All Forum Posts by: Dan H.

 Exactly this and why you should not do cash for keys to reward poor tenant actions.   You are training the tenant on exactly how to $crew the next LL.   If everyone took the cash for keys approach, then the odds of a LL getting such a tenant increases.

I have never had to do a cash for keys.   I have been asked quite a few times.   I suspect most who requested cash for keys had previously received cash for keys.

What I do instead is explain:

- the housing shortage in my market and that an eviction will forever make it difficult to find a quality rental in this market. 
- I will ding their credit such that all credit cards and other debt will cost them more.

- I will keep their security deposit for funds owed.

- I will do my best to garnish future wages until their debt to me is paid in full.

This has worked 100% time so far.  Zero evictions and zero cash for keys.   My family has had rentals almost 50 years.   I think it is good screening, luck, and that my tenants believe what I tell them.

Do not reward tenant bad behavior!

What is your source of the 10% difference data? I have considered doing a TIC/coop in San Dego but have the belief, without any data except for how I would value the financing challenges and tic risks, as being much greater than 10% price difference from condo price. I expect greater than 10% just for the loss of residential F/f financing.

at 10% difference, or even 15% difference, coop would be up there with lot splits on sophisticated value add.  

I did the below research a couple/few years ago (so info is slightly old) but never ended up doing one but for those who watch my posts, I have indicated it is high on my list for Q4.  my hope is to get a nice unit for my son at below 50% of retail.  

TIC in this case is virtually synonymous with coop.

finance items

- There are several ways to finance TICs – group loans and fractional loans are the most common.
- Fractional TIC loan: you can now own a unit in a building that isn't classified as a condominium, yet from a financing perspective, will feel that way. Fractional TICs give owners the financial independence that has been associated with condos, without the need to wait for a condo conversion, a process which can take anywhere from 2 to 10 years depending on the specific requirements for the subject property. Fractional TIC loans are available for both owner occupied, second homes, and investment properties. A default by one co-owner results in a foreclosure on only the defaulting owner's share, and does not affect the other co-owners.
- Both Sterling and Bank of Marin offer financing to TIC developers for acquisition and renovation of buildings that will then be converted and sold as tenancy in common. These loan products include a partial release feature that allows them to be repaid gradually as TIC interests are sold, and ensure that the sold TIC units are not encumbered by a blanket encumbrance.
- The variety of financing products available as individual tenant in common loans remains limited, and the terms are generally less favorable than either apartment building loans or condominium loans. The maximum fixed-rate period seems to be seven years, and there is generally a balloon payment at 10 or 15 years. Rates tend to be 25 to 50 basis points above commercial (5+ unit) apartment building loans, and 50-100 basis points above residential (1-4 unit) loans. Loan-to-value allowances vary, but seem to top out at 75-80%, and even that figure can be misleadingly optimistic in light of the appraisal difficulties (described below). Secondary financing is generally permitted, and the realities of the marketplace usually require the seller to carry financing for most buyers. Underwriting guidelines are more strict than on residential loans, and buyers who might qualify for a condo loan sometimes cannot qualify for an individual tenancy in common loan. Many lenders also impose additional requirements such as owner-occupancy, and/or that one lender make all of the institutional loans in the building.
- Valuation: The variety of financing products available as individual tenant in common loans remains limited, and the terms are generally less favorable than either apartment building loans or condominium loans. The maximum fixed-rate period seems to be seven years, and there is generally a balloon payment at 10 or 15 years. Rates tend to be 25 to 50 basis points above commercial (5+ unit) apartment building loans, and 50-100 basis points above residential (1-4 unit) loans. Loan-to-value allowances vary, but seem to top out at 75-80%, and even that figure can be misleadingly optimistic in light of the appraisal difficulties. Secondary financing is generally permitted, and the realities of the marketplace usually require the seller to carry financing for most buyers. Underwriting guidelines are more strict than on residential loans, and buyers who might qualify for a condo loan sometimes cannot qualify for an individual tenancy in common loan. Many lenders also impose additional requirements such as owner-occupancy, and/or that one lender make all of the institutional loans in the building.
- The CA rules seem to have many rules related to financing such as seller must include appraisal, no balloon payments before 10 years, etc. definitely need to have lawyer look at it.

