All Forum Posts by: Sam Grooms

Expenses seem low. They're usually around 50%, not including debt service. This report is showing 48% (on the first page) including debt service. Also, what's the plan to renovate in 6 months? Are there no leases in place?

Looking at the second page, you get a more accurate description of the cash flow. $600 post refinance, so $150 per door. 

Also on the second page, your expense growth rate should not be below inflation targets. That needs to be at least 2%. 

Lastly, you should dig deeper when see that your purchase cap rate is over 9%, but your pro forma is under 7% (from the top of the first page). Those are usually reversed. It's highly unlikely current NOI is $31K.

25% operating expenses seems low. Especially on such low rents. 

I think it has more to do with the individual investor's tax situation. How much other income do they have that can be offset by the depreciation? Are they a real estate professional? What's their tax rate before and after the depreciation? Yes, they may have a 15% tax rate after the depreciation (because they have hardly any income now), but if their tax rate was 25%+ before taking all of that depreciation, well then you have to consider that as tax savings. 

Then, if they end up in a situation like what you mentioned above ($4.5K vs $2.7K), what type of investments are they putting their tax savings from years 1-5 in? 

Yes, if you are in a very low tax bracket, avoiding taxes at 15% to pay them at 25% might not make sense. However, if I can make a 20% annual return on my investments, well then I'd still be better off with the extra cash today, and paying it back at a higher rate in the future. 

If you're playing the cap rate compression game, yes. If you're doing value-add, no. I can do value-add with a stable economy (flat), and provide great returns. Now, obviously if I buy in a bull market and sell in a bear market, that will eat away at my returns, and likely erase them. But I don't need the economy to be doing great, to provide great returns. 

Can you explain your last sentence? 

Also, you can't just add depreciation recapture to the top line of your income statement. It gets taxed at a different rate. Taking the depreciation is about two things. 

First, moving up expenses, which is almost always a good thing. Yes, you'll "pay it back" on the exit through recapture, but if someone says I'll give you money today, and you have to pay it back at a future date with no interest, most people will take that. 

Second, it's about tax rate arbitrage. Depreciation is shielding your income from being taxed at your ordinary income tax rate, up to 37%. When you recapture it, it gets maxed out at 25%. 

So in summary, not only do you get to wait years, possibly decades to pay taxes on that income, you can possibly pay the taxes at a lower rate. For most people, this makes sense. Yes, if you buy in an area that doesn't appreciate, its possible your tax burden on exit is greater than your gain, meaning you lose money in that year. But, overall, you're still better off, as long as you plan accordingly. 

Yes, you'll need to look in every unit, especially on your first purchase. We still do this at the 100+ unit level. There are third parties you can hire to do this for a few hundred dollars. Most large property managers offer due diligence as a service (unit walkthroughs, plumbing/electrical/roof inspections, and lease audit). We pay $1,000-$2,000 on 100+ units for this. 

Regarding financials, just reach out to whoever posted the property on Loopnet. Ask them for the rent roll and P&L (T12).

Yes, once you leave your W-2, you won't need your CPA. However, your pay will be a lot better in the meantime at your W-2 if you have your CPA. It's the route I took, and still maintain my license, even though I don't use it at all. 

That price per unit seems high for Avondale. 2/1's aren't very desirable in that area, either. 

@David de Luna, When I mention "at acquisition," I'm talking about cash outflow. Year 1 cash flow would be part of the next 9 series. 

Regarding the cash received at closing, not quite. If you calculated it like that, you wouldn't show your initial equity as cash received at closing. I would take my sales prices, less selling costs, less my loan repayment, less any prepayment penalty, plus any deposits/reserves I'll be getting back, from either the lender or utility companies.

Here is a picture of what the 11 series of cash flows will look like.