All Forum Posts by: Scott Skinger

Looks interesting, thanks!

@Account Closed nope, this Jake & Gino podcast, https://jakeandgino.com/multifamily-financing-evolution-jake-gino/

@Anna L. Talk to brokers, other investors and analyze enough deals that you start to get a feel for what the cap rate in your area is. I'm very inexperienced (couple of months) with all of this as well and I can say that I have a lot more comfort in understanding market cap rates (in my area, Chicago and suburbs) after actively analyzing deals, getting feedback from brokers and talking to other investors. Two things to keep in mind:

1. There is a big difference in market cap rate depending on the building quality type, age, size, location and sub-location. So in the city of Chicago for a 40 unit well rented apartment in a nice area the cap rate might be 4%. While in a far reaching suburb, a 10 unit older building might be more like a 10% cap. Keep in mind, cap rate is ultimately just a guideline and the exact cap rate (and therefore price) on the building is negotiable.

2. Exit cap rate (what you are going to be able to sell the building for) is incredibly important to keep in mind. We may be at the top of the market right now (or not) but when you start modeling returns when you buy an apartment building the exit numbers are just as important as the acquisition numbers. For example, if you overpay for a building today (say you buy a building for a 7% cap price when it should have been a 8% cap) and the demand for multi-family goes down...or even stays the same, you are going to have a tough time getting the returns you modeled if the cap rate is 9% when you want to sell. Long story short, of course "buy right" but also be conservative about the exit. When I model an investment I like to assume that my exit cap rate is going to be approximately 1% lower than my buy cap rate. If the returns still look solid with the higher cap rate at exit, then I start digging deeper. 

My approach would be to run your numbers through a deal analyzer being very careful about including all expenses. Be conservative, add PM, R&M & CapEx as you mentioned. Double check your costs on insurance and other variable cost items that may impact the deal. Once you have your numbers solid, including a return that works for you, print out some version of this to the seller with notes next to line items if necessary. It is a lot easier to make an unemotional offer to the seller when you can present a business case. They may reject your offer because they can get more for the building from a less educated buyer, but that's what this business is all about.

I will let others with more experience speak to the per unit metrics and some of the other intricacies. 

This is a rough example of what I will present to a broker when I'm justifying my numbers. I might clean this up a bit before presenting to seller with LOI.

Thanks! I plan on being there.

Of course. BTW, for context, I should have added that the numbers in those images are based on a 12 unit building (6 duplexes) with low vacancy. I'm budgeting tenants to stay for 2 years, so 6 tenant turns per year.

@Johnny Hastings I purchased Michael Blank's SDA, it is an excel spreadsheet and capable of handling apartment syndication deals. It comes with a small learning curve but he has a lot of videos that explain how to use it. I love this tool and use it every day, even for evaluating small 10 unit deals with no other partners. It might be overkill for what you are looking for but it is well worth the $129 price, or $99 with a discount code.

I have not had a chance to really dig into the the other two analyzers. Jake & Ginos tool is an online calculator, I plan on giving it a test drive over the next week. Real Data is also a spreadsheet.

I didn't mention this before but of course if you are looking for something quick and easy there are a lot of free spreadsheets available on the BP site. It is just cumbersome to go through all of the files and I did not find something that was sufficient for apartment investing.

Good Luck!

Be very careful with the decision "I would rather not hire a property manager because it's expensive and the whole point is to make money, right?". Yes, you want to make money but at the same time you also have to value your time. If you are cash flowing $500/month but at the same time you are investing 50 hours/month on tenant ads, phone calls, applications, showings, lease signings, check ins/outs, maintenance calls, back office, etc. you are working for $10/hr. 

I'm not saying it is the "wrong" decision, I'm saying be careful and thoughtful about the decision. It may be worth it to you because you want the experience, the overall returns are good, you are passionate about landlording, etc. But what about time off, vacations, kid obligations, etc.? I can imagine that many people get tired of this after a certain period of time. Personally, I don't want this, it is called "owning your own job". 

I may do the exact same thing that you are doing, buy 10-20 units, scale up to 100 units and self manage because I want to learn about the business. However, I will ALWAYS price in management because A. You or somebody that you hire has to get paid for performing these duties and B. You may outsource your building to a property management company when you get sick of doing it yourself and you want to make sure that these expenses are priced in.

BTW, here is a really simple way of looking at property management and pricing it out. It is not all inclusive or necessarily accurate but just a quick way to think about how to price out the property management piece if you don't want to use a fixed %:

Hey @Johnny Hastings, exciting! I would really focus on getting actuals from the seller. Get a rent roll for 2017, figure out actual gross income and vacancies. You could estimate expenses at 50% but that might be a mistake for this building as you describe it. I would get actuals for expenses (they will be way low) as well and then start building your proforma based off of reality. Personally, I wouldn't feel comfortable purchasing a building off of rules of thumbs or estimates like per unit cost, I would want to plug my numbers into an apartment deal calculator like @Michael Blank's http://www.syndicateddealanalyzer.com/ OR @Gino Barbaro's https://jakeandgino.mykajabi.com/store/zdt9X8o2 OR Frank Gallanelli's  https://www.realdata.com/p/reia/reiafamily.shtml. Any of these are well worth the time savings and money.

One simple mistake can throw your whole investment off and make it a loser.

 Sorry for the late reply...been real busy the last couple of days. In addition to @chris martin's comments, I will add:

1. My understanding is that your husband can represent you as your broker but commercial listing agents aren't usually real fond of this. The broker commission would be split but somebody needs to shed more light here.

2. You are correct on the calculation of NOI (no CAPEX), however, for my projections I include CAPEX reserves as an expense so I'm tracking real cash flow when I do my return calculations. For tax (return) purposes, CAPEX isn't an expense, so it can be adjusted within your accounting software. Also, when I'm dealing with a broker and cap rate comes into play, I will just adjust accordingly. For example, "mrs. broker, my offer is x, which is a 9.2% cap rate including capex reserves, with capex reserves removed, the cap rate is 10% which is the market rate for this area and property class".

3. For commercial loans over $1MM, these terms are available through Freddie Mac small loan program. 30 year am, 10 year term, 20% down, rates from 4.5% depending on other factors and possibly 3 years of interest only...and non-recourse. Loans from a community bank will look much different.