All Forum Posts by: Arn Cenedella

@Francisco Perez

Just to clarify, your partner KP might be happy to have you run things as many KPs don’t want to be involved in the day to day. Rather the point is legally in terms of the partnership documents, they have the right to take over IF THEY find it necessary to do so. If you are doing a good job, most would be happy to have you handle the headaches. 

Hope this make sense. Arn

@Francisco Perez

As @Chris Seveney notes, this is about building relationships. 

Attend in person or virtual commercial real estate events or conferences. Join a few mentoring groups. 

Doing so will help you find the right key principal. 

Just to level set expectations, the more experience the wealthier key principal in addition to the share of the profits will also often want control of the deal since his or her name is on the loan. 

The KP might let you have day to day operational control - let you take the ball and run with it - BUT will want the legal right and authority to take control of the deal if there are issues. 

Hope this helps. 

Arn

@Chase Caudill

We own a 43 unit complex consisting of all one bedroom one bath units in Greenville SC a town of 75,000. 

We love the 1/1 units. Lower wear and tear on these units than typically found with larger units. 

We have good tenant retention also. 

Thwre are plenty of single person households as people are choosing to marry later and they often refer having their own place rather than being in a “room mate” situation. 

As noted earlier, the answer depends on your market too. 

That being said, the “conventional wisdom” against 1/1 is often wrong. People hear it said and then simply repeat it without any critical thought and so many people then say it - it becomes as “accepted truth” which is often wrong. 

@Account Closed

Nice explanation of the difference between pref returns and actual cash distributions. It is important LP investors understand the “mechanics” of all of this. 

👍

And go slow when choosing partners.

Do a deal or two with a partner or partners and see how the team works before formally forming a company.

Date before you marry.

Lots of folks talk a good game.

It’s only thru day to day practical experience do people fully reveal themselves. Do they have the same drive and work ethic? Do they share similar ethical values and have integrity? How do they respond when something goes wrong? Are they a team player and commit to the joint goal or process even if their idea was rejected?

@Gabriel Miritello

Congrats on getting started with several rentals and flips. That’s awesome start.

Any property will cash flow depending on how much cash down you put in to buy the property.

So the better question is: Cash flow with 20% down? 30% down?

Cash flow is hard to find on any MF right now due to high interest rates and still high prices.

In general the cash flow for an SFR won't be that much different than a 4plex for example.

I might suggest you continue to acquire SFR rentals (as you already know how to do this.) Hopefully they will appreciate and when you are ready to "retire", you 1031 them all into a 40 or 50 unit building.

Without capital, it’s hard to create cash flow.

So to determine a target amount of capital or equity, you might look at the following:

How much net rental income (in addition to your pension income) do I need when I “retire”?

Say that number is $5,000 a month or $60,000 a year.

Assume a very conservative 6% cash on cash return.

$60,000/0.06 equals $1M. $1M in equity will generate $5,000 minimum net rental income.

If you want $10K a month net rental income, one needs $2M.

So the question for me would be: How do I create $1M in equity as fast as I can?

Whatever the answer to that question is might be your best path forward.

Just presenting another perspective for you to consider.

Lots of investors talk cash flow but at the end of the day to create financial freedom one needs equity or capital. You don’t need the cash flow now, you need it in 4.5 years. So build equity as quick as you can while working and then focus more in cash flow when you retire.

Hope this helps!

@Jason Malabute

Way to stick with it! Congratulations.

As @Evan Polaski notes while understanding first and second position is important the more critical factor is total LTV.

Scenario I

30% cash down 50% bank loan 20% pref equity 

Is far different from

Scenario 2

15% cash down 65% bank loan 20% pref equity

For the pref equity these are far more risk profiles. Scenario 1 is probably pretty safe while I see Scenario 2 as risky. 

The other issue that bears consideration and is on a case my case basis is at what point does the pref equity "cost" start to hurt LP returns?. At some point the advantage of higher leverage in producing a higher IRR will be eaten up by the cost of the pref equity. The pref equity is many cases will eat up most of whatever cash flow the property earns thereby reducing cash flow to the LP.

Spark does smaller deals and pref equity is less useful. I’m also an Old School investor and 1) look long term and 2) have no problem with lower returns in a safer deal structure for the LP. 

We have been buying smaller new BTR projects at CO. We have nothing to do with the construction. Builder builds them we buy them when complete and lease up. 

We raise about 45% from LP capital and get 55% LTV fixed rate no prepayment penalties from local banks or credit unions. We are paying about 7%. The initial returns don't jump off the page - 5% average cash on cash 13% LP IRR but the deal is safe and it is sound. If and when rates come down to even to 5% to 5.5% we can refi with long term agency debt pull cash out return capital to our LPs and now have a nice cash flow deal that is set up well for long term value. New product at $150/sf in a growth market.

Yes we could raise less LP capital use pref equity but I don’t believe the minimal “potential” increase in returns is worth the risk of using 14% 15% pref equity. We’d rather raise more capital albeit at lower initial returns but in a much safer stronger foundational structure. Our investors like this. They want good long term returns but value safety and security overall. 

I understand other investors think differently which is fine. 

@Marcus Perez

I’ll present a different viewpoint.

LLCs are oversold as asset protection devices in my opinion. Each LLC has annual costs associated with it. These could be additional CPA fees for each LLC return. Ongoing state filing or registered agent fees. Perhaps additional banking fees etc.

So at some point the amount of equity and or net worth one has comes into play. 

If one is trying to protect $5M $10M in net worth by all means go to a sharp attorney and set the structure up. In this case the costs associated with doing so are clearly worth it. 

But if you are trying to protect $500K to $1M in met with, I suggest a personal liability umbrella for $1M or more should be sufficient. Most fire insurance policies have some liability protection. If that amount is exceeded then the umbrella comes into play. 

One final point the best way to minimize liability is to do the right thing and maintain your properties - do not allow hazardous situations to exist at your properties. Follow Fair Housing Laws run a professional rental business. 

@Peter W.

I think you have a good plan and approach. 
Diversify your capital. 
Give rental real estate and try and see if you like it. 

It’s a sound approach.