All Forum Posts by: Dan H.

I claimed for years 1) initial cash flow and cash flow over a long hold have a poor coupling 2) that I would purchase a property with negative initial cash flow.  3) I cared about total return and did not give a $hit about cash flow if the other returns produce an outstanding return 4) that cash flow is my least favorite return because it gets taxed annually. 

It was easy to say this as I had never purchased a property that had negative cash flow.  Talk is cheap.

So my last purchase (Dec 2031) was the extreme negative cash flow. Initial rents were ~$3.5k below PITI. Much more negative when including realistic expense estimates (maintenance/cap ex, vacancy, PM, misc). Fast forward to today. My value is ~$700k above purchase and rehab costs and I cash flow with my expense estimates over $1.5k/month.

The negative cash flow of your RE gives me no concern.  However it appears you have no value add and are not purchasing below retail.  You have all your eggs in the appreciation basket.  That basket has produced huge bounties over the last dozen years, but there are signs that the golden goose may be taking a siesta.   I suspect that appreciation cannot continue like it has.  Parts of Texas and much of Florida have RE prices that have fallen significantly. Is this isolated or an early indicator?  

I would be leery investing in a cash negative property with the only profit source being appreciation.

Good luck

Lot split by far has largest upside, but it is also the most work with the highest cost.  

JADU typically subtract value so if you plan to sell in the future it is a poor option.  A big reason is the owner occupancy requirement associated with the JADU.  It is also the retraction from primary footage

There are many reasons that ADUs are not typically an ideal RE investment, but this is typically when adding a single ADU. Adding Multiple ADUs along with the primaries will have economies of scale. This economy of scale will volunteer the biggest disadvantage of adding an ADU. When adding a single ADU, the cost of adding the ADU hands off is typically greater than the value added if in single family zoned areas.

Here is a list of why a hands off ADU addition costs s often one of the worse investments. Note some of these are not the case in your situation:

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.
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 n 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.

Good luck

I think this era it is more important to have the utilities paid by the tenants.  Utilities are costly (my market likely has the most expensive water in the country and electricity costs that are in competition for highest in the country).  It promotes conservation.   Here are some extreme cases that are mostly 21st century issues:

- cannibus is legal in many states.  Growing cannibus can require high energy and water consumption.  
- bitcoin mining can be energy intense

In addition, I want tenants to report any leaks as soon as discovered.   I find this is more likely to occur when they are paying the utilities.  

Create as equitable utility division as you can, place this utility expense in each lease, and charge the tenants per the utility usage.  If tenant has complaint, point to the lease, that they agreed to this utility cost, and indicate they can terminate their tenancy at the end of the lease.

Good luck

Quote from @Kevin L.:

I am closing on a 4 plex in Bridgeport, all units are 2 bed 1 bath, and the current rents are under market at $600 against a fair market rent of 1200+. All other 2 beds in the neighborhood are renting for 1200+ so I know it's a fair price.  

I will be introducing myself as the new landlord soon and I'm nervous. I was thinking to increase rent by 200 over the course of 3 months to get to fair market price. They are month to month and are free to leave which is even better because I would like to renovate the place 1 unit at a time.   

Does anyone have experience handling raising under market rent? 

If units are being rented at $1200, I question if your units in their current shape (in need of renovation) have a market rent of $1200. 

If they are $600 below market, and market is $1200 you are proposing doubling their rent.  If this is what you propose, I think you will end up losing each tenant as it is a rare tenant that can afford to have their rent double.  

I suspect if you raised the rent half way, you may be financially better served.   You may keep some of the tenants, you will save on renovation costs, and you may not have al, 4 units vacant.  Note even half way would be a 50% rent increase if they are going from $600/month to $900/month.  

Good luck

There is no way I take your RE agent advice and accept a reduction equal to estimate or even close to it.  I would not even accept reduction equal to estimate and lost rent.  

We only do a value add if the expected value add is at least 2 times the cost of the value add.   This is our minimum and here is the thinking 1) it is work doing value adds.   Even with the use of contractors, it is work managing the contractors and making various decisions.  2) value adds have risks.  I was overconfident after successfully doing numerous value add rehabs when this spring we took on a rehab of a little unit that was listed as built in 1901 (I believe it was really built in 1920s and 1901 was used because they did not know when it was built).  I had no experience with that age.  In addition little added complexities.  Age meant we did things we had not done previously.   We went way over our expected budget - by far our worse budget miss ever (remarkably we were only 0.5 week over our 2 month timeline).

Using my rule, take the estimates and double them then add for lost occupancy and that is what I would be seeking or the owner have the work done using licensed contractors and do the work, take the risks, and suffer the vacancy costs.

If you purchase having to do the work and your appraisal can handle it, the credit at closing is superior to price discount.  It would mean the costs are financed with the property and it raises your basis cost against future cap gains.  

good luck

>appraisal just came back for $235K when we had estimated along with our real estate agent an ARV closer to $340K based on comps. 

in My market the refi appraisals are more conservative than appraisals associated with offers.   However, I do not expect the refi appraisal to be 30% low, maybe 10% low.

Did the market price fall or were the comps used by RE agent not good comps.  If they were good comps and the market has not fallen, then those comps could be the basis of an appraisal appeal.  It is very unlikely that the appeal will get the property to a $340k value, but even a $275k valuation would reduce what you need to bring to refinance.

Question is how is the cash flow?   Is it renting for at least $4k?   If not, I question if it is worth keeping. 

I will not beat you up when you are down.  I expect you are aware of various mistakes without the need for them to be itemized and will do better next time.  

