Professional Documents
Culture Documents
Commercial RE Course by Peter Harris
Commercial RE Course by Peter Harris
Manager
You're about to discover how to hire a great commercial property manager as well as when
and how to fire a lousy one. You'll learn the 3 main goals of a property manager, 3 powerful
advantages to hiring manager (versus managing the property on your own), the single most
important thing to look for, the best ways to find them, the 10 most effective questions to ask
in the interview, the top 3 red flags to watch out for, tips on managing your manager and
specific action steps that will set you apart from the crowd. All you need is one great property
manager to build an fortune in commercial real estate and this training will show you how to
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3 Ways to Find Commercial Property Managers
1. Referral from Another Local Investor
2. Commercial Brokers
3. Online Search: AllPropertyManagement.com, IREM.org, Yelp.com
Next Steps
1. Build and nurture a strong relationship when you find a good property manager
2. Send a "Thank You" note
3. Reward them with a management contractor
All you need is one great commercial property manager to build an
absolute fortune in real estate.
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property. In this detailed training, you'll discover 4 powerful reasons to invest in Office
Buildings, the big difference between office and residential real estate, 3 Office Building
basics, the different types of Office Buildings and which one you should avoid, 10 key
Office Building investing terms that you must know, the ABCs of office leases, possible
Office Building pitfalls to watch out for, the most important thing when choosing a
Tenant and the top 3 trends affecting office buildings today.
https://youtu.be/HNZdKNaGOeA
PART 3: 3 Office Building Basics (8:18)20% of all Commercial Real Estate in the
United States are Office Buildings but it is the most volatile property type of all
commercial properties.
(1) Economy
White Collar Job Growth: To get job data, go to the United States Bureau of Labor
Statistics
Economic Growth: to get local economic data, go to the Local Chamber of
Commerce Business Development Department
(2) Supply and Demand
Vacancy Rate for the Area
Absorption Rate for the Area
Local Market Supply
(3) Real Estate Cycle
Office cycle mirrors the economic cycle but lags by 4-5 months
PART 4: Different Types of Office Buildings (14:31)
3 Main Different Types
High-Rise: Skyscrapers
Mid-Rise: 3- 24 floors
Low-Rise: 1 - 3 Floors
3
Types of Tenants/Properties
Government
Medical
Business Park
Research and Development
Office Condo
Office Building Classes
A Class: Trophy, High Rents (Not for us individual investors)
B Class: Older, Good Quality Tenants (Ideal for individual investors like us)
C Class: Oldest, Least Desirable (Not for Beginners, Ideal for Value Add Investors)
PART 5: 10 Key Office Building Investing Terms You Must Know (19:45)
1. Gross Area
2. Rentable Area / Gross Leasable Area (GLA)
3. Price Per Square Foot
4. Gross Rent
5. Lease Type (Gross Lease, Modified Gross Lease, Triple Net Lease)
6. Reimbursments
7. Common Area Maintenance (CAM) Charge: Repairs, Hallways, Cleanings, etc
8. Tenant Improvements (TI): Allowance landlord gives the Tenant
9. Operating Expenses: Insurance, Taxes, Repairs, Roof, etc.
10. Capitalization (CAP) Rate: Net Operating Income / Sales Price
PART 6: ABCs of Office Building Leases (24:14)
Gross Lease: Benefits Tenant the most
Triple Net Lease (NNN): Benefits Landlord the most
Modified Gross Lease: Somewhere in between Gross Lease and NNN
3 Quick Tips
Leases are the lifeblood of Office Buildings
Hire a professional when negotiating a lease
Everything in a lease is negotiable
PART 7: Possible Office Building Pitfalls (27:35)
Rental rates go up and down significantly with the economy.
Tenants with the Largest Square Footage
Expiring Leases
Obsolescence
PART 8: Most Important Thing when Choosing an Office Building (31:02)
Credit Worthiness
DnB.com
StandardandPoor.com
PART 9: Top 3 Trends in Office Buildings (34:37)
Workplace Density: Today companies allot 185 sq ft per office worker, 10 years ago,
it was 250 sq ft per office worker
Untethering of Office Workers: 30-40% of dedicated workspace is vacant in a given
day
4
Telecommuting is OUT and Colloboration is IN: Yahoo! nearly stopped all
telecommuting and wanted everyone not only in the office but in rooms together to
give a start up small company feel
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50,000 Mobile Home Parks
60 Million People Earn $20,000 per Year
$1,000 per month is the average rent for an apartment in the United States
8% of United States Population live in Mobile Home Parks
PART 2: Why Invest in and 3 Misconceptions of Mobile Home Parks (5:39)
Growing Demand for Affordable Housing
Stable and Predictable
Limited Competition for New Parks
Potentially Higher Returns
Misconception # 1 - Crazy Lazy People live in Mobile Home Parks
Misconception # 2 - Mobile Homes can pull out at anytime
Misconception # 3 - You can't get loans on Mobile Home Parks
PART 3: 5 Tips on What to Look For and 3 BIG No-Nos (12:18)
Increasing Population Areas
Stay Away from 5 Star Parks
Seek Out Mom and Pop Owned Parks
Minimum 10% Cap Rate
Best deals allow for easy rent increases and cost reduction options abound.
No-No # 1 - Hurricane Zones
No-No # 2 - Park Owned Homes
No-No # 3 - Operating Permit Status Issues
PART 4: How and Where to Find Mobile Home Park Deals (21:36)
LoopNet.com
CIMLS.com
MobileHomeParkStore.com
1031CommercialProperties.com
Direct Mail Campaign
Of the deals you look at, 20% will be potentially good deals, 30% deals will be
marginal deals, 50% will be over priced.
PART 5: 3 Most Common Ways to Finance Your First Mobile Home Park
(26:48)
Bank Financing
Seller Financing
Seller Financing with Note Assumption
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for. At the end, you'll walk through the numbers on a real life self storage deal. Enjoy self
storage investing for beginners! https://youtu.be/mKe_sQUdKn0
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Good location
Turnaround Deal
Distressed deal
Poor or no management
Poor location
Needs to be turned around
Things to Look For: (15:15)
Size:
You must know the size of the self-storage facility
You need 30-40,000 square feet to be able to afford a fulltime manager
If self-managing you can start smaller, just know your numbers
Unit Mix:
Have a Mixture of sizes of storage units
Need variation to offer customer base
Location:
90% of your customer base will be within 1-5 mile radius of the storage unit
Do research on the radius area to make sure there is potential
Is there area growing or shrinking?
Is the city expanding in the area or away from the area?
Know your competition
Traffic count:
How many vehicles drive by the facility every day?
Signage and Visibility:
Understand local laws on signage allowances
An area that is easily accessible
Management:
Is property managed by the owner or a management company?
Are you going to self-manage or hire someone?
Drainage:
Poor drainage will cause issues
When you do due diligence the Property inspector will help find potential issues
How to Fund Your Self-Storage Deal: (21:17)
Bank requires 3 things for any income producing commercial real estate
loans:
Property’s income and expenses and what is leftover
Property’s condition and location
Borrower’s credit and financial situation
Sources of Money to Finance Your Self-Storage Facility:
Local regional banks
Credit Unions
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SBA (Small Business Association)
The 7A Loan Program and 504 Lending Program are specifically for storage units
Private Investors
Seller Financing
2 Biggest Myths of Self Storage: (26:35)
Myth 1: It’s a hands-off passive income business
In any commercial real estate business that is income producing you need the 4 M’s
to be successful
Systems on handling the Money, the Marketing, the Management, and the
Maintenance.
If one falls down they all can fall down
The better you are at managing your business the more money you will make
Myth 2: It’s a quick turnaround business
Renovations take a long period of time to get stabilized
Takes the 4 M’s to succeed
Let’s Analyze a Deal: (30:00)
Deal was found on Loopnet.com
In a small town in Georgia, 270 units spread out in 32,000 sq foot on 3.5 aces
Asking price of $485,000
80% occupied, 20 years old, gated, and brought in $79,000 last year
Is this a good deal?
You need the annual income, the annual expenses, and to know the debt services
(mortgage payments a year)
Income: $79,000 a year
Expenses: Self-storage rule of thumb: 40% of income so $32,000 a year
Income-Expense=NOI (Net Operating Income)=$47,000
NOI-Debt services (Mortgage) =cash flow/money in your pocket
Down payment is 25% of purchase price=$121,750
Asking Price $485,000-down payment (121,750)= $363,750
Mortgage rate is 5% 30 years
Mortgage payments= $1953.69 a month
Annual Payment is Mortgage Payment ($1953.69 x 12)= $23,432 = Debt Service
NOI ($47,000) – Debt Service ($23,432)= Cash Flow of $23,568 a year
Cash and cash return is Annual Cash Flow ($23,568) divided by down payment
($121,750)=19%
Passes!!!
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Understanding the fundamentals of apartment loans can be very helpful if you're
looking to invest in apartment buildings because the sellers of many well performing
properties will not go for a creative master lease agreement but instead may require a
straight sale to which a loan would help you facilitate. In this training, you'll discover the
basics of apartment loans, including how apartment loans differ from residential
mortgages, how to qualify for an apartment loan, what apartment lenders like and
dislike, the 10 steps to obtaining an apartment loan as well as what apartment loans are
available in the marketplace today. https://youtu.be/23qNsfBffHQ
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The process typically takes 45 days or longer to complete.
Phase 1
Step 1. Send financials and photos
Step 2. Complete loan application and review borrower credit
Step 3. Order appraisal and site inspection
Step 4. Register loan into lender's system and lock rate
Phase 2
Step 5. More underwriting (1 - 2 weeks)
Step 6. Order termite inspection and title search
Step 7. Loan commitment (1 - 2 days)
Step 8. Approval! A letter of commitment (LOC) OR they are going to request more
documentation
Step 9. Finalize closing
Step 10. Closing and Record Documents
PART 5: Apartment Loans Available Today (19:28)
Where do you go to get a loan?
Option # 1 - Mortgage Banker: Local small, regional or national bank
Option # 2 - Mortgage Broker: Works with all kinds of banks
Fannie Mae and Freddie Mac Small Apartment Loan Program
Planned to lend $60 Billion this year and have already used up over half of the
allotment
5+ Units
Minimum $750,000 to Maximum $5,000,000)
20% down payment
1.25 Debt Coverage Ratio (DCR)
Low Fixed Interest Rates (5 or 7 or 10 years with a 30 year amortization)
Interest only payments option
These are non recourse loans
680 FICO score
No previous experience required if the property is local to you (If you are long
distance, you will need previous experience)
That's Apartment Loans 101
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Fire Burns My Apartment Building
Teachable Moment: (1:20)
One of my favorite shows is called “The Prophet”
It is about an entrepreneur who partners with struggling businesses to bring them to
the next level
His business model for success is, “People, Process, and Product”.
People
Your property management team
Process
Represents your day to day operations
Product
The Property itself
Every highly successful, profitable piece of commercial real estate
is based off of the 3 Ps:
When you have a great team (People) running a great system with proper
procedures (Process), combined with a nice looking property in a great area
(Product) that is the formula of success.
If you have an undertrained team (People) poorly running a property (Process), with
a property that is in a poor neighborhood and in poor condition (Product), then it will
fail.
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Use a fresh list from a reliable source
It is a campaign
You must remain in the minds’ of property owners.
Send out your letter every 4-5 weeks, 3-5 times.
Why Start with 5 Unit Apartments not 4 (16:30)
4 unit apartments
Considered a residential property
Its value is constrained by the sales comps in the area
5 unit apartments
Considered commercial property
Its value is based off sales comps AND NOI
NOI is your income minus your expenses
As NOI goes up your property value goes up
Value equals NOI increase divided by your Cap rate
Financing Your First Small Multi-Family Apartment Deal (21:33)
Conventional Financing
Take loan package to a local bank or loan broker
Local bank:
Salary person
They submit your loan package to a board for approval or denial
Loan Broker:
Works off of commission
Submits your loan package to 20 or more lenders to find financing
Creative Financing
Seller financing
The seller becomes the bank for you and finances the loan
Seller-carry
The lender might require 25% down that you do not have so the seller carries a
second loan to cover what you do not have
Master lease
You do not need a lot of experience or cash down
Do not have to go through a bank
I have a 20 minute video about “Master Leases” here
Wholesale
A great way to make money if you do not have a lot of funds or experience
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Find a great deal, get it under contract, then assign the contract to an investor buyer
for a fee
You collect the fee at the closing and the investor buyer takes over ownership
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Know what you are walking into
Look at the exterior and the interior
In beginning stay away from major rehabs
The Numbers
Over the last 12 months make sure the property’s income exceeds the expenses
Get the numbers in writing
Do not use the broker’s brochure
Management Strategy
Are you planning on managing yourself or hiring a management company?
Exit Strategy
Holding Longterm
Flipping
Refinance with lower rate
Refinance cash out
Holding Longterm
Flipping
Refinance with lower rate
Refinance cash out
Ask Tough Questions
Take out the emotions
Do not fall in love with the property fall in love with the deal
The Three Areas Most Beginning Investors Go Wrong (10:53)
They tend to believe their property financials based off the brochures
The numbers in the brochure are misleading
Get the numbers from the seller
They underestimate the expenses of the property
A property is like a body, it needs to be maintained
Get expert advice from a mentor
The expenses often equal 50% of the income
Property Management Oversight
Proper mindset,”If you have a steel suitcase full of 100,000 $1 bills, you get busy and
need someone else to look over the suitcase. How careful would you be on who you
hire to look over your suitcase?
Have the same mindset when finding a property manager
Perfect Deal: (15:55)
A perfect deal does not exist
Be smart, start small, get started, start practicing.
Do not look for the perfect deal
Breakdown of My Very First Apartment Deal (16:32)
45 units
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Asking Price of 775k
Purchase price of 720k
Location: Next to a major university with a medical school. Next to corridors where
lots of grad students and university workers worked
Financed: Went into the president of the bank’s office and explained why he should
finance me. Took lots of tries but persistence paid off
Put down 20%
Cashback: I found a lot of flaws that equaled 50,000 worth of work.
Received cashback of $40,000 to help cover the repairs
Cashflow: $6500 a month
Action Plan for Getting Started: (21:15)
Get educated, absorb as much information as you can
Find a friendly broker who specializes in apartments
Nurture this relationship by being friendly and communicating often
You want them to think of you when they receive pocket listings
Start visiting apartments that are for sale
See the difference between the brochure and what you see
Get your financing in order
Do you have the cash available or not?
Commit to a financing direction
Create a relationship with a local property manager
Ask questions
They can do driveby inspections on properties
They can do the walkthroughs with you to evaluate the property
Get your mindset right
You can do anything you set your mind to
Believe in yourself
Do not give up
It will take time to find deals
One brick at a time
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Just one really good commercial deal can set most people financially free, but the ugly side of
commercial real estate is that also, all it takes is one really bad deal to financially ruin you for
life. In this training, you're going to discover the ugly side of commercial real estate investing,
including a real life example of a terrible deal that has the potential to economically flatten the
beginner investor who bought the property. You'll learn priceless lessons on what NOT to do
as his case example is broken down into great detail. You'll find out that commercial real
estate laws do not have the same consumer protection laws that residential real estate has so
if you make a mistake, forgiveness may not be an option in commercial real estate. Finally,
you'll be equipped with the wisdom on how to ensure no commercial deal ever flattens you
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deal this was, the Buyer tried to back out and forfeit his earnest money but the seller
threatened to sue for specific performance as well which could have cost the Buyer an
additional $100,000.
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7 Important Facts Before Starting Due Diligence
1. Due Diligence costs Non Refundable Money (Travel, Inspections, Reports)
2. You can ask for an extension
3. You will ask for an extension
4. Findings set up renegotiation of the deal
5. Always keep your exit strategy in mind
6. Have a business plan on the table going in
7. Famous Due Diligence Proverb: "The plans of the diligent lead to profit as surely
as haste leads to poverty." -- Proverbs 21:5
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How Deal Funding Works in the Protege
Program
https://youtu.be/ShaOlYZ9H3g
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Seller got down payment money for a new deal and got out of a problem property
Joe paid the lease and then the seller used that money to pay the mortgage
He created 800,000 worth of equity in just one deal in a 4 year period
Two things you must do to land your first Master Lease
Get the seller motivation
Construct a deal and terms based off seller motivation
In Simpler terms: (6:55)
Seller gets:
Lease Payments that cover the mortgage
Easy Sale
Freedom from involvement
Rescued from any personal or financial issues pertaining to the property
Buyer Gets:
Purchase with little to no money down, no banks, no credit
Less risk because the loan is still in sellers name
Cash flow-any money left after lease is paid is yours to keep
Option to buy after the agreed upon years
All profits
3 Nuggets on YOU Doing a Successful Commercial Master Lease
Deal (8:58)
Get the seller motivated and construct the deal based on that motivation
Unwind your mind on what a typical deal looks like
Master Lease Agreement Document
What Property/Seller is ideal for a Master Lease Deal? (9:47)
Seller that is tired and burnt out
Seller lives out of state
Seller is sick or has other personal reasons for selling
Avoid capital gains tax
Large prepay penalty on loan
Has property management problems
Vacancies over 90 days old
Conclusion (19:45)
Learn how to solve other people’s problems
The Secrets of the Millionaire Mind by T. Harv Eker
“An Entrepreneur is a person who solves other people’s problems for profit”
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How to Purchase Your First Commercial
Property with a Master Lease
How to purchase your first commercial property if you do not have 35% down
payment cash, ideal credit, and millions in net worth? You must get creative. One way
to do this is with a master lease.
Master lease contracts have been around for hundreds of years. Think of a master
lease as the “lease with the choice to buy” but over some sort of property. The term
lease option is used in reference to single family homes, but for apartments and
commercial property, it is usually called a master lease agreement.
In simple terms…
You will purchase the seller’s property by giving him a minor (or no) down payment
in exchange for all rights and freedoms of possessing and running the property
without legal title exchanging hands. At closing, you get equitable title, instead of a
legal title. You are authorized to the property’s cash flow above the master lease
payment, all new equity, tax benefits, and every day managing.
Because your fees and conditions are set, all of the benefits are yours to keep. The
more competent you are, the more you will make. As the Net Operating Income (NOI)
grows, the property’s increase in worth becomes yours. The seller only receives a
monthly payment from you on the interest of the difference concerning the lease
agreement price and what he owes. Once you sell the property, any amount over the
lease agreement price is yours to keep.
In simpler terms…
The Seller gets:
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a purchase without banks, loans, or appraisal
all Gross Income above the lease payment
Option to purchase the property at a pre-fixed price within a set period of time
despite how much the property value has gone up
any profits above the master lease agreement price
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When you see these words, jump on the chance
speedily…
Here are important words and phrases to look out for when trying to find properties
perfect for the master lease method: owner motivated, seller financing, owner will
carry, master lease option, creative offers welcome, open to all offers, JV partner
wanted, investor wanted.
In conclusion, here is the secret to doing creatively financed deals, whether it’s a big
or small deal…ask!
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3 Things You Want to Know About the Commercial Real Estate
Deal You are Analyzing (0:32)
How much money does it make
What is your return on investment
How does this investment compare to other investments
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Rules of Engagement for These Five Key Terms
(10:06)
Do not make an offer until you calculate each of these terms
For income and expenses you need the income to be greater than the expenses
The NOI needs to be greater than the mortgage payments
Cash Flow needs to be positive
Cash-on-cash return must be greater then or equal to 10%
Cap rate should be greater than or equal to 8%
EXAMPLE (11:43)
3 Assumptions for This Example:
The property purchase price is $450,000
Down payment is 10% so $112,500
Mortgage Payments are 20,000 per a year
On this property the income is 48,000 a year
Expenses are 12,000 a year
This means that the NOI is 48,000 – 12,000= 36,000
Cash flow is 36,000(NOI) – 20,000 (Mortgage) = 16,000
Cash-on-cash return is 16,000 (cash flow) divided by 112,500 (down payment) =14%
Cap rate is 36,000 (NOI) divided by 450,000 (sales price) = 8%
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https://youtu.be/hqovi3kA2Ts
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Three Advantages of Using LOIs (3:40)
1) You can make a lot of offers because it is only 1 to 2 pages long
2) LOIS are free
3) There should be no fear in making lots of offers because it is not legal binding
I challenge you to make one LOI offer a week
Lastly there is a link on this page directly above this summary where you can
download your own letter of intent
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CONS for Apartment Investing
If your neighboring developers are building new apartments
New builds will attract your buildings ability to attract new tenants
Sometimes people do bad deals
2.Self-Storage (3:52)
Self storage are commercial buildings with individual rooms where people store their
stuff
They come in different sizes
Also include boats and rvs stored
WHY Invest in Self-Storage?
Same as Apartments but you are missing two things that are to your advantage
Missing tenants (easy evictions, not labor intensive)
Missing Toilet Repairs (Less maintenance)
Creates cash flow
Force Appreciation
Experts consider Self-storage economy proof
Sweet Spot of Self Storage
Buy a large enough self-storage facility to be able to employ a property manager
Do not do this yourself
Cons of Investing in Self-Storage:
If the neighborhood has decreased in value your facility might not be desirable
Location is extremely important
It can take a while to occupy all of the units
3.Shopping Centers (7:38)
Strip centers large or small
Shopping malls indoors or outdoors
WHY Invest in Shopping Centers?
Stability
Most tenants sign a 5-20 year lease
Sweet Spot of Shopping Centers:
Buy Small, start small, and scale up
Cons of Shopping Centers:
Capital Intensive
Need lots of cash
If a major tenant leaves It can take up to 30% of the income
You will still have to pay mortgage as you build up for the next tenant
4.Office Buildings (10:13)
Single building with one tenant all the way up to a skyscraper that’s 80 floors and
dozens of tenants
WHY Do We Invest in Office Buildings?
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When the economy is booming their rents can be astronomical
Can make a lot of money by holding onto them for a long period of time
Sweet Spot of Investing in Office Buildings:
Start small, buy an office building with multiple tenants with long term leases
Cons of Investing in Office Buildings:
They depend on the economy
If the economy goes down the office building goes down
5.Mobile Home Parks (12:20)
You either own the mobile home park and the tenants bring the mobile home
You own both the park and the homes and rent out both
It is better to own only the mobile home park aka dirt because less maintenance and
expenses
WHY Invest in Mobile Home Parks
They produce cash flow
Affordable housing demand is great
You won’t see many new ones being built
Tenants tend to stay a very long time
Most mobile home parks are seller financed
Sweet Spot of Investing in Mobile Home Parks:
Buy a mobile home park that is big enough to hire a property manager
Cons of Investing in Mobile Home Parks:
They have a negative reputation
Financing for mobile home parks is difficult to get
Conclusion:
F.O.C.U.S
Follow One Course Until Successful
Choose one route to go and stick with it
Weigh the probability and the size of the investment
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For those who have read Commercial Real Estate Investing for Dummies, in the book it
is mentioned a special gift in the form of an Addendum. Here is a link to download that
document:
https://youtu.be/tPl9K2dbS90
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(Repairs, Utilities, Taxes)
$57,170 is the total I added up for the years’ worth of expenses
Step 3) Get the Mortgage
Minimum down payment of 20%
$550,000 asking price x 20% is $110,00 down payment
$550,000 - down payment= $440,000
Conservative mortgage interest rate is 6.5% for 30 years
Mortgage Payments a month come out to be $2748 x 12 months =$33,372
Now all you have to do is subtract the expenses and mortgage from your
income and you have your cash flow.
$113,400 - $57,170 - $33,372=$22,858
$22,858 is what goes in your pocket every year
To find your return investment you divide your cash flow by your down payment and
it comes out to be over 20% return
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How (2:26)
How much desire do you have?
Anything that you pursue that is great and worthy in life, is going to have obstacles.
To come out successful you are going to have to have desire.
If you have a strong desire it will outdo any talents or gifts when it comes to
commercial real estate.
WHERE (3:30)
The question is, " Where should you invest?"
Invest in your own backyard first.
Begin in your own city so that you can qualify or disqualify your own area first.
It is easier to become an expert if you are a local.
If you want to go out of your area, that should be a last resort because it can be risky.
Computer
Must have internet access
The world if flat, you can invest anywhere you'd like just by having a computer
Cellphone
Setting up appointments and meetings
Calculator
Nothing fancy
Use mortgage calculator online
Calculated industries has real estate friendly focused calculators
phone app calculator
Time
Anything that you go after there needs to be a focused amount of time on that
endeavor
3-4 hours a week bare minimum
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A real estate license
fact it can be a liability
You don’t have to start in residential real estate to jump to commercial real estate
They are two completely different investment types
You do not need a Masters or MBA to understand everything about commercial real
estate
You need experience focus and desire
You don’t need to be rich
You need a little bit of money and a lot of desire
Check out Master Lease Agreement technique
Conclusion (9:39)
Two things the super wealthy have in common. The super wealthy are people that
make a lot of money but also use it to do good.
First trait: They all own commercial real estate
Second Trait: They are all known for their integrity. They do the right thing even when
it hurts.
How you do one thing is how you do everything. Always keep your integrity in tact
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Why Getting Cash or Credit at Closing is Good
1. It makes you look good and it makes your deals even better.
2. Your buyers come out of pocket less at closing by the amount you
negotiate.
If you can negotiate a credit or cash at closings, your buyer will come out of pocket
less by that dollar amount you negotiate. In their eyes, you'll be a super star.
3. Raises your cash and cash return a whole lot.
Here's an example. If your down payment is $100,000 on your deal and you
negotiate a $50,000 credit at closing or cash at closing, you have just doubled your
cash and cash return by putting some language in a contract. That’s how powerful it
is.
4. You will have money now to immediately do repairs, renovations or
improvements.
This allows you to immediately capitalize on their proper potential.
If the property needs a new roof and you need some interior decorations or
renovations to raise your rents, you now have money to do this and it's not your
money. You got it from the seller.
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1. You need to substantiate the credit amount you're asking for with more than
one contractor's estimate.
Get at least 2 or 3 credible estimates to justify the credits you're asking for.If you
need a credit for roof or some siding repairs, kitchen repairs, whatever it is, get 2 or 3
estimates so you can say here is a reason why I need to credit to make me want to
move forward in this deal.
Look at these estimates and if you average the 3 out, this is what I'm asking for for
the credit or take the highest one.
2. Expect for the seller to counter
To counter your requested amount of credit with the lower amount, This is real estate
101, Consider slightly increasing your credit amount in anticipation of the counter.
If you need a credit of $25,000 to make your deal super duper, ask for $35,000. Ask
for $35,000 so when he counters you, you end up with $25,000, exactly what you
want.
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Remember, assign means that you'll get cash at closing but credits means that the
closing company will credit you that amount at closing towards your down
payment. Big difference,
2. Wording. I word the contract so that the money will be assigned to the buyer's
choice of entity.
We use that wording so that the cash at closing does not go to you personally. That
raises too much suspicion in my opinion and it maybe consider loan fraud if you're
doing it wrong.
We want to make sure that we are doing everything by the book.
3. When you assign the money to your buyer's choice of entity,
that's a choice of entity that you have so you can just open up an LLC You already
have set up or set one up in the future and assign the money to be paid to that entity.
Another way of doing this is you can assign it to a contractor or you can assign it
back to the bank.
4. Use the wording property renovations and not repairs
We're assigning $100,000 to a buyer's choice of entity for the purpose of property
renovations, not repairs because the word repairs means there's something wrong
with the property, it's in poor condition. That makes banks nervous. It makes people
nervous, especially lenders.
Conclusion:
Now I explained to you how to get cash and credit at closing, right? Again, it makes you
look good. It makes your deal better. If you're a wholesaler, you come out of pocket less
at closing.
It can potentially double your cash and cash return to pay in the amount that you can
get credit or cash for.
Then if you get cash at closing, you'll have money to immediately do repairs,
renovations and improvements.
It allows you to immediately capitalize on property potential and realize that the
property's true potential.
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7 Reasons to Use Creative Financing in Your
Commercial Real Estate Deals
1. The first reason is leverage, lower down payment, not having to deal with banks.
2. You have the cash resources but not the credit.
3. If you are whole selling this deal, creative financing gives you the immediate
impression that the deal is unique, special, and desirable. I guess for you whole sellers
out there, this is really important for you guys.
4. It’s a way to finance a property that's in disrepair or distress whereby bank financing
just couldn't happen.
5. If you have seller who wants to avoid or delay capital gains taxes on a sale
6. Seller is ill, old and tired, or burnt out, very, very common reason to use creative
financing in commercial deals.
7. It's just a fun and cool thing to do.
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purchase.
Simply put he hosts the mortgage for you.
Here's an example.
If the purchase price is 500,000 and you put down 50,000, and then you will make a
monthly payment on the remaining 450,000 balance. Follow me so far? That balance is
called owner carry. As for the loan terms and things like that, that's up to the unit seller.
That is called an owner carry first mortgage.
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I'm positive that some of you have seen situations where sellers are sick, they have
to relocate overseas, there's a divorce going on and he need quick cash. Seller carry
first mortgages are ideal here, so you must know how to do those.
By the way, the 4 reasons I gave you, these are what I call seller motivations that you
really need to watch out for. You want to know why? It's because seller financed deals
are put together around seller motivations. If you ever wanted to know how to put
together a creative deal or a seller financed deal, get the seller motivations, number 1.
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The Remax office went out of business. The owner was 3 months behind in their
mortgage. She's sunk her life savings into the building and the business. She wants to
basically avoid bankruptcy and foreclosure. She is facing financial ruin, so she's very
motivated.
Karen came to me, "Peter, this is what I found." After hearing her, I go. "This is ideal for
master lease, Karen. Here is what I want you to do."
To make a long story short, Karen's idea was to turn the office space into office suites,
after studying the area's needs. Basically what she did was she called a professional
leasing company, and she asked them point blank, what does the area need? They said
the area needs office suites very badly. We decided to convert this Remax offers into
office suites. In this building, all the copy machines were there. All the furniture was
there. The break room was all outfitted with nice tables. Everything was there. This was
just ideal for this situation.
Here's the deal. The purchase price is $1.3 million. We use a master lease agreement.
We put down $75,000, and we took over the mortgage payments, the tax payments and
the insurance payments for the owner. This $75,000 down payment was used to catch
up with the late payments, pay off the liens and pay broker commissions. To make a
long story short, once this property was 80% leased up, their property will be worth $2.3
million at a 7 cap. Remember, we bought it for 1.3, empty, and 80% occupied is worth
2.3 million dollars at a 7 cap, in which the area can easily afford a 7 cap. It's probably
below 7 cap today.
Now, maybe they're asking, "How did Karen come up with the 75,000?" She borrowed it
from a mother and a sister. Here are the terms that she paid her mother and sister. She
gets her mother and sister 8%, annually, plus she gave them 25% of their profits when
she sells. 8% interest paid annually, plus a 25% kicker on the backend. That's what you
can do with the master lease.
Now, here's a good question that many of you maybe are wondering. Why was a master
lease ideal for this situation? When Karen brought this deal to me, why did I say this is
ideal for a master lease?
The reason why is the seller was distressed. She had missed mortgage payments, she
had a failed business. The building was empty, and she had her life savings at stake,
again, seller motivations. The seller may have been a good real estate agent, but she was
not a good investors. How many times have you seen that these days?
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Now, another reason why this was ideal for a master lease is most banks will not lend
conventionally on an empty commercial property.
If we wanted to take advantage of this situation, buy this property, we had to deal with a
master lease. The fourth reason why it's ideal for a master lease is Karen didn't have a
down payment or the credit or the net worth to buy a property herself. She just didn't
have it. Many of you are like that. That's where the master lease comes into play.
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Commercial Cash out Refinance
There are some things in the commercial real estate business that you want. There are
some things that you need, and there are some must-haves. The commercial cash out
refi is a must-have.
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Example:
Yes, the market still does have a little say but the net operating income has a bigger say.
I will give you an example right now to show you how powerful the net operating income
is when considering a cash out refi and how it plays into that. Here's basically how it
works. Let's take a 12-unit apartment complex as an example. Let's say you purchase it
for $1.4 million and let's say all their rents are $750 a month for each unit. But let's also
say that the rents are $125 below the market. The rents can actually go from $750 to
$875.
Then let's also stamp the market with a 5% cap rate. I'm out here in California and that's
pretty common. Some places on the East Coast and in Southwest, that's pretty common
too. We'll use 5% as the market cap rate. We have a 12-unit and the rents can go from
$750 to $875 so $125 bump. Let's also say that we can also cut the cost of the water
utility by transferring those water cost to the tenants. We'll put in separate meters and
we'll charge the tenants the cost of water.
Let's say also, we're going to be really good property managers, so operationally, we're
going to be way more on top of things than we were in the past and so we're going to
have a total monthly savings of about $1,000 a month which is about $12,000 a year.
We get that from the water savings and just better management. A total savings of
$1,000 a month or $12,000 a year. You follow me so far? So far, we have a rent bump of
$125 across all 12 units and also we're implementing water utilities to the tenants and
being a better manager so we're saving $1,000 a month.
Now, let's say that the price is $1.4 million, 25% of that is $350,000. That's the typical
down payment on the commercial deal of 25%. So, 25% of $1.4 million is $350,000.
Follow me so far? After you put down the down payment of $350,000, you're going to
owe $1,050,000. It's just simple math. Remember that number. You owe a $1,050,000
after your down payment. Just remember that number. As I mentioned before, your
rents can go from $750 to $875. We're going to do that across the board. We're going to
do $875 a month times 12 units times 12 months. That gives me $126,000 a month.
Now, we have the income of this 12-unit, the new income of this 12-unit.
NOI
Now, we're going to subtract expenses. To make a long story short, we're going to take
35% of the income as expenses. So, 35% of $126,000 is $44,000. I'm going to subtract
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the $44,000 from $126,000 and I come up with a net operating income of $82,000.
Follow me so far? So, $126,000 in income minus $44,000 in expenses gives me a NOI,
net operating income of $82,000. The net operating income or the NOI is a very
important number in commercial. Hopefully, you follow me so far.
