Ask the Real Estate Investing Expert

 by Travis Watts

60 Second Wealth Tip – Advice From My 80 Million Dollar Mentor

80 Million Net Worth Multi-Family Investor Buys…Muni Bonds?

I thought this was interesting and worth sharing. I have a personal mentor in my network worth approximately 80 million. He primarily invests in multi-family real estate; however, I recently discovered that he holds nearly 40% of his portfolio in tax-free municipal bonds. Upon learning this fact, my first thoughts was…why invest in an asset that yields 3% when you could invest in real estate and potentially have a much higher return? Then he explained the lesson. In summary, the lesson was about capital preservation, NOT potential equity upside or seeking the highest yield. In other words, this is a risk mitigation strategy for him.

After all… 32 million x 3% = $960,000 a year in tax-free income – Not bad

If you are reading this blog, you are probably a multi-family investor or have an interest in the asset class. Here are a few questions to ask yourself based on this lesson:

  • How do you rank the importance of capital preservation (protection of your initial investment) when it comes to investing in multi-family?
  • Do you diversify in any other asset classes?
  • How do you evaluate risk vs potential return when making an investment?

To Your Success

Travis Watts

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 by Alex

Syndication Expert Theo Hicks Walks Through Apartment Turnovers

If your business is apartment investing, you know good tenant relationships are critical to long-term success. Not only do you want to retain responsible renters, but you need a smooth process for turning over apartments when they move out. This step may sound simple, but its management affects your finances, tenant retention, and your reputation.

Syndication School instructor and Joe Fairless Best Ever Show podcast host Theo Hicks takes a turn in the guest chair to discuss apartment turnovers. He talks about inspecting a rental unit and organizing your information for efficient results. He shares his process and a free handy checklist that you can use in your inspections.

About Theo Hicks

Theo Hicks is a syndication expert who co-hosts the Joe Fairless Best Ever Show and the Apartment Syndication School education series. He also co-authors the Best Ever Weekly Newsletter and Blog, which presents strategies for passive investing, active investing, and managing commercial properties.

Joe and Theo recognized the need for quality guidance on getting started in apartment investing and syndication. Theo hosts free podcast courses that include worksheets and other documents for your business use. He also runs a private program for investors seeking mentorship on investing in commercial properties.

Trained in chemical engineering, Theo purchased his first multifamily property in 2015 and never looked back. His passion is the intersection of personal development and success. Here, he shares tips for smooth rental unit turnovers.

Turning Over an Apartment

If you’ve ever moved into a residence with some damage or broken fixtures, you know how frustrating it is. Sometimes, a management company or owner walkthough of a vacated property is too cursory and misses needed repairs. You want to do better for your apartments, and there are practical reasons why.

Protect Your Investment

First, you want to provide a high-quality residence for your tenants. Not only is it the right thing to do, but they will thank you by taking better care of the property. They will also stay longer, which lowers your costs and supports a stable neighborhood and property value.

Theo stresses that happy tenants help preserve your reputation. Active investing means your name is out there. People tend to write reviews when they have complaints rather than compliments. In today’s online world, your apartment complex could be reviewed on several websites and easily found in searches by prospective tenants. Business associates and vendors also check your reputation as part of due diligence. You want to model how to manage apartment investing well.

Dive into the Details

Each vacated apartment merits a detailed inspection. Theo advocates using a template checklist to standardize your process and ensure you don’t overlook anything. The list should have columns for noting any damage above normal wear and tear. You can deduct these items from the tenant’s security deposit.

If you find damage, you want to note whether it is a repair or replacement item. You will end up with an itemized list of what is ready for cleaning, what needs replacement, and what needs repair. This approach simplifies matters for your maintenance manager or vendors, such as the cleaning company.

Master Inspection Checklist

Theo cautions that you want to use a written checklist for each walkthrough. If you have done several of them, you may be tempted to rely on memory. However, it’s too easy to miss a small repair item that a new tenant will spot immediately.

If you focus on passive investing, you likely rely on a property manager or another owner to handle walkthroughs. Consider following up with them to ensure they are using a written process and documenting each turnover carefully.

Theo presents an overview of what to address for each section of your apartment. The below shows you the work scope you can expect, leaving full details to the checklist.

Outside and Mechanical

Theo recommends starting with the outside of your property and noting any issues. This is good practice regardless of whether a tenant has just moved out, as you can catch maintenance needs before they become serious. Also, check the unit’s patio, balcony, or yard for disrepair or landscaping needs.

Check the mechanical systems inside the unit, including HVAC and water heater. If the building has central HVAC, make sure heat and air are working in the apartment.

Laundry Facilities

The interior laundry room is a frequent site of water leaks and clogged connections that pose a fire hazard. If your building shares a laundry room, you can take the opportunity to do a spot inspection.

  • Washer and dryer operate normally.
  • Hardware connections are intact.
  • Hoses don’t have cracks or clogs.
  • There are no signs of water leaks, such as stains or warped flooring.

Interior Fixtures

Check fixtures such as lights that are common to all rooms. You want to ensure they work and don’t present a safety hazard.

Now is an excellent time to check walls and other surfaces, which can hide issues at first glance. Inspect walls, ceilings, baseboards, and flooring for cracks, nicks, stains, and holes. Look for mold or mildew that may need treating or indicate hidden water damage.

  • Light fixtures, bulbs, and switches work, are in good cosmetic condition, and are secured.
  • Electrical outlets work and are undamaged and securely fastened.
  • HVAC vents open and close. Air ducts are clear.

Entryway and Livingroom

Check the entryway interior and exterior for missing or broken items. The door should close smoothly, lock securely, and be free of damage or warping.

  • Windows open smoothly and stay in position. Glass is set securely in the frame. Locks work and are tightly installed.
  • All windows have screens in good condition.
  • Blinds and other window coverings operate smoothly and are in good condition.
  • Smoke alarms are present and operating.
  • If carbon monoxide detectors are installed, they work.

Kitchen and Bathrooms

These rooms are time-consuming to inspect because of heavily used fixtures and appliances. In addition to daily wear and tear, these areas also contend with moisture and heat.

Kitchen

You want to inspect and test each appliance even if it looks in good working order. Check the condition of each cabinet. Sometimes tenants don’t report minor maintenance issues.

