1031 Exchange a Rental Sale Profit into 4-5 long distance turnkey properties

34 Replies

Hi, BP!

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)? I'm thinking of doing this through Memphis Invest properties with Chris Clothier. The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.

Hi @Charles Moore ,

Welcome to BiggerPockets.

First of all, you can do a 1031 exchange into any number of properties, in any market in the US, provided you follow the exchange rules.

You have 45 days from the day you sell your other property(ies) to identify your new 1031 properties for the exchange.  The rules are very strict and you must identify those properties within that period and you cannot change it thereafter.

Memphis is a very stable market.  What other markets have you looked at or considered?

Continued success!

@Charles Moore

Yes it is realistic to identify and secure 4-5 properties in that 45 day period, also you choose a great city to possibly invest in and a solid well known company as well. Good Luck let us know how it all turns out..

Happy Investing!!

Derrick

Originally posted by @Charles Moore :

Hi, BP!

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)? I'm thinking of doing this through Memphis Invest properties with Chris Clothier. The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.

 I live in Seattle and buy houses in other areas of the country including Memphis. If you work with Memphis Invest, I would stay out of what they call the Loop and stay out of Frasier and the area right around the Memphis airport. I say that because I have seen out-of-state investors buying in these C and D areas. I would buy in Barlett and Cordova and maybe Hickory Hills. I personally don't like Raleigh (in Memphis) but that might just be me.

I think your strategy could make a lot of sense. We wholesale 15 to 20 off-market properties a month here in Seattle and I don't know where you can match the cap rates here on SFR compared to Memphis.

Cap rates have been falling in Memphis since two years ago. The hedge fund BLT who bought 1200 homes in Memphis I think over bought and they have been selling some of their homes.

Locally I would recommend Kevin Hummel at McFerran Law who is an expert in 1031 exchange and they will do a free consultation. 

Contact me if you need contact info for Kevin Hummel or other contacts out of state.

Originally posted by @Charles Moore :

Hi, BP!

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)? I'm thinking of doing this through Memphis Invest properties with @Chris Clothier . The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.

 You are KILLING THE GOLDEN GOOSE!  Obviously your Seattle property has increased in value so much through APPRECIATION that you are in a spot to buy 4-5 properties in Memphis.  I would ask @Chris Clothier

 and @Marco Santarelli

 to reverse engineer this process.  Say what would have happened if you had bought the 4-5 Memphis properties at the time you purchased the Seattle property.  Would you even be close to be able to buy the Seattle property based on the numbers?  

If you are dead set on Memphis properties why not look into doing a cash out refi to purchase in Memphis but keep the Seattle Goose alive!?

I wouldn't go so far as to call this condo a golden goose. One of the problems is that the HOA only allows so many non-owner occupied units there, and that allowance is always maxed out. If and when my tenants leave, I would go to the bottom of the waiting list to rent it out again and thereby be sitting on a cash drain with the mortgage and HOA dues, and I would not even consider moving out of my primary residence to live there due to the space my family needs. Besides, my rate of return for cash flow on this is very low, and I hate dealing with the HOA and their incompetent property management.

Originally posted by @Bob Bowling:  
 
Originally posted by @Charles Moore:  

Hi, BP!  

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)?  I'm thinking of doing this through Memphis Invest properties with @Chris Clothier . The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.  

You are KILLING THE GOLDEN GOOSE!  Obviously your Seattle property has increased in value so much through APPRECIATION that you are in a spot to buy 4-5 properties in Memphis.  I would ask @Chris Clothier and @Marco Santarelli to reverse engineer this process.  Say what would have happened if you had bought the 4-5 Memphis properties at the time you purchased the Seattle property.  Would you even be close to be able to buy the Seattle property based on the numbers?  

If you are dead set on Memphis properties why not look into doing a cash out refi to purchase in Memphis but keep the Seattle Goose alive!?  

