All Forum Posts by: Jonathan Twombly

I don't believe there is going to be a 2008-style crash in the multifamily property market.  However, I do believe that we are in the final stages of a normal property cycle, perhaps 12-24 months away from a downturn.

First, we've been in this bull market for a very long time, nearly 10 years.  That's a long time for a property bull market, as they tend to be more around 7 years on average.  Some things have extended it, like lots of liquidity from around the world, compressing cap rates even more abroad and making US real estate look cheap by comparison.  But all good things come to an end eventually.  I think we're 12-24 months away from eventually right now.

Second, there is some exhaustion among buyers.  When I went to raise a fund in 2015, one of the objections I heard repeatedly was "we're full up on real estate now."  Another was that the market was overpriced.  And the bull market has run for two years since then.

Third, the recent JHCS on the state of the housing markets states that commercial real estate prices are now 30% above their pre-crash peaks.  Clearly, assets are getting expensive.

Fourth, in talking with my other syndicator friends, we are all having extreme difficulty in finding deals that pencil out for us.  Many people are starting to take to the sidelines.

Fifth, some mortgage broker friends have related to me that they are seeing deals fall out because, at 75% LTV, they cannot make the required debt service ratios. Lenders are requiring them to put more equity into the deal, which often kills the deal. It's now one of the biggest reasons for deals to fall out.

Sixth, I'm starting to see cheerleading in the real estate press, along the lines of "Here's why the bull market still has room to run!"  When I start seeing this kind of thing, I know that they are pushing back against the opposite opinion, which is starting to get traction.  A break in the solid wall of enthusiasm for the market means that the good times are coming to an end in the foreseeable future.

Now, all of this is anecdotal.  I'm not an economist.  I don't have a crystal ball.  Take what I say with a huge grain of salt.  I'm also probably more risk-averse and conservative than most investors.  But I do think a number of factors point to the market just running out of steam within a few months.  Not a crash; just kind of petering out.

@Viq C. At 100% lending, at prevailing hard money rates, the debt service is going to eat up all of your cash flow.  You should access the equity you have and then get conventional financing on your new purchase.  Perhaps you can find a deal where the owner is willing to give you seller financing - though that's not an area of expertise for me.  Best to find someone else here who deals with seller financing.

@Austin McAnena

I just want to point out that, as a marketing professional, you have a built-in advantage over most people here, because so much of real estate is marketing, and people don't realize this.  If you want to break in with brokers, you need to market yourself to them.  If you want to raise money for deals, you need to market yourself and the deals to investors.

My friend Joe Fairless has a background in marketing and I know that one of the biggest factors in his fast success is that he was able to harness his deep knowledge and experience in marketing and apply it in the real estate field to grow his investment business.  Listen to Joe's podcast.  I am sure you will see a lot in common with yourself and learn a lot from him. 

Good luck!

@Cameron Delmotte

I would definitely structure the deal as an LLC structured as a partnership for just the one entity. (You should always have your investment assets in separate LLCs to protect you from them and them from each other.) Worry about an overall LLC agreement with your partner later. You may find that you want to structure each deal differently or that, after one deal, you don't actually want to work together anymore.

In each deal, you might bring different amounts of equity.  One of you might have found the deal.  One of you might bring in an investor or two.  One of you might manage the deal.  You might want to leave the option open to have a different structure in each deal, with different things you do worth different amounts of equity.  Or, for the sake of simplicity, you might want to structure every deal as 50/50.  But the point is, don't jump into an overall partnership agreement right away when all you have is a single deal in front of you.  Just become partners for that deal and then work from there.

@Bill Exeter  very helpful! Please PM me to connect!

@Stuart Fraass  Have you considered the Hudson River Valley for MF homes?  I have friends who have had success in Troy, NY, and Albany is a market with a lot of rental properties and relatively low entry points.  $300,000 would go a long way in those markets.  You could do a cash deal to pull of the 1031, and then pull out some proceeds in a refi and go buy two more MF properties there.

@Thao Kieu  The first deal I tried to do was for 110 units in Houma, Louisiana.  It was a C-minus property with 10 down units, but it cash flowed like crazy and we were going to do a value add that would bring the down units back on line and add $60,000+ to our bottom line each year.  We found a lender who was all set to do the deal.

We were under contract, hired lawyers, incurred that expense.

We paid lender fees, to cover third party reports, etc.

Between me and my partner we were into this property for at least $20,000 each, all things considered.

Just before the loan rate locked, the lender sent down its junior underwriter to look at the deal and do final approval.  This is generally pretty much a formality.

A couple days later, the mortgage broker called and said the lender wasn't going to do the deal.

Guess why?

Well, here were their "reasons."

The breezeways were dirty.  (Yes, we planned to power wash them.)

There were ten down units  (Yes, the lender already knew that from our documents; we were getting $100,000 back from the seller in the deal to repair them and our contractor estimates were for $60,000 to do the work; that was the value-add in the deal!)

The underwriter found that a golf ball had come in through a window in a down unit.  (I remember seeing the broken window and golf ball when we walked the units.  But, seriously?  A $5 pane of glass would break a $3,000,000 deal?!)

Clearly, the lender was looking for reasons to get out of the deal.  Maybe they did not like Louisiana.  Maybe they were still skittish after the crash.  (This was 2011.).  I don't know what the reason is, but every banker I have ever told this story to said it was ridiculous and the bank was just looking for excuses to back out.

We were able to get our deposits back, because we were still able to get financing contingencies back then.  But we were out all our costs - as I said, about $20,000 each.  At a time when I was making no money and living out of savings to try to make it as a full-time multifamily investor.

