All Forum Posts by: Jonathan Twombly
Jonathan Twombly has started 34 posts and replied 698 times.
Post: Things You Wish You Would've Known With Your First Apartment

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Terrill Clark We don't really think of per-unit profits. We're more focused on return on invested capital and absolute dollars paid out, since we have to meet a preferred return to our investors before we can participate in the deal.
I say that you should start where you are. You will get where you want to go much faster by simply getting started. But make sure you exercise discipline at all times, because the most important thing in making money is not losing money.
Post: Things You Wish You Would've Known With Your First Apartment

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
Here are some things that I wish I had known when I started out.
The first property I bought was 102 units, in South Carolina. I had the equity lined up, the debt, everything. I thought I was good to go.
First, I did not realize that, with commercial loans, the lender will not lend to you unless you have a personal net worth equal to or greater than the size of the loan, with 10% in cash. I had to get my partner to sign on the debt with me. Even though he more than had the balance sheet, he was extremely reluctant to sign on it, since he was not a real estate guy and really overestimated the risk of signing on a non-recourse loan. So you should know about this going in, and if you don't have the net worth to do the deal yourself, make sure that you have partners who have the net worth and are not afraid to sign on the dotted line.
Second, you need to raise a lot more equity than just the down payment. In addition to the closing costs, there may be tens of thousands of additional funds needed for escrows, funding your operating accounts, etc. The lender may come at you with demands for immediate repairs, which you need to escrow up front - and then pay for, before you get this money back. So you need to have the money for the escrow AND the money for the repairs set aside up front. (Crazy, right?) The point here is that you really need to get ahead of this as early as you can, so you need to have ongoing discussions with your lender about costs and escrows, so you can be sure to raise enough money up front.
Third, you will need a reserve fund for capital items. You cannot finance capital items out of cash flow. It will kill the property's liquidity. You need to raise a capital fund up front so that you have the funds set aside to pay for capital items. It's almost line your own internal line of credit. You will be paying the lender escrows every month for capital items, but you will not get this money back until you have paid the vendor, so you need a source of cash to pay the vendors while you are waiting to get your escrows back from the lender, which can take 60 days, and is usually subject to some kind of minimum, because the bank does not want to deal with requests for $500 her and $1,000 there.
If you don't provide the property with enough funds to be liquid, you will NOT make money.
Of course, if you are doing this on your own, and you don't need to pay investors, you can finance these items out of pocket as the need arises. But you need to be prepared.
Post: How much in cash reserves

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Manny Rivero The scenario that @Andrew Cushman describes is what we did with our first deal. We were so concerned about providing the highest possible returns to our investors that we did not raise additional cash for a reserve fund. Then, when capital items started coming up, and we tried to finance them out of cash flow, the property started suffering from a liquidity problem and we could not do apartment turns quickly, which meant more vacancy. On top of that, when the banks require you to escrow reserves every month, it means that you are effectively paying 2x for your capital items. Once, you pay to the bank. Then, you pay to the vendor out of pocket. Finally, you can go to the bank with proof that you spent the money on the capital item and the bank will give you your money back. This can really destroy your liquidity and can lead to a death spiral. We had to put extra money into the deal to help with liquidity.
After that, I learned my lesson and always raise a capital reserve fund up front that we use as our own internal float so that we don't have to spend cash flow on capital items. I prefer to use a separate account for this rather than the operating account of the property.
Post: What to do about cash reserves for big apartment deal?

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Abel Sng. This is very common with larger lenders, though some banks are worse than others. We've done most of our deals with CMBS (thank goodness we now qualify for agency debt) - and every lender made us escrow funds at closing, though one bank was much more demanding than the others, and we don't work with them anymore. In any case, it's something that you need to be prepared for so that you don't fall short of funds at the closing. But, fortunately, the banks don't spring this on you right at closing. They will give you some lead time. As soon as they have received their engineering report, they let you know what you need to escrow for so-called "immediate" repairs. Have never understood what is so immediate about a seal & stripe, but who understands the minds of bankers? :-)
Post: Investing in NY Duplex

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@John Hickey tell me more! I'm very curious. I've been rooting for Newburgh but the last time I looked seriously it was around 2010 and things were very bad there.
Post: Determining Multifamily Rent Rate

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Ewan Heinemeier. When we diligence a property, we always "shop" the competitors. Call them up pretending to be a potential renter and just ask them what the rents are. Say you're coming for a one-year position and you are not sure if you are going to bring the family, so you want to know what the rents are on all the different layout types they have. Be sure to ask about amenities so that you are comparing apples to apples. Also make sure you ask if they are giving any concessions like free rent, free partial month's rent, etc.
Post: Separate LLC's with Ownership into a Partnership

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Anthony Surico. Yes, by "LLC Agreement," I meant partnership agreement. I don't know how Florida works, but here in New York you are required to execute a partnership agreement within 90 days (or something like that) of forming the LLC. However, you do not need to file it with anyone. You just both sign it and keep it on file. Make sure your attorneys have copies of it.
I also don't recommend doing this on Legal Zoom. I did an agreement on Legal Zoom once and I did not understand parts of the agreement - and I practiced law for 12 years. Perhaps to save money you do a draft on Legal Zoom and then take it to an attorney for comments. But my preference is to use a live attorney, even if it is more expensive. In my experience in these things, you want it done right up front, and you definitely get what you pay for.
Post: Investing in NY Duplex

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Raul Tirado. I'm NOT a CPA, so definitely check with your CPA about this. But i think that the tax benefits of a rental property would be greater, because if you live in the property you would not be able to depreciate the portion of the property you live in. With a full rental property, you can depreciate the whole thing AND deduct the mortgage interest, and at least in the early years, that will wind up with you having very little taxable income from the property.
But you should not just look at it from a tax perspective, but from a cost of living perspective as well. Which strategy would put more cash in your hands at the end of the day?
And, whatever you do, make sure you're cash flow positive! Never, ever invest only for appreciation!
Post: Separate LLC's with Ownership into a Partnership

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Anthony Surico. At this point, it probably does not make sense for you to each have your own LLC through which you own the joint LLC. It's more important that the joint LLC invest in its properties through property-level LLCs, rather than having them all directly owned by a single LLC - because then they are all in the same bucket that is attachable by any creditor of any property within the main LLC
It's also really critical to have a good, strong LLC agreement between you that deals, especially, with how you get out of it if you need to do so. You have to include dispute resolution policies, like what happens if you do not agree, since neither can outvote the other in a 50/50 partnership. You might want to agree to appoint a neutral to arbitrate any dispute.
Also, if you think that you might want to own your piece through an individual LLC or trust someday, make sure that the language of your LLC agreement permits a transfer to a related entity whenever you want to do so.
Post: Investing in NY Duplex

- Rental Property Investor
- Brooklyn, NY
- Posts 722
- Votes 1,260
@Raul Tirado - Oh, I'm sorry. I might have misread your post. Do you intend to live in the property yourself?
If that is the case, you can ignore my post, except for the part about transit. I would focus very strongly on walkability and access to transit because that is what the people who are moving to Westchester from the city want.
In the old days, it was the standard pattern for people to leave the city when they had kids. The younger generation now avoids moving to the suburbs if they can help it, and usually move because they are priced out of the city. When they move, they want to recreate Brooklyn hipster life as much as possible, so that means walkability and being able to do things without a car. They don't want to drive into the city; they'd rather take the train.
My real estate friends in that area report to me that it's become very difficult to sell houses that don't have easy access to downtowns and trains. Now, this is secondhand information, so take it with a grain of salt. But that is what I am hearing down here in the city.