All Forum Posts by: Matt Ward

Yes, I'll second everything Chase said, and add a few of my own observations:

● Improper economic vacancy assumptions

● Aggressive year 1 gross receipts projections (they immediately jump the income to new rents with no phase-in which is simply impossible)

● Underestimated expense assumptions

● Improper use of cap rates and/or incorrect exit cap rate assumptions

● Failure to properly account for property tax reassessment post-sale (in states that do this)

● Basing exit prices on capitalized value of the income without accounting for the subsequent owner’s property tax reassessment

● Failure to account for all of the costs incurred in putting together this type of deal and purchase real estate of this size

● Failure to account for raising enough money to pay the down payment, closing costs, finance costs, syndication costs, immediate capital improvements and still have enough money left over for capital reserves

@Matt Ward

I know the question wasnt really directed at me, however I will offer up my 2 cents.

There are a multitude of factors that can skew the IRR of a project. Personally, in my experience, it is often times the overly optimistic projection of asset performance. We have a tendency to overestimate our ability to improve an assets performance based off a number of bias'. But mostly its our inability to completely emotionally detach from our investments. No one wants their investments to fail and all want to see optimal performance. This is why it is best to have a thrid, disinterested party calculating projections for your investments.

Another reason I have seen is underestimation of capital expenditures and rehab costs as well as maintenance costs. This could be due to optimism again or simply a failure to properly inspect the asset.

Assuming the market will continue to grow linearly. Failure to include mild corrections throughout the holding period, failure to properly calculate capital expenditures, not only the amount as stated above but WHEN they will be deployed.

Another big one that can affect IRR is the failure to account for turnovers efficiently. Not every tenant moves in in January and out in December. It is imperative that you review lease data and determine expirations as well as calculating the probability of renewals. Are the leases staggered or are they accumulated? Having 12 units turnover in a 3 month window without properly preparing can have a major residual effect on your bottom line. Overall there are any number of factors that can affect IRR, as you do your analysis you can watch it change as you adjust relative inputs.

Analysis is a dynamic projection and when properly done requires time and more than a BP calculator (no offense BP). Your analysis is the entire framework for the investment, like a mission statement for the asset. It has to be constantly performed and readjusted. Depending on the size of the asset that I am invested, I rerun the analysis in its entirety biannually or annually.

Never one and done your analysis its much more than a decision making tool for your investment, its a vital asset for properly managing and diagnosising your properties throughout the investment horizon.

I'm sure @Brian Burke will second that.

The only deals that project returns higher than 20% IRR are the ones where the person doing the underwriting made a mistake or forgot something. Achieving over 20% IRR is very rare unless you hit a market cycle just right and I think it's tough to assume that buying today is going to be hitting a cycle just right.

So assuming that the deal as a whole throws off anything less than a 20% IRR, if you have a 20% preferred return you as the sponsor will make exactly $0.

My concern as an investor in such a deal is that first you probably didn't underwrite correctly, and second that you structured the waterfall such that I receive all of the profits and once you figure that out you'll abandon the project and I'll have to take over and finish it.

To avoid that perception, and potentially that reality, you should consider structuring your offering with terms closer to market and triple-check your underwriting to ensure that you are underwriting conservatively, with full awareness that conditions today are about as good as they'll ever get and when things get worse you can not only survive, but produce a result somewhere in the same universe as you projected.

Good afternoon. I had a question about partnerships/creative financing (sort of, maybe...?)

I am looking to expand my portfolio here in the next few years. I Have a W-2 job that I absolutely love and have no desire to leave for about 20 more years, which will put me at age 51. I make a comfortable living and easily support myself and young family and am able to save some money to invest on a regular basis. Which leads me to my question....

I don’t care about seeing a return on my investments until I retire. I will take a pension upon retiring but it will be significantly less than what I currently bring home. I am looking to supplement my early retirement with real estate. I am trying to come up with a scenario/structure that would be beneficial for me in the long run, as far as not taking profits in the immediate future, and beneficial for a partner in the short(er) term.

Will it get too messy as far as exit strategies? Ex. They want to sell I want to hold. They want to leverage, I don’t....

Hopefully I phrased this question in an understandable manner. Any examples, suggestions, help or criticisms are welcomed with open arms. Thanks in advance!

 Please elaborate as to why ?