All Forum Posts by: Enrique Huerta

@Jack Yu, If it was my capital, I'd ask for a minimum of 70% of the equity interest in the property if there was no preferred return. I would not sign loan documents and I would maintain control of the operations should things go sideways through a meticulous operating agreement. I would only agree to lower equity interest IF, AND ONLY IF, there were some skin in the game from the JV partner's end. In this scenario, there is NOT, so I would not go below 70% of the profit returns to me. I would also ensure there is some limit on budget on the rehab and commissions on the sale since the contractor and broker are affiliates of the JV partner. Just some food for thought.

And I agree with @Dennis M., I probably would pass on the opportunity just given the mindset of the JV partner.

I would encourage you to be patient and do more research on the deals you're trying to do as well as the people you are trying to do them with. There's no need to rush into your first deal. If you're comfortable with everything and just need help to negotiate a fair arrangement, then hey, it is your money and your decision. I gave you my personal threshold above.

 

@Jack Yu, One red flag I see is that the person putting zero money into the deal is making more money than you. Just because you are a "passive investor" doesn't mean you get lower returns. You eventually do, but you should be the priority upfront and only get lower returns AFTER a specific return is reached. 

I don't think the person putting zero money into the deal should be compensated at a higher percentage than you. That doesn't make any sense, ESPECIALLY if they are collecting a fee, doing the renovation work, and having an affiliated party list the home on the back-end.

I personally would do #3 if I was looking to be a passive investor. No loan or other liability should be associated with my investment. HOWEVER, I would not agree to only receive 25% of the profit. It doesn't pass muster with my personal investment philosophy. 

Is this your first JV on a house flip?

@Kevin Hoff

Underwrite every deal that you come across. Only by seeing everything can you establish a baseline.

Discuss the market with brokers and managers.

And there’s no substitute for packing a suitcase and visiting the market yourself. You need to do the upfront work.

As an alternative, our firm is moving into the Midwest and would welcome a discussion with you regarding your interest in working with us if that’s what you’d prefer to do.

Also, you’re worried about leasing commissions while your units are sitting vacant. Don’t walk over dollars to pick up pennies...

I would see what your options are to change managers and interview new firms.

You need to fire your manager. Why would you sign a 2 year agreement? That’s crazy...

At a minimum, you should have professional photos and be listed on Zillow, apartments.com, and cozy. Those 3 networks syndicate pretty well across the Internet

Great, Jason. Then just add in the utility expenses to update the Op Ex and NOI. From there, you can divide the Net CF by the 20-25% down payment and you have your COC return. The deal seems promising but it all depends on location and other things like that. Also, this is a static proforma. You'll need to run a full 10 year cash flow to determine IRR, etc but it looks promising on the surface.

Those numbers, if they included all expenses, would make me want to jump all over the deal. Do you mind me asking where you are located? We don't see anything like that in SoCal.

Hi Jason, Two questions:

Are those monthly figures? If so, I have annualized them and underwritten the deal below for you.

What is your down payment? It's hard to help you calculate cash on cash without a down payment. I will assume 30% and I would run the numbers like below:

The deal looks promising but I will make a few notes:

• Vacancy at 3% is too aggressive (in my opinion)
• There is no bad debt or concessions in your proforma
• You're missing Administrative, Marketing, and Payroll costs in  your proforma
• You're missing turnover costs but you have good capX so that may be OK
• There no utility expenses in your proforma

I am moving to Phoenix AZ. I am looking for house hacking with multifamily property. I am new in the REI market. I have few questions regarding multifamily investment.

1) I am looking at the neighborhood which has crime rate high but same time cash flow is good. There is less crime rate area but little expensive and cashflow is low. I am leaning towards the less crime rate area with little expensive. Any thoughts?

It all depends on the management company you're going to use. Since you are house-hacking, you will be living in one unit while renting and managing the other units. In this situation, it will depend more on your personal preferences and safety concerns. Also, the type of crime matters a lot. I would dig into the demographics further to really decide where you'd like to be. There are so many factors that go into this decision, but I personally wouldn't mind buying in a rougher neighborhood to get better cash flow and a better basis. You just have to be aware of your surroundings and see if you're concerned about that. I'm single. A family man may feel different.

2) How financing will work in this situation since I am going to apply the house hacking strategy? (Most of the cases while I was reading people have got the minimum 25% down.)

You can use FHA or Low-down conventional programs up to a 4-unit property. I would speak with a mortgage broker to see all your financing options. I'm not a lender but happy to make some referrals to people in Phoenix that may be able to help you.

3) Is this right time to invest?

I will say something that is potentially controversial to some, but yes right now is the right time to invest IF (AND IT IS A BIG IF) it is the right time for YOU to invest. Do you have the income, savings, willingness, and time to move forward? IF SO, MAKE YOUR MOVE. Don't wait. Many people are on the sidelines waiting for a recession. That's cool too, but what if it takes longer than 1 year to come? What if a trade deal is reached and the recession is no longer imminent? You would have missed out on potential appreciation and management experience. If you can afford to do it now, just underwrite conservatively, don't over-leverage your investment (so 25%+ down may be smarter), and buy a good deal. Make your money on the purchase and you can make a sound investment in any part of a real estate cycle.

4) Which areas around phoenix are good for positive cashflow with property value appreciation?

The west side of the valley will be more cash flow positive around this time of the cycle. I recommend you analyze a minimum of 100-200 deals to establish a baseline. If you find a deal that fits your investment criteria, then dig in and move forward.

5) According to you which numbers are more important while starting investment as a new?

According to me, I believe in 2 things: Conservative underwriting and Cash flow. I am targeting a minimum 7% cash yield for new acquisitions and I sensitize all underwriting assuming a larger op-ex ratio and a larger vacancy factor. The days of underwriting 5% vacancy and 35-40% operating expenses are gone. I also would build in a larger DSCR than 1.25x.

6) Any good financing options or suggestion?

Talk to a good mortgage broker! DM me for referrals.

Any suggestion?

Read and execute. Best of luck.

Disclaimer: The views and opinions expressed in this article are those of the author and do not
necessarily reflect the official policy or position of any other people, institutions, organizations, or companies that the author may or may not be associated with in professional or personal capacity unless explicitly stated. 

If you're an accredited investor interested in multifamily, it may make sense to make a passive investment with a reputable apartment syndicator. If you're not accredited, buying a smaller apartment building out of state and using a professional property manager would help build a reliable income stream for you and put your capital to work. PM me if you have any specific questions.

 Hi @Timofei. The main barriers to buying apartments in California is the capital required. Prices are high and cash flow is low so you will need more money down when buying the deals. Also, you should consider the pending legislation on rent caps, rent freezes, etc....

Other than that, the same work and opportunities are available in CA for apartments. Best of luck. Feel free to message me with any specific questions.