All Forum Posts by: Dan H.

Quote from @Ray Hage:

I wouldn't worry too much yet but if after a couple more days of no activity, I would bring the price down a bit to be closer to the top end of the market and see if there are recent comparables that have been rented (especially if you have access to the MLS)

 I disagree about not worrying about getting no interest in 2 days. Every market is different, but when my add first gets posted get inquiries immediately.

These are rough numbers, 30 inquiries results in 5 to 8 property views, that results in 1 to 3 applications received. In my market, it requires a lot of inquiries to get a qualified tenant. If you have zero inquiries, you are not likely to get a qualified tenant.

By the OP’s own numbers, he is above the top end of average rent range.  OP does not state any reason his unit warrants above average rent.  Note, because it looses money otherwise might be a reason from the LL’s perspective but is not from the tenant’s perspective.  

I highly question the underwriting performed.  Note I do my underwriting with conservative numbers so I would have used $1500 rent, but seeing that the OP apparently wants to use top down f market rent.  

$1800 (high end of rent range) - $1535 (hopefully mortgage includes full PITI) - $90 (5% vacancy) - $400 maintenance/cap ex - $180 PM (at that low rent point I am using 10% all inclusive) - $50 misc (bookkeeping, utilities that are not tenant responsibility such as slab leak, tax man, allocation of asset protection, etc). Negative $455/Month and at that price/rent point, poor historical rent growth and appreciation.

What is the expected source of return?  Note residential RE is not passive even with the use of a pm.  To be worth the effort, it should produce return significantly greater than passive options.   D you see this property accomplishing that?

Good luck

Quote from @Renee Coss:

These are great ideas!  

My garage is a two car garage. It does not have a bathroom. How will i rent out the garage with no bathroom?? How will that work??

 The prices I listed was to rent the garage as a garage, no bathroom required.  These are the prices to rent garages in San Diego area.  

https://sandiego.craigslist.org/search/prk?query=garage#sear...

If you can rent a 2 garage at $450 without spending ~$150k for a garage ADU conversion, no work/risk of the ADU conversion, the lower maintenance/capex, easier eviction, no rent control, less tenant interaction, it will not convert your SFR to rent control, etc, it seems superior to the garage ADU conversion.

See my long list posted earlier of the issues adding an ADU.

Good luck

In general hands off ADU additions cost more than the value that they add.

Have you looked into what the garage could rent for as a garage?  In my market, 1 car garages go for $225 to $300 and two car garages go for $350 to $500.  you have an easy house hack opportunity that does not have the disadvantages of an ADU.  

Here is a list of what adding ADUs, especially in single 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.
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

Quote from @Stephen Keighery:

BRRRR is awesome. I have done around 25 of them. The key is buying them at a heavy discount so you can add value and pull all your capital out. It is more challenging to cash flow with interest rates and insurance right now so you need even deeper discounts when buying.

I agree with what Stephen stated but believe he under emphasized the challenge.  I can find good flip properties.  Properties that used to be good brrrr properties.  However, today when I refinance at high LTV to extract my value add, I am in a large negative cash flow position.  

This is why my last brrrr purchase was in Dec 2021 and because it is unlikely that my next purchase will be a brrrr even though I have made a lot of money from BRRRRs.  Sometimes you have to pivot.  It is my belief that the rate increases have pretty much curtailed successful BRRRRs.

good luck

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