All Forum Posts by: Scott Skinger

@Ryan Weddle I think you and @Omar Khan are right on. Just to add a few thoughts. As you say, and I agree, returns drive everything. CoC, IRR and is the overall return worth my effort.

I consider cap rate to determine approximate value and tweak my strike price based on this. I'm also very careful to model my exit cap rate into the calculation. There has to be enough meat on the bone for the next investor to make their returns or it will be a tough sell.

I use metrics like price/unit, price/sf, cap rate, expenses/unit to look at my potential purchase price from many different angles and to determine if I'm missing something. For example, if I look at comps of "like kind" buildings that are selling for cap rates of 8% and $50,000 per unit, I'm definitely going to be comparing my purchase to these metrics and dig a little deeper. Are my units bigger/smaller? Newer/Older? More/Less updated? Etc.  

The devil is in the details and this type of information will help tell the story of what you can potentially charge for rent, what your expenses might look and ultimately what you should be paying for a building.

I agree with @Joel Owens on the financing side, basically as long a term as possible. 

Regarding some of your metrics, ultimately, you have to decide what is right for you. Personally, I don't pay much attention to the "per door" returns, I focus on CoC, IRR and is the overall return big enough to be worth my while.

If I did pay attention to "per door" prices $100/door doesn't work for me...not enough meat on the bone and not enough room in case something goes wrong. A DSCR of 1.3 is low. A bank might take the loan but I would be hesitant.

Wait for the right deal with returns that hit your goals. Sellers are greedy right now, especially small 6-10 unit buildings. I see a lot of these building in my market being offered at 6-7 caps (which is way too low) and once you account for "real" expenses their prices are closer to 5 caps. Stay away. Don't forget, you have to dispose of the asset or refinace in 5-10 years, what is that going to do to your returns if the market is softer?

Feel free to post a few more details if you're looking for more feedback. 

There’s a big variance depending on market, sub-market, sub-sub market, building condition and size. I invest in Chicago. Just to give you an idea:

3-5 cap - great locations in the city and some surburbs, A/B+ markets

6-7 cap - B locations in city, large B class buildings in suburbs, people also try to sell small buildings at 7 caps or under in suburbs which are typically overpriced 

8-9 caps - south side of Chicago but still decent cash flow and up and coming, class c buildings in suburbs, smaller buildings, Rockford 

10+ caps - bad neighborhoods, small mom and pop buildings, more rural areas

Stop!!

I’m reminding you that the reason that you’re in this mess (as you said in the OP) is that you didn’t do your DD. You’re about to make the same mistake again. Take a step back, take a couple of weeks, write down/consider your options and then move forward. You’re taking advice from random people on BP who know nothing about your individual situation and all of the details of your apartment building and you are ready to immediately throw money at the problem. This probably won’t end well. At a minimum, you should consider doing the following:

A. Plug in your current numbers, estimated construction costs, rent increases, assumed exit cap rate and more into a deal analysis spreadsheet specifically designed for multifamily. The BP calc won’t get you there. Buy one from Michael Blanks site or Real Data and learn how to use it. This one investment will save you a ton of money going forward.

B. Take @Thomas S.’s advice about construction costs/plans. Talk to your PM, talk to people on BP, talk to the people doing the work. Get your budget nailed down and then go back to step A above and plug in your new numbers.

C. If your numbers from above work and you're happy with the ROI then you move forward and take @Account Closed’s advice and sell. Just keep in mind that nobody will want to buy your problem unless it is for a deep discount. You might have to do all of the above before you are able to sell anyway.

Take your time and break this problem down. Those who fail to plan, plan to fail. Don’t be that person. You can do this.

Good Luck.

@Terrence Williams As part of your DD you need to have your lawyer review the actual lease and see what your options are. For now, take the PM's word on it and assume that what they are telling you is accurate. The amount they are paying should be included in your underwriting for the current year and the next 13 years (including the new 10 year option to renew). The gross income should be adjusted down to include what is actually to be collected (not the market rate). Less income lowers the NOI and thus the value of the property.

You should only buy the property based off of the actual gross income, not what it could be generating. Ultimately, if they are trying to lock in a long term "good deal" for themselves they are really just screwing themselves because they are lowering the value of their property exponentially.

You don't make clear whether or not you plan to continue using the PM. This could be a strained relationship. Feel free to share numbers if you want some specific feedback.

Good Luck!

I think those designations are specific to that property. Look for a key or ask the broker for clarification.

My best guess is that these are just different layouts. NP could stand for some thing like “no patio” or just about anything.

$36/door is really thin. On a 10 unit you're talking $360/month or $4,320/year. One missed expense or problem you weren't expecting and you're negative cash flowing. Even if you are right, is $360/month worth your time? If $36/door is a year 1 number and you have a lot of value add that will raise this number up, a little different story, but still the same warnings as above. 

Personally, I'm modeling for over 10% CoC year one, over 15% CoC by year three and IRR at 20%+ for a 5-10 year hold. This is more in the ballpark of $200/door.

If you model (and buy) at $200/door you are getting good/reasonable returns and you have a much higher margin of error.

Good Luck!

@Ray Harrell I'm in the Chicago suburban market and would love to know who you use for PM if you don't mind sharing.

@Dan O'Neill I think when you look at the % it is a big number and it is easy to call it "too high", however, I agree with @Steve Vaughan, you need to know exactly what you're getting and how good they are at doing their job. What are you getting for 10% + $417 (site manager salary)? What don't they do or do poorly? Does this include leasing? Are they handling all screening, phone calls, showings, renewals and doing it in an efficient manner so that you're not losing rental income? Every week a unit is unfilled is costing you $150-$200. 

A good PM should be saving you $. Yes, your paying them a fee but if they get units turned quicker, fill vacancies fast, keep tenants happy with quick service calls, etc. they are actually saving you money not costing you money.

Sounds like general lack of comfort outside their own market area. How many days of DD left? For sure I think it makes sense to at least start meeting with banks local to the property to ensure that you have other options and have established relationships.

giving this thread a little "bump love" to see if anybody has some feedback...I would love to hear about other's experiences/thoughts as well.