All Forum Posts by: Allan C.

@Bill Ham cash flow comes from 1) capital equity 2) sweat equity 3) market arbitrage

Without understanding the trade-offs between the various factors you are not making complete investment decisions.

@Logan French I suspect highly unlikely that you are achieving 1% rule on a $1M property, even if it is a 4-plex.

@Matt D. You’ll have to agree on a discount rate to determine your net present value. The discount rate is a % that represents opportunity cost of the capital, interest rate or whatever yield factor you agree upon. This will often range between 3 - 10%. Once you determine the discount rate you simply discount the future cash flow (ie $100 next year at 10% discount is worth $90 in today’s present value).

@Michael Plaks could Safe Harbor for as Small Taxpayer be applied so the improvement cost can be expenses over a 2-3 yr period?

@Brian Langstrom the first thing to reduce during a recession is discretionary spending, thus reducing demand for STRs. No one can gauge the extent of impact, especially for your specific sub-market, so best thing to do is maintain optionality.

If you are agile and can pivot between STR and LTR then you have flexibility to capture the market that gives you highest and best use of the property.

@Manas M. Is it worth sacrificing future wealth for short term comfort? If you cannot get through the near-term bumpiness then you can consider selling or partnering, but this sounds like a situation of not having enough reserves.

Ask yourself these additional questions: 1) is the property in a good location 2) what other repairs can you anticipate 3) is the cash flow healthy when not factoring large capex items

Try not to make a shortsighted decision because you’ll find yourself in the same situation again without understanding the root cause of your current one.

@Colleen Keenan you should expect 5+ yrs of negative CF when buying in the south bay, however after 10+ yrs you'll have healthy CF. Alternatively you can reduce leverage and move towards 50% LTV, but that isn't the most efficient way to deploy capital.

You’ll have to give up on one of your parameters, but my suggestion if your friend is set on buying west of the 405 is to find ways to manage the negative CF. IF they can make it to year 10 they’ll be extremely happy.

Quote from @Joe Villeneuve:

Quote from @Allan C.:

@Joe Villeneuve good chat Joe. I think we’re saying the same thing, but with different assumptions.

I agree that refi's are less common with 80% LTV, but my experience is 70-75%. I also see 75% LTV as common for any new purchases as NOO, so I think the two scenarios still have equal dead money since Scenario 1 has commission costs that Scenario 2 doesn't. It doesn't matter if you pay commission off with cash flow since you still have the same pre-refi cash flow in Scenario 2.

The key take-away is that we don’t have a clear blanket answer and folks need to compare new purchase interest rates, refi rates, and LTVs for all alternatives.

I think you're missing a few things I wrote with regard to the timing of all of this and how that impacts the difference between the two scenarios.  I used to do refi's, but stopped when I realized I could do it better and faster, and cleaner, by just selling the property once my two criteria was achieved.  Not sure you followed what I was talking about when I was using the extra CF from the longer time it might take to get to the doubling of the original equity. This is one of the many examples of the need to run through the numbers from beginning to end, and then extrapolate beyond, to see how the numbers actually play out.  One of the biggest impacts is how the refi reduces the CF in the original property when it's refi'd due to the higher loan amount than when it was purchased.
As far as using 75% for both LTV's, that's fine. What changes then is the timing with regard to the doubling of the equity. Instead of doubling the 20% you have to double the 25%...which will take longer, but so will the CF recovering the DP. Since the REFI scenario is also using the 25% DP, it reduces the buying power after REFI of the cash out so the 25% has a delaying effect on the REI scenario too.

...and I agree about the "good chat".

I was following your logic, and also created a cash flow model just to make sure i wasn't missing anything. I believe the difference in our views is based on assumptions, and those factors will depend on markets, asset class and other. For example, I don't see 80% LTV as common new purchase loan terms in the asset classes that i'm purchasing, so refi LTV and new purchase LTV are equivalent. I also make the assumption that markets are efficient and your cash flows between properties are comparable for consistent DP and loan terms. Counter to your journey, i used to be a believer in selling and trading up properties, but now I prefer to refi and hold. Like everything else, it's all relative to situation and goals. Good exchange!

@Joe Villeneuve good chat Joe. I think we’re saying the same thing, but with different assumptions.

I agree that refi's are less common with 80% LTV, but my experience is 70-75%. I also see 75% LTV as common for any new purchases as NOO, so I think the two scenarios still have equal dead money since Scenario 1 has commission costs that Scenario 2 doesn't. It doesn't matter if you pay commission off with cash flow since you still have the same pre-refi cash flow in Scenario 2.

The key take-away is that we don’t have a clear blanket answer and folks need to compare new purchase interest rates, refi rates, and LTVs for all alternatives.

Quote from @Joe Villeneuve:

Quote from @Allan C.:

@Joe Villeneuve why would you sell instead of cash out refi when you reach your disposition hurdle - you create transaction inefficiencies that erode your profit for no substantive benefit.

Not so.
One reason is, when you refi, the loan on the existing property goes up thus reducing the CF.
Another is the total PV is higher when you sell and buy new as opposed to doing a refi where the existing PV remains the same but the PV on the new property doesn't make up the difference.
Plus, you are usually leaving more than 20% equity "sleeping" in the existing property (where the PV stays the same...see above) instead of moving it forward where the actual value in new PV of it is 5 times its face value...which will be larger than if it was left behind.
The actual math doesn't lie.

I'll use some numbers to see where my assumptions differ from yours. Let's assume original property value is $100k with $20k DP - i'll also simplify many other irrelevant variables like ignoring principal pay-down, FCF earned, etc. 

In Scenario 1 you sell once you recover $20k in FCF and property appreciates to $120k. At this point you walk away with $34k net equity ($40k less 5% sale commission) to purchase a $170k property using your 80% LTV assumption. New Loan value is $136k.

In Scenario 2 you recover $20k FCF and you refi at 80% LTV with property value at $120k, leaving $24k in the deal and using $16k net refi proceeds to purchase an $80k property.  Your combined property values are $200k and combined loan value is $160k. Yes your new loan amount is higher, but it's a function of higher combined PV by not paying commission. 

What am I missing?