All Forum Posts by: Kevin Dean

Hey @Rachel Luoto great question, we use cash for replacement reserves on our properties. 

Depending on the year of construction, current state of on site operations, the business plan and the deferred maintenance, we put between $250 and $350 per unit in cash reserves.

The key is to make sure that whatever way you plan on funding reserves for the property are as liquid as possible and can be accessed easily at any time. 

We see these reserves as an expense and we are fine with the opportunity cost of it being in cash, it gives us room for the unexpected. 

Hey @Scott Anderle, I would like to introduce you to @Kyle Deutschmann. He is very active in the Nashville market and will be able to help you reach your goals! Best of luck. 

Hey @Taylor J., I would start by looking on all of the more popular multifamily brokerage websites, just to name a few check out....

1. CBRE

2. JLL

3. Newmark Knight Frank

4. Colliers International

5. Marcus & Millichap

You will find that there are also a ton more brokers in your area who are smaller and will spend time speaking with you regarding targeting properties that meet your specific investment goals and criteria. The key is that you want to build knowledge and experience before trying to truly develop those relationships. That way you can build rapport with Brokers from Day 1 without wasting their time. 

So step 1 would be to define your investment criteria.

Step 2 would be to start filtering on those large popular sites and finding opportunities that meet your criteria.

Step 3 is to analyze those opportunities and become efficient at understanding what a good deal is and what a bad deal is.

Step 4 is after building knowledge analyzing deals, to reach out to brokers in your target market, communicate your investment criteria and build rapport.

Step 5 is to receive leads from those brokers, underwrite those leads and make offers at a price that meets your investment criteria while communicating with the broker why certain leads do not meet your investment criteria in order to get more targeted leads in the future.

If you do these steps consistently, I believe you will have a good chance of acquiring a great property that meets your goals!

Hey @Amir B., one thing to remember is that investing in large multifamily properties is a team sport. Its tough for one person to network with vendors, source deals, underwrite deals, raise money, close transactions, manage construction, manage the asset, communicate with investors as well as all other functions I have not mentioned in this abbreviated list. 

One way to get into a large multifamily deal is to add value and provide services in one of the functions mentioned above to an experienced operator who is already doing what you want to do in a market you are interested in. 

First thing I would do is figure out what you can specifically bring to one of these experienced operators.

Second, I would start networking with these individuals and specifically look for ways where your strengths can help them grow their business. 

Third, I would continue to build my skills in areas of weakness and add more value than you take. 

The equity and returns you're looking for will follow!

Hey @Colin Yang congrats on making the decision that you want to get into real estate, but don't let your age be an excuse or a hinderance. If you can help investors make money nobody will care how old you are.

I have seen individuals work there way into multifamily deals in the following ways.

1. Help raise capital

2. Bring the net worth and liquidity needed to qualify for the financing

3. Source, underwrite, perform due diligence and help busy operators close deals

4. Bring operational experience to the deal and help operate and manage the deal

In regards to whether or not it is a good time to buy, just like investing in the stock market, it is very hard to time the market. Yes, we have been on a long bull run since recovering from the financial crisis, but that doesn't mean that multifamily has no more room to grow. There are strong fundamentals (depending on the market) which support continued growth of multifamily in the United States. Here are a few....

1. As debt per capita has risen, as a result of the cost of college for example, it has become harder for recent graduates first to qualify for a mortgage and second to put a down payment on a personal residence.

2. The job market has remained tight, meaning businesses are unable to find qualified talent, which should continue to fuel a growing economy as this is usually a sign that demand for goods is outpacing our capacity to produce them. This supports at worst a flat economy, and at best a growing economy. 

3. Due to the rise in cost of labor, and as a result the cost of new construction, it is not as attractive to build new multifamily properties. Meaning demand (in certain markets) may outpace supply in the long run.

4. With the run up in all asset classes over the last 10 years, individuals across the united states and the globe have more capital than they know what to do with it. Multifamily has become an attractive spot for those investors to park that capital. This has reduced cap rates, increasing values tremendously, and with the continual influx of capital out of "less safe" investments into "safer" investments such as multifamily, cap rates should continue to compress, only lifting valuations higher.

All this is to say, that in my opinion, Multifamily is still a great asset to invest in. My analysis however does not take into consideration the effect of an unforseen global shock or tragic event which could shake all markets, but that is the case at all times regardless of what the last ten years have looked like. 

Yes, you do want to be more conservative in your underwriting than you may have been four years ago, but odds are that if everyone says that a crash is coming, the opposite is most likely true. 

If I were you, I would do everything you can to get going on reaching your real estate investing goals. Worst case scenario, you get nowhere but learn a lot in the process. Best case scenario, you grow a large portfolio and also learn a lot in the process. 

Hey @Elad Messing I'm currently taking level 3 of the CFA (Chartered Financial Analyst) program, which focuses on all asset classes with a heavy focus on equities, real estate being a smaller segment of the material. Full disclosure however, I spend 100% of my professional career in Commercial Real Estate, so with those two perspectives pulling me in opposite directions I will try to answer this as unbiasedly as possible.  

There are seven steps you can walk through in order to determine your optimal asset allocation. 

1. Assess your capacity to take risk - Do you have a large financial cushion and a high current income? If yes to both, then you have a higher capacity to take risk. If not to one or both, your capacity to take risk is lower. 

2. Assess your willingness to take risk- Based on your prior investing experiences and personal preferences, are you more risk or less risk averse? If you are risk averse, you will want to focus on higher current yield, less volatile, more liquid investments. If you are not risk averse, you will want to focus on lower current yield, volatility will be less relevant, high growth, less liquid investments. 

