All Forum Posts by: Brian Levredge

Quote from @Jacob A Clark:

Currently in the process of underwriting and finding equity partners for a deal our team sourced in Chattanooga. It's 25 units, off-market (we are direct to seller on it) and is a value add opportunity. Class B-/C+ property, currently being self managed and has been difficult to obtain financials. Currently assuming an expense ratio of 40%. Owners are open to seller finance a small portion ($300k) of the equity. Anyone have any tips on how to assume / run expenses when there is no formal rent roll / P&L statements? Price point is under $2.5million. 

 Your expense underwriting is probably light.  If it's in TN (as opposed to N GA) you property taxes alone will be close to 15% and with the habitational insurance markets going nuts, you're probably almost at 30% combined on those two.  We do quite a bit of multi family around town. Feel free to msg and happy to help if I can. 

I grew up in SoCal. Have lived in Chattanooga now for almost 11 years and have been investing here since 09. Clevenland TN is right up I75 from us and a good market. A couple things to know before dipping your toes in the pool out here. Use a TN LLC. It will be cheaper. Also, TN has a Franchise and Excise (F&E) tax levied on businesses that are set in limited liability structures. It's basically a business income tax and is two components. The franchise tax is .25 of a point of the net value of the asset. The excise tax is levied against the adjusted gross income on your property so you still take all the deductions you normally would. Obviously talk to a CPA who is versed in this so you can account for it when underwriting properties.

It's not a foundation issue.  I'm a builder here in Chattanooga as well.  Most of your framing lumber is #2 grade (cheaper) and isn't always the straightest.  So you might have a joist or two with a big crown causing the bump. If you don't feel any flex or give in the bump when walking over it then that's probably your culprit.  If you do feel flex you just have loose subfloor because the framers didn't use enough subfloor glue and/or nail/screw off the plywood enough.  

As an aside most older homes here in Chatt have some type of settling because of lack of soil compaction when building and the fact we get 50+" of rain a year.  No one likes buying something new with problems.  Don't get me wrong, but from a rental standpoint, your issue won't impact your ability to lease it.  

The problem with looking at crime stats is that they're done on a per capita basis generally.  So smaller markets with higher crime pockets are adversely affected.  I've invested in Chattanooga now for almost 14 years.  Yes, anything can happen anywhere, but it's especially magnified in sub-markets like East Chatt, East Lake, and Alton Park.  Conversely, there are other sub-markets in town where crime is very low. If you want to make things easiest from an analysis standpoint you can look for the highest ranked public schools.  You will see that property values around those schools tend to be higher than in other parts of town.  Of course, there are trade offs.  Higher property values generally translate to less cash flow though you're often renting to a stabler base of residents.  

Quote from @Ariana Soto:

FB=Facebook.  Leasing commissions are to an extent negotiable, but yes, you are generally correct.  Piggybacking on some of the other comments in this thread a good PM will allow you to scale your investing business.  Yes, it's a cost and not a small one at that, but there's also a premium for your time, or there should be.  If you're the type that wants to exercise a lot of control over the PM then I would suggest working with someone who handles most everything themselves.  They will be small because of that, but that also means more responsive to the clients they do have.  
A good PM (as mentioned here) will also have their own systems in place.  If you want them to manage your portfolio then you need to be willing to change and adapt to their systems/processes.  It's also important that you can communicate and get along with your PM.  Personality fit is somewhat important as this person will be taking care of your assets.  

Unless they have direct ownership of the property, whoever does your leasing must be a licensed agent.  As an aside PM companies (I own one) are real estate brokerages in TN and almost every other state.  Now having said that does this provision get ignored all the time?  Yes.  I"m not passing judgment or giving advice.  Make your own choices.  You'll typically pay 50% of one month's rent for tenant placement.  Some charge more, but that amount is pretty standard.  So if you have a unit that rents for 1k or 1.5k/month it may not be worth it to many agents.  Conversely, most of the PMs here in Chattanooga won't do just leasing but you might find someone.  I'd recommend looking on the FB search engine and typing Chattanooga Real Estate Investing.  It will give you a bunch of pages you can join and ask around.  Best of luck! 

