All Forum Posts by: Dan H.

@Kelton Bajo For conventional financing you can typically have 10 SFR to quad properties. So if each property is a quad you can have 40 units conventionally financed.

As for the $150K equity you do realize that typically on refinance investment property you can typically only get 70% LTV. This implies that you will not be able to extract the full $150K equity through a typical refinance. ELOC are difficult to find on investment properties and probably will not desire to go above 70% LTV so likely will not be able to help.

I understand Texas to have high property taxes.  In general states with income tax (CA) should avoid doing RE investing in states with high property tax even though I know of some San Diego RE investors that appear to have done very good investing in Texas (@Cody L.).

Your cash flow on the Texas properties do not appear to have cap expense or vacancy factored in (and possibly not insurance or maintenance).  Cap expense is higher than most investors want to believe.  If I used my San Diego cap expense estimate numbers that Texas Property does not cash flow (or barely cash flows).  Do you expect the property to appreciate?  There are locales in Texas that have appreciated significantly in the last few years.

The cash flow on the property looks at best lean.  That is OK if you have confidence of appreciation or can add value in some way (sweat equity, etc.).  Only you can answer the question if you think you can do better but I would want to do better.

Good luck

@Justin R. I saw the news blurb on this but what was not real clear to me in the news blurb is whether these proposed regulations are for existing short term rentals or only new STRs. Our STR duplex (my other RE is LTR) has been a STR since 2000 or 2001 (purchased in 1999) and is in an area that is virtually all STRs (Mission Beach: 1 block from the beach).

If this applies to STRs that have been long established the entire market in Mission Beach will be thrown for a loop. Fortunately, our STR units calculate out OK even as LTR (mostly because they were purchased at greatly below current value) but not nearly as well as STR. Anyone who bought recently or in 2003 to 2008 in coastal Mission Beach will have issues with return compared to purchase price. Everyone will have huge reductions in cash flow and likely resulting property devaluation.

Thanks for any clarity you can provide.

I probably am not making friends here but I would not use a real estate agent for an off market property (and I am in California).  A real estate attorney will provide better protection.  How do I know?  I encountered a huge non-disclosure on a deal using an agent (>$60K provable non-disclosure: at the time it was biggest the broker had ever encountered).  My agent and broker were useless.  I needed to go to my attorney to get it handled.  The agent/broker got their commission but I wish I could have withheld it.  I asked for a discount due to lack of support and needing to use my own attorney but got none.  They likely knew I would not ever use them again even if they had reduced their commission so they had no incentive to reduce their commission.

I am not a big fan of most real estate agents and believe you only know if you have one worth paying when something goes wrong.  Anyone can handle the ideal closings.

I have paid real estate commissions for very little work by the real estate agent on listings from the MLS but there is no way I would use one for an off market property unless their commission was a fraction of the usual commission.

RE is full of trust but verify.  Make sure that you verify and do not take everyone's post as gospel.

Good luck

I know virtually nothing about the New Jersey market so keep that in mind with my response.

Where I RE invest (San Diego county) my worse performing RE is my ex-home.  This is even with favorable property tax situation due to prop 13 (A CA prop tax initiative that caps the amount property tax can increase).  This is because it was purchased to be a good home and not to be a good investment property.

Federal tax rules let you write off appreciation of a home that you occupy for 2 of the last 5 years (to some lifetime limit).  You will be giving this up but if you home has only appreciated $15K then this is not very relevant.

So compare your expected returns keeping your current home as a rental versus what you could obtain via a different property.  What I suspect you will find is that you can find a better rental investment than your current home.

Good luck

you can use conventional financing for BRRR. I have done it multiple times (helped by market appreciation) but here are the challenges:

- the sfr with the best repositioning (most sweat equity) opportunities are the ones that need major repairs and do not qualify for conventional financing. So the challenge is to find a REI that can qualify for conventional financing and still provide enough sweat equity to get your initial money out with a refinance loan.

- refinance appraisals in my area are very conservative.  I believe they are more conservative than purchase appraisals when an appraisal should be consistent regardless of what the appraisal is being used for. 

- on non-owner occupied (I.e. Investment property) refinance 70% LTV is typically highest LTV.

The 70% LTV implies to pull your money out you typically need sweat equity of 43% of purchase price. Example using simple numbers $70k purchase will require a refinance appraisal of $100k at 70% LTV to be able to get all of your initial investment out. Finding a property that provides an opportunity for 43% sweat appreciation that qualifies for conventional loan is very challenging.

So it is not as simple as Brandon seems to imply.  Also be aware of seasoning rules.  Typically a cash out refinance using a traditional loan requires a minimum amount of holding time.  Another hurdle in the brrr method.  

