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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: April, 2019
Apr 25, 2019

Commercial Real Estate Due Diligence is the key to buying right.  If you fail to underwrite properly, you will learn the hard way.

Brian Hennessey, is a 30 year commercial real estate veteran.  He has learned and authored multiple books on commercial real estate, including, “The Due Diligence Handbook For Commercial Real Estate”.

FREE 14 Page Comprehensive Due Diligence Checklist for Real Estate Investments

TEXT “CRE” to 444999

After  18 years as a commercial real estate broker, Brian took a position as VP of acquisitions for one of his clients.  How different could it be from the broker role versus working for the investor making acquisitions?

The first large office deal almost got Brian fired.  The seller quickly realized Brian did not know what he was doing and took advantage of Brian’s lack of experience.  The steps Brian missed during due diligence his boss dearly and almost cost Brian his job.

Brian had a choice to make.  He could either walk away and go back to the broker side, or he could create systems to make certain he never made these mistakes again.

From this point, he created a reference manual.  He included questions to ask, issues to be aware of and checklist so that he would not miss these items again.  For the next 6 years, he used, and added to his reference manual while he oversaw the acquisition of over 9 million sq feet.

Back to Broker

When he returned to the broker side, he made his reference manual available to clients and prospective clients as a tool to help differentiate himself and his expertise from other brokers.  His clients loved it.

This is when he decided to spend the money to properly publish it on Amazon, where it remains a best seller for commercial real estate due diligence.

Old school brokers did not want to show up at physical inspections.  They felt it opened themselves up to problems. So, to avoid problems, they left due diligence up to their clients.

Now, a good broker has to be present at the inspection.  If your broker doesn’t know something, a responsible broker needs to find professionals that do.  There is too much at risk. If the broker ends up in court and the judge ask if he was going to be compensated for the sale, the broker will be held responsible.  

Top commercial real estate brokers are making due diligence a priority.  They are bringing professionals onto their team; attorneys & cpa’s, etc.

Due Diligence Mistakes

Due diligence without a process or system is a recipe for disaster.  To avoid common simple mistakes, create a process & system will help you make an informed decision and avoid the deals you should never do.

Remember, the seller will not come to you with a list of things that are wrong.  They hope you don’t find anything wrong. They want to get the deal done.

Common Due Diligence Mistakes:

Mis-value the property.  There are two values to consider when buying a property.  The “pre” due diligence value versus “post” due diligence value.  One reflects the value with no adjustment to fix the needed capital improvements, the other has been adjusted to reflect the cost of the work needed to operate the property profitably.   

Lender underwriting requirements.  Pick up the phone and talk to a lender about what they can do for you and what they need from you.  Do this before you sign a purchase agreement. Otherwise, you are wasting everyone’s time.

Local compliance.  Take the time to personally go to the city or county that governs the building codes for the property. Find out if codes are coming that will affect you and your operation of the property.  It’s one easy conversation that can alert you to any coming issues the seller may not be aware of.

Tenant leases.  When you buy commercial real estate, you are buying the income stream.  If you do not know the quality of your tenants, and their ability to pay, you can end up with unnecessary vacancies and collection problems that will not help your bottom line.  

Third party reports.  Every lender requires various third party reports; inspections, soil, appraisal, etc.  Most lenders are limited to using reports provided from their list of approved providers.  Make certain you know who is on the list before you order any reports. Otherwise, you will likely get to pay for the report twice.  

Inspect the Closing Statement.  It takes time do all the due diligence.  The preliminary closing statement is your chance to go through all prior communications and confirm that everything is as it is supposed to be.  Professional sellers are notorious at adding fees to the closing statement. If you do not ask for the closing statement in advance of the closing and review the numbers line by line, you will not get the deal you planned for.  Get a second set of eyes to check the numbers. Ask questions, get proof.

Walk the entire property.  Inspect what you expect.  Once the deal is final, every defect is yours.  Even if you have a claim against the seller, you will be tied up in costly litigation to get your correction.  Inspect everything,

Talk to vendors.  Vendors that service the property know the condition and quirks of the property.  If you don’t ask, the answer is always no.

Spend time at the property.  What is the property like in the evenings, on the weekends, in the morning and middle of the day.  If there are issues, these will become your issues. Know what you are buying.

Once you learn how to do Due Diligence properly, brokers and sellers will know and will be forthright with the information.  Learn how and create your process and systems to do it right everytime.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK:  Assume everything is ok.  

How to manage the risk?:   Assume Nothing, If you assume anything, you have to assume there are problems everywhere.  When you know how to do the deep dive on due diligence properly it will minimize the risk.

 

For More go to:

https://impactcoachingsystems.com/

FREE 14 Page Comprehensive Due Diligence Checklist for Real Estate Investments

TEXT “CRE” to 444999

Apr 18, 2019

Underwrite a Multifamily Market before you invest in a property.  Before you fall in love with a property, you have to learn what is driving the market.  

Anna Myers, Vice President of GroCapitus, identifies key indicators of a healthy housing market.   When these are present, you protect yourself and your investors from financial loss.  

Since 2006, Anna has been a long distance real estate investor.  She invested in single family and land before focusing on the benefits of multifamily. Today, she and her investors focus on class C properties where they can do value add improvements and force appreciation.

The Multifamily Market

First things first; there is not a national multifamily market.  Every Metro Statistical Area, MSA, is its own market and must be underwritten separately.  Each market has its own economy which are influenced by geography, resources, area businesses and population.

Population size

Population size reflects potential number of renters.  While it is best to be in a larger market with multiple large employers and well paid employees, don’t overlook the surrounding markets within a 30 minute drive that allows workers to commute. These markets can provide excellent opportunities to take advantage of the strong job market and create a strong value add opportunity.

Larger metro areas will have access to public transportation.  If a market has a healthy transit system, this provides renters multiple options to get to their employment.  

Once you identify a market, it’s time to drill down into specific neighborhoods.  Within the specific neighborhood, you want to learn the following:

Most Important Multifamily Underwriting Criteria

It all starts with jobs.  Without jobs, you have unemployment, and unemployed tenants are not able to pay your rent.  You can find a lot of this information online from the Census or local chamber of commerce.

So, when underwriting a market, you want to first confirm the following;

Job Market

Job growth: Are local employers growing?  If so, are they hiring? Do they need to employ more people to accomplish their growth?

Number and type of employers: You need to find out who the major employers are in the area.  A healthy market will have multiple larger employers. You don’t want to find that there is only a couple of major employers in the market.  If there are are not multiple employers who are growing, be careful.

More employment sectors is better.  If the market has only a couple of major sectors it can become problematic if there is a downturn.  A few sectors to be aware of because of their cyclical nature include; military & construction. Sectors that are always in demand include health care, which provides a lot of high quality jobs.

Median household income -  You need strong wages. Anna and her team set a minimum median household income of $40,000 for their investment criteria.  If you want to collect rent you need people with good paying jobs. If you underwrite and rent to tenants with at least 3 times the monthly rent for income, collecting rent is easier.

Unemployment: it is best have no more than 8% unemployment in your neighborhood.

Housing Supply:

How many units have been built in the last 3 years?  If there is more demand than supply, this is good for an investor,  in that you are less likely to have vacancies. When you underwrite a multifamily market, it is important to recognize how much new construction has recently occurred and how much is in the pipeline.  When supply suddenly grows and exceeds the demand, the newer properties will likely be more attractive to prospective tenants.

To fill the newer class A properties, management & owners will utilize promotions, concessions and rent discounts.  The B class tenant will be attracted to a nicer newer property that cost the same or a little more than their current rent cost.  This will cause rising vacancies in the B class properties.

This same conditions will be employed between the B & C class property tenants.  This is why you have to understand the area development projections and how it will affect your property.  

Price to Rent Ratio

Anna and her team recognize the price to rent ratio range they refer to as the “goldilocks range” of 14-22 as the ideal range.  If the ratio is lower than 14, it is easier for the tenant to buy a home. When the ratio is above 22, it is more difficult for the tenant to buy and for the multifamily property to produce cash flow.  

Price to Rent Ratio calculation:

Median value of owner occupied home / Annual median gross rent.

Rent Growth

Forecasted rent growth: Find out the most recent rent growth statistics for both annual and the most recent quarter.  Ask local brokers what the rent growth forecast is for the next 12 months. While projections may be substantial, Anna uses a conservative rent growth cap of 4% rent for the first year.  If you get more, great, but don’t over estimate.

