All Forum Posts by: Ian Stuart

Aberdeen is a tough market! Smells like teen... cap rates?

Please don't do this. One of the primary reasons multifamily CRE (in particular) has performed as well as it has over the last 40 years, is because it has directly overlapped with a long term credit cycle of programmatic monetary easing (1980 - current, see long term 10-year UST yield chart for context). Without relentlessly declining treasury rates and dovish macro trends at your back, will be significantly more difficult to make money in multifamily. The days of (i) paint everything grey / stainless appliances / faux wood floors (ii) raise rents $200/door (iii) treasuries compress 25bps (iii) cash out refi may very well be behind us. Caveat emptor, but if you're going to enter - be smart, and be conservative!

What specifically do you mean when you say a better lender than a bank? 

The answer to this question will shape the response. 

If "better" means "ultra high LTV lenders who will overlook my minimal liquidity/experience/balance sheet - and take the property / force a partnership if I **** it up" - then you're talking about private/hard money lenders. That said - hard money lenders aren't necessarily "better" loans. They'll hit you with fat fees on the front/back end, jack your rate up, and take advantage of borrowers who were either too stupid or too impatient to save up for a reasonable down payment themselves - and they want to be paid for taking the risk on (essentially - subprime) borrowers like this.

Entirely depends on what you mean by "better". If "better" means low rate, non-recourse, borrower centric terms at moderate/high leverage - banks/agency. If "better" means high proceeds / will overlook my ****** liquidity and worth - the private money /hard money wolves will be happy to profit off your impatience. 

@Sam Spoerl

Real Estate Taxes: Know where the County Assessor will re-assess your property value post purchase (talk to an appraiser for guidance). You’ll likely get reassessed in line with purchase price, top end of the comp set, or your taxable value will be capped. Know before you buy.

Insurance Premium Quote: Get one.

Utilities: Get the full historically, and ID any upside by installing energy efficient fixtures, etc (LED lights, low flow appliances/fixtures, etc)

R&M / Future Capex: Get a PCA inspection done to idea any future capex / deferred maintenance and get on it. Major stuff like roof, building systems, parking lots, siding, etc - id any issues that'll need to be addressed then either (a) knock out immediately or (b) budget a reserve so you can cover when it comes up.

Mgmt Fee/Payroll: Make sure your management fee isn’t ripping you off - comp out their %EGI fee. Should need onsite payroll if you’re <15units.

Advertising/G&A: Depending on comps and direct area. General and admin should be <$150/unit especially for a small deal with no onsite staff / leasing office / etc

Replacement Reserve: Ties into the R&M capex comment. Always put away $250-400/unit per year for replacements and capex. Better to have it and not need it vs. need it but not have it.

Lol - hit the nail on the head. 

These guys are all Kroger store-brand Grant Cardone wannabes IMO. 

Will be entertaining to watch these guys get cleaned out / start jumping off bridges when rates rise on their max leverage IO loans, pref investors bail, and their models' 3.75% exit caps don't pan out. 

Buy high-quality liquid assets that can be disposed of in event of significant currency/bond market volatility to raise cash and avoid deflation.

-Equities: Heavy EM/Commodities/Tech/Growth

-Cryptocurrency: ETH/BTC/LINK/AAVE/DOT/SOL - network effects / illiquid markets sensitive to future institutional flows.

-Precious Metals (Gold/Silver): Insurance

-Opportunistic Bridge Notes / Rescue Capital: Clip 6.00-7.00% on the note plus fees on distressed value add multifamily. If operator blows up - I get great real estate on the cheap that I can then flip and dump proceeds into opportunity zone developments.

If bond market blows up and yields spike spike significantly in a short period of time - illiquid real estate assets will go bid-less in short run until seller expectations adjust (3-12 mos. down the road) to higher interest/cap rates. People forget - your target buyer pool is leveraged to the hilt (70-80% LTV - and that's just the debt) - and depends more and more on artificially cheap debt to make deals pencil at your listing brokers' 4.00%-4.50% caps target.

Since 1982 - real estate has essentially been directly correlated / a call option on treasury bond prices (whose yields underpin the interest rates on all your fixed rate loans - think Fannie/Freddie/HUD). Investors who've been buying since the 80's (treasury rates >14%.5 top tick) or new blood that started buying post GFC (2009-2012) think they can't lose - since their investment has (essentially) been buoyed by asset inflation tied to declines in treasury yields --> interest rates --> cap rates --> increasing govt intervention/QE/debt monetization.

One of the key implicit assumptions of the bulletproof BRRR model (which so many people here swear by) - is that interest rates will always and forever continue to decline. Since 1982 - this has been one of the most reliable, lucrative, and no-brainer business plans in existence. However - if and when rates turn, the real estate business will change dramatically (especially if you have an IO loan).

Three factors: 

1. Leverage 70-80% LTV (Debt): Borrow max amount of money at artificially low rates, with complete disregard to what will happen once the Fed loses control of bond market and treasuries spike.

2. Syndicate 80-90% of Equity Stack (Equity): Raise the majority of your equity down payment from LP's who you give no management control to. Why put up 20-25% of purchase price with your own equity, when you can raise it from HNW friends/family/colleagues and still keep all the control

3. Charge Aggregious Acquisition Fee(s): Charge said LP's high acquisition fees to compensate for your "expert knowledge" or cookie cutter 80's-90's vintage "value add" multifamily deals. 

Repeat.

You will constantly see people on LinkedIn bragging about "all the deals they're buying" and that "we're at 5000+ units". What they don't tell you - is that it all OPM (other peoples' money). 

Believe me - I see all the organizational charts.

@Sherief Elbassuoni

Legacy Capital Group - based out of Bellevue - can provide you with a broad spread of private money options for (a) spec SFR construction (b) rehab loan for fix and flip SFR (c) short term acquisition bridge loans for builders, homeowners, investors and (d) mezz loans for ground up construction builders and (e) residential mortgage loans.

https://legacyg.com/

Call Chris Gurdjian and see what they can do. No idea what their rates look like today - but know they're active in this space. Also will look at smaller multifamily private money loans also if I recall. 

Don't know if they can lever up to 90% in this market- that a lot of leverage for small SFR / multifamily. But give him a call, good guy to know.

@Account Closed

In order to confirm rents, we conduct a lease audit - where we cross comps (a) tenant leases (b) rent roll and (c) T12 financial statements to make sure no one is committing fraud or blatantly lying. We also request copies of the owner's operating account bank statments - to see if there are inconsistencies with "collected rents" on and rents in the bank. Beware owners that co-mingle personal and operating funds. Sketchy operators do this for a reason.

We also ask the owner open ended questions during the property tours / conference calls to identify any inconsistencies and any fishy activity.

The owners are also required to sign (a) Blanket Property Financial Statement Certifications and (b) Borrower Certifications. This gives us recourse via "Bad Boy Carveouts" to go after any scumbags that attempt to lie to us. 

Never be afraid to do thorough due diligence and ask direct questions. If you are ever in a scenario where the owner is not being fully up front and transparent about their books - regardless of deal size - red flag. Always push for more info if the owner is sketchy and/or if their onsite staff is sketchy. 

Also note - sketchy sellers often hire sketchy brokers. If you're getting a tour from a sketchy guy from a local, regional brokerage wearing a ketchup stained Tommy Bahama polo with two day old facial hair shadow, hold on to your wallet.

Verbal agreements mean less than nothing to me. Show me the numbers, and prove it.

@Sam Shi

10-4, I’ll shoot you a DM.

Best,

Ian