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Commercial Real Estate Pro Network

Commercial Real Estate Professionals who work with Investors, Buyers and Sellers of Commercial Real Estate. We discuss todays opportunities, problems & solutions in Commercial Real Estate.
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Now displaying: March, 2017
Mar 31, 2017

They say hindsight is 20/20, and I have new knowledge to share that would have been good to know when doing a plumbing inspection.  

 

Recently we purchased a 12 unit apartment building in FL.  Our due diligence checked all the boxes, except for one; a thorough plumbing inspection.  

 

When I spoke with our plumbing inspector, he provided two options;

  1. Do a complete inspection including all lateral waste lines.
  2. Inspect the waste line stacks from the roof to the street.  

 

For those who have not had a plumber scope your lines, it is comparable to a colonoscopy for your building.  The plumber puts a camera through the pipes to see what’s inside.

 

Given my experience, as a property owner, investor and as an insurance broker, I felt confident that the waste line stack inspection was appropriate.  On a couple of properties we own, we have had to replace the waste line from the structure to the street, as well as water mains due to tree roots growing into the waste lines, and growing roots pressing against the main until it broke the line.   

 

If I knew then what I know now, I would have selected the complete plumbing inspection including the all the lateral waste lines.  But then, I would not have had the opportunity to meet Ann McClellan with Roman Plumbing of Central Florida, who I highly recommend if you are in Central Florida and have an old building with older plumbing.  

 

What I have learned about a plumbing inspection

Old buildings have old plumbing.  If you are considering buying or currently own a building that is older than thirty years, you have some potential repairs in your near future.

 

The easiest way to test the plumbing and see if there is a problem.  Turn on all the fixtures to see how the drains handle the water.  You will learn a lot. If all the water disappears down the drain, you are in great shape.   If not, well, you will have to figure out what the problem is and how to fix it.

 

Additional things to know when doing a plumbing inspection.

Supply lines:

The water main supplying water to the property from the city is an underground pipe until it gets inside the building.  From the building to the street, it is difficult to recognize a problem until you get your bill.   If all fixtures are turned off, and you observe the water meter moving, you have a leak.  Also, if the bill is abnormally high, you likely have a leak and need to replace or repair the line.  

Inside the building, broken supply lines will give themselves away when they leak. Look for wetness, staining, and sounds of running water for clues for where the leak is.  

The biggest danger is if no one is around when a pipe breaks.  Water that runs for a long time can cause damage throughout the property.

 

Waste lines:

The main stack from the roof to the street is made from some of the most durable material, cast iron.  Failure in these is usually detected when the drain backs up.  Standing water can cause older pipes to rust, which opens the pipe to outside elements, roots, etc.

Lateral waste lines, when under cabinets, can be easily identified.  Once they go behind the wall, problems are not as easy to recognize.  In a block building where corroded pipes leak, it will fester and cause unwanted odors.  

 

Regular wear out items

Hot water heater

The average life expectancy is 7 - 10 years.  If yours is older, you are on borrowed time.  If you see any rust, or leaking on the ground, you will need to replace.

 

Fixtures

Faucets, dishwashers, garbage disposals, all wear out and need to be inspected regularly.  Faucets need to regularly have the washers or cartridges replaced.  Be sure to look for drips under the sink in the cabinets in addition to in the sink or tub.  

Toilets that run continuously are probably in need of a new flapper.  If you find water on the floor, or the floor around the toilet is soft, check the supply line fitting.  

A wobbly toilet is a sign the bolts holding the toilet to the flange need to be tightened or replaced.  When replacing any bathroom flooring, always replace the wax ring and the bolts.  

 

For more contact:

Roman Plumbing of Central Florida

(321)242-6700

Romanplumbingcfl@gmail.com

 

Links to additional information:

https://en.wikipedia.org/wiki/Drain-waste-vent_system

http://www.diyadvice.com/diy/plumbing/prep/drain-system/

http://www.watts.com/pages/_products_sub.asp?catId=70&parCat=131

https://www.biggerpockets.com/forums/32/topics/104177-commercial-building-inspection---checklist

Mar 24, 2017

Clean Carpet is a must for landlords looking to attract new tenants.  The cost to replace carpet is significantly more than the cost to clean it if cleaning is possible.  

 

The prospective tenant’s first look at an available unit is a lasting one.  Stains, smells, and worn spots will keep a tenant from renting your unit.

 

For your FREE Guide for Property Owners & Manager click here

 

If your market has low vacancy rates, you may be able to get away with less attractive carpet.  However in a market with higher vacancies where tenants have more opportunity to chose from available units, you will need attractive flooring to compete.

 

Life Expectancy

The average life expectancy of carpet varies from five to ten years depending on quality of carpet, traffic, care, etc  It is estimated with regular cleaning that the life can be extended up to twice the average.

 

Cleaning Frequency

The manufacturers recommend that you clean the carpet once per year.  Realistically, this may be more timed to tenant turnover.  Some landlords and property managers offer free annual cleaning to their tenants.  This can be a smart way of gaining access to the property to inspect for any needed repairs, as well while extending the life of your carpet.  

