Best Ever Apartement Investing Blog Posts

If you are reading this, you are probably interested in making some smart, life-changing decisions in the real estate industry. Without question, apartment investing can be a great path to take. Multifamily properties are often easier to finance than others, for one; additionally, you can grow your portfolio quickly, and property managers can take a lot of stress off your plate.

Whether you have never invested a penny in real estate before, have been in the industry for decades, or fall somewhere in-between, I believe I have the tools, knowledge, and experience you need to make the most money—and, in turn, get the most out of your time.

A great way to start would be to check out my multifamily and apartment investing blog posts, which can provide you with a foundation of knowledge and answer a lot of questions you may have.

Want to learn how to add value to apartment communities, how to figure out if you should be getting into passive or active apartment investing, or how to spot commonly overlooked expenses? Maybe you’d like to know how to effectively evaluate a multifamily deal and save thousands of dollars on your taxes.

All of this, and other tips regarding apartment investing, can be found below. If you like what you read, I encourage you to also read the rest of my blog posts, of which there are hundreds, and to check out both volumes of my book, Best Real Estate Investing Advice Ever.

Top 10 Ways to Add Value to Apartment Communities

If you are on this blog then it is fair to say you are interested in multifamily or apartments for your portfolio. This particular type of real estate investing is a great choice because it allows you to have greater control over your portfolio’s profitability by adding value to the property. How so?

When you purchase multifamily properties, an efficient way to increase your property’s value is to take action on multiple fronts. Below is a list of the value-add opportunities that will show better returns in months:

 

1. Property Updates

Surprisingly, a fresh coat of paint, landscaping, light fixtures, door handles, and drawer pulls will spark life into a property that would otherwise be humming along. A simple trip to the hardware store may be all you need to put a new perspective on a property that is currently performing fine. It would also be a way to show that you are in control of your property, it has your attention, and to show the tenants you take pride in ownership of the property. It is also a subtle way to telegraph that you may be trying to keep up with the market.

 

2. Repairs

Repairing that running toilet, door hinge, dishwasher, etc. goes far in keeping your properties in good shape and again, signals to your tenants that the property is an asset you care about. Simple everyday fixes go a long way to maintaining value and keeping your property market-ready.

 

3. Management

Having centralized management who is responsive to tenants goes farther than anyone in the real estate game really gives it credit for. With multifamily units, the management is the face of the owner. Thus, when a smiling and responsive manager or management team answers that service call, responds to a question, or just pops by the unit to ask if everything is going well, that leads to tenant satisfaction, which leads to tenants staying longer and your door turnover going down.

 

4. Technology

It’s 2021 and everyone has a smartphone in their pocket, hand, or purse. Installing software to allow tenant interaction for service calls, rent payments, and communication with the property management lends itself to making the rental process more effortless for the tenants and the management. Here is a blog post with more ideas on how to use technology to improve your multifamily investments.

 

5. Parking

Sometimes parking can be a hit or miss endeavor for the tenants and their guests. If there is no space that is another issue, but if you have the space, these simple steps will make everyone’s life easier and lead to better tenant retention.

  • Keep the lot(s) smooth and clean;
  • Keep the striping clear and bright;
  • Have lights for accident prevention and the safety of your tenants;
  • Make sure there is access for the elderly, and those with additional needs; and
  • Provide shade to keep cars cool and safe.

 

6. Laundry

Installing pay-per-use laundry equipment is a hidden gem in the multifamily space. Laundry equipment now can be purchased to accept coins, credit cards, debit cards, or even laundry-specific money cards that can be loaded with cash on-site. Not only does this generate more money for the property, but it also engenders loyalty to the property and the management who are taking care of the needs of the tenants. The washing and drying units are right there, with detergent and fabric softener that can be purchased by the box.

 

7. Pets

I have dogs. I love my dogs. I spend money on my dogs just like the rest of us. I expect to pay pet rent if I am renting. Charging a pet deposit and adding $25 a month is more than acceptable to any pet owner. Also, a dedicated pet area for Fido’s daily droppings, playing fetch, or socializing is greatly appreciated by pet-owning and non-pet-owning tenants alike. These types of value-adds also cut down on the nastiness that can be discovered when a tenant exits the unit if those things are not provided.

 

8. Storage

Extra storage, whether it is a storage facility or an extra closet on the patio, is a value-add most do not think about. So many tenants have no place to keep that Christmas tree they put up every year, among other items. This extra space also makes the property more valuable.

 

9. Submetering

Many multifamily properties pick up the tab each month for water or some other utility. By individually metering the units and billing tenants for their individually measured utility usage, you will SAVE A TON of money.

 

10. Trash Pick-Up

Without overstating the obvious, people produce trash. Make it easier for them to get rid of their trash and have it hauled away. Convenient trash cans, trash shoots to a bigger receptacle, or being able to walk to the driveway’s end with a provided can will keep your property clean and help to invest your tenants in the cleanliness of the property.

 

These simple steps are effective for landlords to control and increase property value. Moreover, these steps help control tenant retention and create a community that is valued in your area and shows value in your monthly returns. Best of Luck out there!

 

About the Author:

Brian T. Boyd is a licensed attorney in Tennessee who handles commercial, real estate, construction, and business issues for clients. He and his wife also invest in real estate. To learn more about Brian, visit www.boydlegal.co.

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Six Investing Strategies to Thrive in 2021

Six Investing Tactics to Thrive in 2021 and Beyond from Real Page Chief Economist

COVID-19 changed the commercial real estate investing landscape in 2020. Heck, Boise, ID, of all markets, experienced the greatest rent growth one year into the pandemic of 16%.

Now that we are over a year into the pandemic-induced recession, many commercial real estate experts are offering their advice on how you need to change your investing approach. One firm that is leading the way in providing such insights is Real Page.

Greg Willet, Chief Economist at Real Page Inc., was a featured speaker at this year’s Best Ever Conference. In his presentation, he outlined six investing and operational strategies to implement in 2021.

 

Tactic #1 – Throttle up your sun belt assets

One of the best strategies for 2021 is to get in front of the renter demand by focusing on markets that performed well throughout the COVID-19 pandemic. ApartmentList.com is a good resource that tracks rents across the nation on a monthly basis.

Many markets in the Sun Belt region (southern US from southern California to Florida) performed well since the onset of COVID. In fact, with the exception of the major MSAs in California and Texas, New Orleans, Nashville, Orlando, and Miami, basically all Sun Belt markets experienced rent growth rates greater than the national average of 1.1%.

Also, don’t rule out the Midwest. Outside of Chicago, Minneapolis, and Cleveland, the other Midwest cities posted positive rent growth rates in 2020 (most exceeded the national average, too). Demand is not as strong as it is in the Sun Belt regions, but low supply in the Midwest will drive demand in 2021.

 

Tactic #2 – Don’t bank on flight-to-quality

Historically, when a recession occurs, top-tier Class A products discount their rents. As a result, “flight-to-quality” occurs – the lower rents of Class A products attract renters which boosts occupancy. However, during the COVID-induced pandemic in 2020, these rent discounts did not result in an uptick in demand to the extent experienced in previous economic recessions. Instead, renters have had the tendency to move down and downgrade to Class B and Class C products to save money. This trend was also expedited by stay-at-home orders with people moving from expensive urban areas to the less expensive suburbs for more space at a lower rate.

 

Tactic #3 – Explore a low-capital value-add strategy

Similar to not banking on “flight-to-quality,” don’t pursue large value-add opportunities either. Hold off on the bells and whistles and focus on maintenance issues and the appearance of the asset. In doing so, the asset will be more affordable to a larger group of renters.

Another benefit of this approach is your ability to turn around a vacant unit faster (or keep the existing resident) with a lower quality upgrade. This will boost occupancy and support resident retention at lease expiration. Plus, the lower quality upgrade will leave money on the table for a future buyer.

 

Tactic #4 – Measure what is working now

It is the right time to adjust the recipe for your operational “secret sauce.” You do not want to be doing what worked well in the past. You want to be doing what works well now. For example, testing and measuring the success of technology at your properties.

Millennials overtook Baby Boomers as the US’s largest population in 2019. So, pay attention to what young adults are doing and how it impacts the types of units that are in demand. Then, determine how this impacts your marketing needs because certain marketing strategies are better and worse based on what is in demand.

The bottom line is to measure everything to see what is different now compared to two years ago.

 

Tactic #5 – Focus on renewals

Since the onset of COVID-19, there has been large variability in renewal rates across the country. However, you must make it a priority to hang on to the good residents who are making their full payments on time. Taking a hit on rent on a renewal lease might be a good thing if it is a high-quality resident.

Pay attention to the type of units with lower and higher renewal rates and ask yourself, “Why aren’t they renewing?”. It may not be the rental rate or other fees, so focus on the non-pricing factors, like maintenance and customer service.

 

Tactic #6 – Take back control of your brand

Know what you are selling and who the target for your product and message is in this marketplace. The overall message should focus on service, appearance, ease of living at the property, the location – don’t focus on price.

 

Six Tactics to Thrive in 2021

Focus on the markets that outperformed the national average in 2020, especially the Sun Belt and Midwest.

Consider avoiding top-tier, Class A+ and Class A products since many renters elected to downgrade to Class B and Class C in 2020.

Instead, consider a low-cost value-add strategy focused on addressing deferred maintenance and appearance issues.

Test out new operational strategies to determine what works today because what works now didn’t work two years ago.

One of the best operational strategies of 2021 is to retain your high-quality residents, even if it means not increasing their rent at renewal.

Focus your asset’s branding and marketing on lifestyle-related factors instead of pricing factors.

 

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6 Things You Must Know When Scaling from Residential to Commercial Investments

6 Things You Must Know When Scaling from Residential to Commercial Investments

Few investors are content with their current portfolio – most want to scale and add more units. This is especially true for residential investors looking to make the leap to commercial apartments. However, there are pitfalls that could derail your goals if you are unaware of the landscape. Many investors begin with residential multifamily (two to four units) with plans to move up to commercial multifamily (five or more units). It’s kind of like trading in those green houses in Monopoly for the red hotel. But unlike the popular board game, it’s not as simple as collecting more rent. There are key differences that investors should be aware of when making the leap from residential to commercial multifamily apartments.

Scaling from residential to multifamily entails managing a different caliber of challenges. Recognizing the key differences allows you to prepare and position yourself accordingly when pursuing larger opportunities. It also allows you to avoid key mistakes when scaling into commercial apartments. Here is a list of differences to note and mistakes to avoid.

1. Predictability

One of the main differences between residential and commercial apartments is the scale. Residential properties are two to four units, while commercial is five units and above. However, the number of units only tells part of the story. The more units you have, the easier it is to anticipate and forecast monthly income and expenses. If you have a two-unit property, you are either 100% occupied, 50% occupied, or 0% occupied. And one major expense can wipe out all the cash flow for a year.

Conversely, if you have a 100-unit property, one resident moving out does not drastically change your occupancy, operations, or projections. In fact, you are anticipating a certain amount of turnover each month for a net occupancy in the 90-95% range. This predictability allows you to make better financial projections, thus reducing the risk of the unknown. With that noted, you want to make sure you accurately forecast expenses because an extra $50 per unit, per month in expenses quickly adds up.

2. Sophistication

In residential real estate, it is common to come across an owner who is motivated to sell due to a lifestyle change, inheritance, or financial distress. You may also come across an inexperienced real estate agent that underpriced or overpriced a deal. And while this is possible in commercial multifamily, don’t get your hopes up.

For starters, factor in that commercial property owners have been successful enough to actually own a commercial property. These properties require more experience and capital than residential properties. Also note that these properties have less volatility than residential, and multifamily has appreciated drastically over the last 10 years, with the price per door shooting up 156% according to a study by Commercial Search.

Consequently, you are less likely to encounter a desperate, motivated seller in the commercial multifamily space. In a seller’s market, owners are actually interviewing you to see if you are worthy of their time. A colleague of mine learned this the hard way when an owner sent her a list of questions to answer before they would even let her tour a building. You’ll need to establish credibility with brokers, owners, and other industry professionals if you want to gain traction with commercial apartments.

3. Valuation

Residential properties are valued based on neighborhood comps, so if your neighbor does not maximize their value or sells at a discount, it will impact your valuation. Most investors of two to four-unit properties are not professional investors, so they may not actively raise rents or employ the strategies and techniques to maximize returns.

Commercial properties are sold based on the profits they generate. In this case, you are not as impacted by your neighbor selling at a discount. You will have more control over the value with the ability to increase revenue and manage expenses. Income is not limited to rent, as you can charge other fees and offer revenue-generating services such as coin-operated laundry, storage, covered parking, and more. All of this additional income boosts cash flow and the overall value of the property.

4. Management

Residential properties are easier to self-manage or find a qualified property manager (PM). Typically, these property managers operate multiple properties at a time. Most charge a fee based on rent collected, with additional fees for services like coming onsite to the property.

Smaller commercial properties (five to 10 units) will operate similarly but require a PM that can dedicate time to maintain the personal touches of a small commercial property. The next size up is 10 to 75 units and many investors struggle to find quality PMs in this range. These properties tend to overwhelm residential PMs and offer little financial upside for seasoned commercial PMs.

This caught me completely off-guard when I bought a 28-unit building and found a sizeable gap between my expectations and realities. Half of the companies we interviewed were not qualified to manage the building and the other half declined because they felt it was too small for their business. We eventually found a good fit, but this was a major eye-opener. If you are looking for deals in the 10-to-75-unit range, spend an ample amount of time finding a quality PM.

Larger apartments (75 units or more) can handle a dedicated onsite staff. This provides a professional solution for residents with business hours to address their needs. It also allows for better attention to details, such as picking up litter, which would be difficult to manage without onsite staff. In addition, you still have the resources of a larger PM firm to help you drive efficiencies and optimize income.

5. Debt

Standard residential debt is a 30-year term, amortized over 30 years so the only factor investors consider is the interest rate. For commercial apartments, the terms range widely from bridge loan products to agency debt. Bridge loans are shorter in nature, usually two or three years, with higher interest rates. Agency loans are usually set for five, seven, 10, 12, or 15 years. The amortization schedule is usually set at 20, 25, or 30 years. And then there is the pre-payment penalty to consider.

Outside of the terms, the loan qualification process differs among the different types of loans. Residential loans examine the borrower closely and want to see a strong work history with W2 income. Lenders rely heavily on your credit history and investigate your source of capital to ensure you have the funds to cover the down payment for the investment.

Commercial lenders look at the borrower, but they are usually more concerned with the property’s current performance and your business plan. They will underwrite the deal and use their own numbers to determine their comfort level. To qualify for a commercial loan, borrowers will need to show the net worth and liquidity equal to the loan amount, along with evidence of some operational experience. If there are gaps with your personal balance sheet or experience, commercial lenders will allow you to bring in partners to help meet these requirements.

6. Equity Structure

When acquiring residential properties, you are typically going to own them yourself or partner with one or two other entities. Typically, all parties will apply and sign on the loan and share the equity according to each member’s contributions. This scenario is called a joint venture or JV.  Commercial apartments present an array of options for stacking the capital. If each investor will be active, a JV is still common. However, if some of the investors will be passive, this is considered a syndication, and typically you will have a class of shares for the active partners and a separate class of shares for all of the passive or limited partners. This can get fairly complex and requires the assistance of a securities attorney to ensure you are in compliance with current regulations.