Bob -- first off, I mentioned Memphis as a good market.  I didn't suggest it as being the best choice for Charles.  There are many other options open to him.  

Second, you're defining his "Golden Goose" as a property that has fortunately seen a lot of appreciation since he purchased it.  That looks great on paper but as Charles said his cash-flow is only about $100 a month, and his rate of return is very low.  Compound that with the fact that his local market will eventually flatten out in terms or price appreciation.  Worse yet, these are cyclical markets, so if the primary focus is on the equity gained through appreciation, then it will come back down, as it has historically in these cyclical (i.e. "bubble") markets.

There is no crystal ball as to what his local market will be like in 5 years from now, but we can get a better feel and make better predictions on what it might be like in a year (or two).  It is always wise to preserve one's equity gains.  

Therefore:  

1.)  If he feels his market is coming to a peak then it would be wise to move parts of his portfolio into markets with less downside risk.  

2.)  If he wants better cash-flow and/or increased rates of return on his capital invested, then it probably makes sense to diversify his portfolio into other markets with better cash-flows and/or rates of return.

Whether these two objectives are accomplished by doing a 1031 exchange or a cash-out-refi, it's a matter of assessing the situation and deciding on what makes the most sense financially and strategically.

Finally, if appreciation is the only objective when buying or holding real estate, then that's nothing more than speculating.

Originally posted by @Charles Moore :

I wouldn't go so far as to call this condo a golden goose. One of the problems is that the HOA only allows so many non-owner occupied units there, and that allowance is always maxed out. If and when my tenants leave, I would go to the bottom of the waiting list to rent it out again and thereby be sitting on a cash drain with the mortgage and HOA dues, and I would not even consider moving out of my primary residence to live there due to the space my family needs. Besides, my rate of return for cash flow on this is very low, and I hate dealing with the HOA and their incompetent property management.

 OK, Golden Game Hen.  Why you you buy a rental investment in a rent restrictive building?

How are you calculating your cash flow rat of return? Why not 1031 to a property with a better HOA in a non restrictive rental building that has the same or better appreciation rate that what you have?

Run the numbers for yourself but you seem to be trading tens/hundreds  of thousands of appreciation  dollars(capital gains) for a few hundred a month of possible cash flow.  I can understand where you made some mistakes in this investment but to think that you're going to give up real estate investing by handing someone thousands of miles away several hundred thousand dollars and expect them to make money for you is a little too much rose colored glasses scenario for me.

Originally posted by @Marco Santarelli :
Originally posted by @Bob Bowling:  
 
Originally posted by @Charles Moore:  

Hi, BP!  

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)?  I'm thinking of doing this through Memphis Invest properties with @Chris Clothier . The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.  

You are KILLING THE GOLDEN GOOSE!  Obviously your Seattle property has increased in value so much through APPRECIATION that you are in a spot to buy 4-5 properties in Memphis.  I would ask @Chris Clothier and @Marco Santarelli to reverse engineer this process.  Say what would have happened if you had bought the 4-5 Memphis properties at the time you purchased the Seattle property.  Would you even be close to be able to buy the Seattle property based on the numbers?  

If you are dead set on Memphis properties why not look into doing a cash out refi to purchase in Memphis but keep the Seattle Goose alive!?  

Bob -- first off, I mentioned Memphis as a good market.  I didn't suggest it as being the best choice for Charles.  There are many other options open to him.  

Second, you're defining his "Golden Goose" as a property that has fortunately seen a lot of appreciation since he purchased it.  That looks great on paper but as Charles said his cash-flow is only about $100 a month, and his rate of return is very low.  Compound that with the fact that his local market will eventually flatten out in terms or price appreciation.  Worse yet, these are cyclical markets, so if the primary focus is on the equity gained through appreciation, then it will come back down, as it has historically in these cyclical (i.e. "bubble") markets.

