All Forum Posts by: Bob B.

 Thanks, I already factored in the depreciation recapture into my numbers stated above (although it might not have been clear).  I will have a $2M tax bill coming, hence looking into alternatives to lessen it or spread it over time.  I have chatted with Ben once as we both own investment properties in the same town as we were both at a city meeting about the pending zoning changes and how it would impact us as he lives a few miles away on the beach in the next town over.

Hi,

I have read a lot of the posts and I will throw out my scenario and share with you were I am getting into analysis paralysis and see if someone provides some thoughts, ideas, feedback that might help me break the cycle.

I'm about to turn 54. I have about a $10M SFH rental portfolio. It is roughly a 6 cap with me adding in property management expense (I manage it for the most part with the help of some 1099 contracted part timers). To come up with the 6 cap, I did kind of figure out how much each roof, HVAC system, water heaters, etc was costing me per year to add that to my expenses to try to really figure out what my return is. Would I take a 5% return a year to not to have to deal with any headaches, absolutely. Working so hard to get to here, I also don't want to just make a snap decision that may cost me quite a bit of money by being uninformed or rash. But, I am getting tired of the rental hamster wheel after 9 years. I want to actually be able to enjoy myself and not have to worry about a broken toilet.

So a bit more about what I am arguing back and forth in my head.

1) I could 1031 out and go with any number of NNN options like Wawa, Taco Bell, etc, but I do worry that more than likely one of them would go dark and all of the sudden it is worth 25% of what I purchased it for. So that I feel a bit uncomfortable and since I more than likely will be in my early 70s when they start to renew, I am not sure I will want to figure out when to sell, what new to buy, etc at that age.

2) I could go with something like a Home Depot or Lowes ground lease which seems pretty stable to me, but that will be putting all my eggs into one basket.  I do feel more comfortable with them than the above scenario, as I feel if they did vacate, it would be easy to turn into self storage and the dirt would be worth a lot more than a vacant Taco Bell.

3) I could just pay the 20% capital gains and then invest in whatever I want, but I am not sure that will be getting me to a more passive investment stage as then I may be stressing about what the financial advisor is doing with this stock or complex fund which invest in different stock that throw dividends with put and call options....blah, blah, blah.  What I am getting at, my experience over the past 20 years is most of the financial advisors are doing well regardless if I make money or not due to their fees, commissions and such.  I just have not seen great returns and it seems like with their picks, I just always got the wrong one.  I am not saying I lost money, but rather lackluster returns such as 4%.  So all that to say I am not sure that paying the gains will give me any better options to provide a nice return that will also provide a comfortable income stream. 

4) I could 1031 into an apartment complex. That would make it easier to manage than SFH. But still a lot of the same challenges.

5) I could 1031 into some DSTs, but that seems like I have to figure out the correct ones or rely on companies like Kay or Income Property Advisors or such who tell me there is just a small commission and the DST advantage over 721s which I will speak to next is you can pick the correct one. But they don't really want to speak about the commissions and fees involved or say the returns overcome it. They also talk about how it can do the return I want, but there is I guess minimal possibility for backend appreciation and I am looking at trying to figure out new DSTs ever 4 to 8 years? I am not sure that is super appealing.

6) So I have been reading some stuff from companies like Sera Capital and it seems like they say 721s are the way to go due to the low fees vs DSTs constantly turning over with high fees. They tout the backend appreciation that is "expected" in conjunction with the distribution payments. The backend is nice, but if I can't ever get to it without paying capital gains, I am not sure how it helps. As it seems when I read other articles when you do end up selling the REIT shares, you will be selling at a discount. So in effect, does that add to the soft cost almost like a exit tax?

Here is something they wrote too about the loads and costs, but I am not sure if the math is really accurate or not.  If it is, maybe the 721 is not too bad.

https://seracapital.com/721-exchange/why-fees-matter-when-pu...

So I don't want to make a mistake.  This has been the last 9 years of work in the real estate rental world and 20 years prior working and saving to get the money to start my real estate portfolio.  

