Real Estate Investing: Uncle Baxter's Real Estate Finance 101 |
- Uncle Baxter's Real Estate Finance 101
- 1 euro properties in Italy
- If I like the way a house looks, and I want someone to build me the exact same house, what information do I have to get from the owner of the house so that I can have a contractor build me the exact same house.
- Help me understand my investment - did I get crazy lucky?
- Can someone confirm that my logic makes sense to take out two 10% down mortgages instead of one 20% down mortgages?
- Tenant(s) targeted in recent drive by - LL options?
- Biggest challenges with being a landlord
- New investor
- Deeding to LLC and impact on depreciation
- Capital gains tax on vacant land sale?
- Pre-Filling Upcoming Vacancies
- Property inspections: how do you handle it ?
- Make Sense (and Dollars) to Update a Rental?
- A critical next move.
- Washer and dryer
- Vacation Rentals in Asheville? Advice Needed
- Thinking of buying an apartment building
- Trying to buy first home (VA Loan)
- Commercial loans coming due - refinance (residential)
- Guidance needed: home-equity tax deduction for buying rental in all-cash
- Adding a property -- and overthinking a tax question!
- What types of jobs are you looking for tenants to have post-corona?
- Home renovations - carpet & flooring replacement
| Uncle Baxter's Real Estate Finance 101 Posted: 25 May 2020 07:21 PM PDT Time to gather around the campfire for the first installation of Uncle Baxter's Real Estate Finance 101. After observing the subreddit for some time now I feel that my background and experience can be useful for the community. I hope this post can serve as a tool, or foundation of knowledge, for eager investors who are just starting off. In today's fireside chat we will cover the basics of real estate investing finance on multifamily properties. Including, but not limited to, a deep dive into the pro forma as well as various key asset and market metrics. May even dabble in a hypothetical deal… What is the ultimately goal of real estate investing? Rather, what is your goal of real estate investing? Understanding and answering this question honestly is the first step, as this answer will determine your business strategy. A multimillionaire dentist with a dental practice grossing $3MM annually who is looking for asset diversification will have a much different strategy than a recently graduated college student making $60,000 who is looking for long term wealth creation. Let's first look at the variety of multifamily properties. Multifamily properties are generally broken down into four categories:
Let's put ourselves in the shoes of the Dentist from above for a moment. We have already created wealth and are looking for an alternative asset to diversify into. Where do we go? Often, we are looking for a turnkey (ready for immediate use) Class A asset that will require no true knowledge of real estate that can kick off 4-8% a year. Where the recently graduated college student is hungrier for wealth creation and will take on the additional risk of lightly rehabilitating the Class B or Class C asset for a higher return. Let this serve as an ideological framework, however, for matters of today's lesson, let's assume that we are looking for wealth creation. Let's say that a long-lost cousin, Cousin Cornelius, comes to you out of the blue with a home run real estate deal that will only cost you $300,000. Should you blindly agree and purchase it immediately? Probably not. What do you need to understand further in order to justify that purchase price? Let's break down Cousin Cornelius' home run deal. Some important facts to consider:
So where do you begin? First and foremost, let's understand the revenues this asset is producing. Revenues come from the units that are rented; 4 units x $900 = $3,600 per month or $43,200 per year. This is our Gross Income and in a perfect world, what we would take home every year. Unfortunately, the world sucks and takes most, if not everything from you, but I digress. If a tenant moves out or does not renew the lease, how long will it take to fill that unit? If the unit doesn't fill, what is the cost associated with that? The cost will be 100% to you and it is in the form of lost rent. This is called our vacancy expense, which we will assume conservatively at 15% of our Gross Income. This means that we will not have a tenant in any given unit, on average, 15% of the time. We will deduct this from our Gross Income: $43,200 less $6,480 = $36,720. This is our Effective Gross Income. Now, each asset has unique characteristics and qualities that drive operating expenses. This particular property has an unruly lawn that needs mowing, as well as property taxes, property