All Forum Posts by: Tom Cyr

This was how Dave Ramsey lost his shirt.  He got too leveraged and too many loans got accelerated.  Moderation with backup assets is my policy. 

I was performing due diligence with Equistream to get a pool of deeds for them to load with buyer/borrowers.  I met the company in the spring and the owner/family seems pretty honest. There must be 5 or 6 family members who run the company.  All nice people in my dealings.  But I ran into inability on their end to answer some advanced tax questions.  

Since they sell deeds to an investor, and then manage individual property sales soon-after to an end buyer in an installment sale, the investor is really a "dealer" in the eyes of the IRS and is responsible for taxes on the entire markup, even though the money has not yet been received.  I haven't heard of any "investors" claiming short term capital gains on their tax return and paying the taxes on the entire pool.  The amount could be enormous.  Of course, penalties and interest in addition to paying a professional to defend one in the event of an audit would add to the misery.  Most of their "investors" they referred me to for visiting with are not full time professionals and are unaware of the financial danger they may be in.

I never could get anyone in the company to comment on their method of property transfer or that they may be creating ticking timebombs in peoples' portfolios.   After a while, no one would return my phone calls or emails.  I think they discovered that even after many years, they may have a problem that they would prefer just to sweep under the rug.  It's been crickets for two months.   They might be able to restructure the transactions using lease options instead of contract for deed but I haven't heard any response to that suggestion that I passed on from industry experts.

In a Roth, you really want growth. One problem is though, you can't be very involved without committing a prohibited transaction. If you can partner with someone who will flip and split the profits with you, it may be your highest yield. Just make sure you document your JV in writing with someone you trust.

Less trouble is long-term hold in renting but you have to get creative to turn a traditionally low yielding asset (rental real estate) into something decent.  Some areas, particularly the rust belt have some decent cap rates since the crash. 

Look up turn-key rentals in states that you desire to put some REI roots down in. Sterling's example is just one. If you can find a half down owner-finance seller, you may have reserves for either an unexpected cap ex, vacancy, management change, or another deal later. Look for loan payback from the net rent in 5-6 years so your yield is in the 20% range.

It might be that the deed is in limbo and all the investor holds is the delinquent mortgage.  Or the bank has not been able to foreclose either.  

Very good. So if you multiply your 4-month return by three, you will get your ROR, which is the real number to keep your eye on, since that allows you to normalize returns across other options. It's the timeframe that makes the ROI meaningful. 20% in 4 months is a whole different story than 20% in two years.

Now, can you find an asset to rehab three times a year to keep your capital fully invested?  Inventory is becoming scarce in many parts of the country.  Keep up the great work.

Thanks for the report including the partnership issue.  Great job and excellent profit. 

I didn't see any dates included that would be used to calculate ROR.  Those are always helpful in comparing opportunities.

Since the depreciation recapture is not tax free, would you comment on claiming depreciation if one is renting a bedroom out in their personal residence?  

I'm not sure which part is unclear since I presented several concepts.

Rental property is a cash flowing asset.  The asset could be anything, a toll booth, an oil well, a fast food restaurant...  The net in the financing model is simply arbitrage.  That is all.  It is the difference (or spread) between the outflow of your debt service and the net income after expenses.  

I suspect that your arbitrage is a lot smaller than you realize.  Ex-landlords have a better idea what kind of net there is on a rental than inexperienced new investors. You might present your analysis to a burned out landlord for his comment.  I think you'll hear that you have omitted a great many items.  Usually it's vacancy, cap-ex, or plain old maintenance.

If you really want to push through and do a deal (even as a learning experience) don't saddle the deal with 100% debt financing.  Lower your risk by taking on an equity partner for the down payment who also thinks that rental income is respectable.  If you offer him/her half the profit, it sounds like you are incredibly generous.   My hunch is that if the asset nets 5% on his down payment, you will be very fortunate.  If you were to offer the investor 2.5% interest on their money, they would probably laugh at you.  But the result is the same.  

One data point that is missing in this so far is retail price for the duplex. Is $125K retail market value? What is the expectation for real estate appreciation in BR for the next 2-5 yrs? Remember that a multifamily property will only appreciate a portion of the amount of that SFR projection.

Almost 20 yrs ago, I bought a $104K duplex for close to retail and lived in one side.  The other side we rented out for $750, so the ratios are very close to what you are showing.  Because the duplex was owned by a trust, we paid rent like any other tenant.  We owned it four yrs, and put a roof and condenser units in both sides.  When we sold, the only reason we made any profit was because we sold it ourselves at a market peak.  The only money we made was capital gain.  The rest of the spread went out for maintenance.  And we had a personal mortgage, and we managed it ourselves.  

You can save yourself a lot of trouble by drilling into the numbers in your analysis before you buy.  Instead of spending your time getting locked into a project with little to no profit, spend it looking for assets that you can arbitrage for a lot higher yield.  Look for doubles, triples and home runs.  Start by hanging around others who demand yields commensurate with what value they put on their time.

Do you have any written rental agreement?  With a rental agreement, you don't need a lawyer to evict in TX.  It's rather straightforward but it will cost $200-ish in court fees, even if they move before the court date.  Many eviction courts have procedures.  I'm sure you've tried your best to keep them moving so keep that going and if they stall, serve them their 3 day notice to vacate in their hand, document delivery and then see if that lights a fire under them.  If not, you'll have to do the eviction process which is going to be longer than you'd like and you're going to have hostile people in your house until they move.  Finesse is going to be your best ally so keep your cool and keep trying to reason with them.