All Forum Posts by: David Thompson

Trying to time the market is difficult to do and most will say not a sane business strategy.  A foundational model based on a strong market (jobs/population exceeding averages and projected to continue), conservative deal assumptions / modeling (rents, occupancy) and an experienced team should weather downturns.  I point to 3 things w/investors when we discuss risk.  Our only concern is a black swan / cataclysmic event that we cannot predict or have not weathered.  The typical downturns or even strong downturns you should have evidence of how your investment can hold up.

1) In 2008, most consider a very strong correction, MF loan delinquency nationwide was 1% vs 4-5% for SFR

2) In Houston, 2013 oil fell from $100 to $50 barrel.  Being an oil dependent city economy, this is a good test on a local level of what can happen.  Class B/C value add occupancy held steady while Class A fell off a cliff.

3) In Dallas, we have data on avg occupancy dropping to 85% at the worst point in 2009 (REIS data) in some key submarkets where we are buying today, our sensitivity analysis is built to show investors that rent can drop 10% from projections and fall to 75% occupancy and breakeven.

HiTaylor,

Thanks for sharing.  I follow these guys and they have some interesting seminars.  Appreciate you sharing your learnings and the next conference info.  I've found several of your 10 takeaways relative to my engagement w/investors and raising of capital.  Here's a few other things to consider.  My takeaway is that you can always be continuing to refine your craft.  

 https://www.biggerpockets.com/blogs/9145/67627-rai...

Sam,

Not sure if you mentioned being active or passive.  I've taken Scott Myers 3-day course and definitely a good place to start if you are new and looking to be active.  I took it not to be active from an operator standpoint but to learn more about the industry as I looked to partner / syndicate w/operators in this niche as I had a growing investor base interested in learning about it.  Here's a high level blog on its attractions.  I also think a good place to learn and earn is being a passive investor with experienced syndicates that offer self storage investment opportunities.  

https://www.biggerpockets.com/blogs/9145/54155-sel...

@Mark Allen thanks for adding that additional perspective.  This clearly highlights risks in class A and accurately talks about pricing and salaries that need to catch up on new construction, not supply / demand for MF in general.  DFW continues to be a strong market for class B/C MF assets where rents are far more affordable for the continuing growth in population and jobs. The pricing comparison on rents for these posh units discussed in the article and B/C rents is not even in the same ballpark.

@Alex G., typically on the gross revenues.  It often is charged quarterly in a lot of the deals I'm engaged in and certainly the GP should have a lot of discretion when to take it.   It can be deferred under soft market conditions to conserve cash.  I also see in some of our deals we don't even take it until the preferred return of 8% is achieved for the limited partner.  Syndicates at a min want to do everything they can to protect that 8% for its investors.

I've also seen the asset management fee based on property value which personally I don't like as much as on the revenues.

My observations are that financial magazines by and large are funded (advertisements) by large financial institutions which are more focused on getting investors to buy their stock and bond products.  As REITS trade like a stock and are offered at these types of institutions you often seen more coverage of this asset type.  Direct owned real estate gets far less attention and is covered by far fewer experienced reporters with deep knowledge of real estate so it does not surprise me at all that reporting is not as helpful for the experienced investor.

Kurt,

While MF apartments managed by proven operators over many years has been a great core holding in alternative real estate investments you may want to continue to evaluate if you should put all your investments into one niche.  I find most investors like MF as a main core holding as folks have to live somewhere (almost everyone reading this probably lived in one) so they are comfortable with it. Other attractive niches like self storage (one out of ten people use one) and mobile home parks where many folks have never lived in one are often overlooked investment niches.  So you may want to research a few more areas with similar return characteristics that have positive future outlooks (see a few of these ideas in below blogs).  

I like the systematic approach you are laying out.....dollar cost "averaging in" approach to reduce market timing risks and what I internally call a "cooling off period".....minimizing putting a lot of money at work at once to give the rationale mind a chance to catch up.  I do like investing with multiple experienced partners in different geographic areas.  

https://www.biggerpockets.com/blogs/9145/54155-sel...

https://www.biggerpockets.com/blogs/9145/62927-6-r...

