All Forum Posts by: Mike Day

Hi all, I have not occupied the home since 2017. The property has been listed on my taxes using a Schedule E for the last two years. After speaking with some people, I do qualify for a 1031 and am being guided to buy 2 properties in the High Desert (Victorville) because it will have the highest ROI. Maybe he's telling me this because he can only sell in CA, but is this the best move?

Are we talking properties that cost roughly $400k that would rent out for about $2300?
Assuming you're talking about selling the Compton house and putting that equity into the two places in Victorville, I think you're looking at $0 cash flow, best case scenario, and will probably be in the negative. You'd be better off not touching anything and staying with what you've got, unless you want to manage these places as short term rentals or invest out of state.

0 Votes

Los Angeles County, California

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

@Dan H. @Travis Biziorek

Dan and Travis, I'd love to hear you guys hash out appropriate vacancy and maintenance numbers on low-cost rentals in the Midwest.

Travis owns rentals in the Midwest and uses 15%, Dan thinks it should be 45%+.

I do not know how to say this clearer: maintenance/cap ex should not be based on a percentage of rent. I showed examples of why this is bad even if many rental calculators have it as a percentage.

The issue is a 3/2, 1000' unit that rents for $4k in San diego has very similar maintenance/cap ex as 3/2, 1000' in Peoria that may not rent for $1k. On this property in my market, I would have ~$450 allocated for maintenance/cap ex (varies depending on landscape, hardscape, flooring, fencing, HVAC vs furnace, roof type, and many other items). This is not a guess. I used to maintain a spreadsheet that calculated this based on lifetime and cost for each of my units. As my unit counts increased, I stopped the exercise but I know maintenance/cap ex is costly.. Here is an example that is more expensive in my market (so this one does not transfer well). A 40 gal water heater changed by licensed plumber in my market costs $1600. Unlike most parts, our water heater is more expensive because it is a different part than would be required in Midwest. $1600 / 12 years / 12 months is $11.11/month. A duplex has 2 kitchen (refrigerator, range, etc), water heaters, HVAC or furnace, 2x the bathrooms, etc. so a duplex has maintenance/cap ex much higher than a SFH. mintnnr/cap ex just on replacement is $22/month for a duplex. In reality there is likely to be a need to light the pilot a few times over 12 years. Occasionally an igniter goes, the TPR fails, the drain valve goes, or the thermal coupler. I had $18/month maintenance/cap ex for a water heater ($36 for 2 water heaters of a duplex).

Note using a percentage of rent would have the maintenance on a $1600 SFH the same as a duplex where each unit rents for $800 even though SFH has one kitchen, water heater, HVAC, etc but the duplex has 2 of each of those items.

Mike thinks 15% of rent would cover vacancy, maintenance/cap ex, misc (missed payments, asset protection (actually I am not surehebelieves in asset protection), utilities from property failure such as slab leak). So Mike has $120/month allocated. At 45%, the allocation would be $360/month (which I think is too low). Peoria Illinois vacancy rate is over 10% (10.4%) so $83 in this case. Mike would $37 for maintenance/cap ex etc. I would have $277 which is not enough in small unit count. So you would have an allocation in excess of 45% for this particular property (but maintenance/cap ex should not be based on a percentage of rent).

I am unsure how Mike has derived his maintenance/cap ex estimate, but I am curious. I know I have derived mine with a process that can be described and justified.

Peoria vacancy 10.4%:
https://www.rate.com/research/peoria-il#:~:text=Among%20Peor... recognize my underwriting many would consider conservative. I have yet to encounter an investor who has put forth the effort to determine a maintenance/cap ex that I have that thought my numbers are extremely conservative. In addition, I desire my underwriting to be a little on the conservative side and suggest this for all investors. It should take rare events such as Great Recession or Covid to under perform an underwriting.

Good luck

Hey Dan I want to clarify that I don't absolutely 100% disagree with the general *concept* of what you're doing here, although the end result is too conservative and will prevent you from making profitable investments, at least if it's the kind of stuff I invest in.

To be really honest, I didn't know this discussion was going to get so involved and I was not thinking deeply about my initial 15% figure. I was discussing this with Travis and he used it for his own rentals so I just did the same and spat out an example. In retrospect, it's low. I don't have my actual maintenance and vacancy numbers in front of me right now. I have been running probably 90-95% occupancy for the past couple years on my rentals in the Midwest, off the top of my head. Maintenance is NOT 35% no matter what your model may say. I'd need to really dig down to get you the appropriate number for my own rentals, but I can tell you right now that 25% for maintenance and vacancy combined is not too far off. Fannie Mae uses it and I've always found it appropriate for back of the envelope stuff. I have not taken this to the granular level that you are doing here. I understand your attempt to predict costs more accurately, but in the end, there may be a reason Fannie Mae does it the way they do it. You are overestimating these numbers.

Speculations as to why: tenants in these particular rentals may be tolerating a lower standard of maintenance than you think and thus everything wears longer than you think it will, I may have a different relationship with my maintenance people than you do (actually I don't let my management company do anything and I'm very involved in maintenance, I know how to do practically every necessary task, I manage people directly and sometimes I'll do a few things), there may be an error in your calculations such as you're assuming two units in a duplex don't share as much as they really do (they still share roofs, yards, and many other things), or something else entirely.

Either way, your numbers are way too high and I will not be able to answer why in more detail or provide you with my exact numbers without spending a significant amount of time on this. 25% ain't too far off. No way do rentals such as these have close to 45% vacancy and maintenance unless very badly managed.

Now, I'd love to hear how @Travis Biziorek got his 15%.

> I can tell you right now that 25% for maintenance and vacancy combined is not too far off. Fannie Mae uses it and I've always found it appropriate for back of the envelope stuff.

It is important to understand how the 25% is used. f/f provides 25% of rent to go to income and typically loans at 30% which equates to 7.5% on the loan. So from the lenders perspective, they are covered if expenses are less than 92.5% but this includes more than vacancy, maintenance/cap ex. It has to include all expenses.

So the 25% does not mean what you seem to be implying and it certainly is not meant as an estimate of vacancy and maintenance/cap ex.

>Maintenance is NOT 35% no matter what your model may say. I'd need to really dig down to get you the appropriate number for my own rentals, but I can tell you right now that 25% for maintenance and vacancy combined is not too far off.

in the one statement you indicate my number (which really was 45%, but I am assuming a typo) is wrong and my model is wrong. Then you admit to not knowing the number and needing to “dig down to get the appropriate number”. You certainly do not justify any number here but your comment below does provide some explanation.

> I may have a different relationship with my maintenance people than you do (actually I don't let my management company do anything and I'm very involved in maintenance, I know how to do practically every necessary task, I manage people directly and sometimes I'll do a few things), there may be an error in your calculations such as you're assuming two units in a duplex don't share as much as they really do (they still share roofs, yards, and many other things), or something else entirely.

Active participation will reduce the costs. Depending on the level of participation, the costs can be reduced significantly. I can believe with an active role you may be able to get maintenance/cap ex to 25% (but not including vacancy where the rental vacancy is above 10% - no way maintenance/cap ex is $120/unit) at that rent meaning $200/unit per month for maintenance/cap ex. depends on how active you are but remember you likely strive to make more than the trades (even though plumbers are expensive, my time is worth much more). When you do trade work, you are in effect earning trade wages.

