While you are waiting for the Real Deal Commercial Event
By Rick Melero, Commercial Investor, Real Estate Mentor, Member of HIS Board of Advisor
Congratulations for joining our Real Deal Team!
Important: Make sure to check your inbox for an email titled
"Confirmation: 'Real Deal Commercial Investing'"
This email contains your unique link to access the webinar. Make sure you save this email for the event.While you are waiting for the Real Deal Commercial Event, we want to give you the opportunity to learn more about our team. Download our Private Placement Example PDF and learn more about our Investing Philosophies and The HIS Board of Advisors.
We look forward to working with you.
Regards,
Rick Melero
HIS Real Estate Network
Perfect Storm has been brewing in Mobile Home Parks, now is the time to invest!
By Alex Zokan, Fun Guy - Commercial Real Estate Investor, Educational Speaker, Director of the Real Deal Bulk REO FundLike all forms of real estate, mobile home parks have had about a decade-long run of easy financing and low cap rates. However, those good old days are over. And the result can be some of the best yielding mobile home park deals since the first trailer rattled down the interstate.
Here’s our weather forecast on the great mobile home park storm, and what the impact will be:
New home sales
Mobile home sales have been in a continual decline since 2000. From a peak of almost 400,000 units sold per year then, sales are down to under 100,000 today. And most of those sales are units that do not end up in parks. The good news is that, unlike the single family home industry, bad new home sales have been in every park owner’s and bank’s budgets for almost a decade. There is no collapse to worry about -- it’s already been dead for a decade. And no sellers are trying to use numbers based on good sales that are not really there anymore, nor do you have to guess when the rebound will occur. This whole side of the industry has been dead and buried since before Bush was President.
Financing
Few banks want to make loans on mobile home parks. There were only about 20 that did it with any regularity, and that number has dwindled down to about 5. At the same time, there has been a “flight to quality” on the part of all banks when it comes to making loans. The net result is that only credit-worthy borrowers with 20% down can get a bank loan. This is a sharp contrast to the past decade when anyone who could fog a mirror and had 10% down was able to get credit. The effect will be a buyer’s market for those who qualify.
Equally important, the death of financing will set in motion even greater seller financing availability. One of the attractive parts of mobile home park purchasing has been the existence of seller carry. Now, you should see even more of it. Most seller carry offers below market down payments [giving you greater leverage], as well as below-market interest rates and, perhaps most importantly, non-recourse.
Cap rates
This is where the opportunity goes from Category 1 to Category 5. Only a few years ago, cap rates on parks were around 6% to 8%. Due to the lack of qualified buyers, those rates have skyrocketed almost overnight to 8% to 12% or more. And that’s not even the whole story. Back when financing was easy, sellers get comfortable capping income that wasn’t really there. The home that just got pulled out, the asphalt repair that was capitalized and hidden from the actual profit and loss statement – they were never really scrutinized. Today, with greater scrutiny, the income and expenses are a lot more accurate and capable of being banked on. Even if the buyer is an unaware, the bank normally lends a second, conservative opinion and reduces down the price or kills the deal.
Quantity of deals
There have never, in the 12 year history of www.mobilehomeparkstore.com, been so many mobile home parks for sale at one time. This enormous supply/demand disaster has rendered many terrified sellers into a panic mode. Sellers are stating on their parks “make offer”, “must sell”, and “seller will carry”. This is the quintessential “buyer’s market”.
It’s not as bad as it looks
This is the key part of the perfect storm. Although sellers are freaking out and reducing prices, and banks are shriveling up and blowing away, the mobile home park business has not really been much affected. Sales of new homes have been terrible for a decade, and every park owner has already adjusted their business.
Occupancy has remained stable at most parks for at least the last five years (many parks had a significant drop in occupancy at the start of the melt-down on new homes in about 2001). There is no reason to believe significant declines in occupancy lie ahead.
Operating costs, although feeling constant minor upticks in water and tax rates, remain very predictable and not out of control. There is no 800 pound gorilla in the expense closet.
And bank foreclosures on parks remain among the lowest of all classes of real estate. The decline in bank loans has not been due to problems with the mobile home park business model – only guilt by association with the rest of commercial real estate market.
