CLOSED on a 98-unit TODAY!

[Ben Leybovich]

So, we had another thread going for a couple of weeks here. And this is not yet a success story, since a lot of work needs to be done to make it a success. 

But, today, @Sam Grooms and I closed on this 98-unit in Phoenix.

This is a syndicated private placement acquisition. @Jillian Sidoti and her firm, whom I highly recommend, helped with the PPM-related docs. 

The unit mix includes studio, 1x1, 2x1, and 2x2 lay-outs. The asset was constructed in 1984, and has by and large been un-touched on the interior of the units. However, the bones are very good, the unit sizes are attractive within the sub-market, and the location is experiencing very significant gentrification.

This was a mom-an-pop owned property. Rents are low even for as-is condition. Our Cap Rate on the way in is a bit under 5%. Our expected Cap Rate after the re-positioning in Y3 is 8.3%. Obviously we feel that there is a lot of upside on the rents. 

We have a $1.4M renovation budget, which includes complete reno of the interiors, as well as close to $500,000 in the common areas.

I could talk for hours, but I won't. I have a feeling me talking for hours might happen on the blog :) 

But, feel free to ask questions - I won't tell you everything, but I'll do my best to paint the bug picture.

[Sam Grooms]

Originally posted by @Adam Mauck:

Congratulations!  I'm a native Phoenician and have been investing here for the last 25 years.  It looks like a great property in an obviously hot market, pardon the pun.  Can I ask what part of town and approx. price per unit?  I have been looking for something similar for a while now. On top of a great looking property you bought from a non institutional owner which is fantastic. 

Thanks,

Adam

Adam, we're right next to Grand Canyon University, which was a huge draw for us. You might know this already, but that area is going through some major changes right now. After having 1,000 students enrolled in 2008, the university had 17,500 on-campus students in the spring of 2017, and over 20,000 in the spring of 2018. In 2017, GCU was granted membership into Division 1 athletics by the NCAA. In 2018 (this summer), GCU received approval to return to non-profit status, allowing it to accept philanthropy and pursue grants. The university is spending hundreds of millions of dollars on construction projects in 2018 alone, including new classroom buildings, parking garages, a restaurant, athletic building improvements and library expansion. It's all part of a $1 billion construction project that GCU is in the midst of. 

Ben will likely tell me that I'm giving away too much information here, but I can't help it. I'm bullish on this area. The best part is, we didn't factor any of that future upside in to our underwriting. 

[Jeremy Mattson]

Congratz  @Ben Leybovich & @Sam Grooms !! Looks like an amazing place

[Ben Leybovich]

Originally posted by @Adam Bonoff:

was curious about the actual numbers on a deal like this.  How much was the capital raise and what was put down, interest rate, etc.  can you share the deal the investors get.

Thank you 

Adam 

Adam - I think we've posted the general data points prior. But, $8.15 was the acquisition. The loan is a bridge loan LIBOR + 350, at basically 75% LTC, including the renovation. Caps cost us about $50,000. 

Investors have an 8% cumulative pref COC . We did a 70/30 split after pref on CF and capital gains, and we did not do hurdles or escalations on that (may syndicators do, and I don't rule in out, but not on this deal).

Hopefully, that answers your question.

[Sam Grooms]

Originally posted by @Billie Miller:

Congratulations! My husband just quit his job to syndicate apartments (and by that I mean underwrite deals all day every day...).

Would you be willing to share your thoughts on your exit cap rate? Not so much the specific numbers but your assumptions in forecasting it? I realize that the entry cap rate on a value add doesn't really mean much. But since you're looking out 24-46 months, how did you do that?

Our method (not all that scientific) has been to look at what similar, stabilized properties are trading at and inflate that.5-1% (depending on the market) just to be safe.

Billie, I was in the same boat your husband is in. I'm pretty sure my wife thought I was crazy leaving my career as a CPA, to then sit in my office at home and underwrite with Ben all day. 

To provide a little more color on our exit cap: Obviously interest rates and cap rates generally follow each other. Not in sync, but in the same direction. What's interesting is that even with the recent uptick in interest rates, we haven't yet seen that in multifamily cap rates (at least not here in Phoenix). That could mean the market is more bullish on apartments now, than when they first started raising interest rates, thus offsetting the effects of the interest rate increases. The fundamentals are certainly there to back that up. But, what if its just a delayed reaction? To be conservative, let's just add that interest rate increase to our cap rate. Then, we looked at the Fed's goal of 3%. We're still about 1% under that right now, so you'd expect interest rates to raise another 1%. Let's go ahead and add that to our cap rate, too. Like I said, we haven't yet seen cap rates start to follow interest rates, so this approach gives us a lot of room to outperform our projections. 

