All Forum Posts by: Kyle K.

Operating expenses, vacancy and capital expenses (i.e. reserves) all need to be taken into account as you suggest. However, perhaps you should look up the definition of NOI-- it does not factor in capital expenses. So, the REAL NOI using this set of assumptions is $20,798.

First off Mr. Real World, you are assuming a 100% financed deal. Financing terms can make or break a deal â€" if we are not both not speaking about the same loan terms (i.e. LTV, term, interest rate, etc), then we could be debating this endlessly.

Once again, your numbers are hypothetical; these numbers are actual. Using the loan product we’re currently using, debt service is $14,758… utilizing the above assumptions “real cash flow†is $3242. If you factor in the expense allocation, then the "real cash flow" is $11,002. And thse are actual numbers, not hypothetical like yours. This is what is happening in the real world.

This is the actual monthly cash loss that you should expect to incur over time with this deal. You'll note that this was with a 30 year, fully amortizing mortgage, which is difficult to get with a commercial loan. With a more common 15 or 20 year loan, this deal looks much worse.

You have used an interest only loan at 5.25% to analyze this deal. However, what you haven't discussed is what happens when the loan resets.

I'll work under the assumption that you're not well versed in commercial real estate loans. The loan product we are CURRENTLY using in the real world is an 85% LTV, FHA, non-recourse 35 year fully amortized, fixed rate at ~6%. Once again, this isn't a hypethical loan like you suggest; this is the loan product we are currently using. Granted, in the above real world example we didn't use this loan product; I'm just stating this to make a point.

Now I must apologize because I think the overall plan on the property has not been adequately communicated; this property is a project with a 2-year holding period. You typically want to use the right loan product for the job (i.e. if your hold period were 2 years, you may not want to pay the additional cost to get a 30yr fixed rate loan). What you call gimmick loans are what I would call purpose specific loans â€" having said this, you are pointing out that you may not want to time your loan to “expire†exactly at your projected hold period in the event that you need to continue to hold onto the property, but the other extreme is also not prudent as it can be more costly and impact your IRR. Which brings me to your next point:

The entire purpose of an IRR calculation is to account for the time value of money â€" to suggest otherwise means that you are not well-versed in IRR, NPV calculations. The pro-forma of this investment is 31%; that includes the "big down payment." The IRR calculation adequately accounts for the time value of money. Additionally, I've heard you critique IRR as an analysis tool before which makes it ironic that you now attempt to critique this investment by citing we haven't taken into account the time value of money. With an IRR of 31%, we have definitely taken that into account.

Once again, I didn't adequately explain the plan. Since the holding period is 2 years, the FLEA (expense allocation ) is also 2 years worth so the extreme levels of cash flow will be present throughout the holding period of the property.

The FLEA does not pay back investors with their own money â€" rather is prepays expenses. While prepaying expenses is counter to the time value of money, the projected IRR takes into account this larger required initial investment. Furthermore, the FLEA is useful for a number of reasons;

1) is provides expense insurance for expense overruns

2) it minimizes risk by taking a variable expense and fixing it – typically variable expenses are viewed as analogous to higher risk

3) it minimizes the risk associated with syndications by minimizing the probability of a capital call requirement – a capital call in a syndication can be problematic since 1 (or more) investors may not have the ability to adhere to the capital call putting the entire investment at risk

:D Kyle

Emelio R,

Many people buy Multi-Families with Cap Rates of 6% and less. In fact, in San Diego you won't find a multi-family with a Cap rate less than 7.5%. Does that mean that no one buys multis in San Diego or that, even worse, anyone that does loses money? Of course not. To say otherwise would be ignorant.

In fact, in another thread, https://www.biggerpockets.com/forums/48-general-real-estate-investing/topics/34916-appreciation-vs-cash-flow-the-clash-of-the-titans-?page=8, I address an example where my company not only increased the value of the multi-family in question, but it also provided positive cash flow.

Now, am I saying that it's easy? Absolutely not. Sometimes the negotiations alone take an extraordinary amount of time. Closing a multi-family usually takes significantly longer than, say, a single family home. However, to those experienced teams that know how to spot a good value and, more importantly, capitalize on that value, the rewards are lucrative. I hope that answers your question!

Kyle

Honestly, I think business cards are important. You absolutely want to put your contact info on them and I would follow the guidelines MikeOH put forth. Also, you want your card to stand out in some way. However, be careful not to make your card stand out by being gaudy. Sometimes, just having a high quality card (vice the barely-thicker-than-paper-thin variety) makes all the difference.

Margo is absolutely right. With the strict guidelines regarding identifying exchange properties and closing them, it is important for one considering a 1031 exchange to consult companies experienced in dealing with such transactions. The 1031 exchange is an excellent tool that only makes real estate investment more attractive than it already is.

Originally posted by Kyle Koller:

I think this issue comes down to how one wants to spend his time and what he wants to do. I certainly think one could manage 50 properties by himself. He could probably successfully manage even more than that. However, his job is property management. That also will take up a good chunk of his time.