3. Determine your liquidity needs - do you need to maintain a certain percentage of your wealth in liquid investments/cash? This will be based on current living expenses, debt covenants and obligations, or for the purpose of having cash on hand in order to be opportunistic and act quickly on an opportunity in the market. If high liquidity needs, use safer, liquid investment vehicles. If you have lower current liquidity needs, you can open yourself up to pursuing illiquid investment opportunities, which often come with a premium due to the illiquidity factor. 

4. Consider your current tax situation - Are you currently in a high tax bracket? If so you may want to increase your allocation to tax deferred investments, which will result in you paying taxes when your tax bracket is lower in the future. Additionally, a high current tax bracket may mean you want to allocate more of your capital in tax shelters such as a LIHTC property, or a value-add multifamily property in which you can use cost segregation to accelerate depreciation, resulting in current losses which will enable you to write down your higher current taxable income. 

5. Project your current income needs - Are you currently living off of your investment income? If so you will need to allocate more capital to income producing assets such as fixed income or real estate. 

6. Set an accurate time horizon - When do you plan to use this capital to fund living expenses? The closer that time horizon is, the more you need to allocate to income producing, liquid assets. If that time horizon is further away, you can tie up more money in growth assets with less cashflow and less liquidity, such as growth stocks, venture capital or real estate development projects. 

7. Consider any special circumstances - Do you or any of your dependents have any serious health considerations? Do you or any of your dependents have any large life expenses coming up that will force you to alter your return goals, liquidity needs, tax considerations, risk budget or current income needs? Do you have any outstanding lawsuits against you? There are a number of things you could throw into this category. Factor how these special circumstances will effect the answers to steps 1 - 6. 

8. Determine your investment goals and set your risk budget - based on your answers to all of the questions above, you will formulate return, cashflow, tax and liquidity goals. You will then need to realistically analyze your capacity for risk and allocate your capital in a way that will meet all of your goals while not exceeding your risk threshold. 

Conclusion: As you can see through the analysis above, everyone's asset allocation should be different. Rules of thumb are set by those who do not want to dig deeper. Age is a very small component of determining an asset allocation and people of the same age can have very different asset allocations depending on their personal circumstances. You know yourself better than anyone else and it looks like you have no fear allocating capital across a range of non-traditional asset classes. I would think through the steps above and allocate your capital in a way that meets all of your personal investment needs. 

Hey @Mike Kehoe I think that is a great starting point.

I would say be cautious, when you have cash on hand and you mix it with the excitement that all investors get when starting out, it's easy to get into bad deals and bad partnerships. There are always people who will look to take advantage of your inexperience and your money.

It sounds like you are already headed in the right direction. You may want to think about diversifying both your money and your education across a few different deals and with a few different sponsors. In my experience it has been very beneficial to see how a number of people operate. 

Spread your time out by adding value to two or three different individuals.
Spread your money out by partnering or investing in two or three different deals with two or three different deal sponsors.

This is definitely a longer term process, but with the 5 year mindset that you mentioned you have, this is a realistic strategy to equip yourself in the right way in order to move yourself to where you want to be five years from now. 

Hey @Rachel Dixon here are a few things that I would think about.

If you buy one property in cash....

• Lower risk in meeting obligations as you have no debt to service
• Lower actual returns, as your invested capital is higher
• Higher cash flow per unit
• Lack of diversification. If you have all of your money tied up in one property, you are not diversifying your property specific risk across multiple properties
• Less headache as you will only have to manage one additional property rather than two or three

If you buy multiple properties with your saved capital combined with leveraging bank debt...

• Higher risk in meeting debt obligations as you will have multiple mortgages
• Higher actual returns as your returns will be leveraged
• Lower cash flow per door
• Receive the benefit of diversification among a number of units.  You are diversifying your property specific risk across multiple properties
• Potentially more headache as you will have to manage more than one additional unit

In regards to holding onto cash and waiting for a market correction, people have been waiting for a market crash for years now. Imagine how they feel after watching active investors do well over the last few years while they were sitting on the sidelines earning inflation on there money market investments, waiting for a turn in the market.

It seems as though you already have experience being that you already have 6 doors. If you are concerned with a turn in the market, I would just be more conservative in your projections, use enough leverage to boost returns and diversify across multiple properties, but no more than you are comfortable with. The snowball you create by buying rental properties correctly, has historically outperformed sitting on the sidelines in cash.

No one can time the market, but everyone can be conservative in their projections and cash flow over the long term!

Hey @Alec McGinn personally, when I am saving specifically for Real Estate, I use liquid money market securities. If you're plan is truly to take that money and allocate it to real estate when the time is right, then this is your best bet as it will provide liquidity and will hedge inflation. 

Unlike many real estate investors, for many reasons I am still a big proponent for allocating a portion of your money to equities. When you are savings specifically for another investment however, investing in the stock market opens you up to timing risk. All of my money that I put into equities I see as long term retirement money, it will compound for decades to come. I know I cannot time the market, so I let it sit and will not sell unless I absolutely need to for liquidity reasons.

Putting your real estate specific savings into money markets will keep you ahead of inflation (unlike a savings account) and will keep you liquid without risking selling during a downturn (like investing in the stock market).

Let me know if you need any more specifics!

Hey @Frank Quan, I would not use the 50% rule when analyzing multifamily properties. In reality expenses as a % of revenue will be based on the location, size, year of construction and current operations. 

Large, newly constructed, well managed properties with high rents, low vacancy and high "other income" can have an expense ratio as low as 30%.

Smaller, older, poorly managed properties with under market rents, high vacancy and minimal "other income" can be cash flow negative. Meaning an expense ratio above 100%,

You want to evaluate every property, and every line item individually, and validate your assumptions with your property manager. 

If you use the 50% rule for all properties, you risk overpaying for poorly performing assets and underpaying for well-run properties.