Info

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.
RSS Feed Subscribe in Apple Podcasts
Commercial Real Estate Pro Network
2018
December
November
October
September
August
July
June
May
April
March
February
January


2017
December
November
October
September
August
July
June
May
April
March
February
January


2016
December
November
October
September
August
July
May
April
March
February
January


2015
October
September
August
July
June
May
April
March
February
January


Categories

All Episodes
Archives
Categories
Now displaying: Category: real estate
Dec 13, 2018

Cash flow from day one is the key to building generational wealth that provides you options regardless of market conditions.

Daniel Ameduri from Future Money Trends has been investing in real estate since he was 18 years old.  In a short time, he went from investing in properties that cash flowed to properties he hoped would appreciate in value.

When the market crashed, he lost those properties he was betting on for appreciation.  The properties that cash flowed from day one, continued to produce and increased their output while the market was falling.  

The lesson was learned.  Invest for cash flow and you will be free!

Cash Flow versus Saving

An asset that produces regular recurring cash flow is the goal for any investor looking for a way out of the need for a job.  A very simple plan, free from the hocus pocus of the stock market is real estate. For a modest down payment, you can purchase with leverage, a rental property.  The tenant pays the rent, the rent pays the mortgage. When the mortgage is paid off, you get all the rent.

Compare this to saving cash, and earning minimal if any interest in the bank.  You are way better off to invest in a tried and proven asset class like real estate.

Investing strategies for Cash Flow

Paid off real estate can be a tremendous base for your retirement future.   Simple Retirement plan: purchase multiple single family rental properties. Pay them off.  Cash flow for life. The key with real estate is time. So, the quicker you acquire, the sooner you will be free.  

Financing.  Unless you have an unlimited money supply, you will have to borrow to grow your real estate portfolio.  If you have strong credit, and a good W-2 job, you can qualify for conventional financing.

However, if you have lesser credit and financial qualifications, you will have to get creative.  

Seller Financing:  Look for property and a seller with a problem.  A property with a problem will not qualify for conventional financing.  The seller’s problem is an opportunity for you to negotiate a low price, and determine what the actual cost to repair the problem will cost.  A seller with a problem is more likely to agree to seller financing.

If they do not own the property out right, consider assuming their mortgage.  All conventional mortgages have a due on sale clause. However, Daniel has never heard of a performing mortgage be called by the lender.  So, this is your chance to take over an existing mortgage. Find out what the seller needs to allow them to move on. Most of the time, it is relatively little.  

For a few thousand dollars, you can own a property that has a mortgage, and you get the equity the seller has paid down.  

If you don’t want to keep the property, you can sell it.  You can offer to carry a mortgage. When the original sellers mortgage is still in place, you create a “Wrap Around Mortgage”.  

This is when your sell the property for more than you purchased it for.  The new buyer gives you a down payment. You collect their payment, and make the payment on the original mortgage you assumed.  The difference between what you collect and the cost to service the first mortgage is yours to keep.

For more go to:

https://www.futuremoneytrends.com/

Cash Flow Monsters:

https://www.futuremoneytrends.com/cash

Dec 6, 2018

Private Money Lending is the debt side of real estate.  

So much of real estate investment information is about how to. How to find the property, raise capital, improve the property, improve operations, refinance and disposition for a profit.  Do you ever hear about the income the opportunity from the lender side of a real estate deal?

Anthony Geraci with Geraci Law specializes in working with private money lenders, from single property notes to hedge funds.  Real estate investors who lend rather than borrow.

Bank Lending

Traditional bank lending is not sexy.  Banks are mainstreet. They are regulated.  With this comes built in limitations and risk tolerance allowed by regulators.  They like borrowers with proven credit history for buildings that are completed, occupied that provides a reasonable assurance of repayment. These properties provide the bank security.  They can lien the property with a mortgage, collect regular payments consisting of principal and interest.

If you have a low risk deal that fits the buttoned up model banks are looking for, you will receive a low interest rate after proving you and your deal are worthy.

