All Forum Posts by: Steven S.

Sounds like you are on the right path, you are worried about the right things in the right order!

Is it a good deal? It's hard to say without underwriting the project myself, but out here in LA the deals don't last long! To be confident moving forward, I would check Rent comps for my terminal product's units, draw that up into GOI, calculate expenses or just multiply by 0.7-0.75 to subtract annual expenses (utilities, maintenance, taxes, insurance, etc) and arrive at NOI, then subtract my other expenses (like debt/loan payments) over the year, to see what we're looking at in potential CF once fully stabilized. Next, I would check market sales of similar product, see what the cap rates are for them upon their hopefully recent sale (Cap Rate = NOI/Sale Price), double-check they have similar units as our terminal product, then take the NOI & divide it by that market-cap rate you just calculated to get our income-approach of value. Double-check your estimated $/sf, $/door, and projected rents are in-line with the comps sales. Let's say $5M is the worst-case sale price, you are confident it will sell for more.

Work your way back from there with the construction (hopefully a good estimate, slightly more than required to be safe), carry costs over the total project duration, selling fees of 5% when you go to sell, etc. Let's call this your all-in costs. Take them, and subtract them from the ARV you calculated to get your break-even price. Whether you want to either have good cashflow or be able to make 20% annually on this thing when you stabilize it and sell, just change your offer price to leave room for that accordingly.

Making a spreadsheet model yourself, one that inherently makes sense to you, will always work best for this, but I am happy to provide you my SFR & Multifamily quick-evaluation models, just reach out:

As for financing your deal, I would lookup the top-lenders for the type of property/product (use https://www.scotsmanguide.com/), select 3-5 of them, call them, explain exactly what you want to do, discuss the various lending options with them, and ultimately write down what LTV & interest rate they are willing to provide you. Then choose the one that makes the most sense. You will definitely have to put up a down-deposit, and/or pursue hard-money loans that are interest-only (like Kiavi, they fund the purchase and provide renovation funds that you pay interest-only on, but you will have to ReFi once it's built or sell it to pay them back the balloon loan)

@Leo R. Your post title got me excited, but after reading through it, seems lacking. I mean where is your model so we can get an idea of what you're referring to?

Projection models? Do you mean what rent prices or $/sf will be in 1-2 years, for your specific property/properties? Seems like a fools errand, just underwrite it at current-values, if it pencils for you (either in flip profit or CF return by holding) buy it, and build/improve it. If you hit your numbers, you should sell (unless it meets/exceeds your CF return thresholds), capture that value, & move on to the next. If you don't hit your numbers (construction took too long, was more than expected, no offers coming in, etc) then you have to stick to the rental CF and wait for appreciation (in either rents or $/sf) to get you out of the deal profitably.

Bottom line is your model is only as good as what you put in it, and you can only be 100% certain about Today's values/rents/rates/etc. If it doesn't make sense with that, you are entering the realm of wishful thinking.

I do value-add development, mostly fix & flips, some new builds, and hold 3-4 unit rentals we built from a 1-unit SFR via ADUs.

Here's my fix and flip model (which 'Projects' my return should the terminal-value change upon delivering the product to market, allowing me to better visualize the risk of the deal):

And here's my MF hold/flip model (just shows me the key-metrics at today's values so I can ensure I'm offering at a price which suits our desired return thresholds upon sale or hold):

In my MF model, there is a 'Months held before Sale' that will increase the NOI by 3% every 12 months, but that is the only 'Projection' in this model, and I practically never use it:

For projecting if a market (and respective deal) is good, I have to look at market-analysis data metrics (absorption, $/sf, rents, etc, all over time, so you can see if something is peaking or undervalued). Typically absorption is tied to $/sf, longer DOM is indicative of the market slowing down, etc. No excel model will show you this stuff, you have to get it elsewhere, so I am curious what you are 'Projecting' off of, and what usefulness you yield from these 'Projections'. In my mind, you should run all possible development schemes/projections up-front, before the purchase, and embark on the most profitable one from the start.

And do you plan on refinancing once you stabilize this 4-unit? Current rates would destroy the CF you are currently able to yield with your 3.11% loan.

Just look at how much the end-CF & CoC changes with a 7.5% loan at your same loan balance:

If you do go for a $2M value on the ReFi, it's actually upside down in terms of CF:

So you must be planning to be equity-heavy & keep your original loan once stabilized, right?

