All Forum Posts by: Giovanni Isaksen

@Lakshay G. One of the big differences between multifamily (5+ units) and retail is the complexity and length of the leases. Apartment leases are pretty straight forward and many times standard forms available from your local landlords association are used. The terms tend to be 12 months or less although I've seen some that were up to 18.

Commercial on the other hand and particularly retail leases have many more moving parts. The first is the term which tend to be multi-year and up to ten or twenty years with tenants having the option for one or more renewals at set rates and terms.

Because of their long term nature many commercial leases also have built in increases in the rent which may be either a fixed amount, a certain percent or based on some sort of inflation index.

The next piece is the structure of the lease which can range from Gross (tenants pay rent and utilities, similar to an apartment lease) to true Triple Net (or NNN where the owner pays the debt service and maybe the property tax but the tenant pays for everything else)... and everything in between.

Another component is Tenant Improvements or TI and who pays how much for it and who performs the work. In some cases the tenant pays for all the TI subject to the owner's approval of the plans. Often the owner provides a fixed allowance that the tenant combines with their own funds to complete the work. Other times the plan is negotiated and the owner (using either in-house workers or outside contractors) does the work. The amount of the TI allowance ties into the length of the lease since an owner can't make money putting up new TI funds every year or two.

Another issue that ties into TI is how much control the tenant has in what kind and size of signage can be put up and how much they can alter the exterior look of their space. This can be a very important issue when the owner is doing what architects call 'placemaking' where the idea is to create a look and feel that draws not just customers but the public as well who are at least potential customers.

For retail leases an often important piece is Percentage Rent where the owner receives a base rent plus a percent of the tenant's revenue. This helps align the interests of the owner with the tenant although tenants don't often see it that way. However this can help a tenant during startup or slow periods by having a lower base rent than a straight market rate. Whether the percent is based on gross sales or something closer to the tenants bottom line will determine how far into the tenants books and business the owner must crawl, hopefully they both have good accounting and accountants.

Are there any outs for the tenant and what happens if the tenant wants to sell their business before the lease expires are among numerous other provisions that need to be dealt with as well.

All these things and more can be negotiable depending on how much demand there is for the space. The negotiable nature of all these moving parts also puts a premium on the owner's ability to analyze the deal to make sure when it's all done that they're making the money they need.

Beyond the lease terms there are a couple other considerations for the owner which includes finding a tenant mix that helps increase everyone's business. A restaurant can be a good draw but are rarely very profitable and tend to turnover regularly. A restaurant broker I know says that most of the small restauranteurs he deals with are just buying a job, not building a profitable business.

In my mind are also the big questions of what is the future of retail and how much future does it have? There are two big disrupters in retail, the first of course in online sales but the other one on the way is 3D printing. When consumers can have almost anything custom made for them on the spot, what kind of space will the tenants require, what will it look like and will current zoning allow those activities to take place in current retail locations are some of the issues that play into those big questions.

I'm an apartment guy by nature but so much of what we're doing these days is urban mixed use that I'm having to deal with the retail side and it's much more complicated. If not for the trend of demand I would stick to apartments and avoid retail all together, especially stand alone.

But since we must, the key is to have a very good and experienced commercial leasing broker who represents owners on the team.

Good hunting-

@Joseph Plaugher The first one is the toughest since you don't have a track record of success but there are a few things that will help:

1. Find a really good deal. In multifamily that usually means a building that is 'under managed' as they say with rents below market and probably a good bit of deferred maintenance. In the 6-12 unit range it is much more common that the owner is self managing and has become a 'tired landlord' so there will be more properties that fit.

2. Assemble a good team. This includes a good broker, attorney and an accountant who all specialize in apartment investments. It also includes a very good property manager because having one will help the property run better and add some experience to your team. If the deal doesn't pencil with professional property management fully loaded it's not a deal.

3. Be willing to give up a lot of equity in the deal, 75 - 90% if you have to. The real objective of your first deal is to build a track record of success more that make a pile of money. Having the track record and a good team will help make the next deal much easier.

4. Put together a professional presentation that shows that you understand real estate investment, the local apartment market and this deal in particular. Keep the projections realistic, remember under promise and over deliver. The materials should also demonstrate that you've dotted all the i's and crossed all the t's when it comes to the legal aspects of your investment structure.

5. Have a list of potential investors identified for the property size and type you're going after. For this size deal you may only need one but the more the merrier when it comes to the number of potential investors.

Good hunting-

It is a common misunderstanding about multifamily (or multi-family); they are buildings with five or more units. Plexes are plexes whether they are duplexes, triplexes or fourplexes and they can be purchased with a residential loan. The real test is if you need a commercial loan to finance it, it is multifamily. If you can buy it with a residential loan it is not multifamily.

Good hunting-

@Chris Adams What to measure is dependent on what you're trying to achieve. What is your overall investment objective for your real estate holdings? Are flips a method to grow your capital for acquiring a portfolio of rentals? Are flips funding your living expenses?

If building a portfolio of rentals is the objective it sounds like you're hitting it out of the park when you get all your cash out at refi. If that's the case then it may be best to measure the returns by whether or not revenue is growing year over year as rents rise (or not) and vacancy falls (hopefully). If revenue is growing then you're doing infinitely well and getting better all the time!

