Apartment-Multifamily Real Estate Syndication

Apartment syndication is a great way to invest your money, but doing so requires a lot of work and maybe even some expert guidance. If you are new to investing, you probably have a lot of questions about real estate syndication. How do you get a project off the ground? How do you find the right people with whom to do business? What is the difference between active and passive investing, and which option is best for you? Over the years, I have helped curious investors like yourself navigate the world of apartment syndication, and have done so successfully. That’s why I am confident I have the resources you need to thrive, and, as my clients have learned, since I left the world of advertising and immersed myself in real estate, my goal is to help you “do more good.” That means freeing up your time so you can use it as you wish. Today, I am happy to share some of my real estate syndication insights with you for free through my comprehensive blog. Below, you will find many posts that can help you get started with apartment syndication, including where to find great apartment real estate, what it takes to stand apart from other syndicators, and how to close the deal on your first deal. After reading these posts, you may want to schedule a planning session, which can teach you how to buy apartments and how to bring in investors; additionally, you can learn how to start investing with me, which would lead to plenty of passive investment opportunities, provided you are an accredited investor.

Raising Real Estate Capital with Crowdfunding

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

About Chris Rawley

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

Why Crowdfunding?

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

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

Advantages of Crowdfunding

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

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

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

Crowdfunding may be right for you if:

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

Choose the Right Platform

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

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

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

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

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

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

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

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

Build Your Team and Track Record

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

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

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

Present a Winning Deal

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

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

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

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

Crowdfunding for Agriculture Investing

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

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

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

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

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

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

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

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

Potential Benefits of Interest-Only Payments

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

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

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

Potential Drawbacks of Interest-Only Payments

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

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

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

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

Conclusion

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

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How to Compensate a Commercial Real Estate Broker

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

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

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

Compensation Structure #1 – Percentage of Sales Price

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

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

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

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

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

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

Compensation Structure #2 – Flat Fee

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

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

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

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

Compensation Structure #3 – A Hybrid Structure

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

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

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

Example

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

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

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

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

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

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Beth Azor on Thriving Today with Retail Centers

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

About Beth Azor

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

Why Retail Shopping Centers?

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

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

Manage the Rent Rollercoaster

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

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

Mom and Pop Struggle to Survive

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

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

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

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

National Tenants Play Hardball

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

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

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

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

Hold ‘Em: A Retail Portfolio Strategy

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

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

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

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

Prospect on Social Media

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

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

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

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

Fund Managable Deals

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

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

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

How to Get Started in Retail Investing

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

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

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

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5 Ways to Win a Bidding War (Other Than Paying More Money)

Do you keep losing bidding wars on apartment deals?

You rarely make it to the best-and-final offer rounds. When you do, the apartment deal is always awarded to someone else.

The most common solution investors implement after losing multiple bidding wars is to increase their offer price. Yet, oftentimes, they still end up on the losing side.

This is because the offer price is just one of the many terms in the contract that make or break a deal. Therefore, the secret to winning more bidding wars is knowing how to create a more attractive offer by focusing on the other purchase terms that are the most important to the seller.

In this blog post, I outline five ways to create a better offer in order to win more bidding wars.

1. Offer a Hard Nonrefundable Earnest Deposit

The earnest money is a deposit made to a seller that represents a buyer’s good faith to buy the property. The standard earnest money is a refundable deposit equal to 1% of the purchase price.

When the earnest money is refundable, the buyer receives the full deposit back (although there may be a cancellation fee) if the contract to purchase is cancelled.

Therefore, one way to create a more attractive offer is to submit a nonrefundable earnest money deposit.

Why is this more attractive to a seller? Because of the negative consequences of a buyer cancelling a contract.

Once a seller accepts an offer, they no longer market the deal to other potential buyers. Assuming the first buyer closes, everything is fine and dandy. But what happens if the first buyer backs out?

Well, at the very least, the seller is annoyed because their time was wasted. But there are countless other negative outcomes: the economy changes, resulting in lower offers the second time around; the seller had their sights set on another opportunity, but won’t be able to acquire it because their capital is still locked up in this deal; the other buyers who submitted offers before are no longer interested in the deal.

When comparing a refundable and non-refundable earnest money deposit, the latter shows the seller that the buyer is more serious about closing. If they don’t close and the earnest money was nonrefundable, the buyer loses and the seller gains tens or hundreds of thousands of dollars.

There are few different approaches to offering non-refundable earnest money.

First is the timing of when the money goes “hard”. For example, the full earnest deposit can go hard day 1, which is the most attractive to the seller. Another option is the full earnest deposit can go hard after a certain clause is triggered, like at the end of the due diligence period, or after a certain number of days, like 30 days. The third option is a hybrid of the first two: a portion of the earnest money goes hard day 1 and the reminder goes hard after a certain clause is triggered or after a certain number of days.

For example, we offered a 1% earnest deposit on a $40 million deal, which is equal to $400,000 in total. In the contract, we offered $250,000 to go hard day 1 and the remaining $150,000 to go hard after 30 days.

In addition to the timing of the earnest money going hard, the other option is to increase the nonrefundable earnest deposit. For example, we’ve gone as high as a 2% nonrefundable earnest deposit day 1 on a deal.

I do recommend adding in a few contingencies to the nonrefundable earnest deposit. If one of the contingencies is triggered, the earnest money is no longer nonrefundable. Examples of contingencies we have included in our contracts when the earnest money is non-refundable are:

  • Title: a major lien
  • Survey: if something comes up on the survey which disqualifies the deal for financing
  • Environmental reports: if something comes up that wasn’t disclosed by the seller

In other words, these are contingencies that would result in the deal not qualifying for financing because of something the seller did or did not do.

2. Shorten the Due Diligence Period

A second way to create a more attractive offer is to shorten the due diligence period in the contract.

During due diligence, your lender/mortgage broker and you are performing inspections and reviewing the operations of the property in order to confirm your underwriting assumptions and uncover any disqualifiers.

Usually, contracts have a due diligence timing and contingency, meaning the buyer can cancel the contract based on the findings of the due diligence reports before the due diligence period expires.

A 30-day due diligence period is standard. Therefore, during those 30 days, the buyer can cancel the contract.

By offering to shorten the due diligence period, you are shortening the time in which you can cancel the contract. Like the nonrefundable earnest deposit, this shows the seller that you are more serious about closing on the deal. Plus, the shorter the due diligence period, the faster you close, which means the seller gets their capital back sooner.

3. Sign an Access Agreement While Negotiating the Contract

A seller is offers their apartment for sale. Buyers express their interest to purchase by submitting letter of intents (LOI). The seller accepts the best LOI. However, once the seller accepts an LOI, the deal isn’t officially under contract. The buying and selling parties will negotiate the final terms and then sign a purchase sale agreement (PSA).

It is possible for a seller to accept an LOI from a buyer who doesn’t ultimately sign a PSA if negotiations fall through. Again, this is a waste of the seller’s time.

To respect the seller’s time, show that you are serious about closing, and get a head start on due diligence, sign an access agreement within three days of being awarded the deal.

By signing an access agreement, the seller gives the buyer permission to inspect the property while the final contract is being negotiated. The access agreement has some of the same provisions as the PSA but is usually more limited in scope.

Something else you can do is stipulate that once the access agreement begins, the due diligence period begins. In other words, you will have 30 days from the start of the access agreement to conduct due diligence. You can perform some of the due diligence prior to signing the contract and then do the heavier due diligence once the PSA executed.

4. Use and Mark Up Their PSA

To reduce the back and forth negotiations, offer to mark up their contract.

Rather than sending a seller a PSA created by your attorney, use their contract. Then, have your attorney mark up the contract with minimal revisions.

This may seem like a minor act, but it is not uncommon for a deal to be killed because of a disagreement over legal language in a contract. When you offer to mark up their contract, making minor revisions, the seller knows that they are already comfortable with all the terms not adjusted by your lawyer. Therefore, the chances of the deal being cancelled are lower.

5. Guarantee a Closing by a Certain Date

If there is talk of a market crash on the horizon, it is an election year, or there is some other event in the coming months that may result in economic fluctuations, offer a guaranteed closing by a certain date.

For example, during an election year, guarantee a closing by November 3rd, the end of the year, or by inauguration.

This means no extensions and may also required the shortening of certain contingencies, like the due diligence period.

 

By following these five tactics, you maximize the probability that you come out as the winner in a bidding war.

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

Need help generating more commercial real estate leads?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to find on-market commercial real estate for sale

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now what do you do with this list?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

9. Commercial Real Estate Vendors

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

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

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

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

Conclusion – How to Find Commercial Real Estate For Sale

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

Which strategies should you pursue?

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

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

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

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

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

The key is consistency!

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit www.bec2021.com.

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Kevin Riordan Shares Bold Insights on Institutional Investing

You may face a day when the funding needed for your target real estate deal merits an institutional investor. Though this is a sign of success, it can be daunting if you are unfamiliar with raising institutional equity. Real estate investor and longtime pension fund executive Kevin Riordan explains how to begin. As a guest on the Joe Fairless Best Ever Show podcast, he summarizes institutional raising and what entrepreneurs seeking equity can expect.

About Kevin Riordan

Kevin has deep institutional expertise stemming from extensive business and Wall Street experience. He took a commercial mortgage REIT, Crexus Investment Corp., public in 2009 and knows the process firsthand. A full-time professor of real estate at Montclair State University, Kevin grounds his investing in accounting and finance mastery.

Kevin’s career spans 30 years of institutional investing, focusing on raising capital for commercial real estate. As a young CPA, he moved from the accounting group to real estate at work after hands-on experience making transactions. At age 30, he moved to TIAA CREF, a pension fund for educational institutions, and broadened his investment analysis and real estate deals experience. Kevin leveraged 20 years there to create initiatives merging public capital with commercial real estate.

Kevin sees two sides to the business of providing institutional capital for equity. One side is through joint ventures with property developers handling the operations. The other aspect is funding entrepreneurs planning to buy or develop properties.

We Are the Money: The Equity Side

During his tenure at TIAA CREF, Kevin formed many joint ventures with real estate operators. The total project costs ranged from $12 million to $30 million, and the institution would cover up to 100 percent of the funding.

A typical partnership structure has the equity investor receiving a preferred return until reaching a hurdle rate. A hurdle rate is the minimum acceptable rate of return that an investor expects. At this point, the property developer receives a promote, which is an amount above the developer’s contribution. The contract should contain the exact terms agreed to.

Project costs vary with the type of property built. Kevin recalls one apartment building with 210 units in a quaint northern town that cost about $14 million. In contrast, a downtown Atlanta development with some construction challenges ran closer to $29 million.

The project begins with a construction loan to start operations. The institution uses its capital to pay off the loan and shares ownership with the developer. This arrangement grants the institution a preferred return on investment and access to the property’s initial cash flow.

Kevin provides an example of how these transactions typically work. If you put up capital of $1 million at a 6 percent return, your preferred return would be $60,000. The property’s first $60,000 return goes to you, and you and the developer split subsequent gains.

