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REAL ESTATE How did you find your commercial niche?

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yveskleinsky

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How did you find your commercial real estate niche- or have you?
 

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AroundTheWorld

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Great Question.....

We met Steve O a couple of years ago, and he gave a talk about apartment buildings.

We walked away from that little presentation with one HUGE understanding that we did not have before.

You can create EQUITY in a property by PRODUCING or INCREASING income. The increase in Equity is compounded. 5K in income is worth oh so much more than 5K. It is worth 50,000 to 75,000 in increased value in the property.

The POWER of commercial property - we learned from Steve O - is not in the cashflow - but in CREATING value by increasing net income.

We stumbled upon an old trailer house on 2 acres. The trailer was a dive - but the property itself was UNZONED and on highway frontage.

We bought that little old place, moved the trailer house out of there, and started building self storage. The same lessons we learned from Steve apply to self-storage as well.
 

SteveO

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Those numbers were an eye-opener for me as well. When I first started developing my plan and laid it out on a spreadsheet, I was blown away. People wouldn't believe me when I showed it to them. I still get skeptics when that presentation is given. It is only math though. The ability to make those numbers happen is the challenge.
 

andviv

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Yes, I know what you mean. When I presented the projected numbers for the last multi deal and showed expected returns of 45% in two years they did not like it... the numbers looked too good so probably there was something wrong with it. And they did not even understand that the ones putting the deal together were already taking their part, so the real returns were above 100%
But yes, when I saw the numbers for multis I was hooked. Besides, apartment buildings were the natural step after owing SFHs.
 
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yveskleinsky

yveskleinsky

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Would you guys recommend that if I were to jump to multi-family that I start small? Duplex, 4 plex, 8 plex? ...I can comfortably afford about a 10% down payment on a 4 or 5 plex. I would need the owner to carry the other 10-15%. ...I am trying to stretch my brain to think it is possible to go with a building that is like $700k, but then part of me thinks that even if I could figure out the financing part, I would still have problems due to lack of experience with multi-units. Thoughts? :confused:
 

andviv

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Respect the numbers, and why they were an eye opener for me, I created this spreadsheet to show the effects that small changes have in a multifamily property.

Let me start by saying that the numbers are close to past deals I've seen. They are somewhat realistic, but you'll have to take a look at the current numbers in different areas.

For this example, let's assume we are in an area where there is expected growth for the next few years. Also assume the going CAP Rates are around 8% for properties in this area. After spending weeks of research in this area and getting yourself familiarized with it, you know that the vacancy rate is 7%. After all your networking you find a property were the owners inherited the property (their dad owned it and managed it for 10 years, but when passed away the sons chose a cousin as property manager, but this PM was not experienced).
The property has a vacancy of 15% so you know there is room to grow. And you also noticed the reason why this property is not being rented: the PM is not advertising at all, and when people want to see the place he many times did not show up to the appointments. The owners are fed up with the situation and can't just fired their cousin the pm, so they decided to sell. You know there is an opportunity here. You make your offer at just below current market values (similar properties are selling for $45K per unit, and you negotiate a $40K per unit in exchange of a short DD period and fast closing). You offer is accepted. Now you need to make it happen. You only have 50K but you know there are other investors interested in the same type of deals, so you and three more investors put each $50K to make the deal happen.

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andviv

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I want to explain a little bit more about this deal.

Once you know what the problem is (poor management, no advertising) you put together a plan of action. First, you will get an experienced PM in place. Will make an aggressive marketing campaign to fill out the three units that are currently empty (think about it... 3 units are the 15% vacancy.. you think you can fill just these other three units? I think it is possible, but if you don't then probably RE is not for you). Also, as part of your plan, you will improve the signage and landscape with the $20K that you smartly put aside from the investors money, so now the property is more noticeable, current tenants are happier with the way the property looks and you can entice new renters to your property easier.

You plan for the first year calls for reducing your vacancy rate from 15% to 8% (basically fill two of the empty units during the first four-six months after buying it). Also you will try to keep the expenses around the same as before (projected 3% increases from year to year). Also, by the end of year 1 you would have increased rents 3% (all the units were rented for $610, now you will increase it to $628. Don't you think is doable now that the property looks better???). You have schedule another 5K for improvements, as needed.
At the end of year one, if you were successful, you have created 137K in profit, assuming a 4% cost for selling at current CAP rates of 8%.
 

andviv

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Now for the second year your focus is to keep the property at current market levels of occupancy. As you spent many hours researching the area and you know the growth calls for an increase of rents of 4% (now going from $628 to $653). Now it is time you start thinking of selling. You spend another $5K in improvements and make sure to list it with a great broker. Given that the area has improved and the property has better occupancy rates, you can list it asking top dollars for it. In the case that the CAP Rates have not improved in the area (not likely as the area is in better shape, the economy is improving, and the rents have increased) you would still sell making a profit of $202K.

Analyze this investment from the financial perspective, you will see that you made 100% in two years. And this is happening with just 20 units.

I ran the numbers for different size of properties. And this is why multis look like the perfect vehicle to me. Here are the numbers:

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yveskleinsky

yveskleinsky

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I understand that a good PM is critical for success in RE. What type of questions should I be asking to determine the quality of a PM?

Andviv- I like your explanations. Thank you for taking the time to (so thoroughly) go through everything! ...I am touring more properties on Tues, so I'll keep you guys posted.
 

BeingChewsie

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Now for the second year your focus is to keep the property at current market levels of occupancy. As you spent many hours researching the area and you know the growth calls for an increase of rents of 4% (now going from $628 to $653). Now it is time you start thinking of selling. You spend another $5K in improvements and make sure to list it with a great broker. Given that the area has improved and the property has better occupancy rates, you can list it asking top dollars for it. In the case that the CAP Rates have not improved in the area (not likely as the area is in better shape, the economy is improving, and the rents have increased) you would still sell making a profit of $202K.

Analyze his investment from the financial perspective, you will see that you made 100% in two years. And this is happening with just 20 units.

I ran the numbers for different size of properties. And this is why multis look like the perfect vehicle to me. Here are the numbers:

.
Thank you for this. I have just finished the Vollucci book for the second time and am on the second read of the Berges book tonight...and I'm a numbers person so the numbers and system make sense to me.

I'm starting to research markets this weekend using the criteria in the Vollucci book. I wasn't really paying much attention to commercial real estate until I read these books and until Robert showed me similiar numbers..all of a sudden the light went on. I am no longer confused :eusa_clap:. I'm a believer...:hl: Thank you and thanks to Steve O for sharing your knowledge! ..and a really big thanks to my better half for putting up with me while I figured things out...I know I can be stubborn..:bgh:.

It has been a series of BAM!!! moments this week.

Sue
 

AroundTheWorld

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LOVE, LOVE, LOVE... hearing about all the people getting out there - even just in this week alone - and takin some steps.
 

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