Investing in Apartment Buildings

The 10-Minute Offer for Apartment Buildings

This ebook teaches you the proven and tested system for making offers on apartment buildings and getting the deal in no time at all! You will control the entire process, and you will learn every detail that you need to clear. You will learn the tips and tricks for working with brokers and how to make sure that the deal falls completely in your favor. Investing in apartment buildings has the potential to be one of the most lucrative businesses that you get in to, because the right building can turning huge amounts of profit without having to spend too much time working for that money. With this ebook, you can get started on the right foot by making sure that you get the deal with plenty of money left to spare. You will cut the deal of a lifetime in 10 minutes or less. It doesn't have to take much time at all to make money! Continue reading...

The 10Minute Offer for Apartment Buildings Summary


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Apartment buildings also known as residential properties

The commercial properties that are in the residential category include everything from small apartment properties (five or more units) to huge apartment building projects that cover several city blocks. You drive by thousands of commercial properties like this every day (or you may even live in one). Every single building you see is owned by a commercial investor who's in the game to make money. (Now anytime you see a nice apartment building, you won't be able to stop thinking about getting into commercial real estate investing.) What we find great about investing in apartments is that they're easy to find, banks love to lend on them, and they're great cash flow generators.

Small Apartment Buildings

Smaller apartment buildings, containing between 5 and 100 units, are part of a fragmented market. A lot of mom-and-pop owner-operators run small apartment buildings. money for you. It is harder to sell an apartment building than a home if the market goes bad because it is an investment property. It is more difficult to find financing for an apartment building than for a home. Rarely will a bank or mortgage company loan more than between 60 and 80 percent of the purchase price of a small apartment building.

An Eight Unit Money Maker

I recently discovered an eight-unit property that is up for sale. This apartment building generates 40,800 a year in rents. The seller is asking 245,000.2 Operating expenses (maintenance, property taxes, insurance, management, yard care, etc.) for the property total about 18,000 per year. After allowing, say, 3,000 per year for vacancy and collection losses, an investor would still net (before mortgage payments) 19,000 a year. You may not need qualifying income to finance an apartment building.

Lending Money Using Real Estate as Collateral

Most of the real estate private loan situations concern individuals or small groups of people who have bought commercial property, such as small strip centers, apartment buildings, or storage facilities. Some of the people looking for loans may have a construction company, and some may have bought residential or mixed-use property. There are many different types of property that an individual or a small group of individuals can buy. When properties are owned by small groups of individuals, these partnerships or limited liability companies (LLCs) are always looking for investor dollars. In this tough economy, more and more individuals and small groups in partnerships or corporations are seeking private money for residential, commercial, or land loans. Many types of loans are available conventional, hard money, and private capital loans and the terms of the loans are dictated on a case-by-case basis. The primary factors in choosing the type and terms of a loan are the nature of the...

Can I make money at commercial real estate investing

This is one question that we have a definitive answer for Yes We know that you can make money investing in commercial real estate for three reasons 1 If you look at the most successful investors out there you'll find that they all have a pattern in common They've typically started out by investing in homes, running a business, or working in a fairly well-paying profession. The next step is to begin investing in smaller commercial properties such as apartment buildings. At some point the successful investors all move up to either big commercial deals or land development.

Myth 3 You Can Flip Your Way to Success or Get Rich Quick with No Money Down

Many people think that flipping property, in other words buying it and quickly turning around and selling it for more than you paid for it, is the way to grow wealth. The people who believe strongly in this have been lucky enough to make money this way. But in my opinion, this is like day trading in the stock market. It isn't easy, and it is very risky. No money down is another way of saying that the property is 100 percent financed. That means a much larger part, if not all, of your cash flow is going toward the monthly payment. In no-money-down deals, you'll be paying higher interest rates because there is greater risk to the lender, have higher loan costs, and have virtually no money to improve the property or even repair it should something break. With this model, you are banking on the property appreciating to make money rather than improving the operations of the property and making money through cash flow. Let's hope the market is high-flying and that you time it perfectly...

Increase the Market Potential of a Property

Wallace could have taken a number of directions. Keep in mind that one form of increasing the market potential of a property is to make it available to more ready, willing, and able buyers. As seller of the apartment building, Mr. Wallace could have turned the building into a condominium or a cooperative apartment building, seeking 25 different buyers at much reduced prices. In some market areas, this has been the direction that many sellers have taken, producing a greater sales price than would have been realized had the building been sold to a single investor. Let's go back to our apartment building seller, Mr. Wallace. If part of his long-term goal was to retire to the mountains of North Carolina with a nice cabin and 10 acres of apple trees, he might look for an exchange that would take him directly to that goal. It is possible that somewhere in the North Carolina mountains there is a property owner who would like to own the Wallace apartment complex. Of course,...

What Kind of Properties

Should you invest in single-family homes, duplexes, apartment buildings, condominiums, shopping centers, office buildings, land, or trailers This 40-Day Plan has worked in nearly every community with every type of property. Keep your investor's eyes open. Remember, someone's going to buy that property you're considering someone's going to sell it someone's going to move into it. Staying narrow, deep, and focused brings success in any business. It's competitive out there. Most investors select one or two types of property and one geographic area to specialize in. I began specializing in single-family homes and duplexes in a certain area of Nashville, Tennessee, and it's worked well for me. I have a friend who specializes in small apartment buildings another who just does preconstruction on condos another who just does new construction in Las Vegas another who just does small commercial properties in his area. I highly recommend that you stay narrow, deep, and focused to keep your...

Do I have to be a genius to crunch the numbers

Wasn't too difficult, was it Now, here's an example for a 30-unit apartment building. You have 30 two-bedroom units renting for 500 per month. That totals 15,000 per month in income. Total expenses for the 30 units are 6,000 per month (which includes taxes, insurance, maintenance, and property management costs). The mortgage payment is 5,000 per month. Here's how the formula works to find the cash flow per month This concept applies for office buildings and shopping centers as well. Just remember that for any property you want to analyze, you need to get the income first, the expenses second, and the debt payment third. From there, you can see whether the property makes any money. In this book, we go through this concept in much more detail. In fact, after going through the real-life examples that we provide, your confidence level should be incredibly high.

How Is Commercial Real Estate Different from Residential Real Estate

Here's our definition of commercial real estate It's any piece of real estate that's bigger than one house on one lot. So, commercial real estate includes everything from small apartment buildings (five or more units) and large office buildings to shopping centers, to industrial parks, and even land development. i Commercial real estate projects are passive investments only after they're up and running. Remember that unless you have a ton of money and don't care about getting huge returns, commercial real estate will take a lot of your time and effort to get started. After all, you have to deal with many things, including the learning process, finding the right mentors or teachers, searching for the right deal, financing your investment, picking management teams, protecting it from lawsuits, and overseeing the project. If you don't believe us, consider these numbers When several of our Commercial Mentoring Program clients were sharing how they got started in commercial real estate, we...

What Types of Investments Are Available

We define commercial real estate as any real estate that's bigger than one house on one lot. So even if people live in the property, it's still commercial as long as it's bigger than one house. Some people would argue that a little property like a duplex or a four-unit isn't really commercial. That's ok. We like keeping our definitions simple. Actually, five or more units in an apartment building is considered commercial, but who's counting We explain each of the different types of commercial property in the following sections.

