All Forum Posts by: Tom Lafferty

Lots of people say never buy on proforma numbers, but its not that clear cut, and a lot of factors can affect how buyers perceive a deal. There are a lot of reasons why a seller may have below market rents, often significantly below. Maybe the units need renovations and other similar properties in the area are achieving higher rents after rehab, yet the owner has no desire to put money into the deal and is simply keeping it full. In that case many buyers will see a clear path to increasing NOI, and will pay a bit more for the deal. I looked at a deal recently in which the seller had owned it forever and his rents were FAR below market; happens all the time. He also had super high expenses that any experienced buyer would reduce in their projections, allowing them to pay more.

As many others have said, of course brokers use projected income.  Its up to the buyers to decide how realistic those numbers are.  Some shops use crazy comps that are much newer and in better areas, while others are known to be more reasonable.  You'll get to know the reputations of those brokers the longer you're in a market.  

It also depends on how competitive the market is that you're investing in.  In a very desirable area, buyers are usually willing to pay a seller more of any potential upside than they are in a less desirable area.  This has obviously shifted a LOT in the last year or so as competition has dropped dramatically, and buyers are able to be more conservative.  

I believe it all comes down to knowing the market very well, doing your own surveys, building relationships with the active brokers, and being confident in your projections as well as knowing the risks of missing them. 

I only have experience in multifamily, so cannot comment on other CRE types. In MF, ten years is considered long-term. As others have mentioned, hopefully you've got significant equity in the property by that point. In 2008 there WERE people that lost properties because loans were due, and there was no other financing available, but supposedly that was a very tiny amount. That probably doesn't include bad operators, people who paid way too much right before the crash, etc.

Fixed rate, Fannie/Freddie "long-term" debt (10-12 yrs) is somewhat the gold standard for multifamily lending. The Freddie floater came along not long ago, and became the most popular, but now bridge debt use has skyrocketed. As a comparison, most bridge debt is 3+1+1, so really the loans are due in 3 yrs. That obviously does add more risk, but the proceeds are so much better than agency has been over the last year that many are willing to take that risk.

I've run across a few deals that had HUD 30yr financing, but those loans are very restrictive and take a long time to close so they're not very common; at least from what I've seen. Not sure what you're going for, but smaller multifamily (under 20-30 units?) may have different options available, but not sure on that. I did a couple of full recourse bank loans on 32 and 78 unit properties several years ago, but have only done larger non-recourse agency and bridge debt since then.

Oh boy.  I try it stay out of these conversations, but occasionally feel compelled.  I've made a few other posts on this topic over the years, so please do a search and maybe they'll come up?  

My personal experience with a paid mentor changed my life.  You can absolutely go the route of buying a small deal, gradually increasing in size, lose money and consider it your education, and all of the other common guidance often given.  I was 45 when I discovered real estate investing and did not have that kind of time.  I chose a mentor,  used the information I was given, worked like crazy, and 9 years later have syndicated deals of the following sizes:  32, 78, 154, 238, 60, 216, 322, 128, and 377 units.  Total purchase price of all is in excess of $160,000,000.  To purchase these properties required raising over $58,000,000.  The vast majority of those funds came from investors I met within the group, along with referrals from happy investors that have come along the way.  I will just tell you that there was an absolutely ZERO percent chance that I would have ever done the first deal without the mentoring I paid for.  Zero.  I'm not saying someone else wouldn't be able to accomplish as much or more than I have on their own, but for me it was simply too overwhelming to consider using other people's money and not having an experienced expert and multiple resources to guide me.  Not a chance.  It was not easy, and I worked my rear off to achieve these results, but to think that I almost didn't jump in due to the cost is an incredibly scary prospect.  I was so incredibly skeptical that I spent 6 months trying to shoot down the process, and find the skeletons that I was sure were hiding.  I wish I had used those 6 months to buy more deals.  I could've paid 10X what I did for the coaching, and it would have been the best decision ever.  