My numbers were explicitly for the condition of the OP. OP is OOS investor. They would be very challenged to have active role in maintenance/cap ex even if they had the desire.

For the case of the typical OOS RE investor who would be hiring out work to contractors or using their PM’s maintenance staff for all repairs, I hold my estimate costs and process that derived it is fairly accurate and easier to justify then pulling numbers out of the air.

I understand some duplexes are attached and share roofs, yards, etc Note some are detached. I own some of both. The items I listed are typically in each unit regardless of attached or detached units

By the way I am way more active with my RE than I desire. We have acted as GC for every rehab (dozens) so far (but maybe will not be going forward). My numbers were not based on me doing the work even though I often do. The numbers were a case like the OP as an OOS purchase.

It does appear you have pondered some of my statements which I am glad. I believe we can all be successful and that there is a lot of opportunity for those who educate, properly access risk/return, and take appropriate actions. I will add work moderately hard at least when starting.

Continued best wishes.

Sure, well, we're at where we're at. I'm glad that we were able to dig into the details of these numbers some more and I could some perspectives based on my experience with this type of rental.

Looks like @Travis Biziorekbowed out. I would have been interested in hearing his viewpoint on these numbers since he seemed to have some pretty strong opinions and was laughing himself silly because my numbers were so ridiculous. But not a peep today. Oh well.

Well, hope everybody makes the best decisions based on the best info they've got.

1 Vote

Los Angeles County, California

Quote from @Dan H.:

Quote from @Mike Day:

@Dan H. @Travis Biziorek

Dan and Travis, I'd love to hear you guys hash out appropriate vacancy and maintenance numbers on low-cost rentals in the Midwest.

Travis owns rentals in the Midwest and uses 15%, Dan thinks it should be 45%+.

I do not know how to say this clearer: maintenance/cap ex should not be based on a percentage of rent. I showed examples of why this is bad even if many rental calculators have it as a percentage.

I am unsure how Mike has derived his maintenance/cap ex estimate, but I am curious. I know I have derived mine with a process that can be described and justified.

Peoria vacancy 10.4%:
https://www.rate.com/research/peoria-il#:~:text=Among%20Peoria%20residents%2C%20there%20is%20a%20homeowner%20vacancy,of%2010.4%25%20from%20a%20total%20of%2053%2C325%20units.

I recognize my underwriting many would consider conservative. I have yet to encounter an investor who has put forth the effort to determine a maintenance/cap ex that I have that thought my numbers are extremely conservative. In addition, I desire my underwriting to be a little on the conservative side and suggest this for all investors. It should take rare events such as Great Recession or Covid to under perform an underwriting.

Good luck

Now, I'd love to hear how @Travis Biziorek got his 15%.

0 Votes

Los Angeles County, California

@Dan H. @Travis Biziorek

Dan and Travis, I'd love to hear you guys hash out appropriate vacancy and maintenance numbers on low-cost rentals in the Midwest.

Travis owns rentals in the Midwest and uses 15%, Dan thinks it should be 45%+.

0 Votes

Los Angeles County, California

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

>you want data for Peoria home appreciation further back than 2000. No problem.
https://fred.stlouisfed.org/series/ATNHPIUS37900Q

Peoria has appreciation below the inflation rate just as your link shows. You link proves my point. Appreciation for Peoria per your link 2.58%/year, inflation since 1979 is 3.31%/year. As I indicated, you can simply look at the price to know this is true. Do you not understand compounding? I do not understand how you could think this is good appreciation, ;appreciation below the inflation rate is not good (at least I do not consider it god). https://www.in2013dollars.com/us/inflation/1979?amount=100

>the Midwest has no appreciation, you're objectively wrong.

What i said was the appreciation on your sample property had appreciation below the rate of inflation. You proved my comment was correct with the link you provided.

>If you say you can't cashflow there now, you're objectively wrong again.

Your example did not show decent cash flow. More accurately I indicated the Midwest cash flow was not worth it. I would not choose that path for a few hundred a door (which is greater than your calculated cash flow for your example property and much greater than my calculated large negative cash flow). The return on that sample RE does not meet my goal in owning RE.

>if I had a lot more energy I'd just pick 10 properties off the MLS right now in different Midwestern cities where you can comfortably cashflow right out of the gate.

You listed one such example and it had negative cash flow using legit expenses. 0 for 1 so far. As indicated I am not interested in a few hundred month cash flow per unit so if you owned 10 you would have $3k/month but would be having 10 units and 10 tenants to deal with as well as the properties to purchase. All work. Note being a PM in my market at 8% and average SFH rent you would make significantly more than your projected cash flow. Basically you have a job at less than optimal wage using your plan. I pay my PM over $2k/month to manage each of my STR units. I would not choose to own OOS residential at less than $150 unit (your projected cash flow. I would not buy that Peoria property even if my underwriting was projecting $500/unit. the reality is those units are negative cash flow which implies they are very far from my buy box.

>I started this journey with like $20,000 in savings back in 2011 and I'm basically retired now or something very close to it.

Good for you. Until 2nd quarter 2022, the market was very different than it is today. I remember when the 1% rule was the 2% rule and finding 2% rent ratios was not that challenging in the Midwest and the interest rates were low. RE was better investment everywhere including the Midwest. I claim virtually everyone purchasing high LTV today have lowered their buy criteria to purchase vompared to before 2022.. The goal for me is easy money that can be life changing. I do not see this in rent ready units today. My opinion.

>I don't post information about properties I own in forums that can be searched through Google and I suggest you stop doing it too.

You know this info is easy to find. To judge that just look how many solicitations you get to purchase your property. Many days I get more but solicitations than regular mail. The units I posted are on Airbnb, VRBO, furnished finder, etc. I posted the direct booking links (rather than OTA links), so links I want people to have. Who knows maybe someone will book one of the units. I wish I could do more to reduce the power of the OTAs.

>If you don't get it, you do you.

I am glad you are content with your choices and am suggesting this not to change that but give you something to ponder. Have you calculated the monthly appreciation on the CA home you sold? I suggest doing this. I believe you are not receptive to what I posted but maybe the day will come that you are more receptive. If not nothing lost.

Good luck with your investing.

Okay, let me clarify: appreciation in this particular Midwestern city keeps pace with inflation without leverage. Clearly investors do much more than keep pace with it with any type of financing.

I just don't know how you're a real estate investor and you can't see how the example I posted would easily cashflow with, say, a 30% down payment. I guess you need the 30% for your umbrella and LLC and the most expensive manager and the best painter in town and you're also gutting everything to the studs before putting a tenant in it. The example I posted very easily cashflows. I own units like this and I'm cash flowing on them now.

Yes, I get phone calls all day long. I still won't be posting addresses and specific information on my assets on BiggerPockets. I mean why don't you talk to other investors who buy in the Midwest if you think I'm making all this up? You'll eventually find out you're wrong. I'm not sure if you think I'm lying or what. Maybe you just think it's your way or the highway and don't get that someone could be successful with another approach.

The fact on relying on appreciation in California is that we can't control the fundamentals of the economy that produce that appreciation. That goes for appreciation anywhere, actually. If you just want to hitch yourself to the wagon of the whole housing market and go along for the ride and hope to profit, I think that's acceptable for some. Seasoned investors in California have done very well with that for decades. Someone just starting out who needs cash flow should not immediately dive into coastal markets. Cash flow is a more reliable source of gain and it's better elsewhere.

