All Forum Posts by: Henry Clark

Taking a break from the last round of snow and ice.  Wasn't too bad.  Around 2 to 4 inches for two back-to-back storms.  I'm on Week 3 of my right hip replacement so I had our neighbor plow the snow, versus renting a skidsteer and climbing around on the ice.  Hip is doing great.  Walking on my own after about the first 5 steps to loosen up.

Little marriage advice before I get into the post.  Always ask your future spouse if they will help you out.  My wife out helping salt and chip frozen ice.  Had a kick about how large some of our icicles got.  

Okay.  People are always asking about which is better Cash Flow or Appreciation as NOI as an investment model.  I'm not going to discuss those.  

While salting and chipping ice got to thinking about the returns on Self Storage.  Just taking a break and writing a post right now.

Rarely discussed are the Non-sexy returns of Self Storage.  Interest expense as a deductible, Depreciation expense as a deductible and Principal paydown as a piggy bank.  I'm not going to get super mathematical, just going to discuss these aspects in general.

1.  Interest Expense- when you do monthly "P/I" payments there is a portion for interest expense and principal paydown.  The ratio of each starts higher with interest expense in the first month and then higher with principal in the last month.  To keep this simple, let's go with the two extremes.  Let's say in year one, all interest expense and no principal paydown.  Say Income tax rate is 25%.  Interest expense of say $50,000.  That is a $12,500 cash back to you.

2.  Principal paydown- Same scenario as 1 above.  But let's say 100% principal paydown of the same $50,000. No impact to the tax return. Just you put $50,000 into your piggy bank if/when you sell the location. The good thing about Self Storage there is very little Capex R&M, so this $50,000 is truly yours to reap. Or this equity can be used as collateralization for another deal.

3.  Depreciation Expense- As noted in 2 above, there is very little Capex R&M in Self Storage. Let's use $100,000 as depreciation each year, again at 25%. Thats $25,000 cash per year. Yes, you will have to pay taxes back for the depreciation amounts should you sell in the future. And for Self-Storage you will definitely beat Inflation, and your building and property will sell for more than it originally cost.

Forgot one:

Inflation-  Got to love inflation.  If you already own.  Inflation is great. Realize its relative. But for Self-storage it is beneficial in two ways.  A.  Our rentals are on a Month-to-Month basis.  So, we can increase the rent as needed., B.  Principal Paydown- If your loan term is say 20 years.  Inflation is 5% per year.  Your paydown in the later years is virtually free.  $1 of debt in year one, will only be worth say $.10 in year 20; someone can do the actual amort table.  Who doesn't love Inflation?

Yes, deal Cashflow and Appreciation are great.  But the meat and potatoes of Interest expense and Depreciation tax impact, Principal paydown and Inflation truly make the deal.  When we do our deal analysis, we normally build so that at 65% occupancy on our 1st phase we are cash neutral, which includes P/I paydown.  Thus at 65% occupancy we are still making good money.

Start small and Make Your Big Mistakes Early.  Plus ask your future spouse if they will help out.

OP  First do several deal analysis even before you look for a property.  Forget what you want to do down the road.  Its a step by step process you have to work your way through.  

The reason I said Aquaculture is because of your biology degree, pilot (familiar with airports) and entrepreneur.  I always like to have an unfair advantage.  If you do housing, your just another investor.

OP.  Still working with little info.  

Taking the current cash flow out of the way.  That you will continue your business for a while.  Again, it gets back to your overall view of the economy and the near future.

I would sit out investing near term (12months). Identify a market and type of REI I want to invest in. Start getting to know realtors in that area and give them a Buy Box you're looking for. Start running deal analysis on properties during this time. Decide on what your financial targets are. To what degree do you want to Scale or not, that will help determine the type of investment.

With your situation I would skip trying to scale up in housing or MFH. Go with CRE. Contact one of the CRE broker/investors on BP and converse with them about NNN commercial industrial properties. By doing this approach you are not competing with the Millions of other investors in SFH or MFH. Plus, you're not adding headaches to your life, unless you want to be hands on, even with property managers.

Use the magnifying lookup or post over in the Commercial section. Looking for NNN commercial industrial investing.

We do Self Storage and Country Subdivision lots.  Pick something that fits your style and investment of both time and money.  Then decide if you want to Scale later and this fits.

OP.  The US can double its population in one year if it wanted to.  

