All Forum Posts by: Jacob Pereira

@Kevin Kelly What are your goals? Are you looking to stay in residential (below 5 units) or go into commercial apartments? The Austin small multifamily is really competitive right now, but there are a few underserved areas that still cash flow pretty well. I'm not as familiar with apartments.  

Greg, I am impressed! You really know the Austin Market.  I actually already have two there, one bought slightly higher and one bought slightly lower, and I was just trying to get some unbiased views of it. It is indeed in Lakeside, although I have to say that my experiences are quite different. In my first property I did have to do cash for keys for one tenant (or rather pay for a storage unit for one month and a moving truck) to get her out in month one, but everyone new has been great, and by the time I find out a tenant is considering a move, everyone in the neighborhood is calling me to try and rent the property. The ones I currently own do indeed require a bit more in repairs, but the repairs are cheaper. For example, I just moved a stove in there that I'd pulled out of another property of mine; thus it was a repair, but all it cost me was a trip across town, and it actually saved me the dumping fee of getting rid of the stove.

In my opinion, this is an area with tremendous growth potential; when I first invested there in 2014 I'd say it was a solid D neighborhood, but it is moving up to C class at a tremendous rate. To get it to B class might take a while, but it is right down the street from LASA, which was recently named the top high school in Texas. There's tons of city money going to finally helping this underserved area, and the last two leftover foreclosures have been sold recently. I know all of Austin is appreciating, but I expect this one to beat the local market average (for residential multifamily) during the 2016-2021 period. I'm also actively reaching out to landlords in the area to try and encourage them to help bring the area up.

The answer to your literal question is yes, there are plenty of stupid investors out there; the answer to your implied question is no, your business model is not a sound one. Ignoring the ethical implications of predatory selling to unwary investors and misrepresenting your properties as solid investments, there are also protections in place to prevent people like you from doing this. They don't always work, but after 2008 they work much better than they used to.

One of the first barriers you're going to face is financing. You're selling a 7-unit, which means the buyer will need to get a commercial loan (I'm ignoring the possibility of a cash buyer, since I assume anyone with that much cash probably has some basic business sense), and the lender will look at your numbers and refuse to finance. That's assuming the investor doesn't have a realtor, and while residential realtors often have no idea, your average commercial realtor will see through your plan.

Rather than looking for ways to fleece people, why not look for legitimate value-add opportunities? This website is a testament to how powerful of an investment vehicle real estate can be, and there's no need to ruin people's lives or sell your soul to do it.

@Daniel Lehman, now that there's more information on the table, I think some people might alter their advice a bit. Since you only owe $8900, I don't know that selling it and buying a beater is the best move for you. I did the reverse math just like @Erik Johnson and came to similar conclusions. That means you have a Civic that you bought for 11-12k. If you were super lucky, you'd be able to sell it for only slightly less than your loan amount, meaning you'd still have to put your own cash in, and then spend more to buy a beater which would likely also have higher maintenance costs. You might come out 1-2k ahead, but that's not worth the loss. That said, 24% is insanely high, so you really need to shop around and find a lender that will help you. I promise you they won't be hard to find.

Now here's the good news; it doesn't matter! You have the VA loan. This means you don't need money to start investing. I also started with the VA, and it's a great vehicle (pardon the pun) to get started. Buy a small, 2-4 unit multifamily (preferably a quad, but whichever deal you can find is best) that needs repairs, and move from unit to unit fixing it up while you gradually raise rents. At the very minimum you'll save a ton on rent, and most likely you'll be able to live for free and make a profit. After you've completed the whole thing, if you have savings, keep the place and buy another, if you don't, sell it and use your VA to buy the next one.

As an update for everyone here, I went ahead and took @David Miller's advice and called my CPA for advice on this. He says that the simplest way to do this would be to make sure the partnership is well-documented, and then just have my partner pay out my funds in a 1099 once the sale completes. Does anyone else have experience with this? 

Thanks for the good advice, Duke. My biggest concern is the tax liability at the end of the year. Honestly the main reason we're even forming the LLC is because it's the only way I know of to evenly distribute the profits for IRS purposes. The liability protection is nice, but probably not necessary, IMO. Do you know what paperwork we'd need to file to make sure that the gains are split properly?

 I didn't want to put in my estimates, because I didn't want to influence what other people's analysis was. I see now that I probably should have added just a bit more information for people to make good estimates. The building is from 1983, tenants pay all their own utilities, the roof is about 7 years old, and the HVAC systems are in good working order. They could definitely use some updating, but they're in decent working order overall.

 Thanks Art,

Property taxes in Austin are high (no state income tax) and end up being closer to 1.5%. Taxes for 2016 will be $4760. I'm also certain that there will be OPEX and CAPEX costs, but I do expect them to be minimal. Vacancy in Austin is currently pretty much zero, as we're experiencing a huge shortage, so a bit of a rent raise shouldn't be a problem.

 Hi Matthew,

They don't sell many fourplexes in Austin these days, so comps are hard to come by. The best I can find is a similar one a few blocks down that sold earlier this year for 270, and one that sold in 2014 for 220. So I guess you could say I'm priced about right? At the end of the day, though, it doesn't really matter to me what comps are. I'm planning on holding this for at least ten years, so I just want to make sure that it cash flows well and that my money couldn't be invested better elsewhere.

 Thanks for the answers David. Let me ask a few follow-ups:

1. My understanding is that a quitclaim to LLC is quite common, and as long as there are no disruptions the bank has no incentive to call the loan. We could cover the whole thing if we have to, it would just be expensive for us to do so. How high of a risk do you think it is? Is there an alternate way that's better?

2. Everything is split 50-50, including the downpayment and monthly payments.

3. I'm planning on repurposing an LLC agreement that a software company I partially own uses as an operating agreement here which addresses those major issues. Are there any RE specific ones I should watch out for?

4. That part I have no idea about. Any advice? I'm not shy about my money, so I'll happily let him know any info he needs.

Thanks again.