Private Money Lending

A private money lender is designed for risk.  Often referred to as, hard money, for the risk they take and the rates they charge.  Many commercial private lenders structure their loans so that they are interest only.   

Because of the higher cost, private lenders are the option of choice for many real estate investors with a short term need to complete a project.  For some investors, private money may be a necessity due to poor credit. However, for most, the use of private money is a preferred over conventional lenders.   

Private lending is where sexy debt lives.  These are the option for investors with an idea to improve a property, ie fix & flip.  If you have a non conforming deal, a vacant building, a short term need for capital, or just don’t have the time to wait through the loan by committee process preferred lenders require.   

Risk and Reward for Private Money Lenders

The reward for private money lenders is significant.  To guard against the risk, it is imperative that the proper legal contractual protection be used for if, when things go wrong.  Each lender is unique and for this, the structure and offerings will vary depending.

Your legal team will advise you through all phases to manage the risk of your private lending business.  Like any business activity, setting up the proper entity is a first step. Additionally, private placement memorandums are needed when raising capital from investors and loan documents for use with your borrowers.  

When things go wrong; foreclosure, etc, your recourse is spelled out in the legal contracts signed by both parties.  For this reason, it is a must to work with legal counsel focused on real estate.

For more go to:

http://geracillp.com/

anthony@geracillp.com

https://nonconexchange.com/

Nov 29, 2018

Do you have an 401K checkbook?  Are you self employed?

If you are self employed and do not have a 401k, there is still time to take advantage of the beneficial 2017 tax law to substantially fund for your retirement.

If you are not able to take advantage of a self employed 401k, check out our IRA episode for the options available to you: CREPN #171 - Checkbook IRA with Bernard  Reisz

Bernard Reisz with 401kcheckbook.com provides the education, structure and tools to help investors who are looking to take control of their financial future.  

2017 Tax Law Benefits

The 2017 tax code capped personal deductions for state and local taxes expensed on federal tax returns at $10,000.  This will likely increase your tax liability for 2018. However, you can take advantage of the new ways to lower your tax liability if you fund it before the end of the year.

If you are in business and generating profits, you can create a 401k for that business.  When you fund your 401K, it reduces your taxable income. If your company is set up to match, the match is an expense to the business which again lowers its taxable income.

The Qualified Business Income (QBI) Deduction is a new for the 2017 tax law.  It provides up to a 20% tax deduction for any qualified business income up to $315,000.  The amount of QBI reduces for taxable income above $315,000 for married filing jointly. Funding your 401K can help reduce your income and maximize the percent of QBI you are eligible for.  

Solo 401k

If you have no employees, the Solo 401K is ideal for you to maximize your retirement account funding.  The Solo 401k is the ideal candidate for the Checkbook 401K.

Unlike the IRA, a 401K is not required to have a financial institution as a custodian.  You are allowed to be the administrator and trustee. There is no requirement for a custodian.  

The maximum amount you can contribute to your Solo 401k and deduct from your taxable income is $55,000.  If you are over 50 yrs old, you can increase that amount to $61,000.

To contribute the maximum, you must:

  • Have net income equal to or greater than your contributions.
  • Employee deferral: $18,500 maximum.  This can be dollar for dollar of net income your company generates.
  • Employer Profit Share: 25% of company net income can be contributed.  To get the full $55,000 tax deduction, you will need to have $175,000 net income.   If you are an S Corp, you are limited to 25% of the W2 salary.

Either a traditional 401k or a can be used.

Traditional 401K; You receive a current income deduction for contributions.  The account grows tax deferred and is taxed at ordinary income tax rates when withdrawn.

Roth 401K: You receive no income deduction.  Contributions are after tax, but grow forever tax free.  There is no tax due when withdrawn.

Personal loans from your Solo 401K are allowed with few limitations:

  • No seasoning required.
  • Maximum loan percent 50% of the balance, with the maximum loan up to $50,000.
  • Pay back within 5 years with interest to your 401k.

