Apartment-Multifamily 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.

trust a broker's rent comps

Should You Trust a Listing Broker’s Rental Comps?

You receive a call from your real estate broker about a hot apartment deal that they’ve just listed. You quickly review their offering memorandum and, using a current rent roll and T-12, you populate your underwriting model. Before you can calculate an offer price, you need to perform a rental comparable analysis to determine your stabilized market rents. Luckily, the real estate broker has already conducted the analysis, so you should just use their results, right?

WRONG!

You should never unquestionably use the information in a real estate broker’s offering memorandum. The offering memorandum is only to be used as a guide, and this applies to their rental comparable analysis as well.

I’ve reviewed my fair share of offering memorandums. As a result, I’ve developed a keen eye for identifying instances where a listing broker tricks a buyer with incorrect rent comp information (whether it is intentional or unintentional is up for debate). Since the results of rental comparable analysis will be used to calculate a stabilized market rent, which will have a direct effect on the cash flow, using the correct properties is a must.

Now, a good starting place for finding rental comps is the offering memorandum. But, there are three main things to look out for when reviewing the comps that the real estate broker provided.

 

#1 – How far are the rent comps from the subject property?

First, see how far the comps are from the subject property. Distance is important, because a rent comp that is 30-miles away will not give you accurate results. But the neighborhood in which the comp is located is even more important.

For example, I was looking at a property and the rent comps provided by the listing broker were nearby (within a few miles) but were in a completely different neighborhood. I was local, so I knew that the comp was located in a neighborhood of college graduates while the subject property was not. But if I wasn’t local, I’d have to investigate the neighborhoods in which the rent comps are located to confirm that they are similar, especially in regards to demographics. A neighborhood with college students will demand different rents than a neighborhood with young professionals or blue-collar workers.

Key takeaway: The rent comps need to be close enough to the subject property to be in the same or a very similar neighborhood with similar renter demographics.

 

#2 – When was the rent comp renovated?

The second thing to look out for is the year the property was renovated, over what period of time, and how that relates to your business plan. As a value-add investor, we will often purchase apartment deals from owners who have already initiated a renovation program. Maybe they’ve renovated 25% of the units over the last 6 months. In that case, our plan would be to upgrade the remaining 75% of the units over a 12 to 18 month period, projecting to demand the same rental premiums they received on the 25%. When that is our business plan, we need to find rental comps that were upgraded to a similar quality and with a similar renovation timeline.

For example, I was looking at another property that had proven rental premiums but the renovations had been performed over two years to only 25 units. That’s about one unit per month. Our renovation timeline moves faster than that, so that is not a good comparison, because the renovations were too slow. A better rent comp would have those 25 units renovated over a few months.

Another red flag would be if the units weren’t renovated recently. If the units were renovated over 6 months ago, you cannot trust the accuracy of their rental premiums, because they’ve likely changed.

Key takeaway: The rent comps need to be renovated recently and over a period of time that is similar to the speed at which you will perform your renovations.

 

#3 – Do the operations at the rent comp match those at the subject property?

Last, look at the operations of the property to see whether they match up with the subject property.

For example, I was reviewing an offering memorandum that had a mixture of rental comps where the owner paid for all of the utilities and rental comps where the owner paid for some of the utilities. If the subject property has the owner pay for all of the utilities, all of the rental comps need to be the same, because this impacts the rental rates.

Another example would be the rent specials offered. If a rental comp is offering concessions to new applicants, then they can likely demand a higher rent. Unless you plan on offering a similar amount of concessions, that rental comps should be eliminated (or the rents need to be adjusted downwards). If all of the rent comps provided by the listing broker are offering a lot of concessions, that may also indicate a market with low demand.

Key takeaway: The operations at the rent comp must match those at the subject property.

  

If the listing broker’s rent comps adhere to these three factors, great. But you should still verify that information provided is correct. If they don’t, however, you’ll need to find your own rental comps (and here’s how you do that).

 

Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book

 

 

value add apartment

27 Ways to Add Value to Apartment Communities

Of the three main apartment syndication strategies, two (value-add and distressed) involve making improvements to the physical property or the operations in order to increase the revenue or decrease the expenses, resulting in an increase in the value of the apartment.

 

Regardless of whether you decide to pursue the active or passive apartment investing route, understanding the various ways to “add value” is a must.

 

As an active apartment syndicator, it is your job to identify the value add opportunities in a prospective deal in order to create a business plan that maximizes the projected returns for your passive investors.

 

As a passive investor, you need to be capable of analyzing a distressed or value-add syndicator’s business plan in order to determine if the opportunities identified are conducive with the property type, market, resident demographic, etc. and if they will result in an increase in revenue and/or decrease in expenses.

 

Five syndicators looking at the same apartment deal will create five different value-add business plans. Therefore, the ability to identity value add opportunities has a direct impact on not only the return projections but also the syndicator’s ability to even acquire the property in the first place. Generally, the most creative syndicator will underwrite the highest projected returns and, as a result, be able to find more deals that meet their investment criteria.

 

I break down the value-add opportunities into two categories – simple and advanced. Simple opportunities are more creative, require little to no capital or effort to implement and can be add to most sized apartments. Whereas advanced opportunities require more capital and more effort and usually only make financial sense on larger projects, with some only making financial sense on luxury apartment communities. However, the opportunities in both categories will result in an increase in property value and allow the community to standout against its competitors.

 

Simple Opportunities

 

1. Add washer and dryer: install washer and dryer units into all or a select number of units and charge a monthly premium. Another option is to create a laundry room and install coin-operated washers and dryers.

 

2. Stainless steel appliances: if the units have dated or black/white appliances, such as refrigerators, dishwashers, microwaves and/or stoves, upgrade to new stainless-steel appliances and charge a rental premium.

 

3. Appliance upgrade packages: for units that already have newer or nicer appliances, charge a rental premium.

 

4. Appliance rentals: offer rentals for common items like vacuums and carpet cleaners. This will also reduce the expenses associated with turnovers.

 

5. Upgrade light fixtures: installing new light fixtures is a quick and inexpensive way to make for a more aesthetically pleasing unit.

 

6. New hardware: Of course, units with new cabinetry in the kitchen and new vanities in the bathroom will demand a higher rent. However, a more inexpensive way to update the look of the kitchen and bathroom is to install new hardware, which includes new cabinet/vanity handles, sinks, toilets, faucets, showerheads, etc. Additional new hardware upgrades are new door handles and installing curtain rods.

 

7. Ratio Utility Billing System (RUBS): Implement a RUBS program, which bills back a portion of the water, sewer, trash, electric and/or gas expenses to the residents.

 

8. Parking: Rather than implementing the more advanced parking upgrades, charge a monthly or yearly fee for a guaranteed or premium location parking spot.

 

9. Pet fees: charge a one-time deposit or monthly fee for residents with pets. This strategy is best for apartments that already allow pets but do not collect a fee.

 

10. Location/view premiums: Each unit has its own unique view and location, with some being better than others. For units with better locations and views, charge a rental premium. Examples are first floor units, units near the front of the community or amenities, units with a view of a body of water or fountains, units with better surrounding greenery, etc.

 

11. Bike rack rental: depending on the market and resident demographic, install bike racks and rent them out for a monthly fee. Bike racks are best when the resident demographics are Millennial or Gen X.

 

12. Clubhouse rental: for large communities that have a clubhouse, offer to rent it to residents for special events at a flat fee.

 

13. Upgrading property management software: use the latest and greatest property management software to accurately calculate the market rents to ensure you are charging the correct rental rates.

 

14. Short-term leases: depending on the market, offer short-term leases or offer furnished units and list them on services like AirBnB or work with a corporate housing provider.

 

Advanced Opportunities

 

15. Demographic based amenities: construct specific amenities based on the demands of the renter demographic. From a generational perspective, Millennials prefer a resort-style living experience. They value convenience and flexibility so they will often seek apartment communities that offer high-tech amenities and services. These include free coffee in the common areas, high-speed Wi-Fi, in unit USB charging ports and a modern fitness center with fitness classes offered. Gen Xers also prefer high-tech home furnishings, but also concierge services and family-friendly features like playrooms, playgrounds and areas that offer family-friendly activities. Additionally, Gen Xers want easy access to washers and dryers and fenced in backyards. Finally, Baby Boomers demand larger living spaces (both individual units and common areas), state of the art fitness centers and common areas that offer fitness classes and social gatherings.

 

16. Patios or balconies: build patios for the ground level units and/or balconies for the non-ground level units and charge a rental premium.

 

17. Fenced-in yards or patios: increase privacy by constructing fences around the yards or patios of all or a select number of ground level units and charge a rental premium.

 

18. Carports: build a select number of carports and charge a monthly or yearly fee.

 

19. Extra rooms: add extra bedrooms, bathrooms, dining rooms, living rooms, sunrooms, etc. by erecting walls in larger units or building additions onto existing units.

 

20. Dog Park: if the apartment community has a large amount of unused green space and depending on the renter demographic, fence in an area and create a dog park. But don’t forget the poop bag stands!

 

21. Storage lockers: install storage lockers in the clubhouse and rent them out for a monthly or yearly fee.

 

22. Vending Machines: buy or rent vending machines and install them in the common areas.

 

23. Billboards: depending on the traffic and building codes, install billboards on the grounds and lease them to local businesses.

 

24. Daycare, after school or summer programs: attract the family demographic with the convenience of a childcare facility for daycare or after school/summer programs.

 

25. Coffee shop or convenience mart: I’m not talking about building a Starbucks or CVS/Walgreens. Just a small shop or cart that offers coffee and/or snacks, similar to those found in hotel lobbies.

 

26. Fitness center: update or construct a fitness center and offer free fitness classes like yoga, aerobics, spin, etc.

 

27. Miscellaneous: other advanced/luxury upgrades that can be offered for free (i.e. with the costs built into the rents) or a monthly/annual/one-time fee include a car-sharing service, 24-hour concierge, cooking classes, dry cleaning/laundry service, free Wi-Fi, iCafe, package delivery management, personal shoppers, pet grooming, rock-climbing wall, rooftop terrace, spa/massage center, tech/business center and a wine cellar.

 

 

Whenever you are analyzing a prospective apartment deal, run through this list of 27 simple and advanced upgrades to determine if they make financial sense based on the property type, market and renter demographic, which is accomplished by ensuring that the required capital investment is returned, and then some, during the projected holding period. And always make sure the projected rental premiums are confirmed by the property management company and are supported by the rental comps in the area.

 

What do you think? What value-add opportunities are missing from this list?

 

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active vs. passive

Active Vs. Passive: Which Is the Superior Real Estate Investment Strategy?

 

Originally featured in Forbes here.

 

When the average person thinks of real estate investing, they might imagine a billionaire who develops massive commercial properties, or an HGTV fix-and-flipper who turns a profit by converting a run-down property into someone’s dream home. With this mental representation, it’s no wonder more people aren’t real estate investors.

 

Obviously, this isn’t the case in reality. There are thousands of different real estate investing strategies from which to choose. The difficult part — aside from shedding the false belief that real estate investing is only for the rich —  is identifying the ideal investment strategy that fits one’s current economic condition, abilities and risk tolerance level.

 

Generally, entry-level investment strategies fall into two categories: passive and active investing. The question is, which one is best for you?

 

For our purpose here, I will define active investing as the acquisition of a single-family residence (SFR) with the goal of utilizing it as a rental property and turning over the ongoing management to a third-party property management company. Alternatively, passive investing is placing one’s capital into a real estate syndication — more specifically, an apartment syndication — that is managed in its entirety by a sponsor.

 

In order to determine which investment strategy is best for you, it is important to understand the main differences between the two. Based on my personal experience following both of these investment strategies and interviewing thousands of real estate professionals who have done the same, I’ve discovered that the differences between passive and active investing fall into three major categories: control, time commitment and risk.

 

Control

 

As a passive investor, you are a limited partner in the deal. You give your capital to an experienced sponsor who will use that money to acquire and manage the entire apartment project. You have no direct control over any aspect of the business plan, so you are putting a lot of trust into the sponsor and their team. However, this trust is established by not giving your money to a random, unqualified sponsor but through an alignment of interests. For example, the sponsor will offer you a preferred return, which means that you will receive an agreed-upon return before the syndicator receives a dime. Therefore, the syndicator is financially incentivized to achieve a return above and beyond the preferred return.

 

As an active investor, you can directly control the business plan. You decide which investment strategy to pursue. You decide the type and level of renovations to perform. You decide the quality of tenant to accept and the rental rate to charge. You determine when to refinance or sell. With for passive investing, all of the above is determined by the apartment syndicator.

 

Time Commitment

 

As an active investor, the advantage of more control comes with the disadvantage of a greater time commitment. It is your responsibility to educate yourself on the ins and outs of single-family rental investing. Then, you have to find and vet various team members. Once you have a team in place, you have to perform all the duties required to find, qualify and close on a deal. After closing, as long as you have a good property management company, it should be pretty hands-off. Although, if (really, when) something unexpected occurs, you’re responsible for making those decisions, which can come with a lot of stress and a lot of headaches.

 

Of course, it is indeed possible to automate the majority, if not all, of the above tasks. But that requires a certain level of expertise and a large time investment to implement effectively.

 

Passive investing is more or less hassle-free. You don’t have to worry about any of the actions described above. You just need to initially vet the apartment syndicator and vet the deal. From there, you simply invest your capital and read the monthly or quarterly project updates.

 

Risk

 

You are exposed to much less risk as a passive investor. You are plugging into an already created and proven investment system run by an experienced apartment sponsor who (preferably) has successfully completed countless deals in the past. Additionally, there is more certainty on the returns. You will know the projected limited partner returns — both ongoing and at sale — prior to investing. And assuming the syndicator conservatively underwrote the deal, these projected returns should be exceeded.

 

Active investing is a much riskier strategy. However, with the higher risk comes a higher upside potential. You own 100% of the deal, which means you get 100% of the profits. But, you also have to bear the burden of 100% of the losses. For example, a turnkey rental will likely cash flow a few hundred dollars a month depending on the market. The costs associated with one large maintenance issue or a turnover could wipe out months, or even years, of profits. A value-add or distressed rental has a huge upside potential. However, a common tale among distressed or value-add investors, especially the newer or less experienced ones, is projecting a certain renovation budget but finding an unexpected issue during the rehab process that drastically increases their budget, resulting in a lower or negative overall return.

 

Additionally, failing to accurately calculate a post-renovation unit’s rental premium will also result in the reduction or elimination of profits. While these profit reduction or elimination scenarios could technically occur with a passive investment, the risk is spread out across many investors, and a sponsor with a proven track record and a qualified team will mitigate these risks.

 

Real estate investing is for everyone, not just the moguls of the world. However, not all investment strategies are the same. It’s important to understand the pros and cons associated with each to determine which strategy will set you up for success.

8 Step Process For Selling Your Apartment Community

You’ve acquired a new asset, completed your value-add business plan and have been distributing higher than projected returns to your satisfied investors – or if you’re just an apartment investor, to yourself –  for the past few months.

 

You think your investors are satisfied now? Well, they are going to be ecstatic when they receive that massive distribution upon sale! So, when and how do you sell your apartment community?

 

One of your responsibilities as an asset manager is to evaluate the market in which your property is located on an ongoing basis. Once you’ve stabilized the asset, completing all of the value-add projects, estimate the property value at least a few times a year. Find the current market cap rate and, using the net operating income, calculate the value of the asset.

 

Even if your business plan is to sell in five years, don’t wait until then to evaluate your asset. You may be able to provide your investors with a sizable return if you sold, or refinanced, before the end of your initial business plan.

 

If you get to the end of your business plan and the market conditions are not such that you can sell the asset and meet your investors return expectations, don’t be afraid to hold onto the property longer.

 

When the market conditions are right, here is the 8-step process to sell your apartment community:

 

 

1 – Be Mindful of The Sale

 

As you are approaching the end of your business plan, or when you determine that it makes financial sense to sell earlier, be mindful of the sale. The value of the asset is dependent on the market cap rate (which is outside of your control) and the net operating income. In order to maximize the value, you want to maximize the net operating income, which means maximizing the income and minimizing the expenses.

 

Once you’ve made the decision to sell, don’t start certain projects if the payback period extends past the sale’s date. For example, if you plan on selling in three months, it doesn’t make sense to renovate a unit for $5,000 to get a $100 rental premium.

 

Consider spending a little bit more money on marketing to increase occupancy. Offer more concessions than you usually would to increase rental revenue. Pursue collections a little harder than usual.

 

Overall, look at your profit and loss statement and see which income and expense line items can be improved in the months prior to listing the asset for sale.

 

 

2 – Send Your Lender a Notification of Disposition

 

When you decide to sell, you will need to notify your lender. To do so, you need to send them an official notification of disposition. This is typically two months prior to listing the apartment for sale to the public. Work with your experienced attorney to draft the notification and send it to your lender.

 

Depending on the loan program you used, you may have a prepayment penalty. Keep that in mind when deciding to sell, because a large prepayment penalty will drastically reduce your sales proceeds.

 

 

3 – Request a Broker’s Opinion of Value

 

Based on your evaluations of the market, if you are confident that you can sell your apartment at the price you need in order to get the returns you want, the next step is to find a listing broker. It’s easy to write down a value that makes you happy, so you’ll want to get a relatively unbiased second opinion without having to shell out a few thousand dollars for a full appraisal.

 

You want to find a broker who is the best fit to sell the property. Loyalty is important in this business, so I recommend using the same broker who represented you when you purchased the asset. But, there might be reasons why you want to go with someone else. If that is the case, reach out to two or three of the best brokers in the market and ask them for a Broker’s Opinion of Value (BOV). Send them whatever information they request (T12, rent roll, etc.).

