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All Forum Posts by: Dan H.

Dan H. has started 29 posts and replied 5788 times.

Post: Rental Vacancies in North County San Deigo

Dan H.
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#4 General Real Estate Investing Contributor
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  • Poway, CA
  • Posts 5,901
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My units do not turn over often.  We usually fill the vacancy in the first open house.  We write our leases to expire late spring or early summer.

We had an Escondido tenant break lease moving out Dec 31 (terrible time).  The initial open house seemed to have about unusual turnout.  Second open house attendance fell off some.  It got to where the open house was getting 3 or 4 potential tenants.  I think I had 6 open houses.  Tenant moved in march 1, so ~7 weeks to rent (it took a week to get unit ready). 

I do not know if to blame the slow placing of tenant on trying to place tenant in January or a slowdown in market. 

I have another Escondido unit that will be available for rent in November (hopefully ready Nov 1).  I will try to post how it goes, but November again is not optimal time to be placing a tenant.

I suggest having leases end in late spring or early summer so placing tenant is at an optimal time.

Good luck 

Post: How to start my business

Dan H.
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I 2nd what @Jonathan Greene indicated. At current valuations and rates, after the high LTV refi to extract value the properties have huge negative cash flow in virtually every market. A cash out refi prior to 2022 had mortgage payment almost half of what it would be today. The lower rates then meant that there could be some level of positive cash flow.

The high valuations and high rates with respect to market rents make BRRRRs a challenge.


good luck

Post: Pay Off Loan Sooner?

Dan H.
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I exert a certain amount of effort to keep a high leverage to maximize return (both ROI and ROE). I never understood why one would want to pay a low interest mortgage off early:

- the difference in rate of return for appreciation of a 80% LTV vs 50% LTV is 2.5x. As an example if a property appreciates 20% at 80% LTV you have made 100% from the appreciation but at 50% LTV you have only made 40% from appreciation. Going to the next level the difference in rate of return from appreciation at 80% LTV vs 0% LTV is 5x. The property that appreciates 20% at 0% LTV you made 29% from the appreciation (versus 100% return at 80% LTV).

- Fannie/Freddie (f/f) residential conventional loan is the cheapest money available. Even with the recent rate increase of the last couple of years, f/f is significantly below S&P lifetime return. This implies that rather than pay the loan early, you are likely to do better putting that money in S&P or you can do far better using it to make a smart RE investment.

- current f/f is around 6%. This implies paying down is saving 6%. I think most of us can agree that we do not invest in RE for 6% return. So why would we pay down the lian at a rate of 6%?

- 6% rate at 30 year each $100k borrowed adds $600/month. My worst appreciating property has apprecated $2700/month. My best property has appreciated over $10k/month. Point is cash flow (positive or negative) can be inconsequential compared to the appreciation assuming you do not need the cash flow to pay the bills

- cash flow is taxed, appreciation is tax deferred and can be avoided.

I put forth effort to keep my RE investment significantly leveraged. To intentionally reduce the leverage more than required is a foreign concept to me.

Best wishes

Post: Buying a grandparents home to flip?

Dan H.
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I have purchased from trusts as an insider.   I agree get 3rd party valuation, however I believe off market your offer should be 6% to 9% below that valuation for the sellers to net the same amount they would on open market.

Then you have to worry about change of mind.  I purchased similar to you with all parties agreeing to the terms (8% below appraisal on property with drastically under market rent in a rent controlled jurisdiction).   I did great rehab that added a lot of value (it is what I do). one party no longer liked the deal and threatened to get a lawyer.  I reminded him he signed a document with the trust attorney indicating he was good with the terms (it was also ~2 years after the sale had closed).   If I had done no value add, he likely would have continued to have been fine with the agreed terms (it would have been loosing thousands every month due to reassessed property tax and drastically under market rent). Because I did a good/great job adding value he is no longer happy.  

It has put some friction in our relationship.  Even though I am up around $700k, I would have passed on this purchase and found different candidate property if I knew it would cause an issue. 

Point is that you can treat all parties fairly, but there could be some seller’s remorse especially if you do a good job at increasing the value.   Also some people have no comprehension of the work and skill involved in executing a good value add and the compensation I expect for executing one.

