All Forum Posts by: Brian Sparr

Hi @Peter Ivanov -

Yes, you are allowed to move into your rental property and consider it your primary residence.  However, you should be careful with how soon you move into the property after completing the exchange; otherwise, you risk invalidating the exchange.

A 1031 is deferring the taxes - not eliminating them (putting aside proper estate planning and you holding the property until you die).

Accurately working through these types of scenarios can be tricky because of all the moving parts - ie, recapturing depreciation, adjusting the cost basis, whether you owned the property prior to 2009, etc.

However, if we generalize this and ignore the tricky parts for the time being, you could have this scenario play out like this:
- buy property A in 2010 for $500k
- sell property A in 2020 for $1M and exchange into property B (deferring $500k of profit)
- rent property B for 1 yr and then move into it as primary residence
- sell property B for $1.5M in 2030 (another $500k of profit)

To figure out your taxes, you'd be looking at:
- a total of $1M in capital gains ($500k from sale of prop A and $500k from sale of prop B)
- you owned props A and B for a total of 20 yrs - 9 of which were as your primary residence (45%)
- this limits your potential primary residence exclusion to $450k ($1M x .45)
- since you're married filing jointly, you can exclude the entire $450k (but not the max of $500k)
- the remaining $550k would be treated as long term cap gains

Again, this is very generalized and not meant to be an accurate calculation, but hopefully gives you an idea of how the numbers might work out.

Best advice any of us can give you here = consult with your tax professional :)

Good luck,
- Brian

Hi @Darla Love -

When you say "going the 203 route", I assume you're referring to a 203(k) rehab loan? If so, this is an FHA loan and not intended for investment properties. Unless you claim you're going to live in the house yourself, I don't believe this will be an option for you.

I'm guessing the house is going to need more work than just fixing the existing plumbing issue, correct?  It seems unlikely that a single $10k problem would cause a house to sell for $40k below comps.

If I were you, I'd start by getting some contractor bids for all of the work that you don't plan to do yourself.  This will give you a better idea if financing via credit cards is even an option for you.  After that, I'd start looking at all my options to see which makes the most sense - this could be getting a personal loan, hard money loan, maybe there's equity in the house that you can access via a heloc?

Best of luck!

- Brian

@Anthony Van Gilder - I don't know about Huntsville and Clarksville, but if you want to connect with another local Indy investor, I'd suggest attending one of the Thrive REI meetups generally held in Walnut Creek ... Beau Eckstein, who runs it, is doing a bunch in the Indy market.

Good luck!

Hi @Anthony Van Gilder - you're on the right track ... it should be the combination of what you see in the video along with what your agent notices/recommends.  It's by no means ideal, but another example of how important your local agent/team are to the process.  If you're the only one putting this repair list together, you're working with the wrong agent.

As we shoot these videos for our own out-of-state clients, we try to highlight any immediate concerns and, when time permits before making an offer, will try and get an estimate from one of the contractors that we work with.

What market are you considering right now?

Hi @Robert Collins -

Are you referring to the book Shift by Gary Keller?  If so, I'm not sure it's what you're looking for.  I'm not saying don't read it, but it's a strategy book for agents about running their business during tough times - it talks about expense management, lead gen/conversion, etc.

Maybe you were referring to Big Shifts Ahead by John Burns?  I haven't read this yet, but John Burns is a beast when it comes to market analysis.  His book is about understanding demographic shifts and how to take advantage.  Book aside, you should definitely check out the podcast his company puts out - they have a big focus on new home developments, but talk a lot about the overall housing market.

If you want a book, you can try Timing the Real Estate Market by Campbell ... it talks about looking at existing home sales, new home permits, mortgage defaults, foreclosure sales and interest rates to try and read the market.  Depending on the market you're trying to evaluate, these items may or may not be all that applicable - for example, the SF Bay Area lacks undeveloped land, so tracking new home permits has less of an impact there than it does in a different market like Raleigh.

Good luck!

Hi @Almantas Buikus -

Let's just work through the numbers assuming you BRRR it...

You're all in for $220k with an ARV of $285k - refi and pull 75% out (~$214k) ... so, you've got approx $6k left in the deal.

It rents for $2300/mo
- assuming you refi at 4.5%, your P&I is $1083
- taxes are $471
- insurance around $100
- HOA at $260
- Vacancy at 8% = $184
This leaves you with $202/mo to go towards maintenance and future capex.  You just finished rehabbing the place, so capex, in theory, shouldn't have to be an immediate concern.

Based on what you've described, you've got a new-ish condo in a great location that will attract good tenants ... you would have $6k into the deal with approx $70k of equity and, potentially, a couple hundred bucks in positive cash flow each month.

What is your calculator telling you differently?  And, what kind of numbers are you looking for?

Hey @Will Dean -

We price them out the same way the appraisers will - we use the sales comp and income approaches to generate two values and then we use our best judgement as to which number is most accurate.  (In reality, the appraiser will also generate a replacement cost value, but it's so rarely factored into the final decision that we don't go through the exercise.)

