All Forum Posts by: Jonathan R McLaughlin

Hi Ryan,

Well, we have recently made investments totalling about $1M in Western MA (Berkshire Co.) and Central MA (Franklin Co.), are attempting to expand there and hampshire/hampden and I like contemplating the future of the region(s)...so I'm happy to weigh in. Would love to hear others as well, the more the merrier. I'll start by answering your direct questions then maybe riff a bit.

1) longevity and sustainability--both areas are generally behind the major metro markets so I think they have longer to run on this immediate cycle. Investors pushed out of the creeping--north NY market are finding good quality and decent numbers. Boston investors who used to stop at springfield are starting to look in what was once exclusively a NY backyard and say, "gee, these places are nicer than lawrence, etc. and the numbers aren't bad..." For the long term a number of trends favor the region(s):

  Revitalization of the rail routes up from NY, to Vermont and Boston on the 91 corridor and Pittsfield/NY/Albany routes

  Increasing diffusion of work life...a few days in Boston and NY, a few days in the countryside is more and more          viable for people now--keep an eye on the wifi infrastructure. Pittsfield (one of our favorite cities as a service town to the berkshires with good restaurants and infrastructure from the GE days) just opened a co-working space, as did North Adams and others

 "japanification of america"--quality of middle-class corporate life is eroding just as cities are becoming wealthier, leading to longer 1.5-2 hr commutes as standardf--as a result, these areas are becoming more competitive. For real, you can get a really nice 1500 sf house in a nice neighborhood with 3 beds 1.5 baths and a yard in Greenfield for 160K if you are just a little lucky. Only one person has to do the commute to make it an economic slam dunk, and even two service jobs and or decent freelance gigs can make it work. And its nice out there compared to ANYWHERE you could get closer to a major city
 

Aging population-the trend of declining population and aging out of the housing stock that was/is killing these areas are starting to bottom out, and there is a growing market for young people with families who can afford a house, rip out the wall paper, old stuff and revitialize some really nice 1900-ish housing stock. 

Arts and environment: a major influx of eco-minded young people, outdoor enthusiasts and next gen owners is underway. Many towns are positioning themselves as vibrant communities with most of what you need.

Appreciation (10-20 years)--I think slow and steady or at least not down. Its a nice buy and hold market in a time when thats rare. And unlike all those stories in the midwest where people are getting cash flow out of bottom barrel places, the quality of life and neigborhoods is high. If you think of appreciation in terms of inflation hedge, its a great bet. The smaller houses with more land are a draw not a drawback to smaller families and people don't mind the multis and see them as a way to live more sustainably, so they can be sold to end-use buyers more readily.

Cap rates/cash flow:

I think you can see fair and profitable numbers in 10-30 unit multies because there aren't that many of them , and so even in a boom market its not like people are lining up. Say a true 8-9 CAP(i.e real vacancy, capex, maintenance and management) in a b neighborhood? Broad rule of thumb there.

For the singles/small multies I think lots of forced appreciation is possible given the tired houses mentioned above. You aren't going to make a killing on a flip cause things just aren't worth that much, but the numbers are manageable. You could probably do a true 200-300 a month on a buy and hold, even off of MLS and maybe not have too many crises to manage. Add in the "I found it!" deals on foreclosures, etc. and an ambitious, handy person can do well.

Inefficient markets--you have to pick your spots and things are spread out, sales volume not that high, so as a result you have more of a chance of finding something undervalued/can add value than in a market which is completely saturated. And its harder for the big guys to scale. At the same time this undercuts your returns, so its a trade off.

I'll stop here, but happy to keep it going....

@Michael Pursell following up on @Charlie MacPherson good comment you also may want to pay attention to the exact wording of this stuff and how its individually interpreted by the various building departments: Accessory Dwelling Unit, In-Law and other terms may mean something slightly different town by town and be treated differently, likewise if you owner occupy or not. 

If it doesn't have two exits it usually isn't legal to rent via lease. Also, the banks won't finance it as a two family or count any income.  With the right layout most people will deal with this regulation by having roommates, who while they may have run of the house in theory, stay within their area, even if it isn't a legally defined unit. Make sense?