I own a PM company here in Chattanooga.  Fees are one thing (and I'll get to in a minute) but there are other, more important questions you need to be asking, IMO.  First, what is your goal with the property?  What is your rental philosophy?  On that second one, what I mean is as an owner how will you want to handle maintenance and capex long term?  That matters and can have a big impact on a property's value in the medium and long term.  Regardless of your answer, you want to make sure your PM is aligned with them.  

You'll also want to set expectations and make sure they PM can adhere to them.  How will communications be handled and in what time frame? What are maintenance thresholds, and so on?  This will be partly how you hold them accountable going forward.  

As for fees, 8-10+% is what you should expect to see.  It will vary somewhat based on rent range and location.  Leasing fees of 50% of the first month's rent are quite common, but you'll want to find out about other fees.  Set up fees, Lease renewals, vacancy fees, eviction fees, and so forth are all somewhat common.  Maintenance markups are also a big one.  That can be 15% at the low end and go up from there.  If you buy an older property with a bunch of deferred maintenance and opt not to address it at the outset you'll get eaten alive on maintenance costs. Most small PM companies derive up to 50% of their revenue from maintenance markups.  

Investment Info:

Retail commercial investment investment.

Purchase price: $1,000,000
Cash invested: $400,000
Sale price: $1,950,000

Contributors:
Jeffrey Holst

31k sq ft retail strip center that was on a ground lease.

What made you interested in investing in this type of deal?

The price was great and there was a ground lease that gave us upside.

How did you find this deal and how did you negotiate it?

It was a pocket listing. The seller was anxious to sell since she was out of market and would take a big discount off the list price. There were also 21 years left on the ground lease at the time, which was held by a different owner. While we were in DD we renegotiated a new, 60 year ground lease with a first right of refusal over the entire parcel which included two other buildings (Autozone, lender) and a billboard.

How did you finance this deal?

Bank financing and equity raise

How did you add value to the deal?

We leased up vacant units.

What was the outcome?

Sold it less than three years after buying it for almost double what we paid. Investors received north of 30% IRR.

Lessons learned? Challenges?

Tried to do leasing on our own for the first six months. That was a waste of time and set us back. We also leased out two of the units right at the start of the pandemic. We redid one lease to shift the start date but ended up evicting the other tenant, who was simply trying to take advantage of the situation.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes.

As mentioned above, you're going to have to bite the bullet on some decisions.  Given the inflation of construction materials (and everything else) there's no way to get all your rents up to market in the near future without spending a bunch of money.  It's a Catch 22 of sorts.  Anyway, paying the loan off, unless it's a high rate is not a great idea.  Plus the additional cash flow will not be enough to get you where you need to be either.  You could look at gettting a business line of credit against the portfolio, or even one or several properties (depending on value) to use to fix things up.  That will be an interest only loan so the debt service will be manageble.  Once you've got the units fixed up and up to market you can look to refinance into longer term debt.  That may defeat your purpose of owning these free and clear but you're either going to need to sell a couple or borrow against a couple to get everything up to snuff.  I'm local if you want to DM me.  

Investment Info:

Office Space commercial investment investment.

Purchase price: $1,270,000
Cash invested: $340,000
Sale price: $2,400,000

Contributors:
Jeffrey Holst

Value add single-level, multi-tenant office building in a business park in East Brainerd. The property had two of four units vacant when we bought it. We leased out the vacant units after renovating and were able to recapture some of the tenant improvements. This was a syndication where the investors (small group) doubled their money in the under three-year hold time.

What made you interested in investing in this type of deal?

The anchor tenant was in negotiations to not only renew their lease, but expand their footprint in the building as well. This made the deal carry right out of the gate (with some minimal cash flow) thus mitigating risk.

How did you find this deal and how did you negotiate it?

Was listed on commercial MLS

How did you finance this deal?

Syndication and bank financing

How did you add value to the deal?

Renovations to existing vacant units and putting in market rate leases. A third space came vacant mid-stream (that was expected) and we were able to quickly fill the space limiting vacancy on that suite to one month.

What was the outcome?

We greatly increased cash flow on the project and almost doubled the value of the building at exit.

Lessons learned? Challenges?

Commercial leasing can be a challenge. Make sure you are working with an agent that understands that particular space.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes.