How to invest proactively in a Sellers market

Since I feel we are in the 9th inning of an 11 inning ball game, I decided to pass on a recent Class-A apartment deal in a secondary market.

Here is my thought process…

First off, Robert Kiyosaki has a saying: “There are three sides to a coin.”
People like to argue that it is either a good time to buy or a bad time to buy. For example, they say that “MFH” is overheated or commercial is getting killed by Amazon and e-commerce. I think these are mental justifications by tire-kickers who are scared to act. I mean really how many of these people are under the accredited status (not sophisticated) or not obtained their “Simple Passive Cashflow number.”
Sophisticated investors still trying to grow live on the edge of the “coin.” They buy deals out of the reach of amateurs due to the amateurs’ lack of network/knowledge. These opportunities are undervalued, with undermarket rents, with value-add opportunity. Sophisticated investors are patient; they don’t stray from standards that force them to get crushed in a market correction. (Cashflow from other investments makes this possible.) They invest following the macro- and micro- trends and don’t gamble on gimmicks such as guessing where Amazon’s next HQ is going or where the hurricanes just drowned a market.
The trouble is that an unsophisticated investor or an outsider (in terms of having a poor network) is figuring out which of these deals transcends the two sides of coin and is on the edge. Stating the obvious (though often ignored by many)… starting out as an investor is going to be slim-pickin’s due to the lack of network. But you have to push through this rough part. You are not able to decode the noise until after a few deals or having someone mentor you.
With that out of the way let’s continue…

Real estate is one of the best risk-adjusted investments out there. In private placements or syndications, we are able to crowd-invest in larger & more stable assets while maintaining control with operators who are aligned in our best interests. By going into a project properly capitalized with adequate capital expenditure, budget, and cash reserves, you are able to remain steadfast through softness in the market where rents stagnate and vacancy decreases.

Pause there. In troubled times what happens?

People lose their jobs and there is a bit of shuffling.

Yea, people need housing, but there will be some vacancy as some people will lose their jobs and be displaced elsewhere.

Following this train of thought…

In a recession, the high end or class A will be hurt the most. It is Class A workers who fulfill much of he discretionary services.  We are already seeing softness in rent by rent decreases in class A of the high-end markets such as Seattle and San Francisco.

For example a once $1,700 one bedroom is now $1,625.

Most deals model for 1-5% in annual rent increases or escalators. Other than the Cap Rate to Reversion Cap Rate truck, this is the second most manipulated assumption in investment modeling.

In this unfortunate but natural event, the A-Class renters will fall to class B housing. Some homeowners will even lose their jobs creating foreclosed investments for smaller investors in the single-family home scale.

What’s happens to the B and C class renters?

It is likely that they will also lose their jobs at higher or lower rates, but that is up to debate. In the same fashion as the A-Class renters, the Class B/C renters will downgrade to make ends meet.

I imagine this similar to a game of musical chairs (where the chairs are getting crappier and crappier). Or it looks a lot like the natural housing shuffle in the summer near colleges with people moving in and out. The landlord/investor is likely to see increased vacancy.

Multifamily occupancy varies from 85-95% in stabilized buildings. Some markets are hotter and some are colder. It is important to use the correct assumptions depending on the markets. For example, Dallas typically sees 92% occupancy while Oklahoma City sees 89%.

One of the reasons we love multifamily is because of the decline of the middle class and the need for more scalable workforce housing. [And those millennials can’t save] The population is increasing too.

 

[I like to use this image cause I make fun of millennials… this is the millennial version… cause they can’t seem to afford (or want) to own anything]

When I travel to Asia (which I see as a more mature society, for better or worse) there is a much larger wealth gap than in the USA.  People are living in cramped apartments or very rare single-family homes. And they are driving a Mercedes on barely enough money to share a family moped. This is the trend that the USA is following.

As with many things, you need to look past the headlines and the general data. Instead of analyzing a whole asset class, as the media likes to do, let’s break down vacancy in terms of classes.

Here are some typical vacancy rates (notice the spread).

Class C 4.5%

Class B 5.0%

Class A 5.5%

Why? Because there is just more demand for the lower class properties cause there is more demand than supply.

Many times the business plan is the be the “best in class.” For example, businesses want to be the best mobile home park or best high end remodel because you attract the richest customers in that niche.

I like to monitor the number of new units coming online because that is your downward pressure. It is rare that new builds are for Class C or Class B.

The micro-unit trend is an attempt to build for Class C and B tenants due to the need. But often the numbers don’t make sense when you have purchased the same building materials and mobilized the same crews to build a Class B asset as opposed to a class A asset.

Let’s go through that Armageddon example again.

Class A will have to drop rents severely and see great vacancy.

Class B and C will see vacancy come up too as people are losing their jobs but should see some absorption from ex-A Class tenants.

Mom and dad will also see some absorption as deadbeat son or daughter move back home.

Shows like Friends and How I Met Your Mother will go on for another decade.

Note: one can argue that class A+ will not be affected at all which I believe is true. That’s why we are trying to invest right to enter that untouchable status.