If you're not interested in a few hundred cash flow per unit with modest appreciation, fine. Don't use this approach. For someone who wants that, it works.

That's all.

>appreciation in this particular Midwestern city keeps pace with inflation without leverage.

per the data you supplied from the NAR (good source), Peoria re appreciation did not keep up with appreciation since 1979. Per the data I showed from neighborhoodscout (another good source) the Peoria RE appreciation did not keep up with inflation since 2000. Per looking at the current value of the property, I can tell that the property has not kept up with inflation.

>you can't see how the example I posted would easily cashflow with, say, a 30% down payment.

correct. With my underwriting at 70% LTV that is cash flow negative. Note though my comment has always been prefaced with the condition of high LTV loan. At 70% LTV, this is cash negative even in the absence of any asset protection.

>The example I posted very easily cashflows. I own units like this and I'm cash flowing on them now.

the example you posted certainly does not have positive cash flow at high LTV. Even using your numbers (which were not realistic) without PM the property was cash flowing less than what the OP would make PM local units (if they wanted a job). 1) I have zero trust in your underwriting. 2) you would not post a purchase you made since q2 2023 for us to evaluate. 3) as already indicated your example did not have positive cash flow with realistic expense numbers. As I have indicated multiple times, pre q2 2022 you could obtain modest cash flow on the cheap Midwest properties. Maybe for some people it met their goal (not my goal as I seek life changing return and did not see a path for me to accomplish it (meaning it would require more work than I desired - not meaning it was impossible).

>Someone just starting out who needs cash flow should not immediately dive into coastal markets.

I agree if they do not want an active investment position (value adds, rehabs, self managing alternate rent models such as STR, MTR, rent by room)

>Cash flow is a more reliable source of gain and it's better elsewhere.

I disagree with both comments. Historically appreciation is where the money is. When was the last time you have seen a RE syndication offer without an appreciation play? I do not ever remember seeing one. There is a reason; it is the only way that it can achieve the returns that Lp investors seek. There is no long period in CA coastal markets without appreciation going back to the start of tracking this data.

For appreciation it is important to realize there is a big difference between initial cash flow and long term cash flow. Markets depict appreciation and rent growth into market price. If you invested $100k in Peoria in 1979 and $100k in San Diego in 1999, in the absence of extraction of value, which do you think would have had the better cash flow? Same question with $300k in the year 2000. Case Shiller used to answer the one for 2000, San Diego was #3 in the nation for total return for this century. They achieved that ranking based on a combination of appreciation, rent growth, expense increasing less than other markets. (In large part due to prop 13 which basically makes prop tax a fixed cost).

Midwest will have better initial cash flow on average, but over a long term they historically have under performed higher cost markets. The poor rent growth is reflected in the property values.

Ponder at your will. I said once I was out but found it difficult not to rebu statements especially when you provide me the data that shows Peoria has re appreciation below inflation. again I am bowing out.

I wish that you ponder my responses. I also wish you the best in your investments and life.

Okay, this is gonna be my last contribution. I want everybody to see they can cashflow on heavily financed rentals in lower-cost areas of the country right now. That seems to be at issue here and I'm confident in what I'm saying because this is what I do. I'm discussing the general type of thing I buy. Again, I will not send addresses for places I own.

Going back to my initial example, a $90k 2 br 1 ba x 2 duplex in Peoria.

https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

It should rent for $1600. Not just should, it's currently rented at that, according to the listing.

I'm not using the capital expenditure numbers you provided because they're way out of line with reality. Can I just ask you to trust me? I actually invest in this type of thing and as far as I can tell you don't. For the sake of something neutral, I'm going to use Fannie Mae's 25% for maintenance and vacancy. If it were that out of line with reality, the government wouldn't back loans on this basis. So, a more conservative $400/mo for maintenance and vacancy.

So after that, we've got $1,200 coming in.

Less expenses:

Principal and interest ($63,000 financed at 7%): $419

Management: $193 (for the sake of argument, a more conservative number than before--see note below)

Insurance: $65

**Cashflow: $523/mo

Gives plenty of room for your more expensive asset protection or the best painter in town. In fact, after writing this, I'm tempted to start buying in Peoria.

Regarding management costs: you wanted to include more costs for placing tenants. It's very difficult to figure this because we don't know how many turnovers there will be each year. Maybe you've got long term tenants who will stay for years and there will be no such costs. In my experience, though, it might make sense to expect one of these turnovers per year in a two-unit property and to pay half a month's rent for it. So, the management expense is 10% + $400 prorated over the year.

There might be deferred maintenance on it as someone pointed out. But it's not so bad someone can't live in it. If do you want to do the repairs, and roll it into your loan costs or finance it, you can. You'll still cashflow.

Oh, and if you've got only 3% appreciation (which I think is low), you're still far outperforming inflation even in a catastrophically horrible situation of zero cashflow because you're leveraged. I'm not going to do all the math on that right now. I've said enough and I think my point is made.

All the best to you as well.

This is hilarious.

You conveniently omitted property taxes ($237/mo as you stated in an early reply) as well as interest only payments on the HELOC you're using ($27,000 borrowed at 8.5% = $191.25/mo).

That's $428.25/mo of expenses you just pretended aren't there.

And if you think there's no deferred maintenance/capex on that listing you linked to, you're either completely insane or you've clearly never bought properties like this.

The best part of this entire discourse is the fact you've been preaching this "strategy", pointing to Peoria as an example of where it works, yet you've literally never done it.

It's wild!

I don't think you're reading, Travis!

I've done this, well I said I wasn't going to get into how many times, but a number of times. I am doing it right now and collecting my checks. Why is the idea that this is possible so hard for you to accept? I really would like to know.

I forgot the taxes, you got me there. Point for you. As you may (or may not) notice, it still cashflows a few hundred bucks a month.

I think I said there could be deferred maintenance on it, but it literally doesn't matter if there is. There are currently tenants in it so it's good enough to live there. If you want to fix it too then I guess you could turn it into one of those value add things you were talking about (or was that someone else who got fired up because my business model that's currently making me money is so absolutely wrong??).

This was a proof of concept that Midwest rentals can and do cashflow atm without the HELOC part and with more conservative numbers that was in the concept of a discussion with someone else. You yourself used 15% for maintenance and vacancy. Maybe have a talk with Ben about that. He seems to have a lot to say. If the numbers are done your way then obviously the cashflow is even better.

If it's hilarious, have your laugh, and I'll keep collecting my checks.

0 Votes

Los Angeles County, California

Quote from @Nicholas L.:

@Mike Day

for what it's worth i was skeptical of your numbers too, i think they're overly optimistic and i tend to agree with @Dan H. in the spirited discussion you have been having. i do appreciate all the information you've posted, and of course it's possible to successfully invest in any state - California, Alaska, Illinois, anywhere. I have successful rentals in 3 states in my small portfolio.

BUT - let's do this, and set all of that aside. forget who is right and who is wrong and how much capex a house in Illinois needs and how expensive San Diego is. forget it all.

because here's the thing: OP has no investing experience, no network that we know of anywhere in the US, and potentially no money except the equity in the 1 house. So OP will not be successful in Illinois. that to me is the more important point. we see over and over and over threads in the forums from folks in HCOL areas - primarily California - who buy somewhere "cheap" and get absolutely crushed. and you can say "well, that's because they don't do it right." fair enough. but that's how they seem to do it.

https://www.biggerpockets.com/forums/48/topics/1160450-run-i...

