building a single ADU.

11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and an ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.

12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

This study released by NAR is slightly dated (from Nov 2021) but has a table of property values with an ADU and value of properties without an ADU for many of the larger cities (look at the table at the bottom) . If you subtract the value of homes without an ADU from the value with an ADU you obtain an average valuation of ADUs for your city. Compare this with the cost to add the ADU subtracting off any loss of garage for garage conversions and you have the average value added by ADUs. In my San Diego market, an ADU added $13k of value on average, but a hands off, quality garage conversion is ~$150k. Ground up addition is obviously more. In addition before the summer of 2025 there was not a cap on number of ADUs that could be added. I question if the multiple ADU additions were eliminated if San Diego would have lost value when adding an ADU.

I wish the study indicated what percent of the ADUs in each city was a garage or other existing space conversion. I also wish it noted how many ADUs were added. In virtually all southern CA cities, the cost added is significantly less than hands off grounds up ADU addition. In most of the So Cal cities, the average cost added is below the cost of a nice garage conversion. Note in some markets in the US including some in So Cal (Torrance), adding an ADU lowers the value of the property (property was worth more prior to the ADU addition).

https://www.nar.realtor/magazine/real-estate-news/study-adus....

Good luck

 My rough guess is you are a factor of 2 too low if allocating for sustained maintenance/cap ex.

I do not see anything to be gained by holding.  The value add is the only significant source of return.   The longer you hold it, the lower your return when properly allocating for sustained expenses.

Good luck

Here are some of my thoughts

- it would be a very unusual (but far from unheard of) value add that costs $10k to increase value $125k.   I usually achieve just over 2 to 1 increase on rehabs with my best rehab ratio was 4 to 1.  If this is a rehab value add, I believe your numbers are not correct.  Note more sophisticated value adds can do better than rehabs (I had one once that cost nothing to add ~$200k and my initial protege achieved about $500k value add for $0 (just knowledge on better use of the property)).

- maintenance/cap ex seem far too low for 5 units.   Remember 5 units have 5 tenants and 5 kitchens.   They have 5x bathrooms.   My guess is you are about a factor of 2 too low if allocating sustained maintenance/cap ex for 5 units.

- $190/month cash flow for 5 units is not good especially on a property that has not historically kept up with inflation. Have you run the numbers as a flip? Not sure what the thought process is on a hold. The cash flow produces a poor return and historically the appreciation is poor. $110k of equity to produce $2280 of cash flow is 2%. The money is in the value adds (assuming your ARV and rehab numbers are accurate).

I think it is far from a slam dunk as a hold.  I think I would try to get the value add and exit.  If your numbers are correct this is a good value add opportunity.

Good luck

Concentrating on a single source of the RE return is ignoring data that largely dictates the total return.

When starting out you may need cash flow to pay the expenses.   If that is the case, cash flow is a necessity.

If you have the means to absorb negative cash flow then you should concentrate on total return.   My last RE purchase was so negative cash flow at purchase that it was shocking.  However it has been a home run investment based on return that would be achieved if I sold today.   It also now has modest cash flow for its equity (high cash flow compared to most properties).

I am skeptical of your cash flow estimate.  What expense/vacancy ratio did you use?   Who has looked at your underwriting?  Ideally a long time, multi property landlord in your market has looked at your underwriting.   Remember 4 units with 4 tenants has virtually 4 times the maintenance/cap ex as a single unit due to 4 times as many kitchens, bathrooms, etc. in the absence of a local experienced LL examining your underwriting writing , you can use 50% expense/vacancy ratio which can provide a rough estimate of expenses/vacancy.  By the way even if self managing, include the appropriate cost as your time has value and you may not always want to self manage.

Example 4 units rent for a total of $6k.

$6k (rent) - $3k (expenses/vacancy) - mortgage (P&I) = approximate cash flow.

Good luck

Clearly your cash flow is not good (likely negative if the mortgage is only P&I) considering the number of units but your spreadsheet did not include purchase price.   You indicate you purchased many of them for between $50k and $60k.  The balance indicates you have already extracted cash from many of these properties.

If you purchased at an average price of $70k you paid $1.89m (not including closing costs) for $2.4m of value.   $0.5m of appreciation with various length holds up to 30 years.  It seems lean, but I suspect some people would be happy with $0.5m of appreciation for a ‘passive” (residential RE is not passive and the lower the class area the less passive it is) investment.  Knowing what you paid for each property would provide a clearer picture of the returns you are obtaining.

