All Forum Posts by: Account Closed

My simple analysis is to count 'warm bodies'. By that I mean that population growth is going to mean that there will be people available to rent to. As for up or down markets/buyer seller market, like the stock market you can make money either way if you focus on the fundamentals.

We always look for a competing property in a market that is out performing the other comparables. That usually tells us if there is upside and if there are renters willing to pay the higher rent. Sometimes we just cannot offer the same amenities as the higher priced property but the delta is a good barometer of the strength of the market.

As for all those other factors you have listed, they are very important but you need to put together an algorithm that you can understand so that you tract any trends. I would take a lesson from the Wall Street guys an look for corollaries. The problem with most real estate data is that it is dated and by the time you get the info, the market has moved. By developing corollaries, you can become more predictive and less retrospective. (in case you are wondering what corollaries are, think of the idea that when there is a power outage, nine months later there is an increase in children being born)       

Right up my alley,

LIHTC are a great way to provide initial equity for a project. Size is usually not an issue but you need to keep in mind that there is significant cost associate with the process, so that you need a project that can still benefit from the LIHTC after the overall higher cost of development.

Couple of quick items:

1. 9% LIHTC are called competitive credits because you need to apply and based on your application and those of others, you may or may not receive them. Each state only has a finite amount they can issue each year.

2. 4% LIHTC are available without the competitive process but there are many hoops to jump through and the value of the tax credits may not be worth the effort.

3. While initial LIHTC deals look attractive, the real problem comes later. LIHTC restrict rent based on AMI (area median income). When you have stagnate wage growth as we have had over the past 10 years and expenses continue to grow and your net revenue decreases. If this continues for a long time, the lack of revenue usually result in the owners putting off maintenance and hence the quality of the properties drop. Most older LIHTC look pretty rundown.

4. Compliance is a critical issue during the first ten years so that developers without experience have a harder time getting the best value for the tax credits. You really need to team up with a good management company and builder.

5. There are state and federal tax credit. The application process is different for each state and the value of the credits also varies.

6. Areas with low AMI, while maybe having the highest need, may not still not make for a good prospect because the market rent in the area may still be below the breakeven level after the utilization of the tax credits. Ideally, you want a project in an area with high AMI where you can then always find a pool of tenants that are below the AMI.

I would really get your architect and contractor onboard first as well as making sure your permitting and plans are acceptable to the city. Additionally, your equity is only part of your cost, you need to plan for lease up, marketing, and interest carry during construction and until you stabilize. Some lenders will finance these and some will not.

You will need at the very least what's called a lender package from the architect. It shows the floor plans and building elevation as well as a site plan. With that in hand, you can compare similar existing units and determine rent comparisons to have a credible feasibility plan for your lender.

Lots of comments but I vote for all those that question IRR as your basis for comparison. We syndicate properties all the time and when I get an investor that asks about IRR, I ask them what number they want and will adjust my projections accordingly. I know that sounds arrogant but the issue is that for real estate, IRR is a moving target.

A vacant piece of land that has an annual negative cashflow for taxes insurance, etc.. could have the same IRR as a fully occupied rental project with positive cash on cash returns. The two are very different investments with different capital requirements, holding strategies, most importantly, exit strategies.

For IRR to be meaningful, the properties being compared should be very similar in almost all respect. Real estate is seldom a generic investment. Two people doing the same deal might have very different returns. I would focus on selling your investors on the merits of the deal. Risk/Reward analysis are far more helpful and if you apply a sensitivity analysis to your IRR projections, you might find out what is more important to your investors, cashflow vs appreciation and the risk of each, which should help you determine a target for raising capital. I usually tell an investor that says he/she wants a 20% return that they must be willing to accept a risk that there is a 20% chance of losing money. I know that that is not a direct relationship but if you think that getting 1% on a CD means that there is a 1% chance you might lose, it put the whole risk/reward equation in perspective.

Most lenders do cost vs value. But what you might get is a loan that covers some needed repairs so that the 75% ltc would include the repairs. Alternatively, you could have the seller escrow the repairs and adjust the price up so that you maintain your ltc.

Wow - a lot of things being said that really confuse the issues. As a affordable housing professional here are some reality checks.

1. HUD for the most part has eliminated "project" based subsidies. That means most new projects do not get a blanket tenant payments. There are many older projects that do get subsidies and those HAP contracts are a totally different part of the Section 8 program.

