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How To Master The Art Of Multiple Offers In Real Estate

Making multiple offers on properties might be a numbers game, but it takes time, research, and persistence to get good at it. Once you do, you’ll realize there’s a method to all the madness.

You can’t always score a deal by simply offering a client a deal that’s 70-80 cents to the dollar; you have to do more. You have to come up with really creative offers and provide a ton of options that prospects would find difficult to walk away from.

In a nutshell, find out what the prospect wants and lay out the game: you are willing to do any reasonable price deal as long as they are willing to wait. If they aren’t ready to wait, they will have to fork out more.

Similarly, they could lower their terms and get a property at that moment. If they decide to stick to their terms, they will have to either pay more or wait longer. Whatever their choice, you will have an option for them.

For that to happen, you must have the relevant experience to know how to value a property and hit your target numbers for contingencies, bargaining strategies, and counteroffers. This is how you can assess properties and make offers that a client can’t refuse.

1. Comparable Sales Method

This method, also known as the sales comparison approach, helps to determine the value of a property. It is one of the most common methods real estate appraisers use when dealing with residential and commercial properties.

Comparable sales are applicable in this method when the property under appraisal is similar to other properties recently sold in the area. When using this method, you must consider the following factors:

  • Features and amenities: The more feature-rich the property, such as a walk-in closet or hardwood floors, the more expensive it will be than comparable properties.
  • Location and neighborhood: Homes located in perceived safer areas or near popular attractions such as parks or shopping centers are likely to sell for more than those located further away from these areas.
  • Square footage: larger homes sell for more money than smaller ones because they offer more living space and amenities. However, doubling the cost of a 1000-square-foot home won’t determine the value of a 2,000-square-foot space because smaller homes are generally more expensive per square foot than larger ones.
  • Age and condition of the property: The age of your home may also impact how much money it will fetch when selling on the open market. Older homes have more character but less modern amenities than newer ones.
  • Recently sold listings: Provide a starting point for determining the current pricing for similarly specced properties in the same area.

2. Rent Multiplier Method

The rent multiplier method is a simple way to determine how much you should offer for a house. If you’re trying to get a property listed for, say, $200,000, you can offer up to $2,000 per month (the multiplier) over their asking price.

So, if you paid $100,000 for your property and it generates $3,000 in annual rent, your gross rental multiplier would be 33.3 ($3,000 / $100,000). If you want to sell your home at its current value of $100,000, an offer for $33,000 above the asking price would be about right.

3. The 70% Rule

The 70% rule is one of the most important concepts you should aim to understand before starting your real estate investing career, especially if you’re into house flipping. It’s simple:

Max Allowable Offer = (ARV * 70%) – (Repairs + Holding + Selling Costs)

Where ARV stands for “After Repair Value,” which is the amount you think a house will be worth after repairs. You can estimate this number by researching similar properties in your area and their sales prices, and the average of these prices is the after-repair value of the listing, even before you sell.

Repairs are what you think it will cost to make all necessary repairs to get the property ready for sale, including painting and new carpeting. The repair estimate should also include any costs associated with obtaining permits to make changes. You may have to pay extra for these permits or inspections, depending on what kind of work needs doing.  I typically calculate the Repair cost and add 20% as an additional buffer.

Let’s say you’re looking at a house listed for $100,000 with a repair list of $5,000, and you think you can sell it for $120,000. That means your maximum allowable offer would be $79,000: ($115,000 * 70%) – $5,000.

The 70% rule is a great way to value a home because repairs may end up higher than anticipated, or the market might dip into your profits. Note that in a hot market, you might have to pay more, and in a potential declining market you might be applying a lower percentage.

4. Sandwich Lease Option  

The sandwich lease option is a strategy where a property owner (landlord) leases their property to an investor (lessor), who then leases it to the end user (lessee). The lessee pays a higher rate than the lessor, allowing them to make a profit.

It is a good strategy for beginner real estate investors who don’t have the capital to start as you don’t need to make a down payment or obtain a mortgage. You can even enter a lease-to-own agreement with the landlord, a deal you can then pass on to the lessee if they are interested.

