All Forum Posts by: Gabriel Graumann

@Dave Zirkelbach There are several ways to approach this, but to use the adage, start with the end in mind. If the primary intention is to position the property for sale, start by determining what the market is for the type of property and building you have if it was vacant, and also what the going lease rates are for the condition, material type, location, etc.

Once you understand the market value for the building and land, you can move towards structuring a lease that may improve the value of the property at time of sale. As a previous member shared, a short term lease may be preferable if it's a weak tenant or weak financials. The business may be full, but how the clean are the books? They'll need to show 3 years tax returns, historical rents, bank statements, credit, etc. so make sure those are organized and ready to go PRIOR to bringing the property to the market for sale.

Assuming the business is financially strong, compare the lease terms to market standard terms. Is there an escape or termination clause for the tenant that may let them opt out prior to the end of the 15-year term? Are there scheduled rent increases, and if so, are they market average increases? Is there a cap on NNN expenses? Does the property need management, and if so, is it factored into the operating expenses? I know you shared there the only CAM was property taxes. However, the lease should define who pays in the event of a structural issue (roof, walls, foundation) and major maintenance (HVAC replacement, parking lot repairs, landscaping, windows, siding, etc.). Knowing who is actually responsible for these items impacts the value of the lease.

Once all of the above is known, you'll be in a position to compare it to other net lease or similarly advertised investment opportunities to know what the going value is. The CAP rates should be similar enough to attract an investor.

If you aren't able to do all of the above, find a good commercial broker (preferably a CCIM) who has experience preparing a sale like this. Hope this helps.

Investment Info:

Single-family residence fix & flip investment in Everett.

Purchase price: $375,000
Cash invested: $77,500
Sale price: $520,000

First Whole Family House Flip

What made you interested in investing in this type of deal?

My brother and father were looking for a fix & flip opportunity close to where they lived and this house was within 3 miles for each of them.

How did you find this deal and how did you negotiate it?

Property was listed on the MLS. Multiple bid situation with a review date, so I offered an all cash, quick closing, and a bit over asking price if the seller accepted the offer prior to the review date.

How did you finance this deal?

My father, brother and I partnered to pay cash for the acquisition and renovation budget.

How did you add value to the deal?

Full renovation of interiors, plus new roof & paint on exterior.

What was the outcome?

Property came to market at the start of the Washington state "stay home" order due to COVID-19, yet we had numerous tours in person and virtual, ultimately selling at $520,000. Total net profit for the capital invested was 7.5% which was below our target, yet all things considered on the timing of the resale, we were happy with the outcome for my brother's first deal.

Lessons learned? Challenges?

Due to our quick turn-around on the flip, which was under 50 days for a full renovation, the property did not qualify for FHA financing as the property hadn't passed the 90 day market between our recording as the new owner and the time we came back to market. We had interest from buyers at a higher price if we would agree to take it off-market and/or hold the property for them, but we opted to adjust the price and sell it as the uncertainty of the stay home order impacted near term sales.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I acted as the listing broker. Utilized BKCO Title & Escrow work at a flat fee of $800 and provide exceptional service. Conducted a pre-inspection through WIN Home Inspections.

It's easy to buy into the narrative that we are living in uncertain or unique times. While there may be a small element of truth in those statements, the truth is that nothing we are experiencing now and likely are to face over the next 6-18 months or longer are actual uncertain or unique if you look at the history of the modern world. There have been pandemics in the past. There have been massive selloffs on Wall Street and other global markets. There have been oil shortages and oversupply wars that have caused volatility. There have been recessions and bear markets.

Yes, I would agree that the arrival of a flu pandemic on our shores was likely not the method by which the casual observer or even seasoned economists would have guessed as the trigger for our current economic situation. However, regardless of the trigger a down market was well past due and now here we are. The only question that should matter to those focused on investing is "what should I do right now?"

The answer is simple: Control what you can control, ignore the rest of the noise.

Pro tip: turning off the TV, news, and radio will greatly assist in this endeavor!

You can't control what the stock market does. You can't control how other people respond to the circumstances they are facing. You can't control (for the most part at least) what the government chooses to do.

You CAN control your mindset. You CAN control your effort & energy. You CAN control your amount of hustle. You CAN control the words you use & the narrative you choose to believe. You CAN control the conversation with your clients & customers, and co-workers for that matter. You CAN control whether you opt to play the victim of a bad market card, or choose to see this as an opportunity to grow, find deals, and create true value for clients & customers. 

Oh, and you CAN control your spending & lifestyle....though this one is often the most painful for brokers & investors who were used to living far above the bare minimums.

