All Forum Posts by: Kurt Moeller

@Mitchell Behm I concur with Marcus with the West Allis, Tosa, and Wash Heights area based on what you are looking for.  You get the best of both worlds, cheaper cashflow property deals and walking distance to Miller Park tailgating fun or short ride to the downtown.

I had the same idea, moved to Milwaukee post college, rented cheap place downtown for 1 year and then bought my first duplex in 2004 in West Allis (Six Points neighborhood - northeast West Allis).  Had a few friends get sucked into expensive downtown fun and never started RE investing.  I found it easier to find 1% cashflowing properties on the West Allis side vs the Tosa side of 94.  Though in hindsight, the appreciation has been far better in Tosa vs West Allis.  Many people start in the city or West Allis and moved to Tosa (or burbs) once married with kids starting school.  Run your own numbers and do what makes sense for you.  

Cashflow 16 years later is still great for me, best of luck!

Ha! Sorry about that, I just first discovered this concept after reviewing my tax prep documents on Tuesday.  Spent all day Wednesday reading through IRS docs and and Google threads educating myself before coming over to BP (which should have been my first stop) and tripping across your post which almost exactly defines my situation also.  Very glad you brought this topic up it helped me a lot and I am sure there are others in the future.

I think I better understand it now, I'm now just  trying to sketch out all the different cases for a reference guide going forward.  Thank you for starting this thread!

Hmmm, I never really thought of it that way. In the case I sell within this 3-year window, it won't make a huge difference either way on recapturing depreciation, but may make more sense to have a lower FMV. In the case I just hold as a rental for 5 years AND it appreciates back up in value, that is where I would lose out and have to pay back both depreciation as well as cap gains. I really do like the idea of holding onto the house, but there are some advantages to selling it in the next 12-24 months.

I looked up an old email from my bank from March 2015 which said I was approved for a HELOC of $120k at LTV 89% or $94,500 at LTV 70%. I don't have the actual appraisal but would guess it came in at $135k. The City Property Search website having the $137,400 Assessed Value and $136,900 Estimated Fair Market Value in 2016 (minus land at $17.1k) seems to be very close. A realtor recently identified 3 nearby comps of $130k, $149k, and $159k with also sending an estimated sale range of between $130k-$149k right now via email.

What seems the most defensible FMV number to pick here? Does anyone have a best practice of picking this? I skimmed through the, but wow, is that a ton of info and seems like a group of both professional appraisers or a group of IRS auditors could individually disagree on what is the correct number to choose.  Now I am leaning towards trying to get a bank copy of that 2015 appraisal and using that number of $135k (minus land).  Thank you!!

Thank you everyone for your contribution on this thread, this is exactly the information I was looking for as I just started renting out a property last year that was my personal residence upon purchase at the height of the market back in 2007 at $174k. Even back in the boom days it was difficult to get super close comps at that high range so the appraiser went out a bit further to find 3. Those same 3 comps today have yet come back on the market since 2007, though most values in the area sunk hard and have been slow to come back up. Obviously I would like my FMV to be as close to my purchase price as possible, but I want to be able to defend it going forward.

By default I was thinking of using either the 'Estimated Fair Market' value on my 2016 property taxes of $136,900 ( Land Assessed Value of $17,100 so the difference leaves $119,800 for improvement basis) or the 'Assessed Value' of $137,400 ($120,300 for improvement basis).

Since my new tenant's lease started on 8/15/2016, I am using that as the official conversion date.

I'm sure if I reach out independently to 10 different realtors, I would might get 10 different CMAs.  If they all give me ranges of $130k-$160k, I have no idea what value to use.  If I listed today, I would like to put it up for $174k and work backwards from there if no action until it would sell.

My question is this, what is the best way for me to calculate both the most IRS defensible AND the highest possible FMV in this case? Not sure if I need a retroactive appraisal, or if a current/retroactive CMA would work from a realtor, or if I could just do some redfin/zillow/MLS research and keep it in my 2016 tax folder going forward.

Thanks for the feedback everyone, much appreciated! This has definitely added some value by improving my process to quickly estimate expenses on new rental offers as well further eliminate the variability of my water bill!

Just looked at another one today with an estimated NOI for about $4k from a $1050rent, now if I can just get the purchase price accepted at a cap rate closer to 10%...... The hunt for good investment continues! Feel free to send over any West Allis area deals!

@Darren Budahn & @Dawn Anastasi, this makes good sense for a SFH, I like the incentive for the tenant to manage their own consumption.

Regardless though, if I reduce rent and the water bill is paid by the tenant, it should really be a wash over time in regards to Expenses as a % of Gross Income.

Reworked the numbers for my example:

Gross Income: $1035/mo rent, 4.2% Vacancy Loss (1 out of 24 months) = $11,902/year

Expenses: $3,200 Tax, $560 Insur, 5% Opex ($595), 10% Capex($1190), 10% PM ($1190), Water Bill (Tenant), and Admin/Advertise ($75) = $6,811/year

Net Income: $5,266/year and this puts the Expenses as a % of Gross Income at 57.2%

Still am over the 50% rule though, my only other variable seems to be to pin down Opex/Capex harder (which I would do regardless), but is it unrealistic to regularly forecast 50% for SFH in West Allis/Milwaukee area? At $1,335/mo, this all evens itself out, but it is a little rich for eastside of West Allis.