Funding Entrepreneurs: The Buy Side

What if you are a multifamily property investor seeking additional funding and not a real estate developer? Kevin speaks to this situation, too. Many investors start by using their financial resources and then raise funds from friends, family, and professional networks. They may top out and need to raise more capital to pursue their target transaction. Individuals often reach this point when they’ve rolled proceeds from multifamily properties into larger projects and face steeper equity requirements to continue growth.

When institutions invest in these types of projects, the funding is typically in the form of a mortgage instrument that allows the entrepreneur to buy a property or begin development. In return, the investor acquires a coupon or share of the mortgage debt.

If you plan on approaching an institution for capital, you want to present yourself and your business plan in the best possible light. Serious potential investors will conduct due diligence on you as a candidate and on your proposed projects. Kevin shares tips on how to prepare.

Document Your Track Record

A potential investor will first ask you, “What have you done?” The institution’s top concern is that you have a successful track record. Document and quantify your achievements and be prepared to discuss them.

Here are some foundational questions to be ready for:

  • Which transactions have you done?
  • What was your role in each?
  • How did each investment perform?
  • How were the deals structured?
  • Who were the other partners?

As in a job interview, expect to walk a serious investor through your process on at least one deal.

Create a Detailed Plan

Kevin describes his experience taking Crexus Investment public and meeting with major institutional investors for the first time. He had worked for a large pension fund and was now on the other side, taking his first company public. When visiting Fidelity Investments, BlackRock, and other large players, he found their concerns shared a common thread. In addition to his track record, they wanted to see a detailed and thorough plan.

Kevin stresses that despite differences in scale, multifamily property buyers and institutions must perform similarly to succeed. Nonetheless, the transaction must meet a minimum equity threshold for institutions to consider it. He notes that a $500,000 deal, a hefty commitment for most individuals, is too small for institutions.

Approach Investors at the Right Time

If you are considering institutional equity for your next project, should you approach investors before or after entering a transaction? Kevin suggests working with investors first to secure funding. At this point, they will evaluate you based on your track record and business plan. Ideally, you’re proposing adding one or two zeros to a solidly performing portfolio.

The alternative is to proceed with a deal on a contingency basis. One drawback of this strategy is that you may sacrifice some credibility with partners who prefer to have funding locked first. Another potential issue is not obtaining equity in time or being denied altogether. Lining up institutional financing first is a cleaner strategy.

Prepare for Due Diligence

Let’s assume you have passed an institutional investor’s due diligence, and you have the green light to put together a deal. The institution will draft a profile of your project, and funding is contingent upon meeting the requirements. Your job is to find or develop a suitable property and to check all the associated boxes, as Kevin puts it.

The institution will expect your project to satisfy given criteria such as:

  • Property location
  • Asset type
  • Expected rate of return
  • Deal structure

After analyzing the target project in depth, you should be prepared to meet the checklist. However, institutional investors also vet your company’s suitability for executing the project and managing it for the long haul.

Kevin emphasizes that investors assess a company holistically, looking for breadth as well as a compelling investment story. They want to understand how your business’s core people and operations will drive the project’s success. To do this, they look at history as well as current circumstances. For example, did your company triumph over a setback, such as a regional downturn or sudden loss?

Kevin suggests preparing for an evaluation of your past and present operations and any principals besides yourself.

Areas of scrutiny include:

  • Accounting systems
  • Reporting
  • Operating agreement or articles of incorporation
  • Other company principals
  • Financial history
  • Response to adverse conditions
  • Plan for operating the new property

How to Find Institutional Investors

Suppose you have your CV, company, and investment plan in place but have no institutional contacts. How do you reach out to these large equity investors?

Kevin suggests you partner with an intermediary such as a real estate consultant or mortgage broker. Many of these professionals arrange equity as well as debt and can facilitate the right introductions. When contacting mortgage brokers, for example, ask whether they work with institutional equity.

You and the institution will benefit from an intermediary’s services. Institutions prefer this approach because it weeds out the deluge of nonstarters and helps identify quality prospects. As an entrepreneur new to the process, you will gain valuable guidance from a high-caliber consultant or broker.

Make Your Bold Move

What is Kevin’s best advice for real estate investors new to institutional equity? Paradoxically, it is to act boldly while sensibly mitigating risk.

Kevin refers to a personal lesson learned. Following the Great Recession, he could have purchased $2 billion of Barclays Bank mortgage debt. Instead, Kevin bought only $750 million and left a significant profit on the table. He attributes the decision to caution over boldness.

If you haven’t already, you will eventually encounter a deal that seems like a fortune-changer. You will probably need to move quickly and irrevocably. According to Kevin, the key is to balance bold action with a clear understanding of the risks in a given investment opportunity. These decisions are always challenging, but isn’t that the fun?

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Commercial Real Estate Lending: What is the Ideal Multifamily Loan?

Do you know what the greatest ongoing expense is for real estate investors?

Assuming debt was secured to acquire the asset, the great expense is the ongoing debt service.

Since the debt service is not included in the net operating income calculation, it do not impact the value of the investment. However, it does impact the cash flow, which in effect impacts the returns to passive investors.

Therefore, being the greatest expense and impacting the return to passive investors, securing the best loan is of the utmost importance.

The purpose of this blog post is to help active apartment syndicators and passive apartment investors alike to understand how to know what the most ideal commercial real estate loan for a particular multifamily investment is. To accomplish this task, this blog post will outline the following:

  • What lender should be use?
  • Should an agency approved lender always be used?
  • Should a mortgage broker or a lender be used?
  • When is the best time to engage with the lender/mortgage broker?
  • What are the qualifications of the borrower, deal, and market?
  • What are the upfront reserve requirements?
  • Are renovation costs included in multifamily loans?
  • What should be looked at when comparing multifamily loan options?

What lender should be used?

The ideal multifamily loan is an agency loan for most apartment syndications. The main exception is if the business plan includes an early exit – via a refinance or a sale. When this is the case, a non-agency bridge loan is ideal because a borrower won’t be required to pay a prepayment penalty (more on this in a later section) at sale or refinance?

When pursuing an agency loan, what lender should be used?

With an agency loan, a lender provides a borrower with debt to purchase an apartment. Rather than holding the mortgage loan on their books, the lender sells the mortgage to an agency. Hence, an agency loan.

The agency pools together thousands of mortgages, which are sold to private investors and investment firms on the open market as mortgage-backed securities (MBS).

The two agencies that purchase and resell mortgages as MBSs are Fannie Mae and Freddie Mac.

Both agencies guarantee the MBSs. Since Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), the MBS are implicitly backed by the Unite States government. Therefore, in order to provide a guarantee, the agencies only buy certain types of mortgage from approved providers.

Fannie Mae was created first. Later, Freddie Mac was created to generate competition in order to drive down interest rates and fees for both the borrowers, the lenders, and the MBS investors.

Since Fannie Mae and Freddie Mac are buyers of mortgages, they do not work directly with borrowers. Therefore, to obtain an agency loan, a borrower must work with an approved lending institution.

Fannie Mae only buys loans originated from Delegated Underwriting and Servicing (DUS lenders). As the name implies, Fannie Mae delegates the underwriting and servicing of the loans underlying their MBS products to third-party institutions that meet their strict qualifications. Therefore, in order to obtain a Fannie Mae loan, a borrower must work with a DUS lender. Fannie Mae has a list of approved lending institutions on their website, which you can view here. Currently, 25 lending institutions qualify for DUS status.

Freddie Mac also has approved lenders called Optigo conventional lenders. The list of Optigo lenders is similar to the list of DUS lenders. You can view Freddie Mac’s list of approved lenders here.

Should an agency approved lender always be used?

One of the major benefits of an agency loan are the terms. Agency loans generally result in lower down payments and/or lower interest rates. Consequently, debt service payments are lower compared to non-agency loans, which means a higher cash-on-cash return.

However, as I mentioned above, the deal and the borrower (and their team) must meet the agencies strict qualifications.

So, yes, a borrower should always use an agency approved lender, assuming they and the deal qualify, and they projected hold period is longer than the prepayment period. If the borrower and/or the deal do not meet their criteria, or the plan is to exit the loan after a few years or less, the borrower may still be able to use an agency approved lender since most offer more than just agency loans. However, they will not qualify for the best rates and terms.

Should a mortgage broker or a lender buy used?

There is an exception when it comes to securing agency loans. Borrowers can secure an agency loan without working directly with an approved institution by working with a mortgage broker.

A mortgage broker acts as an intermediary between lending institutions and borrowers.

There are countless different multifamily loan programs offered at any given time. Rather than finding the best loan on their own, borrower relies on the expertise of a mortgage broker or lender. The borrower submits information about the deal and the mortgage broker or lenders returns the best loan program option/s.

A mortgage broker is not limited to loan programs offered by a single lending institution. They have a network of many lending institutions, which means they can find the lending institution that offers the best terms for that particular loan program. When a borrower works directly with a lending institution, their options are more limited.

Since the mortgage broker is an intermediary, however, they charge a fee for their services.

So, who should be use? I think it makes sense to work with a mortgage broker. Sure, the expense to secure the loan is higher. But since they have relationships with multiple lending institutions, they will likely underwrite a loan with better terms that offsets the broker’s fee.

When is the best time to engage with a mortgage broker/lender?

A borrower should already have engaged a lender or mortgage broker prior to looking for deals. Based on their and their teams background, the lender or mortgage broker will let them know which loan programs and how much debt they qualify for.

With this information, the borrower will know which type and sized deals to pursue.

Then, when the borrower is interested in submitting an offer an a specific deal, the mortgage broker or lender can quickly provide a quote (since all they need to do is fully underwrite the deal as opposed to fully underwriting the deal and the borrower). The borrower will have an idea of the down payment and debt service so that they can submit a more accurate offer.

When a borrower doesn’t engage a mortgage broker or lender before looking for deals, they may over-estimate the type and size of deal for which they qualify. They may submit an offer, get a deal under contract, and get forced to cancel the contract because they cannot qualify for financing (or the financing results in a higher than expect debt service). As a result, the borrower’s reputation is tainted in the eyes of the seller, listing commercial real estate broker, their property management company, and their passive investors (depending on how far into due diligence the deals was when the contract was cancelled).

To avoid these issues, the borrower should engage the mortgage broker or lender for even looking at deals.

What are the qualifications of the borrower, deals, and market?

Both the borrower and the deal must meet specified criteria in order to qualify for Fannie Mae and Freddie Mac debt.

The borrower includes the guarantor, key principals, and principals.

  • The guarantor is who guarantees the loan.
  • The key principals are any person who controls and/or manages the partnership or the property, is critical to the successful operation and management of the partnership or the property, and who may be required to provide a guaranty.
  • The principals are any person who owns or controls specified interests in the partnership. When the partnership is an LLC, a principal is anyone who owns 25% or more membership interest (this includes passive investors too).