I thought I already answered that question, but I'll elaborate a little more. I choose not to manage properties myself. Is all my time spent looking for new deals, negotiating new deals and the like? Nope, of course not. A good chunk of my time is also spent consulting clients, analyzing my existing portfolio, working out, mountain biking... I think you get my point. I would rather spend my time doing something else. I'm not knocking you for managing your own properties; that's great. I just don't share the same passion.

Truthfully, there's nothing. I have no problems finding deals. Any aspects of operating the property from acquisition to disposition, we've got covered.

That's not to say you couldn't be any help; I'd consider co-oping 20% of my commission if you brought me investors that I wouldn't have found myself.

I think it would be a great place to invest (provided you've got a good investment). Nuclear power is inherently safe (I have a back ground in nuclear engineering technology). At least in the interim, I believe nuclear power will play a bigger role in supplying our nation's energy. For the first time in years, new nuclear power plants are being planned and built.

Plus, if congress ever gets off their ***, they'll finally open the Yucca Mountain storage facility so that spent fuel can be stored there, not at facilities at the power plant.

I've actually never heard of nuclear leakage occurring at power plants in the U.S., at least not any leaks that escape the boundary of the power plant itself.

I think this issue comes down to how one wants to spend his time and what he wants to do. I certainly think one could manage 50 properties by himself. He could probably successfully manage even more than that. However, his job is property management. That also will take up a good chunk of his time.

I personally don't like to manage property. I'd rather spend my time looking for other investment properties, negotiate new deals and the like. I believe that allows me to grow my portfolio quicker. Plus, if I become satisfied with my portfolio's size I can just stop working. With effective property management in place, I can just sit back and enjoy the passive income.

But, once again, that is just what I want to do. Some people like to change their own oil in their car too. I'm just not one of those people.

Eddie,

No worries. Trust me, I take no offense. Single family homes certainly aren't my expertise!

Eddie, you're right in saying that the bottom of the real estate market has probably not yet come. However, it was inappropriate for you to apply that logic across every market in real estate. Single family homes? Who knows if you can make them cash flow and who knows how long it will take for their values to recover to 2006 levels. Commercial
residential income properties, however, are a different story.

Take this 34-Unit Property we acquired in the first quarter this year in Vista, CA for $3,535,000. The NOI of the property had been $180,771 so we acquired the property at a 5.11% CAP rate. The expenses on the property had been $153,171.

The building had extremely low rents. Consequently, we raised them. 1BRs were going for about $825/month and 2BRs were going for around $925/month. Within 4 months of acquiring the building, rents were raised twice, initially upon acquiring the property (which the previous owners did on our behalf) and again upon resident turnover. Depending on the specific apartment’s location, we have 1BRs going from $1000-1100 and 2BRs going from $1200-1300. Let’s stay conservative and say that from here on out with no more rent increases, and assuming that rents are the lower number of the range, the Potential Rental Income is $432,000 (24- 1BRs @ $1000 and 10- 2BRs @ $1200). Assuming a slightly higher vacancy rate (5% vice 4%) and assuming no change in other income, the Gross Operating Income is $420,400 (of note, we currently have no vacancy on said property but I’m just giving conservative assumptions). Now, assume that the expenses increase by 5% (becoming $160,830), our new NOI is $259,570. Assuming we sell the place at an even higher CAP rate than acquired (say 5.25%), our selling price would be $4,944,190. That is a gain of $1,409,190.

Now explaining the cash flow is a bit trickier. The total initial investment of the property was $1,383,072. This includes the down payment plus loan fees, closing costs, repairs, commissions and, importantly, an expense allocation. This expense allocation is the estimated costs of all expenses (which includes everything from property taxes to insurance, gas, electric, property management, etc. The only thing this excludes is repairs and maintenance and funded reserves. This expense allocation allows for significantly higher cash on cash returns and acts like insurance. After all, if the investments expenses are more than projected, my company Epifany Properties pays for it.

Back to this example: our loan product included a 5.25% interest only and a seller-carry back at 7.5% leaving the debt service at $138,219. With a NOI of $259,570 and subtracting the debt service of $138,219, your cash flow would be $121,351, which is modest cash-on-cash return of 8.8%. But, remember that “expense allocationâ€? Well, you get that back since expenses were paid for up front. The yearly expense allocation is $132,021, so your total cash flow for the year is $253,372 ($121,351 + $132,021), or a 18.3% cash-on-cash return! Please note that even without the rental increases, and even if there were no “expense allocationâ€, the property would still cash flow. It just would have been a lot less.

Now, this was by no means an easy transaction. In fact, most in the company would argue that this was the hardest transaction any of us had ever participated in. But that is exactly the value behind our team. John Doe investor isn’t going to be able to pull off a transaction like this. This is what we do and this is how we make our clients money.