All Forum Posts by: Michael Ealy

I am somewhat new to Real Estate Investing. I currently own a few SFR's that provide me cashflow but have a goal for 2020 to acquire a multifamily or ideally an apartment building with a few investors. Can anyone shed light on the expected return that I should anticipate to provide to the limited partner's? I have seen a few that provide a 6% return. Is that good or fair or is it standard for LP's to obtain a higher return? I am in the state of NC if that helps determine apartment location as well. Thanks guys!

6% is TOO low.

We give our LPs 15-20% IRR.

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Quick answer: Buy RIGHT not marginal deals PLUS control your costs (thru vertical integration).

Long answer: Listen to this podcast interview by @Dave Morgia

https://podcasts.apple.com/us/podcast/29-growing-your-business-to-be-able-to-control-all/id1471965852?i=1000463165972

I am launching my book on apartment investing soon!

If interested to get my book for FREE, email my assistant at [email protected]

1 Vote

Originally posted by @Lamont Marable:

I'll be out in Cinci in March to walk a few properties and meet up with a few brokers. I hope to connect with @John Lenhart while I'm out there with my partners and @Michael Ealy. I need to reach out to those great gentlemen again.

Sounds good man. Email my assistant and he can put you on my calendar.

3 Votes

Originally posted by @Canesha Edwards:

@Michael Ealy

Thank you so much for the insight. I’ve gain so much knowledge from reading your other post. I was able to find a co-sponsor for the deal and we’re negotiating with the seller.

Happy investing!

Canesha

Congrats Canesha!

And they say that one cannot start doing BIG deals right away but if this deal works out, you will prove those people wrong!

Let me know if you need anything else.

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Originally posted by @Gaspare U.:

Perhaps as others have said it’s best to shake hands, thank them for their time and leave the door open for a possibile connection later on. But...

I would toss in the from research here (I believe I am quoting @Michael Ealy) and other sources, the good syndicators always make sure they buy right. Buy for cash flow! This allows you to weather the storm during the downturns. Show them how this property IS purchased right and demonstrate different situations. Use reduced rents, increased vacancy rates and higher cap rates for an exit strategy. And don’t forget the tax differed benefits :)

Good luck... and like others said, I wouldn’t push it.

Thanks for the mention Gaspare.

To answer the OP, actually I don't invest in cashflow per se. I don't invest in appreciation per se either.

I understand why you got the objection of "we're on top of the market so I will wait in the sidelines".

Here's how I overcome that objection. But it's specific to my strategy in making money in this market. If your strategy is different, then below will not work.

I invest in apartment buildings where I can "force the appreciation" or add substantial value by increasing rents, decreasing expenses or preferably both.

The problem for investing for the long term and focusing ONLY on cashflow is that the investor's money is stuck in the project a long time.

And of course, the problem for investing for appreciation is that it's speculative.

Since I only buy buildings I can add value to, the market is IRRELEVANT. The economy does not matter. Interest rates does not matter.

Also, I can exit the deal in a relatively short span of time (3-5 years) not the 6-10 years I am seeing other syndicators are doing now (because their strategy is cashflow - which at today's low cap rates - which means low cashflow, means they need to hold the building a while to make money).

1 Vote

Originally posted by @William Allen:

@Joshua Watts, it did seem high to me. I was just wondering if you needed to go that big to upgrade the property. However, I don't know your exit strategy or plans for it going forward so it may be a great move to renovate to that level. I've over renovated a lot in the past for a boost in rent or better tenants and usually been sorry. But if there is forced equity that comes with that and the rent or tenants jump dramatically I would do it too! Looks like a fun project!

Joshua,

I have a similar project but the rents are way higher.

30 units, Acquisition: $450,000 + Renovation: $1.2 Million or $40K/unit, rents: $1250/mo

I think your budget of a little bit over $30K/unit is realistic to a little bit high given you're going to get rents of $800/month. Maybe try to push the rents even higher as the units should look like new once you're done. I was projecting to get $850 but got $1250 instead. New construction in the same area gets $1600/month.

With regard to your operating expenses of 25% - that's low. We have in-house property management as well but I always factor in paying for that because when I sell, my buyer will pay for that. Factor in 30-35% to be conservative and if the return is there, then great.

Good luck on your project.

0 Votes

Originally posted by @Ben Leybovich:

Janet is a well-known operator in Phoenix and parts of TX. As @Sam Grooms mentioned, we've competed (unsuccessfully) against them in the highest and best.

Everyone has their "tricks of the trade". WWC likes to create several levels of value add in a community, with various levels of interior improvements. Perhaps one level is just to clean up the unit and install new appliances. The next level up might be to reface the cabinets. Another level might be to add tile backsplash and stainless. They also like W/D install.

In general, I am not aware of anything bad. They seem disciplined, and like Sam said good underwriters. I don't particularly love the methodology for this cycle, which is reflected in Sam and I are doing things very differently, but this is a matter of opinion. There's enough for everyone.

As to the fees, we can argue either way. However, these fees tell me that Janet wants to get paid, and while some of the fees may be on the high side I see nothing wrong with it in general. What we do is hard work and a lot of responsibility. And, ultimately, she is raising the money, which means that enough people trust the prospects of her performance.

You simply have to decide where you stand and play or pass.

Everyday my respect for you Ben is increasing. You didn't bad mouth your competition and it tells me a lot about your character.

