All Forum Posts by: Joshua Ferrari

@Trey Rittenhouse

Welcome to BP Trey! I started investing in real estate when I was 20. You're never too young to pursue financial freedom.

My advice is to find your niche & stick with it. Too often investors will flip-flop between niches and try to be okay at all of them. If you can focus on just one niche, for example buy & hold, then you can own that niche and be "the guy" to go to whenever someone is selling one or has any questions about them. 

Read lots of books, listen to tons of podcasts, read blogs & forums, go to your local Real Estate Investor groups, network with other like-minded individuals, find a mentor, and don't over-analyze. Of course you want to make a safe, calculated decision when investing into anything, but if the numbers seems right, go after it! You can't ever hit a home run if you never step up to the plate. 

You're welcome to check out all the resources we have on our website as well. You can find it on my personal page & learn everything there is to know about multifamily syndications! Get after it and never give up!

@Valentina Bizeta

There are tons of different ways to get financing. 

Hard money loans are an option. They don't typically look at you so much as they look at the deals ability to produce sufficient income for the debt service. However, hard money comes with points (fees charged by the lender) and typically a higher interest rate.

If you happen to know anyone else with a big chunk of money you could consider private money. Then you two can hash out all the terms amongst yourselves and leave the big banks out of it.

Owner financing is also a creative option to getting deals done. Your ability to solve the sellers problem could score you amazing terms that make the deal extremely lucrative for both you & the seller.

Subject-To financing requires you to take over the existing mortgage on the property with the same interest rate and amortization, but could result in the lender wanting all of their money when the title changes hands. (Typically doesn’t happen, but with everything goin on in the market, would definitely be something to double check)

You could also try partnering with someone that does have proof of income and pay them a fee or give them a percentage of the equity, in return for their contribution. 

I'm sure I'm missing 1,000 other options. There's tons of forum posts on lending that I'm sure would help you have a better understanding of it all.

You could also check out our website, on my personal page, that has tons of blog posts and podcast episodes on syndication and how that's another possibility for funding the deal. However, syndication typically only makes sense with larger deals. (5+ Units)

@Lillis Hawker

If the original property has no mortgage on it, then that's a lot of potential equity tied up there that you could use as a down payment for your new home. 

No banks are doing cash out refis right now, so I would consider going the HELOC (Home Equity Line of Credit) route. Only issue with that is that it's essentially like a credit card where there would continue to be a minimum payment every month on whatever number of capital you take out.

You would want to be sure that whatever you take out of the original property for the new one, could be paid back monthly from the $1,475/Month income. If you can make that happen, then you've essentially bought a second house for free, steered clear of closing costs, taxes, & realtor fees, & have been able to keep your old house of which is probably still appreciating, still cash flowing, & is giving you immaculate tax benefits such as depreciation. I highly recommend keeping the property. 

If you've been managing the property yourself, and now you're moving away, then you'll need to also consider property management fees. Typically 5-10% of the monthly income. If all of that can calculate into profit, then that's the route to go!  

If you don't think it's a good deal then I'd say its probably not. You know things about your market, and your situation, that I don't know, and without that information the deal doesn't look that solid. 

Hard to say. There's a lot of numbers left out. 

Bad Debt? Coronavirus has skyrocketed that number. Best to be on the safe side and include 2-5%.

Do you have to pay the utilities or are the tenants?

Definitely need some money for repairs & reserves.

Also need CapEx set aside on the entrance to the deal.

I'm assuming you've got your lending info tightened up. Lending is changing. Fast. You're going to want to be sure that you can 100% achieve the loan before entering under contract. 

Are you 100% sure on the taxes, insurance, property management, & HOA? Getting quotes on these will reinforce no surprises upon ownership.

@Ryan Alexander

Pretty good price on a duplex! Definitely need some CapEx in there.

7% vacancy is assuming only two months of lost or missed payments. Do you believe that to be feasible in your market? With everything going on with the economy, some bad debt might need to be calculated to be on the safe side. If either tenant loses their job and suddenly can't pay rent, and you can't evict because of the moratorium, then that would cause an issue.  

How tight is your lending? Lending requirements have changed drastically in the last two months. LTV's are lower (Higher Down Payment), DCRs are higher (Higher NOI to Debt Ratio), Reserves are higher (I've heard some lenders requiring 12 months of reserves), Interest Rates are lower, but Rate Lock has been moved to the closing table, almost. I had a friend that was trying to close on a property, and his interest rate got raised by 2% on the day of closing because rates changed, they wouldn't allow him to rate lock sooner, and they changed the credit score requirements on him.