I remember when I sat through the same economic presentation at work from 2010-2014. The sentiment at the time was that it was going to be an extremely slow recovery. It makes sense that the length between the 2008 recession and now is very long which is why I mentioned an 11-inning ball game.

This is why I took a set back from some pretty Class A deals because I asked myself the following questions:

1) What will happen to the rents if IT should happen?

2) Is the modeled 90% vacancy rate going to get blown up?

Class B and C apartments in strong submarkets will perform best over the long term. If you ensure the loan term is long enough so you don’t get hurt then you should Outlast the bumpy ride ahead.

Beware of the self-destructive behavior of not investing. You know what I mean… are you someone who self-sabotages?

Understand the micro and proceed if the numbers make sense.

I have to admit Class C and B assets are boring but work especially in a seller’s market because 1) they cashflow and 2) have a forced appreciation value-add component to give you levers to pull in tough times.

Again going back to Mr. Kiyosaki’s three-sided coin quote, investors go through three stages.

Stage 1: Go into MFH… Duh (I did well at single-family rentals let me try apartments)
Stage 2: Be a contrarian investor so go into other asset classes most decent investors are afraid or don’t even know about
Stage 3: Do special projects such as Affordable house taking advantage of tax credits or specialized operators (ie take abandoned big-box space like movie theaters and convert to the latest consumer needs)
Experienced investors who were in the downturn in 2008 say its interesting that the sentiment in 2006 was exuberance that it was going to keep going up. Now in 2018 the sentiment is fear… This is a good thing.
Remember that in this market we still have:
  1. Historically low-interest rates
  2. Historically high rent increases (not 8% anymore but still 2-4%)
  3. Historically low vacancies
Things to monitor if you really need to geek out on numbers:
  • 2 and 10 yield t curve. When that crosses you have just-a matter do time. Because its a measure of fear.
  • Automation and AI – huge shifts in jobs. People need to work but technology has been increasing since the beginning of time.
  • Wage growth
  • Bankers prospective: how deals are getting funded and by who (institutional or dumb capital)
There is a saying out there that real estate is location specific. However, when I invest in more stable asset classes its a National market based on the economy both USA and international. When you invest in a micro-economic fix and flips then its location specific. When you invest in commercial assets it’s with more stable tenants and based on the aforementioned larger economy.
A lot of people point to the Yield-Curve as a big indicator. In the end, I do believe that real estate will go down because of consumer instability. But if you have stocks you should sell those before even thinking of lumping it into cashflow type rental real estate.
“The guy not investing right now and hoarding cash (with net worth of under $1M… because if you can live off your cashflow then cool you can do what you want) is just afraid and lacks deal flow. Its like the person who complains that there is nothing to do during the weekend in LA (insert city with a vibrant scene) when in actuality they don’t have any friends (lack dealflow)… and by the no one likes (has a bad attitude and that person who makes excuses”
Doomsday theory: Everyone talks about national debt but we are far far behind debt to GDP ratio that of Japan. When Japan hits the wall lookout. Her is my theory… watch out post-Japan Olympics when they have to let loose the belt (after a holiday period of excess calories). Leading up to a period where Japan has to save face while they are in the Olympic spotlight (and I’m not being racist cause I am Japanese and it is a thing). I don’t have the latest data but Japan is at around 250% where the USA is at 100%.
Household debt KPIs: student debt, car loans, housing debt. Which is why I like these assets that are used by the poor and middle class! #RenterForever

To join our Hui Deal Pipeline Club and stick with the group join below:

Why invest in MFH

MFH is the obvious choice when it comes to jumping into syndications because it is the shorted logical leap for a single family home investor.

Here are some other reasons:

  1. We need more housing for class-C and class-B renters due to population increasing and rising interest rates
  2. Inflation favor hard assets
  3. We are no longer a buying nation we rent (think millennials)

    [This is the millennial version… cause they can’t seem to afford (or want) to own anything]

  4. The government is trying their best to incentive investors – Follow the money people!
  5. 2018 tax changes with bonus depreciation make it better for projects like large apartments to get better tax treatment than ever before via a cost segregation.
  6. The country needs 4.6m new apartments by 2030 (Source). We need more class C and B housing. Our country is becoming more like Asian Countries where the is a bigger divide in the wealth gap and need for low-income communities.

Market Indicators:

  1. Large employers or job growth
  2. Population increasing
  3. Rent increases
  4. Occupancy/Vacancy stabilized

Typical business plan:

  1. 60+ units or more to get economies of scale and to have dedicated staff on site
  2. 1970-1980s Class B or C buildings
  3. Utilize Fannie Mae or Freddie Mac Non-Recourse debt with up to 12-year loan terms
  4. Buy right – rehab units with $2,000-8,000 per unit – reposition by improving operations and stabilizing rents for exit
  5. Property cashflows day one after purchase
  6. Re-brand (new signage and online presence)

Value-add:

  1. Poor existing property management
  2. Old tired units or leasing center
  3. Outdated amenities
  4.  Creative improvements using best practices and technology
  5. Additional opportunity for extra income

Miscellaneous ideas for thought:

  • 2010 to 2015 is the golden era of Multifamily. Many rents were going up 5-10% per year (average 2-3% in a good market).
  • The (Global/National) markets go in cycles, the sub-markets (physical locations) go in cycles (see below)
  • Asset Classes go in cycles but hopefully, you are investing with the pros who transcend the high-level norm.

