All Forum Posts by: Evan Polaski

It has been a while since I was watching any flipping shows, so maybe things have changed.  But I seem to recall most of them being on the fast end of "realistic".  The bigger thing to me was the seeming disregard to permitting (although maybe they didn't need it in their areas).

The bigger lie to me was the budgets.  Some seemed fairly real, but a lot felt like just the labor was going to be significantly more than stated budget.  

And of course there is the mathematics of the actual flips.  Production companies need commitments of typically at least 10 houses per year.  So, if you have a $150k contract to be filmed, and there are not 10 good properties worth buying, you have to start thinking: I am 2 houses short, given me the two that will lose the least amount of money.  If I get two that lost $50k each, I am still ahead $50k... versus losing my contract with the production company.

@Denise Supplee, I wouldn't say there is a single factor yes.  Because, first it needs to be an asset class I generally believe in to create strong returns with minimal risk.

Then it has to be a group that is both professionally run, with a clear focus, and also strong alignment of interest.

Within the alignment: it gets to what Michael was alluding to: the groups that are run to make the sponsors rich right away with copious fees, no true co-invest, egregious waterfalls, etc.  

Ultimately, it looks like a combination of Michael's and Chris's comments.  There are some syndicators out there that have investor losses, realized or unrealized, that have learned from their lessons.  I.e. if you are doing capital calls and "pref equity" raises to bail out your floating rate deals, while still buying new properties with floating rate debt, you have not learned anything.  But, if the sponsor is investing a $100k into a $10mm raise on a $30mm asset with a 3% acq fee and another 1% financing fee, even if it is fixed rate debt, this sponsor both has no co-investment ("investing $100k to make $1mm at closing" is not co-investment) and has no real alignment given the fee load relative to potential carried interest value.

We can also get into anticipated hold timelines, who the management team is, what the management fees are (if internally managed), NOI projections on current deals relative to actuals, etc.

To Michael's point, there are not a lot of syndicators discussed on these forums that elicit much confidence in being able to add any real alpha to deals.

The biggest lesson I learned from both the GFC and today's market cycle is:
If you go in with a long term mindset, you will (almost) always be fine.

Short term debt is not an option if you plan on holding 10+ yrs.
Capex budgets become less of an issue (I know of more than a few syndications that have fixed rate long term debt, but are suffering because roofs, repaints, foundation issues, etc are becoming real issues now that the deal is no longer a 3 yr hold, but rather a 8-10 yr hold)
And like BRRRs, even refi's start to become more realistic when you budget for long term holds.
Yield maintenance/prepayments become non-issues when you intend to hold long term.

Lastly, like Brian noted, what I see is that if your goal is long-term security in your investment, typically, you go with well seasoned investors.  Why?  Like Brian noted, like I have heard Ken McElroy and others with decades, not months or years, of experience: these guys took their lumps in the past.  They likely learned the hard way.  They focus on operations when deals are slow to come, but they better optimized their teams to whether the storm, when the next one comes.  And this allows them to stop chasing deals when the deals don't make sense, because they don't need the acquisition fee of a new deal just to keep the lights on.

@Saul Vega, like Caleb, I am not totally clear on what you are asking.  But assuming Caleb is correct, I would say it all depends on the scale you are working at and what you are putting in your contract.

I lock up deals by offering fair prices for houses.  And I only offer on houses that I have toured and have a good handle on scope of work and ARVs.  

I am trying to understand what you are even asking, and all the comes to mind is you are asking if we think you should be blasting out lowball offers with great terms (other than a low price) and high EMD? And so you are taking the spray and pray technique: send out hundreds of offers sight unscene, and only tour once they accept.

Is this what you are asking about?

@James McGovern, because gurus are marketers first and operators... hopefully... a distant second.  I know you mentioned flippers, but the MF gurus are typically guys who barely got their first deal done, and then realized they actually need to make money somehow until the deal hopefully sells for a profit.  So, they take to teaching.  

And while, there are some people who are purely drawn to teaching others, MOST that are teaching any capitalistic pursuit, are doing so to make money themselves.  In flipping, like multifamily, it is just a lead magnet.  "Buy my course to make millions in real estate".  Then it goes one of two ways:
1. The guru makes it sound so hard that you need to pay their upsale.  Find them a deal, they will finance it, they will bring their contractors in (for an additional fee) and they will walk you through everything for a share of the profits too.