Brad Gilboe didn't rep you on the buy or sale on this one, the listing agent Jayme Colon repped the seller and you. Why mention Brad on a deal he didn't partake in?

https://www.zillow.com/homedetails/5907-Yarmouth-Ave-Encino-...

Anyways, yes you got great appreciation on this one! But so did everyone who bought in the 2010's... As for how it currently performs as a rental, I ran my numbers for fun:

With my estimated $4,200/mo rent, you seem to be holding this at a 5% cap, but your Cash-on-Cash is rather low, only 2.6% CoC return after paying your mortgage (doesn't beat current inflation).

Looks like you should capture the appreciation now by selling it, and either 1031 those funds into a more-profitable project (something 5%+ CoC), or just put the money in a 5%-yielding money market account because values are basically at their all-time peak:

Are you yielding much more than $400-500/mo in CF after paying the mortgage, taxes, insurance, & utilities/maintenance? Curious why you'd hold this when you can capture the value from the appreciation and use those funds to make 2x as much CF return. Heck even $190k (your equity-in) in a 5% Money market account would yield you ~$800/mo without any work or risk on your end.

@Richard Mercado

Congrats on the project! I see you bought https://www.zillow.com/homedetails/521-Mission-St-South-Pasa... at the right time... 3.11% rate loan for $1.2M, congrats on that, it saved your deal's cashflow.

I ran the numbers on your deal for fun (with my best-guess development scheme): By turning this into a 4-unit property, spending ~$500k on the construction, and renting it out for top-of-market rents, you'll be holding this property at a 5% cap rate with a 4.7% Cash on Cash return.

With all-time high rents right now, you are at least getting about the same return as a current money-market savings account, ~5% CoC return.

Your risk is if you need to sell once it's built, it looks like you will end up breaking even or loosing on the deal (at today's values). It's a $2.25M all-in cost project, which will sell for $2.0-2.25M at the end of the day (see the bottom-right of the model above). Sure, you have cashflow available once you stabilize the 4-units due to your low interest rate loan, but the value of the property you will deliver will likely be below what someone else is willing to pay for it. You won't get a 5% cap buyer on a 2-4 unit property. Unfortunately, they just aren't valued like that unless they are 5+ units.

I suppose you are planning on appreciation building up the value over time, so it will become a net-positive value deal? It's interesting to say the least, would be glad to understand why you chose this & what you intend to do with it (to hold for rental CF once built, to flip it once it's built, to hold it for 3 years then flip it, etc). Looks to me like the only option you have is to hold it and hope rents & value go up over time, as you won't be able to sell profitably without that occurring. What are/were your projections/intent?

That being said, it's a lot of headache & hassle, so if its not your only rental property I would just keep the sec dep and rent it out ASAP, cut your losses and do better screening next time

$10k is the max small claims amount, at least in CA. It costs $30-75 to file, and then $50-150 to get them served by a competent party. It is well worth it for you if the lease was clearly broken by the tenant(s), and you have nothing to hide. Just print 3x copies of everything, show up to court after you serve them, and you will win the judgement. Now the fun just began, you will have trouble collecting or getting them to pay the judgement, but good news for you is you know they have a job, and with that judgement you can garnish their wages (take from their employment income until you get your judgement satisfied). It's just another piece of paper to file with the courts. Worst case is you wait until they die to satisfy your judgement from their kids inheritance (interest accrues quickly, this would be better than putting the $10k in the S&P 500).

Best way to learn is by doing. If you've got the time, spend the $100-200 bucks and file it, will give you more confidence later down the line to straighten out the scumbags

Yes they do it automatically, you have no option to prevent this type of reporting. The IRS will get Apts.com version of your rental income, and if your reported doesn't match, big red flag.

If you are referring to your tenant's credit scores, no they will not affect those unless you file for collection.

The Roosevelt comp is a 2/1 Main House with a 1/1 ADU, total of 1,286sf 3 bed 2 bath, so it's not THAT much larger than the subject property. The mistake was using a comp that is not a 3/2 SFR, next mistake is using a comp in a completely different neighborhood:

The Roosevelt property is in a higher-valued neighborhood, as you can see the ARV & ACV (as-is value) is higher:

Yup, I see AS-IS this should have sold for closer to $425k, to be flipped at $610k. Whoever purchased at $540k is way too close to the ARV of $610-625k.

Someone already ate up most of the value-add component of this deal, did you get this from a wholesaler? Someone made easy money on this, but it wasn't you