There is no crystal ball as to what his local market will be like in 5 years from now, but we can get a better feel and make better predictions on what it might be like in a year (or two).  It is always wise to preserve one's equity gains.  

Therefore:  

1.)  If he feels his market is coming to a peak then it would be wise to move parts of his portfolio into markets with less downside risk.  

2.)  If he wants better cash-flow and/or increased rates of return on his capital invested, then it probably makes sense to diversify his portfolio into other markets with better cash-flows and/or rates of return.

Whether these two objectives are accomplished by doing a 1031 exchange or a cash-out-refi, it's a matter of assessing the situation and deciding on what makes the most sense financially and strategically.

Finally, if appreciation is the only objective when buying or holding real estate, then that's nothing more than speculating.

 Let's compare APPLES TO APPLES as I suggested.  No need to look to the future.  Show @Charles Moore what his financial situation would be if he had committed the financial resources to Memphis instead of Seattle.

Originally posted by @Bob Bowling:  
   

Bob -- first off, I mentioned Memphis as a good market.  I didn't suggest it as being the best choice for Charles.  There are many other options open to him.  

Second, you're defining his "Golden Goose" as a property that has fortunately seen a lot of appreciation since he purchased it.  That looks great on paper but as Charles said his cash-flow is only about $100 a month, and his rate of return is very low.  Compound that with the fact that his local market will eventually flatten out in terms or price appreciation.  Worse yet, these are cyclical markets, so if the primary focus is on the equity gained through appreciation, then it will come back down, as it has historically in these cyclical (i.e. "bubble") markets.

There is no crystal ball as to what his local market will be like in 5 years from now, but we can get a better feel and make better predictions on what it might be like in a year (or two).  It is always wise to preserve one's equity gains.  

Therefore:  

1.)  If he feels his market is coming to a peak then it would be wise to move parts of his portfolio into markets with less downside risk.  

2.)  If he wants better cash-flow and/or increased rates of return on his capital invested, then it probably makes sense to diversify his portfolio into other markets with better cash-flows and/or rates of return.

Whether these two objectives are accomplished by doing a 1031 exchange or a cash-out-refi, it's a matter of assessing the situation and deciding on what makes the most sense financially and strategically.

Finally, if appreciation is the only objective when buying or holding real estate, then that's nothing more than speculating.

Let's compare APPLES TO APPLES as I suggested.  No need to look to the future. Show @Charles Moore what his financial situation would be if he had committed the financial resources to Memphis instead of Seattle.

No need -- that wasn't his original question, and it's a moot point.  His question is what should he do now going forward from today.

@Marco Santarelli

You sell turnkey properties. I have asked you several times how you calculate the "cap rates" for SFR's you advertise on the website that you link here on BP. You have still NOT responded. Here you are evasive to submit past performance of the properties you sell. What would be the harm of comparing past performance and THEN making a decision if one will perform better or worse in the future, you know, SPECULATING?

See your thread about cap rates.

http://www.biggerpockets.com/forums/88/topics/2167...

Originally posted by @Bob Bowling:
Originally posted by @Charles Moore:

Hi, BP!

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)? I'm thinking of doing this through Memphis Invest properties with @Chris Clothier . The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.

 You are KILLING THE GOLDEN GOOSE!  Obviously your Seattle property has increased in value so much through APPRECIATION that you are in a spot to buy 4-5 properties in Memphis.  I would ask @Chris Clothier

 and @Marco Santarelli

 to reverse engineer this process.  Say what would have happened if you had bought the 4-5 Memphis properties at the time you purchased the Seattle property.  Would you even be close to be able to buy the Seattle property based on the numbers?  

If you are dead set on Memphis properties why not look into doing a cash out refi to purchase in Memphis but keep the Seattle Goose alive!?

Good advice is to buy cash flow properties to become financial independent (passive income > expenses). After your passive income exceeds your expenses, then you buy rentals for appreciation. I am active in both Memphis and Seattle and I think it is a good strategy for him to buy in Memphis but only if he works with the right people in the right areas.

