Commercial Real Estate Pro Network

J Darrin Gross Podcasts

J Darrin Gross Podcasts

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CREPN #187 – Technology Disrupts Multifamily Property Management with Neal Bawa

Technology is disrupting Multifamily Property Management, and the results are impressive.  

Neal Bawa, founder of Grocapitus Investments and Multifamily U is a technologist by education, who came to real estate investing out of necessity.  It was when his boss elected to purchase a building rather than continue to pay rent, that Neal was forced to learn on the fly how to make the new property ready before their lease expired and penalties ensued.

Like most of us, the lessons learned under pressure are permanent.  Having caught the bug for real estate, Neal first invested in single family homes, but soon realized the challenge to scale.   Then he found and invested in thirteen syndications as a passive investor. However, he was not getting the returns he expected.

Realizing there was a vacancy problem that was preventing him and his fellow investors from receiving distributions, he asked the syndicator if he could market for prospective residents.  Soon, he developed a system that was generating qualified prospects to managers who were able to fill the vacancies. When the property filled up, investors started receiving distributions.  The increased NOI drover the value up, and again made investors very happy.

When the asset managers asked Neal what he wanted in return, he asked for permission to participate in their weekly asset management calls.  They told him the calls were boring, full of acronyms, and he would not like them. But he did.

Over the course of 200 such calls, he got a front row seat to the inner workings of multifamily operations on a day to day basis.  He realized that each person in the operation had a particular expertise, but no one person, knew all the pieces. Except for him, the note taking technologist.  Neal realized he had learned something that not everyone else knew.

To make certain he did not forget these newly learned lessons, he started a wildly successful Meetup group in San Francisco where he shared everything he learned about multifamily investing.  Soon the members became motivated, and wanted to invest with Neal. He had the knowledge and the support to become a multifamily syndication sponsor.

Technology Disrupts Multifamily Property Management

In the 200 weekly operations meetings, Neal recognized some limitations in the existing property management system for filling vacant units.  As a technologist, he identified the choke points where it was time for technology to disrupt the status quo.

Neal developed a technology hardware and software system with virtual assistants that attract, screen, schedule, and remind prospective tenants of their scheduled tour for his properties.  For 2018, his system attracted 30,000 qualified resident prospects for properties he owns. This flood of qualified prospects accounted for 64% of all leases signed. Now, property managers are able to focus on showing units, signing leases and do more operational tasks without the distraction of marketing for empty units.  

Additional Value from Technology

Now that the units are full, Neal realized a second opportunity to leverage his technology and disrupt the income stream to add more value to the property.  There were missed sales opportunities for add ons like carports, washers & dryers, etc. Neal observed that property management income was a percentage of all rents collected.  While they were focused on a big number like the apartment rent, they did not get motivated about a little number that would pay them an additional $1.20 commission for leasing a carport for $40 per month.  

For Neal and his fellow investors this lack of focus was keeping them from realizing a significant long term value.  The $40 per month carport rent was $480 per year in income. That same $40 per month translates, at a 6 cap rate, to an additional $7,680 in property value per carport!  If you have 100 carports, that’s as much as $768,000!

So, how do you get someone to focus on something they don’t value?  You don’t. Instead, Neal again leveraged his technology and created a follow up task for his virtual assistants.  Now, the virtual assistants contact the new residents to make the additional sales. And his property managers take care of what they do, lease, collect rent and turn units.

Multifamily Lessons Applied

Since these beginnings, Neal started Multifamily U and Grocapitus Investments which are education and multifamily syndication investment platforms.  Today, he syndicates multifamily properties all over the US and continues to apply the lessons he learned, and the technology to make his properties more profitable.

BIGGEST RISK

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

BIGGEST RISK: Opportunity Zones.  When millions of dollars are pumped into distressed areas with no fundamentals for growth, why will these areas become successful?

How to manage the risk?:  Don’t invest as a Class C area with no growth potential solely as a strategy to avoid paying capital gains taxes.  Be wary of investing in an opportunity zone if you do not understand the fundamentals in the area.

For more go to:

Multifamily Training And Resources
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CREPN#186 – Financial Freedom through Self Storage with Ross Stryker

Financial Freedom is the end goal for every working American.  Some day, you hope to have enough to feel secure that you can live comfortably without the stress or worries or need to continue to work.

Dr Ross Stryker realized that working as an orthodontist until he died was not the path to financial freedom.  The decision to go to a financial freedom seminar about real estate, changed his outlook forever.

Wall Street vs Real Estate

The American worker has been indoctrinated to regularly invest in the stock market for retirement.  Buy dollar cost averaging, starting aggressive, and as you reach the age of concern, dial back the risk to some municipal bonds that pay 3 to 4 percent.  Then when you retire, withdraw up to 4% and live happily ever after.

If you study this model closely, you will come to the conclusion that this will not allow you to continue to live the lifestyle you are accustomed.  You need to consider an Alternative Investment, maybe cash flowing real estate.

A Better Way

Passive income is the goal.  In real estate, the opportunities for passive income are numerous.  You can buy single family turn key properties, invest in note funds, etc working with people dialed into the market providing returns well above 3-4%.  This is a good option for someone looking for more control.

However, Ross recognized the challenge of scale that exist when investing in single family properties.  He liked real estate, but really wanted to be able to scale. Something he could share with others.

Self Storage

After sifting through multiple real estate asset classes, multifamily mobile home, retail and assisted living, he landed on self storage.

While Self Storage is a want instead of a need.  He recognized a positive characteristic about Self Storage: Americans love our stuff.  In good times, we buy stuff. In bad times, we don’t want to get rid of our stuff. As long as we have more stuff, the demand for self storage will remain strong.

