All Forum Posts by: Evan Polaski

@Ryan Schaefer

I always look at the long term goals, first. Do you want to own multi-family? Management of MF is vastly different than commercial space. And even with PMs, with only 10-12 units, you are likely working with the same PM groups that will do SFR and small multi's, versus the (typically) more professional large MF management groups that will only take on 100+ unit properties. In the SFR/small multi space, the best I have heard is "my manager is fine".

But assuming you are willing to manage yourself or deal with the PMs, then it simply comes down to what's the additional cost to build, what is the additional cash flow you can expect, and is it worth it to you?

Adventures in CRE has a mixed-use model you can buy for pretty inexpensive, if you simply need a cash flow model to put in inputs. But the harder part will be determining your actual inputs to use. Market rents, market expenses, loan terms (both construction and long-term loans). You will run into allocations of NNNs, and what can be billed back to the dental practice and other retail tenants, and what needs to absorbed within MF allocation, etc. Nothing is terribly difficult, it is just making a lot of calls to understand what the inputs should be, validating them, and plugging them in.

And lastly, like others noted, if I could afford to do this without a partner, without taking on too much financial risk, for me, I would do it myself.  Adding investors adds more complexity in the whole process.  But, at the same point, I imagine just the construction cost of 10 apartments will add $1.5-2mm in additional cost, which in theory means $400k, minimum, of additional down payment.  For many that is not an investment amount available to put into a single project, and if that is you then you may need to seek out partners.  I would focus on other dentists, who typically are fairly high earners, see the value in owning their real estate, and likely already within your network through your wife.

@Dawson Foley, typically, the only reason to build new, versus rehab, is if you are going to increase the size or have MAJOR rework to the floor plan, i.e. currently one bedroom is only accessible through the other, with no easy way to add a hall.  

Given the scope you outline, the only things it sounds like may not be touched (or maybe just not listed) are HVAC and windows.  So unless you need extensive work to floor plan, which changes load bearing walls, etc, then I would say, the renovation will likely be slightly more cost effective, still put you closer in rent to new construction, and provide a low maintenance property for years, given everything will be new eitherway.

@Simandu Yakubov, there is no consistency when it comes to broker packages, but I will note that the brokers goal is to maximize the sale price for the seller. 

That being said, for priced deals, the list price is often somewhere in the middle. It is higher than the T-12 numbers can really support, but still leave something for the buyer. Additionally, while the proforma rents are reasonably easy to determine, the proforma expenses are quite commonly based on T12, and not achievable in reality, specifically insurance and taxes. Some brokers are good about adjusting taxes to post sale numbers, but many do not. And insurance is a major hurdle in many markets these days, where premiums are growing 15-20% per year.

As for a refi: technically yes, but refi's are notoriously conservative, since there is no arms length transactions. I have had lenders tell me I have "above market" lease rates, below market expenses, and then you get into the cap rate question. So, not to say this will be your experience, but as others noted, not only do markets move in 12-24 months, but even your actual numbers can be up for debate. But in theory, if there is enough movement on NOI, then yes, you could refi and recycle that capital.

Generally, as you are getting started, your three main sources of information will be brokers themselves (while they may be painting an optimistic picture, the good ones are still in reality), lenders (many loan brokers will happily take a look at a deal you are considering and throw it into their quick calculators, again giving you some ideas as what numbers they expect to see), and property managers (these are the front lines who are controlling your expenses and revenues, so typically provide the best info).

@David Switzer, while I am 100% for staging residential properties and I completely understand your thought process here, the challenge is knowing what use you will be putting in your commercial space. In retail: coffee shop vs clothing store vs jeweler, or industrial could be warehousing or some type of entertainment type use, i.e. axe throwing.

In general, if I had a tricky space with a pretty strong grasp of the use I wanted to put in there, and the staging was very inexpensive, then it certainly could help.  But, given most mom & pops won't have the budgets to do full build outs anyways, you may need to be careful with any visions you provide, because they could be coming back to you for the TI.

@Frank Nguyen, I am only echoing the other comments: if you have a verbally agreed upon price, personally, stick with it and get the lease signed.  A bird in hand is worth two in the bush...

There is always a chance the tenant will pay the higher rent if you renege on your verbal agreement, but like all relationships, trust will be broken.  And of course, they may choose to not renew.

