All Forum Posts by: Joshua Nicholas

Hey @James Wheelock,

WELL DONE SON!

I've done the same thing myself, I got in contact with an owner of a 30 unit building in an NY suburb. He's selling it to me for $3.5 million AND holding 75% LTV seller financing for 15 years with a 25 year amortization. Building will be worth $4.8 million on day of closing and $6 million within 18-24 months.

These guys are GOLD, esp. to young guys like you and me (I'm 28). My theory is they see us as younger versions of themselves.

But alas, you did not come here for my anecdotes, you came for answers.

Determining ARV

• Is a rent roll of $804,000 for 88 units good or bad for your area?

A lot of times older owners are so concerned with keeping high occupancy they don't aggressively push rents because candidly they don't really need the money or feel like dealing with tenant pushback. That means this is a more valuable building because there's "juice" to squeeze via unit rehabs and rent increases.

• What have similar properties (50+ units) sold for in your area? (Call up a commercial RE agent at CBRE or Cushman if they're in your area and ask them for that data. Get price per unit, price per sq. ft and current cap rates. And check the location of these comps, because 50 unit crack dens selling at 10 caps don't do much to help you figure out ARV for this building which sounds Class A.)

Now I have to be honest. And you might not like my advice. But here it goes.

You're young like me. You're going to get up to bat many many times in the future on deals like this. And I know you want to take this one down but if your gross numbers are right, the expenses will probably eat up 50% of Effective Gross Income in upstate NY. That is going to bring you to an NOI of $400,000. At a 7% cap rate, that's a $5.71 million dollar purchase.

You’re going to need to raise at least $1.43 million before closing costs. I’m NEVER one to discourage someone, but if you can get him to agree on a price significantly below market, you can make a TON of money flipping this contract. Ask yourself if you really don’t need several hundred thousand dollars.

So if the seller’s asking price is a lot lower than current market values, then you should talk with a local hard money guy, form a partnership with him, put the deal under contract and flip the contract to another investor. Real Estate attorneys are also good people to source the money for ideas like this.

BUT DO NOT UNDER ANY CIRCUMSTANCES SHARE THE ADDRESS OF THIS PROPERTY WITH THESE POTENTIAL PARTNERS FOR GOD’S SAKE. THEY ARE SAVAGES WHO WILL CUT YOU OUT AT THE FIRST OPPORTUNITY. (At least not until they've signed a non-circumvention and non-disclosure agreement.)

Feel free to email me and we’ll get on the phone and chat if you have any more questions about this deal, glad to see other NY millennials making moves!

Building stuff this late in the cycle is risky IMO unless your land basis is super cheap because you acquired it much earlier. In addition, you're starting to see rental growth rates slipping and with so much new construction going on, construction costs have been skyrocketing across the country.

Like @Brian Burke said, today you can still buy at way below replacement cost, even in hot markets, so unless you're plenty experienced on construction and/or have millions to spend, I would stay away. 

Hi everyone,

I'm hoping someone can help me with this as I've tried to figure out this game by myself to no avail.

I have a project I'm looking at that's 80 units, vacant and needs a full gut rehab. I can get really fantastic terms on the property and from comparing rental rates between market rent and HUD Fair Market Guidelines I think there's a big opportunity in making the deal a Project Based Section 8 building.

If we make that deal with HUD, we can refinance and get 90% LTV with 35 year amortization, fixed rate on a non-recourse basis with the FHA 223(F) program.

I'm just having some issues learning more about the entire affordable housing space whether it's LIHTC, Project Based Section 8, regular Section 8, etc. and I can't figure out whether this is a good idea vs going regular section 8 or just renting it to market rate tenants then refinance and just hold it indefinitely. 

I don't know the pros and cons aside from the possible difficulty in selecting good tenants and dealing with government agencies. I thought the complexity of learning the laws about rent stabilization in NYC was difficult but this is even more daunting and complicated.

Can anyone direct me to some resources that can help me learn about this space? 

Thank you for your help.

Hate being this guy but I gotta interject.

1.http://www.multifamilyexecutive.com/news/why-older...