After his passive income exceeds his expenses, then time the Seattle rental market for appreciation.

Honestly, about 6 out of 7 investors who I know and watch in Seattle lost their money during the 2008 crash.  If you play the Seattle market, I would buy in the first six years (of an 18 year cycle) and sell at the end of the next six years of the cycle. And then stay out of the market during the last six years of the cycle and maybe buy something recession proof like tax lien certificates out of state. 

I still think we have a ways to go in Seattle market appreciation like maybe 5 to 7 years. But if you are just starting, I would always start with the higher cash-on-cash return. 

During a market crash, the cash-on-cash stays stable but the appreciation goes to zero or even becomes negative. As long as our government keeps a $18 trillion dollar deficit as as along as global deflation from China and the third world keeps interest rates at historic lows, real estate will keep being a boom and bust in Seattle. The Midwest does not have the highs that Seattle has but it does not have the lows either. For example, for someone who sells real estate in Seattle and deals with multiple offer scenarios every week, it sounds crazy to me that multiple offers in Knasas City (Missouri) all stay around asking price. Unlike Seattle, people just don't bid up the price even with 20 multiple offers. That would never happen in Seattle.

Originally posted by @Ryland Taniguchi :
Originally posted by @Bob Bowling:
Originally posted by @Charles Moore:

Hi, BP!

Just joined up after being a long-time reader because I finally need to ask: when doing a 1031 exchange, is it realistic to identify and secure 4-5 properties in the 45-day identification period (and abiding by all the other 1031 rules)? I'm thinking of doing this through Memphis Invest properties with @Chris Clothier . The numbers indicate I can get better net cash flow and rate of return in that part of the country than in Seattle.

 You are KILLING THE GOLDEN GOOSE!  Obviously your Seattle property has increased in value so much through APPRECIATION that you are in a spot to buy 4-5 properties in Memphis.  I would ask @Chris Clothier

 and @Marco Santarelli

 to reverse engineer this process.  Say what would have happened if you had bought the 4-5 Memphis properties at the time you purchased the Seattle property.  Would you even be close to be able to buy the Seattle property based on the numbers?  

If you are dead set on Memphis properties why not look into doing a cash out refi to purchase in Memphis but keep the Seattle Goose alive!?

Good advice is to buy cash flow properties to become financial independent (passive income > expenses). After your passive income exceeds your expenses, then you buy rentals for appreciation. I am active in both Memphis and Seattle and I think it is a good strategy for him to buy in Memphis but only if he works with the right people in the right areas.

After his passive income exceeds his expenses, then time the Seattle rental market for appreciation.

Honestly, about 6 out of 7 investors who I know and watch in Seattle lost their money during the 2008 crash.  If you play the Seattle market, I would buy in the first six years (of an 18 year cycle) and sell at the end of the next six years of the cycle. And then stay out of the market during the last six years of the cycle and maybe buy something recession proof like tax lien certificates out of state. 

I still think we have a ways to go in Seattle market appreciation like maybe 5 to 7 years. But if you are just starting, I would always start with the higher cash-on-cash return. 

During a market crash, the cash-on-cash stays stable but the appreciation goes to zero or even becomes negative. As long as our government keeps a $18 trillion dollar deficit as as along as global deflation from China and the third world keeps interest rates at historic lows, real estate will keep being a boom and bust in Seattle. The Midwest does not have the highs that Seattle has but it does not have the lows either. For example, for someone who sells real estate in Seattle and deals with multiple offer scenarios every week, it sounds crazy to me that multiple offers in Knasas City (Missouri) all stay around asking price. Unlike Seattle, people just don't bid up the price even with 20 multiple offers. That would never happen in Seattle.

 Can you show some rough numbers how you will ever get enough cash flow in Memphis to match the appreciation in Seattle?

