A lot of members who do these AMA's usually start by saying something like "WSO has been instrumental to my career and I never would have made it without the community. So now I want to give back." I wish I could start with this, but the reality is I didn't learn shit from you monkeys lol, but I do enjoy the community, talking shop with all of you, and genuinely providing any advice/guidance that I can to others here. So in order to "give back," impart some knowledge to the community, and maybe inspire some of you, I've decided to do a very detailed breakdown and an AMA on a home run deal (at least I consider it a home run, this may be peanuts to some of you) that I am working on with my family.
MY BACKGROUND:
Grew up in a mom & pop real estate development family (Dad's a GC/developer who has been building and selling luxury townhouses for the last 25 years). Graduated from a semi-target with a major in finance. Worked at a Wall Street bank in "middle office" and hated it. I always wanted to end up in real estate eventually so I decided to pursue my MSRE at NYU (a useless degree in of itself, but allowed me to become a student again and take on real estate internships (interned at a LMM REPE shop and a boutique debt/equity placement shop). Upon graduating from NYU, I worked at a MM developer in my city, which btw is a major city (NYC, LA, DC, Boston, SF), for a couple months and was laid off due to covid (best fucking thing to happen to me. In the 6 months that I was at the MM shop, I absorbed every single deal they've ever worked on and learned all of their contacts/network - architects, attorneys, banks, etc..- honestly learned 95% of everything they had to offer in 3 months and was ready to leave anyways). Upon getting laid off, a home run deal appeared...
DEAL SOURCING:
Didn't actually source anything. A real estate agent that we know reached out to my family about an off-market, 3-unit, ~6,000 LSF (~8500 GSF), property in the nicest area of one of the most expensive neighborhoods in my state...with 8 parking spots (these 8 parking spots are what makes this property worth so much...no one will buy a multi-million dollar condo with no parking. You need at least 1:1 parking to unit ratio to hit the big bucks...and this one has an 8:3 ratio...Right off the bat we know this property is worth $3.5mm-$4mm (we know this market incredibly well..it is our bread and butter market). The asking is $2.8mm. The condition is deplorable btw...but it is a developer's wet dream because I'm going to gut it to the studs anyways. We throw $2.75mm at it, no contingencies (If we offer full price immediately the Seller will think they sold for cheap and get greedy). Seller counters at $2.79mm...we counter at $2.78mm (My dad's a penny pinchers lol). Offer Accepted.
P&S:
During P&S negotiation we find out that the Seller doesn't actually own the property...turns out that the property is an estate sale (Gotta love estate sales) and the heirs have been suing each other for the past 3 years and the judge has appointed a Commissioner to liquidate the asset. This Commissioner is just some attorney that works closely with the court and doesn't know shit about real estate which explains the incredibly low price. Anyways, the Seller is trying to flip the P&S he has with the Commissioner to me, but according to his P&S with the Commissioner, he is not allowed to assign the P&S without approval from the Commissioner. So we create an LLC with both of us as members and name the LLC as the buyer of the property in the P&S with the Commissioner. We then draft an agreement stating that upon closing of the property, my family will buy out the Seller's ownership in the LLC for $250k (the agreed upon price between the Seller and the Commissioner is $2.53mm and I agreed to buy the property from the seller at $2.78mm). Just as we are about to sign the agreement...
HICCUP IN THE DEAL:
A similar property in the same town, but a less desirable location sells for $3.5mm. Seller realizes his royal fuck up and starts making excuses to get out of the offer he accepted 2 weeks ago and goes MIA. I'm pissed and am determined to lock him into the deal by any means necessary. Start seriously considering suing for breach of contract and specific performance. Even if nothing comes of it, tying him up in court will cause major issues for him. Don't forget that he has a P&S with the Commissioner with a closing date in 60 days. His goal is to flip the P&S and make a few bucks (or hundreds of thousands rather) without coming up with any cash. Tying him up in court throws a wrench in his plans. At 1AM I'm twisting and turning in bed trying to figure out how to salvage this deal. So I decide to do what should have been done at the beginning of this deal...read every damn word in the 50 paged P&S he has with the Commissioner. In the Addendum I discover that one of the terms of the P&S is that at any time before closing, if the Commissioner receives a better offer, then the Commissioner has the right to void the existing P&S and take the better offer. Next day I email my lawyer to tell the seller "If you do not come back to the table, we will go directly to the Commissioner and put an offer in" within 15min his lawyer emails back with "Oh the Seller actually realizes that the offer is binding and still wants to sell..blah blah blah." I review the side agreement between me and the Seller and make sure it is air fucking tight. Seller signs the agreement.
