All Forum Posts by: Mack Benson

If it is just you and your brother-in-law you should be able to purchase this property as a Joint Venture (JV). I would still get with an attorney to have a partnership agreement drawn up that gets very granular. A couple examples of the specifics would be who has what responsibility and what will be done if the partnership goes south. I am currently working with a group of investors who are in a dispute and part of the partnership wants to sell but the other side does not. In their partnership agreement they did not cover what would happen in this scenario so they are having to negotiate the terms of the partnership dissolution while emotions are high.

Holding the property in an LLC versus in the name of the JV is separate from what I am qualified to speak to for your situation so I would default to your attorney.

Education x Action = Results

The first thing I recommend is to take stock of your strengths and weaknesses. Is there anything you can do that utilizes your strengths? That is usually a shorter bridge than working on your weaknesses. In this industry you can likely find somebody who has a strength in your weakness and vice versa. 

The next thing I recommend is to set some goals. At 20 I am sure your goals differ than me at 38, married,  2 kids and #3 on the way. In your goals set a timetable one how you plan to get there, lay it out and take it step by step.

Other big things are read and network. You will get to where you want to go fastest by having the knowledge and having the network.

Good luck on your journey!

For me Cap rate plays a back seat to cash on cash returns and I typically back in to the cap rate from the NOI and purchase price. Recall the formula

Cap Rate = Net Operating Income / Price

Or

Price = Net Operating Income / Cap Rate

During my underwriting I have a minimum acceptable cash on cash and I change my offer price in order to hit my goal. The NOI won't really change so when I have my offer price and NOI I am left with the Cap Rate.

A lot of people get hung up on the cap rate but in my opinion as long as you can hit your return goals I don't think cap rate is the end all be all some make it out to be.

If you plan on syndicating then yes, the IRR is also a very important figure because it is a measure of the returns your investors may receive over the life of the investment. Imagine being a potential investor and someone coming to you with a capitalization rate of 7% or someone else coming to you with a return goal of 15% per year. People don't invest in what they don't understand so the cap rate could introduce a confusing metric.

This all depends on your market. If you haven't been underwriting potential deals for long you may want to reach out to brokers, bankers or property managers to get the average expenses across your market. For vacancy 15% would be very high in my market, most properties are running less than 5% physical vacancy, usually less than 2% and a lot close to 0%. The banks in my area will use at least a 5% vacancy rate in their underwriting so that's what I have been using. With Covid I'm bumping my loss to lease and bad debt so all combined I am underwriting at a 10% economic vacancy. Again that is specific to my market and yours will likely be different so research is likely needed.

Disclosure: I am in no way an expert nor am I a CPA. 

From https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips "Under the Tax Cuts and Jobs Act, Section 1031... An exchange of real property held primarily for sale still does not qualify as a like-kind exchange." This is where flips would fall.

I think the IRS is pretty vague about the amount of time so it would probably be best to involve a 1031 expert.

Coming from a mindset of "if it don't cash flow, let the grass grow," I'm not a big fan of a $0 monthly return and counting on future appreciation. That is especially true today when the future is very uncertain. I'm not saying this is a horrible deal but it is a risky play and for a first deal it could cost you in the end. What happens if things go down the crapper in the next year and your property loses 10% of it's value, now rather than starting at $725k you are starting at $625.5k. What if, because of the pandemic, rent goes down 5%, that's a conservative approach some of us are taking in the multifamily world? Now rather than taking in $3,500 you are only taking in $3,325. I know some operators are underwriting to a 5% rent decrease and 10% economic vacancy over the next 12-24 months.

Now, in a different hypothetical, how much is left on your mortgage, do you currently have any equity, and what would it look like to sell the condo and use the proceeds to purchase a rental that has a decent positive cash flow? This may require you going out of state because two of your numbers look to be killing the deal, the taxes and HOA.

I think it gets a bit fuzzy because I do not believe you can 1031 a flip if you didn't have the intention of holding it as an investment property. For this there are questions of the length of time you held the property and other considerations best left to the professionals.

Also, I have to assume your CPA is advising you that you can't do a 1031 exchange and use the proceeds to payoff your HELOC, this is and isn't true. You should be able to do a partial 1031 exchange and reserve a percentage of the proceeds of the sale to pay off your HELOC but the amount will not be protected by the 1031 and will be subject to normal taxes.

Regardless I think you should seek the assistance of a 1031 professional and not a run of the mill CPA.

Welcome to BP @Marissa Turrubiates and good luck on your journey!

If I read right you are looking at turning a 3 unit property into a 4 unit property? If so then this will still qualify as a residential sale and will be valued based on comparable properties.

On the other hand if you are looking at the cost benefit of adding it for a long term hold then things get a bit trickier. You'll want to take your cost of the conversion, including the permitting and calculate that versus how much you will receive in added revenue. There's also considerations to be made if you take our a mortgage to help complete the conversion. 

Here's a simple way to look at it assuming no mortgage. Assume the conversion costs you $50k our of pocket and the rent is $750 per month, that is $9k per year, we'll also assume 50% of that will go to expenses so you are left with $4,500 per year of cashflow. To recoup your initial investment of $50k it will take about 11.1 years. 

If you use a mortgage at 25% down you have $12,500 capital into the conversion rather than $50k but you also have about a $200 mortgage or about $2,400 per year which decreases your cashflow to $2,100 per year. To cover the initial investment of $12,500 it will now only take you about 6 years.

In the end, know your goals, run the numbers and trust the numbers.

We're probably going to need to know a bit more to be able to give proper feedback, have you run the numbers through any of the BP calculators? The Rental Property calculator will probably hit the mark for what you need.

I'll try and run with what we know. On a purchase of 215k and 25% down I'm guessing your mortgage P&I will be just under $775 per month. I think you should be calculating your property taxes and insurance in your expenses above the line so they your mortgage payment will not include them and your NOI will already have them included. With an NOI of 24k, $9300 of that will go to your mortgage you will be cash flowing just under 200/door/month.

9300/4 units = 2325/unit/year 

2325/12 months = 193.75/unit/month

I can't say if this is a good deal or not because I don't know what your expectations are or your market. And again, these are very rough numbers and I highly recommend using the calculators yourself to get closer to your actuals.