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Are You Focused on Commercial Real Estate?

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By Rick Tobin

Earlier this year in January, economists from the International Monetary Fund claimed that commercial real estate prices had fallen at the steepest pace in more than 50 years. As we now approach the fourth quarter here in 2024, the price drops have escalated and only worsened for property owners. Now, we might be seeing the worst commercial property price declines in U.S. history.

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Approximately 20%, or $929 billion, of the $4.7 trillion dollars’ worth of outstanding commercial mortgages owed to lenders and investors may balloon or become all due and payable by the end of 2024, as per the Mortgage Bankers Association’s 2023 Commercial Real Estate (CRE) Survey of Loan Maturity Volumes.

Between 2024 and 2028, upwards of $2.81 trillion in commercial loans are scheduled to come due and need to be paid off or refinanced, according to Trepp. Within this same analysis provided by Trepp, they project that more than $533 billion will balloon or come due in 2025. The largest commercial mortgage holders for these commercial mortgages coming due are regional banks and thrifts that hold over half of these maturing loans through 2028.

Commercial Real Estate Trends

Let’s take a look at both positive and negative commercial property trends across the nation in recent years:

  • The estimated total dollar value of commercial real estate was $22.5 trillion as of Q4 2023, which makes it the fourth-largest asset market in the nation following stocks or equities, residential real estate, and Treasury securities. (Federal Reserve’s April 2024 Financial Stability Report),
  • By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
  • 72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
    The typical length of a building lease in the US is three to 10 years. (DLA Piper)
  • Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
  • As of July 2024, the national office vacancy rate reached a whopping 20.1%. This was the very first time ever that the U.S. vacancy rate surpassed 20%. (CommercialEdge)
  • In 2024, the U.S. apartment construction industry is expected to break a new all-time record for apartment units delivered with well over 500,000 units completed, which is 30% higher than back in 2022. (Fannie Mae)
  • An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
  • The Inland Empire (Riverside and San Bernardino counties) in California had averaged an incredibly low 1.2% vacancy rate for industrial space in 2021 and/or 2022. (Commercial Edge)
  • However, vacancy rates for industrial properties in the Inland Empire skyrocketed to 6.8% by Q1 of 2024, a 400-basis point vacancy rate increase compared to 2023. The Inland Empire now has the second highest vacancy rate for industrial properties on the West Coast, behind only Phoenix. (Kidder Matthews)
  • Nationally, the industrial real estate vacancy rate reached 6.1% in the first half of 2024. (CommercialEdge)
  • For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)

Is Multifamily Strong or Not?

In many U.S. regions, the multifamily sector is very strong partly since so many tenants can’t afford to buy homes nearby that are currently priced at all-time record highs. In other regions, multifamily apartment landlords may be struggling with significant financial losses.

The multifamily apartment mortgage default rate has quadrupled over the past year, according to Freddie Mac. Last year in 2023, this year in 2024, and through at least 2025, more brand new apartment units will be completed and available for lease than at any other time since as far back as 50+ years ago in 1973.

Multifamily apartment landlords across the nation are defaulting on their mortgages with decade-high rates in states like California, Texas, Florida, and elsewhere.

Some of the main factors why multifamily apartment mortgage default rates are rising are as follows:

1. The owner’s existing mortgage rate may have increased by 100% or more after their previously 3-year, 5-year, 7-year, or 10-year fixed rate converted to a new adjustable rate at today’s much higher mortgage index. As a result, the once positive monthly cash flow turned negative due to the higher mortgage rates and payments.

2. Rising vacancy rates as fewer tenants could afford rapidly increasing rents in many of these apartment building locations found in various metropolitan regions.

3. In other regions, the vacancy rates had increased so much that landlords had to drop their rent prices which, in turn, turned monthly profits into losses.

4. Skyrocketing costs for various types of landlord insurance or umbrella insurance policies as well as increased litigation costs from unhappy or injured tenants.

The multifamily market is projected to add or deliver another 574,000 new apartment units in 2024 alone, according to an analysis shared by the CoStar Group. As a result, future rent prices may start falling as the available supply exceeds the demand.

