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________
Is dealing in Cryptocurrency dangerous?
Bitcoin grew in value by 1,000% in 2017.
Ripple was the best performing crypto, which had gains of 36,018% last year due to its ease of use. Each coin of Ripple is worth a small fraction of a Bitcoin. The technology makes it easier for banks, payment providers and businesses to send payments globally. They promise to deliver an experience that is instant, traceable, and inexpensive.
NEM is an enterprise blockchain with “smart assets.” It can also be used to manage things like currencies, financial instruments, supply chains, and notarizations. Think how eBay or Amazon takes data from UPS or USPS to track your packages, but a lot bigger.
Other Cryptos:
Ardor
Stellar
Dash
Ethereum (2nd biggest Cypto)
Golem
Litecoin (getting in mainstream vernacular)
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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________
Graham Parham: New Awards:
#1 in units at Highlands Residential Mortgage for 2017
#11 in state of Texas and 92nd in the US according to The Scottsman Guide and
Mortgage Executive Magazine – 1% top originators in the US
Top Ranked – Ask A Lender
Discussion today is 1-4 unit income properties, not owner-occupied.
20% down on first ten financed properties? 25% for 2-4 units?
DTI considerations when using HELOC from primary residence to invest?
Credit scores down to 620. Max. credit score that helps?
Reserves?
New Fannie Mae Reserve Requirements for Investors with Multiple Properties Owned
The Old requirements were six months Principle, Interest, Taxes, and Insurance (PITI) on the subject property and two on all other properties up to 4 leveraged 1 – 4 family properties excluding the primary residence. Properties 5 – 10 would require six month PITI on all properties.
The New requirements are based on a percentage of the unpaid principal balance on each loan excluding the primary residence.
If a borrower has 2-4 financed properties, the reserves of 2% of the unpaid principal mortgage balances are required, excluding the principal residence and the subject property.
If a borrower has 5 – 6 financed properties, 4% of the unpaid principal mortgage balances are required, excluding the principal residence and the subject property.
If a borrower has 7 to 10 financed properties, 6% of the unpaid principal mortgage balances are required, excluding the principal residence and the subject property.
The aggregate UPB calculation does not include the mortgages and HELOCs that are on
the subject property,
the borrower’s principal residence,
properties that are sold or pending sale, and
accounts that will be paid by closing.
The subject property will still have monthly reserve requirements based on the total mortgage payment (PITI). Reserves are funds that you have access to liquid or non-liquid. Reserves are funds you need to have after the closing your transaction. Funds for reserves cannot be your funds for down payment or closing cost.
Fannie Mae now will allow for 100% of the Non-Liquid funds, not 60%
Non-Liquid funds can be used for reserve requirements.”
IRA’s
401K’s
SEP Funds
Gifts are NOT allowed on an investment property.
Investor interest rates how much higher than owner-occupied?
Mortgage sequencing. Example: if buyer wants to buy in Memphis today, Jacksonville next month, how should they plan?
Overall, lending climate more lose or tighter than 1 year ago? 5 years ago?
What should a prospective borrower do before contacting you?
1031 exchanges Cost and funding
What cost are covered in the exchange
What is UP with interest rates?
4 Factors that determine your mortgage interest rate:
Credit Score
Credit Scores Adjustments
740 +
740 – 720
720 – 700
700 – 680
680 – 640
640 – 620
% of down payment 20% or 25%
Loan Amount Adjustments
Property Type
What about the 15 Year fixed?
Does it make since to pay points?
What is the difference between Mortgage Brokers and Mortgage Bankers?
What are overlays?
Does Fannie Mae have a black list?
Are Appraisals regulated and by who?
Is there an appraisal black list?
What happens if the appraisal does not come in a contract price?
Closing cost differences between lenders
Should I pay cash for my investment properties or use leverage?
The next example will show the benefits of using 20% down leveraging for properties versus buying one property and paying CASH.
If you pay $150,000 in cash for one property, your net cash flow is $1245.00. By putting 20% down with an 80% loan to value and a 5% interest rate, your net cash flow is reduced to $600.81. Let’s not stop there. Keep in mind that 20% down payment on a $150,000 home is only $30,000. If you bought FIVE $150,000 homes and put 20% down on each with the same loan terms and monthly rents, you could increase your return on investment by $1759.05 a month to $3004.05. Invest your money wisely.