You can set up an entity, LLC owned by your 401K to funnel your investments through.  This is ideal for purchasing real estate and provides significant asset protection.

When purchasing real estate inside your 401K, like the IRA, the loan must be non-recourse.  Unlike the IRA, your 401K can purchase real estate with leverage and avoid UDFI penalties.    

For more go to:

401KCHECKBOOK.COM

bernard@resurefinancial.com

(212)259-9302

Nov 22, 2018

You have a checkbook IRA?  Probably not.  A Traditional Individual Retirement Account, aka IRA, requires a custodian to hold your retirement account.  

The typical custodian has investment models to follow and limited products available for you based on your risk profile.  Investments that are eligible to be held in your IRA are limited only in that you cannot invest in life insurance nor collectibles.  

Notice that real estate is not prohibited?  What if you could select higher performing investments beyond your custodians limited options?  

Bernard Reisz with 401kcheckbook.com provides the education, structure and tools to help investors who are looking to take control of their investment strategy using a checkbook IRA.  

There are two types of government sponsored tax deferred retirement accounts; Individual Retirement Account; and 401k.  The IRA is for is a non employer sponsored plan while the 401k is an employer sponsored account. In this post, we focus on IRA’s.  

There are two types of IRA’s:

Traditional IRA; You receive a current income deduction for contributions.  The account grows tax deferred and is taxed at ordinary income tax rates when withdrawn.

Roth IRA: You receive no income deduction.  Contributions are after tax, but grow forever tax free.  There is no tax due when withdrawn.

Take control with a Checkbook IRA

Now you can take control of your IRA by using a Self Directed IRA, aka SDRIA.  SDIRA custodians allow your to invest in alternative investments, including real estate.  This keeps the investment inside the tax deferred account, including all income and expenses, as required.  The manager of the account is you, the IRA account owner, or someone you choose.

The traditional SDIRA custodian can be fairly expensive.  They charge fees on assets under management and per transaction.  The checkbook IRA provided through 401kcheckbook  simplifies and minimizes the cost to administer your SDIRA.   

To do this, you will need move your funds to a SDIRA.  The SDIRA creates an LLC that is owned by your IRA. To maintain the tax deferred benefits, the investment, returns and expenses must be contained inside the SDIRA.  

Alternative Investment Options

Now that you have your checkbook IRA set up, let’s take a look at two real estate investment options; equity and debt.  

Equity, ownership is an option to you.  To do so, make certain the real estate is titled to the LLC your SDIRA owns.  The funds for the investment come from your IRA.

Issues to be aware of when using your Self Directed IRA to invest in real estate.

  • Leverage: Your SDIRA can use leverage, however, the loan must be “non recourse”.  
  • Unrelated debt financed income UDFI: As an equity owner of the leveraged investment, your SDIRA is subject to UDFI.  This is the percentage gains associated with leverage, your return on leverage, and is subject to tax. Your SDIRA will have its own tax return, and will pay tax based on the UDFI.    
  • If sold while you have a loan, your self directed IRA will have capital gains tax.  However, if the loan is paid off twelve months before sale, there will be no capital gains tax!

Debt, a loan with your SDIRA LLC recorded on title, are an exceptional opportunity for significant returns.  As a debt instrument instead of equity investor, the SDIRA is not subject to UDFI. All gains are tax free.  So, if you are able to make an interest only, hard money loan secured by real estate at 20%, the entire gain is free from tax.

 

For more go to:

401KCHECKBOOK.COM

bernard@resurefinancial.com

(212)259-9302

Nov 15, 2018

Qualified Opportunity Zones, a late add to the 2017 Tax Code, are designed to stimulate neighborhoods in need of investment.

Kathy  Fettke, author, investor, syndicator and host of RealWealth Show Podcast shares her views on the new tax law.  For investors with capital gains who are looking for a way to lessen their tax liability, this just might be the answer to your prayer.