Originally posted by @Bob Bowling:
 
You sell turnkey properties.  I have asked you several times how you calculate the "cap rates" for SFR's you advertise on the website that you link here on BP.  You have still NOT responded. Here you are evasive to submit past performance of the properties you sell.  What would be the harm of comparing past performance and THEN making a decision if one will perform better or worse in the future, you know, SPECULATING? 
   

Bob -- Sorry, I didn't see your request for the calculation, but here is how it is calculated:

Capitalization Rate = Net Operating Income / Purchase Price

NOI = Total Operating Income - Total Operating Expenses

Purchase Price = The price paid by the investor for said property.

You can see the exact breakdown and each line item by clicking on the Orange Button under the thumbnail photos.

Please note that these cap rates are calculated using the property's income and expenses to derive its 1st year financial performance.  It is not an evaluation of a "market cap rate".

Originally posted by @Marco Santarelli :
Originally posted by @Bob Bowling:
 
You sell turnkey properties.  I have asked you several times how you calculate the "cap rates" for SFR's you advertise on the website that you link here on BP.  You have still NOT responded. Here you are evasive to submit past performance of the properties you sell.  What would be the harm of comparing past performance and THEN making a decision if one will perform better or worse in the future, you know, SPECULATING? 
   

Bob -- Sorry, I didn't see your request for the calculation, but here is how it is calculated:

Capitalization Rate = Net Operating Income / Purchase Price

NOI = Total Operating Income - Total Operating Expenses

Purchase Price = The price paid by the investor for said property.

You can see the exact breakdown and each line item by clicking on the Orange Button under the thumbnail photos.

Please note that these cap rates are calculated using the property's income and expenses to derive its 1st year financial performance.  It is not an evaluation of a "market cap rate".

 Can you show the exact operating expenses you used to come to the 9.6% cap rate on the Blue Heron property?

http://www.noradarealestate.com/Real-Estate-Invest...

Originally posted by @Bob Bowling:  
   
What would be the harm of comparing past performance and THEN making a decision if one will perform better or worse in the future, you know, SPECULATING? 
    

There is no harm, however:

  • You cannot compare a cyclical market like Seattle with a linear market like Memphis.  They are different.  (That's apples to oranges.)
  • Past performance is no guarantee of future performance.  Remember what happened to all those CA, NV, AZ and FL "investors" (i.e. speculators) back in 2006 thinking the party would go on?
  • You can compare a local market's current condition to its past performance and try to deduce what it may do over the next year or two.  (I use tools to do this.)
  • And, you can take the pulse of a market every 6 months to gauge where it might be going by following job growth, migration trends, major employer actions, affordability, etc.

I don't buy purely on appreciation potential.  It's a factor that plays into my decision making but it's probably fifth on my list.

Originally posted by @Bob Bowling:
Originally posted by @Charles Moore:

I wouldn't go so far as to call this condo a golden goose. One of the problems is that the HOA only allows so many non-owner occupied units there, and that allowance is always maxed out. If and when my tenants leave, I would go to the bottom of the waiting list to rent it out again and thereby be sitting on a cash drain with the mortgage and HOA dues, and I would not even consider moving out of my primary residence to live there due to the space my family needs. Besides, my rate of return for cash flow on this is very low, and I hate dealing with the HOA and their incompetent property management.

 OK, Golden Game Hen.  Why you you buy a rental investment in a rent restrictive building?

How are you calculating your cash flow rat of return? Why not 1031 to a property with a better HOA in a non restrictive rental building that has the same or better appreciation rate that what you have?

Run the numbers for yourself but you seem to be trading tens/hundreds  of thousands of appreciation  dollars(capital gains) for a few hundred a month of possible cash flow.  I can understand where you made some mistakes in this investment but to think that you're going to give up real estate investing by handing someone thousands of miles away several hundred thousand dollars and expect them to make money for you is a little too much rose colored glasses scenario for me.

