All Forum Posts by: Cory Carlson

@Jeff Wolfe this meet up is by my house

For the owner-occupied buyer in our market I usually start with the conversation about drawing the line between utility and investment. Utility being you want a place to live in a certain area because you like it and the subsidized income from the adjoining unit(s) is a bonus. The mathematics can be simple here - mortgage minus adjoining unit(s) projected income. Add any variable expenses (repair/maint/turnover/management software/etc) you wish to account for. 

On the other side of the line is strictly investment where we take into consideration the initial 4 investment metrics. 1) pre-tax cashflow; 2) After-tax cashflow (factoring effective tax rate, depreciation and interest expense); 3) After-tax cashflow and principle pay down; 4) Total Return (After-tax + pay down + appreciation-x%). The reality is the bigger pockets perception of maximum leverage (95%, 90%, even 85% LTV) the debt service and PMI kills any potential for cashflows in our low cap market. 5%+ Cash on cash is not possible with this much leverage and anyone who tells you it is, is doing their math wrong. The denominator in the calculation is your "invested equity" ie. down payment for acquisitions. When that number is small (10% of $400k for example), the margin of error is huge. In laymen's terms I like to say with some candor, "you're a microwave away from breaking even". Buying a house hack and expecting cashflow with a low down is not arithmetically possible, especially year 1.

More subjectively I would say, if the low down payment is what is feasible now to be dancing across the utility and investment line. If you can find something with a low down payment, some upside and a monthly out of pocket that is near what is market rent you are heading in the right direction. If you bought a single family home for the same price your monthly out of pocket would be much higher. This strategy is as much as a personal finance decision (utility) as it is an investment. Buyer is unlocking the ability to buy more asset value with a lower monthly out of pocket for single tenant property.

@Brad Hammond made a great point above. The house hack in our market is a lot like what they call a BRRR on BP. Buying the property with low rents, do some updates to achieve market rents and that will force the value as well as sweeten the returns of the house hack. Consider two duplex's next door to each other and are the same size and condition. Duplex A receives $2k a month in rents. Duplex B receives $3,000 a month in rents. When using the income approach, duplex B is worth more money. The stabilization factor of a house hack following the forced appreciation allows the investor to reposition themselves in the asset a few years down the road.

Disclaimer though, valuation of duplex's is convoluted between the income approach and comparable sales valuation methods because of exactly the reasons I've outlined above. Here is an example from a duplex listing in I closed in February. From the income approach this property was probably worth ~$780k in my opinion. Seller would have taken that too. I was using an adjusted expense load from what I considered the "appraisal norm" and a 4.35% CAP. Yes, it was really close in Portland - low cap. I opted to leave one of the units vacant and have the option to market to owner occupied buyers. They bought it for the utility at $820,000 and the appraiser used comparable sales to appraise. The utility of the property to the buyers outweighed the more conventional investment returns and my client made out with an extra $40k. How do you, as an investor compete with buyers like that? Its the same for single family home investors, competing with people who want to live in the thing.

Without diving into illustrations and analysis I have found success with my owner occupied clients by drawing the line between utility/investment and profiling you as a buyer. Are you going to swing a hammer? Then find a value-add/stabilization play. Do you want turn-key subsidized living with a monthly out of pocket that is market, but to own higher asset value than if you bought a house? Then less leverage, more units and turn-key. These are the subjective components to strategy. If you want to dive into the objective ones then a higher down payment is advised. Of course there are exceptions but your findings with the low down payment option is a sticky one. 

The answer to this question lies in the mathematics. Hard to advise what to do with your "capital/equity" without knowing where are you today. This means running current scenarios, refinance, sell/exchange/reinvest and comparing all the strategies. The 4 major return metrics would come into play and be compared.

1) Pre-tax cashflow

2) After-tax cashflow (after effective tax rate, depreciation and interest expense deductions)

3) After-tax cashflow + Pay down (same as #2 but adds principle pay down)

4) Total Return (After-tax cashflow + Principle Pay Down + Appreciation-X%)

First, lets see how the property is performing today. I would guess given the equity position raising faster then the NOI, you are on the downhill side of the yield curve. This is where option 1, quantifying the returns following a refinance comes into play. See what the projected returns would be with different leverage positions (80%, 75%, 70% LTV). The pulled proceeds could be used for reinvestment. Depending how much that is would depend on what second property to advise. Ideally enough for 2-4 units, otherwise a great candidate for a syndication/pooled fund as a minority owner. The second option would be to sell while you still qualify for the section 121 exclusion, take your funds and reinvest. 9/10 in the Oregon market and with the portfolio's I advise on, option 2 is the plan. The reality is repositioning in single family homes with todays current prices is setting investors up for in the best case, break even cashflow. Buying/holding and hoping is not a real estate strategy. Most of the analysis are pointing in the sell and reinvest your capital/equity into a higher yielding multifamily property. Here you can manipulate the NOI and shoot for forced appreciation and acquire higher asset value.

