All Forum Posts by: John Jacobus

@Brad Cogswell As a rule of thumb, I use 50% of gross rents as a starting estimate of total operating expenses (line 21 in your model).  This is popularly known as "the 50% rule" and is helpful to quickly weed out uneconomic deals but insufficient for a detailed underwriting of a deal.

I recommend that you start with the 50% rule and then adjust it upwards depending on the age of the property, class of the neighborhood and tenants, and amount of deferred maintenance.  If your deal doesn't work using the 50% rule, move on to the next.  If it's close, dig in further to qualify your assumptions and adjust your analysis as needed.  The value in the 50% rule is that it helps focus your time and energy.

Your current total operating expenses (line 21) should be ~$200/month higher to get to the 50% rule.  Add to this where you detect issues with deferred maintenance, tenant turnover, vacancy, and owner paid utilities.

I recommend a few good resources for honing your deal analysis chops:

1. Is This a Deal? By Ben Leybovich

2. The ABC's of Real Estate Investing by Ken McElroy

3. Wheelbarrow Profits by Jake Stenziano & Gino Barbaro 

@Travis Doyle With regard to raising capital to acquire multifamily assets, consider your cost of capital and let that guide your selection of the best source of funds.  Ultimately, the lowest cost source of funds would be the ideal option.  While equity financing is considered "expensive capital", it's a common source of funds for multifamily acquisitions.  If you can find investors willing to take a note with a reasonable interest rate, that would be a "cheaper" option as compared to sharing equity in the deal with investors.  Debt financing secured through a private note may also be easier since it would not require a private placement memorandum (PPM) and subscription agreement, both of which are typical for equity financing.  However, with debt financing, if the additional debt service would threaten the viability of the deal (i.e., threaten positive cash flow), equity financing may be a more attractive option.  The theme here is that there are many financing options available for your deals, each with pros and cons to consider.  A good commercial mortgage broker or community banker may be valuable contacts to help you gain a detailed understanding of the available options.

If you decide to pursue equity financing, a sponsor's share of 20%-50% could be appropriate. Additionally, an acquisition fee (1-2%), asset management fee (1-2%), and sale/refi fee (1-2%) are all common. Ultimately, the economic prospects of your deal and the projected returns articulated to your investors should drive your decision about equity splits, the various fees to charge, and the magnitude of the fees. I recommend working backwards. Start with the target IRR, conservatively underwritten, that would be attractive to your investors. This could range 8-20%; it depends on your investors' goals. From there determine the equity split and sponsor fee(s) that could charged while delivering the target IRR to your investors. You'll need a fairly sophisticated financial model in order to iterate through various scenarios and find attractive options. I use @Michael Blank's Deal Analyzer and it's solid.

Based on your questions, I recommend Chapter 8 of Gene Trowbridge's It's a Whole New Business! for valuable education on various ways in which sponsors structure a syndication.

Gene Trowbridge's It's a Whole New Business! is solid foundational book on the business of real estate syndication.

https://www.amazon.com/Its-Whole-New-Business-how/...

@Jeremy Santy There isn't much info available on the listing to thoroughly evaluate the deal.  You may want to gather the unit mix, size of the units, gross rents, and actual expenses from the listing agent to get a better sense of how the property may operate going forward.  

In the absence of more detailed information, I made a few assumptions and shared my work below to give you a sense of what may be baked into the listing price. You can use this to determine whether the assumptions are realistic and determine where to probe further with the agent. For example: Is the advertised NOI of $36,000 achievable? Do the rents and expenses reflect reality? How long can this be sustained?

The first thing that jumps out to me with this deal is that the list price and cap rate suggest avg. rents of $800/month/unit.  While the listing doesn't outline the unit mix, I assume all 7 units are studios given the location of the property.  According to Retometer, the avg. rent in the area for studio apartments is ~$500/month/unit.  Can the units in this complex realistically rent for $800/month/unit?  If so, how long will they stay occupied?  Studio apartments turn over frequently and cater to transient tenants, especially in this location.  It's worth probing further here.

Additionally, the property is ~60 years old.  A 50% expense ratio may be too low.  It depends upon the recent renovations and age of key property infrastructure.