  • The oven and broiler work on all settings and heat to correct temperature.
  • Range elements are intact and heat promptly and to correct temperature.
  • Range hood has a filter and working light and fan.
  • Refrigerator and freezer are operating at correct temperatures.
  • Refrigerator and freezer lights work. Shelves and bins are intact.
  • Ice maker and water dispenser operate without clogs. Replace the water filter.
  • Garbage disposal works.
  • Sinks and faucets function with no leaks or clogs.
  • Dishwasher works on all settings and doesn’t leak.
  • Microwave operates normally. Have it tested for leaks.

Bathrooms

You want to physically inspect each fixture to ensure it is working correctly and securely anchored. In Theo’s experience, escutcheons tend to loosen. An escutcheon is the metal plate covering the hole where plumbing pipes exit the wall. It can look intact but fall from the wall when touched.

  • Toilet is free of clogs and flushes without running.
  • Shower turns on and has expected water temperature and pressure.
  • Faucets have hot and cold water and operate without leaks.
  • Sinks drain properly.
  • The vanity has no damage.
  • Cabinets doors and drawers work.
  • Mirrors are intact.
  • Tile is free of mold, mildew, and damage.
  • Escutcheons are intact and well secured.

Bedrooms

Bedrooms and areas such as dining rooms have few fixtures and are straightforward to inspect.

  • Doors open properly, lock from the inside, and are free of damage.
  • Closet doors work and are in good condition.
  • Closet fixtures such as racks, rods, and shelving are intact and well-secured.
  • Hardware functions properly.
  • Mirrors are intact and anchored.

Take Final Inventory

Now that you’ve gathered your walkthrough information, it’s time to take inventory for your next steps. Do you need to make any repairs or replacements before renting this unit? The answer is likely yes, even with normal wear and tear.

At this point, you can quickly generate a list of replacements and repairs, by room or system, to give to your maintenance manager or vendor. After they address all items, the unit is ready for cleaning and a final walkthrough.

When you do the final walkthrough, try to see the apartment through a new tenant’s eyes. What’s your first impression? As Theo says, you should think, “Wow! I want to live here for a long time!”

If you standardize your turnover process, you’ll have happier tenants and better profits. Success lies in the detailed work behind an immaculate apartment.

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 by Theo Hicks

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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 by Travis Watts

Justifying College Tuition? – Check Out These Numbers!

Every year I am astounded by the rising cost of college tuition and I feel for the students lining up to pile on massive debt before they even have a chance to start earning an income or know what job opportunities might be on the other side of this 4-year commitment. USA Today recently published an article stating the average cost of tuition in the U.S. is now around $48,510.

It’s been more than a decade since I graduated from college and my perspective has not changed. At age 18, if I had to pile on $48,510 in debt in order to obtain a 4-year degree, I simply would choose not to attend. If I had $48,510 sitting in cash, I would question very seriously if a college degree was the best use for my capital.

Before the hate mail starts rolling in, allow me to clarify… I am not advocating that your high school graduate should not attend college; however, I do think it’s worth asking yourself the question:

What is the ROI (return on investment) from a 4-year degree vs investing that same amount of money?

I ran an analysis for educational purposes. I am well aware that college is not only about dollars and sense. There are certainly reasons to pursue a college degree despite the financials and there are many careers that 100% require a college degree. But since I am a nerdy numbers guy and an investor, I’m ran the numbers for those like me who are interested in this kind of “fun”.

College Tuition Cost 2020-2021

In addition to the USA Today article mentioned at the beginning of the blog, I came across an article on usnews.com which compares the annual cost of college from in-state public institutions, out-of-state public institutions and private colleges. We can conclude from the information and surveys conducted in these articles that $50,000 is a conservative figure for how much a student might spend on 4 years of college tuition these days.

How Much Do High School and College Graduates Earn?

Now that we know the average tuition costs, we need to better understand what a typical 4-year degree graduate earns in salary vs what a typical high school graduate earns. To help answer this question, I will reference The Bureau of Labor Statistics (BLS) which reports that Americans with a bachelor’s degree have median weekly earnings of $1,198, compared to $730 a week for those who have a high school diploma. To convert these into annualized figures, that is $57,504 (bachelor’s degree) vs $35,040 (high school degree).

Long-Term Investing Returns

I chose to use a 9% annualized return figure to represent the “alternative to college” investing scenario for two reasons. First, 9% is based on the historical stock market returns since inception (1926 to 2020) and secondly 9% is a conservative figure based on my actual real estate cash flow performance (2009-2020).

Let’s Compare The Two Scenarios:

Scenario #1 Johnny chooses to pursue a 4-year degree and spends $50,000 his parents saved for him to attend college. After graduating, Johnny finds a job that pays him $57,504 a year and receives 4% raises for the next 20 years. *Note: For sake of this example, I am not factoring in the added cost and complexities of financing the tuition; many students have this added to their plate as you and I know.

Scenario #2 Sally chooses to enter the workforce after graduating high school and ties down a full-time job earning her $35,040 a year and also receives 4% raises for the next 20 years. However, rather than spending the $50,000 her parents saved for her to attend college, Sally chooses to invest this capital into the stock market and real estate instead.

Now, let’s fast forward 20 years…

Scenario #1 Since Johnny spent the first 4 years after high school attending college, that means he has been earning a steady full-time salary for 16 years in a row and has been receiving 4% annual raises. Johnny now earns an annual salary of $107,703.91 thanks to the continuous 4% raises. In total, Johnny has earned $1,305,190 in his working career.

Scenario #2 Since Sally did not attend college after high school, she has been working for 20 years in a row and has been receiving her annual 4% raises as well. Sally now earns an annual salary of $76,776.95 thanks to the continuous 4% raises. In total, Sally has earned $1,085,160 in her working career. But wait! What about the $50,000 investment Sally made 20 years ago? The current valuation of her investment is now $300,457.58 thanks to the 9% annualized returns she’s been earning. When you deduct Sally’s initial contribution of $50,000, she has earned an additional $250,457.58 on top of her $1,085,160 salary earnings. Combined, Sally earned $1,335,617.58 compared to Johnny who earned $1,305,190.

Sally exceeded Johnny’s earnings over 20 years without a college degree AND she kept her initial $50,000 nest egg.

The Power of Investing Prevails!

On a serious note, college is a big decision and is offered at an ever-increasing cost. While college may have been a wise investment in 1971 when tuition was about 1/10th of the cost today, it’s worth asking yourself some tough questions if your children are considering attending:

#1 Is the decision to attend college based on social pressure, peer pressure or the negative stigma of “not attending”?

