Tag Archives: real estate investment

Finding Off Market Commercial Real Estate Deals

Please note that we work in the Los Angeles, CA area and are no longer active in sourcing national deals. However, we’re always help with investment advice if warranted. 

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Believe it or not, it’s rough out there for commercial real estate investors. The amount of time some buyers spend analyzing deals is more than they spend at their real jobs. Day after day, I meet more buyers who are absolutely against looking at anything on the market. If it’s already been on LoopNet, they’ve “seen it” and completely disregarded it. There’s the problem, though. They’ve “seen it”…meaning they looked at the price, location, unit mix, read a few words of the description, and MAYBE called the agent and said “DO YOU HAVE ANY OFFERS?!” and once the agent lied and said ‘yes’, they gave up and moved on.

It’s no wonder you have all these brokers running around asking each other for off-market deals or “pocket listings”. When nothing on the market seems reasonable, it’s time to hit up the people who DON’T actively want to sell. That makes sense, right? Nope.

In a perfect world, listing agents who put their listings on sites like LoopNet would 1) price it correctly 2) be descriptive 3) sufficiently inform their clients. Also in a perfect world, someone who claims to be a savvy apartment investor would know that everything is negotiable to a certain extent, including price. I get a kick out of the guys who, no matter how high of a CAP rate they’re getting, will insist on offering $100k less. “Property’s listed at $1m? Deliverable at $900k? I’ll offer $800k.” This isn’t the right way to make strategic investments in multifamily properties.

I’ll use a previous client of mine as a case study to show you how my father and I successfully find deals that make sense for our investors AND sellers. We used all the tools and resources available to give our client the technical data, facts and ideas necessary to make the most educated decision possible.

First, we’ll identify their buying needs: In this example, our client came to us with $2million that he needed to invest. His main objective was to gain cash flow and build equity in an appreciating asset that he can cash out in a few years. He had a steady job, paid off home, and was generally in great financial shape. He saved up this capital over the course of a decade, so he was naturally very careful of any risky investments. He decided real estate was the way to go and even did quite a bit of research on his own…even went so far as to get on LoopNet and start calling on the deals that were on the market in his neighborhood.

Clarify market knowledge: It’s always challenging when a client comes to you reciting things they heard their realtor friends saying about the commercial real estate market. That’s because 99% of it isn’t true. “My sister’s realtor friend told me people are buying apartments  in Montrose for 20 cents on the dollar!” No. “But I read online that you can make 15% on your money in apartment investing.” Hmm.

So, we spent about half an hour bringing him up to speed on market metrics (CAP rates, IRRs, vacancy rates, etc.) and what the current market conditions were like in the area.

Set reasonable goals: We set reasonable goals for the local markets here surrounding Glendale, CA that we would aim to achieve; 7% CAP, 10.5 GRM, 10% IRR, ~$130k/unit. If you don’t know what these metrics mean, well…don’t worry about them. Basically, we wanted to accomplish a reasonably profitable investment rather than try to find a “steal of a deal” and be stuck with problems.

Deal-searching: Yea, he’s seen every apartment building for sale in Glendale, CA  on LoopNet all right. He even knows each on-market property’s address and physical description by heart and he’s not happy about any of them. When we put the LoopNet results page on the screen in front of him for North Hollywood apartment buildings, he started going down the list one by one saying “this one’s great but not worth it, that one looks like a dump, this one’s empty.” We explained to him that the “price” on listings aren’t like price tags on stuff you buy at the store. You can negotiate. In fact, there are quite a few agents out there who specifically over price their listings because they’re used to being low-balled. Also, every property is being sold for a reason. Leveraging that information could be very lucrative in this business.

Naturally, he wasn’t content with what was on the market no matter how low we negotiated some of the deals. We had literally talked each seller down by at least $100k off of each listing. Our stubborn buyer still wanted to see more. We developed a method which would help us target off-market sellers (and yes, I’m totally giving away my secrets by saying this but I must warn you…no one does it quite like we do.)

