All Forum Posts by: Ben Leybovich

Ben Leybovich has started 96 posts and replied 4169 times.

I think you are right. It takes time.

Now, there are disqualifiers, of course, which cause you to trash the opportunity in 5 seconds. Such as wrong location, mechanical set-up, vintage, unit mix, etc. However, if you don't trash it right away, what you're left with are 4 aspects of value add that have to synergize:

1. Price

2. Debt

3. Lift

4. Budget

Price is beside the point. The debt is a function of in-place numbers, which you need to break down and organize such as a lender would. Lift is a function of the market and the asset, which takes a minute to figure out. And, budget is a function of the business plan, which you won't know until you know 2 and 3.

So, if you can do it in an hour, good for you. Takes me longer.

2 Votes

Hmm Phoenix looks pretty good. @Ellie Perlman - where are you buying right now?

0 Votes

Originally posted by @Stace Caseria:

@Ben Leybovichthere are other reasons why @Alina Trigub and others may say holding is safer during uncertain times. To me, it feels like you're taking a micro view (looking at the CRE market as the thing, rather than the global economy). If a debt jubilee occurs, in which all debt is forgiven, either in the US, or globally, then you'd rather have hard assets than cash in a bank where it may be within reach of the government. I'm not knowledgable enough to weigh in on the particulars of how it would work, if it could happen, or how to best survive it, but Neal Bawa has advised all RE investors to get familiar with the concept. So, yeah, you could say a hard asset is safer than cash in some circumstances if you're open to seeing that those circumstances are a possibility.

So, now we are basing strategic investment decisions on a "debt jubilee"...

My mother is a very smart Jewish woman. She's taught me many things, one of which is this:

If you look for brains up your ***, you will eventually find them :)

1 Vote

Originally posted by @Adrian Fajardo:

Originally posted by @Ben Leybovich:

Originally posted by @Adrian Fajardo:

@Ben Leybovich Hello! I can't wrap my head around how you came to the conclusion that you can't make money with just $500 in rents with an 8 CAP? Would you please elaborate a little bit?

This is my understanding:

$500 x 8units = $4000/mo

$4000 x 12 = $48,000/yr (Let's assume 50% will be expenses)

$24,000 = NOI

$24,000 / .08(CAP) = $300,000

Are you saying that with the NOI, it won't be enough to cover the financing for $300k?

Sure, it will be enough to cover the financing - just not enough for you to make money...lol

For an 8-plex you will need a portfolio loan. It's been ages since I did one, but UI can't imagine anything less than 4.5% with a 20-year AM. With a 30% downpayment, this would be about $15,000 per annum of debt service. More if you find a lender willing to do 25% down.

This means there'd be $9,000 left to cover 2 things: CapEx and your cash flow.

All I'm saying is that to replace flooring in one unit you'll spend $700. To replace hot water tank $850. To re-paint one unit $550+. I'm not talking about central HVAC, windows, roofs, or any big stuff. How much of that $9,000 would be left for you to pocket?

Thank you for responding and for a detailed explanation too! :)

I see. Using your financing rates, it is only $750/mo of cashflow. That is bad.

You said it's been a while since you used a portfolio loan, so how did you arrive at a conclusion with just the rent and asking price as an input? Am I looking at the scenario wrong or is it because you've analyzed so many and you can tell a good and bad deal? I'm saying that's some amazing filtering right there! Lol.

I am sorry, I am not sure what you're asking. It's just math. You are the one who used 50% ratio, and I didn't argue, although depending on location that could be low or high. Further, Fannie and Freddie don't finance above 4 with residential and 8 is not large enough for GSE commercial. This leaves portfolio lenders/community banks. Can't see them lending at under 4.5%. The replacement costs are not a secret to anyone. The rest is just math.

I don't think there is anything amazing about this. It's just common sense. The amazing piece in all of this is that when you figure out how to think, this is truly very simple :)

Good luck!

1 Vote

Originally posted by @Adrian Fajardo:

@Ben Leybovich Hello! I can't wrap my head around how you came to the conclusion that you can't make money with just $500 in rents with an 8 CAP? Would you please elaborate a little bit?

This is my understanding:

$500 x 8units = $4000/mo

$4000 x 12 = $48,000/yr (Let's assume 50% will be expenses)

$24,000 = NOI

$24,000 / .08(CAP) = $300,000

Are you saying that with the NOI, it won't be enough to cover the financing for $300k?

Sure, it will be enough to cover the financing - just not enough for you to make money...lol

This means there'd be $9,000 left to cover 2 things: CapEx and your cash flow.

1 Vote

This was entertaining :)

I did not watch the video. Life's so short, after all.

@Lenza M. - James sells investment properties in Cleveland; TK. If you don't understand the implications of this, you should likely not be a buyer.

That said, James, as you know I play in the big pond. The rationale you put forward, that because this is not commercial, it's somehow different and expectations for disclosure should be lowered is flawed to the bone. Let me explain my thoughts...

The reason I buy communities and the reason I deal with Berkadia on my debt instead of a local bank is that both the asset and the process are more institutional, rational, and efficient. By contrast, small multifamily is a highly inefficient market.

You teach underwriting to the average, which is the correct way to do it. However, if I want to know the average rent per sq.ft., economic loss, insurance cost, or any other = line-item of OpEx for large multifamily in a given town, there are a number of statistical publications for me to reference. All of these things on an institutional level are much more trackable and transparent.

However, in the small stuff - who the hell knows. You have to be a local operator to really know anything.

