All Forum Posts by: Brian Burke

As the old saying goes, “the devil is in the details”.  Sorry to hear about your experience.  Bringing this up may certainly help another investor avoid the same fate.  I’d guess that the rate cap wasn’t the only issue here, but more likely a combination of factors conspiring together.

I focus on sentiment.  If the market is in the dumps and no one is buying, I assume that the market will be better in the future and my exit cap can compress from current rates, assuming there aren’t other macro or micro factors at play. Conversely, if the market is absolutely on fire and everyone is throwing money around like there’s no tomorrow, I assume it will be worse when it’s time st sell, so I decompress the exit cap (notwithstanding modifications due to macro/micro). 

This approach fits the thesis that cap rate is simply a measure of market sentiment. Thus the mission, should you choose to accept it, is to attempt to forecast future sentiment and translate that into a number. That’s the “part art, part science” aspect.

Request information from open syndicates as if you were going to invest (and maybe you will).  You’ll receive the PPM, operating agreement and subscription agreement.  Study those and you’ll have studied the syndication documents.

Quote from @Daniel Sehy:

@Brian Burke

 

I’m going to dive into those articles you shared, but one thing I’m trying to wrap my head around is how you practically compare “like-kind” assets when you’re evaluating an area you don’t know well yet. Do you typically rely on broker BOVs, sales comps, CoStar-type data, or just getting out there and touring everything you can?

Yes, all of the above that you mentioned plus one more (my favorite): underwrite everything.  Don’t buy any of it, but follow the result and note the sale prices and compute the going-in cap rate based on your underwriting.  Next is the tricky part: forecasting how today’s cap rate from these trades will move by the time you expect to sell, so you can estimate the exit cap rate. Some argue to just decompress today’s cap rate by some standard figure, such as 10bps/year, but that strategy lacks context.  It’s really part art, part science, unfortunately.

@Daniel Sehy targeting a cap rate is a fool's errand, most commonly practiced by the same folks that complain that they can't find any good deals.

Most important is to realize what cap rate really is--it's a thermometer for investor sentiment.  When people are bullish on a certain type of property in a certain area, they are likely to pay more for an income stream (meaning a lower cap rate) than they are if they were bearish.  Market cap rates vary between property types, classes, and locations. It's not important that you buy at any specific cap rate, what's important is how your entry cap rate compares to other similarly-situated like-kind assets in the same area.

A better way to analyze income property is by backing into a return, such as an IRR and/or Cash-on-Cash return using historical financials, comparable property's rents, realistic expense assumptions, and using an EXIT cap rate that is realistic for the property type in that area for the purpose of estimating the future resale value.

Another way to say this is, the first thing you want to know when buying any property is what you can sell it for.  Cap rates are useful for that, but not much else.

Here are links to a couple of articles that I wrote for the BP blog a few years ago.  They are just as applicable today, and may be helpful in shaping how you approach the cap rate dilemma:

https://www.biggerpockets.com/blog/capitalization-rate-definition-myths-debunked

https://www.biggerpockets.com/blog/real-estate-cap-rate-proper-use

And I wrote a whole subchapter on cap rate in The Hands-Off Investor:   https://www.biggerpockets.com/syndicationbook

Yeah it took me a bit to find it too…should be more obvious.

Here it is, @Jay Hinrichs:  https://www.biggerpockets.com/blog/real-estate-1140

It’ll be interesting to see how this ages!

@Henry ClarkThe first thing you need is a very strong, experienced regional operator.  The second thing you'll need is a feasibility study (is there demand for this use in this area at this scale).  Third is a cost analysis for conversion--these older hospitals can be far more trouble than they are worth.  

We have an old hospital not far from where I live and it's been a vacant eyesore for over a decade, costing the county more than a million dollars a year just for security.  It just sold at auction where an out-of-town developer is going to tear it down and build housing.  The teardown cost probably exceeds the land value.  

I don't know the size of this facility you are looking at, but in the picture it looks quite large--perhaps hundreds of rooms/beds.  That would be a lot to absorb in one spot, so the feasibility study would be critical.

You’re probably right, @Jay Hinrichs.  As an example, we are buying two facilities built in the 2000s for $20,500 per bed—it probably costs 10 times that to build these new.  We are buying another two for about 60% of the seller’s loan amount.  For us, building doesn’t make sense.

But converting is another story.  Depending on the cost of the building and costs of conversion, as well as supply/demand factors, a conversion might make sense. But a ton more risk than what we are doing.

I’m not sure what is meant by “retirement home”, however. We are buying skilled nursing, assisted living, and memory care facilities. These, plus “independent living” make up the landscape of senior housing / healthcare real estate. When I think of “retirement home” I think of a Del Webb community with golf courses and Pickleball courts. That’s not what we are doing and probably not what @Henry Clark means based on the photo above. 

Quote from @James McGovern:

I would ask what is the cheapest fastest legal way for others to become syndicators?

Probably by going to work for an active syndication sponsor, work your way up, then work your way out on your own.  You’ll gain experience and get paid while you do it.

Starting any syndicate will cost between $10K and $40K depending on complexity, and putting a property in contract and getting through due diligence will require $10K to $1M or even more, depending on deal size.  

“Cheapest” isn’t really in the syndication vocabulary.