$1 million in equity and "only" making 56-64k a year.

Multi-Family and Apartment Investing
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$1 million in equity and "only" making 56-64k a year.

Casey Miles
Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes

Hello Everyone,

I think it's time for a change.

I really want to keep my post on topic. If you have questions or want to debate CAP rates, cash on cash, etc. please shoot me a message and we can go from there.

A little history. I started investing in RE in roughly 2009 in the Phoenix market as that's where I'm from. I bought property that according to me was a "deal" at the time. I literally have property spread out all over the Phoenix market.  I didn't give much thought into capitalizing on my resources by keeping investments to one area. I have roughly 10 properties equating to 18 residential doors and 4 commercial office spaces. I've always had the goal of buying more and building my wealth via RE. Keep in mind that wealth can be $ or wealth in time. I don't need to be "rich" in $ but I want to have enough to support my current life style which I think is modest for my wife and I AND not have to work for The Man any longer (I still work a 9-5)

As my post indicates, conservatively after commission, etc. I think I have +/- $1mm in equity not including my personal residence. I make roughly, after PITI, maintenance, vacancy and CAPEX roughly 56-64k a year and that's with me managing everything. If I had a management company take $20k away from that. Now I know I'm gaining in equity every year due to growth so obviously my IRR is better than what I'm portraying. However, for right now, my money isn't working hard enough for me. I currently still work full time AND manage all my RE. When I started investing CAP rates were @ 9-10% and COC was 20-25%. I know I'm not going to see that now but this 3-5% is for the birds.

Time for a change! I think what I want to do is sell everything and 1031 the equity into 1-2 Class B/C apartment buildings. I want to stick to apartments, especially B/C properties, because I feel it's a safer investment during economical downturns. This seems really tricky because of the timing of selling everything. I guess I can make all the contracts 1031 contingent so they all close fairly close to one another? My goal is make a cash on cash of 12% AND have at least 3% year over year growth in property value (20 year average) AND not terribly risk my initial investment. Am I trying to find a unicorn? Syndication makes me uneasy just because it seems like you could lose everything? At least if I buy the property myself (or JV) I still always have the property if things go south. Plus I'm told I can't 1031 into a syndication.

I'm open to suggestions and brainstorming. I learned a lot from this forum and here I am coming back to the well. 

Thanks in advance!

Casey

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Salvatore Lentini
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
9y

@Casey Miles Not sure how much equity you have but what about a cash out refi on your portfolio?  That way you keep what you have an add to it with a large multi family?

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  • Salvatore Lentini
    Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
    9y

    @Casey Miles Not sure how much equity you have but what about a cash out refi on your portfolio?  That way you keep what you have an add to it with a large multi family?

    7Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    I've got decent equity (>50%) but compared to sales the appraisers around here are pretty conservative on heloc(s)/refi(s). Plus I'd rather heard the cats so to speak into one or two properties.

    0Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    9y

    very interesting thread, thank you for posting 

    How much are you looking to make per year so you can have the freedom you desire?

    0Reply
  • Account Closed
    Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
    9y

    @Casey Miles 


    Change can be good.  I know there area creative ways to structure 1031s (i.e. options , contingencies etc) but practically speaking, do you think your end buyer is going to pay a decent retail price for your package as 1? Im guessing not and then you have to think about batching out in chunks (i.e. office with offie)  or selling individually then grouping the funds .


    On the flip side.... Have you looked at the buy side on multi fam ? Its no cake walk and the valuations on a lot of stuff are going to be up there... 


    Your ROE  (return on equity) as you have found is not good .  What if you portioned off a handful of properties you don't like , have the most downside, or perceived risk to you, and then  work to convert that into something else  (like multi family) . 


    Take chips off the table and be a ready willing and able buyer into something else .  Just know that you might be sitting on cash and be ready to come to terms with that instead of overpaying for a junker.  

    Or maybe your model is working , consider the refi, keep building your portfolio as you are and  keep pegging along. I vote your route of sell and consolidate but be ready as it may not be an easy and simple road in the current market .   Try not to make bets where you either prosper or fail depending on what the market does either. 

