Dad (owned 100+ units) Interview.
Buy in good neighborhoods, not depress, in areas that are good condition.
Look at Capitalization rate
– property management
– income minus expenses i.e roof replacement within time frame ur owning it
– condition of building will affect how much you pay for it
How much you need down is determined by the cap rate (income minus expenses)
- Always need 15% down
- Age of person buying i.e 30 v.s 55 year old. Much different
Key factors to analyze & purchasing
- 3 approaches
- Cost approach. What would it cost today to rebuild/rehab that 6 unit
- Comps (6 units for sale)
- Cap rate – Income approach.
https://www.cbre.us/ – commercial realtor (from large hospital complexes to office buildings) has cap rates/discount rate, is pretty much what your rate of return is.
Lower cap rate – makes it more valuable. I.e 7-12% (seller wants 5%, buyer wants 20%)
- If you only plan to hold for 5 years and interest rates go up, you could get hosed
- If you plan on holding long-term (your in early 20’s) then don’t matter
Interest rates do affect cap rates. Down would manipulate it down.
You have to become knowledgeable in: legal, repairing, who to hire/not hire.
LEASE – benefit of buyer & also to treat people in kind, and in a mannerly way.
– before they sign lease (Rob, trailer court), go over main points and explain.
He was (by state law) able to charge two deposits, which helped him filter out bad tenants
- If they did bail, he could recoup cost of cleaning & getting it rented
Standardized: same paint color, faucet, keys. He did change carpet color.
Unrealized costs: new roof, paint exterior, etc
- You should over estimate your expenses
Build your team and have processes in place.
– Auction, beware fine print. I.e building can be used as a restaurant, even if prior it was
– Foreclosure: for every good story there’s a bad story. Time can be major element. Balance out risk/reward when deciding.
– Residential. Contractor know the marketplace & have your team ready. Know what you’re getting into I.e Florida – has mold. Know: I can refurbish, put $x,xxx into it, I know the area is booming right now, I can sell it. But for average Joe is going to miss those caveats of hey you gotta put more money in that I need. (hiring more people to figure out what’s needed/more $$$)
Have your kids hold flashlight for you/bring them along if there’s a lesson to be learned (in a good situation).
Take your INCOME (from Business/R.E/Stock Market) i.e take income from apartment buildings and invest into stocks & bonds.
R.E is good as long as not too much competition, because then it gets time consuming. I.e Florida.
Stock market 8-12% is good. Age 30 you can more risk than 60. Have some fun too.
Business – you get a higher return, but you put a LOT of time, sweat equity.
Stock market – lower return but it’s very passive
R.E – take part of cash flow and put back into Improvements (annually), to keep up w/competition. Take part of retained earnings and put back into i.e keep building looking clean, shrubbery, new roof (not wait until hole in roof before replace). Make it better.
– Renters club in your area (also gives you idea of buying/selling).
– https://www.loopnet.com/ – free for a while.
Best Tip #1
Knock on door, find out who the owner is. “I’m an investor, I love your property. When are you goona sell it? I’m interested. I love what you do, I would love to own it someday.” Sometimes they will actually finance it for you.
- Benefit to them is they don’t have to pay Capital Gain, and you convince them that by them paying you through the years, that reduces their tax structure. Almost like setting up an annuity for them.
Best Tip #2
– When you see i.e 10 unit condo’s in a strip/complex. But 1 unit at a time (eventually all 10), maybe a little run down (paint & carpet)… then you own the whole building. But that takes a lot of due-diligence and time.
Put it in terms of their interests “You’re goona wanna sell the building someday & your biggest concern is Capital Gains tax. So, you know, I’m a successful business owner , I have a lot of collateral that I could offer up and you and I could maybe come to an agreement with no realtor, we could put the realtor aside so their not taking their 7% cut on say 1,000,000 building with is 70k right there.
– Legal paperwork would be under 1k for entire transaction. I have interest in maintaining the property , keeping it accountable. Come to agreement as you look at what costs would be. Throw that on table as a win/win.
You will need down payment and a lot of sweat-equity in time. Teach yourself how to be a good manager & approach people in a kind and loving way. Care about your tenants = success.
If you’re in good market area you can improve and raise rents, which in turn raises your cap rate, so when you’re looking to sell (you are also being kind to yourself).
Commercial you may have 3 month vacancy to suit the business owner. Raise the rents, makes up for lack of down payment (it can be hard for people to give you a lot of money upfront)
As a Buyer, you wanna look at 5 year history to see the trend line of prices of buildings and what charging for rents. Some sellers may try to jack up rents in year or two prior in order to elevate the property price. Which could create 100% occupancy down to 70% for you.
Once you sell 6 unit, pour that into say 15-30 unit , which is easier to manage (everything under 1 roof).
Don’t over leverage so that ur able to have some cash flow to reinvest into improvements. Take it slow and ease into it.