  1. Foreclosure Records: filtered and searched through Notice of Default and Notice of Trustee Sale records (or properties that are in foreclosure).
  2. Expired Listings: pulled a list of all properties that match our criteria that were on the market in recent years.
  3. Target Search: went through my database of apartment buildings and found properties that match our criteria but are also owned by elderly retirees and have no debt/depreciation left on them. Why? Because older investors who have managed and dealt with their apartment buildings for decades are going to love the idea of exchanging into a NNN fast food restaurant for more cash flow and no hassle. =)
  4. Contact Property Owners: After all of that, we had 12 off-market properties to work with, all of which were in awesome locations and had great potential to add value. I contacted every single owner directly and had a brief conversation about their investment, told them what I was trying to accomplish and suggested letting us do a property valuation for them, free of charge. Only four of them agreed to have their property valuated by us. One out of four of those owners actually decided she would very much love to get fair market value for her building because her home was also in foreclosure and she needed money fast in order to save it. We put the deal together literally over-night and opened escrow the next day.

Boom! Our picky buyer acheived/surpassed every single one of the target goals and thanked us over and over again. This is what we do for our clients. Sure, some of our clients can probably just do it themselves if they really wanted to. However, the advantage of using Verdugo Properties as your commercial real estate brokers in the areas surrounding Glendale, CA is that we’re extensively trained and experienced in surgically orchestrating and executing transactions just like this. No matter which product type you’re into, we’ll achieve the same result over and over again; success.

 

A Creative Cash Flow Possibility

This post is probably going to raise an eyebrow or two about apartment investments, but oh well…as long as someone benefits from it. This isn’t by any means an offer or solicitation but rather an inquisitive look into a creatively crafted transaction that allows one party to retire from managing their apartment buildings while still keeping their passive income and another party to make a decent amount of profit managing the building with an opportunity to purchase it without a bank loan. Please feel free to point out any flaws or suggest an improvement. I’d love to try this one day.

In markets like ours here in Glendale, CA, long-time apartment owners very rarely decide to sell their buildings and even if they do, they really stick to their price. That’s another indicator of how desirable apartments are in the non-rent control environment of Glendale. From my experience as a broker specializing in this area, a lot of the property owners WOULD list their property but they just don’t think it’s worth the hassle of dealing with a sale, especially because the values aren’t quite as high as they’d like. Apartment investments in Glendale are constantly growing streams of passive income to their investors…who would want to give that up? Especially if it’s paid off!

Well, any commercial real estate broker that’s worked this area long enough will tell you that a lot of these buildings actually are debt-free and owned by elderly investors who have owned the properties for decades. Most of them rely on the income for a living while others simply pass down the benefits to their trust. (Some would call this an impenetrable market because property owners really have very little reason to sell; they’d have to be in some kind of distress or they’d be price motivated, asking unreasonable amounts for their building.)

Either way, there’s one thing a lot of these older owners have in common: they’re all tired of dealing with the things that come along with owning an apartment building. Decades of dealing with “my toilet broke” calls at 2am or having to rent out empty units can get a bit annoying when you’re trying to enjoy retirement. This is why a lot of my sellers end up trading into a NNN investment where they have no management issues whatsoever. In fact, that’s basically what this post is all about; turning an apartment building into a NNN leased investment with a small lease-to-own and seller-carry component.

How does it work?

Let’s assume I’m trying to do this on a 10 unit apartment building in Glendale at 336 Sample Street. The property owner, an 85 year old retired engineer, has had enough of managing the units but relies on the income. He’s too weary of the current market conditions to sell this investment, but he’s already tried getting his desired sales price for it and failed. I step in and underwrite the property, giving him an accurate view of what it’s worth in today’s market and where the opportunities are. While evaluating his building, we learn that he only gets $1,000 per month in rent from each of the 10 units, while the market rate for apartments like his are $1,200 a month. He’s already missing out on $2,000 every month. Also, his expenses are unnecessarily high (30%) because of the lack of upgrades in the units (low-flow toilets, energy-saving technology, etc.) thus bringing his annual Net Operating Income down to only $84,000. In today’s market, his building would be worth somewhere between $1,350,000-$1,500,000 depending on the location and condition.

