All Forum Posts by: Scott Krone

@John Smithe - seems you have a well thought out plan and strategy. Why is your plan dependent on FHA financing. Look for other means of financing. Once it is stabilized you an can restructure the debt.

With respect to Midwest or Florida, I think it would be wise to assess the risk level of both and then adjust the rate of return based upon the risk/reward.  My relatives live in Orlando, and find it hard to buy appropriately based upon the high speculative nature of that market.

@John Smithe  I applaud your discernment.  One close person to me spent over 30 years studying and never pulled the trigger on an investment out of fear of failing.  It wasn't the failure that was the issue, it was the perception that people would see the failure.

So, to answer your question, I would suggest defining your goals.  Based upon those specific goals, develop a criteria to meet them.  Research that market, and then know you have the confidence to proceed based upon your due diligence.

My criteria may be completely different that yours.  This past year, we have made major shifts in our strategy based upon the market conditions we are observing.  I believe we are at the peak of the market so, we are looking for under served market conditions.  Ours is a longer term strategy that is 3-5 year plan.  That being said, we have based the plan on lots of research, observations, and experience.

Once, we have made that decision, we are going hard after it!  

@Brad Penley  I can not comment on that specific course, as I am not familiar with it.  Have I paid for mentors and education beyond college and masters - yes.  Have they  been beneficial yes.  That being said, prior to purchasing, I researched what I was looking to accomplish with the program, and how the program fulfilled that goal.  If it didn't, then I would not proceed.  If it did, then I made sure I went after it 100% to maximize the rate of return on that investment.  

Both as a teacher as well as a student, I have seen many invest a tremendous amount of money and time into a program (be it college, grad school, or programs).  The ones who applied themselves the most, received the most benefit.  Those who didn't apply themselves, ultimately dropped out.  Some call it the 80/20 rule.

I disagree that all education is a waste, and you can learn it all on your own.  There are many hidden costs that are not taken into account with that assessment.  So do your research and talk with others who have done the program.

@Charlotte Dunford - I agree with @Mike Dymski.  However, I disagree with one post.  Don't over pay.  Your analysis demonstrates why we sold our apartments and moved into self storage.  Many markets within apartments are way over priced.  Better to hold than over pay at the top of the cycle.

@Ben Watkins I believe you asked two questions.  The first related to return of equity.  Typically, the waterfall on the proceeds from closing go:  Debt, Equity, and then profit.  With respect to what is an appropriate split (preferred return, 70/30, or 50/50), personally I believe everyone gets caught up in the percentage of the split verses the rate of the return.

The reason many multi-family products have a high split or a preferred return in favor of the investor is they need that split in order to generate an attractive rate of return.  So, what is an "attractive rate of return"?  The simple answer is "Depends".

Ultimately, it comes down to level of risk and reward. By definition of CAP rate, a stable rental building is currently trading in many places between 4% - 8% CAP. So, the expected rate of return should be lower for those assets. 4% to 8% cash on cash for the full investment, will not yield a high rate of return without a generous split in favor of the investor.

New construction or development by definition is higher risk, and therefore the investors accept a higher level of risk in exchange for a greater rate of return on their investment. If the project has the ability or potential ability to generate a greater amount of proceeds (buy at 12% CAP equivalent and sell at a 6% CAP), the split can be more balanced, AND still return a greater rate of return compared to an existing stable asset. Most developers will not consider a speculative deal without proforma of 20% yield.

So to specifically answer your question, you need to determine the level of appetite of your investors to assess what rate of return they are seeking with respect to their perceived level of risk. That varies from deal to deal and investor to investor. There is a bit of trial and error to see what the market will yield. There is also current market value that your competition is currently showing. So, if you are offering a stable class A apartment at 20% rate of return on investment, with a 9% pref on 4% CAP building, it will raise eye brows because it is not in line with the market.

My mentor always advises:  have three scenarios:  Best Case, Worst Case, and What Mostly Likely Will Happen.  My experience - don't show Best Case.  Show Most Likely and Worst Case so they know you are taking the risk into consideration.

@Amit M.  The Opportunity Funds are in response to the new tax code that was passed in December of 2017 which created Opportunity Zones.  OZ's are defined by each state and local governments to determine where they wanted to encourage economic growth.  To attract the investments, the tax code gives the investor staggered level of tax relief on the investments.  The major provision of the code was to create tax shelters for ALL capital gains - not just real estate. Here is a post 

https://blog.codamg.com/what-you-need-to-know-about-opportunity-zones

@Amit M.  Another option would be to roll the money into an Opportunity Fund.  The down side is you could not take interest payments during the time the money is in the Fund.

@Corey Miller - there are good MF investors in the community (@John Casmon) to get their opinions.  

That being said, we have been studying migration, pension, tenant laws, taxes, and CAP rates. Suffice to say, our most recent acquisitions have not been in IL.

@Tyler Mundy  There has been great advice provided, but I am not sure anyone directly answered your question.  What you described is NOT syndication.  It is having 2 mortgages.  Syndication means you are raising money by offering equity positions, not debt.  Equity means they become part owners in exchange for their investment.  Hope that helps you understand the terms in the books others have recommended.

@Serge S.  Thank  you for beginning a productive conversation on the state of the market.  I think more open conversations like this benefit all.  I agree with @Jonathan Twombly assessment regarding monitoring who is entering the market and at what level. I am not as familiar with the MF on the national level, but regionally here in the Chicago market, I definitely agree it is at the peak. CAP rates are at the lowest, and yet buyers are still trading on speculation verses cash flow. It reminds me of the 2008 pre-crash market for SF.

When evaluating the market, we have been studying both MF and SF.  SF is definitely slowing down, with respect to velocity as well as pricing.  We are seeing pricing similar to 10 years ago.  Migration is a major factor to the overall market, which is why other regions may be doing better than here.

We also sold our MF portfolio, and have been focusing on self storage.