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Steven Fletcher

I tell everybody I like that their first property needs to a multifamily purchased through the FHA (Federal Housing Administration) program.


Why?


You only get so many opportunities to put down less than 20-25% for an asset that can make you money and/or allow you to live for free, nonetheless a small apartment building.


With an FHA loan, you can put down as little as 3.5% for a 2-4 unit structure, move-in, improve it, and control an asset you couldn't take on with a higher down payment (all while learning the nuances of underwriting, lease agreements, management, marketing, maintenance, and renovations).


The typical buyer for these properties are people like you: somebody who wants to own, save money, and create some value along the way.


The goal isn't to learn how to fix toilets and re-seal windows.


Sentiments are different if you're purchasing an asset to live in vs. rent out- individuals are willing to pay a premium for personal uses and you'll likely be competing against them for these property types.


This will make the acquisition process harder but also exposes a reality in many markets.


The properties that qualify for the FHA program are often valued at a premium to comparable ones given the lower down-payments, credit requirements, and personal attachment for buyers that use it.


It's not about yield for most- it's about controlling overhead.


After 1 year, you can lease your unit and operate the property or continue to live there- some nice optionality.


The first property doesn't need to be a home run, but it should provide avenues to add value and be able to pay for itself once you're gone (and with a return if you do it well).


Over time, that small multifamily property will continue to marinate as you live for free, tenant's pay down your debt, and the land/structure hopefully appreciates.


The hardest part is putting the seeds in the ground- getting the down payment together, due-diligence compiled, securing a strong entry price, finding somebody to check your work, etc.


Bad things will happen but if you stay the course, you have a great outlet to grow your personal wealth and knowledge.

Steven Fletcher

We often get asked why we favor long-term holding periods vs. selling assets every 5-10 years.


The answer has a few components:


1.) We target supply constrained markets where it’s incredibly difficult to execute construction (historic districts, geographic constraints, etc.) and build new apartments.


Meaning, it’s tough to source product in these locations (let alone ones that pencil).


If we sold every 5-10 years, we’d need to re-enter the market to source the same asset.


Because we intend to be in these areas for extended periods of time, it’s best to retain good properties within them.


2.) We focus on cash-on-cash yield and don’t forecast exits.


-If we receive a Godfather offer, great.


-If not, we’re happy to hold on to properties given our tight buy box.


-Our underwriting, renovation, and management processes are driven by long-term outlooks- we refuse to underwrite future market conditions.


3.) Tax Advantages (not a CPA, do your own homework here*).


-Debt financed distributions (refinances) are tax free (again, I’m not a CPA*).


-Selling will incur capital gains taxes and force redeployment of capital.


-Through opportunistic refinances: we can return (some or all) principal, control the asset, and continue to generate yield without selling.


-A win win in our book.


4.) Longer runway for (potential) growth


-We don’t account for appreciation, but we do seek out walkable A+ locations where young professionals want to live.


-Our thought process: If it’s difficult to add new inventory to the area and if it continues to be a desirable place for people to live- signs point to future growth.


5.) Risk.


-We don’t lose sleep if property values drop.


-We don’t need a certain exit price per sq.ft, and thus, favorable market conditions (though downturns still affect rents and that’s why we ensure the asset can withstand a 20% hit to them).


-We don’t need to sell an asset to fully execute the business plan.


There are many strategies and ways to make money in the space.


This approach cultivates what we hope will become a generational portfolio.

Steven Fletcher

One thing we've experienced in expanding into a new market:

 

A learning curve.

 

Every city has countless sub-markets and within those are corridors that are unique and bring their own quirks/amenities into the picture.

 

It's very easy to drive a city over the course of a few days and occasionally pop out for a coffee.

 

But this will leave us with a baseline experience and unsure of our own underwriting.

 

We need to source the local’s perspectives on the location(s), integrate them, and then create our own thesis with this information.

 

Meaning, we need to understand:

 

-we can't go past X street without experiencing crime

-X corridor is the lifeline of the neighborhood

-what bars/restaurants are favored/hated by residents

-what areas are transitioning (and in what direction)

-how walkability decreases after X avenue

-where are target tenant base lives and why

-plans for future development or infrastructure (these can often take 10 years to materialize, don't be too early)

-the streets between X and X present a parking nightmare for residents


Our Process:

 

1.) Take extended trips to fully understand the market, sub-markets, and the residents within them. A lot can change in 100 yards and the quiet neighborhood we toured on a Wednesday night might turn into an NFL pregame location on Saturday.


Source the landmines in that market: Corridors plagued with crime, areas of low density, retail dead zones, and whatever else could antagonize our strategy.

 

2.) Create our baseline: Pull countless P&L's from listings, insurance quotes, assessment records, and old permits to form expectations for operating costs.

 

3.) Validate operating costs: contact local trash/landscaping/property management companies to confirm the $X charge listed on the P&L is on par for a building of that size (most of the time it isn't ha), leverage the assessor's office to nail the future tax bill amount, splice through insurance quotes to ensure competitive pricing, confirm permit processes and typical timelines (each city is different), source renovation costs on a per sq. ft basis (this takes time), etc.

 

4.) Take reps: create our map, source the assets within it that fit our menu, see who owns them, and underwrite them (even if they're not for sale).

 

5.) Assemble the team we'll need to operate.

 

6.) Keep our ear to the ground on local politics, property transactions (even if they don't fit our menu, it's good to know who's doing what in the city), new developments, and don't stop talking to brokers.

 

With enough reps, these processes get refined and ultimately allow us to move quickly (good things don’t sit).

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