All Forum Posts by: Dan H.

There is a monthly Meet up at a current REI project put on by some San Diego BP members (@Justin R., @Parker Cox, @Kevin Fox, @Tim G.) that last month was hosted by @Sarah Dumm.

There has been no selling. I have found them to be motivating, a chance to network, and learn something.

I recommend you come to at least one.    It will be worth the time just for the chance to network with other San Diego REIs.

I have not seen the posting for the next one yet.  I have one of my search words be "San Diego".  It usually (but not always) catches the BP Meet up open house post.

Good luck

First I want to say I think your purchase sounds great and that I think you will do well but I am responding to the "appreciation is a guessing game".

I hear forms of this statement fairly regular to justify cash flow over appreciation: Appreciation is not guaranteed (little is guaranteed but you can come fairly close to guaranteeing San Diego residential RE will appreciate over time (there are short down cycles) faster than the national average and faster than inflation (always has), appreciation is a guessing game (there are many indicators of likely future appreciation and it most certainly is not a guessing game), and the most bogus of all: you cannot pay your bills with appreciation (My bank and investment accounts are full of money that some people think I can not pay bills with - it is simple to take appreciation out of a property).

Historically San Diego RE has always gone up faster than the national average in the long term.  You can use any duration you desire.  Last year San Diego residential RE went up 8%.  The year before was a little better than 8% (I forgot exact increase but I think it was just above 10%).   In 2013 San Diego residential RE appreciated >20% (~24%).  For last 3, 5, 10, 15, 20, 25, 30, 35, 40, 45, and 50 years San Diego residential RE has appreciated faster than national RE and faster than inflation.  That is a guessing game with very good odds especially if you cannot identify a reason that history would not continue (I cannot).

As indicated your purchase looks very promising and seems likely to appreciate but appreciation is not a guessing game.  In fact, you use some convincing rationale (Obama library, past prices, purchasing below current unit market price) in justifying your belief that your Chicago RE will appreciate (and I believe I also provided some convincing rationale that San Diego residential RE is likely to appreciate better than the nation RE and faster than inflation).  Guessing would be blindly throwing a dart at national map to purchase in an area and expect that area to appreciate more than the national average (it may with a lucky throw or more likely it will appreciate no faster than the national inflation rate).

Good luck

@janet Lancaster 

If I use $0 for cap expense, vacancy, and maintenance then you have made $1388 * 24 = $33,312 in the two years.  Definitely not a poor profit.   In reality the cap expense likely is $200 to $250/month per unit.  Subtract a small amount for maintenance and vacancies and it still is not a bad profit. 

The last 2 years San Diego RE has appreciated 8% annually. The $300k SFR without compounding would be worth $348k for profit of $48k (compounding likely would have it closer to $50k). Note in reality the rents have gone up proportionally so your rent likely would have gone up $100 to $200/month.

Last year I refinanced my REI assets and took out significant equity without tax consequences. I am in the works of doing it again on select properties.

My point is that I do not distinguish one source of profit from another (except for taking into account the tax man).  If I make $50k on appreciation or $50k in cash flow it is still $50k.  

Historically the return on financed San Diego buy n hold via appreciation (rent and price appreciation) has far out performed better cash flow locales.  

@Ayaz Usman

Here is the link for the meetup/open house that Sarah hosted.  I do not believe the next one has been posted yet.  

https://www.biggerpockets.com/forums/521/topics/34...

There is a monthly Meetup put on by some San Diego BP members (@Justin R., @Parker Cox, @Kevin Fox, @Tim G.) that last month was hosted by @Sarah Dumm. 

I have been to 3: 2 flips by the same person and Sarah's buy n hold last month. There has been no selling. I have found them to be motivating, a chance to network, and I learned something at both flips and enjoyed Sarah's passion and talking to her. 

I recommend you come to at least one. 

San Diego is more of an appreciation market than a cash flow market.  As @Sarah D. indicated there are ways to create appreciation.   I think most of them are not for the beginner but someone who has rehabbed a unit or two, has a network of contacts with some trusted contractors, etc.  Sarah will have rehabbed 4 units by the time she finishes her current property and has been networking (we talked for probably an hour - she has a lot of passion about her current project).

I purchase duplex to quad in working class neighborhoods (most in Escondido).  The units that sell (not as listed) typically pencil out as cash positive or neutral after taking into account all expenses (and I use a high cap expense).  However they do not pencil out as following the 1% rule.  They rely on the current low interest rates for their small cash flow.

Where things start to look much better for San Diego buy n hold is in the appreciation.  This is both property appreciation and rent appreciation.  I purchased a duplex 2.5 years ago that was cash neutral.  Today it is cash flowing at ~$600/month (both units were rehabbed but without the rehab it likely would still be cash flowing at about $300/month).  Rents have gone up the last few years at almost $100/month for each year.  Add in that I purchased the unit at $390K (I do not remember if I put 20% or 25% down so we will use worse case of 25% down) + ~$40K in rehab and it appraised at ~$600K for a refinance late last year and I believe it is worth ~$640K today.  I have all of my original investment out of the property due to the refinance yet I still have 25% equity.