So I don't know if you have some suggestions of advisors you feel shoot straight (maybe you will say some of the ones above), recommendations, suggestions, or what have you will be greatly appreciated.

Thanks,

Bob

@Jay Hinrichs  I agree.  I tried not to go too far into things there as I could have wrote a book.  As you mentioned, it is hard to do wholesaling to the point to make 6 figures if you are by yourself and not well funded.

As I also mentioned above, I have a buddy who does wholesaling and can't fund his how stuff.  But he does not make 6 figures.  But he is happy and making a living.  Once a year he makes $20K on a deal and then he does a bunch of $3k to $7K deals on average.

To your point and which I vaguely alluded to.....you got big companies out there spending $20K a month on mailings.  We do our own stuff that is scaled to meet the available capital we have.  Honestly, I don't want to have too many deals going on at once.  I want to be able to relax on the beach too.  But that is because I have the other part of the equation which is passive income from the rental portfolio so if there is a blip, it won't devastate me.

My experience was if you go back 5 to 8 years ago....there were tons of wholesale deals at a real low margin because there were so many.  Now you can get a bit more on margin of the wholesale deals because of the increase in house prices there is more to be made on the backend for the flipper which directly impacts what the flipper will pay.

So where there was little margin to be made in wholesaling or flipping 5 to 8 years ago. I mostly did buy and hold rentals at that time as it was not worth my time to make so little.  Now I have a nice cap rate return.  But now that prices rose, I can't get the cap rate I need on rentals and since the prices have more margin in them on the retail side, it makes sense to flip now versus rent in my opinion.  But everyone has their business plan and for various reasons that may or may not make sense for others.  It is just a general statement on the current cycle of the market in my opinion.

I did not even mention as you did, the homes that the seller just needs more than we can offer them....so we offer to list it.  Sometimes they list, sometimes they don't.  But that money can go back into or offset our advertising budget as found money.  

Steven,

Thanks for the DM, but I will answer your question here since you also asked publicly for the benefit of all. I preface this by saying, I have a rental portfolio, a retail flip enterprise and a wholesale business. So I touch many different aspects of the real estate investing market. I am giving you what is my experience and simply my opinion. It is worth what I am charging you (nothing) ..so here goes. I will also say, I’m sure I am going to make a few comments that may set some people off. I touch on these aspects to try to support some of my opinions and make you aware of things in the industry you may not be aware of.

It is great you are building your list of buyers. That is usually the easiest part. As if you have deals, people will come with cash. However, that is only one piece of the puzzle.

So let’s set the premise that when you are looking to wholesale, your goal is to find houses at a good deal, put them under contract and reassign them at a profit to others. If you do not have it under contract, it is actually illegal in Florida to market the property to others for profit. But if you do have it under contract, it can be legal. People can get into a debate on this, but for this discussion, hopefully we can all agree that if it is not under contract it is illegal to try to wholesale. So you really have to have the property under contract to wholesale it.

The piece that is usually the impediment to most is money.

It is hard to have the ability to in good conscious put a house under contract if you do not have the capital to actually close on it. I personally find it unethical to put a property under contract if I do not have the money or intention on closing on it. However, I know many wholesalers who will put a property under contract and if they can't find someone to wholesale it to, they simply back out of the deal leaving the seller in a bad situation and it is these types of wholesalers that give the wholesale industry a bad name. Some programs teach that as a way to get around the fact if you don't have the money to close on it, that it is no big deal. Just try to wholesale it for the 3 days before you have to put up escrow. Then if you can't wholesale it....it is no big deal, just walk away.

So in my opinion, you really need to make sure that you have the capital to purchase the houses you are looking to put under contract. Having the money not only allows you to properly put it under contract, but it also gives you the ability to make enough margin on a wholesale deal if you can’t wholesale it before you have to actually close on it. If you try to fund it by hard money, usually the hard money guy will make most/all the profit. For example, sometimes a homeowner is in distress and we have to close in 3 or 4 days. Maybe I don’t have time to properly market it and wholesale it before closing. Well, if so, no big deal. I close on it and sell it after I close on it versus reassigning it. There are so many variables it is hard to touch on them all.

