Physical: Once the financials have been checked and the legal review is complete it is time for the physical inspection.  You want to do this after the financial because why waste time and money to inspect the proeprty if the seller has been less than truthful about the financial records.  I have cancel many a deal once I have seen the books and the seller did not want to renegotiate the sale.  The physical inspection is much more that you looking at the property.  You will need to spend money on a 3rd party professional inspector.  Don’t try to cut corners and eliminate this step or try to do it your self.  You want an independent eye looking at the property.

• Site inspection: A qualified inspector will preform an inspection that looks over not only the visible elements of the buildings, roof, siding & stairs of the building, but will also look over accessibility.  Electrical & HVAC aspects of the buildings.  Condition of the parking lot & walk-way are an often overlooked aspect part of the property, but these items can be a large expense to replace.
• Property plans and specifications: Do not count on getting these unless you are buying class A or B building.  Class C buildings are often neglected and older buildings.  The older the less likely the owner has the plans. Inspect if there have been nay additions to the original building and did they have a permit.
• Survey: A survey tells you where the buildings are on the proeprty in relationship to the proeprty lines and to each other.  This is required if you have a lender, but is often not done with owner financing unless you ask for it.  Make sure the seller provides this survey.
• Tools and supply inventory: You are not just buying the property and the building but everything used on the property that is stored there.  That means all the tools, equipment, office, etc.  Include everything in the purchase.
• Appraisal:  This is required and ordered by the lender.  But if you are buying from a seller that is providing the financing you will have to take care of this.
• Phase I/Phase II Inspections: This is a more in-depth inspection that will look for hazardous waste.  If it is found, a Level II inspection will be required.  These inspections are expensive and are required whenever a lender is involved in the deal.
• Pest inspection:This is an inspection that you should always have done.  We are mainly concerned with termites but there are other pests.

Though you will have qualified 3rd party inspectors doing these inspection you still want to tag along if possible.  You will learn signs that will tell you of problems or potential problems. It will add to your experience.

photo credit: ralphpaglia

As with anything in life there is a learning curve.  Real Estate Mentors can shorten that learning curve tremendously.  Even really bad mentors can help propel your career along.  Let me tell you have had some real losers as well as some winners.  I am not making any moral judgement of these so-called Gurus, nor do I blame them.  The ultimate responsibility of anything I do is on me.  They are losers not for the information they impart but on the information they don’t impart.  Let go through our early list and I will explain.

1. Robert Allen: a good mentor.  Our contact with Mr Allen in the early part of our career was basically though his book Buying Real Estate Nothing Down.  Had some great ideas but implementation was difficult for the novice.  We were not ready to do all the strategies that he laid out in his book at this stage of our career.  Anything outside of our comfort zone was not done.  We will visit Mr Allen in later posts.
2. Dave Del Dotto:  His program “Cash Flow System” was a begin loser. Everything was easy.  But a lot of his book and system hinge on taking from the seller or down right lying to get financing from the federal government, i.e.getting farm loans from Farmer Home Administration by having a farmer front for you.  Can you say felony and he put it in writing.  We quickly moved on from him.
3. Dante Perano: Dante was a local boy making it in the real estate seminar arena.  He started the Financial Services of America.  This was basically a real estate company that found low priced rental property in other states and sold him to investors who signed up with him.  Good concept but the break down is alway on buying them low enough for the investor to make a profit on them.  Also location, location, location still govern in real estate.  So yes you could buy a property in Hobbs New Mexico for $5,000 but who lives there and where is the property located.  Who are your tenants and what will they pay.  Can you trust the property manager.  Hard to tell when you never meet them.
4. Charles Giverns: I will have a separate post on Mr Givens in our saga, but for now we encounter Givens in are revamp of our financial world and he soon separate to include real estate.  Of all the early guru’s he had the complete package.  I look back and I can see an early form of todays bootcamps.  Books, tapes, newsletter and video tapes.  He started on a small step of the buying process and lead the top coaching program.

Yes we had some losers and winners in our early years but we learned a little piece of the real estate investing market.  It is all these pieces that make us what we are today.  It is hard to admit that we read and followed some of these and others that do not rate mentioning here, but we learned from each one.  Even if it was what not to do.

Due diligence is a critical part of the buying process.  You should not take it lightly.  While the period can last 30 to 60 days, the time flies fast.  In this second part of three posts we will look at the Financial Review.  Click Financial Review to see the first post.

