All Forum Posts by: Greg Scully

@Au Jia - I would say go to commercial multifamily as soon as you can. 

You mentioned in your post that commercial appreciation potential is lower, I tend to disagree.  With commercial properties you are able to "force" appreciation because the value is largely determined by the net operating income rather than comps (like residential).  When purchasing value-add apartments the upside potential is significant and any proceeds from a refinance after repositioning is tax free.

The lending process is not necessarily more complex, it's just different, and because it's the same amount of work to analyze and secure funding for 10 units as it is for 100 units, I would suggest going as big as possible.  A 100 unit property is not 10x the complexity and cost (closing/due dilligence) of a 10 unit.

I think the return potential for commercial is higher, that's because you're buying a business, and there are more tax, lending, and partnership opportunities for businesses than there are for individuals. Accelerated depreciation is just one strategy that can significantly offset other earned income (including your spouses)...I'm not a CPA. Generally speaking too much emphasis is put on cash on cash returns and IRR instead of looking at how all the aspects of the business affect your personal situation. Without going too deep into it, the returns can be divided among the investors too meet specific needs: some may want more cash flow, while others need the tax shelter aspects...I'm still not a CPA.

One good way to learn more about larger multifamily properties is to invest passively.  You can find syndicated deals that have preferred returns from 6-10% and the LP also get a piece of the upside.  Typically these are 5yr holds.  You'll get a good introduction to the process, paperwork and how a property operates as a business.

FYI, I started with SFR (2), passive multi (50 units), and now owning complexes (62 and 41 units with partners). All of which are out of state (Tennessee).

@Jonathan Aymin - Since the value of a commercial property is derived from the NOI/CAP rate, an increase in the NOI (either by income growth or expense reduction) will have an affect on the value.

If you purchased a property with a NOI of 100k at a 6% CAP rate, the value is 1.66M. Increase the NOI to 120K and the value jumps to 2M.

Single family values are determined by comparable sales.  You're property is largely determined by the market - of which you have no control over - and therefore increasing the value is less of a business plan and more of a market play.

@Ariella Sherman - Get it professionally inspected by an experienced multifamily inspector, it may run you a couple of hundred dollars per unit.  

A couple of things jump out:

- if the seller fills the vacant units, you will have no control over the quality of these tenants.  They may be putting "warm bodies" in there to push occupancy.  Typically when you get something under contract, your approval of leases is part of the deal.

- You are modeling 10% down.  Most lenders will want 20-25% down, especially from new investors. I would not expect 30 year terms.  5 yr term over 20-25 year ammo is more likely.  Also your closing costs are likely to be 4% of purchase or higher.

- Your expenses are very low.  About 50% is typical (excluding debt service).  I don't see anything for contract services, legal fees, capex (200-300 per unit per year for future expenses).

Perhaps you've got lending lined up already, if not, I would talk with a lender to get a better idea of what your terms may be.

@Sean Lynch - You may wan to look into a manager managed LLC (the other type is member managed). The first is for an arrangement where the other investors are passive, the second needs all member to be active is some way.

@Adam Philpot - Crexi, Marcus and Millichap, NAI, I've even seen them on Realtor.com.  Broker relationships are the best route, however getting on these site and setting up automatic alerts can help get you in touch with the right people.

@Zackarias Aitchison - Replacing lighting with LED fixtures or bulbs, also pipe wrap is an inexpensive upgrade.  @Jim Goebel suggestions are good. 

Most banks will finance apartments, but the terms you get will vary wildly. I've found some banks listing their general terms online (down %, LTV, term, ammo, etc). 4-6% is typical for closing costs. The interest rate will also vary greatly dependent on the size of the complex, location, condition, and experience level of the borrower. Right now I'm modeling 5.5-5.75 for generic bank financing.

@Dean Attali - I see the Heloc as a toll for short term strategies...flipping, hard money loans etc.  The arbitrage opportunity still exists with the syndication, but the long term aspect is more suited for money that is available for investment.

@Christopher Soos - Ask the agent for a CMA (Comarative Market Analysis) to get a better idea of what the property is worth. You could get it under contract and complete your financial due diligence without seeing it. They agent should be willing to take some pictures and video for your. I'd also get the property inspection done.

If everything still looks good I'd go tour it in person...with a W-2 job to come back to.

@Chris Grenzig - I would add market analysis data for the markets you operate in.  You could also link to articles affecting your markets (new employers, new construction) and real estate in general.