All Forum Posts by: Anthony Chara

Depends on the purchase price. An NOI of $3700 a month ($1850 per unit) seems awfully high. How much is the rent? To have an NOI of $1850 per unit, the rent would need to be $3700-$4500 per month per unit.

Have you factored in Taxes, Insurance, Utilities (assuming the resident pays for them, you still need to cover them when vacant), Management (even if you're going to do this yourself, you still need to subtract 10% of collected rent), Maintenance & Repairs/Reserves?

How close is the complex to any Theme Parks, colleges or business centers? You could potentially fix them up and rent them out on the AirBnB market and do very well. An alternative to a hotel for some folks.

Make sure that in order to get the 'lower costs', that the difference isn't being added into your loan balance. Sometimes lenders will make it appear you're getting a better deal because you don't have to come out of pocket on the front end, but they add those costs into your 'cash-out' refi. If that's the case, find out what the estimated monthly P&I will be on both loans and then see if it makes sense to stop the first one. 

Certainly, lower loan costs are a good thing, but make sure you're getting the whole story. Not saying the second lender is doing that, but you need to check so you're fully informed.

This is common practice on some of my properties. Nothing special needed in the lease except an addendum that explains how the monthly billing will work. i.e. If the electric was $2000 for the month, how do you determine what that resident's amount will be for the month? Is it based on square footage of their unit compared to the entire complex? Is it based on number of occupants? Is it based on number of bedrooms? Once you figure that out (btw, I use the sq. ft. method), give it to your attorney to draft the addendum.

1 other note, I wouldn't lower the rent the the lowest. Using your example, I might only take it down to $625-$650. 

Putting the amount of utilities back onto the residents is a great way to get them to realize they are in control of their costs. If they see the monthly rate dropping with some marketing by you to conserve electricity/water, it may have the added benefit of actually costing them less to live in your property than it used too. In properties where we instituted a flat fee for water ($10 for a 1 bed, $20 for a 2 bed) our water usage went up!!!!  I think that was due to the 'buffet' mentality. If I'm paying for it, I'm gonna use it!!!  However, if its variable and you can show them the monthly cost and calculation, they will get it that the less they use the less they'll pay. The more they use the more they'll pay.

Having said that, be aware that you will have turnover. Some residents don't like change of any kind. As long as you budget for some extra vacancies, you'll be okay.

I look for a minimum of $100 per month per unit in cash flow. Of course, cash flow is after all Operating Expenses and Debt Service are paid. Certainly, I do look for higher, but this is my minimum in order to even submit an offer.

Debt Service Coverage Ratio (DSCR) is the 'cushion' a lender is looking for to make sure you have ample cash flow after paying your Debt Service to cover any surprises like extra vacancy or repair costs. Typically, a lender will want you to have at least 20% more than your annual debt service to reach your bottom line in the form of Cash Flow. In other words, if your annual Debt Service for P&I is $5000, then you should have at least $1000 (20% of $5000) leftover after all of your operating costs are paid going into your pocket as cash flow.

@Flavio Zanetti's formula above is correct. Anything less than 1 means you're losing money and generally, most lenders outside of hard money, won't even give you a loan. Using that formula, banks want to see a DSCR of 1.2 or higher. .2 would equal 20% more than your Debt Service which is what I tried to illustrate in the paragraph above.

Hey @Daniel G., here is a potential paragraph. Suggest you run this past your attorney as there maybe additional concerns they have over the wording:

The value of any preferred equity interest in the Company (as listed in
Schedule A), will be calculated at the time of the buy-back, such that, in total,
the Company will distribute a return on the initial capital contributed for the
preferred equity interest, that equates to an annual return from cash
distributions and the proceeds of the exchange of the Member interests of
25% per annum, or the annual cash distribution plus 10% of the capital
contribution per annum, whichever is greater. Also any unreturned capital
contributed for the preferred ownership interest will also be returned to the
Member. 

I cannot comment any further on how or why you would use or implement this further with your investors. Please consult your attorney as to whether or not this information is valid or logical for your potential investors/any deal you're working on.

I'll check with them to see if they're willing to share their calculation and get back to you.

What @Jon Holdman said!  Your SEC attorney should help you with this wording. All of our investors know they can sell their ownership stake anytime they'd like, but they have to follow the guidelines set forth in the Operating Agreement. The OA gives them the entire process of how they need to info the Investment Group of their desire to sell, their target price and the fact that the Investment Group has the Right of First Refusal should they find someone outside the group that would like to purchase their ownership stake. Some of my students have even come up with a formula to buy-out the investors should they want out early and all of that is stipulated in the OA so there are no surprises down the road. 

Our investors are also told, just like Jon mentioned above, that they may not be able to find ready buyers for their ownership stake and they may have to stay in longer than they'd like too, until the entire investment 'matures'. If they're okay with that, they invest. If they're not, they don't invest.

Hi Sonya, good feedback from @Account Closed. You don't have to jump into mentorship right away either. You can start small and just learn from someone or someones that have been investing in your niche for quite some time. Learn from their successes and their mistakes so you don't make the same ones. BTW, if they haven't made any mistakes, I suggest you find someone else to teach you. 

Once you get your feet under you and perhaps have done a small deal or two based on your criteria above, then it might be better to reach out to a mentor to help you reach that next level. You should also be able to recoup your investment in your mentor on your first deal too! Either in the form of just creating a killer deal or getting an acquisition fee from your investors for putting the whole deal together. Therefore, I wouldn't focus on the price tag, but on the value of the results of learning from the mentor. I do have a biased opinion though, but I'd love to hear feedback from others on my thoughts.

@Javon Mckinnon  410 units in Indianapolis. Not a wholesale deal.