All Forum Posts by: Giovanni Isaksen

@Account Closed First let me clarify that the $250 - 450 per unit is set aside annually. Your approach of 1/useful life of each item is the best practice as long as there's a little inflation built into the replacement costs and some padding for unknowns.

One of our standard due diligence items is an engineering inspection that includes estimates of the useful life remaining on building components. Lenders require these for most deals and 100% of the time for Fannie, Freddie and HUD loans so we will have this data as a starting point to build the reserve schedule from.

@Angelo Without getting into legal or tax advice we typically have language in our letters of intent to the effect of buyer will assign the property to a new entity created solely to hold the property. When the deposit goes hard (non-refundable) and we are moving to a close we will create the new entity which typically is an LLC.

Whether to create an entity to hold the property entities is another question and there are many dearly held opinions about this, and I'm sure there are many forum discussions on that very subject. My non-lawyer take on it is that if I was an investor with other full time employment who was acquiring properties for my own portfolio a holding company wouldn't be necessary... but I would discuss it with your attorney to determine the best strategy for you.

Good hunting-

Those properties can work for long term holds, minimum one full apartment investment cycle, provided they're acquired with long term fixed rate financing and they cash flow adequately after reserves for future capital expenditures are set aside.

To create a Margin of Safety we model a maximum Break Even Ratio of 85% (BER = Total Debt Service + Total Expenses including CapEx reserves ÷ Gross Operating Income). This implies that the Margin of Safety is 15%; rents and/or occupancy can decline by 15% and the property will still break even. In more volatile markets we may go to an 80% or 75% BER to provide a 20 or 25% Margin of Safety. Doing this typically requires a lower LTV and more cash in the deal but for long term holds it can be warranted.

We also look at historical cap rate trends for the market and property type to model the eventual exit price using the long term average cap rate. If you're planning to hold 'forever' modeling the exit isn't as important but in my experience every property eventually sells (at least in the US).

BTW, this is what many large institutions are doing today in US major markets and the NCREIF 30 year compound annual total return on apartments is about 8.5% for that type of strategy: http://bit.ly/1oWtv25

Good hunting-

We always build in a minimum of $250 per unit for capex reserves and have gone as high as $450. Most lenders will underwrite a minimum of $250 and some will require it to be escrowed. Replacing roofs, HVAC and parking lot paving, etc. is a fact of life; reserving for them creates a much more predictable cash flow.

@Account Closed I wouldn't form an LLC just so you can use it in your elevator pitch because you can craft your story without having a company and still sound legit. It also somewhat depends on the size of property you're targeting. Ken is strictly 100+ units and he does already have a company that owns multiple properties. On the other hand if you're targeting smaller properties a more personal approach may work better. Once you get ready to close on a property it makes sense to form an entity to hold it in though.

Out in Seattle cap rates are in the high fours and investors are competing with institutional money as well as overseas investors who snap deals up with all cash. There still are small (< 50 units) '60s vintage properties scattered around that have room with value add but it's a hot market.

Portland has higher caps in the suburbs but smaller institutions are there too. You can still find some decent deals there if you are a long term holder and you stay under 100 units but that will make property management more expensive.

You can go north from Seattle and caps are a little better but if you go too far north you begin to compete with Canadian investors coming south and will bid up anything with a broker's six cap because it's twice what they can get in Vancouver where caps are in the threes.

In Seattle prices have crossed the Line of Doom (existing properties selling above replacement cost) and we're being pitched a lot of development deals. That typically means the apartment investment cycle is getting peaky but just when you think they'll be no renters to absorb the new supply Amazon announces another million sf of office buildings they're about to break ground on.

The saving grace is low interest rates. Ben/Janet say please buy assets so if you lock a property up with fixed financing (minimum 10 year fixed) and plan to hold through at least a full cycle you'll do just fine. If you're flipping with hard money you could get caught without a chair when the music stops

@Hament Raju Mahajan a good place to start is with the local landlords or apartment owners association in the markets you're interested in. There won't be a guru pitching 'bootcamps', etc but you will be networking with actual apartment owners, property managers and other apartment specific service providers.

Many of these organizations have training available and some provide market data and even contact lists for their members.

Good hunting-

@Bradley White, as @Joel said there are no carved in stone definitions but these are the rough guidelines that we use. Note that they combine property class with neighborhood class and of course we're all looking for the B property in an A neighborhood or a C property in a B neighborhood because they come with built in upside. Also in historic neighborhoods there can be old buildings that don't meet the age qualification of an A or B property but can be rehabbed into a very nice, desirable property:

Class A Properties:
• Typically less than 10 years old (No deferred maintenance)
• These apartment communities have a definite market presence.
• Typically occupied by white collar workers who are renters by choice.
• Residents pay above average rents.
• High levels of unit features and amenities such as garages, in-unit washer/dryers, pools, spas, exercise gyms, the latest technology, etc
• May have less cash flow than B or C properties but greater appreciation potential.

Class B Properties:
• Typically 10-20 years old (Little or no deferred maintenance)
• Occupied by both white and blue collar workers
• 80% to 120% of an areas median income (the middle class apartment dweller)
• Usually renters by necessity, not by choice (can’t buy for one reason or another)
• Tend not to move as often as other tenants.
• Generally command average rental rates
• Property finishes are fair to good and systems are adequate
• Includes former Class A apartments that are 10+ years old
• Complexes are well maintained
• Properties will have decent cash flow and decent appreciation potential.

Class C Properties:
• Built within the last 21-30 years (varying degrees of deferred maintenance).
• Typically occupied by blue collar workers and even some Section 8 tenants
• Usually have below market rental rates
• The projects have fewer amenities
• Renters by necessity.
• Properties will have decent cash flow but appreciation has to be created with physical improvements (remodeling, aka rehabbing or repositioning).

@Medellin Heel

Frank Gallinelli's book on cash flow is the source for understanding income properties. You can find it on Amazon here: What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures http://amzn.to/Zv0Zph

Frank also has another book called 10 Commandments for Real Estate Investors that I reread every other month or so as a reminder: http://amzn.to/15ikXL0

Ken McElroy has two great books on apartment investments and one on property management:

The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss http://amzn.to/HdXVf1

The Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals http://amzn.to/1bcWx50

The ABC's of Property Management: What You Need to Know to Maximize Your Money Now http://amzn.to/1d518JK

Also see Ken's BP interview on Podcast 052: Buying Apartment Complexes, etc. here:

http://www.biggerpockets.com/renewsblog/2014/01/09/bp-podcast-052-raising-millions-ken-mcelroy-rich-dad/

I think these are the place to start, but there's many more let me know if you'd like to see more.

Good hunting-

@Luis Saez I don't know about the app but Frank's cash flow book is the bible for learning how the numbers work in income properties. There are higher level texts but if you understand and can apply the concepts in Frank's book you'll know more that most commercial brokers.