Bookkeeping and Cash Flow Questions

Investor · Member since 2023 · 64 posts · 11 votes

Bookkeeping questions:

I purchased a property with cash flow, according to my calculator, on day 1, but knew it was a value-add opportunity. Since the acquisition, I have done upgrades. Technically, I know that with the upgrades, I am putting money into the property and any cash flow is already used up before I even receive the rent. About 6 months worth of cash flow was negated by the upgrades. More so when I do more upgrades. My questions are:

1.) Are the anticipated upgrades counted as 'renovation' costs in my calculator, thus the property still cash flows, but the COCR takes a hit, or

2.) Do I not have cash flow for those first 6 + months?

If 1.), then do I still pay myself the cash flow amount, simply to put it back into the bank account to pay for the upgrades? That just seems like shuffling money around. Does that have a positive or negative tax implication? If I do pay myself, then when I need the money again to pay for upgrades and I transfer money from my personal back to my business, does that pierce the corporate veil (I have an LLC set up)?

If 2.), I assume I just don't pay myself?

Since I am a newbie to this, I am curious as to how normal this situation is, with value-add properties and putting money into the property. A few local investors I talk to say it is normal (for them), but I am looking for other input as well.

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Jamie Banks

Real Estate Consultant · Reston, VA · Member since 2022 · 513 posts · 521 votes

I would recommend using a real estate bookkeeping software that will help you with a lot of these questions. Baselane is the software I use because it's created for real estate investors. When you categorize each transaction using the software you can then create statements to understand your monthly or even yearly cash flow.

I personally reserve 15% of my rent per month for maintenance, capex, and vacancy. The cash flow left over after reserves, my mortgage, and other expenses is the cash flow that I "pay" myself / my business.

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Simon W.Business Member
Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 659 votes
2y
Cash flow will still be the same regardless if you expense the reno cost right away or capitalize it.
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Account Closed
Accountant · San Diego, CA · Member since 2019 · 1k+ posts · 552 votes
2y
Quote from @Dean Valadez:

Bookkeeping questions:

I purchased a property with cash flow, according to my calculator, on day 1, but knew it was a value-add opportunity. Since the acquisition, I have done upgrades. Technically, I know that with the upgrades, I am putting money into the property and any cash flow is already used up before I even receive the rent. About 6 months worth of cash flow was negated by the upgrades. More so when I do more upgrades. My questions are:

1.) Are the anticipated upgrades counted as 'renovation' costs in my calculator, thus the property still cash flows, but the COCR takes a hit, or

2.) Do I not have cash flow for those first 6 + months?

If 1.), then do I still pay myself the cash flow amount, simply to put it back into the bank account to pay for the upgrades? That just seems like shuffling money around. Does that have a positive or negative tax implication? If I do pay myself, then when I need the money again to pay for upgrades and I transfer money from my personal back to my business, does that pierce the corporate veil (I have an LLC set up)?

If 2.), I assume I just don't pay myself?

Since I am a newbie to this, I am curious as to how normal this situation is, with value-add properties and putting money into the property. A few local investors I talk to say it is normal (for them), but I am looking for other input as well.

Ideally you want to separate gross rental income at the "top" and have all your expenses, then have at the bottom "cash flow". While there are more complicated ways to measure this, the most practical way if you care about answering the question "how much do I make every month" is just income - expenses = cashflow. No need to over complicate it!
2 Reply
Jamie Banks
Real Estate Consultant · Reston, VA · Member since 2022 · 513 posts · 521 votes
2y
I would recommend using a real estate bookkeeping software that will help you with a lot of these questions. Baselane is the software I use because it's created for real estate investors. When you categorize each transaction using the software you can then create statements to understand your monthly or even yearly cash flow.
I personally reserve 15% of my rent per month for maintenance, capex, and vacancy. The cash flow left over after reserves, my mortgage, and other expenses is the cash flow that I "pay" myself / my business.
2 Reply
Account Closed
Accountant · Remote · Member since 2024 · 3 posts · 1 vote
2y
1) Capital improvement can be added to to original cost basis thus would reduce your tax paid on capital gain had you decide to sell it later. The property's cash flow is unaffected, just how you want to pay yourself
Paying yourself from a single member LLC as owner's draw has no affect to tax you pay for the whole profit when filed. Owner's draw to personal account or distribution then transfer money to the business or contribution has nothing to do with piercing the corporate veil.
1 Reply
Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
2y
Yes @Dean Valadez it is hard to cash flow and upgrade a property. What you are calling 'cash flow" is actually capx or repairs of some sort. Unless you need money out of this property best to let money build up for your next upgrade and/or repair. Cash flow sounds nice but often misleading when large repairs pop up.
1 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
2y
@Dean Valadez
Based on your initial statement, you bought this property with value add potential. Therefore, the money spent was to add value. That rental money reinvested into these value add components should theoretically have a 3-5X, or more, return. Thus, your exit/extraction, with grant you all that money back TIMES 3-5. If not, then that was not a value add play. Think about it... If you spent $5000 on a value add item, that should rais the value of the property by $15-50K or more. If not, then it was not a value add event, it was just maintenance, and it should have been covered by your maintenance budget.
So, the question is when will you realize the gains produced by your value add expenses? Don't wait too long, because those gain may lose value based on time, trends, or rates.
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Simon W.:

