All Forum Posts by: Bill F.

The idea that business have only the choice of using a single account or opening a bazillion accounts to get FDIC insurance is a false dichotomy.

Three options come to mind. 

1. Roll all funds out of their main op account every night and move them back in the the morning. I know this seems odd, especially to RE investors, but this is treasury mgmt 101. Super simple stuff. With the amount of GSB, Haas, other top MBA grads between the VC funds and Startups they have the brain power to figure this out. 

2.  ICS Account. Insured Cash Sweep. Keep excess liquidity in an insured cash sweep account.  Not a new product or idea. Banks and brokerages offer them. I haven't read the SVB loan docs in detail, but I know they are cov light and not sure what minimum level of funds needed to be kept in the bank.  

3. Match your investments to your cash outflows via short duration treasuries, repos, CDs ect. Granted this is more work, but it is done every day outside of the VC world. We figured out asset liability matching awhile ago

Real finance/treasury professionals will have have more/ better suggestions. None of this is sexy stuff, which is part of the problem methinks. 

Apropos of nothing, I greatly enjoy how this SFR centric RE forum has so many banking experts hiding in plain sight. Wonder why their expertise hasn't come up before?

@Gino Barbaro

What worries me as in investor in the MF syndication space is sponsors who aren't oriented on the most impactful variables for the current climate. 

It isn't often I've read something of @Brian Burke's and disagreed, but I think the focus on macro factors like interest rates, population trends, and exit caps rates is less important now than it was for the last 10 yrs. When everything was going up and to the right, those drove significant value of deals and they most certainly fall into the category of important questions. However they were certainly a bit more "knowable" 3-5 years ago than they are now. With interest rates close to the bottom, they only had one place to go, up. That has knock on effects for cap rates and to a lesser degree populations growth trends. The calculus has changed dramatically and in my opinion those three things now fall squarely into the "unknowable" category.

 What I see driving success in the MF syndication space is GPs who can operate the hell out of an asset. Painting with an admittedly broad brush, but for a lot of years all GPs had to do to find success was buy an asset in a good location at a not terrible price, do some landscaping, put in a new sign, rehab some units, throw in a playground, and they could get to 85-90% occupancy. Wait 18-24 months and they could exiting at a lower cap, with higher avg rents and occupancy drove most of the returns.

Now, again in my opinion, you need a GP who can take an average asset and make it the top in its area/class. That will take 36-60 months of hard work. 

Being quite frank IDK how many GPs are out there who have exercised those muscles recently. 

 Seems like you are stepping over a dollar to pick up a dime. Stop focusing on the one low rate of your fixed debt and how much it would hurt to lose that and rather look at the rate you pay on the entirety of your debt. 

To Illustrate lets assume you have $100k in total debt between your two properties, $40k fixed @3.5%, $30k HELOC @ 7.5% and $30k HELOC @ 9.3%. The weighted average of those yields is 6.4% (.4*3.5+.3*7.5+.3*9.3). In this example, you'd want to refi everything to the fixed term 6%. The 6.4% above is what matters; we don't know exact numbers so one one can tell if refi-ing makes sense.

I agree with @V.G Jason as a new-ish RE investor you need to seek simplification in your strategy not complexity. There is already a mountain of things you have left to learn and adding variables like 'what will rates do in the next x months' distracts you from the important learnings of how to run rentals successfully.

Once you have a few rentals under your belt with stable cash flows and an understanding of what style works for you, sure go take some interest rate risk by getting some variable rate debt. 

If you want to get to the point where you have cash flowing rentals, suck it up, pay the piper for making a dumb call with the HELOCs, find a 30 yr fixed or at the least a 7/1 ARM, and consider the lost % tuition in the school of hard knocks.

@Nathan Faselt

I agree with you Chat GPT is an amazing tool. I think the best/ most immediate uses for it would be in market research/ data aggregation. No more hunting for different data sets to understand a new market or help you frame supply and demand questions. The AI will do most of the work for you once you get proficient at asking it question. 

It can also greatly flatten the learning curve by consolidating ALL the writings on a given topic. Want to learn about about Cost Segregation studies? Chat GPT will take in everything written about it and give you back an answer. No more having to dig and dig to find reputable sources of info. It can also help find info for technical questions such as Tax or Zoning. 

I'm sure there are far more, but that's what I can think of off the top of my head. 

114 pages (to date) summarized visually 

@Christopher G Platt

Thanks for taking the time to write such a through post. 

I generally agree with @Steve Vaughan that unless you have absolutely massive amounts of liquid cash (min six figures) than the time effort and risk isn't worth it. 

