All Forum Posts by: Jarrod Williams

@Chris Seveney

Thanks Chris.  I am less confused about measuring the return and whether it is a good deal or not than I am the process of negotiating a deal with a seller in which I plan to approach investors about.  Let's say it is a fantastic deal by anyone's measurement.  It won't stay around long enough for me to complete a pitch deck, approach investors, work on those details, and then return to the seller to make an offer, especially in the current market.  Also in my limited experience, investors get annoyed if I bring pitches to them and the cannot complete the deal for whatever reason. So how do I go about having the confidence to negotiate a deal first and approach investors later?  Are there mechanisms of some sort that I should have in place in order to execute in this fashion?  Or are we talking about off market vs. on market deals?

I would like to start a discussion about deal making to help clarify some confusions that I have that generally revolve around logistics with execution.  Background; I talked my family into starting a rental business 4 years ago, we own about 10 doors right now.  So I have a decent amount of experience and now have questions about some more complicated things that I am trying to grow into doing.  One thing I would like to do more of eventually is bring on limited partners to deals.  I hear on the podcasts all the time (episode #272 being a great example) that you should focus on finding a great deal and approach a potential investor with that opportunity.  My confusion is how to lock down the deal.  How do I present an offer to a seller that lays out in the contract that I will be seeking outside investment and protects me if I am unable to find the money?  We can use a current example I am looking at for the discussion.  My agent presented me with a listing in a neighboring city for 27 houses asking 1.8 million which represents a 10% cap rate.  Homes are 90% occupied with management in place.  I would like to negotiate down to something like 1.5 million.  I have investor contacts that I think would be interested in this deal if I were to be able to negotiate that kind of price.  Do I negotiate the deal, sign the contract, and then approach my potential investors?  If that is the normal course what protects me if I can't find the money?  Is that recourse for me to get the good faith deposit back or is the risk I am taking loosing the deposit?  Also much is discussed in the podcasts about presenting different types of deals that the sellers may be interested in.  How do you go about this when you are going through an agent?  How do you initiate a discussion and back and fourth with the seller without having to send a written offer each time?  My agent seems only willing to send written offers.  Thanks.

@Steve Vaughan:  Thanks for the info.  Never dawned on me to evaluate the look at the percent they attribute to the land even though I knew to do that later for tax prep.  Any idea what goes in to a county evaluation of different land zoning?  Is commercial zoning always going to be valued higher for land compared to residential even if for arguments sake they are right next to each other?

Still have a little trouble on the taxable income from a macro perspective, anyone else please feel free to chime in as well.  I get deductions, I get expenses, I get depreciation.  What I can't seem to grasp is how an income producing property can both have a depreciation schedule that leads to low to no taxes AND have an income stream significant enough to grow the business?  I'm only a few years in so still working through most of this.

So 3 buildings (480 - 12 = 468) (357 - 6 = 351) (700 - 60 = 640).  Total assets 1,537,000 depreciated over 27.5 years is $55,890.91 a year.  Lets pretend you filed single and had no kids etc.  Assuming something near the 1% rule the gross income should be around $184,440.  So the expenses, deductions, etc. would have to be almost 130K to not have a tax burden left over?  Am I getting this right?

You said you only earn what you save by not paying someone else.  Does this mean that instead of hiring a property manager you pay yourself to manage, giving you an income but allowing you to put that down as an expense for the business, and thus lower the businesses taxable profit? Am I understanding that right?

Thanks for sharing real numbers.  This is helping a lot.

@Steve Vaughan:  I keep hearing about this.  I think I understand but I want to make sure I have it all ironed out right.  Would you mind helping me with your specifics?

So your "effective tax rate" has been negative for 14 years. Let me take a stab at what I think this means and where I am getting lost. You have some sort of business entity (LLC, S-corp, whatever) that you do your real estate through. You have a large portfolio of hold properties in that. Those hold properties have expenses, mortgage interest, amortization of points from loans, and depreciation all of which you can use to lower the taxable income from your properties. Allow me to use an example with numbers because it will help show where I am confused.

You are 3 years in to real estate investing.  You bought 1 property a year for 3 years at $100,000, you put 20% down each time, interest was 5% every time on a 30 year note, you paid 2 points to originate each loan, each property rents for $1000 a month ($1200 gross rent/year/property), 10% loss for maintenance/vacancy, insurance $500 per, property tax $1000/year, no utilities.  Assuming every purchase happened on Jan 1st each year.

Year 1: NOI - $9300 = (12000*0.9 - 1000 - 500);

mortgage interest paid = $3315.12

amortization from points = $160 = (80000*0.02)/10

depreciation of property = $3636.36 = 100000/27.5

taxable income = $2188.52 = 9300 - 3315.12 - 160 - 3636.36

Year 2: NOI - $18600 = (12000*0.9 - 1000 - 500)2

same order as above - $6588.63, $320, $7272.72

taxable income = $4418.65

Year 3: NOI - $27900 = (12000*0.9 - 1000 - 500)3

same order as above - $9818.81, $480, $10909.08

taxable income = $6692.11

So the only way I see to carry a negative tax balance is to spend the taxable income in expenses or capital improvements.  So if you added a bathroom or something to all the properties for 10K a year to push appreciation you would have a loss.  Now your properties are all worth 125K a piece.  You wrap them all into a refinance to realize the appreciation and use that money to buy another property.  Is this how you carry a negative "effective tax rate" and still have cash to grow your business?  What am I missing or have incorrect?  Thanks.