Cash flow will still be the same regardless if you expense the reno cost right away or capitalize it.

Thank you. Could you elaborate please? It sounds like you are taking position 1.) of my original question?
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Account Closed:

Quote from @Dean Valadez:

Bookkeeping questions:

I purchased a property with cash flow, according to my calculator, on day 1, but knew it was a value-add opportunity. Since the acquisition, I have done upgrades. Technically, I know that with the upgrades, I am putting money into the property and any cash flow is already used up before I even receive the rent. About 6 months worth of cash flow was negated by the upgrades. More so when I do more upgrades. My questions are:

1.) Are the anticipated upgrades counted as 'renovation' costs in my calculator, thus the property still cash flows, but the COCR takes a hit, or

2.) Do I not have cash flow for those first 6 + months?

If 1.), then do I still pay myself the cash flow amount, simply to put it back into the bank account to pay for the upgrades? That just seems like shuffling money around. Does that have a positive or negative tax implication? If I do pay myself, then when I need the money again to pay for upgrades and I transfer money from my personal back to my business, does that pierce the corporate veil (I have an LLC set up)?

If 2.), I assume I just don't pay myself?

Since I am a newbie to this, I am curious as to how normal this situation is, with value-add properties and putting money into the property. A few local investors I talk to say it is normal (for them), but I am looking for other input as well.

Ideally you want to separate gross rental income at the "top" and have all your expenses, then have at the bottom "cash flow". While there are more complicated ways to measure this, the most practical way if you care about answering the question "how much do I make every month" is just income - expenses = cashflow. No need to over complicate it!

Ha! I might be overthinking and overcomplicating things, no argument there! But my brain still wants to know. Yes, I know to subtract the expenses from the gross rent, as my calculators have me do so, but my original question still remains - do reno/upgrade costs count against cash flow when calculated at the time of purchase but executed during the first 6 months of ownership? Technically, according to my calculator, it does cash flow when I account for the upgrades prior to purchase (which is why I purchased the property), but during the last 6 months of ownership, in my P&L, I am not making any cash flow. Thus, which is it? Yes, I am making cash flow, or no, I am not?
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Jamie Banks:

I would recommend using a real estate bookkeeping software that will help you with a lot of these questions. Baselane is the software I use because it's created for real estate investors. When you categorize each transaction using the software you can then create statements to understand your monthly or even yearly cash flow.
I personally reserve 15% of my rent per month for maintenance, capex, and vacancy. The cash flow left over after reserves, my mortgage, and other expenses is the cash flow that I "pay" myself / my business.

Thanks, Jamie! Yes, my calculator has me take out CapEx, vacancies, maintenance, etc., and 15% is what I did as well. However, my original question was not about standard expenses, but instead was about how to account for the planned upgrades for the property, beyond the typical maintenance. The property cash flowed prior to purchase even with the planned upgrades (which is why I purchased it), but during ownership and having paid for the planned upgrades, it appears as though it doesn't cash flow.
I'll have to look at Baseline! Thanks for the tip!
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Account Closed:

1) Capital improvement can be added to to original cost basis thus would reduce your tax paid on capital gain had you decide to sell it later. The property's cash flow is unaffected, just how you want to pay yourself
Paying yourself from a single member LLC as owner's draw has no affect to tax you pay for the whole profit when filed. Owner's draw to personal account or distribution then transfer money to the business or contribution has nothing to do with piercing the corporate veil.

Great to know! Thank you!
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Jeff S.:

Yes @Dean Valadez it is hard to cash flow and upgrade a property. What you are calling 'cash flow" is actually capx or repairs of some sort. Unless you need money out of this property best to let money build up for your next upgrade and/or repair. Cash flow sounds nice but often misleading when large repairs pop up.