#2 How much of a setback would $50,000 of debt be on your child? How about $100,000 in debt? At what price, does college stop making sense?

#3 Does your child have a strong “WHY” for attending college?

#4 If your child’s desired career path does not require a college degree, then does college still make sense? Consider business owners, sales professionals, entrepreneurs, and vocational trades for example.

I’d love to hear your thoughts. Feel free to reach out with any comments or feedback. Thank you for reading.

 

To Your Success,

Travis Watts

 

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 by Theo Hicks

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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 by Amber Bagwell

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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 by Theo Hicks

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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 by Theo Hicks

Real Estate Investing Advice from 7 US Military Veterans – Happy Veteran’s Day

Many former US military service members become real estate investors after transitioning to civilian life.

Discipline, a strong work ethic, loyalty, collaboration, leadership, effective communication, problem solving and many more skills obtained in the military are also beneficial to growing a real estate business.

Additionally, because of their background, they bring a different perspective to real estate investing – things that civilians like me may not have thought of. Fortunately for you and me, many veterans have come on the podcast to share these unique insights.

In honor of Veteran’s Day, here is the Best Real Estate Investing Advice Ever from 7 US military veterans interviewed on the podcast.

1. Think Big, Act Small

Seth Wilson: Founder and Managing Director of Clarity Equity Group

Military experience: Four-time combat veteran of 14 years, and currently serves in the Missouri Air National Guard as a pilot of the C-130 tactical airlift aircraft

Episode: JF2208 Veteran To Founder

Best Ever Advice: Thing big but act small. When setting goals, always aim high. But make sure that you paying attention to the details and taking massive intelligent action every single day in pursuit of your goal.

2. Get Out There and Take Risks (That Won’t Destroy You)

David Pere: Founder of From Military to Millionaire

Military experience: US Marine Corps since 2008

Episode: JF2102 From Military to Millionaire

Best Ever Advice: Just get out there, do it, and take risks. Having a safety net (in David’s case, his job in the military) can give you more confidence to take greater risks. But, David did put a ceiling to the level of risk one should take – if you take a risk and fail, it shouldn’t utterly break you. That is, you should be able to mentally and financially dust yourself off, recover, and get back in the game. The greater risks you can take, the larger the payoff.

3. Find Your Own Unique Niche to Reduce Competition

Phil Capron: Multifamily investors and Senior Mentor with Michal Blank

Military experience: Naval Special Warfare Combatant Craft Crewman

Episode: JF1984 From the Military to Multifamily

Best Ever Advice: When in the military, Phil’s smaller special ops unit did the missions other crews weren’t able to. The other, bigger units lacked the tactics, training, equipment, or personnel. Similarly, Phil pursues deals and strategies that other, large operators aren’t willing or able to do.

Whatever the big operator’s investment criteria is his is the opposite. As a result, he has access to deals that they don’t have access to, which has allowed him to do deals in competitive markets.

Therefore, if you are having a hard time finding a deal, ask yourself what you can do differently to create a niche for yourself with minimal to no competition.

4. House Hacking and the Real Formula to Success

Eric Upchurch: COO and Co-Founder of Active Duty Passive Income and Senior Managing Partner at ADPI Capital

Military experience: Army Special Operations

Episode: JF1890 From Military Life to Civilian Work & Real Estate Investing

Best Ever Advice: First is to use the VA loan if possible (the similar option for civilians is the FHA loan). Zero (or minimal) money out of pocket for a cash flowing asset. Target a four-plex, live in one unit for at least one year and one day, and repeat. You will live rent free(ish) and/or generate cash flow each month.

Second was Eric’s real formula to success: “Learn, network, add value, take action. If you do those things over and over again, success will hunt you down.”

5. Always Follow Through with Commitments

Jamie Bateman: Founder of Labrador Lending

Military experience: Captain in Army Reserves

Episode: JF2224 Note Investing Strategies

Best Ever Advice: Jamie’s best ever advice was three-fold. First is to focus on your strengths and outsource your weakness to others. Second is to consistently think about how you can add value and contribute to something bigger than yourself – both in business and your personal life. Third is to just do what you say you are going to do. Keeping your word is very important. There are many people who make a commitment to do something and then disappear, never follow-up, or follow-up too late.

6. Set 10X Goals Based on Your Potential, Not Current Abilities

Vincent Gethings: Co-Founder and COO of Tri-City Equity Group

Military experience: 14 years in Air Force

Episode: JF2204 Investing While Overseas

Best Ever Advice: Set goals based off of your potential and not your abilities. Many people have limiting beliefs, which force them to set goals based on what they think they can accomplish based on their current experience, education level, relationships, etc. As a result, they set the bar extremely low. They use the SMART (specific, measurable, achievable, realistic, and time-based); Vincent hates SMART goals because of the R, realistic.

Instead, Vincent is more of an adherent to Grant Cardone’s 10X rule. Set big, scary, audacious goals, and then take massive action toward them. Don’t be realistic, because that doesn’t give you any chance to grow.

7. SHUT UP!

Bill Kurzeja: Owner and Founder of Professional Success South

Military experience: 8 years of service as a Sergeant

Episode: JF2155 sales Skills to Improve Your Business

Best Ever Advice: Shut up and listen. We have two ears and one month, so use them accordingly. In sales, most of the time people will tell us exactly what they want and how to win them over. We just need to listen, use the information, and apply it back. This starts by setting the table – that is, proper preparation beforehand, which includes research and practice.

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 by Theo Hicks

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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 by Theo Hicks

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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 by Joe Fairless

Bruce Petersen Mentors You on Syndication

Many real estate investors are eyeing syndication as a lucrative next step. If you’re thinking about sponsoring a passive investing partnership, syndicate expert Bruce Petersen has hard-earned wisdom for you. Bruce is the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, focusing on multifamily property investing and management. He’s also the author of “Syndicating Is a B*tch”. A recent guest on the Joe Fairless Best Ever Show podcast, Bruce discusses the power of mentorship and other tips to make your launch into syndication a success.

 

About Bruce Petersen

 

Bruce is a late-blooming entrepreneur who found syndication after 20 years in retail. At 43, burned out from 100-hour weeks, he took a break to evaluate what to do next. After researching real estate, he found an excellent mentor, a relationship that changed the course of his life. His mentor was a buyer’s broker for multifamily properties. Soon Bruce had purchased his first syndication property, which yielded an impressive return. He was hooked.

