Getting started with Commercial Real Estate Investing, or an experienced investor? This is a weekly podcast on the steps that I take to make my Commercial Real Estate investments (Retail, Office, Self Storage), including successes and lessons learned. We also cover advanced techniques for purchasing, operating, and exiting your properties, from the best people in the industry. You will learn everything you need to know about real estate investing. We are based in San Francisco / Silicon Valley and also cover how technology affects Commercial Real Estate, and how you can stay ahead of the game.
In this episode we learn about mobile home parks: why are they a good asset class to invest in, how do you go about analyzing a mobile home park, how do you get rent comps when there are no parks near you, and how to find these deals? We are interviewing Todd Sulzinger, founder of Blue Elm Investments.
You can read this interview here: https://montecarlorei.com/how-to-invest-in-mobile-home-parks/
Why mobile home parks?
I had always been intrigued by mobile homes, for one the returns are better than most other real estate assets. They’re very recession resistant. There’s definitely concerns now with what’s going to be happening in the economy in the future. And the mobile home park business is very resistant through any kind of recession movements in the economy. If you own your own mobile home, then you can often rent the pads themselves. In the markets that I look in, you get between one hundred and fifty and three hundred fifty dollars a month. If you don’t own your own home, but you’re renting a mobile home from a park owner like myself, you might be able to rent it for between $450 to $750-800 dollars. If somebody is looking for a place to live, that’s potentially less than an apartment or a single family home, then mobile home parks are one of the best choices they have.
How do you go about finding deals in a market that is shrinking like the mobile home park market?
My primary source has been through brokers. There are a few brokers out there that specialize in the mobile home park space, as well as other commercial brokers who periodically get listings for parks. I recently closed on a park in Georgia, and I found that one through a broker who specializes in mobile home parks. The mobile home park consultants that I work with have quite a bit of deal flow that crosses their desk. So I see a fair amount through them as well that have the potential to purchase. And recently I’ve also started to see more activity on the partnering front where I’ve seen quite a few other people putting deals together who are looking for people to partner with. They may have a park under contract and they’re looking for people to partner with to put deals together, and sometimes things come across my desk from that angle as well.
How do you analyze a mobile home park?
It’s a multi-step process. When I’m looking at potential acquisitions and bringing them through my funnel, I’ve a simple spreadsheet that I have created where when something looks like it might work. I plug it into the spreadsheet and take a look at the numbers to get a quick sense of whether it’s even worth pursuing further. If it looks like it is, I have a more detailed model that I put numbers into. You look at the amount of income that it’s generating. You then look at the last 12 months of income statement. What is the history of vacancies? What have the operating expenses been? Go through the due diligence process of visiting the park and seeing if there are any other infrastructure issues that might need to be taken care of. From there you take a look at the net operating income and the purchase price to see if this is something that will make sense for your investors. Can there be enough safety, in return and potential upside, that it’ll be attractive for me to bring to my investor group?
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Today we cover self storage lending, how long should you stabilize a property before refinancing, and the best kept secret is out: who is the best commercial lender in the world? We are interviewing Billy Brown, the Vice President of Business Development for Alternative Capital Solutions.
You can read this full interview here: https://montecarlorei.com/loans-the-good-the-bad-and-the-ugly-self-storage-and-what-is-the-absolute-best-commercial-lender-part-2/
Self Storage Loans
Did you know that SBA will lend on self storage? SBA has a lot of options for self storage if it's the right size. Even for ground up investments.
What would be a typical loan size?
Probably over a million. If you're going to do anything ground up on the self-storage, it's going to be over a million because the price of steel right now and the price of land. But you can get up to four years interest only. This is one where you come in and do some fun stuff where you go build it, lease it up, let it season a few years. Then once you have a couple of years tax returns, the property becomes more valuable because the NOI goes up and then you can do a cash out refinance.
For how long should we stabilize the property until we do the refinance?
I would start on the front end because sometimes I can even help you give me some tips on negotiating the financing because I love seller financing. The triplex we bought, as well as the office complex that we're buying is under land contract, also called seller financing. You can do some fun stuff with the seller financing. There are many strategies when you have seller financing, for the triplex that we bought, I negotiated a low interest rate of 4% and I negotiated 90 days before my first payment. And you'll justify by saying "I want to give you your price, but my term, and my terms are this: lower interest rate, 90 days before my first payment because I have to stabilize the property. I've to get tenants in there, I've to put a lot of money into this I don't have more money into it for somebody to back out. And I want a longer loan with a couple extensions built in. And they did it for me. You can also negotiate a limited recourse or non recourse.
How long was the loan for?
It really just depends on the terms that you’re negotiating. If you get decent terms, why would you want refinance? Most sellers want an in and out in six to twelve months. As a lender, we want to see 12 months of financials from the owner. The story also helps, and we can help with that as well.
Many sellers, especially the mom and pop deals on self-storage, or multifamily, or smaller multifamily don’t have very good financials. They mix their personal expenses in with the deal, therefore, they can’t get the prices they want. So you can come in and say “I’ll give you your price, but under my terms”. But because you don’t have proper bookkeeping, I need at least a year, 18 months, two years, to go run the property professionally so I can go get a proper loan. I usually start at two years and negotiate down to one if needed. Typically you can get a decent lending after one year.
Who is the absolute best commercial lender in the market?
The seller. Why would a commercial lender like myself, and an investor, want to tell you “Go get seller financing”? Here’s a little secret: commercial lenders are much better at refinances than they are at purchases.
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Today we are learning what are the pros and cons of each asset class and their loans. In this post we are covering office, retail, and warehouses. You will also learn some strategies for selling your property, as well as how long you should account for getting a commercial loan. We are interviewing Billy Brown, the Vice President of Business Development for Alternative Capital Solutions.
You can read this interview here: https://montecarlorei.com/commercial-lending-the-good-the-bad-and-the-ugly-office-retail-warehouse-part-1/
Let's go over three or four different types of loan options and the pros and cons of each one of them, it's important to know what the cons are so that all the investors can decide what is best for them and their business plan when they're purchasing a property.
The first one is if you have a bunch of rentals, four, five, six of them, they've Fannie Mae, Freddie Mac lending on them and they're getting a little frustrated with how more difficult is becoming to go get that sixth or seventh one. And they're about to be what we call "Fannie and Freddie out". They may see that the cash flows are good. There's some equity in there that's lazy, and they want to access that. And there's a way to go do that. It's called cross-collateralization. What we then do is we take that into one loan and we can go up to 75% of the appraised value. And if it's big enough, then we can do what's called "non recourse lending". If it's not big enough, then we can go recourse lending.
How many years are there for prepayment penalties, are they for the entirety of the loan?
No, it's not like multifamily, the prepayments are usually limited to the first three or five years. Usually the first two are pretty heavy in the 5% range, and then it drops down significantly after that. So by year three or four, you're down to 1 or 2%.
Office and Retail Loans
This one is one of those asset classes that's under the radar and most people shy away from it, because the lending isn't as great as the multi-family world. And that's because the tenant determines what type of lending you can do, as well as the size of the loan. And the size of the loan matters, a $500,000 loan is actually harder to go get than a $5M loan. That's a little flip on the the idea of starting small and moving up. It's actually easier to get the bigger stuff. On the office, your tenants and the length of the lease will determine what type of loan you can get.
Warehouses are the next best tenant because they typically stick around once they put in their $100,000-$200,000 equipment and they bolt it to the floor. Most of time they don't leave. They'll sign leases and they just keep on staying there because these guys like to work their hands, they're typically not business people so much and they just don't want to move. It's a pain in the rear to go get these things off the ground, bolted, and go find another place, especially warehouses. You can bundle the office, warehouse and retail, in general, in the same bucket as far as your lending options. Because it's all determined by the strength of the tenant. For newer investors, they're going to be a lot more conservative, and have a lower loan to value, versus the NNN larger corporate tenants. If you get a good deal, it's all on the buy. The lending becomes much easier.
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As we continue our conversation around commercial financing, will learn: how you can get a commercial loan as a first time buyer and operator, what is debt service coverage ratio, what counts as assets when you are getting a loan, what are deal killers when getting a commercial loan, and what are some things that you should keep in mind about your loans in case our economy takes a turn. We are interviewing Blake Janover, the founder and CEO of Janover Ventures, a commercial real estate and multifamily capital markets advisor focused on providing senior debt for commercial real estate.
You can read this interview here: https://montecarlorei.com/commercial-loans-debt-service-ratio/
Can first time buyers and operators get a loan? Do they need to have a job, does the credit score matter as much as residential, what's the minimum down payment?
The answer is yes. It's considered a credit factor, a risk factor, when an underwriter that analyzes credit looks at a deal and says "This is your first piece of commercial real estate" this is higher risk, but there are ways to mitigate it. One way to mitigate the risk is to add a partner that's highly experienced, I think it's great advice. It's not just great advice because it's what the lender wants, but generally speaking there's a reason the lender wants it, and it's imprudent to enter into a new industry without experience and not think that there are a lot of things that could go wrong that you don't know about and that's what having an experienced partner is about.
In some cases you can offset experience with having an experienced third party property manager that has a demonstrated track record of managing similar properties in a similar sub market, and lenders will look at other things in order to offset certain risks such as a larger down payment, for example.
What is debt service coverage ratio?
From a net worth and liquidity perspective, lenders generally want to see that you have a net worth greater than the loan amount. That's all your assets minus all your liabilities. So if you're borrowing a million dollars, they want to see that you have a better than a million dollar cumulative net worth among all the guarantors or carve guarantors. And this isn't a hard and fast number. Liquidity is generally 10% but I'll talk about a deal a little later where we went way below that. So these are not hard metrics. Debt service coverage ratio is a hard metric. A good example is if your monthly debt payments to your lender are $10,000 a month, your lender will want to see that you have net operating income no less than $12,000 a month. That 12,000 representing 1.2 multiple of the 10,000 debt payments.
What are some typical deal killers for loan applications?