 

Cost of Accepting Pets

Many tenants have pets, and landlords are willing to accommodate.  Oils in the pet’s coat combined with the size and type of a pet, can accelerate the need to clean and cost to replace the carpet sooner.  Something to consider when agreeing to allow tenants with pets.  

 

How to Choose a Carpet Cleaner

The IICRC provides the carpet cleaners with training and ongoing education for professionals wanting to stay on top of the latest tools and techniques for cleaning carpet.  This designation is a good starting point to look for when considering a carpet cleaner to hire.  

 

For more go to:

ORCA Group NW

206.371.9632

Mar 17, 2017

Real estate investing strategies vary from investor to investor.  Some prefer the fast cash of Flipping, while others prefer the long view of Buy and Hold.  Active investors make it a full time occupation, while passive investors may remain employed beyond real estate.  There is no one way to invest in real estate.  The important thing is to do your homework, and get started.

 

Why do real estate?

Many people feel they need to get into real estate because it is in the news, low interest rates, big rent increases, and everyone is doing it.  Because everyone is doing it is not a reason to get in.  

 

How to get started?

No matter who you are, or when you start, the first deal is always the most difficult.  It’s new to you, and there is a lot to learn.  Regardless of how much you think you know, you will quickly learn lessons you did not think about before investing in real estate.  

 

Know the numbers!  

If you think you are making money because the rent you are collecting is more than what you need to cover the mortgage, you may be upside down.  Don’t forget to account for things like, taxes, repairs and vacancies.

 

For your FREE Deal Workbook, CLICK HERE:  

 

What strategy is right for you?

Flip for cash?

If you decide to flip, you can make some amazing returns fast.  To be successful at flipping, you have to understand the marketplace!  Know the most you can pay for the property and the most you can invest in the upgrades.  If you mess this up, you can lose.  

 

As a precaution, it is best to also know what your plan B is.  If the market changes, how much can you rent the property for?  Many investors start out as flippers, but end up as landlords because the market changed.

 

Buy and hold?

The marketplace is dynamic.  It goes up and down.  If your plan is long term, you may struggle in the beginning, but if you can weather the downs, you will come out ahead in the end.  Some basic principles of wealth building through real estate investing:

  • Loan principal reduction
  • Property value appreciation
  • Rent increase
  • 1031 Exchange: The chance to upgrade your investment and leverage into larger properties will significantly increase your wealth.  

In the beginning, it can be a struggle when you borrow every dollar you can, and cross your fingers that nothing breaks, and that everyone pays on time.

Overtime, the equity due to principal reduction and appreciation can be significant.  But nothing grows if nothing starts.

In order to be successful, you have to do your homework.  Talk to investors, learn the lingo, understand the market, and don’t do something because you fear that you will miss out.  

Mar 7, 2017

Owning one property is manageable for most investors.  One problem, one unique solution.  However, for true wealth, multiple units are the goal.  To accomplish this without going crazy, or broke, you need systems for success.  

Systems provide direction, a playbook, for what to do when you or your staff face a situation.  Knowing what to do, how to do it and who to call when a crisis shows up, gives you the confidence to have a predictable outcome and freedom to focus on other matters like growth.

We spoke with Matt Faircloth from The Derosa Group about systems for success. Matt is an investor, flipper and multifamily syndicator.  In order to grow, he developed systems that are written in pencil because he recognizes that if a better solution is recognized, he wants to use it.

System for Success in Property Acquisition:

1) The first step is to do a Market Analysis.  If it is your local market, it is easy to know the different areas of town and their reputation.  

If you are not familiar with the area, you need to find the answers to the things you cannot change:

  • Crime statistics: the type and frequency of crime committed in the neighborhood.  
  • Local area median income:  Can your potential renters afford the rent you need to get?
  • Affordability index: Are there enough potential residents that can afford the rents you want to charge?
  • What are the market rents for similar units in the area?

Additionally, answers to these questions will tell you if the area is on the upswing:

  • Is the population growing?  Is there growing demand for housing?  
  • What is the unemployment and employment outlook?
  • How many major employers are there in the area?

2)  Evaluate the Property:

If the area checks out, it’s time to evaluate the property:

Do the numbers work?  This is where you go line by line with the information available in the offer.  (Click here to get a FREE DEAL WORKBOOK)

  • Actual Rents: it is good to know the market, but start with actual rents.
  • All Expenses: Line by line, what will it cost you to operate the property?
    • Insurance
    • Trash
    • Water
    • Etc.

 

If the numbers work, it's time to do the physical inspection.  

3) Physical inspection: The key to the inspection, don’t start inside the units.  Start with the systems.  What is lurking that is going to cost you money:

  • Roof System?
  • Electrical system?
  • Heating System?
  • Windows?

If you have a major expense and the seller is not willing to work on the price, move on.  

Bonus: If you can, ask tenants you see what do they think of the property.

Then look in the units.  What can you do to add value?

  • Remember, if there is a tenant in the unit paying close to market rent, the unit is fine!
  • What is your competition doing?  You may need to do some undercover work to see what are your potential tenants looking at when considering renting your property?
  • What is the benefit to doing small improvements?
  • How attractive is the property, what can you do for minimal to approve the curb appeal?