Be cautious in dealing with family.  recognize there are various risks, not just financial risks.


Good luck


Post: Can a seller legally avoid closing on a deal?

Dan H.
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Quote from @Sergio P Ramos:

@Jay Hinrichs @Russell Brazil maybe i should have rephrased it. I understand how a seller could be lied to. Although I don't know the exact price, it was agreed upon between owner and wholesaler. I am able to make an educated guess based on the original offer from owner to myself before the wholesaler scooped it up and the price agreed upon myself and wholesaler. Based on previous deals through this wholesaler I can average out wholesaler normal up charge percentage. The price is relatively the same based on that information. There seems to be no fraudulent acts. Again, i don't know the exact terms of their contract. I'm simply asking for any type of advice and/or suggestions. Could it be the owner simply didn't know what they were doing?. Owner simply thought he could just walk away from a contract and try to resell the same property. There seems to be some lack of knowledge on the owners' part come to think about it.

Do you believe the wholesaler was up front about never intending to close on his behalf and simply profiting from being the middle person?  Most wholesalers imply that they are closing for themselves.   They represent prospective buyers viewing the property as inspectors, contractors, etc.  

it is a rare wholesaler that is upfront about their intent to wholesale the property.   Most have intentionally been deceitful.  

If the wholesaler did not misrepresent anything, he can prevail.  I suspect the odds that the wholesaler did not misrepresent anything is fairly small.

if your wholesaler is picking up the legal costs to pursue this so that you are only going to be out the time value of your earnest money, I think I would just sit back and see how this plays out.  If you have to take up any part of the litigation, I would cut bait and get your earnest back and look for your next deal.

good luck. 

Post: What do I do next

Dan H.
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If you purchased at high LTV, in 6 months there is unlikely to be enough equity to be worth trying to extract equity.

In the event that there is, the new purchase would be at or near 109% LTV between the heloc and the loan on the newly purchased RE. It would be virtually certain to be cash flow negative. It also seems likely that you would be under capitalized and a recipe for disaster.

How to scale?   1) Smart, successful value adds that would allow you to extract sweat equity.  2) patience to save up the deposit via you income.  

RE can be a dangerous game if you are over leveraged.


good luck

Post: Making Sense of San Diego Real Estate (Renting and Investing vs Buying)

Dan H.
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Quote from @Scott Albritton:
Quote from @Dan H.:
Quote from @Scott Albritton:
Quote from @Dan H.:
Quote from @Scott Albritton:

Welcome to San Diego! 

Near the 56 is a great place to live. As you've mentioned, great schools, area in general is nice and it's centrally located. Other areas nearby that are great include, Cardiff, Encinitas and Del Mar. 

As for your scenario, how many bedrooms would be ideal? If you elected to rent, would a house be the only considered option? Would you entertain a condo?

We've seen the rental market soften here in the greater SD area as whole, prices may continue to soften towards the end of the year. 

I'd consider renting for a period of time and identify a particular area you'd like to eventually buy. From an investment perspective, I'd look to invest in small multi-family 2-4 units with a larger down payment ~50% or more (only way to produce positive cash flow here at the moment) 

Investing in San Diego right now isn't driven by immediate cash flow. If cash flow is the main goal, there are many other markets to consider before San Diego. With that being said, if you're comfortable with a long term hold, San Diego and especially coastal, will always be attractive imo. 


Best of luck, San Diego is a great place to be!



 >I'd look to invest in small multi-family 2-4 units with a larger down payment ~50% or more (only way to produce positive cash flow here at the moment)

I never understood why one would want to buy cash flow.  Here are my thoughts:

- San Diego is an appreciation market implying poor cash flow and the bulk of the return comes from appreciation.

- the difference in rate of return for appreciation of a 80% LTV vs 50% LTV is 2.5x. As an example if a property appreciates 20% at 80% LTV you have made 100% from the appreciation but at 50% LTV you have only made 40% from appreciation.

- Fannie/Freddie (f/f) residential conventional loan is the cheapest money available.  Even with the recent rate increase of the last couple of years, f/f is significantly below S&P lifetime return.   This implies that rather than buy the cash flow, you are likely to do better putting that money in S&P or you can d far better using it to make a smart RE investment.