One of our biggest deal killers prior to an application is unrealistic expectations. We get inquiries that are not based in reality: "I'm buying a property for $5 million, I want to borrow $6 million". Okay, me too, let me know when you find that loan. Sometimes folks are looking for equity and we're really focused on senior debt. A big pre-application and post application deal killer is nondisclosure, principals that are not telling us all of their dirty little secrets and then it comes out later and it hurts everybody. I'm a big believer in just tell us everything upfront and we will either figure out a way to make it work or put a bullet in it early, but everything comes out in the wash. Other deal killers are net worth, liquidity, experience.
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Today we are continuing our conversation around commercial financing, we will learn how you can get a commercial real estate loan, ways to partner up with seasoned operators, how to find lenders that can make creative financing available to you, and a few other valuable things. We are interviewing John Pascal, Managing Director of Paramount Capital Advisors (PCA).
You can read this interview here: https://montecarlorei.com/8-things-you-should-know-about-real-estate-financing/
Let's start with the basics: is a job needed for first time investors, does the credit score matter, what is the minimum down payment for that type of investor?
From a lender standpoint it’s very important that the borrower has experience executing the business plan that they’re proposing. It’s a little bit difficult to get financing for first time investors or developers. Generally, who I deal with are more experienced real estate groups because it’s just very difficult to finance the deal otherwise. But I would encourage anybody who is looking at getting into the business to maybe partner with, or work with a group that has done it once what they’re proposing to do. And it’s also important that the borrower has a good balance sheet. Typically a lender would like to see net worth equal to or above the loan amount, and liquidity, meaning cash or marketable securities equal to at least 10% of the loan amount.
What are typical deal killers when trying to get a loan?
The lack of financial capability, i.e. net worth and liquidity. The parameters for that are more stringent with a traditional bank than they are with a private equity lender. The other hurdle is the experience of the borrower. The more experience, the easier it’ll be to find financing because the lender will have comfort that the borrower can execute on their business plan. The strategy itself is also important. If a borrower says “I can sell this property in a 4% cap rate and that’s my way of paying the loan back”. It has to be realistic, and proven in the market. Are 4% cap rates prevalent in the market, and can that be proven out to the lender? Those three things are really critical for getting the loan approved.
I heard that you are very creative on getting financing, I would love to hear some examples of your creativity.
It all boils down to having a good understanding of the capital markets, and which capital sources are doing what. I spend a lot of my time understanding what different lenders with different equity sources are interested in doing. One example was that there was a developer of a hotel in the Atlanta area whose lenders were looking to foreclose on the asset, and the property was in a good location. It just was at the time completed and about a year or so prior to me getting involved, and it was just ramping up, basically it was under water. The vultures were circling, and the borrower came to me to try to figure out a solution. It was a situation where a traditional lender probably wouldn’t have looked at this deal because the deal was underwater, but I brought in a private equity firm to recognize that there was going to be some value in the deal. There were probably 15 or 16 lenders on the deal, and we negotiated with each of the lenders to take them out. It was like herding cats. The bottom line was that I found a private equity firm who would do the deal. They certainly charged a lot of money to do it, but today the property is doing great.
Today we're discussing commercial loans: how are they different from residential loans, how to find the best lenders, how to apply to these loans and present them to the lender, and what are some of the terms that we get to choose on these loans.
Read the full interview here: https://montecarlorei.com/how-to-apply-for-a-commercial-loan-how-to-find-the-best-lenders/
How should a new investor present a deal to a lender in order to get approved?
Run your credit report up front, accumulate the last three years of your tax returns, put together a personal financial statement, and basically be candid with the lender. If you have anything that you think is going to look badly, like a past bankruptcy or past foreclosure, just explain it upfront.
What are some different loan terms that we as investors would be able to choose from and decide on for commercial properties?
Basically you can choose how much leverage you want. It depends on what the lender's going to offer, but you can get leverage anywhere from 60 to 75 or 80%, we even do 85% of some stuff. Where you have the most flexibility, as a borrower, it's the prepayment. The longer you do your prepayment out, typically the lower your rate is going to be. So whether you do a three year, five year, or ten year prepay, that's really where you have the most flexibility when you're speaking to the lender.
Can these loans be transferred to a new buyer if we decide to sell the property before that three, five or 10 year prepay?
With most lenders, yes. with some lenders no. In today's market, most lenders would transfer, and there's usually a small transfer fee.
How do you recommend people going about finding really good lenders? I see a lot of people posting hard money loans and they really sound like a scam because their rates are so low. How can people make sure that they are really dealing with a legit lender and also a very good one?
There's a lot of scammers in this business, so I'm just being very careful. I would say to talk to other investors, see are they used for lenders and or bonkers and I would really do it that way. I wouldn't just, you, you know, if you're a new investor, just going in on your own, talk to other investors and network, you know, go to the networking groups. It pays to network with other investors. You know, I mean this is an information business or whatever one's one.
A lot of people say that you need to find a local lender where the property is based out of. Is that true?
No, that’s false, I don’t buy that for a minute. For example, the deal that I shared with you previously that I did in Ohio, it was a retail deal in Cleveland and we got great deal for them, 4.35%, 10 year term. 75% loan to value, with a California lender 2000 miles away. I think there might be a few times where a local lender makes sense, but off of the top of my head, I can’t think of a circumstance.
Were you there back in 2008 doing loans? Do you want to share a little bit about what was going on and how we should be prepared for a potential recession coming up?
Yes, I was. What was going on? Not a great deal. Nothing really. I was actually working at Marcus and Millichap back then and not much was trading. How do you prepare for that? That’s a good point. A lot of people believe, particularly in some of the biggest cities, particularly in multifamily, they think it’s a little frothy right now. The cap rates are sub five. I think looking at tertiary markets, secondary markets, and value add is kind of a protection for that.
One of the most asked for podcasts has been on the financing side of real estate investing: do we need to be employed in order to get a commercial real estate loan? Does our credit score matter? How long are these loans for? Are the interest rates the same as residential loan rates? What does the downpayment look like? What are the risks, loan options, etc? We will have a series of interviews coming up with commercial lenders to discuss the financing side of things in order to clarify some of these questions for you. Before that, I thought it would be appropriate to discuss personal finances first, in order to make sure we are all starting this journey together on the right foot.
You can read this podcast and get all the links we discussed here: https://montecarlorei.com/8-tips-to-improve-your-personal-finances/
Top 8 Tips for Improving Your Personal Finances
If you have credit card debt, and you have an interest rate that is anything higher than 0%, fear not, you are not alone as we just found out! Call your credit card company and ask for a 0% interest rate. They will likely say no, and then you just open a credit card with Citi Double Cash, and transfer this debt to that new card, you will get 0% interest for 1.5 yrs, that will give you enough time to pay off your existing debt without it growing every month.
On that same note, if you have, let’s say $5,000 in credit card debt, and you are paying 20% interest in that debt, and you have $10,000 in your savings account, you should pay off that debt with your savings, so your credit card balance stops increasing by $1,000 per year. After you pay off your credit card debt, another benefit of this “Citi Double Cash” card is that you get 2% cash back on all of your purchases.
If you have a student loan, make sure you are getting the lowest interest rate as possible. If you have multiple loans, make sure to consolidate all of them into one very low interest rate loan: https://studentloanhero.com/featured/5-banks-to-refinance-your-student-loans/
If you have a checking account that is paying you 1 penny per month, you can open an account with Wealthfront, they are a company that is paying the highest rat that I could find, 2.32% today and they offer up to $1M in FDIC insurance (unlike the other banks that offer a maximum of 250k FDIC insurance). I know someone that works there and they told me that they’re able to give $1M FDIC insurance because they break the balance down with different institutions, for example, they’ll put $250k with Bank of America, $250k with Wells Fargo, etc.
Watch out your expenses! If you buy Starbucks everyday, you might want to buy a coffee machine and do it at home, I never understood why people pay $3-5 for coffee every day when they can make coffee at home. It was only after I had a really good job after my 30’s, that I started buying myself lattes, and on the weekends only!
You can get in touch with me here: https://montecarlorei.com/contact-us/
Today we are reviewing where is retail going, how should a retail investor think and approach their investments in today's world, what are tenants looking for in a retail center, and what are major items that national tenants and landlords want to see in their lease.
Read the full interview here: https://montecarlorei.com/where-is-retail-going-lease-negotiation-national-tenants/
Where do you think retail is going based on your experience?
I'm sure a lot of folks that have come on your podcast talked about the retail evolution, the apocalypse, and that retail is dying. And when you look at the history of retail, it has always evolved based on consumer demands and convenience. From a macro view, we are seeing a slowing in the development pipeline, slightly higher cap rates compared to other sectors, and I'd argue we're a little overbuilt in the United States when it comes to retail. However, there is a tremendous amount of product that is obsolete, a lot of C lass C malls and Class C shopping centers across the US need to be repurposed and rezoned. We're starting to see this happening now, I go back to this idea that Sears completely disrupted retail back when they came out with their catalog, and then, the next flavor of the month was "It's more convenient to go to the mall." And then in the 90's power centers just ballooned, you had these huge giant anchors, and they were fulfillment stores. Now you have online shopping, and we're seeing all of these things shift out.
How should a retail investor think and approach their investments in today's world?
I think that regardless of the asset, you have to take a longterm vision on real estate based on strong fundamentals. We can't control what the Fed is going to do tomorrow, we can't control what cap rates are, and where they're going to trend, so I don't want to spend a lot of time worrying about those things. Commercial real estate is so cyclical, and it's always in either one of four phases. At the end of the day you want to find well located assets with really strong demographics, one, three and five mile radius, understand how many households, what's the average household income, what's the population, how's it growing, how's the job market? Just going back to the basics. And then we want to look for attractive opportunities. When you're in a rising cap rate market, you have to find ways to grow your NOI. The only way to do that is to really dig into the market dynamics and understand where the value is. There’s an art to underwriting shopping centers, it’s not the broker's job because they will say that you can just lease up this vacancy in three to six months, and this is the market rate they’re going to pay. There are so many more nuances to getting leases done, you have to find ways to lease and attract the right tenants.