I've also had the opportunity to invest in many other syndications as a totally passive investor as a result of my involvement with my mentoring group.  Many (maybe even most) of these were with other new syndicators in the group that I know and trust, and they've dramatically increased our net worth.  I would have had NO exposure to these otherwise.  

 I am not saying all programs are equal, or that they are for everyone.  This is simply my personal perspective and results.  I will also add that if you do not have some funds to begin with, it will certainly add difficulty, and may be a reason to follow the advice to start small.  If you do have some funds to deploy, are willing to work hard, can commit the time, and are willing to deal with all the obstacles that are sure to come your way, paid mentoring can be a great option.  

Thanks @Evan Polaski, very helpful!

Thanks @Danny Randazzo.  While I would be ok accepting such a letter, apparently a lot of cpa's will not accept the liability of certifying their clients as accredited.  That is very annoying, as its a pretty clear concept.  My own CPA firm is apparently one of those offenders.  I'm going to test that, as I'm accredited as well but want to see if they'll be willing to say so.  

Hey Nick, haven’t heard from you in forever, thanks for the reply!  I’ve been through it too and it wasn’t a big deal but have heard from others that it was a pain.  

I have only done 506b offerings so far, and am considering a 506c.  My only hesitation is the grief it may cause the investors as they go through the verification process to prove they are accredited.  Have had several investors in other deals have attorneys/cpas who would not provide a letter so they had to go through verifyinvestor.com or similar, and had to deal with annoying questions over several days with the attorneys. 

To those that have moved from a 506b to 506c with the same investor database, did you get much pushback?  Lose investors because of it?  Obviously if they want to invest bad enough they'll do what is needed, but just wondering if its worth the hassle.  My typical investor is $50-$300k, so there is usually a large number of them.  Sounds like a mess, any experiences positive or negative appreciated.  

@Luke Miller nailed it.  I was very frustrated in the beginning by all the discussions on BP advising people to find someone who was already successful in the MF biz and “add value.”  How in the word was I supposed to do that as a complete beginner?  I have people ask me to help in that way, and although I try, it’s  just too time consuming.  

The other common thread is to make a passive investment to learn the business.  I would argue that doing so will teach you very little.  It will give you a very slight amount of credibility with the brokers, which is extremely important, but it will not teach you how to find and analyze deals, manage deals, get the rehab done, work with PM’s, etc.  

I do think passive MF investments are one of the best things you can do, and I have invested in many myself, but I do not think it’s realistic to think you are going to learn the business that way.

Oops, the $500M in volume was 2018, not 2019.

I have another post somewhere relating to Brad Sumrok so I won’t repeat it all here.  Not sure how to find it but hopefully you can.  

I try to stay out of these discussions because I now work for Brad, so I realize my comments will be disregarded somewhat. 

I will just say that the comments about how paying a mentor is like burning money are not always accurate.  Can you go out and buy a MF deal without a mentor?  Of course you can.  Would I have done it - Absolutely NOT.  I did not have the funds to buy a deal on my own, and I would not have risked anyone else's money (nor would I have known how to raise it) without someone very experienced advising me.  You will often see comments about how you should start with a 4 plex, then move up gradually.  I had NO interest in doing that.  Prior to being a part of Brad's team, I was able to syndicate deals, and raised the money entirely from others in the program.  I have since invested in many more deals and have the ability to retire from my job, which I am in the process of doing.  I could have done it a few years ago, but truly enjoy what I do, so just haven't done it yet.  

Brad's program is not about "no money down, no credit, no problem" and he'll be the first to tell you that.  In addition, if you think someone can pay to join, then just sit back and watch the deals roll in, that is false too.  It takes work, commitment, and typically at least some liquidity to get started in larger MF deals.  Members of Brads group purchased over $500,000,000 worth of apartments in 2019.  I think that figure speaks for itself.  Most of these deals are over 100 units, and many were put together by first time buyers.  How many people can do that by reading books and listening to podcasts?  I think those are great things to do, and I spent a lot of time on them myself, but in my case I would not be where I am without Brad Sumrok's help.  Period.