More power to you and Sam!

There are people - even right here on BP - who think that they should tear people down so that they are perceived to be superior.

Also, there are people who "hate" on apartment syndicators for even using OPM (Other People's Money) and don't want to pay us fees we deserve for all the hard work we do. We take on 100% of the liability, do all the work and sometimes even put our own cash on the line and only get a portion of the deal (sometimes as low as 30% or even 20%).

If I want to know more about Phoenix (as I buy hotels all over the country), hope I can chat with either of you. Don't worry - I won't compete with you on apartments :)

3 Votes

Originally posted by @Immanuel Sibero:

Originally posted by @Neil G.:

@Michael Heisterkamp can you clarify for a new investor, how can you increase the value of a property to lower the cap rate if the value of the property is calculated by using the cap rate? It's making my brain explode

The prevailing cap rate of a certain area (certain sub market) is a reflection of investors' sentiment in that market. If investors are bullish about a certain market they will bid up the price. When investors bid up the price, they are saying that they are now willing to pay more for a given dollar of NOI. For example, investors might have been paying $10 for every $1 of NOI in the past (i.e. 10% Cap) but because of above average economic growth in the area, investors are now willing to pay $12 for every $1 of NOI (i.e. 8.3% Cap). This is an example of cap rate compression. The point here is Cap Rate is determined by investors (i.e. by the MARKET). Property owners can not lower or raise cap rate.

So how do you increase the value of your property? Well let's look at the formula... Value = NOI / Market Cap Rate. Just based on the formula an increase in Value can be achieved by either increasing NOI or decreasing Market Cap Rate or BOTH. But wait, we have stated earlier that Cap Rate is determined by the market and property owners can NOT lower or raise cap rate (i.e. property owners can NOT control market cap rate). So property owners are left with manipulating NOI as an option to alter Value. The fact is to increase Value, about the only thing you can do is increase your NOI! How do you increase NOI? Raise revenue or reduce operating expenses or both.

You might run into explanation that seems circular - value is calculated based on cap rate but cap rate is calculated based on value, it's like watching a dog chasing its own tail over and over again ... at some point your brain will explode :-) As stated above, the breakdown in the logic is the fact that some people think they can alter and calculate cap rate, this is incorrect. Cap rate is given, it's determined by market consensus (i.e. investors). You can obtain cap rate from local commercial brokers, property managers, bankers, etc.

So the statement "...increase the value of a property to lower the cap rate.."does not make sense! You can not lower the cap rate in a given market.

Cheers... Immanuel

Immanuel got it right.

Cap rates is a measure of risk/return for a given property in an area or location or sub-market.

For example, in Cincinnati area, we see the following cap rates:

A area - 4% to 5% cap
B area - 5% to 6% cap
C area - 6% to 7% cap
D area - 8% to 10% cap
F area - 10% -12% or more cap

So, given two buildings with the same economic or financial performance (say both produce a Net operating income of $100Kyr), one will pay $1M ($100K divided by 10% cap) for that building if it's located in a D area but pay $2M ($100K divided by 5% cap) for it if it's an A area. Why? The A area has lower risk and therefore the investor is willing to pay a higher price and willing to accept a lower return.

In addition to what Immanuel said though, cap rates will also depend on the # of units of the building in a given area. For example, smaller apartment buildings (5-30 units) will command a higher cap rate than larger apartment complexes (31 units and up specially 100+ units and up).

So if they're in the same area, a 30-unit building might be worth 5% cap but a 100+ unit building might be worth 4% cap.

3 Votes

Originally posted by @Paul David:

Due to unforeseen circumstances I ended up spending more than I anticipated (like everyone warns). What is the best way to raise 40k to finish the job? Because I'm in the middle of construction I can't pull out an equity line. It's owner occupied 4 unit building. Most hard money lenders only do a NOO. Any ideas? Once complete I'll do a cash out refi n pay back investors as I should have 300k + in equity after remod.

Yeah - hard money won't work for you since this is owner occupied (I am assuming you live in the property).

Here are 5 ideas that MIGHT work:

1. unsecured Business Line of Credit - do you have an LLC? If not, put one up. You need to have a minimum 720 credit score. What's nice about BLOC (when done correctly) is that your balance will not be reflected on your personal credit. I can refer you to a resource who can help you with this.

2. unsecured Personal Line of Credit - do you have a good relationship with your local bank? Ask for an unsecured personal line of credit. If you make good income and have great credit, you should be able to open an unsecured $40K line of credit

3. Peer to peer lending - you can borrow $40K cash from P2P lending websites like LendingClub.com. As long as your credit is good (I think around 650), you can borrow money from P2P sites.

4. secured Personal line of credit - if your credit is NOT so good, and you have some assets like Certificates of Deposit or stocks, talk to your banker about opening a SECURED personal line of credit. For CDs, they will lend you 100% of the value and for stocks, they will lend you 30-50% of the value. So, if you have $120K worth of stocks, you don;t have to sell them and pay the capital gains taxes. You can just pledge it as collateral to borrow $40K cash.

5. Lastly, you can always try friends and family - if all else fails. If you're a trustworthy person, have decent income (or have a decent job), you should be able to borrow money from your personal network.

Hope the above helps!

5 Votes

All Forum Posts by: Michael Ealy

Michael Ealy has started 68 posts and replied 1506 times.

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