All Forum Posts by: Bryan H.

You stated that you had problematic tenants. This is usually the result of managing your own property. Some people think that the only task a property manager does is to collect the rent, and they do not want to pay for that service.

However, a good property manager's most valuable contribution is selecting reliable tenants. A reliable tenant stays many years, always pays the rent on schedule, and cares for the property. Reliable tenants are the exception, not the norm.

I've worked with many property managers during the 15+ years we've operated our investor services business in Las Vegas. I only know of two property managers with this skill.

I suggest hiring a skilled property manager if you retain the property.

Let me know if you (or anyone) would like to know how to select a good property manager.

To Sell or to Hold

The goal of real estate investing is financial freedom. Financial freedom is more than just replacing your existing income. It's about maintaining your current lifestyle for as long as you live. To achieve this, you need a passive income that meets three requirements:

Rents must outpace inflation
Persistent: You will not outlive the income.
Reliable: The rental income must come every month, even in bad economic times.

Whether rents outpace inflation and how long your income will persist depends on the city you invest in. Income reliability depends on the tenant(s).

The critical component for financial freedom is rent outpacing inflation. So, are rents outpacing inflation in your city?

If rents do not outpace inflation, no matter how many properties you own, you cannot achieve financial freedom. An example will prove this.

Suppose you have a property and the monthly rent is $1,000, the rent growth rate is 2%, and inflation is 4%. What will be the rent's present value (purchasing power) at 1, 5, 10, and 15 years?

First, I will calculate rents at 2% rent growth.

Year 1: $1,000
Year 5: $1,000 x (1 + 2%)^5 ≈ $1,104
Year 10: $1,000 x (1 + 2%)^10 ≈ $1,219
Year 15: $1,000 x (1 + 2%)^15 ≈ $1,346

Next is the rent's present value (buying power), including 4% inflation.

Year 1: $1,000
Year 5: $1,000 x (1 + 2%)^5 / (1 + 4%)^5 ≈ $907
Year 10: $1,000 x (1 + 2%)^10 / (1 + 4%)^10 ≈ $824
Year 15: $1,000 x (1 + 2%)^15 / (1 + 4%)^15 ≈ $747

So, in the 10th year, the rent is expected to be $1,219, but inflation reduced its purchasing power to what you can buy today for $824. This is the long-term financial trap of buying properties in locations where rents do not outpace inflation.

If the rents in your city aren't outpacing inflation, consider using a 1031 exchange to a location where rents are outpacing inflation.

Income Persistence

You never want to be in a position where you've outlived your income. The only way for your income to persist is if your tenants remain employed at similar jobs. The problem is that non-government jobs do not last. The average lifespan of a company is about 10 years. An S&P 500 company has an average lifespan of 18 years. So, every non-government job your tenants have will vanish in the foreseeable future. Unless new companies move into the city and create replacement jobs, all that will remain are lower-paying service sector jobs. If your tenants have reduced pay, your rent will stagnate or fall.

What characteristics attract companies to set up new operations in a city?

✅ Low operating costs

✅ Low crime rate

✅ Low risk of a natural disaster

✅ Pro-business regulatory environment

✅ A sufficient population for economic stability. This usually requires a population >1M.

If your city does not meet the above, 1031 should be considered.

Properties and Tenants

Each tenant segment has specific housing requirements and is unlikely to rent a property if it doesn't meet them. The converse is also true. The characteristics of a property determine which tenant segment it attracts.

Are there enough reliable tenants in the segment your property attracts so that a skilled property manager can consistently choose a tenant who will stay many years? Some segments stay longer than others on average.

In 2005, when I selected Las Vegas to set up my business, I did extensive tenant segment research. I discovered that there are three major segments, which I named Transient, Permanent, and Transitional. Below is the average length of stay for each segment.

Transient: <1 year
Permanent: >5 years
Transitional: < 2 years

We target properties in the $320,000 to $475,000 range to attract the Permanent segment. Above about $500,000, properties attract the Transitional segment. Properties that attract Transitional tenants are often unprofitable due to short tenant stays and a longer time to rent. Below about $280,000, you get into a tenant segment that stays, on average, one year or less. Vacancy costs make properties targeting this segment a non-go.