 

Since then, Bruce and his wife Stephanie, who serves as CFO, have acquired multifamily properties in Texas. Their goal is to provide an exceptional living experience for tenants from all walks of life. Bruce also serves as a mentor and educator. He recently released “Syndicating is a B*tch”, a book that tells the raw truth about syndication’s difficulty and challenges.

 

Find the Right Mentor

 

If you’ve considered a formal mentor but think it’s too costly or sensationalized, Bruce has some advice. His mentorship with the multifamily broker catalyzed his success more quickly and professionally than he could have achieved alone. Why reinvent the wheel when experts have already created it? Your effort will net a higher return if you leverage their knowledge and experience.

 

Bruce notes that mentorship has gotten a bad rap in the business due to hucksters who hype themselves as gurus of a lavish investor lifestyle. These people are not mentors. Good mentors walk the walk, are successes in their field, and have verifiable track records. They are honest about what they offer you and don’t overpromise.

 

Mentorship Is Cost-Effective

 

Most mentors charge for their services. If you balk at this, says Bruce, consider the cost of a college education. People often spend $50,000 or more as undergraduates and $200,000 or more with graduate or professional school. Then there’s the opportunity cost of four to 12 years of lost endeavors and income. Ultimately, many people end up in jobs they dislike or didn’t prepare for.

 

In contrast, the right mentorship can teach you how to run a lucrative business you’ll enjoy. Syndication is hard and full of unforeseen challenges. If you’ve never done it before, you’ll encounter obstacles you’re not prepared to manage. A mentor will coach you on all aspects of the business and slash your learning curve to self-sufficiency. Bruce’s bottom line: “You do need a mentor. Don’t do this alone.”

 

Find Your Investors First

 

Bruce notes that many new investors ask if they should find property or raise financing first. Though you may be eager to hunt for the ideal multifamily, he advises starting with the money. It’s too easy to get to the table without your financing locked. Think about it: This happens all the time with primary residential purchases. Syndication has significantly more risks and variables.

 

Meanwhile, you’ve tied up the property for one or two months, and people will remember that. If you withdraw from a deal at the last minute due to a lack of funds, word will spread that you can’t deliver. You’ll be just another enthusiastic greenhorn who didn’t prepare.

 

Raise Twice the Money You Think You Need

 

According to Bruce, you should raise at least twice as much financing as you think your property will cost and preferably three times as much. For example, if you’re targeting a $500,000 cash property, plan on raising $1 million to $1.5 million.

 

Over raising can be a tough sell to prospective investors but will likely save the deal. You should assume at least half of your pledged investors will bail. Some may have personal situations arise, while others may get cold feet. Build this likelihood into your financials, and it won’t derail your plans.

 

If you’re contemplating your first deal, consider these typical costs in your estimate:

 

  • Down payment
  • Closing costs
  • Rehabilitation costs not covered in the loan
  • Operating expenses

 

Then double or triple that total to arrive at your investment target.

 

Get Out There

 

Real estate investors are like successful salespeople: They need good personalities. You are selling potential investors on your opportunity, but you are selling them on you most of all. If they don’t like you or smell an ethical rat, they’re gone.

 

Bruce describes how he told one excited man at a syndication event to find another venture. Why? Though the man could finesse spreadsheets and was motivated, he was a self-described jerk and misanthrope. According to Bruce, that’s a deal-breaker.

 

You don’t need to be an extravert, but you do need to meet people and have them like you. Bruce found the investors for his first deal from a meetup group he started. He had no experience or even a job, but the members got to know him over many months.

 

If running groups doesn’t suit you, there are many existing ones to join. Bruce suggests attending events from experts such as Joe Fairless, Jake and Gino, and Michael Blank to network with like-minded people.

 

You’ll also learn a tremendous amount by immersing yourself in the world of passive investing. Many groups and events feature free or low-cost training in webinars, videos, books, and more. Simply by interacting with people, you will learn from their experiences and stories. They, in turn, will learn from you.

 

Lead With Your Best Self

 

Here are Bruce’s straightforward tips for networking success. If you’ve dealt with pushy colleagues who were all flash, you know these bear repeating:

 

  • Be genuine
  • Dress the part
  • Present dignity and confidence
  • Keep your ego in check

Know Who You Are

 

When you watch Bruce captivate a large audience, you might assume he can command any networking situation he encounters. The truth, he says, is that he’s an introvert who dreads working a room. Having to start small talk with strangers leaves him frozen and awkward. Instead, he lets his wife engage people, and then he joins the conversation. On the flip side, Bruce is a natural on stage, whereas his wife avoids it.

 

The takeaway is to know who you are, play to your strengths, and manage your weaknesses rather than pretend they don’t exist. Networking is the backbone of real estate investing, so if certain social situations make you uncomfortable, don’t avoid them. You could be leaving valuable contacts and information on the table. Instead, find a way to adapt gracefully.

 

Present Yourself Professionally

 

Dress the part, as strangers will remember your first impression. Bruce is not a fan of the image of the “millionaire next store” in cheap clothes. Instead, he suggests dressing at or above your means to project confidence and professionalism.

 

This attention to presentation doesn’t mean overspending to achieve an image. Such overreach financially sabotages your goals and ultimately undermines your self-confidence. However, you do want to appear you belong in the room. Some creative shopping can net you a well-priced and polished wardrobe. Don’t forget other basics such as professionally printed business cards, quality accessories, and a clean car.

 

Be Honest About Your Experience

 

Many people wonder how to present themselves to potential investors if they have no experience. If you lack experience, say so. You want to be transparent, Bruce notes, but confident. Every investor out there started somewhere.

 

You should offer people a solid idea of the type of property you plan to purchase and why. Have your elevator speech ready just as you would for a traditional job. For example, “I’m targeting a 30 to 50-unit multifamily property in Raleigh, built between 2000 and 2010.” As the conversation continues, you can explain why.

 

Be mentally prepared for rejection. Some potential investors won’t like your inexperience, your approach, your personality, or your shirt. That’s their prerogative, so stay calm and move on. When starting out, Bruce once had a man laugh in his face. Bruce expressed his understanding and politely excused himself to meet others in the room.

 

Is Syndication Right for You?

