All Forum Posts by: Dan H.

I think the numbers are very tight for a flip but maybe a buy n hold investor would be happy with purchasing below market.  

Good luck

 When someone on BP says San Diego I do not typically associate it with the city without the suburbs.  I include the suburbs when San Diego is mentioned on BP and suspect the typical BP reader interprets San Diego to include the suburbs and not just urban city of San Diego.  

San Diego suburbs have some of the best schools in the state.  

 There is not a school district as large or larger in California that does better on the standardized testing than Poway school district.  In other words the only school districts to out score Poway school district are smaller districts.  San diegeto school district is in many ways ranked higher than Poway school district (but is smaller).  Carlsbad and Coronado school district are also very highly ranked (and smaller than Poway school district).  This is not a complete list of good San Diego school districts but are the best of the many good San Diego school districts. 

So San Diego has quite a few highly ranked and touted school districts. 

@Lee G.

I believe when starting out in REI you should self manage as typically your resources are not as significant and self managing provides a learning opportunity.

However, as many have indicated as you scale the self managing of the units will become a job as it will take significant time.  How many units do you think you can self manage and work a traditional W2 job?  Do you like managing properties?  I slightly do but time is also very precious.  Do I like managing properties more than fishing with my kid(s)?  I say the answer is no but my actions state otherwise.

We still self manage all of our LTRs (14 units) and we use a property manager on our 2 STR units. However, my wife and I both realize that at some point we will convert some of the self managed properties to managed properties. My view is that somewhere around 20 units, even with a good team (mine is currently just an OK team), the managing of the units is a job.

Also as others stated, is dealing with tenants or doing handyman tasks the best use of your precious time. I think the answer may be yes when you are starting out and not able to generate large amounts of cash. However, for me to self manage in many ways is stupid. I self manage because I slightly like it but also because I am teaching my 14 yo son what REI entails (all facets) similar to what my Mom taught me. I recognize that it is not financially the best use of my time and may be financially the worse use of my time.

So it is important to include management fees because there will likely be a time that you no longer want to self-manage.

In general, I agree with @J Scott that my time is worth far more than the expense of a Property Manager and if you do not learn from managing your units or enjoy it then at some point if does not make sense to manage your units.

Good luck

@Patrick Senas I fall mostly into the @Justin R. former category as mostly we do a modified BRRR. I call it modified because we typically wait for the tenant (assuming a desirable tenant) to give notice and move out before doing the rehab. We will not get super rich on our rehabs. We strive for a 50% return on the rehab and I believe we have achieved it every time but some appraisers have not agreed with me (but in my market I know the value better than any appraiser I have seen, typically I have seen each of the comps when they were on the market but I digress).

Doing nothing larger than rehabs my family and I have done very well long-term mostly due to the long-term San Diego RE appreciation. It likely is a slower process than Justin R.'s process but long term it has done great. Every property I have ever purchased has produced a good annual return taken over the life of ownership. This includes 2 properties that were purchased near market highs and at one point had depreciated close to 20% (1992 SFR purchase for $167K fell to around $140K worth ~$550K today and a 2004 SFR purchase for $741K fell to ~$625K today worth ~$950K). Most of our RE purchases never went below purchase value (other than the 2 already listed) and the ones in recent years appreciated every year.

So I do not call it coincidence (even though I virtually always agree with Justin's view) as much as that the long-term San Diego RE appreciation track record will typically save even poor purchases (like my 1992 and 2004 purchases).  It is like speculating on a virtual certainty (going back over 50 years San Diego has long-term appreciation that exceeds inflation and the RE appreciation of virtually all other locales (20, 30, 40, 50, 60 years it does not matter what long-term duration you use)).

Of note is that there have been cycles of depreciation (as my 1992 and 2004 purchases demonstrate). You must have the resource to ride out any such cycles.  Virtually the only people to lose money on San Diego buy n hold RE are people that sold when the market was depressed.  Most of the investors who sold when the market was depressed were over leveraged.

Good luck

@Kyle Horjus

I have an opinion on buy n hold local versus out of state and it is that new investors should start local.  This does not imply that a new investor cannot succeed doing out of state but it is more difficult for various reasons the biggest of which is you need to trust others more than you do for a local investment.  Building a quality trustworthy team is not always simple and it takes work to maintain the team (even local takes work to maintain a quality team).