Legal:  This part of the Due Diligence that is usually handle by other parties to the deal.  Either by your attorney or the Title company.  You will review the following:

• Title:  Review the title of the property.
• Building code violations:  Check for building code violation.  Once the property is yours any code violations will be yours also.
• Zoning certificates:  This should be a slam dunk but check the zoning.  Is the building zoned for the use that it is being sold for.
• Insurance:  Check the insurance coverage.  This ties back into the financials and the expenses you factor into your operating expenses and ultimate the profit of the property.  Also look for the coverage, premium, expiration.  Check the insurance against another company.
• Rental ordinances:   Are there any restrictions on you raising rents on the proeprty.  It most rural and suburban areas this will not be a problem.  it is in the cities that there may be rent control or restriction.
• Licenses, certificates of occupancy and other permits:  Check the assessors description of the property against the actual.  Were any improvements done without a permit.  If the assessor states the property is 45 units and the property is being sold as 50 units – that raises a red flag and you need to confirm with the seller of the proeprty.
• Vendor contracts:  Review all the vendor contracts to see what you are agreeing with.  Most will need to be redone when you buy the property with on major exception, laundry services.  Check this contract carefully.  The seller can enter into an agreement that ties the future owners into a crappy deal.  What happens on these contract is a laundry service will sing the agreement with the previous owner and receive a upfront payment on future earnings.  This can be up to $25,000.  The laundry service is going to recoup this amount over a ten year contract.  They are going to take a significant part of the laundry revenue.  The contract stays with the property not the owner.
• Estoppels:  Are forms that verify what the seller has told you.  You confirm from each tenant what they pay for rent and what deposits they paid.  You can compare the residence’s knowledge with what the seller has told about the residences.

This is a very tedious & sometimes expensive if you are having a lawyer help you, but important part of the Due Diligence of your purchase of a multifamily property.  Spend the time needed to get the information to make an informed decision.

photo credit: jimmiehomeschoolmom

I have been asked many times how I analyze multifamily properties.  I thought I would go through my steps in today’s post.  The idea is to look at many properties quickly to determine which one warrant your further attention.  I have created a spreadsheet that I use to do my analysis.  This spreadsheet will organize all rents, expenses, additional income to determine the Net Operating Income.  From here you can determine Annual Debt Service, Down Payments, Reserve Accounts, Private Money requirement and the highest we will pay for a property.  Here are the steps

1. Find the property – Loopnet or broker
2. Determine the unit mix and rents for each – from broker
3. Potential Rental Income (# of units x monthly rents x 12 months) (PRI)
4. reduce total by vacancy and credit loss = Effective Gross Income (EGI)
5. Add other income from laundry, etc = Gross Scheduled Income (GSI)
6. Subtract Operating Expenses (OE) to get Net Operating Income (NOI)
7. From NOI you can determine what you want to pay for the property by dividing your CAP Rate
8. If this price if more than 20% less than the asking price I will file the property away for a few months
9. If it is within 20% of the asking price I will continue with the analysis
10. Does the property need rehab and estimate that amount
11. Determine the Annual Debt Service, Reserve Account, Private Money needed to close and the rate of return offered to the private lender

I can go through this analysis in 10 minutes and I know if we have a property worth our time.

photo credit: word_dancer51

Due diligence is a critical part of the buying process.  You should not take it lightly.  While the period can last 30 to 60 days, the time flies fast.  In this first part of three posts we will look at the Financial Review.

Financial: You want to look at every part of the property’s financials.  You should request and receive the following documents:

• Past 2 years of monthly operating statements:  You have based your purchase price on numbers that you may have gotten from the broker for the seller.  You want to review the numbers each month so you can look for trends in the expenses of the property.  This history is valuable in giving you a glimpse of the management of the property.
• Year-to-date operating statements:  While history is good but we want to look at how the property is presently  operating.
• Rent roll for current and past two years:  Like the review for the expenses you want to look at your income side of the property.  Again you are looking at trends in the property.  The past shows the trends, while the current rent roll will confirm your numbers that you based the purchase price on.  It all comes down to money in and money out.
• Past three months deposits:  While somethings can be faked – like names on a rent roll – deposits in a bank account cannot.
• Existing loan documents:  You should be aware of the term of the existing loan.  This is especially important if you buy the property with a seller wrap.
• Security Deposit:  Verify the deposits.  This is important because this money will be credited to you at close of escrow and thus reducing the money you need for closing.
• Utility bills:  This is verifying elements of the operating expenses.
• Property tax bills:  This is a major expense that you want to review.  Verify the last assessed value.  If the price you are paying is higher – your tax bill will be higher.
• Service Contracts:  You want to verify all contracts with the property.  One that is critical and needs to be verified is the laundry contract if you have a laundry service.  These are contracts outlast the sale of the contract.  Look at the terms closely.  These contract frequently give the owner of the property a large payout on the front and very little during the contract.
• Payroll register:  Confirm what the staff is being paid.

