All Forum Posts by: Serge S.

@Mark Ferguson  agreed! I am in the same boat as you. I guess its a question of where you see your market in the cycle. You clearly know how to buy property with equity on the front end. Honestly - whats the difference at this point if cash flow is $100-$200 more or less? If you have enough cash flowing properties, that incremental "cash flow" does very little for you. 

For guys like you (and me) I think the play today is balance sheet growth via buying equity. I'm not talking about appreciation, rather achieving your exit returns through the front end purchase. 

I personally am very convinced that those 2% rule midwest properties are nothing but a mirage. I've owned enough C class 1950s junk to know that the long term cash flow is best realized on paper and not reality. If you think you can hit the 50% rule with that asset class and locations ... seriously, how many things need to go wrong in a $650 rental built in 1950 (let alone 1920 like some of the stuff I see). Maybe one of 5 years hits its mark, every other year it will be a roof, HVAC, eviction, etc etc etc. Combine all that nonsense with guaranteed no appreciation and no equity on the front end since that equity went to the turnkey operator. I just don't see how thats a formula to grow an already successful business. This formula only works IMO for the local owner operator and I don't doubt they can succeed. 

@Charles Williams My take away is not that C Class has no value. The low rents certainly make everything exponentially harder. There are talented operators that have and will make money in this sector. The question is can it be done the "right" or way. The "right" way involves many expenses that are not accounted for by the local owner operator that will be doing it his own way. For example, if I am buying a 100+ unit out of state, I will need 2-4 employees and all the costs that come along with that such as payroll, WC, etc. I'll need to budget the realistic cost of capex (done by professionals) and need to leave plenty of margin for the exit to drive my IRR.

Now my local competition, his underwriting will look much different. He will plan to run it with less or no employees, try to do the handyman work himself and cut all sorts of corners that will save him real money. For that guy, his underwriting looks much different and the deal much more appetizing. And to his credit, that guy knows the market much better than me and has a better chance to capitalize on resale margins. As such, he can pay much more for the same deal. @Ben Leybovich is not this guy and it sounds like you are not either. Especially if you want to do this in scale.

@Steve Olafson  gives some good examples. He is on the ground where his investments are and will be plastering cars with marketing. He has infrastructure to deal with the management. You as the out of state syndicator will have a tough time sourcing and competing with the guys like Steve. The deal your looking at, Steve already passed on. Once you buy, you will be using a PM that believe me, will not be marketing like Steve. Your capex numbers will look very different than your local competition.

So ... its not so much that these properties are "worthless junk" like Ben seems to think. They are worthless junk for guys like Ben. For locals that can actually get it done there may be value. Not that I necessarily advocate doing it yourself but thats a completely different debate and a different business model.

Personally, I am pretty much done with large multifamily for the time being. In today's market just about everyone else in the food chain will make more money than the multifamily owner. Better to be the broker, property manager, construction company, etc than the owner of C class multifamily bought at a 5% fictitious cap rate. I only see the downside.

@Mark Ferguson My (AZ) market has also seen significant appreciation to the point where buy and hold makes little sense. I used to pick and choose what I wanted and hit 2% all day. Today its a fight to come close to 1% with a big sacrifice on quality. Like you, I self manage with PM infrastructure that involves little time on my end. I have also begun to look at turnkey solutions out of state. I have found that its generally not worth it. When you take into account the cost of PM, the turnkey operators margin on the resale and the property tax rates out of state, you will be pressed to find anything that hits 1%. Now that may be fine for some people but combine that with the lack of appreciation in these markets and I think on an overall IRR basis you will nearly always find it better to stay in your backyard.

I have shifted strategy from buy and hold long term to more buy and hold for immediate equity and marginal cash flow (slow flips). If you compare the total return with this strategy, it is most likely superior to any turnkey offering. You have the infrastructure setup and a Lambo with your name on it. Why not use it.

If you still want to go turnkey, @Ben Leybovich can probably help you navigate Ohio if you can deal with all the doom and gloom and negativity and hear why your plan will fail. Engelo Romero is doing some interesting stuff in Toledo and @Chris Clothier is the class act in Memphis. Either way good luck.

