All Forum Posts by: David Lilley

@Noelle B. your mind is on the right track; scale up and move into multifamily! If you currently lack the experience, knowledge, and/or capital needed to acquire a multifamily property, I would suggest putting that cash into a syndication with an operator who is willing to hold your hand and answer any questions you may have along the way. Use it as a learning experience to get you ready to do bigger deals on your own.

My start looked a lot like yours, and now we are beginning our 7th acquisition. DM me with any questions. I'm happy to help!

@Jon Gorham that is wild! Creating an LLC takes about 5 minutes and $300 if you file in Texas (no state taxes here). Go here and create an account to file https://www.sos.state.tx.us/co...

After that is done, make sure to go to the IRS website and get your EIN.

The answer to your question is yes. The structure would look like this- your entity and the 1031 entity as Tenants in Common. Then, ownership would be split based on equity put into the deal by each entity. If your entity was the manager/sponsor, you can mirror your typical promote structure in the TIC agreement. Talk to a real estate corporate attorney. Happy to give you a reference just DM me.

It's a beautiful thing! Bonus depreciation is being phased out, so we must capitalize while we can.

@Buddy Holmes I am not sure a understand your question, but you can sell a property where you are TIC and utilize a 1031 Exchange. We are doing this on a transaction currently, but to make things a bit cleaner (and since our TIC partner wishes to exchange with us) we are merging the two TIC entities into one entity (our entity is absorbing his). If our TIC partner did not wish to 1031 with us, we would have remained TIC and then they could 1031 on their own or opt to cash out and pay capital gains.

That said, the only reason for a TIC in the context of 1031 Exchanges is to fulfill the requirement of exchanging real estate for real estate. If you 1031 Exchange into a syndication, you must do so as a TIC with the entity of that syndication and not into the entity itself, because in this scenario you would be exchanging real estate for shares of an entity which is not allowed.

A TIC is also utilized when some members on an entity do not want to 1031 Exchange with the group. In this scenario, you would be doing a Drop and Swap. Property LLC which owns the property 100% drops title to Tenants in Common (Property LLC and Members Who Don't Want to 1031 LLC). You could even drop title so that each individual member holds title to the real estate and then can decide individually whether they want to 1031 Exchange or pay capital gains.

Assuming this was disclosed as part of the business plan prior, I would get an appraisal and/or 3 Broker Opinions of Value (BOV). Your expenses would be your true expenses, and any fees you intend to charge should be listed in the operating agreement.

That said, cashing out investor's positions and retaining the equity is usually never in their best interest. If you have carried out the business plan and want to re-syndicate (essentially sell to yourself), I think that would be okay as long as it is for the true market value.

Always take care of your investors first. 

@Chris Yager do you have any data to support that? I haven't seen that comparison done.

There are three things that I look at to evaluate this rising rent concern:

1. Is the median area income still 2.5-3x my rents?

2. Is it still cheaper to rent? DFW (where we invest) home prices have jumped 25% (which is more than rents have grown) and demand is extreme, so I would say yes.

3. Supply. As of October we were short approximately 4mm housing units nationwide.

When purchasing, your focus should be the Yield on Cost and Development Lift, not purchase cap rate.

@Canesha Edwards I see two rate raises in 2022, but beyond that is anyone's guess.

Inflation isn't a good sign for real estate; real estate is a hedge against inflation for reasons we are all seeing.

As long as the economies you invest in continue to see positive job, wage, and population growth, and your underwriting accounts for the potential rise in rates, I know of no valid reason to sit on the sidelines. This is the Golden Age of U.S. real estate. China's GDP has been on a steep trajectory that they can no longer maintain due to their one child policy for 40 years. They have no labor force! As long as we keep corporate taxes low, can you guess where those manufacturing jobs are going to come? I believe this will happen much faster now that COVID has shown us how foolish it is to outsource all of our manufacturing.

@Canesha Edwards if syndicators are underwriting to a 3% exit cap rate on Value-Add investments that would be a major red flag for me. However, most Value-Add investments I look at in the Dallas area are in the 3-4% cap rate on their T12 (tax adjusted). Any professional operator is planning for rates to go up and cap rates to follow. On a recent acquisition, we are purchasing at a 3.14% cap rate and plan to exit at a 5.25% cap rate in 3-5 years which takes rising interest rates into account.

3% cap rates may scare a lot of people when they were 6% two years ago, but unfortunately, that is the market we are in. This is why I choose to invest in growth markets like Dallas Ft. Worth with thriving economies and massive incoming migration.

Purchase cap rates are a measure of risk and really only useful in determining a potential exit price. Two years ago we purchased a storage facility at a negative cap rate. Yes, the risk was high and we were losing money for the first year of ownership, but the potential reward was great. We have just accepted an offer on this same facility and stand to make investors a 2.8x on their money in just over two years.

Inflation is likely here to stay, but rents typically rise with (or higher than) inflation. We are seeing 10-20% year over year rent growth in DFW and CoStar is forecasting around the same for 2022. This is the Golden Age for U.S. real estate. Those who think they will wait for the bubble to burst before investing will likely be sitting on the sidelines for quite some time.