@Tim Hall: I've thought about this a lot.  My reasoning is that if I stop paying the mortgage it reverts back into their name and they would again be on the hook for it.  So they would be destroying a property and could potentially have to face the consequences.  Still trying to decide if this is enough of a deterrent or not.

Let's say interest is 4.5% but it is already factored into the mortgage payment and locked so it doesn't matter too much. Yes, you would have to rent for something like $1500 for it to make sense. 

The payment was based on the equity they have in the house.  If we agree to sell the house at 220K and they owe 205K ish the payment would be for the difference.  Another way to do it might be to not give them any money down but allow them to stay in the property free from rent for a period that would equal that amount.  So offer that they can stay in the property free for 10 months and I will make the mortgage payments.  Basically I am buying an option on the property.  I loose $1000 each month (plus taxes but I think they would pay their own insurance) but I'm buying the option to sell the house which I know is worth $250,000 as is.  After the period that they leave I make minor improvements and stand to possibly sell at $275K which is supported by comps in the area.  So I spent roughly $1200 a month on rent for a year and 10K on improvements after they leave.  So I pay roughly 14.5K and after the sell make 70K (275K - 205K, not including commissions and closing costs with the sell).

@Account Closed: Yes! Didn't mean to bash realtors, mine is fantastic.  Just meant they often don't know much about rental rates.  For comps on the value of the home, definitely trust your realtor.  That's what they get paid for!

@Akar Pokhrel  Here is a tip for something I have been doing to accertain rental numbers for an area.  It is pretty labor intensive but of great value to me thusfar because it gives me info that most other people don't have.  Don't listen to realtors about what a place can rent for, most of them have no idea.

The problem with using something like Zillow to search for rent results is that it doesn't show you the info that you want.  If you check the rent box you'll see for is "available" for rent.  That's not what I want to know.  I want to know what has been rented in the area.  There isn't an easy way to do it but it can be done.

Go to Zillow.  You have to make an account to see this info, it's free so make an account.  Set the search on rent.  You actually have to do this because Zillow shows you different information if you check the sale box or the rent box.  Then zoom in on your area until the houses around the one you are looking at have rent estimates above them.  This allows you to click on them.  Go house by house in your area.  Click on them an scroll down to the section that says "Price History."  If you have the Sale box checked this will show you when and at what price the house was sold.  But, if you have the rent box checked this will show you when they places the house on the market for rent and at what price.  It will also tell you when they removed the listing.  So if they placed it on the market at $1200 a month on 3/1/16 and removed it on 3/18/16 there is a good chance they rented it for that price in 2 weeks or so.  Conversely, if they reposted at a lower rent, you know that they had trouble renting at that price.

This is labor intensive because obviously not every landlord uses Zillow to post their units but LOTS do.  Also, obviously it can be hard to find a house that is used as a rental in some areas.  However, the juice is worth the squeeze when you find a few because the information is invaluable.  In my opinion WAY better than asking a realtor or a property management company.  Realtors have no idea and property management companies usually aren't trying to maximize rents, rather minimize vacancies which can be good and bad.

I have yet to find a discussion on Evergreen Real Estate Funds on BP.  It has been mentioned a few times in some podcasts.  I would love to get a conversation started about them.  Are they generally always structured in the same way or have you seen them structured differently and if so, what are the pros and cons to the differences?

I wish I had a great plan that you could follow.  Unfortunately, the reality is that there has been a record low number of properties on the market in Lexington for the last 6 months or so and demand is really high.  So prices are inflated and decent homes don't stay on the market long.  I still have been able to find decent deals but it has taken me significantly more time to do so.  We finally got under contract on our first place of the year last month and I must have spent 80 hours looking for 3-4 months, but like you I had a real tight criteria to fill.  So I am employing many different tactics to varying degrees of success.

I am assuming you are ready to make an offer without seeing the place because if you plan to find something and come and look at it before making an offer its most likely going to be gone before you get here if its any good.  I think its definitely possible to fill your criteria, you'll just have to keep up on new additions to the market when they come on and be ready to move quickly.

The part of your criteria that is tough is "where short term rentals would perform."  I am still trying to get a feel for that myself.  Obviously downtown would be good but I have had pretty good success so far in areas that aren't all that close to vacation type things to do.  So if you can expand your search outside of downtown you can obviously get more results to choose from.  Hamburg, for example, is very desirable.  I feel like it is not Lexington but would someone visiting enjoy being there for their visit?  Still trying to answer that one myself.

Something like this could be interesting: 750 Shaker Dr. Apt 609. A little above your price point but HOA fee includes water, trash, and electric. You likely wouldn't even need to hire a property manager. Might check to make sure the complex allows subletting, but a pool during a vacation stay in Lexington could help with your AirBnB traffic. They would definitely need a car to get around from here but that's probably true anywhere in Lex.

Most of my deals have come from agents that I had connections with that brought something to me when I expressed an interest in buying.  That has been happening less lately with the sellers market however.  I usually go to a listing service and put a filter on added in the last 1 days to see what was added that day, might go out 3 days or so.  Any longer and it already has an offer or its not worth the price.