Once in a lifetime opportunity
The perfect storm of this magnitude may not come around again. Or it may come back in a cycle twenty years from now. But if you are trying to invest and get a maximum return, the time is now.
Put on your raincoat and hat, and head
out into the storm, because it may not be this dark for
long."
WRITTEN BY DAVE REYNOLDS
This
article really states the essence of Real Estate Investing,
when everything is brewing up to be the "Perfect Storm" this is
when investors should be getting excited. Like Warren Buffet
said it well, "When people get greedy, I get nervous. When
people get nervous, I get greedy." We are in a time right now
where people are nervous this is causing them to panic and sell
off their assets quickly and at a discount. What this means to
us as investors is that we can pick up some steep discounts on
properties that are being sold under their intrinsic values. As
long as you buy a property that has a solid cap rate and
cash-flow coming in, you will be prepared to weather the worst
storm, because were in it!
Good times are ahead for mobile home park investors since the
need for affordable housing solution is more apparent than
ever. The days where majority could qualify for a home are
gone, also so is the waning mentality of living outside of your
means.
Since our government is printing money with no end in sight, to
hedge against inflation in the future interest rates will have
to raise. When this happens the purchasing power of the
consumer greatly decreases leaving most scrambling for an
affordable alternative. Along with hikes in taxes and lower
wages.
Ok, its now time to get
greedy!
How to Manage Tenants for Success
By Gary TharpTo manage tenants effectively, proper and prompt communication should be your first order of business. You also have a variety of primary tasks to handle:
• Tenant complaints
• Pre-emptive management
• Renewal programs
Tenant Complaints
Usually you have the responsibility for major equipment in your buildings, such as a working elevator. If your tenants keep reminding you that something isn’t working and you don’t fix it, you are responsible for any problems or injuries that occur.
When their lease comes up for renewal, they probably won’t move out. Businesses don’t move as often as people in residential situations because moving involves some major expenses, such as business cards, letterhead stationery, and telephone service. However, if they become dissatisfied enough, they will move.
Therefore, handling complaints becomes a critical issue. This is especially true when the market slows down, because happy tenants normally stay. Otherwise, they wouldn’t consider moving unless they are expanding and need more space, or perhaps they are extremely successful and profitable and they’d like a more prestigious base, perhaps from a Class B to a Class A building.
Tip: Handle complaints promptly and communicate effectively with your tenants to avert any troublesome situations.
Pre-emptive Management
If you buy a building that already has tenants be sure to determine when each lease expires. This will immediately show if there might be any vacancies occurring at about the same time. If you have only a few tenants and even if only two of them have leases expiring about the same time that could possibly represent a huge loss for you.
What you need to do in this type of situation is meet with each of these tenants separately and discuss the expiration date now, before it occurs. If a tenant in a commercial building is going to move, they usually decide that at least six or eight months before the lease expires, so they can create detailed planning and scheduling.
When you meet with them, be prepared to talk about renewing their lease immediately. If they are willing to renew this far ahead of schedule, you should consider granting them extra concessions. Offering three or more free months when the lease expires is usually a deal that most commercial tenants would certainly appreciate.
It’s also a good deal for you, because it could be significantly more than three months of vacant space if a tenant leaves. You might even have to include the cost of cleaning and re-renting and possibly remodeling the space, by moving walls or adding extra tenant improvements, like new carpeting. Those costs could be far beyond what you would be giving away with three months of free rent.
Sometimes the conversation with tenants turns up the fact that they would like some more space, perhaps a few thousand square feet. If your meeting with the second tenant helps you to determine they need more space, but it’s more than you can provide, they may need to move. This will allow you to offer some of their space to the first tenant.
If the first tenant signs the new lease that includes the extra square footage, you could have less of a tenant vacancy problem than you had earlier. Sometimes this solution will work easily because it’s contiguous space.
The whole point of this is to be proactive in your leasing. To ensure that you don’t have too much vacant space and reduced cash flow, pay particular attention to your tenants’ needs. Be careful to monitor your leases.
Preemptive management includes offering these renewal programs to balance your turnover, and make sure you’re on the top of your game.
Commercial Real Estate Evaluations: (What is the NOI?)