Good luck

Quote from @Sipan Y.:

Hello Everyone,

I’m considering investing in a short-term rental and have been researching areas outside Yosemite National Park. Specifically, the Groveland and Oakhurst regions seem promising if I can find the right deal.

I would love to hear from anyone with experience in short-term rentals in these areas. What do you like or dislike about them? Any insights or stories would be greatly appreciated!

Looking forward to hearing from you!

Realize you are likely going to use CA Fair Plan (due to fire risk) and that is not cheap. On a nice (I.e. expensive) cabin you may approach $1k/month which will affect the cash flow. ADR has to be high to cover expenses. Have you looked at AirDna or another STR data tool to obtain expected ADR? In particular, you need to identify what criteria is necessary to optimize ADR with respect to price. Once that is identified, can you afford to achieve it and does it meet your expected return?

Good luck

Quote from @Andres Murillo:

Quote from @Franklin Marquette:

Hello all,

I have a zoning question here. My property is in Los Felix (zip 90027) and is currently zoned as a R2-1XL. Its a duplex as it stands now with a garage in the back. I would like to split the downstairs unit, currently a 200 sq ft 5 bed 3 bath, into 2 2 bed 2 bath units AND convert the garage to an ADU. Effectively turning a 2 unit property into a 4 unit. Almost every property on my street is a 3+ unit property.

Now, I understand that I cannot build a quadplex due to zoning restrictions. I of course could get the property re-zoned but that is a long, tedious, and expensive process.

I called the city twice about this and both times they told me that with R2-1XL zoning I can have 3 ADUs, 2 detached and 1 attached. So, I would not be allowed to turn the property into a quadplex BUT could turn it into a duplex with two ADUs, one attached (the additional unit built downstairs) and one detached (the renovated and converted garage).

Does this sound accurate to the community here? Does anyone have experience with this? I just want to make sure that this is actually allowed before I go down this path. I know two different folks at the city said it is, but you tend to get a different answer within the city departments based on who you call and what group you call so just want to make sure there isnt any grey area here.

Thanks!

Franklin

I'm looking at a similar situation for a client currently in Yucaipa, CA. Zoning only allows a "max of 3 units" but will also allow for "2 ADUs". Our project is going to look a lot like a 5-unit apartment building but on paper, it won't be. Timing your permits and applications might be tricky. Our project is raw land development so we're submitting everything all at once. In your case, you might have to finish the main units before applying for the ADU.

Did you consider waiting until 2025 when 3 units would be able to have 3 ADUs (SB1211)?   I do not know the layout, but believe 5 units is the worst unit count.  Requires commercial funding, but is the smallest unit count that requires commercial financing.   Likely will have a value lower than if it were 4 units (but higher rent than 4 units). 

good luck

Without responding with respect to your zoning and what is allowed locally, I will discuss what is allowed on state level because i believe it will allow what you seek.

In 2025 SB 1211 (Skinner) – Multi-Family goes into effect allows an ADU (I think it specifies detached but question if that is a requirement) for each legal non ADU unit up to 8 units. So a duplex can have 2 ADUs. Read it, as there is also some text regarding lost parking resulting from taking away the garage.

By the way AB 2533 (Carrillo) – Unpermitted ADUs extends the protection of existing (not newly built) unpermitted safe units of SB13.  These ordinances make clear the state does not desire any jurisdiction from removing safe unpermitted units. 

Good luck. 

Quote from @Scott Vaeth:

I purchased a house in South Carolina this past year with the goal of BRRRRing it. I currently live in it as my primary residence but had plans to eventually rent it out and then cash out refi once I reach 20% equity in the property. I'm now realizing that in the state of South Carolina, the tax rate jumps 2% for rental properties to help fund public schools, a $600/mo cost that I didn't account for when using the calculators in the earlier stages. By the time I reach 20% equity (likely 3+ years away), my monthly mortgage payment will come down when I refinance, but $600 is a big hit to the numbers. I feel like these are my only options:
- House Hack: Would I still need to pay the 6% tax rate if I'm getting rental property insurance?
- Renting it Out: The likely rent I'd get in this area will cover half my mortgage payments at the moment
- Add Square Footage: Taxes will likely go up significantly
- Build an ADU: Overall ROI will likely not offset much since it'll still be counted as value tied to the one house
- Selling Off Land: Sits on .5 acre that I might be able to sell. This obviously will only get me so far. 

I already have some equity in the property after doing a complete rehab but I don't want to diminish my returns selling it after one year, paying for commissions/closing costs. It's in great location that I'm confident will continue to appreciate. However, the opportunity cost is that I won't have funds to invest with my current salary as long as I have this house. Any advice would be greatly appreciated.

 >The likely rent I'd get in this area will cover half my mortgage payments at the moment

I have done all of my brrrr in different market and I have the same issue that after a refi to extract the value add, my high LTV property at current rates is large cash flow negative (not as large as only covering 50% of the mortgage). IMO your property is not a good brrrr candidate if rents do not cover mortgage and even more so if they only cover half the mortgage.

I do not flip so I understand your reluctance to want to flip (it’s a job, taxes, selling costs, etc), but it seems like a much better flip than brrrr.  This is almost regardless of the $600/month extra tax hit, but more so with the $600 extra tax associated with renting.  

Proper underwriting is important.   I will say you do enough underwriting and something will eventually get missed (my last rehab was my first to go way over budget due to various reasons so I am not perfect).  Learn from this so it never is repeated.

On the positive, with the value add you likely will do alright flipping it.

Good luck