DEVELOPMENT PLAN:
Gut renovate and sell each unit as luxury condos. And during construction, we will seek a variance to convert the basement space as a 4th unit (Fast forward to present day, our Zoning Board hearing is actually in 2 weeks and I've been working on this for the last 8 months (8 months for 1 extra unit...and yet the city still wonders why housing is so unaffordable...idiots)). Now when we get to the "sell out" section which will go over the figures, some annoying monkeys are going to nitpick and say "Well Fred...you don't have the variance yet so you can't count the proceeds from the 4th unit." The ZB is going to approve my variance. They've approved similar variances for basically every 3-unit, building as long as you have at least a 1:1 parking to unit ratio. The town's Planning & Development Committee has already approved it and has recommended it to the ZB and it is incredibly rare for the ZB to vote differently from the Planning Board or else the town just looks stupid and not unified. Even my building inspector is already assuming that this will be 4 units because they approve it all the time. My property is also in an "overlay zone," where the town is trying to increase unit count. I will go over the variance process later.
UNIT INFO:
Unit 1: Garden Level i.e. the basement unit. 1800 LSF, 3BR/2BA
Unit 2: First Floor, 1800 LSF, 4BR/2.5BA
Unit 3: Second Floor, 1950 LSF, 4BR/3BA
Unit 4: Pent House, 2000 LSF, 4BR/3BA, 200 SF Private Roof Deck
Each Unit has 2 Parking Spaces
TOTAL PROJECT COST:
Acquisition Price: $2.78mm (Seller didn't deliver the property clear of all debris or install smoke alarms per the P&S, so we escrowed $10k and took the full amount. This basically breaks even with my closing costs)
Hard Cost: $1.2mm (already adjusted for inflation of raw materials, keep in mind that we are also the GC)
Soft Cost: $120k (architect, zoning attorney, engineers, permit, builder's risk, RE taxes etc...)
Interest Expense: (80% LTV, 100% Hard & Soft, 4% interest only): ~$150k (bank forgot(?) to charge me the origination fee that we originally agreed on lol)
Sales Cost: 5% (Sales commission and closing costs)
SELL OUT SCENARIOS:
Here's the part you've all probably have been waiting for...
Best Case:
Unit 1: $1,400,000
Unit 2: $2,100,000
Unit 3: $2,200,000
Unit 4: $2,300,000
Total Sell Out: $8,000,000
Profit: $3,350,000, EM: 7.02x
Expected Case:
Unit 1: $1.3mm
Unit 2: $2,050,000
Unit 3: $2,100,000
Unit 4: $2,200,000
Total Sell Out: $7,650,000
Profit: $3,017,500, EM: 6.42x
Worst Case:
Unit 1: $1.2mm
Unit 2: $2,000,000
Unit 3: $2,050,000
Unit 4: $2,100,000
Total Sell Out: $7,350,000
Profit: $2,732,500, EM: 5.92x
IRR analysis doesn't even make sense lol
COMPARABLES & SELL OUT ASSUMPTIONS:
When we initially acquired this property, we projected each unit (except for the Garden level) to sell between $1.85mm to $2mm, which is still a hell of a project. However, recently sold comps boosted our expectations. A very similar condo conversion project, in a less desirable neighborhood sold out at $1.7mm - $1.8mm and their Garden level unit sold out at $1.2mm. These condos are about 100 SF smaller than mine and have only 1 parking each...my extra parking space alone is probably worth $50-$100k. But the most compelling evidence revealed itself recently. A 1800 SF, 3BR/3.5BA condo, renovated 6 years ago with only 1 parking space that is literally next to my building came on market for sale asking $1.675mm...it just sold above asking at $1.85mm. This comp gives me full confidence that each of my units will sell for at least $2mm (excluding the Garden level). If an older condo with only 1 parking space can sell for $1.85mm...my extra parking spot alone should bring my units to $2mm let alone the fact that my units are bigger, brand new, and 1 of them has a private roof deck (and subjectively speaking, my kitchens are MUCH nicer than the comp's. The comp's kitchen is honestly quite pathetic for a $1.85mm condo. It's tiny and not impressive at all. Kitchens and bathrooms are the major selling points.)
