All Forum Posts by: Jake Wiley

For me it would depend.    Have they been decent tenants with few issues and requests and are likely to stay for a while, if so I'd probably let it go but keep track of it if a history/pattern develops.    If they've been consistent with damage and or likely to move on soon, then I'd probably push it.   

If they are saying that it broke on its own, then they are likely going to be unhappy if you ask them to fix it and it could create animosity and a more tenuous relationship.   

If you decide to let it go, I would be clear that this is unusual and something you've never seen before, however, you'll take care of it this time.    You are telling them you are reasonable and a decent person to work with, but you are aware and it's not a free for all.    

It is customary to transfer the deposits at the sale.    In reality, deposits should be held in a separate account than the operating bank account.   I am sure that doesn't happen all that often, but it should be held and accounted for separately and transferred at the sale.   

John - 

There are some great reports out there that focus on the positively trending markets and are free.

PwC has emerging trends in Real Estate reports.

CBRE - has Market Outlook reports.

There are many others, too if those don't provide the level of detail you require.

I'd use these as a starting point on where might be interesting, then dive into general housing pricing trends in the markets to see which meet your budget criteria.   

While not 100% of the time, you will likely find that that markets that are trending are in demand and the prices are higher. STR's typically demand a little bit more by way of location and amenities than a standard rental, so that will impact your pricing as well.

With that said, I did recently interview Byron Carlock PwC's real estate leader and head of the the Emerging Trends in Real Estate report and he was really bullish on what he is calling Rural Renewal.   Meaning that with all of the work flexibility, either 100% remote or in the office only a day or two a week that people are "moving home" which he defines as the small towns they grew up in that has a ton of character, a little main street, but this isn't where the jobs were coming out of college and thus weren't really an option.    It's a bit speculative, but the point I am making is that there may be opportunities in the rural towns surrounding the metros that are highlighted in the report that meets your budget, but also offer something for those looking to get away and have an experience.   

Having purchased more HVAC systems than I'd like to, I have recently hitched my wagon to Daiken as a brand as they have the full gamut of systems, but most importantly can have a 12-year parts AND labor warranty for the systems.   Its nice peace of mind, especially when you have so many of them.   

500-600 feet is probably a prime candidate for a mini-split system.    

Having purchased more HVAC systems than I'd like to, I have recently hitched my wagon to Daiken as a brand as they have the full gamut of systems, but most importantly can have a 12-year parts AND labor warranty for the systems.   Its nice peace of mind, especially when you have so many of them.   

500-600 feet is probably a prime candidate for a mini-split system.    

Originally posted by @Arn Cenedella:

@Jake Wiley

Income is taxed every year not just year one.

Depreciation usually shelters most if not all income tax due on distributions anyway.

The bigger tax issue occurs upon sale.

Thanks for the quick response.    

I was really wondering about the Ordinary vs. Capital gains treatment of the income after year one.   

Depreciation vs. Depreciation recapture is just a timing issue in my opinion.    Nice to get it during the hold period, but stings on the sale due to the lowered basis.    I think the depreciation benefit of real estate is often oversold as if it is this magical free expense you get to deduct for tax purposes without considering every year the depreciation benefit you take reduces your basis and is "recaptured" upon sale, oftentimes at a higher tax rate when considering that hopefully income increases over time, thus bumping up tax brackets.    Anyhow, not intending to hijack the thread with a depreciation conversation.    

Originally posted by @Evan Polaski:

@Chris Collins, honestly it also depends on how the waterfall is structured, and how each individual views it.  I won't even say it is LP vs GP.  

If I invest 100k, and start getting back 7k per year, regardless of classification, that is, depending on your views, reducing my risk of total loss by 7k.  

-How does it affect the initial invested dollar amount? - I would say it doesn't effect your initial invested capital from a tactical standpoint, but from a return calculation standpoint, if it is classified as return OF capital, it is reducing your invested capital which means any future returns will likely be higher, even if marginally.

-How does it affect the money you have left in the deal? - Technically, return OF leaves less capital in the deal, but from a tactical view I don't think this matters at all.  Money goes in, and money comes back.  From the LP perspective, the more money I get back the better.

