All Forum Posts by: Chris Winterhalter

@Evan McMullin 

I'm sorry I misunderstood your first post.  I thought you were looking to invest in a project through a sponsor/syndicator.  

When you state you are newer to multi-family but have done residential real estate what do you mean?  Multi-family is residential, or do you mean 5+ unit multi-families?  Or do you mean you've only invested in single family homes?  

It's best to invest in smaller multi-family projects to learn the operational and transaction side of the business before jumping into syndicating your own deal.  Even if you are a high new worth individual with 1-2MM+ to put into a project I would still recommend investing in your own project before pooling funds together.  

There are plenty of books on the subject and seminars and conferences that can be attended.  However those generally speak to the logistics and framework of syndicating a deal not the actual real estate investment & operational competent.  Those should be mastered before funds are raised (in my opinion). 

This is great news that I just received from my accountant as well.  

It does only apply to business with less than 10MM in assets or less than 10MM in gross revenue though.  

@Evan McMullin 

There are many BP topics and a lot of literature on the subject.  

The sponsor/syndicator is the person putting together the development & the funds.  His/her role can vary greatly however they are generally the person with expertise on the deal, putting together all the framework, sites, deals, financing, legal, etc.  If you are looking to invest in private placements on the passive side you would find a successful sponsor, and many times that translates into a successful operator/contractor/developer/broker of some sort.  

@Evan McMullin 

I'm guessing you would prefer to invest in a deal locally?  Do you have a preference in existing or new construction?  I would start here...

-Identify the top 10 multi-family property management companies in your market.  They will likely sponsor deals on a regular basis (not all).  If they have a solid track record in the market then that's a good first step.  They will probably have someone on payroll that deals with fundraising.  Talk to them and get a feel for the process.  

-Top CRE brokers can also syndicate deals. They will also likely know the successful syndicators in the marketplace. Reach out to these folks.

-Lenders for commercial properties (specifically institutional funds, CMBS, Life Insurance Lenders, & Fannie/Freddie Multi programs).

-Apartment developers that you recognize doing deals in your area.  

-Potentially crowd funding sites

Good luck! 

@Brad J. on his broker/agent comment. I would focus on networking with the local & national CRE brokers. You will probably be dealing with newer associates at the larger firms and local brokers who specialize in smaller multi-families in your market. Smaller multis also tend to be listed on the MLS but those deals can be overpriced (not always). Loopnet.com is almost worthless in my opinion (I'm not sure why I still pay for it). I use it every once in a great while and set myself up with automatic property alerts. It's not a bad tool to find new brokers either. It was better several years ago when we were in the depths of the foreclosure crisis, most banks required brokers to list properties.

I don't know your market that well for multi-family but I would imagine B & C class is selling around 100-200k/unit range (give or take)?  So the biggest building you are looking at is probably around 20 units?  Do you plan to self manage?  Caps are probably sub 6 in LA Country for small C class multis (just taking a guess).  

I would work on building strong relationships with local brokers who deal in the smaller multi-family market.  It will take a while to build a relationship because the market is so hot.  They are busy and will want to know you are a serious buyer who will not waste their time.  The good brokers have already built up their cash buyers list from several years ago so you need to separate yourself from the existing clients.  

National brokers to check out (some may not specialize in small multi-family):

Berkadia (formerly Hendricks & Partners) is a national multi-family only brokerage.  Several offices in LA.  

Marcus & Millichap 

Cassidy Turley 

Colliers 

CBRE 

Plus many more...

Good luck! 

@Jeff McCaskey 

We (my property manager) turns down applications on a some-what regular basis because of referrals.  

Just two weeks ago we had a tenant that needed to move quickly, and wanted to get in a unit within 7 days (why the rush???).  Called the landlord reference (provided by the tenant) and the landlord stated that they were currently being evicted, late on rent for the last few months, and have caused disturbances within the complex.  DENIED! 

The tenant probably figured that a certain number of landlords wouldn't check references.  It's rather sad actually...but that's business and real estate.  Filled with a variety of people that may or may not run the operation professionally.  

So it's a 172 units selling for just over 31k/door running at around 95% occupancy.  Can you describe the area?  Is it in the suburbs, rural or in the city?  Rents below $500/unit always come with higher operating costs.  Tenants tend to give items that should have a useful life of 10 years about 3 at best.  You get the idea.  So I would by no means take the brokers advice.  I would however talk to several property management groups in the area that manage larger complexes nearby.  Try to set up a meeting to go over some items face to face.  Then have them put together an operating pro-forma based on the property.  A good, experienced property manager will not over sell you on the pro-forma.  A few additional questions & comments:

-I see you have a gas and electric bill, what does the owner pay for specifically?  