 

The syndication investor lifestyle isn’t for everyone. You need confidence, good people skills, and an entrepreneurial spirit. You should also have grit and the humility to learn from others. In this business, you will encounter shockers you couldn’t make up. As Bruce notes, we are living in an era of black swans, so expect more of those, too.

 

Bruce points out that there are many ways to make excellent money. You don’t have to choose syndication or even real estate. However, if you decide syndication is for you, then leverage the quality resources available to create your roadmap.

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 by Joe Fairless

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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 by Travis Watts

Accredited Investor Status – What It Means For You

Let’s take a look into the term “accredited investor”. Every week I have the privilege to speak with investors who are excited to start investing in multifamily syndications or real estate “private placements”. These investors are usually on the search to find access to deals. Since I am a full-time passive multifamily investor myself, I’m always happy to lend a hand, however, it is important to note that many operators and general partners in this space require an accredited investor status to participate in their offerings.

What does accredited investor mean anyway? Besides a designation that gives a person access to private placement investment opportunities.

According to www.investor.gov the SEC (Securities and Exchange Commission) definition of an accredited investor, in the context of a natural person, includes anyone who:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). 

 

There are other ways to qualify which can be found on www.sec.gov but for the purposes of this blog, I’m going to assume most of the audience falls under the individual accredited investor status.

 

Why Accreditation Exists

The SEC created this definition to identity investors and entities who are considered “sophisticated” and are able to absorb a potential financial loss. Essentially, the criteria was created as a protective measurement to protect inexperienced investors from getting into riskier projects; especially because they may not have the financial means to cover a loss. Additionally, the SEC uses this label to regulate investment companies against advertising to or soliciting investments from non-accredited investors. 

The Advantages to Being Accredited

In short, the advantage to being an accredited investor is that you have an opportunity to hear about more deals, gain access to them, and ultimately invest in those deals if you choose. A few examples of accredited investor opportunities may include:

  • Real Estate Syndications (Private Placements) 
  • Angel Investing / Venture Capital
  • Hedge Funds

Becoming an Accredited Investor

It’s really quite simple to “claim” accredited investor status. In fact, some private placements only require self-qualification. Essentially, you check a box as part of the legal documents process that certifies you are an accredited investor and by which method you meet the qualification requirements. There are of course, additional disclaimers and fields where you confirm that you understand the implications involved. 

In other types of private placement offerings, such as a 506(c), you may be required to submit a letter of verification from a CPA, attorney, broker-dealer or a third party verification service such as www.verifyinvestor.com. In any case, you should only certify that you are an accredited investor if you actually are. If you falsely claim that you are accredited, it could cause some legal ramifications down the road for you and the company you invest with.

Summary

Ultimately, being an accredited investor allows you access to additional investment offerings and opportunities that most do not have access to. If you are actively looking for deals and talking to investment firms in the industry, it is likely that you will come across opportunities for accredited investors only. Keep in mind that this is for compliance and regulation purposes. If you are not and accredited investor, don’t worry, there are plenty of investment opportunities available that you may be able to participate in as a non-accredited but “sophisticated” investor. I will cover this topic with more detail in an upcoming post. 

To Your Success

 

Travis Watts 

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 by Joe Fairless

7 Free and Paid Online Services to Generate Off-Market Apartment Deals

There are many ways to market for off-market deals. Direct mailing campaigns, cold calling, cold texting, bandit signs – the list goes on and on. However, before you decide how to market to apartment owners, you need the names and contact information of the apartment owners.

In this blog post, I am going to outline the best online services active real estate investors use to generate these types of apartment owner lists.

I’ve broken the services into three categories: free, budget-friendly, and professional.

The free services won’t cost you a dime. However, tradeoff is that the time investment is greater and/or the list generated is more generic.

The budget-friendly services require a lower investment amount and allow you to generate more customized lists.

The professional services are the costliest but also the most robust. These are one-stop shops for creating hyper-targeted lists and will offer other services that will help you grow your apartment investing business.

The Free Services 

 

LoopNet

Many multifamily investors I’ve interviewed find deals on LoopNet. But LoopNet is an online listing service, so the deals are all on-market.

Antoine Martel (whose full interview you can listen to here) uses LoopNet to generate off-market leads. 

First, he compiles a list of brokers in his target market using the “find a broker” search function. 

Then, he emails each broker, introducing himself, providing relevant details on his background, expressing his interest in buying an apartment, and providing his investment criteria. Every two weeks thereafter, he sends a follow-up email to each broker. 

The follow-up emails begin with a standard template, reminding the broker of his investment criteria, and ends with evidence indicating his ability to close. He said, “every month I would change up that final sentence to tell them why I had cash, why I would be able to close, that I just sold something or I just refinanced something and got the money to be able to close.”

Whenever a broker sent Antoine a deal (on-market or off-market), he would provide his feedback in a timely manner. If the deal does not meet his investment criteria, he would respond saying “Hey, this deal is just way too overpriced. I can’t make this make sense at this price but keep sending me stuff that you have.”

There are four main benefits to this strategy. Firstly, it is free. Anyone can log onto LoopNet, create a list of brokers, and send them emails. Secondly, once the list is created, the time investment is minimal. Because of his template, Antoine says he can follow-up with 20 brokers in less than 30 minutes. Thirdly, you know the owner is interested in selling. The owner expressed interest in selling to the broker, so you can skip the part of the negotiation where you need to convince them to sell. Lastly, you build relationships with brokers, which will ideally result in more off-market deals in the future.

The main drawback is the lack of precision in targeting deals. Rather than targeting specific properties, you are targeting brokers. Therefore, unless they are hyper-focused on deals that meet your investment criteria, it may take a long time before you receive an opportunity that matches your investment criteria. Antoine followed this strategy for nine months before buying his first deal.

Commercial Real Estate Brokerage Websites

You can also follow Antoine’s same strategy but rather than locating brokers on LoopNet, you can locate brokers on the websites of the top multifamily brokerages in the market.

Using Google, search “commercial real estate brokers in (market name)”. Oftentimes, you can find the contact information of a broker in that office. But sometimes only a general office phone number or email is available. If it is the latter, call/email to obtain the contact information of a broker in that office.

Once you have a broker’s contact information, follow Antoine’s strategy outlined in the “LoopNet” section.