A third wrinkle with enforcement/financing etc. is often the presence of a stove. Can't have a stove in an illegal apartment. Funny thing is this isn't a code driven test but it seems pretty standard among the inspectors. People have been known to pull stoves out of the secondary kitchen before appraisal or inspection. 

If you are renting out you should figure out if you can get a second entrance (variance?) as this will make most issues go away. If the apartment doesn't have one you really can't rent it legally and you will always be in the wrong if something goes wrong.

If it wasn't for illegal in-laws a lot of people in the Boston area would be in even more of a pinch, but that still leaves you in a precarious position liability wise if there is a problem. Owner occs will have an easier time getting along day to day, as will those who own something that is safe in all other aspects, i.e. ceiling height, stairs etc. 

Check out St. Kitts. Lots of virtues with good infrastructure, govt. and tourism industry, not on the main hurricane track, still laid back and not a huge scene. Speaking to the place as a destination and solid place to own for what you say. Haven't investigated real estate value though and would be curious what you find.

one very successful company's dictum is "one step sharper than the client" for key interactions which I think is great advice in general to show respect and savvy. And it can work anywhere. Shorts and flip flops in the office? Wear khakis and polo, business casual at the bank? Match it and throw on a blazer, they are wearing jackets and tie, wear your suit and so on.

@Daniel Coblentz no problem. I can certainly see more of appeal given what you have outlined. My bad, I thought the owner was doing only a piece of the downpayment not the whole note, so was outlining more conventional financing. I don't see any reason why he couldn't do that. Great loan.

Good your adjusting the repairs, I think sellers often ramp down their repair spending in the time before the sail

For the capex, you are going to pay it either in repairs or in the sale price so I'd include at least 10%, in other words, lets say you have a 10 year roof, the place is 5 years old. Even if you don't do anything and hold for 5 years, you go to sell and a buyer says, "hey, the roof is at the end of its useful life, I have to replace" so they discount in the offer. Certainly as an investor, I'd want to see more allocated.

Still a little confused on the management costs. Are you self managing? In any case, in addition to the vacancy rate (which I remember being low). You may have to pay lease commissions of 1/2 or 1 month on every tenant turnover, and there are renewal fees as well. And a few grand to refresh/repair upon turnover of a bad tenant every now and then. If these add up to 11% that makes some sense, but I wouldn't count on driving that number down if so. You mentioned legal and accounting fees so there is a lot packed in to the 11% already.

I would break it out so your investors can see the expenses. More professional. Especially if you are self managing....I don't think I'd want to be paying you as sponsor that much....

I'd break out the utilities and other expenses too.

I can't escape the feeling its a little light, though of course I don't know the property. Would be curious to see the revised calculator if you care to share. 

Good luck!!

@James W. to be clear, just engaging with the premise...like Ben L. said I don't think the metric makes much sense, and in the way we have all seen it used commonly on the site, awfully, awfully thin and likely to fail. 

@Samantha Lotti points here :

Actually, after they answer "yes, I'm interested" I wouldn't talk at all except for 

" tell me why?" --you are likely to get a ton of useful information. Just listen. Do a lot of nodding.

After that: "In your opinion, what do you think the best parts of the house and location are? I really like  the property."--again, listen.

Then: "well, I have to say I'm intrigued. Would you be willing to put together what you know about expenses, upkeep age of stuff? Its the kind of property I really like as an investor and I would want to have my numbers really solid. Would you be able to look them up and write them down for me?"

Another great question: "other than the best possible price (of course!), what should I know about what matters to you in this sale?"

I wouldn't mention seller financing at all in this first conversation. I would bring it up later as part of a possible solution and be prepared to walk them through it. To much too soon will just make people shut down. 

I'd get their number but I wouldn't pay much attention to it at his point unless its absurd one way or the other. Come back with your number and be prepared to weather the "you got to be kidding me moment."

@Samantha Lotti points here :

Actually, after they answer "yes, I'm interested" I wouldn't talk at all except for 

" tell me why?" --you are likely to get a ton of useful information. Just listen. Do a lot of nodding.