OP. I agree with @Rick Pozos.  A degree is a negative.  

Looking at your background I don’t see any deals.  Your best education will be to invest in a duplex up to 4 plex and live there.  If you’re a Pilot you’re in a white collar environment.   The path you mentioned is very dirty and blue collar.  Make sure your personality matches your path.  

If I had your background I would look at aquaculture.  Both from your Biology and your aviation experiences.  Plus your entrepreneur interests.  

OP.  As mentioned above, far too little info and data.

With that said I’m going to make a bunch of assumptions about you and your life.  The following is a potential path but maybe not yours or your outlook on the world.

1.  Stock market will crash 50%.  Your position won’t recover for 15 years.  Only have enough in stocks for Longterm investing beyond a 15 year horizon.  Rest in money equivalents.

2.  Sell your house if you have lived there 2 out of 5 years as a primary.  Take the $500,000 capital gain avoidance.  Then rent until the housing market crashes and you know your retirement plan.  Florida and DFW markets are already switching to a buyers market.

3.  Inflation will skyrocket in the 4th quarter. Don’t hold on to cash to long.  Keep cash in hand to cover your period of concern.  1 year up to 5 years.

4.  Your original question.  Housing will not be your answer for cashflow and a retirement lifestyle.  

5. Reach out to some of the CRE brokers on BP and look at commercial and industrial.

6.  Kids- don’t fund their college or weddings.  Tell them to join the military and buy a keg and shredded pork sandwiches for the wedding.  Your focus is retirement.

7.  Move to a lower property tax, insurance, cost of living, income tax area.  

OP you might research but I believe the Federal OZ program has sunsetted.  Unless you’re talking about some City specific program.  

OP

If you're doing Flex let's do a preliminary wholesale on me being the Buyer and also the seller.  Don't think of knowing or getting all of the answers to wholesale.  This will be a straight up listed property and a purchase just to see the process on a Commercial/Industrial property.  Then think through it from a Wholesaler standpoint.  The chances of you getting a property Wholesaling without it going through a commercial Agent listing is very slim.

1.  Flex property listed for $2,000,000 in Tampa Bay.

2.  Zoning is C3 whatever that means in Tampa Bay. You have to figure that out, relative to the potential buyers needs.

3.  It has been listed for 3 months versus say 2 years.  Means seller has not truly had the market do price discovery.

4.  A Commercial realtor is handling the deal.  And the Seller runs things through their lawyer.

5.  Property is on 2 acres.  Has 40,000 sq ft, with 8 bays of 5,000 sq ft.  Is Pre-1970.

6. Tenants are all market rate. 5 year leases. 3 are NNN and 2 are NN. They have remaining years on contract- 1 is 5 years, 2 are 3 years, 2 are 1 year left. All are local except for one is a national brand auto supply store, using this for a warehouse. Rest are yard/snow plow, plumber, electrician, hot rod enthusiast, and a regional Power drink distributor.

7.  You have to make a written offer.  I'm going to ask for either a $50,000 downpayment or a source of funds letter from your lender to cover this amount.

8.  You're going to negotiate for 30 days due diligence, 30 days to finance.  I'm coming back at 30 days due diligence and 15 days to finance.

9.  Do you have a due diligence checklist?

10.  Do you have the downpayment or funding letter?

11.  You just signed the offer letter and are on the clock.  You have to find a customer who wants this type of property.  They will want to also do due diligence.  The longer you wait to find the customer, the less time they have to do due diligence.  Plus, they need the 30 and then the 15 days to get their financing in order.

12.  Somewhere in the above you need to work in either Title search or Title insurance.

13.  This is a Pre-1970 property.  Any EPA issues or studies required for your financing?

14.  Any grandfathered items.

Forget whether you know the above.  It's part of the learning curve.  So you need to develop your checklists before you bring your first deal.  30 days is a very short time to execute and learn.

etc etc.

Use the above to start the development process for your wholesaling efforts.

OP.  Think you had a similar post somewhere else I responded to.

What type of Commercial/Industrial properties are you talking about?

As you're doing your research, the main difference you will find with a Commercial versus SFH/MFH is the due diligence time constraints. Also, the vetting process of you the potential buyer. You will most likely need to be a qualified buyer with a lending institution and/or put down a downpayment. These will put pressure on a simple Wholesale transaction.