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All Forum Posts by: Ben Leybovich

Ben Leybovich has started 96 posts and replied 4174 times.

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Andrew Pugh:
Originally posted by @Ben Leybovich:

Probably depends on the investor. Sounds like you've done a great job of increasing the value of the property, congrats! Personally, I'd be happy to have my original investment back plus the profit ASAP so I can reinvest into more deals... rinse and repeat.  

 Naturally. But, by definition, an exit will require recapturing losses that are barely 1 year old, which goes back to the original post. Regardless of what the tax implication is or may be, the focus should always be on the validity of the investment first. 

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:

@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!

@Ben Leybovich  So Ben your investors in your deals  they get no benefit of cost seg and bonus deprection.  I was thinking that was one of the major benefits of syndication..  can you clarify or give you opinion on the matter.

Jay, first, my company is WhiteHaven Capital.  Open Door Capital (ODC) is Brandon Turner.

But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.

 Ben I know..  but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.

Greg, 

now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on  my personal investments ?  

 Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.

Separately - are you saying you are going to start investing in WhiteHaven deals?

good one Ben  will see !!  I have always been kind of a do it yourself guy..  But I see some of your deals are smashing success's congrats ! 

 There are very few people I admire. Tell me what I need to do for us to work together. I am game!

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Jay Hinrichs:
Originally posted by @Ben Leybovich:
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:

@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!

@Ben Leybovich  So Ben your investors in your deals  they get no benefit of cost seg and bonus deprection.  I was thinking that was one of the major benefits of syndication..  can you clarify or give you opinion on the matter.

Jay, first, my company is WhiteHaven Capital.  Open Door Capital (ODC) is Brandon Turner.

But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.

 Ben I know..  but I also know tagging Brandon would not have gotten a response LOL.. I figured I had a better chance with you.

Greg, 

now for us that are full time real estate professionals and taxed as such cost seg and bonus deprecation on our personal investments is available, correct? and I was under the impression if I invested in a syndication, I could also take the cost seg the syndicator was doing even though I am not a material participant in their project. If I cant on a syndication then I can deduct it from rental income on  my personal investments ?  

 Jay, you, as a professional, can treat depreciation stemming from cost seg as any other depreciation. The argument here is that those who are not under the status of real estate professional, while they get this depreciation, may not be able to apply it in the given year. This is a non-issue for us.

Separately - are you saying you are going to start investing in WhiteHaven deals?

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Greg O'Brien:

@Ben Leybovich of course. We would recommend timing this pass through loss up with another exit as well if the investor has several investments

 This is a challenging conversation because investors are not terribly educated in taxes, losses, 1031s, etc. I'll give you an example, and this is from a standpoint of a sponsor.

10 months ago we bought a property. This was a smaller purchase at $16M. The income at the time was around $80,000 per month. Within the next 3 months, the income will be pushing $145,000 per month. The property is now worth almost twice what we paid. Clearly, I am compelled to sell, but this means the investors will have to recapture all of the depreciation we gave them just a few months ago. So what's the point...?

I firmly believe it's a mistake to chase 2 objectives. I have never done 1031 for this reason, though investors have asked. I simply feel I can't win. If I promise a 1031, I may be forced to take a deal I really shouldn't just so I can preserve the 1031, and investors wil be mad later. And, on the other hand, if I stay true to finding the best deal, I may need to pull out of the 1031, angering investors now. Either way, the chances of people being mad now or later are high...

Passive losses are the icing on the cake, nothing more and nothing less. The singular objective for investors should be the validity of the merits of the deal. If the deal is right, you'll make so much money that you should be able to pay some tax and not feel too bad about it. Otherwise, chosing 2 birds can often become a bigger issue.

Post: 250k in cash but trouble finding lenders

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294

In other words, lenders are counting the expenses associated with the townhouse in their DTI but not the income it will generate. Couple of thoughts:

1. The expenses on the townhouse are only $1700/month. If this is enough to blow their DTI then what the lenders are thinking is that your parents simply don't have enough income to be playing in the real estate game at their age. I would tend to agree. It may not be a bad idea to buy more real estate, but they need to somehow limit their exposure to risk because they don't have enough income to shield them.

2. I am not sure $300/month warrants the strategy in the first place. In other words, your parents are posing the following question - how can we best grow the $250,000 that we have? And their answer is to use it as a downpayment on a bigger house and move into it, and collect $300/month on the townhouse. Regardless of the location. age, or condition of the townhouse, I am not sure this strategy makes much sense. I have to believe there are other ways to multiply the $250,000 in a more diversified manner with a lower risk profile.

