jbaldyga Wrote: ------------------------------------------------------- > I’ve been told I’ll learn more in the next two > years than I possibly could have in the last 10. > Let’s hope we’re still around on the other > side… true dat… I hear it all the time too. Back to the original Q from BadBeat, I think your deal could potentially work. A lot hinges on who the sponsor/manager is and your market. I would be reluctant to do this type of thing with condos in an urban setting, but if your talking about single family houses in small towns, it could work well. If this is something your interested in, do a lot of homework, and if you’re comfortable doing so, post the manager’s fee structure on here and we’ll see if he’s trying to rip you off. Also, I’d post the capital call procedures and penalties too if possible.
here is the scoop - I had the meeting this morning. The potential deal and structure sounds intriguing, however, I see immediate red flags. The properites are multi family properties in less than prospering areas in the counties surrounding St. Louis. Section 8 housing preferrably (HUD provides FMV for rents - pretty unbeliveable how high the FMV for 3 bed - 1 bath goes for considering cost) - would end up being about 10% NOI/Cost. Met with the county who runs HUD program and he believes these properties can stay occupied (flags: why in foreclsure if county says they can stay full?? - section 8 seems like less likely to care for the property = more maintenance ongoing). The guidance provided by HUD does provide somewhat of a bottom for the rents, however, I wonder how often these rules change. Anyways, the properties are being bought out of foreclosure (most likely a bank, short sale, type deal). In no instance will we pay more than 50% of last sales price with the sale occuring in the last five years. We would purchase the property with an interest only construction loan (I didn’t know you could buy a developed property with construction loan), make improvements, and wrap into a commerical loan probably within a year, 25 year amortization). HUD reviews property annually to ensure meets standards,etc… I would be responsible for providing capital down to start a reserve, pay transaction fees and make the first few payments while improvements are being made, operating principle brings in the tenants, coordinates financing, improvements, manages property. Maintenance is split 50/50 cost, with operating principle coordinating with contractors. Net postive cash flow and equity interest is split 50/50. There is a much more organized word doc if either of you are interested, I can email it. I also plan on dropping the assumptions into a model I worked on while taking a real estate investing course in college.
There are better opportunities than this one… Lots of risk here.
Yeah sounds like there are quite a few moving parts there.
How much math have you done on this? Your IRR needs to be north of 25%. Also, how experienced are your partners? Completeing construction is a lot harder than you think. Also, when you do your math, make sure you factor credit loss into your vacancy calc, and provide for eviction legal costs. Also, leverage will help your returns but I’ve seen examples in affordable properties, where tenants realize that the Borrower is in trouble with the bank and they assume that they can not pay rent and avoid eviction longer than the Borrower can avoid foreclosure. If your tenants aren’t convinced that you have deep pockets you can wind up in trouble… Also, how steep of a management/asset management fee are you going to pay? Do you get a preferred Div? Do you get any priortiy in terms of getting your equity paid back?
I’m an affordable housing underwriter for one of the GSEs (my firm has about 75% of all business right now, the other GSE has about 24%, for some perspective on how bad things are right now in the market). Look, I’d be very very cautious. I’ve started to find that there is no such thing as a “discount on market”–or very rarely. If a property is truly selling for 20% of the market or 50% (or any discount), then there is a serious inefficiency in the market. Usually, a property selling at 20% of the market value is actually selling close to what the market can bear. You can check this pretty easily by looking at your simple rate of return (expected cap on one year of expected NOI). National cap rate averages for multifamily are over 8% now and headed to 9%. If you are seeing a cap rate of around, say, 20%, then there is probably something wrong with the properties that may require serious capital investment in the near future, which would likely bring the cap closer to market. Vacancies are shooting up, rents are stagnating, defaults are on the rise, values are collapsing, and the midwest is not considered a lush commercial real estate investing environment. I’d be very cautious. That said, now is a good time to buy for savvy people with correct INFORMATION. Information is king. I encourage you to explore the idea with skeptical optimism.
ahahah Wrote: ------------------------------------------------------- > How much math have you done on this? Your IRR > needs to be north of 25%. Also, how experienced > are your partners? Completeing construction is a > lot harder than you think. Also, when you do your > math, make sure you factor credit loss into your > vacancy calc, and provide for eviction legal > costs. Also, leverage will help your returns but > I’ve seen examples in affordable properties, where > tenants realize that the Borrower is in trouble > with the bank and they assume that they can not > pay rent and avoid eviction longer than the > Borrower can avoid foreclosure. If your tenants > aren’t convinced that you have deep pockets you > can wind up in trouble… > > Also, how steep of a management/asset management > fee are you going to pay? Do you get a preferred > Div? Do you get any priortiy in terms of getting > your equity paid back? +1. Bad debt, concessions, physical vacancy–people often don’t think of these. Yeah, affordable tenants, unfortunately, are often difficult to work with (although they complain less). I’d bet the OP’s project will compete with subsidized and LIHTC properties. Look out…
kkent, There’s z-spread question you may want to weigh in on on the LI forum.
