All Forum Posts by: Matt Inouye

I should add that I usually work numbers for buy and hold rentals... so doing note buying calcs are not in my current tool kit. I tried to follow along with some other forum posts and youtube videos on how to setup an excel sheet for IRR

@Chris Seveney

Yes I am the borrower and the debt is mine.  The note holder is asking if I can pay off the loan faster.  

I just want to make sure that if I do work a deal to pay off the debt earlier that 1) the calulations I am using are correct and 2) that the return would make sense to a professional note investors/buyer.

Hey Cory,

Congrats on the purchase... that looks terrific!

I also invest in the area and have a 15 unit across from the capitol back in 2021.  Back then I rough penciled the deal around 1.5% but with the realized rent increases it came out to be more like 1.7%.  I think you are in the ball park with your assumption on 2% rule in the area.

HOWEVER... my rehab costs far exceeded what I was budgeting and built into my UW.  Also, depending on the area, codes and historic have been a big pain especially since the new city administration has put a much higher % inspection requirements for "cosmetic rehabs".

I've been able to turn majority of the units in the last 3 years. It will still be a solid deal with increased NOI/valuation, but its been a process. Best of luck on yours... and DM me if you'd like to connect and share notes

Aloha,

Matt

Hey Jay... thanks for the response.  Yes I work with Amanda's team at Keystone CPA.  They were my first stop.  The experts at BP were my 2nd stop as I wanted to confirm my calculations and assumptions on expected returns were in the ball park.

I've been a member of BP for a while and you've always had great input.  Thank you for all you do in the forums.

-Matt

Hello BP Community,

I have been approached by the holder of a seller-financed note (for a property I purchased from them) asking if I would be able to repay my note earlier than agreed.  They understand that it would have to be at a discount to the amount owed and would need to make sense for me.

There is roughly $360K in unpaid principle @4.00% and 311 monthly payments remaining. The monthly payment amount is about $1,800/mo. Am I in the ballpark that if I purchase this for $110K today, that it would yield about a 20% IRR? And also, since I am the borrower, am I correct in my understanding that I would be subject to a tax on cancellation of debt which would lower my total IRR.

I saw many years ago (like in 2017) on BP that note investors were shooting for 10-12% IRR in a zero-interest rate environement. Is it safe to assume that with rates much higher, that the target IRR is now in the mid to high teens?

Is there anything else from seasoned note buyers that I might need to consider before attempting to work a deal? 

I appreciate all of your help in advance.

Thank you!

Matt

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@Danae Meurer

I can also confirm @John Underwood 's experience.  I just received a notification from the SBA that they are extending the opportunity to increase my EIDL loan limit.  No paperwork yet, although I could imagine additional forms if you push the $500,000 loan limit which requires the personal guarantee of shareholders.

@Greg O'Brien

Correct, the company would not be acquiring RE within the S-Corp or with the proceeds of the EIDL loan.  The increased loan would be used for payroll and other operating expenses of the S-Corp.  However, what I am wondering is what happens if the company increases the loan amount to pay for operating expenses and then ends up having a bumper-year of profits.  With an S-Corp, I am thinkging this profit would filter down to the shareholders.  Essentially the shareholders would be able to pull-forward the future profits of a company to invest in their own endeavours (some would probably buy RE on an individual level).  If both taxes and interest rates are likely to increase in the coming future, Is there value to this thought process?

Thanks,

Matt

@John Underwood

Yes, additional low interest capital is exactly how we were looking at it.  I recall with the PPP loan, it technically was not supposed to be used for expansion of the business.  I didn't know if taking the increase in the EIDL would be subject to similar limitations on the use of funds.  Mostly I was trying to gauge other's opinions if it was even a smart thing to borrow more from the EIDL loan.  Thanks for the response.

Hey BP Community

I had a question regarding the EIDL loan from the SBA.

Business partners and I received an email from the SBA notifying us that our business (non RE related S-Corp) is eligible to receive an increase in our EIDL loan. We originally used the original loan to maintain payroll and other business expenses during 2020. We have the ability to request up to $500,000 total loan amount (for 2021) and are wondering about downside risks before requesting an increase in loan amount.

Would there be tax/legal liability if the increased loan amount is used to pay for the business's salaries and operating expenses while the natural revenue from the business solely went to shareholder distributions.

Business owners realize they would be paying higher taxes due to higher shareholder distributions.  Basically they would be paying more taxes today but possibly less/no taxes in future years since any excess revenue from the business will be going to debt service/repayment instead of shareholder distributions.

The main goal here is to pull-forward any future value from the company while not creating unforeseen tax or legal liabilities for the business or owners.  Also to limit the tax liability on the individual side, there will be a large amount of cost-seg (from outside RE investments) that could be used against the higher shareholder distributions from the business.  

Thank you in advance and I appreciate any insight from the BP community 

Aloha,

Matt

Hey @Mitch Messer

Thanks for the response and clarifying questions.  Yes, I am the Payor and yes the note owner has entertained several offers from professional note buyers.  As you had mentioned there is a discount the note buyers expect which the note owner doesn't want to accept at this point (hence his approaching me).

At this point I am trying go figure out a win-win where he gets more than what note buyers will pay and I get a discount on my unpaid principle owed and a full reconveyance of the property. 

The piece I am trying to figure out is how to navigate the discount portion of the note which for me as the payor would be treated as cancellation of debt income (which is taxable).

That's why I am investigating the "price reduction after purchase" method as a means to achieve the win-win without me getting hosed on taxes.

Any particular reason you personally wouldn't pursue the price reduction path?  Was there a bad experience in the past when you did this or did it create a lot of accounting headaches after the fact?

Thanks,

Matt