Apartments into Condos

More recently, rapidly escalating condo prices, rising vacancy rates in apartment projects, and softening rents have encouraged increasing numbers of investors to buy apartment buildings and convert them into condominium developments. Similarly, facing soft office markets, some investors are converting office buildings into commercial condominiums. Large numbers of doctors, lawyers, and accountants (or even other investors) are signing up to buy them.

Investors in Physical Capital

Financial market interactions involve two types of players those who need funds for physical investment and those who provide the funds. Traders, as well as individual and institutional investors, are providers (sellers) of funds. Durable and nondurable goods manufacturers together with builders of single-family homes, apartment buildings, and commercial and industrial buildings produce physical investments that must be funded. They provide financial markets with shares of stocks and a supply of bonds. While individual and institutional investors may look for high yielding securities (and might favor a rising rate environment), investors in physical capital prefer a low interest rate environment to finance their borrowing. Often, you will find new bond issues brought to market when companies feel interest rates are bottoming out, or when they find windows of opportunity in a high rate environment. On the whole, investors in physical capital benefit from a low interest rate environment.

Properties Create Easy Cash Flow

What business do you know where you can advertise for nine days with a small classified ad and some handwritten signs and get 50 potential clients begging you to choose to do business with them The only one we know of is real estate. When you have an income-producing house or apartment building, you can easily find someone to rent the property. The money that they pay you monthly is a passive stream of income that takes very little work on your part, provided you set up the deal correctly as you'll learn to do in Chapter 5. One of my apartment buildings nets me over 30,000 per year. That money is mine without having to do any work other than look over the monthly statements from the management company and make a few decisions each year. Yes, I had to work hard to put this deal together and to get the property set up correctly, but from that point on it turned into a hands-off deal.

Myths and Questions about Investing in Commercial Real Estate

If you don't believe us, here's an example Donald, a mentoring student of ours, recently purchased a 24-unit apartment building. The purchase price was 750,000. The owner carried a second mortgage of 100,000 for Donald. That left him 50,000 for a down payment. Donald negotiated 30,000 for repair credits at closing. That left him with an out-of-pocket cost of 20,000, which he funded from a refinance from another property. Donald proves you only need to be rich in desire and creativity. Coauthor Peter Harris started his career by buying small commercial properties. His first was a cheap seven-unit apartment building. His second was a small and quaint self-storage building used by the plumbers in town. He did this part time while holding a full-time day job and raising a small family. It all started from there and grew to owning and operating large community properties around the country. controls in commercial real estate investing. If you compare it to residential real estate...

Basis of the Transaction

Suppose you want to buy an apartment building for yourself. Within step 1 of negotiating, you must examine the various elements involved What is the long- range goal you plan to reach through the purchase or acquisition of the apartment building Is it to buy the property for a potential conversion to a condominium or other use some time in the near future Or do you want to maximize equity build-up and plow as much of the cash flow back into the property to attract a wealthy prospect The investment plan is important because this will dictate the direction you go in developing the financing for the acquisition. Both the long-term and short-term goals are important, and must be kept clearly in sight. It is too easy to overlook the original objective and to attain the desired result in such a way that you jeopardize your long-term position. Assume that your long- term goal is to establish a steady income at the end of a 15-year period and that the apartment complex will fill that need by...

Evaluating Commercial Real Estate

This chapter explains what creates value in a property, shows you how to analyze an apartment building and a shopping center like a pro, explains how to know a good deal from a bad deal, and provides invaluable guiding principles of investment that will keep bad properties out of your portfolio guaranteed.

Surveying the Types of Residential Properties You Can

If you've been in the market for a home, you know that in addition to single-family homes, you can choose from numerous types of attached or shared housing including apartment buildings, condominiums, townhomes, and cooperatives. In this section, we provide an overview of each of these properties and show how they may make an attractive real estate investment for you. From an investment perspective, our top recommendations are apartment buildings and single-family homes. We generally don't recommend attached-housing units. If you can afford a smaller single-family home or apartment building rather than a shared-housing unit, buy the single-family home or apartments.

All Types of Real Estate Their Advantages and Disadvantages

I ew real estate investors always ask me what type of real estate is best land, houses, duplexes, and so on. Should they get into high-end property Low-end property Middle-income property Commercial property Apartment buildings My advice is to pursue whatever you are interested in. Do not ever listen to someone who says, Only do this type of real estate. Only get into houses. Never do commercial. Only do commercial. Do not do houses. Big apartment buildings are better than little apartment buildings. Trailer parks are the best, better than houses. The truth is it all can work. Your job is to find a good deal in real estate, whether it is a 3,000 trailer, a 30,000 house, a 300,000 luxury home, a 3 million apartment building, or a 30 million commercial property. Find properties you are comfortable and familiar with at first, then expand. This chapter gives you an overview of different types of investing, so you can consider the advantages and disadvantages of getting into them.

Financing Rental Property

Some lenders like large apartment buildings and some like the smaller ones. In a competitive market, rates can vary in points and fees quite a bit. Most loans on investment property aren't the same as your traditional residential property or an owner-occupied loan. Your appraisal will also be more expensive, as well as the fixed costs and monthly expenses.

Minimize Your Down Payment with Owner Occupant Financing

By far, the easiest, safest, surest, and lowest cost way to borrow all (or nearly all) of the money you need to invest in real estate centers upon owner-occupied mortgage financing. In other words, lenders give their most favored interest rates and terms to investors and homebuyers who live in their properties (for a minimum of 12 months). Numerous high LTV (loan-to-value) owner-occupied loan programs are readily available for single-family homes, condominiums, townhouses, and two- to four-unit apartment buildings.

How to Find an Agent Whos Right for

The first thing is to visit the local real estate offices in the area where you plan to invest. Ask the receptionist if he or she knows which agent sells the most apartment buildings or income properties. Get yourself introduced and tell the agent exactly what you're trying to accomplish. The interview will be your opportunity to learn what the agent thinks he or she can do for you. But remember the agent must know exactly what you want done in order to respond in a meaningful way.

Current Homeowners Too Can Use This Method

Even if you already own a home, you too should definitely weigh the advantages of using owner-occupied financing to acquire your next several properties. Here's how Locate a property (condominium, house, 2-4 unit apartment building) that you can buy and move into. Find a good tenant for your current home. Complete the owner-occupied financing on your new property and move into it. If

Defining your property search

Many beginning commercial investors typically start out looking for commercial multiunit properties with anywhere from 5 to 50 units. Creative financing, including nothing-down deals, is possible in this market segment because it can be difficult for owners to get conventional financing. The reason is because lenders who make loans on commercial properties would much rather put together a loan on a 300-unit apartment building than they would on a 20-unit apartment building. It's basically the same amount of work, and the lender makes much more on the larger property.

The Gross Rent Multiplier

Table 3-1 show data for the sale of apartment buildings ranging between 5 and 100 units in size during the period between April and October 2001 in Los Angeles.1 Included are the price, GRM, and building size in square feet (SF) for each sale. The entire dataset of 700 sales is included with the electronic files that accompany this chapter. We display only the first five lines of the data in Table 3-1 to get a feel for what it looks like.

