All Forum Posts by: Arn Cenedella

@Jason Piccolo

Sorry to hear about your experience. 

I’ve only been in one deal where floating rate bridge debt was used. LPs like me got back 94 cents on the dollar and I was thankful I didn’t lose my entire investment. 

If a deal doesn’t work with fixed rate debt, it’s probably not much of a “deal.”  As a lead sponsor on 8 syndications, we have fixed rate debt on all of them. And there are no issues with any of these deals. 

History repeats and I would make an analogy between adjustable rate debt for houses and floating rate bridge debt for apartments. They are basically the same thing but just called by different names. 

The subprime crisis of 08 crashed the SFR market and the use of floating rate bridge debt has caused huge problems in the commerical real estate space.

Let’s compare the two:

Back in 2004 thru 2008, the SFR market was on fire fueled by:

1. Low money down high leverage loans 

2. No documentation loans - income was not verified - loans based on stated income 

3. Low “artificial” initial interest rates - where the actual interest rate would increase even if the index the loan was tied to did not

4. Many loans often made in difficult areas often with crime and poverty present

Floating rate bridge debt is basically the same:

1. Operators could get higher leverage requiring small capital raises with floating bridge debt than fixed rate debt

2. Loan amounts were NOT based on actual current performance (NOI) but rather estimated future performance - ie based on phantom income stated future income with no way to verify

3. Index plus margin above initial note rate

4. Often used for heavy lift value adds deals often in low income difficult neighborhoods 

And now many LPs are suffering. 

It's no surprise the bubble burst in MF as the same factors that caused the SFR market to burst 15 years earlier caused the MF market to burst.

Fixed rate debt. 
Leverage loans maybe 70% LTV at most

Ample cash reserves

Invest in deals with those characteristics and the odds of success increase greatly. 

Hope this helps put the current issue in perspective and provide guidance to evaluate future opportunities.  

@Daniel Sehy

market knowledge is the key to not getting “overly optimistic”. 

An investor needs to know their market or anything that goes into the excel document is nonsense. 

My market is Greenville SC. It’s our only market. We own say 500 units in this market. We KNOW what units will rent for when we see them. Our first hand experience guides our projections. 

What can we rent this unit for?

What will it cost to renovate this unit?

How “upscale” should we renovate?

The answers to these questions and more are ALL based on market knowledge. 

If you are a first time investor you need to out the leg work in to learn your market. Act like like a potential tenant and go see every similar building in your market. That’s how you learn the market. That’s how you Future rents. 

Be a detective and investigate. 

Then make a bet invest your capital and go for it. 

@Daniel Sehy

To add to @Brian Burke comments:

One could also ask WHAT cap rate?

Cap rate based on actuals?

Cap rate based on proforma?

Some folks like “yield on cost” in value add deals. 

Yield on cost would be Stabilized NOI/(purchase price plus cap ex).

This would tell you what the yield aka cap rate is on a value add deal after biz plan is executed and stabilization is achieved. 

I like the yield on cost approach.

Another way to say this:

I am willing to put 12 to 18 months of effort in to get a property performing in a top notch manner - this could be physical cap ex improvements or it could be operational improvements or both. 

What will that property produce in a year or two?

That’s what I aim for. 

We acquired an asset at a going in cap rate of 5% back in May 2021. We projected year one cash flow at 6% - nothing to get too excited about. Now at the start of year 5, our cash on cash return is 16%. Even at a 6% we have almost doubled that value of the property.

So when thinking about cap rates, what the cap rate is NOW is important perhaps what is even more inportant is where an investor can bring that property in 2 or 3 years. 

The finish line is NOT year 2. The finish line is year 5 or 7 in my mind. 

Hope this helps. 

Arn

@Tony Sanders

Lots of great advice for the comments here. 

FIRST and MOST IMPORTANTLY:

Become an excellent investor yourself!

Until you become a highly skilled investor, there is no logical reason to become a syndicator. 

