All Forum Posts by: Stephen Dispensa

It ALL comes down to deal analysis. You need to understand that the return on investment doesn't just come from cash flow. You need to take into account appreciation (both forced and natural), principal paydown, and the tax benefit of depreciation expense to understand your total return. The situation you described as being in the middle of a BRRRR when the market drops would be less than ideal, HOWEVER, the second to last R, refinance, is the most important one in this situation. If you are dealing with a single family home, your refinance options are going to be limited because they will only appraise the property using the comparable sales method.

However, if you're in a multifamily property, the appraisers are most likely going to use the income approach. And if income is rising, so is your property value. Looking at everything going on in the economy with inflation right now, do you see rents going down anytime soon? I don't. Hell, even during the market crash, rents didn't decrease anywhere near as much as property values on Single Family homes did. 

I do deals like that with PM investors sometimes. We usually agree on a simple interest return / preferred return prior to the profit split. Alot of times we'll fund these with the investors heloc. So we tend to double the interest rate of the heloc. I'll give you a simple breakdown on one that we did back in 2019:

Partners: 3 - Myself, Flipping Partner, Investment Partner.

Profits: 3 way split

Investment Partner: Funded 100% of purchase and 100% of rehab and holding costs through HELOC on their primary residence. Interest rate on HELOC was 7%

Purchase price: 262k

Rehab costs: 110,000k

Holding costs: (Taxes, utility bills, insurance for 7 month renovation and 1 month marketing/closing) = 10,000

Total investment: 262,000 + 110,000 + 10,000 = 382,000

Interest Expense: 17,826.66

Sale Price = 490,000

Returns: 

Investment Payback: 382,000 + 17,826.66 (interest expense) + 17,826.66 (preferred return) = 417,653.33

Sale price 490,000 - Investment Payback = 417,653.33 = 72,346.67 (profit)

3 way Split

Me: 24,115.55

Flipping Partner: 24,115.55

Investment Partner: 24,115.55

So in this example, we each made about 24k off our equity split in the house. The investment partner who put up the money received an equal split of the profit, plus a preferred return of 7% of their investment which came out to 17,826.66. Their total profit was 41,942.21. They had a return of 10% on the investment and an annual return of 14.5 % as the money was out for 8 months total. 

The upside of this strategy is their principal is protected since the investor had their name as a partner in the LLC that owned the house. Had we messed up and they needed to liquidate the house, they're in a far better position to mitigate losses compared with a foreclosure. And they also were in a position to reap a higher return depending on the final sales price and renovation budget. Had they funded the property with actual cash and not cash from a HELOC, their return would have been even greater. However, their leveraged return is even better since they basically never spent a penny of their own money and walked with 41,942.21.

I mainly work with out of state investors here in Tampa handling real estate brokerage and property management. My investors have seen some pretty incredible appreciation over the past year. As an example I had an investor purchase three properties with conventional loans over 6 months from December 2020 through July 2021. 10 doors total. Their total cash outlay was around 250,000 on the purchases and another 70,000 in rehab / renovation. After rehabbing 3 units out of 10, and replacing roofs on two of the buildings, they were able to refinance and take all of their cash investment out of the properties, and get a lower payment even though interest rates had risen considerably. The properties are running smoothly overall and we continue to see great rent appreciation year over year. The combination of low cap rates and rising interest rates means cash flow takes a while to develop, but appreciation is great still.

ANYTHING is possible. The market could crash tomorrow and homes could be selling for pennies on the dollar. Or the market could surge to unexpected levels as people continue to hedge against massive inflation by investing in RE. 

What's important to realize is that it normally is an outside factor that causes massive market crashes. People who say things like "these prices are unsustainable" are generally off because just looking at the RE market in and of itself can't accurately predict a market swing.