The sandwich lease option is an excellent choice during a seller’s market where potential first-time property owners can’t afford it because of punitive mortgage rates; hence they settle for leasing.

Final Word

It would be best to be a little creative to survive in the current real estate environment—the old tactics of offering 70 or 80 cents to the dollar won’t cut it anymore. You have to provide a raft of options if you are to walk away with a deal.

Explain to clients that they could get a property for the price or terms they want if they are willing to wait. To ensure you hit favorable price points, even during an economic downturn, opt for the sandwich lease option, rent multiplier or comparable sales method, or the 70% rule.

I always attempt to define the true needs of the seller and “create” my offer based upon those needs, I want the seller and myself to be sitting on the same side of the table and negotiate with the Mr. Market on the other side.  This results in a collaboration rather than a competition.  Although the examples I am giving are for smaller properties, they apply even more to multimillion dollar commercial properties.

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Creating Cornerstone Content That Converts Leads Into Clients For Real Estate

Real estate investors often get stuck in a rut of creating text ads, which, while effective at generating leads, rarely convert them into partners.

You should consider cornerstone content to build your brand and turn leads into partners.

Write cornerstone articles to make the potential customers’ decision-making easier. The cornerstone content should be the go-to resource for information about your industry and business that people can hold onto for reference and use as they look for more information about your services.

For instance, the return on investment (ROI) on commercial real estate is reportedly 9.5% per annum. Use cornerstone content to show how much experience you have in helping people purchase or sell such property at an even higher markup. So, here’s how you can use cornerstone content to convert leads into clients.

What Is Cornerstone Content?

Cornerstone content is a post that provides in-depth and valuable information for your clients. It could be a series of your best articles that you intend to rank highest on search engines.

Since they provide exhaustive content that includes comprehensive information rather than sell products, they tend to be longer and more complex. It could be simple blog addition or a stand-on page.

Cornerstone content is vital because it’s ideal for building trust and credibility since the foundational content helps build traffic and brand awareness by establishing you as an authority in the industry. That is crucial to showing potential customers what you can do, making them interested in your services.

The goal of the cornerstone content is to create a positive first impression, making them more likely to convert into paying customers. For best results, create cornerstone content once or twice every month, depending on how often you publish new content on your site.

How To Create Valuable Cornerstone Content

Here are sure-fire tips for creating cornerstone content that will help your real estate agency grow:

1. Choose The Right Topic

It may seem mundane, but this is perhaps the most crucial step of the cornerstone content.

Before settling on the topic, you have to ask yourself a series of questions, chief among them is the major pain points or problems the target audience faces. Next, find out what hasn’t been answered sufficiently on other websites, then determine which issues you can answer competently.

It helps to ask members of your team if there are common questions they face. In addition, ask real customers too. That should allow you to formulate cornerstone content containing unique insight that addresses burning issues.

2. Keywords And SEO Optimization Strategies

It’s not just the real estate industry; the first page of Google is where all the action is. As 95% of web visitors rely on the first-page result, ensuring your website makes the cut and appears on the first page is essential.

One of the best ways to do that is through keyword optimization. It involves using words and phrases relevant to what you’re selling and what clients are searching for and answering the potential customers’ most pressing needs.

For example, if you’re selling a house in San Francisco, you might want to put “San Francisco” and “Bay Area” in your title tag and Meta description. You might also include those phrases in the body text of your page so that search engines will pick up on them.

Another strategy is ensuring your site is easily crawlable by search engines using proper coding standards and following web design best practices.

3. Be Consistent With Formatting And Style

Your clients will recognize your brand more efficiently if your content follows a similar pattern and uses familiar language and branding. Engaging, high-quality, consistent content impacts a potential customer’s decision-making more than any other technique.

4. Internal Linking

Send the most internal links to your cornerstone posts as this signals to search engines that they are the most important, allowing them to rank higher. It helps to use text links, that is, the keywords as the anchor text for links and then link within the text itself. Ensure you’re linking from pages with related content.