Upside-Down Office Buildings

Almost 45% of all office buildings nationwide that are leveraged with debt are upside-down or underwater where the existing mortgage debt exceeds the current market value, according to sources like ZeroHedge, Bloomberg, and Morgan Stanley. Some office buildings are now selling for as low as $9 per square foot, not $900/sq. ft.

An eye-opening example of how massive some of these commercial property prices have plunged was the recent April 2024 sale of the 44-story AT&T Center office building in St. Louis, Missouri. Back in 2006 near the previous real estate bubble peak, the same building sold for $205 million dollars. In April, this property sold for just $3.6 million, which was a staggering 98% value drop.

Some savvy investors who purchase these discounted office buildings may choose to convert them into multifamily apartment buildings if the remodel and rezoning costs aren’t too high. Are you seeing heavily discounted office building deals in the areas where you live or invest as well?

Two of the main causes for falling residential and commercial real estate values are related to rising unemployment and upside-down properties as more people may soon clearly see, sadly.

All-Time Record Consumer Debt and Defaults

The ability to pay rent or a mortgage payment is directly related to access to cash and credit for most people. When times are more challenging and the employment or investment income is either lower or nonexistent, many people choose to access their credit cards to make their monthly payments. Once the credit card limits are reached, some tenants may not be able to pay their rents.

There is not a single state in the U.S. today with less than a 10% credit card delinquency rate for their residents as credit card APRs are near 28% to 40% in 2024, depending upon the credit card issuer and the borrowers’ creditworthiness .

Back near the depths of the Great Recession in April 2009 when credit card rates were closer to 12%, the national credit card delinquency rate was only 6.77%.

Highest Credit Card Defaults

By state, here is the percentage of consumers who are delinquent on one or more accounts:

* Mississippi – 39%
* Louisiana – 32%
* Alabama – 31%
* Arkansas – 30%
* Oklahoma – 28%
* Kentucky – 28%
* South Carolina – 27%
* Tennessee – 26%
* Texas – 25%
* West Virginia – 25%
* North Carolina – 24%
* Indiana – 24%
* Georgia – 23%
* New Mexico – 23%
* Missouri – 22%
* Arizona – 20%
* Nevada – 19%
* Wyoming – 18%
* Oregon – 17%
* California – 15%
* Florida – 15%
Sources: Trading Economics and John Williams

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Top 10 Credit Default Cities

Here are the U.S. cities where the largest share of people are behind on their credit cards by at least one payment.
1. McAllen, Texas — 51.7 percent
2. El Paso, Texas — 46.3 percent
3. Baton Rouge, La. — 45 percent
4. Greensboro, N.C. — 44.8 percent
5. Columbia, S.C. — 44.6 percent
6. Jackson, Miss. — 44 percent
7. San Antonio, Texas — 43.8 percent
8. Augusta, Ga. — 43.3 percent
9. Greenville, S.C. — 42.6 percent
10. Memphis, Tenn. — 42.5 percent

Source: LendingTree

Discounted Real Estate Buying Opportunities

Just like following the Great Depression, the Savings & Loan Crisis, and the Great Recession, there were incredible discounting buying opportunities for homeowners and investors who were searching for both residential and commercial real estate deals.

You must continue to stay focused on the opportunities rather than on the obstacles to get ahead in this world. “Out of chaos comes opportunity” as I like to say repeatedly to friends, family, and clients.

If 99 people are running towards the hills and doing nothing, you can be the sole brave and wise person who buys the property for almost cents on the dollar like some of the office building deals. If so, you might create generational wealth for you and your family.

Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411.com or our Eventbrite landing page, CLICK HERE.

10 Roads To Real Estate Investing Profits

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By Tamera Aragon

“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” The Bible – Ecclesiastes 11:2

This is good advice as long as you don’t get so spread out that you are doing too many things but nothing with success. It’s important we understand the fine line between focusing on one real estate niche without putting all your eggs in one basket, (so to speak).

To simplify the terms of real estate investing, there are really only three ways for investors to make money in real estate:

  1. Real Estate Appreciation and Equity
  2. Cash flow while you own it
  3. Assignments: Payment when you flip a real estate contract without owning it.

