In today’s society, the possibility of becoming wealthy exists but remains a lofty aspiration for most. While many have come to understand that real estate is one of the most effective mechanisms by which one can attain wealth, many would-be real estate investors are held back for one reason or another. If only there was a way such an investor could more easily cross the bridge into the wonderful world of real estate…

Bridging the gap

One viable option is to participate in a syndication. A real estate syndication is simply a group of like minded investors that pool their resources together in order to participate in investments larger than they otherwise would have been able to alone. These resources may include liquid capital, expertise, project management, and a variety of other valuable things. Similarly, syndications come in a variety of flavors. Let’s look at reasons one might want to participate in a syndication before discussing the various types of syndications and common pitfalls to avoid.

There are many would-be real estate investors—doctors, lawyers, engineers—that would love to jump in the real estate game but lack the time or inclination to do so. Inversely, there are many experienced investors that know a good investment when they see one, but they may lack the capital necessary to pursue it alone (such as a larger 75-unit property). Both types of investors are ideal syndication candidates.

The passive investor—with money, but no time or expertise—can join a real estate syndication and reap the various benefits of real estate investing without any of the hassle. The experienced, but capital deficient, investor can purchase the investment of a lifetime while helping out others. It sounds like one of those fabled “win-win” situations I keep hearing about.

Sounds intriguing, but what kind of syndications are out there?

Syndications are basically formed as follows: some managing member, or expert, pools all the necessary resources, including capital, and basically does all of the dirty work. Naturally, the managing member is compensated in some way. This is where problems can arise.

Some managing members will perform all of the steps necessary for completing a successful real estate transaction, and all they will charge is a “reasonable” 10% interest in the property. Offhand, this doesn’t sound terribly unreasonable. But on a $10 million property, the managing member would have just netted a fractional ownership interest worth one million dollars. Not bad for a day’s work, huh?

Stay away from these forms of syndications!

Another form of syndication—a fair one—is where the managing member charges a fee that is some inverse percentage of the investors initial investment. In other words, the larger an investor’s share of ownership (not to exceed 50%, of course), the less his syndication fee. After all, that investor is less dependent on the syndication—the other investors—than they are on him.

Add this information to your arsenal of investing knowledge, and continue making informed decisions along the path to achievable wealth.

Happy investing!

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

The Bridge to Wealth: Real Estate Syndications

A while back, I mentioned my project installing a bathroom ceiling fan as an example of something automated systems wouldn’t help with – a dirty, uncomfortable job I had to do myself.

That doesn’t mean the job had to be nearly as difficult as it was.  I could have saved a huge amount of time if I had taken some steps to learn the building beforehand.

A Hugely Annoying Day

Like most bathroom ceiling fans, the Broan 678 actually attaches to ceiling joists.  This means that to install it, you really want to work from above.  It’s pretty darned difficult in a building like mine because there is no easy access to the attic.  I knew of three possibilities:

1. I could remove some of the suspended ceiling panels in the kitchen or living room, get my body up there, and work my way over to the area over the bathroom.  (The bathroom did not have a suspended ceiling, as most don’t, because suspended ceiling tiles are not very water-resistant.)
2. I could work from the roof down.  The good news was that the apartment was on the top floor and there was a roof hatch.  The bad news was that getting to the roof would be a chore – I didn’t have a ladder that could reach it from the street.
3. I could cut into the drywall around the ceiling fan, thereby making an opening big enough to take out the old ceiling fan and put in a new one.  This was my least favorite option because it was the most complicated and time-consuming.

The first option was my favorite, so I brought out my stepladder and started working my way around, taking out ceiling panels one by one, looking for a path to the bathroom area.  No path was to be found.  The previous owner (PO), or the one before that (PO-1), or somebody had thoughtfully partitioned off the entire attic with vertical wallboard panels.  I’m not sure why he did this, but it may have been for fire suppression.

(Up until 1977, my two story building was a three-story building.  The third story had been gutted in a fire and simply removed.  Nobody, including me, wants it to become a one-story building.)

So much for the first option, on to the second.  I got out my Multimatic ladder and went through an elaborate process to lift it up to the second-floor fire escape platform.  All the while I was imagining elaborate disasters with falling ladders, with or without me on them.

