All Forum Posts by: Luke Grogan

@Trevor Miller

I loved reading this thread - you’ve got a great opportunity and a good team behind you with your father and wife on board. Makes me a touch jealous of you! People say to be careful with family in business, but I could only wish my dad and wife were with me on my deals…

As to the tenant that needs a bathroom, lights and sign, that sounds easy to me. You’ve got a great deal under contract and off market. In my area, light industrial is very competitive and I would think you could handle those requests under about $6k…

I use Buildium for my tenants and as I work toward acquiring an industrial property, my plan is to continue. It has been flexible and relatively easy for me to use with 11 residential tenants.

QuickBooks also has a product, but not sure that either were designed for commercial tenants. This could be something to look into.

Curious about your decision to self manage and have a maintenance company vs manager and handle maintenance requests as they come up?

Thanks for the responses. It is incredibly difficult to find industrial space in Brevard County. My partner needs a location for his business if it is going to grow and it would be great to have ~4-5k feet. 

Basically, we want to house hack, but light industrial hack. 

The market is selling for $85-100/ft for industrial, but building what you want is ~18 months and some headaches and it costs ~$135/ft to build. 

This deal turned out to be class A warehouse space. Fully under AC, clean rooms for advanced manufacturing, excellent building in every sense of the word, from a tenant perspective. 

While I think the owner with sell for ~$75/foot, that makes it in the $2.1MM range and it has been vacant for 1 year. 

Amazon and the developer for their site location are renting out about 3k feet and taking the offices (really just helping themselves to a 10k foot wing, which is smart of them. 

I’d love to do the deal and start recruiting for a good tenant that needs class A space, while we take about 6k feet for our stuff. We don’t need it and don’t need AC, but it is niche space for the right tenant. We could also vacate at some point when we have better light industrial space, therefore moving on to the next hack…

At this point, it seems to niche for us and not the best first deal. Commercial/industrial can sit vacant for a while and this spot is unique to that (developing) area because everything else is class B and and geared toward true light industrial. 

Any thoughts on this niche and the house hack model for industrial? 

We are evaluating a purchase of ~30k square feet of warehouse space next to a new Amazon distribution center. Part of the space would be used by the owner/operator for his business (I am an investor in his business) and we would lease out the other space. 

In general, would there be any obvious pros/cons to purchasing industrial space next to an Amazon warehouse?

One concern is that the warehouse was built for a single tenant, who subsequently bought out their lease and it has sat vacant for over a year. COVID may have been part of the reason for the vacancy, but also there seems to be a shortage of space in the 5000-50,000 ft space, so it’s a little curious that it’s still vacant. 

We are doing a site visit today and wanted to hear what you think about investing near an Amazon facility. 

This is a good question and has me wondering also. I normally advise my tenants that I have insurance to cover the structure, but it is their responsibility to protect their belongings, which can include shutters/plywood over their windows and securing their yards so debris isn't a problem.

I keep trees cut back and do what I can, but I am not able to buy shutters/plywood and send out crews by the time we get notice of a hurricane. It would cost several thousand dollars each year and the time I did do it, the tenants didn't store the plywood appropriately after the storm. Being an out of town (out of country) landlord, it would be difficult, at best to expect me to handle the storm prep.

Does anyone know if there are requirements for landlords to board up houses or provide shutters?

@Brant Richardson

Yeah, it’s a little bit of wondering how to shape a portfolio. Properties that have gone up in value, but I can’t access the equity and do anything with it. My return against the phantom “equity” number is pretty weak, but I’m not sure if I should chase higher returns on a portfolio value basis or just keep looking at the dollars invested and realize it’s good there so sit tight and don’t complicate things.

I’m moving back to FL for a few years and have been debating moving the portfolio inland toward areas of Orlando. Even though the purchase prices will be higher, I could save on insurance and taxes. I don’t have to rush it and I think you laid out some good options to take it step by step. I’m generally against selling everything and sitting on the sidelines waiting for a big drop. I’d prefer to redeploy and just keep the leverage low and the cash reserves higher.

I saw a portfolio marketed in Montgomery, Alabama and was blown away by the insurance and taxes quoted. The cap rate would approach 9% and it would be nearly double the houses and on paper I could take roughly $90k in distributions using the 45% guideline I follow. Got me thinking more about this topic that I often wonder about.

I know of two very successful buy and hold players around Central Florida and I may just see if I can sit down with them to get a big picture view of long term buy and hold. I think six years is a longtime, but it’s really not in the big picture...

@Alan Grobmeier

I’ve never heard that term used. Interesting, but I’ll have to find out if my ordinary income was reduced by depreciation, and therefore any gains will be taxed as ordinary income and not more favorable capital gains...

When is bigger pockets going to form a lobby or pay a lobbyist to advocate a longer window to use 1031 exchanges?? @Brandon Turner

Wait, that will never happen because all real estate investors are so rich... ;)

@Alan Grobmeier

I tend to hope they will follow what I’m teaching and use it to generate a decent income and possibly leverage it to grow it again.

What do you mean by depreciation recapture? All the depreciation the portfolio has taken off my taxes is then returned in cash that I am taxed on? I’d need to check with my CPA, but I’m carrying a lot of carryover losses that I won’t be able to benefit from unless I sell or after the properties are fully depreciated. But I’m not sure I completely understand the whole tax picture...

@Brant Richardson

@Dave Foster

Good points and food for thought. In terms of capital gains taxes, I figure I’ll just bring my CPA in and go through the scenarios, but not sure how to maximize tax savings. Like you said, selling all of them and reinvesting within the time period would be difficult to say the least.

In terms of where I’d live, I don’t love the idea of FL forever and I’ve been living out of the country self managing for five years, so I have been able to make this system work. Sometimes it means paying more for work and then paying someone to make sure it’s done properly, but I’ve been able to manage and it definitely doesn’t cost 8-10% of the rent in addition to repair costs.

