All Forum Posts by: Lane Kawaoka

Second what @Henry Clark says. 2022-2023 was a really bad year for commercial real estate. Totally understand that investors are going to be low moral due to recency bias. That said those in the game now and until 2026 will be rewarded. 

Below is a comprehensive list of questions that I took from my personal checklist. However, before you delve into these, I'd like to highlight an important point for passive investors. When seeking connections with other accredited passive investors, remember that authentic relationships seldom stem from online forms, which are often cluttered with sponsored content and misleading reviews. But, having said that, here's the list to get you started. It’s a starting point, after all.

Basic Deal Information

1. Where is the project located?
   
2. What is the year of construction for the property?
3. How many units are there in total?
4. What property class is this project categorized under (A, B, C, etc.)?
5. What is the minimum investment required?
6. What is the projected hold time in years for this investment?
7. What is the total purchase price of the property?
8. How is the purchase price per unit calculated?

Financial Information

1. What is the estimated amount for capital expenditures?
2. What is the current average market rent in the area?
3. What is the occupancy rate at the time of purchase?
4. What are the projected gross rents?
5. How is the effective gross income calculated?
6. List all components included in the total operating expenses.
7. What is the projected net operating income (NOI)?
8. What is the debt service amount and how is it structured?

Investment Returns and Metrics

1. How is the internal rate of return (IRR) calculated?
2. What is the expected average annualized return (AAR)?
3. Explain how cash on cash return (COCR) is calculated.
4. What is the equity multiplier for this investment?
5. What are the expected break-even occupancy rates?
6. What are the entry and exit cap rates?
7. How is the yield on cost calculated for value-add deals?

Risk Assessment and Analysis

1. What is the default ratio and how is it calculated?
2. What are the stabilized loss to lease (LTL), concessions, and bad debts projected to be?
3. Are the stabilized non-revenue units accounted for in the economic vacancy calculation?

Income and Expense Projections

1. Are there reasonable assumptions for phased rent increases?
2. How do other income sources align with historical performance?
3. Are improvements or capital expenditures included in the financial projections?
4. Are the pro forma taxes accurately assessed post-acquisition?

Transactional and Oversight Fees

1. What is the acquisition fee and how is it justified?
2. Are there any other significant fees such as loan processing or guarantee fees?
3. What are the projected property management and asset management fees?

General and Market Specific Information

1. Is there a clear and viable exit strategy outlined?
2. Does the plan of distribution in the PPM match the executive summary?
3. How does this deal align with the sponsor's past or core business strategy?
4. Is there significant co-investment from the GP indicating alignment of interest?
5. Are the projected rents per square foot in line with the market comparables?

Debt Information

1. What is the principal balance of the loan?
2. What is the loan to value (LTV) ratio?
3. What are the interest rate terms and are they fixed or adjustable?
4. Is there a prepayment penalty involved?
5. Is the loan recourse or non-recourse?

Market Dynamics

1. Is the median household income approximately three times the forecasted rent?
2. Are all employment sectors within the market diversified (less than 20%)?
3. Is there evidence of job and wage growth in the metropolitan statistical area (MSA)?
4. Is there population growth in the MSA?
5. How does the crime rate near the property compare to other areas in the region?

https://a.co/d/cdbZOAB

Reach out but I would always do 5-8 hours of research and books first then ask good questions from real people.

It really depends on where you are in terms of income and location. Since you mentioned that you're earning under $200k and living in a less expensive area, plus you have access to a VA loan, buying a primary residence could be a smart move. VA loans offer significant benefits, such as no down payment and no private mortgage insurance, which can make homeownership more accessible and financially sensible. Might want to follow @David Pere

In areas where the cost of living is lower, the financial burden of a mortgage is often comparable to or even less than rental costs. This means that buying a home could not only provide you with stable housing but could also be a better long-term investment compared to renting. It's a chance to build equity in a property while potentially enjoying lower monthly payments.

Additionally, owning a home with a VA loan is a great opportunity to get into the housing market with favorable terms. As your income grows or your needs change, this initial purchase could also potentially be converted into a rental property down the line, adding another layer to your investment strategy. This approach allows you to secure your housing situation now while keeping your options open for building wealth through real estate in the future.