insurance, water & sewer expenses, garbage removal, and general cleaning… bringing our annual operating expenses to $12,852. Furthermore, we have no intention of organizing and maintaining this property ourselves, so we are going to hire a property manager, Jose, who charges a flat 10% fee of Gross Income: $4,320. From our Effective Gross Income of $36,720 we now deduct $12,852 in operating expenses and $4,320 in property management fees, leaving us with $19,548. This is our Net Operating Income. From our Net Operating Income, we can now derive one of the most important metrics in Multifamily Investing, the Capitalization Rate. The Capitalization Rate, or Cap Rate, is a measure of the rate of return generated on an investment property (and risk… but that's for another post). Cap Rate = Net Operating Income / Purchase Price Our Net Operating Income is $19,548 and our purchase price is $300,000, giving us an implied cap rate of 6.51%. Why is this important? Cap rates don't really mean all that much by themselves, but they are a useful tool for in-market asset comparisons. For instance, if the exact same house with the exact same financial situation was next door for sale for a price of $275,000, an implied cap rate of 7.11%, would it be a good investment? Well, we don't yet know if it would be a good investment, but we do know it would be a better investment than purchasing the same asset for $300,000. You can apply Cap Rates to Net Operating Income to give a rough purchase price, conversely, you can apply a Cap Rate to a purchase price to understand an asset's Net Operating Income. We can't forget that once a decade we will need to replace the roof, or boiler, or floors, or electrical wiring, or driveway, or literally anything major in the house. This is separate and apart from general operating expenses. There are major expenses associated with these types of improvements, which are called Capital Improvements. Typically, 10% of an asset's Net Operating Income should be set aside to cover these types of improvements. In this case, $1,954 should be withheld leaving us with $17,593 in annual cash flow to take home to our piggy banks. Without any leverage (debt) we are taking home $17,593 a year on an investment of $300,000, giving us an unleveraged 5.86% Cash on Cash return (Cash Flow / Purchase Price). Meh, pretty lousy if you ask me. But wait. The units can be renovated, and we can command a higher rent from those units with the renovation…. For an additional $5,000 per unit, or $20,000, we can increase our monthly per unit rent to $1,100. This brings our Gross Income to $52,800, our vacancy loss to $7,920, and our Effective Gross Income to $44,880. Our expenses of $12,852 won't change, though, our property management fee, which follows Gross Income, increases to $5,280. Our Net Operating Income has now increased to $26,748. Saving 10% for capital expenditures, we can now take home $24,073 in annual cash flow. However, our cost basis (purchase price + improvements) has also increased, from $300,000 to $320,000 and our unleveraged Cash on Cash return is now 7.52%, up from 5.86%. Let's revisit the initial question I posed before, what is your goal of real estate investing? From the perspective of the recently graduated college student who is looking for wealth creation, I'm going to go tell Cousin Cornelius to go kick rocks. No way in hell would I purchase this quadplex in need of $20,000 in rehab when I can park my money in an index fund and get a similar return in the stock market. Maybe if I could pick this property up for 10% less, but even then, the profit margin may be too thin for this. From the perspective of the Dentist, this deal may be too small and too labor intensive and may not be worth their time and money. Different strokes for different folks, but this deal won't really appeal to either of our fictional alter personalities. I hope this can be a good starting point for how to go about looking at deals and a preliminary understanding of the finance behind successful real estate investing. Next time I will incorporate in the concept of leverage and how it can be used to better or worsen the returns from this investment opportunity. You just may want to keep Cousin Cornelius on speed dial… Until next time, Uncle Baxter [link] [comments] |
| Posted: 25 May 2020 08:30 AM PDT Has anyone one here gone through the process of purchasing a property in Italy for one euro? If so, what was it like? Was it to flip or to keep as a vacation home? The good, the bad, and would you do it again? [link] [comments] |
| Posted: 25 May 2020 12:16 PM PDT |