5. Call To Action

Considering you’re creating the cornerstone content aiming to convert them into clients, it helps to insert a call to action (CTA) at the end of the article. A CTA instructs the reader to take a course of action. You can do this by using call-to-action buttons at the end of your post.

CTA’s are highly effective, but the best performing is personalized, which HubSpot found to be 202% more effective than their basic equivalents. For instance, ContentVerve turned the phrasing in their CTA into the first-person point of view. Instead of writing “start Your 30-day…,” they wrote “Start My 30-day…” and realized a 90% rise in the click-through rate (CTR). So, how do you ensure your call to action is clear and compelling?

  • Tell Your Readers Exactly What You Want Them To Do Next: Make it clear what they need to do next. Use action-oriented writing instructing them to take action, such as clicking a link to another page on your site or even asking them to leave a comment with their thoughts. The key is to be specific, so there’s no room for confusion.
  • Ensure The CTA Is Visible And Eye-Catching: If your readers can’t see the button clearly, it won’t matter how good your copy is—they won’t click on it. Make sure that whatever design element you use for your CTA is highly visible, accessible, and super apparent where to find it. The goal of any call-to-action is getting people excited about taking action—and for that excitement to translate into clicks.

6. Promote The Content

You can create the best cornerstone content, but it will be pointless if your target audience doesn’t read it. Since it takes time for new content to rank organically, make a splash by promoting the content in the meantime.

Email promotion is one of the most impressive ways of doing it, with 4 billion daily users. It’s telling that 59% of respondents said email marketing influenced their purchasing decision.

Social media is another potent outlet considering 72% of Americans use social media daily. Focus on platforms that work best for real estate, personalize text and images for each platform, and share more than once.

7. Maintenance

Finally, you must maintain the cornerstone content’s health to remain evergreen. Monitor the performance, update information regularly, improve loading speeds, and give it a style refresh every few years to keep it looking up-to-date.

Final Word

If you’re a real estate investor, cornerstone content might provide the tipping point of turning leads into clients. You can do that effectively by researching suitable topics, conducting keyword research, and creating content with plenty of internal links and a personalized call to action.

Ensure you maintain consistent messaging and branding across the cornerstone content, promote the posts, and keep updating the content to keep them evergreen.

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7 Real Estate Trends To Watch Out For In 2023

We are just barely into the second half of the year 2022. Much of the economic news is doom and gloom; perhaps it’s best to look into the future if one wants to find an iota of good news. For that, a glimpse of the past could provide near-accurate future predictions.

Six months on, the Russia-Ukraine war is causing a considerable downturn in every sector of the economy, including the real estate market. The ongoing war has triggered fears of a global recession, with the World Bank dropping its growth prediction from 4.1% in January to 2.9%, causing supply chain disruptions, high commodity prices, inflation, and food insecurity.

While COVID-19 might seem like a thing of the past for most Americans, pandemic lockdowns are still alive and kicking in the “world’s factory,” China. That translates to supply chain issues, which explains why there’s a push to bring some of those jobs back onto American shores. With that background, here are the top trends in real estate to watch out for in 2023.

1. Housing Prices Likely To Remain High

According to Zillow, the typical monthly mortgage payment increased 75% between June 2019 and today. The National Association of Realtors (NAR) also states that home sales dropped 5.4% from May to June, marking the fifth consecutive month of declining sales—but median prices reached a record high in June: $416,000, up 13.4% from a year ago.

Although incomes have risen over the same period, they haven’t kept up with inflation. Wage growth in June was 6.7%, below the 9.1% rise in inflation that month. Moreover, mortgage rates continue to stagnate, and there’s the ever-present threat of further interest rate hikes. The overheated markets of early 2022 will drop precipitously in the later half of 2022 and most of 2023. But that still means, even if home prices were to drop 20-35%, they probably would remain beyond the reach of most first-time homebuyers.

