All Forum Posts by: Benjamin Aaker

Joseph, can you give us more information? What renovations are you doing? What rent are you asking? What is the ARV?

Absolutely another good way to do this, @Dave Foster. I sold a smaller property and was able to use the 1031 to purchase a bigger property and that deferred the tax. Thanks for your help on that one (and more), Dave!

Calling all you data nerds out there to help me. Looking at you Data Deli @Dave Meyer. I've been doing a deep dive looking at cash on cash return for various down payments and expenses on properties with a mortgage. If expenses are high relative to income, the cash on cash increases when the down payment increases (16k column). If expenses are low relative to income, the cash on cash decreases when down payment increases (10k column).

There must be an inflection point somewhere, so I did some spreadsheeting and indeed there is a point where the expenses and income are such that the cash on cash return is the same for all given down payments!

Have I just discovered the secret to getting rich in real estate? Have I made a terrible mathematical error? What mystery of the universe is uncovered here? And how can we use this when underwriting our deals? Surely someone has noticed this before and can explain it.

Hi David, and welcome to BP. Start going to meetups in your area. I echo Nicholas, start investing in your area if possible.

Hey Kyle, thanks for listening! 

I am very big on building equity, largely due to my career situation. I'm taxed in the highest bracket but even if you are not, every extra dollar you bring in puts you closer to the next tax bracket. I'm not a real estate professional in the IRS sense, so if I take money out of my real estate investments as profit, I'm paying ordinary income.

I'm fine paying my fare share of taxes, but the government incentivizes us to do what it wants us to do - buy real estate, by giving us tax breaks. Every dollar I put into equity is less 'income'. I'll gladly take that income later, when I'm in a lower tax bracket, such as retirement.

You've hit it on the head for how I do it for the most part. For my personal properties, I design the mortgages so that I'm just above cash flow neutral. 5% of the gross income is a good number I shoot for above neutral. I have enough personal income that I can pay for cap ex and repairs if I need to (most people can't, and shouldn't, do this unless their W2 income can support it). Doing this will give you a lower interest rate, which is why I prefer it to getting a longer amortization and paying extra on the principal.

Another thing to do is to take that extra cash flow and put it into cap ex that improves the value of the property. The downside to this is that you risk a higher valuation for property tax.

Appreciation is a good thing. Simple appreciation, where it increases because of the market is nice, but not guaranteed, and you have no control over it. I will do rehabs to force appreciation whenever I can.

Another way is to buy a bigger property. Take the larger down payment and put it into something bigger, which lowers your %equity in the property but still keeps the $equity and the cash flow is now going into the larger property. As an example, considering purchasing a 100k building with 40k down vs a 200k building with 40k down. You'll have less cash flow on the 200k but the absolute equity build will be faster.

I'll also say that I don't actively avoid cash flow. As long as I'm not taking it out of the property into my personal income, I don't have the income tax burden. Either put that extra into repairs or cap ex or mortgage repayment.

Feel free to DM me if you want to talk more.

To add to Chris's advice - Consider your long term goals. If you want to quickly expand you'll need to maximize your cash on cash and try to put as little down as possible. 
But you may have already answered your question. You don't want to be cash flow negative, so you'll need to put as much down so that doesn't happen.

This seller feels like he has a good position to turn down people who need to finance. If you are in that boat, nothing is stopping you from making an offer with a financing contingency. You'll have to make your offer appealing in some other way. Look for how long this place has been on the market. Longer times mean he is more likely to deal with you.

Hey @Nathan Gesner, can you tell us more about how you do guest mode? Do you pay for cable service in these units?

You haven't given many details so it's difficult to give you a quality answer for your situation. Generally speaking, you will have better economy of scale with a 4 plex than a 2 plex.

When you say the 2 plex appreciates more, are you talking about forced appreciation or simply the value going up as the market goes up, what I'll call simple appreciation? Forced appreciation, where you do things to raise the value, should be taken account of in your underwriting. Simple appreciation is a gamble because you have no control over it, so don't consider it.

Closing costs will be 1-1.5% of the purchase price. Read Gary Keller's The Millionaire Real Estate Investor for a deep dive on expenses. 

More importantly, get the high interest rate debt paid off first. Spend the time now reading and learning so you will be ready when you have the down payment for your house hack.