All Forum Posts by: Arn Cenedella

@Jacob Breytspraak

Or you rent for a while and 1031?

Depends how big a MF property you want to buy. 

At a $200K value maybe you refi for $150,000?

At $250K value maybe you refi for $200,000?

Figure you will need 25% to 30% to buy 5 units or more. 

With the down payments above you are looking at $600K to $700K. 

What kind of MF could you buy at that price range?

Would there be better options at $800K to $900K?

as @Seth McGathey mentioned the interest rate matters. 

Great to borrow against an existing property to buy another property if you can get 4% debt but at 7% debt not so sure. 

Hope this helps. 

Arn

@Pavan K.

In general, real estate losses via operational loss or depreciation deduction can not be used to offset ordinary income (W2) if one’s adjusted gross income is over $150,000. 

If you are a high income earner, the loss doesn’t really benefit you. 

I’m just speculating here because generally investors do take depreciation.

If it can not be used immediately it becomes a loss carry forward that can be used in the future (certainly upon sale).

Again I’m just speculating why your CPA provided this guidance. 

Perhaps you ask him about the limitations of passive loss based on income?

Arn

@Brian Burke

Yes inexperienced operators for sure is a big part of the problem. 

And yes if a common equity LP sees pref equity coming into the deal, their equity is now on life support. 

Once you complete the data you should write a follow up book to the Hands Off Investor - What NOT to do as an LP investor. 

@Brian Burke

Excellent study to complete. I’ll be interested to see what you determine.

I’d suspect some common themes might arise:

1. Use of floating rate bridge debt combined with maximum leverage

2. C class properties in rough areas

3. Underestimated cost and time to execute value add business plan

4. Out of are operators

@Roy Mitle

There are opportunities to buy existing shares in a syndication via 3rd party sources - ie somebody wants out of a deal and is looking to sell their shares on the “secondary” market in years 2 3 or 4 of a deal after a large chunk of depreciation has been used up. 

Of course this raises the question of why the seller wants out? I rarely find people want out of a deal that is doing well.  

@Roy Mitle

It’s a small world. I had a residential brokerage business in Menlo Park and lived in San Carlos for over 30 years. Left the Peninsula 10 years ago and moved to Greenville SC. 

You are correct passive losses can only be used to offset passive gains. 

Passive LP investments are “passive thru” entities and also generate their own passive losses via depreciation. Generally cost segregation is used to create large depreciation write offs and therefore losses year 1 of ownership. 

So depreciation will also produce passive losses in LP passive investments. The income is also sheltered by depreciation - ie LP investments for tax purposes are basically treated the same as individual investments. 

Given the cost of debt even passive LP investments will generally NOT generate passive income until year maybe 2 or 3. Eventually they will but it takes some time. 

What typically happens with the cost few bonus depreciation is few if any taxpayers can use up the losses and so they are carried forward until the taxpayer can - typically upon sale. 

Hope this helps. Happy to answer follow up questions. 

Arn

@Audrey Sommer

Agree with @Nicholas L.

If I may, it’s not a 50% cash flow rule. 
it’s a 50% operating expense rule. 

Let me illustrate:

1. All rules of thumb are high level down and dirty approximations to be used for quick evaluation of potential deals. Each property each deal is different. On some properties (newer) a 40% op ex ratio may be better on other (older) perhaps a 55% to 70% op ex ratio is better. 

2. To make the math easy let’s assume you buy a 10 unit building were each apartment rents for $1000 a month. That’s $10,000 a month GROSS rental income or $120,000 a year GROSS rental income. 

3. Apply the 50% op ex rule to the $120,000 which yield $60,000 in operating expenses. Operating expenses are EVERY cost associated with running the property other than debt service. Op ex includes property taxes insurance repairs maintenance property management utilities landscape etc etc. 

$120,000 x 50% equals $60,000 operating expenses

$120,000 gross income less $60,000 operating expenses yields net operating income (NOI) of $60,000.

This is what is used to pay debt service. 
Let’s say loan payment PI is $4,000 a month that’s $48,000 a year. 

NOI $60K less debt service $48K leaves $12K that's the cash flow.

Hope this helps. 

Arn

@Mark J.

Welcome to the glorious reality of owning rental property. 😀 it’s not quite as easy or glamorous as many make it seem. 

I used to manage my SFR portfolio but turning it over to a good PM was the best thing I ever did.

Your indicate PM will cost $1000 a month in cash flow. What’s your time worth? I’d guess $100/hour minimum. So if you over 10 hours a month dealing with your rentals you actually will be saving money by hiring a PM. 

Of course hiring a good PM isn’t easy. I’d suggest giving one or two properties to a PM and see how they do. If good then let balance of portfolio. If bad find another and try again. 

1031 into Second home retirement or STR may be a little tricky. Be sure you do it in a way that's compliant.

1031 into MR makes sense to be. Be easier to have a rental with 10 doors all in same location than 5 scatter site rentals. Coordinating the sale of multiple properties and have the timing all work out all takes skill. 

One final point:

We pay tax on every dollar we earn over our lifetimes. RE is generally taxed at the most favorable tax rates. Calculate tax due up sale and weigh that amongst your options. 

If the tax due is $10k $25K maybe it’s best to just pay the tax and wait for a greet option to buy that retirement second home. 

If tax due is $100k or more maybe the answer is different. 

After 47 years in RE I see far to many people let tax driven decisions lead to a bad real estate decision. 

Good luck. 

Arn

@Spencer Cuello

I second @Chris Seveney mention of Todd D. I know him personally and we share similar “old school” investing principles. 

At Spark Investment Group, we do 506b deals open to BOTH accredited and sophisticated investors. Our minimum investment is $25,000.  I can say we have never paused distributions or had a capital call. We have paid every distribution on time every time in the amount promised or more. 

We do NOT swing for the fences preferring to hit line drive base hits time after time. I've been in REO since 1978 and our team (75 years combined experience) understands REI is a long game not get quick rich scheme.

Other advice::

Work with experienced operators that excel in a narrowly defined niche and those that have been thru at least one market cycle  I would avoid operators that do two MF deals then jump to ATM machines and then RV parks and car washes. Jack of all trades master of none applies  

If the deal seems to be too good to be true it probably is. Right now MF deals might provide average 5% or 6% returns and LP IRRs of 16% if you see a MF deaL that promises 10% cash on cash and 23% IRR, run don't walk away.

Last suggestion - don’t go all in on your first deal perhaps spread your capital amongst 2 or 3 deals and get your feet wet.

Hope this helps. 

Arn