All of that to say, be sure that your lending capabilities are solid before entering into the contract and being unable to close. 

Based on the numbers given, it looks like a solid deal. Really hone in on what your local market is doing, and how it's reacting to COVID-19, in terms of unemployment rates, job growth, (or lack thereof), & population growth. 

Are home prices decreasing in your market? What about rent prices? There's a study that showed that new vacancies are being listed for less than they were when they were rented, meaning some markets are seeing a decline in rents. (Something we haven't seen in decades) Granted it's not a whole lot, it's like 5-7%, but that's still not a good sign for a healthy market. Be sure that's something that could also be calculated in your numbers once you have a turnover. 

 @Mike Cahill

There are tons of different ways to make money in real estate. If real estate truly intrigues you, and you want to be active in the business and eventually quit your W-2 job, then you should go for it! 

That's what I'm doing. I'm a multifamily syndicator and a full time aircraft technician and I make it work and still have plenty of time to spend with my family. However, my end goal is to retire from my W-2, run my syndication business full time, and scale it into something great. 

If you truly enjoy your W-2 and are looking for some supplemental income, then the only TRUE passive real estate investment, is a syndication. To learn more about syndications, you can download our free e-book titled "The Ultimate Guide to Investing in Multifamily Syndications". 

Let me know if you have any questions!

@Joseph Verschleiser

Here's a little bit of advice and clarity on how Self-Directed IRA's can assist you in creating wealth. I'd love to chat more if you have any questions!

How to Invest in Real Estate through a Self-Directed IRA

A Self-Directed IRA is a traditional IRA or Roth IRA in which the custodian permits a wide range of investments that are allowable in retirement accounts. One of these alternative options, real estate investments, is appealing to many people who consider using a Self-Directed IRA to purchase rental properties and/or invest passively in syndications.

However, just because something is allowed by the IRS does not always mean it is the best choice for your retirement savings. Here are some important things to be aware of when it comes to using an IRA to purchase/invest in real estate.

Self-Directed IRA Definition

The term "self-directed" means that alternative investments are accepted or offered by the IRA custodian. An IRA custodian is the financial institution responsible for record-keeping and IRS reporting requirements. The "self-directed" aspect kicks in each year, since you must accurately value your investment annually and report the value to your IRA custodian.

How They May Be Used to Buy Real Estate

The first step is setting up a Self-Directed IRA. Several reputable companies provide individual investors with the ability to set up self-directed retirement accounts. Due to the complex nature of Self-Directed IRAs, it is helpful to have a custodian that will provide some much-needed guidance as you travel through the murky and confusing waters of the IRS tax code.

Some IRA custodians have more complicated fee structures than others. Therefore, it is important to do your homework and examine all of the potential fees and expenses that will impact the overall return on your investment. In many cases, it is also advisable to establish a limited liability company (LLC) or other entity to hold the investment assets. In Multifamily Syndications, there will already be an LLC that your SD-IRA will own a percentage of.

Primary Benefits of Owning Investment Real Estate in an IRA

Perhaps the biggest benefit of using a Self-Directed IRA to purchase real estate is found in the potential tax benefits. As is the case with any investment in your IRA, you benefit from tax-deferred income until the day you take withdrawals. Or, if your investment holdings are in a Roth IRA, your investment gains accumulate tax-free, and you can withdraw it tax-free.

You still must wait until you reach age 59½ to withdraw your funds, or else you will be subject to an early withdrawal penalty, and the withdrawal will be included as ordinary income on your tax return. However, active investors may buy, sell, or flip properties and move funds from one project to another while maintaining the tax-deferral status of the IRA.

Another benefit of owning real estate in an IRA is the familiarity. Investor interest is often sparked by global market uncertainty, and this can lead investors to stick with more local investments. Self-Directed IRAs provide you with an ability to invest in investments that you know and understand.

Potential Downsides and Risks

As an account holder in a Self-Directed IRA, you are responsible for doing the required due diligence on the property itself, unless it's a passive investment. This may be an appealing feature of real estate investing in IRAs if you are a real estate professional or experienced investor. However, if you are not a savvy real estate investor, it could easily lead to a bad investment decision or leave you vulnerable to fraud. The Securities and Exchange Commission has released an investor alert addressing Self-Directed IRAs and the risk of fraud.

