All Forum Posts by: Dan H.

Rent control does not apply to SFR or 2 units if the owner occupied before the tenant.

I suspect a majority of MF for sale in San Diego are not at “market” rent but some of them may be at fair rent because they are in poor condition.

Until the last 2 years our market rent increase was the rent control increase and prior to the last couple years that meant 10% increase to existing tenants (actual average increase was above 10% in some of those years due to the tenant turnover increases driving it up).

Class c here, if you manage well, are not too tenant cumbersome (but I still, do not recommend and I have maybe a dozen class c+ to c units).   Our tenants pay their rents on time even in class c because they will be challenged to find housing without a strong LL reference.  We have one of the lowest delinquency and eviction rates in the country.  There is more tenant drama in class c and they are in general tougher on the units, but they seldom are real bad tenants which is good because when rents are going up a lot, it is hard to get rid of poor tenants.  It is easier if rents are flattish, but I can legally raise the rent 8.8% (~$300/month on my average rent).. I think I will use this to try to get rid of a tenant that is not a bad tenant, but not up to what we desire/expect (she has never been late on a rent payment but does not abide by rules and is rough on the units).

Good luck

You missed my point.  my point is cash for keys encourages more cash for keys and ends up costing LLs more in the long run. 

Both my tenants who explicitly asked for cash to exit mentioned that they had previously received cash for keys.   I explained I do not do cash for keys and that I will do everything I can to collect what is owed and make sure the eviction is public making it hard for them to get another quality unit (in my market if you have an eviction you will only be able to rent slumlord units).  Both times the tenant has moved out because they know I will, pay the best lawyer I can find to make it happen.  We have never paid a bad tenant to move out.

By the way tenant's talk to each other. Do you think you can pay cash for keys without the other tenants knowing you did this? Maybe if Al, your units are SFH, but not likely in MF.

Seeing we have had 100s of tenants over the ~50 years my family has had rentals and have yet to pay cash for keys to a bad tenant, I will still be ahead the first time I will need to pay a lawyer versus having paid tenants to leave.

I agree that the low vacancy rate and tough tenant screening criteria of my market plays a favorable role. 

However, paying bad tenants to leave encourages the behavior and expectation.  I will not be encouraging this behavior.   so far it has worked perfect for me.

I will continue to advocate that LL have the fortitude to not pay poor tenants to leave.  This encouraging of this behavior increases the expectation for cash for keys which ends up increasing LL costs.

Sometimes you need to lose a battle to win the war.  I care less that one eviction may cost more than going the cash for keys route.

best wishes

If you took the average SFH in San Diego ($1m median), it would rent for significantly less than a 0.5% ratio (my guess is a little above p.4% ratio). Of course these are not what the typical RE investor is buying. Re investors are either purchasing small MF, in c class or below areas (not an approach I recommend), off market, and/or value add to achieve a slightly better ratio. A 0.7% ration on an mls purchase is very good in San Diego. This 0,7% ratio at the San Diego high rent points used to depict some cash flow (not much at 80% LTV, the return in San Diego RE is via appreciation and rent growth) before the interest rates doubleD, using my underwriting. Now they are large negative cash flow and the appreciation and rent has been flattish over the last 2 years (depending on the source of the data).

Another approach some San Diego RE investor have been taking is buy below market rent properties at slightly below the value represented by comps.   the ratio at purchase on these purchases is typically far below 0.7% and can be below 0.5%. There is statewide rent control and San Diego city has a slightly more restrictive rent control (both applying to MF (2 units or more) only).   These below market rents can be quickly raised at the end of lease by doing an extensive rehab that tenant cannot live in unit (more than flooring, unless flooring has asbestos or painting).  Under this extensive rehab, the LL has to pay the tenant to leave (2 months rent in San Diego city, 1 month rent statewide).   Alternative is they can move a close family member into the unit at same buy out.    

Or the LL can raise the rent within the rent control restrictions (local CPI + 5%, capped at 10% - currently 8.8% for San Diego).   This could take many years to achieve market rent and prior to the last couple of years was loosing ground because the market rent increased more than the LL could raise rents on the below market rent units).

The LL collecting below market rents end up losing cash flow monthly and they lose more at exit because they have to sell at a discount due to below market rents and no easy ability to raise the rents to market rent.

Not hard to see why my last local purchase was over 3 years ago,just before rates started going up.

Good luck

I understand having financial difficulty.   My issue is are you really the person who should be helping the tenant with their financial struggles?   Do they have family?   Friends?  Belong to a church?

Recognize your generous, kind actions will not always workout the way you (and everyone) desires it to.   Many times people think they can recover but cannot.  

If someone provides a schedule and has got behind, what makes you believe they can recover the schedule when so far they have been unable to meet the schedule?  Hopefully you understand the analogy. It usually does not happen.   It has little to do with their intent.

if you take the generous, kind, lenient route, recognize it can cost you.   I am not going to tell you take the heartless, firm approach as that is your decision but I want you to recognize the risks.   The risk of this not working out is not low.

During Covid, I indicated I would not evict anyone who could not pay rent due to real COVID impacts.   As it happens the local legislation forbid anyone evicting for missed payments.  I knew I would be paying the price but I knew I could afford to.   I had 2 tenants request reduced rent due to reduced income.   It resulted in a slight reduction of my collected rents.   Make sure you understand the repercussions of your decision and that you are ok with those repercussions.

good luck

I never do cash for keys. I do not desire to reward tenants for poor behavior.

