All Forum Posts by: Paul Florez

@Paul Florez I really like the 1031 exchange for growth into additional units. You can take them out of any market and any type of real estate and get in to any different type of real estate. I helped an investor take his 4 units and turn it into 16 units and then 2 years later turn it into 92 units through a partner of his. Now he has over 1,000 units. This was all done here in KC. 

 Hi Paul, 

Good stuff! 

For your current place, what is the cost basis for the property and what would it be worth if sold today? 

From a sales perspective, if you're married ($500k) or if single ($250k), you'd have a portion of the exclusion (%50) assuming the square footage is the same for each unit (assuming a duplex)

The remainder (%50) could be 1031 exchanged into another property tax deferred. 

Or, if possible, move into a different property, hold onto this property for another 2 years or so, (your circumstances have now changed) and you'd like to sell your investment property, 1031 all proceeds into a "like-kind" property and benefit from the 1031 tax deferral. 

Best of luck, seems like you're on a great path!

Thanks for that shout out @Gino Barbaro.  @Paul Florez, You're actually in a great position.  Since you have two units and you live in one.  the one you live in would qualify for the primary residence exemption.  And as long as you have lived in it for 2 out of the previous 5 years you'll get the first $250K ($500K if married) tax free.

But what's even better is that you can still do a 1031 on the sale for the portion that is used for investment.  So you'll be able to get part of your profit tax free.  and the rest of the profit will be indefinitely tax-deferred in the 1031 exchange.

Best of both worlds!

@Paul Florez

I would ask @Dave Foster if you qualify for 1031 if you sell even if you live in one apartment.

I am afraid if you get a situation where you have to evict and it takes months. I always try to plan for worst case scenarios, and carry enough reserves

Gino

@Paul Florez

You'd be surprised at how many owner financed deals are on the MLS. Only challenge is there are broker fees and closing costs. Best case, you're looking at 10-15% down on those deals to cover costs.

On Zillow, Craigslist, facebook, you can find For Sale By Owners.  You'll need to have conversations with them as they don't always advertise owner finance.  Often they don't know about the advantages to them.  it's usually an education process.

@Paul Florez

I would myself be hesitant to refi and go negative with my cash flow. A couple months of vacancy or repairs could put you behind the eight ball.

You could always sell the duplex and take the equity and roll it into something bigger. You could also refi the property with an 80% LTV, take less funds but have more stability

Gino

 Congratulations!  Those are great goals.  

Essentially, being conservative, 75 units at $200 net profit per door gets you there if multi-family is your only investment.  Over the next 10 years, you could acheive that goal reasonably.

You have a duplex now.  Add another 10 units puts you closer to your goal.

I wouldn't worry too much about the $15,000 initially, and focus more on adding doors.  10 years is a lot of time to raise rents and replace your income.  12 units by the end of this year puts you at 16% of reaching your goal.  

Tony Robbins always says that "most people over estimate what they can do in a year and underestimate what they can do in 5 years."  Imagine 10 years.

If you can add 10 units a year, you'll reach the goal in 6-7 years with a few years to improve rents.  7-8 properties kicking off 1500-2000 per month is pretty doable.

As for financing - There are lenders who will lend to you on a smaller deal like this.  Local Credit unions and small regional banks.  You can also find owner finance deals that will take lower down payments to get you in without the bank hassle.  Refinance them later. 

I just acquired a little 2 bedroom condo last month on owner financing with $7,250 down and the owner is carrying the note for me for 12 months.  I'll refinance next year.  $300 positive cash on day one with roughly $30k equity.  The deals are out there when you look for them and can structure them.  

I'm happy to connect and discuss.

 Hey Paul, Its great to have you here and contributing. 

Understanding your long term goals is important in making a decision like this.  There are a couple of ideas with real estate that most people shoot for.

1. Reduce Taxes through depreciation (If you don't meet the IRS definition of a real estate professional, it won't improve any W-2 income taxes)

2. Cash flow - smaller MF like these can take a few years to start seeing decent cash flow, so having positive cash flow early is a positive as it typically (not always) grows over time.

3. Equity / Capital Gains - This is usually a shorter term timeline.  Buy a value add, improve property and rents, resell for the gain.

4. Contribution - some want to provide good housing options.

Most will have a combination of all these factors.

QUESTIONS.

What type of cash flow are you looking to generate?  By when?

Adding a 5-10 unit will increase your expense exposure initially until you raise rents to cover costs.  Within 12-18 months you should see a positive return helping you get back to the $1500 cash flow you're used to.  Over time, more units = more cash flow.  Additionally, a larger property like this is valued based on the actual cash flow, not sales comps, so you have the ability to force appreciation faster with efficient management.

Adding the a 5-10 unit may also increase the amount of time you spend getting you closer to the 'Real Estate Professional' status for tax purposes opening up room for offsetting some W-2 income on taxes.  

Waiting as an option.  The current environment is shifting again.  Indicators are showing that price drops in the MF sector may be near bottom, and activity is picking up in the coming year.  That will drive prices up.  Rule of thumb is that waiting in real estate rarely pays off.  Find the right deal and take action sooner rather than later.  

With supply constraints and dropping interest rates, more activity will increase demand for this type of property.  A year from now, that decision will cost you more than you'll be able to save or build in equity.  

Besides. A year from now, you will still have the option for a 90% HELOC.

Best wishes to you.

Hi Paul,

You've done well with your duplex and have solid options for scaling.

Refinancing at 90% LTV to pull out $157K lets you expand now but reduces your cash flow by $300/month. If you go this route, buying a 5-10 unit commercial property offers the chance to scale quickly and diversify, though commercial real estate comes with a learning curve and stricter financing rules. Alternatively, buying a Midwest property and house-hacking a duplex in Albany gives you two properties but may involve more management complexity.

Waiting a year to build more equity while keeping your cash flow intact is the safer option, but you risk missing current opportunities. If you’re ready to grow fast, I'd lean toward refinancing for a multifamily property. Otherwise, patience might serve you better.

I’d be happy to assist with financing strategies for either path! Let me know how I can help.

Best regards,

Drago

@Paul Florez - Would you consider a partner in some capacity? Either as a JV partner with equity or a private lender that would lend you money towards a project. I think the opportunity to scale rather quickly will depend upon using other people's money. However, if you'd like to develop a portfolio that is 100% "your own" that would be another path. In that case, I would vote for you to refinance at a lower LTV (~80%) to ensure you are breakeven/some small cash flow at a minimum. Good Luck!