All Forum Posts by: Dan H.

Do you have enough finances for a down payment if the property can be conventionally financed?  Can you get a conventional loan with your lack of W2 income?

If not you need to find alternative financing such as hard money or a partner.  Hard money is costly.  if you go the hard money route look to get conventional financing as soon as you can.  Partnerships can be tricky.  if you partner with a friend of family you need to realize if things do not work out the relationship may never recover.

With your level of experience, if the property is run down I would have both an inspector and a contractor look at the property.  I have a lot of trust in my inspector but for many things he indicates bring in an expert.  I think in your case it may be prudent to have both an inspector and contractor look at the property.

Remember the numbers have to make sense.  The numbers include the cost, financing available, repairs, the cap expenses, Vacancies, maintenance, your time, etc.

Good luck

I am unsure if you got this from one of my posts but in my San Diego market this is definitely true. Average list price on a duplex in my market is ~$600K but average sold price is closer to $450K. The $450K sold RE mostly have come from the MLS (not off market properties). They were either priced to sell initially, after minimal interest the owner took a lot less than asking price, or a lot of issues were found in the inspection (I have reduced one price $47K on inspection).

Unfortunately with the current interest rates a $450K duplex (2/1 or 2/2: $1400  to $1500 rent each) without significant value add does not really cash flow much after subtracting for cap expense, maintenance, vacancy, misc expenses.  So I am only looking for value add of at least $40K and ideally more (duh!) that can have similar cash flow.

Good luck

According to Trulia San Diego RE has appreciated 10% in the last year. This follows quite a few similar or better appreciation years. If you purchased a cash neutral property a year ago with 20% down the ROI is close to 50% (discounting selling fees). Add in that San Diego is projected to have the 6th highest rent increase increase in the next year of large cities and the cash neutral property is projected to soon be cash positive. The increase in the last year is verifiable fact. The rent increase is speculation by supposed experts. To imply that San Diego does not have good ROI for financed buy n hold is verifiably incorrect. It has had very good ROI over every virtually any amount of time going backwards from today's date (1 year, 3 year, 5 year, ..., 50 year).

I recently refinanced 6 units and was all set to purchase one or two multiplexes this spring when the interest rates rose substantially.  That significantly worsened cash flow.  So I continue to look for Properties with forced equity opportunities that are not cash negative but there is not a lot to tempt me to purchase.  So my money from the recent refinances are currently in other investment classes waiting for the right RE opportunity.  

I will add that I am spoiled on real estate ROI and therefore do not purchase many properties that cash flow and have some minimal opportunity for forced appreciation. If I cannot get $40k to $50k of forced appreciation I have been not pulling the trigger. If I were at a different place in my life I would easily jump at $10k of forced appreciation.

Good luck

@Tommy Nguyen1% rule is were the monthly rent is 1% of purchase price (or ARV if repairs are necessary). It is not possible in San Diego and with current interest rates is not necessary to achieve cash flow.

I have only purchased once in San Diego meeting the 1% rule and it was in 2012.  I purchased a duplex for $302k that had rents of $1900 and $1300 for a total of $3200/month.  It is perhaps my best RE investment but the family has a far better one (a duplex). 

The family's best purchase was purchased from someone that was renting long term and the units were immediately converted to short term vacation rental for high season and long term rental in the off season.  Today each unit is rented short-term rental all year.  The high rent is $425/night (think July 4) with 4 night minimum per unit (it is a duplex).  Needless to say it cash flows nicely even after paying management fees.  The purchase was $360K (It was purchased around year 2000) and is worth close to $2M today.  So it was far better than the 1% rule mostly because it was converted to short-term rentals. It was around 1% when rented as a long term rental by previous owner.

Neither of these purchases exist in today's market in San Diego.  The 1% rule may be achievable in traditionally non-appreciating markets but not in San Diego.

Good luck

@Michael Swan

I figured that you realized that you would need to continue to leverage out to continue to make the significant equity increase that you have been making.  I do not know if the refinance option without exchange will get you what you desire because the property already has provided the forced equity and the market is not a high appreciating market.  The 1031 exchange will work but finding, purchasing, rehabbing, etc. involves some work (as does our self management).

Versus in San Diego, if market appreciation continues like it historically has (not guaranteed but I see nothing to indicate is will not appreciate long-term), the equity will continue to increase long-term just by holding. When the LTV is significantly deviated from 70%, the property is refinanced pulling out the equity from market appreciation to either invest in RE, invest in another asset class, or to simply enjoy.