So where do you start? Let’s try to answer this question on every aspiring real estate investors mind. Since real estate investing encompasses so many types of exit strategies or I like to call profit centers, it’s important to study and pick those you are most passionate about. otherwise called exit strategies.

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The following is a summary of Ten of the Most Popular Real Estate Investment Strategies with their advantages and disadvantages.

1. Rentals or Cash flow Investment Property: These types of investment properties are the ones which generate rental income. These are mainly apartment buildings and rental houses.

  • Advantages: One of the easier ways to get started, and good long term return on investment while also earning monthly income.
  • Disadvantages: Risk of not renting property leaving you with the mortgage payment and no income. Property management can be a challenge. You typically will wait awhile to sell your property so payoff is slow.

2. Lease Option. This is when you buy a property, then sell to someone else via a rent-to-own arrangement.

  • Advantages: You get higher rent, and the buyer is usually responsible for maintenance. Cash flow can be good.
  • Disadvantages: Most rent to own buyers don’t complete the purchase (this can be an advantage too, but it does mean more work for you). Bookkeeping must be done properly and can be complicated.

3. Fixer Upper Investment Property. These types of investment properties are the ones which are in ugly condition and need renovation. These properties can be acquired to flip after fixing-up quickly or held to rent out.

  • Advantages: You can receive a quick return on your investment (months). You usually get below market value pricing on properties bringing you instant equity.
  • Disadvantages: Higher risk. (Many unpredictable expenses come up in construction). You get taxed heavily on the gain when you sell in under a year.

4. Vacant Land. Many options including just holding while appreciating. You can also split it and sell it.

  • Advantages: History has shown that land always appreciates in value (it’s the buildings on the land that go down. It is simpler than most real estate investments, with the possibility of great profits.
  • Disadvantages: It can take a long time to increase in value. You have expenses, but no cash flow while you wait unless you sell the contract before closing.

5. Commercial Real Estate. These are any building containing 5 units or over and/or buildings sited for commercial use.

  • Advantages: Long term triple-net leases mean little management and high returns. Lending is usually based on the value of the property vs. personal credit.
  • Disadvantages: Commercial property valuation requires a more complex method, taking into account the income potential of the property. This is recommended for the more experienced investors as there is a lot more involved to set up and maintenance.

6. Buy property with Forced Appreciation. Buy in the path of growth and holding until values rise. For instance buying a lot in a residential development prior to roads being completed.

  • Advantages: Can yield large profits, especially if you buy low to start.
  • Disadvantages: Future price is not predictable – the market can turn, the developer can go out of business. You have expenses with no income while you’re waiting.

7. Preconstruction Investment Property: These types of investment properties are acquired directly from a developer before the construction or renovation is completed.

  • Advantages: Low money out of pocket to tie up property while being built. If purchased in appreciating markets, you make money in equity at closing and can instantly re-sell at a profit.
  • Disadvantages: You can’t always predict what a market is going to do. If market depreciates, you have lost money. Also higher tax rates in selling quickly.

8. Pre-Foreclosure Investment Property: These types of investment properties are the ones which you buy from sellers who are behind in their payments and may lose their property to the bank via foreclosure.

  • Advantages: You have opportunities to buy properties at below value pricing – “Instant equity”.
  • Disadvantages: Legal liabilities are higher. Finding these properties requires a lot research and footwork to find a deal that works. You can do all the work and still not have a deal with enough equity to profit after expenses to sell, (taxes, realtors, etc).

9. Assignments: This strategy has you get into a property at a discount, preferably with a known buyer in place before you commit to your purchase. After you are in contract to purchase a property, you would sell your contract for a fee to someone else. For example you get into purchase contract to buy a $120K property for $100K. You turn it to an investor for $110K and profit $10K cash without the cost and hassles of ever closing on the deal.