[Sam Grooms]

Originally posted by @Matthew Cain:

@Ben Leybovich That is awesome! I'm from Phoenix area and love the market. What books or resources would you recommend for newbies who are interested in investing in multi-family?

Matt, Ben mentioned Dave Lindah's book, Multifamily Millions, but there are some other good ones, too. 

I really like The Complete Guide to Buying and Selling Apartment Buildings by Steve Berges. Not a lot of fluff, just a lot of teaching. 

Then there's The ABCs of Real Estate Investing by Ken McElroy. 

Those three books will introduce you to a lot of the basics of multifamily investment. 

[James Dickens]

@Ben Leybovich and @Sam Grooms Congrats guys, Can't wait to see a Blog post about this!. I went back through the 6 pages and created my own highlight sheet :) Thanks for sharing what you have so far on this deal. It certainly helps people like myself to understand the process a bit better with real-world examples along with the reasons behind the decisions included. 

[Sam Grooms]

Originally posted by @Ben Leybovich:

Originally posted by @Adam Bonoff:

was curious about the actual numbers on a deal like this.  How much was the capital raise and what was put down, interest rate, etc.  can you share the deal the investors get.

Thank you 

Adam 

Adam - I think we've posted the general data points prior. But, $8.15 was the acquisition. The loan is a bridge loan LIBOR + 350, at basically 75% LTC, including the renovation. Caps cost us about $50,000. 

Investors have an 8% cumulative pref COC . We did a 70/30 split after pref on CF and capital gains, and we did not do hurdles or escalations on that (may syndicators do, and I don't rule in out, but not on this deal).

Hopefully, that answers your question.

Also, the raise was a little over $3.5M. The caps Ben mentioned are the interest rate caps, since its a variable rate. They're a type of hedging instrument.

[Billie Miller]

Thanks for the cap rate insights!

@Sam Grooms, my husband used to be a lobbyist for the multifamily industry...until he realized that's the wrong side of that industry. It's much more lucrative to be the people paying the lobbyists :)

[Adam Mauck]

Hi Sam,

I agree completely! If you would have told me to start buying in that area 10 years ago, I would have just blown off the suggestion.  That's what makes Real Estate such an incredible career!  I have become better at speculating the longer I'm in the business, but it's still a roller coaster.  I had a friend start buying in that area about 6 years ago and he had no idea what he was getting.  I say, "buy it if it feels right."

Adam Mauck

[Rhonda Wilson]

@Sam Grooms Thank you for sharing some of high-level details from the IREM report. I agree that it would be unfair to IREM to share substantial details of what it included in their report. 

How do you inform people about offerings? We are still doing our own deals, but we're not as young as we used to be. We've thought a lot about our "exit" strategy, meaning that we would like to move more towards passive investing. Do you keep a mailing list of contacts? 

Am I correct in assuming that your deals are not structured for 1031 exchanges? 

[Ben Leybovich]

Originally posted by @Adam Mauck:

Hi Sam,

I agree completely! If you would have told me to start buying in that area 10 years ago, I would have just blown off the suggestion.  That's what makes Real Estate such an incredible career!  I have become better at speculating the longer I'm in the business, but it's still a roller coaster.  I had a friend start buying in that area about 6 years ago and he had no idea what he was getting.  I say, "buy it if it feels right."

Adam Mauck

There is totally something to be said for "buy it if it feels right". I went to college in Cincinnati. I am used to the urban feel. Every time I am on-sight, I feel at home - I know there are people who will want what I've got, and I know who they are.

I don't really care how good the numbers look. If I don't feel it - I don't buy it, period! 

[Lynel Johnson]

@Ben Leybovich Congratulations! What a great feeling! Hoping all goes well for you in this venture! ~Lynel

[Sam Grooms]

Originally posted by @Rhonda Wilson:

@Sam Grooms Thank you for sharing some of high-level details from the IREM report. I agree that it would be unfair to IREM to share substantial details of what it included in their report. 

How do you inform people about offerings? We are still doing our own deals, but we're not as young as we used to be. We've thought a lot about our "exit" strategy, meaning that we would like to move more towards passive investing. Do you keep a mailing list of contacts? 

Am I correct in assuming that your deals are not structured for 1031 exchanges? 

That's correct, we aren't structured for incoming 1031 exchanges. On the exit, we'll have a vote of all investors, and if at least 50% of them want to 1031 exchange into a new property, those investors will have that opportunity. 

It sounds like you may be starting a similar transition that Brandon Turner is doing, with going passive. 

