All Forum Posts by: Account Closed

Reality check- 

New construction is almost always going to translate into higher rent. I agree with you that many more people are limited to renting as a result of higher prices and tight credit lending but you need to keep in mind that with construction cost at an all time high, a new unit may not be affordable to the main stream market. 

In Dallas, one of the best rental markets in the country, the cost of new construction for a garden style apartment is around $110,000 per unit ( all in including land and soft cost). Most projects are well above that number.  Given typical financing cost, that translate to around $1.45 per sf in rent as  a min.  Median rents are well below that so that you are catering to a smaller section of the market.

Lastly, if you have not developed a property before, be prepared to show a lot of liquidity in your financial statement.

We develop and invest in apartments and the two are very different strategies. In general, your maintenance cost are less with new construction but other cost such as taxes are higher so that your overall cost are not significantly different. The real question is holding period. As a merchant builder, your value is made in development, as a revenue manager, your money is made in improving cash flow.

We have a project that we are doing in Colorado Springs that might be of interest. Give me a call and I will fill you in. 

Two very different investment strategies. We do both - New construction is a value creation model. Sometimes referred to as merchant building, the goal is to create value and exit via a sale or refi in the short term, less than three years.

The second strategy is to profit through ownership. The focus is improving cash flow either thru repositioning  or rental/noi increases. Since lease turnover controls your timing, it usually take at least two rent cycles to make a significant impact.  In some areas, the typical rent cycle is 6 month leases in others its over a year.  Since investors want to see a 12 month history, you have to make your improvements and changes and then season it  for a period of time to maximize value. Most appraiser and lenders do a 2 year look back and are sensitive to large price swings in less than two years so this strategy is typically a 3 year plus investment. 

Yes there are exceptions and every deal is different but the point is that ground up vs revenue management require two very different skill sets.

Welcome to BP. We have had the same experience in the Denver market and have had a hard time finding value. We are currently doing deals in the Springs (I know, not as sexy as Denver but more profitable). We just completed a 20 unit new construction apartment project and are now seeking investors for a for sale product consisting of 8 townhomes.

Nothing like telling BP members that you have money to invest to get a conversation going. So here's my 2 cents.  $100,000 plus debt can get you a lot of property in Texas. The real question is how active you want to be in day to day management. On one end, a syndication will let you sit by the pool but you will give up returns. On the other end, 10 homes in San Antonio will mean a lot of money spent on gas from Austin. I would look to do a partnership (not syndication). You will most likely get a better deal and learn along the way. Contact me if you want some names of people in the area that are active and are experienced and successful.

Cashflow is the net of all monies received after all cash expenses. In simple terms, its rent and fees received minus all your out of pocket cost. That includes in addition to your normal operating cost, items like carpeting, improvements, long term appliances, roofs etc.

Part of the benefits of owning real estate is that you can potentially shelter/defer income from being taxed. For example, if after all your expenses, you received a net of $10,000 at year end and then deduct depr.. of say $10,000, your taxable income would be $0. In effect you made $10,000 tax free/deferred.

The catch is that not all expenses can be deducted in the year incurred. Items that are eligible for depreciation can only be partially written off so that while you get to carry the expense write-off to future years through depreciation, you have to pay for them up front. So for example, that $10,000 you made above might be wiped out if you had to spend $15,000 on a new roof. Your depr. expense might only be $1,000 each year going forward for the next 15 years.

As to what to ask for, the P&L will give you a good idea of all the expenses incurred but I would try to get a three year history so that you could see what is "normal" operating expenses and what are "capital" non recurring expenses. Additionally, I would consult a management company to help you develop a budget and determine your own operating plan. You might also talk it over with you accountant to determine the potential tax implications. Deductible expenses can be tricky.

dan 

don't confuse cash flow with income. cash flow can be negative and you may still have positive income and visa a versa. in general income is for tax purposes.