  • Advantages: This is a great way to make quick cash with low or no upfront investment, low risk and fewer headaches from closing and ownership. This strategy creates a win win win outcome for everyone involved.
  • Disadvantages: This will only work if the property you are buying has equity so that you may buy it a discount. In declining markets, this type of property is harder to find. Also when dealing with banks on REO’s or Short Sales you will find they will not allow you assign your contract. However, there are ways to get around this if you plan and handle the contract correctly up front.
    Do you want to know how I have managed to get around not being able to assign a contract? I have purchased properties in the name of an LLC set up exclusively to buy properties. I then sold the LLC to someone, making them the owner of the LLC, therefore making them responsible for closing on the purchase contract and end buyer of the property.

10. Flipping – Wikipedia defines Flipping as is a term used primarily in the United States to describe practice of buying an asset and quickly reselling (or “flipping”) it for profit ..

This description pretty much explains property flipping, with there being a slight difference from that description of flipping assets. In real estate you can get into an agreement to flip a contract you have gotten into before you even buy it. This can be done with ease when you know exactly what your buyers want and with no money out of your pocket utilizing transactional funding. Flipping can also mean closing and quickly reselling your property, sometimes even doing both transactions the same day – this being subcategorized a “double closing”.

  • Advantages: My favorite strategy. You work the deal backwards. You create relationships with buyers who can close quickly with cash. Then you find a property meeting the needs of your buyers. This strategy allows you to profit literally from no money down, with lower risk and very little of your own time.
  • Disadvantages: The law requires you to disclose your intent to resell quickly to sellers. When dealing with banks, this can sometimes cause your offer to be rejected. You must buy properties in the name of an LLC in order to utilize transactional funding. Setting up and maintaining an LLC will cost you money. Though the intent of a buyer might be to close on the transaction, sometimes “life happens” and something causes the buyer to be unable to follow through. You may have to walk away from earnest money if you cannot find another buyer quickly

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Now that you that you have learned strategies to consider, you will need to consider the type of properties you want to go after, developing a marketing strategy to find motivated sellers of those deals. Over the next months I will be sharing steps and strategies on how to profit investing in real estate 12 different ways.

Please leave a comment if you have anything you would like add to what I have written here with the heart to support fellow real estate investors. (Any solicitations for business will not be published) I appreciate the feedback!

Tamera Aragon

Tamera Aragon is a professional online entrepreneur and has bought and sold over 300 properties, establishing her as an expert in the real estate investing field. Since 2003, she has purchased over 10 million dollars in real estate and currently holds properties all over the world. Tamera’s focus is on the booming Foreclosure market, buying Pre-foreclosures, REOs and Short Sales. Tamera who is a noted Author, Success Trainer, Speaker & Coach, shows her passion for helping others with the 17 websites she has created and several specialized products to support fellow investors throughout the world. When Tamara is not busy running her website, she is very involved with her Fiji joint ventures and investments. Tamera Aragon is one of the few trainers and coaches who is really “doing it” successfully in today’s market. Tamera’s experience has earned her a solid reputation in the industry as well as the respect and friendship of many of the top national real estate investment and internet marketing experts. Tamera Aragon believes her success has garnered her the financial freedom to fully enjoy her marriage and spend quality time with her children.

Learn live and in real-time with Realty411. Be sure to register for our next virtual and in-person events. For all the details, please visit Realty411Expo.com or our Eventbrite landing page, CLICK HERE.

Commercial Mortgage Lending to Get a Big Boost

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Article by Fuquan Bilal, NNG Capital Fund

Commercial mortgage lending could clock in another record year for 2019, and see billions more deployed in 2020. The smart money is bullish on commercial real estate lending and debt. Big players plan to increase their stake in this sector in the months ahead.

That could be a great thing for real estate investors of all sizes, and provide new opportunities for those navigating the space between distressed assets and new capital eagerly waiting to be put to work.

Who is Funding CRE Deals Now

According to the Urban Land Institute:

  • Banks still fund 40% of all CRE debt each year
  • Government sponsored agencies take up 22% of the market
  • Commercial mortgage backed securities make up 16% of the market
  • Debt funds and nonbank lenders account for 11% of lending
  • Life insurance companies make up 10%

CRE Lending Rising

As of the middle of 2019 all commercial mortgage debt totalled $3.5T. Commercial and multifamily mortgage lending grew 10% year over year through the second quarter of 2019, and 29% between Q1 and Q2 according to the Mortgage Bankers Association. There was a 32% rise for multifamily loans specifically. 42% of the loans made in the first half of the year were refinances.