Two different paths ((forced appreciation + cash flow) versus (forced appreciation + market appreciation)) that hopefully both provide good ROI.

@Michael Swan I understand what you are doing and suspect you will do well with your strategy.  I have read many of your past posts and the posts on this thread.

I posted earlier in this thread some of the info you seek including my expected cash flow (not nearly what your out of state is), my ideal LTV (70%, but not quite achieved), etc.

I refer to historical returns.  It seems like you are trying to time the RE market with the belief that San Diego appreciation is near a peak.  It is not easy to time the market.  Those that do often miss the most significant market increases.

So you have 1031 exchanged various San Diego properties into better cash flow locales because you believe San Diego may be at a peak.  You invest in properties that have opportunity for rent appreciation (i.e. either has gotten behind market market or needed a little TLC to maximize rents or both).

So you increase the rents and seeing it is MF the value increases and therefore your equity has increased.  So you have a quick equity increase with good cash flow which is very good.  But then what?  Your markets are not in traditional appreciating markets.  Is your profit going to be solely the cash flow (which would not be bad) or are you going to 1031 exchange these properties for other properties that provide the opportunity for rent increases?

For San Diego there is significantly less cash flow available but the same opportunity to purchase MF and raise rents for the initial equity increase.  But while your recent purchases cash flow well they traditionally do not have much market appreciation based solely on rising values (and you have already raised rents to market).   While in San Diego the cash flow is significantly less but historically there is the property appreciation.  The rents typically appreciate similar to the property values. 

Different paths that ideally both provide profit. We will not know for a decade or so which was the better path but hopefully both paths provide good ROI.

Between my family and I we have been in buy n hold since the 1970s. We have tried out of state but not out of state MFs (so we have not tried your path). We currently only have one out of state unit (SFR that is lake front in Alabama). Our RE are, except for the one SFR, all in San Diego county (Mission Beach, Pt Loma, Bonita, Claremont, Poway, and Escondido).

Good luck

I agree with @David Faulkner reply but thought I would respond to the ROI statement in OP.

San Diego residential real estate rose 10% in the last year (source Trulia). So if you purchased a cash neutral financed buy n hold RE investment in San Diego a year ago with 80% LTV (20% down) you would have had ROI of near 50%. It is verifiable fact that few locales have returned better ROI on financed buy n hold than San Diego for virtually any duration (1 year, 3 years, 5 years, ..., 50 years).

Rent appreciation typically corresponds with property appreciation.  So the cash flow neutral property purchased a year ago that appreciated 10% likely had about the same appreciation in rent and now has some small cash flow.  Fast forward 5 years and the property that was cash neutral could have significant cash flow.  

Another benefit of investing in California is the property tax protection provided by prop 13.  

I believe in the long term San Diego will continue to have better ROI on financed buy n hold than virtually all other locales. Note San Diego RE has always appreciated long-term but there have been many short-term depreciation cycles but it has always recovered and continued to appreciate.

Good luck

I do not see that big a difference between profit achieved via appreciation vs cash flow.  Trulia shows San Diego residential real estate rose 10% last year.   If I placed 20% down on a cash neutral property a year ago I made 50% profit.  Current median price is $522k.  If my purchase was median i would have made ~$50k on a single tenant at a cost of about $100k.  this is a good return on investment.  

I realize that it is possible to also have a good return on investment in better cash flow areas but historically there are few locales that have had the ROI of San Diego financed buy n hold including the last year. Last year there were those who thought San Diego RE was over priced but it continues to appreciate. Trying to predict the market high is as difficult as trying to predict the stock market high.

So I am content holding my San Diego buy and hold RE with its smaller cash flow but great history of property and rent appreciation. 

@Michael Swan you seem to be doing very well with your RE investments and you are knowledgeable about various RE investment strategies so you are likely making sound investment decisions.  

However, historically San Diego has out performed better cash flow locales.  

I personally know RE investors in San Diego that have lost money in RE investing but everyone of them invested outside San Diego.  I personally do not know any RE investors that have lost money on financed San Diego buy n hold but it would be possible if they had to sell at a market decline. 

There are many ways to make money investing in RE.  History tells us how things have occurred but does not necessarily indicate the future.  The best RE investment going forward will not be known until it is in the past.  However, it is unnecessary to have the best investment; it is sufficient to have good investments.  

San Diego financed buy n hold has historically been a good investment. Will the future be different? I have about the same RE equity as you indicated in your post and my family has a little more than double what you indicate and all except one SFR (lakefront in Alabama) is in San Diego county. So I am expecting San Diego to perform long term similar to how it has historically performed.

Good luck.