All Forum Posts by: Jim Kittridge

 These are market and property specific but below are some general rules for small multi:

• Deferred Maintenance - depends on the property
• Property Management - 8%. Do not skip this.
• Vacancy (speak to local management companies if you don't have a solid grasp) - 4-6%
• Taxes - Depends on your city & county
• Insurance - Depends on coverage. Speak to an insurance agent.
• Maintenance Reserve (Not their cost) - 4-6%
• Cap Ex Reserve (Not their cost) - 4-8%
• Turn-over cost - Speak to property managers in your area

@Brian Geiger Yes, agencies and banks are actively lending to experienced operators. Most of them have lowered LTVs and increased operating reserves.

Multifamily is holding up well relative to what is happening across different asset classes and the economy. For Q2 in the US, the vacancy rate rose by 30 basis points (bps) quarter-over-quarter to 4.6% and average monthly rent fell by 1.4% to $1,720.

In my opinion, you can invest and do well in any market cycle as long as you're buying the right assets at the right price and understand what stage of the cycle you're in. 

For example, it would be very risky for a new operator to start building their first luxury apartment community right now. It is much less risky for an experienced operator to buy an apartment community that is at a 25% discount of market value, cash flows with conservative underwriting and has well-below market rents.

Some sound advice has been given. Based on the broker's numbers it's a 6.45% cap rate. 

I would recommend underwriting it with your numbers to see where your NOI is. Typically, a broker's NOI calculation favors the seller by omitting or under-counting expenses/reserves. Here are some common items that need to be accounted for:

• Deferred Maintenance
• Property Management
• Vacancy (speak to local management companies if you don't have a solid grasp)
• Taxes
• Insurance
• Maintenance Reserve (Not their cost)
• Cap Ex Reserve (Not their cost)
• Concessions
• Bad debt
• Turn-over cost

I would recommend using your own numbers for vacancy, maintenance and cap ex reserves. It isn't uncommon to see owner lowering their maintenance & cap ex to inflate the NOI before selling.

It's up to you to decide if the deal is attractive with your underwriting. Based on what you've shared so far, I would likely only do this deal if I could add significant value to it.

A ~22% expense ratio on a 6 unit is pretty low which tells me that you're likely underestimating some expenses. We're around a 35-40% expense ratio across all properties which are blue-collar SFR and small multifamily.

I'm sorry you had to go through this but appreciate you sharing it with BP so others can avoid it. It's unfortunate that anyone has to go through this. 

I would highly advise against doing unsecured loans in the future. At 7% IO, you should absolutely get a 1st position with +30% equity as protection. At a minimum, get a PFS & a personal guarantee. 

Your interest/return should be a function of the risk that you're taking. Unsecured loans fall in the riskiest category in RE.

I would also recommend a background and credit check. If a borrower isn't willing to consent, I would not do business with them.

 
Sure thing. Hope this helps clarify.

• Reposition: Buy it at a 30% discount and add value to the property by renovating units and increasing the rent and NOI. Increasing the NOI increases the value of the asset, hence, repositioning it.
  Drop & Swap: This is a 1031 strategy where you line up a patient buyer for the asset you are ready to sell and you find the next opportunity that you want to purchase. Then you sell your asset and do a 1031 exchange. It can be tricky to execute, but if done properly can save you a lot in taxes. There are plenty of articles on 1031's and drop & swaps to learn more.
  Agency Debt: You can get attractive financing from agencies (Fannie Mae and Freddie Mac) on assets that are stabilized and cash flowing well. Regardless, your financing options will be more attractive when financing a purchase of a performing asset vs doing a cash-out refinance after you just bought a property in cash.
  
  

Buying it with cash and then doing a cash out refinance is going to result in substantially worse financing terms unless you have a great relationship with your lender and have the track record/balance sheet to back it up.

The deal would likely still be worth pursuing at a 30% discount if you have the funds available. If it were me, I would reposition it and line up a drop & swap that I can add value to and get attractive agency debt on.

Here are a few to online tools to estimate it:

• Rentometer.com
• Housecanary.com
• Rentrange.com

I would highly recommend getting a CMA from an experienced agent and to talk with a few property managers with at least 20+ properties in that sub-market. Online tools are great starting points but don't understand the nuances of the every neighborhood and what the demand current demand is.

As others have said, you can get a RE license but will not be able to service clients. 

As someone who buys a lot of great deals without a RE license, I would recommend spending time to find the right agent in your market to get an automated MLS Email feed based on your criteria. You can set it up so that as soon as a property is listed that fits your criteria, you get an email.

Best of luck Janani.

$80,000 is a good amount to start in a lot of markets but it's going to be a challenge in Boston since you are not bankable until you get a full-time job out of school. Banks want to see that you have steady w-2 income or 2+ years of 1099 income. 


I would recommend looking at other options of investing more passively or partnering with someone. You can also spend time educating yourself through BP, podcasts, and books so that you'll be ready to hit the road running when you're able to get financing.