Looking for a financial analyst to help with tradeoff analysis

12 Replies

TL;DR: Looking for a financial analyst/planner to help me with quantitative tradeoff analysis to help me decide whether I should sell (some subset of) my 5 rental properties so I can afford to purchase a single family home and stop "throwing away" ~4K/month on rent. I've worked with a couple financial planners in the past and neither seemed to be capable of doing more thorough analysis than I was given ~20 hours of work in Excel, so I'm looking for someone who can demonstrate to me quantitatively that their analysis is correct given whatever assumptions their modeling takes into account.

Background:

I currently own 5 properties, 14 units in Minneapolis/St. Paul, MN metro area. Total value is $1.5-2M. After subtracting loan balance and sellers fees, net for selling all would be $350K-850K (There is obviously a lot of uncertainty here, high value is based on a recent pitch from a realtor who specializes in investment property; low-range is based on skepticism of that). I currently live in one of the most expensive parts of the country, the "Bay Area" or Silicon Valley. I plan to be here for the next 20+ years. I need my kids to be in a good school district. I currently spend $4300/month on rent for a pretty decent place (3Br/2.5Ba, ~1600SQFT). The house I'm renting is valued at $1.2M. Rent has been going up ~10%/year for the last 5+ years but some commentary says it's finally hitting a peak. Home values have gone up similarly enormous amounts. California has a wacky law where assessed value for property taxes can only increase at a very limited rate (~1%) so most people are locked into property tax rates much lower than their current home values, so this favors purchasing rather than waiting.

$4300/month is at the high-end of affordability for me, so seems like the only way I'll be able to purchase a home of the quality/location I want is to liquidate (at least some portion of) my real estate portfolio. In general my investment properties are in an early stage where the total equity (ie. + cash flow) appreciation each year is >10% (ie. better than could be expected from the stock market), so selling seems like a bad idea. OTOH, "throwing away" ~48K/year of post-tax income on rental for the next 20 years also seems like a terrible idea. Thus, I need someone competent to do a thorough financial analysis to help me understand where the swing points are in the tradeoff where one option would make more sense vs. the other one.

Something along the lines of:

https://www.nytimes.com/interactive/2014/upshot/bu...

but which also incorporated my current investment property holdings. And, I would need someone who could do the necessary background research to find reasonable estimate ranges for what property and rent appreciations are for both Minneapolis/St.Paul areas and Silicon Valley; and _ideally_ do the analysis across a range of values for each of the inputs. 

I'm uncertain whether such an analyst exists and whether it's worth spending whatever it would cost to have this analysis done. As I said, I can go pretty far with some massively complex spreadsheets but I'm still fundamentally uncertain of the soundness of some of my analysis, and within the context of Excel it's pretty hard to do across a range of inputs. OTOH, it would be very disappointing to spend $5K only to have someone provide me with an analysis that still doesn't do much better (or as good) as what I can do on my own if/when I'm able to find the time.

Thanks,

-Ken

If you are looking for high level analysis you probably won't find it in a forum post, you might look on Upwork.com and see if you can find someone who specializes in the area of analysis you are interested in and is willing to take on a temporary side job for a fee.

After reading your post, it seems that you have most of what you need already. The extra functionality that you are looking for is found by using Monte Carlo simulation on some of the inputs. Then, you would be able to look at the resulting range of different outputs and make your informed choice. Several third-party software developers make such add-on/plug-in packages for Excel.

EDIT: Be wary of any potential analyst doing this without using some type of Monte Carlo simulation or similar technique. That is a necessary tool for completing this. Also, the rate that any competent individual would command may be more than you are willing to spend.

Curious what you find out.... I'm in a similar position.  I ended up seeking out below market rent (plenty in east bay) and that freed up my down payment money to invest OOS.

If we subscribe to the belief that what happens in SF trickles out the rest of the bay (at varying degrees) then it looks like there might be a peak for rents (which again depending on area might be at or near). 

