All Forum Posts by: Jeff Petsche

@William Smith I am born and raised in Southern California and have been in real estate since 2003 as a real estate Broker/Agent representing buyers/sellers/flip investors.

Your SD market is insanely expensive, as is my area of Orange County. Yes prices are more affordable the more INLAND you go (San Bernardino and Riverside Counties), but IMHO I don't believe BUY/HOLD investments pencil in our areas.

To confirm my hypothesis, I have analyzed over 200 deals from investment properties that SOLD in the MLS, took the numbers I had to work with from the listing agents, and NONE even came close to respectable numbers. The rent/value ratios are .05 or lower, CAP Rate average was about 4% and COC was less than 6%, so maybe you will have to go out to Bakersfield, Victorville, Hesperia, Beaumont, Indio and other high desert markets to make it work. The risk with these investments is when the correction in CA comes, these areas get hit HARD and FAST. If you buy in CA with the speculation of appreciation year after year after year, then I believe you are just gambling and not looking for the long term wealth.

I suggest you WAIT until we get back to a Buyer Cycle I and II and then ride the Seller Cycle I and II wave next time around. I believe we are currently in a high point of Seller Cycle II. I know many investors in our areas who bought their SFR/Condo buy/hold properties at the right time (Buyer Cycles I and II), are now unloading their properties because they made stupid equity, and are doing 10-31 exchanges into multi-family properties out of state.

Prices in our areas of SOCAL have been rising since 2011 because of LOW INVENTORY and HIGH DEMAND. As long as this trend continues, I do believe prices will continue to rise about 5-6% per year. However, when the "correction" comes, and it will because it always does and we are close to the end of our UP CYCLE, property values could (and probably will) drop double digit percentages. Why, because CA is the king of BOOM/BUST states.

Me personally, my girlfriend and I have decided to RENT in CA at this time because of over inflated prices and we are investing some of our cash into Out of State BUY/HOLD properties, and keep some cash for when we decide to buy back into CA when prices drop (my projection 12-18 months).

We are looking at SFR and multi-family properties in Indianapolis, IN, Kansas City, MO, Oklahoma City, OK and Columbus, OH. Criteria: We are looking to incorporate the BRRRR strategy and focus on properties that hit the 1% rent/value ratios, COC of no less than 12% in great B/C neighborhoods with appreciation of 3% a year. These markets don't typically get hit very hard when there is a correction and properties still cash flow, which is what we focus on, not the appreciation because we will hold these properties 15-20 years, unless we sell and buy UP into bigger units.

@Dustin Ruff Thanks for starting the thread. Not sure I have the most exciting story to share, but here goes.

At 19 years of age (I'm now 51, so that was back in 1985) I entered the United States Air Force for two main reasons: 1. To get $10,000 from the GI bill so I can pay my own way through college and 2. To receive VA benefits when I exited the military, primarily the VA loan benefits to buy a home. I have two great parents, but I did not grow up wealthy, big fancy house, lots of money, exotic vacations, etc. We were a very simple family and both my parents are blue collar workers who live and think like most that are described in the book Cash Flow Quadrant (Get a job, pay off your ONE house you live in, save your money and collect a retirement pension). I never grew up learning about business or investing.

After exiting the military in 1989 with an honorable discharge, I started college and lived at home for a short time before living with my GF (future wife, but now ex-wife. It happens!) and another mutual friend. Wish I would have known about "house hacking" back then!

After one year of college, my roommate, who was a police officer, had me look into law enforcement as a career path. I did, and in 1990 I was hired full-time as a police officer for Newport Beach, CA. I worked as an officer from 1990 to 2003, but unfortunately received a medical retirement due to a few on duty injuries. During those 13 years I got married, had two beautiful daughters, finished my education by receiving my BA degree in Criminal Justice and purchased TWO primary homes. My first home was purchased in 1994 using my VA loan. I purchased the property for $154K (not happening today in CA) and was out of pocket a total of $1,450 to close the deal. I sold this property in 2001 for $240K and purchased a new primary home in an up and coming area (different county) for $247K (bigger home by 2X). Did not use my VA on this property, but instead used the old 80/10/10 loan. We lived in this home raising our family until 2010, when we got divorced, and sold it for $410,000 (It got as high as $625K during the crazy days of 2005-2006).

