All Forum Posts by: Tyler Kastelberg

@Mark S.: I second @Michael Bishop. The offering should set expectations. If occupancy is far below the original underwriting, then the sponsor is under performing.

@Rich Dooley: Welcome to the investment community! Like Mihir mentioned, I highly recommend you consider taking a leap into multifamily investing rather than purchasing an SFR. With every additional unit, you slightly reduce your tenant risk and find that valuations are better on larger assets. If you're uncomfortable going at it alone, find a local semi-pro who can partner with you on your first deal. You won't regret it.

@Jason Howell

Jason - You're on to something and I want to keep walking down this path ...

Why would investors want to purchase in low cap rate markets?

I can tell you from experience underwriting deals for a number of institutional and semi-pro investors that they have achieved IRRs greater than 15% and yields greater than 8% in markets like San Francisco, LA, NY, and DC that advertise 4% cap rates.

Markets with low cap rates typically share the following characteristics:

1) Strong rent growth, driven by

2) Strong population growth, driven by

3) Strong job growth

4) Low vacancy

5) High per bed rents (lower operating costs as a percentage of total rent)

6) Good property management options

7) Higher quality tenants (young professionals like myself will rent in SF until their late 30s to early 40s)

To achieve returns in these markets, investors buy buildings with significant value-add or development opportunities on very low to no leverage (debt), and refinancing the deal after stabilization to cash out. To execute this strategy, you need a lot of patient capital. The returns are definitely there.

@Jason Howell

Jason: It looks like you have enough data points to axe the deal without much further research. However, Immanuel makes a great point that the market cap rate is pivotal in this analysis. Have you estimated the internal rate of return or equity multiple on the deal?

@James Winters

Don't do this deal. The rents are too low to support long term capital expenses (roof, new furnace, etc). Aim for rents above $800/mo.

@Dean West

I'm also based in San Francisco and can relate to your itch to invest out of state. However, the learning gained by investing in a property and managing it locally yourself is invaluable. You can also gain this experience by investing with an experienced syndicate manager in larger projects (100+ units) and closely studying their monthly/quarterly reports. Be sure to do diligence on your investment partner ... lots of folks are syndicate "wannabes" in this bull market. 

In my experience, investing out of state in a single family or small multifamily is fraught with risk:

1) You won't be an expert in the area (unless you've lived there)

2) You have serious tenant risk (1 bad tenant can ruin years of returns)

3) Good quality, small asset property managers are tough to come by

@Mason Fiascone

Mason: I agree with the masses - the success of your investment will be predicated on the quality of your property manager and the amount of leverage you put on the property.

If multifamily/commercial, run a model to make sure debt service coverage can handle stressed performance, and maintain a reserve.

@Phil Capron

RPM and Dodson will take good care of you. I know RPM will take equity positions with their clients to align incentives, and Dodson will if its a development project. I don't recommend offering equity positions on small deals ... most of the time you see this with large multifamily and commercial.

@Josh Oaten

@Hadar Orkibi

The trouble in CRE is access to quality data. Costar is by far the best source for US data, but it requires an expensive monthly membership. In the past, I've explored "up and coming" markets by pulling US census data and mapping areas with large population growth.

@Josh Oaten

Josh: Are you looking for data on US emerging markets or non-US emerging markets?

@David S.

If you ask a sponsor to show you their model and it is a "guru" model,  run the other way. @Omar Khan knocked it out of the park. The best sponsors have deep financial modeling capabilities on their team and run scenario analysis to determine the risk associated with market retractions.