Now, if the circumstances are right, I’ll suggest our magic transaction to the owner. We sign a Master Lease Agreement where the owner leases the entire property to me for 5 years on a triple-net basis, meaning I now collect the rents and reap the benefits of the property while also paying for the property tax, insurance and maintenance. I agree to pay him $7,000/month in rent for leasing the property to me. Now, this may seem like too little, but if you do the math correctly, it’s actually what he was actually netting after property expenses and property taxes. Also, every time the rents went down in the neighborhood, he probably made less there too. This $7,000 that he’s getting from me is purely passive profit that is unaffected by any market conditions. Whether or not the building is fully occupied, he’s getting his money!

How the hell could this be profitable for me? Well, I step in and take over management of the building now. I make rental adjustments by raising them to market rates, thus creating an extra $2,000-$2,500 of monthly income. Every time a unit turns over to a new tenant, I send my crew in to upgrade it and make it way more energy efficient. I reface/repaint the exterior of the building to bring it up to or above par with the neighborhood. I modify the expenses until it’s running as efficiently as possible. The lil’ old apartment house that the engineer so tirelessly tried to manage for years is now earning him a guaranteed sum of money ($84,000) every year without him even having to think about it. Meanwhile, I’m netting an extra $45,000-$50,000 a year just by managing a 10-unit apartment building and dumping a minimal amount of capital into it.

To make this deal even sweeter, you could try working out a deal with the owner to have your lease amount go towards your down payment, in case he decides to sell it to you later on down the line. Or he can agree to seller financing if you already have enough to pay as a down payment.

Please share your thoughts about this one…I’d love to hear if anyone’s done anything like this.

NNN Investments – Drive Thru Cash Flow

Most of the cold calling I do is to apartment and office building owners. Almost 90% of the owners I get to talk to aren’t really interested in selling. In fact they’re usually pretty rude about it hehe. But if they were, they’d either only sell at a really high price or just to be able to exchange into a property where they’d be able to enjoy the cash flow of their investment without any headaches. These are people who own and manage multiple properties and always have to deal with minor management chores like collecting rent, paying their upside-down mortgage, finding new tenants, fixing broken toilets, dealing with contractors and so on. So, naturally, you can imagine why a management-free investment would sound amazing to someone who absolutely hates the management aspect of owning real estate.

Over the last few months, I’ve confirmed a rising new popularity amongst my clients towards NNN investments. A NNN (triple-net) leased investment is where the tenant of the property not only pays the landlord rent, but also pays for the maintenance of the building, property insurance, and property taxes. This lets the investor or property owner simply sit back and collect the rent without having any management duties whatsoever. Most of the time you’ll see major fast-food chains or franchise stores on these types of leases; Burger King, Starbucks, Taco Bell, Carl’s Jr., Walgreens, etc. .

Since I listed a Del Taco property in Riverside County in May, I’ve had the pleasure of speaking with hundreds of different investors who really only play with these types of properties. I asked them how they got into it in the first place and 9 times out of 10 they’d say they sold property that they inherited or owned before (usually apartments) and traded into NNN deals because it was easy to manage. They’d say that although they could be making a little more money in another product type like apartment buildings, this was the safest bet for their retirement.

Why are NNN deals so “safe”? Well, for starters, if a corporate-backed franchisee of, oh, let’s say McDonald’s couldn’t pay their rent, there would have to be some pretty epic economic catastrophe to explain it, right? We as Americans love our fast food. We love our coffee. We love drive-thru. Doesn’t matter if you’re rich, poor, black, white, fat, skinny…at some point in time (some more than others) everyone goes to these restaurants. It’s probably one of the very few industries that make a huge profit in a good economy and an even bigger profit in a bad economy. So, you can be sure that as a landlord, you’re pretty much guaranteed income for as long as you own it. It’s sort of the “low risk, low reward” alternative to real estate investing. If you put your money in a bank, the most you could get is maybe 2% return on your money? If you bought an office building, depending on the kind of deal you made, you’re maybe getting somewhere from 7.5-10% on your money? With a NNN deal like the Del Taco I’m currently selling, you’re making between 6-7% return without having to worry about a single thing.

I find it kind of funny that major fast food and pharmacy chains not only make the consumers’ lives “easier” and more “convenient”, but their landlords’ lives too. It’s like drive-thru cash flow!

That’s all the rambling I’ve got for now. I’ll have an update as soon as the deal is sold.