All Forum Posts by: Arn Cenedella

@Jack Pasmore

I’ll share a few thoughts. 

The decision between 506b and 506c is somewhat a function of deal size and capital raise required. 

The larger the deal, the more likely the operator sponsor will go 506c. One - the sponsor needs bigger checks to fund the deal (more likely from wealthy investors) and Two - the sponsor needs more investors and so advertising these deals as allowed in 506c works - Three - there is a limit of 35 sophisticated investors in 506b.

I agree there must be an element of trust built before an investor cuts a check for $50K $100K. That being said, the old adage KNOW LIKE and TRUST applies. The KNOW comes first where advertising helps. 

At Spark Investment Group, we do fairly smaller syndication deals $3M to $6M with capital raises of $2M to $3M. We do 506b deals with a $25,000 minimum.  This structure fits our deal size - our average investment is $50,000 and so we generally have 30 to 50 investors per deal. I’d say half are accredited and the other half sophisticated so we don’t run into issues with the 35 limit. 

The first “sale” is always the hardest. 
How does one acquire their first client or investor?

That always takes the most work. 

I’d say:

One must have:

1. A track record in real estate or business. Some years investing with demonstrated success and expertise. 

2. Local market and or niche knowledge. A sponsor must demonstrate he or she knows the sand box they are playing in. 

3- A professional website and investor presentation. 

4. Work friends and family first - one’s professional and social sphere. 

5. Invest your own capital. 

Once that first “sale” is made then it is time to perform for the investor. If you do, you probably will have an “investor for life”.

At Spark I’d say generally 50% to 60% of our investors in any deal are repeat investors. 

They know us, they like us and they trust us - not because of any “canned” sales pitch but rather we perform for them, and are transparent and available. 

Hope this helps. 

@Robert Rixer

Here’s my back of napkin approach to easily sort thru MF deals. 

Gross rental income divided by 2 (50% op ex ratio) equals net operating income. 

NOI divided by purchase price gives you cap rate.

Know your market cap rate and you can quickly determine whether property is worth a closer look. 

Op ex ratio may end up being more like 45% or perhaps 40% with newer high quality construction. But the 50% op ex ratio will be close enough for first pass. 

If it is a heavy value add deal, the calcs become a little more complex. 

Determine market rent upon renovation. 
Determine cost to renovate. 

Calc is then (market rent upon renovation) divided by 2 equals net operating income. 

Net operating income after renovation divided by (purchase price plus cost to renovate) equals cap rate - let’s call it yield on cost. 

@Jack Pasmore

GIGO garbage in garbage out. 

UW is only as good as the numbers that are entered into the data cells. 

One needs to have outstanding local market knowledge to underwrite effectively. 

Things that AI won’t know:

Market rent as is

Market rent renovated

Cost to renovate

Speed at which renovations can occur

Lease up rate once renovated

Investors learn all of this by doing work in their market. Knowing the data in Dallas does not mean one knows the data in Charlotte.  

UW is as much art as science. 

@Jeremy Schneider

Lots of agency lenders out there 

CBRE

Walker and Dunlap

Lument

Old Capital

Berkadia

And forgetting dozens more. 

Agency guidelines and UW policies are set so they don’t vary from lender to lender. 

Google a few of these lenders and have a conversation. 

Quote from @Gregory Schwartz:

Quote from @Arn Cenedella:

@Gregory Schwartz

Thanks, that’s helpful. In your opinion, would someone be considered an expert after completing 2-3 'smaller' multifamily deals, or is it more like 5-10 deals? I understand it can be harder to gain experience with larger multifamily properties compared to single-family homes or duplexes, where someone might complete 5 deals in 1-2 years. With multifamily, it might take 5-10 years to reach that same number of deals. What’s your perspective?

I’d say if you did 2 or 3 smaller MF deals on your own and they went well, I’d say you are qualified to raise capital to buy properties similar to what you have already bought yourself.

2 or 3 smaller MF deals does NOT qualify you to raise capital and buy 150 unit deal.

I believe in step by step progress slowly and consistently working up the ladder towards bigger deals. Build a solid foundation before taking a step up - each and every step of the way.

There’s a way to scale recklessly and there is a way to scale safely.

When OPM is involved safe is way better than reckless.

Despite a life long career in RE, I scaled as follows

Bought a few duplexes for my own account
Bought a fourplex for my own account
Bought 12 units as a JV with some friends
Syndicated 43 units
Syndicated 30 units
Bought another 12 units as a JV
Syndicated 281 units

This was over a 3 or 4 year period.

and so forth - now I am GP in close to 1000 units with $125M AUM.