Thanks, Jeff. By 'unless you need money out of this property', are you referring to a cash-out refi? I will be looking to do that next year. If that is what you mean, do you have any tips on the best way to do it?
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Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Sam Yin:

@Dean Valadez
Based on your initial statement, you bought this property with value add potential. Therefore, the money spent was to add value. That rental money reinvested into these value add components should theoretically have a 3-5X, or more, return. Thus, your exit/extraction, with grant you all that money back TIMES 3-5. If not, then that was not a value add play. Think about it... If you spent $5000 on a value add item, that should rais the value of the property by $15-50K or more. If not, then it was not a value add event, it was just maintenance, and it should have been covered by your maintenance budget.
So, the question is when will you realize the gains produced by your value add expenses? Don't wait too long, because those gain may lose value based on time, trends, or rates.

Thanks, Sam. I like the idea of 3-5X'ing my money! That's for sure. I am curious how you got that general formula. Do you have a resource you can recommend whether it's a YouTube vid, book, or article? I have not heard of that. I am familiar with there BRRRR method though as BP talks about it, which leads me to a Q.
This is just an example: If an unkept/foreclosure property was purchased for $100K, in a neighborhood that mostly has houses for $200K, and the investor put in $70K for renos for this value-add, then cash-out refi's at $200K, he/she just made $30K to then apply to another purchase, which seems to be what BP talks about a lot. But using your formula, the investor should have made $210K at minimum, or $350K, which means the house would be appraised at $410K-$550K. Here, the formula does not make sense. How can a reno create 3-5X more?
Am I missing something? Thanks for any input you can provide!
0 Reply
Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
2y
@Dean Valadez what I was referring to was the need to be concerned about cash flow as though you needed the cash flow to help pay your bills. Refi to get a better rate is good but have to weigh the cost of money and the time you have the loan to see if it is worth the costs to get a new loan. If you are just trying to get your down payment back then that is another thing. If you get your money back out and reduce your payment and keep it a while that could be a good thing too.
In my mind the cash flow is something that should arrive over time. I don't count on it early on and usually consider feeding it until all the bugs are worked out.
1 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
2y
@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.
1 Reply
Oyinda Oyetunde
Toronto · Member since 2022 · 15 posts · 1 vote
2y
Following the comments to learn more.
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Sam Yin:

@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

That's great! Pretty impressive. It does sound like our scenarios are different. Where you are getting your 3-5X in return is mainly due to:
1.) You're doing your own labor, thus your going off material-only costs. In my scenario, some of the upgrades are electrical and plumbing, which I cannot do, thus I have to pay for the labor. I plan on doing a lot of work myself where I can though.
2.) You bought in Cali, where home prices appreciate extremely high. I don't think you could 3-5X like that in every state.
3.) You bought a major fixer-upper, probably for wholesale costs, or way under market costs, and saw extreme equity growth due to that. I did not buy a major fixer-upper, but is still a value-add property. It is a class C+ property in a class B/B- area.
I think there's a lot I can still take from your experiences though, so I appreciate your in-depth explanation!
0 Reply
Sam YinPro Member
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
2y
Quote from @Dean Valadez:

Quote from @Sam Yin:

@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

That's great! Pretty impressive. It does sound like our scenarios are different. Where you are getting your 3-5X in return is mainly due to:
1.) You're doing your own labor, thus your going off material-only costs. In my scenario, some of the upgrades are electrical and plumbing, which I cannot do, thus I have to pay for the labor. I plan on doing a lot of work myself where I can though.
2.) You bought in Cali, where home prices appreciate extremely high. I don't think you could 3-5X like that in every state.
3.) You bought a major fixer-upper, probably for wholesale costs, or way under market costs, and saw extreme equity growth due to that. I did not buy a major fixer-upper, but is still a value-add property. It is a class C+ property in a class B/B- area.
I think there's a lot I can still take from your experiences though, so I appreciate your in-depth explanation!

Hi Dean. You are correct, I bought them in CA, by choice to have greater local control. However, I think you may have missed my point, a little.

I bought at market or over-market value just to lock them in, NOT wholesale or a discount. Specialized work was done by contractors.
The first 2 SFHs were major fixers that I had intended to live in, the latter I still do. But they were not at any discount. As for repairs, I did do some work myself, on the homes, but not the plumbing, electrical, roof, remodel, etc... I mainly did clean up and prep for the contractors to save a little time and money, as well as some painting and sealing. For the two tri-plexes, I did a lot of cleaning work, but I hired out for roof and plumbing.

