How can you afford to hire contractors to do maintenance in large properties?

General Real Estate Investing
21

Well, “apartments” is vague. What if 300 of those are corporate owned behemoths with 600 units and golf courses attached?

Better find a way to sift to the sweet spots and leave out the wastes-of-postage, as it were.

I refer to anyone I’m prospecting for as a ‘seller.’ If not, why send them mail? I know one guy on here put me on to calling the “suspects,” and that’s been my favorite word for them, since that’s all they represent to me, until they respond to my marketing, and then they morph from “suspects” to “prospects”, and if I’m successful with a closing, ‘sellers’ or “clients.”

Meantime, don’t remain too literal, or you’re gonna get tripped up a LOT.

I already gave you a rough draft. Just tell the suspects that you are a private party looking for units to invest in, and you would like to discuss an offer whenever they decide they’d like to sell. Include some helpful/interesting information about their local real estate market, or something relevant to the operation of their units. Management tips and tricks is always great. Everybody wants to know how to better manage property …especially someone with management problems, which in my estimation is like 110% of apartment owners. (I’m being facetious again. Otherwise, you’re gonna ask me why 110% of apartment owners have management problems.)

Finally include all your contact information (except your email).

Do NOT include your email.

I edited the previous post where I said to include your email. You don’t want to get into email conversations with people. If you can’t hear their voice, you can’t make judgments about their sophistication, education, experience, much less motivation. After you’ve talked, then you can email each other like girlfriends.

Extra motivated sellers will want to talk with you NOW on the phone, and so will ‘extra’ unmotivated ones. You want to be the one to determine which you’re dealing, and not the competition.

Never mind that email conversation take ‘forever’ to write and respond to. Do you have that kind of time, and do you want to telegraph the seller with that notion? Nope.

Unlike me here pecking away, trying to advise someone ad nauseum, with my extra-shiny pearls of wisdomness. :beer

When a seller calls YOU, and that’s the only way you’re gonna initiate contact… and they express interest in selling, you simply ask how much they were wanting, thinking about, imagining, fantasizing, or wishing they could get out of their property today.

They either give you a number, or they don’t. Either way, you ask for a copy of their operating numbers. Seldom do sellers have more than a rent roll, but some will be prepared to give you real numbers, and get nitty gritty with you. It just depends.

For starters, you want the current rent schedule, number of units, who pays for which utilities, and because you’ve already analyzed 100 operating data statements before, you already know what the per unit cost of utilities will be for a given apartment, what the taxes will be, based on the sale price, and the management costs, based on what you’re willing to pay, and the insurance costs based on historical data.

So, with just that information, you can fill in the blanks with educated guesses, and/or assume 50% overhead, to keep things simple, and see where this property can be milked. That means if the expenses are climbing passed 50% you know there’s some money to be had. Or you discover the manager is being paid 25% of the GSI. Obviously, that’s at least 15% over budget, and somebody’s gonna get the Donald Salute: “You’re Fired!”

That said, you also know what the rents should be in the area, for the age, and condition of the units, and that gives you a strong idea of the rental upside potential.

Meantime, some sellers will want to meet with you. That’s a great sign. Do it. Dress exactly how you see the seller dressing. Probably jeans and a t-shirt. I don’t meet man prissy owners. They hide their money, and drive really dull cars. Just saying.

Get to know the sellers and make friends whenever possible. It’s not necessary, but it’s easier to give bargains to people you like, and it’s critical if you’re asking for financing at the same time.

***You’re offer will become obvious, but it needs to start with the seller’s numbers. Multifamily financing is ALWAYS base on the property’s performance. So, if the building’s half-empty, and needs gutting, the costs to restore it’s value, including intangibles such as time and energy, all come off the comps of well-run, well-occupied, units. It really comes down to negotiation skills in most cases. You pay what you negotiate.

That’s not the seller’s view. He thinks you should pay exactly what the beautiful, well-managed property, with garages, carports, and a pool, that is twenty years newer, was sold for. Yeah, sure.

That Realtor’s advice about rent is good advice. The issue: When you’re negotiating a price, as far as you’re concerned the seller’s property is performing as well as it ever will.

You’re not a miracle worker.

This is especially true when the seller says “The rents are low, and you can raise them by “x” dollars a month.” I say, "No. If they could be raised that much, you would have done that already. We’ll stick to what’s happening, because the bank will only finance me on what’s happening now, not what will happen when the unicorns arrive. (You won’t say it quite that way to a seller, unless you’ve got some kind of relationship developed with with him… Just saying. However, I have no problem insulting brokers with that kind of feedback.)