I am an analyst for a financial planning firm in Minneapolis. I could take on this project (actually sounds like a fun one), but I have no idea how you would estimate the property values and rent sufficiently for the analysis to be meaningful.  I would expect that if you were to poll 5 housing experts in CA and MN, the 5, 10, or 20 year numbers they come up with vary greatly, and I would have very little confidence that their numbers would predict what actually happens.  If you would like to remove this part of the analysis, I may like to take a stab at it. Otherwise, keep us posted here ; I'd be interested to see what you find out.

I think a lot of this will depend on your (and expert) expectations of current property values and the current cash flow you are receiving from your rentals.  

We would be able to work through an analysis for this but it would largely rely on assumptions of property values (CA and MN) and projected market expectations.  In MN right now the multi-housing market is pretty tight which is good for sellers but to get solid sales prices we would have to rely on local realtors or appraisers in the area.  Same goes for California...  So many of the variables in your analysis would be people and their opinions on value and where the market is going.

As you mention, after tax cost is a concern as your rentals may be generating taxable income however your rent is not tax deductible.  With the current tax proposals, if you purchased a property with a large loan the interest may not all be deductible however renting is one of the worst things you can do from a tax perspective.

Given the information you have posted and past experience I suspect that your best bet would be to structure a 1031 exchange on your property with the greatest appreciation, exchange it for a property that you want to live in, and move in after a period of time.  If you follow all the rules you will avoid any gain on the property you sold, remain invested in productive real estate, and receive the whatever tax benefits remain in owning a house after any tax reform is completed.

This would entail many assumptions and an after tax cash flow analysis but I think the best and worse case scenarios would give you some comfort in making a decision.  I would have to disclaim that we would have to hire outsiders, anyone who claims to wear all hats is just looking for your money.

Originally posted by @John Woodrich :

I think a lot of this will depend on your (and expert) expectations of current property values and the current cash flow you are receiving from your rentals.  

We would be able to work through an analysis for this but it would largely rely on assumptions of property values (CA and MN) and projected market expectations.  In MN right now the multi-housing market is pretty tight which is good for sellers but to get solid sales prices we would have to rely on local realtors or appraisers in the area.  Same goes for California...  So many of the variables in your analysis would be people and their opinions on value and where the market is going.

As you mention, after tax cost is a concern as your rentals may be generating taxable income however your rent is not tax deductible.  With the current tax proposals, if you purchased a property with a large loan the interest may not all be deductible however renting is one of the worst things you can do from a tax perspective.

Given the information you have posted and past experience I suspect that your best bet would be to structure a 1031 exchange on your property with the greatest appreciation, exchange it for a property that you want to live in, and move in after a period of time.  If you follow all the rules you will avoid any gain on the property you sold, remain invested in productive real estate, and receive the whatever tax benefits remain in owning a house after any tax reform is completed.

Just to clarify, but the 1031 proceeds have to be rolled into an investment property, which I can then later convert to a primary residence, right? And there's a 45-day period after the sale of the rental property for me to decide up to three properties I want to buy? The tax advantages are obviously enormous but that sounds incredibly difficult to do in the Bay area's extremely aggressive real estate market (it's common for properties to receive > dozen offers with extremely minimal marketing, maybe just one open house and then to receive offers -- not uncommonly all cash -- 20-30% over the asking price). 

Originally posted by @Scott Jensen :

I am an analyst for a financial planning firm in Minneapolis. I could take on this project (actually sounds like a fun one), but I have no idea how you would estimate the property values and rent sufficiently for the analysis to be meaningful.  I would expect that if you were to poll 5 housing experts in CA and MN, the 5, 10, or 20 year numbers they come up with vary greatly, and I would have very little confidence that their numbers would predict what actually happens.  If you would like to remove this part of the analysis, I may like to take a stab at it. Otherwise, keep us posted here ; I'd be interested to see what you find out.

I'm assuming there's a website with records of historical property value appreciation for each area? Is there anything similar for rent prices? As a first approximation I'd probably take records from the largest time frame available, do a linear fit to that and assume the same percentages can apply over the next 20 years. For a Monte Carlo simulation, I might apply a +/- to that and see to what extent variations in that estimate have ~non-linear effects on the final answer.