By Rick Melero, Commercial Investor, Real Estate Mentor, Member of HIS Board of AdvisorHere is a quick definition.
Net Operating Income. Is the income after deducting for operating expenses but before deducting for income taxes and interest.
Here is a quick break down of how you would arrive at the NOI.
INCOME
Gross Scheduled Rent Income
+ Other Income
TOTAL GROSS INCOME
- VACANCY & CREDIT ALLOWANCE
= GROSS OPERATING INCOME
- Operating Expenses :
Accounting
Advertising
Insurance (fire and liability)
Janitorial Service
Lawn/Snow
Legal
Licenses
Miscellaneous
Property Management
Repairs and Maintenance
Resident Superintendent
Supplies
Taxes
Real Estate
Personal Property
Payroll
Other
Trash Removal
Utilities
Electricity
Fuel Oil
Gas
Sewer and Water
Telephone
Other
= Net Operating Income
The NOI is often viewed as a good measure of the income producing asset's performance. Many investors believe this figure is less susceptible than other figures to manipulation .
We talk in more detail about commercial investing in our Real Deal Webinars. Make sure to RSVP for our Next Call.
Regards,
Rick Melero
www.HisRealEstateNetwork.com/commercial
Commercial Lease Clauses
By Gary TharpYou should include introductory clauses in your lease that do
the following:
• Describe the premises
• Specify the lease term
• Indicate the rental or lease payment amount
Many times, you will be dealing with a five-year lease. Therefore, you need to explain in the lease, how rental increments will happen every year over the period of the lease.
You could also include additional tenant conduct, indicating what tenants can or cannot do. This is where you would specify whether they could assign the lease, sublease it, or limit it to subleasing—subject to landlord’s approval.
Signage
Signage becomes a problem in some places such as Florida, because of hurricanes. One of the most serious threats to life and limb in a hurricane is not the wind per Se, but the debris that the wind blows around.
If you have a sign that is not well anchored and a hurricane comes along and tears off chunks of glass or plastic, these can become deadly projectiles.
Hence, you get into a lot of code issues about how signage has to be constructed, type of materials, and other similar issues. So, in your lease, you must ensure that it includes a clause that specifies that no signs can be erected on the property without:
1. Landlord approval
2. Proper permitting through the local county officers or local city officers, so that signs
— Meet code
— Conform to local rules and regulations
Additional Tenant Expenses
Include language in the lease that itemizes the expenses for which the tenant will be responsible, such as taxes, utilities, and insurance. A prudent policy is to require that all your tenants carry a million dollar liability policy on anything that happens on the premises.
Otherwise, if something happens as a function of their business and they are not sufficiently covered, the problem rebounds to you, because it’s your building. Be sure that your tenants furnish proof of insurance before you allow them to occupy the premises.
Tenant rights, landlord services, common areas, and common area expenses that you are going to incur and pass on to the tenant, are all standard clauses. Other clauses may pertain to preserving the premises, making repairs, maintenance, and surrender of the property.
Tip: If your tenants want to change something in the building, they must come to you for approval. After all, it’s your building!
You should also consider the rules for alterations, surrender, damage destruction, and protecting the landlord’s subordination. Be sure to specify that you have the right to enter and inspect the premises.
Other clauses to consider are those for indemnification— being held harmless, evidence of default and remedies, security for performance, security deposits, and other similar rights. Obtain an experienced real estate attorney who specializes in commercial leases, and can review and revise your lease appropriately.
Building Owners and Managers Association (BOMA)
BOMA publishes standard methods for measuring floor area in industrial buildings. You may not think this subject is an important issue, but there are many ways to measure that can affect your rental income.
Landlords have been sued, sometimes after many years, for leases that were found to include inaccurate square footage descriptions. To protect yourself always use the BOMA method and include that description in one of your lease clauses.
More Commercial Lease Terms You MUST Know
By Gary TharpThis type of operation basically means that you construct a building the way a prospective tenant dictates, and then you rent it to them. You pay the initial cost of setting it up as turnkey, in that you put up the capital cost. You’ll recover those costs through the rent that the tenant pays over the next 5 to 10 years.
