Presentation is Everything

This phrase may sound cliché, because it is, but have you ever given the meaning of it any serious thought?  I hadn’t.  That is, not until recently.

“Presentation is everything” can be used to cover a wide array of subject matter from how one actually looks, their demeanor, business negotiations, quality of work, or even cooking.  After all, isn’t this phrase basically just another way of saying “you only have one shot to make a good first impression”?  I promise that’s the last catchphrase I’ll use, but I want to drive home the point of how important presentation can be.

You might be thinking to yourself that I’m not telling you anything you don’t already know.  In fact, I’m positive you already know this, but you also are aware that knowing something and applying it are often two different things.  For example, we know that eating unhealthy food makes us fat, but who here besides me has a love affair with a good cheeseburger or pizza?  Exactly!

I know I’ve already discussed the importance of creating a comprehensive loan package, and while this post has some similarities to that post, I believe this topic is important enough to warrant its own post.  Reason being is we talk to a lot of people, who are mostly involved with real estate, that have a solid grasp of the everyday applications of the market and how it relates to their business, but when it comes to creating a marketing package, executive summary, or business presentation they often don’t know what goes into creating it.

The result is subpar presentations that lack adequate information, are often outdated, incomplete, and in a lot of cases they look so bad that just the overall look of the presentation hurts their credibility.  After all, what you present is a direct reflection of who you are and the quality of work you deem appropriate.  You may have a great property, solid business idea, or a strong loan request, but if the presentation creates more questions than it answers and looks like an 8^th grader put it together how is anyone supposed to take you seriously?  Simply put, they won’t.

One cause of poor presentations stems from a lack of understanding of what should to be incorporated into one.  To put it in general terms, the creator knows the information relating to the main subject, but doesn’t understand that they need to “spoon feed” that information to whomever they’re creating the presentation for.  It’s easy to forget the person(s) who will be reading the presentation may not know anything about the market, product, geography, economy, etc. that relates either to the subject or is in support of it.  It isn’t enough to impart the information you feel is important.  You need to ensure that when the reader gets to the last page they have a solid grasp of everything they need to know in order to make an informed decision.

Also, technology, and the lack of knowing how to properly use it, can drastically impact the quality of a presentation.  I can’t tell you how many times I’ve seen an executive summary – requesting millions of dollars – being presented as a word document with mismatched fonts, uneven spacing/borders, and outdated and/or incomplete data.  It really is unfortunate.

Granted, I know it isn’t easy to develop a command of programs such as Adobe Acrobat and PowerPoint.  Even Word can be daunting given all that it can do these days.  I know I struggled for a long time to get comfortable with them so I can sympathize, but knowing how to properly use them is instrumental if you want a quality product.

However, once you understand how to create graphs and charts, integrate photos, edit borders, insert headers and footers, etc., presentations take on a whole new dimension.  This isn’t to say creating quality presentations becomes easy, or fast.  It doesn’t.  Creating a good presentation takes a lot of time and patience.  In some cases, we’re talking weeks, but the end result is something that is far better than a simple word document.

At this point you may be asking yourself when I’m going to make my sales pitch. The answer would be right now.

If you or anyone you know could benefit from having a professional construct a presentation for them we’d like to take the opportunity to talk to them.   We have plenty of examples of past work to present that range from a dozen pages to over sixty.

Here are just a few examples of presentations we can create:

• Executive Summary
• Business Plan
• Marketing Package
• Product offering presentation

Since no two presentations are the same, neither is the cost.  We factor items such as the length of the presentation, amount of supporting information needed and time associated finding/verifying it, quality of the subject information and if any help is needed to bring it current, etc.

We are, however, reasonably priced and find that the quality of what we create costs much less than if dedicated marketing companies were to create a similar presentation.

What Do I Look For When Buying a Multi-Family Property?

With the US rental market seeing some overall good returns, there is an influx of investors looking to buy rental property as an investment.  For clarity, I’m not talking about your run-of-the-mill SFR that a buyer is going to rent out. I think it’s safe to say that that topic has been covered ad nauseam.