One of the biggest risks of owning real estate in a Self-Directed IRA is the potential lack of diversification. While not impossible for super savers who have accumulated substantial amounts of wealth in an IRA, many investors lack the cash needed to create a diversified real estate investment portfolio. Only focusing on the upside potential is a major risk to consider before purchasing, or investing in, an investment property.

Liquidity is another big concern when investing in real estate within an IRA. There is always a possibility that you may not be able to access the value of your investment to make distributions when you may need the money the most during your retirement years.

Self-Directed IRA Tax Pitfalls to Avoid

Owning real estate in an IRA allows your investment to grow on a tax-deferred basis (Roth IRAs provide the potential for tax-free growth). However, if you don't follow the rules, you could purchase a property the wrong way, disqualify the IRA, and create a taxable event. IRA ownership of investment property also loses some of the tax breaks available to real estate investors if the property operates at a loss. You also cannot claim depreciation on IRA-owned real estate.

If you plan on using an IRA to purchase a vacation home or a primary or secondary residenceâthink again. Self-Directed IRA investment transactions involving real estate must all be arm's length transactions. That means that no self-dealing or personal transactions are allowable with Self-Directed IRAs. This rule also applies to immediate family members. If you buy a property from or sell a property to a family member (or yourself), you will create a taxable event.

Unrelated business income tax (UBIT) is another potential tax issue. It will be especially important to pay attention to this tax if you are thinking about using a mortgage to purchase an investment property.

With a traditional IRA, you must take required minimum distributions once you reach age 70½. If you own real estate in an IRA, it is very difficult to sell off your real estate holdings in small chunks each year. For that reason, you must keep enough cash in your IRA accounts to cover your required distributions, or else you'll run into tax problems.

Let me know if you have any more questions! There are also other options to invest, either actively or passively, using retirement accounts. Another example is a QRP. (Qualified Retirement Plan)

Absolutely we care. I haven't seen any high quality property managers in my area (Mobile, AL) that charge 6%. If I could find one that was exceptional, then I would absolutely go with them. However, if you already have a phenomenal manager, and the numbers work for you and your investors, then why fire them just to save 3%? In the end, they'll make you back way more than that 3% you'd be saving.   

The trick is, is the cheaper property manager actually better than the others charging 9-10%? Do they have the systems and infrastructure in place to be able to properly manage 50, 100, 150, 200 units? I would dig DEEP into their performance with other properties to see if the comparison really is the same. 

Are they managing the same class property as yours? Do they manage the same size property as yours? Do they have sufficient employees for the size property you have? What are their reporting systems like? Do they take weeks to do what you ask of them? Are they regularly communicating with you in the good and the bad, or just in the good? Are they on-site every day? Are there lots of tenant complaints from their current properties? Are they happy people? Do they show that they care about your property and that they want to be there? If they don't show it, the tenants will see that, and they won't want to stay at your property either. 

There's a multitude of other questions you could ask them, but the point is, you better be 1,000% sure they will perform to the same capacity as the 9% manager in every facet. 

1. @Kole Moore
2. Syndication is a very lucrative investment strategy, if done properly. You MUST have the utmost trust in the syndicator/sponsor. The best way to create trust is by learning everything you can about them and how they run their business. Below are some questions you can ask every potential sponsor in order to get a handle on exactly who they are and how their syndications have been operated. 
3. Questions are courtesy of @Brian Burke of whom just wrote a fantastic book all about vetting syndicators! Title of the book is "The Hands-Off Investor" and it can be purchased at the biggerpockets book store! I definitely recommend the read. Let me know if there is anything else I can do to help you in this journey! 
4. TEAM
5. How they have delegated their roles, and who is responsible for the various disciplines? (Some examples of roles include acquisitions, due diligence, equity and debt structuring, entity and transaction legal, insurance, accounting, asset management, property management, investor relations, investor reporting, and tax matters.)
6. Who is providing the loan guarantee?
7. How long have the partners been working together?
8. Do the partners do all deals together or do the partners switch up from deal to deal?
9. What plans are in place if one or more partners break off?
10. Have any principals ever been convicted of a felony or any other financial crime or securities violation?

    How do they handle key person risk, and do they have a succession plan?

