All Forum Posts by: Heath Ryans

The due on sale clause is hit or miss. You might get lucky and they don't care OR you get very unlucky and they do care.

It won't stop the calls. It's public data unless you go through a ton of hoops to hide your ownership of the LLC.

It's a business expense so it should come from that business's account.

You have a few options

1) wholesale the property and collect a few thousand dollars to help build toward buying a deal yourself 

2) See if the seller will do a carry back of the total downpayment amount or a partial amount (assumes you can qualify for the loan)

3) See if seller will 100% finance (chances are slim but not impossible)

4) Borrow the downpayment from someone (assumes you can qualify for the loan)

5) Bring in a partner on the deal and split the equity.

@Devin Monroe

Without knowing your market or going through your numbers, roughly 6% return is probably fairly accurate just purchasing a turn-key property without being in a higher risk market like Memphis.

Investors hitting higher/infinite returns are purchasing value add properties (below market rents/needs updating). They then go in and raise the value of their property and refinance their money out, or just bump up inplace rents to hit those higher metrics.

@Richard Masino

Many investors in the area recommend Derrek Malcom in Bristol as a good real estate attorney. He is accessible via email.

@Paul Waterloo I'm an active multifamily investor in East TN. My partners and I primarily invest in the Johnson City and Knoxville markets but have experience in, or knowledge of, most markets east of Nashville/Clarksville. I would be happy to discuss further. 

Cap Rate = Net Operating Income/Purchase Price

Cap Rate is the projected return for 1 year of unleveraged ownership of a property if you continued to run it as is. That basically means if you buy on a 6% cap rate, if you pay all cash for the property, don't change anything, and everything continues to operate normally, you will make a 6% return on your money.

Net Operating Income (NOI) is the leftover capital after all operating expenses are paid. This includes maintenance, vacancy, loss to lease, management, taxes, payroll, contract services, utilities, admin, ect.

CapEx expenses should be added back into NOI.

Debt service is not included in the calculation. It is subtracted from your NOI to determine cashflow but has no influence on cap rates.

What you will find is that when looking at purchasing a property, the seller is going to want to sell on their actuals to inflate the price. When the seller runs a mom and pop type operation and they don't factor things like a management expense, don't track repairs, or just all around don't have a clue how the property actually operates, their NOI tends to be greatly overexaggerated which leads to a higher advertised cap rate.

Similarly, a seller that has a large portfolio with vertically integrated operations may have much lower expenses than someone operating on a smaller scale could reasonably expect. The lower expenses will lead to a higher NOI, and again, a higher advertised cap rate at a certain price than your actuals would reflect.

If you have financials on a property, you can plug all that info in and determine NOI and divide that by asking price. That's their listing cap rate that they are trying to sell it on.

Then run your analysis of the property based on how you know you can operate it. Divide your projected NOI by their ask price and that is the true cap rate for you at asking.

If you're making an unsolicited offer, again, run your own analysis, then divide your projected NOI by the market cap rate to determine a property's value.

@David Jones 

Hey David,

I'm an investor here in Kingsport. I host a monthly REI meetup in Kingsport and my partners host another in Johnson City. There's quite a few active investors in the area. Did you have any questions about the market specifically?

@Joshua Rainwater 

My assumption is that you are trying to do you're first deal and your looking to create a sample deal that's similar to the type you are trying to do. The purpose of that being to pitch it to an investor that will hopefully fund you're deal.

If that's the case, you need to look at a few P&L's from listed deals that are both local and similar in size to your target to see how they are laid out as well as costs relative to the deal size. Don't try to pitch someone on a 4 unit deal using financials from a 100 unit.

From the given financials, you need to construct an underwriting model based off given actuals. Then make one based off your expectations of the deals performance at purchase. Finally, make one based off your future projects of the deal and how long it takes it to reach that and through what avenue. 

ie. are you buying a turn key asset that will grow through appreciation alone? a value add deal that requires renovation to achieve target rents? a recently renovated deal that was just leased up and will benefit in the future by optimization of expenses and bringing leased units up to market rent at the next renewal? ect, ect

Always be conservative in your numbers and understand what exactly your asset is. If you're buying a 1960s build property with no amenities, don't think your going to hit the same rent metrics as a 2018 build that's decked out.

An underwriting model that you're presenting to investors should be very thorough and include every aspect of normal operations. Again, pull from listed properties. It's fine if you download OM's from large commercial listings and look at how things are laid out. Just be sure your comparing apples to apples with your pitch.

@Stephen Fletcher

As you said, FHA can only be used up to 4 units. But that is a 4 unit property max. If it has 1 more unit on it, it's considered commercial. If you want to purchase a 7-10 unit property for your first, then by all means you can. But you won't get a 3.5% down FHA loan. You'll be in the 25-30% down range if you go conventional financing. If you can negotiate owner financing, you can workout whatever you and the seller can agree on.