I’m out for the night.

22

Hi,

 Jay you sure have more patience than I do!


       GR
23

At 100% owner financing…

An example of a building that sells for $1,000,000 at 10% cap rate ($100,000 NOI)…

If it is financed at 5 years at 4.5%, that is $223,716.24 of loan payments per year = not profitable

It has to be 4.5% over 30 years to profit $39,197.80/year.

Doesn’t this get in the way of getting your “Trump on?”

24

“Financed at five years at 4.5%” does not mean the loan amortizes over five years. It means that no matter how many years the loan is amortized over, the balance is due in five years.

Otherwise, yes a five year amortization schedule would definitely get in the way of getting your “Trump” on.

When someone offers five-year financing, that simply means that he’ll finance you for five years, and then he wants to be paid off. It doesn’t mean he’s amortizing the loan for sixty months, with ridiculously high payments. The amortization schedule can be anything, but rarely is it 10 years, often it’s 15, and likely 20, and ideally 30 (from the buyer’s perspective). However, it comes down to whatever you negotiate, and what your goals are.

For example, if the project pushes off a lot of cash flow, and you’re not depending on that to live, you may want to shorten up the amortization, simply to reduce the principal balance that much faster.

That said, you lock yourself into a shorter amortization schedule, and you are LOCKED into a shorter amortization schedule. This can be inconvenient, if for some reason there’s a cash-flow hiccup. Better …negotiate and ‘lock in’ a longer amortization schedule, but pay more principal per month, as you’re able, and effectively turn a 30/year loan into a 20/year, or a 20/year into a 10/year loan, etc. You get the picture.

25

So I can pay at the rate of a 30-year loan, but both the buyer and seller know that the full balance is due in 5 or else they get the property back?

Is there a chance that I could refinance this through a bank or credit union during those first five years and have those 30 year payments be on an actual 30-year loan? (or 20-year, as this is the longest I’ve ever seen for a commercial real estate loan)…

26

*** Yes, of course both the buyer AND seller know that the full balance is due in 5, or else the seller gets his property back. Why would only one party know, and not the other? It’s written in the contract, and the loan note.

*** I don’t know what a credit union will do. We’re talking seller financing only right now. Anything’s possible when dealing directly with a seller. Who knows what the market/regulations/guidelines/policies of a credit union will be at the time you try to get financing.

So, let’s not talk about what banks will do. If you’re focusing on the right kind of deals, a bank won’t want to finance them anyway.

*** That said, I actually do have a seven-year minimum on balloon payments. I’ll know in five years, whether this deal is gonna fly on schedule, or not. However, in three years, it’s debatable, especially when I’m relying on the performance of the property to get good financing.

*** In my opinion, only insane people agree to five-year balloon notes.

27

If I borrowed $1,000,000 for a property that had an NOI of $100,000/year at 4.5% over 7 years amortized over 30…

At the 7 year balloon payment point, I would owe $870,262.84 on the principal and have taken in $700,000 of cash.

I would be in a bind unless I was able to refinance during those first 7 years.

A credit union is the same as a bank, in my opinion. I have never actually used either of these, but I have wasted the time of many a loan specialist finding out how their system worked. Many of the credit unions have more lenient terms than a Bank of America, Wells Fargo, for example.

Do you refinance in every situation? Is there any reason not to? Have you ever had trouble refinancing? What must you show to the bank in order for them to agree?

I think tomorrow, I will “waste the time” of more loan officers at all of the major lending institutions that have a branch within 30 miles of me.

Also, have you ever had luck getting the owner to finance rehab costs?

28
  1. No, you wouldn’t be in a bind. You’ve been planning for seven years to get new financing. You only have to finance about 87% of the original loan value (aka value at the time of the purchase), and the property is worth 15% more now, or at least $150,000 more.

So, securing an 80% LTV refinance would be relatively simple, and easy, as long as you had support for a well-operated building at that point. You’ve got verifiable numbers, tax returns, and what not to support your smooth operation and low risk.

2-4. I can’t answer any of these questions in a vacuum. Each answer depends on the situation, or what I’ve negotiated. Otherwise, I could answer yes and no to every question you asked.

