Greetings from the metropolis of Cedar Crest, NM.! I just got back from taking my youth group to The Red Letter Rock Fest in Snyder, TX. A whole lot of driving, a whole lot of rockin’ and a whole lot of wind. Nothing stops the wind in West Texas. Never the less…..the kids had a blast and I lost my hearing. Wow….I am still recovering from the trip. Two hour naps in the middle of the day are part of my rehab….and possibly a part of my every day routine from now on.

Anyway…..

Like most real estate investors, I began with “no money down” residential deals. After a year or so of investing in houses, a few commercial investment opportunities came up and I made the jump. Although I still have several residential investment properties, commercial real estate is my preference.

There are several reasons why I like to invest in commercial real estate but the risk level is not one of them. There is a lot of risk involved in commercial real estate investing that goes beyond the asset and how the markets are doing. The “real” risk in commercial real estate investing is the fact that a large commercial deal will entail a lot of money and a lot of people. Money and people can be a lethal mix in any business transaction…especially large commercial transactions.

Before you run to the hills, understand that risk is just part of doing business and not a good reason not to invest in commercial real estate. The pros definitely out weight the cons (my opinion of course).

The bad news is there is no way to get around the risks when it comes to mixing money and people but the good news is there are actions you can take to minimize them.

So….what can you do to minimize the risks (mixing money and people)?
Plenty….

1. R.E.S.P.E.C.T.

   Before you do anything….have a healthy respect for your deal. Respect for your investment with regards to risk will drive you to take the precautions necessary to protect yourself and your investors (if you are recruiting investors).

2. Pay for good Advisors

   Your advisors are an important part of your team. DO NOT BE CHEAP! Good advisors (real estate attorney, asset protection attorney, CPA, mortgage broker, real estate agent/broker, insurance broker, property manager, mentor, etc.) are worth their weight in gold. Be willing to pay for it. Don’t cut commissions, don’t use prepaid legal, and don’t take short cuts when it comes to your advisors. Don’t ask your uncle Vincent because he had a year of law school.

3. Accept the advice from your advisors

   Okay….I know what you are thinking….but many people will listen and ignore their advisor’s advice. If you are going to pay your attorney $400 an hour….make sure you use the advice you are given. If you do not agree, get a second opinion but never ignore professional advice. Sure…question the advice and seek alternatives but ignoring advice will hurt you.

4. Partnerships

   I can go on and on about partnerships. I have had horrible partnerships as well as great ones. The problem is that horrible partnerships linger like garlic. Partnerships are like parenthood. It is easy to be a parent but difficult to be a good one. Time and time again, I have counseled many of my students on partnerships. The key thing I have learned is to prepare for the worst by having an operating agreement in place (done by an attorney). If things fall apart, your operating agreement will help soften the breakup. If your operating agreement is not done well, it could get ugly.

Obviously the list is much longer but I think you get the point. Being prepared for the worst will allow you to expect the best from your investment. Once you protect yourself on the “mixing people and money” side of the transaction, you can focus on the risks associated with the property. Market conditions, due diligence, real estate cycles, and all the other fun stuff.

Until next time……rob

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Tags: commercial investing, commercial properties, Commercial Real Estate, commercial real estate deals, real estate, real estate investing, real estate investor

Howdy from the metropolis of Cedar Crest, New Mexico.

I just got back from my father-son retreat with my boys Colt (9) and Dakota (7). It was fun to hang out with other fathers but it was a lot more fun to be with my boys when they wanted to hang out with me. I was competing with their friends for time. What is up with that? When did I become “not cool”? I am thirty seven years old! I am too young to be “not cool” …right?

Anyway….

I am currently refinancing my shopping center in Southwest Texas. I am on my second attempt to refinance and I have been trying to do so for six months now. The shopping center is a solid performer with regards to cash flow, tenant strength and occupancy (100%). It is also in a great city with regards to the local economy. So…what is the problem? Where do I start?