These six areas certainly are not the only differences worth noting, but they are some of the areas that surprise many investors. Whether you plan on moving into commercial apartments to invest in syndications or just to get more doors under one roof, you will want to understand the key differences between residential and commercial multifamily to make a smooth transition.

 

John Casmon has helped families invest passively in over $90 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Target Market Insights: Multifamily + Marketing. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com

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How to Add Value to Commercial Real Estate

How to Add Value to Commercial Real Estate

Many of the readers of this blog are multifamily investors or hope to be someday.  While multifamily investing has many positives to it, it is not the only asset class in commercial real estate.  Additionally, in this blog, I discussed the different risk profiles of real estate, and these risk profiles exist in all real estate asset types.  Today, I am going to be discussing what the value-add business plan generally looks like in the various asset types.

At a very high level, the value-add business plan is any business plan that, with minimal capital spent, the operator is able to increase the net operating income of the asset.  These assets will be cash flow positive from day one but have room to grow that cash flow.

 

Multifamily

The value-add multifamily business plan is often one of light renovation.  The previous owners did not choose to spend the capital to keep the property current to tenants.  Therefore, it feels aged and cannot achieve full market rent.

The value-add operator is buying the asset with capital allocated to renovate the units and exterior of the property, but typically in a very cosmetic way.  New cabinets, backsplash, counters, flooring, and fresh paint make up the common upgrade list.  The operator is doing the HGTV treatment to the units.  From time to time, the scope may be a little more intense, but any work is still limited to a single unit at a time, and construction timelines are typically less than two weeks of downtime.  Once the units are renovated, the operator anticipates achieving a higher rent per unit.

There are variations to this plan, but the light, cosmetic upgrades plan is the most common.

 

Retail

Often times the value-add retail business plan has to do with modest levels of vacancy.  The value comes from filling the vacant units and renewing near-term lease expirations.  The vacancy is not so high that it creates a challenging retail environment and will typically sit in the 10-15% range.

Because retail leases tend to be much longer than apartment leases (five to 10 years versus 12 months) even below-market rents are hard to overcome, as the operator is bound to the leases present with the property.  But, a focus on tenant mix is important for a successful retail center.

Like multifamily, there are often some deferred maintenance and capital items that need to be addressed.  The focus of capital improvements is on the common areas.  Common practices include restriping parking lots, installing better lighting, and dressing up pylon signage.

 

Office

Similar to retail, the office lease is longer in the term, so the business plan comes down to filling vacancies and renewing near-term lease expirations.  While tenant mix is not quite as pressing of an issue when compared to retail, office properties, particularly large office buildings, can benefit from a strong tenant mix.  Most properties will have their anchor tenant, and ancillary businesses to that anchor certainly assist in leasing efforts and overall demand.

Once you get into capital improvement, the focus is comparable to retail.  Common areas take precedent, with upgraded lobbies and elevators.  Other common practices are adding amenities for the office workers, like a café and fitness facility on site.

 

Industrial

Value-add industrial properties tend to stem from leasing efforts and below-market rents.  For large projects, filling vacancies is the most common focus on value-add projects.  When it comes to capital, the drivers of where to spend capital come down to renter demands.

Clear heights have grown in recent years.  So a low clear height that might be fairly inexpensive to increase is a great option, but this renovation is typically not financially feasible.  Improving access, parking lot capacity for more trailer storage, and adding technology to the property to aid in the movement and storage of products can help leasing efforts and increase value.

 

Hotel

Hotel and hospitality properties look most similar to multifamily.  Due to the management-intensive nature of hotels, the most common value-add play is to seek out under-managed properties and improve operating efficiencies.

Hotels are primarily a franchise business, with Hilton, Marriot, and Intercontinental owning a majority of the common flags you see.  Because of this arrangement, there are capital improvement components to the value-add play, especially if the existing franchisee does not have the capital to renovate their brand to current brand standards.  This would result in the existing owner either needing to sell, downgrade their brand within the franchisee structure or lose the franchise entirely.  As such, a value-add investor could acquire the operating hotel and begin the renovations to bring the property up to current franchise standards for that brand and thereby keep a higher income stream.

As you can see, every asset class has its own nuances of the value-add business plan, but at the end of the day it boils down to the same thing.  Spend money to take an outdated asset and bring it back to what is currently in demand, thereby increasing the overall income of the asset and the value.

 

About the author:

Evan is the Investor Relations Consultant for Ashcroft Capital.  As such, he spends his days working with investors to better understand their investment goals and background.  With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself.  Please feel free to connect with Evan here.

 

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10 Markets with Greatest Rent Changes during COVID Year in Review

10 Markets with Greatest Rent Changes During COVID: Year in Review

One year ago, this month, we began to see major changes in the world due to the COVID pandemic. On the 12th of March, the NBA elected to suspend the remainder of the season. In hindsight, this act was the first domino that led to further lockdowns across the country.

The first city to shutdown was San Francisco on March 17th. The first state to shutdown was California on March 19th. By the end of March, 32 out of 50 states had locked down.

These lockdowns, as well as the economic stimulus and eviction moratoriums, have affected multifamily markets to varying degrees. Some markets experienced a large increase in rents while others experienced double-digit drops in rent.

In this blog post, I will outline the five markets with the greatest increase and the five markets with the greatest decrease in rents one year into the coronavirus pandemic lockdowns.

Markets with Greatest Increase in Rents

1. Boise, ID

  • Rent change since March 2020: +16.0%
  • Rent change month-over-month: +3.4%

2. Fresno, CA

  • Rent change since March 2020: +11.9%
  • Rent change month-over-month: +0.6%

3. Greensboro, NC

  • Rent change since March 2020: +9.5%
  • Rent change month-over-month: +0.9%

4. Gilbert, AZ

  • Rent change since March 2020: +9.0%
  • Rent change month-over-month: +0.6%

5. Riverside, CA

  • Rent change since March 2020: +8.9%
  • Rent change month-over-month: +1.3%

Markets with Greatest Decrease in Rents

1. San Francisco, CA

  • Rent change since March 2020: -23.2%
  • Rent change month-over-month: +3.4%

2. New York, NY

  • Rent change since March 2020: -18.7%
  • Rent change month-over-month: +0.9%

3. Seattle, WA

  • Rent change since March 2020: -18.5%
  • Rent change month-over-month: +2.2%

4. Oakland, CA

  • Rent change since March 2020: -15.2%
  • Rent change month-over-month: -0.5%

5. Boston, MA

  • Rent change since March 2020: -14.5%
  • Rent change month-over-month: +2.9%

You can view the YoY and MoM rent changes for all major US markets here.

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10 Markets with the Greatest Vacancy Changes During Covid

10 Markets with Greatest Vacancy Changes During COVID

Historically, vacancy rates increase during recessions. According to the US Census, vacancy on renter-occupied properties increased by 0.9%, 0.7%, and 2.4% during the 1990, 2001, and 2007 economic recessions respectively.

The current COVID recession is following a similar trend. According to Marcus and Millichap’s 2021 multifamily forecast report, multifamily vacancy increased by 0.2% – from 4.2% to 4.4%. Even though we are technically still in a recession as of this writing, an overall increase in vacancy is a good assumption, especially since an eviction moratorium has been in place since the onset of the pandemic.

Physical vacancy is an important metric for multifamily investors because it indicates the demand for apartment rentals. The closer to zero percent the vacancy rate is, the more demand for multifamily, and vice versa.

While absolute vacancy rates are relevant, understanding the vacancy trend is even better. Absolute vacancy rates provide a current snapshot of how demand in one market compares to another. However, vacancy trends show if demand is increasing or decreasing, which helps with future investment decisions.

In this blog post, I will outline the markets where vacancy rates decreased and increased the most during the current COVID recession.

 

United States 

  • YoY Change: +0.2%
  • 2019 Physical Vacancy: 4.2%
  • 2020 Physical Vacancy: 4.4%

Markets with Greatest Decrease in Physical Vacancy During COVID

1. Riverside-San Bernardino

  • YoY Change: -1.7%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 1.8%

2. Las Vegas

  • YoY Change: -1.2%
  • 2019 Physical Vacancy: 4.7%
  • 2020 Physical Vacancy: 3.5%

3. Sacramento

  • YoY Change: -0.9%
  • 2019 Physical Vacancy: 3.5%
  • 2020 Physical Vacancy: 2.6%

4. Detroit

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 3.3%
  • 2020 Physical Vacancy: 2.6%

5. Baltimore

  • YoY Change: -0.7%
  • 2019 Physical Vacancy: 4.8%
  • 2020 Physical Vacancy: 4.1%

Markets with Greatest Increase in Physical Vacancy During COVID

43. Austin

  • YoY Change: +1.6%
  • 2019 Physical Vacancy: 4.6%
  • 2020 Physical Vacancy: 6.2%

44. New York City

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 2.0%
  • 2020 Physical Vacancy: 3.7%

45. Northern New Jersey

  • YoY Change: +1.7%
  • 2019 Physical Vacancy: 4.4%
  • 2020 Physical Vacancy: 6.1%

46. San Jose

large metropolis from above

  • YoY Change: +2.2%
  • 2019 Physical Vacancy: 3.9%
  • 2020 Physical Vacancy: 6.1%

47. San Francisco

  • YoY Change: +6.6%
  • 2019 Physical Vacancy: 5.1%
  • 2020 Physical Vacancy: 11.7%

The Market Rankings From One to 47

Rank City YoY Change 2019 2020 Rank City YoY Change 2019 2020
1 Riverside-San Bernardino -1.70% 3.50% 1.80% 26 Raleigh 0.20% 4.70% 4.90%
2 Las Vegas -1.20% 4.70% 3.50% 27 Cincinnati 0.30% 3.30% 3.60%
3 Sacramento -0.90% 3.50% 2.60% 28 St. Louis 0.30% 4.40% 4.70%
4 Detroit -0.70% 3.30% 2.60% 29 Kansas City 0.30% 4.60% 4.90%
5 Baltimore -0.70% 4.80% 4.10% 30 Oakland 0.60% 3.90% 4.50%
6 Atlanta -0.60% 5.10% 4.50% 31 Dallas/Fort Worth 0.60% 5.10% 5.70%
7 Indianapolis -0.60% 5.30% 4.70% 32 Houston 0.70% 6.30% 7.00%
8 Orange County -0.40% 3.60% 3.20% 33 Los Angeles 0.80% 3.70% 4.50%
9 New Haven-Fairfield County -0.40% 4.40% 4.00% 34 Orlando 0.90% 4.10% 5.00%
10 Tampa-St. Petersburg -0.40% 4.60% 4.20% 35 Minneapolis-St. Paul 1.00% 3.30% 4.30%
11 Charlotte -0.30% 4.70% 4.40% 36 Chicago 1.00% 4.90% 5.90%
12 San Diego -0.30% 3.60% 3.30% 37 Miami-Dade 1.00% 3.80% 4.80%
13 Philadelphia -0.20% 3.50% 3.30% 38 Seattle-Tacoma 1.00% 4.30% 5.30%
14 Phoenix -0.20% 4.00% 3.80% 39 Washington, D.C. 1.10% 4.00% 5.10%
15 Cleveland -0.20% 3.70% 3.50% 40 Nashville 1.10% 4.50% 5.60%
16 Fort Lauderdale -0.20% 4.40% 4.20% 41 Pittsburgh 1.30% 3.20% 4.50%
17 Columbus -0.10% 4.20% 4.10% 42 Boston 1.50% 3.40% 4.90%
18 Portland -0.10% 4.50% 4.40% 43 Austin 1.60% 4.60% 6.20%
19 West Palm Beach -0.10% 4.70% 4.60% 44 New York City 1.70% 2.00% 3.70%
20 Salt Lake City 0.00% 4.20% 4.20% 45 Northern New Jersey 1.70% 4.40% 6.10%
21 Denver 0.00% 5.10% 5.10% 46 San Jose 2.20% 3.90% 6.10%
23 Louisville 0.10% 4.80% 4.90% 47 San Francisco 6.60% 5.10% 11.70%
24 San Antonio 0.10% 6.20% 6.30%
25 Milwaukee 0.20% 3.50% 3.70% United States 0.20% 4.20% 4.40%
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photo of smart home.

Four Ways to Use Technology to Improve Your Multifamily Investments

There is a buzz presently in the multifamily sector with the entry of smart home technology. Homeowners and buyers are beginning to discuss more the different gadgets that can be used in their multifamily homes, the dollars being saved by using smart thermostats, the new level of security provided by smart doorbells and security cameras, the new face of entertainment, and even the management of shopping lists with new technologies.

Following the report of Statista in 2019, more than 33% of homes in the U.S. will have one form of smart home technology. This number is projected to grow to more than 50% by the end of 2023. Looking at the revenue generated, it summed up to about $27.24 Billion as of 2019 and is projected to go above $44.79 billion by the end of 2023.

Although the technology trend is seen to be dominant amongst the wealthy owners in the single-family home sector of real estate, a new stride is occurring in the multifamily sector regarding smart home technology. This has become a strong point for homeowners and managers looking to differentiate their homes using the latest trends and what renters want.

With the present increase of renters, Pew Research stated that more households are renting now than in previous years. This has pushed a lot of investors to increase their interest in multifamily buildings and has also pushed a lot of millennials to rent rather than own to save money. With that said, we cannot remove the fact that tenants are seeking something more than an ordinary apartment. They are searching for homes with sophisticated technology. Research has also established that more than 86% of millennials are willing to go for smart apartments well equipped with high-tech gadgets. This is also seen with 65% of the baby boomer generation.

Let’s take a closer look at how technology can be utilized in the multifamily sector.

Immersive Experience Using VR (Virtual Reality) and AR (Augmented Reality)

In recent times, immersive experience has caused a paradigm shift in the multifamily and real estate sectors. Intending residents can now experience a property using VR and AR without having to travel to the property. VR and AR are creating more personal experiences for intending homeowners and renters, and it is expected that this will see the next level in no time. There is also a look into how customers experience properties where a prospective client holds up a smartphone to an area of the multifamily property and all the information and details of amenities including pricing will show up.

Artificial Intelligence (AI)

Artificial Intelligence for multifamily homes is going beyond the normal Alexa technology and is transcending into more sophisticated areas like identity verification. We can already see the use in airports for security using facial recognition to confirm passengers faster. In the multifamily space, facial recognition is used for guest verification or service personnel going out and coming into the building. Also, we see the utilization of Google Home and Alexa in a wider form in most homes for property management.

Smart Space

Smart spaces are gaining traction in the industry as more and more environments are repurposing their buildings and properties to become smart spaces. The multifamily homes are not left out in this drive as many homeowners are opting for smart spaces to enhance cost savings, better security, proper maintenance, and customer satisfaction. Some of the areas touched include smart lighting, smart thermostats, smart locks, security devices, smart entertainment systems, and other automated systems.

Utilizing Blockchain for Multifamily home

Blockchain remains a disruptive technology in all sectors including real estate. It can be used to tackle complex everyday problems using instant and verifiable transaction recordings. This is the record-keeping technology that is applied by Bitcoin. Once data is stored on the chain, it is fully accessible and stored forever. The accessibility of such information is faster compared to traditional methods. This will speed up the processes of buying and leasing in the sector. Furthermore, the Blockchain will change the way payments are made; both for purchase and rent. This is most likely going to be a game-changer in the multifamily space and the real estate sector at large.

