Graduating to Bigger Real Estate Investments – The World of Commercial InvestingPosted by: theinvestortoday / Category: Articles
Sorry everyone, I’ve been busier than normal these days. As I’ve often said, I’m a real estate investor, not a guru. Yes that means I’ve been busy actually neck deep in investments and haven’t been able to update the site as much as I should.
I’ve always kind of thought that when you hit the mark of being able to buy multiple homes at once or large apartment and/or commercial buildings with multiple units that you’ve finally “made it” in real estate investing. To some degree, that is true.
Firstly, here are some of the reasons why you want to eventually reach that point.
- More money (obviously)
- Commercial/Multi-Residential investors are more sophisticated. Since they aren’t emotionally attached to their investment properties, you can get right to talking about money and numbers.
- It’s quite common for them to hold financing. In fact, they might say no the occasional time but they will rarely look at you like “whatchu talkin’ ‘bout Willis?”
However, in order to reach that point of being a bigger investor, there are some things you’re going to need to do to reach that point.
- Firstly, when dealing with larger investors, it has been my experience, that there is a higher level of sophistication and know-how required. For example, you can’t get by with just “we buy houses” signs because your phone just won’t ring.
- Secondly, they know all about real estate. You can’t fake like you know something. You have to already know your contracts in and out or it will show.
- Realtors matter more because so much goes through them in that arena and there are so few investments by comparison. You don’t necessarily have to get a deal with a real estate agent but you certainly don’t want to earn a bad reputation with any because you screwed up a deal because the other owners will find out.
The good news is that a lot of the same techniques work. For example, with a few tweaks in the language, you can easily change a regular lease option contract into a master lease-option that has domain over the entire apartment building. You can short sale any property that is in distress, including a large multi-residential property or a commercial property.
Our personal preference is to deal with apartment buildings of 40 units are greater. The specific reason for the 40 units or greater is that for whatever reason, the utility costs seem to be very similar regardless of a building’s size but averaged out per unit, it is much higher in a small building. Obviously, the more real estate cash flow the better and bigger units generally provide that. Unfortunately, I don’t have time to do a full complete in depth study on how to buy discounted apartment buildings but I’d like to discuss a basic outline for how I buy a discounted apartment building and sell it for large profits.
1. Get a database first of every single apartment owner in your geographic area. There are a few companies that sell lists, you can also spend a day or two at the county courthouse and pull titles or in some places you may need to visit your city hall. I once spent 3 days pulling titles for a large database so take some time and get a complete list.
2. The second step is to locate a motivated apartment seller. Unfortunately, they aren’t going to call from your residential marketing materials. What has worked for me is to send them a one page letter that is personally addressed to them which lets them know you are an investor who is looking to purchase an apartment building in the area. Microsoft mail merge has a feature where you can input a field like the person’s name and address and each time it will print it with the apartment building owner’s address. Because there is going to be a certain level of sophistication required, you’ll need a website and promo materials at the very least that look professionally done and you’ll want some of that info listed at the bottom of your letter. I have gotten these made on odesk and/or freelancer for less than $50. If you have earned your weight in residential property, this is just a drop in the bucket. The seller will probably check into your information before they even call you so it has to make you look “legit”.
3. Set up an appointment with your investors and gauge their level of motivation. Obviously the more motivated the better. The same questions of “why are you selling it” and “what are you going to do if it doesn’t sell” work here. Once the owner reveals their level of motivation, there is still due diligence required. I recommend asking them to see it so that you can make an evaluation before you can come up with any sort of offer. They always agree.
4. Analyze the property in full detail. You don’t want to end up with a lemon that will be as much trouble as it was for the last owner. Money isn’t worth stressing yourself out over. Take notes of everything you find in the apartment broken down by area. For instance, I first take notes of the common areas, then individual apartments that I view, then lastly the mechanical areas. I also speak to the tenants to gauge their interest. I then do a formal analysis of the market and the local area the building is in. This is important for two reasons, one so you are properly protected and two because the negatives will help justify a better negotiation with the seller. They rarely have rebuttals for someone who is as well prepared as you’re going to be.