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

https://www.biggerpockets.com/forums/88/topics/1171104-the-m...

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

https://www.biggerpockets.com/forums/48/topics/1159104-overl...

Hey, all I can say is I think that if I were to buy that property today my numbers would be similar to these and it’s far from my first rodeo. With a $500 cushion, there’s plenty of room for mistakes.

Whatever OP does, she has to learn how to do it, this is one way and it works for me!

Thank you for your input.

1 Vote

Los Angeles County, California

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

>you want data for Peoria home appreciation further back than 2000. No problem.
https://fred.stlouisfed.org/series/ATNHPIUS37900Q

What i said was the appreciation on your sample property had appreciation below the rate of inflation. You proved my comment was correct with the link you provided.

>I started this journey with like $20,000 in savings back in 2011 and I'm basically retired now or something very close to it.

>I don't post information about properties I own in forums that can be searched through Google and I suggest you stop doing it too.

Good luck with your investing.

Okay, let me clarify: appreciation in this particular Midwestern city keeps pace with inflation without leverage. Clearly investors do much more than keep pace with it with any type of financing.

If you're not interested in a few hundred cash flow per unit with modest appreciation, fine. Don't use this approach. For someone who wants that, it works.

That's all.

>you can't see how the example I posted would easily cashflow with, say, a 30% down payment.

>Someone just starting out who needs cash flow should not immediately dive into coastal markets.

I agree if they do not want an active investment position (value adds, rehabs, self managing alternate rent models such as STR, MTR, rent by room)

Midwest will have better initial cash flow on average, but over a long term they historically have under performed higher cost markets. The poor rent growth is reflected in the property values.

I wish that you ponder my responses. I also wish you the best in your investments and life.

Going back to my initial example, a $90k 2 br 1 ba x 2 duplex in Peoria.

https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

It should rent for $1600. Not just should, it's currently rented at that, according to the listing.

So after that, we've got $1,200 coming in.

Less expenses:

Principal and interest ($63,000 financed at 7%): $419

Management: $193 (for the sake of argument, a more conservative number than before--see note below)

Insurance: $65

**Cashflow: $523/mo

Gives plenty of room for your more expensive asset protection or the best painter in town. In fact, after writing this, I'm tempted to start buying in Peoria.

All the best to you as well.

0 Votes

Los Angeles County, California

Quote from @Dan H.:

>you want data for Peoria home appreciation further back than 2000. No problem.
https://fred.stlouisfed.org/series/ATNHPIUS37900Q

What i said was the appreciation on your sample property had appreciation below the rate of inflation. You proved my comment was correct with the link you provided.

>I started this journey with like $20,000 in savings back in 2011 and I'm basically retired now or something very close to it.

>I don't post information about properties I own in forums that can be searched through Google and I suggest you stop doing it too.

Good luck with your investing.

Okay, let me clarify: appreciation in this particular Midwestern city keeps pace with inflation without leverage. Clearly investors do much more than keep pace with it with any type of financing.

If you're not interested in a few hundred cash flow per unit with modest appreciation, fine. Don't use this approach. For someone who wants that, it works.

That's all.

0 Votes

Los Angeles County, California

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea.

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex? If not, where is the cap ex costs? This would be $120 per unit for vacancy, maintenance, and cap ex. If so, you are orders of magnitude low. The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc). At 10% the PM would get $80/unit. I do not believe they can place a tenant inclusive of $80/unit.

At that purchase price, historically the appreciation has not kept up with inflation. This implies that in inflation adjusted dollars, the property value is declining. This declining value affects the return and should be noted in any pro forma calculations.

The rent has the same issue. At $800/unit, the rent likely is not keeping up with inflation. This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit To me this does not justify the effort of owning residential units. I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

Do you have any STRs? I suspect I am in top 20 on BP site in terms of STR longevity (first 2 STRs were in 1999). In my market, STR with pm, utilities, and furnishing costs is about on par with LTR without PM. Every market I have looked at gets tight with use of a pm. I pay pm 25% so if I self managed, I would have greater profit than LTR but it is work and takes time. I get well compensated for working, so I choose not to self manage the STRs. Note self managing will impact the ability to scale. My point is STRs have challenges.

>Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest

It is orders of magnitudes too low. First reference look at average apartment maintenance/cap ex which NAR publishes. Realize that is with maintenance staff, benefits of large volume,etc. Alternatively you can fill out a life/cost for each item spreadsheet to determine your cost. What would a water heater replacement cost for OOS investor? Divide by 144 to determine monthly expense then multiply by 2 for the duplex. Do refrigerator, range, faucets, toilets, kitchen, flooring, bathrooms, rough plumbing, siding, roof, HVAC, fencing, rough electrical, hardscape. Everything has a lifespan and replacement cost. You are I suspect at least 3x low.

>how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before.

10 years is not long term. You can look at building cost and know that property has depreciated in inflation adjusted dollars since build. Neighborhoodscout shows it has appreciated 1.95% annually for this century which as I indicated is long term appreciation below the rate of inflation. https://www.neighborhoodscout.com/il/peoria/real-estate

>I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth.

My umbrella policy is far greater than what most people need and far more costly but it is distributed across all my units and includes a fleet of vehicles and other toys. However, I recommend asset protection for all landlords. It is worth the cost when $hit happens. I suspect that a $0.5m policy on small number of assets would be about 10% of what I pay.

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

I self manage my LTR properties but still include pm in my underwriting. I deserve to be paid for all work and want to know I can pay someone to do the work if I decide I no longer desire to be the pm. You can do the taxes and bookkeeping but what about as you scale? 10 units might be ok. 20 units and it gets difficult and doing the job yourself may be costing you lost tax benefits. 50 units, the bookkeeping would likely be a full time job. So it is important to show the cost in the underwriting otherwise when you hire out the work you could have an under performing property.

>refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point.

I think I am in the few. Last time I saw an underwriting in Midwest market that I believed was worth the risk and effort for an OOS Ca investor with low unit count was before the rates increased. Note I am not saying it cannot work for hands on local investor or a large volume OOS investor such as bob stevens. I also believe local investors can more easily manage value adds providing another option.

note, I believe it is a tough RE market everywhere. i can find flips that would work, but flipping is a job. New development can work but also a job. Brrrr do not work for me after the refi as in my market they are very cash negative (using my underwriting, not at $120/unit for vacancy, maintenance and cal ex). I have not purchased in 2.5 years (I purchased $4m in Dec 2021) which is my longest duration without purchase since 2010. My point is that do not show your examp,e to be worthy for CA OOS investor just means it is like the other properties I have analyzed in the last couple of years.

Best wishes

Yep, I do have short term rentals that I manage myself. Mine certainly make more than my long-term rentals. I brought that up as one means of dealing with thin cash flow, which is simply a fact of life under current conditions no matter what you do. It's far from unique to the scenario I've described. Everything has its pros and cons. I'm not saying you should self-manage 25 properties, but certainly managing 3-5 isn't a big deal and can be done while holding down a job. It's just an *option* that someone could choose to protect their cashflow when they have other properties that are only barely making money.