Cap Rate
If you recall, I also have a savings of $12,000 because I pass on the water and I
tightened the management. That goes to my bottom line to my NOI, so $12,000 for the
year. My new NOI is $82,000 plus $12,000. It's $94,000 now. I have a new net
operating income of $94,000, new NOI of $94,000. Now, there's an equation I need you
to know. Many of you, know the basics of commercial that a cap rate formula, cap rate is
equal to the NOI divided by the sales price.
Cap rate is equal to NOI divided by the sales price. I can flip that equation over and say
the sales price is equal to the NOI and divided by the cap rate. All I did was flip that
equation over. The sales prices is equal to the NOI divided by the market cap. Now, if
you recall, I have an NOI of $94,000 and I stamped a cap rate of 5%. Now, I have my
new sales price. Remember, sales price is equal to NOI divided by the cap rate so it's
$94,000 divided by 5%. My new sales price now is, I do the math there, it's $94,000
divided by 5% equals $1,878,000. So, $1,878,000, follow me so far?
Now that I have increased my NOI, I have a new value. As the NOI goes up and the cap
rate stays the same, the property value goes up. You can just use this new equation if you
want. New value is equal to your new NOI divided by the cap rate. That's all I did, new
value is equal to my new NOI which is $94,000 divided by 5%. I have a new value of
$1,878,000. Let's continue.
Commercial real estate lenders allow you to refi 75% of your new value. Once the
property is stable, they will look at this new value of [$1,878,000 00:08:07] and they
will do a typical 75% refi. What's 75% of $1,878,000? The 75% of $1,878,000,
$1,408,500. I'm going to go ahead and get a refi loan in the amount of $1,408,500. Now,
do you recall what we owed? We owe from our original loan $1,050,000. I'm getting a
refi loan at $1,408,500, my old loan is $1,050,000.
Cash Out Refi
My new loan is going to pay off the $1,050,000. What do I have left? After my new loan
of $1,408,500 pays off my old loan, I have $358,500 left. That's cash to you. Do you
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recall what your initial down payment was? Your initial down payment was $350,000.
At the close of your refi loan, you got a check for $358,500, you originally put in
$350,000, you have essentially paid yourself back with this refi loan. This is called a
cash out refi. It's a very popular thing to do, something you need to learn how to do, very
powerful thing.
Basically, all I did was increase my rents. I pass over the utility to the tenants and I
tightened my operations all in the spirit of increasing my NOI. Then, I apply for a refi
loan with a new value and then I got the cash out and I paid myself back. What do we
learn here? We learned here was to always look for ways to increase your net operating
income. I discovered that my rents can go up $125. I discovered that I can pass off my
water cost to my tenants. I discover that I can be a better operator and better property
manager and tightened things up and increase on bottom line which is my NOI.
Force Appreciation
Always look for ways to do that because as your NOI goes up, your property value also
goes up. Now, as your NOI increases, it can come from, as I mentioned, rent increases or
expense reduction. This is what we call force appreciation. When you do a force
appreciation, you're forcing appreciation by increasing the NOI. You're not relying on
the market. Remember what I said, this is not so market-dependent as more NOI,
income-dependent so we can force your appreciation by doing those things.
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Creative Financing Using Second Carry
Mortgage
It's really important that you know how to structure deals that no one else does to give
you the upper hand. A typical real estate agent may or may not know how to be creative
but for the most part, they're not interested because it may affect their commission.
From my experience, nearly 95% of all property owners, the sellers, don't have a clue on
how to safely structure creative deals.
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the purchase price of an apartment building is $500,000, and the down payment is 25%
or $125,000, but you only have $75,000 so you only have 15%. There's a 10% shortage.
Here's how seller carry mortgages can help. In order to satisfy the down payment
requirement of the lender, which is 75%, the seller may agree to hold a second mortgage
against the property for the remaining $50,000 or 10%. That's called a seller carry
second mortgage. Now, if agrees to do that, everyone is happy. The seller gets to sell the
property. You get to buy the property. Lastly, the lender's equity requirement, a 25%
down payment is satisfied. In a nutshell, that's what a seller carry second mortgage is.
You're going to have two mortgages. You're going to have to pay the first mortgage and
the second mortgage. You're going to have to evaluate this and figure your cash flow out
by subtracting two mortgages from the NOI.
How does this affect cash in cash return if you don't do a seller carry second
mortgage?
If you don't do a seller carry second mortgage in this case, you have to come up with the
entire 25% or $125,000 instead of $75,000. You'll be only taking care of the first
mortgage. You know, that can have a huge difference on your cash and cash return.
Now, in the first case, you have a seller carry second mortgage. You have a certain cash
in cash. In the second case, there's no seller carry. You're putting down the entire down
payment. There's a certain cash in cash there. The difference is you putting 15% as
opposed to 25%. That's over a 30% improvement on your cash in cash return.
If you can organize a small seller carry of 10%, your cash in cash return can potentially
be over 30%. It can be a 30% difference there. For example, let's you're able to produce a
25% cash in cash return with the seller carry second mortgage. That's if you don't have a
seller carry second mortgage. It can be 15-17%. You can go from 15-17% up to 25% with
the seller carry second mortgage so that's huge.
Second Example
Let me go over a second situation with you. Let's say we have the same apartment
building at, $500,000 purchase price. The seller this time has 4 years remaining on a
current loan in the amount of $300,000. The buyer must assume the loan because the
seller has a large prepaid penalty if the loan is paid off, so he can't just sell it to you. You
have to assume the loan, but there's a gap there right? He owes $300,000, but the
purchase price is $500,000 so there's a $200,000 gap there to cover, but again you only
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have $75,000 so there's a $125,000 shortage. The question is what do you do? How do
you buy this deal?
Here's what you do. Again, this is about seller carry second mortgage. You're going to
take your $75,000 and you're going to apply to the gap of $200,000, and then the seller
is going to carry a second mortgage for the remaining $125,000. Okay? You got it?
You're going to put down your $75,000 to the bank. The seller's going to take out a
second mortgage against the property for $125,000 so that gap is covered now. You
become the owner of that property, but, guess what? You again have to take care of the
first mortgage and you have to take care of the second mortgage. Basically, you're
assuming the seller's loan with the current terms, and by the way, it's going to cost you
about 1% a loan amount to assume it, plus closing costs. Again, you're assuming the
seller's loan.
That's what a loan assumption is. When you hear the term "a loan assumption", this is
exactly what it is. You're going to assume the seller's loan, the $300,000 so you're
making payments on the $300,000 plus you need to service the $125,000 second
mortgage. That is what we call a loan assumption with a seller carry second mortgage.
What would the cash in cash return be without assuming a loan and not taking a seller
carry second mortgage?
This is even a more drastic change. In this case, Let's say there's no assumption so
you're going to cover the $200,000 difference just out of your pocket. Boom. Down
payment, $200,000. Your cash in cash is going to be X-ed. Now, let's say that in case B,
you only have $75,000 so you're going to apply the $75,000 and he's going to do a seller
carry of $125,000. There's a huge difference there in the cash in cash return. Guess how
much? 50%, over 50% in this case, in the difference in the cash in cash return. If your
cash in cash return, without the assumption, you plop down $200,000 as 10%, for
example, your cash in cash return with the assumption can be over 25% so that's over
50% there.
We saw the huge problem. The huge problem was the seller wanted to sell. He has a loan
assumption with a large prepay penalty. You don't have all the equity so the solution is a
seller carry second mortgage.
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Some of you are going to be thinking, "Peter, how do I calculate what my interest rate
should be on my seller carry second mortgage?" Here's the answer:
Always start of with 5% interest only payments if you don't know where to start.
Always plug in 5% interest only on the second mortgage.
Try to negotiate no interest payments for the first six months. This allows you to have
higher cash flow before having to take on the second mortgage payment.
Never over-leverage or over-debt a property. Try to maintain, at the minimum, 10%
equity in a property.
My last tip here is not all lenders will allow second mortgages, and I found that here's
the reason why:The lender's figure you’re going to pay the second mortgage before
spending the money on maintaining the property. The lender is concerned about the
property looking well and being taken care of. You're more concerned about paying
the second mortgage so you don't go into default. That's the reason why not all
lenders will allow seller carry second mortgages.
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Number 2: When your debt coverage ratio equals 1.0. By the way, debt coverage ratio
is basically your NOI divided by your annual mortgage payments. When that formula
equals 1.0, that means you're breaking even, it's not a good time to use seller carry
second mortgage.
Number 3: Seller carry second mortgages are not good to use if the seller's current
mortgage matures soon, within the year, it matures. It's probably not a good time to use
seller carry second mortgages because you need time to fix up the property, get the NOI
up, get the value up so you can pay it off.
Number 4: If you don't have a clear plan or extra strategy to pay off the seller carry
second mortgage when it's due, it's not a good time to use this strategy.
Number 5: If you don't have enough time to allow the property value to increase, to
pay off the second mortgage, it is not a good time to use seller carry second mortgages.
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All of you now know how to evaluate a deal with or without a second mortgage. You also
know how to calculate and include both mortgages properly. You all know now when it
is ideal to use as well when it's ideal to not use. You know what the benefits are of using
a seller carry second mortgage and how to be creative there. You now know what the
risks are and lastly, now you're able to create more deals from deals you may have
walked away from.
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What does that person look like? Well, these owners tend to have a mindset that their
property is out of sight and out of mind. Their property is in disrepair, either knowingly
or unknowingly. They may have vacancies that are over ninety days old. That's a great
sign that there's something wrong there. They may have poor records or no records of
the financial positioning of their property. There could be negative cash flow for a long
time. They're not in denial of their property issues. But, I tell you what, they have put in
their own money to support their property. Those are tell-tale signs of a distressed out of
state owner. There's plenty of those out there.
Another thing about the distressed out of state owner is most of them do keep their
mortgage, insurance and tax payments current. Most of them do, right? Let me tell you
this. They, also, originally bought their property for cash flow, but they have little to no
training on how to run their property profitably. That's a big sign of them, and that's a
big problem. A few of them bought their property sight unseen, which I highly, highly do
not recommend you do. Nearly all of them regret buying their property.
The key thing is they are motivated to sell.
That's the bottom line. They are motivated to get out of their negative cash flowing
position. That's who the distressed out of state owners are.
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These first two types, the distressed out of state owner and the local owner, there are so
many out there. You're going to run into them. I can guarantee it. If you do a good job of
finding commercial property owners that we teach, you're going to find a lot of these
owners.
Priority Levels:
In my opinion, the first priority, the first guys to focus on and the guys that are most
distressed is the distressed life issue owner. They are the most motivated, but they're,
also, the most volatile.
Secondly most motivated is the distressed out of state owner. Be prepared for
misdirection, sometimes lies. They don't know a lot of things, and be prepared for the
lack of information on their property, so get good commercial training so you can pick
up these things.
On the third level of motivation is the distressed local owner. They're likely to be the
most difficult negotiator of the three
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Wholesaling works well, because they don't care who buys their property, as long as it
sells. If you can structure a good deal, you have a buyer lying in wait, you can wholesale
and make big dollars working with a distressed out of state owner, because, remember,
they're not only out of state, they're out of touch with their property and their mindset is
far from being attached to this property.
Also, creative financing fits here because of their motivation to stop the cash flow
bleeding. Remember what I said, you want to gather as many motivations as you can,
and structure the deal around their motivations. I have several trainings on how to do
creative financing, so go check out those.
You may want to start off with a master lease agreement. Many of you know that's one of
my favorite techniques, so start off with a master lease agreement with a low down
payment. Give them terms and give yourself enough time to fix the property. That's how
you deal with the distressed owner. You can look at wholesaling, creative financing, and
with that creative financing, it could be a master lease, because these guys are
motivated.
Example
We had a student client named John, and we taught him how to find apartment owners,
and he became really good at it. John ended up finding the Chins. The Chins lived in
Southern California, and they purchased a seventy-five unit apartment building several
years ago. They did not hire a third party property management company, because they
thought they could save on the six percent management fee, which is about twenty-three
hundred dollars a month, and they wanted to do the management themselves. You can
already see where this is going. This is mistake number one.
But soon, the Chins realized that they were not good managers from afar. They were
absentee owners, out of state owners, and they were suffering from high turnover,
meaning that there was lots of people moving in, moving out, moving in, moving out,
and because of that, they were barely breaking even. The husband decided to spend one
week per month down in Texas. At least, that's what he told John. I doubt it, because
John toured the property and learned from the onsite janitor, or the person cleaning the
grounds, that the Chins were doing much worse than what appeared or shared by the
Chins. That's what John found out.
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John and I got together. We gathered all the facts. We looked at all the motivations, and
looked at the financials, and we made an offer on the property with a sizable cash back
at closing to handle the needed repairs and deferred maintenance. The offer was
accepted after maybe a week or so of negotiations, but during due diligence, John found
out that the rents were under market by forty-five to fifty dollars per unit. There was,
also, an opportunity to bill back the tenants for water utility costs, because the rest of
the neighborhood, the competition were doing this as well, so why not us. That's
additional savings right there.
With the combination of the rent increases and the water reimbursement, we've
projected that the property would have a fifty-four thousand dollar increase of NOI per
year. Now, NOI cap, that fifty-four thousand meant a six hundred and seventy-five
thousand dollar upside in value. John was in no position cash wise to buy this property,
so he contacted a local buyer who is very busy and buying property in this area, and
John ended up wholesaling this deal for forty thousand dollars. This was how to deal
with a distressed out of state owner, and it worked. We found the motivations. We
understood where the seller was. We understood what he wanted to do, and we made an
offer around all those things.
What Can We Learn From John's Deal?
We can learn that the Chins should have hired a reputable property management firm,
right? John, also, put together an attractive deal for his buyer that included cash back at
closing, upside in the rents, and an upside in water reimbursement. You have to look for
these little upside things. Also, the Chins didn't take advantage of either the upside in
rents, because there were too busy playing property manager and doing a poor job.
Unfortunately, the bottom line is the Chins, as inexperienced self-managers, are pretty
common place in commercial. You are going to run into these type of folks. How do you
deal with them? I just shared with you how to deal with them.
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Then, next, I need you to get a fresh perspective on the property and the market from
another local property manager. Many of you are beginners. Don't make conclusions on
the property without consulting an expert, a market expert like a property manager. A
property manager can tell you what the vacancies are, what the rents are, the plan you
want to do to improve the property. You need someone with experience to come in
agreement with you as to how and if this can work. If you don't have a coach, a mentor,
the next best thing is to get a property manager. A property manager can't help you
structure deals like a mentor could, but they could help you look at the market trends,
which are very important when dealing with distressed local owners. Beat them up first,
soften them up a little, and then get a fresh perspective from a local expert, how the
property can really perform.
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amount of work, and money, and skill to get it in workable shape for tenants to occupy
it. I don't recommend this if you are a beginner. There's too many moving pieces, too
much at risk here. If you want to do a vacant property, start with something very, very,
very small, and have lots of cash available for when things go wrong. Not IF things go
wrong, WHEN they go wrong. It's just the nature of the business. You need to scale.
3. The third seller situation I want you to avoid is if the seller's court proceedings for
foreclosure have begun, because, by the time a property has entered court proceedings,
this gets too risky, because a seller has lost too much control of the property, and this
puts you in too much of a shaky ownership position, so I would pass on this seller.
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The Power in Knowing How to Structure
Creative Financing for Commercial
Property
1. Leverage
Don't you agree that there's power in knowing how to lower your down payment? Right?
There's power there. Don't you also agree that there's power in learning how to avoid
banks and lenders and creatively structuring your commercial deals? There's great
power there.
2. CASH
You have the cash, but not the credit or experience. These guys have recovered well from
the recession. They have built up a little bit of savings, but they have no credit, and they
have no experience. They're not favorable to the bank.
How do you structure a deal like that? They found a great property, they have the
money, but they don't have these two requirements here to get to commercial property.
There's power in knowing how to do that.
3. Commercial Wholesalers
Or, those of you wanting to wholesale commercial properties out there for big dollars.
We teach that in our company here how to structure wholesale deals that are small and
on the large side. If you were to structure a creative deal, let's say with a master lease,
where the seller carries second mortgage, seller carry first mortgage, all those type of
things that are really, really cool, that I'm going to teach you in a few minutes. If you
were to structure a deal like that and take it to your buyer, it will immediately give the
impression to your buyer that you're deal is unique and very desirable.
4. Knowing How to Structure Creative Deals
It gives you a way to finance distressed properties that a bank wouldn't touch. You're
going to run across quite a few of those as you jump into commercial real estate.
5. How to Deal with a Seller Concerned About Capital Gains Taxes
How do you deal with that? You're going to run across quite a few of those sellers, and
you must know how to structure deals where you can, "Avoid or delay," their capital
gains returns. I'm going to show you how to do that, an example in a few minutes.
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6. Dealing With a Seller Who is Ill, Elderly, or Burnt out
How many of you know a seller who is ill, elderly, or burnt out? Either residential or
commercial?
I'll bet a lot of you have seen those type of sellers. All right? How do you deal with those?
I bet some of you have unknowingly passed through or passed on quite a few of those
deals because you had no clue of how to handle those sellers. Well, after this training,
you're going to know how to deal with them.
7. FUN
Putting together creative commercial deals is just plain fun. It's so fulfilling for me and
for my students. I would say that roughly half of the deals that we do have some type of
creative component, so it's just a lot of fun.
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Three Fundamental Strategies of Creative
Commercial Financing
1. Owner Carry First Mortgage
The owner is carrying the first mortgage. He is being the bank for you.
Example
Let's say the purchase price of a property is a hundred thousand dollars. I'm just making
it up, and the down payment is ten-thousand dollars. That means the mortgage is going
to be ninety-thousand dollars, so the seller is going to carry the mortgage for you. This is
great for properties that are owned free and clear.
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Let’s say you have an eight unit apartment building, and the purchase price is five-
hundred thousand dollars as an example. You found this property. Now, just quickly
compute the income and the expenses. All right, so we had eight units at eight-hundred
dollars a month, times twelve months is equal to seventy-six thousand dollars, eight-
hundred, okay? Now, we have the income. Next is the expenses. Now, we're going to
take away thirty-five percent for a typical and normal expenses. Thirty-five percent of
seventy-six thousand, eight-hundred for expenses. Do that subtraction and I come up
with forty-nine thousand dollars. Income minus expenses equals forty-nine thousand
dollars. That's by the way the net operating income, very important term.
Now I have the income, I have the expenses, what's next? You got to figure out the
mortgage. In this deal, we have negotiated a ten percent down term. Why? Is because
the owner owns it free and clear and he can be the bank, so we're going to offer him ten
percent down on this property Ten percent of five-hundred thousand dollars is fifty-
thousand dollars, so your mortgage is going to be four-hundred and fifty-thousand
dollars. Now, let's figure out what the payments will be. I'm going to make this up again.
Payments going to be five percent with a thirty-year amortization. Pretty typical. Those
payments will be about twenty-four hundred dollars a month, which would be about
twenty-nine thousand dollars a year. We have mortgage payments at about twenty-nine
thousand dollars per year. Mortgage payments. What I do next is I'm going to subtract
my mortgage payments from my NOI. If I do forty-nine thousand dollars minus twenty-
nine thousand dollars, equals twenty-thousand dollars per year in cash flow.
That's my cash flow, twenty-thousand dollars per year. Now, to do ROI calculation, or a
cash and guess calculations, basically you would divide your annual cash flow by your
down payment. Twenty-thousand dollars divided by fifty-thousand dollars, that's a
pretty good cash and cash return.
That's only possible because you put down ten percent. It's only possible because he
owns the property free and clear. Owner carry first mortgages are great for free and
clear properties, very useful. The next time you find an owner who owns his property
free and clear, check out this strategy and see if it works with him. You now know how
the math works. It's also useful for distressed owners. It's also useful for when you have
little cash, no credit, or experience. Why? Is because if you have little cash, let's say you
wanted to buy this property, from a bank it would probably cost twenty-five percent
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down payment, but because he can be the bank for us, we're able to put down ten
percent.
You don't need credit or experience because the seller is the bank. There's no credit
requirement other than what the seller wants to see.
Installment Sale
Next is, this is really cool, if the owner needs to delay paying capital gains taxes if he
sells. The owner carry first mortgage works really, really well for that. In fact, that little
technique is called the installment sale. Installment sale is a very, very effective
technique if the seller needs to somehow split up his capital gains taxes over the course
of years.
Example
Let's say that he owns this property free and clear, and he's about to make a huge profit.
He doesn't want to pay one lump some of taxes, you can do an installment sale with the
owner carry first mortgage, and you can buy his property over the next five years, twenty
percent at a time. Something like that, so you can be creative as you can be on this type
of strategy. Now you know how to calculate the cash flow, the cash and cash return, and
this is what it's useful for.
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interest only payment on the seventy-five thousand dollars of the seller. That means that
you're going to have two mortgages to pay, so make sure the numbers work out.
How It’s Useful
Now, again, let's say you have a motivated seller, but you only have fifty-thousand of the
one twenty-five. Well, this is useful for when you need to leverage. You're leveraging
your fifty-thousand dollars into this deal, because you have a down payment shortage,
so it's very useful for that.
You need to have a motivated seller for that to work. When you have a motivated seller,
and a ready and willing bank that will allow a seller to carry second, you can leverage
your fifty-thousand dollars into a five-hundred thousand dollar property. Now, what it
does is when you're putting down fifty-thousand dollars, that's your outlay, your
investment. Instead of the one twenty-five, basically it's going to increase your cash and
cash returns. In this case, your ROI, your cash and cash return is going to more than
double than would be if you were to put down the hundred twenty-five thousand dollars.
Leverage
The owner carry second mortgage is a great way to not only leverage, but to just go
through the roof on your cash and cash and ROI. When you see this language here, let's
say that you're on LoopNet, or any other type of online community where you see
commercial properties, or even maybe in a flier. You see this language here, "Seller
financing available." You see that, or you see, "Owner may carry."
That is code language for motivated seller, for seller needs to move this property. This is
code language for, "Bring me something creative." Now you know what to bring them.
You see this language, you bring them an owner carry second mortgage offer
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Well, in many cases, he may not be able to. The reason why is because of these four
reasons.
You guys have just learned how to put together, conceptually, a seller carry first
mortgage, a seller carry second mortgage, and a master lease. You can now take those
three strategies and see if your seller falls in one of these categories or reasons, and
apply what you just learned.
1. The first reason why a seller would even consider creative financing is if this property
has high vacancy, is in poor condition.
These days, if a property is eighty percent occupied, it's considered distressed these
days, all right? A bank wouldn't want to qualify the property for a loan, so how could you
sell it for top dollar with high vacancy? Same thing with poor conditioning. The
property's in poor condition, same situation as this here. If a property suffers from this,
and the seller still wants to sell the property, the only way to get his price is to do
creative financing.
2. Let’s say the property is in good condition, condition's okay, but the seller's not. What
if the seller kept no books and records on the property? Amazing as it sounds, a lot of
commercial owners keep very poor records of their income and expense. It doesn't allow
you to validate how much the property makes.
If it doesn't allow you to validate it, the bank is going to have the same problem, so the
bank is not going to give you the dollars you need to buy the property. The banks may do
that, but they may want to ask for a large down payment to protect their downside, and
the deal makes no sense. When the property's okay, but there's nothing to substantiate
the pricing, that's when creative financing may come into play.
3. Let's say the seller has concerns about paying capital gains taxes if he sells. Where you
already learned from previous video about the master lease, which is a creative
financing technique. You also learned of the owner carry first. In both situations we can
mitigate his concerns about paying taxes when he sells. We can mitigate it by spreading
out over time his capital gains taxes. You can look at an installment sale. You can look at
a master lease. You can look at an owner carry first mortgage as a way to mitigate this.
4. The seller needs a quick sale because of a life situation.
For example, if the seller is ill, going through divorce, or being relocated, he needs to sell
the property quickly. Sometimes, for privacy's sake, a seller does not want to list a
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property on MLS or online, and wants a quick sale. In any case, when a life circumstance
requires a quick sale, the best way, the best way is to do creative financing.
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Or, a master lease term over an extended amount of time that you and the seller agree
upon?
The obvious answer is B, the master lease where you extend a deal out, because their
motivation is what? She doesn't want to pay, or she wants to delay her capital gains.
Again, what's the motivation? We set the terms
Example 3. The seller wants to sell, but would like to maintain some type of monthly
income from the property. What's most likely to work? A master lease where you
structure a monthly payment plan to him over and above paying his mortgage? Or, B, a
master lease, a joint venture, where he shares in the profits when you sell the property
years down the road?
The answer is A, a master lease where you structure a monthly payment to him over or
above the mortgage payment.
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Definition of an Exit Strategy for Commercial
Property
My definition is this:
An exit strategy is your escape plan for the money you put in and want to get out of the
investment
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3 Questions to Ask Yourself Before Investing in Any Commercial
Real Estate
1. Why am I buying this property?
It could be for retirement. It could be for personal and wealth creation. It could be to
pay for your kids' college tuition down the road. You may want to sell and buy larger,
larger, larger properties. That's what I've done. Or you may want to ease out or quit your
day job. That's what I did. Or your property buying could be for use as a tax shelter.
Those are possible reasons why you are buying this property
2. How long do I plan to hold this property?
Now let me tell you this. When answering this question, your loan terms, the loan that
you get on a property will dictate how you answer this question.
If it's a short term hold, like a finder or less than 5 years, then select that type of loan. If
you plan on holding for more than 10 years, 20, 25 years, then look for long term loan
options. If you end up selling the property too soon, then you may have to pay a very
large prepay penalty. If you want to convert your short term loan into a long term loan,
the long term loan terms today may not be available tomorrow.
3. How will a sell affect my taxable income?
Very important question, because Uncle Sam will likely get his hands on as much of the
income that you earn from a property sell as possible, right? This is the IRS.
Tax planning as early as possible is one major asset to your real estate exit strategy. The
sale of a property could put you into a higher tax bracket and take a large buy out of your
profits. What I want you to do is consult with a tax professional and organize way to
reduce your tax burden at the very beginning.
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Hold Long Term for Cash Flow
You need to get a good long term loan as long term as you can.
You need to get really, really good at managing the management. That's where the
money is made long term. Managing the management, having good property
managers.
Set up an income and expense budget every single year.
If you don't know how to do it, what you do is you get your property manager set up
for you and they're supposed to do it every year for you. On our properties, our
managers have their annual budgets for the following year are due at the end of
November each year. If this year is X, so X year that budgets are due at the end of
November for X plus one year.
Get a good real estate tax advisor. Do not use one of those franchise tax advisors.
Yes, they're cheap, but let me tell you this. Being cheap can be very expensive.
When you're buying commercial property, there's so much money, there's so much
taxable income involved.
Don't use a tax advisor like an attorney or a tax advisor who only does tax returns.
Use a real estate-based tax advisor.
I need you to be anal. That's right, be anal, be a micro manager because no one
cares more about your investments than you do.
You need to watch your numbers. Some people say that commercial property is a
passive business. It is not. It is not a passive business. You need to be on top with
everything, everything.
Sale Outright
I don't know why you want to do that, but you maybe forced to do that for some
personal reasons.
Just remember this, it takes 12 months to plan a good exit and it takes 3 months for
the sale to actually happen.
If you want to sell your property, you should plan to sell it a year in advance to set up
the numbers, to make sure everything is good, the NOI is good.
Then when you decide to sell it, it takes 3 months for actually to happen, so planning
is very important. Next, be prepared to pay capital gains taxes.
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Capital Gains
Tax that either a short term rate which is 25% up for investments held under year or
for long term, it's 15% for investments held one year or longer.
Twenty-five percent tax it for investments held under a year and 15% for investments
held one year or longer.
Talk to your tax advisor on those specific numbers. Again for the person selling
outright, what are you going to do with the profits? You may want to research if
there's a better way to get the profits out of their property before selling outright.
Sale Leaseback
To free up money tied up in your property, you can do what we call a sale leaseback.
You would sell your property to an investor for cash, then lease it back for a long
period of time as an agreed upon price, rent price.
If the seller or a tenant that's you, you're very strong financially, then your investor
can get good financing. That's a win-win.
This strategy not only frees up cash, but the seller that's you retains use of their
property with the long term lease.
This is ideal for doctors and attorneys that own their property in which they practice
their business. They're ideal candidates for sale leasebacks.
Just to let you know, typically the price of the sale leaseback should be set by an
independent appraisal.
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I call it gifting it to your heirs. If you wish for your children to own a portion of your
commercial real estate while you are still alive, you can gift portions of the real estate
to them each year in the amount of the annual gift tax exclusion which I believe today
is about $13,000.
Every year you can give them $13,000 worth of their property and you can gift it to
them.
Here's one caveat. Unlike inheriting real estate in which the heirs' basis is a fair
market value with their property as of the date of the inheritance, a donee's basis
from a gift is the same as the basis of the donor.
Your children may wish to consider a 1031 exchange or another options when they
sell the real estate to avoid a big capital consequence.
In a nutshell when you gift this to your kids, make sure they get a tax advisor before
they decide to sell those property because they could be in for a big surprise if they
do.
The Wholesale
If you have an excellent property under contract and you decide that you don't want it
for yourself but you would still like to make money from it, consider wholesaling your
property to a qualified buyer. Basically what you're doing is you're assigning the
contract, you're flipping the contract to another buyer for a fee. Okay, that's called
wholesaling in commercial property.
Real life example of having a razor sharp exit strategy can do for you.
There's this LLC which owns a property that's called Goshen Investments LLC. They
purchased a 112-unit apartment building and they called it Goshen Villas. They bought it
more than 15 years ago. That 3 partners' investment objective was to pay themselves a
certain cash flow every month and they end up doing this for several years quite
successfully so it worked out really well. However, the partnership as a whole decided to
sell Goshen Villas and part ways, but 2 of the partners faced huge capital gains
consequences at closing if they did sell. They were really concerned about that and they
consulted their advisors which was me. I advised them to refinance their property,
payoff the third partner, continue to sell the property, and then perform a 1031 tax
deferred exchange.They end up doing that and exchange their "tax" re-profits into
another property that had even greater cash flow. It was a win-win for everybody.
Here's a lesson in this. If you don't have a razor sharp exit strategy when you sell a
property, be prepared to pay Uncle Sam heavily. Okay.
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2. Have more than one exit strategy at a time. Ideally you want to have an exit strategy
going in the investment, during investment, and as you come out of the investment. At
that point, there maybe 3 different types of strategies there.
3. If you don't have an exit strategy thought of, you are telling yourself that it's okay to
lose your investment or that you're not looking forward to any profit. That's how
important an exit strategy is.
4. The best exit strategies come from wise investors. You will limit yourself and your
options and you may leave thousands if not hundreds of thousands of dollars on a table
if you don't get help in designing your exit strategy. Don't try to be the expert or the
know it all here. You are not the expert on exit strategies because you don't have
experience.
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Question 1
Have you ever over paid for a property? Do you know of anyone who have ever over paid
for commercial property? It's not a good feeling, and it's not a good position to be in.
Question 2
Do you know how to properly value a commercial property comfortably in any city, in
other states? That's a necessary skill, and it's a required skill to be excellent at
commercial real estate investing.
Question 3
Number three is, do you know of anyone who had plans and dreams of cash flowing
massively on their commercial property, but it never happened? It's not a good feeling,
it's not a good position to be in.
Everything here, there's a secret to it. What I'm going to show in this video, the bits and
pieces of it are out there in the internet world, and in various books. In this video I'm
combining it all into one training to put you in the best position to make the best
decision in your next commercial real estate deal. https://youtu.be/0gSGg2dusgE
The Secret
Let's get started. Here's the secret, the secret is you must be in blank in your sub market.
What's a sub market? A sub market is your neighborhood. If you are investing in a
commercial property down town, your sub market is down town, it's your neighborhood.
Here's our secret, you must be an expert in your sub market.
It's foolish not to be an expert in your sub market, how do you know where the
opportunity is? Based on what, right? I'm going to share with you four things that you
must know to be an expert in your sub market. You must know these four things before
buying any commercial real estate.
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Four Things You Must Know in Order to Be an
Expert in Your Sub Market
Let's say that someone that you trusted sent you a great commercial deal, and you
believe it to be a great commercial deal. It's a cash flowing, twenty four unit apartment
building that's in an excellent neighborhood, right? Three great things going for it.
Number one, it's cash flowing. Number two, it's a decent size, it's twenty four units.
Number three, it's in an excellent neighborhood. A decent deal, it seems, right? Let me
ask you this, how do you know if it's cash flowing? How do you know? That's based upon
what, right? How do you know that expenses that the broker gave you are true and
accurate. How do you know that the sellers information they gave you, the expenses are
true and accurate? Based upon what? You have to know that.
Number two we said that this was a decent size. How is it decent compared to their
price, and their neighborhood? A twenty four unit in different neighborhoods at the
same price may be overpaying, or may be a great deal, right? Twenty four units is a
decent size, based upon what? Lastly, it's in an excellent neighborhood. How do you
define excellent? If a neighborhood is not excellent, how do you define it? How do you
measure it? What I'm going to do in the next few minutes, I'm going to share with you
how to determine all these things. These four things, I'm going to share with you how to
determine in a typical deal, all right? Again, do not buy or invest in any commercial real
estate without know first these four things that will make you an expert in your sub
market. I'll see you there.
The Truth
All right, the four things needed to become an expert in your sub market, right here.
Before I start though let me share this with you, this truth. There is no such thing as a
national real estate market that's relevant and useful for us. What we need to know,
what you need to know is what's happening in our own sub market, what's happening in
our own neighborhood? From a national perspective, it doesn't help us much. We need
to know locally, what's happening in our sub market, okay? Got it? All right.
Number One: Price Per Unit
Let's move onto these four. Number one on the four things to become an expert in your
sub market, is you need to know what the price per unit, or per door is. Now, in these
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four examples I'm going to use a large apartment as an example. They're easy to
understand, there's a lot of them out there. Number one, know the price per unit, or per
door in your sub market. For example, let's say you have a ten unit apartment building,
and a hundred thousand dollars purchase price. That's ten thousand dollars per door. In
your sub market, you need to know what the price per unit is, price per door is, in your
sub market, it does exist.
