All Forum Posts by: Serge S.

@Jeffery Callis yes the Phoenix deal was a former Marriott Residence Inn. The conversion was not at all easy but luckily most of the heavy lifting was already done and I had city approval before closing but with some specific conditions that I have a year to fulfill. These conditions are completely unnecessary and will end up costing me around $300k unfortunately. But by the end of the day we will have the best possible entitlement which is commercial with density allowance meaning this can be run as a hotel, multifamily or anything in between. The reality though, is that it could have been run any way I wanted and the "conversion" is strictly for my exit as the end buyer will be an out of state multifamily investor. I want nothing to do with trying to predict or market a "hotel" exit. Also I would be very weary of this "hotel conversion" trend. Most hotels will simply never be conducive to being a multifamily and most larger cities will extract a pound of flesh in the process. On the other hand, IF you can find some distress in a landlord friendly city ... I did a small 70 unit extended stay "conversion" to multifamily and all it took was letter from my architect. There is a lot of hype around this model right now but I'd say buyer beware, without experience these projects are impossible to underwrite correctly.

@Eugene Tan the debt was one of the big facilitators of these deals. The PHX deal came to me as a "if you can close in 20 days" deal before seller CMBS issues. I had some sales in the pipeline but could not be certain of those closings or timing so I had the bank fund around 90% of the purchase (+ requested capex) through a reverse 1031 exchange. The reverse exchange just means that you buy the asset first (with or without debt) and the intermediary holds it until you bring in your cash. This gave me the time I needed to sell other property and bring that cash into the new deal and still get the benefit of the exchange. So at end of the day, all of these properties had a downpayment of between 25%-35%, rates in the low 3s and no prepayment penalty or origination fees. Having a flexible and knowledgeable lender on your side makes all the difference.

@Matt Horn I used Washington Federal and First International, both statewide portfolio lenders and highly recommended if you can do recourse.

@Brian Burke thanks bro, I credit you and the lessons learned. If you want some good advice it is to read Brian Burke's book on Multifamily investing. And congrats on the big Tucson purchase and confidence in Southern Arizona. I am very confident that your investors will be rewarded.

@Michael Le the lease up is a story on the PHX property. I knew there was demand for this unit type and location but I underestimated the Covid related mass migration from CA. Numbers in a newspaper is one thing, but 10-20 check ins a day  with no price resistance has been an amazing thing. 

Hey @Nick B. all me on these, I don't generally do partnerships or syndications for a number of reasons. I considered working with @Brian Burke on the larger 200 unit but it ultimately made the most sense to just go solo. These were all balance sheet loans with recourse.

Forgot to add pics

Greetings BP, its been a while and I wanted to post a brief update of our deal flow in the last 60 days:

1. Metro PHX - 168 unit mid 80s and late 90s former Marriot Residence Inn, off market deal purchased from Covid distressed seller. Purchased at $15.75M, unit mix is split between 2bd/1bd/studio all fully furnished with a $25k/door Marriott PIP less than 24 months ago. Fully converted to multifamily and currently running it as a hybrid. Property was empty at purchase in early December 2020 and as of of Feb 1 is 94% occupied and generated $290k in cash reciepts in January 2021. I underwrote this project to a year 1 $1.25M NOI and its looking like this will be closer to a $2M NOI.

2. Metro Tucson - 135 unit late 70s multifamily in an ideal Tucson location on Broadway. Off market deal through seller/broker relationship. Fantastic unit mix including nearly half 2/2. This complex had no RUBS in place and average rents at least $200 below market and produced a $500k NOI at time of purchase for $10.8M. Planned capex will include an exterior refresh and bringing rents to market. This will be an $900k year 2 NOI with minimal heavy lifting.

3. Metro Tucson - 236 unit 1980s in fantastic Catalina Mtn location, walking distance to the best retail in Tuc. Another off market deal purchased for $19M with nearly $1M NOI in place. Rents no less than $200 below market with no RUBS in place. This will be a year 2 $1.5M NOI.

All deals were done with local portfolio lenders at terms equivalent to Fannie but without any prepayment penalties. 

Any questions, please post ...

Investment Info:

Large multi-family (5+ units) commercial investment investment in Tucson.

