CLOSED on a 98-unit TODAY!
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.
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We were able to get it under contract before the call for offers went out. That helped a lot in preventing the price from getting bid up.
Most of our investors were accredited, but it was a 506(b) offering open to sophisticated investors, too.
Phoenix is our top market right now, but we're also looking in other markets that have the fundamentals we like to see, and where we have local connections. I'll let Ben decide if he wants to share what markets those are.
@Sam Grooms or @Ben Leybovich,
Thank you both for sharing how these things work with all of us. Quite the inspiration on many levels, from building relationships, building your reputation, how all the different players can benefit for each roll etc....
On a deal similar to this, what is the typical minimum investment you would be looking for from an investor in a round number? as in 50K, 100K or 500K?
I see that you do not like the idea having 1031's come into the deal which is understandable. What about 'Self Directed' investments, either SDRIA or SOLO401K?
Thanks, Dan Dietz
Dan, thanks for the kind words. The minimum investment on this deal was $50K. This number will usually change with the size of the raise. We raised over $3.5M, and to be honest, $50K was probably too low. Think about the math. If every investor would have done the minimum, we'd need 70 investors to raise $3.5M. That's a lot of investors in a deal.
I would love to be able to take 1031's, but they just don't make sense in a syndication. We'd have to structure it as a TIC or DST, per the tax code, and the cost/benefit isn't there for the sponsor. We do take self-directed investments, and we had quite a few on this deal.
Dan, it's not that we don't like 1031. It's that taking 1031 money requires a DST, which is a trust, and as per stipulations within a trust the managerial functions are layered with scopes and restrictions. What we do is value ad, we create value by making strategic improvements. However, doing so requires us to stay nimble. Working within the confines of a trust makes this difficult. Thus, you will mostly see Class A syndication done with a DST, but those are more coupon investments without the value ad.
SOLO and SDIRA are where a lot of money comes from for these syndications. And the minimum buy-in is driven by the size of the stack. This one was $50,000, though lots of investors came in with more at $100,000. And few higher than that.
We raised $3.5M for this, and $50,000 minimum was manageable. For a $6M raise I would likely cut off at $100,000 minimum.
Hope this helps.
Joel, I'm not completely sure what you're asking, so let me know if I don't answer your question.
When you're forecasting cash flows for your investors, yes, you'll want to subtract your management fee from the property's cash flow. This will give you distributable cash flow, or investor level cash flow. On the acquisition and exit fees, you'll need to include these as part of your closing costs for their respective transaction.
Haha @Sam Grooms - we should probably coordinate so we don't both answer the same questions :)
Guys, this last question relative to the minimum buy-in was interesting. This is neither here nor there, and might even belong more on the blog, but there is but 1 guy on BP whose opinion I value so much that he can actually change my mind, and it's @Brian Burke. Pretty unheard of, actually...
Anyhow, a long time ago I asked Brian - how big of a deal can I do? To which he replied - how much money can you raise...? Most beginning syndicators are lucky to raise $300,000... If you have no stack, you have no deal.
Lots of you reading this post wondering what it's going to take for you to be me - the answer is a question:
How Much Money Can You Raise?
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OUCH!
This hurts!!!
Three years ago, @Ben Leybovich shouted at me, "WE (Ben and friends of Ben) DONT BUY FLAT ROOFS AND BOILERS IN OHIO!!!"
So I promptly bought a complex with three flat roofs and three boilers... in Ohio. : )
Fast forward to 2018 and the ugly truth is that 2.5 years into ownership, the flat roofs and boilers reign supreme over the big fat CALPERS pension that I worked 25 years to earn.
Financially, 2.5 years > 25 years. : (
I am thankful that @Ben Leybovich skedaddled to The Valley of The Sun leaving plenty of the flat roofs and boilers behind here in Ohio for the rest of us, as was his obligation in accordance with Leviticus 23:22.
Okay @Ben Leybovich .... fire away !!!!
and congrats to Ben and @sam grooms . I hope that this proves to be a long and fruitful friendship/partnership for you two guys and everyone who worked with you on this deal.
DL
Hey @Ben Leybovich, Congrats! Great looking property, good luck and can't wait to see the process!
John
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just a refernce to the most famous saying that Ben seemed to coin over the years 30k pig in Ohio.. LOL.. I suspect he bought a low end house one time and it was not fruitful.. but hey now the sun is shinning and they are on to bigger and better things..
- Jay Hinrichs
- Podcast Guest on Show #222
The most important thing in real estate - quality. You got that, everything else falls in place. This, as you've eloquently alluded to, Jay, is definitely not a pig :)
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ya it looked nice in the pics and I think the desert offers some advantages with weather other than some heat issues..
still waiting for that donation from camp Ben.... don't forget us now...
- Jay Hinrichs
- Podcast Guest on Show #222
DL, so happy things are working out. However, that's like saying - after 2.5 years my marriage is still great; we love each other, never fight, and intend to be married forever...lol
Talk to me in 20 years, and if you still love that boiler and those flats - God Bless, and I'll eat my words...
In the meantime - I went into my branch of Wells Fargo the other day. I bet the building couldn't be more than 5 years old. There were tiles handing from the ceiling, and security cameras hanging off of them. The teller tells me - it rained and this happened. They are coming to fix them...sometime
DL - this is Arizona flat roof which never freezes...hhaha
There is a complex I am eyeing, but it has flats. Man, I dont know if I can cross that line...
Jay, statistically it costs on the average about $1,000 per door per annum less to run multifamily in the South-West than Mid-West. There are many reasons for this, but that's beside the point.
Where do I send the check. It'll be a couple of weeks, but you will get my donation!
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aheroshome.org instructions are there and we deeply appreciate the support.. cant wait to give that first home away to the deserving first responder..
- Jay Hinrichs
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I think the cause is fantastic. Give me a couple of weeks. I am looking forward to sending that check :)
Ben
Congratulations on the new deal! Curious if you had any debt service constraints going in, did you have to raise additional capital due to a lower LTV, or is a bridge different than agency on DSCR? Clearly there is upside potential with that cap rate spread, just wondering how the lender looked at it with current actuals so relatively low compared to future potential.
Also, how conservatively do you model the fixed rate agency debt interest rate upon refi out of bridge years 2-3 and cap rate at that point?
Good question, Shawn, and the answer is really a series of articles. Just briefly, no - the DSCR is not the same here as in GSE. Requirements are lower because they understand that this is a re-positioning. The LTV ended up being around 75%, and they financed the renovations. They considered rents, but their appraisal reflected the re-positioned rents and included escalation annually. The appraisal proposed weighted blended rent was within $3 from our underwriting, so basically the same. And yes - the lender was less interested in what is there today, and more interested in validating after-reno numbers, which they obviously did or we wouldn't have gotten the loan...
The interest rate is a difficult questions, not only because we don't know how conservative to be on the rate itself, but we don't know what impact the rate will have on the Cap Rates. We inflated both, and we think it's conservative enough, but if not it's important to remember that the current model liquefies a good amount of the invested equity, so if we need to accommodate higher rate or Cap Rate all that means is that we'll be able to return less capital. While that's not desirable and we'd certainly take a bit of a hit on the IRR, I see it highly unlikely that we won't be able to roll the existing debt. Stress tested the crap out of it :)
Congratulations @Ben Leybovich & @Sam Grooms on the successful close. What you say above is pure gold!!
Looking forward to the updates and wishing you nothing but the BEST!!
Vinit - thank for your help and support! We are going to knock this one out of the park!
And then a few more :)
Congratulations! I've also spoken with Jillian a few times. She truly knows her stuff!
Thank you!
Congratulations - very exciting.