Multifamily Investing Lingo

Real Estate terms:

  • Pretty simple if you understand the way to utilize them and how they play together in real estate transactions
  • Applies a lot in larger transactions (multifamily), but can be applied as well in smaller (single family) transactions

Income (types):

  • Different ways you can make money on a property
    • Rent – not what is on the contract, but what the market would yield for the space that you have
    • Other Income
      • Pet Fees
      • Laundry
      • Reserve Parking
      • Late Fees

Gross Market Rent:

  • Sum of all the different types of income you can earn from the property

Deductions that can be taken from the Income types (can also be called Efficiency deductions):

(Loss to) Lease:

  • Loss of income based on the market value of the property minus the amount you are renting the property for
    • Example: You have a property you are renting out at $750/month. The current market value of the property is actually $825/month (based on listings in Craigslist, etc.) You have a $75 Loss to Lease per month on that property
    • This is money that will never be gained, as the market changes so much
    • This has to be factored in when looking at properties, and you should constantly monitor the market you’re in to see what kind of Loss to Lease you’re taking on

(Loss to) Vacancy:

  • Especially on bigger properties – you will never have it leased all the time
  • Normally, there is a week or two of vacancy, sometimes more (up to a month or even longer) between tenants
  • A lot of people like to estimate 5% loss due to vacancy, but should be considered more scientifically than just stating a number. For example, if it’s a single family home, you’ll want to factor in at least one month’s rent, which would be equivalent to 8%. If it’s a duplex you’ll want to factor in one month’s rent for your most expensive unit. The more units you have, the more you can expect that vacancy rate to go down. But be conservative when you’re writing up a deal – the smaller the deal, the higher your vacancy rate. So start at 10 if it’s a one or two unit deal, and then drop accordingly.

(Loss to) Collections:

  • Isn’t just money you will be getting back from tenants who are late on payments
  • Includes loss of money from tenants who move out and are not able to pay their balance
  • You need to factor it on your own in the market you are in and what the economy you are dealing in is
    • Example: If you are dealing in C or D type neighborhood, you will have to factor in [Loss to] Collections. If you’re in a B or A type neighborhood, then you can lower Collections down to zero and assume the loss will just come out of Vacancy

Effective Gross Income (EGI):

  • Gross Market Rent minus whatever loss will come out during operations (Efficiency deductions)
  • Real money that comes in through the property
  • From your EGI, you will still need to deduct your expenses (listed below)

Expenses:

  • Insurance
  • Professional Services – Leasing commissions and/or other professional services you bring in (legal, accounting fees, etc.). If you’re an LLC, you will need to put in your budget the cost (tax) for the LLC every year ($400 – $500), IRS
  • Regular Maintenance (landscaping, snow removal, heater service, pest control, touch-ups and minor renovations on unit before tenant moves in, fixes like clogged-up toilets, etc.)
    • Rule of thumb for Regular Maintenance: Brokers will place it 3% of your EGI, but is more effective to think it as dollars per unit.
    • Example: If property is something you bought, did a full renovation on, put tenants in, and then got it refinanced (BRRRR – Buy Rehab Rent Refinance Repeat), your maintenance should be lower because you’ve done everything and should be able to call for a warranty call at the very beginning if it’s something the contractor who did the work on your property didn’t do. If you’re very good at turning these properties over, then you should have very little maintenance going in
    • If it’s a newer rental, could be anywhere from $300 – $400 every year
    • If it’s something you’re inheriting (inheriting maintenance issues as property already has current tenants and will need to deal with it as you go), you will want to go with higher maintenance numbers: $700 – $900 per unit per year
    • Will really depend on how much you project it to be (check out the property thoroughly, and/or if there are existing tenants, ask them what are the maintenance issues) as it can really kill or make you a lot of money on your deal.
  • Property Management Fee – 6%
    • Property Management means looking after the property and make sure operations is running smoothly
    • If you are managing the property, you will want to put that in your own pocket
  • Asset Management Fee – 2%
    • If you are hiring a Property Manager, you will also need to hire an Asset Manager, or you can be the Asset Manager and that money will also go into your own pocket
    • Fee of managing the Property Manager
    • Asset Manager will be the one to pay mortgage, ensure real estate taxes are being paid, monitor the markets and ensure that the right rents are being charged, will also have veto power to veto work orders that might come up that you don’t want to have done because they’re too expensive, etc.
    • Asset Manager is also there to look at the real value of return on the asset
  • Utilities
    • Everything from heat, water, sewer, even CCTV systems, phone lines
    • You will want to look at the prior owner’s expenses for utilities were (around 18 months’ worth), or look to see what the market or other people are paying
    • Make a good guesstimate on what your utility projections are going to be and go from there
  • Real Estate Taxes

(Above the) Line:

  • Term sometimes used by brokers when grouping Gross Market Rent, Efficiency deductions, EGI and Expenses (everything that gets deducted out to determine the profitability of the deal)
  • Note: I don’t really talk in terms of Cap rates because you can manipulate the “above the line” assumptions to get whatever you want

Net Operating Income (NOI):

  • EGI minus all the expenses that can be deducted from it
  • Does not include mortgage payments or Debt Service (money you have to borrow to buy the property)

Capital Expenditures (Cap Ex):

  • Also usually referred to as Below the Line expenditure but is also sometimes considered as Above the Line, depending on whether you are selling or buying a property
  • Long-term improvements to your building/ property
  • Major renovations to bring unit/ property up to market standard (replacing the roof, replacing the furnace, full renovation on a unit)
  • Any expense that will add long-term value to your building
  • You will need to set aside money for this (Cap Ex Reserve)
  • Not taxable as it is just money you are earning but will be setting aside in a savings account

CAP Rate:

  • NOI divided by the price you’re buying the property for
  • Determines the money that the property will give you
  • Example:
    • If NOI is $100k and the price of the property was $1 million, then CAP Rate would be 10%
  • Intended to be used when valuing buildings (especially commercial real estate)

Cash Flow (CF):

  • NOI minus Debt Service
  • Also determines your Return on Investment (ROI) on the property

Debt Services Covered Ratio (DSCR):

  • Looked at by the banks
  • How many times the deal can cover the Debt Service
  • Calculation: NOI divided by debt service
  • Most banks will want to see a DSCR above 1.25%, you will want to see a DSCR of above 1.5% to get a higher ROI

Green Credits:

  • Breaks in your interest rates for employing energy saving means
  • Full report

Reports for your digest:

18.11.15 – 3Q18_US_Multifamily_Capital_Markets_Report

18.11.18 – Yardi Monthy Report

126 – Gino Barbaro talks Apartment Investing


YouTube Link: https://youtu.be/lvd9F9OmDI0? sub_confirmation 1

Article Link: Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Jake and Gino have a great podcast and definaetly fit in the category as guys who are growing and doing things right
Let’s work together to redirect money from the Wall-Street casinos and corrupt financial institutions…To help the endangered ‘Middle Class’ savers find safer, more profitable investments in Main Street opportunities benefiting local communities. Join Hui Deal Pipeline Club and check out the sSimplePassiveCashflow.co/mission

Gino Barbaro from Jackandgino.com who focuses on MFH real estate.

Group owns 848 units valued at >$50 million. Expecting to go up this year.

Took 5 years to get $25K-30K/month in passive cash flow.

Fumbling around in the beginning with smaller cash flow amounts, but snowballs over time.

Came from the corporate world to managing a family restaurant. 2008 transitioned to real estate to make better use of time outside of the kitchen.

Highly recommend reading “The E-Myth” by Michael Gerber. Need a visionary, manager, and technician for any business.

Believes you need a Connector, Executer, and the Backbone. Can’t do all 3 – pick 1 or 2 and hire out.

95% of blocks are internal. The rest are external. So, focusing on resolving limiting beliefs and get a life coach.

Google Tony Robbin’s 6 human needs. Have to continue to grow and contribute in a large way.

Relocated to Florida and aiming to obtain $40K/month by end of this year.

Have lifestyle work for his business; not his business work for his lifestyle.

Becoming more efficient by hiring a VA and Digital Marketer for jackandgino.com. Wants to spread content and message; not work on menial tasks.

Focus on 1 or 2 niches for real estate and become an expert at it.

MFH has more barrier-to-entry v. stocks, crytocurrencies, etc. The more people in it, the less profit margin there will be.

Share weekly successes. It’s not bragging, it inspires people and surround yourself with the right people.

Be present in the moment. When you’re at work, with family, etc. focus on dealing with that situation.

Visit www.jackandgino.com. Also on FB, LinkedIn, Twitter, and Instagram. E-mail works too: gino@jackandgino.com.

 

 

122 – Apartment Investing with Michael Blank

YouTube Link: https://youtu.be/1N3wBAwPrfw? sub_confirmation 1

Article Link: Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

Partner with Multi-family Home (MFH) students to close first MFH deals.

Passive Income became attractive after reading Rich Dad, Poor Dad.

Opened pizza restaurants without mentor and lost 95% of net worth after 5 years.

Realize can raise money for Real Estate. Flipped 30 houses in 2 1/2 year but still active work.

Received passive mailbox money for first apartment in 2011 and never turned back.

Combination of doing MFH deals and teaching/helping others is fulfilling.

Stop being a drifter. Drifting keeps us from living an intentional life.

Ongoing experiment to scale business while not lacking quality of deal.

Transition from being focused on generating money to helping people become financial-free.

Do first MFH deal and reduce living expenses to quit W-2 job.

Momentum will build in subsequent deals. But first deal is always hardest.

At peace with things out of your control.

Be sensitive to where your business is to make right investments, such as virtual assistants, salary employees, etc.

Smaller apartment deals (duplex) will kick off law of first deal.

Don’t need $30K to do first deal. Spend on education and raise capital and/or find deals in this seller’s market.

Controlling time is most important resource. Don’t put ladder on wrong building.