Talk to several property managers. Ask each one about the typical duration a tenant might stay in your property. Also, ask about the time it takes to find a tenant.

I would consider a 1031 exchange if the answers are unfavorable.

Buy Now Or Later

I continue to hear people lament that interest rates are no longer around 3%. They aren't and won't be in the foreseeable future, so we have to deal with the rates as they are.

Prices are rising. Since the beginning of this year, the prices of properties in our target segment increased by 9%.

What will happen if you wait until rates fall? An example will show the problem.

Suppose property prices rise by 8%/Yr, and it takes 5 years before rates fall to 5%. What is the cost of waiting?

I will assume a $400,000 property to have numbers to work with. The table below displays the rising market value from appreciation and the accumulated equity. By waiting, you lose a lot of equity growth, which can not be recovered.

There is another problem with waiting. In five years, prices will be higher, so buying the same property will cost you more. See the table below.

So, waiting 5 years costs you:

Lost equity: $187,731
Increased down payment due to appreciation: $56,319
Higher debt service due to higher prices: $251/Mo

What would happen if you purchased today and refinanced in 5 years?

Also, purchasing today does not necessarily mean negative cash flow. We are still finding properties with first-year ROI between 0% and 1% by putting 30-35% down and or buying down rates. Buying today gets you on the rent and appreciation escalator.

So, I see no advantage to waiting.

Summary

Nick, consider the property's long-term outlook, the type of tenants it attracts, its rent growth rate, etc. Then, decide whether the property can support the goal of financial freedom you desire or if it's time to take action.

@Eric Fernwood, this is a great analysis. I’m wondering how you would factor in holding vs selling a property that meets all these parameters, yet is fully depreciated after 27 years - losing some of its benefit to hold. Also, how do you find the data to know if your rents are outpacing inflation over time?

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Quote from @John McKee:

Here is an idea: Sell it and pay the tax. Take your remaining 270K and invest it in mortgage notes paying you 12% or $32,400 a year. No tenant hassles, intermediary commissions, broker commissions, closing costs of a new property, and most of all NO capital improvements to worry about.

John,

So would you honestly do this and eat $100k tax or is this more of a “throw it out there” idea? Mortgage notes paying 12% sounds great yet also risky. Do you hold notes of this type? Where/how do you find them and what are your parameters to vet them so you feel comfortable with the risk?

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Quote from @Basit Siddiqi:

$400,000 gain is likely taxed at the following at the federal level

15% or 20% Capital Gains Tax on about $300,000 of the gain.
24% depreciation recapture on about $100,000 of the gain.

You likely are also subject to the 3.8% net invsetment income tax.

You should also factor in locality taxes as well(DC or your state of residence if different).

I am just saying this as you may have to pay more than 25% tax when you sum up all the tax rates, which makes the 1031 more attractive.

Thank you Basit!

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I have a 1br condo in prime Dupont Circle neighborhood of Washington DC, - owned it for 27 years - could list it for $425k. Fully depreciated so $100k tax bill due at sale. It was long overdue for full renovation, (all surfaces) and I just finished that, so I’m at a crossroads.

Rent or sell.

I rely on the 20k annual net income, but that’s only a 5% return at best. 1031 exchange seems impossible in practicality with the timing etc…I’ve been looking and not finding a deal to move into.

Would anyone ever just eat the tax in this situation in order to have funds at the ready for the next deal/better investment?

I’d be left with only around $270k after selling fees, if all went smoothly. $270k in Scwab money fund would get me $15k/year while I’m waiting to pull the trigger on something. Some background information - I see new hvac $10k, new windows $10k, and building assessment $10k in the next few years on this property.

I should think a move-up property exists somewhere in the $600-800k range that would cover a mortgage on top of my $400k down payment and still net me $20k/year or more, but not in the markets I’ve looked (DC area and my local NC area) . I need time to figure that out.
More background info - I have no real W-2 income. My income is from 3 successful airbnb’s and this condo.

If I get renters in place right now, take a year to figure out which market makes sense, I still don’t see a realistic path to 1031 due to timing with renters/sale/etc…am I wrong about that?

