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J Darrin Gross Podcasts

J Darrin Gross Podcasts

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Qualified Opportunity Zones Round II Regulations with Jonathan McGuire – CREPN #205

Qualified Opportunity Zones were created in the 2017 tax plan passed by congress.  

Following is from my second conversation with Real Estate Accountant, Jonathan McGuire, from Aldrich Advisors.  In this we dive into the clarifications provided Treasury Department draft proposal of proposed regulations.  Eventually, final regulations will follow. In the second round, a path from inception to exit strategy has been made clear.  

Qualified Opportunity Zones

On CREPN Radio episode #158 Round I, Jonathan explained what Qualified Opportunity Zones were and their purpose.  For investors with a capital gain, from any investment, they could invest with a temporary deferral on the owed tax if they stayed in for 5 or 7 years.  If they stayed in 10 plus years, the subsequent gain on the investment in the Qualified Opportunity Zone is TAX FREE. 

Click the link to download your Qualified Opportunity Zone Explanation

Temporary Gain Deferral

Temporary Gain Deferral is the initial benefit to investors with capital gains who reinvest their gain into a Qualified Opportunity Fund that invest in a Qualified Opportunity Zone.  The QOZ deferral program last until December 31, 2026 at which time, the deferred tax becomes due. 

Discount on the Original Capital Gain   

If the investor holds the investment for:

  • 5 years by 12/31/2026, the investor receives a 10% discount on the basis for which tax is owed.  
  • 7 years by 12/31/2026, the investor receives a 15% discount on the basis for which tax is owed

TAX FREE BONUS 

If the investor holds the investment for more than 10 years, ALL SUBSEQUENT GAINS ARE TAX FREE!

Round II Clarifications:

Use inside the Qualified Opportunity Zones –  Originally, the understanding was specific to the real estate; new construction, or substantially improved.  The round II clarified that tenants in a QOZ can also take advantage of the tax laws.

TAX FREE GAIN End Date

Round II clarified the end date for the free bonus on the subsequent gain.  The 100% tax free subsequent gain ends in 2047. Previously, there was no recognized end date attached to this.  This will likely create another anniversary date for additional market activity.   

Fund Rules

Fund Rules require that 90% of assets held by opportunity zone fund must be invested in qualified opportunity zone stock, partnership or property.    And, at least 70% of the property inside of the business, etc must be qualified, ie: acquired after 12/17, substantial improvement, original use inside the QOZ, etc. 

More Clarifications:

  • Land will always have original use.  This clarification reduces the amount of substantial improvement required, due to the subtraction of the land value from the purchase price.  The reference point for determining the value of the land is the county assessor tax record.  
  • QOZ allows you to separately recognize the true economic value of the structure and land.  By lowering the value of the structure, this lowers the amount of substantial improvement needed to qualify for the QOZ.
  • Depreciation, if you keep the investment for 10 plus years and sell before 2047, for qualified investments, there will be no capital gain and capital gain tax.  Therefore, the benefit of a cost segregation study is worth even more when considering the basis step up. Because you have no gain, you can have no depreciation recapture.  
  • Paying the deferred tax from your original gain that your deferred into the Qualified Opportunity Zone has been made easier.  Round II explanation provides the option to refinance the property, take cash out so that you can pay the tax due in 2026
  • Property in lieu of cash can be contributed to the Qualified Opportunity Zone.  If you currently own property in a zone, but do not have a gain from a sale, you can contribute the property you hold into the fund, and participate in the investment.

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK: I would say the BIGGEST RISK is not taking a serious look at Opportunity Zones. If you don’t do it and put a little bit of sweat equity into this to see if you can you can make a deal fit inside of a zone. If you have a project underway or a potential project that you’re looking at I mean, you would be doing yourself a disservice if you have a property or a business that it’s going to be located in the zone and not take advantage of this. Now maybe you don’t have capital gains so you can’t do anything. But you know maybe you need some investors, and you need capital. Why take a debt interest? Let’s get somebody with equity that wants to have a vested interest in seeing the business succeed and create an investment that works for them and for you. And then it’s a win win on both sides. 

For more go to:

www.aldrichadvisors.com

jmcguire@aldrichadvisors.com

Multifamily Mindset with Tim Bratz – CREPN #204

Multifamily Mindset is key to growing true wealth in multifamily real estate.  

Tim Bratz brokered his first commercial lease for a 400 square foot retail space which rented for $10,000 per month in New York, NY.  When he realized the landlord was going to make almost $2,000,000 over the 12 year lease for this one space, he knew he was on the wrong side of the coin.  He needed to be a landlord instead of a real estate broker if he wanted to create real wealth in real estate.  

Since that time, Tim has flipped single family homes, wholesaled, owned single family rentals, turnkey rentals, and invested actively and passively in multifamily properties.    

The first apartment building he purchased was an 8 unit property for $30,000 which he invested another $50,000 into.  All in he is in for $10,000 per door, and it cash flows like crazy. Since this one property, he stopped investing in all other types of real estate except for multifamily.

Real Wealth in Real Estate

Real wealth is not created on one commission from an individual transaction.  It is created from residual income; getting paid repeatedly, month after month and year after year.  Wealth in real estate is created over time, not by flipping property after property, but by holding the asset and letting it appreciate over the years.    

Multifamily Mindset

Multifamily Mindset for Tim started with the realization that residual income was key.  More wealth has been created in real estate. It’s a proven formula if you stick with it and have a vision.  

The more he learned about real estate, the more he saw an opportunity for him.  He also recognized the power and potential danger of leverage. When the 2008 crash happened, those with too much leverage, lost everything.  While those with cash flowing assets, were able to ride out the storm.   

When the banks were not lending, real estate investors with positive balance sheets and cash flowing properties were able to get loans, because they had cash flow.  This allowed them to buy more and grow their portfolio.   

Getting Started

Your Multifamily Mindset starts with education. Recognize, you will pay for this, one way or another.  If you decide to go it solo, and learn the hard way, on your own, you will pay for your education in costly mistakes and missed opportunities.  If you elect to pay a mentor, you will be able to shorten your learning curve, and gain from your mentors experience, and mistakes so you won’t have to repeat them.  The choice is yours.