In the end, however, the ladder did make it up to the fire escape, I made it up the ladder to the roof, and over to the hatch.  I opened the hatch and discovered another huge challenge.  PO, PO-1, or somebody had built a nice little room under the hatch, again with vertical wallboard panels.  The only thing I could do with the hatch was climb down it into the little room, presumably eventually falling down through a suspended ceiling panel or two on to the second floor and breaking at least a few bones.  (Bear in mind I had already cheated death once with the ladder and would have to do so again to get off the roof.)

So much for the second option.  It was now time to start working from the bathroom itself, cutting around the drywall surrounding the ceiling fan, and so on.  That’s what I did, anyway.  It was in the midst of that project that I made my one smart move.  After installing the new ceiling fan, but before replacing the drywall I had cut away, I tested the new fan to make sure it worked.

Had I not done so – had I installed the fan, replaced the drywall with all that entails (cutting a new piece, putting up backing boards, screwing the new piece on, filling, sanding, and painting), and then found out it didn’t work – I would have climbed back out onto the fire escape, ignored the useless ladder, and done a swan dive on to the payment.  My children would now be fatherless.

Anyway, the ceiling fan went in, the drywall was repaired, a new tenant has since moved in, and life is good.  Of course I did waste a heck of a lot of time with Options #1 and #2.  The next time a bathroom ceiling fan fails, I’ll move right on to #3.

My serious point

Like most BP posters, I have a lot going on in my life, and really can’t afford to waste a lot of time on what should be simple repair jobs.  I would have saved a ton of time if I had just learned the building before the repair was necessary.

I’ve owned the place for almost six years.  That’s plenty of time to have checked it out thoroughly.  I could have opened that hatch on some previous day when I was up there and had time to poke around.  I could have checked out the attic space on that same or some other day.  After learning the building (and there’s lots more to learn, these are just examples), every future repair job that involved those areas would have gone much more quickly, with less stress and aggravation.

So here’s my challenge for you – how well do you know your building(s)?

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Save Your Sanity, Learn Your Building

Even the most bearish economist is predicting that commercial real estate prices will fall up to 40 percent from peak to trough. However, the data released yesterday from Moody’s Investor Service shows that in April commercial property prices plummeted a record 8.6 percent. According to Moody’s data, commercial property prices fell a total of 29.5 percent from their highs in 2007. This leaves another 10 percent drop in prices if the most bearish economists are correct. In my opinion, much of this drop was due to a speculative credit bubble that caused commercial property buyers to purchase properties that would never produce a positive cash flow, even assuming a strong economy and strong demand for commercial real estate.

I believe that most of the declines in commercial property prices that can be attributed to the credit bubble have mostly taken their toll on prices. But, I surmise that we could experience an even greater decline in commercial property prices due the fact that the economy is fundamentally unsound. If one closely examines the fundamentals of supply and demand for the commercial property sector, the prospects for continued price declines becomes readily apparent, especially in the retail and office building sectors of commercial real estate.

Background to a Crisis

During the speculative credit bubble, developers built many more office buildings and retail stores than could possibly be sustained. Now that unemployment is in the double digits and major economic sectors like the automotive industries are going bankrupt there is less demand for commercial property. There have been many large, well known, retail brands either going bankrupt or severely cutting back growth projections. In a small city, near where I live, there are at least fifteen Starbucks. How many Starbucks stores can one small city support? Circuit city is out of business, Brandsmart may be next. Car dealerships are closing their doors around the country. These are all commercial real estate tenants whose absence can’t easily be filled. The list goes on and on. If so many large retailers are going out of business or curtailing operations then there will be even less demand for all of the vacant commercial retail space.

Commercial Real Estate Breakdown & Predictions

As local, state and federal governments go deeper into debt they will be increasing taxes even further on businesses and property owners. This means higher taxes for the owners of commercial real estate. If the costs to hold a property increase, then its intrinsic value must decrease.

I would challenge the 40 percent figure and would argue that prices could drop even more due to the dismal state of the economy at large. I would go the record to say that the commercial property sector could see real price declines of up to 70 percent from peak to trough. The worst might still be ahead of us.

Source: Reuters
Photo Credit: strangelv

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• ‘Wave of foreclosures’ to hit commercial sector, Insider Q&A; told (lansner.freedomblogging.com)

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Is This the Bottom for Commercial Real Estate Prices?