Selling the out of state property and combing the portfolio is a good start. It won’t allow me to go all in on something bigger, but will let me see if I’m ready to give a year to prepping the portfolio to sell. It’s definitely a good problem to have and a good reminder for me that whatever the path, it’s rarely a quick move and assure strategy. It almost always seems slow and steady is the way to do the long term game.

When is the best time to sell as a buy and hold investor? As I write that, it doesn’t sound like I am a buy and hold investor, but I’m definitely not a flipper and I’m in this for the cash flow.

I buy SFR, usually with cash, fix them a little, and hold them for cash flow. I started in 2013, so I'm only 6-ish years into this. The interesting element is that appreciation has been brisk and that raises some questions, like do I shift my portfolio to a lower price area and get more properties, do nothing and keep collecting cash, or sell a couple and redeploy into higher yield properties and/or lower tax/insurance areas.

A little about my portfolio:

* One home is out of state and was my primary residence. It has a 1st & 2nd loan - VA loan with an adjustable rate currently at 3.5% and a second at 5%. I have had this home 15 years and have roughly $110-120k in equity. Cash flow is $350/ after PITI.

* Five homes were purchased for $70k or less, 3 yrs later put a blanket mortgage on them for 40% of the value, which helped me recoup roughly 70% of the cumulative purchase price. Average rent for these homes is $1150. Average value is $142k as is. Maybe in the $165k range with a $10k facelift.

* Two homes bought for $110k each. One rents for $1200 the other for $1400. I've got an adjustable HELOC on each that allows me to get up to $200k out, so that usually works to my benefit. Value is probably $360-375k together.

* Two other homes in older areas bought for $70k and $80k and rent for $840 and $1000. Could bring up the rent on the $840 but was renting to a multi year tenant for $750 and raised to $840. I’d rather keep it rented since they are low maintenance and raise it 3-4% per year going forward.

So the question is what would you do? Sell everything and buy more of what my last two look like? Cheaper homes with good cash flow but will not appreciate as quickly because they’ve already bounced from the $40k ish range from a few years ago. If I sold everything (except the last two listed) and paid the mortgages, I’d net around $900k-950k depending on some factors. I’d assume $1.07M if I sold all of them. With this, I could move inland away from the coast where both taxes and insurance are climbing higher than other areas (but appreciation should also be better on the coast). But, assuming 3% appreciation, this adds roughly $41-50k in yr one and averages $58k/yr in appreciation over 10 years (assuming a consistent 3% appreciation, which they have appreciated much faster than that).

One interesting thing about appreciation as a buy and hold investor is that it doesn’t do much for me. It might be good for my kids and it will help when it comes time to refi, but I found commercial mortgages on single family homes are difficult and most banks would not do 8-10 individual loans. This leads me to think multifamily might be one of the better options, but I have no experience there and do not want to self-manage a sub-40 unit complex (I currently self manage). I also don’t expect 3% appreciation going forward if I were to buy at these prices, unless I take a much longer term view.

I generally take between $5-5500/month as disbursements and collect just under $11,500 in rent. Based on the total value of the portfolio, I'm taking around 3.5% as a return on the unleveraged total value and 16.5% after expenses on the leveraged value. $60k per year is about 9.5% return on original capital invested. So I am taking 43% of the monthly rent for myself and the remainder covers PITI, short term expenses and long term capex.

In honesty, I’ve semi retired off the $5k per month and my savings and I’m not dying to go hustle again, but I can. So this means if I did sell everything, I’d start eating into the cash until I pick up my income, which would take 2-3 months. Assuming that I did jump back in and get back to work within a few months, I could stop drawing on the cash, but I’d expect to take at least $45k and seek to reinvest the rest.

So, what do you think you would do in this market? Sell because most investors are not selling and wait until I can buy when most investors are not, or cannot buy? Sell off and use good financing to find something that produces an unleveraged return in the 5-6% range, of which I could bump to 10-11% by putting 50% +/- leverage in place, hopefully at sub 5.5% rates.

Or I can just sit tight and continue to collect rent and raise rents 3-4% per year. I have two that need to be raised around 20%, but I hesitate because it puts people out of the houses, costs money to get them rent ready, and then takes 2 months to get renters. But that is some low hanging fruit that I’ll need to address to get highest and best usage out of them.

A final thought would be to lease to own with an option deposit and sell them at full market or a touch higher and seek to help the tenants buy the houses in three years. The properties have three years left until I either refinance or sell, so that could line up with my financing.

Given the numbers and your take on the market, would you sell and immediately reinvest into lower tax/insurance areas, sell and go into MF, sell and wait until the next pullback, or just continue down the original buy and hold, raise rents every year, keep using moderate (sub 60%) leverage?

@Justin Petrides Generally no. Unless they go through typical approval process. Even then, I don’t advertise to friends and family, so unlikely they would see it or need it. I do only SFR and the second deal I did was renting it to an acquaintance that did some plumbing work for me. He said he and his wife and father in law with health problems had been renting for 8 years and the landlord was selling the place. Asked if I was selling or renting the place and we went through my terms. I failed before, so was very upfront that I don’t waive fees, exchange work for rent, and I prefer not to evict, but sometimes they happen. They’ve been great and have been in the home five years. 3-4% rent increases and I make sure their place is safe. If you do friends and family, lay it out upfront and consider using a property manager if you want to keep some distance. I let all my renters know that I have partners and I have to report to them or I lose my business. My partners are my banks that hold mortgages, my credit card companies that trust me to pay off balances, and my wife and kids that depend on me. They don’t need to know who my partners are, but they need to no it’s truly not personal, it’s business.