Learn on your own dime before you learn on other people’s money. 

THEN put together a team.   

Here’s how I think about it:

There are four keys roles in syndication:

1. the Hunter - finds the deals (acquisition)

2. the Hammer - runs the deals (operations)

3. the Mind - runs the numbers (underwriting and accounting)

4. the Money - raises the capital

One person rarely has all four skills. 
Find those skills - my team is 3. 

I’m the Hunter, Brian is the Hammer and Dan is the Mind. All three raise capital. 

Hope this helps. 

@Austin Fowler

My advice is to work in both simultaneously. 

How much capital can you raise?

Truth is until you try you won’t know. 

If you don’t know how much capital you can raise, how do you know what purchase price you can pay? Answer is you can’t. 

If you don’t know your maximum price, how do you know what type of property to look for?

No sense looking for a $5M which will require $1.5M to $2M in cash if you can’t raise that amount. 

Good rule of thumb:
Actual capital raised will be one half of what you expect to raise. 

Best bet for first time capital raisers is friends and family your social and professional spheres. 

The other question is:

What experience do you have in commerical real estate? Investors will only invest with sponsors who have greater knowledge and experience than they do. If they know as much as you do, why would they invest with you?

Not being critical just trying to level set your expectations here. Far too many new investors have believed the “go big or go home” gurus and lost their shirt. 

Start small - get some small wins - build your resume - have success and then based on that track record start to scale. 

Start talking to your close circle:

Hey Joe I’m starting to look for a small MF property to buy. Would you be interested to take a look if I find something good?

Do this with 50 to 100 people. 

Maybe 25 express interest. 5 may end up investing. 

My advice is look for something where you can find 1/2 the deal yourself. You need to be in a position to “back stop” the capital if your raise falls short (which it probably will). 

So $1M property you will need $300K $400K to buy. If you have $150K to $200K on your own you only need to raise 150 to 200. That’s maybe 4 investors. 

One must also gauge where there sphere is financially. Is the average person in your network making $100K $200K $500K a year? It matters. 

Set a realistic target goal  start looking start talking to people no pressure just share what you are doing those interested will self identify  

Hope this helps  

arn

@Pierre E.

Nothing is settled. Nothing is set. 

Best approach is to sit back and see what happens. 

@Jacob Breytspraak

Or you rent for a while and 1031?

Depends how big a MF property you want to buy. 

At a $200K value maybe you refi for $150,000?

At $250K value maybe you refi for $200,000?

Figure you will need 25% to 30% to buy 5 units or more. 

With the down payments above you are looking at $600K to $700K. 

What kind of MF could you buy at that price range?

Would there be better options at $800K to $900K?

as @Seth McGathey mentioned the interest rate matters. 

Great to borrow against an existing property to buy another property if you can get 4% debt but at 7% debt not so sure. 

Hope this helps. 

Arn

@Pavan K.

In general, real estate losses via operational loss or depreciation deduction can not be used to offset ordinary income (W2) if one’s adjusted gross income is over $150,000. 

If you are a high income earner, the loss doesn’t really benefit you. 

I’m just speculating here because generally investors do take depreciation.

If it can not be used immediately it becomes a loss carry forward that can be used in the future (certainly upon sale).

Again I’m just speculating why your CPA provided this guidance. 

Perhaps you ask him about the limitations of passive loss based on income?

Arn

@Brian Burke

Yes inexperienced operators for sure is a big part of the problem. 

And yes if a common equity LP sees pref equity coming into the deal, their equity is now on life support. 

Once you complete the data you should write a follow up book to the Hands Off Investor - What NOT to do as an LP investor. 

@Brian Burke

Excellent study to complete. I’ll be interested to see what you determine.

I’d suspect some common themes might arise:

1. Use of floating rate bridge debt combined with maximum leverage

2. C class properties in rough areas

3. Underestimated cost and time to execute value add business plan

4. Out of are operators