All Forum Posts by: Nick Gray

Hi, I purchased an 8-unit set of townhouses in Seacoast New Hampshire in September 2020 and renovated all 8 units from October to January. The total project cost was ~$1.0M and now, based on current income/expenses and an 8% cap rate, the property has appraised for $1.350M. To raise capital for my next acquisition, I am refinancing the property with a higher loan principal and also contemplating the sale of 30% equity to a few limited partners. 

If/when I sell 30% of the equity, my presumption is that I will incur a capital gain of ~$105K (0.3 x ~$350K). Because I have only owned the property for ~6 months, those funds will be a short-term capital gain and will be taxed as ordinary income. Are those short-term capital gains eligible for a 1031 exchange, assuming that I satisfy all other 1031 requirements? Or are only long-term (>1 year hold-time) eligible for a 1031 exchange?

Hi, I'm a 26-year old real estate investor/agent from New Hampshire who has acquired 30 apartment units across 6 properties over the past ~18 months. To date, I have self-managed my properties while also managing a few properties of others, working as an investor's agent, looking for more deals for myself, and going on active duty orders with the NH Air National Guard every couple months for a couple weeks at a time. My short term goal is to keep expanding my personal real estate portfolio, meanwhile my mid to long term goal is to build a full service real estate company with real estate syndication, brokerage, and property management under one roof. 

I have been successful in taking on multiple roles to get my real estate business off the ground, but I think that I am at or near the tipping point at which I need the help of one or more assistants. Much of my daily time and energy is spent on tasks that are not commensurate with my skill level: apartment leasing, repair scheduling, tenant relations, accounts payable, packing mailers, supervising renovation work, brokerage showings, brokerage marketing brochures, etc. I know that at some point I need to hire help for these tasks such that I can focus on raising capital, vetting new deals, networking, and education, etc. 

My question is regarding when and how I should make one or more hires. I am hoping that someone who is farther along the business growth curve can explain how they went about scaling their help with their real estate holdings. Perhaps you can recommend particular hiring moves at a particular number of units or gross rental income. 

For example, at how many units or dollars of gross income, can a self-managing real estate business justify a full-time office employee/assistant? What tasks should you have that first hire work on? What kind of person should that hire be? Likewise, when should a second and third employee be added? How would you then divide responsibilities between multiple workers? What is the appropriate compensation package for this kind of hire?

My focus right now is on an office assistant because I anticipate that person could help me with property management, brokerage, and investor direct mail marketing. I'm fairly confident that I can now give an assistant 40 hrs/week of work between those different roles, assuming the person who I hire can handle all those different functions. Placing a full-time employee on payroll does give me some heartburn though, so I want to be sure before I pull the trigger. 

A little farther on the horizon, I anticipate that I will need a handyman on the payroll such that I can address small repairs in a timely manner without lots of scheduling hassle. Right now, I can find contractors to renovate entire apartments, but I can't find someone who wants to fix a door hinge. At how many units or dollars of gross income can a real estate business support a part-time and then a full-time handyman? What minimum skills should that handyman have and what tasks should I continue to pay for on a 1099 basis? How much should a salaried handyman be paid? 

I would appreciate any suggestions on what hiring moves I should make now and in the future as I continue to grow. To give a sense of what money I now have available for payroll, counting only my apartment income, my current gross revenue is ~$42K/month and my net cash flow is ~$14K/month. Thank you in advance for all of your help. 

I currently have an 8-unit, 16-bedroom apartment building under contract in New Hampshire. I am working through my 30-day due diligence period and it has been discovered that the private well that serves the property contains high arsenic levels at 0.022 mg/L, above the EPA standard of 0.010 mg/L. This is a common issue for well water in New Hampshire, but it is nonetheless one that needs to be addressed during my due diligence period.

There are a variety of water treatment systems that can filter out arsenic levels but, for an 8-unit structure's flow rate, it sounds like the options can get pricey, with $20K being very well in the realm of possibility. I am setting up quotes with vendors to get harder numbers. A conversation with the seller and a request for concessions would undoubtedly follow.

Question 1: Does anyone have experience with needing to purchase such a system? If so, what kind would you recommend and what is the approximate cost to your knowledge?

Question 2: While tenant safety absolutely comes first, does this arsenic problem necessarily need to be addressed with a treatment system? Do I have the option to instead notify current and future tenants about the arsenic levels, have them sign a disclosure/release form, and strongly advise that they drink only bottled water? Even if this is legal, would you recommend it from a business/leasing standpoint?

In short, what would you do in this situation?

I am in talks with a multi-family owner who would like to sell me his property, but stay on as a 20% owner as I re-position it over a 2-year period. This raises some tax questions for me. This property is in New Hampshire, is owned in an LLC, and has been fully depreciated after almost 40 years without changing hands.

In New Hampshire, there is a 1.50% transfer tax split 50-50 by buyer and seller that is charged to all sales of real estate. If I buy the property from a newly created LLC in which I was an 80% owner and the seller was an 20% owner, we would be subject to this tax without question. However, I am wondering whether we avoid the transfer tax if I simply buy an 80% stake in the LLC that already owns the property. Is that the case?

If I do purchase an 80% stake in the currently existing LLC, is the 27.5 year depreciation schedule reset for both myself and the seller?

Whether a new LLC is created or not, how is the seller's capital gain treated? He is reaping a large capital gain after ~40 years of ownership and then re-investing about 10% of it back into the property. Are those re-invested funds eligible for a 1031 exchange?

