All Forum Posts by: Mitch Provost

Then that's a great deal no matter how you look at it (get a thorough inspection to uncover any gotchas). Especially if comp rents match. Also, buying a pre-leased property is a no-brainer. You're practically guaranteed cash flow from day one.

Can you really get $995/mo rent on a $90k property?

@Account Closed, the risk you identified is that something could go wrong with the plumbing or electricity since they haven't been updated. You should first have the plumbing/electricity inspected (either by you if you know what you are looking at or a professional). With that information, you can estimate how much it would cost to make any repairs if they become needed.

With these costs, you can decide how best to mitigate. It could be to improve the installation now to prevent future repairs, add additional money into your ongoing or future expenses (for potential repairs), or do nothing. What you do depends on your own tolerance of risk.

@Account Closed nailed it. Just remember that risk is a measure of uncertainty. The less we know about something, the more risk there is. The best way to manage risk is knowledge (research, due diligence, experience).

Also, risk is a personal (or company policy) thing. Different (underwriting) results can be calculated based on your tolerance for risk. For example, Fannie Mae has a specific risk tolerance that is used in their underwriting.

Many people I see on BP are very risk-averse and their offers for a property will never be accepted. Others have a higher tolerance for risk because of their knowledge and can be more aggressive with offers, thus have more success. However, they must work harder/smarter to ensure their identified risks don't actually happen or the impact is minimized.

@Anson K Au, I/O payments are usually 2-5 years. I'd check that to see when principal payments will begin. That will change your DSCR, thus your expense ratio and returns.

Most sellers want to have their loan assumed when there is a prepayment penalty (so they don't have to pay it). The benefit of assumption for them is that there is no penalty since the debt will continue to be serviced. Your benefit is potentially getting a loan at better than available terms (check with lenders). If the terms are not better than currently available, you would be better to get a new loan. You would have to qualify for an assumption as if you were making the loan yourself.

I'm guessing that Fannie Mae is offering supplemental because LTV of the primary loan is low and there is room for more leverage. If LTV is low based on the current loan value, you would either need to make up the difference from the current loan amount to the sale price with either all cash or the supplemental loan plus cash.

If you're able to come up with a large cash investment, you won't need the supplemental, but your returns (and risk) will be slightly lower due to the large amount of equity.

@Kyle Majors, the lenders I've worked with use T3 for income, not T12. I believe this is standard for agency loan underwriting also. The reason is that T3 income provides insight into what is happening with the property most recently. I've seen dramatic changes in income over a T12 period that will skew your NOI (either conservative or high risk), especially with vacancy.

As @Greg Dickerson says, your offer should be based on your underwriting. Use numbers you feel confident with. If you don't have confidence, do more research but don't rely on rules of thumb.

@Niv Levi, as @John Casmon is referring, the input is unique to your own risk tolerance and should be reviewed/adjusted with your input. But outsourcing is always a good plan to make your own operation more efficient. Since much of underwriting is gathering data and entering it into the model accurately, that could be wise money spent. The real value in underwriting is the few adjustments to the input based on your own experience of how well you can recover from any risk events after you close the deal. Your focus on these details is your value opportunity, not spending time gathering data and entering it.

@Mario J Perez, The rules of thumb provided above are very good for high-level gut checks. However, there's no substitute for actual expense numbers from current operations (at least T12). These numbers give you a much better understanding of that specific property. Even properties adjacent to each other can have vastly different expenses. There may be expenses that you underestimate (using rules of thumb) because there is a unique requirement. You may overestimate and lose out on opportunities resulting in a non-competitive offer (or no offer at all).

Most brokers will provide these financials for any deal up front. It is their (and the owner's) responsibility to provide accurate expense numbers for you to evaluate the deal and make a competitive offer. Your offer should be conditional on the data provided and you should walk away if you learn after due diligence audit that they aren't, thus putting your offer at unacceptable risk.

Having said that, the biggest expense likely to be different is taxes. It's a good idea to know what the millage rate is for the property and adjust the taxes based on your offer since you have little control over tax assessment without lots of costly legal help. I've found this one expense to change the overall expenses substantially in some cases.

@Ki Lee, I'm just curious, why the high cap rate unless only looking for yield? Purchasing multifamily at a higher or lower price based on cap rate is a bit of an illusion. The objective for private investors is typically to add value and force appreciation regardless of the price paid. The price paid then becomes a competitive advantage.

Cash flow is generated over time with value add. Yield play is typically for institutional (very large) investors with lots of cash to buy unleveraged.

Underwriting reveals opportunity in making returns and determines what cap rate (or purchase price) can be paid to meet your target. If your target is not met in a competitive market (i.e. cap rate), you move on to the next one.

Investors are still making lots of money in low cap rate areas like Dallas.

@Ryan Hamaker, I'm curious where you are getting your data on the inversion curve. According to FRED, the 10 yr minus the 2 yr treasury has maintained a positive balance in this cycle (even though it is very low around 0.15~0.2).

https://fred.stlouisfed.org/series/T10Y2Y#0

We're certainly in unpredictable times since this cycle has just passed the previous longest one (in the '90s) and we may be seeing a new fundamental regarding recession predictability.

My research agrees with @Michael Ealy and @Michael Glaspie that real estate (especially multifamily) is historically resilient during a recession and is not an important factor for the true long term investor.