So $390K * 0.25 + closing = ~$100K + ~$40K for the rehab.  = ~$140K (which I have extracted) for a gain of $640K - $390K -$40K = $260K.   So not including cash flow the ~$140K investment has made $260K in 2.5 years.  I also want to note that this property was not exceptional in any way.  The area is not up and coming.  It was a property that had not been rehabbed and therefore had some opportunity in that area and it was priced fair (not a super great price).  In other words there were a lot of similar properties available.

I do want to warn that San Diego properties historically have always appreciated in the long term and the rent typically appreciates similarly but in the short term there are down cycles some of which last for quite a few years.  The only people who have lost money on financed San Diego buy n hold properties are those that have sold.  You need to be sure you can weather a down cycle.  Besides that the only other concern is that something has changed that makes the past history not a reflection of the future history.  I believe the future will track similar to the past.

Good luck

I'm 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, 20, 30, 40, and 50 years and compare them to the national average. So Cal not only would have been the superior investment for financed buy n hold but it would not even be close compared to the average locale. Of course past performance is not necessarily an indicator of future performance. However, One thing to note about So Cal properties is the supply is finite especially in coastal urban areas. The demand seems to be infinite. Simple fact is that virtually no where has had the historical ROI of a coastal So Cal financed buy n hold property over virtually any duration between 3 years and 50 years (verifiable fact). Do you think something has changed such that the historically appreciating market is unlikely to do so on a long term buy n hold?

So here is my case for So Cal:

- 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 property 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: 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 tells me that excluding something catastrophic it is likely to continue to appreciate in the long term.  Historically it always has appreciated over the long term.  Is there any reason to think this will not continue.   These better cash flow places often have virtually 0 property appreciation.

- rent appreciation: I have purchased properties that were neutral on initial cash flow.  I purchased such a duplex property in 2013.  It is now cash flowing at about $1k month.  Recent rent inflation has been at ~$100/month per year over the last 3 or 4 years. These better cash flow places often have virtually 0 rent appreciation. 
- 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 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).

- most cash flowing places are appreciation challenged.  That is why they sell for so much less. 

- cap expense: it varies more by size than value. For example if I have a 3/2 1500' sfr REI in Ohio at a purchase of $50k and same purchase in San Diego county at $350k I would not expect the San Diego county cap expense to be 7 times the cost but maybe 25% to 50% higher (everything is more costly in coastal So Cal). So your out of state cap expense versus rent is significantly worse than So Cal REI.

My family has purchased units out of state and we no longer purchase out of state.  We have not regretted the decision.  

I suspect you will find that electricity usage in an apartment is very different from a house and that you will be selling a lot less power back to SDG&E at wholesale rate than you are anticipating.   If you have net metering the buyback does not occur monthly but annually.  This is good because there will be variation if both the power generated (summer is more than winter) as well as power used (typically AC is large electricity user and typically at worse in Aug and Septempber (but not so much this year)).

My point is that I suspect the lease will not be as bad as you have calculated.  Still if you are conserve your electrical usages $130/month is slightly high cost.

If the area is 95% SF then using a recent sold multiplex in the same area will be difficult.

My view is that the property is somewhat unique and that the comps will not be that good and will need a lot of tweaking to provide an appraisal.  The thing about unique properties is that unique does not necessarily mean worth more.  Unique properties often have a smaller buying base.

If you plan on conventionally financing the REI, the lender will do an appraisal. Typically I see their appraisals do not put much value on uniqueness which may make using a SFR of similar size appropriate but if I were the seller I would not be too keen on this approach. This is one reason unique properties sometimes stay on the market longer than the more standard listings.

It sounds like an interesting opportunity.  Good luck.

Why are you mainly looking for cash flow.  If you believe a property will appreciate it is trivial pulling equity out of a property.  I am about to do it for the second time in 2 years. 

I agree with everyone that indicates that RE goes in cycles. This is true even in Cal. However in coastal So Cal you can look at any number of years and the market has appreciated faster than virtually everywhere else (I suspect to a lesser degree this is true in Sacramento). Do you think something has changed so that this history will not continue? My point is if you can ride a down cycle in the long run Cal buy and hold when financed has historically whooped the higher cash flow areas on ROI and that it is trivial getting this appreciation out of a REI (and you do not pay taxes on this money until you sell the asset without doing an exchange - I never plan to pay taxes on this money (If I sell I plan to do a 1031 exchange)). So I do not understand a preference for cash flow especially if historically that cash flow does not approach the ROI of your local REI. Add in the extra headaches and effort of a distant REI and you understand why I currently only invest local (We still have one out of state property but it was purchased more than a decade ago).

Good luck on whatever you decide.