Four Ways to Use Technology to Improve Your Multifamily Investments

These are just a few ways in which technology is being utilized in multifamily homes. There is a lot to expect from technology in the way business is done between multifamily homeowners and renters. Also, there are numerous benefits that technology brings to the table for multifamily homes. A few of the advantages are:

  • There is improved sustainability which is not just a function of minimizing the environmental footprint of the building, but it is underlined in the significant reduction of cost associated with lighting, cooling, and heating.
  • There is real-time data that can provide property managers with proactive insight into identifying opportunities for improved efficacy and reduced waste.
  • With the substantial risk faced by most buildings from mechanical faults to equipment malfunction and even tenant activities, the entry of technology can mitigate the risk in a very significant way.
  • Finally, we cannot deny the fact that smart home technology makes tenants happy.

Looking at the different ways technology can be utilized in the multifamily sector and the various benefits it brings to both homeowners and tenants, there is no denying the fact that wider adoption of smart multifamily homes will be on the rise in no time.

Author: Veena Jetti, Vive Funds

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How to Manage Your Apartment Property Manager

As the asset manager of an apartment investment, one of your main responsibilities is to oversee the property management company.

Here is a blog post where we outline all the GP’s duties after the acquisition.

This blog post will address five frequently asked questions about interacting with and managing the property management company after you’ve acquired a deal and assumed your position as the asset manager.

For all of the FAQs, your property management company may or may not be onboard (for example, they may not send you every report that you ask for), which means you must set expectations with them BEFORE finding a deal. You need to ask the right questions based on the FAQs below when conducting property management interviews.

1 – How often do I interact with the property management company?

You should have monthly performance calls with your property management company at minimum. During the stabilization period (i.e., when you are performing renovations), the calls should be on a weekly basis. Once the asset is stabilized, you can continue the weekly calls, change to monthly calls, or have calls on an as-needed basis.

The weekly performance calls should include you and the onsite manager at a minimum, and ideally the regional manager as well.

During the calls, you will review property reports and key metrics (more on these two things below).

2 – What reports should I expect from my property management company?

You will get what you ask for. If you ask for nothing, you will likely receive nothing or just the bare minimum.

The reports you want to receive on a weekly basis are:

  • Box score: summary of leasing activity, including the number of move-ins and move-outs and unit occupancy status (vacant-leased, vacant-not leased, vacant-ready, notice-leased, notice-not leased, model, down, other use)
  • Occupancy: physical occupancy (percentage of total units occupied) and economic occupancy (rate of paying tenants)
  • Occupancy forecast: the projected occupancy based on future occupancy status (i.e., units that are occupied, units with expiring leases that are leased, and vacant units that are leased)
  • Delinquency report: list of resident delinquent (i.e., past due) amounts
  • Leasing reports: summary of leasing activity (traffic information, leasing information, concession information, marketing information, projection information)
  • Accounts payable: summary of money owed to vendors (including to the management company)
  • Cash on hand: the asset’s liquidity

The reports you want to receive on a monthly basis in addition to the weekly reports above are:

  • Income and expense statements: detailed monthly report with all income and expense line items, as well as the dollar and percent variance compare to the budget
  • Deposits: summary of security deposit information (balance, forfeits, returned checks, refunded)
  • General ledger: summary of all financial transactions
  • Balance sheet: summary of assets, liabilities, and capital
  • Trial balance: summary of all debits and credits
  • Rent roll: summary of all unit information (occupancy status, market rent, current rent, move in, lease start and end, other fees, deposit)
  • Expiration reports: summary of expiring leases
  • Maintenance reports: summary of maintenance issues and costs

Again, make sure you set reporting expectations with your management company BEFORE you have a deal.

3 – How do I obtain these reports?

The simplest way to obtain these reports to is to ask your management company to create custom reports using their management software and have them sent to your email on a weekly/monthly basis.

Another option is to ask for access to their management software so that you can have real-time access to these reports.

If your management company doesn’t use a software or if you don’t like the look of their reports, you can create your own custom spreadsheet and ask your management company to update it on a weekly/monthly basis. Click here to download a free Weekly Performance Review tracker.

4 – What metrics should I focus on the most?

The most important metric to track is the cash flow relative to the projections you presented to your investors. Track the forecasted vs. actuals on the income and expense report, focus on the line items with the greatest variance, and create a strategy to bring those line items back on track during your weekly performance calls.

For the value-add business plan, the number of units renovated relative to your forecasted timeline and the rental premiums demanded are important during the first 12 to 24 months because both will have a large impact on your cash flow.

Additionally, certain metrics, like leasing metrics, capital expenditure costs, and total income, may vary from your projections during the value-add portion of your business plan. For example, the total income may be lower than forecasted after owning the asset for 3 months due to a higher number of move-outs than anticipated. Or, you spent a larger percentage of your capital expenditure budget in the first three months because you are ahead of schedule. So, the key metric during the value-add portion of the business plan is the forecasted vs. actual rent premiums for renovated units.

Other metrics to track that may be the cause of a high income and/or expense variance are the turnover rate, economic occupancy, average days to lease, revenue growth, traffic, evictions, leasing ratio and other metrics from the reports outlined above.

Again, the best strategy is to track the variance on the income and expense reports, strategize with your management company to identify the cause by reviewing the other reports and come up with a solution if needed.

5 – What other things do the best asset managers do?

First, look at your property management company as a partner and screen them accordingly. Are they someone you want to work with for a long-time? Does their track record speak for itself? What are the tenants saying about them? How professional are they when speaking with a potential tenant (you can role play as a potential tenant to find out)? Are they willing to change if needed? Do the employees like working at the company? Are they engaged on social media?

Next, the best asset managers always look ahead. You should evaluate the market, evaluate the competition to compare your property to, track and maximize income growth and expense decline, and ensure tenant satisfaction by checking reviews, social media, and hosting community events.

Also, even though the property management company is your partner, you should watch them like a hawk. Most people focus on the front-end activities, like finding deals, sourcing capital, whether they need to form an LLC, etc. Fewer people focus on the back-end activities, like asset management, which take years and decades to do. So much of the asset’s success and your company’s ability to scale is dependent on your property staff and property management company, so you have to watch them like your career depends on it, because it does. If things don’t work out, don’t be afraid to part ways.

Lastly, visit the property at least once a month in-person. If you invest out-of-state, a great strategy is to ask someone local to mount a GoPro on their vehicle and drive the property on your behalf.

How to Manage Your Apartment Property Manager

Set up frequent phone calls with your property management company, starting with weekly calls.

Request the proper weekly and monthly reports to see how well or poorly the property management company is implementing your business plan. Track the most relevant KPIs, like cash flow variance, number of units renovated, rent premiums, etc.

Properly screen the property management company upfront and continuously evaluate their performance.

Visit the property in person to make sure the reports match reality.

 

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How a Passive Apartment Investor Interprets a Schedule K-1 Tax Report

DISCLAIMER: THIS IS FOR YOUR INFORMATION ONLY. SINCE I AM NOT A TAX ADVISORY FIRM, I REFER ALL GENERAL TAX-RELATED REAL ESTATE QUESTIONS FROM PASSIVE INVESTORS BACK TO THEIR ACCOUNTANTS. HOWEVER, I WILL SAY THAT INVESTORS OFTEN SEEK REAL ESTATE OPPORTUNITIES TO INVEST IN DUE TO THE TAX ADVANTAGES THAT MAY COME FROM DEBT WRITE OFF AND LOSS DUE TO DEPRECIATION. BUT I DON’T INCLUDE ANY ASSUMPTIONS ABOUT THESE TAX ADVANTAGES IN OUR PROJECTIONS.

Apartment syndications remain an appealing investment for passive investors due to the myriad of tax benefits—the foremost being depreciation.

Fixed asset items (a long-term tangible piece of property or equipment that is used in operations to generate income and is not expected to be consumed or converted into cash within a year) at an apartment community reduce in value over time due to usage and normal wear and tear.  Depreciation is the amount that can be deducted from income each year to reflect this reduction in value.  The IRS classifies each depreciable item according to the number of years of its useful life.  It is over this period that the fixed asset can be fully depreciated.

A cost segregation study identifies building assets that can be depreciated at an accelerated rate using a shorter depreciation life.  These assets are the interior and exterior components of a building in addition to its structure. They may be part of newly constructed buildings or existing buildings that have been purchased or renovated.  Approximately 20% to 40% of these components can be depreciated at a much faster rate than the building structure itself.  A cost segregation study dissects the purchase/construction price of a property that would normally be depreciated over 27 ½ years—and identifies all property-related costs that can be depreciated over 5, 7, and 15 years.

If the expense of the construction, purchase or renovation was in a previous year, favorable IRS rulings allow taxpayers to complete a cost segregation study on a past acquisition or improvement and take the current year’s deduction for the resulting accelerated depreciation not claimed in prior years.

You can learn more about how depreciation is calculated, as well as the other tax factors when passively investing in apartment syndications, by clicking here.

Each year, the general partner’s accountant creates a Schedule K-1 for the limited partners for each apartment syndicate deal. The passive investors file the K-1 with their tax returns to report their share of the investment’s profits, losses, deductions and credits to the IRS, including any depreciation expense that was passed through to them.

Click here for a sample Schedule K-1.

There are three boxes on the K-1 that passive investors care about the most.

Box 2. Net rental real estate income (loss). This is the net of revenues less expenses, including depreciation expense passed through to the LPs. For most operating properties, the resulting loss is primarily due to accelerated deprecation. On the example K-1, the depreciation deduction passed through to the Limited Partner is $50,507, thereby resulting in an overall loss (negative taxable income).

Box 19. Distributions. This is the amount of equity that was returned to the limited partner. On the example K-1, the limited partner received $1,400 in cash distributions from their preferred return of distribution and profits.

Just because the LP realizes a loss on paper does not mean the property isn’t performing well.  The loss is generally from the accelerated depreciation, not from loss of income or capital.

Section L. Partner’s capital account analysis. On the sample K-1, the ending capital account is $48,093. However, this lower amount doesn’t reflect the capital balance that the limited partner’s preferred return is based on. The $48,094 is a tax basis, not a capital account balance. Thus, this limited partner wouldn’t receive a lowered preferred return distribution based on a capital balance of $48,094. From the operator’s perspective, depreciation doesn’t reduce the passive investor’s capital account balance.

The capital balance is technically reduced by the distribution amount above the preferred return (i.e., the distribution from the profit split), which is a portion of the $1,400 in the “withdrawals & distributions” box. However, operator’s deals are structured in a way so that the LPs continue to receive a preferred return based on their original equity investment amount, with the difference made up at sale.

The majority of the other accounting items on the K-1 are reported on and flow through to your Qualified Business Income worksheet.  The net effect of these items will be unique to each investor based on their specific situation and other holdings.

If you want to learn more about each of the individual sections and boxes, click here to review IRS instructions for the Schedule K-1.

To better understand your own tax implications on any investment, it is important to consult a professional who has an understanding of your overall finances so that they may give full tax advice.  Therefore, always speak with a CPA or financial advisor before making an investment decision.

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What Financial Reports to Send to Passive Apartment Investors

After closing on an apartment syndication deal, one of the responsibilities of the general partners (GP) is to provide the limited partners with ongoing updates on the investment.

Here is a blog post where we outline all the GP’s duties after acquisition.

One aspect of this passive investor communication is providing financial reports on the asset. Not all general partners provide financials to limited partners. However, when they do, there is an increase in trust between the GPs and LPs, which is the number one reason why passive investors chose to invest with one operator over another.

The purpose of this blog post is to outline the process of providing your investors with deal updates by sending them financial reports.

What Financial Reports to Send to Passive Investors

The reason to send passive investors financial reports, aside from increasing transparency and trust, is so that they know what is going on with the investment. The information provided in monthly or quarterly recap emails is a good start, but a spreadsheet with hundreds of data points paints a more detailed picture of the asset’s operations.

Ultimately, how often you send financial reports and the types of financial reports you send is up to you and the preferences of your investors.

The two most relevant financial reports to send to passive investors are the rent roll and the T-12.

A rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income. The rent roll provides passive investors with a current snapshot of the investment’s revenue.

A T-12 is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement, the T-12 provides passive investors with current and historical revenue and expenses.

A best practice is to send financials at least once a quarter.

How to Obtain Financial Reports

The first step in the process starts before you even have a deal. Most likely, the financial reports will be generated by your property management company. When interviewing property management companies, make sure you set expectations. First, ask them what type of property management software they use and if it can generate custom financial reports. Ideally, they provide you with a sample rent roll and T-12. If they do, how detailed are the reports? Is the T-12 broken down into specific line items? Does the rent roll list out all of the important metrics?

Here are examples of how detailed a rent roll and T-12 should be.

Assuming they generate the right reports, the next question to ask is “will you send me financial reports upon request” and “what is the lead time?” In doing so, you will know if they are willing to send you financial reports and how quickly (or slowly) you can expect to receive them.

How to Send Financial Reports to Passive Investors

One approach is to include links to download the financials in the monthly or quarterly recap emails.

Create a Dropbox folder for each of your properties. Each quarter, upload PDF versions of the rent roll and T-12 to the property’s respective Dropbox folder and include the links in the recap email. For example, include a sentence like, “Also, you can download the quarterly financials (current rent roll and profit and loss statement) by clicking here,” and the wording “clicking here” is hyperlinked to the financial reports.

Another more advanced and efficient option is to upload the financials to an investor portal. Rather than linking to the financials in your recap emails, you can direct the passive investors to the portal.

Before sending the financial reports, make sure that your resident’s and investor’s personal information is removed. Sometimes, the investor distributions will be included at the bottom of the T-12. Only include the line items above the net operating income. Also, make sure you remove the variance column from the T-12. Your property management company’s software may include a column that has the difference between the actuals and the project (i.e., the variance). To avoid confusion, remove the variance column and only send to investors upon request. Consider removing the names of residents for the rent roll too.

How to Handle Passive Investors’ Questions About Financials

Like any questions received from investors, if you know the answer, reply in a timely fashion. If you don’t know the answer, reach out to your property management company.

The most common question you will receive from investors will be about how the T-12 actuals compare to the projections you provided in the PPM. If you are not hitting your projections, speak with your property management company to determine why there is a variance and what is being done to solve the issue. The best responses to investor’s questions include a diagnosis of the issue as well as the solution which should already be implemented.

 

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Everything You Need to Know About Filing an Insurance Claim

One of the greatest unknowns that is nearly impossible to predict when underwriting a commercial real estate deal is whether a catastrophe will occur at some point during the business plan. If a catastrophe were to occur, you need to understand how to address any damages in a timely manner. Depending on the level of damage, you may be required to submit an insurance claim.

A commercial property insurance claim entails restoring the property to the pre-loss condition within the limits of the insurance purchased, while also maintaining the business during the time needed to rebuild or repair the property.

Here is a general overview of the process:

Some sort of catastrophe occurs: Examples are a natural disaster (hurricane, flash flooding, tornado, intense storm, etc.) or a fire.

Mitigation of damages: You are required to protect the property from additional damages to mitigate the extent of physical and economic losses. This means you may need to make temporary emergency repairs. For example, any window, door, roof, or other opening must be covered so that rain, animals, or people cannot enter the property and do further damage to the property.

Evaluation of coverages: You will want to review your insurance policy to understand the terms and conditions, including coverage limitations, valuation methods, time limitations, and your duties and responsibilities for filing a claim.

