All Forum Posts by: Anthony Vicino

@Tim Swierczek nailed it on the head. The $30k is less than 10% of total cost. That's really not so shabby given where we presumably are in the market cycle.

It's certainly possible to cash-out your entire initial investment, but those deals are few and far between. We operate in the larger multifamily space where we have much more control over valuations, and even there we're happy if we can retrieve 40-60% of the initial investment.

I don't think the 50% expense ratio is too conservative. It's certainly a number you should overachieve against, but when underwriting it's always best to assume the worst.

I do agree with @Evan Kraljic on being real certain about your renovation budget, however. Construction creep is real. If you've reasonably accounted for that, and the numbers still work, then the only thing that should hold you back is whether or not you have the ability to execute the business plan.

If you think the answer's yes, @Chris Ha, then get after it, son. Only way out is through. ;)

There's really no downside, @Hayden Wright. Worst case scenario, you just get practice talking publicly about real estate investing, which, is a skill that (depending on where you want to go) you'll probably need at some point in this industry.

It's all about finding the unique angle, though.

You're not an expert (yet!) so don't pretend to be one. Come from an authentic position of seeking knowledge and wanting to learn about people's stories and you'll do great.

Somebody else mentioned that you might have a difficult time finding guests. I'm not so sure I agree. That's not to say you'll get the top-dogs on your show, but everybody starts somewhere and there are plenty of fish in the pond to talk to.

In addition to finding your unique angle, here's the second most important thing you have to do...

Commit to releasing at least ONE episode every week for the next TWO years.

If you're not willing to commit to that sort of consistency or longevity, then without knowing anything else about you, I can confidently predict you will fail.

But, Hayden, my man, you don't strike me as a quitter.

Right?

Others have already mentioned it, but this is BRRRR on a large scale. Or, as it's more commonly known within this space, Value-Add.

It's a winning strategy and one we've deployed across hundreds of units. It's the most effective strategy in our book because it puts control of the property's ultimate valuation in our hands.

Within this model, you have two levers for controlling the NOI: Revenue and Expenses.

Everybody likes to go straight to raising rents. It's sexy in the same way that scoring points in basketball or football is sexy. We tend to remember the offensive players much more than the defensive players.

With that said, one of the business lessons that's served me best throughout the years is the idea that a dollar saved is worth more than a dollar earned.

Why?

Because a dollar earned is always on a margin. If you have a 50% expense ratio, then for every new dollar in top-line, only $.50 makes it to your NOI.

A dollar saved, however, is a pure dollar to the NOI.

Keep this in mind as you're evaluating properties and where the potential value-add might exist.

Then again, decreasing expenses requires operational prowess, which is easier to come by in conversation than in actuality. ;)

@Erik W. It's peculiar to hear that the appraisals in your area don't use income-based valuations on properties under 20-units. That's certainly not the case should you go agency (Fannie and Freddie).

Great question, @David Kuhlke.

Unfortunately, it's not really the right one.

Cap rates are tricky and they trip up new and old investors alike. I've written a couple articles on the topic if you feel like doing a deeper dive, but here are some high-level things to keep in mind.

1) There is no such thing as a good cap rate.

A 3% cap rate is not necessarily better than a 10% cap rate. Investors who say things like, I only buy at a 10cap, fail to fully comprehend the cap rate, what it's for, and, more importantly, what it's not for.

You can make money at any cap rate. The key lies in the business plan and intended execution. The entry cap rate on a value-add multifamily is largely irrelevant because you're going to go in there from day one with the expectation of increasing the value and thus skewing the cap rate.

The question isn't: What's a good cap rate for this area?

Instead, the question is merely: What is the current cap rate for this asset class, in this area, at this particular point in time?

You mentioned the book you read is from 2005. Go ahead and throw it out the window where cap rates are concerned. Which leads to point number two.

2) Cap rates move constantly

You need to have a finger on the pulse of a market to have any hope of gleaning the appropriate cap rate. This can be done through googling different industry reports, talking to brokers, and auditing recent transaction histories.

You'll likely get some fluctuation in numbers depending on the source. Which leads to point three.

3) There is no definitive cap rate

Ask ten investors in a market and you'll probably get ten different answers.

Who's right?

They all are.

Who's wrong?

Again, they all are.

Doesn't really matter.

What matters is whether or not the asset can deliver the expected returns at the purchase price you're paying.

And finally,

4) Cap rates are hyper-local

The midwest is a big place. The cap rates for Class A new build in downtown Chicago are different than a Class C in boondocks Wisconsin.

Cap rates fluctuate even on neighborhood levels, so you'll need to be way more specific than just midwest, unfortunately.