I’m going to focus on properties that are 3 to 4 units in size since those are still considered residential properties, and as such, can be obtained using residential financing. Granted, a lot of what I talk about in this post can still be applied to properties that have more units, but since 5 units and above fall under the umbrella of commercial property/financing I think it’s important to keep the two separate. Not to worry as I will discuss larger properties in the next post.

In recent talks with some of our sellers we have all noticed an uptick in buyer’s appetite for properties with more units. The general consensus is that buyers are realizing they can often acquire more units without spending a lot more than it would take to buy a nicer investment SFR. The logic here is fairly sound since there aren’t too many investors who wouldn’t want to increase their revenue stream by having more tenants if it didn’t come with a large additional outlay of capital.

Since there isn’t a large turnkey market, at least not yet, for these types of properties a buyer must be prepared to do a larger degree of due diligence. We also believe one should take a harder look at the local market when considering buying more units. This reasoning is derived from the fact a 4-unit is built as a rental property whereas a SFR – that can certainly be rented – is often not built with the renter in mind. An apartment within a 4-unit is looked at just the same as someone who went to a car dealership and is looking for that special car out of hundreds.

What I am getting at here is that it is important to consider other factors such as:

• Health of the rental market, number of units available, units being built, unemployment rate, etc.
• Market rental rates
• Amenities that are being offered
• Crime, traffic, noise

Yes, it is also critical to analyze the property, and while I’m confident most of you already know what that process entails, I’ll go over some of the key points for the benefit of anyone who reads this that might not know what goes into evaluating a property. Plus, I’m fond of lists with bullet points.

So, here are some important items to look at when considering any investment property:

• Property information

• Age, potential deferred maintenance, preliminary title search, tax/insurance estimates, who the Property Manager is, what is the parking arrangement, etc.
• Financials
  • Rent roll, P&L, tax returns, leases, proof of work done, management contract, estimates for any needed work, calculating new NOI/ROI, etc.

Since I’m feeling particularly generous today I’ve done some research on where you can find information on a particular market:

http://www.huduser.org/portal/MCCharts/marketReports.html

Below is a recent list of the top rental markets right now along with number of new units rented.

The Top U.S. Apartment Markets(as of the second quarter of 2011 and according to MPF Research):

• Dallas-Fort Worth – 8,390 units
• Chicago – 6,350 units
• New York -6,270 units
• Los Angeles – 5,630 units
• Atlanta – 5,110 units
• Houston – 4,390 units
• Boston – 4,360 units
• Washington, D.C. – 4,290
• Phoenix – 3,940 units
• Detroit – 2,500 units
• Denver – 2,480 units
• Miami – 2,450 units

This list demonstrates that some markets are having great success when it comes to filling units. It also reinforces how important it is to understand the market you want to enter since there are large differences from the top cities to the bottom ones and these are the top ten markets. If I could find a list that showed the bottom ten markets I’d post it, but I couldn’t find one. Consider that your homework.

Why should I consider buying property in another state?

We are often asked this question from potential investors looking to buy an investment property. Often times, the thought of buying a property that’s too far away to check on whenever they want to is something that can be hard to overcome. After all, buying a property has a lot of moving parts to it and it’s a big monetary investment. Perfectly understandable.

However, we believe that with the proper due diligence, most of the legitimate concerns can be addressed, and overcome. We also believe that in most cases the benefits in investing out of state can outweigh the negatives.

Rather than address the issues one must address when buying an out of state property, I’m going to talk about the upsides one should instead focus on. If nothing else, there’s already too much negativity in the world without me adding to it.

A buyer has far better chance of finding a property in a location that has the benefit of stable, or increasing, market rents if they are receptive to looking in other markets. While some markets are seeing a declining rental inventory and/or an increase in market rents, there are still more than a few states that are seeing those just yet. This component should be a driving force when looking at an investment property.

If you properly screen your property manager it is possible to find a good company who will efficiently manage and care for your property. Chances are there are just as many bad property management companies in your home town as there is the next so the screening process should be done the same no matter where you buy a property. If it helps, we’ve already written a post on what to look for in a good PM company.

