All Forum Posts by: Jon Licht

Likewise!  Thanks for the feedback.

On emails lists, LOL!  Ya, great points on gurus and preying - I agree with your feedback.  I guess it is relative.  I suppose I am likely just overly salient when I hear ********, so it registers in my mind that it's mainstream :).  

On your points on averages, gotcha.  Completely agreed.  I love your analogy.  I would bolster your point by taking a look at the probability distribution.  For a normal and concentrated distribution, the law of averages is probably OK.  My dataset is small.  But to your point, the flatter and more skewed the distribution, the less appropriate it is to leverage the law of averages.  It's not appropriate here - which also suggests using a range for cash flow.    For instance, in your analogy, the distribution would be insanely right skewed with most observations being zero and a few being $1,000,000 or whatever.  This is also a great point related to venture capital.  People say, "hey, the average multiple in VC is 2X, so this beats the S&P".  But if you look at the distribution, it follows a power law, not a normal distribution.  The takeaway is that most of the returns in VC are from a very few investments in unicorns and decacorns.  And most VC firms fail to beat the S&P.  The ones who do are outliers - and skew the distribution.

 @Greg Scott Thanks for the feedback, a couple points.

* Yes, it is a sample size of three, lol.  If you read the scope of the post it is validating or falsifying real estate dogma relative to my portfolio (a sample size of three).  My goal is to expand the dataset to deduce market-wide implications.

* "What is your ability to forecast the returns from your stocks?"  This is a really great point.  So there are three phases to any investment data analysis.  Phase I is simple calculations such as alpha and beta.  That is the scope of this post.  Phase II is expanding the dataset to assess the wider market.  That is what I'm hoping to do.  Phase III is leveraging machine learning to make predictions.  So the point of this post is to challenge anyone to evaluate their portfolio relative to what the projections were.  My hypothesis is that they were off.  See my response to @Jonathan R McLaughlin but if we're following basic statistics, this data suggests that the only appropriate way to predict cash flows would be a range within a certain confidence interval.  Again.... that's with a dataset of 3.  My goal is to grow the dataset to provide market-wide findings.

* "Out of about 35 multifamily and 15 single family deals, cash flow projections were pretty dang close for most."  If you are taking a look at a longer than monthly time horizon (let's say annual) and you focus on large MF deals... then, yes, I expect volatility would go down.  But, here's the issue... There are numerous product on the market for retail investors that suggest things like "buy 20 properties cash flowing 300 / month and retire with 6,000 / month!!!".  Now you - as an experienced investor - know this is silly.  But, imagine someone in their 60s starts listening to BP and decides to reposition their retirement portfolio into turnkey SFHs.  Their 6,000 / month turns into anywhere from $0 to 10,000 / month.  That is unlivable.   If my data is any representation of the market - that person could be in serious trouble.  My goal is to grow this dataset (I would love to collaborate on your deals BTW) and be able to provide market-wide findings.  Turnkey Vendors should be held accountable to abide by simple math.

* Yep agreed - when incorporating tax benefits real estate is the easy winner. There is also nothing here suggesting that real estate is bad - I am an avid real estate investor. I didn't include my vacation rental portfolio here (which is what I focus on now), because they weren't passive investments - I actively manage them. The point of this post was to take a look at passive SFH turnkey opportunities. This data suggests that mainstream dogma is largely inaccurate. Like I have said a few times - the scope is very small, and my goal is to grow it. But .005 R2??? c'mon. It took me 1 hour to do this. yet you have 'professional' real estate vendors still providing static cash flow estimates. It's a violation of basic math.

Thanks for the feedback!  A couple points:
* On your first one, I still respectfully disagree.  Here's an analogy.... guns.  Take a stabilized M4 at 1000 yard.  You would expect to hit the exact same spot every time, right?  Wrong.  Due to uncontrollable error in the mechanics of weapon systems, they can only be guaranteed to have precision to a certain mil range.  The same applies to real estate.  My point is that calculating a single static value and saying (this is my estimate) is silly and contradictory to basic math.  Now you intuitively know this as an experienced investor.  My issue is that to me this is criminal for inexperienced retail investors.  There are tons of people saying things like "If i buy 20 properties at 300 cash flow a month, I can retire".  Rhetoric like this (in my opinion) is fueled by poor math.  The appropriate way to project cash flows would be to provide a range within a 95%-or-so confidence interval

* I'm not sure what you mean by "averages don't mean much". Benchmarking ROI against the S&P is really the only way to know if you are winning as an investor or not. I didn't provide the values here, but that is the fundamental calculation for any investor - alpha and beta

Five years ago I began my journey as a real estate investor.  Since then I have also branched out into other assets such as angel investing, note investing, and fund investing.  In comparing common "real estate dogma" to other professional investing circles, it seemed to me that real estate was behind the curve.  My gut instinct told me that much of what I was 'taught' was wrong.