The net cash flows do not take into account the annual city, county and state property taxes and the annual hazard insurance. The numbers may vary considerately by the taxing authorities. You will have to include that information in your bottom line.
Graham W. Parham has been a Mortgage Loan Officer for over 18 years with 25 years
in sales and marketing. He is a leader of financial expertise in the North Texas
residential real estate market, developing a significant following among homebuyers
and investors. Known and respected industry-wide, Graham’s production consistently
ranks him as a top producer in this market place. According to Scottsman Guide
Graham ranked 92 nd in the US loan originators.
Graham offers invaluable insight into a purchaser’s likely requirements, providing an
exceptional business ethic of customer service and respect, catering to their needs from
pre-qualification to closing. He is a truly dedicated person, who strives to ensure that
each transaction is handled in a timely and stress free manner. By employing these
standards, Graham has established a solid reputation for going the extra mile to put
together the absolute best financing available for his clients. Graham prides himself on
staying ahead of the curve, keeping up to date with the latest products and industry
trends.
As an active investor himself, Graham has a strong insight on what his investment
buyers are looking for to accomplish their short and long term goals. Knowing that
investment loans strongly scrutinized, it is up Graham his team of underwriters who
understands rental property loans versus that of an owner occupied residence. His
general knowledge of REO properties and Turnkey providers coupled with a strong
operational staff allow his loan closings to be seamless and “On Time Every Time”
Highlands Residential Mortgage, LTD. is completely submerged in the real estate
investing industry and has access to many lenders nationally. Our clients benefit from
up to date guidance on all conventional investor loan programs, and less known
creative financing strategies. Knowing that an investment loan will be far more
scrutinized, it is Graham Parham and his team of underwriters who understand a loan
processed for a rental property versus that of an owner occupied residence.
Just as you would not seek legal counsel from someone who does not have a law
degree, nor should you trust a loan originator for your investment property loan from
someone that is not an investor themselves. Highlands Residential Mortgage, LTD. is
an unparalleled mortgage lender whose delivery sets us apart!
Graham Parham’s team mission is to consult every investor based on those
individualized situations and goals. Whether you are buying your first home or
investment property, we carefully look at your options that will give you the best
opportunity for success. Because we know how important your investment financing
strategy is, our extensive research and knowledge of those programs will be brought
forward in educating you as an investor, throughout the lending process.
“My goal is to continue assisting my clients for life and help them meet the ever-
changing needs life throws our way!”
To get access to the lending guide please sign up below:
Fundamentals – Bonus Depreciation via Cost Segregation Studies with John Collins
Since Mr. Trump enacted new tax law, 100% Bonus Depreciation creates significant tax benefits in the acquisition year.
In one of my apartments $3M, 52-unit building is looking to get more than $266K in tax savings (at 37% tax rate) in his first year of ownership.
On syndications, depreciation is distributed to investors on the K-1 Form.
Not making any promises as depreciation amount is primarily based off building specifics and amount of leverage used in a deal but here is a real-life example from a $50K investment in the first year K-1 in 2018 utilizing cost segregation.
Passive Losses!
Note this is a Class C apartment deal
Basics
One of the cool things about investing in real estate is that the properties create a paper loss. For single family homes, you can take 1/27 the value of the property (minus land value because that does not devalue over time) per year for 27 years. This is what is shown below. A cost segregation juices this deduction as it puts the asset on a more aggressive depreciation schedule which front-loads as much depreciation as the tax code allows. This is one of the reasons why bigger deals are better because they can support a 5-8K cost segregation study.
Paper losses due to depreciation!
What is Cost Segregation?
Cost Segregation is the identification of building components and reclassifying the tax life on each of those components. Typical components that can be reclassified include a building’s non-structural elements, such as carpet, decorative lighting and trim, dedicated electrical and plumbing, and security systems; exterior land improvements, such as landscaping, curbs, sidewalks, fencing, and signage; and indirect construction costs, such as architect and engineering fees and construction permits.