**** On a refi, you have to show the lender your operating numbers for the last two, or three years, depending on the age of the property, and what the bank wants to see, including your tax returns for the last three years pertaining to the subject property.

The bank looks at the performance of the property, market conditions, comps, owner’s tax returns on the property, and specifically the occupancy levels.

The issue is, you qualify for financing based on a verifiable history on the project, as an owner, and not as a potential buyer.

Your credit isn’t really an issue, unless you’re trying to salvage a turd situation. And your management competence is assumed, unless again, you’re trying to put out a fire, with new financing.

  1. There’s no “luck” involved in this business. Get that crappy thinking, and word-use, out of your head and mouth. “Luck” is a gambler’s term (aka “chance taker,” and/or “loser”) and that should never be part of your professional language.

Just to drill this home, you’re not about being lucky. You’re about being prepared for opportunities, and/or negotiating them into existence. Or, you create your own “luck.” And that’s still called being prepared for an opportunity, but never referred to as “luck.”

Even if there was “luck”, an unprepared person’s luck runs out on impact with the opportunity.

Another reason to be studying and analyzing 100 operating data sheets, before you start trying to pull the trigger on a deal. You need to see deep into a deal, know why and how the numbers can be different, or should be, and be able to negotiate to a ‘win’ with confidence and credibility. After that, and by any laymen’s standards, you’ll seem to get “lucky” once a month.

29

I would not be in a bind because I should easily be able to secure refinancing, correct?

If I were not able to secure refinancing, then I would be in a bind. But this should not be a problem.

30

You’re asking questions without any context. I have no idea.

If you bought wrong, yes, you would have a problem all the way around.

If you bought right, and had a stable project, and could support it with verifiable numbers, than no.

I realize these questions are born out of fear. You’re attempting to negotiate with yourself, and worse, on a hypothetical notion of what you might be doing.

Think constructively, and positively, and ask, “How can I make this work.” Just saying.

31

Hi,

You know it's awfully nice of you to spend the time writing a book about commercial property investing but the truth is and you and I both know old Redstar needs to spend some years learning to own and manage a house before he is ready for his first 5 unit apartment building!

It is basically a waste of time thinking that a guy who has no management, maintenance, financial or risk management skills to learn enough from a 1000 page text book to handle and master advanced commercial investing techniques with no prior knowledge and a current property he did not buy himself!

I think Redstar needs a little 3 bedroom / 1 bath rental home to understand and handle before he jumps out of the frying pan and into the fire!

It’s basically a waste of time writing a novel as most of what you have written is already in the forum if Redstar would go back and read and study rather than continuing to post questions on points already covered.

Sure Redstar can become successful he just has to work, read, study and gain experience.

             GR
32

I have one more question on this topic.

I shouldn’t have asked if you’ve had “luck” getting the seller to finance rehab costs, I should have asked where do you get them from?

The immediate improvement costs of a $1,000,000 apartment complex would be pretty significant and if the idea is to get in with $0 down, I don’t know where they’re going to come from otherwise.

Also, back to the original topic, let’s say that I bought this apartment complex…

http://www.loopnet.com/Listing/19141177/5172-Conroy-Road-Orlando-FL/

Do you really expect me to hire an unlicensed retiree to do the electrical?

33

“No down” and “No money” are two different animals.

The issue is controlling the units with none of your own money …especially since you have no money of your own in the first place.

The next question is “Where are you going to come up with rehab money?”

That can come from anywhere, but on one of my buildings, I simply rented the remaining empty units as-is, and slowly upgraded the units with the cash flow. It took a while to revamp the building, and get the rents to where I wanted them, but I did it.

This isn’t always possible, if the units aren’t marketable (torn up, damaged, etc.), or you’re doing full-on remodeling jobs.

Otherwise, you find a partner with some money, like I have, or better, offer someone a great interest rate and borrow the rehab money. Once you have the building stabilized, you refinance the loans. Some might say, refinance as much cash as you can from the project, and invest it in another project. More, or less, daisy-chaining your profits into more units.

*** I’m not analyzing that project. That’s your job. When you start investing in pride-of-ownership deals like this, you won’t need to worry about who’s doing the repairs.

34

I asked a realtor for listings of all properties that match my criteria in this area. I haven’t gotten around to my mass mailing campaign yet. I told him that I wanted to owner finance 100% over 7 years, amortized over 30 for this property… (Not asking you to analyze it, just in case you want to see. It’s a hotel, which I know is not your thing.)

http://mfr.mlsmatrix.com/Matrix/p?L=1&k=5453331XMQLJ&p=AE-1436882-13&rn=3&portalAction=item

He replied saying that I could finance over 30 or 7, but not both. This is before he had even talked to the seller.

