All Forum Posts by: Trevor Richardson

How many units?

Banks care about DSCR and sold $/unit comps. I've never had a commercial lender or residential lender ask about cap rates. Cap rates are just too subjective for lending institutions.

I think the first step for new investors is identifying the metric that’s most important to you for evaluating investment properties. Depending on budget and goals not all investors are alike.

If you are looking for a project because you have extra time, look for value add deals and hone in on construction costs and trades and pro forma rents. If you are looking for turn-key deals with little work instruct your agent to search out the best deal that has had a good renovation and new set of tenants. 

Some investors want value purchases which means they may look at only $/sf and put that above all metrics. Some look at a straight forward cap rates for comparison between deals. IMO the best metric is monthly income after all expenses and financing. It's just the simplest number to show a monthly returns (CoC) calculation. It answers "ok after all expenses and my mortgage what am I taking in per month".

Some investors want to reduce their overall income so higher cash flow properties aren’t a priority. That may sound crazy to some but we run into that all the time. That’s because that’s their financial goal and fits into their personal situation. 

I’d recommend to first think about what you want out of a multifamily investment. What are your goals? That’s a great place to start.

I feel on-market properties always are underrated. There is some allure to off-market deals. A buyer/investor typically seems to think because a property is off-market it’s a great deal, or they are not overpaying. That’s not really reality, on market sellers want to sell, some “need” to sell. 

The numbers are what we focus on. Some of the best transactions we have done for clients were great deals hiding in plain sight on the open market. 

For a first time investment I would strongly recommend buying an existing building for renovation. Doing a fix and hold or flip is hard enough. Being a builder/developer is another level of difficulty. I have seen a lot of new investors get hung up on the complexity of pulling a property out of the ground. 

When investors ask us about this we usually recommend the area. Here is why. If there is a big class A residential project going up typically that project is going to be asking top of market rents.

If you renovate a property nearby, you are probably still a more affordable option. Smaller properties become the more affordable option for tenants looking at the larger properties. Then you enjoy the improvements of the area over the coming years. Be the more affordable option, it’s not bad to be in the shadow.

Note: if this project is releasing 50-100 units in a two month period, while you are trying to lease. That can affect your shadow property during that absorption period. 

$15k should get you a cosmetic rehab of the interior. The problem with these older properties are the more advanced systems, HVAC, plumbing, electrical, windows, exterior beautifications etc…

If it’s in escrow I’d take those latter issues right off the purchase price, or propose that to the seller. Roof could be $10k electrical panels could be $5k, windows could be $400/window for vinyl, yard cleanup concrete exterior paint could be another $5-10k. 

Depending on your scope of work and target rental rate you need to balance the level of upgrade. Obviously I have no idea what this property looks like but I’m just providing a ballpark. 

I’d recommend to not make it complicated. We have pretty advanced underwriting models and exports, but I’ve built it over years of transactions. 

But when you are starting out focus on good rents (GRI), subtract accurate and realistic expenses to calculate an accurate (NOI) for cap rates. After that I would advance it to include financing for CoC and monthly income which to me, is the final answer.

This analysis doesn’t mean much if you can’t somehow evaluate every property in an area or the marketplace. So try to keep it simple. 

It depends on the state. But an easy way to think about it is “cosmetic rehab”. Painting and flooring for example are generally cosmetic and don’t require permits.

Walls/electrical/subfloor/exterior work usually require permits. If non cosmetic work is done poorly they can cause damage to the property or residents. Licensed contractors that have a good business won’t do the work for you without the required permit. They know what to do. 

If you take a macro approach at the western US. Vegas is the most affordable city, anyone see it any different? It’s outside the most expensive state in the US. Like can you think of a city in Washington, Oregon, California, Utah, Idaho, Arizona that’s more affordable than Vegas, with 2 million people MSA?

That alone has to be an attractor to investors looking for upside in a market. The city is growing like crazy (cause it's affordable and again outside the most populated state). Reno is more expensive for rents, and median SFR sales.

My conclusion. Vegas is the best market in the west for value investors. In comparison for Nevada, Reno has more niche stability (Tesla just announced its investing $3.8 billion more here) and is a hotbed for the wealth out of the Bay Area. Which causes prices to be high and returns low. When I underwrite properties in Vegas I typically get a 1% range higher cap rate.