Dialed into the asset class, he had to determine where to invest.  Looking for opportunities, his team identified that coastal and large metro areas were heavily saturated with existing self storage.  The underserved opportunity exist in the midwest secondary, tertiary and rural markets.

Opportunities in Self Storage

There are multiple ways to get into self storage.  You can buy an existing property, build new, or convert an existing vacant property.  

Limited supply is another benefit.  Self storage has been identified by many cities as unwanted.  They have passed building ordinances, rules and zoning laws, etc to make developing any additional self storage difficult for any future potential competitors.  

Operation of Self Storage

For passive investors, the obvious choice is to utilize third party management property management.  There are multiple name brand professional operators that have all the expected marketing and infrastructure to attract and manage clients and send owners the check.

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

BIGGEST RISK: Going it alone

How to manage the risk:  Get involved in a group of like minded investors and or mentor group.

BONUS RISK; Don’t go to big too fast.

How to manage the risk:  Start with something small that is manageable.

For more go to: https://www.smartassetopportunities.com/

CREPN #185 – Multifamily Due Diligence for Class C Properties with Matt Hawley

Multifamily Due Diligence for Class C property investors can be the difference between paying extra attention prior to the sale, or paying dearly for unplanned capital improvements after the purchase.  

Matt Hawley with Multifamily Inspection Services, provides some insight to help investors avoid costly, unplanned expenses.  

Multifamily Due Diligence

The Due Diligence clock starts as soon as you have a signed Purchase and Sale Agreement.  Typically, the seller will agree to 20 to 30 days for you to inspect the building for its physical condition.  This is your chance to determine the condition of all systems, and determine what expenses you need to plan for or negotiate away prior to sale.  NEVER, NEVER, NEVER skip inspecting each and every unit.

What to Look For When Walking Older Properties

Value Add vs Capital Improvements

Most Class C investors hunt for a property they can make improvements to that translate to increased value.  Management, rent increase, renovations, add dog park, RUBS, charge for storage, etc all translates to an increased NOI, and ultimately a higher value.  

Unfortunately, capital improvements like a new roof, plumbing, electrical and HVAC systems don’t give a boost to the rents.  These are bare essentials included in a place to live, and therefore will not improve the operational value of a property.

Therefore, it is important for any new investor to recognize the physical condition of the property prior to sale, so they can plan and budget accordingly for the updates needed to the systems.

Primary Building Systems

There are four primary building systems which are critical to the proper function of your multifamily property;  Roof, Electrical, Plumbing, HVAC. For pictures and descriptions of each potential system, click here: What to Look For When Walking Older Properties.

Roof

A good roof keeps the water out and the inside dry and free from water damage.  When inspecting the roof, look for any signs of improper installation. Inspect appearance, flashing, and the general condition of the roof.  

Stains on a flat roof suggest  pooling of water that can be problematic.  If water is unable to properly drain from the roof, it will find seams and travel to places not intended causing potential damage on the inside of your building.

Get a professional roofing contractor to provide a condition report and determine the expected life left in the roof.  When budgeting you should determine the cost of a roof replacement, and amortize this over expected life of a new roof and account for this amount to your annual capital replacement reserves.

Electrical

Your electrical system can be the difference between affordable insurable or a non insurable property.  For pictures of some problem systems,

click on What to Look For When Walking Older Properties

There are multiple things to look for when inspecting a property:

  • Electrical panels: Throughout time, there have been different electrical panels that have been used in construction that ultimately were determined to be problematic and potential fire hazards.  Two specific panels are: Federal Pacific with Stab lok Breakers and Zinsco / Sylvania.
  • Aluminum wiring: During a brief time in the 1970’s, the cost of aluminum was less than copper.   This cost differentiation caused builders to use aluminum wiring. Over time it has come to be a potential fire hazard.  The correction is to have the ends pigtailed to copper at every connection.
  • Amperage to the unit; some insurance companies require a minimum of 100 amps to the individual unit.  If the building units have less than 100 amps, you will need a written report from a licensed electrical contractor confirming the electrical system is in good working condition.

If any of these conditions are present, you will need to either budget for the correction, or negotiate the repair or cost of the repair form the seller.

Plumbing

  • Type of drain pipe: If you have cast iron drain lines, have the lines scoped to determine the condition of the pipe has any corrosion, or has been compromised.
  • Hot Water tanks; If they are all the same age, you need to plan for replacement.
  • Supply lines; Polybutylene is a problem pipe that leaks and causes damage.  Pipes are gray plastic with PB printed on the pipe. If you see any polybutylene, you need to get an estimate for replacement and reserve for this or negotiate the price of repair or a discount with the seller.

HVAC

  • Recognize the age of the system and get an estimate of how many years are left in the system.  
  • Is the system clean?  Does it appear to be well maintained?  Is the evaporator coil clean? Is the condenser clean?  Is the condensation line clogged or is it able to drain properly?
  • The AC units affect the air quality and can negatively affect your tenants health.

Exterior

  • Windows and doors; look for water intrusion.
  • Settlement; look for for cracks in the foundation or slab floor of more than 1/8th inch difference in elevation
  • Vegetation on the roof or against the building must be trimmed away.
  • Spindle width on railings; should be no more than 4” between the post.  Any larger opening and a toddler can fit between and potentially fall.

Interiors

  • Stains: look at the ceilings, and around the windows.  These can be a clue to water issues.
  • Electrical: are there any overloaded outlets?  This can be a sign that the electrical system is not working properly and should be questioned.
  • Shower walls: if you press on the walls and there is any give, it could be a sign of trouble.  
  • Cabinets: what is the condition?  Do you need to plan on updating the cabinets?

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

Not properly doing your due diligence.  If you have deal fever and don’t fully invest the time, money and effort into your the property due diligence, you will pay the price.