Risks/additional hurdles
- On the practical side, the absence of deeded rights makes tenancy in common ownership considerably more risky than condominium ownership, even where the TIC owners have separate financing. The increased risk is generated by the fact that the owners are relying on the validity of the tenancy in common Agreement for their usage rights, and it is possible to imagine legal circumstances under which this validity might be undermined.
- If the subdivider or someone with relationship to subdivider sells, a public report must be done. How much work is a public report?

Links/references

- https://www.canva.com/design/DAFHd-6ryQ8/_T6h0Y9jV0zIEADl6bq... 

- https://therentalgirl.com/tic https://andysirkin.com/tenancy-in-common-tic/operating-and-m... 

- https://www.stonesalluslaw.com/tenancy-in-common-in-californ... 

- https://www.investopedia.com/terms/t/tenancy_in_common.asp 

- https://www.rocketmortgage.com/learn/tenancy-in-common 

- https://www.allcalifornia.com/tenancy-in-common 

- https://andysirkin.com/tenancy-in-common-tic/guidance-for-se... 

- https://www.dre.ca.gov/files/pdf/tic_guidelines.pdf

by the way I received a lawyer referral who is supposedly familiar with tic in California. Andy Sirkin, based in San Francisco but supposedly has done some in Las Angeles. Seeing I have not done a tic, I have not used this lawyer myself but I suspect CA lawyers with TIC experience is likely limited.

Good luck

Was the SFH in a single family zoned area? Can you provide the address of SFH with ADU & JADU additions? Something seems very unusual about this. I have access to all lender appraised values in CA so I only need the address.

In general in single family zoned areas, JADU typically subtract value (I suspect largely due to the OO requirement). ADU increase value less than the hands off ADU addition, but a developer is not a hands off ADU addition.

Thanks

 My market is San Diego so I do not have direct referral for a GC in north Hollywood but I will say my preferred way to get contractors is direct referral. I consider the two best sources is from other trusted contractors and other RE investors.   After those sources are RE agents, mortgage brokers, friends and family.  Behind referral on on-line sources like Next door, Google review, FB marketplace, etc.   of those I like next door best because it is hard to fake and the reviews are easily tied to a reviewer in your community.

The costs of ADUs vary significantly for various reasons including by ground up vs conversion, difficulty with lot (sloes, access, etc), finishes, and even the size (bigger typically have lower PSF).

Good luck

 The good GCs charge 20% but this does not equate to your savings because the GC will have better contacts, have namer experience coordinating contractors, be more familiar with permit process and expectations of the inspectors.   My belief is that you will be challenged to realize a 10% savings loan n your first effort and there is some chance it will cost more than if you used a GC.  

I would recommend against being the GC unless you are confident of doing more than one effort.   We act as GC on our efforts but we have gotten tired of the effort involved.  So. I am training our son to basically do the rehabs but there is a learning curve.  He is leading his 2nd rehab and it is taking longer than I would take (but I have done it many times).   In addition I am giving him freedom to explore (to a certain extent) on my dime. This is for a LTR in a nice area (A-/B+ area (pt Loma), but B unit due to MF).  For example he is trying to place a bookcase door to access a small amount of storage from the bathroom.   No way we can get additional rent to justify this effort. He is also planning on a tile accent wall.  Again I cannot collect rent to justify this cost/effort.   He is putting in a spa (I think because it is 4 units this expense can be justified).  We wants to rip out a perfect pre-fab shower enclosure to put in a custom tile enclosure.  I think I will not let him make this upgrade as a 5 year payoff would require over $100/month additional rent.  

My point is certain things are learned with experience and 1) acting as GC once does not provide an opportunity to leverage the experience 2) mistakes can be costly.

good luck

I agree with what Rick stated but believe he intended this for a single ADU in a single family zoned area. What you propose is different but in your original post this was not clear.

with the additional info, I have seen similar comped with quads.   I have also seen appraisers recognize that multiple ADUs by rule does not qualify for conventional F/f financing.  The impact of not having F/f financing is large (>10%) if the appraiser recognizes this potential issue.  These appraisers are too educated as in general this rule is virtually never applied on MF lots (I have heard of it once).  I think it likely an appraiser will value your duplex with 2 ADUs via comps with quads, but recognize there is some risk assuming this.   I likely would take a safe approach in my underwriting and value it with the quads then subtract 15% off the total.  Then I would hope the valuation comes in at the value of the comped quads.  