Median Monthly Rent

Anna’s team has found the minimum median rent of property needs to be not less than $800.  Markets with a lower median rent makes it difficult to collect rent.

Path of Progress

Look for areas where the median income has increased, but the median price of housing has not yet increased.  This is a sign of rising housing prices.

City Data is a free website that allows you to see a map of the neighborhoods and the census data associated with it.  This allows you to recognize where the price of housing will increase.

Emerging markets - when you find a city or neighborhood with positive indicators, study the surrounding areas and you may find a web of supporting markets.  Is there a trend that suggest where progress is moving?

Laws

What are the landlord tenant laws in the market?  Are the laws pro landlord or pro tenant. Cities and states that overly protect the tenant should be avoided.  In these markets, there are tenants that know how to work the system, and can create real havoc for a landlord.  Learn the laws regarding notice to evict before you invest in a market.

Occupancy Rate

There are two calculations to consider.  Physical & Economic occupancy. As a rule, occupancy under 95% will likely be a challenge to collect rent from your tenants.  



BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Not understanding your market.  Not understanding the data.

How to manage the risk?:  Know the data, it does not lie.  This is especially important when you are entrusted to invest others money.  

To learn more goto:

Grocapitus.com

Multifamilyu.com

Text: “RETOOLKIT” To 44222

Email: anna@grocapitus.com

Apr 11, 2019

Seller financing is a viable strategy for real estate buyers and sellers.

Since 1986, Larry Goins has been buying and selling real estate.  He has bought and sold residential, multifamily, commercial, developed subdivisions, mobile home parks and more.  For financing, he has utilized multiple methods including traditional banks, partners, hard money, lease options and seller financing.

Generating Prospects - Sellers

To generate multiple leads, requires a sophisticated marketing campaign utilizing postcards, Facebook, and pay per click Google Ads.  This is all in an effort to make the phone ring. When the phone rings, a screener will qualify the opportunity. If it sounds plausible, Larry makes a call and offers a full price cash offer.  

The typical marketing campaign numbers look like this:

  • Postcards mailed to identified suspects: 25,000 per month
  • Inbound calls from postcards: 200 per week / 800 per month
  • Average response: 3%
  • Results: 5 - 20 deals per month

Developing a Buyers List

Developing a large buyers list is key to your success as a wholesaler.  More potential buyers means more success. Larry and his team utilize the following methods of marketing:

  • Bandit signs: 25-30 around the neighborhood where the property is located.
  • Local Facebook groups
  • Craigslist
  • Website
  • Bigger Pockets

For each method, they collect emails and grow their email list for the next property they have for sale.

Wholesaling

Wholesaling is an simple way to make money without the need for a lot of capital.  Larry authored the book, Getting Started in Real Estate Day Trading and has students from around the world employing his system.

The ideal property will be purchased well below market, but that is because the seller has problems.  When you find the person with a problem who is willing to part with their property for very little, you have the first ingredient necessary to make a profit.

As soon as a property is put under contract, the marketing team takes over.  First they go to the property and take numerous photos of the property including all interior, exterior and building systems.   Next they market the property to their buyers list.

The most efficient model for wholesaling provides for a purchase and sale on the same day, using none of the wholesalers money.  The net result of a successful wholesale is a profit after selling a property he never had to invest in, but found both the seller and the buyer.  

Seller Financing

There are two sides to Seller Financing.  

When you are the Buyer:

If a Seller does not agree on your offer price, but they are interested in continuing to receive monthly income, Seller Financing can work.  When negotiating with a seller, her are some key points to make with the Seller,

  • They will continue to receive monthly payments,
  • You will take care of insurance & taxes.
  • They will no longer have to deal with tenants,
  • You will help reduce their capital gains tax using an installment contract.  

From here, you can either operate the property as a rental, sell to a new buyer who will assume the loan after you collect a down payment.  For example, you buy at $35,000 and sell for $45,000 with $10,000 down and assign the mortgage to the buyer.

Another way is to utilize “wrap mortgage”.  This is when you acquire the property on terms from the seller, and then sell the property on contract to a buyer.  To make this work, you need to acquire for a low monthly payment, and then sell on a higher monthly payment. You make the money on the spread.   

When you are the Seller:  

If you have the financial ability to acquire a property, seller financing is a great way to make substantial returns.  Larry and his team try to buy a property for 30% of what they can sell it for on contract. He calls this “Flip to Riches”.  