The 2008 crash wouldn't have had half the impact that it did if it was just another stock market crash. The problem is all the collateralized debt that caused the crash was tied up in the housing market. And even THAT wouldn't have caused the RE crash to the level we saw, except for the fact that banks pulled in the reigns on lending. If no one can qualify to borrow, demand goes down. At the same time you had people losing jobs and needing to get out from underneath expensive variable rate mortgages, which meant available supply went up. If supply goes up and demand goes down, you have a price crash, simple as that. It is classical economics 101.

Now, let's think about the world today and some real world problems today and how likely they could lead to a massive crash:

Inflation: Not likely to lead to a crash because as inflation rises we tend to see RE prices rise as people use RE as a hedge. The question I ask all of my multifamily investors all the time is: How often does rent go down? 

Energy Crisis: A massive world wide energy crisis COULD lead to a real estate market impact. If people can no longer afford to heat / cool / power a large home they may consider downsizing, leading to a spike in supply without an uptick in demand resulting in a price crash. Prices have spiked massively in Europe as a result of the Ukraine war, we have also seen prices for gasoline spike in the US in the past few months, however these price hikes are usually short lived. The speed at which the RE market moves is unlikely to be influenced much by an energy crisis for the simple fact that energy crises tend to resolve themselves kind of quickly. If nation states like the US and the European Union embargo Russian fuel, guess what happens? The Russians sell it on the black market. The initial supply drop usually gets offset when the nation who has been embargoed starts selling the fuel at a discount on a black market. This happens all the time and it's why fuel costs have been dropping since the beginning of summer. The fact is RE isn't as liquid as energy is so it will always be a lagging indicator. By the time an energy crisis spurs homeowners into drastic action, the crisis will likely already be abetting.

Retirement Crisis: This is an interesting one. Many blue states have large public sector guaranteed pension funds that I don't believe are as well funded as they claim to be. With the largest generation (boomers) retiring, there are massive amounts of guaranteed payments these funds are supposed to disperse. What happens when these boomers outlive the original projections of the fund? How many FDNY firefighters worked an insane amount of overtime their last two years on the job to get pension payments that are above what they earned in their career? How much of this was calculated in when the return formulas for these funds were first generated? I predict at some point in the next ten years you will see massive public sector pensions from states like NY, Massachusetts, New Jersey, Illinois, etc. fail. This will have a massive ripple effect throughout the country. First, you'll have a ton of pain in the states that guaranteed these funds. What happens when multiple counties, cities, and states have to declare bankruptcy? Besides the obvious (their credit rating goes to hell and it becomes impossible to issue bonds for public infrastructure projects), they also get hit with austerity measures. What would this look like at the county, city, and state level in the US? In a word: taxes. You would see an increase to property taxes across the board, increase in sales taxes, and an increase in or implementation of income taxes. And all that results in less buying power for people. Since property taxes are calculated in monthly payments, the mortgage amounts individuals would qualify for would decrease to cover the larger tax rate. Higher income and sales taxes would mean even less money for housing. So what would people do? Well many of them would leave blue states ( a trend we have already been seeing since prior to the pandemic and has sped up in recent years). However, if you think living in a red state with low taxes and a sound fiscal policy would save you from this kind of crisis, think again.

Let's take a fictional example: A school teacher works 40 years in a Long Island school system in NY teaching 6th grade. They retire at the age of 65 on a pension worth 75% of their annual salary. They were making $200,000 per year at the end and their pension is worth 150,000 per year. (If these number sound ludicris, they're not, I legitimately know a teacher who has these exact numbers). Now let's say they decide they want to move to the sunshine and live out their days in Florida. So they sell their Long Island home at a high price to a young couple, and go buy a house in West Palm Beach with cash from the proceeds. Everything is going great the first few years as their pension and social security cover a nice life for them in Florida. They bought their Florida home in cash so they don't have to worry about a mortgage payment. Suddenly the pension fund fails. NY State has guaranteed the pension and is able to make payments for a time, but eventually the state has to declare bankruptcy. Austerity measures are introduced, the young couple that purchased the house from our fictional teacher can no longer afford the taxes and have to sell it at a loss. Less money is coming into the states coffers, eventually the pension fund is written off and the guaranteed pension for our fictional teacher of 150,000 is reduced to mere pennies on the dollar. They need to sell their home in West Palm Beach, but because so many retirees suddenly had to downsize, there's a glut of supply on the market. Prices drop and continue to fall. At this point banks have lost billions on public bond investments in the north east that will never be repaid because of states declaring bankruptcy. Lending tightens, buying power decreases across the board, and real estate prices crash nationwide. 

