All Forum Posts by: John Jacobus

@Dahl Brandon I use Michael Blank's syndicated deal analyzer.  It is one of the few that I've encountered that let's you model various partnership scenarios and allows you to understand syndicator vs. passive investor returns.  Go to the site below to see a live demo of the tool.  Michael's YouTube channel also has several recorded demos which you can review before you decide to move forward.

http://www.syndicateddealanalyzer.com/

@Account Closed  This is a small nit, but I think you intended to have "# of Units" in the column headers of your table above rather than "# of Properties".  This is based on the fact that you mentioned multifamily in your post and outlined that you intend to generate "$150 of cash flow/unit/month".  Building a plan based on # of units is common and will help with consistency when projecting cash flow/unit and acquisition cost per unit.

I've included a few comments and items to consider below as well as an alternative way to approach your plan based on a set of revised assumptions.

The alternative model below is based on the 17 column definitions listed below.  I have included a definition of each column, the revised assumptions where applicable, and additional items to consider.  I hope this helps you refine your plan and move forward with greater certainty.

Column 1 - By End of Year:  Self explanatory

Column 2 - # of Incremental Units to Acquire Per Year:  Self explanatory.  You may consider being more aggressive with scaling after you have a few years under your belt.  Many experienced investors find that they gain significant momentum after the first few years of measured progress.

Column 3 - Total Cost of Incremental Units/Year (Assuming $60k/Unit):  Column 2 x $60k.  In your original plan, it appears that you assumed each unit will cost you $100k to acquire.  While this will fully depend upon your market and the class of property/neighborhood in which you invest, this price/unit seems high based on the rent per unit you are assuming (i.e., $600/unit).  I apologize if I've misunderstood your rent/unit assumption but I moved forward with this in the spirit of providing an alternative perspective.  The model below provides an alternate way to look at things with revised assumptions based on $600/unit in rent and the "1% Rule" ($60k price/unit generates $600/month in gross rent/unit).  You may have heard of the "2% Rule" in various BP forums but I've found it very difficult to find property that meets this rule.  Properties that meet the "1% Rule" are much more abundant.  Your ability to generate positive cash flow will depend to a great extent on the ratio of price to rent in your market, the leverage you employ to acquire property, the financing terms you're able to obtain, and your ability to manage operating expenses.  I recommend that you review your target market and property class to determine the appropriate median price/unit and monthly gross rent to include in your model.

Column 4 - Assumed Rent/Unit/Month (Assuming 1% Rule):  Explanation included above.  Check your target market and adjust accordingly.

Column 5 - Total Incremental Rent/Month:  Column 2 x Column 4. 

Column 6 - Operating Expenses/Month for Incremental Units (Assuming 50% Rule):  Column 5 x 50%. You may need to adjust this upward based on the class of the property that you acquire.  However, the 50% rule is OK as a starting point for modeling/planning.

Column 7 - Net Operating Income/Month for Incremental Units:  Column 5 - Column 6.  Please note that this ignores monthly cap ex reserves which will further reduce the projected cash flow outlined in Column 13.

Column 8 - Financing Required to Acquire Incremental Units/Year (75% LTV):  Column 3 x 75%. Your plan didn't outline your financing assumptions. The debt service is a key factor in determining cash flow. While the allowable LTV will vary by lending source, 75% is a conservative starting point for planning purposes. This can range from 65% - 80% for multifamily investment property.

Column 9 - Down Payment (25% LTV) & Closing Costs (5%) Required to Acquire Incremental Units/Year (Total 30% of Purchase Price): Column 3 x 30%. As stated in my comments in Column 8, your LTV will vary based on lending source. However, your model should account for a down payment in addition to closing costs.

Column 10 - Rehab Cost for Incremental Units/Year (Assuming $5k/Unit):  While this is optional, unless you are purchasing turnkey property you will need to invest capital to upgrade your units.  While the capital required depends heavily on your location and property class, this could range $2k-5k for basic upgrades such as paint, flooring, appliances, and fixtures.  Consult with a local multifamily broker or property manager to refine this assumption.

Column 11 - Total Capital Needed per Year to Acquire Incremental Units:  Column 9 + Column 10.  Things to consider:  Will you raise capital from others?  Will you come up with the capital from your own funds?  Your ability to scale quickly will depend on your ability to raise capital from other sources (i.e., passive investors, joint venture partners, etc.).

