All Forum Posts by: Michael Ealy

Thanks @Matt Moylan and @Russ B.

What about @Greg Dickerson - do you have any experience with this?

Hi BP Nation,

I am evaluating this hotel with a golf course and I wonder if anyone in BP nation has any experience with this. I invest in hotels so I know what the numbers should be for a hotel and so I can see if there are any operating inefficiencies with it that I can solve and create that VALUE-ADD.

For golf courses, I am not as familiar.

What's the typical NOI vs. revenue (in terms of percentage) does a stabilized, performing golf course has? In apartments, that ratio varies from 40-65% and for hotels it's about 20-40%.

What about golf courses?

Better yet  - this one...

 Manny explained it well.

In other words, if your building (say it produces $19,000 in NOI) and it's in a "D" area (say cap rate of 10%) and if you find a similar building in an "A" area (with a cap rate of 5%) that produces the same income ($19,000), investors are more than willing to pay DOUBLE the price to get that $19,000 income for a building in an "A" area vs. the same income for a building in an "D" area.

Why?

Because the rationale is that buildings in "D" areas have more management headaches and the NOI have a high risk of declining over time due to higher maintenance/higher wear and tear (and therefore higher capex) from the tenant base.

So 10% cap is appropriate for the risk of owning a building in "D" areas whereas for "A" areas, since the risk is lower, investors are more than happy to receive a lower return (5%).

 Stephen, there are many ways to structure the partnership depending on his/her goals and yours...and what each of you will contribute to the partnership.

If your partner is totally passive, then you can give him a preferred return on the money he/she invested plus a percentage of the equity. For example, you can give him a 6% return on your cash investor's money and an additional 30% of the equity - which means, he/she gets 30% of the cashflow after paying the 6% pref and 30% of the profit when the building is sold.

In this way, your partner gets paid first for investing the money and you're incentivized to make the property cashflow higher than the 6%  - because otherwise, you will not get paid. Higher cashflow also means, higher value and higher profit when you sell. So the above structure aligns your interest with your partner's.

Makes sense?

 Again, smart advice from Evan.

If you're not handy or you don't have patience for managing people and the rehab process, as your first deal, go with something that is rent-ready. Keep in mind your profit will not be as high but at least, your headaches will not be as high too :)

One other issue with 203K is that the process of getting it takes a long time. 45 days is considered quick. For the meantime, a property that needs work is a negative cashflow property for you until you renovate it and rent it. If you're not well capitalized, again, do the easy thing first.

If on the other hand, you're handy, or have renovation management experience AND you have a lot of cash in the bank as operating and capital reserves, then by all means, go with a 4-plex that needs work. If you do it right, you will make MORE money (both higher cashflow and higher profit when you sell).

I agree with Evan. Looks great and cheaper to maintain too. However, we still have carpets in the bedrooms though - but it's brown so it does not look dirty too easily compared with white/beige carpet. Carpets have their "warmth" appeal and feel which is particularly desired in colder climates. However, for high traffic areas like kitchen, living room and bathroom, vinyl plank flooring is what we put. Here are some before and after photos of one of our renovation so you can see how luxury vinyl flooring looks like and compares with hardwood and carpet:

(Before)

 (After)

(a different angle - before)

(after - almost same angle)

Living room (before)

(after)

 Your assessment of 41% expense ratio is spot-on (mine is 40%) for a property that is 20 years old.

Not sure what the cap rate is in the area but assuming it's 5.5% cap, this deal is NOT a good deal.

I always allocate a capital improvements budget (say $2K/unit) because I will need to spend that down the road so I might as well raise that money upfront.

Here's the screen shot of my Value-Add Quick Analyzer: (the upside after increasing the rents is too thin)

 Great question Nik. We actually tried selling the building as well. That's how we do it after we've stabilized a property - we simultaneously try to sell it and work towards refinancing it and whichever comes first - that's what we're going to do.

In this building, the note on it when we acquired it was an owner financed note for $500,000. The balloon payment is coming up so we decided to refi instead of waiting to close to the deadline to sell. Also, the cashflow is still pretty good even after the refi that we've decided to just keep it.

 Thanks for the mention Bjorn.

Frank, what I do is I first focus on one metric that "trumps" everything - i.e., it's my most important number. Once a deal "passes" my minimum threshold for that metric, I can look into the details of the P&L of the property.

For me, my focus is VALUE-ADD. I don't buy anything unless I know I can increase the value by addressing the property's deferred maintenance, or updating the apartments or solving the property's financial underperformance (or all of the above).

I created a tool that allows me to evaluate a deal in 5 minutes or less. It will even say "Yes" or "NO" to the question: Is this deal worth looking into? Here's the screenshot:

If it says "Yes" I look at the detailed T12 (trailing 12 months) and I look for those economic inefficiencies (like low rents, high repairs and maintenance, high vacancies, high capex, etc) that I can improve.

As others said, you need to read books/listen to podcasts/attend webinars and seminars to know apartment underwriting. Then you need to do a lot of practice underwriting until you get an "intuitive" feel for it.

I can give you the tool above if you want. Let me know.