All Forum Posts by: Robert C.

Quote from @Suganya Vinayakam:

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?

Based on the responses you probably can see that ADU additions on single family homes are still the wild west right now, so you need to be clear on the numbers and goals in your specific market. Appraisals are unreliable, but there are definitely places like near me where you can make the money off of resale. 

My biggest concern with ADU’s on single family lots is that all the new laws have muddled what the long term value looks like, and most people don’t realize it yet. What will be the difference between a single family home + ADU vs making a duplex with SB9, for example? Duplexes are generally valued lower than a single family. As other people have mentioned, does it increase risk of being rent controlled down the road? Duplexes usually get a carve out, but triplexes not necessarily if you add ADU+JADU. 

Now AB1033 allows you to condo convert your ADU’s. That’s an interesting one, but who knows what that’s going to look like as an investment! I actually can’t believe that one passed statewide. 

Anyways, I have taken advantage of adding ADU’s in 5+ multifamily and triplexes. For the former, being able to add 25% more units to the right apartment building is just magical. And 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. 

@Mark Goodman, My first thought is I rarely see a good reason to move a building from 2-4 units to 5-6 units. Your cash flow may improve, but you may not be increasing the long term value of the property since 2-4 are appraised/appreciate differently than 5+ multifamily. You also lose access to certain loan products. 

Maybe if it’s a condo conversion… maybe.  

Quote from @Bjorn Ahlblad:

@Robert C. Success to me is not being forced to sell, to  others it may be buying inventory at the bottom and keeping it until recovery.

I had a property in San Mateo that we tried to sell during the dot com bust. Lucky for us we did not find a buyer at 280k. So we continued to rent it out, and found money another way. A few years ago we sold the property to buy rentals OOS, it sold for 1.2 million. 

We had another property in Los Gatos Ca that was hammered during the 2006 period that we later sold for considerably more. 

For me the goal is being in control through the dip and never being forced to sell.

 You do make me think of the more seasoned investors that tell me the richest guys they know never sold anything. 

Hopefully some experienced folks can weigh in here. I’ve been wondering what you think it actually means to have done well during and after a market downturn?

People love to have bragging rights after the fact because they “called the crash”. At the same time there are lots of people here who have never been through a full cycle yet. What makes you look at another investor after a downturn and say “yeah, they did it the right way, I want to be them”?

I think it’s too easy to just pick out the people who saw it coming and sell everything. I wonder if 1.) That actually means you outperform people who ride it out. 2.) Or if that’s more about keeping a “perfect” record to show off to investors. 3.) Maybe it’s as much luck as skill. 

What about just capital preservation and not losing money? Is that good enough?

Not everyone is going to have a pile of cash on the sidelines just waiting to be deployed at the right moment. And even that may not be optimal. 

What’s your perspective while we wait to see if another bank gets bailed out?

Quote from @Amit M.:

@Robert C. hey shout out to Robert…long time no see!

@Jay Hinrichs shout out to you too Jay!

As to the quandary posed by the OP: The root of the issue is that it basically sucks to be an RE investor these days. It’s like everybody was gangsta 2012-2019, and then 2021-early 2022 was weirdly good too (due to market distortions caused by COVID.) Mid 2022 and onwards? Not so much ;)

So now investors are feeling the weight of dog properties…be it higher interest rates, non paying tenants, property values falling, government intervention (especially in CA), etc. Lots of advice given here, and each has of course it’s pros and cons. While syndications were the rage the last few years, I’m quietly hearing more about failures. Funny how it’s easy to find stories about 20-30% profits….but you really have to dig to hear about the losers. Remember syndicators run a business, and they invest in almost all market conditions. The question is if those investments make sense or not in *this* market. 

As for being a hard money lender. Could work, but remember people that need hard money usually need it for a reason. And those borrowers that are higher risk are risky for you too. Knowing this space well is important imo.  

