All Forum Posts by: Ryan Marchand

Hey Celine, great questions.

Our firm invests in Michigan and Ohio, with 90% of our holdings in southeast Michigan. We have found that the Midwest offers an attractive price per door that cannot be matched in any other region. If you are predominantly looking to flip these homes, someone else may be able to provide more-specific advice for your situation. More directly related to your area of interest - I suggest concentrating in 1 market out of your list at first, and build a system (vendors, property manager, etc). Once it's really running well, take on another city on your list. If they're in the same state, that will make your legal team more streamlined, but otherwise, you have to form all new vendor teams when assets are scattered across multiple MSAs & states. If you work a day job in addition to your plans to pursue real estate in this way, then focusing in 1 city/MSA will drastically reduce your time spent focused outside your job, allowing you to keep your income high, your job safe, and your problems simpler. Best of luck!

thanks for the feedback. since this post, our models have become much more sophisticated, but even then, your advice is helpful! 

-our new underwriting standards account for pre-funding partial years for property taxes

-we also have a much more sophisticated capex review process that builds annual reserve budgets

-the biggest challenge now is just "enforcing" the budget across multiple teams. 

the dilemma: do you want to try to get capital appreciation, or cash flow? 

steps to decide: 

1-flush out the cash flows & sales proceeds of both scenarios, discount them based on what % of the return is likely to be realized vs "optimistic"

2-find a delta in the cash flow of the risk-adjusted outcomes (pretend these are your most-likely outcomes)

3-determine your time investment on the self-managed opportunity

4-divide line item 2 by line item 3 and compare against how much income per year / hour your time is roughly worth

5-if this figure is less than your desired income, avoid the time commitment investment; and if the figure is more than your income, buy the time commitment if you're wiling to do it. If they're about the same - ask yourself:  Do i want to work more hours without paying myself overtime? 

If you understand the tax implications of these decisions and are comfortable penning out your hold period scenarios for each, that will give you the best answer. Before you start, make sure you understand your tax benefits in the syndication.

Cash on Cash becomes ROE after year 1 (assuming no capital calls in year 1). Track your cash in the deal at EOY in your analysis. If you do a refi-out, reduce your equity by loan proceeds distributed (they're not an income, they're the asset offset related to the loan liability). Your future year ROE will showcase the remaining equity CCR (hence ROE), and your new cash should be reinvested at some prevailing pre-tax rate (say 7% for example). Combine all equity and all cash flow for the global ROE, which is my favorite way to show loan proceeds are increasing your yield over time.

Down payments are not an expense, so it does not offset income. If either property has paper losses that exceed the taxable income of the other, that would neutralize taxes due, but your goal should be 1) produce as much rental income as possible and 2) maintain the property while carefully tracking all expenses and improvement costs so you are only taxed on the appropriate amount of income, if any. Depreciation helps reduce your income exposed to taxes, making income from real estate more attractive than w-2 income of the same amount (dollar for dollar).

Situation:

We're acquiring properties at a steady rate (2-4 per month) and I'm looking to improve our cash management. The ultimate goal is to reduce the likelihood of capital calls, while at the same time streamlining work for the bookkeeping team.

Example: 

We're buying a 40-unit apartment complex (in Michigan) with an annual property tax bill in year 1 of approximately $50,000. Let's assume all other "Uses" equate to $350,000 in this particular example. Let's also assume that cash flow after debt service is $75,000 (NOI less CAPEX) and debt service is $60,000 per year. All figures are generated for illustration purposes only and do not reflect actual figures of any of our current/past transactions.

Questions:

1-If our debt package requires 3 months of prepaid P&I ($15,000), should we increase our Sources & Uses schedule to account for this figure, or do we anticipate the property to perform & simply borrow funds short-term from ourselves or 3rd party credit until operating incomes can pay back the short-term loan? I don't want to get in the habit of depending upon future incomes to prepay bills if it means we're now "dependent" upon the property to perform. 

2-Are there 3rd party vendor that offers nationwide property tax payment plan solutions for commercial properties? 

3-A property acquired in August would require far more cash at closing for prepaid taxes versus the same property acquired in June of the same calendar year. How does this impact the pro-forma and budgeting leg of your acquisitions & bookkeeping workflows, respectively?

4-If in Q#1 the S/U increases by $15k, then our Cash on Cash Return ("CCR") would decrease proportionally due to having a larger denominator. However, if we are prepaying $15k of the year 1 opex, should we deduct that $15k in the proforma for year 1? In this scenario, the CCR increases because we've reduced opex that will be paid during year 1 by prepaying at closing as part of our initial cash investment.

Photo is of one of our properties; not impacted by this post.