With the stock market still frothy, the political chaos only heating up, and the residential mortgage lending market hampered by over-regulation, even more capital is likely to find its way into commercial mortgages over the next 12 months.

Life insurance companies in particular are preparing to ramp up their activity. Total multifamily loan originations are expected to hit yet another record high in 2020 according to coverage by Housing Wire. Life insurance companies have said they hope to add $50B to $120B in multifamily loans to their portfolios. Even a $10B increase would mean a 30% rise in the total for multifamily lending compared to 2018.

Opportunities For Real Estate & Debt Investors

All of this capital means liquidity for investors. Especially in the form of cheap money. At the same time there are some sizable gaps in the market.

Keep an eye on maturities. The last few years of sprinting and new investors trying to graduate to multi families, without much thought for short deadlines and the need to refinance and restructure debt could present some opportunities.

There are also many borrowers struggling on prime properties that could be ripe for conversions.

The smart money is definitely in, but it needs active investors to put it to work for them.

LEARN MORE:

Discover additional information and learn about investing in secured debt and real estate, please visit NNG Capital Fund

Sun and Sea Villas Boutique Hotel Changes Hands

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Lauderdale-By-the-Sea, FL- March 21 – Rick Tobin of Premier Hotel Realty announced today that Sun and Sea Villas, a 9 unit hotel, was sold Friday March 15th to a buyer from North Carolina, for $1,990,000. Sun and Sea Villas is located at 4512 Bougainvillea Drive, one block from the beautiful Atlantic Ocean and 2 blocks north of Lauderdale by the Sea’s bustling downtown.

Sun and Sea Villas has been a favorite of seasonal travelers because of its proximity to the Atlantic Ocean and to Lauderdale-by-the-Sea’s popular beach area, downtown shops and restaurants. The pet-friendly property also offers access to a public park across the street with tennis courts, basketball courts, a playground and a dog walk.

The seller sought out the help of Premier Hotel Realty to market the property both locally and internationally to buyers who would appreciate the increasing values, great weather and economic and political stability of this seaside community.

Rick Tobin, Broker for Premier Hotel Realty and a Director of the Greater Pompano Beach and Lauderdale by the Sea Chambers of Commerce said, “We saw massive interest from both local and foreign buyers looking for a South Florida beach-area resort. Investors from around the world are noticing the long term value of the area. This is one of the many recent hotel sales that I’ve been involved in. I’m honored to be playing a part, not only in helping these sellers move on to new goals, but also to be bringing new owners to the area. I only wish I had more properties for eager buyers.”

About Premier Hotel Realty

Premier Hotel Realty, led by Broker, Rick Tobin, is based in Pompano Beach, Florida and globally markets a wide variety of commercial properties. Premier has been advising on hotel and other commercial transactions in South Florida’s beach communities. Tobin also markets local apartment buildings, industrial properties and other types of commercial real estate, often marketing to investors from around the world, recently including Canada, Sweden, the Ukraine, Denmark, Israel and various countries in South America.

For more information contact Premier at [email protected]

 

The TOP FIVE Reasons to Consider COMMERCIAL REAL ESTATE for Your Portfolio

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By Tom K. Wilson

While many investors see single-family homes as their “bread-and-butter” investment, investing in commercial properties is an option that can also help you achieve your financial goals.

“Commercial” in its broadest lay vernacular includes multifamily apartments, however, the true industry definition separates multifamily properties (over five residential units) from true commercial, such as retail, office space, industrial, self-storage or medical centers.

I’m often asked what kinds of properties I recommend. There is, of course, no one size that fits all investors or markets. While in a normal market multifamily properties are a natural progression from single family homes, this is anything but a normal market and currently there are too many multifamily buyers chasing too few deals, so it currently has lower CAP* rates or returns than pure commercial.

Here are five reasons to consider commercial properties for your portfolio.

