All Forum Posts by: James Storey

@Snehann Kapnadak yield maintenance is a very complex calculation looking at a particular point in time based on current treasuries. I have my own excel model on these in which I can pull the last three days of treasuries and I use for determining proceeds from selling an investment, refinancing, or doing an asset swap to mitigate the yield maintenance fee. I perform this analysis for my clients all the time.

From a high level, the yield maintenance calculation is ((Present Value of Remaining Payments + Present Value of Balloon Payment) - Principal Payoff Balance). The main calculation is easy to understand but how to get the PV of the loan is the challenge because you have to determine the discount rate to use which is basically the interpolated treasury yield of the Weighted Average life of the loan (including balloon payments and weight average principal payments). The more challenging part is trying to determine the discount rate on an average life that isn't directly correlated with an easily accessible treasury. For Example, if the average life of the loan is 12.5 years, you would have to make another fancy calculation to determine the rate on a yield that is between 10 years and 20 years. There are no 12.5 year treasury bonds available. 

Please see this article to help determine the average life of a loan or bond.

https://www.investopedia.com/t...

In the end, if you believe treasuries are going to go up, then the yield maintenance can have a major value add aspect. I had a client sell two large multi family properties on a 1031 and the bank actually payed them to pay off the loan all because it was how the loan would "maintain its yield" since they could make more money on the current rates. Make sure to negotiate that from the beginning. On the other hand, if you think rates are going to go down, the yield maintenance might be too big of a risk and you would want to consider doing the step down prepayment penalty structure.

I think I might right an article about this calculation in depth but I need to get motivated to do it first. Hope this helped at least a little bit.

James Storey, CCIM

@James ONeal I am interested to hear why you have decided to focus in on Lafayette, Indiana. Being from mid north Indiana, I can tell you that the best that Lafayette has going for it is Purdue University and some blue collar manufacturing jobs (a lot of welding jobs). A lot of my investors have consider Lafayette as a good large multi family hub or scientific research in Industrial real estate being the hub for agricultural research, but a good majority have found great returns in Indianapolis and Bloomington.

As @Greg Scott mentioned, 10% isn't very hard to come by even after all expenses have been made. A lot of investors are looking for that plus some potential value add and possible capital appreciations in their investment which can be somewhat stagnant in Lafayette in my experience. A lot of investors are excited by the job growth Indy had (pre Covid 19) which just increases the employment market and thus increases the housing market. Either way, I think you are on the right track. 

James Storey, CCIM

Hello Brain

You wouldn't want to include any amortization or depreciation expenses in your NOI projections. These expenses are only in regards to the cost and deductions of the specific owner and wouldn't be transferred verbatim with ownership. You could make assumptions on depreciation and amortization based on the cost of acquisition for your tax situation (below the line deduction) but as a non cash expense, it should not be added into NOI to project a value or future before tax cash flows.

I would back that out and any interest expenses the hotel has on the P&L to come to a projected NOI. You can use interest expense and principal payments to project cash flows if you are assuming any debt obligation. In the end, all you are looking for is unleveraged cash operating expenses that are necessary to operate the business normally to project a true NOI.

James Storey, CCIM 

@Deniz Eker NNN stands for triple net or absolute net (net of expenses) and it is a lease structure where the tenant is responsible for taxes, insurance, utilities, maintenance, as well as capital items such as roof, HVAC, and parking lot replacements. The landlord has no responsibilities and simply collects a check for rent.

James Storey, CCIM

@Jake Pham Congrats on the appreciation made in just 2.5 years! Seems like you made a good bet on that house.

Based on the numbers you are giving, it looks like you are going to increase your returns with the quadplex in MO for the $90,000 you have. Just keep in mind, you probably wont have $90k at your disposal after paying for prorated taxes, title fees, and other closing costs. You will be close though.

Keep in mind that you will pay 15% on the appreciation you made but you will also pay 25% on the unrecaptured depreciation that you took over the 2.5 years you owned it. Depending on Illinois tax law, you may also have state capital gains to pay also. If you haven't yet, you need to talk with a qualified intermediary to ensure you are compliant with the 1031 stipulations. They will need to hold onto the funds after you sell your property in Illinois and they also will disburse the funds when you buy the quad in MO.

If it were me, I probably would have refinanced your property in Illinois and took the cash out from the refinance to the property in MO. You had plenty of unleveraged cash flow returns in your property in IL to be able to use leverage in a positive manner and maximize your cash flow potential. However, since you are already in the process of selling, I would go ahead and talk with a qualified intermediary and do a 1031. No need to give extra money away when you can put that money to work in the nice cash flowing property in MO.

If for some reason the property sale in IL falls apart, really think about the refinance options. You might have already given it thought but the numbers really would make sense in your situation. 

James Storey, CCIM

I would probably buy a single tenant NNN commercial property at 30% on a $1M property. Not the highest return you could possibly obtain but I love true passive income. I value time and peace of mind over the additional return I would obtain from SFH and multi family. Just me.

James Storey, CCIM

If you want to take title/possession of the property as the owner, you would need come up with a $50k down payment and seller finance the rest. Mortgages are due on sale of the property so there really wouldn't be a way around it if the property had a mortgage and you wanted title on day one. A lease option would be the next best option if you didn't have the money but you would hold out on owning the property yourself. Seller financing works best when there is no or low amounts of mortgage left.

James Storey, CCIM

@John Fish depending on the amount of cash you are working with, you could also looking into buying a absolutely NNN single tenant commercial property with a long 10+ year lease. That is my specialty and work on Dollar Generals and other large corps where the landlord has to do nothing other then deposit a check from rent. You can get those deals with 30% down and structure financing to mature upon the end of the lease and you have a paid for property. Just an extra idea.

James Storey, CCIM

Utilize an agent that specializes in what you are looking for in the area you want to invest. They don't cost you anything to use and they can help find you the right deal for you. If they can't find you something stable then find a new agent. The deals are out there, just have to expand your network and employ expertise in your area. 

James Storey, CCIM

I am in agreement with Taylor above. It takes a long time to build those relationships and once the brokers actually obtain these deals, they only want to send them to people who they know will perform. Offering a buyers fee doesn't hurt but I think you should need and want to build the relationship even further.

James Storey, CCIM