All Forum Posts by: Joshua Ferrari

@Tim O'Rourke

7 Figure Flipping is one of them, but they charge a pretty penny to be apart of the mastermind so you have to make sure that it is something you 100% will be committed to.

@Tim O'Rourke 

I always found ListSource to be a great resource for finding off-market leads. Certain mastermind groups even offer discounted leads due to their high volume/business account. I've seen them as low as .01/lead as opposed to the standard .15/lead. 

It could help. We insulated our attic to R-32 which is just the level of insulation in your attic 

Too many variables to be able to give a definitive answer. Is this an older home? I've got a fourplex that's 100 years old and my tenants that live upstairs complain about the heat during the day in the middle of the summer. My solution was to get black out curtains for the windows to keep the suns heat out and buy them a window unit. 

The central HVAC just can't keep up with the extreme heat down here with such a lack of proper insulation in the windows and walls. During the morning and night though, they are plenty cool. It's just during the day, and now that everyone is working from home due to COVID-19, I felt it necessary to buy the curtains and window units. 

Have you ever run out of gas? I’m not talking the figurative gas tank, but the literal one we have in our vehicles.

I had a truck years ago that frequently over-stated the amount left in the tank and one time it got the better of me. Embarrassingly enough I ran out of gas on the top of a mountain, while I was trying to propose to my girlfriend. It was such a pain to pull off to the side of the road, walk to the nearest gas station, spend a small fortune on a portable gas can, hike a bunch of miles up and down the mountain, spill half of that gas trying to get it into the tank because those spouts are designed so poorly, and on and on…

Even though quite a few people have experienced this frustration one time or another, it is a relatively rare occurrence. We’re collectively pretty good at avoiding it because it is so annoying and painful.

On a recent road trip back home, I almost ran out of gas again while driving and not paying any attention to my gas gauge. This got me thinking about the value of a full tank not only in our vehicles, but in our multifamily investments as well.

How painful, annoying, and potentially catastrophic would it be for a multifamily syndicator to run out of gas (cash) in their deal?

My point in this article is to share some perspective on why I believe embracing these reserve requirements will only make your business stronger.

1. Most of Your Competition is On the Sidelines

I had a conversation this week with a syndicator who has over 1000 doors under management. We discussed a current deal he has under contract. He wants Agency debt and has underwritten the deal with 18 months of principal and interest reserves required for a full leverage Fannie Mae deal.

Guess what… he is still projecting a 22.3% IRR, 2.09x equity multiple, and an 8.9% cash on cash return!

Does he have to raise some additional funds to do the deal? Absolutely. But he’s still able to offer great returns to his investors.

The point is, and I feel like it is important, this individual has embraced the reserve requirements while most people are in this “wait and see” mode that has come so pervasive of late. They want to wait for the reserve requirements to burn off before doing a deal.

This over-arching sentiment is simply an opportunity for those contrarian thinkers to capture great deals by embracing the current lending climate that has scared a lot of folks out of the market. Didn’t a wise man say something to the effect of ‘buy when the herd is selling and sell when the herd is buying’???

2. You’ve Got a CapEx Budget Anyway

What do we do as syndicators? We add value. There are two primary methods in so doing – 1. Better, more efficient management. 2. Capital Improvements. Part of the business plan is to improve the physical structure both inside and out; both functionally and aesthetically. This is done by investing money in the property.

Who says that must be done day 1? If you’re projecting a 5-year hold, could you wait twelve months to start the rehab? Or part of the rehab? Of course you can. The vast majority of time that is a very viable strategy.

Let’s say you have a $1 million budget for improving the property. And let’s also assume the COIVID-19 induced mandatory lender reserve is $400,000. Rather than raising $1.4 million in equity, you still only need to raise $1 million. You put $400,000 in the reserve and go to work with the $600,000 left over. It will probably take you a year to do all that work anyway. You just defer the lowest priority work until the lender reserve is released and you complete the capital improvements then.