Stress test your rents for what if there is a change in occupancy, etc.  Will you be able to hang onto your property?

For more go to:

www.multimamilyinspector.com

matt@cfigwealth.com

www.cfigwealth.com

Multifamily Inspection Services

CREPN #184 – Syndication Profits from Multifamily Sale with Vinney Chopra

Syndication Profits are proportionally the greatest when the property is sold.  

Multifamily Syndicator, Vinney Chopra, takes us through a recent property sale, providing insight to investor earnings, including payment during operation and through the disposition.

Preferred Return

Most multifamily syndicators provide a level of preferred return to the investors from operating the property.  These proceeds are distributed either monthly or quarterly. Vinney pays his investors quarterly, providing a level payment for three quarters, with bonus returns paid after the fourth quarter.

When you buy a value add property, you have to implement your value add plan in order to increase the value.  Renovations, rent increase, etc, are all examples of ways to increase the net operating income and the property value.  

Syndication Profits When You Sell

When investors invest their money into a syndication, they are informed of the exit strategy and a  window of time for when the property will likely sell. It is upon the sale of the property that the majority of the syndication profits are realized.  

In a recent sale, Vinney received a Broker’s Price Opinion that the value had increased over $3 million since he and his investors purchased the property.  When the investors learned of the valuation, they elected to sell.

Once the decision to sell is made, investors are made aware that the quarterly distributions will cease until the property is sold.  This is a measure to conserve cash incase there are some buyer due diligence requirements to complete the sale. This avoids the need for a cash call from the sellers and or a discount at closing.

The sales process can take several months.  For this reason, it is very important to vet the buyer’s ability to close.  If you chose the wrong buyer, and they fail to close, you can lose market time, and frustrate your investors.  

When done properly, the syndicator buys a property, implements the value add plan improvements, increases the rent, noi and market value.  The cycle is completed with a successful sale. This makes investors very happy, and likely willing to invest with you again.

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

BIGGEST RISK: SEC Regulations:

Be transparent.  Make certain you follow the rules, have pre existing relationship with investors, and they can afford to invest in your deal.  You must guard your investors interest.

For more, go to:

www.vinneychopra.com

Text: SYNDICATION to 474747

Multifamily Investment Syndication

Prior Multifamily Syndication episodes with Vinney Chopra

CREPN #145 – Why Multifamily Real Estate Investing with Vinney Chopra

CREPN #149 – Why Multifamily Syndication is a Great Option for Real Estate Investors

CREPN #153 – Building Your Multifamily Syndication Team with Vinney Chopra

CREPN #157 – How to Attract Capital & Communicate with Investors with Vinney Chopra

CREPN #161 – Multifamily Underwriting with Vinney Chopra

CREPN # 165 – Letter of Intent & Purchase Sale Agreement with Vinney Chopra

CREPN #169 – Syndication Profits from Multifamily Sale with Vinney Chopra

CREPN#183 – Self Storage Real Estate Investing with Scott Krone

Self Storage real estate investing is an attractive alternative to low cap multifamily.  

Scott Krone, Managing Partner of Coda Management Group, is an architect and developer based in Chicago, IL.  He has experienced the boom, bust of residential cycles..  Recognizing the compressing cap rates in Multifamily as a sign that values would likely not increase, he sold his entire multifamily portfolio.  Now his focus is finding underserved markets with unmet demand for self storage and filling this gap.

Self Storage Investment Strategy

Before you invest in self storage, it’s important to get educated on the basics.  For starters, the property values and capital required to get into self storage is a fraction of what is needed to get in to multifamily.  Otherwise the investment works similarly, NOI, cap rates, etc.

Traditional self storage is located near the edge of town  Usually a series of one story buildings with exterior entrance for all units surrounded by a perimeter fence.  

Scott creates class A self storage facilities in underserved urban markets.  The ideal opportunity is an existing building with current zoning in place that allows for self storage.  An ideal property is 80 – 100,000 sq ft building with high ceilings. When completed, the user will be able to drive into the facility to load and unload their vehicle, protected from the weather in a safe and secure place.   

By purchasing existing structures with zoning already in place, Coda is able to quickly close on a property, renovate and get the facility open to generate income.  This is a significantly shorter timeline than what is required for ground up construction, which could literally take years.

The building renovations typically include: new roof, HVAC and lighting.  Like any market, understanding the opportunity better than your competition is key to your success.  Scott has been able to leverage programs like the Department of Energy PACE  program which have provides unique low cost financing for energy savings updates.

Renovating versus New Construction

The difference between renovating and new construction are staggering.  

Timeline

The risk timeline  faced by a developer for a new construction are frightening, especially if you look back a to the last market crash.  Consider the risk of what could happen if your project takes longer than you planned and you miss the market opportunity entirely.  You could be left with a building that you cannot rent or sell.

Starting with an existing building significantly shortens the time line from start to completion.   Depending on your renovation schedule, you can be generating income in a fraction of the time it takes to develop a new construction project.

Value

The numbers really make sense when you compare to the cost of new construction.  If you buy a vacant building for cheap and add the cost of renovations, they are a fraction of the cost of new construction.  As Sam Zell illustrated in his book Am I Being Too Subtle, when you can purchase an existing building for substantially less than you can build, that’s a good value.

Successful Renovation Conversion Projects

Managing Self Storage

Coda sub contracts the management to REITs with self storage portfolios.  These are nationally branded, with all the marketing and systems in place to create a top performing property.  Ideally, the REIT becomes the buyer when Coda is ready to sell.

BIGGEST RISK

What is your Biggest Risk: Leverage

How do you manage the risk: Don’t over leverage your project.  

Bonus Risk: Too much competition

How do you manage the risk: Paying attention to the marketplace.

Know the saturation point of your market.