 

When you receive their opinion of value, ask them a few follow-up questions. You need to be confident that they can sell the property at that value. Ask them questions like:

 

  • What valuation approach did you use?
  • What types of buyers do you typically sell to? What size and price range do they invest in?
  • Why do you feel confident that those buyers will purchase this asset at this price?
  • Have you sold similar assets recently?

 

Based on the value and follow-up questions, select a broker to list the property.

 

 

4 – Start a Bidding War

 

Over the next six weeks or so, your broker is going to create the offering memorandum and market the apartment to the public to whip up a whole lot of interest. Interested parties will come visit the property and follow the same approach that you did when you purchased the property – talk to the property manager, tour units, inspect the exteriors, analyze rent comps, run the numbers, and submit an offer. The goal is for your broker to create a bidding war in order to push up the offer price and get you the highest offer price possible.

 

 

5 – Screen Out Newbies with a Best and Final Call

 

Once you stop accepting offers, you will review the submissions and have a best and final call with the top offer or offers to qualify the buyers.

 

You want to know about their track record, funding capabilities and proposed business plan to gauge their ability to close. Ideally, you sell to a sponsor with a large track record. You don’t want a newbie that has to back out of the deal during the due diligence phase because they cannot fund the deal, did poor underwriting, etc.

 

 

6 – Negotiate a Purchase Sales Agreement

 

Select the best offer and negotiate a purchase sales agreement (PSA). Have your experienced attorney draft a PSA. Don’t let the buyer draft the PSA, because you want to start the negotiation with terms closest to where you need them to be, and not the other way around. Send them the PSA for their attorney to review. You’ll likely go back and forth to negotiate the terms of the contract, with the end resulting hopefully being reflective of what was in their letter of intent.

 

This negotiation process typically takes about a week. Sometimes longer, but usually not shorter.

 

7 – Fulfill Obligations During Due Diligence

 

When the negotiations have concluded and both you and the buyer have signed the PSA, the due diligence period begins. The buyer will be required to adhere to the schedule agreed upon in the PSA (i.e. they have X number of days to perform due diligence, Y number of days close, etc.). And you owe them whatever it is you agreed to in the PSA (i.e. they can come to the property with 24 hours’ notice, they can look at your bank statements, financials, leases, marketing material, etc.).

 

Best case scenario is that nothing comes up during the due diligence period and you sell the property at the price and terms defined in the PSA. If something does come up, there may be additional negotiations back and forth with the seller on either the terms, purchase price or both.

 

Once the due diligence is completed, the buyer will work with the lender and title company to finalize things in preparation of closing.

 

 

8 – Close and Distribute Sales Proceeds

 

A few days prior to the officially closing date, you will sign the hundreds of execution documents. Then, on the day of closing, you will be wired the sales proceeds.

 

Distribute the sales proceeds to your investors according to what you and your investors agreed to. They will then go from satisfied to ecstatic and will be ready to start the process all over again!

 

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What is Your Ideal Passive Apartment Investment?

Last updated 9/28/18

 

After reviewing the differences between active and passive real estate investing, assessing your current economic condition, ability and risk tolerance level, you’ve decided to passively invest in apartment syndications.

Great! You are one step closer to investing in your first deal. So, what’s next?

Similar to determining your ideal general investment strategy (i.e. active vs. passive), you need to establish your ideal passive investment. And in order to establish your ideal passive investment, you need to know what your options are first. In particular, you need to learn about the different types of apartment syndications in which you can passively invest your money and the benefits and drawbacks of each.

Generally, apartment syndications fall into one of three categories: turnkey, distressed or value add.

 

1 – Turnkey Apartment

Turnkey apartments are class A properties that require minimal to no work after acquisition. These properties are fully updated to the current market standards and are highly stabilized with occupancy rates exceeding 95%. Therefore, the turnkey business model is to take over the operations and continue managing the asset in a similar fashion to the previous owners. No renovations. No tenant turnover. Nothing fancy.

Of the three apartment syndication strategies, investing in turnkey apartments has the lowest level of risk. The property is fully updated and fully stabilized at acquisition. The risks associated with performing renovations, which include overspending, unexpected capital expenditures, bad contractors, incorrect rental premium assumptions, etc., and turning over a large percentage of tenants are minimized. Additionally, the asset will achieve the projected cash flow from day one, because the revenue pre- and post-acquisition remains the same.

The drawbacks of the turnkey apartment syndication strategy are the lower ongoing returns and the lowest upside potential compared to the other two apartment types. Because the property is fully updated and stabilized, there isn’t room to increase the revenue of the property. Therefore, the ongoing returns are and remain in the low to mid-single digits. Additionally, since the value of the asset is calculated using the net operating income and the market cap rate, unless the overall market naturally appreciates, the property value will remain the relatively stable. As a result, there is little to no upside potential at sale. Most likely, you will receive your initial equity investment back with minimal to no profit.

 

2 – Distressed Apartment

On the opposite of the end of the spectrum is the distressed apartment. Distressed apartments are class C or D assets that are non-stabilized with occupancy rates below 85% and usually much lower due to a whole slew of reasons including poor operations, tenant issues, outdated interiors, exteriors, common areas and amenities, mismanagement and deferred maintenance. Generally, distressed apartment syndicators will take over and, within a year or two, stabilize the asset by addressing the interior and exterior deterred maintenance, installing a new property management company, finding new tenants, etc. Then, they will either continue their business plan to further increase the apartment’s occupancy levels and/or rental rates or they will sell the property.

The major advantage of passively investing in a distressed apartment is the upside potential at sale. Once the asset is stabilized the revenue – and therefore the value – will increase dramatically, resulting in a large distribution at sale.

The drawbacks of distressed apartments compared to the other two types are being exposed to the highest level of risk and receiving the lowest ongoing returns. The high upside potential at sale also comes with the risk of losing ALL of your investment. There are a lot of variable to take into account with a distressed apartment, which means there are a lot more things that could go wrong. Additionally, since the asset is not stabilized at acquisition, there will be little to no cash flow – and maybe even negative cash flow. That means you won’t receive ongoing distributions unless the syndication structure is such that you receive interest on your investment before the sale.

 

3 – Value-Add Apartment

Lastly, we have value-add apartments. Value-add apartments are class C or B assets that are stabilized with occupancy rates above 85% and have an opportunity to “add value.” Generally, the value-add apartment syndicator will acquire the property, “add value” over the course of 12 to 24 months and sell after five years.

Adding value” means making improvements to the operations and physical property through exterior and interior renovations in order to increase the revenue or decrease expense. These renovations are different than the ones performed on a distressed apartment. Typical ways to add value are updating the unit interiors to achieve higher rental rates, adding or improving upon common amenities to increase revenue and competitiveness like renovating the clubhouse or pool area, adding a dog park, playground, BBQ pit, soccer field, carports or storage lockers and implementing procedures to decrease operational costs like loss-to-lease, bad debt, concessions, payroll, admin, maintenance, marketing, etc.

Compared to the other two apartment types, value add apartments have a lower level of risk, the highest ongoing returns and a high upside potential at sale. At acquisition, the property is already stabilized and generating a cash flow. So, at the very least, the property will continue to profit at its current level and your passive investment is preserved. That also means that you will receive an ongoing distribution (typically around 8%, depending on the syndication partnership agreement) during the renovation period. Once the value add projects are completed, the ongoing distribution will increase to the high single digits, low double digits and remain at a similar level until the sale. Additionally, the increase in revenue and decrease in expenses from the value add business plan will increase the overall value of the asset, which means there is the potential for a lump sum distribution at sale.

 

What’s Your Ideal Passive Investment?

Your ideal passive investment will be in an apartment type with the benefits and drawbacks that align most with your financial goals.

Are you content with tying up your capital for a year or two with minimal to no cash flow and willing to risk losing it all in order to double your investment? Then I would consider passively investing with an apartment syndicator that implements the distressed business plan.

Are you more interested in capital preservation and receiving a return that beats the inflation rate? Then I would consider passively investing with an apartment syndicator that purchased turnkey properties.

Are you attracted to the prospect of receiving an 8% to 12% cash-on-cash return each year with the prospect of a sizable lump sum profit after five or so years?  Then I would consider passively investing with an apartment syndicator that implements the value-add business model.

 

Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book

Flowchart planner

What’s the Superior Investment Strategy – SFR Rentals or Apartments?

Real estate is the most exciting investment vehicle because there are nearly an infinite number of way to get started, achieve financial freedom and/or launch a business to create generational wealth.

 

There are many investment types to invest in, but which one is the most conducive to long-term success?

 

Today, I want to determine the answer to this question by looking at two investing strategies in a particular – single family residence rentals and apartment investing.

 

I will define SFR investing as purchasing a single-family home using your own capital and renting it out, and apartment investing as purchasing an asset with 50 or more units and raising capital from passive investors and renting it out.

 

For the purposes of this blog post, I will assume that an individual has set out to achieve a goal of $10,000 per month in cash flow (or $120,000 per year), which will replace their current corporate salary.

 

So, based on this goal, which strategy is superior? Let’s compare both across three important factors: scalability, barrier to entry and risk.

 

Scalability

 

Scalability is how efficiently one can grow their real estate portfolio. The more difficult it is to scale a business using a certain investment strategy, the longer it will take to attain a cash flow goal.

 

Both SFR and apartment investing will allow you to generate $10,000 per month in cash flow, but which strategy will reach this goal the fastest while reducing the number of headaches?

 

For SFR rentals, the average cash flow per property per month is in the $100 to $200 range (depending on the market of course). Therefore, 50 to 100 SFRs are required to make $15,000. We immediately run into a few problems. First, you can only take out a limited number of SFR loans. Once you’ve purchased 4 to 10 homes (depending on the bank use and if they use Fannie Mae or Freddie Mac), you no longer qualify for a standard residential loan. However, a simple solution is to find a local community bank, who – once you’ve established a successful track record – will provide ongoing financing for your deals.

 

Although, you haven’t completely solved your financing problem. How will you afford the 20%, 25% or 30% down payments required to purchase 50 to 100 SFRs? This is the biggest drawback of SFR investing in terms of scalability. If you’re buying all $100,000 properties, that’s $1,000,000 to $2,000,000 in 20% down payments. Even if our sample individual saved up half their corporate salary to cover these down payments, it would take them 17 to 33 years to purchase 50 to 100 SFRs, and that’s assuming everything else goes according to plan. This timeframe can be reduced through refinancing, lines of credit or other creative financing strategies, but it will require a large amount of capital for down payments nonetheless.

 

For apartment investing, since you’re receiving commercial financing, you can obtain an unlimited number of loans (as long as the numbers pencil in for the lender). However, you will run into the same funding problem if you plan on using your own money. That’s where raising private money and syndicating an apartment comes in to save the day!

 

As an apartment syndicator, one of the ways you make money is from an acquisition fee, which is a percentage of the purchase price paid to the syndicator at closing. The industry standard is 2%. Therefore, to make $120,000 in one year, you would need to syndicate $6,000,000 worth of deals. To break it down even further, since an apartment deal generally required 35% down, you must raise $2.1 million from private investors to achieve your annual goal. And that’s not even accounting for the other ways you’ll get paid as a syndicator (i.e. asset management fee, a portion of monthly cash flow, a portion of the sales proceeds, etc.), which you could then use to purchase your own properties or reinvest into future syndications.

 

Technically, you could also raise private capital for SFR investing. However, the problem is that you’ll need to find multiple cash flowing deals at the exact same time in order to attract private capital or make the same amount of money compared to an apartment community. It’s possible but much more difficult to find 50 to 100 SFRs than finding an equivalent sized apartment community.

 

Unless you believe it will take you multiple decades to raise a few million dollars or you win the lottery, apartment investing is more scalable than SFR investing.

 

Winner: Apartment investing

 

Barrier to Entry

 

Barrier to entry means how easy it is to get to the point where you are capable of investing in your first deal. From a personal finances perspective, the barrier to entry is lower for apartment investing than SFR investing. To syndicate an apartment deal, investing your own personal capital will promote alignment of interests with your investors. However, this alignment of interests can be achieved in a variety of different ways (having your property manager invest in the deal, having your broker invest in the deal, having an experience syndicator as a general partner, etc.). Therefore, it is possible to syndicate a deal with zero dollars out of pocket. Although, I always recommend investing some of your own money in the deal for alignment of interest purposes but to also benefit for the profits! Whereas for SFR investing, as I outlined above, you will need to save up millions of dollars to afford the number of down payments required to generate $10,000 a month in cash flow.

 

From an educational and experience perspective, apartment investing has a much higher barrier of entry. No one is going to invest with you if they don’t know who you are or if you haven’t proven yourself to be a credible apartment syndicator. The solution to the former is creating a thought leadership platform. The solution to the latter, however, is more difficult (although, establishing a name for yourself through a thought leadership platform will not happen overnight). From my experience, before you can even entertain the idea of becoming an apartment syndicator, you must have a successful track record in real estate, business, or preferably both. Once that’s established, you need to educate yourself on apartment investing and syndications, which requires a lot of reading and research (but that’s what this blog is for!). Then, you need to surround yourself with credible team members who have an established track record in apartment investing. Only then will you be ready to search for your first deal, which could take anywhere from a few months to a few years! Whereas for SFR investing, as long as you have the money, you can buy a deal.

 

The barrier to entry for apartment syndication is easier from a personal finances perspective, but much more difficult from an educational and experience perspective compared to SFR investing. And there isn’t a way to fast track this process. It will take time.

 

Winner: SFR rentals

 

Risk

 

Investing, in general, will always have risks. However, not all investment strategies are the same in that regard.

 

As I mentioned in the section on scalability, the typical monthly cash flow generated by a SFR is $100 to $200 per month, or $1,200 to $2,400 per year. However, those low margins are very vulnerable to being drastically reduced or wiped out completely. One unexpected maintenance issue (let’s say a broken HVAC system) will cost thousands of dollars. Even minor maintenance issues of a few hundred dollars (replace an appliance, plumbing problems, electrical problems, etc.), when added up over time, will cost thousands of dollars. The same goes for turnovers. Some turnovers are relatively smooth and cost a few hundred bucks. However, if you have to repaint walls or replace carpet/refinish hardwood, those expenses add up quickly. An unruly resident may stop paying rent or violate the lease, and the resulting eviction process can be quite costly. Any one of these scenarios will eliminate months or even years of profits! Some of these risks can be mitigated with proper due diligence, but most of them are just the costs associated with investing in SFRs.

 

For apartments, these risks are spread across tens or hundreds of units. One maintenance issue, one turnover or one eviction has a much smaller impact on your profit and loss statement. Unless you are hit with a large amount of these problems at the same time, the apartment will cash flow. Whereas for SFR investing, you will not be able to benefit from this risk reduction until you’ve created a portfolio of at least 10 to 20 properties.

 

An apartment community is susceptible to risk when you don’t have a solid property management company or you failed to perform proper due diligence on the asset. As long as you have these pieces in place, and you follow the three fundamentals of apartment investing, the asset will not only survive, but thrive – even in a down market or if a handful of major or minor maintenance or tenant problems occur.

 

Winner: Apartment investing

 

Conclusion

 

Apartment investing has a higher barrier of entry. However, once you’ve addressed your education and experience, apartments are advantageous in terms of scalability and risk when compared to SFR rentals.

 

COMMENT BELOW: Which investment strategy do you think is superior between SFR rentals and apartments, and why?

 

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high-end rental complex real estate investment

Three Ways An Owner Benefits From Selling Their Apartment Off-Market

Originally Featured In Forbes Here

 

The most common type of real estate transaction is an on-market sale. An apartment owner who is interested in selling their property lists it with a broker, the broker markets the deal to the public, in today’s competitive market a bidding war ensues and the contract is generally awarded to the highest bidder. The more uncommon transaction type is an off-market sale, where an apartment owner who is interested in selling their property does so without enlisting the help of a broker.

 

If you’re an apartment investor who’s looking to expand your portfolio, to find the best deal, focus on off-market opportunities. It is true that an on-market opportunity is much easier to find. However, due to being highly marketed by a broker, the proceeding bidding war will result in an artificially high sale price. Conversely, off-market opportunities can be more difficult to find, but the financial benefits of acquiring an apartment directly from an owner are worth the time investment.

 

If an owner can get a higher sales price by listing their apartment with an agent, common sense dictates that they’ll be resistant to selling it off-market. However, by bypassing a broker and selling directly to a buyer, there are three main ways the apartment owner will benefit. By understanding these benefits, you, the buyer, can put yourself in the best position to negotiate with pure intentions — since both parties will benefit from the transaction — and the better you’re able to communicate these benefits to the seller, the better chance you have of securing a contract.

1. Higher Profit

 

The first benefit an apartment owner has by selling their property off-market is that they will actually achieve a higher profit. That’s because of the cost savings associated with not hiring a broker.

 

Generally, in a real estate transaction, the seller is responsible for paying the broker’s fee. A listing broker charges anywhere between 2% and 6% of the purchase price. Moreover, listing on-market increases the chances of the buyer being represented by a broker who charges the same fee. On a $5 million sale, the seller would lose between $200,000 and $600,000 in pure profit.

 

But, by purchasing the apartment off-market, the seller will benefit by saving between 4% and 12% of the final sale price.