Commercial properties establish a 39-year depreciation schedule, and residential properties establish a 27.5-year depreciation schedule. For example think of a 3 bedroom single family home in Birmingham, Alabama that is worth $100,000. Of that approximately $65,000 is determined to be the building value and $35,000 is determined to be the land value. Each year you can deduct 27.5th of the building value which is about $2,363 a year that can once again offset income gains. This can be taken for the next 27.5 years until all the value on paper is depleted. Unfortunately, you cannot deduct the land.
However, the IRS assigns a tax-life to each of the individual components.
Most components that qualify for accelerated depreciation can have their tax life reclassified to either 5, 7, or 15 years:
5-year tax-life components: tangible, personal property assets (carpeting, decorative lighting and trim, dedicated electrical and plumbing, and security systems)
7-year tax-life components: all telecommunication related systems (cabling, telephone, etc.)
15-year tax-life components: land improvements (landscaping, curbs, sidewalks, fencing, and signage)
What is a Cost Segregation Study?
A Cost Segregation Study is a strategic, tax-saving tool that can be used by companies and investors who have constructed, purchased, expanded, or remodeled any kind of commercial real estate (including 1 to 4 unit residential rental properties). The study allows the owner to take advantage of accelerated depreciation deductions and defer federal and state income taxes on the reclassified building components mentioned above.
During a Cost Segregation Study, components of a specific property or leasehold improvement are identified and reclassified for depreciation over a shorter time (5, 7, or 15 years). For example, 30% to 90% of the total electrical costs in most buildings can qualify for 5 or 7-year depreciation. The result of a Cost Segregation Study is that a property owner’s tax obligation is reduced and his cash flow is increased.
Is Cost Segregation something new?
Cost Segregation is not new. On the contrary, it has been in existence since 1954 when the IRS allowed for certain personal assets to be accelerated into a shorter life class. However, it wasn’t until Hospital Corporation of America sued the IRS in 1997, and won, that the IRS revisited the issue of accelerated depreciation. The IRS ruled that property qualifying as tangible personal property under the former Investment Tax Credit (ITC) rules would also qualify for purposes of federal income tax depreciation under MACRS (Modified Accelerated Cost Recovery System).
The IRS Chief Attorney wrote a memo saying, “. . . Cost Segregation, for it to be properly applied, had to involve those with competencies in architecture, engineering or construction and/or construction techniques, in order for personal property assets to be accurately identified and segregated.” As a result of this memo, Cost Segregation became a viable tax-saving strategy allowed by the IRS.
What type of real estate is eligible?
Commercial real estate (including 1 to 4 unit residential rental properties) eligible for Cost Segregation includes buildings that have been purchased, constructed, expanded, or remodeled since 1987. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $100,000. A Cost Segregation Study is most efficient for new buildings under construction, but it can also uncover retroactive tax deductions for much older buildings.
What are the steps involved in the process?
From start to finish, the Cost Segregation process can be broken down into the following steps:
Engage a reputable Cost Segregation firm that utilizes engineers and architects trained in Cost Segregation and its application to the proper allocation of assets.
The engineer determines what documents are available (e.g. planning, construction, invoices, appraisal, and current tax depreciation) for reference and referral.
The engineer then sets a schedule for surveying the subject property and gathering the available documents for review prior to arrival at the subject property.
For those documents that are unavailable, time is then scheduled into the Cost Segregation process for document recreation using known industry standard costing data (Marshall & Swift and/or RS Means costing publications). After all necessary documents are acquired, it takes about 4 to 6 weeks to finish the process.
The site survey is executed and completed. Time varies for each survey, but it can be completed within as little as an hour. During the survey, measurements are taken and all areas are photographed for IRS verification and substantiation of asset values.
The engineer returns to the office and “crunches the numbers.” This is when all documents are reviewed in detail, assets are verified and measured against known costing data, and asset reallocation is applied.
A review committee then examines the results of the analysis completed by the engineer of record to verify its veracity and confirms it meets and exceeds IRS guidelines per the Cost Segregation Audit Techniques Guide.
Once approved, the study results are compiled into a final report that includes: all IRS tax code to substantiate the reallocated assets, spreadsheets identifying all assets categorized according to their building codes, representative photographs of the reallocated assets, and the engineer’s credentials for IRS review.