| Help me understand my investment - did I get crazy lucky? Posted: 25 May 2020 09:49 PM PDT Just bought a home with my partner and decided to rent out my first home. First home is on a very clean/quiet street surrounded by a C neighborhood. It rented for nearly x3 the mortgage and I had 100+ inquiries online which makes me think it was underpriced. Here are the approximate numbers: Purchase price (2 years ago): $70k + 2k closing costs. Monthly mortgage payment: $350. Monthly Taxes+insurance: $100. Monthly rent: $978. Did I luck out? Is this as good as I think it is, or am I missing something? Even assuming 20% for vacancy and maintenance, this is still positive cash flow of $4000/yr. Rent ratio=1.35% Cap rate=13% (assuming 20% for vacancies and maintenance - 16.7% without these assumptions) (Edited for punctuation) [link] [comments] |
| Posted: 25 May 2020 09:47 PM PDT Interest rates are low right now. That includes PMI. Note that all these calculations were down with a mortgage interest rate of 4.5% and a PMI of 0.75% (someone can let me know if these numbers seem off). I have about 40k I would like to invest. I'm thinking of two options:
I understand that there are closing costs involved in this but I have the cash to cover that in addition to the 40k I want to invest. From my understanding, the disadvantage of taking 10% down is the additional PMI. If I buy one property, the mortgage would be $811. If I buy two properties, with PMI the mortgage would be $987. Now let's say a standard 200k property will cash flow $200 a month (with 20% down). That means I would be cash flowing $24 from each 200k property with 10% down, however I would be getting much more in principal pay down and tax benefits. Honestly, the tax benefits itself would probably offset the difference in cash flow. The biggest thing that draws me is the possibility to BRRRR and get my money back if I fix up a place and refinance. I also understand I am taking on more risk by over-leveraging myself with buying two properties with less percentage down. I have a good income and can cover both mortgages of the two 180k loans if necessary. Based on your experience, do you agree with my logic to buy two 200k houses with 10% down. It's also important to note this will be my first deal since I've never bought a property before. [link] [comments] |
| Tenant(s) targeted in recent drive by - LL options? Posted: 25 May 2020 08:21 PM PDT Tenant(s) in a single family rental was the target of a drive by shooting. (I say tenants cause I don't know if it was one or all of them). Luckily, no one was killed or injured. Property sustained some bullet damage but actually it isn't too horrible (under $1k insurance deductible). Plus, not sure it's best to tell my insurer about this situation unless it's required. . It seems in the best interest of both landlord and tenants for them to leave. . However, what can landlord do without violating fair housing laws? They are being shady about the whole situation and yet they were the intended victims. [link] [comments] |
| Biggest challenges with being a landlord Posted: 25 May 2020 10:04 PM PDT What do you feel is the worst part about the tenant process? I feel like personally dealing with a real estate agent sucks but many others dislike having to sift through many disqualified applicants. What are your thoughts? [link] [comments] |
| Posted: 25 May 2020 09:38 PM PDT I'm investing in real estate. Should I set up an llc, s-Corp, c-Corp or some sort of trust account, etc...? Any advice would be great. I own 2 duplexes and I plan on buying more multi family. [link] [comments] |
| Deeding to LLC and impact on depreciation Posted: 25 May 2020 08:26 AM PDT I own a few properties under my brother's and my name with mortgages under both of our names. Let's put aside the risk of due on sale clause. I've spoken to the county office and was told even if we are deeding to our LLC so the ultimate owners are still us, the transfer tax still applies. It's a lot in my county and the value of real estate is a lot. I was told people often come in to deed properties at $100 to get around this and it's fine. My question is if we deed the property to our LLC at $1000 doesn't that completely give us all our depreciation we can take? Or would you just keep the same depreciation schedule and if audited for taxes and it comes up then you'd have to explain why? Also, if you wanted to sell you'd have to consider your taxable basis basically zero right? Would you have a huge loss personally from when you deeded at $100 that you'd carry forward that would offset any of the taxes from $100 up to the price we bought at under our names? I will be consulting a lawyer and accountant but want to know others' stories. Thanks. [link] [comments] |