Bob, let me provide some background info - most importantly, I bought this condo as my first personal residence at the beginning of 2009 with 10% down and a fixed 30-yr mortgage. A growing family prompted me to upgrade to a nearby house, which we did in 2013. Thanks to reading material on BP, I'm renting out the condo from 2013 - 2016 to some ideal long-term tenants, and make about $100 in positive cashflow every month (my primary purpose was just to have them cover the condo mortgage + insurance + property taxes + HOA dues + maintenance costs until the condo appreciated enough with the recovering market to sell for a profit). The condo has appreciated quite a bit now and is predicted to keep doing so throughout the next year. When I sell next year, I may have a $75K net profit after closing costs, improvements, realtor fees, etc. I want to do a 1031 exchange with that. I could use that as a down payment on typical $375K SFH here in the Seattle area and manage it myself again, and at most I might get $300-$400 positive net cash flow every month. However, I'm busy with career and family and can probably count on more maintenance involvement with this new property, and a PM would of course decrease the net cash flow. I'm thinking of doing what other BP investors in expensive areas have done: put my money in less expensive markets where it can go further. Specifically Memphis invest with Chris Clothier. I figure I can get multiple properties with the $75K divided up into the down payments for each of them, and cash flow of closer to $1000/month from all combined. Plus their well regarded PM.

As for rose-colored glasses, this is just one option I am researching now, part of which is talking with other BP members. I've read some bad turn key stories as well as good, so remaining objective is my main criteria.

 In Cordova and Bartlett (Memphis) today although the inventory is getting tougher to find, you can 15% or 16% cash-on-cash return with 20% down and traditional non-owner occupied financing. The numbers are not as good in Memphis today as they were 2 years ago when I was more active there.

Comparing cash-on-cash and appreciation through the time value of money is not comparing apples and oranges. I would rather have higher cash-on-cash than appreciation numbers. Also, it is kind of a fruitless exercise since returns vary by area. Such as Kent and Ballard are too completely different areas in Seattle. Frasier and Cordova are too completely different areas in Memphis.

It's better to compare IRR from Seattle (that factors both appreciation and cash-on-cash) and Memphis.

That being said, the numbers in Memphis in lets say Bartlett are 15% cash on cash and 8% to 9% appreciation. A comparable area in Seattle to Bartlett would be kent with more like a 5% cash on cash and 12% appreciation.

Now specifically on the condo he is discussing. In Seattle, Condo prices for non-warrantable condos insanely dropped. It is misleading to look at appreciation on these condos because they dropped so far that there recent appreciation looks amazing. A lot appreciated in 2013 and 2014 but many of these same condos barely went up in 2015. Condos are popular because of their price range between $150 k and $300 k. But non-warrantable condos are not worth much because the buyers can't get Fannie or Freddie financing, which negates their affordability. Usually it requires 20% down and an interest rate 2% higher. Plus, the HOA on some can be as high as half the principle and interest. If non-owner occupied non-wArrantable, the down is 40% usually. I wouldn't invest in condos and if you do hire a realtor like me that knows this stuff in great detail (and will read every page of the resale certificate).

By the way, if you want a second opinion on Memphis, maybe it's better to get advice from an investor rather than a turnkey operator in Memphis that is trying to sell you something. Feel free to message me.

Originally posted by @Bob Bowling:  
   

Can you show the exact operating expenses you used to come to the 9.6% cap rate on the Blue Heron property?  

http://www.noradarealestate.com/Real-Estate-Invest... 

Bob -- please see the numbers below...  (Note that the 9.6% to the right of the thumbnail is based on the "raw" numbers which excludes vacancy and repairs; those costs are included in the detailed cash-flow analysis when clicking the orange button.)  

Thank you!

Originally posted by @Marco Santarelli :
Originally posted by @Bob Bowling:  
   

Can you show the exact operating expenses you used to come to the 9.6% cap rate on the Blue Heron property?  

http://www.noradarealestate.com/Real-Estate-Invest... 