Agency lenders will analyze the borrower based on the organization (i.e., entity) structure, multifamily and business experience and qualifications, general credit history, and current and prospective financial strength. What is considered passing criteria is based on the size, complexity, structure, and risk of the deal.

  • Organizational Structure: For most agency loans, only single purpose entities are eligible borrowers. This means you will need to create a new entity for each transaction. The exemptions are the small balance agency loans in which individuals and non-single asset entities are eligible borrowers.
  • Multifamily and business experience and qualification: Fannie Mae and Freddie Mac have different ways to qualify the borrower based on experience. Fannie Mae uses a service called application experience check (ACheck). ACheck checks the borrowers experience with Fannie Mae loans in the past. Generally, a member of the borrower must have been a member of the borrower on a previous Fannie Mae loan to “pass”.

Freddie Mac provides more specifics on how they qualify borrowers. The borrower must have a minimum of three years’ experience in the same capacity that it will have for the proposed transaction, and acquired, developed, or owned a minimum of three properties. Also, the borrower must own and manages other properties in the market where the subject property is located. If the borrower is lacking in one or more of these areas, Freddie Mac may require a higher replacement reserve deposit.

  • General credit check: The lender will conduct a general credit check on the borrower, checking for other loans and liabilities to determine their ability to fulfill the debt obligations based on the current and past debt obligations.
  • Current and prospective financial strength: The agencies do not have specific liquidity and net worth requirements for the borrower on their conventional loan programs, which means it will vary from deal-to-deal. They may require more upfront reserves if the borrower has weak finances.

We can get an idea of what the agencies require regarding liquidity and net worth by looking at the stated requirements for their small loan programs.

For Fannie Mae’s small loan ($750,000 and $6,000,000) and Freddie Mac’s small balance loan ($1 million to $7.5 million) programs, a minimum liquidity of 9 months principal and interest and a new worth equal to the loan amount is required.

Assuming the borrower qualifies for agency debt, the next check is the deal.

To qualify the deal, the lender will analyze the property, the occupancy, the property management company, and the market.

  • Property: The agencies only provide financing on certain types of properties. However, most multifamily properties you look at will meet their requirements. The requirements are standard characteristics like five or more units, accessible by road, the units have bathrooms and kitchens, water and sewer service, up to code, access to emergency services, etc.
  • Occupancy: The major factor that determines if a deal qualifies for agency debt is the occupancy.

Fannie Mae’s conventional loan program requires a minimum physical occupancy of 85% and a minimum economic occupancy of 70% for 90 days. The occupancy requirements are even higher at 90% for their small loan program.

Freddie Mac’s conventional and small balance loans require a minimum physical occupancy of 90% for 90 days.

  • Property management company: The property management company who will manage the deal post-closing will also be analyzed by the lender. The agencies do not have restrictions on the type of management company, which means it can be in-house or third party. However, the property management company must have adequate experience to ensure effective administration, leasing, marketing, and maintenance, and is staffed appropriately for the type and size of the property and the services provided.
  • Market: The agency will also analyze the strengths and weaknesses of the market in which the deal is located. They characterize strong markets as having low vacancy, minimal rental concessions, stable or increasing tenant demand, good balance of housing supply and demand, stable economic base, and employment diversification.

Also, certain loan terms will vary based on the market. For example, Freddie Mac has different minimum DSCR and maximum LTVs for top markets, standard markets, small markets, and very small markets.

What are the upfront service requirements?

The agencies have increased their reserve requirements in responses to the coronavirus pandemic.

Fannie Mae is currently requiring 12 months of principal and interest for loans of $6 million and more, and 18 months for loans of less than $6 million. However, if the debt-service coverage ratio (DSCR) is 1.35 or higher and the loan-to-value (LTV) is 65% or lower, Fannie Mae only requires six months of principal and interest. If the DSCR is at least 1.55 and the LTV is 55% or less, no reserves are required.

Freddie Mac is currently requiring nine months of principal and interest on loan with DSCR less than 1.40, six months on loans with DSCR 1.40 or higher, and 12 months on small balance loans.

Are renovation costs included?

Both Fannie Mae and Freddie Mac offer loan programs which cover the costs of renovations.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan (mod rehab). This is a supplemental loan that can be secured in addition to the conventional DUS loan to cover renovation costs. Unlike standard supplemental loans, the mod rehab loan doesn’t have a one-year waiting period. The main requirements for the mod rehab loan is that Fannie Mae must be the only debt holder on the property and minimum renovation costs of at least $10,000.

Freddie Mac offers two renovation loans – moderate rehab loan and value-add loan. The main different are the renovation costs requirements. For the value-add loan, renovations must be between $10,000 and $25,000 per unit. For the moderate rehab loan, the renovations must be between $25,000 and $60,000 per unit with a minimum of $7,500 per unit designated for interior work.

Therefore, if renovations are less than $10,000 per unit or greater than $60,000 per unit, a borrower will have to cover 100% of the renovation costs with passive investor capital or secure a bridge loan through a mortgage broker.

What should be looked at when comparing multifamily loan options?

Here is a list of factors to be aware of when you are analyzing loan options.

Debt service is the payment owed to the lender each month. The lower the debt service, the greater the cash flow. However, the loan option with the lowest debt services isn’t automatically the best option. The debt service may start low and gradually increase if the interest rate isn’t fixed. The debt service may be low but the closing fees are too high, or the loan may not be assumable, the prepayment penalties may be high, etc. Therefore, the other factors which are outline below must be taken into account in addition to the debt service.

Loan amount is the total amount of money a borrower will receive from the lender. The different between the loan amount and the total project costs is the amount of equity a borrower will need to raise.

Loan term is the number of months until the loan must be repaid in full. On shorter-term loans, a borrower may have the option to purchase one or multiple loan term extensions. Ideally, the total possible loan term is at 2x the projected business plan. For example, for a value-add business plan with a renovation timeline of 24 months, the maximum loan term should be four years. That way, a borrower isn’t forced to sell or refinance. However, the longer the loan term, the higher the interest rate, so the longest term isn’t necessarily the best term.

Amortization is the time period the principal and interest payments are spread over. The greater the amortization, the lower the debt service. Usually, the interest payments aren’t spread out evenly during the amortization period. Instead, the first payments are mostly interest (so the lender makes their money upfront) and the interest gradually reduces over time.

Interest-only period is the number of months of interest-only payments. At the end of the interest-only period, principal and interest payments are due.

The main benefit of interest-only periods is the increase in cash flow, resulting in a higher internal rate of return (IRR) since money is returned sooner. This increase in cash flow is even more beneficial on value-add deals because cash flow is generated from day one before the increase in revenue is realized from the renovations.

However, there are a few potential drawbacks. Firstly, there is no principal paydown, which impacts future supplemental loan or refinance proceeds. Secondly, once the interest-only period expires, the debt service increases, which reduces cash flow. Lastly, a borrower may convince themselves to do a bad deal because of the lowered debt service during the interest-only period.

Debt-service coverage ratio (DSCR) is a ratio of net operating income to debt service.

This is one of the factors the lender will use to calculate the maximum loan amount.

Loan-to-value (LTV) is the ratio of the loan amount to the appraised value of the apartment community. All lenders will provide financing up to a maximum percentage of the appraised value.   

The higher the LTV, the more leveraged the deal. This is beneficial because of the lower down payment but is also riskier since a borrower has less equity in the deal as a protective cushion against market fluctuations. Therefore, don’t secure a loan with an LTV that is greater than 85%.

Interest rate is the rate the lender charges a borrower to borrow their money. The interest rate is either fixed, meaning it will remain unchanged during the loan term, or is floating, which means it fluctuates up and down during the loan term. Generally, the initial interest rate is lower when floating. But it doesn’t mean it will remain lower.

If the interest rate is floating, a borrower will want to know what the rate is tied to, which is referred to as the index. Then, they can see how the index is trending to determine if your interest rate will go up or down during the hold period (to the best of their knowledge, of course)

If the interest rate is floating, a borrower may also want to consider purchasing an interest rate cap. For an upfront fee, they can place a ceiling on how high the interest rate can rise. This is always ideal since it is impossible to predict whether interest rates will rise or fall during the hold period.

Whether the interest rate is fixed or floating, a borrower will also want to know when the rate is locked in. If interest rates are raising, they want to rate to lock as quickly as possible. Sometimes, a borrower has the option to expedite the rate lock period for a fee.

Click here to learn more about fixed rate vs. floating rate interest rates.

Recourse determines if the guarantor is personally liable for the loan. If the loan is recourse, the guarantor is personally liable. If the loan is non-recourse, the guarantor is not personally liable.

If the loan is non-recourse, a borrower will want to determine what the exemptions are that converts the loan to recourse, which are typically fraud, misrepresentation, and gross negligence.

Tax and insurance escrows: a borrower may be required to submit monthly deposits into a tax and insurance escrow account, even if taxes and insurance payments are due quarterly or annually. If monthly escrow deposits aren’t required, they may need to raise extra money upfront to cover lumpsum tax/insurance payments, depending on how quickly each is due after closing

Lender reserves is the amount of money the lender requires each month to be deposited in a reserves account. Usually, lenders require between $200 and $300 per unit per year.

Besides the deposit amount required, a borrower also wants to know when they stop making deposits and when they can pull the money out if it isn’t used.

For agency loans, expect to continue to make the payments until payoff the loan. Also, don’t expect to be able to access the funds until payoff of the loan either. For non-agency loans, the lender reserves are usually negotiable.

Prepayment penalties is a fee incurred if a borrower pays back the full or a certain percentage of the loan amount before a specified date.

The prepayment penalties are important if they expect to refinance or sell before the prepayment period expires. If this is the case, they will need to include the prepayment expense into your sales disposition calculations.

Click here to learn more about prepayment penalties.

Assumable: if the loan is assumable, when you are ready to sell the deal, a prospective buyer has the option to either secure new debt at new terms or assume the existing debt at the existing terms. This is attractive to buyers if the existing terms are better than the new terms currently available.

Typically, there is a fee incurred to the buyer who assumes the loan.

Supplemental loans: these are secondary loans taken out on top of the existing mortgage. If a borrower is allowed to secure a supplemental loan, they will want to know how many they can secure and when they can be secured. Generally, they are able to secure a supplemental loan one year after the origination of the first loan.

Click here to learn more about supplemental loans.

Require reports: the lender will order reports to be conducted on the property. These generally include an appraisal, property condition assessment, and phase I environmental, at minimum. A borrower will want to know which reports are required, when they are due, and the costs associated with each.

Click here to learn more about the different due diligence reports.

Financing fees: these are the fees charged by the lender (or mortgage broker) to put together a loan. Common fees are applications fees, processing fees, origination fees, good faith deposits, and interest rate lock fees.

Want to learn more about commercial real estate lending and multifamily financing?

Click here to download a FREE document with more detailed information on the different types of agency loans, bridge loans, and multifamily financing options,

Also, click here for more blog posts on apartment financing and lending.

