All Forum Posts by: Henry Clark

OP.  I would stop for a second.  On paper put your goals and then a plan to scale.  You will see you hit a road block very quickly on your cash or equity to do the next deals.  

Divide your REI types into the following. Appreciation long term, cashflow, and cash snowball.

In your shoes and current situation I would do a value add to build cash.

A. Pick a house with extra acreage you can subdivide. The original house if it is a 2/1 then ADU into a 3/2. Use as primary for 2 years and sell taking advantage of no taxes in capital gains 2 out of 5 years primary. Rent a room. You take the smaller unit.

B.  Pick the worst house in a great neighborhood and modernize.  Again see if you can do ADUs.  Or split off lots.  Again 2 of 5 years.  Rent a room.  You take the smaller room. 

C.  If you’re near military, coast guard, hospitals, airport, etc.  look there for your future MFH.  Or your house with room to rent. 

OP.  I would add another action item to my response above.

If you have a commercial loan and are in year 4 or 5 of your term, I would go ahead and refi at this point.  Get another 5 years or even ask 7 years.  You might give up a percentage point for one year.  But you trade off for security of getting refi’d and locking in your interest rate. 
Yes looking at different investment assets is great.  But I would take care of existing first.  I would not be selling say MFH or Retail to get into a new asset type at the moment. Would only do as part of an asset pruning exercise. 

OP

Ask your utility company to do an energy audit. This will show where your usage is coming from. 

Ask your insurance company or your hvac to do a temperature scan.  This will show cool and hot spots.  Way to check for insulation and airflow issues.  

Both of the above are free for us.  Get your PM to do.  

General comments. We have also been concerned about the economy and have taken actions.

1.  Self storage is our main investment.  You need to stratify the discussion into ABC markets.  Our investments in C markets say 10,000 population.   Our occupancy has been at 99% forever.  We have increased our rental rates by 25%.   Too small a market for both Large or small investors to attack.  “A” markets draw the large locations and large REITS and oversupply and unit price have deteriorated.  Our “B” market investments are Performing well.  Self storage is great in both good and bad economies due to housing movements up and down.  Having looked at many markets in the U.S. there are still many markets that are under supplied.

2.  MHP maintenance.  It’s been 50 years but sewer line, water line and road repairs aren’t that big of a deal for established parks.  
 MHP needs to be stratified between lot rental only or Park owned units.  
      
  MHP are  housing of the last resort or a low cost entry point.  Both are great for a recession.   

3.  Senior homes.  Ride the Silver Tsunami.  Demand is guaranteed.  Baby boomers with all their wealth.  Problem this is an intense customer, regulatory, secondary customer- children, dietary, therapy, medical industry, employee based industry.  The real estate part of it is large but the easiest part of the equation.      

More than investment type concerns for a poor economy we have looked at the following.      
 A.  Reduce debt.    
B.  Increase cash reserves.   
C. Diversification of asset types.       
 D.  Pruning investments.      
E.  Both hold off or Start new investments.  We have held off starting our next Self Storage location even though the market analysis is concrete.  We are bringing to market a Country Subdivision.  We don’t build houses and this is the worst time to start a subdivision.  Luckily recessions don’t last that long and subdivisions usually take a while to fill.  We are doing this with cash and not a loan. 
F.  I personally would not start a new asset type going into a recession. Unless it was small and I did it for experience so I could ramp up quickly coming out of a recession.  

OP and other DST investors. Would you post your due diligence list and the various Stress Tests you performed on these investments?

The emphasis on Student housing.  What is the underlying concern being identified?  What was the impact of Covid versus your occupancy stress tests?  

We don’t invest in DSTs or REITS.  The investor plays the role of an investment banker.  Always wondered how Passive investors take on the Active role of an Investment Banker.  Could you state your technical profession. Would like to know how closely that aligns with the Active skill sets required.  

OP not sure on what you mean by more technical.   

1.  Keeping water flow into the downstream neighbors property the same.

2.  Do you create a damming effect causing a portion of a neighbors property to now be in a flood zone.  

3.  Sewage lift pump.  Do you have enough “fall” across your property, or do you need a lift pump.  

4.   Storm drains.  Do you have enough “fall” to connect to the city or reach a storm pond.  

5.  Surface coverage versus drainage.  Example.  If you have say 80% building coverage that drains onto a drive say 5%, it will flood your building.  Grew up in LA and TX.  The most unexpected place I saw this was Lubbock TX.  The town would flood because it was so flat and had to much building coverage for the drainage.  

Point C.  Set your limits at say $5,000 versus $20,000.   That way nothing gets out of hand and you both know what is going on since it takes two of you to pay.   You might have to pay them down 2 or 3 times a month which is a headache, but controls your spending better.  

I wouldn’t do it.  

1. At some point he will want to or should want it just to be him. He should want to keep the same LLC so he has the history behind it.

2. If he goes to either dissolve the LLC or buy you out it could create some cash issues for him.

3. If you're not really good at writing the LLC operating agreement you could get sucked into a bad situation.

4.  To me it is better for him to do a consulting agreement with you.  If he wants you to share.  Taxes will be higher for you but less risk.  

If you move forward with the LLC then reduce exposure. Build these into the Operating agreement.

A.   How to value and you sell out.

B.  Loans and bank accounts require dual approval to add and for transactions.  

C. Credit card and account limits are small enough to trigger early payment.  

D. Would do term insurance on both of you for 5 years. The other is the beneficiary or the LLC.

OP.  This is standard practice.  Except your comment about interest only.   Should be P/I.

Is their an interest ceiling on the extension at the end of 5 years.   Example 1.5% points above current rate or prime.
 
Ask if you can do a 7 year term.  

At the end of your 5 years you might extend a year early or several months early, even if you pay a higher interest rate for one year.  Don’t wait till near term.      

Di you have a term sheet you can share in here?  You can exclude the bank name.  

OP it’s amazing what you think about when you’re out harvesting your cassava or yucca in the heat.

Run the numbers with them. Throw in property tax as mentioned before and insurance.  Old house versus say smaller new home.  

We are in the country side in Iowa.  4,200 sqft on 30 acres.   Acres is taxed very little.  Say $6k property tax and $5k insurance.  Would think if they are older they would go for a smaller house.  We will.   Thus the above are high.   Take their current figures and see what the annual difference is.  Unless grandfathered as noted in a post above.  Their costs should be a lot higher.  

Another reason for them to sale and leave since this comes out of their annual income.  

Tell them my guys will build a 1,200 square foot house in Belize for $30,000 if they own the land and run the utilities.  Property taxes will be about $100, almost zero income taxes and no Capital gain taxes.  The government earns most of its money off of tariffs.