With DSTs you need to make sure that the various fees don't negate your profits. Plus you have no control when they do an exit, and you're paying fees all over again to re enter into a new DST. Frankly I'm not sure how profitable they are long term. I haven't seen any longer term studies done, only promotional info when the RE market was generally rising.

Bottom line is that you need to understand which risks you’re capable of handling with these various options. No free lunch in this market!

FYI in my case I was lucky, as I profitably sold some properties late 2021 and early 2022. Not only was my market timing great, but I sold my less promising buildings and used the proceeds to pay down debt on my long term keeper properties, which have higher end tenants and are thus more stable and much easier to manage. So for me the decision was pretty straightforward, but it still required a lot of thought.

It’s not easy out there these days folks, best of luck!

Hey Amit!

Just stretching my legs with a little bit of biggerpockets therapy during these uncertain times!

Congrats on the sales. I got rid of a couple properties too, but now I’m hunkering down and maximizing cashflow/operations. 

@Leon G., We’re the same age and while I haven’t thought about exiting real estate, I have thought about diversifying asset classes. This is a really hard mental challenge to overcome because you don’t know what you don’t know about other investments. Any move is possibly going to have a learning curve and some unexpected setbacks.  

My approach is to slow my decision making on big moves given the market timing. Everything in managing rentals right now probably feels harder because landlords are getting hit from all different directions (inflation, interest rates, government, etc) and there is a great amount of uncertainty in many markets. Being in our 40’s, we still have a lot of time to make investments, so we can afford a little patience to see how things turn out. At the same time, people who invest over the very long term seem to agree that focusing on the thing you know best results in the highest returns over time. 

Maybe if you’re really willing to cash out, then buying bonds seems to be the strategy with the most certainty today. Really, the beginning of last year was the time to cash out, in my opinion. And things could still get rockier, but hopefully your expertise and seasoned investments mean your overall risk profile is very low. Then you can make the appropriate moves when the wind is more at your back and there is less emotional involvement in your decision making. 

@Scott Trench, @Brian Burke

Follow up question. What are your thoughts on a tug of war between all the aforementioned potential crash indicators vs. sticky inflation? How much of any upcoming crash is just dealing with "pandemic hangover", and where will we be when we return to an equilibrium but after having gone through (and maybe continuing to go through) several years of higher inflation? 

Isn't the whole concept of living through a high inflationary period that, when all's said and done, both rents AND valuations will be generally higher. Except as multifamily owners, it just won't FEEL like we are making more money because everything has become more expensive (or said another way, our dollar has lost more of it's value). I believe most economy-watchers agree that we aren't likely to just fall straight back to 2% inflation. There could even be additional spikes in inflation like in the 80's, right? 

In terms of supply, I get that some regions of the country will have a glut from in-progress projects. But once that gets worked through, I can't imagine much new construction happening subsequent to that without more catalysts. Construction costs have gone so out of whack, that it's hard to even put together an estimate with any confidence at the moment. Either replacement costs have to fall enough to pencil with drops in rents, or rents (and therefore valuations) have to be pulled up in order to motivate the developers. Hasn't the mantra among all real estate gurus been that rents go up with inflation? Not to mention, every little repair you're doing when a unit turns or to keep your tenants happy is hacking away at your bottom line more than ever. 

Hopefully I'm making some sense - there's a lot of upward pressure, too, in this environment. 

It seems to me that the way things will play out after an initial shock are a little foggier than just everything going on sale. Maybe after the dip, having cash is king, but you can only buy 75% of the amount of properties with your money than if you'd stayed invested. When I hear stories from older investors who lived through the 70's/80's, I don't tend to hear about people who made it rich in the early years, as inflation was going up. What I do hear a lot of is about people who didn't get wiped out and held on past the end of the period, and then became super wealthy. That happens to coincide with the historic peak in interest rates followed by many decades of the rates going in basically one direction - down. 

