All Forum Posts by: Dan H.

I'm surprised it is so hard to get rid of the PMI with the equity that you have in you property. I would think an appraisal would suffice. It is a shame to have to pay PMI with such a high equity percentage. Has your lender told you what you need to do in order to not pay the PMI?

You can definitely get out of paying PMI if you refinance to a 80% LTV or lower (most refinances will want a 75% LTV for favorable terms which being lower than 80% has no PMI). You can also pay down the $15K you are short but if you go this route realize when you refinance you are likely to only get 75% of this $15K as cash out (due to the 75% LTV). So $15K in will only result in $11.25K cash out when refinanced at a 75% LTV. Still I would rather pay the $15K than PMI because the PMI payment is lost while the ~$4K of the $15K that you will not be able to pull out upon refinance is still yours in the equity.

Again I hope to provide you things to consider.  The correct choice for you has to be made by you.

Good luck.

People who say this have not actually looked at the ROI on Southern Ca REI because there are virtually 0 locations in the US that have had a better return than So Cal and San Francisco over the last 5, 15, 20, 30, 40, or 50 years. All you need to do is look at the property appreciation in So Cal for any of those durations and you will realize the size of the return exceeds virtually everywhere especially if the REI were financed. This does not even account for rent appreciation which has had similar appreciation percent as the REI appreciation. REI purchases that I did 3 or 4 years ago have returned over 100% on my investment (typically financed at 75% LTV but some at 80% LTV) and this is the usual where I invest (it is not like I picked exception investment properties - in fact I suspect I did average at best). Good luck finding many areas outside So Cal and San Francisco that can approach those returns.

Hearing it does not make it true in either the cannot get good ROI or can get good ROI on So Cal purchases. So I invite you to look up the property appreciation for any of the years I listed for either San Diego, Orange county, Los Angeles, or San Francisco. Then let me know where I could have had a better ROI (assuming conservative 75% LTV financing on the So Cal REI) with the other location numbers (I know the SoCal numbers). Numbers should include initial cash flow, appreciated cash flow, and REI appreciation. It would be great to find a better REI location.

Why are you still paying PMI? Once your equity has surpassed 20% you typically are able to drop the PMI. Contact your lender as soon as you can to confirm but every loan I have had only requires PMI until 20% equity. On the positive, your post is probably going to save you some money. On the negative you likely have been paying PMI for quite a while unnecessarily.

Next, a refinance at favorable terms likely will only let you refinance at a 75% loan to value (sometimes you can get 80% LTV but 75% is much more common). This implies you will get ~$100K. This would be a great down payment on a San Diego property assuming you can get financing. Because it would be a rental property the expected rent will be used in any loan calculation and you may qualify for more than you think.

You do not state if you like you home and its location but one thing to consider is that you are paying property taxes on a prop 13 protected asset. For tax purposes you may be paying on a base value of ~$225K rather than the $385K value. Also if you sell and then buy a new home to live in I believe this is unlikely to get you more money for a REI than a refinance because the new purchase will not have rent used in the loan calculations (because you will not be getting rent but will be living there), the payments will be higher because of the increased property taxes and seeing you would be reducing your equity you would once again be stuck with PMI (note ate 75%LTV and 80% LTV there is no need for PMI) and there could be tax consequences if you do plan to buy a less expensive home (do you want to downsize your home?).

Most of these decisions are personal decisions that I cannot make for you. What I can do is provide you some things to consider such as San Diego REI over the out of state you are considering and the advantages of San Diego REI. Such as pointing out the prop 13 advantage your current home has that a new home purchase would not initially have (not until it appreciates). Such as pointing out that you may qualify for a larger loan than you think because loan on rentals take into account the rent for the REI.

Good luck.

I realize you indicate that you do not have the money to invest in San Diego but out of state REI are risky, require a great team, and traditionally do not have the ROI of San Diego REI.

