All Forum Posts by: Ben Leybovich

I agree with Michael. I don’t really understand the concept of taking on a liability just so that you can break even. Sure, there are parts of the country where this is a reality, and those may not be the best places to invest in RE. Otherwise, it may be necessary to structure better deals. When I buy something, it needs to impact my income statement in a positive way. Thus, in my opinion the main reason to buy is for the CF, but there are others:

RE is the only investment vehicle I know of that benefits from Leverage, meaning that we can control $100,000 with a down-payment of $30,000, or $20,000, or $5,000, or even $0 if we are very creative (welcome to my life :).

RE is an inefficient market, meaning that we can negotiate deals that are infinitely better than the market-established value. Furthermore, we can improve returns through management. This is not possible in most other markets.

RE income is IRS-friendly (long-term CF), which helps tremendously with our bottom line.

These are just some of the reasons for why RE…

Adam, welcome to BP.

If passive CF is your ultimate goal, then controlling property long-term is your only option. You could buy notes as well, but this requires access to substantial cash.

The reason I say “control” is because it is possible to build CF without actually taking title to property; sandwich techniques such as option/lease option/installment purchase and then turn around and do the same or simply rent. While those are doable, and some people build their entire business model around control w/out ownership, there are drawbacks to that. One is that if you put money into something that you do not own, you are assuming a lot of risk. Another is that it is much more difficult and at time impossible to realize all of the benefits of ownership when it comes to tax time unless you actually own (installment sale may work, but options and lease options are a problem in this respect). On the other hand, you can potentially do those deals without much money or credit.

One thing is for certain. If you say you want passive CF (residual income), then flipping and/or wholesaling won’t get you there. There is absolutely nothing passive about those activities. Hope this helps. Good luck

Oh man – watch out for everything. Foundation – if it’s bad nothing else will matter. Flat roofs – nothing rolls off of them so they don’t last as long and take effort to up-keep. Tile on the wall in bathroom – you can pretty well guarantee water got into the wall. Old claw tubs – heavy as all get-up to move if need be. Electrical – you can update the service but what about what’s in the walls ($$$$). Plumbing – don’t even want to go there.

Just ask yourself: how costly will it be to repair this when it breaks, cause it will break.

I really suggest you look at a lot of buildings to get a sense. Have fun Norm!

I have been working with private money for a long time now. Unfortunately, I have found that private money doesn’t usually fall inline just because the deal is good. Hard money may, but private money will not. Private money wants trust – it wants a relationship. The relationship takes time! These people want to know that you are a winner before they jump onto your bandwagon. There are exceptions of course, but this has been my experience.

The way you collateralize private money is either with a note and mortgage or a deed of trust, depending on whether you are in a lien theory or title theory state (I would talk to an atty.) Here is the problem, when you go to the bank, you are going to find that they likely will not want to play along on the residential side – if that was your plan. On the commercial side this is still tricky because we are talking about 100% financing, but it's doable. However, since this will be a lien in second position with a monthly payment attached to it, you need to be careful that the DSCR (debt service coverage ratio) is within the bank's guidelines. DSCR = NOI / Sum of all mortgage payments. Most banks will not touch anything less than 1.2 DSCR, and on an 100% financed deal they may want even higher.

If you have more than one investor, you are better off structuring an LLC or another entity – I don't know why anyone would want to hang out in 3rd or 4th position.

In terms of structure at the front door, it may be easier to purchase this thing with all cash and then refinance to get the private money out. Going this route, the 30-year residential is back in play.

I strongly suggest that you have a banker in on this deal from the get go so there are no surprises. Well, that’s an oxymoron – a RE deal without surprises…Hope this helps a bit. Good luck

By the way Jean,

I forgot to mention that I spent my summers in Aspen at the festival for about 5 years in the 90es. Loved it.