From 2003 until the present I’ve been working full-time in real estate on the retail side of things making a good six figure income from selling, managing an office(s) or both and I receive my police retirement of about $4,100/month tax free, so it’s not for a lack of income to invest. Back when I was married it was because of bad credit. I was going to invest in buy/hold rentals back in 2004-2005 in both California and Texas, but my credit was not great due to some poor financial decisions made by my wife at the time, which affected my credit because she was a stay at home mom and everything was in my name. I was unable to get a traditional loan, so I had to sit on the side lines while my friends invested in Texas and did very well. I was not educated on creative financing back then, so I sat and watched while working on getting my credit back in order, which is now over 800..YAY, and I no longer have a wife!

After getting divorced I rented for 2 years, got my financial life back in order and bought a primary home in 2012 using my VA once again. I purchased the home for $265K and $2,400 out of pocket, and just sold it in December of 2016 for $420K. I cleared over $175K TAX FREE thanks to Capital Gains!

So here I am now, 51 years old, sitting on plenty of cash to invest, I’m Semi-Retired because my police pension of $4,100/month covers all my monthly expenses (PASSIVE INCOME) and I also make good money actively running my retail real estate business. I’m involved with a wonderful woman, who I live with, and she is a VP for a large national medical device company, so financially we are good and ready to move into investing.

We have both been educating ourselves through reading books, listening to podcasts, reading forums on BP, etc. and it’s now time to take that step into PASSIVE INCOME. We have no less than $250K to start investing with, so there is NO EXCUSE at this point to make things happen.

We have decided, based on great insights from Cash Flow Quadrant to NOT purchase a primary residence and take on BIG DEBT at this time. We do believe that your primary home is a LIABILITY not an ASSET as outlined in Cash Flow Quadrant, so we are going to rent and invest our money in Buy/Hold Assets. We are looking at investing in out of state markets from SFR to 20 unit complexes using conventional loans and the BRRRR strategy. Our goal is a minimum of 10 units/doors per year over the next 12-13 years and have cash flow of no less than $20K/month by year 2030.

I’ve owned 3 homes during my adult life, and all were primary residences. I never lost money on any of these homes and although I wish I had been in a position to invest in rental properties much earlier in my life, it’s never too late to start and I still have some good years left in me. Not to mention we’ll be leaving something for our children to benefit from.

Like I said, it’s not the most exciting story, but it’s MINE and it’s REAL!

@Jordan Grimstad I've been in the real estate business since 2003 and some markets are hit more by a "correction" than others. I live in CA, so when there is a "correction" (not a crash) we feel it harder than say Indiana or Ohio or Oklahoma, etc. Regardless of the type of market, I will always look to BUY, so long as I am buying at the RIGHT PRICE going in and it makes sense for my END GAME investment strategy. I WILL NOT buy on speculation of appreciation. That's a recipe for disaster!  

Real estate is 'cyclical' and will always have the UPS and DOWNS. The key is not so much buying at the right time, it's buying at the right price! You make your money going into the deal more so than when coming out.

You need to look at your end game as well. If my strategy is to own buy/hold properties that cash flow, and I'm holding them for 20+ years, then I don't care what happens to the market in the short term because historically the real estate market has yielded a 8%+ return each year. If you go into a deal with speculation of "appreciation" and that's your focus, then you are gambling IMHO. Go for the properties that CASH FLOW!

IMHO, if you are in the WHOLESALE and FLIPPING game, you run a bigger risk during a downturn "correction" than someone who is in the BUY/HOLD game where they are holding their properties for 10, 15, 20+ years.

For me, it's all about CASH FLOWING, PASSIVE INCOME and acquiring ASSETS, so as long as I get a deal at the RIGHT PRICE going in, and I'm holding that asset for 20+ years, I don't care so much about appreciation.

@Jaysen Medhurst Thanks for the information Jaysen. I also assume you factor in the actual property taxes/insurance, or do you use a rough % when first analyzing the deal?

I must first start off by saying I don't yet own any investment properties, so maybe I should sit on the sidelines for this one. However, I have been in real estate since 2003, representing several retail and investor clients, so I'm not completely foreign to the game. I've also been doing a lot of reading and have attended an advanced boot camp on multi-family investing and have analyzed several opportunities with other seasoned investors, so take the following for what it's worth. I yield to the PROS who own property and would love to read their input on this matter for my own education.