For more go to: https://www.codamg.com/

CREPN #182 What Wealthy CRE Professionals Do That Most of Us Do Not with Doug Marshall

What are wealthy CRE Professionals doing that most of do not?

Doug Marshall is the principal at Marshall Commercial Funding.  Additionally, he is a CCIM, author and a returning guest to CREPN Radio.  In this episode, he shares five points he learned from his commercial real estate clients that have changed his financial fortunes significantly for the better.  And more importantly, how you too can leverage your relations with your commercial real estate clients.

For the first 24 years as a commercial real estate professional, I was on the never-ending hamster wheel of low paying jobs.  I was living paycheck to paycheck. I was just barely getting by financially.

My financial situation went from bad to worse when I decided to make the transition from banker to mortgage broker at the age of forty-six.  I was hired by a mortgage brokerage firm as an independent contractor which meant I received no salary and no health insurance. I didn’t even receive a draw.  I was totally without a safety net and that first year I made a whopping $7,000. I quickly went through the little savings I had and started borrowing against the equity in my house.  To say that time in my life was emotionally painful is a huge understatement.

The next four years I saw steady gains in my commission income but not enough to live comfortably, let alone put money aside for retirement.  During my fifth year as a mortgage broker, I came across the Albert Einstein definition of insanity. “Insanity is doing the same thing over again, expecting different results.”  I kept asking myself over and over again, “I’ve been working at this company now for five years and I’ve barely scraped by financially. What makes me think my sixth year will be any better than my first five years?”  And the honest answer was, I couldn’t expect my 6th year to be any better than the previous five years.   

Something had to change

I realized something had to change.  After much consideration I decided I needed to take the great leap into the unknown and start my own business.  So at the age of 51, I started Marshall Commercial Funding which turned out to be the best business decision I ever made.  For the first time in my career I was making good money. Boy that felt really good. But even so I knew there was no way that I was going to retire well.  

You see I could do the math and I understood I was too close to retirement to make up for the hard, lean years.  I realized it was very likely I may never be able to retire at all.

But I also realized that my clients were doing quite well financially.  Their liquidity and net worth were growing rapidly. That is no exaggeration.  I have a number of repeat clients and I saw how their financial strength increased dramatically from one year to the next.  It was an amazing thing to watch! And I knew at that point that the only way I was going to retire well was if I started investing in commercial real estate.  That was the only way of getting off the hamster wheel.

My financial situation improved dramatically

So, twelve years ago I started investing in commercial real estate.  And my financial situation has gone from very bleak to very good. Because of my real estate investments, my net worth and liquidity have grown dramatically.   

Not only could I retire if I chose to, but I could do so comfortably.  The passive income from my rental properties when added to my future Social Security checks significantly exceeds my personal expenses.  Today I am one of a small group of investors that owns several rental properties valued at over $50 million. So that’s my story.

Most Americans aren’t going to retire well

Why am I telling you this? I believe that many of you listening to me right now, are either living paycheck to paycheck or you realize that you aren’t going to retire well.  

Here are a few recent statistics:

  • 40% of adults can’t cover a $400 emergency expense with cash
  • 45% of adults have nothing saved for retirement
  • 63% of Americans at age 65 are dependent on Social Security, relatives, friends, or charity
  • 80% of Americans believe they will not have enough saved for retirement

I understand why most Americans would have a difficult time saving for retirement.  But those of us who are commercial real estate professionals we have a distinct advantage over most people.  Every one of us, reading this, in our own way, contributes to the success of our clients. But there is no reason why we can’t go along for the ride.  

And that is what some of us have done.  Do you want to know what wealthy CRE professionals do that most of us do not?  They invest in commercial real estate. Now throughout this reading, I’m going to ask you to raise your hands or sometimes to nod your heads.  I’m doing so because I need your feedback. As practice, by a show of hands, how many of you currently own a rental property?

Which brings me to my first point:

Point #1 – There is real wealth to be created in owning commercial real estate

Those who just raised their hands will tell you owning CRE creates wealth.  It’s not a myth. It’s not a get rich quick scheme. It actually works. My book, Mastering the Art of Commercial Real Estate Investing, shows you how to do it.  I’m going to give you a couple of tidbits from the book today to get you started on learning how to build wealth and grow passive income.

For those of you who didn’t raise your hand, this is my goal for you today: When you done reading, you’ll know what’s holding you back and you’ll know the steps you need to take in order to achieve financial freedom.  

Today I am going to share with you 5 critically important points that have the potential of being life changing. Actually, I’ve already shared the first point: There is real wealth to be created in owning commercial real estate.  

The second step to achieving financial freedom is this:

Point #2 – The savings generated from active income, i.e., your day job, will be invested in assets that generate passive income.

So we are all on the same page, let me define what I mean by financial freedom.  Financial freedom is achieved when your monthly sources of passive income consistently and substantially exceed your monthly personal expenses. When that day happens you no longer need to work for a living.  Congratulations! You’ve stepped off the hamster wheel.

Passive vs Active Income

But notice I said passive income.  What is passive income? Passive income is cash flow received that requires little to no effort by the recipient to maintain it.  Another name for passive income is mailbox money because it comes in the mail without lifting a finger. Here are some examples of mailbox money.

  • Annuities
  • Book royalties
  • Dividends from stocks
  • Owner distributions from rental properties
  • Pension
  • Social Security checks

The source of passive income I believe hands down has the best opportunity for creating wealth and growing passive income is commercial real estate investing.  

Active income, on the other hand, comes from performing a service. Your day job is a perfect example of active income.  In order to receive a paycheck, you must perform a service. So what you do for a living is a form of active, not passive income.  