Determining your location with demographics

With commercial real estate, it's all about being in the path of progress or going into a marketplace that's really at the point of taking off because of the people moving in and businesses growing to support them. If you have a strip mall in this area and suddenly a lot of new apartment buildings go up and people come into the area, your rents in the strip mall will likely increase. i Large retail chain stores, also known as big box retailers, spend millions of dollars every year on demographic studies on where to build their next stores. Wal-Mart and Home Depot are a couple of typical examples. So why not save your time and money and start investing where you see those folks break ground for new stores They've already done their research and have decided to invest tens of millions of dollars in that location. We suggest that you find out what's in demand there and follow right behind them. Risk How much of my money would be at risk Would I be personally liable for debt that's used...

Cheapest Property Will Likely Offer Best Selling Terms and Biggest Profits

It goes without saying, if you live in a trashy apartment, your rent will be a lot lower than if you live on Snob Hill. Naturally, apartment buildings on Snob Hill are worth much more than the ones at Scumbag Villa. Suppose there's a six-unit property for sale at both locations. Scumbag has a GRM value of five times gross and units rent for 325 each. (Refer to the GRM chart earlier in this chapter.) The indicated value would be six units times 325 rent equals 1,950 per month, which is 23,400 annually. Multiply this annual gross times a GRM of 5 for 117,000. Thus, each unit is worth 19,500. Doing exactly the same math for Snob Hill, which is valued at 10 times gross with rents of 525, you'll find that each unit is worth 63,000.

Step 3 Build the brokers or sellers motivation level for selling

Lisa I found out that the seller wants to buy a small shopping center rather than this apartment building. Rob Try this with the seller. Say to him The good thing for you is that most people would stay awake at night worrying about an apartment building like this. You seem to be pretty well rested. It's nice that you're able to avoid thinking about this building 24 hours a day. Lisa, you need to spend some time here and get the seller to open up. Let's face it, a motivated seller isn't going to step right up and say, I'm desperate. So, I want you to go back to see the seller and find out how much time you can spend in the motivation step. Then I or one of the other coaches will help you to move ahead with the next steps.

Property Improvement Loan Insurance Title I

HUD insures loans to finance improvements, alterations, and repairs of individual homes, apartment buildings, and nonresidential structures, as well as new construction of nonresidential buildings. Loans on single- family homes (except manufactured homes) and nonresidential structures may be for up to 25,000 and may extend to 20 years. Loans on apartment buildings may be as high as 12,000 per unit, but the total for the building cannot exceed 60,000, and the loan term cannot exceed 20 years. A loan on a manufactured home that is classified as real property may be for up to 17,500 with a maximum loan term of 15 years. Loans on other manufactured homes are limited to 7,500 and a maximum term of 12 years. A property improvement loan may be a loan from the lender to the borrower or a retail sales installment contract (purchased by a lender) between the borrower and the contractor or dealer providing the materials or services.

One Common Misconception

A similar apartment building in another location is doing well, or that an office building upstate is raking in cash. Diversification should be the mantra of every investor. Management quality. Then, of course, there is the issue of management. Good management is crucial but that is not only true in real estate. If you look around at major U.S. non-REIT corporations, you can see, for instance, the value of a Jack Welch to General Electric, or how Bill Gates's vision brought Microsoft to where it is today. Incompetent management can ruin a major corporation or a neighborhood candy store. Real estate, like all other types of investments, cannot simply be bought and neglected it requires active, capable management. And good management teams are able to select real estate for acquisition and ownership that is likely to appreciate, not depreciate, over time. Despite this, many otherwise intelligent investors have bought apartment buildings, small offices, or local shopping centers, often...

Turnaround Property

Say you locate a 12-unit apartment building that is poorly managed and needs upgrading. You might offer to buy the property. But you really don't have the financial power to arrange new financing, and the owner doesn't want to sell the property using a land contract or purchase-money mortgage. Currently, the property barely produces enough cash flow to pay expenses, property taxes, and mortgage payments. The owner wants to turn this money pit into a moneymaker, but lacks the will to invest time, effort, money, and talent.

Determining what you need to get started

Most of the time, real estate investors make a down payment and borrow the majority of the money needed to complete a purchase. That is the conventional way to purchase real estate investment properties and will be the most successful method for you in the long run (as it has been for us). For most residential investment properties, such as single-family homes, attached housing such as condos and townhomes, and small apartment buildings of up to four units, you can get access to the best financing terms by making at least a 20 to 25 percent down payment. (Mortgages on non-owner-occupied property tend to be 1 4 to 1 2 percent higher). You may be able to make smaller down payments (as low as 10 percent or less), but you'll pay much higher interest rates and loan fees, including private mortgage insurance. (We cover the topic of financing in Chapter 8.) You won't find such wonderful financing options for larger apartment buildings (five or more units), commercial real estate, and raw...

Investment Property

Investment Property ads are for properties being sold by investors and landlords. They may not know enough about investing or analyzing or managing property. They may be losing money on their properties or deciding to retire. Find out their situations these sellers could be highly motivated. After a rich man in Nashville passed away, Bill, a friend of mine, read the obituary in the newspaper and called the widow. She had just inherited 14 apartment buildings and 20 small houses property she didn't want to deal with. She was happy to sell them to my friend for 50 cents on the dollar. She offered owner's terms and made a lot of money. The lesson is this Be aware, look in the paper, and make that phone call. Why did Bill find all those deals and make all that money, while I didn't Because he picked up the phone and asked. I wished real estate was a bit more complicated than that, but it's really not. Most of my deals are done with other investors.They understand investing. They...

Sell Your Lease Option Rights

As you can see from this example, a master lease with option to buy can create significant profit opportunities for investor-entrepreneurs who are willing to turn a poorly managed, run-down apartment building into an attractive, effectively operated residence for high-quality tenants.

Capitalizing on advanced funding strategies

For example, Robert has focused on establishing partnerships where each partner brings a needed skill to the table. One partnership consisted of a top local real estate broker who identified properties along with a partner who was a real estate lender and knew the ins and outs of lending. Robert's company provided the property and asset management to reposition the property and create value. This team used their complementary skills to successfully purchase, renovate, and later resell a 48-unit apartment building while providing cash distributions to the partners during the holding period. Family members sometimes make good partners. Parents, grandparents, and perhaps even siblings may have some extra cash they want to loan or invest. But some families aren't suited for partnering to buy and operate real estate. Disputes over management style, cash distributions versus reinvesting in the property, and how and when to sell are difficult in any partnership but particularly in families...

Lawns Shade Trees and Picket Fences Are

Many older houses and smaller apartment buildings are just oozing with charm and homeyness. The problem is, you must educate yourself to spot these things while searching through many dumps. Identifying potential beauty in the rough can quickly move you ahead of the competition. Most buyers are frightened off by dirt and deadbeats.

Housing Starts and Permits

Housing starts and permits include single- and multi-family units. Single-family housing starts comprise the lion's share of the total, as shown in Figure 4.4. Historically, single-family housing starts were more sensitive than multi-family housing starts to changes in interest rates. Multi-family housing units, which include townhouses, condominiums, and apartment buildings, are also affected by subsidized housing, changes in tax laws, and speculative investment building. If housing permits lead starts at all, it would be for the multi-family sector. Technically, a start is defined as an excavation beginning for the footing or foundation of a residential building. In plain English, a housing start is nothing more than the first shovel of dirt to break ground. A brick does not have to be laid. Participants in the fixed income market view a rise in housing starts unfavorably because it signifies economic growth. Housing starts push down bond prices and push up yields. When housing...

