All Forum Posts by: Aaron Nelson

@Rodney Smith sounds like it could be a winner deal, but I can't help you with the inmate thing- ha, that's one thing I haven't done yet! Best of luck to you

Just wanted to give an update on this deal. Sold the note as anticipated for 90% of face value before I even received first payment. Everything went as expected so I feel thankful that it worked out this time. I appreciate all the advice and collective wisdom everyone contributed here. Thanks!

Hello, community!

I am about to close escrow on a large commercial building here in Northern California. The non-profit owner/occupant was facing foreclosure and so they listed the building at a very aggressive price point to sell quickly. I tied it up immediately when I saw it for $525k and will be closing this week with a private loan I arranged. The 20,000 SF building sits in a busy retail district in a central location and is on nearly 3 acres, which is great because it has over 200 paved parking spaces. The building was constructed in the 1960's and does have some deferred maintenance, although it isn't that bad and the current tenants use the building on a daily basis. I've had roof and HVAC inspections which came out in fair condition. 

My main question here is regarding a potential tenant. I called the county liaison who handles most of the county leases and who coordinates different departments with the real estate needs they may have. She expressed interest in the building and said she had a couple agencies that were indeed looking to move locations. Well, I got a call yesterday from her again and she had just finished pitching my building to a large department needing to move locations within the next 6-12 months. We met at the building yesterday and there were about 6 decision-makers there who all walked the building and grounds with me. They were very interested and spent over an hour at the site. They asked me what kind of rate and terms I'd be looking at. I told them I'd be very motivated to get them in the building and would be competitive with my rates. They said they want a minimum of 8-10 years. 

I know that the rate and terms for commercial lease with a government agency will vary widely depending on location, geography, age of building, etc. but I am hoping to get some guidance here. It seems in our area there are a couple large spaces available for around $.85 /SF to lease, but those lack adequate parking. The parking seems to be the clincher with these guys as they have a pretty large fleet of vehicles. I've researched my market intensely and there really is nothing available quite like my building. If I could get close to $.85 /SF with this particular government department I would be elated. The tricky thing is they asked if I'd be willing to do TI's. I said that I would be willing to spend some money on specific improvements they would need (I'm guessing about $200k in build-out) but their only caveat is they can't technically sign a lease with me until the improvements are done, and they also cannot put up a non-refundable deposit. From what I understood, the reason why they can't do those things is because when the unions see that there are improvements being done, they will immediately require that the workers are being paid prevailing wages, which would basically double the costs of construction. I understand the benefit for myself and this lessee to avoid having the increased costs of prevailing wage, but I would not be excited to spend that kind of money on the space without any assurance that they would be compelled to move forward once the renovation is complete. It would basically be a non-binding LOI they would sign. They've told me that it is a low probability that they would change their mind once we entered into non-binding agreements, but it still seems risky to me if the TI's being done are specific to their needs and not just general improvements.

I think a better idea is to offer them a reduced rate which could allow them to do any improvements they need. I believe they would have the budget to do this or could probably make it work, although then obviously they have to pay 2x as much for their build-out costs with prevailing wages. How motivated should I be to capture this tenant? Should I offer them an artificially low rate for the first few years of the lease to compensate for the money they would be spending on my building? If I secure a 10 year lease with this department I've got to imagine that the building would become much more valuable than my acquisition price. Ultimately, I'd rather acquire this particular tenant and gain long-term value with the building even if it means I have to accept lower returns in the beginning of the lease period. Also, does anyone have experience with valuing a property with a government lease like this in place? Is there more demand from buyers once a government lease is in place, and if so, what type of CAP rates are those investors willing to buy a building for on average? Basically, is there more intrinsic value when an owner secures a long term government lease and do buyers of these deals generally accept lower CAP rates than normal for that type of 'guaranteed' income? I'm curious and interested to hear thoughts from some of the commercial investors. Thanks for your interest.

@Rodney Smith  thanks for the post here... you've got some good insights and comments. Yes, I would be a bit nervous if Bethel collapsed and that renter pool dried up, as they seem to comprise some of the best potential tenants out there. I know the new townhouse style homes that Palomar is building (around same location as mine off Churn Creek) that front the freeway have been getting strong tenant demand and they rent quickly. I've heard they go for around $1500 although I'm pretty sure they are bigger and nicer than mine plus they are detached. I would hope to attract same tenants as those ones attract.

