All Forum Posts by: Brian Levredge

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.

Can't help you with STR, plus the city just put a moratorium on non-owner-occupied STRs, so might want to look more at LTR. I also own a PM company and know all the submarkets.

Quote from @Account Closed:

I just noticed something.... I searched for "apartments to rent" in a certain location in Arizona and if I were to rent out a townhouse I was thinking of buying at the same "low" prices this apartment complex is then I would be in serious trouble. Is my thinking correct in that large apartment complexes are generally able to provide cheaper rent than a small landlord trying to rent out one townhouse?

If I were to rent out the townhouse at the same prices the large apartment complexes are... I would be in even more trouble. 

It's about the comps.  Generally, large apartments charge more in rent than a comparable unit elsewhere due to location, amenities, etc.  If your search yields no results try looking up addresses around the townhome you want to buy to see what, if anything, they've rented for in the recent past.  You also need to make sure that your comps aren't subsidized properties, or some other form of rent control that isn't really what the market would bare otherwise.  If you're still having trouble finding data then you have to take a long hard look moving forward if there's nothing to support what you need to make to the deal work.  

Quote from @JD Martin:

I have to laugh at everyone who thinks where they live is the best place to move and invest - of course we would think that, if we were local investors (or had a stake in the outcome as realtors, lenders, etc).

I would suggest this: you may want to visit some/all of these places before you pick one and move there. I've lived in 8 different states and there's a lot of differences out there. The Bay area isn't super expensive by accident - people love living there, for a reason. Climate and culture are both major drivers of where people decide to live. Employment opportunity is high on the list as well, though with remote work it's a little lower than it used to be. If you move to Ohio from SF you are going to be in for a serious shock to the system, culture-wise and weather-wise. I grew up 12 miles from downtown Manhattan, and when I lived in Ohio I might as well have lived on the moon, or Mars. It was freezing cold and a cultural wasteland. Were there redeeming parts to it? Of course - I thought there was a lot of natural beauty. But I was ill-prepared for how cold it got, and how far you could actually live from a decent restaurant. Other people found that way of living was right up their alley. 

This, right here.  I spent my whole life in Los Angeles.  I started investing in Chattanooga in 2009 and moved here from LA three years later.  I happen to love it because it's so different.  In many respects, it's worlds better than LA and in some, it's not, or even worse.  The point is investing in a market is one thing.  Living in that same market is entirely different. In our case, we were wanting to get out of CA for years prior to actually moving here, but even then we took multiple trips to TN and spent real time here to see if it was something we liked.  

@Dan Beaulieu with Longhorn would be a good place to start. 

You're going to be better off doing RUBS instead.  There's no cost and it's very easy to do.  We do that on all the multi-family we manage rather than submeter.  We did submeter a 40 unit about five years ago.  The cost wasn't terrible (about 10K) but it was already set up pretty well to submeter.  The problem is the ongoing expense and hassle of dealing with a third party billing system.  There's a few companies in that space, and they do the submetering too, but the bills are a nightmare to manage, and IMO, not worth the time.  Plus the tenants end up getting pissed at you because they are often getting billed well in excess of their usage with no rhyme or reason.  

Without knowing the requirements of a DSCR loan, that's going to be your best bet. Commercial lenders here in town, while they finance purchases in LLC's all day long will have an issue with the distance and the fact that each partner on their own is not particularly strong, at least based on what's been laid out here. Now if you both make great income then that will offset to an extent but that's not been said. Plus the fact that you are out of the country and presumably your partner is a foreign national in essence makes this a non recourse loan and no one is going to get too excited to do one of those.