Evaluating a Region The Big Picture

You can find the vital economic data you need for your evaluation through your local economic development department, chamber of commerce, or public library. Real estate lenders often have in-house economists that collect information concerning areas where they lend money, and these folks are often the first to detect weaknesses in the market. So if your lender isn't particularly enamored about the location for your proposed real estate investment, it probably knows something that you should heed. Also, contact a professional appraiser in your area, because they routinely collect this information for their appraisals. economists find that a new household is needed for every increase in population of three persons. Of course, these numbers can vary based on average household size. So if you're considering investments in rental homes or small apartment buildings in a certain area, the overall net population growth can be a factor in determining current and future demand for rental...

The Normal Approach to Data

Most practitioners in sunny California would agree that expenses of 59.18 of income for an apartment building are at least unusual, if not unlikely. Likewise at the other extreme, expenses of 10.43 are probably understated. We need to adopt a healthy suspicion about the extreme observations. The plot of an ordered list in Figure 3-6 shows, as always, a few extreme observations, but the majority of the observations is between 25 and 45 .

Who Can Utilize This Mortgage

The criterion for using a blanket mortgage is easy enough. You must have at least two parcels of property. It helps if they are adjoining or in the same area, but this is not necessary. A home and a lot, an apartment building and a warehouse, or vacant land and a duplex are some of the many combinations of dissimilar properties that can be combined in a blanket mortgage. Some blanket mortgages can include dozens of properties. The property had a low first mortgage of 230,000. The seller indicated he would hold up to 200,000 in a second mortgage, and wanted cash above that. Simon discovered that within the new money market, the best he could come up with, after mortgage cost, was 500,000. This left him short the difference needed to buy the property, even if the seller held the 200,000 paper. The best terms available from a local lender were 24 years at 8 percent with two points closing costs. However, he did own a small lot that was across the street from the apartment house. It was...

Setting Target Property Parameters

Substantial size so we can afford to have a professional property manager on site to handle the day-to-day issues. That works well within my company's structure. The year 1988 is important because many properties older than that take a lot of money to bring up to the standard of other apartment buildings in the area. You will find it's normal to replace roofs, paint, install new carpeting, and so forth. But if all the other apartment buildings in the area have washer-dryer hookups and yours doesn't, you will either have to spend lots of money remodeling and updating if possible, or charge below-market rents. Neither is a good alternative. See what I mean about knowing your market Complacency. It's easy for out-of-towners to lose interest and become complacent over time. Especially if they are making money and their property isn't one they drive by every day.

Conventional Financing Options

Deciding on the type of financing you need or want depends on many factors as well. One of the most important deciding factors is your exit strategy. Simply put, your exit strategy is why you're buying the property in the first place. For example, if you plan to buy and keep a retail center for a long time, you might consider a long-term permanent loan with a fixed interest rate. Or if you want to buy an apartment building for a short period of time, you may want to consider a loan that has a low upfront cost and low interest rate.

Funds From Operations

The very term depreciation allows yet another opportunity for distortion when it comes to items that might be considered part of general maintenance, such as, for example, an apartment building's carpeting or curtains, even dishwashers. The costs of such items often might not be expensed for accounting purposes instead, they might be capitalized and depreciated over their useful lives. But, because the depreciation of such items is a real expense, when such real estate depreciation is added back to arrive at FFO, the FFO will be artificially inflated and thus give a misleading picture of a REIT's cash flow. Practically speaking, carpeting and related items, to use our example, really do depreciate over time, and their replacement in a building does not significantly increase the property's value. These are real and recurring expenses.

Selecting a lender for your deal

I Find out if he or she is your type. No, this tip has nothing to do with dating. Instead, we mean that you should make sure that your lender has relevant experience in putting together loans and closing loans of your product type. If you're purchasing an apartment building, for example, it makes much more sense to use a lender who specializes in apartments rather than one who specializes in construction financing.

Controlling the interest rate to some extent

I Property type and risk If you were a bank, which is the riskier loan A loan for an apartment building that's 100 percent occupied or a loan for a gas station in the middle of desert country You guessed it. If the gas station closed down and the bank foreclosed on it, how difficult would it be to sell or rent it We're guessing pretty difficult. But, with an apartment that's 100 percent full, you shouldn't have a problem.

Tax Free Benefit Increased

Another lot, however, also owned by Roland, has not been used for several years. He did not sell it because he decided it would be a good investment and would increase in value in the future. He exchanges this lot for an apartment building. Because the apartment building can be construed as an investment, the exchange will meet the like kind property test.

Increase Depreciation

Apartment Building Net market value Existing mortgages Equity (apartment building) Equity (farm) Cash due New mortgage on apartment building Straight line 27.5 years Cash paid in transaction Equity in apartment building Sellers Now Want to Buy the Apartment Building Price of apartment building Total mortgage Cash required Cash from sale of farm Additional cash needed Straight line 27.5 years Cash paid in transaction Equity in apartment building

Acquisition Opportunities

The early 1990s were a golden acquisition era for apartment REITs, which may be why so many of them went public during that time. The most seasoned apartment REIT at that time, United Dominion, could raise equity capital at a nominal cost of 7 percent, and debt capital at 8 percent. It could then acquire apartment properties at well below replacement cost in the aftermath of the real estate depression of the late 1980s that provided it with entry yields of 11 percent or more and internal rates of return that were even higher. (The sellers were troubled partnerships, overlever-aged owners, banks owning repossessed properties, or the Resolution Trust Corporation.)

Balancing Equities in Exchanges

The cash balance Assume that you own a duplex worth 75,000 and owe 50,000 in a first mortgage against it, so your equity is 25,000. You want to exchange for Peter's apartment building, worth (to you) 200,000. Peter has a first mortgage of 130,000 on the building, giving him an equity of 70,000. You want to make the exchange and will balance the equities with cash, as shown in Table 12.11.

Creating the Right Teams and Partnerships

When Eric and Sara first got started, it was just the two of them. Eric was unclogging toilets and doing maintenance, and Sara was doing the books. They were filling the buildings and their cash flow was increasing. Then we challenged Eric to start growing their business. He suggested bringing a bookkeeper in and getting maintenance people on staff, because Eric doesn't make much money doing maintenance. The value of the right type of partnership is that each person brings a very unique skill set. For instance, Eric isn't the type of person who wants to sit down and create an Excel spreadsheet that shows whether the project is going to be profitable. But Sara loves doing that. Eric and Sara have a partner on their team who actually loves getting in his car and driving for two weeks across the state looking for deals. He enjoys talking to agents and driving to small towns and looking for 20-unit apartment buildings or strip centers. They have another person on their team who's...

Primary Reasons for Using a Pyramid

You are acquiring an apartment building worth 230,000. There is an existing mortgage of 125,000 at reasonable terms from a local institutional lender. That would mean a seller's equity in the property of 105,000. However, the seller tells you he would like to hold a first mortgage in the amount of 100,000. This presents a problem, because the existing mortgage would have to be paid off, and you don't want to invest 130,000 in cash ( 230,000 less the seller held first of 100,000). You look at what other assets you own that might help you make this deal. You own a vacant lot you purchased 10 years ago for 50,000. Based on recent sales of similar lots in the subdivision, you conservatively estimate its value to be 150,000. You could offer the seller of the apartments this property as security for the 100,000 first mortgage he wants to hold. So you offer the seller the following EXAMPLE 2 . In the same basic situation but the seller only has an existing first mortgage of 40,000...