By not having the capital to close on it, you limit your options on how to make money as sometimes you will see value in a property that others won’t. By being able to close on it, if you can’t wholesale it, you may be able to do a lipstick job on a property and realize a great profit by retailing it.

Anyway, if you do not have the money, that is where you will probably have to do some sort of joint venture.

Now do I know individuals who don’t have the money to close the deal who does this and can support themselves? Yes. Are they making 6 figures? No. Will they hopefully build up enough capital to the point where they can expand their business from just wholesaling to also include retail flip where usually you can make more money? I hope so. Are there exceptions to what I have seen? I am sure.

Now to dovetail into going from wholesale to retail per se. Some people will tell you to just get hard money and if you can’t wholesale it, just flip it at retail But in my experience, if you do not have your own guys on your payrolll for the rehab and you have to pay a general contractor retail for a rehab, plus the hard money costs, plus the selling costs.....I think you will be hard pressed to make money ( or maybe I should say you will be hard pressed to make enough money to make this sustainable). So how do I know this for your area? I am active in Pasco and Pinellas so I am pretty in tune with the market. Most sellers are willing to sell their properties below market if they are in distress, but at an amount that will cover all these costs and still allow you to make a healthy profit on of that? They are few and far in between in my experience. They way we can make money on flips is rarely having to use hard money (unless we have too many flip going on which is when we start to wholesale) and to have our own GC license/crew to do the rehabs so we are not paying retail for the rehab.

You may ask am I trying to scare you away as you would be competition? Absolutely not. If you are wholesaling and you have a good deal, I would hope you would call me and offer it to me so I can do the retail flip as that is one of my lines of business. I do buy from other wholesalers and at times. If I have too many properties, I wholesale. So again, various lines of business as I don't pigeon hole myself into only doing one type of transaction wholesale or retail. I get my leads through how I advertise. You are cold calling. I don't do that, as I don't have the time for that. Time is money to me. I am happy with the deals I get through the way I get my leads so I am sure you will pick-up deals that way that would never hit my desk.

So you also mentioned in another post you did not know what contracts to use and some other what I consider really basic questions. So you asked should you spend the money on a real estate investing coaching program, go private mentoring. or just learn as you go?

I don't find a ton of value in those programs when I consider the cost of them (I am not saying they don't have value, I just think you can get the same info from a book at the bookstore versus $5K, $10K, $20K some of these programs charge). I say that knowing some of the guys who write and market some of the local REI programs ( I won't say which ones). Do they have people who are successful? Yes, but they usually have the capital to fund their own deals.

I am giving you my advice on how I would approach it if I was you. I will do this using a scenario.

If you came to me with a wholesale deal and you did not have your paperwork in order and you don't really understand a closing and the costs associated with them and you misunderstand or miscommunicate some of those costs to me….I am going to be very upset (as will any other buyer). So since you admit you don't know that stuff…instead of having someone like myself spoon feed it to you….do yourself a favor and instead of spending $5K on a REI course, get your real estate associate license. For a few hundred bucks you will learn the basics you need to know. You can then for the most part, not have to worry about the legal/illegal aspects of the grey areas of wholesaling and you will have the great foundation on which to start.

Then it is my opinion that you can supplement from your new found knowledge by reading all the REI books to help you fill in the blanks. If I was you, would I still be looking for a JV partner? Absolutely. But I think others will be much more receptive to it if you have a license. That will show that you at the very least know how to fill out a contract correctly. As messing up a contract can cost you and your partner thousands of dollars. Do people wholesale and make money without a RE license? Yes, but it is much easier with a RE license in my opinion as I do get stuff off the MLS here and there and the knowledge you will pick-up from getting your license will help you be confident in what you are doing and making sure you are doing it right.

Anyway, best of luck. I hope you will find my insight helpful.

LOL  I almost spit out my dinner!