#1 HIGHER ROI

Commercial properties often have higher and more predictable return-oninvestment than single-family homes, in part due to the economies of scale from investing in a larger property not usually available to the small investor.

For example, a current commercial retail center that we are acquiring has an 8.2 CAP rate and a four-year internal rate of return* of 12.0%. When you can borrow money at 4.25% and invest it in something yielding 12.0%, that’s worth considering!

#2 FEWER HEADACHES

It’s generally easier to manage one large property through a professional property management firm than to manage scattered single-family homes. Also the business tenants you get in retail or office space are usually of higher quality than most residential tenants. Business tenants have higher credit/risk scores, have pride of ownership in their businesses and want to protect their livelihoods. As a result, they have an interest in taking care of the property.

Many commercial properties are NNN* (triple net), so the tenant pays most of the expenses including taxes, insurance, and maintenance making the owner’s expenses very predictable and consistent.

#3 STABLE CASH FLOW

Commercial leases are typically 5-10 years in length vs. annually for single-family homes. Additionally, commercial leases include annual bumps in rent and options to-renew. As a result of all these factors, cash flows are more predictable.

#4 NO 10-MORTGAGE FANNIE MAE LIMIT

Any loans taken by the owner or syndicate do not count against your 10-mortgage limit because they are in the name of the owning entity and not on your personal credit. This enables you to put more of your capital to work.

#5 APPRECIATION MULTIPLIERS

Unlike single-family homes, which are strictly valued based on market demand, or ‘sales comps’, commercial properties are valued as a multiple of their Net Operating Income (NOI),* which can be driven up by a good property manager’s addition of value. At a Cap Rate* of 8.0,everyone-dollar increase in annual NOI can result in $12.50 of appreciation!

Steps you can take to actively improve NOI include:

  • Upgrading the existing buildings
  • Increasing TI (tenant improvement)
  • Adding leasable square footage
  • Raising rents
  • Reducing operating expenses
  • Adding amenities
  • Adding additional revenue generating resources (ATM kiosk), and many more

Rather than wait for market forces to raise real estate prices organically, you can create appreciation using levers like the ones listed above.

ADDITIONAL BENEFITS

Of course, the five advantages of commercial real estate listed above are in addition to the usual benefits of any real estate investment:

  • Tax Benefits
  • Hedge against inflation
  • A hard asset with intrinsic value

Caveats of Commercial Investing

No discussion of commercial investing would be complete without noting a few issues that investors should be aware of.

Financing can be more challenging

Typically, the investor(s) must put down 25-30% of the sales price and finance the loan amount over a 5-10 year term with a balloon payment at the end of the term. Selling or refinancing options at that time will vary depending on market conditions. And there can be stiff prepayment penalties.

Not as Liquid

If you own 10% of a Commercial building and want to sell your interest, you can sell to your fellow investors (who usually get first right of refusal) but if none are interested, it may be difficult to get out of the investment. That is why long-term funds, like IRA money, are ideal for commercial properties.

Sale of a Commercial Property can take longer

While just about everyone wants a home, only a small percentage of the population is capable of purchasing a retail center or office building. The smaller market of potential buyers coupled with a detailed due diligence process means that the sale of the property can take longer than for a single-family home.

Syndications

Many of the challenges outlined above can be mitigated by investing with an experienced syndicator. Their knowledge, track record, and ability to qualify for the loan and manage the property, allows the small investor to participate in a high quality commercial property or to invest in multiple projects to distribute their risks.

SUMMARY

The benefits, economies of scale, opportunities for forced appreciation and higher returns make commercial properties an attractive addition to most investors’ portfolio, and one worthy of serious consideration.

For your free copy of Wilson Investment Properties article “Are Real Estate Syndications for You?” and a guide to “Commercial Real Estate Terms” please go to our website, www.TomWilsonProperties.com .