County Auditor Site

Another free way to generate lists online is with the local county auditor site. Most US counties have auditor (or sometimes called appraisal) websites where information is recorded on every piece of real estate in the county. Most, if not all, are free to access. 

At the very least, the auditor site will have a “property search” function where you can input information and output a list of properties. Typically, the larger the county, the more advanced the search function. With an advanced search function, you can use more filters to generate a more specific list. But usually, there are only a handful of relevant filters at most.  

In addition to the “property search” function, you may be able to download pre-created lists, like delinquent taxes, foreclosures, recent sales, etc. However, the type of lists (if any) that are available and how easy they are to locate on the website will vary from county-to-county.

How you download the information will also vary from county to county. In some counties, you can quickly download a list with every property in the county or more narrow lists like the ones mentioned above. In other counties with less robust websites, you will need to manually log the data. 

The major benefit of this strategy is that it is free. Also, you will have access to the same data that is pulled from the paid services like ListSource and PropStream.

However, there are a few drawbacks. First, since each auditor site is created and managed by the county, no two websites are the same. Therefore, the ease in which you can generate a list will vary from county-to-county. You will not be able to quickly generate a list or download a pre-created list on every county website. 

Another drawback is that even if you are able to quickly generate a list, it will likely be generic. Maybe it is all buildings with more than 5 units. Or maybe it is every building in the county. Therefore, once you download the list, more work is required to filter out all the irrelevant properties. 

Also, since you are pulling public records, the owner’s name will likely be an LLC. Therefore, additional effort will be required to identify the true owner’s name and contact information (see the “ListSource” section below for more details on how to skiptrace the owner’s contact information).  

Lastly, unlike the first two services where every deal has an owner who is interested in selling, only a portion of the properties in the list will reply to your outreach, let alone be interested in selling.

If you have a hard time locating the search function or lists on a county auditor website, I recommend emailing or reaching out to the webmaster for assistance.

 

The Budget-Friendly Services

 

ListSource

ListSource, a product provided by CoreLogic, can be used to generate a custom list of apartments based on data pulled from public records. 

You can generate a list in one of two ways. Firstly, you can use their “quick lists” function to download a list based on standard criteria. Examples of the quick lists are absentee owners, estimated equity (to determine if they are underwater or have lots of equity) and foreclosures. 

The other way is to use their “Build List” function to generate a completely custom list of apartments. A list is created using “Build List” in six steps:

  1. Filter by geography (city, area code, census tract, county, MSA, etc.)
  2. Filer by mortgage (loan-to-value, maturity date, loan type, interest rate, etc.)
  3. Filter by property (number of units, equity, sale date, property type, year built, total assessed value, etc.)
  4. Filter by demographic (age, occupation, martial status, income, etc.)
  5. Filter by foreclosure (pre-foreclosure, auction, REO, and respective details)
  6. Filter by other options (owner occupied status, trustee-owned properties, corporate-owned properties, and address completeness requirements)

Once you’ve completed step six, ListSource will tell you the total records available based on your filters.

One of the benefits of ListSource is that you can access the “Build List” function for free. This means you can see the exact filters available, as well as how many apartments will be on the generated list. However, there is a cost to download the list. You can either pay per list or select from a variety of subscription options.

James Kandasamy (whose full interview you can listen to here) uses ListSource to create lists of apartments with owners who may be motivated to sell. He uses the geography filter and the property filter. For the geography filter, he selected his target market. For the property filter, he selects the number of units and the sales date. He focuses on apartments owned for more than five years. He said, “most of the time the sellers who are selling the property within the past two or three years didn’t build enough equity to give you a good deal. The owners who have the property for more than five years may have bought it at $15,000 to $20,000 a door, but they don’t mind selling it to you are $40,000 because for them it’s a good deal, even though the market is at $50,00 a door.” Once the list is generated, James will then text the owners. 

Cory Boatright (whose full interview you can listen to here) targets all properties of a certain size (75 to 150) in his target market. He found that most apartment investors assume “just because [the owners] have 100 units or more that they’re happy and everything’s great, and their bigger than everyone else” whereas the truth Cory discovered is that “these people are still motivated.” Cory sends owners direct mailers. But rather than basic postcards, he sends FedEx packages or envelopes with the words “urgent” on the front.

Another drawback of ListSource is that most of the owner names generated on ListSource for apartments are LLCs. Therefore, you must use a skip tracing service to locate the owner of the LLC. James uses TLO, because “it’s the best way to find the direct owners.” A manual and much slower way to locate the owner of the LLC is through the Secretary of State corporation search function (which is what the paid skip tracing services do). 

Cory locates the owners of LLCs using a few skip tracing services – American Tracers, IDI, and delvepoint, with the latter two being harder to set up but having the best data.  

Another skiptracing service is skip genie, whose founder, Larry Higgens, I interviewed on my podcast (which you can listen to here).

Also, like building a list on the county auditor site, you don’t know how many (if any) of the owners are actually motivated to sell their apartment.

PropStream

PropStream’s capabilities are in-between ListSource and CoStar/YardiMatrix. PropStream pulls the same (or similar data) as ListSource but the way you search and the resulting outputs different. On PropStream, you search and filter your list using a Dashboard. You input your market, select the filters and the output is a map will all the properties that meet that criteria. 

Besides the map Dashboard, the other major difference between PropStream and ListSource is that PropStream has built in skiptracing capabilities – for a fee. PropStream will append an LLC’s owner’s contact information to the generated list, which means you won’t need to download the list and use a second service to locate the actual owner’s contact information.

PropStream is Dan Schwartz’s (whose full interview you can listen to here) preferred list generating service because of the built-in skip tracing feature. He said “You can use a tool like PropStream and within five minutes get a whole list of phone numbers for vacant houses in your target market.”

Jessie Neal (whose full interview you can listen to here) also uses PropStream. He said “you can go to county records if you don’t want to pay for a service [like PropStream]. I’m a big fan of paying for a service because it saves time.”

Unlike ListSource, you do not have access to PropStream’s Dashboard before buying a subscription. 

Also, like building a list on the county auditor site and ListSource, you don’t know how many (if any) of the owners are actually motivated to sell their apartment.

 

The Professional Services

 

CoStar

CoStar is a one-stop shop for all things commercial real estate. Generating lists of off-market deals is just one of many different services provided by CoStar. Because of the level of detail on the commercial properties in CoStar’s database (which comes from public records and CoStar research), you can select from countless filters to generate a list of potential deals. Based on your filters, like PropStream, the results are available presented on a map.