So, don't worry.  This stuff happens.  You'll get through it and you will be better and stronger for it!

Good luck - though I don't think you'll need it.  You seem pretty determined.

@Michael Prakash  I've never heard of a list, though that doesn't mean there isn't one.  The easiest thing to do is just go to a mortgage broker to discuss this.  They already have the connections, so no need to reinvent the wheel.  And often the lender waives its point because you came through a broker so they have no marketing expense associated with the loan.  That point pays for the point you will pay the mortgage broker.

The broker can give you a very good lay of the land for the kind of deals you want to do.

@Marc Bushee

That's a very broad question.   I will try to do my best to answer without overwhelming you.

The first thing to understand when doing syndication is that you are selling a security. You typically syndicate a deal by forming an LLC that owns the property and selling membership units in the LLC (what LLC shares are called) to investors through a private securities offering, called a private placement.

You will need to hire a securities lawyer to make sure that this is done correctly, as a lot of rules apply.  Many people, myself included, prefer to deal only with "accredited investors," because you encounter the fewest problems here.  Accredited investors are people who meet the following definition:  either (1) $200,000 of income individually; (2) $300,000 as a married couple; or (3) $1 million in net worth, excluding their primary residence.  Some people also deal with "sophisticated investors" as well -- people who are not accredited but can demonstrate a high degree of sophistication in real estate investing, such that they can understand the merits and risks of the transaction they are entering.

Though the JOBS Act has thrown some wrinkles into this equation, to stay within the law, you must have established a "substantive relationship" with an investor before you can bring them a deal, and my understanding (which could be wrong) is that you cannot bring them a deal that you were already working on when you met them.  I have done some research in the area, and it seems to be the case that you must wait at least 30 days after you have established a relationship with the person before you bring them a deal.  However, there has never been any clear SEC or court guidance on this issue.

To establish a "substantive relationship," you need to know them well enough to know that they are, in fact, accredited.  That means if someone tells you they are accredited, you know them well enough to know that their job is the kind that could actually pay them $200,000/year, that they understand real estate investing, etc.

It's best to document everything.  I keep a record of every investor who I meet, when I met them, when I send them my accreditation materials, when they returned them to me, when we first had a substantive discussion, what we talked about, and deals they have invested in with me.  I also keep the records of investors who are not qualified, so I can demonstrate that I am rejecting unqualified people.

As far as getting investors is concerned, this is a process.  You need to be out there networking with people and generally getting your name out there, letting them know that you are in this business and looking for deals, and asking whether they would be interested if you do find a deal like the kind you're targeting.  Then, you need to keep those contacts warm while you are looking for deals, and approach them again to sell them when you have a deal in hand.  You need to beware that at least 2/3s of people who say they want to invest with you won't actually invest when you have a deal in hand, so you need to have 3x the commitments you need to close the deal.

Since you need to be working with rich people, you need to hang out where the rich people are.

You will also need to get good at putting together good marketing materials for your deals, including your financial analysis, an overview of the market, demographics, pictures, maps, etc.  As much as anything, syndication is a marketing process.

And, of course, you have to be able to source deals. This is a bit of a chicken-and-egg thing, because it's hard to sell people deals until you start getting deals, and it's hard to get deals if you don't have the money lined up. You will hear in this business that, if you have a good deal, the money will come. I know from bitter experience that it's not true. You need to have a deep pool of investors - and other syndicators who will JV with you and bring the deal to their investors too - to insure you have enough money to close.

This is just an overview.  Hope it helps.

@Sam Fried

Everything that @Brian Burke said.  (Brian, by the way, you're a terrific writer.  I enjoyed that response.)

What Brian said about getting to know brokers is even more important in this market.  When I got started it was 2011, still in the bad overhang of the Great Recession.  It was a buyer's market and, even then, it was hard to get brokers to pay attention to us, even though we could waive proof-of-funds at them with six zeros on it.

We had to slowly network our way into the brokers' good graces.  We started making some offers on properties and explaining our reasoning when we came in short of what the seller was looking for.  Over time, the brokers began to take us seriously.

Then, my partner and I broke up, I started looking in a new market, and I had to start all over again.  Through a person connection, I found a buyer's broker who knew all the seller's brokers in the market.  But, still, it was hard to get a foot in the door, because the seller's brokers knew I was the principal and I was unknown.  And this was 2013, when the market was getting stronger but still not at the frenzy we're in today.

Finally, my broker called in a personal favor and we were able to get a meeting with a broker who happened to be his business partner's best friend's daughter.  It took that level of personal connection to break in.  Because of the personal connection, we got first look at a deal that no one else had gotten to see and wound up being able to buy it.

Approaching brokers cold doesn't work.  My suggestion would be to research the markets, come up with an investment thesis, and decide on a few specific target markets.  Then you need to start getting ducks in a row.  Put together some nice materials explaining who you and your team are, the kinds of deals you want, your investment thesis, the kinds of due diligence materials that you require to do your preliminary underwriting, etc.

Then, go through your team of attorneys, accountants, management company, mortgage broker, contractors, etc., and ask for personal introductions to brokers.  Go through your rolodex and ask for personal introductions to brokers.  Once you get the warm introduction, you then email them asking for a meeting and providing your documentation of who you are.  Prove to them that you are legitimate, even though you are new.

Regardless of how much money you have at your disposal, if the brokers are not convinced that you can close seamlessly, they won't pay attention to you.  So you need to show them that you are ready to hit the ground running and close.

Particularly in a market like this one where, in major MSAs, people are going hard with their deposits on day one and closing in 30 days with no financing contingencies.  The brokers have so many proven closers to turn to right now.  You have to convince them why they should spend time with you.