In general, based on the assumptions below and in the absence of more detailed information, it feels like the rent is overstated and the expenses are understated.   Additionally, a small multiplex of studio apartments is not ideal given the transient nature of the tenants.  These are just a few areas to consider as you evaluate whether this is a good deal or not.  Ultimately, I think you need to gather more details from the listing agent to adequately evaluate the deal.  Hope this helps.

Learn to analyze deals and possibly invest in property on your own.  This will be appealing to investors, add to your credibility, and alleviate a common frustration among many investors.  Use this knowledge as the crux of your marketing plan.

Investors are frequently frustrated by RE professionals who don't know the basics of investment analysis.  You can differentiate yourself by learning how to determine key financial metrics, evaluate market factors that impact property values, and understand how to enhance a property's value.  Employ this in your marketing activities to investor clients.  In my experience, there is no better way to learn to think and appeal to investors than by becoming one.

@Matthew Bailey, I like your approach of determining a long-term plan to understand how much capital you will need to raise in order to build your RE empire. Many people never develop a plan and suffer years later as a result.  I commend you for thinking ahead, determining your goals and developing a plan that will help you get there.  

One way to get a better understanding of the expected cash flow per unit for multiplexes in the Bay Area is to analyze a few deals that are available on LoopNet or other digital sources of multi-familly property listings. I could simply tell you the answer but you would lose the opportunity to learn and forego the chance to experience the nuances of estimating rents, calculating the NOI and determining the cost to service the debt. Developing a sense of the expected cash flow based on your own work is key to setting your expectations about multi-family in the Bay Area (Hint: There is a lot of capital in the Bay Area chasing multi-family real estate. Cap rates average 4-5% in the South Bay and along the Peninsula. I suspect you will be surprised at how little cash flow the average small multi-family property produces in the areas that surround you. An average 4-plex purchased with 25% down and a 30-year fixed mortgage at 4.25% may barely break even, depending on the property condition and specifics of the situation. I consider $50-$100/unit my minimum threshold for cash flow). I found the practice of analyzing deals invaluable when I was first getting started. Feel free to post the results of your analysis to the boards for feedback.

I like Losness Group (http://www.losnessgroup.com/index.shtml) as a source of info for small Bay Area multi-family properties.  I grew up in the South Bay and lived there for ~30 years until moving to New York in 2015.  I have chatted with the team at Losness Group on several occasions.  I recommend their free newsletters posted to the website above as a source for market activity and research on sub-markets such as West San Jose, Willow Glen, Cupertino, etc.  You may also be interested in reaching out one of their brokers to discuss market conditions and obtain guidance on building out your plan.

To get started with your analysis, compare the income presented in the marketing materials to market rents in the area using rentometer.com, apply the 50% rule as a rough estimate of operating expenses (ignore the figures in the marketing materials, they are typically unrealistically low), calculate the NOI for the property, lookup the prevailing cap rate in the area to determine property value and determine your debt service cost by estimating the size, terms and interest rate for your loan. A detailed analysis will need to consider many additional factors, but the aforementioned steps will help you quickly determine what to expect and filter deals that warrant further research.

I found the following resources helpful as I was learning to analyze multi-family apartment deals:

• The ABC's of Real Estate Investing by Ken McElroy (Chapter 7)
• The Ultimate Guide to Buying Apartment Buildings with Private Money by Michael Blank
• 13 Steps to Valuing Your First Multiplex by Ben Leybovich

Good idea, @Ann Howell.  Let's see if this gets traction as a stand alone thread.  Follow along below.

Forum: Bankers, Lenders and Mortgage Brokers

New Post: Starting a Mortgage Finance Company

https://www.biggerpockets.com/forums/22/topics/321...

One of the aspects of the real estate industry that interests me is the abundance of niches. I'm excited by the different ways in which entrepreneurs can pursue opportunities in this industry. I'm interested in exploring the mechanics of starting a mortgage finance operation to originate, underwrite and fund loans to investors to purchase, refinance and/or rehab non-owner occupied SFR's and small multi-family property (<20 units) in California.

While I've participated exclusively as a borrower of capital to purchase investment property to date, I like the idea of using my capital to make loans secured by real estate. The real estate finance market for small scale investors seems less efficient and I wonder if it may offer better opportunities for competitive returns than traditional real estate investment avenues such as purchasing SFR's or small/medium multi-family property to rent. Additionally, my experience with banks and other traditional mortgage lenders has been frustrating. I've found their lending standards unreasonable and experienced an unwillingness to explore (or inability to comprehend) creative financing options, especially when investment property is concerned.

