All Forum Posts by: Account Closed

Your issue on the fannie loan is the yield maintenance, given the rising interest rate market, your prepayment may not be that high and you might be able to get a new fannie loan with higher leverage than the one in place.  Yes the rate might be slightly higher but so will the rate on the supplemental.

Jasmine, I congratulate you on stepping out into the world of multifamily. Due diligence and good property management are your keys to success. If you are serious about pursuing a deal like this, get in touch with some professional property managers. I am not talking about an agent that manages property on the side (no offense) but professionals that do this full time and are experienced both in property type and area. Interview several, ask hundreds of questions, and for your first deal, do not under estimate. go for the most conservative expectation. 

As for pricing, returns, and exit strategy - always remember that INCOME property is just that. Your proforma should be your own, don't go by what the seller is doing. His success or failures are seldom reflected in their operating statements. The concept of fix n flip is seldom the case in multifamily. Fixing the property may not result in higher rents but simply addressing differed maintenance. Additionally, you will need to go thru typically two lease cycles until the new rent levels become marketable as real income. If you think as year one as a rebuilding year and year two as your first stabilized year, then a sale or refi in year three would be realistic as a short term hold. 

Lastly, apartments are not like a good wine, age is your enemy. As the property ages, repairs become more expensive and replacement of key structural elements even more so. Above normal cash flow should never come at the expense of keeping up the property and staying in touch with market needs. We always seek to emulate the best property in our market so I would suggest that when you do your comparisons, find the best property in the area, and see how your property can compete with it. If you only compare your property to other just like yours, you will never create value.

Good Luck 

ps. In Texas, stay away from two-pipe systems. 

Nathan,

The formula above is just a sample, we adjust for each deal. Additionally, most our projects utilize non recourse financing and in excess of $3M. very few hard lenders at that level an even fewer friends.

Cap Rates vary and can be derived with numerous variables that impact the cash flow/purchase price formula. I would present that you should derive your own cap rate requirement and then apply it to cash flow to determine an offering price. For small income properties, try the "band of investment" formula below:

(Interest Rate on Debt X Loan to Value)+(Desired Equity Rate X Equity to Value) = Cap Rate

Example:

(6% interest rate x 80%LTV )+(10% equity yield X 20% equity) = Cap rate

or 

4.8%+2.0% =6.80%

In the example, the 6.80% cap rate is one that meets your objective of a 10% cash on cash return. Do a google search on "band of Investment" cap rate analysis if you want more info.

For those of you who want to discuss (argue) the merits of this analysis, feel free to do so but this approach can be expanded to include other factors such as appreciation, amortization and even standard deviation. The point is that cap rate analysis is only one of many tools and you should not rely on just one tool in making an investment decision. 

I find this "band of investment" analysis as a good tool for weeding out properties that will NOT fit my investment goals. In my example above, any property that would be below a 6.8% cap would be eliminated. If you find that you can not find any properties that meet your cap rate, you may need to reconsider your equity and debt factors. When it come to selling, this formula is irrelevant, since the market ie. each investor will set their own target. 

The concept that there is only one number, is highly flawed and before you start making investments on that number, look at all the variables that go into determining cash flow first, then decide if the cap rate is appropriate. I would warn BP readers, that published cap rates are usually from institutional buyers and typically do not represent the investment formula of most small properties. Cap Rates from appraisers are typically derived from sales so that they reflect a historical prospective and are limited by available information on rents and expenses which may not be those used by the buyer.

Long winded and out of breath and do not not get me started on IRR.

Happy belated Thanksgiving

 I am in full agreement, stick to the lease. If the pets are an add on, I am not sure that it matters whether they _the pet_ moves out. The same is true whether  the tenant moves out, they are responsible thru the term of the lease. The exception might be if the pet lease is month to month, otherwise - the lease should stay the same through the term.

 I like city-data but there are many sources that compare building starts to population growth. The resulting absorption rate is really our bench mark. Combine that with declining vacancy and rental growth and you have the recipe for a great market. 

As to where to find the data, many appraisers might be willing to tell you absorption, rate, and occupancy trends without charging you a fee if you do not get to specific about a location. Beyond that, depending on the city, many lenders and economic agencies publish regular data as well as trade journals and apartment associations. If you are an out of town investor, i would assume that you would be looking to local management and most good management companies have access to these local publications.

Here are a couple of sites that might help:

http://www.bls.gov/eag/

http://redcapitalgroup.com/lending-research/market...

http://www.bizjournals.com/news/

http://www.multifamilyexecutive.com/

There are many more 

The key for us is positive population growth. Markets with slow stagnate or declining populations mean that you need much more local knowledge to know which areas is strong and which areas are soft (niche investing). In markets with strong population growth, ie high absorption rates, you have much better chances of not making a market placement mistake as well as having the potential for good rate growth. 

I would recommend the following:

1. Give your partner a preferred return on his investment. ie say 10% on his 20K.

2. After that split all the cash flow 50/50.

3. Lastly when you sell the property, give him back his 20K and then split the profits 50/50

Why. The plan you outline above is either a buy-in partnership in which case you do not really have 50/50 until the buy-in is complete and a lot can go wrong before that happens - OR - Its a loan from your partner to you to in which case a lot can go wrong as well. Lastly, there are some significant tax issues here and you really need to talk this over with your accountant and attorney. (at risk rules) Remember that your mortgage loan is most likely going to be "joint and several" meaning that both of you will be 100% on the hook not 50/50. That has the potential for all kinds of problems when only one party has actual cash in the game.

I like partnerships where that things are set going in so that when rainy days happen everyone know what's at play. Open ended partnerships always end up different from the original plan. Not to say that that's always bad but rather that when things are good, no one reads the documents, when things are bad, Article 12, paragraph 3, section 4.1 says......