All Forum Posts by: Joe P.

Bay Area is a bubble, according to some experts. I honestly wouldn't know, but your 1.5 million can net you more leverage in other areas of California, or the US, if you are willing to put your money there.

I am not a PRO at all, so take what I say with a grain of salt, but I'd rather take proceeds from those sales, take it to a good neighborhood, good schools, good tenant, and good cash flow area, and start building my RE holdings there.

There's a lot to be said for those stable areas -- you won't see Bay Area appreciation but unless you were an investor 15 years ago in the Bay Area, I would imagine cash flow deals are impossible to find, even per your note "The property prices are very high and there will be barely any returns after expenses." There is money to be made SOMEWHERE but Bay Area may not be it.

The returns of the stock market are higher than normal. Folks are making 20% on their money, which is fantastic. But the stock market is not tremendously different than the real estate market -- sure, the ENTIRE stock market is up but not every sector is the right investment. RE is the same -- Bay Area isn't where I'd invest, but could you find a blue collar neighborhood nearby with stable tenants and cash flow? Sure, I bet you could, and that's where I'd probably start.

And finally, make sure you frame your decision-making to align with your short and long term goals. What is the POINT of your investment path and vehicles? I know what my goals are and it helps me to decide what to do with my money.

Know thy numbers.

I started with renting out my original SFH in 2014. If I had known what I know now, I probably wouldn't have. The numbers never made sense, there was no cash flow, and tenants ended up ruining the property.

I should have sold it then, even if it my proceeds weren't as good as they were in 2017, and would have properly evaluated the market and for a more appropriate property. I was so attached to the idea of renting out my property that I failed to properly complete step 1 - understand my goal and analyze the property to help me reach the goal.

I'll kick us off. Interesting area - definitely a ton of appreciation thanks to hipsters moving in around 10 years ago, yuppies around 5, and some serious development in-between. People are paying a ton of money for what was a warzone years ago. Sugarhouse is around the corner, which has its benefits and its drawbacks. The Fillmore, Barcade, etc...lots of fun stuff to do in that area. Again, those things have their appeal and drawback for the type of property you may be looking to build.

Brings me to my next point -- it sounds like you are into some new construction opportunity? Is it a develop from ground up and sell? Or are you building a multi-unit apartment building to hold and rent? I think the type of property is important there. A million dollar townhome would probably sit on the market, but a bunch of 350k smaller townhomes might move quickly. Young professional renters would probably be drawn to the area.

To answer your specific questions:

1. Solid upside for Ground-Up? (Assuming expert construction mgmt & decent cost controls)
   1. I am not a builder/developer and have no experience here. But I think I know enough about the area to know ground-up might work if you build to the type of people who want to live there. I don't see it being a great area for super expensive large homes, but maybe a development of a multi-unit building or several townhomes on a lot would move quickly to young professionals/yuppies/hipster types?
2. Any downsides or extraordinary risks that you anticipate or forsee? (Zoning, Regulations, Taxes, etc..)
   1. Philly has its challenges; I could see zoning and permits being a PITA for you, also stringent neighborhood requirements now that the area is saturated. Crime is odd there; given its proximity to Sugarhouse its not a perfect area.
3. How does the trend in the demand curve look? Trending up? Starting to soften? Near the top, or still upside?
   1. Haven't consulted any trends, but it is relatively saturated. A REI or REA might be able to provide more specific details for the area.
4. Is the market over-saturated with supply for Residential? How about commercial?
   1. My understanding is inventory is at historic lows. If you can build and turn it around in 6 months, you should be able to sell and get what you want.
5. What are Resi / Commercial rents per Sq/Ft or for 1 / 2 BRs in this immediate area now? Are they trending up or down? Why?
   1. Haven't consulted any trends, but it is relatively saturated. A REI or REA might be able to provide more specific details for the area.
6. Vacancy rates? Trend?
   1. Haven't consulted any trends, but it is relatively saturated. A REI or REA might be able to provide more specific details for the area.

Apologies I couldn't be of more assistance, I'm just an interested viewer of this thread with knowledge of the area, having lived in the area my entire life. Keep us posted with your news!

@Michael Nguyen I don't have any short term rentals so I manage my property personally. With the occasional travel (once per month) I leave my wife in charge; we've never had any issues come across while I've been gone, and I would simply tell her what to do via phone if it did.

I wish you luck -- you are braver than I am. Kind of a backwards way of thinking I suppose; short term rentals probably can't inflict much damage on a property the way a long term tenant conceivably could, but I like the stability of a long term renter personally.

Ask your realtor to run the numbers and have them tell you why it's a good deal.

Without knowing anything about your realtor, their intentions, your relationship, etc., I'd hesitate to say this -- they are either not working in your best interests, or might be misinformed regarding what a good deal for an investor would be.

I think their response is going to be incredibly telling. They will either realize that they have no idea how to evaluate a property (and it'll become apparent mid conversation), or they're going to continue to push what may be an unrealistic financial analysis on this property.

