All Forum Posts by: David Faulkner

In theory that is true. In theory, there is no difference between theory and practice. In practice, there is.

Renters are not always 100% rationale people ... they would choose to rent a place where rent was $50/mo less and they would have to pay a $60/mo water bill over the same unit with higher rent and water included. I agree with other posters in that the first question is do the units have separate water meters, and the second question is it customary in that market for the tenants to pay the water bill ... if yes and yes, then it will normally be better to have the tenant pay rather than raise the rent and include it. Another thing to consider is the water for landscaping, especially if you have a lawn in front or back. Include water and it will get watered. Don't include water and you may find that some tenants may mess with the auto sprinklers to save on utility cost ... again, they are not always 100% rational and would sometimes rather live with a dead lawn to save a few bucks a month on water. If you live in one unit and run the sprinklers off the water from that unit then no problem, at least until you move out and rent it.

I agree ... well selected DGI beats the heck out of OOS Turnkey, in PITA, in risk, and in return. Well selected local, hands on REI beats the heck out of DGI, though ... but you work for those extra returns and to maintain that extra control; it is far from passive. The extra work to maintain control and hedge your risks is the key ... leverage with control has great returns, but leverage without control is very dangerous.

Personally, I don't see the harm in disclosing ... not like you are or should be trying to hide anything ... so, I agree with the other poster to say that when in doubt, disclose.

Still not saying you should invest OOS IMO, but if you do, find the Property Manager (PM) first, before the property, before anything ... spend your time and effort into finding a great PM. That is the "quarterback" of your OOS team, without a good PM you will NOT be profitable, I don't care how good of deals you can find, how good the cash flow looks on paper, or how good the rest of your team is. A great PM can also guide you as to which neighborhoods and types of properties to invest in, which ones to avoid, and help you to round out the rest of your team. All other things looking about the same, I would even go so far as to say pick the market where you can find the best quality PM ... it is THAT important. Understand that most PMs absolutely suck and will cost you way more money than they are worth, and that a great one is a needle in a haystack ... a great PM will not necessarily be the one with the lowest fees ... you need to find that needle in the haystack BEFORE you even think about buying anything.

One other bit of advise would be to spend the extra money to buy quality properties, that will attract quality tenants, and make your PMs (and in turn your) life easier ... these properties won't show as high of cash flow on paper as the rough end of town, but a nice B-class neighborhood over a cheaper C (or worse) class neighborhood will be money well spent, especially your first time out of the gate as a OOS investor. If you can swing it, I'd even advise to pick the first one up with as much down as you can manage (all cash is all the better) ... you can always cash out refinance it later after you get a feel for how it is going to perform for you. I like your idea about going through an agent and separate PM rather than turnkey ... you can normally find a "turnkey" property right off the MLS, sometimes with a tenant already in place, with verifiable trailing 12 month financials from the seller for THAT property, with a PM already in place that you could choose to use, and normally still pay less than what you'd get through a "turnkey" company ... if after you get some experience and build out a team, you can get even better deals than that by buying vacant properties that need a little cosmetic work, but all in good time. This is still NOT the optimal route that I would choose as I find local hands on to be more profitable with more control and less risk, but if you are going to go the OOS route anyway, this is how I'd advise approaching it to maximize your odds for success. Good luck to you, whichever path you choose.

I have also done well ~45 minutes drive from you in East Lancaster and East Palmdale ... East of say 15th St East ... stay away from Central (Division St.) unless you really know what you are doing, and west side (west of 14 frwy) is nicer but more expensive. That area has a booming Aerospace and Defense industry right now ... and with global Geo-politics being what they are today, I don't see that declining anytime soon. And in spite of what some with absolutely zero experience investing and landlording here in SoCal may say, you absolutely can find stuff there that cash flows. One word of warning to caveat that, though, is that these far inland markets (including the IE, as you may already know) tend to be MORE volatile and have lower long term appreciation than the more coastal stuff that cash flows less initially. Those markets tend to crash much harder in a downturn, but then appreciate much faster when the market turns to close the price gap a bit more, but the average appreciation (over several cycles) tends to be lower ... so, the best time to buy in these type markets is actually after a crash, but that is not to say that it can't work today so long as you put in the time and effort to find a great deal before pulling the trigger, which to me is the cardinal rule to follow in any market at any time in the RE cycle. As you become more skilled at acquisitions (and value add rehab), especially off market acquisitions, you can find better and better deals and thus cash flow further and further west, or cash flow even more in the inland markets. I still have a LONG way to go with my acquisition skills, but I like to buy everything like a flipper would (and still run the cash flow analysis too), then I just flip it to the rental market instead of the sales market :)