Sell Half Property Increase

Over the past several years, Allen has managed to acquire several properties with low down payments. Today, he owns two single-family houses, a five-unit leper property (a property no one else wanted to touch), and a seven-unit apartment building. He's done very well with low down payments however, he suffers from the affliction common to most all low-cash-down buyers elephant-size mortgage payments every month. Allen has managed to fix up the properties himself as he goes along, but he's in a cash bind now, because his fix-up expenses have basically been paid from his personal bank account, which is running on fumes. Nothing stops a good investment plan faster than running out of money. Allen has reached the point where he fully understands the flip side of no-down- or small-down-payment buying. It generally means no cash flow or very little.

Fine Points in Finalizing the Pyramid

Alex wanted to buy a 10' unit apartment building. He had approached the seller with several different techniques, each using a low down payment offer, and each offer was turned down with the same reply from the seller Look, son, I'm not going to finance any buyer that doesn't have equity to back up his offer. The seller you are dealing with may not put it that bluntly, but the end result might be the same. The fact of the matter is that many sellers balk at the very idea of holding financing on their own property simply because they remember how much they paid for that property. After all, if they paid 20,000, how can they justify holding 80,000 in secondary financing on that same property, even if they are selling for 300,000 While Alex was fooling around with this apartment building, he found a strip store complex that he liked and felt would be a good investment. He made several offers on that property and found the same kind of response from that seller. Alex decided to offer the...

Under Everything Is Land

Example 13 Brad Creates a Land Lease. Brad had a 12-unit apartment building. It was throwing off a net operating income of 46,000. From this, he had existing debt service of 31,000 (which represented annual payments on 305,000 of mortgages). The office building he was trying to buy was offered at 275,000 and was free and clear. The seller demanded a minimum of 150,000 cash down and said he would hold a first mortgage for the balance. That would not work for Brad, so he created a land lease on his apartment building. He sat down with his lawyer and had a simple, but effective lease drawn up. It had provisions that I will show you later on in this chapter, and an annual rent of 11,250 per year. In addition, it had an option to buy the underlying land for 125,000 any time within the first 12 years of the lease, which was a 40-year lease. Brad then offered the seller the 175,000 cash he wanted and the land under his twelve-unit apartment building subject to lease. In essence, Brad was...

Interviewing your prospective managers

I How many units and or square feet of space do you currently have under management What type Make sure that the company has experience with your type of property. After all, a property management company that manages 400 single-family homes isn't the same as one that manages 400 units of apartment buildings.

Ironing out straggling issues

Be sure that your purchase agreement clearly indicates what personal property is included. The personal property can be a significant factor in large apartment buildings because it can include the appliances and window coverings, plus common area furnishings and fixtures.

Estimate Market Value

Throughout the country, cap rates for small rental properties may run from as low as .06 or .07 up to .12, .14, or higher. Generally, a low cap rate occurs when you're valuing highly desirable properties in good to top neighborhoods. Apartment buildings with condo conversion potential also tend to sell with low cap rates. Remember, a low cap rate will create a relatively high property value and a high cap rate yields a relatively low property value. Relatively high cap rates apply to less desirable properties in so-so neighborhoods.

How You Can Greatly Increase the Value of Your Investment Property

To refresh your memory, let's go through another example. Assume that you find a six-unit apartment building. This rental property currently brings in a net income (NOI) of 48,000 a year. Based on talks with real estate agents, appraisers, and other investors, you figure this property as is should sell with a cap rate of 9 percent (.09). With these two numbers you can calculate the as is value of these six units at 533,333.

The 1031 Taxdeferred Exchange

You must trade for like-kind property. In this instance, like-kind would mean the property you are trading into would be for investment purposes. For example, you can't trade an income-producing duplex for a getaway beach cottage. In contrast, you could trade that duplex for a strip mall or another apartment building. The idea is to trade income-producing property for other income-producing property.

Use Creativity to Move a Difficultto Sell Mortgage

However, later in the same year Castile found a small apartment building he could buy if he could pay cash to the existing mortgages. The apartment building should throw off nearly 13 percent cash. He tried to get the owner of the building to take the mortgage as part of the transaction. Failing that, he went back to the cash investor and discounted the mortgage to come up with the cash to buy the apartments. Castile now had a greater use for the cash than the present return generated from the yield on paper. Using mortgage paper you hold as a result of a sale you had completed in the past or by way of purchasing debt from other people (at a discount, I hope) can be a good way to profit by shifting your asset to a property you want to purchase. Remember, usually the most motivated party in a transaction is the seller. Because this is such a good way to move off mortgages, let's look at several other ways that Castile could have sweetened the deal for the seller of the apartment...

Your Apartment Checklist

You could discover an actual market rent level. But, in fact, houses and apartment buildings differ in dozens of ways that their potential tenants find appealing or unappealing. Mentally tour properties. What do you see How do the properties differ with respect to these features

Good Example of Brokering Notes

One of my students, Susan C. from Manhattan, New York, found a commercial note that a seller had sold on an apartment building and taken back a first mortgage of 800,000. It was a 30-year note at 11 percent. The note purchaser, whom I helped to arrange the transaction, offered Susan 715,000, and she in turn offered the original seller 660,000. She made a profit of approximately 55,000 for just finding that one note. It took three weeks from the original first call she made to the actual closing, when she received her check. ply refrigerators, stoves, and air conditioners, they are going to break and cost you a lot of money. One day, I was at a fellow real estate investor's office when I noticed that the investors had seven cars sitting out in front of their office. These cars had For Sale signs in them. Often, they would buy these cars from their tenants who needed down payment money to buy one of their properties, or they would take the car of a tenant who could not pay the rent, or...

Postwar Units Are Modernized

I once bought an older eight-unit apartment building. It had been built in 1949 to house the veterans ofWorld War II and their fast-growing families. The units were arranged in a 3BR 1BTH style (common to that period) with one moderate-sized bedroom for the parents and two small bedrooms for those recently born baby boomers. In the early 1990s (when I bought the property), most tenants looked at the units and said, Ugh, no way could we live here.

Check for Neighborhood Noise

No doubt, you'll typically hear more noise in neighborhoods filled with apartment buildings. But single-family neighborhoods can also suffer from loud stereos, barking dogs, and unmuffled car engines. Does the drum corps of the nearby high school practice outside three hours a day When possible, visit the property during periods of high traffic or peak noise. Don't assume that a neighborhood offers peace and quiet. Verify.

Real estate investment trust funds

Do you want to invest in real estate without the hassle of being a landlord Invest in real estate investment trusts (REITs), which are stocks of companies that invest in real estate. These funds typically invest in properties such as apartment buildings, shopping centers, and other rental properties. Of course, it's a hassle to evaluate REIT stocks, but you can always (you guessed it) invest in a mutual fund of REITs W _ w REITs are small-company stocks and usually pay decent dividends. As such, they are not appropriate for higher-tax-bracket investors investing money outside of retirement accounts. Most of the larger, diversified U.S. stock funds that I recommend earlier in this chapter have a small portion of their fund's assets invested in REITs, so you'll have some exposure to this sector with investing in a REIT focused fund.