You sell TK investments to out-of-town folks. I would think you would go the extra mile and provide them with the trailing financials to help them make an efficient decision in a highly inefficient market. I can't imagine closing a $20M deal without a whole lot of disclosure. But, for a lot of people, a $50,000 deal is akin a $20M to me.

18 Votes

Cleveland, Ohio

In my view, this game is all about appreciation if your main interest is creating wealth. If you want to store wealth, Class A TK works.

0 Votes

Originally posted by @Vincent Chen:

Originally posted by @Ben Leybovich:

Originally posted by @Ryan Short:

@Ben Leybovich beautiful property and amazing value add numbers. Best strategy in the best asset class in the world. Do you ever have value adds where you renovate and stabilize all units then sell? Or do you always leave meat on the bone for future buyers to add value?

Yes, in fact, Canyon 35 is on the market right now as a proven value add, with 50% of the units still to be completed. I see every acquisition as a mandate to try and maximize the highest risk-adjusted returns to partners. I finance these things in such a way so as to be able to exit at practically any time. If it sells for enough today, I sell. And if not, I hold and try again tomorrow.

@Ben Leybovich It is really great that you mention this point, I come from finance background, it is important to have the flexible to exit in any good favorable condition, not fixed dates. Not sure how you structure it?

And for all your business plan, I know the property management company(or other operator?) is important, since graduate to increase the rents and finish all the remodeling across the 2~3 year is long time plan, it takes experience and executions. How do you monitor or manage this process? The value add plan, mainly rent increase can come from due diligence and market/competition, but the detail plan (timeline of rehab, graduate rent increase plan)is handled by property management company, so they are the key person for whole plan, do you have any KPI for them to make sure the plan is on the track? And btw, 2 years to increase 350 for all the 100+ units, does it too aggressive?

Last piece, it sounds really great deal, just add 1M rehab and take some time can add great value, so any reasons that the seller is not doing that? All the defer maintenance is come from capital or old management?

Vincent, you are asking many good questions. I think the best thing is just to listen to the podcast that just came out. We cover the answers to most things you are asking about:

https://www.biggerpockets.com/blog/biggerpockets-podcast-383-ben-leybovich-sam-grooms

0 Votes

Purchased 20 months ago.
- 98 Units in Phoenix
- Purchase Price $8.15M
- Renovation Budget $1.5M
- In-place Income $60,000/mo.

Current

- Revenue $86,000
- T-12 OpEx $430,000 ($36,000/month)
- Community Reno complete
-49 Interiors Complete.
- 1 interior in process
- Remaining LTL in classic units $14,000

This has been a challenging lift. The property was a disaster when we got it. But, it has definitely turned the corner and is operating more or less stabilized.

We will finish the renovations within 12 months, and we project being able to hit $100,000+ revenue. We started with NOI of $25,500, which means this property was negative cash flowing for a while. The NOI is at around $50,000 today, with another $14,000 to come from capturing the classic unit LTL.

#ThisIsValueAdd :)

1 Vote

Originally posted by @Christopher B.:

Originally posted by @Ben Leybovich:

Originally posted by @Christopher B.:

@Ben Leybovich

That's great news. Very nice. I'm looking forward to details. What type of renovations did you do? Only renovations, or other things to cut expenses?

Chris, cutting expenses is a myth by and large. I know it's sexy to talk about on BP, but it rarely is possible. Furthermore, it doesn't do much. Let me give you an example.

HMS is 117 units and runs about $470,000 OpEx on T-12, so basically $39,000 per month. If I were to find a way to lower costs by 10%, which would be extraordinarily hard to do without cannibalizing some part of operations that would negatively impact performance, I'd save about $4,000 per month.

This is savings of $48,000 per year that would flow to the NOI. Capitalized at 5% cap this would create about $1M of additional value, which sounds great. The problem is that I'd have to hire a cheaper manager, cheaper maintenance, cut marketing, do less remodeling, etc. I'd have to find these savings somewhere, right?

On the other hand, a better fixed up unit, that is maintained by a better maintenance tech and represented by a better leasing agent with more marketing budget allows me to lift rents by $350. For a 117-unit property, this represents $40,000 of additional monthly income, or almost $500,000 per year. Capitalized at the same 5% cap this additional income represents $10M of value. I could not do this with less budget.

So, the real question is: Do I want to race to the bottom, cut corners, and hopefully pick up $1M, or do I want to run the property as it should be run, make it the best asset in a 3-mile radius, and potentially pick up $10M of value.

Does this make sense?

We install new cabinets, granite, stainless appliances. Build offices. Build gyms. Etc. We are vertically integrated and do interior construction completely in-house.

Yes, I agree, there are probably not a lot of expenses to cut usually, unless there is excessive staff in place, maintenance not being done right the first time, but what about utility costs, or changing who is paying the utilities, depending on what the market can support. For example, water is sometimes paid by owner, but the surrounding market can support water being paid by tenant. That's a huge savings, if the opportunity is there.

I agree with everything you're saying. For properties under 120 unit, we are able to run them with 2 staff. You really don't need anymore. Having said that, this is plus or minus $130,000 - $140,000 of payroll per annum after the overhead. And the more challenging the reposition, the more experienced employees are needed. You get what you pay for... So, in reality, there is very seldom any opportunity to cut corners in payroll.

As to the utilities, while I agree that this is very important, whether we are talking RUBS or some other form of bill-back, what we are talking about is income, not expenses. We are creating a revenue stream to offset the expenses. Focus - income.

Thanks!

0 Votes

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All Forum Posts by: Ben Leybovich

Ben Leybovich has started 96 posts and replied 4169 times.

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