Valuation of damages, claim preparation, and documentation: Before anyone moves or removes anything, you want to document the extent of the damage. Take lots of pictures from many different angles of each damaged area and item. Write detailed descriptions of the damages that correspond with the pictures. Include when the loss occurred and any questions or concerns you have about potential hidden damage. There is no such thing as too much documentation. Additionally, obtain estimates and bids from licensed contractors for repairs or to rebuild. You will be required to submit a detailed itemized claim with expert reports and estimates to your insurer. This should include information about the property damage, as well as business interruption, loss of income, rents, etc., and extra expenses to continue normal operations. This report is commonly referred to as a Proof of Loss Statement.

Negotiations and settlement: Your insurer will audit your claim in detail and make any necessary adjustments based on your policy and their experts’ opinions.

Restoration of property and operations: Do not proceed with permanent work until you have reached an agreement with your insurer. Once a settlement has been reached, work may begin to restore the asset to its pre-loss condition.

What a Typical Commercial Property Insurance Policy Covers

Here is what your typical apartment property insurance policy will cover:

Property Damage, including the buildings, fixtures, machines, furnishings, raw materials, and inventory.

Business Interruption, which is intended to place your business in the position it would have attained, had the loss that caused the interruption not occurred. It should provide funds necessary to sustain your business while its operations are suspended as a result of damage caused by a covered peril. It typically pays the asset’s profit and continuing operating expenses, including payroll, for a specific time period.

Extra Expense, which covers expenses incurred in mitigating the business loss, or increased costs in continuing a business in the event of a catastrophe. It can reimburse you for money spent moving a covered business to a different location while the covered property is restored. It is intended to offset expenses associated with returning to normal operations. Equipment breakdown coverage is often available with this coverage and should be purchased if a customer’s business is dependent upon certain equipment.

Contingent Business Interruption is usually an extension of the business interruption coverage available in most commercial real estate policies. Contingent Business Interruption provides you with benefits to cover lost profits and extra expenses resulting from damage to a third party’s property, typically in four situations: (1) when the insured business relies on a third party to deliver materials or product; (2) when the insured business depends upon a third party to manufacture products; 3) when the insured business depends on a third party to purchase its products; and 4) when the insured business depends on a third party leader location to attract customers.

Ordinary Payroll Coverage provides for salaries as a continued expense, and a policy may provide coverage for you to pay hourly employees for a specified period of time while the business is closed.

Loss of Rents pays for lost income when a covered commercial property is made uninhabitable by a covered event and renters need not make rental payments. A lease or a rental agreement is helpful in estimating the amount of coverage needed.

Extended Period of Indemnity provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.

Civil Authority coverage provides business income benefits when a civil authority prohibits access to the insured property due to direct physical loss or damage to other property. It is most commonly triggered during mandatory evacuations.

Utility Services – Time Element extends business income and extra expense insurance to protect against losses caused by interruption of services from a specified utility that provides a business with water, power, or communications.

Loss of Ingress or Egress provides benefits when, as a direct result of a covered peril, ingress to or egress from real and personal property is prevented.

Make sure you review your policy so that you know what is and isn’t covered.

Tips for Avoiding a Delay with Your Insurance Claim

Your policy states that your insurer is legally bound to process your claim and pay you what is owed from your damages in a timely manner. However, timely is a subjective term and commercial insurance claims can be delayed for many reasons.

Here are some tips to avoid some of the most common reasons why a claim would be delayed:

  1. Know your policy

Your property insurance policy is packed with enough legalese to make anyone’s head spin. Even seasoned claims professionals routinely argue over business insurance policy interpretation. Still, it is critically important to read and understand what your policy covers, what it excludes, what it obligates you to do, and the process you must follow to settle your commercial property insurance claim successfully.

If you have gaps in your understanding of your policy, seek help from a business insurance claims professional, like a licensed public insurance adjuster. He or she can review your claim and advise you on how to achieve the maximum settlement under the terms of your specific property insurance policy.

  1. Take immediate steps to mitigate additional damage

You are required to make temporary emergency repairs to prevent additional losses resulting from the original damage. Any damaged window, door, roof or other opening must be covered so rain, animals or hooligans cannot enter and do further harm to your property.

This is a no-excuses step you must take, as your policy provides coverage for the cost. Prior to entering the damaged premises, contact your utility companies and fire department to ensure you are cleared to enter.

  1. Collect abundant documentation of all damage

When you suffer insured commercial property damage, the burden of proof to substantiate and document your loss is squarely on you, the policyholder. To that end, there is no such thing as too much proof. Too little, though, can be the cause of significant delays in your commercial insurance claim process.

Before anyone moves or removes anything from your damaged premises, take photographs — many, from all different angles, of each damaged area and item. Write detailed descriptions of the damages you observe that correspond to the pictures. Include when the loss occurred, and any questions you have or reasons to suspect there may be hidden damage (for example, if smoke or soot permeated your walls, ductwork, machinery, etc.).

This initial documentation will be very valuable when you develop your Proof of Loss statement.

  1. Get multiple bids from repair contractors

Some insurance carriers may encourage you to believe you have to select your repair professional(s) from the carrier’s list of preferred providers. Others may suggest you’ll save big money with their chosen providers. The fact is, you have every right to select the provider of your choice to do your contracted work.

Solicit several bids, and get everything you are promised in writing. Bid prices often vary, and those price differences often reflect the use of different materials and methods. Make sure the contractors you’re considering aren’t the lowest priced, but the ones best able to return your property to pre-loss condition.

  1. Submit a proper Proof of Loss statement

Developing a proper Proof of Loss statement is one of the most important steps you can take to help your commercial property insurance claim process resolve successfully and without delays.

Your insurance company will send you a Proof of Loss form. Be sure the information you provide is accurate — and thorough. This is commonly where people unknowingly shortchange themselves on their claim settlement amounts, by providing insufficient information, documentation and evidence of their losses.

Organize the photographs and written descriptions of your damages to show what happened, when, where, and the resulting damaged property, inventory, equipment, personal property, etc. Provide copies of the estimates you obtained, and a value for the full extent of your loss.

Here, too, a licensed public adjuster can be an invaluable asset to help you avoid delays, calculate a fair estimate for the full extent of your damages, and maximize your commercial property claim settlement.

  1. Keep a claim journal

Filing a commercial property insurance claim takes time, effort, knowledge, determination, and communication. Throughout the process, it is wise to keep a claim journal, so when you need to look back at any of the process, you will have detailed notes about what happened, when, and who said or did what.

Wherever possible, communicate by email. If you are contacted by or speak with anyone by phone, note in your claim journal the date and time of the call, the person’s name and title, what you talked about, the conclusions reached, any additional steps needed, who is responsible for taking those steps, and any deadlines set. Get the person’s email address. Follow up the call with a written summary of the conversation, and ask him or her to review and agree to the information included.

  1. Be respectful, but firm

Achieving a fair settlement for damages to your business can be challenging, stressful, frustrating, even infuriating. Take a deep breath and remind yourself: you have the right — and the obligation — to stand up for yourself and your business. The more organized, direct, respectful and firm you are throughout your commercial property insurance claim process, the better your chances of avoiding delays and achieving fair compensation for your loss.

The last thing I wanted to mention is how to work with your passive investors in the event of a natural disaster of fire. Check out this blog post here about the SOS approach: safety, ongoing communication, and summary.

 

 

 

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How to Do a 1031 Exchange on an Apartment Syndication

DISCLAIMER: This blog post is written for educational purposes only. We are not providing tax, legal, or accounting advice. Therefore, we strongly recommend that you speak with a tax advisor, CPA, and/or financial advisor for more details on the federal, state, and local tax consequences associated with doing and/or participating in a 1031 exchange.

Generally, as a real estate syndicator, the two common approaches to a disposition is to either 1) liquidate and distribute the sales proceeds to yourself, other general partners, and the limit partners, or 2) roll the sales proceeds into a new deal.

The latter is referred to as a 1031 exchange.

There are two main, potential benefits to the 1031 exchange. By participating in a 1031 exchange, your passive investors may be able to defer capital gains taxes on the profits from sale. It will also allow your passive investors to continue to collect distributions, and the new preferred return will be based on the higher proceeds from the sale instead of the original investment.

In this blog post, I want to provide an overview of the 1031 exchange process from the perspective of the apartment syndicator.

1031 Exchange Requirements

The requirements for a 1031 exchange are laid out in the United States Internal Revenue Code 26 U.S.C. § 1031.

Here are the current requirements in order to qualify for a 1031 exchange:

  1. The relinquished property (i.e., the property you are selling) must be an investment property
  2. The purchased property must be of “like kind”
  3. The purchase property must be at least the same value as the relinquished property or more
  4. The purchased property must be purchased by the same name or entity that owned the relinquished property
  5. Sales proceeds must be held in an escrow account
  6. Purchased property must be identified within 45 days after closing on the relinquished property
  7. Purchase property must be closed on within 180 days after closing on the relinquished property

We go into more details on these rules in a blog post here.

1031 Exchange Process

If you want to implement a 1031 exchange, you need to work with a 1031 consultant. These are companies who are qualified intermediaries who specialize in the 1031 exchange.

Like most team members, the best way to find a 1031 exchange consultant is through referrals. However, a quick Google search will generate hundreds of potential candidates. The main requirement is that they specialize in 1031 exchanges and in apartments (or whatever asset class you focus on).

Once you’ve selected a company, they will send you a letter of engagement that outlines the 1031 exchange process and will ask the person or entity on the property title to fill out a Form W-9.

In order to start the 1031 exchange process, the consulting firm will also request the following:

  • Name of person(s) or entity in title: If entity, who will sign on behalf of it and what is their title? What type of entity is it? Single member LLC, partnership, corporation?
  • Social security or Tax ID number of person(s) or entity in the title
  • Mailing address
  • Copy of driver’s license or valid ID
  • Copy of the purchase and sale agreement
  • Address of property(ies) being sold
  • Name of purchaser(s)
  • Tentative closing date
  • Name and contact information of title company or closing attorney handling the sale

Notify Investors

After you are under contract on the relinquished property and engaged the 1031 exchange consultant, you will need to notify your passive investors about the disposition. Additionally, you will want to explain the potential benefits of a 1031 exchange and ask whether they want to participate in the 1031 exchange. A simple way to do this is to ask investors to reply to the email with “A” if they want to participate and “B” if they don’t want to participate. Another option is to create a Google Form to collect contact information and responses.

I recommend setting a “let us know by” date that is at least 7 days prior to closing. For example, if the scheduled closing date is May 8th, ask your investors to let you know whether they want to participate in the 1031 exchange by May 1st at the latest. To ensure they reply on time, let them know that if they do not submit a response by that date, their distribution will be delayed.

In general, it is a best practice to set “let us know by” dates. The earlier you have replies, the more efficient the process is for you as a general partner.

As replies come in from your investors, you will create two lists: investors who are participating and investors who are not participating. Send separate email updates to each list.

For the investors who are participating in the 1031 exchange, make sure that you send them status updates after closing. Let them know once you’ve identified the new deal, including the same information that you would include in a new investment offering email (deal information, projected returns, conference call information, etc.), as well as how much their investment will be in the new deal (for example, if you initially invested $100,000 into the first deal, your investment into this deal will be approximately $120,000 – $100,000 initial investment + $20,000 profit from sale). From there, you can add the 1031 exchange investors to the email list for the new deal and send them the regular closing updates.

For the investors who are not participating in the 1031 exchange, make sure the you send them status updates after closing too. In the closing email of the first deal, let them know the process for receiving their final distribution (i.e., when will they receive it, how will they receive it, and what the amount will be). Additionally, like the sale of any deal, the investors that are not participating in the 1031 exchange will need to sign a document that states that they have no further obligations in the original deal. Your attorney can help you prepare this document.

What You Need to Know About Seeing Up a 1031 Exchange

The two potential benefits of the 1031 exchange are deferred taxes and a preferred return based on a higher investment amount.

The IRS regulates who and what qualifies for a 1031 exchange.

When you are selling an apartment, notify your investors about the sales and determine who wants to participate in the 1031 exchange. Send separate updates to investors who do and don’t want to participate. Investors who do want to participate will have their proceeds rolled into a new deal. Investors who do not want to participate will receive their proceeds and have no further obligations.

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Why and When to Bring Apartment Property Management In-House

The property management company that manages your apartment investments is one of your most important team members. Because they are responsible for overseeing the day-to-day operations of your apartment investments and implementing your business plan, they can make or break your business.

Many apartment investors start off by hiring a 3rd party property management company. However, the other option is to bring property management in-house.

Why Bring Property Management In-House

The primary reason to bring property management in-house is to improve the performance of your apartment portfolio. You do not bring property management in-house to make money. In fact, it is possible that your in-house property management company operates at a loss. The purpose of bringing property management in-house is to improve the overall performance of the individual apartment asset and your portfolio as a while. In-house management can result in higher quality customer service for residents, better marketing, faster unit turnover, more training opportunity for staff, top talent, etc. The important word here is “can.” Therefore, If you don’t think you can do it better, don’t do it at all.

Secondly, there are greater alignment of interests with in-house property management. 3rd-party property managers typically make money from a percentage of the collected revenue (referred to as fee-based management). The major issue with fee-based management is that the 3rd-party property management company isn’t incentivized to maximize revenue. Let’s say a 3rd-party property management company charges a 3% management fee. If the property generated $100,000 per month in revenue, they make $3,000 per month. If revenue increased by 25% to $125,000, they make $3,750, or only $750 more per month. An increase in revenue of 25% is huge for you and your investors, but not so much for a 3rd party property management company. However, when property management is in-house, maximizing revenue (or whatever else you decide) will be a top priority.

Lastly, bringing property management in-house improves communication. Since it is your property management company, you decide how often they send you the property’s KPIs. If you want a daily report, no problem. Whereas with 3rd-party property management, they may only agree to send weekly or monthly performance reports. Similarly, since it is your property management company, you can be as involved in the actual operations of the property as you want. In turn, you will have more up-to-date, detailed information to share with investors about the status of your business plan, as well as make faster adjustments if challenges arise.

When to Bring Property Management In-House

There are only two times when apartment investors bring property management in-house: day 1 or when they have achieved scale (i.e., thousands of apartment units). Neither option is objectively better than the other but there are potential pros and cons.

Pros of Bringing Property Management In-House Day 1

Bringing property management in-house day 1 results in zero disruptions. There are a lot of moving parts when transitioning from 3rd party to in-house management. You need to provide notice to the current company, terminate contracts, create the new company, and then move the all the operations over to your company. This may involve all new staff as well. All of this is a major disruption for residents and potentially operations.
Bringing property management in-house day 1 results in smaller overhead. You will not need to build out an entire operation with Executive, Directors, etc., which is expensive and time consuming, especially since the team and infrastructure need to be created before taking over management and generating revenue. Instead, it is likely that it is just you and your site staff. Over time, as needed, you can bring on additional team members and naturally grow to a full-sized business.

Pros of Bringing Property Management In-House When You Have Achieved Scale

Bringing property management in-house when you have achieved scale allows you to attract top talent. Property management and business professionals are eager to bring their expertise to a brand-new company that will manage thousands of units. They cannot wait to be actively involved in implementing a business plan they had a hand in creating. You will have a difficult time attracting the best-of-the-best to your property management company when it only manages one building.
Bringing property management in-house when you have achieved scale can generate a profit. As I mentioned earlier, the purpose of creating a property management company is not to make money. However, waiting to bring management in-house when you have thousands of units may allow you to generate a small profit, or at least breakeven. Having one apartment will not cover the costs of an in-house property management company and you will operate at a loss.
Bringing property management in-house when you have achieved scale allows you to implement best practices. The top talent you attract will also come with the best property management practices. They have years of experience working for the best property management institutions. They will have intimate knowledge of the market. As a result, they will bring their expertise to your portfolio, allowing in your ability to implement the best practices to improve operations. When you do not have a track record and large portfolio of properties, you won’t attract the top talent, meaning you likely won’t be implementing the best practices.