BUILDING PERMIT:
Sorry for the digression...back to talking about the process. Once we closed on the property, I apply for a demolition permit which required a lot of bullshit documents like a demolition plan, contract with a contractor, GC license, worker's comp, and approvals from different departments such as water & sewer department, fire department, department of health etc...Once that's pulled, then my subs begin demolition while I work on pulling the building permit which required a lot of bullshit documents like architectural plans, engineering plans (civil, structural, if you're a big enough project then MEP's), worker's comp of all my subs, construction safety plans. Between the demo permit and building permit, it took me about 6 months to permit this project (once again...the city still wonders why housing is so unaffordable). The reason it takes so long to get a building permit is because when coordinating with so many parties (architect, engineers, multiple city departments, building inspector etc...) every "turn"/edit takes 2-4 weeks to get back to you and you can't get the feedback all at once. For example, after my architect and engineers complete and submit the building permit package, the building inspector takes 2 weeks to get back to me with feedback (the city has a general policy that it will need a bare minimum of 10 days to review anything), then my architect sends those comments to the engineers which takes another 2-4 weeks for them to make their round of edits and then they send it to my architect which takes another 2-4 weeks to make his edits. On this particular project I ran into 2 issues that significantly delayed my building permit. The first issue is that my idiot inspector (he's young and new) threw the book at me and told me that I needed full structural and MEP plans. I told him that we were hardly doing any structural work...just putting in 2 LVL beams in order to demo a bearing wall. A full structural set of the entire building would cost me $10k-15k, but all it would need to show is the calculation for 2 beams...I told him that it's ridiculous that I would need a full structural set for such minor structural work, so we went back and forth on this for 2 weeks until he finally agreed that calculations from a structural engineer showing that the LVL's are enough to support the structure is enough. My lumber supplier does this for free for customers..so i saved myself $10-$15k. Then MEP's...he was insistent that I needed full MEP plans...something that we have never needed before in previous projects. I told him that we have never needed MEP's before and that we design-build our projects..my plumber, HVAC guy, and electrician will figure out how to run the plumbing, duct work, and wires as we go. He tells me to call the plumbing and electrical inspector to see if I need MEP's...after another 2 weeks of trying to get a response from these 2, they tell me it's not needed for such a small project...you don't need MEP's unless you're doing like 10+ units, so I go back to my building inspector and tell him. He then asks the deputy building inspector who says that I do not need them...another $10-15k saved. The other issue was regarding Fire Alarm and Sprinkler systems. Since I was gut renovating a 3+ unit property, I triggered the building code for needing a Fire Alarm/Sprinkler system and the building inspector needed the FA/Sprinkler plans to be in my building permit set before issuing a building permit, but my FA/Sprinkler plans need to be approved by a 3rd party company and then approved again by the fire department. So my Fire Protection Engineer takes a month to draw up the fire protection plans, then I submit it to the 3rd party reviewer who gets back to me 2 weeks after submission to tell me he is now reviewing it (it's 1 motherfucking guy who reviews all the fire protection plans for this company). After another 2 weeks he gets back to me with a laundry list of comments that my Fire Protection Engineer needs to edit. After another 2-3 weeks my Fire Protection Engineer sends me the final drawings with all the edits. I resubmit it to the 3rd party reviewer and luckily it only takes him a week to review/approve it. Then I submit it to the fire department for their approval. Once again takes them 2 weeks to get back to me to tell me that the submission is incomplete because I didn't have a signed affidavit from my Fire Protection Engineering (the affidavit basically states that the engineer is responsible for this project). Within 24hrs I get my engineer to sign the affidavit and send the affidavit to the fire department...no response for 3 days...so I call the fire department and ask them if they've reviewed my fire protection plans...the motherfucker on the phone says to me "oh because you didn't submit the affidavit with the plans, the submission was incomplete so we haven't even looked at it yet." I lost my shit. Went off at him...I specifically remember yelling "Are you fucking kidding me?! I submitted these plans 2.5 weeks ago and you didn't review them because of a stupid affidavit that takes less than a day to get to you and you waited 2 weeks to tell me about the affidavit? This project costs me $500 a day in carrying cost...it's been 17 days since I submitted these plans and in those 17 days you've cost me $8,500 and now it's going to take you another 2 weeks just to review the plans, which will cost me another $7k. Is this normal? Does this sound right to you? I'm not some big time developer working on main street with a $10mm profit margin. I'm a small time general contractor trying to make a living." Fire protections drawings get approved within 2 hrs. Submit full building permit package to building department and get the building permit by end of the week.
