All Forum Posts by: Salem VanderStel

What type of projects?  I'm an institutional investor but occasionally do small investments in Grand Rapids because it's my home town and gives me an excuse to go back there. 

For Multi-Families in Grand Rapids, Allison Koetsier is exceptional.  She owns dozens of units in Grand Rapids herself and understands the considerations from a buyers perspective.  Additionally, if you don't have a team in place already, she has a substantial list of contractors, PMs, lawyers, and other contacts you will need.  I've had success with many of her contacts over the years.  Feel free to message me for more detail.  I also have a few multi-fams in the area I'd consider offloading.  

Hi James,

I put together a basic model of your project to give you an idea of what this property would return to you and the investors.  I used a real property located in Chicago off of loop net and used rules of thumb based on other properties I've invested in to fill in the gaps. Of course, I'd need substantially more detail to fully underwrite it

Assumptions:

$2.1M Property

$54k Closing Costs (2.5%)

$200k Renovation Budget (40 units x your $5k per unit)

units $5000)

$537k needed for 25% LTV loan with Rehab financed through Investors

$53k Emergency Fund

$791k - Total Equity Raise

Returns:

Investors Equity - If your property compounded 6%YOY (more on this later) per year for 6 years in a row, the total value of the property would be ~$3.0M.  After paying remaining debt service and closing costs, this will equate to ~$1.4M in equity to be split up between GP (Matt and Chris) and LP (investors).  If the property was split 35% to investors per your model, this would net them $503k total equity after 6 years on their initial $791k investment.  

Investor Cash Flow - On a $2.1M property at $50k unit, I would expect this to be a high cap rate area.  Given current market conditions I would expect you to net about $75k in cash flow after debt service in year 1 and $150k after debt service in year 2 and beyond.  Based on your split,  the investor would receive $146k in total cash flow over the course of your project.  Note that this isn't factoring in that at that $50k/unit, the property is likely not in a great neighborhood, you would be paying a much larger portion of your return to unit repairs.  $15k turns are not uncommon in this tier  

Total Return for Investor - $790k investment would yield the investor $649k after 6 years ($503k in equity + $146k cash flow).  Or, a $140k loss

Conclusion:

I somewhat anticpated these numbers as soon as I saw your split but wanted to lay it out.  I'm by no means suggesting this project won't work, however, I would substantially change the underwriting.  A few initial recommendations.

- GP/LP Split - Right now you are at 65% GP /35% LP,  this should be closer to 30% GP / 70% LP.

- Appreciation Assumptions, for a buy and hold project in this market, the 6% assumption is quite risky and investors would need to be compensated for the additional risk. You could do this by further splitting the LP/GP in their favor. You could also instead focus on having an excellent operations team to drastically increase the NOI thereby mitigating the effect of the total equity change. Some hybrid approach would also work as well.

- Preferred return - as a personal philosophy, I would be very hesitant to invest into any deal where the GP group would earn significant equity even if the project produced me no return.  This helps protect against that.

- Working Backwards - For a project you are describing, where the return is primarily based on equity, I would target a total IRR for the investor of between 20-30% with a cash flow target of at least 10%

Please don't hesitate to reach out with any more questions.

Respectfully,

Salem

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@Alex Corral

As @Bill F. mentioned, it definitely depends on your personal goals and risk tolerance, but on a straight comparison:

2-4 Unit MF rentals are valued on a comparison basis so the equity appreciation or deprecation will be more volatile.  Given that we are at or near the top of the market, I would not suggest purchasing for continued appreciation but instead purchase for cash flow and holding for a long enough period that you won't need to sell during the next downturn.  Certain markets are much better than others in this respect. 

Syndicates offer more stabilized returns. Properties in the 100+ unit space are valued on a income basis and since income is much more stable than SFH and small MF values, the total value are much less volatile as well. Again to Bill's point, you want a team with a very narrow scope. Ideally one that has completed numerous properties in the same market, with the same team, using the same strategy.

Best,

Salem

@Rick S.

1. Not with a traditional multi-family, value add, secondary market play.  Teams that are doing above 8-10% would typically be over-leveraged.

2. The effect on your return will range from negligible to significant depending on how the deal is underwritten, assuming you are working with an experienced team. For example, if the property has a sub 70% LTV loan in a high cap rate market, 30-50% of your return would come from cash flow. Because so much of your return comes is derived from income - which is inherently much more stable the property values - your total IRR would still be over ~12% if you sold at peak 2009 cap rates. In practice, however, the operating team would likely choose to hold 1 or 2 more years when cap rates normalized to some degree. Conversely, if the property was underwritten more aggressively and leaned heavily on appreciation, a sale at peak 2009 rates could cut your target return significantly.

In summary, the trade off for lower cash flow can be a group that operates more conservatively with a low LTV ratio, ample cash reserves per door, underwriting to rising cap rates, and 40%+ of return deriving from NOI, all of which will mitigate the effect of a downturn on your total return.

Best,

Salem

@Jonathan Twombly

Great Post. 

@Amadeus Hladun

I'd start by identifying a market that fits your investment profile.  

Cities like San Francisco, Arlington VA, Seattle, and Austin have experienced incredible appreciation for BRRRR projects and those that purchased 2-7 years ago. At the current cost basis, however, these cities will be less likely to provide you satisfactory income per dollar unless you add substantial value to the property.

Conversely, cities like Houston, Cleveland, Jacksonville, Detroit, and Tampa have experienced less dramatic appreciation and still offer a great cap rate with a stable industry base, but you are less likely to get massive appreciation. 

It ultimately depends on your goal - if you would like to be more aggressive, you could pick up a rehab property in a low cap city listed above, but be conscious that the appreciation experienced since the recession may not continue forever, so I'd recommend being quick with your hold time.   If you would like to be more conservative, build a team or buy into a syndicate in a market pillared on cash flow.

Either way, the first step is to ask questions, so you're on the right track!

Best,

Salem

Hi Lyndon, I work with a lot of investors doing exactly this. A couple thoughts: -To roll over your 401k, you will need what's called an IRA custodian. UDirect is a popular option - Many companies do not allow a 401k rollover if you are still employed with them, so check with your HR to make sure it's allowed in your company plan - When using your 401k nest egg, it's imperative that you are with a highly experienced team or syndicate with many demonstrated projects. Feel free to reach out with any more questions about structures, legal, returns, etc.. Best, Salem

@James Johnson

Hi James,

I'm a financial engineer and syndicator, I can help you with this. 

Clarify my understanding below of your post assumptions and I should be able to guide your financial structure at a high level. 

Fund sources:

-Investors put down 25% down payment (+ closing costs)

-Investors also put up an additional 10% for emergency fund

-Bank covers remaining 

GP/LP split:

65% GP (Matt and Chris)

35% LP (Investors)

Cash flow:

85% GP

15% LP

No preferred return 

Other questions 

Hold period?

Renovation Budget?

Do you have a target return for investors? It's ok if not, I can tell you what range would be appropriate based on the above variables.

@Ray Hernandez

Hi Ray,

I'll echo many of the comments on here that you need a highly experienced group, and if you have a deal with Sam Zell you should take it. 

If you have any questions about syndicates, I'm happy to answer then.  Of course, I am a syndicator, but there are advantages and disadvantages of syndications that ultimately rely on the investors goal. Typically syndications are best for investors looking for long term stability and tax sheltered cash flow, as opposed to a smaller project that would have higher returns but carry more operational and market risk. 

Best,

Salem