As you work with a lot of tenants, what are they looking for in a retail center nowadays?
It has always been about market share, finding sales, and finding the desirable tenant mix. Retailers are getting so sophisticated when it comes to understanding what the market analytics, trends, and where they need to be in the marketplace. Demographics play a huge role in this: understanding traffic counts, traffic patterns, visibility, the amount of parking that they will need, and they want to partner with well-respected landlords that are going to take care of the asset.
Blog post: http://www.concordiarealty.com/resources/crc020-online-sales-vs-brick-and-mortar-retail/
Today we are covering what is the difference between Cash on Cash and IRR, what are REIT's, and what are the pros and cons from an investor's perspective.
Read this interview here: http://montecarlorei.com/episode-23-what-is-cash-on-cash-irr-and-reits/
We're interviewing Jason Ricks, a professional real estate investor focusing on acquisitions, leasing, construction, and development. He has a background in retail leasing and asset management working on premier properties worth hundreds of millions across the country. He also oversaw a 2.2 million square foot value add retail portfolio throughout Texas and Oklahoma, and most recently he was featured in the number one Amazon best selling book Desire, Discipline and Determination.
What is the difference between cash on cash and IRR?
These are both really common metrics that a lot of investors use when evaluating real estate. One of the beauties of commercial real estate, or income producing real estate, is the cashflow. Cash on cash is a snapshot of the percentage return of your cash invested. Imagine that you invested $100,000 into a shopping center. In year one you got a cash flow check of $10,000, so what type of return is that on your investment? That's going to be a 10% cash on cash return and this is usually quoted on a before tax basis. What that does is that it gives you a nice snapshot of the initial return that you're going to get on your investment, which a lot of investors are curious about, especially when you evaluate this against, for example, a stock dividend or a coupon. That's one of the exciting things about commercial real estate - that cash on cash income producing, and cash on cash gives you a nice snapshot of the IRR.
Internal rate of return gives you the full picture, the comprehensive picture. And the way that's done is if you own, let's say a shopping center over a period of five years, you're going to have very different cash flows. And whenever you decide to sell the building, you're going to have a big chunk of sales proceeds. How do you evaluate a return on your investment over a five year period, taking into account the time value of money? That's what the IRR does. It gives you a nice picture of your yield. A lot of times investors will look at IRR before making an investment, and it's primarily a proforma. So it will say, here's my crystal ball and here's where I think cash flows are going to be, here's where I think we're going to end up going on an exit cap, and this is going to be the sales proceeds. And what's nice about it is that it gives you an opportunity to evaluate it against other investment vehicles.
What are REIT's and what are the pros and cons of investing in a REIT from an investor's perspective?
REIT's came about in the 60's and at that point only accredited investors were really engaged in commercial real estate, REIT's then allowed non-accredited investors to invest in commercial real estate. This can be done in either debt or equity REIT's, and these can either be private or public. To qualify for a REIT there are a lot of requirements, and a ton of reporting. 90% of its taxable income has to be in the form of shareholder dividends, and you have to invest 75% of your assets in real estate cash or US Treasuries. As an individual investor that's unaccredited, what's fantastic about REIT's is that gives you broad based diversification and exposure to commercial real estate, plus just like any other publicly traded stock, it's liquid, meaning that you can get in and get out very quickly.
Unfortunately, REIT’s don’t offer much in the form of capital appreciation. They’re very dividend heavy focused. And those dividend checks that you do get from REIT’s are going to be taxed as regular income.
In this episode we will learn what are some of the top 5 mistakes to avoid when investing in CRE.
You can read this episode here: http://montecarlorei.com/episode-22-top-5-mistakes-to-avoid-when-investing-in-commercial-real-estate/
1. Looking at Pro Forma Numbers
One of the things that you will start to see as you're searching for properties is that there are two sources of income in the financial statement. Number one is the actual revenue / actual net operating income of the property. Number two is the pro forma income / pro forma net operating income. And these numbers are different because one is the current number and existing financials and the other one is an imaginary number. It's an imaginary number based on what the real estate agent thinks the property could make after you buy it. Commercial real estate brokers don't have the same obligations around disclosures or telling the truth as residential real estate agents do, you have to be careful and take everything that they give you with a grain of salt on the pro forma numbers.
2. Always take a look at who your tenants are
Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy or what if something happens to the local market and these tenants all decided to leave at the same time? Not only are you looking at the tenant mix and when their leases expire, you are also looking at how much these leases are currently at, are the leases above market price? Are the leases currently below market price?Is this the right mix of tenants? If it's a retail building - when are their leases expiring? If the majority of the tenants have lease expiration dates coming up all around the same time in the next three years, that's not a good sign. Why? Because what if something happens to the economy and these tenants all decided to leave at the same time?
3. Survey the property for environmental issues as well as the laws within that city
There are a lot of very difficult cities to do business with, San Francisco is a prime example. For example, if you want to convert an office to a Starbucks, you're going to have to go through a lot of approvals with the city. If you want to convert something to a residential building, it might take literally years to get that approved. A lot of people in the neighborhood will make a big deal out of it and they will make it very difficult for you to get approvals in a short period of time, so you really want to check what you can do with that property without having a lot of issues.
4. Get all reports and surveys done
Get a structural engineer to make sure that the building is solid and has no problems. Get a roof inspector to make sure that your property has a solid roof, and depending on the type of property, you might want to have a few other surveys done such as taking a look at the foundation, the windows, and HVAC units, if applicable.
5. Take a look at hidden costs and contracts that will have to be honored by you after the sale
Some properties may have contracts that are two, three years long for online advertising and those were part of the costs that you were planning on cutting after you took over the property. However, the contract doesn't end for at least another couple of years. You also may have to pay local taxes that the seller was responsible for paying, and there may also be some insurances that you may not need that the seller purchased and now you're responsible for paying.
Today we are reviewing how to make investments with a possible recession coming up, and how do you underwrite deals with that in mind. We are interviewing Hunter Thompson, the founder and managing principal of Asym Capital.
You can read this full interview here: http://montecarlorei.com/how-do-you-prepare-for-a-possible-recession-how-to-underwrite-real-estate-deals-resistant/
I am personally very excited about this topic, from my observation living in Silicon Valley, I think that the signs on an upcoming recession are everywhere:
1. One of the companies that I used to work for is currently losing $130 million per year, and they’re valued at almost $10 billion in the stock market.
2. I dabbed into angel investing, and so much money being thrown at startups that don’t have any customers
3. There’s a lot of money being thrown in real estate. Cap rates are very low, interest rates are at an all time low, and the government is not raising rates for some strange reason.
These signs all happened right before 2000 and right before 2008, and now is a great opportunity for us to jump into why we should be looking at session resistant properties and how to underwrite these deals.
How do you prepare for a potential downturn and how do you underwrite real estate deals with this in mind?
My thesis is that all types of real estate are going to perform if the capital markets are booming and the economy is really heating up. If you can raise rents aggressively, you can fill occupancy, you can complete capital expenditure and expect to be able to raise rents, etc. But only some types of real estate do well when the economy is contracting, so even if you have a portion of your portfolio that’s focused on the types of real estate that do well when the economies are contracting, it really significantly increases the overall risk profile of your portfolio and increases the favorability of the risk profile.
A significant portion of our business is focused exclusively on things that cater to people that are making $35,000 – $55,000 a year, somewhere in that range. The mobile home park business, for example, is probably the most clear example of a recession resistant asset because the worst the economy does, the more demand there is for the product. Think about it like this: if everyone that’s making $100,000 moves down to making $60,000, and everyone that’s making $60,000 moves down to $40,000 and everyone that’s making $40,000 moves down to $30,000, there’s always demand for that bottom product. Now that doesn’t paint the whole picture, which is something we can get into from a big picture perspective, though the mobile home park business is very compelling because the demand is stable.
A similar case can be made for something like self storage where people use the product when they’re going through some kind of life change. Let’s think about things like downsizing, which is very common during recessions, people change jobs, people have to move in order to stay employed, things like that are all very common during recessions, and also you have people moving home from college unexpectedly, but all of them spur demand for the product of self storage. From a downside protection standpoint, it’s very compelling. And also looking at the historical data, this isn’t something that just sounds reasonable. It’s very compelling and not just something that makes sense from a big picture.
In this episode, we will review what is due diligence, what types of questions you should be asking during the due diligence period, and what documents you should be getting from the seller. I won't go over the entire due diligence checklist because that is a very long checklist. This is just a very brief overview of some of the items that you will need as you're going through the due diligence report.
You can read this podcast here: https://montecarlorei.com/what-is-due-diligence-what-are-some-items-you-should-cover-when-purchasing-a-property/
What is Due Diligence?
It’s a term that you will learn when you are buying your first commercial property, it happens after your offer was accepted and that means that you have a specific number of days to review all the documents that the seller has on the property, schedule all types of inspections and reports, compare rental rates that are ongoing in the market, as well as sales comps to make sure that you are paying the right price for the property. If you Google what is due diligence, Google says that due diligence is the “reasonable steps taken by a person in order to satisfy a legal document, especially in buying or selling something”. It’s a comprehensive appraisal of a business undertaken by you (the prospective buyer) to make sure that the assets and the liabilities are correct, and make sure that this is an actual good deal for you to purchase or not. You typically have, depending on the market, 15 days at the very, very minimum to do all of your due diligence, all the way to 30 days, 60 days, sometimes 90 days. If the deal is really, really complex, it can take six months, nine months, or even one year. If you get in contract to purchase a property and you get 30 days to do your due diligence, and then you realize that you need more time because you were not given all of the paperwork on time, you can always ask for an extension, which is what we did on my first offer.
What are some example items that you need to cover during the due diligence process?
- Who is going to escort everyone to the property? You will have contractors coming over to do inspections and some reports, so you need to know who will be helping these people get in the property.
- The seller’s agent should provide you with a contact sheet for who is the escrow agent, who is the escrow officer, their phone numbers in case you need to get in contact with any one them.
