All Forum Posts by: Ron Read

@Nicholas Aiola

We've seen entities structured legally where a Trust is the owner of an LLC. Can this entity be held in a Solo 401k or an SDIRA?

I love this idea. Thanks for the great suggestion!

That's a great point.  I haven't even gotten that far yet. 

My broker sent me the listing, and I think after seeing the pictures, my gut is looking for a reason to pass and not waste any more time on this one anyway.  If the numbers were fantastic, I'd probably already be in the car to go scope it out in person.

 I guess that's the real solution to this.  Maybe I'll just hold off and see if I can find a reason to get up in that area for some other reason.  

This was my first though too, so I checked Google Maps, but the pictures are all 7 years old.

Seller claims 6 of 7 units are rented, but none of the pictures in his listing show a single car in the parking lot.  I'd expect no-matter the time of day this shouldn't be the case.  Am I paranoid?  Should I even waste the 90 minutes it would take to drive out and check out the neighborhood for myself?  The deal looks 'okay' but not fantastic if all his numbers are right,  which doesn't leave a lot of room for error.

Some great points.  Since these REITs are large companies, I'm guessing that they have staff, and won't be paying the same commissions you or I would pay, but you're definitely right they wouldn't get the total appreciation as a net.

I also suspect their model is not pure appreciation, since with anything less than 25% vacancy should cash flow for them.  In the sample I provided above with the 11 properties, they were cash-flowing at about $3k/yr each with a still pretty high 15% vacancy rate.  Since AH4R is a publicly-traded company (AHR), we can look into their books.  They claim that their Operating Margin is 21.2% which is the amount of cash left over after paying expenses on every dollar earned.  How much of that comes from appreciation or cash-flow is a mystery without reading their full-reports--a task I'd rather not perform.

I'd further assume that if interest rates are still reasonable, and the math dictates it's still profitable, that they will just roll over the loans on these properties rather than sell them.  That, or sell off a percentage as homes age past whatever their model dictates, and reinvest in newer homes to rebalance the portfolio.

Lastly, even if they only make appreciation of $15k/property, that means a company like AH4R will net $750 million since their portfolio is 50,000 properties.  Probably not the return shareholders are hoping for, since that's only about a $3/share return, which is a pretty paltry 15% over a 10-year holding period, based on current stock price of about $20/share--so if there was no operating income, this wouldn't be a great stock investment.

There is definitely some risk baked into their model, which is why they have to pay bondholders a better rate of return than they would get investing in a Treasury Note where your principal is guaranteed by the US Government, or putting the money into CDs where it is guaranteed by FDIC.

Thanks for running with the ball, Josh!

I'm guessing that appreciation is definitely a part of their model.  Even if market values only increase with the value of inflation (2% compounding), a $185k property should net a $40k gain.

I suspect that 25% vacancy is right about break-even for them, assuming the same 8% CapEx and 12% Maintenance and Management costs I used in the other models.

Keep in mind they are also doing this at scale.  Some properties may linger vacant longer than 25% while others may be occupied throughout the entire year.  As long as the median vacancy remains below 25% they probably cash-flow for them; where you and I couldn't make these cash-flow unless we had a rich uncle who was willing to give us an unlimited quantity of cheap long-term interest-only loans with zero-down like these guys are getting.

I was really hoping someone who works for a big REIT would jump into this thread too, and let me know how far off I am on any of the assumptions I've made. It's a really interesting model they've created, but also a model any investor could aspire to with a lot of hard work, and access to some creative financing.

Candidly, I don't.  I'm still trying to close my first deal.  I've had a few offers fall through, but I'm being patient because i want to buy right.  Most of my knowledge about REITs comes from my background in financial services.  

Please document your builds if you go forward. I'd love to see it work out for you.

 I think that's a great strategy, as there doesn't seem to be a lot of small multis to compete with in this region.