2. Section 8 Vouchers is the most common subsidy available to low income tenants. The program is based on the concept that each tenant must qualify with the local housing authority for a subsidy based on the individual needs. HUD assess the market area and sets maximum rental rates that are available for subsidy. The tenant then may get all or a portion of that amount as a subsidy. Lastly, the tenant is barred from paying more than the HUD maximum so that the landlord that accepts Section 8 can not charge more. Example - if the HUD max rent is $600 monthly, and the tenant gets a $500 voucher, then the tenant can only pay $100. The voucher is reduced if the rent is less so that the tenant will always pay $100. Guess what most landlords do?

3.Tenants are free to rent anywhere from any landlord that accept vouchers. Accepting vouchers also requires the landlord to accept certain HUD policies

4. Most Section 8 vouchers are less than 100% but they do represent a major portion of the rent.

5. Due to Congress inability to pass a budget, HUD has been operating under a continuing resolution for over the past seven years. This means that there has been little expansion of the voucher program over this time and most parts of the country do not have vouchers available. In some areas of the country, waiting list for voucher applicants exceed three years.

How to proceed- Since it sound like you have experience with HUD, you are probably aware that each unit and the property as a whole needs to be inspected prior to a tenant be able to rent. I would focus on trying to "steal" tenants by offering them incentives that might get you existing Section 8 residents with vouchers. You can not offer them money but you could offer to help them move for example. Inside the Section 8 program there are some underserved residents. By this I mean that while there might not be any vouchers available for most residents, some individuals may qualify under a different part of the ACT. For example, we recently received a number of vouchers for a SRO (single resident occupant) project that serve the homeless transitioning to housing.

When you talk with the Housing Authority, make sure you ask the right questions otherwise you might end up in HUD hell. Many of the HUD programs are very specialized and most departments do not know much outside their own program specialty. Getting to the right program requires a lot of research. Keep in mind that the programs are for the most part national and that the local office may not even be aware of possible alternatives. Conversely, many existing programs are not currently funded even though they are on the books as active.

Finally, I have been too long winded, but given your purchase price and proposed renovation, you might consider applying for tax credits (LIHTC). This would provide for a significant equity contribution,

Steve

Two perspectives -

One - if your goal is simply to increase cashflow, there are many things you can do. Fees are becoming a real income source, especially for management companies. I recently saw one project where the tenant was charged $75 per person application fee plus a $285 lease setup fee plus a $50 move in fees. So the tenants for a two bedroom unit paid $485.00 plus a security deposit. Most times these fees are not bankable when underwriting but they do add substantial cash flow.

Two - Your example above with respect to getting an additional $25 per month has far more impact. Your analysis that it will take you more than two years to recover may have an immediate impact on cashflow but the real value is in refi and sale of the property. $25 per month is $300 per year.  If you capitalize that at even a 10% cap rate, you have added $3000 to the value of your property. I would happily spend $650 to make $3000. Additionally, it is a lot harder to reduce expenses than raise rents. I think that your on the right track to focus on delivering an exceptional rent experience. Our company has always emphasized tenant value as the real source of property value.

I mis-spoke, I was simply try to say that an investor can borrow from their own sources to get the benefits of leverage without having to cosign a loan for a larger amount that will negatively impact their net worth. I said IRAs only in the context of general savings. I know that you can not borrow on IRAs but they do have a positive impact on your balance sheet and make getting personal loan easier. Sorry for the confusion.

Andrey

I agree with David, that a "syndication" for $300K is probably not the best way to do this. Your "syndication" cost are too high for the size deal. A simple llc partnership will do and the returns discussed above pretty much frame the range of investment options available. The one thing that I will take exception to is that because you have "no" money in the deal, you do not have "skin" in the game. On a deal this size, you will be signing full personal recourse on the loan. Your investors typically do not in a true syndication. Your liability is far greater than the investors.

Also, I think that if you are going to raise capital for this type deal, your investors will most likely need to sign the loan docs. For me that is the the same as cash. Since each investor may have different borrowing ability, the loan clause "joint and severally" means that the strongest investor will always bear the biggest burden. If I can not get the loan on my own, then I would do this 100%cash and let each investor finance their own investment. (ie. borrow against IRA etc...)

A refi after a proven seasoning is always easier and if you can "cash out" your initial investment, your long term returns will more than offset the initial low COC returns.

Part 2 -

Question - given that many empty nesters and couples are "downsizing" can you get away with building 1 bedroom homes with an open study that can serve as a guest area ie. murphy bed? I would love to hear BP members comments.