After that: "In your opinion, what do you think the best parts of the house and location are? I really like  the property."--again, listen.

Then: "well, I have to say I'm intrigued. Would you be willing to put together what you know about expenses, upkeep age of stuff? Its the kind of property I really like as an investor and I would want to have my numbers really solid. Would you be able to look them up and write them down for me?"

Another great question: "other than the best possible price (of course!), what should I know about what matters to you in this sale?"

I wouldn't mention seller financing at all in this first conversation. I would bring it up later as part of a possible solution and be prepared to walk them through it. To much too soon will just make people shut down. 

I'd get their number but I wouldn't pay much attention to it at his point unless its absurd one way or the other. Come back with your number and be prepared to weather the "you got to be kidding me moment."

@James W. At $80k/unit ($8,000,000) which is less than they can be had for in a decent part of our area with 25% equity, that is a loan of $6,000,000 and a payment of $36k/mo at 5.5% on a 25 year amort. After all expenses, debt service and cap ex reserves, if you still pull away $100/door=$10k/mo ($120k/yr). If we look at the return over 5 years, this would be $600,000 in profit and $643k in principal amort=$1,243,000/5= $249k/yr total return=12% total return. This might meet the goals for some people, but the numbers would need to be solid to the point where $100/door will always be achieved in a stressed environment as well. Vacancy estimates would need to take into consideration a worst case scenario and rents would need to remain feasible in a down economy. 

One thing to think about when you are moving lots of money around is how hard it is to get large chunks of money to get high returns without undue risk. Working with your overall scenario: what are your alternatives to 2 M? 

Its not insured if you leave it in the bank at absurdly low interest rates that lose to inflation, stocks have volatility (though certainly you would be invested in them to some extent) and many fewer tax advantages. If you have real estate expertise and favorable financing, your control over your investment can be high and your risk of macro shocks can be lower--though never non existent.

Not saying the idea you are sketching out is the best deal in the world, but someone could see the situation you describe as "$100 a door that will always be achieved in a stressed environment" as a VERY good way to put money safely to work. We think about the benefits of scale being income, but it has its benefits for risk reduction too. A voice in my head is whispering "Sharpe's ratio"* right now. 12% with a high ratio might very well beat 16% with a low one.

And even us less well capitalized spread buyers (i.e paying interest at 4-5% and getting the building to generate income at a TRUE 7%) can do well (although personally I think you need 8% in that scenario). 

2% of 1000 isn't much but 2% of even 2M is $40,000--or 10K above the individual median income for the country ($31099 in 2016).

* For the finance nerds and wannabe's-like-me out there: Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. A portfolio with a higher Sharpe ratio is considered superior relative to its peers.

Hmm....I'm not seeing the same appeal.

capex  seems WAY, WAY low. 

Repair low 

Turnover costs?

ongoing legal and accounting? 

lease commissions?

Management costs seem high at 11% so you may have some of this baked in. 

Not sure how you are going to get a 30 year amortization on the main note? You'll need to structure this as a commercial loan so 25 is max and 20 more likely. Reset on rate every 5 years and/or 10 year balloon. FHLB 5 year rate is 3.08+2.25 spread (YMMV but it will be similar method of computing rate) so at least 5.4% I'd bake in 6 to be safe as these can take a while to close.

loan fees--call it 12K

Closing costs will be a lot more than 3K--you need an appraisal at least at 1500 and maybe more, you will need the partnership agreement drafted (welcome to lawyer land!), environmental phase I and maybe phase II, company filing blah blah. Figure 15k-20K You will want your own inspection during due diligence thats another 1200 or so.

Does the 25K you put in the repair costs really yield 200K in immediate value increase? I'm skeptical, what is the plan?

"Find investors to put in the first 600K"--thats a pretty big raise: and where is your money? 

Are the taxes current or based on the new purchase price?--I've been whacked by making that "should have been obvious" mistake.

Trying to help, not be negative. Run the numbers again, maybe, with these assumptions and see what you get. 

Good luck!