Two obstacles to investing in passive sources of income

But there’s a problem.  We may agree intellectually that we should invest in assets that generate passive sources of income, but most of us will fail miserably to put our plan into action.  Why? Because other purchases like a new car, an exotic vacation or a nicer home will tempt us to spend our money elsewhere. If that doesn’t cause you to stumble the next obstacle does: You’ve been brainwashed and incentivized to put your savings into an IRA or 401(k) plan.  And what types of assets do you normally purchase for these types of accounts? Stocks and bonds that generate little or no passive income.

The benefit of investing in assets that generate passive income

Some of you are thinking, “Why is it important to generate passive income.  I’m very happy with the return I’m getting on my 401(k) or IRA?” Right? Fast forward to the day you retire.  If your assets are in stocks, bonds, precious metals, land, art, collectibles (anything that doesn’t generate passive income) how are you going to live off them?  You will live off them by slowly liquidating them over time. Right? What happens if you live longer than your assets do? You’re toast. You end up being like the vast majority of Americans who will eventually end up dependent on Social Security, friends, family or charity.  

Not so with commercial real estate.  You do not live off liquidating your rental properties.  You live off the passive income generated from your rental properties.  And this passive income slowly builds over time. So when your passive income from your rental properties coupled with your future Social Security checks consistently and significantly exceeds your monthly personal expenses, you have attained financial freedom.  In other words, you could live to be 120 and you’ll never run out of money.

So the second step to financial freedom is to invest your savings generated from your day job into rental properties that generate passive income.

The third step to financial freedom is this:

Point #3 – Everything we really want in life is on the other side of fear.  

Think about that statement for a moment.  Is it true? I believe it is. Remember that first kiss?  How about the first time you did anything well? A solo, a speech, an athletic endeavor?  Do you remember that fear you felt that gave way to relief? And then to joy? Those are examples of doing something that you really wanted to do well, and you overcame your fear and did it.  

I believe the number one reason we don’t invest in CRE is fear.  Fear of failure is all about looking foolish in the eyes of your family and friends if things go wrong.  I get it. I really do. But it doesn’t have to be this way. Those of us who are reluctant to invest in CRE need to adopt a different mindset of, “You either win or you learn.” In everything we do, we either win (we make the right decision) or we learn an important lesson so next time we have a better outcome. Sometimes your investment is a home run, and sometimes you learn what not to do so next time has a higher probability of being a success.

An example of overcoming the fear of failure

In 2009, a group of like-minded investors banded together to purchase a 56 unit apartment that had been taken over by the bank.  Do you remember what was going on in 2009? We were in the depths of the Great Recession. The real estate market was in a freefall.  Everybody and their brother was running away from real estate in 2009 and here we were thinking about buying an apartment. What were we thinking!!  Had we lost our minds?? Was I fearful? You bet I was! But I kept looking at the numbers and it made sense to me. Eventually I decided to proceed and looking back on it now, it was the best investment I’ve ever made.  For every dollar invested we received $6 dollars back in owner distributions or in increased equity. But before I could invest, I had to get over the fear of failure.

Winston Churchill quote

Some of you are being held back from investing because you too are fearful.  Winston Churchill said it best when he said, “Success is not final, failure is not fatal; it is the courage to continue that counts.”  To succeed in life, we must realize that everything we really want in life is on the other side of fear. Does that make sense?

So the fourth point we are going to discuss is this:

Point #4 – The best way for most of us to invest in CRE is as a passive not an active investor.  

How many of you are thinking some like this: “Fear is not holding me back from investing in commercial real estate.  My problem is I don’t have the time, the experience or the financial resources to be investing in rental properties. I’ve got a day job that keeps me plenty busy without adding this additional stress to my life.”  So who is thinking something like this?

But this is where you’re wrong.  Dead wrong. That thinking assumes that the only way to own rental properties is as an active investor.  An active investor is the person who makes all the important decisions, what to buy, how much to pay for it, how to finance it and manage it.  To name just a few. True, this is one way to own CRE. But many times, the active investor, also known as the managing member of an LLC, or the promoter, or the syndicator or the sponsor, can’t do it without passive investors, also called equity partners, who provide the capital needed for the down payment.  

Not everyone can or should be an active investor as it requires someone who has the time, experience and resources that many of us don’t have.  But if we want to retire well all of us should strive to be passive investors of commercial real estate.

In the past 12 years I’ve invested in 10 rental properties as a passive investor.  My only responsibility has been that I provide some of the equity to purchase the property.  I leave all the decision making to my real estate sponsor. I’m more than happy to have someone else make all the decisions while I get my monthly owner distributions.  It’s kind of like the best of both worlds, don’t you think?

So the best way for most of us to invest in CRE is as a passive, not an active investor.  Does that make sense?

The fifth and final point I want to make is this:

Point #5 – To succeed as a passive investor requires finding the right active investor to invest with.  

Be wary of real estate syndicators

Where do you find the “right” active investor?  You have two choices. You can go to one of many online crowdfunding sites and choose one.  But you must qualify as an accredited investor. But the real problem with using a syndicator from a crowdfunding site is that you have no idea the character of the person you’re trusting with your hard-earned money.  

One time I was considering an investment opportunity with a syndicator.  On the surface everything looked legit. But I was having problems determining how much money the real estate sponsor was going to invest in the property.  They kept sending me pages of details about their proposed offering, but nothing explicitly stated how much they were personally investing in the property. So I point blank asked.  The answer: none! Not a penny. So if the property went belly up, it would have no financial impact on them personally. Not only that, they were making handsome fees up front coupled with a very generous fee split with the equity partners when the property was sold.  It was a win, win, win for them! This was an excellent deal for the syndicator but they were treating their prospective investors like chumps. They were structuring the deal so they made out like bandits while incurring no personal investment risk if things went badly.    

