All Forum Posts by: Arn Cenedella

@Nicholas Kitchen

Yes BP is a source of information.
But it’s a matter of degree. 

If I understand your intent, you have found a deal and wish to syndicate it with you as a GP?

Is that correct?

If so, I don’t believe BP is the appropriate venue. 
There are SEC regs, lots of other people’s money is involved. Would one go online to get a free medical diagnosis? I wouldn’t. 😀

@Justin Goodinoffers a great place to start. The Best Ever Syndication Book. I read it several years ago and it is an excellent soup to nuts presentation of the basics. It’s a good staring point. 

I’ve been in the RE industry for 45 years and when I switched to MF in 2020 (now GP in 8 deals 1100 units $138M AUM) I consumed education over a year - learned how it worked - before I took on a GP role and even then on my first few deals I partnered with more experienced operators - got a mentor etc. 

I’m just suggesting BP isn’t the place to learn syndication to the degree one needs to before becoming a GP. 

Just my opinion. 

@Nicholas Kitchen

I’d suggest your find a mentor, coach, or more experienced partner to further your education on this. 

Listen to podcasts, go to conferences, find an attorney who does syndications etc. 

@Nik Frid

Google “Annual Property Operating Data” form or some variation of same. 

You will find plenty of APOD worksheets that are great guides to make sure you account for all expenses. 

Arn

@Stuart Udis

Thank you and you make excellent points. 

By definition, gurus need to sell RE as a get rich quick deal. It’s not. 

@Allan C.

I’m 69 years old. 

When I went to college, computers took up an entire room or building. I’d drop off those manila punch cards and come back the next day to get the results. 

I still have my HP 12C that I use to this day. 

So I know first hand about technology and software. 

When I started in the RE biz, fax machines were new. Microsoft excel didn’t exist. Cell phones were a foot long. 😀

So I hear ya!

@Jaryn Pierson

Good point about the gurus. 

If one wants to quit their W2 that’s generating $150,000 annual income………….

It’s hard if not impossible to do with only $500,000 in capital. That would require an annual 30% cash on cash return. Haven’t seen many RE deals that do that. 😀

Excellent point!

@V.G Jason

Love the flight to quality idea. 
Investing is both art and science. 
Investing is both qualitative and quantitative. 
I try to look for the intrinsic value in a property or location and believe ultimately that will win out and produce value. 

👍

@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.