| Capital gains tax on vacant land sale? Posted: 25 May 2020 05:31 PM PDT My wife and I have lived in an apartment for the last 5 years. About a year and a half ago we bought some vacant land hoping to build a new home. Long story short we abandoned that idea and sold the land. We bought at 130k and sold at 175k which was surprising to us but great at the same time. Now we have just entered into a contact to purchase another house. Will we owe capital gains on the vacant land sale if we are using all proceeds to purchase a new home? [link] [comments] |
| Pre-Filling Upcoming Vacancies Posted: 25 May 2020 08:34 PM PDT I have two tenants that informed me they will be moving out in a month. I want to start marketing their units to find a new resident as soon as possible. However, I also want to repaint and do some minor improvements while the property is empty. Should I just take the extra month and market it after the turn is complete or can I do it early? How do you market a unit that still has someone living in it? Additionally, I have a property that is almost done being rehabbed that will be used as a rental property. It needs a couple more weeks until it's completely done. Can I market this one early too so it doesn't sit vacant? [link] [comments] |
| Property inspections: how do you handle it ? Posted: 25 May 2020 12:21 PM PDT How often do you do property inspections for SFR and what do you check while you do that ? I have a property manager but eventually I will need to do this on my own. [link] [comments] |
| Make Sense (and Dollars) to Update a Rental? Posted: 25 May 2020 07:18 PM PDT My current plan isn't very sophisticated. Buy, and then hold forever. Recently got a 2450 sqft house to live in (and a 3.3% rate) and plan on potentially being here long-term, potentially moving on down the line in 3-5 years and converting it to a rental. It's a 1963 home. I had a buddy who flips houses stop by yesterday and give me some ideas on improvements I could do that would more than likely lead to a corresponding increase in value. He basically said, update the decent sized kitchen (10k), new flooring in the areas without the original hardwood (5k), and put new windows throughout (8k). From what I gathered his flipping philosophy is to wow them in the kitchen/living areas, and then if they get into some funky stuff in the bedrooms, it won't be a deal breaker because they're already "in love with it." And believe me there's some funky stuff with this home! So, does this make any sense to spend 25k on updates? I assume it could probably only rent for $100 more with all of that MAX (~5% cash on cash). My main thought is that- in my quickly appreciating area, if I spent the 25k, would I see it back in an appraisal, and then be able to borrow against it to buy more property. Like if the value jumped 100k through natural appreciation plus my forced appreciation with improvements over the next 5 years, I'd borrow that and buy more property. Is that logical for a rental or does it make more sense to just hang on to the 25k for the next purchase? Also, please factor in some owner satisfaction while I'm living here- but it's 100% livable now and I like it as is- so I don't want to dump 25k into it to "feel good." Please let me know if any more detail is needed- this is a thought in its infant stages. [link] [comments] |
| Posted: 25 May 2020 02:21 PM PDT Hello everyone. I recently joined this subreddit and have been absorbing a lot of incredibly useful insight, and I now feel comfortable enough to start critiquing my family's real estate investing plan which has already been in action for a few years. Bear with me here and please let me know if I have some terminology wrong or if additional information is needed. Here is where we are so far investing in the San Diego area. We currently have 2 units (single family home with another unit on that same property). We purchased it in 2014 for $415,000 and lived in it for just under 5 years before moving into our current house using the house hacking method. Despite an $800 cashflow/month, the property is still a bit of a lemon, and is subject to absurd upkeep and is in need of extensive repair in the future (Think new roof, mold, huge yard, leaking pool, all that not fun stuff). As such, we have been preparing to unload this property soon so as to have a nice chunk of cash to sit on if property values drop after the pandemic. We alerted the renters that they needed to vacate within 60 days, and they immediately inquired about purchasing the house from us. Sounded too good to be true, but these people are actually approved and are able to buy the property at the full value of $625,000 (appraised last year). Another bonus, my brother is a real estate agent and the whole deal will