All Forum Posts by: Joshua Nicholas

anyone?

http://www.biggerpockets.com/files/user/JNJ1987/fi...

Sorry, here is the analysis sheet I used

Hi everyone, 

I am faced with a problem I'm hoping some people on BiggerPockets can help me with.

I'm looking to buy a 6 family property in my area that is going to be foreclosed on for unpaid taxes. I've negotiated with the city and they've agreed to allow me to purchase the lien before the tax auction around 6 weeks from today. As of right now, the lien on the property is for $300,000 in unpaid taxes and the owner has disappeared from the area.

This is a brick building built in 1969, and according to the property card it has (1) one bedroom, (2) two bedroom and (3) three bedroom units. I gleaned this from the number of rooms per floor and total number of units.

In my area, purchasing a property for $50,000 per door is totally unheard of, however this does require a significant rehab. I have private money sources who will loan me the purchase price and rehab costs for this building, secured by a 1st lien on the property at 8% interest. I also have an excellent GC as well as an investor client (I'm an agent) who I've become good friends with that is helping me with this project.

As a selling point for the investors, I offered to escrow 6 months taxes, insurance and interest payments at closing as I think this should cover me for the time to complete the rehab.

I'm planning on gut rehabbing the property (kitchens, bathrooms, electrical, plumbing, new gas boiler, insulation, roof, windows, flooring) and renting it to section 8 tenants in my area. Section 8 demand around here is insatiable and seeing that there is no supply, I am very confident I can screen rigorously and get good quality tenants. In addition, the units rent for much higher rates in this area than cash tenants.

But there are two issues I'm facing.

Because this is a property "condemned" by the city (I put that in quotes because at least from what I can see from the outside, the property looks like it's safe to walk in), I cannot enter the building. 

This week someone from the building department and someone from the fire department will accompany me to the building and allow me to see inside, however I can't walk the property on the inside with my GC to assess the condition, see the scope of work and see the layouts. 

Secondly, I don't know how long I should be underwriting for the time to complete the entire rehab. 

I'm selling an investor a building right now that was fire damaged and from several walkthroughs with his entire crew, we are estimating it's going to take 12 months to complete the entire building. Granted, it is comprised of (2) 2 bedroom units and (8) 3 bedroom units and was basically totally destroyed in the fire, but I am still concerned that 6 months to complete this rehab is too aggressive.

And finally, I don't know exactly how to estimate the gut rehab costs for this building and although I believe I'm underwriting this conservatively, I'm worried I won't have enough money to complete the rehab. 

I'm willing to put up my own money (I have around $130k of my own) to finish construction if it came to that point, as I'm confident I will be able to pay off investors and cash out $200k+ with a 1.4x DSCR when I refinance in 9-12 months.

However I'd prefer to borrow additional money from the investors at 8% instead of using my own funds if possible and keep my money as kind of a "worst case worst case reserve fund".

I've attached my underwriting sheet here to show rental rates, gut rehab cost projections and refinancing assumptions so you can get a feel of whether or not I'm being conservative enough. The vacancy assumptions, repair costs and management fee costs are direct from a local bank I'm speaking with and most of the other assumptions are what I've seen after analyzing $100mm+ of P&Ls this year.

If you guys could A) Tell me how I can possibly find out the layouts without walking the building (I'm worried the units are railroad style which rent for 30% less than regular layouts) and B) Estimate gut rehab costs and time frame without being able to walk the entire property (if that's even possible), and C) Whether I should pull the trigger on this deal, I would greatly appreciate it.

Thanks!

 http://www.cepr.org/content/deleveraging-what-dele..

http://finance.yahoo.com/news/why-financial-deleve...

There has been 11% deleveraging in 7 years, the equivalent of going from $20,000 in debt to $17,800 in debt. Hardly massive deleveraging and has been 100% offset by the massive increase in government borrowing which without the Fed printing money would have put massive upward pressure on interest rates. 

We ended Bretton Woods because we lost control of the gold price despite repeated interventions in the market with the London Gold pool. We lost control of the gold price because we printed money and ran large trade and current account deficits starting in the 1950s and spent recklessly all throughout the 1960s, culminating in a run on the dollar and massive dollar redemptions for gold.

And I understand the whole idea that velocity falling is the reason rates have been falling since 1980. But you forget how convenient it is to have a central bank with unlimited printing power unconstrained by gold. I can make rates continually stay low no matter the demand for credit if I constantly increase the money supply.

Anyway this debate is too wonk-y for BP. Real estate is headed for a crash, rates are going to rise soon and there will be hell to pay.