For what it's worth, where we operate (Minneapolis and Saint Paul, MN) cap rates could be anywhere between low 4 up to high 6 percent. Just depends on the building and area.

Would be happy to hop on a call and discuss further, @David Kuhlke! Good luck

No problem, @Adam Snow.

Try this!

@Arn Cenedella nailed it on the head. You're going to find it difficult to scale with FHA loans. If you're okay with that, and taking the long view, then yeah, you'll have a hard time getting into an equivalent investment vehicle for less money down.

But less money down isn't always a good thing, especially depending on what you're buying.

There are many reasons why moving up to larger multifamily properties makes sense, but one I'll point out here that's worth considering lies in how properties are valued.

Your quad is based on comparables, which means it's worth pretty much exactly what all the other similar quads in the area of your property are worth. This is fine in a rising market, but hard when things to get soft.

Personally, I always hated having the value of my building dictated by how other people were managing their buildings.

That's why I made the move to larger multifamily properties where the valuation technique is based more on Net Operating Income (Revenue - Expenses).

This is an important difference from smaller residential buildings because it allows us to execute the value-add model whereby we go into the property, increase rents, decrease expenses, and ultimately increase the value of our building.

After we've driven up the valuation, we then execute a cash-out refinance (typically within the first 2-3 years), returning at minimum 60% of our initial capital. We then take that capital and roll it into the next deal while still cashflowing on the first.

This is the power of larger multifamily assets.

I house-hacked my first property (triplex) many moons ago through an FHA, and I never looked at it through the lens of Cash-on-Cash, especially while you're still living there.

I looked at it through the lens of: How much will I be making per door when I move out?

Cash-on-Cash return gets horribly skewed when you're coming to the table with so little money, anyways.

Smaller properties operate on thinner margins so you probably won't make much more than $200-300/unit (after accounting for all expenses (and I mean all!)).

Factoring in the extra costs of an FHA loan, I would expect that cashflow to be closer to $100/unit, honestly.

Then again, real estate is hyperlocal so it all depends on your specific market.

Great question, @Adam Snow.

Submetering the water is probably overkill here. Ratio Utility Billback Systems are a great way to get tenants to pay for their water, but it doesn't need to be overly complicate with rigid measuring systems.

You can create a formula yourself based on square footage, number of tenants, etc... that each unit contains and then right it into the lease that they'll be responsible for a portion of the monthly water bill as calculated through that formula.

The key, and it's an important one, is that you cannot profit from billing them for utilities.

That means you should take the monthly water bill, and only charge back, say 60-80%. That way they're paying the majority of the water bill, but you're never in danger of inadvertently charging them too much.

Tread very carefully, @Thomas Pollard. This has "nightmare" written all over it.

As @Erik W. pointed out, there are more than a few things here setting off red flags.

With that said, regardless of whether this guy is on the up-and-up, it doesn't sound like you're actually in a position (from an education or experience) perspective to be able to help.

Unless you have some previous capital raising experience and have a warmed up investor network (or you're sitting on a boatload of cash yourself), it's going to be a real uphill battle to get this thing funded.

My biggest question is: Why is this guy coming to you (an admittedly new investor with no experience) to fund his deal?

First of all, where did his funding disappear off to? That's a bad sign to begin with.

Second, why doesn't he have a network of experienced investors he can turn to? That's an incredibly bad sign.

Sorry to rain on your parade, Thomas, but this doesn't smell right. Be careful!

Great question, @Melody R..

Others have already given a great perspective on this, but here's another angle to come at the problem from.

Let's assume that if you raise rent by $300, the tenants will leave. Now, two things to consider are:

1) How much will it cost you to get a new tenant (marketing and unit turn)

2) How long will it take you to get a new tenant moved in.

Alright, so you said raising rent by $300 is only a 10% bumb, so current monthly rent is $3,000 on a single-family.

How much will it cost you to go in there and get the building rent ready (painting, cleaning, etc..) for the next tenants?

How long will it take you to do that work?

Let's assume you can do the turn in a week, get a new tenant moved in within another week, and the cost to turn is $1,000.

You'll lose around $2,000 all told (between unit turn costs and lost rent).

It'll take you about 7 months to recoup those losses at the new higher rent. Within 1 year with these new tenants you'll have pocketed $1,500 more than if you'd simply kept the old tenants at the previous rent.

But what if you were only to bump the current tenants rent by $150? By the end of the year you'd have made an additional $1,800 (without any of the headache of finding new tenants or doing a unit turn.

We're all about minimizing turn-over, even if that means not getting top dollar for rent. Just another lens to look at the problem through.

Hope that helps!