What are peoples’ thoughts on where rent’s should be set or the best way to get them up if you fall behind?
You are spot on: not considering annual increases for every property is a cardinal mistake. Tenants expect them and it is better to increase a small amount every year then a larger amount after several years.
We typically know what market rent is from the turnovers and keeping a long-term tenant slightly below market seems to be the sweet spot. We also keep an eye on hourly wage growth,
. You have to raise rents, because your expenses go up with inflation (have you paid for a roof lately?) but you also want to create an incentive for people to stay.
From a tenant's perspective, there is also a monetary cost to moving, not to mention the effort it takes all the way down to the little annoying things like changing the zip codes on your credit cards or address on your drivers license.
The real money is made in the equity column.
Great points about keeping an eye on wage growth and it's a hassle for tenants to pack up and move. When I had my first rental property, I had at least 3 people tell me they don't raise rents on good tenants. And one of them in the Bay Area had been renting it out since early 2000s - when I talked to her it was 2018, never raised rent since tenant was a nice guy, not a high income earner. The reasoning being she bought this back in the 1990s, mortgage paid off. They didn't even raise it the 1.2% to 3.6% (varies by year) allowed by rent control. I would think there's now a lot of deferred maintenance and property needs a new roof, etc if tenant has been living there for 20+ years.
SFHs generally aren't under rent control, the year the tenant started renting it matters, depends on the city. For San Francisco if tenant started renting it in 1996 or after, no rent control on SFH, but you do have to give the tenant 90 day notice if raising it more than 10%. If an old tenant moves out and new one moves in you can charge market rate rent currently (on SFH and MF, but there's an Assembly bill in the works to stop this)
I don't know if they've checked and seen what California rents are now. I think sometimes DIY landlords would be better served with having a property manager. My friends that are doing this aren't what I could consider investors in the sense they're not monitoring the market - they have a good tenant that doesn't bother them so keep the rent the same for years until something bad happens like the bathtub overflows. Or tenant gets mad and complains to the Rent Board "hey my landlord has an illegal ADU, fire code violations, mold etc."
They have the equity growth from buying in 1990s or buying a great deal in 2008 but they could be doing much better to maximize return.
I find it’s tough to bring California (the Bay Area) in on the conversation because it’s such a different beast from most markets and people have been conditioned to look down on California from what they’ve heard online. I totally agree that there is no reason to leave rents flat for 18 years, but owners here have been spoiled by:
1.) Huge historical appreciation. People start disregarding rents when they have massive equity and/or a high-paying W2.
2.) Supply/Demand imbalance. Beyond adding to the appreciation our housing stock is a majority crappy and old so expectations are lower than other parts of the country in what they expect for their money. You can actually keep a renter for years without having to do much maintenance for them for lack of alternatives.
3.) Prop 13 which freezes property tax basis. One of the great advantages for CA investors also reduces one of the largest expenses over time for lazy landlords.
I suspect that the time of many landlords keeping rents THAT low around here will steadily disappear now that there is state wide rent control. The “nice” apartment owners that kept decades low rents in place and are selling now have gotten hit much harder on their valuations. For anyone paying attention, the state rent control law has effectively put in a floor on how far behind market rates you can be without losing equity (in multifamily).
Sorry, totally went on a tangent from the OP topic. But to bring it back, I agree with everyone that said it comes down to your underwriting standards. Instead of “you make your money when you buy” you could also say “you make your CASHFLOW when you buy”. Because so many people think of real estate as an “investment”, all they consider is buy low, sell high. If more folks truly viewed real estate as a “business”, then it’s buy low, sell high AND operate profitably.
@Scott Eadie, I’ve been where you are deploying a large amount of starting capital. There are no books written for people in your situation, and most people on this forum can’t relate. The door you’ve opened here is too big to even get the right advice. The only few tidbits I would say based on having a lump sum:
1.) Take your time deploying the full amount. Timing wise there are plenty of low risk places to park the money that will earn you 4%-5% yield with liquidity while you strategize. Start there then move portions of your money to where you feel you’d like to take on more risk. Some amount can also probably be put in an index fund and just leave it.
2.) If you are interested in real estate, start how everyone else starts, with something small and learn the ropes. The one advantage you have is using all cash offers to win deals and get the best price. You can refi afterwards if you want to.
Just to answer your questions about liquidity, real estate is not liquid and you never want to have to fire sale your properties. So if you have need for a liquid emergency fund for your health, I don’t think you should play with that portion by buying properties.
The bank is just a "spread" trader actually.
During cheap money era they borrow money from the Fed with 0.5% rate for example, and then they give us mortgage rate of 3% rate and 7% HELOC. The spread between 3 and 7 percent is their profit.
During expensive money era like today the Fed note is 4% and the bank give us 7% mortgage and 12-14% HELOC rate. The spread is the same concept but "widen".