@Ben Leybovich  too much time on your hands? I'm looking for a good resident manager in Arizona. You could learn the ropes of managing a large multifamily and apply all your "theories" to real life. Can keep you busy while your "looking" for your syndication that doesn't exist. I'm sure other BPers would thank me for putting you to good use. And the best part is the free room and board. You pay your own water and electricity:)

@Engelo Rumora take the Leybovich negativity w a grain of salt. If I listened solely to Ben I'd be retired and completely inactive. Your out there doing it and it sounds like you have built an impressive operation. Keep hustling. 

@Ben Leybovich  so ... maybe you should give a little more detail. What I heard is that this was a C class building with average rents of around $500. You underwrote to stabalized proforma and STILL showed large negative cash flow. Thus this project had 0 intrinsic value. 

I find this very interesting and see you as making a pretty broad statement that LARGE (100+ unit) C class multifamily, IF underwritten appropriately to include real management, payroll, capex, etc, has no real value AND that the only reason they sell at all is because people don't know how to underwrite. Quite a proposition.

The next few years should be interesting as these buyers shake out.

@Ben Leybovich  YES RE investing is a fight indeed! Show me something worth having that comes without a fight.  Show me a worthy business to start and I'll tell you all the reasons it will be hard. Show me an easy way to make money in this world. Everything from your pretty wife to your 10 plex had to be fought for. The key is to keep growing. Keep moving. The person that stops growing starts dying.

@Ben Leybovich  you are an inspiration to many. You are in fact a pessimist yet a realist. I always enjoy trading landlording war stories cemented by the mutual line "this is a ****** business we are in." Keep pushing on and here is to a bright 2015. Just no more articles about how bad an idea it is to buy $30k junk property:)

Can't help but get a laugh out of this one. As @Brian Burke so famously said in his podcast, you must "stay relevant." Words to live by.   Are @Ben Leybovich  and @Brandon Turner  relevant? To those that read their writings, books, posts, and educational material the answer is a resounding yes! Staying relevant is much more than actually being active over a specific amount of time. Its about engaging and being a known entity with something to offer. Ben and Brandon are quite relevant in that regard.

I had a fairly active 2014 and completed a large 1031 exchange from one small multifamily into a higher quality larger multifamily. I don't think that makes me any more "relevant."

Where I lose my friend Ben Leybovich is his reasoning for staying on the sidelines. Lima, Ohio was hardly a dormant market with no deals to be had in 2014. Ben made up his mind that he wanted to be a large syndicator. Unfortunately 2014 did not cooperate. To me, this means the market is telling me focus on something else. I.E retail, single family, etc. I take what the market gives me. I'm just as happy making $40k on a flip in a regional market as I am closing on an asset class that I prefer. 

I have a "friend" who is an unemployed accountant. Been unemployed for years and living with his parents. He says there are no good jobs out there. Well ... the market is trying to tell you something. You can't get your preferred job because the market doesn't see you fit for it. Do you sit in your sweats and lament on your misery or do you take what the market is giving you and build until the appropriate opportunity arrives?

@Dick Rosen  there is not a right or wrong answer here. The necessity of an on-site resident manager mostly depends on the class of the asset and your proximity to the asset. There is no real cutoff in number of units but generally I would not want to manage 20+ units myself UNLESS they were less than 10 miles from me and they were minimum class B projects with little turnover.

With over 20 units, there are always units available for rent meaning always showings, advertising, turns, contractor meetings, etc. I couldn't imagine doing that on my own unless I had the internal infrastructure to do so. In particular - class C will drive you crazy as there is much more turnover and as such more work.

Regarding payroll ... to each his own. I would agree with @Ben Leybovich that the larger complex is much more appealing as the overhead can be accommodated without as much of a detraction from margins. Its simply economies of scale.  One resident manager can manage 10 to 100. Clearly managing 100 will be much more cost effective.

I manage over 100 units with one resident manager who is also my operations manager outside of the complex she lives at. I have multiple contract labor outside of that including showing agents, handymen and service professionals. I have systematize as much as possible where all tenant communications, collections, service requests, etc are done via an online portal/PM software. I know people doing it much more manually and could not imagine that nightmare. Its still a task but manageable.

@Ben Leybovich  another option for you ... deposit all your cash holdings in a Ruble denominated Russian bank. 17% Cash on Cash :) Can't beat that even in Detroit ...