 

If everything looks good, you are ready to make an offer.

4) Make the offer

  • Use a Letter of Intent.  This allows you to present your offer without the contract back and forth.  Once you have an agreement on the the basics, you can go to the contract.
  • Include with your Letter of Intent a list of the issues you found during your inspection that will need to be overcome.  If the roof has five years left, identify the cost of a new roof in five years.
  • Prove to the seller that you can close.  A letter from your lender with a commitment to lend really helps.

 

Now the clock is ticking.

5) Due Diligence:  You have thirty days to confirm everything you believe to be true now.   

  • Financing: Where are you getting your funds?
  • Bring in your team to verify what you think is the case:
    • Contractors for roof, heating, electrical, plumbing.
    • Insurance
    • Trash
    • Utilities
  • Get a copy of all the contracts that stay with the property:
    • Leases
    • Laundry
    • Trash
    • Utilities
    • Certificate of occupancy

Usually there will be something that comes up.  This is your chance to address the seller to renegotiate if needed.  If everything comes together, you will be the owner of a property.

Congratulations!

6) Operation: Now you need systems that cover the day to day operation including:

  • Management: What are the daily, weekly and monthly tasks management needs to perform?
    • Property Management walk through frequency
  • Bringing the property up to market rents:
  • Get to know the property and the residents personally.  Let them know you care.
  • If you have any bad apples, this is the time to identify and get them to move along.
  • Tenants: What is your tenant selection process?  What are the minimum standards?
  • Having unit standards will simplify the turn process when tenants move out, including:
    • Color of paint
    • Floor coverings
    • Cabinets

7) Refinance: If you are in a syndicate, this is the time to pay your investors.

8) Repeat

 

For more information goto:

http://www.derosagroup.com/

https://www.youtube.com/user/derosagroup

Mar 3, 2017

Due Diligence is a timed process for the buyer to inspect and confirm the information about the property and the deal before any money is lost.  Most buyers focus on the physical characteristics and the financials of the property.  They look at the condition and age of systems, roof, maintenance, etc.  On the financials the focus on the Net Operating Income.  If everything checks acceptable, they move forward.

These simple and obvious features are easy to identify and verify.  However, they are only part of the story.

In order to know the “rest of the story”, you need to meet with the seller and determine why they are selling the property.   The seller’s motivation can open the door to opportunities in creative financing.

One of Doc Haller’s students, presented an opportunity to purchase a $3M property operating in excess of 10% NOI.  There was only one problem, the student lacked the $1.2 M required to close.

During the due diligence, several things were learned by reviewing the tax returns and the loan documents:

  • Property was held by a corporation.
  • The existing note from the bank, in the name of the corporation, had 9 years remaining on the term.
  • The banknote did not have a due on sale clause for change of corporate ownership.
  • The seller did not need the cash from the sale.
  • The seller needed to remove the debt from his balance sheet in order to proceed with another project that he needed financing for.

 

Using what you learn in due diligence

If you know why the seller was selling, you can get creative with your offer.  In this case, the buyer was able to apply the knowledge gained during due diligence to offer a creative solution:  

The buyer provided a Letter of Intent to purchase the entity.

  • $2.5M offer for the stock purchase.
  • $250,000 Down
  • $25,000 for closing
  • $250,000 Seller carry back

The bank tried to stop the transaction, but realized they had no leverage to call the note.  However, the bank did call the ten percent guarantee, $200,000 from the seller.

In light of this requirement from the bank, the seller requested an additional $250,000 collateral from the buyer, until the seller was reminded of a forgotten fact.

 

When due diligence pays dividends:

Hidden in the tax returns, beyond the view of the accountants and attorneys, was a note on the tax returns.  In exchange for the cost of the tenant improvements & betterments for the restaurant tenant, the seller had received thirty percent ownership of the tenant, a restaurant that annually provided in excess of $80,000 income to the seller!

The buyer now had the leverage.  Instead of keeping the stock ownership of the tenant restaurant, the buyer agreed to dividend the stock ownership of the restaurant to the seller, which was clearly valuable to the seller.

Summary:

By examining all the seller information available to the buyer, the buyer was able to:

  • Buy a 10+ CAP building at a 17% discount increasing the CAP to over 12%.  
  • The downpayment required was only ten percent of the offered and accepted price plus $25,000 for closing.  
  • The buyer was able to retain the financing in place with a 9 year remaining term.
  • The seller retained his ownership in the restaurant tenant providing more than $80,000
  • The buyer picked up a property providing over 100% annual cash on cash returns.

 

For more information go to:




Commercialrealestatementor.org

 

Free White Paper: “How to Escape the Residential Rut”

 

Commercial real estate active training program with Doc Haller special offer:

For listeners of CREPN Radio, Doc is offer a 50% off discount.   The course normally sells for $2,000, avaliable to listeners of CREPN for half off:

1 payment = 50% Discount  code: CREPN

6 payment of $200 Discount code: CREPN6

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