All Forum Posts by: Dan H.

I do not know if you switched numbers from your OP or if your calculation on time span to positive cash flow is off.

You show a negative $328/month on $2200 rent.

Without compounding (with compounding it would be better and take less time to achieve positive cash flow) using your rent growth percentage

1.05 ** years * $2200 - $2200 is the rent

at 5 years

1.05 ** 5 * $2200 - $2200 = $607.82 which is likely enough greater $328 to compensate for expenses other than P&i having risen (basically inflation on the non fixed costs).

>Since this is your reserve fund, you definitely have to keep it invested in something safe which will probably barely beat inflation. Let's be generous and say you make 5% on it. So, dealing only with the first year of doing this, you make $16,955 from the house and $7,250 from your reserves, or a total gain of $24,205 on a total investment of $225,000 or 10.8% return. Again, that's making several generous assumptions, and the return continues dropping year over year, which leads to the second problem.

There are many ways to manage risk.   I believe high diversification reduces risk.  I think only a very conservative investor would have more than a year of safe, liquid reserves (money market, etc).   So your reserve scenario does not match most investor’s approach.  I do agree that the reserves should not all be in one asset class; that is too risky.   But an investor has a year or so liquid and substantial other investment in other classes besides RE, they have a more robust plan than someone relying solely on cash flow.

>By the time your cashflow is inching closer to $0, your return on equity is bad, like below 10%.

what ends up typically occurring is money is extracted before is gets to a 50% LTV to leverage the capital elsewhere reverting the cash flow. I virtually always have used 30 year fixed loans once stabilized for their safety but I have yet to hold a loan 10 years. With the rate increases that started q2 2022, there is a chance that I will finally hold one of these loans over 10 years.

My worse appreciating property has appreciated $2700/month over its hold.  It never had negative cash flow but even if it did, it could not impact the return significantly.   I purchased for $47k out of pocket including closing costs.  My best appreciating properties have appreciated over $10k/month over their hold.   One of these did have initial negative cash flow at purchase (quite large negative cash flow), but in less than 3 years it had positive cash flow.  The negative cash flow was always inconsequential compared to the value increase.

I do believe the low cost markets are appropriate for local investors.   Long distance investors should seek higher quality assets.

Good luck

I do not know if you switched numbers from your OP or if your calculation on time span to positive cash flow is off.

You show a negative $328/month on $2200 rent.

Without compounding (with compounding it would be better and take less time to achieve positive cash flow) using your rent growth percentage

1.05 ** years * $2200 - $2200 is the rent

at 5 years

1.05 ** 5 * $2200 - $2200 = $607.82 which is likely enough greater $328 to compensate for expenses other than P&i having risen (basically inflation on the non fixed costs).

>Since this is your reserve fund, you definitely have to keep it invested in something safe which will probably barely beat inflation. Let's be generous and say you make 5% on it. So, dealing only with the first year of doing this, you make $16,955 from the house and $7,250 from your reserves, or a total gain of $24,205 on a total investment of $225,000 or 10.8% return. Again, that's making several generous assumptions, and the return continues dropping year over year, which leads to the second problem.

There are many ways to manage risk.   I believe high diversification reduces risk.  I think only a very conservative investor would have more than a year of safe, liquid reserves (money market, etc).   So your reserve scenario does not match most investor’s approach.  I do agree that the reserves should not all be in one asset class; that is too risky.   But an investor has a year or so liquid and substantial other investment in other classes besides RE, they have a more robust plan than someone relying solely on cash flow.

>By the time your cashflow is inching closer to $0, your return on equity is bad, like below 10%.

what ends up typically occurring is money is extracted before is gets to a 50% LTV to leverage the capital elsewhere reverting the cash flow. I virtually always have used 30 year fixed loans once stabilized for their safety but I have yet to hold a loan 10 years. With the rate increases that started q2 2022, there is a chance that I will finally hold one of these loans over 10 years.

My worse appreciating property has appreciated $2700/month over its hold.  It never had negative cash flow but even if it did, it could not impact the return significantly.   I purchased for $47k out of pocket including closing costs.  My best appreciating properties have appreciated over $10k/month over their hold.   One of these did have initial negative cash flow at purchase (quite large negative cash flow), but in less than 3 years it had positive cash flow.  The negative cash flow was always inconsequential compared to the value increase.

I do believe the low cost markets are appropriate for local investors.   Long distance investors should seek higher quality assets.

Good luck

I think anyone that has had STRs for a while have got what seems like crazy complaints.   It happens.   I think crazy complaints need less addressing than less crazy complaints.