Hi Kay Kay,

I have had the pleasure of chatting with you before.  You have a catchy name..ha.  I think you are doing the wisest thing and that is reading, asking questions and ultimately developing a strategy and plan that works for you.  Assuming you want to be passive and its real estate related (I won't portend to go into financial advising areas, diversification, etc), there are a variety of niches that might be logical for you to consider.  I think diversifying into areas you have researched that make sense to you (trends, good downside protection especially since we may be later in the cycle here); thinking about geographic and sponsor diversification may set the framework.  Timing and specifics you'll ultimately need to work out.  I like 3 areas now (value add MF apartments, mobile home parks and self storage).  

I have several articles on my blog sections but here's a few to get you started (diversification with syndication; 10 tips for vetting sponsors).  I wish you the best and reach out if you'd like to go deeper into some of these areas.  

https://www.biggerpockets.com/blogs/9145/59865-div...

https://www.biggerpockets.com/blogs/9145/53959-vet...

@Bart H...in the market now you can obtain 10 year fixed loans at very good rates (say low 4%) and pay interest only for a period of time (say 2-3yrs though we just scored 5yrs on our latest deal). This supports better cash flow to investors during the renovation ramp / rent adjustment period (typically 2yrs). Amortization is over 30 years. Instead of refinancing a good underlying fixed loan and pulling money out for investors, it's better to look at using a supplemental loan after the renovations are complete and you have achieved your rent projections (increasing its FMV). The supplemental loan is on top of the underlying fixed loan. This enables funds to be pulled out to the investor increasing CoC and IRR for the investor at end of yr 2. This also reduces investor risk because we are now paying back more of their equity earlier in the program (typically we target a 5 year hold).

How does this not become riskier you might ask? Well, the LTV starts at say 75% may go down to 65% as the value of the property has increased thru your value add strategy. Hence, the supplemental loan gets us back to 75% where we started which was safe debt in the first place. This allows us to keep the bulk of the debt at a very low rate and provides us with 8 more years after renovations to look for a better market exit.

I think folks get the impression that in a downturn we won't make money, be forced to sell, etc?  Well, we won't sell is the goal.  We hold on and if positioned well, we continue to payout distributions to our investors and weather the storm looking for a better exit.  Sensitivity analysis will show you how low occupancy and rental rates can drop to B/E.  Surprisingly for many, its pretty far say 75% occupancy and reduced rents 10% for B/E.  Get 3rd party data to show worst case avg occupancy of apts in past 15 years in the submarkets you are in.  It's usually not much worse than 85% because again, folks have to live somewhere.  At 85%, most of the deals that are conservatively underwritten are producing 4-6% cash on cash.  

Keep in mind the 2008 downturn was pretty darn severe and the laws that were in place unfortunately prevented a lot of mortgage loans to be re-worked as they were part of large collateralized mortgage packages sold to investors via Wall Street.  Those laws have been changed to prevent as much damage next go round.  Even so, during this period MF mortgage delinquencies were still in the 1% range versus 4-5% for residential. Overbuilding / oversupply is something you always need to watch but new construction is where that will hit first and do the most damage.  We saw this in 2014 in Houston w/oil falling from $100 barrel to $50 barrel  w/B/C value add properties there performing admirably while class A occupancy fell hard.

Vince,

Couple thoughts in helping understand the landscape.  @Leslie Pappas mentions that are some pros and cons that I've experienced as well from an investor and syndicate viewpoint.  The portal is simply a path for sponsors to raise capital and investors to look at deals.  There is not a lot of interaction between the online investor and the sponsor, so getting an education on the market, deal and team may be more challenging.  The investor has to figure that out.  Pluses may be lower entry points than going direct to a syndicate, the ability to invest in several deals like a shotgun approach and perhaps diversify into several niches and geographies.  But a good syndicate who doesn't use crowdfunding platform to fund their deals, grows investors organically through relationship building will be a better bet for newbies and those wanting to get a real understanding of the asset class, market and deal that they are evaluating.  This business works well on trust and experiences.  I think a lot of new folks may not know truly what they are investing in or the people behind it.

https://www.biggerpockets.com/blogs/9145/63405-syn...