All Forum Posts by: David Faulkner

I would research the towns inland a bit, where the price points and rent ratios are a bit kinder. Then I would rent there month-to-month for a bit to get the lay of the land. That way, you can get familiar and take your time to find a great deal. Then, when you're ready, house hack it for 2 years on a fixer you can add some sweat equity into. You could either rent rooms in a single family (my personal preference) or units in a small multi-family (with 4 units or less). After 2 years or more, move out and repeat as necessary whenever and wherever the numbers make sense. As previously mentioned, portfolios here are slow to build but you can get paid well if you do it right. I wouldn't try to rush on a several $100k investment in an area and asset class you are not yet fully familiar with.

Forgive me if this sounds harsh, but I don't think you are ready to purchase a property yet. Yes, you may be able to construct some sort of creative financing to buy something, but that doesn't mean you should.

My concern is that if you only have $2,500 to invest, that to me says that you do not yet know how to manage your money. If you currently mismanage your money and buy a property, you will still mismanage your money, just on a larger scale and with high leverage. When ignorance is combined with leverage you get some pretty interesting results (not in a good way).

So, I would focus 1st on mastering personal finance. You'll know when you've mastered it because the money you'll need to invest will magically start accumulating in your bank account. In the meantime, I'd get a library card, research on BP, and join in REI meetups for education ... the best things in life are free :-) If you still want immediate hands on experience, then go work for somebody that does what you want to do and get paid to learn.

Good for you for your ambition to ... I think that this would be the more sensible way to start.

I have a 2 BR, 2 BA, 1250 SF SFR, 7,000 SF lot in an A-class hood. My house is surrounded by 4+ BR, 2000+ SF homes. Market prices are ~$500/SF today. So, I'm thinking at some point in the future I may consider moving back in (it is currently a rental), pulling permits and developing out the property adding ~1000 SF as an "owner builder", and selling tax free after 2 years or renting it back out again. It is on an steep up-slope such that it is 2 stories in the front and 1 story in the back ... the 1st floor in the front has only the 2 car garage, ~100 SF unfinished basement, and concrete block retaining/structural walls with crawl space well before the back of the house. Stucco over stick framed construction. I was thinking I could perhaps dig out the basement to add footage. There is another residential street running behind the property, so I might also be able to relocate the garage to detached in the terraced backyard and turn the existing garage to living space. Either that or pop the top to add a 3rd story with insane city views, but then it might stick out (in a bad way) in this block of 2 story, 1920s spanish homes (mine is the newest on the block, 1952 traditional :-) ). This is not a designated historic district to my knowledge.

Would you build this home out under these conditions? How would you plan it? How would you design it? How would you build it? When? How big? What factors would you consider in this decision? I'm not looking for a GC or JV, just advice and opinions please.

I may be unusual here, but I listen to all of the negative things they say. Then I figure out how I can structure my investments so that if those negative things happened, I'd still be ok. The more I think about those negative things, the more robust my investment plan becomes, and the more confident I become in my investments. In this way, I turn the negatives from them into a positive for me.

If you want to stay in CA, invest in RE, and NOT invest remotely out of state, then you will need to adapt your strategies to this market. That means forget about 2%, probably would need a small miracle to pull 1% and in the nicer neighborhoods you can't even cashflow with less than 50% down. This doesn't mean you can't still make money in this market, it just means you'll need to either change up your tactics (value add house hacking, flipping, RE services, etc) and/or wait until the market turns (always does, and usually dramatically in CA) to get cashflow. BTW, even in the depths of the great recession I was only able to pull ~1.25% on SFRs in C-class hoods (Palmdale, Lancaster), but they cashflowed and their values have since doubled ... so profitable buy-n-hold is possible in CA, just probably not at this point in the cycle. You need to be cognizant of the market cycles, adapt accordingly, and always protect your downside with a viable plan B. BTW2, I generally advise NOT investing out of state ... been there, done that, and it was very painful for me; your mileage may vary.

Your strategy to save both sides money would work on a FISBO (For Sale By Owner) or a RE broker trying to sell their own home, but not in most other cases. However, I used a similar strategy for a different reason  to help get good deals.