Also remember, many listings are priced with the LL assuming at least some improvement costs needed for new tenant, which you don't have.  And if the market rent is only 10% more than current, you have to rent the space pretty quickly to not end up losing money on the turnover.  If the market rent is 20%+ it makes more sense to have some vacancy, but again, you will likely have some buildout for new tenant.

@Dani Beit-Or, I generally align with Stuart.  Not to say you are implementing these things to share with LPs to help build trust, but if you had me interested in investing, then went down a rabbit hole of all the ways you are protecting the investment, I would actually start to second guess my investment.

But more to your practical question: the best way I have seen this done typically requires a fairly large scale.  Your PM/CM has authority to sign contracts, and all are on 30 day payments.  Any contract over $1000 needs to be approved by VP of PM or VP of Construction.  Contract input into accounting system, which creates the payable for your AP department.  Your Accounts Payable department cuts checks for those contracts, directly to the contractor, through the accounting system.  The property accountant performs a bank reconciliation each month confirming checks cleared and tying to terms of the contract.  The Chief Accounting Officer signs the checks.  The third party auditor performs annual audits on assets and funds.

Clearly the process outlined requires at least 5 people to issue a payment, more if you include the third party audits each year.  But the standard saying of: don't let the people that keep the books, write the checks; is the simpler version.  You need at least 2 people: accounts payable writing checks, and bookkeeper recording the transactions to keep things fairly safe.

@Chris Guldi, while I have not done this type of deal before, I would think your best bet would be to go to the actual syndicators you know and ask if there is interest in partnering and what that partnership may look like.  If this is a great deal, I have yet to meet a syndicator that isn't interested in being involved in a great deal, typically. 

On the more "inexperienced" side, I have a friend that partnered with a syndicator, and that syndicator outlined the following, typical, structure:
Deal Sourcing: 20%
Underwriting: 20%
Asset Management: 20%
Capital Raise: 40%

Others will partner where splits of various fees/carried interest vary based on each partners roll: i.e. if one person sources the deal, underwrites and asset manages, they get say 70% of AMF, Dispo Fee and Carried interest and 40% of acquisition fee, while the capital raiser keeps 30% of those fees and gets 60% of the acquisition fee.


 

@Justin Walker, before paying any mentorship, I would spend some time doing research online for free. As you experienced, most "seminars" are marketing funnels to upsell something more. And honestly, MOST but certainly not all paid mentorships are just mid-level marketing funnels to get you to do more (common examples are deal sourcing or raising capital, where you do the work and keep a cut, but the mentor also gets a decent cut, too) Not to say it isn't worth it, but a multifamily mentor will not help you on NNN deals, and at this point you don't know what is better for you.

Additionally, I always recommend you start doing smaller deals first before hiring a mentor.  Some mentors are more marketing focused, some are operational, some are just high level logistics items.  If you learn that operations are pretty straight forward for you, but you need some pointers on marketing to bring in more capital, then it would be better to focus on marketing-biased mentors.  

Alternatively, NNN properties can be a lot of things. My mind always goes to retail: the free standing restaurant or Walgreens, for instance, which have their own nuances for finding good deals. But technically, most industrial (single and multi-tenant) and multi-tenant retail, are NNN too. They have their own nuances. When underwriting deals, they have different management fee structures, leasing commissions, expectations on tenure of any vacancies, TI allowances, etc.

@Karolina Powell

Generally, I would say your tenant pool in a the same submarkets will be the same, outside of single family rentals, which by default have "more" amenities than any multifamily (no one above of below, yard space, etc).  

Beyond that, I would say the actual amenities will drive more, to a point.  But there are certainly some tenants in all markets that prefer smaller properties to big, or bigger properties to small.  

And, as noted above, more tenants means more chances for disagreements, but that is a biproduct of size, not directly correlated to how I read your question.

@Cody Caswell

4. Be PRESENT and COMMUNICATE with the contractors.  

Even the best design board, electrical plan, etc will encounter real world issues.  My wife is a designer, as well, and does all of these things.  But, whether she has done new construction design, or renovations, nothing comes out perfect.  Whether it be a ceiling height that is off an inch or two, and therefore the perfectly aligned tile lines for the tub surround that now need to be biased up, down, or split in half...  Or a perfectly centered vanity light that actually has a stud right in the way...

She has to be present nearly daily on renovation projects.  This is not a hands off field.  And the number of nuanced decisions that need to be made in order to have a well-executed design simply cannot be fully covered prior to demo, and often even after demo, especially if you are talking renovations.