Just What Is a Commercial Fixer Upper

To understand what a commercial fixer-upper is, watch while we take the term apart and put it back together. Commercial refers to commercial real estate that can be defined as a retail strip mall, an apartment building, an office building, or an industrial project, to name a few. And fixer-upper is something you can buy at a discount because of its poor condition with the intent of fixing it up and selling it for a profit. Therefore, a commercial fixer-upper is an underper-forming piece of commercial real estate that you acquire at a discount, fix up, lease, and sell for a profit. (Or keep for cash flow.) Here's an example of a typical fixer-upper. Your favorite grocery and hardware stores sit in a neighborhood strip mall. But because the owner didn't spend any money on cosmetic improvements or new and better-placed signage, tenants have relocated elsewhere. Three years ago, that same strip mall had a beauty supply shop, a chain pet store, a family restaurant, and a dry cleaner, but...

Seven Elements That Establish the Value of a Leasehold Interest

Different properties will obviously have different values. Is the lease for land only, buildings only, or the combination of land and buildings If it is land only, then either there are no improvements on the land, or the improvements are separate from the land. For example, in Ronnie's case, the lease is applicable to the land only he separately purchased the improvements as a combined lease plus purchase. However, because the hotel purchased sat on all of the land his leasehold interest would, unless prohibited by lease terms, have the same merit and value as if he owned that land. His lease payments would have no long-term effect once the negative value was subtracted from the overall value any more than his annual payment of taxes and or insurance. In reality, in Ronnie's case, even less effect as his rent is fixed at 74,000 for the life of the lease. However, if the land lease were under a 100-unit cooperative apartment building, the leasehold interest...

Determining your cash flow

Say you own a 2-story, 20-unit apartment building, and you've collected the rent from your tenants for the month. This is your gross income. Now, you have to pay normal property expenses such as property taxes, hazard insurance, maintenance, repairs, water, electricity, and trash. These are your operating expenses. 20-Unit Apartment Building Analysis What Is This Property Worth

Condominium Conversion

To plan for a condo conversion, study the local area to learn the sales prices of comparable condo units. If you can purchase a similar apartment building at a low enough price, renovate and sell the converted units as condos to earn a profit. Here's how you might calculate the potential profits of converting rental units into individually owned condominiums for a 16-unit apartment building

Internal Rate Of Return

Let's look at another example using The Value Play Income Analyzer, a proprietary model used for analyzing income properties such as apartment buildings. In Table 7.4, the cash flows of a 50-unit apartment building are examined to determine its respective internal rate of return.

Maintenance and Repair Costs

Savvy investors also need to reduce or eliminate money-wasting property maintenance and repair expenses. From my experience, I would encourage you to focus on five things 1. Low-maintenance houses and apartment buildings. 2. Tenant selection. Just as there are both low- and high-maintenance houses and apartment buildings, so too are there low-maintenance and high-maintenance tenants. Avoid the latter and select the former. Personally, I watch out for chronic complainers and people who show no house sense.

Example 7 Buyers Use Discounted Paper to Close

You want to buy a home but do not have the cash down the seller wants. You do own a small apartment building that is presently financed with a low (loan-to - value) first mortgage. You go to the seller and offer to give her a second mortgage on the apartment building you have been thinking of selling in the near future and you create such a mortgage in the offer, but it does not exist. In your offer, you make reference to this second mortgage as follows The benefit to you is double. First, you need only invest 70,000 of your own money in the new house, and you have put a great second loan on the apartment building, which may now help entice a buyer. Within these same amounts of money, is there something else you could have offered What if instead of increasing your cash at closing, you had offered to pay a bonus to the second mortgage of 2,000 a year This is still a form of discounting the mortgage, but now, as you are planning to sell the apartment building you can...

Example 9 Part Cash Part Exchange Dominic wanted to buy a

Vacant lot on which he planned to build a small apartment building. The price of the lot was 55,000. Dominic offered to pay 20,000 cash out of the apartment building's final draw on the construction loan. For the balance of 35,000 he agreed to give the seller a vacant lot in the Florida Keys. This was okay, only the Florida Keys lot was not owned by Dominic. Dominic had made a side deal with that owner to exchange for the lot, giving the lot owner one of the condo apartments to be built on the lot.

Look for Property with Private Mortgages

To illustrate, let's say we locate an older rundown apartment building and discover it's had three owners during the past few years. Further research reveals that with each of these sales new owner carryback mortgages were created to facilitate the transactions. These mortgages, commonly called owner financing or purchase money notes, are long-term and they are assumable to a new buyer. The seller is asking 300,000 for the building, a price that seems reasonable based upon the income. The seller will take 30,000 cash down payment (10 ) and allow the buyer to assume the three existing mortgages with remaining balances of 85,000, 50,000, and 35,000. To complete the transaction, the seller is willing to carry back another mortgage for the balance of the sale price. The new purchase money mortgage will be for 100,000, secured by the apartment for a term of 20 years. These are excellent terms for a buyer. Obviously, the seller must be fairly motivated to make this deal. In most cases, the...

Most Sellers Would Rather Have Cash

Jones is receiving monthly mortgage payments from the sale of his apartment building. Jones sold the apartments several years back, because the tenants were about to drive him completely bonkers. In a moment of weakness, Jones rented to a rock band that played loud music all night, slept all day, and paid rents only when Jones stayed up late enough to catch them Jones is now 67 years old and retired. He sold the apartments and carried back a note for 90,000, which now has an unpaid balance of 85,000. Jones is scheduled to receive payments of 780 per month for 25 more years. Jones would have preferred a cash sale for his apartment building. He

Example 24 As a Seller You Agree to Take Part Rent If you

There are many ways to use future rent as part of a real estate transaction. It might be to pledge the rent of another property as security for a note or mortgage on the property you want to buy. Alternatively, you might offer the seller the right to stay on for a period of time as a tenant without paying any rent. It is important for you to think again in the area of benefits and not money. If you have something you have not been able to rent, or even thought about renting, why not offer that on your next deal If one of those things you own is a mountain cabin, you could offer free holiday rent in that cabin facility for some period of time. straw in trying to make a deal with Roco. The only thing that was holding them apart was that Roco wouldn't take Brownie's unsecured note for 50,000 due in full at the end of two years as part of the down payment. Brownie countered with the same 50,000 note, but added as a security all rents above the first 1,800 Brownie would collect as total...

Issue 13 Minimize Your Tax Exposure

In addition to making your money accountable by tracking your ROI and ROE, you want to minimize your tax exposure. This is a fundamental operating principle for all millionaire investors. They understand that taxes are an obligation but not a mandate The government wants you to pay what you owe but gives you many ways not to pay, at least not right away. It is really saying We will charge you less if you do these things. Looking at it another way, it is saying We will invest in you if you do what we want you to do. The government wants you to invest in real estate, hold those investments, or move into bigger ones. In a sense, the government is your coinvestor. You are wise to take advantage of what it wants you to do, particularly since that is very advantageous to you as a real estate investor. deferred saving plans to make and hold your real estate investments. As long as you don't take the money out of those accounts, you do not have to pay taxes even if you achieve large amounts...

Lesson 7 Quickly Record Your Agreement

So which should you record Your complete agreement or a Memorandum of Agreement In a perfect world, you should record a Memorandum of Agreement. But, if you are pressed for time and won't be able to get a Memorandum of Option signed and notarized for several weeks, then just record your actual agreement. With a house, you're probably fine because most potential tenant-buyers won't check the title to see what your terms and price were. If you are ever buying an apartment building, however, always use a Memorandum of Agreement because your buyer will most likely be much more sophisticated and will probably look up all the recorded documents with respect to the property.

