All Forum Posts by: Chris Reeves

 First, I say go for it in terms of buying apartment buildings. I can't tell you what to do with partners - we play only with our own capital and have never taken on investors. I'm not saying that's right for everyone but it keeps our motives pure. I can tell you the way we deal with this risk is to:

1 - Not buy at insane cap rates on small spreads

2 - Be quite conservative in terms of leverage. My family's been in this game quite a while and have thus seen disgustingly ugly financial crises. We are not as aggressive as some other people and I'm sure we're not as successful as some others. On the other hand we've never gone bust - even during times when we've lost 30% of a tenant base and had to drop rents 20% in addition. And that's because we were conservative with leverage and never bought at the top of a market.

3 - Maintain a *lot* of liquidity in other investments so we can feed the properties if necessary, and like you said pay off the notes if refinancing is not available.

4 - Never bite off more than we can chew. In the early days that meant not buying more property than could be saved/fed in case of market disaster with salaried income from day jobs - no matter how tempting the deal. Now that we are bigger it means not buying any one deal that could take down the portfolio if things go south - no 2nd mortgages to buy other deals. And we only do no recourse financing.

I realize this is easy for me to say - for someone starting out in the game with not a lot of capital and nothing to lose then maybe aggressive leverage and syndication makes sense.

Syndication could make sense even if you *do* have a lot of capital - but the idea of a locked in sale date just seems insane to me. It's like asking your friends to all buy a share of Coca Cola stock together and saying "But we are going to sell on January 25th 2021 no matter what the price of the share on that date."

Appreciate the response but my question was very specific - not about asset class exposure or portfolio diversification. My question is how do syndications hedge against the risk of locked-in expiration dates coming due in bad markets? Or don't they? Do some have extendable time periods so they aren't forced to sell at low prices? I personally have no desire or need to get involved in syndications - I'm just asking out of curiosity because I know they're so popular. 

Just curious - I've never been part of a syndication either as an investor or the syndicator. We own our own stuff directly, and thus can simply ride out long down cycles (as long as we are not over-leveraged) and continue to collect the rent.

These syndication deals which have expiration dates seem inherently risky to me - I guess you got free equity for putting the deal together so there's no downside for yourself. But how do you convince investors that their best move is a locked in time period of X years? 

Nobody can predict where the market or economy will be in 5 years - if everything goes to hell right at your scheduled sale/exit then that would be the worst possible investment move - the right move would be to hold on, let the property keep paying for itself, and ride out the cycle.

So again, I don't see how syndication deals hedge against this possibility, unless they have some built in clause that says "we won't sell in a down market." Is that how they are actually structured?

Hi Joshua,

If you have some capital to work with I think your strategy is great. The business is not rocket science. My family also did not start out with single family rentals and things worked out fine. So here are my pointers for you:

1 - Do not rely on broker's "pro forma" magical predictions of what a property will cost to run. A cap rate projection is only as good as the assumptions which underly it. When you find a property you are interested in bring it here to biggerpockets (delete the address of course) and let some experienced members look at the pro formas to see if they look realistic.

2 - There will be bad times. There will be times of high vacancy. I promise you - it will happen if you hold long enough - and holding for 10 years or more is the safest way to ride out market cycles and make good returns in the long run as long as you don't overpay in the short run. So be prepared for the bad times by not over-leveraging yourself - always keep some liquidity. Keep some liquid investments like stocks and bonds handy so when that day comes that the world falls off a cliff you don't lose your apartment complex.

3 - Do not trust your property management company - there are good ones but you need to be their "overlord" so to speak - quarterly reviews of their numbers, regular meetings with them, etc.

4 - Do not buy a complex based on magical projections of future rent increases - only buy it if it the numbers work as is. I factor in only a long term 1-2% projected annual appreciation rate - if the complex works with this number then you'll make money long run.

Any help on this is much appreciated. I've had an off market, bank owned rehab deal brought to me by a broker we've bought from before and trust. My specific question is how to go about inspecting a complex this large and putting together a detailed, accurate figure for what it will cost to rehab the complex.

I have no problem modeling the financials for a stabilized property, evaluating the market, etc. We operate in that market already, have effective management experienced in doing rehabs, etc. We have three decades of our own operating data in several different markets to build projected NOI for this property,

But we have not done a distressed physical rehab before.

