All Forum Posts by: Dan H.

You did not provide an estimate of the cost to convert the garage to a duplex unit and I am unfamiliar with the IN market (or anywhere outside So Cal).  Also you did not indicate if you expect this conversion to cause the equity to appreciate more than the conversion cost.

Assuming the new duplex unit can rent for $1200 (it is newer than the one getting $1000) you would have $3K in rent ($1200 + $1000 + $800).  At 5% rate you would need to do the conversion for not much money to have decent positive cash flow.  At 4% the numbers look better.  At 5% you would definitely be hoping for an equity gain via the conversion and appreciation as the cash flow alone would not be worth the effort/money.

In my area (home prices are going up here and I think will continue to go up) I think this would be profitable enough at 4% and possibly 5% as the conversion here would result in more equity than the cost to convert a garage to a unit.  The rents would provide a positive cash flow (obviously more positive at 4% than at 5%).  I would get the equity gain from the conversion, equity gain from appreciation of all properties (the appreciation not related to the conversion), and have the tenants pay the mortgage and some of the rent be in excess of the mortgage (monthly profit).

So I think it all comes down to the Fishers, IN market and what else you can do with your capital/efforts (is this the best you can do? - In So Cal I think it would be a pretty tempting purchase especially at 4%).

I purchased a property with a much larger non-disclosure than you are talking about ($60K non-disclosure) and brought in an attorney.  To summarize the attorney indicated that because I had not sold any property, etc. that my damages were low.  I could walk away and sue for damages (a few thousand dollars) or negotiate with the threat to hold up any other sale.

If I had huge damages such as had sold a property to purchase, etc. the attorney believed that I would get the lesser of the damages or the value of the non-disclosure ($60K).

I ended up getting a $9K discount on the property ($750K to $741).  My attorney was recommending trying for a $30K discount but I really wanted the property and the seller was very cool in this whole ordeal and was difficult to get him to budge to that $9K.

BTW I used a real estate agent. In my previous view the primary advantage of using a real estate agent was if something went wrong. Well I was wrong, the real estate agency did virtually nothing. I had to hire my own attorney, do my own negotiations, etc. The real estate agency wanted to collect its fee but did not want to deal with any legal hassle to do so. This may not be a popular view on this site but if you can save some money by not using a real estate agent I recommend you do not use an agent. Their biggest value is finding property on MLS. They are not as good at finding distressed under valued properties (unless they are on MLS and have a dozen other perspective buyers) and have shown to me to be useless at resolving any legal issues. Maybe there are some that would have defended their purchasers but this was a large national real estate agency.

I have seen that a lot of our pet owners have gotten their pets certified as companion/service animals.  Search on the web and you can see that there are service animal certificate sites that will provide doctors who will rubber stamp (always approve) that the person benefits from/requires the service animal.  The tenants indicate that because the pets are certified companion/service animals I cannot collect extra rent or additional deposit and my interpretation of the law seems to agree with this view. 

This practice is detrimental to people who really have a need for service animals.  I consider it a legal scam as the agencies that provide the doctors that rubber stamp the certificate are legitimate agencies (same agencies that certify the legitimate service animals) that collect fees for this service

So far if I allowed animals at the unit I have accepted the certificate and have not collected additional moneys (normally I charge additional cleaning deposit and a small increase to the monthly rent (1st animal is charged more than subsequent animals)).  I had one issue though with a perspective tenant with a rubber stamped service dog that applied to rent a property that indicated no animals.  I told him no animals and he indicated I could not deny him for having a service animal.  I told him it shared a yard with a family with 4 children that played in the yard daily.  He indicated he would pick up the sxxx but I indicated they would not desire to play there even after it was picked up.  I told him that I did not believe his rights exceeded my existing tenants rights and they rented a unit with a yard for their children to play in that was listed as animal free.  I was not going to lose a good tenant for one that was causing trouble before he even had moved in.  He indicated he would sue and I told him I would see him in court.  I never heard from him again.  I do not know how the court would have ruled but the unit would have been already rented out so I suspect the worse that could have happened is a fine.

So this is a warning if you accept animals (and maybe even if you do not) there are places that will rubber stamp the service animal certificates.  You have a good chance to eventually encounter one of these (Where my units are it seems to be about 50% have service animal certificates).  These certificates are a legal scam.  These "service animals" can get special airplane flight options, special residency rights (it is against the law to discriminate against the handicapped), etc. 

It really is a shame as it tarnishes those that legitimately need a service animal.  I am considering going animal free at all my units just because of this "scam".

I feel there is no one formula.  I only have one property that met the 1% rent to price ratio when purchased.  However the equity in my 10 rental units (5 properties) probably went up $300K so far this year and all have positive cash flow. 