If you pay all cash, you remove the $644 mortgage payment, so your cash flow becomes $428 per month. Wonderful, right? That's probably where your realtor will hang their hat.

Except your payoff point (when you get your initial investment back) is 32 YEARS. 32 YEARS! Oh my god. Your cash on cash return is 3%.

Look, I think the name of the game for the BRRRR crowd (and more experienced people should stop be dead in my tracks if I'm wrong) should be as follows:

• As little skin in the game as possible (e.g. none of your money or a small down payment)
• Buying for cash flow - to reinvest into the rehab part of BRRRR or into the next property
• Buying undervalued properties to provide value (make your money when you buy the deal)

When the stock market provides 10-15% in a year, and you're making 3%, did you put $160,000 into the right investment? Probably not.

160K with avg rent of 1450/month - so it doesn't hit the 1% rule?

Let me understand your P&L - I ran it into my spreadsheet using the following:

• Purchase price 160,000 (25% down mortgage balance is 120,000 at 5%/30 yrs)
• 25% down and 5% closing costs (total all in cash = 48,000)
• Rent is $1450 per month

Income:

• RENT:  $1450.00

Expenses:

• Mortgage:  $644.00
• Insurance:  $100.00
• Taxes:  $400.00 (3% of purchase price per your note, so $4800 per year)

Net Profit:

• $306.00 per month

What you are NOT considering:

• Property Management:  $145.00 (10% of monthly rent)
• CAPEX: $145.00 (10% of monthly rent)
• Vacancy:  $116.00 (8% of monthly rent)
• Maintenance:  $116.00 (8% of monthly rent)
• Other Expenses: $????? (utilities, HOA, garbage, advertising, etc)

Cash Flow:

• -$216.00 per month (thats a negative number)

Happy to have other investors weigh in, but this is not a good deal. Using even the 1% rule you can see this probably shouldn't have even made it this far. What are comps in the area like? Can you go to a slightly worse location to stretch your dollars further, and perhaps into a multifamily unit?

@Alexander Felice I think nailed it. I'm not a rehabber and not terribly interested in major renovation projects, so having little cash in the game with good cash flow and COCR is important. If I buy a house with cash outright, sure my cash flow may be excellent, but the return on my cash is probably not as good as a 25% down payment. It also could mean my ability to invest in multiple properties is limited if all my cash is tied up into one property. BUT, if you are able to buy cheap, rehab, and get it rented...sure why not!

Run the numbers -- they won't lie. Divide your annual cash flow by your all-in cash, and run it for both a mortgaged property and outright cash purchase. See which one would be more attractive to you, and make this just part of your overall financial analysis. Just because one is better than the other, doesn't mean you should choose a property solely based on that.

I guess it depends -- areas where I live which were once considered warzones now have townhomes selling for hundreds of thousands of dollars. @Jason D. is correct -- location is so important. If this area has nearby public transportation, maybe some up and coming housing/businesses, good access to the city, parks, schools, etc., and its just a bit rundown now...probably a good pickup. The numbers would have to work, of course, above all else.

If it is a crappy location and still cash flows, then great, but be prepared for being in a crappy location and all that entails.

Interesting setup -- here's what I would add to the comments above:

• If you've got a support system in place for while you're gone, then great. But keep in mind this is still your property and the buck stops with you. I travel for work occasionally myself; what are you going to do if something goes horribly wrong? Can you count on someone to manage major issues if you are not reachable, or even if the STR needs some assistance/has a question?
• Are you OK with strangers in YOUR part of the house? Renting out your duplex to a long term renter makes sense, but for the unit you plan to live in, are you OK with people on your couch, in your bed, in your bathroom, etc?

I'd never tell someone to not pursue the available rent money - but if you can't actively manage your rental for what may or may not happen, that would be highly concerning. I suppose the same problem exists with your long term renter, but I guess I could see something going wrong moreso with the short term renters just in terms of operations, questions, etc.

Thanks @Alex Deacon, I was thinking about this post some more after I moved on -- @Gulliver R.'s first interaction with these tenants is going to be to install a new water sub-meters and pass along that cost to them, along with a new clause/update to their contract? Ouch.

I know for the smart investors here, it's all about the numbers -- how do increase my CF, COCR, Cap Rate, how do I lower my personal expenses and pass it along to others, etc. -- but you are buying a property with 36 tenants! First off, congrats, but I would imagine stable, long-term, paying, and HAPPY tenants is a good starting point to hitting those numbers. The last thing you want is to introduce new terms and give those happy/long-term tenants an out to their lease.

Oh yeah -- some leases have a clause that says if the landlord changes something, it opens a cancellation window. That's there to protect the tenants from landlords who raise rent unexpectedly, introduce major changes to rules/regulations, etc.

All the more reason to consult your lawyer, determine what the additional costs would be for the tenant, get a sense of how tenants might feel about such a change, etc. I would not go into this with installing and then informing your tenants, who you have basically no relationship with, that they'll get an added water cost every month and there is nothing you can do about it.