Note if you go over 4 units, your valuation will be based on NOI and comp rate. This likely will result in a lower unit value than if value was derived from comps (especially seeing commercial MF values have fallen in recent times).

Good luck

 >There are MANY landlords with properties on the west coast and in the New England states, that deal with negative cashflow - but, depend on appreciation to make their rentals "profitable".

I am very familiar with west coast markets and investors on the west coast market typically only have negative cash flow if they recently purchased or recently did a high LTV extract of value. This implies most have positive cash flow. And unlike some Midwest markets this positive cash flow is such that it includes realistic sustained expenses.

How is this possible when west coast markets have poor initial cash flow?   Simple, there is a tight coupling of appreciation and rent growth.  The high appreciation results in high rent growth resulting in great cash flow over a long hold if no equity growth is extracted.

A few years ago case logic indicated my market had an average annual rent increase of $600/month.  This amount of average rent increase can quickly improve the cash flow.

By the way you can definitely live off cash flow. I retired from my w2 job a few years ago, but recognize that no W2 income reduces loan options. Especially OO loan options become scarcer.

Good luck

I have done quite a few brrrr, but the market interest rate results in large negative cash flow when properly allocating expenses for a sustained hold. I am currently not looking at BRRRR as an option.

Fortunately there are a lot of ways to make money in real estate.  So pivot to an option that the underwriting depicts a return that justifies the effort and risk.

good luck

 Appreciation is tax deferred not tax free for RE investors meaning if you sell without a 1031 or dying, taxes are owed.

Rent growth has more impact on cash flow than initial cash flow on a long hold.

Case Shiller used to publish the top residential return large cities since 2000.  I have not seen it in a few years, but the top 3 were CA cities and the top of the list was heavily CA cities.  When you looked at the numbers on the top 3, they all had good cash flow and great appreciation (the numbers were calculated as though no equity had been extracted).  It was bonus that CA had near fixed property taxes.

The low vacancy rate decreases the odds of getting a bad tenant because the tenants realize then will need a good LL reference to obtain local housing.  Not only is the eviction rate near the lowest in this country, but the delinquency rate is near the lowest in this country.  So any difficulty with evictions is mitigated by rarely having to perform an eviction.

There is a reason that CA has the highest percentage of investor owned SFR in the country and the reason is not that there is a bunch of stupid RE investors investing in CA. It is because the return has been outstanding for decades and the data projects it to continue.

Total Investor Home Purchases Are Unlikely to Dip Due to Rising Interest Rates | CoreLogic®

Why do people buy property in California?  It is for the great return and the ease of owning.

Never the less, I recommend RE investors invest in their local market.  This is true if it has good initial cash flow or poor initial cash flow (Like my San Diego market).

Good luck

 >One major issue and they can be wiped out.

Having negative cash flow does not imply not having the reserves to handle every issue.  Do not confuse the two.

>Hoping and praying for values to rise isn't a good strategy.

Hoping and praying for values to rise may not be a good strategy, but researching a market to understand the data make appreciation a near certainty can be a very good strategy that can dwarf the return from cash flow in the best cash flow markets.  The data backs this whether it is derived from case Shiller top performing residential markets for this century or it is based on the data of the top appreciation markets in neighborhoodscout.  My worse appreciating unit has appreciated $2700/month over its hold.  My best appreciating properties have appreciated over $10k/month over the hold period.

the best investors evaluate the risk associated with return.   If something has only a 1 in 2 chance of occurring but returns 10x if it occurs, that is typically a good investment.

My last purchase (not the one I am currently under contract but last purchase) was large negative cash flow at aquisition.  Today it’s value is up ~$1m and it has positive cash flow.

Do accurate and conservative underwriting.   Accurate includes researching the market and understanding what the data indicates.

Good luck