All Forum Posts by: Henry Clark

OP.  Stop for a second and identify your goals.

1.  If just short-term cash flow, as mentioned go to your local bank where you already have a relationship and I would take out a working line of credit.  Pay interest only for 2 to 5 years.

2.  If you plan to do another commercial project, recommend you don't take a loan out.  Wait till you have your next project and use this property as Cross Collateralization for financing the next project.

3.  If this is the only project, you plan to ever do.  Would recommend you check on doing a long-term commercial loan.  This will lock in the rate normally for 5 years with say a 20-year amortization period.  It will cost you an appraisal, say $2,000 for kicks.  Relative to the total value and the amount you want to cash out.  Say a $1mm property, but you only want $100k out.  Depending on your objectives, ask for a longer refi period of 5 years to 7 years.  Or for a 1% lower interest rate since there is so much collateral tied up.  If you don't want a long-term loan.  Then ask for a working line of credit for say 3 to 7 years.  Instead of an appraisal see if they will do a penciled valuation, since their collateralization will be extremely high.

Cap rate is the same no matter cash only or debt only.

 Cap rate.  Net operating income divided by price.  Since interest expense is not part of Net operating income.   How you finance has no impact on Cap Rate.

Couple items to consider.

1. Capex needed. Exact same property, exact same NOI and Cap rate. Exact same financing. Which one would you pick? The one with zero or $100,000 capex requirements?

2. Cap rate- who gave you the NOI and the price? Did you validate. Let's say a Cap rate of 6. I can make it legally swing from 4 up to an 8. Plus their list price isn't necessarily your purchase price.

3. Cap rate- their cap rate isn't necessarily your cap rate with your business model. You might pay higher than it's worth knowing you're going to make more NOI with a different business model.

I would throw out the use of cap rate.  As mentioned above go with cash on cash type of measures.  

OP. Make sure it’s a good Longterm location for you.   Size, customer base, and neighboring businesses.  Are there any Magnet stores that might leave?  Lease terms for them?

Appraisal-  compare similar property values on Crexi, loopnet and costar.  Just ball park.  Each is different.

Appraisal- commercial is usually based on A. cost to build which they use 25 year average. With inflation the appraisal may need to be higher. B. Comparables. Very hard to do with commercial. C. Revenue stream. What is the value you would place based on your current lease? Revenue stream NPV, Capex repairs, NNN. Don't add in your businesses revenue stream.

Deal- if he lists he loses say 7% RE commission.  He should reduce by 1/2 to you.  Owners selling multiple properties hard to do 1031, you might offer deal terms to help him out on 1031 timelines.  But I would lock the property down with a deposit so he doesn’t sale underneath you.  

Deal- only do if you're willing to go thru. His sales value is based on having a tenant lease in place especially with NNN. What are your lease terms and length? I would negotiate downwards before he sales. Also be prepared to move if terms allow in the short term. Ask for a lower purchase price.

Deal- Capex, roof, parking if not common area, etc. reduce price if you buy.

Personal- compare tax impact of owning versus leasing.  Impact to your. Cashflow.

OP definitely run the contract thru attorney.   

This is a standalone building?  Since you’re familiar with the building I would look more outside.   Can you describe the building and the surrounding common areas, signage, parking, etc?  Is this an older building?  Any grandfathered in issues that will go away?  Any epa issues?  External utility issues?  Do you get or have the google map address? Etc.  Etc.

REI deal considering risk issues and your existing resources.

Change any assumption I make.  Since I don’t know your life.

1.  If your kids are in the military teach and help them to use BAH to become millionaires by 40.

2.  Use your kids as part of your investment strategy as renters.

3.  Use military renters to reduce tenant risk  of damage, rent non payment, getting them out of the unit if issues come up.   Just call their commanding officer.

4.  With your AF background and in the Raleigh area get your RE license and specialize in BAH housing deals.

5.  Primary residence capital gains. 2 out of 5 years.  Use your current house and future residences and take advantage.  Just making this up, but you might have to do 10 rental units versus 1 primary flip to be equal after taxes.  

6.  Cash snowball.  Recommend you do some primary residence flips or BRRRs to get your cash flow going.  Although you could invest with low downpayment recommend you don’t with higher interest rates.  To manage your cash flow.  
7. Value add- look for 2/1 or 3/1 you can add an ADU room or bathroom. Can split a lot off.
8. Baby Boomer REI investors. Find an investor who is ready to get out of the business. Start buying their properties. Give them solutions. 1031, installment sales for tax purposes, revenue stream for them, tired of managing, no RE fee, etc. Pick an area you would like to invest. Go on your city or county property GIS map. Start looking at properties in that area. Look at the bottom. They will list related PID properties. Look for someone who has a bunch. 10 or more. Look at those properties. Reach out to the owner and see if they would like to build a relationship and start transitioning their REI to you.

9.  Older people-  during the lead fall and snows.   Drive the areas you like and see who doesn’t clean up.   Approach them.  Go to a great neighborhood and pick the worst house.  Look in the obituaries from a year or more ago.  Find their house and see if you can buy from who inherited.  Since they got stepped up basis, no tax issues.  Plus if kids they probably live far away and don’t want the house.

