All Forum Posts by: Jared Prevost

Hi @Zac Smith, I have found that a lot of investors get caught in a bit of a 'cap rate trap' when it comes to residential portfolios. The portfolio seller will pitch the deal based on an attractive cap rate. However, I think this can be misleading or a bit of a trap for a few reasons:

- One of the single biggest advantages to owning an apartment complex is that you can scale management and all tenants are in the same location. You lose this benefit on a single-family or small multifamily complex. You will also not have the luxury of spreading major CAPEX expenses and some maintenance expenses across all units (one roof, one electrical system, one lawn, one parking lot, one HVAC system, etc)

- When you buy the portfolio, there is a pretty good chance that at some point you will want to sell off the lower-performing assets in the portfolio or the assets that cause a headache. At that point, the cap rate becomes irrelevant.

- I think that sometimes investors get so caught up in the cap rate, other more important considerations are lost. Are these properties close to each other? Are they in desirable areas that will appreciate? Are any higher cash flow strategies outside of LTR possible here? Are these older properties that will require more attention? Your cap rate at purchase (or any other purchase metric for that matter) is important, but I believe the two most important variables in the success of a property are: 1) likelihood of rent and price appreciation in this market/submarket and 2) effective asset management/operations

- I'm not 100% positive on financing, but I believe if you're buying as one portfolio, it will be a commercial loan. You may only get 60% - 70% LTV.

Overall, I think the metric that should be most important to you (and will likely be most important to a buyer when you go to sell) is your cash-on-cash return. With that being said, when underwriting I would use cap rate and comparable sales method to help you better understand the deal and potential exit strategies.

@Rebecca Coleman As far as logistically executing a seller finance deal, I think one aspect that regularly gets overlooked is how the payments will actually be made.

When of the most common objections from sellers (especially tired landlords) goes something like this, "That sounds great and all, but I don't want to be running around collecting checks like it's rent. I might as well continue to be a landlord!"

So how do you address this objection AND make your life easier? I recommend setting up an escrow account or a direct deposit account with the seller so the money gets deposited directly so it's truly passive income. That will also help you keep accounting records of the payment for if/when you eventually sell or refinance.

Awesome resource @Jorge Abreu! I always recommend folks interested in investing in a syndication read through The Hands Off Investor by Brian Burke.

Odds are, if you invest with a group that has a strong reputation, you'll be just fine. However, it's really important to vet the sponsor to mitigate sponsor risk as much as possible. If you're putting your money on the line, it's always advisable that you don't rely on odds, do your due diligence :)

If you're actively investing in Tampa, I would highly recommend working with Albatross Title.

We work with them exclusively on our wholesale deals and we also use them for our creative finance deals. Fantastic communication and real problem solvers.

If you reach out, tell them Nick's team at 27 Properties sent you their way :)

@Steve Vaughan

Good to know!

We might just be working off different definitions here, but what I'm describing is a hybrid.

What I call a wrap would look like this:

1) Take over mortgage sub to say for $15k down with 3% interest and get the house in name of my LLC

2) Seller finance (or land contract) sell to an end buyer for $25k down at 6% interest

Hybrid - Sub to and seller finance payments go to seller, I keep the property in my own LLC's name as a rental

Wrap - Sub to payments go to seller (could also be seller finance payments). I resell the property via seller finance or land contract to an end buyer and arbitrage the loan payments to net a profit. If the buyer defaults, I get the house back and can resell the financing again

Lots of awesome info on WA seller protection laws, thank you @Account Closed

It sounds to me like what the seller is asking for is a creative 'hybrid' solution - I have no idea if buying hybrid (seller finance + sub to) would diminish any legal risk of buying creatively in Washington.

Perhaps for education purposes only, here are my thoughts on this deal.

1. I don't see how it makes sense to give the seller equity payments. Unless the sellers can list on the market (and have the time to do so) and get the place sold for at least $240,000 purchase price, selling sub to is their best, and maybe only option to sell without having to cut a check. From what you've mentioned, it sounds like the sellers really don't have any leverage here

2. Say in as-is condition, the property can get $240k+ on the market and the sellers aren't on a tight timeline, you can offer a seller finance note in addition to taking responsibility for the payments on the existing mortgage. The problem with hybrid deals is that it can make walking into cash flow difficult as you now have two mortgages to pay on a property, rather than just one. Frequently, hybrids only make sense if you pay $100 - $200 a month on the note

3. Assuming everything is in line legally and sub to or hybrid is the best way for the seller to sell, you've got to underwrite the deal. I have a very simple 'back-of-the-napkin' creative finance calculator I can send you that may be helpful for you

@Wendy Busa

This can be done in under 30 days yes, and often times if the seller can show they have a signed purchase agreement, then you can push back the auction date. I would recommend the seller work with a lawyer to push back the auction date. I'm in Florida which is a judiciary state, not sure if that process looks any different in Wisconsin.

