All Forum Posts by: Jered Sturm

@Kevin Greene Awesome that you’re putting your money to use, And BP is great place to educate yourself on how to do just that. Although private lending is a great way to invest I will offer an alternative idea to you and all other readers on this thread.

I am a big proponent of having ownership of real estate as an investment. The following example I have used before is exactly why.

When it comes to real estate investment the two most powerful things are debt (leverage) and taxes. You receive neither of those benefits when doing hard/private money lending.

Here is an example of two investment channels you mentioned:

Hard money/private lending:

$100k lent out for 1 year at 12% interest w/ 2 points will give you a gain of $14k or a pre tax COC of 14%. Lets assume you are in a 35% tax bracket. You will cut a check to the IRS for $4,900, leaving you with $9,100 or a after tax cash on cash of 9.1%

Apartment building investment:

$100k down payment on a $500k building. At an 8% capitalization rate (very achievable) you are left with $40k net operating income. lets assume when you borrowed the $400k from the bank they lent it to you at 4% interest over a 25 year term. This means your year one mortgage payment is $25,332 ($15,827 interest, $9,505 Principle) leaving you with $14,668 in cash flow or a pre tax cash on cash return of 14.6%. This beats your total pre tax return of 9.1% from the Lending example above BUT we haven't even started on all the other benefits of investing in real estate.

So you cash flowed $14,668 do you pay tax on $14,668?? NO! Another beauty of real estate and leverage is the depreciation tax benefit. Even though you only put 20% of the $500k in to the property you get ALL of the depreciation. Apartment buildings/houses are depreciated over 27.5 years, which means you get to depreciate the building value. The buildings value does not equal the property value because the building sits on land and that land also has value. The IRS does not allow you to depreciate the land. A typical percentage of a property value to allocate to land value is 20%, or in this example it would be $100k. This leaves you with 400k of building value to be depreciated $400k/27.5=$14,545. What does this mean? It means you barely pay any tax on that $14,668 cash flow you made on the building. You actually only have a taxable gain of $9,628 ($14,668 + $9,505 - $14,545) we add back the principle amount of your mortgage payment because it is not deductible and subtract out the deprecation we listed above. Again assuming a 35% tax bracket the gain of $9,628 would result in cutting a check for $3,370 to the IRS. This means your after tax return is 11.3%. A 2.2% increase on after tax return when compared to hard money lending

That’s all great and will make you a lot of money, butHMLhas no tenants, no phone calls, no toilets. That piece of mind in its self is worth not receiving the additional 2.2% return owning real estate provides right? I don’t think so because there is one more major piece to this puzzle.

Another huge difference between HML and owning investment real estate is the power of debt and with debt comes amortization. Wealth is built in the amortization of the debt you put on the property. Back to our example the $400k in debt you put on the building will have an army of tenants paying down your mortgage month after month. In our example after 10 years you will only owe $285K on the building IF the property never appreciated one cent and it was still worth $500k in 10 years you would have $215K in equity. You could then sell it or refinance it (again tax free).

Now lets wrap the amortization into our example. Using the loan terms I mentioned the first years of the loan will result in a $9,505 reduction in principle or if the value stays the same that would be seen as a $9,505 increase in equity. If we add that $9,505 to the cash flow and tax benefits we are left with an all inclusive after tax return of 20.8%.

This is just the basics. You can accelerate depreciation benefits through cost segregation, Structure loans for quicker amortization depending on your goals and many other tricks.

If you have no desire to be an active owner of real estate you can receive all of these same benefits from investing in syndications where an experienced investors raise capital from passive investors and shares in the equity/profits of the property. This leaves the heavy lifting to the experienced investor willing to put in the legwork and the passive investor reaps all the same benefits since they are an equity owner. I know there is loads of information on syndications on BP, also If you cant tell I really enjoy this stuff so feel free to reach out if you ever have questions!

Wishing you the best what ever strategy you choose!

We use a good photographer on our flips and plan to use for our apartment building marketing. He has a flat rate of $99. Always does a good job.  

Jim Elmore photography.

If you cant find him online shoot me a message and Ill send you his contact.

Welcome @Oliver Pereira. Cincinnati has been a good market for us to start and grow our REI business in. We recently closed a 42 unit in Cincinnati that was a great buy for us. Best of luck on your continued journey! Apartment investors are few and far between on Bigger pockets, Let me know if I can ever be of help!

@Ken Abdullah Happy to help if I can. Feel free to reach out! 

@David Sims Thanks for the response. I am traveling today so I have plenty of time to respond but unfortunately have to do it from my phone, so forgive me on structure or typos.

First it's great to hear you are out analyzing properties. That is the best way to get comfortable.

You are always welcome to reach out to me directly on here and we can set up a time to chat on the phone/skype. Nonetheless I'd like to clarify the math and dig in a little more to help all other readers of this forum.

A large variation I found between my math and yours is the calculation of gross rents, and NOI.

For clarity: NOI (net operating income)= gross income - operating expenses. For this industry NOI does not factor in debt service.

I think the most important disconnect between our math was gross income and how it plays into valuation. So let me explain how I figured my original message to hopefully clarify:

If the property was purchased for $2.5M at a capitalization rate of 8% then the property must produce a $200k NOI because $200k / .08 = $2.5M. In my experience a Apartment complexes operating expenses will be roughly 50% of the gross income. If we apply that 50% to our example that means gross income for our example property is $400k.