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Quote from @K S.:

Quote from @Bryan H.:

Quote from @James Hamling:

If there’s a bigger jackass on this forum, I’ve never seen it. This is a forum for sharing ideas, spreading knowledge, and learning. I started with a valid question - not complaining about anything. I’m not stupid by the way as your tone seems to imply with every post. I have a life outside of real estate, but I have been netting around $225k annual off my real estate investments. But surely nobody can impress you with anything - that’s abundantly clear. What’s not clear is why you actually seems to have a chip on YOUR shoulder considering you’re self-proclaimed gods gift to real estate. 😂

If you’d paid attention you see that most of you’re ideas wouldn’t work for me, because of the time required.

I told you to ignore him but you didn't listen.

You did? Sorry I must have missed that post…

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Quote from @James Hamling:

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I should mention that this is an apples to apples comparison between 100k in the S&P 500 and 100k SFH cashing both out after 16 years. I did not include the fact that I'm doing a 1031 exchange on this unit nor did I include a scenario where you only put enough down to break even with the mortgage so you can leverage yourself with more properties.

Bills example as my own is a classic early 2000s strategy which in most states today, would not work. You'll be requireing a larger down payment on a higher priced house with higher interest rates. His own example shows his unit at 100k rented for 1k (1%) as my own but is now 400k but only rents for 2000 (.5%) which is worse than mine. That's a terrible investment for anyone reading this and thinking you can do that today. The strategies have shifted from buying turnkey properties to buying distressed properties and renovating them and hustling.

Almost my exact scenario. $100k purchase price back in 1997 for a 1br condo in Dupont Circle, Washington DC. Top location, top neighborhood. Today it’s worth exactly $400k after estimated $300k income over 20 years (I lived in it for first 8 years). Yeah 1br condos just don’t do that great.
Anyway, now I have a window. Tenant just left - I’d love to sell now but feel super stuck because I need to maintain the $20k net annual income it’s providing. Just did the $15k remodel. If I sell now I walk with only between $275-300k, because it’s fully depreciated. Should I just eat that $100k depreciation recapture tax and start fresh? Being able to 1031 the full $400k into a larger better performing property while maintaining the $20k annual income feels like a fantasy. Who’s got a great idea?

Tough choice at your age because I don't think you have too many more decades left in you to be fooling around with 30 year mortgages unless you're like John and some of these other guys who have the time to make leverage work for them. I do like the instant gratification of 20k/year although less without your depreciation.

If you look at my updated stats, I included depreciation of ~$3600/year which nets me an additional $1,000/year? So That's $3200 deducted x .28 tax rate. If you sold outside of a 1031 exch, you would owe 18,000 back I think. That's 25% of the total depreciation of 70,000 over 20 years. But, you won't owe depreciation if you 1031 exchange. Just the $2,000 it costs to push the paperwork.

Due to your cashflow, I see no reason to cash out just to put yourself into more 30 year mortgages when future appreciation is uncertain to surpass the historical average of 4%. I'd keep my 20k/year net profits for sure so start with that advice first. Someone might say pull 50% LTV cash out for another property to break even on but I'm not savy enough to disagree. I myself am 1031 exchanging that house and bought land to build a multi unit because of the ADU laws so I can build a home with a JADU for the purpose of house hacking. Is that a good idea? Probably not lol. But I'm going to do it anyways.

If I were you, which I'm not. I would keep the house and reinvest the cashflow into the S&P 500 or max out your 401k w/match (22,000/year). 20k/year at 8% return feels less risky than potentially buying a turd. And the benefit is that the money is always there if you need to shift from the market back into cashflow. If you looked at my updated numbers, I laid out the fact that had I reinvested the $12000/year into the S&P 500 over 16 years, my total equity minus my cost basis would be ~$650,000. Note: I think I said 850,000 in the last post so I messed up if anyone was paying attention. What I'm trying to say is that a condo/SFH is awfully close to the same outcome had we financed 3 or 4 units with the same capital investment with no cashflow. Good when you're young and have capital, maybe not good when you want to retire in the next 15 years and don't want the headaches or risk of uncertainty. What's certain is 20k/year and that's like a jackpot as most people on here are like struggling to break even on their leveraged properties. $200/month is like nothing when it can be wiped out killing your returns for the entire year after uncertain capital expenses.