There are tons of books and podcasts available for free.  But these do not hold you accountable. How many times have you been to a seminar or read a book that inspired you to do great things.  But as soon as you return home, you get into your regular routine and forget all the excitement and momentum you gained from the event.  Having regular meetings with your mentor or mastermind group, will keep you on track and hold you accountable to yourself so that you reach your goals.  

Tim has learned from books, podcasts and mentors, both bad and good.  He has found his mastermind group has been the most beneficial for him.  His mastermind group is where he learned from other investors who had passed through his current challenge.  

Meeting regularly with his mentor or his mastermind has helped Tim create a portfolio valued at more than $250,000,000 in just over 4 years.

Regular Reflecting

Tim had over 200 doors made up of a mix of single family and multifamily properties.  When he took some time to reflect, the numbers did not lie. NInety percent of his wealth was from multifamily yet it accounted for only ten percent of his time.  This aha, lead Tim to focus only on multifamily from that point forward. 

If you don’t know where you want to go, it doesn’t matter which path you take.  Know your why, and then back into the numbers to get you on the right path for where you want to end up.  When you know what you want, you can ask better questions, on how you can accomplish your goal.    

Take a day, schedule it, and periodically take stock of where you are and compare it to where you want to be.  Then ask questions, and course correct.  This is key to keeping your multifamily mindset. 

Consistency is Key

Consistency is key to building a successful business.  An apple a day keeps the doctor away, not seven apples on Sunday.  

If you want to build a big business, there is no shortcut.  Consistency is the key to growing a big business. If you want to build a big business, recognize that it will take time, and act consistently.  When you do this over time, your efforts will accumulate and you will have success.  

Marketing

Tim recognizes that having a consistent marketing message in front of his key prospects is how he will reach his goals.  This applies to both raising money, and buying apartments. In the communities where Tim is actively acquiring properties, everyone knows Tim buys apartments.  Why? Because, for the past three years, he has marketed to owners, and residential brokers that “Tim buys Apartments”.  

For investors looking to participate passively, Tim stays in front of them, and is constantly building his list.  His consistent actions allows him to raise millions of dollars in a single webinar for any deal he has.  

From his residential wholesale days, where he built his list of buyers and wholesalers, he recognized that wholesalers come across multifamily deals all the time, and usually throw them away.  What if the wholesaler could make a referral fee by sending it to Tim?  

Tim emails his list of wholesalers weekly, reminding them that he buys apartment buildings.  Because these buyers come across multifamily opportunities regularly, and have nowhere to go, Tim has been able to make a win-win-win situation for the seller, wholesaler and Tim.

Syndication Strategy

Tim has a unique syndication strategy for how he structures for his deals compared to traditional syndication models.  Unlike others where investors may not see any return until the building sells, Tim offers a preferred return to investors from day one.  As soon as the property is stabilized and can be refinanced, he pays back the investors their principal, replaces his bridge financing, and keeps his investors in the deal for 10 to 30 percent equity into perpetuity.  

Investor benefits include: tax advantages because the preferred returns are long term capital gains.  The investor gets their capital back for the next deal, and they get the long term equity build from their 10 – 30 percent investment with no capital in the deal.   

For Tim, this has created a constant source of money looking for a return that is ready for the next deal.

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?” 

BIGGEST RISK: The BIGGEST Risk we face is the potential tightening up of the banks.

How do you manage the risk? The model is based on refinancing within 12 to 18 months.  If we see the market shifting, we can refinance sooner, and not take out any proceeds.  Usually we like to wait for 12 months so we can take out some proceeds. This allows us to pay a little more to our investors, and make them happy, and me a little more liquid so I can qualify for more loans.  But if we had to refi before 12 months, we could just refi at our basis, lock into long term debt, and ride out the storm.  

The other thing we do is underwrite our projects as if the loan to value is going to drop by 5 – 10% in 12 – 18 months and we assume that the interest rates will bump up 1 percent.  Do I think these will happen? No. But, I want to be prepared for if they do.    

For more go to:

Face Book: Tim Bratz

Website: Legacywealthholdings.com

Podcast: Legacy Wealth ShowEvent: Commercial Empire

iintoo Real Estate Investing with Shoshana Winter – CREPN #203

Real Estate Investing for accredited investors seeking a passive alternative that utilizes data and technology can now use the online real estate investment platform, iintoo.  

Shoshana Winter managing director for iintoo USA, shares the opportunities for passive investors to take advantage of iintoo’s data science to achieve predictable returns.

Mining the Data

The success of iintoo, is rooted in its data science.  Digging into the numbers and looking for the trends are the key to identifying opportunities.  What are the attributes of a particular market? How close is it to an urban center where housing is not affordable. Is the job market healthy?  What about demand for housing? Does this market or industry have a cyclical basis?

iintoo Investment Options

iintoo has two investment options;  single property or in a fund.  

Through syndication, iintoo provides investors the opportunity to invest in a single commercial property with as little as $25,000.  If you prefer to spread your risk to multiple properties and geographic areas, you can invest in a fund. The fund option has a minimum investment requirement of $30,000.

While the platform is online, and available 24 / 7, they recognize that many investors prefer the confidence that comes with personal contact.  You want to know someone before investing hundreds of thousands of dollars. For this, iintoo provides the high level of touch including in person visits in the office, or video conferencing.  

Debt or Equity

Currently iintoo’s model is an equity investment.  All investments are placed as equity in a commercial property.  In the future, it is expected that iintoo will have a debt option available.  

Realty Shares Acquisition

iintoo in joint venture with RREAF Holdings LLC, announced their acquisition of Realty Shares in May, 2019.  Realty Shares was one of the pioneers in real estate crowdfunding, successfully closing over 1,100 deals in 40 different states.  The acquisition increases iintoo’s investor count from about 50,000 investors to over 200,000. 

BIGGEST RISK 

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK: 2008 looms very large for people.  All the KPI’s are looking for the positive signs.   We know from experience that everything is cyclical.  There’s a new administration, or not; a world event, changes in the job market, unemployment, interest rates, etc.  All of the factors, we know from experience, have the ability to create a seismic shift in investment markets, across the board.  