    5Reply
  • Michael S.
    Rental Property Investor · Gilbert, AZ · Member since 2015 · 49 posts · 56 votes
    9y

    Casey, 

    I'm located in the Phoenix area (east valley) as well with roughly the same amount of doors.  I have mostly SFRs and sold off my multiplexes due to the quality of tenant I was getting.   You're doing well considering appreciation, mortgage debt being paid off each year and cash flow.  The last few years for those investing after the crash have been life changing. 

    All of that said, I have been having the same thought regarding return and "dead" equity and agree it could be better. I bought in Tucson for better cash flow (though the appreciation is not as much, so the return balanced out), also it was difficult to rebuild a portfolio of workers for repairs in another city. I've also spent a few years researching markets out of state, mostly those outlined by the Jason Hartman network. I'm not affiliated with his website, but I recommend checking out the properties section just so you can see the ROI in other cities. They are still finding 10% cash on cash or 30% with leverage in some markets.

    I've slowed down on buying in Phoenix as the deals diminished but there are still a few deals a few times a year if you have cash ready.  Be sure to make your money going in.  Look for under valued or distressed apartments in need of a turn around or management, otherwise it will be so much work to simply trade dollars from one property to the next.  Be sure to over estimate your repair budget on new acquisitions, labor has been getting more expensive as the economy improves.

    To sum it up, I think you can still find 12% cash on cash with 3% appreciation but just not so much in the Phoenix market.  In the Phoenix D class areas there is always the mirage of double digit cash flow but the reality is much different.

    Good luck

    3Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    9y
    Originally posted by @Casey Miles:

    Syndication makes me uneasy just because it seems like you could lose everything? At least if I buy the property myself (or JV) I still always have the property if things go south. Plus I'm told I can't 1031 into a syndication.

    Hi Casey. Yes you can 1031 into a syndication.

    To your comment about syndications making you uneasy, this industry, like all real estate, has its ups and downs. My experience with those that have had bad experiences it that they are tied to poor Sponsor selection or offering selection. It's vitally important to know who you are working with, and have the history of the players involved. I see former players from the 2000's coming back to the industry under different business names, and some of their prior work was less than stellar. It's important to have the advice and perspective of an industry old-timer, in my opinion.

    2Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    Many things to consider. If you sell all these and 1031 into an apartment all the profit needs to be re-invested. Say you need to invest the entire $1M. You would then buy a $4M building. Here's the kicker though - for a $4M property most banks will want to see the $1M for the down payment, but they also want to see closing expenses and a reserve account. This amount will be another $120-$150k. In a syndication, if you choose to go that route you will be able to use the entire $1M. A lot to think about, but just remember that you have a good "problem!"

    4Reply
  • Ryan Fortier
    Investor · Bedford, NY · Member since 2015 · 33 posts · 13 votes
    9y

    Also, for that 4M commercial building with a 3M commercial loan, your net worth has to equal or exceed the loan amount.

    2Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    9y

    I think your thoughts on consolidating properties to 1 part of the valley is smart.  I used to have properties all over but as we got more mature in our buying, we start buying only properties 25 min drive from my house.  This has improved my ability to effectively manage.  No more driving for 2 hours round trip to check something out.

    We've done 6 1031 exchanges this year to trade properties we weren't interested in keeping into a different asset class. Selling condos in Chandler and exchanging into SFH in mesa. The returns as you know were questionable at best, but the way I looked at it was that I was exchanging cashflow. So if my 1 condo generated $500 a month in cashflow, then the property it exchanged into must also generate $500 cashflow. I did have to pick up a little more debt in the process but generally pretty happy with the process.

    One thing someone mentioned above is getting a blanket loan on your properties and do a cash refi.  You can make a margin off of that on hardmoney loan or crowd funding.  There is some risk but you are then putting your "dead" equity to work.  We are in the process of implementing this strategy.  

