All Forum Posts by: Mitch Provost

Just a note about small investments ($1k-5k, etc.), I know very high net-worth investors that are happy to invest only $5k in a deal because it helps them spread risk to meet their yield objectives with maximum potential (i.e. not Wall Street). As we know, this business is very risky and success depends heavily on sponsors. Investors that don't know sponsors intimately will naturally feel an additional amount of risk.

Everyone is different and there are pools of investors with similar risk profiles that lean conservative. These may not be the investors for you, but they are out there and en masse have large sums of money to invest.

@Scott Choppin, thanks for this. Lot's of calculations indeed. In addition, this link has 42 input variables used in these calculations.

Once the formulas are prepared in a spreadsheet and quality checked for accuracy, they should never need to be revised. However, the input variables require careful consideration for each deal when underwriting since they dictate the amount of risk.

@Jackie Griffin, first we should clarify what 'multifamily' is. By normal (and agency lender) definitions, it is any building or property with 5 or more units. Most of our responses are referring to many more than 5 units and is applicable to any number (hundreds) of units. Larger units need preliminary underwriting to prepare an offer.

(Preliminary) underwriting is normally the very first thing that is done by the purchaser to help screen properties. It helps to put a price on the property that you may be willing to offer based on its potential for earnings.

Most multifamily brokers provide full financials for available properties. This usually (should) include a memoradum, T12, and rent roll. These, along with basic tax and local comp data, are used for preiminary underwriting to determine an offer amount.

Part of that underwriting is getting details from a lender (typically larger properties are leveraged with debt) on loan options. The lender will also do his own preliminary underwriting to determine estimated loan terms which would go into your underwriting.

After an offer is accepted, detailed underwriting goes along with due diligence (audits, etc.) to confirm any risk that may have been unknown during the preliminary.

@Jackie Griffin, if you are referring to the tax basis assessment, that is always going to be low. Otherwise, I assume that you or someone else made this assessment through underwriting.

Underwriting is simply said, but pretty difficult to formulate. I have found at least 42 variables that go into underwriting multifamily. Each of these influence the calculated value and your decision on what each value should be is based on your own risk assessment.

It helps to have some industry and market knowledge to give you more confidence in your underwriting input. BP has plenty of great resources to help you gain that confidence. Don't be afraid to reach out for that help.

Responses to these kinds of questions always amuse me, but the bottom line is that real estate investing is a business. @Michael Ealy has the best response focused on the business aspect (his success makes this obvious).

Emotion should be put aside and a realistic view of what interests you specifically in the business should guide your decision. Everyone responds to risk differently and there are some very good responses here that help you identify some of those risks. You can then determine if you are comfortable with the risk and have a good mitigation plan or pass.

Location is only one part of a deal. All variables in a deal carry some level of risk.

@Thomas J. Clifford, you can't get much better advice than @Jaysen Medhurst. He hit the nail square on.

Remember that no leverage is basically a yield play. You earn a margin (from cash flow) from your investment, but it typically has little chance to multiply earnings.

Leverage allows you to create value and multiply your earnings much more than when paying cash. Yes, risk comes into play since now you have a liability for the loan, etc., but this can be mitigated by giving you more opportunities.

@Ricky R., along with many others I have also used MB's tool. I've also used several others, but found that they were always missing something. I eventually created my own, but as @Luke Miller says, Multifamily is very complex. Most importantly is the information that is fed into the tool (along, of course with accurate calculations).

I analyzed so many deals that myself or my partners were not inclined to pursue, I felt the time/effort shouldn't go to waste. Just because the deal may not fit our criteria, there are many other syndicators that will.

I finally decided to make that data available to other sponsors that easily makes up for the time/effort that goes into it. It gives you a very quick head start on live deals. The full 5 year proforma is free to give you a good look at what to expect on the deal. Obviously, the at least 42 input variables can be adjusted to your own risk tolerance, but this is far easier/quicker than to re-create the entire input.

You can find the link on my profile page.

@Farzan Setayesh, Yes, I'm invested in both 506(b) and 506(c) deals. I also provide underwriting help to sponsors and investors and work with sponsors on putting deals together.

@Farzan Setayesh, see https://www.sec.gov/fast-answers/answers-rule506ht... for details from SEC.

Summary:

506b: 

• The company cannot use general solicitation or advertising to market the securities.
• The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.

506c: a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:

• The investors in the offering are all accredited investors; and
• The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

Again, it would be wise to check the SEC guidelines, but sponsors have the ultimate responsibility to ensure their investors meet the requirements.

@Karen M., I've been invested in several projects at Fund That Flip since Jan with my SDIRA. All projects have paid on time without fail. Average return is around 9.5%. So far, FTF has performed as advertised and I get timely and thorough reports on status for each project with financials, progress, risk profile and photos.

There is a bit more risk associated with these one-off investments, however the low entry makes that more tolerable. I'm also invested in one of the funds that @Ian Ippolito refers to and actually make higher returns on it with more diversification (over 100 loans).