Quote from @Bruce Woodruff:

Quote from @Robert C.:

Not when buying at today's prices. It's primary benefit is for those who bought decades ago and are holding, not investors. It's just numbers.....buy a much lower priced property at tax rates close to (or lower) than California's and you'll be way ahead.

For example, I was paying 1.25% in Cali and now pay .65% in AZ. True, it's not locked in but after 3 years here it has barely moved upward.

No doubt, the benefits if you bought decades ago are huge today, but that same principle applies with buying today, you just have to wait for it. Hindsight is 20/20 and we won't be able to see who is right until another couple decades have passed. Also, I take issue with saying that it does not benefit investors... there is such as a thing as a buy and hold investor... ahem.. like me. But yeah, anybody flipping or syndicating won't ever see the full benefits because they don't hold long enough. 

Quote from @Becca F.:

Quote from @Steve Harlow:

There is no good answer to this. Depends where in Calif your taking about. If that's not defined it a pointless discussion. I have properties in California and about 7 other states.I buy different kinds of properties in different states. What are your performance metrics, IRR, Annualized returns, etc.

What's your risk tolerance?   You need to take your analysis to the next level.

Well said! I see lots of blanket statements "Don't invest in California. Prices are too high and it's not landlord friendly" to "You can't beat the California appreciation. It'll pay off in the long term" California is a huge state with Northern (San Francisco Bay Area, northern counties, Central Valley) and Southern (LA area, San Diego). I have 2 Bay Area properties that are cash flowing positive. My investor friends who acquired properties before 2010 and a few a long time ago (1970s to 1990s) are doing well charging market rate rents and the lower property taxes from Prop. 13. 

Right now my risk tolerance isn't very high so I'm looking out-of-state (most likely Midwest, Tennessee). The Bay Area has the highest income earners and it depends on how far they will move out while rents are increasing here. I could look at Stockton or Sacramento. Stockton is questionable to me with high crime areas and prices are still higher than the Midwest. I have a SFH in Indiana - there's no Prop. 13 there so I just saw another property tax increase. The assessed value is much lower than a California house so I'm still getting decent cash flow. I could cover the monthly payment for a while if I buy another $150,000 to $225,000 Midwest SFH if I couldn't get a tenant in right away. I couldn't do that on $600,000 to $1 million house in the Bay Area. I do see Bay Area investors here make the numbers work - I can't compete against a $700,000 all cash offer. I'll look at IRR and annualized return while doing my out-of state analysis. Also a beginning investor is in a different situation than an experienced investor with lots of equity. There are many ways to invest: different geographic locations, SFH, multi-family, long term rentals, mid-term rentals and short-term rentals and there's not one way that works for everyone.

Prop 13 is the most underestimated reason to invest in California. Honestly, the advantages it gives you over time didn't really fully hit me until I 1031'ed out of a building in 2015 and looked back on the decision several years later. I don't want to say it was a mistake, but when you happen to hit the part of the cycle that's on an upward trajectory, I've learned there's very little reason to give your property tax basis away by selling vs. a cash out refi. You can think of it as another hedge on inflation on top of fixed rate debt. 

Quote from @Mike Dymski:

Hey Joseph, great to see you on the forum.  #3 for me.  I am building a hybrid apartment/hotel that has short, medium, and long term stays with pool, gym, laundry, outdoor kitchen, and courtyard on site...in a great location.

There is a lot of talk on the forums with very little real life transactions being discussed.  Most of the talk is either (1) disguised advertisements to drum up business or capital where the investor is spending someone else's money or (2) desktop research and endless chatter about "the market" with no actual investing discussion.

I’m curious to know how you plan to handle the management? Even if you are hiring a property manager, that’s combining several disciplines. 

I self-manage long term holds with a small in-house team. We tried dabbling in some short and mid-term rentals, but found the additional work involved distracting from our core long-term portfolio. However, I do keep wondering if a hybrid offering could be more lucrative and provide diversification.