All Forum Posts by: Dan Cioaca

If it's a good deal, then I say by all means pursue it, and just have empathy. Estates are complicated because of the parties involved and the emotional baggage that accompanies them. That's also one reason why they can present good buying opportunities, so I'd think about two aspects when planning your approach: 1) the deal itself; and 2) the inter-personal dynamics.  

1) If the deal pencils, I'd dig into the intangibles to understand the risks and likelihood of closing. If the house is vacant and they don't intend to move in, then the maintenance, taxes, insurance, etc. turn it into a money pit and they'll eventually have to move on. So hang around and build rapport until they're ready for closure. Since the holdout sister likely doesn't have the money to buy out the other two and then fund a rehab (assuming rehab since you mentioned BRRRR), they will have to sell sell eventually. If one of them lives in it is otherwise dependent on it, their personal interests may diverge and that could lead to a family feud and possibly an eviction problem you probably want to avoid.

2) You should try to understand the inter-personal dynamic among the heirs, and remember it's critical to have empathy when dealing with the bereaved family. They just went through emotional trauma that each of us will deal with at most a couple of times in our lives. They're mourning a loved one, are revisiting a lifetime of emotional baggage on top of planning a funeral, possibly dealing with probate, cleaning out a household of memories and possibly their childhood rooms... They may also disagree on what to do with the property and any external pressure would just feel like piling on. 

That you're in direct contact with the sellers is a huge advantage, so you should use it. I looked at an estate deal recently where the family lost one parent during covid with no funeral, the second parent just entered hospice, they were being foreclosed on by the reverse mortgage lender, and the siblings would have to move on sale after 40 years in the property. I got to know them on walkthrough, asked them about the house, the history of the neighborhood, and praised their flower garden, which it turns out was their mother's and they were maintaining it in her memory. They were really good people and had a lifetime of memories in that house that they were happy to share, and I know that would give me an edge if a robotic vulture investor came long.  

Be kind, show empathy, and listen. Good luck!

You should be fine so long as you (i) buy substantially below market value; (ii) only buy where you can rehab or otherwise add value; (iii) have positive cash flow when stabilized; (iv) have fixed long-term financing in place; and (v) only invest excess reserves and don't over-extend yourself financially. If you check all those boxes, short-term ARV doesn't matter that much other than potentially slowing your velocity of capital on a BRRRR strategy. If a property makes sense on a purely cash flow basis and you treat appreciation as gravy, the short term market drops shouldn't hurt you too badly.

That all said, a serious recession can negatively impact employment, vacancy rates, and ultimately your cash flow. In that case, you should take an honest look at your property relative to the market and ask how you'd fare if vacancies double or triple. I look for lower-end rentals partly because I think they're less exposed to economic headwinds since people tend to trade down when times get tough, i.e., from nicer luxury properties down to nice/clean but cheaper options.

Investment Info:

Single-family residence buy & hold investment in East Hampton.

Purchase price: $1,050,000

House hack of sorts. Summer rental destination, so MD-LD are 70% of full-year rent and is cash flow breakeven with 3 month rental. Free use of it off season as a vacation home. Switched to full year rental when Covid created a year-round market and tenant pays utilities, so half of rent is left after the mortgage.

What made you interested in investing in this type of deal?

Wanted a tenant-funded weekend getaway. NYC had already recovered from the GFC, but good listed deals still existed out there. It's the worst house on a street with very large lots: a 2-story 1500 sf 2BR house on 1.2 acres, so there are a lot of options for expansion. The current zestimate for the next cheapest house on the street is 2x our zestimate.

How did you find this deal and how did you negotiate it?

It was listed, but poorly advertised, not well-staged, and listed during the winter when there were few buyers. Owners were a retired couple who wanted to move to Florida and had 100% equity. They were sticky on the price, but it was a good price, so we had them leave the furniture that we wanted and move out the rest, and as a result we were able to rent it that summer.

How did you finance this deal?

Traditional 30-year mortgage.

