All Forum Posts by: Evan Polaski

I love that this came back to the top, mainly since BiggerPockets does typically rank well on google results.

@Jason Palliser, I would be curious how many home owners you have helped stay in their house?  While I will trust that you have good intentions, it appears based on this post, that you are selling this system to would be real estate investors.  Presumably under the guise of being a way to make money from real estate.  

I would imagine, most of your students are using this course in a way that does not align with any altruistic goals of helping "down on their luck" owners keep their houses, but rather in a way to try to access deals before they hit the market.

I am not faulting the system, if that is the play. My concern is what is coming across as a thinly veiled altruistic purpose, which is truly a way to understand your potential seller's pain points in order to capitalize on their misfortune in the most profitable way.

@Garret Rumbea, to be fair the money I am likely losing also underwrote conservatively, at the time.  It just wasn't conservative enough.  And while they underwrote conservatively, they didn't structure the deal conservatively, in hind sight.

They have a pref in their deals.  They have tiered waterfalls, so I keep more if they only perform marginally better than a pref.  But at the end of the day, the biggest alignment will come from having real money in the deal.

I understand the point of an acquisition fee.  But I no longer invest in groups that the acq fee takes out all of their co-investment.  There will always be a misalignment of interest, but using a deal I am currently working on as an example:
Purchase Price: $6.8mm
Acq Fee: 2%
GP Co-invest: $390,000
GP Co-invest net of fee: $254,000

So if the deal starts going sideways, I still have $254k to fight for.  But if I didn't have any money left in deal, and it starts going sideways, my only fight is for the carried interest, which can be profitable, but the further a deal slips, the less I have to fight for.  So, again, a sponsor needs to have real skin in the game, not the illusion of skin in the game.  And we can discuss reputational damage all day, but I can't take that to the bank.

@Carlos Silva, I would talk to an attorney.  There are pros and cons to each structure.  

The ones that come to mind: a mortgage, only in one member's name, means they are bearing the liability brunt. Things go south, it is exclusively their credit on the line. And while there will likely be agreements between the 3-4 of you, that one person ultimately has the biggest liability on them. And even when you transfer to an LLC, the mortgage does not move over too, it stays on the one person. If I were that partner, especially when you only own one asset, I would be asking for more of a share in the partnership to offset those risks.

If I were looking to do something like this, I would form the LLC and outline all member's equity contributions, responsibilities within the partnership, etc. Outline all the financial arrangements: how are reserves handled, accountant's bill, repairs, etc. Outline what happens when capital contributions are needed but not all partners can afford to fund them. Outline how you can remove a member or bring in a new one. So on and so forth.

What should not be handled in that agreement is the fact that one member is living in the property.  That member is a tenant, like anyone else.  They pay rent, which flows to the partnership account to pay bills and build reserves.  When they move out, nothing changes, because a new tenant moves in and pays rent.  All tenants get the same treatment. Security deposits on account, move out checklist and repair requirements, etc.  If the member that is living there is also managing the property, that is handled in the partnership agreement, not the lease, or is a stand alone management contract.  again, this way, if they move out and don't want to manage the property anymore, the partnership can cancel the management contract and hire a new management company without impacting either the lease (if still in place) or the partnership agreement.

I will offer the story of someone that found NOT success in passive multi-family.  

Ultimately, passive investing is ideal for those that already have very high net worths and/or plan to maintain their high incomes for quite some time.  

My "not success" is based on many factors. Buying at peak (my 21 and 22 investments are likely complete losses), buying on floating rate loans, misalignment of sponsor (acq fee resulted in about a 5x+ return to sponsor day one.  Put another way: $2mm co-invest into fund yielded about $12mm in acq fees for sponsor).  

I know my experiences are very limited in the universe of all passive investment opportunities, so take with a grain of salt.  And all of these issues were disclosed up front, so I take responsibility for not being more prudent in my diligence.  The sponsor had a great track record prior to that, and held in very high regard in the community.  They got greedy when capital was flowing, and I got greedy thinking the COVID boom would only die off slightly.

Personal money and one outside investor. No bank/HML/Private lender money. All equity.

I forget the exact amounts, but I think on the equity,  I (we, really, because it was my wife and me) put in 50% of the equity and had an investor that was a close friend put in the other half.  

Any profits were split:
50% to project manager (my wife and me)
50% to equity partners

Therefore, I effectively kept 75% of the profits since I was due 50% for management, and the 50% of the 50% for the equity.  

As you note, most lenders that I know of will not lend to first time flippers, so your only real option is to use your own money or raise equity from outside investors.  I am sure there are some lenders out there, but given how lean flips are these days, your fees and interest can quickly eat all of your profit.

As for the lenders I worked with, they required at least three completed flips before they would lend to us.  And even then it was never more than 80% of total costs, so I still had to bring real money into every deal.

@Basit Siddiqi

2 and 3 from your list: 100%

Regions and dedication to running investments is a scale issue.  I.e. Blackstone seems to have limited issues going into new regions but they have ~5,000 employees.  Same with marketing efforts: typically the "household name" was never running deals.  They were the marketer, while the other partner is focused on deals.

