All Forum Posts by: Dan H.

Quote from @Chris Barrett:

Hey Dan, what do you underwrite for cap ex/repairs? I underwrite 10% cap ex, 10% property management, then subtract insurance, P&I, then taxes. Personally I management my own properties, so they sit at around a 25% expenses + P&I. 

I don't know much about the OPs situation or locale, but I would guess it would make a couple hundred bucks a month? It's not a great buy, I wouldn't do it unless it was in an area where the renovations make it a homerun. 

Using a percentage of rent is not a good way to allocate maintenance/cap ex.  I recognize many calculators (including the BP calculator) represents maintenance/cap ex as a percentage.  I believe this is a disservice.  I will show by some examples why using a percentage is not a correct approach:

- 2/1, 650' bathroom in mission beach rents for $5k/month.  4/2 in Escondido rents for $3400/month, 1400'.  These are 2 units in my portfolio and I will say the Mission Beach is 5 homes from the boardwalk and that 2/1 on the boardwalk rents at over $6.5k/month.  Which property will have the higher maintenance/cap ex?  The cheaper rent property due to size and double the bathroom count is expected to have the higher maintenance/cap ex.
- 3/2 in class A area rents for $6k month, 3/2 in same city class D rents for $2.5K.  Which do you think will have higher maintenance/cap ex?  Clearly in general the class D will have the higher maintenance/cap ex.

What I recommend is every RE investor populate a spreadsheet with current replacement costs and expected average life span in months for every item on the property to determine the expected monthly maintenance/cap ex.  I used to do this for each acquisition, but have only done one in recent years (because it was a condo (I have no condos in our portfolio) in a new market (Emerald Coast)).  Because I have done many in my market, I have a decent estimate for my market.  My last underwriting was a 4/3/1, 3200' and I used $600/month for maintenance/cap ex.  What I know is every time I do one of these in a new area I am shocked at the sustaining maintenance/cap ex.

My market has a more expensive hot water heaters (low NOX) than most markets (versus most parts are the same cost in all markets).  My contractor (not handyman) water heater replacement is $1600 (which is cheaper than most will get in my market).  If I use expected life of 10 years (reality is I get a little longer than this on average but I also have some costs like pilot light starting or a part replacement) is $13.34/month maintenance/cap ex on a water heater.  

The total costs of all items adds up.  Many years ago, my smaller attached units had $300/month allocated, but this is too low now for my market.  Around 2 years ago I did a condo with no exterior costs (the exterior costs were in the HOA fee) and calculated around $300 for a moderate size condo (3 bedroom).  I took input from the RE agent we were using in that market on expected costs (because some costs are market specific such as our expensive water heaters).

I think you do this and you will find 10% is far too low for a sustaining maintenance/cap ex in most markets (exception for high rent markets).  You can attempt to sell with deferred cap ex, but you may need to sell at a price that reflects the deferred cap ex.

Good luck

@Jennifer Roussel

Your correct.  The comps should be closed sales if there are closed sales that are appropriate comps.

In addition, the comps should be as similar as possible.  Ideally this means same Bedroom and bathroom count and within a couple hundred feet.

The comps your real estate agent provided seem to be poor and likely warrant getting a different Real Estate agent.

Good luck

Quote from @Ryan Brown:

Quote from @Dan H.:

does the section 8 case worker know there is only one person living in the 2 BR unit?  I suspect he is getting more rent assistance than is appropriate for a single person.  The case worker may handle getting rid of this tenant for you.

If you are going to be a property manager, you need to know the applicable laws.  You will not always be able to request assistance on BP as some items need to be dealt with immediately.  Either hire a professional PM or put in the time/effort to be a competent PM.  This means learn the relevant laws.   A professional PM should charge to evict a tenant that they did not place, but it can potentially save you mistakes and they may have access to an experienced eviction attorney if it is necessary.  If you handle this without a professional PM, get referrals for a good eviction attorney and let them use the expertise.

Good luck

Hey Dan, thanks!

I assume section 8 knows that because when I uploaded the new lease it only had her name on it…actually, section 8 might be unaware that it’s only one name on the lease for a 2bedroom apartment. What exactly does BP stand for? Right now, my primary focus is finding an attorney that can walk me through this process

Sorry BP = Bigger Pockets (this site).  Their annual conference is BPCon for short.

I do not think section 8 typically will supplement a 2 BR for a single person.  If you are getting government subsidized, you should not be subsidized a spare bedroom.

Good luck

Quote from @Chris Barrett:

Without knowing more, I'd say not to do an ADU.

However, if both the price and the rents are distressed due to the condition of the property and you could do renovations and get both rents and value up that may be worth it. With current price and rents you'd definitely make money, but is it a money pit with terrible tenants currently? 