Why and When to Bring Property Management In-House

The main reason why you bring property management in-house is to improve the operations of your apartment portfolio. It will also increase alignment of interests and improve communication.
You can either bring property management in-house day 1 or when you have achieved scale. The benefits of bringing property management in-house day 1 are no disruptions and smaller overhead. The benefits of bringing property management in-house when you have achieved scale is your ability to attract top talent, start with a profit margin, and implement best practices.

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How to Provide Best-In-Class Customer Service to Your Multifamily Residents

Multifamily investing offers the opportunity to profit tremendously when you sell your property, and a well-managed property will also throw off regular income throughout your ownership period. As a commercial real estate investor, you have devoted a tremendous amount of time, energy and money into the purchase of a great property. You want to do what it takes to optimize your return on investment, but successful commercial real estate investing involves more than buying and maintaining properties. Your tenants are the lifeblood of your investment, and they should receive just as much care and attention as property upkeep and number crunching.

Get to Know Your Tenants as People

While your multifamily property is a financial investment to you, it is the place that your tenants call home. Each of your tenants has unique factors to consider related to their lifestyle, finances, interests and goals, and these are often entwined with their living experience in vital ways. When you get to know your tenants as people rather than as names on a lease, you can offer them a higher level of customer service. In the process, you may decrease turnover and improve online reviews. These factors directly feed into a healthy bottom line. How can you serve your property’s residents as customers rather than solely as tenants?

Be More Than a Rent Collector

Your property’s residents will be more likely to renew a lease and to recommend your property to their friends and family members when they feel valued and respected. In many cases, the relationship between a tenant and a landlord is purely financial, and it is entirely dictated by the terms of the lease. You must abide by the terms of the lease, and you must ensure that rents are collected in a timely manner. However, your relationship with your residents should extend beyond the monthly rent collection process. For example, you can send tenants birthday cards or call to check on their unit’s condition periodically. Small gestures like these can go a long way toward developing a positive relationship with your tenants.

Be Proactive

The top brands today stay on top of their customers’ needs, and they anticipate behavior when possible. Your multifamily property is a business, and your tenants are your customers. With this in mind, you need to nurture relationships and proactively anticipate your customers’ needs. For example, reach out to your tenants a few months before their lease expires to give them renewal options. Implement a loyalty program that rewards renewals, transfers and referrals. A high turnover rate at your multifamily property can dramatically erode profits, so creating a reward system that encourages renewals can be cost-effective for your business. At the same time, the benefits of the reward system likely will be appreciated by your customers.

Support Your Residents’ Goals

While some residents may move out of an apartment building that is poorly managed, others will vacate for reasons that are not related to property management at all. For example, they may need a larger space or may be ready to purchase a home. When your tenants decide to vacate, avoid creating stressful and unnecessary roadblocks. Consider collecting moving boxes and other materials from new tenants and offering these to tenants who are vacating as part of your service. Offer to do a walk-through before the tenants vacate so that they can recoup as much of their deposit as possible. You should support your tenants just as much when they are vacating as you did when they were moving in.

Approach Rent Increases Transparently

For the majority of your tenants, their monthly rental payment may be their largest expense. An unexpected increase can create immediate stress and anxiety, and this may be followed by a kneejerk reaction to look for a new and more affordable place to live. From your perspective, maintaining rents at market rates is essential in order to optimize profitability. How can you maintain market rents while also retaining happy tenants? Create a small report for your tenants that shows current market rents in the area. This report should substantiate the rental increase at the time of renewal. If you launch a rewards program for loyal residents, consider outlining any savings that they may enjoy by renewing their lease. This type of detailed and customized report could actually help your tenants to feel positive about renewing their lease at a higher rate.

Be Readily Available

Tenants commonly reach out to their landlord or property manager because they have a complaint or a repair issue that requires prompt attention. In many cases, tenants are provided a single phone number to call for assistance, and landlords may let those calls go to voicemail to screen them for urgency. To tenants, the inability to quickly and easily reach you when they need assistance with their home can be stressful. More than that, it could create the impression that your tenants are a bother to you. To counter this, offer multiple communication channels. In addition to a phone number for verbal communication, offer text communication, an email and a website. Make a point to always answer the phone when a tenant calls and to respond to all other methods of communication promptly.

Cross-Sell with Your Other Properties

Do you own more than one multifamily property? The apartment that a tenant lives in today may no longer meet their needs, but one of your other properties could be a better fit. If you have provided excellent customer service to the tenant throughout his or her residency period, the tenant may be happy to consider relocating to one of your other properties as long as the property meets their current needs. Likewise, consider extending the rewards for your referral program to all of your properties. These practices will help you to maintain higher occupancy rates overall, and the increased options can bolster customer satisfaction.

Ask for Reviews

Your existing tenants will directly impact your bottom line from multifamily investing long after they move out. This is because potential tenants often read online reviews from past tenants to learn about important factors like property management responsiveness, rent increases, property maintenance and more. Because unhappy tenants may be more likely to post reviews than tenants who have loved living in your property, soliciting feedback from satisfied tenants is essential. Consider asking tenants to leave reviews at different stages in their experience. For example, you may ask for feedback about the move-in process after they get settled. You may also ask tenants to leave comments when they renew a lease or after they move out. In addition, use feedback from negative reviews to make improvements.

As is the case with other types of businesses, you will not be able to please all of your tenants at all times. However, because success from multifamily investing is intricately linked to tenant satisfaction, it is essential that you develop a sound customer service policy that touches your tenants throughout their experience. Properly managing tenant relationships may require more time and energy than you initially anticipated. Consider hiring a reputable property management firm if you are challenged in this or other critical areas of commercial real estate investing.

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Obtaining an Insurance Quote – 8 Things to Consider

During the past year or so, the multifamily insurance market has changed. Throughout most of the post-2008 economic expansion, we were in a “soft” insurance market. That is, insurance companies were competing for business. As a result, multifamily operators had access to relatively low insurance premiums. However, according to multifamily insurance specialist Bryan Shimeall, we’ve officially transitioned into a “hard” insurance market.

In a “hard” insurance market, insurers are very picky about the types of properties they will insure and policies they will provide. As an example, Bryan said many insurers no long offer renewable policies. Once the current contract expires, they may elect to not renew the insurance, depending on their updated underwriting standards.

As a result, assuming the property still qualifies for insurance, the premiums will tick higher and higher.

Because of these changes in multifamily insurance, here are the eight things to think about when obtaining an insurance quote.

  1. Setting the insurance assumption when underwriting: The days of assuming the stabilized insurance premium will be equal to the T-12 insurance premium or OM insurance premium are over.The increases in insurance rates depend on the geography, but a double-digit percent increase in the insurance rate is not uncommon in certain markets. When underwriting a multifamily deal, speaking with your insurance provider to get an estimated insurance premium is now more important than ever.
  2. History of losses: To provide you with an accurate quote, your insurance provider will require the history of losses from the current owner’s insurance provider. When they do not have the history of losses, they will create a quote with the assumption that the property has a clean history.However, if they discover a history of losses during the due diligence period, the insurance premium will go up. Depending on the severity of the loss history, the insurer may opt to not provide insurance on the asset at all. Therefore, request the loss history as early as possible.
  3. Deductible vs. Premium: Generally, the deductible and premium have an inverse relationship. The higher the deductible, the lower the premium and vice versa. You want a higher deductible that you are comfortable paying and a lower premium. This will result in a reduced insurance expense and higher cash flow. Ask the insurance provider for multiple quotes with varying deductibles and premiums and select the coverage with the highest deductible you are comfortable paying.
  4. Understanding the deductible: There are two types of deductibles: a deductible per occurrence and a deductible per building. If damage occurs to multiple buildings and the deductible is per building, you will have to pay the deductible multiple times until the insurance coverage kicks in. If damage occurs to multiple buildings and the deductible is per occurrence, you will have to pay one deductible and then the insurance kicks in.
  5. Loss of income coverage: Apartment insurance not only covers the physical building but can cover loss of income as well. You will want to determine if you receive reimbursements for a loss of rent if the property is damaged by a covered loss, like a storm or a fire. If you do, how does the coverage work? Will it cover a certain time frame? Up to a certain amount?
  6. Commercial general liability insurance: Apartment insurance can also protect you against lawsuits from a tenant or visitor being injured. A good rule of thumb is $1 million per occurrence and $2 million overall in general liability coverage.
  7. Replacement insurance: Make sure the replacement cost is what it would cost to replace the property. The replacement cost should be based on the price per foot to rebuild as opposed to some other method of valuation.
  8. Real Estate America Property Association (REAPA): REAPA partners with the best-in-breed industry leaders to provide its members with significant savings on products and services related to real estate. Join REAPA for $250 per year to access their less expensive insurance product.

 

8 Things to Consider When Obtaining Insurance

To avoiding underestimating your insurance costs and to ensure you have adequate coverage when needed, make sure you:

  1. Don’t trust the proforma insurance but rather obtain a new estimate
  2. Request history of losses from seller ASAP
  3. Go with the lower premium and higher deductible policy
  4. Understand the difference between deductible per occurrence and per building
  5. Obtain loss of income coverage
  6. Get general liability coverage
  7. Confirm replacement cost is based on price/sqft approach
  8. Join REAPA for discounted insurance premiums
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10 US Cities Where Rents Will Rise the Most in 2021

The COVID-19 pandemic has accelerated the trend of people, especially the millennial generation, moving out of high-cost gateway markets. Pre-COVID, the millennial generation moved to be closer to family and/or start a family. After the onset of the pandemic, even more people began (and continue) fleeing high-cost gateway markets. For example, since many people are working remotely, they prefer the lower rent payments for a larger unit size rather than paying higher rents for a tiny apartment.

Many suburban, tertiary, and tech hub markets benefited from this migration trend in 2020. Markets with the most growth in 2020 include Sacramento (6.1%), Inland Empire (7.3%), Phoenix (4.6%), Tampa (3.9%), and Las Vegas (3.8), Boise (9.5%), and Scranton-Wilkes-Barre (7.8%), according to YardiMatrix.

2021 is a new year, yet many of the challenges from 2020 remain. Overall, YardiMatrix predicts rents will rise by 2.0% nationally in 2021 (compared to -0.8% in 2020). They predict rents will rise the most in Las Vegas (4.8%), followed by Salt Lake City (4.3%), Austin (3.9%), and Indianapolis (3.9%).

Investing in a market where rents exceed the national average is ideal. While you still want to make conservative rent growth assumptions based on a rental comparable analysis, market-driven rent growth allows multifamily investors to exceed their return projections.

Here are the 10 cities where rents are forecasted to increase the most in 2021:

 

 

1. Las Vegas

YardiMatrix 2021 Rent Forecast % Change: 4.8%

2020 Rent % Change: 3.8%

2. Salt Lake City

YardiMatrix 2021 Rent Forecast % Change: 4.3%

2020 Rent % Change: 3.8%

3. Austin

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: -3.6%

4. Indianapolis

YardiMatrix 2021 Rent Forecast % Change: 3.9%

2020 Rent % Change: 3.5%

5. Phoenix

YardiMatrix 2021 Rent Forecast % Change: 3.7%

2020 Rent % Change: 4.6%

6. Winston- Salem

YardiMatrix 2021 Rent Forecast % Change: 3.6%

2020 Rent % Change: 6.6%

7. New Orleans

YardiMatrix 2021 Rent Forecast % Change: 3.5%

2020 Rent % Change: 0.6%

8. Birmingham

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change: 2.8%

9. Sacramento

YardiMatrix 2021 Rent Forecast % Change: 3.4%

2020 Rent % Change:6.1%

10. Cincinnati

YardiMatrix 2021 Rent Forecast % Change: 3.3%

2020 Rent % Change: 2.2%

 

Here is a data table summarizing 11 to 20:

Market YardiMatrix 2021 Rent Forecast % Change 2020 Rent % Change
Atlanta 3.3% 3.0%
Columbus 3.3% 2.3%
Louisville 3.3% 1.8%
Raleigh 3.2% 0.0%
Richmond 3.1% 6.5%
Memphis 3.1% 5.9%
Tucson 3.0% 5.9%
Nashville 3.0% -1.5%
Tampa 2.9% 3.9%
Houston 2.8% -1.9%

 

Forecasts are never perfect

Not many people, if anyone, could have predicted that the market with the greatest rent growth in 2020 would have been Boise, Idaho. Therefore, a strong rent growth prediction should not be the only reason why you decide to invest in a market. However, like all forecasts, rent growth predictions are good guides to locating potential investment markets on which you perform a deep dive analysis.

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How Passively Investing Can Make You a Better Real Estate Investor

If you would like to make more money as a real estate investor, consider the benefits of a good investment. Investing passively is a smart way to make more money and give yourself more free time. You can start a passive income plan no matter if you have not done real estate before or if you have your own business. Learn about this approach and how it could make sense for you over the long run.

Active Versus Passive

If you want a solid wealth building plan, knowing the difference between passive and active investing is a critical part of the process. An active investment is when you go out and look for properties to buy and sell all the time. To maintain your income, you need a steady stream of new homes to buy and sell.

With a passive investment, you keep making money over the long run. You invest in a property and rent it for the best results. You keep your income stream as long as you maintain your property and follow the proper steps.

Passive Investments Increase Your Wealth

Passive investments are a great way to build your portfolio. You can only buy and sell so many properties at a time, so you will reach a profit cap if you are not careful. If you don’t want to face that problem, get passive investments that make the most sense for your bottom line.

Passive investments involve buying properties that people want to rent. Once you buy the property and set up the paperwork, you continue earning a profit without too much effort. If you want to get the most from your effort, invest in vacation rentals.

How to Get Started as a Passive Investor

Learn how to get started as a passive investor. You need to have a plan before you begin and to know how much you are willing to spend. Look at properties in your area to get an idea of what you should do next. Each investment property you buy boosts your profit and takes your business to a whole new level, and you will see the difference in no time.

If you don’t know why passive investments work so well, do as much research as you can. You can find a lot of information online if you know where to look. Also, buy books on passive investments online. This takes your experience to the next level. Learn different passive investment strategies if you would like to succeed over the long run.

When you educate yourself before you begin, you reduce the number of mistakes you make and enhance your projected profitability. It does not take as much as you think to become a passive investment expert.

 

Keep an Eye on the Market

Keep an eye on the market to understand what investment makes sense for you. Look at local prices to see how much profit you can expect. Local rental prices rise and fall over time, so you can’t just look at current prices. Look at past and projected profits to discover what path is right for you, and you will be happy you made the effort.

Watching the market shows you what prices people are willing to pay. Even after your investment properties are in place, you should still watch the market for important changes and updates. Doing so keeps you in the loop and lets you maximize your profits.

 

Try Getting the Best Deal

Try getting the best deal possible to save money. When you look into different investment options, you find a good investment at a fair price. Write down different properties and their prices until you find one that stands out to you more than the rest. You must keep a record of different deals.