 

2. Faster Closing

 

When an owner is interested selling a property, don’t automatically assume that their primary motivation is to make as much money as possible. If the owner is facing a distressed situation, which could be due to delinquent taxes or mortgage payments, facing many evictions, low occupancy, deferred maintenance or a multitude of other reasons, their main interest may be to unburden themselves of the property as quickly as possible. Even if they aren’t distressed, a faster close means they’ll get their money quicker, which they can then use for other purposes.

 

If an apartment owner lists a property with a broker, the broker will have to create an offering memorandum (OM). The OM is a detailed report that outlines important information about the apartment community — the financials, sub-market information, a competitive analysis and more — that can take weeks, if not months, to complete. Additionally, the time horizon widens if there is a competitive bidding situation. Then, the contract could be awarded to a buyer who, for some reason or another, backs out.

 

Instead of waiting for their broker to complete the OM, as well as to avoid the other potential time-consuming occurrences, the owner can sell off-market. They’ll send their rent roll and trailing 12-month expenses to the buyer, who can quickly underwrite the deal and submit an offer, expediting the closing date in the process.

3. Less Hassle

 

Finally, selling a property off-market has much less of an overall hassle. Again, not every owner is primarily motivated by getting the highest offer price. They may just want the least stressful exit.

 

By selling off-market, there are no open houses or property tours scheduled with several interested parties. There aren’t multiple question and answer sessions with prospective buyers. Random buyers and their contractors aren’t poking around the property and disturbing the tenants. And, there are no rumors floating around about the apartment community being sold to an unknown party, which could negatively affect resident and/or vendor relationships. Instead, the owner has to deal with one buyer, which eliminates much of the hassle of listing on-market.

From the buyer’s perspective, there are three ways that they will benefit by purchasing an off-market opportunity. First, they will save money by avoiding a bidding war and the broker’s interest in finding the highest paying buyer who will close. Second, they have more opportunities for creative financing since they’re working directly with the owner and can identify their pain points and goals for selling. Finally, the overall closing process is faster with the broker out of the equation.

 

But ultimately, an owner’s willingness to sell their apartment off-market will come down to how it will benefit them. If you can sufficiently convey these three benefits — more profit, faster closing and less hassle — to the seller, you’ll succeed in creating a win-win scenario for both parties and add a new apartment to your portfolio.

 

Have you ever persuaded an owner to sell you their property off-market, and if so, how?

 

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magnifying glass

Find Higher Quality Apartment Leads with This Proactive Marketing Approach

Dylan Borland – listen to my full interview with him here – is a fix-and-flipper turned apartment investor. He currently controls $10 million in real estate and is aiming to control $100 million of the next five years. His best ever advice and what he believes to be the key to his success is his unique prospecting approach.

 

The typical marketing approach for finding off-market deals is building a list of owners, sending out a direct mailing campaign and sitting back to wait for the phone to ring. While there is nothing inherently wrong with this tactic, Dylan prefers to take a much more proactive approach to finding deals. Instead of sending out mailers, he calls the owners directly.

 

Dylan obtains his list from CoStar. It includes the owner’s name, address and phone number. However, it doesn’t really matter where you get the list from, as long as it includes the owner phone number. Click here to download your free copy of 24 Proven Ways to Get Off-Market Deals, or check out all of my blog posts about lead generation to start building a list of motivated sellers.

 

On rare occasions, the CoStar list doesn’t include the owner’s phone number. If that is the case, Dylan finds the phone number by doing a reverse address lookup using either White Pages Premium or Vulcan 7.

 

When Dylan makes the phone call, he opens by saying, “Hey (owner name). I just want to introduce myself. My name is Dylan over at the Borland Group. We’re looking at buying properties in your particular area, and that’s how we found out about yours. We wanted to see if you have any interest in selling?”

 

Similar to direct mailing or any other prospecting technique, the majority of people won’t be interested in selling. But, you are looking for the one that does. All the person has to say is “Yeah, I have a slight interest” or “What would you offer me?”

 

If there is any inclination that they are interested in selling, the next step is to collect the relevant information – profit and loss statements and rent roll –  to underwrite the deal and determine an offer price.

 

Dylan’s prospecting approach is easy and straightforward – just pick up the phone and ask if they’re interest in selling. However, he did admit that it can be frustrating. Generally, 99 out of 100 owners won’t be interested in selling. But, since we are dealing with larger properties, you don’t need to have a high conversation rate. You just need to hit 1 out of 100, or even 1 out of 200, especially since you can easily make 100-200 phone calls in a week.

 

An additional advantage of this strategy is that since you are taking an active approach, you control how many conversations you have, rather than hoping an owner calls you. And then it is also less costly, because you don’t have to pay for letters, envelopes and stamps. Besides the cost of his CoStar subscription (which he pays $350/month through his brokerage), Dylan’s overall marketing budget is $1000 per month. If you find that one deal out of 100, 200 or more, you’ll more than recoup your costs.

 

To add to Dylan’s approach, if a specific owner isn’t interested in selling, don’t give up just yet. Follow-up by sending the owner a letter. Reference the phone conversation, provide your contact information, and tell them that you will reach out again in X months (2, 4, 6, whichever you decide is best) to see if they are interested in selling.

 

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train with smoke

5 Steps to Become an Unstoppable Real Estate Investor

Last updated 7/6/2018

 

We’ve all heard the concept “it’s 80% mental and 20% physical,” or some variation applied to nearly every endeavor under the sun – sports, business and relationships. And I’ve even heard some people say that it’s upwards of 90% to 99.99% mental.

 

If that is true, then how should we enhance on our mindset and psychology?

 

Everyone has their go-to technique. But Tina Greenbaum, a peak performance and executive coach and a dynamic optimal performance workshop leader, has created a tried-and-true five step process, which has improved the mindset of business leaders, athletes, artists, and speakers over the past 30 years, for developing an unstoppable mindset.

 

Tina said, “Any kind of business that you’re going to invest money in, you take a risk. And in order to take a risk, we’re now in the unknown. We take what we call calculated risks, we kind of do our homework and put our money where we think that it’s going to make money for us, but the truth is we don’t know what’s actually going happen tomorrow, none of us do. So, when we get caught up in trying to control the future, we get into trouble.”

 

In order to provide you with the techniques required to successfully navigate the unknown, In our recent conversation, Tina outlined her five-step curriculum for cultivating your mindset.

1 – Focus on what you want

 

Number one, and the foundation to the entire process, is focus. Tina said, for almost everything we do, “We kind of lose focus, we bring it back, we get distracted, we bring it back.” So, the question you need to ask yourself is, what do I focus on? Or, am I focusing on what I am supposed to be? Also, what happens to you when you lose focus? And how do you even know when you aren’t paying attention?

 

A really important concept, Tina said, is “whatever we focus on expands.” Or, as my mentor Trevor McGregor always says, “where focus goes, energy flows.” So, if we are focusing on the wrong thing, are constantly losing our focus or are unaware of what we are focusing on, that’s what our experience of life is going to be.

 

To work on honing your focus, Tina said, “as the day goes on, or you’re with family, or you’ve in a business meeting, just notice, ‘How am I talking to myself?’ because you’ve got to be your own best friend.”

 

I find that the remaining four steps are a continuation of this step. They will guide you towards maximizing the amount of time spent focusing on the right things, and minimizing the time spent focusing on the wrong things or being unaware of what it is that you’re focusing on, which is the key to the unstoppable mindset.

 

2 – Relaxation to eliminate negative emotions in the moment

 

Next is relaxation. Tina is a firm believer in the mind/body connection. She said, “in order to manage stress, we have to be able to manage our nervous system. And in order to manage our nervous system, we have to know how to do that.”

 

“If our system is on overload, we can’t think clearly. So, if you’re in a negotiation and you want to have your best foot forward, you want to be very grounded and you want to know exactly what you’re taking in, and be conscious of what’s happening internally.”

 

Tina provided a relaxation exercise called the Three-Step Breath that – when practiced repetitively – will allow you to instantly calm down your nervous system when you get anxious, worried or stressed. I recommend listening to that part of the podcast here, but here is a summary:

 

  1. Place your hands on your belly, breath in through your nose, and allow your belly to fill up. Then, let out all the breath before you take in the next breath. In through your nose, out through your nose.
  2. Once you’ve mastered the belly breath, repeat the same process, but this time, the first half of the breath should fill up the belly and the second half should fill up your rib cage. Then breathe out, letting the belly go first, followed by the rib cage.
  3. Once you’ve mastered the belly-rib breath, repeat the same process, but this time, the first third of the breath should fill up the belly, the next third is the rib cage, and the finally third is the upper chest. On the breath out, let the belly go first, followed by the rib cage, followed by the upper chest.

 

Tina said, “if you’re starting to feel anxious and you’re not sure which way to go and what you want to say, you just take a moment, nobody will see it; you don’t have to put your hands on your body, just take a nice deep breath, let it go, and all of a sudden now your mind is back.”

 

3 – Use mindfulness to create an emotional vocabulary

 

Three is mindfulness. Tina said, “we operate automatically, but there’s so much going on; there’s so much under the surface that if you become a student of really being curious [and mindful] about your own unconscious material, your own self, what’s driving you, what’s calling you and what you’re scared of, [you will discover] how do I react in a certain situations? What kind of negotiator am I? What is my tolerance for risk? What happens when I feel I am over the line, I’m risking too much?”

 

Again, like relaxation, building up your mindfulness muscle takes practice. You can perform mindfulness mediation, where you sit and pay attention to everything that comes into your awareness. Or, more practically, when you are feeling a strong emotion, anxiety or stress, notice the sensations it gives your body. Then, Tina said, “once I learn to identify what those sensations mean to me, then I’ve got a new language.”

 

4 – Eliminate negative self-talk and take responsibility

 

Four is your self-talk. “Negative self-talk,” Tina said. “Sometimes we get really annoyed with ourselves. ‘Ugh, I can’t believe I did that’, or ‘That was really stupid.’ Or ‘I don’t really have anything to say here.’ There’s a million different ways that we undo ourselves. So again, if we don’t even know how we’re talking to ourselves, then the mind just does what it does – you’ve heard the term ‘monkey mind’, it jumps all over the place. [If] it’s not managed, it’s not controlled.”

 

This brings us back to focus. If we focus on the negative self-talk, we will self-sabotage ourselves – sometimes without even being aware of it. In fact, here is a list of the 22 self-sabotaging behaviors that lead to entrepreneurial extinction. How many of these behaviors do you have?

 

Sometimes, our self-talk may not be negatively directed towards us, but towards others. The example Tina provided was bringing a package to the post office on Saturday at [12:10]pm and arrived just in time to realize it closed at noon. Negative self-talk would be beating yourself up for being the idiot that didn’t realize the post office was closed, blaming the post office for not adhering to your schedule, or cursing the universe. Instead, Tina said, “you could say to yourself … that ‘I take responsibility for my own experience. I am in charge of what happens to me. I’m in charge of what I create.”

 

Taking responsibility for everything negative that happens will ultimately lead you to asking yourself how you may have played a part in creating the dilemma. In the post office example, it is her fault for not looking up the operating hours. Then, once you identify your level of culpability and a solution, now you have a new piece of information you didn’t have before, and you should never face this predicament again.

 

Now, use that concept of taking responsibility, determining how you played a role, identifying the solution and apply it moving forward to everything you do rather than falling down the negative self-talk rabbit hole.

 

5 – Create Powerful Visualizations

 

Finally, create powerful visualizations. Imagine the way you want your life to be and where you want to go. You may not have a clue of how you will get there, but once you have a vision in place, Tina said, “ask yourself ‘is what I’m doing going to take me to that end result? … Am I moving in that direction, or am I way off? Am I just kind of getting lost in making agreements and decisions about things that don’t take me where I want?’… If our whole body and our minds are in alignment and we’re looking at what we want to create – again, everything that we focus on expands – and we use the power of visualization, you can create a visualization and even if it hasn’t happened yet, your brain already has had that experience … and then we walk it.”

 

While you should create visualizations for your overarching vision, this technique has day-to-day applications as well. Tina said, “every time I do a workshop, or I’m getting ready to do a talk, or a lecture, I sit down in the morning and I visualize, ‘what do I want to create? What’s the environment that I want to create? What do I want to have happen?’, and I walk through it step-by-step. And then when I’m actually doing it, it’s like I’ve been there.”

 

Conclusion

 

Mastery coach Tina Greenbaum’s five-part curriculum for creating an unstoppable mind is:

 

  1. Focus on what you want
  2. Relaxation to eliminate negative emotions in the moment
  3. Use mindfulness to construct an emotional vocabulary
  4. Eliminate negative self-talk and take responsibility
  5. Create powerful visualizations

 

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business deal

The Ultimate Guide to Finding an Apartment Broker

One of the real estate professionals you want as a part of your real estate team is a broker. A great broker is one that sends you deals, and more specifically, sends you off-market deals. However, like all relationships, it must be reciprocal. Most likely, the broker will have countless investors asking them for deals. Therefore, when approaching a conversation with a new broker, it is important to realize that they are interviewing you as much as you are interviewing them.

 

Read on for tips on how to approach these broker conversations. First, I will provide a list of questions you need to ask them. Next, I will outline how you can win the broker over to your side by focusing on coming across as a serious, credible investor who will close a deal. Finally, I will provide a list of questions the broker may ask and that you should be prepared to answer.

 

Questions to Ask the Broker

 

When interviewing a broker, you need to know your outcome of the conversation. For me, as an apartment syndicator, my main goal is to determine their level of experience and success with apartment communities that are comparable to my investment criteria.

 

To accomplish this goal, here is a list of 11 questions to ask during the interview:

 

  1. What is your transaction volume?
  2. How many successful closes have you experienced in the last year?
  3. How long have you been working as an agent? How long have you focused on apartments?
  4. How many listing do you currently have?
  5. How do you find deals?
  6. Do you offer both on-market and off-market deals?
  7. What stage is the local apartment market in?
  8. What is your specialty?
  9. What are the top three things that separate you from your competition?
  10. Will you please provide references?
  11. What haven’t I asked you that I need to know?

 

Ideally, we want to find a broker that will send us an endless supply of off-market apartment deals. However, don’t bank on this, especially in the beginning phases of the relationship. But after you’ve proven to the broker that you’re the real deal, successfully closing on a few deals, it will become more and more likely that you will be the first person who is notified when they have a new off-market deal. It just comes with time.

 

How Do I Win Over a Broker?

 

Again, when interviewing a broker, it’s important to realize that they are interviewing you too. Therefore, put yourself in their shoes and ask yourself “what are they looking for when deciding whether or not to bring on a new client?”

 

Since brokers are paid a commission at the sale of a property, their number one motivator is to close on a deal as quickly and as easily as possible. They don’t like tire kickers, wannabe investors who waste their time asking a bunch of questions but never close on a deal. Their ideal client is an investor who has a proven track record of closing on deals. So, if you don’t have previous investing experience, that will be your number one challenge.

 

To win over a broker during a conversation, you need to sell yourself and your business and build rapport. If you have past investing experience, you shouldn’t have an issue selling yourself. If you don’t however, what relevant experience do you have that will convey to the broker that you are serious about closing deals? Have you successfully completed projects in a non-real estate related field? Have you started a business in the past?

 

If you are struggling to come up with relevant experiences, this is where having a reputable team comes into play. Sell your team members. Talk about your real estate mentor or advisor’s real estate experience. Tell them about the number of apartments your property management company manages. And bring up any other relevant relationships you’ve formed (i.e. contractors, attorneys, CPAs, your meetup group or thought leadership platform, etc.)

 

Along with the asking them business questions, to build rapport, get to know something personal about them. Find out something that’s important to them and bring it up with genuine interest next time you meet. A quick way to accomplish this is to ask, after having already established yourself, “what’s been the highlight of your week?”

 

Finally, I recommend preparing an opening statement or elevator pitch. If you already have a deal in mind, you can say, “I’d like to discuss making an offering on ABC apartment.” Or, another example would be saying “I am working with ABC Property Management and will be buying a property in (city name) in the next few months.” The purpose of the opening statement is to grab the attention of the broker, come across as a serious investor, and address their “want” – which is to close on an apartment – from the start.

 

Questions to be Prepared to Answer

 

Don’t expect the broker to simply answer your questions, chat about their business and personal life and then get up and walk away. If they are seriously interested in bringing you on as a client, they will want to ask you questions as well. Therefore, you need to proactively brainstorm questions they may ask and have ready-made answers.

 

Here is a list of 9 potential questions an interested broker will ask you during the interview:

 

  1. Who is your property management company?
  2. How many units to they manage?
  3. Are they local?
  4. Have you (or someone on your team) purchased an apartment building before?
  5. What type of deals are you looking for? What markets are you looking in?
  6. How did you find me?
  7. Will you sign an exclusive agreement with me so I can get you the best deals?
  8. What are your expectations?
  9. Can I see a biography of you and your partners?

 

And as you interview brokers, if you are asked questions you’re not prepared to answer, make a note and tell them you will find that answer right after the meeting and send them an answer.

 

In today’s market, buyers are a dime a dozen. So, many brokers will simply brush off an investor who is looking to purchase deals. Ultimately, a broker will bring more deals to buyers that they like to work with, and the types of buyers that like to work with are the ones who will close and not lose a deal due to inexperience, laziness or passivity. However, by following the approach outlined above, you will come across as a credible investor who can make aggressive offers and back them up by closing the deal.

 

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cash in a hand

The Top 10 Values of a $600 Million Apartment Investor

It’s important to define what your values are. Because if you don’t, you are like a marionette whose strings are being pulled by an unknown force. Hence, why Gandhi once famously said “Your values become your destiny.”

