All Forum Posts by: Nick B.

You need to find out:
- how much similar houses are sold for in a move-in condition (ARV)?
- how much will it cost to finish the rehab?
- what equity do you expect to obtain if you finish the rehab?
- what will a house like this rent for?

Now, if price of the house + closing costs + rehab + equity gain < ARV AND this house will cash flow your desired amount if financed at 75-80% of the ARV, then you have a deal.

Cap rate means absolutely nothing for SFHs. They are valued based on comparable sales.

1. Define your criteria for a "great deal": e.g. 3/2/2 1500-1700 sqft, rents for $1500+, "all-in" cost $120K, 20% cash on cash, $20K equity capture, $20K out of pocket (all numbers are for illustration only)

2. Analyze listed homes to see if any of them fit into the criteria. (Most likely they won't.)

3. See if there is a way to negotiate the price down to where it makes sense for you. 

4. If you and the sellers are miles apart, change your criteria or look at a different market.

Cap rate is used for evaluating commercial properties (5+ units multifamily is commercial). The value is calculated as NOI divided by market cap rate.

Cap rate is irrelevant for SFHs as they are valued based on comparable sales. 

@Matt George, "mom & pop" and $50M don't usually belong to the same sentence :-) I know two or three people who have $50+ portfolios but they are in their 40ies and own not just the properties but also management companies that manage those properties and also engage in the day-to-day operations of the said companies. They don't have to sell but nevertheless they sell their smaller assets and trade them up (1031 tax deferred exchange) to larger ones. That resets the depreciation. Initially those lager assets don't cash flow much but the plan is always to raise the rents and get even more income than before.

I once spoke with a "mom & pop" owner of a 140+ units complex that was paid in full. I asked him why he would not sell and trade up to a larger asset and have tax deferred income. He replied that he gets plenty of income and not does not care if that income is taxable. I don't know if he is an exception or a rule.

@Matt George,

Cost segregation study and decision to use it are done during due diligence process before even buying a property. I am not sure what you mean by "come back to bite you". Once the project is sold all previously accumulated depreciation is recaptured and taxed at something like 20% (ask a CPA for exact rules). If you hold "forever", there is no recapture tax (heirs get a step-up basis) but that would not work with a syndication as those are not held forever.

On your second question, the deal must meet ROI requirements first and for most. Depreciation does not change that and does not even apply to all investors (e.g. those with IRAs and 401Ks don't get any benefits from it). It is usually used a sales pitch for otherwise mediocre deals.

Buying for depreciation makes sense if you (or your spouse) are a real estate professional (in the tax sense). Then you can write off excess depreciation against your regular income.

Also, excess depreciation can be used instead of 1031 for passive investors. If you have realized capital gains from one project and reinvest the proceeds into another that utilizes cost segregation and excess depreciation, you would likely shield you your gains from taxes if your share of depreciation is higher than the gain.

That said, I suspect that large operators are buying mostly for their own benefits: they get acquisition fee and asset management fee from the "day one" and if their investors end up holding the bag 5 years later, it's a ding on the operator's reputation but the fees have more than paid for that ding. 

Cash-on-cash is based on your initial investment. So, it's $6000/$3500 or 171%. 

Although, I highly doubt that you can buy an investment property with 3.5% down-payment and no closing costs. You can get into that position if you buy a fixer-upper with cash or hard money, rehab, and then refinance almost 100% of your initial cost. But that's probably not what you had in mind.

It's whatever works for you. There is no "rule". Also, don't look at the "per door" cash flow. Look at the overall cash-on-cash return as %% of your equity. That will allow you to compare different properties. 

Metrics can (and should) be applied to all market "units" (state, metro, suburb, zip). Think of it as of a view from a descending airplane. The resources are a plenty. city-data.com and datausa.io are commonly used.