Number Two: Cap Rate
Number two, you need to know the cap rate for your sub market. You see, every sub
market in a city, let's see there's two sub markets in a city, let's say that one sub market
is very expensive, and one sub market is lower to middle income. The cap rates for the
rich neighborhood is going to be here, the cap rate for the poor neighborhood is going to
be here. You can see you have different cap rates for the different sub markets. Whatever
sub market you're located in you need to know the cap rate, got it?
Number Three: Sub Market Rent
Number three is you need to know the sub market rent. For your given sub market, what
is the rent for a typical one bed room? What is the rent for a two bedroom, what is the
rent for a three bedroom? In your sub market you need to know those ranges for the
one, two, and three bedroom rents. Okay, got it? All right.
Number Four: Expenses Per Unit
Number four is you need to know the expenses per unit or per door for your sub market.
This is where a lot of people mess up because they just don't know. This is where a lot of
properties don't cash flow because this was either miscalculated, or never known. If you
want to give yourself the best chance of not overpaying, of cash flowing and having a
good long term deal in your sub market, you need to know these four things.
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Here's number one, why you need to know the price per unit or price per door in your
sub market. The reason number one is you need to know what to offer. If this prop is
worth making an offer on, and you come up with an offer price, what is it based upon? It
should be based upon the price per unit, or per door in that somewhere, all right? What
this does, this prevents you from overpaying. A few weeks ago I talked about if you know
anyone who overpaid for their commercial property, they probably overpaid because
they didn't know the price per unit, okay? Got it?
Now, here's something for you whole sellers out there. You need to know what the price
per unit is because for you whole sellers, how do you know if you have a good deal or
not? If you have a probability under contract for thirty thousand dollars per door, right?
We know that price per unit, the price per unit or price per door is forty thousand in that
sub market and you have it under contract with thirty thousand dollars a door, we know
we have a good deal, okay? Got it. That's important. That's why you need to know that.
Cap Rate
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Let's next move onto the why we need to know the cap rate in your sub market. See you
there. Number two, why you need to know the cap rate in your sub market. Remember,
this is all about becoming an expert. Here's what you need to know, every sub market
has it's own cap rate stamped upon it. A neighborhood that's considered a very rich
neighborhood, would have maybe a five or six percent cap rate stamped upon it.
Whether a poor neighborhood would have a cap rate of nine or ten stamped on it, so you
can see the difference there. If you were to do an evaluation of this type of property
using this cap rate, guess what's going to happen? You're going to mis-value the
property because all commercial real estate is based upon the cap rate. You must know
the cap rate in your sub market to properly value the real estate, got it? Okay.
In my previous videos I talk about the cap rate, and how to calculate it, and the
importance of net income, all of that. Look at my other videos, but I can't go over here in
this video for the sake of brevity. Here's a third reason why you need to know the cap
rate in your sub market, the higher the cap rate, the lower the price. You got it? Now
conversely, the lower the cap rate the higher the price. It's really important that you
know the cap rate in your sub market so that you don't overpay, or over value, or in good
cases if you can purchase an A class property in a C class neighborhood, that's a good
thing, all right? Okay.
How
Now let's move onto how to get this information, how to get the cap rate information.
Well, it's pretty simple. Number one, you need to look at a lot of deals. You need to do a
lot of evaluation of deals and do your own cap rate calculation, some of the deals that
you look at on Loop Net for example, or from brokers, the cap rates are already
calculated. If you can look at a certain sub market and look at a lot of deals, you'll see
what cap rates they are projecting, okay? You have to look at a lot of deals, what's a lot?
Not five, not ten, minimum of twenty five deals just to get a feel for what cap rates are in
your sub market, okay? Not five, but twenty five, got it?
Ask
You can also ask two or three commercial estate agents, just call up and ask them, "Hey,
what's the cap rate for B and C class apartments in this neighborhood?" Let them give
the answer, call two or three, then average them out. Cap rates don't move that much,
and they're not that dynamic. They pretty much stay put for a long time. Number three,
there's several online resources that you can use. Now you know the importance of
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knowing the cap rate in your sub market, okay? Let's move onto the next category, okay?
I'll see you there.
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We're going to jump into the last one, right? Number four, and that's why you need to
know what the expenses are per unit or per door. Number four and the last thing you
need to know to become an expert in your sub market, the fourth part of the secret. It is
knowing the expenses per door.
Why?
Why do you need to know that? Well the number one reason why is, it's the biggest
reason why beginners do not cash flow is because they don't know what the expenses are
per unit for their sub market. They end up not cash flowing because they
underestimated what it took expense wise to operate the property. That's the biggest
reason why beginners fail to produce cash flow in their property. Single family,
commercial, you have it.
Number two, agents and sellers, they never give you accurate information. In my
experience, when we plug the agent or seller information into the property and operate
it, and we look back a year at what happened, our actual expenses will be higher than
what they gave us. Okay? My experience is they never give you accurate and clear
information, all right? Number three, the reason you need to know is because this is
what experts know and do. Sub market experts, people who are experts in the sub
market in the apartment business, they know what it takes expense wise to run their
apartments. They know expenses per unit, got it? All right.
How?
Next thing is how do you get this information? Again, you have to look at a lot of deals.
Repetition, repetition, practice, practice, look at a lot of deals and you will come to a
conclusion on what the expenses are per unit or per door for that sub market. Also, you
can ask a local property manager. That's what I did because I didn't understand what
the expenses should be, so I went to a very established property manager and had him
lay out the budget for me. He showed me what expenses are. What I did was I gathered
all the expenses, and I divided it by the number of units, and I got my calculation
expenses per unit moving forward in that sub market for all the deals, okay?
Mentor
Lastly, you can get a mentor, get someone who's been there and done that so they can
look over what you're doing so that you do not experience what most beginners do,
which is a negative cash flow. Okay, you got it? That's number four, so what I want to do
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now is I want to give you a quick summary and compelling reasons why, again, you need
to become an expert in your sub market.
Summary
All right we're finally here, here is the summary of the secret to commercial success, and
the four things you need to know to become a sub market expert.
Number one, you need to know the price per unit in your sub market.
Number two, you need to know the cap rate in your sub market. Remember, every
cap rate has a ... every sub market has a cap rate stamped on it.
Number three, you need to know the market rents for a one bedroom, two bedroom,
and three bedroom, and what the typical rent ranges are in your sub market for those
bedrooms.
Lastly you need to know, and this is probably the most important thing, is you need to
know what the expenses are per unit, right?
Benefits
Now, here are the benefits for just understanding why you need how to get them, here's
the benefits. You won't overpay on your commercial property any longer, your cash flow
will be predictable, you're going to learn how to properly value commercial property,
and lastly you're going to meet your investment objectives. That's what it's about, that's
what it's about in creating wealthy commercial real estate is meeting your investment
adjectives, right? Through knowing this secret, knowing these four things and becoming
an expert in your sub market, hope you got it.
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There are 7 commercial real estate terms that you must know before you make any
commercial real estate investment decisions. I've taken the most important terms from
my YouTube Channel and I condensed them right here for you.
https://youtu.be/JPfj6P5m5wE
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Cash on cash return is also known as your ROI, or return on investment. It is the heart
of your money or your investor's money and is basically your annual cash flow divided
by your down payment.
ROI:
Return on investment or your ROI is a very important term because it's not how much
money you spend on the property, but how fast your money is coming out of the
property. If all you have is $50,000 to spend and it takes 20 years to get back your
$50,000 through cash flow, that's not too exciting. That's only a 5% return. Perhaps
that's okay for a stock broker, but not for us in commercial real estate. We are expecting
a double digit return minimum. Instead, it would be better if you could earn back your
$50,000 down payment in three years.That's a 33% return on investment and that's
good and very doable in commercial real estate.
When you can achieve a 33%, or sometimes even 50% return on investment, it is
because you are working on what we call value added opportunities and that is what we
focus on here in our company. Value add commercial properties. Another thing I want
to share with you is when you are raising capital from an investor, how you determine
what you can pay them is your cash and cash return, because it comes straight off the
top. That's why it's really important to know this term.
3. Capitalization Rate
If you look at the commercial real estate industry as a whole, and are looking for a
singular calculation that everyone uses in the industry, it is the cap rate. It's an industry
standard to use the cap rate which is the NOI divided by the sales price. It's important
to know this because the cap rate is used to measure a building's performance, without
considering the mortgage financing. For example, if you paid all cash out without
investment, how much money does it make? What's your return? That's what a cap rate
is. In layman's terms, a cap rate is your return on investment if you paid all cash for the
property.
High and Low Cap Rates:
A high cap rate which is 10, 11, 12% usually typifies a higher risk investment and a low
sales price. High cap rate investments are typically found in poor, low income
neighborhoods. In comparison, a low cap rate, such as 4, 5 and 6%, usually typifies a
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lower risk investment but a high sales price. Low cap rates are usually found in upper
middle class to upper neighborhoods. Therefore, neighborhoods within cities have
stamped on them their assigned cap rates. Every neighborhood has a cap rate. If you
know what the NOI is and you know the cap rate, then you can calculate what the sales
price would be.
Sales Price:
If the cap rate is equal to the NOI divided by the sales price, you can flip that equation
over and the sales price is equal to NOI divided by the cap rate.
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units. If you have a $500,000 apartment building and you have 10 units in it, that's
$50,000 a unit. That is how you calculate the price per unit.
Price Per Square Footage:
We use price per square foot for office buildings, retail centers, and industrial buildings.
To determine the price per square foot, you use the same calculation as price per unit,
but instead divide the price by the square footage. So, a $500,000 building that is
10,000 square feet would be $50/sqft.
If you know the price per square unit in your sub-market and compare it with the price
per unit of your property it will help you:
Gauge your offer price
Not over pay for your deal
Know if a seller's asking price is realistic
Wholesalers:
Commercial Wholesaling is when you find a good deal, get it under contract, find a good
buyer and flip it to the buyer. Knowing the price per unit and square foot is a valuable
skill for wholesalers to determine whether they have a good deal and position
themselves to make a lot of money. Again, knowing the price per unit and price per
square foot in your sub-market and your property is at the heart of determining what
your property is worth and what your offer price will be.
6. Building Classification
Commercial buildings are separated into three classes. These classifications mean
different things to different types of investors.
Class A Building:
Class A buildings are the newest and highest quality, with the best location and highest
rents. They are beautiful buildings in beautiful neighborhoods and attract the highest
quality tenants. They are typically downtown with commercial on the main level and
residential units on the top. As a beginner investor, Class A is not for you. The reason is
because the price is too high, with low returns and you get steep competition from
institutional buyers and funds. They can pay all cash and are okay with the low returns.
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Class B Building:
Class B buildings are usually a little older, but they are still good quality and attract
average, working class tenants. Oftentimes value added investors target these types of
buildings as investments since well-located class B buildings can be returned to their A
class glory. These are the most stable properties. As a commercial real estate investor,
your goal is to find a B class building in an A class neighborhood and then renovate that
building to get A class rents.
Class C Building:
Class C is the lowest official classification and the buildings are older and need updating.
They have the lowest rents and you'll find lower to middle income tenants in them. If
you are an apartment investor, class C is the way to go because the ratio between the
price per unit and the rents are still good and you can get the highest returns. There will
always be a demand for them because they are the most affordable, especially with the
rising rents of Class A and B apartments. However, you need to be careful because the
buildings tend to need a lot of maintenance and the neighborhoods and tenants could be
challenging. Managing these properties requires skill.
Class D Building:
There is also another class but it is not an official class. The buildings are often vacant
and in need of extensive renovation. Class D properties are for experts who have deep
pockets. If you're a beginner, don't even consider a class D building.
7. Types of Leases
Leases are the lifeline, they're the life blood of a commercial property keeping the money
flowing, thus protecting you from foreclosure. They are legally binding written
agreements between the property owner and tenant. Let me briefly highlight several
types of leases. In a previous blog, I went over it in great detail.
Apartments:
For apartment buildings the lease could be a one year lease, a 9-month lease or a month
to month lease. All our leases are strong leases written by our attorney. Why are they
strong? Because you are in the income business. Leases give you the legal right to collect
rent, evict people and take them to court if they don't pay. If you don't have a strong
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legal instrument your tenants can take advantage of you and stay in your apartments
without paying rent. So, having a strong lease is really important.
3 Types of Leases for Office Buildings and Shopping Centers:
Full Service Lease: The tenant pays a flat fee and landlord pays for everything,
including insurance, taxes, repairs and utilities.
Triple Net Lease: The tenant pays for everything. This is a passive option, where the
landlord only has to pay the mortgage. Watch my video Truth Behind Triple Net
Lease to learn more.
Modified Gross Lease: The tenant and landlord split certain expenses.
Again, leases are the lifeblood of any commercial real estate investment. Another way to
look at it is, you're buying the building for free and you're paying for the leases. The
building is worth nothing without the leases.
Bonus Term: Relationships
I have a bonus term I want to share with you and it is probably the most important term
of all if you want to have long lasting success as a commercial real estate investor.
Knowing this will:
Help you get the best deals.
Convince the seller to work with you instead of others.
Help you work with their broker that will send you his or her off market deals.
The bonus term is relationships. Commercial real estate is a relationship based
business. This is probably the most important term of them all because if you don't get
this part right, none of the other 7 terms matter. Here's the question. What do you think
will get you the best deals, knowing terms or knowing people? What will convince a
seller to work with you instead of others, is not knowing terms but understanding the
needs, motivations and building rapport of the seller.
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Choosing the Right Commercial Real
Estate Broker
Years ago, I spent several years working for a prestigious commercial real estate firm
while researching for my Dummies book. What I discovered is that commercial real
estate agents are a different breed. They're a different breed of people. They're highly
skilled but well-respected. Getting to know how they work and function in their jobs is
critical in choosing the right one to work with. Don't you agree?
Well, many people like yourself are intimidated by commercial real estate agents. I
know I was intimidated. They didn't look as friendly as residential agents. They wore
suits always. Their suits were in big buildings, and they seemed so professional,
especially the way they spoke. Sometimes the words that came out of their mouth just
went completely over my head. Like everything else in life, I just have to jump in. I
called them. If I messed up, I messed up. I get a second chance, I get a third chance, and
so on, but they had something I wanted: deals. Eventually, I learned how to relate to
them, and I prospered. Today I can thankfully say that I have fantastic working
relationships with commercial real estate brokers all across the country.
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don't have to rely so much on closing a deal to pay my bills." You see, they're like normal
people. The lesson here is don't be intimidated.
2. There's a big difference between commercial real estate agents and
residential real estate agents.
Here's the difference, a commercial real estate agent is business-focused. He's business.
He's focused on business. A residential real estate agent, their job revolves around the
wants and needs of a homeowner and his or her family. You want to know what that
means? That means that commercial real estate agents rely less on emotions than
residential agents do. They rely more on facts and figures than school districts and cozy
streets. You must really understand that if you don't already.
It makes sense to first understand what your goals are. Why are you looking for a
commercial real estate agent, and what do you want from him or her? That's the
question.
Here are your goals. Here's what you want.
1. You want pocket listings or off-market deals.
That's what we ultimately want. There's deals all over LoopNet and CoStar and other
things online. We want the deals that are not online, that are not on an MLS, that are
not on LoopNet. We want their pocket deals because those are the best deals. Those
deals are going to make you the most money. Those deals don't have the competition
that you have with deals that are online. Let's face it, the deals that are online, they've
been picked over, and those are basically the left-overs. You want the pocket listings, the
off-market deals.
2. We want them to return our calls.
The number one complaint I get from my students is that the agents don't return their
calls. We want to work with someone that will return our calls.
3. We want them to provide us information on the current listings.
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4. We want enough market data concerning whatever asset type you're
looking for, whatever commercial type you're looking for, to make buy and
sell decisions.
We rely on them to get us that data. It could be sales comparables, rent comps,
demographics information, all of the above. We rely on them to get that information to
us.
5. We want to have a sound and professional business relationship.
That's what we want, and that's what they want as well.
6. We want referrals from them to key personnel in the industry, such as
property managers, lenders, attorneys, inspectors, surveyors, other
investors, things like that.
It's really important because they are in the industry, and the best source of a property
manager, lender, attorney, and inspector is by referral. We want to work with someone
who is happy with theirs. What you want, pocket listings, returned phone calls,
providing information on current listings, enough market data to make buy and sell
decisions, sound and professional relationships, and key personnel referrals.
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LoopNet
CoStar
Google "commercial real estate brokerage,"
Now, here's something that applies to both referrals and online resources. The question
is, is the broker's area of focus the same as yours. What I mean by that is most brokers
focus on an asset type. For example, I work with an awesome team of commercial real
estate brokers here in my area, and if I'm acquiring multi-family appointments, I go to
Brian. If I'm acquiring an office building, I go to Bill. Their expertise are in their niches.
Brian's is with multi-family, and Bill's is with office buildings. You need to work with an
expert. The best thing to do with that is if you are looking for an office building, then you
need to focus and ask questions about the person's ability and understanding of office
buildings.
Something That's Not Important When Finding Brokers
The thing that's not important is the size of their office. Some of the best firms I work
with are called boutique firms. There are 3 guys in the office, and they are the best in
that area of the country, 3 guys in the office, and they rule. They rule that city. Just
because the firm has 100 brokers or has this amazing marketing and software system,
doesn't mean that they're good or they're going to work for you. This is an individual
business. It's all about the individual broker. This is a relationship business.
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I can't tell you how many times that I had a great relationship with a broker and he
connected me to other sellers, so I can produce commission, he connected me with other
investors so I can do more deals, he connected me with lenders that were having
problems with their properties I can go and buy. You want someone that's well-
connected in his or her market.
4. You want your broker to be full time employed in the business of
commercial real estate brokerage.
We want no part timers. We want full-time employment in commercial real estate
brokerage. Not in single families but in commercial real estate brokerage.
5. They need to understand your needs
The fifth qualification is really important. I want you to see if they ask you any questions
because if a commercial advisor does not understand your needs and objectives first,
then it may not be a good fit. I don't know what's more important, having an expertise in
a niche and location, or this one, to see if they understand what you need first. Okay, it's
a toss-up between the two.
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guess what they would do. They would never contact you again. Do not talk cap rate or
ROI.
2. Jump in.
That's right, I want you to jump in feet-first. Stop over-analyzing and start analyzing
deals. You know who you are. Stop procrastinating. Give the agent feedback after you
analyze the deal. That's how they're going to get educated from you, is by you giving
them feedback in what you like and what you don't like. How to begin working with
them? Make the call, jump in feet-first, and stop over-analyzing. You don't need to know
everything or be the expert. You don't have to read my book 7 times to call him. Read it
once or twice, make the call.
I know that this is about you choosing to work with a broker, but it goes both ways. Why
should he or she work with you? The question is, "How can you position yourself so
commercial real estate agents want to work with you?" What I did was I asked one of my
broker buddies who's one of the best in his market, and he's very successful, does
transaction after transaction. He is so well-known, and here's what he told me when I
asked him. I asked him this question, "Hey, could you give me a few attributes that you
look for when choosing to work with a client?"
He told me 4 things.
He said he wants you to be responsive when he calls you.
Aha. Interesting, huh? Interesting that that came out of his mouth first because
remember the biggest complaint that we get from brokers is the brokers don't call back.
He's asking you to be responsive when he calls you. I wonder if those two are connected.
That's the first thing he wants you to do. He wants you to be responsive.
He wants you to make a commitment to work with him.
If he's going to put in the work and bust his butt and get in there and fight and bringing
you deals, he wants you aboard. He wants you committed to working with him and not
just treating him like 1 of 10 brokers.
He wants chemistry.
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He wants chemistry, and what he means by that is he wants a productive relationship
with you. He wants to work with people he likes, so you need to be enjoyable. You need
to say what you do and say what you do, and return his phone call.
Here's one thing he didn't say and it may surprise you. He didn't say he wants
a client with deep pockets and lots of cash
He didn't say that. He didn't say he wants a super-wealthy client. In our conversation,
that wasn't even mentioned. What's most important to him is for you to be responsive,
committed, and relationship-focused. That's why a broker would choose to work with
you, being responsive, you committing to him, and being relationship-focused. Got it?
All right.
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Let me end with this. In the end, we only regret the chances we didn't take. Isn't that the
truth? Get out there today and get busy created relationships because they have what
you want, and choosing the right commercial real estate broker is what it's all about,
choosing the right one.
Arnold's Beginning
When Arnold first came to this country, he needed to figure out a way to pay for his
competitions, to pay to get to auditions, to pay to market himself, because he had a
vision. To do all that, without having a 9 to 5 job, he saved every last penny he had from
earning money in competitions, in giving workshops, and giving seminars, until he had
enough money to purchase a 6-plex.
Arnold had a vision, and in that vision, he had a belief. That belief was he should first
buy an income producing property. First, before buying a home to live in. That's exactly
what he did. He purchased a 6-plex, he lived in apartment number 6, and he rented out
the other 5. That afforded him to do what he had to do.
Three years later, he sold his 6-plex, and bought a 12 unit. From his 12 unit down the
road, he sold it, and bought a 36 unit. At this point, now he's seeing the possibilities of
the power of commercial real estate, so it led him to build his empire, that consisted of
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hundreds of apartment units, office building, and retail space, in west Los Angeles.
Today, Arnold has a real estate empire worth 300 million dollars. That's not the moral
of this story. The moral of this story is, Arnold did all of this, all of that, before he
became Governor of California. What I want you to get here, is Arnold used his real
estate, his income producing real estate, to fuel his passions, and to fuel his dreams.
Arnold didn't have a lot to begin with when he got started. Something I want you to
think about. Us here, at commercial property advisors, I personally believe that we are
the best in getting people started here. We can't guarantee you, that you're going to
build a 300 million dollar portfolio, no one can. We can surely help you here, to get
started on this journey. Again, the moral of the story is, to let your real estate endeavors
and investments fund your dreams and your passions. I want to share a quick story with
you, hopefully to encourage you. This is the license plate to our car, California. It says
Dad, that's me, and high 5 PJ, Peter Junior, that's my son. You see, I had a dream many
years ago, driving down the California coast with a Daytona yellow Corvette
stingray with a 427.
Some of you car buffs know exactly what that is. To me, it was the most beautiful car in
the world. That was my dream. I mentioned that to my mentor, my mentor challenged
me. "Peter, buy the car, but buy it with your real estate." That's what I did. I bought a
small apartment building that cashed over 1,100 dollars a month. I saved up 6 or 7
months of the cash flow, went out and got the car. The payments were 300 per month.
With my cash flow, I'd pay it off in a year and a half, but the coolest part was on one
chilly April morning, it was really foggy that day, my son and I jumped in that car ... I
was a single parent, and a full-time engineer, and just a part time real estate investor.
That morning, we drove down the California coast, and my dream was realized. It was
funded through my apartment investment.
What do you want to do in life? I hope this has encouraged you that it's never too late to
start. Here is the youtube link that's going to show Arnold Schwarzenegger's interview.
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It's going to take you through this entire journey. I hope you enjoy it. It's very
encouraging, very inspiring to me.
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Shopping centers
Mobile home parks
and the list goes on
3. I'll share with you the 4 guiding principles of investment.
You do not buy any commercial property or any income-producing property without
first understanding these 4 guiding principles of investing. Anyone can do this.
4. I'm going to show you how to calculate by using 3 examples.
How to calculate the cash flow and ROI which is your return on investment. These are
the 2 pillars of any income producing property. Do not buy any property without first
knowing how to thoroughly calculate the cash flow and return on investments, and why
you should become a commercial real estate investor.
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3. All it takes is 1 commercial deal to dramatically effect your financial life
For the rest of your life, including your children's lives.
Quick Disclaimer:
I am not a CPA. I'm not a tax attorney or a tax expert. I am a commercial real estate
investor and mentor. My taxes are done by professionals and their companies. My
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advice is to always get the advice of a tax expert when you make any types of personal
financial decisions.
Person 1
If you recall, person number one has a full-time job but they do not own any real estate.
Do your best to not stay here too long if this is you. This person has the standard write-
offs that the average American worker gets. That's about it. You're going to pay the most
in taxes and basically get to take advantage of zero of the tax loopholes.
Person 2
This person has a full-time job and owns some investment real estate. This person has
some restrictions that the IRS sets forth. They are as follows: As long as your income is
$100,000 or less per year, you can take a real estate loss like a paper loss of $25,000 per
year against other income. This is an incredible thing, which basically allows you to wipe
away $25,000 in income so you end up paying less in taxes. However, if you make over
$150,000, you can't take any real estate loss.
If you make between $100,000 and $150,000 you can take some loss, but as you
approach the $150,000 mark that loss phases out. However, person 2 is able to take
more advantages then person 1. If you make over $150,000 a year, your advantages are
basically phased out. What do you do if this happens? You have a really good job, you're
buying real estate, but you have losses on paper that you are unable to claim.
Person 3
Your best option would be to become Person 3. Become a full-time real estate
professional. You can either be a full-time investor, a real estate agent, property
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manager, or other real estate job. Under IRS rules, this is defined as a real estate
professional. You must basically work in real estate more than any other job and you
must work at least 750 hours per year in that real estate job. Got it?
Now, as a designated real estate professional, you can take unlimited amount of real
estate paper loss against your income no matter how much you make or how much your
real estate loss is. Remember, you don't have to be a millionaire or billionaire for this to
work for you.
Donald Trump
This is exactly what Donald Trump did to avoid paying taxes. In some cases you can
carry forward losses to future years to wipe out those taxes too. This is what Donald
Trump did when he reported a $975 million loss. He carried it forward to a future year,
which means he paid no taxes for several years. I heard he didn't pay taxes for around 18
years because of his losses. This is completely legal and in my opinion a smart thing to
do. It's all legal.
Why?
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Why is there such a huge difference between the two and what they're taking in and
giving out? It's because there is a huge lack of education of our tax system of how real
estate professionals work. Real estate investors, including commercial real estate
investors and even some tax accountants don't take full advantage of that designation.
They prepare these tax returns for their clients but they're not getting all of the
deductions and tax benefits that they deserve.
If you are a real estate investor, are you claiming all of the benefits that you have rights
to? Do you have the right CPA working for you, where you're not just a number, and
you're not just receiving the basic benefits. You must be the type of person that is going
to look at your file, your goals, and everything you are doing, and maximize your
benefits.
Example
I want to give you a practical example by sharing a real life person example and their
tax situation and what they did to maximize their tax savings.
Dr. Rob is an engineering manager for a local tech firm here in the Bay area. He's
single and earns about $250,000 per year including his bonuses. He has a pretty good
job and he has a PhD from Stanford, so he is also a pretty intelligent person. Over the
years, Dr. Rob has also purchased a 12-unit apartment building near Silicon Valley in
Santa Clara and a downtown strip center in Santa Clara. He owns those two properties
and they cash flow about $82,000 per year.
When he does his tax returns, Dr.Rob's returns show a paper loss of $90,000. He cash
flows about $82,000 a year but he has paper losses on his tax returns of $90,000 a year
but guess what, he can't use those losses against his cash flow because he earns too
much. If you recall, if you make over $150,000 and the job is not real estate related, you
cannot deduct those pass up losses. What could Dr. Rob do to increase his tax benefits?
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Here's what he did. He got married. The good doctor marries Joan who ends up
managing the apartments and strip mall full time while being a housewife. In fact, the
housewife is probably a harder job knowing Dr. Rob. Anyway, she qualifies as a real
estate professional and because she qualifies as a real estate professional and they're
filing a joint tax return, they both get to take advantage of her being a real estate
professional.
Now they get to deduct that $90,000 loss on Dr. Rob's properties, which are now their
properties. They end up saving tens of thousands of dollars in income tax. To me what a
great basis for a successful marriage.
What advice would you give this couple, Dr. Rob and Joan?
My advice would be to buy more cash-flowing commercial real estate. Enough so that
they end up paying no taxes on their properties or on his income. Buy enough income-
producing properties to accomplish earning as many tax benefits as possible.
Again, if Dr. Rob did not get married and he continued to be an engineering manager,
he would pay taxes through the roof. But because he got married and his wife's job is
now a real estate professional, they qualify jointly as a real estate professional.
2. Hire a CPA/tax planner who specializes in tax planning for real estate
investors.
All CPAs are not created equal. You will want to find someone that is creative and will
explore different ways to maximize all of the benefits and rights you have as a real estate
investor. You want a CPA that wants to help you become a real estate professional.
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3. "The greatest investment on earth is earth."
There's nothing like having tangible assets like a piece of commercial real estate I can
touch and feel and look at and go, "Wow, that's mine." You have that so you can
maximize your cash flow and your tax savings. There's no other investment like it.
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Dave and his wife own a 56 unit apartment building in Florida. They bought it distressed
four years ago from a bank for a very good price, and two investors supplied the down
payment. They would need to put money and work into the property, but Dave was not a
very good property operator. He was not a good manager, which caused the property to
suffer. The complex did not have a great reputation in the community and the rent
collections were very poor, which meant the investors were not getting paid.
So Dave came to me for advice and actually wanted to sell the property and quit real
estate all together. But, I saw potential, not only in the property, but in Dave and his
wife if we could get the property to run properly.
Over the course of 18 months we repositioned the property with better tenants and
improved looks on the inside and out. We painted the building, cleaned up the
landscaping to approve the curb appeal, redid the kitchens, bathrooms, and installed
new flooring. Rent collections are now consistently over 95% and the rents have gone up
over 25%.
To Sell or to Hold?
It was now time to make a decision on whether they should sell or hold onto the
property. As their coach and mentor, I advised them to refinance now because the NOI
has gone up significantly and is now stabilized. As everyone knows, as your NOI goes
up, your property value goes up. I then recommended that they pull out the cash to pay
back their investors, which would make them happy. Then I suggested that they keep
the property and reinvest their money and investor's money into another property to
keep the commercial real estate investing journey going.
The end result was a happy wife, pleased investors who had now spread the word and
helped him raise more capital for his next property, and renewed confidence to do this
business full-time. They are now full-time real estate syndicators.
The Lesson
The lesson is to get help if you have a property with potential. Make sure you realize the
potential and work your butt off to meet that potential. Then refi because cash pleases
everyone.
2. Daryl's Story
Daryl has worked in sales for the last 28 years. He's really good at it but works long
hours and is pretty much 100% commission. It is stressful and exhausting work.
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12 years ago, Darryl purchased a 14-unit property in New York City as a retirement
investment. Once, he began to tell me more about the property I realized he could
possibly retire sooner or work a lot less hours sooner with a smart refi. His original loan
balance when he bought the property was 1.6 million at 6% interest and it was amortized
over 20 years. His payments were about $11,000 a month and he had been paying down
his mortgage for 12 years, making his mortgage balance now around $800,000. He had
a ton of equity in the building and a really small loan balance compared to the profits he
was making.
Daryl's Two Choices
1. He could continue to pay the $11,000 per month for another eight years, and then
his property would be completely paid for.
2. He could refinance at his current loan balance of $800,000, with a lower interest
rate and longer amortization schedule which would increase his cash flow
and reduce his payments. $800,000 at 5% interest amortized over 30 years, would
drop his mortgage payments to about $4,000 per month, for an increase in cash
flow of about $7,000 a month or $84,000 a year.
3. Alan and Myra's Story
Alan and Myra's situation own a small shopping center, midtown, in an excellent
location. They love the property and it has been in the family for years with decent cash
flow. The issue is their loan matures next year, which means they're going to have to get
a new loan at that time. When you refinance a home, the lender will value your refi
based upon the comparable sales in the neighborhood. They'll find a comparable
commercial property and the lender will put a huge emphasis on the NOI, the net
operating income, to be at a certain level and stable for a certain period of time.
Alan had not been the best landlord lately and has about 3,000 square feet of space
that's been vacant for two years, not because of the demand in the area, but because he
hasn't done anything with it. His second problem is that he lets a few of the tenants not
pay their full rent because he's friendly with them. I warned Alan that it's likely that his
lender for his refi will not approve the refi at the loan he wants, because of these issues.
When Alan applied for a new loan with a local lender they said they would do the loan,
but the interest rates were way too high and the other terms were horrible. They wanted
him to put money in the escrow and the amortization schedule was way too low. I
explained to him that they gave him terms as if the property was high-risk and
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distressed, because to lenders, t poor rent collections and too high vacancy, mean high
risk. Alan and his wife didn't see their property as distressed but the lenders did.
In the end, they were able to refinance their commercial real estate property with good
terms once they paid closer attention to the needs of the property. Alan got the 3,000
square feet leased out and they started requiring all of their tenants to pay on time.
The Lesson.
1. Always run a tight ship because every property with a loan on it has a refi right
around the corner.
2. Keep your eye on the NOI.
In Summary
1. You can use refinancing commercial real estate as a tool for, repositioning
your investing journey of the property. If you improve the property's financials and
performance, it will enable you to pull out cash, repay yourself, repay investors,
buy another property, or do whatever you want. The journey will not only continue,
it can take you to greater heights. Look at a refi as a repositioning tool for, not only
the property, but for yourself.
2. Look at refis as a way to increase cash flow. What's the biggest indicator that
you're ready to work less hours or leave a job? It's not net worth or equity in the
property; it's cash flow. Here's a quote from Jim Rohn, "Your income needs to exceed
your outgo. That's when you know you're ready."
3. Keep an eye on when your loan comes due. Paste it on a board some place and
make sure your property's financials are stable and strong. Don't let the property's
condition, occupancy, or NOI fall apart or else you may not qualify for a refi. Keep the
property's curb appeal looking nice, maintain at least 90% occupancy, and maximize
your NOI continually.
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https://youtu.be/pWyA8lOzUYI
1. National Perspective
When looking at Commercial Real Estate as a whole, from a national perspective, I
suggest National Real Estate Investor Magazine. It features stories and
informative articles on a variety of asset types, such as; apartments, self-storage, office,
retail, and more. It is a very relevant source of commercial real estate information, the
articles are very educational and enjoyable to read, and it also has an excellent rankings
section with lists of the top commercial property brokers, lenders, and owners.
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news source that has a business section you can read.