Also, some people charge more for the property than they expect you to pay. If you don’t want to pay the full price, negotiate to get a better deal. Speaking with a real-estate professional is another option worth considering. Your expert will help you get the best price possible so that you don’t end up overpaying for your property. A passive investing plan works well no matter your long-term goals.

 

Look for Future Investments

If you get enough passive investments, you won’t have to keep making additional investments if you don’t want to do so. Many people buy old homes or apartments and fix them. They then rent them out for a profit. You can keep doing that each time you get another apartment up and running, or you can stop making investments once you are happy with the money you make.

No matter your situation, always keep an eye on future investment opportunities to keep your options open. Even when you are done buying properties, you can still find deals worth making. Never overlook a good investment opportunity when it presents itself, and you will make the most profit possible for your situation.

Your wealth plan depends on you having the right strategy for the situation. Your wealth building strategy works much better when you keep an eye on the future, and you will know you did the right thing.

Final Thoughts

Look at different passive income plans to understand what path is right for you. Your passive income plan takes your results to another level and empowers you to reach a level of success you never thought possible. Make sure you know what you are doing and that you have a plan.

The right plan will take your real-estate investments to a whole new level, and you will be happy with the outcome you get. Learn as much as possible about active and passive investing as you can to boost your profitability. You will soon have a steady source of income that keeps working for years to come.

Vacation rentals are a powerful investment when you want to earn money passively. The amount you earn depends on many factors you must consider. When you put a plan into action, you will be thrilled by the outcome you achieve. Being a wise investor takes your profit to where you have always wanted it to go.

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Where Investors Did (And Didn’t) Buy Multifamily During the COVID-19 Pandemic

Transaction volume up over 50% in Pittsburgh, San Jose and Stamford, CT only other cities with increased volume

Each year, Integra Realty Resources (IRR) releases their “Commercial Real Estate Trends Report.” Based on long-term and short-term historical economic trends, IRR attempts to forecast how each commercial real estate sector will perform in the coming year.

According to the Federal Reserve Bank of St. Louis, which is responsible for dating recessions, the economy entered a recession in February 2020. And as of this writing, FRED has yet to call the end of the recession.

One dataset included in IRR’s annual trends report is the transaction volume during the prior year. Since the market was in a recession most of last year, the 2020 transaction data provides us insights into where commercial real estate investors were buying up multifamily during a down and uncertain economy. Maybe even more insightful are the markets where investors WERE NOT buying multifamily in 2020.

As a baseline, according to the report, the total multifamily transaction volume in 2020 was down 40% year-to-date, although it still had the highest total transaction volume of the other commercial real estate industries. Only three markets experienced an increase in multifamily transactions in 2020 – Pittsburgh, San Jose, and Stamford, CT. The greatest increase was in Pittsburgh with over 50% more transactions in 2020 compared to 2019, making it one of the “hottest” multifamily market in 2020.

Every other market analyzed experienced a decrease in transactions in 2020. However, some markets more than others. In five markets, the transaction volume in 2020 was down by over 50% – Cincinnati, Inland Empire, Hartford, Cleveland, and Philadelphia.

 

Here are the 10 markets with the greatest increase in multifamily transactions in 2020:

1. Pittsburgh, PA

  • YOY Change: 53.8%
  • Total (4Q2019-3Q2020): $855.7M
  • Volume Rank:39

2. San Jose, CA

  • YOY Change: 11.7%
  • Total (4Q2019-3Q2020): $1,913.3M
  • Volume Rank: 22

3. Stamford, CT

  • YOY Change: 10.3%
  • Total (4Q2019-3Q2020): $440.9M
  • Volume Rank: 50

4. Kansas City, MO

  • YOY Change: -4.4%
  • Total (4Q2019-3Q2020): $1,063.6M
  • Volume Rank: 34

5. Memphis, TN

  • YOY Change: -5.6%
  • Total (4Q2019-3Q2020): $509.3M
  • Volume Rank: 48

6. Seattle, WA

  • YOY Change: -6.5%
  • Total (4Q2019-3Q2020): $5,524.9M
  • Volume Rank: 4

7. East Bay, CA

  • YOY Change: -7.8%
  • Total (4Q2019-3Q2020): $2,079.2M
  • Volume Rank: 21

8. Sacramento, CA

  • YOY Change: -8.9%
  • Total (4Q2019-3Q2020): $1,384.2M
  • Volume Rank: 28

9. St. Louis, MO

  • YOY Change: -12.7%
  • Total (4Q2019-3Q2020): $649.6M
  • Volume Rank: 45

10. San Antonio, TX

  • YOY Change: -13.4%
  • Total (4Q2019-3Q2020): $2,139.7M
  • Volume Rank: 20

Here are the 10 markets with the greatest decrease in multifamily transaction in 2020.

City YOY Change Total (4Q2019-3Q2020) Volume Rank
Manhattan, NY -46.6% $3,820M 8
Baltimore, MD -47.3% $1,1775.5M 32
Long Island, NY -48.3% $469.5M 49
NYC Boroughs -49.0% $2,656.5M 15
Washington, DC -49.8% $795.2M 41
Cincinnati, OH -59.3% $272.5M 52
Inland Empire, CA -60.4% $1,035.4M 35
Hartford, CT -63.2% $109.6M 54
Cleveland, OH -66.9% $240.2M 53
Philadelphia, PA 69.4% $1,013.4M 36

 

An interesting takeaway from this data supports something we talk about here a lot on the Best Ever blog: commercial real estate is very submarket and neighborhood dependent. All three top ranking cities are in the same state as a bottom ranking city (Pittsburgh and Philadelphia, San Jose and Inland Empire, Stamford and Hartford). Therefore, before making an investment decision, you need to continue to perform a high level analysis on a submarket and neighborhood level, rather than focusing on city and MSA level data. However, reports such as these can be a guide to determining which cities and MSAs to research further.

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5 Risk Profiles of Real Estate

Real estate can generally be broken down into five risk profiles. But what do these categories mean?

  • Core
  • Core Plus
  • Value-add
  • Opportunistic
  • Development

Core

Core assets are generally the A quality asset in the A market.  These are viewed as the lowest risk because of their age, condition and market dynamics.  Because of the low risk, they often also generate the lowest returns.

The returns from these assets are typically from cash flow and long term, market driven appreciation.  The buyers of these assets tend to be institutional and carry low leverage with the intent of holding 10+ years.

 

Core Plus

The next tranche in risk is Core Plus. Compared to Core, these assets are older and/or in a less desirable market, although still in strong markets and sub-markets with strong population growth, low crime, and good schools.

For simplicity, these assets will be fully renovated assets with little or no deferred maintenance. When talking about apartments, the units will be recently renovated and achieving full market rents. In regard to market risk, these assets will typically fall into Class A or B submarkets, within major primary and secondary MSAs.

The returns of these assets are, like Core, derived primarily from cash flow with long-term, market-driven appreciation. Leverage is still fairly low, but slightly higher than Core.

 

Value-Add

Value-Add assets, like the name suggests, are existing, cash-flowing assets that have the opportunity to increase the value. The business plan can vary but will always boil down to increasing the income of the asset.  Most commonly in multi-family, the income increase is created through unit renovations.  These assets tend to fall in the B to C range, and can be found in, most frequently, in A, B and C markets.

These assets will frequently have some deferred maintenance that needs addressed, and often times are outdated aesthetically or operationally.  These assets will often require a capital investment to be brought to market standards.

In connection with the large amount of work and capital infusion, the returns in this class jump pretty significantly from Core Plus.  The returns often come from cash flow and forced appreciation but skew more heavily to appreciation.

 

Opportunistic

Opportunistic assets are the riskiest of the EXISTING asset class. These assets often have severe deferred maintenance, high vacancy, and very little, if any, existing cash flow. Most commonly, significant construction is performed to cure the deferred maintenance and bring the property to market standards to begin backfilling the vacancies. Many times, the property is repurposed within its existing structure; for example, converting a vacant warehouse store to self-storage, or a hotel to apartments.

Relative to the purchase price, leverage is often high for Opportunistic assets. The returns are generated through forced appreciation.

 

Development

Development is the riskiest of all asset classes. Typically, developers are buying vacant land, but may also buy existing properties with the intent to demolish the existing structure and build something new.

Returns for developments are created through forced appreciation.

In the cyclical nature of all things, it is interesting to note that many Core buyers are buying newly constructed assets from developers.

In the follow-up blog, I will be diving into the risks of each profile.

About the author:
Evan is the Investor Relations Consultant for Ashcroft Capital.  As such, he spends his days working with investors to better understand their investment goals and background.  With over 13 years in real estate, he has seen all sides of real estate from acquisitions, to capital raising on the equity and debt side, to operations, and actively invests himself.  Please feel free to connect with Evan here.

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Raising Real Estate Capital with Crowdfunding

When raising capital, real estate investors often graduate from personal contacts to complex partnerships or institutions. Another option to consider is crowdfunding. On this Best Ever Show podcast, real estate investor and CEO Chris Rawley explains the power of crowdfunding as a capital source and how to tell if it’s the right option for you.

About Chris Rawley

Chris Rawley has been a professional real estate investor for over 20 years. His portfolio includes single-family, multifamily, and commercial properties. He currently focuses on income-producing agriculture as an opportunity for passive investing. His platform, Harvest Returns, matches quality agriculture deals with investors to raise much-needed capital for U.S. farmers.

Why Crowdfunding?

If you’re doing real estate investing, the conventional funding path usually goes like this. You first use your own money and then approach friends, family, and business contacts for passive investing. When those sources run dry, you may turn to institutional funding or spend considerable time developing partnerships from scratch. Institutions have a high lending threshold and are suited for larger commercial properties such as retail shopping centers. They also come with significant oversight and conditions.

Many individuals engaged in commercial investing have quality deals that don’t meet institutional criteria. Crowdfunding provides a robust, flexible funding alternative. As the deal sponsor, you have access to suitable investors. You also gain legal and regulatory resources that would cost you considerable time and money to build on your own.

Advantages of Crowdfunding

Assembling a syndication deal involves adhering to complex financial regulations and drafting the requisite documents. If you do it yourself, you spend significant time and money on accounting, tax, and legal services. You need to understand the role of the various oversight agencies such as the SEC and hire the right experts. The beauty of crowdfunding is that the platforms handle much of this groundwork for you.

Each platform differs in the type and amount of guidance it provides. For example, Harvest Returns offers its sponsors the benefit of the legwork Chris initially did for his real estate ventures. His business spent considerable money to have securities attorneys put all legal and regulatory requirements in place. As a result, his platform’s listing sponsors benefit directly from this expertise and documentation. They still need to learn the legal environment, but they do not start from scratch and slow the deal.

Another major advantage of crowdfunding is the built-in pool of investors. You don’t have to find and vet your backers. You also have access to a more extensive and diverse group that you would likely discover independently. When the platform accepts your listing, you are guaranteed eyes on your project. You are not guaranteed quick results, but your deal will have the attention of the right audience. This alone is gold for commercial investing.

Crowdfunding may be right for you if:

  • You have exhausted non-institutional resources.
  • You have a successful track record.
  • You have a niche asset class, such as income-producing agriculture.
  • You have a partially funded deal that could benefit from additional investors.

Choose the Right Platform

Crowdfunding investment platforms took off around 2015 and today offer diverse opportunities for various real estate asset classes. You can find platforms tailored to single-family flips, wholesaling, and commercial projects such as retail shopping centers. You can also find options for specialized assets such as specific financial instruments or agriculture.

Chris advises beginning by defining the type of investor you are. Do you fix and flip houses? Do you wholesale apartment buildings? Are you targeting niche real estate markets such as sustainable development? You want to identify the crowdfunding platforms catering to your project niche and research each one to find the best fit.

Most platforms expect sponsors to list exclusively with them rather than attempt to raise funding on several sites. This requirement eases regulatory compliance, and you will likely sign an agreement with the platform you finally choose. A way to feel more comfortable about exclusivity is to speak with other sponsors who have succeeded on that platform. Most sites are happy to provide references. Chris suggests you be wary of any platform that won’t do so.

Your next step is to determine if you qualify for the platforms you’re interested in. They have listing criteria that syndication sponsors must meet. They also differ in the resources they offer, such as regulatory forms. Your best bet is to reach out to them and learn their guidelines and support for sponsors. Most have sales and marketing teams to provide information and perhaps speak with you about your particular situation. Established platforms have more stringent listing criteria, while smaller or newer players often have more flexible requirements.

For their part, investors are looking to mitigate risk. They examine each deal in light of questions such as:

  • Is this project viable?
  • What return can I expect?
  • Can this sponsor deliver results?
  • Can I safeguard capital gains or income?
  • What are the tax implications?

Chris stresses that many investors want to make personal connections and to believe that their capital helps the greater good. If you can demonstrate how your project will benefit the local community or causes such as sustainable farming, your support will grow.

As with any deal, investors look for strong fundamentals. Platforms differ in their due diligence procedures, but you always want to prepare a solid business case and be ready to speak to it.

Build Your Team and Track Record

Investors want to see that a sponsor has a successful track record. As Chris puts it, they don’t want to invest in a newbie’s mistakes. You are best off trying crowdfunding after you have done at least a few successful deals.

For investors, a sponsor’s experience is often the differentiator between two similar offerings. Even a short track record builds credibility. Before attempting crowdfunding, do one or two syndications on your own, either with personal contacts or an established partner.

A credible sponsor has a strong team as well as a track record as an active investor. Investors want to see that you have accounting and legal experts as well as any other business advisers appropriate for your asset class. This shows that you have some experience, are serious, and run your active investing as a business.

Present a Winning Deal

Many platforms conduct a thorough background check on potential sponsors before moving forward with them. They examine the deal’s structure and numbers to determine if it is a viable investment.

Each platform has requirements for putting your listing in front of investors. Your listing needs to differentiate itself from other concurrent offerings. At a minimum, it should include essential details about your project, such as location and asset type. Also, your platform may ask you to provide supplementary information for investors such as a business plan or pitch deck.

Once the raise is underway for your project, potential investors want a thorough understanding of the deal and expected return. Some platforms handle all of the interfacing for you and cater more to passive investing. Others treat the process more as active investing. You might host a webinar or answer questions in a formal round table for the active investor who wants a voice in your project.

Chris has found that people respond well to webinars, as they can interact with the sponsor and ask live questions. They can also meet the members of the sponsor’s team, such as the attorney or CPA. In Chris’s words, the process lends tangibility to the deal and builds trust.

Crowdfunding for Agriculture Investing

The food supply and related issues are hot topics today, and many investors are curious about agriculture opportunities. Crowdfunding is a good option because the platforms present you with curated projects appropriate for your goals. Chris’s platform structures agriculture deals similarly to the real estate deals he’s done for years. They have debt offerings from 7% to 12% and equity deals in the teens. They also offer opportunities in AgTech, which is the application of computer technology to farming. These offerings are higher risk but offer potentially greater returns as much as 40%.

Unlike most real estate, agricultural properties are unique. Each farm is distinctive and should be evaluated on its own merits. Indoor projects have gained momentum and include vertical and hydroponic farms. These options allow more locally grown produce and some refuge from climate and transportation infrastructure impacts. Successful investments enjoy a high rate of return.

Chris keeps the minimum investment in his projects as low as $5,000. This threshold allows more investors to participate and to diversify their portfolios. As for farmers interested in funding sources other than banks, Chris urges them to reach out to his team.