    I've struggle with the same issue you have are facing.  But right now, having strong equity position in cash flowing properties may be a good place to be.  I also recently heard on a podcast of a strategy of getting Helocs at the current high prices and using the heloc to purchase when the prices re-adjust.  If the adjustment never comes and you never use the money in the heloc, oh well no loss.

    Good luck.

    2Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    Good Morning, 

    @Leslie Pappas @Todd Dexheimer. I was referring to this blog (#15): 

    https://www.biggerpockets.com/blogs/9145/65780-syn...

    I'm sure there are several syndication options. So can I indeed 1031 into a syndication or does doing so require a less common tricky method? Good point Todd on possibly not being able to re-invest the entire $1M. I overlooked the reserve account.

    @Michael S. I too have looked at Tucson as a possibility. What do you think the year over year growth is? I definitely don't want to deal with Class D properties to gain the return. I'd go out of state before I'd do that. Ditto on the labor going up, it's really gone up! We should have coffee/beer sometime to compare strategies, etc.

    @Ryan Fortier Not that I doubt you I'm just surprised my banker has never mentioned this. Is this just for certain amounts/property types? I know that in the early days I didn't have squat from a net worth standpoint and as long as I had 25% down, a decent personal DTI, and the property itself cash flowed well enough that was all I needed.

    @Stone Jin Who did you use for your 1031s?

    Thanks Everyone,

    Casey

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    Casey Miles - WOULD NOT, WOULD NOT 1031 into a DST or syndication type structure if this is a majority of your net worth the 1 million.

    If for example your job makes 60k a year and you made 1 million through market cycle timing then if you were to lose that money it could be catastrophic for you.

    If you were a doctor for example making 500k a year and something happened to the 1 million where you lost some of it likely would not be the end of the world as you could regenerate capital back fast.

    When you 1031 into these syndicates you tend to lose control of your capital. Many syndicators do not like taking 1031 money for investments as it creates another layer of complexity to doing projects.

    5 to 6% on your money is actually good as I know some people in Cali who buy commercial properties with me. They are currently getting only 3% to 4% in Cali. They have lot's of equity from the run up but little to no cash flow return. So they buy commercial properties where they can get 7% coc and up in other states.

    Once people have made millions they are usually happy to outpace inflation and make about 6 to 10% cash on cash and protect what they have made. The last thing you want is to make this money, lose it, and have to go back to (working for the man). The ultra wealthy clients I deal with tend to want safer quality assets and with equity growth at decent cash flow returns that  outpace inflation.

    No legal advice given.  

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Casey Miles I would talk with an attorney, accountant and some 1031 exchange experts. PM me if you want names

    0Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    9y

    You seem to have the vision knowing nothing is going to stay that way forever. Apts are safer. The recession is coming according to Wall Street researchers.  Retain your equity with a safer investment.

    0Reply
  • Stone Jin
    Rental Property Investor · Chandler AZ and Sylvania, OH · Member since 2009 · 708 posts · 561 votes
    9y

    @Casey Miles I used IPX1031.

    1Reply
  • Casey Miles
    OP
    Investor · Mesa, AZ · Member since 2014 · 176 posts · 54 votes
    9y

    @Joel Owens Thanks for the advise Joel. There is no way I'd put all (or even a 10th) of my equity into a syndication. I simply don't have the stomach for it. And to your point, I'd like to reasonably protect my equity as I don't make $500k/yr :)

    I'm "making" 5-6% because I'm managing it. The effective is closer to 3-4%. My goal is 12% CoC but I'd settle for 10%. If I could figure out a way to make 100-120k a year while continuing to gain 3% growth I'd be a happy clam.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Casey Miles, Syndication is a word that is used very loosely to mean many different things.  What is most commonly referred to as a syndication by multi family investors is a Limited Partnership or Limited Liability Company structure.  @David Thompson's blog is absolutely correct.  In these two types of investing you are purchasing membership interest or shares of an entity.  This is not allowed as acceptable replacement for your 1031.