 

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Passively Investing in Apartments – Fund or Individual Deals?

There are many ways to passively invest in apartment syndications. Knowledge of these different strategies is important to understand which is the best wealth generating vehicle for you.

In this blog post, I want to educate you on the differences between investing in individual apartment syndications and investing in an apartment syndication fund.

But first, we need to distinguish between the type types of passive apartment investments.

Passive apartment investments are either debt investments or equity investments.

For debt investments, the passive investor is acting as a lender to the apartment or the apartment syndicator. The loan is secured by the property and the passive investor receives a fixed interest rate as a return.

For equity investments, the passive investor is a shareholder in the entity that owns the apartment. Depending on the equity structure, the passive investment receives a preferred return and/or a share of the total profits.

Click here to learn more about the differences between debt and equity investing.

Passive investors who prefer equity investments over debt investments will chose to invest in individual deals or into a fund.

The first option is to invest in a single deal at a time. One deal. One business plan. One market.

A fund (i.e., a private real estate fund) is a private partnership that owns more than one piece of real estate. For apartment investing, numerous passive investors commit an amount to invest and the apartment syndicator use the passive investors’ capital to purchase multiple apartment communities.

The apartment syndicator of the fund will either execute one or multiple of the apartment syndication business plans: value-add, turnkey, or distressed. And they may focus on investments in a single or in multiple markets.

What are the different types of funds?

Close-ended fund: For a closed-ended fund, you would commit to invest a certain amount of capital when the apartment syndicator is accepting investor capital. Usually when the apartment syndicator commences a fund, they will continue to accept commitments until they’ve achieved their desired funding goal. Then, the apartment syndicator will begin purchasing apartments over a specific period of time – usually 3 to 4 years after the start of the fund. The apartments are held for a specific period of time – generally 3 to 7 years, depending on the business plan. Therefore, most close-ended funds are 10 years. But apartment syndicators may have the option to extend a close-ended fund by one or more years. 

Typically, your initial equity investment is not returned until the end of the fund. However, some close-ended funds will distribute lumpsum profits once an apartment is sold or refinanced. The apartment syndicator may also have the option to recycle proceeds from sales or refinances back into the fund if, for example, the apartment is sold or refinanced a certain number of years after acquisition or less.

Open-ended evergreen fund: The other fund option is an open-ended, or evergreen, fund. The main difference between evergreen and close-ended funds is that evergreen funds do not have a specific end date. Therefore, the apartment syndicator is continuously accepting investor commitments. To exit an evergreen fund, you would need to sell your shares in the partnership rather than having to wait until the end of a close-ended fund.

How does close-ended and open-ended funds compare to individual deal investing?

When passive investor money is due: When investing in individual deals, once you have committed to investing, funds are typically due in full shortly thereafter. Once you commit, you sign the deal documents and submit your funds.

When investing in a fund, once you have committed to investing, your funds may or may not be due shortly thereafter. The committed amount is submitted at a capital call. A capital call occurs when the apartment syndicator of the fund has identified an acquisition and requires a portion or all your committed capital to cover the purchase costs. 

When the apartment syndicator sends a formal capital call notification, you are legally obligated to fulfill their call based on your committed capital investment amount. Typically, a capital call will only require a portion of your capital investment, but it is possible that they request the full committed amount. If you fail to meet the capital call, the apartment may force you into default and to forfeit your entire ownership share.

Compensation structure: The compensation structure for funds and individual deals are the similar. You are offered a preferred return and/or profit split. Oftentimes, the profit split will change and become more favorable to the apartment syndicator once a certain return threshold, like IRR, is passed. 

The timing of the ongoing distributions after you’ve submitted funds are similar since you are actually submitting your capital once a deal/deals are identified. 

However, the time from commitment to receiving your first distribution is longer when investing in a fund because of the gap between commitment and the first capital call. Additionally, you may not submit your full investment amount until one, two, three, or more years after committing, depending on the length of time over which apartment syndicators plan on acquiring apartments. Since you receive a return based on submitted funds and not committed funds, the ongoing distributions will be lower at first.

Return of Capital: When investing in individual deals, you will not receive your initial equity back until the asset is sold. When investing in a fund, you will not receive your initial equity back until the fund is closed. The exception would be an evergreen fund, where you can sell your shares at any time (or after a lock-out period).

The apartment syndicator of both approaches will provide you with a projected hold period (for individual deal) or fund length (for funds). Assuming you were to invest with apartment syndicators who follow the same business plan, you will typically receive your initial capital back sooner when investing in individual deals. 

Profit upside: The overall return upside is lower for funds compared to individual deals. If you are investing in an individual deal that performs exceptionally well, your return increases in the same proportion. However, your return on investment in a fund is based on the average return of the entire portfolio. Therefore, if one or a few apartments perform exceptionally well, the performance of the other average or below average deals will flatten the overall return.

Risk: On the flip side, since by investing in a fund you are investing in multiple deals, the probability of losing a portion or all your initial capital investment is lower. If one or a few apartments perform poorly, the performance of the other apartments in the fund will cover (or at least reduce) your losses.

However, when investing in a fund, you place more trust in the apartment syndicator, especially early on in the fund when there are zero or a few apartments. When investing in an individual deal, you can qualify the GP and the deal. If you don’t like the syndicator, you can pass. If you don’t like the deal, you can pass. If you really like the deal, you can invest as much as you want.

When investing in a fund, you can only qualify the apartment syndicator. If you don’t like thm, you can pass. But at a capital call, if you don’t like the deal (if you even get to see the deal), you have no choice but to invest. Conversely, if you really like the deal, you cannot go all in. Therefore, qualifying the apartment syndicator is even more important prior to investing in a fund to minimize risk.

Taxes: From a tax perspective, distributions from an individual investment and a fund are the same. Ongoing cash flow payments are considered income and are subject to the income tax. Taxable income may be reduced if depreciation is passed on to the passive investors. Profit at the conclusion of the partnership are considered gains and are subject to capital gains tax.

Feasibility: Only accredited investors are qualified to invest in funds whereas sophisticated investors can invest in certain individual deals.

Another minor advantage of funds to individual deals is the paperwork. When investing in a fund, you complete once set of documents at the beginning of the fund and then are invested into multiple apartments. Each individual deal you invest in outside of a fund come with its own set of paperwork.

Which is the ideal passive investment?

First, you need to determine if you are an accredited investor.

Assuming you are an accredited investor, all other things being equal (the GPs, market, and business plan) the only major differences between the two options are return and risk. 

Investing in individual deals come with a higher level of risk, meaning both the profit upside and profit downside is greater.

Investing in funds diversifies your investment into multiple apartments and markets, reducing the risks and resulting in a more stable return.

If you want to maximize the chances of preserving your capital in return of a lower return, investing in a fund is the ideal option for you.

If you are more focused on growing your capital and potentially receiving a higher return, investing in individual deals is the ideal option for you. 

 

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The Best Shortcut to Getting Started in Multifamily Investing

You know what one of my favorite things is about interviewing multiple people each week for the Best Real Estate Investing Advice Ever Show? Occasionally, I will come across an investor with a mind-blowing amount of creativity and hustle.

They were in a bad financial spot, having no money to invest and no real estate experience. Yet, through massive effort and ingenuity, they were able to get started in real estate investing. 

Usually, they identified a unique, unconventional path – dare I say, a short cut – to success. 

One recent guest I interviewed that fit the above description was Chris Thomas. In fact, before interviewing him, I read his biography and was perplexed. It said he was a short-term rental investor with only two and a half years of experience, yet he had somehow amassed a portfolio of over 250 rentals (at the time of the interview).

“How is this possible?” I asked myself. Once the interview began, I was even more confused. Chris was in the backyard at one of his rentals, wearing a t-shirt covered in sweat (which I was actually kind of jealous of because it was around 30 degrees in Chicago) and holding his iPhone as the camera and microphone. He tells me that before he got started in real estate, he was a high school dropout on welfare (and was maybe even without a home for a period of time).  

After telling me more about his background, he begins to explain his investment strategy. To be honest, even 10 minutes into the interview, I was still uncertain as to how he built his portfolio. All I knew was he somehow began quickly amassing short-term rentals.

It wasn’t until I asked Chris, “how did you buy over 20 rentals in 8 months with no money and no experience? I don’t understand” that I finally realized what he was doing. And the reason for my confusion is that I had never heard of someone implementing that kind of strategy before. I didn’t realize it was possible (or even legal).

Now that I understand what he did, I’m here to convey his strategy to you. 

Here is how Chris went from welfare to controlling over 250 units, without prior real estate experience.

Overall, Chris uses over people’s money to lease and furnish individual units in large multifamily buildings. Then, he manages the unit as a short-term rental on AirBnB.

The first thing Chris needed to do was secure private equity from investors. The problem was that he didn’t know anyone with money. So, he told me that for two days in a row, with little sleep, we sent 500 messages on LinkedIn. The reason it took so long is because he had to manually type each message since LinkedIn marks copy-and-pasted direct messages as junk.

Chris found LinkedIn profiles with the word “investor” in their tagline. Then, he reviewed their profile and sent a custom message based on their interests or an article they recently liked. He said the was completely transparent in the message. He explained what he was doing (rent, furnishing, and AirBnBing apartments), that he was new to this but was working with someone who currently managed one AirBnB, and asked if they would be interested.

Of the 500 messages, 40 responded. After further conversations over the phone, 11 agreed to invest.

Next, Chris needed to find units to rent, which also required massive effort. He reached out to many property managers and apartment owners, asking if he could rent, furnish and AirBnB their unit. Countless managers and owners declined. However, enough agreed to allow Chris’s new investors to pick up 3 to 5 units each.

After the investors submited their funds, Chris was responsible for furnishing the unit and managing the AirBnB process in its entirety. The investor is only responsible for signing on the lease and setting up a direct deposit for the monthly rent.

Each investor invests $7,500 to cover the first month’s rent, security deposit, furniture, and Chris’s $1500 to $2000 fulfillment fee. Each month, the investors receive the cash flow left over at paying expenses and Chris’s $500 to $750 management fee, which is approximately $2,000.

When Chris and I spoke, he was managing 70 units for other investors. That means he made between $105,000 to $140,000 in fulfilment fees and was generating between $35,000 and $52,500 each month in income. 

Once he had proof of concept with his investors’ investments, he began investing in the units in the same buildings. At the time of our conversation, Chris was personally invested in 187 units. 

He said the units generate ~$2,700 per month in income. Based on a $5,000 ($7,500 minus the fulfillment fee) investment per unit, the annual ROI is nearly 650%. 

Now, I didn’t write this blog post with the intention of convincing someone to execute Chris’s strategy, because I am uncertain whether it can work in every market (or if it is unique to California Chris’s market) or if it adheres to securities law regarding raising capital. 

However, I think we can use Chris’s story as an example of how hard work and imagination can allow you to overcome whatever obstacle is keeping you from getting started or scaling. If a high school drop out on welfare can create a seven-figure real estate business in less than three years without any money or experience, what is your excuse?