Bob -- please see the numbers below...  (Note that the 9.6% to the right of the thumbnail is based on the "raw" numbers which excludes vacancy and repairs; those costs are included in the detailed cash-flow analysis when clicking the orange button.)  

Thank you!

 OK, RAW numbers???  Now your new operating expenses looked cooked and I do believe that describes them most accurately.  Where are your expenses for legal, advertising, janitorial, utilities, etc. ? 

Also the market cap rate for this market is 12.2% so at your cooked NOI of $9,096 then the market value of this property is ONLY $74,600. You are overcharging by $80,840!! That's all of @Charles Worth 's capital gains. !

Updated about 6 years ago

@Charles Moore not worth since he's losing that.

@Bob Bowling -- Aside from sounding antagonistic, you clearly don't know what you're talking about.  As I've mentioned to you in the past, this is not a commercial property where its market value is determined from the cap rates of other nearby commercial properties.  Residential properties are appraised using sold comparables only.  And the investor's cost basis is what he pays for it.

The cap rate is calculated using the property's income and expenses.  Investors are free to add other expenses such as legal, if it's applicable.  (Things like advertising, janitorial and utilities don't apply to these properties.  Tenant turnovers are covered using the vacancy allowance.) 

I suggest you read "What Every Real Estate Investor Needs to Know About Cash Flow" by Frank Gallinelli.  One of the best books on financial measures.

Good luck to you.

Originally posted by @Ryland Taniguchi :

 In Cordova and Bartlett (Memphis) today although the inventory is getting tougher to find, you can 15% or 16% cash-on-cash return with 20% down and traditional non-owner occupied financing. The numbers are not as good in Memphis today as they were 2 years ago when I was more active there.

Comparing cash-on-cash and appreciation through the time value of money is not comparing apples and oranges. I would rather have higher cash-on-cash than appreciation numbers. Also, it is kind of a fruitless exercise since returns vary by area. Such as Kent and Ballard are too completely different areas in Seattle. Frasier and Cordova are too completely different areas in Memphis.

It's better to compare IRR from Seattle (that factors both appreciation and cash-on-cash) and Memphis.

That being said, the numbers in Memphis in lets say Bartlett are 15% cash on cash and 8% to 9% appreciation. A comparable area in Seattle to Bartlett would be kent with more like a 5% cash on cash and 12% appreciation.

Now specifically on the condo he is discussing. In Seattle, Condo prices for non-warrantable condos insanely dropped. It is misleading to look at appreciation on these condos because they dropped so far that there recent appreciation looks amazing. A lot appreciated in 2013 and 2014 but many of these same condos barely went up in 2015. Condos are popular because of their price range between $150 k and $300 k. But non-warrantable condos are not worth much because the buyers can't get Fannie or Freddie financing, which negates their affordability. Usually it requires 20% down and an interest rate 2% higher. Plus, the HOA on some can be as high as half the principle and interest. If non-owner occupied non-wArrantable, the down is 40% usually. I wouldn't invest in condos and if you do hire a realtor like me that knows this stuff in great detail (and will read every page of the resale certificate).

By the way, if you want a second opinion on Memphis, maybe it's better to get advice from an investor rather than a turnkey operator in Memphis that is trying to sell you something. Feel free to message me.

 Agree 100%, get advice from a "been there done that" investor, not a salesman of turnkey property.

At least with the banks around here, going from a freddie/fannie conforming note to a portfolio loan raises my interest 0.125-0.25% tops (not 2%), and the required down payment goes up 0-5% ie. 25% down, not 40%. Don't know what bankers you are dealing with but I'd find a better one. Good day to you!

Yes, I'm hoping to find BP's who have been there and done that with Memphis Invest and other turn key operations, as their referrals are the most valuable! I haven't found really any negative things said about Memphis Invest, but still want to talk directly to those who took the plunge.