All Forum Posts by: Ryan Daigle

@Evan Polaski @Erik W. both of your stories seem to be cautionary tales not only of getting into bed with a third party, but the extremely frustrating aspects of working with any bureaucracy. Combine the two and you could be in for a world of hurt.

I think these are great things for people to keep in mind regarding Section 8. It can be a useful tool and has many positives, but man do those edge-cases really burn!

Thought you all would appreciate a dose of reality from the trenches of a multifamily operator - Section 8 abatement.

If you have Section 8 tenants at your property you have to be aware that there are three parties involved in the relationship (you, the landlord, the tenant, and HUD). There are certain situations, such as repair requests going ignored, where the tenant can report you to HUD and they will withhold paying rent. This is called abatement and can be an unwelcome surprise if it happens to you.

We recently had this happen to us not because we were being negligent in our landlord duties, but because there were outstanding maintenance requests to the previous landlord that caused HUD to stop paying until it got resolved. This information didn't transfer to us with the change of ownership so the first we knew of it was when we didn't get paid by HUD.

There are a lot of moving pieces when you're responsible for the living arrangements of your tenants, but even more so when there's another party involved that acts on their behalf. We caught this particular issue quickly and closed the gap with HUD to ensure it doesn't happen in the future so it's all good. Just something to be aware of when you're dealing with government programs and other third parties!

Do you have any abatement horror stories?

Hi @Ken Moyer. It's hard to say what you *should* do given we don't know what your investment goals are. However, there's usually a very clear risk/reward tradeoff to being debt vs. being equity.

Equity usually has more upside, but at the risk of losing a lot of value too (sometimes all of it). Debt is more limited in the upside, but its payments gets first priority from cash flow and is usually collateralized in some fashion (i.e. the debt holder gets something if the borrower can't pay, like ownership of the property itself).

Your situation seems different in a few ways. First, on the equity front, you mention a dividend. I'm assuming this will be some portion of the cashflow the property generates. Do you have a good understanding of the financial performance of the property? I would definitely want to see a T12 to know what my future dividend realistically looks like.

Second, on the debt front, I doubt your loan to your friend would be collateralized by the property itself since it already has other debt on it and it has shared ownership. So how will your loan to your friend be secured? What do you get if he can't make payments?

Overall, the complexity associated with assuming ownership of 1/6th of an existing partnership seems quite high (unless the LLC bylaws already provide a mechanism for transferral of ownership)? Whereas a loan from one person to another is much more straight forward (be sure you're still getting an official note drawn up by an attorney here). So there's the administrative overhead to consider as well.

Hope that helped with your decision!

@Joseph M'Mwirichia I'm not hedging a certain percent on the purchase price, I'm just keeping very conservative projections on rent growth and vacancies for Y1/Y2, and required reserves, which has the net effect of lowering purchase price to meet certain return thresholds. 

@Steve Chan great to hear – you're welcome!

Hi @Account Closed those terms refer to penalties that the borrower must pay if they payback the loan before maturity. They're ways the lender can ensure they meet some minimum return on the loan.

When evaluating your financing options, you need to pair your business plan with the type of loan/prepayment. Are you looking to quickly stabilize the property and then sell it? Then a step-down plan that has severe penalties through year 5 wouldn't be a good match.

Hey @Nicolas Biangel. Congratulations on getting a deal!

To your question. If you (by way of private lender) are bringing the 20% down payment that implies you're financing the other 80% via a bank? If so, there is no equity left, you just have two levels of debt.

If you mean this is an all-cash deal (no institutional lending) and you're bringing 20% and hope to raise the other 80%, then I'm not quite sure what you mean by "market rate"? Do you mean the expected return a typical investor will have?

If so, that will vary wildly based on the type of asset, location, etc... In your "vanilla" C-class value-add syndication pre-COVID investors were regularly shown an IRR of 15% over a 5-7 year hold period. B-class stabilized syndications were maybe closer to 10-12%, though explaining to investors what risk-adjusted returns are is always a challenge.

Was that the gist of your question?

@Steve Chan here are some of my sources, in no particular order:

• https://www.bls.gov/lau/metrossa.htm
• https://www.bls.gov/web/metro/...
• https://www.bea.gov/data/income-saving/personal-income-county-metro-and-other-areas
• https://www.huduser.gov/portal...
• https://www.realtor.com/resear...
• https://www.census.gov/data/ta...

Good luck wading through it all!

@Jason Malabute who is your primary lender on this deal? They'll have much stronger opinions on your required reserves than I do :)

I'd underwrite 12 months and not go less than 6 even if your lender let you.

@Tom Ott local knowledge can certainly outweigh market-level statistics, but here's what it looks like for the Cleveland MSA as a whole (which is Cleveland proper + surrounding areas):

Still not good. Declining population.

Perhaps there are underlying trends that are more promising for the area, but from a high level it doesn't look great. The cash flow available in that market also indicates it's not a strong market. You don't get 14% CoC in an area with a lot of growth and appreciation. Economic dislocations like that just don't occur (at least not for long if they do).