I am in talks with a multi-family owner who would like to sell me his property, but stay on as a 20% owner as I re-position it over a 2-year period. This raises some tax questions for me. This property is in New Hampshire, is owned in an LLC, and has been fully depreciated after almost 40 years without changing hands.

In New Hampshire, there is a 1.50% transfer tax split 50-50 by buyer and seller that is charged to all sales of real estate. If I buy the property from a newly created LLC in which I was an 80% owner and the seller was an 20% owner, we would be subject to this tax without question. However, I am wondering whether we avoid the transfer tax if I simply buy an 80% stake in the LLC that already owns the property. Is that the case?

If I do purchase an 80% stake in the currently existing LLC, is the 27.5 year depreciation schedule reset for both myself and the seller?

Whether a new LLC is created or not, how is the seller's capital gain treated? He is reaping a large capital gain after ~40 years of ownership and then re-investing about 10% of it back into the property. Are those re-invested funds eligible for a 1031 exchange?

I find myself facing an interesting financing challenge on a prospective deal that I am considering. I am currently in negotiations to purchase the worst building on the nicest street in a wealthy Seacoast New Hampshire town. I believe that I can buy the building, an old boarding house, at a good price and then knock it down to re-develop the site into luxury apartments or condos. 

One significant problem has already presented itself, however. The owner does not want to part ways with monthly income or face full capital gains tax this year and he will therefore only sell the property with 100% seller financing. I normally love seller financing, a tool that I have used to grow my portfolio, but how do I use seller financing if my intention is to destroy the seller's collateral to re-develop the property? What further complicates things is that I will surely need bank financing for the re-development capital. The seller would need to accept being in second position to the bank, who will be lending several times more than the seller's loan to me. 

Does anyone have ideas on how I can navigate this situation? Maybe a creative structure in which, instead of using a seller mortgage, the current owner sells me the property for a percentage ownership of the final re-developed property? I am open to all ideas...

I'm a 26 year-old real estate investor from New Hampshire and, as I grow my current 22-unit multi-family portfolio, I need to ensure that I maintain sufficient capital reserve funds. Under usual economic conditions, how much of a capital reserve fund is sufficient for a multi-family investor? 

For purposes of this discussion, let's describe capital reserve fund totals in $/unit, # months of scheduled income, or # months of fixed expenses. Let's also assume that these capital reserve benchmarks are for relatively well taken care of properties that are without major deferred maintenance.  

A further question is whether the minimum required capital reserve fund changes with the size of one's portfolio. For example, my sense is that, once an investor has more units and greater economy of scale, he/she can afford a slightly smaller capital reserve fund in $/unit because he/she is less reliant on a given property's income versus say a new investor who only owns a duplex.

I am real estate investor/agent from New Hampshire who, like everyone else, is looking for answers on how best to adapt to the current coronavirus outbreak. With 22 apartments of my own and no dependents, I have enough scheduled passive income to survive a downturn in the brokerage industry if, and this is a big if right now, tenants pay their rent on time. 

I know that there will be an upcoming slump in the residential home sales market, but I recognize that there should also be new opportunities emerging for enterprising entrepreneurs like myself. People have new problems and I should be able to earn money if I solve those problems. I have confidence in my abilities and, in that sense, I am cautiously optimistic for the near-term future. However, I don't know exactly how I should be investing my time and money during this uncertain time. 

A few ideas come to mind. I have commercial real estate experience and there will be office, industrial, and retail landlords and tenants facing disruption who I could assist with sales and leases. Likewise, there will be single-family and multi-family owners that can't make their mortgage payments. In these cases, perhaps there are wholesaling or lease-option opportunities that can help the current owner and allow me to make a profit in the process. 

What are the best ways for RE investors, RE brokers/agents, and other RE professionals to make a living during a downturn like this, ideally while helping others too? What would you do if you were in my situation? For others' benefit, what would you do if you had a family with more dependents to take care of?

Thank you for the replies. I am working with a tax accountant and I have explored the idea of a cost seg for accelerated depreciation. However, because the renovation extended into this calendar year, he has advised me to perform the cost seg in 2020 (now) for my 2020 tax return only. I am writing here to confirm the recommendation that he has provided to me. 

Is a cost seg and accelerated depreciation necessarily the most advantageous course of action given the tax shield that I would lose after the renovation improvements are fully depreciated?

For the 2019 renovation funds, can I take regular depreciation (straight line over 27.5 years) on my 2019 tax return and then accelerate the depreciation schedule once the cost seg is done for my 2020 tax return?

What improvements can be fully deducted in year 1 or accelerated over a shorter period without a cost seg?
 

I am working through my 2019 tax return, which is significantly impacted by a $200K renovation of a 12-unit apartment building that I finished late last year. I recognize that repairs are deductible in the year of and capital expenditures must be depreciated over 27.5 years or on an accelerated schedule. Most of the $200K is attributable to capital expenditures: new parking lot, new kitchens and baths, new electrical and plumbing. However, some of the $200K is related to small fixes that one would traditionally call repairs if they were not done at the same time as the big ticket renovation improvements: landscaping revamp, hallway paint and carpet, etc. 

For tax purposes, can I identify certain expenses out of the $200K and deduct them in 2019 as repairs? If so, since my contractors provided invoices to me with repairs and capital expenditures alike, how do I determine the proper dollar figure to count as repairs? It would need to be a good faith estimate.