I’m sure there are many fine real estate syndicators that you can do business with.  But I have no sure-fire way of determining who is honest and who is a wolf in sheep’s clothing.  Who is offering a fair fee split for their services and who is gouging their investors? It’s sometimes hard to tell.  The point I’m trying to make is this: I’m wary of syndicators that I do not know personally and you should be too.

The best and easiest way to choose an active investor

But here’s the best and easiest way of choosing an active investor to partner with.  And they are right under our noses. They are our clients. For me it was an easy choice to determine who I would trust with my investment money.  I do all my investing with one real estate sponsor that I’ve known for about 25 years. He’s not only my client, he has become a friend and a 7 year member of my book club.  I know his excellent commercial real estate investing track record. I know that he is a man of integrity and because of that I trust him. So in 2007 I asked if I could invest with him and he gladly said yes.  He said yes because I had financed several of his properties over the years and he had come to know that I was good at my craft and someone he trusted and liked. And now when he invests in a new property I am one of the first people he asks to invest with him.  Better yet, I’m given first shot at doing his financing.

As a passive investor you let someone else make all the investing decisions except for one: Who do I want to trust with my money?  This decision is very important, maybe the most critical of all the decisions you have to make about investing in commercial real estate.  

Ask your clients these questions

So how do you go about finding the right client to invest with?  It’s really a no-brainer if you’ve been a CRE professional for a number of years.  Ask yourself these questions. Of all my clients:

  • Who consistently brings me their business?  
  • Do they think of me as a valuable team member?
  • Do they trust and like me?
  • Of these clients, which ones invest with equity partners?
  • Final question: Do I trust and like them?

Raise your hand if you have someone in mind?  So the next time they contact you to use your services, ask them if you could invest with them.  You won’t know if you don’t ask and if you ask I bet they’ll say yes. Why wouldn’t they say yes?  They use your services because they consider you the best in the business or they would go somewhere else.  Right? And investors who team up with equity partners are always looking for new sources of investment capital.  The worst case scenario is they say no. If that happens, don’t take it personally. They have their reasons which probably has nothing to do with you.  Instead, go back and review your list of clients and go through the process again. Rinse and repeat until one of your clients enthusiastically says yes.  

So the fifth and final point I want to make today is: To succeed as a passive investor requires finding the right active investor to invest with.  Does that make sense?

Summary of 5 points

We talked about:

  1. There is real wealth in owning CRE.  It’s not a myth.  It’s not a get rich quick scheme.  It actually works.
  2. The importance of invest your savings in assets that generate passive income.
  3. Don’t let fear stop you.  Understand that everything we really want in life is on the other side of fear.
  4. Most of us should invest in CRE as a passive, not as an active investor.
  5. To find the “right” active investor, invest with a trusted client who values your service and would be eager to have you as an equity partner.

Final thought

I want to leave you with this final thought: If I can do it, so can you.  I wasn’t able to start investing in CRE until I was 55 years old! That’s a very late start and yet I am now able to retire well. So if I can do it, so can you.  

Imagine for a moment that you start investing a modest amount this year with one of your favorite clients.  As the years progress that small equity investment will grow, slowly at first but before you know it, it will be a tidy sum.  Now imagine if you invested a small amount every year between now and retirement so that when you retire you have 20 or more these investments.  Where do you think you’ll be financially when it’s time to retire? Yep. You’ll be able to retire in style.

Call to action

This brings us to my original point: I began my talk by expressing my hope that when you walk out of here today that you would know what’s holding you back from achieving financial freedom.  If what I’ve said today describes your financial situation, either you’re living paycheck to paycheck or you know that you’re not going to retire well, then I want you to do these 3 things:

  1. Take a moment right now and identify what’s holding you back;
  2. Right now, determine what one thing you need to do to move the ball forward; and
  3. Consider buying my book.  On your table is a book card which identifies the book’s name and author so you can go to Amazon to purchase the book.  And if you’re skeptical that this book or any book for that matter can help your financial situation, then I encourage you to download for FREE the introduction and the first 2 chapters of the book.  You can do that by going to the URL found on the back side of the book card.  If after reading it, it resonates with you that this book might be helpful, then buy the book.  It’s as simple as that.

This is my 3-step plan for you to become financially free.

Thank you so much for your time and attention.  

 

Source: Fed survey shows 40 percent of adults still can’t cover a $400 emergency expense, Sarah O’Brien, https://www.cnbc.com/2018/05/22/fed-survey-40-percent-of-adults-cant-cover-400-emergency-expense.html, May 22, 2018; 20 Retirement Stats That Will Blow You Away, Matthew Frankel, CFP (TMFMathGuy), https://www.fool.com/retirement/general/2016/01/26/20-retirement-stats-that-will-blow-you-away.aspx, January 26, 2016.

 

For more go to: https://marshallcf.com/

CREPN #181 – Real Estate Investment Strategy with Josh Welch

What is your Real Estate Investment Strategy?

Josh Welch, founder of Three Pillars Capital, started like most investors.  Single family properties, one at a time. When he figured how long and hard it would be to grow a portfolio of single family, he knew there had to be a better way.  The answer: Multifamily.

Real Estate Investment Strategy

Multifamily real estate investing offers multiple strategies.  First you have to decide if you want to be active or passive with your investing.  Do you go it alone, with partners, or through syndication? These are questions that should be answered before you can really grow.  

Josh chose multifamily syndication.  

Investment Team

A successful real estate investment strategy starts with your team.  Three Pillars Capital’s team members are responsible for Acquisition, Operations, Project Manager, Management and Investor relations.  While the General Partner is Three Pillars Capital, its many of its Limited Partners take an active role in the management. The active limited partners do so because they want to learn the multifamily syndication process.  Some have aspirations of joining future general partners as fund raisers or potential syndicators themselves.

What better way to learn than by doing?

