All Forum Posts by: Matt Mason

Originally posted by @Account Closed:

Originally posted by @Matt Mason:

I personally don't see the appeal of owning property thousands of miles away unless it is a hands off NNN, a multifamily operation that has 100-150+ units, or other commercial property.

If I am correct, average home price in Beverly Hills is about $3,000,000. :) 

That isn't exactly an actively sought price point for a majority of renters. Not even close! Sure, owning a personal crib in Beverly Hills isn't too bad an idea, if you are thinking long term appreciation. Its just not a go to market for rental cash flow.

You are also correct, different areas have different strategies. Some markets are pure appreciation, some CF and some both. Think of it this way...if you really like the value add route, you can still do that in a market with strong CF potential. Nothing stops you from buying a value ad rental project in say Baltimore for instance.

Regarding investing out of state, sometimes it is unavoidable. If I happen to live in a market where the prevailing cap rate is 2 or 3% and I feel rental income should be a reasonably sizeable part of my investment strategy, then I will buy in markets with a slightly higher cap to achieve rental income objective. 

You sometimes wont always find abnormal appreciation and cash flow rates in the same market.

Doing a rehab from a distance isn't something I would want to do nor would I think it appropriate for a new investor.  

Also, you have to be careful where in a city you are doing your project and make sure you are going to get the rent increases necessary for a value add strategy.  That prob isn't going to be the case in a $40k house.  If you are doing multifamily I'd ask if your market has tenants who will pay to rent a nice apartment or are all the professional tenants just going to buy a house after a year or so.

Newbies seem obsessed with initial cash flow and gloss over attributes like the long term quality of the real estate, how they are going to manage the property, tenant quality, and exit strategies.

The successful investors I know have that Wayne Gretzky quality and are going to where the puck will be and not only focused on where it is right now.

Finally, while expensive, the average per unit apartment price is no where near $3M in BH.  

Originally posted by @Account Closed:

Originally posted by @David Faulkner:

Oops! Rent increases follow a similar trend as price appreciation, so LA rent increases at a rate ~1.5x Baltimore's.

Oops! Rents and expenses don't scale linearly with rents ... 2 single family homes in LA will have ~16% the CapEx of 12 single family homes in Baltimore, regardless of rents and price points.

Oops! 2 tenants paying $3500/mo each will be much easier to manage and a much better tenant class than 12 Baltimore tenants at $1,395, resulting in much lower vacancy and steadier cash flow with fewer management headaches.

Oops! Long term LA wins the appreciation game AND the cash flow game.

 Of course you have your way of looking at things....  we have to use what is reasonably certain than compound forecast and assumptions exponentially. some may argue that estimating a 3% increase in a rent control environment is excessive but general price increase is at 3% hence that is used for both cities.

Also, although 45% expense is estimated for both cities it can also be that expenses are actually higher in LA than Baltimore, so actual expense in Baltimore may be like 35 or 38% which is totally feasible.

Well, we let property management worry about managing properties within their allocated budget right? :)

Try not to take it personal Dave!

 3% is the lowest annual rent increase in the city of Los Angeles per its RSO.  In other words the rent stabilization ordinance mandates that the maximum annual rent increase is at least 3% every year.  In Beverly Hills it is 10%.  You can't make generalizations about rent control as it varies from city to city.  Also, single family houses cannot be subject to rent control in CA, so you are mixing up all sorts of items in your example.

Not that any of this really matters as all of these comparisons on BP between areas miss the point. Different areas have different strategies. If you want to buy a house and do nothing to it and sit back and collect rent, then I'd say a market like LA is not for you. LA is much more a value add market. Flipping for SFR and repositioning and modernizing multifamily in gentrifying areas is where the real money is.

I personally don't see the appeal of owning property thousands of miles away unless it is a hands off NNN, a multifamily operation that has 100-150+ units, or other commercial property. Locals are going to get the best deals over an out of stater and they also are going to manage the assets better even if they use a PM. E-mail and telephone only go so far and everyone forgets you still have to asset manage a property with a PM. That is a lot easier face to face in a market you know well.