How did you add value to the deal?

Only cosmetic changes to driveway, entry gate, furniture, new coat of paint.

What was the outcome?

Tenants pay utilities while renting, so the house self-funds with a summer rental and the mortgage is 50% of a full year rental, so the rest is profit. Did a cash-out refi of 100% of our initial downpayment in Q3 2021 and bottom-ticked interest rates at 2.75%, so probably won't refi that anytime soon.

Lessons learned? Challenges?

Finding reliable communicative vendors out there is very difficult. Work often doesn't get done if you're not there in person, so we multi-task vendor management with

Investment Info:

Single-family residence buy & hold investment in East Hampton.

Purchase price: $1,050,000

House hack of sorts. Summer rental destination, so MD-LD are 70% of full-year rent and is cash flow breakeven with 3 month rental. Free use of it off season as a vacation home. Switched to full year rental when Covid created a year-round market and tenant pays utilities, so half of rent is left after the mortgage.

How did you find this deal and how did you negotiate it?

On market but poorly advertised, and purchased during winter lull in a beach destination. Received unsolicited all cash offer for 20% more after closing hit the town records.

How did you finance this deal?

Traditional 30 year mortgage.

@Munim Jalil

First, congratulations on 5 years of success in one of the hardest property/landlord markets in the country! I live in NYC and couldn't imagine being a landlord here with some of the horror stories I've heard, let alone through covid. The professional tenants and lawmakers seem to be in cahoots, and I've steered clear. 

Regarding your question, can you clarify your goals? You said you want to maximize FCF and equity value, but you don't want to add leverage, so why does equity matter? As far as FCF, there are tons of good books out there for tips and tricks, including some BP books, and they basically come down to increasing rents, reducing expenses (especially utilities, possibly with RUBS), and reducing vacancy. 

If you have a proven formula, stick with it until it stops working. As you expand, I'd focus on leveraging your existing core competencies and maximizing economies of scale.  

+ core competencies: When considering things like commercial or airbnb, ask yourself how much of your existing operation you can leverage versus which gaps you need to fill. Landlording can be quite different for long-term tenants versus businesses or STRs - just consider citywide vacancy rates for commercial versus residential. My barbershop's landlord raised rents on them 5 years ago so they moved next door and the old space is still vacant because it was perfect for a salon and not much else, and nobody wants to move next door to the competition. 

+ economies of scale: if your buildings are clustered, contractors/handimen/turn-crews have local economies of scale, but you'd need a duplicate team in a different market, including lawyers, agents, etc. It sounds insignificant, but even little things like wording of leases, notice periods, how you handle security deposits, the dispute process - it can all be different and now you need manage two separate processes. If you do expand geographically, find someone who knows that area and figure out if you can realistically achieve local economies of scale in that market. 

Your under-leverage strategy makes sense to minimize risk, especially when starting out and if you have plenty of cash available. That said, I'd be open-minded as things change - a year ago I locked in a 2.75% long-term mortgage rate on an investment property and now the mortgage is as much of an asset as the property.   

I personally focus on Connecticut because it's cheaper to get to scale on units and I prefer the demographics and landlord/tenant laws. I've also found a few areas that I think are less likely to exhibit the boom-bust market cycle, which I value given the dark clouds in the economy. Right now I'm looking at a 3-unit with a purchase price of $350k, ARV of ~$700k, should cash flow nicely even with 6% mortgage and 75% LTV, and I can pick it up for less than $100k down. For me, this is a faster path to more units and greater diversification.

Contact me directly if you want to learn a bit more about where I'm looking and I'd be happy to tell you what I'm seeing. I'm also be very curious how in the heck you were able to make NYC work. 

@Eric Hempler

There are any number of reasons for gaps between buyers, as mentioned by others, but most or all of them fall under differences in your assumptions. A few I've seen:

1) modeling assumptions. Models are only as good as their inputs, so it comes down the quality of your inputs and how conservative you are. A few examples are: required return, LTV, mortgage rate (if financing), closing costs, reserve requirements, rehab estimates, vacancy, operating expenses, rental increases.

