All Forum Posts by: Michael Ealy

 Totally agree with Chris.

After 20 years of investing in real estate, I own 1,000 apartment units, 45 houses and several parcels of land. I can say with certainty that the smaller deals (below $3M) take up more of my time than the bigger deals. I wish I started with a bigger deal than what I started with or wish I scaled up bigger sooner.

One can start with bigger deals but you need EDUCATION and in addition, you need to PARTNER up with the right people.

Partnering up with the right people is what I did right when I transitioned from apartment investing to HOTELS. Investing in hotels is even more difficult than investing in apartments. The profit is way higher and the work involved is way less. But without the right partners, it will be difficult.

Going back to apartments, the right partners will help you:

1. Qualify for bank financing (banks need borrowers with experience with MF investing...so even if you have the downpayment, the lenders will ask if you have experience. By partnering with people with experience, you are leveraging on their experience. They will be on the loan with you so they will personally guarantee it so they have something to lose)

2. Manage the property and make it into a profitable operation (you can read all the books, listen to all the podcasts, attend all the seminars on apartment investing but nothing beats real life experience obtained from the "front lines"). You get this experience by partnering with someone with experience.

3. Acquire the right property in the right location, at the right price. Again, you don't know what you don't know. Experienced apartment investor knows the right areas to buy apartment buildings in and the right price. 

Hope this helps!

 I believe this is under Regulation A but I am not an SEC attorney...

My SEC attorney recommends we structure our apartment syndication as Reg D, Rule 506(b) so that most investors we accept are accredited and still allows some non accredited investors with whom we already have a pre-existing relationships with.

Having said that, this is not necessarily a scam if the right SEC rules are followed. 

If you can afford to lose $250, one thing you can do is invest $250 and see how it goes - worst case: you lose $250 but in the process, they send you their prospectus and investor-updates and you can learn something. Consider it as $250 "tuition" paid for real life education on a real deal. Best case, you learn and make a few dollars :)

$250 is way cheaper than attending a 2-day seminar on apartment investing (those start out like $1K-$2K or even higher). 

Now, if you can't sleep at night if you lose $250, then don't invest and buy an apartment investing/ syndication book instead. Browse the forums and see what people recommend. I think the one written by Joe Fairless and Theo Hicks is quite popular and people say it's good.

 Devyn,

No, the numbers are not realistic. 

Apartment cap rates in good areas (that can command $1K/mo rent) are usually in the 4-5%.

Let me break down the numbers for you.

$1K/mo rent x 25 units = $25K/mo x 12 = $300K/yr gross rents

Usually, there's 94% occupancy and 40% expense ratio for "A" properties in "A" areas. This means, your NOI is $300K x 0.94 x (1-40%) = $169,200 and at a 5% cap (which is high in a lot of areas), you're looking at a likely purchase price of $3,384,000 (which is way more than double your $1.5M price).

If I were you, since you're asking this, it shows that you need to do more research and study to know what a realistic deal looks like. Have you read any books about apartment investing? 

Have you spoken to commercial real estate brokers in your area? Have you attended your local REIA meeting or your local landlords and apartment owners association meeting? By talking to people in your area/city who are into apartment investing, you will learn what the realistic numbers in your local market.

Also, I suggest that since you don't have $300K in your bank account that you start with a smaller deal first. Maybe a 4-plex and use your own capital first. You don't have the right to use other people's money because since you're new, there's a high chance that you will lose money. You might as well lose your money first instead of losing and learning on someone else's dime.

The other alternative is to partner with someone very experienced but you have to bring something to the table (like finding a deal for him/her and raise capital from your own network).

Makes sense?

Agree with @Michael Dang, @Erik W. and @Stace Caseria,

"C" areas are not bad. This is your lower middle class area/ blue collar neighborhoods.

I have 1,000 apartment units and been doing this since 1999. Based on experience, I get:

1. Very good cashflow in Class C

2. If you do value-add, you can even get appreciation (the "forced" kind) with Class C

3. With Class C, some of the tenants you get have section 8 vouchers which is good because you get guaranteed rent (but managing section 8 tenants is a whole separate topic altogether)

4. Class C are more "recession-resistant" than Class A. I actually made MORE money during the Great Recession in 2008-2009 and I am grateful for my buildings in "C" areas because their occupancy remained strong during that time. Class A on the other hand suffered significant rent and occupancy drops

5. With "C" areas, you can get good, decent renters who tend to remain renters their entire lives (whereas "A"/"B" area renters become homeowners eventually). In 2005 (when everyone can get a mortgage), class A rents and occupancy were dismal because their tenant base were buying homes

"D" and "F" areas are way tougher than "C" and even though I made money in D and F, I don't recommend them for the newbie investor.