Practical steps to get lean & mean: Cut ALL unnecessary expenses. I'll help you define unnecessary too because this one seems to puzzle many people. Cable TV, streaming services, leased autos, financed autos (sell them and buy something you can actually pay cash for), and any subscription (personal or business) that doesn't increase your financial position. All memberships to health club, country club, golf club, knitting club, yacht club, social clubs, etc. Unless you are receiving ACTIVE deals & lead flow that materialize on a weekly basis from a "for-fee" networking group, drop them.

Get your time back and re-purpose those efforts on connecting with NEW people that have a problem that you can help solve. For a season this may include engaging your audience via social media outlets & webinars, which many people do but few do very well (myself included in the "not well"). Provide content that is actually HELPFUL, not just telling people what you need them to do for you. Find out how to truly help solve other peoples problems. Encourage people on your posts. There will be plenty of people spouting fear and discouragement, complaining and voicing all of their current problems out there. Don't be one of them. People need HOPE more than HYPE.

For you investors out there, there will be plenty of opportunities to make money, find deals, and find people to buy those deals if you don't or can't execute on them yourself. Just as in the recession of 2008/09, the tech bust in late 90's, the oil crisis of the 80's, investors made money in all of those cycles. It may be in new places than you are used to looking or in different segments of the industry, but there will be deals. Stocks have all taken a pounding and who knows how much lower it's going to go. In general, the market is down 30% across the board, which means the entire market went on sale. That's typically the best time to buy. It'll be a crazy, uncomfortable ride if you watch it daily, but if you buy then turn off your computer and burn the statements for a few years I'd be willing to wager nearly everything good company will be higher than it is today.

Housing deals will be aplenty as some people only look at the current situation and make emotional decisions. They'll want to sell at a discount just to get out of a deal and have some cash. Be the buyer, at a discount of course. All previous wisdom on how, where and what to buy still applies, you just get to be more selective on the price you're willing to pay. If you are looking at this purchase in terms of multiple years, you'll be fine. Flips and fixers (which I do several of yearly in Seattle area) may take a hit right now in many market as limits are in place to keep people home, but that doesn't mean nobody will buy or sell a house. As recently as yesterday I helped a buyer close on their property purchase, later toured an investment buyer through a 2-lot home sale for spec build on one lot and fix up the existing into a rental, and today I am hosting an owner-user buyer of a commercial building through the property he's had under contract for 2 weeks and is still moving forward on.

Yes, some deals will die. Some clients will choose to be passive. Some deals that looked good 1 month ago might look very good today. We overcome all of these potential negatives by looking at more deals than yesterday, talking to more people than yesterday, and definitely reassuring more people than yesterday.

Hopefully this helps someone on the fence about whether they are in the right spot as an investor, broker or other real estate professional.

@Gregory Schwartz my encouragement to you and all others that frequent BP, especially those newer to real estate and those who entered after the recession, take the long-term approach. I don't sugar coat answers. Not saying this is you, but if people "jumped" into real estate simply because they were excited about investing or making quick/easy/(fill in you adjective) money, without substantial reserves for MONTHS of regular living expenses, then it's going to be a rough season for those people. Cut all unnecessary expenses (cable, streaming options, eating out/delivery food, nearly all Amazon purchases, etc etc etc. Get your finances lean and mean. Dump any debt possible. Quit leasing cars/trucks or buying them with financing, only the necessities. Brokers should be living on well less than they make in the more affluent areas with average home prices in the $300's and higher. Most brokers in lower priced areas seem to do a better of job of this by nature from my experience. Hunker down, find value for clients, and help them through this upcoming season.

To correct any misconceptions, people ARE buying houses and selling houses, buying and selling commercial properties, buying and selling land deals. Personal and investment deals are out there. Yes, many who didn't plan well over the past decade will miss out on most of the great deals as a result. Those who understood market cycles, regardless of the reason for this current one starting, knew that bull markets don't last forever and are cyclical in nature, so a downturn was only a matter of time. We just arrived at this one much quicker. However, there is money to be made in ALL market cycles and the most money is often made in the downturns.

I don't mean to preach, but after 17 + years in the commercial and investment brokerage, plus asset management, it always bothers me when I see all the posts of people claiming there are no deals, or no one is buying. Real estate is a LONG-TERM play. It's an INVESTMENT, not intended to be speculation. Get educated, get busy on the phones, go make deals happen.

@Jay Hinrichs As several have shared, there is opportunity to be found in every market cycle. And the greatest opportunities tend to come in down markets if you have cash and/or the ability and fortitude to buy at the right price. Stocks are no different. They have taken a beating over the past couple of weeks, going from record highs to dramatic selloffs in a matter of days. Once a vaccination is found and mass produced, and the people get back to work and moving forward with life, certain elements will bounce back quickly. People will keep buying iPhones, buying their Starbucks, ordering items off Amazon, and have a desire to drive the country again. Strong companies will weather this storm and when it passes, confidence will be restored and the up wave of their stock prices will follow. Certainly not all, but many will experience significant increases quickly, while other less essentials may move more sluggishly. If you want to play lower money but be on the cutting edge, buy a handful of biotech stocks that are all working towards a vaccine. Whoever gets that figured out first should see a windfall. Plenty will miss. I don't play the futures game like some have suggested as I don't see the value in rooting for a market to tank or rise without sanity in play. That's just me though.