You might even find out you can achieve desired outcomes without spending the full $1 million budget. There is opportunity here and it takes a very simple mind shift and doing things marginally differently.

3. Investors Will Appreciate and Gravitate Towards Safety in Uncertain Times

I’m a firm believer at a base level, and whether they will admit it or not, most passive investors’ biggest fear is losing their capital. No one wants a zero percent return, but I dare say most people could live with not losing their money.

The stock market can swallow up capital that is never to be returned. We invest in real estate because there is a tangibility and longevity to the asset class.

I’m of the mindset it is virtually impossible to lose in real estate as long as you can hold on long enough. Cash allows you to hold on.

Syndicators love leverage. The vast majority I’ve worked with want as much debt as they can possibly get. It makes perfect sense. Debt is cheap money, especially today. The more debt, the higher the projected investor returns. And the more debt, the fewer investors they need to go get, manage, and work with. Leverage through debt is what makes these deals work.

The flip side of debt is there are obligations with it. The greater the leverage, the more risk a syndicator takes on.

So how does one mitigate that risk?

Cash.

Cash on hand is the way to mitigate that risk. If you lever up and have a bunch of cash on the sidelines, there is plenty of “dry powder” to service that debt if times get tough.

Remember how much fun it is to run out of gas? Yep, no fun at all. Cash is the gas that keeps the syndicator’s deal healthy and insulated from risk. This means investors can sleep well at night knowing there are funds to weather any storms.

The Agency imposed mandatory reserves make a deal stronger. It should be presented to investors as a benefit and a reason to get involved in a deal now. I don’t need to spell that out here, I know you can connect the dots.

The moral of the story today is one that has been repeated over and over again throughout the ages – Cash is King. What may appear to be a draconian reaction to the coronavirus pandemic may very well be a big opportunity for the syndicator who embraces the new rules of the game.

It’s typically through a company such as CoStar or RealPage. Heavily analytic software companies who’s life’s work is nothing but numbers.

They are pretty pricey however, so currently we just get our brokers who have access to this type of data to pull it for us, then cross reference it with in-house data that we pull for that market/deal.

Either way we will be verifying all information from these companies, but they are excellent platforms for a good basis on numbers for markets. 

As a multifamily syndicator, here is some of the data points that we look for in the deal, and in the market, in order to be sure that the deal is a good one:

- Market Performance: Rent Growth, Market Vacancy, Long-Term Vacancy Average, Adverse Cycle Occupancy Bottom, Median Income, Employment Pool, Rent to Cost of Ownership, Income to Housing Cost Ratio, Market Rankings, Construction/Absorption Ratio, Pricing, Cap Rates, Trends in Capital Market, Etc.

- Forecasted Market Performance of the Same

- Property Specific Performance: Asking Rents, Actual Rents, Vacancy, New Lease Trade-Outs, Average Vacant Days, Lease Terms, Retention Rates, Renewal Trade-Outs, Sales Record, Renovations Completed, Market Comparable Amenities based on Class of Asset, Revenue, Rent Roll, Trailing 12 Months of Operating Expenses, Property Taxes, Property Insurance, Market Trends of Specific Floor Plans, Etc.

This is but a few of the major things we look at to be sure we are providing our investors with a solid investment that brings healthy returns.

I would recommend starting local if you're just starting out. Investing in your own backyard will give you such a leg up on the out of state competition. Plus, you can visit the property, be hands on, walkthrough the property, and get to experience the whole process with boots on the ground in case anything goes awry. (Which it will.)

I wouldn't say now is the "best" time. No one will ever be able to properly time the market. 

Assuming you can afford a mortgage, and the other costs involved, and your job is not in danger of being cut, then yes, now is a good time to buy. Smart investors and people who are financially savvy know that these times are ridden with opportunity because the general public is going to contract. But every individual situation is different. Unless you’re sitting on pretty hefty savings and know your industry won’t be impacted by what’s going on, then you should err on the side of caution.