These documents and information confirm the financial viability of the property.  This is the first review of the Due Diligence because this this is the first that is will fail.  Saving further time and travel expenses.  If your assumptions do not meet with reality, then cancel the deal and more on.

photo credit: Wesley Fryer

If you are like most investors of multifamily properties, you tend to take on everything yourself to make sure it gets done and done right.  That is a recipe  for disaster.  You need to delegate to survive.  Just get the thought in your head and get use to it.  You can’t do everything.  You need to attract quality people to you to help your growing concern.  There are a number of things you do before you buy a property, but that number multiples by a factor of ten after you buy a property.  All those deals will kill you if you take them on yourself.  Here are some strategies to help you.

1. Procedures: You need procedures in your office to handle questions as they come up.  This makes for a consistent response to everyday challenges.  This is along and laborious task, but when complete you can give the procedures to someone in the office and you are reasonably assured that the tasks will get done like you want them to get done.
2. Interns: Hire an intern.  There are hundreds of college students that would kill to get an inside look at how an investor work his real estate business.  You can find good quality interns at any university.  Do not expect them to hand around unless you are willing to compensate them well.  These are very bright and intelligent students who are looking at your opportunity to learn the business and apply it themselves.
3. Virtual Assistants: These are businesses setup to handle work that does not require a physical presence in the office.  It is a great way to get help very quickly.  You will probably have to commit to a set hours per week or month.  Procedures are a must when working with someone not in your office.  There is a learning curve to the service.
4. Hire staff: This is last on my list because I had to lay-off 6 people in this economy in my other business and it is not fun.  I will make sure that I have more than enough work before I expand my staff.  The biggest plus to this step is you have the most control over your workload and can be the most fulfilling.

So there are 4 steps to reduce your workload and keep you sane.  You should do what you do best and let someone else help you with the things they do best.  If you have any other ideas drop me a comment.

photo credit: Nina Matthews Photography

When it comes to buying Multifamily properties, it helps to be creative with the financing.  In fact the more creative the better.  What I mean is look at more than the traditional approach to buying the property.  The traditional approach would have you put 25 – 30% down and finance the rest.  I don’t know about you but I usually don’t have $400 to $600K to put down on a property just lying around.  Besides that is too much capital to tie up in one property.  So we get creative.

It’s nothing personal but I just don’t like working with a bank. With the higher lending restrictions, I would rather go see my proctologist instead, excuse more colorful metaphors.  But getting a loan is way too more painful.  If I can get Government backed financing I will do that, but traditional financing I am going to steer clear of at least for the foreseeable future.  I can understand the bank’s restrictions with the bath that they have taken in the last three years.  I certainly don’t want to be subjected to that.  So we look for other financing ideas.

Like seller financing.  How do we find it?  We ask every seller we consider buying from.  Whether they state it in the listing or not.  At some point all sellers will consider it in order to get rid of the property.  So start asking for seller financing.

If the seller has equity, ask for a wrap.  That is when the seller wraps an existing loan around their equity and gives it to you.  Your payments are based on the size of the loan and covers the sellers loan payments and gives them money for their equity.  This a great way to buy a property.

Split the down payment.  Like I said earlier, most of the time we don’t have a full 30% for a down payment.  But we can certain pay them enough to cover the seller’s costs (commissions, closing costs, etc..) and divide the rest of the down payment over several month as an interest free loan to us which we will use the cash flow from the proeprty to pay.  We have done this on a number of occasions and it works great.

So here I have talked about three ways to be creative with your financing for the purchase of a seller’s property, but the sky’s the limit.  Be creative and do not be afraid to ask for the moon.  Let me know if you have any other ideas I missed.

You can learn more about creative we can be with financing with our Private Money program.  Just Clicking Here!

photo credit: miss_yasmina

When purchasing a  Multifamily property the watch words are “Trust but Verify”  That is the whole idea behind Due Diligence.  Due Diligence is the period of time after the signing of the purchase agreement where the seller opens all their books and property for your inspection.  This period of the purchase process can last from 30 to 90 days depending on the size of the property.  There are three parts to your Due Diligence: Financial, Physical & Legal

Financial: You want to look at every part of the property’s financials.  You should request and receive the following documents:

• Past 2 years of monthly operating statements
• Year-to-date operating statements
• Rent roll for current and past two years
• Past three months deposits
• Existing loan documents
• Security Deposit
• Utility bills
• Property tax bills
• Service Contracts
• Payroll register

