All Forum Posts by: David Monroe

@Noah McBride Something isn't jiving. If the rent roll is $17,800/mo and the average rents are $700/mo on 20 units, that's only $14,000 a month.

Where did you get the information that market is $950/mo, and did you vet that information by walking the rent comps?

Your margins are really thin on this property so you want to make darn sure you get the expected rent growth.

I'll pull a CoStar report for you and test the market rent data you've received.

@Jeff Lundeen When we purchase multifamily properties with a value add rehab component, we plan to cash out our investors on refi at re-stabilization, usually between 12 and 24 months.

To factor in rising interest rates we just proforma the refi loan to be 100bps, 1%, higher than the original. If rates don't go up that much, we win even more, if they go slightly higher, then as mentioned previously, it would be negligible. 

@Steven Eitreim I'm afraid i'm going to have to disagree with your statement that rents will rise with inflation. The 2 have nothing to do with each other.

Rents are a product of supply and demand, and the reason multifamily survives recessions better than any other asset type.

When interest rates go up so does the cap rate, eventually. It's dependent on the buyers risk and cost of capital. So rising interest rates will effect the value of an asset.

@Emily Jones There's an app called land guide. It runs off your GPS on your phone and will pick up all the property information around you and even follow you as you drive.

You can see parcel size and number, owner information, zoning, and more. There is a 30 day trial then a small fee, like $14.99 a month.

@Kellen Driscoll Is Renee your Agent?

Some of the comment above are really good, especially on hiring Experts to look at the mechanicals, electrical and roof.

Here's what I do for every property I invest or broker:

• Hire the experts for the mechanicals, electrical, roof and foundation.
• get 3 years of P&L, since this is a small property the owner probably doesn't have a P&L, ask for his schedule C tax returns, the bank is going to want to see them anyway.
• Current rent roll. If things copacetic, that should be enough, otherwise ask for the last 12 months of rent rolls. Again, small property owner may not have a rent roll...
• ...In which case create one yourself from the leases, and last 12 months of rent receipts. Make sure you look at the move-in date, lease expiration, and tenant deposits. Create a balance of rent owed from the rental receipts.
• DO NOT INTERVIEW THE TENANTS! If you want to piss of the owner, go ahead. This works in your benefit as well. If the tenants think the property is for sale, they will move out for fear of rising rents. The numbers will tell the story on who's naughty and who's nice.
• Interview the fire inspector and chief building inspector to ensure the property has no outstanding violations. If possible get a meeting with planning commission to find out what the master plan is for the immediate area.
• Get a survey, phase I and possibly II environmental, and if the lender requires a third party condition assessment, for God's sake DO NOT hire a local property inspector, no cares if the linoleum in the kitchen of unit C2 is pealing in the corner. Hire a firm that will do property condition assessment, PCA, and the phase I and II environmental inspection. They will only walk 10% of the units. so you will need to walk the rest with your team of professionals.
• Walk EVERY unit. For occupied units, apologize and thank the tenant for allowing to inspect their apartment, be very kind and DO NOT dig under sinks or open closets. Be respectful for their time. You will get an idea of the condition from the vacant units.
• Get a copy of any insurance loss reports from the last 3 years. This will be required by your insurer and give you an idea if there was a fire, flood, wind damage, etc.
• Find the rent and sold comps for the property and WALK THEM! Act as if you're looking for an apartment. See what the condition of the units are in compared to the subject and see if you have room for updates and rent increases based on the comps.
• Get your personal financial statement together for all the managing members of the LLC, and all the financials and tax returns from the property, to include your proforma and summary of operations, because the lender is going to require them for their underwriting.
• Look at the local demographics and make sure the tenants in the market can afford any rent bumps you have planned. This can be done by pulling a per capita income report for the immediate area. As a property manager you want the tenant to have at least 3 times the monthly income of your proposed rent. Per capita income will tell you the average annual income for the trade area per employee. This is an advanced strategy not many people use, and it has bit them when they couldn't get their rent bumps they projected.
• Pull a flood plain report and make sure the property isn't in a flood zone. It's OK if it is but you will need an elevation certification before you can get it insured.
• Look at all the vendor contracts, especially laundry. You want to look for areas you can save money and any contracts that may be hard to get out of. You will hear that it's impossible to get out of a laundry contract. It's not true. The owner of the property, or LLC, is the holder of the contract, not the property. When you take title, unless you assume the owners LLC, the contact is no longer valid for the property. Disclaimer - Consult with an attorney in your state to verify this statement.
• If you aren't going to manage the property start interviewing management companies. The lender is going to want to know who is going to operate the property.
• If you're going to rehab the property, start getting contractors in and getting quoted on the repairs so you can properly budget for the rehab and be  more accurate on your proforma, especially if you have investors.
• If you're seeking private investors, and it's more than just a couple of friend or colleagues, you need to hire a SEC attorney to draw up the disclosures, PPM and operating agreement for the property.
• Stet up and register your LLC. You will need to have it done before closing so you can take title in the name of the LLC, if that's the route your going. If your taking title in your name, disregard.

