All Forum Posts by: Stuart Udis

“The office of Dutch Mendenhall” is raising capital for exciting new opportunities. @Dutch Mendenhall surely won’t respond but @Brent Mendenhall is clearly still active….Perhaps he has some insight into his brother’s new business ventures. 

Congrats, make sure you get your rental license activated as soon as possible. Even if past owner's was active and has not expired, a new license is required with ownership change. If this is a property that's subject to lead testing, check with past owner. Their reports, should still be accepted depending on how long ago they were completed.

@Adrian Au Without knowing the debt terms for the refinance there’s no way of confirming  the cash flow assumptions but back of the envelope calcs suggest the cash flow will  be less than $400/m on $1,200/m rentals. 

Using round number a $150,000 loan amortized over 25 years at 7% interest is $1,060/m. With the loan terms I provided as an example and 30% expense ratio you are below $400/unit. I would imagine you are anticipating a loan of more than 46% LTV.

If you believe my 30-35% expense ratio is off, I want to remind you with operating real estate the costs are the costs. By this I mean many costs associated with a $1,200 unit will be the same as a $2,000 unit in the same market. Let’s just assume the $1,200/units are 1 beds. When that sink leaks it costs the same to repair as the sink in the $2,000 unit bathroom. When the exterminator has to be scheduled it costs the same. When the curb trap has to be replaced it costs the same etc etc. Therefore the $1,200 rental struggles to absorb the costs as well. I’m not suggesting owning $1,200 rentals are bad investments, but I wouldn’t expect $400/m in cash flow unless you have very low levered and or cheap debt. 

Next, GRM is particularly meaningless with lower cost rentals. Remember they are disproportionately impacted by cap ex and operating expenses. You should throw this out entirely.

Last, to temper expectations it’s very difficult to replace W2 income with cash flow. Very few succeed. Most who are able to pursue real estate in place of W2 employment are able because they collect fees from an affiliate service (normally construction) or develop with a healthy pipeline where fees are built into their projects. 

@Kris Stack There's no scenario involving real estate cash flow, collateral and fundamentals that suggest making an LP/JV investment can yield an 8-15x return in a few year hold period. Just the spread of 8-15x should have presented a red flag let alone being "promised" even the low end 8X result.

In scenarios like this, there's rarely a favorable result for investors unless the GP/Operator makes a miraculous come back and judging by leaderships apparent pivot to the guru circuit education model and large number of staff members either leaving or being fired, this suggests the investments are not ripe for a comeback. There's videos online of Dutch boasting about finally having his own executive bathrooms in their Tampa offices and Amy Vaughn looks like the female version of Mr. T in most photos you see of her online.  If you were looking for evidence of waste look no further. 

 Until new information surfaces suggesting they have collateral that can be turned around I stand by my position that spending more on pursuit of lost capital is probably going to end with nothing more than judgments worth as much as the paper they are printed on. My hope in pointing out that when investment terms appear to be  too good to be true, will lead investors to consider this before making the same mistake. That advice is inclined to help more people than recommending more money is spent on legal in pursuit of lost capital.

Finally to your your RV park. It's not only speculative but it is 100% levered with a preferred equity partner, and two lenders who are all priority creditors to you. You could also make nothing on that deal. Its also a deal that can't be compared to your RAD deal where you already admitted to investing $300K. You can't compare return in two deals where one is 100% levered and the other requires you to invest $300K. The question you have failed to answer is how you expected to yield an 8X return on a $300K passive/JV investment.

People make this out to be some new strategy but its simply smart use of leverage when paired with good real estate. Good real estate development and investment yields returns that far exceed the cost of borrowing so leaving equity tied up in transactions rarely makes sense. Unfortunately, most who pursue the BRRRR strategy buy lousy real estate where the paper equity rarely performs remotely close to the appraisal in an arms length transaction. These are usually the investors chasing doors believing if they reach xyz doors they will be financially free, be able to leave their W2 etc. Unfortunately for them, they fail to realize they are really levered much higher than 75-80%. Some get lucky when their markets appreciate but many end up writing checks to sell their properties. That's the use of BRRRR investors want to avoid but many equate return of capital as success in this business which is often the wrong approach.

@Kris Stack With the balance sheet you appear to have, something isn't adding up. It's normally the little guy investing $5K in syndications who drinks the Kool-Aid expecting 8-15x returns in a real estate deal. There's nothing to suggest RAD ran a Ponzi, they just appear to be terrible operators who managed to raise a lot of money. That has nothing to do with 8-15X return expectations. Even the best operators don't yield those types of returns.  What knowledge and patterns led you to believe that type of return profile was attainable? I am sorry but nothing you wrote adds up.

@Savannah Wallace If there's a mortgage (which applies to most properties) the signature line on this recorded document will contain the member's identity.  This is an easily accessible public document. Confusing anonymity for asset protection is one of the biggest misconceptions that's consistently echoed in these forums. It's also consistently the novice investor with no balance sheet to speak of who is petrified of "losing everything" and who get caught up spending too much of their time and resources creating these unnecessary entities falsely believing they are invincible. Meanwhile they run reckless businesses due to their perceived invincibility.  It's a huge problem.

As others have already noted what does "20 doors" achieve? Most who are chasing doors have in their mind a precise amount of cash flow they anticipate generating per unit and believe acquiring a set number of units will help them achieve financial freedom, the ability to leave their W2, perhaps allow their spouse to leave their W2 etc. Unfortunately that's not how real estate works and I caution you not to approach real estate through that lens because it will lead to poor investment decisions. 

@Zach Logan I commend you for recognizing the easier absorption of many cap ex items as well as operational expenses associated with owning real estate. Many who fail as investors purchase lower cost real estate and get drawn in by their spreadsheet cash flow without understanding the true costs associated with keeping those properties running. I am not recommending you purchase a $400K quad that yields $200/m in cash flow, but I do recommend you focus on identifying good real estate acquisitions that are in that price range instead of the entry $100K properties. 

The one caveat is the 95% financing. I am generally opposed to financing any real estate at 95% LTC although I will admit, the ability to acquire an FHA property (at even higher leverage) in a neighborhood with strong fundamentals that experiences a significant appreciation event is possibly the greatest return an investor can generate. However, with that comes risk and most who are qualifying to purchase FHA properties are not in the position to run the necessary analysis correctly.

On the flip side of that argument, I would rather have a 95% LTC loan on a $400K property in a historically stable neighborhood than a 95% LTC loan on a $100K lower tier neighborhood. One cap ex event and I am already under water with the $100K property. Again 95% leverage yields greater risk in general but to present this point another way, I would sleep better signing my name on a $7M loan collateralized against a $10M multi-family property with great occupancy history and good reserves  in a A/B location than a $95K loan on a C/D  property because I am more likely to be called upon to cover a deficiency with the $100K property. I realize debt can be scary as a new investor, but understanding the collateral is incredibly important.

@Vaughn Ramcharitar Who is the natural buyer? That  hasn't been discussed and is important to the disposition strategy.  If this is a portfolio of homes in neighborhoods with low home ownership than selling these homes individually is going to be a monumental task and selling as a portfolio or perhaps in multiple packages will make most sense because an investor is the logical buyer. If these are homes in neighborhoods that always were (or even better for you) transitioned to neighborhoods where home ownership has increased, chances are there's a lot of equity and the best buyer, depending on condition may be to sell to home owners. This requires analysis by local real estate sales people who are experts on the markets where the properties are located. Understanding who the natural buyer is should come before assessing tax strategies.