Crowdfunding for syndication is a relatively new and evolving space with numerous platforms catering to all asset classes. If you’re ready to move beyond personal capital, take a look at what it has to offer. Not only might you fund your next deal, but you might also find lucrative investment opportunities you never knew existed.

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Interest-Only Commercial Real Estate Loans – Potential Pros and Cons

As the name implies, when you secure an interest-only commercial real estate loan, the monthly debt service is equal to the interest on the principal loan balance. For example, on a $10 million loan amortized over 30 years with a 5% interest rate, the interest-only payment is $41,666.67. Whereas the debt service on a non-interest-only loan would be $54,486.03 (principal plus interest).

Generally, when securing a bridge loan, the debt service will automatically be interest-only. However, when securing an agency loan from Fannie Mae or Freddie Mac, you may have the option to receive one or more years of interest-only payments (even up to the full hold period for the most experienced borrowers).

When securing an agency loan and deciding whether to pay interest-only or pay principal plus interest from day one, here are some things to think about:

Potential Benefits of Interest-Only Payments

There are two main potential benefits to securing an interest-only period for a commercial real estate loan.

First is the higher cash flow during the interest-only period. When implementing a value-add business plan, you are forcing appreciation by improving the physical property and the operations to increase the net operating income. Typically, this process takes at least a year to complete. So, during this value-add period, the net operating income (and therefore, the cash flow) is lower. When you secure an interest-only loan, the lowered net operating income may be offset by the reduced debt service. As a result, you can use the extra cash flow to either reinvest in the property or, more likely, distribute returns to your investors. In fact, one of the best ways to achieve the preferred return during the renovation period is to secure an interest-only loan.

The second potential benefit of the interest-only loan is that you and your investors can receive cash sooner rather than later. The additional cash flow received during the interest-only period helps increase the IRR compared to receiving that cash at sale. Back to the $10 million loan example in the introduction, the difference between the interest-only payment and the principal plus interest payment is $12,819.36. Technically, all payments above the interest amount reduces the loan balance. So, rather than receiving that additional payment during the business plan, you would receive it at sale. Due to the time value of money, that $12,819.36 is worth more when received during the hold period than it would be worth in the future, say once the property is sold in 5 years. In addition, in the event of a massive reduction in property value, you and your investors will be much happier if you were able to receive those additional cash payments, especially if the value of the property is lower than the loan balance that would have otherwise been paid down.

Potential Drawbacks of Interest-Only Payments

There are three potential drawbacks to securing an interest-only loan.

First is that there is no principal paydown. As I mentioned above, this is also a potential benefit due to the time value of money. However, if the plan is to refinance or secure a supplemental loan after implementing the value-add business plan, the proceeds will be lower due to the fact that no principal was paid down during that period. Or, if the market cap rate increases and the value of the property decreases, you may become “underwater” on the mortgage and have to actually pay to sell the asset.

Secondly, once the interest-only period expires, the debt service increases. If you are not implementing a value-add business plan, unless the rental rates increase naturally, your cash flow will take a major hit once your debt service increases. If you are implementing a value-add business plan, you will need to increase the cash flow by an amount that is equal to or greater than the increase in debt service once the interest-only period expires. If you are unable to increase the cash flow as quickly or as high as projected, you may not be able to achieve your projected returns once the interest-only period expires.

Lastly, you may convince yourself to do a bad deal because of the lowered debt service during the interest-only period. For example, you may underwrite standard principal plus interest debt and the deal doesn’t meet your return projections. But if you underwrite three years of interest-only, the deal does meet your return projections. This isn’t a problem as long as you are conservatively underwriting the deal. Since you know the deal doesn’t make sense with a standard principal plus interest loan at the current net operating income, you need to be confident in your ability to increase that net operating income amount before the interest-only period expires.

Conclusion

Overall, interest-only loans are best when you are implementing a value-add business plan. As long as you are conservatively underwriting your deals and are confident in your rent premium assumptions, interest-only loans are a great way to distribute the preferred return to your investors while you are repositioning the asset.

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How to Compensate a Commercial Real Estate Broker

When you decide to list your apartment deal with a commercial real estate broker, the are paid a commission. Unlike residential transactions where the realtor’s fee is essentially fixes, the commission on commercial real estate transactions is negotiable. However, depending on the size of the deal and if it will be listed on-market or kept off-market, there are general guidelines for the commission structure and amount.

The information used to create this blog post is based on an interview I did with commercial real estate broker T Furlow. You can listen to his full podcast episode here.

Here are the three main structures for compensating a commercial real estate broker:

Compensation Structure #1 – Percentage of Sales Price

The percentage-based commission is the most common structure for on-market deals. The percentage generally decreases as the purchase price increases.

Sometimes, the commission is split between the buyer’s agent and your listing agent. This is referred to as co-brokerage split. But it isn’t uncommon for your agent to also find a buyer and receive 100% of the commission.

It is uncommon to see a commission of 6% (the standard fee on most residential transactions – 3% to each realtor), unless it is a very small deal under $1 million. Generally, the commission is 3% to 4% of the sales price. And the commission is capped at a certain amount. It is possible but rare for a broker to receive a commission of $300,000+. For larger deals, the commission can be less than 1% of the sales prices.

Generally, the percentage-based commission is set by the market and the sales price.

The advantage of the percentage-based commission is that your broker or a buyer’s broker is incentivized to maximize the sales price. The higher the sales price, the higher their commission.

The advantage of the co-brokerage split is that it increases the number of potential buyers. Rather than one broker – your broker – finding buyers, any broker in the market can find buyers for your deal. Plus, your broker is incentivized to put forth a greater effort to find a buyer so that they receive 100% of the commission.

Compensation Structure #2 – Flat Fee

The flat fee commission is the most common structure for larger apartment deals.  T considers sales prices of $8 million or more as large deals. Once the sales price exceeds $8 million, a flat fee commission between $150,000 and $250,000 is standard, but may be lower or higher depending on the market.

Flat fee commissions are also common if you want to sell your deal off-market with a broker. Expect to pay a higher flat fee for a large on-market deal than a large off-market deal since on-market deals require more effort on the part of the broker.

Generally, the flat fee is negotiated between you and the broker.

The major drawback of the flat fee compensation structure is that it doesn’t incentive your broker to maximize the sales price. No matter what the sales price is, they are paid the same amount.

Compensation Structure #3 – A Hybrid Structure

A hybrid compensation structure can be negotiated for any sized on-market or off-market deal.

Once you determine a strike price (i.e., the expected sales price), you offer a commission that is slightly below the market commission rate. Then, offer a significantly higher commission on any amount above the strike price.

This compensation structure is better than the percentage-based structure because your broker is incentivized even more to sell the deal above the strike price.

Example

Let’s say you are selling a deal on-market and you determine that the strike price is $42 million.

Compensation Structure #1 – Let’s say that the market commission rate is 0.75%. If the deal sells for $42 million, the broker makes $315,000. If they can sell the deal for $44 million, they make $330,000.

Compensation Structure #2 – Let’s say you negotiate a flat fee of $275,000. If the deal sells for $42 million, $44 million, or even $50 million, the broker makes the same $275,000 commission.

Compensation Structure #3 – Let’s say you negotiate a 0.65% commission up to the $42 million strike price and 5% thereafter. If the deal sells for $42 million, the broker makes $273,000, which is less than Compensation Structure #1 and #2. If the deal sells for $44 million, the broker makes $373,000, which is higher than both Compensation Structure #1 and #2.

This example illustrates why I prefer Compensation Structure #3. If the deal sells at the strike price, you pay the lowest commission. However, if the deal sells above the strike price, you and the broker make more money! So it is a win-win.

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Beth Azor on Thriving Today with Retail Centers

These unprecedented times have hit retailers hard, but the news rarely highlights the fallout for smaller landlords. Retail shopping center investor Beth Azor shares the inside story on a Joe Fairless Best Ever Show podcast. Investing in commercial properties catering to retail is ideal for the active investor who enjoys hands-on management.

About Beth Azor

Beth owns Azor Advisory Services, a retail real estate development, management, and education company. She has over 30 years in commercial investing and currently manages a portfolio of retail shopping centers worth $80 million. Based in Fort Lauderdale, Florida, Beth owns six local shopping centers. She has adapted to competition from online selling and the current pandemic and has tips on thriving in this market.

Why Retail Shopping Centers?

Beth enjoys active investing and the variety of working with different types of businesses in this challenging sector. She also appreciates that managing commercial properties means dealing with companies instead of individuals as tenants. Beth prefers not to be responsible for an individual or family losing their home because they could not afford rent. Though evicting anyone is always uncomfortable, she finds it a little easier when it’s a business and not, as she puts it, a person losing a bed.

When asked about the perk of receiving discounts from her retail tenants, Beth stresses she forbids the practice. Accepting a concession or freebie means the retailer might leverage a quid pro quo situation and not pay full rent on time. Though tenants often try to offer breaks to Beth’s employees and family, the potential fallout is not worth it.

Manage the Rent Rollercoaster

Like many other landlords during COVID-19, Beth spends considerable energy on obtaining rents from distressed tenants. She learned the hard way that the time and emotion involved could overtake her week. She also discovered that small business owners behaved differently than national retailers and needed a different approach.

As a result of these insights, Beth started blocking off set times each week to work with both types of tenant. She reserved Tuesdays and Thursdays for small businesses and Mondays and Wednesdays for national companies.

Mom and Pop Struggle to Survive

The pandemic has shut down many smaller stores reliant on in-person traffic for sales. Beth has her share of these tenants and tries to work with them to persevere for mutual benefit. She finds that these businesses are often unable to pay full rent due to being effectively closed. The owners are understandably upset but eager to discuss options.

When evaluating the best recourse for a distressed tenant, including payment programs, Beth considers several variables. One factor is how easily she expects to lease the space if vacated or when the lease is up for renewal. Other considerations are whether the tenant has significant infrastructure installed or exclusive rights to sell a specific service, such as nail care. Sometimes a business will retain the rights to services but not offer them. If the tenant leaves, the landlord can recruit another retailer in that same popular niche.

Beth notes that she and many retail landlords prefer to grant rent deferrals rather than outright waivers. For example, a struggling tenant might pay half rent for two months and allow the landlord to take the difference out of the security deposit. The tenant agrees to pay any remainder the following year when in-person shopping presumably recovers. Beth avoids moving the balance to the end of the lease as she wants to encourage the tenant to renew at the market rate.

As part of giving back to her local community, Beth interviews small businesses for her YouTube channel and website. The increased exposure raises their profiles and helps bring in more customers. Beth does this marketing work gratis and finds it very rewarding.

National Tenants Play Hardball

Working with national retailers presents different challenges. These tenants quickly adapted to pandemic conditions by offering online, pickup, or delivery services and associated customer incentives. Though their revenues have fallen, deep corporate pockets will keep most of these businesses solvent and able to pay rent.

However, Beth finds many of her national tenants demand forbearance and aren’t always polite about it. Their message is, “I can pay this month’s rent, but I’m not going to.” The nationals often have representatives tasked with delivering the harsh news to landlords and other business partners.

Beth has dealt with real estate managers, lawyers, and CFOs in her quest for resolution. Perhaps because they feel ambivalent pushing for potentially unfair concessions, some representatives communicate unprofessionally. Negotiating with them is time-consuming and often unpleasant, and so Beth siloes time each week to do so.

To illustrate, Beth notes the national coffee retailer that sent well-publicized letters to landlords demanding rent deferrals for a year. What observers may not realize is that many commercial landlords are small investors such as Beth. These owners have far less financial backing than the nationals, and a drastic cut in rents could prove catastrophic.

Hold ‘Em: A Retail Portfolio Strategy

Beth favors a hold strategy for her portfolio. She bought her oldest holding in 2008 and has averaged an acquisition every two years. She then focuses on developing the new center, sometimes from scratch. As one example, Beth bought and demolished a vacant former strip club and built a shopping center in its place. The new center has five tenants, including Starbucks, Verizon, and Blaze Pizza.

In another transformative move, Beth bought a dated office building from the 1970s, razed it, and built a shopping center featuring a Starbucks on one side of the land. She is holding the other half to develop when the opportunity is right.

Beth’s holdings are a mix of anchored and unanchored developments. Anchored shopping centers are those with a well-known tenant to drive traffic, such as a supermarket. The anchor tenant typically pays less rent while the smaller tenants pay more to benefit from proximity to the anchor.

Unanchored shopping centers feature tenants of similar size where no one business draws significantly more customers than the others. For example, one of Beth’s developments boasts Verizon, Starbucks, Blaze Pizza, Select Comfort, and an ice cream store.

Prospect on Social Media

When prospecting for tenants, Beth has found that smaller businesses respond well to social media outreach. Unlike national retailers with marketing departments, small business owners usually monitor online channels to keep tabs on customer satisfaction. Beth has had particular success with high response rates on Facebook and Instagram.

For example, Beth might direct message business owners on Facebook and receive a 40 percent response rate within a day. Out of that pool, about 10 percent will express interest in her properties. This return is excellent compared to the old world of knocking daily on numerous company doors.

Prospecting national retailers requires a different approach that relies on networking. These large companies work through exclusive tenant representatives, local market experts who broker deals between landlords and tenants. The landlord pays the broker for a successful match.

If Beth has a vacancy and a tenant in mind, she reaches out to that company’s rep about doing a deal. She likely would not even meet the corporate real estate manager until a property walk-through.

Fund Managable Deals

Beth chooses to focus on smaller deals that she can personally fund. Her sources include income from other properties, personal assets, or funds from friends and family open to passive investing.

As is common in commercial investing, Beth used to work with institutions. She stopped this practice after a major deal funded by BlackRock went south.

Beth cautions not to let one stellar success blind you into overconfidence. Giddy investors can quickly become wedded to one perspective at their financial peril. In her case, she and a partner were doing a BlackRock-funded deal and leased one space to Staples for a pricey $20 per square foot. Emboldened, she and her partner decided to hold out for $15 for the remaining space, even though Walmart expressed strong interest at a lower rate. They ended up losing the property and $5 million.

How to Get Started in Retail Investing

You may be wondering how to break into the business of retail shopping centers, especially if your background is in passive investing. First, keep in mind that this niche is best suited for the active investor who enjoys operations and social interaction. Your best bet, says Beth, is to shadow a property owner to learn the ropes.

Beth started as a leasing agent with a real estate license, a path she recommends for those interested in active investing. Owners are looking to fill vacant suites, so be the person who can deliver the tenants. If done well, this role is gold.

Beth cautions against starting at a brokerage as you must obtain your own listings, which is extremely difficult. If you shadow an owner, you may land an internship and possibly a paid position. The upside of this apprentice approach is that you can trial the work while maintaining your current activities. Even if you are a seasoned real estate investor, a firsthand look at the dynamic retail world is well worth your time.

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Commercial Real Estate For Sale | 9 Ways to Find More Deals

Need help generating more commercial real estate leads?

You have come to the right place. From basic strategies like using a commercial real estate broker to generating leads through the landscapers (yes, that is correct!), this blog post is an ultimate guide for finding commercial real estate for sale.

Let us get started by first talking about the two different types of commercial real estate for sale – on-market and off-market.

On-market vs. off-market commercial real estate for sale

The tactics for finding commercial real estate for sale are simple. You don’t need a Ph.D. in commercial real estate or a 160IQ to find commercial real estate for sale. However, uncovering the best deals – that is, the deals with the most “meat on the bone”, upside potential and built in equity – require will a higher time investment.

In general, of the two types of commercial real estate, on-market deals are easier to find.