I have had complaints for 

Blackout curtains letting in too much light

Guest getting a ticket for parking hanging over the sidewalk

A room with a bunk bed even though it is both in the description and photos

Seating only holding 5 when stated unit max occupancy is 5.

Airplane noise where listing explicitly states unit has airplane noise.

Too much seaweed (our beaches are cleaned often but just before the next cleaning there can be significant seaweed).

Tight parking when listing provides exact measurements of the garage.

I suspect I have got more nit complains or complaints on things that were in the listing than legit complaints.   I also believe the nit complaints have gotten more regular.   I used to get few nit complaints.  I would say I get one every 10 or so reviews now.

Do not worry about it too much.  I would respond to the guest comment basically stating that there was an extreme weather condition that affected the quality of the river.  do not get defensive or disparage the guest. Anyone who reads that review will recognize that the guest comment was not well thought out (bordering on inconsiderate).

Good luck.  

Case Shiller used to publish a list with total residential return for this century.  The top of the list was all high appreciation markets.   The bottom of the list was comprised of high initial cash flow properties.   What the list showed was a strong correlation between appreciation and cash flow over a long hold.   The list showed a poor correlation between long term cash flow and initial cash flow.

I invite you to run your numbers at 80% LTV using that extra down payment to deal with any initial negative cash flow. Use the appreciation and rent growth for this century on each city. Basically the case shiller data without the effort of determining local property tax, maintenance, PM rates, etc..

In have been investing in my San Diego market for many years. I have purchased with poor timing and great timing.  My worse appreciating property has appreciated $2700/month over its hold ($47k down and closing).  My best appreciating properties have appreciated over $10k/month over their hold.  I suspect that virtually all residential RE in my market will have numbers between my best and worse case.

Knowing the San Diego appreciation rate (almost 6%/year for this century per neighborhoodscout) how do you think the rent growth has been?

With time the market with the higher rent growth will always have higher cash flow than the higher initial cash flow market that has lower rent growth.  It is basic math,

So the high appreciation market has historically produced both better appreciation numbers and better long term cash flow than the low value markets.  This is easy to verify and I believe most experienced investors ecognize this. I recognize past history is not necessarily an indicator of future performance but the metrics on my San Diego market still look promising.

My view is the low cost markets are best served by local RE investors who know the nuances of the area.

Best wishes

Thanks for the callout.  I had seen the OP’s post but thought @Rick Albert response was very good.   

I agree with everything Rick Albert stated, and upvoted his response, but believe he left out some of the downside of adding an ADU. For example, if your primary is over 15 years old it now is a rent controlled unit (even though I strongly believe this was not the intent of senator Weinkowski with AB1482). It seems like Albert got good financing, but in general ADU financing has worse terms than loans associated with a property purchase. Albert did cover well the effort (that I claim is comparable to a brrrr with far lower return) and timeline (except sometimes the timeline exceeds 9 months, but it probably should not if the jurisdiction does its part and you have good contractors).

NAR provided Nov 2021 data for many large cities of average sale of properties with an ADU versus without an ADU. My market is one of the worse for ADUs adding values as the NAR stats showed homes with ADUs sold for only $13k more than homes without ADUS. I checked to see if NAR released the data for Santa Clarita/palmdale, but it did not. Los Angeles ADU values are significantly higher than San Diego per the NAR data.

Here is a list of why adding a single ADU in single family zoned areas in my CA market (San Diego) 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.

I agree if you can find a property with an existing ADU you will likely get more for your money, at significantly less effort and risk, with better financing terms, and not as long a time before obtaining revenue from ADU. You want to be sure that the ADU is a quality rental (the stuff @Rick Albert indicated and bonus if separately metered or submetered and has its own parking).

Good luck

Most new investors do not have the means to support a large negative cash flow property for an extended period of time.  In addition, most new investors significantly under estimate expenses.

However, once you have sufficient reserves to be unconcerned about the cash flow you should evaluate a property’s investment quality based on total return.

My last purchase had total revenue $3200/month less than PITI. My under writing was showing -$5000/month when allocating for all sustained expenses & vacancy. Not sure how many people have purchase a non commercial property that protected a worse cash flow outlook. Today its value is nearly $1m higher than purchase and value add costs. The market rent is $8k more than PITI. From horrendous cash fliw to modest cash flow, but the big return is in its current valuation. I could never make $1m cash flow on a non commercial residential in 3.5 years. It is not possible.

Because cash flow is taxed in the year earned, it is my least desired source of return. Note if I extract from the $1m of value ($750k at 75% LTV), that money is tax deferred. Via 1031 I can tax defer it to another property. When I die (Everyone dies) the property (or the 1031 exchanged property) gets a stepped up basis and no one ever pays a tax on the gain.

