All Forum Posts by: Wes Brand

@Account Closed Where in San Francisco are you going to find a property at 875k? I've been looking all over the place for about 2 months now and anything decent comes in at around 1.2/1.3mil at the low end. And of the stuff that is cheaper it's very hard to find something that you won't have to carry until rent appreciation makes it cashflow neutral. Also keep in mind that list price is a very loose guide around here. The vast majority of the properties in the area are going to go for far over list if they're at all attractive. A decent place I was looking at in SF earlier this month ended up going for about ~40% over list, for example. 

I was able to find quite a few terrible investments at under 875k, though. Places where there are protected tenants in place renting for 700/mo. I know SFH are exempt from rent control, but do you want to be the one kicking out the 85 year old disabled guy? And even if you do...have fun carrying it for 3 years while you wait for the eviction to go through. Or places with insane HOA fees (2k/mo!) in the middle of the city.

The majority of properties in the 875k range are in South San Francisco / Daly City. You might get lucky in Bernal heights, Outer Mission/Richmond/Sunset, Crocker Amazon, Excelsior, and Bayview. 

I'm not sure on the appreciation market, but price point wise you'll be better served in Oakland. Stay within 4 BART stops from SF and the neighborhoods are currently going up. You might even find a cashflow positive place near Fruitvale / Coliseum, but you're getting into high crime territory there and are really waiting for gentrification to push the undesirable element out of the area.

Anything will look like a deal if you plug in a low enough purchase price. You can skip your 'quick' analysis completely if you answer the following question:

What's market cap for apartment buildings in the area?

You might want to break out the 55% a bit better. Some properties I analyze are closer to 60%(or more), some are closer to 30%, so that deal could be significantly better or slightly worse than you're accounting for.

@Sean Tracey 'if it doesn't work out' is interesting. There's 'total loss', but the risk of that happening is so minimal it's not worth considering, so now we're in to a question of 'how much loss'...and that depends on when I sell it. The property will, if my rent guesses are correct(market research), cover all costs with the only 'cost' left to me being the equity I'm putting in to the place in principal paydown, so I shouldn't be forced to sell in a bad market. Unless, of course, I lose my job and can't find another one. This scenario assumes I'm right with my conservative rent estimates and only getting the low end of what I think I can. IE it's 'worst case'. Further, even if the market does drop it hasn't dropped by more than 20% in the past, and every time it does, it surpasses the previous high within 5 or 6 years. (Market reesearch)

If we take a moderate assumption instead of a pessimistic one and assume my rents are in the middle of the range of what I can get I'm now making money on the property, but the cashflow is minimal. A couple hundred-ish a year after equity and costs. Further let's assume appreciation tracks inflation but that's it. My underwriting puts this at about a 30% total ROI/year (for reference, the pessimistic numbers were about 8% total ROI).

Optimistic we grow value by 10% and get middle of the road rents, etc. 

Point being: The percent of my net worth it represents does not factor in to my decision. My decision / estimation of risk is 1: What can happen? 2: How likely is it? 3: If it happens, what do I lose? 4: What is the opportunity cost of the resource I'm using? 5: Can I reduce it?

1, 2 and 3 depend on market research. *That* research is what tells you how risky or conservative your investment is. *That* research will tell you if you're likely to be buying a good investment or a speculative one. Just like the person above who saw opportunity in Detroit and *moved there* to take advatage of it. If you want to do well in real estate know your market and know your goals. 

Focusing on CoC returns and price to rent ratio and historic appreciation are all missing the forest for the trees. It's possible, easy even, to buy a place with good CoC or appreciation returns but which is a terrible investment.

You need to talk to another lawyer in your area. One specialized in evictions and landlord tenant law.

Honestly. You're playing with fire if you listen to people on the internet about this. I don't say that to knock anyone, but if you want to do anything other than get them out of the property that's now yours you need to make sure all of your i's are dotted and t's are crossed. 

I'd either go all the way "we're not getting officials involved" or "let's do it right". If I'm trying to save a buck I'd say we'll just split the driveway cost and let the title sort itself out later. Clearly you're both currently using the space as a driveway now without issue, and the question of "who owns it" is unclear anyway, so adding an actual driveway is unlikely to change it(not a lawyer, don't quote me). 

If the price is high enough where I'm not comfortable potentially walking away from the improvement then I'd do it right, with an attorney and a plot survey and the correct legal language to make sure my ownership interest in the driveway is preserved. Unlikely to matter with the current other owner, but an extreme problem if there's a new owner.

For example, let's say the driveway is owned by house2 and you want to sell house1. Further, let's assume that the "ownership interest" was properly recorded (so house2 owns it, house1 had an easement), but the easement was not. Some technical reason that no one could have foreseen unless they were versed in law. Of course, this doesn't present a problem to you, because you and the owner get along...but now house1 wants to sell and house2 doesn't want to play ball. When house1 lists you need to say "no driveway" or "need to file an easement". All of the sudden, in order to skip on paying an attorney up front when everyone is amicable, you've created a major problem for the value of your house. Plus you've paid for the driveway.

