Where do we go from here - advice on how to scale our business

Question

Hi All,

Looking for some advice from the BP community!

Background on our journey -  It's been 5yrs since we started our real estate journey in NYC. We purchased our first multi property at the end of Dec-17 and added a new property every year and half. We had some major set backs along the journey - one resulting in owning a vacant building for one year. We have bounced back since.

Portfolio key stats - We currently run a 9% Cap Rate in NYC with a FCF of $177K on an Unlevered basis-forecast*. We will look to maximize our portfolio (increase rent, property development, etc.) over the next year and half to a reach a 13% Cap Rate with a FCF of $264K+. We currently own 10 rental units split across 4-properties. Our portfolio value will come in shy of $4M (based on our valuation and market comparables) with a debt to equity ratio of 30%:70%.

As we enter a high interest environment with an impending recession, how do we maximize our FCF and equity value on our portfolio? We are interested in purchasing larger multi-family buildings (6+ units) / mixed-use (commercial + residential building) / Airbnb type of acquisition. We are also exploring investing in other states where our dollar will go much further.

Any advice/tips are greatly appreciated!

Dan Cioaca · Answer

@Munim Jalil

First, congratulations on 5 years of success in one of the hardest property/landlord markets in the country! I live in NYC and couldn't imagine being a landlord here with some of the horror stories I've heard, let alone through covid. The professional tenants and lawmakers seem to be in cahoots, and I've steered clear.

Regarding your question, can you clarify your goals? You said you want to maximize FCF and equity value, but you don't want to add leverage, so why does equity matter? As far as FCF, there are tons of good books out there for tips and tricks, including some BP books, and they basically come down to increasing rents, reducing expenses (especially utilities, possibly with RUBS), and reducing vacancy.

If you have a proven formula, stick with it until it stops working. As you expand, I'd focus on leveraging your existing core competencies and maximizing economies of scale.

+ core competencies: When considering things like commercial or airbnb, ask yourself how much of your existing operation you can leverage versus which gaps you need to fill. Landlording can be quite different for long-term tenants versus businesses or STRs - just consider citywide vacancy rates for commercial versus residential. My barbershop's landlord raised rents on them 5 years ago so they moved next door and the old space is still vacant because it was perfect for a salon and not much else, and nobody wants to move next door to the competition.

+ economies of scale: if your buildings are clustered, contractors/handimen/turn-crews have local economies of scale, but you'd need a duplicate team in a different market, including lawyers, agents, etc. It sounds insignificant, but even little things like wording of leases, notice periods, how you handle security deposits, the dispute process - it can all be different and now you need manage two separate processes. If you do expand geographically, find someone who knows that area and figure out if you can realistically achieve local economies of scale in that market.

Your under-leverage strategy makes sense to minimize risk, especially when starting out and if you have plenty of cash available. That said, I'd be open-minded as things change - a year ago I locked in a 2.75% long-term mortgage rate on an investment property and now the mortgage is as much of an asset as the property.

I personally focus on Connecticut because it's cheaper to get to scale on units and I prefer the demographics and landlord/tenant laws. I've also found a few areas that I think are less likely to exhibit the boom-bust market cycle, which I value given the dark clouds in the economy. Right now I'm looking at a 3-unit with a purchase price of $350k, ARV of ~$700k, should cash flow nicely even with 6% mortgage and 75% LTV, and I can pick it up for less than $100k down. For me, this is a faster path to more units and greater diversification.

Contact me directly if you want to learn a bit more about where I'm looking and I'd be happy to tell you what I'm seeing. I'm also be very curious how in the heck you were able to make NYC work.

Munim Jalil · Answer

I have, but haven't figured out exactly how to start - but love to learn more about how to get involved in Midwest investing!

Caleb Brown · Answer

Nice work! Well there's a couple options. If you want to buy more properties I'd look in a cheaper area like the Midwest. You could probably buy 2-4 per year. Once you get a portfolio of 8+ you could 1031 into multi family. Would be a steadier play but Midwest is a consistent market. On your current properties, I'd hold. Keep improving them. If you wanted to leverage the equity you can refi into a portfolio or 1031. Either way you are doing great. Just need to decide what path/market you want to pursue. Happy to chat on KC :)

Mo Karim · Answer

Did you consider investing out of state? You can invest in Midwest, B class neighborhoods and scale very quickly. I'm originally from NYC too and think scaling at a fast rate will be tough there, but not impossible.

Munim Jalil · Answer

@Wesley Sherow First, thank you for advice! I would definitely love to learn more about investment opportunities further upstate in NY. Unfortunately, we are not looking to leverage our portfolio at the moment since our cash at at hand will enable us to purchase a property every year. Don't get me wrong if there is a property that we believe has some great value, returns and the numbers make sense we will leverage our book - these deals are much more difficult to come by. I also agree about your comments around NYC investing, NYC is in a market in itself from the prices, tenants to city/housing regulations.

Wesley Sherow · Answer

@Munim Jalil Wanted to chime in here. Would you consider taking maximum leverage on these properties? A refinance at this point for these stabilized assets might be a good play so that you can take the funds and roll them into the next deal. I personally focus on the Upstate New York market, though I have a lot of friends who invest in the NYC area. 9% cap rates however in the NYC area is in my understanding a pretty great return in a market that's more-so known for lower returns and higher stability. It always astounds me at the small quantity of units that's referenced in deals worth $1-2M+. I am currently refinancing on a similar property, however upstate. There I purchased a 10 unit for $735k, and after about $250k down and another $100k in renovation budgets, we just got a term sheet at the $1.5M evaluation. If you'd consider investing further north in the upstate NY region, I could tell you a bit about what the market is like up here. More notably, it's a lot more effort, but the returns for a skilled investor are exceptional. Just recently I entered into contract into a similar scale of deal. 12 Apartments spread between Troy and Cohoes, NY at about $50,000/door. The ARV in this market is approximately $120-140k/door, so we are seeing another good one here in terms of potential.

The thing that sets the NYC market a bit apart from other markets, is that it's much easier for RE to remain passive even up to 10 units or so with large quantities invested. In younger markets you'll be purchasing north of 100+ units for the same amount of cash in the deal as you have there - which never ceases to amaze me.

Munim Jalil · Answer

Let provide some additional color on our portfolio - we have $1.3M in owner equity + $1.5M  appreciated equity value for roughly about $2.8M. We purchased all properties in distressed conditions, directly from the owners and off-market. These are multi-family buildings (1-4 units) where we expect the rent roll to increase over the next 5-10yrs + additional appreciation of the underlying assets (we have not priced this into our valuation, we are relatively conservative - $4M is what we expect if we unloaded our portfolio today). We did not raise capital nor did we did we syndicate our deals. We are not looking to sell our portfolio but rather add to it or leverage the strength of our book for future acquisition.

Jim Pellerin · Answer

@Munim JalilSo let me understand. You have $2.8M in equity in duplexes (guess)? I would sell everything and go and buy a $10M+ apartment building. Or do your own syndication and raise a bunch more caoital and buy something larger. That's how you need to scale.

Where do we go from here - advice on how to scale our business

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