Final report is issued. Digital copies are emailed to the client and the CPA of record for application to the client’s tax return.
Why bother? I’ll eventually get the deduction.
As investors, we like paper depreciation to occur earlier because that offsets gains earlier and gets more money in our pocket earlier. Just like you give a mouse a cookie…. Give an investor a dollar early and… they will turn em and burn em.
In other words, you are not creating more depreciation but you are shifting it earlier to take advantage of the time value of money concept.
On the project level in a single asset LLC arrangement the more you can lower your tax liability the more you can significantly increase your cash flow and create more value for investors.
A Cost Segregation Study in effect gives you an interest-free loan from the government for the first 15 years, which you will then repay interest-free over the remaining 25 years. Wouldn’t you rather have your money? There are also advantages to doing a study if the building is going to be sold (via 1031 exchange) or if the owner of the building dies.
Does the Cost Seg need to get done this year (Dec 2018) or do we just need to acquire in this year (2018)?
For bonus depreciation, we just need to acquire. The Cost Seg can be completed in the next year (2019).
How much will I save on taxes?
Most Cost Segregation firms will perform a free analysis if you provide your basic property information and tax rate. From the information you provide, they can provide a conservative estimate of the accelerated benefits you can expect, as well as their fixed fee proposed for the final study.
Typically, tax savings from 5% to 10% of the building’s original tax-basis are generated, but there are instances where it can be substantially more. Each property and circumstance is unique, so it requires a case-by-case approach to give you a definitive answer.
How much-accelerated depreciation can I get?
Certain types of commercial property can be grouped together to give us an idea of the percentage of those types of buildings eligible for accelerated depreciation. Your results may be greater, or less than those quoted here, but in general, property that falls into one of the following categories is most likely to result in accelerated depreciation within the specified ranges.
Commercial Property Types:
Apartment Buildings 15 – 25%
Dental/Medical 30 – 60%
Health Care 25 – 65%
Heavy Manufacturing 30 – 80%
Industrial 25 – 70%
Light Manufacturing 20 – 45%
Office Buildings 15 – 25%
Research & Development Facilities 30 – 75%
Restaurant 15 – 30%
Retail Centers 10 – 25%
Senior Living Facilities 15 – 30%
Warehouse 5 – 15%
Does Cost Segregation have other benefits?
Yes. Cost Segregation can provide additional tax benefits. It can reveal opportunities to reduce real estate tax liabilities and identify certain sales and use tax savings opportunities. Under certain circumstances, segregated assets may qualify for a special bonus depreciation allowed by multiple tax reconciliation acts enacted by Congress. Additionally, a Cost Segregation Study can
Maximize tax savings by adjusting the timing of deductions. When an asset’s life is shortened, depreciation expense is accelerated and tax payments are decreased during the early stages of a property’s life. This, in turn, releases cash for investment opportunities or current operating needs.
Create an audit trail. Improper documentation of cost and asset classifications can lead to an unfavorable audit adjustment. A properly documented Cost Segregation Study helps resolve IRS inquiries at the earliest stages.
Capture retroactive savings. Since 1996, taxpayers can capture immediate retroactive savings on property added since 1987. Previous rules, which provided a four-year catch-up period for retroactive savings, have been amended to allow taxpayers to take the entire amount of the adjustment in the year the Cost Segregation is completed . . . this alone is huge. This opportunity to recapture unrecognized depreciation in one year presents an opportunity to perform retroactive Cost Segregation analyses on older properties to increase cash flow in the current year.
Lower property insurance premiums. Since it generally costs less to insure personal property, versus real property, building components reallocated as personal property should reduce your insurance costs as well.
How much does a Cost Segregation Study cost?
On average, the total fee will generally fall between 5% and 20% of the estimated Net Present Value tax savings shown on your free analysis. This can be impacted by how large or small the real estate project is. In addition, the location, accessibility, and quality of the records and documents impact the ultimate cost. Minimum fees can be as low as $2,000 for small projects, and some firms GUARANTEE a minimum of 500% ROI (fee vs. tax recovery) on projects over $500,000.
How long does a Cost Segregation Study take?
