All Forum Posts by: Spencer Boerup

I just had a new tenant move in (2b/2ba townhome, modest quality). They were far and above the best candidates but are only signed for 1 year as they just moved to my area for school and they want to maintain some flexibility as they are new to the area. They have been great in communication and background and credit check were perfect. 

After 1 day in they sent an email with photos of the inside of the kitchen cabinets, specifically some of the shelves. The shelves inside some of the cabinet doors are bowing in the middle. The cabinets are not new and not top grade and probably more than 20 years old. They're not terrible but they're not awesome, either. They also noticed in an outdoor carport garage (where laundry appliances are located) that some of those shelves are bowing, too. 

They requested these be replaced as the dishes "slide around". The previous tenants were there 2 years (homeowners in another area, relocated for temporary work requirement) and never had any issues with the property, and never anything with the kitchen.

The current tenants have never been homeowners and are younger, so their experience with what a landlord should fix out of preference vs what they are required to fix out of obligation is probably a gray area for them.

I am simply trying to verify that this repair request is a preference and not a legal requirement for health/sanitation or safety reasons. From my understanding of AZ law, the landlord is required to keep the property sanitary and clean (like with water supply, drainage, ventilation, appliances functioning, no mold, etc.). There isn't a possibility of danger nor risk of unsanitary conditions because some of the shelves in the cabinets are not flat or level.

To me, the shelves are there for convenience and not requirement, nor do they pose a safety hazard in their current state. With that said, it they place items on them and they crack or brake, I believe that is where the gray area may exist in their mind as to who is responsible.

I'd appreciate any guidance or insight on how to best respond. While on one hand, I am a responsible and generous landlord and prefer to treat good tenants well so that they continue to renew. But, I'm also hesitant to replace something that simply isn't to a standard they might have a preference for "better" and then set a precedent for future repair requests.

I'm a new REI and looking to add more to my portfolio, somewhere possibly between 10-15 units in the next year.

I have a commercial unit fully leased (to another business I own), and a single Townhome with about $1130/mo COCR, with a projected IRR of about 16.4% over 6 years. It was my first foray into residential and now I'm looking to get into MFH.

I have worked with a local long-time REI who is a close personal friend. He knows the market very well and has done easily over a thousand deals, with over a hundred units locally. He's helping me close deals quickly, but obviously getting a commission.

I've been a business owner for 13 years and understand the sales process and am not afraid of getting my own deals done working with other agents. I'd love to save money not paying commissions, especially since I'm analyzing all of my deals and doing all of the finding. My friend has just helped me assess potential property renovations that may be needed, and looking for things to avoid in properties when we tour them.

If I can save money, I'm interested...but, do most REI's get their real estate license so they can save on realtor commissions and close deals themselves?

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Best way is to search by parcel number (MLS) or just the address. Pretty quick. Then click on the Tax tab and you can see the actual tax history (and whether it is current).

https://gis.pima.gov/maps/landbase/parsrch.htm

Thanks for your perspective, I really appreciate it!

I get that in a true COCR analysis, only count how much cash flow you have in the year. That's simply one analysis is all. But you'll end up paying tax on any "net income" you generated from the property.

So from an Income tax perspective, the "net income" from the property is what you're paying taxes on, and because your principal payment from the mortgage isn't tax deductible, you'll end up with more net income than your free cash flow.

So if you remove your depreciation (which is what I'm understanding makes REI so valuable) from your net income, then you essentially have your taxable income from that property.

So the above examples that I gave had a net income of $4,109. If I can deduct depreciation of $5,454, which ultimately leaves me with a net loss. This essentially means I'm almost getting a tax refund in a roundabout way (assuming I have income from other sources).

So the COCR, to me, isn't just the cash flow, because you'll have to rectify your income/losses with Uncle Sam, which absolutely impacts how much cash you have left over.

I'm a serial entrepreneur that has owned and successfully run multiple businesses over the last 13 years, one of which has landed on the Inc5000 two years in a row. Scaling a small business to turn out a healthy profit is something I think about constantly, and analyzing an Income Statement and Balance Sheet is pretty normal for me.

As I have been looking to maximize my time and my talents I have become somewhat attracted to the economics of real estate. Part of the attraction for me is that it can be a "competition-free" business that can be somewhat passive if you wanted it to be. RE investing is just a diversification of my investment portfolio, and something I want to learn and be proficient at.

Before I get into any new business venture, I try and become as educated as possible so I'm not making mistakes as I go. As a relatively new investor in real estate, I've been consuming a LOT of content to learn from other people's mistakes and advice, and have begun modeling the financials of different types of properties with my own calculations. I currently own my own office building that my business rents from me, so I have a real-world example with real money and real taxes (applicable to my AGI). 

As I have been building out my financial models, and comparing them to the BP calculator and other resources I have found online, I'm stuck on a concept that I wanted to ask here to validate whether I am thinking about this correctly. The concept has to do with how people are calculating cash flow, and cash on cash return.

What seems to me is that the BP calculator includes the principal payment as part of the "mortgage expense", when the principal is not an expense, and will not appear on the Income Statement for the property as an expense. Thus, the net income calculation is off by the amount of the principal payment. 

It seems that the "cash on cash return" calculation is correct, because it's still taking the net cash generated at the end of the year. But, the "Total Annual Expenses" (OpX + Mortgage...aka Debt Service) would be incorrect because the Principal shouldn't be factored in.

As an entrepreneur, I look at ROCE (Return on Capital Employed), which is the total capital employed in the business, and how much income (not just cash) it spits out in return. Real Estate is much simpler because you can project a balance sheet easier than a business that is dependent on inventory turns that are somewhat out of your control if you don't own the manufacturing. All I'm trying to do is calculate ROCE, and I saw this as a potential flaw in the calculator.

I share this as it can drastically alter the perceived amount of return from an investment. Since most people compare investments to the general return of the stock market, most real estate investors seem fixated on the cashflow side of it, and rightfully so as many are trying to generate enough positive cash flow to sustain their lifestyle. But the inclusion of the mortgage principal payment as an expense could get people into hot water on their tax calculations, especially if they're reporting it to the IRS incorrectly.

Below is my example for the first operating 12 months. The ROCE / Net Income is 12.1% vs 6.4% when comparing it to Cash on Cash return.

Anyway, I'm open to learning more from you all, and please feel free to call me out on any calculations! I'm known to make some flubs in the numbers, and it's for this purpose that i'm sharing here to validate (or invalidate) what I've been working on!

Assumptions:

• Purchase Price: $150,000
• Down Payment: $30,000
• Closing Costs: $2,500
• Repair Estimates: $1,500
Capital needed: $34,000

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Income: $17,100 ($1,500/mo with 5% vacancy rate)

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Expenses: $12,990.40
• Mortgage Interest: $5,360.40 (per annum)
• Insurance: $900 ($75/mo)
• Taxes: $1,000
• Utilities: $420.00 ($35/mo)
• Landscaping: $600 ($50/mo)
• HOA: $1,200 ($100/mo)
• Management: $1,710 (10% of rents received)
• CapX/Repairs: $1,800 (10% of anticipated rents received)

_____________________________
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Net Income / ROCE (before depreciation): $4,109.60
ROCE: 12.09%

Mortgage payment P&I (30yr, 4.5%): $ (608.02)
Mortgage principal payments made: $1,935.87

Cash on Cash Return:  $ 2,173.73
Cash on Cash Rate of Return: 6.39%