All Forum Posts by: Andrew Kniffin

@Bill Exeter great input.  Thanks for sharing.  Certainly makes me more likely to consider 1031s!

Alongside the 2% title transfer fee in Washington, I imagine this will have a negative impact on WA state flippers (7% on capital gain PLUS 2% on transaction price (basis)) and thus lead to more eyesores, and dilapidated houses.

"Starve the beast." -Milton Friedman

I moved to WA because of its preferential tax climate.  It seemed a better place for me to make my daily toil.   State policy seemed to celebrate wealth creation, rather than confiscate it.  

This is a step in the wrong direction, then.  It would further incentivize a buy-and-hold strategy, where you access cash through HELOCs not sale transactions.  

Question: If you made a sale, could you avoid the CapGain tax by 1031ing into another property?

So @Ben Leybovich you are applying a 9.5 cap to a property that by your estimate is offered at a 3.3 cap? (even though by its pro forms the claim is that it is listed at 9.5-cap.) Offhand,  that would be an offer at less than 50% of asking.  That seems so low as to not be worth your time.  What am I missing?

Rent control is a local issue, county-by-county.  You would have to find other investors in your area to get input on that.  

Hi George -- good question.  I've been asking myself the same question recently. 

I think the tradeoff is that, in low-cap areas, there tends to be higher increases in rent rates, whereas high-cap areas do not have much natural rent rate increase opportunities. 

The "the wind is at your back" when buying low cap areas because the market forces tend to allow for increased NOI through rent increases (with expenses being the same). The downside, though, is that your initial cashflow when buying the low-cap areas is minimal, and sometimes even negative!

Thus, it depends on whether you're hungry for CF immediately, or whether you don't need the cash now, but want long-term value creation in the asset through NOI increases ("forced appreciation").

Interested to hear what others have to say...

Happy to help, Stephanie.  I learned something new, too: @Jon Holdman mentioned that depreciation on a multifamily is the same timetable as residential: 27.5 years.  It's only the type of financing you need that changes.  

That definitely makes MF more attractive, since it provides greater "paper expenses" to reduce taxable income.  We're always learning!

Just to clarify, if you were to assume the $2.6 million loan and the purchase price is $3.7M, then in reality you'd need to come up with $1.1M buy out all their equity (ownership) in the place. 

If it was purchased for $2.6M and current debt is $2.5M, then I assume at some point the owners refi'd the property and pulled out all their initial cash.  Do you know if that's correct?

I agree with @Nick B. those expenses are too low and they skew the cap rate.  I'd encourage you to look at the property as a multiple of Last Twelve Months actual Rents, since this metric avoids all the "funny business" with expenses. 

My understanding is that...

TAX --- depreciation is on 39.5 year schedule, rather than 27.5

LEGAL -- you are subject to stricter Fair Housing Act / discrimination rules than you are when managing 1-4 unit properties. 

Others can probably add much more insight.   Good question. 

Orion-

Here's a quick list.  I generally think of acquisitions in 3 main categories:

• BUILDING QUESTIONS
  • What is the condition of the units? Do they need renovation/rehap/facelifts?
  • What is the condition of the building?  Exterior, roof, HVAC systems?
  • What is current vacancies, historical vacancies?
  • Who are the Property Managers? 
• MONEY QUESTIONS
  • What is last-twelve-months of actual revenues received?
  • What are actual expenses in LTM?
  • What is offering price? (Determine for yourself what the offer price / LTM rev # is...this is the Gross Rent Multiplier) (Also get a sense of Cap Rate offered)
• MOTIVATION QUESTIONS
  • Why is he selling? Is it urgent?
  • Why isn't he using a broker?  Why try to get person-to-person?
  • Is he willing to carryback a subordinated note?