only set us back 2% of the sale price When (and IF) this sale goes smoothly, after paying off the $395,000 mortgage we will have a little more than $220,000 cash to throw at more properties. For clarity, this is separate from our family's other assets, savings, assets etc. This cash is ideally purely for real estate investing. This brings us to the property we are in now. Purchased in 2019 for $565,000. This thing needed a lot of work. My father works in the construction industry and a nice benefit is that we have been able to DIY every repair and also have been able to do almost the entire renovation ourselves while living in it. Overestimating here, we expect to put in no more than $25,000 before it is ready to be rented. This includes a garage conversion for another bathroom and 2 more bedrooms (It's less than a mile from a major state college). Going off of comps and advice from my brother's real estate team, we expect the house to be valued at upwards of $650,000 after reno with a positive cashflow of $800 a month. Looking to the future, we want to make this money works as efficiently as possible as we begin to build a sizable real estate portfolio for our family now, and into the future. So far we have been sort of doing this "on the fly" and I believe we really need to structure a clear plan and long term goal, which this post will hopefully help in developing. We are extremely flexible and will really go down the most efficient path, even if that means house hacking again. Multi-unit properties have been looking awfully tempting, but we're not to excited to tie up all our cash in a down payment if it could be better to keep doing what we are doing. I have recently been analyzing all sorts of deals using a combination of advice from this sub and hard number spreadsheets. Analyzing these deals and running the numbers has given me a lot of insight and I think so far it is a great strategy in deciding what path is best for us. I am interested to hear what some of you would do if you were in this position. Please, feel free to humble me if this post is either naive and or missing vital elements. We're trying our best to learn. [link] [comments] |
| Posted: 25 May 2020 10:59 AM PDT Just found out our place isn't lined for gas in the laundry room. Kind bummed, aren't electric washer/dryer units much less desirable and durable? What's your experience? [link] [comments] |
| Vacation Rentals in Asheville? Advice Needed Posted: 25 May 2020 04:51 PM PDT I'm in Greensboro and I invest in long term rentals here. There's been some talk amongst the family of investing in some land, building (many) tiny homes, and renting them out to tourists (vacation rentals). Besides benefiting from the revenue, we're looking to leverage them for getaways. I'm humble enough to say that while I LOVE Asheville and the surrounding area, I don't know about the market or hurdles associated with following through with this venture. Some things to note
Are there any horror stories associated with vacation rentals, building something this size from empty lots, or something I should be aware of before starting out on this venture? [link] [comments] |
| Thinking of buying an apartment building Posted: 25 May 2020 10:24 AM PDT Hello All! I am thinking of buying a Class-C 20+ unit value-add apartment building in Cincinnati. Pre Covid-19, some comps within the general area were slightly north of $40K per door. The total rent loss (vacancy+tenants not paying rent) is about 15%. I can acquire the said building at slightly less than $35K per door. I am not seeing any price reductions as of now. If I buy the apartment building and over the course of 2ish years (and if Covid-19 situation doesn't deteriorate), the numbers make sense. I am just confuse, whether I should go forward with the purchase now? If there will be more opportunities in the market, at a later time? Just want your guys general opinion. Edit: The current revenues are at $110K and anticipated expenses are $59K. The general market sentiment is that we may see a very small correction, if any. Going in, I would have to replace the boilers ($45K) and then windows $50K). I will do apartment renovations as they come empty. Edit 2: The current revenues include vacancy. Edit 3: Changed the total rent loss to 15% from 85%. [link] [comments] |
