All Forum Posts by: Dan H.

 There is a tight coupling between appreciation and the cash flow over a long hold.  The long hold cash flow coupling with appreciation is much stronger correlation than there is between initial cash flow and the cash flow over a hold.  All of my rentals at the great recession maintained their positive cash flow that was the result of market rent increases that was tightly coupled to the appreciation.

So purchase with poor or no cash flow in an appreciation market and the cash flow will come with the appreciation.   Appreciation virtually always results in rent appreciation which results in increased cash flow.

Case shiller used to publish a ranking of large cities based on total residential return since the year 2000.   The large coastal California cities were ranked very high in appreciation (not surprising) but also were ranked very high for their cash flow (this could surprise some who do not recognize the coupling of appreciation and cash flow).

Initial cash flow has a poor correlation to actual cash flow over a long hold. This is not by chance as there are many factors that determine a market’s RE price.  Two key ones are expected appreciation and expected rent growth.  In general the best initial cash flow markets have poor appreciation and poor rent growth outlook.   Note the market with higher rent growth will virtually always produce the better cash flow over a long hold.   Appreciation with its tight coupling to rent growth, results in cash flow.

An example from my market, a few years ago core logic indicated the average rent increase in my market was ~$600/month.  Imagine what that type of average rent increase does to cash flow.

i recommend all new investor start in a market near them, regardless of initial cash flow or appreciation outlook.   I believe success can be achieved in both markets.   However, in general the appreciation market will produce the higher return and historically on long holds much of that return can be from cash flow.

good luck

@James Wise

 Outside bases, especially on military payday, is one of those places you can find sex providers easily in San Diego area.  They can be assertive/aggressive in obtaining a client.

 I disagree with so much of this reply.  First look what he said.

>Appreciation is great until the market turns and you see that appreciation vanish ask any investor that was in the business before the crash.

“Any investor” is clear that it is any investor.  I was an RE investor at great recession.  I still consider appreciation great and i know of no investor that did not exit at the great recession that does not think that appreciation is great. In fact i will speculate the opposite as i believe virtually any investor who has held investment RE since the great recession highly values appreciation.

>if a property that makes ample cash-flow drops in value you are still able to use that cash-flow to support yourself. You have a lot more control over cash-flow as an investor than you do market appreciation!

I am unsure what control you think you have on market rents.  My market, and many markets, had little or no rent decline at the great recession so there was zero need to sell as the tenant, by paying the rent, was paying the mortgage. In my market, the fore closures were mostly not RE investors because the income did not decline (we only had 7 rentals at that time, not one had a reduction in rent). However there were other markets like Detroit, las vegas, much of arizona, much of the midwest that had large loss of rental income from a combination of higher vacancy and falling rent.  If you were in one of those markets, your cash flow vanished and in many cases the rents were insufficient to pay the mortgage.  I suspect the LLs in these markets wish they could affect market rents/vacancy but there was little they could do.  Not sure how you believe they could control their cash flow. 

Your take away on the great recession is different than mine.  My take away is cash flow is not guaranteed.   The Investors who purchased in higher initial cash flow markets in general were more prone to reduction in cash flow.   My next takeaway is that if you are not overly leverage such that you have to sell at or near the low, the value will come back and typically fairly fast.  There were quite a few years not long after the great recession that average appreciation in my market was above 20% and a couple years far above 20%.

As a RE investors at the great recession, i highly value appreciation. I intentionally minimize my cash flow (try to maintain high LTV, use accelerated depreciation to our advantage, etc) because it gets taxed annually. I plan to never pay tax on the appreciation with the current tax rules (1031, die with step up basis, etc).

Best wishes

Question: assuming an ideal brrrr that has all investment extracted at the refinance, why would you choose a low cost market over a high cost market?

- value adds add more value in high cost markets.  I recently added a half bathroom to existing footage in a unit that is valued over $1k/ft that the comps showed the half bathroom added ~$50k of value.

- not sure of your home market but i assume you are choosing ohio for its lower cost. Bullet 1 points to the folly of this thinking. Successful BRRRRs are challenging enough to do local to you. A remote brrrr is many times more challenging. I have done quite a few BRRRRs, but i would be hesitant to try a remote BRRRR.

- in this higher rate market, i find BRRRRs to be challenging because after a high LTV refinance the units have negative cash flow. Recognize there are challenges doing BRRRRs since the rate increases that have occurred in the last couple years.