11. EXPERIENCE
    

12. How long have the principals been investing in real estate, and more specifically, in the type of real estate that is being contemplated for syndication?
13. How many properties has the team acquired?
14. If they are in the multifamily business, how many units have they acquired? How many do they currently own?
15. If they are in the commercial property business, how many square feet? How many hotel rooms, or self storage units, or whatever it is that the fund is investing in?                                                                                                                                                                                                                                         How long has the sponsor been in the geographical market?                                                                                                                                                    How many units have they owned and managed in that market?
16. Has the sponsor survived previous adverse market cycles? How did it work out for them? How did they handle it?
17. How long have they been doing syndications?
18. How much money have they raised?
19. How many deals have they done?
20. How have their previous deals performed?
21. How have they performed as compared to what they projected?
22. Why did underperforming deals underperform, what did they learn from that, and what did they change in response?                                                                                                                                                                                                  How many investments have gone full-cycle (bought, managed and sold)? How did those perform relative to their original projections?                                                                                                                                                 What does their current portfolio look like? How many units? Where? Product type? Similarity to what they are buying now?                                                                                                                                                             Have they done similar investments in the past? How many? Where?                                                                                                                                         Do they specialize in one specific strategy, location, or product type?                                                                                                                                      Have they ever had to make an unplanned capital call, and why? What did they try to do to remedy the situation prior to issuing an unplanned capital call?                                                                                                                 What was their worst deal, and what they did to overcome the challenge?
23. RELATIONSHIPS
24. How do they source their acquisitions?
25. How do they source their debt?
26. Ask them to explain their lending relationships. How many loans have they done with this lender? How long have they been working with this lender?
27. DUE DILIGENCE
28. Ask them to explain their due diligence procedures.
29. REPORTING
30. Who performs the accounting function at their organization?
31. What accounting experience does that person possess?
32. Ask them to explain their accounting experience specific to real estate operations.
33. Ask to see sample quarterly reports.
34. Ask how frequently they report and distribute.
35. Do they have an online investor portal?
36. When do they typically deliver their K-1s to their investors?
37. Have their investors ever had to file for an extension because they were waiting for their K-1?
38. PROPERTY AND ASSET MANAGEMENT
39. Who will be managing? Third-party company or in-house?
40. Ask to see a bio on manager’s experience.
41. How many units has the manager managed? Are those properties similar to the ones being acquired by this sponsor?
42. How many units are they managing now?
43. How many units do they or have they managed in this area?
44. CAPITAL IMPROVEMENTS
45. Is their renovation budget based on contractor bids, their past experience, or just a wild guess?
46. Is there a line item in the budget for contingencies?
47. CAP RATES AND VALUATION
48. What is the market cap rate for similar properties in this area?
49. What exit cap rate is the sponsor assuming for the sale of the asset? How did they arrive at that exit cap rate?
50. Is the income used for calculating the forecasted exit price adjusted for the next buyer’s property taxes?
51. SPONSOR CAPACITY
52. What happens if they don’t close?
53. What will they do if they only raise half of the money and can’t raise the other half?
54. Do they have someone willing to contribute the difference so the deal closes, and they can continue raising until that lender is repaid?
55. Can they delay the closing to allow more time to raise the rest of the capital or will they have to cancel the deal?
56. If they have to cancel, what happens to the money already raised? Do the investors get it back or would it be held by the sponsor for the next offering? Or would the sponsor use it to pay for the cost of the failed deal?
57. Is there any risk of loss of any or all of your investment if they can’t complete the fundraising?
58. Who absorbs the costs that were paid for due diligence and other unrecoverable expenses if the deal fails to close?
59. ALIGNMENT OF INTEREST
60. Who is signing the loan guarantee or carve-out guarantee?
61. EXIT STRATEGIES
62. Does the loan have a large prepayment penalty due if we sell when planned? Is that included in the cost of sale?
63. What is the plan if there is an adverse market cycle when it comes time to sell?
64. Does the operating agreement have provisions that allow you to hold for longer than planned if the original sale timing isn’t right?
65. UNDERWRITING AND PROJECTIONS
66. Are the forecasted returns gross or net?
67. What are the terms of the loan?
68. Are there any prepayment penalties? If so, what, and for how long?
69. WATERFALLS
70. Is this a fund that invests with other operators or is this fund buying real estate directly?
71. Is there a dual-promote?
72. FEES
73. How is the asset management fee calculated?
74. Are all fees accounted for in the financial projections?
75. Are there any fees that aren’t shown in the marketing or underwriting?
76. REPORTING
77. How often do they report to investors?
78. What do the reports contain?
79. If the investment is a fund, do the reports include property-level reports or just fund-level reports?
80. Do they show a comparison of the originally projected performance and actual performance in your quarterly reports?
81. Or do they show a comparison against the current budget, or no comparison at all?