The book, Irrational Exuberance, that explains how we are in this phase where everything is good, but we are waiting for the other shoe to drop.  Because, we’ve seen it happen. 

Risk is inherent.  

What iintoo does, and tries to do, is to pull apart risk.  We ask, what are people most worried about? We use data. We stay actively involved.  Our thesis is to stay in these investments for short terms, 3 years.

Most recently, we started providing “Equity Protection” for principals on certain funds of our investments.  This provides a second layer of protection. The first layer is a portion of the proceeds go into a retention fund.  These pooled funds are available if an investment goes bad. If the first layer gets exhausted, a second layer is available.  This 2nd layer is through a reinsurance carrier, through Everest Re. and is available if the 1st layer is exhausted.  

For more go to:

Website: www.iintoo.com

Email: invest@intoo.com

Cost Segregation Study with Yonah Weiss – CREPN #202

A Cost Segregation Study is a tool available to real estate investors that accelerates depreciation which lowers the taxable income  and improves cash flow in the initial years of ownership.

Yonah Weiss is life long learner.  Formerly a teacher, he turned to real estate, first as a broker, then mortgage broker and investor who now uses all of his real estate experience to help investors understand the value of Cost Segregation Studies.  Today, he represents the cost segregation firm, Madison Specs, which has performed over 14,000 studies throughout all 50 states.  

Here, Yonah provides insight on how cost segregation can improve the cash flow of your property utilizing this IRS approved depreciation accelerator.

Cost Segregation Study

Simply put, a cost segregation study is a way of breaking down the property into faster depreciation lives than the normal straight line, twenty seven and a half (residential) or thirty nine years(commercial). So instead of taking a small deduction every single year, the IRS actually allows you to reclassify or segregate out the costs of everything in the property to these faster depreciation lives. Thereby, resulting in greater depreciation deductions and greater tax deductions in the early years of ownership which equal greater cash flow.

This detailed report becomes a source document for filing your taxes, and must be updated as you replace building elements.   

Depreciation

noun

noun: depreciation

  1. a reduction in the value of an asset with the passage of time, due in particular to wear and tear.

Straight Line Depreciation

Straight line depreciation is recognized when you pay your taxes, depending on the type of property you have invested in.  The property is separated between land and building, because land does not depreciate. Then you divide your building amount by the appropriate number of years, 27.5 or 39, and take the result as a deduction from the property income.

For example:

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Annual depreciation: $80,000/27.5 = $2,909

Each year your basis in the building will lessen by $2,909.  

This amount is subtracted from income to determine the income amount you owe taxes on.

Accelerated Depreciation

In order to accelerate the depreciation of you building, you must have a cost segregation study performed by specialist, engineers & accountants.  They will walk the entire property, document all the components, and classify element, light switches, carpet, toilets, faucets, nail, screw, etc. into different categories representing varying life expectancies.  

The result is instead of taking 27.5 years to fully expense an item, you can do so in 5, 7 or 15 years.

Residential Property

Purchase price: $100,000

Est value of land: $20,000

Est value of building: $80,000

Yonah’s estimates approximately, 30% of the building value gets reclassified into shorter depreciation schedules versus straight line.  Conservatively, experience suggest:

In general up to 20% of the building may qualify for the 5 year classification.

Another 10% is classified as 15 year.

Balance 70% remains in 27.5 year schedule.

Cost Segregation Study first year depreciation:

$80,000 x .20 = $16,000

$16,000/ 5 years = $3,200/ yr for 5 years

$80,000 x .10 = $8,000

$8,000/ 10 years = $800/ yr for 10 years

$80,000 x .70 = $56,000

$56,000/ 27.5years = $2,036/ yr for 27.5 years

1st year depreciation: $6,036

This represents 207% of the straight line option.

As the property value increases, so does the value of the cost segregation and increased depreciation.  

When to do Cost Segregation

The time to do a cost segregation study is as soon as you buy or build a real estate investment.  This gives you the maximum potential benefit. This does not mean you are too late if you have owned the property for a number of years, as there may still be an opportunity for savings.  If this is the case, you can amend your tax returns and reduce your tax liability.

BIGGEST RISK

Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”  

BIGGEST RISK:  I think more than anything in my experience and that risk is actually arrogance. OK so what I mean by that is when you are thinking that you’re going about and you’re making a million dollars and making 10 million dollars and it’s all you you you you’re right. You did it all. You know there is a certain when you start thinking like that you get into a very dangerous situation not just with yourself personally with the people around you. And everyone knows that real estate investing is really a team sport. And there are so many people that are involved. So when you think, just about yourself, and think about how you did it all by yourself and how great I am. And obviously that’s important. I’m not talking about you know low self-esteem here. But real humility means that I’m willing to cooperate and willing to learn from everyone around me.

How to manage the risk:  I realize that I can’t do this on my own I realize that you know whatever talents I have you know are really God given gifts and I have to be grateful for that and recognize recognize that and use them. But at the same time don’t think that you know I’m I’m the best thing in the world because that’s the biggest risk. As soon as you start thinking that history proves itself over and over and over again, you’re bound to fail and you’re bound to lose whatever you have built you lose whatever friends you made et cetera. And it’s just the easy way to lose friends in general. So that’s what I think the biggest risk is.

For more go to :

Website: http://www.madisonspecs.com/

Email: yweiss@madisonspecs.com

Multifamily Syndication with Ben Leybovich – CREPN #201

Multifamily Syndication in Phoenix is Ben Leybovich’s focus.

A classically trained musician, Ben was encouraged to seek an alternative means for generating income after he was diagnosed with MS.  In his search for an alternative to his planned career as a musician, he found real estate.

Since he was located in, Cincinnati, OH, he started investing locally in single family & smaller multiple units. For ten years, he built a real estate portfolio in Ohio, then he moved his family to Arizona for the health benefits.  This is when he began his educational journey into multifamily investing.

His original real estate investment mentor encouraged Ben to continuously grow.  Once you master single family, get a duplex. After the duplex, get a 4 plex, etc.  

He realized managing properties was not his interest.  However, his experience with his smaller properties, gave him valuable hands on experience that provides Ben with a unique perspective on the market, he would not otherwise have.

