All Forum Posts by: Jonathan Twombly

@Andrew Johnson and you've picked up 700 votes in just two months!  Impressive.

@Jordan Decuir  Just to be clear, I was not talking about marketing the properties, but about marketing my investment business.  I have found that social media, blogging, and appearing on podcasts have been quite effective, and I wished I had started doing them earlier.  In fact, if I were starting today, I would start a blog about getting started in real estate and just writing about the journey as you go.  The critical thing is to do it consistently, which I struggle with even today.  According to a friend who is an expert in driving traffic to websites, if you consistently blog 2x/week, you can build a large audience within 6 months.  But consistency is the key.

@Anita Ahuja

If they are buying the deal at a 5.4% cap rate and the Year 5 cash on cash return is only projected to be 7.1%, how do they propose to get to a 15% IRR? If this is all based on the supposed appreciation, it's basically a bet. And you're making a bet that, at what may well be the top of the market, some how you are going to get even more appreciation.

I would ask them about this.  Where do they think we are in the market cycle?  Why do they think that they are going to get so much appreciation?  What cap rate do they think that they are going to exit the deal at?  Conservative underwriting principles usually require you to assume that the exit will be at 50-100 BPS higher than the purchase price.  I would look into what their exit cap rate is and ask them to explain their assumption.

I'd also focus heavily on their track record.  Ask them how their other deals to date have performed.  

As a syndicator, I will tell you that these deals are not liquid.  It is very difficult to sell your interests if you want to get out, and if you do sell them, you will probably have to sell them at a loss because most buyers of these interests want to buy them at a steep discount to ensure that they make money.

If you are new at this, definitely have the documents reviewed by your CPA and attorney to understand all the risks.

@Mo S.

The Census Bureau has lots of data on growth estimates.  You can also use www.hometownlocator.com.  I find them quite helpful.  I imagine that the State of California also has a vital statistics division that publishes this kind of data.

@Hassiem Cliett  Assuming that you will put 25% down on this deal, as is the standard case with commercial real estate deals, the preliminary questions are:  (1) Do you have or can you get $1,025,000 for the equity downpayment, plus another $120,000 or so for closing costs; (2) do you (or you and your partners) have a net worth of at least $3,075,000, with ten percent of that in cash, which is what a lender would require you to have to lend you the money; and (3) can you get someone on your team with the 2 years of experience that most lenders would require to lend on this deal?

@Marek J.  You absolutely do not need an MBA to do this.  If you polled the members here, and even the experienced investors, I am sure you will find very few MBAs.  You really only need that if you are planning to work for an institutional real estate investment company.   If you are planning to do this yourself, even a guru course is less expensive and more helpful than an MBA.

@Robert Cook

You're going to structure this as a partnership, but within that there are many choices.  The decision depends on how active or inactive your partner wants to be.  If he just wants to be the money and have zero other involvement other than getting checks, then you can structure it like a syndication with one investor.  In that case, you would become the sponsor and he is the investor; you would pay him a preferred return and get to share in any profits over and above that.  

Or, if that sounds too complicated, you can structure it as a more standard partnership.  There is no legal requirement that the sharing of profits, losses, and voting power reflect the amount of equity that the partners contribute.  So, he can supply 100% of the money and you can supply 100% of the work, and you can decide on whatever split makes sense to you.  (Generally speaking, money is worth more than work.  Some gurus say that you can do a deal like this and split it 50/50, but in my experience that's not true.  The more money that someone has to invest, the more sophisticated they tend to be, and the more they resist a 50/50 split when one person is supplying all the money and thereby taking all the risk.)

The advantage of a syndication is that you can structure it so that you have complete control over everything and he just collects checks and cannot make you do anything.  The disadvantage is that there are a lot of legal requirements surrounding who can be an investor in a syndication, and you need to make sure your friend qualifies as an "accredited investor."  If he does not, then the traditional partnership route is different.  But one thing you need to do is figure out a way to break ties if you are 50/50 partners in everything.

Start marketing the hell out of your business the minute you start it.  Don't wait until you are "successful" or have a track record.  Market the journey if that's all you've got.  But the point is to market, market, market.

Early to bed.

Early to rise.

Work like hell, and advertise!

@Andrew Johnson  I'm totally with you.  I see a lot of people flooding into really marginal markets, with flat or declining populations, just because cap rates are higher than they are elsewhere and they think they are getting a bargain.  When the correction takes hold, those people are going to feel some real pain.  

As for Class A, we definitely have an oversupply here in New York, at least for the moment.  A massive amount of product is coming on the market simultaneously, and I see "for rent" signs and concessions offered all around.  In the ten blocks between my office and the subway, just along one avenue, there must be about 1,000 units coming online in the next 12 months.  And that's just along this avenue.  It doesn't count what's coming in one avenue over.

@Andrew Johnson  I think it really depends on the specific market profile.  In a lot of big cities, there has been a construction binge - but it has all been in Class A.  So you simultaneously have a shortage of housing (for most people) and a glut (for a small portion of the market), with rents flat or declining and concessions appearing.

In smaller markets, like the ones where you and I are active, the same dynamic has been at play, although the construction probably has not been as active.  But what's getting built is also Class A.  Nothing for the large mass of people moving in.

Even though the fundamentals for Class B/C suburban product in smaller markets remains strong, I could see the following happening:  a correction occurs in the major markets, which spooks a lot of investors.  There is a flight to safety, which combined with higher cap rates in the major markets, leads many of the larger players to retreat back to the big cities - if they are not on the sidelines altogether.  There will be a ripple effect down into smaller markets as the tide of cash starts to ebb back toward the big markets, though this will take some time to play out.  

I would suggest that, once we start reading stories about how the market has gone south in the major cities, we start preparing ourselves for the same to hit the smaller markets in 6-12 months time.  Watch out for the inevitable press stories from real estate boosters and local brokers about how "everything is different" in these smaller markets.  It may be different for a while, but the low tide will eventually reach the back waters too.

This will be good for us small market investors who are prepared, because the fundamentals of those deals will remain good, but the competition will lessen, meaning we will be able to buy good assets at better cap rates.  And then we can sell them when the tide of cash inevitably comes back in after a few years.