The time that a Cost Segregation Study takes depends on the size of the project and the completeness of the documentation that you can supply. Generally, it takes about 4 to 6 weeks from the time the appropriate documentation is received and recreated.
What is required of me to have a study done?
You need to provide as much of the original documentation pertaining to planning, construction, and current tax depreciation as you can. This could include a complete set of construction plans, current tax depreciation records such as tax returns, building cost budget information, final AIA (American Institute of Architects) application and a document of certification for payment or other cost information, change orders, direct or indirect costs paid by the owner that are not included in other documents, and other information depending upon the project.
What if I lack some of the needed documents?
Even if you lack some of the necessary documentation, a study can still be performed for you. Construction, engineering, and other specialists will do an extensive site visit. They will measure and estimate using currently accepted costing techniques and pricing guides (such as the IRS-recommended costing publications Marshall & Swift and RS Means) to determine the costs that qualify for shorter recovery life periods.
Can’t my CPA do a study for me?
CPAs are not qualified according to the IRS guidelines. However, most Cost Segregation firms will gladly work with them on a consulting basis to complete the work for you. Remember, the IRS Chief Counsel issued a memo that made it clear what constitutes proper “methodology” in applying Cost Segregation, and it must be done by people who are competent in architecture, engineering or construction and/or construction techniques. See “Is Cost Segregation something new?” above.
Will a study increase the chance of an audit?
A study conducted by a reputable Cost Segregation firm should strictly adhere to the IRS Cost Segregation Audit Techniques Guide. The type of study most firms perform actually decrease your chances of an audit because the study places you in Internal Revenue Code Tax Compliance. However, be aware there are six different Cost Segregation methods allowed by the IRS, and not all are of equal merit. There is currently no standard method, and there is still some ambiguity about which method is best. If you have heard conflicting information about what is, and is not possible regarding Cost Segregation, this is probably why – it depends on which method is being used.
Will I be assisted in the event of an audit?
A reputable Cost Segregation firm can assist you in the event of an audit. They will focus on doing the Cost Segregation Study to create documentation and support for conclusions so that these are easily communicated and resolved with the IRS. In fact, you should expect a final report that is “all inclusive.” It should quote specific Internal Revenue Codes related to the reallocated assets. Additionally, it should provide photographic evidence of these same assets for complete substantiation of the assessment.
Conclusion:
The Pro’s
Reduction in tax liability
The deferral of taxes
Bump in up front cash flow
The Con’s
Costs typically range $4,000-$8,000, depending on property size/asset value
Accurate and complete documentation is required and requires effort to collect
Cost segregation is not feasible below $100,000 property value
Cost Segregation studies is one of the easiest and quickest way to squeeze a little extra profit out of an investment. If you played race video games in your youth (or still do) it’s like paying for the inexpensive computer chip upgrade, its a no brainer. If you don’t get that reference, its “low hanging fruit.”
If this is a concept new to you, you may be able to go back to previous years taxes and get back some benefits this year. Often times getting a quote is free and quick.
Segregation Holding LLC performs Cost Segregation Studies in all 50 states and throughout the globe for US tax-paying citizens owning investment property outside the US.
Summary: Pay a 30-year mortgage in 5 to 8 years by paying back your mortgage with simple interest instead of amortized interest.
I recently discussed this in my Forbes article here.
Is this something new?
We all know it’s a sellers’ market, with the lack of deals out there and the majority of the Simple Passive Cashflow Podcast listeners looking for something to invest their cash in. Good times, if you ask me. This strategy is nothing new but now the strategies that are, “trending,” like bell bottoms, tights, and neon colors but forgotten. One of these old plays from the playbook is called the Mortgage Equity Arbitrage Strategy also known as, the Australian Banking system.
First off, let’s talk about good debt versus bad debt. Obviously, an 18% interest rate paid on something like a credit card is bad debt. But taking a 4% HELOC (Home Equity Line of Credit) or loan from your life insurance policy can be good debt. Especially, if you are putting the loan proceeds into AHP at 12%, a MFH Syndication at 20%, a Turnkey rental at 30%+, or another higher risk syndication at 35%+. Just don’t buy jet skis or other doodads with the money… I don’t know why it’s always jet skis as the example. Maybe something to do with the fact that it is a mini-boat, and boats are known as the worse purchase known to man.