Physical: Once the financials have been checked it is time for the physical inspection.  You want to do this after the financial because why waste time and money to inspect the proeprty if the seller has been less than truthful about the financial records.  I have cancel many a deal once I have seen the books and the seller did not want to renegotiate the sale.  During the physical inspection you will do or get the following from the seller:

• Perform a Site inspection
• Property plans and specifications
• Survey
• Tools and supply inventory
• Appraisal
• Phase I/Phase II Inspections
• Pest inspection
• Site inspection

Legal:  This part of the Due Diligence that is usually handle by other parties to the deal.  Either by your attorney or the Title company.  You will review the following:

• Title
• Building code violations
• Zoning certificates
• Insurance
• Rental ordinances
• Licenses, certificates of occupancy and other permits
• Vendor contracts
• Estoppels
• Title inspection

I know it looks like a lot of work and it is, but once you have completed the process you will know and understand what you are buying.  You can complete the purchase with confidence.  In future posts we will look at each part of the Due Diligence process more closely.

photo credit: cdsessums

Ask any investor in multifamily, if they will tell you, how do they find commercial properties to evaluate?  You will get several different answers because there are many different sources to look at property.  Commercial real estate does not have a centralized listing of every property is available like the MLS is for residential real estate.  You need to dig around a little bit – sometimes a lot.  Lets look at three sources.

1. The first source and the easiest is Loopnet.com.  It is a free or low cost service that you can subscribe to and  review brokers’ commercial property listings.  It is quick and easy.  That is the good and the bad of the service.  The bar, for getting information, is so low that everybody is on the service.  They is a lot of competition for properties.  You will really need to search hard to find a great deal.
2. CoStar is another service, but this is a paid service that provides a lot of information.  This is an expensive service that commercial brokerage companies use.  The competition for the properties will be less because of the price.  It is not a service that someone starting out in commercial real estate will use.
3. The 3rd and best source of deals is the old fashion way: brokers.  They have access to all kinds of information and properties.  They can be an invaluable source of deals, but it takes time to develop a relationship.  You need to show that you are someone who will close deals.  A broker is paid on commission and their time needs to be spent with people who will analyze deals and can close when the numbers look right.  That is why you will find that you need to work harder at first to get their attention and information.  Knowing the right questions to ask is part of it.  You need to do your homework to show the broker you are a player not just a wanna be. Until you are a known quantity you are low on their totem pole.

So unless you know a broker in another state, if you are investing out of state like us, start with Loopnet.  Yes it will take longer but you have a variety of properties to look at and enough information begin your preliminary numbers.  As you purchase properties the brokers will see that you are someone who closes and they will devote more time to your questions getting you information.  Small steps.

You would think that we wouldn’t need to talk about this topic, but I have talked to people who have purchased property without a site inspection. What could be dumber – well maybe there is one or two things that are dumber. But let me tell you about our latest site inspection to illustrate the point.

We sent a Letter of Intent (LOI) for a property in Memphis, TN. The preliminary numbers looked pretty good and we even had driven by the property and the outside looked great. A brick building with a good looking roof. Everything looked great. We started our Due Diligence. The detail information looked OK. Not great but not enough to kill the deal. It would have been easy to go ahead with the deal since we have since it.

We scheduled a site inspection.  Now one tip I would give anyone who is looking to sell their properties.  When a perspective buyer is coming to your property you might want to pick-up the empty beer bottles and cut the lawn.  That is want we found when we drove up to the site.  Not a good impression (Strike One).  The second tip is your property manager should know all about the property.  The PM did not know much about the property (Strike Two).

We start our inspection of each unit.  Yes inspect each unit – Why?  You want to verify that the rent roll with a warm body in the unit.  It is easy to say that property is 85% filled.  But walking through you can see if someone is living in the property.  That is a little more difficult to document.  The first unit we walked into set-off red lights.

Each unit has the AC in the middle of it.  It is in a hallway closet and the water that is produced by the FAU (Forced Air Unit) is removed out by a small pump.  We found water on the floor of the 1st unit outside the FAU closet.  The pump had failed and the water over flowed outside the door.  We looked at the ceiling and there were water stains and some mold (Strike Three).  We continued through the rest of the units but saw the same thing in all of them.  In fact one unit had mold on the walls of a closet that had a tenant living in it.  If that is not a lawsuit waiting to happen.

So the moral of the story is to trust but verify and always make a site inspection.  We canceled the deal and got our earnest money returned because we canceled the deal during the Due Diligence.