Thanks for all the feedback with regard to this post. This deal structure was just proposed to me earlier this week, and I am a pretty cautious investor. I plan on getting all the assumptions together and modeling out different scenarios (I took classes from a professor that did a lot of real estate investing and he provided us with pretty good models to use) to see if these would/could work. Never would I make a hasty decision in this current market. With that said, however, if everything looks good on paper and it doesn’t seem too good, then I will CONSIDER the deal. Ahahah- As for the following statement “Also, leverage will help your returns but I’ve seen examples in affordable properties, where tenants realize that the Borrower is in trouble with the bank and they assume that they can not pay rent and avoid eviction longer than the Borrower can avoid foreclosure”, this answers one of my questions - however, I wouldn’t think these tenants would be Savvy enough to realize the borrower is in trouble (plus their rent is subsidized by the Government). Also, these are properties that are already developed, new construction isn’t needed, only rehab work - in no instance would be purchased something that needed to be totall gutted - minor improvements ~10,000.
kkent Wrote: ------------------------------------------------------- > ahahah Wrote: > -------------------------------------------------- > ----- > > How much math have you done on this? Your IRR > > needs to be north of 25%. Also, how > experienced > > are your partners? Completeing construction is > a > > lot harder than you think. Also, when you do > your > > math, make sure you factor credit loss into > your > > vacancy calc, and provide for eviction legal > > costs. Also, leverage will help your returns > but > > I’ve seen examples in affordable properties, > where > > tenants realize that the Borrower is in trouble > > with the bank and they assume that they can not > > pay rent and avoid eviction longer than the > > Borrower can avoid foreclosure. If your > tenants > > aren’t convinced that you have deep pockets you > > can wind up in trouble… > > > > Also, how steep of a management/asset > management > > fee are you going to pay? Do you get a > preferred > > Div? Do you get any priortiy in terms of > getting > > your equity paid back? > > > +1. > > Bad debt, concessions, physical vacancy–people > often don’t think of these. Yeah, affordable > tenants, unfortunately, are often difficult to > work with (although they complain less). I’d bet > the OP’s project will compete with subsidized and > LIHTC properties. Look out… KKENT - Can you elaborate on this last sentence “I’d bet the OP’s project will compete with subsidized and LIHTC properties. Look out…” Do you mean tenants of these properties are problems? I believe you are right because Section 8 is a subsidized program for low income tenants, however, if you could shed more light on this, that would be great.
Yeah, I actually just saw your follow-up (I missed it at first) and saw that there will likely be a Section 8 housing contract. Ok, here’s the “inside scoop”–word is, due to budgetary constraints, HUD will not be re-newing many of their Section 8 contracts nationwide. That’s a big issue. However, there are few things sweeter than having a property with a project-based Section 8 contract. In most cases, you will actually collect MORE rent than the market will bear because HUD Fair Market Rents (FMRs) are usually pretty liberal. In addition, Section 8 properties–in most cases–have nearly 100% occupancy rates almost all the time, with waiting lists. Obviously, these projects, however, tend to have relatively high neighborhood crime rates, are often poorly maintained, and suffer from bad debt (yes, even when the rent the tenants are paying could be just a few hundred bucks or less per month). Frankly, my biggest concern about your project is the condition of the project and renewal of the HUD contract. Find out when the contract expires–if it is many years from now, don’t sweat it. If it is, say, September 2009, I’d make some serious phone calls to see what the state of mind of the decision makers is. That said, non-renewals of HUD contracts have been consistenly scarce–they almost always renew contracts–but with the federal budget getting out of hand, it is not guaranteed anymore. I’d say if the property is in decent condition and there is a reasonable certainty of contract renewal, there is very little risk. In addition, I’m telling you, affordable housing is a lucrative industry–you could mark it as your first hands-on experience and join the club. As far as property condition, a physical needs assessment (PNA) will obviously be needed–focus on inflated repair reserves. That will tell you a lot about the investment.
kent-- what does non-renewal do to the value of the property? I think I read somewhere that some funds were buying, expecting the contract not to renew and that would enhance value. But this was over a year ago. I imagine that value would only be enhanced if the “market rent” subsidy was actually under true market. I think this would occur in more of a supply constrained and desirable market (e.g. NYC). What’s the formula for “market rent” determination? Does it track the market well or lag? If it lags, then having the contract may be valueable in this market if you expect falling rents…
badbeat88 Wrote: ------------------------------------------------------- > Thanks for all the feedback with regard to this > post. This deal structure was just proposed to me > earlier this week, and I am a pretty cautious > investor. I plan on getting all the assumptions > together and modeling out different scenarios (I > took classes from a professor that did a lot of > real estate investing and he provided us with > pretty good models to use) to see if these > would/could work. Never would I make a hasty > decision in this current market. With that said, > however, if everything looks good on paper and it > doesn’t seem too good, then I will CONSIDER the > deal. > > Ahahah- > > As for the following statement “Also, leverage > will help your returns but I’ve seen examples in > affordable properties, where tenants realize that > the Borrower is in trouble with the bank and they > assume that they can not pay rent and avoid > eviction longer than the Borrower can avoid > foreclosure”, this answers one of my questions - > however, I wouldn’t think these tenants would be > Savvy enough to realize the borrower is in trouble > (plus their rent is subsidized by the Government). > > > Also, these are properties that are already > developed, new construction isn’t needed, only > rehab work - in no instance would be purchased > something that needed to be totall gutted - minor > improvements ~10,000. Think of it this way, a lot of them will challenge your ability to collect rent. They may be right and they may be wrong , but the rent certainly won’t always be recieved on time… “Saavy” may be the wrong word…