The tenant might even pay a percentage of what the cost is to build the turnkey, but you will also pay a percentage of it. You will see build-to-suit many times in rental property where the building is a shell. A tenant will not take it as a shell, but will want it built out to a certain degree.
Build-To-Suit
A build-to-suit situation is a deal in which you can negotiate who pays how much of the build-out fees. When your tenant pays a specific amount per foot in tenant improvements, that’s a built-to-suit type of situation.
Sale/Leaseback
Albertson’s grocery chain does a lot of sale/leaseback. They find suitable property for a grocery site, build a store to fit their own specifications, sell it (usually to a group of investors who like to buy their properties), and then lease it back.
They know that they can make 12 to 13% return on the money they invest in the grocery business. In the real estate business, owning real estate might give them an 8 or 9% “Cap Rate” with an AAA tenant like that. So, rather than have their money tied up in real estate at a lower rate of return, they sell the property to somebody else and lease it back. Then they can invest their money in their grocery business, where they can obtain much higher profits. This is just another financing method.
Commercial Lease Terms You MUST Know
By Gary TharpMost of the time when you have a multi-tenant building, you factor in charges for CAM. Usually tenants pay $12 a square foot for annual rent, plus a certain percentage for CAM. So CAM for a building is passed on to tenants.
Many of the issues considered in the commercial arena are not even available in residential leasing. For instance, if your commercial real estate investment target is small office warehouses, strip malls, or strip retail centers, CAM is one of the items you need to research.
Before you start renting or buying those types of facilities, you should know what the standard CAM is for your type of property. Sometimes in some smaller properties, there is no CAM, since the landlord pays it.
That’s all part of your costs as a landlord in this type of property. It’s not a pass-through, because you can’t legitimately pass through CAM expenses to your tenants, if no one in the area who owns a similar property is having their tenants pay it.
Percentage Leases
When you pay a fixed rent plus a percentage of sales over and above the fixed rental, you have a percentage lease arrangement. You will probably not run into percentage rent situations very often as a landlord. Most of the time, percentage rents are used in retail businesses located in large shopping centers and other similar areas.
You might charge percentage rent, if you had a $2,000,000 shopping center with a JC Penny’s, Sears, or Dillard’s, and the attraction of those mega stores brought traffic to your store. Therefore, they want to become your partner, in effect, by charging you a percentage. This is not common in small to moderate businesses.
Ground/Land Leases
This type of arrangement is where the tenant rents the land and builds on the property. Any way in which you improve the grounds, including any buildings, usually belong to the landlord when the lease ends. This is actually a form of financing.
You’ll find many ground tenants in high-cost land areas, like New York City. People don’t want to tie up personal capital in owning a piece of land when they could be putting that money into business operations. The standard land lease is a very long-term lease.
Sublease
A sublease is when you lease the whole property and then sublease a portion of it to someone else. For example, you might rent 10,000 square feet from a landlord. If you don’t need all that room, you have the right to put your own tenant onto the property using a sublease.
Assignment
An assignment is very similar to a sublease, in that you initiate the rental lease. However, you become a landlord by assigning the entire property to one or more tenants whom you manage.
There was a time when real estate investors would lease property and negotiate a very low rental rate. Then they would assign that same property to tenants at a much higher rate. Their real estate business consisted entirely of collecting money from their assignment.
Assignment Not Allowed
In some commercial leases, there’s a sublease clause stating that you are allowed to sublease the entire property, subject to the landlord’s approval. This clause, in effect, means that you cannot assign the lease. Particularly when you get into larger properties, you’ll want to be sure to personally check personally the credit of everybody who expresses interest in leasing your property.
Tip: Assignments can get you into trouble. If you don’t know whether the assignee is credit worthy, don’t assign under any conditions.
Is Apartment investing really that great? part two.
By King of The City, Residential and Commercial InvestorLet's go deeper....
Some investors don't mind 'war zone' or low-income areas. Some only invest in more middle class areas where the crime rate appears to be lower and tenants are more likely to stay for longer. It's totally up to you what area you invest in, but do keep in mind that generally speaking you will find cheaper deals in low income areas, heck maybe you can even pay cash for them. But in other, more prominent, well maintained middle class areas you will more than likely have to get financed for the deal.