@Jonathan M Peters you're asking the right questions, and as Cory shared, understanding how your equity (or money in) is performing for you compared to other opportunities may answer your question for you, or at the least, will give you a baseline to measure other opportunities by.

The big disclaimer is you need to get educated on the process and pros/cons of performing a 1031 exchange. In summary, you are taking the net proceeds from one investment sale and rolling them into the next, bigger deal without touching any of those proceeds in the process, which then allows any taxes on gains to be deferred until you sell the new property. In theory, you could continue doing this forever, but that's a separate conversation all together. There are timelines to be aware of to locate, identify, and close on the replacement property in the exchange, so understanding those well in advance of any property sale you hope to exchange is major component.

Now, if you're simple looking for one investors opinion here is mine (and worth the price you paid). I want my investment dollars to work and return as much cash flow as possible while providing long-term equity upside, so to accomplish this I look for commercial value-add deals which provide me the maximum tax incentives, write-offs, depreciation, and least amount of hands-on time/energy/headaches. Granted, I've been actively engaged in the commercial real estate industry for 17 years so I know and understand this space well, so for me it's likely easier than for other investors new to all real estate types.

That said, there is a reason that many of the investors who've been interviewed on BP, written books, and grown a portfolio often scale or "trade up into commercial" over time, so they can achieve the benefits I mentioned above. For instance, if you have 50 residential units, with 50 roofs, 150 toilets, 50 hot water tanks, etc. you have a huge liability at any given moment where nearly all of the repair and maintenance expense is on you. In commercial investment properties, this is almost the exact opposite.

Even if you had 50 separate tenants, the leases are structured in a way (or should be) where each tenant PAYS YOU an estimated amount of your annual repair and maintenance budget, taxes, insurance, property mgmt, landscaping, HVAC, etc. plus are required to pay for nearly all repairs within their own space if they occur. Also, many commercial leases are for a term of 3+ years terms, so the turn over is much lower than residential in most cases, because it's expensive for a tenant to relocate their business. You still get appreciation, you get cash flow, you get heavy tax incentives, but the involvement I've found to be considerably less than residential.

Not sure if this helps or muddies the water, just sharing what I know. Honestly, if I only had $50,000 today to work with, I'd be looking for a fix/flip opportunity to grow the funds more quickly to allow me to get into a larger commercial deal sooner than later. The idea of tying up $50K for the prospect of earning a net 10% return of $5K isn't an attractive way to build and scale a portfolio.

@Jack Hemion Welcome to BP & investing in the Puget Sound region. I intentionally say region to set the expectation that you don't necessarily mean in downtown Seattle investing but more over the entire Seattle metro and close communities that may offer the returns you are looking for within the investment capital requirements you have to work with.

All I can share with confidence is what I have personally done, and what I have successfully accomplished on behalf of clients in our local market. Start with these questions to define your investment requirements, the outcome of which will provide guidance on which investment type to pursue first:

1. How much actual capital do you have to work with (cash not debt)?

2. What are your return requirements? Net 5%, 6%, 10% or 15%+ annually?

3. What level of involvement are you truly open to? One monthly or quarterly update from a mgmt company? Or calls on a long-weekend from a tenant with a leaking toilet?

4. Do you need or expect the initial fund contribution to be returned within a specified amount of time, or are you building equity through debt reduction and appreciation?

Obviously there are plenty of other questions that you could ask yourself, but these are the basics that I ask myself and investors to gauge where we need to be looking. Here's my perspectives on the two types you have already referenced, plus a few others for consideration:

1. Turnkey - if you can find a property you like, where your all in expenses to purchase plus annual costs to hold still provide the annual desired cash flow return scenario you were hoping to achieve without ANY appreciation, then buy it. Again, I'm talking a truly NET cash flow meeting your investment return requirements after 100% of the true costs of ownership (property taxes, insurance, property management fees, maintenance costs, holding costs, debt service, reserves, etc.). What I see far too often, especially with newer investors, are they overlook many of the fees associated with holding a property long-term. Even new construction properties will require repairs and maintenance (though they should be less than older houses). Taxes and insurance often get missed. Wear and tear costs are below true repair costs for someone who'll have to hire it all out. 

