All Forum Posts by: Michael Klinger

@Dave Foster, Solid answer. And it makes a lot of sense.

Okay, so a couple of hypotheticals:

1.) Let's say we find a project "pay cash" and do a rehab funding it with our credit line, then turn around and sell it for a profit, pay down the credit line and square up on that. Then we pay the taxes on that gain. As you pointed out the prior 1031 is complete and not affected or involved. Right?

2.) Let's say we get started on something that becomes a buy and hold. Then refi out of the credit line. Then some years later sell that and want to do a 1031 on that one (assuming such things still exist). Then that that transaction has its own independent 1031 exchange without regard to how we got there. Correct?

We did a 1031 Exchange a little under a year ago. Out of an office building --  Into 3 seprate multi-family properties. We are now talking to the mortgage lender (the same lender for the three replacement properties) about securing a significant line of credit using the apartments as collateral so we can do some other short terms deals with "cash purchases" then refi, etc.

Are there any considerations or gotchas/ endangerment with this idea the regarding the original 1031 exchange? The credit line would be in the name of the parent LLC that was the entity the exchange was done in. The properties are held in their three subsidiary LLCs -- which are disregarded entities.

@Jake Walroth

You neglected to mention that the TV show WKRP, was portrayed here/there.

Thanks for the input. It's interesting getting all of the agendas to align. I think we (I) expected that my Los Angeles (non real estate ) business would have a little more life in it, than how it has played out in the last year. So the reliance on cash flow from the apartment properties for living income has become more important than I expected. And the apartments were a little slower to perform properly than anticipated, so we are still feeling that burn a little bit.

Otherwise I can see how much quicker I could build the apartment business, if I could put the returns back into it. But... not possible right now.

And we've only owned these properties for 8 or 9 months. I have started a preliminary discussion with the bank that holds the mortgages about getting access to equity (we have a conservative LTV), and they are cautiously interested, running the numbers and thinking it over. Even though it's probably a hair early in arc of all of this.

I went into what we acquired with buy and hold intentions. I really don't see selling them this soon to trade up. We didn't choose mortgage types for a short term play. I plan to keep them and find other ways to increase income. I also don't really want to take over the world. Number of doors doesn't impress me when I look in the mirror, except vaguely we might need to get up to around 100 total of similar caliber to get to the income level that I would like to see to be near 100 percent living off them.

I've been reflecting back as it is about a year now, since I began shopping for my 1031 exchange. Back then, I pivoted out of an owner occupied Los Angeles office building (that I had owned for 15 years), into 3 multi-family properties in the same city in the midwest for a total of 64 units on a more conservative leveraging scenario than what was likely possible. It’s been a journey and now I find myself saying in an existential voice “now what?”

With the 64 units (spread between 2 local management companies), It took 5 or 6 months to get everything smoothed out and putting off reliable cash flow. With that amount finally hitting original projections for the last few months, I have about 60 to 70 percent of my household overhead covered with apartment cash flow as long as it stays relatively smooth and consistent. During the process of selling and buying and then stabilizing, my household income took a hit, because none of this was putting off much initially and that issue piled up a bit. Which is something I will have to dig out of a bit.

Because of my path from office building to a pile of apartments, I have never flipped a house, never wholesale-d, never bought a duplex to then trade up to a 4-plex, etc.

I still have a business in Los Angeles, that I manage and support from the East Coast where I now primarily live. However that business has been on a long decline due to obsolescence of our core services. What’s left of that operation probably has only a few weeks or months left in it. While this business was my main bread and butter for many years, it no long cash flows enough to move my meter. My wife is working, so with those pieces and apartment cash flow, we are close but not quite at the 100 percent of household needs.

In terms of any tweaking the apartments’ performance, we are close to the end of much any tinkering, without pouring money into them for major upgrades. The heavy lifting is done. Evictions, turnover, rents raised to new high points on new tenants, rents raised on current tenants wherever possible, some nagging issues cleaned up, operational costs scrutinized. The signal of “New Sheriff in Town” has been relatively effective. We are at near 100 percent occupancy all around. It just took longer than I hoped to do all this tweaking. My two management companies are not awesome, but adequate. It’s mostly to do with their communication with me that stinks. They otherwise get things done in their own way. It’s just really far away from my way, so it annoys me.

In other non real estate arenas, I have mutual funds both in and out of retirement funds and I don’t see anything to tweak there, I am satisfied with the performance of all of that.

What I am finding is an itch to make something happen to turbo boost my household cash flow issue. Unlike a service business, with the apartments, I can’t have a sale or take on extra jobs or stay open later. Instead I find myself willing the months to move faster, so we can get to the first of the month, so we can get into a new rent collection cycle and get a hold of the profits from that. And that doesn’t seem entirely healthy.

