All Forum Posts by: Serge S.

@Jose E Ramirez $1M doesn't buy you too much today in AZ. Best bang for your buck will be tertiary markets south of PHX but those markets will have PM risk that you won't be able to stomach. That leaves you PHX metro and your probably looking at 8-10 units in a suspect neighborhood. You will end up with a $5k-6k gross rent roll, plenty of capex and a building thats small enough that nobody competent wants to manage it. Your seller will be CA or Canadian that purchased 3 years ago for half of what your buying it for and your seller will have purchased from a local at 50% below that number. Why bother? That is the exact investment class that will lose 80% of its value in the next downturn.

@Shahriar Khan I like the thought process. There are multiple markets that a lot of operators like to talk about. Atl, Charlotte, FL large MSA markets. I like them too but knowing what I know that it takes to source a deal appropriately, I'm content sticking in my backyard rather than investing in the time to conquer a new market. Would rather go in as an LP with a proven sponsor. Finding that sponsor/deal is a different challenge. 

@Omar Khan love the podscasts you have been on and your approach to underwriting, I'm a big fan. I see the boot camp 1st time syndicators in my market PHX on overdrive right now. It would be of service for them to listen to your approach. Unfortunately its tough to compete with these guys underwriting a 6% economic vacancy and 5% cap exit with perpetual 3% rent growth. I guess thats what they teach at band camp.

 This data is readily available and usually provided by larger brokers. They email clients quarterly sumarket reports with detail. 

Reversion or exit cap rate is simply the implied cap rate your end buyer will demand at sometime in the future. Hence the problem, we don't know what prevailing cap rates will be in year 3-10 as cap rates are based on a number of factors, interest rate being predominant. The higher the cap rate that buyers demand at exit, the less your sales price will be. As such you want a healthy spread in your underwriting. I like to look at the historical submarket cap rate over the last 20-30 years and compare to the current spread. I'll add 50 basis points to that. So in a market thats trading today at 4.5 cap but historically a 6 cap market, I will underwrite to a exit 6.5 cap. Brokers tell me I'm crazy and that 4.5% is the "new normal."  Sure would make it easier to buy an overvalued property if I was naive enough to listen. 

Keep it simple and cheap with the first few SFRs especially if your not sitting on a material balance sheet. If wanting to go the LLC route you create the LLC in the state where you are doing business. That LLC is owned by a Wyoming LLC which is owned by you and partner if any. Wyoming LLC is very cheap and easy to setup and provides for full anonymity (amongst other benefits).

@Vlad Denisov the use of IO debt is used for very specific type deal. Generally a value add where there is no cash flow during the value add process. It also creates another market risk risk to the deal, especially today. In a stabilized deal, the lender will want the investor to show a minimum debt service coverage, this is a key metric for them as it shows the asset's ability to carry that debt. 

During the golden age of multifamily 2010-2015 this was actually a pretty rare practice as most cities were trading at equilibrium historical cap rates and the asset had the ability to carry the debt load. Come 2015 few deals could project the 7-10% COC a sponsor needed to make the deal work and competition among banks brought the IO to the 3-6 years we see today.

This presents its own set of problems especially in cities where multifamily is in the hypersupply side of the cycle. Everyone understands that once IO expires principle payments begin but what is not talked about is that effect on COC. I ran these numbers on my last deal and it came in the ballpark of eating 5% in the year of reset and thats with a stable interest rate environment. This means that if the asset doesn't have a minimum 5% COC it can't pay debt. As a sponsor or investor you better be pretty damn confident in how fast you can turn units, increase rents, decrease economic loss to lease etc; NO room for error. This is not what I see. I see less than 10% economic loss to lease, 30% year one rent bumps, renovations done in one year. Essentially your buying an asset running perfectly and betting you can run it even better. I

There are other products where IO on front end combined with longer term debt can meet both purposes. Unfortunately today the IO in conjunction with Bridge financing is the only way to make these deals work on paper. 