For some time I've wondered if the market for non-conforming real estate finance and investor loans is underserved. Since I seldom encounter discussions along the lines of "how do I become the bank?", I've struggled to gather adequate insight into the mechanics of starting a mortgage finance business and becoming a lender. I'm curious to hear from the private lenders, nonbank finance professionals and mortgage originators:

• What moved you to pursue this side of the real estate industry? What appeals to you about this aspect of the real estate industry?
• In mortgage lending, how is growth of a lending operation constrained? Is the scale of lending operations limited to personal capital and capital pooled from other private investors or are bank lines of credit a viable source of funds to use to originate new mortgages? What is the typical size of these lines of credit and what factors determine access to and volume of revolving funds that can be used to originate mortgages?
• What are the key challenges to starting out as a lender?
• What are the key challenges in growing a mortgage finance operation beyond finding credit worthy borrowers, complying with state and federal regulations and evaluating the quality of collateral to lend against?
• What resources do you recommend to those looking to start a mortgage finance operation?
• Are there legal firms specializing in helping entrepreneurs start mortgage finance businesses?

I don't seek trade secrets or sensitive competitive insight. Consider this as an honest inquiry into the basic dynamics of mortgage lending. I'm interested in getting started as a mortgage lender as I suspect there may be an opportunity to build a small/medium business in serving small time investors. Before jumping in blind, I want to qualify whether it's worth pursuing or if it's plagued by complexity, constrained by red tape and/or has unreasonable capital requirements that constrain growth. Any advice to a newbie looking to qualify this as a worthwhile endeavor would be greatly appreciated.

In your experience, can HML's and "hip pocket lenders" obtain lines of credit as a wholesale source of funds to lend at retail rates, allowing them to earn a spread on the interest rates? Is this common practice, highly risky or just plain stupid?

To an outsider looking for an entry point into the business of lending, it seems like it may be difficult to grow a hip-pocket lending business into a sizable operation unless one already has significant personal wealth to lend. What am I missing?

One of the aspects of the real estate industry that interests me is the abundance of niches.  I'm excited by the different ways in which entrepreneurs can pursue opportunities in this industry.  I'm interested in notes from a different perspective: as an originator.  

While I've participated exclusively as a borrower of capital to purchase investment property to date, I like the idea of using my capital to make loans secured by real estate. The real estate finance market for small scale investors seems less efficient and I wonder if it may offer better opportunities for competitive returns than traditional real estate investment avenues such as purchasing SFR's or small/medium multi-family property to rent. Additionally, my experience with banks and other traditional mortgage lenders has been frustrating. I've found their lending standards unreasonable and experienced an unwillingness to explore (or inability to comprehend) creative financing options, especially when investment property is concerned.

For some time I've wondered if the market for non-conforming real estate finance and investor loans is underserved.  Since I seldom encounter discussions along the lines of "how do I become the bank?", I've struggled to gather adequate insight into the mechanics of starting a mortgage finance business and becoming a lender.  I'm curious to hear from the private lenders, nonbank finance professionals and mortgage originators:

• What moved you to pursue this side of the real estate industry?  What appeals to you about this aspect of the real estate industry?
• In mortgage lending, how is growth of a lending operation constrained?  Is the scale of lending operations limited to personal capital and capital pooled from other private investors or are bank lines of credit a viable source of funds to use to originate new mortgages?  What is the typical size of these lines of credit and what factors determine access to and volume of revolving funds that can be used to originate mortgages?
• What are the key challenges to starting out as a lender?
• What are the key challenges in growing a mortgage finance operation beyond finding credit worthy borrowers, complying with state and federal regulations and evaluating the quality of collateral to lend against?  
• What resources do you recommend to those looking to start a mortgage finance operation?

I don't seek trade secrets or sensitive competitive insight.  Consider this as an honest inquiry into the basic dynamics of mortgage lending.  I'm interested in getting started as a mortgage lender as I suspect there may be an opportunity to build a small/medium business in serving small time investors.  Before jumping in blind, I want to qualify whether it's worth pursuing or if it's plagued by complexity, constrained by red tape and/or has unreasonable capital requirements that constrain growth.  Any advice to a newbie looking to qualify this as a worthwhile endeavor would be greatly appreciated.