> With current price and rents you'd definitely make mone

How do you figure this? At that rent point, the 50% rule is aggressive meaning sustaining expenses will be more than 50% or the rent.  

Using 50% rule which is too aggressive at rents below $1k/unit at 80% LTV:

$2600 * 0.5 - 1296 (P&i at 6.625%, 30 year)  = $4/month total (all 3 units)

Why do I state 50% rule will be too aggressive at that low rent?  It is because maintenance/cap ex is more a function of the property features than the rent.  Sustaining maintenance/cap ex on a 3 unit property will exceed $900/month (average $300/unit).  a detailed underwriting will depict far worse than $4/month total profit due to the maintenance/cap ex. 

This property is cash flow negative at purchase.  In addition rent growth does not show a path to change that because the rent growth historically has not exceeded appreciation by enough to provide a viable path.  The property requires a good/great value add to be a profitable investment (ideally one that can raise rents 50% or more) or interest rates to fall significantly.

best wishes

Minut over noise aware.  If you message me, I can email you a comparison that I did but the comparison did not take me long as Minut has more features at a better price.  Minut will book a virtual meeting with one of their represntatives if you want and provided us a coupon for doing the virtual meeting.

Schlage or Kaba smart locks.  Avoid Kwikset as they eat batteries if hooked to wifi and fail too often.  Kwikset batteries are fine if not hooked to WIFI, but then you get no notice that the batteries are low.

Price labs is very popular, but I have no experience with the competition.

Good luck

Quote from @Jay Hinrichs:

Quote from @James Wise:

Quote from @Steve K.:

@Jay Hinrichs Ohio, Columbus, Cleveland @Jim K. @James Wise 

 I don't invest in things I don't understand and I don't invest in things that I can't control. For those reasons, I've never got into Crypto so I got no friggin clue.

LOL me too.. my son in law is always telling me  to buy it though.  And I have some clients in Baltimore that were telling me to buy some when it got down to 15k a few years ago.. But I also had a client the year before get hosed with it.. going form 60k she paid and selling at 20k.  I remember when it was 1 dollar and I do kick myself for not taking 1k and buying a thousand of them :) Even though I did not understand it then and done really now..  will stick to renting my money out to others for a fee that seems to have worked for me by and large for decades along with rehabbing or building new construction.. But like crypto can crash real estate was/is not immune from falling either.. we got hammered in 09 to 2011. 

My then 16 or 17 year old son in 2019 or 2020 purchased a child amount on BitCoin.  It is up over 20x, but he only purchased I believe it was $200 or $250 (this purchased a fraction of one Bitcoin - bitcoin was already worth quite a bit).  It was a pretty large investment for him at that time.  Certainly not going to make him wealthy, but it did teach the value of investing better than I ever could.

@Marc Hardy

I know nothing about your market, but here are some general thoughts:

- rent of $2600 is very low for 3 units and a total of 7 BR.  Not sure of the breakdown but 3/1 for $1K and each 2/1 at $800 makes sense.  this price point indicates that the rents have not kept up with CPI.

- Valuation of $253K indicates that valuation has not kept up with inflation.

- At that rent point, this property is cash negative when properly allocating for sustained expenses when financed at a high LTV.

- 3 units have much higher maintenance/cap ex than one unit (not as high as 3 times the maintenance/cap ex but maybe 2.5 times.

- ADUs are not valued the same as the square footage of the primary units. Search BP for ADU appraisals. In my high cost RE market ADUs are typically valued no higher than $100K.

- With unit costs as low as $85k on the subject property, what is the value adding an ADU. It will likely cost more than $85K (or at least close) and you will lose the garage and are not acquiring any land for that cost.

Again I do not know that market but with negative cash flow, rent growth below inflation, and appreciation below inflation I suspect you need a killer value add for this to be worth the effort. Adding an ADU is not that killer value add. Is there another value add?

Good luck

Quote from @Selina Gruden:

Hi James,

I came across your post and was curious—did you end up moving forward with short-term rentals in San Diego? How has your experience been so far? I’d love to hear how things turned out and if you found a good management solution or cohost!

Selina

 We have had STRs in San Diego since 1999.  We used to do outstanding.

Currently the city of San diego (not the other cities or the county) has STR quotas but the only area that hit its quota is mission beach.

The last 2 years have been lean. How lean? We plan on returning 2 STR permits because the STR revenue has not exceeded LTR revenue by enough to justify either the additional costs or if self managing the additional effort.

Between the regulations, lean ADR, effort/cost I suspect there are better markets.  

Good luck

I hope to never have points giver per post.  Imagine the $hit posts that would result.

I question the benefit of getting points for using the calculator.

I think the points should reward quality and not quantity.  Quality on this forum is indicated by upvotes.  Blogs add value as do new threads that achieve a certain level of response.