2. Make it sound simple, so you go out and realize that it isn't that easy, and then need to go back to them for an upsale like in option 1.

Being a guru has nothing to do with knowing anything about how to do something.  It has everything to do with marketing yourself as an expert to make money.

@Rajagopalarao Paidi

The ONLY reason places don't sell is price.

Not saying any of these are specific to your property, but:
Bad Neighborhood
High traffic street
Bad School district
Too small for typical buyer
Shoddy workmanship
Major structural defects...

All of these are non-issues if the price is right.  So lower the price.  Potentially, it may be worth taking off the market for a week or month, or whatever is needed for your house to show as a new listing, and then relist with a price as close to breakeven as you can stomach.  

Of course a lot of factors will play into this, but if you are offering a great house, at a great price, then coming with a lower price could very well create a bidding war to drive up the price.  

@Josh Smith, of all the posts, I agree with Don the most.  If you want to keep your wife, you need to align on goals first.

Her goal is a forever home.  Is she willing to get the forever home at all costs?  Is there a way to get the forever home that is an investment too, i.e. my current house is starting to feel like a forever home.  It was also a gut renovation when we bought it, and so we have a SIGNIFICANT amount of equity in it, and more than we ever made in any of our actual flips or rentals.  

To me, the personal side needs to be setup before you can think about investments.  I get lifestyle creep, where somehow you make more money, yet still don't have more.  It is hard to fight. And I am not one that entirely thinks real estate is the best or only investment.  Are you saving into your 401ks (assuming you have employer matches)?  Are you saving each month out of your take home?  If not, owning a rental property isn't going to help you much. Even if you get a house that creates good cash flow, if you aren't living within your means now, you will end up spending that money too.  And then, when those very expensive and necessary repairs come, you won't have the money.  

And lastly, even if you don't get the forever home, you need a place to live.  Do you really have enough equity in your current house to sell and buy two houses at today's prices with today's interest?

@Mitchell Flaherty

Similar to Caleb's comments: first you need to understand if your improvements will actually add value.  I.e. replacing the HVAC is, likely, a necessary maintenance item, but it is not an improvement in any meaningful way.  So, whether you refi before or after HVAC repair won't really matter.

If you are doing improvements that are likely to increase the value, then I would typically say refi AFTER the improvements are done, so that you can get credit for them in your appraisal and therefore potentially increase the new loan amount.

Then you get into interest rates and what you can actually tap into while maintaining cash flow from the property.  If you have a 4% interest rate currently, you are unlikely to tap into any equity through a refi at 7%.  But this is all worth talking to loan officers about and understanding, generally, where rates are, what your likely new payments will be, etc.

@David McDonald, do people trade short term cashflow for long term equity?  Yes, but typically in high appreciation markets, like greater LA area. :)

I am lucky enough to live in a "high cash flow" market, Cincinnati, OH.  But, based on long term averages, my rentals would have performed 3-4x better financially if I bought in Los Angeles back in 2011 instead of Cincinnati. As Nicholas noted, there are a lot of often overlooked risks when investing OOS, which would have been true if I invested in Los Angeles.

As for the tenant laws, while I hear your concern, I also know of many people that have had rentals in CA and NYC that have performed VERY well.  Generally, like all rentals, I think a good tenant screening will mitigate many of those risks. 

Lastly, as you are chasing returns, one of the most common items I see overlooked is the cost of travel, when investing out of state.  Travel to the market to tour houses and neighborhoods before you buy.  Then, travel at least annually, ideally twice a year, to see your properties.  In many cases, when you are buying $200/mo in cash flow before travel, and then add even one trip: flight, rental car/uber, hotel for a night, a couple meals out, you have eaten most, if not all of your cash flow for the year.  Of course this gets amortized over many properties if you build a portfolio there, but it is still a cost that must be considered.

Flipping in my own market.  Or put it in the S&P500.

But this is an irrelevant question.  What are your actual goals?  How much work do you want to put into placing the capital?  How much risk are you willing to take?  How are you actually adding value in any meaningful way to the investment?