All Forum Posts by: James Kojo

@Bob Gruenig it might help if you could clarify what you're trying to accomplish with the LLC strategy.

The most simple and common way to invest in a syndication is to put money as an individual.

Almost all multifamily syndications will already be run as an LLC, in which investors like yourselves would be the passive "limited" members. That structure will usually shield you from inside liability, like a tenant lawsuit, and also limits your actual decision making power.

So, if you're trying to add another layer of liability protection, then it's probably not worth doing.

Syndications also have a minimum investment amount. Are trying to get around that by pooling your money with your friends? If that's the case, it may be simpler to just talk with the syndication sponsors to see if they'd make an exception for you.

In general, mixing money across your natural financial boundaries has some risk, so creating partnerships like the one you describe should not be done without due consideration. If you start pooling money from people who are not full partners (i.e. have decision making power), you will start to cross into the territory of securities, in which you will be subject to SEC rules. Tread very carefully there, for sure!

Hope that helps!

james Kojo

Really, it's just like any other activity that consumes your time. The basic strategy is: prioritize, optimize and leverage.

Prioritize: How important is the whole REI thing to you? More important than watching a game on TV? I'm guessing yes. But how about spending that extra hour with your wife and kids? Well, that's a a lot tougher. Your primary relationships should come first, but there is a point of diminishing returns even for high-priority activities. I'm sure your wife would love to have some extra time with you, but after the 10th hour in a day of buzzing around her, perhaps she'd be ok with you doing something else. :) Figure out what's "enough" time to put into your primary relationships and responsibilities, and allocate what's left over to your ambitions.

Optimize: You can spend a lot of time working on things that don't make much of a difference. Figure out which activities really "move the needle" for what you want to do, and focus on doing those things. Again, beware of the point of diminishing returns. Figure out exactly how much effort, time, and money should go into any one REI activity.

Leverage: @Chris Tracy already mentioned this.  After you've figured out what the highest and best use of your time is, figure out how to best leverage other people's time, efforts, and expertise. Don't spend your days unclogging toilets. Pay somebody else to do that.

A bonus step for you: take an inventory of your core assets, and backwards engineer a REI strategy that takes advantage of them. Some example core assets: Time, Hustle, Money, Relationships, Expertise, etc. It sounds like you don't have a lot of time, but do you have money? If that's your core assets, then maybe passive investing is the way to go. If you have hustle and relationships but little money, then you can be a money raiser for syndications. There's pretty much a niche for all types of people in REI. Find one that suits you.

Hope that helps!

James Kojo

I'm surprised nobody else brought it up already: Bonus Depreciation.

@Jay Hinrichs mentioned it in the context of buying a airplanes, but there are actually many other ways to take advantage of it.

Firstly, for the houses you bought this year, you can take the full 5,7,15 year depreciation schedules *this year*.  Depending on that cost basis of your rentals, that could be a very big paper-loss. Since you would easily qualify for as a "real estate professional" according to the IRS code, there is no limit to how much depreciation you can take.

This will require to pay for a cost-segration study. Previous to this year, this strategy was typically not recommended because the cost of the study often outweighs the benefits for SFRs. However, you can do a low-cost "residental" study. That coupled with the new bonus deprecation rules probably change the cost/benefit ratio in your favor. Check out kbkg for the residential study.

Secondly, you can buy a car. If you buy a regular passenger vehicle for business use, you can get 18K deprecation this year. If you buy a larger vehicle (6K+ lbs), you get the *whole enchilada* in depreciation. That's right: then entire cost of the vehicle. Of course it doesn't make sense to buy a car just for the deprecation (or an airplane for that matter), but if you were thinking about getting one in the next couple of years anyways, now's the time to act.

Thirdly, and it may be a little late in the game for this: you can invest in multi-family syndications. Cost-segs may or may not work for SFR, but they almost always work for larger MFRs. A knowledgeable syndication lead can commission a cost-segregation study, and pass the depreciation straight through to the passive investors.

Please keep in mind those are 2-3 sentence descriptions of very complicated and new tax rules, so don't go off half-cocked and try to implement them without getting some real advice from a tax pro. And speaking of which, if your CPA isn't already talking to you about bonus depreciation, then you need to find a new CPA asap. I had a CPA for 15 years whom I absolutely loved, but he wasn't a REI specialist, and he didn't know about stuff like this. You *need* a specialist for your field.