I am sure they have the $19.99 solar panel from Harbor Freight so they can have their phones charged and some electric.  But I guess they will not get the 30% tax credit on that since they do not own that part of Skid Row.  

Actually, it is a shame.  I feel bad as most of them have either mental or substance abuse issues.  The family fabric of the US has seemed to go down the tubes in the past 50 to 70 years.  Everyone has to have their own house and live above their means.  Versus in the 50s and 60s when you had multiple generations living under one roof.  You had 2 aunts (who could discipline you too) and 4 cousins all lived within 5 blocks of you and everyone in the family supported each other through hard times.

In regard to code enforcement on another note, it really is area specific.  In most places I lived in NJ, it was very tight as every 2 square miles is self contained city which has it's own city government.  Hence why they have the highest taxes in the country.  Here in Florida, I have lived in 2 coastal towns.  One in Pasco county which is governed at the county level.   I see people getting away with a lot.  Next county over (more affluent with much higher tax rates), every city in the county has its own city government and they actually send people to drive every street, every day looking for violations (there is good and bad for that).  I am scared to litter as I might get fined before the litter would even hit the ground.  But in the coastal towns, they are very diligent about addressing stuff like RV living, garage living and people even doing VRBO, AirBnB rentals.  They have the staff to search for them online and fine you for violating local ordinances (but that is a whole other topic off of solar panels). 

The one other consideration on the 0% down...you have to be careful. Many of the companies that do that, they actually lease you the panels and you don't own them until the end of the lease for a nominal buyout. The homeowner cannot claim the 30% tax credit in that case. I agree with your statement about the infinite ROI, but as I am sure you are aware, you can get a loan you on them. But my concern from someone looking to scale their rental portfolio is this...that will show up as a liability when they may need that credit to purchase more rentals and being as liquid as possible when good deals come up. You make your money on the buy side. With most of my rentals, I bought at a steep discount because people were in distress and it had to happen quick and now I have 20% cap rates. Having access to liquid cash, I can make much more money on those deals than tying it up. But I will also admit, it is blended. I have my rental portfolio for my passive income stream; my wholesaling for stuff I don't feel like getting involved in but I can make a few bucks; my flips for when I see enough profit to make it worth my while to get into a rehab. Sometimes I buy stuff that could be a flip, but I put into my rental portfolio because it makes sense. But I have to be liquid enough to buy it cash or have access to money quickly. So there is a balance there. I just mention these things so people who are new, really think things through on getting the best return for their money.

 LOL...I have to laugh (not at you, but at what people will go through and the possibility of tax fraud which will make this thread murky).  I think your verbiage can be debated.  A true investor is generally not a house hacker as you mention.  So that is an important part of the discussion.

I would check on item #1.  I would guess that if it was not your primary residence, you will not be able to make that claim for item #1 (but I could be wrong, but I doubt it).   #2 you are saying you would move every year to get the tax credit, but are agreeing that it must be your primary residence at time of installation as I stated and thus at that time it is not a rental.  #3, I may beg to differ.  I bet you the IRS will apply the same rules that you stated in the duplex, triplex scenario #2.  So again, you are claiming it is your primary residence.  Supplying electric to another metered unit from your system would have multiple issues.  First the electric company would have an issue with that and so would the local municipality when it was inspected.  So you would have to do that sort of change to the system after the fact.  But from an IRS perspective, again, just as my home office allows me to depreciate 10% of my solar system as a business expense, I can't double dip and say I want the 30% tax credit on the whole value of the installation.  You have to carve that out and only take the 30% tax credit on 90% of the install value if I claim my home office (or in your scenario rent out a portion of the property) or not claim my home office (or in your scenario the portion of the property; otherwise tax fraud).  So building on that logic.  