- current f/f is around 6%.  This implies paying down is saving 6%.  I think most of us can agree that we do not invest in RE for 6% return.  So why would we buy the cash flow at a rate of 6%?

- 6% rate at 30 year each $100k borrowed adds $600/month. My worst appreciating property has apprecated $2700/month.  My best property has appreciated over $10k/month.  Point is cash flow (positive or negative) is inconsequential compared to the appreciation assuming you do not need the cash flow to pay the bills.  

I put forth effort to keep my RE investment significantly leveraged.   To intentionally reduce the leverage more than required is a foreign concept to me especially in the San Diego market.  

Best wishes

Thank you for the reply Dan. I appreciate the perspective and insights. 

In the current market, it's pretty much impossible to have any positive cash flow in the 2-4 unit space with long term rentals, unless you're putting ~40-50% down, not only focused on the cash flow per se, but rather simply not being in the negative. As you're very aware, appreciation here locally has skyrocketed in the past ~4 years. I don't believe we'll continue to see that trajectory moving forward over the next 4 (you never know though!)... 

You've put yourself in a great position to capture both appreciation and increase in rents simultaneously, which is a great place to be. For investors looking to purchase properties here in SD at the moment, 20-25% down will most often leave you with negative monthly cash flow. 

With that being said, appreciation is certainly something to always consider here in SD.

Example of current property for sale, 

$1,800,000 asking price (25% down) - 4 units 

$10,200 total monthly rents (pro forma) - rental market has seen softening as of late

$9,770/month after assuming 5% vacancy rate.

$8,981 mortgage at 7%
$2,918 expenses monthly 33.38% of Gross rental income (Prop mgt, maintenance reserve, utilities, Prop Taxes, Insurance, other)

$6,852 NOI/monthly

($2,129) negative monthly cash flow..


Same scenario with 50% down, 

$864 positive monthly cash flow

Not saying it's the best use of capital or the only way to do it, instead providing an example using an available market opportunity to share what the numbers look like.


 My underwriting is a bit more conservative than yours (and yours is more conservative than most I see).  Note if monthly rent is 0.5% purchase ratio, the property tax will be ~20% of the rent.  Using your ratio that leave 13.38% for pm, insurance, maintenance/cap ex.   You can see why I am more conservative.  In fact assuming attached 4 small standard San Diego units, my maintenance/cap ex would be $1200 or almost 12% in your scenario.  So my property tax and maintenance/cap ex estimate use virtually all your expense estimate.  Utilities, insurance, pm, misc would place my expense estimates about 10% higher than your estimate.

we agree that mls San Diego properties at 75% LTV are likely large negative cash flow.

I also agree that RE appreciation is unlikely to match the last dozen years, but you never know.

Where I am unsure we agree is that paying $450k to improve the cash flow ~$3k (your numbers but I expect my delta wold be similar meaning both my cash flow estimates would be worse than yours but both would be worse by the same amount not affecting the difference) makes sense especially if the cost of having the extra $450k is only 6% rate which is historically simple to beat via numerous investment options and hopefully no one is investing in RE for an expected of 6%.  

To look at it from a months to recover, $450k divided by $3k is 150 months, which is 12.5 years.  I do not make investments that forecast an over 12 year recovery.   This is what is being advocated by buying the cash flow.  Note this calculation gets worse if you recognize the declining value of currency.  In inflation adjusted dollars, this likely is closer to 15 years to recover the $450k.  I have never held a mortgage 15 years (or even 12.5 years) and I have had quite a few mortgages.

I claim that it is better to have the negative cash flow and use the $450k to achieve a return in excess of the 6%.  This is especially true in appreciation markets.  If you put it in RE hopefully your return is many times the 6% (4x the 6% minimum). 

I recognize no one likes negative cash flow.  Worse than negative cash flow is buying out of negative cash flow at current rates.

Note I put forth certain effort to keep my leverage high Until the recent rent hikes, it was fairly simple to refinance every few years and keep the leverage without large penalty from rate differential. Today my rate differential would be a doubling of rates so my LTV may be at all time low. Nice to have a problem that the properties have appreciated so much that the LTV is below my desired LTV goal. Note if rates were still below 3% I would not have this problem.