    In order to be eligible for 1031 treatment you must be selling investment real estate and purchasing investment real estate. Shares of a company do not qualify. So in this sense you cannot 1031 into a syndication set up as an LP or LLC.

    If a "syndication" is set up so you receive a deeded interest in real estate itself then yes you can use a 1031 exchange. Structure, control, and financing issues usually steer contemporary syndicators to the LP/LLC structure. And so your 1031 into that is usually going to be a non-starter.

    There are certain passive instruments that qualify for 1031 treatment.  They act and look like a typical syndication format but are specifically structured so that you receive an interest in real estate itself.  These are the Delaware Statutory Trusts, and Tenant in Common projects.  DSTs and TICs offer the passive role and 1031 benefit while letting you invest into something bigger than you could do on your own.  Because these two types of investments are heavily regulated and structured returns tend to be more compressed than in a typically syndicator LP.  But risk is also usually much less as these products are more often than not underwritten by national credit tenants.

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  • Michael Hacker
    Investor · Phoenix, AZ · Member since 2013 · 167 posts · 127 votes
    9y

    @Casey Miles Casey, how would you factor debt pay-off into this equation? Assuming that your loans are 20 or 30 year amortized, some of them would be relatively close to the tipping point of more payment going to principle than interest. In other other words, you have already "suffered" through the worst years of most of the payment going to interest. I understand your post is focused on cashflow, not IRR, but it seems that there is value in keeping that debt as opposed to selling or refinancing - even though your cash return isn't optimal, your debt pay-off is increasing every month.

    6Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    As I read your post, your equity in all of these properties (the value of the property minus mortgages & sales costs) is $1 million. You are netting, before taxes, ~$60k. That's a 6% return on your equity. Considering that the bulk of that equity likely came from property appreciation, and some from tenant pay-down, that's a pretty good return, really. Rather than sell everything, why not take advantage of some of the better spreads, do a cash-out refi, and use that money to seed an apartment complex if you want to go into apartments? Unless you're talking about buying apartment buildings that cost $5 million, and you just want to use your equity as a down payment, it seems to me that you could access several hundred thousand to use as your 20% on a $1-2 million apartment complex, keep all of your properties and have the complex. 

    If you are worried about a downturn, why would you want to have the entirety of your equity in one or two buildings?

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  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    9y

    Hi Casey,

    I hope you have visited Uncle Bears in Mesa....that would make me happy as part owner.  Re: syndications make you queasy, why is that?  Like anything, there are trusted operators that have a ton of experience, can get you scale, forced appreciation with value add focus and into geographies that are hard to do living in one location.

    You seem to be managing your properties and doing fine w/it.  Keep doing that if you like.  Maybe pull out some equity as @JD Martin mentions but instead of putting it all into one property, take another look at diversifying your risks into some passive investments that will create cash flow.  Diversification could come in taking a limited partner role in value add MF apts, self storage and mobile home parks as examples.  You get niche, sponsor and geographic diversification....better blending a portfolio into some of the more promising sectors, good risk adjusted track records and promising future trends.

    You mention risk, but selling everything and putting it all into one property seems like a far riskier strategy and having a hybrid approach to investing is an interesting way to look at things.  Very few of us out there control everything we are investing in anyway and my experiences with folks is that over time, the hassle of all that control (your time, administrative paperwork, hassles) can weigh on you.  A few blogs on the topic below you may find helpful.

    https://www.biggerpockets.com/blogs/9145/65780-syn...

    https://www.biggerpockets.com/blogs/9145/59865-div...

    https://www.biggerpockets.com/blogs/9145/53959-vet...

    3Reply
  • Ryan Fortier
    Investor · Bedford, NY · Member since 2015 · 33 posts · 13 votes
    9y

    I'm looking into purchasing a larger commercial property and the net worth requirement I heard from a couple of commercial lenders.  These were brokers who quoted Fannie/Freddie products.  I also spoke with a small, local bank who offered a commercial loan without the net worth requirement, but they could only offer a 20 year amortization.  Fannie/Freddie were 30 year amortization with interest only options at great rates. I guess it just depends who you are dealing with or what commercial loan program they are offering.  