On-market commercial real estate for sale are deals that are listed by commercial real estate brokers. These are the easiest deals to find because they are heavily marketed by brokers. Consequently, there typically isn’t as much “meat on the bone” compared to off-market deals (of course, there are exemptions).

In fact, an on-market deal selling above market value is not uncommon. Since the on-market commercial real estate for sale is heavily marketed, many more commercial real estate investors will submit offers, which can result in a bidding war and an increase purchase price.

Also, on-market commercial real estate for sale may take longer to close on. Generally, the offer process for on-market deals includes a touring period, a call-to-offers date, a time range for the seller to review all of the offers, a best-and-final offers round, and a best-and-final sellers call before the deal is even placed under contract.

However, these potential drawbacks can be minimized or avoided entirely by a commercial real estate investor who has a strong track record of closing on similar deals in the past and/or has a pre-existing relationship with the listing broker. At the end of the day, the seller’s main motivation is closing. Therefore, on-market commercial real estate for sale can be advantageous for commercial real estate investors who are (rightly) perceived as closers. They will get awarded more on-market deals, even if they don’t submit the highest purchase price.

Off-market deals is the other category of commercial real estate for sale. Off-market deals are not listed by commercial real estate brokers. However, commercial real estate brokers can be good sources for off-market leads (more on this later in the blog post). Therefore, generating off-market commercial real estate leads requires more proactive effort.

Experienced and reputable commercial real estate investors will close more off-market deals because this isn’t their first rodeo. The sellers know they are operating a well-oiled machine and the likelihood of the deal closing is high.

Who would you rather have perform open-heart surgery on a loved one? A freshly minted medical school graduate, or the top heart surgeon in the state who has complete thousands of successful procedures? (Rhetorical question). Therefore, a seller is more confident signing a contract with an experienced commercial real estate investor who has a history of closing rather than a brand-new investor with no deals under their belt.

The main benefit of off-market commercial real estate for sale is the potential for the juiciest piece of “meat on the bone” at closing. It is common for commercial real estate investors to secure a contract on an off-market deal at a purchase price that is 1%, 5%, 10%, or more below the appraised value. This means that at closing, the investor has instantly generated 1%, 5%, 10%, or more in free equity. The reason is because there is less, or no competition. Usually, there is only one buyer, so bidding wars are avoided.

Also, if the seller is highly motivated, the closing process can be fast. However, it is also possible to have an extremely long closing horizon. A negotiation period lasting multiple months – even up to a year or longer – isn’t uncommon with off-market commercial real estate deals.

As I mentioned previously, a commercial real estate investor can secure the deal at a better price because there is less competition. However, this is not always the case for large commercial real estate deals. Larger commercial real estate for sale is likely owned by a sophisticated investor. They will know the market value of their asset and will not accept a lowball offer (unless they are motivated to sell because they are distressed – more on this later in the blog post). In fact, it is possible to pay above market value for an off-market deal. Since the seller isn’t receiving multiple offers, the market won’t set the price. Therefore, unsophisticated commercial real estate investors may get a sucker price.

Lastly, the commercial real estate investor can work directly with the owner in order to determine their unique needs for selling, which means that there is more opportunity for creative financing.

Overall, both on-market and off-market commercial real estate for sale have their pros and cons. Therefore, the best approach is to pursue on-market and off-market deals.

So, how do you find on-market and off-market commercial real estate for sale?

Let’s start with how to find on-market commercial real estate for sale.

How to find on-market commercial real estate for sale

On-market deals are always widely marketed by commercial real estate brokers. Therefore, they are very easy to find.

1. Commercial Real Estate Brokerages: Most of the larger commercial real estate brokerages list their deals for sale on their websites. If you simply Google “commercial real estate brokers in (city)”, you will be presented with a long list of commercial real state brokerage. However, I recommend being more specific by searching for commercial real estate brokers who focus on your niche. For example, if you are looking to find apartments for sale, Google “commercial apartment brokers in (city)” or “commercial multifamily brokers in (city)”.

Each commercial real estate brokerage’s website will have a section where they list commercial real estate for sale.

For example, when I search “commercial apartment brokerages in Chicago”, SVN Chicago Commercial is a top result. On their website, they have a property search function with a list of all their commercial real estate for sale:

 

One approach is to visit the commercial real estate brokerage’s website each week to look for new opportunities. The more efficient method is to subscribe so that new offerings are sent to your email inbox automatically. Locate the “subscribe” function on the brokerage’s website and input your contact information.

Repeat this process for as many commercial real estate brokerages as you want, and you will receive commercial real estate for sale in your email inbox every day.

2. LoopNet: Another way to find on-market commercial real estate for sale is on LoopNet. LoopNet is an online listing platform where commercial real estate brokers can list commercial real estate for sale.

Every large commercial real estate brokerage in a market should have a website where they list commercial real estate for sale. But some of the smaller commercial real estate brokerages may not have a website, or their website isn’t easily found on Google. Smaller brokerages do, however, list commercial real estate for sale on LoopNet.

LoopNet is also very easy to use. Simply select a property type and market, and you will be presented with a list of all the commercial real estate for sale.

Usually, most of the commercial real estate for sale on LoopNet are a repeat of deals listed on commercial real estate brokerage’s websites. However, others will be brand new deals you’ve never seen before (listed by smaller brokers who lists you aren’t subscribed to).

How to find more off-market commercial real estate for sale.

Finding off-market commercial real estate for sale generally requires more effort compared to on-market. Unlike on-market, there isn’t a website with a list of off-market commercial real estate for sale.

The overall idea behind off-market deals is to find an owner who is motivated to sell their commercial real estate before that owner has enlisted the services of a commercial real estate broker.

There are three main ways an owner can be motivated to sell their commercial real estate.

The most common reason why an owner is motivated to sell is because they are “distressed” in some form or fashion. There are literally countless ways an owner of commercial real estate can be distressed. Here a few examples:

  • Delinquent on taxes
  • Delinquent on mortgage
  • Building code violations
  • Health code violations
  • Liens
  • Facing foreclosure
  • Natural disaster damaged the property (i.e., fire, hurricane, tornado)
  • High vacancy, usually due to evictions
  • Recently experienced a large increase in taxes
  • Mismanaged by their property management company
  • Lots of deferred maintenance
  • Falling out with business partner
  • Personal reasons (i.e., divorce, death in family, divorce, illness, etc.)

A second common reason why an owner would be motivated to sell is if they are at the end of their business plan. For example, the typical hold period on a value-add apartment deal is 5 to 10 years. The apartment is acquired, renovations are performed over 12 to 24 months, the property is held for cash flow for another 3 to 9 years and is sold. The motivation is to sell so that they and their investors can realize the gain in equity and reinvest into a new opportunity.

The third common reason why an owner would be motivated to sell is because they are tired of being a landlord. They’ve owned the commercial real estate for 10, 20, 30 or more years and are ready to cash out to retire.

As I mentioned previously, the overall idea is to implement market strategies that target these types of motivated sellers, or people who know these types of motivated seller. I have previously created a detailed blog post that outlines how to create a list of motivated sellers – 7 free and paid online services to generate off-market apartment deals.

Now what do you do with this list?

3. Direct mail: Probably the most common strategy for finding off-market commercial real estate for sale is direct mail. A direct mail campaign consists of sending out a batch of letters to a list of motivated commercial real estate owners with the purpose of sparking a conversation that results in the acquisition of their property.

I have previously written a blog post that outline how to use direct mail to find off-market commercial real estate for sale – the ultimate guide to a successful direct mailing campaign. Overall, the strategy includes creating a list of motivated commercial real estate owners, creating a marketing piece to send to the owners, screening incoming calls and qualifying deals, and ultimately negotiating an offer price.

Direct mailing campaigns can be used to target all three types of motivated sellers – distress, at the end of the business plan, and tired of being a landlord.

4. Cold calling/cold texting: An iteration of the direct mail approach is cold calling and cold texting. After a list of motivated commercial real estate owners is created, rather than sending a marketing piece, pick up the phone and call and/or text the owner.

For example, click here for a story about an investor who was able to find two apartment communities totaling 340 units by texting motivated apartment owners.

The extra step required for this strategy, depending on the service used to generate the motivated seller list, is skip tracing. Most of the free and inexpensive list generating services only output an owner’s mailing address. Therefore, to acquire the owners phone number, you must “skip trace” the list. Here is a list of skip tracing services investors who have been interviewed on my podcast use:

Like direct mail, cold calling/texting can be used to target all three types of motivated sellers.

5. Thought leadership platform: A more creative and indirect approach to is to use a thought leadership platform to find commercial real estate for sale. A thought leadership platform offers unique information, insights, and ideas that will position you as a credible and recognized expert in your industry.

Common examples of thought leadership platforms are podcasts, blogs, YouTube channels, newsletter, publishing books, hosting conferences, and meetup groups.

Click here for an in-depth blog post on the process for how to create a thought leadership platform.

With a thought leadership platform, you will build new friendships and business relationships. It allows you to stay top of mind of commercial real estate entrepreneurs and professionals because you are constantly providing valuable, free information. Essentially, you can continuously network with people on a global level 24/7.

Now, what did I write earlier about how to find off-market deals? You must communicate with motivated owners and people who know motivated owners.

Well, with a thought leadership platform, your following (readers, listeners, views, etc.) will consist of both parties. Some aspect of your thought leadership platform should let your following know what types of deals you are looking to purchase. This can be as direct as saying “send me deals” or as indirect saying “I am a value-add apartment syndicator.” Assuming you have a website and a “contact us” function, your followers can reach out if they or something they know are motivated to sell their commercial real estate.

Something I also mentioned earlier about both on-market and off-market deals is that the stronger your track record, the more likely you will be awarded a deal. The main weight of your track record is your previous commercial real estate experience. However, having an established thought leadership platform will also increase your credibility in the eyes of owners and commercial real estate brokers.

“This guy/girl has a massive following on YouTube. He they must know what they are doing!”

Therefore, not only is a thought leadership platform a great way to find off-market commercial real estate for sale, but it will also help you get awarded more deals.

Unlike direct mail and cold calling, a thought leadership platform isn’t typically a direct approach to finding commercial real estate for sale. The exception would be if you created a meetup group to find commercial real estate for sale. Click here for a blog post I wrote about real estate investors who directly sourced deals through a meetup group. Therefore, I do not recommend using a thought leadership platform as your only approach to finding commercial real estate for sale. It should be used in tandem with other strategies on this list.

6. Call “for rent” ads: Another creative approach to finding commercial real estate for sale is to calling “for rent” and “for lease” ads.

As I mentioned previously, an owner may be motivated to sell their commercial real estate because of vacancies. Therefore, when you see a “for rent” or “for lease” ad, you know that they are experiencing some level of vacancy at their commercial real estate. You have immediately identified a potential pain point.

Depending on the number of vacancies or length of the vacancy, they may be at the point where they are willing to sell.

This strategy works better for smaller commercial real estate. It is unlikely that an owner of a 300-unit property, for example, will sell based on 10 vacant unit. Whereas an owner of a 10-unit property would be motivated to sell if all 10 units were vacant.

Additionally, with larger commercial real estate, the contact information provided in the “for rent” or “for lease” ad is likely a leasing agent and not the owner.

However, don’t let that stop you from trying this strategy on large commercial real estate. Maybe, once they are ready to sell, they remember you (especially if you consistently follow up) and give you a first look at the deal before going to market.

7. Nearby apartments: For every on-market commercial real estate for sale you come across, reach out to the owner of surrounding properties and attempt to purchase two deals: the on-market deal and an off-market deal.

This is an approach I used in the past to find commercial real estate for sale. Click here for the full story on this strategy in action. In short, our commercial real estate broker reached out to the owner of an apartment across the street from an on-market deal. The owner happened to be interested in selling, so we put both deals under contract.

At the time, the market was very competitive, and the on-market deal entered into a bidding war. However, because of the economies of scale and complementary nature of the off-market opportunity, we were able to pay a little bit more for the on-market opportunity, ultimately coming out as the victor of the bidding war.

8. Commercial real estate brokerages: As I mentioned at the beginning of this blog post, commercial real estate brokerages can also be one of the best ways to find off-market commercial real estate for sale. However, there is a caveat.

Before commercial real estate brokers bring a property to market, they may send the opportunity to commercial real estate investors who they know can close on the deal. This is either to give them a chance to actually purchase the deal prior to going to market or to, at minimum, give them a head start.

The key phrase above is “who they know can close on the deal”. Therefore, unless you have the established track record I’ve mentioned multiple times in this blog post, you likely won’t have access to off-market deals from commercial real estate brokers.

When a commercial real estate investor first speaks with a commercial real estate broker, the broker will ask questions to gauge how serious the investor is.

“Are they able to close on a deal or are they a tire kicker who is wasting my time?”

If they don’t think you are capable of closing on a deal, there is zero percent chance they will send you off-market commercial real estate for sale.

I interviewed a top commercial real estate broker in Washington, DC, and he provided me with the five questions he asks investors to determine if they are serious and capable of closing. You can read the full blog post by clicking here, but the five questions are:

  • Have you completed a deal before?
  • Can you send me examples of what you’ve done?
  • Do you understand the market?
  • How would you finance a potential deal?
  • What are your goals?

If you haven’t completed a deal, cannot answer simple questions about the market, don’t have the cash and/or financing capabilities, and don’t have a vision, no broker is going to send you off-market commercial real estate for sale. However, the exception would be if someone else on the team does have the required track record. When that is the case, your reply to each question would be “well, my business partner has…” or “my property management company has…”

9. Commercial Real Estate Vendors

Anyone involved in the rendering their services to commercial real estate, like electricians, carpet installers, roofers, plumbers, HVAC professionals, pool repairman, lawn mowing companies, landscapers, etc. can be your own personal “birddoggers”, generating motivated seller commercial real estate leads with zero competition.

One of Joe’s family members owns a lawn mowing company. One of their clients was behind on their payments. They asked Joe, “do you know why a property management company wouldn’t pay a contractor for services?” Joe replied, “well, it’s not the property management company but the owner who is the problem. They likely have liquidity issues and cannot pay the bills.”

Just like a commercial real estate owner who isn’t paying their taxes or mortgages, one that isn’t paying their contractors may indicate motivation to sell. Therefore, to generate potential commercial real estate for sale, form relationships with local commercial real estate vendors and ask for a list of clients who are in arrears.

Simply calling up random lawn mowing companies may not be the best use of your time (although it might work). The better approach is to use a vendor’s service first and then ask them to notify you of local apartments who are behind on their payments.

Conclusion – How to Find Commercial Real Estate For Sale

These are eight ways to find more commercial real estate for sale.

Which strategies should you pursue?

I recommend everyone who is interested in finding more commercial real estate for sale to implement to the two on-market strategies – subscribing to commercial real estate brokerage’s listings and searching on LoopNet.

Next, I recommend starting a thought leadership platform, for both the credibility and networking benefits.

Then, of the remaining off-market commercial real estate lead generation strategies, I recommend starting with one. Test is out for six months and analyze the results. If it works, great – keep doing it. If it isn’t working, select a different strategy to test for another six months.

Unfortunately, there isn’t a one-sized fits all approach to finding commercial real estate for sale. The strategy or strategies that work best depend on the market, the overall economy, your business plan, and your level of experience.

However, a commercial real estate investor somewhere out there has been able to find commercial real estate for sale using each of the eight strategies in this blog post.

The key is consistency!

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