4th Unit Variance Process:
Similar process to pulling the building permit. Same rules apply that generally it will take 2-4 weeks for edits to get back to you. Once my family and I decided that we want to try for zoning relief for a 4th unit, I went to the Zoning Board's hearing decisions page on the city's website to find the best zoning attorney. Turns out there's only 1 zoning attorney that everyone uses in this town. Call him up and tell him what I want to do. He is quite optimistic that we can achieve the variance. Sign his proposal and send him a retainer. The process for a variance in my city is 1.) Architect draws plans 2.) Attorney shops it to neighborhood and city officials 3.) Make edits based on feedback 4.) Shop it again 5.) If good, then schedule Zoning Board hearing. My architect wasn't able to work on the 4 unit plans until after he completed the plans for the 3 unit as of right building permit that I pulled in the "Building Permit" section (we pulled an as of right building permit for a 3 unit gut renovation so that we could begin construction while we worked on getting a variance for the 4th unit). Once we pulled the 3-unit building permit, my architect works on the 4 unit plans and sends them to the zoning attorney, the zoning attorney provides feedback before even shopping it around, another 2 weeks go by to make those edits, zoning attorney meets with the Planning & Development Committee to shop the plans around for feedback, the Committee comes back with a bunch of stupid comments (now keep in mind, these city officials are a bunch of power hungry fucks...according to my zoning attorney, you need to approach them with the mentality that you are seeking their sage and wise advice and that you need their help...they can truly wreck all your plans if they are having a bad day) such as these drawings need dimensions, can they make this building more green/sustainable?, we're afraid there isn't enough sunlight in the basement unit (bitch...the basement level unit is being sold at half the price of the other units...you know why? Because it is a fucking basement level unit with less sunlight...no one is going to die because of a little less sunlight...let the damn market price my basement condo you power hungry socialist.) I ask my attorney if I can tell them "no" to all their requests and he tells me I can. Zoning Board hearing is in 2 weeks and I send 70 letters to notify all the neighbors and ask them for their support. Also, if the variance is granted I will need to make a donation to the town's affordable housing fund. Not sure how much it will be but I think $10kish?
I will update this as the project progresses if people are interested, esp with actual sell out figures, but that wont be for another year. I will try to be as open as I can in regards to this project. AMA
Very nice. Love posts like these. Keep us posted.
Sick way to start starting off with the family. Bumping for visibility, interested in the results.
I'm assuming since your pops works in the industry that he already has significant connections to whatever political market you're in for the ZB and local DOB. Great example of how development is not only an execution and finance game, but also shows a huge need for political capital and ability to schmooze to an extent.
