All Forum Posts by: Matt Huber

@Adam Michael Andrews 

The catalyst for this discussion was my concern about the location. I believe that Huntsville/Harvest is a good area - but I'm afraid the neighborhoods I've invested in will continue to experience decline of quality. This, I recognize, is a consequence of my decision to go Section 8 versus other avenues. 

But you're right; other than that, the operating fundamentals area still reasonably good, and the capex isn't really surprising. Thanks for taking the time to share your view; it helped me to get my own view into focus.

@Adam Michael Andrews Thank you for the feedback. I have considered that a 3 year lookback might be insufficient for a complete analysis; but it's what's available right now. And shouldn't one periodically review investment performance and compare it to one's goals? Also, the historical data tells me that 3 years of underperformance means that future performance must improve substantially in order to meet the IRR goal for the investment. That's useful for informing decisions.

With respect to the interest rate: I do have a sense that borrowing at such a low rate can be viewed as an asset. But what difference does it make if the leveraged portfolio earns an insufficient risk adjusted return? After all, the interest rate (high or low) is just a number on a spreadsheet.

Please help me understand the perils of this view.

Thank you for the replies so far! It's helpful to see other points of view and go through these questions.

One of the reasons I decided to make direct RE investments was to provide a hedge for volatility in our portfolio. But to your point, the risk adjusted return does not seem adequate. (This, of course, depends on one's assumptions about future appreciation; the prospects of which I have my doubts.)

@Michael Smythe To answer your questions:

In the first couple of years there was some appreciation. However, I believe it has deflated a bit recently due to the current interest rate environment, increased inventory of nearby new homes at a low(ish) price point, and the neighborhood turning to mostly investor owned homes.

I do have mortgages; the tenants are paying these down. 

@Basit Siddiqi The area is Harvest, AL. If the existing mortgages were at current interest rates, the P&I would be about 30% higher and the pro forma cash flow would no be much more than break-even. I believe this limits the price that investors are willing to pay. 

To clarify my assumption about current equity: most transactional activity in the area has been new construction and established neighborhoods of "better" quality. I've tried to be conservative in my assumptions and based on the best available comps have valued the properties using the 1% rule for this analysis.

In 2021 I purchased a couple of single-family rentals. After nearly 3 years of operating history, I'm concerned that the properties are not performing well enough to warrant continuation of the venture, and I'm considering selling. This venture was originally expected to have a 10 year horizon, with the goal to maximize IRR in that period. I'm curious to hear feedback from other investors on the question: should I hold or sell?

Here are some basic facts:

Initial cash invested: $120k

Year 1 Cash Flow: $12.3k

Year 2 Cash Flow: $8.6k

Year 3 Cash Flow (YTD, 3 months left in year): -$4.5k

Current equity estimate (net of expected selling costs): $102K

Mortgage rates at or below 3.75%

CapEx uncertainty: HVACs will likely require replacement within the next 5 years and one of the roofs is nearing 20 years old.

Market is the Huntsville, AL area.

Underwriting hurdle when acquiring these properties was 10% CoC return annually.

With a 10% CoC return after Year 1, I felt good about this investment. Year 2 had some large expenses, including some CapEx items (water heater, roof). Year 3 we achieved a 10% rent increase across the portfolio, but have incurred high turnover and vacancy costs. (The rental market is strong - these costs are largely due to a problem tenant who recently left the property.)

Both properties are rented to Section 8 tenants and professionally managed. I believe my property manager does a good job and keeps me informed. (We discussed the "problem tenant" situation above, and I believe it was an anomaly and not necessarily due to poor tenant screening.) So, these properties are probably as close to "mailbox money" as one could get with direct REI. Given current rents and historical expenses plus some cost escalation, I believe stabilized cash flow of $12k/year is a reasonable expectation excluding any major CapEx. Due to the likelihood of needing to replace AC and/or furnaces in the next 5 years, there will probably be another year or two of near zero cash flow at some point.

When I bought these houses, the neighborhoods had a lot of rental homes, but were still desirable affordable neighborhoods. Today almost all houses in these neighborhoods are investor owned, with a high proportion of Section 8 tenants. Nearby new build 3/2 SFRs start in the mid-200's, and there's a lot under construction. Because of this, I believe the market for selling my houses is likely limited to other investors. If this is true, I believe they will not appreciate with the SFR market at large, but rather appreciation will be limited by the ability to increase rent. In other words, I expect low, if any, appreciation over the next few years.

A similar investment in the S&P 500 would have yielded a 25% return if sold today. (Net of capital gains tax and NOT including dividends.) By comparison, liquidation of these properties today would yield a slight loss. I'm leaning toward the decision to sell, as the expected rewards do not seem worth the risk (or opportunity cost). 

But what am I missing? Is it worth it to hold onto these properties? Or should I sell and move on? 

How do I check the financial strength, outlook and longevity of an insurance company? I tried the AM Best website but it appears a subscription is required...

@Bo Bond Thank you for the insightful answer. When I think of a non-admitted carrier, I tend to think of risks that are rather unique. So I was confused when the agent wrote this policy for my very vanilla tract rental home.

Anyhow, I appreciate the help.

Here's another data point:

The renewal offer from my current insurer for an SFR rental in Huntsville, AL is nearly double the current premium. So I received a quote from a Steadily agent. For apparently similar coverage, the price was actually a little less than the current premium. So I said yes.

After receiving and reviewing the policy documents, I found that the insurer (Fortegra Speciality Insurance) is a surplus lines carrier, which makes me a little uncomfortable. I'm going to shop around and see if I can get a comparable price with an admitted carrier, but am curious what the group thinks. Am I being unreasonable?

@Account Closed Thank for the clarification. I'm actually in CA and was looking at a SubTo deal in Tacoma. (We have since decided no to move forward with it.) When I wrote the comment above I was thinking of the time I spent finding an experienced SubTo investor to partner with in my area. I was not clear, and I apologise for that.

@Michael Haas I appreciate you sharing. I'm tempted to keep looking for a SubTo deal just to prove to myself that the concept works and add another "feather to my cap." But mostly I'm leaning toward not pursuing any SubTo deals. None of the deals I've looked at produce an outsize return that's commensurate with the risk and effort. At this point in my investing career, it seems best to stick with what I know. 

@Account Closed Thank you for sharing your experience. I have figured that buying a property subject-to is an advanced strategy with many moving parts. And, if not executed just right, could result in big headaches. It's baffling to me that SubTo has become a "go-to" concept for many who have not yet closed a single deal. I will proceed cautiously and seek advice from those who have truly beat down the path. But it's funny; I've tried to find people who have closed a SubTo deal near me, so that I can absorb their wisdom. Yet I come up empty handed.

@Brandon Vukelich I appreciate you sharing these referrals.

I'm looking at purchasing a property subject-to in Washington state. I own a few properties but this would be my first subto deal; I'm looking for any anecdotes from those who have done such transactions in Washington state. Specifically, I'm trying to figure out how to hold title (it sounds like land trusts are a no-no in WA) and deal with insurance after purchase. 

Also, referrals to trusted attorneys for advice, contracts and/or closing are appreciated. Many thanks to everyone in advance!