I explain the consequences of an eviction to the tenant. I explain they will have difficulty Renting a quality unit, that I will ding their credit, that I will attempt to garnish their future income to recover what they owe. They believe I will do what I state because I have always done what I told them I would do.

My market has a low vacancy rate. Poor tenants cannot obtain quality housing. My tenant requirements includes no evictions, ever. No excuses accepted

So far with a combination of good screening and good luck, I have never needed to evict a tenant.

When the time comes to evict our first tenant, I will hire the best lawyer and let the expert take care of it. I will add the cost of the eviction to what tenant owes, and if the cost is not recovered I will consider it a cost of doing business.

What I will not do is pay a bad tenant to leave so that another landlord gets stuck with having to deal with a bad tenant that I have rewarded for their poor behavior.

In addition if I paid a tenant to $crew me, it may cause me to lose sleep. Sleep is precious. I would rather not pay the tenant, pay a lawyer, lose some rent but not lose one wink of sleep allowing the bad tenant to get money from me.

Do not do cash for keys.

Good luck

 >Someone tell me where I'm wrong!

Here is an alternate perspevtive on one aspect of your reply.

>As long as rents are high in the US there will be constant pressure on renters to buy.

It depends on how you define “high”.   2 separate recent studies showed that in virtually every large city it is initially cheaper to rent than to buy and that this is the all time most extreme.   So per those studies and what I see in my market, rents are low relative to the cost of purchasing a home.  Per the studies, people in virtually every one of these cities should rent and not purchase.

My own view, not from the studies, is a property purchased today is at some point in the future likely to cheaper than renting.   This is because most buyers use fixed rate money so the largest expense (P&i) is fixed while inflation will drive up all other cost in most markets it will not be as great as the rent increase.  The question is how long until the purchase is superior to having rented and are you actually going to own the property long enough to benefit from the ownership recognizing the costs associated with buying and selling.

Good luck

Historically San Diego RE has been a great investment.   However, RE is more challenging than in recent times.

However it is my view there are only a few paths in San Diego RE at this moment 1) patience. I am thinking years of patience. San Diego has historically out performed virtually all other markets. Over the long term I believe this will continue. However, other markets have the same issue contrary to the posts from OOS agents. I am not that patient. 2) value adds. For the most part these require work and have risk but there are few markets that do better than San Diego via value adds. My last purchase is up over $500k above my costs in 2.5 years. 3) alternate rent models (rent by room, STR, MTR). These require work. Pay a pm and the profit is significantly reduced 4) path of progress. It is getting a little late to leverage the Chula Vista bay front development. However Brown Field upgrades is in its infancy.

You can achieve cash flow by minimizing leverage.   However, historically the San Diego return is via appreciation.   Leverage magnifies the return from appreciation.   Lower leverage equates to lower return.   Low leverage is a conservative approach that will be reflected in the returns achieved.

Good luck

I would first determine why there is no leach field.    Can a AEROBIC TREATMENT UNITS (ATU) be used to leach cleaner water.   ATUs can be used in septics with poor leaching.    They have higher installation and maintenance costs than tradition septic, but likely will be less expensive than pumping the tank every me it gets close to full.

 Find out what the options are before rejecting the property.   If an ATU. is a viable solution,  you could End up with a. Good purchase because you were able to address a problem that sent other potential buyers running.

good luck

The markets you listed have already arrived.  The returns in such markets is the lowest that any buyer is willing to achieve.

Your task is to identify markets that are attractive but are not widely known by RE investors.  There are many destinations that are not yet known but could be the next “wave”, Dollywood, etc.  When I visited the wave, I visited a site in the area that was every bit as spectacular that is virtually unknown.   I will use the initials for those in the know, C.A

Such markets should have monthly rents near or above 2% of the purchase price with expected rent growth as the attraction grows in popularity. Use a STR revenue tool (airdna, STR insights, etc) to determine the income. Recognize some of these markets have poor competition and it is not hard to exceed the revenue projection. Use the enemy method to analyze the competition.

If you go to a market like the smokies, recognize your expected return will be the least of what an investor in that market is willing to achieve.

Good luck

Not a lawyer.  Verify with your trusted professional.

did you use an estate lawyer?   Do you understand stepped up basis?  Did you get a time of death appraisal?   Do you know that you almost for sure can assume the existing loan even if you would not normally qualify?  

BP has various calculators (look at the various calculators) including one for buy and hold residential investment properties.   If you have zero clue as to expenses you can use the 50% rule.

Rent  * 0.5 - principle & Interest = rough estimate at cash flow.   Most markets currently have negative cash flow especially on single family homes but if the existing loan is older than a few years old it likely has rates below market rates.   This could turn a poor cash flow property into a decent cash flow property.

There are a lot of paths in real estate (RE).   Different rent models (Long term, short term, mid term (furnished long term), rent by room), different financing (including assumable), different strategies (flip, buy and hold, value adds, development, etc), different asset types (residential, commercial residential, office space, industrial, storage units, business, etc).  Educate yourself on the various paths as well as recognize REmay not always be the best path of the path for everyone.

If you are in CA let me know as there is some considerations with regard to property tax.

good luck