All Forum Posts by: Stuart Udis

@Colin Smith I believe what's missed here was Jay's interest in using a strategy that allows for him to refinance out his initially deployed capital while using very little of his own money. New construction is one of the more capital intensive real estate investments. Not only will the leverage, especially for an inexperienced developer be lower, significantly more cash is required to advance the construction as you can't solely rely on the draws (particularly in the beginning since construction loan draws are funded in arrears). Also, who is going to build a one-off duplex as a 3rd party GC? Good GC's will have two attributes: financial means and knowledge. Anyone who possesses both attributes is more likely to build for themselves or if they will undertake 3rd party work they will look for larger and more profitable engagements. The owner of land looking to build a one off duplex is going to either have to pay a premium to hire someone competent or be stuck with a weak GC. Lastly, with the current interest rates adding additional finance charges to the transaction it will be difficult to refinance out the invested cash. 

I am not saying new construction is not feasible but it's not the right investment vehicle for Jay's desired strategy. I will also add nobody should get involved in real estate if they believe investing can be done with little or no money. Anyone who is teaching this methodology is doing a disservice. Chances are if you succeed in using this strategy successfully the best asset you will acquire is a "C" or "D" location small scale rehab in a zero barrier of entry market that will only sell to another investor and any equity that might be shown on paper will never materialize to an actual gain. This is what the "gurus" teach because it is easy to show quick & measurable results to justify the fees they charge.

Resist the temptation or pressure to make real estate acquisitions based on what you see others doing. Depending on your financial background this could play a role in ability to scale. But more frequently those who appear to scale portfolios quickly are either lying as Chris correctly stated or are highly leveraged and/or are fee developers who own minimal ownership interest and are backed by LP equity.

You also shared your objective of holding your assets for a long period time. In most instances if you are reliant on outside capital, there will come a time where you are forced to sell which is usually not in the best interest of the underlying asset or the sponsor. Unless you have access to outside LP equity (not mezz or high interest accruing pref equity) that is closely aligned with your objectives my advice is to stay the course. What you are doing with conservative leverage will set you up for success. 

There's no one size fits all structure. A successful structure is dependent on the underlying investment opportunity, the cost and access to capital, and in my opinion, most importantly, the human capital involved. Using your 50/50 JV structure as an example and assume the investment opportunity pencils well:

What happens if the on the ground operator who is responsible for managing the project is a bad operator? The project likely fails

What happens if the partner responsible for the funding misrepresents his access to capital and there is a short fall? The project likely fails

Also, what if the operator is very strong? Can this person add value to the project that others cannot? On the flipside does the funding partner have access to capital that is at a lower cost than others can source? Similarly, this can add differentiated value to the deal.

If you are seeking a JV where one partner is responsible for funding and the other for on the ground management, no matter which role you fill, seek out a partner who has a skill set that can add value to the deal. Also, make sure you properly vet your JV partner and don't merely rely on the credentials they share.

You can make a buy, renovate and re-sale opportunity work in any stage of a market cycle. When you are flipping a home, remember you make your money when you purchase the home (assuming you can execute on the construction phase) & you should focus your attention on the acquisition. Assuming you find a good development for re-sale opportunity, they are usually easier to finance in today's interest rate environment because the lender will focus on the costs and whether there is a good thesis behind the as complete sale figure. Meanwhile, with rental/assets you intend to hold lenders are leaning on DSCR and even if the appraisal is coming in strong, the lenders are pushing back on leverage citing the interest rate impacts on the DSCR.

Investing in real estate is capital intensive. There's a lot of courses and "gurus" out there who will suggest investing can be done with little or no money. This is merely to solicit mentees and buyers of their courses. Even Preston's example will do some who read this forum a disservice. Don't believe $19,000 is a sufficient amount of funds to execute a $480,000 total cost real estate opportunity. To elaborate:

 The borrower in that scenario would have to pay for builder's risk and general liability insurance prior to closing &  it's also not clear whether the closing costs were included in the $120,000.00 budget. But let's focus on the interest payments.  Regardless of whether the interest payments were capitalized or paid outside of the loan (as is the case in Preston's example) what happens if there were delays and the interest reserve was depleted before the project is completed? The borrower was now paying out of pocket to cover the interest and this will be when the loan has been largely drawn down and the payments are at their highest. Or alternatively what happens when there were contingencies and the loan proceeds that were set aside for loan payments were required to complete the renovation. Borrower was still short cash to either complete the project or pay their loan payments. 