2) cost and operating efficiency. If others are better at rehabs or operations, they'll have better NOI from the same property and can out-bid you.

3) accounting. The mom-and-pops use cash accounting as a shortcut and don't typically charge themselves non-cash expenses. For example, they self-manage, so management is free, whereas I model 8% even though I intend to self-manage. Same for lawn care and snow removal. Another big non-cash expense is capex, so they're often surprised with a large unexpected bill every few years, whereas I treat it as an expense and segregate the money, making it look less profitable today. 

4) return calculation - When looking at the overall return and hurdle rate, investors typically combine yield and appreciation, and in fairness that's the correct way to calculate IRR. However, it can lead people to accept deals the two are wildly out of balance and most or all of the return comes from appreciation, i.e., 0% cash on cash or even cashflow negative. People have made money that way the last couple of years, but it's very risky long-term strategy. Conversely, if you're not looking at IRR at all and requiring all your return from cash flow, you could be overly conservative.

What if your numbers are correct and this is the stable market equilibrium? I'm seeing something similar in my area of interest, and though these are ultimately also all related to modeling input assumptions, here are a few things I've observed:

+ there is a big range in price per unit. I pulled all sales for 10 years and the bottom/mid/top of market is about 100k/250k/400k per unit, which both a huge range and shockingly stable over time - all three trend up together slowly over time. That's partly due to unit quality and rehab needs, but also buyer/seller circumstances. You have to be in the bottom 1/3 of cost per unit with full rehab to cash flow in my market, so 90% of deals look too expensive to me and that's been true for years. 

+ if using comps rather than bottom-up modeling for valuation, there's a big gap between trailing comps and forward-looking estimates. Sellers/agents learned over the last decade to just step up 12-month comps by some amount, whereas today I'm only look back 90 days because the numbers are very different than even 6 months ago. 

+ unemployment and vacancy will rise with the recession, but those are trailing indicators that materialize over years. During the GFC, unemployment peaked 21 months after the recession started. I've been using recession-level vacancy rates which don't reflect the facts on the ground today, and underwriting is harder, but I think that's a good thing. 

If you're solid on your numbers, stick with them and use them to protect yourself. It can be frustrating to watch the calendar turn with no deals, but that's the required discipline.

@Curt Smith

I took a look at Propstream and it seems like a great value and provides a surprising number of services under one umbrella, so I'll probably start with that - thanks!  

Thanks also for the very detailed response on MFRs more broadly. As far as the risks of MFR and the value of education, I take your comments to heart, hence why I'm here. I've been a SFR landlord for 10 years and have found that the business runs itself once good systems and team members are in place, which is part of my motivation to expand. SFRs where I live don't pencil and are much harder to scale, hence my interest in MFRs.

Now, I understand MFRs are a different animal, so I've started to get educated and am looking at buying my first property in the next 6-18 months, so there's no hurry. I listen to a handful of MFR podcasts and have read maybe 30 books on the various aspects of MFR over the past 3 or 4 months and I've gotten to the point of diminishing returns. I'm love learning, but I'm seeing decreasing marginal returns on education, and I think it's time to move on to hands-on learning. I hadn't seriously thought about coaching, but I'll take your advice to heart and look into it.

I'm also taking some steps to limit my risk. I'm starting local, so the properties are drivable, with small deals so I can afford the early mistakes. My target properties are 2-4 unit to avoid the commercial financing and so I can sell to a house hacker if absolutely necessary, and are in the range of 15-25% of the value of my primary residence, so they won't ruin me financially (or make much money) regardless of the outcome. I've also started finding partners for the parts I'm less experienced in, specifically construction/rehab. The job of deal #1 is to road test my team and systems, since those are hard to do in the abstract, and streamline operations for growth later on. The first property gets as long as it takes until it's stabilized and cash flows smoothly, and only then do I move on to the next deal. 

