All Forum Posts by: Nick L.

Good tips from everyone. 

I recently bought a duplex and was subject to the Certificate of Code Compliance. My other properties are larger than 2-families so I'd never experienced this before. I was pretty bitter when I realized the previous owner had not been inspected or penalized for decades of neglect, while I had to pick up a very large compliance bill within 3 months.

I was a bit childish about it and wrote a pissy email to my alderman, which I immediately regretted. The email made its way to the inspector (whoops) who luckily did not hold it against me and was quite reasonable. I agree with @Dawn Anastasi, @Dave Carpenter, @Ramon Jenkins and @Robert Taylor that it's much better to work with the inspectors than against them.

Next time I buy a property subject to the CCI or Residential Rental Inspection program, I'm going to call the inspector during the due diligence period and request a pre-inspection. Hopefully I can get that written into the property inspection report as a Defect for the Seller to fix. I might even write a contingency clause into the offer requiring the seller to pay for any code violations resulting from the CCI.

Fortunately or unfortunately, unrecorded code violations are not considered encumbrances on title, so CCI and RRP issues will not prevent closing.

LL is not responsible for the contents of a refrigerator unless you were clearly negligent. Normal events such as a power outage are not your fault. In the scenario you gave, you are not liable as long as you make good faith efforts to get the refrigerator repaired in a reasonable time frame.

I have sometimes chosen to give tenants a rent credit towards things like spoiled food that weren't anyone's fault. But that's just a goodwill gesture, not a liability issue.

@John Zoulis

Sounds good so far but you need more info to determine whether the project is viable.

Some quick answers to your questions:

1)is it worth going after tax credits and how do i find more information?

Maybe. There are lots of types of credits, for example state and federal historic tax credits, low income housing tax credits (LIHTC), tax incrememental financing (TIF) and others. Each comes with its own set of benefits and restrictions. Some are highly competitive. If your project is suitable you could stack multiple types.

For the major categories of credits you can just google them to see if you are likely to be eligible. For other, smaller and lesser known categories, you might consider asking a financial specialist or other professional.

2)how much should engineer,architect fees should cost according to the project overall cost?

Depends on many factors including project cost, complexity etc. For a back of the envelope pro forma you might consider 5-8%.

3) how much should a complete 1 bed unit cost compared to a 2 bed unit?

Whatever your market will bear. From a development perspective you should look from both a PSF and per unit perspective. Renters will only consider per unit. With all other factors being equal, the rent PSF will be the same across all unit types, but in reality price will vary according to demand.

4) how much per sf should cost or what guideline to use?there are numbers from $150-$200 per sf.

Another one that depends on many factors. Hard costs for a middle class housing development might run you from $100-150 PSF depending on location, construction type etc. Soft costs might be another 20-33%. Don't forget about land costs too.

5) what financial institutions should i look for

Bank for financing. Investors for equity if you need it. There are a million ways of structuring finance... you're going to have to be more specific. Most likely you will start with a construction loan and then transfer it into a permanent loan on stabilization.

6) how much this project should cost overall to make numbers work ?

You should calculate stabilized value by taking NOI / cap rate. Your total project cost for a viable project would typically be 85-90% of that.

7) what finishes should i consider in order to attract best tenants

Market dependent. Scout your competition. Remember to look from your tenants' perspective and not your own personal preferences.

8) how do i choose a top notch Property Manager in order to market the project for leases upon breaking ground?

Don't worry about that yet. When it comes time, interview a few reputable companies in your market.

I agree with @Chris Field. You (or your dad) could call up a few local developers whose work you like and sound them about a deal. Depending on what you bring to the table (obviously land but also capital, credit, experience, connections....) and how much control you want, you should be able to figure out a deal that works for everyone. 

As an example, I know someone who snapped up an unsalvageable property in a great location for pennies. He struck a deal with a local developer to raze it and turn the site into mixed use mutlifamily urban infill. The developer does all the work and provides the financing so he gets the lion's share of rewards, but it's still worth it to the land owner to get a large check each month for doing nothing.

To add to @Katie Neason's point, I once did something like that. I had the property under contract with a contingency that I could find an acceptable tenant within xx days. I was not able to find the right tenant and the deal fell apart. But I got my earnest money back and was not saddled with an untenantable property, so it worked out.

@Sam Erickson Are you comfortable sharing what area of Milwaukee this is in? 

Also do you have any comps that would indicate projected rent psf?

Assuming the answers to both the above are good, I would take the deal with a long due diligence period and a "free look" contingency that you find a tenant for a certain number of sq ft at a certain price. If you can do it, most of your risk disappears. If you can't, then the deal is not so good after all and you should walk away.

@Ramon Jenkins Yes that is around where I am selling. I am for sure not a buyer at those caps, so I must be a seller.

@Joel Owens Your observations reflect my own quite closely - especially since we are in quite different markets. Am I distilling your comments correctly in saying the following?

1. Retail strip malls can still offer good value

2. Medical office space has growth potential

3. Industrial is down right now but might be a good long term value play

4. Stay far away from SFR, multifamily and office

@Daniel Chang

You make some good points. I guess I was pretty vague. More specifically, what I would like to do is to find some opportunities where I can (a) add value through my work, (b) have a reasonable expectation of natural cap rate compression, and (c) have a favorable risk/reward balance. 

Of course every market is different and for sure SoCal is completely unlike Milwaukee. I was just hoping to tap into the collective BP wisdom to help shape my search for a forward investment. For example, in the 2009-2012 period, multifamily was a clear winner because there was a huge tenant demand coupled with fire sales and irrational investor fear. I am hoping to find something like that.

Maybe I should just sit on the cash and wait 5 years until the current overbuilding of Class A apartments plays out and they are all sold off at bargain prices!

Nick

I'm selling some apartments at what feel like crazy low caps. I'd like to 1031 the money into a value play of some kind. Retail is the traditional next step but I'm concerned about the outlook for anything except AAA locations. 

I'm considering:

- Industrial - Apparently this is where the smart money is going in my market, but I don't know the first thing about making a good play here

- Health care - Pretty much recession proof but it's hard to compete with the REITs for quality product

- Office - Terrible in my market, might be good in others

- Restaurants/bars - Cap rates almost as low as residential for quality local tenants, and much lower for NNNs

Where are you guys seeing high cap rates and good outlooks?

@joel owens - I'm sure you have some good comments here as always!

I would do one of the following:

1. Use a standard purchase agreement with a long general due diligence period

2. Use a standard purchase agreement with a specific contingency related to your situation, for example signing a development agreement within X months

3. Use an option contract

In all cases you may need to make a concession to the buyer to extend the timeline, for example upping the earnest/option money or making it non-refundable.