All Forum Posts by: John Jacobus

@Brandt Hollander You're welcome.  Another thing came up today that made me think of this thread.  I'm a regular listener of Joe Fairless's Best Real Estate Investing Advice Ever podcast.  Today's episode may interest you as Joe covers the key areas that he includes in his monthly updates to investors.  I have invested with Joe and can attest to the effectiveness of his monthly updates.  Check out episode #969 below for more recommendations and best practice advice on this topic.

https://itunes.apple.com/us/podcast/best-real-esta...

@Brian Linton I found the team at Old Capital Lending to be extremely helpful in outlining the financing available for multifamily acquisitions.  James Eng walked me through the details and provided a white paper explaining the primary capital sources and underwriting guidelines.  I recommend that you reach out to a commercial RE mortgage broker in your target markets and/or review Fannie Mae and Freddie Mac loan programs and underwriting guidelines published on their public websites.

@Isaiah Turner Your logic is reasonable. Determining the annual cash flow as a percentage of the initial cash outlay to acquire the property is the conventional way to calculate CoC return. As long as your additional capital improvements don't require a capital call or additional raise of equity, then it is reasonable to leave the investment basis (the denominator in the equation) alone.

You are correct that the cap ex reduces the numerator (cash flow) in the equation.  Therefore, it doesn't make sense to adjust the denominator unless you require an incremental equity injection in order to complete the capital improvement.

The way I think through this is from a passive investor standpoint.  I hand my initial capital to the sponsor (the denominator in the equation) and receive annual cash flow distributions (the numerator in the equation).  Throughout this period, the sponsor may make additional capital improvements to the property but the initial capital provided has not changed.  Therefore, the denominator is unaffected despite the fact that the numerator is reduced by cap ex.  

Hope this helps.  If you are looking for educational material on this topic, I recommend the following books which I found valuable:

1. What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures by Frank Gallinelli

2. Is This a Deal?: How to Analyze, Finance, and Manage a Multiplex by Ben Leybovich

@Brandt Hollander  I have read hundreds of investor letters and general status updates to capital partners. I've found that a majority of the effective investor update letters include some or all of the following:

• Detail on key accomplishments or events that have occurred during the quarter
• Information and status updates on major in-flight activities that span multiple quarters
• Detail on issues and risks that have emerged since the last update
• Financial update: actual results relative to plan with commentary on major variances from plan
• Relevant information affecting your market, asset type, macro-level detail
• Administrative detail affecting LP's/Members (i.e., tax matters, upcoming distributions, capital calls, etc.)

Here are a few things to keep in mind when deciding how to move forward with architecting the format of your periodic updates to investors:

• Tailor the level of detail to your investors. Analytical types will want more detail, in which case I recommend that you provide links to supplemental materials that they can review (T12 financials, current rent roll, bank statements). Others who are more passive and may not have the background or interest in the detail will just want key highlights. You will need to strike a balance based on the personality and professional background of your investors. My personal preference is to provide high level bullet points with links to supporting materials for those who want to dig into the detail.
• There are a variety of options with respect to the medium that you employ. My personal preference is email + recorded conference call/webcast. Consider one or a few of the following:
  • Email
  • Recorded conference call/webcast
  • YouTube video
  • Narrated webcast
  • PDF/Word document (formal letter)
• Focus only on what's relevant and important. My personal pet peeve is when investment managers provide long narratives on the economy, the geopolitical landscape, provide reckless forecasts, and opine on other macro topics in their quarterly updates. This is usually irrelevant and, most importantly, deters your investors from absorbing the relevant information affecting your asset. Your primary goal as a sponsor is to ensure that your investors hear and absorb the key events, issues, and risks affecting your asset that have come up in the latest period. With this in mind:
  • Don't overwhelm your investors with detail.
  • Be transparent by disclosing the key information that you would want to know if you were in your investors' shoes. Don't go overboard with detail.
  • Encourage your investors to reach out to you separately if they have questions or need additional detail.

Below is a sample template that mirrors some of the advice above. I recommend using email while also providing a link to a recorded webcast where you cover the details of the period and perhaps run through Q&A with another partner, property manager, or other member of your team.

Medium: Email + link to recorded webcast

Frequency: Quarterly

Example:

Subject: Q1 2017 Partner Update - Wobegon Plaza

It's been quite a quarter at Wobegon Plaza, out here on the prairie. We continue to execute better than expected despite the fact that our property is in a town that time forgot and decades cannot improve. While the key highlights of the quarter are summarized below, consider viewing our recent webcast <hyperlink> where I cover the details of the quarter and answer several questions that I have received in the past few months. Additionally, please do not hesitate to contact me at XYZ ZYX with additional questions. Thank you, as always, for your partnership. It’s an honor to be a steward of your wealth.

