All Forum Posts by: Frank Jiang

~45%

Cashflow is a garbage metric.

The same house can have positive or negative cashflow depending on whether you put 0%, 5%, 25% or 100% down.

Most people don't even calculate cashflow properly and fail to account for deferred maintenance or future capex spend.

It "works" fine for simple deals, but any investor worth their salt is capable of underwriting to IRR.

Totally agree with you on future predictions.  At the end of the day, the discussion you and I are having is purely semantics. 

Here's the logic behind my viewpoint on calculating IRR. From the information given, the net result of his change would be an increase in rent that lasts forever, i.e. a perpetuity. This sounds weird to say, but the IRR or ROI of the investment is the same whether or not Andrey is alive. The way I view the calculation is that it affects the net value of the property itself, not the value of the property relative to Andrey. Does that make sense?

Yes it does.  It's effectively the same if you hold it for 10+ years.  The net result of the formula is an insignificant amount different if you hold it for long enough.

As a perpetuity, IRR is the same calculation as ROI. That's actually where ROI comes from.

Yes, your math seems spot on. The only thing I'd consider is if it would be possible to raise rent regardless of whether or not you put in the upgrades. You likely have an increase due to general appreciate as opposed to gain from fixtures or the quality of the interior of the apartment. I would use this number to calculate the gain in IRR as opposed to the gross gain from the current.

My understanding is that you would get no tax break until you sell.  You would not be able to depreciate this additional 15K.  Let's say you bought the property for $150K and it is now worth $300K.  My understanding is that you would normally pay capital gains tax on $150K, but since you put this $15K in, you would only pay capital gains tax on $135K.

But again, I'm neither an accountant nor a tax specialist.

You're getting $3,660 pure income flowthrough per year on $15,000 outlay, or 24.4% IRR. Seems like a no-brainer to me.

I don't believe you get to amortize the cost, but you would add it to the cost basis of the home when you sell it and get the tax break then.  I'm not an accountant though.

An individual buys a house in 2008 for $300K.  After 10 years, they then sell it for $600K.  They could sell it for $850K fair market value if they put in about $100K worth of upgrades but they don't have the cash or skills to do so.  They end up netting $300K in profit.

A flipper comes in and buys the house, puts down the $100K in and sells for $850K.  That flipper profits $150K.

A nice family comes in and gets a nice asset at fair market value.

Everyone wins.  Capitalism is proven to be effective once again.  QED.

P.S. If you feel like making money is the definition of success, I'd recommend spending more time looking for deals and less time having vague and abstract philosophical discussions with strangers on the internet.

New tenant who moves out gets nothing.  They can ask for whatever they want, you're not obliged to assist them.  I'd say it's more than fair to remit back their entire deposit and go your separate ways.

My concern is that you knew about the smoking and the dog long ago but you used that as the basis for the cure or quit notice.  I'd be concerned about the legal strength of that notice and would advise further research on this area.

Hopefully, it all works out and you can successfully ozone the hell out of Smokey's side of the building.  Cigarette smoke permeation is a PITA to get rid of.

I don't think you should invest out of state.  I think you should do your best to make it work in Seattle.  Do all of these things together.  House hack, buy a fixer-upper to force equity, live in flip, and do what it takes to make it work.

My reasoning is that in the long run, this line has a much better chance of increasing your total net worth.  It is much easier to convert a high net worth into passive income and cashflow than it is to convert cashflow into a high net worth.  The beauty of buying into a market like Seattle is that you get tremendous benefit from the power of leverage.

If you buy 5 OOS turnkeys for $75K each with 20% down and manage to make 15% return on them after leverage, you only make $11k net per year, not to mention the headache you'll have trying to find reliable help from 500 miles away.  Take that same $75K, invest it in a live in flip at 5% down owner occupied and you can own a million dollar property, force equity and make $11K look like chump change.

This approach is much riskier, but also provides higher potential.