Visit www.themichaelblank.com to download free ebook about raising money for MFH apartments.

The Journey to Simple Passive Cashflow – Preview

This course is currently in Beta mode and Beta pricing. Email Lane@SimplePassiveCashflow.com if you want a deal.

Week #1 – Introduction to the “Journey to Simple Passive Cashflow”

Week #2 – Seeing the Matrix – You will know why the middle class is shrinking and what you can do to continue your same standard of living

Week #3 – About Me – Learn about my background and why I have the formula for high paid working professionals to escape the rat race

Week #4 – Real Estate Investing from a 30,000 foot view part 1 – You will understand real estate investing and all the options. We will cut through the noise and identify what are the best options for the high paid professional

Week #5 –  Real Estate Investing from a 30,000 foot view Part 2 – Continuation with the addition of downloadable tools

Week #6 – A free special gift

Week #7 – Fundamentals – You will get to know the basics of what every investor needs to know without reading a gazillion books or going through hours of boring podcasts

Week #8 – In-Field Experience – A guide to effectively network and build your investor circle

Week #9 2018 Trends – The Fundamentals don’t change but the market climate changes so here is the latest market report and things to be on the lookout for

Week #10 – Buying a Rental Property Part 1: Acquisition – Start shopping for deals and refine your criteria to be able to spot out your next addition to your growing portfolio

Week #11Buying a Rental Property Part 2: Lending – You can’t buy anything and use leverage effectively if you don’t know the basics of using the bank to your advantage.

Week #12 – Buying a Rental Property Part 3: Operation – Congratulations you are a rental property owner but that’s only half the battle. Now we focus on managing the manager so we can optimize our returns.

Week #13 Buying a Rental Property Part 4: Mentorship/Networking – You net worth is your network. Don’t be that guy who repels help and good ideas and the last person to hear of the latest trends or work with bad vendors.

Week #14 – Half-Way Point! – Build your portfolio with the end in mind and with a holistic approach

Week #15 Syndications + Apartments Part 1 – Understand why most sophisticated investors scale up to larger investments

Week #16 Syndications + Apartments Part 2 – Find out how you can get access to deals once only accessible to the wealthy within the country club

Week #17 Investor Mindset – Once you get started you realize that the possibilities are endless (I know it sounds cheesy but some people sign the front of the checks and some people sign the back)

Week #18 Productivity – Following up mindset the limiting factor might be the fact that you suck at getting things done. Here are some of the best tips to increasing your output and having more time to do what you want to do.

Week #19 Taxes – You will learn what you will need to know to prevent legal churn from a lawyer who does not know what they are doing

Week #20 HELOCS/Refinancing – A great way to find lazy money to put to cashflowing rental real estate

Week #21 1031 Exchanges – Don’t be fooled but this talked about tax strategy. It is often not what cutting edge investors use.

Week #22 QRPs – Got funds locked up in retirement funds? Lets free that lazy equity!

Week #23 Life Insurance Banking – Its called life insurance but its use by the wealthy to bank from yourself and avoid taxes.

Week #24 Other Financial Hacks – Other secrets I pick up by hanging out with wealthy people

Week #25 Covering your assets – You will learn some ways to build legal protections around your financial empire

Week #26 Conclusion – Pulling together the basic and advanced topics for you

This is the stuff you don’t hear talked about from co-workers!

Most so-called financial planners don’t even have a clue – although they are probably a nice guy.

These are the secrets of the uber-wealthy and specific mentorship groups that I have spent over $40,000 to learn over the past few years.

Podcast #113 – Buck Joffrey – Medical Surgeon gets fired and goes into freefall

For the limited offer coaching from Buck and program: Simplepassivecashflow.com/buck

Video Version: https://youtu.be/jq0MhXDEzzA

Audio Version: https://youtu.be/TUmVLqNNtlE

 



Text “simple” to 314-665-1767 to download the Hui Google Drive files and the  2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

Please help the show by leaving a review: http://getpodcast.reviews/id/1118795347

Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

 

We heard you on podcast 17 and you told your story – http://simplepassivecashflow.com/podcast-17-serial-entrepreneur-dr-buck-joffery-wealthformula-podcast/

Hearing your story high paid doctor. Describe yourself as an employee?

Great butt kisser

Lane’s getting fired story

So you were fired what gave you the security to not go back?

Lane’s getting fired story

 

http://richhabits.net/catastrophes-reveal-inner-greatness/?mc_cid=610082b2da&mc_eid=a129173ca3

 

Why professionals are trained to go through the system

 

The two excuses why not to leave the professional system

 

Wealth formula – Mass (money) x Velocity (Leverage) = wealth

 

You need to make money

 

What happen to assisted living project?

 

Taking shots and trying things out? Where is the transition point from taking singles to going to homers?

 

We are talking about Jorge from Simplepassivecashflow.com/ahp

 

SPC listeners are usual creatures. Get me in a room with a bunch of W2 workers talking about their frequent flier miles and their cars and I’m completely turned off. What are your thoughts on coping with this?

 

What are some ways you teach the entrepreneurial spirit with your kids?

 

What if they just want to work for the man or do peace corps?