- You are going to be asking for referrals for structural engineers, architects, roof inspectors and this could be from your own real estate agent because they are familiar with that city and they can refer you to the right people that they have used in the past.
- Sales comps for the area from your real estate agent, and this is for you to understand if you are paying a fair price for the property. How you determined that is by looking at the price per square feet. Prices can vary greatly based on location, so you need to take that into consideration as well. For instance, one of the sales comps can be three blocks away from your property.
- You'll need a copy of all of the leases that have been signed for this property. If you're buying an office building or a retail building, you really want to make sure that your read every single lease and all of the red lines. If you have two national tenants there for example, let's say you have a Starbucks and you have a Chick-Filet, they will likely require the owner of the property to use their own leases, so Chick-Filet and Starbucks will give their own lease to the owner of the property and they will negotiate from that.
- A breakdown of every single expense that the property has, and for most of these expenses you will want a two year history of all of the bills.
Today we’re going to do a very basic analysis around the question: should you buy your own place, or should you invest in a commercial property? I’ll also going to update you on what I have been up to for the last couple of months, and how are my projects going.
Read this entire episode here: https://montecarlorei.com/should-you-buy-a-home-or-invest-in-commercial-real-estate-my-project-updates-and-lessons-learned/
Should you buy your own home, or rent and put the down payment in an investment property?
I am not providing any financial advice, this is my personal opinion based on the things that I have learned, you should always do your own homework and ask a professional for advice. Here’s my personal opinion on the question around buying a home to live in, or not buying it and putting that money towards an investment property.
If I were to buy a one bedroom apartment in San Francisco, I would be paying around $1.2M and I would have to put 20% down, so I would be putting $240,000 as a down payment and my mortgage would be $960,000, the interest rate could be around 4% in today’s market, that’s $960,000 at 4%. My monthly payment would be $4,500 per month plus property taxes of $1,000 per month (1% of the property value in California), and we have another $1,000/month in HOA fees (Home Owners Association). My total payment would be $6,500 per month if I were to own my one bedroom condo. On the other hand, I can be a tenant and rent that one bedroom apartment in today’s market for $4,500 per month. That’s a $2,000 difference – $4,500 if I am renting from someone vs $6,500 if I am the owner of that apartment. On top of that, if I am the owner, I just put $240,000 as a down payment, so I’m not making any money on that $240,000.
Now, let’s say you’d take that $240,000 to invest in a commercial property, and we are going to round this up to make things very simple: let’s say that you are making a 10% return every single year on that $240,000, which is very acceptable for real estate investing. At $240,000 that you were putting as a down payment, you’re instead getting a basic return of 10% every single year. That’s $24,000 that you’re making every year, plus, as a renter, I am saving $2,000 from the $6,500 that I would be paying if I was a homeowner or a condo owner in this case. That’s another $24,000 that I am saving by being a renter every single year, and another 10% on my $240,000 which is another $24,000 that I’m making every year in my commercial real estate investment. That’s a total of $48,000 every single year, that’s almost half a million dollars over ten years.
How much should you save to buy a home, and to buy a commercial property?
If you are going to own your own house, you typically should put a 20% down payment, there are all kinds of loans that you can get to nowadays, you could probably only have a 10% down payment, and sometimes even less depending on the type of loan that you find. For commercial properties you should have around 30% down payment. This number can also change depending on the property income and the type of loan that you get. This is a very standard number: 20% down for your own home, 30% down for a commercial investment, or you can join a syndication where you are investing with quite a few people and you buy a small part of that property. Typically the minimum amount to invest in a syndication is around $25,000 (it could also be much higher than that), and in a syndication you would own a percentage of that property.
In this episode you will learn a tip for tax deduction when you buy a property, it’s useful even if you have already bought some properties: cost segregation. What types of properties can benefit from cost segregation, we’ll go over an example of how much you’ll be able to deduct on your taxes, why it’s important to have cash on hand today versus in five years, what is bonus depreciation and how much a cost segregation study would typically cost. We're interviewing Yonah Weiss, a Business Director at Madison SPECS, a national Cost Segregation leader.
You can read the interview here: https://montecarlorei.com/what-is-cost-segregation-what-types-of-properties-can-benefit-from-it-whats-bonus-depreciation-and-how-much-would-a-cost-segregation-study-cost/
What is cost segregation?
It’s a tax benefit for real estate investors and it has to do with depreciation. When you own a property, you get a tax deduction called depreciation. Where cost segregation comes into play is the fact that the IRS determined that things in the property have different useful lives, anything that is not part of the structure of the building depreciates over five years. Then you have another category of things called land improvements and this can be anything like pavement, asphalt, parking lot, landscaping, fencing, anything outside the building actually depreciates over 15 years instead of 39 years. You break out the components of the property into their cost, and depreciate them at a faster rate.
What type of properties qualify for this?
Any type of property, as long as it’s not your personal residence, it can be commercial, residential and multifamily, office, assisted living, hotels, hospitality, self storage, industrial, shopping malls, golf courses, mobile home parks, etc.
What is the main benefit of doing cost segregation?
The cashflow. When you have more deductions than you have income, you don’t write a check. We’re not talking about getting free money, what we’re talking about is keeping the money that you made and paying less taxes, or no taxes. In many cases, the main benefit is the cashflow, you’re able to use that money to invest. The second thing is the time value of money because you can take huge deductions early on and make sure that you’re using that money to invest. The time value of money means money today is worth more than it is five years from now. If I were to offer you $50,000 today or $10,000 a year or five years, what would you take?
What is bonus depreciation?
It used to be a rule that when you developed a new property, you could take 50% of the depreciation of that property in the first year of that new construction. The law changed in that it’s now for any property that you buy, not just new developments. All the depreciation that is less than 20 years (in the example that we gave, the five-year personal property and 15 year land improvements) all of that cost segregation is eligible for bonus depreciation, you can actually take 100% of that depreciation in the first year of ownership, instead of spreading it over five years. You have a choice of 100% or 50%, which really gives you a much added benefit to take, to knock off your entire income tax liability in the first year.
How much would it cost to do a cost segregation study in our example property, 30,000 square feet office that was purchased for $3 million?
At our firm and for that property, it could cost around $5,000-$6,000.
In this episode we're learning why you should invest in self storage, how to select the location to invest, what are the biggest challenges with self storage and how to select and hire the best property manager for your locations. We're interviewing Ryan Gibson, a co-founder of Spartan Investment Group.
You can read the full interview here: https://montecarlorei.com/making-a-case-for-self-storage-investing/
Why should real estate investors invest in self storage?
Self storage is something that we looked at back in 2016, we made a pivot from investing in residential real estate, we were building condos, new houses, flipping houses, and we landed in self storage for a couple of reasons: 1. We liked how straight forward it was, how operationally easier it was to manage than a multifamily property. We looked at vacancy trends, rent growth, saturation and all the things that people like about self storage. It is also one of the least foreclosed upon asset classes during the last recession.
How do you guys go about deciding where to invest in self storage?
We focus on 150 MSA’s across the United States. And those MSA’s have a key component of population growth. Population growth is the number one driver of self storage utilization, overall market saturation, job growth, demographics of our ideal consumer, income levels, job placement, migration trends, and we look for cities and areas, or an MSA that are trending positive and have a good outlook for population. We look at rental rates as well. We have a hard time justifying building in certain markets, brand new storage, if the rental rates are, say less than $6 a square foot, it would be difficult to do that.
What are some of the biggest challenges with self storage?
I would say the number one challenge is finding the right projects. We looked at 880 projects last year, we put out six offers, and we bought three. It's a very institutionalized asset class. A lot of projects that are over $5 million are getting all cash offers, so it’s very difficult to compete with a lot of the institutional capital, and larger players in the market because they have a lower cost of capital than we do. Because we're offering our investors a market rate return on equity and they have a good team of folks that can find the same data that we're finding.
Moving on to property manager, how do you select and hire the best property manager and what do they do all day long? Some folks will hire third party property management companies like Cubesmart, Extra Space, West Coast Self Storage, Public Storage. They might hire a company like that to come in and do the property management for them, but they're still going to have to hire somebody that works at the desk, that the owner is responsible for covering that expense. The property management companies will take a fee, usually 6% of gross revenue, to manage that facility. We do the property management asset management in house.
What is your second favorite asset class after self storage and why?
We own an RV park in west Texas and that has been my favorite deal ever. Very similar in characteristics to a mobile home park in that the tenants are there full time and they live there right now, rent is about $800 a month (and utilities are included in that). Not to have a whole lot of amenities and have the lowest entries for housing, we just collect a lot rent and the folks bring in their own RVs and mobile homes, they purchase their own homes, it does well in good times, and in bad times.
In this episode we'll learn if investing Silicon Valley could be a good idea, what happened to office spaces during the last downturn, things an investor should cover when looking at purchasing an office, what types of leases are standard for office space, and what does the future of office space could look like. We're interviewing Eduardo Zepeda, an asset manager and leasing director of a family's holdings, he manages north of $100M in combined assets comprised of multi-tenant office and retail property.
You can read the full interview here: https://montecarlorei.com/should-you-invest-in-silicon-valley-what-does-the-future-of-office-space-look-like-what-happened-to-office-spaces-during-the-last-downturn/
Making a case for investing in Silicon Valley: Why do you like this area?
It’s the perfect storm of supply and demand economics where you have a finite fixed amount of land and a very strong demand not only for housing but also for space to occupy, whether it’s office, industrial or just land to develop and improve. The macroeconomic factors for the Bay Area are very compelling, whether you’re looking for a short term value add project with an exit, or a long term hold, there’s a compelling argument in both cases for investing in this area even during this economic times. The challenge is that prices are very lofty.
What was the vacancy rate like during the 2008 recession and what were some of the major issues that the properties that you were managing were facing?
We were doing deals somewhere in the $20’s/yr/sf, sometimes even in the high teens and there was a lot of inventory space back then. The demand was pretty low, especially compared to now where the vacancy rate in San Francisco is around 5% for office. The demand didn't stay very strong throughout, on a rental rate basis it was quite different than what it is now, from $20/sf back then.