Thanks for the question! Actually, my dad has no political connections at all. He doesn’t play well with others and hates rubbing elbows. I used to think development was about knowing the right people and it certainly helps, but actually capital is the most important, not just for obvious items such as construction cost, down payment, etc… but to hire the people with those connections (zoning attorneys/lobbyists). Each town has a different zoning attorney that specializes in that town and knows the city officials. The attorney I’m using for this project hired someone who used to work on the Planning and Development department for this town. In another town that I work in, the zoning attorney I use knows the mayor and eats lunch regularly with the district councilor. If a developer is trying to pursue large scale developments like 50,000+ SF, then there are 2 or 3 consulting/lobbyist firms you can hire. These lobbyist firms employ former senators, former house reps, former chief of xyz department etc… In terms of pricing, these attorneys and lobbyist firms are not as expensive as you might think (obviously this is subjective), but the attorney im using on this project will only cost me ~$5k, but that extra unit will be an extra $1mm profit. The other zoning attorney charges $2k/unit he is able to get you so if he is able to achieve a variance for 20 units, it’ll cost $40k…but a 20 unit building is like a $5mm profit margin in that town. The lobbyist firms run about $500k per project, but they can help you achieve high rises in the hundreds of units. Obviously you also need to have the right project for them to help you. If you own a single family in a single family area and are seeking to build a skyscraper, no amount of political connections will help you
Ah so this is why I can’t buy a fucking house
Mfers out here just tryna find a place to live and then you have Real Estate Dealboi here absolutely juicing housing prices
Surprised this thread hasn’t taken off yet.
who is your capital partner (equity) on this deal? how did you source this capital partner (or are you just using family money)? what are you going to target for your next project, or are you going to find a new salaried job after this project is over?
No capital partners, all family equity. I have no plans of returning back to the corporate world and have a pretty sustainable strategy going forward. This project was a one off deal that really comes down to luck to find. My larger plan for my family’s business is to grow our real estate portfolio and generate fixed income (basically transitioning to more of a capital allocator than an operator). The goal is to make sure all our capital is working for us passively and then take on condo conversion/development projects actively
do you have any feelings of leeching or maybe leeching isn't the right word but since you wouldn't be able to do this unless you were doing it with your family do you have any feelings of being seen as just a family money guy? do you have a chip on your shoulder because of the family money setup?
I’ve met so many trust fund kids like this and they all have this insecurity but frdburger seems like a humble guy
I completely understand this perspective and why some people may view me as a "trust fund" kid and tbh there is nothing I can do about that nor do I care to, but personally I don't feel like this or have a chip on my shoulder for several reasons. The first is that I am not totally dependent on my family, of course to be doing the things I'm doing now I am because it requires a lot of capital, but when I finished my MSRE, I got job offers at top developers and REPE firms, so it's not like I was a deadbeat that could only get employed by my family. If I wanted to return to the corporate life, I think I could get those offers again, esp in development. Having worked with my family for the past year, I've learned infinitely more than I could ever have as an associate, DM, or even a VP/director at a big developer.
The second reason is that I know I am adding tremendous value to my family's business. I'm not just getting paid a salary to do some bullshit work because I couldn't get a job elsewhere. In this project that I'm working on, I've been solely running point on the entitlement process for the 4th unit (I also salvaged the deal, found the best lender/financing terms, and pulled the building permits). My family has never pursued a variance before and in fact, after we acquired this property, my dad told me to just forget about pursuing the variance because it was just a huge headache. I told him no. From the numbers above, that extra unit will increase this project's profit margin by $1mm and I intend to squeeze every possible dollar out of this project. I found the best zoning attorney and architect to work on it and I've been running the entire process. I am also working on entitling another project of ours. Once again, my family does not play well with others and they hate dealing with attorneys, city officials, etc...If I didn't join my family's business, they would not pursue these variances. Furthermore, I have a much larger strategy to grow my family's portfolio. The strategy is to acquire multifamilies, renovate them, and rent them out for fixed income and ultimately increase our portfolio and unit count. On average, post renovation, these multifamilies will generate ~$4000/month in positive cash flow to equity, which will equate to 15%-20% cash on cash return. Now $4k/multifamily may not seem like a lot, but if you can replicate this 10x, 20x, 50x...it adds up. My family never thought about leveraging their equity and creating fixed income. They thought that having a lot of debt is bad. It took me a year to convince them of the strategy and to prove the model to them. In the last year, we've acquired 3 of these "fixed income properties" and now my dad is fully on board with the strategy...because it works. Had I not joined my family's business, they never would have thought about pursuing this.
