All Forum Posts by: Tom Lafferty

@Jay Hinrichs I totally understand the feeling of wanting to invest with someone with a track record, but first time syndicators aren't always a bad thing.  I am a student of Brad Sumrok's, as well as a member of his team now, but I can tell you that I've passively invested with several of his students, most of whom were first time deal sponsors.  Am i taking on additional risk since they do not have experience?  Possibly.  I didn't blindly throw money at them though.   I have to know them well, know that they've been educated, trust that they're going to ask for help if needed, and most of all, care more about their investors money than their own.  I was absolutely terrified of losing investors money in my first syndication, as well as all subsequent deals, and as long as I get the impression a sponsor feels the same, I'm great with investing in their deal as long as everything else meets my criteria.  

Second to trusting the person, another huge reason I do it is because first timers typically take far less out of the deal than an experienced person would.  I've invested in many deals that have no acquisition fees, no disposition fees, construction management fees, refi fees, and whatever else.  No waterfalls either after a certain return.  Mitigates a lot of risk in my mind.  

I also know that those educated by Brad tend to be pretty conservative in their underwriting.  I can't tell you how many times we've gone after a deal, seen someone pay FAR more than we were willing to, and then receive an offering for it with much more aggressive projections that I'd ever be comfortable with.  These are from "experienced sponsors" too.  Plus they've tacked on all the huge fees!  No idea how those are going to turn out, but I will pass.  

6.8 would be a steal in DFW for C class right now.  Most are going well below that.

, that post was over four years ago.  I definitely try to under promise.  @Josh Stack, I didn't buy that property, but I did buy another shortly after that post. I was WAY off on the reversion cap I used, as the market just kept going crazy.  I projected doubling investors money in five years, but we hit that goal in two years.  I have another one we bought in 2014 that is under contract to sell and will be around the same return in just under two years as well.  

I'm still using conservative exit caps, but it makes it VERY difficult to land anything.  The longer we go in this cycle though, I want to be even more careful.  I've missed out on a LOT of deals and millions of dollars, but I'm ok with that to stay out of even ONE bad deal.   

All good info in this thread, but I'll add my .02 on Brad Sumrok.  I work for him now so take it with a grain of salt, but I started as a student with ZERO real estate experience, and continue to be a paying student.  I agree with @Jay Hinrichs that there are so many "gurus" out there that do not provide value, that everyones guard should be up.  I regret that I spent six months checking out Brad, and getting to know others in his group extremely well before committing and taking action.  In those six months, I passed on several deals that others bought, and they made a killing on them.  

Regarding having prior experience, that is actually NOT the norm for those in Brad's group.  Some have SF experience, but almost none have MF, and I would say a large majority have no RE experience at all.  Jay is right that doing your first deal is likely very tough without a large database of accredited family and friends.  One of the greatest things about Brad's group is that is puts one right smack into the middle of that exact thing.  Not only are they accredited and looking to invest specifically in apartments, but they're typically very well educated on the process, which in my mind reduces my risk as a sponsor.  We are very careful about following all SEC laws, and there must be a pre-existing relationship with our investors prior to offering them a spot in a deal, but it makes the fundraising part of syndication the easiest part. 

 I'm not saying its easy, and you have to work, you have to meet people, get to know them, make sure they know and trust you, etc.  I have sponsored deals myself, but I invest with first-timers fairly often, as I know they've had a strong education, they're working with a very experienced mentor, and I'll only invest with someone I know well, and believe they'll come for help if needed.  I would NOT invest with a newbie if I got the impression they felt they knew it all and would not ask for help when they needed it.  In addition, there is a big incentive for me to invest with a first-time sponsor-- they're taking a much smaller percentage than someone with several deals under their belt.  Certainly there is risk involved with a lower experience level on the part of the sponsor, but the investors are rewarded for this; and rewarded WELL.  

There is also a huge accountability factor in being a part of the group.  If someone were unethical, or simply didn't perform, they would not be able to do anymore deals, as everyone would know about it. 

@Drew Shirley, yes we are interest only on about a $3M loan.  I will assume we can improve the property if there's a very clear reason for it.  In this case, there were over a dozen down units that had been that way for over 10 years, rents were much lower than surrounding properties that did not have units as nice as what ours would be when renovated, and it had absolutely terrible management.  I'm absolutely fine assuming we will be able to improve over those conditions.  

The investors in this deal have straight equity, and no preferred return.  They knew there would likely be no returns for a while, so hopefully I can deliver on the end goal!  Actually it is making money now, I'm just hanging onto it for a while longer as we finish up some unit rehabs, an office remodel, and a burn unit that could be pretty costly.  

Hi @Drew Shirley, on the extreme value add I mentioned, our loan is 4.5%.  That's a 5 yr note from a local bank, 5 yr term with 25 yr amortization.   It still projects to cash flow anywhere from 8-11% over a 5 yr hold, with a total return of over 100% to the investors including capital gains at sale.  It will hopefully hit the 5 yr goal in 2 years, but still working on it.   Being a bank loan, we will not have a pre-payment penalty if we decide to sell before the loan is due.  