What are offices charging per square foot nowadays?
It depends on the building type, within our portfolio we have multi-tenant, and class B and C properties. Depending on the part of town and the part of the Financial District, or South of Market, anywhere from the high $40’s/sf/year all the way up to the high $60’s- low $70’s for a class B. For a high rise, you can go anywhere from the mid $70’s-low $80’s all the way up to $100’s or higher, depending on the building and the area.
What should investors look for when buying an office building?
1. Get a working knowledge of the building systems: the HVAC , boilers, chillers, electrical, and those types of systems that depending on the way that the leases are structured could be an expense of the landlord, or they could be expensive to the tenant. 2. Having some working knowledge as to the way that they are operating at that property.
3. Have a working knowledge as to the different types of leases that are active in the market, or typical for this kind of building.
4. Know the difference between a full service gross lease, an industrial gross lease, a net lease, or any variation thereof. That's pretty important because it will dictate how much is going to be an expense to you as a landlord.
5. If it's a building that has some vacancy, or that has some holes in the leases in the next one to three years - know what the market is doing in order for you to able to accurately predict what you're going to be able to lease those spaces for on a per sf basis.
In this episode we’ll learn how to manage multiple companies at the same time, how to hire and inspire the best people, what types of asset classes and what markets are interesting to invest in today’s market, and we will also learn what are opportunities zones and how you can leverage OZ's in your investments. We’re interviewing Greg Dickerson, a serial entrepreneur, real estate developer, coach and mentor. Over the last 20 years he has bought, developed and sold over $200 million in real estate.
You can read this full episode here: https://montecarlorei.com/what-are-opportunities-zones-how-to-hire-the-best-team-what-types-of-asset-classes-to-invest-in-todays-market/
How do you make sure that you're successful when you're doing everything from fundraising to investing in all kinds of asset classes? You have done multifamily, retail, medical center, offices, how do you make everything move forward?
Education. I didn't go to college but I am very highly self-educated, I've always developed myself personally and professionally. I've never owned one song, only audio books and courses. Business and personal professional development are important in order to accomplish things. You need to be a visionary, a leader. What is it that you're trying to accomplish? Create the vision, communicate that vision in a way that people understand it and can see it even though it's not there. Put together the right team, inspire the results out of that team, delegate, motivate, and lead.
Is now a good time to invest in commercial real estate? What are your favorite markets?
It’s always a good time to invest in commercial real estate, but it's not always a great time to invest in every asset class. And every market is specific. Everybody says that real estate is local, I call it hyperlocal, real estate is local down to the block of the neighborhood within the city and the subdivision you're investing in. You could say that multifamily is a great, safe place all across the country, which it is, it's the safest bet from a real estate investment standpoint, especially at the low A, high B level. That's an asset class that's probably never going to go away, people need housing, so when you start going down in the B, C, D classes it can get a little risky in certain areas, but they can be slam dunks in other areas.
What are Opportunity Zones, and how can people leverage them within their own investments?
The Tax and Jobs Act from 2017 gave governors of all the states in the US the ability to designate certain areas as opportunities zones. The idea behind it was to incentivize investment into lower areas, primarily in business and in real estate assets. Each governor was able to go through their state and pick zones within cities of the state as opportunities. It was created to spur investment in businesses and in real estate in lower income, distressed areas. With opportunity zones, you get to defer capital gains, let's say that you sell stock, art, or property - anything that generates capital gains. You then can invest into an opportunity zone fund, and for the first five years 10% of that gain is a written off. After seven years you get an additional 5%, and an after ten years anything that you make on that gain is tax-free. You can also refinance, sell assets and reinvest in another opportunity zone within a year and roll it over. You could invest $1 million, make $10 million within a year, reinvest that gain and keep on going.
Cel: (434) 326-3903
In this episode you’re going to learn how to get started in real estate investing with zero money down. If you’re feeling a little overwhelmed by the fact that you need a lot of money to get started in real estate investing, fear not! There are opportunities out there where you can partner up with people. We interviewed Ellis Hammond to find out how he got started in real estate investing with no money down.
Read this podcast here: https://montecarlorei.com/how-to-get-started-in-real-estate-investing-with-no-money/
What are some things that you did to get to where you are, and what are some things that you wish you did when you were starting?
Build your network before you need your network is the best advice I can give to someone who wants to get started into real estate. That’s really how I went from owning no real estate to doing a $2 million deal last year, and we have two deals right now that will be over $15 million in real estate. I found a mentor, and that mentor opened me up to his network and other networks. I showed up at conferences that have people that you want to connect with.
What are some ways that people can get into real estate investing without any money?
It’s finding the deals or finding the money. That’s essentially what it comes down to. Which one of those can you begin to play a part in? I think the nice thing about commercial real estate is that it’s a team sport and there are multiple roles within commercial real estate. That’s why I like it. That’s why I really got out of the single family space because commercial real estate allows you to specialize in what your superpower is. What is your superpower? What are you really good at doing? I’m really good at networking. I’m really good at building relationships.
If our listeners were to raise all of the funds, or raise 50% of the funds for a particular deal, how much would they own of that deal?
For big commercial deals, the person who raising the capital can normally get paid 2-3% on the money that they raise. If you raised $1 million, you could make 2-3% or right off the get go on that million dollars you bring into the deal. So that’s nice to get some money right away. But you want to be a partner in the deal and with the people that you’re investing with. For syndications there are two sides of the deal: the general partner who’s the sponsor, or the operator, the ones who are putting together the deal. And then there are the investors, which is it called the limited partnership. So you then negotiate for a percentage of the general partnership and the equity so that you have consistent cash flow throughout the life of the project. If you’re raising all of the money, you would look to have about 10% of the deal or 25-40% of the general partnership equity.
There is another side to this that you could also start with: finding deals. Can you elaborate on that?
If you don’t like asking people for money, the best thing you can start doing is looking for deals. In this market, if you get really good at finding deals, you’re gold. People will pay to find good deals because good deals are hard to find, especially in this market. This is a super power, it takes a ton of follow up, it takes a ton of detailed work. I tried to do both sides and I just realized that a lot goes into this one. So to get started learning how to find deals, go to a website called listsource.com – it’s a database website where you can filter real estate by asset class.
Today we'll learn what is a real estate syndication, what types of asset classes are safer so we can be prepared when we go into a recession, how do to underwrite and pick deals, as well as what does replacement cost mean. We're interviewing Matt Shamus, the founder of Driven Capital Partners, a real estate private equity firm based in California.
Read this episode here: https://montecarlorei.com/what-is-a-syndication-how-to-underwrite-deals-what-is-replacement-cost/
What is a syndication?
A syndication is pooling assets together to achieve something that neither of us could achieve on our own. That term is used very commonly, especially today in real estate investing for a structure where you have the sponsor who is outsourcing the deal, underwriting the deal, packaging it together, and then raising money from individual passive investors, that structure is called syndication. I actually don’t love the term syndication or syndicator, and I don’t really apply that to what we do because it has a bit of a connotation. In fact, one of our investors recently told me that he considers our group a little bit more like an investing club than a syndication, and I think that’s the approach that we’re taking.
Is there a particular asset class that you prefer today?
“Today” is a very important modifier to the question because we are in May, 2019 and in the middle of a trade war between the United States and China, there’s a lot of uncertainty in the stock market. There’s a lot of uncertainty with regard to when are we going into a recession, and our belief is that we will be entering a recession at some point. What that means as a real estate investor is that you have a choice: Do I stay on the sidelines and see what happens and forgo potential gains for the sake of being “conservative” and waiting it out? Or do I take the approach that everything that I’m investing in, I’m looking at a little bit more closely, specifically through the lens of “we’re going to enter a recession at some point”. Our investors want the benefits of investing in real estate, but they don't have the time or expertise.
Can you elaborate on what does it mean when a property is below replacement cost?
I’m writing an offer today on an industrial warehouse, it’s 86,000 square feet, it’s mostly warehouse in a great location appealing to someone that needs a distribution center, high height space, which is essentially space that a large truck can back up into and you can stack the merchandise very high so you can maximize the square footage, and also has office space. That combination is very appealing in this particular market. We are looking at buying this property for less than $60 a square foot.
If I were to build this exact same property on a similar parcel, I couldn’t build it for $60 a foot. I’d have to pay more just to build the property and then I would have a vacant property sitting there waiting to be leased. So the risk associated with the development is meaningful. What we look for is where can we buy something that is below the cost to replace it. That’s one way of determining if it’s undervalued, and it’s one way that a lot of brokers will use if you look at an offering memo. One thing to watch out for is that brokers are salespeople. It’s easy to say that this asset is below replacement cost, but what they will never they tell you is “this actually would be replacement cost, and here are the real numbers that we used”. Below replacement cost is a term that is used very loosely with a lot of brokers.
In this episode we cover what does the base year mean in office leasing, what are specific things that startups want to negotiate on a lease, what happens when a startup goes out of business, LOI’s, lease negotiation & TI’s (also called lease concessions), and lastly, what makes for a good office landlord.
You can read this episode here: https://montecarlorei.com/office-leases-lease-negotiation-points-what-makes-for-a-good-landlord-what-does-base-year-mean-on-a-lease/
For offices, are the leases typically NNN?
No. It's typically what's called a "full service lease" where you pay your rent, and it's pretty much in all in rent. The landlord covers the utilities, the janitorial, the operating expenses, and real estate taxes. The way that it works is you get what's called a base year. So let's say we completed our lease in 2019 and we do a three year term. You get a "base year" and 2019 is your first year, you don't need to pay any real estate taxes and operating expenses. But in the following year you are responsible for paying your proportionate share of the increase in operating expenses and real estate taxes. So let's use round numbers, for example let's say that you occupied 10% of a building. The operating expense in real estate taxes were $100 in 2019 and they went up to $200 in 2020, a $100 increase. All you need to pay is your proportionate share of $100, in this case $10. But as you do a long term lease, 7-10 years, it's growing every year, and that number can become significant. So a lot of companies will renegotiate their lease, they will do what's called an extension, or they'll expand and renegotiate the lease to get a brand new base year so that they don't have to incur those costs.