What you do with the liquidity from the debt is what really matters. Traditionally, it has been good to go into debt for a college education paying 4-8%… unless you are getting a glass blowing degree… or maybe a psychology degree so you can trick yourself into thinking college was worth it… or Asian studies degree because you are going to have to get used to ramen noodles in your adult life… or a Communications degree to be able to spin your financial reality. Ok I admit, I had a pretty depressing college experience…
I don’t personally like these accounts for my own investing even though the future gains and withdrawals are tax-free because you can’t use the best Fannie Mae or Freddie Mac loan products when investing in your IRA.
Unless you are using a QRP (Qualified Retirement Plan).
With syndications using leverage (as most good deals do) you will be likely opening yourself up to UDFI etc taxes.
In the end, I want the freedom to enjoy the money now and not have to wait till I am 60 something.
SimplePassiveCashflow.com/133va
David from Military to Millionaire
Currently still enlisted in Army and spent some time as a recruiter
Don’t blow you money on a nice car
VA Loan – 0% down home loan for a primary residence with no private mortgage insurance (PMI)
You can buy up to a 4 unit
Move and buy at each difference duty station
Generally, 410K loan is the max with exceptions for high price areas like Hawaii
Relocation benefits
Do you stay enlisted in the military
Don’t underestimate the tax-sheltered allowances and perks
Between 2010 and 2017, population growth averaged 5.5% for the US as a whole. Delaware boasted the highest growth rate, 15.3%, over these years. A state with a relatively small population, however, needs fewer new residents to achieve such a high growth rate. The double-digit rates recorded by Texas (up 12.6%) and Florida (up 11.6%), both high-population states, are therefore that much more impressive. There were three states that posted population decline between 2010 and 2017: West Virginia (down 2.0%), Vermont (down 0.3%), and Illinois (down 0.2%). – ITR – 19.02.28
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.
(If you are starting out you should start with turnkey rentals even though they are much more volatile)
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:
Historically low-interest rates
Historically high rent increases (not 8% anymore but still 2-4%)
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.
How affordable is rent really? – “During the same span, median effective rent nationally has risen by about 26%. That rent appreciation pushed the median monthly rent nationally to around $1,220 per unit to end 2018. With the US median household income being just over $62,000, this rent accounts for 24% of monthly income. Using the typical benchmark of monthly rent being 30% of monthly household income for affordability, a margin remains for renters.” – [If you stick to using 2% and under rent growths and stay away from Tier I or Primary markets you should be fine] – ALN 19.02.24
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
Lane’s theory: I’d rather be in deals that cashflow today that do better in a recession like Class C and B assets. Say it cashflows a 8%.
The guy who is stilling on the sidelines with the “hoarding cash” mindset will lose because they will make 0%.
I, on the other hand, might dip from 8% cashflow to 4% cashflow. On paper, I might be in a market with compressed cap rates but hopefully, I have forced appreciation potential if I really needed to sell – the counter move is to get 8-12 year debt to effectively bridge you to the next side of the market cycle. In the meantime you cashflow 4% which is 4% more than the “hoarding cash guy”.
In addition, remember back in the 2008 crash. 2009-2012 people did not know if that was the bottom and it was so hard to close deals in that Phase IV (see below). “Hoarding cash guy” in 2009-2012 and the few years after the next recession will likely be in the same clueless situations.
Wouldn’t you like to be in solid Class C and B assets that continued to cashflow?!? 4% x 4 years is still 16% ahead!
Now if you are “hoarding cash guy” with no deal flow then I get it. Saving cash is the best thing to do for the guy with no deal flow or does not know how to run the numbers. I guess everything does suck.
[Investors are chasing for decreasing yield these days] – REI.com – 19.03.4
[Sophisticated Investors know interest rates and caps go up and down together and their money is made in the delta between the two] – REI.com – 19.03.4
Of course, all the Pro-Apartment publications will say this: Get Ready: Recession-Proofing An Apartment Portfolio – National Apartment Association 19.03.7
To join our Hui Deal Pipeline Club and stick with the group join below:
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________
I worked with Matt’s team way back when in 2014 buying turnkeys. Simplepassivecashflow.com/turnkey Since then it is interesting as times change how his strategy has changed.