So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

It is simply a fact of the US economy that the growth of housing prices outstrips inflation by far, and so does rent growth. These are some of the basic premises of real estate investing. You can take the last 25 year period most places and price growth wasn't amazing. The reason is that the period from 2000-2015 was pretty flat. But if you want to go long term, really go long term. This is an odd thing to have to argue with a real estate investor. Properties appreciate over time above and beyond inflation. Could you end up in a 25-year period with growth under inflation? Sure, you could. As investors, we take on risk. This being the case, should people just put their money in bonds?

Right, if you have significant assets on top of your investments, you should have an umbrella. But there's no way someone in OP's situation needs one that costs $5k. I agree, a $.5 million umbrella might be like $500 a year which is reasonable if you have a few properties, along with significant other assets someone could take in a lawsuit.

Okay, again, in a situation like OP's, she can just do her bookkeeping and taxes herself. She's hardly in the position of needing a full-time accountant. If we're talking 50 units, then she needs to hire someone, but that's not the situation.

Well, I have investments in both California and the Midwest and it works for me. I'm not just here blowing smoke. It's almost always better to stay local, but it's different when you live somewhere like California or New York and are just starting out. Can you point me to a property in the LA area that I can put 15% down and cashflow on? Maybe there's some shack somewhere that is technically habitable that would? It's far, far from a normal situation. In, say, Indiana, Kentucky, Ohio, and Illinois--more states than that, actually basically the entire Midwest and South--this is relatively easy to achieve. So that's why I say people in California who want to invest should give that a strong look. There are many, many already doing this, too, not like I just pulled it out of my rear end this morning. Again, every single choice has its pros and cons. A good PM is absolutely key.

BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

My way is just one way. It works. If people don't want to deal with long-distance landlording, I think that's totally fine.

Jeez, I really feel like I'm going through the Spanish Inquisition over basic stuff everyone does all the time. I'm really not saying anything new at all. This all very old and time-tested stuff.

>So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

Not in general but for $800/month units, I believe it should be at least 45%. I can back it up via two different means (NAR data or spreadsheet of replacement cost and lifespan). The reality is maintenance/cap ex is not a function of the rent and using any fixed percentage based on rent is flawed. In fact, in some case maintenance/cap ex has inverse relationship to rent.

Same 3/2, 1200' SFH with similar finishes, yard, etc. one is in class b area and one in in class d area. We will use my market rents but suspect the percentages are similar in other markets. Class b ~$4500. Class d ~$3k. Which do you think will typically have the higher maintenance/cap ex?

By location, 2/2 ocean 800’ ocean front class b+ for ~$6k, versus Inland class b+ 4 br, 3 ba 3000’ is $6k. Which do you think will typically have the higher maintenance/cap ex?

Maintenance/cap ex is primarily a function of unit features and tenant quality and not a function of the rent.

Part costs are similar nationally. Labor rates vary, but not so substantially to be as big an impact as property features and tenant quality.

So what does this mean for $800 units? 1) expenses other than P&i will be far higher than 50% rule 2) properties need rent to purchase cost ratio far higher than 1% (1% rule) to have positive cash flow for a high LTV purchase at current rates. 3) they likely have long term rent growth below the rate of inflation 4) PM likely has to be significantly higher than 10% all in costs. 5) they simply will never generate return that should be of interest to CA OOS investor.

Let’s say rates were 3% like 3 years ago, I still would not recommend the referenced sample for OOS Ca RE investor. Why? Because positive cash flow would be small. Likely below $100/unit with accurate underwriting. The cash flow would increase slower than inflation because rents are increasing slower than inflation. The appreciation being lower than inflation has the property declining in value in inflation adjusted dollars (as reflected in neighborhoodscout data). So $100/unit decreasing in inflation adjusted dollars with time and a property loosing value in inflation adjusted dollars. There is work and risk owning residential units. Why invest in something that has risk and requires work unless you can envision a path for it to improve your life? I see no path for the referenced property to substantially improve a CA OOS RE investor’s life but I can see numerous ways for it to negatively impact their life (including one real bad tenant that does not pay and destroys the place).

again I am not stating this unit cannot work for a hands on local RE investor or an OOS investor that has large volume (lots of little cash flow can add up). For the OP at current rates, it would be a poor investment.

By the way the OP purchased for 240k. 11 years later it is worth $686k. That equates to $3378/month of appreciation. Compare that to $122/montn cash flow (that was done with poor underwriting). $3378 monthly appreciation can be life changing.

for my local (San Diego area) purchases, my worst appreciation is $2700/month. My best is over $10k month. That can be life changing.

Best wishes

Okey doke, so let's say there's no cashflow on this or even slightly negative cashflow due to higher than expected capital expenditures. I mean, I own properties like this so I can tell you 45% for vacancy/maintenance/capex is way overboard. For all my disagreements with Travis I think he was on the same page with me on that. However, like I said, if I were to actually carry out the strategy I basically "back-of-the-enveloped" this morning, I would add some ingredient involving greater effort and greater likely profit, such as short-term rentals, to guarantee positive cashflow.

Let's look at the position a hypothetical investor like OP would be in if she actually bought 13 multi-family properties like the ones I described. Let's say they have $0 cash flow as long-term rentals, but she does get some positive cashflow by self-managing three units herself as short-term rentals. Three units shouldn't be an unmanageable workload for most people. It isn't unrealistic at all to expect $15k cash flow from that and that provides a cushion in case of other issues with the long-term rentals. Let's also assume 4% appreciation and let's say 10% of the rent goes to capital expenditures and 1% consists of principal that will eventually go back into the investor's pocket. All this is extremely rough, or I'd be going on for pages. So, gains outside of cashflow are 4% of $1,495,000 annually (13 properties costing $115k each), or $59,800, plus 11% of $249,600 ($1600 in monthly rent x 13 properties), or $27,456. Total of $87,256 in non-cashflow gains. This investor would have fairly modest cashflow but be gaining six figures annually in total. Is this a position you'd tell someone not to get into?? Again, these numbers are far from exact. I don't have time to get to a granular level with this. It should still be clear this is an excellent situation. And I'm not counting the appreciation on the Compton house, which she's keeping. Another $40k maybe. So she's well into the six figures, even if my rough figures are off.

I'm curious about what you do actually recommend to someone in OP's position?? I haven't seen anything concrete. It looks like so far you've recommended 1) sit on it and let it appreciate (what can she hope to gain, maybe $40k a year?), 2) value add (you didn't say what, such as building an ADU on it? not a terrible idea, but the money can be put to much better use), 3) short-term rental, which is also part of what I proposed and which weirdly you argued against when I proposed it. By the way, if she stays local like you've recommended, her equity isn't enough to buy a suitable property for an STR, maybe (maybe) only a poorly maintained rental house in the absolute pits of south LA that is absolutely unsuited to Airbnb which guests will promptly one-star into oblivion.

I've just noticed I'm the only one in this thread to actually offer a concrete plan. Everyone else says nothing works or puts forth plans that are both very modest and very vague. OP doesn't have to do what I said, by any means, but I think she should understand the principles behind it and take action on her own--these principles are guiding in a better direction than anything anyone else has offered.

Some of your points have been valid, but the part about rent and appreciation not outpacing inflation is, plainly, hogwash. If that were true, it would literally be better to put your money in savings bonds and no one would invest in real estate.

