All Forum Posts by: Dan H.

My strategy would be to hold it until at least the market is no longer depressed.  Try to never sell in a depressed market.  You try to purchase in a depressed market.   Most depressed markets have been less than 5 years in the high appreciation cities.  Do not over leverage and there will be no reason to sell in a depressed market.

Interesting thought but I will propose something for you to consider: A class 4 BR/ 2 BA, 2000' in an A class area provides a 1.3X and a different 4 BR/ 2 Ba, 2000' in a class C area, class C property produces the 1.5X.  Both are geographically in the same vicinity.  The A class property has $1K "cash flow" (using your definition of cash flow) and the C class has $1K "cash flow".   So your criteria would have the class C being the one that would be purchased.  Which do you think is likely to produce the better actual cash flow?  Note in reality I am likely underselling the "cash flow" of the class A property because to produce 1.3X on an assumed much higher purchase price it would produce better than the same "cash flow" as the C property (otherwise it would not have achieved 1.3X).

Many of the repair costs are similar for an A property versus a C property.  Basing maintenance/estimated cap expense on purchase price or rent price has flaws.  In general the A property will have better tenants likely reducing damage and wear and tear.  In additon the A class property will have nicer quality items providing longer expected life times (what is the life span on travertine tile: 50 years?).  The A class will require nicer kitchen, bathrooms, flooring, etc. so there is definitely an increased cap expense estimate partially offset by increased life spans.  However, items like plumping, hot water heater, foundation, structure, etc. are very similar regardless of the class of the property.

BTW I did an analysis of my RE and only 1 property that I owned more than a year did not meet your criteria today.  I suspect most did not meet the criteria at purchase. 

Just hoping for appreciation is for people who do not want to bother to study historical data, supply and demand, vacancy rates, income increases, cost of building new supply, population growth, etc. There are markets that in over 70 years do not have one 10 year span anywhere with a net decline. Some of these markets it costs >$100K to break ground on a new SFR. I can say with a lot of confidence that I can research a market and provide more basis for it having a higher RE value 10 years from now than a Midwest market can provide convincing evidence that their rents will not fall like Detroit did in the Great Recession. I do not consider investing in these types of markets any more speculation than investing in a Midwest cash flow market.

As for getting money out ... You certainly do not need to sell. You can try to find Equity Line of Credit but they are getting more challenging to find on rental properties. however, as long as rates continue to be low a refinance works for getting money out of a place that has appreciated (either marked appreciation or forced appreciation). Refinance is a key R in the BRRRR process.

I agree with the posters that indicated 12% COC is not enough in a 0% appreciation market. It is too close to the returns of S&P 500 to justify the effort. Because there is no compounding (i.e. the rent is unlikely to increase) my return on the S&P 500 (with compounding) will surpass the cash flow RE property given time.

One thing to note that I did not see mentioned above is the 0 appreciation market typically has 0 rent appreciation. This in effect means that the return is decreasing by the inflation rate. The high appreciation market may have 3% COC upon purchase but if the property appreciation is 6%/year you can expect that the rent will appreciate. 5 years from now when the RE has appreciated ~34%(assuming the projected appreciation actually occurs) you can bet the rent will be higher than at purchase and that the cash flow will be higher than at purchase.

I do not need cash flow from one property for my living expenses as I have my cash flow from previous RE purchases and my other investments.  I would take your scenario 2 every time.  Not only would I, I basically have.  Most of my RE investments have been in a high appreciation area that provides minimal cash flow (compared to Midwest locales) upon purchase.  I will add they cash flow outstanding today.  One purchase cash flows annually more than I invested at purchase and it was not a cheap property with a real cheap down payment; how is that for cash flow?

I will add that even historical high appreciation markets have RE declines (typically less than 5 years from peak to new peak). Anyone who invests anywhere has to be prepared for market depreciation. If you have minimal cash flow you need to be sure that you are not relying on appreciation to meet your financial commitments.  Selling when the market is depreciated is the only way for investors in some of these high appreciation markets to have lost money.  Any RE investor needs to make sure that they are not so leveraged that they may need to sell when the market is depressed.

Good luck

Note I am not an expert on LLCs but I pay for experts to provide us guidance.  Based on that guidance I will describe what we have done.  Realize your own experts may provide you guidance that leads to a different decision.

In CA the LLC is $800/year. We pay the fee but we do not expect that it provides any real asset protection because our properties are not owned via the LLC. So we pay the $800/year for the name H3 Properties LLC and because superficially it looks like the properties are in an LLC. If the appearance of being in an LLC prevents one law suit it is well worth the cost but it may not ever prevent a law suit. If a law suit is filed we are not relying on the LLC for any asset protection.

We use an umbrella insurance coverage for our asset protection. It is easier to use as LLCs have requirements like separation of assets (personal and LLC assets are to be separate) in order to not be pierced for asset protection. Typically SFR to quad are purchased via conventional financing. Good luck trying to get conventional financing for a property being purchased by an LLC.

For asset protection an umbrella coverage is almost idiot proof.  To raise the coverage amount the cost of coverage goes up slowly (I.e. $10M coverage is no where close to 10 times the cost of $1M coverage).  We have enough coverage that we cannot fathom a lawsuit seeking more damages.