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Apartment Amenities and Coronavirus: 6 New Trends

Due to the onset of the coronavirus, the types of amenities and services in demand by residents of apartment communities have shifted. 

Whether this shift is permanent or temporary remains an uncertainty. It depends on how long the pandemic lasts and, maybe even more importantly, how long resident’s memories will be.

Nonetheless, it is helpful to know what residents are demanding. Armed with this information, you can adjust your current investments, as well as intelligently analyze prospective investments.

Here six amenities and services currently in demand by apartment residents as a result of COVID.

1. Virtual Everything

Residents still want to socialize with other residents. Therefore, social-distanced and virtual events are desired. Simple examples are virtual happy hours, virtual craft events and contests, and food truck events.

Another service that has become popular during COVID are virtual fitness classes. This can be as simple as providing residents with fitness videos on YouTube. You can also partner with a local fitness instructor. They can record videos for residents or do live fitness events over video, as well as be available to answer resident questions. 

At Class A apartment communities, consider an interesting service called TF Living, which is a technology-enabled amenities company providing wellness and lifestyle services to apartment communities across the US. 

Depending on the local COVID restrictions, you can offer outdoor fitness classes.

Something else that is currently in demand and will likely remain so even after the pandemic has subsided are virtual tours. Residents should be able to obtain enough information on the available units to rent sight unseen. Examples include video recordings of units, 3D walk throughs, and live video tours.

2. Outdoor Spaces

Residents who are stuck at home still want to experience the great outdoors. Therefore, access to outdoor spaces, both common and private, are desired.

Residents want access to the outdoors in their own private units, which means patios and balconies are in demand.

The demand for public outdoor amenities isn’t new. Pools, BBQ grilling areas, and pet parks remain in demand. 

An outdoor space more recently in demand are walking and biking paths, ideally ones that connect to existing local parks and paths.

3. Working Spaces

Remote working may be temporary. However, many employers will likely continue to allow their employees to work from home for the foreseeable future. Therefore, onsite public and private workspaces are in demand.

The type of workspace you can offer your residents is limited by the existing footprint of the community. However, here are a few unique tips on maximizing the current space:

  • Add seating in outdoor areas
  • Add seating and dividers in indoor areas
  • Tweak the furnishings in the model unit to include a workspace (ideally near a window)
  • Add console/desk combination under the living room table (like what you find in hotels) to select units for a premium
  • Offer In-unit fold down desks for rent

Arguably the most important shift is the quality of internet. In unit and shared Wi-Fi must have the bandwidth to support video conferencing. 

4. Kitchen Space

With the closure of restaurants and limited seating, more people are forced to eat at home. Therefore, residents are demanding new kitchen features. The bar eating area dividing the living room and the kitchen is a great way to maximize space since residents won’t require a kitchen/dining room table. 

Since people are cooking at home more, larger pantries to store more food, especially nonperishable item, and more cabinets to store new cooking tools are desired.

5. Package delivery capabilities

More people are purchasing home goods over the internet. Therefore, your apartment must have the ability to securely deliver packages to residents. Ideally, the apartment community have package lockers or package rooms that can be accessed with a code 24/7.

6. No-Touch Technology

The demand for sanitation likely won’t go away anytime soon. Therefore, residents prefer no-touch technologies, both in unit and in common areas.

For example, no-touch entry. For units, this means door handles that can be unlocked/opened with a phone app, hand way, elbow-open, or voice activation. Also, touchless soap dispensers and faucets in unit and common bathrooms. Adding touchless hand sanitizer stations in common areas is also a smart move.

In conclusion

Whenever an unforeseen event, like coronavirus, occurs that impacts the economy, the winners are always those who know how to identify new opportunities and then pivot accordingly. 

In multifamily, offering the right amenities is always a must. Using the information in this blog post, you can pivot from your existing amenities offered to increase the demand for your units, maintain (or even increase) revenue, and become a winner during the pandemic.

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Investing in Apartments as a Limited Partner

Why Apartments Are “The Asset of Choice” 

Large multifamily properties have historically been owned by institutional investors such as mutual funds, REITs, insurance companies, and pension plans because of the stability and yield that apartments offer. 


Being a Limited Partner investor allows an accredited investor and in some cases, a sophisticated investor an opportunity to buy a passive ownership stake and participate in these same large real estate acquisitions; a 400-unit apartment building, as an example. The Limited Partners (individual passive investors) can experience the same buying power, leverage, and potential tax benefits, just as institutional investors do. 

 

The individual passive investor has the benefit of owning a percentage of an apartment community without the day-to-day management obligations. Additional benefits may include monthly or quarterly cash flow distributions, potential income sheltering through depreciation and tax benefits, debt leverage, principal pay-down, and potential appreciation in value.

Predictable Income


An apartment building’s revenue is derived from rents paid by the residents for leased units and other income-generating items such as covered parking spaces, fenced-in yards, coin laundry facilities, on-site storage facilities, to name a few. A strong property management team will focus on attracting qualified residents to the property and carefully have lease agreements executed, often with contracts lasting 12 months or longer. These practices in turn, generate long-term, consistent cash flow for the Limited Partner investors. 

 

Forced Appreciation


By making improvements to an existing property (known as a value-add business plan), the property’s value can increase through this repositioning process. By increasing rents and occupancy, higher levels of revenue are generated. Since multifamily apartments are primarily valued based on the income they produce, a value-add business model can in-a-sense, “force” the property to appreciate in value rather than relying on market conditions or annual inflation. When the property is refinanced or sold, the proceeds can be returned to the Limited Partners or in some cases, can be rolled into another “like-kind” investment property using a 1031-exchange to defer the taxes.

 

Steady Cash Flow


One of the greatest advantages of real estate investing is the steady, and often tax-sheltered, monthly cash flow. Few investments can be bought with the same kind of steady cash flow return combined with the appreciation potential.

 

Tax Benefits


Distributions made to the Limited Partners are treated more favorably than most other types of investments because a significant portion of the distributions are often not considered income according to the tax code. This is due to the flow-through of expenses and depreciation. Additionally, the capital appreciation is deferred from taxation until the assets are sold and may be further deferred from taxation if a 1031-exchange is implemented. 

 

Total Returns


An apartment’s combination of stable cash flow (primarily derived from rents), capital gains (resulting from increased property value upon sale), principal paydown (from residents paying down the loan balance over time) and tax savings (due to the current IRS rules and the additional benefits from the Tax Cuts and Jobs Act passed in 2017) provide returns that can be quite impressive given the current state of the stock market and the lack of yield offered by banks, money markets, CDs, and bonds. 

 

A Hedge Against Inflation
Historically speaking, rents, property values, and the replacement cost of real estate improvements rise with inflation. This makes real estate a particularly effective hedge against inflation, and might be an asset class to help you balance your investment portfolio, especially in the low yield environment we are in today. 

 

Ownership of Real Estate
Passive investors desiring steady income with a balance between risk and reward, may consider multifamily apartment investing as a Limited Partner to provide a solid foundation for building lasting wealth. Additionally, the ability to use a “hands-off” investing approach can be useful in building passive income streams that, in turn, free up time to spend on what matters most to the individual investor. 

 

To Your Success

Travis Watts 

 

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People Are Fleeing Urban Centers for the Suburbs – What This Means for Apartment Investors

One of the main metrics I look at when analyzing a prospective market to invest in is the population growth. 

The thought process behind this is simple: if the population is increasing, the demand for real estate is increasing, and vice versa. 

Of course, there are other relevant factors like the supply side of the equation. However, there are some investors I’ve met who ONLY select markets based on the net migration. If more people are moving out of the market than are moving in, it is automatically disqualified.  

U-Haul is actually a top source for migration data, which they release annually. you can view their migration reports here.

When you understand where people are moving to and moving from, you can adjust your apartment business plan accordingly. If you are in a market with a positive net migration, you are sitting pretty. However, if you are in a market with a negative net migration, there may be trouble on the horizon.

One of the biggest migration trends resulting in part due to the coronavirus pandemic is the urban-to-suburban pipeline

Not only are more people interested in leaving urban markets, but in some states, such as New York, the exodus has already begun.

The Hill, in their article “Americans leave large cities for suburban areas and rural towns”, says that approximately 250,000 residents plan on moving out of New York City while another two million consider moving out of the state altogether. Also, more than 16,000 New Yorkers already moved to suburban Connecticut. 

And this trend isn’t unique to New York. 

“A record 27.4% of Redfin.com users looked to move to another metro area in the second quarter of 2020,” reads a Redfin analysis performed in July 2020

The most popular destinations are Phoenix, Sacramento, Las Vegas, Austin, and Atlanta. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origin.

 

The locations with the large outflows were New York City, San Francisco, Los Angeles, Washington DC, and Chicago. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origins.

 

Are any of your investment markets on either one of these lists?

There is also an increase in demand for rural markets. For example, according to US News, 57% of realtors who responded to their survey said they’ve seen an increase in interest in rural Montana. The main reasons were because of its low coronavirus infection rate, as well as because they grew up and had family there. The same The Hill article cited above said real estate sales in Montana were 10% higher year-over-year, and that rural Colorado, Oregon, and Maine experienced similar increases in sales.

So why are people leaving the urban centers? 

Another telling article was written in NASDAQ entitled “The Urban-to-Suburban Exodus May Be The Biggest in 50 Years.” This article provided more data on the reasons why New Yorkers were fleeing urban centers. The top 5 reasons were cost of living, crime, looking for a non-urban lifestyle, concern over the spread of the coronavirus and the ability to work from home.

One of the major COVID-related changes that is driving more people out of urban centers is working from home

According to MARKINBLOG, 88% of companies are encouraging or requiring employees to work from home due to COVID and 99% of people prefer to work remotely. Compare this to just 3.4% of the US population working remotely pre-COVID, this has the possibility to massively disrupt real estate, especially the type of real estate that will be demanded.

Since employees aren’t required to go to the office, they are choosing to live in areas that are more affordable, closer to family, and closer to local amenities while still having direct access to a downtown. Hence, they are leaving urban areas for the suburbs. 

However, they are also choosing to head to the suburbs due to the type of homes that are offered. For example, people are looking for more outdoor spaces (whether that is a private yard or nearby greenspaces and parks) and homes with an extra room to convert into a home office. Greenspace is universally nonexistent in a lot of urban areas, and the cost of an extra bedroom in urban areas is also financially unrealistic for many would be buyers and renters. Therefore, if they want to see real green grass and trees, as well as have a home office, the suburbs or rural areas are their only options.

What this means for you?

As a multifamily real estate investor, you need to understand the population and migration trends in your investment market.

If you are heavily invested in major urban centers, it may be time to consider a pivot and diversify into suburban areas.

This is great news for those already invested in suburban areas, as you should benefit from both an increase in rents as well as an increase in value due to falling cap rates.

Newer investors can take advantage of the low barrier of entry since real estate is generally more affordable in suburban and rural markets.

