All Forum Posts by: Kevin Dean

Hey @Pat L. your right, I'm starting to find that it is an entirely different animal as compared to the multifamily value add model that I am used to. 

Still on the hunt for a good tool to model this out, but do you have any good rules of thumb you have found useful when looking at these types of deal?

Hey @Jesse Copjec any luck on this? Looking for the same thing right now. 

Hey @Eric Palmer, when I first graduated I had to battle with this same question. This is how I thought about it...

If I believe that my ROI from investing will be greater than the interest rate on my student loans, I invest. 

If I believe that my ROI from investing will be less than the interest rate on my student debt, pay off my loans as quick as possible.

To play devils advocate for the thought above here are some additional things I considered....

1. This simple equation does not account for the feeling you will receive after being debt free. 

2. If you dedicate 100% of your time towards being the best dentist possible, you may create more wealth in the process than you would have created by sticking your toe in the water in real estate investing while maintaining the full time dentist job.

3. The opportunity cost of not investing right now may outweigh the return you will get from putting that extra money towards you loans.  

4. But with no experience and a demanding schedule as a dentist, you may not have the time, energy and focus needed in order to create outsized returns above that of your interest rate. 

5. Another option could be investing with partners who have more time to spend sourcing, underwriting, acquiring and managing investments, enabling you to focus on your work, while investing that money into real estate and potentially receiving a return above that of the interest rate on your student loans. 

Just some of the thoughts that ran through my head when I was contemplating the same question. For the record, I chose to invest!

Hey @Jason Parker I'm not sure if you are looking at a single family property or a multifamily property but here's something I have learned in my experience walking multifamily properties.

In addition to what has already been mentioned, you can learn a lot from walking a large multifamily property when you go with the future property manager and general contractor.  It is good to use this site walk not only to better understand the current state of the property and to develop a business plan going forward, but it can also be used as an interview for both the Property Manager and the General Contractor who might be walking with you.

Here are some things that I noticed on my last site walk...

• If the PM you are walking with is the current on site manager, see how tenants treat that individual and how the PM treats 
• Notice how the trash, landscaping and general maintenance around the property is being handled.
• When you walk into different tenant's units, the tenants will often verbalize their complaints, usually exaggerating a bit, but still very good feedback and can be used to understand the quality of the current operations. Also use this time to ask them what they would change on the property if they could. 
• If you notice something is off, wait and see if the property manager and GC call it out, or if you have to call it out and how they handle these issues around the property.
• Also remember that the property manager is the expert on site, they may have been there for years and know all of the nuances, the things that need to be fixed, the things that don't need to be fixed right away, what matters and what doesn't. So ask a lot of questions and take their opinions into consideration as you decide to move ahead with developing your plan for the property.
• One other tip, make sure you bring a pen and paper because you won't remember every detail after completing the walk through.

The site walk is extremely valuable in determining your business plan for the property regardless of the size of the property, I think you will want to be detailed in your questions and observations. 

Hey @Chris Serger here is some information on the details you have provided.

• 7% preferred return - This is the return that the limited partners will receive prior to the syndicator getting paid out of cash flow. This is a mechanism used to make sure general partners are aligned with the limited partners, but are not a good indicator of your true return, so I wouldn't put too much weight on this. It is not a promised return, it just means that you receive preference in cash flow over the syndicator.
• Cash on Cash - 8.5% over 5 years - This is your average cash on cash, so it doesn't mean that you actually receive exactly 8.5% per year. For example in year 1 you might receive a 2% cash on cash return, but in year 4 you may receive a 13% cash on cash. Again, I can't tell you the exact return by year without seeing the underwriting.
• Equity Multiple 1.94 - take your equity invested and multiply it by 1.94, this is your total return including the cash on cash throughout the deal, the money returned from loan proceeds if there is a refinance and lastly the proceeds received after selling the property in year 5.  So if you invest $100,000 on day 1, you will receive a total return of $194,000 throughout the deal which includes your original $100,000 investment. 

In multifamily value add type deals, you usually have a lower cash on cash in the first few years, and then most of the money is received on the sale after you have added all of the value and executed the full business plan. This is why IRR is typically used to show the return of the project while accounting for the time it takes to actually receive that return.