2. Syndication / Crowdfunding - I haven't personally engaged in crowdfunding, but syndication I have. In general, you still need to know the answers to the above questions to make sure you are investing in an investment vehicle that aligns with the goals of that investment group. Often there are penalties/fees for pulling out or cashing out earlier than the invest is designed for, so make sure the monies can stay in the vehicle for the life cycle of the investment to maximize the return. Also, make sure you are really okay with the idea of not being the only decision maker, or having zero control at all in the performance of the investment. Pros are you can often get into a bigger deal and potentially larger returns with limited to no management requirement, and in theory at least you are working with a professional group who has successfully produced the returns you are looking for.

3. BRRRR's - If you're following the guidelines of book you'll need to buy a property for a maximum of 70% of the ARV, then put in time, energy, and funds to improve the property, rent it, and finally refi it to see all of the benefits of this method. Nothing wrong with this plan, but my current experience in looking for and analyzing a dozen or more deals weekly for the past 10 years in the Puget Sound region, the numbers are making less and less sense to justify the process or risk. In fact, I was running the numbers for a SFR fixer property I have under contract in a north Everett community this past week and it was the first property in over a year that actually provide positive cash flow (and only $150/month) using the actual BRRRR method. Even then, when I looked at it side by side with a fix/flip or wholesaling strategy, the fix/flip or wholesaling provided the best ROI on an annual basis on a 3-5 year perspective, which is what aligned with my investment goals. I ended up assigning the deal accordingly so I could reinvest those funds in a larger commercial deal I'm working on.

So my summary of my long post is simply this. Understand what you need/desire your investment funds to do for you, and act accordingly. Then find a mentor who is actively invested and involved in that type of investment vehicle and start pursuing those deals. Hope this helps and good luck!

@Jonathan M Peters I'd be happy to connect with you. I've managed, owned, and invested in cash flow, fix & flip, commercial, and other value-add RE to hit my investment goals in the King to Skagit County corridor. For me it comes down to what investment types I'm most comfortable with, the capital I have to invest with, and what percentage return I would need to realize the $10K+ in monthly income. And would be helpful to confirm if you mean NET $10K monthly, not simply gross $10K monthly.

@Alik Levin Greetings from another local BP member, broker and investor. When I started in commercial property management 17 years ago straight out of college, I failed to realize that I needed my RE license to collect PM fees. I skirted it for a for years because the RE I was managing was partially owned via a family portfolio of properties, but as those sold off and I started bringing in outside properties for management (and leasing activities) I had to get my license. Here's the requirements and options in Washington state as of today:

1. Yes, you have to get your real estate license and "hang" that license with someone that has a managing brokers license. Every independent or branded brokerage in the state has at least one "managing broker" on record, the requirements for it are:

• * be at least 18 years old,
• * have a high school diploma or the equivalent,
• * have at least three years of experience within the last five years as a full-time real estate licensee,
• * have successfully completed 90 clock hours of approved real estate courses within the last three years, including:
  • a 30-hour advanced real estate law course,
  • a 30-hour brokerage management course,
  • a 30-hour business management course, and
• pass the state managing broker's license exam.

In the states eyes, the managing broker provides oversight on each contract you touch to ensure you are following your obligations as a licensed member.

2. Yes, you'll have RE fees to pay annually. The total baseline fees are actually pretty low, just a couple hundred bucks yearly. However, each brokerage has their own fees based on their model, so you'd need to ask what those are for each office you interview. Fees for "splits" on commissions earned, B&O, L&I, E&O insurance, general liability insurance, desk fees, association requirements (like Realtors), etc. can all add up and greatly vary office to office.

3. Make sure the office you go to is open to, and set up for, the liability of a property management company working under its umbrella. Seems obvious but most offices are not set up to cover issues that arise out of a rental or property management company. Different insurance is needed for a RE brokerage and a property management company. This is why many branded company's do not allow their brokers to engage in property management activities.

What I did to address all of the above was this. 1. I found a small boutique RE brokerage of just 2 guys in the commercial side that were really just focused on their own clients and book of business that weren't looking to grow a RE brokerage, and I hung my license with them. 2. To keep my and their costs down we drafted an operating agreement between us that stated any additional costs or liabilities that his brokerage incurred as a result of me being there would be directly paid by myself. If I executed leases or a future buy/sale I would pay a 90/10 split (meaning I paid 10% to the brokerage) as a cost of doing business to cover the time, paperwork, and oversight it may require by the managing broker. Otherwise I was on my own. Now, I had 3-4 years of commercial management experience, rented my own office, and ran all of my own accounts and expenses through my own LLC so my impact on this brokers overhead was practically nothing so our deal made sense to everyone. If you're looking for office space, need more frequent oversight, administrative support and/or want to partake in the systems of a larger or better organized business, you should look to pay a bit more. As soon as I had the 3 years of licensed experience requirement I opened my own boutique brokerage and hung my license within it. Then after 12 years being an independent I moved to KW Commercial as a licensed broker, but I still own a commercial property management entity that is licensed through a separate office to keep it all organized and properly structured.

Hope all of this is helpful, happy to stay connected in the future.