Many apartment buildings are now facing foreclosure because of falling prices, stricter underwriting guidelines and 5 year mortgages becoming due. For the astute buyer of apartment buildings these apartment building foreclosures could represent an investment windfall.

As a glaring symbol of the burst bubble in national residential real estate prices, the National Association of Realtors announced recently that a full 63% of homeowners in Las Vegas are now “underwater” in their mortgages. This simply means that they owe more than their property is currently worth. For many of these people, it simply makes no economic sense to continue paying for their mortgages when the underlying asset is no longer worth what they owe. This situation will probably lead to further foreclosures and further declines in real estate prices. As all eyes are currently watching the steep decline in residential real estate prices and rising foreclosures, the commercial side of real estate has hardly begun to realize the problems that may be looming on the horizon for many apartment building owners.

Homeowners in Las Vegas, for example, who are able to continue paying their mortgages may decide to hold on to their property for a few years and hope that real estate prices recover. They are able to make this decision because, presumably, they have 30 year mortgages. In contrast to residential mortgage holders, many investors in commercial real estate are holding on to 5 year mortgages. This means that they will be forced to refinance their properties when the notes become due and it couldn’t be happening at a worse time. Many apartment buildings rose in value right along side residential real estate prices and too many of these owners paid too much for their properties because they figured that as long as they were seeing a net profit every year from their rent collection then they had nothing to worry about.

Market Conditions Lead to Great Opportunity in Apartment Market

During the real estate investing frenzy apartment building buyers didn’t take into account the possibility that real estate prices would drop so precipitously is such a short period of time. Now, many apartment building owners are facing a dire situation. For example, let’s assume an apartment building investor purchased an apartment building in 2005 for 1 million dollars. He came out of pocket for $200,000 and he financed the purchase with a 5 year balloon note that becomes due on January 1, 2010. He financed 80% of the purchase price. In the last years, however, the market price of his apartment building has dropped 20%. It is now appraised by the bank as being worth $800,000. Unfortunately, when he goes to the bank to get a loan, the loan officer tells him that the bank has changed their underwriting guidelines and they are now only willing to finance 70% of the appraised value of the property. Now, he is only able to finance $560,000. The problem is that he still owes just around $800,000 on the property. The difference between $800,000 and $560,000 is $240,000. Unless the apartment building owner can come out of pocket to pay this additional $240,000 to the bank then he will eventually be forced into foreclosure. It is safe to assume that many apartment building owners will make the same choice that thousands of home owners have, to walk away from the mortgage and the property, chalking it off as a lesson learned.

For the first time buyer of apartment buildings, this could be a windfall in the making. There could be thousands of properties, in good condition, appearing on the market at rock bottom prices.

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Apartment Building Foreclosures Create a Buyers Market for Apartment Buildings

We put together the following video presentation in 3 parts to help you learn about the basics of Short Sales, how they work, etc. Other topics covered include Credit, Deed in Lieu of Foreclosure, dealing with the banks, and Taking a Short Sale Listing etc.

PART II

PART III

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Learn the Basics of Short Sales (Video)

How High Is Up?

The answer can be as simple as one flight of stairs. It also can be as grotesque as 300%. Since I’m talking about real estate, I’ll skip the flight of stairs type of answer and concentrate on the 300% side.

Unless you’ve been living in a cave in Zimbabwe, you know the real estate market has taken a directional turn – down. In some areas, if the articles I read are correct, like Detroit and Cleveland, you can literally buy foreclosed properties for less than 10¢ on the dollar. That looks like one heck of a deal to the naked eye.

However, if you do the numbers, it is actually one hell of a bad buy. In order to understand why I say what I say let’s look at the math of gains and losses. By the way, you can get exact numbers by doing an Internet search for that exact phrase. My numbers in this post are rounded down to the nearest whole number.

Math Is A Two Way Street
I will use $1000 as the example number. Making believe your property was worth $1000 two years ago and is now worth only $620 means you’ve sustained a 38% decrease in value. If you’ve seen 38% before that’s because someone wrote an article that says 38% is the average decrease in property value in the U.S.

I say who cares what the average value is because I don’t live in an average value area. I live in one of the highest foreclosure states in the Union. You too may live in an area where the foreclosures are still running rampant. Therefore, 38% means very little.