The banks and Warren Buffet is actually more like "spread trader". They re-invested cheaper money to a productive economic that generates higher income.
Now from Buffet and any other big time investors prefer to invest at cash position (CD).
The way I look at things is that all capital allocators are spread traders underneath it all, maybe real estate more so because of our common sources of funds.
I watched the recent Berkshire annual meeting, and my personal takeaway isn’t to invest in CD’s, although parking cash is another matter. Berkshire operates at a scale where Buffet points out that it’s really hard to make any investments that move the needle, so that results in hoarding cash for now, or reinvesting in already successful businesses in the portfolio.
One of the questions to Warren Buffet was what he would do if he was starting over today with $1m and he talked about finding where he can make 50% return on his money and doing that. Now we’re not all Warren Buffets, but I also take him at his word that he and Charlie Munger are not actual geniuses either - it’s mostly knowledge, discipline, and patience. In my opinion, it doesn’t mean all us “non-Warrens” should be settling for risk free returns. I suspect he would continue to recommend passive players buy indexes or just Berkshire stock!
....when I told one of my family members about my interest in real estate, he was very skeptical. What can I explain to him are all the advantages of real estate over other forms of investment, like the CD market which guarantees a 5% return annually?
James, great post, and that distinction between people viewing real estate as a business versus an investment has been on my mind a lot lately. I've been thinking it's one of the reasons real estate "investors" often find themselves over-leveraged, because they aren't thinking of the business fundamentals. Instead they've somehow been brainwashed into rinse-dry-repeat formulas that lack foresight.
@Ryan Daulton, one thing I've noticed is that whenever I've asked others for investment advice, they mostly speak to the thing that worked for them to the exclusion of all else. For example, when I first started out, I sat down with a luxury real estate developer and told him I was thinking about buying apartments. He told me luxury real estate is the best because rich people are always buying or building or remodeling in good times and bad (this was around 2010 in Palo Alto, CA). He also said there's no money to be made in apartments. I'm pretty sure he forgot he said that, because he looked me up 8 years later to ask about apartments so he could get into it.
Anyways, I don't hold it against people, but I understand that's how it is and I just make my own decisions in the end. But it also speaks to the fact that people make money in those fields where they have the most expertise.
My other thought is that it's actually really hard to compound your net worth, because you have to put it all (or most of it) at risk to achieve worthwhile returns. Real estate naturally lends itself to putting more money on the line because of entry prices, and that not only potentially benefits your compounding, but strategies like the 1031 and basic leverage help you maximize with pre-tax dollars. Some of this is a psychological argument, too - I'm not someone that can put a bunch of money in an index fund or stocks that are fully liquid and keep myself from messing around with it when I shouldn't. CD's are nice risk-free vehicles to get a return on my cash reserves, but I'm also nagged by the thought that if banks are willing to offer 5% on my money, then what are they doing with that money that is earning more?? Put another way, when 5% is the easy money, then I tend to think there are reasonable opportunities to make more than that.
@Sarah Ali Just something I’ve been thinking about lately:
I also live in the Bay Area and this is a place where I know people “retiring” in their 40’s after working 10/15 years at the big tech firms. I think it stems from the illusion startup founders project by becoming young billionaires. This is also a location where you never feel rich because you are surrounded by affluence. But when you look at many of the business heroes many folks on bigger pockets read and follow, they made their biggest money between 40-60 and beyond.
If RE is brand new to you, I would focus on playing defense:
1.) Shortcut your learning curve by learning from experienced players who do what you want to do.
2.) Focus on making course corrections on your early mistakes fast and moving on or problem solving.
3.) Utilize unintended advantages that you’ve gained over the years. For example, you may already know people who are crushing real estate and you’ve just never had the conversation with them. You may also know other people who have also been thinking about investment in this stage of their life and have the financial means.
4.) Only do it if you think it’s going to be fun/interesting or you feel you will be good at it. Why waste the next decade or more otherwise.
Thank you all very much for the range of perspectives you shared above. Just to add some context to my original post:
- The $30k in capital gains is, indeed, mostly depreciation recapture. It was depreciated ~$100k over ~5 years. The rest is from a modest profit at the time of sale. I bought for $600k and sold for $640k — however, I say modest because there was a last-minute seller assist of ~$30k that took quite a bite out of the proceeds.
- To get a little more specific on profits and losses: my parents gave me $150k and I gave them back the net $166k from the sale. Per my records, I had a loss of ~$30k over ~5 years from management costs, repairs, appliances, etc. My loss was somewhat offset by the tax benefit I had from reporting depreciation over 5 years, but it's been difficult for me to quantify exactly how much I benefited. I'm not a CPA and I had other income and expenses that were commingled with the property on my returns.