-How does it affect your % ownership in the deal? - Typically, return of capital is not reducing your ownership and return on is never reducing ownership.  I am sure there are structures that do this, but most syndications I have seen a return of capital is not altering ownership interest.

-Is there a TAX implication based on this wording? Yes.  Return of capital, in my experience, is non-taxable.  Return on capital is. But return of capital reduces basis, so upon sale, there is a lower basis in deal, and therefore more taxable gains.  The upside for many is if it is return ON, it is taxed at ordinary income this year.  If it is return OF, it is both deferred and then comes through as a long term capital gain, which is currently a lower tax rate than ordinary income.

-As an investor, which do you prefer for you? Return OF for tax purposes and return ON for capital account and return calculations.  Yes, this can be done.

-As an operator, which do you prefer for your investors? What is best for the investor.  Syndication is a long term play, if you are making decisions that are detrimental to your LPs, you will not be in business long.

@Evan Polaski - When you say " The upside for many is if it is return ON, it is taxed at ordinary income this year. If it is return OF, it is both deferred and then comes through as a long term capital gain, which is currently a lower tax rate than ordinary income."

Is that "return on" portion ordinary income every year or just the first year?   

Originally posted by @David M.:

@Bryce Bunton

First, I'd make sure he knew what he was talking about..  Did he just reno or something?  How much capital gain can he really have in less than 12 months?  i.e. make sure he is calculating capital gain correctly.  For example, there has been a rash of threads here on BP recently with people trying to offset capital gains but they are calculating it complete wrong.

The term escapes me...  But, what about the technique where you pay for the property in installments?  So, you would close now, but actually pay him next year?  I THOUGHT the idea of that was this benefited the seller since he doesn't have to claim the income all in one year...

I think you are referring to an installment sale.   Haven't done one of these personally, but there may be a requirement for it to roll over calendar years?     Financing could be tricky if you are looking to lock in rates.    If that's the issue, I'd ask the lender if there is a way to buy in a longer lock period.   

You've received a mix of responses above.  You definitely need to look at your goals and your niche for your investment properties.    If you are building your brand on affordable housing, then it may be worth it to try and figure it out.  If affordable housing is secondary or would be nice as part of your portfolio then my advice would be to think twice about section 8.    While I've never been a landlord of section 8 in the Chicago/Cook county area, I have in other parts of the world and there are a lot of extra hoops to jump through, inspections to be completed and frankly, it was a pain and frustrating at times.    I've had the tenant do some dumb things to the property, that then caused it to fail an inspection resulting in having to fix the issue, having to get a reinspection out of my pocket to start the payments again.   

Long-story short, if the investment thesis is based on maximizing your ROI - I'd focus on charging market rents and then consider section 8 adjustments like @Crystal Smith mentioned if the current market conditions warrant.    

Abe, 

It's a pretty straightforward process.   If you are working with an agent or are using the standard real estate contract in your state there is a standard form you will use for inspection requests.   I have found that sharing the inspection report and highlighting the items you are asking for coupled with a third-party estimate to repair is the strongest method for making a case for your inspection requests.    That way they see you aren't asking for everything and you didn't pull the prices out of your hat.   

The only other point I think is worth making is potentially asking for a credit vs. a price reduction.   This really only matters if you are financing the property.   If you are financing the property, then a price reduction reduces the purchase price of the property and the bank will then base its financing off the lower number and your required down payment, however if you ask for a credit the entire amount you are asking for will be credited to you at closing and actually gives you the resources you need to make the repairs.   

A simple example, you are purchasing a house for $100k and are putting 20% or $20k down.    You find that there is $10k worth of repairs that need to be done via the inspection.   

If you ask for a price reduction:

Price is now $90k - Bank will finance $72k and your down payment is now $18k. So you have an additional $2k to make the repairs.   You'll need to come up with the remaining $8k out of your pocket.   

If you ask for a credit:

Price is still $100k - Bank will finance $80k, you now have the full $10k to make the repairs.   

Note:  This is a super simplified example - Each lender and loan type has specific limits on how much in terms of credits can be received at closing and 10% is likely over that limit, but it highlights the cashflow issue.  

Good luck -