All Forum Posts by: Dan H.

 I understand what you are indicating but I indicated they are related but I did not mean that they match exactly.   There is definitely a lag on the rent appreciation compared to property value when property has been appreciating the way San Diego RE has for the last 5 years.  So what this indicates is that San Diego rents are likely to increase in the near term even if property appreciation stagnates.

I like your LED conversion (I am an anal conservationist but mellow on virtually all else) but our RE is one to 4 units so we do not have the same opportunity to increase our net worth but have different advantages.  Help the environment and increase your net worth $1K for each 5 minutes is great.

I agree San Diego appreciation has come in spurts but for the long-term it historically has gone up faster than inflation and faster than virtually all other locales.  My family and I have been through quite a few depreciation cycles but being in it for the long term means that the depreciation cycles are simply opportunities to purchase at a discount.  I find trying to time the RE market is like trying to time the stock market (not easy).  So we have purchased at highs (1992 and 2003: both depreciated nearly 20% after purchase before recovering and appreciating far past purchase price) and lows (1998 (by far our best purchase: over $100K/year in rent), 2012 (distant 2nd best purchase), 2013, 2014) but because we hold long term every purchase has been profitable. 

Good luck

Expensive (and not a CPA) but sometimes you get what you pay for: Miles Lawence. I believe his rate is somewhere near $300/hour; it has been a while since I looked at his rate. He gets me good rebates without having ever getting audited. From my perspective I believe I pay the minimum taxes that I owe (i.e. he gets the legit write-offs but stays away from ones that are likely to result in an audit). As for your question in a different post on how much taxes I pay on my REI it is $0. The depreciation covers all profit after writing off all expenses.

In addition if your W2 income is below some threshold you can write off the REI depreciation against your earnings. If your income is above that threshold then the depreciation losses are banked against future REI related taxes.

A CPA or tax person can explain this better than I can.

Good luck

Look at my just posted response on areas that I believe should cash flow.  Pick such an area near you.  If you cannot find any cash flow in that area then look at my profile.  Also you may want to look for a previous post from me that discusses list price versus actual price in my primary RE locale.   Only use closed transactions to set price. 

Hope this helps but ideally without creating greater competition in my locale. I am analyzing a recent MLS listing. If I choose not to make an offer I will post numbers if someone reminds me. It cash flows by my numbers.

Also do not too heavily discount principle pay down. I am not stating that it is as desirable as cash flow (especially for new investors that do not have large cash reserves) but I run my numbers both including it and not including it. The property with the real bad refi appraisal was about cash neutral when purchased but I purchased it because 1) I knew it was priced below market ($40k below according to appraiser but I believe over $50k below market) 2) it had forced appreciation opportunity as neither unit had been rehabbed and the property was built in late 1960s 3) with the current interest rates there was significant monthly principle pay down 4) I was fairly confident that the market was still going up (I am less confident now). My initial principle paydown (prior to the refinance) was ~$400/month. Post refinance principle pay down is ~$500/month (primarily due to the change in LTV and larger loan but the interest rate did improve slightly).

There is a lot to consider in analyzing a property and cash flow is only one criteria as my initial cash neutral property has had all of my investment money pulled out and significant profit extracted (even with a bad appraisal), has had the rent increase from $2500 to $3135 (both market and rehab increase but one unit is $200 below market so market rent is currently $3335), and, even when ~cash neutral, was increasing my net worth (not counting market appreciation) $400/month via principle paydown.  Anyone looking primary at cash flow would not have purchased this duplex.  

Hope this helps.  Good luck.  

 My last 2 refinanced originally had pathetic appraisals (both from the same appraiser).  I appealed them both and got a $60k increase on one then the appraiser disappeared so there was never any processing on the second appraisal appeal (so it refinanced with the 2nd worse appraisal I have ever seen).  

The one with the $60k increase probably ended up ~$20k low.  The other probably was ~$60k low.  

I do a modified BRRR in that if inherited tenant is desirable I do the rehab upon tenant turn over which implies I owned the RE longer before refi than a traditional BRRR so I ended up getting more than my initial investment out of both those properties. Honestly with the second appraisal if it were not for market appreciation I am not sure I would have gotten anything out of it as the refi was at 70% LTV but initial purchase was at 75% LTV. I would like to think I got a pathetic appraiser but it is not the first time I have had a poor appraiser so there seems to be many out there. I really believe he derived his price by simply applying market appreciation to my purchase price and made the comps work to those numbers (which in this case was really bad because my appraisal at purchase showed I was purchasing $40k below value).

I think the poor appraiser is a real risk with BRRR and it appears especially high risk in San Diego.

So consider this risk in any REI plans.

As for zip codes where cash flow provides best opportunity is working class (blue collar) areas.  I Avoid welfare areas but my tenant's for the most part have occupations like truck driver, handyman, tow truck driver, butcher, etc.  they likely will never be able to purchase their own home in San Diego.  

Good luck

I see properties regularly (at least virtually every month) in San Diego that have positive cash flow with realistic cap expense numbers (I.e high and conservative). I think you need to spend time to know market rents, PITI costs (interest rates have big impact on PITI) local markets where cash flow is doable, etc.

there is also off market properties (I get slightly regular off market opportunities that cash flow including 3 the last full month that I was home (may)).    

