All Forum Posts by: James Kojo

Hate to be a party-pooper, but in some jurisdictions it's illegal to profit from charging your tenants for utilities, so tread with care if you implement a system in which you pay less to the utilities than you charge your tenants.

Check with your PM or your lawyer, etc.

Of course if you're just billing back to the tenants what you pay, there's nothing wrong with that, and as other have already said, it's a pretty fair and efficient system so long as the market will bare it.

James

When I’m starting in a new market, I call up all of the major PMs I can find, and I have a list of questions to ask them. 

One thIng I ask about is their biggest rehab that they've done on a MFR and how they go about doing it.

Many will have in house teams that they use for medium sized rehabs (counters, cabinets, floors etc) and they will contract out for specialties. Some go All contractors and mark up the price for their project management.  Some just charge an hourly rate for project management. 

Once you show them that you plan to stick with them after the acquisition, they are usually happy to provide you with initial guidance on the property. Though many will ask to represent you in the acquisition. I think that’s fair if they find you the deal. 

Hope that helps. 

James

Awesome! Was there a matching thermos inside?

One aspect of MFR re-positioning that has always intimidated me is the rehab phase.

I don't feel like I really have a good eye for aesthetics in terms of design, colors, layout, and materials.

I've done cosmetic upgrades before, but they were for A-class, single-family homes, so it was fairly easy since I could just choose stuff that I already have in my own home (hand-scraped hardwood floors, granite and marble surfaces, and brushed-nickel or bronzed finishes, etc.) But even there, I needed to get a lot of advice from sales people and others.

If I'm going to do a gut-rehab on a MFR, what are my options for getting advice on design, colors, layout and materials? Do I just hope that the contractor can figure it out, or should I hire specialist? If so, what specialists do I need?

Thanks!

James

Thanks everyone for your thoughts.

What I've gathered from this thread so far:

1) 8 caps may exist for B properties, but are needle-in-a haystack situations

2) cap rate in general is a snapshot it time metric that can help with pricing the exit, but is not necessarily a good acquisition criteria.

3) I should focus on total IRR, which probably means increased focus on value-add and plans for improving op-ex.

Let me know if I missed a point.

Thanks!

James

My major steps are:

1. Goal Identification
2. Market Selection
3. Team Selection
4. Deal Flow
5. Property Selection and offer 
6. Due Diligence
7. Business Plan
8. Finance + Close
9. Operate
10. Exit

There's a lot of overlap in those steps, and each have a bunch of sub-steps, (like underwriting deals.)

Do you have any particular area that you are asking about?

Since you seem to have a deal in-hand, the immediate must-do's are:  you need to get a good PM on your team, underwrite the deal and have someone who can double-check your assumptions, then start looking for financing. As part of the underwriting and financing steps, you'll need to figure out your business plan, which will include improving, operating and exiting the property.

I hope that helps.

James

@Mark Brooks that's very helpful.

You made the statement that I should "establish a base-line CAPEX and then average it out over time."

I guess that's the part I'm struggling with. If you aren't going to use a fixed % based estimate, how do you take the capex from the actuals and create that baseline?

Thanks!

James

I'm looking at a smaller deal where the financial statements are not well-specified. It's a mom + pop owner-operator situation.

For instance, it looks like they may have put large capex expenses under "repairs." I see a steady stream of monthly repair expenses ranging from $100-500/month, then there's one month with $9K and another with $3K, etc.

I've asked them for more details, of course.

My question is, if I'm underwriting a deal with actuals, but I only have a limited history, how should I account for capex? Should I take the total actual expenditure over the time periods that i have, and take an average?

Or should I try to figure out what the capex was used for, and try to average it out over the useful lifetime?

For example, if they had a 9K charge for replacing the roof in 2017, and that was the only capex I could find in the 3 year history that I have, would I estimate capex reserves at 3K/year or $900/year for a 10 year roof?

What would a lender do?

Thanks!

James

@Account Closed : if you have at least some REI experience, you may be able to get by with partnering up with a very well qualified property-manager.

Find the biggest/best PM in the area and ask if they've had any clients get agency financing (assuming you're going with fannie/freddie.)

Alternatively, call up your potential lenders, and ask them which PMs they have worked with before in your area.

Hopefully getting a good PM on your team will help you improve your credibility.

Hope that helps and good luck!

James

@Brian Burke @Casey Miles @Todd Dexheimer

Thanks for your thoughtful responses. I haven't actually had the "is cap rate important" debate, so all points of view are interesting to me.

Let me back up an state my goals, and perhaps you folks can comment on my KPMs.

My investment strategies to date have focused almost exclusively on growth and appreciation. That has served me very well over the last 10 years to the point that wealth growth is not as important as preservation and income. By my estimates, if I can get to a roughly 12% CoC for my invest-able equity, I wouldn't ever have to write another line of code, buy another stock, or rent another unit (although I almost certainly will do all of those things, but by choice instead of necessity.)

So, cash-flow is the my #1 priority at this point. I could increase my cash-flow by decreasing my leverage, but that would also decrease my CoC.

My questions to you are 1) are my KPMs aligned with my goals and 2) is a 12%Coc and/or 8% cap realistic in secondary markets in B neighborhoods?

Thanks!

James