I realize the above example is a little fantastical, but understand this process can be applied to many outside factors that can influence the real estate market. So YES, a crash is possible, but remember real estate is a lagging indicator and also a hedge against other market conditions, so the correlations may vary depending on outside conditions.

For some of you who have followed my previous posts and have reached out to me, you’ll know that I made a decision a few years ago during the height of the pandemic to change strategies from house flipping with investor clients/partners to multi-family value add properties. This allowed me to effectively scale up the business I had been running as my contractor and vendor contacts I had made house flipping immediately scaled up to larger jobs on multifamily properties.

However, about a year ago I started to see a massive black hole in the process: property managers. Many of the deals I put together were owned outright by investor clients which prevented me from managing the property for them. My brokerage at the time did not allow sales agents to act as property managers.

So, seeing an obvious need, at the end of 2021 I began preparing for the Florida Brokers Exam and took and passed the test in early February. After a few more months of waiting for LLC paper to be filed and Corporate Broker Licenses to be processed, in April my brokerage/property management company, Dispensa Properties, LLC, began operating.

I immediately took over management of two doors for a client of mine and have been growing steadily since. With each property I've taken over I have analyzed a multitude of strategies to attempt to generate the best ROI so I thought I'd write up this post to go over the state of some of these strategies in the Tampa Bay market right now.

Our rental strategy for multifamily units can be divided into three potential strategies: short term rentals, medium term rentals, and long term rentals. (Henceforth abbreviated STR, MTR, and LTR) STR's and MTR's tend to be furnished units, where as LTR's tend to be unfurnished.

Let's start with STR's. These are our "AirBNB's" and "VRBO" units. They have the POTENTIAL to generate the highest returns, however come with a whole host of issues that frankly are getting worse. We started this past spring with two STR's advertised only on AirBNB to start. They were located in Port Tampa City in a location that was not particularly conducive to tourism (compared to say, a beachfront property in Indian Rocks). Upon putting them on the market, AirBNB initially forces you to offer out the units at a discounted rate for your first couple of guests. This worked fine, however as a new listing we started seeing massive issues in the QUALITY of guest we were getting.

Namely, we started dealing with con-artists right out the gate. Namely the con will look like this: you will get a booking request from a guest with few or (most likely) no reviews. Once they’re booked, communication will be sparse. They’ll check in, act like everything is fine. Then in the middle of the night they’ll send a complaint in about the rental. They’ll claim there’s bugs. They’ll claim there is hair everywhere. They’ll send you pictures of bugs and hair (which they likely brought in and then dropped everywhere). Then they’ll tell you in the middle of the night that they cannot stay there and they’re leaving immediately and cancel the booking. They’ll ask for a refund and since AirBNB does not send you funds until the second day of your guests stay, most of the time AirBNB will issue the refund.

However, we put wifi enabled smart locks on our doors. When the guest claimed all of this filth forced them to move out at 3 in the morning, we were able to immediately show AirBNB the lock log showing they did not actually leave until 9:00 am. Their con to get a free night was busted and we wound up keeping their entire fee although they did not stay in the unit. Having inspected the unit an hour prior to their arrival I knew the complaints to be false and we were lucky in not getting conned in this case. However, I’m certain other AirBNB hosts haven’t been as lucky.