On this deal, yes, we reached out to investors that we knew were interested directly. However, we just opened up a new investor portal, where we'll put future deals, and then the portal will email them a notification that there's a new deal. The portal is fairly sophisticated. We used it for the subscription process on this deal, meaning we had all of the documents in there and everything was signed directly within it. Investors will be able to see monthly financials, quarterly updates, and their K-1's directly in the portal. It'll also give them real time performance metrics on their investments, like cash on cash, ROI, IRR, etc.

[Jeffrey Almonte]

@Tommy Hoang and I are excited to have partnered on this deal. @Ben Leybovich and @Sam Grooms are some of the most hard-working people we know, success is well deserved!

[Sam Grooms]

Thanks, @Jeffrey Almonte, glad to have you on board! 

[Ben Leybovich]

Originally posted by @Jeffrey Almonte:

@Tommy Hoang and I are excited to have partnered on this deal. @Ben Leybovich and @Sam Grooms are some of the most hard-working people we know, success is well deserved!

That's a nice thing to say, Jeff. Thank you!

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[Andrew Bosworth]

@Ben Leybovich & @Sam Grooms

Congrats on the deal!  Great area of town.

For underwriting purposes, did you develop your own calculator or buy something "off the shelf"?  I'd be curious to know what your go-to tool is.

[Sam Grooms]

Originally posted by @Andrew Bosworth:

@Ben Leybovich & @Sam Grooms

Congrats on the deal!  Great area of town.

For underwriting purposes, did you develop your own calculator or buy something "off the shelf"?  I'd be curious to know what your go-to tool is.

Thanks, Andrew.

Definitely nothing off the shelf. I've seen 3 of the more popular calculators out there, and I'm not a fan of any of them.We each developed our own underwriting model. We underwrite each property separately and then compare. 

My problem with the packaged calculators is most people using them don't have a complete understanding of what's happening in them. You need to understand each formula and all of the logic that goes into it, to be able to make a decision based on the output. You need to understand its limitations, and how to adjust it (the model, not the inputs) for each deal. At that point, why would you need someone else's calculator? 

[Ben Leybovich]

Originally posted by @Andrew Bosworth:

@Ben Leybovich & @Sam Grooms

Congrats on the deal!  Great area of town.

For underwriting purposes, did you develop your own calculator or buy something "off the shelf"?  I'd be curious to know what your go-to tool is.

I'll take @Sam Grooms 's comment even further. The real issue is not that people don't understand what's happening in the calculators, they don't understand the dynamics of what's happening with the asset! 

I've written so many articles on the BP blog over the years addressing this very issue. Most people see the property/opportunity through the focal point that is the calculator. This is backward - we see the property first, and then boil the dynamics down to the inputs. 

The calculator is only as good as the inputs you provide, and no one teaches those inputs (except for me, of course). The calculator, then, should be a reflection of one's ability to internalize the dynamics within the investment. The more one can "see", the more precise the inputs become, the more inputs it takes...

So - the reason there will never be one size fits all is not because all property is different - it's because all investors are different. We see things differently. We allocate importance to different elements. Etc.

Makes sense?

[Sam Grooms]

@Ben Leybovich, I love it. These last two posts clearly show the differences in how we think, and which one of us has a Bachelor of Science and which one has a Bachelor of Arts. 

[Tim Puffer]

@Ben Leybovich and @Sam Grooms - Awesome job guys. Very exciting! Looking forward to seeing how the renovations turn out.

[Raul Rodriguez]

@Ben Leybovich Congratulations, Ben!

[Jeffrey Holst]

I'll second the complete guide to buying and selling apartments.

Originally posted by @Sam Grooms:

Originally posted by @Matthew Cain:

@Ben Leybovich That is awesome! I'm from Phoenix area and love the market. What books or resources would you recommend for newbies who are interested in investing in multi-family?

Matt, Ben mentioned Dave Lindah's book, Multifamily Millions, but there are some other good ones, too. 

I really like The Complete Guide to Buying and Selling Apartment Buildings by Steve Berges. Not a lot of fluff, just a lot of teaching. 

Then there's The ABCs of Real Estate Investing by Ken McElroy. 

Those three books will introduce you to a lot of the basics of multifamily investment. 

[Jeffrey Holst]

Also congrats to both of you.  10mm is a big deal for sure.  Hope you hit your 15mm exit position.

[Ben Leybovich]

Originally posted by @Jeffrey Holst:

Also congrats to both of you.  10mm is a big deal for sure.  Hope you hit your 15mm exit position.

Thanks, Jeff. And we'll hit it, the only question is when...and even that's not too much of a secret. If the Cap Rates hold - in 3 years. If Cap Rates inflate, then longer. The rest is an automatic process...