All Forum Posts by: Serge S.

Originally posted by @Ben Leybovich:

 I was looking at a tax credit property the other day. Lots of loss to lease to be recaptured if the property could be taken to market. In the end, too speculative for me...and dealing with freaking government. I run from that kinda stuff...:)

 These tax credit deals are legit. I generally like what @Ben Leybovich is scared of meaning I like quite a bit:) The change over from a tax credit to free market property is much easier than people think and there is not much ambiguity. A little bit more work but you can buy at a better basis since it scares off guys like Leboyavich. 

@Brandon Turner I've done 4-6 exchanges every year since 2010. This is my primary method of moving in and out of deals. Typically its selling one SFR to buy two type deal. I sold 3 homes and a 32 unit to 1031 into a downpayment for my 56 unit. I currently have a contract in place on multiple homes with a friendly buyer that I am waiting to execute (strategy is to buy more time to find replacement property). Once I find the replacement property I will execute the contracts and open escrow and start the process. The initial identification period is the most stressful and following all the rules with multiple LLCs can be a challenge if not structured correctly up front. Also buying Fannie owned properties with 1031 funds is pretty much a nightmare as they deem that an assignment. Feel free to reach out.

Hahaha thats great. I think I might just go the Vegas route:) All or nothing, thats how I like to roll in multifamily.

@Ben Leybovich interesting project. Often times older hotels in declining cities are better served as multifamily. This is the case here. Let me shed some more light on this project as I am looking at it with Ben.

This is a 1987 strong C complex and located in a military city. One trick pony military city with limited other employment and infrastructure. The city and the base are in decline and never recovered from the recession or sequestration. The base will not be closed but there is no reason to believe a major uptick is likely. Perhaps if Trump is elected President but I digress. 

The complex was originally built as a residential rental/multifamily. All units have full real kitchens and a small bedroom, average is 600 sq feet. It has had over $400k in capex over the last 36 months including all new furniture, appliances, televisions and unit remodels. It is operating as a hotel and vacancy and payroll are just too much to operate at the low 15-20% occupancy. It is owned by an out of state absentee owner that ran into health issues and cannot and has not managed the property. It has fabulous reviews on all the travel sites. Utilities are master metered with wall hotel style ACs. 

As a multifamily, I figure average rent would be $595-$650 inclusive of utilities. Utilities average $140 per door all in every month. With RUBS in place it would be $495 base rent plus billback. VRBO or furnished executive rental to tourists and military personal would be $45-$59 per night depending on season. Don't have enough info on how strong that demand is at the moment.

This is an offmarket distressed sale. Short sale, previous owner purchased for $1.4M in 2012. We should be able to close at $640k-$680k cash, no financing.

@Brandon Hall

@elizabethcolegrove I believe you have some experience with this type of asset class?

@Brian Burke I know hospitality is not your favorite but what do you think here? 

@Joel Owens any of your multifamily clients jumping into hospitality conversions?

@Jay Hinrichs  good advice. From what I have gathered so far, this is similar @Rob K. where the city will be fine and legal to operate as apartments. I should be able to get a soft confirmation in advance of closing. Issue is that we are not ready or willing to run a hotel at this point if push comes to shove. I don't see how to keep occupancy as a hotel high enough to have any NOI. Current owner has been bleeding cash and yes it can be run better but a job is not what I am looking for. The city simply has an overabundance of hotels and the population decline and on base housing has decimated both the hospitality and residential rental business.

I think there might be something here, no risk no reward.

Wendell De Guzman I prefer the Sunbelt and the Southwest. I'll take the combination of low taxes, appreciation, population growth and climate all day. I looked long and hard at Chicago about two years ago when our AZ market recovered and was scared off by the outrageous property taxes and landlord laws. Rents are higher but the Capex in the old buildings is a killer. If I was local and on the ground it would be a different story but I'm not dumb enough to think I'm competing successfully w locals like you.

@Jason Bott they are asking for an aggregate of $3M. Each property has $1M liability already. I am looking to refi 10 properties. So your saying the cost will be same if I include just these 10 properties or a portfolio of $100? Are you using a separate insurance product on top of the policy in place on each property. I'm having difficulty finding companies that provide such a product and getting limited offers from my broker. Looking for the best way to shop this specific product.

I've been working with B2R and First Key on a large cash out refi and one of their requirements is that I carry a combined liability of $2M for First Key and $3M for B2R. I had my insurance broker get some bids that are coming back at over $2500 a year. This is a real cash flow killer. I currently carry $1M per property and my average cost of insurance on an SFR in AZ is around $350. On 10 properties this additional cost is a real impediment. I'm wondering how others met this requirement and the cost incurred. Would be great to have a referral for a carrier that operates in AZ.

@Jason Mak well played! I have a similar strategy and have been lucky enough to hit on a couple big ones as well. I agree with your lessons learned. I'm currently sitting in a similar position where I've added the value and created the equity and cash flow on a 56 unit. The issue is that cannot find an adequate replacement and with prepayment fees and taxes it is hard to make sense of a move sideways. These type of deals do exist but not as much today. 

I just recently had an HVAC trifecta here in PHX. No more than 2 days into a 110 degree late June stretch we will get crushed in HVAC repair and replacement cost. I have units that need new compressors and motors after only 5 years here. Costs have definitely increased as well. 

Capex reserves are important but an even bigger takeaway is to think long and hard about that "asset" that you are fixing. 10% capex reserves are not created equal. For that $600/month PIG rental 10% just will not cut it. Very big difference from the home that is renting for $1000 in more ways than one.

This is also indicative of SFR investing. To have anything meaningful in terms of cash flow, you really must own a large chunk of them. Unfortunately 1% properties with 70-80% debt attached just won't cut it. You will not be quitting your day job anytime soon. This is why successful investors make sure they are also buying equity and appreciation. No its not just the icing on the cake, most of the time it is the cake.

Finally, wake up if you think a home insurance plan will save you or add any kind of value. How many large investors with large portfolios have you ever heard recommend that? Who do you know that has had home warranty on many properties over a year? Does not exist. The dirty truth about the home warranty plan is that if your appliance is past its useful life, they are instructed to use a clause that exempts them from repair due to the owner not maintaining the unit. This can be dirty coils, air filter or just about anything. Sure they will replace a fan motor on a 4 year old unit. Thats about it. So at the end of the day, you are paying $400 a year to mitigate the 5% chance of $400 repair. 

@Michael S. thank you for your prompt response. I left a message with both. I see you are in Chandler, good to have another East Valley investor on the forums. I appreciate the info.