All Forum Posts by: Mitch Provost

@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).

Is there such a thing?

Seems the concept of a business model may not be fully applied here. Many project oriented businesses (non-RE) cannot predict where their next contract will come from, yet they are still very viable and sustaining businesses. Comparing RE (syndication in this frame of reference) with product businesses like ice-cream is more like apples and oranges, but might be more comparable with businesses that execute unique projects that utilize the same systematic processes. They provide the resources and 'systems' (work scope, resource plan, execution plan, risk management, quality, etc.) to execute their business model and make their market by selling it to those in demand. The difference I see with RE is the uncertainty with the supply rather than demand. In this sense, it makes it difficult to market something you don't have until you have it. Nevertheless, it is certainly a business model that brings a supply to meet a demand, despite the uncertainty of where your next supply will come from.

@Chris Ha, think of a multifamily property as a business (really can't be anything else). Your are buying/financing an existing business (even if you live in it), so it already has income/expenses that will be considered. This is the way lenders view this and everything about the transaction will be considered this way. Therefore, they will want to see trailing financial data on the property and a proforma (among many other things) that they can underwrite the risk of default going forward. Even if you have plenty of liquidity, they will want to see what your plans are and how the property will perform. A good mortgage broker can help a lot with explaining this and what will be needed.

@Kevin R Moses, leveraging real estate takes advantage of you owning the whole property without paying for it out right. You realize this gain when taxes come around. The IRS doesn't care if you have leverage or not when you take deductions (unless it's IRA money). Considering this, leverage is good. On the other hand, too much leverage is risky if the market downturns and you need to liquidate. This is how many went 'under water' or had more leverage than the value of the property during the great recession.

Many portfolio owners with plenty of cash will maintain leverage between 50-75% as a safe play. Multiple properties also spreads your risk of vacancy, maintenance, etc. As @Jim Walters says, it's always good to have cash in hand for another investment. Once you buy your first, you will very soon be looking for your next one.

@Bo Goebel, yes that's how it works. Each year after your syndicator's CPA completes the tax return for the property, he will issue you an IRS Form 1065 Schedule K1 which will include your capital contributed in equity (your investments amount) and your net profit/loss based on all property tax deductions. This would be used for filing your taxes. The profit/loss is your prorated share of the total property profit/loss after deductions that is reported to the IRS by the property GP and would be used for your own tax return.

Normally, a loss is reported due to depreciation and expenses in the first few years, in which case you would owe no taxes on any cash return you earned for that year from the property.

Your tax adviser/CPA can give you better details for your unique tax situation (note that I'm not a CPA).

@Pundari Pothini

Remember that syndication is simply obtaining investment capital from many sources (investors) instead of just you/the owner. This is how nearly all big deals are executed. When you are an investor in these deals, you are either a limited partner that has no direct influence on the execution of the deal (i.e. just providing capital to make the deal work) or a general partner that is responsible for executing the deal.

The risk in executing these deals and making a profit are laid upon the general partners. While investors have the risk of losing their investment, it is similar to choosing any other type of alternative investment where your own due diligence in the deal and GPs will guide you through your risk of investment, as suggested by @Ken Breeze.

As a GP, you are responsible to make the deal work and generate a profit. This requires a deep knowledge of execution, but is very rewarding and exciting. Since lenders have the risk that you default on the loan and property managers have their business at risk, they won't typically work with someone that doesn't have some level of experience or is working with another experienced partner. These are some of the reasons why many first time large multifamily investors start with a passive investment to learn how the deals are executed, then move into a more active role.

@Michael Le, @Michael Niemeier, @Bill F.

According to the Greater Houston Partnership, despite a negative 10,000 in domestic population in Houston in 2017 (mainly due to oil/gas job losses), there was a positive 43,000 international and a net positive 33,000. International migration is growing substantially and Houston is now considered the most culturally diverse city in the U.S. (most rent since they can't qualify for home loans).

So as you say, whether its due to millennials or immigrants, population is growing in the rental markets (at least in Houston). This was validated from a local property management company I just spoke with today that said they are definitely seeing an uptick in rentals well after the Harvey recovery. Not sure about the rest of the country, but Houston is looking strong for multifamily rentals.

Also, according to Marcus & Millichap's 1Q18 MF market report, new construction deliveries for MF will fall nearly in half in 2018. 4Q17 population ages 20-34 is 22% (U.S. 21%) with 42% of all households rent.

@Sarah Albert, looks like you have an exciting opportunity, congrats!

Your risk tolerance is different from mine or anyone else on this forum so take advise with your own twist. The key issue is income vs expense and their associated risks. Even your income savings of $1000 may have some risk to it, but it may be tolerable (i.e. low probability you will lose it or it goes lower). If you feel good about the risks and your mitigation strategy , you should have enough confidence in moving forward.

Remember that even after your decision, you should reassess the risks so that you can mitigate them going forward. For example, you may want to have a roofing inspector give you an estimate (if not already) for a more accurate budget or periodically check on the furnaces/coolers to more accurately anticipate that expense. Having a plan to do things like this help optimize your opportunities and give you confidence in your decision.

One thing to consider is your cash-on-cash return. Cash of $4800 for $48,000 investment is 10% which is pretty good, but many like to see this a bit higher due to the unexpected expenses (risks), especially if you will spend $18,000 on a new HVAC system within 5 years. This would nearly wipe out your cash flow, so it's something you may want to get more information/confidence on for a buy/hold position and no plans to sell to cash in on the appreciation value.

@Stu Johnson, this is normal with a syndicated deal. Your 'commission' is effectively a fee (normally called acquisition fee) that is needed for larger deals to recover costs associated with bringing it all together. You have the option to invest in your own deal as an investor also. In fact, many investors want the sponsor of a deal to make his own investment to show that he believes in the deal enough to risk his own money.

Just remember that as soon as you syndicate money for an investment with passive investors (i.e. non-GP investors that will have nothing to do with managing the asset), your deal falls under strict SEC rules. I suggest that you read up on SEC Reg. D rule 506. This rule allows exceptions to registering the business with an exchange (and listing an IPO), but comes with many conditions that limit just who you can have as an investor and what paperwork is required. If you are seriously considering syndicating money for equity from passive investors, you should get counsel from your attorney or an SEC attorney.