All Forum Posts by: Spencer Gray

Not surprised at all with that list. Californians are making a mass exodus to Las Vegas, Arizona, Boise, Salt Lake City, Austin.

Indy has been overlooked for the last 10 years, is still affordable, growing, and has one of the best post covid recovery stories in the US. 

@Jason Merchey thanks for the heads up. Is it another fund filed with a 506(b) exemption that will invest along side the 506(c) main fund or are the side cars direct 506(b) vehicles of individual fund projects?  

I'm curious where the line is according to the SEC on LPs talking publicly about 506(b) deals as usually you aren't allowed to generally solicit or advertise.

@Chan Le the market has definitely moved compared to now vs this time last year. Last year we were still able to buy newer (2000's vintage) core plus assets for around a 6% cap and older value add deals for a 7% cap rate. We are currently selling an older value add deal with "meat on the bone" for sub 5% cap rate a newer class A is trading sub 5%. 

It makes some sense given the move lower in interest rates, now we'll have to see if NOI growth catches up to keep markets sane, especially if rates continue to rise.

Makes sense @Andrew Killian - you have to focus on what is worth your time. Good luck!

I agree with @Andrew Schutsky - you'll want to bring in a attorney sooner rather than later. 

I'm not 100% following your equity break down but it sounds like you will be responsible for sourcing deals and property management until you get to 30 units, which at that point you will bring on a PM. 

This may not be the plan as it looks like you want to go one deal at a time, but have you considered pursuing 1 30+ unit deal? There are quite a few advantages for bigger deals (economies of scale, 1 closing vs 20-30, 1 loan, 1 roof, 1 set of tax returns, vs 20-30) compared to SFH and smaller multifamily.

You'll move much quicker this way, and potentially earn a better return on your money, but more importantly your time. 

In terms of partnership structure, you could have an acquisition fee, say 1-2% of the purchase price to compensate you for your time in finding the deal. The partnership could have a preferred return on invested capital, say 8%, then a split of cash-flow/equity beyond the preferred return either 60/40 , 70/30, 80/20 - whatever everyone thinks is fair. 

This is not legal/financial advice - definitely bring in your attorney sooner rather than later. 

If you have a track record of success then it's just a matter of getting the word out about your success and projects - and that you are open to partners. 

I would attend local real estate investing meet ups/groups, network, and tell everyone you know what you're doing and that you would be open to bringing in a passive partner. You might be surprised by who you already know that may want to invest with you but don't know if you are open to partners. 

It depends on how a deal is set up and what the waterfalls are. 

In your standard 8% pref and 70/30 LP/GP split project, the project level IRR is usually 200-400 bps higher than the LP level return. So if the project achieves a 18% IRR the LP IRR can be around a 15% IRR. This is a very general rule of thumb as there can be many factors that go into a partnership order of cashflows ,etc.

In my opinion to achieve 3% extra of IRR for doing all the work isn't worth it compared to be completely passive as an LP.

When it makes sense to put in the time to do a (large) project on your own is if you decide to use OPM (raise capital) so you can achieve 30%+ to potentially infinite IRR's.

A others have said, the best course of action is to build you acquisition team which includes an attorney, insurance agent/broker, property management/construction, lender, and brokers. 

Your attorney will be able to review zoning, title, etc.  

If this is your first deal, you'll want to leverage the experience of your team who should be able to walk you through the process.

Also, just because the buyer wants "cash," doesn't mean you still can't get a loan for the property, it just means he doesn't want a financing contingency during the due diligence period.

@Zaid Bender I assume you are referring to the interest rate on multifamily loans. I don't try to predict interest rates or cap rates in the future. We use current rates and then apply sensitivity analysis for an exit period that shows us a range of potential outcomes depending on macro forces that are outside out control.

Cap rates and interest rates, specifically the US 10 year treasury are relatively correlated, with cap rates lagging behind rate movements. This is because your typical Fannie/Freddie loan will base their rate on a spread over the 10 year treasury - if rates are low you can borrow more money cheaper which facilitates higher prices with relative yield, driving cap rates until there is more equilibrium. 

Predicting rates over the next year or over the next 10 years is next to impossible. 

That being said we do know that the Federal Reserve is committed to keeping the benchmark Fed Funds rate near 0 for the foreseeable future. The Fed has more direct influence on shorter term bonds, although if later maturing bonds like the 10YT start to rise quickly for whatever reason, the Fed could ramp up their purchasing over those notes to control the yield curve and prevent rates from running.

There is massive incentive from central banks and governments to keep rates low for as long as possible, and only raise them in the face of rampant inflation. There is far too much debt in circulation that cannot be serviced if interest rates rose dramatically and borrowers had to refinance at higher rates. The biggest borrow, the US Federal Government, is acutely aware of this, so is the Federal Reserve. 

I imagine rates will stay low, with some fluctuations up and back down. Rates have been declining since they peaked in the mid 1970's, which was an aberration from a multi century long trend of declines. They will rise again, at some point, which will likely topple the house of cards that the global economy is built on. But is that 1 year, or 100 years? It's such an unknown that it is almost not worth considering.  

Thanks for the mention @Justin Goodin

I have to agree, @Charit N. , there are some very strong markets in the midwest that often get overlooked. While institutions and private syndicators alike all target the same booming markets in the sunbelt, markets like Indianapolis, Lexington, Kansas City keep growing and offer a very attractive risk/return profile compared to other growing markets. 

Indy specifically is on fire right now, though: 

Currently, Indianapolis is the second most economically resilient city in the USA in terms of least year over year job losses.

Rent growth was around 4% in 2020.

 Record high occupancy, high absorption rate with balanced rate of supply.

Steady job and population growth over the last few decades.