Perhaps one of the most overlooked items when buying real rental property is if the state is landlord friendly. Without going through each state individually, it’s just important to point out that some states can make your life a nightmare if you need to evict a tenant and others tend to side more with the landlord. If you are going to have tenants you will eventually be blessed with one who will be a total dirtbag. No way around it so having a state that will favor you instead of the dirtbag will be a definite plus. Nothing is worse than having someone live rent free only because you have to go through a long eviction process.

A couple other items worth mention is looking for property in a state that has reasonable tax and insurance requirements. Paying a lot of taxes on a property can significantly impact the bottom line so it would be smart to look for states with reasonable taxes.

I’ll close by saving a whopper of an item for last. Looking for property elsewhere could get you more for your dollar. Wouldn’t you be interested in a property if it cost half as much somewhere else? Of course you would.

While there are exceptions, we have noticed that property in the southern states tends to be far less expensive than a comparable property in the north. We had a buyer looking at an 8-unit in NY for $280,000. Granted, it was a decent property, and he wouldn’t have been doing anything wrong by buying it since it generated positive cash-flow.

For that money we could have gotten him a 16-unit that would have been a much better deal. While the rents would have been less per unit, the property would be a better long-term investment given the equity he could expect to realize over the long haul. A 16-unit is also more marketable, can sustain vacancies better due to having more units, is often easier to finance, and in this case, generated more income. Also, NY is not considered a landlord friendly state which he didn’t know.

How to Prepare Your Loan Package

I remember the “good ‘ol days” when money was practically being given away for commercial real estate projects. It wasn’t too long ago that borrowers could practically qualify for a loan just by having a heartbeat and/or some semblance of a good credit score. Even today, I still get the occasional request asking if stated loans are available even though they haven’t been around for years. Some look back fondly at the days when all caution was thrown to the wind and times were good. Or so we thought.

A big part of what got us into the mess we’re currently in was the lack of underwriting loans (commercial and residential) based on their merit. Alas, all of that has changed. To obtain money these days requires a borrower to dot all the i’s and cross all of the t’s in anticipation of the shakedown the lender is going to subject them to if the request makes it to underwriting.  This of course is just a simple way of saying a borrower must present a lender with a comprehensive loan package, and be prepared to show supporting documents to back that package up, in order to be taken seriously.

With competition for a lender’s money at an all-time high, it is critical for a borrower take the necessary steps to make their package shine. To not do so is a sure-fire way to earn a prompt loan denial, and unfortunately, too many borrowers have no idea how to do construct a decent loan package. As a result, they are often their own worst enemy.

Personally, I like to use the term “Investment Grade Package”. It encompasses the material most lenders are looking for in a nice catch phrase. While it isn’t rocket science to understand what a lender wants to see in a loan submission, it does require a measure of time and commitment to make sure someone, whether that is you, your broker, accountant, etc. does the necessary work. Gone are the days when a lender will spend the time to hand hold a borrower or wait for weeks while you get your business in order. The lender will be long gone if you choose to take that approach.

To do the job right, here is what you need to include in a loan submission:

• A well thought out executive summary that goes over the “who, what, where, when, and why”. It’s important to keep the size of the summary in correlation to the deal. A small 10-unit apartment scenario doesn’t need a 20 page summary. In contrast, a 100-unit project can’t get by with a 2 page summary either.
• Detailed use of funds. What do you need the money for and how is it going to be spent?
• Resume/bio
• YTD financials
• Current Rent Roll
• Photos of the property (exterior/interior)
• Personal Financial Statement (PFS)

To support this information, you should ideally have 3 years tax returns (business and personal), budgets, purchase and sale agreement, appraisal/BPO, any estimates, notes, permits, copies of leases, bank statements, articles of incorporation, etc. on hand.

It is also important to make sure that all of the information is up to date. I see outdated information ALL of the time, and not only does it make my job harder, it also reflects poorly on the borrower. How can anyone feel confident in what you are presenting if you can’t take the time to make sure the information is current?

