All Forum Posts by: Kathryn M.

Hi Risa,

I highly recommend the local South Bay meetup this Friday http://www.biggerpockets.com/forums/521/topics/144... . I think meetups like this and other local ones in Oakland (J Martin), San Francisco (Johnson H) and Santa Cruz (Shane Pearlman) are a fantastic resource... lots of very experienced and helpful fellow investors who generously share their expertise and experiences.

@J. Martin ) were critical in helping me determine my next investments.

@J Scott  said:

Let's say someone in my area takes that same $100K and leverages it across multiple properties in an area where he can get 15% leveraged COC return, but only 2% appreciation (assume it holds steady with typical inflation). The $100K invested at 15% COC -- and assuming the cashflow can be reinvested at the same rate, just like your scenario -- will be worth about $813K in 15 years -- for a gain of $713K.

Hi J. Scott,

Do you know of a work around for CA investors who lose up to 50% (a little more) on rent re-investment for your second scenario? Whereas appreciation gains stays untaxed until sale (possibly never if held until death).

Hi Tony,

Welcome to Bay Area BP. I highly recommend the local meetups, I think the closest ones run regularly are Oakland and SF/South Bay by @J. Martin emphasized, things are never the same. I am no expert but I will share  my personal generalization which I think might address your question.

All things being the same: 

* A small house (not necessarily condo) will appreciate at a higher percentage than a larger house. IMHO this will be due to the higher % of land (appreciates) vs building (depreciates) ratio. Perhaps related to adage: buy worst house in the street.

* A larger house will rent at a higher % than a smaller house --> IMHO rent increase will be higher than the increase in operational costs.

The combination of the above two will determine your total return. I can't think of generalization that addresses the combination as the mix covers a such a wide spectrum.

* In a "normal" steady state market (not 2009), a single family home will appreciate better than a condo due to higher % land value. Since 2009 some condos have appreciated spectacularly well  as they were "oversold" in the financial crisis.

* Condo operational costs could well be less due to less land, exterior area per entity. However, that assumes similar operational efficiency... IMHO this is not guaranteed and will depend on the specific Home Owners' Association.

Hi @Riley F. 

Congratulations on the great discussion that you started. I am much smaller time than many BP investors and love to learn from the very varied experiences that they share. 

A couple of months ago, I struggled with exactly this question and would also love the analytical approach that you seek. Alas, I have settled for a process that will sound more like the WAGuess that @Account Closed  's philosophy of viewing real estate portfolio like dividends/capital gain; value/growth stocks and also have a bit of a mix... though mine are emerging market + growth vs value + growth.

5. All of the above are before-spreadsheet-constraints. I then start with initial 6% (after 50% operating costs) cash on cash return. In order to even get this I have to force some appreciation by rehabbing something that normal people (non-investors) are reluctant to buy.

6. My appreciation spreadsheet number is lick the finger and say conservative 3% based on CPI... on average real estate/rents will go up with inflation. I am expect/hope/wish that the properties I have chosen specifically for appreciation will do better than average. IMHO this is akin to comparing Google to S&P 500, if you think GOOG is an above average stock.

Base case: 6%+3% is > bond return makes current RE barely worth it. As leverage drops and properties appreciate that return on investment drops off dramatically.

I predict that actual appreciation will run between 3%-12% over 20-30 years. LOL how is that for a forecast.

7. Agreed that I need my icing (appreciation above CPI) to make real estate worthwhile. I continuously run a CAGR (compound annual growth rate calc) including appreciation (my estimates, some validated by refi cash out appraisals). 

8. I certainly don't think I know more than J. Scott. However, it is precisely that I know less than J. Scott, I have to settle for vagaries of appreciation returns. Amit alluded to the benefits of buying 20 years ago - great if you can do it!!! However, due to 2009, I feel I have "banked" a few year's of appreciation... and thus it makes the math a LOT different to buying today. Also, even though I am buy and hold with 30 year horizon, I hope at any point I can move to a higher cashflowing property... with the attendant 1031 headaches.

So Riley, that is my "appreciation" tale of "OK so far, future is definitely uncertain". It would be wonderful if past returns could predict future returns but I know that is not possible.

Hi Amit,

Thought you, @Account Closed and other thread contributors might be interested in this article. I support the intent but IMHO the lack of % returns and time period chosen, slant it a bit too heavily towards appreciation :

http://www.marketwatch.com/story/where-you-can-cle...

I love this quote from @Amit M. :

What I prefer is finding a property where I put some brains and renovations into, and reposition it. 

