All Forum Posts by: Tyler Kastelberg

@Sandra Holt

Sandra: Make sure to review all leases and operating costs in depth. Key items to review:

Leases

1) Type of lease (NNN, full service gross, modified gross)

2) Schedule of escalations, renewal options

3) Common area maintenance reimbursement (how is it calculated, etc)

4) Percentage rent (unlikely in office, but best to double check)

Operating Costs

1) Utilities - Get all the utility bills for the past two years and review for abnormalities. Check if utilities are sub-metered for each unit, making NNN leasing easy.

2) Taxes & Insurance - Get statements from the seller and verify they match city/county records

3) Contracted Services - Make sure you review any cleaning/maintenance contracts that will transfer to you at closing

Most importantly, review local comps and market occupancy with a fine tooth comb. You'll want to be sure your underwriting includes accurate market expectations for the vacant units, as well as a stipend for tenant improvements and leasing commissions.

@Mary M.

You're on the right track asking about the differences in bank debt and non-recourse debt. See a few differences below:

Bank

1) Easy to get -- most local banks will be happy to give you a loan on a high-valued asset with good cash flow

2) Recourse -- you'll need to personally guarantee that the debt will be repaid

3) Rates -- interest rates are typically a few basis points above non-recourse debt

4) Flexibility -- local banks can tailor a financing solution to your needs

5) Cost -- low cost, few fees

Non-Recourse "Commercial" Debt

1) Hard to get -- must have liquidity and net worth satisfactory to the agency lender

2) Non recourse -- you *technically* are not held liable for the outstanding balance if the loan defaults

3) Rates -- interest rates typically fall a bit below that of local banks

4) Flexibility -- not much ... your deal must have a minimum occupancy and have adequate operating history

5) Cost -- more than a local bank, and fees will need to be paid before loan approval

You can find a term sheet for Freddie's small balance program here: https://mf.freddiemac.com/product/sbl.html

@Nina Hayden

Welcome to multifamily! I'd recommend taking a look at Multifamily U by @neal bawa

No sales pitches, just good content.

@Gladys Pilarski

Gladys: Before you jump into buying something like this, you really should build an underwriting model to help assess the risk/return potential of the deal. This will help you:

1) Determine if the property's return potential is worth the investment (when compared to a more liquid investment like the stock market)

2) Build credibility with lenders if you elect to pursue a loan

3) Understanding your downside risk should you purchase with a mortgage and the market contracts

At 14 units, the property is big enough to be materially impacted by market dynamics that are out of control. You'll want to factor in the current vacancy in the neighborhood and its past/present trending. 

@Ty Scott

Ty: Tough question to answer with the current info. Depending on the deal structure, you'll need to value the business or the property (or both). An SBA loan might be your friend in this type of deal (if SBA lends on casinos?) -- check it out!

@Mike Krieg

Adding to @Brian Burke's answer, all metrics can and should be stress tested. You can run data tables in excel to see variation in IRR, equity multiple, debt service coverage, and other important metrics based on changes to operational metrics like rent growth, market vacancy, etc.

Best of luck!

@Blaine Watson

Most investors will tell you bigger is better in multifamily.

Be sure to underwrite the deal in detail, and get help from an experienced local investor or third party advisory firm to affirm your decision. 

When investing in larger multifamily buildings, real estate changes from a hobby to a business. Every decision you make (or don't make) will hit the financials and impact whether or not you made a good decision. Protect your downside!

@Jim Froehlich

One of my colleagues in Virginia has had a lot of success with mailers. I thought he was crazy to try them, but he's un-earthed a lot of mom & pop owners who are open to selling.

Best of luck to you!

@Jim Growfer

I applaud you for creating a quick heuristic to evaluate a deal. My gut tells me that you'll eliminate a number of possible good opportunities using this method.

Alternative: Investors with expertise in certain markets can quickly determine whether or not a property is worth pursuing based on its price per 1 bed unit, 2 bed unit, etc. 

For example, I know that I can make a deal work in my favorite neighborhoods of Norfolk, VA at $60k per 2 bedroom unit. If the property has 10, 2 bedroom units and its asking price is less than $600k, it is most likely worth pursuing diligence.

@Jonathan R McLaughlin

You're correct, debt decreases in value as rates rise. The decision to invest in debt is dependent on your view of where rates will settle. If your view is that rates will continue to rise, then investing in a stabilized 5.5% cap rate multifamily building is hard to justify as interest rate moves are typically a leading indicator of cap rate movement.