No one knows for certain what the future holds for real estate post-COVID. However, due to other factors leading up to the pandemic (which I outline in my article about why I am confident in multifamily) combined with the migration trend outlined in this article, I believe multifamily real estate in suburban areas will thrive in the years to come.

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.

  

However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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The CDC Eviction Moratorium – What You NEED To Know

You may have seen recent headlines referring to an “eviction crisis”: 

The COVID-19 Eviction Crisis: an Estimated 30-40 Million People in America Are at Risk – The Aspen Institute 

 

Experts fear the end of eviction moratoriums could plunge thousands of people into homelessness – CNBC

President Trump signed an eviction moratorium order that effectively bans evictions nationwide through the end of the year. According to the Centers for Disease Control and Prevention (“CDC”), the moratorium order has been issued to provide housing stability and to prevent the further spread of COVID-19. However, it is important to note that rent is NOT cancelled through the end of the year. Let’s dive into how this order effects landlords and owners of real estate…

 

According to the moratorium, there are stipulations in order to receive this “eviction protection.”

Those who are eligible must meet additional criteria before presenting their landlords with a declaration, which will be made available on the CDC website. This criteria includes: 

  1. The resident has sought all available government rental assistance
  2. The resident will earn no more than $99,000 in 2020 (or $198,000, if filing jointly)
  3. The resident can’t pay their rent in full due to a substantial loss of income 
  4. The resident is trying to make timely partial payments, to the extent they can afford to do so
  5. The resident would, if evicted, likely end up homeless or forced to live in a shared living situation

What to do if you (the landlord) receives a CDC Declaration from a tenant?

 

According to Colton Addy from Snell & Wilmer Law, if a landlord receives a CDC Declaration from a tenant, the landlord should respond in writing to the tenant to encourage the tenant to make partial payments of rent (and similar housing-related payments) to the extent the tenant is able, in accordance with the CDC Declaration. Additionally, the landlord’s written correspondence should remind tenants that the rental amounts are not forgiven and will ultimately need to be paid. 

 

Additionally, many tenants may not be aware of the government assistance programs that are available to tenants to help tenants pay their rent during the COVID-19 Pandemic. Landlords should include a list of available resources that tenants can use to pay their rent. The Department of Housing and Urban Development (HUD) has stated that nonprofits that received Emergency Solutions Grants (ESG) or Community Development Block Grant (CDBG) funds under the CARES Act may use these funds to provide temporary rental assistance to tenants. 

 

The following websites provide information on federal assistance that is available:

 

www.hudexchange.info/programsupport

https://www.hud.gov/coronavirus

https://home.treasury.gov/policyissues/cares/state-and-local-governments 

 

Additionally, landlords should include other programs that may be applicable in their jurisdiction. Landlords may also consider filing an eviction proceeding for one of the reasons permitted by the CDC Order, but landlords should use caution in pursuing such actions as eviction proceedings in the current climate are likely to draw additional judicial scrutiny.

 

Penalties:

 

The penalties for individuals who violate the Order are severe, including:

 

 

  • A fine of up to $100,000 and up to one year in jail, if the violation does not result in a death; or
  • A fine of up to $250,000 and up to one year in jail, if the violation results in a death.

 

The penalties for an organization violating the Order are even more severe.

In summary, the moratorium order provides temporary relief to those residential tenants facing eviction who submit the required declaration, through the end of the year.  The order, however, does not absolve a tenant from paying rent or restrict a landlord from applying penalties, interest, or late fees on the tenant’s account for non-payment of rent.  Additionally, the order does not relieve landlords of their debt service obligations if a tenant seeks relief under the order. 

 

Disclaimer: The materials contained in this blog post are for educational and informational purposes only. Nothing in this blog post is to be considered as the rendering of legal advice. Readers are advised to obtain legal advice from their own legal counsel. Additionally, please note that the orders and laws related to the COVID-19 Pandemic are changing on a daily basis and your jurisdiction may have stricter rules related to evictions in place. Please verify the rules currently affecting your property at any given time.

 

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How to Underwrite an Apartment Deal with Incomplete Financials

A frequently asked apartment syndication question is “how do I underwrite an apartment deal when the seller doesn’t effectively track financials?” 

The two important items needed from a seller to underwrite a deal is a rent roll and a T-12. The rent roll provides information on the current rental income. The T-12 provides information about the historical income and expenses.

The typical underwriting process at a high level is as follows: Armed with the rent roll and T-12, the apartment syndicator populates a cash flow calculator with the current rents, T-12 income and expenses, and their assumptions for how they will operating the asset after acquisition. Once debt terms and other acquisition terms (i.e., general partner fees, renovations costs, limited partner compensation, etc.) are added, the apartment operation can determine an offer price based on the cash flow. 

Therefore, without the financials, it is very difficult to calculate a fair offer price.

Does this mean you should only underwrite deals that come with a detailed rent roll and a T-12? 

Of course not. Often, these can be some of the best deals. You will also have minimal to no competition. 

Before you can benefit from these types of deals, you need to understand how to successful underwrite deals without financials, which is the purpose of this blog post.

Types of Deals With Missing Financials

Most on-market deals listed by a broker will have a rent roll and a T-12. A broker usually won’t bring a deal to market without obtaining clear financials from the seller. The broker knows that it is difficult to sell a deal with missing or incomplete financial for the aforementioned reasons.

Therefore, deals with missing or incomplete financials are generated through off-market lead generation strategies. More specifically, financials are lacking on off-market deals owned by mom-and-pop owners who self-manage.

This does not mean that the all deals with missing or uncomplete financials are off-market, mom-and-pop, self-managed apartments. Nor does it mean that financials are only lacking on these types of deals. It is always important to request a rent roll and T-12 on all deals, on-market or off-market.

If you request the rent roll and the T-12 and either one or both are missing, the process that follows is how to best underwrite the deal, which was inspired by an interview we did with Chris Roberts of Sterling Rhino Capital.

What is the Secret Short Cut?

The first thing to realize is that there is not a shortcut to underwriting a deal without financials. Essentially, the overall underwriting and due diligence process is the same. The major difference is that you will need to create the missing or uncomplete financials from scratch.

However, creating the financials from scratch is time intensive and must include the efforts of the seller. Therefore, this creation process usually will not start until the deal is under contract.

Submitting an Offer

The actual offer price is less important when the financials are missing or incomplete. For example, the final sales price on Chris Robert’s deal was approximately 20% below the original contract price after negotiations were completed. Therefore, determine what the price at which the owner wants to sell. Assuming this is at least in the ballpark of recent sales comparable, do not worry about an intensive back and forth negotiation.

The most important part of the offer are the terms. The earnest deposit needs to be 100% refundable or deposited after the financials are created. The official due diligence process, which starts with an inspection, shouldn’t begin until after the T-12 and rent roll are created. There need to be adequate contingencies in place, like an inspection contingency and a financing contingency.

When you create the proper offer terms, worst case scenario is the loss of time without the loss of money.

Work with the Seller Directly

Once the deal is under contract, the next step is to create the financials. This is best accomplished by working with the seller directly. Therefore, if a broker is involved in the deal., the first step after placing the deal under contract is to bypass the broker to work directly with the seller. 

Even if they broker is against you working directly with the seller at first, it is likely that the deal will reach a stand still where the only way forward is directly connecting you with the seller or canceling the contract. 

This is what happened on Chris Robert’s deal. He attempted to work through the broker to get the seller to create the financials to no avail. Eventually, because the deal was stalling, the broker caved and let Chris speak directly with the seller. 

When speaking with the seller, Chris discovered the point of contention. The seller was under the impression that is was Chris’s responsibility to create the financials by himself, which is impossible. He told Chris, “why am I doing your work for you?” 

Chris replied, “Look, we are in this together. You are not going to sell your apartment unless you have financials, because neither I nor anyone else is going to be confident in investing a deal without historical numbers. I am willing to work with you to create these financials so that we can both get what we want.”

By showing the seller that it was in his best interest, Chris was able to convince the seller to take the required steps to create the financials.

How to Create the Financials from Scratch

Working directly with the seller, the next step is to create the rent roll and T-12 from scratch. 

The first step is having the seller connect with their CPA. The CPA can use the seller’s bank statements and tax returns to generate the profit and loss statement. Additionally, on Chris’s deal, he sent the seller a T-12 template and asked the seller to update the template each month.

To build a rent roll from scratch, your property management team will need a copy of each lease. Your management team should be local to the market, which means they can travel to the property to create the rent roll. 

Re-negotiating the Price

Once you have the rent roll and T-12, you can officially underwrite the deal and renegotiate the price accordingly. 

At this point, you can follow the standard due diligence process. Whenever you come across a step where a financial document is unavailable, you and the seller will need to work together to create it from scratch.

 

The total time between receiving the lead and closing will depend on the cooperation of the seller and the level of missing documentation. For Chris’s deal, it took nine months. In general, I wouldn’t expect to close in the traditional 60 to 90-day time frame.

The main different between a traditional deal and a deal with incomplete financials is the time required to work with the seller to create the financials from scratch. It may be a lengthy process but it is a great way to acquire a deal below market, especially in a competitive market.

 

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Debunking a Common Myth About Apartment Insurance Rates

A common practice when underwriting multifamily apartment deals is to assume a stabilized insurance expense equal to the T-12 insurance operating expense. In other words, the assumption is that the insurance premium paid by the current owner will remain the same after acquisition.

This practice was indeed correct for the past five to ten years. However, according to commercial insurance expert Bryan Shimeall, who was interviewed on the Best Real Estate Investing Ever podcast, this is no longer a safe assumption.

Due in part to the onset of coronavirus, as well as to the increase in the number of people entering the commercial real estate investment realm, insurance rates are rising fast.

Towards the end of 2019, the insurance market transitioned from a soft market to a hard market. 

In a soft market, insurers are competing for apartment investors, resulting in more competitive rates. Therefore, when underwriting deals, apartment operators were assuming the T-12 insurance rate would remain the same after acquisition, or even potentially decrease. 

However, in a hard market, the opposite is true and apartment investors are competing for insurers. As a result, insurance rates are rising. 

The magnitude of the increase is geographically driven. According to Bryan, an apartment investor should expect between a mid-single-digit and up to a 20% increase in the insurance rate when underwriting deals.

He also said that insurance companies are pickier about the types of apartments they will insure, as well as offering non-renewing insurance policies. If an apartment qualifies for insurance, there is no guarantee that it will continue to receive the same rate, the same coverage, or any coverage at all once the initial contract has expired.

Now that you know about these recent changes to insurance rates, what changes should you make when underwriting apartment deals?

The most important thing you need to do is have a conversation with your real estate insurer. If you do not have one, you need to find an insurance company or broker that specializes in real estate.

Ask the insurer about the insurance rate increases in the market you invest in.

Another important factor besides geography that is driving the rate increases are the history of losses. Bryan says it is more important than ever to provide your insurer with the history of losses as soon as possible.

