All Forum Posts by: Spencer Gray

If the cash-flow is negative it's not a good deal, plain and simple. Have you negotiated price? Have you calculated raising rents on the other units if they are below market or renovating them to force appreciation and rents? What about not living there yourself or at least make yourself pay rent to at least make the numbers work. If you run the property well you can start to pay yourself a salary as PM. 

That all being said just go off the numbers and if it does not cashflow keep looking! I would rather buy a nice house for myself with a $2000 mortgage as it would be less risk, less work/headache and give a better standard of living. 

@Thomas S.

While there are some suckers out there I wouldn't say most have no concept of value. Most are working with RE agents who educate them on the market, they simply have lower yield expectations and don't have the sticker shock that local REIs have. Local REIs are looking for a deep wholesale discount and their idea of where the market is often  6mo-year behind where the market is today. There are plenty of local Midwest investors who have been sitting on the sideline who think the market is overbought when there are good deals out there they're just harder to find or you have to be a little creative in your strategy. 

I would start by showing them your model with various scenarios, which you probably have since you have the property under contract. You could also show rental comps, demographic trends, sales comps, rehab budget and return analysis, hold period, your experience, general plan for the property, etc.

It doesn't have to be fancy just real and accurate data.

Welcome to BP! There are tons of resources on the site with plenty of experienced investors and operators who are more than happy to share their experiences and give advice. 

You aren't investing in real estate by investing in ancillary businesses that services the real estate market. 

I would look at syndications by proven operators in growing markets.

Some quick advantages of RE, specifically investing in a syndication, over owning common stock: Sheltered cash flow, scale, preferred return of at least 8% (sheltered!), leverage, relationship with the operator (I can pick up the phone and call the sponsor of a deal, you'll have a harder time getting a CEO of a public company on the phone), better returns (almost always beats the S&P composite). 

The major disadvantages being: Liquidity, less flexibility (can't short, sell options, etc). 

Check out Marcus and Millichaps 2017 multifamily forecast if you have not already. On page 10 they have a graph of "Apartment Cap Rate Trends" compared to the 10 yr treasury from 1990-2016. This is a national average of sales above $1m but the trend is the trend.

You'll see a sharp dip in 2007 into early 2008 before reverting back up to the mean. However the trend was of compression and it is still occurring due to limited supply and the strong demographic fundamentals in many parts of the US.

This is happening all over the Midwest. 5.5-6.5% cap rates for larger (100+ unit) multi fam is the market now. It's better than 4% on the coasts which obviously why those investors are looking for yield in the Midwest. 

What's even crazier is that there is a good chance cap rates will continue to compress in 2018.

I would highly recommend looking at syndications in the markets you listed. It allows you to scale, take advantage of economies of scale (as in 150-400 units), while not sacrificing much if any in terms of ROI. The key is to find and vet good quality sponsors/syndicator/operators that are professional and have a proven track record. I have experience with quite a few operators in the Indy and other Midwestern markets and would be happy to connect you.

An attorney can draft an operating agreement that spells how the partnership will work but it's up to you and your partner to agree on the basic terms in order to tell your attorney what to draft. A good CPA can also help determine the proper structure for taxes and may even have some insight on how to structure your entity. It should be a team effort between the principals, your attorney and CPA. I would get them in the same room or a conference call  to brainstorm what will work for you.  Start with ownership % based on contribution amounts, then who is going to do what for the project and if someone is doing more of the work should they be compensated for that in either a fee, equity, etc. There is no right or wrong way to structure a deal, but there are better and worse ways! 

Creating an entity is the easy part (in Indiana I can create and register an LLC and register an EIN online in about 10 min combined). I had my attorney draft a blank operating agreement that can be used for each single purpose entity I create to invest in a property. Each of those entities are owned by a single member, which is my companies parent entity (LLC) which has a different, more detailed operating agreement that lays out how the company operates, voting, control, management, contributions, distributions, sale/liquidation, taxes, etc. That's what works for my situation, yours may be vastly different.

*This is not legal or financial advice, consult an attourne and/or CPA.*

I agree with @Jeff Schechter This map is nice but not the full picture and paints with a very broad brush. Indy can widely differ block by block, street by street.