Column 12 - Total Monthly Debt Service - 75% LTV; 25 Yr Amortization @ 5%: I didn't see any assumptions related to debt coverage in your original model. As you can see, this reduces monthly cash flow significantly. While the loan parameters will vary by lending source, it's unlikely that you will obtain >80% LTV, >25 Year amortization and/or <4.5% interest as a new multifamily investor. Things to consider: As you start out, you can expect to pay higher interest rates (5+%). Additionally, consider that interest rates are at historic lows. Therefore, 10-year financial projections such as the plan you've created should factor in elevated interest rates in the future; this is subject to a wide margin of error as nobody can project what will occur with interest rates with any precision. Also consider that amortization periods of 20-25 years are common for multifamily investment property. You can expect shorter terms when you start out which will increase your monthly debt service and reduce cash flow.

Column 13 - Cash Flow per Month Generated by Incremental Units Acquired During the Year:  Column 7 - Column 12.  Notice that the revised model produces significantly less monthly cash flow than you had originally assumed.  The debt service was the major factor impacting the cash flow.  Also consider that you'll need to set aside cap ex reserves to handle unexpected issues.  To boost monthly cash flow, you can explore opportunities to reduce operating expenses below 50%, boost rent (note that the model assumes rent will stay constant which is probably too conservative), lower your leverage, or obtain more favorable financing terms.  To maximize cash flow, focus on high yield markets (i.e., those with low price-to-rent ratios).

Column 14 - Total Cash Flow per Year Generated by Incremental Units:  Column 13 x 12 months.

Column 15 - Total # Units Owned:  Sum total of Column 2 at end of each year.

Column 16 - Total Cumulative Cash Flow per Year:  Sum total of Column 14 at end of each year.

Column 17 - Total Asset Value Assuming No Appreciation (Assuming $60k/Unit):  Column 15 x $60k.

Other Comments:

- To reach your goal of $150k annual cash flow, you'll need to scale faster, boost rents over time by executing value-add initiatives (BRRR strategy), raise more capital / reduce leverage, and/or obtain more favorable financing. It's also worth considering that certain markets provide better cash flow than others. Review the comments in Column 3 above to refine your assumptions regarding price per unit and rent/unit. If cash flow is your goal, seek markets with a low price-to-rent ratios (i.e., high yield markets).

- As mentioned above, after you have a few years under your belt, it's fair to assume that you will be able to accelerate your growth.  Many investors find that deal flow and acquisition pace increase after a few years of successful execution.

- As you acquire larger multifamily properties, you may be able to obtain more favorable financing terms, which will lower your monthly debt service and increase cash flow.

- Use models such as the above/below as a guideline, not a precise plan.  Develop a base case, pessimistic case, and optimistic case to build a range of outcomes.  The goal is to develop a reasonable set of targets based on conservative assumptions. 

- Using $40k to get started with multifamily investing is a sound approach.  The fact that you're modeling future cash flows and developing a conservative plan of execution over 5+ years is a good indicator of your future success.  Too many investors execute at an unreasonable pace in the hopes they'll get rich quick.  Additionally, few focus on cash flow and build projections to guide their activities.  Both result in eventual failure.

My top 3 struggles are:

1) Deal flow - developing consistent access/visibiilty to quality B & C class multifamily opportunities in DFW, Atlanta, and Phoenix where the numbers make sense

2) Broker relationships - developing relationships with brokers who understand the investor's mindset/values and share quality opportunities with their clients

3) Capital - gaining access to additional pools of patient/permanent capital to invest in quality B & C class multifamily opportunities 

@Anthony Smith Brad Sumrok's group is very active in Texas.  He and other lead sponsors in his group invest in Houston and several other markets in Texas and beyond.  Brad's group has significant brand and reputational equity in Texas, which helps with deal flow, attracts capital from investors, and simplifies the process of obtaining financing from lenders.  The team has a solid track record of closing which is very meaningful in this industry.  

Brad holds educational events approximately each quarter.  The next one is July 15-16 in Dallas.  The event will provide you with an opportunity to meet other lead sponsors and like minded investors.  You may also benefit from the educational content and bus tour.  For more information, Google "Brad Sumrok" and look for his "Rat Race 2 Retirement" event.  Keep in mind that the main focus of the event is to attract new students to his mentoring program.  However, I believe the event offers significant value to those who aren't interested in joining the mentoring program.  I attended the event last weekend and found value in networking with other deal sponsors, passive investors, and mortgage brokers.  I also enjoyed hearing success stories from others who have achieved significant milestones and touring 3 apartment communities owned by Brad's students.

In addition to Brad's group, I also recommend looking into Think Multifamily.  Mark & Tami Kenney are active in Texas and Georgia.  They also lead networking events in Texas.  I attended their last 2-day educational conference in January and found it worthwhile.