Once you know you are serious about a deal, email the listing broker (if on-market) or the owner (if off-market) and request a copy of the history of losses for the apartment. 

Your insurer will need accurate and complete information about the history of losses at the property to provide an accurate insurance quote. Without the history of losses, the insure will generate a quote based on a clean history.

If your insurer obtains the history of losses report that isn’t clean, the insurance rate will be higher. Depending on the type of losses, the insurer may decide to not provide insurance at all. 

The worst-case scenario is your insurer receives the history of losses and won’t provide insurance on the apartment after you’ve invested tens of thousands of dollars into due diligence. Another bad scenario is the new insurance quote is significantly higher than your original projections and you need to back out of the deal or renegotiate a new purchase price.

Therefore, to avoid canceling contracts and wasting thousands of dollars, do not assume an insurance rate that is the same as the current insurance rate. Instead, have a conversation with your insurer prior to submitting a contract to understand the projected rate increase in the market. Then, obtain a history of losses as soon as possible so that your insurer can provide you with the most accurate quote before you have progressed further into the due diligence period.

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High Net Worth Frugality – How To Save Like The Wealthy

Frugality has played a major role in my life, starting in childhood and being brought up by two very frugal parents. I have tremendous gratitude looking back on the lessons learned and seeing the impact that saving money has had. In this post, I want to share with you some interesting data I recently came across and a unique perspective on frugality.

Americans spend the majority of their money on three expenses: Housing, Transportation and Food, according to the U.S. Bureau of Labor StatisticsYou probably already knew that, so I want to dive a bit deeper in a direction I think we could all benefit from. I want to share with you how High Net Worth Individuals save and spend their money compared to everyone else in these three primary categories. Obviously, there is no official handbook or methodology that all wealthy individuals follow; so I compiled some data and research so we can take a peek behind the scenes. 

#1 Housing 

You might be familiar with the fact that Warren Buffett paid $31,500 for his home in Omaha nearly 50 years ago and he has not increased his spending in this category ever since. This is an extreme example, but how much do you think the average American spends on housing as a percentage of household income? To my surprise, the data shows nearly 30% of household income is spent on housing costs according to the U.S. Bureau of Labor Statistics

 

Now let’s take a look at another High Net Worth example; we’ll use Tim Cook (the CEO of Apple). Tim Cook has an estimated net worth of 650 million dollars and he bought his California residence for 1.9 million dollars. This home purchase represents less than 3% of his net worth (if he paid cash) or a mortgage payment of approximately $7,500 a month if he financed the home with a traditional loan and 20% down payment. If the house is mortgaged, that means Cook spends approximately .072% of his annual income on housing costs based on the 125 million in compensation he received from Apple in 2019. It’s interesting that Buffett and Cook have the ability to buy nearly any home they desire, but they chose to embrace a reasonable frugality in this category. There are, of course, hundreds of other High Net Worth examples like these, but it is fascinating to consider this mindset when the majority of American homeowners max out their debt leverage to buy the most expensive house they can afford.  

 

#2 Transportation

According to a study done by researchers at Experian Automotive (and published on Forbes), 61% of wealthy individuals (defined as earning $250,000 or more in income per year) drive Hondas and Toyotas and Fords. You may also be familiar with the fact that many billionaires drive inexpensive vehicles as well, many of which are valued under $30,000. A few examples include:

 

  • Steve Ballmer (Billionaire) Ford Fusion Hybrid MSRP $30,000
  • Mark Zuckerberg (Billionaire) Acura TSX MSRP $30,000
  • Jeff Bezos (Billionaire) Honda Accord MSRP $20,000
  • Ingvar Kamprad (Billionaire) Volvo 240 MSRP $25,000

 

According to AAA research agency, the average American spends $9,282 a year on their vehicle, which equates to $773.50 a month. The median household income (for 2018) was $61,937 according to Current Population Survey and American Community Survey, which are surveys conducted by the U.S. Bureau of Labor Statistics and the U.S. Census Bureau. Americans dedicate nearly 15% of household income to a vehicle. 

 

#3 Food

This is one of my favorite topics when it comes to personal finances. In this post, I will keep it brief, but you can check out some of my other blogs and articles that dive deeper into the topic. According to The National Study of Millionaires, which is a 71-page nationwide study conducted on 10,000 U.S. millionaires and their spending habits, it was found that 36% of millionaires spend less than $300 each month on groceries and 64% spend less than $450, and only 19% spend more than $600 a month on groceries. The punchline; non-millionaires spend about 57% more on groceries compared to millionaires. But that’s just groceries, so what about restaurants and dining out? I’ll get right to the point on this one… 

 

To turn a profit, many restaurants charge around a 300 percent markup on the items they serve. When you go out to eat, you are paying for service, convenience and atmosphere. There is certainly a time and place for restaurants, but if you are eating out frequently, consider that you could make a $15 meal in a restaurant for $5 at home. The statistics are also interesting. According to a study from the JPMorgan Chase Institute that focused on fifteen specific metropolitan areas, studying credit and debit card purchases from more than fifteen billion anonymous transactions and characterizing them by quintiles of income, the poorest 20% spent 16.6% of their income at restaurants, trailing the wealthiest income quintile at 17.8%.

 

Takeaways

Perhaps it’s time to remove “The Joneses” from our life and start keeping up with ourselves instead. 

 

There are two sides of the money coin. One side is about making money and the other side is about saving money. Long-term financial success requires a commitment to both. We can’t forget about mentors like Mike Tyson, who amassed over 300 million dollars in a career and filed for personal bankruptcy in 2003 after going completely broke. Or perhaps the more recent example of Johnny Depp “losing” his 650 million-dollar fortune due to wild spending habits like $30,000 a month on wine and renting 12 storage facilities to store his “memorabilia”. We all know of athletes and celebrities who unfortunately were not taught about frugality, or simply chose not to pay attention. The goal for you and I may not be to join the Billionaires Club, but perhaps it’s a worthwhile pursuit to find a balance between having enough and living life on your own terms. 

 

To Your Success

Travis Watts 

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9 Things to Consider When Converting Apartments to Condominiums

Besides the traditional three apartment investment strategies (turnkey, distressed, and value-add), condo conversions is another less common business plan that can be very lucrative.

The condo conversion investment strategy involves purchasing an apartment community, converting it from individual rental units to individual condos, and reselling the individual condos for a profit.

This post isn’t going to discuss which investment strategy is the best, because like most things in real estate, it depends on what you are interested in and what your goals are. However, if you do decide to pursue the condo conversion investment strategy, here are the 9 things you need to consider:

 

  • Speak to an attorney: First and foremost, speak with a real estate attorney that specializes in condo conversion projections. You need to know the state and local laws on condo conversions and the step-by-step process you must follow.
  • Vacating the property: The largest potential challenge is the process for vacating the apartment building. An attorney will tell you the laws that protect the rights of the existing residents. In some markets, the residents must be given a specific time frame of the notice to vacate. You may even be required to cover their relocation costs and give them a chance to purchase a completed condo. The longer it takes and the more expensive it is to vacate the property, the greater the holding costs.
  • Hidden fees: There are a lot of hidden fees involved in condo conversions, which the attorney can help you uncover. There are application fees with the city, surveying fees, attorney fees, and fees related to code compliance. Once the conversion is completed, the city will inspect the condominium for code violations, which you will be required to address. Therefore, another fee is associated with hiring a private condo pre-inspection specialist to inspect the property to give you an opinion on potential code violations and the costs of the repairs. Another hidden fee is the increase in insurance costs. Insurance on condominiums is generally higher than apartment insurance, so make sure you obtain a quote for the new insurance premium. Last are the upfront and backend fees you charge for putting together and managing the project.
  • Financing: You will need to speak with a mortgage broker who specializes in condo conversion projects to securing financing. This conversion needs to begin prior to placing the deal under contract so that you can estimate the debt service and other important loan terms, like I/O periods, loan term, interest rates, prepayment penalties, financing fees, and closing costs.
  • Timing: To determine the holding costs and hold period, you need to know the estimated timelines for each step in the condo conversion process. First, how long will it take to vacate the building? Once vacated, how long will the renovations take? How long will it take to list the condo units for sale after the renovations are completed (i.e., post-conversion requirements like setting up the HOA, inspections, etc.)? Lastly, what is the average days on market and closing timeline? Add these all together and you have the hold period and can calculate the holding costs.
  • Holding costs: The holding costs are the ongoing expenses paid during the hold period. These include insurance, taxes, utilities, and debt service. Since you will be generating no cash flow (or some cash flow in the beginning while vacating the property), these expenses must be covered by initial equity.
  • Renovation costs: There are four aspects of the renovation costs to consider. One is the cost to convert the apartment units into individual condos. Two is the investment amount is required for the common areas. Three is the cost to address deferred maintenance. Last is the size of the contingency budget.
  • Sales process: The first thing you need to know is the projected after-repair value of the condominium units, which requires a sales comparable analysis. You also need to consider the costs associated with marketing and selling (i.e., the broker’s commission) the condo units.
  • Limited partner compensation: Lastly, you need to determine the compensation structure offered to the limited partners who invest. What type of return will you offer (i.e., preferred return, profit split, or both) and when are they paid (i.e., after each condo is sold or when all condos are sold)?

 

To address all the above, you will need to work with at minimum an attorney, a mortgage broker, and listing broker, and a contractor – all who specialize in condo conversions.

Purchasing an apartment community and converting the rental units into individual condo units is an alternative to the traditional apartment investment strategies. However, you need to understand the laws surrounding condo conversions, the added costs, and the required team members to properly underwrite the deal, successfully complete the conversion and conserve and grow the investors capital investment.

 

 

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President Trump Signs Coronavirus Relief Executive Orders

President Donald Trump signed an executive order on Saturday night after negotiations reached a deadlock in the House over another coronavirus relief package.

Click here to read the full memorandum.

Here is everything you need to know about the executive orders:

Unemployment Benefits

Unemployment benefits include an additional $400 per week, retroactively starting August 1st. The federal government would contribute $300 and the states would contribute $100.

White House economic advisor Larry Kudlow said Sunday that people could expect checks in a couple of weeks.

Eviction Moratorium and Renter Assistance

The executive order did not provide specifics on a renewed eviction moratorium or renter assistance. Instead, it defers to other governmental agencies to make that determination.

The decision to ban evictions will be decided by the Health and Human Services Secretary and Centers of Disease Control and Prevention Director.

The decision to provide financial assistance to renters will be decided by the Treasury Secretary and Housing and Urban Development Secretary.

Student Loan Payment Deferrals

Student loan debt interest would be waived through the end of the year. This only applies to loans held by the Department of Education, so it does not apply to privately held student loans.

Payroll Tax Cut

The federal tax withholding for the payroll tax would be deferred (not forgiven) starting September 1st and through the end of the year for people earning less than $100,000 a year.

The Treasury Secretary may also exercise his authority to defer the withholding, deposit, and payment of the tax, meaning it may be forgiven. He could also extend the program for a full year.

