All Forum Posts by: Charley Gates

Hi Jacob. 

May I ask how you found this deal?   Door knocking or postcards or cold calling or other direct marketing efforts or networking?  

Deal flow is critical!  Congratulations!

Quote from @Bradley Jernigan:

Quote from @Charley Gates:

Quote from @Bradley Jernigan:

One thing I have been lucky about is having property managers already present at the property I bought and them wanting to continue to manage the property after. This has been a huge advantage as property managers offer several advantages! Some include rent collection, property maintenance, tenant screening, and handling legal and administrative tasks. What are other ways people have been able to find good property managers ?

Hi Bradley:  great thread.  Thank you for broaching this topic. 

As you know, property management is absolutely critical to a property's performance.  Property management is also hard to do well.  Margins are thin, and different owners often prefer to have their units managed in different ways.  

I experienced challenges with each property management company that I tried.  My solution to this was to grow my portfolio to the size where, when combined with the units and expertise of a fellow investor, it made sense for us to bring property management in-house.   We started our own property management company to manage our units. 

Another thing to think about is the importance of asset management and how it is different than property management.  Others have used the metaphor that the property manager is the pilot of a plane and the asset manager is the person at air traffic control.    

I hope that this is helpful.  Best wishes in your journey! 

Thanks for the input @Charley Gates ! Does your property management company work in Dallas, Tx? If so, I would love to work and possibly have someone manage our units

 Hi Bradley:   unfortunately, we do not.  We are based out of Pittsburgh, PA.

Quote from @Bradley Jernigan:

One thing I have been lucky about is having property managers already present at the property I bought and them wanting to continue to manage the property after. This has been a huge advantage as property managers offer several advantages! Some include rent collection, property maintenance, tenant screening, and handling legal and administrative tasks. What are other ways people have been able to find good property managers ?

Hi Bradley:  great thread.  Thank you for broaching this topic. 

As you know, property management is absolutely critical to a property's performance.  Property management is also hard to do well.  Margins are thin, and different owners often prefer to have their units managed in different ways.  

I experienced challenges with each property management company that I tried.  My solution to this was to grow my portfolio to the size where, when combined with the units and expertise of a fellow investor, it made sense for us to bring property management in-house.   We started our own property management company to manage our units. 

Another thing to think about is the importance of asset management and how it is different than property management.  Others have used the metaphor that the property manager is the pilot of a plane and the asset manager is the person at air traffic control.    

I hope that this is helpful.  Best wishes in your journey! 

Hi Ryan,

Congratulations on finding this deal!  

Both of the options that you mention (to obtain a loan or to find a partner) are possibly viable depending on the details.  You'll need to share more specifics to get more meaningful feedback.  

You could also wholesale the deal (get it under contract and then assign your interest in the contract for a fee).  

Quote from @Paul Vail:

Quote from @Charley Gates:

Hi Tam.

There is no statutory or case law requirement for LLCs to have annual meeting minutes.  

Having said that, I definitely create annual meeting minutes for my LLCs for the following reasons:

1)  it's fairly straightforward to do

2) it shows that you are following corporate formalities which strengthen the legitimacy of the LLC

3) it makes it more difficult for a creditor to 'pierce the corporate veil' meaning the creditor argues that the LLC is really just a proxy for you and thus tries to pursue you personally for damages

I also recommend that each LLC has its own bank account and that funds are never mixed between companies.

Hope that this helps!

Charley, thank you for posting this.   As I dip a toe or two into the LLC world, I was wondering the same thing as the OP (@Tam Nguyen).  Also trying to lay out best practices for transferring money from personal to LLC checking.   My initial feel is this should be done as a loan from me to my (single member) LLC.  That would keep the funding monies from being considered profit.

So figuring this out from what I've read thus far, I would need to charge an interest rate on the loan (perhaps something nominal like 1% or 0.1%), work up a generic loan document that would state the terms and such.  Would I even need to have this notarized or simply documented in my files, along with monthly interest payments?   Generic documents seem to suffice.

Thoughts?

Hi Paul.

When I have funded my LLCs, I have simply categorized them as 'capital contributions' from an accounting perspective.  This would not create a tax liability for the LLC.   

I think that a personal loan to the LLC is more complicated than is necessary.  

I welcome other view points on this.