10.  Look for daycares for sale or old small elementary buildings for sale.  Small flat roof churches. Convert to rentals.

Look at your self and your assets/strengths. Look for an unfair advantage. With the high interest rates and the internet steam to do REI competition look for a different approach. Don't bid against the world on 3/2 properties.

1.   Spouse and risk aversion.   Normally is due to lack of knowledge.  Lay your finances and life style out.  A.  Retirement needs., B. Retirement income sources., C. Cash needs by year.   Keep $xx,xxx in liquid cash equivalents. D.  Midterm investments. 3 to 5 years., E.  Longterm investments 5 years and longer.  

Do a quick run thru. Don't get buried in the details up front. This will help both you and your spouse understand your risk and how much to invest in REI.

2. Risk- investment loss. REI is generally not a zero sum game. You can't lose it all, "unless" you overextend. Or can't cashflow and have to cash out early in a downturn. Look at your investment and what if, the market went down 30%? What if you had to cash out early?

3. Risk- lawsuit. LLC. Business insurance coverage. Contract review and property management policies. Personal umbrella policy.

4.  Risk-  your first investment.  If some rehab do superficial only.   Flooring, landscaping, painting, windows, kitchen, bathroom.   Stay away from foundation and structural projects for your first one.  

5.  Risk-  you will invest for cashflow and or value growth.  Do stress tests for both.  Occupancy is 70% versus 95%.   capex is $15,000 per year versus $5,000.   Slur growth- will you beat inflation?  Will you beat financial investment returns?

6. Risk- never investing in REI. At some point pick a low risk easy exit investment and just do it. Might not be the best financial deal but you will move your REI education forward. And start to develop your team and systems.

OP

This discussion should be more about you as an investor versus if the deal is good or bad.  

Most technical professional high earners are good at their job but bad as investors.  Are you a high end professional are you good at investing?

Most of these people the best REI first investment they should make is their office or an office complex.

If you’re going to invest thru syndications or funds you need to be the “Investment Banker”.  Very few investors are trained to do that.   They have money and they gamble.  

Most of the failures now are due to true fundamental investment concepts.  

A.  Used short term funding for a midterm deal.   Got squeezed with rates going up.

B.   Did not do a thorough market study for rental rates or occupancy for MFH investments.

C.  Did not assess quality of tenants and length of contracts in corporate lease tenants.

D. Did not do a proper Capex assessment.

E.  Did not assess the Operational experience and capabilities of the operator.  

F.  Did not stress test the above.

G.  Read the fine print.  Have the right to convert your investment from debt to equity.  Run.

These are very basic investment steps that these doctors, lawyers, wealthy people trusted and did not play the role as an investment banker.  You have to develop these capabilities.  You have to be able to Risk adjust return rates you are being told.   

If you're still wanting to go down this road. Keep learning but make several investments with different groups. How much money are you okay loosing? We all have to pay for our REI education. Make 2 or 3 investments with different groups. Start learning by doing and by fire.

OP

1.  Break your estimated $400k improvements down on paper.  If it’s $200k sweat equity you’re paying taxes.  If it was a bunch of cash payments with no receipts you’re paying taxes.   If it was all bought through credit cards and checks, just pull your statements together and start marking them off.  Try to get invoices for the larger amounts.  

2.  Although it’s negative, you probably have another $100k to $150k in closing costs. So your tax estimate will be lower.

3. Since private home no 1031 or DST option.

4.  Just timing.   If you’re unemployed and can get REP status look for a real estate investment that has writeoffs that can help offset some of the gains.

5. Pay the taxes. Basically you did a Longterm BRRRR. Take the cash and rinse repeat in NZ

6.   Look forward.  USD to NZD is 1.65  The USD is strong going into that market.

7. All REI is local, but looks like NZD is a buyers market. Use your cash position up front to get a 30% reduction plus do a value add like you just did.
8.  Interest rates are lower there.  5% or lower.  Keep a good portion of your cash liquid.   But see if you can leverage your cash investment position with a bank down there for an even lower rate even.  

9.  Research if the U.S. and NZ have a tax agreement.  Also cut ties with the U.S.  Otherwise you still have to pay and file on your worldwide income with the U.S.  Luckily or unluckily looks like NZ tax rates are higher than US. So you wouldn’t need to pay extra US taxes.  You might consider keeping most of your fluid wealth in the U.S. to pay a lower income tax rate.  

You’re in a great position.   I would just start looking forward for wealth and tax savings.  

OP financing is easy to get.  You need to look from the lenders perspective are you a good customer?

1.  Do you have a good track record?

2.   Are they part of your team or are you chasing 1/4 percentage points?

3.  Do you show them how you mitigate and control risk?  

OP your reference line says Miami.  You still have another 15 to 20 years worth of baby boomers that need to go south.  If you’re in the Florida market I wouldn’t worry about population size for the next 15 to 20 years.