All Forum Posts by: Sam Grooms

 That's awesome, definitely keep looking. I think the proximity to Tempe and Downtown Phoenix is the biggest draw for this area. 

Like Ben said, its going according to plan. All of our renovated units are being rented at our target rates. In fact, we're considering pushing them further here pretty soon. All of the exterior is now complete and the new fitness center we're adding is almost ready. 

And this is our competitive advantage in Phoenix. If you go a mile West, yes, it's a rougher area. However, this property is half a mile from brand new class A retail. Surrounded by homes priced well above the metro average. 

In the last two years, this area has been completely transformed. After looking at the property for the first time, Ben and I had lunch one light down. The area felt like we were in Chandler or Gilbert. 

Maybe he'll give you his phone number one day. (I'm just kidding, Brian. I don't wish that on you)

To give you an idea of how conservative we underwrite, even with the $300 increase in rents: 

We met with the new manager at the property this morning, and she says our post-renovation rents need to go up another $50 on the 1x1s. We knew that going in, but it provides an additional $700K of upside to help us outperform. 

Don't be too aggressive with your underwriting; give yourself some cushion. 

The typical large up-front costs that the sponsor will need to cover are:

Earnest Money Deposit

SEC Attorney Fees

Lender Deposit

Most of the other fees are paid at closing, but you could have various other costs, like due diligence fees, LLC formations, good standing certificates, bank account deposit (to open bank accounts), etc. If you're purchasing rate caps, you'll need a Bloomberg LEI. If you're using an investor portal, there's another cost. Your closing attorney should be willing to delay their fees until closing, but not all will do that.

Note that a lot of the other expenses/fees can be delayed until closing, but you'll still be on the hook for them if you don't close. 

Do you have a company, yet? If so, just say Managing Member or Managing Partner.

@Ben Leybovich, agreed. Just because I can charge $1,000 rent instead of $800, doesn't mean all of my operating expenses went up. Obviously property management fees go up, but that's about it. Note that I said operating expenses. You will have some increase in economic vacancy (in $). 

Some good questions, Rivers. 

1. No. Underwrite to your return objectives, not to cap rates and spreads. Also, what type of MF investor do you plan to be? In today's market, you almost certainly have to be a value-add investor if you want to cash flow. If that's the case, what matters more is how much upside there is, not so much what your going in cap rate is. What if current rents are $100 under market, and if I do a light remodel, I can get another $100 of rent increases. I might be willing to accept a lower cap rate on T12. It's more important to know your repositioned cap rate (as well as the spread between market rates and your repositioned rate). But again, the ultimately deciding factor is your return objective, in my case, a 14% IRR on a 10 YR hold (10 year hold is the worst case scenario for me). I use IRR because I plan to exit the property after reposition, not hold on to it.

2. I use submarket specific averages. 50% for Operating Expenses is OK when having a discussion with something, but not when underwriting. I underwrite most major expense categories to the average. Payroll will be based on number of units. Property tax is based on your jurisdiction. Here in Phoenix, 5% increase over prior year. Property management will obviously vary, 3% for me. R&M can be $450-$550 per unit per year, depending on year of construction, HVAC system, boiler/chiller, pitched vs flat roof, etc. General and admin, insurance and marketing are averages. Utilities is property specific. However, I expect them to be around $900 per unit per year. If they're $600 or $1,200 in the T12, I'm asking questions. Physical and economic vacancy are submarket specific. You can get most of this information from the annual IREM report.

3. So my biggest advice is don't use the T12 as an expectation of how it'll be run in the future. Like I mentioned in #2, use your own numbers. One thing to look for is their R&M. If it's way below what I'm expecting, I have to assume there's deferred maintenance. And likely a lot of it. Are utilities really high? There could be a leak. These are things you'll want to check on during due diligence.

4. Every lender will be different. We do major value add projects, so it requires a bridge loan. They like to 6 months of interest reserve. Then, we have another 4 months of interest reserve and $1,000 per unit operating reserve, that we use as working capital/reserves. On top of that, we have contingencies for roofs, HVAC, plumbing, and then an overall contingency of 5%. This all gets included in the rehab budget. Lender will also want to see around $250 per unit per year of capex reserves, that will come out of cash flow. 

5. Property management companies will tell you when you can afford them. Our property management company has 21,000 units under management. Very professional. They won't usually accept less than 80 unit properties, and that's pushing it. They like to see 100+. As a general rule of thumb, for every 100 units, you'll have one office manager and one maintenance personnel. If you go lower than that, your costs per unit obviously go up. If you can have the same personnel with 110 units (or 117 like one we just got under contract), your cost per unit goes down. 

6. See above. You will have property management of 2-4% for the big guys. On top of that, you have payroll for the onsite personnel. Labor is different in each market. Here, I can budget $50K for my manager, and $17-22/hr for maintenance. However, labor is going up, so stay up to date. 

7. That's the process. Submit an LOI. It'll take quite a few before one gets accepted. Then you start working on a purchase and sale agreement (PSA). This can take as little as one day, to a few weeks (three weeks on the 117 unit we got under contract yesterday), or over a month. It depends on the type of seller, their attorney, how many attorneys get involved, etc. They had two attorneys going back and forth most of those three weeks. I think the contract was in our court for maybe 15 total hours during those three weeks. Once its accepted, you move on to due diligence. This can be 10 days, 15, days, 21 days, whatever you negotiate. As for when money goes hard, again whatever you negotiate. Our money on the 117 units goes hard in 15 days. On our last deal, it went hard immediately. Yes, it goes towards the cash needed to close. If you want contingencies other than your inspection/due diligence period, you'll need to include those in your LOI. You might want a finance contingency. We work with the same lender, so we're able to waive that.

8. This is a hard one. Very difficult and it takes time. Let them know you're underwriting everything they're sending you. Go tour properties with them. Take them to lunch. If the numbers don't work for you, let them know why. Give them your criteria. Never say something like "the cap rate is too low." The big players don't buy on trailing cap rates. Like I mentioned, its based on returns, usually projected returns. 

Let me know if you have any questions. I'm sure @Ben Leybovich will disagree with everything I've said here, so that should be fun. 

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