On most other deals, we'll use fannie mae loans, which are currently running around 4.75 I think, but haven't checked lately.  I did get a Freddie Mac quote last week at 4.32%, but they don't fund rehab so not our preferred route.

I agree it would be tough to buy at a 6 cap if debt were nearly the same cost, but that's assuming no improvement to the property, correct?  If there's a clear value add to the deal, one would hopefully far exceed the difference between your going in cap rate and the cost of your debt.  

I suspect that is going to be a different answer for everyone, and a combination of several factors.  

For us its more of a total picture rather than one factor, although I guess I do focus on some more than others.  I am constantly trying to learn from those who have been through several RE Cycles (the more the better!), and one common thing I hear is that focusing on cash flow when buying will help you get through the downturns.  If (when) things change, if the value of your property drops because cap rates have increased, as long as it continues to cash flow and your debt isn't coming due then who cares?  Keep making money until things improve, and the value hopefully returns.  

So when analyzing a deal, I really try to look at the cash flow, but I also look at how aggressive our underwriting has to be in order to hit those numbers.  I've been to a few events where Ken McElroy was speaking, and at one of them he was going over how they analyzed a particular deal.  He made the comment that when evaluating a deal, whether you're buying it or investing with someone else, the pro forma rents are the most important thing to look at.  I put a ton of value on anything Ken says, so I always want to know how someone came up with their rents, how they compare to the comps, and whether they seem achievable.  

As far as cap rates, I don't focus much on the going-in rate.  If there is a clear value add to be done, and its being proven with a substantial number of units, or nearby properties are doing the same thing, then I'm fine with that.  You will hear a lot of people say NEVER to buy on pro forma, and only buy on actuals.  If you're buying in a competitive market, good luck with that.  Even off market stuff is getting a large premium over what the actual numbers warrant.  I'm mainly working in Dallas Ft. Worth, and I can tell you owners are getting an enormous amount of the upside right now, but there are still potential deals to be had.  

Reversion cap rates are another story.  We always want to use a higher rate than whats going on now since things are so overheated.  As an example, a C class deal in DFW may sell for a 7.0 or less, but we'll use 7.75 or 8 for a 5 yr sale.  That's just a guess anyway, but if the cash flow is good,  I feel ok about it.  

There are situations where we will put more emphasis on the value add potential than the cash flow.  I'm a year into a deal that we bought purely on pro forma, and had to give the owner FAR more than he deserved in order to win it.  It has not paid out anything to the investors yet, but will likely double their money at the 2 year mark.  The risk in that one is I had to use only 5 yr recourse debt, which I do not like doing right now, but the reward warranted the risk for me.  On just about any other deal we like to buy with 10-12 yr non-recourse fnma debt in order to have the flexibility to ride out a downturn as all the very experienced people are always telling me.  

So all in all, I just evaluate the whole picture.  If every factor has been pushed to the limit, I will not do the deal, or invest in it if its someone elses.  If one or two factors are aggressive, its a good (or great) area, and I trust the sponsor if making a passive investment, I'm ok with that.  

@Joseph Gozlan, and @Cody L., Brad Sumrok absolutely does "do" as well as teach.  I have a long post somewhere on BP where I tried to objectively explain the benefits of paying a highly experienced and successful mentor, who IS walking the walk, and loves the teaching side of it.  Im sure a search will find it.  

Why would you care if they've syndicated vs owning as a solo buyer?  If I want to learn about syndicating, I sure as heck want a mentor who can not only teach me how to locate, tour, analyze, offer on, inspect, purchase, rehab, operate, and sell it, as well as all the moving parts of raising money and managing investors.  As a syndicator myself I can tell you it is MORE complicated and difficult than being a sole owner.  You are still managing the asset, the management company, etc.  

I joined Brads group as a student in 2014, have ownership in over 600 units, which is a very small number compared to some MANY other members of the group.  I now work for him as well, which I'm sure will make some skeptics disregard my words, but I will not endorse something I don't wholeheartedly believe in.

If it matters, Brad has been a solo owner as well as syndicated thousands of units.  He continues to do deals currently.

I have never done fourplexes, but did make a decision to focus on one thing, so spent many months researching single family, small multi, and larger multifamily.  I chose larger for several reasons.  Most having to do with economies of scale. Management is probably the biggest.  A 16 unit property won't support on site staff, but just a little bigger and you can hire part time people, or have a resident handle leasing and maintenance for you.  

Valuation is another big reason.  Larger properties are valued on their income rather than comps so easier to increase value.  

I will also add that 60 units is FAR easier to deal with than 16!   So find some partners to go in on a bigger one rather than 1 smaller!

David sold that property a while ago.  I know because a friend of mine bought it!