Markets cycles are affected by supply, demand, interest rates, etc.  When needed, the tax code is a proven tool the government can use to stimulate growth and change the behavior of investors.  Opportunity Zones are the newest iteration for investors looking to lessen their taxes and get a better than average return on their investment.

Have a Capital Gain?

Do you have an unrealized capital gain?  Unlike 1031 Exchange, the Qualified Opportunity Zone is not exclusive to real estate investors.  All investors, who have taxable gains from the sale of stocks, bonds, business, real estate, etc are eligible.  You have up to 180 days from the sale that caused the gain to invest in an opportunity zone fund.

The opportunity zones are in neighborhoods needing a jumpstart.  New investment will likely not be a cash flow opportunity. Instead, over time, the expectation would be for significant appreciation.  It takes time to improve a neighborhood. The goal is to find a neighborhood with momentum that will attract other investors. If you find this, and you can be patient, the reward will be worth it.  

Disclaimer: The information presented is is for discussion purposes only.  

The QOZ details are developing.  It is up to YOU to engage a tax professional for advice on how to proceed and benefit.  

Where are the QOZ?

There are over 8,000 qualified Opportunity Zones in the US.  States had 90 days from the date of the act to apply to the US Treasury for zone status.  To find one near you do an internet search, “opportunity zone map”, or click: ttps://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

How Qualified Opportunity Zone Works

  • To qualify, you must have taxable gains.  Ordinary income is not eligible.
  • Taxes on the original gain are deferred.  If you stay in the investment for 5 yrs and get a 10% discount on the tax owed.  Stay in the investment for 7 years, you you get a 15% discount on the taxes due, and 7 years to pay them.  
  • Bonus: if you stay in your new investment for 10 years, the subsequent gain on the new investment is TAX FREE; not subject to Capital Gains TAX!
  • So far, the use of a Qualified Intermediary is not recognized as a requirement.     
  • Your gains must be placed in a “Qualified Opportunity Zone Fund”.  This can be your fund, or in another’s fund, just not a single member LLC.
  • The “fund” must invest in a property located in a designated QOZ.
  • The property must be improved.  You can do new construction, or substantially improve an existing building.  Substantial improvement example:
    • Purchase Price: $1,000,000
    • Land value: -$  500,000
    • Existing Structure Value: $   500,000
    • Investment required to be substantial: $500,000

 

For more go to:

RealWealthNetwork.com

Nov 8, 2018

Multifamily Syndication Structure and Fees provide a significant opportunity to make money.  Who better to ask about the numbers than the sponsor of twenty-six syndications, Vinney Chopra.

To buy a large multifamily property, it takes the coordination of several like minded investors.  The General Partner, finds the deal, builds the team, and gets the commitment from the limited partner investors to close the deal.  

Members of the LLC

The owner of the property is the LLC entity created specifically for this property at closing.  Members of this entity are the General Partner, sponsor, and the Limited Partners, investors. The range of ownership depends on the specific deal, but a split range of 20-40% for the General Partner and 80-60% for the Limited Partners is common.  The specific opportunities are spelled out in the private placement memorandum. The opportunities to make money are numerous for the Limited Partners including:

  • Distributions; this is from the operational cash flow.  Distributions can be tied to a preferred rate of return for the LP’s.  This payment can occur as frequently as monthly - quarterly. The LP and GP can participate in the excess over the LP’s preferred return on a predetermined percentage split.
  • Disposition: When the property is sold, the equity gain is split between the GP and LP based on the ownership split.   
  • Refinance: If the market supports it, a refinance can return the investors capital before selling the property.  

So what’s the reward for the General Partner?  Below are the various ways to get paid as the sponsor of a syndication.