For example, if we're pricing out a duplex, we select 3 to 6 recent sales of other, similar sized duplexes in the area. Take their sales prices and make adjustments based on how they compare directly to the property you are pricing out - adjust for different numbers of bedrooms, bathrooms, livable square footage, lot size, condition, etc. These adjusted values will lead you to your "sales comp" number. This process is no different from using sales comps to price out a SFH or condo/townhouse. Just keep in mind that different markets will place different values for extra beds, baths, square footage, etc - you need to know your market when making these adjustments if you hope to be accurate.

Now, with each of those comps, take their sales price and divide it by their total monthly rent - this will give you their respective GRMs. Based on the range of these GRMs, choose a number that seems most appropriate (some appraisers will simply average them all together - others will just choose a number) ... take the GRM value you've decided to use and multiply it by the monthly rent you expect for the duplex you are pricing out - this will give you your "income approach" value.

Now, you look at the two values you've just generated and use your best judgement as to which is most accurate - or it might be a blend of both.

To give you a real-world example of this, some clients of mine just closed on a duplex in Raleigh ... the appraisal came back with $468k for the sales comp approach - $594k for the income approach - and $480,200 for the replacement cost approach ... the appraiser selected $468k as the market value.

Hope I made this clear enough for people to follow and understand...

Hi @Katelyn B. -

What are your plans for the property? Flip it? Rent it out? Live in it?

The power you hold in this transaction right now is your ability to walk away ... the seller will not only have to go back to the starting line to find a new buyer, but they will also have to explain why the first buyer backed out.

Now, I don't know the disclosure requirements/laws for agents and sellers in Arkansas, but if you deliver them written reports by licensed inspectors that indicate roof, drainage and/or foundation issues, they are now aware of material facts that negatively impact the value of the property - I would assume that they will have to disclose these facts to all future buyers.  Therefore, they're going to have to address these issues at some point ... they might as well handle it with you and close the deal sooner rather than later.

That said, it sounds as though you're in a rather delicate situation.  Emotions get involved in deals and logic goes out the window.  If the seller was truly "offended" by your initial offer, asking for another $15-25k off in price could easily be a breaking point for them.  I hope your agent has a soft touch when it comes to negotiations :)

Since all your closing costs are already being covered by the seller, you have limited options with how to structure any negotiations.  A reduction in price is the easy approach, but it may not be what you really want if you're financing the deal and have limited funds for the rehab.  Another option is to have part of the seller's proceeds remain in escrow after the deal closes and to be paid directly to the contractor doing the roof/tree work.

A few different thoughts:
- I wouldn't automatically assume that insurance will pay for wind damage to the roof.
- working with an agent from the same firm as the seller's broker shouldn't be an immediate red flag ... if you have concerns about your agent's actions behind-the-scenes, that's a concern that can and will exist regardless of who the listing broker is ... that's a trust issue with your agent, and, in my opinion, a reason to find a new agent to represent you.  It should be the lack of trust and not the brokerage that's the reason for switching.
- I would get the findings and estimates in writing from each of the inspectors/contractors so I could share it directly with the seller and agent

Good luck!

Hi @Sam Rogers -

Using the county appraisal values may or may not be in your best interest - before responding to the owner, though, I'd want to see as many of the properties as I could ... if I couldn't get inside them, I'd definitely want to do a drive-by ... if, for whatever reason I couldn't do a drive-by, I'd hop on Google Maps and look at the street view on each of them.  

After that, I'd run some preliminary numbers to see how they compared to the county numbers.  I'd value the entire portfolio at retail prices so I have a clear understanding of what I'd be getting.  Compare the retail value to the county appraisal value - whichever is lower would become my "working" number that I base my negotiations off of.

Keep in mind, you're doing this guy a favor by buying the entire portfolio off-market ... because of that, I'd knock a percentage off of my "working" number ... there's no standard or rule-of-thumb that I'm aware of for what this percentage should be, so you've got to decide what the deal is worth to you and what you're willing to ask for.  10, 15, 20, 30% off?  The guy wants out - don't be afraid to start much lower than you think will be accepted.

Good luck!

Hi @Sebi Ardelean -

The majority of the MLSes across the country feed directly into realtor.com - there are a few exceptions, but I don't recall off-hand who they are. So, assuming the market you are looking at doesn't happen to be one of these exception areas, you can be pretty confident that what you see on realtor.com is an accurate reflection of what's in the MLS ... you're not losing out on deals because the information is dated.

If you're working with an agent, they'll most likely setup an automated alert for you based on some general criteria. This won't take extra time and doesn't need to overly filter the data ... if your agent understands all the capabilities of their MLS, they can make these searches either hyper-focused (well beyond anything that you could search for on a public listing site) or they can make them extremely generic - whatever you want. Then, when a property hits the market matching your criteria, you'll get an email with the details.

If you're trying to find deals, though, at a certain point you're going to want or need to go off-market.  And this only happens by you either 1) finding owners yourself that are willing to sell off-market or 2) networking with other real estate players in your area that are finding owners willing to sell off-market.  #2 is the easier option ... connect with local people here on BP - watch for local events to be mentioned - go to meetups - go to open houses for properties that have been flipped and meet the agents and find out who's behind those deals - etc.

Good luck!