Millennials are not totally averse to homeownership. Low rates have just driven prices to unaffordable levels for millennials to get into the market. I say this as a 28 year old millennial.

2. http://www.multifamilyexecutive.com/design-develop...

Vacancy rates are already starting to slip because of massive new construction. I know I know it's "All class A, all urban core" blah blah blah. You build enough Class A and you're going to end up with class B rents. See Florida in 2009.

3. Hubert, you're 100% correct on your assessments. Average cap rates in NYC on real numbers are sub 2% (on real numbers), same as the Bay Area and most of the gateway markets across the country. Rents have been on a tear but started to cool off even in NYC and if they're cooling off in the most supply constrained market in the country, I would be cautious in your local markets.

The real way to protect yourself is underwrite conservatively. At the same time, I don't care what people say, you're probably not going to be able to purchase a sizable deal today without stretching at least somewhat. 

There's an abundance of foreign money, 1031 exchange money, people cashing out of the stock market, etc etc. Cap rates have compressed around the country dramatically so you'll have to be aggressive in making a deal, gone are the days when you could take your time and negotiate with a seller for an extended period of time. I have a deal I'm looking to sell right now at a 1.8% cap rate on real numbers. Very cheap in terms of price per square foot and price per unit however. 

I sent it out to my list of buyers and had 4 cash offers come in sight unseen on day 1. This is NOT in core Manhattan but a suburb of NYC. That's who you're competing with in today's frothy market because bubbles make everyone act stupidly.

Another way to protect yourself is buy a building with some value-add component, borrow 10 year fixed rate money with 25 year amortization and 70% LTV. You're going to be very safe no matter what happens in the economy because of a large cushion in terms of your DSCR and how quickly you are paying down the debt. Most people who got in trouble in 2008-2010 were in trouble because of refinancing issues, not occupancy levels which never dipped below 85% nationally. 10 year money and a 25 year amortization eliminates that risk. Admittedly you're not going to have the same cash on cash returns available even a few years ago and not the returns you'd have if you used 80% LTV but you'll sleep well at night knowing your investment is "anti-fragile" to quote Nassim Nicholas Taleb.

It doesn't affect cash on cash returns. Principal reduction affects return on equity and IRR.

Of course it's possible, but if this is your first deal I would not risk it.

SoCal is like the Northeast, crazy pricing and competition right now. Not much more room for prices to grow at this point. I wouldn't be attempting a flip right now unless I had very deep pockets and knew exactly what I'm doing.

A good book is Dave Lindahl's Multifamily Millions, it teaches a lot and is a solid primer on "Multifamily 101". I wouldn't recommend spending money on a bootcamp however.

I would also caution not just to disregard broker projections but most things that are put out, and I say this from personal experience as I am a broker. I put out marketing packages based on actual numbers because all experienced investors will do their own underwriting and make offers based on real numbers but this is hardly the norm.

It would behoove you to look at IREM.org as they have financial information from local property managers in every major market and they'll give you the real numbers when it comes to the cost of repairs, water & sewer, heat, electrical, payroll and other information.

Once you have this, you should start practicing underwriting deals with your own spreadsheet or one like RealData so you can learn what a deal will actually make versus what BS brokers put out to market.

@David Faulkner Investors either pony up more equity or sell the property if they can't refinance. The best way to hedge yourself is using 25 year amortization and taking out 7-10 year loans. Sam Zell said real estate became a much crappier business when you couldn't get 30 year fixed rate loans on apartment buildings like you could in the 1960s, 5 year loans just leave you so exposed to interest rate risk and recession risks.

The S&L crisis was exactly like this (from what I hear, seeing as I was 3 years old when the SHTF). But rarely will you find a time where there's absolutely NO debt available. The real issue is that if rates rise, cap rates rise, property values fall and all of a sudden a 70% LTV loan that should be easy to refinance becomes an 85% LTV loan that can't be refinanced without injecting some equity.

To further compound the problem, when banks are facing defaults they further tighten their lending so even if your property hasn't fallen far in value (maybe your rents rose dramatically like the oil boom times in North Dakota), they may only make loans at 55-65% so either way you need to inject some equity. 