There are a plethora of items that I did not see coming…NO ONE did. But from what I understand….my mortgage broker(s) are telling me about a “perfect storm”:

1. Interest rates are extremely volatile…so lenders are increasing their margins to protect themselves
2. Real estate values are dropping
3. Underwriting in tightening
4. The lender pool is shrinking
5. Increased environmental concerns

And on and on. Yes, I could keep going because the reasons are limitless and the excuses are shocking. I do have to say that my mortgage broker is going out of his way to make things happen BUT the “hold ups” are unprecedented.

So…what have I learned and what advice can I give you?

1. Start now - If you are planning to refinance in the next six months to a year, start now. This is a great area to be proactive in especially if you are dealing with defeasance, prepayment penalties, environmental issues, short leases, bad credit, etc. You will want to know before hand what issues you might be facing and start addressing them right away.
2. Do business with mortgage brokers you have used before or come highly recommended - I have been burned once (okay..twice) by using a mortgage lender that I did not have any experience with and that was not recommended. Get recommendations from me or other real estate investors who have had good experiences with mortgage brokers. Most investors are happy to recommend someone from their team. Avoid real estate mortgage brokers from internet forums and those in the back pages of newsletters. Are they all bad? Of course not, but none of us have time to waste trying to find a mortgage broker.

With all that is going on in our economy, financing commercial projects require a lot more elbow grease than it did a year ago. Being proactive and having deep relationships with solid mortgage brokers are the best ways to get your deal done in a tough financing market.

Until next time…..rob

Usually apartment buildings with more than 20 units are managed by professional property management companies and those buildings with fewer than 20 units are usually managed by the owner and a live in property manager. Regardless of who is managing the apartment building it is important to follow some general principles and tips to make sure that operations run smoothly.

The management of an apartment building should be efficiently run like any other business. The manager should look to improve the client-tenant living experience while minimizing costs and increasing profit opportunities whenever possible.

One important legal issue that should never be ignored are the Fair Housing Rules which prohibit discrimination based on race, gender, age, disability, marital status, and sexual orientation. Everyone involved in property management must follow these rules.

Another important matter to that can generate complaints with the management is the issue of who is responsible for repair and maintenance of the apartment units. The property owner should clearly write out in the lease agreement who is responsible for what repairs. State and federal laws should also be consulted because it is illegal to shut off essential utilities for the failure to pay rent. In other words, if a renter is late on rent it is illegal to shut off the electricity or water.

The apartment building manager should succinctly write out the following information in the lease agreement:

• The tenant’s responsibility to maintain a clean rental unit and also pay for damage caused by neglect or abuse.
• The tenant should alert management of any dangerous or defective situations with the property. For example: faulty wiring, water leaks, mold and fire hazards.
• The manager will provide tenants with the official policy and procedure for dealing with complaints and repair requests. For example, what the hours of operation are for the maintenance and repair staff and how fast tenants should expect a remedy to complaints.
• Have restrictions on tenant alterations on their apartment with out your permission, such as adding appliances, painting, etc.

In general, maintenance and repairs should be handled as speedily as possible to avoid further complaints from the tenants. Major issues like plumbing leaks and heating/cooling problems should be dealt with in 24 hours. An open line of communication between tenants and management is an essential ingredient to good overall relations. Management should keep the tenants informed of when and how the repairs will be made and the reason for any delays.

Tags: apartment building buyer, apartment building investment, apartment building management, buy apartment building, property management, property-manager

The importance of financing is so great it pays to leave nothing to chance and assumption. Knowing the local lenders and what they like to invest in is critical to finding the right lender for your investment project. Also, presenting a compelling case to the lender is important. These two aspects lay the foundation for creating a successful project.

This goes back to preparation and research. You might also want to research private financing, which entails knowing wealthy people, or knowing someone who knows wealthy people.

Having a good idea of what’s the favored investment in a local area will no doubt play a part in the choice of the investment project. But if you have followed advice and have become knowledgeable of your area, you should have a good idea about trends and the financing possibilities.

You have also, no doubt, become knowledgeable enough to exude confidence when you present a project to be financed. It also pays to have gathered support from influential people you know in the area who can vouch for you. Having references will allay doubt, unless you know the lender personally. It may be a process getting to the right decision maker, so you should be persistent and not give up at a first brush-off. Getting to know the assistant might be the first step, and it might take more than a few visits to get in the right door. Everything you learn from the first few failures will be important in devising a better plan.