Key Accomplishments:

• February marked our successful transition to a new property manager, Lakeshore Partners. We are thrilled to have the most experienced small multifamily operator in the market as our partner and have already seen tangible positive results stemming from their new operating plan. Join us on our webcast <link> where we interview Gary Keylor, Operations Manager at Wobegon Plaza, and cover our short-term plans for enhancing resident engagement, driving rent growth, and addressing recent crime at Wobegon Plaza.
• We continue to make progress with implementing a RUBS program throughout the property. As of March 31, 75% of our units are enrolled in the RUBS program, up from 35% last quarter. We expect to complete the roll-out by Q2 2017 and are projecting $40,000 - 50,000 annually in incremental operating income.
• In our last update, we announced our plan to upgrade half of our units to "Premium Units" with the goal of boosting rents by 30% and attracting higher quality tenants. In Q1 2017, we completed upgrades of 4 units, all of which have been leased at rates 27%-32% above prior leases. We will continue to upgrade units as leases expire until we hit our goal. At this point, we anticipate all planned units will be upgraded and leased by the end of Q4 2017.

Financial Update:

• The property is currently operating at 94% occupancy, consistent with the past two quarters. <Link to Rent Roll>
• We are trending above plan for our trailing 12 month NOI as a result of rapid enrollment in the RUBS program. Detailed financials with actuals relative to plan can be found here . I provide highlights on key variances to plan in our webcast
• New units are leasing at rates $25-$30 above expectations last quarter. We will continue to be aggressive in driving growth in rents as we expect to benefit from the thriving business ecosystem of the greater Lake Wobegon area.

Capital Improvements:

• As mentioned above, we completed upgrades of 4 units to "Premium Units". I recently toured an upgraded unit and have included pictures <link to pictures>. Our new and existing residents really like the glass tile and stainless appliances, and they're willing to pay ~30% more than current levels for these amenities. We have received significant interest in our upgrade program from existing residents and now have a waitlist for completed “Premium Units”. We are encouraged by this recent success and are confident about executing the upgrades for the remaining units by the end of Q4 2017. We've included our pro-forma reflecting the anticipated timing of the upgrades and resulting rent increases for the upgrade program <link to pro-forma>.
• Our dog park is complete. The final expenditures were $2,000 less than projected due to the favorable weather in March. I’ve included pictures from our opening day <link>

Issues and Risks:

• We suffered damages to our roof during last month's hail storm. Repairs are in progress and it will cost $10,000 to restore the roof to normal working condition.
• Several burglaries have been reported in the past 6 weeks. Gary at Lakeshore Partners is working closely with the local police to determine an action plan. Join our webcast to learn more about what is being done and considered to address this issue.

Lake Wobegon Market Update:

• Lake Wobegon has long been a magnet for business due to it's reputation as the town where all the women are strong, all the men good looking, and all the children above average. It seems Google and Amazon have taken notice with their recent announcements (link 1, link2) to open new data centers in the northwest industrial district. 5,000 new jobs are anticipated as a result of these announcements. We believe we can attract a portion of the new employees to Wobegon Plaza with our “Premium Units” and our proximity to the new job sites.

Partnership Matters:

• All partners should have received their form K-1 in February. Please contact me for assistance.

@Michael Bracken The key is finding experienced partners who have successfully analyzed, acquired and managed properties that you aspire to own. While multifamily investment groups can be a good source of experience partners, it's not the only place to look for the expertise and advice that you seek. Consider consulting with a mortgage broker to gather a conservative perspective on your underwriting, review your business plan and pro-forma with a local property manager who has experience managing properties of similar type, class and location, and/or build relationships with local deal sponsors and operators by attending local REI events or meet-ups.