Tom K. Wilson has utilized his experience and skills acquired in 30 years of managing some of Silicon Valley’s pioneering high tech companies to buy and sell more than 2,500 units and over $130 million of real estate, including three condo conversion projects, eight syndications, and seven multifamily properties. He founded and owns Wilson Investment Properties, Inc., a company that has provided over 500 high cash flow, high-quality, rehabbed and leased residential properties to investors. Active in real estate associations, Mr. Wilson is a frequent speaker on real estate investing where his expertise and experience makes him an audience favorite. He is the weekly host of the Wed 2pm edition of KDOW’s RE Radio Live in San Francisco, the Wall Street Business Network (1220am).

*A GLOSSARY OF COMMERCIAL TERMS

CAP RATE (Capitalization Rate)

A measure of return calculated by dividing the property’s net operating income by its purchase price.

CONC (Cash on Cash Return)

A measure of return calculated by dividing pre-tax cash flow from a property by the total cash invested (e.g., down payment plus closing costs).

GRM (Gross Rent Multiplier)

The Gross Rent Multiplier is a measure of how expensive a commercial property is relative to the gross rents it brings in, calculated as: GRM = Purchase price of the property / Gross monthly rents.

NOI (Net Operating Income)

The total income from a property minus vacancy, credit losses, and operating expenses.

NNN (Triple Net)

A commercial lease in which the tenant pays three operating expenses (in addition to rent): Property taxes, insurance, and maintenance.

ROI (Return on Investment)

ROI measures the amount of return on an investment relative to the investment’s cost and is calculated as: ROI % = (Gain from the investment – Cost of the investment) / Cost of the investment.

10 Things You Have to KNOW Before CLOSING a Multifamily Deal

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By Tom Wilson, CEO of Wilson Investment Properties

There are so many reasons to get excited about owning a multifamily property that it can be easy to overlook one or more critical areas of due diligence. I’ve been investing in real estate for five decades, and I love multifamily products. My best performing asset is a multifamily that I purchased 17 years ago. And the worst deal I ever owned was also a multifamily asset.

Often deals look amazing with the proforma (projected returns with ideal conditions and assumptions) showing high cash flow and high IRR (Internal Rate of Return) projections. These returns are indeed the goal; however, you need to determine if they are just virtual (on paper) or if they can actually reach your pocket. I’ve seen the good and the bad, compiled my experiences, and would like to share the top ten things to consider before closing on your next multi-family deal to maximize your success.

1) LOCATION LOCATION LOCATION.

The metro and the sub market are critical. What is the traffic count? Visibility? Is it on the right side of the freeway, or in the path of progress for its city or town? What do its neighbors look like? Who is shopping in the local stores? Would you walk the streets at night?

The answers to these questions are going to be indicative of your experience if you purchase the property.

2) GREMLINS INSIDE?

Every property has surprises. Some good, mostly not. While a smart purchaser always includes contingency and reserve accounts, certain multifamily properties hold more surprises than others.

The foundation, age of chillers and boilers, environmental review, roofing and all deferred maintenance can be major red flags of potential deal-breaking capital expenditures. Make sure your team walks every unit, not just a sample. Twenty percent of the units can chew up 80% of your rehab capital. Also, who is actually living inside your potential property? Review every lease and check if they are really representative of the area. Did the seller fill up the property with low qualification residents just to show a high physical occupancy?

3) JOB & POPULATION GROWTH.

How good is the metro? Any multifamily property requires stable or growing rents and tenancy to be a successful investment. Good tenants have jobs and pay their rent on time. Look at individual job growth statistics. Is the city growing faster than the state or nation? What about in your sub market? Good job markets attract people, while bad markets see net negative population growth.

If your property’s market is stagnant or on the decline, chances are your occupancy rates will follow.

4) ONE HORSE TOWN?

So you like the metro, employment is good, and population increasing. Now ask yourself “why?”. A good metro has good employment diversification that will weather storms and booms of economic sectors and individual corporations, while singular economy metros are more vulnerable.

Remote military towns can be shut down overnight by congressional base closures. Large corporate offices or manufacturing plants can be relocated else-where or even overseas with mass layoffs in the local area. Natural resource boom towns are vulnerable to single commodity prices and competition.

Even government offices can be moved to newer, cheaper areas, which can leave a non-diversified metro in shambles and hurt your investment. I like growing metros over 1 million people with a broad economic base.