Acquisition Fee

The acquisition fee ranges from 2 to 4% of the purchase price.  It is the sponsor’s reward for putting the deal together and raising the funds needed to close.  A good rule of thumb for the capital raise is 30-35% of the purchase price. The money raised will cover;

  • Down payment 20-25% of purchase price
  • Closing cost
  • Annual insurance
  • Annual taxes
  • Syndication Fee
  • Real Estate Legal Fees
  • Capital Expenses deferred maintenance ( more if significant improvements needed)
  • Acquisition Fee

Loan Sponsor “Enhancer” Fee

In order to borrow the funds needed to close the deal, the lender one investor guarantee the loan.  This individual must have a personal net worth greater than the loan amount. The fee for this obligation ranges from a flat fee to a percentage of the General Partnership.

Asset Management Fee

Throughout the course of holding the property, the asset manager is responsible for overseeing the property manager and any repositioning of the asset if a value add plan is to be executed.  A sponsor will also prepare and provide regular reports to investors on the property’s performance. The Asset Management fee is typically 1-2% of annual collected income.

Property Management Fee

If you have enough units, consider creating a property management firm.  This is an excellent opportunity to serve your investors and collect a fee.  Fees range from 4-10% of the total income collected depending on the size of the property.  When you are the property manager, you can negotiate better deals with your suppliers for the benefit of your investors.  

Refinance Fee

While operating the property, if the market supports, there may be the opportunity to refinance and return some equity to the investors.  The proceeds of the refinance are paid to the investors to return their investment capital. When you can return the investors original capital and continue to pay them a quarterly distribution makes investors happy.  The sponsor can charge a refinance fee, 1%, for doing the work necessary to complete the refinance.

Disposition Fee

When it’s time to sell the property, sponsor will charge 1 - 2% of the sale price.  The fee is for the work required to prepare the property for sale. This includes: conduct property tours, gather the broker price opinions from four different brokers, and meet with CRE Brokers.

For more, go to:

www.vinneychopra.com

Text: SYNDICATION to 474747

Multifamily Investment Syndication

 

Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra

CREPN #145 - Why Multifamily Real Estate Investing with Vinney Chopra

CREPN #149 - Why Multifamily Syndication is a Great Option for Real Estate Investors

CREPN #153 - Building Your Multifamily Syndication Team with Vinney Chopra

CREPN #157 - How to Attract Capital & Communicate with Investors with Vinney Chopra

CREPN #161 - Multifamily Underwriting with Vinney Chopra

CREPN # 165 - Letter of Intent & Purchase Sale Agreement with Vinney Chopra

Nov 1, 2018

Real Estate Investing has benefits that are not always recognized by investors.

Tyson Cross is a former Teacher turned Commercial Real Estate Broker and investor based in Portland, OR.  His journey from educator to investor is a common progression for investors; awareness to action.

Invest in What You Know:

Do you understand the fundamentals of the stock market?  You know you need to invest, but where? How? If you have a W2 job with an employer sponsored 401K, that may be all you do.  In this options, the only control you have is the amount you put into your account and which investment fund you select. Your employer contribution and the market performance are out of your control.  

Outside of your 401K, you can choose any traded stock on the exchange.  What do you know about any of the companies on the stock exchange?

Now, think about real estate.  It’s everywhere; big cities to rural towns.  In every city, people need a home, and over time, what happens?  Rent and the cost of housing go up. If you understand this, you understand the upward trend line for real estate market fundamentals.  Your understanding of this makes the benefits of investing in real estate tangible.

Stocks vs Real Estate

Your 401K is essentially a savings account.  Every payday, you buy shares, which over time adds up to a substantial sum.  What’s not so well understood is that when you are ready to take your money out of your 401K, you have to sell shares.   When you sell them, they’re gone! The remaining shares have to increase in value for you to stay even. This is out of your control.

Real Estate is not as liquid as stock.  However if you keep your property for several years, you can borrow against the equity.  The proceeds from the loan can be used to invest in additional properties, or taken as cash.  Neither use is a taxable event.

Don’t forget the cash.  Investment real estate valuation can include positive cash flow from day one.  