As I went into further in REI and purchased apartments, ALL of the rehabs were by contractors. I only spend a few hours a month on my REI business, mainly for bookkeeping. The rest I rely on is a team of managers, contractors, and local repair vendors. When using professional contractors, I get even more return on the capital investments because I have run it more as a business. For example, the 8-unit that cost $700K only appraised for $660K. I overpaid by $40K because I knew it was my way to get my foot in the door of commercial residential investing. All the rehab and repairs associated with it are done by professionals. Hidden behind the balance between cash flow and ROI for rehab, I also made actual money on what I allocated for maintenance, repairs, management, and reserves, as underwritten because I had 1031 before spending those funds.
I have completed eight 1031s since, and have used contractors for capex, with significantly higher returns on the value... mainly because these are now commercial-type loans, not residential. A quick example is $15K in rehab on 2/10 units (+ rent increases) that returned $400K on equity for an exchange to a larger deal, etc...
The other point to be made is about the cash flow itself. How can your business sustain itself without cash flow? If you break even, you are losing because you lost time. If you are running negative, that is even worse. I understand that for high-income earners, this is not a big concern because they supplement their primary job. That was not the model I was looking to create with REI. I need both cash flow and potential appreciation. for example, the leftover net cash flow in the last couple of years of investment was used to purchase two more commercial buildings.
To you OP, regarding bookkeeping and Cash Flow:
1. Anticipated upgrades are worked into the deal before COE, because it was anticipated. The COCR hould not take a hit, unless you DID NOT anticipate it.
2. There may be some quick periods of no cash flow, but that should be made up at the end of the rehab... meaning make up for the loss of cash flow used for the rehab + regular cash flow, not back to neutral cash flow. The rehab should have cause the cash flow to increase above previous calculations, once completed.
Investors run their bank accounts differently. I put my gross into an account. I pay all my operating costs and debt from it. I also pay for all my additional rehab from it. I also pay myself, but I do not deplete the account to a point where I need to transfer personal money back in... unless there is an emergency. This is where reserves are crucial. Reserves in that business account, built from the rentals. When my reserves go beyond my comfort threshold, I immediately deploy them into another investment. I DO NOT pay myself the excess.
I hope that clears it up a bit more. This is just one of many ways to run an REI business. I am sure others can critique my strategy. I continually reevaluate and adjust my operations.
2 Reply
Max Emory
Accountant · 100% Remote · Member since 2019 · 495 posts · 216 votes
2y
Hey @Dean Valadez, there will be exceptions but for the majority, rental real estate is a high CapEx / low cash flow business model. You may not have cash flow for 6 months. You may not have cash flow for years. This depends on what types of properties you're going after and what your overall strategy is. Then, how well you execute your strategy.
Most people consider all costs prior to the rental being "placed in service" to be "start-up" costs that will factor into your COCROI. As far as managing your "cash flow", that also depends on your strategy for growth.
Just keep in mind, rentals don't pay much cash flow-wise in today's market. They are a great place to store cash and make money long-term through forced appreciation (improvements), natural market appreciation (hedge against inflation), depreciation, loan paydown, and a little cash flow if you're lucky.
1 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
2y
Quote from @Sam Yin:

@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

God bless you Sam, this is such an amazing post. These are the kinds of posts that make this place so helpful. It probably would have taken me at least an hour to put my thoughts together and type up something like this. Thanks for posting!
2 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Sam Yin:

Quote from @Dean Valadez:

Quote from @Sam Yin:

@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

That's great! Pretty impressive. It does sound like our scenarios are different. Where you are getting your 3-5X in return is mainly due to:
1.) You're doing your own labor, thus your going off material-only costs. In my scenario, some of the upgrades are electrical and plumbing, which I cannot do, thus I have to pay for the labor. I plan on doing a lot of work myself where I can though.
2.) You bought in Cali, where home prices appreciate extremely high. I don't think you could 3-5X like that in every state.
3.) You bought a major fixer-upper, probably for wholesale costs, or way under market costs, and saw extreme equity growth due to that. I did not buy a major fixer-upper, but is still a value-add property. It is a class C+ property in a class B/B- area.
I think there's a lot I can still take from your experiences though, so I appreciate your in-depth explanation!

Hi Dean. You are correct, I bought them in CA, by choice to have greater local control. However, I think you may have missed my point, a little.

