All Forum Posts by: Jeff Takle

7 months? That's awesome. I've met too many people who have none, or maybe one month's expenses and tell me not to worry because they "haven't had any problems getting tenants in their properties." That system works great as long as life doesn't throw any unexpected curves. At all. Ever.

Thanks, good info. Looks like this is, at a minimum, a good additional source of revenue should a deal present itself; likely would be a bit slower moving though. Would take more research to know if you could invest part IRA money in with your non-IRA money in a property as a partnership / TIC...one part Trustee investment, one part Me the Individual investment...hmm, probably no reason to make this hypothetical any more complicated than it already is.

Would be interested to hear if anyone has more/better/different information on this issue:

I just set up an Individual 401(k) for my consulting company, which is a single-member LLC. I'm wondering if this might also apply for short-term real estate investment company. As an employee, I can put up to $15,000 of salary deferral into the 401(k). As the employer (the LLC), I can contribute profit sharing equivalent up to 25% of the employee salary, up to a total employee/employer contribution of $42,000 this year. So...

If consulting brings in $100,000 this year e.g., I can contribute $15,000 of my salary and my company can contribute another $27,000 for a total of $42,000. My taxable income is reduced from $100,000 to $58,000 for a tax savings of around $10,000 in the current year. Not bad, but I'm also short all that cash because it's sitting in my 401(k) waiting for old age. Here's where real estate comes in...

Law allows (though AIG and T.Rowe Price 401k plans do not) that you can invest that 401k (or an IRA) money into real estate. Also, the gains from that real estate are exempt as I understand it from cap gains tax and all cap gains get rolled back into the 401k and can be used without 1031 time restrictions to invest in more real estate. The only taxes you would pay would be on 401k distributions, which you can delay until I think 70.5 years old and can stretch out a long time. End result? Could be a great way to take ordinary income tax free, flip rental property without capital gains penalties, and end up with a few income-producing properties fueling your 401(k). Ahhh, there's the catch--you can't get your money out.

Any thoughts?

First, this is a great back and forth--I am amazed at how many people I speak with tell me their mortgage is "X" and their rent is "X+$100" so they have positive cash flow. There is, as evidenced above, a lot more to it. A few other thoughts, if you want to get down to the nitty gritty about the bottom line, though some of these stats are relevant whether you sell or keep the prop:

-expected appreciation over life of investment
-equity bought through mortgage payments
-benefit of the interest home mortgage interest deduction in terms of saved (or shielded) current annual income
-a 10% misc operating expenses bill tacked on
-a 4%-12% vacancy rate average depending on local norms
-25% recapture of depreciation
-cost of improvements that will likely become necessary if you keep the house for 10 years+ like new roof, new water heater, new carpet/floors, etc...minus the depreciation you can claim for each over time
-whether you've held the property for at least a year, which will impact the classification of short-term cap gains taxed at personal income rate, or long-term cap gains currently taxed at 15%.
-etc. etc. In short, it's a bit more complex to get the clearest picture on the numbers, IMHO, than a lot of folks portray. Some things impact current cash flows, some impact future cash flows, some impact current taxes, some impact future taxes...

Is this a good buy or not and should you keep it: Can you afford the cash outflows required to sustain the property? What is your projected IRR and how does that compare with other options like stocks or bonds?

Edge,

In my areas rates range typically from 6-12%, with vacation and short term rentals (<6 months) around 20-25%. Rates go higher for very high-end executive lodging. But, most property managers will provide a portion of their services for a lower price, e.g. you only want them to do maintenance, not to collect rent or provide financial statements, and they'll do that for 4%. All depends on what you negotiate.

As a general rule of thumb if you use a property manager you will pay:
-1 month's rent for Managment fees (rent collection, maintenance, financial, etc)
-1 month's rent for Listing fees (advertising, screening tenants, lease signing)

So, the easy-sneezy solution will cost you 2 months (16%-24%) of your rental income each year for a normal propert under a one year lease. This is probably the easiest place (IMHO) to impact your margins and reduce costs / increase cash flows by doing it yourself with a few software tools.

Ha. Good times...

I am hopeful that the days of a walled-off MLS are numbered. Technology trends are exploding towards making information easier to get for everyone and even the TelComs are bending under a public cry for municipal wi-fi, broadband over the last mile, and wholesaling information on the Internet. More and more counties are coming online--even if to the chagrin of many of the county workers. MLS will someday be free!

juzamjedi makes great points about the difficulties in putting something like this together. First, a word of caution--if we actually had a free MLS, many investors would be out of a job. One of the best things going for us is information assymmetry with our "competitors." What distinguishes most real estate investors isn't their abilty to do better, more rigorous, financial analysis of the real data than anyone else could, it's that they have the guts to pay for the real data or get it the hard way, and the gusto to leap over the edge and buy with imperfect information. Still, I thought it would be helpful to take a minute and look at the potential upsides of pursuing a free MLS.

