Reasonable Ask for my skillset and money on MF deal?

Question

Hey there,So I'm reading everything I can in this forum, (very very helpful btw) and have come to the conclusion that I would like to try and put together a close-to-home apartment deal on some smaller (4-16 unit) multifamily buildings in my local area. I have a personal conviction at the moment about local investing, which is based on some experience managing my small portfolio of SFR's and condos. Some background - I am a former construction/millwork/welder dude, have run a couple of my own businesses, and got into landlording about 14 months ago. bankrolled by a family member, have 5 units in 4 properties owned, 2 mortgages, and a track record of profitability. I am currently personally un-bankable, so deals have to come from cash, partners, or their own financial merits. Coming from the construction world, there isn't much that I can't do on the 16 unit and under buildings. I still own a lot of my equipment, and have graduated to "finger pointer/organizer/budget manager/a-kicker". Believe it or not, I actually enjoy the day to day running of places, working with my hands and head and iPhone, and making properties better. Like I tell all my subs: "I can do your job and keep the money if you screw it up, so don't make me prove it"My duplex is in escrow, and will net me about $75K in cash, which is all I am going to have to bring to the table, along with my skill-set, 10+ years of knowledge, and track record (albeit a short one) of 10+ cap rates in areas where everyone else gets 6. I am focusing on an area of scottsdale that I would describe as the proverbial pimple on the proverbial backside of my part of town. Its full of 60's-era block multifamily units, and surrounded by C&B grade apartments, starter condos, and some SFR's. Current properties, except for 2, are run-down, poorly-maintained, disgusting, and have everything from working class immigrant families to meth-heads. If you take the part of town I'm in, and consider it a "block", this is definitely the worst house on the nice block, so to speak. The drawback of my area is that dirt is expensive, and seeing 10+ cap rates based on price isn't going to happen. This is a 6 or 7 play at best, with appreciation as the icing on the cake. It won't happen overnight. I would like to either raise money, or take on some partners, and I'm asking (pleading just sounded bad..) for some ideas on deal structure. I have cruised the area in question daily for the past year, and am about to start direct calling landlords to see who wants to sell. I know, without a shadow of a doubt, they have headaches. Based on some hypothetical math, I think that buy/reno budget on these places should be about $75k/door (purchase price + construction) and will rent for $500/door per month. As the neighborhood turns, rents can and will go up. So call it a cap-rate-turned-land play. I'd like to be paid for finding, managing, etc, and don't feel that it is an unreasonable attitude. Anyone ever tried this? Got a good success or horror story ending? Suggestions? I am well aware that the first one will be the hardest, and don't mind the hustle.

Brad Freeman · Answer

Been doing it for awhile. I would guess you would have to prove yourself first? But ultimately there are people everywhere that want to invest and have cash. What many people lack is finding deals with enough of a discount worth doing. Find a deal (deals) and you bring value.I guarantee nothing...just produce results!I never hold anything. I just get in and out as fast as I can, and if someone wants to fund me, then I split it..otherwise I just do the deal myself. Never lost a dime in 15 years. It's all about how low you can buy it for.

Manolo D. · Answer

Brad Freeman That is the intro part, but I guess I'm interested in how the core for the 50/50 deal, I have tried to make a simple JV, but I couldn't get past the "what ifs" on both parties when they do not perform.

Brad Freeman · Answer

@Manolo D. Answering your JV question: Every deal is different! I use a simple letter of intent that just outlines what the deal is (just a letter that spells out the intent in regular English). You have to trust your partners or they aren't worth partnering with. At least that's how I look at it.

Manolo D. · Answer

Darwin Crawford I guess what I'm trying to figure out is the gap between cap rates. I wanted to know if you were doing a plumbing leak yourself instead of getting someone and paying $50-100/fix, of course, you know what i mean.

Darwin Crawford · Answer

@Garrick Oconnell - sent you a PM back, thanks for reaching out. @Manolo D. - unsure what you mean by "Buzzed" in regards to cap rates. Typically, I bid out the construction portion of each project like anything else, and I either pay myself at market rate less 10%, or take equivalent equity in the property. So far, working alone, I've simply paid myself and my subs like any other project, but of course, I wind up doing some things for "free"....nature of owning property i guess.