Good luck

Have you considered just adding a subpanel with a submeter?   I suspect there is a small number of electrical runs from the primary unit to the secondary unit.  Run them to a metered subpanel.   I have had subpanels added but not a metered subpanel.

I do not know how much a submeter is but I know that the inverter for my solar has a submeter (I.e. I can find out how much power I generated as well as how much power I used).

Of course the utility company would not read the submeter.  In some locations in Germany they have a meter for water for entire property and a submeter for water for the garden/yard.  The sewer fee is based on water that is not for the yard (water into house - water used for yard).  The property owner reports the water use on the submeter.  I suspect there is an occasional verification that the reported submeter water is accurate. 

Good luck

I thought it was a fair approach as people with large yards in US where sewer fee is based on total water use pay more sewer fee than what they use.

I am not anti-stocks; I consider stocks to be the easier money.  However to significantly beat the indexes takes a lot of time doing research that does not interest me.  To beat the indexes you are not only are competing against investors such as yourself but you are competing against asset managers whose full time job is to try to beat the indexes (and they only have mixed success doing so).  So most of my stock is in index funds.

For me RE is more hands on but I also have more passion in that area.  In my locale of expertise for my selected product I am one of the experts.  The appraisers for example typically have not seen most of the comps; I have.  I can tell when a product in my wheel house in my locale hits the market the amount of time it will take to sell.

Some of my stock assets are due to using stocks to place RE profits waiting for the next RE purchase ...

My ratios: Stock: 43%, RE: 43%, North Dakota Mineral rights: 8%, Cash and bonds: 5%.  For my age I am high risk investments (i.e. my stock holding is much higher than recommended with respect to bonds).  

Basically invested evenly on stocks and RE as percent of our net worth. 

I have made significantly more money from my RE investment per dollar invested but I have also spent significantly more time on RE investments per dollar invested.

I am a big proponent of newbies investing local to where they are located. I realize Seattle has a fairly high entry cost but some of that can be negated by house hacking a detached duplex. As owner occupied you would have a significantly lower down payment percentage and a lower rate. In addition, Seattle has pretty good historical appreciation which can help with ROI. Texas has lower entry costs but property tax is severe in many locations and there are many locations that have significant foundation issues. Then there is the occasional hurricane. We owned an OOS property (Gulf Shores, Alabama) that got hit by 2 hurricanes in a short duration of time so it does happen.

The primary reasons that I am a big proponent of investing local are 1) the learning opportunity that comes with self managing a property.  This knowledge if so valuable.  As Rich Dad Poor Dad indicates the knowledge is priceless and there is no way investing OOS with a PM you obtain the same type of knowledge 2) requires less reliance and trust on others.  You are in control.  You will be much better prepared to build that killer team for OOS after you have acquired certain knowledge that is best learned hands-on 3) Local provides the potential for owner occupied which has better loan terms (lower down payment and lower rate).  4) Local provides you the best opportunity to be an "expert" on the area.

So if I were you I would wait until after I pick where I am going to live before purchasing.  I would then house hack a detached duplex acquiring as much knowledge as I could.  After I have a little experience I would consider if I was ready to take on the challenges of OOS RE investing.

Good luck.

> You can find a much better ROI in the Midwest.

You are a professional. You know that historically your statement is not true. If you do not know it is untrue then simply pick a coastal city in CA and compare the ROI to the best city in the midwest for 5 years, 15 years, 20 years, 30 years, 40 years, 50 years and reply indicating which Midwest city beats the worst coastal Cal city for ROI (i.e. list both cities and the time frame). I am confident that you cannot find one especially if the purchase is financed.

If you indicated cost of entry is less in the Midwest, cost of purchase is less in the Midwest, initial cash flow (at purchase) is often better in the Midwest, that much of the Midwest has more friendly landlord rules, or that there are places in the Midwest with lower property tax rates then I would not be taking exception to your statement.

However, I know that you know that your statement is historically not accurate. I challenge you to find the Midwest city that has produced a better ROI than the worst coastal Cal city for any of durations listed. You provide one and I will retract my statement indicating that you know your statement to not be true.

Good luck with that challenge

 Never had scented candle smoke damage but I did have the worst smokers damage that I have seen in many years.   It was an inherited tenant that stayed a total of 23 years (23 years of heavy smoking).   We did everything except paint the foundation to remove the smoke smell but when the unit has been closed up a couple of days you can still smell the smoker smell. 

Ceiling texture removed, ozoner used, industrial deodorizer, kilz primer to seal, new paint, all flooring except tile in bathroom and kitchen removed, it had no heat ducting.  If I were doing it again I would seal the cement foundation with something like the kilz primer.  Other than that we did all that we could and the smell still lingers.  

Fortunately the smell is reduced enough that just living in the unit provides enough air movement so that it does not smell; for tenant turnover we need to open the unit up prior to the showing otherwise it has some smell. 

We were already all non-smoking on tenants we had placed but this confirms our policy.  

The longer a tenant has been a good tenant the more forgiveness they have earned.  

However in no case would I give them no penalty for breaking lease early.  if they have been a good tenant for 5 plus years and leave the place with little effort to flip to the next tenant I would probably charge $50 early termination.  If they have been there less than 2 years or the place is not handed over in very good condition I would keep the 13 days of rent.  

In both cases they need to know providing less than 30 days notice is not acceptable   

Good luck