- It's not lost on me that my parents acted as a lender, and that a lender would never pay someone's taxes. However, can I suggest a different analogy here? Since I returned their principal investment and the profits in full, wouldn't I have been more akin to a investment broker who was acting on their behalf?
- I fully understand that in the eyes of the IRS I'm still the one to pay the tax because the income was in my name. But intuitively — I gave back to my parents everything they gave me, and then some. If you gave a stock broker $150k and they gave you more than that back, the broker wouldn't be the one to pay capital gains. I absolutely, 100% realize that I need to be the one to pay the tax bill. So my question (which could have been clearer) is less about tax burdens and more of an ethical one of: which party should the tax payment originate from? Maybe I posted this in the wrong forum, but appreciate all candid and respectful takes here all the same.
- To the small minority who chimed in with something to the tune of "geez, I'd disown you too, you little Gen-Z brat": maybe take a beat before you judge somebody's character by a low-context post here. The money my parents gave me was a guilt payment for a lot of messed up stuff that happened in my childhood. It's not something I felt entitled to, but they offered it freely and I tried to do something constructive with it. It was a messy deal with a messy outcome. I'm trying to do what I can tie it up equitably, so I appreciate everyone's input here.
Based on your second post, it comes across as trying to fit everyone’s feedback here into an “ethical” narrative that you’ve already defined in your head. In other words, the outcome you seem to already want is for your parents to chip in on the tax bill.
Honestly, if you just boil down the responses, including all the snarky ones, everyone here is saying it’s your responsibility, because you took the money to begin with and became its steward.
In my opinion, ethically, you already gave the money back including gains on the original amount. Doesn’t matter who it is, going back after the fact to ask for some of it back is at best “bad form” and at least “ethically challenged”. I’m willing to bet most investors here would not do something like that for fear of harming their reputation.
Just my honest perspective - not trying to be one of the snarky ones.
HOT TAKE - If buyer’s commission really gets whittled down to a low flat fee, isn’t there a point where most of you (realtors) should just become leasing agents for a living instead?!
@Sean Barber
So are you saying if you invested $100,000 you will get back $38,000
Will you also owe taxes for any accelerated depreciation that was taken?
@Dan H., I looked up the San Diego ADU bonus program. 15 years is not a long time to be deed restricted! The wild west indeed.
Also had a random thought how it’s interesting that these laws are getting passed by the state and they seem to magically get altered in the subsequent years in very significant ways. So who knows what the localities will and won’t be able to choose on their own later on.
I'm currently constructing an ADU in Southern California. While I haven't remodeled the main house, it's situated in a highly desirable neighborhood. I'm interested in understanding the increase in value that the newly built ADU will bring to the current value of the property. will it be appraised for same cost per-sqt as like main house? Did anyone appraise the property / sold after adding adu?
AB1033 is like sb10 in that it allows a jurisdiction to opt in. So passing means as much as the passing of SB10 that last I heard was only authorized by a single jurisdiction.
Duplexes and 2 units only get a carve out from AB1482 rent control if a unit is owner occupied prior to tenant occupying the other unit or less than 15 years old. Some jurisdictions, I believe erroneously, are having existing unit become rent controlled if over 15 years old when an ADU is added. Note this goes against the rationale of the 15 year rule which was to encourage new housing by not having it result in rent control for 15 years. The state law makers have to clarify on this as the way it is today is unclear and adding an ADU can make your existing unit rent controlled.
>moving from a triplex to fourplex generally has no impact to the $/sq ft appraisal. From my view, neither property type (with the right features) suffers from the same potential downside appraisal risk as converting SFR or duplex.
I agree this seems to be low/zero risk but I am unsure why you excluded the duplex.. I would have only stated as converting SFR. In fact adding unit to SFR in area with true zone MF also seems to not get the negative impact from adding an ADU. Worst ADU addition appraisal occur where there is no zone MF in the vicinity.
Are you aware of city of San Diego rules regarding converting existing legal space to ADUs? It may interest you.
Best wishes
I excluded duplexes because at least in the SF Bay Area, SFR earn a premium on sale over Duplexes, and duplexes get higher price/sq ft over 3-4 units. That's in general of course - exceptions to every rule and all that. So adding one more unit to a duplex may deplete equity gain even if it improves cash flow over here.
In San Francisco proper the discrepancy between 2 and 3 units is bigger I assume because of condo conversions. I never really understood the discrepancy in the sub markets except maybe people can wrap their heads around renting out 1 unit versus maybe they are scared of having more then one tenant? There are also discrepancies due to whether or not the public record includes garage square footage. People either can’t do math or don’t pay close attention to that not-so-little item.
Thanks for the specifics on these bills. Really hard to keep all the details straight since there have been so many laws passed down from the state in recent years.