All Forum Posts by: Ed Matson

I'm with Omar.  If you use more accurate interest rates, like 3.75 - 4.0%, you should get a different result.

@J Scott's explanation was more complete than mine, so I like it better. One comment to it. If you do the flips as an entity (LLC) vs. as an individual, you may be able to reduce or eliminate the self employment tax. The self employment tax is calculated based on salary, and is not payable against distributions. Again, talk to a good CPA.

Assuming no other costs (expenses) than the $300K to buy and rehab the 5 homes, you will be taxed on the $150K income less the interest expense of $12,000, or $138K of income.

I think of apartment complexes more as investments rather than "real estate" as it pertains to a single family home. The value of the apartment is in the cash flow and IRR it can give me. Period. Assessed value only is important to me as it determines tax payments.

Additionally to what Chris M. said, which is how a wholesaler works, a flipper can benefit from buying from a wholesaler if that wholesaler puts a house under contract at the right price and can relatively accurately estimate the rehab costs and the ARV. So, a good wholesaler, hypothetically, can sell a good deal to a flipper. Be careful and do your own due diligence. Do not take on face value what a wholesaler tells you. The best wholesalers have flipped houses themselves, so they can estimate repair costs and ARV. Beginning wholesalers? Maybe not so much. So, a deal might look like this: Wholesaler puts house under contract for $150K. It has an ARV of $275K. It requires $50K of rehab costs. The flipper buys this house from the wholesaler for $160K before the wholesaler's contract to buy the house expires. The wholesaler gets $10K at closing. The flipper hopefully gets a house he/she can make money on. The idea is that wholesalers do nothing but try to find good deals, and sell them to flippers. A small flipper may have trouble spending the time to develop a marketing machine to find deals.

@Anuj Khosla - Best of Luck

Since you will have an opportunity to adjust your offer after your DD, why not offer $3.3 ? You can show the owner your logic and rationale in coming up with that number. Then if he disputes your numbers, he has the burden to prove you wrong with real actuals. You even use his Cap Rate. IMO this presents you as a serious buyer with a reasonable offer, especially since the offer is 25% less than asking. If DD shows differences in either actual income, expense, or building condition, you will have the opportunity to adjust your offer. You really need to decide what Cap Rate/IRR is acceptable to you over your investment horizon, and go from there. For example, I need to focus on a property's current income. My investment horizon is only ten years for buy and hold. Potential appreciation is less important for me due to my personal situation. Your situation may be different.

Hi Anuj,

Your numbers look good to me. We have 46 units built in 2003 that are professionally managed. The complex is in a hot market and rents have been increased to just under market (by design). Actual occupancy was just under 2% in 2015. Only one turnover through April 2016. So, in my opinion, our numbers represent nearly a best case scenario for a professionally managed complex of this size. Because of this, Operating Expenses are down to 40% (from 45% in 2013), and NOI for 2016 should be 60% of actual total income. So, I agree that the 34% Op Exp on the pro forma is wishful thinking. Our actual Cap Ex is about 1.2% of gross income for this newer complex. Your estimate is nearly 2%, which may be closer for an older complex. I would base my offer on the current income and expenses of the complex, and not on what they could do if you upgraded the remaining 24 units. Your 50% expense estimate is in the ballpark. So, I agree that this complex is worth about $3.3 MM at a 6.0 CAP. In today's market for MF a REAL 6 CAP in a good neighborhood in a good town isn't bad. Then I would estimate the cost to upgrade the remaining 24 units and calculate the new NOI and calculate a total ROI over whatever your investment timeline is. This should help you understand whether you have a good value add play or not.

Welcome to BP Michael.  Best of luck.

If you want to maximize passive income, you might want to look at a fund of short term real estate backed loans.  You can get regular double digit (pre-tax) income with no work except your initial due diligence and monthly reporting.  That $250K can generate $27,500 in annual income, paid monthly.  You will not have any appreciation, nor inflation protection, but you can get good diversification/risk reduction, and decent principal protection.  If this is of interest, PM me and I can suggest a fund.