2. Expect An Uptick In Mortgage Defaulters

To fight rampant inflation, the Federal Reserve activated its nuclear option—hefty interest rate hikes. Inevitably, mortgage rates rose as well, with the national average mortgage rate hovering at 5.08% as of August 2022.

Considering the August inflation rate is in the upper 8%, higher than the long-term average of 3.26% and the Fed’s target rate of 2%, it’s inescapable that the Fed will announce further interest rate hikes.

That means higher mortgage rates, and since the wage growth in June was 6.7%, below the inflation rate. As the economy continues to contract, you should expect an uptick in mortgage defaulting that will likely stretch to 2023 and beyond, and more people are likely to choose adjustable-rate mortgages over fixed-interest mortgages.

3. Affordability Of Homes Still A Problem

Affordability of homes is still a challenge for many Americans, but it’s not the only one. According to a recent survey by Pew Research Center, 46% of Americans say affordable houses are still a challenge.

That is exacerbated by the rising cost of rent, with New York recording an average of $3,500 in June 2022, an all-time record high. With the raging inflation and considering rent prices hardly drop significantly over time, it’s difficult to see how homes will become more affordable in the near future.

The only hope lies with the Fed cooling down inflation sufficiently, imposing more agreeable interest rates, and the cost of living dropping significantly to lower the price of everything, including real estate.

4. Suburb Living And Higher Prices In The Suburbs

With rental prices in major cities shooting past most people’s capabilities and mortgage prices continuing to lock people out of home buying, there’s a push towards moving to the suburbs to access affordable housing.

More employees are also pushing for more opportunities to work from home to save on the daily commute. That should see the prices of suburban houses rising to meet this new demand, which should persist into 2023.

5. Prevalence Of Technology Usage

The trend of increasing use of technology in real estate is nothing new, but it has become more widespread in the last few years. For instance, the NAR states that 97% of all homebuyers used the internet to search for a new home.

That trend will continue, allowing homebuyers to access a broader home listing catalog. The same is true for realtors as it will enable them to advertise to get their listings before more prospects. The apps and websites also come with matching and software to make it easier for buyers to filter homes that fit their descriptions better.

Technology also comes in handy when showcasing a home. Instead of hosting an open day which may force prospects to travel great distances, a real estate agent can conduct virtual home tours. Virtual staging will save the agent a ton of money as they don’t have to spend time and money collecting and setting up furniture that matches a listing.

You’re also likely to see an increase in drone videos and photos to capture stunning overhead footage of properties and the surrounding amenities to enhance the desirability of the listing. Social media sites that use videos and photography, such as YouTube, Instagram, and TikTok, may also prove vital as independent platforms for showcasing real estate.

6. Emphasis On Amenities As A Selling Point Of A Home

In the next few years, you will see a substantial shift in how people choose where to live. What was once a matter of location, price, and square footage will soon become a question of amenities.

As more people focus on their health and wellbeing, they’ll look for homes that offer more than just a place to rest their heads. They’ll want easy access to gyms and pools, dog-friendly apartments, and pet-sitting services—and they’ll even want walkable neighborhoods with local stores and restaurants.

7. Luxury Homes

The need for luxury homes has steadily risen over the past few years. These refer to homes that go for $1 million in the smaller cities. In major cities, that starts at $4 million.

According to luxury home marketing, single-family luxury homes only spent 12 days in the market in 2022, compared to 38 days in 2020. At 41.6%, the growth in luxury home sales in 2021 outpaced other segments of the market, such as affordable homes at 7% and mid-priced homes at 5.9%. This trend will likely continue to 2023 and beyond as the trend for buyers looking for luxury homes seems to be going strong.

Final Word

We can use historical patterns to chart a course for future trends, and what that teaches us is that housing prices will cool down but will likely remain higher than most people can typically afford. Additionally, we will likely experience in the real estate market are the continued high demand for luxury homes, emphasis on amenities for healthy living, the prevalence of technology usage, and the continued preference for suburban living.

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How To Be A Successful, First-Time Homebuyer In 2022

Mid-2022 is probably the worst time to buy a home. Median home prices hit an all-time high of $440,000 in July, and mortgage rates are at 5.5%, almost double what they were last year.