How do you obtain financing for a large apartment building or complex? It's obviously going to be more expensive than a SFR, so unless you're blessed enough to be super rich, you're going to need financing.
Contrary to popular belief, It's easier to finance a multi-million dollar apartment building than a single family investment property. With commercial financing, the properties qualify for the loan, not you
Ok, so you want to buy an apartment building. Things these are made for two reasons. To provide affordable housing and to cash flow.
One way to do a quick analysis on a property in order to determine if you should investigate further is to use something called the 1% rule.
The 1% rule is calculated like this:
Take 1% of the purchase price or value and compare that number to the existing annual gross income of the property.
for example:
Value/purchase price - 150k
1% of 150k is $1500. This is your rough estimate in debt service (The series of payments of interest and principal required on a debt over a given period of time).
You then compare that number (in this case $1500) to the existing annual gross income of the property. This will give you a pretty good idea if the property is/will cash flow and how for how much. If the numbers are close or the debt service is higher than the income, pass on the deal.
After that you'll want to do a full cash flow and commercial income property analysis.
What about rent? How much should you charge when you take over the property? Any easy way to find out is to ASK someone. A tenant in a neighboring developlment or rental house. ASK your Realtor what the average rent is for the area. You do have a Realtor don't you? ASK www.Rentals.com. search by zip code and look for comparable places that are available.
Doing your Due Dilegence and ASKing Questions are two of the most important pieces in being a successful investor.
Be Free.
-Adam Walker
Millionaire In Training
www.MMMChallenge.com
www.TheKingofTheCity.com
www.RealDealLouisville.com
How to keep you MHP Tenants and retain cashflow!
By Alex Zokan, Fun Guy - Commercial Real Estate Investor, Educational Speaker, Director of the Real Deal Bulk REO Fund
Here is an interesting article
written about retaining your tenants and managing your
cashflow.
"It is impossible to be a landlord and not receive frequent
requests to “help” your tenants. These requests normally revolve
around payment of the rent – either to pay late or to pay a
reduced amount. And the way you handle these requests has a huge
impact on your business, and the life of your tenant.
First, let’s look at the request to pay rent late. Normally, the tenant has an excuse for paying rent late, such as a delayed check from an employer or social security. And sometimes the reasons are legitimate. However, you must never allow someone to pay rent late without consequences. The tenant who is paying late must pay a late fee, as should be standard with all of your customers. If you allow the tenant to pay rent late and not pay a late fee, you have set a dangerous precedent that will be spread by word of mouth throughout the park. Additionally, you must explain to the tenant that you will begin the eviction process as scheduled if the rent has not been received during the grace period, but still will stop the process as soon as the rent is received. For example, if the park sends out ten day demand letters on the 7th of the month, then you should go forward with sending the letter, regardless of any advance request by the tenant. You can always call off the eviction process if the rent is received. However, you cannot afford to delay beginning the process as scheduled. That way, if the tenant is lying and is not going to pay the rent, you can kick him out in line with any other tenant who failed to pay the rent. Bear in mind that a lot of times the condition that forces the tenant to request to pay late is a structural change in the tenant’s finances that will eventually force him to leave the park. For example, the delay in receiving disability payments from the government may be the result of being kicked out of that program. Similarly, a tenant who claims he is getting paid late by his employer may actually have lost his job, or has been laid off due to lack of work. This problem is not going to go away in the near future – only get worse.
Requests to pay less than the required rent require the same proactive approach. If you agree to let a tenant pay less than the required amount, you will create a deadly precedent in your park. Nothing will put you out of business faster than receiving partial rent every month – none of your bills can be paid with partial payments. But the truth about letting a tenant pay less than they owe, including no rent at all, and not evicting them is that you are really setting them up for losing their home and putting them out on the street. You have become an accessory to the crime. The fact is, if you let the tenant get more than one month behind on their rent, they will never be able to catch up. It is very hard for the average tenant to manage their finances well enough to pay the existing month’s rent, much less an even greater amount. If you force the tenant to pay the rent or be evicted, then you force them to take immediate action to solve their financial problem. Maybe they need to get a second job, or change their payment priorities, or get a bridge loan from a relative. The sooner they focus on their finances, the faster they will get back out of trouble. By letting them pass on their rent, you are basically loaning the tenant money – a loan they will never be able to pay. Think sub-prime predatory lending, because that’s what it is. And the result will work for them as well as it has for the mortgage industry. When you don’t force the issue that very month, you are actually doing a disservice to your tenant. And their family and any other person living with them, who is soon to be homeless. In a mobile home park, the rent is relatively low – maybe $200 per month – and well within the reach of any person even earning minimum wage. It’s not a money issue when a tenant can’t pay – it’s a prioritization issue. They are testing you to see if you are one of the bills that can be rolled when that big screen T.V. is on sale, or there is an Aerosmith concert to buy tickets for.