Another measure to consider for the rentals is Return On Equity, the equity being what you would net after selling at a market price every year. If market prices remain steady and the tenants pay down the mortgage to the point where ROE falls below an acceptable level then it would be time to refi again or sell.

Good hunting-

@Richard H. When cash on cash is infinite that's a win in my book. How many cash flowing properties would you like to own with zero money in them? Put that one in the win column and go find some more!

As @Ben Leybovich points out IRR is a better overall measure of a property's performance but before there is a final disposition the IRR will be at best an interim number. The workaround is to estimate the net sales proceeds every year based on the property's current market value but the return will vary based on the changes in the market more than the rental performance.

One metric that you could use to track the rental performance of the property is YOY (Year Over Year) Revenue Growth. Has the cash flow gone up or down since last year and by how much? As long as the cash flow is growing, the property is doing infinitely well and getting better all the time. Note that every time you do a cash out refi on the property the clock will start over on the revenue growth.

Since you have multiple properties it may also be useful to track cash on cash on a portfolio basis with all the properties combined. To keep that figure accurate remember to include any capital investments (such as new roofs, appliances or furnaces, etc.) on the total investment side of the equation.

Good hunting-

@Jegan Basha sorry I missed your email, let me address your questions here by starting with your second question:

Rational investors will factor the new GST into their analyses and require an additional 6% return to hit their numbers after tax (6.383% to be exact). This may cause them to be more selective in their investments. On the other hand less sophisticated investors (who typically haven't done a detailed analysis and don't have a targeted return they're aiming for) may be afraid of missing out, and acting out of greed just plunge ahead.

If the market keeps going after the new tax is imposed it could mean that fundamentals don't matter which would be a sure sign of a bubble. Another possibility is that investors rush to get out before the tax becomes effective and this wave of selling depresses prices enough to create attractive opportunities.

One of the things that makes buying for pure appreciation so risky is that the future is unknowable and just because things have been going up doesn't mean they will continue to. If you are feeding a property and the market goes sideways (let alone falls) for a few years how long could/would you continue to feed it? With a cash flowing property your tenants are paying down the mortgage and you could afford to be patient. When you're the one paying the mortgage at a certain point it becomes throwing good money after bad in terms of hitting your targeted return.

On top of that when things get bubbly fundamentals don't matter until they do and then they matter a lot all at once. It can become a game of musical chairs and you may get caught out when the music stops as buyers disappear from the market. An additional risk present now is that because the world is so interconnected, something that happens in Europe, China, the US (or Crimea) could have devastating consequences for your local market. Without any rational support for prices like cash flow, things could blow away like a puff of wind.

That's not to say things won't keep going up and by sitting out you'll miss out on the fun (greed). Having been through a bubble was an expensive education for me personally but here's what I learned and/or relearned:

1. Cash flow is king. If a property doesn't cash flow adequately from day one, it is a speculation and a speculation is just a half step from a gamble.

2. When existing properties are selling above replacement cost (The Line of Doom), they will soon have tough competition from new properties which will be built specifically to cater to the latest trends in design and amenities.

3. When no properties can be acquired with positive cash flow, the market is saying that fundamentals don't matter. This means that emotion is driving the market and it can turn on a dime.

4. There is a cycle to real estate markets and knowing where your market is in its cycle is critical to long term success.

As I've said before I don't know your market so these are just my observations of how markets work.

@Chris Adams re: equity vs. debt-

Although most everyone on here probably understood what you were saying, for the benefit of anyone who is just learning, I believe you meant that 'this guy had 25% equity in his 400 home portfolio'. And that you wouldn't be surprised to hear that 'he barely had 10% pre crash equity'.

I believe the figures in the quote represented the amount of debt, not equity otherwise he would have survived with only 10 - 25% debt on the homes.

@Darrell Shepherd I think you have the quote of the week: "cash flowed on paper, but not in real life". This is far more common than admitted to in polite company. Most deal with it by not looking/understanding their numbers until it's too late.

I really appreciate you sharing your story of the bank collapse and its effect on your real estate holdings. I had my own learning experience back then and it was quite an education.

Hello @Alex Kelly +1 on @Christopher Bowen's comments on the state of the Seattle multifamily market.

There are a couple real estate investment associations who tend to be guru of the month type organizations but the networking and local knowledge are the real value.

REAPS (Real Estate Association of Puget Sound) http://reapsweb.com/

REIA (Real Estate Investors Association of Washington) www.REIAwa.com

To take your apartment networking to the next level go hang out with apartment owners, operators and those who provide services and products to apartments: the landlord associations. There won't be a lot of how to invest (get that here on BP) but there will be a ton on what to do once you acquire one plus market, economic and political factors that effect apartments are covered.

Rental Housing Association of Puget Sound http://www.rha-ps.com

Washington Apartment Association http://waapt.org/

Washington Multifamily Housing Association http://www.wmfha.org/

Washington Landlord Association http://www.walandlord.com/

Some are more focused on smaller properties, some on different parts of the state, some have better networking, some have more educational programs, some have great speakers at their events. WMFHA is affiliated with the NAA (National Apartment Association) and is oriented to larger properties but has great events and education.

Good hunting-

@Zach Schwarzmiller cool, talk to you then-