All Forum Posts by: Allan C.

Quote from @V.G Jason:

Quote from @Allan C.:

@V.G Jason you didn’t mention if these are single member LLCs or multi-member where members are not related parties. It’s worth inquiring about these differences w.r.t protection if your approach is single-member.

 Single member LLCs, just me in it. 

@V.G Jason you didn’t mention if these are single member LLCs or multi-member where members are not related parties. It’s worth inquiring about these differences w.r.t protection if your approach is single-member.

@David Bennett seems unlikely that you’ll obtain a commercial loan for a single unit. You will likely be getting a non-owner occupied residential loan since those rates and terms will be better. If you are pursuing a cash-out refi under the circumstance above, you’ll need to document that your proceeds are used for investment purposes to deduct the interest payments.

@Martin D. #1 rule is to remove all items prone to error - wifi thermostats fit squarely in this category.

On a similar note, we’re removing garbage disposals from all units during tenant turnovers. They don’t increase rent and it’s one less call every two years per unit.

If you’re just stating out on your investment journey, there are not many reasons why a 15 yr loan makes sense. A prudent investor should always achieve higher returns than prevailing interest rates, thus minimizing down payment and maximizing loan tenure should be your goals. You want to maximize your cash position to diversify your investment portfolio. A 15 yr loan achieves the opposite. 
You can always pay down more principle if you wish, so you only give up slightly better interest rates by going with 15 yr option.  And let’s face it, interest rates are not enticing regardless of loan product at the moment, so you’ll want to refi whatever loan you get as soon as interest rates drop 75 bps. 

@Amran Musaid I self-manage remotely but have Realtors that I use to manage tenant transitions. I buy properties using their services and they gain commission on new tenant placements. This might be the middle ground for you to still have boots on the ground while simplifying your self-management burdens. I use this model in 3 different markets so it can be easily replicated.

Quote from @Eric Fernwood:

Quote from @Allan C.:

@Eric Fernwood You’re missing quite a few items from expense deductions, including capex and inflation adjustments. You capture all upside in your simple calc an no downside.

Hello Allan,

In your statement, "You're missing quite a few items from expense deductions, including Capex and inflation adjustments." You are correct. However, if I used a real-world spreadsheet, it would be too complex for making my point of the post. That is why I prefaced the worksheet with the statement, "Below is a simplistic worksheet."

The formulas we use for return calculations are below:

• ROI = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax) / ( DownPayment + ClosingCosts)
• Cash Flow = (Income - DebtService - ManagementFee - Insurance - RETax - PeriodicFees) x (1 - StateIncomeTax)

You will note that we do not include tax savings, maintenance, and vacancy factors. Some comments, starting with maintenance cost.

Our population's average annual maintenance is about $350/Yr. The reason it is so low is due to several factors, including:

• The construction necessary to survive in the Mojave Desert.
• The lack of moisture and no hard freezes.
• The criteria we use to select properties.
• "Desert" landscaping.

Below is a typical property we target.

There is not a lot to maintain with the properties we select.

The average stay of the tenant pool we target is over 5 years, so a reasonable annual vacancy cost is about $500/Yr.

If you add vacancy cost and maintenance cost, it represents between 2% and 4% of annual rent. Depending on your tax situation, depreciation increases the effective return by 3% to 6%. So, we do not include tax savings, maintenance, or vacancy costs in our initial calculations.

Capex is a popular phrase but only applies to commercial properties. For example, if you have a warehouse, you include a Capex maintenance provision for redoing the parking lot periodically.

In a way, residential properties are similar to commercial properties. Maintenance has two components. Base maintenance (dripping faucets, etc.), which is generally covered by monthly cash flow. Then you have high-priced items, like a water heater or an AC compressor. For such items, maintenance provisions are based on the remaining useful life of individual units. There is no general way to estimate maintenance costs that has any basis in reality. In summary, my intent with the spreadsheet was not to provide a comprehensive financial assessment. It was to point out a single factor.

I won't dispute your specific opex assumptions since you seem to have a streamlined asset selection process. However, most novice investors on this site won't have operating efficiencies that you realize, thus it's more appropriate to advertise a 30-40% opex factor so they have a more realistic assessment of cash flow. 

I generally agree with your notion that residential properties mainly have two categories of maintenance, large and small. However, capex is still a concept folks should understand for calculating cash flow/reserve and depreciation/tax purposes. To ignore roof, appliance and other large mechanical replacements in amortized annual expense estimates leads to unrealistic yield assessments.  

I'm diverging from the intent of your original post, but simplified analysis becomes misleading and distracting. Similar to the response of others, I also don't agree with the premise that buying real assets in this environment is the best way to deploy capital. I have a T-bill ladder that maintains liquidity when I need it, but the risk vs yield relationship in this environment has me on the sideline in most markets.  

Quote from @Edgar Garnys:

Quote from @Allan C.:

@Edgar Garnys getting I/O loans to defray the cash flow burden - targeting 7/1 or 10/1 products to create sufficient time buffer.

Thanks Allan. I never considered this. I know there is a lot of potential downsides, but I could see how it might make sense if you have the funds to support the higher monthly payments down the road. Can you explain the 7/1 and 10/1 products? Also, can you refinance before the interest-only period expires (hopefully to a lower interest rate if timing works out in your favor)?

7/1 means you get fixed interest for 7 years and then it adjusts annually after based on a spread to then-market interest rates. 10/1 and 5/1 are same concepts. Yes you can refi anytime, though many lenders have a penalty if you refi before 18 moths. 

@Edgar Garnys getting I/O loans to defray the cash flow burden - targeting 7/1 or 10/1 products to create sufficient time buffer.

@Eric Fernwood You’re missing quite a few items from expense deductions, including capex and inflation adjustments. You capture all upside in your simple calc an no downside.