 

Your values shape how you perceive everything in the world – how you approach new relationships, how you react to failure and ultimately determines whether you will attract or repel success.

 

The number one value I live my life by can be summed up in my favorite Tony Robbins quote: “The secret to life is giving.” For every endeavor I undertake, I automatically focus on how this will benefit others. And the resulting inspiration and passion has gotten me to where I am today.

 

What are your values?

 

Carlos Vaz, who is the CEO of a multifamily company that controls nearly $600 million across around 5,000 units, attributes his business and life success to defining and living out his top values. In our recent conversation, he provided the top 10 values that took him from an immigrant waiter and truck loader to a multimillion dollar entrepreneur.

 

1 – Faith

 

Carlos’ number one value is faith. In fact, his said his Best Ever book is the bible. “My faith is important because it has really shaped me.”

 

2 – Excellence

 

Number two is excellence. That means, Carlos said, “doing your best in all you touch. It’s not about quantity. It’s about quality. Sometimes people say, ‘Well, I’m going to do this halfway.’ Really? It takes twice the amount of time and effort to come back and fix something that you didn’t do well the first time, so take the time to do well he first time around so that you don’t need to come back.”

 

Everything you do in real estate needs to be done at 100% effort and with 100% of your attention.  Because If you approach things halfheartedly, you may land yourself in more trouble than if you wouldn’t have something in the first place.

 

In fact, you need to show up outstanding, which is one level higher, in order to achieve excellent results. Want to achieve outstanding results? Click here to learn how.

 

3 – Perseverance

 

Number three is perseverance. And in order to persevere, especially when the going gets tough, you must minimize the time you spend complaining. Every second spent on complaining could have been used to get yourself out of the situation you’re complaining about.

 

“It’s so easy for people to complain about what they have in front of them, ‘I hate my job, I hate this here,” Carlos said. “If you work at a job that you don’t like, and you get home and you just watch TV and you go to bed, and the next day you do exactly the same thing, guess what? Five years from now, where are you going to be? Exactly in the same place. I think at the end of the day, it’s up to us to make decisions, right? Not [complaining] because the world is fair, [but] we need to look at your habits and say, ‘How can I improve? How can I make things better?’”

 

When Carlos was early on in his career, working as a waiter and unloading trucks and working on construction sites, instead of complaining about his current situation, he was grateful for what he had and was determined to continue moving forward. For every job, he told himself that “this is going to give me some money so I can take another class or this is going to give me some knowledge that I can take somewhere else.”

 

4 – Establish Great Relationships

 

Number four is to establish great, reciprocal relationships. This goes hand-in-hand with my number one value about giving.

 

“Be a team player and help others, and let others help you,” Carlos said, “because nobody wants to be around a jerk.”

 

5 – Effective Communication

 

Number five is having effective communication skills. Carlos said, “I think many times [when] there’s an issue, it’s because of lack of communication. It’s not [about] communication itself, it’s what you call effective communication.”

 

6 – Integrity

 

Many successful entrepreneurs say that your word is all you have. That brings us to number six – integrity.

 

“You always do the right things, even if it means making hard choices,” Carlos said. “Integrity is everything. When I shake your hand and we do business, we’re going to do something together. It’s not a contract that’s going to put us together. That contract is just going to be a formality. I think that you have to have the integrity to do the thing that’s important.”

 

Integrity and trust is one of the best ways an apartment syndicator can attract and keep their passive investors.

 

7 – Love for Family and Country

 

Number seven is the love for both your immediate family and your extended family – your community or your country. Carlos said, “I always say, ‘What can I do to provide for my family, for my parents, to my mom and to my brothers?’ And also, I do believe that this country, in my books, is the best country in the world. Seriously. We live in an amazing country called the USA. There are opportunities every day as long as you’re willing to wake up in the morning and go get them. So, I think that it’s important to give back and help this country.”

 

8 – Knowledge

 

Carlos’ best ever advice is to never stop learning, which is value number eight – knowledge.

 

“What are you doing to pursue growth and learning?,” Carlos said. And not just learning more about real estate. It’s also about “how to become a better leader, how to become a better friend, a better father, a better brother. There’s so many things that we can become better [at],” he said. “There’s so many good nuggets, there’s so many things if you’re looking for learning from other people that are actually doing things. That helps me not to make mistakes.”

 

Carlos creates his foundation of knowledge for continuing his formal education (he’s currently enrolled in a three-year program at Harvard), skills and lessons from past jobs and surprisingly, his kids. “It’s funny. Now that my kids are young – 2 and 4 – sometimes just talking to them and learning from those little guys. It’s amazing how much a child can teach you sometimes, and I love that.”

 

Click here for my recommended book list.

 

9 – Health

 

Number nine is health. Carlos said, “Health is really important when I look at my life and everything. If I don’t have health, there’s nothing. So, what are you habits? What are you doing to yourself?”

 

This is a value that I’m sure we can all work on. We can work our butts off to create a real estate empire, but if our diet and exercise habits are poor, we’re reducing the time we’ll have to enjoy the rewards.

 

10 – Commitment

 

Finally, number ten is commitment. Carlos said, “When you say that you’re going to do something, get things done, because there’s no point about you saying something and at the end there’s no commitment.”

 

If you aren’t scaling a business, lack of commitment is one of the five reasons why. Click here for the other four reasons, as well as the five things you should be doing instead.

 

Conclusion

 

The 10 values that Carlos Vaz attributes to his real estate success are:

 

  1. Faith
  2. Excellence
  3. Perseverance
  4. Establish Great Relationships
  5. Effective Communication
  6. Integrity
  7. Love for Family and Country
  8. Knowledge
  9. Health
  10. Commitment

 

Which of these 10 values do you think is the most important for a successful real estate business?

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

                       

If you have any comments or questions, leave a comment below.

 

 

 

How to Perform Due Diligence on an Apartment Building

The due diligence process for an apartment building is much more involved and complicated in comparison to that of a single-family residence or smaller multifamily building. For the latter, you will likely only require an inspection report and an appraisal report in order to close. If you are experienced, you’ll perform your own financial audit, comparing the leases and rent rolls with the historical financials.

 

When you scale up to hundreds of units, the increase in potential risk points is such that you’ll need additional reports before deciding whether or not to move forward with the deal. In fact, for the apartment due diligence process, you’ll want to obtain and analyze the results of these 10 reports:

 

  1. Financial Audit Report
  2. Internal Property Condition Assessment
  3. Market Condition Report
  4. Lease Audit
  5. Unit Walk Report
  6. Site Survey
  7. Property Condition Assessment
  8. Environmental Site Assessment
  9. Appraisal
  10. Green Report

 

1 – Financial Audit Report

 

The financial audit report is the detailed results of an inspection conducted by a commercial real estate consulting company. They will analyze the asset’s operating history and provide a breakdown of the individual components of the operating income and expenses.

 

When you underwrote the deal, you likely used the income and expense figures provided in the pro-forma, and then made assumptions for what those figures would be after you took over the property. The results of this report will confirm the actual income and expenses, as well as allow you to make adjustments to your assumptions if necessary.

 

2 – Internal Property Condition (PCA) Assessment

 

The internal property condition assessment is an inspection report that provides you with the overall condition of the property. The assessment is conducted by a licensed contractor of your choosing.

 

This assessment will differ depending on the contractor. However, you will most likely be provided with a list and images of problem areas observed by the contractors, recommendations for repairs, opinions on costs to address deferred maintenance, and whether or not further inspections are required.

 

These results will help you confirm or make adjustments to your repair and rehab assumptions and screen out deals that have maintenance issues outside your investment criteria.

 

3 – Market Condition Report

 

The market survey and condition report is a comprehensive comparison analysis of the sub-market. The subject property is analyzed and compared using multiple variables, including rents, unit type, occupancy, unit size, new construction, historical statistics, amenities offered, and more.

 

This report is created by your property management company, so the thoroughness of the report will depend on who you select.

 

The results of this report can be used to confirm your underwriting assumptions including for occupancy and rental rates.

 

4 – Lease Audit

 

The lease audit is a systematic examination of the leases, including the stated income and expense figures, billing methodology and lease language. Typically, this audit will be conducted by your property management company.

 

The purpose of this audit is to verify that charges billed are accurate an in compliance with the lease terms. The most important piece of information I receive from this audit is to understand the difference between economic and physical vacancy.

 

5 – Unit Walk Report

 

A question my clients ask a lot is “when I am performing due diligence, do I need to walk every single unit?” The answer is a resounding yes! And that is the purpose of the unit walk report. It is a detailed inspection of every single unit, assessing the condition and characteristics of the entire unit.

 

This report is also prepared by the property management company. However, if you so desire, you can print out a spreadsheet and perform the inspection yourself.

 

6 – Site Survey

 

A site survey shows the boundaries of the property, indicating the lot size. It also includes a written description of the property. The report resembles a map.

 

There are a lot of third party services that can conduct a site survey. A quick Google search of “site survey + (city name) will do the trick.

 

7 – Property Condition Assessment

 

The property condition assessment is the same as the internal property condition assessment, except this one is created by a third party selected by the lender. So, you’ll have two PCAs from two different contractors, which should cover all your bases.

 

8 – Environmental Site Survey

 

The environmental site survey is an assessment that identifies potential or existing environmental contamination liabilities. This report is required and is conducted by a third-party provider selected by the lender.

 

The analysis typically addresses both the underlying land and the physical improvements on the property.

 

9 – Appraisal

 

The appraisal is a report that determines the value of the property based on market capitalization rate and net operating income. This report will also be created by a third-party provider selected by the lender. Hopefully, the appraisal value comes back equal to or, even better, exceeding the contract price.

 

10 – Green Report

 

The green report is an energy audit that evaluated an apartment for potential energy and water conservation opportunities and calculates the estimated cost savings that would result from addressing these identified opportunities.

 

The audit is performed by an energy efficiency provider. Once completed, you are sent a report with the results and recommended next steps.

 

Conclusion

 

The 10 reports needed when performing due diligence on an apartment buildings are:

 

  1. Financial Audit Report
  2. Internal Property Condition Assessment
  3. Market Condition Report
  4. Lease Audit
  5. Unit Walk Report
  6. Site Survey
  7. Property Condition Assessment
  8. Environmental Site Assessment
  9. Appraisal
  10. Green Report

 

Failing to do so can, and most likely will, result in unexpected and unplanned for expenses later on down the road.

 

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high-end aprtment complex real estate investment

Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

Many beginner apartment syndicator’s main focus is on raising equity or searching for deals, but then they forget about the financing. Once they identify an opportunity, they go with the first bank that offers them a loan.

In reality, the type of financing secured for an apartment is just as important as raising equity or finding the right deal.

Large commercial loans are not the same as the cookie-cutter residential loans. There are a multitude of options when it comes to commercial financing. When you are dealing with multimillion dollar loans, the difference between two loans can have a huge impact on the cash flow and sales proceeds.

Steve O’Brien, an investment officer who was responsible for the acquisition of over 20 multifamily assets totaling close to $200 million in the last five years, understands the different components of the loan and how they can affect an investor’s bottom-line. In our recent conversation, he outlined the five financing components an apartment syndicator needs to pay attention to prior to selecting a loan.

 

1 & 2 – Interest Rate and Loan-to-Value

The two loan components that even the first-time syndicator is aware of are the interest rate and the loan-to-value. “Those are the two most important that everyone focuses on,” Steve said. “It basically determines what your costs are going to be, what is the debt service and how much money you’re going to need from an equity standpoint based on what amount they’re willing to lend you.”

 

3 – Recourse

While those first two components are relevant to residential loans as well, this next component is not – recourse vs. nonrecourse loans. Steve said, “with most banks these days, given the crash, they want recourse. What I mean when I say recourse is that they want you to guarantee some or at least a portion of the loan that you’re getting personally.” However, a lot of lenders will offer nonrecourse loans as well. Steve said, “on our entire portfolio that we’ve done of about $100 million in financing, we have not signed any recourse, meaning that if the deals were to go bad, the most the lender could do is come after you for the property itself, so you can technically lose your equity in the deal.”

Of all the loan components, recourse is the most important because it can come back to bite you big-time. In fact, this is one of the things that happened with the real estate crash in the late 2000s. “A ton of people put up recourse and all their loans went bad, and it caused bankruptcies and other issues,” Steve explained. “Not all the lenders will do all the math on all the recourse you have. So you may have guaranteed 150% of your assets, and if everybody comes calling them at the same time, that can be a real problem.”

With a nonrecourse loan, you are personally protected as long as you don’t commit fraud or gross negligence (what are referred to as “carve outs”).

Steve said, “In general there are a lot of options for multifamily investing in particular that do not require recourse, and as long as you stay at a reasonable loan-to-value, you can get a nice healthy 75% loan and still remain nonrecourse.” And if you go low enough on the loan-to-value ratio, depending on the lender, you can avoid the bad-bay carve outs too.

 

4 – Terms

Another component of the apartment loan to pay attention to are the loan terms. “A lot of banks will want to do a 35-month loan, or a 36, or up to five years with extensions,” Steve said. Your ideal loan terms will depend on your business plan. For example, if you plan on a long-term hold, especially with the historically low interest rates, it may make sense to pay a high interest rate and lock in a 15-year loan. If your business plan is to add value and refinance, a three-year bridge loan may be the best option for you.

 

5 – Prepayment Penalty

A final component of the apartment loan to pay attention to is the prepayment clause. If your loan has a prepayment penalty and you want to sell early, you will have to pay the lender a large fee. Another form of a prepayment penalty that may be triggered at sale is yield maintenance, meaning the bank will make you buy an instrument to pay them back the interest rate that you would have owed them if you completed the loan.

However, Steve said, “ultimately, that’s a decent problem to have because it probably means that you’re doing well, but it just limits your flexibility.”

 

Best Ever Loan Advice

Steve’s Best Ever advice for how to approach these five components is “You’ve got to pay attention to your goals. Is your goal to buy and improve a property and then flip it? Well, then don’t put long-term debt on it. If your goal is to buy a property and hold it forever, well then you may want to consider not doing a three-year bank loan with two one-year extensions and going to a longer-term lender that will do a balance sheet loan for you, like a life insurance company or an agency (Fannie Mae, Freddie Mac, something like that) in order to lock your returns in for the long-term. Because it’s a nice, warm blanket to have a low interest rate that you know doesn’t mature for 10 years. Unless you want to sell it, and then you’ve got a prepayment penalty. So it’s all very determined based on your goals, and I think that’s what the key is – to set your strategy and your goals for the asset and try and find debt and equity that best mirrors your strategy and goals.”

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

                       

 

 

person standing by waterfall and rainbow

The 3 Principles to Achieving Financial Independence Through Real Estate Investing

 

Escape the corporate rat race and gain financial independence.

 

That is the main goal of many who decide to enter the real estate investment game. However, it’s much easier said than done.

 

Fernando Aires, who designed computer chips in the tech industry for over 25 years, was able to achieve the coveted financial independence and leave his full-time job in 2014. In our recent conversation, in regards to quitting his job through real estate, he said, “the key for me has been to buy enough properties, mostly with long-term fixed rate financing and some cash, in order to achieve this parity with my corporate income.”

 

For Fernando, it was a long process, but the juice was definitely worth the squeeze. Along the way, he discovered some tricks that enabled him to expedite the process.

 

What are those tricks?

 

#1 – Tax Benefits

 

Firstly, Fernando didn’t pursue zero or little money down loans or a creative strategy or really anything fancy. “Most of my properties are financed,” he said. “I try to get as much long-term fixed financing as possible, so by itself the property doesn’t generate lots of cash flow. My typical cash flow for financed properties is about $250/month.”

 

That’s $3,000 a year. With having corporate salary of a quarter of a million dollars to replace, that’s a lot of properties. However, he was able to slash the amount of money he needed to replace his salary with nearly in half because of the tax benefits real estate offers. “With income property, due to depreciation, which is the best tax write-off that you can imagine, you end up paying very little in taxes when you take that into account,” Fernando said. “When I was working for Apple in California, I was roughly paying 50% of my income to the government, which means that I only need to make about half gross that I was making in corporate America in order to be at the same point, due to the tax situation.”

 

Right off the bat, the tax advantages of real estate will allow you to have a “freedom number” that is significantly less than your current pre-taxed income from your corporate career. This involves hiring an accountant who has experience in the real estate niche you are pursuing (here is a video where I outline exactly how to find the best accountant)

 

#2 – Appreciation

 

Another thing that accelerated Fernando’s financial independence was appreciation. “Appreciation is certainly something that comes into play,” he said. “Over time, the properties have appreciated and some of them I’ve been able to do an equity strip from the properties due to the things that I’ve made, and you can also do an equity strip from the properties and you don’t have to pay any taxes when you borrow money against the properties.”

 

In other words, the equity that was created by appreciation can be pulled out, tax-free, to use as a down payment to purchase additional properties later on in the business plan. This is money on top of the cash flow from your portfolio and the money you are saving up from your corporate job.

 

#3 –Leverage

 

Fernando also benefited from another form of appreciation – inflation. And since he was leveraging the properties with debt, meaning he was able to control 100% of the property by putting less than 100% down, the benefits of inflation were compounded.

 

“A quick example for most of my properties is if you put 20% down on a property with a long-term financing fixed rate in place, which is what I recommend, you’re essentially leveraging your money 5 to 1. Five times 20% is 100% of the property. What that means is if the property goes up by let’s say 5% a year – basically tracking inflation numbers that we’re given – you’re actually making 25%, because it’s five times your leveraged money.”

 

When taking the compounded effects of appreciation/inflation into account, Fernando’s returns far exceeded what he could achieve investing in the stock market.

