All Forum Posts by: Oren K.

Michael,

It seem to me that you are asking two separate questions;

Firstly: How much should I get for 'sweat' equity? ... This has been debated back and forth on BP several times. Don't know that anyone changed their minds but I think the basic threads were; 'whatever the market will accept' on one side and on the other side 'proportional to money put in + "fair" compensation for time / services'. As well, there have been any number of syndication deals reviewed on BP that include a syndication 'cut' (e.g. 100% of the funds needed get less then 100% of the project with the syndication sponsor getting the balance). Many times, syndication deals also have ongoing fees for administration, asset management, project management, property management, etc.

Secondly: How do I structure a business relationship? .... This question has also been discussed multiple times also and I unfortunately I can only 'it depends'. In this case, as there are only 2 people involved, it is simplified but you still have to consider what I call the 4 basics: Estate, Tax Efficiency, Liability and Capital Gains. Depending on your and your partners particular circumstances, different arrangements are 'best' (as a side note, I have yet to see the 'perfect' answer, there are always tradeoffs). 

This is where a lawyer & accountant come in very useful. My perspective is that a business relationship have elements of trust, fear and greed. You generally don't demand the same degree of formality from long time friends then from first time partners. Also, DO get things in writing! Even with friends.

It doesn't have to be 100 pages but does have to spell out contributions, responsibilities and decision making. The paper work is there not for when things go well, but for when things go bad.

Good luck,

Oren

@Dick Rosen , I don't think you are correct. The 10% vacancy is for when the property is just sitting empty (~5 weeks per year). The 1 month lease up fee (8.33%), is generally an extra one time charge by the PM. In discussion with PMs in different areas I have seen, in writing, leasing fees ranging from 0% to 1 1/2 months (~12%). It really depends on the local practice. Similarly, depending on the location, I have seen PM fees from 5% to 12%. Shopping around is always a good idea but cheapest is not always best. I would rather pay more but have confidence that the PM will keep the unit occupied with the best quality tenant for the target demographic.

Not a PM myself but I have not problem seeing, depending on the property, the time to do showings, screening process and other activities associated with the lease up as an extra fee. As they say; 'Time is Money' and what the PM is selling is their expertise and time. Having said that, if the property / unit sees regular turnover (e.g. every year), the PM is not doing their job property in screening tenants.

One approach is to take the vacancy allowance you have in years that there is no turnover and bank them just this purpose (future vacancy, turnover costs, lease-up fee, etc). It takes discipline, but worth it.

On the other hand, if this is simply the nature of the property, that tenants are generally transitory, you 'simply' have to factor this as part of your deal analysis. I have been surprised how infrequently this purchase criteria is discussed on BP. Obviously, the lower the better but understanding what to expect in the local market and factoring that into your deal analysis is important.

@Eric Doud  I think you mean 16% a year (assuming annual turnover).

@Roy N., thanks for the link. I will take a look at it. Your previous comment is also correct with respect to active / passive. The question becomes, is there any way to legally repatriate the income as 'active' income to maintain the favourable tax treatment in the US all the way into Canada.

Still researching...

Tax structure considerations for Canadians and US foreigners in general can be quite confusing. On the one hand, the mentor courses / boot camps / common advice (including many here on BP) is to just set up an LLC but when I've discussed it with professionals, they argue against it. I have never really understood why.

I recently was speaking with yet another specialist who put it to me this way;  

In Canada, companies are taxed the lowest and individuals the highest. In the US the reverse is true. So there is a miss-match and you end up paying more then you should.

This, if true (I think it is), now makes some sense. I also came across the following article which reviews why LLC as a structure is not the way to go.

http://www.moodysgartner.com/canadians-beware-united-states-limited-liability-companies-may-be-hazardous-to-your-tax-health/

I also found the following to be informative. It reviews a number of different structures with  the advantages / issues of each;

http://www.mondaq.com/canada/x/334102/Capital+Gains+Tax/Are+United+States+Limited+Liability+Limited+Partnerships+the+Holy+Grail

Adding anther layer of complexity is; how much are you generating in profits? If your holdings are small (i.e. a couple of SFH), the cost of setup companies, annual filings, etc. may simply not be worth the cost. Just pay the taxes and be done with it. On the other hand, if you are netting significant profits (e.g. 100K+ per year, but I really don't know where the cut off point is) in the US, the overhead may be worth cost / aggravation.