@Sal Zafar Reach out to Nick Sotta who is part of Nick Fluellen's team at Marcus & Millichap in Dallas.  Nick's team specializes in multifamily property under 75 units.  They are very active in Texas and may be able to assist you.  I provided a link to their site below.

http://multifamilyadvisors.com/

@Jeff Langham A few ideas to consider:

• I recommend looking into a few multifamily investor meet-ups in the area around that time.  There is an active community of multifamily investors in the DFW area so there are likely to be several events over the summer.  
• Brad Sumrok is holding an event July 15-16.  While his weekend seminars cost ~$200, they are a good way to quickly meet other like-minded investors and also get a sense for the basics of multifamily investment principles.  
• Reach out to James Eng, Michael Becker and/or Paul Peebles at Old Capital Lending.  They are very active in facilitating loans to multifamily investors in Texas.  They can provide basic education on lending sources for multifamily investment, tips for new investors, and recommend property managers and brokers in the area that are aligned with your interests.  They also hold events throughout the year with expert speakers.

@Brandon Sturgill I found the resources below to be the most influential while learning to raise capital to acquire large multifamily property.  I also identified a few individuals who were actively acquiring large multifamily property and reached out to them, read their books, listened to their podcasts, attended their workshops, etc.  Some of those who were most helpful were:  Mark Kenney (Think Multifamily), Brad Sumrok, Joe Fairless,  Brian Burke (Praxis Capital), Michael Blank, Brian Adams (Adams Investor Group), James Eng (Old Capital Lending), and Vinney Chopra (Moneil Invesments Group).

Books:

1. Wheelbarrow Profits by Jake Stenziano and Gino Barbaro - Focuses on purchasing, financing, and re-positioning "mom & pop" multi-family apartment communities.

2. The Ultimate Guide to Buying Apartment Buildings with Private Money by Michael Blank - A step-by-step overview of how to identify multi-family apartments and raise money from private investors to acquire and re-position them.

3. The ABC's of Real Estate Investing & The Advanced Guide to Real Estate Investing by Ken McElroy - Solid detail on the process as well as case studies and advice based on personal experience.

4. The Complete Guide to Buying and Selling Apartment Buildings by Steve Berges - A nice overview of the apartment investing process from beginning to end with case studies and personal stories.

5. How to Create Lifetime Cash Flow Through Multifamily Properties by Rod Khleif - A nice overview of the apartment investing process from beginning to end with case studies and personal stories.

6. The Perfect Investment: Create Enduring Wealth from the Historic Shift to Multifamily Housing by Paul Moore - I enjoyed this because it outlines the merits of multifamily relative to other investment options.

7.  It's A Whole New Business by Gene Trowbridge - A detailed overview of the syndication business.

Podcasts:

1. Old Capital Real Estate Investing Podcast - Lots of good stories about newbie investors getting started with multi-family investing

2. Wheelbarrow Profits Podcast - While they have a variety of different guests, Jake and Gino have several interviews with individuals who have scaled quickly and achieved success in the multi-family arena. The Jake & Gino personal story is also a great success story in the value-add multi-family area.

3. Apartment Building Investing with Michael Blank - Same comments as Wheelbarrow Profits

4. The Lifetime Cash Flow Through Real Estate Investing Podcast with Rod Khleif 

5. Best Real Estate Investing Advice Ever with Joe Fairless - I recommend the "Follow Along Friday" episodes to you. In these episodes, Joe shares updates on his investment activity and shares lessons learned, mistakes, and best practices from acquiring multifamily properties. He has scaled from 3-4 SFR's to ~2,000 multifamily units in just a few years.

@Tj Hines While Kevin Bupp is focused on mobile home parks now, he has owned multifamily property in Florida.  I recommend reaching out to him and getting a sense of who he thinks can help you in his network.  He's in the Tampa area and encourages other investors to reach out for a phone discussion or coffee.  Rod Khleif may also be a good option as he is active in Florida as well.

@Shaheed Crier To the point above, you don't have enough information to develop an informed view of the property's value. While you can use an estimate of 50%-60% of gross rent for operating expenses to arrive at NOI, you'll definitely need to get a better sense of the details by requesting the T12 and rent roll from the broker.

To give a ballpark range of value based on crude estimates and rules of thumb, consider the scenarios below. Keep in mind that the scenarios below exclude any deferred maintenance (which may be considerable for a 45+ year old building), which would be applied after NOI ("below the line") and other meaningful details such as other income, vacancy, etc.

Scenario 1 - Assume 50% Operating Expenses

• Gross Rents:  $89,400
• Estimated Op Ex:  $44,700
• NOI: $44,700
• Estimated Value: (NOI/Cap Rate) = ($44,700/5.22%) = $856,322

Scenario 2 - Assume 60% Operating Expenses

• Gross Rents: $89,400
• Estimated Op Ex: $53,640
• NOI: $35,760
• Estimated Value: (NOI/Cap Rate) = ($35,760/5.22%) = $685,057