And lastly, if rates rise quickly enough, your NOI may not be able to support a refinancing at the same LTV so you'll have to put EVEN MORE equity in.

@Joel Owens I agree, the guy I know w $600MM in property is borrowing some reckless amts. floating over LIBOR but again like you said, when you're that rich you can get away doing some reckless stuff. I asked him what he would do if rates skyrocketed like the 1970s. He goes "I'll call the banks back and ask them if they want the buildings back." LOL!

It is a truism, if you own the bank $1,000,000 they own you, if you owe the bank $1,000,000,000 you own them.

I still don't get why these guys do what they do. 

When I get to the point I have $500mm in property I'm going to deleverage to 50% LTV, call up Fannie Mae and I'm getting a 15 year full amortizing mortgage.

Contrast this with my mentor who is floating at 1.85% (true story, 75% LTV, non-recourse, 3 year) and then putting some mezz. debt on top to bring it to 90% LTV.

Admittedly it's on a portfolio deal that he bought for $50k/door (disaster property) that's now worth $150k/door but still, I don't know how he sleeps at night.

@Joel Owens Couldn't agree more.

Anything today listed by a major brokerage (CBRE, Cushman, Marcus & Millichap) has been bid up to nonsensical pricing.

I don't care what anyone says, if you're buying nearly anything today (heavy value-add somewhat excluded) and you have 65% LTV+ debt that matures in under 7 years you're going to be in some serious trouble. (Leaving aside all the idiots buying with ARMs floating over LIBOR who are just completely screwed.)

I'm under contract on a deal at a 6.8% cap rate in a 5% cap rate market with rents $200 below market. And yet I'm STILL considering wholesaling the deal, taking a 7 figure windfall and waiting for the crash because I doubt things are going to hold up another 18 months.

Even if the Fed doesn't hike rates further (and they've got $19T reasons not to raise rates), the coming inflation in expenses (when they bring in the next round of QE) will not keep pace with rent increases and NOI will suffer, causing serious refinancing problems.

And I know all the reasons I'm "wrong"  but I'm not buying it. This time is NOT different.

My mentor who owns $600mm+ in property in the NYC area told me he bought something like $75 million of property from 2008-2012. He said he's only purchased 2 deals in the past 4 years because of all the silly prices in the market. He's refinancing left and right as we speak in order to sit on cash to scoop up deals in the coming crash.

"I look for the desperate optimism of the invested that occurs at market tops."

Michael Janszen 

Doesn't the above quote sound like all the bulls today saying "we're becoming a renter society", "foreign money is limitless", "no new housing supply is coming online", "construction financing is still tight", etc.?

P.S. People should checkout RealForecasts.com, see how an Austrian Economics trained institutional real estate analyst is predicting the next crisis at the end of 2016.

1. If someone has investors, most likely they have a finite time frame with which to exit an asset. If their fund is a 5-7 year fund, around year 4 or year 6 they're going to be forced to begin liquidating assets and winding the fund down to return investor money.

2. If you buy a small multifamily and complete your value-add, it might make sense to sell it and move onto a bigger property. A crappy 5 family you fix up and get rented may be now worth the down payment on a 20 unit property. Makes sense to roll your equity into a new project where you get bigger cash flow and bigger depreciation.

3. People get old and tired. I'm under contract on a deal with a landlord who is selling me an amazing property at a 6.8% cap rate. In my area that's a WILD deal. He's owned the property since he built it around 1968 and in his words "I've been a landlord for 50 years and I'm just done with it now". He's 85 so he's willing to just relax now, he's going to hold the note for me so he can get cash flow without the hassle and it frees him up to enjoy his remaining years.

4. The 10% rule, while it's useful to aim for, is not realistic in the hot markets, at least from day 1. I don't care what anyone says, 10%+ cap rates do not happen in supply constrained markets with aggressive rent growth. And you can't think of that as the only rule of thumb. If you grow your NOI by $10,000 in a 10% cap rate market, you created $100,000 of value. In a 5% cap rate market, you created $200,000 of value. If you were looking to create wealth quickly, you're going to build a large nest egg faster in a low cap rate market.