Okay here goes;

The "comparative sales" approach, which sounds like what you are trying to use to determine value, is typically used for 1-4 unit properties, but anything with 5+units it's about the property's NOI in determining value. Because you are a residential flipper, it's always about ARV, but with the 5+ unit properties it comes down to NOI. If I can increase my NOI (increase rents, lower expenses, add additional income through laundry, storage, vending machines, etc.), I increase the value; regardless of what another 8 unit community down the street sold for.

You can have TWO identical 8 unit properties side-by-side and one has a NOI of $25,000 and another at $32,000. If you shoot for a CAP RATE of 10, the first property has a value of $250,000 and the other $320,000.

Banks are going to be looking at the income the property generates, not what a like property sold for.

In your numbers, if your NOI is accurate at $24,688 (based on the $850 rent), then for a CAP Rate of 10, the value would be $246,880. Your numbers put the CAP Rate at 8.2% ($24,688/$300,000). Still a respectable CAP Rate, so now I'd want to know what my COC is going to be. I personally want a minimum of 10%, but ideally I'm shooting for 12%+.

Also, I believe vacancy of 2% is TOO LOW when analyzing a deal. Minimum of 5-7% vacancy should be factored in and to be ultra conservative, 10% is what I use when analyzing a deal. I wouldn't go below the National Average, which is currently at 6.9%.

I'd be curious to run this property through my software analyzer, but I'd want more information to feel better about my findings.

On the BARE surface, and because I would ideally be looking for a CAP of 10 or better, my starting offering price would be around $246,000 and may event take another 8% to 10% off that to get the negotiations started.

It appears you are analyzing this property with more of a "flipper" mindset, which is expected because that's what you have been doing, but you should be looking at this as an ADD VALUE play through increasing NOI.

Just my 2 cents, and with the value of the dollar shrinking every day, that is not saying much!

Good luck with your property!

@Sean C. I'll be sending you a PM.

I'm a licensed real estate Broker here in Southern CA and I'll give you my opinion on what is going on with wholesaling here in SOCAL.

@Samuel Lynch First I would like to thank you for your service. I am also a Veteran and have used my VA loan twice to buy my primary homes. Using it to buy a multi-family, live in one unit and rent out the others is not at all a bad idea, IF you the collected rent from the other units supports the property and you are living there for FREE.

I have been a real Broker in Southern California since 2003 and I can tell you first hand that prices here just do not pencil, unless you can find a REALLY SMOKING DEAL. I know some on BP feel you can still invest in SOCAL and hit certain numbers, but IMHO I don't think it's the smartest move TODAY. In 2-4 years we could be having a different conversation because the market is about to SHIFT again.

I'm not a fan of BOOM/BUST state investing because I am looking to invest for CASH FLOW, not appreciation and speculation, which is why I'm looking to invest OOS in areas that have signs of emerging markets through growth, jobs, stronger economy, etc. (Ohio, Indiana, Tennessee, Utah, Oklahoma, Georgia to name a few)

I've made money buying real estate in So. California, but it was always either during a Buying Cycle I or II, not during a Seller Cycle II, which is where we are NOW and reaching the peak.

I just listened to a BP podcast with an investor from San Diego who is a teacher. He purchased some great condos in the San Diego market in I believe it was 2009-2011. They all cash flowed and of course he rode the appreciation wave from 2011 until 2016, but has since liquidated ALL properties and did 10-31 exchanges into larger apartment units OUT OF STATE. He went from one property cash flowing $5,400 a year to an apartment building where his cash flow will be $24,000 a year.

I fell you have missed the buying cycle for now, but it will come back and by NEXT SUMMER we could be talking a whole new ball game.

Good luck.  

@Marshall Easlick I agree with the other comments that have been made regarding buying a "NEW HOME/NEW CONSTRUCTION" does not make a lot of sense with regards to buying/holding as a rental.

As someone who is also a Veteran, thank you for your service by the way, I have used my VA loan twice. The VA funding fee is almost always rolled into the loan amount and the VA non-allowables should be paid by someone other than you.

As you know, the VA loan is for "Primary Residence Only", but I believe you now have the ability to rent it out after 12 months, but the REFI is tricky.