Focusing on the renovation, the borrower required funds to not only begin the rehabilitation phase but the borrower would need additional funds to continue to advance the project. Whether the borrower used a 3rd party GC or oversaw the construction improvement, funds drawn through a construction loan are released in arrears. The borrower couldn't rely solely on the loan proceeds to efficiently move the project towards completion. Funds are needed at the beginning and funds are needed to make purchases for the longer lead time items such as kitchens, appliances, windows etc. Don't expect to find a sub-contractor base who requires no deposits (this is rare in the price point of this example).

Now fast forward to when the project is stabilized. If the borrower couldn't sell or the objective was always to refinance the property, most lenders want to see their borrowers have liquidity (otherwise the borrower's signature as a guarantor is worthless). This leaves the borrower with two options: bring in a co-guarantor who will take a piece of the deal or struggle to refinance and if the borrower succeeds on their own, the terms will be terrible.

Cash is necessary to successfully invest in real estate.  It doesn't necessarily have to be your own, you can raise capital. However, there are a lot of real estate investors who get themselves in trouble by getting started without being properly capitalized.  Being undercapitalized is just as likely to lead to a failed real estate investment as bad underwriting. 

My objective is not to scare people from investing in real estate. I merely want to those who are interested to understand what is required to succeed.

I don't want to discount the steps you are taking but seek out internships with hands on operators and be open to assisting with the most remedial property management & construction management aspects of the business. The future version of yourself will thank you. Most of successful operators I've come across understand every aspect of their underlying business and this comes from a hand on approach. I will invest my money with a someone who has a strong operating background over someone who has the ability prepare fancy spreadsheets.

When it comes to flips, you make your money on the acquisition. It doesn't matter how well you manage the construction, if the profit margin isn't in the opportunity you will not make money. Before you concern yourself with taxes and the cost of originating your debt you should really be focused on the acquisition. Since you appear to have construction management experience you may be suited to GC your own projects. This gives you an upper hand and if taxes are concern perhaps you should explore rental assets that require significant renovation budgets. This will allow you to realize cash flow through the construction management while not incurring the tax burdens you rightfully want to avoid.

The legal lending limit is the maximum a bank can lend to a specific borrower. This will vary depending on the bank. This is why it's important to grow your banking relationships and spread your loans across multiple lenders. As you become more familiar with specific lenders you will also learn specific acquisitions or refinances may fit better with certain banks and will dictate who you send your loan requests. Its also best to build relationships when you don't necessarily need a loan. Learn their lending parameters and work off the list when financing opportunities come up.

I don't personally own any properties leased to housing choice voucher recipients but heard from others who are having trouble leasing their properties. They are citing a lot of inventory competing for the same tenants. These landlords from what I understand have properties in marketable locations and doesn't seem as if it's the particular properties that's the issue. I have also personally seen a big push towards investing in affordable housing. It's a low barrier of entry asset class, especially the single-family homes and small multi-family properties in cities such as Philadelphia which I assume has also led to an influx of inventory. I suspect the increased rents will cause more investors to turn to the program which may cause more lease-up issues. This is merely what I am hearing along with some suspicions. Others who are active within the program may have other intel to share.

If the motivation behind leaving your W2 employer is to "travel and live freely" and believe real estate is the solution you are likely making the wrong career decision. This is especially the case in the early stages of building a portfolio and even more so if you intend on flipping homes which is more hands on. Unless you have a sizeable amount in savings to cover your living expenses without the need to tap into those funds to cover business related expenses the two groups who generally fair the best with the transition away from W2 employment who haven't already built a portfolio while employed are individuals who have a construction background, can self-perform their own construction where they can use the construction management fees as a salary from day one or alternatively individuals who have the backgrounds that allow for the immediate move towards larger fee driven syndicated opportunities where fees can serve as a runway. If you are planning to buy fix and flip properties and or small rental assets that don't possess heavy rehabilitation budgets where you are collecting the construction management fees it's very difficult to make the transition without a sizeable amount saved to cover living expenses. You will also be far less marketable in the eyes of a lender, especially without a track record.