Title work

Typically your title company will pay a lien search company to track down any existing liens on the property and figure out the amount that needs to be paid off on the property. From my experience, this can usually be completed in a week, but it can take up to a month if there are weird things going on with the property or uncertainty with liens.

To find out what is owed on the mortgage, you will need a loan payoff statement. This can be obtained through the loan servicer. You can get on a 3-way conference phone call with the seller and a representative of the loan servicing company and they should be willing to share the loan payoff amount. Sometimes they will need a written 3rd party authorization form.

For the taxes due, this should show up on the lien search. You can check the county property appraiser's website to see how much property taxes are currently.

If you are looking to buy 'sub to' there are some very specific recommended ways of purchasing the property. I would either work with an attorney or partner with a seasoned sub to investor to make sure this is done correctly. (I think missing out on a sub to deal is better than buying a sub to deal incorrectly).

Timeline

It's possible to buy a sub to deal in 14 days, having a 30-day timeline will take the pressure off you though, and allow for more thorough due diligence.

Deed Transfer

The deed will transfer at closing yes - I might work with an attorney-owned title company that has a reputation for closing creative deals to make sure it's handled properly.

@Manny Vasquez

The REIT saga is an interesting story that's unfolding. What I think is most revealing about the storyline is the power of the masses. While groups like Blackstone are the 700 lb gorillas (even iBuyers to the average SF investor) it's important to remember these groups are ultimately subject to the will of their investors.

Institutional buyers traditionally 'overpay' for properties because they don't buy properties one-off. They accumulate large portfolios of properties in order to ride the broader macroeconomic wave. While frustrating for the typical investor, the Blackstone's of the world still have to provide an alpha (outperform the market or other available investment vehicles) to their investors or they will park their capital in another sector or asset.

Removing capital from a business is almost the equivalent of removing gasoline from a car, without gas the business can't run. Blackstone isn't about to run out of capital, but this storyline does make a few things clear:

1) Capital is actively coming out or real estate and into less volatile assets (bonds/treasuries)

2) Independent of company size - if you don't deliver returns, investors will take their capital elsewhere

3) Additional indication of reduced buyer competition and softening prices in commercial real estate

Hi @Ryan Spearman

Looks like you've got a lot of good info here, if you haven't noticed, every investor will happily point out the best parts of their particular market (it's this weird 'My market is the best market' mentality investors seems to have')

Where should I buy?

You need to establish some goals or criteria before answering this question, you can make money in every market in the US. Here are some questions I'd be asking myself:

-  At the commercial multifamily level, everything SHOULD cash flow if underwritten correctly. What's more important to you, cash flow or appreciation? There is a natural tradeoff here

- Do I want to asset to be in a city or area I'd like to visit? Or do I not care personally about the location?

- Do I want to invest in a competitive market (going to be more work to find a deal) or invest in 'overlooked' markets where brokers, sellers, and agents will give me more attention?

How Big?

If you can buy up to $1.6M purchase price and renovation and want to buy a single asset, you're looking at the 8 - 26 unit range depending on the market and how distressed the asset is. I would recommend buying a single asset as you can scale operations easier and devote attention to one building.

Finding a Team

I'm going to be honest with you here, the odds of you messing up your first multifamily deal while investing from abroad is much higher than a local investing in multifamily who has done a few deals already in that market.

I would recommend finding some syndication groups you like who buy smaller deals and coming in as a $50k or $100k limited partner so you can observe and learn. Then, when you start looking for your own deals to run, you can general partner with the syndication group you've gotten to know and they can help you run the deal successfully.

Hi @Jourdan Mercer,

You've got some good information here, but it seems we're missing some very important information so let's start from the top.

You've got your criteria for qualitative and strategy, but what are your investment hurdles? In other words, what are you shooting for as a cash on cash return? Or, if you're doing a BRRRR, at what % of ARV do you want to buy and how much money are you willing to leave in the deal?

Once you establish your financial 'hurdles' it will become clear if the deal is worth pursuing.

As far as how to buy creatively, it sounds to me like there isn't any equity to be financed to them. If there was equity, it would be in their best interest to just list on the market. It seems the only viable option is you catching up the arrears, covering closing costs, putting a few thousand $ in their pocket, and taking over payments on the loan subject to.

As a side note, I would verify on county record that the sellers are actually on the title and the property doesn't need a probate (if you haven't had deals go through probate, it can be a nightmare!)

If you'd like, I'm happy to send you a creative finance calculator to help you analyze via cash on cash. It's a very simple, 'back of the napkin' tool. Just message me with your email.