- flipping is a job, stop flipping and stop making money.  However, it does not result in a negative cash flow tenant situation.

good luck

 I know of no RE investor that had RE before the crash that did not exit that would agree with your statement including this investor.  

 I agree on a neighborhood basis.  In general higher cost neighborhoods are safer than lower cost neighborhoods. Howevr, look at the stats on a city basis.  There are LCOL cities with low crime rates and HCOL cities with high crime rates. There is not a tight coupling between price and violent crime rates. for example denton texas has one of the lowest violent crime rates.   I highly suspect few people consider it a HCOL city.  As indicated the correlation of LCOL cities having high crime rates and HCOL cities having low crime rates appears to not be strong.

Ca large cities have lower violent crime rates than many cities in other states that are a similar size. 

California has the highest rate of investor homes in the nation because of the returns that can be achieved.   There is nothing that trumps the return on why it has so many investor owned homes.  Great appreciation, great cash flow on long holds, great value add opportunities, good tenants in most areas (my city delinquency and eviction rates are near the lowest in the country).  There are lots of ways to make money in CA real estate for those that know what they are doing. 

However, i recommend newbies start in or close to their home market.  They need to identify the possibilities in their market.  After that if they believe CA is the right market for them, they can join the plethora of investors that invest from all over the world in CA RE.

good luck

 The post i was replying to implied a serious crime rate in large CA cities.  That is not true.

i also do not associate crime rate with cost of living and find it interesting that you do.  If you look at the list, there is not a strong correlation between price and violent crime rate but more important, the large california cities are lower than most large cities in other states. The stats seem to indicate there is not a violent crime issue in large CA cities that some people believe exists.   They have that belief in large part due to media sensationalizing certain crimes.   The violent crime stats tell a different story.


best wishes

The adu has 2 big. Issues 1) even garage conversion ADUs in single family zoned areas typically cost more to build than the value that they add.  This initial negative equity position consumes the initial cash flow.  2) the addition of the adu makes the property multi family and likely makes rent control apply.  Single family homes are exempt from rent control when privately owned.   The allowable rent increase is not typically the big issue with rent control, the bigger issue is getting rid of poor tenants that pay their rent. Rent control in the bay area can be extreme as many areas have rent control in excess of the state mandated rent control

In general experience RE investors are not choosing to add a single ADU in single family zoned areas. They are using rules to add multiple ADUs.

Here is a list of why adding a single ADU in dingle 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.

Good luck

 Utah is beautiful with great national parks/monuments.   Arizona is beautiful with many sites to visit.   I have explored both extensively.   I have been to every national monument/park in both states except petrified forest.   They both have great places to visit.

Neither have the environment diversity of CA, but if you have no interest in the ocean the difference is less.   Even discounting the ocean, ca has the highest and lowest spots in continuous US (and you can do them both in the same day if you are fit enough).  The Sierras suck the rain out of the storms so it has the 1000s of lakes and the area to the east of them are dryer (not the same)

living in San Diego versus arizona or utah is no comparison weather wise.  It was mid 70s today.   San Diego official temperature seldom is above 90 degrees.  The average temp in january ranges from a low of 47 to a high of 69 degrees.  Sure looks nice.  The average temp in july ranges from a low of 67 to a high of 87.  Sure looks nice.  Every month of the year has nice average weather.

It certainly is not cheap to live in San Diego (fortunately that is no longer an issue for me).   There are a lot of people.  When it snows, the crowds go to the mountains.  When the desert flowers bloom, the crowds go to the desert.   Most beaches are crowded every weekend in the summer but some locals can still find beaches that are not crowded.  No top league professional football, basketball, or hockey teams.  San diego has great weather, but it has some issues.  I could live where ever i want and choose to live in san diego.  Those not struggling financially to live here can live where they want.   My community is filled with professional athletes that could live anywhere but choose to live in poway.

San Diego is not perfect, but it is the best i have found for me. Others have different priorities.  One priority has to be able to financially live there.  The average San Diego house is beyond $1m.  This year the average San Diego home (including condos) will likely pass $1m. 

The best place for any individual will depend on their priorities.  san Diego is too expensive for many people.   It may be too liberal for some people (the board of supervisors is currently 2-2 party affiliation due to a democratic member stepping down and one of the leading contenders (mayor of Chula Vista) for replacement is a republican.  It is too crowded for some (including me which is why i do not mind people leaving San diego).  It is not for everyone.  

I hope everyone loves where they live as much as i love san Diego.  

Best wishes