All Forum Posts by: Sebastien Hitier

Hi @Sei-jung Park, 

I know this is a bit late to post an answer but there are important fiscal consequences to this:

1. you can either invest in real estate directly (as yourself or as a disregarded entity such as an LLC for additional liability protection) then you will need to file for an income tax in the US. The tax rate is low in the US. This is a good option for residents of a country with a territorial tax base. However, it seems to me that Koreans are taxed on their worldwide income, so you may need to declare that income again in Korea and talk to a Korea-US tax expert to see how the treaty to avoid double taxation is enforced.
2. the alternative is to invest through an LLC and elect to make that company fiscally opaque. Then the company will file tax in the US and be taxed on its net profit. You will also be taxed by US 15% by the US given the taxation treaty on any dividend distribution, and 12% on any interest you pay yourself from lending the initial funds to the company.

It seems to me that a tax specialist you consult with should tell you about these 2 options, and explain to you whether you should loan the initial capital to the LLC, as it seems to me that it could alleviate the concern of double taxation of (1) profit and (2) dividend.

You can PM me so we can share what material we have on offshore taxation.

To understand a CoC, you need to know the cap rate and financing rate and term.

To understand a cap rate, you need to know the gross yield and expense ratio used.

investors only agree on how to compute gross yield, and will count at 16% to 4% gross yield, and 70% to 50% of that as cap rate after non-financial expenses. One may add to that yield an "expected" appreciation to make numbers look better.

When it comes to financing, the 30Y mortgage payment at 80% LTV will shave off 4% to 6% from the cap rate and then multiply that number by 5.

The bottom line is that the estimate of CoC is 5x more dependent on your vacancy, repair, and capex than the cap rate estimate. So one needs to give the other numbers.

To be able to compare, it makes sense to check the $ amount per door, for these, as expenses do not scale down on low-end properties.

Finally, appreciation is the elephant in the room and will do most of the work for investors. 

If there is no context, a skilled investor may give a lower number than a Detroit investor who forgot to charge capex or a San Francisco investor who used past appreciation as the estimate of the future.

@Bria Johnson, for capex and repair reserves, I would not base a number on rent but put a fixed amount. If we are talking about the roof, water heater, kitchen cabinets, there is around $110 per month needed for repairs you get only every 20 years. 

The older the house, the more likely that these expenses happen soon. You might get lucky and not have any of these expenses if the house appreciates and you sell in the next ten years.

Besides low-frequency items, you will need to redo carpets, paint and change appliances, and that will depend on your tenant turnover. So that could add $200 per month, especially if the house has carpet.

The bottom line is that you see $500-$1500 per year on your properties but whenever a tenant leaves who stayed for more than four years, that you have a bill of $2000 paint and $2000 carpet (hence the appeal of luxury vinyl planks).

That's why it is much harder to break even on a $750 than on a $1400 rent.

Let us know what you find ^^

See https://www.biggerpockets.com/renewsblog/2015/03/0... and https://www.biggerpockets.com/forums/88/topics/240...

I would be interested if other BPers know of other deep dive capex articles.

@Chris Seveney and @Jay Hinrichs do you have an idea of which city and price range those canaries are now buying at?

There was a lot of talk about Hedge Funds entering the residential rental space in 2013. Hedge Funds are the canary in the coal mine, I would expect to see their buying stop once the middle class has rebuilt its credit and starts buying again.

Do you see hedge funds still buying in your area and at what price? (Hedge Funds first bought properties below 100k, then they went for properties below 150k. Is it still the case?)

@H W Beckley, I collected the data myself.

 I used census data per MSA (metropolitan statistical area) with 2000-2015 growth to identify fastest growing cities and then identified postcodes with a Trader Joe in those MSA. then I used Zillow to determine the median price and median rent. 

I did this research back in May-June 2018. Anyone is welcome to PM me to get the data.

Here are the affluent zip code gross yield, for the nation's most demographically dynamic MSA:

• Indianapolis IN pop cum growth 30% , gross rental yield 10.6%
• Houston TX pop cum growth 41% , gross rental yield 8.6%
• Dallas Fort Worth pop cum growth 38%, gross rental yield 8.4%
• Atlanta GA pop cum growth 34% , gross rental yield 7.8%
• Orlando FL pop cum growth 45% , gross rental yield 7.7%
• Des Moines IA pop cum growth 29% , gross rental yield 7.6%
• Charlotte NC pop cum growth 40% , gross rental yield 7.4%
• Jacksonville FL pop cum growth 29%, gross rental yield 7.4%
• Phoenix AZ pop cum growth 41% , gross rental yield 7.0%
• Raleigh Cary NC pop cum growth 60%, gross rental yield 6.7%
• San Antonio TX pop cum growth 39%, gross rental yield
• Nashville TN 40% 6.7%
• Colorado Springs CO 30% 6.5%
• Denver CO 29% 6.4%
• Charleston SC 36%, 6.4%
• Greenville SC 56% 6.4%
• Provo Orem UT 55% 6.2%
• Austin TX, 60% 5.6%

You should note that local tax and insurance is much higher in Florida than other states so that 3% to 5% more needs to be deducted from gross yield to compare to other states such as Georgia or North Carolina.

Be careful that properties that have no appreciation potential should have proper capex baked into the numbers. Single-family houses require the same capex whether they sell for 75k or 150k. Two articles that circulated on BP estimate the capex cost. One at $182 per month, another at $250. This means that 1/3 of a 750$ rent needs to be put as capex reserve and explains why houses with such rent often are undermaintained and sell below their replacement value.

Wow, did I just read Dani Z shaming someone for being trans or cis-gendered? How does she know? Did she pull his medical file or does she judge him based on her subjective appreciation of probabilities? It seems inappropriate to me, and she should write an apology.

There are many types of successful investors, and Dani Z point that we should aim to publicize the greatest diversity of experience and background is in my opinion very valid and would make the podcast even more useful.

I come here because Biggerpockets has excellent content on real estate put forward by people irrespective of their race or gender. 

Hi @Bob Starlin , 

1) RE pros are much more often incompetent than dishonest, they don't abscond to another jurisdiction but they may waste vast amounts of money by not having proper contracts in place, not doing due diligence on a prospective tenant, not getting the best bids for repairs... These are the things you need to check they do. You need a PM you can trust with security deposit and 1 month of rent...

2) find a better property management company and have that discussion with the existing manager. If you want to leave and have an alternative now, they won't want to hold onto the property for much time. Don't tell your manager you want to leave him until you have a better alternative.

Hope this helps.

Hi Brett,

You had a nice yield compression on that property. 

Interestingly, your expense yield went from 1.3% to 3.1%, so it more than doubled while gross yield went down as the price went up.

I reach for higher yields if this is just an investment. If you love the place and might want to live there, that's a different question.