All Forum Posts by: Jered Sturm

I started my investing career in single family buy and holds March 2012. We bought up as much as we could figure out how to. Over the past 4 years we were able to build our portfolio to 24 units. As the market continued to recover we shifted our strategy in April of 2015 to fix and flip.

Fix and Flip fit our company very well. With a background in contracting, I have a full understanding of the process of taking a bad house and making it desirable. Couple that with our REI knowledge, a real estate license, and a strong work ethic, we were able to come out 1 year later with 16 flips under our belt with close to 3 million dollars in sales.

As we wrap up our last flip this week. We look forward to next week when we will be closing on a 42-unit apartment. I enjoyed each flip, but man was it hard work! The profits were good, and allow us the ability to purchase this 42 unit building next week. Instead of buying a fancy car or big house we are pushing much of those profits back into this new apartment building.

If it weren’t for the flips we would not have the ability to buy this multimillion-dollar apartment building with out raising money from private investors. Now because of the success we had in flips we are able to put our own money up to purchase the 42 unit, prove our ability in the multifamily space with our own money. Which will lay the groundwork to later raise money to do even larger deals.

The past 4 years has been a snowball effect. I can’t wait to see what the next 4 bring!

This is why I am excited to be waving goodbye to flips and hello to apartments. 

@Jean Zambrano 

Welcome to the site! Just from your brief post I would say you have some fantastic traits to be a property manager. A bilingual driven person who is an expert at customer service... Sounds like the type of resident manager I would love to hire. 

Good luck in your new venture! 

I will be moving down to the Marietta area this summer. Maybe we will cross paths at some point. 

@John Coberly Good for you on figuring this out at 22. That in its self is so powerful. 

I think your mindset is in the right place. One heads up I would give after reading your post is the $15,000 NOI you mentioned. That is before your debt service (mortgage) is paid. Make sure you factor that expense in when figuring cashflow.

I could commend you for a long time for starting young, but instead check out my BP podcast episode "building a real estate empire at a young age" Show 124. I think you will like it after reading your post. 

@Dan Schwartz I could only cringe reading your post because I knew you were correct, and I had made a mistake. Riding in a car on a road trip, while doing math only my I phone to post on BP led me to missing obvious factors. I am embarrassed of my error since I do pride my self on knowing my numbers. However my intension of posting was to help others so I am glad you corrected me. Thank you. 

@Jay Hinrichs Your strategy and business sounds awesome. Congrats to you on all your success. I am very intrigued by your using leverage in your HML business.

Patrick Desjardins Thanks for the response and the good insight. I agree there are assumptions in my example, as there are in all investments including HML. Everyone has their own investment taste and strategy of choice. My goal of posting is to show an alternative. 1) I'm not a fan of retirement accounts of any kind. My thought is why jump through all the hoops and loss of control just to shelter your income from the tax man when you can simple change your tax strategy to achieve the same result with out handing over full freedom of when and how you want to use your money. But again everyone has different paths. 2) I completely agree that any strategy does not and should not be mutually exclusive. I use several myself. I don't really see HML and investing in real estate as Apple and oranges. I see both as a way to make money and build wealth. So in that regard they can be compared. I think a good blend between the two would be investing in an apartment deal syndication. This would allow the passivity that HML allows and the benefits of leverage and taxes that ownership of real estate.

@John Thedford  I respectfully disagree. Below I will explain 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 money lending.

Here is an example of the two investment channels:

Hardmoney lending:

$500k lent out for 1 year at 12% interest w/ 4 points will give you a gain of $80k or a pre tax COC of 16%. Lets assume you are in a 35% tax bracket. You will cut a check to the IRS for $28k, leaving you with $52k or a after tax cash on cash of 10.4%

Apartment building investment:

$500k down payment on a $2.5MM building. At an 8% capitalization rate (very achievable) you are left with $200k net operating income. lets assume when you borrowed the $2MM from the bank they lent it to you at 4% interest over a 25 year term. This means your mortgage payment is $127k (rounded up) leaving you with $73k in cash flow or a pre tax cash on cash return of 14.6%. This appears it does not beat your total pre tax return of 16% from the HML above BUT we haven't even started on all the other benefits of investing in real estate.