Purchase price: $19,000,000
Cash invested: $5,000,000

236 unit Tucson mid 1980. This was an off market, broker relationship deal. In place rents at time of purchase were $200+ below market and no material RUBS in place. $19M purchase price with $1M NOI in place, around a 5 cap at COE. Plan is to put around $1M in Capex, primarily on the exterior and bring rents to market. This will be a minimum $1.5M NOI property by end of year 2 and $1.75M NOI by end of year 3. NO substantial interior renovations planned or needed to achieve exit.

How did you find this deal and how did you negotiate it?

Off market marketing combined with broker relationship.

How did you finance this deal?

Local bank.

Investment Info:

Large multi-family (5+ units) commercial investment investment in Tucson.

Purchase price: $19,000,000
Cash invested: $5,000,000

236 unit Tucson mid 1980s with 65% 2/2 unit mix. This was an off market, broker relationship deal. In place rents at time of purchase were $200+ below market and no material RUBS in place. $19M purchase price with $1M NOI in place, around a 5 cap at COE. Plan is to put around $1M in Capex, primarily on the exterior and bring rents to market. This will be a minimum $1.5M NOI property by end of year 2 and $1.75M NOI by end of year 3. NO substantial interior renovations planned or needed to achieve exit.

How did you find this deal and how did you negotiate it?

Off market marketing combined with broker relationship.

How did you finance this deal?

Local bank.

Caught this in the back of page of the WSJ. This will have some real impact on those of us in the vacation rental space. Specifically, due to the pressure from city, state and local associations, the VR model is and has been under attack. Now without GSA financing the only players left will be cash buyers in very specific VR friendly locations OR a very small segment using non GSA financing to buy small to large multifamily and doing VR in that small space. 

I recently sold a small 36 unit MF and had only one VR. Buyer was using a Freddie loan and the lender demanded that we dismantle and delete from all advertising that one vacation rental or they would not close. As such there is no way to capitalize any of the additional income.

WASHINGTON—Getting a mortgage for a resort-area condo might become more difficult after Fannie Mae FNMA -5.42% and Freddie Mac FMCC -6.60% moved to tighten rules on buildings with many short-term rentals and hotel-like amenities, some Realtors and bankers say.

Fannie Mae last month changed its rules to make it clearer that it won’t back certain loans in high-rent vacation areas, with Freddie Mac taking similar steps that go into effect next month.

The moves by the two government-controlled mortgage giants come as the Trump administration seeks to shrink their footprint in housing, especially in areas such as vacation properties that may not serve the core mission of encouraging homeownership by making it more affordable.

The updated rules, which went into effect Dec. 7 for Fannie, are starting to generate pushback from Realtors and bankers who say entire buildings could be ineligible for financing even if only some units are rented out on a short-term basis.

They also fault the process Fannie uses to determine the eligibility of a building, saying it is opaque and can’t be disputed by a building’s owners or its homeowners association.

“We’re concerned that access to credit could be limited for whole projects or condo buildings, which could affect not just second-home buyers but some primary home-buyers across the country,” said Ken Fears, a senior policy adviser at the National Association of Realtors.

Fannie says its revamped rules are meant to clarify longstanding policies, which revolve around the eligibility of the entire condo project, not particular units. The focus is also more on “condotel” buildings organized centrally through management, rental and realty companies than on individuals who offer their units on Airbnb Inc. or other hosting services.

“We have specifically told lenders that seeing individual units advertised by their owners on home-sharing platforms does not, by itself, mean the project is a condotel,” a Fannie spokesman said.

When a project as a whole functions more like a vacation rental resort, the building is ineligible for Fannie financing, and mortgages secured by units in that project are also ineligible, the company says.

“Fannie Mae’s charter is for residential lending,” the company spokesman said. “We provided clarity to lenders regarding what are acceptable residential condominium projects and what meets Fannie Mae residential lending standards and practices.”

Bankers say the tighter requirements are beginning to limit the number of lenders for second-home condos, driving up interest rates on new loans and limiting the availability of 30-year mortgages on such units. Bankers fear Fannie and Freddie may no longer buy loans on certain condos or force lenders to buy back mortgages on ineligible buildings.