One pitfall people do at this stage is buy a home to live in which can be a potential financial trap on your journey to wealth. Many aspiring investors wonder if they should buy a primary residence or invest in rental properties. This decision can vary significantly based on location. In high-cost areas like California or New York, the rent-to-value ratios often make buying a primary residence less attractive compared to investing out-of-state where the economic and political climate may be more favorable for landlords. For those just starting, investing in rental properties may offer a more substantial financial growth pathway through cash flow, tax benefits, and mortgage pay-down facilitated by tenants.

In contrast, areas with more favorable rent-to-value ratios (like some parts of the Midwest) might make buying a primary residence a sensible start. 

Investment analysis often revolves around understanding exit cap rates, or terminal cap rates, as a major lens through which we evaluate deals. By conservatively assuming a future sale in a weaker market, say with a terminal cap rate of 6 to 6.5%, investors can stress test the resilience of their deals.

Take, for instance, a typical 5-year investment horizon. Here, the projected returns based on equity multiples are vital. At a terminal cap rate of 5%, and assuming all goes according to plan, your $100,000 investment might double. If the cap rate shifts to 6%, your return drops slightly but remains robust.

It's essential to monitor these rates closely, especially given the current high-cap period with potential for recovery. A few years down the line, we might see cap rates decrease to around 5%, significantly enhancing potential returns. This analysis is demonstrated in our chart, providing a clear visual of how even minor fluctuations in cap rates can impact your investment outcome dramatically.

Using separate LLCs for each real estate investment offers significant benefits in liability protection and risk management, by isolating legal and financial issues to individual properties. This approach aids in easier property management and selling, but increases administrative costs and tax complexity. Alternatives like umbrella insurance or series LLCs may offer similar protections with less overhead. High-net-worth investors over 2-3M will probably opt for irrevocable trusts to get assets/liability out of their personal estate.

Note not tax advice, this is more for the high income earner...

Simple Scenarios: Using TurboTax

• Primary Use: TurboTax and similar tax preparation software are best suited for relatively straightforward tax situations. This includes individuals who primarily have W-2 income from employment, basic investment income, and perhaps own a home or have standard deductions.
• Rental Property: If you have one or two rental properties and feel comfortable managing the related expenses and deductions, tax software can handle this level of complexity, especially if your transactions are straightforward and well-documented.

Complex Scenarios: Hiring a CPA

• When to Consider: As your financial life becomes more complex—such as owning multiple rental properties, running a business, dealing with investment incomes, or having special tax considerations (like inheritance or foreign income)—the benefits of hiring a CPA increase.
• Cost Consideration: Hiring a CPA typically costs at least $1,000 to file your taxes, which can increase based on the complexity of your return. This cost is often justified by the value added through their expert advice, ensuring compliance, optimizing your tax return, and potentially saving you from costly mistakes.
• Audit Support: Another significant advantage of a CPA is their ability to represent you in the event of an IRS audit. They provide peace of mind knowing that your taxes are prepared correctly and can defend your filings if questioned.

Benefits of a CPA for High-Income Individuals

• Tax Planning: CPAs do more than just prepare your taxes; they can offer year-round tax planning advice to help reduce your tax liability through strategic decisions about investments, deductions, and other financial moves.
• Customized Advice: A CPA can provide tailored advice based on your specific financial goals and life situation, such as planning for a child’s education, buying or selling real estate, or planning for retirement.

Decision Factors

• Cost vs. Benefit: Assess whether the cost of hiring a CPA is outweighed by the potential tax savings, reduced risk, and the value of your time saved.
• Your Comfort Level: Consider how confident you feel about handling your tax situation. If the thought of dealing with the IRS directly in an audit is daunting, a CPA’s expertise might be invaluable.

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• Remote Rental eCourse: Perfect for beginners! Learn how to start with turnkey rental properties.

1. With your high income, increasing your passive income is crucial and offset with passive losses via real estate. One approach is real estate professional status (REPS), though this would typically require more active participation than you might prefer. However, your spouse could potentially qualify if they manage your properties or undertakes substantial renovation projects, allowing for more aggressive tax strategies such as accelerating depreciation.
   Another way to get passive losses is through Cost Segregation. Consider a cost segregation study for your rental properties to accelerate depreciation deductions, significantly reducing your taxable income.
2. Active Utilization of Your S-Corp: This is more small ball type of moves. I would focus on above that said reactivating your S-Corp could be strategic, especially with your spouse’s contractor license. This could allow you to more effectively manage renovations or developments, potentially offering services to other investors or personally managing the renovation of acquired properties to increase value.