So you cash flowed $73k do you pay tax on $73k?? NO! another beauty of real estate and leverage is the depreciation tax benefit. Even though you only put 20% of the $2.5MM in to the property you get ALL of the depreciation. Apartment buildings are depreciated over 27.5 years which means you get to depreciate $2.5MM/27.5=$91,909. What does this mean? It means you don't pay any tax on that $73k you made on the building. You actually have a paper loss of $17,909. This loss can off set other income. Again assuming a 35% tax bracket the paper loss of $17,909 would result in an additional $6,268 in tax savings. This means your after tax return is 15.85%. A 5.2% increase on after tax return when compared to hard money lending 

Thats all great and will make you a lot of money, but Like you said no tenants, no phone calls, no toilets. That piece of mind in its self is worth not receiving the  additional 5.2% return owning real estate provides right? Wrong. 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 2MM 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 $1.4MM on the building IF the property never appreciated one cent and it was still worth 2.5MM in 10 years you would have $1.1MM 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 $52k reduction in principle or if the value stays the same that would be seen as a $52K increase in equity. If we add that $52k into the cashflow and tax benefits we are left with a all inclusive after tax return of 26.3%. How much tax do you pay on that??? NONE.

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're thinking this sounds great but those are just made up numbers and assumptions. These numbers are real in my own investing. I close on a 42 unit 8 cap apartment in 2 weeks. The loan is what I stated above and the price tag is very similar. On top of all the benefits I listed I will also be able to add $600k in value over a two year period even further boosting returns.

I hope this helps!

I obviously enjoy talking about this stuff. Feel free to reach out to me whenever and we can talk more.

Disclaimer: I am not an attorney or CPA. This is just examples and my own experiences. 

@THU NGUYEN Awesome, Happy to help. Real estate is a very useful tool when used right to grow wealth. Everyone has their own strategy, and risk tolerance, but from my own experience the returns I listed above are very achievable with minimal risk. Always buy right and it makes the life of the investment a great journey. 

@Miguel Dormany

@Miguel Dormany Thanks! Glad I could help. Yeah, returns are only mediocre when looking at real estate as an investment with out the power of leverage and taxes. Our government has incentivized real estate investment through the tax code more than any other form of investing and using/understanding that is key.

I'm not sure if Im understanding your question correctly, but Ill take a crack at it. Let me know if Im not answering what you asked.     If I understand, you bought three properties cash, you want to do a cash out refinance on those properties to pull the equity out to buy more property. This has been a great strategy I have used many times. 

Typically your COC is much lower in a free and clear property. This is because you have more cash into the deal. for example if you buy a $100k house cash and you have $10k cashflow on that property you have a 10% COC return ($10k/$100k). If you buy that same house with a $20k down payment and a $80k mortgage it is likely your cashflow will drop because you have to pay a mortgage. If the mortgage payment is $500 a month thats $6k a year that eats into your cashflow. So your cashflow is only $4k. BUT your COC would be 20% ($4k/$20k). So you doubled your COC with leverage. 

Any income your properties produce will be subject to tax. Even if the properties are free and clear, or leveraged. In the example above the property paid for in cash will have $10k of income and the leveraged property has $4k of income. Regardless if you have debt on the property you as the owner get to depreciate the whole $100k purchase price. Residential property is depreciated over 27.5 years. This means on a $100k  property you have depreciation of $3,636. That $3,636 will reduce the taxable income the property generated. this means on the free and clear property you have to pay tax on $6,364 where the leveraged property you only pay tax on $364

2) Wrapping 2 or more properties into one loan is commonly know as a blanket loan. If you search that term on BP you will find a bunch on that. My opinion is that it depends on each specific situation if that would be a good fit. it can change by portfolio, by borrower, and lender. Whats most important is understand pros and cons of a blanket loan before agreeing to one. 