Leverage & Control

The increase in value difference between a percent of a small number, your 401k or a big number, a leveraged asset, like real estate.  

Example: If you have $100,000 saved in your 401K and the market goes up 8%, you made $8,000.  Not bad.

If you purchased a property worth $500,000 using your $100,000 as a down payment, and the value goes up 5%, you made $25,000, which is more like 25% return against your $100,000 investment.  

The difference between the $8,000 and the $25,000 is $17,000!  This is the power of leverage.

The percentage increase or decrease in value is directly proportional to the amount you have saved.  With leverage, you benefit from a large number increasing by gives you the benefit of a big asset increasing in value

The Benefits of Real Estate Investing

Real estate provides the opportunity to control an expensive asset with help from leverage, a loan.  You collect rent from the residents and pay off the loan over time. Now let’s look at the benefits unique to Real Estate.  

  • Equity / Principal increase: As the loan balance gets paid down, the difference between the market value of your property and your declining loan balance is your growing equity.  
  • Cash flow; If you purchase your property right, it will income from day one.  This is after your operating expenses and debt service. If you maintain it and keep rents at the market rate, you will always have cash flow that keeps up with inflation.
  • Appreciation; When you sell in the future, it should be for more than your purchase price.  Commercial real estate value is determined by dividing the annual Net Operating Income by the market Cap Rate.  You have no control over the Cap Rate, however, you have direct input regarding the NOI. If you are able to increase your NOI, you will increase the value of your property.  
  • Depreciation; This is a gift from the IRS.  It is an amortized expense tied to the life expectancy of your building.  The gift is that you do not have to actually spend the money to get the benefit.  When you subtract this expense from your income, it reduces your taxable income.

The Risk

There are no guarantees in life.  But, for those who take action, real estate investing is a proven path for wealth accumulation  If you know why you are investing, get educated, get your mindset right, focus, and take action, and you will overcome the risk and be successful.

For more go to:

www.Tysondcross.com

tysoncrossre@gmail.com

Oct 25, 2018

Insurance is required to close any Multifamily Real Estate deal with lender financing.  Recently, Rod Khleif invited me on his podcast, Lifetime Cashflow Through Real Estate to discuss insurance for Multifamily.

Rod Khleif is a veteran real estate investor syndicator, real estate mentor, and podcaster based in Sarasota, FL.  We discussed steps multifamily investors can take to be successful in procuring insurance for your property.

How to Chose Your Multifamily Insurance Broker

Insurance for Multifamily is very specific. To make certain you are working with a broker / agent that can help you, here are some questions to ask:

  • Ask your CRE Broker & Property Manager for a referral to an Insurance Broker.  An experienced Insurance Broker will be plugged into the Commercial Real Estate community.
  • Ask the Insurance Broker/ Agent to describe their experience with Multifamily real estate.
  • Find out if the Insurance Broke specializes in Multifamily.  So many agents have no speciality and may not fully understand the coverage needed.  
  • will writ isl If you are working with your home and auto agent, you are likely not getting all you need.

Property Questions You Need Answered

If you are purchasing a property that is more than twenty-five years old, you have to ask some questions not required for newer properties.  There are 4 Building Systems that every Insuance Underwriter wants to know about on older buildings. If you want the most affordable insurance, find the answers to the age and details of work done to  these systems:

  • Roof; what year the roof was replaced?
  • Electrical; what has been done to update the Electrical System and when?
  • Plumbing; what material are the pipes made of for both supply & waste lines.  If updated, when, and details as to what was replaced.
  • Heating and Cooling system, type and details of when and type of updates.

Sometimes, you can determine from the seller’s financials dates and significant amounts spent on system updates.  During the due diligence period, review the financials and ask quesitons.

For Liability you want to walk the property looking for trip and fall hazards.  Are the hand railings firmly attached, stairs in good shape, any uneven walking surfaces, or  cracks in the concrete? All of these are potential claims that the insurance company is looking to avoid.  If the insurance company’s inspection finds that your property has these, you will receive a cancellation notice, or inspection report requesting that these need to be repaired for the carrier to continue providing coverage.  