The Syndication

The dictionary definition of to syndicate is “to pool together”.  

Together, investors can do more than they can on their own.  For multifamily investing, it means pooling investor funds for the purpose of buying a single property.  

As such, Ben and his partner Sam Grooms focus on finding multifamily value add opportunities in Phoenix, AZ where they pull together investors to invest in a large multifamily properties.  

Syndication is essentially a partnership, pulled together investors.  But it is not a democracy. The partners do not have equal say in the decisions.  Instead, there is a division amongst the partners; Limited Partners and General Partners.  

The Limited Partners are able to invest with an expectation of return on their investment, but have no say in how the investment is managed.  

The decision makers are referred to as the General Partners.  All the management and operation decisions for the property is their responsibility of the General Partners.  It is their job to find the property and present it to potential investors following all of the SEC guidelines regarding securities.  

This “pooling together” of Limited Partners with the General Partners forms the Syndication.  

Why Multifamily?

Why did Ben get into Multifamily?   

The answer is multi faceted. When Ben asked his real estate mentor, “How do I know if I am moving in the right direction?”   The mentor answered, “Make sure each step is slightly bigger than your last. Doing this, will assure that your continued growth.”  So the natural progression is towards multiple units.

The experience of building his portfolio gave Ben an education on how people, markets and assets behave as the market goes through its cycle.  As he moved through the cycle, he was able to ask questions, “why did this happen?” His answers were available from the rearview mirror perspective.  Ben attributes eighty percent of his real estate investing education from this rearview perspective, being invested in the market. The balance he learned from reading books.  

The experience gained from over 10 years as an investor gives his syndication business a real sense of what is likely to happen as opposed to a theoretical view from just reading.   

Plus, from a mathematical perspective, larger multifamily properties just make more sense especially when comparing the expenses of operating smaller properties.  

Underwriting

Ben & Sam are very methodical about their underwriting.  Given the market cycles, they always underwrite for a 10 year hold.  This is not because they want to hold for 10 years, but because this length of time, allows them to safely ride out any down turn in the market.   At this point in the market, if they did not do this, they could get stuck with the need to sell or refinance when the market is not favorable to do so.

Cash Flow

Today’s cash flow is tomorrow’s “Cap X”, capital expense.  Every investor looks for cashflow. But if you have not owned a building for four or eight years, you have not experienced a Capital Expense Cycle.  The Capital Expense Cycle is a function of building mechanicals as they get used up and need to be replaced. The replacement of these systems are capital expense.  

The cost of replacement is significant, and is why the IRS provides for depreciation and cost segregation studies to help investors plan and prepare for these events.  Ideally, your positive cash flow is put into reserve so that you have funds for these events.

With this in mind, Ben underwrites for a minimal amount of cash flow starting in Q4.  As the value add improvements get implemented, the cash flow will continue to increase.  

Appreciation

The true measure of profits in real estate is defined by appreciation, regardless if you are buying and selling single family or multifamily.  

In single family properties, homes sell based on what the neighbors homes are selling for.  This market gives the investor no opportunity to push the value.

In multifamily, the market value is established by market cap rates and the property net operating income.  Multifamily investors have some control over income and expenses which gives them control over the net operating income.  When you increase the NOI, you increase the value. Your ability to increase NOI is the appeal to multifamily investors.

Multifamily Market Outlook

The Multifamily Market Outlook is favorable based on multiple data points.  The Federal Reserve’s set goal is to keep inflation at 2%. This is manageable and will naturally push the cost of rent up.  

Add to this the growing demand for rental housing due to population growth, formation of families and the growing segment that does not want to own a property.  

The cost of new construction is prohibitive when compared to cost to rent for a potential buyer making the median income.  This will keep the amount of multifamily supply from growing out of control and the demand high.

Exit

How do I exit this syndication?  This is a reasonable question from someone who has pooled their money with others.  Ben is very conservative, and underwrites to a 14% internal rate of return for 10 years.  He does not want to be in for 10 years, but does not promise any returns to his investors until the ultimate sale.  

Only after the value add plan has been substantially implemented, does Ben begin to project cash flow, usually by Q4.  His experience has taught him that cash flow needs to be accumulated for future capital expenses. By keeping the property well maintained, he can drive future sale value.  

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.

BIGGEST RISK: The BIGGEST RISK is always, you don’t know what it is.  Strictly buying for cash flow without an idea for how you are going to get out.  

How to manage the risk:  Underwrite each deal for a 10 year hold.  Not because I want to hold it for 10 years, but for safety if we need to.

For more goto:

www.justaskbehwhy.com

Email: ben@justaskbenwhy.comPodcast: Multifamily Syndication Unscripted

BIGGEST RISK with Scott Hollister

From an investor and rehab standpoint the two big issues that people get hung up on are under estimating the rehab cost and under estimating the time to complete the project.  You’ll find that if you go forward that type of lending, they’re always going to ask, “What’s your exit strategy? What’s your backup exit strategy? What’s your third exit strategy?  That’s what I try to find. If I can’t refinance out, can I quick sale? Can I fire sale it? Can I do some type of creative strategy? What does it look like on a commercial note? What does it look like on a fixed 30-year, you know Fannie and Freddie note?  I try to play out that worst case scenario, “can I weather that storm?” Then I back into the deal.

BIGGEST Risk with J. Darrin Gross – CREPN #200

What is the BIGGEST Risk Real Estate Investors face?

Merriam Webster defines risk this way:

possibility of loss or injury

In Real Estate, Risk is everywhere.  It’s what you don’t know can hurt you.

That can be a problem when you are talking about millions of dollars.

This is why so many wise, experienced investors place a premium on knowledge and so much effort is spent in due diligence.  

Most investors agree that you can never know everything, but you can dig in and ask questions and get answers that make sense for you to go forward.

By day, I am an insurance broker.  My focus is working with Real Estate investors to assess their exposure to loss and help them manage the risk.

