All Forum Posts by: Sam Bates

@Armand Farr

I would split the capex based on the percent of each partner. It's the easiest way to handle things from an accounting perspective. I've been in multiple partnerships and the initial investment, capex, income, and distributions have always been based on the percentage of the investment each partner owns.

It is difficult to provide a recommendation on operating reserve without knowing more details on the deal. The larger a deal is the lower the percentage I would recommend to hold back because you are able to weather the repairs over time better than you can if it's a single family or a small multifamily. With MF, lenders have a reserve requirement that is typically between $250-$350 per unit. A lot of people who invest in SF state you should hold back about 10% of income. I'd take into consideration the age of the property, what capex has already occurred and what future capex you plan on doing.  

@Hal Truitt.

I've used Equity Trust out of Ohio for my SDIRA and they have been easy to work with. I've been with them for over 5 years, but only have one SFR in the account. Your investing looks to be more transaction oriented so I would check their fee structure.

@Kyle Houlahan the net worth only has to equal loan amount so if you buy a property that's $2.5M your net worth will need to be 75-80% of that depending on LTV. If it's a good deal you can probably bring in a guarantor pretty easily especially if it's a non-recourse loan.

From your initial post I wasn't sure what you wanted to do with it, but increase value and hold for 2-4 years is a great strategy. 

We all hope prices drop in the next few years, but I don't rely on it to make buying decisions. In 2014, at least around Dallas, people were saying the market was nearing its end so if you stayed on the sidelines you missed out on 5 years of growth. I say you should always be in the game or you could miss out on some opportunities, but now that we are nearing end of this cycle you need to make sure your very prudent on your underwriting, become more conservative, and potentially take on less leverage than before. IE - higher reversion cap rate than purchase cap rate, lower rental growth estimates, etc. Also, stress test the deals more than you might have a few years ago with different scenarios to see if the deal is still a deal. 

@Kyle Houlahan I would second an LLC and also have an operating agreement the states what the job responsibilities are of each partner and what percentage of the deal each partner has.

Depending which market you purchase the property will depend if they will lend up to 80% LTV. Also, with the economy softening the LTV percent could be lower if you are not buying the property for a year or two.

Posts from the previous guys are correct. When you are looking at multifamily assets, the lender is more concerned with the asset than your personal credit history. Your net worth or combined net worth if you bring in guarantors will need to equal the loan amount and they typically require roughly 10% liquidity of the loan amount from all guarantors.

It can be a smart move for your first multifamily property to be a yield play so it is cash flowing from day one and you don't have as many headaches with a value-add deal. With this being said, I would suggest that you buy an asset where there are some ways to add value to the deal to increase NOI and force appreciation. This can be done in many ways by increasing income or reducing expenses. I do not focus on to much on cap rates because they can be subjective. I base it more on what the return to investors are.

@Raleigh Lewis,

You do not have to be an accredited investor to buy an apartment, syndicate an apartment, or participate in an apartment syndication. There are two types of syndications that are filed with the SEC. One allows non-accredited investors to investor and the other requires you to be an accredited investor. It all depends on how the syndicator structures the deal.

I will say that lenders will require you and any other guarantor on the loan to have a net worth that equals the debt on the property plus 10% liquidity based off the debt from all guarantors. This essentially will make a purchase of an apartment have a net worth over $1 million, but it is not a requirement.    

@James Canoy,

I personally would pass on the deal and get "ready" for the next deal. There are many ways you can get ready to invest in real estate so it's up to you which path you want to follow. Ultimately if you want to invest in multifamily I would suggest sticking to multifamily. I've invested in single family deals and while some skills are transferable, the businesses are completely different. I don't think you gain an advantage by investing in single family then jumping to multifamily. This is one of my regrets thinking I needed to invest in single family before owning/syndicating multifamily. This held me back from scaling earlier in my real estate career and I missed a lot of great opportunities.

As a physician, I know you are intelligent, have internal fortitude to succeed, but might not have much time. This was me as well working as a consultant putting in 60-70 hour per weeks. That's why my first investment was in a syndication. In a syndication, like most endeavors, you get out of it what you put in. I've syndicated multiple deals and the limited partners who learned the most were the ones who are active and engaging with questions via email, phone, or in person meetings. 

It is vital to create your team before buying a property or getting a property under contract.
Team consists of:
Lender or mortgage broker (biggest partner in the deal)
Property manager
Contractor
Lawyer(s)
Maybe another general partner
Maybe limited partners

I wish you the best with your investing!