That’s why I say 38% is just another number. But that’s going down a side track. If you are looking for your property to rise back to the $1000 value to restore the loss, by what percent must it go up?

61%.

Wow, that’s almost twice what it went down. Yep, but that isn’t as bad as if it went to a value of $250 meaning it experienced a 75% decrease. To restore the value of $1000, it would have to rise in value by 300%. To me that is a bigger wow.

As the percent of decrease increases, so does the rise in value percentage. In other words, if you can buy a property that has decreased by 90% like in the cities I mentioned above, your rate of rise would be close to 450%. Remember, this is a rounded number so do your research.

Opportunity Is In The Eye Of The Beholder

So what do these numbers actually mean? Depending on what side of the numbers you are on, they could be disaster or opportunity. Let’s say you bought a property for $250 and it went to $1000 in an acceptable period of time. You just made a fantastic return provided you sold it with very little expense.

If you owned the $1000 property and it slipped to $250 but did nothing, you are simply sitting on an asset that has decreased in value. No big deal if you aren’t planning on selling and can afford to continue to pay the mortgage. No big deal also if you needed a big loss for tax purposes and decided to sell. That actually may be an opportunity. On the other hand, if you must sell, you just encountered disaster.

When I was a stock broker, I remember people using the sell at a loss strategy. They would sell stocks that had slipped in value so they could take the loss to offset gains and reduce their taxes. I fully realize this may have limited application. However, it is still an option.

The purpose of this post was to present the two sides of the math, in general terms, that comprise this market. The numbers are illustrative only and meant to jump start the thinking process and the manner in which you look at your investment(s). After all, it is your money at risk and you should have as many facts as possible in order to make an informed decision.

Photo Credit: timonoko

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

How High Is Up? A Look at Real Numbers Defined by the Real Estate Collapse

Finding the right apartment building to buy for an investment can seem like an overwhelming and daunting task for the first time apartment building buyer. However, if you know a few things to look for when purchasing an apartment building everything becomes a lot easier. There are good things to watch out for and some very bad things as well. The good things allow you to locate apartment buildings that have a strong chance of making you money over the long run and the bad things mean that you will have problems making profits.

Here are some warning signs to watch out for when locating apartment buildings to buy. If you see that your potential apartment building investment has any of these attributes, run the other way.

1) Rent controls that limit the amount of rent you charge or limit the amount you can increase rent. It makes no sense to invest your hard work and energy into any enterprise that will not reward you for your labor. With apartment building investing, the reward comes in profits and positive net cash flow. If rent controls do not allow you to charge a fair market rent then you will always be struggling to pay your bills and make a profit. There are thousands of apartment buildings out there with no rent controls.

2) Structural flaws and deficiencies in load bearing walls or in the apartment building foundation. The key word here is “structural”. As an investor you don’t want to purchase a building that has serious structural flaws because the repairs on these problems cost a lot more money then you might think. Even if the building is apparently priced to reflect the cost of the repairs it is best not concern yourself with a building that is in extremely bad physical condition. There may be unseen issues that could eventually lead to the building becoming condemned. The building also may not qualify for bank financing if the problems are severe.

3) Environmental issues such as toxic mold or buried oil tanks that are leaking. Make sure you research your investment very well. Most states require sellers to disclose the presence of environmental hazards on a property; however, it is up to you to do your due diligence. Mold remediation and the removal of buried oil tanks can be very costly.

4) A large majority of the units are occupied by tenants who are receiving subsidized rents from the government. The presence of many subsidized renters can mean that the tenants are gainfully employed. This can lead to problems such as crime and drug abuse.

5) An area with a large surplus of vacant units. If an area has vacancies at 15% or above then you will have trouble renting your units. Watch out for areas that are offering huge incentives and free rent to prospective tenants.

6) A bad neighborhood. Do some research and determine if the neighborhood you are looking at is safe place to live. Ask yourself if you would feel safe living in that neighborhood with your family. Drive around the neighborhood at different times of the day and night. Are there people lingering on the street corners during the week day? Does there seem to be an unusually high level of police activity?

Photo Credit: turkeychik

This Article is Copyright © 2004-2009 BiggerPockets, Inc. All Rights Reserved.

Buy an Apartment Building — With Warnings