@Sean Tracey

There's always risk. The question is how much are you comfortable taking on, what's the downside, and what happens if that downside is realized? If you want to create maximum long term wealth you should definitely investigate high priced markets; I'm not saying you'll want to buy in them, but that choice should be made after looking at the market where the properties are and making an educated guess about what it will do and how much risk you can afford to take on. 

The property I mentioned in a previous post is actually an extremely conservative bet with the potential for a huge upside should things swing my way. 

1/ I can afford to carry the cost of the property if it explodes in my face (extremely unlikely)

2/ I'm "cashflow negative" but only because my liquid bank account is getting smaller while my illiquid one gets bigger.

3/ If rents or property values go up the way they have historically my CoC ROI goes to well over 100% (10% appreciation in value means I've basically doubled the cash I've put into it)

I've hedged it in that I can eat a total loss if I need to with other income, I'm not actually losing money even with conservative rental estimates (my bank account gets smaller, but my net worth actually increases...only it's 8% return instead of 140%+), and I've given myself three ways to make a significant amount of money on the property: rents go up, property values go up, or my estimate of rent is wrong and I can get significantly more per month than I thought. Is there a chance I lose my shirt here? Of course. There always is. 

Am I speculating? I'd say no -- it's a calculated risk. The biggest risk here is the opportunity cost of the leverage I'm deploying. Could I be using it for something more profitable?

Or...

That was a long winded way of saying "CoC returns" is not a measure of "conservative-ness". Your investments may be conservative, but that's because you've thought about the risks and taken steps to mitigate them. Someone could buy in a bad area of Detroit and make amazing CoC returns...but I wouldn't say they've made a conservative investment.

@Samantha Soto They're commonly used for commercial property because you can calculate a market cap rate and compare between commercial properties. They're traded at a stable enough price that you can understand what someone means when they say "5.5cap", while with smaller units there is too much variability. In this case I was using the same language as others were and using the colloquial definition of cap rate, which can, sort of, apply to anything; assuming you're comparing across investments. I'm not talking about CoC at all -- the property I was looking at would cost me 7k/year to hold with rents; I'd be making it up in appreciation (or rent appreciation) over the long term. That said, the 7k/year is mostly just a shuffling around of money from liquid investments(cash) to illiquid ones(housing). I was calculating about 19k of equity per year, so 7k "in the red" means I'm actually gaining networth

Was it something they could have reasonably found? A rotten beam behind a bunch of drywall isn't exactly something that can be noticed in a typical inspection. Knob and tube wiring...I have a harder time believing that was just missed, but maybe...

That said, if it could have been found I'd complain to whoever employs the inspector I used; not in a "OMG I'm going to sue" way, but in a "I have some concerns about the inspector we used, they missed some pretty obvious problems..." way. If no one complains then a bad employee (if that's what this is) remains far longer and causes far more damage than they should. Assuming good faith on the part of the business, of course.

@Brent Coombs What if the rental market drops and your 1200/mo rental becomes 600/mo? There's always risk in RE investing. We can play 'what if' games all day long. Investing for cashflow only without researching your market is making the same mistake as blindly buying a property because 'of course it will appreciate'. Investing for solely cashflow has the additional problem of you'll never see huge gains; your property won't go from being worth 300k to 600k in 10 years. Invest for appreciation and it might.

Nowhere did I say that a 5cap must be a good investment because it's a 5 cap. I said if you can afford to carry it you *must* evaluate the opportunity. You can't just say '5 cap, will cost money to carry it with debt service, nope'

The cap rate doesn't make the investment good or bad, unless you *need* the free cash flow.

For an example of this: I'm currently evaluating a property that will cost me 7-12k per year with debt service. It's in an area that has a huge chance of appreciating, and I don't need the free cashflow. 10% appreciation means a paper networth increase of 100k. The debt is cheap; low % down(under 20) and decent interest rate with no PMI. If I put 30-40% down it'd cashflow at today's rents, but then I'm spending my own money. If rents go up in the city (unlikely in the short term, signs point to a softening market, but likely in the long term) then it cash flows easily without a bunch of my own money. If I hold it for 10 years and sell and it's gone up 300-400k, I've made a pretty great ROI. Or I refi cash out at a number that's sustainable and I get my principal out for something else. If it doesn't go up I have rents which basically cover the cost aside from the extra debt service, which is a 'deferred down payment'.

Now, is this a good move? The answer to that depends on how strong you think the market in your investment area is. What do you think it's going to do? And it also depends on one other thing: Can you afford to carry it? If you can't the entire exercise is moot.