All Forum Posts by: Bruno Araujo

Hello all, I am a general partner in apartment syndications and have a tax/legal question. Many in my investor network have indicated that they want to sell their rental properties, and move those funds into our deals.  One of the recurring objections however is taxes, my investors don't want to incur the capital gains taxes.  The deals I raise capital for have very high minimums to do a full 1031, far above what the average investor in my network has.  

I spoke with my securities attorney, and he mentioned its possible to set up a DST which my investors could roll their 1031 money into for our deals. They would sign my PPM, and the DST would sign the PPM for the deal itself. So my question is mainly centered around taxes, does this sound like a feasible option to avoid the taxes?

How can this be done?  Any of you out there who are GPs bringing in capital, how do you all tackle this?

Maybe 'calculator' was the wrong title for this thread lol.  There is not a reliable way to account for all of these intangibles we're talking about in a 'calculator'.  I think my goal is to create something that opens that discussion for the purpose of talking to investors. 

I created a spreadsheet that takes into account the following variables:

Home price, down payment, interest rate, appreciation rate, monthly rent in year 1, rent growth rate, capex/expense rate (as a percentage of rent).  Then i calculated what the 'total equity' was at the end of each year for 30 years which included the principal paydown equity gain, the market appreciation equity gain, and finally the cash flow based on the rent vs debt/expenses.  This is based in part on the amortization schedule using the inputs listed above.  

Then I compared the end of year equity position each year for the rental and plotted it on a graph comparing it to a syndication earning around a 16.1% IRR. All the inputs for the rental can be changed, and it's interesting to see how the different inputs change the graph. For example how much leverage the rental deal used is a huge factor in the graph comparison, how much the rents grow at is a marginal factor, etc.

When syndications are pitched, there's a projected IRR. People also come to this website and run numbers for a particular deal using the rental calculator. I believe there is value in running that calculator for an 'average' deal (whatever that looks like depending on the investor/market) and comparing it with the projected returns from a syndication IRR. That is something an investor can look at, and then add all the intangibles on top of it. Like is this worth my time? Do I have the experience to make this rental work? Do I have the risk tolerance to see this out?

That movie scene was very interesting. 

This is exactly what I'm going for.  The purpose of the spreadsheet is to provide the data for the graph, the graph itself would be the sales tool.  I just want to be sure that I'm using accurate, 'typical' numbers for the rental.

@Alina Trigub @Luke Miller @Lee Ripma @Bill F.

First of all, thank you all for the replies.  Let me try and approach this from a different angle:  Many real estate investors place a high value on their time (as do all of us).  But the fact is that many do not too.  They derive a sense of pride from owning and managing their own rental property - they get a sense of self-worth & value from it.

When I'm talking to a lot of the prospective investors in my market, I get all of the typical arguments in favor of managing their own rental including lots of financial reasons: 'Having the tenant pay off the mortgage', 'The home will keep appreciating', 'Once the home is paid off, all that rent is mine', etc.  Those are emotional reasons masking as financial ones.  Because while those reasons are still all true, when compared with a syndication, it's no longer an argument.  If the goal is total wealth creation over the long term, then the average buy and hold strategy doesn't compare to a series of syndication investments when you look at the financials.  

I want to highlight that as a sales tool as you mentioned Bill.  YES, this comparison is apples to oranges...I get it.  And YES, the big sell is the time factor required on your own rentals, I get that too.  But if the objections being raised are emotional masking as financial, then I need to sell financial reasons to change that emotional perspective.  Know what I mean?  If you can tell somebody, 'look rental property investing is a strategy to create wealth, it works.  But is it the best strategy long term?  No, it's not.  Total returns are much higher in a series of syndication investments.  Then I can talk about the time savings as gravy after that.

At the end of the day, yes, there are great buy and hold deals and there are poor ones.  YES, there is a ton of variability.  YES, it is all very deal specific.  However, a 20-30yr buy and hold doesn't even come close to a series of say 4-8 syndication investments for that same time period.  And those reasons are because of the ones I already mentioned - amortization schedule, deleveraging, interest expense, etc.

At a fundamental level, how can a buy and hold compare with a capital group focused on large-scale value-add projects lasting 2-6 years each? That value creation is repeating and ongoing multiple times over the long term, and thus the returns are reflecting those big bumps. Without say a BRRR strategy, a simple TK or buy and hold won't beat a syndication's returns.

@Greg Scott

@Greg Scott Thanks for the reply. I agree with you: All of this is very much deal specific. There are great buy and hold deals, and there are poor syndication deals, and vice versa. They are indeed apples and oranges.

However, from the perspective of a passive investor, The choice between strategies still occurs. Like...they gotta choose.

Granted there are a lot of variables affecting outcome of a buy and hold. Rent growth, appreciation rate, capex are all inputs. My goal is to show that regardless of what those inputs are, over the long term...a syndication returning a certain % will still outperform a rental property. Amortization schedules put interest ahead of principle for the 1st third/half of the Investment. And for every dollar that goes towards principal paydown, the overall cash on cash return is lowered. The longer the hold, the more the deal is deleveraged, and that cash on cash return slowly transitions from being high to being low (the appreciation rate itself of around 3-4% nationally).

A syndication earning a consistent 14-20% per year is going to far outpace the buy and hold rental over the long term.

Has anybody out there seen a nuts and bolts spreadsheet or calculator comparing investing in syndications versus owning a rental property over the long term?  Before I spend a week creating it, I'm hoping to get a head start.

It would need to include all of the assumptions and inputs pertaining to each including:

1) Loan details

2) Appreciation rate

3) Rental growth rate

4) Capex rate

5) Market rental rates

6) Reinvestment rate

It would have to include the amortization schedule of the loan, and include the 3 ways of making money on a rental including the principal paydown, cash flow and appreciation.  Including taxes would be great too.  All of the inputs/assumptions would be plugged in then compared to the return of a syndication.

Hoping to spit out a graph showing an easy comparison between the two. My hunch is that over the long term, the syndication is going to far outpace the rental property, especially when you consider the long term appreciation rate of the SFH. Anyway, thanks in advance for any responses!

@Justin Windham @Brian Eastman Thank you both for the input. Side note, I discovered that of my Roth IRA balance, I am able to pull out the original contribution amounts tax free. To my understanding, it would just be the gains earned since those contributions which are subject to taxes. Curious, if I make an early distribution of those gains, they would be subject to the 10% penalty...now is that in addition to my current income tax bracket or would it be capital gains?

So whats the plan for somebody with a Roth IRA who doesn't want to pay UDFI? @Brian Eastman @Justin Windham

My credit union offers a home equity loans of 25k-500k at 3.99% with a 20yr term.

This is almost perfect...except I need it to be...a credit line.

What I really need is this exact loan product but I want to be able to draw from it and pay it back as needed.

Does anybody out there know who might offer something like this? Perhaps it's in the form of a business line.

Realllllly hoping for BP to come through on this one. I'm in California, but I'll go to the ends of the Earth to get it. Credit score is 800+.

@Basit Siddiqi I could be going a bit askew with this.

The obligation stems from an investor agreement whereby the funds the investor is giving to the nonprofit are primarily used for the real estate investment - They are not in whole a donation, I don't think it is a loan really either - it is still an investment into the syndication.  The only difference is the fees normally charged the investor, are allocated to the nonprofit...as a donation from fyre CAPITAL.

I might need to take a step back and realize that fyre CAPITAL itself is the donor, rather than the investor.  However, it wouldn't be possible without the investor's original capital.