Profitable BRRR is definitely doable in San Diego county but I will say local appraisers stink at fully valuing rehabs for the refinance (actually my view is most appraisers are lazy and not very good at setting values compared to active RE investors).

So my view is those who cannot find cash flow properties may need to do more research and that it is not that difficult.  I realize I have been doing this a while and it takes time/effort to figure things out.  

Also initial cash flow in San Diego will not be as high as lower appreciation areas like Ohio, Memphis, KC, etc.

Good luck

swanny and I have communicated via IM.  This I believe

- he believes his RE method is optimal

- he has nothing to sell and is not intentionally deceiving anyone

However we have different investing beliefs (which he also knows)

In the last 5 years the lowest appreciation year for San Diego was 8% and the best was over 20%. The property swanny sold in 2015 if he had 75% LTV (my own goal for my LTV on my properties) he would have had at least 64% return on his initial 2015 equity on his San Diego properties without any effort.

Second after he has made the efficiency improvements and raised the rents to obtain his forced appreciation on his Ohio RE he now has a property in a historically lower appreciation area than San Diego.   To continue to achieve such appreciation he likely needs to keep exchanging properties to properties that have forced appreciation opportunities (efficiencies and/or below market rents).  Versus the San Diego properties have historical long term appreciation that is near the top in the nation whether you use 20 years to more than 50 years.  The rent appreciation typically is related to the RE appreciation.  So the San Diego return did not require finding efficiency improvements or having initial below market rents. 

So the San Diego investment is passive in comparison.  

Note as @David Faulkner points out Swanny obtained much of his investment capital from his San Diego RE appreciation 

My post is not intended to imply that Swanny cannot be successful following his path but to also point out how easy it can be to be successful investing in San Diego.  

Swanny believes his  RE investment choices are optimal while I believe my RE investment choices are correct for my goals.  Maybe we are both correct.  

I agree with @Anthony Ciulla that getting proper permits after completing construction is typically not easy as inspecting things to verify after completion is difficult.  I also agree that you need to ensure a safe living space.  

As for enforcement of codes and permits I find it varies significantly from community to community in San Diego county.  Poway is real strict; did you know there is rules to size of firewood stacks?   City Heights and Escondido are lenient.  I suspect that most duplex to quad in City Heights are not proper and this is common knowledge amount RE investors in city Heights.  Escondido seems to be less risk to proceed without permit than getting one as they enforce rules with a permit but seldom do any construction enforcement.  

Realize that if you go without permit you are taking on some risk.  I know quite a few investors that take this risk.  Also in your case the financial risk is low because the cost to make it an extra bedroom is low.  

So if I were you I would determine the cost to do it to all codes but suspect it will be more than you desire.  Assuming cost is greater than desired I would then determine extent of city enforcement (in poway I would suggest only smallest projects without proper permits).  If in an area like City Heights or escondido due to the fairly low risk (low cost) I would convert to a BR without doing it to permit if cost to doing it via permit was high.  I would make sure it is a safe bedroom though (good egress, good electrical, good structure). 

By the way I have a unit in Escondido that is a 2 BR with a fairly large extra room.  It cannot be easily made into a BR because you go through the room to enter a BR.  The tenant's treat the extra room as a BR and when I last rented it I set the price at the low end of the 3 BR units.  Our typical lease is max occupancy is 2*num BR +1.  So a 2 BR has max occupancy of 5.  For this unit max occupancy is set at 7 (I.e same as if it were a 3br).  My point is depending on the location of the unit the extra room may be used as a BR without you doing anything and may rent for virtually the same as if it were a BR.  This approach may also reduce your level of responsibility because you would not be renting that room as a BR (but you have moral obligation to make sure it is safe to use as a BR (I.e make sure it has good egress, safe electrical, CO detector, etc)).  

Good luck

 My family and I have quite a few duplex to quads that in recent years have been refinanced a lot.  The appraisals I believe always have included a value based on the rents and a value based on comps but the value used for the property is the one from the comps.  I think they do it both ways in hopes that both valuations are consistent.  The rent valuations is not used in setting the property value.  

If anyone has an appraisal for duplex to quad that did use the rent based value I would be interested in hearing about it. 

 I hope it is clear to all that you have no Balt RE which is an indication of what you really think of an outside investor investing in Balt.  

 All my San Diego properties cash flow but my point is that it is my belief that you own no Balt properties.  However, I will present you an opportunity to show your great Balt investment in an area that Balt should compare well.  You post your best cast flow property (we could even use current value versus purchased price) and I will post my best San Diego cash flow property.  I will even provide link showing it rents for the price I claim.  You could use Zillow for current value for my RE but last I checked Zillow was low by quite a bit so we can add to the zillow value and still compare.  

So here is your opportunity to show that you believe what you indicated about Balt being a good place for outsiders to invest enough to have found and purchased a good cash flowing property.  If you are not invested in Balt then it indicates what you really believe of the Balt RE opportunity. 

I suspect, like my other offers for you to post info on your Balt RE, there will not be a post of your Balt REI.