1. Gas analogy is false. Supply does more to set prices than demand. Has demand for iPhones ever been higher? Have the prices ever been lower to acquire one in real terms?  Gas prices collapsed due to fracking and shale drilling, not because people all stopped driving or started buying hybrids. Supply controls demand, demand does not control supply. 

The demand thesis as a cause of rising rates is false as well. In the 1970s rates went sky high because of the end of Bretton Woods and Volcker needing to defend the USD from hyperinflation. And then rates fell dramatically from 1982-2012 while debt levels grew very rapidly, especially after year 2000 which was the 1st time in US history where Fed Funds rate was 0% (may have occurred during Great Depression, don't quote me).

2. The Fed controls the short end of the curve. Most investors borrow from local and community banks at 3, 5 and 7 year terms, often with floating rates over LIBOR. Therefore when they push the Fed funds rate to zero, the commercial real estate market feels it much acutely than the residential market. That's why multifamily has seen such ridiculous cap rate compression (which just means asset inflation) since 2009.

3. Idk what you're talking about in terms of demand for credit being lower than anytime in the past 30 years. Since 2007 alone global debt levels have grown $57T, and pre-financial crisis global debt levels had been growing at a CAGR of 11% while global GDP grew at 4%. Sovereign debt levels are crazy high and only going higher due to unfunded liabilities caused by the aging of the baby boomers.

Debt is more in demand than any time before. Can you imagine where real estate prices would be without 3% down FHA loans and everyone had to put down 20% or more? Auto sales without subprime lending? Retail sales without consumer credit?

Negative rates only exist because we are in a yield starved world, financial repression going on and the ECB has embarked on QE. Also China is slowing so capital is flowing to countries like Germany and Switzerland in the chase for safety and investors are willing to loan money for a negative rate because they expect the rise in purchasing power to make up for it in real terms even while losing in nominal terms.

4. I agree rents will keep rising, but they will not rise enough to offset a 2% move in interest rates with debt levels this high. Hang on to your hats people!

It's refreshing to see an article written by someone with common sense. I sat down a recently with a guy who owns 4,000+ units in NYC (girlfriend's family friend) to learn how he underwrites and analyzes deals.

Using his conservative underwriting criteria he's buying apartment buildings in NYC at 5% cap rates, using 75% LTV I/O 3 year 1st at 1.85%, 15% mezzanine debt at 6% over LIBOR and puts up 10% equity. Mind you, these are purchases for buildings that often times are 50-75 years old, 100% rent regulated, filled with working class tenants (just saying these are not millennial investment bankers who can afford 6% annual rent increases) and located in the most tenant friendly city in the U.S. (maybe SF is worse idk).

Now I sat there with him and tried to sell myself on why this makes sense. I mean, this guy has several hundred million dollars and I'm a 27 year old broker just trying to buy my first building.

But then I started to run the numbers when I got home. If rates rose 1-2% then dramatically higher NOIs would be necessary for banks to be able to refinance these properties in 3 years due to the crazy high leverage being used in all gateway markets. 

Worse still, if rates went up due to inflationary pressures, then to add insult to injury you would have higher oil or gas bills, higher water and sewer bills and higher insurance premiums and likely higher RE taxes, putting significant downward pressure on NOIs while facing upward pressure on cap rates.

3-5 years from today people will be shaking their heads at the prices being paid today.

1. New construction will most likely have submetered utilities, meaning 50% rule would likely not apply here. I've seen gut rehabs of existing properties with sub-metered utilities end up with a 20% expense ratio in NY.

2. A new construction multifamily complex, depending on level of finishes, sells at much lower cap rates than exisiting properties most times. If the property had a 30% expenses ratio (common in brand new construction), NOI would be about $600k. At a 7 cap (conservative seeing as 48 new construction townhomes could almost be an institutional grade asset), price would be $8.6mm, giving a profit of $1.5mm on $2mm equity and a 27% IRR assuming construction takes around 18 months.

Bottom line, for a buy and hold it doesn't make sense, building to sell a stabilized brand new asset does make sense. Also, you can't be sure the builder won't be using mezzanine debt as well to increase his IRR.

I'm looking in NYC which includes the Bronx, I'm not looking in Manhattan (although I've found a few solid ones in Washington Heights that will approach 10% before even removing rent-regulated tenants through turnover.)

Guys, of course I can buy a $1.2mm deal in cash, but in NY, a GREAT deal has a 7 cap. I want to generate 10% returns so I can take a 3% split.

I need to use the banks to get really cheap leverage otherwise it's not going to happen.

bump