All Forum Posts by: Enrique Huerta

Hi @TJ Flynn,

This is what I would personally do if I were you. I am not you so take this for what it is: one person's opinion and triangulate the data to make the best decision for you, your ambitions, and your goals.

Since you have a contractor's skillset, I would look into a flip/value-add project where you can invest both cash equity and sweat equity to add value and generate some profits and cash flow. You can also look into ground-up development although that requires more contacts and work.

I would personally buy a "light value add" deal that needs some cosmetic work and start with that. A house is OK but not my personal favorite. I'd probably tackle a 2-15 unit deal. Seattle is expensive so maybe a fourplex to begin. Renovate all the units and lease them out at higher rental rates. Then you can refinance and cash-out. Look into the BRRRR method. Rinse & Repeat. My personal philosophy is to buy something with an in-place minimum return that can be grown through cosmetic renovations and hands-on management.

I'd skip paying all cash. I'd skip the primary SFR. I'd skip 15-year mortgages. I'd consider hard money loans and I'd consider doing a Joint Venture with someone else. One structure I would do is approach an investor and say: "Bring me a deal and I'll invest some money and some construction work." Then y'all can partner up and make a project come to life. As always, vet all your relationships and do full DD on the project and the people involved.

A final option would be to take some capital and make a passive investment with an experienced sponsor of investments. This would be an option if you are an accredited investor. That way, you can make some "small bets" with other experienced investors and then you can place some other "small bets" with your capital in an active way.

I would do a 25%/50%/25% split or 50%/25%/25%

Take 25% and invest it passively. Take another 50% and invest it in your own hands-on projects since you're handy. Save the other 25% for cash reserves for a "rainy day" or current environment like today.

or

Take 50% and invest it passively. Take another 25% for your own hands-on projects. Save 25%

This is all with the assumption that you're not looking to make real estate your full-time job. If you are, my advice would change. If you want to keep your current career and make some investments on the side, the strategy above is awesome in my opinion.

I am biased but that is what I do with my own capital. Take it for what it is and best of luck.

Final thought: today's environment is challenging and it's good that you have cash to deploy. Don't jump at the first deal. Make sure it is a solid opportunity and when it appears, take it.

@Pope Lake, as others mentioned, these are considered "Pursuit Costs," or the cost of doing business when purusing deals therefore they become a sunk cost. The more experience you have, the more you can determine what may appear on the PCA and the lease audit with good questions and a thorough tour. So, the main risk becomes the ESA Phase I expense. In the grand scheme of things, a couple of thousand dollars is worth the cost to avoid a bad deal.

Best of luck!

@Alejandro Antonio Taylor JR, Congrats to you and your dad on your new endeavor! We are in interesting times so I salute you for your courage and willingness to move ahead despite the market turbulence. If you have any questions along the way, I'd love to connect and talk through some of your challenges!

Your question is extremely loaded and there is no "one-size-fits-all" answer. In general, I would say that a seller's asking price is just that, their asking price. Everyone's motivation is different so there is no guaranteed formula to get a $5M deal for $3.8M. The reality is that everyone solves for different returns and YOU have to decide what returns you and your dad are looking for. A $5M deal will attract offers in a wide range from $3.5M to over $5M.

With that said, stories of "good deals" are just stories without any context or numbers to back up the stories. Those stories are typically indicative of good timing and a motivated seller. The only way to find those is to be in the market every single day speaking with brokers, lenders, and owners.

I would encourage you to discuss with your dad what returns would be suitable for YOU. Look at various investment return metrics and choose the best mix for your goals. IRR, Equity Multiple, Cash-on-Cash Return, Annual Average Return, Stabilized Yield on Cost, Proceeds Per Unit, etc. And then make an offer based on the price that meets your goals.

For example, if the $5M deal didn't meet my hurdles, I would lower the price on my financial analysis until I "back into" a price that meets my investment return goals.

