I’m currently experiencing what most would describe as a “good problem to have”.
It’s one of those situations where all the alternatives are pretty good options. I can’t really go wrong with any selection.
Maybe you can help me decide. I’m going to tell you the decision I’m facing and I’d like to know… What Would You Do?
I learned about Opportunity Cost my senior year of high school in the first week of AP Econ.
The textbook definition is: the loss of potential gain from other alternatives when one alternative is chosen.
In other words, saying yes to something means saying no to everything else.
I currently have 4 investment options on my desk.
If I’m being responsible, I should choose none or one of them. If I’m willing to stretch myself in these uncertain times, I could possibly choose two.
I’ll do my best to communicate the pertinent information of all options without boring you. Then I’d like to hear from you. What am I not seeing?
I’m aware many of the people reading this are not real estate investors, but that’s exactly why I’m asking for your opinion.
As a “professional” real estate investor, I often get stuck in the spreadsheet. After analyzing an investment property for hours, I get tunnel vision and can’t see past the numbers.
That’s where you come in.
OK - let’s dive in.
Option 1: Delanco, NJ
Option 1 is a 3-family home in Delanco, NJ.
The seller is a general contractor so the home is actually in decent shape. It does not need a major facelift, but there is some deferred maintenance that needs to be taken care of.
Purchase Price: $215,000
Closing Costs: $5,000
Rehab Budget: $25,000
Total Capital To Acquire: $245,000
Projected After Repair Value: $250,000 - $275,000.
- There are no recent comps for 3 family homes in the area but plenty of duplexes have sold for $200K or slightly above. So we can assume each unit is worth $80-$100K.
Floor Plan: 2,600 square feet of livable space
- Unit 1: 3 beds, 1.5 bath + Office
- Unit 2: 2 beds, 1 bath
- Unit 3: 2 beds, 1 bath
Stabilized Operating Statement:
The Cash on Cash return is 12%.
This is AFTER I took all of the seller’s actual expense data for the year ending 2019 and increased it by 10%.
I also baked in 1 month of vacancy for each unit. This probably won’t happen considering the tenant in the 4 bedroom unit has been there for about a decade and the tenant in the 2 bedroom unit already told us she has no intention of leaving when ownership changes.
Here’s the potential downside of this deal: no real demand for economic growth in the area. Delanco, NJ is a small town that isn’t really in the path of progress.
I don’t think we’ll be seeing much appreciation here outside of keeping up with inflation. Also, we’re not buying so far below market value where we can benefit from instant equity either.
However, my partners on this deal have a property down the street in a town called Riverside. They swear it’s one of their favorite properties because the tenants are low maintenance.
Option 2: Bloomfield, NJ
Option 2 is a 2-family home in Bloomfield, NJ. However, the basement can be converted into a bonus unit because there’s enough height clearance and a separate means of egress.
The property is currently in livable condition. However, we’d want to improve the property to the standards of the submarket so we can achieve higher rents.
The current tenants in place are paying way below market rents. The current rent roll is $2,900, but we believe this property can bring in closer to $4,750 (including the basement).
The seller paid the property off so he’s less incentivized to operate it at its highest and best. We tried to convince him to give us seller financing, but he declined.
Purchase Price: $305,000
Closing Costs: $10,000
Rehab Budget: $85,000
Total Capital To Acquire: $400,000
Projected After Repair Value: $450,000
Floor Plan: 1,900 square feet of livable space + Basement Unit
- Unit 1: 2 beds, 1 bath
- Unit 2: 2 beds, 1 bath
- Unit 3: 1 beds, 1 bath (Basement)
The cash on cash return is only 8.5%.
The only actual data in my pro-forma is the insurance and property tax. Everything else is a conservative assumption.
We used Rent-o-meter, Zillow, and the MLS to get a feel for rental rates.
Rental Comps (<0.4 miles from Subject Property, Rented in last year)
2 bed 1 bath units rents anywhere from $1,500 - $2,250 per month. It basically comes down to the finishes. Newer = higher price.
Tenants should be paying all utilities, but I plugged a nominal cost in for water/gas/electricity anyway.
Since the After Repair Value ($450K) is significantly higher than our cost to acquire and rehab ($400K), there is an opportunity to do a cash out refinance and take some money out of the deal.
However, I don’t underwrite to that scenario. I assume we’ll be leaving the cash to close funds in the property for the foreseeable future.
The location of this property is really good. There’s a bright light shining on small multifamily properties in Bloomfield, NJ right now. Mostly because they have two train stations that go to New York Penn Station.
I’d say more than 1,000 Class A rental units have been built in Bloomfield in the past 2 or 3 years. These are the high amenity buildings that attract people with high paying jobs.
A rising tide lifts all boats.
The downside of this property is its cash on cash return. I’m not ecstatic about 8.5%. I don’t love investing in properties that yield less than 12%. Because 12% on paper usually means 8% actual.
But this place could pay for two kids’ college tuition if Bloomfield holds its trajectory for the next decade or so.
Finally, I could actually see ourselves living here for a year. Bloomfield is almost perfectly in the middle of where Dia and I work.
Living in one unit and renting out the other has serious perks. Namely, saving a shit load of money.
Option 3 & 4: Private Placement / Syndication
Option 3 is an opportunity to invest alongside one of my friends who is acquiring a 336 unit apartment building in Winston-Salem, North Carolina.
Option 4 is an opportunity to invest alongside another friend in his quest to acquire vacant lots in Philadelphia to develop and rent out small to mid-size multifamily buildings (2-20 units).
The benefits of these two investments is that they are completely passive. I send my investment and within a couple months, I’d get a check in the mail every month (8% preferred return annually).
With these types of opportunities, the most important factor is the person running the show. A bad sponsor can make the best deal go completely awry. A good sponsor can turn a lemon into lemonade.
I’ve invested in 5+ other properties with the guy buying the 336 unit apartment building. He hasn’t let me down yet and I don’t anticipate him letting me down on this either.
I have yet to invest with the guy building new construction multifamily in Philadelphia. However, I did go check out his projects, and I fully believe he’s on to something valuable.
The downside to these types of projects are:
- I have no say
- These structures typically charge a lot of fees that eat into returns
- Asset Management Fee - 2% of Gross Collected
- Acquisition Fee - 2% of Purchase Price
- Capital Transaction Fee - 2% of Capital Refinanced
- Disposition Fee - 2% of Sales Price
- They are illiquid. Selling shares in a syndication is less like selling shares on the stock market and more like selling partial ownership of a small business. How many times have you heard of the latter situation? Yeah, never.
Moving Forward
Currently, 85% of my rental real estate holdings are made up of private placement / syndication investments.
My business model so far has been partnering with fix and flip investors, investing the proceeds into a large multifamily syndication, repeat.
Generate a chunk of cash, invest it so it becomes a recurring income stream, repeat.
Why invest in multifamily syndication? I wanted to invest alongside people much smarter and bigger than me so I can learn from them.
I still have a lot to learn, but I’m now at a point in my education and network where I’m confident enough to start doing my own projects.
So yeah, not 100% sure what to do. Feel free to share any thoughts.
--
Did someone forward you this email?
