Starting Apartment Investing, Looking For Ideas/Tips (with numbers)

Multi-Family and Apartment Investing
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Starting Apartment Investing, Looking For Ideas/Tips (with numbers)

Michael Michaels
Greenfield, IN · Member since 2014 · 2 posts · 1 vote

Intro
Hello, Everyone. I'll let you in on my business plan. I'm a motivated beginner, ready to get started, and have big ideas. The reason I included numbers in this is because I haven't found very many threads/websites that talk openly about numbers. And, BP has some intelligent, successful people that I look up to when I read.

My Target
I'm looking for a 6-10 unit apartment building in Indiana. I use www.loopnet.com to find buildings in the $225,000 to $275,000 range. I want to stay away from the rougher parts of Indianapolis and Section 8 areas. As far as money goes, I'll be ready for purchase in November next year, so I have time to learn and continue setting up.

Numbers
By November 2015, I will have $100,000 on hand.

Retain $5000 just in case
Plus $10,000 for repairs/maintenance
Plus $10,000 for ~6 months mortgage (assuming completely vacant)

Which leaves me with $75,000 for a down payment. 

Let's say I found a $250,000 building with 6 units and set rent at $750/mo.
$175,000 Loan gives me an $850/mo mortgage (30 yr. at 4.10%)

Money Talk
Now lets make some conservative assumptions:

5 Occupants: $750/mo rent X 5 Occupants X 12 mo = $45,000 gross income
After taxes (assuming I pay 35% taxes):  $45,000 X .65 = $29,250 gross income
Pay 1 year of mortgage: $850/mo X 12 mo = $10,200/yr mortgage
Pay property manager 7% of gross income: $45,000 X .07 = $3150/yr property manager
Pay a maintenance $300/mo for lawns/repairs: $230 X 12 = $3600/yr maintenance

Now for total profit: $29,250 (after taxes) - $10,200 (mortgage) - $3150 (pm) - $3600 (maint)
Total of: $12,300/yr after all is said and done ($1025/mo).

Reinvesting
I plan on putting all of the money back into it, so: 

$850/mo (mortgage) + $1025 (reinvest) = $1875/mo
Therefore: The building will be totally paid off in less than 10 years

Background
I'm in the Navy, so I'll be deployed for months on end without communication. My mom is a property manager and my dad can do maintenance, and they're both capable of running the property. Trust is not an issue; they look forward to it and will happily do it. I'll be in for 6 more years and would like to get the entire property paid off before then (so I'll have to put my own paycheck into it to take the 10 years down to 6 years).

The Need
Now, here's where I need help. I plan on setting up an LLC, hiring them, and setting up a separate bank account for the business only. The money I retained will be enough to get everything started, plus I'll be adding some from my paycheck for emergencies. If I could get your business ideas, advice, and anything you can think of to make this a smoother or more profitable process, I'd greatly appreciate it.

Thank you all so much

1Reply
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Most Popular Reply

Bobby Narinov
Rental Property Investor · Trabuco Canyon, CA · Member since 2014 · 134 posts · 78 votes
11y

I am not an accountant (nor a CPA, nor a lawter).

You should calculate your taxes last. And it is not so simple as you presented it. I recommend you use a CPA for the first several years (and forever, if your business increases).

From the gross, you should subtract all of your expenses plus amortization and what you are left is your taxable income. Now some expenses can have a huge tax implication. for example a remodeling is considered a capital investment and is amortized over 20+ (I think it was 27.5 years) while a repair is considered an immediate expense. So consult your CPA how to do the things in the most tax efficient manner.

In addition you have a real estate depreciation. This is a fake deduction through which you can depreciate an asset (you can only depreciate the building but not the land, so check your taxes on how much is your building cost) over the 20+ years. This will let you lover your tax liability even more. The loan is also not a 100% expense. Only the interest is considered an expense.

When you start your apartment RE investing, I would recommend you to find a CPA that specializes in RE taxes (preferably in RE appartments) and spend 1/2 day with him/her to explain to you how to structure the tings for maximum tax savings. Please do that when you start your business instead of waiting for the tax season (3 months later). During the tax season they are usually preoccupied and cannot spare time to talk(make sure you pay for the consultation). Also some of their recommendations may require an action on your side so if the year is gone, you cannot go back in time to do it.

Property taxes, insurance, utilities are also considered expenses. Driving to and from the property to show it to potential renters can also be considered an expense but you have to keep track of your miles (with date and timestamps matching your odometer). 

After all that, most of the buy-and-hold RE professionals are not making any sizeable profit so they pay no or very little taxes the first years of business. Once they start making profit, they 1031 the property into a bigger one(or two) and keep on doing it getting bigger and bigger while having only paper loses.

I can't stress enough how important is to consult a CPA or a TAX attorney when you start. (The CPAs charge less that the tax lawyers). 

