All Forum Posts by: Dan Brewer

Jerry -

Just to compare apples to apples, I assumed there would be outside property management at 10% of rents. I used the mid-point on the rents, and the high-end on the taxes. Assuming you pay $60K cash, including rehab, you will net $6,800 (not factoring in repairs and vacancy/non-pay). Thats about an 11.3% cap rate cash-on-cash (i did not factor in the leveraging). A decent cap rate comparatively, but you did state that the area is not so great. That means more volatility, more risk of non-pay, vacancy, vandalism, abuse etc. For not so great areas, I would factor those expenses in and therefore want a greater cap rate in my initial purchase analysis - at least 15% or 16% in todays market. Then when you incur those expenses, I think you will achieve a cap rate at about what you would achieve with an 11.3% cap rate in a nicer area.

I see better deals all the time when investors apply for our loans, and we have a mechanism to evaluate the volatility. But you are experienced, and you do have other properties in that same area. So that helps. I feel you really need to stay on top of properties in more volatile areas.

Hope that helps.

Robert, I work quite a bit helping assisted living operators and developers raise capital and acquire financing, and have worked on several deals with HUD. Since the financial market collapse, its been very difficult for these operators and developers to acquire financing from traditional banks, and still is to this day. HUD has become a very popular source, and often the only one. Unfortunately that has bogged HUD down tremendously. Ellis is correct - contact the SBA and HUD to educate yourself on the process and understand how to proceed when you are ready. However, the SBA and HUD lenders are incredibly busy right now, and you won't get very far without a deal to proceed with. In addition, the seller will have to be willing to wait a long time - often in excess of 12 months or longer. For example, we are working on a funding for an assisted living community in Illinois, and are working with a very experienced approved HUD lender. At this point, our estimated close date is late 2014 or early 2015.

I am also concerned about the amount of cash you have to fund the deal. It would be difficult to get it done with 10% down, particularly if that would tap you out or run you pretty low on reserves. But you picked a great industry - the demographics are all in the favor of the developers and operators. We as a nation are getting old, and the wave of baby boomers are starting to retire. The demand for assisted living communities is skyrocketing, and the difficulty getting the financing is only increasing the need for these communities. Assisted living communities generally cost $10M+ to either build or purchase, and often the amount is closer to $20M. So its difficult for smaller investors to have the opportunity to invest in them. When that chance presents itself, its a great way for an investor to diversify their investment portfolio and get involved in an real estate category that should be very profitable and beneficial to their portfolio for a long time to come. The bank (or HUD/SBA) will do a lot of the underwriting for the investor, because they will have the bulk of the capital in the deal. So that should bring investors unfamiliar with this investment category a fair level of comfort. However, I strongly recommend investors do their own due diligence, and put their greatest faith in the strength and experience of the company that will manage the operations for the community. That is my #1 criteria for my investors. My favorite statement is that a great operator will take an assisted living community that is undesirable in many other aspects, and make it successful. At the same time, a mediocre or bad operator will take a community that is strong in virtually every other aspect, and ruin it.

I concur with Will. I often suggest to clients and other investors to diversify their real estate investment portfolio. Certainly investing in cash-flowing rental properties is one strategy that should be utilized, but many investors are not well-suited to manage their real estate property portfolio, particularly remotely. However, they often don't know what else may be available. I generally quiz investors to understand their capabilities, skills, goals, etc, and often recommend they consider a variety of real estate investments that may be more suitable for them. There are excellent real estate investment funds with strong track records, and other options such as notes. confirm the experience and reputation of the companies and individuals that offer these investment options, and choose an option that allows you do do a thorough analysis of the offeror as well as the offering. I recommend investors look at loanmls.com, which is a loan/note market place, as a source of diversification.

We have many clients who invest with us using self-directed IRAs. Many are with the more well-known SDIRA administrators, and express frustrations similar to @Douglas Larson. One of my favorite IRA administrators is First Trust of Onega. I find them to be very pleasant and very efficient when processing the paperwork from our investors. I highly suggest investors consider them when selecting an IRA administrator.

In my opinion, absolutely. But there are also lenders for properties in areas that don't meet this profile. I would not support that, nor would I recommend an investor go into those areas. But there are plenty who would disagree with me.

Andrew, first of all, congratulations on beginning your real estate investment career. I think you will find this to be a great forum for information and learning. there are many ways to reduce your risk, and one of the most valuable ways is through education and creatign relationships with others that have been in the business a long time. The internet provides an excellent forum for this, and I wish it existed in its current form when I got involved. Take your time, educate yourself, and create relationships wit many experts.

More specifically, have a plan. You can buy/hold, you can buy/sell, you can buy/rehab/sell, etc. You can do single family, multi family. Start small, minimize your exposure, and look for early successes to build up your confidence. Locatio is a worn out word, but it is truly the most important aspect of your real estate investment. You can change everything else about the deal, but you cannot change the location.

Non-recourse lending is a smart way to go to reduce risk. Their is usually an associated cost, because now the lender is picking up more of the exposure. and since you are new to the business, it may be more difficult to obtain. However, many non-recourse lenders look specifically at the asset, and base their risk in that, and less so in the borrower. Usually you have to bring some money to the deal, because they do want to see that you have a vested interest, and are less likely to walk from the deal and force the lender to liquidate it.

Most non-recourse lenders do not want the asset, regardless of the value. they are lenders, they want to make safe loans, and they want them repaid. The security is in the collateral, no question. However, they will take the borrower into consideration, and determine if the borrower has a history of responsibility. If that is questionable, its unlikely they will make the loan.

Interesting topic. I have been in real estate investment property lending for over 10 years, and firmly believe the cap rates on investment properties are difficult to hit, particularly for the average rental property owner. If your sharp and a detail-oriented person, they can be achieved. But property ownership is not for everyone.