He also asked for proof of my income. But isn’t the profits from the hotel supposed to cover the loan?

If my painting/pressure washing company does as well as I think it will, I could afford 30 year payments on $1,000,000 in a few months.

Also, I went to a local bank and they confirmed that the refinancing strategy works. They said they would require 2 years of tax returns and could finance up to 80% over 30 years.

35

**** Don’t take this wrong, but you make me laugh out loud. I’ve made the exact same mistakes myself.

**** First off, tell the broker nothing about your financing intentions, or about your finances. Just don’t.

Don’t even tell them you’re a principal, if you can avoid it. Tell them you’re inquiring on behalf of your partner “Mr. Redstar1324” (ie: your dad, your neigbhbor, one of your drinking buddies at the RV park, etc…)

Just get the operating data. Forget making offers for now. Don’t make verbal offers, or telegraph your intentions. Just get the data sheets. And that’s different from the sales brochures with all sorts of pretty pictures and very little operating data.

**** Practice filling in the blanks on that real estate analysis sheet I gave you. And see how much, above or below the 50% line the expenses go, and learn why.

Get as much of a breakdown on expenses as you can get. Otherwise just assume 10% for management (total on, and offsite) and 10% for maintenance/repairs, 3% for reserves/replacements for starters.

**** If you waste the agent’s time making practice offers, remember that agents are paid to investigate you, your financials, and your history, like they were qualifying you as deep pocket pedophile to sue …just to put this in the worst possible way.

**** I have no idea what you said to prompt the agent to ask for proof of income. That’s ridiculous. You want proof of the project’s income, if anything…!

**** Finally, evidently you still don’t understand the term “amortization” or “balloon.”

Here goes:

Amortization: Amortization is the paying off of debt, with a fixed repayment schedule, in regular installments, over a period of time.

For example: A 30-year loan.
$1,000,000 is amortized over 30 years, at “x” percent interest, with 360 equal payments.

Balloon Payment: A balloon payment is the payoff of a loan, before it is fully amortized.

For example: A 30-year loan with a 7-year Balloon.
$1,000,000 is amortized over 30 years, at “x” percent interest, with 360 equal payments, but after the 84th payment (7 years), the entire balance becomes due and payable in full.

You’ll discover the way a lender short-hands these terms is by calling a 30-year amortized loan, that’s due in five years as a “30/5 loan.” Or maybe a 20-year amortized loan, that’s due in ten years, as a “20/10 loan.”

36

I said…

“Please tell 1403 E. Alfred that I’ll buy it right now if he finances 100% over 7 years, amortized over 30, plus finances rehab cost, which will be much less than the stated rehab cost.”

He said…

“Owner Finance Offer has to be either 7 years or 30 years. Can not be both. Will of course require full disclosure of your current income , credit and asset status. Please provde personal financial statement of assets, liabilitues and income and i will find out if the seller is interested.”

I told him my income ($34,000/year) and he laughed at me. Rightfully so… But I could pay back the owner financed loan with the profits from the property.

Also, I don’t entirely NEED the financial data because I can figure it out myself, I hope.

Is the answer to not go through realtors? (I have actually personally visited hotels before and gotten data).

37

See what you’ve learned already? You made an offer, and the agent started pounding you for financials.

That’s OK, since you’re practicing. However, you’re still getting the cart before the horse, in making offers before you’ve analyzed enough deals/data.

I can’t help you on hotels. I have no idea what to advise. I have no experience with these, and have no desire invest vicariously through you.

If you want to learn how to analyze hotel deals, start getting operating data sheets and familiarize yourself with them.

Frankly, the first questions the agent wants to know is “Where is my commission coming from? How am I getting paid?”

Agents represent overhead and interference to any transaction, especially ones with creative financing.

That said, your financing offer wasn’t that creative. It was vanilla seller financing. Except that it was something like 110% seller financing, since you were asking the seller to finance the entire price, and on top of that, the rehab costs.

This was a great opening salvo, which very few entrepreneurs I know would have had the guts to pitch. However, it was a verbal offer, that opened you to a barrage of questions about your credibility, integrity, credit, and financials. Really? Those are things you include with a written offer. That’s why you only make written offers on properties that are for sale.