I too, try to follow this strategy... just need a brain the size of Amit's !!!

Wow @Amanda Hensley did much better LTV% than me...

BofA said no, Wells Fargo said 60% at a reasonable (IMHO) interest rate. Great mortgage broker Andrew Chen at MPR financial Albany, CA (sorry no use to you) offered me a range of choices at 60% and 65%.

Valuations were a bit lower than I would have liked, but kinda expected.

I was very happy with the overall result... it is financing another property.

Hi,

I am not an expert but I think you might be exempt from specific Oakland rent control according to http://www2.oaklandnet.com/oakca1/groups/ceda/documents/policy/dowd008111.pdf:

Excerpts:

8.22.030 Exemptions

A. Types of Dwelling Units Exempt. The following dwelling units are not covered units for purposes of this chapter, Article I only (the Just Cause for Eviction Ordinance (Chapter 8.22, Article II) and the Ellis Act Ordinance (Chapter 8.22, Article II)) have different exemptions):

....

8. A dwelling unit in a residential property that is divided into a maximum of three (3) units, one of which is occupied by an owner of record as his or her principal residence. For purposes of this section, the term owner of record shall not include any person who claims a homeowner’s property tax exemption on any other real property in the state of California.

...

D. Exemptions for Owner-Occupied Properties of Three or Fewer Units. Units in owner-occupied properties divided into three or fewer units will be exempt from this chapter, Article I under the following conditions:

1. One-Year Minimum Owner Occupancy. A qualifying owner of record must first occupy one of the units continuously as his or her principal residence for at least one year.

2. Continuation of Exemption. The owner-occupancy exemption continues until a qualifying owner of record no longer continuously occupies the property.

I was very much looking forward to continuing chats with @Account Closed meetups and very wise and generous attendees, I am on my way to implementing an improved strategy of cashout refi and increasing cashflow.

Hi,

As someone near your Dad's age, I can give you some considerations (but no answers) from your Dad's perspective:

If I was your Dad, I would be looking to support all living expenses from my entire portfolio. The portfolio may include e.g. real estate and stocks/bonds. Personally, I have a mix of cashflow and appreciation (significant long term tax benefits for my estate) objectives from my real estate, and am ideally aiming to double the cashflow (living expenses) from my real estate portion before full retirement.

Differing exit timing is one of my biggest concerns with taking on a partner. I intend to buy and hold until death (and a bit past depending upon tax benefits). My intention is to only sell for strategic (after tax return increase) or catastrophic (unplanned) reasons. However, if you or your Dad intends to sell to fund e.g. future principal residence, long term care or vacation travel it would be good to know ahead of time and have a well defined and funded exit plan ahead of time. IMHO it certainly doesn't hurt to have the kind of conversation (and written agreement to avoid misunderstandings) about specific objectives and exit timing that you would have with any partner.

BTW: If you are lucky, your Dad has a plan for living expenses funded without selling and he hopes to pass the properties to you. That is my plan, but although they know our current net worth, I don't let my kids plan on this - I tell them my plan is to extract value from every dollar of our net worth, party to death and die with exactly zero net worth!

From the little you have described, it sounds like it could be a very complementary partnership as presumably your Dad does not want to be involved with the day to day running of the investment properties and you are in the industry and able to be more hands on. 

I would caution going too low looking for cheaper properties seeking higher cashflow. IMHO the possible risks that increase with cheaper properties are related to tenant management, operating expense ratio/rent and overall depreciation, which may lower your overall return. Some appreciation may be important to your overall return if your intention is to buy and hold until stepped up basis.

You don't say whether you are using leverage or not... this is something that I see different with you young whipper snappers - paying more for 30 year fixed is the way to go in this interest rate environment whereas the I prefer 15 year fixed - no leverage and maximum cashflow as soon as we stop earning W-2 $. Shorter terms certainly won't hurt you - lower interest rate, higher ROI on that specific property :-)

If you haven't already absorbed it - I recommend you fully embrace the 50% rule - plan like operating costs (excluding financing) are going to consume 50% of your rents. ie don't spend 100% of your cashflow on living and get caught by vacancy, economic downturn, rising interest rates, new roof etc :-)

My advice is to just keep talking specifics with your Dad about his investment objectives so you and he will understand each other and enjoy your great relationship.

@Minh L. 

Thanks again for the detailed explanation. Are you expecting 14-16% p.a. return on equity from appreciation? If so, this seems like good multi-families appreciate at comparable rates to single family homes?

Sorry, to ask for the "multi-family for dummies" explanation.