If this all makes sense to you then you are on the right track to starting the loan process on the right foot. If all of this sounds like advanced calculus that is OK too.  In this case just look for someone who can take your information and create a nice summary for you.

Passive or Active? Which Type of Investor are You?

For those of you who are investing in real estate you likely fall into one of two categories, active or passive.  Success can certainly be obtained through either avenue, but we often see someone who is one category who might actually be better served by being in the other.  Why, you ask?  Good question.

A passive investor is someone who has the funds to invest in real estate, but chooses to let another entity do the heavy lifting.  There are plenty of reasons why one might prefer to be a passive investor;  perhaps you have a full-time job or have partnered with a more experienced investor who has a better understanding of real estate.  You might not have any actual interest in real estate but are simply looking for X return on your money.  These are all perfectly good reasons to choose the passive route to investing.

Whatever the reason, as a passive investor you are relying on someone else to put your money to work in real estate.  This is perfectly fine as it is done all the time and there are many established groups who are successful that rely on investors as their source of capital, and in return for their money, provide a return.  In many cases, the investor earns a preferred return along with a portion of the profits.  This can often amount to a higher return than you would make on your own since investment funds have experienced real estate professionals at the helm.  They understand the markets, tend to have better negotiating power, can buy larger properties, and in most cases, don’t get paid until you do.  Translation, they are highly driven to perform.

As an active investor, you are the one in the trenches who is finding, evaluating, purchasing, and in some cases, managing the property.  A lot of people have success doing this and you may be one of them, but there are also many who may have reached their limit as to what they can do on their own, are limited to a geographical area, or are comfortable with residential yet are looking to break into buying commercial property.  For those of you with discretionary funds looking to expand your business you could become a passive investor using a fund who is experienced in the space you are looking to invest in.

We also see what we’d call a third group, the inactive investor.  In our experience, this group has the funds to become either an active or passive investor, but becomes neither.  Most often, this is because they are trying to enter into a new real estate sector (most often multi-family) and become overwhelmed so they spend an enormous amount of time trying to get comfortable, but never quite make it to the point where they make the plunge.

Another scenario for the inactive investor is someone looking to invest in a larger or different market.  From our experience, the case is someone in another country looking to capitalize on the real estate market in the US or someone looking to get into a major MSA.  In those situations, it can be a never-ending task to select a market, find a property(s), do the necessary DD, and pull the trigger on buying it.  That too can lead to a level of success that is never achieved.

For the inactive investor partnering with an established real estate fund may also be the way to go.

If you feel you may benefit from joining an experienced group, you may want to speak with a fund that we are investing with.  Comprised of successful real estate investors with decades of experience in the real estate and venture capital businesses, this group has a dedicated a fund to the purchase of distressed multi-family and commercial properties.  If you are interested in learning more about this fund or other opportunities that we know about, please contact us so we can make an introduction.

International Investors see an Opportunity in the US market

While most of us involved in real estate are aware that there is a fair amount of activity regarding foreign nationals buying property here in the states, I doubt a lot of us have stopped to actually investigate at how much of an impact they have on the real estate market.

We receive a lot of requests for foreign national financing, but even with those loan requests, it wasn’t until writing this blog that I spent any time learning who is buying what and where they’re buying. I suppose it’s no real surprise to see that while most states report  some foreign national activity, the primary markets for real estate purchases are Arizona, California, Texas, and Florida. More than 53% of the properties purchased in 2010 were in those states. Of course, a lot of that  is due to those states being some of the most impacted by the downturn in the real estate market. It only makes sense that there is a deeper pool of properties to pull from compared to other states not hit as hard.

Another reason for the activity in those states is due to the country where the buyers are coming from. Buyers from Mexico, China, and Canada account for 41% of the market share. People from South America (who are on the increase) and Mexicans tend to buy in Florida and Texas while Asians prefer California and Arizona. It only seems logical that some foreigners tend to buy in US markets that they are familiar with and/or are more inclined to visit.