Verbal offers are not offers, and should be avoided, unless your in front of the seller and ready to reduce what you’ve said to writing. That’s what a letter of intent is for. In fact, that’s what your marketing copy is good for. Its serves as a ‘mini’ Letter of Intent.

The rest of the time, you make offers in writing. That doesn’t mean you can’t make suggestions as to an offer to a seller. I do this all the time. As I’m talking with the seller, after having analyzed his operating data, so that I’m on the same page with the seller, I’ll suggest any of a dozen things, which might include offering full price, in return for temporary financing, or ask, “If I give you a full price offer, will you consider financing the project.” The seller will say, “No, forget it.” or “What did you have in mind?”

I would say, "I’m not exactly sure, but I may make an offer that includes this, and you can look it over, and tell me what would be acceptable (or say something of that nature).

Here I haven’t been specific, and only felt out the seller’s lack of flexibility, or otherwise.

The thing you don’t want to do verbally, is say what you did to the agent. Instead, make the offer one suggestion out of several you have in mind, without committing to one option. ( I could go on, but no.)

Interestingly, you gave the seller (agent) no reason to finance the rehab, other than it would save YOU money. Ha!!! I love it.

BTW, notice the agent didn’t tell you to get lost?

Now, evidently the agent knows the NOI sucks, and that if anyone gets paid anything back, early on, it’s gonna come from your checking account, not the cash flow generated from the project.

Here’s how I might have pitched this offer (so getting ahead of myself here, but).

Mr. Seller, the current NOI on this project is “70,000” dollars. Of course that’s all that’s available for debt service as of today.

The current NOI makes it impossible to get conventional financing, without putting up additional collateral, paying a very high interest rate, and tying up everything we own, just to buy, rehabilitate, and stabilize your building.

And that doesn’t include the nearly quarter million dollars in rehab money we will be required invest to make the project profitable again.

There’s just not enough upside potential for us, to do something that so negatively impacts our credit picture like that.

So, it looks like I’ll have to pass on this deal, unless you would be willing to finance the purchase and rehab at rates and terms that are better than the bank. (You don’t want worse terms…!)

I’m confident that I can turn this project around, based on my experience with my last project, where I turned the project around, stabilized it, and made it cash flow in ten months, despite getting drunk with my tenants, and them screwing me out of rehab money, but I digress.

[Showing the seller a before photo, (not) showing you having a beer with your drunken tenants, and then an after shot of your finished project.]

As a result, I am prepared to give you full price, if you’ll finance the purchase price of $1.45M, plus an additional $200K at 1%, over 30 years, all due in 7 years.

*** Of course you could structure the financing 1,000 different ways, as long as the combined, overall, annual, debt service wasn’t over $70,000.

(I’m not saying this is a good offer. I’m assuming it is, only for illustration purposes.)

38

I’m going to ask him for financials and tell him I’m not committed to this one deal.

I went from “drunk” to Adolf Hitler in about two days.

I’m not stuck on hotels, either. I have no experience with them. I know there are things I don’t understand about the industry, like why they fluctuate their rates on a daily basis and what is that based on?

39

Also, I want to make sure my terminology is correct.

If I take out $1,000,000 at 4.5% over 30 years, that is monthly payments of $5,066.85 for 360 months.

If I want to pay $5,066.85 every month for 84 months, then the remaining principal in full at the 84 month mark, that means…

7 year loan, amortized over 30 years, with a 7 year balloon.

Is that correct?

40

Yes, technically, but that’s a clumsy way of stating it, and will be confusing to someone hearing it said that way.

Rather refer to it this way…

A $1M loan, with a 30-year amortization, all due in seven years. Anyone would understand exactly what you were talking about.

You don’t normally call a 30-year loan, that’s due in seven years, as a “seven year loan.”

That would confuse it with the way a car loan is described.

For example, most car loans are described as something like a “three-year loan,” or a “five year loan.” A car loan amortizes fully over either three or five years, or 36, or 60 equal monthly payments, and then the loans is paid off naturally. There is no balloon term involved.

So, if you call a mortgage loan a “five year loan,” out of context, anyone will assume you mean a 60-month amortization schedule.

So, stop referring to mortgage loans by their balloon terms, and rather by their amortization schedules, and if you have to, add ‘all due in five years,’ etc.

This is the longest I’ve ever spent explaining amortizations and balloons e.v.e.r.! :beer