All Forum Posts by: Andrew Cushman

@Jonathan Johnson, a few things in regards to what you mentioned:

1.  For a 100 unit property, you should be paying 3-4% fee, not 10%

2.  If you are not keeping the management, on closing day the old management leaves and your management group takes over.  Since it is currently self managed, the current staff are their employees, not yours, so it's the seller's job to relocate or fire them.  You can always make an offer to anyone you want to stay, however it sounds like in this case you need a complete culture change and thus all new staff.

3.  As for the tools, TV, etc. - that should be on the Personal Property List that is part of your contract.  It is exactly what it sounds like - a list of all of the personal property that belongs to the property and is needed for running it.  You need to get that list from the seller, and then verify it is all there when you take over on closing day.

4.  For finding a good mgmt company, I would start by asking the broker something like "who are the top two companies you would hire if you owned this asset?"  I'd then go ask the same question of other brokers who are active in the area.  If the same name or two keeps coming up, then you very likely have found a solid candidate.

Just be prepared - this sounds like a situation where the employees will make off with whatever they can, and probably without the Seller's knowledge.  Prevention is the name of the game, since once it happens you aren't likely to get much back and it's probably not worth the effort anyways.  But keep it in perspective - a few tools and a PC shouldn't make or break a multi million dollar transaction.

Andrew

@Adi A., the CBRE link @Account Closed posted is a good resource. Keep in mind cap rate really only really applies to stabilized deals, and is only one of many ways to evaluate a property. Candidly, I don't even bother with going-in (i.e. at purchase) cap rates, since I only care about the cash-on-cash returns and IRR after I add value. Plus, you'll find the buyers/sellers/brokers can argue all day long about what does and does not get included in the cap rate calculation (for example, have property taxes been adjusted for re-assessment after the purchase?). To me, unless you're buying stable institutional class assets, worrying about cap rate is largely a waste of time.

Andrew

@Charlie Price, see if the seller will file a title insurance claim.  It sounds like his carrier missed this when he purchased the property.

Is that third child still alive?  Could be as simple as tracking them down and paying them $500 to sign.  I've done that one before myself!

Or, as others have mentioned above find a different title company or hire a lawyer yourself.  If you have a good deal, andother couple thousand dollars on a $350k apartment deal is nothing in the big picture if it makes the difference between getting and not getting the deal.

There IS a way to solve this, you just have to go after it hard enough.

Andrew

@Tj Hines, let's say you originally got a $1,000,000 loan, and now your property is worth $2,000,000. Then let's assume the lenders you are working with will go up to 75% LTV on the new valuation.

If you get a whole new loan for $1,500,000 that pays off the existing loan and leaves you with $500,000 cash, that is a cash out refinance.

The other option (especially if your 1st loan has a large prepayment penalty).  Is to get a supplemental.  In this case, your original loan stays in place and you get an additional loan for $500,000 (the supplemental).  It's the commercial equivalent of getting a second mortgage on your house.

Andrew

@Tj Hines, reserves are for exactly what they sound like - a reserve to cover whatever comes up, whether it be an unexpected cap ex project, a change in market conditions, etc.

Ideally, you don't ever use the reserve, and you can return it to investors upon refi or sale.  Always raise all your money up front and start off well capitalized.  Going back to try to get more funds from your investors down the road is harder and never makes you look good.

Underfunding a property is one of the main causes reasons fail with multifamily investments.  Once the property gets tight and has to skimp on repairs, maintenance, marketing, etc. it ofter enters a death spiral that is very difficult to recover from.  Don't let that happen to you or your investors!

Andrew

@Tj Hines, what you are proposing is a syndication, and you are selling a private security once you bring in more than one investor or limited partner.  If you do a deal like this you need to work with a good syndication attorney that will keep you out of trouble with the SEC.  The "upfront agreement" you reference would be your Operating Agreement and Private Placement Memorandum, and those cover just about everything you can think of (if you chose the right attorney ;-)  ).

@Michael Le is 100% correct - Do NOT plan on doing rehab from cash flow.  That is one of the most common mistakes new MF investors make and it is often deadly.  You need to estimate what the property needs and raise the money to fix it prior to acquisition.   Cash flow is for ongoing repairs & maintenance (including recurring cap ex such as carpet and appliances), not repositioning a property.

Also, you don't promise returns.   You will give investors a proforma, which is what you believe will be their profits/distributions after everything is accounted for.  While you will do everything you can to hit those numbers, there is no guarantee or promise you will be able to.

Good luck!