Risk Management Process

Risk Management is a continuous process.  There are four basic steps to risk management:

  1. Identify
  2. Assess
  3. Manage
  4. Review

Risk Management Strategies

In insurance, we utilize three specific Risk Management strategies:

  • If the situation is too risky, Avoid the risk
  • If there are things we can do to Minimize the Risk
  • What can you do to Transfer the Risk?

Risk in Real Estate

Where is the risk in real estate?  This is the question you have to look for when you buy a property.  It’s your job to find where the risk is hidden, because the seller will not tell you.  The due diligence period is your opportunity to go through the property from top to bottom looking for the hidden risk.  You also need to comb through the numbers to find out what is missing, and where you can make things better.

Depending on what unexpected information you find during due diligence, the purchase process provides you an opportunity to present your findings to the seller.  The seller can offer to correct the problem, or provide you a discount on the price. If you fail to find these hidden issues, and address with the seller, they are yours.  Once you close, the property and the problems you did not find are yours.

Metropolitan Statistical Area

What do you know about the Metropolitan Statistical Area you are investing in?

  • What is the median income?
  • Who are the largest employers?
  • What are the market rents?
  • What is the population of the market?
  • What is the forecast for jobs in the market?
  • Who is the competition in the market?
  • What is the local government attitude towards landlords and tenants?

Beyond, the MSA, you want to understand the neighborhood you are investing in.  In many markets, a mile can make a big difference. These are all numbers you want to know and understand to see if they will be able to support your investment model.

Physical Condition of the Property

The physical condition is where you look for deferred maintenance and assess the major building systems, Roof, Electrical, Plumbing and Heating & Cooling.  How much life is left in each? What is the cost to replace? These questions need to be answered so you can properly budget for replacement. If you fail to budget for these, the unexpected cost will negatively affect your cash flow and make for some potentially difficult conversations with your investors.  

Financial Condition of the Property

What is the Financials condition, what do the books look like?  Are the Seller’s records in order? What is missing? What is out of the ordinary?  This is where you dive deep into looking for things that are missing and or out of the norm.  

A high water bill is a tip off for leaks, and something you can fix and reduce your cost.  How do the rents compare to the market rents? Is there room to increase rents? Is there any record of laundry income?  Some small property owners put the cash in their pocket without recording. This can be a hidden source of value not expressed on the sellers financials.

Regardless of what you find from the seller, you must contact each service provider and find out what your actual cost will be.  If the seller has owned the property for a long time, or owns multiple properties, their cost will be less than yours. Anything you can do to improve the net operating income should be part of your value add strategy.

Management

Management is one of the greatest ways to lose money in real estate.  Is management pushing rents? Are they marketing the property to attract quality tenants and turn vacancies quickly? This is an easy area to improve upon, especially if the property has not been professionally managed.

If you are investing with others, what is the experience of your partners or deal sponsor.  Are they experienced in this asset class of real estate investing? What makes you certain you will be able to achieve the returns you are projecting?

Purchase Price

Your purchase price needs to accurately reflect the value for the property as is.  An experienced investor will not pay more than what the property supports. The seller and the seller’s broker job is to get as much as possible.  Your job as a buyer is to stay disciplined and not over pay. You cannot get in a bidding war driven by your emotions.

Too often, sellers agree to a sale price with a higher offer only to learn that the buyer cannot perform.  If the seller really wants to sell, and no offers meet their ask, they will be forced to deal with the reality of the market.  

Financing

Due to the significant price of large commercial real estate deals financing is required unless you have an endless supply of money.  Fortunately, commercial real estate financing looks at the performance of the property. The bank will not lend more than the property can support.  

The bank will require at least 125% debt cover ratio.  If you don’t understand this before you make your offer, you may lose earnest money or the deal.  Neither is a good option. If either happens, you will not be recognized as a performer amongst the local commercial real estate professionals.   

Insurance

Insurance is easy for new buildings with desirable tenants.  There is an unlimited supply of insurance companies ready to provide coverage for this type of risk.  As your building gets older and has more deferred maintenance, you will have challenges finding insurance.  

To avoid any problems with insurance, pay attention to the age and type of building system in place for: roof, electrical, plumbing and HVAC.  Most insurance companies require updates if these are older than 30 years. During your due diligence, ask and find out age and type of building system in place.

Market Cycle

Where are we in the market cycle?  Are there reasons to be concerned, or is there momentum and demand for you to take advantage of.  Do not assume that the most recent past will continue. Markets ebb and flow, and for every top, there is a bottom.  If you are buying at the top and selling at the bottom, you are doing it wrong.

Exit Strategy

What is your exit strategy?  Every property will eventually sell, so what is your exit strategy?  Your strategy will be very different if you have partners compared to if you are investing solo.  How quickly can you return capital to your investors? What rate of return are you projecting? What happens when you get there and the market does not support selling?  

The Unknown

Any experienced investor knows there are additional lessons, the unknown, waiting for you.  To prepare for these, you have to do your homework up front and make certain our capital reserves are sufficient to take care of these when they happen.

BIGGEST RISK

As an investor, you have to understand these lines, and create your own lines you will not cross.  In an effort to learn more about investors, their risk models and the lines they will not cross, I began asking the guest on my weekly podcast CREPN Radio  the question,

What is the BIGGEST RISK?

To my delight, the guest have shared what concerns them and what they do to manage their risk.  Theri answers have covered the spectrum of real estate investing.

Following is an example of the answers guest on CREPN Radio have provided.

For more go to:

www.crepnradio.com

6 Headaches Faced by Centimillionaires with Richard Wilson – CREPN #199

Headaches faced by Centimillionaires, really? If you had $100,000,000 would you really have headaches?

Richard Wilson is the authority on wealth challenges faced by the ultra wealthy.  He is the founder of he The Family Office Club, and author of the best seller, The Single Family Office where he helps Family Offices deal with the challenges of preserving and transferring the family wealth to the next generational.  

By design, centimillionaires, families with net worth in excess of $100,000,000, keep a low profile.  They don’t do interviews, nor share publicly about the the challenges of managing and maintaining their wealth.   

In today’s episode on CREPN Radio, Richard takes us through the 6 Headaches Faced by Centimillionaires in his book Centimillionaire Migraines.