5. Lender Perspective
The news source most commercial lenders turn to is National Mortgage News. It
provides information on the newest financial regulations and laws, current mortgage
rates and changes, and lists of the top loan originators by year. Since you'll most likely
be borrowing money to acquire commercial real estate, reading commercial real estate
news from a lender's perspective is very helpful. Together, these five different
perspectives provide a commercial real estate investor with a well balanced view of
what's going on in the world of commercial real estate. Those five sources are among the
most authoritative commercial real estate news providers available. That is commercial
real estate news that you can actually use!
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Question One:
What do you do if you find a great property that has lots of potential, but is greatly
distressed?
Based on your research, you have found that this property would cashflow very well,
but how do you finance a distressed property with great potential?
Question Two
What do you do if you find a property in a great neighborhood with great upside, but
the owner has run it into the ground?
Based off your research you have found that this property could be worth millions if
you could just fix it up and run things the right way, but how would you finance this
type of property?
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Why is This a Great Commercial Real Estate
Deal?
Let's say that you come up with the $180,000. The goal after you close the deal is to take
care of all the repairs, pay the taxes and fines, and re-rent the property at a 100%
occupancy rate. Once the property has been stable for a period of time it is ready for a
more permanent financing scenario.
Most hard money lender's interest rates are 12, to 14, or even 16%. This is very expensive
so the goal is to fix up your property, get out of your hard money loan, and qualify for a
more traditional conventional loan. After the repairs and stabilization of your property
you will be able to get a loan from a conventional lender.
Exit Strategy
I want to go over to an example of an exit strategy so I can show you how this is a good
deal. After you have fixed up your property and are in good shape you can bring the
apartment to the lender and show them that it is now worth $650,000. The traditional
lender will then offer to lend you around 75% of the value of the property, which is
$487,500. Once you have your new conventional loan, you can use this money at closing
to pay off your hard money loan.
Property Worth: $650,000
Conventional Loan Amount: 75% of Property Worth so $487,500
Hard Money Loan Amount: $270,000
If you pay off your hard money loan with money from your new conventional loan you
are left with $217,500. This is known as a cash-out refi. I have a video on YouTube
called, “The Secrets to Refinancing Commercial Real Estate”, that you can check out to
learn more.
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Or if you had investors help pay the original deposit, you can use this money to pay
them back, and still have enough left to pay yourself an ownership interest.
What’s Your ROI on this Deal?
If you put none of your own money into this deal then your cash return on investment is
actually infinity.
To summarize this, what you did was find an eight-unit property for sale real cheap due
to some issues it has. You then obtained a hard money loan which you used to buy and
fix up the apartment. After fixing up and stabilizing the property you applied for a
permanent loan for 75% of the properties new value. You used this new conventional
loan to pay off your hard money loan, which is known as a cash-out refine.
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The True Purpose of Hard Money Loans
A hard money loan is also known as a bridge loan, it bridges you from a temporary
situation to a more permanent situation. The goal is to be bridged from a hard money
situation to a more conventional situation where you're going to go from a very
expensive interest rate payment per month to something much lower.
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Red Flags to Watch Out For:
1. Do not pay hard money lenders any upfront fees until they have looked at your deal,
visited the property, and reviewed your capacity to make sure it is realistic. If you come
across a company that says, "Hey, send me $750 for me to look at your deal" before they
do anything, that's a red flag, don't do that.
2. Do not use a hard money lender that is unwilling to divulge their source of money or
provide references. This is a sign that they have no money.
3. If the terms are too good to be true they usually are. If a hard money lender offers you
100% financing, and promises to close within five days with low upfront cost, and low
interest rates, it is mostly likely too good to be true.
4. 100% financing. Anytime a hard money lender offers 80% loan to value or higher on a
commercial loan it is a red flag.
These are the four red flags. If you see any of these warning signs I want you run and use
someone more reputable with more realistic terms.
The Hard Money Locator is a resource for finding hard money lenders all across the
country. This is a great tool that enables you to search for a hard money lender based on
the criteria of your deal.
https://youtu.be/TuL7sjVHi0o
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The 6 Ways to Raise Money for Your
Commercial Deal
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How Do I Know if My Deal is Good Enough to Attract Investors?
Good deals attract money. A good deal will attract interest and this is exactly what we
teach our students.
Five Elements of a Good Deal
Your deal must be priced under market
You don't want to bring an overpriced deal to your investors. People like good deals.
You want your deal to have income upside.
In other words, you want the rental income to be capable of going up over time instead
of down. As the net operating income of a commercial property goes up, so does the
value. You need to show your investor that you have a plan and that the property is fully
capable of increasing income, therefore increasing in value.
Your deal must have excellent cash and cash return.
What's your 401K or IRA cash return? If you're getting 4 1/2 to 5% return on investment
on your IRA it's going to take 16 years for your investment to double. That's a very long
time and you could be way past retirement by then.
The market must be a good one capable of sustaining your investment for
years to come.
You must know all of the market demographics; the economic trends, the vacancy
trends, population, and migration.
You must have a razor sharp exit strategy that's realistic and conservative
An exit strategy is a design that you have in place to return the investor's money plus
more.
2. Raising Money For Commercial Real Estate Using Creative
Financing
There are four different methods for raising money using creative financing. They are
the master lease agreement, seller carry first mortgage, seller carry second mortgage,
and the hard money loan.
Podcasts and Videos on These Methods
A video on the master lease agreement
A podcast on buying commercial real estate without banks.
A video on commercial hard money loans
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Example
This is an example of how to use creative financing to help raise capital or structure a
deal where the capital requirement is very small. This is an actual deal from one of our
students.
A three-story office building that is 40% vacant or 60% occupied is considered a high
risk investment, which means it will not qualify for a typical loan. The property does not
generate enough money to pay for the loan, because of it's high vacancy levels. Even
though a typical bank wouldn't loan on this property, a hard money lender would. The
seller was willing to sell for $1 million, but if the property goes from 60% occupied to
90% occupied, it would be worth $1.6 million.
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The exit strategy is to get out of the hard money loan by putting longterm permanent
financing on the property and letting it cash flow. That's using creative financing to
create a win-win-win situation for all. Win for you, win for the seller, because he got a
million dollars, and a win for the lender who gets their equity requirements taken care
of.
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You cannot use the property for personal reasons. The property must be treated
as an investment, not for your immediate benefit or your family's benefit. It's for the
IRA's benefit only.
All of your maintenance repairs on the property must be done by a third-party.
If the IRA owner, provides any sweat equity like changing a light bulb in the property,
there could be significant penalties.
4. Raising Money For Commercial Real Estate Using
Crowdfunding
Crowdfunding is a method of raising capital through the collective efforts of friends,
family, and individual investors. This approach taps into a larger pool of people in an
online platform called a crowdfunding platform, and it leverages their networks for
greater outreach and exposure. Let me put it in layman's terms for you, you have a
internet company that goes out and recruits rich people to put money into their
company. Then the company goes out and recruits the person needing the down
payment, and inputs their deals into the system. The system will then decide if the deal
is approved to use the investor money or not. This process is done completely online.
Popular Crowdfunding Websites
o RealtyMogul.com
o RealtyShares.com
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One of the most important parts to getting approved for a crowdfunding down payment
is that you must be experienced, have a track record, and some funds to invest.
If you're a beginner than most likely, crowdfunding is not for you.
Example
This is something my team only uses for small deals requiring between $25,000 and
$100,000. We had a student that needed $60,000 to close a small commercial property
deal. He had a good job, good credit, decent income, and was able to borrow the entire
down payment at 7% for five years through peer to peer lending. With peer-to-peer
lending the better your income and credit is, the lower the interest rate is.
You also have to factor that loan into your overall returns. If you look at a simple
analysis of commercial property, we have income minus expenses minus the mortgage
equals cash flow, right? If you use peer-to-peer lending, you have your income, minus
expenses, minus your mortgage, minus your peer-to-peer loan, equals your cash flow. In
other words, make sure that your deal can afford peer to peer lending.
6. Raising Money For Commercial Real Estate Using Wholesaling
Most of our students have limited funds to invest in commercial real estate, yet they do
have a great desire to do so. We have a whole program to teach them how to wholesale
their deal to buyers to create capital for themselves. If they do this multiple times, they
can stack up and raise their capital so that they have enough money to do their own
deals.
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Basically, what they do is find a deal, get the deal under contract, and then flip it to a
buyer for a fee. You can do this several times and the goal there is to build up your own
down payment. Consequently, if you do not have a lot of money; you can still raise
money for commercial real estate by wholesaling your deal.
Closing
After I negotiated and got the property under contract we flew down to the property
together. I wanted him and I to both be convinced that the deal was very doable. My
investor put up the entire $66,000 down payment, but we applied for the loan together,
which means both of us would have skin in the game.
I wanted to show my commitment to the deal, because, he was the one putting in all of
the money. So by putting my name on the loan I was putting my credit and holdings at
risk if the deal was to fail. We were personally guaranteeing this loan. My attorney
drafted up the LLC and we closed on our project. I did all of the asset management;
oversaw the manager, made sure the bills were paid, and took care of the taxes at the
end of the year. This means I was able to collect an asset management fee every month.
Exit Strategy
After about 18 months we sold the property and we split the profits 75/25. 75% to him,
25% to me. I gave my investor a large split because I wanted to gain some experience on
how to raise capital for deals. I wanted to show potential future investors that I had
already raised money and had a project succeed. Equally important, I wanted my
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investor to reinvest with me, and I thought it was enticing for him to receive a larger
split. As you get into syndication and learn more about it, you'll see that that split is
quite normal.
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Real estate syndication allows you to close on more deals because it allows you to
leverage partnerships and other financial resources.
You can even use real estate syndication for retirement planning. Many people,
including myself, use syndication as our pension. You might want to consider doing real
estate syndication because you can make a nice amount of monthly income through
asset management, acquisition fees, or if you are the agent, you can earn lots of
commission from selling your own deals.
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the lawful disclosures you need, and provide legal protection when you close a deal with
a private investor.
If you were to forget just one of these things, and you could open yourself up to a lawsuit
or worse. There is a government agency called the SEC, the Security and Exchange
Commission, and their purpose is to protect investors from dangerous or illegal
financial practices or fraud by requiring full and accurate financial disclosures by you,
the syndicator. This is something an attorney can handle for you.
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You can also participate in the equity splits on the back-end. On the back-end means
when you sell the property, there's a split between you and the investors that decides
how much you are going to give them and how much you are going to keep for yourself.
For example, your deal might stipulate that 50% of the profits fo to you and 50% goes to
the investor when the deal sales. This allows you to almost double or triple, and
investors rate of return on investment.
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onto YouTube and look at this video called "The Basics of Real Estate Syndication,"
there is a link there that you can download, and it's the exact same copy our students use
that we send out to potential investors, just to gauge their interest.
If you send this out to 24 people out of those 24 people, 12 will look at it. That means the
other 12 are not even going to read it. Out of the 12 that did read it, 6 are going to show
some interest and the other 6 not going to be interested. Out of the 6 that show interest,
3 are going to want to talk to you and out of those 3, 1 will invest. The ratio for beginners
is a 24-to-1 ratio. There's no shortcut, because no one is going to hand you investors.
You have to go out and find them yourself.
How Many Investors Do You Need?
The short answer is you need double, but here's a long answer. If you need 250,000
dollars for a down payment, then your goal as a beginning syndicator is to raise 500,000
dollars.
Why?
It's because people will be people. Some will back out, some aren't ready, and some just
don't want to do it. So to raise $250,000 dollars, you need commitments of double,
$500,000 dollars.
What comes first? The deal or the investor?
If you are a beginner, find the investors first. If you are a seasoned investor, the deal
comes first.
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2. The deal must have some income upside, meaning that there's
potential to raise the rent.
There's a potential to get higher lease rates, because in commercial real estate , as your
income goes up, so does your property value, so if your deal has that attribute to it, it's a
good one.
3. You need to have an excellent cash and cash return.
Your ROI must be better than what they're getting with their IRA or their 401(k), so
make sure you have excellent cash and cash return. I would suggest a minimum of 8%.
4. Your deal must have good demographics
This means that the investment must be in a good neighborhood with good job
statistics. Basically the area of the market must be capable of sustaining your investment
for years to come.
5. Your exit strategy must be realistic and conservative
If your exit strategy is too aggressive, they will see that as too risky, and they will not
invest.
6. Have a track record
It doesn't have to be your track record. You can bring in someone else's track record and
make them a partner in the deal.
7. You need to prepare an executive summary
As I mentioned before, you can go on to my blog "Basics of Real Estate Syndication," to
view this executive summary.
If you have those seven things, you put yourself in the best position for the investor to
say yes. I'm going to leave you with one word of wisdom on convincing your investor to
invest with you. The word of wisdom is to start small. Don't start off by having to raise
millions of dollars. Make it easy for yourself.
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1. Is there a guarantee that I'll get my money back?
The answer is no. There is a risk in every investment on the planet, and it's not just the
investment, it's everything. Investors lost a lot of money in 401(k) and stocks in the last
market bust. Let them know that the investment is secured by the property, which is in
an LLC. Property insurance will protect them against loss, fire loss, flood loss,
vandalism, things like that, so they'll have that security, but you can't guarantee them
anything.
2. "When will I get my money back?"
It depends on the exit strategy. When you meet your investor have the exit strategy in
terms of years already figured out. For example, you can tell them, "The deal goes on for
five years, then I am planning on selling the property"." It’s deal-dependent, but most
investors don't want to see their money tied up for more than five years, so typically an
exit strategy is three to five years.
3. "Do I get tax benefits?"
The first answer out of your mouth should be, "Please contact your CPA to get advice on
tax benefits, because I am not a tax professional.” You can also let them know that the
IRS will probably call them a passive investor, therefore they would not qualify for tax
write-offs directly from the property.
The cash flow they receive might be sheltered by the LLC's write-offs, such as the
property expenses and depreciation. This means that it's possible a good portion of their
cashflow, won't be taxed. It's going to be sheltered by the LLC's expenses, but each deal
is different so check with your CPA.
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optimized the rents. If you do the math, $150 per unit x 24 units, is $3,600 income per
month, or multiply that by 12 months, that's $43,200 more per year.
In this case, if I divide my additional income of $43,200 by 8%, my 8 cap property value
increase is $540,000. If I were to take that $540,000 increase in value and add it to the
purchase price of $925,000, the apartment building is now worth $1,465,000. The
question is, "How did he structure the deal with his investors?"
He agreed to pay his investors, 8% return per year for the use of their money for 5 years,
and then at the end of 5 years, he's going to sell the property, and do an equity split with
them. He's going to give them 25% of the profits when he sells the property.
His Exit Strategy
His exit strategy is to complete the rent increases over the next 18 months, and then do a
cash-out refi and pull out all of the investor money to pay back the investors. In that
case, investors would have their money back, but he wants the investors to maintain a
small piece of ownership, so they'll get checks every quarter. The investors would have
no money in, but they'll still be getting money from the property. This increases the
chances that the investors would be willing to invest in him again. So that's how he
structured his deal, kept it nice and short and simple.
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I want to share what their answers were and offer you a few solutions to these
common reasons real estate investors fail.
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purchase price, same income, but the property expenses are 30% higher. This is
something that you need to be aware of.
If you don't know how to estimate expenses accurately, do not rely on the seller's
property information, or broker's property brochure because both of these are 100%
incorrect, 100% of the time.
Key Performance Indicators
After investing and teaching in commercial real estate for about two decades now, we've
developed, I would say, 12 different calculations, or what I call KPIs. KPI is short for Key
Performance Indicators. Those indicators tell us right away if a deal is good, average, or
ugly. It's taken years and tons of good deals, average deals, and ugly deals, to be able to
share these with my students, in a very understandable way.
Failure 3: The Inability to Analyze Your Market Effectively
You have to know which market trends are important, which are the ones that are the
hardest to find. You also need to know which ones are not important and the easiest to
find and used by everyone. Experience in investing will help you know how to decide
which trends are important to your investment objectives.
Secondly, you must know about supply and demand. You need to know when your
market will reach its tipping point, or your equity in the property could be trapped until
the next market cycle. This is not good if you're using commercial real estate as a
retirement vehicle.
You also need to know all of the little things that can have a huge impact on your
property. Rent control laws and how to get around them, unwrapping large profits in
lease audits and lease restructures, and having strategies for realizing the upside
potential on the property. Those things are what equates to real wealth.
I took a class in commercial estate leasing, and a professor told me, "When you're
analyzing commercial real estate and there are leases involved, the leases are so
important that when you buy the property, you're actually buying the leases, and the
property comes for free." That's how important leases are. Leases are so important to
analyzing your market effectively.
The solution is information utilization. This means you need to be able to roll your
market and you deal date into the appropriate deal technique. It takes experience to
shortcut you to success.
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Failure 4: Poorly Designed Exit Strategies
Creative financing can be one of the greatest ways to acquire commercial real estate, and
it's one of my favorite ways to buy. But if your exit strategy is not well-designed, you
could lose all of your profits and credibility, waste all of your hard work, and it could
even cause a swift departure from the commercial real estate investing business.
Having multiple, well-thought-out, razor-sharp exit strategies is the key to making
money and having lasting power in this business, instead of being a one-deal or two-
deal success. . The key is to have an exit strategy figured out before purchasing the
property.
Simple Strategies
Exit strategies shouldn't be complicated. It must be simple enough to execute in a
conservative and a timely manner. Some exit strategies include a cash-out refinance, a
sales leaseback, a 1031 exchange, a reverse 1031 exchange, and many more. The solution
is to get good at designing these exist strategies.
Failure 5: : Not Being knowledgeable Enough in Structuring Deals
This one was probably the one where we did the most research on, because we got the
most feedback on it. When you are not knowledgeable enough in structuring deals it
will cause missed opportunities for motivated sellers.
Examples of Seller Situations
A seller who is ready to retire and owns a property free and clear, but has capital
gains tax concerns. This is a great situation to take advantage of and create a win-
win for you and the seller.
A burnt out seller who's commercial loan is assumable, but has a large pre-pay
penalty.
Next is the seller's nearing foreclosure, has lots of equity, but neither of you qualify
for a loan. What do you do in this case?
The seller lives out of state is absent from the deal physically and mentally. He
wants to do a 1031 tax-deferred exchange.
The seller wants to "JV," or joint venture, with you. This is a great opportunity, but
you have to be very careful. He has already set up a profit split structure of 50/50 the
first tier, and 80/20 the second tier. If a Joint ventures reaches a certain benchmark,
the profits are split 50/50. If you reach benchmark number two, then the profits go
80% to you, and 20% to him. This is not typical, but it's something that we've done in
the past that you should be open to. This is also, again, a missed opportunity.
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These are quite typical seller scenarios that you're going to run into once you're in the
real estate investing business. You must know how to approach each and what technique
to apply. If you can't, then you're going to lose out on that one deal.
As the deal fits, you're going to have to learn where and when to incorporate things such
as a master lease agreement, seller-carry first mortgage, seller-carry second mortgage,
installment sales, and other creative commercial real estate strategies.
Failure 6: Thinking Too Small
When my fellow investors looked back, they regretted thinking too small, but also their
self-limiting beliefs. When faced with decision to buy a 5 unit or 60 unit apartment,
many chose the 5 unit apartment building. By the time they bought and closed the 5-
unit, they realized that it would have been the same amount of work as the 60-units, and
I totally agree.
The two big differences here were that the 60-unit would have allowed them to exit the
rat race and meet their goals in half the time. Plus, they would have been setting their
bar higher by buying the 60-unit, and that's what this business is about. It's about
growth. Once they had acquired a 60-unit building, there's no reason to buy anything
smaller ever again. There's a saying, "If you already know how to make a dream come
true, then you're thinking too small."
Failure 7: Quitting Before Even Starting
The biggest reason why people quit pursuing commercial real estate is because of a lack
of focus. The person who chases two rabbits catches neither. The entire acquisition
process is actually the same for an apartment building, a shopping center, an office
building, self-storage, mobile home park, etc, and the principle behind the process is the
same, too.
An investor who does not follow a proven and focused process will chase multiple
rabbits at once, catch neither, and will go home with nothing but an unfulfilled dream.
Nearly all of us, myself included, can really relate to that. How we have chased many
things over the years, but because we didn't focus, we're holding onto nothing with no
real results. I have an acronym for focus. F-O-C-U-S equals Follow One Course Until
Successful. That's what I do and what I teach my students to do. Our most successful
students aren't the ones with the most money. They are the ones that follow our process
to the T and focus on the right things.
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Why I Invest in Section 8 Apartments
Apartments and you're about to discover why. The reality is that if you have terrible
Section 8 tenants who destroy your property, that is your own fault. What's so
wonderful about Section 8 is that the government guarantees payment on 80-100% of
your rents, will give you a rent increase of 5-8% a year and there is also usually a large
pool of tenants to choose from on a verified wait list! What you're about to learn is is
how to own and operate Section 8 Apartments like I do so that you maximize your
results while minimizing the risks and hassles. https://youtu.be/4OOH36r-3cA
What is Section 8?
Federal Housing Assistance programs were started during the Great Depression, a time
of great struggle in the United States. The poor were in great need of housing
assistance, so in the 1960's and 1970's, the government created subsidy programs to
increase the production of low-income housing and help families pay rent. Then in 1974,
Congress started the Section 8 program to provide rent assistance to low-income
families. Typically the tenants will pay around 30% of their income towards the rent.
This balance is subsidized by the government federal funds, which is a program
overseen by the HUD, the Department of Housing and Urban Development.
Section 8 Vouchers
The main Section 8 program involves a Voucher Program, which can
be "project based"; where its use is limited to a specific apartment building. Or the
voucher can be "tenant-based"; where the tenant is free to choose a unit in a private
sector, but is not limited to specific complexes.
If you want to rent to Section 8 tenants, you have to register as a Section 8 Landlord,
which puts you on a list that potential tenants can use to contact you. After qualifying
the tenant, you show them the property, and the Section 8 tenant will set up an
inspection with the Section 8 office so that your unit, can be approved. Once your
property passes the inspection, you will negotiate the rent with the Section 8 office and
sign the lease so that the tenant can move in. This is a basic summary of the section 8
process.
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If the tenant's rent is $1,000, then the tenant will typically be responsible for paying
$200. Section 8 will pay the remaining balance of $800, which in my experience, is a
pretty good deal.
Section 8 Advantages
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5. Short Vacancies
Most cities have a mile-long list of Section 8 participants with vouches, who are seeking
housing. Filling a vacancy is a pretty quick process once your property has been
inspected and approved for Section 8.
Section 8 Disadvantages
1. Government Bureaucracy
One of the biggest disadvantages of Section 8 is dealing with the government's
regulations and red tape. Government bureaucracy is one of the reasons it is costly to
qualify and maintain a property for Section 8 housing. Even worse, HUD is often
understaffed which results in slow and sometimes unreliable services. I have
experienced great service, mediocre service, and horrible service, from the HUD
department, so you never know what you will get.
2. Delay of Payments.
The entire Section 8 process can be very slow which results in a delay in getting a tenant
into your property. Then, after the tenant moves in, it can take up to 60 days to receive
your first rent payment. The only upside that is in 60 days, you will receive double the
payment, since it's been two months.
3. Strict Inspections
Properties qualifying for Section 8 housing must pass strict inspections, which can often
make it easier to just rent properties to private paying tenants. Sometimes, it can be
quite laborious just to get past all of the inspections.
4. Delinquent Tenants
Even though the majority of Section 8 rent is paid for by the government, the tenant is
still responsibly for paying a portion of the monthly rent. If a tenant doesn't pay their
portion of the rent, you can go through the Section 8 eviction process, but this often
results in you settling for less profit, or possibly even losing money after you calculate in
any maintenance repair costs.
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Sometimes Section 8 landlords are reluctant to report a tenant who is late on their rent
payments, because it could lead to a long bureaucratic process to have the tenant
removed. Once the tenant is evicted, the entire Section 8 Process has to be repeated in
orderto find a new tenant. Landlords deals with both private and Section 8 delinquent
tenants, and the Section 8 delinquencies are definitely costlier due to the bureaucratic
regulations.
5. No Compensation for Damages
If a Section 8 tenant damages your property, the government will not compensate you
for any damages. Since the tenant is obviously low-income, getting any money from
them will be a challenge as well, even if you take them to court. Generally because
Section 8 tenants are less financially invested in your property, they to be a little less
concerned about proper upkeep as well.
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involved with your tenants. You are the parent and they are the children, so you must
enforce the rules with a firm hand.
4. Fair Market Rents
You can find out what the Section 8 rental rate is in your city by googling, "Fair market
rents," and then your city. Click the HUD link and it will show you what Section 8 will
pay for one-bedroom, two-bedroom and three-bedroom properties. You can simply
compare it against the market rents in your city.
5. Know When to Not Rent in Section 8
If your property is in a good location, well-renovated, and could be rented out privately
quickly, with higher rent then a Section 8 tenant, do not rent to Section 8. In other
words, if your property's in a great neighborhood and in great condition, you're probably
going to attract a better tenant who can pay a higher amount than what Section 8 can
pay.
My all-time best tenant was a Section 8 tenant who was a single mother of four little
girls. She was very clean, kept the property in good shape, always paid on time,
and was a very responsible person.
My all-time worst tenant was also a Section 8 tenant. Of course, I learned nothing from
the best tenant, but I learned a whole bunch from the worst tenant.
What I Learned from my Worst Tenant
I learned how to screen and filter through potential tenants, in order for them to qualify
for my rental properties. Over the years I have developed a process that I believe is the
best you will find anywhere. It is a point-based system that leaves all emotion out. If the
tenant has a good story but doesn't have enough points, they get denied. Even if they
come highly-recommended but don't have enough points, they are denied. If they have
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enough points, they get in, if not, they are denied. In one building, our evictions have
gone down 70% in just one year by switching to this simple point system.
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What is a REIT?
A real estate investment trust is a company that owns, and in most cases, operates
income-producing real estate. REITs own many types of commercial real estate ranging
from office and apartment buildings, to warehouses, hospitals, shopping centers, hotels,
storage facilities, and even data centers. They can own pretty much any asset type.
Real estate investment trusts are basically dividend paying stocks that focus on real
estate and allow average individuals to invest in large scale, income-producing real
estate. People invest in REITs because they earn a share of the income produced
through commercial real estate ownership without having to purchase commercial
properties. I call REITs, "Investing from the sidelines", because you are investing in
commercial real estate without actually participating.
Types of REITs
Equity REIT
In this type of REIT the group of investors actually own the physical property.
Mortgage REIT
In this type of REIT, the investors are investing in the mortgages of the commercial
properties.
Exchange Traded Funds REIT
ETFs are basically stocks that invest in other REIT stocks and then they pull them
together. It offers a diversified basket of Real Estate Investment Trusts holdings and
they trade on the stock exchanges as well.
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must be managed by a board of directors or group of trustees and have a minimum of
100 shareholders with no more than 50% of its shares held by five or fewer individuals.
That's a lot of qualifications for a REIT.
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to REIT.com, Dividend.com, Marketrealist.com. These websites will share how well the
REITs perform in terms of investor returns and dividends paid out.
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and this makes REIT operations more transparent to investors. You can keep informed
through public disclosures via the SEC.
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On the other side, if you do your own investing and purchase your own commercial real
estate, you are in control to buy whatever you want, wherever you want, whenever you
want. You can refinance or improve cash flow by increasing your income, whenever you
want. Because you are completely in control of your property, you can even choose to
sell it. You will receive a greater cash flow and greater returns, and also reap all of the
tax benefits. When you invest in a REIT that is a huge property with huge depreciation,
as a shareholder, you do not get to experience that benefit. But if you buy your own
property, you get the full benefits of depreciation.
Leverage
If you invest on your own you can also use leverage. You can take $100,000 and
purchase $100,000 worth of shares in a REIT
You can leverage by using your $100,000 as a down payment on a $400,000 mortgage,
to purchase a $500,000 property.
Syndication
You create your own personal REIT by getting people to invest with you to purchase
large pieces of commercial real estate.. This is called syndication and I have a podcast
called, "The Basics of Real Estate Syndication" that will teach you how to gather people
to purchase a property, that you couldn't purchase on your own. In this case, you're
going to pool everybody's money together and buy large pieces of cash-flowing
commercial properties.
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Do You Have the Right Mindset to Own Commercial Real Estate?
For most people, the answer to this question is no, which is exactly why they do not own
commercial real estate. There are many challenges involved in purchasing your first
commercial property, but the biggest obstacle you must overcome is “Stinking
Thinking”. Stinking Thinking is when you have the wrong mindset on how you look at
potential opportunities or potential problems. I am going to teach you what that wrong
mindset is in commercial investing and why it stops you from being successful. I will
also share with you what the right mindset is, so that you can begin your journey to
purchasing your first commercial property.
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3 Examples of a Customer Mindset
1. A person with a customer mindset believes that property
renovations cost too much. They focus on the cost of something
instead of the benefit.
One of my students recently purchased a 24 unit property with only one water meter
which was costing him $26,000 a year, because he was paying for all of the tenants’
water. Because this student had the right mindset, he decided to pay for individual water
meters for each unit. It will cost him $1000 per an apartment unit to install the
individual water meters, which makes the total conversion cost $24,000 for all 24 unit.
Once the conversion is done, the $26,000 a year he was spending on water will be
passed off to the tenants, and be added to his cash flow.
So the first benefit of this property renovation is an increase in cash flow. The second
benefit is something I have mentioned in previous blogs, which is that when the NOI
goes up, so does the property value. If the NOI goes up by $26,000 and he's in a 8% cap
rate area, we can divide the $26,000 by 8% and come up with $325,000 in increased
property value. A person with a customer mindset would not spend $24,000 to get that
benefit.
2. A person with a customer mindset is a person who buys a low
cost commercial property only because they can afford it.
In the world of commercial real estate, there is no such thing as a low or high price. It
just simply does not exist. There is also no such thing as cheap or expensive. These
things are just unimportant to a real estate investor with the right mindset. Instead, a
person with the right mindset focuses on whether a deal has a low ROI or high ROI.
They are focused on their return on investment, not whether something is cheap or not.
3. A person with a customer mindset does not recover from
failure
Our country goes through lots of ups and downs in the economy and when there is a
recession, financial hurt can happen. People lose properties, and properties lose
property value. A person with a customer mindset will let a previous failure cause them
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to give up the dream of owning commercial real estate. They believe that real estate is
not for them or that they are unable to recover from that failure.
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Wealth Ratio
The secondary focus of a person with an entrepreneur mindset is their focus on their
wealth ratio. Wealth ratio is passive income stream divided by your monthly living
expenses.
Once your passive income stream equals your monthly expenses that means that you are
out of the rat race. The focus is to develop and increase your passive income stream
through commercial real estate. Ideally if you can get your wealth ratio up to 1.5, I would
say you are safe to leave your job. Reaching 1 is monumental and it's great, but get to 1.5
before you leave your current job. That's something you should shoot for.
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Let’s say you found an apartment deal and it can significantly dent your wealth ratio. In
fact this one deal can most likely put you out of the rat race, but you're short on a down
payment. You’ve just recently gotten back on your feet, so you have some credit issues,
and past failures, but you have been working on your mindset and are ready to get back
in the game. A person that is in this situation, with the entrepreneur mindset, is going to
get help. They're going to get a mentor. They're not going to try to do this by themselves.
It's too risky. It takes too long and there's too much at risk.
Next is, they're going to evaluate the deal, but this time they're going to evaluate the deal
with expert help. Then they're going to find the money and a credit partner. If you watch
my previous videos on real estate syndication and raising capital you can learn exactly
how to find money for a good investment deal. Lastly, a person with an entrepreneur
mindset is going to get things done.
Second Example
Another example would be if you found a commercial building that once again can
significantly put a dent in your wealth ratio, or possibly take you completely out of the
rat race. It's a significant deal that could utterly change your life. You have a little bit of
money saved up and good credit, so perhaps you even have a down payment, but guess
what? You never jumped in out of fear or some other excuse.
A person in this situation that has an entrepreneur mindset, would get expert help.
Don't try to do this by yourself. Next you would get knowledge. The reason why
knowledge for this person is really important, is because if you don't get knowledge the
fear will dominate you and you'll never jump in. Next you would assemble your team,
which is a smart move. Next you would jump in. An entrepreneur with an entrepreneur
mindset is a person that would jump in after you have your expert help, your knowledge
and your team.
How to go from a Customer Mindset to an Entrepreneur Mindset?
First, you must focus on building the new. Secondly, I want you to watch all of
my videos and I can almost guarantee that you mindset will shift to the entrepreneur
mindset because those videos are built for success.
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How to Buy Distressed Commercial Real
Estate
In the commercial real estate business you will eventually come across a distressed
commercial property. Some of these distressed properties could turn a huge profit if you
could just find a way to buy them and fix them up. I am going to share with you not only
what a distressed commercial property is, but how to locate and buy them.
https://youtu.be/wVJrp_St-3g
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personally unable to fix something for one of our student deals, I can pick up the phone
and call someone more experienced to help me out.
Get the Story
Each deal has a story. Your job is to get the story, and the more of the story you get, the
better you are able to buy the property and know how to buy it. You will know which
financing strategy will work and what your exit strategy should be. It is very important
to get the story on any distressed property you are interested in.
Get Help
If you are a beginner, do not try to do this yourself. Our students are able to get expert
help from our company, because we help them put these deals together with military
like precision. It is crucial that you have an expert guided plan to do distressed
commercial property deal successfully.
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If the ARV is 1.8 million the lenders will lend you 75% of your after repair value as a
new, permanent loan. You typically buy a distressed property with hard money or a
bridge loan, so after it is fixed up you will need to refinance into a more permanent
financing called a, “take-out loan”.
So if the ARV is 1.8 million and the bank will loan 75% of that then that equals 1.35
million which was your total cost of the property. This means the loan will pay off your
original hard money loan, plus reimburse you for your repairs and holding costs.
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Conventionally
Conventional means a bank or traditional loan office. With conventional financing, the
lender will look at three things to underwrite a deal. They will qualify you. They will
qualify the property, and they will qualify the area of the property. The lenders will also
look at the financials of the property which is a problem with distressed properties. Most
likely the financials of a distressed commercial property won’t qualify for a typical loan.