Andrew

@Tj Hines, as @Carlos Flores mentioned more info is needed.  However here are some options:

1.  Agency (Fannie/Freddie) debt.  Pros: low fixed rate, assumable, non-recourse.  Con: must be assumed to avoid hefty prepayment costs.  If you want to pull cash out, you will need to get a supplemental rather than refi.  I just completed a Fannie supplemental on a 96 unit property this past Monday and it worked out great.

2. Bank:  Pros: negotiable/flexible terms, no prepayment penalty or short step down penalty, rates can be low or high, easier to refi out of  Cons: usually recourse, may not be fixed, longer terms (7-10 years) may not be available.

3.  Life Company:  Very similar to bank. Difference is you can get non-recourse for a slightly higher rate.

4. CMBS: generally higher rates and a giant PITA. Some guys use CMBS effectively but I have always found better options.

I regularly use options 1-3 depending on the deal as our strategy is similar: purchase, add value and reposition, and then pull out cash to return to our investors.

Andrew

@Abraham Anderson, how are you going to manage it?  A good third party management company can do it for you, and if they end up managing the property for you than there's typically no charge.  While they are there they will also do a full lease and file audit, which is another key piece of your inspections.  To supplement the management company, I will also have my contractors onsite to crawl all over (and under) the place!

On a side note, make sure you or one of your representatives goes inside EVERY unit.

Typically, if you don't end up buying the property the fee is $50/unit, give or take.  $9,500 sounds really high to me.

Also, @Brent Shryock is correct - the lender will do a PCA and charge you for it.  However this is NOT to be used as your due diligence, but only as a supplement to it.

Andrew

@Gregg Pauly, first, good job wanting to get out there and look at deals.  The more bad deals you look at, the better you'll be at spotting the rare good one.  

Second, to be successful in the multifamily business you must develop strong relationships.  That means getting on the phone with brokers, and having lunch/dinner with them when you are visiting the market.

Don't worry about sounding too green.  No matter how much you read or study and try, they are going to know anyways, so just own it and be candid.  But that's ok - it typically takes months for them to start sending you the really good deals anyways.  By the time you've analyzed a ton of deals, gotten to know the market, and spent months talking to the brokers, you won't sound green anymore (and they'll know that you are in business to stay).

With that said, if you really want to just look at a bunch of deals and minimize discussion time, here's what you can do:

1.  Go to Loopnet and see what brokers have the most listings in the market you're interested in.

2.  Go to those broker's websites, create a login, and sign up to be on their distribution lists.  You'll now receive an email for almost every property they list.

3.  On most sites, you can search available listings.  Find something that is of interest to you.

4.  To get access to the financials, you'll need to sign a Confidentiality Agreement.  On many sites, this can be done electronically without talking to anyone.

5.  Download what you need and have fun!

Here's an example of the type of site I am talking about:

http://www.aranewmark.com/

One thing to note: in many cases, the brokers will reach out to you to see what you thought about the property.  If they do, do NOT ignore them.  Quickly get back to them and let them know you are just getting to know the market and probably won't be putting in an offer.  They will appreciate you saving them the time of continued follow up, and it will get the relationship off on the right foot.

Good luck,

Andrew

@Mike Lynch, @Andrew Johnson makes a good point - a lot depends on whether the property you're looking at is a quick drive away, or on the other side of the country.  For me, almost everything is 2,000+ miles away and 100 units or larger.  So I do everything I can to minimize travel time, but the same principals really still apply locally.

The first thing I do is see if the property and neighborhood fits my pre-determined parameters: how old is the property, type of roofs, high enough median income, low crime, no flood zone, good population growth, etc. That rules out many of them, and you can easily train a Virtual Assistant to check all of that for you if you want. If the property fits all these parameters, then I'll ask for a rent roll, T12 (twelve months of monthly financials), and where the broker expects the property to trade (i.e. realistic price).

Once I have that I'll do a quick underwriting.  For a rehab estimate, I use a generous estimate based on age of the property, any pictures provided, and any broker comments.  If I underwrite the deal and it looks good, then I call the broker and ask a ton of detailed questions so I can refine my underwriting (you listed many good questions). At that point I'll also dive into rental comps, etc.

If after all that it still looks good I'll have a local team member tour it for me.  If their feedback is good, I'll submit an offer and usually I don't physically see a property until I am under contract and starting due diligence.  If I find something horrible during due diligence, I can still cancel and get all my deposit back.

The bottom line is your time is one of the most valuable things you have, so don't waste it analyzing or driving around looking at every property that comes up, even if they are local.  You can easily train someone to do initial screening, and even to go look at properties for you.  At the absolute least, you can hire someone on Craigslist for $25 to go walk through a property and take a ton of pictures for you.

Andrew