 

“If you add that 25% with a relatively low cash-on-cash return of 8%-10%, your already at 30%-35% for a property that is leveraged. Try to beat that with buying any stock. As a matter of fact, I’ve compared – since I’ve worked to Apple – Apple stock’s annualized return from 2012 to 2015 with my real estate portfolio, and my real estate portfolio beat the Apple stock,” Fernando explained. “My numbers were 14.8% averaged over the period, and Apple stock was 12.1%… So it’s just no comparison.”

 

Conclusion

 

Without the advantages real estate provided from a tax, appreciation, and leverage perspective, Fernando would not have been able to achieve his financial freedom, or at least not as quickly and efficiently as he did.

 

If your goal is to replace your current income with real estate, you must become familiar with these three principles. Like Fernando, it will increase both your chances of achieving financial independence and the speed at which you will be able to do so.

 

Related: 10 Laws of Successful Real Estate Investing

 

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Library books

The Top 13 Best Ever Apartment Investing Books

Many people ask me how I was able to go from making $30,000 a year in a corporate 9 to 5 job to controlling over $400,000,000 in real estate. In a three-part interview series, I outlined my journey in full detail (click here for part 1, part 2, and part 3).

In this interview series, I stressed the importance of education. Before I began my multifamily investment journey, I read all the best investing books on apartment investing I could get my hands on.

So, if you’re trying to figure out where to get investment advice you can take action on, here is a list of 13 books I read (or wrote) that I recommend you read. These will help you understand the ins and outs of apartment investing before or during the process of starting your multifamily real estate investment career.

 

 

Best Ever Apartment Syndication Book by Joe FairlessBest Ever Apartment Syndication Book by Joe Fairless and Theo Hicks

If you want to raise money to purchase an apartment community, this is the ONLY book that provides a step-by-step system for how to complete your first apartment syndication deal and how to build a multimillion or multibillion dollar apartment investing empire. You will learn the exact process that Joe followed to go from making $30,000 each year at a New York City advertising firm to controlling over $400,000,000 in apartment communities.

 

 

 

 

 

Commercial Real Estate Investing By RoosCommercial Real Estate Investing by Dolf De Roos

Roos reveals all the differences between residential and commercial investing and shows you how to make a bundle. He also explores the different sectors—retail, office space, industrial, hospitality, or specialist—to help you discover which is right for you. Finally, Roos shares key insights on finding tenants and avoiding vacancies, financing large investments, managing property, setting a tax-smart corporate structure, and taking full advantage of tax breaks.

 

 

 

 

The Complete Guide to Buying and Selling Apartment Buildings by BergesThe Complete Guide to Buying and Selling Apartment Buildings by Steve Berges

This is another one of the best investing books if you’re interested in apartment real estate, as it helps you map out your future, find apartment buildings at a fair price, finance purchases, and manage your properties. Berges includes tax planning advice, case studies of real acquisitions, and appendixes that add detail to the big picture. Plus, it includes a handy glossary of all the terms investors need to know, helpful sample forms that make paperwork quick and easy, and updated real estate forecasts. With this comprehensive guide at hand, you’ll find profits easy to come by.

 

 

 

How to Take an Apartment Building from Money Pit to Money Maker by HaskellHow to Take an Apartment Building from Money Pit to Money Maker by Craig Haskell

If you’re a struggling apartment owner or manager wondering where to get investment advice, Haskell offers ultimate answers in one of his best investing books by introducing a new step-by-step, 5-stage apartment recovery system that helps owners and managers take their apartment buildings from money pit to money maker. This book really gives apartment owners and managers the tools they need to build a thriving, top-producing rental property.

 

 

 

 

 

Multi-Family Millions by LindahlMulti-Family Millions by David Lindahl

Here, real estate mogul David Lindahl provides expert advice for investors who want to make the transition from single-family homes to more profitable multi-family units. He shows you how to find troubled properties that are ripe for quick profits, how to fix or flip those properties, and how to re-sell at maximum value. With a proven step-by-step system for managing each stage of the process, this book shows you how to get started in money-making, multi-family units, even while you work your day job.

 

 

 

 

The ABCs of Real Estate Investing by McElroyThe ABCs of Real Estate Investing by Ken McElroy

Some of the best investing books include basic, foundational information. In this back-to-basics book, you can learn how to achieve wealth and cash flow through real estate, find property with real potential, unlock the myths that are holding you back, negotiate the deal based on the numbers, evaluate property and purchase price, and increase your income through proven property management tools.
 

 

 

 

Investing in Apartment Buildings by Martinez

Investing in Apartment Buildings by Matthew Martinez

Are you newer to apartment real estate and trying to learn where to get investment advice? With this book, you can create a reliable stream of income and build long-term wealth. Throughout, Martinez provides step-by-step advice that gives newcomers to real estate investing the practical advice needed to learn the business from the ground up.

 

 

 

 

 

Crushing It in Apartments and Commercial Real Estate by MurrayCrushing It in Apartments and Commercial Real Estate by Brian H. Murray

Murray shares the secrets to his success through straightforward, actionable advice that will help you get started no matter what your experience level, or how much cash you have on hand, which is why I consider it one of the best investing books to learn from. You’ll learn how to find and creatively finance commercial property, grow a portfolio without any help from outside investors and without taking on excessive debt, use your small-investor status as a competitive advantage over corporate investors and identify simple, practical ways to increase profits while keeping costs low.
 

 

 

Trump: The Best Real Estate Advice I Ever Received by TrumpTrump: The Best Real Estate Advice I Ever Received by Donald Trump

Donald Trump has gathered in one book the best advice on real estate from the 100 brightest and most experienced people in real estate.
 

 

 

 

The 7 Secrets to Successful Apartment Leasing by CumleyThe 7 Secrets to Successful Apartment Leasing by Eric Cumley

Cumley provides seven proven industry secrets to building the relationships that achieve and maintain high-occupancy levels. From stop qualifying prospects and start interviewing them to follow-up is the extra mile, Cumley provides examples, tips, to-do lists, sample scripts, and more that will help you with filling vacancies and to do so quickly and effectively.

 

 

 

 

 

 

The Definitive Guide to Apartment Marketing by Grillo

The Definitive Guide to Apartment Marketing by Josh Grillo

In this book, Grillo shares insights into new tools, tactics, and terminology that are increasing leads, leases, occupancy, and rents for multifamily companies. This has been called a must-have book for marketing directors, owners, developers, and property management companies that want to get the most out of their marketing.

 

 

 

 

 

2 Years to a Million in Real Estate by Martinez2 Years to a Million in Real Estate by Matthew Martinez

This book contains everything you need to know about securing your financial independence through rental properties, including: how to invest small amounts early-on while working a full-time job, avoid real estate “bubble” risks, get others to pay your mortgage for you, pick a hot property (and spot others that will become hot), simplify the ins-and-outs of financing, negotiate like a pro, screen for reliable tenants, understand how local tenant laws work, hire good people to manage your properties, and know when to sell. It’s probably easy to see why this is in a list of best investing books.

 

 

 

 

Tax-Free Wealth by WheelwrightTax-Free Wealth by Tom Wheelwright

Tax-Free Wealth is about tax planning concepts. It’s about how to use your country’s tax laws to your benefit. In this book, Tom Wheelwright will tell you how the tax laws work, as well as how they are designed to reduce your taxes, not to increase your taxes. Once you understand the basic principles of tax reduction, you can immediately begin reducing your taxes. Eventually, you may even be able to legally eliminate your income taxes and drastically reduce your other taxes. Once you do that, you can live a life of Tax-Free Wealth.

 

 

 

Want a more exhaustive recommendation list of the best investing books I’m aware of, including books on general entrepreneurship, mindset, and sales and negotiation? Subscribe to my weekly newsletter here, and I will send you the entire list of where to get investment advice and more.

multifamily

The 22 Tactics to Go from a Corporate Job to $400,000,000 in Multifamily Real Estate

 

On May 18th, 2017, I was on the other side of the mic when I was interviewed on the BiggerPockets podcast, one of the most downloaded real estate podcasts in the world.

 

During our conversation, we covered 22 different topics on how I went from my corporate job in advertising to controlling $130,000,000 in multifamily real estate – and now over $400,000,000.

 

Below, I included hyperlinks for each topic. Clicking on a link will send you directly to the time in the conversation when the topic was discussed. That way, you can skip around and find exactly what it is you are looking for.

 

If you want to listen to the interview in its entirety, ​click here.

 

7:20 – My corporate background in New York prior to buying my first investment property

 

11:44 – Why I began investing in single-family homes in my hometown of Texas while continuing to work my corporate job in New York.

 

13:44 – How I purchased my first deal in 2009 without ever visiting the property

 

17:00 – Tactic: How to invest in out-of-state real estate without viewing the property

 

21:40 Pros and cons of investing virtually

 

23:13 – Why I quit my job and transitioned to large multifamily investing via syndication

 

26:30 – Tactic: Shifting your mindset when making the leap from small to large investing and how I found my first apartment deal

 

31:04 – Tactic: 3 factors for qualifying a multifamily market

 

33:58 – What’s the strongest multifamily market in the nation?

 

36:20 – My overall real estate investing goal and why it’s cannot be all about the money

 

37:40 – Outlining how I completed my first deal: What comes first, the deal or the money?

 

40:53 – The Master Lease: Pros and cons of buying apartments with a master lease and why it benefits the buyer and seller

 

47:50 – Tactic: How to leverage your existing network to raise private money for your apartment deals

 

54:15 – Why putting your own “skin in the game” results in additional alignment of interest with investors

 

55:32 – Tactic: How to find off-market deals in a hot market

 

59:25 – Three ways I, the syndicator, make money on the deal?

 

1:01:52 – When underwriting deals, what metrics/criteria must an apartment meet in order for me to invest?

 

1:03:54 – Difference between economic occupancy and physical occupancy

 

1:04:20 – How do I find on-market and off-market deals?

 

 

FIRE ROUND Q&A

 

1:08:09 – Question #2: “I’ve been discussing potential investment opportunities in apartment syndications with my network. The toughest objection I’m coming across is ‘what if I need to get my money out early.’ How do I overcome this?”

 

1:09:16 – Question #3: “What are the downsides to apartment buildings with only 1-bedroom units?”

 

1:10:46 – Question #4: “How do I check to see if an investor group is real and not a slick organization trying to steal my money?”

 

 

Did you like this blog post? If so, please feel free to share it using the social media buttons on this page.

 

I’d also be VERY grateful if you could rate, review, and subscribe to the Best Ever Show on iTunes by clicking this link: http://bit.ly/2m2XyM1

 

That all helps a lot in ranking the show and would be greatly appreciated. And if you have any comments or questions, leave a comment below.

 

 

 

colorful soap bubble

Bond Bubble Could Sink Paper Assets. Diversify with Multifamily Real Estate

Written By: Thomas Black

 

If the mortgage crisis in 2008 scared you away from investing in multifamily real estate, there is another potential financial bubble that should scare you even more. Especially if most of your wealth is invested in paper assets. Consider this an ALERT!

Full Disclosure: I do not believe traditional paper assets, such as stocks and bonds, can reliably deliver an abundant retirement. Growth is slow, unpredictable, and doctors and other professionals are at the mercy of their brokers for “hot” tips. That’s my opinion based on data and real-world experience in property investing.

But if you won’t believe me, at least consider the article in the New York Times. Oct. 24, 2016, by Landon Thomas Jr. He starts with this comment:

“European and Asian investors have been rushing into the United States bond market, spurred by a global glut of savings that has reached record levels.”

And then the writer makes this frightening observation: “A growing number of economists are concerned that this flood of money may inflate the value of these securities well beyond what they are worth, potentially leading to a market bubble that eventually bursts.”

 

Does this sound familiar? It should to anyone who got caught on the wrong side of the mortgage crisis in this country. In that event, the price of family homes rocketed to ridiculous levels, often well beyond what those properties were likely worth. The result was millions of foreclosures on bad loans, and a significant loss of national wealth.

This new threat is interesting because it sheds light on the global economy. Foreign money is looking for a home is the result of near-zero interest rates in European and Asian countries. The low rates make saving accounts mostly useless. So, the wealth seeks the next “hot” thing. In this case, the destination is a growing corporate bond market. I’ve got to believe that some of these high-grade debt securities are attractive because they are being issued by brand names, such as IBM and General Electric, according to Thomas.

To make matters worse, this pile of cash in Europe and Asian is expanding. That’s why economists see this surge of money as similar to the years preceding our mortgage crash. In the early 2000s, European investors shoved billions of dollars into mortgage-backed securities because they saw an opportunity to grow wealth. But it all mostly went bad. Some of those investment packages were so complicated that they couldn’t be unwound—meaning, they could not easily be liquidated when the implosion began.

Not your problem? Think again!

You might say that you have nothing to worry about if you’re not heavily invested in bonds. Yet financial experts worry that this enormous pilgrimage of foreign money puts too much pressure on the American economy, which still has weak knees. In other words, if another bubble bursts, we’ll all feel it, one way or another.

Here’s the irony. When there is a global glut of savings investors are forced into riskier ventures than they would otherwise consider; even junk bonds have done well in recent years. Why? They can’t find any place else to put their money. Remember the good old days when our parents encouraged us to save? With that mind-set, it is difficult to grasp that hoarding cash worldwide can be destructive—thanks to low interest rates.

 

Mentioning multifamily real estate in this conversation may also provide some irony: Isn’t that where we went wrong a decade ago?

No. Real estate was not the problem. Mortgage securities were the problem. In many cases, there was no “there” there. The shiny new investment vehicle was a mathematical equation, as thin as air. When you buy a dwelling, at least you have four walls and a roof. It’s real.

Also, before the implosion, there was a Gold Rush, or get-rich-quick, mentality toward property ownership. It wasn’t sane. Buyers would pay any price to get in. Not to mention, loose banking oversight allowed many people to get into homes they could not afford. At least the debacle cleaned up some of those practices.

Chinese and Russians in Manhattan: Store of value

An acquaintance who works with high-end real estate in New York City told me that it is very difficult to make much profit now, with prices so high. Yet he has witnessed foreign money from China and Russia swoop in and acquire enormously expensive commercial property—site unseen. Why? An analysis showed that the buildings produced income and would therefore always be a store of value. Compare that to securities that can disappear—poof!—when trouble arrives.

There was a time when real estate holdings were considered an “alternative” investment. Not anymore. Buying property with a long-term strategy has many tax advantages and builds net worth like nothing else.

 

Multifamily investing also provides stability that securities do not. As an example, let’s go back to the mortgage crisis that blew up in 2008. Several years later, I purchased single-family homes in the Houston area and rented them to families. Some of those families had foreclosed on properties during the crisis.

But guess what? They still needed a place to live. And I earned a profit.

 

Thomas Black, MD is the author of “The Passive Income Physician- Surviving a Career Crisis by Expanding Net Worth.” Tom is a former Navy veteran turned physician turned real estate investor. Together with his brother Tim, who is the former Chief Operations Officer of Great Wolf Lodge Resorts, founded Napali Capital, LLC.   Napali is a real estate investment firm with over $60 million in assets under management. For more information about investing or us please visit www.napalicap.com

 

presenting

7-Steps to Presenting a New Apartment Deal to Your Private Investors

Last week, my partner and I presented a new multifamily deal to our private investors. Our current approach is to set-up a 60-minute phone conference using the free software at www.freeconferencecall.com.

 

For those who are currently raising money for deals, or expect/desire to raise money for deals in the future, presenting a deal to investors can be a stressful experience, especially if it’s your first time. In order to mitigate the stress, preparation is a must. That being said, I wanted to share how I prepare and structure my presentations for investors.

 

1 – Get Your Mind Right

 

First, you have to get in the right frame of mind. What I mean by that is you must answer the question, “Why am I presenting this opportunity to investors?” I write the answer to this question at the top of the Word Document outline I use as a guide when presenting a deal.

 

At the top of the document, in bold letters, reads, “I am here to serve. I am here to help my investors retire, do what they want with their money, and ultimately do what they want with their time. When they get the returns we’re projecting, then they’re going to be able to spend their time the way they want to spend it.

 

If I accomplish the goal of this statement, it is a win-win for both my business and for my investors. A personal belief I hold is when people spend time how they want to spend it, they will naturally gravitate towards doing more altruistic things. I’m not just helping my investors make money, but I am helping them have the financial freedom to do what they want with their time, which in turn, will result in more altruism and philanthropy in the world.

 

So, starting out with the right mindset, as well as coming from the heart and knowing that you’re there to serve the investors is the foundation for a successful conference call.

 

2 – What’s Your Main Focus?

 

In addition to getting myself in the “service” mindset, I also remind myself what my main point of focus is – capital preservation.

 

This became my main point of focus in part due to an interesting psychological concept called loss aversion. Loss aversion refers to people’s preference to avoiding losses relative to acquiring an equivalent gain. In other words, people’s negative reaction to losing $5 is greater than the positive reaction of gaining $5. Through personal investment experience and after interviewing 1000 real estate professionals, I have the anecdotal evidence to support this concept as well.

 

Assuming you are conservatively underwriting a deal (which you should) then capital preservation needs to be sprinkled into the discussion with investors.

 

3 – Introduction

 

Now that my mindset is right and I’m focused on capital preservation, I’m ready to start the actual conference call. I start every call with an introduction, which is a simple summary of my background.

 

Additionally, I provide my email address and ask the investors to send any and all questions to me so that my business partner and I can answer them during the Q&A session (see step 6).