 

Simplepassivecashflow.com/buck to get the free 1-hour coaching offer from Buck.

—————————————————–

 

Our worst W2 moments which were our Han Solo Moments

 

How to make it as a medical professional? – Kiss Butt 😁

 

We are robots.

 

For more content go to Simplepassivecashflow.com/buck

Apartment Video Walk-Throughs on YouTube Channel

Check out all the videos on our YouTube channel. Subscribe to get the latest and hidden videos.

Des Moines, Iowa – 52-unit C+ Class Apartment (April 2018) – Video

San Antonio, TX – 192-Unit Class B+ MFH (March 2018) – https://youtu.be/-5h2GKZ3I58

San Antonio, TX – 253-Unit Class B+ MFH (March 2018) – https://youtu.be/vj8ZMteppfg

Oklahoma City, OK – 170-Unit Class C MFH (March 2018) – https://youtu.be/3n4Kan6fmAw

QRP – Qualified Retirement Plans & Free Book

If you have a 401K or Roth or IRA you need to start using a QRPs or qualified retirement plan!

If you are running low on cash because you have been picking up deals left or just broke because you have been listening to mainstream dogma and you have money in your retirement plans this is for you!

Damion Lupo was a previous guest on episode #40

Here is the webinar! Enjoy and send me questions to post the answer below.

If you are late to the game of investing in alternative investments like real estate (imagine that) and already have a large 401K over $100,000 then you should convert it to a Solo401K or Solo401k Roth version. At that point you can slowly take money out to minimize your taxes (not go into the highest tax bracket) and invest in the meantime as you “leak” the money out of the Governments control.

***Updated 9/2018***

My order of contributing to these (future money) accounts after you take of (today money) regular liquidity. [I suggest per hour Coaching]:

1st QRP – contribute at least until the match.. 100% return

2nd IRA – Flexibility to self-direct

3rd SERP – liability of the employer.. pays out when you leave or after retirement age or a designated age in the future

There are a couple caveats to point out:

  1. When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using the QRP loans get you the second tier financing options, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!
  2. QRPs like your 401Ks or IRA accounts is pretty much locked up until you are “old”. There are some provisions to get the money out when you are 45 years old but you need to eat today. So I recommend a holistic strategy of blending your investment funding from both QRPs and you regular liquidity. We can likely discuss this in a quick 1-hour coaching call.

Info on using retirement funds for syndication deals:

Question: I am considering investing in a 506c investment on a multifamily property. They are raising a 1 million from investors, then getting a loan and making improvements to the property and repositioning it over 5-7 years. I wanted to use my funds from my SEP IRA which is currently in a qualified intermediary trust. What is the UBIT tax? Will I be subject to that on this deal? Also, should I set up an LLC that then loans the money to their LLC? How can I structure this for tax and liability benefits?

Answer [Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt-financed income).

For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.

For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.

There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.

UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.

Follow up question: Is there any difference in how the UDFI will apply for these:
1) SD IRA
2) SEP-IRA
3) Solo 401K
4) SD IRA (operated as an LLC) so this one is confusing… My LLC owns an LLC (syndication) which owns a property such as 150-unit on 123 main street

Question: I’m trying to decide if one is better than another for tax purposes?

Answer: The solo 401(k) is not subject to UDFI but it subject to UBIT. The IRAs are all subject to UBIT and UDFI. Note that generally the passive income flowing back to you is very low and the, as a result, we don’t see a huge UBIT tax.

Another idea would be to take a debt position (lending) rather than equity. The interest you would receive is free of UBIT and UDFI tax.

(This suggestion of a “debt” position or note investment with the SEP IRA to avoid UBIT and UDFI tax is a creative one… but it’s a very low chance of happening because it’s just too complicated and honestly not worth the effort from the syndicators’ side. It’s a very similar case of to a Tenant-In-Common (TIC) arrangement where an investor has 1031 exchange funds and wants to parlay that money into a syndication. It’s possible but from the syndicator’s perspective a lot of unneeded work when you can just raise the funds the traditional way. Caveat: if you are bringing in a huge amount of money say 50% of the raise then that might tip the scales in your favor)

Ask you can tell this is a really grey area. One CPA mentioned, the answer depends on how you structured the syndication, UBIT may or may not apply for the real estate holding for solo 401k. I would really try to toss the Operation Agreement to your individual CPAs to examine and determine ahead of time as I am not a CPA 😉

Caveat: If you are late to the game and already have a fat 401k then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.

So if you are going to have one of these QRP accounts since you have an old 401K or old retirement accounts want to self-direct it in good investments and don’t want to take a huge tax hit right away set up a Solo401k or Checkbook control.

Hey Lane! I asked my CPA [who actually knows what they are doing… let me know if you want a referral] and here is what they said… [my additons]

If you are going into a deal with your Self-Directed IRA, you won’t be able to use passive losses to help offset W2 income or taxes due on early IRA withdrawal. We would rather see you take a withdrawal to invest rather than invest within the IRA.  [If your 401K or IRA has more than 90-120K you may want to keep it or start-up a QRP. At the very lease consider taking out withdrawals slowly as to minimize your AGI creeping up to higher tax brackets] They said the first two years will not be any UDFI as Bonus depreciation will offset it within the IRA.  In the long run, UDFI will become substantial plus the taxes due on retirement withdrawals.  Just pay the tax, either way, the only real present-day penalty is 10%.

