No. of Recommendations: 2
Hi Bill,

The specific properties include 2 4-bedroom & 1 3-bedroom houses in Kaneohe, a four-plex in Kaneohe, a single family house subdivided into a duplex in Kailua, and a 3-bedroom townhouse in Hawaii Kai.
Holy Hawaiian sweetness... that is one mighty tasty portfolio, my friend!!!

As there is very little debt on the properties, I may recommend additional leveraging to generate additional investable cash. Thus I need to get a feel on valuation methods by local lenders.
These are all residential 1-4 unit properties, the valuation method's the same in all 50 states plus the territories; Standard FNMA form 1004 Appraisal. Going the recently sold comparable route.

In our part of the world (the NE), lenders would value the properties based on an income approach, using a cap rate against the NOI's. Do Hawaiian lenders do the same? If so, what level CAP rate would they use?
You're thinking of 5+ unit residential... completely different category.

She could rebalance up to 70% of the current values on these rentals out. I would naturally suggest making sure that the net aggregate cashflows (after costs of planned leveraging) are more than sufficient to cover contingencies, and that safety/emergency reserves are carefully maintained.

Btw, selling is not a viable alternative as the properties have been almost completely depreciated for tax purposes. A sale would reward the Feds with a significant capital gain. Rather than a outright sale, I may explore a 1031 swap with her tax attorney.
I agree that selling is an unfavorable idea... but not because the depreciation is a gain to the government, it's not. Its merely a repayment to them of an interest-free loan they had been making against collectable taxes.

In that aspect, although not a principal loss to your niece, it is certainly a loss of an interest-free, 100% deferred payment, silent 1st position loan that she has 'earned' and accumulated over time... and that would be very much unfavorable.

Besides... exchanging out of this portfolio would mean she had properly tied up something even better (and by better I mean at sufficiently below market value, and/or market cashflows/rents, relative to what she is holding at present.) I rather think that is pretty much highly unlikely.

Further, if she wanted to do aconsolidating exchange, she'd have to tie up the next level big purchase on some kind of lease/option 1st, and then line up the various 'sales' of her portfolio pieces on lease/options, and then when they are *ALL* under contract, scramble to execute the various options (and chew fingernails that they all perform in time) in order to get it all done within the required 90 day window.

Certainly possible... but given the risks, the next acquisition would need to be pretty damn amazingly better than the already-tasty accumulated port. she already has. I just doubt that is possible.

If she's wanting help from her recent loss of her spouse, help her get management lined up. That's my best idea at this point.

Dave Donhoff
Leverage Planner
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