All Forum Posts by: Lennon Lee

 While there are many "good" markets across the country for multifamily investing, it ultimately depends on your goals and your investment strategy. A good market for passive investors in large commercial multifamily deals might not be a good option for a new investor looking to do its first small to mid-size active multifamily investment.

With that in mind, there are still a few fundamentals that need to be looked at regardless of your investment strategy. Job growth and diversity, population growth, landlord friendliness, are a some of the items that you want to evaluate when analyzing your target market.

Starting in your "backyard" is typically (not always) a good idea regardless of the fundamentals above mentioned. Just like @Omar Khan mentioned above, you want to determine what's your advantage. The market might have strong fundamentals but if your relationships are weak and you don't necessarily have a solid credibility in that particular area with brokers then it might be a challenge to even find the deals in the first place. Whereas it is more likely that you have a solid network of brokers in your city and maybe even have some relationships with local contractors that you can leverage at the time of implementing the business plan in your property.

Good luck and happy investing!

Congrats on getting this deal Harsh.

First things first, you should be talking to your attorney and your CPA for legal and tax advise on how to best structure your deal according to what you agree with your partners.

That being said, the structure of a deal can take many different shapes and forms and it will vary according to the type of involvement the partners will have in the deal.

Are you in charge of putting together the deal, securing debt, managing the operations? how about your partners? Will they be actively involved in the deal as well or are they just bringing part of the equity and putting it in your hands with an expectation of a financial return? The answer to this questions might determine if you need to be talking with an SEC attorney given that you might be dealing with securities.

If everyone will be actively involved and will have different responsibilities in the deal then the structure and compensation for each member of the partnership can only be determined by you and your partners. Only you know how much value each one is bringing to the table. Maybe you found the deal, secured the debt, and then brought the opportunity to your partners and you will all be managing the property. If that is the case, then you might consider including a small acquisition fee for all the up front effort of sourcing and securing the deal.

With limited info (and even with all the info) I can only tell you that it ultimately depends on what your goals are, what you think is fair and on what your partners are aiming to achieve out of this deal as well.

Again, talk to your real estate attorney and your real estate CPA and have them advise you on the best structure to move forward.

Probably not the straight up answer you were looking for but I hope it helps.

Good luck!

 If it's back of the envelope type of calculation that you are referring to, then I go with the 50% rule. 

Income - 50% of income gives you your NOI and from there if you know your area then you should know at what CAP rate comparable properties are trading at. So with that info you will have a very (veeeery) rough estimate of what the property is worth.

Lynzie,

Location is paramount. If you could only base your investment decision in one single item then it should be location. And before some people come after me for putting it that way, I am talking in general terms. Every investor has different goals, strategies, risk tolerance, etc and it all will affect how they decide to go about their acquisitions.

That being said, when talking commercial real estate you ultimately have one goal: keep your income as high as possible and your expenses as low as possible which then translates into a higher NOI and in consequence a higher value of the property. Is as simple as that.

Nothing gives us apartment investors more confidence than a location (market and sub-market) where job growth and population growth are at least above national average. We look at this metrics (among others) as fundamentals that very much so indicate a healthy market (healthy location) where not only there will be high demand for rental units but renters will actually be able to pay rent and even pay a premium for more modern (or renovated) units, giving us the opportunity to add value to our properties that way.

I hope this helps. Happy investing!

 The equity multiple refers to investors equity my friend. If you bring in $1MM into the project and the equity multiple is 2.0X then you would be doubling your equity during the life of the project. ;)

 Paul,

I think the confusion comes because you are stating that you will be the "money" guy and a Limited Partner in the deals which typically means you are 100% passive and are relying on your General Partner to operate the property, do asset management, secure debt, etc. Under that structure you would be regulated by the SEC and the whole deal should be structured accordingly.

If you are planning on having some level of active involvement in the operations and not completely relying on someone (The GP in this case) to manage your capital with the expectation of future financial return on your invested capital then you can go ahead and just go the "partnership" route. This would be to simply create an LLC where you and your partner are 50/50 members (if you think is fair) and lay the structure, responsibilities, etc out in the operating agreement.

Consult all of this with your CPA and your Attorney, since I'm not qualified to offer legal or tax advice.

That being said, that 50/50 split will ultimately depend on how much value is each of you bringing to the table. For your reference, on our deals we do the following:

We bring accredited investors as Limited Partners under a syndication model. Their participation is 100% passive, and we offer them a preferred return (we don't see a dime out of cash flow until their pref return is met), a 70/30 - 80/20 split on their favor after that, and typically the same split on every capital event. We also charge 2% acquisition fee and 2% asset management fee.

I hope this helps. Good luck!

 Welcome to BP Peter! 

You certainly are in the right place if you want to start learning the ropes and get some advice from great investors with tons of experience. 

Get your education going and don't rush to leave your job. It doesn't have to be binary, only make the jump when you have built a strong enough foundation in your real estate investing business.

Although I'm very bullish on multifamily I think that starting with SFRs is a great strategy as well, and it certainly is less intimidating at the beginning. (Which makes it easier to overcome the analysis paralysis, if any).

Good luck and happy investing!

 Hi Freddie,

The strategy certainly works for commercial properties regardless of the size.  You need to have a "sit down" with your lender and make sure you know the amount of time you need to hold the property after stabilizing it and being able to refinance. That will and should have a significant role in your planning.

Also, like @Gino Barbaro mentioned, you need to define your funding strategy. Are you bringing all the cash? Will you use hard-money? How about syndication? The answer to this question will be fundamental to your planning as well.

All that being said, I want to put in a word of caution. Although no one one knows for certain when this cycle will make a downturn (if it didn't already), many agree that it will come soon along with a potential recession period. 

Thinking about how this could affect your project if it were to happen within the time period that you plan to hold the property is key. You should be thinking about, and including in your business plan, strategies that will protect your capital (and/or your investor's capital) before planning for growing that capital. 

Having this in mind will also affect the decision making process when analyzing the location, the projected monthly rents, etc.

Just be conservative in your underwriting and implement strategies to protect the downside before anything else.

Good luck!

Patrick,

Although we have gone with a waterfall structure on some of our deals, we typically structure our deals the following way:

- 2% Acquisition fee and 2% Asset Management Fee

- 7-8% preferred return 

- If preferred return is not met, the GP does not receive an Asset Management Fee. (Carried)

- 70/30 LP/GP split of cash flow after preferred return is met. (Depending on the deal it may vary to 75/25 or 80/20)

- 70/30 LP/GP split of sales proceed.

Offering a preferred return or not, should not affect the lender. The debt service is paid before any cash is distributed to investors or anyone else for that matter. The lenders look at DSCR (Debt Service Coverage Ratio), which they typically request that it be at 1.25 or more.

 I'd go ahead and post the question on the forum here on BP. You'll for sure get pointed in the right direction. Here are two websites for companies that many of my colleagues work with:

https://www.crowdfundinglawyers.net/

https://syndicationattorneys.com/