Family Offices

Prior to starting The Family Office Club, Richard worked in risk consulting for publicly traded companies and then as a placement agent working with hedge funds calling on investment managers.  During his investment placement work, he realized that the investment managers were not a good fit for his opportunity. He also learned about Family Offices.

Family Offices were the qualified prospect that had the ability to invest in his opportunities.  He searched for information about Family Offices, but found very little. There were no white papers, no network, nothing.  

To satisfy his own curiosity, he followed Gary Vaynerchuk’s advice and documented his journey.   He started reading, meeting with family offices, and sharing his findings online. Shortly after starting and documenting his journey, he received invitations to speak at family office events.  Suddenly, he had the attention of the audience he sought, family offices.

Looking for expand his reach, he purchased Family Offices.com and focused all his efforts on meeting with family offices to learn more.   Since 2007, he has done over 115 events, written a dozen books, posted 1800 videos, all of this on family offices.  

His progression from finding a need for information, gathering the information, and sharing the information is a textbook example of how to develop and be recognized as an expert in your field.  

Inefficiencies in Family Offices Developing the Niche

Inefficiencies in the Family Office industry are and forever will be.  Which provides the opportunity for Richard or anyone seeking a chance to develop a niche in a marketspace.  

While he developed a ton of digital information, it was not until he was invited to speak at events that his family office consulting business took off.

The cycle of marketing

Richard truly started from scratch.  As he researched and shared what he learned, the volume of digital content grew.  Once he had the digital content, he got the opportunity to speak at events, which put him in front of his ideal client.  Being in front of his ideal client gave him access and deal flow with his ideal client, which provided him additional, quality content.  This cycle continued to where he it fed itself.

Additionally, he has found that the best way to attract investors is to take the long view and provide the most value.  When you you believe in the niche, and want to be involved in 20 years, it shows.

Two Markets

Family offices have specific needs.  For those, Richard and Family Offices provide consuslting help to get set up, and connecting them with providers to meet their needs.  

On the other side of the fence are the service providers and Investors looking to provide services or raise capital from Family Offices.  For these, Richard shares what information that helps these business tailor their offer so to better appeal and attract the attention and business of family offices.  Richard has also authored the number one book, Capital Raising which teaches investors how to raise capital.  

Knowing both sides of the market allows Richard ot better serve these individual markets, and be the connector between the two.  

The Centimillionaire

The centimillionaire is one that has $100,000,000 net worth.  There are 16 times more centimillionaires than billionaires. Every billionaire was first a centimillionaire.  The centimillionaire has just as many headaches as a billionaire, less identifiable and typically more accessible.  

6 Headaches Faced by Centimillionaires  

In Richards book, Centimillionaire MIgraines, he found six unique pain points.  Here he shares a few. To learn more about each pain point and get a free copy of the book, go to and complete the webform at https://centimillionaires.com/book/.

Blurred vision.  

Most Centimillionaires achieved their wealth through the sale of their business for which they had a single focus for as many as 20 or 50 years.  Now they have hundreds of millions of dollars and could literally do anything they want. They have request to participate in multiple investments, and joint ventures.  What they need is clarity specific to what they want. Without it, they will be instructed by others on what to do.

In order to gain clarity, they need to make decisions, on what they want regarding income, investment returns, transparency, where do they want to live, where they what their kids to go to school, etc.

Family Quarrels

Mismanaged expectations and communications are a recipe for disaster.  A lot of families stop talking when money is involved. Without mutual understanding of what is happening things can go awry.  Why is the brother, who has an interest in and operates the family business, using the company jet? If the brother happens to lose the sisters money in the business, what happens?  

Deal Flow Deficiency

Centimillionaires may not even know they have a deal flow problem.  If they are only seeing three deals a quarter, how would they know this a problem if they are not talking with a similar family office to compare notes?  

Sense of Loss of Control

These ultra wealthy acquired their wealth due to their ability to control their outcome.  Now they have a less control, and they don’t know what to do.

Time Constriction

To learn more go to https://centimillionaires.com/.

Sensitivity to Fees

Too many times service providers think they can charge more because you are wealthy.  For most wealthy people, part of the reason for their success is due to not over paying for things.  While the ultra wealthy can afford to pay more, they are not interested in paying a luxury price for budget level service.  They are willing to pay a high price for a high level of service.

They need people who they can trust and who are in it for the long run.  Not someone who is short sided. They need ethical people capable of providing valuable service.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The BIGGEST RISK is Key Man Risk. Most ultra wealthy individuals have developed the specific skill set and knowledge over time.  If they drop out of the picture, how long can the business sustain itself?

How to manage the risk:  As much as possible, systemize, push the task down to  support staff. Realize that the results may be less, but still effective.  

For more goto:

Website: https://familyoffices.com/

Website: http://capitalraising.com/

Website: https://centimillionaires.com/

Digital Marketing Growth Strategies for Real Estate Professionals with Lael Sturm – CREPN #198

Digital marketing growth strategies are critical for any real estate professional seeking for more clients and sales.  If you have no web presence, you are invisible to your prospective clients looking for you.

Prior to the internet, Sales and Marketing were lumped into one sentence.  In many companies, they were the same department. The internet provided separation.  Now your marketing efforts can be tracked and measured while you attract and nurture prospective clients. Sales is measured by sales presentations and closings.  

Lael Sturm founded LPSS Digital Marketing to deliver effective growth strategies and tactics to real estate professionals and other profitable businesses.  Below he shares some strategies & tactics that you can implement in your business to attract new clients.

Digital Marketing Growth Strategies

Digital Marketing channels are invaluable for Real Estate professionals who market to individuals.  Whether you sell single family homes, commercial buildings or you seek investors to participate in your syndication, it makes no difference, you need a digital marketing strategy.  You are no longer limited by the words on a written page. Today, the investors expects more.

The great news is that you no longer need a huge budget to get found.  The internet has given the same tools to the entrepreneur as the fortune 100 company.  Each have the opportunity to demonstrate their worth and let the consumer decide which option they want to satisfy their need.

Your prospects will look for you online before or after a meeting to determine your qualifications and ability to meet their needs.  To demonstrate your expertise, you can use all forms of media; written words, photos and video.