So the answer to the question of how important is cash flow depends significantly on your current finances and where you are in your RE investing journey.

Good luck

Quote from @James Wise:

Quote from @Dan H.:

The type of eviction that you refer to does not require relocation assistance.

Have you looked at the eviction rate in San Diego (using the typical definition and not using it for an end of lease termination of lease)?  how Low is it?   The eviction rate is also one of the lowest in the county (the lockout rate is below 1 in 1000 rentals).  My family and I have had rentals for 50 years and have yet to not collect any money while the tenant occupied the unit.  Not $1 not collected.  

This is not because all the units are class a.  Our units go from class A- to class C-.

So why is this?  Certainly the pain to evict plays a role but look at the delinquency rate for San Diego.  It also is also one of the lowest in the country.   So this would lead one to conclude it is not primarily related to the PIA of doing an eviction.   No it is because of the housing shortage (vacancy is historically below 5%).   Our policy to rent our units is no evictions ever.  We require strong LL references and the credit report cannot have any indication of ever having not paid the landlord.   All the large home providers also do not accept any tenant that has ever been evicted.   The tenants recognize if they have been evicted or have an adverse LL issue on their credit report they will find it difficult to obtain a decent house to rent forever.  Therefore our tenants pay their rent on time and take care of the units.

Look at the stats.  It shows San Diego has high quality tenants and virtually no evictions.

good luck

 
Unsure what you mean by “nah nah” but everything in my post is verifiable except my personal experience.    You can look up the eviction rate and see it is one of the lowest in the country.   You can look up the delinquency rate and see it is one of the lowest in the country.  You can look up the vacancy rate and see it is historically below 5%.

Most recent city of San Diego vacancy data I can find is 3.12%

https://timesofsandiego.com/business/2025/07/02/san-diego-re...

All easily verifiable data but really the vacancy rate tells the story.   When there is a housing shortage, the tenants appreciate their housing.   They recognize an eviction, delinquent payments, poor LL reference will make it challenging to obtain quality housing.   It makes sense and you can see it in both the eviction and delinquency data.

How many people can say they have had hundreds of tenants have never not collected a single dollar owed from the tenants while they occupied the units?   Are we that good at screening or is it San Diego has quality tenants?  I think it is a little of both.

Also by the competition for local RE, there are not enough San Diego RE investors ditching San Diego. Last week we placed an offer $92.5k above initial list price. I was informed there were 4 offers higher than our offer. We can close extremely fast (with a cooperating HOA and seller, in as few as 3 work days) and we have a solid reputation in this area. The only contingency we had was HOA info and we would only exercise it if 1) unit was not allowed to be rented 2) large supplemental association bill was forthcoming 3) that HOA modification approval time limit is larger than 4 months. Very reasonable items to result in renegotiation. What happens if there is $30k supplemental coming? A: price should be reduced likely near $30k. What if HOA does not allow renting the units? A: this would significantly affect value and would mean our only option would be as a flip. What if HOA is allowed to take 6 months or a year to approve changes? A: potentially increases our hold cost which should result in some adjustment in price.

San Diego is a very different market than the Ohio cities.   Class a to c in San Diego typically have good tenants that always pay their rent, virtually always on time.

Good luck

 One br: $2354

$2354 * 3 * 12 =$84,744.00 

So the median household income can afford this but 1) I expect the single earning household income to in general to be less than 2 or more earner households.  2) I suspect most single person households are younger people and making less than the median income.

What I see is the young people often decide to rent a multi BR with roommates to reduce their housing expenses.  My son rents a 3 br that he shares with his girlfriend and one roommate but they are in search of another roommate.   The rent for the unit is $4400 (it is in a class b+ area) so it would be $1450 per BR if all BR were equivalent (they are not all the same).   

I see a similar choice from single migrants.   They rent a multi BR typically not in great shape in a class C or D area and fill to maximum allowed occupancy (2 * BR + 1).   Common is 5 in a 2 br or 7 in a 3 BR.  Note these are typically small units for their BR count.  This amounts to the cheapest non-government supplemented housing option.  Many of these LL are the prototypical slum lords (but I have 2 such units and they are not in great shape but they are safe and cheaper housing).

Latinos are often content with multigenerational living.  They also often maximize the occupancy.

I have one tenant that rents her spare BR to a foreign exchange student.  It is our only approved sublease situation (we have quite a few roommate situations) .   I do not know what she gets in rent from the student.  This unit is in good shape, rehabbed in the last decade.

I have three 1 BR/studio units.  2 are occupied by seniors.   The third is a large 1/2, 900’ and has a middle age couple renting it (2 income).  All 3 of these are nice, but 2 are real small, units.

