All Forum Posts by: Matthew Drouin

@Matt Smith sent you a connection request so we can talk!

@Matt Smith I think this narrative is way over blown.  The systemic trouble is in a few high growth markets in the US.  The ones that had high rent growth, lax zoning laws, and general buzz about multi family gold mines.  This is not the case for the majority of metro areas across the US.

In less hyperbolic markets there wasn’t an intense amount of speculation so operators didn’t pay high and are weathering the storm on interest rate resets and are finding a way to refinance Deals with maturity walls.

I am finding that a lot of killer deals with my clients are happening in the sub 50 unit deal space for those who need to sell, because there’s much less competition in a chase for yield.  Creative financing is ruling in this transaction space.

@Grace Tapfuma I have no idea how things work in Australia but if I were you in the US…

Don’t sell the business.

Businesses usually sell for a much lower multiple of their products income than real estate does.

To be honest, you’ve built out a lot of infrastructure to create a successful business and maybe reinvesting in it would create a much better return on investment.

For which you could reinvest those future profits into real estate, once you’ve scaled your business into a money making machine that isn’t so dependent upon YOU to drive the bottom line.

I had a friend (38 years old) just recently sell his medical device company for $30M dollars and now he’s using this chapter of his life to passively invest in real estate ventures.

Meanwhile, I’ve been toiling out here for 19 years as a real estate investor and I’ve built a portfolio worth $18M and have a net worth of $5M at 41 years old.

Sometimes the grass isn’t greener on the other side.

Correct me if I’m missing something!

I've run into this many times on deals I acquired and rehabbed utilizing hard money. Community banks generally have no seasoning requirements. These banks are the OG DSCR lenders and will generally offer the best rates and terms. To find the best community bank, I would post in a local facebook group and ask which are the best local lenders to work with and ask for a specific contact. Not all loan officers are created equal. Even within the same bank. Great work!

@Frankie Lotrec if you have an existing loan on the property and you plan to legally convert from a 4 unit to 5 unit , you should check the loan documents because you’d essentially be converting it to a commercial property, since 5+ units is considered commercial and subject to different appraisal approaches and so it would rule out the property being considered for purchasers utilizing residential financing.  This would be a significant modification to the underlying collateral and I’m sure it would be prohibited in your loan docs.

@Hanh Nguyen neighborhood safety is a non negotiable.  I don’t care if you steal a property, high quality tenants will never sacrifice on being safe and feeling safe.  That being said, there’s nothing wrong with investing in blue collar areas but I prefer to invest in the ones that have a higher degree of owner occupancy because the residents of those areas care about where they live and have deeper roots.  Assuming the area checks out, I’d rather buy in a high price area that has little to no cash flow rather than an area that has cash flow but lower price.  Not a popular opinion but cash flow won’t make you rich.  It’s owning high quality assets within areas that have a high barrier to entry so that asset appreciates over time as you pay debt down.  I agree with the other contributor that it’s better to own a $1M asset that appreciates 3% per year that pays no cash flow (over the long term) rather than a $100k asset that appreciates 3% and pays $300 a month in cash flow.

@Harsaha Lenka

I looked at the OM and it’s missing vacancy and collection loss and repairs and maintenance.  That 4% cap rate on in place financials is a lie.  Plus is 4% even in line with market cap rates?

Also what’s your financial objective?  Break even, appreciation focused?

Assuming 7.5% interest rate, the negative leverage would require you to put way more than 20% down just to break even. And how much would you have to spend in order to get market rents? If you are going to move forward with this deal, you'll want to have a review of HOA financials. Self managed HOAs are usually undercapitalized so you want to take a thorough review of the condition of the community to make sure there isn't deferred maintenance because you might get hit with a special assessment if the board isn't setting aside cash for those capital improvements.

At face value, taking into consideration my typical financial objectives, I wouldn’t do this deal unless it was a much lower price.

@Ken M. rents are softening in the places that have had a lot of new units come on line.  In high barrier markets, rents have gotten stronger but not the double digit growth we had seen, which was an anomaly.  Incomes are having a hard time keeping up.  This is anecdotal information based upon the interviews I’ve had with operators across the country.

@Brittney Yang first red flag is it doesn’t sound like he’s that interested in long term holds but the primary reason for partnership is expertise in renovation and secondary reason is balance sheet and income to help get financing.

Regarding reason one, I would offer to compensate him for his time in assisting you and have a very clear scope of what that responsibility is.  A deal this small wouldn’t make sense as a partnership unless the original intent was to scale and grow together assuming this deal works out.

In regard to the financing, if you can’t get it on your own without someone else’s balance sheet and income then it would be very difficult to untangle that partnership since he’d be a personal guarantor right along side you.  So even if you had a buy out agreement negotiated up front and execute that buy out agreement, the bank would still require him to be guarantor unless something drastic changed on your side financially.

The best scenario here would be to purchase and rehab the property using a hard money lender or bridge lender.  If you were able to increase the value of the property significantly after the rehab, then you could bring the deal to a community bank  to refinance and take the hard money lender out.

You keep all the equity and don’t have to file a partnership return for your annual tax return, which can be costly.  I pay about $2500 a year for each of my partnership returns with my CPA regardless of whether it’s a $1M deal or a $5M deal.

I would save the partnership conversation for if and when you are doing much bigger deals.

@Justin Reyes the location is outside of my zone of genius.  That being said, I’m experienced in adaptive reuse and those types of projects are going to be very dependent upon deep subsidies.  Even for office to market rate residential conversion.

And even if you are buying the building super cheap or even getting it for free in that case.

The first form of subsidy would be historic tax credits.  Does the building have some type of historic value to it?  It doesn’t need to be an extremely old building to qualify.  Check with your State Historic Parks Office and get their opinion to see if it would be likely to get a determination of individual eligibility.

If it doesn’t meet individual eligibility, does the subject property exist in an area that has historic fabric?  If that’s the case, you could get the area registered and then that building might qualify.

HTC could qualify the rehab expenses of your property for up to 40% in tax credits.

Bottom line, talk to your city and ask which developers have done similar projects to what you have envisioned and meet with those people.  They will be the best advisors or potential partners for a deal like that.