And lastly, I am highly cognizant of my incredibly fortunate background, but we are all beholden to our parents...some more than others. I'm going to make the bold assumption that many on this site had the good fortune of their parents paying for they college tuition. Are they leeches too? Where does "leech-hood" start? I had the option to completely separate myself from my parent's business if I wanted to. I would have taken the REPE job because that would have provided me the most lucrative career outside of my family, but I ultimately turned them down and also turned down a very large developer to work for an MM Developer because the MM developer was most relatable to my family's business and I always knew that one day I would return to my family's business and try to grow it...I just didnt expect it to be so soon. Some people in my situation may have a lot of pride and want to prove that they are capable on their own, even if it means lower earning potential and I totally respect that. I do not possess such pride. Financially speaking, no job I ever pursue can come close to the financial benefit of my family's business and I just don't see the point of leaving that all on the table because of pride. And just for the record, for most of 2020 I was not being paid by my family. I have a corporate credit card for food, gas, etc...but not until those 3 "fixed income" projects came to fruition was I salaried. I officially have 0 equity in the family business (when I was creating the LLC, my attorney asked me how much equity I would have and how much my dad would have. I told him that my dad will have 100% ownership). I hate talking about how equity will be divided between me and my siblings (my siblings do their own thing and have nothing to do with the family business) because ultimately I'm not really doing any of this for money. Obviously making a lot of money is awesome, but for me it's the thrill of each deal/project and having a vision/plan and achieving it.
I learned a lot from this project. The reason I decided to make this post and be so open was to show some monkeys in the community what true real estate development is like, especially when you are the owner. Many of the community members are juniors who are siloed into 1 job function (usually acquisition/finance). But development is so much more than acquisition/financing. There's so much politics/bureaucracy involved and ultimately development is about project management and solving problems. Almost everything I wrote in this post was new to me and I only recently learned them. There's also a lot of talk in this community about "going off on your own" and becoming the next Tishman. I also wanted to show some in the community that you don't need to be building institutional developments to make good money in real estate. A couple years ago, I spoke with the owner/president of a very large developer in my city. His advice to me was not to pursue institutional projects, esp not urban mixed-use because those projects are so sought after and every major firm and their mother fights for them. His advice to me was to work in the sub-50 unit market because there are a lot of unsophisticated players and it's much easier to find good deals.
so guy with like 6 months of RE experience and leaves the corporate world (got fired) and joined dads business, dad sources off market deal and provides capital, guy goes through variance process for the first time (forwarding emails back and forth to attorneys), then guy posts on WSO about how he already knows way more than people working corporate RE jobs anyway.
this post is the weirdest flex i've seen in a long time.
As written above ^, completely understand this sentiment and not much I can do about it. If getting laid off and fired is the same thing then I guess I just joined the tens of millions that got fired in 2020. As for knowledge, you'd be surprise how much you learn from one project from cradle to grave when you're working on every aspect of it. Once you've done one, the next project you do is 80% similar (what would be so different?) My previous boss was the executive president of the MM developer and worked only on financing deals his entire 30 year career...he could not manage a development project. Once the deals were financed, he never worked on them again. Also this is only one of several projects i'm working on. I sourced 3 of the other deals. As I stated above, the point of the post was to give a detailed breakdown of the entire project because when working in the corporate world, very few see the entire deal and really get into the weeds. A lot of real estate monkeys also talk about going off on their own and start building 100 unit properties, which quite frankly is a very unrealistic goal that very few of us (if any) will ever achieve. The post was also to show that real estate can be very lucrative at much smaller scales. Sure, the numbers in this project are very high...but that's because the market it is in is the most expensive. One could go to one of the up and coming markets where prices are a 1/3 to 1/2 the price (still a lot, but definitely more achievable) and do condo conversion sell outs there and still make a lot.
If I came off as arrogant in the post I apologize, there were sentences where I tried to be funny and maybe rubbed you the wrong way and there were sentences where I began venting (esp in the building permit section), because it was frustrating rethinking the process and I didn't bother to edit those parts. Cheers
No worries, I was giving you a hard time because some parts of the post came off as arrogant/naive to me, but from your response it doesn't seem like you're a bad guy or anything.