A major advantage of CoStar is that the list generated will include the contact information of the true owner at no added cost. This is a massive time saver since you aren’t required to skip trace to find the true owner. This is the main reason why Dylan Borland (whose full interview you can listen to here) uses CoStar to build multifamily lists. He said it “does give us the owner’s name, address, the true owner, and then their phone numbers.”

Another major advantage of CoStar are the extra tools in addition to creating lists. CoStar has very detailed and robust property level information, sales and rent comparable data, market data and KPIs, historical performance data of the property, etc. You can quickly generate professional reports on the market or submarket the deal is located in. Also, many Best Ever Interview guests said that CoStar news is there go to resource for market intelligence (Anthony Scandariato, Dan Hanford, David Toupin, etc.) 

A drawback of CoStar is its cost. Dylan pays $350 per month for access to CoStar’s database, which is a discounted rate because he has broker’s subscription. Cory Boatright (who is mentioned in the section on ListSource) says a CoStar subscription is $25,000 to $30,000 for an individual user. 

There is a quick and inexpensive way to access CoStar. Cory says you can access CoStar is through a commercial broker who already has a subscription. However, there will still be a cost incurred to you in the form of the broker fee since they will want to represent you on any deal you find through CoStar.

The only other drawback, like building a list on the county auditor site and the budget-friendly services, is you don’t know how many (if any) of the owners are actually motivated to sell their apartment.

YardiMatrix

YardiMatrix offers essentially the same services as CoStar. You can create detailed lists and generate a map of the results. The owners contact information is also generated. You can access sales comparables, rent comparables, property information, and historical performance data to help with underwriting. You can generate professional market and property reports. It also shares in the same drawback as CoStar – the subscription is over $10,000 per year.

However, one advantage YardiMatrix has over CoStar, according to Rob Beardsley (whose full interview you can listen to here) is better the sales and loan data. This means there are more sales and mortgage-related filters compared to CoStar.

 

So which service is the best? Well, like all things in real estate, it depends.

If you are just starting out, the free options are likely the best since your business isn’t generating income.

Once you begin to generate income and want to create a market budget continue to scale, the ListSource and PropStream are best.

If you are a large company (own thousands of units) and are willing and able to spend tens of thousands of dollars to generate highly customized lists, as well as benefit from the additional bells and whistles, CoStar and YardiMatrix are the best.

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 by Travis Watts

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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 by Joe Fairless

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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 by Travis Watts

The CashFlow Quadrant – How I Save Thousands on Taxes (Legally) 

One of the most life-changing discoveries came to me years ago when I realized I was earning income the wrong way. This was uncovered when I read the book, “Cashflow Quadrant” by Robert Kiyosaki. It’s a powerful book that helped guide me to become a full-time investor and to make financial freedom a top priority. Additionally, this book has single-handedly helped me save thousands in taxes over the years.  

Source: https://www.richdad.com/taxes-stealing-your-money

 

As you can see in the diagram above, each quadrant (E, S, B and I) represents a different way to generate income. Some people earn money in only one of the quadrants, while some earn money in multiple quadrants. There are advantages and disadvantages to each quadrant.

The two quadrants on the right side (B and I) are the primary paths to financial freedom. The majority of the Cashflow Quadrant book is about the unique skills and mindsets required to succeed on this path. If you haven’t checked out this book, it’s a worthwhile read. You can learn more here.  

Let’s Explore Each of The Four Quadrants:

E – Employee

An employee earns income via a job. This is the quadrant where most people earn their income. The job itself is owned by a business, which could be a single person or a large corporation. The employee exchanges his or her time, energy, and skills to an employer in exchange for a paycheck and often other benefits such as healthcare coverage and/or a retirement account match.

Employees can make a little or a lot of money, but when an employee stops working, or if the business goes under, the income stops.

The lack of control over income is a serious consideration of the E quadrant and something I became intimately aware of when I worked in the oil industry and layoffs began to occur around 2015. An employee’s financial freedom is dependent upon the success of the employer and the ability to show up to work and exchange time for money. 

Kiyosaki points out that the reason as to why most E quadrant workers pay around 40% of their income in taxes (as shown in the diagram above) is simply because most personal expenses aren’t deductible. You can’t, for example, deduct the expense of your personal car from your taxable income. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information. 

 

Tax Example: 

Federal Tax: 27% 

State Income Tax: 5% 

Social Security Tax Rate: 6.2% (half paid by the employer) 

Medicare Tax Rate: 1.45% (half paid by the employer)

Total = 39.65% in Tax

 

S – Self-Employed

Many employees eventually get tired of the lack of control over their pay and schedule and choose to work for themselves instead. A self-employed individual still exchanges time for money, but they “own” their job. 

Common examples of the S quadrant workers include dentists, doctors, insurance agents, realtors, handymen, among many other skilled trades. It is possible as a self-employed individual to earn a large income, but like an employee in the E quadrant, when they stop working, so does their income.

Self-employed workers have more control compared to an employee, but more often than not, they also have more responsibility. As a result, success usually means working harder and working longer hours. Over time, this can lead to burn out and fatigue as I also experienced first-hand in 2015 when I was actively investing in real estate with fix and flips and vacation rentals. 

Kiyosaki points out that the reason why most S quadrant workers pay the highest taxes, around 60% of their income (as shown in the diagram above) is that Social Security and Medicare Taxes are paid 100% by the self-employed individual (they are not split by the employer as is the case with an employee). Additionally, an S quadrant individual often earns more income compared to an employee and therefore can be in a higher tax bracket. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

 

Tax Example: 

Federal Tax: 37% 

State Income Tax: 5% 

Social Security Tax Rate: 12.4%

Medicare Tax Rate: 2.9% 

Total = 57.3% in Tax

 

B – Business Owner

Those in the B quadrant own a business system and they lead other people. In this quadrant, the business often has 500 or more employees. The systems and employees who work for the business can run successfully without the business owner’s daily involvement.

Unlike the S quadrant where a plumber, for example, might own and work in his own plumbing business, a B quadrant business owner might create a plumbing company and hire 500 or more plumbers, administrators, managers, and other staff to run the systems in the company.  

 

The wealthiest individuals in the world typically own B quadrant businesses. A few of these individuals include Bill Gates of Microsoft, Jeff Bezos of Amazon, and Mark Zuckerberg of Facebook.