Investing in Real Estate Financial Ratios for a Piece of Real Estate

Let's say you buy an apartment building for 500,000. You put 100,000 down and secure a mortgage for the 400,000 balance. You have a monthly cash flow of 2,000 after all expenses and mortgage payment are paid. Your cash on cash return is 24 or 24,000 ( 2,000 x 12 months) divided by 100,000. Before buying the apartment building, you must decide how you will purchase it. Will you buy it through a C-corporation, an LLC Corporation, or a limited

Example 2 Finding the Right Buyer You have just bought five acres

You make up the inventory list, without prices, and send it to a dozen developers in town who are building new properties. These might be homes, apartment buildings, or commercial projects. All these need new plant material, and they are used to paying top dollar for quality stuff.

Types of Investments

Investors from all over the world are focusing on Auckland because of its large increase in population. The Auckland City Council is dedicated to significantly increasing the density of housing. Nonresidents can buy property under NZ 50 million and land under five hectares without requiring consent from the New Zealand government. Common investments are apartment buildings, developments, and commercial real estate. Currently, demand is very high, and properties are on the market for a very short time, but this may change with the recent increase of interest rates. New Zealand encourages foreign investment, and barriers to investment are minimal.

Is It Good Debt or Bad Debt

For example, a friend of mine, Jim, has a mortgage on an apartment building for 600,000, for which he pays out 5,500 each month in mortgage and interest payments. He receives rental income from his tenants of 8,000 each month. After all other expenses he has a net positive cash flow of 1,500 each month from that apartment building. I would consider Jim's mortgage a GOOD DEBT.

Investing in Private REITs

Investing in private real estate investment trusts (REITs) is another option. Although these are real estate investments, we view them as business-to-business investments because you're investing in a trust rather than in a particular property. All REITs are secured by some form of real estate, whether it's a commercial strip center, an apartment building, or multifamily housing. There are several types of REITs publicly traded, non-exchange-traded, and private. You can find out more about REITs by checking out the National Association of Real Estate Investment Trusts (NAREIT, Its Web site describes in further detail the differences between investing in the three types of REITs. Private REITs are usually secured by major strip center malls or tenants-in-common. For example, Kohl's, the discount department store chain, is the largest REIT company. It offers publicly traded, non-exchange-traded, and private REITs. One benefit of a private REIT is that you're investing...

Natural or Learned Talents

Good at choosing colors, a love for gardening with proof that you don't kill whatever you plant are some of the elements of which I am speaking. However, there is more that you may not directly relate to the fixing-up or remodeling of a home or apartment building. Management skills are also a good and often more natural skill than one learned. Without the ability to manage your tenants, or deal with other workers you will hire from time to time, you may have difficulty in owning and operating income property. Are you a good cook How can that relate to fix-up of real estate What if you thought about opening a breakfast-lunch diner, or wanted to throw a catered party for the seller of a property you wanted to buy and offered that service as a part of the down payment Can you or your partner sew Make drapes, hang them, fix broken ones, and so on. All little things that make up a great team for acquisition of real estate that needs some tender loving care to bring out the real (and often...

What If You Dont Own a Restaurant or Appliance Store

There are several ways to create scrip. Having your own business helps, but it is not the only way to use this very effective tool. In essence, there are two basic methods of generating your own scrip from outside sources. In my book Real Estate Investing with Other People's Money, I discuss these two methods as Watered Scrip and Commissioned Scrip. The people who own the businesses must be shown that the scrip you are going to create will bring them business they don't already have, which in turn will generate more business that will be on a cash basis. Scrip business then has an advertising value that accounts for the discount to you. In addition, by offering to buy future business now you can frequently get a substantial discount for that alone. Couple these factors with the idea that you aren't going to pay money for the scrip, and the idea becomes very attractive for you. Best of all, since you are going to tailor the scrip to the transaction, you will have a higher success rate...

Laying The Foundation To

That's right, he or she was lucky, and many other investors will be just as lucky due to no specific act of their own. They just happened to make a buy that turned into a small pot of gold. Unfortunately, for every one of these lucky investments, there are dozens of not-so-lucky ones. Buying real estate is not a guaranteed route to wealth. Not everything you buy is going to go up in value fast enough (if at all) to cover the cost of holding on to it. Not every property will produce a profit not every apartment building will be fully occupied and become a money machine. Losing your shirt investing in real estate is possible no matter how much you know. In fact, some very smart investors lose their shirts. Not every investment I have made has turned out the way I wanted it to. I have taken a few high flyers that could have turned out like a diamond mine, but instead developed into a latrine. Other investments I have made where every bit of Insider information suggested that the value...

The 1031 Exchange Avoiding Taxes by Trading In for Another Property

With commercial real estate, when your property has increased in value, you have the choice of simply selling the property outright and getting a big check at the closing table (after taxes, of course) or using the magic of a 1031 tax-deferred exchange, which allows you to make even more money. A 1031 tax-deferred exchange allows you to roll over money that you get from the sale of your old property into a new property while deferring paying taxes. So, if you've made 200,000 in the first commercial property that you've invested in, you can sell this property and buy a second one by using the 200,000 as a down payment. When you're involved in a 1031 exchange, you can sell any type of investment property and buy any other type of investment property. In other words, you can sell an office building and buy a warehouse or you can sell an apartment building and buy bare land. The properties both must be real estate investments, though. You can't sell a rental property and buy personal...

Statement Of Cash Flows

The third financial statement most commonly used by investors is the statement of cash flows, which is used to measure the cash inflows and outflows produced by the various operating, investing, and financing activities of a business. These activities affect companies and their respective financial statements in different ways. For example, income may flow into an investor's apartment building from its rental operations and subsequently flow out of it through the purchase of new equipment. In this example, both the income statement and the balance statement are affected, since cash flows in from rents and is then disbursed to purchase assets such as equipment.

You Can Afford to Pay Rent

With a greater number of units, up to say 15 units, would be fine as well, but they may be out of your budget for the time being. In my case, my wife and I lived with my parents for a short while after returning to the United States from Europe where I lived (as a renter). The first thing we did was look for a lot to build a four-unit apartment building. We found one, made an offer, and closed on the deal the day my contractor broke ground on the building. It consisted of three one-bedroom apartments and one owner's two-bedroom unit. We went the direction of building a new building because we could not find anything that was for sale that appealed to us. I also knew that the market was ripe for such a venture, and I knew that if I set everything up right we could finance the majority of the land and buildings. The fact that the owner is dealing directly with you is very good news. This means that the owner is also dealing directly with all the problems of the building. The fact that...

Exploring Alternative Possibilities

Different ways to create value in the investment opportunities you consider. Start by looking at the property for what it is and analyzing it accordingly. Then consider any alternative uses for the property to determine whether there is not perhaps a better and higher use for it. There may also be other ways of creating or adding value to a property, such as by making various improvements to it, by converting unused storage space to rentable space, by expanding or enlarging an existing facility, or perhaps by adding rentable garage or storage space to an office or apartment building. The point is, investors should get in the habit of shifting their minds into high gear by looking for opportunity wherever it may exist and especially wherever it doesn't exist.