It likely would not change anything I do on BP.  But if I got a free book, discount on my membership, or discount to BPCon for things that I am already doing, I certainly would not complain. 

Quote from @Steve Chaparro:

Quote from @Dan H.:

I want to preface I am not a financial advisor, CPA, tax advisor, etc.  Check everything with your trusted expert.

I have some questions/comments for you to ponder (no need to answer on BP, just think if they apply to you):

- is your unit that you currently live in rent controlled?  How much is it below market rent?

- how much cheaper is it to rent than to live in a purchased property?  It is my belief that Los Angeles has large cash flow negative when using accurate expense estimates.  How negative is the property's cash flow if using the 50% expense rule.  Note at purchase with typical rent to value ratio, the property tax alone is ~20% of rent.

- Is the primary reason for the live in flip 2 year plan to not pay the gains?  If so, have you considered 1031 exchange?

- What happens if at 2 years for some reason it does not make sense to sell?  What could cause such a situation?  Believe it or not the two conditions most likely to result in this is exact opposites.  One is that RE prices have fallen to where the profit is poor.  The other is prices have risen so much with an associated increase in rents that the prop 13 discount is large.

- Accelerated depreciation is not available on an OO. If you want the quickest tax write off, it is tough to beat. My Net Income Tax Savings using Bonus Depreciation for accelerated depreciation studies competed in 2024 was $256K.

- Your plan has constraint on scaling that does not exist with other options. If a rehab takes 4 months but you have to wait 2 years, that impacts the ability to scale. In addition, you can only OO one property at a time as a primary. That also impacts ability to scale.

Discuss your plan with your trusted financial/tax advisor. There are a lot of options to consider especially if write offs is a primary motivation. Cost segregation, 1031, 2 of 5, standard depreciation, RE professional, STR "loophole", stepped up basis, prop 13 in CA, etc.

Good luck 

Hey Dan, I really appreciate your insights—especially around cost structure, tax implications, and scaling. You bring up some great questions that I’ve been weighing as I refine my approach.

I’m working on a two-pronged strategy where I use the Live-In Flip/Live-In Rent model to capture tax-free appreciation on primary residences, while also building long-term cash flow and equity through BRRRR and Build-to-Rent projects.

Your point about scaling constraints is spot on. The live-in flip model naturally slows the pace of acquisitions, so I'm balancing that with a parallel strategy: generating cash flow from an ATM business to fund BRRRR investments, which will later transition into Build-to-Rent.

On the tax side, I’ve been considering 1031s, cost segregation, and STR tax advantages to optimize write-offs. I see the trade-offs between appreciation and depreciation benefits, so I’m evaluating whether holding more rentals makes sense alongside the live-in flip model.

Would love to hear how you’ve balanced appreciation vs. cash flow in your experience—have you leaned toward flipping, holding, or a mix of both?

 My market is similar to LA that the initial cash flow is terrible, however the appeciation and rent growth have been outstanding.  In addition, the value added via virtually any value add it outstanding.

Appreciation: my worst appreciating property has appreciated $2700/month over its long hold.  This is likely worse than the worse of at least 75% of your local RE investors.  Go to an RE meetup and have a couple of the RE investors calculate their monthly appreciation, I suspect virtually all will have done better.  I have 2, maybe 3, properties that have appreciated over $10K a month over the hold.  This likely beats far more than 75% of non-commercial properties (likely over 95%).  You can realistically expect long term monthly appreciation between these 2 numbers.

Cash flow: rent growth is far more important for long term cash flow than the initial cash flow.  What does this mean?  It means that the cash flow can be outstanding for a long term hold in our markets.  Many of my properties have rent ratios over 2% of purchase price, one has rent ratio over 4% of purchase price.  Imagine what the cash flow could be.  I will address why I used the words "can be" near the end of the post.

Value add: I completed 3 rehabs in the last year but the one I will use to make my point is a property in a very high cost area.  The average PSF is over $2K.  The comps showed adding a half bathroom out of existing footage added $50K of value.  I am a bit skeptical, but even at 80% that would be $40K value add for a toilet and vanity.  Crazy.

Tax benefits: I already mentioned the value of the cost segragations I did last year (2 properties).

Now to address the "traditional" reality.  The real high cash flow is typically not achieved due to an extraction of value.  I am unsure if I have ever had a loan more than 5 years and am sure I have never had a loan last 10 years.  I have extracted a lot of money that has allowed me to scale.  With the increase in rates that started in Q2 of 2022, there is a chance that I will have some loans that are going to go over 5 years.  BTW I refinanced everything between Dec 2021 and Dec 2022.  When the fed states they are going to raise rates, it is generally a good idea to believe them.  My cash flow using a 40% expense ratio is a modest $19.3k/month (modest for the amount of RE holding).  Imagine what my cash flow could be if I had not regularly extracted value.

Good luck