Establishing rapport with those along the way will help clear the path — if what you present is compelling, you can advance, but the lower players will not likely stick their heads out if you seem unsure are don’t have a good presentation.

This is where having a good team already assembled helps . If you have chosen a well-known attorney and accountant, and have chosen property management (if it will be needed) and solid, quality contractors, then this shows that work has been done and others have looked at the project — it shows you are prepared and that you are a serious investor.

Having a good resume will be impressive, one that shows your skills and experience and why you would be good at this type of investment. Most lenders want to say Yes, but they want everything in place to be able to say Yes.

Make it as easy as possible for the lender by being co-operative and having others vouch for you — you might be good at selling yourself, but to a lender it will only be self-serving — a lender will be impressed if others who are influential and respected are selling you.

The bottom line is that the more you know about the right decision-making lender, the better you can plan a presentation that will be accepted favorably. Having all the numbers clearly crunched by an accountant, having all the legal ramifications covered by an attorney, all the construction aspects assessed bya contractor, all the management lined up and factored in, will present a strong case for acceptance — much stronger than if you go in alone and brag on yourself and idea and basically ask a lender to go on faith .

When an idea is reasonable, researched and the numbers make financial sense, AND you have a team behind you, the chances of getting financing are greatly enhanced — who knows, you may have lenders competing for the project, which would be even better.

Tags: Commercial Real Estate, financing, lender, presentation of the investment project, rea estate investment financing, real estate, Real Estate Investing

I have approximately ten serious buyers who have a home to sell in another state before they can buy. I talked to the relocation person at Gulfstream here in Savannah and she said many of her new hires have homes to sell before they can buy. If you take my situation and consider all the agents in Savannah who are working with buyers who have homes to sell, the numbers add up.

To me this presents an investment opportunity — a risky investment opportunity — one that would require building a trusted network of agents and property managers. It would also require understanding other markets and being able to trust that information.

We all know by now that certain areas are being hit by the national slowdown in home sales. A willing investor could mine this situation for good investments and help break off a little piece of the log jam.

I’ve talked with a local investor and we’ve identified several good investments that will help him, the buyer/seller, me and the listing agent on the other, and perhaps a listing agent on this end. What the investor will need to do is contact local real estate agents with productive businesses and ask them how many out of town buyers they are working with who have homes to sell in other areas before they are able to buy. If the agents are willing to work with the investor, the investor then begins to gather information and perform research on each market where the ready and willing, but not yet able, buyers have homes sitting on the market.

If the home can be bought at a reduced price and rented out until the market changes in that particular location, then the investor identifies a trusted property manager for that area and determines the viability of the rental market. Then it’s a matter of crunching numbers, tax considerations and getting the best financing. This strategy would require a lot of research but it can be done long distance once the right local players are identified.

In a way it would be an exciting, interesting investment strategy because it would entail working with professionals and markets in different locations across the country. In a way, also, it’s risky and contrary to the advice to stick with markets you know — being an out-of-town landlord can have its drawbacks, trust and lack of hands-on management being two. The key would be developing a trusted network without having to physically go to each location.

Many agents now have created internet networks and can be helpful in connecting the investor with this network to get good information and recommendations of local professionals who can be trusted. With technology being what it is, boundaries are quickly being eradicated and long-distance investing is becoming more of a practical reality.

This strategy is not for an investor with a weak stomach and a distrust of long-distance relationships, but I can see it working for an investor who creates and trusts a network of professionals who have been vetted and proven competent and trustworthy.

I now know real estate professionals across the country whom I trust as much as anyone local. There are deals all over the country — with the right system, and with good solid information that can be trusted, this strategy might uncover more good deals that an investor can handle.

It’s just an idea. I will keep you all informed how it works with the investor I’m working with — and maybe someone is already doing this who can advise us on how it’s working.

Tags: investing in down market, investor, landlord, long distance landlords, real estate, real estate investing

With the recent melt down of the sub prime mortgage market banks are tightening up their lending practices in the commercial sector of the finance industry as well as the residential. What this means for the apartment building investor is that he or she needs to make sure that he is working with a commercial mortgage broker who has experience preparing apartment building loan packages in tough times.