 

4 – Deal, Market, and Team

After I’ve provided my bio, the call is structured into three categories.

 

  • The Deal Details
  • The Market Details
  • The Team Details

 

I’ve already determined the main highlights of the deal, so before going into granular details on the three categories, I provide a high level overview of the deal. The overview explains the main reasons why I like the deal. I do this because I want to focus on and continue to reiterate these main points throughout the call. I don’t want to discuss these three data points and have everyone’s mind swimming in numbers. I want to make sure that the points I want to make about the deal are clearly and consistently communicated.

 

For the investor call I had last week, the two main points for that deal were exceptional location and a proven business model with a proven team. I led off with that, and that was the theme throughout each of the three categories.

 

Next, I went into each of the three categories and explained the highlights of each.

 

When I say something like, “It’s an exceptional area,” I will follow it up with, “and here’s why,” versus just throwing out hyperbole. You always want to have stats to back up your claims, and if you want to take it to the next level, tell a story as well.

 

For example, the deal I presented to investors last week was in Fort Worth, Texas. I mentioned that it’s an exceptional location. The population is growing, and as a reference point, the U.S. Census Bureau named it the number one fastest growing city in the United States, with a 47% population growth from 2000 to 2015.

 

I could have left it there with that stat. However, I went on to explain why the population is growing. I mentioned job growth, job diversity, and gave some specific employers. This was the macro level overview for the market.

 

Then I went into the micro level for the submarket. I talked about the school district and the specific employers within a 3-5 mile radius.

 

Overall, it’s important to know what you’re talking about (obviously), but mention the numbers and the reason behind the numbers, rather than just stating statistics. Tell a story, and then make sure you are hitting the points you need to hit, which are the ones you’ve predetermined are the most important selling points or desirable attributes for the particular opportunity.

 

5 – Dive into More Details

 

I present steps 3 and 4, which takes about 15 minutes. Then my business partner talks for another 20 minutes. He explains the business model in more detail, the financing we are obtaining, etc.

 

6 – Q&A

 

Finally, the rest of the call is the Q&A session to answer the questions investors emailed me. I will reply to some of the emails while my business partner is speaking, but most of the questions are addressed at this point.

 

At the conclusion of the Q&A session, the conference call is completed.

 

7 – Send Recording to Investors

 

Since I record all conference calls, I will send out the link to the recording to all my investors. I do this because probably around 40% of the investors aren’t able to attend the call.

 

Conclusion

 

My conference calls with investors consist of 7 steps:

 

  • Get my mind right
  • Determine my main focus
  • Introduction
  • Three categories – deal, market, team
  • Dive into more details
  • Q&A
  • Send recording to investors

 

When you follow this 7-step formula, it makes for a very concise conversation and you’re able to have an effective call.

 

Did you like this blog post? If so, please feel free to share is using the social media buttons on this page.

 

I’d also be VERY grateful if you could rate, review, and subscribe to the Best Ever Show on iTunes by clicking this link: http://bit.ly/2m2XyM1

 

That all helps a lot in ranking the show and would be greatly appreciated. And if you have any comments or questions, leave a comment below.

 

 

 

women with sea binoculars

The Most Commonly Overlooked Expenses in Real Estate Investing

“Don’t worry about failure, you only have to be right once.” – Drew Houston

Mark Ferguson, who is a realtor (sells hundred of homes a year), an investor (has flipped over 100 homes and owns 16 rental properties), and an author (has written 5 books), is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.

In a conversation with Mark all the way back in 2014, he provided his Best Ever advice, which is a sneak preview of the information he will be presenting at the Best Ever conference. His advice was also featured in the Best Real Estate Investing Advice Ever: Volume I.

What was Mark’s advice? He outlines the most overlooked expenses by buy-and-hold and fix-and-flip investors.

Mark’s Real Estate Background

 

Mark was exposed to real estate at a very young age. His father was a real estate agent and also did fix and flips. As a result, Mark got started in real estate by helping his father with flips during high school. Having been exposed to real estate at such an early age, Mark told himself that he would never get into the real estate industry. Instead, he went to college and obtained a degree in business finance.

 

After graduating, Mark could not find a job in the world of business finance, so he decided he would do real estate part-time, only until he found a job. In 2001, Mark re-entered real estate as an agent, and struggled for a long time. He did not have a niche, he didn’t have any goals, and he wasn’t great at talking to people. This all changed when Mark found the REO foreclosure niche. He started listing REOs, started making goals, and his career took off.

 

In 2010, Mark began investing in single-family rentals, purchasing 16 properties over the next 5 years. In 2013, Mark took over his father’s existing fix-and-flip business and real estate sales team. He has been focusing on that business as much as possible. If being a real estate agent, a buy-and-hold investor, and a fix-and-flipper wasn’t enough, Mark also started a real estate blog, “Invest Four More,” where he writes articles about his past and current experience as an agent and investor.

Real Estate is Very Region Specific

 

Mark’s real estate agent, buy-and-hold, and fix-and-flip business models focus on single-family residences in the Denver area. Within the Denver area, Mark’s target sub-market is 50 miles north of the city. In this area, prices are more reasonable and he can acquire a property between $80,000 and $150,000. The reason why Mark focuses on single-family instead of multifamily properties is two-fold:

 

  1. Since he focuses on SFR as a realtor, he knows the properties very well, so he can get a much better deal and make more money on a SFR compared to a multifamily
  2. Real estate is very region specific. He pays considerable attention to different parts of the country and the different terms that people get. For whatever reason, Colorado has horrible cap rates compared to other parts of the country. It is hard to find any multifamily properties above a 5% cap rate.

 

Due to these two reasons, Mark can be much more successful with SFRs than he can with multifamily in his specific market. He focuses on buying below market value through short sales, REOs, estate sales, etc., so he can make money as soon as he buys the property.

Overlooked Expenses: Buy and Holds

 

Rents have shot up in Mark’s market over the last couple of years. As a result, he can purchase a SFR for around $120,000 to $140,000 that will rent for $1,500 a month. If he were to purchase a multifamily property, he could get a 4-unit with 2 beds and 1 bath per unit for $250,000 that might rent for $2,000 a month. Compared to most parts of the country, this is backwards, but again, real estate is very region specific.

When investing in SFR rentals, Mark strongly advises that you invest for cash flow. Many people get caught up in a rising market and just buy any investment property they can find. However, they neglect to take a closer look at the actual numbers and operations. People get in trouble because they think that if the property rents for $1000 a month and their fixed expenses (mortgage, taxes, and insurance) are $500 a month, then they will cash flow $500 a month. They factored in the fixed expenses but they overlooked additional expenses, like vacancies and maintenance. If the market goes down and they cannot maintain the $1000 a month in rent, then they have properties that are not making money and they cannot sell, so they are stuck. When you invest for cash flow and figure in all of the additional expenses, if the market goes down, you will still make money and can weather the storm.

 

Advice in Action #1: When investing for cash flow, make sure that you are figuring in vacancy and maintenance costs on top of your mortgage, taxes and insurance:

  • Vacancy
    • Expect at least a 5-10% vacancy rate, even if the historical rates are much lower
    • One eviction or bad tenant can create that 10% pretty quickly
  • Maintenance:
    • A little harder to estimate because it varies depending on the property’s condition, age, and how good your tenants are
    • Figure at least 10%, but more often 15-20% for maintenance and capital expenditures
    • If you need to replace a roof, these costs can add up pretty quickly

These rates are a percentage of the properties gross rent. If your gross rent is $1,000 per month, figure in $50 to $100 a month for vacancy and $150 to $200 a month for maintenance.

 

Overlooked Expenses: Fix and Flips

 

On the fix and flip side, Mark can purchase a property for $80,000, put in an additional $15,000 to $20,000 in renovations, and sell it for $140,000 to $150,000. Being all-in at $100,000 and selling for $150,000, one would think that the net profit is $50,000. However, in reality, this is not the case. After factoring in holding costs, carrying costs, financing costs, and all the other costs that many people do not consider, the profit is closer to $25,000.

 

As a fix and flipper, you have to understand your actual costs. In Mark’s example above, if he overlooked the additional expenses, he would have expected a $50,000 profit instead of the actual $25,000. If the numbers were even tighter and he expected a $20,000 to $25,000 profit, he would have ended up breaking even or potentially even losing money on the deal.

 

Advice in Action #2: When performing a fix and flip, make sure you figure in the additional expenses on top of the rehab budget. These expenses include:

  • Holding Costs
  • Financing Costs
  • Insurance
  • Utilities
  • Maintenance
  • Everything else that goes on during the course of a flip

Most experienced fix and flippers account for most of these additional expenses, but Mark finds two other surprising costs that many flippers still overlook:

 

  1. Higher Than Expected Repair Costs – Mark has been fix and flipping properties for a long time, and every single time, the repairs end up being higher than expected. You don’t really know how much work a house needs until you start getting into it and really have a contractor take a look at what is there. There are always hidden surprises, especially on larger renovations and when you are knocking down walls.

Advice in Action #3: To account for these surprise costs, Mark always adds at least $5,000 to his repair budget automatically. On a $20,000 rehab, that is an additional 25%. Commit to doing the same.

 

  1. Longer Than Expected Project Time – Similar to Mark’s experience with the repair costs always being higher than expected, the same holds true for the project time. The length of time it takes to flip a property is almost always longer. There is a huge difference in holding costs if the project time is 4 months vs. 6 months. That extra time can result in up to $10,000 in additional expenses.

Advice in Action #4: Mark always tacks on an additional two months to his expected project time, and adjusts his holding costs accordingly. Commit to doing the same.

 

 

Want to learn more about raising property values and rents, as well as a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!

 

 

Related: Best Ever Speak Brie Schmidt Sneak Peek How to Avoid the Shiny Object Syndrome in Real Estate Investor

 

Related: Best Ever Speaker Kevin Bupp Sneak Peek Lessons Learned From Losing Everything During the Financial Crash

 

Related: Best Ever Speaker Theresa Bradley-Banta Sneak Peek Don’t Invest in Real Estate on Unfounded Optimism and Emotions

 

Related: Best Ever Speaker Linda Libertore Best Ever Success Habit of the Nation’s #1 Landlord Aid

 

Related: Best Ever Speaker Kevin Amolsch Why Moving at a STEADY Pace is the Secret to Real Estate Success

 

Related: Best Ever Speaker Bob Scott and Jimmy Vreeland How to Acquire over 100 Properties in 24 Months Utilizing the Lease-Option Strategy

 

Related: Best Ever Speaker Jeremy Roll 3 Essential Factors of Diversification in Passive Real Estate Investing

 

Related: Best Ever Speaker David Thompson 3 Ways to Raise Over $1M for Your 1st Real Estate Syndication Deal

 

Related: Best Ever Speaker Al Williamson 4 Ways Showing Leadership Increases Your Property’s Value and Rents

highrise apartment real estate investment

Flashback Friday: Investor Analysis After Closing on a 296-unit Apartment … 2 Lessons Learned

I conducted an investor analysis after closing on a 296-unit apartment 5 months ago and came away with some interesting findings.

 

This was the 4th purchase in a 12-month period. You can read about my lessons learned on the other ones here:

 

Closed on 155-units in Houston, TX … 3 Lessons Learned

 

Closed on 250-units in Houston, TX … 2 Lessons Learned

 

Closed on 320-units … 6 Ways to Creatively Get into the Multifamily Syndication Business

 

For this analysis, I looked at the investors who invested. Most specifically, I looked at if they were new or returning investors, as well as how much each (new vs. returning) investor contributed to the total money raise.

Here were the findings on this apartment deal:

  • 69% were new investors
  • 31% were returning investors

 

However, the interesting thing I found was that the percentage of capital contributed to total money raise was almost split 50/50 between new and returning investors.

  • % contribution to total raise for new investors: 49.6%
  • % contribution to total raise for existing investors: 50.4%

 

So, here are a couple takeaways for anyone in the biz of raising money for their apartment syndication projects.

  • New investors likely won’t invest as much per person as returning investors.On this deal 31% of my returning investors invested 50% of the total equity raise. However, after the 1st deal, the new investors were no longer new investors! So as long as you deliver and/or exceed expectations, it’s likely the amount invested will increase over time.
  • Always have 3 ways to bring in new investors. Then convert them to returning investors.

 

My 3 largest lead generation sources for new investors are:

 

1. Referrals from current network

 

I don’t ask for referrals from my current investors or clients, but I do get them. One suggestion is to provide your investors (or potential investors if you don’t have them yet) with content that they can and want to share with their friends. For example, I wrote a book (Best Real Estate Investing Advice Ever: Volume 1) and mailed out TWO copies to each of my investors. I wrote a personal note to the investor on one of the books and told them the other book is for a friend of theirs that they’d like to give it to.

 

2. My podcast – Best Real Estate Investing Advice Ever Show

 

My podcast is the world’s longest running daily real estate podcast. The daily show has provided me with a consistent presence via iTunes and Google searches. Most importantly, it helps people get to know me even though we’re not having a one-on-one conversation.

 

3. BiggerPockets

 

Since joining BiggerPockets, I’ve posted over 2,500 times and have been rewarded 10x over via the new friendships and relationships I have formed

 

I hope this is helpful for your money-raise efforts as well!

 

Want to learn more multifamily and apartment syndication tips, as well as learn more about a wide-range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!

 

 

 

people colabroating and taking notes

Throwback Thursday: Closed on 155-units in Houston, TX … 3 Lessons Learned

About 10 months ago, my business partners and I closed on a 155-unit apartment deal in Houston. It was my 3rd syndicated deal. My first deal was a 168-unit and the second was 250-units.

 

In case you missed it, here are the two lessons I learned from closing on that second deal: Throwback Thursday: Closed on 250-units in Houston, TX…2 lessons learned

 

Here are three more lessons I learned from the 155-units

 

1. Go farther faster by playing to your strengths

 

For my first syndication deal (168-units in Cincinnati, OH), I did it all:

 

I found the deal. I did the underwriting. I raised all the private money. I performed the due diligence. I hired all the team members and was the main point of contact moving forward. I closed the deal. I was the asset manager.

 

While it was a great learning experience, doing it all myself didn’t set the deal up for optimal success. Quite frankly, I am not an expert at many of those duties. For example, I am not a proficient underwriter. I am competent and know how to evaluate a deal and determine if it is good or not. However, I haven’t spent hundreds or thousands of hours focusing strictly on underwriting deals. Like most things, the more you do it, the better you get.

 

So on this deal, I learned that I needed to partner with someone who is phenomenal at underwriting large multifamily deals. Actually, I partnered with this person on my second deal – the 250-unit. This third deal only re-enforced the need to do it again moving forward because it will allow me to do what I’m good at and allow him to do what he’s good at. Again, we’re both capable of doing each other’s job, but we wouldn’t do as good of a job.

 

This allows the business to go farther faster because we are both focused solely on our crafts. Yes, there is overlap (I triple check all the underwriting and review it in detail), but it’s better for someone with lots of experience to be the primary underwriter.

 

Thought for you: What’s something you’re really good at? What’s something you’re not good at? Do more of the former and less of the latter because it’s likely that you enjoy doing what you’re good at, which is why you’re good at it, and vice versa.

 

2. Do something consistently on a large distribution channel

 

If you are a real estate investor, you’re in the sales and marketing business. Fix-and-flippers, wholesaler, multifamily syndication, etc. are all in the sales and marketing business. Perhaps passive buy-and-hold investors aren’t, but I’m sure there’s a creative way we could connect them to it.

 

Since were in this business, we must have a consistent daily presence in order to gain exposure and build credibility with our customers/clients/leads.

 

Some large distribution channels (with some ideas for each) are:

 

  • BiggerPockets (official BP blogger, being an admin, posting, commenting, adding value, offering assistance, being insightful)
  • com (writing books and publishing them)

 

Related: Self-Publishing Your Way to Thought Leadership, Leads, Money, and Much More

 

  • iTunes (podcasting)
  • YouTube (video blog, tips, interviews, make real estate music videos…?)
  • Facebook (create a community around an in-person event you host and then open it up to a larger audience)
  • Instagram (pictures of renovations before & after)
  • Twitter (proactively answering real estate related questions)

 

Related: The 4 Keys to Building Relationships Via Social Media

 

Whatever you do, do it DAILY.

 

Do it consistently.

 

And do it on a large distribution channel.

 

Many people want the shiny object, the golden nugget, the Super Secret Plan that will let them retire on the beach in Tahiti. I think that’s ridiculous. We live in an instant-gratification culture. The truth is that to make a good living in real estate, you MUST be consistent with strategic, proven actions. That’s it.

 

 

3. There is major power in doing a recorded conference call when raising money

 

This is going to be a super simple lesson and you might even say “duh.” If you do, I don’t blame you, BUT, it’s something I didn’t do on my first two multifamily syndications. I figured if you don’t do it either then it would help you out when raising money.

 

Here’s the tip: have a conference call with qualified investors to talk about your deal and record it!

 

When we were in the middle of raising money for this 155-unit apartment community, my business partner and I decided to have a conference call to present the deal to accredited investors. We did a similar call on our previous deal but we didn’t record it.

 

For this one, however, I recorded it. It was tremendously helpful with raising money for the deal, mainly for two reasons:

 

  1. Most accredited investors are busy making money, which is why they actually have money to invest in the first place. This helps them listen to the presentation on their schedule
  2. The questions being asked are from a group of people, which is beneficial to others who are listening but didn’t think of those questions

 

Here’s how I record the conference call:

 

  • First, I make sure the attendees have the presentation prior to the call so that they can review it and come up with questions.
  • Next, I used freeconferencecall.com (I have no affiliation with them) and simply set up the call.
  • During the call, I have the attendees email me questions. That way, I know who is asking the questions, and I can follow up with them afterwards
  • At the end of the call, we do a Q&A session, and my business partner or I answer all the questions that are asked.