Because of the super lean early months with the apartments and distractions from the slowly dying business, I’m feeling a bit land-locked financially. Talking to the mortgage lender on a credit line on then apartments, but it could very well be too early for them on that.

Even so, then what? Flip a house? Or on this level, does that just seem like a weird hobby? What’s (for the lack a better term) an “experience appropriate” real estate move for a guy with 64 units and years of small business experience who needs a little more cash flow?

I'm good with any spelling as long as the check clears.

@Conor Freeman Thanks. Love the nerdy detail of your reply. Is there some place I can go to check in on the stats of this at any given time? Mine is not an immediate loan need. More of a survey to keep in the loop.

@Hadar Orkibi and 

@Joel Owens Thanks, also good information.

What are some real world rates/terms/fees you've been gettting for commercial multi-family in recent months?

@Mackaylee Beach - I am out of state and mostly in Cincinnati with 64 units, but when i was picking a market, Kansas City was on my short list. Are you also in Kansas City? Or are you bypassing your own back yard for some reason?

@Kevin Moules. Nice thread you started here. Yes? 

I had to look up P.O.S.  so no, not part of my world at this point. I do consider property taxes on the high side in Cincy, but at the same time part of the of the relative business model that relates to the area a property is in. A cost that is ultimately reflected in appropriate rents. 

When I was deciding what markets to invest in I did reject a few cities, pretty much over the tax rates. In retrospect, I did put a lot of weight on tax rates, not so much because it was an iffy business model, more because it bugged me too much. Which might be a good example of trying not to be emotional about this stuff. 

However, in some cities it is very cloudy on what will happen to your near future taxes, when inevitable re-assessments happen. Since the tax assessment process varies so widely around the country or county or region (and in some places even from town to town that border each other). So I stayed away from a couple of markets that were like 3 percent of some tagged assessed value and then heading towards some vague unknown massive re-assessment due to a hefty new purchase price. Ohio has a procedure that can be planned for to some degree, but where it's heading in terms of $$ can be vague. There are purchasing strategies to control a little or some of this in some cases.

In California, I still own a house. As you probably know Kevin, due to prop 13 in the 70's, property tax is shortly after a sale re-assessed pretty much at the sales price and then typically is adjusted over the years at a slower pace than the market. Then for a new buyer a re-assessment based on sales price again. Which is pretty easy to comprehend and so possible to forecast. This is true for residential and commercial property, which I owned there for a long time as well. In my cases the tax rate in CA was maybe 2/3 of Cincinnati. So in CA, if you only strategy or consideration was property taxes, you would buy and hold forever. Because the market value would rise and you'd still have a lower property tax bill than any new owner of the same.

In Massachusetts where I also own property, it's done town-by-town. In this particular town of Massachusetts they re-assess upon sale, but the town's value tends to lag below market value. They actual tax rate is less than 1/2 here than Cincy (but that is because this town does well with summer tourism and the property owners catch a break that way). Other parts of Massachusetts are just as high or higher than Cincinnati.

In Cincy the system is convoluted as it is in many districts: The county deems a market value, and then takes 35 percent to mark the assessed value. Then apply a mill rate, reduced to an effective mill rate, which is multiplied to assessed value. Relative to my recent 3 purchase prices, this is roughly (roughly) 2 percent. A little more on one property, a little less on the other two. But this is a long term conversation, because current taxes are actually previous owner's taxes, not mine.

One other thing that has been a "surprising" cost is water and sewer. Like a lot of cities in that region water and sewer is expensive. here at my house in Mass, the last water bill came and 6 months of water and the whole bill was under $60. Which is absurdly cheap. It was also absurdly cheap all my years living full time in CA. I always knew that. Cincy water and sewer is REALLY expensive. Or at least that is my perception. And this may come as a surprise, but most of my tenants (all have water/sewer included) aren't particularly conservation minded. We recently did an eviction and it was reported to me that the tub was running when we took over the unit. Not 100 percent maliciously, but because the faucet wouldn't shut off and they never reported it as a maintenance need. Whether you care about water waste or not, I don't know how you live with that. One of my properties (that one) still has a water/sewer bill that rivals the mortgage and is the #2 single expense on that property. Again, aside from the idea of water being wasted as a source of irritation for me, the raw cost of it from a business point of view is no matter, as long as you can roll it into appropriate rent. I've heard rule of thumb of $20 per occupant, so 2 occupants in a unit $40. Mine is higher that, so either more occupants than an average of 2, or the rule of thumb is off. More like $55 to $65 per unit on average. One property in particular. And low flow toilets are only so helpful if people leave their kitchen sinks running . I recently spent some time around all my Cincy properties and the very first thing I ran into was one of the laundry sinks running. How long? 5 minutes or for all of last month?

There might be a future solve. Sub metering (if viable), but also have to consider what is expected/standard in an area when other apartments include water, and you don't. Such things are delicate.