All Forum Posts by: Mike L.

~3k vs 5k. I have one 4 unit property.

Question for you veteran landlords out there - would you trade 2000/yr in premium savings for a 25k higher deductible for wind and hail (includes tornado) all else equal assuming I have the cash to self insure? Policies are literally identical other than the wind/hail deductible (current policy is 2500 and potential new carrier is 28k - 2% of replacement limit which is 1.4m). Building (and roof/siding) are about 20 years old and I estimate roof replacement to be about 30k - location is southern Wisconsin where we do have have some hail/ tornado risk but not as much as other parts of the midwest.

I'm looking into building a new multifamily building with separate garages (and electric meters) per unit and the idea dawned on me that while doing it, running 220v to each garage stall might be smart in the event a tenant wanted to charge an electric car as it seems like it would mostly just cost the circuit breaker, wire, outlet and a little bit of extra time. Can anyone think of any reasons NOT to do this? Only thing I could think of was someone using it for something I didn't want like running an oven, dryer or welder down there that could create a fire hazard. 

@Cody Smith

IMO I think it's a question of what else you have to lose besides your rental properties if you get sued in terms of whether the LLC is worth it. If all in your own name, everything else you own is at risk including your other rentals. If you use A separate LLC for each property all you can lose is that one property with the caveat that you're still on the hook for the debt most likely unless you are able to get non-recourse debt. In either case, insurance is good even if in LLC unless you're ok losing your equity in a worst case scenario. The insurance costs aren't that different in own name or LLC around here for small MF if you're getting a landlord/business policy.

@Chase Yokoyama

I started with buy and hold multi family managed by a property management company. I have a day job and young kids so it seemed like the easiest path to get started. So far I’m happy with the strategy and continuing to build my portfolio towards my long term goal of 15-20 high quality doors.

@Matt Kehl

Depends on amount/size of deal, the government ones have minimum size thresholds and are really expensive/complex in terms of fees, inspections etc as a small individual investor. The ones you see online for 30 yr fixed usually have a significant rate premium over a shorter fixed period, so unless your deal is a couple million plus you’re likely looking at doing in your own name on residential side or a commercial note with a 20-30 yr amortization with a 5-10 year fixed term. There are some products out there with auto renew options at a fixed spread but haven’t looked too closely at those.

@Heather De lap

Do you have a water softener? This happened to me - water softener was stuck in regen mode and ran every night for a month.

Hey @Joe Villeneuve, 

Just to clarify, I'm not saying to go for a marginal deal, rather that I don't know this particular local market to know whether this is good or bad and trying to say that in some circumstances a 6 or 7% COC isn't necessarily bad (around here I'd be looking hard at it). I agree with all points about looking at comps, saving on commission, negotiating down on price but depending on @Steve Kim's goals and the local market climate, rejecting this deal solely off of the CoC return % may not make sense. My math I shared above assumes zero appreciation as I think things will level off in the next few years if rates go back up.

If this is @Steve Kim's first multi family, he has a plan to hold long term with long term fixed debt, likes the location of this property and has a day job he likes/doesn't have time or interest to invest in tons of direct marketing or investing out of state then this may be worth considering as his first multi-family. Especially if he confirms he can get it for a fair or better than fair price for the market and validates his costs (including budgeting for increased taxes and capex which he already included at 10%). In my market, an off market deal like this is usually worth looking hard at, if only for the fact that you can take your time and don't have to complete with 5 other buyers who have all cash and offer over asking once it hits MLS (all listed decent multi family around here is under contract in a matter of days with multiple offers). Even if not the best deatl possible, this would likely beat the alternative of earning .5% in a high yield savings account in a 2%+ inflation environment.

When I think of CoC return, I think of it no differently than you would if buying dividend stocks. You buy the shares (equity) and then get the dividends (rental income) and have the potential for appreciation just as a stock that could go up or down (similarly not realized until sale) but unlike dividends that are immediately taxable, you get to wash out all taxes in this case and then some using depreciation and also get the ROI enhancement due to leverage from the principal reduction component when compared to buying shares of stock outright (as opposed to on margin).
 

I think of real estate assets similarly to stocks and bonds. 

For example: 

• Highest risk - requires high expected short term return to consider deal
  • Penny Stocks > D class properties in bad areas with large vacancy/non payment risk and low appreciation potential or potential decrease in value 

• Medium Risk: 
  • Growth Stocks - B or C class, medium aged assets in average quality neighborhood with low vacancy - property maybe has some deferred maintenance or major systems nearing end of expected life - probably will be a little smoother ride than the high risk ones, you'll likely get some appreciation long term but have some updates to deal with in the near future. 

• Low Risk
  1. Bonds - Best/safest assets in a market - highly desirable neighborhood/school district with strong, diverse job growth, high quality building that's newer or has has had a full cosmetic and mechanical rehab. These properties will likely have lower vacancy, higher rent increase potential and in some cases may not need any capex items for years.

The return you expect in terms of cash depends on which category you fall in. If it's in a low risk area, it's unlikely you'll hit the 10% COC return in todays market. Not familiar with your area but around here it's very hard to get those numbers on a high quality asset but that doesn't mean that you're a fool for purchasing due to all the other ways you can make money.

For example - If your duplex falls into the high quality/low risk category, the low cashflow on those low risk assets is offset by a variety of things: 

• Appreciation potential 300,000 * X%
• Principal reduction $6500 in year 1 assuming 3% mortgage for 25 years
• Depreciation: your $4500 of income is offset by $8700 of depreciation leaving you with a $4000 passive loss assuming your land is 20% of the value. This may be able to be applied to your W2 income or carried over to future years when your rent goes up or you pay off the property. 

• Therefore, before factoring in any potential appreciation your actual internal rate of return is: 
• $4200 cash (would  need to be a return of closer to 6000 in taxable investment vehicles)
• $6500 of principal reduction
• $4000 of passive loss which is worth 4000 * your tax rate in either this years taxes or a future year. let's assume 25% and assign this a value of $1000. 

Therefore, with 60K down, you have $4500+$6500+$1000 = $12,000 of value generated before any appreciation which is about a 20% internal rate of return. There are some caveats i.e. principle reduction isn't liquid and only a benefit if values don't decrease, things like depreciation are recaptured at sale and you pay some tax then but if you're in a high quality market, buying and holding for the long term, etc it may still make sense to consider below the 8% CoC level if your confident in your numbers and have appropriate reserves. The low risk assets are a longer term plan and probably not ideal if you're goal is to generate max cashflow now but could be good if your goal is to generate max wealth 20 years from now. It's up to you to make that determination given your situation, market, and long term goals/cash flow needs but thought I'd share a perspective and some metrics I don't see shared as often on this site.

The Madison REIA meets a couple times a month usually and has been doing virtual meetings during the pandemic. I also believe there's a BP meetup though I haven't made it to one of those.

https://www.madisonreia.com/