 

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Why Multi-Family? Why Now?

Why Real Estate? 

Most people who are career focused and have money to invest or people who are coming to the end of a professional career, often look to real estate as a viable investment option either for building equity or for income generation. Unfortunately, real estate investing is typically thought to be a sole ownership strategy. Very few people are aware of the passive investing opportunities in multi-family private placements or “apartment syndications”. 

Why Multi-Family?

Syndications and/or private placement offerings are all about “pooling” your money together with other investors to purchase large assets that may otherwise be unattainable as a sole ownership purchase (for example, a 300-unit apartment building). If you have 10 million dollars to use as a down payment, you might have the means of purchasing an asset like this individually; however, if you prefer to only invest $100,000, that’s where a syndication structure can be a huge benefit and allow you to participate in a deal of this size. 

Why Value-Add?

I tend to invest in value-add projects. In this business model, the General Partner or Managing Partners and their teams often add value to the apartment community in a number of ways. Common value-add strategies include renovating the units, updating to modern appliances, countertops, in-wall USB ports, smart thermostats, on-site storage lockers, improve the landscaping, renovate the clubhouse, gym, pool, parking lots etc. Every property is unique and the business plan will be different for each; the overall goal is to update the property and match the current market demand while increasing below market rents along the way.

The value (price) of an apartment complex is primarily derived from the NOI (net operating income), which is comprised of the total collected rents and income minus expenses to operate the property. When the net operating income increases, the value of the complex increases. For example, let’s say the annual net operating income on a property increases by $100,000 a year. A $100,000 a year rent increase could potentially bump the purchase price up by nearly one million dollars (for example/educational purposes only). 

Why Invest? 

Multi-family real estate investing has a lot to do with diversification of an investment portfolio. There are two common reasons why people invest in real estate. Most people either invest and wait for the property to increase in value or “force” the appreciation (equity investing) or they rent it out and collect the cash flow (income investing). Why not do both? Value-add business plans are often designed to capture both of these strategies. 

Multi-family real estate is a diversified asset in itself. This is largely due to the fact that when you buy an apartment building, you are investing in many units. With single-family homes, you have (1) unit and (1) tenant. If your tenant moves out or doesn’t pay rent, you are 100% vacant and 100% unprofitable. With a 300-unit property, it is not uncommon to have the ability to lose 70-90 tenants at any given time, and still be profitable. The diversification does not stop there. Many people invest passively in syndications because they can spread out their risk geographically among several properties and Sponsors.  

Why I Decided to Invest in Multi-Family

In 2015, after a complete burnout of trying to expand my single-family portfolio, I decided to return to the drawing board in search of a more sustainable and scalable approach to investing in real estate. I was desperate to become a hands-off investor after realizing how active this business can be. In 2015, after reading 52 books, listening to podcasts, networking in real estate groups and seeking mentors, I ultimately decided that multi-family real estate was my solution. More specifically, investing passively in apartment communities via private placement offerings (syndications). 

These Were a Few of My Reasons:

  • I needed a hands-off approach to invest in real estate 
  • I wanted tax advantages equal to or exceeding single-family 
  • I wanted geographic and asset type diversification 
  • I was seeking a recession-resistant asset class
  • There was (and still is) a nationwide demand for affordable housing 
  • I wanted to leverage other people’s expertise, track record and deal flow

Whether you decide to be active or passive in the multi-family space, I wish you success in your journey. This asset class has truly been a blessing for my family and I. I have a passion for helping educate others in real estate. If you have any questions, please reach out anytime. I would be happy to connect on a call or email to help in any way I can.  

 

To Your Success

Travis Watts 

 

 

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“You Shouldn’t Use the Radio to Generate Leads” Myth Debunked

“Don’t waste your money or time advertising on the radio.”

“The radio is prehistoric.”

“No one listens to the radio anymore.”

I am certain you’ve heard one or a version of the above in your real estate career. Consequently, most real estate investors believe they should not use the radio to generate leads.

However, the statistics on radio usage may surprise you. Radio is still one of the most powerful mediums in the United States with a weekly reach of around 90% among adults. Since adults are listening to the radio and adults own real estate, the radio can be a great way to generate leads.

But the myth isn’t quite debunked just yet… Enter Chris Arnold.

We interviewed Chris on the Best Real Estate Investing Advice Ever Show. He has closed on over 2,500 real estate deals. And guess what? Every single deal came from a lead generated using the radio!

Now, the myth is officially debunked.

One of the main reasons why Chris has had so much success using the radio is because most people believe the myth this blog post is attempting to debunk. How many real estate investors do you personally know who use the radio to generate leads? For most of you, I bet the answer is a big fat zero.

Many people are listening to the radio yet very few real estate investors utilize it to generate leads. Therefore, there is a massive supply-and-demand imbalance from which Chris is benefiting, and so can you.

How can you replicate Chris’s success on the radio? Here’s his simple four-step process:

Define Target Audience: First, you need to define your target audience. Chris’s target demographic are people over the age of 50, because this is the demographic that is likely motivated to sell a home due to things like retirement, inheritance, tired of being a landlord, etc. Since defining a target audience isn’t the purpose of this blog post, click here and here to learn more about this topic.

Create the Advertisement: Once you’ve defined your target demographic, the next step is to create your advertisement. Like any advertisement, it needs to touch on the pain points of your target demographic, as well as include how you will alleviate that pain point and a call-to-action. Chris says you can either record the ad audio at home or, if you don’t have the proper equipment, you can use the local radio station’s studio.

Find a Radio Station: After you’ve created your advertisement, you need to find the right radio station on which to air your advertisement. Selecting the right radio station is easy. You’ve already defined your target audience, so all you need to do is determine the type of music they prefer. Since Chris targets the 50+ demographic, he airs ads on classic or old school rock stations. If your target demographic is rural, he says country music radio stations are best. Or R&B stations if your target demographic is urban.   

Negotiating the Costs: The last step is negotiating the costs of the advertising spot. Chris says the average person calls into a local radio station, asks for their media packet, and pays that price. However, Chris pulls reports on the value of the radio station prior to calling. Based on the reports, he calculates how much the advertising spot is actually worth. Then, once he calls the radio station, he tells them how much he is willing to pay based on his research rather than asking how much do pay. As a result, Chris is able to pay $1,500 for 100 sixty second ad spots per month.

 

One of the major benefits of using Chris’s method is that it is a set-it-and-forget-it strategy. Record the ad, send it to the radio station, and wait for the phone to ring. This is contrasted with other, more active marketing strategies like cold calling, direct mail, or driving for dollars.

And, as I mentioned previously, the number 1 benefit of using the radio to generate leads is that no one else is doing it. 

Chris’s episode is scheduled to air July 22, 2020. Be sure to mark your calendars so that you can listen to his episode to learn even more about this powerful lead generation strategy. 

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How to Navigate 2020 – 5 Tips for Real Estate Investors

What a crazy year this has been! It has certainly been a rollercoaster to say the least, but the good news is that there are ways you can not only survive, but thrive in 2020 as a real estate investor. 

Here Are 5 Tips That Can Help:

#1 Educate, educate, educate. Working from home? Can’t travel? Attend some online events, webinars, read a few books, listen to podcasts, watch “how-to” videos, get on BiggerPockets and read blogs. 

“An investment in knowledge pays the best interest” – Benjamin Franklin 

#2 Re-define your goals and investing criteria. What are your long-term goals? What do you REALLY want to gain from investing in real estate? It’s not all dollars and cents and it’s not all about cashflow vs equity. Take a couple hours this summer to write down what it is you really want to achieve in life. Money can only be exchanged for experiences or “things” – what are you after? 

“You should set goals beyond your reach so you always have something to live for” – Ted Turner

#3 Volunteer your time – seek mentors. Learn from other’s successes and failures. Mentorship can come in many forms, but the most effective is usually in the form of having a personal coach or mentor. This has made the biggest impact in my life over the past decade. Have money to spare? Consider hiring a coach or mentor. Don’t have money to spare? Consider volunteering your time to add value to others in exchange for mentorship.  

“The richest people in the world look for and build networks. Everyone else looks for a job” – Robert Kiyosaki 

#4 Get your personal finances in order. What can you do to reduce overhead or save additional cash? Could you start a side business for some additional income? Stay focused and disciplined on your long-term objectives. Any time you spend money on things you don’t need, you move further from your goals.

“Personal finance is only 20% head knowledge and 80% behavior” – Dave Ramsey 

#5 Learn from mistakes. You will make mistakes and you will likely lose money based on inexperience; I know I have. Reading biographies, seeking mentors, asking people about their “lessons learned” can help you cut the learning curve. 

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes” – Warren Buffet 

I hope you find these helpful. Even if you only implement ONE of these, you will be 90% ahead of most. This year, more than ever, is a time to grow, expand and thrive. 

To Your Success

Travis Watts 

 

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Senate Announces HEALS Act Stimulus Package: Here’s What You Need to Know

On Monday afternoon, the Senate Republicans unveiled the Health, Economic, Assistance, Liability Protection and Schools (HEALS) Act, the second stimulus package meant to offset the economic impacts of the coronavirus pandemic.  

Here’s what we know so far about the potential terms of the second stimulus package based on the HEALS Act:

Second round of stimulus checks: Like the CARES Act, the HEALS Act should send payments to qualifying individuals and families. The payment amount was up to $1,200 per person in the CARES Act, and the HEALS Act will likely follow the same payment model. What is undecided are the eligibility guidelines. However, it seems like the negotiation is between keeping the eligibility guidelines the same or allowing more people to receive the payment. Therefore, people who were eligible for the CARES Act stimulus checks will likely be eligible to receive a second payment. The goal is for people to receive checks in the beginning of August.

Unemployment benefits: People who applied for unemployment for the first time due to COVID or were already collecting unemployment will receive a weekly payment on top of the ordinary unemployment benefits. People who were unemployed received $600 a week from the CARES Act. However, the HEALS Act would reduce the extra payment to $200 a week and over time increasing to $500 a week.

Payroll Protection Program (PPP): The PPP program provides forgivable loans to small business to cover payroll (and other costs) as an incentive to keep employees on the payroll. The HEALS Act is expected to target the hardest-hit small businesses with PPP loans. 

Employee retention tax credit: This tax credit program was introduced in the CARES Act. Companies receive tax credits for wages paid to their employees during the pandemic as another incentive to keep employees on the payroll. The HEALS Act proposes to include additional tax relief for companies who hire and rehire workers. 

Return-to-work bonus: If an unemployed person gets a new job and begins working at a previous job again, they will receive a bonus of up to $450 a week on top of their wages.

Renter assistance: The renter assistance programs proposed would help tenants pay their rent, help landlords pay expenses and put another hold on evictions for up to a year.

The next step is for the House to negotiate the terms of the act to finalize the bill. Hopefully, Congress comes to an agreement by next Friday, August 7th, which is the last Senate session before a month-long recess. 

We will keep you posted on any developments regarding the next stimulus package.

 

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