All Forum Posts by: Arn Cenedella

@Roy Mitle

It’s a small world. I had a residential brokerage business in Menlo Park and lived in San Carlos for over 30 years. Left the Peninsula 10 years ago and moved to Greenville SC. 

You are correct passive losses can only be used to offset passive gains. 

Passive LP investments are “passive thru” entities and also generate their own passive losses via depreciation. Generally cost segregation is used to create large depreciation write offs and therefore losses year 1 of ownership. 

So depreciation will also produce passive losses in LP passive investments. The income is also sheltered by depreciation - ie LP investments for tax purposes are basically treated the same as individual investments. 

Given the cost of debt even passive LP investments will generally NOT generate passive income until year maybe 2 or 3. Eventually they will but it takes some time. 

What typically happens with the cost few bonus depreciation is few if any taxpayers can use up the losses and so they are carried forward until the taxpayer can - typically upon sale. 

Hope this helps. Happy to answer follow up questions. 

Arn

@Audrey Sommer

Agree with @Nicholas L.

If I may, it’s not a 50% cash flow rule. 
it’s a 50% operating expense rule. 

Let me illustrate:

1. All rules of thumb are high level down and dirty approximations to be used for quick evaluation of potential deals. Each property each deal is different. On some properties (newer) a 40% op ex ratio may be better on other (older) perhaps a 55% to 70% op ex ratio is better. 

2. To make the math easy let’s assume you buy a 10 unit building were each apartment rents for $1000 a month. That’s $10,000 a month GROSS rental income or $120,000 a year GROSS rental income. 

3. Apply the 50% op ex rule to the $120,000 which yield $60,000 in operating expenses. Operating expenses are EVERY cost associated with running the property other than debt service. Op ex includes property taxes insurance repairs maintenance property management utilities landscape etc etc. 

$120,000 x 50% equals $60,000 operating expenses

$120,000 gross income less $60,000 operating expenses yields net operating income (NOI) of $60,000.

This is what is used to pay debt service. 
Let’s say loan payment PI is $4,000 a month that’s $48,000 a year. 

NOI $60K less debt service $48K leaves $12K that's the cash flow.

Hope this helps. 

Arn

@Mark J.

Welcome to the glorious reality of owning rental property. 😀 it’s not quite as easy or glamorous as many make it seem. 

I used to manage my SFR portfolio but turning it over to a good PM was the best thing I ever did.

Your indicate PM will cost $1000 a month in cash flow. What’s your time worth? I’d guess $100/hour minimum. So if you over 10 hours a month dealing with your rentals you actually will be saving money by hiring a PM. 

Of course hiring a good PM isn’t easy. I’d suggest giving one or two properties to a PM and see how they do. If good then let balance of portfolio. If bad find another and try again. 

1031 into Second home retirement or STR may be a little tricky. Be sure you do it in a way that's compliant.

1031 into MR makes sense to be. Be easier to have a rental with 10 doors all in same location than 5 scatter site rentals. Coordinating the sale of multiple properties and have the timing all work out all takes skill. 

One final point:

We pay tax on every dollar we earn over our lifetimes. RE is generally taxed at the most favorable tax rates. Calculate tax due up sale and weigh that amongst your options. 

If the tax due is $10k $25K maybe it’s best to just pay the tax and wait for a greet option to buy that retirement second home. 

If tax due is $100k or more maybe the answer is different. 

After 47 years in RE I see far to many people let tax driven decisions lead to a bad real estate decision. 

Good luck. 

Arn

@Spencer Cuello

I second @Chris Seveney mention of Todd D. I know him personally and we share similar “old school” investing principles. 

At Spark Investment Group, we do 506b deals open to BOTH accredited and sophisticated investors. Our minimum investment is $25,000.  I can say we have never paused distributions or had a capital call. We have paid every distribution on time every time in the amount promised or more. 

We do NOT swing for the fences preferring to hit line drive base hits time after time. I've been in REO since 1978 and our team (75 years combined experience) understands REI is a long game not get quick rich scheme.

Other advice::

Work with experienced operators that excel in a narrowly defined niche and those that have been thru at least one market cycle  I would avoid operators that do two MF deals then jump to ATM machines and then RV parks and car washes. Jack of all trades master of none applies  

If the deal seems to be too good to be true it probably is. Right now MF deals might provide average 5% or 6% returns and LP IRRs of 16% if you see a MF deaL that promises 10% cash on cash and 23% IRR, run don't walk away.

Last suggestion - don’t go all in on your first deal perhaps spread your capital amongst 2 or 3 deals and get your feet wet.

Hope this helps. 

Arn

@Zoe Brennan

Starting to invest in real estate is a great idea. 

But when you write “scale quickly” alarm bells go off in my head. 

Real estate is not quick. It is slow and steady. 

No RE deal will change your life with $25K of capital. 

I started investing in RE when I was 26. I bought my first property for $107,500 put 10% down borrowed 80% LTV from Wells Fargo at 11.75% rate and my father lent me the last 10% and charged me interest the same as Wells Fargo did 11.75%.
 

I’m now 70 and have never stopped. 
I became financially free in my early 50s. 

My suggestion is not about how you invest $25,000 but rather how can you make consistent investments in RE over time?

A 10 to 15 year plan - slow and steady. 

Pending property prices in your market perhaps $25,000 is enough to buy a small rental house. If so that’s a good place to start. 