Has it ever happened that a startup went out of business, and what happened to that contract? What are the recourses for the landlord?
They go into what’s called a default and the landlord eventually ends up needing to collect their money. This situation has come up numerous times and what we do is find a new tenant to sublease the space. We market it for sublease, and once you come to an agreement on terms, the landlord will say “Okay, instead of subleasing from this company who has gone bankrupt, we’ll wrap up that lease and do a new direct deal with this new tenant”. So we’re able to bring a new tenant into the space and, by doing that, cut our client out of any rent responsibility moving forward.
What are some specific things that startups want to negotiate in a lease that we haven't covered yet?
The few things that we've covered so far are the big items such as rent, term, free rent, tenant improvement allowance, and the security deposit. Things we haven't talked about yet are: let's say a landlord is forcing us into a five year deal, but we know we're not going to be able to make it for the full five years. We try to negotiate a termination option where after three years we can terminate with no penalty, or a very small penalty such as two months rent. Another item is sublease rights, a landlord will generally give you the right to sublease, but any profit that you get for that sublease is split 50-50 between the tenant and the landlord since they want to discourage tenants to take space and sublease for a profit. When you're in rapid expansion mode we try to negotiate what's called a right of first refusal, where if a space becomes available in the building, the landlord is required to present it to the startup first at a fair market value.
Steffany's Linkedin: https://www.linkedin.com/in/steffbold/
In this episode, we interview Reuben Torenberg, a commercial real estate broker who specializes in helping startups, technology companies, and venture capital firms find office space in the San Francisco Bay Area and beyond.
You can read this episode here: https://montecarlorei.com/what-do-startups-look-for-when-leasing-an-office/
What do startups look for when leasing an office?
Every startup is in rapid growth mode. At the very beginning you don't know exactly what your projections are 12 months out, even six months out. So you are looking for a space to do a few things:
1. Attract talent.
2. Manage growth. You don't want to get an office that's too big and be hemorrhaging money.
3. Staying flexible. It's very hard both in San Francisco and throughout the world to find space that will let you stay flexible as you continue to grow larger, as landlords are looking for three to five year terms.
You have to be creative in how you're able to position your client to stay short term. One of the things you can do is actually get into subleasing. A lot of companies that are growing too quickly or shrinking faster and they'd hope need to offload space for 12 months, 18 months, which tend to be very, very attractive situations for our clients.
Who would be responsible for subleasing that space? The tenant or the landlord?
The tenant is responsible. They become a sub landlord in that instance, and they put the space in the sublease market, usually at a premium here in San Francisco because it is so attractive to startups. And then once they managed that whole leasing process, they need to get the landlord's consent where they present the sublease to the landlord and the landlord has 30 days to say, yes we would like this new tenant, or no. Another huge thing for startups is being near public transit. Attracting talent in San Francisco has become extremely difficult. They're now looking to the East Bay. There's also a lot of talent down in the South Bay with Stanford, with Berkeley in the East Bay. Being near Caltrain and being near Bart is a huge plus, and rents are much higher near those areas. So startups try and find something in between. Subleasing is one option.
What are some other things that they look for when leasing an office?
It all ties into the big main question: will this place help us attract talent? Once you get past that, it goes into a lot of the comfort stuff, so a big one is how many meeting rooms are in this space. A lot of times startups like to be in wide open environment to maximize the amount of people you can fit in, and to endorse collaboration, to have everyone talking, hanging out, help the culture. But everyone at some point needs to enclose themselves in a room to have a private conversation. The question is, are there enough meeting rooms for us to fit? This is frequently a pain point. We have a metric actually for it, and it will vary between companies, but we say that startups should have at least one meeting room for every 7 - 10 employees. So if you have 50 employees, you should get at least five meeting rooms. Another one is size. Can we fit all of our employees for the duration of the term? If this is a three year lease, but we're going to be blowing out of it in a year, do we need to take on more space? Are there enough restrooms?
Today we are reviewing the Investors Summit at Sea. I’ll also share a few lessons learned on this cruise that are simply invaluable.
You can read this full episode here: https://montecarlorei.com/review-of-the-investor-summit-at-sea-and-lessons-learned/
Lessons learned specifically for real estate investing:
– Have a team, management is key, get very good managers.
– When things go wrong, it’s almost always because you had the wrong people in the wrong chairs.
– Don’t try to do things that are too small because you cannot afford to get the right people in the right chairs, so go big in order to be able to afford the right people.
– Really evaluate if you want to get into a tertiary market.
– Cut your losses early.
– A market has thousands of submarkets. Just like within your city, there are very good areas and within that very good area, or that upcoming area.
– Make sure to change your investment strategy if it is reaching a peak.
– Don’t say I can’t do it. Say, how can I do it? (you can do a joint venture deal, you can get a few partners, etc).
– Always be building and growing your team.
– The best time to get started is yesterday.
– Get mentors and ask them questions that you already think you know the answer to.
– FHA HUD loans can take a while to get approved, they have heavier fees, but when it’s done, you get a 40 year loan, fixed, non-recourse debt. This is very good for construction loans and refinance loans.
– Don’t wish for no problems, wish that you get better at solving them (I love it!).
– Statements, close the mind, questions open it. (Double love it!)
How you can prepare for what is coming in the economy:
– You should have five uncorrelated assets. For example: real estate, gold, stocks, and a couple of other things.
– Lock your rates for 10 to 12 years, and get 30 year loans. You should have at least six to 12 months worth of operating expenses as a backup.
– If you are a syndicator, you should always have cash calls in your paperwork.
– Underwrite your deals based on historical rent and historical cap rates (rates similar to when we were in a recession back in 2008).
What have I learned about the economy and government:
Here I encourage you to do your own research to learn more about these topics:
– The federal government hasn’t been audited. Has anyone thought about that before?
– Pension funds are America’s greatest retirement crisis in history. State pension funds are not governed.
– Fidelity Investments has $7 trillion under management, $2 trillion of that is in 401k’s, and their fees are $40 billion per year.
– Inflation is a form of taxation. The Fed is committed to increase inflation by 2% every year.
– The money we deposit in the bank is not ours anymore. The bank now owes us that money, this was passed very quietly under the Obama administration.
– The number one asset in a government bank is student debt. It’s the only thing that you cannot remove in a bankruptcy.
– If you want to revoke your citizenship here in the US, you owe the government three times your income. and if you owe $50,000 in taxes or more, they may revoke your passport.
– At a $100,000 income, if you pay 40% taxes, and if you put your remaining money ($60,000) at a 12% return, it will take you 5.5 years to get that money back to $100,000!
The next Summit will be from June 11th -20th, 2020.
Sign up for the Summit at Sea here: https://realestateguysradio.com/summit/
Make sure to mention Steffany Boldrini to get $100 credit in the ship, which can be very useful for internet usage.
Today we interview Adam Carswell, a Director with Concordia Realty and a Business Development Manager with Asym Capital. He focuses on retail, mobile home parks and self storage.
You can read the full interview here: https://montecarlorei.com/retail-investing-strategy-why-be-optimistic-about-retail/
What is your business model? Why do you guys invest in the properties that you invest in? What is your strategy?
My business partners at each firm go about things in different ways. Starting with Asym Capital, Hunter Thompson (the host of the Cashflow Connections Real Estate Podcast) focuses more on the syndication side of things, we look to partner with experienced operators, and as you can see with our track record, we really take our due diligence with operators and sponsors seriously. The level of due diligence that we do, not only on the asset or the deal that we're going into, but on our sponsor at underwriting is literally what I would call next level. And that's one thing that I've been fortunate to be in an environment like that, with someone who is this diligent.
Transitioning to Concordia Realty and Michael flight, we are retail focused, shopping center focused, and we look for opportunities to add value to shopping centers anywhere across the US. We normally will stay away from primary markets, but we do like secondary and tertiary markets. We like for our shopping centers to have a grocery store as an anchor, and at least one, and sometimes two discount stores in the plaza as well. So that could be a Family Dollar, Dollar Tree, Dollar General, etc. Drugstores are always good too: CVS, Walgreens. If we see a shopping center that fits that mold and is less than a hundred dollars per square foot, we will take a closer look at it, put it through our financial model, make assumptions and see if it will be a good fit for us and our investors.
Can you share with us why are you optimistic about retail nowadays?
The first reason is that Amazon invested $13.7 billion into brick and mortar. That's a lot of money! And a company like Amazon has a lot of data that they have access to, and the amount of information that they have access to is also next level. There are very few people that can make a move like that. Sears is also doing a few things in retail.
The second reason is when you look at life in general, and you look at trends, and you look at things that people gravitate towards, retail has had its moment of super success and it's had its moments of no success. Kind of like what we're going through right now, but it's all cyclical. Retail has been around since the Roman Agora. It just evolves and takes a new shape and a new form. You had the general store in the 1900's, and then you had Sears catalog, which killed that general store. But then Sears did brick and mortar after the catalog with all their department stores. Amazon is like the new catalog that came out and kind of killed the brick and mortar movement. But again, it's, it's just very cyclical.
Right now is the perfect time to start at least researching and learning as much as you can about retail real estate because it is going to make a comeback nationally, and it's not going anywhere. It's just going to evolve.
Contact Adam Carswell here:
Today we’re interviewing James Chung, he is the Executive Managing Director and Managing Principal for the Western US for Cushman & Wakefield's Retail platform. He has been with the company for 15 years and has worked with over 30 national tenants and over 9 million sf of retail across the Bay Area in Silicon Valley. Some of his clients are: AT&T, Chase Bank, Adidas, In&Out Burger, and Sur La Table.
Read the full interview here: https://montecarlorei.com/lease-negotiation-points-for-national-tenants-lois-what-happens-when-a-tenant-goes-dark-part-2-of-2/
In terms of leasing retail space to a national tenant, what makes a national tenant want to lease a particular space?
