All Forum Posts by: Reginald Ross

@Ralphie Hernandez

I had this same problem at first but found come creative yet legitimate ways around it.

Other than the obvious, “find a good cash flowing deal with high ROE”, here are a few things that have helped me...

First, assuming you have your properties under an LLC, you should talk to your CPA about "material participation". It changes the nature of the income from passive to active.

There are some rules the IRS has in place to qualify but basically, if you spend > 500 hours per year on real estate related activities, you can most likely take advantage. I don’t mess around and keep a log of my hours every week in case I’m ever audited. This one change helped immensely.

The next strategy I’ve employed was cost segregation which is just a fancy accounting trick for accelerating depreciation by segregating asset schedules. It increases cash flow and rate of return by front loading depreciation in the first couple of years of owning the asset.

This year, it meant the difference between owing $50k in taxes to getting back ~$25k. My CPA charged $4400 for a cost segregation analysis on 22 of my properties and $450 to generate the tax projection. The money I spent was well worth it. I plan on doing one every year that I purchase assets.

A 1031 can help delay some taxes but I usually find they are close to break even when you consider the time and money invested.

Also, if you keep a property in your back pocket that you can show a loss on sale with, you can sell it to offset your other taxable income.

Hope this helps!

@Nick Troutman

If they plan on managing your property, suggest adding metrics in the property management agreement that hold them accountable and see how they react.

For instance, have a clause that states if OPEX exceeds 10% of gross rent, property managements go from 10% to 5%.

Or if vacancy rates excess the local average, then hold them accountable in some other way.

I have a great PM that also sells me turnkeys but I strongly suggest some “shared performance provisions” so that it’s not just feeling the pain in a pinch.

Performance follows the incentive.

@Katie Miller

2020

1) Double current SFR portfolio from 25 to 50 units

2) Achieve $500k in annualized gross rental income

3) Net Operating Income > 65% of gross rent

4) Maintain ROA > 20% and ROE > 50%

5) Increase network and private investor pool

@Nicholas Bolcon

I tend to lump them together but it’s really a function of the age and condition of home and types of tenants you have.

College students with pets in a home built in 1929? 20% for repairs all day long.

2 story home built in 2015 rented to a professional couple? Probably close to 0-5% during the first year.

I dislike rules of thumb in REI because while those numbers may be an average, the standard deviation is large.

@Peter Baudendistel

Thanks Peter. I’ve been hesitant to use the services you mentioned. You’re the third person this month to mention your successes with them, so maybe it’s time for me to get on board.

@Cory Lucas

I’m somewhat more analytical with my calculations and try to use very accurate numbers to plug into an income statement to analyze cash flow. Here’s what I do for each line item:

GROSS RENT: Ask a realtor to pull rent comps or get you’re hands on the actual rents paid for the previous 2-3 years.

VACANCY: Always use conservative numbers. My rental geography has an average vacancy rate of 7-8%. I use 10% when vetting a new place. Vacancy has a hidden cost too...turnover costs.

PROPERTY MANAGEMENT: if you have a property manager, you already know this number. If not, call around and ask for their schedule of fees. They usually nickel and dime owners but will erode your bottom line. 10% of gross rent, new tenant fees and re-lease fees are usually part of that. Figure out who keeps pet fees and late fees too.

INSURANCE: ask several insurance providers to quote you on the property.

PROPERTY TAXES: you can look up current taxes on your local county’s web portal most of the time. If it’s a current rental, use that number. If it’s owner occupied, double it for your calculations because they likely have homestead exemption.

CAPEX/OPEX/REPAIRS: this is usually the trickiest one to forecast though the age of the home and condition of major components (roof, HVAC, plumbing, electrical, etc) can influence this number tremendously. If you've done your due diligence and tenants are properly screened, there is no reason that this number should be >10% of gross rents.

FINANCING: an obvious element to consider. Origination fees, points, APR, etc should all be factored in to the calcs.

MISC: Don't forget transaction costs. You'll like have to pay for an inspection, an appraisal and title work. These "hidden" or forgotten costs can easily several % to the purchase price. Also, stay away from flood zones and HOA's.

WORKING CAPITAL: Keep a nice cushion to absorb unexpected costs. If you’re conservative, keep 6 months worth of debt service payments.

5-YEAR FORECAST: after you’ve crunched all the numbers, extrapolate out cash flow for the next five years. Assume modest rent increases and project 5% increases in tax and insurance each year.

If the numbers make sense after all that scrutiny, you’ve likely got a good property.

Typically NPV/IRR hits a peak around the 4-5 year mark where it usually makes sense to sell or refinance to increase your ROE. If that's part of your strategy, don't forget to include seller costs or refi fees.

I realize this is a huge departure from using a 50% rule for back of the envelope calculations but if you spend some time putting together a robust spreadsheet, you can use it over and over again. Plugging in numbers is easy. Trying to unload a poorly performing property is not.

Hi All,

Bank of England currently services an investment property loan for one of my rentals and it has been the worst experience I’ve experienced to date.

After a completing the refinance, I attempted to consolidate the home under my blanket commercial insurance policy which covers 24 other properties, however they are refusing accept it.

The benefit to me is being able to save ~$1200/yr on insurance by switching to the commercial policy.

I’m being told that it is BOE’s policy to not accept commercial policies on investment property loans.

Does that sound remotely legitimate? Can a lender say what insurance they will and won’t accept?

I get the feeling that they just don’t want to do the research or the work to switch my insurance but wanted to get some opinions before I really start raising hell with them.

Thoughts?

@Gadiel Del Orbe

So what if there’s a recession? People still have to have a place to live. If you’ve done your homework and used realistic assumptions where actual data isn’t available, your investment *should* be relatively recession proof.

What happens in a recession? Economic activity slows and property values go down. Plan for 10-20% contraction in rents. It’s not all bad though, properly taxes follow property values so those should go down as well. Prepare to protest with documentation.

Unemployment may go down and tenants might be more at risk of losing their jobs. Screen your tenants more rigidly and have swift and rigorous eviction processes.

The fact that you’re moving into one side of the duplex you intend on buying is an even safer move. I understand the hesitancy but at some point you have to make a leap of faith because at the core of your investment is an inescapable element that you can’t avoid...risk.

You have to plan for risk and be ok with it. Acknowledge it, plan for it and if things go south...well, congratulations you learned something.

Good luck!

@Thuy Pham-Satrappe

Cash is king. Always has been been, always will. One in the hand is better than two in the bush. There is a time value associated with money.

Banking on long term appreciation is a gamble. If the property cash flows and the underlying economic fundamentals are sound, you are good.

If you use an NPV analysis to vet properties and assuming your 5 year projections are accurate, the probability for success is high.

@Matt Jones I just bought a vacation rental in Gulf Shores, AL and over the course of the year, I was told to expect 50% occupancy from a seasoned local owner. Keep in mind that’s an average though. You might have 100% occupancy during summer months but in the off-season, vacancy goes up and nightly rates go down so you get hit twice. If you can find a snowbird who wants to live there part time every year, say October thru March, maybe you can up that 50% to 80-90%.