Anyway, thanks again for your thoughts. My model in Redding has mainly been to flip the residential properties. I've got a multi-tenant commercial building on Cypress I own, and I'm in process of buying a large commercial building on Lake right now that I'm trying to get a government lease with for a tenant. I'll have to keep you updated on that later. Otherwise, no, I just have my primary residence here but no long term residential at the moment, although I am interested now in possibly keeping some multi family if I can find the right deals here. thanks

@Joe Fairless thanks for the insights, Joe

@Joel Owens really appreciate the tips and analysis you provided- extremely helpful and I'm going to re-read that several times and go to city today to see about how many multi-family permits are approved at the moment

@Ben Julius thanks Ben for the tip- I had thought about a condo project here as well. I feel if I could keep expenses about the same that I could do pretty well with that. I believe each of the units could sell for around $159k-169k once completed. But I have never had experience with that and am not sure which way would be better. I'll be weighing it out so thanks

@Anthony Gayden I had someone else mention this might be a good, lower risk way to go. I appreciate you bringing that up- I'm going to see about that possibility

@Rodney Smith I'm sorry didn't see this until now- Honestly I haven't had very good experience with handymen. I just use a contractor for everything I do now and probably overpay! But I let my contractor sub everything out to his guys so I just have one guy to go to for everything. Hope you found someone good

Hello! I've got a piece of vacant land under contract in Redding, CA which had approval to build 17 townhouse-style units, all 3/2.5 bath with attached garages, about 1350 SF each. The owner of the land recently passed away and I'm buying this 3 acre piece from the heirs for $150k. (Former owner had over $500k into the land and permits /engineeering/ architectural fees etc.)  This is an above-average class A location surrounded by newer developments (a fire station and a retirement home) as well as nice single family neighborhoods. It is very close proximity to several popular schools and colleges and there is huge rental demand and a scarcity of units available in this immediate area. There is also huge demand for furnished rentals for international students where I could further increase the rents, and from this unique location they could literally walk or ride bikes to the school campuses within the one-mile radius from here.

It looks like my all-in price to build including the land would be about $1.8 million ($105,000 per unit). The units should rent for $1200 each, bringing the annual gross rents to about $244,800. In our area there are literally no apartments like this available for sale. Neither have there been any sales of complexes this new and in this good of a location within the last 10 years. Researching back as far as the mid 1990's on my MLS I know that most units that sell are B and C locations that trade for around 8-12x the gross rents. The nicer buildings in nicer locations are definitely in the 11-13x gross rents-range. I recently represented a local doctor who purchased an 11-unit off-market apartment complex for $1.1 million. His was a similar type of location and building with all townhouse style units with garages built in the late 1980's. It was very clean and a good rental area, B+/A- area. It sold for 11.2 gross rents with a CAP rate of about 4.4%. He is ecstatic and would buy another building just like it if there were one available. Mine that I am considering building would be a better location and nicer units than that or anything I can find in the MLS that has sold. So even though there doesn't appear to be a ton of upside, with the worst-case scenario feeling like there must be worth at least 10% more than what the build-out costs would be it feels at least like it could be a project to consider.

My risk tolerance in pretty high and I've done quite a few rehab projects around here and have been actively involved in my market for over 10 years. I feel that the product I could deliver would be in high demand and there would be virtually no vacancies once this is completed. Worst-case scenario feels pretty palatable to me if it's worth at least what I have invested into it and the maintenance and management would be very minimal. I have other investors that have expressed interest in pooling money to do a project like this if I could find one worth pursuing in our area, so I also believe I could bring together the money to develop it and gain experience in developing properties, which is a primary goal of mine for the coming 5-10 years. So aside from just this project's fundamentals, my secondary goal is to gain experience with syndication, fundraising, and learning firsthand about the development process.

I am interested to hear from developers who have any insights into this and especially developers in markets similar to mine that don't have great cash flows but have high demand and potential for good appreciation. Is anyone building out projects like this currently or am I crazy to even consider this right now? 