The second big problem we had with these units is cleaners. When I took over those first two doors, the owner had a relationship with a cleaning company. However, upon inspecting their work I noticed they were cutting considerable corners. Not washing sheets, not wiping down surfaces. Not following the clearly laid out checklist. Again, we had wifi door locks installed and could tell when cleaners entered and left. On a “deep clean” that was required because of an extended stay with a pet, the cleaner entered for twenty minutes and left. We had paid over $250 for a deep clean. The cleaning service had simply entered, made the beds without changing the sheets, did a quick vacuuming and arrange pillows etc. I fired the cleaning company on the spot and spent the rest of that morning cleaning the unit by myself prior to the next guest arrival. Luckily I was finally able to find a reasonably priced cleaning company that does solid work. This crew is worth its weight in gold and I will hold on to them as long as I possibly can.

Since last Spring, as many of you know, AirBNB has changed their algorithm completely. This resulted in a MASSIVE drop in bookings for us. Frankly, with increasing fees and the amount of work that has to go into optimizing your listing for their new search algorithm, I no longer view AirBNB alone as a viable option for generating a substantial revenue stream.

Right now, we're utilizing OwnerRez to cross market the short term rentals across AirBNB, VRBO, Booking.com, Travelocity, and adding in the others that OwnerRez allows channel management of. This strategy definitely is showing results however I do believe the greatest indicator of success with an STR will always be its proximity to tourist destinations. Properties near the beaches on the Gulf will always do well year round, and properties in the city will have different challenges. Sometimes they will still work well for business travelers but you really start getting into very specifics as to whether a property will work for STR.

Frankly the amount of work that goes into managing STR's in residential neighborhoods (outside of tourist destinations) really doesn't make sense when comparing to the potential increased cash flow.

With STR, there's also A LOT more work to be done on the management side. I charge a considerably higher rate for managing STR's because they literally require me to be glued to my phone all day to deal with booking requests and issues. And that is even with a considerable amount of automation. The biggest problem is that if we aren't above 75% occupancy, we often get last minute booking requests. Vendors are difficult to find (cleaners, etc) and are often booked up. Here's a typical situation that I see with STR's:

I have a unit with an 11:00 am checkout time and a 3:00 pm check in time. Guest 1 checks in for a two week rental. Checking in on Saturday the 1st of the month. Their checkout is on Saturday the 15th at 11am. Guest 2 has booked a 5 day rental starting Monday the 17th. I contact my cleaners three weeks ahead of time and give them this schedule. Seeing as there’s no same day check in, they clean the same day check in units first on Saturday the 15th and begin the cleaning at 1:00 pm. Suddenly at 2:45pm we get a last minute booking from Guest 3 and they are literally standing in front of the building as my cleaners are still working. My phone is suddenly ringing off the hook and we are scrambling to accommodate them.

Now there are a number of things we can do to avoid this situation: turn off instant booking, turn off last minute bookings, etc. But if we are below 75% occupancy, do we really want to do these things?

The conclusion I've drawn from all this is that STR's really need to generate significantly higher revenues AND have extremely low vacancy to be worth the effort. The low vacancy will allow you to ensure your systems are running smoothly by having the unit booked out well in advance.

Now MTR’s are a nice sweet spot that is sadly drying up on some level as well. Previously we had a good deal of success furnishing units (rather inexpensively too) and marketing them on furnished finder and some other sites. We were seeing considerable returns renting to travel nurses and medical personnel. Through the pandemic, many of them received significantly larger travel stipends to help ease the burden of overworked hospital staffs in certain markets. As an example, a unit that we had purchased in summer of 2021 was leased month to month at $850 a month. We gave notice to vacate, spent $10,000 on renovations (painting, new floors, new hardware, re-glazing bathtubs and surrounds, new vanities and mirrors, new lighting) and about $5,000 on furnishing (beds, bedding, couches, TV’s, tables, kitchen supplies, and décor). We began leasing these units to travel nurses at $2,500 a month (utilities included) and as high as $2,700 a month. We kept the unit at 100% occupancy from September 2021 until mid-August of 2022. At which point many of the hospitals started lowering travel stipends for their traveling personnel as some of the staff crunch from the pandemic stabilized.