Disclaimer: I'M NOT A CPA AND THIS IS NOT ADVICE! :)

Hope that helps!

James Kojo

Yes. I'm active in Columbus as well.

I have one or two referrals depending on where it lies on the C-D scale. :)

Let's chat!

James

@Dom Chit

The loan program I'm guessing you're talking about is called the FHA 223(F) program.

The short and long answer can be found on the HUD website directly: here.

It's easy enough to find lenders who deal with them. Just google "FHA 223(F) lender" or replace "FHA" with "HUD."

I've looked into them but have never actually closed one. Here's what I know:

They offer some of the best terms around. up to 85% leverage with fully amortizing terms up to 35 years. Rates are comparable to what you would see with other agency debt (Fannie/Freddie), which is to say, low.

It sounds like a home run, but here are the downsides.

They take forever to close. I think a typical turn-around time should be about 6-months for a purchase. Unless you find a super patient seller, you'll need to take a bridge loan to close the deal while you're doing the FHA loan. Many FHA lenders will have a bridge-loan product designed specifically for that scenario, so you won't have to pay points twice, and may be able to leverage some of the 3rd party fees.

The documentation requirements for both in the initial closing as well as on-going reporting are onerous. That's part of the reason it takes 6 months to close one. If you have enough scale, you can have "your people" handle that for you. :)

Finally, the fees. It's a very fee heavy program. What my broker told me was that it rarely makes sense to try and take an FHA loan less than 3M, so your deal may be on the lower end of what makes sense.

If you want a couple of referrals to brokers who deal with these loans, PM me. They are generally happy to give you the low-down in exchange for a shot at your business. 

Hope that helps!

James Kojo

@Jonathan Studdard : 

you described the deal-making process as "long" and "tedious." I think that's a pretty good tell. :)

If you're a cash-flow, value-add investor, both routes require quite a bit of that type of work, especially now that inventory is so tight in most major metros. To find a deal that pencils, you will probably have to pound-the-pavement long and hard. If that prospect doesn't excite you, then you'll be trading a lot of "work" to get a little more money. And that's just to find the deals, nevermind financing, rehabbing, leasing, operating and exiting the deals.

Personally, I love prospecting and underwriting deals, even if I immediately throw most of them in the garbage afterwards. So it's not "work" for me, it's profitable fun. If it's not going to be fun for you, it may not be worth your effort, depending on how you value your time vs money, so please consider that.

Now specific to your question: first question for you is, how many houses does 100K actually get you in your target market? Even leveraged at 4:1 (25% down), that's 400K worth of assets. Remember, you'll need to leave some reserves. So I'm guessing that's 2-3 houses using conventional financing?

If that's the case, I think i'd rather buy a single quad. You can find those on-market easily enough, so that will help eliminate a lot of the tedious work, and you can still use conventional residential financing. That's a LOT less work than closing 2-3 separate loans.

However, if you're an appreciation player in an appreciation market, then I'd rather go SFR.

All that said, if you don't enjoy the game and you aren't trying to build an empire, then you should just go passive like Chris mentioned. You'll be giving up a few points of return (maybe), and your biggest job is to find a syndicator that you trust, then cash the quarterly checks.

Hope that helps!

James Kojo

For off-market commercial deals, it's very common for there not to be a buyer broker involved, and if there is one involved, it's common for the buyer to be paying for it out-of-pocket.

After the CRE broker gets the listing agreement, they will shop it directly to their exclusive list of investors. If one of them bites, the broker keeps the whole enchilada. However, the number is usually not 6%. Probably more like 3-5%.

In almost all of my off-market deals, the broker technically represents the seller and not me. However, the broker has a reputation to maintain with his buyer list, and he knows both sides need to play-nice in order for the deal to happen, so he's incented to be helpful to both parties. But you need to know who's paying the bills, and therefor who's more important.

If none of the internal investors bite, then they will often put it on-market.

When it's on-market, it behaves very much like @Jonathan Minerick describes. Selling broker will offer a commission split with any other broker who can bring a qualified buyer, or keep the whole thing if he finds a qualified buyer himself in the meantime. 

The difference is, there are a lot fewer protections in CRE vs residential, so the laws about dual-agency and fiduciary responsibility are probably out-the-window.

Hope that helps?