If you plan on owning a home in Los Angeles and you like your home and it meets your current needs, then it doesn't make much sense to sell. You'll incur selling costs and lose your Prop 13 benefits. Also, there is no guarantee that you'll be able to buy a similar quality home for less in the next few years. As an example I bought my primary in 1999 and I remember in 2010, I had friends over and they said I should have sold a few years back. They may have been right, but I had no real reason to sell. I walk to work and had made some improvements to my home that I liked. Fast forward to now and the home value is higher than 2007 and I still have my assessed value based on the 1999 price, which saves me thousands each year even if I had been smart enough to sell in 07 and buy in again in 09-10. Instead I decided to go after small multi family. My biggest regret is I should have house hacked back in 99 and gotten into multi family back then or even in 01 or 02.

Indy is a great city and has a lot going for it.  Nice size city, great for major sporting events, good business environment and so forth.  Not sure it will ever be a major tech center though.  However, tech is growing too big to just be in Silicon Valley so there will be more and more clusters around the U.S.

Here in Los Angeles, a lot of people hate the Silicon Beach name, because it implies we are trying to replicate Silicon Valley or be another Silicon Valley.  Don't think there will be another Silicon Valley, but there will continue to be tech nodes around the country like LA, Seattle, Austin, Denver, Boston etc...

I went to college at Purdue, which is the biggest engineering school in the US.  If it was on the West Coast, there would likely be startups all around it.  However, the Midwest is tough for this.  Tech startups tend to be about doing things in new ways, have a global focus and are often started by immigrants, etc..  These are not strengths of this part of the country.

Originally posted by @Susan O.:

http://www.latimes.com/business/la-fi-tenant-buyouts-20160919-snap-story.html

Again.  Nothing in there about cash for keys becoming illegal. 

Originally posted by @Susan O.:

Originally posted by @Matt Mason:

Originally posted by @Susan O.:

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

Yes, you can do cash for keys in Los Angeles.  Not sure if you read your article, but it just discusses the fact that the cash for keys transaction has to be recorded with the City. 

 They actually don't let you raise it to market rents during a pay out or reloacation.  So you can pay them out to use the ellis act and change the use, but you can't raise the rents for the existing units.

I've paid out a tenant $23,000 then I was not able to raise the rents.  I had to keep the rents at the current rate based on the previous tenant.

https://caanet.org/rentcontrol/

http://hcidla.lacity.org/rso-overview

If the tenant agrees to a payment and agreement to vacate their unit you can charge whatever you want on the re lease.  If you are talking about Ellis Act or moving in as an owner then that would not apply as there are additional rules regarding that.

I know several people that buy out tenants, renovate the units and re lease at market rates in LA.  It is done all the time.

Originally posted by @Susan O.:

Youre actually not allowed to do cash for keys in cities like LA. Possibly in other cities. 

http://www.laweekly.com/news/la-moves-to-curb-cash...

They cracked down on landlords  even offering as much as $75,000 to tenants to leave! it's like having to bribe someone even though it's YOUR property

Also if you want to be an owner occupier in LA you have to pay up to $22k in relocation fees.

If you try to give cash for keys you can get fined and open a lawsuit in a lot of cities with rent control.  it's illegal under rent control rules.

http://hcidla.lacity.org/Relocation-Assistance up to $23k/ family for relocating older tenants

Yes, you can do cash for keys in Los Angeles.  Not sure if you read your article, but it just discusses the fact that the cash for keys transaction has to be recorded with the City. 

Originally posted by @Paul Faryna:

Haha, how'd you know, have you seen me there!? It's definitely possible though it would be tough in Sunnyvale.

Income:
$35,000 after taxes -- no real estate tax benefits included! That's a bit more that $2900 per month.

Expenses:
-$1400 -- rent (with roommate, admittedly this situation will change)

-$350 -- electric, gas, phones, internet, car insurance

-$500 -- health insurance

-$200 -- groceries

Total: $2450

That leaves a net of $450 for luxurious expenses and a safety net for "**** happens" - car repairs, vet bills, medical bills, etc.

Clearly doable, while living in the most expensive place in the world and living like a king compared to 99% of people on Earth and 99% of people who have ever lived. But again, this would not be my ideal area to settle down for a few reasons. If we "settled" somewhere with reasonable expenses we could cut the overall expenses in half and have more for luxury spending.