Market Focus

There is no such thing as the “real estate market”.  Some employ the real estate investment strategy of invest in any market.  However, every market is a market to itself. Three Pillars is a multifamily syndication firm based in Houston, TX and is solely focused on this one market for now.  This intense focus gives them an advantage over any outside investor. They know the market inside out.

Knowing the subtleties of each neighborhood in a market gives you an edge over someone looking at Loopnet from thousands of miles away.  When you focus on one market, you know which block is the border that separates a good neighborhood from a rough one.

Boots on the ground gives you insight to the micro trends in the market.  Are employers hiring, or laying off? What is the demand for units today? When “For Rent” signs begin to appear, you know it before the reporting agencies declare an uptick in vacancy rate.  Is there a local effort to redevelop a neighborhood that will bring the whole neighborhood up? The value of real time boots on the ground knowledge cannot be underestimated.

Property Asset Class

Three Pillars Capital focuses on Class C multifamily properties with a value add opportunity. The term value add covers a wide range of things.  An ideal opportunity for Three Pillars is a property that is in good physical shape, but has been mismanaged. They can easily create additional revenue and value through rent increases and RUBS with these properties.  Other desirable opportunities include properties that can be easily updated with a thorough cleaning, floor coverings, paint and fixtures.

Biggest Risk

Risk is everywhere.  As an insurance broker, I am constantly looking at the risk of loss and what can be done to manage it. In most cases, there are three strategies available: Avoid, Minimize, or Transfer.  

Going forward, I am asking my CREPN Radio guest to identify the Biggest Risk they face.  

Q: What is the Biggest Risk you face?

A: Fear: Fear can be paralyzing.  Is the market at the top?  Will interest rates rise? What if the market has multiple years of to go and you are not in the market?  You miss out. Do your analysis, be disciplined and take a calculated risk. Don’t let the fear over run you to inaction.

For more go to: www.Threepillarscapital.com

CREPN #180 – Real Estate Investor Book Club with Scott Hollister

Real Estate Investor Books provide tremendous value for  knowledge seeking investors.

Consider the bargain found in a book.  In all likelihood, the author has taken years and possibly thousands of dollars making mistakes in order to learn the lessons detailed in their book.  For a small investment, you can learn from their experience, what not to do and what you need to do to achieve success. For this reason, books are a true bargain.

Book Club Interview

Scott Hollister is a former teacher, turned real estate agent, mortgage broker & investor.  He is also the host of The Book Club Interview podcast.  Here he combines his passion for books with real estate investing.  Last year, he read one book per week to prepare for interviews with the author for his podcast.  

Recent interviews include

  • Mat Soresen: Self Directed IRA Handbook
  • David Allen: Getting Things Done
  • Jay Papason: The One Thing
  • Doug Marshall: Mastering the Art of Commercial Real Estate Investing

Regardless of your particular investment strategy; fix and flip, value add, syndication or buy and hold, each strategy shares investing fundamentals.  However where some books dable in a topic, others explore the depth of the subtle important nuances.

The ability to publish a book in 2019 is easier than ever.  Now all authors have an opportunity to publish, it does not mean that all books are exceptionally well written.  Scott finds the books to be similar to the teachers he had in school. While some teachers are more noteworthy than others, he always came away with at least one kernel of knowledge.  The same holds true in the books he reads.

Real Estate Investor Books

During the course of my interview with Scott, he provided a list of books I had never heard of that he recommend on specific topics.  

Regardless if you flip, syndicate, value add or chose to lend money using your 401k, there are some terrific books that dive deep into the topic.  

Some of the books that Scott turned to when getting started and has found interesting:  

Jay Scott

    • The Book on Flipping Houses
    • The Book on Estimating Rehab Costs

David Lindahl

    • Multifamily Millions
    • Emerging Real Estate Markets
    • Commercial Real Estate Investing 101

Brandon Turner

    • The Book on Managing Rental Properties

Ken McElroy

    • The ABC’s of Real Estate Investing
    • The ABC’s of Property Management

Joe Fairless

    • Best Ever Apartment Syndication Book

Gene Trowbridge

    • It’s a Whole New Business; The How-to Book of Syndicated Investment Real Estate

George Antone

    • The Bankers Code

The Biggest Risk

Risk is everywhere.  As an insurance broker, I am constantly looking at the risk of loss and what can be done to manage it. In most cases, there are three strategies available: Avoid, Minimize, or Transfer.  

Going forward, I am asking my CREPN Radio guest to identify the Biggest Risk they face.  

Q: What is the Biggest Risk you face?

A: Biggest Risk: Under estimating the cost to rehab a property and the time needed to complete it.    

Solution: Have multiple Exit Strategies incase it all goes bad.

For more go to: The Book Club Interview podcast

Face Book: https://www.facebook.com/bookclubinterview/

Bigger Pockets: https://www.biggerpockets.com/users/MrHollister

www.davidwesleyrealestate.com

CREPN #179 – Grow Your Property Management with Jason Hull

Property Management is essential to the profitability of all real estate investments, regardless if you self manage or contract to others.

Jason Hull, founder of DoorGrow.com, helps property managers focus, grow and make their business more profitable.  In episode #179, Jason shares his insight into how to identify an exceptional property manager.  

If you self manage, have you considered managing for others?  Jason shares how you can turn the work you are already doing into a profit center when you do it for other property owners.  Property management has desirable business characteristics that every real estate investor seeks: minimal investment required to start, recurring & increasing revenue, clients who rarely leave, and the inside track to true off market deals.  

Successful Property Management

A successful property management company is easy to recognize.  For starters, they answer the phone when you call. They are a sales focused organization committed to the growth of the whole organization.  Happy clients are the standard. They do not run from crisis to crisis. The experienced team can handle any situation and keep both the property owner and tenants happy.  They rely on systems to ensure that success is a constant and they do not recreate the wheel.