As for buying your primary residence I have two considerations: 1) how long do you plan to live in the area 2) how are the long term appreciation outlook (in LA the long-term appreciation outlook historically has been excellent).  Even appreciation markets like LA go through down cycles.  If you are only planning on living in the unit 5 years you may be attempting to sell after a decline.  Then add selling fees.  Similar if your market is unlikely to see appreciation faster than inflation there is not much to gain by purchasing.

@Ali BooneAli Boone using the fixed point in time analysis makes it easy to justify renting. I am more knowledgeable about San Diego RE appreciation but figure LA has a similar path. In San Diego in the last 5 years the lowest RE appreciation year was over 8% and the highest over 20%. So if I purchased a SFR with 10% down even in the worse year in the last 5 years I gained 80% on my investment (net worth). In the best year I gained over 200% on my initial investment. Rent appreciation usually correlates with property appreciation so it is likely her rent has risen significantly in the last 5 years. There is little doubt in my mind that she would have greater net worth if she had purchased in the last 5 years than she has by renting.

I realize this is 20/20 hindsight and that the next 5 years could be different (we will know in 5 years) but San Diego and LA have a long track record of long-term appreciation that exceeds inflation and if you use periods like 20, 30, 40, 50 years there is little difference (i.e. the market has always had long-term appreciation better than inflation going back over 50 years).   However, 5 years from now the market may be down (there have been many short-term cycles of depreciation) which is why I think to have best chance for purchase beating renting you should plan to live there 10 years or longer.  If the market continues to appreciate then you can move out when your assets allow but if there is a decline in the market and you need to move in less than 10 years you could lose money (and remember there is a cost to sell).

Good luck

Depends on where you look. In my area that should get a triplex. I saw a quad a month ago on MLS that was not much more than $600k.

Never use the MLS active listings as the price of duplex through quad. In my market the price between listing and those that have sold is very large.

Good luck. 

I thought his numbers were conservative on vacancy (I have never had a year as bad as 5% vacancy between all units) but way too low on cap expense.  My calculation for San Diego shows a attached  2/1 has cap expense of ~$250 and just the kitchen is ~$50/month.  Another way to look at it is what is the lifespan of a kitchen rehab?  I like to think 15 to 20 years.  If the rehab is $7k and the lifespan is 15 years the rehab cost is real close to $40/month.  Add in all the items that are unlikely to last 15 years like refrigerator, dish washer, paint, garbage disposals, etc. and you can see why a kitchen alone cost ~$50/month.  I would be surprised if there is anywhere in the us where a sfr with yard has a cap expense significantly below $200/month. 

However I think his cash flow estimate is better than most I have seen.  He allocated a lot to vacancy and maintenance. So I do not expect his actual cash flow will be significantly off.  

I have probably done around a dozen rehabs and I still am over my projected budget on every one and they typically take longer than I expect.  Things always pop up but I have gotten closer to budget on the last half dozen than the first half dozen.   

Basically you will get better at this with experience.  No body does calculus on their first day of math.  Why would RE be different?  You learn with experience and hopefully without any really huge mistakes.

I look at it that the goal should be to get better on each RE deal.  So if you make a little money on the first RE purchase it should not be too hard to make more money on your second RE purchase.   I do not know when you hit expert (I know I am not there) but hopefully I get closer to expert with each RE purchase and I believe you can also.  It is unreasonable to expect a homerun your first time at bat (but it does happen on occasion - usually with a fair amount of luck).  Your first RE purchase should prepare you for subsequent RE purchases.

Also if you see an issue coming, BP is a great community to request advice.  Just realize that most posters are not experts and that even if all the advice is good there are more than one way to solve most issues.  Ideally, someone provides the best solution for your situation.

Good luck

Your cap expense number is way too low based on my calculations.  In San Diego a rental (small) kitchen alone has a cap expense of >$50/month according to my calculations.  

I would refinance and remove some equity while the interest rates are still low. This would provide options including possibly leveraging it to another RE purchase. There are typically refinance options at 70% LTV and 60% LTV. 60% LTV typically have slightly better rates because there is less risk to the lenders. If you want to be conservative in your refinance then refi at 60% LTV but I would refinance the property at 70% LTV. Do not be surprised if the appraisal comes in lower than you expect.

Good luck