Your ability provide instant pictures and videos to a potential buyer, located anywhere in the world is normal.  Theses same potential buyers expect to be able to google you and learn about you without having to call you. If you do not have the information they are seeking, they will find your competitor who does.  

This level of marketing used to be the exception.  However, in 2019, this is the expected. This is the time for developing digital marketing growth strategies to propel your business forward.   

Developing Your Social Media Strategy

The social media options available are numerous  In order to be effective, you first have to develop a strategy.  This is achieved by first knowing what you are trying to do. Are you trying to be informative, capture leads, or make sales.  

Where do you need to be?  Website, social media, or email newsletter?  Lael says the answer is, “yes”. You may want to buy ads on Facebook or Google.  To determine where and how to deploy your marketing dollars, it is important to determine first  set some goals so you have measurable goals.

Who is your target audience?

Where are they online, and how can you best reach them?

Set up a step process, where you can build out your presence and add to it as you go.

Having an effective website is critical to being found in the digital age.  On your website, you need to have content that speaks to the key search words people are looking for.  To refine your website’s effectiveness, there are website tools available to measure how you rank for your key search words.  To improve your ranking, you can employ search engine optimization, “SEO” strategies to fine tune your content and raise your online rank.

Social Medial

For businesses, LinkedIn is the preferred platform.  You should have both an individual page and separate page for your business that describes your business and how long you have been in business.  That said, don’t forget Facebook. These are the two most used platforms for business.

The setup is easy to do, but you need to be thoughtful.  Look at what your competition is doing for some ideas.

Social Media Curve Balls

While Linkedin and Facebook are the standards, there are always new platforms.  

Instagram

The  current most influential platform is Instagram.  For a real estate professional, with great pictures of the property you are selling or leasing, this is a great place to show off.  Posting regularly online is necessary to stay top of mind. For Instagram, posting 4 – 7 times per week is a great goal.

Facebook powerful tools

In the past, people would purchase and develop specific websites for a specific property.  This is involved and expensive. Facebook allows you to post to your Facebook page each new listing, which eliminates the requirement of building new sites for each property.  By utilizing Facebook, you have access to all of Facebook’s features to drive qualified prospects to your site.

Frequency of Sharing New Content

Fresh and new content is key when trying to rank in the Google algorithm.  For a site that has not had a new post in 5 years, Google will not look upon your site favorably.  Your website needs to be current. You can add new posts as little as monthly.

For maximum effectiveness on social media, it is best to try and post every week day.  For the most effective use of your content, it is advisable that you tailor the same content to the platform rather than wholesale post the same to each platform.  

Email Newsletter should be sent at a minimum of once per month.  Newsletters need to provide value, and cannot just be a sales letter.  What can you share with your community that will be informative and inspirational that keeps you top of mind and makes them reach out to you when they are in need of your services?

Results

In order to measure your results, you first need to know what your goals are.  Are you looking for likes and follows? Or are you looking for new emails and sales?  Each platform will have different results. It takes time, but if done properly, you will be able to grow your following and determine your effectiveness based on your connections with people who want to do business with you.  

For immediate results, ads are a great way to create instant results.  A properly done ad campaign will present your offer to your ideal prospects numerous times.  Normally, it takes 5 – 7 impressions, or “touches”, before the prospect identifies your solution as a remedy to their problem.  In as little as 4 – 6 weeks you should have real data to determine how the ad is performing.

DIY

Doing it yourself is not hard.  The hard part is doing it well. Many have tried to create digital marketing growth strategies, only to realize less than desirable results.  To get on track, those truly looking for growth, hire the services of a firm like LPSS Digital Marketing to sift through and make things work.

Rule number one, Don’t buy followers –  lack of engagement is punitive. If you have done this, it will take time to undo the mess.  To be effective, you do not want quantity, you want quality. The most followers are not your goal.  You want followers who are inclined to do business with you.

Be Authentic

To differentiate yourself, be authentic.  Forget pictures in front of a private jet.  People with problems are looking for genuine experts who can solve their problem.  Demonstrate your expertise and value. What you do may not seem unique or sexy, your perspective is.  Share your perspective about what you have learned and you will find people who are looking for someone like you.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The BIGGEST RISK is a fear to take action.  The biggest risk is not using the tools because you fear you may break the rules and get into trouble.

How to manage the risk: Lael and LPSS recommend that clients educate themselves on 1) the rules of engagement for their industry so they do not break the rules. 2) Learn the tools that are available to help you get the word out to your effective audience.  3) Start small. The internet is not going away. You need to participate and share your perspective.

For more go to:

FREE Social Media Services Guide: https://www.lpss.co/CREPN

Website: https://www.lpss.co/

Challenges with Scaling in Multifamily with Krista Testani – CREPN #197

The Challenges with scaling in Multifamily faced by investors trying to grow are avoidable, if you are willing to learn from others.    

Krista Testani quit her law practice cold turkey for real estate.  Together with her firefighter husband, they started flipping single family homes on Long Island, NY, in 2007.  Initially the margins were healthy, and the number of opportunities were unlimited.

By 2011, competitors were everywhere.  The profit margins were shrinking and the supply of available properties started to dry up.  It was at this point that Krista recognized, in order to scale her real estate investment business, she needed to get into larger properties.  

Flipping single family homes does not naturally lead to multifamily.  While both flipping and multifamily are real estate, they are dramatically different.  Flipping homes is buying, fixing and selling, quickly for a profit. Multifamily is a business with ongoing operations.  It requires you to dive deep into due diligence to find the operational or physical changes you can change to improve the value over the next couple of years.  

To learn the ins and outs of multifamily, Krista worked with a mentor who showed her the possibilities in multifamily to scale her real estate business.  While she understood how multifamily worked, it was the action steps, the doing, that kept her from instant success.

Fortunately for you, she shares the lessons she learned below.  These are the specific steps that will help you propel your multifamily business and achieve the success you desire.  

Challenges with Scaling in Multifamily  

The challenges with scaling in multifamily are many.  You can either go it alone and grind your way, or you can learn from others who have gone before you.  The following are lessons recognized by Krista that she recommends doing to accelerate your growth.