 $200 for groceries?  Are you going to live on Top Ramen and pb&j sandwiches?  Also, transportation expenses, clothes, etc. are not accounted for.  Are you going to have a car, a bus pass, a bike.  They all cost some money to some degree.  I think you are too Pollyanna in your assessments.

Originally posted by @Joe Splitrock:

Originally posted by @Matt Mason:

I think we will have to wait for tax reform to see if there are any major changes there as that may greatly affect real estate, especially if we are talking about eliminating the 1031 exchange and reducing the use of mortgage interest deductions for homeowners.  

As far as a lot of people expecting a flood of assembly line factory jobs coming back, I think that is pretty naive.  More companies are talking robotics and automation in their production.  Also, tariffs and trade restrictions can work both ways if things come to that.

Finally, there is a lot of positive expectations about reduced taxes and regulations and increased government spending especially in border security, defense, and infrastructure.  The devil will be in the details and execution in my opinion.  It wasn't more than 15 years ago, we had a unified President and Congress working in tandem on a semi-similar platform and it didn't turn out very well at all and they got to start with a federal surplus.

Automation and robotics are nothing new. It has been gradually increasing since the assembly line was first created. Robotic welding for example became widespread in the 1980's. Even factories that move to Mexico or China use the same automation as they would in the USA. The factories still support hundreds of jobs. People need to maintain and operate the machines and there are tasks robotics cannot perform. The factories need raw materials or sub-assembly parts, all of which are better sourced locally. The factories themselves need to be built and maintained. That involves hundreds of skilled labor jobs. Plumbers, electricians, roofing, yard and snow maintenance. I will acknowledge that Los Angeles will not see significant manufacturing gains, but remember the US is a big country. In everywhere between CA and NY, the economies are lead by manufacturing and farming. 

As far as tax reform, eliminating the 1031 is only due to it becoming obsolete. In the new plan you can claim 100% of your rental expense in the year it is purchased. There is no longer a reason to defer gains. For example, I sell a house worth $200,000 and purchase an apartment worth $600,000, my net for the year is a $400,000 loss. That is a larger immediate benefit versus merely delaying my gain. The GOP plan states there is no intent to remove the personal home mortgage interest deduction. For investment properties, mortgage interest would only be deductible against other interest gains. That is because instead of depreciation, your investment can be taken as a full expense in the year you purchase it. Most investors will have large losses they can carry forward for several years. 

As far as Bush reform, it lead to record levels of home ownership and soaring real estate prices, followed by a massive real estate crash. The Obama years put more restrictions on lending which cooled the market for years. That was a good thing for economic stability, but hardly fueled growth. The current proposed tax plan is nothing like what we had in the Bush years, be it good or bad. I agree the details will determine how it plays out, but to say it is more Bush-policy is a stretch at best. 

Yes, automation has been a factor in the past, but it is increasing in new factories as new technology takes over.  Look at Tesla, which is growing rapidly as one example.  Even in the Midwest which tends to adopt technology and new processes a little more slowly, some of these changes are taking place.  In other areas, we are starting to see automated cashiers, drone usage, and eventually automated driving.

We don't know what tax reform will entail yet as it hasn't it started to develop through Congress yet.  A lot of these ideas are going to have to be dropped or tempered as future concerns over the deficit mount.

On the farm front, Mexico is just starting to talk about retaliating against a potential hostile administration by turning to the rest of Latin America for their massive corn imports instead of the U.S.  As someone who lived in Indiana for quite a few years, I know some producers are starting to worry about that as that would be a big blow.

I think we will have to wait for tax reform to see if there are any major changes there as that may greatly affect real estate, especially if we are talking about eliminating the 1031 exchange and reducing the use of mortgage interest deductions for homeowners.  

As far as a lot of people expecting a flood of assembly line factory jobs coming back, I think that is pretty naive.  More companies are talking robotics and automation in their production.  Also, tariffs and trade restrictions can work both ways if things come to that.

Finally, there is a lot of positive expectations about reduced taxes and regulations and increased government spending especially in border security, defense, and infrastructure.  The devil will be in the details and execution in my opinion.  It wasn't more than 15 years ago, we had a unified President and Congress working in tandem on a semi-similar platform and it didn't turn out very well at all and they got to start with a federal surplus.