You need to talk to some lenders who are QUALIFIED in the VA space regarding your strategy with the REFI out after one year, etc. It's not as black and white as it sounds because I was going to use the same strategy and was told by several lenders that I couldn't do that. I've been told that the VA loan # stays with the home you purchase until it sells, so when you REFI it does not necessarily "free up" your VA loan ability. Also, you may not be in a position to REFI after only one year unless the market does really well and gives you enough equity for the banks to approve a REFI option. And in my opinion, we are ending the peak of the market, so I don't believe the appreciation would be there in 12 months to make that REFI a reality.

One strategy in using your VA loan, and it gives you the ability to start getting buy/hold doors, is look at buying a multi-unit (Duplex, Tri-Plex, etc.), live in one of the units (if that's a possibility for you) and rent out the others. Under the VA rules, as long as you live in a unit (usually the largest one), you can buy a multi-family using a VA loan. After 12 months, move out and fill it with a renter. Now you have a performing multi-family buy/hold rental and you got in with very little of your own cash. As long as the other unit's rent can support the entire property through operating expenses, CAP EX, vacancy, debt service, etc., then it's worth looking into.

I'm looking at doing this very same thing with a 4-plex using my VA loan. Live in one of the units for one year and rent out the other 3. So far I have not found one that makes sense, but it's on my radar.

*Disclaimer: I am a licensed real estate Broker in California, but I am not a real estate attorney or tax professional. This post was not intended to give real estate advise for the Colorado market, any legal or tax advise and I recommend that you seek out professionals in your state for such advise and information pertaining to your personal situation. 

@John Kunick tell it like it is John, and no judgment here! hahaha

Combination of government and bank greed is what started the problem!

@Jay Hinrichs @

I don't live in Texas and I'm not in the transactional wholesale game. However, as an ethical real estate Broker here in CA, the wholesale business here is CRAZY-CRAZY (as I'm sure it is in other states) with a TON of Daisy Chain types of transactions going on, and from what I can tell, NO DISCLOSURE like what is mentioned in the original post is happening.

I'm my humble, professional and ethical opinion as a licensed Broker bound by the California board of ethics, I feel FULL DISCLOSURE as to your INTENT with a transaction is VITAL and could eliminate the muddy water that takes place with wholesaling. In fact, IF I were to get into a wholesale opportunity, I believe because I am a licensed Realtor/Broker in CA, I would be required to disclose that my sole interest in the property is "equitable", I'm not the buyer and my INTENT is to assign the contract to an end buyer, and disclose the profit I would make above and beyond the original agreed upon price. At that point, if I was the seller, I would ask me, "Well why don't you just bring me the cash buyer at the higher price and just get paid a commission for said representation?". Truth is, that would be a 100% fair question to ask. You also have to disclose in the original RPA as to whether you INTEND or NOT INTEND to occupy the property. 

Wholesaling is not illegal here in CA. In fact, there is an Assignment clause in the CA RPA (Residential Purchase Agreement) that requires you get consent from the seller in a separate written agreement to a specified assignee. It reads: Assignment: Buyer shall not assign all or any part of Buyer's interest in this Agreement without first having obtained the separate written consent of Seller to a specified assignee. Such consent shall not be unreasonably withheld. Any total or partial assignment shall not relieve Buyer or Buyer's obligations pursuant to this Agreement unless otherwise agreed in writing by Seller (C.A.R. Form AOAA).

The C.A.R. From (AOAA-Assignment of Agreement Addendum) outlines the details of Partial Assignment, Total Assignment, Assignee's Name, etc. and a section where you check a box stating that Seller has been advised that Buyer IS or IS NOT receiving monetary consideration from Assignee for the Assignment. It DOES NOT require you to put in an amount. (Not yet anyway!)

Since it's REQUIRED for the Seller to give written consent to a SPECIFIED ASSIGNEE, I have no clue how these DAISY CHAIN wholesale deals every fly unless each wholesaler is completing NEW AOAA (or legal version of) with the new Assignee, which in some cases is 3 to 4 deep before you get to the actual end buyer! To me I would RUN RUN RUN from Daisy Chain wholesale deals.

I know of a wholesaler in town who advertises his properties and specifically gives a disclaimer that he WILL NOT assignee to anybody other than the END BUYER. NO DAISY CHAIN wholesaling will be tolerated and/or considered.