Good luck

I did not model the rent increases.  I showed it cash flows today (using market not rehabbed unit rents and my cap expense that many think is conservative).  I do believe because the rents have not caught up to the recent property appreciation (also shortage of supply and rising minimum wage) that rents will increase faster than inflation for at least 5 years but there are large studies that try to predict things like rent appreciation with varying degrees of success.   So mostly I am not trying to forecast an accurate future cash flow as much as provide me a feeling that the property is likely worth purchasing (maybe cash flow today would not warrant the purchase but just a small amount of rent appreciation would push it over the threshold).

I suspect we have both seen various forecasts for San Diego rent appreciation (Zillow will even take a guess (it is much more than a guess?) )at it per property.  The forecasts vary quite a bit and their track record is that when rents appreciate a lot the estimates are typically too low and when rents are flat (especially when they first go flat) that the estimates are too high.

10 years out is too far out for me to feel comfortable venturing a guess but I suspect rent appreciation for at least 5 years unless something like an economic melt down.

For me it was a duplex.  The contractor would not install the windows not to code.  So my choice was to find a contractor that would be willing to install not to code and risk a fine, not do the BR windows, or do new framing to enlarge the BR windows (the most expensive option).  I went with the most expensive option but it did irk me that I would be OK leaving the old windows but making the unit nice I could not use the same size windows.  Using the same size (old size) windows was not making the units less safe than it currently was.

The code certainly discourages upgrading small bedroom windows which leaving the old windows is less efficient, less nice, and does not provide the egress to current code.  Basically my point is the same size new windows (which would not be to current code) would still be an improvement over the old windows that also did not meet egress code.

Property tax at 1.25% (typically a little conservative) would be almost $2k month.

I would place cap expense on this RE at more than $500/Month (but use $500 for calculations below).  Many people will think I am conservative with this but I do not agree.

Vacancy at 5%.

Insurance: I have no units in Santa Monica but I will use $150/month but I am sure others could provide a more accurate number.

Maintenance: I have no units with this mix but I think $150/month might be close.

Utilities for laundry room and ?: Maybe $50/month if they are not separately metered (more if separately metered).

8900 - 7200 (PI: using your number but not sure what interest you used on what down payment to know how real this number is: non owner occupied has small rate premium) - $500 (cap ex) - 445 (vacancy) - 150 (insurance) - 150 (maintenance) - 50 (utilities) = 405/month if self managed.

10% Property management: would provide 405 - 890 (PM) = -$485 using a PM.

So it may have cash flow if self managed but not a lot.

Good luck

I am pro San Diego investing like @Kevin Fox but I do not believe properties pencil out well with their current rent to value numbers (even in the small percent of listings that he implies).  Sure you may be able to find some that cash flow by the thinnest of margins but I believe most that project to cash flow are depict cash flowing due to under estimating the cap expense costs and that with realistic cap expense estimates the best do not have cash flow that warrant the effort .  Do you want to property manage a unit for less than $50/month?  Note that PM typically charge ~10% by the time all charges are added on (So a cheap $1200/month not rehabbed 2/1 unit in class C area will result in a ~$120 PM cost yet current cash flow has you earning less than 50% of that amount - The Property Management is not getting super rich with what they charge and you will be getting much less.  There is no way to make a lot of money on that cash flow and property management is work (they earn their fees dealing with certain tenants).

Does this mean that I am not looking in San Diego?  No I continue to look.  If I found the right property that cash flows using my cap expense estimate (or maybe cash neutral) I would consider purchasing it (Kevin).  Not for the measly cash flow.  Not because I am that certain that property appreciation will continue (it is very tough to time the market perfectly).

What I have a lot of confidence in is continued rent appreciation.  Why?

- rent appreciation lags property appreciation.  It has not caught up with property values or anywhere close to it.

- supply and demand.  San Diego RE prices are heavily dictated by supply and demand and there is a rental unit shortage. That shortage is not likely to go away soon because the cost of construction is high and the space available for construction is limited.

- minimum wage is rising.  This will make the current rents more affordable and will therefore result in moving up and increased rents

This implies that a property that is cash neutral today is likely to be cash positive $100/unit next year and likely $200 unit in 2 years. 

I also look for sweat appreciation opportunities.  So ideally I get a cash positive/neutral place that is a little run down and with below market rents.  I ditch not ideal tenants immediately and rehab the units for hopefully 50% appreciation on cost of rehab (i.e. a $20K rehab results in at least $30K value increase) and raise the rents to market on a rehabbed unit. 

BTW a week ago I posted my calculation on a MLS property that my calculations show cash flows - so there are definitely some on the MLS that cash flow. It was not the right property for me and it did not have great initial cash flow. But 2 years from now the cash flow should be significantly better than I depict as current cash flow in my calculations.

To summarize, I believe very few properties on MLS cash flow enough to warrant purchase at the time of purchase (effort versus cash flow) but 1) rents are very likely to increase 2) there are often value opportunities in rehab and raising rents. Any property appreciation is bonus and I believe very few will pick the peak correctly.

End result, I am still looking in San Diego (for the right RE) and hope to buy 4 duplex to quads in the next 2.75 years (@Kevin Fox, others).