Overall, the percentage of real estate that foreign nationals accounts for is relatively small. In 2010, they accounted for just 4% of total real estate sales. When you take into consideration the dollar amount 4% translates into it takes on a different light since it amounts to $41 Billion dollars. Given there are 162 countries in the world with a GNP of less than that dollar amount it starts to put things into perspective. There’s a tremendous amount of money being injected into this country from foreign nationals. This is especially true given how hard it is for foreign nationals to obtain financing and that most are buying real estate using cash. Just 45% of the transactions closed obtained financing of any sort, and a good portion of those were Canadians who have an easier time given the similarities in the financial system between Canada and the US.

The amount of property, and interest, in buying US property by foreign nationals has proven to be a solid niche for some in the real estate business. With the weakened US dollar, steady supply of foreclosures, and lack of appreciation in most markets, there will no doubt be more markets across the US seeing tour buses full of investors looking for a deal.

So, what is it that the foreign investors might see in the US real estate market? Could it be that they see a window of opportunity, a way to profit from the financial crises? Maybe they know that with each economic depression there have been a very few that not only survived but actually thrived during such events. That is definitely the case of those we worked with so far. There are certainly other reasons that entice them based on individual needs which prompts the question. Do you know what your individual investment needs are?

Contact us for an individual real estate investment evaluation to see what your options are.

LLC versus an S-Corp

What is the best structure for your real estate venture?

Good question, and the answer is one that is best answered by your attorney, and/or accountant. Still, there is no harm in doing some research on your own to educate yourself and form your own opinions. After all, as a savvy investor, you like to take matters into your own hands, right? Perfect.

In general, there are two options most people consider when looking to form a business entity. One is an Limited Liability Company (LLC) and the other is an S-corp. Most often, they are easy to setup and don’t require large fees to get them going or to maintain them on an annual basis. I should point out that it is really important to check with the state you are looking to operate in since there are some expensive states out there. New York comes to mind, so again, do your homework.

When it comes to LLCs, the IRS does not recognize this entity for tax purposes. To them, it must file taxes as a corporation, sole-proprietorship, or a partnership. This stems from an LLC acting as a pass-through when it comes to income. In effect, you are considered self-employed, and as such, are going to be a victim of self-employment taxes. More so, the entire net income of the business is subject to that tax since it is passed on to you.

Still, an LLC does offer some advantages since it can be member-managed, owner-managed, or even managed by a manager of the company. Having an LLC also frees you from the a lot of the paperwork that is associated with an S-Corp.

From a real estate perspective, an LLC is ideal if you plan to hold onto a property long-term. It should be noted, that while an LLC protects you and your assets, if you plan on buying multiple properties you may want to consider having a separate LLC for each property. If you hold multiple properties under one LLC, the equity the LLC realizes from those properties could all be put at risk if something where to happen with one.

An S-Corp is more rigid than an LLC in that the members (who are set forth in the initial paperwork) of the corporation manage the company and are paid a salary according to the ratio of stock ownership. This is what creates the biggest difference between an S-corp and an LLC. Whereas all income is subject to self-employment tax under an LLC, only the salary paid the employee(s) is subject to the tax.

As far as what makes an S-Corp beneficial in real estate, this sort of entity is better suited to flips since paying yourself a salary might be better then having all of the income pass through to you like it would if you had an LLC. This is based on the premise you would be keeping a large part of the money in the company to continue flipping property.

Your Assets are not a Kidding Matter

You may think we’re kidding but the value of the US dollar is going down with each day. This means that Americans are losing their purchasing power and their current standard of living, while foreign folks find it remarkably profitable to invest in the U.S. real estate. You may not hear it on the daily news but the day will come when your hard earned US dollars in the bank will be debased faster that anyone can imagine. Are you willing to take that chance with your money? We recommend you don’t!   What we recommend is real hard assets,  healthy investments that…

• generate substantial revenues during good times and bad times;
• are made out of real assets that don’t vanish;
• do not lose their earnings potential with time;
• maintain their capital value;
• keep up with inflation;
• are made out of assets that satisfy one or more human needs (housing, food, energy);
• can be passed on to heirs and generate passive income for them

The great thing about it is that the minimum rate of return is 13%, but that is the absolute minimum. You can experience 15%, 20%, or even 25% in many cases. How’s that compared to the rates banks offer today on money markets or savings accounts? And forget about the FDIC protection! FDIC is bankrupt so why put your life savings at such a risk?