Action Items:

  1. Get a quick pay per hour coaching call to see how this plays into deals coming up in the Hui Deal Pipe Club.
  2. Get set up here or ask me for a warm email intro.
  3. And get the free book on QRPs!

 

Here are the podcast notes:

To get to know Damion more go to SimplePassiveCashflow.com/damion

I have been having a lot of calls with listeners having exhausted their liquidity and have money in their 401K or IRA’s still in Wall Street Investments.

One of those ways to get the money out is via a QRP or Solo401K.

Today’s guest Damion Lupo with discussing – SimplePassiveCashflow.com/qrp to get a free copy of his book

I cashed out my 401k because I figured I was going to pay the taxes anyway and my tax load would be a lot higher in the future and I wanted access to my money before retirement age.

Visit CrowdfundAloha.com – a website dedicated to helping hard-working middle-class people build real estate portfolios.

$26 trillion in retirement plans. You have all sorts of money that can be tapped into, but fear holds you back.

As an investor, Damion has purchased 150 houses in 7 states ($20 million portfolios).

2008: went from $20 million to -$5 million. Had to start all over.

Beyond money, find out your why. Read Simon Sinek “Find Your Why.”

Mission Statement: Free 1 million people from financial bondage.

I.R.S takes 70% of the average person’s money.

The QRP (Qualified Retirement Plan): “The Ferrari of 401(k)’s.”

You probably haven’t heard of QRP as Wall Street tends to control your stuff.

QRP allows you invest in many real estate options (syndications, lands, rentals, apartments, commercial, international deals, HML, etc.).

Total control, fixed fees, endless choices, and FAST with QRP v. Self-Directed IRA. 10X contributions and control with no custodian.

SDIRA will lose 1/3 of profit as UDFI triggered. QRP – Roth has no UDFI – keep 100% profit.

Can keep 401(k) at W-2 and sign up for QRP. Max contribution would be $55,000 in combined plans – $28,000 in the QRP.

QRP can hold other non-real estate investments, such as gold, silver, Cryptocurrency, etc.

Build-in credit line in a QRP. Up to $50K in cash.

Investors, self-employed, and family members are all qualified.

Properties you have or use right now cannot be placed moved in a QRP.

To fund, can rollover any IRA, 401(k), +TSP, 403b, 457.

66% people are worried about not having enough money for retirement.

Free copy of QRP book at www.simplepassivecashflow.com/QRP

Podcast #111 – Interview – Brent Kawakami – Saying NO to a measly $300 a month & Networking on Facebook

YouTube Link: https://youtu.be/dgdMLNq73TM

Text “simple” to 314-665-1767 to download the Hui Google Drive files and the 2018 Rental Property Analyzer

For a free electronic version of my bestselling book in 12+ categories text the word “ebook” to 587-317-6099.

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Join the Hui Deal Pipeline Club! SimplePassiveCashflow.com/club

Pardon the grammar – I’m an Engeneer, Enginere, Engenere… I’m good with math!

________Here are the Show Notes________

1) How much CF are you making today and how are you doing it?
Generally I’ve fluctuate based on buying/selling of real estate. Right now it’s all from passive investments in apartments. My peak was couple thousand a month.
So as I started investigating other investment activities I dabbled in:
P2P investing – Returns were decent (I think I made like 18%), extremely passive once you funded loans. I was fortunate that none of the ones i lended on defaulted so that’s real risk. While you are earning interest payments, it goes back to account so extremely illiquid. You wait out the loan term which can be long. No control. I’d rather do private lending that’s backed by a physical asset.
Dividend stocks – Lot of research, reading investment newsletters, etc. You’re still at the whimsy of the stock market. I could see doing this in future maybe if there’s a crash and you can pick up trophy companies cheap. Again no control.
Gold/silver – I got caught up by the Gold bug rhetoric of “the dollar not backed by anything” “ the crash is coming” “ look how much debt we have” blah blah . A lot of similar stuff you see some Cryptocurrencies saying now. To me you need treat as a store of value and something you don’t care about price. And you need to hold physically. It’s a chaos hedge. But it doesn’t cash flow. And if shit really did hit the fan, you’re not going to need gold, you’re going to need guns, lol.
Internet business (I did sell it later for a small gain). A lot of work…it’s a business. You can get caught up in the 4-hour work week thing, sell your ebook, etc but this takes consistent cultivating like any other business. I had an instance where a change in Google algorithm killed my profit.
Infinite banking (which i’m all in on still) – You’ve had podcasts before on this topic about all the benefits but it’s an amazing vehicle that complements real estate. Personally I don’t think of this as a true investment, it is a savings vehicle. I treat it as my cash war chest and foundation. Downsides to me are that you have to understand and treat as a system otherwise you’ll fail miserably. It’s also literally a lifetime commitment.
Ultimately I settled on real estate starting the single family route in Dallas area (buy, rehab, rent, self manage, etc). I eventually saw the light (What was the light) of multifamily and started investing passively, sold off my single family houses and now a new aspiring sponsor/operator. There’s all the typical things people say (econmies of scale, non-recourse, etc) but my a-ha moment (my 2nd Han Solo moment I guess you could say) was when I started looking for another rental house. I realized adding another $300/mo cashflow wasn’t going to drastically change my life. If I wanted to level up faster, I needed scale faster. Multifamily can do that. When you get a large check for hundreds of thousands from a disposition event on an apartment complex, that’s life changing and can get you places.

