All Forum Posts by: Jordan T.

Have you decided to keep looking into it?  With pretty conservative assumptions and plugging in 15% vacancy, I'm still seeing an 11.5-12% cap rate.

My question is: why is the seller offering such a good deal?  Either the owner isn't very smart, or he/she is being forced to sell quickly, or there's some kind of issue with the property. 

I agree with his solutions if we're near the end of the cycle.  Demand for income assets is higher because lending is easy.  When the cycle turns down, only the best multifamily  assets will sell easily.  Otherwise you need to be prepared to buy and hold, meaning you need longer terms on loans and stable assets in your portfolio.

People chasing after C-class properties at compressed cap rates will get hurt, as rising rents and easy credit mean more people will become homeowners.  Maybe C-class tenants can't afford their own homes, but B-class tenants can, and higher vacancy rates and lack of rent increases will trickle down into the C-class.

The viewpoint about millennials not wanting to own homes is wrong - buying homes and starting families was just delayed due to a large recession at the beginning of their careers. 

What do you think? 

As possibly the most successful real estate investor around today, Sam Zell is a great source to listen to.  I found some notes from his latest conference presentation, and the link is below.  Here are a few parts:

• Sam thinks the future is in high rise versus low rise, changing the company and upgrading his portfolio. Suburbs sold, focus is on 7 core markets.  
• Baseball adage – in the 8th inning on commercial real estate.
• Once you get to the 9th inning – value dramatically dictated by quality of assets. High quality assets with minor alterations but the marginal items in historical pricing is where you will see an impact in value.
• The disparity between A and B class properties will increase.
  
• Enormous amounts of liquidity and financing at attractive rates = lots of competition which is destructive.
  

Sam Zell Comments at Invest for Kids Chicago Conference 

The 30yr loan is better every time, and I'll tell you why: opportunity costs.

Paying down a loan is exactly the same as investing that cash at the loan interest rate.  For instance, if your mortgage rate is 5%, paying down the principal is like earning 5% on your invested cash.  But listen to this - it's actually worse than that, because you're missing out on the tax deductions from the interest.  If you have a 25% tax rate, the loan rate on an after tax basis is actually 5% * (1-0.25) = 3.75%!!!

Now, maybe you like the security of knowing your properties are free and clear.  But why not keep that low rate mortgage in place, and use the cash on hand to invest in another property at a cap rate of 8%, 10%, or even higher?

If you have a good margin of safety in your numbers, and keep cash reserves on hand for a rainy day, then buy more properties and borrow as much as the properties can safely handle.

It's good that you've been conservative with your estimates...you only get hurt when you underestimate.

I think  you might be a bit high because your numbers are based on the next replacement date, and not the average usable life of each item.  For instance, maybe the HVAC unit only has 5yrs of life left, but normally it would have a 20yr life.  You'll want to reserve a high amount now, but in the long run it's a much lower reserve.  I think your maintenance amounts are a bit low, but you probably have good tenants that keep up the units really well.

I estimate about 2.5-3% of building replacement cost for my repairs and capex (doesn't include land value).  You own an old property, so depending on the condition it may run higher.

I don't own properties where flood insurance is an issue, so I can't speak to that.

As a commercial lender you'd know this better than me, but the 1.1-1.2x DSCR is lower than I'd recommend for future purchases - I don't feel comfortable with anything under 1.5 on my properties.

Does your friend have a lot of experience, and have his past deals been accurate as far as estimated numbers translating to actual numbers?  If he was really experienced I'd expect him to use private lenders on his own, especially for a deal this good.  

It's so important to limit your risk here...you're taking 100% of it and your friend has only upside.  If the numbers aren't rock solid, walk away.

If you do go through with it, another option is that you could act as a private lender, getting ~10% interest while the deal is going on, and switching to 50/50 ownership after you refinance your money out upon completion of the rehab.

I thought it would close in the $165-170k range.  While $180k is a really aggressive bid, you can view it as paying up front for the next few years of appreciation.  You should check with the listing agent to find out the 2nd place offer as a comparison.

Holding it longer term, this will be a good start.  In your current arrangement you'll live pretty much for free, as you're mowing the lawn and doing the property mgmt.  Upon moving out, at today's rates you'd cash flow around $3-4k per year.

Cap rates are not as good as they used to be, that's for sure.  Raleigh was bid up first, then the surrounding towns.  You can find cheaper opportunities in Johnston County or Alamance County, but those are smaller areas with lower rents and can take a little longer to fill with good tenants.  The "higher" cap rates in Durham are on warzone streets right now, and anything in C and higher areas is priced much higher than even a year ago to the point where it's seldom worth it.

Hi Ryan - I know this response is late as I just came across the thread. Those OpEx/CapEx numbers are probably correct from the seller on a trailing basis, but over time you'll pay more than $900 per unit per year. I'd estimate at least $1,500 per unit to be safe. You'd adjust depending on everything that needs to be replaced....brick or wood siding, central A/C vs window units and baseboard heat, carpet vs vinyl flooring, etc. Those are lumpy expenses that may only come every few years, but they do come.

Regardless of how cheap the properties are, I'd find it difficult to make $425/unit rent turn into positive cash flow in the long term.

I know this is an old thread, but if I was back in Wake County and starting out, I'd definitely go with one of those Cary duplexes.  It's not a fantastic cash flow, but renting out one side will cover the mortgage and save you a lot of money.  And it's a B class area as well.  My first purchase was a townhouse for myself and I really wish I had bought a duplex instead.