The underwriters at banks are now being especially stringent when following their own guidelines. In the past, when a borrower submitted a loan package to a bank loan program that required the borrower to have a minimum net worth of at least 1 million dollars for the purchase an apartment building for 1 million dollars they may have let the borrower float through with a net worth of only $900,000.000. Those days are over. The apartment building investor now needs to be especially diligent when applying for the loan and preparing the loan package for bank underwriters.

Many loan programs for commercial real estate acquisition and refinance have also disappeared. It is now very difficult to qualify for an 85% loan-to-value mortgage on an apartment building whereas in the past they were more accessible. What this means to the apartment building investor is that he or she needs to be working with a commercial mortgage broker that specializes in apartment buildings or at least a broker that only does commercial real estate loans. The two sides of the lending industry commercial and residential, are so different from another that I have never encountered a mortgage broker that I would consider especially adept in both arenas at the same time.

It is important for the apartment building investor to realize that a commercial mortgage broker will usually only charge one point in fees on an apartment building investment. One serious mistake that many apartment building investors make is that they try to contact the banks directly and submit their own loan packages in an attempt to shave half of a percentage point of the interest on the loan. What these novice investors don’t understand is that all banks who do apartment building investments are actually brokers. This means that they sell their loans to the secondary market.

The investor who tries to place his apartment building loan by himself is actually hurting his chances of finding the best rate and terms on his apartment building loan. Many banks and “direct lenders” only offer one or two loan programs that they are willing to underwrite for multifamily properties. A commercial mortgage broker who specializes in apartment building financing will be able to offer the investor ten or twelve different loan programs to choose from that match his personal financial profile and that of the property as well.

Tags: apartment investing, apartment real estate, apartments, Commercial Real Estate, real estate, real estate investing

Many aspiring apartment building investors are eager to buy their first apartment building but many times they don’t have the requisite 20% financing that banks and commercial lenders require. There are certainly creative ways to overcome this obstacle, however, it should be stressed that there is no one answer or magic solution that will apply to every deal.

The apartment building buyer should first and foremost evaluate the property to make sure that the property will “debt service”. This simply means that the total income produced from the property will be able to pay for all of the annual expenses including the principle, interest, taxes and insurance. In addition to covering all of these expenses the property should also show a profit as well. Banks require a debt service coverage ratio of 1.2 or 1.25 on most apartment building investment deals. After determining that the apartment building will have a positive cash flow and a debt service coverage ratio of at least 1.2 the investor can than look for creative ways to raise cash for the down payment.

For example’s sake we will assume that the investor is looking at a 15 unit apartment building that has a purchase price of $1,000,000.00. We will also assume that the property will have a debt service coverage of 1.25 with a 30 year, fixed rate, commercial mortgage that has a fixed rate of 6.5%. We will also assume that the apartment building buyer has about $75,000.00 in cash to apply towards the down payment. The buyer now needs to raise about $125,000.00 to reach $200,000.00.

In my opinion, the best method to raise these funds is to seek out other investors and form a limited partnership. If the apartment building investor has no experience with limited partnerships then he or she should consult a qualified real estate attorney who can facilitate the partnership and prepare the legal paperwork. In brief, the investor will act as a general partner and the other investors will act as limited partners. The limited partners have a limited liability and they are responsible only responsible for debts incurred to the extent of their registered investment and they have management authority. Therefore he general partner will make the decisions about the property and undertake the management and the limited partners will share in the profits of the investment according to the extent of their original investment and as outlined in the partnership agreement. The limited partnership is a flexible and useful method for the individual investor to raise capital and invest in larger sized projects then he or she would normally be able to without actually borrowing more money.

The difficulty the new investor will face with raising money in a limited partnership will be convincing limited partners to come on board and invest their hard earned money in your project. For this reason it is necessary to have clear and accurate financial projections. It will also be more difficult to find partners if the investor has little or no experience with commercial real estate investments. For this reason, the investor may want to consider approaching family, friends, or other business associates to find qualified partners. Another avenue to explore would be to network at investment clubs.

Tags: apartment finance, commercial investing, Commercial Real Estate, invest in commercial real estate, limited partnership, real estate, real estate limited partnership