All Forum Posts by: Joseph Hennis

@Steve B. Hi Steve, nice to hear from a fellow engineer. You are correct that there is an inverse relationship between cash flow and appreciation, but how tightly correlated those two variables are depends on the market in question.

For instance, in the commercial mutli-family market those two variables are strongly correlated because the primary buyers of multi-family are buying as an investment. However, in the single family residential market these two variables are only loosely correlated. Other forces become the dominating market factor.

Real estate values are inversely proportional to the debt service. When mortgage payments go up, values go down. So if the area has a high tax rate, when values go up, taxes go up, mortgage payments go up, and values go down. There is a counter-balancing effect with high taxes. Similarly, if the area has high insurance rates, like a flood zone, there is a counter-balancing effect. As values increase, insurance costs go up, mortgage payments go up, and values go down. These two things tend to cause flat markets (very little to no appreciation).

Rents in these areas tend to continue increasing over time but since values are kept down, cashflow increases. Some of the best markets for cashflow have very flat RE values. I may buy some property in these areas just for cashflow, but my main focus right now is appreciation (until I hit my goal of 3 million equity) so I will mostly avoid these areas. Other appreciation killers include high crime and declining population.

Interest rates are also inversely proportional to RE values, but interest rates tend to affect the market as a whole.

@Max T. @Steve Allen Philadelphia area is a place on my radar. Historically it can see large double digit appreciation but had a long downturn lasting into 2015, so it is just beginning it's cycle. It is also a difficult market for an out of state investor because of the high crime, war zone areas. You've got to know the area, block by block.

@JD Martin While I agree with you about the need to keep insider knowledge "inside", real estate market conditions are hardly insider knowledge. That's public information. What's worse, is keeping that information to yourself is only hurting yourself in the case of appreciation. If you are looking for appreciation, you want MORE investor demand to help drive prices higher. Competition may make deals harder to find, but will also make them more lucrative, especially if your strategy is buy and hold.

@Maxwell Lee Is Jacksonville,  FL currently experiencing high foreclosure rates?

@Maxwell Lee & @Steve Allen I will check into Boise and Jax. I have family there too, so the bonus is I get to visit them more often. =)

@Andrew Johnson I'm not sure how I got that from your reply either, lol. I think I misread it.

I agree with you on the cashflow, it has to be there. It's probably best to have a mix of properties that cash flow only a little but will appreciate long term, and properties that have large cashflows but not necessarily as much appreciation... (though one can always hope...)

Right now it is definitely more difficult to find areas that will have both appreciation and cash flow. The strategy is to invest in areas that are cash flowing first, and will likely, though uncertain, appreciate.

@maxwell I bought in California in 2009, then switched to Utah 2012-2014.

@Diane G. clearly it does exist. I have already done it. I will do it again. It's not that hard. Just gotta be patient.

@Andrew Johnson I disagree with you on some of that. Appreciation isn't just a guessing game or gamble, there are strategies to position yourself to get it when it comes, but you are right, it is not predictable in the short term. It's kind of like they say in the BP podcasts, you make your own luck by being out there and talking to people. In the rental market, you make your own luck (for appreciation) by being in the market and owning rentals. That doesn't mean you should buy barely cashflowing properties in a place that has, and will likely never have, appreciation. 

@Maxwell Lee Yeah I'm not looking for a confident answer. Appreciation doesn't work like that. One thing to look for is an area where the market is depressed currently, but historically the area sees appreciation (like california, 2008-2013).

Look, there are articles out there with EDUCATED guesses. Educated because they analyze trends and look at market data. No, no one has a crystal ball and will know what will happen in the next year, but over much longer periods of time, the market has predictable cycles. I am a patient investor.

In any case, I will be earning money from the cashflow and debt repayment, long term. Just don't really want to be in an area where it will never appreciate. I already have some ideas and places on my radar. Just wanted peoples' opinion on some other good places out there. Maybe I have missed an obvious one.

I realized i never answer your question about self manage vs PM. Here is my experience and take on that... I did self manage my first house hack, when I had a roommate with my first property. Two things I took away from that. 1. My wife can't live with roommates, so scratch that idea. 2. I suck at property management. I even took some classes at a local community college on property management. It didn't help me much. Does that mean I should quit real estate altogether?

Well, 526k equity later... I think it was good that I didn't quit. Instead, I hired (and fired) property managers. The best part is I hardly have to do anything for my real estate. I just get occasional emails, or calls, that I may have to deal with. Generally really simple and easy to maintain while going to school (UC Davis) and working as an engineer.

Really, I already knew I wouldn't be that good as a PM. I realized early on I would be better off hiring someone. My parents had owned a rental before and had failed at it because they tried to self manage (they even discouraged me from buying rentals). Sucking at property management runs in the family, it seems, LOL. Now, my parents have their own rental that I got them a property manager for, and everything is doing fine.

So the question you have to ask yourself, honestly, do you think you would be a good property manager? Have you taken any classes or have any experience in the field? Do you have a personality naturally suited to dealing with people issues (the property repair part of PM is easy, it's the people issues that are difficult)? If not, get a PM. Easy fix.

So removing capex on a short term hold strategy with a property that is brand new may work, but stuff starts to fail just 5-10 yrs in. Life span on a water heater can be less than 10 years.

Capex does not equal repairs expense, however. You have to include for other repairs too. Other repairs can run 10-20%.

Stuff like toilet clogged, sewer line clogged, broken light switch, door hinge coming out of wall, sink leaking... etc. The list goes on... These are not capital expenses (capex).

Generally when analyzing deals, if the numbers dont look nice, its not going to turn out well for you to change the way you calculate instead of looking for better deals.

Have you looked at the bigger pockets marketplace? Ive seen wholesale deals on there with great numbers...

My strategy thus far has been to find properties that cash flow $300-500 a month in areas that appreciate. While the cashflow I have earned thus far has been mediocre ($3k-5k/yr for last 5 years), the appreciation has been huge ($526k, huge for me anyway, lol).

I am hoping to repeat this success with my future purchases, but I know it won't work in the areas I bought in previously. They have already appreciated beyond the price for which they would cashflow.

So, what areas right now still have decent cashflow (monthly rents are 1-3% of purchase price), and are in an area that historically has seen, and is likely to see again, appreciation?

Thanks BP!