Another thing that I do not like about the 1% formula is it provides no value to the cost of the money.  Interest rates have a big impact on cash flow for buy and hold investors.

So if you are in an area where there can be expected to be significant increase in property values there should be less emphasis on the cash flow.  Your profit will be partially derived from the equity increase and being able to access that value for further investments.  If you are in an area that real estate prices are stable and not likely to increase much then greater emphasis must be placed on cash flow as that is where you will make your profit. 

Cash flow has quite a few variables: rent, interest on funding, maintenance costs, occupancy rates, LTV (i.e. amount borrowed), etc. Also if your LTV is below 70% you likely have some money that is not doing much to help make you money (i.e. could probably be invested better).

I suggest whether you like the variable terms of the HELOC or not that you apply for the HELOC as they typically have very low fixed cost (often waived the first year) and no interest until you use the money. Think of it like an emergency fund or short-term fund for investing. The fixed cost of the HELOC is the cost of having these funds available.

If the killer deal comes your way maybe the cash from the HELOC can help you close. Then you can look to obtain other financing. Sometimes the deals are available to those that can bring some cash quickly. I have lost deals for not having enough cash during the negotiations.

If you do not end up needing the money from the HELOC the cost is very low but if you end up needing the money you will be glad you have the HELOC.

I agree with @Stuart Birdsong but want to add that no amount of coaching can answer much of what you will encounter.  It is because most property investments have something unique to that investment. 

So my view is there is so much to learn from Bigger Pockets and other sites that you can target to your specific situation. Meetup has maybe a dozen meetup groups in San Diego related to REI of which you could meet other investors and other real estate pros and learn.

If it is not already covered on Bigger Pockets or other sites you could ask for help on Bigger Pockets or a REI Meetup group that you feel comfortable with (with a dozen SAn Diego REI Meetups to choose from one is likely to be a good match for you).

So I would save your money because I believe there are so many sources of REI learning that are free. I know for me there is so much available to learn that I do not have the time to make use of all the great information available. Why pay for addition information when so much is available for free?

BTW I am not afraid to still invest in San Diego (Even though my last purchase was last year - I have made competitive offers twice this year on separate quads) if the cash flow is OK.  What I experienced during the housing crisis was the rents did not fall nearly as much as the home prices (My total rent decline was $50/month).  If you are in long then I believe all will work out and regardless you have the mortgage covered with the rent (assuming any downturn is similar and does not heavily effect the rents).

Most of my units are in Escondido.  In Escondido the amount of cash flow to be expected is related to the amount of work the units will require.  Units that have all maintenance done and look nice and should take minimal time will have worse cash flow than units that have a lot of deferred maintenance and likely require more time commitment if self managed.

My average cash flow without including maintenance and vacancies is $471/unit.  The ones that have best cash flow typically have higher maintenance costs.  The last units I bought, which were in very good shape, have cash flow not including maintenance and vacancies of $304/unit (2 units so $608 total and so far no vacancy and low maintenance costs - Purchased Nov 2014).

Closer to downtown San Diego is more difficult to get good cash flow. I have a SFR in Claremont with good cash flow mostly because LTV is high (I owe less than 50% of value which I do not recommend - It is this way in part due to time constraints and in part that it is not super easy to get ELOC on rentals). So this unit does not work for what should be expected (unless you want a LTV greater than 50%). I think if you are close to downtown San Diego and can get positive cash flow from a maintained unit (one that will not require lots of time) you are doing pretty good.

As indicated our property is 2 blocks north of Belmont Park/coaster.  So same area you are looking but there are party street and quieter streets.  Jamaica Court is a party street and I think it is because of the MB Ghetto.

Even the older people that rent often come to MB to party hard.  Virtually all our vacation renters are over 25.

Unless you are beach/bay front it is tough to be a vacation rental year round in MB.  We have tried it a couple of times and made less than having a tenant in during the school year and vacation rental during summer break.   We are 1.5 blocks (maybe 150')  from ocean front.

 Mission Beach has significant party areas.  This I know from first hand experience.  We (my family) have a Duplex on Jamaica Court (2 blocks north of the coaster).  We rent long term in the school year and vacation rental in the Summer.  I have not stayed over night at our place in years because of the type of area it is in (Party all the time) even at the expense of renting out someone else's unit in Leucadia (quiet and beautiful).  The unit next door to us in MB is referred to as the MB Ghetto not because it is in disrepair or cheap but because of the number of units on the property (I think there are 8 units).  The MB Ghetto regularly has party issues.  We lost a tenant because he got decked by a tenant from the MB Ghetto.  We have also experienced first hand from our tenants the party issues.  Our little yard was once made into a mud wrestling pit so the girls could wrestle in the mud.   So before closing a purchase in MB I recommend you visit at least twice on Friday and Saturday night.  Make sure you like the atmosphere of the area that you are looking to purchase.