If you are unable to qualify for a typical loan, you can use a hard money loan. I have
a video on how hard money loans work and how one of our students used a hard money
loan to purchase his first commercial property. Hard money loans are expensive and do
not leverage very high. The interest rates can be between 12 to 15%, and it can cost 4% to
6% upfront origination points as well just to use the money
A bridge loan, on the other hand, is a gentler form of hard money. It’s called a bridge
loan because it allows you to buy the property, fix it up, and then it bridges you towards
permanent financing.. So a bridge loan is a temporary loan. The interest rates are 7 to
8% and will only cost you 1-2% upfront origination points.
My team and I typically purchase distressed commercial properties with creative
financing. Most distressed properties have financial and physical issues that cause
traditional funding to be difficult or sometimes impossible. With creative financing you
can create your own terms and be as creative as you want, as long as the seller agrees to
the terms.
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Exit Strategies for Distressed Commercial
Properties
If you have watched any of my videos, you already know I stress the importance of
having an exit strategy before buying a property. In fact, when you are making an offer
you should have several exit strategies already planned out.
Three Examples of Exit Strategies for Distressed Properties
1. You buy the property, fix it up, and sell it. You can take the earnings as payment or
invest it in a larger property in order to do a 1031 exchange.
2. Buy the property, fix it up, and then hold long term for cash flow. You will need a
long term loan with a low interest rate. Many people choose this strategy as a way to
fund their retirement. They replace their 401K or self-directed IRA with this exit strategy
in order to establish long-term income.
3. You buy the property, fix up, and cash out refinance. A Cash out Refi is where
you pull the cash out that you put in and then hold long term. This is called the
syndicator strategy because a syndicator pools other people’s money together in order
to purchase real estate. Their strategy is to buy it, fix it up, pull the down payment out
over time and then hold it long term for cash flow.
In my opinion, this is the best strategy for wealth accumulation and portfolio growth. I
find it to be the most rewarding and fun strategy as well. You buy a great property, at a
good price and eventually get to the point where you can pull out all of the cash and hold
on for long-term cashflow.
Example Deals:
1. A student of mine found a large apartment building with 100 units that had a 60%
occupancy rate. Lenders consider any property with a 20% or more vacancy rate to
be distressed. Not only did this property have a 40% vacancy rate, it also had a
50% economic occupancy. This means that even though the property has 60
tenants inside, only 50 of those tenants are actually paying their rent. The property
was also very close to foreclosure so the seller was in big financial trouble.
The apartment building was financed through a hard money loan on top of a seller-carry
second mortgage. We chose to use hard money because the occupancy rate was an issue
for traditional loan offices. A seller-carry second mortgage was used because the
student had very limited funds and it was the only way to get the return on investment
required to make the deal happen.
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We are currently 1 ½ years into the project and in four years, there is a 2.5 million dollar
projected profit. It turned out to be an amazing deal and everything has been working
out great.
2. The second deal was a 6300 square foot building located in a great area but in
very poor condition. The owner spent a lot of time out of the country and had become
very disinterested in the property. Because the owner is so disinterested, most of the
tenants have stopped paying their rent, even though it is well below market.
The property was purchased at $57 per a square foot using 100% investor money.
Comparable sales of similar buildings in the area sold for $98 a square foot.
The exit strategy is for the student to do a 1031 tax deferred exchange once he sells the
property. The process can take up to two years, but once it sells, the student can buy a
larger property with the profit, thus deferring the capital gains tax payments.
1. Affordability
The first reason is affordability, which translates to higher return on investments,
greater cash flow, and faster growth
Example:
A 12-unit C-class apartment building in San Francisco, CA will cost you roughly $7.5
million, but a 12-unit C-class apartment building in Dallas, Texas will cost you roughly
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$1 million. This means that if you take your California money to Dallas, you can buy an
80 to 150-unit apartment building.
This is a huge difference in affordability. Some of our students have a goal of building a
portfolio of 1,000 apartment units in five years, through syndication. This would be
rather difficult to achieve due to affordability. But this goal is highly achievable in a
more affordable state.
2. Diversification
A lot of investors do not want their real estate holding all in one area, so they search out
for good, economically sound, and growing areas. There is no such thing as a national
real estate market. It is all about sub-markets when dealing with commercial real estate.
The Portland, Oregon sub-market, is completely different from the Portland, Maine
commercial real estate market. Just because one area in the US is at the top of the
market cycle, doesn’t mean every other area is. It is smart to diversify your holdings into
economically stable areas.
3. Deal Flow
To increase your chances of finding more commercial real estate deals, you might need
to expand your search territories. As an investor in high price regions like California or
New York, you might want to take your search inward to states like Tennessee, or
Florida, in order to increase your deal flow
There is never a situation where it is wise to purchase a commercial real estate property
without seeing it first. In most cases, commercial real estate investments are the biggest
financial investments people have ever made. It would be very foolish to invest so much
money into a property, you haven’t physically been to. It is irresponsible and poor
stewardship.
Purchasing a property you have never seen is a very risky business. In residential real
estate such as: single family homes, duplexes, triplexes, or fourplexes, most states
require the seller to provide a property disclosure with a list of anything wrong with the
property. If the seller lies on this disclosure and you find out after closing, there’s
recourse, and you can sue.
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In commercial real estate there are no consumer protection laws like that. There are no
property disclosures required by law, it is purely buyer beware.
If you want to invest in commercial real estate out of state without traveling, here are
two alternatives.
1. Let someone do the investing for you. Syndication is the process of pulling
money together to buy a property larger than you could afford by yourself. Syndicated
deals happen all around the world. You could live in Hong Kong and invest in a
syndicated deal in Phoenix, Arizona.
With Syndication you are basically a passive investor that invests money for a return on
investment on that money. I have a Youtube Video and Podcast on, “The Basics of Real
Estate Syndication”.
2. The second alternative is to invest in a REIT. A REIT is short for Real Estate
Investment Trust. A RIT basically buys large commercial properties and forms a
company that sells shares to investors. You can literally invest in a brand new 300,000
square foot downtown office building from your computer. You act as a type of
shareholder in the company, like a stock. I have a YouTube and Podcast on REIT if you
want to learn more about them.
When you purchased your home, you had guiding principles that helped you find what
you were looking for. You knew the neighborhood you wanted to be in, the number of
bedrooms you needed, and even the amenities that you wanted. You also need a set of
guiding principles if you are investing out of state.
Smart Guiding Principles When Investing in Long Distance
1. You need 10% cash in cash return. This should be the minimum number on any out of
state deal. If it's less than 10% and there are some vacancies or needed repairs, you risk
breaking even or having negative cashflow. This is not a problem you want to have from
far away.
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2. The second guiding principle is to have a property management company that is well
vetted, proven, and have other happy investors as clients. You need to lead your search
with the property management company.
3. The third guiding principle is population. It is okay to invest in a small population,
but the surrounding cities must be healthy and growing. These bigger cities help support
the small city, hence providing it with a healthy flow of renters. Do not invest in a small
rural town in the middle of nowhere with no big cities to support it.
4. Invest in cities that are investor and landlord friendly. Cities that have very expensive
eviction costs are not conducive to successful investing.
Out of state commercial investors need to purchase a property that's big enough to
afford a professional property management company. You cannot manage it from afar
yourself, especially if you're a beginner. Some people try self-managing because they
think they can save money, but being that cheap can actually be very expensive. A
beginner investor doesn’t have the necessarily skills needed to manage the money,
maintenance, and marketing.
The best deals our students find are actually from out of state owners who chose to self-
manage and failed. Despite the property's enormous profit potential, the owner wants
out due to poor management. Look for deals that were self-managed by out of state
owners. These people are not in good shape and are eager to sell.
You need to evaluate a deal thoroughly and also do your due diligence. One of the most
misunderstood and miscalculated numbers that causes failure in commercial investing
is property expenses. Property expenses are operating expenses that recur, every month.
This number also include capital expenses like roofs, parking lots, siding, and major
property updates.
If you evaluate a property that has failed, you can typically find the spot where the
owner misunderstood or miscalculated, because he or she didn’t have the necessary
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advisers or expertise. You can overcome this potential problem by acquiring a mentor
who is willing to share their knowledge.
You need to have expert due diligence. Due diligence is doing your homework on the
property physically, financially, and legally. It is super important, but it becomes ultra-
important when buying property out of state because you are unfamiliar with the area
and all of the inner workings of that area.
Due Diligence Tips:
1. You must be at the property during the inspections.
2. It is important that your property manager is also there.
3. Get familiar with the property market by doing a rent survey by yourself or you can
have your property manager do it. It is important to understand the vacancies, expenses,
landlord laws, and trends.
4. Develop contractor relationships. This is especially important when investing from
afar.
Get a coach that can sit down and share the inner workings of the industry. You need to
realize and acknowledge that this is a team sport. It is very risky to try to invest in
commercial real estate on your own. You need a coach or mentor to help you step by
step and also protect you from common mistakes.
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How Many Doors Will it Take for You to
Exit the Rat Race?
In other words, how many apartment units do you need to exit the rat race and become
financially free. This could mean leaving a job, reducing your workload to part time, or
simply having financial options. How many doors will it take for you to exit the rat race,
and how do you calculate that number? This is exactly what I will explain in this blog.
Today you're going to learn how many doors it will take for you to exit the rat race. Over
20 years ago, my then mentor, Robert Kiyosaki, taught me what I now cal the ABCs of
exiting the rat race or leaving your job. https://youtu.be/GPZ-O6QNDXE
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Listening to these voices will cause you to lead a very, very average life. Most of my work
with Robert Kiyosaki involved mindset. It involved getting beyond limiting beliefs in
order to discover and go after our true potential. Everyone has these limiting beliefs,
these little voices that tell us that we cannot achieve our dreams. I have a video called,
"Do You Have The Right Mindset to Own Commercial Real Estate?" I want you to watch
it so that you can see the mindset you need in order to own commercial real estate, as
long as the wrong mindset which will cause you to never own commercial real estate.
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The Big Question
My big question for you is, "What is the exit rat race number that comes to your mind
right now?" I am sure there is a number that comes to your mind, but it's not the right
number because you're including things that you should not include. This number needs
to be the bare minimum number. I would love for you to calculate it right now and share
it in the comments below. There is a monthly figure that you need in order to exit the rat
race.
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You multiple this number by 12 months and discover that your mortgage payment is
$59,280 per a year.
Next you subtract your mortgage payment from you NOI which is $33,744 per a year
and your cash flow per a year number. This is a critical number because it is the total
you will cashflow per a year on this 16-unit apartment building that was purchased for
$1.3 million at a 7 cap. When you divide your cashflow by 12, you come up with your
total cashflow per a month, $2,812. Since we are calculating how much cashflow we
need to produce per a unit or door, we then divide this number by 16 units and get a
grand total of $175 per a unit.
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2. Make These Goals Visible to Everyone
This first step will help you to hold yourself accountable because everybody needs
accountability. We all set these grand goals but what forces you to take responsibility to
get these goals accomplished? I had mine visible so that when friends and family came
over, I could share with them what I was doing, to help me stay on the right path.
Wherever I went, I was reminded of how badly I wanted to achieve this goal. I wanted so
badly to not work for someone else, and to have true financial freedom. I wanted to have
financial options. So I slowly began to weed myself off my engineering job by working
less and less each week. You can do that if you can achieve steady passive income. If
goals are not written down, they probably won't get done.
3. I Kept a Running Tally of Cashflow That I Achieved
I kept a tall on my refrigerator where I wrote my goal number. Then every time I closed
a deal, I would subtract the cashflow from that deal until I reached my final goal.
I actually ended up exiting the rat race two months early which I attribute to staying
focused and being held accountable for something I wanted very badly.
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5. Get in Touch With Us
Have one of our advisors give you a call back and discuss the options and next steps for
you. They are very intelligent and kind people that will help you figure out this next step,
even if you do not end up working with us.
6. You've Got to Want it.
You have to want it and be willing to put the work in to get this goal accomplished.
There are no excuses allowed, because this is not an easy business. The most successful
people in commercial real estate are the ones that are the most determined.
Robert Kiyosaki
When Robert Kiyosaki was my mentor, we were at a "Rich Dad" event with about 20
other people. It was a close knit group that he coached personally for four years. We
would meet up at a hotel in Scottsdale, and learn about real estate until 11 pm at night.
So we were sitting at one of these meetings playing, "Liars Poker", which is a game
where you challenge your mindset and your boundaries. At the end of the game, I had
totally blown it. Robert was sitting on a stool, when he looked directly at me and called
me a loser. Here my mentor was, calling me a loser, and it completely shocked me.
He told me that he wanted to motivate me bcause he saw the potential in me, but
thought I was taking the easy road in life. So he shook me, and from there on out, my
real estate investing just took off. I needed that kick in the butt to get things done.
My Other Mentors
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My first mentor's name was Nick. He was the mentor that believed in me, because we all
need someone to believe in us. I also had a mentor named Curtis who gave me the tools,
the methodology and strategy on how to be successful. Finally, me mentor Ron had a
mutli-family portfolio that produced C$83,000 a month, which is significant cashflow.
Well he taught me how important operations are in the investing business, and to know
my operational numbers on an intimate number.
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Relationships in this business that you nurture and develop will help you raise money
and solve problems, in order to increase your cashflow. One thing I focus on with my
students in our mentoring company is the relationships they find and grow.
You often hear people say that your real wealth is the network of people that you know,
and that is so true in this business. You will run into a lot of problems in this business,
but these problems can be solved by reaching out to someone that you have a
relationship with.
My Secret
In this day and age, we have the internet, email, and texting, which are all ways of
avoiding human contact. We have to remember that this is a people business, and
people want to work with people they enjoy working with.
One secret to my business, is that after you speak with an agent, property owner, or
some type of industry professional, if you foresee a business relationship, send them a
thank you note. Send them a card that says," I just wanted to let you know that I
appreciate the time you spent with me today." Then put the card in an envelope and
mail it to the person, because people really appreciate personalized letters.
Then when the time comes that you want to reach out to them, they will pick up their
phone when they see your name on the caller id, because you sent them that letter.
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Market timing goes through ups and downs, and I am stoked for the next one coming
up, which I expect to happen in three to four years.
In real estate there is a different market curve for each type of commercial properties. So
an apartment building and an office building located in the same city, could be in totally
different phases of the real estate curve.
Only Invest in One Asset Type
My solution is to focus one asset type at a time. Become good at one type of property
before investing in another. You have to consider the demographics, politics, supply and
demand, and social patterns for each asset type. I also consider the taxation, job market,
income growth, and all general market sentiments.
Types of Commercial Property Assets
Apartments
Offices
Retail
Mobile Home Parks
Self-Storage
Mixed-Use
Market News
There is no such thing as a national market. Some of the information you hear on the
news, might tell you how to the market is doing, but it is not true as a whole.San
Francisco's apartment market is completely different from New Mexico's apartment
market. There are sub-markets for each location and on each asset type, so to be
successful in commercial real estate you must understand your sub-market.
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I did my first commercial deal as a 1031 exchange. There was a plethora of deals
available for me to choose from, but nowadays that is just not the case. So if you think
you're going to get into commercial real estate and close on your first deal within three
months, that is probably not going to happen.
How a Mentor Helps
A mentor will better your chance of it happening because it will fast track your results.
In our program, I can teach someone a marketing method to put in front of property
owners in less than a month. I have developed my methods and teachings over the
course of years by working with students and doing my own deals. It took me a very long
time to perfect and grow that process
My best students are the ones that showed perseverance. When things got tough, or
deals dropped out of contract, these students never gave up. The most successful
students are those that join wanting to be successful, really, really bad. They are the
easiest to coach because they are willing to do all of the work that I put in front of them.
So having the most money in this business does not qualify you to be the most successful
in this business. It's the people that want it the most.
An Example
I had a student named Vicky, who came to me right after her divorce. She told me that it
was a very bad divorce that involved abuse, so she was now a single mom. She wanted to
invest in commercial real estate, in apartments in particular. So I taught her how to
analyze, evaluate, and set up financing for deals.
How She Raised the Funds
She had about $40,000 and a credit line, and wanted to put the money towards an
apartment complex, She raised the money by approaching a client of hers that she had
known for many, many years. She wanted to purchase a 64-unit apartment complex,
and he funded her entire down payment, and they are now 50-50 partners.
The property was in great shape, but did not qualify for financing because it was only 50
percent occupied. So she purchased it through creative financing with a "Master lease
agreement", and after two years of busting her butt to raise the occupancy and stabilize
the property, she was able to afford permanent financing.
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At the end of the day, she created a million dollars in equity in one property. She put in
no money herself, thanks to her investor, and still has a $40,000 credit line. The
property is worth $2 million more now than it was when she bought it two years ago.
What to Look for in a Mentor
1. The mentor should have a track record of success.
They must own a lot of commercial real estate, because commercial real estate is a
business. You have a staff, city laws and ordinances, housing laws, utilities, and many
tenants. You need a mentor familiar with all of the operations of a commercial property.
2. The mentor needs to be available
I found this out because I realized that my students are about to make the biggest, most
expensive purchase of their lives. It would be very cold of me to backoff right before they
close their deal. How dare I not be available for the most important purchase of their
life.
3. Every Mentor Should Make their Money from Commercial Real
Estate
I believe every mentor, should make the majority of their income from commercial real
estate deals and not mentoring. They should own commercial properties because they
need to understand how to do teals and create training from these deals. Everything you
see on my YouTube channel is from good and bad deals I've done over the course of my
life.
4. Your Mentor Must be a Good Teacher
I believe mentors need to be good teachers because that is exactly what they are doing.
We call the people that join our program students because that is exactly what they
are.There are attributes that make a good teacher and a bad teacher, so you have to look
for them.
5. The Mentor Should be Invested with the Student
We actually share in the profits from our students. They pay a tuition, and then we share
in the profits. So if they don't make money, we don't make money. There's an
investment on both sides.
Tuition
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First each applicant goes through an extensive interview process. In our mentoring
company, I am the only coach because I do not trust anyone else in making these big
decisions in people's lives. I don't have time to coach 100 people a year, so there are only
a select number of people chosen each year. Then, once they make it in, there is a tuition
to pay upfront, that we call a retainer. After that we split the profits 50/50 up to
$250,000. After they make that $250,000 the split goes away and they keep all of the
profits, even though I still help them close deals.
Find a Complete Mentor
Students are not a number, they are human beings with desires and goals. You need to
find a mentor that will not only teach you how to evaluate and find deals, but who will
also stick with you to help operate the property.
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property value goes down. So this is the driver of your commercial property value
therefore, how you can force appreciation.
3. Mortgage
Why is the mortgage so important at this point? Because income minus expenses equals
NOI and NOI minus your mortgage is your cashflow. You must know the mortgage rate
in order to determine your cashflow.
I recommend taking your deal to a few lenders in order to establish what your
downpayment and interest rate would be so that you can calculate what your yearly
mortgage would look like.
4. Cashflow
Use the previous calculations to determine the property's cashflow.
5. Cash and Cash Return
This is the term that determines how fast your money is moving. A high cash and cash
return means that your money is moving fast. A low cash and cash return means that
your money will be staying in investment for a long time. In our investments, we like to
target a double digit cash and cash return. It is possible. Don't let anyone else tell you
that it's not.
6. Cap Rate
Cap rate is defined as your return on investment if you were to pay all cash for your
property.
7. Capital Expenses
Does the property need repairs or new appliances? Capital expenses are the expenses
not included in the typical costs of a deal. You need to determine these expenses prior to
making an offer on the deal.
For more information on these 7 terms you can view my video, " The Seven Commercial
Real Estate Terms You Should Know".
How the 4 Phases Use These Commercial Real Estate Terms
The Broker Brochure:
This is an introduction to the deal. It is a pretty little sales tool that's purpose is to evoke
emotion, to encourage you to take action. Unfortunately as emotion goes up, intelligence
goes down. Therefore, we do not make offers based off the broker brochure.
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Do not base your calculations off what the broker brochure says the property's income
or seller's financials are, because these are not always accurate. You must do your
research to get a better idea of the true value number. The seller's motive is to make the
numbers look good enough for the property to sell. You should always determine your
own numbers and calculations for each commercial property deal.
Your Offer:
Once you have calculated these seven essential costs and numbers, you will be ready to
make an offer, based on what works for you. Come up with a cash and cash return that
you are happy with, and also a cap rate that works for you. Next, calculate in all of the
expenses, and come up with a conservative number that you can afford to purchase the
property at.
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If you calculate the above 7 essential things before making an offer it will result in the
following things:
You're going to avoid overpaying
You will also avoid day one negative cashflow
You will gain credibility, because professionals know a valid offer when they see it.
BONUS
Lastly, I would like to give you a bonus to the lesson. It's a download of just a PDF that's
will break down how to come up with the actual numerical offer.
How to Come Up With an Offer Price (.pdf download)
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apartment building that consists of five units and greater, is considered commercial.
Anything that's four units and lower is considered residential.
The second definition of a small commercial deal is a commercial building that goes up
to about 3,000 square feet.? That could be an office condo, retail center, single-tenant
commercial space, or any other commercial property as long as it is up to or around
3,000 square feet.
Lastly, I would define it as a commercial building that you can envision yourself owning.
Something that you can afford to buy in your current financial situation.
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Make Sense to You
The final reason why you should consider doing something small, is because it just
makes sense to you. Wherever you are in life, it just makes sense for you to start with a
smaller property.
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4. Buy Something Distressed
Buying a distressed property is considered an oppurtunistic deal, and is not for
everyone. It is an oppurtunity to make a decent amount of money on small properties.
My student purchased a five-unit building that needed rehab, so he had to pay all-cash,
which was $160,000. He did this because he saw potential in the property. At closing, he
sold what the property could be to the bank , which resulted in them giving him
$80,000 in the line of credit.
The goal is to go through each of the units, fix them all up, let the property stabilize and
it'll be worth 320,000. Then, the goal is to do a cash-out refinance and pull out his
entire capital that he spent. At the end of the day, because he'll do a 75% cash-out
refinance, so 75% of 320 is 240. In that sense, he's gaining out everything that he put in.
Now, some of you may be thinking, "Well, he's over-leveraging." He's not. The bank will
only allow him to pull out 75% of what it's worth, to make sure it's still a cash loan. I
actually have a video called How to Buy Distressed Commercial Property, so check out
the video.
The Ladder of Success
I'm going to share with you the natural progression of a typical commercial real estate
investor, going from a small deal, all the way up to a holder of a large portfolio of
commercial properties. This applies to you if you have a 9-5 job, if you have no
experience, or if you're starting off with very little money. This is the natural progression
of success that we call the ladder of success.
There are four phases, you're going to go from a small deal, to a small-to-medium deal,
to medium deal, to a large deal. After that, the sky is the limit.
Phase 1: Small Deal
Purchase a small deal with a conventional bank to either wholesale or master
lease. When you wholesale, it's not ownership, it's completing your first deal, whether it
be something creative, wholesaling, or something conventional, through a bank loan.? A
small deal, right? Once you're done with this, you're going to graduate to the small-to-
medium phase.
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Phase 2: Small-to-Medium Deal
When you graduate to this deal, your credibility is going to be kicked up a notch,
because you completed the small deal already. Commercial real estate is not the type of
business where you're going to get wealthy in six months. It's what we call a L-O-N-G
game. Once you complete phase 2 with a small-to-medium deal, you're going to
graduate to the medium-sized deal.
Phase 3: Medium-Sized Deal
This deal is going to have a definite financial impact on your life. You will see the light
and the light will tell you, "Oh, I think I can do this and eventually leave my job." Once
you get your medium deal, you're at a whole new level, a different language, and your
mindset is different as well. Now you can see the potential of what real estate can do for
you and your family and the options you have of working part-time, pursuing a passion
of yours, or just leaving your job.
Phase 4: Large Deal
At this phase, your track record is now good enough for you to start using other people's
money. This is called syndication. I have a video on the subject called, "The Basics of
Real Estate Syndication" Basically, syndication is the pooling of other persons' money
together, to buy a property. You're just raising capital for a down payment to buy the
property,
Also, when you participate in large deals, you're going to have to start doing this full-
time, because if you have a 9-5 at this phase, it will start to get in the way of your real
estate success. You're going to have to leave your job.
All right, so, small deal, small-to-medium deal, medium-sized deal and large deal. After
this, there's no limit, the sky is the limit of what you can do in your commercial real
estate career. This is a natural progression of success that we use with our students in
taking them from small deals, all the way up to becoming a holder of large commercial
properties.
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Or Would Your Prefer B?
A 12-unit apartment building, that you wholesale to earn a $40,000, one-time
commission.
So, A or B? That's the question.
If you prefer A, which is the $20,000-per-year in cashflow, you're going to experience
passive income, that you can use to build up your nest egg, retirement, or use it as is
your 401K.
Would you prefer that? Or would you prefer B, which is making a one-time lump sum
fee of $40,000 by wholesaling a commercial deal that you filed. In this case, you're
going to receive a lump sum of cash, you can use it to pay off your student loans, or
perhaps you're going to do multiple wholesale deals to build up your capital base or your
down payments so you can purchase your own property.
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https://youtu.be/4eh8kR-NhK8
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How to Spot A Commercial Real Estate
Diamond
I am going to show you how to turn a bad deal into a good deal. I guarantee that you will
find deals like this in your market. You need to identify them and unpeel the levels until
you find something good about the deal, and see if you can turn it from a bad deal into a
good deal.
Bad Deal # 1
A 12 year old apartment building with an asking price of $900,000. The market value is
$850,000 according to the sales comp. This means that the deal is overpriced by
$50,000. There are 12 units in the apartment, which are all priced under market by
$150 a month. The reason why is because the property needs $25,000 worth of repairs.
There's peeling paint on the exterior, terrible landscaping, and a bunch of pending city
fines for the poor condition of the property.
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The Impact of Raising the Rents
If there is a $150 rent upside for each of the 12 units that is a potential annual rent
increase of $21,600. This is really important because, as the NOI goes up, the property
value goes up. The NOI has a huge impact on the value of a commercial property. This
does not apply to a single family home or residential deal, only to commercial
properties.
If you take your increase in NOI of $21,600 and divide it by the market cap
rate, ($21,600 divided by 7%), you come up with $308,000. This means that because
you increased the NOI by $21,600, the property is now worth $308,000 more. This is
what we call forcing the equity on a commercial property. You can't do this on your
residential property, only on a commercial property.
If you are wondering how I got the 7% cap rate, this is the market cap rate in my area. To
find out your market cap rate, you will have to call a bunch of brokers local to your
property and ask them what the going cap rate is for a 12 unit apartment building, C
class, in the area. You get their answers, and average it, to come up with a reasonable
estimated cap rate. average it, and hopefully it'll come out to a certain number. In this
case, it came up to be 7%, which is a reasonable cap rate.
Can This Example Be Turned Into a Good Deal?
Is it okay to buy it at $900,000 if you can increase it by another $300,000? The answer
is yes, in my opinion. The $25,000 in repairs will scare away most buyers but in order to
take advantage of the upsides of the deal, you will have to spend the money on the
repairs.
Bad Deal #2
A 3000 Square foot office building that is listed at $900,000, which market comps show
us is $50,000 above market value. There is no possibility of a rent increase, which
means the income that the property is capable of producing is currently maxed out. The
owner has also expressed some concerns about paying capital gains taxes.
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3. Can I use creative financing? Possibly due to the seller's concern about the
property gains taxes.
Can This Example Be Turned Into a Good Deal?
Creative deals are structured around seller motivation, which is exactly what you have
with this deal. In this case I would use a master lease agreement with the following
terms.
I would pay a 10% down payment and pay 5% interest payments to the owner for five
years. This would mean that with a Master Lease Agreement the seller would only have
to pay taxes on the 10% downpayment.
Conventional VS Creative Financing
Bank financing would require 15% down, interest, plus would require a much larger
mortgage payment every year, which would make your cash on cash return 5%.
With creative financing and the master lease agreement your lower down payment, and
five year max interest payments would decrease your mortgage and expenses and
increase your cash on cash return to 15%
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property and buy a larger one since it's worth more now, or you can do one of our
favorite techniques, which is the cash out refinance.
Cash Out Refinance
It's just like doing a cash out refinance on a home, where you get a higher value and a
lender gives you money at closing that's tax-free. I share how to do that in
a video, called Secret to Refinancing. Very powerful information and the theme of all
rich people in commercial real estate. We all refinance at some point, and pull out cash
to either pay ourselves back, pay investors back, or do improvements to the property.
The property creates the wealth by your strategy, which is, "Can I raise the rents?"
Question Three: Can I Employ Creative Financing?
Many of you know one of my favorite techniques is the master lease agreement, we've
done a gazillion deals that way, all across the country. This method works really well so
long as your paperwork is tight. I have a video called "Buying Commercial Real Estate
Without Bank Loans." That is important if you want to learn how to turn bad deals into
good,
Hopefully you now understand the importance of these three questions. Once you get a
good understanding of everything I shared in this blog, you will start to know how to
turn bad deals into good deals, and lastly, you'll be able to start finding your acres of
diamonds in your own backyard without selling the farm.
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What could you do with $3,000 per month in passive income for life? How would it
change your life? For some of you, it will be a total game changer. For others, maybe not,
but how would it affect your life if you were the owner of a commercial property that
produced $3,000 per month for life?
1. Security and Confidence
An extra $3,000 a month in passive income would give you security and confidence in
case you were laid off from your job or even downsized. You could still afford the basic
necessities of life.
2. Out of the Rat Race?
Some of you reading this today have a very low cost of living. If you live very frugally, the
$3,000 a month you generate could equal your rat race number. Your rat race number is
the amount of income that you need per month so that you're out of the rat race, out of
the corporate world, and have the option of choosing to leave your job, or work part-
time, do ministry, volunteer, and pursue the desires of your heart. Or you could even
work full-time in commercial real estate. That is exactly what I did after exiting the rat
race.
3. Roadmap to Success
The process of making $3,000 per a month in passive income is a roadmap to
generating $5,000 per a month, $10,000 or even $20,000 per a month in passive
income FOR LIFE!
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In this small office building or 20-unit apartment building, the income is $156,000 per
year, but I'm going to reduce that income by a 5% vacancy factor. You should always do
this because you cannot expect to be 100% full for 100% of the year. That's just not
going to happen. Someone's going to move out or not pay rent, so be conservative and
take away 5%.
That leaves us with $148,200 for the year. Next you must subtract 35% of the income as
expenses because there are expenses for property management, insurance, taxes,
repairs, administrative, and more. The industry standard for expenses is 35% so if you
subtract 35% from $148,200 a year, we are left with $96,333, $330. This is called the
net operating income. Very important number to remember in commercial real estate.
Again, income minus expenses equals NOI. Now that we have the NOI, we can calculate
the cashflow, I'm going to subtract the annual mortgage, from the NOI to get the
cashflow. The NOI minus the $48,000 mortgage leaves you with a cash flow of
$48,018.
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he could raise the rent substantially. He worked hard over the next eight months, but
eventually, he was able to raise the rents, which increased his net operating income. In
commercial real estate, if the property value goes up so does the cashflow.
He was able to produce $700 a month cashflow from just one five-unit property. Next
he found another five-unit property in the same city, and that one produces $600 a
month. After this, he ran out of money, so he did a cashout refi on both of his current
properties, to purchase two more properties that each produce $900 a month. In total,
he generate $3,100 a month in cashflow from his commercial real estate properties.
4. Other People's Money (OPM)
Again, the property costs a million dollars. You need a down payment of $250,000 and
it's going to produce a cashflow of $48,000 per year. The goal is to attain $250,000
from investors. You're going to pay the investors a rate of return of about 6-8%. To be
conservative, I'm going to choose 6% for this example. If you borrow $250,000 from
investors at 6% interest, you're going to be paying $1,250 per month, which is $15,000
per year. This is your annual obligation to your investors.
If we take the cashflow of $48,000 per year, and pay the investors $15,000, you're
going to have$33,000 per year leftover.Not quite $3,000 a month but really
close. Again, don't get stuck on a number. I want you to focus on the process and the
principles here.
5. Creative Financing
One of the reasons why we incorporate the Master Lease is because you don't have a lot
of money. Let's say you don't have $250,000, or investors, but you don't want to deal
with banks. Maybe because you have bad credit, maybe because you have no experience
and they won't give you a loan. The Master Lease Agreement works well in these types of
situations. You just have to be patient and be a very good detective and a good listener
to find out what the seller's motivations are. We structure everything creative around
their motivation, their personal situation
Let's say that the property owner did not want to sell the property and pay capital gains
taxes You can use the Master Lease Agreement because we can defer capital gains off
many, many years down the road.Now, let's do some quick math to show you how this
works. As a default, we like to start off our Master Lease Agreements with a 10% down
payment once we understand the motivations. 10% down payment's $100,000. That
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means your mortgage payment is going to be based on $900,000 at 5% interest per a
year, making your mortgage payment 3,750 per month, $45,000 per year.
The cashflow is the NOI minus your mortgage payment. The NOI of $96,330, let's round
out to 96,000, so 96,000 minus 45,000 is $51,000 per year.I know some of you are
thinking, "Where do I get the $100,000 from?" I don't know, but I'll tell you what you
have to do. You have to find it on a deal like this. You really do. The money flows to good
deals, so you have to know how to create these good deals.
Now, let's say that you found an investor, and you're going to pay him a 15% return on
his money. That's a lot in commercial. We want to entice him and make it really
attractive for him. If your investor puts in $100,000, you will pay him a 15% return.
That's high, but guess what? This property can afford it, because if you borrow
$100,000 from your investor and pay them 15%. That's $15,000 per year you have to
pay additional to your investor, but you're making $51,000 a year, so you can afford to
pay the $15,000. $51,000 minus the $15,000 to your investor equals $36,000 a year, so
you're making $3,000 per month in passive income after you pay your investor.