For your

48 Point Hazard Checklist,

click here.

Price and Coverage Tips

For your best pricing, start talking with your Insurance Broker early.  The older, more value add opportunity you are buying, the more information will be required, including Seller Loss History, to tell a story the Underwriter wants to hear.  

Insurance is complicated.  There are lots exclusions and endorsements that if you or your insurance broker do not ask for can leave you with big coverage challenges in a claim.  The following are a few specific items to ask for:

  1. Get a Replacement Cost Estimate from your Insurance Broker.  The policy is written on the expectation that if your have a total loss, it will be able to pay for a complete rebuild.  DO NOT USE the Seller’s coverage limits. I’ve seen too many buyers set themselves up for a problem by using old outdated values.  
  2. Agreed Amount Clause is a coverage option available on most Property policies.  When you select this option, you and the insurance carrier agree on the value of your property and ELIMINATE the possibility of a Coinsurance Penalty on a claim settlement.
  3. An Umbrella adds additional limits of Liability protection above your Underlying General Liability; will drop down if your General Liability limits are exhausted, and can pick up claims not covered by your Underlying General Liability.  They provide a tremendous amount of coverage for a little bit of money. Buy an Umbrella.

10 STEPS TO LOWER MULTIFAMILY INSURANCE

CLICK HERE

 

Oct 18, 2018

Cash flow must be the goal if you intend to replace your salary, so that you can quit your W2 job.

I’ve experienced first hand and conferred with other investors multiple ways you can screw it up.  The following are some ways to keep the cash coming.

Buy Right & Cash Flow on Day One

My friends Jake & Gino from Wheelbarrow Profits stress, “Buy Right”!  This is the critical first step. If you don’t buy right, it can take years to recover, and keep you from reaching your goal.  To make certain you are buying right, you have to know ALL of your numbers. Use something like my Deal Workbook to account for your expenses.  

I remember the first couple of single family rentals I purchased.  Needless to say, I left some expenses out, because I only accounted for the mortgage, taxes & insurance.  What could go wrong when the a repair was needed, the tenant was late, or the unit was vacant. That’s right, if you don’t budget for these expenses you will pay.  So, know your numbers and BUY RIGHT.

Operations

Operations includes the day to day operating of the property.  Taking applications, rent collection, maintenance, etc. When you have a property manager in place, it’s your job as an asset manager to ask questions and follow up to make sure things are as they should be.     

This includes providing regular reports; income & expenses, applications, turns, maintenance, etc.  An empty unit is a lost income opportunity and a cost to you. If a property manager is not proactive and waits until after the unit is vacant to coordinate with the needed contractors, your vacancy loss will inflated.  

A professional property manager will minimize the down time by communicating and actively marketing the unit as soon as it is known there will be a vacancy.  It’s been said, “inspect what you expect”, otherwise you will be disappointed, and end up with less than you could of.

Capital Expenses

Capital expenses are related to replacing systems; roof, HVAC, plumbing, electrical, parking lot, kitchen & bath remodel, etc.  They last for years, and should be budgeted for. If you do not budget for them, they can mess up your projected returns.

For the most success, make certain to include your capital improvements in your startup funding budget.  This allows you to improve the property right away and increase the rents for the improved property. Paying for capital improvements out of cash flow will take significantly longer to reposition the property and will drain any potential investor returns.  Been there!

An experienced investor will not only budget for these, but also account for them as capital expenses, outside of the operating budget for maintenance.  When you include capital expenses as maintenance they will lower your NOI and your property’s value. Don’t do it!

Disaster

You don’t expect a disaster, but it is always a possibility.  Your ability to collect rent could suddenly stop if your property is damaged.  The risk can mostly be transferred to an insurance company, through the purchase of a policy that provides Business Income coverage.  Be careful, not all policies include Business Income nor cover all perils, causes of damage.