I have been given a price for the complex, and a price for the rehab, and a financing package from the bank which has taken the complex from its owner that includes funding for the rehab costs, and good LTV.

The complex is operational but is over 40% vacant, and is the classic story of an owner who gradually drained their property, eventually lacking the money to do unit turns.

What I would like to do is bring in an independent team to walk the property unit by unit and build out a detailed rehab budget - a team without the conflict of interest of being hired by the bank who owns the property, or being brought in by my existing management firm.

Should I hire tradesmen with specific skills (electrical, drywall, plumbing, roofing, etc.) and pay them each a fee to walk the property? Should I hire a contracting firm to do the inspection?

We need to get this number reasonably accurate in order to model the ROI. It is a value add with margins that look pretty sweet - but if the rehab goes double or triple what's been projected then the deal quickly goes from sweet to "meh."

For the work itself, we are looking at around 100 units which need to be rehabbed - I would prefer to do the work all at once - so should I be dealing with only mid-size to large contractors?

Thanks in advance!

I'm sorry - what does the term "house hacking" refer to? Do you mean buying some units, living in one and renting out the others?

It's my understanding that KC did not recover as fully from the Great Recession as some other mid-west cities. It isn't in the toilet but the economy is underperforming. I heard from a commercial mortgage broker we've worked that he has multifamily clients who aren't risk averse moving into KC for the attractive yields.

Here's a grandaddy of a program - it worked well for me. The best way in reality - if you are willing to put in the time to educate yourself both on Excel and finance - is to build the model yourself. All these programs are is just fancy pre-built Excel sheets.

http://www.realdata.com/p/reia/

There is a company offering online classes in building financial models in Excel - and they have a real estate specific course. It is a bit pricey but I'm planning on taking it myself. www.wallstreetprep.com

Hey guys,

So to the sleuths here - I smell a rat but I can't figure out where it is - 

I have "stumbled" across a 2-park package deal - a "pocket listing" e-mailed to me be a broker I have not done business with, but who lists (and claims to sell) a lot of parks in the mid-west.

Details: 200 pads total, paved roads, 95% occupied at both parks, city water/sewer, tenants pay all utilities including trash, and ZERO park owned homes in the two parks (no, not even any notes - so claims the broker anyway).

Rents are extremely low ($160 at the suburban park and $135 at the more rural one) and have been raised only once in the 10 years the seller has owned the parks (6 months ago).

Location: Park one has over 100 pads in a city of about 30,000 people 40 minutes from a metro of almost 1 million, unemployment rate very low, population growing, located directly next to many good businesses. Park two has under 100 pads but more than 50 - but is in a smaller town of under 10,000 people, 10 miles down the road from park 1. But according to city-data even this small town park is in a town that has grown 30% in the last 10 years and has an unemployment rate well under 5%.

Financing: Broker claims both parks will qualify for bank financing.

Seller will sell one or both parks: Broker claims seller will break the package apart but would prefer a buyer who will swallow up both at once.

Price: None given - seller wants to see what the market will bear and is asking for offers. Broker is telling me offers are coming in around 8-9 caps on actuals. Broker claims rents are under market an immediate $20 as-is and should be $50 higher within 36 months. If I can really immediately raise rents $20 then I should be at almost a 10 cap with two parks that are almost full with no POH's or private utilities to worry about. This seems too good to be true and sets of my "BS" meter.

Seller is located in a nearby state and is supposedly getting out of this state entirely - but owns almost 10 more parks in their home state (but will be selling them soon as well).

Fishy items: 1 - Why would you sell the "ideal" parks if you owned them? 2 - NO POH's? That seems odd - too good to be true. Broker has no explanation except "That's how this company runs their parks." 3 - NO PRICE, no financials available until it goes into diligence - they just want offers. Broker admits this is strange (none of his other listings are marketed this way), is apologetic for the opaqueness of the offer, but claims the seller is serious and just likes to market parks this way and see what the market will bear 4 - Broker also claims to not know why the seller is selling.

Yes I've been to boot camp and will follow to the letter Frank's 30 Day due diligence manual if we get this under contract.

Yes of course I can get it under contract and then see the financials - and I may do just that. But I'm still wondering if anybody has any thoughts on the BS factor of this deal going in. Just doesn't smell right to me.

Any feedback is appreciated!