I hope I answered your question!

@Nicole Jones We have used Buildium since we had a small portfolio just a few units and have stuck with it as it we continue to scale. We found it very useful on both levels. 

I would have to respectfully disagree with @Kami S.

Hardmoney lending:

$34k lent out for 1 year at 12% interest will give you a gain of $4,080k. Lets assume you are in a 35% tax bracket. You will cut a check to the IRS for $1,428k, leaving you with $2,652k or a after tax cash on cash of 7.8%

Rental property investment:

$34k down payment on a $150k building. At an 6% capitalization rate (very achievable) you are left with $9k net operating income. lets assume when you borrowed the $120k from the bank they lent it to you at 3.5% interest over a 30 year term. This means your monthly mortgage payment is $539(given by you) leaving you with $2,532 in annual cash flow or a pre tax cash on cash return of 7.4%. This does not beat your 12% from above but we haven't even started on all the other benefits of investing in real estate.

So you cash flowed $2,532k do you pay tax on $2,532k?? NO! another beauty of real estate and leverage is the depreciation tax benefit. Even though you only put 20% of the $150k in to the property you get ALL of the depreciation. residential real estate is depreciated over 27.5 years which means you get to depreciate $150k/27.5=$5,454. What does this mean? It means you don't pay any tax on that $2,532k you made on the building. You actually have a paper loss of $2,922. This loss can off set other income. Again assuming a 35% tax bracket the paper loss of $2,922 would result in an additional $1,022 in tax savings. This means your after tax return is 10.4% substantially more than after tax return from hard money lending.

Thats all great and will make you a lot of money, but where wealth is built is in the amortization of the debt you put on the property. The $120k in debt you put on the building will have a tenant paying down your mortgage month after month. In our example after 10 years you will only owe $92,644 on the building IF the property never appreciated one cent and it was still worth $150k in 10 years you would have $57,356 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 $2,499k reduction in principle or if the value stays the same that would be seen as a $2,499K increase in equity. If we add that $2,499k into the cashflow and tax benefits we are left with a all inclusive after tax return of 17.8%. How much tax do you pay on that??? NONE.

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.

I obviously enjoy talking about this stuff. Feel free to reach out to me whenever and we can talk more.

The most important thing to note from this post is the fact that some the information you are using to make your decision is protected under fair housing laws. If you reject a tenant based on any of the protected categories you could face a discrimination law suit. 

The federal Fair Housing Act of 1968 and the federal Fair Housing Act Amendments Act of 1988 prohibit discrimination on the basis of the following criteria (called “protected categories”): race or color; religion; national origin; familial status or age—includes families with children under the age of 18 and pregnant women; disability or handicap, or sex.


For example you mention tenant A's age and the fact that they have a young child. By law your tenant selection process should not be effected by these things. 

Also It is my understanding that a minor (tenant B's 17 year old girl friend) can not be legally bound by a contract in your case a lease so you would most likely not be able to include her on a lease. Check your laws. 

You mention a credit score for A but not for B. In our screening we heavily weight credit score in the choice. 

To prevent from any chance of discrimination accusations, and systematize our screening process we have minimum requirements such as:

Minimum Requirements:

•Monthly gross income at least 3.5 times the monthly rent 

•NO convicted felonies 

•NO sex offenders

•Minimum credit score of 600 (check yours for free at creditkarma.com) 

•NO previous evictions

When we get several applicants that meet the minimum requirements and cant decide because its too close we will use the equation below. The tenant with the highest score gets accepted. Its a math equation on non protected characteristics that we find important in applicants. Math cant discriminate.

Attached is a visual of the equation I mentioned (click on it to enlarge). We obviously have a spreadsheet of where you simply plug this info in and out pops a score. This is just an easy way to show you here. 

Good luck with your selection.