I am a big fan of So Cal investors investing in So Cal. All you need to do is look at 10 fastest appreciating markets for last decade and compare them to the national average. So Cal not only has been the superior investment but it would not even be close compared to the average locale. Of course past performance is not necessarily an indicator of future performance but history indicates long term the property and rent will appreciate. One thing to note about San Diego properties is the supply is finite. The demand seems to be infinite.

So here is my case for San Diego REI:
- Advantages of local including expertise, cost to get to property, able to self-manage if desired (typically ~10%). The family had an out of state duplex hit by 2 hurricanes. Even though we hired contractors, because we were not present we were the property getting the least attention with the slowest work.
- Appreciation: Property and rent appreciation.  Do the research. Use your own knowledge of the supply/demand. It really is simple Econ 101. I am not stating that it is certain to appreciate like it has but econ 101 and history tells me that excluding something catastrophic it will continue to appreciate in the long term (there are cycles but long term it has always appreciated). 

- Prop 13: My family suffered from this big time on a property on Gulf Shores Alabama. The taxes went up faster than the rents (until the hurricanes). We sold this property even though it was awesome (on the sand).
- I have no problem finding cash flow properties in my chosen area in So Cal. These properties cash flow using a $300/unit per month cap expense and 5% vacancy (our vacancy rate is less than this) and 5% maintenance expense. This cash flow does not include equity gain from making the payment which is in effect additional cash flow that can be obtained with a little effort. They may not cash flow with other parts of the country but the effort is less than out of state REI and so far the appreciation has more than made up for any reduced cash flow (Each property I have owned at least 3 years has gone up at least $100K - I have one property that has been owned only 1.5 years and is probably up $30 to $40K).
- The equity gain for rehabs is larger than many other parts of the country. Nice properties are greatly valued over neglected properties. This implies that I can purchase neglected properties, rehab, and have additional appreciation (more per unit than many other parts of the country).

So my recommendation is you look again at San Diego REI before considering out of state. My family has only sold 2 REIs. One in San Diego county that was used to get all of the equity out to purchase a San Diego (mission beach) beach duplex (so because we needed the cash to purchase another San Diego REI) and a beautiful duplex in Gulf Shores Alabama because it was too difficult for us to own long distance and had turned into a non cash flow property due to increases in taxes and insurance. The San Diego properties cash flow increase almost every year.

Good luck. 

I also find this to happen more than would be justified by coincidence.  It is my view that the most fair appraisal would occur if the appraiser was totally unaware of the negotiated price.  I especially find it interesting when I know I am purchasing well below market but the appraisal comes in at offer.  However, when I look at the comps listed in the appraisal I feel very good because in general I was in each of the comps and know the differences far better than the appraiser who typically at best drove by the outside and talked to the realtor (often they have not even done that much). 

As a buyer I love when the appraisal comes in lower than value as it provides me better opportunity to lower negotiated price or to obtain concessions for items found during the home inspection and I employ the best home inspector.  On one property I received $47.5K off the initial agreed price with an appraisal that came in at agreed price.

I do see how it can suck for the seller especially because I think appraisers are typically not as aware of market value as the investor who sees/visits each property and tracks the selling price of each property.  In other words, I think appraisers estimates can be significantly different than market justified value on some properties and this typically can only benefit the buyer (if the appraisal comes in higher than agree value there is never a renegotiation for a higher value).

I wish the OP the best. 

I have purchased negative cash flowing properties (2) but I was not relying on them being cash flowing in the near term (they both did end up cash flowing in less than 3 years but I was not relying on it). I am very pro San Diego REI but I also do not ignore history. History tells us that the prices in San Diego go through cycles. I personally do not try to time the cycle. However, history also tells us that long term San Diego properties will appreciate and have rental appreciation.