 

As you’re raising money, I highly recommend this simple approach. I’ve personally seen a benefit, and I’m confident you will too!

 

 

Want to learn more on how to successfully syndicate a multifamily deal, raise and raise private money? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit www.besteverconference.com to learn more!

 

 

city apartment real estate

The 4 Multifamily Asset Classes Defined (12 Images)

Apartment or Multi-family real estate investing breaks down into four distinct asset classes: Class A, Class B, Class C, and Class D. As investors, it is important that you have the ability to distinguish between the four, which will enable you to determine which asset class best fits your apartment deals and which ones you should avoid.

Class A Properties:

  • The crème de la crème asset class for the multi-family home definition
  • Usually less than 10 years old and are upscale, luxury apartments
  • Average rents are high.
  • Generally located in desirable geographic areas
  • White-collar workers live in them and usually rent by choice.
  • Generally have the highest valuations per door and the lowest market cap rates
  • Bought primarily for appreciation
high-end corner apartment building

Image Credit: The Future Tense

 

apartment pool and lounge area

Image Credit: LIV Development

 

 apartment pool and lounge illustration

Image Credit: Homestead U

Class B properties

  • Can be 10 to 25 years old
  • Generally well-maintained
  • Have a middle-class tenant base, including both white- and blue-collar workers. Some renters are by choice, and others by necessity.
  • Cap rate that is higher than Class A property but lower than that of Class C property
  • Bought primarily for appreciation rather than cash flow, but they generally have more cash flow than Class A property
shared patio for apartments

Image Credit: AZ Big Media

 

three story apartment on grassy hill

Image Credit: RE Business Online

 

nine story urban apartment building

Image Credit: Urban Turf

Class C Properties:

  • Built within the last 30 to 40 years
  • Generally have blue-collar and low-to-moderate income tenants
  • Most tenants are renters “for life,” with the exception of some tenants who are just starting out and are likely to work their way up to Class B or Class A property as they progress in their careers.
  • Rents are below market.
  • Most attractive to cash flow investors because they offer the best cash flow
  • Can be the first to appreciate in a rising market
  • Some of the best deals occur when an investor finds a Class C property in a Class B area and makes the required improvements to bring it up to market standards.
row of apartment buildings

Image Credit: Anthony Griffin Blog

 

parking lot of brick apartment building

Image Credit: The Real Estate Guys

 

gated apartment complex and parking lot

Image Credit: Bolour

Class D Properties

  • Built more than 40 years ago
  • House many Section 8, government-subsidized tenants
  • Generally located in lower socioeconomic areas
  • Newbies beware: due to high vacancies, substantial deferred maintenance, and the likelihood of being located in a high crime area, they require intense management and heavy security. They are for seasoned investors only!
people walking by old apartment building

Image Credit: Anthony Griffin Blog

 

courtyard of old apartment building

Image Credit: Uprising Radio

 

panoramic of apartment building

Image Credit: Jefferson Village Apartments

Now that you’ve read my crash-course guide that explains the multi-family home definition – hopefully, you no longer have to wonder, “what is multi-family real estate!” Additionally, if you are interested in working with me on an apartment syndication deal, please complete this form.

Why You SHOULDN’T Be Intimidated by HUGE Properties Regardless of Your Skill Set

Larger properties are intimidating. That’s why most real estate investors start with a single family residence or duplex, and increase in volume or number of units from there. Brian Murray, who owns over $40 million in apartments and other commercial assets, did the opposite – his first investment was a 50,000 square foot office building. In our recent conversation, he explained how he was able to successfully start his investment career with such a large purpose and why you can do the same, regardless of your skill set.

 

Brian’s First Purchase – 50,000 Square Foot Office Space

 

In 2007, Brian purchased a 50,000 square foot office building for $836,000. “It was in pretty bad distress,” Brian said. “It was less than half occupied. It was not well maintained, but it was very well located.”

 

Lessons #1 & #2 – Creative Financing & Credits for Deferred Maintenance

 

Since this was Brian’s first investment, he didn’t have much money and had no prior real estate experience. As a result, he was rejected from the banks and was unable to secure a loan. Enter creative financing – Brian was able to assume the seller’s existing mortgage, which was $730,000.

 

Brian was also able to negotiate credits for deferred maintenance. With the combination of assuming the mortgage and getting credits from the seller, Brian was able to obtain the property with very minimal cash out-of-pocket.

 

How do you negotiate credits? “One of the things I negotiated was to get credit at closing equal to the value of their reserve replacement,” Brian explained. “They had a couple of other reserve accounts with the bank that I was able to negotiate credits at closing in that amount.”

 

However, Brian didn’t stop there. During the due diligence phase, he uncovered a few discrepancies between what the contract and leases said and what he actually saw at the property. For example, “one of the things that was wrong was the rent roll. There were tenants on the rent roll that just plain didn’t exist. There were spaces that the rent roll had indicated were occupied that when I went and actually physically toured the property, I realized they were actually vacant.” (This anecdote points to the importance of proper due diligence). But no worries. Brian was able get more credit from the seller for things that he discovered during the phase. He said, “It all worked out to keep that initial amount of cash [out-of-pocket] fairly limited.”

 

Lesson #3 – Pay Attention to Decrease Expenses

 

One of the main reasons why this deal was so successful is because Brian was able to quickly decrease excessive expenses and make the building cash flow positive after year one. The two main expenses he cut were the utilities and the salary of the building’s superintendent, which he accomplished in one fell swoop.

 

The property had one employee – a superintendent. The superintendent is responsible for coming in early, opening up, and prepping the space. “That means,” Brian described, “unlocking the door, turning the lights on, checking the bathrooms, doing a walk through, and then just general maintenance in terms of landscaping [and] cleaning.” In this particular case, Brian discovered that the current superintendent wasn’t doing a whole lot. In fact, he had a woodshop set up and was doing side work during the workday! “The owners were from outside the area and weren’t keeping an eye on it, [so] the place looked terrible. There was trash all over in the front yard [and] there was no landscaping to speak of. It had really been let go.”

 

On top of that, the superintendent wasn’t controlling the heating and cooling system. “He literally would crank the air conditioner on high 24/7,” stated Brian. “If the tenants were too cold, they had to open their windows and let some warm air in.” The situation was similar in the fall, except he would do the same thing with the heat.

 

On Brian’s first day of ownership, he confronted the superintendent. “I asked him how to control the thermostat, and he said, ‘there’s no way to adjust it. It’s locked.’ I said, ‘you can’t tell me how to control the temperature?’ and he said, ‘no, I don’t know how.’ So that was his first and last day in my ownership.” Brian called the thermostat manufacturer and they walked him through how to unlock and program the thermostat.

 

As a result, Brian saw a substantial decrease in expenses. “I was able to program [the thermostat] so it turned down at night [and] turned down on weekend. By keeping a close eye on that, I cut the utilities bill in half in the first year. By cutting the salary of a superintendent [and] by cutting my energy bills in half right out of the gate, the building turned cash flow positive.”

 

Lesson #4 – Reinvest Profits to Boost Property Value

 

After turning the property cash flow positive after decreasing his expenses by cutting both his utility bill and superintendent salary, Brian didn’t pocket the extra cash. Rather, he reinvested it right back into the property. “That’s another thing I stay true to to this day: I always plow the vast majority of the money back into the properties and keep reinvesting back in. That’s a part of how you build value.”

 

How much value was Brian able to create? Currently, the “property’s probably worth $3 million.” That’s more than triple the original purchase price, which was $836,000!

 

Conclusion

 

Brian’s Best Ever advice is to “think big. Don’t be deterred … Don’t be intimidated by those biggest properties.” He said, “I think people are intimidated by the larger properties, but they really shouldn’t be because the bigger you go, the more flexibility there is in how you can finance it. There’s a lot more opportunity that opens up to you.”

 

This advice manifested from Brian’s first ever real estate purchase – a 50,000 square foot office building. During this experience, he learned:

 

  1. Creative financing techniques with little to no money out-of-pocket when you can’t secure a loan from a bank
  2. To negotiate to get credits from the seller for deferred maintenance
  3. How to investigate to find ways decrease expenses
  4. Reinvesting profits back into the property is how you quickly build your net worth

 

After applying these four lessons, Brian’s more than tripled the value of his first property, and he was able to expand from one property and zero employees to 30 properties and 16 employees in less than 10 years.

 

people colabroating and taking notes

Throwback Thursday: Closed on 250-units in Houston, TX…2 Lessons Learned

Over a year ago, I closed on my second multifamily syndication deal – a 250-unit building in Houston, TX. It was almost 50% more units that my first deal, which was 168-units. After completing these first two multifamily syndications, I was already learning valuable lessons that I still apply today.

 

The following are the two main takeaways from these first two deals:

 

Lesson #1 – Get the Property Management Company to Put Equity in the Deal

 

If you are not managing the property yourself, then have the local property management company you’ve hire put their own money into the deal. While this results in you having less equity in the deal, the advantage is that since the management company has their own skin in the game, it is human nature that there will be much more accountability and alignment of interests. This is something I didn’t do on my first deal (mistake), but did apply to the 250-unit deal in Houston.

 

When following this route, it is even more important that you’ve adequately vetted the property management company. If you aren’t completely comfortable, you’ll be stuck with them as both a manager AND a general partner – a double whammy.

 

Bonus Point: In return for equity, you can try to negotiate with the property management company for the lowering or elimination of certain fees, such as management fees, lease-up fees, and/or maintenance upcharges.

 

Bonus Point: On top of the property management company putting equity into the deal, if they also bring on other investors that adds another layer of accountability and alignment of interests.

 

Lesson #2 – Prime Private Money Investors Prior to Finding a Deal

 

It is true that if you have a good deal, money will find you. But, that doesn’t mean you should wait for the deal before starting the money-raising process. On my first deal, I raised over $1 million and did so after finding the deal. It was, shall I say, a character building experience. As a result, I don’t recommend that same approach to others.

 

Leading up to my second deal, I prepped the majority of my investors so that once I had a deal under contract, the money raising-process would flow more smoothly. I still brought on new investors after getting the deal under contract, but overall, the process is much more efficient when you prep investors beforehand.

 

Note: I don’t actually receive money before I have a deal. I only speak to investors about a hypothetical deal, or past deals, in order to gauge their interest level in investing.

 

Bonus Point: How do you prep investors before you have a deal?

 

  • Schedule a meeting with investors
  • Ask questions to learn their financial goals and how they evaluate success with their investments
  • Talk to them about your business (What is your real estate background? What do you invest in? Why do you invest? What is multifamily syndication? Etc.)
  • End the conversation with the following question: “If I find something that meets your financial goals, would you like me to share it with you?”

 

When I’ve asked this question at the end of investor conversations, I’ve never had anyone say no.

 

Moving forward, keep the interested investors (which should be all of them) updated as you look at properties. Then, when you find a property, they are already well aware of how your business operates and how multifamily syndication works. As a result, they are more inclined to invest.

 

 

For anyone who wants to raise money and do multifamily syndication, I’m confident these two lessons I’ve learned will help you be successful.

working at a home office computer

How to Quickly Evaluate a Multifamily Deal

Here are the 3 factors that you need to look at in order to quickly evaluate a multifamily deal prior to conducting more detailed, thorough due diligence: (1) the market, (2) the deal, (3) the team.

 

The Market

 

When evaluating a multifamily deal, the first factor you want to look at is the market.

 

First, you want to make sure that the market has a diverse economy. In a diverse market, no one employer or industry should make up more than 25% of the jobs in that market. When one company or industry makes up the majority of jobs, if that company moves or if that industry takes faces any sort of challenges, there is a possibility that the entire market tanks, and with it, your real estate investment. Therefore, avoid non-diverse economies as much as possible.

 

Secondly, take a look at the employment and unemployment rates. Is there a positive or negative trend? If the employment rate is increasing, then compare it to the rates of similar cities across the nation. Is the employment in your market increasing at a faster or slower rate? A positive trending employment rate overall, and a rate that is increasing at a faster pace when compared to cities in similar markets are signs that you are investing in a solid, growing market.

 

Blog: Why Studying the Market Can Help You Avoid Disaster

The Deal

 

Obviously, when evaluating a multifamily deal, you want to look at the deal itself. Make sure that you are conservatively underwriting the deal.

 

First, take a look at the trailing 12 to 24 months profit and loss statements (P/L statements), and use that to underwrite the deal.

 

Next, apply the P/L statements to how you would operate the property. Many investors just stop at underwriting the deal using the current P/L statements. However, this only works if you will be operating the property the exact same way as the current owners. In reality, you may be owner operating the property while the current owners utilized a 3rd party property management company. Or you may be allocating more or less money towards the capital expenditures budget. All of the differences must be taken into account when you are underwriting the deal.

 

Blog: 11 Questions to Qualify a Multifamily Deal

The Team

 

Finally, you want to make sure that your team has experience in this specific real estate niche, and that there is an alignment of interests. There are many ways to have alignment of interest, with the best way being that the team members are co-investing in the deal.

 

Blog: All You Need to Know About Building a Solid Real Estate Team

 

 

 

 

Question: Before conducting more detailed due diligence, what do you do to quickly qualify and evaluate a potential real estate deal? Comment below with your strategy!

 

 

multifamily

11 Questions to Qualify a Multifamily Deal

You’ve found a deal, but your work has only just begun. The majority of the deals you come across will not pan out, while a small percentage of them will be smoking hot. How does one tell the difference? Well, here is a list of 11 questions that once answered, will let you know where or not you are sitting on a golden egg or a rotten egg.

 

  1. How did you find the deal?

 

If you’ve found a deal, typically, it is either an on-market deal or an off-market deal. If it is an on-market deal, that is okay. However, expect to face a competitive bid situation. You can find good deals that are on-market, but it is important to understand upfront that the price will likely be driven up due to competition.

 

If you have uncovered an off-market deal, you are sitting pretty and it is worth digging into further. More likely than not, there won’t be a bid war, have a direct line to the seller, and have the potential for putting together a more creative financing structure.

 

  1. Why is the seller selling?

 

You will likely hear a story from the seller as to why they are selling, and it won’t be 100% accurate. However, if you continue to ask the same question, in time, you will hear enough recurring themes that you will have some semblance of what the truth actually is.

 

  1. Do you have all the necessary information to evaluate the deal?

 

At the very least, the three documents you need to evaluate a multifamily deal are (1) the trailing 12-months of financials – 24-months is ideal – that is often referred to as the property and loss (P/L) statement, (2) the rent roll, which will show you the current rents, and (3) if it is an on-market deal, the offering memorandum, which is the package that the broker puts together containing all the deal information.

 

Without these items, you won’t be able to evaluate the deal accurately.

 

  1. What is the deal upside?

 

When buying a multifamily property, it is important to know, specifically, how you will add-value. The majority of people investing in the multifamily niche are doing so because they are trying to add-value and in-turn, force appreciation. Therefore, it is important to understand the potential upsides before purchasing the deal.

 

For example, if you plan on investing $5,000 into each unit and increase the rents by $75, you need to know exactly how you will increase the rents with the $5,000 in renovations, as well as if the market can actually command that type of rent premium.

 

  1. What is the net operating income (NOI) when YOU underwrite the deal?

 

The key distinction is that you are underwriting the deal and calculating the NOI, and that you are NOT simply relying on the broker’s pro forma. Make sure that you underwrite the deal and that your property manager partner signs off on your results. It is one thing for you to come up with a NOI, and another for the property manager partner to validate those numbers based on their experience and knowledge of the market.

 

  1. What is the market cap rate?

 

It is important to know what the entry cap rate is, so that you know you are buying the property at a competitive price. But, it is even more important that you project, as accurately as possible, the exit cap rate so that you can understand the exit strategy.

 

  1. What is the value of the property?

 

Once you’ve determined the NOI (question 5) and the market cap rate (question 6), you can calculate the property value (NOI / Cap Rate).

 

  1. Can you exceed the goals of your investors?

 

This question assumes that you have investors in the deal. Can you exceed your investor’s goals, while still receiving adequate compensation yourself?

 

If you don’t have investors, then ask yourself, “Can I exceed my goals?”

 

  1. On a scale of 1-10, how well do you know the sub-market?

 

Your level of understanding of a market will make or break a deal. It is all about knowing the market, submarket, demographics, school quality, etc.

 

  1. Who are your local team members in the sub-market?

 

Do you have a local team in the subject property’s market? If so, have they successfully implemented a similar business model in the past?

 

  1. What type of financing is on the property?

 

Does the seller have an assumable loan? What are the terms of the loan? If the seller doesn’t have an assumable loan, what new financing will be put in place? A bridge loan to long-term financing? Long-term financing? Something else?

 

 

If you are a multifamily investor, are there any other questions you use in order to qualify a deal? If so, please share in the comment section!

 

 

How to Renovate an Apartment While Maintaining Occupancy

Roan Yarn has over 15 years of real estate experience, which began as project manager for a 46-unit building in Miami. In our recent conversation, I learned that on his first project, he was instantly met with a HUGE challenge – the 46-unit was on the brink of being condemned and had a horrendous reputation in the community. Roan explained how he was able to salvage the situation and renovate the building while the tenants were still occupying the units!

