All Forum Posts by: Ben Leybovich

The biggest mistake I've seen folks make is trying to time the market. Understand the following:

When there are lots of easy deals, there's usually very little money. And when there's lots of money chasing deals, there are usually very few deals. This seems to always hold true, and as such, what conclusions can you make?

One - don't try to time the market.

Two - understand your role as a financial engineer. Your job is to understand the environment and to synergize all elements to make things work.

If you understand both of those and get good at both, you will be able to conduct business in all markets, negating the need to time markets. Good luck!

Lol You can offer whatever price makes your heart sing, but you will have to pay the price that gets the deal done...assuming you want the deal :)

We've used 506(b) but now completely switched over to 506(c), at least until there is clear precedent established. 

A few months ago the SEC offered an update to the definition of sophisticated investor - they identified how much such an individual can invest. I believe, those earning less than $100k can invest up to 5% of their income or NW, and those earning over $100K can invest up to 10%.

The way I read this is that in order to meet a minimum investment requirement of $50,000 a sophisticated investor needs to both earn over $100k and have a NW of $500,000. 

Several issues with that as it relates to WhiteHaven:

First - sophisticated investors have never been more than 15% of our ecosystem. Secondly - of that 15%, only a fraction would meet the above guideline, which means we'd more than likely have to lower our minimums. Next - what we are trading is the ability to advertise investments, so the question is whether the dollars we gain substantiate the freedom we lose.

Last, and this is the most interesting thing, in true form, while the SEC amended the law to identify the specific allowable investment levels, they kept self-attestation, which does not require the sponsor to certify either income or NW. Basically, the investor just checks the box... It'll be interesting to see how sponsors react, but for me, since this language is very specific and is now part of the actual law, it feels wrong to not verify. 

Well, if I am going to have to certify people, I might as well go to 506(c), gain the ability to advertise, and be talking to an audience capable of higher dollar investments.

We actually hate this update. We've had people who started with us in 2018 as sophisticated, invested in 3-4 offerings where we doubled their investment, and in part because of this they are now accredited. This is the way it's supposed to work, and we are very happy to be part of that process. This is no longer feasible, and sophisticated people are the losers in this...and that makes me sad.

@Bryan Hancock

Hahaha Yup, they are still waiting. Although I am confused if the issue now is a huge crash, or hyperinflation, or both...:)

@Shiloh Lundahl - good job! 

@Natalie Schanne - I think I remember your commentary on FB. I thought it was funny. Though, I suppose I am happy that not everyone shares your point of view. The last community I did this scheme on was purchased for around $8M and is in contract to sell for almost twice that in 2.5 years. Again, lucky me not everyone is as concerned about my choice of shingle...lol

I think Shiloh and I will laugh about this when he calls me up to have lunch again, right Shiloh?

My first deal was $50,000. My last was $16M, though it's not the largest.

Knowledge is the key. There are many other pieces to this puzzle, but not desire, nor guts, nor partnerships or market cycles, nor perseverance can take place of knowledge...obscene amounts of knowledge.

God luck to all!

So, I am just about to close on another apartment community, and if @Joshua Dorkin is right, I am in trouble...

Josh - am I in trouble? Lol

There are actually far fewer gurus today than at certain points in the past, you're just too young to know any different :)

Having said this - what is the point of this post? Are you telling us that you are too late to the party, not buying and waiting for the cycle to change? If not that, what are you saying?

So many don't understand this. Expenses in a given market on a given type/vintage of asset are quite efficient, and there is very little one could do to clear that hurdle. To be fair, I did not gain a full appreciation of this until I entered the institutional space. But, it works the same way in smaller assets, just not as apparent. 

Say you’ve bought a 24-unit apartment building that generates $24,000/month in revenue ($1,000 per unit). This is a value-add, and you think you can improve the rents from $1,000 to $1,400, which would equal to revenue to $33,600/month.

Currently, the expenses are $10,000/month. This is pretty good at 42% of GOI, but you feel that you can cut expenses to $8,000/month.

You operate in a 5 cap market.

Let us analyze these numbers

Cutting expenses by $2,000/month, which would add $24,000 to the annual NOI, would capitalize to a value of $480,000 at 5 cap. This is great, but...

Question - how much would you need to raise rents to capture the same Delta?

Well, we already know that you'd need to add $2,000 per month ($24,000 per year) to the NOI. Divided among 24 units in your building over the course of a year, you'd have to raise revenue by $84 per unit.

Question - do you think it’s harder to cut expenses by $2,000 per month or to raise rents by $84?

Next, your underwriting tells you that you should be able to raise rents by $400, not $84. Therefore, by focusing on the value add you could create $2.3M of value, not $480,000. And even if your value-add does only 50% of the expected $400, you would still outperform cutting expenses...by a lot.

Question - which should you be focusing on, cutting expenses or value add?

The perspective 

It is extremely difficult to cut expenses without jeopardizing the asset. Naturally we don’t want to overspend unnecessarily. But, it has become fashionable to talk about cutting costs as a means to value-add. Let’s have trash pick-up twice per week instead of three times. Let’s pay less payroll. Let’s use a cheaper landscaping service. Etc.

Of course, we may use energy efficient fixtures or low-flow toilets. Those are easy, and they actually improve the property and make it more attractive to tenants and buyers. But, skimping on personnel or services may look good for a few months but will catch up to us before too long.

Cutting expenses is the cherry on the value-add cake, not the bread and butter of it. The real value is always, always, and always in the revenue.

Hope this helps some of you.

Hahah Well, this is cute. More so since when we finally get around to naming names, I am sure mine will come up more than once. Looking forward to how this unfolds, if for no other reason than the entertainment value.