All Forum Posts by: Nick B.

I am all for operating reserve. You use it to pay bills and such if you don't have enough revenues. However, using that reserve to pay distributions makes absolutely no sense. Pref is not interest and is not guaranteed. There is no reason to pay it if the cash flow is not there. 

What's the point of raising extra money only to pay it back, pretending it is a profit? 

Pref is not a guarantee. It's a hurdle for you to cross before you start taking your share of profits. If the hurdle is not crossed, investors get whatever property produces and you get nothing.

Some sponsors pay whatever is possible and shift any unpaid balance to the next year. E.g. if the first year payout is 6% and the pref is 8%, 2% goes to the next year pushing pref to 10%, and so on. This a recipe for disaster if the property does not perform but the pref keep growing.

Your stated purchase price is $480K, but you calculate mortgage off of $384K. So, the purchase price is really $384K, correct?

I'd probably bump up repair & capex for the first year at least. Also, you seem to assume no deferred maintenance/rehab and no closing costs in your analysis. The reality is you may need to spend $10-40K upfront to fix and update the building. On the bright side, you may get higher rent for upgraded units (verify if that's the case!).

Assume that every unit would turn in 12 months and it would take appx. a month to get a new tenant in. This would give you 8.33% vacancy factor ($366/mo) plus additional expenses for utilities for one month.

What loan balance, rate, and term to you use in the mortgage calculation? 

You did not provide enough information to evaluate this deal but the very fact that you ask these questions tells me you are not qualified to invest in this deal. 

This is what you need to know and be able to estimate/verify:
- current and projected rents - is the rent increase realistic?
- current and projected expenses - what expense categories look out of the ordinary? why?
- current and projected property taxes
- rehab budget
- area characteristics - demographics, income, employers, recreation
- sponsors - experience, networth, liquidity, track record, background checks
- deal structure - is preferred return offered? what is the LP/GP split? what are GP's fees?

Do you know the people behind these LLCs? Are they easy to find and contact? Are they willing to spend a few hours with you showing you their properties (if you're local) or at least talk on a phone? Are they willing to provide contact info of their current/past investors?

If the answers are 'yes' to all of these questions proceed with caution (you still need to get to know them better).

I never rely upon or assume market appreciation. It's icing on a cake. 

If there is no built-in equity or a possibility of forced appreciation, I would pass on such a "deal".

Find property record at the county tax appraisal district. It has owner's name and address. 

If this is a person, your search is done.

If this is an LLC or similar structure, look it up at corporationwiki.com or opencorporates.com. You may have to decipher the entire corporate structure that they set up but eventually you'll find a person behind it.

There better ways to deploy that $62K than buying a single house that might cashflow at 2-5%.