How We Operate

Acting out of good intent is easier for some than others but, it can create life changing opportunities and friendships if done properly.

What does this look like and how do you go about it?

For us, this is an individual who treats people well, makes the right choices, and tries to assist even if they don’t stand to benefit.

We all know people who like to keep their cards close to the chest. Tough to deal with, won’t give you the time of day unless they stand to make some money, and always looking to extract value from somebody.

This mindset can work for some- but I think it's short-sighted and detrimental.

Why?

You'll eventually push people away.

If you adopt the mindset of “how can I help?” without strings attached, you’re creating an arena where people will seek you out knowing that you’re able to provide expertise, connect a dot, make an intro, whatever.

Providing personal opinions on a development thesis, making an introduction to a great lawyer, helping on that insurance issue, or even talking through employment with a new graduate- these acts likely won’t benefit me directly, but they can put somebody on the right path and alleviate pain points during an especially stressful period.

Fantastic.

These small gestures (over time), even if unreciprocated, will substantiate pieces of your reputation.

People don’t forget who helped them during their most troublesome times and if you’re equipped to do so, I believe you should.

Every interaction is an opportunity for each party to learn more about the other and how they operate.

At the very least- you’re building trust with others in your field, refining your own skillset along the way, and opening yourself to future conversations.

Through helping others, you’re utilizing the knowledge that somebody else likely instilled into you and leveraging that to push another individual upward.

In the end, you very well might end up with many more great relationships and perhaps future partners.

Avoiding Landmines

As the real estate market continues to attract investors with promises of returns, it's crucial to be aware of the potential land mines that can derail your whole thesis.

Here are some key insights to steer clear of common pitfalls:

1.) Market Research: Have nailed this point many times but need a thorough understanding of local market dynamics.

Location is everything. The wrong one can crush you.

Potential landmines to avoid:

-Declining markets over long periods of time (population, economic output)

-Markets that are levered to a single industry

-Areas without supply/zoning constraints

-High crime

-Flood zones

-Low density (subjective to the market)

2.) Due Diligence: Hidden defects, legal disputes, potential for liability issues, type of tenant base- all potential disruptors.

Potential landmines to avoid:

-Un-permitted work (if you file a permit down the line, it’ll open a can of worms with city officials)

-Property violations (some can be solved easily, others not so much)

-Environmental issues

-Legal disputes

-Rent restricted overlays

-Shared boundaries (source cases of encroachment)

-Structural issues or outdated MEP may be an issue for some

-Shared utility meters (units aren’t legal or costs are paid by ownership)

-Low ceiling heights (that you can't raise)

-Lack of certificate of occupancy (especially if leased)

-No utility records (we once looked at a complex that received electricity from a temp pole)

3.) Cash Flow Projection: Missing on rental rates and overhead costs is another quick way to disrupt business plans.

Potential landmines to avoid:

-Underwriting rents based on active listings (need to find the price at which leases get signed, days on market, condition)

-Forecasting rent growth

-Not securing hard insurance quotes

-Not underwriting increases to operational expenses (your taxes won’t be the same forever)

-Missing small stuff: who handles landscaping, snow removal, garbage, common areas? What are the costs and how often do they occur?

-Not keeping reserves and cap ex budgets

4.) Property Management: A bad manager can let one bad egg in and thus, drive everybody out.

Potential landmines to avoid:

-Not matching the size of the management firm to your portfolio

-Choosing a property management company on the premise of a relationship vs. merit

-Not receiving referrals from the property management firm

-Gaps in communication- red flag

5.) Legal/Accounting Compliance: Real estate investments are subject to countless laws and regulations, ranging from tenant laws to zoning ordinances.

Potential landmines to avoid:

-Not working with attorneys (title, entity formation, document preparation, zoning verification, evictions, SEC filings, permits)

-Not following rules that govern your strategy (you can’t advertise offerings under certain SEC regulations)

-Failing to review legal documents that may require periodic changes.

-Not working with a CPA

-Failing to maintain meticulous records around capital accounts, profit & loss, progress reports, etc

DSCR & Why It's Important

One important metric operators use to assess the viability of a real estate investment is the Debt Service Coverage Ratio (DSCR).

The DSCR gauges whether the property generates enough income to meet its debt payments comfortably.

It's calculated by dividing the property's net operating income by its total debt service.

Why is it important?

Risk Assessment: (Crucial) DSCR provides insight into the risk associated with a property. A higher ratio indicates that the property generates sufficient income to cover its debt obligations, implying lower risk for lenders and investors. Need to account for downside scenarios here and make sure you’re able to withstand a substantial decrease in rents in the event of a downturn.

Lender Requirement: Lenders use DSCR as a criterion for loan approval. They need ratios above a certain threshold to write the loan and ultimately make sure they won't lose their shirt.

Decision-Making: For investors, DSCR is a variable in determining the profitability and stability of an investment. Higher ratios indicate you have a better ability to take on pain.

Things to consider:

Thresholds: Ideal ratios vary based on location, property type, and market conditions- a ratio of 1.25 or higher is generally considered favorable for multifamily properties.

Underwriting Standards: Lenders have specific criteria and will analyze the property’s income sources, vacancy rates, operating expenses, etc. Need to have tight, conservative underwriting and familiarize yourself with their process.

Operational Efficiency: Improving DSCR doesn't always mean increasing rental income. Tightening expenses will improve this number- shop out your insurance policies, preventative maintenance, not planting sod, etc.

The DSCR ratio informs portions of your due-diligence process, helps assess downside risk, and sheds light on the performance of the asset.