So my big concern is that you want the property to cash flow in 1 to 3 years.  If the next 1 to 3 years has been like the last 6 years then it will likely cash flow but where are we in the cycle?  One thing is clear is that we are not at the bottom of the cycle.  Are we at the top or part way up the hill?   I personally think we are not at the top but I would not make a purchase based on this belief.

I am a fan of house hacking for young, starting out RE investors but never did it.  I think you can learn a lot (including maybe that property management is not for you), build equity, get favorable financing, etc.

So in general I like your plan but I think your plan going in should be more pessimistic.  Can you handle the property not having positive cash flow for a decade?  Can you handle a 30% depreciation (the last down cycle had more than 30% depreciation in some San Diego communities)?  What are your exit strategies if the market starts to decline?  Do you have the finances and fortitude to ride it out.  I once shorted AOL.  We all know I ended up being right but I did not have the fortitude to stay in as AOL kept inexplicitly (from my perspective) rising in value.  I got out at my biggest loss of any investment I have made (and it was the last time I shorted something).   My point is that it is sometimes not easy to watch equity vanish and not know where it will stop.  It could be tempting to sell and take a loss.   I think what you are planning may happen but you should not plan for all going well and if all goes well then great and if it does not you are prepared.

Good luck

If your ARV and estimated repairs are accurate I consider that a no brainier to pursue. I cannot tell if you allocated anything for cap expense but even if you did not there is plenty to cover cap expense. Even if you repair is off by a factor of 3 it looks good. Hopefully your numbers are accurate and you can complete this purchase.

Good luck.  

@Christopher Monsour my family has 2 units a block and a half from the beach in mission beach. We find we can have it highly occupied in the summer and other holidays but low occupancy in the school year.  So we have tried both yearly vacation rental as well as rent it to students in the school year and vacation rental over the summer. Financially we have done better by just doing vacation rental over the summer but having it a year around vacation rental provides us the opportunity to use it on occasion when it is not rented (which we use the opportunity less each year).   The family also has a quad in Pt Loma that we do as a traditional rental (not a vacation rental).  It is off Catalina but the end that you start at (yours is much closer to the point).  

My opinion on your location is that it is not as desirable a vacation rental as our mission beach location which is borderline as a vacation rental.  The beach front will always rent first.  

Good luck. 

Maybe it is just for me but my mortgage broker provides pre approval letters for me just by me asking.  Of course I can fund any offer I make and the mortgage broker knows this but he does not ask for anything (not even proof of employment).  For all the mortgage broker knows I could have hit some terrible luck and lost my job and all assets.  So at least for me pre approval letters are easy and only requires that I request one.

Are you trying to show you can make an all cash offer?  Hopefully you have access to the cash lined up prior to making the offer.  If you have access to the cash, proof of funds should be simple.

Good luck

@Riley Hinshaw

Basically I agree with @Adrienne Bryson that your price point limits your buyer pool.  You likely need to be in a very hot market to have a sufficient buyer pool at this price point.

You do not state the condition of the property.  What would be cost of repairs/rehab? How long would it take to rehab (cost of money)?  Would you be looking to sell this to a flipper or a buy n hold? 

A cash buying flipper likely would desire the price to be lower.  There is the cost of money, cost of any rehab, cost of marketing and selling, and the compensation for their labor and risk.  Their profit would be taxed further reducing the flippers take home compensation. 

If you are looking for a buy n hold purchaser you need to look at more than comps, ARV, etc. You need to look at cash flow, rental desirability, etc. I think your buyer likely would need to be a buy n hold as the numbers are too lean for a flipper.

I would consider such a price point if a wholesaler came to me (I do buy n hold) with a duplex through quad in my REI area (North Inland San Diego) and the rehab/repair cost would be less than $30K. It would provide $100K equity for the risk (I always overrun my rehab budget in terms of both cost and time) and effort without any selling costs, selling taxes, etc. I do not flip but I just do not see the numbers working for a flipper unless he can do more than a rehab (i.e. add a second unit, etc) to increase the value.

Good luck