Final Thoughts
The question is, why are you reading this blog? What's driving you to learn this
material? Two really important questions. I really implore you to really understand your
why because nothing great is accomplished without understanding and knowing the
why. There's a saying that, "Once you know the why, the how is not too difficult." What
I shared here was the how, you supply the why.
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Do you have retirement savings already built up and will it last all the way to the end?
Are you getting older and haven't been able to save for retirement? Perhaps life has
zoomed by and you were too busy to focus on it. Or maybe you are going through a
tough time financially, lost your retirement savings and you're starting over today.
Whatever your retirement situation, this article will open your eyes to the possibilities of
using commercial real estate to help you catch up on your lack of retirement savings.
Invest in Something Tangible
I recently watched an ESPN episode of 30 for 30, called Broke. It detailed professional
athletes who made tens of millions of dollars during their playing careers, and once they
retired, they had no money left. They were flat broke. That's unfortunate, and it really
doesn't have to be that way.
The mistake these players made was investing in risky investments like restaurants, a
relative’s farfetched start up company, or spending their money on jewelry and cars.
They should be investing in something safe and secure with growth, and most
importantly, in something tangible that you touch, feel and measure. Measure the worth
of it in real time and cashflow. You need to have investments that produce the type of
cashflow that puts money in your pocket to buy groceries, pay the mortgage and support
your family. Of course, they didn't do that.
Catch Up on Your Retirement Savings with Commercial Real
Estate
Commercial real estate can be that vehicle for you and help you catch up for a lost time
in your retirement savings. When Jim, one of our Protégés approached us, his dilemma
was that he was in his sixties and didn’t have adequate retirement savings. He said his
goal was to retire in three years, and he didn't even have a retirement plan. In one year,
with our help he was able to create a $400,000 nest egg that’s providing him decent
cashflow and is still growing. It took twelve months of focus, hard work and coaching,
but it was well worth it.
Can you save enough for a comfortable retirement? I was reading a New York Times
article that gave me pause to think. It said that if you're in your sixties with $1 million
invested in municipal bonds, and begin withdrawing 4% per year when you retire,
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there's a 72% probability that you'll exhaust your retirement savings before you die. We
need a better solution than this.
The Solution is Commercial Real Estate
I believe commercial real estate is the best vehicle for retirement planning because it has
six investor controls that other investments do not have. These are investor tools that
are necessary in any retirement plan.
Six Investor Controls
1.
1.
1. Management: In management of commercial real estate, you have a
say of who you put in charge and what they do. You have a say on the
day to day operations to ensure that your money is safe and your
investment's going to work. No media or controversial CEO is going to
take your company down. There's no fake news that's going to smash
your property value and affect the investment. You have control over the
management.
2. Insurance: What if there's a fire or major catastrophe that totally levels
your commercial property? Using your insurance company, you can fully
recover that property and build it up even better than before at someone
else's cost.
3. Predictability: In commercial real estate, because there's a
neighborhood and not only a piece of property, there is a market. You
can see the volatility happening months in advance. This allows you to
be proactive. If you hear of something happening in that neighborhood
and market, maybe a company expansion or an upcoming loss of jobs,
you can react now and adjust to it before it happens. There's
predictability in commercial real estate that you don't have in other
investments.
4. Leverage: You can buy a $1 million property, not for $1 million, but with
25% of that. The investor in that New York Times article who saved up
$1 million and was drawing from it, should have taken that $1 million and
bought a $4-5 million commercial property. The cashflow is two or three
times more than what he's pulling out of his $1 million. That is an
example of leverage.
5. Tax Advantages: How does a company like Amazon get away with
paying no income taxes? They plan and they strategize accordingly, and
they get to pay little or no income tax. You get the same legal loopholes
and tax advantages as Amazon, even though you own something small,
like a five-unit apartment building. In fact, the recent tax breaks and
incentives from the White House just made real estate investing even
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better. Tax advantages are an investor control that you get investing in
commercial real estate that you would not get in investing in stocks.
6. Cashflow: It is the lifeblood of business when contemplating retirement;
you get to control the cashflow. If you manage your commercial property
well you get more cashflow. If you were to invest in stock, no matter how
good you are you have no control of the cashflow. It's in the hands of
someone else. Cashflow control is of the utmost importance when
contemplating a retirement plan.
Jim's Problem
Jim's in his sixties. He has some money saved, but not enough for retirement in three
years, and he has no retirement plan.
The Solution
We had Jim focus on commercial properties where the owner was out of state. The
reason we did this is because we believe these owners are probably more motivated to
sell and easier to deal with. At Commercial Property Advisors, we are good at helping
find these properties, although almost anyone can find them if they know where to look.
However, what do you do when you find them? A lot of our training goes into how to
build rapport, ask the right questions, evaluate and find motivations, and discover
what's going on with the seller to structure the best deal. That's how we trained Jim.
The Property
Jim ended up finding an eight-unit property with the asking price of $500,000. We
found out the owner was in distress and the property was horribly mismanaged.
Remember, the owner is out of state and the property manager was taking advantage of
her. We made an offer for $500,000. The offer was accepted, however we found out that
the property was in worse shape than we initially thought, reducing the price to
$450,000. At that point, we had contractors come in, and finding out there were some
structural issues and with more detailed quotes, we decided we couldn't pay more than
$385,000. We went back to the seller thinking that she would say no way. She
disappeared for a few months, so we figured she's wasn’t interested, but we kept at her.
Eventually, she agreed to $385,000.
Financing
We went ahead and Jim found financing for the deal. He found an 80% loan, which
means the lender is going to loan him 80% of the acquisition costs, the $385,000 plus
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80% of the renovation costs, which we thought was great. The renovation costs came up
to be $65,000.
Unexpectedly, the appraisal came in at $350,000, so it was $35,000 short from the
agreed upon sales price. What did we do? We went back to the seller and said, " The
appraisal came in at $350,000 not $385,000. We are not going to come to the table with
when an extra $35,000. It's just not worth it for us." We drew a line in the sand, and
thought the deal was dead. To our surprise she agreed to the new price. She had already
psychologically closed this deal with Jim and moved on to the next deal. When we gave
her this news, that kind of blew her paradigm out the water and she agreed to $350,000.
Upside Potential
During our due diligence, we discovered that the property had some good upside
potential. We found a sales comparable apartment complex for $1 million. That means if
we can buy this for $350,000 and put in the $65,000, we have a pretty good deal. We
also did a market rent survey and found out that because of the poor management and
the condition of the property, the rents for all the units were way under market.
The Execution
This is when the real work begins. We did three things: evictions, renovations, and
increased the rents after the renovations.
Jim started off with a net operating income of $26,000 per year. After a little more
than six months, he more than doubled the NOI to $57,000 per year. As you know,
for commercial property, as the NOI goes up so does the property value. Jim was
able to get a substantial increase in property value.
His all in was $415, 000; the $350,000 plus the $65,000 of renovations. How do we
calculate the new value? If you recall from my videos, we can figure out the value of
a commercial property by dividing the NOI by the market cap rate.
The NOI is $57,000 a year, divided by the market cap rate in this case of 7%, is
$814,000. His new property value is $814,000, which is an increase of close to
$400,000 in equity.
The cashflow starting off was about $700 a month, but today is at $2,600 a month.
Exit Strategy
Every good deal has an exit strategy and is repeatable. Jim found another deal that he
wanted to do, but he doesn’t have the money. What do we do? He is waiting for his NOI
to season a bit and then when the lender revalues the property, he will do a cash out
refinance and pull out some of the equity. In this case he will be able to pull out his
entire down payment and put that into another property.
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Watch my video Secrets to Refinancing Commercial Real Estate to learn more
Jim closed a great deal with all the investor controls in place. He accomplished his goal
of retiring in three years by creating a $400,000 nest egg and increasing his cashflow.
3 Questions to Ask Yourself
3. Do you have money working towards your retirement? Not just saved up, but at
work for you creating cashflow?
2. Are you playing catch up? Many people out there are playing catch up and that's okay,
because that leads me to the third question
3. Are you willing to play a bigger game of commercial real estate? Hopefully, the
answer is yes. All it may take is one good commercial deal to financially impact the rest
of your life.
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in the middle, stopping the communication between you and the seller.
The second key is to to acknowledge that there are two sides to every deal. There's the
property side and there's the human side. We are going to look at the Human Side.
Key 2: The Human Side
Author Tony Robbins talks about the six basic needs in human life: Certainty,
Variety/Change, Significance, Love, Growth, Contributions/Desire to give beyond
themselves. On the real estate "human" side, there are six basic needs of every
commercial real estate seller.
Certainty: Sellers want to be sure that you are going to close their deal. They want
certainty.
Urgency: For example, in a commercial estate sales contract, we have
contingencies that force you to put money in their earnest money deposit account if
things are not moving along at an appropriate speed. You must have your financing
in order, your inspections scheduled, and so forth, at an urgent speed. Urgency,
needs to happen with a motivated commercial real estate seller.
Gain: Gain is not only about the money, it is also about the actual selling of the
property. People can even gain something by selling a property, with no profit. Every
seller has a gain need. Make money or get rid of the property.
To Be Understood: Every seller has a need to be understood and feel heard. You
must understand why they are selling the property, what is going on with the
property, and what's going on in their lives. It is really important for you to understand
what their needs are for you to get towards yes.
Motives: Make sure that he seller's motives are addressed. In a few minutes, I'm
going to give you three really, simple but important questions to ask a seller. These
questions can but very revealing and if you structure your offers around seller
motivations, you're going to create win/win deals.
Trust: We all know what trust is, specifically that trust is not the same as certainty.
For example, there could be a seller with $10 million in his pocket, but he could be
untrustworthy. From a mentor mindset, you cannot do a good deal with a bad guy.
Trust is really important. Trust is about relationships. Commercial real estate is a
relationship based business. Relationships are what help to funnel the deals, raise
the money, and solve any problems that emerge.
When working with motivated commercial real estate sellers, you must address all six of
these basic needs. But what's next? How do you extrapolate?
Tip 2: Three Really Important Questions That You Must Ask a
Motivated Seller
How Long Have You Owned the Property?
What's Prompting You to Sell?
If You Were to Sell, What Would You Do With the Profits?
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Tip 3: Exploring Those Questions and How to Respond to Their
Answers
Question 1: How Long Have You Owned the Property?
If the seller says they have only owned the property for a year, that's not really enough
time for them to be a truly motivated seller. Once a seller reaches the seven year point,
our company's statistics say their motivation starts to grow. For this reason, seven years
of ownership or longer is your magic number.
Now, if they say they've owned it for 20 years or more, that means they are nearing the
end of their mortgage or they've already paid it off. If they already paid off the mortgage
and own it free and clear, than they can be the bank for you with a seller carry first
mortgage, which is a technique that we teach in one of our previous blogs . It's
called How to Do Commercial Deals Without Bank Loans. I highly recommend you read
that blog to learn techniques on how to buy commercial property without traditional
bank loans.
Question 2: What's Prompting You to Sell?
If their answer is it's time to move on and do something else, that really means they're
not happy with their investment for some reason or another. It might not be performing
the way they expected it to. If a seller says they are tired of managing the property, it
really means, that the property is not making them any money. They could even be
feeding their own money into the property every month. Being in a negative cashflow
position can create a highly motivated seller.
If their answer is that they'd like to retire, but will miss the monthly income, we have
two solutions for that. We can use either of these solutions to purchase the property, but
also, provide the sellers with some monthly income. The first solution is to use a master
lease agreement. The second solution is a seller carry second mortgage, Really
important you watch those videos after this blog, so that you can learn these techniques
that will help close deals.
Question 3: If You Were to Sell, What Would You Do With the Profits?
The third question is if you were to sell, what would you do with the profits? If they say
they want to buy a larger property, good for them. Wish them the best, and purchase
their property. If the sellers' are planning on retiring, that is the ultimate life goal, so
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congratulate them, and make them an offer.
The number one roadblock answer a seller gives, is that they are unsure whether they
would like to sell or not. Or that they are concerned about paying taxes on the profits
they earn from selling. Our simple solution is to use a master lease agreement, to help
them defer from paying their capital gain taxes for two, three, or even ten years.
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The Problem
Single-Family Homes: Lots of Equity, Little Cash Flow
Our student has two problems. First, he owns several single-family home rentals. They
have decent equity but minimal cash flow; he is only bringing in $100-$200 a month.
His second problem is that because he has equity but very little cash flow, he feels stuck
buying single-family home rentals and it isn’t helping him achieve his goal of working
less in his professional job and gaining financial freedom. He is stuck investing in
single-family homes and is unsure what to do. Does he buy more? What does he do
next?
Opportunity Costs
Our Protégé knew he needed help to get unstuck, and that’s when we came in as his
advisors and as his mentor. Acknowledging the problem is important because it’s the
first step to avoiding lost opportunities. This is called opportunity costs, which is the
benefit an investor misses out on when choosing one investment over another. As he
chooses to invest in more single-family homes, what is he missing out on?
After nine months of focus and hard work, he discovered that he was missing out on
greater cash flow, more equity, increased net worth, and playing a bigger game.
However, there is a solution for him and for you as well.
The Solution
Convert the Equity in Your Single-Family Home Investment into a Multi-
Family Commercial Property
First, you need to prepare and sell your single-family homes. What I mean by prepare is
do any repairs or maintenance needed so that it will show well. Hire an agent, do your
research on sales, and lastly get an advisor who you trust and is experienced. Having an
advisor is important because the step from a single-family home investments into a
commercial deal is most likely the biggest investment of your life. It’s too risky to do it
by yourself, you need get help.
1031 Exchange
When you sell your single-family homes, you are going to sell using a 1031 tax-deferred
exchange strategy. This is an IRS tax code that real estate investors really like, and for
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good reason. If you take all the profit you make from the sale of your property, all the
equity and move it into the next property, a larger property, you do not have to pay
capital gains taxes. You can defer it and use all that to grow your portfolio. If you take all
the equity at close, you won’t have to pay capital gains. You can just trade it up and
continue trading up to larger properties over the years. It’s a phenomenal way of
increasing your wealth and building your portfolio in commercial real estate. This is
what we had our student do.
Watch my video and learn more about how to do a 1031 Exchange
The Basics of the Deal
Our student purchased his two single-family homes for $360,000. His cash flow is
limited at $100 to $200 per month.
He sold them for $625,000 seven years later using a 1031 Exchange and made
$265,000 on the sale.
He purchased a 34 unit apartment for $1.225 million. He used the entire $265,000 as
a 20% down payment.
Over the next year or so he increased the rents by $50 a month per unit. As you may
know, in commercial real estate, as the NOI goes up so does the property value. He
increased the NOI by $22,000.
The $22,000 NOI increase divided by the market cap rate of 8%, equals $275,000 in
increased property value.
The Power of the NOI
What he did was he forced the equity upward. You can’t do this with single-family home
investments, only with commercial. That’s the power of the NOI; a $275,000 increase in
nine months compared to a $265,000 increase in seven years investing in single family
homes. It’s amazing what it can do for your cash flow, for your net worth, and for the
property value.
Increased Cash Flow
Before our student was making $100 to $200 per month renting out single family
homes. Now with his 34 apartment units, he’s bringing in $2,877 per month. That is
almost 14 times more than before in cash flow.
Play a Bigger Game
If any of you are sitting on single-family homes with equity, that perhaps aren’t
performing well in cash flow, consider selling and investing in multi family apartments.
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It will bring you closer to your financial goals, financial freedom, working less at a job,
or having security just in case you lose your job.
I don’t often recommend books, but there is a fantastic book that will help you take
steps if you are stuck in your business. It’s called How to Get Unstuck by author Matt
Perman. It will help you identify your mental barriers and habits.
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A Breakdown of Kevin’s Deal
Kevin runs a small family business as a commercial flooring contractor in Panama City,
FL. He began working in real estate 4 years ago and connected with Commercial
Property Advisors approximately 2 years ago.
Why Commercial Real Estate? (Why not flip houses?)
Kevin felt that commercial real estate would mentally challenge him more than
residential real estate. He also felt like there were a lot less people investing in
commercial real estate, because most of the people he knew had already jumped on the
“fix and flip” houses bandwagon.
The Deal:
Kevin found a 24 unit apartment complex that was being sold by a real estate attorney
who was willing to finance the deal for 24 months. This means that Kevin was able to
just make payments until the end of 24 months, when he was then able to refinance and
pay the owner off.
Seller Financing:
After discussing the deal with the owner, Kevin soon discovered that the numbers for
the property would make it difficult for him to obtain bank financing. The owner knew
that Kevin was getting help from Commercial Property Advisors and felt comfortable
that Kevin knew what he was doing, so he agreed to a creative deal.
The Down Payment:
The property was purchased for $925,000 with $50,000 earnest money, and another
$100,000 due at closing. $50,000 came from a personal loan Kevin received from his
parents, $50,000 came from Kevin’s savings, and the rest was either owner financed or
borrowed from someone.
The Exit Strategy:
The exit strategy was to do a cash out refinance. To cash out all of the money Kevin had
invested in the property, and then refinance with a loan from Fannie Mae. When Kevin
purchased the property, the units were being rented out for $550 a month. Over the next
24 months Kevin renovated 17 out of 24 of those properties, in order to increase the rent
to $775 a month per a unit. During this process he was able to increase the property
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value from $925,000 to 1.46 million dollars. This means that when he went to refinance
he was able to cash out all of the money that he had invested in the property. He even
pulled enough out to replace six roofs on the building as well.
Renovation Break Down:
Seventeen units received a complete cosmetic face lift which included painting, new
flooring, new toilets, and washer/dryer hookups connection installed. There was no
major construction needed.
Why hadn’t the seller done this himself?
The owner lived six hours away and just had other things on his mind, besides taking on
such a large project from far away.
Words of Encouragement from Kevin:
Listen to your mentors. Work diligently. Work Smartly. You will find a deal eventually,
and then just work hard to pursue it and make sure it comes to a realization. Other than
that, you know, work hard, listen to your mentors, and follow their direction, and you
can be successful.
Summary of Kevin’s Deal
Kevin purchased 24 units for $925,000. The seller was able to finance the deal for
Kevin. After Kevin put down $150,000, the remaining balance was financed over the
next two years. The down payment came from two things: Kevin's home equity line of
credit, and secondly, he borrowed money from his parents. Both of these were paid back
when we refinanced the property.
Out of the 24 units, 17 units were fully renovated, producing a rent increase of $225 per
unit. The other 7 units had a slight increase in rent by $50-$75. $225 x 17 PLUS the
remaining seven units rental increase = approximately $4,200 per month more cash
flow a month. This is about $50,000 more per a year, and as you know, the NOI going
up results in the property value going up as well.
The end result was an appraisal for $1.46 million, so he bought it for 925, and over the
course of a year and a half, increased the value by over half a million dollars.
Our exit strategy was to refinance the property with a Fannie Mae small balance
apartment loan. In the refinance, he paid off the seller, paid himself and his parents
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back, plus got enough money back to replace roofs on the property. Once all that's done,
he keeps the property and the cash flows.
3 Keys to Kevin’s Success
1. Kevin was a good student
2. Kevin dug out the seller’s motivations
3. He focused on his exit strategy
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When his big deal that made him a millionaire came into the picture, Chris had already
found three properties that our team was helping him write contracts for. One was a
four-plex, one was a 16 unit, and one was a 26 unit. With the owners so close to signing,
our advisors recommended Chris begin interviewing the best lenders.
Chris began scouring Houston for lenders, brokers, bankers, and mortgage companies.
He touched base with many brokers, lenders, and mortgage companies, making
connections and resources. I gave him the information for a mortgage company I knew
in the area, and Chris asked them to send him any properties they heard about. Two
weeks later, they called and told him they had found a property.
The Property
It was a 90 unit property in Downtown Houston. The broker who sent Chris the
apartment had financed the property for years, so he felt motivated to help the seller
before he went bankrupt or was forced to foreclose.
The Challenges
While doing his due diligence on the property, Chris discovered that sections of the
building smelled like sewage and there was a severe roof leak. There were also some
under-management issues that would need to be handled. He quickly began rehabbing.
The Opportunities
Once Chris and I got together and put together our EPartner Pro Forma together we
discovered that the average market rents in the neighborhood were $200 higher than
what the apartment was currently charging. Once you factor that into the pro forma we
found that we could afford a $600,000 rehab, and still have this considered a very good
deal.
Financing the Property
The property was selling for 3.1 million dollars. The owner was highly motivated and
agreed to take interest only for a year on a million dollars. Chris tried to take the deal to
the same mortgage broker that had brought him the property, but they would not
finance him because he did not meet their loan criteria. We had anticipated this because
the rehab needed was so great and approximately 1/3 of the 90 units were empty.
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Chris then began spending eight hours a day for three or four days looking up hard
money lenders until he finally found one willing to lend him the rest of the money (2.1
million for the property and 600,000 for renovations) at 13% interest.
Just to clarify, the purchase price was 3.1 million, the seller carried back a mortgage in
the amount of 1 million and then you Chris found a hard money lender who paid the rest
of the amount PLUS the rehab costs at 13 % interest.
Refinancing
After a year, the property was stable enough to get refinanced by a Fannie Mae lender
out of California. It was a 30 year amortization loan with a 4.1 interest rate. The loan
did not require any down payment money besides holding costs.
New Appraisal
At the time of the loan the property appraised at 3.8 millions dollars, but after a few
months of full stabilization, it is currently appraised at 6.3 million dollars. This means
that after closing costs and commissions, Chris could sell the property today and profit 2
million dollars.
Chris's Next Step:
By April 2019 Chris wants to borrow against the property in order to purchase a new
property. He is currently looking for properties off market in the local area.
Encouraging Words From Chris
"First you have to decide whether or not you have the knowledge and experience to get
involved with one of the most difficult businesses out there that you would be owning
and operating. I would encourage you to look for the very best mentor who will not only
give you the information, but train you and stay with you very step if the way.I looked at
nine or ten mentors and Peter Harris and his background, resume, and books, all spoke
volumes to me. If you want to do this and you want the knowledge and you want to get
the experience with someone at your side, go with Peter Harris. "
Summary
Chris found a property through a mortgage broker that had huge potential if he was able
to purchase it. He did not qualify for conventional financing so he went to a hard money
lender who gave Chris money to acquire the property and conduct the rehab. Over the
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next 12 months Chris was able to finish up the rehab, stabilize the property, and
refinance the property with a Fannie Mae Loan.
Once the property was completely stabilized it was worth 6.3 million dollars. So Chris
bought it for 3.1 and now it's worth 6.3 in little more than a year plus hard work If Chris
were to sell today after paying the commissions and closing costs he would pocket over
two million dollars in profits.
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Our students find the best deals are found off the radar screen. Brokers don't know
about them, they can't be found on Loopnet, or even on the MLS. You must find your
deals in what our company calls the "shadow inventory".
Dave & Andrea's Story:
Dave and Andrea connected with our company, Commercial Property Advisors, for
hands on training and step by step coaching every step of every deal. They knew that
they wanted to get involved with Real Estate and began researching online for someone
to train them to invest in commercial real estate until they found our Youtube Channel
and ultimately joined our team.
How They Found Two Deals in A Hot Market
Dave and Andrea soon began connecting with our team and doing the homework that
we require in order to learn all of the ins and outs of the business. Soon they were
instructed to start making phone calls to reach out to brokers and get a real feel for their
market.
Dave and Andrea began sending out letters diligently. Many owners are in tough
situations, and taking time to talk to them personally can make a world of difference.
Dave and Andrea spent hours building and nurturing relationships with owners and
brokers, before finding a deal.
A Relationship Business
Commercial real estate investing is a relationship business. You have to give your time
and energy to the owner, because no matter how good the deal looks, if the people you
are working with do not form a connection with you, the deal will not happen.
Deal 1
Their first deal was a five unit apartment building that needed work, but had a lot of
upside potential. The next step for Dave and Andrea was to find a lender that could see
the property's potential.
Soon they found a local banker who knew the market well enough to immediately get
excited about their deal. He offered them a loan-to-value of 75%, which is almost
unheard of in Northern California where the average LTV is 55%-65%.
Upsides:
As a property's NOI goes up, the value of the property will also go up. Dave was able to
increase the rents, thus forcing the property's equity by fixing and repairing the
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apartments. This allowed him to refinance and take money out to purchase a second
property.
Exit Strategy
Dave and Andrea's exit strategy was to refinance the property, pull out the down
payment, and then use that money to purchase another property.
Deal 2
The second deal was once again directly with the property owner, and found through
batch letters. It was a six unit apartment below market rent.
Words of Encouragement from Dave
If you are thinking of entering the world of commercial property investing, then you
should really focus on your "Why". What is your driving force that's going to create the
passion to really work hard and accomplish your goals.
One thing Peter mentions is having the right mindset to be a successful investor. Do not
make excuses, just believe in yourself, and go for it. Hard work pays off.
Summary:
I am so thankful to both Andrea and Dave for sharing their story. I truly hope you have
found it encouraging. Here are some of the key learning points you have learned from
this blog.
1.You don't need a certain degree or profession to be successful in
commercial real estate investing: Dave is a truck driver and Andrea is a nanny.
2. Have Powerful Whys: Dave and Andrea had powerful whys. They wanted to buy
back their time by trading time for dollars. They focused on their retirement goals.
3. Target Owners Directly: They did not use any brokers, they
used CPA's proprietary techniques on creating letters and a very targeted list of property
owners to go after. There are certain specifications and criteria that helps determine
which ones are most likely to sell. We figured that out over years and years of practice.
4. Learn What to Do Once You Find the Deal. Many people understand how to
find owners directly, but our training is based upon what you do after finding great
deals. What you say and how you build a rapport to understand a owner's motivations is
what helps you structure a great deal.
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I have a video on Youtube called "The Three Tips on How to Get Owners to Say Yes
to Your Offer."Watch that video after this one to learn exactly how Dave and Andrea
got owners to say yes.
5. Market Rent Increase: Both of Dave and Andrea's deals were able to be renovated
and have their rents increased. The first deal actually resulted in a 45% increase in rents
once renovations were complete.
6. Having the Right Mindset: Dave mentioned my video called, "Do You Have the
Right Mindset to be Successful in Commercial Real Estate?" The video has really helped
Dave get over his fears when it was time to speak with owners and brokers, interview
property managers, so you have to be in the right mindset to win.
7. Caring is Key: Lastly, we are a commercial real estate company, which is a
company that must work directly with people and in order to do that successfully we
must really honor them. You have to be patient, work hard, and you will get results.
I want to bring to your attention a national crisis. There are 44 million student loan
borrowers in the US today and one out of four are either in default or can't make their
payments. The average college graduate will owe more than $39,000 by the time they
graduate, and they will spend the next 22 years paying off their student loans. This is a
huge problem, for you, for your children, and for any of your loved ones with student
loan debt.
When they graduate, the reality of life hits students very hard. It's no wonder the
millennial generation can't buy homes and they put off getting married or having kids
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because of their student loan debt. What about taking a job because you love it? You
can't do that, and you can't file bankruptcy either. What do you do?
How to Pay Off Your Student Loans
I have a tried and true way of getting rid of all your student loan debt. It's called, pay it
off. That's the only way you will be free of it. We have a student Jeremy, who did just
that. He was ten years in on paying down his student loan debt and he still had more to
pay. Within three months of working with us at Commercial Real Estate Investing, he
wrote a check and paid it off. Just like that.
Jeremy’s Story
Jeremy was in active duty serving in the Air Force for five years and then served two
years in the Army Reserve. During that time, he finished an Associates Degree at
Community College, then later completed a bachelor’s degree in Computer Operations
Technology and a master’s in Cyber Security. After working hard to achieve his goals
and landing a well-paying job, he realized he wasn’t satisfied. He wanted to build wealth
and pay off his student loans.
How Jeremy Paid Off His Student Loans In 3 Months
Jeremy wanted to get involved in real estate and began researching online for someone
to train him to invest in commercial real estate. He discovered our YouTube
Channel and ultimately joined our Protégé Program for hands on training and
mentoring.
Commercial Real Estate Wholesaling
In the first month, Jeremy began four weeks of foundational training. This involves
learning the basics of commercial real estate, teaches you how you do evaluations and
how to talk to sellers. During week four and five, we teach you how to market
commercial real estate. Jeremy focused on learning about wholesaling commercial real
estate because he could get the deal done without having a lot of money. He learned
through our program that the way to market and find a good deal was by sending letters.
He began his mailing campaign, sending out 800 letters which generated a few leads,
connecting him with some motivated sellers. Through negotiations he was able to get
the price of the property down, get the property under contract, and found a buyer using
our marketing techniques.
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The Importance of Lead Generation
Jeremy discovered that lead generation, or finding motivated sellers, is crucial but it is
also one of the most difficult aspects of wholesaling commercial real estate. Finding a
good deal requires a lot of marketing. You may receive a lot of responses from people,
however, they aren't always in a position of needing to sell. Sometimes they just want to
hear what your offer is or want you to make them an outrageous offer. You need to find
someone that is looking to sell and has a reason to sell.
Jeremy Closes the Deal and Pays Off His Student Loan
With no experience in commercial real estate and very little money, Jeremy’s deal was
done two months after finishing his training. Jeremy learned everything he needed to
know within that time frame, and he his results showed it. He had been gradually paying
down his student loans for ten years and he still had $20,000 remaining. It was a long-
term goal of his to pay off his loans, but he needed to find another source of income.
Within three months of joining the Protégé Program and closing his first wholesaling
deal, he was able to pay off his student loan debt completely. As Jeremy puts it, “It was
just a great feeling to be free off it”.
Jeremy’s Goal: Financial Freedom
Jeremy plans to do more wholesaling deals in the future to build up enough capital to
get his own commercial real estate property and eventually replace his nine to five
income. Ultimately, his goal is to build wealth and be financially independent.
Summary:
1. Commercial Real Estate Wholesaling
Jeremy used this technique to generate the income he needed to pay off his student
loans in three months. Commercial wholesaling is a powerful technique for generating
large amounts of cash in a relatively short period of time. A lot of our students use this
same technique to build up their savings so they can invest in their own commercial
property.
3 Steps In Commercial Real Estate Wholesaling
Find off market commercial deals. Commercial Property Advisors is good at this, and
you need to get good at it too if you want to be successful in wholesaling.
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You need to get sellers under contract. You're not going to make money on any deal
that you don't have control over. You get control of a deal by putting the seller under
contract. How to Make an Offer on Commercial Real Estate
Wholesale the deal to qualified buyers for a fee. That fee generated by Jeremy was
the fee he used to pay off his student loans. So, the better you are at finding off
market deals, and I think we're the best at it, the more money you will make
wholesaling to your qualified buyers.
2. Act Now
Our commercial real estate wholesaling techniques are perfect for the person with a
student loan debt burden. Don't just sit there, do something about it. It’s ridiculous to
wait twenty-two years to pay off your student loan debt. The mindset I want you to have
is “never let good enough be good enough”. Don't settle for twenty-two years or even ten
years before paying it off. Never let good enough be good enough for you.
3. Get Educated
I'm going to offer you a copy of my new bestselling book, called Commercial Real Estate
for Beginners. Click on the link and download your very own copy.
Commercial Real Estate for Beginners
Tactic 1: Come Up With Your Take Price Before You Make the
Offer
A take price is the highest price you're willing to pay for your deal. It is the price where
you'll take the deal, hence the name, "take price". Once you come up with your take
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price, put it in your back pocket. Don't share it with the broker or the seller, this price is
for you, and perhaps your coach, only.
Once you've decided on your take price, you are ready to make an offer. Your very first
offer should be your take price, minus 5% or 10%. We do this because we want you to
anticipate them countering your initial offer price. For example, if your take price is
500,000, then your initial offer would be around 450,000. That way if
they counteroffer you are able to take anything between your offer and your take price
and still feel good about it. Any offers above your take price you pass on or try to
negotiate harder in order to keep it at or below your take price.
Negotiations are More Perception Than Reality
I have a very basic example to prove this, that I guarantee will happen to you. You are
going to make an offer, and the seller is going to say, "You're offer is too low. I've already
received offers higher than yours." This statement is more perception than reality and is
quite possibly false. The seller probably received a verbal offer that could be higher than
yours, but it must not have ever materialized. Because if he had received an offer higher
than yours, why did he not take it? Because it is not real. Don't fall for this trick.
Come up with your take price because it anchors you. It encourages you to fall in love
with the numbers and not the property. A huge mistake people make when just starting
out in real estate is getting too emotional with the beauty of the property, and forgetting
about the numbers. A take price causes you to not overpay during negotiations.
Negotiations can become very emotional causing people to overpay, but with a take
price you are anchored to your price. Persuasive tactic number one is come up with
your take price.
Tactic 2: Meet the Seller in Person When Negotiating
When you negotiate a deal on the phone or through email, the seller is building their
own idea and perception of who you are and most times, it's not a good one, because
you're negotiating with them. The only way to overcome that negative image is by
meeting the seller in person, in order to forge a human connection. Forming a human
relationship with a seller can help give you the edge in the negotiation.
For example, we had a student that was stuck at $775,000 with the seller, and the deal
was going nowhere. They were stuck and both the student and the seller were holding
their ground. I told the student to go visit the property with the owner face-to-face, walk
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around the property, ask a lot of questions, develop rapport, and go to Starbucks
afterwards. That's what they did. To make a long story short, in that two-hour period,
the price went down from 775 to 705. He saved $70,000 off the price in two hours.
That's $35,000 per hour. That is what meeting the seller will do for you.
When you meet the seller, I guarantee you, you will win. The human connection is very
important in the real estate negotiating game. More important than you think.
Creative Real Estate
If you wind up short some funds for your down payment, or need to do something
creative like a seller carry second or master lease agreement, forging a human
connection and meeting the seller in person will increase your creative financing
chances by 10 times. If you are short on money and you need to do something creative
with your deal, meeting the seller in person will increase your chances of doing
something creative, guaranteed.
When you meet the seller in person during negotiations, your real estate negotiation
period is more about your relationship than how much money you have in the bank.
Real estate investing is a relationship-based business. It is today and always will be.
