Greetings from the metropolis of Cedar Crest, New Mexico.

After a series of road trips to Arizona….Texas….and New Mexico….it is good to be home and good to be writing again.  I have had a blast exploring, discovering, and experiencing the Southwest with my family.

During all my expeditions, I have been thinking a lot about my next moves with regards to  my commercial real estate investing and my businesses.  The one thing I believe, with all the chaos in our economy, is that this is the most opportunistic time (for strong investors) will see in a long time.

I received an email from my commercial mortgage broker, Terry Painter, that encapsulates the opportunities that exist today for the “strong Investor.”

“Hi Rob,  It appears to me that commercial prices are starting to come down a bit, but usually after negotiating.  This is your standard MO so I think you should do well in this economic environment.  Many investors don’t want to face that their values have gone down and are refinancing.  Many of them no longer qualify to refinance their properties. Often the properties qualify but the borrowers do not due to tighter underwriting guidelines and a drop in personal liquidity and credit.   There is strong opportunity for stronger investors to swoop in right now.  Lets keep in touch my friend,  Terry”

Photo Credit: Sarah Giesecke

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Tags: commercial investing, Commercial Real Estate, Credit, experience, liquidity

During my long drive to the great state of Arizona, I had a lot of time to think.  Specifically, time to think about all that is going on with the real estate market.  Of all that is happening in our economy,  the one thing I know is that the worse things get the more opportunities there will be.  But when will the opportunities show up?  Well….if you have had your ear to the ground ….compared to that last few years…the opportunities have arrived…or have they?  I am  a believer that things have not bottomed out and I think things are going to get much worse.  So…with that in mind, better opportunities are still coming….right?

But ….I am tempted

You see, I am having an emotional dilemma.  What if things have already bottomed out?  Will I miss out on the current opportunities if I do not move now?  If I make a move, what markets should I look at?  All of a sudden, I realize I am asking the same questions I asked myself last year and the year before….and the year before that.

Is there such a thing as “recession proof”?

Now add to my dilemma the theory of a “recession proof” market.  The one thing I am hearing over and over…is that there are real estate markets that are recession proof.  Is there such a thing?  From all my time in business school the one thing I remember is cycles travel.  In other words, all markets will get hit…it is just a matter of time (only the severity of the hit is unknown)….like a ripple effect.  For example, as we watch California’s real estate market fall into the sea….Oklahoma is still going strong.  So strong that the state brags about it.  But if cycles travel…is it just a matter of time?  In theory….yes.

A close friend of mine who is a “self-proclaimed” economist states that the Dallas/Ft. Worth area is recession proof.  I also heard that Oklahoma City is recession proof.  So…as nice opportunities come up in these areas….I am tempted.

What to do?

Develop an Investment Criteria

Late last year, I wrote down an investment philosophy for myself on how I was going to invest for the next few years.  The overall theme of my philosophy was to be a “vulture investor.”  In other words, the plan is to act on opportunities that are “cherry deals.”  The cherry deals had to have the following “aggressive” criteria:

1. Blue collar assets.  Investments that tailored to lower income populations.  Class C apartments, “Thrifty” retail,  mobile home parks, etc.
2. No land…unless I have money to park long term
3. Seller Financing or partial seller financing
4. Purchase at sixty percent of value or less
5. Positive demographics
6. Familiarity with the area
7. Solid property management in the area

Now…there is more to my criteria….and a lot of room for a “case by case” assessment…but every time I am confused or “tempted,” I reveiw my investment philosophy, make adjustments, then make a move.

Needless to say, I have yet to make a move to aquire an asset in the last several months…but not because of the lack of action but because the opportunies have not met my investment criteria.

So….to keep from making emotional mistakes….developing an investment criteria before acquiring an asset can keep you from being a lemming.

Until next time……rob

Photo Credit: DanieVDM

Tags: commercial investing, Commercial Real Estate, investment, real estate, real estate investing

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

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

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