All Forum Posts by: Giovanni Isaksen

What happened to the edit button? Oops, found it.

@Account Closed  Sometimes the best investments are the ones we don't make. If we pay attention they're all educational though (And what doesn't kill you is educational). Good onya for dodging that bullet!

One of our clients is just getting to see the light at the end of the tunnel with a property they acquired that had been stuffed with druggers and gangbangers by the previous management. The only saving grace is that we got first class property mgt. installed day 1.

The key takeaway is don't let deal fever (your need to do a deal) push you into a bad investment. The property mentioned above I thought was a good deal at a 15% lower price but the client had despaired of searching the haystack for a needle. At one point they yelled at me saying they'd never buy anything if they went by my standards (I thought well, you'll never overpay for anything if you stick to my standards but didn't say it).

Fortunately they're long term investors and over their 20-25 year holding period they'll do great but the first four or five quarters haven't been all rainbows and unicorns.

Good hunting-

Great info everyone. @Louis Leone I used to follow Dividend Capital's Cycle Monitor every quarter until I noticed that their placement of Seattle's apartment market had no relation to what was actually happening in that market (my main local market). See here for more: 

Apartment Building Investment Cycle Analysis via Dividend Capital. Can this be right?

I'll be doing a post later this week on the Seattle apartment market's magical trip through Div Cap's market cycle in the last two years. Since they mostly invest in industrial properties hopefully they're more up to speed with that sector.

That said Glenn Mueller's work on how real estate market cycles operate which he explains in every Cycle Monitor is some of the best free real estate education you can get... Although I'm not 100% on board with his contention that markets can back up in the cycle, that goes against the very definition of a cycle.

@Will Wu  Having been a contractor who worked exclusively with architects (a number of them were our clients too) there are three main areas of concern in selecting one to work with.

1st Do they design the kind of buildings you want built? Ideally you're looking for one who loves to design fourplexes.

2nd How close are they with their cost estimates? If you are an uber wealthy patron who wants a 'statement' building it's not so important but if you are a business person who wants an income property that actually throws off income it is important.

3rd How 'buildable' are their designs? We worked with one architect who designed award winning projects for our clients that were beautiful but they were the more complicated structurally than most buildings five times their size. Of course that made them much more expensive to build too. If we could have taken their elevation drawings to an engineer we could have built things that looked just the same but were much less complicated and expensive on the inside where no one could see.

Bonus: How often and how comfortable are they working with first time developers?

The first three questions really should be aimed at builders/developers who've worked with the architect before so maybe the best thing to ask the architect is for a list of the builders and developers they've worked with on similar type properties in the last five years.

Good hunting-

@Account Closed  I don't know about the local market there but 50% of all the adults in the US are single, up from 37% in the '70s according to the BLS (see http://www.bloomberg.com/news/2014-09-09/single-am... )

Do you have data that shows 1/1s are bad or is it just a bias you picked up somewhere?

Good hunting-

@Trevis Kelley  I'm with you 100% on cash flow. I'm also having to look far and wide to find deals that will actually cash flow fully reserved right now. For me as a value investor the key requirement is to have a margin of safety and one of the main ways to have a margin of safety with income properties is to have good positive cash flow.

Some people have hard boundaries around cash flow, like a deal must cash on cash 10 or 12% but in a 2.2% 10yr Treasury world to get that kind of spread requires battling in war zones or taking on serious risk of some kind. Being a slum lord isn't my gig and so I'm willing to accept a lower cash flow (say 6-7%) if it's actual cash flow after reserving for capex and other emergencies.

Accepting low cash flow now while you'd be paying off a seller second makes sense by the numbers but in my crocodile brain I'd feel better with a bit of a cushion. That said, a number of my associates have done quite well buying apartments in '06 and '07 that they wrote checks on every month through '08, '09, '10 and '11. They're smiling now but there was a lot of gray hair between now and then.

Good hunting-

Great suggestions by all. The E-Myth is an important read for anyone in a business and apartments are definitely a business. I've read (or have on my Kindle waiting to read) just about every book on apartments that I've come across and these are great ones to get started:

Frank Gallinelli's book on cash flow is the source for understanding income properties. You can find it on Amazon here: What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures http://amzn.to/Zv0Zph

Frank also has another book called '10 Commandments for Real Estate Investors' that I reread every other month or so as a reminder: http://amzn.to/15ikXL0

Ken McElroy has two great books on apartment investments and one on property management:

The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss http://amzn.to/HdXVf1

The Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals http://amzn.to/1bcWx50

The ABC's of Property Management: What You Need to Know to Maximize Your Money Now http://amzn.to/1d518JK

Also see Ken's BP interview on Podcast 052: Buying Apartment Complexes, etc. here:

http://www.biggerpockets.com/renewsblog/2014/01/09/bp-podcast-052-raising-millions-ken-mcelroy-rich-dad/

There's many more, let me know if you'd like to see more.

Good hunting-

Typically heirs who put a property on the market just want to be cashed out. If there are even just a handful of them getting decisions made without causing squabbles is a real threat and it's one most want to avoid. Especially if they're spread around the country (or the world) the logistics alone can be enough to make them want to sell.

If the NI you listed is the actual Net Operating Income (NOI), their ask is a 6.2% cap which may or may not be a little rich in your market. If you are confident you can get market rents, some utility costs moved to the tenants and some Other Income in the form of paid parking there's some nice upside though. Also the extra land may have some additional value, especially if it can be built on (or expanded onto by the existing building).

Once you're sure you've got a handle on what your expenses should be the other thing to look very closely at are the deferred maintenance and any building systems that are reaching the end of their life (roof, boiler, paving, etc). I would hire an engineer to assess what these are with cost estimates/bids. This will cost more than an inspection from a home inspector but there's a lot riding on it and will be money well spent.

If you are confident of the upside, why not offer the heirs their full asking price subject to them making all the repairs and replacements identified by your engineer, with the fallback that you're willing to have the work done yourself if they will reduce the price by the cost of the work?

If you can get the market rents, some other income and keep the expenses to 28k your effective cap rate is in the 9% range which is pretty nice. 

One other thing to have checked out by a pro is the commercial lease, they're a whole different ball of wax and each is typically one of a kind in its terms. It's important to know how long the tenant will be there on lease and what can/will happen at expiration.

Good hunting-

If you were the seller wouldn't you start with the highest price you could name with a straight face? I would too. Sounds like this isn't your seller's first rodeo so he's probably doing the same, who knows there's one born every minute and he might be able to unload his deal on one. I tend to ignore the asking price until I determine what a property is worth to me as an acquisition.

The question for the thread is; what's this deal worth to you? Most professional investors buy apartments for the stream of economic benefits they estimate the property will produce. Different investors will give varying weights to the different benefits; I happen to favor cash flow but others may lean towards appreciation and still others may look to the tax benefits. I've known some who bought hoping the thing would just break even until the mortgage was paid off when they'd have both a ton of equity and nice cash flow.

Once you know which of the benefits would be most attractive to you then you can estimate what those should be going forward and develop a price you're willing to pay for them. Likely your price will be lower than the seller's ask but it may not be that far from what he'd actually settle for. You never know until you put an offer on the table and begin to negotiate.

One thing to consider is that if the seller is really retiring, a stream of payments may work better for him than a lump sum at the close of the transaction. There are definite tax benefits for a retiring seller structuring the deal this way. You may have to give some amount in a lump up front to sweeten the deal but it's worth exploring.

Good hunting-