OK, that's enough for now. If you have any questions, please don't hesitate to ask.

Obviously the CCIM Institute or Institute for Real Estate Management, IREM, have the best courses for learning how to do financial analysis and give you the tools to do it.

I read a book a few years back that was the best book on cashflow I ever read. It's called, "What Every Real Estate Investor Needs to Know About Cash Flow" by Frank Gallinelli. It's available at Amazon in Paperback and Kindle.

If you want passive income from investments in real estate then you need to invest your money as an investor, not as the owner, sponsor or syndicator. You can do both, as I do, be the sponsor on a deal and invest passively as a private investor. Here you get to share in the Sponsor's equity, active income and treated as such by the IRS, and the Investor's equity, passive income and subject to passive loss rules.

As a sponsor, owner, or syndicator, even if you have a third party firm managing the property, you still have to manage the manager, the investors, and the investment. This is in no way a passive activity, even though it may be part time, and you will want to show it as full time for tax purposes.

As a private investor you have no decision making in the deal, and all you get are monthly, quarterly or annual statements, depending on the sponsorship, so there is no active participation in the investment. You don't even get voting rights in the LLC.

Disclaimer- I'm not a CPA nor an attorney so please seek advise from them before making a final decision about how to invest you money.

@Kevin Dean Here are my thoughts on a macro level:

The Fed's actions are absolutely contributing to the volatility in the stock market but not for the reasons people think. Their actions have caused the short term interest rates, the 2yr Treasury Yield, to sneak up to long term interest rates, 10 year Treasury Yield. 3 weeks ago the 2yr note surpassed the 3yr and 5yr notes effectively causing what's known as a partial yield curve inversion. Since, the 2yr has gone back slightly below the 3yr.

At this writing the 2yr is at 2.518% and the 10yr is at 2.716%. At every point in history, since 1960 when they started tracking this, when the 2yr passes the 10yr in value cause a yield curve inversion, the Country has gone into recession within 6 to 8 months.

A month ago I was seeing interest rates tick up from the GSA's about 50 basis points, bps, or one half a percent. At that time the 10yr treasury was at 3.2%. It has since gone back down.

Capital is flowing into all classes. The class "C" value add space is getting the most attention but inventory is getting scarce. Out of the "A" and "B" properties, the class "B" space has the best chance for adding value and the capital loves this space because because of the low vacancy. The 1031 buyers are dominating this space.

REIT's love the class "A" properties, particularly just built and stabilized assets.

We are definitely at the top of the National market and most primary and secondary markets. Some terciary markets still have room to grow, which is why it's wise to invest outside outside your local market.

Since value have gone through the roof in last couple of years, you can't even buy a class "C" property over a 7 cap in most places these days, it's smart to focus on building investor relationships and getting your available equity from investors up so you have the opportunity to pounce when the market is ripe again.

Investors need be aware of the market they're investing in, especially where in the cycle the market lies. There was an offer recently circulated for a large property on BP in my local market and they took the word of the listing broker about our market fundamentals, the broker isn't from our market, and now they may be in a pickle because they didn't take the time ask local experts what's going on.

My best advice is don't stop looking for deals, I found a true 10.28 cap in Texas this year and took it down. There is still a couple of opportunities out there.

@Noah McBride I have a couple of important questions to ask:

• When was the property built?
• What's the condition of the assets, inside and out?
• What's the vacancy?
• What's the neighborhood like?
• Why are they selling?

I can tell you without seeing a P&L that the net operating income, NOI, is probably around $117K using an 8% vacancy and 40% operating expense ratio, OER. If the owner is paying the water & sewer and the property is older than 20 years then I would change the OER to 50% lowering the NOI to around $98K.

Have you looked at the market and determined if there's room to raise rents or lower expenses. Keep in mind that you always have to adjust your insurance, management, and property taxes post sale for your proforma.

The struggle I see with this asset is getting a loan that will support a 1.25 debt service coverage ratio or higher. If you don't know what that means, the NOI must exceed the annual debt service by 25%.

If this is your first property, you will either need enough liquidity to equal the loan amount for a lender to aprove you, or will need to partner with someone that does. If the partner has a good track record, you could get a non-recourse loan but you still have to personally guaranty via the bad boy clause in the loan documents.

As far as raising the money for the purchase, you would need to raise approximately $575,000 to cover the down and closing costs at a $2M price point, take inventory of your relationships, put a package together that shows why this is a good investment, and start calling your relationships to get an appointment with them. 

You want to try and over subscribe the ask by 10-20% just in case you have 1 or 2 back out. I wouldn't ask for less than a $25,000 minimum investment.

If you are raising money in this way, and it's more than 2 or 3 friends or colleagues investing with you, you will need to hire a SEC attorney to draw up your disclosures, PPM and operating agreement for the LLC you'll create for the asset.

I know this sounds like allot, and it's why most people start with smaller properties or partner with someone experienced. 

Not knowing anything about this property yet, this doesn't sound like a very good deal, unless your strategy is strictly cash flow for a long term hold, and the property supports it.