-Several million residential homes were sold in 2005. (not interested in chasing the specific number down right now). Let's say the typical transaction looks like a single person buying from a married couple, so 3 non-realtor citizens involved in each transaction. I'll estimate 9,000,000 home buyers/sellers involved in 3,000,000 home sales in 2005.
-Right now, only the 1,000,000 realtors nationwide have access to an MLS, and each MLS is regional--none have national reach that I am aware of.
-Assuming technically and legally you could put such a thing as a nationwide MLS together (a HUGE assumption as MLSs and the NAR would spend big $$$ to crush this initiative), that's as many as 10,000,000 potential consumers of your product EACH YEAR. How much money could that generate? Well, let's see...

-If you chose to sell subscriptions to the data to non-licensed individuals as well as Realtors, the majority of the public probably wouldn't pay. Hey, they're cheap. That data companies have been selling this info for years but a typical household doesn't buy is evidence. BUT, looking at the increased traffic on zillow.com, realtor.com, and other watered-down freebie sites, suggests that if they did not have to pay, they would view. This limits you to investors, Realtors, and a few others. Let's say 1,500,000 at $30/month = $48,000,000 revenues per year.
-If you chose NOT to sell subscriptions to people but instead offer the service for free, what can you do with that? Well, requiring people to register in order to use the site could result in a 4,000,000 per year database of people (assuming a 50% internet usage by home shoppers/seller and an 80% sign-on rate). All of these people need moving boxes, trucks, change of address forms, new mailing labels, new printed checks, painters, cleaners, Realtors, title companies, mortgages, investment advice, financial planners, attorneys and tax advice, etc. etc. Being able to provide not only a list of interested home buyers/sellers but being able to pinpoint EXACTLY when they are interested in buying/selling is a marketing utopia. Or, if privacy is paramount, then being able to project highly targeted vendor ads on the free MLS website reaps slightly less. How much is that marketing data worth? I don't know but I'd suspect you could bleed a lot more than $48,000,000/yr out of it. You actually control a hideous amount of power if you can monitor nationwide home buying/selling in real time. That's why NAR would probably spend a billion $ to stop such a thing and probably why one doesn't exist already.
-The experience of Gmail suggests to me that when you offer a truly superior product for free, people are willing to put up with a limited amount of advertising and marketing thrown at them. In moderation.

[size=18]The real question is: is the potential payoff worth the struggle and risk???[/size] :badwords:

I've got a few Excel spreadsheets I can email to you to evaluate IRR and cash flows. I'm no accountant but I've developed these over the past few years through integrating the different ones I've come across. You might also find these helpful when evaluating the income potential / cash flow impact of new prospective deals.

One recommendation--build up 3-6 months of expenses in a savings account (money market or whatever) for each property. It's a lot of money, but that will help you cover vacancies when you have them, and you will have them, as well as any other unforseen boogiemen.

If you'd like the spreadsheets, just drop me an email at: jeff <dot> takle <at> jtnoel <dot> com

As long as you are buying/selling for yourself, no real estate license is needed. If, however, you are flipping for someone else and taking a commission for, let's say, just finding the deals and making it happen, then you are probably required to get a license. States will require a license if you buy, sell, or lease, or negotiate to buy, sell or lease on behalf of someone else.

hbw also makes a good point about the license incurring additional headaches. Once you are a licensed realtor, courts hold you to a higher standard, meaning that they don't want you taking advantage of non-informed (aka non-licensed) people. While you can gain access to the full MLS data only if (as far as I know) you are a licensed Realtor, you are then subject to the state's Real Estate Board regulations and are also required to pay MLS dues, Real Estate Board fees, and any association dues (Natl Assoc of Realtors, state Association, local Association) fees as well. These can total maybe $2,000 in a year. The cost and added oversight on your activities is something to consider.

Unfortunately, the process of getting your real estate license will not teach you anything about investing; it only teaches you how to pass the test and get the license. Beyond gaining a new vocabulary, any practical knowledge you might want will only be gained after you get the license through spending many hours with seasoned realtors, investors, contractors, etc. Investing is a profession and doing it right takes a certain level of effort.

Of course, the flip side is that without direct MLS data...the full data and not the watered down version off Realtor.com...it's harder to find your deals or do any sort of statistical research without paying an arm and a leg for the primary data. Good luck with whatever you decide.
:goofy:

I agree that it doesn't take very long to become a licensed agent in many states--you can do it in less than a week in Massachusetts; it takes about four weeks in Virginia.

But you were right elmo, it does take a long time to BE an agent. I spent my first several months going out almost every night to preview homes, meet with buyers/sellers and renters, develop a network of contractors, talk with my broker and every other agent available, meet mortgage and title folks I could trust, analyze MLS historical data, etc. Realtors put in a lot of hours up front but what you put in is what you get out--if all you want is a license, you can do that. But, a license won't make you any better an investor unless you put time into it.