The answer to this question lies in the mathematics. Hard to advise what to do with your "capital/equity" without knowing where are you today. This means running current scenarios, refinance, sell/exchange/reinvest and comparing all the strategies. The 4 major return metrics would come into play and be compared. 

1) Pre-tax cashflow

2) After-tax cashflow (after effective tax rate, depreciation and interest expense deductions)

3) After-tax cashflow + Pay down (same as #2 but adds principle pay down)

4) Total Return (After-tax cashflow + Principle Pay Down + Appreciation-X%)

Simply put the strategy here could be to keep your space, reposition yourself (refinance) and see if there is enough capital to do something else with. You can keep the condo as your "principle residence" to avoid the HOA headaches. Second strategy would to quantify your net proceeds from sale and if you could find something else that fits your needs but is a better "investment". What i say when advising and consulting on these types of situations are to draw the line in the sand somewhere between utility and investment. Its impossible to quantify both but they can be taken into account if the vision is to eventually turn the next acquisition into a buy/hold rental.

I think maneuvering the Portland market really takes an experienced advisor who can properly profile you as a buyer. All the blood in the water surrounding tenant/landlord laws can be mitigated with an experienced property manager. Tailoring a strategy for the investor that wants to "house hack" vs. the contractor looking to buy work or the doctor who just wants to set his money and let it work for him touches on the many profiles of investor; All of which require different education, skills and advise. 

I would say stick to multifamily although there are some interesting laws changing in Portland surrounding the building allowances for previously single family zoned housing. This is called the residential infill project (RIP). "RIP2" (the second stage/phase) goes into effect June 30 and allows additional zoning types to be infilled with multifamily. The City of Portland's website touches on this briefly. 

Goodluck out there!

Leverage your money to some extent. ARMs are cheaper money than fixed rate mortgages and if you're investing right, investors should be "repositioning" themselves in their portfolio every 5-7 years anyways (ie. refinance or exchange again). Even moderate leverage will show higher yields in the higher cashflow markets than owning outright. The challenge for investors with significant capital/equity in smaller income-properties is that though positive cash flow is being generated, the CASH-ON-CASH return (%) on invested capital is typically low single digits. And, depending on the effective tax rate of the investor, the after-tax return on cash flow is almost always to some degree even lower.

Sounds like option 2 is the better buy if you will have additional capital and can acquire something that has and ADU. Bend is not going anywhere and despite the tick ups in rates (hopefully seen the worse of it now) Bend still has a housing shortage. Transaction volume is low low low... Wait until you're in a better place to buy.

The small plex's (2-4 units) are trading at awfully low CAP rates these days. Most are buying with Pro-forma their strategy. Buy/hold & Stabilize to realize the future cashflows. Also I have found many buyers who want to live in the properties are willing to pay more and looking at the duplex from a more simplistic and utility perspective - Ie. mortgage minus adjoining units income (current or projected). With an investors lens and more conservative underwriting of course none of these are going to cashflow. Just the way it is right now and patience is the name of the game.

Most investment properties are held in LLC's. An attorney is going to be draft these entity structures and go through the pro's/cons. For a partnership (or syndication/pooled fund) scenario each member of the group will hold title to the real estate as Tenants-In-Common. Do a quick google search and you will see the benefits behind owning property this way. The operating agreement (also drafted by a lawyer) will outline the repair/maint/management/buyer & sell moments/taxes/dispositions....etc.

@Paul Merriwether

I concur in recent years and on average over time seeing those high single digit appreciation during the right hold periods is doable. But from equity management & wealth building perspectives single family properties are not the wealth growth ticket... You're talking about appreciation from a property you owned in 1980. Your equity could have go so much further with active money management as opposed to 40 years of buying, holding and hoping. 

Forced appreciation exists in apartments? Your single family homes I would bet are seeing lesser CAP rates than apartments? Buying a 20 unit building with rent upside and/or unrealized "other income" at a 5.25% CAP, then re-selling following a 4-7 year hold period will undoubtedly yield higher returns than buying and hoping a single family goes up in value. I close on one next month for $3.2M and minimal rent bumps to market at the same 5.25% CAP forces a new value of $3.85M. That can be done in 12 months. $500k of forced appreciation expected in 12-18 months or 40 years?

Active money management and positive leverage is what you do in appreciating markets - like the one we have now. If your after-tax return is higher then the cost of the money you're borrowing, you've properly leveraged your money.

I use a conservative 3% appreciation for all my apartment analysis and realistically see TOTAL RETURNS (After-tax + Principle pay down + Appreciation) in turn-key apartment buildings in the 18-20% ranges, depending on leverage. In the current market to realistically realize annualized double-digit returns on smaller income-properties would require strong year-over-year appreciation (minimum 3%) plus some level of structured leverage (loans in place). The math is straightforward. With smaller income-properties, investors usually must make a strategic choice whether cash-flow OR growth of capital/equity is the primary goal, it is just not arithmetically probable to optimize/maximize both at the same time. Moreover, since future appreciation is always somewhat subjective first evaluate any investment real estate holding-s on the objective return metrics first. That is; cash flow, income tax implications on operating income and the effect on yield of any loan in place (leverage).