Keys to Growing Your Property Management Firm

If you are struggling or considering taking on property management for others, here are some keys to growing your property management company:

  • Forget SEO.  Paying to advertise your business if you are not ready, will cause more bad than good.  Only after you have plugged your operational holes can you consider advertising for additional clients.
  • Brand – It is important to be recognized by the public as a property management firm.  Too many managers market themselves as a real estate firm that primarily sells and dabbles in property management when asked.  Think about who your ideal client is and recognize the value of specialization. If you do property management, don’t just hint at it, own it.  
  • Word of mouth referrals.  Happy clients know others who own properties, and may even have additional properties for you to manage.  If you ask every happy customer to connect online, and like or share your page.
  • Positive online reviews.  A ruined online reputation can be difficult to overcome.  You need a strategy that constantly request and receives reviews from happy clients, both owners and residents.  When prospects are looking online, if you only have negative reviews, you are sunk. But if you have mostly positive with the stray negative review, you will thrive.
  • Price your service properly.  In an attempt to attract clients, too many struggling businesses, price their service too low, attracting only bargain hunters that refuse to spend money to maintain their property.  Properties in poor condition attract the lowest eligible tenants. This is known as the Cycle of Suck. If you are in the cycle, it’s hard work to get out of the cycle. To get out, you have to recognize the value you bring.  You will have to fire clients, and increase your price. In the end it is worth it if you attract and retain quality owners, properties and tenants. Happy, happy, happy!

Now Add More

Once you have a solid base operation that is attracting quality owners and tenants, it’s time to prospect for more.  Reach out to local investment groups and offer to speak. Groups are always looking for someone that can add value to their members.  This is an excellent opportunity to prospect for new clients as a speaker in front of groups. When you present as an expert in front of a group, it leverages your reputation way beyond any outbound cold call will ever do.

 

For more go to:https://doorgrow.com/

Podcast: Door Grow Show

Face Book: The Door Grow Club

Twitter: @kingjasonhull

CREPN #178 – Self Directed IRA with Terry White

Self Directed IRA is an option available to all investors, yet it is not widely understood.

If fact, every IRA is self directed.  It is the custodian that limits your options, ie: stock brokers and wire houses limit your selection to marketable securities offered.  To take advantage of non traditional assets, you need to seek out a custodian that supports investing in non traditional assets.

Employer sponsored plans, ie 401k’s usually have a limited number of investment options that are set the administrators.

Terry White is the founder and CEO of Sunwest Trust, a custodian for almost 10,000 Self Directed IRA’s with an average account balance of $130,000.  

Sunwest Trust provides an option for investors looking to invest in non-traditional assets.  Unlike traditional broker custodians who charge based on the assets under management, Sunwest Trust charges an annual flat fee for their services.  

Who is eligible for a Self Directed IRA

Individual Retirement Accounts, IRA’s, are non employer sponsored retirement plans.  You choose the custodian. They can support traditional or non traditional assets.

Employees who leave an employer have two options.  They can leave their 401k with their prior employer, or they can roll over the plan to a Self Directed IRA.  

What can you invest in?

The IRS does not provide a list of categories you can invest in.  Rather it specifies a few things you cannot invest in. The list is short.  It includes life insurance and collectibles.

Who cay you invest with or in?

Again, the IRS does not list all of those potential investors you can invest with.  Rather, they specify the those “disqualified” parties which are prohibited: you, for personal use, your ascendents and descendents; your parents, grandparents, children or grandchildren.  You are not prohibited from investing in a brother or uncle, etc.

How it works:

It is crucial that any purchases in your Self Directed IRA be structured properly to avoid potential taxable event or penalties.  You must have the purchase and sale agreement signed by your custodian. If you act as the buyer individually, then fund with your IRA, you will engage in a prohibited transaction.  

When property is purchased, the custodian does so at the direction of the IRA.  The property is then titled to the IRA in care of, the custodian, ie:  My IRA ,  ℅ Custodian.

All operating income and expenses go through the custodian who deposits, withdraws from your IRA.  It is best to use a property manager that pays directly to the IRA.

You are prohibited from using the property personally.

Leverage

Using Leverage

Your IRA can elect to use leverage to purchase a property, provided that the loan is non recourse.  Keep in mind, using leverage triggers, Unrelated Debt Financed Income, UDFI. This is a tax. It is equal to the percentage of the income that is attributed to the leverage.  Ie; if you put 25% down, and have a loan for 75%, then, 75% of your income will be taxed at Trust rates.

Lending from your IRA

Lending from your IRA is a very clean way to generate substantial gains.  Hard money, interest only loans, as long as you don’t loan to yourself, parents, or children, is one of the most popular ways to utilize a self directed IRA.

Reporting to the IRS

Each year, the assets or property held in your IRA are reported to the IRS on a form 5498 by your custodian.  The non traditional assets, property, are valued at the year end and compared to last year. All income paid to you by your custodian is reported on a form 1099.

Required Minimum Distributions

When you turn 70 and ½, the IRS requires that you take minimum distributions from your IRA.  This requires planning to do properly. Your options include:

  • Sell a property as you near 70 yrs old
  • Make distributions from the cash flowing income
  • Take a loan against the property
  • Take out an ownership percentage of the property via tenants in common TIC.

Is a Self Directed IRA right for you?

A Self Directed IRA is not for everyone.  If you do not understand what you are investing in, don’t do it.  Get educated, learn the ins and outs, and know what you are doing before you invest.

For more go to:

https://www.sunwesttrust.com/

FREE BOOK: https://www.sunwesttrust.com/contact/

and request Terry’s book,

When all You have is a Hammer

Sunwest IRA is a YouTube Channel