Tactic 3: No One Likes to be Coerced into Something
Persuasive tactic number three is very important to remember when negotiating with a
seller. A smart investor will encourage the seller to think they are in control by giving
them a quick out. I personally use this on my wife all the time and it works. (Sorry dear
wife, but I just have to share this, I hope you forgive me.)
Studies have shown that if you use affirming subtle language like, "You'll probably
refuse this, Mr. Seller, but would you consider it?", it increases their compliance a
dramatic amount. If you want the seller to agree to what you want to do, not only do you
have to state what you want, but you also need to give them an out.
An example would be, "Mr. Seller, would you pay for the closing costs in order to close
the deal?" If you leave it like that, he'll probably say, "No. Why would I pay for closing
costs?" But if you rephrase it like this, "Mr. Seller, would you pay for closing costs in
order to close the deal? You're free to say no, of course but would you consider it?". If
you add that subtle affirming language at the end, their perception is that you put them
back into control. They are the boss and they get to make the decision whether you move
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forward or not. A subtle language, a persuasive tactic is to give them a quick out to get
what you want. This works, and it's scientifically proven.
3 Persuasive Negotiating Tactics for Real Estate Investors
Persuasive tactic number one is come up with your take price.
Persuasive tactic number two is to meet the seller in person.
Persuasive tactic number three is to subtly encourage the seller to think they are in
control.
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1. Speak the Language
There are two languages in the real estate world. There's commercial real estate
language and there is the single family residential language (which is a big no-no in the
commercial property investing world). If you want to be taken seriously as a beginning
commercial real estate investor, you cannot use any type of single family residential
language.
You must learn the broker language, because they do speak a certain language. You
must learn the apartment language; learn the terms of the cap rate, cash and cash
return, price per unit, NOI, etc. It helps build immediate credibility with the broker. If
you want to be taken seriously, you have to learn these terms.
7 Commercial Real Estate Terms You Should Know
That was step one of what my Protege did. He studied the terms and learned the
language to help him defeat what I call, "Beginneritis". Which is when you're a beginner
that wants to be taken seriously, but you lack confidence. By studying and learning these
terms and using them when speaking to brokers, you will build credibility and be taken
seriously. It is the first step to beating the more experienced investors.
2. Have the Money for the Down Payment
Have the money needed for the down payment. This doesn't mean that all of the money
needs to be immediately available. This can become a mental block for a lot of beginner
investors, because they fear that they have to have their ducks in a row before they can
call the agent or make an offer. That is not true at all! In fact, I have a blog on
6 Ways to Raise Down Payment Money for Commercial Real Estate.
My Protege didn't have all of the money available, but he had it available in various
places. Have all the money for the down payment available, that's the second tip towards
landing the deal. When you're talking to a commercial broker about a potential deal,
they are going to ask you various questions to determine whether or not your are
wasting their time. Your answer to where the down payment money is coming from is
going to dictate how much time or how many deals they are going to send you.
We instructed our student to inform the broker upfront what he had available and he
had enough available through various means to complete the down payment. That's all
he needed to tell the broker and the broker never brought it up again. When you have
the money available, it evens out the playing field if you are a beginner investor.
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Available could mean cash, savings, retirement accounts, or even other investors. If you
add all of this up you can come up with hundreds of thousands of dollars available for
your deal that you didn't think you had before. To be taken seriously and to beat out
more experienced investors, you must have tip number two. You must have money for
the down payment.
3. Play to Win
Play to win, don't play to lose. One of my favorite book has a great quote I would like to
share with you. The book is called "The Art of War" by author Sun Tzu. He says,
"Knowing the enemy enables you to take the offensive. Knowing yourself enables you to
stand on the defensive."
That means that if you're going to play to win, you need to know your stuff. You need to
do extensive market research and have a great plan. As coaches and mentors, our
company does exactly that for our clients. We are able to put our students in the position
to know how to play to win. Here are the three things we did to help win the deal and
beat out the competition.
1. Our offer was slightly higher than the asking price, just like everyone else who bid.
In order to throw our hat into the ring, to seriously be considered, we had to do that.
2. We used their in-house lender. The in-house lender is the guy who sits next to the
listing broker. We wanted them to communicate how well qualified our student was
to help us win the deal.
3. We kept the inspection period in the contract to 21 days. This gave us 21 days to
do all of our due diligence, and all of our financing. We were determined to show that
we were committed to this deal. If after 21 days, we decided to back out, our earner's
money would be non refundable. Our competition offered 30 or 40 day inspection
periods, but we offered 21 days because we were so confident in the deal.
Know Your Deal
Why were we so confident in this deal? We were confident because we knew there was a
rent income upside of $150 which equates to almost $500,000 in forced equity. So
that's why we were able to offer slightly higher than the asking price, because we knew
the deal. We found out during our research that there were two identical properties
behind this property. I saw the potential of not just 16 units, but up to 48 down the road.
As I am writing this blog, my student is contacting those other owners. The property had
a great location as well, is in a suburb of Seattle with a 30 minute commute to
downtown Seattle. We did our due diligence and knew this deal had fantastic potential.
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Secondly, there were two identical properties behind this property and I don't think
anyone knew, because no one ever brought it up. We found out during our research, so I
saw the potential wasn't just 16 units but possibly 48 units down the road. Right now as
I am writing this blog, the student is contacting those other owners.
Thirdly, their property is in a suburb of Seattle with a 30 minute commute time from
that city to downtown Seattle. That's a great area. As you know, that's one of the hottest
multifamily markets in the nation. That city had a 15% population growth since 2010
and there is a community college and two elementary schools within walking distance.
What's not to like about this deal? So that's why we were able to be so aggressive and
play to win.
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responsibilities, no management duties, no evictions, and no toilets to clean. It's like
getting mailbox money.
Second Example
When you visit a large grocery chain, most likely, that grocery chain does not own the
building, they're just a tenant that pays the owner of the building a triple net lease
payment. The grocery chain pays all of the taxes, insurances, repairs, and other
expenses. The same goes for most major restaurant chains, banks, and single buildings.
They are not the owners of the buildings. There is a landlord who owns the building and
the company leases from them.
Pros of Triple Net Lease
As I mentioned before, one of the great advantages of the triple net lease is the lease will
last 15 to 20 years, and within that lease, every five years or so you're going to have rent
increases. So, over these 15 to 20 years you're going to have rent increases that go up
incrementally, and they are fixed within the lease, so that's a great and huge thing.
There will also be no landlord duties because your tenant pays for all the expenses. They
pay for the taxes, insurance, repairs, roof, and everything in the building. There is
nothing for the owner to do, other than collect your check, pay your mortgage, and
experience cash flow. The best part is this type of cash flow is stable because of these
three things, the long-term lease, no landlord duties, and the tenant pays for all of the
utilities and expenses. Plus, there is potential for rent increases every five years.
Lastly, you have a low turnover, because they are in for such a long time. It's not like
apartment buildings where the tenants last on average a year to 18 months. With a triple
net lease, the tenants will stay a minimum of 15-20 years on most occasions.
The Ultimate Goal
For some of you, the triple net lease might be the ultimate goal. You may have invested
for 20 years in your single family homes or apartment buildings, and worked your butt
off to get where you are. Now you are pretty successful, but still involved in day-to-day
doings of owning those rental properties. Now you think maybe you ought to back up a
little, retire perhaps, and it will be ideal for you to go into triple net lease investments
because of all of these advantages.
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Cons of Triple Net Lease
But there are cons, there are minuses, there are disadvantages to all of these
pros. Number one, there's a risk when the lease ends. If you owned a triple net lease
property with four tenants; a hair salon, a shoe store, a large grocery chain store, and a
pharmacy. Let's say that the grocery chain store lease ends after 15 years and they
choose to relocate. Now you are only collecting three out of four rents, and your largest
paying tenant is gone, leaving a big dark empty building. What do you do now? That's a
risk.
Let's say that you have a triple net lease on a single-tenant bank, and the bank moves
out. You are now 100% vacant, which can be a big problem. So the risk of doing a triple
net lease investment, is what happens when the lease ends? A lot of planning involved
can help to overcome and mitigate that risk, but it is still there.
High Capital Cost
Next is the high capital cost when the lease ends. Let's say you own that bank building,
and the bank lease expires, so they move out. Now you have to get everything ready
inside the bank building for a new bank or a totally different store. And guess what?
Those costs are yours. You're paying hundreds of thousands of dollars to get that
building ready for the next tenant. That's a con.
There is also limited upside if the market gets hot, because you're in a longterm lease
that's fixed with increases. So if the market gets hot there's nothing you can do. You
can't take advantage of it, you can't break the lease and increase the rents. When the
market gets hot, you are held to the terms of your lease, so there's a limit to the upside.
All Triple Net Leases are Not Created Equally
Would you rather lease your single tenant building to Starbucks or to Joel's Coffee who
only has one store? Of course, you want to lease to Starbucks because if they close down
the store after five years, they will write you one check for the remaining 10 years. If
Joe's Coffee go out of business that's it, you're left with an empty building. Even though
both are triple net leases, a Starbucks will guarantee nearly all their rent that's
remaining, whereas, a mom and pop shop cannot.
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Who Should Do a Triple Net Lease?
In my opinion, it's the retiree looking for stable cash to live off of. I have a very good
friend, who has owned her apartment buildings since we were kids, maybe in our
twenties, inherited from her dad. She's an awesome person with a wonderful job, but
last week she asked me, "Peter, what do I do when I turn 70, I don't want to continue to
operate apartments, they're too much work?"
She is the ideal person for a triple net lease, because now she's ready to just kind of pack
it in, do something that's extremely passive so she can enjoy the future grandkids. I
explained the pros and cons to her and she understood them. In the next few years she is
going to consider the triple net lease as a retiree option.
Example 2
The next type of person that should do a triple net lease is someone that owns a five cap
rate property. If this is you, then you're going to sell your five cap rate property and buy
an 8% triple net lease property out of state. If you are in a high price area like I am in
California, you're going to sell your high price, low cap property with all the equity.
This might not produce tons of cashflow because the price is so high, but you're going to
maximize your equity by buying an 8% triple net lease out of state in the Midwest.
You're going to buy a strip mall, or a bank building, or some triple net lease buildings
out of state in the Midwest, or Southwest, some place, to maximize the equity here. So
this is ideal for a person who has a high price property, lots of equity, who maximize
their equity with cashflow while kicking back.
Example 3
The third type of person is, when you're ready to park your money. If you're lucky
enough to be a trust fund baby, or if you received a large inheritance and you're not sure
where to put the money, but you need to put it someplace to start earning 4%, to 5%, to
6%, you would put it into a triple net lease investment for the next 15, 20 years. Or,
sometimes international investors will take their money out of a very unstable
environment, like in their foreign country, and they bring it to the most stable country,
the United States, and invest it into a 15 to 20 year triple net lease property. That
happens a whole lot and this country.
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1031 Exchange Step By Step Case Study
Selling your single-family home rental and trading up into a large commercial property
without paying taxes is one of the greatest wealth building tools that ever existed, and
still exist today. Let me explain. This is what I did. I took my single-family home rental,
and a little bit of cash flow, and I sold it. I took 100% of my profits, or 100% of my
equity, and I purchased a 44-unit apartment building without paying taxes again. Not
only did I increase my net worth with a 1031 Exchange, it also increased my cash flow
enough where I can leave my job as in as an engineer.
Let's say that this is you. Let's say that you have multiple single-family homes. You
bought them with the intent of using them to assist you with your retirement, or at least
set you up for the retirement, but it quite didn't work out that way because of the low
cash flow, the number of repairs, and maybe the management issues. What do you do?
How do you get on track towards retirement? https://youtu.be/-zBXsOAuW8g
The Problem
The problem is you have a single-family home with equity. That's a good problem.
Secondly, you have a little bit of cash flow, which is also pretty good. But here's the
issue, your intent when you started purchasing single-family homes, were to buy
multiple single-family homes so that you can increase your cash flow. Your hope was
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that this would set you up to retire or leave your job, or perhaps if you were to get
downsized at your job, you could still pay the bills with the cash flow from the multiple
single-family homes. Many of you, that's your goal. Or maybe it's to pay the kid's college
tuition when the time comes.
Here's the problem. Your plan isn't working out the way you intended. The main reason
why is because it's taking too long. Buying single-family homes is the long way of
achieving the goals. That's the problem.
The Solution
The solution is based upon the 1031 Exchange. The solution is to sell your single-family
home rentals, all of them or the ones with the equity, and performing a 1031 Exchange
or 1031 Tax-Deferred Exchange where you pay no taxes and purchase either a:
triple net lease investment
a large apartment building
a shopping center
industrial building
office building warehouse
mobile home park
self-storage
If you do it correctly, you can multiply your cash flow and net worth. The next thing I
want share with you is the three main things you need to know when considering or
doing a 1031 Exchange.
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4 Basic Rules of 1031 Exchanges
1. Your property that you exchange into must be equal to or greater than the property
that you're selling. The property you are selling is called your relinquished property,
and the property you are exchanging into is your replacement property. If you are
trading up from a $500, 000 to a $1 000,000 property, your replacement property is
greater than your relinquished property.
2. The amount of equity that you move forward must be equal to or greater than the
next property or properties you buy. You must take all your profits from your
relinquished property and put them into your replacement property. If you do not, if
you make $250,000 in your sale and you only move forward $200,000, that means
your 1031 Exchange has failed, and you're going to pay taxes on that $50,000. It
defeats the purpose of what you're trying to do, which is build wealth and buy more
assets. You must bring your total profits 0f $250,000 into the new deal. Then you
have your corresponding mortgage which is the leverage part. Again, the value and
the equity must be equal to or greater than the property that you relinquish.
3. Once you sell your property, you have 45 days to identify your new property. Then
you have a total of 180 days to close your deal. Once you sell your property, you
have a 45-day period to identify your new property, and then from the day you sold
up to 180 days, meaning an additional 135 days, to close your deal. You have six
months to do everything. If you go beyond those six months, it's considered a
failed 1031 Exchange, and you have to pay the taxes. We call that boot.
4. You must use a qualified intermediary, or a qualified 1031 Exchange Company.
You can find one on the internet or ask your escrow company for who they use or
who they approve to do your deal. Not anyone can complete your 1031 Exchange,
they must be a qualified Company. It's called a Qualified Intermediary or a QI.
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Which Properties Qualify?
Another thing to highlight is the properties that won't qualify for a 1031 Exchange. Your
personal residence does not qualify, you may not use that for a 1031 Exchange. You can't
trade into stocks, into developed lots, or into foreign property. Those are the four main
no-nos when doing a 1031 Exchange.
Now let's dive a little deeper into the case study, so you can see how it really works. If
you have a property or properties that you are considering selling to trade up, you can
just follow this guideline. The first one was the 1031 Exchange basics, so now that you
completely understand those basic rules let's move on to the second and third main
things you need to successfully perform a 1031 Exchange.
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apartment building to increase your cash flow? Are you going to buy a self-storage, a
retail, an office building? It's important to think about your goals.
There are two goals I can think of right away. One would be to increase your cash flow.
The second goal would be to restart depreciation. Maybe you've had your rental property
for many years, and you can no longer depreciate it, so now you want to do a 1031
Exchange, buy a bigger building, and restart the depreciation. You can do that. Again,
the beauty of commercial real estate.
2. What Can You Afford?
Just because you have $250,000 and you want to leverage it into a million dollar
property, doesn't mean you can afford it. You need to determine whether you are able to
do that financially and if you will qualify for that loan.
3. Get Started Early
The third thing, probably the most important these days, is to get started early. Back in
the day when I first started doing 1031 Exchanges, there were plenty of properties to
choose from all around the country. That's no longer the case. Now it takes time and
execution, so give us a call, get some advisors in your team so you can be successful in
this endeavor.
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your replacement property has to be of equal or greater value. With this example I go
from $500,000 to $750,000.
Why Buy This Property?
The goal is to increase the cash flow, so let's go over the numbers so you can see why I
selected this property.
It brings in $112,000 a year in gross rental income.
I pay all of my expenses, taxes, insurance, repairs, and property management, which
is $43,000.
I'm left over with $69,000. That's my NOI. Income minus expenses equals NOI. This
$69,000 is what I have left over to pay the mortgage.
Let's do a quick calculation on the mortgage.
I'm buying this for $750,000.
I'm putting a down payment of $250,000 and have $500,000 leftover, so I will have a
$500,000 mortgage. If you do the quick calculations at 5% interest, amortize over 25
years, the payments are about $2,900 a month. Multiply that by 12, and it comes out
to be $35,076 per year.
I have my NOI, minus my mortgage for the year, which equals my cash flow for the year
of $33,924. That's why I'm buying this property. I'm going from $300 a month to
$33,924 per year which is a significant jump. That's what you can do, and the best part,
it's tax-free.
So, I identified this property. I like it and I'm going to buy it. I then have additional 135
days to close. This is really important. I have 45 days identify. Once I identify the
property, let's say on the 45th day, I have an additional 135 days to close, for a total of
180 days. If I go over that 180 days, I have failed my 1031 Exchange, and I have to pay
the taxes.
Mission Accomplished
I close on my deal and Village Creek Apartments is mine. Did I accomplish my goals?
First of all, my exchange was successful and I did not pay taxes on the $250,000, so my
taxes were deferred successfully. Secondly, I increased my cash flow by nine times. I'm
going from $300 a month to $2,900 a month. That's a significant jump. Thirdly, my
depreciation restarts. I had this single-family home for a long time. I used all the
depreciation and all the tax write-offs. Now I'm buying this 16-unit apartment building,
and I can start writing off once again all the profits or the cash flow that I make from the
property. Then lastly, the most important thing for me personally, I'm back on my
retirement track because if you recall I bought this single-family home, and was
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dismayed because it was taking too long. Now I'm back on track by exchanging into this
1031 Exchange property.
I have another post called "How to Turn Two Houses Into 34 Apartment Units". You can
read that and see an example of what one of my students did. He did a 1031 Exchange,
and he took his two single-family homes and bought 34 apartment units. I go over
exactly how he did it and all the numbers. It will probably be very helpful for you to read
this blogpost as well.
Meet Kathy
We have a student, her name is Kathy and she has a substantial amount of money in a
retirement account, but she has a problem. It's not growing, and she feels uncomfortable
taking money out to spend on her bills because she doesn't believe that's going to last
her entire life. She came to us and hired us as her mentors. We had her take out 15% of
her retirement account and invest in commercial real estate. When we did this, I wanted
to show her the benefits of commercial real estate and how in contrasts with investing
with stocks and mutual funds.
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Benefits of Commercial Investing
She's getting cashflow that she can spend comfortably, continually and confidently
for many years.
There is growth in the value of her property, where she's not going to lose principle
and she's not going to run out of money. We'll call her property her retirement
account.
Her commercial real estate purchase is going to be safe compared to stocks and
mutual funds. Safe means predictability and in commercial real estate we have
predictability. Therefore, when interest rates rise, or when something happens in the
economy, we know what to do because we do nothing other than real estate and
we've been in this business for so long.
It's tax friendly. Every month Kathy is going to put money in her pocket that she can
spend on bills and at the end of the year, that money she received should not be
taxable. If done well, there should be no income tax to pay because of all the write
offs she has and because of the legal tax loopholes that she has as a commercial
real estate investor.
Most importantly, Kathy will have control of her property. You don't have control over
your stocks and mutual funds. Kathy has control over the property, where no bad
news from the media, no political environment, and no corporate corruption can take
away her value or her cashflow.
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that with stock and mutual funds, however you can if you have control over your
investment.
Control Over the Safety of the Property:
What I mean by safety is predictability. With commercial real estate, you have control
over when things happen. You also have control over the management; you can hire
and fire any management you like. If you have stock in a mutual fund, you can't do that
because it's up to the shareholders.
Tax Friendly:
Did you know that if you have a commercial property, for example an eleven-unit
apartment building, and it has 11 refrigerators or 11 air conditioners or 11 sets of new
carpet, you can do what we call cost segregation? You can rapidly accelerate the
depreciation of all those items. Over five years, you can write off all the refrigerators, all
the air conditioners, all the carpets, and all the other fixtures. We call that hidden
cashflow in your pocket during tax time at the end of the year. That is not possible with a
stock and mutual fund, but this powerful strategy, cost segregation, or sometimes called
chattel depreciation, exists when you control your real estate.
Kathy’s Deal
Using a commercial real estate agent, Kathy is buying a 16-unit apartment building. Her
purchase price is $640,000 and she’s buying it in an 8% cap rate area. (For those of you
that want to make the best decisions, wherever you buy, you need to know what
the market cap rate is in your area.) She's putting down 25% of $640,000, which is
$160,000. Her rents are under market, meaning that we can raise the rents. The
property is in average condition and needs some work.
Can you find a deal like this? Of course, you can. However, Kathy created a great
relationship with her agent, and it took her going through probably 40 deals with us to
find this one. So, don't think you're going to just read this post and go on to a website
and find a deal like this. It takes time and focused effort, but this is from an agent, so
these deals are out there.
Below I have her deal numbers broken down for you. First you will see the "today
numbers;" the actual numbers related to her investment as they are now. As well, you
will see the "predicted numbers," which represent the goals we intend to meet in about
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two years. I know two years is a long time, but I'll show you that it's worth it to reach
these numbers.
Current Numbers
Let's go over her today, or actual numbers. Her rental income per year is $90,000.
Because she is not going to be 100% full for the full 12 months, I'm going to subtract a
5% vacancy factor of $4,500. That gives me an effective gross income of $85,500.
I'm going to subtract her operating expenses of $32,142. That includes taxes, insurance,
property management, repairs, and supplies. Then it's going to leave me with an NOI
(income minus expenses) of $53,358.
Then from there I'm going to subtract her annual mortgage amount of $30,912. That's
based upon her putting down 25%, a 5% interest rate, and a 30 year amortization.
The NOI minus the mortgage equals the cashflow. Her cashflow is $22,446, or $1,870
per month. She ends up with a 16% cash on cash return and an 8.3% cap rate. Now, this
8.3% is slightly above the market cap rate, which means she's slightly overpaying for the
property. However, in markets today it's okay, especially in this case, as you will see.
Projected Numbers
Our two-year plan is to raise her rents $125 per unit. As the tenants move out, we're
going to go in and spend about $3,000 per unit in upgrades, and then we're going to
raise the rent $125 more. That's going to give us a new income over the next two years of
$114,000 per year. I'm going to take out my 5% vacancy factor of $5,700 and what's left
over is $108,300.
We have the same expenses of $32,142. I'm going to subtract the expenses from my
income. That gives me a new NOI of $76,158 and an increase of about $23,000. That's
key because as the NOI goes up so does the property value, and it is one of the reasons
why we slightly overpaid.
The NOI minus the same mortgage of $30,912, gives us a new cashflow of $45,246. Over
two years, we raise the rents $125 on 16 units and it doubles our cashflow. Here you can
see the importance of buying more units. That gives her a monthly cashflow of $3,770
per month, 32% cash on cash, and the cap rate comes out to 11.8%.
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Does this property meet the five pillars to
maximize your retirement investments?
Control
Does Kathy have control over this property? She sure does. She bought it herself and no
one forced her to do it. She hired the management and she's overlooking the numbers.
She has full control over this asset.
Cashflow
She’s walking in with cashflow and then two years later she doubles her cashflow. Guess
what? This is going to go up even more and it’s consistent. Every year she's going to
make this until she raises the rent. Can you say the same with your stocks and mutual
funds?
Growth in Value
Kathy came to us because she was not experiencing growth in value in her portfolio
account. Instead, it was going down. So we had her buy this property to show her that it
can grow. You may have to read some of my other blogs to fully understand this concept
but let me explain it.
Commercial Cash Out Refinance
If you take your future NOI and you divide it by your market cap rate area, that's going
to give you your new property value. Kathy’s projected NOI of $76,158, divided by 8%
gives her a new property value of $951,975. She bought it for $640,000, but through the
process of increasing the rents, maintain the expenses and boosting up the NOI, we
increased the property value from $640,000 to $950,000. Then, one thing she can do
that you can't do in a stock and mutual fund is she can do a cash out refinance. She can
go back to the bank, show the banker her new numbers, pull out her original down
payment and keep her cash flowing property.
Safety, Predictability and Management
Kathy hired the best management in the area. She has full control of hiring them and
firing them and overseeing them. As a company, we show our students how to manage
the management, which is extremely important.
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Tax friendly
To me something that's tax friendly simple means that at the end of the year there's no
income taxes to be paid. Her cashflow is $22,000. She’s paying $30,000 a year in
mortgage, $20,000 of that is interest she can write off. There's also around $10,000 of
depreciation she can write off as well. With the legal tax loopholes and all the write offs,
she can write off that $30, 000 against the $22,000, so she's paying no taxes on this
first year.
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Focused Investing Produces Extraordinary Results
When we focus, we become experts in a certain area producing extraordinary results.
Remember, Mark and Warren are famous because of they can produce extraordinary
results with their investments. You may be reading this blog because of the results I was
able to produce with commercial real estate.
This is the opposite of the everyday investor because they want to have the multiple
streams of income. There's no discipline and it leads to frustration. I can relate to this.
In my first five years of leaving my corporate job to do commercial real estate full time, I
had too many things on my plate. I could get nothing done or become an expert in
anything and became very frustrated because it wasn’t producing the results I wanted.
Now that I am focused and disciplined like Warren Buffet and Mark Cuban, I can
produce extraordinary results. I'm a big believer in this acronym for FOCUS:
Follow One Course Until Successful
Focused Investing Produces the Capital to Diversify
Because we have an area of expertise and are highly focused, unique opportunities
present themselves to us and we invest in them. That's what we call diversification. We
were able to invest in these opportunities because our expertise and results produce
excess cashflow and equity. For example, I was able to invest in syndications, other
people, companies and other specialized funds because we had the extra cash flow and
equity built up waiting for these opportunities.
The everyday investor who isn’t focused and tries to diversify their investments in the
early stages can't take advantage of any unique opportunities because they have no
money. The result of this approach is they don’t have the capital to take advantage
opportunities because they're spread too thin. Having an area of expertise and being
focused in the beginning provides the opportunity for diversification later.
Focused Investing Enables You to Build a Team
Now that we have been successful in our area of expertise and been able to diversify by
investing in these unique investment opportunities, we must build a team to manage
everything. By building a team, it builds upon itself and you will not believe the massive
leverage that can be attained in commercial real estate by having the right team. That's
what we teach our students, assemble the right team and have things build upon each
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other. The everyday investor doesn’t have a team and they're struggling because they
must do everything themselves.
Do you now see the difference between Warren Buffett, Mark Cuban, and myself versus
the everyday investor? We are increasing in wealth and the everyday investor is still
struggling to get results. Which one do you identify with?
3 Tips on How to Correctly Diversify Within Commercial Real
Estate:
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Cuban and I do. Having an area of expertise and being focused in the beginning builds
equity and cash flow and provides the opportunity for diversification later.
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When you add value to a property through improvements or other such adjustments,
that's called a "value add" deal...because you added value. The most successful
commercial real estate investors look for properties that have great "value add"
potential. Using the apartment building example, wise apartment investors look for
properties that need certain improvements which provide the biggest bang-for-your-
buck return on investment (ROI). Remodeling kitchens and adding washers and dryers
have proven to bring the highest ROI of any improvements, in recent years. Brand new
built properties rarely have any value add potential so you are stuck with waiting for
appreciation to provide any value increases over time. Some large institutional investors
want brand new properties but we mentor individual investors on value add deals so
they can produce enormous results, far more efficiently, than what typical large
institutional are seeking.
Value Add Commercial Real Estate Investing
You're about to discover...
Definition of value add commercial real estate
How to locate value add deals
How to evaluate the best ones
Roadmap on how to create your own commercial value add deals
An example of a real deal from one of our Proteges that purchased a $3 million
property and increased the value to $6 million in two and a half years
What is Value Add Commercial Real Estate?
Value Add commercial real estate is when you can add value to your commercial
property. It can be an apartment building, a shopping center, a retail center, office
building, industrial warehouse or any type of commercial property. Basically, it is when
you add value to the property by doing certain things. What is this value and how do you
add it? Let me explain.
If you are watching my videos, you know by now that as you increase the net operating
income, or the NOI, the property value goes up as well. Some of you may be asking,
what's the NOI? The NOI is your rental income minus your operating expenses. As that
number goes up, so does your property value.
How Do You Increase the NOI?
1. Increasing the rents as the leases come up.
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2. RUBS: Ratio Utility Building System. This is where you bill back the tenants for the
utilities. Taking the burden off you increases your cashflow, thus increasing your
NOI as well.
3. Add other income. We just recently discovered that everyone around our property
was charging $400 for a pet. We started charging anyone with a pet $400 plus we
increased the monthly pet fee to $75. We had no pushback at all from them
because they love their pets.
4. Reduce your expenses by:
Being more efficient with your property operations. You can do this by being a better
operator and hiring good property management who are efficient.
Contesting your property taxes. If you believe your property tax is too high, you can
hire a company, a firm, or an attorney, that will go in and contest your property taxes
to get them reduced.
Cutting expenses some other way. If you really look at your income expense
statements, there may be something you can start cutting out that's unnecessary.
As you increase your NOI, you increase your property value. That is how you add value
to your commercial property, hence the phrase, value-add commercial property.
How to Calculate a Value-Add Commercial Deal
The first thing you need to understand are the basic terms in commercial deal
evaluation. They're not complicated. In fact, you can learn them from my video
called The Seven Commercial Real Estate Terms You Must Know. You can watch it and
learn these terms to ensure you understand what I'm teaching here. Once you increase
the NOI in a property, the property value goes up as well. How do you calculate that
increase in property value?
Value-Add= Increase in NOI divided by Market Cap Rate
What is the market cap rate? The market cap rate is a compilation of similar commercial
properties. If they're all multifamily properties, you find out what they've sold for. Then
you find out what the cap rates are and average it all together. The result is your market
cap rate. If you want to find the market cap rate in your market, you can call a local
commercial real estate agent and ask them. Ask them what the market cap rate for C-
class apartments in your neighborhood are, and then use that number to calculate the
value-add.
Examples Increasing the NOI
I'm going to compare a single-family home with a 16 unit, and I'm going to compare that
with a 90 unit. This will enable you to see the differences between the properties. For
the market cap rate in my example, we're going to assume it's 8%.
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Single-Family Home
Rent Raised/month: $200
NOI Increase/year: $2,400
Value-Add: $0
In other words, $200 times 12, that's $2,400 per year added to my bottom line. That’s
the NOI increase per year. How much value did I add to my single-family home by
increasing the NOI? Unfortunately, none. This formula does not apply to single family
homes, only to commercial real estate. It applies to five units and greater for
apartments, and anything else that's commercial. However, it does not apply to a
fourplex, triplex, duplex or a single-family home. This is why investing in commercial
real estate is so powerful. We can force the appreciation, force the value up very quickly.
In a single-family home, you can double your rent, but the property value stays the
same, because the property value is determined by your neighbor's property down the
street.
16-unit Apartment Building
Rent Raise/month: $200 on every unit
NOI Increase/year: $38,400
Value-Add: $480,000
In this example, I raised the rent $200 per month on 16 units, and multiplied that by 12,
which equals an additional $38,400 to my bottom line. Using the value-add formula
(increase in the NOI divided by the market cap rate), I divide $38,400 by 8% equaling
$480,000. Therefore, I have a value-add of $480,000. My NOI went up $38,400, but
the property value went up $480,000. You can see the correlation and how important
the NOI is. This is the beauty of commercial real estate.
90 Unit Property
Rent Raised/month: $200
NOI Increase/year: $216,000
Value-Add: $2.7 million
In the final example, the rent was raised $200 per unit, times 90 units, times 12 months,
giving me a $216,000 increase per year in NOI. I then divided $216,000 by an 8% cap
rate, which gives me $2.7 million. That’s the power of the NOI.
How to Find Value-Add Commercial Deals
Next, I'm going to show you how to find value-add property. You may be expecting me
to give you websites or show you how to search with certain search words or keywords.
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I'm not going to do that because there are no websites to go to. Instead, you need to
develop a new way of looking for value add opportunities.
Establish a New Mindset
First, you need to develop a new mindset. Looking with that new pair of eyes is very
simple. You're looking for the value of a property. You need to see how much you can
increase the NOI on a property per year divided by the market cap rate. Again, I showed
you that if you can increase the property value on a 16 unit, by $200 per unit, that's
$38,000 a year which increases the property value by almost $500,000. You need to
approach every commercial property that you look at this way. Those are the new set of
eyes.
Raise Rents
Look to see if you can raise the rent, perhaps bill back the utilities, or reduce expenses.
How do you know if you can raise the rents or add other income? If it’s an apartment
building, you can go on to rentometer.com to see if the rents can be raised. If you want
to know the current rates for an office building or a warehouse and whether you can
raise the rent, go onto LoopNet. There are two options on the site, acquisition and
leasing. Leasing will show you what other office buildings and shopping centers are
getting for rent per month.
Reduce Expenses
Can you reduce expenses? Always ask this question of your properties as well. How do
you know if you can? Your first line of communication should be with the property
manager because the property manager pays the bills every month for his properties, so
will know if expenses are high or not. Getting an advisor or mentor will help you to see if
it is possible for you to reduce expenses. Now, I guarantee you if you choose 10
properties in your market, in two out of those 10 you'll be able to do this formula and see
the upside in value.
To summarize, you find value-add commercial real estate by looking at every single
property the same way and asking, “Can I increase the NOI?”.
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Roadmap to the Big Bucks with Value-Add Commercial Real
Estate
1. Get educated. You must become a student of the game. You can also become our
student, but you need to become a student of commercial real estate by watching
my videos, reading books, and meeting people.
2. Focus on one property type. Do not do shopping centers, apartments, and grocery
stores. Choose one and become an expert at it. There is power in focus. I don't
know anyone who's extremely good at apartments and shopping centers. I know
people who are really good at one or the other and make a fortune with them.
3. Get your team in place. Hire a property manager, agent and lender. Get us
involved. Assemble your team so you can be taken seriously when it's time to buy
your property.
4. Evaluate lots of commercial properties. This is so you can see if they do have the
value-add component attached, to see if there's upside. You need to go through
quite a few to find the property with the numbers that make you excited. Start
examining lots of deals and making lots of offers.
