All Forum Posts by: Giovanni Isaksen

Hello @Alan,

My personal take is that with more and more shopping being done online, bricks and mortar retail requires a compelling attraction to work. It could be the location, i.e. coastal SoCal (or conversely at the airport where people are literally trapped for hours), it could be the exclusive presence of unique brands or merchandise (think boutique/trendy/artsy), something special has to draw traffic. On the other hand even if we all end up working online in our sweats from the couch, we'll still need a place to put the couch and that's why I like apartments.

When you add in the fact that there are 22.5M 18-34 year olds living at home with their parents, and the fact that the median price of both homes and condos (in the US) are north of $200k meaning that buyers looking for conventional financing have to come up with $40k just for the down payment, apartments have powerful demographic and financial drivers behind them.

From a practical point of view, commercial leases have many more moving parts than apartment leases, and this is especially true with retail where percentage rents are often included. The negotiation of every lease whether it's for a new tenant or a renewal can be as big a deal as the negotiation to buy the property in the first place. And then you have to verify your retail tenant's numbers to make sure you're getting all the percentage rent you're owed. There's a lot more to learn to be successful investing in retail than apartments.

@Elizabeth Colegrove

... or apples to Orange Counties ;)

Thanks @Mike Hurney, good point about figuring how to (and the cost of) power the units.

Thanks @Roy N. great info. How much did the installation cost? Would definitely like to see your updates on this project.

Very interesting question @DL Martin. I think it depends on the competition and what kind of tenants you're trying to attract.

We just acquired a property in suburban Portland OR where almost half the tenants had bought and installed window air conditioners (with various amounts of skill). Many had cut the brand new blinds the previous owner had just installed to fit around the a/c units.

I don't think of PDX as a really hot place but people there love a/c in the summer. When we did the competitive rent study portion of due diligence we found there was a rent pop for a/c and right now we're trying to figure out how to install a/c permanently (powered off the tenant's meters) at a price that makes the investment feasible.

Garbage disposer demand seems to be specific to the submarket. I've been in places, especially urban areas with mostly older buildings where people wouldn't use one if they had it because they're so rare, yet typically in other more suburban markets with post 1970's properties people wouldn't know what to do without one.

To @Roy N's point they do put a burden on sewage treatment systems but when they were first introduced they were heralded for keeping food waste out of the garbage and reducing rodent problems. If the municipality in your market recycles food and yard waste it might be worth training the tenants to do that, in many markets on the west coast it's seen as being 'green' which is getting to be a marketing advantage now.

Here's a couple I would start with:

"The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss" by Ken McElroy (http://amzn.to/HdXVf1 on Amazon). All Ken's RE books are good and this is his latest specifically on apartments.

"The Real Book of Real Estate" by Robert T. Kiyosaki (http://amzn.to/13bv4AO). Yes the Rich Dad guy but this book is about how to build your investment team and that is key in this business.

If you haven't read "What Every Real Estate Investor Needs to Know About Cash Flow..." by Frank Gallinelli (http://amzn.to/Zv0Zph) yet I would put this on the top of your list. Also good by Frank: "10 Commandments for Real Estate Investors" (http://amzn.to/15ikXL0) I reread this book (it's very short and to the point) five or six times a year.

If there's still room in your stocking I would add these two, both great reads:

"Confessions of a Real Estate Entrepreneur: What It Takes to Win in High-Stakes Commercial Real Estate" by Jack Randel (http://amzn.to/17mJU5j)

"Creating and Growing Real Estate Wealth: The 4 Stages to a Lifetime of Success" by William J. Poorvu (http://amzn.to/13gOjFD)

Happy reading!

Thank you @Adam Johns for catching that. The example is correct but my typing about it was incorrect. I should have said "The cap rate formula is Net Operating Income (NOI) divided by the total acquisition cost of the deal = Cap Rate. Good catch, I tried to edit the post but time had expired.

Yes @Edita D. you're right on. The cap rate formula is Net Operating Income (NOI) divided by your cash investment in the deal = Cap Rate. The NOI is the cash flow from the property before debt service, as though you bought the property all cash with no loan.

In the attached example you'll see that I include Capital Reserves and Expenses in the NOI calculation even though they are technically not an expense from a tax perspective; but that money has to come from somewhere and it's much better that it comes out of the properties income than your pocket.

- Good Hunting

@Joseph Johnson sounds like you have a great location and a flexible seller so it has the bones of a great deal. To put some meat on those bones I would definitely want to have an experienced Seattle multifamily development specialist on my team. Your friend might be a great builder but I wouldn't want to bet $2.2M that he gets his first multifamily project in an unfamiliar jurisdiction right the first time out. Not knocking your guy but having done similar projects in Seattle in the past (even though growing up there and owning a construction company) we saved our you-know-whats by having a development specialist to guide us through the labyrinth that is the City of Seattle.

The other thing I would do is really drill down on the numbers starting first with the construction costs. As a first time developer how much extra contingency is built in? Imagine you're hiring a first time developer and a non-local contractor... How much for increases in labor and materials between now and when construction actually starts? The surprises in those things are always on the higher side.

The other numbers to really dig into are the rents and expenses. If lease-up isn't going begin for a year or two what are the projected rents, vacancy and months until stabilization based on and how will the market have changed between now and then? On the expense side 30% of GOI looks low, not saying it can't be done but I would definitely want to verify those assumptions with research from someone besides a broker. Even if it costs a couple thousand, that's a rounding error on a $2.2M project.

One other consideration is that developers earn their money the hard way, with blood, stress and tears... and more stress. These projects require significant amounts of time and energy even for experienced hands so add your learning curve on top of that commitment to figure the non-financial part of your investment in the deal. If that and the numbers add up, go for it.

I have a number of contacts that may be a good fit for your project that we can discuss offline if you'd like.

Good hunting-

@J Scott You are correct that the industry standard use of IRR is for measuring the complete cycle of an investment, acquisition through disposition. I have modeled long term portfolios of properties though based on pulling equity out (through refi) that was used to acquire additional properties but the IRR formula is still the same; the net cash flows positive and negative over the life of the portfolio including the initial investment and the proceeds from the final disposition.