I'd like to hear better ideas though.

I was hoping someone knew of a real or hypothetical $800k property or that would cashflow me at least $20k. So I’d leverage 50% into it with a $400k down payment.

A 30 year mortgage thrown into the mix makes no difference as long as there’s still
20k positive cashflow.

Not sure I follow you on me only owing $18k deprciation recapture tax. I’ll over a little over $100k.

The killer for me and why i’m scrambling…I just lost an ADU airbnb I built from scratch behind my house (zoning issue) that I’ve had for 8 years grossing $65k/year. So your idea is a good one. For me to replace that on another property would cost $450k where i live. Or in the stock market I’d need $1.5m to generate that kind of reliable income. I built it for $70k all in.

$20k what? Per month? Per year? Per lunar cycle?

$20k net annual, as was said in my original post earlier in the thread. Did you have something to add?

$20k net annual from $400k deployable capital is laughably easy/simple. Come on, your not being serious on this right?

So tell me what kind of properties you'd be looking at - in this market with 8.5% rates? Thats why I'm fishing for ideas here… ideally to leverage into an $800k property. Multi-unit has always seemed like an insiders game to me, and there are none where I live. Three years ago I built a 1br STR from scratch all-in for $235k and it's been doing over $80k gross annual. Now to build that same exact property is looking like $400-450k, but the STR market seems overdone in my area- saturated. Rates and occupancy are way down so this seems like too much work for too much risk right now.

Well seeing as you've given all but no fences to the "how", that leaves you with only about 4,728 options for how you could do this.

First, you mention STR, ok. Well, there is a few hundred market's you could rather readily go into, find higher end unti's not selling or not renting, because there higher end higher $, and arbitrage them. Call it co-list or arbitrage, whatever point is using rather minimal capital can have under control and put that STR experience to work and get it going.

Let's say your $40k into it. Well, as you know you could drive the kind of revenues that clear that inside of 9-15mnths and from there your at infinite returns.

And/or you could offer JV's to help people in various market's to do this and all you'll take is 10%. Now you have a semi-passive way forward that is scalable, could do thousands like this.

Or could go to a good "farm" market like one of my current "farms" and get 4-5 B+/A-/+ properties at that deployment pumping about $2,100 net monthly, with good appreciation also clocking. OR go to the c "farm" market like mine and pickup nearly 7-10 units, maybe touching on $5k net monthly.

OR could work on some seller finance deals.

Or any of a few dozen other potentials, in a dozen or so states, with a dozen or so markets in each state making for THOUSANDS of potential paths forward.

Look, you got some kind of negativity anchor going, you wanna see how there is nothing you can do that's clear, why i don't know but if you put some effort into finding out how you CAN, you'll find it, rather readily. Your bar is really low.

Hell, here's another; hand me the capital, done. I'll happily pay you $20k annually in perpetuity. That's about as simple as it get's.

And by the way, if 8.5% rate is such a chip on your shoulder, then simply don't do 8.5%, do 6%, or 5%. Yes, it IS that simple. How many you want at 6%? One, five, fifty properties? Done. Don't believe me, try me. 5.97% is current rate I can get.

And on seller finance deals, I can get down to 5%. I "could" get lower but I just feel like a dirt bag doing it so I hold the line at 5%. Can I really get these? Lol, yes, I mean what I saw and say what I mean. Most recent one closed 2 days ago. last one before that closed Friday before. last one before that closed about 2 weeks before that. I couldn't say the # of seller finance deals I have done this year so far, maybe 20/30 or so.

And I have 2 more in hopper right now, even though I technically "turned down" for the holidays 3 weeks ago now.....

Seller finance deals are literally EVERYWHERE. I don't use wholesalers ever, nothing against them I just don't know a 1 who's worth a pizz anymore, and I have no problem digging up seller direct myself.

If I can, yes you can. So I'm a genius, doesn't change fact yes you can.

If you’d paid attention you see that most of you’re ideas wouldn’t work for me, because of the time required. As I said originally I only have $400k deployable IF I can utilize a 1031. How’s that gonna work - setting up and bunch of rental arbitrage in some faraway city under the 1031 timeline.