5. Buy a commercial property with value-add. You're going to buy a value-add
commercial property by following the first four steps.
6. Execute your exit strategy. A well thought out exit strategy is of extreme
importance in commercial real estate. The big bucks are made on the exit, so the
exit strategy must be precise, razor sharp and conservative. If you are a beginner,
don't try to do it yourself. You need someone with experience to help you out with
this.
A Real Student Deal
In conclusion, I'm going to share with you a real deal that one of our students did and
provide a link at the bottom of the page to his story. He took a $3 million property and
he increased it to $6 million in value in about two and a half years. Chris wanted to
invest in commercial real estate. He had a retirement fund that was doing okay, but he
was nowhere near reaching his retirement goals. For this reason, he came to us and his
first deal was a 90-unit apartment complex. We helped him develop a value-add strategy
for fixing up the property, raising the rents, hiring good management, and putting all
that together in the first 12 months. Truly, his story is an example of the power of value-
add commercial real estate.
Here's the full story on Chris: How Chris Became a Millionaire in 1 Year
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How to Calculate Cash Flow…No
More Spreadsheets!
Recently, I have come upon numerous amazing apartment deals all over the US with
incredible cash flow and benefits. Way more than last year or even the year before! I questioned
“why?”, and found the answer to be fairly simple. Several investors, who purchased these
apartment investments, did not see to the necessities to guarantee the success of their investment.
I was astonished that the sole most significant thing they didn’t comprehend is calculating cash
flow. Isn’t that apparent? Well, maybe to you and me, it is. As for them, my guess is that they
were too overeager and sought to be “an investor”. Thus, skipping over the important step of
seeking an advisor to aid them. The simple understanding of calculating cash flow is a
completely essential skill. You cannot succeed without it. . You just can’t! I realize I am getting
enthusiastic, but the typical investor, I found, does not have this basic skill. You need the
fundamentals to be prosperous in anything. I advise to not use a spreadsheet when you first begin
investing. I really do. Spreadsheets cause you to lose focus on the property. Calculating on a
single sheet of paper first, makes the numbers you are computing truly mean something. You
should never skip over the basics. Never.
I’m presently assisting 3 investors improve their distressed apartment building. I found a mutual
reason and source for their demise. The first reason is that they made a bad investment most
likely because of calculating the cash flow incorrectly. This is not brain surgery. In actuality, it’s
fairly easy, but it is often disregarded even though it’s a no-brainer. Once you discover an
apartment deal to assess, you’ll want to find the answer to the most significant question fairly
fast:
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3 Golden Rules of Number Computing
Step 1: get the income per year
Step 2: get the expenses per year
Step 3: get the debt service per year
This is all you need in the beginning to assess any apartment deal!!
After you do this, the final part is easy subtraction: Step 1 amount minus Step 2 amount minus
Step 3 amount = Cash flow per year
Step 1 is to find out what the overall rent payments are each month for every unit. Add it all up
and then find the yearly amount by multiplying by 12.
Step 2 is to calculate what the functioning expenses are on a month by month basis. The
functioning expenses do not comprise of mortgage payments or interest, but do consist of typical
bills like taxes, insurance, utilities, repairs and upkeep, property management fee, wages, admin
costs, publicity, and supplies.
Step 3 is to calculate what the mortgage would be every month if you purchased the property and
then multiply that sum by 12 to get a yearly mortgage total.
You see? It’s easy as pie, right? Be familiar with how to do this before you start using a
spreadsheet of any sort. Steps 1, 2, and 3 should be deep-rooted into your brain. If you depend on
spreadsheets early on, you’ll lose focus on how the property really performs. Too many have lost
focus on their apartment investments and lost their cash flow. Don’t let this happen to you. Go
back to the fundamentals and build from there.
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success in real estate requires you to “see a need and fill that need”. That’s how companies are
started, how new skills are started, and how “new real estate investing” openings are shaped.
Sign #2:
Vacant units are staying vacant for 90 days or more
Sign #3:
Appliances and other parts are being taken from empty units to be used for typical maintenance
Sign #4:
The property’s curb appeal is unsatisfactory.
Sign #5:
The Property bills are not getting paid on time
Sign #6:
Occupants departure (turnover) and not renewing their leases is growing
Sign #7:
Property’s tenancy is worse than the economic average for more than 90 days
If you notice these signs on the next venture you’re looking into, get enthusiastic because an
amazing deal could be in the making. To sum it up, if the owner does nothing to fix these issues
they could be facing mortgage default. Here is where you could come to be part of their
resolution. In a previous blog, I wrote about a low-money or no-money down buying method
using a Master Lease Option. This is a wonderful way to tackle a property that’s about to nose
dive.
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for a giant sum of money or 1031-exchange all of the profits into a bigger building tax-
free.
In Conclusion:
Your answer to flipping apartments effectively is hiring great and knowledgeable property
management, executing and closing on good deals (doing thorough due diligence), and holding
those running the apartment on a daily basis liable for what they assure to contribute.
As I stated before, if you have the aspiration and courage to take on rehabbing and flipping
apartments and decide to go for it, you have a new occupation for life. There will always be
deteriorating and non-performing apartments all over the place in the US. Let’s make the leap
and make millions together shall we? Who’s game?
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Questions to ask yourself:
Question:
When do I need to start looking for financial partners?
Answer:
NOW! There is no way to know what deal will need a financial partner. For that reason, always
search or qualify, and always be on the lookout for monetary partners. Wear your “money
partner-finding hat” at all times. Family events where friends are invited is a great and
approachable place to share your successes. Any time you’re networking, always “be involved”
in whose standing next to you. Ask them what they do for a living so that they will also ask what
you do. Once this happens: you’re on!
Question:
What should I say if I were to run into someone that’s a potential financial partner?
Answer:
Easy, just say the following. “Hey Fred, do you know of anyone who might be interested in this
amazing real estate deal I’m pursuing?” That’s what gets the ball rolling. You’re not selling or
putting any pressure on Fred. You’re requesting his assistance and people usually like to help
other people. Fred might reply that he is interested personally or he might know of somebody
who might be (like himself!).
Question:
What should I say if they ask how much monetary gain they can earn on the deal?
Answer:
By law, you cannot guarantee them a set sum or range or calculation. All you can say is that it
look like an amazing deal, but every deal has risks. Get their contact information at this time and
follow up with them in the next couple of days with the deal facts and particulars. Once you
follow up with them, put your “advisor” hat on instead of your “salesman” hat. Nobody likes to
be sold. Almost everyone likes to be counseled. Know the variance and it could make all the
difference.
Question:
What is THE ONE most significant thing in locating financial partners?
Answer:
ASK. You must ask! This is a worldwide rule. It’s fairly normal to be anxious, careful, and even
overwhelmed in asking. The only thing I can say to that is, “You have not because you ask not”.
In a later blog post, I’ll talk over how to prepare yourself to ask.
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We’ve Got Your Bailout
Money…Right Here!
Last year, we bought via short-sale a 200 unit apartment rehabilitation project that was
only 20% inhabited at the time of closing. The entrance of the property is positioned
on a very busy street and has numerous decent sized retail shops attached to the
building. The shops are entirely occupied and doing fairly well. This is apparent with
all the car circulation and overcrowding in the parking lot.
With everything going on throughout the apartment’s all-encompassing rehab, we let
the retail part of the project run itself and did not give it any attention. We thought,
it’s only 5 shops and there are 6 acres of dreadful apartment building to deal with.
That’s logical, right?
During due diligence this past year, we went over rental rates of all of our apartment’s
competition, but did not go over our retail rate competition because we reckoned it’s
only 5 shops. Those renters were paying around $2 per sq. ft. and we paid their water
every month. After we began to catch up with the apartment rehabilitation, we
decided to do a market survey for comparable retail shops. What we discovered made
us unbelievably happy! First off, the retail rent hadnt been raised since 2002. The
standard rate is $7 per sq. ft. Next, the water ought to be sub-metered, but nobody
thought it was a big deal for only five shops. Wow, were we mistaken!
Once we increased the rent on the five shops to $6 per sq. ft and correctly sub-metered
their water (which saved us $5,000/month), we saw our net operating profits on those
shops alone go up by $160,000 per year. If we do some fast math here: the area that
the building is located on is certainly at an 8 cap. So, if we divide our new additional
$160,000 net income by our 8 cap, we get an amplified property value of $2,000,000!!
We just produced our own bailout money!! A lot of it!!
The moral of the story: In commercial real estate, EVERY single dollar is important.
It’s all about the profits. To be specific, it’s all about the net operating income, or also
referred to as “NOI”. If the NOI goes up, the dollar value of the property goes up. It’s
that easy. As the NOI goes down, so does the property value. It’s that easy. This is of
course assuming that the area’s cap rateremains decently level and unchanging. Here’s
some super easy math in case you would like to test it out on your own business deals
or property:
Since cap rate = NOI divided by sales price, we can flip this math formula around and
find that sales price = NOI divided by the cap rate. Let’s substitute “sales price” for
“added value”. So, we get “added value” = increase in NOI divided by the cap rate.
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3 Ways to Make Your Own Bailout Money:
1: Raise the rent even if it’s a small amount. On an 8 cap property, for every $100 of
growth in the NOI per year, your property income goes up $1250!! This is not
complicated at all! Find ways to grow your earnings by billing back tenants for
garbage pick-up, putting in new laundry equipment and by charging extra,
2: Reduction in overheads will increase your NOI. Find ways to lessen your operating
expenses such as sub-metering any utilities, having your property insurance re-quoted,
shrink tenant turnover, or bring contracted repairs in-house.
3: improvement on the tenant profile and enhancing the properties beauty, you can
actually force your lower cap rate to decrease. A lower cap rate inevitably raises your
property value if your NOI is unwavering. The point I am trying to make is…real
commercial real estate prosperity is made in making the most of what’s left after you
pay all the operating costs except the mortgage.
Until next time…
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I have coached over 1000 new and experienced investors on apartment deals since I
began coaching in 2003. I truly believe that what you teach you become extremely
sharp at. Training and coaching apartment investing has truly aided my own investing
significantly. The marketplace has altered radically since 2007, but coaching investors
are still going solid. For this article, I believe it would be beneficial to share my
understandings from a coach’s viewpoint of what apprentices nowadays are doing and
what they are up against.
Observation #1:
From the 10,000 foot level, I see lots of misunderstanding and distress on both sides –
sellers and buyers.
The inquiries I get from apprentice investors most frequently are: have we gotten to
the bottom yet, what if I purchase and the market crumbles even more, and what is it I
should invest in – apts., retail, self-storage, duplex, etc.
Sellers fall into two categories: ones that are doing well and two, ones that are frantic
to sell. The ones that are frantic to sell are being guided by brokers who have
essentially given up on them. These sellers need imaginative student investors to
salvage them! That could be you!
Observation #2:
Banks and loaning institutes are producing the most barriers to getting a deal
completed. Enough said on this point.
But truthfully, the answer to this problem is: avoid using the banks and use Master
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Leases or Land Contracts to purchase apartments. As I stated in Observation #1,
sellers are being stranded by brokers, but sellers still want to sell. This is where you
come in. Make those deals happen!
Observation #3:
Values of properties in many areas are down to 2002-2003 prices. I also see cap rates
from 2004 levels in amazing cities to capitalize in.
Big office buildings here in SF are retailing for 2003 prices per square foot. In Texas,
areas that were 7 or 8 cap a couple years ago are now 9 and 10 caps. I presume cap
rates to sneak up even more. Check out the website www.loopnet.com to see what I
am talking about.
Observation #4:
You must think long-term now for financial growth purposes. A 7 year grip on cash
flow is a wise strategy to have.
As an alternative to buying and flipping apartments right away, you’ll want to hold
onto it to make the most of your earnings. This is a transformation in our personal
outlook, but it’s how things were done in the olden days (when things were stable).
You must realize, the economy and the way we do things has transformed forever.
Don’t give up, just make modifications.
Observation #5:
Students and others I meet at seminars must be extra aggressive in making offers to
sellers. We are in a buyer’s market which means we set the market price, not the seller
or lender. The apartment is only valued by what you are willing to pay for it.
BONUS Observation:
Don’t give up! The bumpiness and coarseness of today’s market is a “smoothing out”
course. This down market is a strainer so to speak and will significantly repay those
who stay in the game. It’s okay to sit out for an inning or two to catch your breath, but
don’t leave the game. Never give up.
Filed Under: blogTagged With: investing advice, real estate advice, real estate investing tips, real
estate investors, real estate observations
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10 Professional Tips to Handling
Your Property Manager
#1) Vital Information: The majority of property managers are not up to par!!
In other words, 90% of experienced property managers can’t run your
property to its maximum levels. Let’s be real, the property management
business is a hard trade to make a profit in. They typically promise more than
they can deliver. It requires years to be prosperous in it, let alone thrive
financially. Plus nobody could possibly care more about your investment then
you!
#2) Be positive the property management firm is on board with your business plan
and exit plan for the property.
Did you finance this property for monthly income for you to support yourself, or for
your retirement years in the future, or as a tax-shelter? Whatsoever the circumstance,
be sure your property manager is familiar and more important, agree with them.
#3) There is no way to foresee if a property managemer is talented or not, until you
hire them for a few months. Disappointing, right?
Partnering with a property management firm is like being married, you’ll discover if
they are able to do the job only after they’ve been hired and began working for a
while. Select your property manager carefully.
#5) Make sure you come to an arrangement where they send monthly performance
reports – request a sample of their personal reports during the interview.
Bluntly, ask what their property performance recording abilities are for owners. Get
an example of what they presently send out, then inform them of what you need every
week and month, as far as reports and updates on the building. If they are
incompetent, then you have some degree of holding them responsible.
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#6) Hold the property manager responsible for regimented monthly meetings and
“weekly accountability reports”.
Each and every month a conference needs to be set up between you and the property
managers. If you do not keep up with monthly conferences and accountability
reports, think of it like an undisciplined, no consequences child. What happens?
#8) Oversee a yearly customer service approval assessment of the renters which is
typically called a “resident satisfaction survey”.
These are fairly easy to do yourself or there are third party companies you can hire to
conduct the survey. The assessment should talk about the following: upkeep of
apartments and grounds, upkeep of communal amenities (pool, gym, etc.), upkeep of
utilities (heat, water, garbage), resident relations, leasing amenities, and safety. Keep
it uncomplicated with a self-addressed stamped envelope, with the option to remain
anonymous.
#9) Be prepared for bumps in the road because things happen = shape reserves.
Money is the number one thing that destroys business relationships Money
complications look as if they never appear until it’s required and there is none to be
found. Create and uphold fallback funds for emergencies.
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Establish Your Goal:
To buy your first apartment in 90 days. Typically, this strategy is for purchasing cash-
flowing, income-producing apartment deal with its own equity. Do Your Economic
Examination: one of the most significant rules on what location to purchase apartment
buildings in to buy where there is WORK. If there is a lack of jobs and job
development, there will be a lack of people to rent to. If there is nobody to rent to,
your apartment investment will probably bomb. The simplest way to find a strong job
environment is to call your resident chamber of commerce and get associated with the
economic development department. Inside this division are all of the data you’ll
require to see what the present unemployment rate is as well as what the future entails.
You should also get information directly from the source. I’ll call numerous local
property managers and ask them the question flat out: “How’s the job market in your
area?”
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Start Generating Leads:
Since you already have a goal, some market research experience, and an area to begin
with, you’ll want to start locating sources of deals or leads. The easiest way to get
leads is to begin calling local real estate agents or brokers. I advise calling them on the
phone first and if you feel like you’re on the same page, meet them for a cup of joe.
Even though you are qualifying them, you must be concentrating on developing a
relationship with them. If you don’t like each other, it’s not worth working with them.
Life is too short people! I stressed, many times, that the real estate investing is a
relationship business. So, after you spend some time building a relationship, start
sharing what you’re watching for.
Start Networking:
Here’s the big “R” word again. Relationships. Join a nearby real estate group and
begin going to their meetings. Attend investment seminars to not only learn the
newest skills, but to encounter new people. One of the most well-off people I know
has only a small amount of money, but is the king at making contacts and meeting
people. I consider him to be truly rich. There’s fruitfulness in the relationships he
develops. The best deals are not found on the computer. The funds you need for the
down payment are not going to magically appear. These two things WILL certainly
come as a product of new relationships you progress.
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Get Your Apartment on the Right Path:
What this means, is that you need to change your frame of mind from a
homeowner/renter to a business owner. After you purchase your first apartment
building and have renters, you are officially a business owner whether you planned on
it or not. Being a business includes large obligations and burdens. It is time to develop
an entity (LLC, LP, Corp., trust, etc.) that will own your apartment building and
business.
There are quite a lot of people that will show you how to locate, negotiate, and
purchase apartments, but not much is taught about how to keep your apartments full
of paying renters – continuously. In the Southwestern region of the United States,
roughly 60-70% of apartments are turned over every year. What this means is that if
you owned a 200 unit apartment building, 120-140 of those units would have someone
move in and out within 12 months. That’s way too many renters moving in and out! In
other words, only 60-80 of those units will have one singular occupant for more than
12 months. Wow. So, this means you’ll have a never-ending marketing job of
“replacing” residents. Even if you were 100% full, you should never stop advertising,
because it’s very probable that somebody will be moving out in a couple weeks.
That’s just the way the apartment business goes– turnover is unavoidable.
So, the question I had for “my newfound expert” was “How do I keep my apartments
occupied at all times”? Her answer was, “Peter, you need to identify who you’re
advertising to. Don’t try to be a be-all do-all apartment owner. Your multifaceted is
eye-catching to a particular renter profile. Advertise powerfully and cunningly to
them. If your building is near a college and is suitable for students, it’s pointless to
market to families and retirees. That makes perfect sense, right? That’s a simple fact
we already know, right?
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The next thing I know, all those years of leasing and advertising skill just started
pouring out of her. What I plan on sharing with you today is just a small part, but a
tremendously significant one on marketing. It’s called Generational Marketing.
Generational Marketing
There are three generational categories of tenants that every apartment owner should
be aware of and understand when setting a marketing strategy. They are:
In order to market successfully to an age bracket you need to discover a way to grab
their attention, by using a message that feels familiar to them.
Here are top ways to get these specific generations you are targeting to show up for an
appointment, sign a lease and move in!
Generation Y:
• They need admiration and love immediate satisfaction.
• This generation grew up with a superior lifestyle than any prior generation
• They are multi-taskers and have been since they were young
• Get monetary assistance from their parents and grandparents
• Information motivated – if you don’t give it to them – they will find it elsewhere
• Text messaging is their conventional way of interacting and replying to questions or
even setting appointments
• You need a web existence and to be easily reachable or they go “bye-bye”
• They don’t like bulk-marketing. They’ll be gone in an instant if you even try
Generation X:
• Gen Xers are independent and resourceful
• They do a lot of studying on the web
• They recognize what they want and need less assistance
• Like to live close to work and be close to top-rated schools
• The design of the apartment is very significant in terms of bedroom and bathrooms
• They adore theater rooms
• Gen Xers tend to be doubtful so you must to be ready in advance
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Baby Boomers:
Secret #1:
Banks are able to hold apartment REO assets on their books for a time of up to five years.
Secret #2:
Not all apartment REO assets are retailed for super cheap simply because they are REOs.
Secret #3:
Asset managers will not want to work with you.
You most likely have a slight understanding of single family REOs and how they
function. Commercial REOs have little to nothing in common with residential REOs. An asset
manager for an REO division is usually in control of a bunch of properties at a one period. A
commercial division REO asset manager is in control of a certain area, an asset type, a loan type
or a mixture of everything. Since the assets they are handling are further operationally extreme,
they handle a far smaller amount of properties. This means they normally will be familiar with
their assets closely. Don’t forget, they are not a production line (like a residential asset manager),
but are actually working with specialty products that are distinctive. Therefore, you’ll want to
approach them in a different way as well.
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This is what you ought to know about banks. Since banks are seriously controlled, given the
current economic atmosphere, and being that bank regulators are observing all transactions very
carefully, this means that you most likely won’t be receiving many deals from them or asset
managers. It is the job of the bank to demonstrate that they are making every single effort to get
the maximum payback on every REO they sell. (I know it doesn’t always seem like it) The
smartest way for them to do this is to take the property to market (using a r/e broker) and
perceive how much the marketplace (you and I) is prepared to pay for that property. This means,
if there is ever a watchdog auditing a reduced sale price of an REO property, they can respond by
saying they did all they could to sell the property. The price was purely what the market said the
property was valued at.
There are a few allowances, of course. One is if the bank is a minor local bank, it might sell
some of their REOs to local investors they have solid connections with. There’s that word
“connection” again people!
Banks might also be eager to sell their “bad loans”, loans that they refer to as “non-performing”
loans to investors that can achieve. This relieves the bank of going through the total procedure of
foreclosure on a property they want nothing to do with. Essentially, the buyer of the loan would
turn into the new note holder of the property, giving him privileges to foreclose and taking
physical control of the property.
If you are located in an area or know of an area where a bank is holding a collection of
commercial REOs, to come to be an “insider”, performing a little investigative work could pay
off majorly. Discover what agents they are using to liquidate their properties and shape a
connection with those agents. Likewise, learn the sales prices and the properties that they have
sold to figure out their hot knobs. What made the lender sell one property for a smaller amount
than an alternative property? Different banks are scared of different concerns you’ll notice. By
figuring out what those conditions are, it will aid you in negotiating improved deals.
I received this email the a few days ago from a leadership trainer and it contained something I
have confidence in being insightful, yet so guileless. His email discussed five ways to make
yourself luckier. After reading the email, I contemplated these 5 things and regarded my life
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achievements and approved 100% of what he stated. Here’s what he said and I will even add
further information as it relates to real estate investing.
Trust –
Understand that you do not need to know everything before you begin. Just go for it.
Action –
Just do SOMETHING. Taking no action is the most disastrous action of them all. Remember,
indecisiveness is a decision all its own, and has its own penalties. If you do not take action,
events will govern you, you will be continually reacting instead of acting. The bottom line is life
rewards action.
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These are 5 qualities of really prosperous people. The wealth I’m speaking of involves money,
relationships, family, and wellbeing. So, if you are ready to place yourself into a place where you
can “be luckier” and experience life to the fullest (the way it should be!), take a long look at
these 5 qualities and ask yourself if you have any or all of them. It’s just a matter of time before
your ideal deal turns up because of them. If not, it is never too late. Be purposeful in making the
alterations required to be successful and to display each of these traits.
First, you must gain the trust of the agent. You need to make sure he or she knows that you’re
not going to whisk away their client or the listing or do anything without their consent. No matter
how long it takes, work on earning this trust and understanding. When you ask the agent
questions about the building, also begin inquiring about the seller (you’re gradually opening the
door).
Next, keep an eye out for questions you can ask the agent, that he will not know the answers to.
The agent will then ask the sellers these questions for you. Once he returns with answers, ask the
same questions again, looking for additional clarification. Make it seem like you’re not content
with the answer. Give it a day, then reach out to the agent asking if you can speak with the seller
directly with him (the agent) on the phone too. If the agent believes that you are honestly
attracted in the property, chances are he’ll agree to the call. Once you are on the phone with both
seller and agent, come equipped with good inquiries as well as commendations.
The following step is vital. Prior to the phone call ending, say the following: “Mr. Seller, I am
grateful for your time. Once we are finalizing this transaction and headed for a closing, is it
conceivable that I could meet you at the apartment building? For instance, it would be helpful if
you could possibly meet me there during my walk-through assessment for a few minutes. Would
that be a possibility Mr. Seller? I’m guessing he says “yes” to your invitation. In the next couple
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days, schedule a walk-through of the property with the agent and suggest that the owner “stops
by”.
Only arrange this if the seller is available to meet with you. Once you have the seller there,
exchange contact information with one him/her. You are now able to call him directly. Just
remember to use this tool wisely. So there it is…a guaranteed home run on getting by the real
estate agent and being able to speak directly to the seller in a moral way.
I know many of you are wondering “Peter, what did he say?!” Well my friends, here it is:
“Hi, my name is ___(Your Name)___, and I invest in apartment buildings in emerging markets
across the United States. We join forces with investors who are displeased with the 1-2% return
they get when working with an IRA or Mutual Fund. Then we buy, sell, and run multifamily
properties to deliver clients with money made from the cash flow and equity when the units are
sold. Anyone who wants to acquire more information can talk to me after the meeting.”
With this elevator speech, I know that you can go out and collect lots of funds for your
multifamily investments.
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Three Steps to Seeing the Light
Multifamily investors are constantly looking for troubled or underestimated properties
where the cost to purchase is considerably under true market values. The following
three steps are essential to assist new and veteran apartment owners find value that
others do not.
1. Realize Value
You must recognize where the current market is at as far as appraising; cost of rents,
home values, costs etc. Distinguish where the market is and where you reason it will
be. Will you be able to obtain the property at a markdown compared to impending
values?
To be able to recognize value in anything, especially investing in multifamily real
estate, you need to have highly comprehensive assessment principles grounded on
present and historic market facts. You have to recognize your current monopoly and
what apartment buildings are currently trading for.
Next you need to know what the worth of your apartment building is now, and what it
could be in the new couple of years. This is not guesswork. What I am getting at, is
being informed about your market so you are able to estimate rent progress, demand
evolution, and other basics.
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3. Know your Investment Plan
Without a plan you will be unable to concentrate, and without focus you cannot be
prosperous in apartment investing. If you did not have a plan for your investment, you
will be just be selecting up any deal that comes along without knowing where you can
take it. As a result, you will most likely get trapped up in the emotions a lot of
apartment investors make blunders with.
You must select a plan of action and stick to it, so that you do not get lost in the
emotions that cause sloppy mistakes. Selection of an exit plan for your next purchase
is essential to your victory in making a profit for yourself and your financial team.
Partaking in these three comprehensive investment tactics will aid you in finding
value that a lot of other amateur investors are unable to see. You will be at the top in
your market, and brokers will recognize that. Once you have a strong understanding
of market assessments, basics and what your exit plan will be, you will be ready for
triumph with your next multifamily venture! Good Luck!
As apartments are how I earn my income, I pretty much go over numbers every single day.
They’re either my financials or somebody else’s. While I’m meeting with property managers or
customers, the attention is on numbers every time – earnings collected, negligent income, income
we will never receive, vacancy calculations, and money available in the operating account at the
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end of the month, just give a couple examples. Even after all of this time, I am still not a
“numbers person”. I do not feel passionately about them but to review them thoroughly and
recognize them is an essential requirement in running a business lucratively and dependably.
Here are 2 extremely imperative things when going over numbers on your apartment investment
BEFORE you purchase. Then next I will share 2 very significant things to lookout for after you
buy.So, BEFORE you purchase any apartments or even when you’re assessing a deal, take a
careful look at these 2 things:
Filed Under: blogTagged With: apartment financing, apartment investing, assessing apartment
deals
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Inspiring Words on Picking Yourself
Back Up After Real Estate
Failure…A Must Read
October 16, 2015 By Peter Harris
“Pain is temporary. It may last a minute, or an hour, or a day, or a year, but eventually it will
subside and something else will take its place. If I quit, however, it lasts forever.”
That’s a quote straight from Lance Armstrong, the ultimate American road racing cyclist..
I make it a habit to study extremely prosperous individuals and you should too.
As many recall, Lance came out of retirement on his mission for an 8th Tour de France win but
was hit by extreme bad luck. He suffered unfortunate flat tires and terrible crashes on successive
days. His hopes and visions of tour success vanished…just like that. BAM! All that time and
money spent preparing was for nothing.
You’ve probably been in a similarly defeated state. You’ve been chewed up and spit out by life
and cannot seem to get ahead no matter how hard you try. Day in and day out…nothing changes.
Does this sound familiar?
In the game and life of real estate investing, a lot of people are going through the same defeated
state. You have two choices…give up or keep trudging along. Please make the decision to not
give up. You may be two feet from gold!!
Lance had no chance of winning that one race, but he did not give up. He finished the race to the
end and continued to work towards his next win. This needs to be your outlook too. A day is
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imminent soon, if you don’t give up, you too will make your very own comeback. Yes, times are
tough right now, but this is not the end to your real estate journey…No Way!
I’m begging you to not give up YOUR race. You will succeed if you don’t give up. I want you to
take a break each day and meditate on 6 things that will give you a lift in upholding your race:
Lastly, I want to reassure you with a true declaration of life…your setback is just a setup for your
comeback.
Filed Under: blogTagged With: investing failure, real estate advice, real estate failure, real estate
investing
At what time should I leave my job to do real estate investing full time? This is a question for the
ages (and for the courageous!). As my 10 year anniversary of saying goodbye to the corporate
world to follow my dream of being a full-time real estate investor, I can look back and reliably
answer that question. I wish I had further space and time to write about this, but I don’t, so I’ll go
over the basics to get you thinking and on the correct course.
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The Two Most Significant Things For You
to Do:
#1) Keep your full-time job until you save up adequate cash flow from your real estate
investments to pay your everyday living costs. In reality, it is sensible to do this for a minimum
of six months. At the six month mark, you have solid evidence that it can be done. As
your portfolio develops, you’ll discover that your job will begin to get in the way of your
investing. Even though you won’t find a picture-perfect time to leave your job, you’ll recognize
when it’s time.
#2) Within those six months, save up six months’ worth of living expenses. This will become
your reserves during the “snug” months – and there will be snug months, I assure you.
Prior to saying a final goodbye to your job, you’ll have to learn to be somebody you’re not right
now. Do you recall the theory of “Be-Have-Do”? Well, that theory is unfitting. The accurate
theory is “Be-Do-Have”. In order to have something, you foremost have to Be that person, then
the Have arises by Doing. Okay, I apologize if I confused you (it’s a Monday!), but to get right
to the point, you must cultivate an entrepreneur’s mentality. Going from an employee way of
thought to an entrepreneur’s way of thought is crucial to effectively leaving your job (and
remaining gone!).
After I left my employment to do real estate investing full time, I recognized that in order to have
independence, I had to let go of sanctuary. So, what I did was let go of my sanctuary (my pay
check) a small amount at a time by spending my free time operating my real estate business and
then altering my job to a part-time thing. It was a four year (yes, 4 years!) era of ambiguity,
continuous planning, investing, and hard work (plus raising a teenager).
At the four year mark, my job was getting in the way of my real estate business which had
developed fairly well. At this time, I had to make a choice. I had a good job with benefits plus I
had plenty of real estate revenue to live off of. Life was grand. But was it really? Was I living a
focused life? Could I grasp the potential my real estate business had? On Dec 31st of that fourth
year, I offered my letter of resignation. Life has certainly changed. Nowadays it seems like I was
designed to do this full time. But had I not strategized this prudently, worked on my character,
and dove into real estate, I never would have revealed that the grass is in fact greener on the
other side.
The moral of this story is that although you cannot foresee the future, your future will be decided
by what’s going on in your head, the movements you plan and take, and your yearning to stick
with it when rough times come and go.
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The Single Key to Creatively
Funding Deals
Several apartment or aspiring investors have approached me to learn how to create
innovative funding for many different reasons. Almost all of the motives as to why a
person would require creative funding are because:
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If you come upon a property owner who:
#1 wants to dodge capital gains taxes on earnings after a deal
#2 would be required to pay a hefty pre-pay loan fine if he sells
#3 is sick or has private situations that thwart him from operating
the property, resulting in it being in poor operating and physical
state
#4 Has to sell the property for some sort of reason, but there’s no
equity in the property
#5 is exhausted and worn out and/or if the property is under-
performing
These are all probable cases for creative funding to occur.
On another note, if you notice in a property listing or get the following words from agents or
owners, it is a sign that an imaginative funded deal is welcomed: “owner motivated”, “seller
financing”, “owner will carry”, “master lease option”, “distraught property”, “any offer
considered”, or “investor sought”.
An easy way to go online and find tons of these deals is to go onto Loopnet and enter those key
words directly above into their key word search box.
When you get down to the core of the matter, here is the secret to undertaking creatively funded
deals, no matter how big or small: You need to ASK! That is the secret!!
If you did not ask for your wife’s hand in marriage, you would not currently be married to her. If
you didn’t ask your boss for that promotion or pay increase you’d still be where you were
beforehand. You see? That’s where it all begins. Thus, the basic way to obtain and accomplish
anything greater than what you have today is to…ASK!
How do you apply this to innovative financing you say? Simple. First, get the owner’s
enthusiasm for selling his or her property. Then, create an innovatively funded offer that meets
some or all of his or her needs. Next ask the owner by sharing your offer. That’s where it all
begins. If you do not ask, you will never know. And if you never know, you’ll never grow.
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Getting Investors on Board to Say
YES!
Let’s say, $150,000 is what you require to complete this amazing deal you’ve landed.
Supposing you’re currently at the time where you have plenty of information on your
deal and you have a number of potential investors you could reach out to for your
deal. What’s next in succeeding in getting investors to hop on board?
You’ve done numerous things. You spent quality time together even in the little sum
of time you might have known one another. One of you or both of you are probably
good listeners. There is also mutual respect for one another.
Well, to get investors to finance you, you must institute the same bond and conviction
in each other.
How do you respond when somebody tries to sell you something before they know if
you require what they’re selling? You put up an instinctive safeguard, correct? To
overpower this automated response, they should have questioned you a bit first, then
they most likely would have been a tad bit more effective. Take a counselor’s attitude
instead.
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5 Guidelines to Becoming a Superior
Money-Raiser Counselor
#1 Build the Relationship First.
#2 Investor Necessities.
Ask questions such as do they require monthly or periodical pay-outs or are they able
to wait until the investment is finished?
#3 Investment Objectives.
Ask questions about why they decided to invest. Is it for their children’s college trust?
For retirement? To create a trust fund for charity or the underprivileged?
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Educational LINKS
6 ways to Raise Down Payment Money When Buying Commercial Real
Estate
http://realestateinvesting.ontraport.net/c/s/ba/GrSRtad/s/vhS/vt22/6TH243/sHUpE
Ghdg0/P/P/Yx
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