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  • Paul Timmins
    Specialist · Rockland, MA · Member since 2010 · 7k+ posts · 2k+ votes
    11y

    @Michael Michaels 

    Welcome. Thanks for your service. For apartments we use a CAP 8%+, Debt coverage ratio 1.6 %+, and Cash on cash 12%+Time to build the foundation below.

    Check out the Start Here page http://www.biggerpockets.com/starthere

    Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.

    Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having over 90 past ones to catch up on.

    Two Great reads, I bought both J. Scott The Book on Flipping Houses,The Book on Estimating ReHab Costshttp://www.biggerpockets.com/flippingbook

    Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and all the cash buyers (rehabbers) you will need.

    Check out Amanda Han she is active on BP for entity advice and more important tax strategies.

    You might consider Niche or Specialized Housing like student housing. Rents can be 2-4 times more. Remember you don't have to own a property to control it.

    Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

    http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

    Good luck

    Paul

    0Reply
  • Bobby Narinov
    Rental Property Investor · Trabuco Canyon, CA · Member since 2014 · 134 posts · 78 votes
    11y

    I am not an accountant (nor a CPA, nor a lawter).

    You should calculate your taxes last. And it is not so simple as you presented it. I recommend you use a CPA for the first several years (and forever, if your business increases).

    From the gross, you should subtract all of your expenses plus amortization and what you are left is your taxable income. Now some expenses can have a huge tax implication. for example a remodeling is considered a capital investment and is amortized over 20+ (I think it was 27.5 years) while a repair is considered an immediate expense. So consult your CPA how to do the things in the most tax efficient manner.

    In addition you have a real estate depreciation. This is a fake deduction through which you can depreciate an asset (you can only depreciate the building but not the land, so check your taxes on how much is your building cost) over the 20+ years. This will let you lover your tax liability even more. The loan is also not a 100% expense. Only the interest is considered an expense.

    When you start your apartment RE investing, I would recommend you to find a CPA that specializes in RE taxes (preferably in RE appartments) and spend 1/2 day with him/her to explain to you how to structure the tings for maximum tax savings. Please do that when you start your business instead of waiting for the tax season (3 months later). During the tax season they are usually preoccupied and cannot spare time to talk(make sure you pay for the consultation). Also some of their recommendations may require an action on your side so if the year is gone, you cannot go back in time to do it.

    Property taxes, insurance, utilities are also considered expenses. Driving to and from the property to show it to potential renters can also be considered an expense but you have to keep track of your miles (with date and timestamps matching your odometer). 

    After all that, most of the buy-and-hold RE professionals are not making any sizeable profit so they pay no or very little taxes the first years of business. Once they start making profit, they 1031 the property into a bigger one(or two) and keep on doing it getting bigger and bigger while having only paper loses.

    I can't stress enough how important is to consult a CPA or a TAX attorney when you start. (The CPAs charge less that the tax lawyers). 

    1Reply
  • Michael Michaels
    OP
    Greenfield, IN · Member since 2014 · 2 posts · 1 vote
    11y

    Thanks for the initial help. 

    To Paul: I just found today that there are podcasts on here, which I will be watching/listening to when I get a chance. And I've looked in the area for REIA groups, but I'll have to look again and attend a meeting. I enjoy reading and learning, so I'll check out the books, articles, and more forums.

    I don't quite have a clear hold on "Cap Rate". What I understand, it's the potential money (rent*units*12months) minus expenses (Property manager, maintenance, operating expences), divided by the market value of the property. Does that use the total in come (gross) or the income after taxes (net)? 

    To Bobby: I agree that it does seem simply presented. My numbers are rough estimates. I'll look into a CPA who specializes in apartment RE investing. I thought of needing someone to do my taxes, sure, but I'll look into setting up a meeting or something to gain additional insight. I assume I'll need to incorporate the CPA's ideas/documents in a business plan portfolio.

    I have time to get things set up until next October. When would you recommend starting the business? What are the pros and cons of holding it and not using it until I purchase the property? 

    Thank you again, lots of help

    0Reply
  • Stephanie W.
    Rental Property Investor · Roanoke, VA · Member since 2011 · 95 posts · 65 votes
    11y

    The LLC is there to protect your personal assets from lawsuits, but that can only happen if you maintain a 'corporate veil'. Do your research on that, but it means if it walks like a company, talks like a company and smells like a company, the courts will treat it separately from you personally. Holding an LLC for a long period of time before any inflow or outflow of money takes place could put that 'veil' in jeopardy. There is no good reason to set up the LLC long before you need it.

    I appreciate how organized and focused you are. It will serve you well. And thank you for your service. My father, husband and daughter are all Navy.

    0Reply
  • Tony A.
    Real Estate Investor · Houston, TX · Member since 2014 · 21 posts · 5 votes
    11y

    For a small property I would not waste my money on management. 

    0Reply
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