We just completed the last deal for an Mobile home park. Which is a little different than apartments.
Please leave an iTunes review – Help fight negative one-star review
Earning $30,000/mo through single-family homes and seller-financed notes.
Epic Real Estate started selling turnkey properties in 2009.
Built successful portfolio, but returns lowering. However, real estate always a good purchase to buy and hold long-term.
Amortization, depreciation, appreciation, and leverage (wealth multiplier) all make real estate investing attractive.
Focusing more on lease options now for C- and D-class properties to rent properties and eventually sell them to tenant.
Went from 7-figure year as a musician to bankrupt at 34. Found real estate mentor at grocery store and life changed.
Real estate is the final frontier for the average person to have a legitimate shot a creating wealth.
Paid $22,000 for mentorship in 2006. Everyone thought it was insane, but helped him get started.
People who made it were ready for it. “Move faster than your doubts.”
Find the deal first and then the money will find you.
Authored book “Do Over” that chronicled struggles and how he built his real estate empire.
Be intentional with who you surround yourself with. Peer pressure works.
Always be looking for a coach and outgrow them. Results accelerator.
Spends $100,000/year on masterminds – worth being around the right people of doers.
Goal was to increase passive income and decrease expenses. In 4 years became “retired,” but wants to be wealthy; not just financially independent.
Bookkeeper should be the first role you should outsource. Transaction coordinators and marketing person also helpful.
Hardest part of the business is to find the deal and get into contract.
Visit www.epicrealestateinvesting.com to check out the Epic Real Estate Investing Podcast.
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________
Estate planning
Guests I have are giving insights but always hire your own person because these things require personalization
I try to bring guests on and ask the questions that I think you folks would ask.
I believe you need to have a basic level of knowledge before engaging with a professional
For those of you who are in the Mastermind and my current investors you will hear about my Fort Knox strategy which makes LLC enitites creation look like childs play
Email me any questions to feature on the next ask Lane podcast or monthly email newsletter
Andrew L. Howell is the Co-Founder of the law firm, York Howell, with a focus on asset protection.
Many useful tools out there, but where do you as an investor fall on the asset protection spectrum?
Two fundamental risks: 1) Asset-based risks 2) Direct-based risks
Real estate considered as “hot” assets because liability risks are greater – more than equity.
Liabilities both inside and outside the asset.
Typically form a holding company to hold limited liability companies to abate asset- and direct-based risks.
Holding properties in one LLC basket is good, but still risks if something happens in one property.
Concentrate on family protection first (trust, wills, etc.). Then move to next level of asset protection planning.
If own property out-of-state, advise on setting up a parent LLC in states with charging-order protection.
Tough LLC rules and taxes for poor California residents!
Need to do your due diligence on reviewing PPM’s – especially who you are doing business with.
Asset does not create liability risk for LP’s; only GP’s.
If you get personally sued, can go after your MFH syndications and other assets even as LP.
6% of current generation feels obligated to give back to kids. Instead of giving, create a bank.
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________
Brian Hamrick is from Rental Property Owners Association (RPOA) and runs Rental Property Owner and Real Estate Investor Podcast.
Currently owns 380 units, which cash flow makes 50% of W2 job salary.
Paydays not only about cash flow. Cash out refi and syndication benefits once and twice a year exceed W2 job salary.
Was sitting on cash waiting for next downturn. However, in past year, became a silent investor in commercial property, a NPN, and a self-storage facility.
Expects rents to plateau in future, but not to 2008 levels.
Started off investing in high-load tech funds, but bubble burst in early 2000’s and stocks tanked.
Rich Dad, Poor Dad inspired Brian to begin investing in real estate and obtain more control.
California is cash-flow negative market, so looked at positive cash-flowing out-of-state markets.
Transitioned to multi-family investing in 2008 for better scalability and profitability.
As passive investor, focusing on leveraging partners’ strengths for new passive investments.
Down the road, looking at developing the “missing middle” properties (small MFH 2-10 units).
Visit www.higinvestor.com to get in touch with Brian.