To confirm or deny my gut instincts, I conducted a retrospective analysis of my portfolio against three common tenants of real estate that I was 'taught'.   The results of that analysis and implications are listed below.  To be clear, the scope of these findings are specific to my properties over a 5-year time horizon.  I am not saying these findings apply to all properties (yet).  My OBJECTIVE is to meet other investors who want to excel and grow this dataset to achieve further-reaching conclusions. 

1. Real Estate Analysis 'Calculators' provide a reliable way of estimating future cash flows (and valuation)

Finding: FALSE.  I ran a correlation analysis comparing the projected versus actual NOI for my three properties.  For the portfolio, the R2 value (correlation) for monthly cash flows was .006 percent, meaning there is no correlation.  In lamens terms, the 'calculator' was completely wrong.  An easy justification here would be to say "ok, maybe you need a better calculator".  However, that misses the point.  The point is that actual cash flows are volatile and it is silly to attempt to predict a single numeric value projecting cash flow or ROI.  Doing so, to me, reflects a fundamental misunderstanding of the asset.  It's lazy.   From a simple math standpoint, PROFORMas should be providing investors a range of possible cash flows based on a 95% confidence interval & comparable data.  So, the projection would say 12% ROI +- 10%.  This data suggest that any calculator or analysis that does not provide a margin for error is horrendously erroneous.

2. Real Estate provides a steady stream of cash flow that can be used for 'financial freedom' planning

FALSE.  Due to the volatility of actual cash flows, it does not make sense to estimate a single projected 'monthly cash flow' value.  Some may say "ok, great, but when you have more properties, volatility goes down".  My answer... maybe.  If you take a look at this data, the portfolio R2 is worse than two of the properties.  .006 is also abysmally low.  My suggestion - run this analysis for yourself to understand the volatility of your portfolio before making any estimations on 'financial freedom' numbers.

3. Real Estate Investing outperforms the S&P

TRUE.  But, barely.  Note in the images below that Cash flow from Financing (refinances) was 10X Cash flow from operations.  My CoC was approximately 3%.  What this means is that my portfolio ROI is highly dependent on the housing price index.  If I did not refinance all of my properties, my ROI would be terrible.  This suggests a few things.... 1) if I had 40-50 properties, this would be a nightmare... Every 5-8 years I would need to refinance everything.  2) In current market conditions (with the risk of a correction), this suggests that less volatile assets such as multi-family are a safer bet.  

Hi all,

I am house hacking my primary residence in California.  It's a 3/2 with 3/4 acre lot.  The backyard is amazing & a great location for hosting parties.  I'm wondering whether to rent out extra bedrooms via AirBnB or to list it on Peerspace and host parties.

https://www.peerspace.com/

Does anyone have experience with Peerspace that wouldn't mind sharing?  Thanks!

Update... the (4) below lenders offered a HELOC on my rental property in California. But, I can only own a maximum of (4) houses [I have 5]. I'm going to sell one of my smaller properties in the mid-west so that I can quality. Thanks for the feedback all!

Cal Coast Credit Union and Fremont Bank

PenFed

First Tech Federal

First Republic - California

@Justin Phillips would you mind PMing me which lender you used for the 1st position HELOC?

Hi all,

I have a duplex in San Diego, CA. Approximate numbers are $500K bank debt, $800K ARV, 63% LTV. It's a rental & I don't want to sell.

I called PenFed about a HELOC, but they won't underwrite it because I have more than 4 properties. I'm thinking about maybe transferring a few other properties to an LLC and getting them out of my name. Will that help with the HELOC from PenFed?

Any other ideas on financial instruments where I can access the equity in the rental?

Thanks!

Hi all,

I'm looking into lenders who offer HELOCs on rental properties.  I have heard PenFed is the only national lender.  I have also heard that an alternative method is to reach out to local lenders.

Has anyone worked with a lender that does HELOCs in California?  Specifically San Diego.

Thanks!

Thank you all for the input!