Are you also aware that if you are renting the property in your example #3, then you must claim depreciation?  If you don't, the IRS does not care as it benefits them.  But when you sell, they add the depreciation back in whether you took the write-off or not.  Now how would the IRS know?  Well, you did claim the rental income, right? So since you claimed rental income, at time of sale you have to add back in the depreciation whether you took it or not.  Additionally, how you claim the income (or don't by fraud) then limits on how much you can claim as a loss against your rental, business or personal income based on if this is truly a rental or not.  When you have a lot of capital expenses, you want to be able to claim that depreciation and have it apply to that year and potentially create a loss to minimize taxes.  If you don't properly claim it, your losses are capped at $3K and can only be rolled to next year and can't be applied against your other rentals or personal income. So the depth of the implications goes quite deep and by trying to circumvent an IRS regulation, you may be leaving a lot of money on the table.

So you basically agree (outside of a life hack), that you can't do it for a rental as the start of the thread mentioned.  I mean sure you can do it on your primary house.  But you are going to move to a new house every year just to get a few thousand dollar tax credit????  Won't it cost more than that to move unless you are moving from your RV or tent?  :)

Unless you are living in the sticks, most people will not get away with living in a RV or shed.  As you mentioned, there are zoning regulations against it.

But hats off to those who are being super creative.  But me personally, I am not moving every year for the next 50 years to save a few thousand in tax credits per year.  

It also seems like a lot of work for something in which you can spend your time in a more productive manner.

But at the end of the day, even the tax credit does not really make it worthwhile in most cases.

Forget about all the expenses that solar has that are hidden, $25K a system here in Florida can get you $160-$200 a month in electric. So for arguments sake let's say it saves you $2,000 in electric costs (in CA their rates are higher and it can be more attractive).  Let's say you can pass that full amount in increased rent to your customer....In 13 years if you don't have one issue you will recoup your money if you have no vacancy during that time period.  So realistically it will be longer.  You have also lost the ability to gain interest on that money that entire time...compound interest is a powerful thing.   So let's keep the thought process.  You now have a system that is 70% EOL.  Let's say it has a residual value of $8K.

Do that on 3 houses.  You have a residual value of the four solar systems of $24K and now you got your money back and broke even.

Now take that $75K and buy 3 bedroom block house in Pasco, FL at $75K.  Rent it for $1,000- $1,100 a month all day long.  Net $10K a year.  After 13 years you have $130K.  So the reality is you paid yourself back after 7 years and 8 months (much quicker than the 13 years).  Then if you go out to the full 13 years as in the solar example, you will have an extra $55K in cash sitting there (we still have not added in the compounded interest we could get).  

So to compare the two scenarios with a $75K solar investment.  You could have 3 houses with solar on them that paid you back your initial investment and that are probably worth an extra $8K each for a total return of $24K over 13 years.

Now with the $75K invested in a rental house, you have your money back and an asset worth $75K (let's say it did not appreciate one penny), plus you will have $55K cash sitting in your bank account.  Finally, if you put the net $800 in rent in a safe investment generating 3%, you will increase the $55K to $79K.

So where is the money better invested and to address the original poster's question...is solar a good way to increase cash flow?  I would say no.  But also as mentioned, I have 11.3 kWh systems on 3 of my personal houses for personal reasons, so I am not against solar.  I am just saying I don't think it works well in Florida to increase cash flow and don't count on the 30% tax credit per se on rental properties.  

 John, I would guess you are in CA.  As a maxed out residential system is 11.3 k.  So your rates have to be roughly 16-45 cents per kWh depending on month and time which is what my financial adviser's is in San Diego with the on-demand pricing is for SDG&E.  Keep in mind, different markets such as FL as much cheaper (my one house is 10 cent a kWh) and thus we are maxed at generating $200 of electric  per month on the same sized system that you have in CA that generates $500 per month due to the electric rate out there being so high.

I think you may have misunderstood me.  Here in Florida if you create 100 kWh in March and only use 90, you have a credit of 10 that rolls to April.   Then come Decemeber 31st, you make up the shortage for that month if your production was low (as December is usually a low production month) by paying for the difference or if you have a credit, you get paid out at 50 cents on the dollar for that year ending in December.  It then starts all over Jan. 1.  It is the same for Duke, Progressive and Withlacoochee Electric here in Florida.  There may be another provider I don't use, but I can speak to what I experience here.  The rates also seem cheaper here in Florida than in WI.  For instance, Withlacoochee is 10 cents a kWh and The other two are roughly 12.5 cents.