 

46-Unit: Addressing Concerns

 

When Roan came on as the project manager for a 46-unit building in Miami, his main hurdle to overcome was addressing the community’s concerns, which were three-fold:

 

  1. Some of the tenants were afraid that the building was going to be condemned and that they would become homeless
  2. All of the tenants were living in substandard conditions.
  3. The local news had representatives at the property trying to get the scoop on the property’s situation.

 

Needless to say, Roan had his hands full. However, he understood that the community, and especially the tenants, simply needed to vent to someone. Sometimes you have to just stand in the line of fire, and that is how Roan approached the situation. He recognized that there was a lot of displaced anger. The best way to dissolve the frustration was to let them talk it out, take the heat – even though it was the fault of the previous owner and not him – while offering constructive solutions to their concerns.

 

The Importance of Communication

 

Aside from wanting to be heard, the tenants also wanted to see action taken towards addressing their concerns. Therefore, Roan would show each of the tenants his plan of attack. The tenants were provided bullet points with a couple of steps on what the process would be. Once they saw that, Roan could tell that the tenants comfort levels shifted completely.

 

Communicating the plan of attack with the tenants only addressed the tenant and community’s concerns. Roan’s next obstacle was to figure out how he was going to repair all the units while the tenants were still living there. Even though the property was almost condemnable, it had 60% occupancy. People were living in terrible conditions. But, terrible conditions are better than being homeless. Therefore, Roan didn’t want to unnecessarily displace families from their units. Also, this is a business, so he couldn’t cut off the properties income stream either.

 

Roan had to communicate with the tenants and be sensible to the fact that they would be living on a construction site. He accomplished this in similar fashion to how he addressed their initial concerns – open communication and dialogue, being respectful, and standing in the line of fire. More specifically, Roan’s plan of attack was a simple three-step process.

 

Three-Step Plan of Attack

 

First, he had to assess the condition of the units. Ideally, a property that is in condemnable condition is completely vacant. All you have to do is go in, gut everything, and start all over. But, we don’t live in an ideal world! So instead, Roan had to conduct a unit-by-unit assessment for what repairs were needed with tenants still in place.

 

Next, which was the most difficult part, was conveying that information to the tenant that was living there. Contractors advised Roan on how bad things were during the assessment. But, it was his job to translate that into laymen’s terms and communicate the situation to the tenants. For the majority of the units, the tenants were required to “move-out” for 24 to 48 hours. In some instances, Roan had the tenants move all of their belongings to the curb and then have them bring it all back in after repairs were completed.

 

Finally, the last step was to make the required repairs.

 

All in all, this was a great lesson in the power and importance of open and honest communication.

cost segregation

How to Save Thousand of Dollars on Your Taxes Via Cost Segregation

 

In my conversation with tax expert Jeff Hobbs, he explained a little known and little understood method that is virtually guaranteed to put money in your pocket. The method is called cost segregation, and Jeff explains what it actually is and why every investor should look into the benefits.

 

What is Cost Segregation?

 

Cost segregation is the identification of building components and reclassifying the tax life on each of those components. In a cost segregation study, a building is literally broken down into all of its individual components – all the wood, studs, screws, nuts, bolts, cubic yards of concrete, square yards of carpeting, gallons of paint, etc.

 

Most commercial properties establish a 39-year depreciation schedule, and most residential properties establish a 26.5-year depreciation schedule. However, the IRS assigns a tax-life to each of the individual components. Most components that qualify for accelerated treatments can have their tax life reclassified to either 5, 7, or 15 years:

 

  • 5-year tax-life components: tangible, personal property assets (carpeting, secondary lighting, process related systems, cabinetry, ceiling fans, etc.)
  • 7-year tax-life components: all telecommunication related systems (cabling, telephone, etc.)
  • 15-year tax-life components: land improvements (parking lots, sidewalk, curbs, landscaping, site features like a flag pole or a pond, etc.)

 

Why Would An Investor Use Cost Segregation?

 

Jeff says that the best reason to apply cost segregation is because it puts money in your pocket. For example a typical $1 million asset is going to provide the owner between $50,000 and $150,000 in federal income tax savings. If the study resulted in $80,000 in tax savings and the investor owed the IRS $80,000 in federal income tax, then that just paid 100% of the tax debt!

 

When Jeff engages with a client, he provides a guarantee! For properties that are sub-$500,000, he guarantees a 300% ROI (return based on cost of services). For properties that are over $500,000, he guarantees a 500% ROI. His average client ROI is 1200%. With the typical $1 million building, the $80,000 tax benefit from the example above would cost between $4000 and $7000, depending on asset size, complexity of asset, where it is located, and the documents that the client has available.

 

Are Cost Segregations Always Beneficial?

 

There are only two occasions where a cost segregation study isn’t beneficial. (1) If you are a non-profit organization or (2) you aren’t profitable. In base occasions, you aren’t paying taxes, so getting a tax savings isn’t going to do anything for you.

 

 

Everyone wants to save as much as they can on their income taxes. Therefore, at the very least, it pays to look at what the benefits of cost segregation can do for you. A quick Google search of “cost segregation service in (city)” is the best place to start!

 

virtual wholesaling

How a 23 Year Old Secured a 16-Unit Property for Only $5,000

 

In my conversation with Joel Florek, who is a 23-year-old real estate entrepreneur in the multi-family niche, he explained how he was able to obtain his second investment, a 16-unit property, for only $5,000 out of pocket by using creative financing and the art of negotiation!

 

Joel’s main aim for investing is to purchase multifamily properties and hang on to them over the long-term to provide him with monthly cash flow, which he will then use to purchase additional investment properties. With this plan in mind, before purchasing his first property, a 4-unit, he went to a local commercial bank that allowed for more creative financing structures, and presented his investment plan for the next 6 months. Joel knew that he wanted to eventually get into larger, commercial properties, so even though his first investment was a 4-unit, he decided to sacrifice a little bit of the cash flow so that he could begin developing a relationship with the lending department.

 

Ultimately, this sacrifice paid off, because after successfully completing the 4-unit deal, Joel went back to the same bank with another deal, a 16-unit property. Since he had already shown success, the bank was extremely excited to move forward.

 

Lead Details

  • Joel found the lead from a carpet installer during renovations of his 4-unit
  • The 16-unit property was built in 1993 and the original owners were looking to retire
  • They were asking $700,000
  • That NOI was $70,000, which priced it at a 10% cap rate

 

After obtaining the seller’s contact information from the carpet installer, Joel reached out and took the first steps towards build a relationship. Joel believes that it is extremely important to be transparent and honest when speaking with sellers and to never mislead them about your capabilities as an investor, so he made it clear that he was a younger investor, that he currently owned a 4-unit building, and that he wants to grow. Next, they worked through the property details and financials, where Joel was met with a few problems. He realized that the numbers weren’t great at a $700,000 purchase price, and since he is such a young investor, he would need to come up with a creative financing structure to fund the deal. As a result, he went into problem solving mode, and (1) began creating a detailed financial and management plan and (2) started reaching out to friends, family members, and investor groups he had met through BiggerPockets to raise money for the 20% down payment.

 

While his financial and management plans were solid, Joel faced another problem: he was struggling with trying to convince investors that he was someone that was credible enough to complete the deal and manage it efficiently after closing. Add in that the property was in such a small market (population of ~15,000), his age, and his lack of experience, he was unable to raise a single penny.

 

At this point, where many investors, and especially newbie investors, would have given up, Joel continued to persist. He reached out to the seller, and continuing to be his transparent honest self, he communicated that he had the plan and two banks behind him, but he was unable to secure the private money needed to meet the terms of the bank, so unfortunately, he wouldn’t be able to move forward at this time. Much to Joel’s surprise, the seller’s responded with “give us a week and we will call you back.” And one week later, the seller’s called him back and offered a seller finance deal, which included the 20% he needed as the down payment.

 

After a back-and-forth negotiation with the seller, Joel was able to get the property price down to $685,000. The seller offered $110,000, and Joel negotiated the terms down to a 2% interest rate amortized for 10 years. He got $550,000 from the bank, and since he had two banks competing for his business, he was able to negotiate and have the $3500 in closing costs rolled into the loan. Therefore, with $110,000 from the seller and $550,000 from the bank, and add in the prorated rents and taxes he obtained, he was only responsible $12,000. The creative financing doesn’t stop there, because Joel also obtained a $7,000 personal loan from Wells Fargo (which he is almost done paying off), so he only had to bring $5,000 of his own money to the table.

 

All in all, Joel found a lead from a carpet installer, obtained funds via 3 financing methods, a commercial bank, seller financing, and a personal loan, which allowed him to purchase a property that cash flows $2,000 a month for only $5,000 out of pocket, all by the age of 23 years old. Talk about a success story!

 

Rod Khleif Real Estate Advice

Making the jump from single family to multi-family investing: My interview on The Lifetime Cash Flow Podcast

I was honored to be a guest on The Lifetime Cash Flow Through Real Estate Investing Podcast, hosted by Rod Khleif. In this interview I discuss making the jump from single family to multi-family real estate investing, through which I now control over $54,000,000 in property investments.

Here’s some of what you will learn from listening to this interview:

  • What it takes to put a multi-family deal together, (It’s not income)!
  • A look inside a 168 unit, $6.35 million deal in Cincinnati, OH.
  • The importance of finding the best solution to the problem that the seller has.
  • Strategies to raise equity from investors.
Listen to the Episode Below
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Best Real Estate Investing Crash Course Ever!

Check out The Lifetime Cash Flow Through Real Estate Investing Podcast here.

 

enlightening book and reader

Two Reasons Why You Shouldn’t Be Afraid to Give Up A Chunk of a Deal


In my conversation with Rod Khleif, who is an accomplished real estate investor that currently focuses on purchasing multifamily buildings, he gave his best real estate investing advice that he would recommend to any newer real estate investor. In order to help newbies get their foot into the “investing” door, Rod says, “Don’t be afraid to give up a part of a deal in order to get it done.”

 

Rod believes that if you are a newbie investor, when you are doing your first few deals, don’t be afraid to give up a chunk, or even a large chunk, of the equity, cash flow, profits, etc. in order to complete the deal.

 

Don’t be afraid to give up a part of the deal because it may be the only way to get the deal done: If you are just starting out, you may not have the capital, experience, credit score, etc. required in order to obtain a loan and close on the property. While one option is to come up with a creative financing method, like seller financing or a master lease with an option to purchase, another option is to give up a chunk of the deal in exchange for another investor’s capital, experience, credit score, etc. If it comes down to having 50% of something or 100% of nothing, the best path forward seems pretty obvious.

 

Giving up chunks of the deal will ultimately result in helping you get more deals in under your belt: If you have $25,000 in capital, you can use 100% of it as a down payment for a single $100,000 SFR. Or, you can go in 50/50 on two $100,000 SFRs, using $12,500 of your cash and $12,500 of another investor’s cash as down payments for each property. With the same initial capital and more than likely, the same resulting cash flow, you are able to get two deals done instead of just one. This allows you to build credibility and a positive reputation with banks and other investors at a much quick pace than going at it alone.

 

All in all, Rod believes that it is best not to be greedy and want 100% of the deal for yourself, especially if this results in you not getting the deal at all. Also, don’t be afraid to share a deal if it results in you being able to get more deals in under your belt. The added experience and relationships created will ultimately work out in your favor in the long haul AND you are still making money in the meantime.

 

Is there a time where you lost out on a deal that could have been salvaged if you had given up a part of the equity, cash flow, or profit?

 

How to Win in Commercial Real Estate Investing

How to Win in Commercial Real Estate Investing by Craig Coppola: BOOK REVIEW

I just wrapped Craig Coppola’s book, How to Win in Commercial Real Estate Investing and have listed my top 5 takeaways below.

And, if you want to hear Craig’s best real estate investing advice EVER then check out my interview with him here: https://joefairless.com/blog/podcast/jf209-one-expense-everybody-underestimates-when-buying-office-buildings/

Top 5 Takeaways from How to Win in Commercial Real Estate Investing

1. Be a LOCAL expert. Identify a neighborhood or submarket then make a list of properties you want in that area. Run the #s on them and track their progress. Make offers on those properties when it makes sense.

  • Craig even applied this method when buying his own home. He knew the specific neighborhood he wanted, the house MUST haves and then narrowed it down to a list of just a handful of homes. He then went door-to-door (with his kids) and gave a letter to homeowner saying he wants to buy their house so he can move in with his family.

2. Use the T-Bar. It’s taught by CCIM (Certified Commercial Investment Member) and helps show returns in a simple way. (see picture below)

IMG_3259
3. Don’t just set your goals. Track, monitor and adjust your goals. Do it on a weekly basis, at minimum.

4. In market cycles, residential is always the first to decline and first to rebound. Multifamily follows a little later then retail and commercial.

5. When evaluating deals, the focus is on understanding the potential opportunity then minimize risk.

If you are entering commercial real estate for the first time then I recommend this book because it’s a good overview of the terms and will help you get going. If you want to invest in Office buildings you should DEFINITELY read this book and write a note to Craig to introduce yourself because he’s an Office expert and this book does have a slant towards Office.

You can buy his book on Amazon here: http://amzn.to/1IjHOs1

P.S. one other thing it inspired me to do is talk to appraisers. They know the market and we should take them to lunch tomorrow!

11 Questions to Ask When Buying Apartments

 

Anytime you evaluate an apartment community you need to know the income, expenses and debt service. You also need to get answers to these 11 questions…

  1. Why is the seller selling? 1031 exchange sellers have a completely different motivation level than sellers looking to “entertain offers”. Estate sales are different from someone who wants to retire and move to Florida. This is a critical piece of info that you’ll want to ask at least 3 times because the answer could change the more you ask.
  2. How long as it been on the market? Tells us more about the motivation factor and perhaps if there’s anything glaringly wrong with it
  3. Will owner do seller financing? Ahh, the two most beautiful words in the English language “seller financing.” Get this for every deal if you can. Make the terms so it’s a win-win for both sides.
  4. What is the screening process for new residents? Do they take people out of homeless shelters and give them an apartment? I’ve come across this. It’s ok to do but you just know what you’re getting into beforehand. Or do they have rental history, income requirements, work history, credit score and criminal background check qualifications.
  5. What is the effective occupancy? You and I can fill ANY apartment building so it’s 100% occupied. That doesn’t tell us squat. We need to know effective occupancy which tells us how many of those residents are paying.
  6. What is market rent? What do similar apts rent for in that area.
  7. What is market occupancy? You can get this from the property mgmt. company or broker.
  8. What type of work is needed on the property? Take with a grain of salt. There will be plenty more they don’t tell you that you discover during due diligence.
  9. When was the last time the ac units were cleaned? This question is for when you meet in person. It’s a silly question to ask over email but when you meet in person at the property ask it. If they don’t have an answer that’ll tell you they likely don’t have regular, ongoing maintenance as a priority. That means more money to be allocated in deferred maintenance.
  10. When did they buy the property and what did they pay? Find this out by asking your broker. Tells you what the seller is thinking in terms of what they will get out of the deal.
  11. What kind of financing is currently on the property? If their loan is set to mature in a year then that might mean there’s more motivation for them to make a deal happen vs. a loan maturing in 4 years.

Happy investigating!

Quickly Run Numbers on Apts

Let’s talk about how to quickly evaluate an apartment building deal. It’s important because there are tons of deals out there and you have to quickly know which ones you should pursue and which ones aren’t worth your time.

Here are the 5 questions you should always ask:

  1. What’s the NOI?
  2. What are they asking?
  3. What is the upside?
  4. What is the deferred maintenance?
  5. Why are they selling?

 

Here it is in more detail:

First, get the Net Operating Income (NOI). That’s the #1 thing because you have to know what type of income it’s bringing in and the expenses that are going out. You’ll punch holes in their alleged income and expenses later but for now just use what they give you.

Then you’ll simply take the NOI and divide it by the asking price to determine the cap rate (the financial return of the property if you paid all cash).

For example, if the NOI is $35,935 and the asking price is $650,000 then the cap rate is 5.5%. Better be in a darn good area.

If you don’t know the asking price OR are trying to determine what you should offer for it then you need to determine the market cap rate for similar properties in that area. This is found by asking brokers or property management companies.

For example, you know the NOI is $550,000 and the market cap rate is 9%. Therefore, all things being equal, a fair price would be $6,111,111.

Some rule-of-thumb assumptions to help you run #s if you don’t have all the info:

–        No expenses given?

  • Assume between 3k – $3,500 expense per unit per year

–        No clue on debt service?

  • Assume 25% down payment, 5.5% interest rate, amortized over 25 years with a 10 year balloon payment

NOTE: there are exceptions to these assumptions and this is ONLY to be used to initially run #s and see if it meets your buying guidelines. You’ll need to get the concrete info from the seller to truly analyze the deal.

Now that you know the basic financials on the property, it’s time to dig deeper. Here are the top 3 questions you must always ask about the property.

–        What is the upside?

  • Lower than market rents?
  • Bad management?
  • Good area but property needs to be revitalized to enjoy market rents?

–        What’s the deferred maintenance?

  • Current residents treating units poorly so all move-outs will incur substantial costs to get rent ready?
  • Roof in need of repair?
  • Plumbing not where it should be?

–        What’s the seller’s motivation?

  • Is it an estate sale?
  • Is it an investor looking to quickly liquidate so they can move on to bigger properties?
  • Is it a local investor simply testing the market to get maximum value for their baby?

Here’s what we didn’t cover in this post: Market fundamentals. And, investing in the right market is the #1 most important variable of if you’ll be successful. Buy in a bad market and you’re in trouble. That’s a longer conversation for another day but just know the above post assumes your market checks out.