Common Perils

Fire, Hail, and Frozen pipes, are some of the common perils typically covered by a property policy.  Windstorm including tornadoes & hurricanes can be an extra charge depending on where your property is located.  

Not Common

If your property is located in a Flood Zone, your lender will require Flood coverage be in place prior to closing.  However, this does not mean that if your property is not located in a flood zone that it cannot suffer a Flood loss.  

Earthquake and Landslide are rarely required by a lender, but regularly purchased by investors whose primary source of income comes from their real estate. if your property is located in an active fault seismic zone.

To learn more about protecting your cash flowing property from disaster, email J. Darrin Gross

darrin@jdarringross.com

Oct 11, 2018

The Letter of Intent and the Purchase Sale Agreement are significant steps towards closing your multifamily purchase.  

When you find a multifamily property, you run the numbers.  If the numbers show promise, it’s time to engage the seller to see if you can put the deal together.  The initial non binding offer used by buyers is a Letter of Intent. If you and the Seller find agreement in principle, you will formalize the offer with a Purchase Sale Agreement.

CLICK HERE

FREE Sample Letter of Intent & Cover Letter

Letter of Intent

The Letter of Intent is a non binding presentation to the seller that spells out the framework of your offer, your intent to purchase the Seller’s apartment building.  This should be addressed to the selling broker, not the Seller. To see a sample Cover Letter & LOI used by Vinney, click here.

 

The Cover letter should summarize your intentions.  It should also include any relevant experience you or your team has closing on Multifamily Properties, to give the buyer confidence you will close if they accept your offer.  

 

The Letter of Intent is not binding, so it does not require legal review, but should contain::

  • Property details, address, number of units.
  • Identify that your offer is based off of the numbers provided by the selling broker.
  • General terms & conditions to purchase by your company or assign:
    • Purchase Price
    • Estimated requirement for Capital Expenses
    • Earnest money, Vinney recommends at least 1% of the sale price.
  • Timeline to complete the purchase:
    • Due Diligence timeline
    • Inspection Period
    • Extensions if needed and conditions to extend
    • Closing period
  • Financing period:
    • Lender approval letter
    • Down payment funds
  • Readiness of Property, including occupancy percentage required.
  • Inspection documents required from the Seller:
    • Financials
    • Rental Agreements
    • Survey
    • Phase I Environmental Assessment

 

Because you will be offering less than selling price offered, it is to be expected that the Seller will either reject or counter your initial Letter of Intent. After some back and forth, if you are able to reach agreement in principle with the Seller, you need to put the property under contract.  This is accomplished using a Purchase Sale Agreement.

Purchase Sale Agreement

The Purchase Sale Agreement is a legal, binding agreement.   The PSA includes all of the items in the LOI and spells out all the legal performance requirements for both you and the Seller.  Each property is unique and requires that you have your attorney prepare and review to protect you.

 

Vinney advises that you communicate early and often with the Seller during the Due Diligence period to avoid any surprises.  He suggest that your compose a Repair Letter as soon as you know the condition and any additional capital expenses that you were not aware of prior to your offer.  

 

Similar communication regarding the financing should be made to keep the Seller in the loop.  When you do this, the Seller is more likely to credit you additional funds to fix the problem, or accommodate the time needed to obtain financing to keep the sale on track to close.  

 

For more, go to:

www.vinneychopra.com

Text: SYNDICATION to 474747

Multifamily Investment Syndication

 

Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra

CREPN #145 - Why Multifamily Real Estate Investing with Vinney Chopra

CREPN #149 - Why Multifamily Syndication is a Great Option for Real Estate Investors

CREPN #153 - Building Your Multifamily Syndication Team with Vinney Chopra

CREPN #157 - How to Attract Capital & Communicate with Investors with Vinney Chopra

CREPN #161 - Multifamily Underwriting with Vinney Chopra

1 2 3 4 5 6 7 Next » 18