I've also reached out to a few people already, e.g., investors, bankers, agents, etc., and I sense that doors will open much more easily once I can credibly say I'm already an active investor and landlord in their market. I've felt some skepticism from initial conversations and I get a sense that a lot of people think they want to build a real estate until the start to understand the messy details and various complexities, and then they back out. I'm hoping that by starting slow and steady, I'm able to have staying power and build my credibility and network over time. 

@Jim Pellerin

Focused on MFR for long-term buy and hold. Based on my personal experience, I'm planning to start with a few outreach channels and then expand and experiment over time. I'll initially handle inbound calls personally until I can iron out the script sufficiently to hand it off to a call center or dedicated salesperson on my team.

What's your underlying question? Does the effectiveness of direct marketing vary wildly based on property type? And why does exit strategy matter when considering the cost effectiveness of outbound marketing for purchases?

I'm starting to systematize my fledgling real estate business so that I can scale it in the coming years. Listed deals in my area almost never pencil, so I'll eventually need outbound marketing to scale. I'm debating whether to build or buy my marketing data , and I'm leaning toward build for a few reasons, but here I'll focus on the economics. Can anyone experienced with outbound list-based marketing help me better understand the economics or if there's a different/better approach or provider (I used listsource as my reference example)? I do plan to initially use a list provider for proof-of-concept, so my question is about the long-term.

Since list providers charge for usage, they seem to exhibit diseconomies of scale and I worry that will limit growth in the long-term. When pulling sample lists, the juiciest data is very expensive and leads to a cost decision between highly-targeted small list or poorly-targeted large list, each of which is likely to yield few deals. Let's say the list provider has 50 criteria - my marketing budget would fund a list with 1000 targets across 3-4 categories or 200 targets across 6-7 categories. I'd like to be able to target across all 50 criteria and also to experiment with different levels of targeting. If I build my lists in house, this would be a one-time fixed expense and my ongoing marketing costs would be limited to direct outreach costs. There is also some data I'd like to use for targeting that just isn't available at any price if outsourcing. 

Can anyone with experience doing it yourself versus outsourcing comment on these and other tradeoffs?

A few things to consider

+ a common rule of thumb for max acceptable purchase price is 70% of ARV - rehab costs, which in this case would be 70% * $150k - $25k = $80k, which is above the seller's desired sales price. So the margins here would be tight at best and you may want to negotiate purchase price further.

+ you need to fully understand all expenses on a go-forward basis after renovation and see if the property is likely to cash flow. Back of the envelope mortgage on 75% LTV refinance on ARV comes in around $700/mo, so you're looking at another $700 to cover all other expenses. Do tenants pay utilities or do you? What will the property taxes be assessed at after the sales (can't use historic property taxes here because they typically re-assess on sale)? Run through the BP calculators and make sure to plug in actual numbers to see if they pencil. If it doesn't cashflow after the refi, it's going to be a money pit rather than self-financing. Remember also HELOC's have floating interest rates and you're dependent on a refi in 12 months and the fed's stated policy is to increase rates further, so you should do a sensitivity analysis on how high rates can go before the property no longer cash flows - if refi rates are 8% in 12 months, does the deal still make sense?

+ seller financing can be nice, especially if the property is in a condition where a bank wouldn't finance it, but short term debt with a balloon also comes with a lot of risk. What happens if you can't refinance and pay off the debt in a year? There are numerous reasons why this might happen, e.g., property prices fall and it doesn't appraise, interest rates climb too much, markets crash and banks stop making loans, you lose your job and no can't qualify. In any of those cases, the owner could foreclose and take the property, and they may be more willing to do that than a bank since they have experience managing this specific property. If the numbers work out and you plan to go ahead, I'd negotiate contingencies around what happens if you miss the balloon payment. There are plenty of options that would give the seller confidence you wouldn't willingly delay the payment, e.g., you can extend the loan an extra 12 months at a higher interest rate.