5. Make a complete list of all the problems firstly with the building and then with the area on the left half of a page in point form. On the right half, put the potential solutions. Every problem can be solved by I look firstly for the “low hanging fruit”. For instance, one building I was just looking at this week, the management team was Macedonian and didn’t speak English. However, there were no Macedonians in the area so their closing rate on showing apartments was just atrocious. That’s what I call the low hanging fruit. Simply by having someone who speaks English, we can rent the place out to quality tenants. Look for things that are easy fixes like management issues, one problem tenant, don’t answer their phones, poor marketing, etc. and be more careful of bigger issues like extensive rehab, serious crime and/or drug dealing, major mechanical problems, etc. While you can still fix the latter problems, be advised that it’s not necessarily advised, especially when you’re first starting out.
6. This is just a guideline but I try and weed out the remaining buildings that are cash flow negative and near full occupancy. They generally don’t make for good investments. Firstly, I don’t want to have to put my money into the building so if it at least sustains itself, I can at worst break even while I implement my fixes. Apartment buildings and commercial buildings have their value largely tied to their ability to produce income. This is different than a residence which is worth the same rented or not rented. Obviously, you need a detailed look at the building’s financial statements which 90% of owners will provide for you and if they cannot, then it is a management issue at the building and you still might want to verify it in your own way and then consider that investment. Secondly, our goal is to increase the value and therefore, increase our equity and take home. We cannot accomplish this if the building is full and making money since it just won’t have much more to go. If the building is half empty, and you’re getting a price where it makes just a little bit of money, you’re laughing. You will have to pass on a lot of buildings in each step but the end result should be at least one building that has a motivated owner who wants to sell to you privately, who has a half empty building with minor problems, and that building should ultimately at least break even. It’s hard to get around having no “rehab” but you can always use the little bit of cash flow to fix one unit at a time, then rent it and when you make that back, do it to another one. It adds up over time.
7. If it passes all your checks and you believe that you can fix the problems, prepare a list of the solutions to come up with a real plan. You need to have a rough idea of the complete timeline so you can structure your offer accordingly. Some of the best buildings I have found are simply because the owner has an unreadable “for rent” sign from the hardware store that you can’t read the number from 10 feet away. That to me equals jackpot. Often, simply putting this property on craigslist, backpage, kijiji, and/or ebay classifieds, I can have a building that’s been half empty for 10 years fully rented in less than 30 days. It gets even faster if you provide incentives (one month free, free internet, or something that most apartments don’t include) for tenants who pass credit checks. Obviously rehab needs and/or crime issues might need longer periods to address. It will depend on your area but giving a free apartment to a police officer will make your crime problem disappear in a week.
8. In each progressive step, you’re going to lose some properties for various reasons. Perhaps they weren’t motivated, or their building was too full, or maybe the rehab was just too extensive. However, if you take the time and complete this process, you’ll end up with some quality investments to pick from the litter. For each property that passes your criteria, make two offers. The idea is that if you give the owner an “either or” proposition, they are less likely to say no. You’d be surprised but you can get away with offering no money! In fact, that’s my only criteria. I often will offer the owner a 2 year master lease option agreement for a set assignable option of the current value or a regular assignable purchase contract with an insanely long close of like 1.5 years. Some will say no but some will also say yes. The way you pitch them on not giving “cash consideration” is that you offer to do the rehab work and fill the building up and can assign a value to that. I even print a receipt for them so they see it as a tangible value asset. If your marketing material makes it look like a very expensive service you provide then it appears as if you’ve given valuable consideration to that owner. In a way you have because if you don’t close, he or she will still end up with a more valuable building that’s in better shape as a result of our arrangement not to mention they’ll have increased cash flow.
While I don’t generally dabble in commercial investments (large apartment for me thanks) although I do a little, the basic outline is the same. The key that makes all this work as always is your marketing. You have to do the extra work ahead of time to make your prospect want to do business with you before you even walk in the door. If they are impressed with your marketing material, in a way, they’ll already assume you’re competent. If they assume you’re competent, then making an offer of “I’ll give you nothing and you give me the keys to your building to make it run properly” sounds like a great idea. If you don’t sound competent, well let’s just say you won’t be doing any deals. In a nutshell, that’s how you get involved with bigger and better real estate investments. Thanks for reading.