5) PARKING LOT TEST.

Another surefire way to take a litmus test of a property’s tenants is to drive the parking lots at different times of the day and week. Good tenants have jobs and are at work, and the number of cars during the day should be pretty scarce.

If you find a full parking lot during mid weekday, chances are there are many tenants on various levels of subsidized or governmental support, who tend to live with less of a financial buffer to pay rent and care for their unit. This could indicate a higher likelihood for turnover, make-ready costs, and lower occupancy. Park at the property at night and watch. Who is coming and going? A lot of traffic on site that are not occupants could indicate illegal operations or extra tenants who are not on the contract.

6) SELL STORY.

Why is the current owner selling? Have they been struggling for years to make it perform and have just given up? Did they not have enough capital to mitigate deferred maintenance or to attract higher rent tenants? Perhaps the neighborhood is rougher than the listing broker is making it out to be.

I’ve passed on what appeared on paper to be amazing investment opportunities, simply by asking,“Why couldn’t the existing owner do better, and what makes me think I can outperform the current owners?”. Sometimes the property is good but the nearby properties are better, and it would take too much capital to just come up to par with the competition. Remember, the seller knows more about the property than you, so it is important to fully discover the history and challenges.

7) MANAGEMENT & MAINTENANCE.

A critical way to control the tenant density environment, improve service to tenants, and reduce costs is to have full time on-site property management and maintenance.

This allows you to better control who lives in your property and get prospective tenants to sign leases before finding other options. It also allows you to quickly evict problem tenants, and to get maintenance and other problems fixed with minimal wait times and maximum tenant retention.

Typically, a multifamily has to have $40-50 thousand minimum income to afford to have on-site management and maintenance. Any less or a parttime solution with less effective service can hurt your property’s performance. That is why I avoid small multifamily properties.

8) WEAK ASSET IN A GOOD NEIGHBORHOOD.

You can have a lot of control on improving a property, however, almost no control on fixing the neighborhood. I will look at C properties but almost always insist on a B- or better neighborhood.

You’ve heard one philosophy for buying houses to look for the ugliest house on the best block – the same can work for multifamily properties. Find a property for which added value and better management can take advantage of the lift from neighborhood. The sub market around you can help or hurt you. Choose it as carefully as you choose the property.

9) RECESSION REVIEW.

It’s easy to have a Midas complex in this bull market and start believing that everything anyone touches turns to gold. And it’s true, when the economy is on an up-swing, even mediocre properties with average management can be successful. This holds true until it doesn’t, and those who don’t plan accordingly will get hurt the most.

I look at the great recession performance years (2007-2010), and see how the product and sub-market performed then. How much did the occupancy drop? Did the NOI crater? How did the sub-market’s population and unemployment do?

These are good tests on how the property and area will do in the next recession. And all expansions end, we just don’t know when. Select a historically resilient market and plan on having enough reserves and low enough leverage so your property will survive the next recession.

10) FRIENDS AND FAMILY TEST.

Lastly, especially if you are responsible for other investors’ money to help fund acquisition, ask yourself “would I offer this investment to my friends and family?”.

If the answer is “no”, or even if you have to pause and think about it, you likely already know the answer and should listen to your subconscious and walk away while you can. That final “gut test” is useful in overriding our mind’s uncanny ability to talk ourselves into a bad decision even when we know deep down it’s likely higher risk than we feel comfortable with.

This is just a sampling of the many important things to look for during due diligence before closing or even making an offer on a multifamily property. One of my top observations is that sub-markets vary a lot from the average of the metro, and the sub-markets and surrounding areas can be as important as the property itself in determining likelihood of success.

And lastly, don’t reinvent the wheel. Ride on the coattails of experts and utilize the experience of others. Even though I have almost five decades and 4,000 unit transactions of experience, I never do a new deal without consulting an expert for every aspect of the investment, including the sub-market and the asset class. Use those trusted advisors around you that have honed their expertise and judgment and you’ll greatly increase your probability of having a successful multifamily asset.

To your financial success,

Tom K. Wilson

CEO Wilson Investment Properties