    5-6% doesn't sound terrible. I'm currently getting 3% return on my equity and looking into refinancing to pull money out to reinvest.

    0Reply
  • Mark Allen
    Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    9y
    I agree with both David and Dave. There are DSTs and TICs to deploy 1031 money, but you would most likely be better suited refinancing, and deploying equity into syndications to reap your desired returns. Stay diversified! At some point, if you do decide to sell as a portfolio, that's our niche and can help on your exit.
    1Reply
  • Drew Shirley
    Attorney / Multifamily Investor · Houston, TX · Member since 2009 · 173 posts · 136 votes
    9y
    Originally posted by @Dave Foster:

    @Casey Miles, Syndication is a word that is used very loosely to mean many different things.  What is most commonly referred to as a syndication by multi family investors is a Limited Partnership or Limited Liability Company structure.  @David Thompson's blog is absolutely correct.  In these two types of investing you are purchasing membership interest or shares of an entity.  This is not allowed as acceptable replacement for your 1031.

    In order to be eligible for 1031 treatment you must be selling investment real estate and purchasing investment real estate. Shares of a company do not qualify. So in this sense you cannot 1031 into a syndication set up as an LP or LLC.

    If a "syndication" is set up so you receive a deeded interest in real estate itself then yes you can use a 1031 exchange. Structure, control, and financing issues usually steer contemporary syndicators to the LP/LLC structure. And so your 1031 into that is usually going to be a non-starter.

    There are certain passive instruments that qualify for 1031 treatment.  They act and look like a typical syndication format but are specifically structured so that you receive an interest in real estate itself.  These are the Delaware Statutory Trusts, and Tenant in Common projects.  DSTs and TICs offer the passive role and 1031 benefit while letting you invest into something bigger than you could do on your own.  Because these two types of investments are heavily regulated and structured returns tend to be more compressed than in a typically syndicator LP.  But risk is also usually much less as these products are more often than not underwritten by national credit tenants.

    What if he deeded all of his SFRs into one LLC, sold the properties in a bundle, then used that same LLC to purchase the multifamily? Wouldn't that qualify for a 1031?

    1Reply
  • Adam Britt
    Bessemer, AL · Member since 2017 · 49 posts · 30 votes
    9y

    I know this doesn't exactly help you, but as maybe a little encouragement  ... you are already where I want to go with real estate! That is far more than my yearly income at my 8-5.  The fact that you are there even with your full time job is encouraging to me! Even once you have "arrived" at my destination, you are looking to grow even further! That is excellent! 

    2Reply
  • Nelson LealPro Member
    Aviation Sales / Investor · Pompano Beach, FL · Member since 2017 · 112 posts · 45 votes
    9y

    @Casey Miles side note for you since you wrote wealth of time not just money.  How much is that 20k in savings for managing the property compared to the time you would save having someone else managing it.  Perhaps later today @Michael Swan will jump in and tell you about not managing your own property he has a wealth of knowledge to share about multi-family investing and 1031 exhanges.  That time saved by a property manager will help you find the deal your looking for since you'll have more time to find it!

    Good luck sir.  

    0Reply
  • Mark RobertsonPro Member
    Investor · Salisbury, NC · Member since 2014 · 314 posts · 386 votes
    9y

    If you learn one thing in this lifetime ... Learn this.  Do not 1031 your hard earned money into a DST. Period. 1031 into other properties or even a TIC with just a few other investors. Very few syndications can take 1031 money. Your name has to be on the title. They only person that likes a DST are the people that make money selling them. By coincidence, that is who recommends them. The things in life that make you go HMMM.

    Syndications and online syndication are great options, if you can find one with a long track record and one that does not screw you with fees. It can be done, I averaging 10% cash on cash for the last 2 years. The syndicated investments that have gone full cycle averaged over a 20% IRR.

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