My advise would be move and rent for a year. During that year, save, study the market, network with local investors, learn from them what they are doing to make profit and avoiding, narrow in on a sub-market you'd like to start investing in, and learn that sub-market like the back of your hand so that you know instantly looking at a property in that market what sort of neighborhood it is in, whether or not it is a deal, and what price would make it a great deal ... that way, you can answer your own question and gain some knowledge and local experience. If after the year you want to invest, then go month to month with your rental lease and find a great deal to buy ... I think buying a place to move in and house hack is a great way to get started, and you will have prepared yourself to do just that. If you are not interested after a year, then you've saved yourself a lot of trouble and still probably picked up some knowledge that will help you along a different path ... so either way, you win. REI is a long term game and needs to be treated as such to succeed, and this includes preparations before purchase as well as operations post purchase.

Money can be made by smart, ambitious, hard working locals in each and every city in the US at each and every point in time in the RE cycle, though different strategies my be more or less successfully used in different markets and at different times/points in the cycle. I'd advise you move to where you'd best like to live, will have the best quality of life, and can afford to buy property, then learn from experienced local RE investors how to turn a profit in that market. Another option, but one I wouldn't advise as much, would be to determine what your ideal investment strategy would be, and then identify the markets where those strategies are likely to perform the best.

That is a bold statement made with zero rationale or analysis to back it up ... not saying it is right or wrong, only that if you are going to make such statements they should be backed up. Can you elaborate please?

And that, my friend, pretty much sums up why rents are high and growing in SF :)

Do NOT ASSUME that cash flow will be consistent ... model it based on current actuals, grass roots analysis, and future projections based on long term historical trends. CapEx = 10% of gross rents will NOT cut it, for example. If cash flow stays equal in dollar amounts over time, then in reality it is going down on an inflation adjusted basis ... don't assume every income and expense goes in lock step with average inflation, back it up with real analysis.

A few other points for your consideration ... scaling up to more and more properties becomes less and less passive ... I know, you are saying "no problem, I'll just build a team and they will take care of it all" ... but it is a problem ... best case, building such a team and systems will take YEARS, and those years will NOT be passive by any stretch of the imagination, and even after that outsourcing everything is still expensive. Mistakes will be made, and those mistakes will create real risks and will cost you real money and real time and real effort to fix. Fixing those things from a distance will be very difficult and very expensive, and in all likely hood you will need to book plane tickets and hotel stays to fix them. IF you are willing and able to invest the years of time, effort, and money and IF you are able to perfect your systems and get a good team in place, then at that point it can be profitable and passive, but understand that those are a LOT of IFs ... you need to go in with eyes wide open to this fact, and not expecting it to be like buying a stock or a bond ... and no, buying turnkey does not excuse you from the necessity to do this, because the turnkey company's systems are optimized to maximize THEIR profit, and not necessarily YOURS.

Not saying that this is a good investment or not specifically, but that generally investors in CA (and everywhere IMO) need to consider ALL of the profit centers of RE, and consider them over the full life span of the investment. All too often on BP all that folks look at is the cash flow on day 1, and then ignore everything else, which is really dangerous IMO. Cash flow is an important thing, but it is not the only thing. The 4 profit centers of REI are:

1)Cash flow (which changes over time with rent increases and other expenses which may or may not grow at the same rates)

2)Appreciation (both forced and market)

3)Mortgage pay down (through loan amortization)

4)Tax savings

The best way to combine all of these things into a single analytical framework IMO is to project out the financials (including all of these items using estimates based on current actuals and long term historical trends) from the day of purchase on out to the exit (via sale or cash out refinance of your initial investment) and then compute IRR. There will be some uncertainties in your projections, so best to make sure you have sufficient profit margin (aka margin of safety) and cash reserves to cover these unknowns and maintain multiple profitable exit strategies in case they are off.

Please note that this sort of analysis is much more in depth and fundamentally different from the analysis presented by the OP ... however, she asked if her analysis was right, and IMO this is what an analysis that is "right" would look like.