All Forum Posts by: Charles Kennedy

John,

I'll give you an overview: Cap rate = NOI/Purchase price. Essentially this tells you the return you will earn if you buy this property un-levered (no debt/all cash) and make no changes to the property. If we flip this equation around we can also determine a potential purchase price as NOI/Cap rate = purchase price.

This cap rate must be supported by transactions in the market. So for example if you're looking to buy an apartment in a B class area, talk to brokers and see what other B-class apartments in that area have traded at. If it's an 8% cap, you can take that 8% cap rate and apply it to the year 1 NOI of the property you are buying to determine a purchase price. So if that property makes $100,000 in NOI we can determine a value:

NOI/Cap rate= purchase price --> $100,000/8% = $1,250,000 should be what you would be willing to pay

Commercial properties are great because they are all based on the NOI and cap rates. So if you take that same property and are able to increase NOI (by lowering Operating Expenses or increasing rents) by $50,000, you have created $625,000 in value! ($50,000/8%=$625,000). Many times investors will do this by managing better or making capital expenditures that justify charging higher rents.

Finally, it's important to remember market cap rates can change. Right now apartment cap rates are at basically historic lows, so although cap rates could be at a 8% in a market, it could be 10% in 5-years (or 5%...if I knew, I'd be a millionaire at 22).

Does this make sense?

@Michael Lauther So will you use the 401k like debt or can you use it like equity and then get a bank loan and essentially be 100% levered?

For example, could I use 50k from employer 401k and then get a loan for 250k from a bank and pay interest on all the $ or would I have to use 50k in cash, and use 250k from my 401k to loan myself?

@Steven Hamilton II can you roll money from an employer roth 401k into a SDIRA while still working?

edit: Nevermind continued reading through and saw you can lend to yourself, but cannot roll it into a Self-Directed

Sounds like you may want to go the private money route. Since you're a CRE agent (doing investment sales?) I'm sure you know how to put together an offering memorandum. If I were you I'd put one together and go network at local RE events or with any family friends that have money. Don't shove it down their throat, but after establishing a connection let them know you're looking for private money to finance a deal. As they say, if the deal is good enough, the money will come.

I would guess, that would be paid at a closing by the buyer just because the seller obviously must not have the finances to do so if they are tax delinquent. You would just have to get the property under a contract at an amount that makes sense with them still having to pay this.

Full disclaimer though, I do not have experience wholesaling, but this just makes sense logically.

Why not? Those people would be motivated to sell for sure. Great point of negotiating. Just reduce purchase price by amount owed, and person you wholesale the deal to pays it.

Thanks @Mike H. for the response.

@Richard C. skimmed the other comments too quickly!

In this scenario though you are likely paying a higher price than the same exact house without a pool and then incurring an additional $7,500 as well. But if the #s still work, why not! 

@Mike H. do you use a HML just for speed of closing? As in will you simply close with hard money, then ASAP go through a traditional lender? What rates do you get on that?

The cost of this will not only be filling the pool, but the constant maintenance (treating it with chemicals and possibly having it cleaned) and increase in insurance. I'd call an insurance broker and see what the cost would be.

Overall, I'd stay away from having a pool at a rental, that's just my opinion.