All Forum Posts by: Arn Cenedella

@Bryan Hartlen

Good questions.

1. Two factors determined the loan size.

A) Lender debt service coverage ratio - loan amount smaller due to 20 year amortization and higher monthly payment. 

B) We could have borrowed a little more but I sized loan so property would be cash flow positive - ie net operating income sufficient to pay debt service with a little cash left over - did not want negative cash flow - wanted property to be “self supporting” ie pay for itself.

2. This was a small joint venture.

We did a 5 year model with sale exit after 5 years.

That being said, all my investors understand this to be a long term hold. And like any investment, investors need to adjust to market conditions so NO plan is ever cast in stone. While I consult with my investors - solicit their input -  they understand that I as a the manager ultimately make the decisions. I have 45 years of investing experience. They are experts in their careers. I’m an expert in RE.

Looking down down the road, here are the possible moves:

1. Since we have 8 more years of fixed rate debt at 3.85%, we don’t have to do anything. We can sit tight, increase rents, increase cash flow and increase value. We are in control due to our debt. There is no looming financing issue ahead. We got 8 years to cruise along.

At present since debt is 7% and we don’t need to sell, we maintain current course.

If and when cost of debt goes down, we may then have a decision to make.

If cost of debt goes down, value will go up, maybe we sell…….

Or maybe we refinance……

With refinance maybe we pull capital back out and produce capital available for another deal.

Our options are open and we will adjust the game plan as the market and the debt market change.

Since we have 8 years left fixed rate, we sit tight……….

As time goes on and we get closer to maturity, we will need to make decisions.

If debt is 5% 7 years from now, do we refi or sell? Don’t know will figure it out then.

I can see a scenario 4 or 5 years down the road, interest rates down and it makes sense to refinance…….

I can provide options to my investors after a refi……

Stay in the deal longer term or if they want out want their cash buy them out at current market value.

3. Yes I certainly made investors aware that the lower cash flow is a function of the rapid paydown of loan balance. They understood their net worth increase every month even if it doesn’t show up in their checking account.

Back in the 1980s and 1990s, principal paydown was considered as cash flow.

As syndication has gained more prominence, this concept has been forgotten or ignored.

Happy to discuss further.

Arn

I often find myself as a contrarian in the multifamily space. 
There are certain ideas - let’s call them conventional wisdom that are repeated ad nauseam - as if they are handed down from above as TRUTH.

Cash flow is KING is one of them.

Cash flow is important in that is is necessary for a property to be “self supporting”. But once that level is reached, in my mind, equity growth and an increase in net worth should be the goal.

I’ll share a recent acquisition to illustrate the point.
If I had chased cash flow and financed accordingly, the deal would now be in trouble. But since I didn’t and used my own judgement I have a deal that is killing it and will for another 8 years.

12 unit 1994 property Solid condition not requiring lots of cap ex. Spring 2022 purchase date.

Existing rents about $1000. Market rent $1300.

$1.3M purchase price

Due to low existing rents, LTV was constrained.

My loan choices were:

1. 80% LTV, 6% bridge debt 2 year term interest only payments

2. 65% LTV 3.85% fixed rate debt 10 year term 20 year amortization

If cash flow was my goal and juicing the IRR my secondary goal, option 1 would have been the choice. The cash flow is king folks would be happy.

I chose option 2.

Interest rates have exploded and my investors and I have another EIGHT YEARS of sub 4% debt.

The property produces some cash flow. And over the 10 years, we will have paid (really the tenants would have paid) the loan balance down by about $350,000.

That’s principal paydown on average of $35,000 a year that’s almost $3,000 a month.

Question: Would you rather have an extra $1,000 a month cash flow and NO principal paydown or $1,000 a month less cash flow but pay that loan down $3,000 a month?

I believe $3,000 is more than $1,000 and even considering the time value of money, $350,000 more in 10 years is worth more than an extra $1,000 a month for 10 years.

Honestly, if you bought this deal, and took option 1 following the mantra of cash flow as king, where would you find yourself now?

You would have a marginal deal on your hands and be forced to refinance into a 7% loan and pay closing costs all over again. But hey, you got a little cash flow along the way. 

I chose to ignore the mantra the conventional wisdom and made a solid choice to choose long term wealth over short term cash flow.

Investors who turned their nose up at the deal with 10 year fixed debt 20 year amortization are now kicking themselves and many many find themselves in some failed value add deal with the lender knocking on their door.

I choose long term fixed rate debt over cash flow and my investors and I will reap the benefits from this decision. It’s solid. It’s gold.

Cash flow isn’t always KING.

I am raising for a new BTR project in Greenville SC. Will be a 506b. 

I agree with @Taylor L. and @Evan Polaski!

I’d be careful. 

Most syndication deals currently in trouble are Class C value add deals. It’s these deals that are pausing distributions, stopping distributions, issuing capital calls or got forbid losing them in foreclosure. 

Texas has been the belle of the MF ball for many years but investors and operators I trust are having questions about Texas - insurance costs property tax costs and weather related issues. 

I’m not saying NO to Texas - just saying be careful. 

As a non accredited investor you need to find a 506b deal but I would try to find more experienced operators to work with. 

One other question:

Are any of the GPs actually living in this market? Do they own other assets in this market?

Arn

As @John Underwood indicates Greenville SC is a great market. 

I am a multifamily investor and syndicator in Greenville SC. 

Happy to connect with any and all interested in investing in Greenville SC. 

Thats the beauty of doing it right the first time. My sense is you now have 10 years of low maintenance operation which increase your bottom line.  

@Dave Kapsack

Respectfully, this is not the kind of question where “free advice” is of value. 

If you are going to acquire several million dollars of MF property and have a net worth sufficient to demand "liability protection", please don't take guidance from people you don't know and may not be informed. In adddion, LLC law varies from state to state. What might be true in Nevada might not be true in CT.

Pay a qualified attorney who specializes in this kind of law - $5,000 say - to set it all up properly. It’s a minor expense compared to Millions. 

And don't form the LLC thru Legal Zoom or some other inexpensive option. If it's worth doing, do it right.

Legal expense is all part of real estate investing. 

As a syndicator, our legal fees generally run $25,000 or more per deal. It’s money well spent - protecting both the GPs and the LPs. 

Hope this helps. Get professional advice not free advice. Please…… 😀

@Justin Goodin

Excellent content as always my friend.

Critical to know what unit turns or unit renovations costs.

The level of renovation should be made on the basis of what provides the highest return on investment for one’s renovation dollars. Units should not be “over” renovated if the rent increase does not justify the cost. 

Here are my “down and dirty” rules of thumb:

Minimum $5,000

Average $10,000

Significant $15,000 to $25,000

When I evaluate value add offerings, on my first pass at underwriting, I just assume $10,000 per door. If the numbers are “close”, I dig deeper and fine tune analysis.

The more units one turns or renovated, the better one gets at estimating costs.

Looking forward to a good 2024!

$5,000

Interior painting

Kitchen counter top

Clean carpet and unit clean 

A couple new plumbing and light fixtures

Minor repairs as needed