“Until there is more clarity from the agencies, all mortgage bankers are shutting off the valve on condo loans right now,” said Rob Henger, director of mortgage banking at FirstBank Mortgage, a Nashville, Tenn.-based bank.

Fannie and Freddie don’t make loans. Instead, they buy mortgages and package them into securities that are sold to investors. The companies’ promise to make investors whole in case of default keeps down the price of home loans and underpins the popular 30-year fixed-rate mortgage.

Together, the companies backstop about half of the $11 trillion U.S. mortgage market. Condos make up between 7% and 10% of their business, according to the Federal Housing Finance Agency, the firms’ federal regulator. It was unclear how many condos are located in beach towns and other resort areas affected by the tightened rules.

Like Fannie, Freddie has also long maintained rules against financing “condotels,” but Fannie has historically been a bigger player in the condo market, according to Realtors and bankers.

Terrie Suit, president of Sanctuary at False Cape Condominium Association, said the building with 248 residential units in Virginia Beach, Va., was disqualified from Fannie financing last month after the revamped rules went into effect.

Through a consultant hired by the condo association, Fannie informed the building just before Christmas that it no longer qualified for financing from the company. It wouldn’t discuss its rejection with the association’s representatives, Ms. Suit said.

What role should Fannie and Freddie have in second-home condos and vacation properties? Join the conversation below.

The decision came as a surprise, since the building had been approved in years past, Ms. Suit said. She speculated it was tripped up this year by new language in the revamped guidelines that disqualifies buildings if they are “transient in nature,” meaning the bulk of the units are for short-term rentals of less than 30 days.

“If they would just talk to us and tell us what characteristics are problematic, we could work on a plan to bring our building back to being eligible for Fannie Mae loans,” said Ms. Suit, who is also the chief executive officer of the Virginia Realtors.

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Well ... there is Phoenix, there is Tucson and then there is everyone else. PHX and TUC have so far been the big winners of the Covid era. The pandemic has pushed forward California migration 5-10 years by some estimates. Maricopa Co in the last 6 months has had 25% more inflow from CA than the 2019 monthly average. Arizona never implemented the draconian measures that have failed CA and has generally remained open for business meaning one of the lowest unemployment rates in the nation. Maricopa county is one of the few counties in the nation that has continued to experience construction growth. This has made us the current epicenter of the global pandemic BUT what its done for RE, both SFR and MFR has been nothing sort of shocking.

I closed on an empty class B, 168 unit multifamily conversion in Phoenix on Nov 30. I estimated that it would take me the entire year 2021 to lease up and get to stabilized occupancy. By year end 2020, I was 50% occupied and currently at 70%. I would estimate 60% of my tenants are transplants. 

The issue buying in PHX is valuation. We have new out of state interest that was not here at these levels pre pandemic. Listen to any podcast and you will be told that PHX and TUC are top markets. The secret is out:) But there are issues. Rent growth has outgrown wage growth and the gap is back to pre-recession levels. There is very little value add inventory in Maricopa Co and sellers are very reluctant to sell. Buyers are literally all chasing the exact same asset.  Bad debt is a real issue although it is largely ignored in current valuations (in my opinion).  As such, all of the optimism is already priced into the market. 

SFRs and small multifamily are now completely disconnected from cash flow. Expect revenue to equal. .5% of purchase price. I guess somewhere along the line the 2% rule became the .5% rule:) I would classify Metro PHX as a buyer beware.

I would exercise an overabundance of caution. There is excessive capital Distressed fund in the market all looking for the same group of assets meaning it will take longer to reach a price floor. We tend to forget that this will be a very long recovery. Nobody is in denial about that any longer. Those that exercise patience will be rewarded.

Multifamily owners made it through Apr and May collections and June should be more of the same. As such, technically valuations should remain strong in the short run. The bigger issue in today's underwriting is the multiple new and unquantifiable inputs for year 1 through year 5. I personally think it would be a mistake to value a deal today based on prior T12 or a year 2+ rent growth. There is no underwriting consensus in the broker community as of yet either. There are no true post Covid comps so today's buyer would be setting that bar, quite a risky proposition. I struggle taking a position that today's value is commensurate with the risk, perhaps the largest imbalance I have ever seen.