All Forum Posts by: Andrew Eherts

@Tammy Wiggins Cap rates are tricky. I'll explain why, but first for Saint Louis:

You'll find newer builds trading at 5.5% cap in Saint Louis, but you will get up closer to 8.5%-9% for the older brick buildings. That is just from a quick search of the area, so you might be seeing something different as you run your own set of numbers. For the purposes of your question, I'd call anything between 7% and 8% "good", but that is purely from a yield perspective and ignores any additional property-level risks. It gives you enough room to comfortably cover debt service if you are leveraged.

Why they are tricky: I think of them like bond pricing in that they are a reflection of the yields demanded subject to asset supply with respect to property-level risks. Really it is just a snapshot of the current capital market in an area without much insight beyond that. If the risk/return profile of a metro does not meet your requirements (such as too much risk for too little yield), you might have to look elsewhere or negotiate prices down. The latter is tough in an environment of falling cap rates, since that indicates there is a lot of capital sloshing around eager to buy things up. 

They are less of a returns determinant and more of a risk-mitigating metric for the tail end when you sell (I always assume they will go up by at least half a point). 

@Lutfi Kadd since @Jaron Walling touched on the harder metrics, I will see if I can touch on the softer ones.

It is definitely tough for me to get out to the properties I want to look at because I am primarily long distance (gross yields in Vegas are sickly...). There is only so much to be gained from checking out the crime statistics to determine a general neighborhood "vibe", so I find I am super reliant on my RE professionals to give me the qualitative rundown. 

Crime is also a tough one, I've found, since they are reported in absolutes, but the real insight comes when it is evaluated relative to the surrounding areas. Any metro has a crime level inherent to its socioeconomic standing, and the neighborhoods are above or below that. For example, Chicago has very high crime in absolute terms, but there are pockets with very low crime relative to the overarching trends in the city. Hopefully that makes sense. 

I really like bestplaces.net -- they seem to be good at amalgamating a bunch of data and can go down to the zip code.

@Tesho Akindele thanks for the great resource! I'll be sure to incorporate this into my analyses going forward.

Just for my own curiosity's sake, I sometimes see metrics like crime to be relative to the areas around them (e.g. a higher crime rate in a general sense that is actually lower than the surrounding areas in the metro). Do you evaluate these on absolute terms in comparison to all markets or in relative terms compared to the rest of the city?

Hi there! Any "gains" from financing are tax free, since those gains are really just a loan against the property and are not considered to be income. If they taxed you on the refi and again at sale, they would be popping you twice for the same thing. You should be fine on that side of things!

Hi all!

I've seen many RE hedge fund managers (especially the global ones like Blackstone) start using the bottom up approach to market analysis. For those of you who might not have heard of this, it is analyzing specific markets (in my case zip codes) in isolation. This can give insight into where fundamentals are strong, greatly reducing the number of markets you have to watch. Being numbers-driven, I believe I worked the start of a solution for which I am seeking a bit of input if you'd be so kind!

Specifically, using a quick run through with Zillow data (who is surprisingly accurate on their median values and median rents), you can ascertain median gross yields across all zip codes, rental growth, and appreciation. Setting some constraints, like gross yields between 10%-15% and elevated appreciation over the 5-year and 10-year moving annualized rates, you'll find zip codes with promising price indexes and appreciation momentum (indicating the expansion phase in the cycle) over their moving averages. 

However, I've stopped there. I wanted to ask other out of state investors what key performance indicators they evaluate when figuring out where to deploy next. If you had this list of metros, what would be the next metrics you'd want to evaluate to narrow further so you can start developing a team? 

Thanks in advance for your input!

Hi @Trey Bagby it's a good question, and I've given it a bit of thought. I honestly think it is too easy to get a license. Knowledge standards are pretty low, startup cash requirements are low, etc. That remaining 13% of agents are probably those who would still get a license if the standards were raised considerably.  

Hi @Jason Duckett it's great you found your way here! It can surely be overwhelming, and that discomfort will get more... comfortable?  I am not sure where you are at from a knowledge standpoint, so I'll assume the bare bones for the sake of completeness. If this is too much, please excuse my long-windedness. There's just a lot to unpack.

One thing I cannot recommend enough: read, read, READ. I try to pack away 50 pages or so on a new topic per day, since the unknown unknowns are just way to much. I have even gone as far as grabbing a master's in commercial real estate finance to get my head around that aspect. Starting at zero, I recommend The Book on Rental Property Investing by Brandon Turner. The other books on Bigger Pockets publishing are great as well, and I often find myself perusing the bookstore for what piques your interest.

The Bigger Pockets podcast is a fantastic place to hear real life stories of how others went about the journey. Kill silence on your drives, walks or at work checking out new topics in there. Invaluable insights can be gained by doing this, and it takes very little effort besides critical listening and implementation. 

You said you are living in spreadsheets. I can relate. Great excel skills will go lightyears when underwriting potential deals. If you need any pointers on underwriting and analysis--that's my strong suit and would be happy to go over whatever you come up with questions on. Analyze one deal per day, even if the numbers are crap. You will get in the correct mindset and begin recognizing patterns that will make decision making go lickety-split. 

Lastly, tell EVERYBODY who asks or will listen what you are doing. I've opened up doors in private equity raising just by telling people that I am raising money. The same could be said about finding property off market--you could be the solution to somebody's problem, and they need to know it!

Wishing you the best of luck!

Hi @Toby Khan! I can tell you this is common practice where I am. Just to clarify, when you say deposits are you referring to them holding rent revenue or the actual security deposit? 

We hold a $250 reserve per door (I personally think a larger reserve of working capital is necessary, but that's another discussion). There are always costs when the tenants move out, and if they caused damages, that needs to be paid from security. We hold rental revenue if we know there is going to be a big expense like an AC replacement or a repipe. Owners are always told first so there are no surprises, but I think what you described above is standard practice, at least where I am.

@Peter Morgan I would hate to make a formal recommendation because I am not too familiar with what moves in your market (and who knows I could be super incorrect!). I think this is a great question for the listing agents you are interviewing, as you mentioned. If they have experience working with investment sales, and hopefully they do, they would give the best indication. 

I'm sorry that the most I could do was share my own experiences here. If only there were answers that worked everywhere...

Hi @Peter Morgan this is really a judgement call. Our property management firm has sold homes tenant-occupied only to have the tenants booted out at lease expiration. Some investors and property managers require that they underwrite their own tenants so they are in control of their risk without necessarily trusting the screening skills of the previous owner/management. Others want something turn-key and occupied. You are really catering to two different potential buyer pools and your choice may isolate one over the other. If you err on the side of tenant-occupied, the new owner can just not renew them at expiration if they want to put their own tenants in. So not much of loss on their part unless the lease has 11 months left.

I am interested to see what others have to say. There are pros and cons to each. I can say from the tenant's side, tenant-occupied sales can be invasive and difficult for them between appraisers, inspectors, repair requests, etc. We just went through one of these, and they are definitely going to get screwed when it comes time to renew even though they (graciously) bore the constant appointments and were very accommodating.