I bought at market or over-market value just to lock them in, NOT wholesale or a discount. Specialized work was done by contractors.
The first 2 SFHs were major fixers that I had intended to live in, the latter I still do. But they were not at any discount. As for repairs, I did do some work myself, on the homes, but not the plumbing, electrical, roof, remodel, etc... I mainly did clean up and prep for the contractors to save a little time and money, as well as some painting and sealing. For the two tri-plexes, I did a lot of cleaning work, but I hired out for roof and plumbing.

As I went into further in REI and purchased apartments, ALL of the rehabs were by contractors. I only spend a few hours a month on my REI business, mainly for bookkeeping. The rest I rely on is a team of managers, contractors, and local repair vendors. When using professional contractors, I get even more return on the capital investments because I have run it more as a business. For example, the 8-unit that cost $700K only appraised for $660K. I overpaid by $40K because I knew it was my way to get my foot in the door of commercial residential investing. All the rehab and repairs associated with it are done by professionals. Hidden behind the balance between cash flow and ROI for rehab, I also made actual money on what I allocated for maintenance, repairs, management, and reserves, as underwritten because I had 1031 before spending those funds.
I have completed eight 1031s since, and have used contractors for capex, with significantly higher returns on the value... mainly because these are now commercial-type loans, not residential. A quick example is $15K in rehab on 2/10 units (+ rent increases) that returned $400K on equity for an exchange to a larger deal, etc...
The other point to be made is about the cash flow itself. How can your business sustain itself without cash flow? If you break even, you are losing because you lost time. If you are running negative, that is even worse. I understand that for high-income earners, this is not a big concern because they supplement their primary job. That was not the model I was looking to create with REI. I need both cash flow and potential appreciation. for example, the leftover net cash flow in the last couple of years of investment was used to purchase two more commercial buildings.
To you OP, regarding bookkeeping and Cash Flow:
1. Anticipated upgrades are worked into the deal before COE, because it was anticipated. The COCR hould not take a hit, unless you DID NOT anticipate it.
2. There may be some quick periods of no cash flow, but that should be made up at the end of the rehab... meaning make up for the loss of cash flow used for the rehab + regular cash flow, not back to neutral cash flow. The rehab should have cause the cash flow to increase above previous calculations, once completed.
Investors run their bank accounts differently. I put my gross into an account. I pay all my operating costs and debt from it. I also pay for all my additional rehab from it. I also pay myself, but I do not deplete the account to a point where I need to transfer personal money back in... unless there is an emergency. This is where reserves are crucial. Reserves in that business account, built from the rentals. When my reserves go beyond my comfort threshold, I immediately deploy them into another investment. I DO NOT pay myself the excess.
I hope that clears it up a bit more. This is just one of many ways to run an REI business. I am sure others can critique my strategy. I continually reevaluate and adjust my operations.

Such great detail! I love it. Thanks, Sam, you have been helpful. This is one of those posts that I will need to return to frequently to re-read it to pull out all the juice I can. I especially like the added bonus of how you say to build reserves in the account but once past the reserves, deploy the excess into another investment, and to NOT pay yourself the excess. Can I ask what type of investment you do? Do you mean something liquid like a money market, or another real estate property, or a syndication?
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Max Emory:

Hey @Dean Valadez, there will be exceptions but for the majority, rental real estate is a high CapEx / low cash flow business model. You may not have cash flow for 6 months. You may not have cash flow for years. This depends on what types of properties you're going after and what your overall strategy is. Then, how well you execute your strategy.
Most people consider all costs prior to the rental being "placed in service" to be "start-up" costs that will factor into your COCROI. As far as managing your "cash flow", that also depends on your strategy for growth.
Just keep in mind, rentals don't pay much cash flow-wise in today's market. They are a great place to store cash and make money long-term through forced appreciation (improvements), natural market appreciation (hedge against inflation), depreciation, loan paydown, and a little cash flow if you're lucky.

That is good confirmation to hear. Makes me feel better that what I am experiencing is pretty common. Thanks, Max
1 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Tony Kim:

Quote from @Sam Yin:

@Dean Valadez
Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.
Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.
Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.
I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?
Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.
Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.
Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

God bless you Sam, this is such an amazing post. These are the kinds of posts that make this place so helpful. It probably would have taken me at least an hour to put my thoughts together and type up something like this. Thanks for posting!