FWIW I actually have a somewhat similar story to you - worked REPE for 10 years, got some money from a deceased relative and immediately quit to buy/manage small multis on my own. Just remember not everybody is as lucky as us.
A few q's, did you fund it entirely through equity? Was there any thought about getting a construction loan?
Also, what you mean by these "fixed income properties", like just becoming a landlord? Because that's very different from fixed income.
No, only the down payment was equity. Got a construction loan for 80% of the acquisition price and 100% of the hard and soft costs.
Yes basically just becoming a landlord and growing our property/unit count. The goal is leveraging up my family's equity and putting it to work, which we were not previously doing or at least not maximizing our risk adjusted returns. Holding real estate as long term rentals can be seen as "fixed income," just not passive.
exciting
Curious what the rationale on levering up to 80% debt was if you knew it was such a home-run basis. Did the lender buy in on the basis as well and give you comparatively attractive debt terms where 75% to 70% leverage wasn't even an afterthought? Can't imagine that's the case with for sale condos.
Exactly as you said above IRRs don't even make sense, while equity multiples are a better way to gauge returns, nothing beats nominal dollars.
Not looking to pick any holes in your execution here/pot of gold sourcing, happy you all pulled it off and made a great multiple. Quick lesson in making sure your PSAs are iron-tight...
Just wondering if looking back you wish you had more skin in the game when an absolute screamer of a deal lands in your lap...
Not entirely sure how to answer your question. Maybe I'm misunderstanding it? Isn't the general goal to maximize returns/multiples by having less skin in the game and leveraging up? Regardless, in the past, my family wouldn't get construction loans. They would get regular financing for acquisition (75%-80% LTV) and then finance the construction out of pocket. I did not like this capitalization at all because it tied up too much equity for too long. My construction loan is only 4% rate. I'd rather leverage up and pay 4% and save our dry powder for other deals. Also at this scale, getting financing at 75-80% LTV and 100% construction cost is standard in my market
Your answer makes sense, all capital situations are different, and the need to recycle equity is a great reason to lever up. Wish that cost of capital existed for debt in light value-add industrial 4 years ago... great pricing.
Dollars in and dollars out are the real point, and circulating capital for you guys very likely created much more value than increasing your stake in that deal.
On the flip side, assuming the money is just sitting in an account... risking more dollars still would have made you more nominal profits at the end of the day despite showing a lower multiple or IRR. And depending on your perceived risk of the transaction that could be very attractive. But using that capital for additional deals (that are still comparatively accretive enough) would make more sense if you are topped out on capital.
I invest on behalf of major corporate institutional pension funds focused on making nominal dollars, not necessarily higher percentage returns. At that deal size rangW capital can be tougher to replace immediately with new quality investments. They actually elect to take lower leverage debt at 55-60% despite going up to 65% wouldn't impact rates materially... Same goes for some major HNW families I work with. EMs and IRRs don't mean jack shit when you already have a few $100B or $100M to your name as it won't move the needle. I agree it seems counter-intuitive as I also am not sitting on milliions and pissed they are taking up to much room in my bank account.
Thanks to offer such an informative post, keep sharing more knowledgeable content.
I swear if you work in investment banking you will build 100 sensitivity tables and then realize all you need is that worst case deal to make sweet $$$.
Great post. As a person that joined a family business, can you further opine on how
You intend to grow and scale your fathers business? Is that someone that you think about a lot? In other words - do you ever question if you’re not providing enough value? How are you learning/who is teaching you since your boss is basically your dad and he has never been through a variance? Are you essentially in the school of hard knocks and learning yourself or as you go? I’m assuming you’re in your twenties but I would always think to myself how I can grow the family business without getting a lot of prior experience from other firms and bringing that knowledge in as a ‘value’ at the family gig if that makes sense
As stated in some of my responses here, my goal is to create a larger stream of fixed income by growing our real estate portfolio. The general strategy is acquiring multifamilies, renovating, and renting for the long-term.