Norm,

You seem very intelligent. Be cautious and conservative in your estimates as you move ahead. Please make sure that the utilities are separately metered. In older buildings we commonly see radiant water heat on a single boiler, which costs the landlord a pretty penny and is tricky and somewhat costly to convert. Try to stay away from flat roofs, etc.

I’ll be happy to try to answer any other questions you come across. Good luck Norm,

Norm,

Everything you are saying makes sense. But, as someone wise said – you don’t know what you don’t know. My friend, I believe you will likely loose money and sleep over this. Look for better spreads. In this one, the property taxes are likely what’s killing you.

Some losses are actual losses, things that cost you money – new roof, carpet, tires on the car, etc. However, other things look like losses on the tax filing, but they are not actual losses to you. Two of the big ones in RE are interest write-off and depreciation. If you borrow $250,000 @ 5%, you will pay close to $12,500 worth of interest in the first year. Now, it is an actual expense to you, but since it is figured into your cash flow calculus it becomes ordinary cost of doing business. IRS understands this and allows you to deduct this expense as cost of business. It would be nice if they would allow us to credit it, but alas…

Depreciation is a value that we can deduct due to a diminishing life-span of the structure, usually 27.5 years for residential (no land can be included). Thus, if you pay $400,000 for the building, of which the land is valued $125,000 leaving $275,000 for the building, you will be able to show a loss of $10,000/year if utilizing straight-line depreciation method. Both are what we refer to as passive losses, or paper losses.

Thus, these 2 items combined would provide you with a shelter of $22,500 in the first year. Ordinarily, this shields your RE income with which the losses are associated. However, in some cases you may be able to use those losses to shield other income. BUT, I believe that the cut-off is $150,000 earned income, which it sounds like you’ll be over.

Some people buy property solely for the losses. They don’t care about the CF and just want the tax shelters. I do not recommend that because if you do it right you can have both. Hopefully this gives you a bit of a bird’s eye view, but I am not a CPA. TALK TO YOUR CPA AND ATTORNEY!!! And incidentally, don’t even think of buying until, or I should say unless you have established a relationship with those professionals. Hope this helps,

Hi Nicholas,

I am in Lima Ohio. Look me up

Norm,

First of all, if you live ion one of the units, you are correct about being able to finance this on a 30-year note. However, of you put this building into an LLC at the time of purchase, you won't be able to get residential financing. If you buy in your own name and then go and deed it to the LLC, you might trigger the Due on Sale clause. Some people say do it anyway; as long as you are making payments the bank won't even think to check. This is not my recommendation. If you do this, you should clear it with the note holder and if they say no …Hopefully this answers the first two questions.

Now, while you are exactly right to consider a small MFR in lieu of SFR, am not sure this is the right deal. In terms of CF you would be breaking even at best. So, as an investment for today this makes no sense. Although, if all you are trying to do is subsidize the cost of living which you would have regardless, this makes a little sense. But, since the building is old, and since you will not really be cash flowing substantially, you will need to dip into your pocket for maintenance.

Furthermore, if you will be earning over $150,000/year, then the effect of paper losses will be very muted for you – talk to your CPA. Not to mention that the landlord / tenant laws in your arena are quite strict on the landlord – make sure you study and speak to an Attorney.

I am an investor, and as such it is strange for me that you would dip into your pocket to cover expenses. This is supposed to make you money! I would agree with the other comments – perhaps you can look in another location; one more conducive to creating positive CF. Hope this helps

I use an inexpensive 15-year Olympic paint from a box store in all of my rentals. Some of my guys complain that it is to thin, but I like it. It wears well and is washable. It is thin enough so that I can put it on the ceiling as well as the walls without worrying about the weight of the paint on the ceiling. This saves me a lot of time cutting-in.

I use an off-white in a satin finish. Satin hides imperfections well enough but still pops somewhat. I use a very expensive and thick VALSPAR white in semi-gloss on doors and trim which pops off of the walls very nicely and ties things together. A lot of people disagree with me about Olympic 15-year, but I like it. Try it for yourself.
Hope this helps.

Thank you