All Forum Posts by: Lane Kawaoka

For non-recourse debt - 0-5% of the equity is the ball park. 

For recourse debt - 1-10%.

I personally would not KP/loan guarantor anyone who does not have 2-5M in personal net worth but that is just me. Typically operators who have a good track record don't need additional KPs which is the ironic thing too. Good luck and make sure you have collateral not in equity (which is worth nothing if things go wrong).

IRR is the Internal Rate of Return. This can often get confused with the return on investment and cash on cash because over the period of one year, all these percentages are the same. IRR specifically takes the time value of money and calculates what the average return is over a period of time and annualizes it. Say you put that 10k in and made 7% per year for 5 years and compounded it each year that equate to a 7% IRR for those 5 years precluded that your 10k was returned to you at the end of the period. When looking at real estate we know that very seldomly does an asset perfectly return an exact percentage and typically the asset grows in value over the time period. This calculation can take that expected growth and growth in cash flows combined into one metric to look at the investment.

Personally, I don't really look at IRR because it is a highly manipulated metric. Showing an unrealistic refinance in year 2 instead of year 3-4 will likely turn a 13% IRR deal to 16-17%. Magic! The best way to explaining this is for you to download an IRR calculator spreadsheet or build your own simple one and play around with one.

For what its worth most deals I deem meeting minimal IRR standards is 13-15% but you have to dig a little deeper to uncover the real placements of cashflows and capitalization events... and then dig even deeper to verify the assumptions such as occupancy, rent increases per year, and what reversion cap rate was used.

Again I don't look for IRR cause its manipulated a lot instead I look at total return on a 5 year basis. Its like sampling a NFL players 40 yard dash but for apartment underwriting. I'm sure there are other ways to do it but weather its right or wrong... I try to be consistent and I'm just trying to go in and pick the best in the field.

BP article - https://www.biggerpockets.com/...

Fund are what operators do when they have too much of a following (sponsor creep) and can do whatever. So they create a fund and throw whatever. Some times the better deals get put in a SPV or separate syndication and the junk gets thrown into the fund.

Funds don't offer good efficient use of capital since money is often sitting around bringing investors yields down in the end.

I just wrote response for this question here https://www.biggerpockets.com/...

@Account Closed has the right idea but instead of passive income vs non passive income it is passive income vs ordinary income.

If you are able to implement a real estate professional status tax strategy (REP) you can use passive losses from syndication deals to lower your ordinary W2 income. If not (ie two full-time working spouses) your only other option is going into land conservation deals, solar deals, or oil and gas deals - all of which have some risks.

Explained in a different way...

1) There are ordinary/W2/active income on one side. Lets call that the :( side.

2) And there is the happy side... passive income (syndications, passive partnerships ie medical/dentist offices) and passive losses (depreciation, bonus depreciation via cost segregations common in syndications). You can you passive losses to neutralize/eliminate passive income. Thats what this is the good side and why passive losses are called PALs too for passive activity losses.

So there is a barrier between 1) Active Income and 2) Passive Income above. You cannot offset passive losses (PALs) for active income. UNLESS you are are real estate professional status for tax designation purposes and able to create a "grouping/active participation". 

Another example: Assume you invest $100,000 in a syndication and the cost segregation yields $20,000 of depreciation. You hold the asset for five years and it is sold for $150,000. You have $50,000 of capital gain and $20,000 of depreciation recapture. Assuming your capital gains tax rate is 20% and you made no further investment, you would owe tax of $10,000 on the gain and $5,000 on the recapture.
Now assume you took the $150,000 and invested it in a new syndication and got the same 20% cost seg, so $30,000 of depreciation. The new depreciation would first offset the $20,000 of recapture then the remaining $10,000 would offset some of the capital gain from the previous sale leaving you with $40,000 of gain. You would pay 20% tax on the $40,000 and the tax owed would be $8,000 rather than the original $15,000. If you have other passive loss that you have been carrying from other investments, that could be used to further defer and reduce the tax.

Your property manager should know the market rent if they have a portfolio of properties that they manage in the area. If they are good, they will have the best insight of how much rent to charge with that particular property/nieghborhood.

I have a couple of investors in my network actively investing in the area and they have not noticed anything alarming with a drop in rents. Within the past year rents, in Birmingham have actually gone up.

It could be for that particular property that is going down in rent, the management company has overestimated how much rent they could charge and is now bringing it down to the true market rent?

Make sure you're buying in a market with a robust, growing working class as they are the backbone of a solid market! Be careful with Florida as the insurance costs can eat up your cash flow. 

Also agree with buying in a landlord-friendly state, no one wants to be in the position where they have to evict a tenant, but when things go south, you will want the right to evict if necessary.

Hi Travis, when learning the numbers for syndications, it's important to learn the different fees (acquisition, asset management, distribution/exit, development), split structure (70/30, 80/20), and type of returns (preferred/equity) involved in the deal. 

Most information on a course can be found somewhere on the internet, you're paying for the convenience of (hopefully) having the essential things you need to get your first property. If a course costs an arm and a limb then there's a problem. 

There are a lot of things that go into purchasing a rental property, but understand it's not rocket science, if you get stuck on finding a market, analyzing a property, building a team, the steps to buy a home, don't be afraid to ask someone on BiggerPockets or ask Google/Youtube!