I believe you may have been confusing the gross income to be $200k and then subtracting out operating expenses where really the $200k is the NOI which already has the operating expenses subtracted out.

Of course our 50% of gross income as operating expenses is an average. Depending on the property that could be 40% it could be 60%. For example our recent apartment purchase was bought for $2.15M with gross income at $360k with an NOI of $178k. Which means operating expenses were 50.5% of gross rents.

I believe you may have misunderstood the $200k to be gross income.

Two other things I want to dig into are depreciation and deducting principle expense of a mortgage payment. In my example above I intentionally over simplified to make it easier to understand, but I feel I should clarify now. The depreciation expense is not for 100% of the purchase price because land is not depreciable. After consulting your tax preparer to help determine the value of the land your building sits on you will then depreciate that amount. Industry standard is 80% building 20% land.

In my example above for simplicity I also reduced the taxable income by the full mortgage payment. Where in reality it will reduce only by the interest portion of the payment because the principle portion is not deductible.

I hope these last two points didn't jumble the example. I left them out to simply and get the key points across. RE is an awesome investment that has so many pluses. Like I said in my first post this is just the basics you can get far more creative to boost returns.

I hope this has helped clarify some things for you. Because our recent purchase is so similar to our example here. I would be happy to share over the phone or private message the full details and strategies involved in our recent purchase of a 42 unit building.

We were fortunate enough to purchase all of our properties up until now with our own capital. However in the next 6 months we plan to begin syndicating deals to enter into larger complexes in the SW Ohio and NW Georgia markets. I'd be happy to talk to you more about that opportunity on the phone if you do decide syndications are a route you want to go. 

One final note to my very long response. You mentioned underwriting to an IRR I think it's great to take in the time value of money when analyzing. One thing to remember to factor In your analysis of your IRR is your exit (sale) or the refinance. These major actions will greatly play into the IRR calculations.

If you would like to discuss this over the phone or Skype. Please feel free to reach out to me via personal message so we can coordinate times. 

Best of luck on your next ventures!

Jered

@Josh Goodwin Welcome to the site. Trading stock to blocks, I like that.  BP is a great place to learn/network. I was born, raised and started our investment company in Cincinnati where it continues to grow and operate. Its a great market once you learn the subtle nuances of the area. 

Your work back ground will be a huge asset as you progress in real estate.

What type of property are you looking for? Single family? Multi family 2-4 units? Apartment buildings 5+? Our portfolio consists of all three but I now see that apartments are the best fit for us and easiest over all. 

Feel free to reach out If I can ever be of help. 

@Ben Leybovich Thank you for the response. You must have never listened to my BP podcast episode, Im dyslexic so it took me a good 5+ times of reading your post to make it through this cipher of REI jargon haha. I got your points just took me a few passes. Correct me if I'm wrong but I took your post to mean, tracking all major things that incorporate, or effect NOI is wise because ultimately a large component on your IRR strategy will be based off the exit and or refinance, which obviously is the factor that you as an investor can control when considering the capitalized valuation of the investment.

If I understood you correctly that seems to also be what @Brian Burke goes on to explain in his post with a few extra suggestions to help boost investor relations. @Brian Burke Thank you for taking the time to type out that response. It will be very easy for us to implement something similar or the same as what you are doing because our partner is a CPA that keeps great book in good software. We have all that data, just need to take your suggestions to get it into visual format so that is easier to understand for a simple guy like myself. 

How about metrics you track to stay on top of your property management? I realize ultimately that performance will show on the income statement, but do you or your PM track anything on a weekly basis in order to stay in front of the issues before the come out a month later in the P&L?  Currently we track: 

• Vacancy rate 
• # of tenants paying before 1st, 1-5th, 6th-10th, 11th-on
• # of Days a turnover takes
• Average total length of occupancy.  (how long are they staying?)
• Maintenance requests and type of request
• Length of time to complete maintenance requests.

Suggestions on other metrics to track? criticism of what we currently track? 

Thanks for your generosity to share your thoughts. 

@Chris Patzelt I recently moved away from Cincy where I was born and raised. Our company built a sizable portfolio in Cincinnati including a 42 unit building. My partner still is heading up cincinnati while we also now are pursuing NW Georgia markets. 

We don't own in Clifton but I know it well. I think it would be a very difficult location to own your first apartment. The buildings are very old and difficult to maintain, tenant turn over is almost 100% annually due to the school year. I would avoid clifton for your first one. If you want to talk other areas in Cincinnati, feel free to reach out to me directly. 

Best of luck! 

Our company focuses is to buy and hold apartment complexes. 

We currently track a few KPIs (key performance indicators) to keep a pulse on how the portfolio is doing. However as we prepare to grow and begin syndicating larger complexes I feel we can do a better job tracking more useful data.

I would love to get my creative thinking going by hearing from others. What metrics, and how you are tracking them within your business? These could be day to day accountability numbers, or a 10,000 foot view metrics.  

@Brian Burke @Joe Fairless @Ben Leybovich @Brandon Turner @Azeez K. @Mike O'Connor we all have a similar focus, and many of you in positions I am striving to achieve. What metrics if any do you focus on within your business?