| Trying to buy first home (VA Loan) Posted: 25 May 2020 03:50 PM PDT So I'm in the Phoenix Tempe Area and want to buy my first home to rent out. My girlfriend and I have about 4100k in monthly income and 80k in savings. I have about I just have so many questions. Should I be waiting is now the best time to buy with this pandemic? How do I shop for the right lender? (my current bank is navy federal btw) Also I remember asking my bank about what loan I would qualify for and they wouldn't tell me unless I had them run a credit report. I just watched graham stephen video saying that you can just tell them your credit so you don't take a hard inquiry? How can I analyze the best houses in my area for cash flow and real estate value? After I find a good deal who should I contact to get this house? Since I'm really only interested in the rental income would it be a good idea to talk to multiple property mangement companies and they could reccomend a property for me to buy since they usually have real estate agents working for them? I've also heard of people buying a house and then renovating it? That seems like a tremendious amount of work and that ties into my previous question of analyzing value. How would I know if a house is worth renovating or not? I appreciate any help!!! I understand none of you will baby me, so if you could even direct me to some select videos that I could use for some formula to something to help pick the most profitable house for me that would be amazing. [link] [comments] |
| Commercial loans coming due - refinance (residential) Posted: 25 May 2020 11:34 AM PDT I have a few commercial loans up for renewal in the next 3 years (5/25s). I know the lender will want the last 2 years tax returns, rent rolls, etc. Let's say I'm less concerned now with accounting for every expense (increasing my taxable income) - but for purpose of example, I don't account for $50K in repairs or operating expenses (take any number really) which in turn increases my NOI. Do any real estate investors do this to get better terms in preparation for loan renewal? [link] [comments] |
| Guidance needed: home-equity tax deduction for buying rental in all-cash Posted: 25 May 2020 08:59 AM PDT Hey reddit, I've been on Google for the past two hours and my mind is going in circles. I'll contact an accountant if this isn't straight-forward, but if there's an easy answer here, all the better. I have my primary residence in California. There's a rental property, also in California, that I want to purchase, but based on the market, an all-cash offer is likely needed. I want to take out a home equity loan against my primary residence to make an all-cash offer, but the language around whether the interest on such a home equity line is tax-deductible is quite confusing. [link] [comments] |
| Adding a property -- and overthinking a tax question! Posted: 25 May 2020 08:40 AM PDT I believe I am overthinking something simple - please please give me a sanity check. Partner and I are each 50% owners in LLC. Buying a new property for $150k, we will each be contributing $75k out of our pockets. I want to make sure that money isn't going to be re-taxed as income when we each get it back. Structuring it as a formal loan seems excessive (unless we want the LLC to pay us interest, in which case I understand the interest would be taxed). Is there any reason we can't just each add $75k to our respective capital accounts? And then any obstacle to withdrawing, say, $800 a month each from our capital accounts until we have our $75k back? And those withdrawals are tax-free? Am I totally overthinking this or totally missing something? Thanks in advance for input!! [link] [comments] |
| What types of jobs are you looking for tenants to have post-corona? Posted: 25 May 2020 02:26 PM PDT As the question says, what type of jobs are you looking for prospective tenants to have? I currently have a vacant unit and I am updating my tenant requirements post-corona to reflect the reality that a lot of people will be out of a job soon and only a few will have recession resistant jobs. One that comes to mind right away is any type of government job such as USPS delivery man, maybe government contractors and the like. What are the jobs you are looking out for? [link] [comments] |
| Home renovations - carpet & flooring replacement Posted: 25 May 2020 06:13 AM PDT Hi! I recently bought a 1,500 sq ft condo. It's a lovely & spacious 3/3 with 3 levels. Most of the place has cheap hardwood flooring that wasn't installed correctly so I'd like to replace that. Also, I'd like to replace the carpets (4 staircases and in 1 bedroom). Most of the carpet is actually on the stairs, only one room has carpet. I saw Home Depot had free carpet installation but read online that it would end up costing more. 1) How have you found quality contractors for flooring renovations? 2) What's a reasonable price to pay? 2) Should I get both the carpeting and flooring done at once? I've never owned property before so just want to hear some of your experiences! [link] [comments] |
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