I believe your analysis on all cash being superior in that market is likely accurate.  I believe at that rent point a 50% expense/vacancy ratio is aggressive so I will use 55%.

$30,681 * 0.45 * 12 =$165,677.40/year

$165k / $2.4m = 14.5% return.   Not Nvidia returns but not bad return.   $166k with the depreciation and other write offs would not likely suffer a heavy tax burden.  I think a lot of people would be very content making that via residential RE.

Good luck

My belief is “passive” (meaning no value add, flip, etc - residential RE is never truely passive) real estate investing is challenging everywhere.

Historically San Diego has been an outstanding location to invest in real estate.  Contrary to the Midwest people who claim they have great cash flow, it has not historically been true for long holds and I challenge any of them to find a reputable source that shows ANY large Midwest city to have better cash flow over a long hold than San Diego (there are none).  Historically the best initial cash flow markets are the worst over long holds because they have good initial cash flow because their growth (appreciation and rent growth) outlooks are poor.

The VA loan is a great benefit. You should maximize this benefit as it is a benefit you have earned.

Now for San Diego

- if you purchase a move-in ready, high LTV residential property via a va loan, mls (retail) properties will be very cash flow negative in the initial years. The higher the number of units, the less negative it will be, but it will be cash negative when properly allocating for expenses. Furthermore it will be cash negative for a while. In addition, the cash flow will stay Negative for quite a while. This is not unique to San Diego but virtually all markets.

- you need to be able to handle the negative cash flow that likely will be challenging at times.  When a tenant leaves a unit in not the best shape and you are cash flow negative, you may question the why.

- the why is because if you have a fixed rate loan, the largest expense is fixed.   In California the property tax is near fixed price.   Rents historically have appreciated near top of nation and the appreciation this century is near top of nation.   This means the cash flow will improve with time and historically the return is from the appreciation.

- How good has the appreciation been?   My worse appreciating property has appreciated $2700/month over its long hold.   I have 3 properties that have appreciated over $10k/month.   I believe virtually all residential long holds in San Diego will be between those two numbers (excluding cheaper condos).

So my suggestion is you analyze whether the long term upside is worth the short-term price. If it is not, the RE investment market will not always be as challenging as it is at this moment. There is nothing wrong with waiting to use your VA loan benefit. When the time is right for you, use the benefit. It does not have to be San Diego.

Good luck

 On moderate rent units like this expenses/vacancy typically run near 50% of rent (the 50% rule).   Expenses/vacancy include PM, maintenance/cap ex, vacancy, insurance, taxes, miscellaneous (asset protection, book keeping, taxes, etc).   Basically all expense other than mortgage payment.  I calculate your mortgage as ~$1k

1800 (rent) - $900 (expenses/vacancy) - $1000 (P&i) = negative $100

This is actually a fairly good cash flow at typical VA high leverage (even though it is negative). I suspect those cheap Midwest units would be optimistic to have expenses/vacancy at 59% of rent.

I am assuming your do not have much equity because 1) typically VA loans have high leverage 2) not much time if ownership (1 year) 3) the property is in a market that has not historically appreciated much 4) the last year in most markets has not had much appreciation.

To me the keep or sell is not obvious from the numbers.  Questions: 1) do you want a rental?  Residential RE is not passive even with the use of a pm 2) do you have any issue supplementing this “investment” potentially for quite a while.  What if rents are flat with no appreciation for 5 or 10 years?

I suspect I would roll the dice and keep this if I were starting out but I would not rely on being able to refinance out in the near term. The likely worse case is that it is a relatively cheap learning experience. With the high leverage (low equity), the returns are magnified. Even small amount o& appreciation can produce good retun(at 90% LTV, 2% appreciation provides a 20% return brim the appreciation). I certainly would not expect this purchase to be an outstanding investment in the near term. Sometimes a base hit suffices. With time, it may be a home run.

good luck

 With an average rent of $1025/month even 35% ratio will be a challenge.    My underwriting would likely have this over a 50% expense/vacancy ratio.

Existing owner minimizes maintenance/capex, likely (I am speculating, but have seen it before) does not reflect the 2 empty units, probably has no PM allocation (because they're self managing and it is convenient not to pay themselves to claim a 22% on T12.

I question if OP or some of the responders have ever looked at a syndication offering from a good syndicator.  1) they typically chow an increase to cap rate 2) they have much more conservative expense ratios 3) they typically project a better return than 7.5% 4) they typically have a value add plan much better than improving operations. 

even with their much more conservative underwriting, many residential RE syndications started in the last few years are struggling (including one that I am an LP in). 

Best wishes