All Forum Posts by: Caleb Johnson

Investment Info:

Large multi-family (5+ units) commercial investment investment.

Purchase price: $755,000
Cash invested: $281,000

Charleston Apartments is a 16-unit apartment in Oklahoma City, OK. It's located in a C/C+ neighborhood. We acquired this in 2022 and secured fixed debt at a low rate. Our business plan was to invest 200k into the exterior and interior and increase rents by $180+.

We're about halfway through our business plan and cash flow today is approximately $5,000 per month.

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

Purchase price and value add opportunity.

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

Found off market through a broker relationship.

How did you add value to the deal?

I knew what the market price was in this area and the property price was well below.

What was the outcome?

We hold it today and are seeing great returns.

Hey David, will you have a virtual option? 

Hey Ryan, will you have a virtual option? 

Hey Matt. Will you have a virtual option?

Did you know that you can build an apartment complex in a warehouse? That’s right, there is a strategy out there where you can have someone build your apartment building in a warehouse that will save you on time and money. This is called Modular Development and we will take a look at some of the pros and cons to this development strategy.

Pros

Modular Construction offers better quality structures

When modular first came out in the early 2000’s, it was not streamlined as it is now. An argument that was made is that it couldn't compare to the quality of on-site projects. Now that modularity has become more streamlined, manufacturers are able to enforce stricter quality on the assembly lines. On-site properties can’t control natural elements and wood can be damaged compared to a climate controlled warehouse.

Modular Construction is cheaper and more efficient

Manufacturers have an unfair advantage when it comes to the cost because an on-site facility requires various things that add to the total cost. While modular construction only needs to produce the same parts, making it more scalable. Since builders don’t need these modules for an on-going construction, they can order materials in bulk. This further reduces the cost and allows the developers to store the material in the climate controlled warehouse, out of the natural elements.

Modular is simpler and faster

In traditional construction, the builder will source the materials from different suppliers to get the best rate. This is good to save on cost but since there are more moving parts, there is a higher possibility for something to go wrong. Modular doesn’t need to worry about this because all materials come from one supplier.

Cons

Modules need transportation

The modules need to be transferred to the job site from the warehouse. Depending on where the warehouse is located compared to the job site, this could cause problems if there is significant distance between the two. There are limitations to the size of what can be transported. The maximum size of modules will only be 16ft wide x 75 ft long because that is the size that trucks can carry. This could mean that more trucks need to be sent out.

Site constraints and the municipalities building code

Modular development is streamlined to be rectangular so that developers can cut down on cost. This could affect your possibilities to use modular construction if your job site is irregularly shaped. Unlike on-site construction that starts from the development stage, modular construction won’t adjust to the shape of the land. Some municipalities still see the old and inferior design/processes of modular development and compare it to today’s buildings. Because of this, a handful of municipalities have not adopted modular construction in their building code. This is something that you need to be on the lookout for when considering modular development in your market.

Lack of customization/Financing

Once the product leaves the warehouse, it is very difficult to make changes to the building’s design. Even changing where a window is could jeopardize the structure’s integrity. The assembly line won’t adjust to what a particular client needs because it can significantly impact each module’s production and cost. On the financing side, some banks won’t give loans for modular construction. With normal construction, the builder can be flexible with getting paid. Modular developers need to get paid before 1 module leaves the warehouse. Since these are all pre-built, there’s no option for the builder to be flexible. This is something to keep in mind when considering modular development. One last thing to keep in mind is that some buyers won’t want to pay as much for a modular build compared to classic construction.

In conclusion, modular can be a great strategy in your development plans. You should check that your markets support modular development and be sure you underwrite conservatively. Modular development has given investors a way to save costs and produce better quality buildings compared to previous modular builds as well as on-site construction.

First, you'll need someone on your team who can qualify for this kind of loan if you can't yourself. Assuming that you can qualify, I have heard of a lot of people looking for 30 year AM w/ a 10 year term. If you can get the loan to have some IO in the beginning, that is even better. Usually you need to have a pre-existing relation with a lender. 

Interest rates are about 4, you could ideally find even lower than that. 

There are other options to make the numbers work like bringing in mezzanine debt in for part of it. But like you said, it is deal dependent. 

@Ryan Fox Thank you for this. 