@Rodney Smith I haven't done a 1031 in a while but I do know that whatever you SELL the property for you have to purchase at least that much or more in your next acquisition. Also, yes, you can spread out the purchase into several different properties, it doesn't need to be just one. Example, if you sell for $300k you could buy a 4plex in Alabama for $150k, then two SFR homes each for $75k... I'm sure someone else on here will have more specific parameters, but I believe that is a rough idea of one thing you could do. But what you exchange into can't be based only on your gain but it has to be equal to or greater than your ultimate sales price. Hope that makes sense. And yes, I'd be glad to chat about it if you would like to give me a call sometime

@Adam Haman First, congratulations on investing half of your income in acquiring properties while supporting your family- that is a huge accomplishment! I can relate to your story since I've been a Realtor/Broker for 12 years now. It's interesting because when I was about 5 years into being a Realtor I also began to get that burnt-out feeling you describe. Although there were aspects to working with clients that I enjoyed and my income was similar to yours for those formative years, those commission checks often came with a heavy load of stress and anxiety and time away from my family. One day about 6 years ago I actually skipped going to the lake with my family and friends on the 4th of July in order to accommodate showing a house to a young couple I'd been working with for several months who still hadn't found the right house to buy. They ended up bringing their parents to that showing and to my surprise the father was not happy with some of my answers about the zoning or the parcel map boundaries and he ended up undermining my professionalism and berating me in front of his kids. It was a painful experience to have this totally unexpected attack on my character and competency on a day when I could have chosen to be enjoying my family out on the lake. To make the experience sting even more, that couple who I'd sacrificed many nights and weekends for ended up buying a house with a different agent a few days later. Ouch! 

For me, sometimes having a really painful experience is actually a good thing. I feel the sting of failure longer than the comfort of success, and for some reason that feeling makes me reevaluate and determine what I truly want and don't want with my life. Allowing myself to re-live the pain of that and other bad experiences has pushed me to carve out a better life for myself because I realized that I didn't want to be subjected to earning a paycheck from trying to convince people to do something or buy something or work with me. My former broker once told me when I had the opportunity to buy one of my first properties, "You are your best client". That phrase has stuck with me since there were many times I tried convincing someone else to buy a property that I thought was a great deal and for whatever reason they often would not pull the trigger. I got tired of trying to convince other people to do things so often and decided that what I wanted more than anything was to be the one personally to decide to buy something or not. That was really a transformative process when I went from serving other clients for a commission to being my own best client and actually taking properties down myself. Gradually, as I've acquired capital and relationships with private lenders, I've transitioned my real estate activities from being a commissioned agent to being the principal in 90% of the transactions I do. 

Since you already are buying and holding properties, you've obviously got that part figured out. I think you'll find like I did that having all the transactional experience of being an agent and helping others will actually serve you well if you decide to go more full time with investing. You'll be able to marshal resources easier than others and private lenders will entrust their money more readily to you since they'll have a confidence in you that you know the market better than most other investors. Think about it- you've gained tons of real-life real estate experience by helping others navigate through deals, without having any financial risk. It really is a pretty great way to transition into going bigger with investing and finding a way to transition to supporting your family now from doing more of your own deals which allows you the time freedom you are looking for without having to completely reinvent yourself through a whole new career choice.

For commissions, I now mainly choose to work with higher-dollar clients or people who are really interesting to me. Most of my actual income however is sourced through my personal real estate investing. Actually, I find that I do a better job now with the clients I do choose to work with since now I don't feel the same stress of having to make a deal work with clients. I feel my advice is more balanced since I'm much less attached to the outcome. I really don't need the money that comes to me through commissions- it's more of a bonus at this point. If I decide a client is taking too much time or is going to be too demanding I will simply refer them to another agent and gladly take a referral fee. 

Congratulations again, and I wish the best in navigating and choosing the path that is right for you and your family.

@Rodney Smith  yes, the most intimidating part of the long distance investment to me has been the PM side of things. Since I've only owned the building a couple months and we are doing some rehab, I can't say for sure how well that is going yet. But I'm sure I'll have some updates in the coming months on that situation. My preference would be to buy and hold most or all properties I can in the Redding area, but unfortunately the numbers just didn't work for me in most cases...