Even with all that, my sweet spot is 30 to 50 unit properties - they work best for my partners and I and more importantly our investors.

@Gregory Schwartz

The answer starts with an honest self examination and assessment. 

I think the answer is more qualitative than quantitative - ie it’s not about how many deals or how big those deals are. 

It’s more about:

Have you invested in real estate for your own account and have you been successful at it?

What skills do you bring that are superior to those you want to raise money from?

Are you an expert?

I’ve raised over $13M as a MF syndicator and it’s an awesome responsibility. Having people write Spark Investment checks for $25K, $50K, $100K and more. It’s great to be trusted with others hard earned capital but I only accept that responsibility because I KNOW I can do the job - that I have done the job over the years. 

Do you know what you are doing based on actual practical hands on experience?

Be honest about your history and abilities. 

I’d start with a smaller deal - buy a 6 to 12 unit say - raise money from your social and professional sphere - people who know you - who you have a beer with etc. AND put in as much of your own money as the investors do. 

Take that deal for a trail run. Learn. Gain experience and then scale. 

Hope this helps. 

@Jonathan Worrell

Here are a few

Best Ever

Deal Maker Live

Jake and Gino

Brad Sumrok (heavily TX focused)

Hope this helps. 

Arn

@Christopher Morris

You hit the nail on the head.

The “retire on real estate cash flow” gurus sell the dream of quick retirement from cash flow.

Buy two houses a year that each cash flow $1000 a month and retire in 5 years, they preach.

Or invest passively in real estate syndications and financial freedom will soon be yours, they promise.

What they don’t tell you is:

In order to owner enough real estate to generate say $10,000 a month income let’s say, you need at least $2M of capital invested in YES cash flowing real estate.

Let’s say one could buy rental real estate that provides a 6% annual cash on cash return. It could be either single family or multifamily. And truth be told, a 6% ConC return year one is hard to find but let’s stipulate to that return.

To get $10,000 a month, $120,000 a year off 6% annual cash on cash, how much capital does one need invested?

$120,000/0.06 equals $2,000,000.

So in my mind the target should NOT be cash flow but rather building net worth.

Despite what the gurus say, sufficient cash flow to be financially free can only come once one has sufficient capital to invest.

Let’s be clear I only buy apartment propeties that cash flow but immediate cash flow to put spendable dollars in my pocket is NOT the primary goal. The primary goal is appreciation adding value building equity and therefore net worth.

I’ve been at this “game” 46 years  and there is no magic bullet.

It takes time, discipline and consistent effort.

But it can be done in 10 years.

Of course this means living below one’s means - ie spend less than they make - to develop and build cash and capital that can be invested and then watch ot grow over time.

Hope this helps.

Arn

@Jenna Schulze

As a newbie investor with limited capital, I’d invest close to home.

Invest in areas you know well.

I’ve been in the RE industry since 1978 and people always ask me:

What’s the best market to invest in?

My answer is: Invest in the market you know best.

Within Dayton, there surely are decent neighborhoods to invest in. Pick one that is improving, homes being renovated and flipped, vacant storefronts being turned into cool coffee shops etc.

Good luck.

@Nicholas Dillon

I concur with @Vessi Kapoulian comments.

Promised or projected returns do not mean actual returns. It’s easy to manipulate projected returns by making a few small adjustments in the underwriting and proforma.

There is nothing guaranteed with any investment.

A few additional comments:

1. Look for sponsors that have been in the real estate industry thru several economic and market cycles. This to me means a minimum of 10 years.

Many syndicators got into syndications in 2018 2019 and their deals look great but that is primarily due to cap rates going from 7% to 4% and interest rates going from 6% to 3%. These operators totally bungled the deal and operation but still made money due to the market.

2. Invest with syndicators who have a narrow niche and proven track record.

For example, if an operator has done 5 or 6 workforce housing value add deals in Dallas, and they are offering a similar deal now, that would be encouraging.if however, their current deal was a brand new luxury Class A building in Charlotte and this was their first acquisition in Charlotte and their first class A deal, as an LP I would pass.

Find operators who do one thing and kill it in that space.

Find operators who own or have gone full cycle with similar assets in the same market.

For example, my firm, Spark Investment Group has a very narrow niche - sub 100 unit MF or BTR in Greenville SC. That’s all we do. We don’t do deals in Tampa, we don’t do deals in Raleigh Durham, we don’t do 250 unit deals etc etc. We do what we do and we are good at it. We maybe do 3 or 4 deals a year, that’s it. If something in our market is not a good investment we pass.

Hope this helps.

One final point, don’t go ALL IN on your first deal. Spread your capital over 2 or 3 deals, 2 or 3 operators. Get a feel for it and see if you like it.