So how do you respond to a rent request from a tenant. First, tell them that you have systems in place that do not allow for customization. Explain that you have to continue with the eviction process no matter what, but you will call it off once the rent has been paid in full, plus the appropriate late fee. It also helps to tell the tenant that you are not the owner (even if you are) and that your boss (even if you are the boss) doesn’t allow any rent deals. This is the type of response that the tenant is used to hearing from the more important bills he has (car payment, charge card, utility company) so he will immediately group you with the “have to pay” bills.
Nobody likes to be the “tough
guy” with their tenants. However, when it comes to the rent,
“tough love” is imperative. So do your tenant and yourself a
favor, and don’t give in when tenants call you about rent."
By Frank
Rolfe
This article sheds a lot of light on why trying to be the nice
guy isn't a good investment strategy. In all actuality it is
paramount to become stringent on rules for rent collection than
risk being in the position for the renter to take the advantage.
Also, if someone knows that they can pay their rent without
consequence they also have the chance of getting so behind to the
point that they aren't able to get current anymore, in some
respects you are helping them develop a habit. Lets face it,
things happen to everyone sometime where they might be in a
crunch for a short time, but it is good to make sure they now
there is recourse or a penalty for being late no matter what.
Also word usually spreads in Mobile Home Parks fast! One little
pass, could mean five other residents trying do the same
thing.
Types of Commercial Leases
By Gary TharpLeases are written contracts between a property owner and a tenant. These documents include references to items such as the specified amount of rent and when payment is due. Usually, the rental period is stipulated, such as a three- year lease.
Leases differ, relative to their target area. For instance, an office building lease in a city like San Francisco and a retail lease for a strip center mall in a smaller city like Sarasota, Florida, would be quite different.
Types of leases include
•Gross
•Net
•Percentage
•Ground
•Sublease
•Assignment
•Turnkey
• Build-to-suit
• Sale/Lease-back
Gross vs. Net Leases
A gross lease is one in which the owner/landlord is responsible for paying taxes, insurance and any other costs of property ownership. Most apartment leases are gross leases since you just pay rent and that’s all. Some apartments may require you to pay your electric bill, but everything else is paid by the landlord in a gross lease.
A net lease is just the opposite - basically, you pay a rental fee to the landlord and then you pay your taxes, insurance, maintenance, and all other fees and expenses associated with the property. Therefore, when you as a landlord agree upon a net lease, the rent you receive is net income. You don’t have to pay any other costs out of it.
Triple Net Lease
In the commercial arena most leases are net, to a certain degree. You could even have a double or a triple net lease.
A triple net lease used to mean that you would pay the rent, taxes, insurance, and common area maintenance (CAM). Nowadays, there’s no such thing as a completely net or gross lease.
Typically, if you were renting space in a freestanding facility, you would pay all fees and operating expenses associated with that area.
The great thing about a commercial lease is that the vast majority of them are net leases. A lease may be largely net, with the tenant paying rent and all of the other expenses of the property, like taxes and insurance.
However, even in a case like this, the landlord would pay something, like the insurance on the building structure itself. Therefore, the lease isn’t completely net.
Tenants insure the contents of a structure. Before the lease begins, if you have a lot of equipment, you should inspect it to make sure it’s in working order. Then, meet with your tenants and agree on procedure, should anything happen to the equipment or property.
Tip: Never allow someone else to insure your assets. The policy could lapse and you might not find out that there was no coverage until after you filed a claim.
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