If you’d like to find out more about a healthy investment in your portfolio or your retirement please contact us right away.

Key Factor when Buying Property, Cap Rate

In real estate, Capitalization Rates (cap rate) can be a valuable tool when evaluating a property, but often times the rate is based off of false information which can lead to a incorrect perception of the real estate. A misleading cap rate can lead to missed opportunities, or on the other end of the stick, opportunities that should have been left alone. While cap rates have more relevance in evaluating commercial real estate, it does have its place when considering 1-4 units too.

Should the cap rate be the sole factor used when looking at a property? No. It should be used as a yardstick to measure if a deal warrants serious consideration or if you should pass, and ideally, you should be compare the cap rate against other properties that are similar and in close proximity to each other.

What does the cap rate tell you? It tells you what your anticipated cash-on-cash return would be for the next year if you were to buy the property using no financing. Why only a year? Because property values and income change in real estate. It can also tell you how long it will take you to recoup your money back. If you are going to use financing the general rule of thumb is you want to the cap rate to be at least 2% higher than the interest rate you will obtain on your loan.

The Cap Rate formula is:

Cap Rate = NOI / Property Price

Example: $15,000/ $125,000 = .12 or 12%.

If you divide 100/12 you get 8.3 which means it would take you 8.3 years to get your initial investment back.

Since the formula takes the Net Operating Income (NOI) into account, this is where people most often are led astray, and where you as the buyer need to do your homework. Unfortunately, the NOI often understates the true expenses of the property making it look like it generates more income then it really does.

So, what is considered a good cap rate? It really depends on the area of the country you are in, but if you are looking at properties with cap rates in the 10-14% range you are doing OK. Once you are comfortable with what the rate is in the area you are looking at you can then use that number as the benchmark when running the numbers on any property you consider purchasing.

Is a property management company worth 10% of your profit?

When buying a property a major question a buyer often has to ask themselves is this. Do I want to pay a company 10% to manage this property or can I do this myself and save the money? This is certainly a legitimate question since the expense is something worth considering.

While there is no real right or wrong answer to this question, there is often more to consider then the bottom line. After all, time is money, and as an investor, your time should be worth a lot. The obvious benefit to having a management company is not having to deal with the headaches associated with tenants. Nobody likes the 3 am call to fix the furnace and the ensuing the calls to repair men for repair estimates, meeting them at the site, dealing with the bill, etc.

Then there are there the inevitable tenant issues that despite the best screening efforts, will arise. While there are wonderful tenants out there who will stay in your unit year after year and pay on time, there will be those who will seem to take joy in making your life miserable. Those are the ones who have a never ending, and creative, list of excuses as to why the rent is late, or they all of sudden have a new dog, noisy boyfriend who moves, etc.

In those cases, having a property management company to deal with those issues is a no brainer. But what about the “other” times that often go overlooked? Who is going to keep up the general maintenance of the building or look to do preventative maintenance? What about when a tenant moves out and it takes time to prepare the unit, market it, screen the new tenant? How about keeping up on all the bills, and ongoing service such as landscaping and trash removal? Those are all issues a good management company will handle for you, and if left to you, will be a considerable drain on your time.

When looking for a management company, you should look for the following. Just like you would screen a tenant, you need to make sure you are partnering with a management company who is going to look out for your interest and not just charge you a fee.

1. Does the company have their own maintenance person on staff?
2. Are they licensed and insured with the state?
3. Are their fees geared towards a high-turnover rate? Meaning, do they take an application fee and/or a percentage of the deposit?
4. How often do they issue reports and how detailed are they?
5. How many units to they currently manage?
6. Do they want you to sign a long-term contract or can you engage them on a month-to-month basis?

If you can find a reputable company where you can ensure they are motivated to look after your property, and fire them if they don’t, we think that 10% of the profits is money well spent.