James Kojo

@Omari Heflin

Hey there!

I hope you don't find this post discouraging, but the answer to each one of your questions could probably fill a book, or at least a respectable white-paper. You'll probably get more value from the forums if you can narrow down your questions to be more specific.

Perhaps you should back-up, and start thinking about a strategy on how to eat this particular elephant (i.e. your MFR education.)

Start by reading at least 1 primer book cover-to-cover, if you haven't already. I like Brandon's book on apartment investing, but there are many others. You can find a good list here. 

After that, There are a ton of free/cheap resources. Books, podcasts, forums, meetups, etc. Those are kind-of givens. You should be doing those regularly throughout your journey. 

But to really learn how it's done, I'd highly recommend you find mentors or advisors to help you while you're doing it. Most people use BP forums to fill that role, and I think that's great, but finding someone you know who you can talk to and trust on a regular basis is better.

But just so you don't feel cheated by my post, here are my (totally inadequate) answers to your questions.

What do you guys recommend is the best way to buy an apartment building ?

- Build relationships with good commercial brokers in your target markets. they have all the deals.

What are the main things you look for when forcing appreciation in a property ? 

- Opportunities for increase rent, and decreasing expenses. Specifically, below market rents due to inferior cosmetic issues (floors, counters, appliance, paint, cabinets, etc.) Look for waste in utility usage or repairs costs due to old/outdated mechanicals.

If your using a bank how much do you have to put down ? 

- The minimum that the bank requires. usually around 25% for an easy deal. This can vary wildly.

What’s the best way to raise capital for your investment ? 

- If you make decent money, save some and deploy it when you have enough. Secondly, you can borrow money from friends/family. Thirdly, you can take money from outside investors (however, the laws around doing this are very strict, so make sure you know what you're doing.) Fourth, read Brandon's book on investing with low/no-money down. :)

Hope that helps!

James Kojo

Another aspect to consider is transfer-ability of the shares. 

In many (most?) case, shares in a syndication are non-transferable without approval (usually with an exception for death). This makes sense, since the KPs in the deal have a relation with the investors, and they don't want people swapping in investors that they don't know.

I've heard at least one story in which an investor formed an LLC to buy shares of a syndication, then sold the LLC to someone else, which is effectively a transfer, but I suppose not technically a transfer.

I'm sure a good SEC attorney would find a way disallow that in the PPM, but I'm guessing that it's a hole in a lot of offerings out there.

I wouldn't recommend using an LLC expressly for that purpose, as I feel it's a violation in spirit of the agreement if not the letter, but if available, it offers a potential out if the syndication lead turns out to be incompetent or if you experience a major, irreconcilable life change, or the like.

Hope that helps.

James

@Matthew RUSINAK

Population growth is probably the best macro-indicator you can use to take a quick test of a market. IF you really wanted to look at a single metric that would increase your odds of success in a given MSA, population growth would probably be it.

Why?  Population growth is a proxy for good economic indicators. Put in the most simple terms: if the local economy is good, people tend to go there and/or stay there. That's probably good for landlords.

That said, it's only a proxy. Why not spend a little extra time to look at the real economic drivers? For me, the top 3 drivers are jobs, jobs and jobs. Allow me to enumerate and expound:

1) Look for a 3-5 year down-trend on overall unemployment rate for the MSA.

2) unemployment *rate* is a percentage, but absolute numbers matter. Look for an expansion in total # of jobs available over the same time period.

3) Look for a diversity of jobs in growing and stabilizing sectors. Growing: healthcare, medicine, IT, biomed, tech, automation, AI, business services. Stabilizing: government, higher-education (universities), finance. Avoid shrinking or cyclical sectors like energy (oil) or anything else commodities related and manufacturing (sorry! those jobs really aren't coming back.)

After you identify markets that meet an adequate subset of those criteria, you just need to ask the simple question: can I find a deal that pencils in those market? The San Francisco-Bay Area (where I live), meet all of those criteria, but good luck trying to find a cash-flowing deal here! Same story with New York City and the like. You can eliminate those markets just by looking at cap-rates.

What you should have left after all of those have been applied are your target markets. Unfortunately, there aren't any "undiscovered gems" in that list. You'll still have to hustle for deals, unless you invest out in the sticks. At this point, it's really important that you know yourself, know your criteria, and know your game!

Hope that helps.

James