@Katerina McKnight  Further to Dan's and Geoff's feedback, you will need to budget for general maintenance expenses in addition to cap ex. Geoff outlined the framework that will allow you to calculate your NOI. However, cap ex reserves are typically a "below the line" item, which means they are deducted as a line item after NOI is calculated. The result of this is the true cash flow for the unit. For a single apartment unit that is part of a larger community, your cap ex reserve will be lower than if you owned a standalone home. Often times, the major sources of cap ex are covered by your apartment community/HOA and you pay for this through HOA dues. I support Dan's recommendation to hire a local contractor and/or consult with a property manager who is familiar with units similar to the one you own in your area. They can provide you with a more realistic cap ex reserve estimate, though I would be surprised if it exceeded $250/month. Many new investors don't properly reserve for cap ex and the results can be awful. Therefore, it's great that you're planning ahead and setting aside reserves for unexpected cap ex that could otherwise disrupt your ability to continue renting your property.

@Katerina McKnight  Further to Dan's and Geoff's feedback, you will need to budget for general maintenance expenses in addition to cap ex. Geoff outlined the framework that will allow you to calculate your NOI. However, cap ex reserves are typically a "below the line" item, which means they are deducted as a line item after NOI is calculated. The result of this is the true cash flow for the unit. For a single apartment unit that is part of a larger community, your cap ex reserve will be lower than if you owned a standalone home. Often times, the major sources of cap ex items are covered by your apartment community/HOA and you pay for this through HOA dues. I support Dan's recommendation to hire a local contractor and/or consult with a property manager who is familiar with units similar to the one you own in your area. They can provide you with a more realistic cap ex reserve, though I would be surprised if it exceeded $250/month. Many new investors don't properly reserve for cap ex and the results can be awful. Therefore, it's great that you're planning ahead and setting aside reserves for unexpected cap ex that could otherwise disrupt your ability to continue renting your property.

@Shane H. I attended Think Multifamily's weekend conference in January and it was highly educational.  I flew in from NYC for the event and felt I reveived value for my time and money.  We focused on a case study that led us through the entire multifamily property investment lifecycle over the 2-day conference.  It was light on the fluff and contained actionable tools and methods to assist with moving forward. Several practitioners were present (tax advisor, broker, property manager, mortgage underwriter, insurance specialist, etc) throughout the weekend to share expertise and serve as a starting point of contact for those looking to build their team of professionals. The content was tailored to active investors looking to learn how to select a market, build a team, locate a property, analyze a deal, negotiate a contract, perform due diligence, obtain financing, execute improvements and realize value.  There was zero sales pitch.  Mark and Tami are active multifamily investors focused on helping others achieve success.  I found them to be high integrity people and very competent.  The course content was definitely introductory in nature so if you have prior multifamily experience I suspect you will get more out of the networking than the course content. Given that the upcoming event is a one-day event, I suspect the content will not be comparable in depth and breadth as the 2-day event I attended.  Regardless, I'm confident, based on my experience at their event in January, that the event will be focused heavily on education and will have limited selling other than the brief period Tami described above for their new mentoring service.

@Kyle McGee One of the most common methods for securing the down payment funds for a multifamily acquisition is to raise the funds from your network of sophisticated or accredited investors.  If you are doing a 506(b) offering, which is by far the most common, then you need to have a substantive pre-existing relationship with anyone who contributes capital to your deal.  A 506(c) offering is a new alternative to the 506(b) that will allow you to advertise your deal to the public and accept capital from those with whom you don't have a substantive pre-existing relationship.  

Some of the larger RE crowdfunding sites will allow you to raise capital for your deal under rule 506(c) but they typically only allow experienced operators to submit deals to their platform.

Gene Trowbridge's book, It's A Whole New Business!, provides a nice overview of your options when forming a syndication.  Additionally, his firm publishes thought leadership  on how to leverage the new crowdfunding rules to raise capital for your RE syndications.  I also recommend that you consult an SEC attorney before moving forward and accepting funds from any outside source.

@Jacob Goodall  Below are three fairly common items.  I left out the financing contingency, which is also fairly common, due to the current market environment and seller reaction to this contingency in today's competitive environment.

1. Buyer has final approval of any new or changes to rental agreements, service contracts, or leases between Ratification Date until closing.

2. The Due Diligence Period referenced in the Purchase Agreement shall begin once Buyer receives all of the requested information.

3. Buyer has the right to extend the date for closing of escrow by releasing to the Seller until closing through escrow an amount equal to one-quarter of one percent of the purchase price for each 30 day extension requested, to be applicable to the purchase price, with Buyer to maintain at all times the current deposit, as set out in the Purchase Agreement, with Closing Agent.

@Russ Olivier You may be interested in reading Gene Trowbridge's seminal book on syndication:  It's a Whole New Business!  While it gets a bit technical in a few areas, there is a chapter on syndicator fees and deal structure variations.  Browsing this chapter could help you gain a better sense of the deal feels and syndicator compensation arrangements that are out there.