Another thing you're saying that's way, way off:

By the way the OP purchased for 240k. 11 years later it is worth $686k. That equates to $3378/month of appreciation. Compare that to $122/montn cash flow (that was done with poor underwriting). $3378 monthly appreciation can be life changing.

You seem to be comparing the appreciation on OP's current CA property to the cashflow on a single Midwestern property when we've already clarified that she could refi and buy 13 of those. Assuming no cashflow on the Compton property seems sensible, but the Midwestern properties would have both (modest) cashflow and appreciation. You seem to want to dispute that, but home prices have approximately quintupled since 1980 in Illinois, where the initial example was set. https://fred.stlouisfed.org/series/ILSTHPI

You picked a 25-year period where they didn't, at least in Peoria, but my point remains that that's exceptional.

The correct comparison is a couple/few thousand a month in appreciation if the Compton house is the only property owned vs. something like $12k a month with the plan I've described. Should be pretty obvious that appreciation is going to be higher on $1.5m of real estate anywhere in the country vs. $700k in Compton, even though Compton's rate of appreciation is higher. But actually, that's not even the right comparison, because with my plan she keeps the Compton house.

>she does get some positive cashflow by self-managing three units herself as short-term rentals. Three units shouldn't be an unmanageable workload for most people. It isn't unrealistic at all to expect $15k cash flow from that

I paid my STR pm >$75k last year to manage my 4 STRs. So >$18k/unit. anyone from CA that wants to manage 3 units for a total of $15k should open a STR PM business in CA. They would make more. So that cash flow imo does not justify the effort of managing 3 STR units and why I use a pm for my STRs.

>I can tell you 45% for vacancy/maintenance/capex is way overboard.

You keep using percentage for maintenance/cap ex even though I showed the folly in doing this. it is not overboard when units rent at $800. How long have you owned? Note many cap ex items have lifespans over 20 years. Copper plumbing is about 50 years.

>Let's also assume 4% appreciation and let's say 10% of the rent goes to capital expenditures and 1% consists of principal that will eventually go back into the investor's pocket. All this is extremely rough, or I'd be going on for pages. So, gains outside of cashflow are 4% of $1,495,000 annually (13 properties costing $115k each), or $59,800, plus 11% of $249,600 ($1600 in monthly rent x 13 properties), or $27,456. Total of $87,256 in non-cashflow gains

again using percentage for cap ex. The referenced property has less than 2% annual appreciation for this century (which is lower than the inflation rate for this century), so less than half your number. the initial principle at 7% loan, 30 year term is below 0.2% so your number is factor of 5 too high. Using the real numbers from subject property is ~$30k + $5.5 so ~$35k on a $373k (at 75% LTV because your example was a duplex). That is underperforming S&P both lifetime and this century.

>Some of your points have been valid, but the part about rent and appreciation not outpacing inflation is, plainly, hogwash. If that were true, it would literally be better to put your money in savings bonds and no one would invest in real estate.

Exactly. I showed using a good source (neighborhoodscout) that it was true for the appreciation and I included the link. I suspect at current rates most nearly passive re investors would do better with bonds. Are you claiming that neighborhoodscout is a poor source? Note when rates were half of their current rate, there likely was cash flow on that Peoria property even with realistic expense numbers, Not enough that I would recommend it for a CA OOS investor, but possibly enough to out perform bonds.

>I'm the only one in this thread to actually offer a concrete plan. Everyone else says nothing works or puts forth plans that are both very modest and very vague.

early I offered insight that she absolutely should keep her current property. You can see post for rational. I am also a fan of leverage, but not over leverage and I presented loan option other than heloc for long term debt (due to variable heloc rates). I did not state what I thought a suggestion for best use of funds. I will say that I do not believe active residential is best option for OP. S&P, syndication, other indexed funds, bonds are likely a better option. This does not imply that an experienced re investor cannot do well even in this market. Op is not experienced and has not indicated she desires an active role in RE.

>Assuming no cashflow on the Compton property seems sensible, but the Midwestern properties would have both (modest) cashflow and appreciation.

That Compton property, if it has not had cash extracted, has cash flow by itself far in excess of multiple of those Peoria properties (which actually has zero cash flow with realistic numbers but I will use your $122/unit, $244 a property). There is a poor correspondence between initial cash flow and long term cash flow. This is not happenstance as prices are based on numerous parameters. 2 of the largest parameters are expected appreciation and expected rent growth. So in general, low initial cash flow markets have higher anticipated rent growth. She purchased at $240k. I expect market rent to be ~$3.5k.almost 1.5% ratio with near fixed property tax and low interest loan. My estimate is, even with my underwriting, cash flow in excess of $2k. Managing a single unit. (versus negative with my underwriting on the Peoria property)

>the Midwestern properties would have both (modest) cashflow and appreciation. You seem to want to dispute that, but home prices have approximately quintupled since 1980 in Illinois, where the initial example was set

A property that quintupled since 1980 would not have such a low price as the Peoria example. The low price was how I knew prior to looking it up that the Peoria property had long term appreciation below inflation. It is not possible to have what you seem to imply, a low property price but decent long term appreciation.

>Should be pretty obvious that appreciation is going to be higher on $1.5m of real estate anywhere in the country vs. $700k in Compton, even though Compton's rate of appreciation is higher.

not true. it is not accurate for the Peoria property. Peoria 1.95% annual appreciation for this century. Compton 6.48%. https://www.neighborhoodscout.com/ca/compton/real-estate Over 3x Peoria appreciation so the $700k historically would have out appreciated $2.3m of Peoria RE, both purchased on Jan 1, 2000.

I know I have done a lot of underwriting, but the issue with your replies are obvious to me.

Again, the Peoria property may work for a local hands on investor. It will not work for the op.

Best wishes

I figured you were actually advocating for not investing in real estate at all, and it turns out that's the case. You know, your thinking about appreciation actually has two issues, one of which I glossed over on first read. First, you're cherry-picking a period that includes the worst financial crisis of our lifetime, 2008. Unless you expect a repeat of that, that' s not a good basis to make predictions. You've arrived at a figure of 2% by doing that. That's to say the least extremely conservative.

Second, you're failing to recognize the power of leverage. If OP has 30% down on a property that costs $115k that appreciates 4% a year, that's a gain of $4,600 yearly on an investment of $34,500; actually, a return of 13.3%, not 4%. Should you take your $34.5k and put it in bonds that "beat inflation" and get say 5%, but provide no leverage? There's a place for bond investing, but notice we're on BiggerPockets. The power of leverage is one reason people turn here.

I can only imagine how confused OP must be reading all this. It has to be going way over the head of someone who's just starting out. I'm just clarifying here: you think she should sit on what she's got and not invest at all. Okay, that's a very conservative option. If I thought there was a terrible crash coming tomorrow, I might do it, but I don't think that. I remain highly leveraged and am comfortable there and am comfortable recommending it to others. OP in fact did say she wants to expand her portfolio using equity. I think that's a great move and I've tried to show in detail why doing so is many times more beneficial than sitting on it, which I guess in the end is what you advocate.

Another key point: you say a Midwestern property won't work for OP. Okay, well I live in California and invest in the Midwest so I'm here actually doing it and profiting from it. I can only say it works for me.

Oh, regarding my rule of thumb numbers, there's probably a pretty good reason lenders use 25% for vacancy and maintenance. If you want to dig into it more deeply, that's fine and good, it's just far outside the scope of what I'm going to respond to in this post.