While buying a home now may seem a terrible idea, there are ways to bag yourself a good deal. So, these are some tactics you can employ to ensure your purchase doesn’t become a financial nightmare.

1. Do Your Research
Before looking for a home, you must understand the market to know what’s within your budget. Sure, most home prices have skyrocketed over the past few months, but there are some places where it’s coming down.

For instance, according to Redfin, Salt Lake City, Boise, and Denver all witnessed at least 50% cuts in asking prices. Seven more cities, including Tampa and Sacramento, saw asking prices slashed by more than 44%.

So yes, you can still bag yourself a deal in the current environment, as long as you are willing to do the legwork and compromise on the places you wish to live in.

2. Build Your Credit History
It helps to build your credit history if you’re a first-time homebuyer. A poor credit score makes qualifying for a mortgage loan challenging or attracts high premium rates because financial institutions will view you as a risk.

If you have little or no credit history, you may need to take steps to build up your score. Here are some tips for doing so:

Pay all your bills in full and on time: Even if you don’t have any credit cards or loans yet, you should make sure that any bills you pay regularly (such as rent or utilities) are paid on time and in full. It will help establish your payment history and show lenders that you’re reliable with money.
Don’t open too many credit cards at once: If you decide to apply for a credit card, make sure that you only use one at a time so that it doesn’t hurt your credit score too much if the application gets denied (or approved but with a low limit).
Minimize utilization rate: Your balance-to-limit ratio (utilization rate) is just as important as payment history. It refers to the total balances racked up on all your credit cards divided by the total credit limit of all the credit cards. Aim to keep this figure below 30%.
3. Make A Sizeable Down Payment
Making a sizable down payment toward buying your home is vital. The down payment is typically between 3% and 20% of the home’s purchase price.

You want to make a large down payment because it will lower your monthly mortgage payments, saving money in the long run. Additionally, making a large down payment means avoiding paying private mortgage insurance (PMI).

PMI is an additional fee that many lenders require as part of their mortgage loan package. It protects them if you default on your loan—but it can add hundreds or even thousands of dollars to your monthly mortgage payment.

You can avoid PMI by paying more than 20% of the home’s purchase price as a down payment. Alternatively, you can avoid a down payment by getting a piggyback or 80-10-10 loan, which covers 10% of the deposit while you deposit the other 10% from your savings.

4. Get Pre-Approved For A Mortgage
When you’re a first-time homebuyer, getting pre-approved for a mortgage is one of the most important steps to ensure you find the right home.

Getting pre-approved means that a lender has reviewed your finances and determined that you can afford a home at a certain price range. Your agent will know how much house you can afford, so they don’t waste time showing you homes that are beyond your means.

5. Try Out For First-Time Home Buyer Grants And Programs
First-time homebuyers have several financial assistance programs that will soften the sting of the hefty payments needed to purchase a home.

A first-time homebuyer’s grant refers to financial assistance you may receive to purchase your first home. It typically covers a percentage of the down payment and closing costs. Since it’s a grant, you may not have to repay the amount. Examples include:

Downpayment Toward Equity Act
Good Neighbor Next Door program
Bank of America’s Home Grant
Chase Bank Homebuyer Grant
On the other hand, first-time home buyer programs usually come from federal, local, or state governments and take the form of tax credits, forgivable mortgages and closing costs, and down payment assistance.

You may qualify for the Housing Choice Voucher if you face financial challenges due to a low income and receive minimum earnings as stipulated by your local public housing authority. A clever way to use the voucher is to fund a rent-to-own program.

Similarly, you can apply for an FHA loan. These are Federal Housing Administration-insured loans made by private lenders, usually featuring zero-interest loans and deferred payment loans. Moreover, they typically have lower down payments and require lower credit scores than most other mortgage loans.

6. Use A Mortgage Broker And Agent
It pays to consult a mortgage broker in such a tight financial environment. They know the ins and outs of the mortgage industry, so they can find you a mortgage with lower fees, great rates, and financial perks and help you overcome borrowing challenges.

