All Forum Posts by: Chris Winterhalter

@Account Closed

Reply back to the group after you have owned several dozen units for multiple years.

Income producing property can be hands off with the right property, property manager, and team set up. However the people that never deal with property issues probably own something that is more A class with much lower returns (think 4-5 cap). They spend more money to pay the right people so they can be extremely hands off. That all lowers returns and isn't really inline with most investors on BP or most small/mid size investors in general.

If you are buying B to C class real estate, your rentals will not be hands off even with a great property manager. Unless you hire someone full time to manage your portfolio & property manager (not possible on small scale) you will have to be involved with the property beyond cashing checks.

@J Scott

Intent is key however if a pattern of suspicious activity occurs the IRS will probably still have issues with the method used. For example if you buy and sell multiple houses but claim they were purchased for a long term rental. If you have no documentation that your intent was to purchase for a long term rental and you show a pattern of "dealing" then you could potentially have an issue with the IRS.

However let's say I buy an apartment building, sign multi-year leases on contract services, washer/dryer, cable, property management but then sell at month 6 because a buyer came along and ownerships situation changed. If I do this 1 time or 2 times over the course of many years and many other long term transactions I am probably fine especially if my intent was to hold the properties as a long term investment. However if 75% of my transactions are of a buy and sell nature...no matter how well documented I am, the IRS could potentially have issues. As you know there is no good way to get around the IRS laws. The IRS likes to see consistency and reasonable transactions. If something looks out of place they can keep digging.

@Jeffery Kuhl

If you live there for 2 years then you can take the owner occupied exemption up to the 250/500k mentioned. If you own the property for over a year (don't have to live there) then you can change the short term capital gains to long term capital gains which definitely helps.

And what @Matt Devincenzo said...

@Chris Simmons

Correct when flipping in your own name you are taxed at ordinary income rates based on your bracket for ownership of less than 1 year...however that's still called a short term capital gain.

@Jeffery Kuhl A 1031 exchange is a great option and there are a lot of posts on the subject on BP. Just use the search function and type in 1031 exchange for a lot of great info. It is still recommended to hold the asset for at least 12 months and have an INTENT to hold when purchasing the property. Unfortunately you've already displayed your intent to sell based on the forum post. 1031's are not set up for flippers/dealers.

@Jeffery Kuhl

It's going to depend what your goals are...if you want to continue buying and selling properties then don't worry about the capital gains tax. If this is going to be your sole investment, or your sole investment for the next year or two then at least stay in the house a year.

Can you sell the house for a profit you are satisfied with after tax? Do you have access to more deals like this? Did you enjoy renovating the property and have time to do more? If the answer is yes to these questions then sell the property and keep buying! Honestly it comes down to your goals.

@Stephen Turner

I wish that was the case however sadly it is not...you are subject to short term or long term capital gains depending on how long you have held the property. Less than a year would be short term and more than a year would be long term. Short term capital gains are much higher than long term capital gains.

@Jeffery Kuhl

If you lived in the property for 2 out of the last 5 years then you could be exempt from gains up to a certain amount. How long did you live in the property?

*No legal or tax advice

@Chan K.

The money is definitely more expensive and can range wildly on rate and points. Pretty much all HML's are going to require 1st position on their loans. If you are looking at 1-4 units then hard money can make more sense depending on your experience and the project. However you need to fully understand your exit strategy and the ARV of the project. Let's say you purchased a 4 unit and let's assume you accurately forecast the financials and rehab:

• 50k purchase w/30k rehab (+ soft costs, holding costs etc.)
• ARV is 100k
• Purchase and rehab funds come from hard money
• After your rehab, stabilization, and seasoning you refi in 1 year @80%. You could potentially get out of the project with little money invested after refi. Make sure you have the proper amount of reserves to allocate WHEN things go wrong though.

Also I'm not sure what house is going to have a positive cash flow of 1k especially leveraged with hard money however the deal isn't possible because a HML isn't going to bring 10% and take a 2nd position. Also a lot of commercial banks won't allow a seller 2nd. Especially if you are new to the game. You are getting more into a partnership/private money situation when wanting to structure a commercial loan with outside funds. You could partner with someone that has capital and utilize your credit and expertise to locate, rehab, and stabilize properties. Make sure to seek proper legal counsel.

@Maurice Miller

I don't really borrow hard money however it looks like the market is tightening up on their end as well. Spreads are thinning out as more capital is entering the market. Are you seeing the opposite happen in FL?

@Eddie Starr

Multi-family is very capital intensive and requires more time to acquire, finance and liquidate. You need the cash to do deals...either your own or pooled together from private investors. Hard money is mainly going to be used as bridge financing (hard money term used a lot less in multi-family) to get through a rehab or some type of reposition play. The reason to use bridge financing or hard money would be when a commercial lender wouldn't do the deal because of weak cash flow, repairs, zoning issue etc etc. Once those items are corrected then you could refinance out into long term financing. A lot of bridge lenders/hard money lenders are going to want 25-40% down on larger multi-family deals.

You might be better off starting with small multi-families, getting the experience and track record and then bringing in investors to do bigger deals. Also I see that you are a Navy Vet from your profile. You might want to get a 4 unit with favorable financing (VA loan) to get into the real estate game with little money down. Self manage and build equity while learning the game. Thanks for your service!

@Derek Carroll

I also don't really think in terms of the 50% rule because there are so many other factors involved. Your 35% expense ratio is common for bank underwriting however just because that includes a replacement reserve number ($250/unit) doesn't mean that number is correct based on capital improvements needed. I understand inspectors will extrapolate capex needed over a period of time however they are usually off. Newer properties with higher rents definitely run more efficiently than C class, older, lower rent properties however capex is still needed over time. They can definitely run closer to 35% however not for a $500/month rental (and not for 10 units).