Currently with the travel nurse tenancy dying down we have been able to find other medium-term tenants in the form of corporate leases and temporary relocations. However, these have required additional marketing and aren’t as consistent as the travel nurses were.

Lastly we have the LTR units. Although these tend to offer the lowest initial return, they are by far the most stable of the units I manage. LTR rents have obviously skyrocketed. Many of the buildings my clients purchase haven’t seen significant rent increases in 5 years or more. Our strategy with these rentals has been to offer renewals on non-renovated units slightly above the going market rate for comparable units. Sometimes a tenant will decide it’s not worth the expense of moving, they like the building, etc. In these cases they wind up paying slightly above market rent to stay put. Most likely (about 75% of the time) they elect to move. Which then frees up the unit for us to renovate and put the unit back on the market at the highest possible price.

Although LTR’s don’t generate the highest return month over month of these rental classes, slow and steady often wins the race. The consistency of rents coming in combined with the stability of good long-term tenants often allows you to generate a considerable return with even small value-add investments. For example, I had a client purchase a 6 plex in St Pete in November 2020 and the aforementioned 4 plex in Port Tampa City in July of 2021. By renovating 3 of the 10 units across those two properties and making some small exterior improvements and small rental increases to existing leases, just last month she was able to refinance both properties and take her entire initial investment out AND get a smaller monthly mortgage payment even though her interest rate has risen considerably. Sure the cash flow of an AIRBNB might have put a few hundred extra dollars in her pocket each month. But on the refi she put the several HUNDRED THOUSAND of her initial investment back in her pocket and ready to invest in another property.

There’s a real sweet spot in demand right now for efficiency units and 1 bedrooms around $1,200 a month, literally anywhere in the region. I had a small efficiency unit the owner was looking for $1,000 a month for back in July. I convinced him to take a shot at marketing it at $1,200 a month. The unit wouldn’t be ready to show for 10 days so I had some time to collect applications. We received over 400 inquiries and 100 applications via Zillow Rental Manager. With so many to choose from the only fair way to lease the unit was to hold an “open house” style showing. Of the potential tenants who showed, we picked the best qualified candidate and they leased it on the spot.

With this in mind, I would honestly consider subdividing some units. I have several owners who own triplexes with 2 one bedroom units and a large 2 bedroom unit. Zoning on many of these properties allow for up to 4 units. We are looking very seriously on the next turn into subdividing the 2 bedroom units into 2 large studios or 2 small 1 bedroom units. It’s a bit of the process which requires going through planning and inspections, but because we’re not adding square footage we can generally build “as of right” because of the zoning and only require a standard building permit.

My outlook for the Tampa market right now is strong. New construction in multifamily is far outpaced by demand. Demand for workforce housing is even higher seeing as the only new construction being built is luxury apartments. Value add opportunities still abound in small to mid cap multifamily properties throughout the Tampa Bay area. I see deals every day both on market and off with the potential for substantial returns for those with the foresight, know how, and risk tolerance to take a chance on them.

My goal as a Broker / Property Manager in Tampa is to close 10 deals by the end of the year on multifamily buildings, minimum triplex, and take over property management for those units. It's a lot, but doable. 

If this is a pre-foreclosure deal and the owners are currently residing on premises there is really no reason to give them any time after closing to move it. If so you should be looking at a leaseback and they should be paying for those days. 

If there are tenants currently there, that is going to be dependent on their lease. If they are month to month, check what your local jurisdiction requires in terms of notice to vacate. If it's 30 days I would tell your sellers agent that they need to file the notice to vacate upon acceptance of the contract and you will not close till the property is vacant.

Frankly if you can qualify for a property with a DSCR loan I would strongly recommend going that route. The DSCR loan will more or less ensure you don't have any cash flow issues because the rent roll should be more than enough to cover your mortgage / expenses. However your overall RETURN is based on only your cash outlay with a leveraged property. Going to keep the math simple and exclude management fees, capex, etc. but those things all scale. Let me show you the math :

Example 1: 250k house purchased in cash, no rehab - Rent $2,000 per month. Expenses: Taxes - $4,000

Simple Return = Annual Rent (24,000) - Expenses (Taxes - $4,000)  / Purchase price. 