I think you handled that well. If you have someone in your local market who is an experienced landlord, I would ask them what their experience is. 

I ended up doing the same thing with apartments.com after I owned the property for over a year. It is a 4-plex and I had some trouble getting tenants to switch over. I also experienced some trouble with the email. The way I did it was to offer them a concession of $20 if they did it through the online system. That worked for 1 of the 2. I also explained that I am not always around the property to collect rent and how I would hate for the rent to be late if they couldn't get it to me. 

It is very important for you to stay on him now since you just purchased the property. It is more difficult when you have accepted rent in the past a certain way and then try and change it on people. 

It will all work itself out in due time. Just be persistent and make sure you learn your laws. Congrats on the first property! God bless.

I think it comes down to knowing your market. If you know that the price per door is 200k and you see a deal that is 150k a door, that might be an opportunity and you might want to take a closer look. 

Do you want to learn how to be wealthy? Then you need to learn the tax game and how to save. There are lots of ways to do this. We are able to use 1031 exchanges, cost seg, DSTs, etc. But which one is best for you and your circumstances? That is a question that your real estate tax professional will have to answer for you. But I want to share what I have learned in regard to the DST strategy and how it can help you. By the way, I am not a tax professional and do not heed my advice without speaking with your licensed professional first.

First, what is a 1031 exchange

A 1031 is a swap of one investment property for another that allows capital gains taxes to be deferred. Which means when you sell the asset that you bought using the 1031, you will need to pay capital gains tax for the entire amount of tax that you deferred. If you have been deferring that tax for multiple deals over many years, that can add up to be a lot. But if you keep on deferring that money through a 1031 exchange until you die, then the tax is nullified. If you decide to use a 1031 exchange, you need to be sure to use a 1031 expert. This is important because if you touch that money for a moment, then that money is subject to taxes.

1031 Flaw

There are a few trials when it comes to using a 1031 exchange. The biggest one is the time commitment. Once you sell your first asset, you have 45 days to identify 3 potential deals that you want to move that money into. Let's say you meet that requirement, then you have 180 days to close on one of those deals. If for whatever reason you miss those time lines, even by 1 day, all that income will be taxed. Investors are concerned if the 1031 exchange will still be around in the near future since our current government is trying to do away with the 1031! So what strategy can we use to defer our taxes instead of a 10331 exchange? The answer is a Delaware Statutory Trust or DST for short.

DSTs

A DST is a security that can only own real estate. When you invest in this trust, there is no time commitment like the 1031 exchange. DSTs usually invest in large deals and these can be anything from triple net leases, multifamily, mobile home parks and other commercial assets. DSTs can be fractional as well. This means that you can invest in multiple DSTs using the proceeds from just the one asset.

More on DSTs…

What has been a problem for some investors in relation to DSTs is that the large companies that do DSTs have brokers that charge large fees. But if you find an operator (syndicator) that does a DST, that will take care of those large fees. Some DSTs require it's investors to be accredited but this is not the case for all. However, the ones that do accept sophisticated investors are few and far between.

Rules for a DST

When investing in a DST, you need to be aware of the DEBT/EQUITY ratio. This means that if the property you are selling has 60% debt and 40% equity, then whatever asset you trade up to, will need to have a 60/40 debt to equity split. Any excess capital that you need to pay taxes on is called BOOT. Now let's say that you sell a property and your split is a 55/45, then you would pay taxes on the extra 5% in equity. However, since we can invest in multiple DSTs, you can invest the remaining amount in another DST. I know, I'm sure you're thinking that this is going to be too difficult but, you are able to pull multiple investors in these opportunities. So in the end, the DST will be split correctly and you can still differ your taxes. For a DST to qualify as a DST, it needs to be generating predictable income.

Another perk of a DST for investors, is that all the cash flow goes to the investors. Now you might think, "Well how do the sponsors get paid?" They are usually paid through management fees, acquisition fees and disposition fees. Another bonus for investors is that you get equity in the deal.

In Conclusion, there are a lot of ways to save on taxes. At the moment, a 1031 exchange is a good way to go. But a DST might be a better fit for you. This might be another tool for your tool belt, especially when it comes to investing in syndication and saving on your taxes. I recommend you do more research for yourself and of course speak to your licensed professional.