All Forum Posts by: Steve Cook

I know this post is over 3 years old, but wanted to memorialize my experience with @Mike D'Arrigo here after recently reviewing the performance of my Indianapolis real estate portfolio.  

Background, in early 2014, I was high on Rich Dad Poor Dad, and extremely eager to dip my toes into the Real Estate Investment world. I saved up my first $20k, did some research, and targeted Indianapolis as my investment market. Through my research, I came across Mike from Pinnacle Investment Properties, we met for lunch, and I decided to move forward with his turn-key service.  

Being new to the game and the Indianapolis market, I put my trust in Mike to find me a property that was 'turn-key'.  It was my attempt to de-risk my first investment.  After trusting Mike's projected paper returns, I moved forward and purchased 4002 Edmondson Ave for $55K.  

The property was rented for $900 with a tenant already in place, fantastic.  The trouble starts about 3 months in, a random inspection reveals the tenant has 2 dogs and 5 cats, we have no pet deposit in place, and the unit is completely trashed.  After a 4 month eviction process, they continued to rack up damage and finally depart the unit, skipping out on the last two months worth of rent.  Year 1 maintenance cost, 89% of rent.

The total cost to turn the unit in preparation for a new tenant you ask, $5,841.  This is a turn-key property.

The next kicker comes when we my property manager informs me that market rent for my unit was $800, not the $900 Mike had communicated.  As many of you know, this is a material difference when you're attempting to hit a certain rate of return.  

Fast forward 5 years and I'm literally still paying the price for not doing my proper due diligence.  Over the past 5 years, the property has returned exactly $451 for a whopping 0.5% cash-on-cash return.  My 'turn-key' property has racked up $12.2K in maintenance over 5 years, 33% of gross rent.

After reflecting on the overall scenario, I realized that Mike didn't really care about providing me with a solid product. I later learned that my property was well below the average asset for the market.  There was no HVAC, it had completely outdated electrical and all the windows required replacement.  

I employed a different strategy for my other 3 properties and am pleased to report that they have averaged a solid 9% cash-on-cash over the past 3 years. 

This is not an attempt to dig at Mike as a person, he's a nice guy, but I wouldn't give him my business.  

@Megan Lawson

@Stephanie P.

Hi BP, 

Thank you for all the follow-up responses.  My wife and I recently had a little girl and I was promoted at Work, so this deal as taken a bit of a back seat.  In addition, I do want to spend more time with feet on the ground before raising the capital.  I've decided to travel out there a couple times in the next couple of months to add a couple more properties to my personal portfolio before moving the business forward.  I would like every aspect of the model completely ironed out before investing money from family & friends. 

Megan, to address your question, yes, they are acting like lenders who receive a rate of return on their investment. The proposed investment horizon is 10 years at which point we would potentially look to liquidate the portfolio to an institutional investor, the returns are usually expressed in terms of IRR (Internal Rate of Return). We would apply a standard 80/20 carry, like most private equity models. Basically, the first 10% goes directly to the investor and any returns in excess of that amount are split 80/20. There are a LOT of documents required in order to raise capital and I'd suggest contacting a lawyer familiar with both real estate and capital raising to kick off the process. They are not easy to find.

Stephanie, LendingOne's 8.7% was the rate for their conventional product. The 9.975% from Colony is a LOC which we would use to acquire the properties and then convert to term loans (6%) in tranches of 10 properties to avoid paying the higher interest rate.

I would echo Ross's comments which I found very insightful, I have a blend of C's and B's in my portfolio and while the C's look good on paper, the B's are more consistent.   If you're talking C's, I would increase the maintenance reserve to 15%.  

I wanted to provide an update to this thread.  I've connected with 30+ lenders over the past two weeks and have had the most success with Colony.  

Although the current plan is not ideal, it will get the business off the ground. The new plan would be to raise the $625K, and take out a $1.875M line of credit. Colony charges 9.975% for the amount of capital drawn. Assuming we're able to purchase 5 properties per month, completing the purchase of 30 properties in a 6 month period, that roughly equates to $55K in total interest. At that point, we would convert the portfolio over to a 75% LTV, 10/30 fixed term loan at 5.5% - 6.5%.

The minimum portfolio loan Colony offers is $500K, which also enables us to move over the properties in tranches.  In intervals of 8 properties, we could convert them to a term loan and reduce the line amount which will also reduce our overall loan exposure. 

Thank you @Ritch Bonisa.  I will follow-up with them and keep you on my radar when we move to the acquisition phase. 

I also finally connected with B2R after some phone tag and they will not lend for acquisitions unless there is only one seller.  In other words, I would only be eligible if I were purchasing all 30 units from a single person liquidating their portfolio.  Their product would make sense for investors who have taken out hard money loans and are looking to convert an existing portfolio to more favorable terms. 

You have a conventional lender that will lend past 10 properties?

I've connected with representatives from Colony, Lima and LendingOne. Unfortunately, they were not viable options for my plan.   

Lima, won't lend on sub $80K properties, a lot of Indianapolis investment properties range from $50 - $80K

LendingOne, 8.7% interest rate, non-starter. 

Colony, won't lend without an already established portfolio.  They will offer an interest only line of credit at 9.95%, which you can draw from and then convert to a term loan at a later period.    

Does anyone else have any other options?

Thank you,

Steve

I've enjoyed working with Shawn Huss at Chemical Bank.  They will only lend up to 4 homes though. 

Hi Guys,

Appreciate the initial feedback. Frankly, the scope of this topic was not intended to cover "How to find a good Property Manager" or assessing the value of a good PM. I've interviewed 8 PM's and have narrowed it down to 2 who have very similar characteristics and I'm trying to evaluate if owners with large SFH portfolios receive a discount for doing more volume business. Also, the savings are not trivial. 30 homes at $1,000 rent is $36,000 at 10%. 30 homes at 8% is $28,800, a $7,200 difference. If each property is cash flowing $250 / month, that's $90,000 a year in cash flow. On that basis, the $7,200 savings is definitely material.

@Andrew Johnson I do like your idea and one PM even recommended that to me as he was so confident I'd come knocking in a year's time.  Haven't ruled it out. 

@Mark Allen Thank you. 

Hi BP!

I'm currently raising a small friends and family round of capital to purchase ~30 properties in Indianapolis metro area. One input into our models revolves around ladder discount for property management and I was wondering if there are any industry standards out there for other owners with larger SFH portfolios. For example,

Properties 1-5 - 10%

Properties 6-10 - 9%

Properties 11-15 - 8%

Properties 16-20 - 7%

Properties 20+ - 6%

Any examples would be very helpful.  

Happy investing!

Steve

@Clay Manship