If not then passive investing in syndications is your best bet. Professionals find good deals, operates them professionally hopefully providing a profit without you have to deaL with the issues that face a landlord every day. 

Hope this helps. 

Arn

@Jack Pasmore

Thank you.

I’ve spent my entire adult life in real estate.

It’s been fun, rewarding and lucrative for me and so I am happy to help others find their way.

I’m not much of a system and process guy - I free wheel most of the time - not saying that’s the best approach - it’s just who I am and how I’ve done it.

So I don’t have a step by step guide but I’ll share some thoughts.

1. Be authentic - be your true self.

(I may most be the right broker or sponsor for many people - but I am the right broker and sponsor for enough people. My style my approach my vibe appeals to many but I understand it doesn’t appeal to all. I’m ok with that. I accept there are people I “click” with and those that I don’t.)

Be yourself - faking who one is takes lots of energy and ultimately fails.

It’s kind of like: If one simply tells the truth, they don’t need to remember what they said and who they said it to.

2. Start with family and friends.

Starting out, a new sponsor raising capital doesn’t have a track record so the most fruitful field to farm is made up of people who already know and like you, They may have questions about your ability to run a deal but these folks want to see you succeed and will give you a chance based on their personal knowledge of your honesty, integrity, and work ethic.

3. Don’t sell don’t ask for money!

Rather share with people what you are doing.

This might look like:

Your work buddy Sam might ask you: What are you doing this weekend?

And you reply: Saturday I am going down to Greenville to look at a fourplex I am considering buying. Then we’ll have some friends over for a BBQ grill Saturday night. Sunday I’ll go for a run and then watch football.

People who are interested in investing with self identify.
They may raise their hands and say Me too.

They may say: I’ve been thinking of buying some real estate but don’t know how or don’t how much capital etc.

You can post similar content on social media etc.

Over time as you consistently drop these crumbs plant these seeds, you will find potential investors.

But let them come to you.

You are never pushing never selling you are just sharing your life and opportunity.

Share your excitement about real estate investing. Share your WHY.

People don’t like being SOLD to. So don’t sell just share.

4, Partner with a more experienced operator.

Maybe find a deal that’s too big for you to take down. Find an experienced operator and let him or her take the lead, You will have to share the profit but hey if this is a long term goal of yours, you need to tart somewhere and get a few notches on your belt.

@Jack Pasmore

I’ll share a few thoughts. 

The decision between 506b and 506c is somewhat a function of deal size and capital raise required. 

The larger the deal, the more likely the operator sponsor will go 506c. One - the sponsor needs bigger checks to fund the deal (more likely from wealthy investors) and Two - the sponsor needs more investors and so advertising these deals as allowed in 506c works - Three - there is a limit of 35 sophisticated investors in 506b.

I agree there must be an element of trust built before an investor cuts a check for $50K $100K. That being said, the old adage KNOW LIKE and TRUST applies. The KNOW comes first where advertising helps. 

At Spark Investment Group, we do fairly smaller syndication deals $3M to $6M with capital raises of $2M to $3M. We do 506b deals with a $25,000 minimum.  This structure fits our deal size - our average investment is $50,000 and so we generally have 30 to 50 investors per deal. I’d say half are accredited and the other half sophisticated so we don’t run into issues with the 35 limit. 

The first “sale” is always the hardest. 
How does one acquire their first client or investor?

That always takes the most work. 

I’d say:

One must have:

1. A track record in real estate or business. Some years investing with demonstrated success and expertise. 

2. Local market and or niche knowledge. A sponsor must demonstrate he or she knows the sand box they are playing in. 

3- A professional website and investor presentation. 

4. Work friends and family first - one’s professional and social sphere. 

5. Invest your own capital. 

Once that first “sale” is made then it is time to perform for the investor. If you do, you probably will have an “investor for life”.

At Spark I’d say generally 50% to 60% of our investors in any deal are repeat investors. 

They know us, they like us and they trust us - not because of any “canned” sales pitch but rather we perform for them, and are transparent and available. 

Hope this helps. 

@Robert Rixer

Here’s my back of napkin approach to easily sort thru MF deals. 

Gross rental income divided by 2 (50% op ex ratio) equals net operating income. 

NOI divided by purchase price gives you cap rate.

Know your market cap rate and you can quickly determine whether property is worth a closer look. 

Op ex ratio may end up being more like 45% or perhaps 40% with newer high quality construction. But the 50% op ex ratio will be close enough for first pass. 

If it is a heavy value add deal, the calcs become a little more complex. 

Determine market rent upon renovation. 
Determine cost to renovate. 

Calc is then (market rent upon renovation) divided by 2 equals net operating income. 

Net operating income after renovation divided by (purchase price plus cost to renovate) equals cap rate - let’s call it yield on cost. 

@Jack Pasmore

GIGO garbage in garbage out. 

UW is only as good as the numbers that are entered into the data cells. 

One needs to have outstanding local market knowledge to underwrite effectively. 

Things that AI won’t know:

Market rent as is

Market rent renovated

Cost to renovate

Speed at which renovations can occur

Lease up rate once renovated

Investors learn all of this by doing work in their market. Knowing the data in Dallas does not mean one knows the data in Charlotte.  

UW is as much art as science. 

@Jeremy Schneider

Lots of agency lenders out there 

CBRE

Walker and Dunlap

Lument

Old Capital

Berkadia

And forgetting dozens more. 

Agency guidelines and UW policies are set so they don’t vary from lender to lender. 

Google a few of these lenders and have a conversation.