-Be extremely careful about deferred maintenance, items adds up very quickly when multiplied by 172.  For example Fannie Mae multi-family loans require a GFI in kitchens & baths.  Let's say it's three total per unit @ $35 each, That's $105/unit *172= $18,060.  And that's just minor.  A few small mistakes can add up to 6 figures+ very quickly.  

-His 2014 actuals aren't accurate.  Maintenance is low because he either neglected the property or added deferred maintenance items to capital improvements.  When reviewing the tax returns review the balance sheet including all capital improvements.  Ask for receipts, invoices etc.  You need to account for on-site payroll & a management company (unless you are set up to manage yourself).  Add work comp insurance into your payroll costs as well.  You should be able to budget a full time maintenance and leasing/pm for the property.  A good PM will source, hire & manage these people.  

If the property isn't in a war zone or C- area then you might have a deal. However I would carefully look at the sub-market, demand, future supply, deferred maintenance, and utility costs. Your NOI will probably be closer to 400k at a glance. But on an 8 cap deal that's 5MM purchase price which is probably in the strike zone. However add in $5,000 per unit in upgrades/deferred maintenance and you just tacked on almost 900k. So it's really hard to tell you if it's a deal or not.

Is the property on the market or listed with a broker?  I would be worried if it's listed and it hasn't seen strong interest.  C class multi-family in the 100+ range is extremely hot right now with more capital chasing deals than available product.  

@Bryan Hylenski 

It sounds like you have an open relationship with the owners.  Ask them if they would take a 20% (it might end up being 10-15%) seller second at a low interest rate (140k).  Push for a 5, 7, or 10+ year fully amortized loan (if they agree). A lawyer can draw up the paperwork and the closing can be handled by a title company (or lawyer).  Have you negotiated down the asking price?  You might want to submit two offers (if able), one for no seller second (lower price) & one with a seller second.  You will need to talk to as many local banks as possible.  Here's how it will go, call 10 banks, 5 have interest, 3 have interest with the terms you like, & 1 actually approves the loan with the stated terms discussed.  It might be more like 15 banks etc but you get the idea.  Not every local bank will have the appetite for this type of business with a new borrower.  Getting them comfortable with the seller second will be important.  Since you don't have a prior relationship these types of deals are more difficult.  They will probably want at least 10% into the deal.   SBA is also an option but will take 90+ days to close.  If you are able to get an SBA loan that is the best option.  Owner occ/operator helps with the loan.  They will generally want 10-15% into the deal and I don't think they allow seller seconds (but I could be wrong).  

Recap with bank financing & seller second:

Bank financing at 75% LTV, loan amount 525k

Seller 2nd mortgage of 15% PP, loan amount 105k

Buyer comes to the table with 10% or 70k plus closing costs etc.  

This is probably your best case scenario with a bank. The bank will also have to verify your DSCR including the seller second. Good luck!

@Kyle D. 

I want to know as well...let me know if you find out.  I might actually go to the psychic later, I'll make sure to report back with the correct date and time.  

All joking aside, this is very hard to determine.  No one has a crystal ball and real estate is extremely local.  So what's happening in my market might not be happening in yours and vice versa.  Cap rates have compressed a lot, and we are seeing sub 4 & 5 caps depending on the area and property type around the country.  A lot of that is fueled by low cost debt.  Some of it is fueled by foreign investment.  Add in strong demand (& supply that hasn't caught up yet) and you have the perfect mix.  The future of multi-family pricing has to do with demand, supply, interest rates, and inflation.  It is so difficult to predict all of those items.  

If you can't find a multi-family property that fits your investment criteria then you might want to look at other property types.  If you purchase correctly, in stable or growing areas, with fixed debt (as long as you can fix it), maintain your asset, & achieve cash flow (not over leveraged) then you should be okay.  If you are trying to speculate and hope for market growth & appreciation (when the deal doesn't work otherwise) then you might be in trouble. 

@Stephen Weber 

Given your most recent comment about taking an equity position & holding a 2nd on the property I would give more deal specifics including property type, deal size, structure including debt/equity financing, basic financials etc.  It's definitely something you want to go through with an experienced SEC/Blue Sky attorney.  If it's a 1-4 residential product it probably wouldn't conform with Dodd Frank (I'm not the expert on 1-4 or Dodd Frank).