You say the Compton property has cash flow by itself far in excess of multiple Midwestern properties. How?? It's financed at 3.3% for $240k, so the P&I should be $1051, tax around $650 (if assessments have kept pace with the rise in value), insurance maybe $150. Total PITI $1851. What do you think this house rents for? At best, I say around $2500 and it barely breaks even as a long-term rental.

I dunno, the more I dig into this the more I think there's an awful lot of mistaken thinking behind what you're advocating... which in the end isn't investing in real estate at all.

Why do you think so many California investors buy in other states? Probably because of exactly the kind of stuff I've been outlining. You say it "won't work," but it does work and is working.

>First, you're cherry-picking a period that includes the worst financial crisis of our lifetime, 2008. Unless you expect a repeat of that, that' s not a good basis to make predictions. You've arrived at a figure of 2% by doing that. That's to say the least extremely conservative.

Two things 1) it was the longest period on neighborhood scout 2) I used the same period on both the Peoria property and the Compton property.

> Second, you're failing to recognize the power of leverage.

true. But the reason I am not in favor of semi passive RE investing is not the appreciation but the poor cash flow resulting from worst rent to price ratio in history coupled with the recent doubling of interest rate. With leverage the appreciation is magnified. The low appreciation (<2% since year 2000) is magnified when leveraged but the real numbers on your reference property bleeds cash each month. Doing self management of STR as I already demonstrated is below what PM can make.

>I'm just clarifying here: you think she should sit on what she's got and not invest at all. Okay, that's a very conservative option.

That is not what I stated. I stated numerous options other than semi active residential RE

>which in the end isn't investing in real estate at all.

At this time I advocate only active RE investing . Value adds, flips, etc. not semi passive option OP is seeking.

>Okay, well I live in California and invest in the Midwest so I'm here actually doing it and profiting from it. I can only say it works for me.

Can you post address of properties purchased in last 2 years? We can look over the data because as already demonstrated your underwriting is suspect.

>You say the Compton property has cash flow by itself far in excess of multiple Midwestern properties. How?? It's financed at 3.3% for $240k, so the P&I should be $1051, tax around $650 (if assessments have kept pace with the rise in value), insurance maybe $150. Total PITI $1851. What do you think this house rents for? At best, I say around $2500 and it barely breaks even as a long-term rental.

you apparently do not own CA property. property tax is near fixed in CA. Prop tax ~$3.2/year (~$270/month). I suspect your rent point for SFH is about $1k low but close to correct for apartments. Your insurance is also high as I pay less than $900 for SFH valued at $1.1m. Maybe $65/month. $3500 - 1051 -277 - $65 is $2.1k. Subtract off vacancy, maintenance, cap esp (at $122, jk). As indicated it cash flows better than multiple of those Peoria properties even using your number ($244) but especially if I use the real number of negative cash flow.

>Why do you think so many California investors buy in other states? Probably because of exactly the kind of stuff I've been outlining.

they do not despite what posts on BP may lead you to believe. Ca has the highest percentage of investor owned SFH in the nation. Those Midwest markets rank near the bottom. I do recognize posts on BP could lead to a different conclusion. https://www.corelogic.com/intelligence/total-investor-home-p...

>You say it "won't work," but it does work and is working.

Not by the example property you provided that is both cash flow negative and appreciates less than the inflation rate.

I am not the only one that advocates not purchasing rent ready residential properties. The list includes some of the more successful syndicators. In addition syndicators that have continued to purchase are having more capital calls and defaults at least since the Great Recession. Why? Because it is a challenging market.

Please post addresses of properties you have purchased in last 2 years. Show me your actions match your words. We can see if they were purchased with underwriting that far underestimates vacancy, maintenance/cap ex, misc.

Note I have made a lot of money with RE, but I have not purchased in 2.5 years (in Dec 2021 I purchased $4m and am up over $1m on these investments (2 properties)). so my actions (no purchases) match my advice.

good luck

>Two things 1) it was the longest period on neighborhood scout 2) I used the same period on both the Peoria property and the Compton property.
Again, that period is not one to use to make assumptions, unless you see a repeat of 2008 coming. I already showed that if you take the last 10 years, or the last 35, the Midwest appreciated significantly.

>the reason I am not in favor of semi passive RE investing...
I've also slowed down my buying activity a lot over the past couple years. I did purchase a cash-flowing rental in the Midwest in 2022 (I guess some here think that's impossible) and I just purchased a distressed property in California that I plan to add value to. I've been ramping up my short-term rental activity, too. So, I understand the reasons for being more active.

Nonetheless, your assumptions about appreciation are wildly wrong. Let me repeat: do you see a repeat of 2008 coming? If not, stop assuming 2% appreciation, in any region of the country.

>Can you post address of properties purchased in last 2 years?
No, I can't. Hopefully the reasons are obvious.

I've already outlined the type of deal I'd buy if buying in the Midwest today. You tore it apart, assuming someone would have to spend thousands on umbrella insurance and a California LLC so my numbers didn't work, and appreciation would be 2%. Cashflow is thin when places properties purchased at current rates and prices without adding value, yes. So, do something more active to ensure cashflow, such as creating a couple short-term rentals, while continuing to profit passively from underlying appreciation. That's basically what I'm doing. It works.

Even appreciation that "doesn't beat inflation," when leveraged, certainly does. If the gains are properly calculated, which you're not doing, even in a worst-case scenario of poor appreciation, what I outlined is going to achieve a total return roughly equal to stocks or bonds.

So you're assuming the Compton house rents for $3500--given, we don't know how many bedrooms it has, what condition it is, or whether the landlord has been able to keep up with market in spite of rent control, but that's top of the market for a home that has 2-3 bedrooms and probably isn't the Taj Mahal. I think $2500 is quite fair if it's a two-bedroom home in questionable repair, which it may well be. But no one is getting rich off that cashflow even in a best case scenario.

So to outline this again, here's the alternate scenario. Take out as much equity as possible, invest it all in a cheaper market, and create enough short-term rentals that you ensure a small amount of positive cashflow. I'll add another piece: with interest rates on the downswing, bank on refinancing and higher cashflow in the near future.

This may well not be what a "more successful syndicator" would do, but it wasn't a more successful syndicator who asked the question, just an ordinary mom and pop investor who's looking to expand on what she's got. Your advice is stick with bonds.

Do what you want, but do fix your assumptions on appreciation.

>I already showed that if you take the last 10 years, or the last 35, the Midwest appreciated significantly.

You used the satiate of Illinois and not the city of Peoria. Illinois include Chicago. Look at Peoria for any long term period (longer than 24 years I see) and you will see that it appreciates less than inflation. The period I used was longest on neighborhoodscout. It includes Great Recession (one of worst periods for RE) but it also includes post GR through 2021 that was one of best periods for RE. Note your 10 year period 1) only includes one of best periods ever without any significant down period 2) is not long term. Note at that price point I did not need to look up the data to know its long term appreciation was below inflation. You cannot have that price point without historical appreciation below appreciation. Show me any Peoria data showing appreciation above inflation that is older than data I provided.

>No, I can't. Hopefully the reasons are obvious.