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Quote from @JD Martin:

Quote from @K S.:

Quote from @Bryan H.:

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You mean you took 100k in depreciation? You only have to pay back 25% of what you took over 20 years and only if you don't 1031. Correct me if I'm wrong but I believe you take the home improvment value (not land) and divide by 27.5. That is your depreciation at least that's how my CPA is doing it from what i can tell. I then times that by my tax rate of 28% to get my savings every year. So if you depreciated 100k, you would owe 25,000 at close of sale if you don't do a 1031 exchange.

Yeah, looks like you got the ADU stuff down. You may want to look at a HELOC against your equity to build another.

You're not wrong. That's exactly how depreciation on SFH rentals work. Using simple numbers if the county assessed value of the improvements was 180k and the value of the land was 20k your depreciation point would be 90% of your basis (whatever you paid plus most of your closing costs), divided out over 27.5 years.

OK, I guess I’m quoting total tax I would owe at sale, not just depreciation recapture. So purchased for $100k sell for $400k, yes 25% of the $100k fully depreciated, yet also my tax bracket rate on the $300k appreciation/profit. Around $100k in taxes.

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Quote from @James Hamling:

Quote from @Bryan H.:

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Quote from @K S.:

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$20k what? Per month? Per year? Per lunar cycle?

$20k net annual, as was said in my original post earlier in the thread. Did you have something to add?

$20k net annual from $400k deployable capital is laughably easy/simple. Come on, your not being serious on this right?

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Quote from @Carlos Ptriawan:

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similar idea like KS....

these are all depends on whether you have w2 too or not, if retirement age is at 60 and we're at 55, just sell the house that has the largest equity (lets say we have 30%LTV left ; move to area and start new 30YFRM with 75-80% LTV), trick is to have the house/SF to be able to be househacked such as in duplex so all mortgage is paid by buyer. For your lost Airbnb you could either move there (sell primary and move to rental) so you dont need to pay tax. For me all these equity from house is actually worth only when I'm able to cash-it-out and re-invest into S&P and selling premium on those cash (creating another 20-30% safe/hedged IRR investment) for monthly payroll.

Who are these people just willing to sell the house they’ve built their whole lives in and go live in a rental? I guess at some point one may not have a choice, but man…even just contemplating that is a serious pill to swallow.

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Quote from @Brandon Stiles:

Quote from @Carlos Ptriawan:

Quote from @Brandon Stiles:

Quote from @James Hamling:

Quote from @Carlos Ptriawan:

the yield being chased when doing leverage real estate investment is actually :

appreciation_of_equity + cash flow * ( spread between appreciation and mortgage rate or spread between bond yield).

As long as your appreciation market is > 1.40 of mortgage rate --> that would define your return.

I guess to everyone that invest in real estate or SPY to create your own spreadsheet and make your own financial modelling before
even placing a bid.

There's no random-ness in investment. Once you understand all these underlying sheets, you would know which investment is profitable at given time.

This chart is very reassuring lol! Forgive me, I'm new to REI.... What factors go into the "Cost to sell"?

Thanks

realtor cost, docs,etc when selling , he put at 10%,usually I just put 7% personally.

Yea you should use excel like what James shared prior to investing.

Also you need to download mortgage amortization period excel sheet as well.

Thats what I assumed but why does it increase to $697k when the propety value is $799k?

Thise numbers are from some other post - nothing to do with my situation or what I was asking.

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All Forum Posts by: Bryan H.

Bryan H. has started 6 posts and replied 51 times.

Post: Selling an investment SF - with 200K Pay off my Heloc or 1031 elsewhere?

Income Reliability

To Sell or to Hold

Income Persistence

Properties and Tenants

Buy Now Or Later

Summary

Post: Eat the $100k tax on $400k sale?

Post: Eat the $100k tax on $400k sale?

Post: Eat the $100k tax on $400k sale?

Post: My 100k house vs 100k in the S&P 500 (16 years later)

Post: My 100k house vs 100k in the S&P 500 (16 years later)

Post: My 100k house vs 100k in the S&P 500 (16 years later)

Post: My 100k house vs 100k in the S&P 500 (16 years later)

Post: My 100k house vs 100k in the S&P 500 (16 years later)

Post: My 100k house vs 100k in the S&P 500 (16 years later)