I got search access to MLS (or Redfin or Zilllow, etc. if you can't get MLS) and identified properties on my own. Then I contacted the listing agent and asked to see the home, telling them I that if I put in an offer it would be through them. This allows you to put in lots of offers on lots of homes and get represented by lots of eager agents trying to double end their listings, giving them incentive to close the deal with you ... this shouldn't matter in theory, but I can tell you from experience that it does matter in practice. You have to watch your own back in escrow, but I'd argue you need to do this no matter what anyway, whether or not your agent also represents the seller.

The value and appreciation is in the dirt ... that is the limited resource that they are not making any more of, especially in coastal SoCal. The home on top of the dirt depreciates, which is why the IRS allows this expense to be deducted on rentals. 

With a mobile home you are buying the depreciating part (the structure) and renting the appreciating part (the dirt under it). This is why mobile homes are a great investment for the park owner, but not so much for the home owner. This was already mentioned by others, but hope this clarifies some of the thought process behind it.

BTW I am also not a fan of condos because you do not control the land or outside of the structure. I'd take a single family home with no HOA over a condo as a longterm hold any day of the week, even if it costs more, is older, and I had to go to a nice hood inland a bit to get it. But that's just me ...

Hi Tyler,

I was also thinking about vacation rentals in Anaheim ... I think you may be onto something there. Feel free to reach out if you'd like to exchange ideas. I've also been a buy, fix, & hold investor since 2002, all long term SFR rentals; I'd be happy to share any experience and knowledge.

-Dave

• Are you actively buying properties, if so, what type property are you looking for?

No, haven't bought since 2012. Buy-n-hold numbers I'm seeing don't make sense. I'm into SFRs. I'm currently renovating some of my properties and may be a seller if the market keeps going up, though.

• What is your niche?

Buy-n-hold SFR rentals with value add opportunity. Considering other niches that may work better in this current market, but still on the fence.

• What area of southern California?

Huntington Beach, Glendale, Palmdale & Lancaster.

• Are you just getting started?

No ... but I haven't bought anything since 2012, so I would be "restarting" if/when I get back in.

• What help do you need to move you ahead?

Other options besides buy-n-hold that work in this market (or how to make buy-n-hold work). Would like/need to "ride along" on a deal or so, offering free labor for the ride, with an experienced investor to convince myself that alternate methods are sound and how to structure them to not lose your behind even if the market falls out from under our feet.

• What are your needs? (locating property, money, partners, expertise, etc.)

expertise and somebody willing to let me tag along on a deal in exchange for free work/

• What price range are you wanting to stay in?

Wherever the numbers make the most sense, but likely under $150k/unit for rentals and under $500k for flips.

• Other? 

I'm happy to give help or advise anybody who is looking to buy-n-hold SFRs, with the caveat that I have not been active in this current market.

 The reasons I'm aware of for people preferring notes (or other debt instruments) vs. equity (RE buy-n-hold) are:

• RE equity investments are already tax efficient. You get depreciation. You get to deduct interest and other expenses. There is therefore little need to put them in a Roth IRA, since they are largely tax efficient investment vehicles anyhow.
• Leverage, another major benefit of RE equity investments, is harder within a Roth IRA. Sure, you could get a non-recourse loan to do it, but this will be a commercial loan with far worse terms (no 30 yr fixed, higher rates, shorter terms, balloon payments, etc.) that you could get from a personal mortgage loan outside the Roth. If you were buying a 150 unit apartment complex, you'd have to go commercial non-recourse debt anyhow and this argument wouldn't hold, but with $45k down on a SFR it is true. Most people just buy property for cash in their IRA, give up the leverage, but gain safety ... if you, in your 20s would not do this outside an IRA, which is probably the right call, then you probably shouldn't do it inside an IRA.
• RE equity investments, if done with "value add" or other methods to boost return, tend to be more active investments. With an IRA, everything must be an "arms length transaction", meaning you can not actively participate in the investment and must contract out those jobs. For example, you must hire full service property managers and contractors (no DIY allowed).
• On the other hand, notes (debt) are naturally not very tax efficient, do not lend (pun intended) themselves to leverage as an investment, and are more passive investments. So, you are gaining tax efficiency and not losing anything with leverage or active investing by putting them in a ROTH IRA.

Hope this helps.