Cap Rate is really only applicable  to each individual investor. ie I might buy on an 7% cap and you might buy on an 8% cap and we both might have the same return on equity depending on our cost of capital and investment strategy. Consider the following "Band of Investment" approach to Cap Rate development:

debt rate X LTV = y

+

equity yield x equity to value = z

Y+Z =cap rate needed to meet investment returns.

Example:        5%loan  X 80%ltv = .04

                       12%yield x 20% equity = .024

                       Indicated cap rate = .064 or 6.4%

As you can see, depending on the debt structure we could both by at the same cap rate but that would not mean we would have the same coc return. The range of cap rates indicate the overall value in the market but each investor should determine a Cap Rate applicable to their own situation.

The Department of Housing and Urban Development (HUD) issued new guidance on April 4th, 2016 that is going to require all single-family and multifamily rental professionals to revisit their policies.

In a decision that is aimed at protecting the rights of "returning citizens", HUD is limiting the use of arrest records in tenant screening nationwide for both public and private housing. While they are not discouraging the use of criminal records in the background screening process, they are requiring a conviction be reported for the record to be considered in the decision. Using an arrest record without a conviction is being viewed as discriminating against a consumer who has not been found guilty of having done anything illegal.

Per the new guidance:

Exclusions Because of Prior Arrest

.....A housing provider with a policy or practice of excluding individuals because of one or more prior arrests (without any conviction) cannot satisfy its burden of showing that such policy or practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest.  

.....As the Supreme Court has recognized, “[t]he mere fact that a man has been arrested has very little, if any, probative value in showing that he has engaged in any misconduct. An arrest shows nothing more than that someone probably suspected the person apprehended of an offense.”

....Because arrest records do not constitute proof of past unlawful conduct and are often incomplete (e.g., by failing to indicate whether the individual was prosecuted, convicted, or acquitted),

.... the fact of an arrest is not a reliable basis upon which to assess the potential risk to resident safety or property posed by a particular individual. For that reason, a housing provider who denies housing to persons on the basis of arrests not resulting in conviction cannot prove that the exclusion actually assists in protecting resident safety and/or property.

What does this mean?

In your rental policy there should be clearly defined requirements for an applicant to be approved to live in your property. For example: income must be xx times the monthly rent. Likewise there should be criteria that will disqualify applicants despite them meeting other requirements. This is the section where your policy clarifies your stance on criminal records that appear during the applicant’s background check. Our recommendation is that you specify that the use of a criminal record must be the result of a conviction, and denial should be limited to specific crimes such as:

The new guidance does not go so far as to make criminals a protected class so you are still completely within your right to deny applicants that violate the criteria above. However, more than ever before, you have a burden of proof requirement. In order to safely depend upon making a decision involving prior convictions, you as the housing provider, must be able to prove that your policy clearly excludes individuals with only certain types of convictions. This proof in your policy is necessary to achieve a substantial, legitimate, nondiscriminatory interest. The use of ambiguous language or blanket statements such as, “a felony is an automatic denial” will get you into trouble.

The new guidance clarifies this requirement as:

A housing provider with a more tailored policy or practice that excludes individuals with only certain types of convictions must still prove that its policy is necessary to serve a “substantial, legitimate, nondiscriminatory interest.” To do this, a housing provider must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety and/or property and criminal conduct that does not.

HUD's new requirements may seem like a big change at first, but it can be followed very easily by following these steps:

1.Review your policy to make sure the language is clear, and conforms to the HUD guidelines (and have your housing specialist attorney read it over).

2.Educate your staff, or anyone involved in reviewing background checks, so they are aware of the new guidance.

3.Consider contacting your tenant screening provider to ask about their ability to restrict records that cannot be used in the decision.

Any thoughts???

Joe 

you need to walk every unit, review every lease, talk with all staff in short 100 percent free access. You need to schedule but otherwise anyone who does not give you access yo need to walk away from the deal.