Krista recognizes two levels of marketing in multifamily syndication; micro and macro.  Micro is the technical learning. Getting to know the brokers and developing your systems so you can analyze a property quickly to determine if a property is an opportunity.  To accelerate your growth curve in the micro, consider working with a mentor with success in multifamily. Then look and analyze a lot of deals.

Macro is marketing.  Marketing to potential investors.  Sharing what you are learning with others.  This is absolutely necessary when raising capital.  Too often new investors believe they can only do after they master the micro.  However, as Krista witnessed, other new investors, who started at the same time as she did, jumped into the macro.  While she waited to talk with potential investors until she mastered the micro, her peers talked and talked.

They talked with others and shared what they were learning.  The more they learned, the more they shared. This naturally created interest with potential investors, and stoked their interest.  These potential investors were investing their time, and became passengers, along for the ride.

Because they had traveled the same leaning journey, raising money was easy.  When Krista’s peers had a deal under contract, they were able to easily get financial commitments from the passengers they had been nurturing.

If you fail to nurture you potential investors, raising capital will be near impossible.    

Market Yourself – Talk to People

Marketing yourself is absolutely necessary to grow and overcome the challenges with scaling your multifamily business.  It can be a struggle if you make it difficult.  However, if you are committed to grow in Multifamily, there are some easy ways to accomplish this.  Remember, multifamily investing is a team sport. In order to close on larger properties, you need a team and willing investors.

Growing your investor list is much like gardening.  In order to grow a successful garden you must plant some seeds.  To make the seeds grow, you have to water, and make sure the seeds get sunlight.  Not all seeds take root.

For multifamily investors, the seeds are conversations.  A gardner has to scatter a lot of seeds to have a large crop.  An investor has to have a lot of conversations.

The gardener gets to harvest their crop.  For you the investor, the payoff comes when others know and trust that you know what you are doing.  Not every seed will bear fruit, but if you talk to enough people, and generate enough interested, able investors, you will have no problem getting commitments when it is time to pull the trigger and close the deal.  

How to Market Yourself:

Do you market yourself?  You have to put yourself out there and let other know what you are doing, but how?  The easiest way is to share what you are learning as you go with people you know.  This allows you to have natural conversations with people who are interested in you and what you are doing.  These conversations help you build your reputation and credibility as someone in multifamily real estate.

The more you share with others, the more comfortable you will become.  Your conversations will lead to questions that require you to find the answers.  Questions are natural for anyone who is interested in learning more. When you find the answer, you have another reason to follow up with the person so you can share the answer to their question.  All of these conversations are necessary to help you overcome the challenges with scaling in multifamily.

In a short amount of time, you will be recognized as someone who knows what they are doing.  Why? Because you had the courage to have the conversations and you took the time to find the answers.  All the while you built up your confidence and your reputation.

Now that you know what you are talking about, you can easily start talking with people you know less.  Ask them what they do. When they ask you what you do, let them know that you are a multifamily investor.

Remember this, if you don’t tell others what you do, who will.  If people do not know what you do, how will they make the decision to invest with you?

Network

Networking is one of the best ways to get to know others.  You cannot do this sitting by yourself behind your computer.  While you can do some initial networking over social media, eventually you have to meet face to face with others.  

You can join a local real estate investment association REIA, Facebook or a MeetUp Group.  If there are none in our area, start one. Again, you don’t have to be the expert. What you have to do is invest in your micro learning, and share this information with others.  

The more organic, authentic relations you can develop, the more success you will have.  Have conversations, be authentic and share the information you are learning with others.

Systems

Systems are key to developing your relationship database and overcoming the investor challenges with scaling in multifamily.  Keep it simple to begin with. Consider using Google Docs. Ultimately, you are doing all of this to develop some relationships with investors who are willing to invest with you.  To make certain they progress to the point of commitment, you need to track your conversations with them.

When you first meet them, make some notes.  Are they experienced real estate investors? What are they currently investing in?  Do they have some parameters that need to be met for them to invest? Do they have questions that you can research and get back to them with the answer?  The answers to these will be important when you are trying to take a deal down.

As you make notes, you will find some common points of interest that will help you gauge the progress of interest.  The quicker you set up a system, the faster you be able to recognize which prospects are able to commit and disqualify those who are not.  

Keep in mind, just because one is not able to commit today, does not mean they will be unable to commit to your next deal.  Follow up is key, so stay in touch.

Never Judge

Never judge people.  You never know who may be interested in your opportunity.  If you chose to not share your information, you may eliminate someone who is able to invest in your deal.  You never know who knows who, and may be looking for the deal you have.

Krista thought her Facebook friends would be the last to be interested in investing with her in real estate.  To her surprise, some of them had been interested in real estate, but did not know how to get into multifamily.  Her post about multifamily provided a friend they could contact to learn more from .

We all have so many opportunities to network and can feel overwhelmed.  If you are truly looking for some new investors, you have to be willing to share, and be willing to accept calls from strangers.  Yeah, a lot of these will not develop into anything, but you never know who they know.

For the dedicated, willing investor, sharing yourself is key to overcoming the challenges with scaling in multifamily.

BIGGEST RISK

Each week I ask my guest what is the Biggest Risk they see that real estate investors face.  

BIGGEST RISK: The BIGGEST RISK Micro – Crime and the cost increase in your insurance if there is a significant crime rate in the neighborhood where your property is located.

The BIGGEST RISK Macro:  The next recession.

How to manage the risk:

Micro: Be aware of the crime statistics in the neighborhood and surrounding properties.  Are they better or worse than your property? These will affect your insurance rates. It is difficult to lower a crime rate in a neighborhood all by yourself.  

Macro: In order to be prepared for the next market correction, stress test your numbers.  Know where the rents were during the last correction. Do your numbers still work if you have to lower your rents?  Also, lock into long term interest rates. If the market changes, will you be able to continue to make your loan payments and ride out the correction?  Stay out of tertiary markets. Stay in primary markets where there will be demand for housing. If using a bridge loan, get the ability to exercise an extension so that you can complete your value add and get through the correction.  

For more go to

Website: www.sharplinequity.com

Email: krista@sharplineequity.com

Meetup: Multifamily Investing Unveiled