In terms of adding value, I do not think about whether or not I am providing enough value or not. My plan was always to eventually "take over" my family's business and grow it, but never really knew how nor thought about it. It all kind of happened by accident. I ended up working at MM developer, learned some of his strategies and realized that my family's business could implement these same strategies and now I am working on implementing that strategy with my family. Since I brought this new "strategy" to my family's business and I'm working on executing it, I know I am adding value. I understand your question of "am I constantly trying to add value?", but it also doesn't really apply to my situation. I'm not constantly thinking of new ways to innovate. Basically, we have the cookie cutter formula, it's just a matter of finding deals that match out formula and executing. No need to reinvent the wheel or think of new strategies if this one is working fine.
Yes I am learning as I go and to be honest...it's not rocket science. I also have my dad who is 30 years in the business so I discuss every major decision with him, but generally speaking everything is pretty common sense and just problem solving. My job is really just a project manager, so I don't have any super technical skill. I hire architects, attorneys, etc... and I have to coordinate them. What I've found is everyone only thinks about their own function and It's up to me to see the bigger picture. For example, my attorney may suggest that we design our development a certain way that the zoning board likes, but doesn't necessarily meet building code and so my architect won't draw it and so they are both kind of stuck in their own specialties and do not understand the other's needs. So I kind of need to take into account everyone's interests, constraints, etc... and coordinate things. I understand the mentality of "I haven't worked for 10 years, so I can't possibly do my own business," because I used to think this way. When I finished my MSRE, I had these long plans of working in REPE for 3-5 years then working for a developer for 3-5 years before joining my family business because how could I possibly join the family business with no work experience? My dad told me to have fun in the corporate world and good luck because he would be retired by the time I was "ready." But after working at the MM developer for 2-3 months, I was honestly ready to join my family's business. I learned 95% of everything they had to offer. My role was acquisitions and financing...so building models, working with appraisers/lenders, due diligence...honestly once you do this 2-3x it's the same shit..I wasn't going to really do anything different. But in those 2-3months, I absorbed every deal they ever worked on, learned all their connections, and learned different strategies. In real estate what you need is 1.) the deal, 2.) the capital, 3.) the right team. My family had 2 and I just learned 3 from the MM developer. Now all we need is the deal. I will say that one huuuge asset that my family has outside of capital is construction knowledge and constructing in-house. This allows us to build much cheaper than developers who hire a GC and also make decisions much faster
hey just wanna say thank you for putitng all these details out there. i know you got some shit for it but quite frankly this is how money is made in real estate and so many of these monkeys should at least be made aware of these little deals out there.
i think you're right to hang onto some income-producing stuff to help you scale over time (if you can swing it) and also, because i am familiar with a group (or two) with the in-house construction expertise you mentioned, i will say that it can limit your 'current volume' (as you probably have been informed or have learned by now) but does not have to be seen as a limitation on your ability to build wealth. the three families i know with in-house construction expertise are either in the 1 BILLION dollar net worth neighborhood or at LEAST hundreds of millions. clearly going in-house did not slow down their ability to create wealth.
Ut laborum laboriosam reprehenderit alias qui soluta id. Iste alias ea quaerat eius in ut culpa. Numquam praesentium et ut vel voluptas veniam repellendus.
Unde blanditiis nam quia quae voluptatem quis. Voluptate cumque ab eius.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Rerum nihil ut necessitatibus distinctio. Nisi illum ipsam laboriosam et saepe qui ut. Dolores enim similique quo expedita. Fugit ut est voluptatem. Aut qui voluptatibus maiores itaque iure cum.
Consequatur impedit enim aliquam ea earum nisi. Quisquam dolorum at aut et. Quia modi consequatur voluptatem voluptate id. Laborum eaque in repudiandae sit. Quidem consectetur est ut voluptatum explicabo in. Laborum nihil tempora dignissimos fugit vero et fugit.
Quo nihil consequatur ut modi quos non. Enim voluptas sed et necessitatibus. Officiis culpa voluptatem et ut nisi.
Et sequi sit maxime odio non ea. Tempora aut vero dolor placeat eum quam. Totam optio occaecati eum rem totam ut maxime. Itaque ea sed et deserunt magni non.