Couldn't agree more!
1 Reply
Account Closed
CPA · NY · Member since 2023 · 891 posts · 157 votes
2y
Here are some solutions to your questions:
1. Anticipated Upgrades as Renovation Costs: Yes, you can consider the anticipated upgrades as renovation costs in your calculations. This approach allows the property to still cash flow, albeit with a reduced cash-on-cash return (COCR) due to the initial investment in upgrades. So, you'll factor in these renovation costs as part of your overall investment in the property.
2. No Cash Flow for Initial Months: If the upgrades significantly negate the cash flow for the first several months, you might not have positive cash flow during that period. In this scenario, you may choose not to pay yourself from the property's cash flow until it becomes positive after factoring in the upgrades.
Regarding paying yourself the cash flow amount to cover the upgrades:
- Shuffling Money Around: Yes, essentially, you'd be reallocating the cash flow back into the property to fund the upgrades. While this may seem like shuffling money, it's a way to reinvest profits into improving the property, which can potentially increase its value and future cash flow.
- Tax Implications: There may not be significant tax implications if you're paying yourself the cash flow to reinvest in the property, as it's not considered personal income but rather a reinvestment into the business. However, it's always wise to consult with a tax professional for specific advice tailored to your situation.
- Piercing the Corporate Veil: Reinvesting cash flow from the property back into upgrades generally wouldn't pierce the corporate veil of your LLC. It's a common practice to reinvest profits into the business for improvements. However, it's essential to maintain proper accounting records and ensure that personal and business finances remain separate to protect the limited liability status of your LLC.
Value-add properties often require initial investments for improvements, and it's common for investors to face similar situations. It's crucial to carefully analyze the potential returns, including factoring in renovation costs, to make informed investment decisions. Additionally, networking with experienced investors and seeking guidance from professionals can provide valuable insights tailored to your specific situation.
1 Reply
Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y
@Dean Valadez, it sounds like you are probably trying to combine a lot of different things into one.
From a technical accounting standpoint, it seems like you are trying to combine some form of Income Statement and Statement of Cash Flows. Your net operating income is positive, from what you outline, since capital improvements are not commonly an income statement item.
Your cash flow is literally that, the flow of all cash in and out over a period of time. If you are flowing more money OUT than in, then you do not have positive cash flow for that period of time. But you have positive net operating income.
Assuming this is a rental owned by you alone, while I know you want to understand things, in practice it really doesn't matter. This is a small business. Sometimes you will be able to pull money out of the business to spend, or reinvest, or whatever the case may be, and sometimes you will need to pump money into the business. Sometimes the "business" will need money invested that you didn't plan for, and you have to tap into savings accounts to keep it afloat.
To answer your initial question, both 1 and 2 are accurate. Your cash on cash return is going to be low, as you have no cash flow to distribute/keep. And for the same reason, you have negative cash flow. These are not two separate things, all the numbers work together.
0 Reply
Dean ValadezPro Member
OP
Investor · Member since 2023 · 64 posts · 11 votes
2y
Quote from @Account Closed:
Here are some solutions to your questions:

Anticipated Upgrades as Renovation Costs: Yes, you can consider the anticipated upgrades as renovation costs in your calculations. This approach allows the property to still cash flow, albeit with a reduced cash-on-cash return (COCR) due to the initial investment in upgrades. So, you'll factor in these renovation costs as part of your overall investment in the property.
No Cash Flow for Initial Months: If the upgrades significantly negate the cash flow for the first several months, you might not have positive cash flow during that period. In this scenario, you may choose not to pay yourself from the property's cash flow until it becomes positive after factoring in the upgrades.

Regarding paying yourself the cash flow amount to cover the upgrades:

Shuffling Money Around: Yes, essentially, you'd be reallocating the cash flow back into the property to fund the upgrades. While this may seem like shuffling money, it's a way to reinvest profits into improving the property, which can potentially increase its value and future cash flow.
Tax Implications: There may not be significant tax implications if you're paying yourself the cash flow to reinvest in the property, as it's not considered personal income but rather a reinvestment into the business. However, it's always wise to consult with a tax professional for specific advice tailored to your situation.
Piercing the Corporate Veil: Reinvesting cash flow from the property back into upgrades generally wouldn't pierce the corporate veil of your LLC. It's a common practice to reinvest profits into the business for improvements. However, it's essential to maintain proper accounting records and ensure that personal and business finances remain separate to protect the limited liability status of your LLC.

Value-add properties often require initial investments for improvements, and it's common for investors to face similar situations. It's crucial to carefully analyze the potential returns, including factoring in renovation costs, to make informed investment decisions. Additionally, networking with experienced investors and seeking guidance from professionals can provide valuable insights tailored to your specific situation.
Thanks! You insight helps me to feel confident in my methods I've been doing/thinking.
0 Reply

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