I am curious what structures Canadians are using and at the end of the day, what is the effective marginal rate they see. For every $1 of NOI, how much is sucked up by US / Cdn Taxes and is left in your pocket?

Also, if you take the time to read the articles, would you keep the same or consider making a change.

Hi Jonathan,

Firstly, welcome to Bigger Pockets. There is a wealth of information, resources and certainly a whole bunch of very experienced people that eat, breath and simply live real estate. Put together there is not much that this group (I do not count myself among them) has not seen and done. They have also made just about every mistake that can be made which we all get the privilege of learning from.

With respect to your post; There is no MAGIC formula. There are rules of thumb, statistical averages, historical trends, preferences, wild *** guesses and 'ooh my gosh, I can't believe this worked' (i.e. sometimes you just get lucky).

There are literally thousands of threads / posts discussing how to value property and you will see terms such as: "50% rule", "2% rule", "1% rule", "$100 per door" and others.

To explain very simply; these are not rules in the standard sense in that they always work (if it was that easy, everyone could do it). They are, as I said before, rules of thumb that experienced investors over long periods of time and over many properties have developed to help them separate the wheat from the chaff when evaluating an investment opportunity. The are a starting point to see if you should spend any more or your time looking into the details of the opportunity. At the end of the day, each opportunity has to be evaluated on its own merits mapped onto your personal investment objectives. What you find to be a great deal may be a terrible deal for someone else.

When you search and read about these 'rules' (the search feature on BP is very useful for this) you will find passionate debate and opinion (mostly respectful :). Spend some time reading and feel free to ask questions on topics / issues that you feel need clarification.

As to the 'rule' you were given, I have not read about this one before. To restate your 'rule' as I understand it; price = 7 X Gross Income +/- 10% based on condition. This falls somewhere between the '2% rule' and '1% rule' mentioned above and for your area may be a valid starting criteria. Also, using 1% of purchase price as the monthly total expense / cost is also something I have not heard before. This represents 92% of your monthly income which seems high but again, may be appropriate for your area.

Good luck and happy hunting.

Jon - What's that saying; "it can't hurt to ask"

I am looking at a property that due to a variety of circumstances it does not have a lot of historical information available. This got me thinking about how to estimate gas, electrical etc. Yes, during the DD period, you can go to the utility companies and get the actual billings but in determining the value of the property and the price to offer, what do you put in?

Assuming landlord paid utilities: I have seen quite a range for gas, electrical and water/sewer costs.

Heating will be nearly the same year to year as you can not NOT heat part of the building. You are dependent on the weather and if your tenants leave their windows open because they are to warm.

Water will depends on how well you stay on top of maintenance (leaky taps and toilets) and if the building is more family oriented or adult oriented (i.e. How many people live in the unit).

Electrical, I think, is also pretty steady per unit and is higher with families then non-families (see water).

Also the age / efficiency of the property envelope, the age / efficiency of the boiler, the age / efficiency of the HW tank come into play. Finally and obviously a building 75% occupied will use less electrical and water then one 95% occupied.

Anyone care to share their 'rules' per unit or per sq ft for utilities?

While borrowing 'can' be a part of your plans, as has been pointed out already, it does not have to be. Doing a 'few' small flips with your own funds would have a lot of value other then keeping more of the profits: Learning Curve, Full Cycle Experience, Portfolio Examples, Refining Target Market, Contact Development, Team Development, etc. etc.

A prospective lender, who has to rely on you to deliver, can have much more confidence in your abilities, capabilities and judgement to get the work done, 'on time', 'on budget' and perhaps most importantly 'on profit'.

Good Luck

Not to hijack this thread but on a related note;

The general 50% expense rule takes into account vacancy of, I believe, 10%. That accounts for the reduced expenses due to maintenance, utilities, etc. But shouldn't you ALSO be reducing the gross income by that amount as that has a much larger impact on the NOI calculation.

Am I missing something?

Kenneth,

There are literally hundreds or even thousands of discussion topics regarding something called the 50% rule or the 2% rule. Suggest you do a search (right at the top of the page) and spend a week or so reading. Anything you still have questions on, feel free to ask.

Oren