Hopefully I have given you something to ponder.  


Dan, I appreciate the thoughtful response, many things to consider and certainly a lot of great information.

For the expenses, yes at 33% I would agree it is a little thin.

You bring up some great points as it relates to opportunity cost and the payback period with a large down payment. Something to definitely consider evaluating more. I appreciate your viewpoint and sharing your thoughts! So thank you for that. 

Do you typically reevaluate your current returns based on the net equity you have in your properties? I've found a lot of investors focus solely on the return they're achieving based on the initial investment in the property.

i.e. - 12 years ago you purchase a duplex for $400,000 with NOI of $30,000, for a return of 7.5%/year. However, that property has now appreciated to $1,250,000 resulting in a net equity of say $950,000 after mortgage and closing costs. Their actual return is 3.1%/year on the equity in which they've acquired over that time. With completing a 1031 exchange into a more expensive property, their depreciation table would reset as well, providing an even greater benefit.


Curious to hear your thoughts. 

Getting back to the original post, what would be a strategy you'd explore given his circumstances? 

 I understand the concept of ROE but there are a lot of unknowns. 

There is no doubt my best return would be to flip after rehab, but then I have a job as a flipper. I do not desire to be a flipper.

Because the rent to value is at all time worst (according to 2 recent studies) and because San Diego is a poor cash flow market, better cash flow is available in other markets for new purchases compared to my market. 

However, prop 13 is a gift to long holds, my interest rates are high 2s or in the 3s, and everything was financed (cashed out) between Dec 2020 and Dec 2021 (when the government tells you they are going to raise interest rates, it is generally a good idea to believe them). So my cash flow would be very difficult to achieve per my equity position on an acquisition today.

The tougher to predict return is from appreciation.  My worst appreciating local property was purchased with poor timing and has appreciated $2700/month.  I suspect this is worse than virtually all other local RE purchases.  My best appreciating are over $10k/month of appreciation and similarly I suspect this beats virtually all other non-commercial (<5 units) residential RE in my market. 

I plan to hold unless the rules change.  If the prop 13 benefit vanished tomorrow, I would analyze whether I should sell.  Similarly if my low rates vanished tomorrow, I would analyze if I should sell.  The way things sit today, I am comfortable continuing to hold

Even though cash flow is at an all time low, I still believe in RE investing for long hold. 

Good luck 

Post: is now a good time to buy investment real estate?

Dan H.
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  • Poway, CA
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I will be the contrarian.  Is it a good time is relative.

It is the worse time in many respects since 2010.  Two studies have shown rent to value ratios have never been worse implying cash flow on the average purchase is at an all time worse.  Recently the rates were the highest for this century.  Further legislation continues to impact residential RE investments.  The residential prices nationally are at an all time high.  Relative to the past 15 years, it is a poor time to buy residential buy and hold.  

However …

- even with this being relatively a poor time to Purchase residential RE, I suspect a 10 year hold will produce better return than most other investment options

- there are a lot of ways to invest in RE.  There is a very small chance that they all would be poor at the same time. 
- there are numerous ways to achieve sweat equity from boring but true rehabs, to development, to various localized sophisticated options.  
- there are various finance options that can help produce better return. 
- even if many buy n holds are not great in the near term, all you need to do is find one that works for you.  

In summary I see deals close virtually daily that I believe only work well with a lot of patience (more patience than I have).  However I also regularly see investors finding deals that work for them.  I will add there are some creative and skilled RD investors.  

Good luck

Post: Seeking Advice on House Hacking Strategy: Buying Single-Family Home to Build Duplex i

Dan H.
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Quote from @Jerome Morelos:

I used a fixed rate second to finance the ADU, paying about $475/month for it. Currently renting the main house as a LTR and the ADU as a MTR. I am NET cash flowing just over 1k (includes maintenance, repairs, cap-ex, vacancies, utilities), which is pretty good considering this is in SoCal. This is also accounting for my increase in insurance costs due to adding insurance to the ADU. There is no rent control in my area. I bought the main house as a fixer upper and forced a modest amount of equity prior to the construction of the ADU, I did not incur a negative equity position. Property appraised for 620k earlier this year after the ADU construction (appraised it to remove PMI) and I owe $375k on the mortgage + 59k fixed rate second. So I'd say it's a good investment. But I could see your point @Dan H. as to why it might not be a good investment. I actually read one of your posts on this topic years ago, which influenced me to carefully choose the right market. 