Every tenant has a different purpose, and each tenant also has a different requirement for the optimal environment for which they can thrive on, and we are often involved in developing a strategy for them in our market. For example, some tenants only want to lease in grocery anchored shopping centers, and they only want to look at a Safeway or Whole Foods anchored center (or the like caliber). Or we could be working with a 100,000 sf box tenant who needs a certain amount of land, they need access to major freeways, and they need the demographic to be above a certain threshold within a 1 – 3 – 5 mile radius ring area. Or we could be working with food tenants who just want to be on downtown, street front environments where they want to be part of a community, there is a lot of foot traffic, and they don’t want to be in a shopping center. In order to help them position themselves in the market it depends so much on the tenant and their process. We also provide analytics on anywhere from psychographic, to demographics, to data on their competitors and sales volume, so there’s a lot of information that goes into the analysis of an opportunity and while one person’s success or failure won’t dictate the success or failure of the tenant at hand, it at least gives a certain starting point of who has done what in a particular market. The appetite for growth is so unique to each tenant that it depends on their requirements, some people are positioning for public events, some are repositioning the market, some people are closing stores, and only want to combine units, so each requirement is truly unique, which makes our job unique. James likes the work he does with a lot of household names that we see, and being able to walk in the stores, shop at them, and eat at them after completing the process. The deal cycles may take a few months to a few years and it’s fascinating when he sees the body of work in the form of storefronts, or a restaurant as a living organism since it creates jobs, it is feeding people, or simply seeing people buying clothes, it’s very rewarding to him and some of the reasons that it attracted him to retail.
Once we’re past the LOI Are they going to try to renegotiate the price when the lawyers get involved?
Typically no, it is assumed that the business items have been agreed upon, and at that point you’re only negotiating the legal language.
What are some deal-breakers for national tenants that we as investors should be aware of?
It depends on how bad they want the site. For example, for a lot of landlords, termination clauses are deal breakers, that means early kick out language and things like that, but ultimately everything is negotiable, so the deal breakers will be dictated by the opportunity and the players at the table, unfortunately there is no standard there.
Contact James Chung here: http://www.cushmanwakefield.com/en/people/james-chung
Today we’re interviewing James Chung, he is the Executive Managing Director and Managing Principal for the Western US for Cushman & Wakefield's Retail platform. He has been with the company for 15 years and has worked with over 30 national tenants and over 9 million sf of retail across the Bay Area in Silicon Valley. Some of his clients are: AT&T, Chase Bank, Adidas, In&Out Burger, and Sur La Table.
Read the full interview here: https://montecarlorei.com/leasing-retail-property-to-national-tenants-and-what-to-look-for-during-due-diligence-part-1-of-2/
Tips for Listing Retail Properties for Lease and What to Charge Tenants per Square Foot
First you need to understand the health of the shopping center, and one way to do that is to understand the health ratio of the tenants. The health ratio is the relationship between gross sales and total occupancy cost. Then go through the health ratio tenant by tenant, and understand if the rent they're paying is equitable to their sales performance. The challenge with pricing is that geography will often dictate pricing. However, you can have an asset next door to you charging half the rent! Part of that reason is co-tenancy, part of it is how updated the center is, part of it is who anchors the center, as well as how accessible the center is. Retail is not commoditized in the way where we can say "By virtue of being on this block or that block, your rent should be X", it's like when you are getting comps for a home, the price/sf in that area gives you an indication, but it is within 10 to 20 to 30% of where things could be, depending on the home itself. Block-by-block can change dramatically. Are the tenants in place at highest and best use for the positions that they are in the shopping center? What are the lease expiration dates, who's lease is coming up and when, who is healthy or not, where we could reposition tenants, etc.
What are Good Types of Tenants to Have in Your Center?
It depends on the opportunity, if it's a neighborhood shopping center, the most coveted asset class would be a grocery anchored shopping center. One of the most desirable investment opportunities for people, especially in the Bay Area are grocery-anchored centers in the retail space. If you're in any neighborhood, if there is a strong national grocery tenant who is the hub of the center - that is typically the most desirable. Besides that, there are lots of asset classes like malls, lifestyle centers, outlet malls, and so many different types of shopping centers, but if he had to pick one, he would probably say grocery anchored.
How Can We Make Money in Retail When the Cap Rates Are so Low in This Market, and What Should We Look For in a Deal?
Low cap rates are actually not necessarily a bad thing if the income on the property is under market. Even if you're paying 3.5% cap on a deal but the rent is 50% of what it should be, that's when market intelligence comes into play, and understanding how things are being underwritten. There is currently a compression in cap rates just by virtue of geography and being in Silicon Valley, but there still are great opportunities out there, you just may not find them listed openly. It's about understanding how to unlock the value in whatever asset you're looking at because there are many ways to skin the cat, and oftentimes people are looking at it very one-dimensionally, when in fact there may be multiple ways to create value.
Contact James Chung here: http://www.cushmanwakefield.com/en/people/james-chung
In this and final episode, I'll go over the financials and how I made the decision to move forward (or not!) with the purchase, and then we'll come to a conclusion at the end.
You can read the entire episode here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-3-of-3/
When we made an offer on this theater that had been abandoned for 30 years, we had three options in mind:
1. Do a very basic remodel and sell it.
2. Go all the way with the remodel, bring the property up to an impeccable state, and run it as a business: running events such as corporate events, weddings, parties, etc.
3. Remodel as much as we should, rent it out to a tenant, and decide then if we would sell it or keep it.
Since we were unsure how the economy was going to go by the time the construction was done, we had to be very conservative. At the time of purchase, the cap rates were at around 6% for the area, and we wanted to think ahead and in case the economy took a hit, so we also ran the numbers at an 8% cap rate. Why? When the economy tanks, cap rates to go up because people are able to buy less property (because interest rates are higher and banks are more conservative), and there are more "discounts" happening (because less people are buying), that's why we had to calculate an increase of 2% in the cap rate, just in case that there be something going on in the economy by the time that the property was fully remodeled. This is a very important calculation for all of us at this time in the economy.
Calculation breakdown for construction costs:
Construction costs: the best case scenario was $780,000 of renovation costs, the medium case scenario was $1,000,000 of renovation costs, and the worst case scenario was $1.5M of renovation costs, plus the purchase price of $430,000. At the worst case scenario, we could have ended up with almost $2M in total costs, in which case we’d definitely have to sell above that number.
Options for what to do after renovations, and their associated costs:
1. With our first option of doing the very basic remodel of $780,000 of minimum renovation and selling the property for a worst case scenario of 8% cap, we would be making around $200,000 – at this number it was not worth the headache for us.
2. The number two option was to remodel incredibly well and run it as a business and do events. For this option, I contacted quite a few events places in the area and I found one place that was very comparable to ours. They were charging around $5,500/event which included security, tables, chairs, linen, staff, water bill, electricity bill. I estimated that out of that $5,500 we would probably end up keeping around $2,000-$3,000 per night. In the worst case scenario we would rent it for 40 nights per year, and in the best case scenario we would rent it for 60 nights per year. I was also adding a revenue for a church to hold services on Sundays for a few weekends during the year. At the end of the calculations, our net income on the worst worst case scenario would have been around $110,000/year, in the best-case scenario would have been around $160,000/year, however this was very conservative at a net revenue of $2,000/night.
Out of these three options, we were calculating the least amount of construction costs that we were going to incur, as well as the highest amount of construction costs. Because we didn’t know exactly how much the construction cost would end up being until we started the construction, we had to understand the minimum cost, and the maximum costs we could end up incurring.
In this episode I'm going to share the things that we had to do on our own during the due diligence process of my first offer, as well as the things that our attorney looked at and objected to on the title report.
Read the full details here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-2-of-3/
What did we on our own:
1. Checked Geotracker which is a website to see if there is contamination near the property. This helps us understand what our Phase I report will probably look like. The Phase I report is an environmental report that costs around $3,000-$4,000 and that you must do in order to see if the ground of the property is contaminated. If it is contaminated, it’s going to be very costly to decontaminate the property, and the city will make sure that you eventually decontaminate the grounds. It’s very important to know if your property is contaminated or not. When you search Geotracker, you’re able to have a preliminary idea if it is contaminated or not, based on existing data.
2. Checked the current assessed value of the property to see how much taxes they were paying.
3. Reached out to the City Department Services Division, and the Community Development Division and asked to see if there were any approved permits for the property. I also had to find out information on zoning in the downtown area to see if we could do what we wanted to or not.
4. Because we were potentially going to run this as a business and do events in the property, I had to check prices for the following: audio and visual installation, new chairs, how much it would cost to level the floor, how to dispose of the existing chairs (could we sell it or not?). I also had to find out how much we could charge per event and the costs associated with that (tables, catering, security, electricity, water, etc).
Reports that we paid for during the due diligence process, and the contractors that we had come by to give us quotes:
1. Phase I Environmental report: the report came out clean (as we expected after checking Geotracker).
2. Roof survey: we found out that it was going to cost us around $127,000 for a new roof since the existing roof already had three layers on it, and we could not add another layer. We had to redo the roof from scratch.
3. Structural engineer: we had one come by to assess the structural damage and do a shear wall test – this meant that he was going to test how strong or how weak the wall was and he was going to tell us if we had to redo the wall entirely, or just reinforce it.
4. Architect: the architect came over to assess some of the costs that we were going to incur during the renovation.
5. I had to find a person that was working at Calwater (California Water Service) in order to find out where there was a water source for the building. Also, where was the line, and if there were fire hydrants near the property. During this process I learned that in California the businesses are the ones who have to pay for installing a public fire hydrant if the property does not have one nearby! This alone can cost at least $50,000. We had to understand how much it would cost for us to pull in water for the fire sprinklers because the property was not up to code and we would have to install fire sprinklers.
6. Fire sprinkler contractor: he came over to give us a quote on how much it would cost to install the fire sprinklers. We ended up finding out that we would have to bring water from the back of the building to the front, and that was going to cost quite a lot of money (I believe it was around $100,000).