Housing is expensive in San Diego. If you want to live in San Diego you either need to be financially well off or be willing to make housing compromises.

Best wishes

 >The real strategy with a BRRR is to get all new mechanicals and updated units. If you do this and leave 25% in the property you are still ahead of the game.

This would be trapping at least as much or more than if you purchased a rent ready property. Note I can purchase rent ready SFH in great condition at 80% LTV and only have 20% plus closing costs trapped in the property. It also means you did not earn much for the effort and risk of the rehab.

The increased competition for RE has made the ideal BRRRR almost a unicorn find. I did two in Dec 2021 that I would have been very close to 100% of investment extract (depending exactly where the appraisal came in), but I chose not to do the extract because the rates I could get on a cash out refi (cash out refi have higher rates than no cash out refi) would be double my existing rate and be large cash negative cash flow at my underwriting.

However, if you are doing a cash out refi and your underwriting is showing that you are trapping more than 10% of ARV, I question if it is worth the work and the risk of performing the rehab. Maybe for simple cosmetic rehab (new paint and flooring only). I know I would not chose to do it, but maybe a younger go getter may decide it is worth the effort (and risk).

Brrrr are work.   They have risks.   The operator deserves good compensation for the work and risk.

Good luck

Average rent for a 2 br apartment in the city of San Diego is $3017. For a 3 br apartment it is $4298 (source apartment advisor). According to census San Diego median household income (which recently passed Los Angeles and is leaving it in the dust after being far below it forever) $104,321 (source census). SFH in general rent for more than apartments for Same BR count

2 BR: $3017 * 3 * 12 =$108,612.00 

3 BR: $4298 * 3 * 12 =$154,728.00 

This implies the median household income cannot even afford to rent the average 2 BR apartment.   They are over $50k short of being able to rent the average 3 BR apartment.

Los Angeles has lower rent, but they now have significantly lower household income (when I was a young worker, Los Angeles salaries were much higher than San Diego and it was called locally as the sunshine tax).   Their numbers I would guess are about the same for affording rent.

It is not good for tenants, but the property values are so high that the rents cannot be much lower (I guarantee the property owners at high LTV are typically large negative cash flow at purchase). The only way the high rents associated with high property costs benefits the landlord is it makes for higher quality tenants and with patience the rents increase while typically the mortgage is fixed. So eventually there will be positive cash flow if no value is extracted.

Note this does not seem sustainable but 1) the rents have been high in San Diego forever.  In ~1990 my now wife rented a 1 br at $650/month.  It seemed crazy high as minimum wage then was $3.35/hour (vs $17.25 today).   2) I suspect the rent to value is near an all time low meaning the tenant has rarely rented more value for their rent amount than now.  In that respect the tenants are getting a good value   3) MF are rent controlled.  Tenants once they are in a MF unit have a cap on their rent increase.  They can typically stay as long as they desire with constrained rent increases.

 housing in San Diego is expensive whether it is to purchase or to rent.   However, it is currently noticeably initially much cheaper to rent than to purchase.   Apparently we are still paying the sunshine tax but now Los Angeles is also paying a similar sunshine tax.

Southern ca is expensive.   Fortunately, there are also opportunities for those with vision, willing to take appropriate risks, and work smart and hard.   The average person is unable to meet all these criteria.  They therefore struggle to afford to live in southern CA. 

I once long ago risked virtually every somewhat liquid dollar (so not my home, 401k, job, or family) on an investment.   First year cash flow was over 65% of my investment.   I had the vision and took the gamble.   It paid off big time and I still am getting cash flow of near 10% of our initial investment amount (in inflation adjusted dollars it is much less than 10% but we already achieved crazy returns on that investment).  By the way, I told some people my rationale on the investment.  Not one wanted to invest.   After the opportunity had gone to a normal type opportunity (so a few years later) one of those people asked if I thought it was still a good investment.   I told him that the cost was 4x what it was when I purchased (my $300k investment was worth ~$1.2m and had paid us around $600k in 3 years)  and that other opportunities could probably out perform it.   He was eager to invest in the opportunity only after it had produced crazy returns but by then it was priced appropriately for its expected return.   That is most people.   Unwilling to take calculated risks.  It is why many people on BP will never buy an investment property.  What is worse a bad investment or no investment?  I can make a case for either.  What is better a mediocre investment or no investment?  I lean toward the mediocre investment.  My definition of a good investment at purchase is not solely based on return.   It is based on the risk adjusted return which includes best and worse case scenarios.   If there is only 10% chance at a killer return (50%+) but the worse case scenario is I lose 5%, even if the worse case will happen 25% of the time, that is a good risk adjusted return.

Good luck