Simplest and easiest, high yield savings account or Money Market Fund.  

Want to get a big fancier? Do some asset to liability matching ( timing the maturity of your savings vehicle with when you need the cash liquid) using a CD for incremental better yields 

Super worried about inflation. Buy some TIPS

At the end of the day, the opportunity cost of spending any more time trying to eke out of few more bps of yield isn't worth it and probably increases your risk far more than you'd ever gain/ 

@Scott Trench

I'll be that guy and responded to your question with a question: why does it matter? 

Do you have rate swap that's moving out of the money and if it doesn't hit you'll lose your house? Do you plan on a career change and have aspirations of becoming the Fed chairman one day and want to do a decision case on this? 

Of course I am being facetious with those questions.

For 99% of the population the why behind the rate hikes and their magnitude hold little to no consequence. What will be will be. They happened and we all have to deal with the consequence, good bad and ugly. Knowing why a hurricane barrels toward the FL coast does little for the residence (not implying that the rate hikes are positive or negative btw). 

I'd be willing to be that the average BP user has a much higher baseline need for cognition than average, but in general I think scratching that mental itch focusing questions that are both knowable and important yields better outcomes and sadly, I think your questions strikes out on both those criteria. 

For me, the question, what's the odds that we experience inflation over 4% in 2023 and the corollary, what are the odds we see deflation at higher than 2-4% in 2023,  to be a better use of time. They lead to the follow on analysis, what is inflation's impact on your life/portfolio/goals; what's deflation's impact on your life/portfolio/goals, which allows us the potential to take some action based on the anlysis. 

@Randon B.

Seems like you've done your research and have your ducks in a row. 

Only addition I'd have centers around making sure that the property you have for sale lines up with the type of buyer who would likely use seller financing. 

As a rough rule, the most creditworthy applicants get the lowest rates since they have the least risk. Another rough rule is that seller carry rates are higher than traditional mortgage rates since the seller had concentration risk (they only have one loan and not thousands like a bank or GSE) and they have a higher cost of capital ( you want to grow your money whereas people who buy bundled mortgage loans have other objectives) 

All that to say, the buyers who will most likely find your plan attractive fall into the sub-prime category ( have some combination of bad credit/ no credit, filed for bankruptcy, or have been denied for a traditional "prime" loan). Nothing wrong with being sub prime, but if your home is in the top 5% for the market the odds you'll find a candidate fall drastically. If the property sits more around the starter then the plan seems great! 

 Brad, I didn't know the bar changed for REPS based on ST vs LT rentals, so thanks for teaching me something! 

I'm not 100% sure that makes the juice worth the squeeze though. Using round number's from OP's example. $700k house, that's 90% building value or $630k. Lets Say the cost seg cuts the deprecation from 27.5 yrs to 15 yrs. You deduct 6.7% (1/15) of the building value per yr ($42k). At a 22% tax rate, that's a $9.3kk savings. Knock $1k off for the cost seg study and you have $8.3k you save from getting REPS and having a STR. You had to put in 500 hrs. That comes out to an hrly rate of $16.50, equivalent to $33k/yr salary. Not exactly Scrooge McDuck territory.

Not great, but once you scale up to a few properties, like the strategy your account suggests, you'll earn more per hr bc the deprecation grows while the hrs stay the same, but where does that land you? At what number of STR have you bought yourself another job? 5? 10? 15? Not saying people don't want that, but scaling to get more dep savings does have a cost.

Another fact is deprecation recapture, which is at the 25% rate. That $42k adds up every year and if you sell the property for more than you bought it for (a generally accepted best practice within the RE community) Uncle Sam will tax all that accumulated deprecation at 25%. That makes OP's title misleading, since you don't pay $0 in taxes, but rather you pay $0 in taxes now. In effect you get a loan from the government with an undefined term. Sure you can 1031, but that presupposes you have an asset you 1. understand and 2. can get at an acceptable price. 

Larger point: this isn't some magic trick that makes you never have to pay taxes. Like a lot of other things in RE, it is a tool that can apply in some circumstances. For instance it works really well for private placements that raise money from high income earners who pay less at a high rate (32%+) now and pay the taxes at a lower rate later. Awesome. Once the users marginal tax rate and the asset value decline so does it utility. 

 Lol, maybe should have lead with that... us mere mortals can't take take RE loses against our income so they pile up until we sell when deprecation recapture comes a knocking.

Also should probably mention mention you need to pay for a cost seg study, which are a few grand. 

These two facts make this strategy much less attractive for no RE professional in the single family realm.