Quote from @Puneet Sharma:

Is it normal for Property Management companies to ask for 50% of first month's rent for a new lease and 25% for every lease renewal. There's no cap to this amount. I have seen this is in two different markets though not every PM asks for it. I was just wondering if this is normal and acceptable. 

 Hi Puneet,

Here are my thoughts on your question:

1.  As most posters have indicated, those leasing fees seem about right, although it is always a good idea to compare to other vendors in your market.  I am co-owner of a property management company, and this is about what we charge.

2.  Tenant placement is a critical piece to success in brick-and-mortar real estate investing.  I have learned this lesson many times over the past 13 years.   Thus, as you look at the expense of leasing, look at the quality, too.  Are the placing quality tenants?  How do they screen?  Are they following all proper procedures with regards to tenant screening and selection?

3.  Property management is in general a difficult business with thin margins.  Thus, fees are part of the way that these companies stay in business.

4.  Evaluate all of the fees that the property management company is charging you (in addition to leasing fees).  How much do they mark up repairs and maintenance?  How much of the collected rent do they retain as a base fee?  

Hope that this is helpful!   Best wishes. 

Hi Ellen,

I am happy to recommend these two books to you:

1.  "Real Estate by the Numbers" by J Scott

2.  "The Hands Off Investor" by Brian Burke

Both are excellent!   Good luck as you begin your journey. 

Quote from @Evan Polaski:

@Charley Gates, while I overall agree with your assessment: yes, a discounted cashflow model is the more realistic valuation tool, you still need to understand cap rates to establish the overall market cap rate for your sale price. 

@Bradley Jernigan, the challenge with cap rate, is no one ever seems to agree on who NOI to use. All over BiggerPockets, everyone says "use actuals". I get that: don't buy on forecasted rents that may never come to fruition. But it is rarely brought up that the sophisticated buyers tend to: a) not use cap rate too much as Charley noted, and b) the NOI is a hybrid number, typically looking at in-place income and projected expenses.

However, if you are considering a value-add/redevelopment/development deal, the cap rate becomes less meaningful in any real world analysis, especially for acquisition pricing.

On stabilized assets, cap rate is a fairly viable metric, as there is no forced appreciation, and therefore your cap rate is unleveraged yield.

Evan: thank you for your thoughtful comments. I definitely agree with you the NOI should be stabilized for cap rate to be most meaningful. I think that that point is frequently overlooked especially in value-add deals.

Hi Bradley,

I would not recommend using the prevailing cap rate to establish the purchase price.  Instead, I would do the following:

1)  Establish property performance during your anticipated hold period including a projection of income, expenses, and cap ex to establish a series of annual cash flows. Keep in mind that nailing rent projections is critical.  Rental income disproportionately drives property performance.

2)  Establish a sale value at the end of the hold period and incorporate these sales proceeds into the cash flow analysis that you developed in #1

3) Establish values for the "big three" performance metrics that would be acceptable to you given the level of risk that you are assuming with the acquisition: cash-on-cash return(CoC), IRR, and MOIC (multiple on invested capital)

4)  When you have projected the cash flows that that property will produce, and established what returns are acceptable, then you can solve for the purchase price

I hope that this helps.

Good luck with the analysis possible acquisition. 

Quote from @Tam Nguyen:

Quote from @Charley Gates:

Hi Tam.

There is no statutory or case law requirement for LLCs to have annual meeting minutes.  

Having said that, I definitely create annual meeting minutes for my LLCs for the following reasons:

1)  it's fairly straightforward to do

2) it shows that you are following corporate formalities which strengthen the legitimacy of the LLC

3) it makes it more difficult for a creditor to 'pierce the corporate veil' meaning the creditor argues that the LLC is really just a proxy for you and thus tries to pursue you personally for damages

I also recommend that each LLC has its own bank account and that funds are never mixed between companies.

Hope that this helps!

Thanks, Charley.  It makes sense but point #3 here brings up something interesting.  Let's say I have a property in an LLC for State 1 and another property in another LLC say State 2.  Both LLCs are owned by a holding LLC.  All have their own accounts.  Let's say State 1's property brings in $1000 CF a month while State 2 LLC brings in $800.  Based on what you said, you should not move money from State 1 to pay State 2 correct? 

Hi Tam:  I agree with the reply from @Luis Alvarez

You should not have State 1 LLC transfer money directly to State 2 LLC. Instead, the flow of money should follow the organizational chart (e.g., State 1 LLC --> holding company LLC --> State 2 LLC).

Hope that this helps.