All Forum Posts by: Russ Kitzberger

 There are very few people who are happy with their GC cost or timing situation right now.  Design is even taking months.  This will take a while to calm down, the supply chain for materials has been corrected because those are controlled by a few big players who can shift inventory internationally for demand.  Local labor is not as flexible. I see it as a reason to help by investing in trade schools and providing a sustainable pricing environment.  

Also, Great advice DD is one of the biggest hurdles for new investors with development goals to overcome. That is why many developers were brokers, engineers, or attorneys. A background in those areas saves DD expenses and brings quicker decisions. An ounce of prevention is worth a pound of cure!

Just pointing out that 5% vacancy means that you will only have one turnover loss month every year for two units with minor collections expense.

Correlating that to 7% management means that you are either not paying one months rent leasing commissions on one turnover or are not paying any additional management expense.

One turnover loss month is 8% vacancy per one unit and 8% leasing commission, plus management commissions/fee. If you have repairs are you being upcharge fees on repairs by management.  

As Zach indicated;
If you are not paying for each additional item the manager does; it might not be reasonable to have such a low management fee.

They can be very hands-off. Particularly new projects or complete renovations.  I have had clients who purchased and literally never visited the building nor had local management until the lease term was up or the tenant otherwise vacated.  Typically the tenant handles everything or reimburses, major capital items are handled by the owner, but they can be planned for. For instance, it is easy to have competitive bids for a roof, parking lot resurfacing, or HVAC system completed from a distance.  If you plan ahead, the tenant deductibles/minimum reimbursements cover routine maintenance/repairs. Insurance covers catastrophies.

Seller financing an option? No, usually developers sell to raise capital for other projects.  Owner users sell in leaseback transactions to free up capital for expansion.

NNN cap rate is a function of risk. You buy future payments from that particular business based on how it will perform during the investment period. As though you were investing in a promise of that business's success in that location and their inability to move or ability to lease it to a similar tenant. It's like buying a bond based on that location's success. It would be difficult to NNN risk gauge a singular location local tenant. In that case usually, the cap rate will be market-based if rent is at market rates.

The other two members answers well covered the other topics.

Changeable/Convertible: unlike a SFR zoned residential, you can convert uses in most commercial sites or buildings to higher and better use.

Scarcity: The underlying value in any RE is the land, things are cyclical, but good locations with strong linkage require significant capital to be invested(from outside governmental forces), which make replacement locations unlikely to be created quickly. 

=Long term capital preservation

So my questions are

1. How do I acquire this as a newbie investor?

Cash or banks will do these with 25-35% down with solid credit and 15-25% in reserves.

2. Is this a good deal or not?

A deal is relative to your investment risk analysis, a deal to one person might not be a deal to another.

3. Am I going to big for my first investment property?

Again, what is your confort level?  

4. What info am i missing, or what else should i be looking at?

Items to note: what is parking, do tenant want to be above the other uses, etc. Rents might be low, or perhaps they are at market based on amenities vs an apartment building. Research the market.

Once you get several of these mixed use type assets; you can leverage the banks for better rates. Mixed use at that level is under the radar of big investors and too big for most one-off investors. That asset class has created some very wealthy investors, it is some work to keep them filled and maintained, but it can pay big dividends.

Concur these are Attorney questions.

Will point out that Industrial is a zoning classification that many governmental agencies assert only industrial uses in.  Public policy in many areas considers residential uses within industrial districts may increase hazards to the residents' health and create significant fire and safety burdens on the safety forces. 

Industrial fires and spills are very different from residential and general commercial fires and accidents.

It depends, check your mortgage terms, rezoning, or similar acts of government many times do not necessitate a term change in a fixed rate loan. Now if you vacate the use, that may be a different issue. Again, check your mortgage terms.

1. You need to ask the broker.  Because of the current marketplace, many sellers do not need to do creative financing.  Commercial lending is currently robust, and these sorts of arrangements do not provide liquidity for sellers or perhaps the ability to do exchanges, creating personal tax issues, etc.   Sellers may not be interested in offering those terms. If you are working with a respected commercial agent, they may be willing to help you determine which listings might be interested in these arrangements. Commercial brokers don't like to waste time for themselves or their clients.  I suggest retaining your own commercial broker who has relationships and receives responses because they are mutually respected.

2. Most states would consider drafting a Land Contract/Owner-Financing Agreement, or Lease to own, as the practice of law, you need an attorney to draft them in those states. Again, another additional step for sellers and brokers, when financing is available through conventional sources.

3. Usually it is via a letter of intent and with further non-binding negotiation, then the attorneys are brought in to draft the formal agreements and it goes back and forth again. Again, additional cost for sellers and time for brokers and sellers.  

You may find that Cash is preferred, financing is considered, and the seller accepting financial risk is not contemplated in robust lending or real estate market.

Hi Adam, 

Since you are in Ohio, the licensed professionals permitted to sign off on plans are State Licensed Architects and Professional Engineers (PE). Some cities will go further and prequalify certain contractors or professions for certain work. IE, requiring registration to work in the city limits.

You can hire a firm and the firm will have draftspeople that do the majority of the work to save money for the client and the PE or Architect will review and sign the drawings.

Site plans will depend on the municipality, the GC or design (Architecture or Engineering) firm will research and provide the required level of drawings. If you have questions on the code, you can hire an attorney to advise or contact the municipality and see if they are willing to provide an answer based on the level of renovation.  Yes, you may have to put forward plans for every job in some cities.