For perspective, here's how I would classify the areas:

A - upper middle class/ income way above median/ very low crime/ best schools
B - middle class/income slightly above median to median/ low crime/ good schools
C - lower middle class/median to slightly below median income/median crime/ok schools
D - lower income/high crime/one house every other block is boarded up
F - lower income/90% of violent crimes happen here/ every other house is boarded up

 Thanks for the mention @Gaspare U.

Demetre, I look for hotel deals all the time. You need to know these numbers:

ADR, Occupancy, MPI

Also, what is the selling price? Why is the seller selling? 

What are the flags these hotels are under?

Usually hotels are sold through a network of commercial real estate brokers specializing in hotels. And they already have vetted buyers lined up. These hotel deals are not usually available to the public but only to a few investors who already in the hotel industry.

If people are forwarding them to you, and you don't know how to get investors interested in hotel deals, I wonder how good these hotels really are. If these deals are really good, experienced hotel investors would have already scooped them up.

Let me know if I can help.

 Mark,

Without knowing all the details and what's allowed in the zoning, I really can't say if this even feasible. You have to:

1. Talk to zoning

2. Do the math - calculate the cost and potential revenue as a hotel and cost and potential revenue as a long term rental

3. How's the location in terms of being able to attract business travelers or people who want to attend sports events? Having a hotel in the right location is very crucial to success. If the hotel failed because of the location, then definitely convert to long term rental. If the hotel failed due to mismanagement, and the location is great, then see if you can keep it as a hotel.

Honestly, 24-keys is tough for a hotel and I am not surprised it failed as such. In my opinion, you need at least 100 keys for there to have enough economies of scale AND to attract the attention of various hotel brands.

If there won't be a problem with zoning and the math pencils out as a long term rental, convert to long term rental.

 Totally agree with this.

Call, then drop by his office.

Letters get lost and most get thrown away.

@Julio Velazquez, @Gaspare U.

In addition to what others mentioned, other ways to determine whether an area is up and coming is to look for reports and studies done by others - like lenders. Keep in mind that it's also asset dependent - meaning, a city can be good place to buy apartment buildings but may not be good to buy industrial or office or even single family homes.

For example, here's a study done by Arbor - a lender specializing in multi family about the city of Cincinnati, Ohio:

https://arbor.com/blog/cincinnati-multifamily-market-expansion/

 Daniel,

I agree with Erik. 20-units is too small to syndicate because you have a lot of upfront costs associated with syndication. For example, to pay for an attorney familiar with syndication and SEC rules, you have to pay him/her $10,000 to $20,000 to get you the PPM, subscription agreements, etc.

The legal and other costs - like if you charge investors an acquisition fee, a rehab management fee, etc - these costs will eat up a bigger portion of your cashflow and profit in a smaller deal vs. if it's spread across a bigger deal (100 units) giving your investors a lower return.

The best route is not syndication but get 1-2 investors who can put up all the cash while you do all the work. 

Having said that - that is not your question though.

Let me answer your question - how do you "partner" with a PM?

When I read your question more closely, it's not really getting a PM to partner up - it's really, how do you get a PM, right? When you say getting a PM as a partner - it implies the PM will put up some cash to buy the deal with you. They won't do that.

You can get a PM by networking at your local REIA and there are Landlords & Property Managers associations also in a lot of cities. Find one in your city and network and talk to people. Ask other landlords to refer you PMs they currently use. Based on experience, you get the best people referred to you. So ask for referrals.

Does this answer your question?

Darnell,

It depends.

You need to have 2 types of reserves:

1. Capital; and

2. Operating

Capital reserves is for replacing the different parts of the house because they depreciate over time. For example, the roof is getting older and after 20 years need to be replaced. So if the roof costs $20,000, over 20 years, you need to budget $1,000/yr or $83.33/month just for the roof. You do this for your appliances, windows, carpet, water heater, HVACs, etc.

Capital reserves should aso include the money you need to repair items that need to be repaired and parts of the house that need to be renovated. You should add 20% for miscellaneous items.

Operating reserves on the other hand - you need to save money every month for taxes, insurance, vacancy, property management, repairs and maintenance, etc. You have to save about 30-40% of the rent you're collecting every month for these items.

If the property is "turnkey" - it's recently renovated (and does not need any repairs at all) and it's in a hot area so you'll have no problem leasing it, you don't need much capital reserves and maybe just 1-2 months of operating reserves and 1-2 months of mortgage payments upfront.

However, if the property needs to be renovated and it could take 6 months to finish the renovation and lease it up, you need to have ample of capital reserves and at least 9 months of operating reserves (include 9 months of mortgage payments) saved upfront. By doing this, you will not run out of cash until you get the property renovated and leased up.

Lastly, if the property is older and in a great area, then maybe allocate more capital reserves and again 1-2 months of operating reserves and 1-2 months of mortgage payments.