Appropriate capital raised: also a scale issue.  A new group raising $20mm is vastly different than a large group raising $20mm, proportionately.

Indicators of success: 

1. Market cycle. All groups you mentioned only know a bull market.  They built average track records within the timeframe they were investing, and clearly assumed things could only go one way.  I don't know that we are in the bottom (I thought 2008 was close to the bottom, but *boom* 2009 and 2010 made me long for 2008, again).  But, if you catch a deal with solid, LONG TERM fundamentals, you might not get a home run, but you likely will be safe.

2. Acquisition Fee: biggest driver I see (and apparently all institutions too) is level of acquisition fee.  2% or less is ideal.  Most institutions won't pay more than 1.5% (and some 1%).  3+% is a solid indicator that sponsor is more focused on quantity over quality. Note: also look at co-invest minus acq fee.  This should still result in sponsor having money in deal.

3. Reaffirming your experience piece.  Sponsors should have worked in industry long before they raised a dollar of outside capital.  Some groups scale slowly with their own money, others come from long experiences working for other companies.  Personally, I don't invest in anyone that hasn't lived professionally through the GFC, so by default I don't invest with anyone under the age of 45 yrs old.

4. Deal level fundamentals. This is very broad and can encompass a lot. But a big one is capital structure: financing type and terms. A deal that can support a 10 yr fixed rate loan today at an inplace 1.25 DSCR is far safer than a floating rate bridge loan at 1.25x DSCR due to a significant rate cap purchase.

And most of all: know your own goals.  If you want to minimize your chances of losses, you will not be getting 20%+ projected IRRs.  If you want 20%+ net IRRs, you are taking on more risk, and therefore more likely to strike out.  

At the end of the day, real estate can either be very safe or very risky.  It can create great long term returns, or it can wipe you out.  In general, real estate is a highly efficient market, if you are seeing 20%+ net IRRs, just know there real risks in the investment in various ways.  And if you want safety and surety, you will very likely not be getting much more than high single digits/low double digit returns.

Coming late to the party, well, because BiggerPockets has not held the same value it used to 5+ yrs ago.

To your point, @Remington Lyman, yes it has been a noticeable decline in content, interesting threads, etc.  I think the primary driver is the market shift.  While it gets old answering the same newbie question "how do I start investing in real estate without any money?", at least 4 and 5 yrs ago those questions came with some sort of genuine desire to learn.  

So,while the AI issue has become frustrating, I think the bigger issue is just the decline in interest, resulting in fewer active participants with an actual interest to learn, resulting in a less robust forum.

@Gregory Schwartz

Office is not dead, but it is certainly a high-risk investment class right now.  Last reports I was reading in my market is suburban office leasing is actually up year over year.  Urban core is still dramatically down.  And within the "suburban" space, it is really area by area.  The newer properties that are still highly convenient to population densities and retail options tend the fair best.  

And even then, it is a cash flow play.  I was talking with an operator that had a 100% leased suburban office property in Easton (outside of Columbus, OH).  When they took it to market, their only offer was at a 20% cap rate.  They were willing to sell at a 12% cap, but hadn't gotten it last I spoke to them.  Credit tenants, lots of life left on leases, one of the best trade areas in Columbus, OH.

www.adventuresincre.com

They sell models.  They have tutorials on how to use them.

Combine that with likely some good content on youtube in general and you should be all set.

I will note that underwriting it part art, part science.  The science is plugging in numbers into a model (or building a model from scratch).  The art is knowing if the numbers you plugged in make any sense.  Is your business plan viable?  Can you really push rents 30%, and when you do how many units will vacate and for how long? What upgrades will help your property stand out to potential tenants?

@Ian Russell,

Just remember that investing out of state affords you different risks.  You can clearly find this.

For me, who lives in the midwest, I would say it overpriced here, too.  At least in the west you have historically made good appreciation.  I am not sure the same can be said, en masse, for the midwest.  And I think the south has seen the COVID boom come, but I don't know how much that will continue.  

So, what I will note is:
a) typical single family management company is 10% of gross, and often 1 month's rent for new leases, and 1/2 month's rent for renewals.  Did you plug this into your equation?

b) wherever you buy, I would be sure to factor in a couple trips per year for the first year or two.  Once you have a PM and leasing agent you are happy with, you might be able to reduce that, but if you are like me, you are not going to just put $450k to work somewhere and trust it is all going well.  My experience with third party PMs is they are "okay" at best, and many are terrible.

c) $200k new construction impresses me as a combination of pretty small houses, cheap construction, and potentially either a pretty small market and/or rough neighborhoods.  I would specifically look at the incomes of the area.  I would want to see average household incomes north of $75k/yr to support that rental level and leave people space to eat.

d) my perception of a small, cheaply built house in a marginal area is you won't see much appreciation, using you $200k new construction example.  So, while you seem to be more focused on cash flow, 9 times out of 10 you make your wealth in real estate from appreciation.  I would guess you are forgoing pretty good appreciation on your duplex for cash flow, and therefore you need to make a pretty healthy spread on cash flow to overcome, what I assume will be, a much, much lower appreciation on midwest/southern housing.