I would ask for the Syndicator to show you the projected annual returns year over year for a hypothetical investment of $100,000, they should be able to provide that information for you as it will already be in their underwriting. 

Let me know if you have any questions or if anything needs clarification.

Hey @Eli Mills, typically you want to avoid the syndication model if you can on smaller deals. Arranging expensive legal documents such as a Private Placement Memorandum is usually cost prohibitive on smaller deals as it will make up a relatively large percentage of your actual invested equity.

With a small amount of investors it is usually best to structure a deal through a joint venture rather than a full syndication. 

Hey @Keith Linne congrats on tying up a property which appears to have a good bit of upside to it! Here are a few of my thoughts after looking over your comments.

1. I noticed you calculated DSCR throughout the hold period, this is essential so great job focusing in on this. Make sure you also look at what DSCR would be if the debt were to be amortizing, not interest only. Most banks will underwrite a deal based on the amortizing DSCR regardless of whether or not the debt will have an interest only component. In general you want to make sure you hit a 1.25 DSCR on an amortizing basis.

The reason you want to make sure you are above that threshold is in case interest only is not an option when you go to refinance. While bridge lenders will go below 1.25, agency debt typically requires it, and it will also provide you some breathing room in case vacancy is higher than expected or your rent bumps do not pan out as expected.

2. I see that you have projected post renovated rents, however you can also factor in a rent growth projection depending on the market. This will give you a more accurate revenue projection as you hold the property over the next few years. You definitely want to be conservative, however if rent growth is more or less than expected, it will effect your loan proceeds when you go to refinance.

3. On the flip side, you will also want to add an expense escalator which accounts for inflation. For example 2% per year, to account for rising material and labor costs.

4. I'm sure you have already thought of this but make sure you budget Replacement Reserves on a per unit basis. The older the property the more reserves you will want to hold. For example if it is a 1970s property you may want to hold $300 a year in cash to account for unforeseen events. 

5. Being that you are looking to add value here, you might also want to include an interest rate reserve (basically hold a couple of months of debt service in cash) in order meet the debt service in times of unexpected distress.

After factoring these things in, your current price you have under contract may still be sufficient for your personal return criteria, or you may have to revise your offer price downwards.

Let me know if you have any questions!

Hey @Candido Trinidad, if you are looking for large commercial financing, my recommendation is....

1. Figure out exactly what your desired target asset looks like based on your experience, business plan and financial position.

2. Consult with a mortgage broker. These brokers will be able to give you an idea of what you may or may not be able to qualify for based on the target asset, market, business plan, your prior experience and your net worth/liquidity.  Its important to do this before tying up a property in order to make sure you are not wasting yours or the sellers time. 

3. After narrowing in on exactly what you are capable of taking down, move ahead with confidence and start making offers based on your investment criteria and your brokers recommendation. 

4. After you get a property under contract, you will already have your broker relationship established and they will be able to guide you through acquiring financing for a commercial property if this is your first large transaction.

One note, these brokers do charge a fee on top of the origination fee that you will be receiving from whoever ends up providing financing for your deal, so make sure you get a rough estimate from the broker up front and then budget for that fee in your underwriting. 

Hey @Roland Osage here are a few ideas for you.

1. Help raise capital for the operator's deals.

2. Help bring deals to the operator.

3. Introduce the operator to other multifamily vendors who you believe will enhance, grow or improve that operator's business.

4. Be boots on the ground in your market.

5. Learn how to underwrite deals on your own, then reach out to experienced operators and figure out what their exact deal criteria is. This will enable you to use that free time generating, screening and underwriting leads up front, only bringing true opportunities to that operator. 

@Mark DiRocco great points and questions. I don't look too deeply into those quantitatively, more qualitatively. Meaning, based on the business plan, and the target tenants of that business plan, I put myself in the tenants shoes and ask myself what is important to me? 

For example, if most of our target tenants in a building are families, more weight will definitely be place on the quality of the school district. If however we are looking at a workforce housing project, we would want to put more emphasis on ease of using public transportation.