Best outcomes:

  • If the buyer does not make their payments, you foreclose and resell the property and collect another down payment.
  • If your buyer refinances, you get paid off.
  • Buyer pays as agreed.

In all cases, you have to be transparent with the seller about what your intentions are.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: Lack of education.  If you don’t know what you are doing, you will get burned.   

How to manage the risk?  Get educated. Read books, listen to podcast, get a mentor.  

 

For more go to:

https://larrygoins.com/

Call: 877-LAR-RYGO

Apr 4, 2019

A Spendthrift Irrevocable Trust might just be the the asset protection strategy you have been looking for.  It allows you to own nothing, but control everything.

Bruce Mack is a real estate investor, Licensed Financial Advisor and student of how Trust work to provide maximum asset protection and tax benefit.  He utilizes Spendthrift Irrevocable Trust offered through Platinum Trust Group.  His primary clientele are Real Estate Investors.

When Insurance is Not Enough

Insurance is a recognized first line of defense for protecting your assets.  But when you read a policy and find the exclusions, you realize there is a potential gap in what could happen, and the coverage the policy provides.  Bruce has multiple examples of clients who found out the hard way that their insurance was not enough. And, because they had assets, the court award required that their assets be liquidated.  Here are a couple of examples:

  • Client owned rental homes.  When their son was at fault in an ATV accident, they were forced to liquidate their assets to pay for the damages beyond what their insurance provided.  They loss 20 residential houses.
  • A real estate investor managed his own properties. When he was found guilty in a wrongful eviction lawsuit, his liability insurance was limited in its response.  He lost 150 rental houses and 2 apartment buildings.

But I Have an LLC

That does not affect me because, I have an LLC.  When you use an LLC, C-Corp or S-Corp to hold title of your real estate, you separate you, the individual, from your business that owns the real estate.  This is referred to as the “corporate veil”.

This is a fairly straight forward strategy. If you own multiple properties, for additional asset protection, you may be advised to create multiple separate entities for each property,  In theory, this makes sense, however, the cost to maintain and operate multiple entities is not cheap.

For each entity you create, you are required to pay separate state business filing fees.  This is in addition to the tax return required for each entity. Multiple state fees and tax returns add another level of expense that reduce your profits.

On top of the fees, you must follow the formalities outlined in the corporate operating agreement and bylaws.  Failure to follow these can blur and lessen the the distinction between you and the entity. When opposing counsel has been able to prove the lack of structure and record keeping, they have been able to pierce the corporate veil and hold the individuals personally responsible.  This opposing counsel strategy is referred to as the “alter ego”.

Protection Provided in a Spendthrift Irrevocable Trust

Bulletproof asset protection.  Your assets are protected when placed in a properly structured Spendthrift Irrevocable Trust.  This deters opposing counsel from suing. If the opposing counsel were to sue and win a judgement, they would place a lien against the trust.  This lien would be satisfied when the trust is liquidated. That happens 21 years after the last beneficiary dies.

Tax advantages for the trust.  When your assets are placed in an irrevocable trust, all ordinary and capital gain income from rental properties go into the trust. Tax is due when one of two things happens:

  1. Beneficiaries receive distributions.  The beneficiaries are required to pay income tax on the income they receive from the trust.
  2. When the trust is liquidated.  The Spendthrift Irrevocable Trust states that this happens twenty-one years after the last beneficiary has passed away.  At that time, the trust dissolved and any liens are settled and taxes paid.

Property held in a irrevocable trust can prevent the need for a 1031 exchange to avoid the taxable event.  A trust can hold assets, receive income from those assets and pay the operating expenses required to maintain the trust.  Only the distributions paid to the beneficiaries are taxed at the ordinary income level of the receiving beneficiary.

Who is the Spendthrift Irrevocable Trust for?

If you are selling an asset, or buying additional real estate, you should look at the protection provided through an Spendthrift Irrevocable Trust.  Both asset protection and tax savings are reasons to look into the benefits of irrevocable trust.

For more go to:

www.platinumtrustgroup.com/crepn

www.platinumtrustgroup.com

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The chance of being completely wiped out due to an unforeseen event.

How to manage the risk?: Follow the advice I give my clients.  I have placed all my assets in an Spendthrift Irrevocable Trust.  

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