All Forum Posts by: Arn Cenedella

@Ema Silva

If it truely is 34% ConC and a 7.6% cap, come up with the extra cash to buy this property. 

With all due respect, I am skeptical of the 34% ConC. Please really be sure of your numbers. 

Updated property tax and insurance costs?

If your expense ratio isn’t between 40% and 55%, you probably are missing something. 

Good luck. 

@Jennifer Wood

1. One can find cash flow but at this time, but one needs to put 50% down to do so.

2. For me, I am OK with little or no cash flow year one and maybe even two if I see a clear path to cash flow and appreciation over 5 to 10 years. The current market and debt requires a long term perspective.

@Charit P.

I’ll try one more time.
Whether you are open to input is up to you. 

Have you discussed this issue with your CPA? 

If so, what does the CPA say?

I’m baffled that you are paying a CPA but then reaching out to BP for an opinion. That’s a little strange. It would be like me going to a MD having tests run and the MD issues a diagnosis and then me going to Facebook to get other medical opinions  😀

The three years of income and expense is not a sufficient data set to determine the answer.

One needs to specifically look at what generated those losses in 2020 and 2021  

If the $22,600 loss in 2020 primarily arose from depreciation and you were able to use those losses in 2020, your basis in the property will have been reduced by the amount of the depreciation. This depreciation taken is now recaptured as capital gain. The deprecation when taken is a paper loss the deprecation when recaptured is a paper gain but still taxable gain.

Essentially at sale you are taxed and have to pay back the depreciation taken over the hold.  

I will finish with: What does your CPA say?

@Barry Ruby

100% on the spreadsheet being important but not placing too much confidence in it.

I still have my HP12C calculator that I use regularly - it's over 40 years old now.

I imagine @Brian Burke is the correct.

The answer probably revolves around the large bonus depreciation due to cost segregation in year 1 of a syndication. Review of your K1 will provide the answer.

I would add since syndication losses are passive losses and most often can only be used to offset passive income - you may not have been able to use that loss year 1. If so that loss if carried forward to a time you can use it. If this occurred, you can use that loss carry forward to reduce the taxable gain from the sale the year after.

I would ask your CPA:

Was your basis in the investment reduced year one via depreciation?

If yes, then was that depreciation used to offset other income in year one or was it simply carried forward?

Get these questions answered and the mystery will be solved.

One final point, there are only three sources of passive income - rental real estate, royalties, or income from a business you own but don’t actively manage.

Most people don’t have much if any passive income, so if I had to guess you have a loss carry forward on your books.

@Abe Rouz

A word of caution………..

The 1% rule, the desirability and amount of cash flow are only a few of multiple criteria you should evaluate when investing.

In my 45 years of real estate investing, I have often seen the following:

1. The rent to price ratio (and therefore ultimately the cash flow) is in an INVERSE proportion to the quality of the asset. As one moves down in quality of the building as one moves down in the quality of the location, the cash flow “appears” to improve in a PROFORMA.

2. The rent to price ratio goes down as quality goes up.

3. The lower the qualify of the asset, the less likely it will perform in “real life” as projected in the proforma. Lower quality assets - older assets - low tenant income and quality - lead to high maintenance costs and greater vacancy and losses.

4. Greater cash flow is available in less desirable locations - where economic growth is slowe or non existent.

One can find greater cash flow in Bakersfield CA than Palo Alto CA. 
Does that mean it’s better to invest in Bakersfield? I think not.

While cash flow is great - buying a fourplex might generate $500 to $1000 a month cash flow (at most). That’s not life changing money.

I suggest for consideration, investing for capital growth rather than cash flow early in one’s investing journey may be a better approach. In my opinion, one needs to accumulate a fair amount of capital before life changing cash flow can be generated.

This may blow some folks’ minds but one can make good investments without being a spreadsheet Ninja. Sacrilegious to some I know. 😀

I am a contrarian when it comes to investing.
I am a REAL ESTATE guy not a spreadsheet guy.
I evaluate location and the physical asset - the quality and the intrinsic value of a property.
I know the spreadsheet can be made to produce whatever returns someone wants.
The expression - garbage in garbage out applies.

Above all is local market knowledge.
Hands on boots on the ground practical day to day knowledge of the market.
The bricks and mortar matter.

I KNOW my market way better than CoStar does. 😀

Yet I see inveatos believe their proforma is the gospel. It’s NOT.

I ask investors and operators:

Can anyone tell me what the world economy will be like what the national economy will be like what the local economy will be like what interest rates will be what cap rates will be 5 years from now?

As folks want to debate projected rent in $10 increments on their proforma, they don’t realize how absurd at some level the whole exercise is.

Here’s my approach:
1. Know your market
2. If you find a quality property that makes sense today - ie it will pay for itself and provide some cash flow today with current debt.
AND
3. Your have rational logical reasons to believe the area and property will prosper over the next 5 to 10 years.
4. I BUY it!

That’s all anyone can really do.

I've never made a buy no buy decision based on cash flow per se or IRR. I know my market and am willing to pay a fair price for a good asset and I have faith for the rest.

I am humble enough to know I have no idea why the world will be like in 5 years.

The spreadsheet guys are in trouble right now. The old school real estate guys are doing fine.

😀

@Asa Hunt

Check PPM and Operating Agreement. 

I suspect if you don’t put up more cash your equity percentage ownership will decrease. 

Say it was a $1M raise to begin with and you put up $100,000, you own 10% of the LP equity. If sponsor needs to raise say $250,000 and you don’t put up your share your equity position is reduced as follows:

$100,000/($1M plus $250,000) equals 8%. 

Your equity share in the deal is now 8%. 

I think you need to evaluate . Can the deal be saved? Or is it going under?

Lots of folks in your situation.  

Sorry and good luck. 

@Jasmine Hu

Not sure I would go to Memphis and don't know the VA markets.

I’m in Greenville SC and love that market - midway between Charlotte and Atlanta.

Booming population, income, and job growth - not as competitive as the NC and Florida locations.

As you note insurance costs are in issue in FL and probably in Wilmington too.

To add some additional context, one can invest successfully in most markets.

For me, knowing your market is as important if not more important than selecting a market. One’s competitive advantage as an investor primarily comes from superior intimate market knowledge. No matter what market you select, you need to spend a lot of time there getting to know the market and the “players” in that market.

Which of these markets can you get to easily and often?

Pick a market drill deep into that market, learn the market and success will follow.

@Ryan Pearlman

Either cap rate seems high given market cap rates of 5% to 8%. 

I suspect your expense calcs may be off. 
They should be 40% to 50% of gross rent. 

Be sure of your numbers - something doesn’t quite add up for me. Be sure you know what property taxes and insurance costs will be. 

Good luck….

Arn