In this episode I’ll go over my very first offer (which happened about 4 months into my real estate education). You can read the process here: https://montecarlorei.com/my-first-commercial-real-estate-offer-what-happened-part-1-of-3/
This will be broken down into a few episodes because it’s going to be a detailed explanation from beginning to end, and it will be as follows:
How did we decide to make an offer on this property
What did we ask the real estate agent to send us during the due diligence process
Are we running this as a business or selling after remodeling, plus all the financial calculations
Which items our attorney looked at and objected to from the title report
What ended up happening and conclusion
Things to note on the offer agreement
We used the standard commercial offer agreement, and as noted above, we had to give the seller all of the inspections if we didn’t end up buying the property, so they could give them to the next buyer. A few other things that I highlighted on the purchase agreement were: 1. We needed to deliver the removal of contingencies or cancel the agreement within those 45 days, 2. If there was any problem with his purchase, we would have to resolve it through arbitration, 3. Both buyer and seller pay for escrow fees, the seller pays for County transfer fees, the seller pays for the city transfer fee, the buyer pays for all the reports, and the buyer also pays for the title insurance policy. These are just standard terms and we agreed to them.
Things to ask the real estate agent to send during the due diligence process:
1. Recommendations for Structural Engineers, roof inspector, and contacts in the city of Salinas since she had been a broker there for a very long time, and she knew quite a few people.
2. The last structural report done on the property.
3. The blueprints so we can give them to our architect, otherwise if the architect did not have the blueprints we would have to pay around $10,000 to get have them redone. I needed those blueprints not only in paper format, but also in digital format since I wanted to forward it to our architect digitally via email. Both of these cost money so since she had the original blueprint (and it was about 11 pages long) she had to scan the blueprints and send them to me.
4. Rent comps, and sales comps in the area. Both of these are important in order for us to understand what we could rent the property for (and therefore what we could sell the property for), and what were people paying in that area once the property was fully leased and fully remodeled. All of this information was used in my financial analysis to do a best and worst case scenario so we could see what was going to be an ideal price for this property. Note that I asked for leased comps and sales comps from two different real estate agents and both of them provided me different numbers so I had to average them out to come up with the final number. You really want to make sure that you ask for comps from more than one real estate agent.
5. The lease for the nail salon, they were on a month-to-month lease and I wanted to understand if they were below market or not. It’s also important for us to have a copy of that.
6. Who the owner of the building next door was, because we were sharing a wall with them and we needed to understand if they did anything to the wall or not.
Today you will learn why I picked commercial properties for my real estate investments and not residential properties. But first, let’s learn what types of properties fall under “residential investments” and what types of properties fall under “commercial investments”.
You can read this episode in detail here: https://montecarlorei.com/why-commercial-properties-and-not-residential-for-real-estate-investment/
Residential are properties where people live in, where people have their bed and pillow to sleep on at night, so it’s not only single family homes, it’s also duplexes, triplexes, fourplexes, mobile home parks, multi family properties like apartment buildings, high rises, lofts, student housing, and senior housing – and each of these categories have their own pros and cons! Also, each of these categories can be good or bad investments depending on the state that you invest in because of things like property prices, local economy, and state and city laws (i.e. some states have laws that benefit the tenants and you cannot kick them out, some states have laws that benefit the property owners, so if a tenant doesn’t pay the rent, they are out of the property within days).
1. Industrial: distribution center, warehousing, or manufacturing
2. Office: you can have a regular office that you lease it out to several companies, lawyers, etc, or you could have a medical office building (for example) where you lease to a hospital, or to dentists, dermatologists, psychologists, etc
3. Retail: within retail you can have a single tenant building, for example in the downtown area of where you live, you can own a building that is leased out to a coffee shop for instance, or you could have a restaurant in your building, so that’s a single tenant retail. Another type of retail is the small neighborhood service center, like the places that have 5-10 tenants where you go to the dry cleaner, and there’s also a nail salon, or a cash advance business for example. Another type of retail can be a strip mall with let’s say 20-40 tenants, like the place where you go grocery shopping and they also have a bank as a tenant, some food places like Burger King or a big box shopping center where they’ll have a Target, Macy’s, a food court, etc
4. Storage units: this is where people pay you a monthly fee to keep things they’ll never need in your building, and within storage you could focus on storing wine for instance, because people like to collect, but don’t have a lot of space to have a temperature controlled storage at home. If you have a lot of courage, you could store gold for people
5. Land: you could lease your land to all kinds of businesses. For example: for agricultural purposes, to wind farms, for RV’s to park for a few days, for truck drivers to park their trucks when they’re on the road
Why commercial and not residential?
1. NNN: this means that your tenants will pay for property taxes, insurance and common area maintenance (also known as CAM), this doesn’t happen in residential
2. With commercial properties you also get better tenants, you can get big companies such as Jack in the Box, or a bank, or a supermarket, and if you can get big name tenants to lease from you, you can increase the value of your property significantly. Why? Because these big companies are unlikely to out of business and the rent is pretty much guaranteed to come in, and the next investor buying your commercial property values that
3. Commercial tenants also sign longer leases: commercial leases can vary from 10-20 years, and sometimes more, there are yearly price increases that are negotiated on those leases, the leases typically start to get increased after year 5 for commercial properties
Welcome back to Best Commercial Retail Real Estate Investing Advice Ever! Today we’re going to be learning the questions that I ask a seller’s real estate agent after I take a look at a property on Loopnet and think that this could be interesting. You don’t necessarily need to ask all these questions every single time, but it’s a good idea to go over most of them when you call the seller’s real estate agent.
Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/questions-you-should-be-asking-the-sellers-real-estate-agent-when-interested-in-a-property/
A brief breakdown of the questions you should be asking the seller's real estate agent is:
1. Introduce yourself
2. How long has the property been on the market?
3. What is the potential you see for this property from an investor's perspective?
4. Are you local?
5. How did you come up with the price?
6. Who is the seller and how long have they owned the property?
7. Is there any known contamination in the property?
8. Does anyone have the right of first refusal (aka ROFR)?
9. Are there any easement agreements?
10. Please send me the rent roll.
11. Is the building historical?
12. Has the building been retrofitted (if older building)? Do you have any estimates to retrofit the building if it hasn't been retrofitted yet?
If you're finding this podcast useful, make sure to subscribe to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlo.home.blog/contact/
Welcome back to Best Commercial Retail Real Estate Investing Advice Ever! Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/what-is-a-cap-rate-and-what-should-you-be-looking-at-on-loopnet/
In this episode you will learn what is a cap rate, which is a variable rate that varies per property, and is determined when you are selling the property. As a buyer, you will be looking at various cap rates, and the very basic explanation is that it is the net income on the property divided by the price of the property. For example, there is a property for sale for $400,000 and the cap rate is 8% – this means that your income on the property is $32,000 per year. There are other intricacies about cap rates when you are selling the property, but what you need to know is that cap rates can vary greatly. It can vary by location (state, city, and even where within that city!), by tenant, by current interest rates, etc. A high cap rate is not always a good thing as you will see in this episode.
Cap rates also vary based on where the property is located in a particular city. If the property is in an incredible location, the cap rates are going to be lower, if the property is leased to a national tenant (for example Starbucks, Burger King), the cap rate will still be even lower because your rent is going to be guaranteed and you can easily sell this property. However, when you have a local tenant, and the property is not in such a great location, or is the location isn’t very visible, then your cap rate can be higher because the seller is incentivizing you to buy the property.
Cap rates are also determined by the interest rates on loans: when interest rates are low your are able to lend more money to buy property – meaning you qualify for a higher mortgage – however, when interest rates are higher, you can afford less property because you’re getting a smaller loan. You need to look at all of these things not only when you’re buying, but also when you’re selling a commercial property because when you’re selling that’s when it’s going to determine what the cap rate for the property is.
To elaborate more on cap rates varying by location: for example here where I am in California you can find cap rates as low as 2.5% in Santa Monica which means that you’re making a 2.5% income per year based on the price of the property. You can also find 7% cap rates in some areas of Berkeley for instance. However, in Alabama, you can find cap rates at 10% and that’s because it’s harder to sell the properties there than in California, so the sellers typically want to make the rate pretty attractive to the buyer.
You'll also learn how to evaluate a commercial property for sale at first glance. We are reviewing a property for sale on Loopnet.com and going over all the details you should be looking at such as: how to evaluate what they are describing the property as, understand price per square foot, parking ratio per 1,000 sf, location of the property and how to "walk through" the outside of the property with Google maps, walk score, what to ask for if you think the property could be contaminated, Phase I report, and much more.
Make sure to subscribe to this podcast to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlorei.com/contact-us/
The very first episode of Best Commercial Retail Real Estate Investing Advice Ever! Here is the step-by-step guide for your homework in today's episode: https://montecarlorei.com/the-journey-begins-retail-real-estate-investing-from-a-z-podcast/
In this episode you will learn a little bit about me: I have been living in Silicon Valley since 2000 and working in tech for the last few years. Being in the startup world, you definitely get enticed to become an angel investor in tech startups, and that is what I started doing – however – when I spoke extensively with my friend who has been investing in commercial real estate properties for the last 20+ years, we came to the conclusion that real estate is the best form of investment, not only from a cashflow standpoint, but also from a tax perspective, and on top of it all, it’s a very secure investment: the worst thing that can happen is not making any money (versus losing tons of money as an angel investor). And if you are here, you already know all of that and need no convincing!
You'll also learn how to setup your Loopnet alerts so that you can start watching your area and learn what is a good commercial property deal or not.
Lastly, you'll also lean how to get started on biggerpockets.com which is a great resource to start meeting people in your community, and learning a lot about real estate investing.
Make sure to subscribe to this podcast to continue learning about commercial real estate investing, and if you can please do me a favor and write a review since we are just getting started, that would be wonderful. You can contact me here: https://montecarlo.home.blog/contact/
See you soon!