Manolo D. · Answer

Brad Freeman I'm really interested in the JV that you have drafted/using. If it is not proprietary, I would like to use them for my construction JV deals. Darwin Crawford Just out of curiosity, do you pay yourself at regular prices (if at all), when you are doing repairs? I'm a bit buzzed at the cap rate difference.

Garrick Oconnell · Answer

I sent you a colleague request please add me I would like to discuss, I am almost sure we are planning on farming the exact area you are talking about.

Darwin Crawford · Answer

@Don Konipol - the move I want to make is to buy these at class C/D pricing, and turn them to class B. The first few buildings will be uphill, but as the neighborhood turns (its not very big) they will get easier, and the rents go up. There is one investor who made the first move in this market, and has done a beautiful job. He has also had very good luck renting them for full price, and quickly. The local beat cops, whom I've met a few of, also would be very supportive of anyone going in to clean the place up. There are class B properties within 1/2 mile, and class A within 1 mile.

Darwin Crawford · Answer

@Don Konipol - correct, I live on the south side of Old town, and spend an inordinate amount of time cruising the streets on my motorcycle with a notepad. I think your assessment is spot-on, and scottsdale is a tough one to make work with lower-end stuff, and especially SFR. I've had great luck with one condo complex in particular, getting 10+ rates with Airbnb and travel-nurse rentals. You just have to hustle for high rents to pay for the dirt, and like you, I've been out-bid more than a few times and just wondered how that person makes the price work. I have a property down by ASU, and yes, college kids are a different beast. I market mine heavily towards nerdy grad-student types and have had far better luck that way. One thought that immediately comes to mind after reading your post is to just sit tight and keep putting in offers at the 10x rent price point. If one sticks, great, if not, keep plugging. My only drawback to that is the laughable returns of having cash in a savings account versus a REI, as I don't doubt it will be a long-ish search. The particular block I want in on is ripe for forced appreciation when cleaned out. The land is simply too close to old town and other attractions to stay the way it is forever, and once turned around, will be gold. The nut I'm trying to crack in the meantime is keeping deals solvent until the land turns, and making some money in the meantime. Being unable to get 5% money means I need to either get lucky, get bankable, or catch a heck of a deal to pay the hard-money guys. @Brad Freeman - I really, really like that line about a houseful of equity. Might have to throw that one up on the whiteboard in my office. Good "mid-day-coffee-break staring material". I'm going to polish up on some buy/rehab/hold cost modeling, to see if there isn't a deal to be made cleaning one out and selling it to another buy/hold guy for some profit. With a little luck, a few of those will net me the cash i need to buy one for myself. In terms of getting a first non-family investor, do either/any of you have an opinion of me showing the books of my current business to potential investors? Good idea or giving away the family jewels? I'm pretty open about what I do in order to make good returns, its not rocket science, just disciplined hard work and relentless organization. Oh, and a very very low tolerance for any tenant BS.

Don Konipol · Answer

@Darwin Crawford, well done in a limited amount of time. You have the necessary assets to do well in the localized small apartment market. I am particularly impressed with the time and energy you put into obtaining a first hand knowledge of your target market. I would assume you are talking about south Scottsdale, just north of Tempe? With the construction boom of residential units in Old town Scottsdale, lower costs alternatives could become popular. However, I worry a little about spending $75K per door for $6K per year rent - for class c apts I would usually recommend no more than 10X yearly rental, all in. At 60K per door you can go short term hard money or outside passive investors - or some combo. 12 1/2 X yearly gross rental doesn't leave enough return to pay anything but low conventional rates, which you say you would not qualify for. Think of it like this, at a cap rate of 10 you can pay interest rate of 9 and make money, at a cap of 6 you can only pay 5 to make the same. 5% is conventional, 9 or more is hard money/investor equity returns. If you had either pride of ownership A property, or hot market appreciation that could change the equation, bad as you say that's years away.Although I invest in A or high B only, I have never been able to make the Scottsdale market work financially. Two of my properties are on Tempe town lake, one across from the ballpark downtown Phoenix, one on the western edge of downtown (Phoenix) and one midtown (Phoenix). Almost bought a small apt project just south of old town Scottsdale, but was outbid and couldn't justify the price. Last I looked, there were a couple of interesting opportunities in Tempe, but then you are dealing with ASU students, and a whole different set of problems.Good luck