@Jade S. Thanks for creating this thread. I’ve really enjoyed reading it. I’ve listened to CG’s podcast and read multiple books of his. He is a machine and is due respect; however, as a syndicator I believe there are better investing options. Listening to his podcast he indicates he overpays for his assets because he believes he’s going to make money as markets increases in value. This may be true, but as a syndicator, you should have a fiduciary responsibility to your investors and it doesn’t seem like he has this mindset with his comments. Additionally, timing of market cycles or when his note becomes due could eventually bite him in the butt.

@Brad Park – 11% return is a healthy return in one year, but it’s really scary now that he’s not continually updating you or you can’t contact him. We provide our investors with monthly financials and an email explaining the financials and what occurred during the month. We have quarterly and yearly meetings to discuss the investment in depth and how to improve operations thus increasing income. If you have not received yearly financials how do you provide the information to your accountant? Do you only receive a K-1?

@Omar Khan is a bright savvy investor. Luckily, I’ve spoken with him on multiple occasions and he knows real estate and the underwriting process. I recommend everyone listen to his advice especially if you are a newbie.

This is the first time I’ve heard GC wanting to bring in sophisticated (non-accredited) investors into his deals. It is a simple process and requires a different filing with the SEC. The SEC will allow 35 non-accredited investors in a deal depending on the filing. This is surprising he would bring in non-accredited investors since he preaches he will not accept people who have filed lawsuits against someone. Statistically, non-accredited investors are far more likely to sue than accredited investors if a deal goes south.

One thing that has not been mentioned in this thread is GC buys properties in high quality areas. Since he is buying higher class assets than many syndicators his returns should be lower. Beginner finance teaches us that the riskier an investment is the higher returns the investment should achieve. Since he is dealing with less risky investments (better tenant profile, better location, etc) his overall return should be lower. If he is producing double digit cash on cash, IRR, or annual ROI on a consistent basis kudos. A newbie or a person who is more risk averse could feel more comfortable investing in this type of a project than a deep value add or a project in a less desirable area.

@Channing Chanel Welcome to BP and congrats on your first project. Sounds like you've hit a homerun!

For you next investment I'd pick whatever investment aligns with your real estate investing strategy and goals for the long-term.  People fall victim (including myself) to the shiny penny syndrome and are always changing the next best thing. I don't know your market or your goals, but ironing out this is crucial. 

Buying a rental property (sfr, duplex, triplex, etc) is a lot less forgiving than flips. I'm personally not a fan of flips because there's no room for error like a rental provides. Rentals, especially in this market, will typically rise in value over time plus you have tenant income providing cash flow to weather a storm which will eventually happen. 

@Wade Stahle

Yes, it is possible to build a property then have it appraised where you recoup your entire initial investment.

The LTV you receive on the refi will be dependent on multiple factors. The bank you use. With a value over a $1MM you should be able to get agency debt and @Greg Downey is correct that they can lend up to 80%. It all depends on the market you are in. Another factor that is changing how much banks lend is interest rates. The higher the interest rate is the lower the LTV potentially could be. With just the recent 50 basis point increase in rates lenders have dropped the LTV they provide some borrowers. 

@Gregg S.

Syndication can be a great avenue to purse if you do not have all the funds yourself to invest in real estate or want to go bigger than your current capacity. For me, syndicating deals has been able to take my real estate business to the next level. It does add pressure because I steward my investors money better than I would my own money. I feel like I have a fiduciary duty to my investors to do the best I possibly can for them.  

Structure of Deal 

I'd first recommend creating an LLC for your company. These are easy to create and inexpensive. Depending on exactly what you are doing will depend how many you should set up. We have the managed member LLC the a managment LLC and an LLC for each property. Depending on where you invest you could create a series LLC. There isn't much case law on series LLC's yet so this is why we didn't select the series LLC option.

All the deals I've ever syndicated we created a private placement memorandum (PPM) and registered it with the SEC. This type of structure can be costly, but if you are wanting to continue in the syndication business I think it would be good to do this from the beginning. This will show your investors that you are legit and want to build lasting relationships with them. This is not the easiest structure, but I believe it is the best. I've paid anywhere from $15,000 to $35,000 for a PPM and all other filings the lawyer handles. 

If you do not want to create a PPM you can create an partnership or LLC for each project with an operating agreement that outlines all the responsibilities of all partners. This is less capital and time intensive and might suit your needs perfectly for your first couple deals.

You mentioned you are going to be dealing with friends and family. I'd still highly recommend that you setup your business as a real business. If the deal ever starts to go bad it could get hairy quickly. Additionally, if your friends and family are non-accredited investors statics have shown non-accredited investors are much more likely to sue than accredited investors. You will want asset protection and create companies/partnerships will provide this. 

I would recommend talking with a lawyer that practices law in the area/state you want to invest in. They will be able to ask and answer all your questions and can provide better guidance on how you should proceed.