Introducing Uncertainty into Valuation

When we analyzed bonds with default risk, we argued that the interest rate has to be adjusted to reflect the default risk. This default-risk adjusted interest rate can be considered the cost of debt to the investor or business borrowing the money. When analyzing investments with equity risk, we have to make an adjustment to the riskless rate to arrive at a discount rate, but the adjustment will be to reflect the equity risk rather than the default risk. Furthermore, since there is no longer a promised interest payment, we will term this rate a risk-adjusted discount rate rather than an interest rate. We label this adjusted discount rate the cost of equity. Most assets that firms acquire have finite lives. At the end of that life, the assets are assumed to lose their operating capacity, though they might still preserve some value. To illustrate, assume that you buy an apartment building and plan to rent the apartments out to earn income. The building will have a finite life, say 30 to...

Calculate What The Business Is Worth

Paraphrasing Williams, Buffett tells us that the value of a business is the total of the net cash flows (owner earnings) expected to occur over the life of the business, discounted by an appropriate interest rate. He considers it simply the most appropriate yardstick with which to measure a basket of different investment types government bonds, corporate bonds, common stocks, apartment buildings, oil wells, and farms. To properly value a business, you should ideally take all the flows of money that will be distributed between now and judgment day and discount them at an appropriate discount rate. That's what valuing businesses is all about. Part of the equation is how confident you can be about those cash flows occurring. Some businesses are easier to predict than others. We try to look at businesses that are predictable.3

Blended Financing And The Weighted Average Cost Of Capital

When purchasing income-producing properties, especially larger ones, investors often combine several sources of financing, including both debt and equity. For example, an investor may purchase a 450-unit apartment building using a first mortgage for 70 percent of the total purchase price plus improvements, then raising another 15 percent of the total purchase price plus improvements through equity arrangements, then borrowing an additional 10 percent of the total for capital improvements from another lender, and finally, investing 5 percent of his or her own capital. Since the four different sources that provide the financing will most likely charge different rates, a blended rate must be calculated. This blended rate is known as the weighted average cost of capital (WACC). A company's WACC is the average rate of return required by all of its creditors and investors. At first glance, it appears that because the WACC is 7.20 percent, our investor is better off leaving her money in the...

Example 1 Preferred Income Used in a Joint Venture You invite

A fellow investor to put 500,000 of his money in a project of yours. Together, you borrow, in the form of a purchase money mortgage, another 2,400,000 to acquire an apartment building you are going to manage. Assume that this 2,400,000 mortgage has an annual debt service of 220,000 per year. You and the investor are 50 50 in ownership, even though the investor has put up all the capital to get the deal started. You know that this property has a great potential, and that your management abilities can reduce the sellers stated expenses, and that in a year or two you can increase the cash flow. To entice this investor you agreed to give him 12 percent return on his invested 500,000. This investor insists that the 12 percent return be preferred. This means that he expects to get 60,000 of the income from the project before you get anything. The numbers are as follows.

How to Find Private Lending Opportunities

Once you find these organizations, associations, clubs, or other groups, go to one of their meetings. For example, you could go to a meeting of a local Real Estate Investor Association (REIA) or a mortgage association through which private investors lend people money. Let them know you're a private investor and that you'd like to learn about their programs and projects and get involved in using some of your funds to lend money. Also, work with those individuals who are actively already making private loans, so you can learn how to do it yourself. If you're working through an investing group, if and when the group needs money, they will come to you. You then lend the group the money so that the group can lend money to private individuals. You can also lend money directly to people, without going through this type of group. For example, you could contact local real estate brokers who can put you in touch with local mortgage brokers who have people who need a loan to facilitate a...

Financial due diligence checklist

The financial aspect of due diligence focuses on why you're buying the property. It helps ensure that you make money by verifying the seller records of the property's financial performance. To perform thorough financial due diligence, be sure to obtain the following from the seller i Lease agreements A lease agreement can be a complex legal document. We suggest allowing someone who has expertise with that type of lease do the auditing for you. If all the leases are the same, such as in an apartment building, have an attorney review the first few to make sure that they're valid. For every other category of commercial real estate, we suggest verifying the leases by using an estoppel letter. This letter confirms that the lease is true and accurate and is the only agreement that's made between the tenant and the owner.

Employing blanket mortgages

One of the very first no money down deals that coauthor Peter Conti did was put together with a blanket mortgage. The owner of the property ran a small construction company, and he simply wanted to get rid of the apartment building he owned. All Peter had to do was come in and assume the existing mortgage and take over the payments. Now understand that at this point, Peter was no Donald Trump. He didn't have a huge track record or lots of money in the bank to convince a lender that it was okay for him to go ahead and assume alone. jjOOTf One of our Commercial Mentoring Program students named Mike came across a small classified ad for a 20 unit apartment building. After calling the owner and getting the details Mike ran through a quick analysis of the property. He could see where even if he ended up paying the price the seller was asking the building would make money from day one. Mike sat down with the owner and got to know him while creating a good connection. Mike found out that the...

Getting Started

Y hen I started in real estate, I thought there was only one way to do real estate Borrow money, buy property, put my name on the title, rent it, put up with tenants, have the tenants pay off the costs, and make money over time. With luck, I would make money every month. Then I learned how to flip property, fix it up and sell it, or lease-option it. I also learned that I did not have to use my own money or credit to buy homes. Most people, including myself sometimes, have no hands-on experience in the subject matter about which they are giving advice. You should seek advice only from experts. Even my mother would say, Robert, this no-money-down stuff, I don't buy it I don't believe it can be true. Now, every time I go to my mother's house for dinner, she says, Robert, I've seen you on TV and in newspapers and books. Why do you keep telling people you can buy property without using your own money or credit Stop it She still will not believe me. She's an excellent expert at being a mom....

Rich Dads Answer

Standing on the beach 40 years ago, I finally worked up the courage to ask my rich dad, How can you afford to buy these 10 acres of very expensive oceanfront land, when my dad can't afford it Rich dad then put his hand on my shoulder and gave me an answer I have never forgotten. With his arm draped over my shoulder, we turned and began walking down the beach at the water line and he began to warmly explain to me the fundamentals of the way he thought about money and investing. His answer began with, I can't afford this land either. But my business can. We walked on the beach for an hour that day, rich dad with his son on one side and me on his other side. My investor lessons had begun. My reply was, There are two reasons. Reason number one is because what we ultimately invest in is a business. If you invest in stocks, you are investing in a business. If you buy a piece of real estate, such as an apartment building, that building is also a business. If you buy a bond, you are also...

Spend Less Save More

When Jack Holden was asked how his family got started investing in real estate, here's how he responded. We scraped, borrowed, and leveraged from every resource we had to muster the funds we needed. . . . For seed money we cashed in saving bonds and borrowed from our insur ance policies. . . . The entire family went on an austerity plan to cut back our food, travel, and entertainment expenses. Today we're thankful we made those early sacrifices. Thankful, yes, and also wealthy. Because of their disciplined spending, saving, and investing, the Holdens (an otherwise average family) built a real estate net worth of 4.7 million that includes not only their home equity of 600,000, but also a variety of rental houses and small apartment buildings. Like most people who make big money in property, the Holdens didn't start out with cash. As Jack Holden says, his family scrimped, saved, leveraged, and borrowed every way they could. So what's the lesson that you can learn To build wealth in real...

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