In Florida, it is illegal to sell electric unless you are the electric company.  So you can bump up your rent and include it in the rent, but you will run into legal issues if you try to charge based on consumption.  That creates another issue....let's say you will include $200 worth of electric per month on average...you will have to advertise it well above the normal going rate and most people will not even consider it thinking your rental rate is high.  Most renters are looking to keep their costs low.  So you will in effect more than likely discourage people from even considering your property since it is priced $200 higher than the comps to get your investment back.

I have 3 solar systems on my personal houses.  I have considered putting it on my rentals, but knowing that they do lose their effectiveness over time, you have expenses in taking them on and off when you have to do a roof replacement and that it gets tricky to market how much electric you are including with the property....the hassle is not worth it in my opinion.

Your comment about the tax benefits is also 100% wrong.  You cannot exercise the 30% federal tax credit on rental units.  Trust me, I have checked with multiple accountants.

In regards to using the "electric" when there is a power outage...well, that sounds good in theory.

Here is how it really works....you have a net meter...you do not use your own electric you produce.  The electric company meters what you use from them (let's say 100 kWh) and how much you produce (let's say 90 for now).  You send your 90 back to the electric company when you generate it.  It does not sit there and hope to be used by your refrigerator.  You use the 100 kWh from the electric company and are billed the 10 kWh difference.

If you make more, the same thing happens except you have a credit that accumulates in the physical year and is paid out in most cases 50 cents on the dollar at the end of the year on any electric you overproduce.

Now if you want the ability to use some of the "extra" electric you produce, you can pay thousands of dollars extra for batteries that you will more than likely never use killing your return on investment (or buy a generator for a lot less).

There are other minor points I can point out such as efficiency loss and maintenance, but I think just the info above is more than enough to persuade most from considering it on a rental unit.  

I am sorry, but much of the logic in the post was faulty.  

Charlie,

I understand you are simply repeating what has been told to you, but that can get us in trouble as an agent (liability wise).

I am an investor and agent myself. I have roughly 50 properties here in Florida. FEMA regulations do not change by state. We were just hit by the last major storm Irma. So we have been through it here too.

So let's help the BP community. If what Tim is saying is true, can you ask him to kindly share a link to the FEMA program application that will raise the houses for free if previously damaged or that FEMA will pay 75% if not previously damaged? It will help everyone on the BP forums.

Here is one FEMA link that speaks to it to a certain extent.

https://www.fema.gov/news-release/2013/01/29/eleva...

Here is the FEMA link for the grant program.

https://www.fema.gov/flood-mitigation-assistance-g...

Maybe there are others I am missing. Additionally, as I mentioned in the previous posts, the grant process is very drawn out. I may be wrong, but I don't think a homeowner can apply directly for Flood Mitigation Assistance per se. It must be sponsored through the State. That said, the Mitigation Assistance program only applies to those already insured by the FEMA program (you can't have private flood insurance which is usually cheaper). So if you already have FEMA insurance and you are damaged, you already have insurance coverage and ICC coverage (although it may not cover 100% of your repair and elevation costs due to FEMA payment caps).

Here is the question I would pose to Tim. Why does he sell flood insurance when he can just tell his clients to let FEMA pay to rebuild their houses if they get damaged in the storm? Is he providing his clients with the process to get their houses raised or is he still selling them flood insurance? Ask him what ICC is and what are the limits?

Please don't take any of this personal, I just want to see the right information out there.  If I am incorrect, it would be awesome to know as I can obviously save myself $85K in raising my house.  But there were also comments about buying a house and expecting by installing flood vents or filling in a crawl space would significantly reduce flood premiums.  I have spent countless days/weeks/hours on how to reduce the flood premiums and I have found those items has such a minute impact they rarely pay for themselves even over a 5 year or greater period.

If anyone feels I have posted incorrect information, please feel free to correct me.  I am just looking to make sure someone does not erroneously go down the wrong path.