After re-reviewing past income statements and doing my budget forecasting for the year I was thrilled to see I hit 38% expenses against my 2014 Gross Income on one of my rentals. But after some research on getting a better handle on expense forecasting, I realized I was not counting PM costs since I manage it and I was setting aside the cash but not specifically saving it into a side account for future Capex.

If I am being conservative for an area 2015 estimate, I have following for a east side West Allis SFH 3/1 1200+ rental:

Gross Income: $1095/mo rent, 4.2% Vacancy Loss (1 out of 24 months) = $12,593/year

Expenses: $3,200 Tax, $560 Insur, 5% Opex ($600), 10%Capex($1200), 10% PM ($1259), $175/quarter Water Bill ($700), and Admin/Advertise ($75) = $7,595/year

Net Income: $6,398/year and this puts the Expenses as a % of Gross Income at 61.4%

Now this rent seems to be in the middle range, maybe could be a little bit higher. Also, maybe the tenant could pay part of the Water bill. But I could also analyze the Opex/Capex further and potentially move it up a bit also. If Property Taxes was half this amount like in other states, it hits the ~50% range.

How do other property investors in Milwaukee County analyze this 50% rule and what do they realistically think they can get per year (or annually over a 5 year run)?

This is awesome @Dawn Anastasi, keep up the great work!

Looks like this one should exceed your 3% rule farely easily, but what about the 50% rule, will that work with this unit? Property Taxes, Insurance will be low, HOA is a good chunk each month, though not sure how much additional you need to budget for OpEx (5%?), Capex (< 5%?), other Misc. Maybe you can bridge any gap since you are doing the PM also.

Look forward to more updates!  

I recently received a text note from one of my longer term tenants that the black bugs are back.  She sent over a picture of a house centipede that were able to catch and before I get into a conversation with her about it, I wanted to see if there is any required action on my part to remove them.

All in all, these are semi-standard house hold bugs, I have seen them when I lived in that building as well as up the street where I live now.  And they are harmless to people and actually only eat other bugs.  But they are definitely creepy and can make you jump when you occasionally see one in the spring or fall.  In my personal home, we eventually got a quarterly bug spray from Terminix (originally for an ant problem, but it took care of both).  I view it as a personal choice to get that for this kind of pest, but I want to make sure I understand my landlord responsibility before we discuss it.

Any experience with this conversation?

Hello!

I am looking to better understand HML and am looking for feedback to verify if my three examples are in the ballpark of how Hard Money Lending works? I am not counting and documentation fees for simplicity and am most interested in the 3rd one below with compounding (i.e. if I want to borrow 100%). But mainly I want to make sure I have a solid understanding of HML.

I look forward to any advice or guidance you can give me.

Here is how I understand Hard Money Lending not using points:

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Hard Money Example 1:

Borrower flip a house and borrow 100,000 in total and payoff the loan on it after

3 months. The interest rate is 18% on this house, plus ZERO points.

Start) - Beginning $100k needed, no points to deal with and borrower received $100k.

1) After Month 1 - You pay $1,500/month to Lender

2) After Month 2 - You pay $1,500/month to Lender

3) After Month 3 - You pay $1,500/month to Lender

End) - Borrower sells house and pays back lender $100,000 total.

Total interest paid is $3,000.

Total point origination costs paid is $0.

Total loan costs paid is $3,000.

Borrower pays the equivalent of 18%

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Hard Money Example 2:

Borrower flip a house and borrow 100,000 in total, and payoff the loan on it after

3 months. The interest rate is 12% on each house, plus 3 points.

Start) - Beginning $100k needed, 3 points to deal with so borrower pays lender $3000 up front and receives $100k.

1) After Month 1 - You pay $1,000/month to Lender

2) After Month 2 - You pay $1,000/month to Lender

3) After Month 3 - You pay $1,000/month to Lender

End) - Borrower sells house and pays back lender $100,000 total.

Total interest paid is $3,000.

Total point origination costs paid is $3,000.

Total loan costs paid is $6,000.

Borrower pays the equivalent of 24%

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Hard Money Example 3:

Borrower flip a house and borrow 100,000 in total, and payoff the loan on it after

3 months. The interest rate is 12% on each house, plus 3 points.

Borrower wants to roll points and interest into the loan to be paid at selling of the house.

Does this mean the loan costs and interest compound?

Start) - Beginning $100k needed, points rolled to total owed, so loan start total

owed back to lender is $103,092.78 (100k divided by (100% minus 3% points = 97% )) and

borrower receives $100k.

1) After Month 1 - Interest after month one is $103,092.78 times 1% (or 12% / 12 months) is $1,030.93, added to start total total leaves $104,123.71 total owed.

2) After Month 2 - Interest after month one is $104,123.71 times 1% (or 12% / 12 months) is $1,041.24, added to Month 1 end total leaves $105,164.95 total owed.

3) After Month 3 - Interest after month one is $105,164.95 times 1% (or 12% / 12 months) is $1,051.65, added to Month 2 end total leaves $106,216.60 total owed.

End) Borrower sells house and pays back lender $106,216.60 total.

Is this accurate for a HML situation?

Total interest paid is $3,123.82.

Total point origination costs paid is $3,092.78.

Total loan costs paid is $6,216.60.

Borrower pays the equivalent of 24.8664%

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Thank you for your time!

-Kurt