What are you goals? Cash Flow, Appreciation, Growth, Steady Returns? How hard do you want to work to get returns? Are you okay buying a small return? Or do you want to "Manufacture" a high return?

Should I have negotiated more strongly when I purchased the property?

It depends. Did you know these items would fail within your hold period? If so, then yes. You could have requested a credit, asked for replacements, cut the price, etc. It is also prudent to underwrite reserves for a year or two from day one and as someone mentioned, set aside funds each month for other replacement reserves.

Real Estate is not always cash flowing. Some months and years it will cash flow to you and other months and years it will take from you.

I would call it a lesson learned and a solid experience. One benefit you can potentially get out of this situation is a tax benefit. Talk to your CPA about those Capital Improvements. 

Would you pay cash for the replacement costs?

Personally, yes. It's the simplest way and you have to do it so might as well bite the bullet. 

If you have access to an interest-free loan, that may be smart to use but I would not use hard money on this. Why pay interest on CapX dollars? Investors do it when it is a meaningful rehab and they get high leverage, but if your HVAC replacements are thousands of dollars, I doubt you'll find a hard money lender to provide that small of a loan amount.

CapEx can always kill a deal's returns if you don't account for it appropriately.

On the next buy, make sure to take a good inspector and contractor to the unit walks and have them look for every problem! You can never know too much about a property.

Forgot to answer the other two questions:

• Invest a few hundred thousand via syndications across various markets I like
• Concentrate in Multifamily Housing
• Leverage would depend. If you're an active investor, no more than 70% LTV in my opinion. I would prevent downside scenarios by running sensitivity analyses on my financial model. How much can revenue decline before the property breaks even? How much vacancy can the asset support? How much can rents drop and the property will still DCR? What is the DCR? I would say bigger is better when it comes to DCR so to minimize downside buy a more stablized, cash-flowing asset with strong in-place CF.

@AP Horvath, I am biased, but I would select one asset class you believe in over the long-term that delivers strong, risk-adjusted total returns and make some meaningful investments in that sector. 

In my experience, multi-housing delivers some of the best risk-adjusted returns over the long-term compared to other CRE asset classes and even other traditional investments (I'd cite my sources but there's a bunch: CBRE, NCREIF, Moody's, etc.)

Full disclosure: I am biased because of what I do, but if I were in your shoes, I'd be a passive investor in real estate syndications. That would allow you to put your money to work, thrive in your career, and have the time to dedicate to your family.

If you're interested in a more hands-on approach, then as others have mentioned, use the capital as a down payment to buy your own property. Of all the asset classes, again, I'm a fan of multi-housing given the structure of the investment (multiple, short term leases; housing is a necessity; improving areas will see appreciation in rents and values; you can add value with some capital investment;etc.).

Let me know if you have any questions or would like me to elaborate. I have worked in SFR and CRE so out of all my experiences I prefer multi. My $0.02.

I would absolutely reach out to a mortgage broker. How do you know you're getting the best deal if you only spoke with one lender? A good broker will have extensive and varied relationships. I would recommend making a few calls to local brokers so you can access more of the market.

As @George Despotopoulos mentioned, you need to elaborate further on your specific situation to receive better feedback and answers to your question.

Generally speaking, Texas can be a strong state to invest in. As @Amanda Chandler mentioned, be wary of property taxes. DFW is more laid back, but San Antonio, Austin, portions of DFW (depends on County), will reassess you aggressively after purchase. Do your homework!

@Candace Price

A lot of factors go into the rates provided.

The asset, location, your net worth and liquidity, your experience, your SREO, the property financials, your relationship with the bank, your down payment, etc.

Assuming you’re good on all fronts. 3.5-4.0% wouldn’t be out of the ordinary with some IO on the loan.

@Ahmad D.

All of the above!!!

Brokers, Wholesalers, Listing Portals, underwriting everything that comes across my desk. Occasionally picking up the phone and calling owners directly. Networking and asking people if they know anyone looking to see a property.

The most important thing is doing it every day.