Agree that one of the biggest impacts is the current value; for two of my properties the mortgage company provides an equity estimate (which I have no idea how accurate it might be since websites like Zillow, etc typically don't handle multi-family properties very well), but here's a sampling of the estimate variations from different sources:

$252K (Appraisal for refinance 21 months ago) vs. $269,939.00 (MortgageCo) vs. $294,900/$321,230.00 (Realtor; CMA vs. Current Income)

$529,973.00 (MortgageCo) vs. $600,000/$626,207.00 (Realtor)

$312K (Appraisal for refinance 21 months ago) vs. $334,900/$391,556.00 (Realtor)

FWIW, Realtor is an investment property specialist and estimates were based on rent. (But obviously they have a motivation for me to want to sell thus hooking me with higher estimates seems likely). 

I think for current values it's safer to go with the lower end of these ranges. There's some benefit there in that I can always change my mind about selling if I'm not able to get the asking price I want, so I can retune the analysis with new data if I find bids coming in too low.

Originally posted by @Ken D. :
Originally posted by @John Woodrich:

I think a lot of this will depend on your (and expert) expectations of current property values and the current cash flow you are receiving from your rentals.  

We would be able to work through an analysis for this but it would largely rely on assumptions of property values (CA and MN) and projected market expectations.  In MN right now the multi-housing market is pretty tight which is good for sellers but to get solid sales prices we would have to rely on local realtors or appraisers in the area.  Same goes for California...  So many of the variables in your analysis would be people and their opinions on value and where the market is going.

As you mention, after tax cost is a concern as your rentals may be generating taxable income however your rent is not tax deductible.  With the current tax proposals, if you purchased a property with a large loan the interest may not all be deductible however renting is one of the worst things you can do from a tax perspective.

Given the information you have posted and past experience I suspect that your best bet would be to structure a 1031 exchange on your property with the greatest appreciation, exchange it for a property that you want to live in, and move in after a period of time.  If you follow all the rules you will avoid any gain on the property you sold, remain invested in productive real estate, and receive the whatever tax benefits remain in owning a house after any tax reform is completed.

Just to clarify, but the 1031 proceeds have to be rolled into an investment property, which I can then later convert to a primary residence, right? And there's a 45-day period after the sale of the rental property for me to decide up to three properties I want to buy? The tax advantages are obviously enormous but that sounds incredibly difficult to do in the Bay area's extremely aggressive real estate market (it's common for properties to receive > dozen offers with extremely minimal marketing, maybe just one open house and then to receive offers -- not uncommonly all cash -- 20-30% over the asking price). 

If it is that hard to find a place you could always consider a reverse/Starker exchange.  Under this scenario you would purchase your new property first, an intermediary would acquire title, you would sell your property, then exchange the properties.  A little more complicated but it can work well.  You would then have to convert from business to personal.  

@Ken D. Robert Schiller's work comes to mind for data sets as it is most likely the most reliable, comprehensive, and available.  The more local data that would be most relevant only goes back to 1975.

Zillow has some good data on rents, however it only goes back to 2010 or so.  The only other public source I know of is the CPI numbers for Rent. This data isn't ideal for this type of analysis. I'll do a little poking around.

aren't the 1031 guidelines focused on intent vs hard timelines... and wouldn't he have to show he tried to make it a successful rental but for reasons it didn't work and then can convert to primary?

Originally posted by @Matt K. :

aren't the 1031 guidelines focused on intent vs hard timelines... and wouldn't he have to show he tried to make it a successful rental but for reasons it didn't work and then can convert to primary?

There is no hard and set rule on converting from business to personal.  I believe the IRS issued a safe harbor at 2 years but if you don't have it as business property for 2 years that doesn't mean you are wrong, it means you are getting into the gray area.

$4300/month for a 1600 sq ft 3 bedroom....... blows the mind.....

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