And there is good reason to exercise caution. For starters, low interest rates have little to do with all of the associated costs of purchasing a home, including property taxes, homeowner’s insurance, and closing costs that can range from one to five percent of the property closing price.

And here’s another point of contention: Mortgage rates, which many people conflate with the interest rate, are at historic lows, but they aren’t zero percent. Lower interest rates mean lower monthly mortgage payments on your home loan; therefore, you technically can pay more since your monthly costs are lower.

However, it also means that there is greater risk in the economy in general. The FED drops rates to spur growth when there is risk of unemployment and people not being able to make their monthly mortgage payments. As a result, banks will tighten their lending criteria, and it may be harder to actually secure a mortgage despite the lower rates. This is where people typically get confused.

There are also logistical issues at hand. Even if you could buy a home at a steal right now, most buyers would need to physically go and see the property, bring a home inspector to assess the property, and—assuming you get an accepted offer and arrive at the virtual closing table—you will need to hire contractors to work on the property, or find a tenant willing to move in this crisis. (There has been more tenants moving around than you would think. I've had a couple of tenants move out in May, and had them filled within the week.) Depending on what amount of time is needed to contain this virus, those things are all difficult to accomplish right now. Compounding the problem are now closed government agencies like notaries and title offices.

But one man’s crisis is another’s opportunity. For those who are eager enough, and willing to forgo traditional customs in favor of a virtual approach, there are deals to be had. Because of the instability in the world, sellers may be forced to sell at a huge discount that could exceed 10, 20, or even 30 percent below what their fair market asking price is. It’s a shame for the sellers, but if a buyer buying a home at a discount today is helping to relieve a seller’s financial worries during this unstable time in the world, even if the property sells for less than the seller may have initially hoped, then this can still be a win-win.

According to a recent poll of 600 top real estate agents across the country by HomeLight, a real estate referral company based in San Francisco, 22% of respondents say sellers are taking their homes off the market in response to coronavirus concerns. It’s hard to make a serious, perhaps life-long purchase knowing that you’re not seeing everything the market has to offer.

But if you are fortunate enough to be employed in an industry that hasn’t been devastated by the coronavirus, have the necessary resources, and decide you want to strike while the iron is hot, there are a few things you can do to take advantage of the low interest rates while minimizing your risk.

Now is a good time to start browsing online and get yourself familiar with the market. Look through your finances and prepare for the time ahead when you will be out and ready to buy. What if you’re already farther along in the process and have found a home worth buying? Put in your offer and lock your rate in. It’s definitely a good time to shop around and get a good rate. Best thing you could do in a time like this, is ante up your marketing and try and find those distressed sellers whom you can financially relieve and create some win-win scenarios for everyone.

If all of this talk of risk-taking gives you more anxiety than you’d like to admit, fear not. Time is on your side. I believe prices will come down in the next six months, across all asset classes. Nothing drastic, but maybe 10-20%. And interest rates will remain at lows to help drive the economy out of the recession. Naturally, you want to take advantage of historically low interest rates, but you also want to buy at the lowest possible price.

Things are changing rapidly, and uncertainty is still amidst. However, I've had great strides during this time, as have many other investors. You just have to look deep at your opportunities and your own situation and decide if you're able to take the risk of investing in these uncertain times. As the famous Warren Buffett once said "Be fearful when others are greedy and greedy when others are fearful." 

@Daniel Mosher

I bought Michael Blank's Multifamily Syndicated Deal Analyzer for a one time fee of $130, and it's been life changing. It has everything on there. If I ever need to change anything or add anything, it's super easy, and I was able to save a TON of time by not trying to create one myself. 

I'm also a multifamily syndicator though, so this analyzer was perfect for me. You could also try out the Biggerpockets calculators. They have a bunch of different options depending on the exit strategy that you're choosing to pursue with that  specific deal. 

We've had plenty of luck. We mainly use Agency debt on Multifamily assets, but they haven't stopped lending. Especially with lower interest rates, they want to lend long term. They just want a bigger cushion to fall back on which is why reserve requirements are so high right now.