 > There is no rent control in my area.

AB1482 applies to your existing house unless it is newer than 15 years old and may apply to your ADU, seeing it is a garage conversion, if the garage is over 15 year old.

What rate, term and amount borrowed did you get for the ADU build and what was the cost? I will say if you did garage conversion for <$200 sf, you did good at your construction cost. Was this hands off or did you do some of the work yourself?

What did you estimate for maintenance/cap ex for the 2 units and how did you derive the number? Did you use 1.1% of ADU cost for prop tax? What ADR did you use for MTR and how did you derive the MTR ADR (or different what rent and what vacancy factor)?

I maintain even break even on valuation (which is rare in SF Zoned areas), the ADU has big disadvantages versus new property acquisition including financing, level of effort, rent control, prop tax being based on cost rather than value added, length of time including length of time from first expenditures to first income, reduction of something from existing unit (in your case existing home lost its garage).

Did you see starting next year Mf can add an ADU per unit up to 8 units without any affordable housing concessions?

Good luck

Post: Seeking Advice on House Hacking Strategy: Buying Single-Family Home to Build Duplex i

Dan H.
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Quote from @Jerome Morelos:
Quote from @Robert Ellis:
Quote from @Jerome Morelos:
Quote from @Robert Ellis:
Quote from @Jerome Morelos:
Quote from @Robert Ellis:
Quote from @Jerome Morelos:

I recommend converting an existing space, like a detached garage for example, rather than building from the ground up. The cost to build will be significantly more than the amount of "value add" of an ADU putting you in a negative equity position. Better to spend $60-80k for a conversion than over 120k.


 new construction gets valued at a way higher premium. this is a false statement. new construction will always beat existing 

Very market dependent. There are not many ADU comps in my SoCal area YET. It's starting to catch up though. A new construction ADU will be appraised significantly less than the hands-off construction cost. A new ADU will cost over 120k to build and will not be appraised close to that from my experience and many other investors I've spoken with. You can also find many examples in the forums of people experiencing poor valuations due to lack of comps. Building a new ADU will put you in a more "negative equity position" than converting a garage for example, which only cost <200 per sq ft.


please send me a case example I'd love to read. that's one appraisal. the knowledge I have as a licensed general contractor working with investors from 5 cities at a time all over the country buidling 3 different floorplans I would say trumps one ADU you read about online

This is from my own personal ADU that I recently built and recently appraised earlier this year. They only appraised it for 75k. They are not appraising ADUs equivalent to the construction cost in my area, I can guarantee that. There's just not enough ADU supply (IN MY AREA) for appraisers to base off of. Though I expect that to increase in the future when more ADUs are constructed. Like most things, the value of your ADU is relative to the area you're investing in. More ADU supply = more comps, potentially higher valuation.


there you go. the problem is appraisal. comparable sales, and your approach to building an ADU against the recommendation of your market. super beginner strategy it's popular in ohio as well but just not worth the investment.

There's an obvious housing shortage here in SoCal. More and more ADUs are being built. There are even ADU grants being offered. I personally used a 40k ADU grant with CALFHA HPP Cares that covered a chunk of the cost. So I almost "broken even" with the cost of construction vs. valuation aspect. It's still a worthy strategy to force cash flow that's rare to find in SoCal, especially if you can reduce the cost of construction by doing a conversion/using an ADU grant or even buying a property with an existing ADU


In general, even if the ADU valuation matches your cost including grants, they are usually not worth it in southern CA in single family zones.

What is your rate, term, LTV, and rent? Did your primary become rent controlled and if not what exempted it from rent control? I assume your prop tax increased 1.1% to 1.2% of the ADU cost even though the ADU only valued at $75k???

Here is a list of what adding ADUs 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.
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.

The reality is there are many issues with ADUs as an investments and the poor valuation is just one of them.  

Best wishes