All Forum Posts by: Dustin Beam

Like it's been said, you left out a lot of variables. 

Strictly mathematically speaking, if you're still interested in investing, will you make more money per month by selling and buying something new? If so, strongly consider doing a 1031.

A property in KC that meets the 2% guideline and is in a decent part of town probably won't be seen on the MLS. If it makes it there, you'll need to pull the trigger immediately.

In my experience, it can be a blend of the bank viewing it as an investment and as SFH, or perhaps just like they are SFH. So on the one hand, they can and will use comps to see what they are worth as they would any single family home. But also, they may also consider that selling them in bulk may be necessary, which means to an investor, which means at some discount. That will be the bank's prerogative.

I'm in discussions now about refinancing, which means appraisals. My existing bank wants to view it as both SFH and MFH. Another bank is willing to view them as simple SFH. So I do know that it depends on the bank.

Raising value on SFH is more about appearance, square footage, neighborhood, etc. Think about what flippers do to raise the value of a property.

MFH will be evaluated by the NOI.

So that means, depending on the evaluation method, you either want to better the attractiveness of the property, increase the NOI, or maybe both.

Maybe the best scenario is that you're buying at a below market value where you have instant equity at the time of purchase. 

 I just added an edit to my first post, but the answer is yes as long as your bank will do it. I actually have exactly 11 townhouses under a single loan myself, but it's a commercial loan, which also has balloons haha. 

I do understand how balloons can be scary, but long story short, as long as your equity position in that property is strong in 3 years, you should be fine. Worst case is you sell them if you can't find financing, which again, if your equity position is strong, you'll profit. 

What you don't want is to owe the seller $400k and they are worth less and you don't have the cash to make up the difference. 

Ideally, they are worth at least $533k. 75% of 533k is 400k, which a bank ought to loan you that money to pay off the seller and under a new mortgage. 

EDIT: I thought it was a commercial property, sorry. So CAP rates probably won't matter. But in essence, you will want that due amount to be approximately 75% of the actual value so a bank will loan you the amount to pay off the seller in full. End edit.

Basically you want enough equity in the property after 3 years to finance w/ a bank. Or, to have the difference in cash to make up for it. 

If possible, the best way would be to increase your NOI to push the value up. If the market cap rates fall, your property will lose value, so you may want to be prepared to bring cash to the table depending on your ability to raise the value of the property.

I don't personally think it will change much, if any. There are over 30 states that have legal medical marijuana, so I don't see some big influx of people moving to MO to take advantage of the new law. Furthermore, from what I've heard, it could be a year before it gets implemented.

Ha, no (to your first question). It's a weird story, but I once found myself catching a ride from a guy I didn't know late at night who turned out to be a broker and I told him all pro formas were bullsh#t lol. I can be pretty forward at times. :) 

I totally agree to do an analysis on any property a person buys. But that's not the angle I'm taking here. For instance, let's say that the pro forma number are reasonable. And you'd make a little money at that price. But, as we all know, there are hurdles to jump to get to market rents typically. Even if repairs/rehab are not needed, you're still going to have to raise the rents...and even if no leases are longer than a month, you'll experience turnover. 

So I guess what I'm saying is that if the market  CAP is say 7%. And the listing broker is trying to sell the property at that 7% CAP, but at the pro forma rents. So they are trying to sell the property at full amount, while the new owner has to go through the hassle/expense to get there. I think we would all agree that you don't pay the full asking in that scenario. My question then, is if the market CAP is 7%, are you willing to pay a lower building  CAP knowing that it will eventually meet or even exceed the market CAP? Or are you only willing to pay a price where the current performance CAP rate and market CAP rates are equal?

I hope I'm not making that too confusing. Maybe numbers are better, sorry for being so lengthy. So simple numbers:

Asking Price: $1M

NOI: $60,000

Potential NOI: $80,000

Building CAP: 6%

Market CAP: 7%

Potential Building CAP: 8%

Market value at existing NOI: $857k

Market value at Potential NOI: $1.14M

So as you can see, the asking price is too much for what the market says it should be at its existing performance. But you think you can get it to actually exceed the market CAP, thus raising the value. How hard do you bargain to get it at market value based on existing performance?

I hope in no way did my post indicate it's impossible. I'm hoping it said the opposite! :) 

For me, though, my post detailed how I think I would need to go about it. And it will probably take me longer than 10 years. Some people could do it in 5, I'm sure. 

Out of curiosity, are those units of yours 100% yours or w/ partners? I'm not asking to try and tear down your accomplishments, I think it's impressive regardless. I ask because the OP wants 300 units that cashflow $180/mo each. If you have partners, the "dividends per door" are probably much less, I would assume anyway. 

My goal is similar actually, although not necessarily w/in 10 years. The point I want to make is that I've pondered how to do this. Reverse engineering it, if you will. 

And while I don't have all the answers, or maybe even very many answers, but in my situation I've decided 2 things have to happen....maybe both. I have to get good at recycling money and/or get good at using other people's money. 

Both are feasible. My first property was MFH that I sold in a 1031 to buy my current. Right now I'm just starting the process to hopefully refinance to pull most, all, or more than my down payment out. I will then use that money to buy an apartment building (assuming all goes well). So that's recycling money. And I want to do the same on whatever I do next. 

So then there's OPM. This is probably the fastest way. And of course, you probably already will be using OPM, as in loans from a bank. But even 20% down each time will eat away at whatever capital you have, unless you're flush with tons of cash. I'm not. So what do you do? Syndicate. I am not there yet, nor trying to be. However, if my next purchase goes well, I will think much harder about it since I hope my track record would be at least respectable enough for investors to know I'm not some green guy off the street. Time will tell. 

Good luck in whatever you do! 

 I hear ya, and that's how I feel about it too. Agree with pretty much everything you said. I just saw one the other day that had real vacancy at 0% and the pro forma had it at 1% lol. The actual may have been zero, but if you go to market rent, doubt you only have 1%.

Paying close to market cap for pro forma rents seems ludicrous to me.