(So now you are in the stage where you are doing all the hard work before the success… lets go through this list of things that you are doing… this add value to the listener and maybe we can have a discussion about best practices – Just think in the future when a future investor listens to all the shit you did to get into this)

1) Joined mentorship program (I would rather not say who they were) No problem. Main best practice to me is it’s almost a requirement for MFH. This is a must in addition to all the other education (reading, podcasts, etc)
2) Regularly Contacting brokers/Signing up for lists
3) Evaluating deals
4) Scheduling in-person meetings with with brokers to connect (what did you do). My partner and I specifically reach out to have a meetings at a broker’s office. We’d talk about what we’re doing, looking for, etc and it gave us an opportunity to meet other associates. I’ve tried to do in-person at their office or if I can take them to coffee. For out of town brokers we’d do over phone or if we travel to see a deal (leveraging a current listing of theirs as a talking point to get convo started).
5) Making regular LoopNet rounds
6) Going on property tours
7) Networking on BiggerPockets/LinkedIn/Facebook, etc
8) Going to Meetups, events, and conferences
9) Partnered up with another new sponsor/operator to duplicate efforts, fill gaps, etc (What do you do well and what does he compliment).
My partner is better at making connections and relationships than I am. I’m more analytical and investigative. He’s an eternal optimist, while i’m Mr. Engineer worst case scenario. He can get shiny object syndrome whereas I’m much better at keepings things on task. We’re both at the same level/point in our investing so we have a good synergy with the perspective we’re coming from. One of the things we like is if it takes looking at 100 deals to get 1, maybe us both looking cuts that in half lol.

2) What is your Han Solo moment…

I had two.

1- One was a couple years into my career and i started think there was more than this for 30-40 yrs and began exploring other stuff (as mentioned before)

2- Shift from single family to multifamily. My a-ha moment mentioned before.

3) Worst life/business moment what did you do a er? Lesson learned?

I’ve had those crappy issues that come up with rentals, like plumbing issues, tenant issues, foundation issues, etc which sucked. Although one big one was not listening to my wife about a single family house. I had a tenant turnover in one of my rentals and I had been mulling about selling and focusing on multifamily. Instead of listening to my wife who encouraged that, I did the easy thing which was find a new tenant. I had gotten so in the routine and it was the easy option even though I knew I was ready to step into next thing. It ended up being my worst tenant ever (she paid but was really needy) and a headache. I ultimately sold it a few months later.

Lesson learned: Listen to your wife more. While she isn’t involved directly in the nuts and bolts, she is a better judge of character and intangibles in both myself and others.

4) Current 2‐week experiment and 6‐month project? (90‐180 day goal) A mark of a high performer is to put your ego aside and accept the help of others and mastermind maybe folks can help you by you asking.

2-week: Let’s see when we get there. Lot of personal type things likely going on (not sure if that’s valuable for your audience?)

6-month: Sponsor a 75+ unit, class b/c apartment. That’s my one thing.

5) What is your simple passive Cashflow number? Now imagine you had 2x that amount… Describe your ideal day, detailed rou ne, and what projects you are working on.

6) Something that you have recently or thought about “burning your cash” on for me savings or an improvement in quality of life.

Meal service, not the recipe in the box but the fully prepared, proportioned individual meals. I enjoy cooking but not thinking about what I have to eat is something that I find makes my day easier, especially now that I have a baby. It’s just fuel, i can eat the same thing everyday and be fine. Plus it helps me stay on the straight line nutrition wise.

There’s a good book on this topic called Happy Money I recommend.

7) Something that you changed your mind on? Our ego o en gets in the way of greatness.

2 Things:

1. I used to think of insurance for the financial aspects only but now I think about the riders, disability kickers, etc. Having a kid changes your thought process so now i’m more thoughtful about things like insurance, estate planning, etc. I’m still behind on that stuff, but now these long term planning things are in my thoughts.

2) Owning a house isn’t a big deal. We recently sold our house and moved to an apartment for a number of reasons…yada yada yada. I’m not full Grant Cardone though.

8) In this sellers market… what are you inves ng in? What should a someone who does not have a substan al level of cashflow yet be inves ng in?

My cash value life insurance/infinite banking strategy is my core foundation. I see that as the warchest and can let me sit on “cash” without losing too much. I’m obviously still actively pursuing multifamily, it’s harder of course with the current market, but deals can be found in all markets.

Nothing wrong with being patient if you think things are frothy. 100% of nothing is better than any percent of a bad deal. Being patient is the hardest thing.

brent@hellomultifamily.com