All Forum Posts by: Scott Skinger

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Congrats @Calvin Lipscomb, glad to hear that things are working out.

@Maxwell Manatt I will PM you a spreadsheet that I set up for a 19 unit. It is fairly rough, but in line with what you are describing above. It lays out on a quarterly basis, capex budget and cash flow. It also has a unit by unit monthly reno schedule.

I'm a couple of investments in with Ashcroft, very early stage, so can't give you a full cycle recommendation. However, I can tell you that Joe Fairless (one of the principals) is one of nicest, most genuine people you will meet. On a personal level I 100% trust in the integrity of Joe. On an operational level I believe in their gameplan/strategy. They know their market extremely well and their past/proposed returns are solid. I've read through two of their PPMs and they are also solid. 

On the downside, they haven't been operators through a complete market cycle, so you might question their ability to handle adversity through a down market. I think they do a good job mitigating this risk, however, through conservative underwriting (cash flowing properties, value add upside), debt structure (long term agency debt) and heavy cash reserves. 

What size? What market/sub-market? I can provide some recommendations if you're looking in the Chicago market. These would be mid-market brokers who have listings from 10+ units up to 150 or so. And generally speaking, it is not about the "best broker" it is about having a relationship with a lot of these brokers and being on their email list.

Understand how they work. Say there are roughly 10 mid-market brokers in Chicago. They are all actively forming relationships and pitching building owners to list their building. Once they have a listing they are marketing this listing via phone/email to only their clients. If you have a relationship only with Broker #1 you will never even know about the buildings that Broker #2 - #10 have listed. They do not share these buildings on a common database. They are dual agency collecting the full commission. Having a buyer's broker is not the way it works in this market, one broker/company facilitates the deal and represents both the buyer and seller. You may have one individual within this company that represents you (the buyer) and a separate individual that represents the seller, but they are ultimately working together to get a deal done and collect a commission. 

@Javier D. Operating reserves need to be considered, not just $ for capex, renovations, etc. Many businesses go out of business (or get themselves into a lot of trouble) because they just run out of money. For example, when you look at the gross income/expenses for a year a lot of people are not factoring cash flow on a month by month basis. You will have some months where expenses are much higher, like when taxes/insurance are due. Or when you have 5 unit turns in one month and have much higher than average R&M costs. Or when you have an emergency roof repair that costs you $5K. I could go on.

This is up front money that you should have to operate your business. Different people have different ways of calculating what their starting operating reserves should be. One month operating expenses is a minimum ($12.5K based on your expenses above) but I would start with a higher figure. For this deal I would have something like $40K-$50K operating reserves. This is cash that sits in your bank account to cover the ebbs/flows of income/expenses on a monthly basis and emergencies. You can start with less, but the lower you go the more you're gambling with your investment.

I don't have time to go through and thoroughly underwrite this deal right now but a few quick things stick out:

-looks like the above is straight from a broker's pro forma in their OM, not based on actuals

-your expenses are at 38% including capex reserves, almost definitely too low for this property

-there's a lot you're not considering with you CoC figure of 13.42%. What about up front repairs? operational cash flow to get started? up front cash for emergency roof fixes, etc.?

-you need to consider disposition of asset, exit cap rates and valuation at key points like refi (if that is part of your strategy) and end of loan term 

Overall, I would say that all of the above needs to be put into a MF underwriting model as there are a lot of factors missing that will blow this investment up (in a bad way).

@Skylar Vincent An OM off of a deal on Crexi or from an MF broker typically has some form of a rent roll and P&L within them. This should at least allow you to take a look at what you typically will get up front and start your analysis. Actual financials and rent rolls aren't shared a lot of times until you have at least toured the property and often times not until your offer is accepted.

I'm happy to share with you as many OMs as you want if you PM me.

Good Luck!

Taken me a while to "get it" but agree with @Brian Burke, cap rates are relatively meaningless when you are underwriting the PP of a property because of all of the variables.

We will underwrite the building using solid/conservative information on gross income (what are market rates, can we raise rents over 2-3 years, what reno needed to get to market, how do are units stack up compared to others, what is market vacancy, etc.), what we can achieve not what the current owner has done.   Sometimes there is upside, sometimes there is not.

On the expense side, same thing. Conservatively underwrite based on a combination of actuals and market knowledge. Can we lower utility costs with energy efficient fixes? Are taxes going to go up in a couple of years after purchasing the building? What is the per unit expense cost? Is the current owner just bad at running a building?

Overall, the idea is that you might be buying a building at a 6% cap rate (or less) but when you underwrite conservatively using market data that you know and are comfortable with, you can run the building better than the current owner, make the building cash flow and effectively making it maybe a 9 or 10 cap building.

A good example. One of the buildings we're buying is a 29 unit on the south side of Chicago. The OM was something like a 7 cap on actuals and a 8.5 cap on proforma. All of this is BS information. In reality, the current owner is losing a lot of money every month. He's in a death spiral because he doesn't want to put more $ in to the building so his occupancy is dropping (around 65% right now) and his tenant quality is dropping. His current strategy is not working and will never work. Working with a PM that specializes in this area, we have a strategy that involves complete reno of units, combo of section 8/market tenants, getting rents to market and offering a quality living space that attracts better tenants. 

Long story short, we're technically buying at a -7% cap rate but feel comfortable being able to stabilize this asset within 3 years to have it running at around a 9% cap rate (based on our PP) with upside. Current cap rates on stabilized buildings in this area (Jackson Park) are around 7%, just to give perspective. 

@Luis Fernandez

Start with finding a good commercial RE lawyer, have a free consultation and if you like them engage (sign an agreement) with them. Before you even get to the drafting of the contract you will probably spend some time discussing the offer, strategies, etc. This is your chance to learn, ask questions and come up with a good plan forward. Yeah, it sucks to feel like your "on the clock" at some crazy high $ rate but if you have a good lawyer, they are very efficient and it is worth every penny. 

Specific to your last question "who pays?", those are the types of question that you would ask your lawyer and they can help you negotiate with the buyer issues just like this. Everything is a negotiation and having a competent RE lawyer on your team tips the scales in your favor.