All Forum Posts by: Dean Valadez

@Dean Valadez

Hi Dean. What I am referring to is the evaluation of ROI of improvements/upgrades/rehabs. This is only one of many strategies, but it is the one that I adhere to most. It helps take the emotions out of the investment. Simultaneously, although I underwrite for long-term and that is the fall back, I generally do not have plans to keep long-term because I'm trying to grow differently than you are.

Here are a few real examples and I will try to explain the logic. I purchased a SFH for about $300K. I put $30K down payment. I have to pay PMI. It is used as my primary. It was a HUD home, that was boarded up, stripped, and there was a large hole in the wall where burglars had cut open to ransack it. I'm married with 3 little kids at the time, 5, 4, and 2. We got one toilet to work and we slept on the dining floor. We put everything away when we wake up contractors can work on the place. Got complete HVAC system (used) from habitat from humanity store for $40. Welded the pipes and recharged the Freon ($300). Got a few toilets from same place for $35. Hired out repiping and tile the kitchen/dining room, while we slept in the garage. Bought a heat gun from Harbor freight ($10) and wife spent evenings removing multiple layers of stick-on linoleum while I use a hammer to break up a brick wall to make space for a new patio. I watch a few YouTube vids on flooring, rented sanders from Home Depot, sanded and sealed the original hardwood floors for the entire house in 3 days. Lied to the wife about visitors and got her to spend a weekend removing all the kitchen cabinets, sanded and resealed all of them (probably my best trick since we married). Put new hardware. Remodel bathroom, Yada yada yada. We lived in it almost 2 years while working on it. Hired help when needed. Total capital costs was approximately $40k. Moved out and got another major fixer for $600K, by refinancing for the new down payment. Rented that one out a bit then sold for $600k, 1031 to an 8 unit building that cost $700k. Did some upgrades and improvements to the 8 unit, including new roof and paint. Total cost was about $40K, but I was cash flowing ($40k/y) those 2 years and 1 day I held it (net $40k). Sold it $900k and 1031 to 14 units and vacant lots for about $1.9M, cash flow 30k/y. That's all because the $40K improvements raised value from $300k to $600k for the SFH and the $40k improvements on the 8 unit took it from $700k to $900k. Btw, I sold the SFH to friend, so it was a discount from about $675k real value.

Back to the $600K home I moved into from the $300k home. Slept on the garage floor while we made 1 bathroom and bedroom usable (5 weeks of contractors and demolition, $40K) redid the floors a year later was another $5k. Refinanced and pulled $120K to buy a $420k duplex, cash flowing $800/m at COE. Then refied again as interest rates dropped, pulled out $150K to buy two tri-plexes, each cash flow about $800/m, but needed lots of work, which I did. Spent about $30K on those 2 triplexes (which basically nulled the cash flow) and sold it 1.5 yrs later to 1031 into a 19 unit building for $2M, that cash flows $60k/y. Recently pulled HELOC on that primary and used $230K to help buy a 6 Plex and a 9 Plex and invest in a start-up, because the roughly $50k improvements had an ROI on my $600k to appraise well over $1M.

I can keep on going, but you get the pic. When commiting capital improvements/upgrades, consider what it's worth. What will it return and what will those returns be used for? How much cash flow in the mean time? Are you working to fun/hold the deal or is the asset working for you and paying you with cash flow? Are you over improving? Are certain upgrades necessary? Did you underwrite the old/worn appliances and structure during your inspection? Did you have enough reserves, build from the gross rental income?

Some believe in cash flow later down the road by buying class A/B in high appreciation areas. I believe in cash flow at COE now to sustain the rental business, but build/grow wealth through it's equity, realized, NOT HIDDEN in the asset. Im just a small time guy, but I wanted to make REI a sustainable business, not an investment that constantly draws outside income. Once stabilized, I then concentrated on the operation and created my own management and maintenance team to free up my time. They get free housing and a salary. They bill me for additional hours when they make repairs.

Also, for context, the above all happened in just a few years span, not decades. But it takes intentional investing. Therefore, create a goal, work backwards to a realistic strategy in the timeline you want, and do it. It may not seem easy to some, but it is more than doable by all. You just need to have realistic expectations of yourself.

Only you know what you can tolerate. But that's an illustration for what I mean by capital improvements expected to return 3-5X. Don't redo the kitchen, maybe some paint and new hardware will suffice. What will be your actual return on investment... Ask that over and over again.

@Dean Valadez

Based on your initial statement, you bought this property with value add potential. Therefore, the money spent was to add value. That rental money reinvested into these value add components should theoretically have a 3-5X, or more, return. Thus, your exit/extraction, with grant you all that money back TIMES 3-5. If not, then that was not a value add play. Think about it... If you spent $5000 on a value add item, that should rais the value of the property by $15-50K or more. If not, then it was not a value add event, it was just maintenance, and it should have been covered by your maintenance budget.

So, the question is when will you realize the gains produced by your value add expenses? Don't wait too long, because those gain may lose value based on time, trends, or rates.

Yes @Dean Valadez it is hard to cash flow and upgrade a property. What you are calling 'cash flow" is actually capx or repairs of some sort. Unless you need money out of this property best to let money build up for your next upgrade and/or repair. Cash flow sounds nice but often misleading when  large repairs pop up.

1) Capital improvement can be added to to original cost basis thus would reduce your tax paid on capital gain had you decide to sell it later. The property's cash flow is unaffected, just how you want to pay yourself

Paying yourself from a single member LLC as owner's draw has no affect to tax you pay for the whole profit when filed. Owner's draw to personal account or distribution then transfer money to the business or contribution has nothing to do with piercing the corporate veil.

I would recommend using a real estate bookkeeping software that will help you with a lot of these questions. Baselane is the software I use because it's created for real estate investors. When you categorize each transaction using the software you can then create statements to understand your monthly or even yearly cash flow. 

I personally reserve 15% of my rent per month for maintenance, capex, and vacancy. The cash flow left over after reserves, my mortgage, and other expenses is the cash flow that I "pay" myself / my business. 

 Ideally you want to separate gross rental income at the "top" and have all your expenses, then have at the bottom "cash flow". While there are more complicated ways to measure this, the most practical way if you care about answering the question "how much do I make every month" is just income - expenses = cashflow. No need to over complicate it! 

Cash flow will still be the same regardless if you expense the reno cost right away or capitalize it.

Dean,

I agree with @Chris Ayars, I would cement bricks around the window well to raise the area around the opening and then get a window well cover that could go over top of the opening.