Simple Return = 8%

This simple return is your basis, cash on cash return. Which is useful, however the true value of your return needs to take in other factors than cash flow, namely Appreciation, Debt Paydown, and Cash Flow from Depreciation

In this example let's say you have a conservative property appreciation of 3%, you have no debt so there's no debt paydown, and you're depreciating on the standard 27.5 years with the land value being 15% of the property and you're taxed at an effective Income Tax Rate of 20%

This would provide an additional .61% in cash flow from depreciation.

So your total return in this scenario is Simple Return (8%) plus property appreciation (3%) plus your cashflow from depreciation (.61%) = Total Return of 11.61%

However, now let's look at what would happen if you used a DSCR loan for a 1 million dollar 4 plex where you're putting down 25%. Let's say the units are all 2 bedrooms 1 bath and generate $1,500 a month in rent. Property taxes are $10,000 in this example. Interest is 8.75 percent amortized over 30 years.

Simple Cash on Cash Return = Rent ($72,000) - Expenses (Taxes $10,000) - Mortgage Payments (70,800) / Initial Investment (250,000) = - 3.5%

So we're cashflow negative on the property at this point, never good because you need to go into your own pocket each month to cover the difference between the rent coming in and the mortgage payment, but let's start adding in the other factors:

Now here is the MAGIC. Let's assume a conservative appreciation of 3% once again, HOWEVER, this appreciation is on the TOTAL value of the property, not just the $250,000 you invested. However it's value in the return is calculated by the initial amount you invested. So, on a property purchased for $1,000,000, a 3% appreciation in value would be $30,000. However, this calculates in our return tabulation by calculating APPRECIATION / INITIAL INVESTMENT. In this case $30,000 / $250,000 = 12%

For our Debt Paydown based on a 30 year amortization schedule you'll have paid down $5,390 in principle at the end of year one, or .07%. But again, this value of this return is based on your initial investment, not the total price of the property. In this case $5,390 in debt paydown on an initial outlay of $250,000 = a return of 2%

Lastly we have our cash flow from depreciation. Again based on a income tax rate of 20%, land value of 15% and a 27.5 year standard depreciation timeline we are looking at $6,182 from cash flow from depreciation. Once again we divide this by our initial investment = $6,182 / $250,000 = 2.4%

Now let's add all this numbers to get our overall return: 

Cash Flow ( -3.4%) + Appreciation (12%) + Debt Paydown (2%) + Cashflow from Depreciation (2.4%) = Total return of 13%

Now in these two examples, I've shown you how a house bought all cash that is cash flowing is actually returning less money than an apartment building that is negative on cashflow. That's the power of leveraging. Your returns are based upon your investment in the property, not the overall value of the property. However the inputs to those returns get based off the overall value.

Also, obviously no one wants a property that is cash flow negative. The solution in this example would be to renovate and raise rents to force additional cash flow and additional appreciation. Also remember that appreciation compounds. In year two of this example the return from appreciation alone jumps to nearly 24%. 

Bottom line, if you can qualify for DSCR loans and have the money to invest, multifamily properties are a FAR better investment than purchasing single family homes outright. Also, rents tend to stay reasonably stable or increase and pretty rarely do they decrease by significant amounts. Valuations thereby hold far steadier on multifamily in the long run.

All the above posts are correct however I'll add this: What constitutes a "bedroom" has nothing to do with the building department (generally). If the room itself is included in the heated square footage of the house, the only real requirement for it to be considered a bedroom is a window and a closet (which can be a standing closet). If the room is a home office type room, just drop a standing closet from Ikea and "presto!" bedroom. If there's no window though . . . you're kind of out of luck at that point.

I'd suggest consider a Short Term Rental property, condo or townhouse, in the right market. Lower asking prices and should still cashflow for you.