You cannot post the addresses because the numbers are weak. Note I have posted actual links to my properties including 4 links to my units that I posted in last 2 days (check my posts from yesterday and day before yesterday to see 4 of my units)p). 2 of those links are 2 of a quad I purchased Dec 2021 and am up over $600k above costs.

>do something more active to ensure cashflow, such as creating a couple short-term rentals, while continuing to profit passively from underlying appreciation. That's basically what I'm doing. It works.

Did you get the impression OP was seeking a non-passive route? My suggestion is for the OP. Experienced, active RE investors can do well, but my issue is that if I extract the added value the property has negative cash flow).

I already showed that using up your STR cash flow numbers, you are better off managing STRs in So Cal. I pay my STR pm significantly more per unit than your projected cash flow. You would be getting less cash flow than if you actually had a job local to op managing STRs. It is a poor plan.

>you're assuming the Compton house rents for $3500--given, we don't know how many bedrooms it has, what condition it is, or whether the landlord has been able to keep up with market in spite of rent control, but that's top of the market for a home that has 2-3 bedrooms and probably isn't the Taj Mahal. I think $2500 is quite fair if it's a two-bedroom home in questionable repair, which it may well be.

your response shows your knowledge of CA rentals is minimal. SFH are statewide exempt from rent control due to costa Hawkins. Your rent point is about average rent for an apartment in Compton. SFH rent for significantly higher than apartments which they should because their value is significantly greater. I guessed (admit I did not look up) an average for a SFH because we do not know br, ba, footage. Feel free to look up Compton average SFH, but it will be substantially higher than the rent you indicate.

> fix your assumptions on appreciation

Assumptions based on the best data either of us have shown on Peoria. Also easy to tell from price point that property has appreciated below appreciation since built. I think you need to recognize the folly of that property as an investment and that it has long term appreciation below the inflation rate.

I do not invest in RE to own units. I do not invest in RE to have a little extra spending money. I invest in RE to have substantial positive impact to my life. I have accomplished this. When I choose to invest in RE, I look at effort involved, risks, and projected return. I would not choose residential RE at a few hundred return a month per unit. My time is far too valuable for that poor return. I have made a lot of money on RE. this year or next year my rent should cross $1m. I have “retired” with a lot of toys (missing a plane but maybe in the next year). You can of course ignore my comments or you can ponder my responses. Up to you.

OP will choose her own path. She has both our opinions (yours: cash out and invest in low cost property in Midwest, mine: cash out investing in something other than RE).

I have heard your thoughts on investing in cheap Midwest. I question if you realize how hard you are working for the return. Something to ponder. I hope you do think about my remarks. Realize my advice is not coming from someone that has not been successful with RE.

This is my way of saying we will not come to an agreement and I am out.

Good luck in whatever route you go.

Okay, so you want data for Peoria home appreciation further back than 2000. No problem.
https://fred.stlouisfed.org/series/ATNHPIUS37900Q

This shows that home prices increased 3.5x (350%) between 1980 and 2024. So, sure, Illinois may only have quintupled because of Chicago. Still, Peoria, and likely basically every other Midwest city, beats inflation by a very healthy margin. And through most of this period, it would have provided great cashflow, too. Clearly, with leverage, it was a far better investment than stocks or bonds. I think it still is, though the cashflow is shakier. It's likely to come back, at least to some extent, when interest rates inevitably come down. Until then, people who don't want to sit on what they own can do something slightly more active to get a little cashflow *while continuing to profit from passive gains*. You say bonds; I say investing in lower cost areas helps us not get eaten alive by negative cashflow while remaining in position to reap appreciation.

The fact is this thread is full of investors from California who only know how to invest in California and aren't even willing to look at other approaches. If your approach works for you, alright, but if you say, for instance, that the Midwest has no appreciation, you're objectively wrong. If you say you can't cashflow there now, you're objectively wrong again. If you tell people to sit on what they own, you're giving advice that's at best overly conservative. I'm getting a little tired of going around and around the rosemary bush with people who don't know what they're talking about but if I had a lot more energy I'd just pick 10 properties off the MLS right now in different Midwestern cities where you can comfortably cashflow right out of the gate. I'd have it done in 10 minutes. If you can't find stuff like that, your problem. Don't give me "I need a $5k umbrella so I can protect my toys." If you own two houses, you don't have toys. It's especially easy to cashflow if you have an actual down payment and not something financed with a HELOC.

I don't post information about properties I own in forums that can be searched through Google and I suggest you stop doing it too. I started this journey with like $20,000 in savings back in 2011 and I'm basically retired now or something very close to it. I rely on the cashflow from my Midwest rentals more than anything, and I manage a few of them as Airbnbs. Maybe people who start with millions do something different from me, and maybe they should do something different from me. I am happy with what I have and where I'm going. The investor who originally posted their question is also very small-scale at this point and looking to scale up. I know every step of that journey. I created value in a home in LA, pulled the funds out and invested them in the Midwest. Had I held onto that house, I would have benefitted greatly from higher CA appreciation, but on the other hand, I was able to benefit from higher cashflow. So, I accepted modest appreciation (doesn't really look that modest since about 2020, honestly), and enjoyed a steady income. Exactly why coastal investors go to the Midwest. If you don't get it, you do you.

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This probably isn't a great idea.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Best wishes

BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

My way is just one way. It works. If people don't want to deal with long-distance landlording, I think that's totally fine.

Jeez, I really feel like I'm going through the Spanish Inquisition over basic stuff everyone does all the time. I'm really not saying anything new at all. This all very old and time-tested stuff.

By location, 2/2 ocean 800’ ocean front class b+ for ~$6k, versus Inland class b+ 4 br, 3 ba 3000’ is $6k. Which do you think will typically have the higher maintenance/cap ex?

Maintenance/cap ex is primarily a function of unit features and tenant quality and not a function of the rent.

Part costs are similar nationally. Labor rates vary, but not so substantially to be as big an impact as property features and tenant quality.

Best wishes

You picked a 25-year period where they didn't, at least in Peoria, but my point remains that that's exceptional.

>Assuming no cashflow on the Compton property seems sensible, but the Midwestern properties would have both (modest) cashflow and appreciation.

I know I have done a lot of underwriting, but the issue with your replies are obvious to me.

Again, the Peoria property may work for a local hands on investor. It will not work for the op.

Best wishes

I dunno, the more I dig into this the more I think there's an awful lot of mistaken thinking behind what you're advocating... which in the end isn't investing in real estate at all.

Why do you think so many California investors buy in other states? Probably because of exactly the kind of stuff I've been outlining. You say it "won't work," but it does work and is working.

Two things 1) it was the longest period on neighborhood scout 2) I used the same period on both the Peoria property and the Compton property.

That is not what I stated. I stated numerous options other than semi active residential RE

>which in the end isn't investing in real estate at all.

At this time I advocate only active RE investing . Value adds, flips, etc. not semi passive option OP is seeking.

>Okay, well I live in California and invest in the Midwest so I'm here actually doing it and profiting from it. I can only say it works for me.

Can you post address of properties purchased in last 2 years? We can look over the data because as already demonstrated your underwriting is suspect.

>Why do you think so many California investors buy in other states? Probably because of exactly the kind of stuff I've been outlining.

>You say it "won't work," but it does work and is working.

Not by the example property you provided that is both cash flow negative and appreciates less than the inflation rate.

good luck

Do what you want, but do fix your assumptions on appreciation.

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