3. If they really want to press the issue, they need to rent the townhouse and possibly season it for some time so that the lender are comfortable using the rental income in the DTI. Clearly, they need a place to live. Once you find out exactly how these numbers need to work from a lender you trust, one option would be to rent their townhome and rent them a temporary dwelling.

Ultimately, though, if the idea is to grow $250,000, I am sure there are better ways. Good luck!

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Greg O'Brien:

@Jay Hinrichs most LPs are allocated losses but many LPs may not be able utilize them in the current year

 This is true, but they roll these losses onto the sale.

Post: Open Door Capital and K1 Investment losses

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Jay Hinrichs:
Originally posted by @Brian G.:

@Matt Pulkrabek I believe any K1 losses will offset any other passive income (ie from other rentals) but you can not use passive losses to offset non-passive income unless you qualify for REPS *And* materially participate which is not possible as an LP. Whether or not having REPS and materially participating in your rental portfolio would then allow you to include losses from a K1 by grouping all your investment activities together for tax treatment (ie can you include the K1 losses even though you are not materially participating in that specific deal if you do otherwise materially participate in your rental portfolio?) I’m not sure. Maybe @Natalie Kolodij can weigh in? Pretty sure you must materially participate in addition to having REPS for non-passive losses to offset non-passive income. For some self education check out the Real Estate CPA Youtube channel & consult your own CPA!

@Ben Leybovich  So Ben your investors in your deals  they get no benefit of cost seg and bonus deprection.  I was thinking that was one of the major benefits of syndication..  can you clarify or give you opinion on the matter.

Jay, first, my company is WhiteHaven Capital.  Open Door Capital (ODC) is Brandon Turner.

But, yes, we pass the cost seg and accelerated depreciation onto limited partners. The losses flow through to their K-1.

Post: What do you use for accurate rent pro-forma forecasting?

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294

That's a bit of a loaded question. Clearly, having first-hand knowledge is invaluable. If this is not possible, big brokerages conduct surveys regularly, which should be your first stop. Yardi as well.

That said, large markets are experiencing price inflation, so looking at data that's 3 months old is not useful, and even predicting future rents upon current surveys can be challenging. Additionally, there is substantial supply constrained in such markets, so if you are planning on renovating units to a greater extent than the competition you may be able to command rents that you'd never be able to validate in existing comps. Ask me how I know :)

This is perhaps the most important task in apartments - understanding your future rents, so you are on the right track. But, it's challenging.

Post: When deals are really just "overpriced offerings"

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Brian G.:

@Ben Leybovich BP is always so much more thought provoking and entertaining when you engage on the forums!

 I am glad you think so :)

Post: When deals are really just "overpriced offerings"

Ben LeybovichPosted
  • Rental Property Investor
  • Phoenix/Lima, Arizona/OH
  • Posts 4,456
  • Votes 4,294
Originally posted by @Allen L.:

@Ben Leybovich nice! How are the earlier investments that you've made 2 years ago? I followed when you made the live stream walking around the apartment complex and the community pool. For these properties that you've stabilized already, what do you want to do with them going fwd? Like you don't expect rent increases from value add on stabilized asset, so say 30% increase in 5 years may be fair to me, on these assets you're more exposed to cap rate moves.

In the last year and a half we sold 4 communities and bought 2. The average hold period on those we sold was 25 months, with 21 being the shortest and 36 the longest. The average return was 1.8x and IRR of 35%. We sold them because on a risk-adjusted basis it didn't make sense to stay in any longer, even though there was more profit to be had.

The stuff we buy now is institutional, in much better locations and much newer, so we may stay longer. But, the value-add DNA is still very much there. We have a property in contract right now with in-place NOI of $2.2M. We are paying $72M, which is about a 3% cap. Stabilized NOI in Y3 should be pushing $4M+. You can do the numbers.

That's the thing - the formula hasn't changed in a long time. Sure, the cap rate has compressed. But, the same economic forces that are pushing the cap rates down are also pushing the incomes up. Comparing these numbers to what they were 5, 4, or even 2 years ago is not terribly effective, but I see people do that all long. What we do, ultimately, is financial engineering, and it doesn't happen in a vacuum - it happens in response to the current and anticipated future environment.