Kiyosaki points out that the reason why most B quadrant business owners pay around 20% in taxes (as shown in the diagram above) is because businesses can deduct a wide variety of expenses from the income of the business, which can lower the businesses income taxes. Additionally, the recently passed Tax Cuts and Jobs Act in 2017 allows for a qualified business income tax deduction of an additional 20% for eligible businesses. You can learn more here. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

Tax Example: 

C-Corporation Flat Rate Tax Rate = 21% 

Total = 21% in Tax

 

I – Investors

Now to my favorite quadrant. The I quadrant is comprised of investors who own assets that produce income. This is the quadrant for truly passive income.

Investors in this quadrant have usually accumulated capital that was earned in one or more of the other quadrants and now they place that capital into income-producing investments to produce even more income. This is the magic formula for financial freedom. 

For example, an investor might purchase shares of a company privately or publicly owned in the form of stock. This influx of capital from the investor helps to fuel the systems created by the business owner, and this fuel can lead to even more growth in the business and for everyone involved. Investing in real estate is a common example of an asset that can produce passive income from collected rents and other income-generating aspects on the property. Investing passively in private placements (apartment syndications) has been my preferred asset class in the I quadrant. 

Kiyosaki points out that the reason why most I quadrant investors often pay as little as 0% in taxes, legally (as shown in the diagram above) is that long-term capital gains tax rates (for assets like stocks or real estate held the long-term) are between 0% and 20% depending on the individual’s tax situation. You can learn more here. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

 

Tax Example: 

2020 Long-Term Capital Gains Tax Rate (For Single Individuals) Earning $78,750 or Less = 0% 

Total = 0% in Tax

 

Conclusion:

There are many paths to financial independence, but most of them lead to the right side of the Cashflow Quadrant – B and I. If you want to achieve financial freedom, it will pay to learn the skills and mindset required to make this move to the right side. I have earned income in the E, S, and I quadrants but the I quadrant has been the most impactful. This is because of a concept I refer to as “Time Freedom”. Which to me, means having freedom and flexibility over your time. When you have more passive income than you have lifestyle expenses, you become financially free. This is where a new world of opportunities and possibilities open up and the world becomes your oyster.     

To Your Success

Travis Watts 

Disclaimer: Travis Watts does not provide tax, legal, or accounting advice. This material in this blog/article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction, investment, or other change. 

 

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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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 by Joe Fairless

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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 by Travis Watts

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 Statistics. You 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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 by Joe Fairless

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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 by Joe Fairless

How to Create a Compelling Property Management Incentive Program

As an apartment syndicator, your most important team member is their property management company. The property management companies main responsibilities are to manage the day-to-day operations and implement your business plan.

However, what if – due to market conditions or lack of skill on the part of the property management company – the your net operating income projections aren’t being met? Occupancy is low. Collections are struggling. Rental premiums aren’t being met.

One strategy to turn operations around, or to avoid operational challenges all together, is to create a property management incentives program.

Why Create an Incentive Program?

An incentive program creates an alignment of interest between you and the property management company. The better they perform, the more money you, and your investors, and they make.

What is an Incentive Program?

An incentive program is an agreement between you and the property management company in which the property management company is given an objective, and if they complete the objective, they are rewarded.

Two Types of Incentive Programs

Incentive programs fall into one of two categories. 

  • Type 1: Incentive programs that begin at acquisition and end at sale. 
  • Type 2: One-off incentive programs that end after a fixed amount of time.

Examples of Type 1 Incentive Programs

The most obvious and common is a program in which the objective is to effectively manage the property and the reward is a property management fee equal to a percentage of the collected income. Plus, they aren’t fired.

Other objectives are investing their own money in the deal, acting as a loan guarantor, or bringing on their own investors. The reward for all three is more equity or cash flow.

You can also create type 1 incentive programs for key performance indicators, or KPIs. For example, the objective is to grow total revenue by a certain % each year. Or maintaining or exceeding a specified occupancy rate. 

Just make sure the objective results in alignment of interest. For example, a bad objective is to grow the occupancy by a certain percentage each year, because there is a maximum occupancy rate. Once they achieve high-90’s, it will become impossible for them to achieve their objective without first sabotaging occupancy so that they can then increase occupancy again to receive a reward.

Examples of Type 2 Incentive Programs

Type 2 incentive programs are used when you want to target a specific KPI that is underperforming. For example, if occupancy drops below 90%, you can create an incentive program. The objective is to achieve a specified occupancy rate within a specific time frame (i.e., achieve 95% occupancy within two months). 

Once the desired objective is achieved, they receive a reward and the incentive program expires.

Type 1 vs. Type 2 Incentive Programs

Both incentive programs can be beneficial.

The type 1 incentive programs create alignment of interest from the start. Whereas the type 2 incentive programs can be used during the business plan to improve a specific lagging KPI. 

However, you need to be careful and mindful when creating incentive programs. For example, if you set an occupancy-based type 1 incentive program (i.e., maintain 95% occupancy), the management company can accomplish this goal by offering unnecessary concessions to increase occupancy. Or for a “number of new leases”-based incentive program, the management company can let in unqualified renters to inflate the number of new leases.

Therefore, type 2 incentive programs are the ideal option for KPI-based objectives. If a KPI is lagging, target it with an incentive program. Whereas the type 1 incentive programs are ideal for non-KPI-based objectives, like effectively managing the property, investing in the deal, etc.

Other Best Practices

The objective of the incentive program needs to be realistic and attainable. For example, an objective to raise occupancy from 85% to 100% in two weeks is too unrealistic. A good strategy to ensure that the incentive program is practical is to plan a brainstorming session with key members of the property management team and discuss objectives and rewards.

Also, be creative with the rewards. They can be financial based, like a gift card or bonus. However, other reward ideas are dinners with you or someone in your company, an extra paid vacation day, a free education or training course, a special trophy or plaque, etc. 

Lastly, the best incentive programs do not punish property management companies for failing to achieve the objective. If they miss the mark on an incentive program, don’t reduce their management fee. However, this doesn’t mean that you NEVER punish (i.e., fire) a property management company. 

Overall, incentive programs are a great way to create extra alignment of interests with your property management team and can help you target specific KPIs that are lagging behind.

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 by Joe Fairless

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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 by Travis Watts

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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 by Joe Fairless

“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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