@Brian Green the $7,500 you see is an excel spreadsheet number or a lazy guesstimate from the property managers renovation super. Your numbers are about right except the biggest corner cut is flooring. An inexperienced owner will fall for the rolled laminate flooring trap. Cheap rolled laminate can be installed for as little as .50-.75/sq foot labor and materials. They use the stuff that looks like real plank/tile/wood and in the pictures it can look decent. Problem is that it is as bad as carpet and lasts 1-2 turns. First piece of furniture or appliance moved in will gash this flooring or just one water leak and its difficult to impossible to replace so it is being turned VERY frequently and the front end savings are offset over 3 years with replacements. 

Another consideration is size of a unit a 500-600 sq foot unit can probably be turned for $7500:

Appliances:$1500 - I'm getting sets in bulk under $1000 but you have to know how to do this and you need storage. Your PM won't be of much help here. PM likes to order from one of the big delivery companies HD or MD Supply at 5-20% above retail or a "deal" that they have with a company like GE. Shop around, this is one line item where you can make a big dent in the budget.

Rolled Flooring: $500 - Not recommended but being used. Most skimp on replacing baseboards but that is a must with any new flooring other than carpet.

Quartz Countertops: $1000 - 

Paint $750 - if your turning a lot of units it should cost less than $1/sq foot and doesn't include scraping popcorn ceiling. $1200 if scraping popcorn.

Cabinets $1200-1500 - Can find them for less than $1000 bulk negotiated

Light fixtures and electrical - $700

Plumbing fixtures - $900

Shower surround - $1000

And there you go $7,500 or less.  Keep in mind none of this includes the dry rot remediation, subfloor repairs, etc. You find a lot of problems in a 40 year old building once you begin. YMMV depending on region. In the Bay Area for example people are paying $2-3/foot for paint and $4-10/sq foot to lay the right flooring. The big shortcut to get to budget is using rolled laminate garbage and this is an enormous mistake because when all the units are done and repositioned for sale the next buyer will walk the units and they will look like the flooring you had in the unit before the remodel. Problem is that using laminate plank (also not a fan) or tile destroys this budget. But sounds like your thinking of doing this the right way.

Finally when a broker tells you "$3500/door" just ask that broker how many apartments he has turned. 

Here are a few pics of how my units look and I can't touch $7,500. I've been coming in at $9-11k and that has not been easy.

Here you go Phoenixmart in all its glory.    Phoenixmart

@Nolan M.Got a good laugh out of this one. I own 200 units in Casa Grande and Coolidge and drive by Phoenixmart monthly. I stopped by recently and took a good video of the progress for my friend at @Brian Burke and I think it made his day. I'll see if I can dig that up and attach if anyone wants to see it. Its an empty shell, not a worker in sight for at least a year. CEO Marshall Stahl in hiding, city and mayor not talking about it. I have a contact in the planning dept and in the past 3 years he went from bullish to nothing to see here. The whole idea is a pipe dream. I've been buying SFRs at the Florence court house steps for since 2010 and there are deals even today. There are multiple big projects in the pipeline and only one needs to hit, my guess its Attessa, not so much Lucid or the Park. The park would be nice, I own a little townhouse row of 10 units at the front gates of the new park plat. Nikola Motors closed on the land for its manufacturing plant today and plans a $1B manufacturing facility in Coolidge. $800M cash in hand for building. Consider the effect on Coolidge a city of 5,500 getting 2000 jobs. The cities tax base will double. And there is only SFR and small mult junk housing, one class A in town, Just saying.

https://www.pinalcentral.com/coolidge_examiner/new...

I'm a big fan of Pinal County but agree with @Shiloh Lundahl about giving away our secrets on the forums. 

@Scott Runyan sounds like you are on the right path. I love the dual track of investing with sponsors while looking/purchasing small multifamily.  Everything you learn with the 2-4 unit will be applicable to your larger multifamily purchase and watching the sponsors over time will fill in the rest of the gaps. There will be a time of distress and you will be ready.

I am transitioning from active to more passive and diversifying through LP syndication investments. I'm enjoying reviewing and comparing notes as to what these guys are doing (sorry to any women in this game but I haven't run across a female sponsor yet). What I've learned is that not all sponsors are created equal. There are marginal sponsors that are learning on your dime and there are pros that have been in the game. I'm not sure how a dentist from CA figures out one from another.