All Forum Posts by: Charles Worth

@Sylvia B.

As others have noted there are moral, ethical and building code issues. However, also it could be a very short sighted attitude. What will happen when one of those drug users hides their stash in his wall and the cops have to put holes in the wall to find it? What about when high on drugs his tenant does major damage or kills someone making the house a crime scene? What about when he wants to collect rent and they get violent? Like most risky activities just because it hasn't happened yet doesn't mean it won't soon. 

@Daphne Barber

Don't know why its "too late". My own opinion (and just that an opinion), the original person may have been referring to common perceptions about "age", i.e. that you have a short time horizon, lower risk tolerance etc. So rather than focus on age I would focus on what your situation is. How long do you want the money to be out there? How much can you afford to lose? How much hands on time can you spend on this worse case? What is your risk tolerance? What are good at? What don't you want to do? Are you investing mostly through an IRA. in which case you could have UBIT etc. considerations?

Also, I think anyone who actively tells you to get rid of everything else and invest with them is a HUGE red flag. I would RUN in the other direction no matter who they were. I can't see any situation where that is warranted to tell you that. All investment has risk and concentrating your investments with one person is a big risk and he should know that.  It just stinks of a hard sell and why deal with someone who would sell that hard?

In terms of your actual question about notes vs. real estate, again mileage will vary by all the factors above but my own opinion notes are designed to have more protections (i.e. they are debt) but have disadvantages as well such as that you get no appreciation, less tax benefits etc.  The benefit is your first in the capital stack (assuming first lien) and if you do get the property and you did your underwriting properly your basis could be 65 cents to 75 cents on the dollar (or less) which provides some protection.  Personally, I do more notes than ownership of properties at this stage in the cycle but again that is partially preference.

Also, if you are accredited you can do more passive investments of larger debt or equity deals. 

I live in NYC as well and happy to help. 

@Thomas S.

If you believe that and want to make a quick $500, I would happily bet you that @J Scott 's rentals are in decent shape. Its just a different world as I would bet his class of properties don't require the love and care that say a C class property does because of the tenant base and the shape its in. Also, I would assume he rehabbed them to not need as much in repairs on an ongoing basis.  Now the average out of state investor simply is not sourcing the same deals in that type of property class and can't put in the upfront work Jay did so yes most people need a PM. 

As to the original post, I am unsure why the argument here is about property management today. Fact is, life changes and so does your situation. You can get sick or sick of managing properties cause you made $1MM somewhere. RE has HUGE transaction costs so unless your property went up a good amount you can only sell if the numbers work. factoring in property management ensures the numbers work for the average investor. If you take thje expense, you can obviously pay it to yourself but at least its in there so your property won't eat you in expenses if you do choose to use a manager later. 

By the way on another note, this is highly location specific in my opinion.  I am the last person on earth who should be managing a property, I am awful at it, have no time and can't fix anything. Yet, in NYC I know numerous people who rent a unit and don't get 2 calls a year. 

@Jack B.

Its not awful but not great. I would need to see the full waterfall to know for sure but it sounds like the pref is trailing off when some milestone is reached. I don't like that so much. They used my money to get there and should thus continue paying me my pref.  However, most structures I have seen do a pref then a payback of investor capital vs. the other way around you see here. Sometimes the pref is on the capital account as it stands on the date the pref is paid which if you got all your money back would be $0 in this case, which means they are doing the same thing just backwards from what I am used to. 

The cash flow split to me is light I generally like 70/30 unless the sponsor is very very strong.

Also, do they get anything other than the split, fees? catch-ups on the pref?

This also raises some questions. How are they giving you back your money? Are they assuming a refi? It sounds like they are. Are you getting any money from the time you invest until the refi or its all accrued? 

It sounds like they are banking 100% on the refi as it would be typically be a pref on your capital say 8% (8% is more typical and what I would want to see) and then all money returned and then a split. 

@Chris Mignone

Assuming you are accredited, why do you want cash flow? If you make 6 figures your tax situation I assume would make cash flow today not always the best strategy. As someone who doesn't need to fund their lifestyle you have an advantage over all those that NEED cash today. Something that pays less but has a higher IRR can be both safer and more profitable than a cash flow deal that pays monthly. Course it depends what you are looking at. I am not a big fan of appreciation investments personally (in this market at least) but there are many other ways to get IRR type investments. Value add for instance is as much dependent on execution as market forces but you will have to wait for an exit if you buy a class B apartment in a syndication, at least for much of the return.

If you really still think cash flow is king there are a number of strategies you can use including lending that could give you cash flow today. 

@Scott Meyers

Not sure I agree on flex space since there is no precedent (the industry as we know it is not very old) and people getting laid off means more people in flex space. I agree on office a bunch of risks there from automation to remote work (although companies like IBM are recalled remote workers) to a recession. 

@Luis Fernandez

There are 2 major issues here with doing this out of state. First one is the locals will see you coming a mile away and charge you a premium in the vast majority of cases I have seen. 

The second is management. As @Jay Hinrichs noted this are really hard to manage. That would be ok except your property manager, assuming you have someone even half decent, is only getting less than $100 per month per property in many cases, for something that is a headache. So they very likely going to do their job but they are not going to do it like you would as an owner. You could do section 8 which CAN be a little easier but that is not a given either as you need to chase people for their tenant portion, people lost section 8 and there are inspections which if you fail drag out your vacancies. In short I at least see these as being much easier said than done. 

@Jon W. yes but you are local, locals always do better esp in tough areas because you can go there and care about the relatively minor amount of capital being deployed and in rents. A property manager will never care as much and for those types of areas its hard to find someone good when you pay them maybe $50 - $75  a month and they have to be very hands on. 

@Liz C.

Where are you seeing 7% cap in NJ? Keep in mind Cap is on paper so a 7% cap in Newark or worse Paterson is not even close to comparable to a 7% cap in B class Houston. 

@Andrew Kewley

yes being in a high priced market sometimes sucks. One thing I will note is that you don't necessarily have to only have 2 options either invested in a high priced but scary and risky market or less scary (at least by entry price) but maybe more difficult to make work as an out of state investor cash flow market. There are many strategies like lending that can give you a return and maybe get your feet wet. Also, being in CA you are much more likely to be accredited (since $200K here doesn't really mean a whole lot in CA or NY) which opens up a world of possibilities. I personally do a little of everything.