Similarly, procure the services of a real estate agent. Using an agent is one of the best ways to ensure a smooth process and a successful outcome. No wonder 87% of homebuyers used an agent in their home purchase.

Real estate agents or brokers know the market and can help you find your dream home at your price range. Ensure that the agent knows your unique needs so they can find the ideal property that fits your lifestyle.

7. Consider Variable-Rate Mortgage
A variable-rate mortgage can be a good choice at this point. You don’t want to go for a fixed-rate mortgage with fixed interest rate monthly payments throughout its lifespan, as the current mortgage rates are very high.

An adjustable-rate mortgage will have fluctuating mortgage rate payments, so you will pay lower fees when the interest rate is eventually lower. Further, an adjustable rate payment allows you to make higher monthly mortgage payments without penalty. That means there’s a chance you might pay much less than a fixed rate arrangement.

Additionally, variable-rate mortgages typically have lower initial interest rates than fixed-rate mortgages, which means they’re cheaper upfront. That could buy you some time until the interest rates finally dip.

Finally, you could refinance the variable-rate mortgage and exchange it with a fixed-rate mortgage when the interest rates eventually drop to reasonable levels and it makes financial sense to do so.

Final Word
Many potential first-time home buyers are postponing the purchase because of the hostile economic environment that has rendered homebuying virtually impossible.

Home prices have reached historical highs, and mortgage rates are double what they used to be in January 2022, with more hikes in the pipeline as the Fed is threatening more interest rate hikes.

If you must buy a home, try looking for one in states that have lowered their asking prices, utilize a mortgage broker and real estate agent to find deals for houses and mortgage rates, and build your credit history to score favorable loan terms.

Similarly, consider a variable-rate mortgage, make a sizable mortgage down payment to reduce your monthly mortgage payments, and try to secure a first-time home buyer grant or similar program.

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9 Things Help Investors Thrive During Real Estate Recessions

There is a concern among many investors in real estate about the possibility of a recession in light of recent economic uncertainties and how that will affect the real estate market.

In most economic downturns, people lose jobs, and mortgage rates typically go higher than most can afford, crippling their ability to purchase properties. But that doesn’t always spell doom for real estate, so here’s a look at how a real estate investor can survive, or even thrive, during a recession.

1. Branding And Marketing

The best way to survive a recession is to keep marketing your brand. It’s about building a brand that stands out from the crowd.

Branding isn’t just about getting customers to recognize your business; it’s about getting customers to keep coming back for more business as you have established yourself as a reputable brand. One of the best ways to achieve this is through positive marketing.

While most businesses would understandably cut down on marketing during an economic downturn, that’s the perfect time to rump up your marketing efforts, as it has healthy returns. For instance, the return on investment (ROI) for email marketing is $36 for every $1 spent. Here’s what you stand to benefit from good marketing and branding:

  • Gaining a larger audience
  • Increased cash flow
  • Help you take some of your competitors’ clients

2. Learn More About The Real Estate Market And The Recession

You need to have a working knowledge of the economy and how it will impact the real estate industry to stand a chance of surviving a recession. Get to know the causes of the recession and where the money is headed.

In a recession, not all economic sectors will slump; some might perform better than others. Use this knowledge to pivot your business to cater to those sectors that are doing better during the downturn.

Take the 2020 recession, for instance: while shopping in malls dipped by 70% and the office industry slumped due to work-from-home initiatives, the booming ecommerce industry led to a steep increase in demand for warehouses.

3. Invest In Technology

Investing in a customer relationship management (CRM) tool during a recession is one of the smartest moves you could make, as it has an average ROI of $8.71 for every dollar spent.

As a real estate brand, you can use CRM to track client information and make follow-ups. A sound CRM system should have features that enable you to access information about potential buyers and sellers easily and communicate with them using various channels.

Similarly, you can use social media sites and real estate apps to showcase your listings and increase your reach.

Consider technologies such as virtual tours and virtual staging to cut down on costs of staging an open day and staging a listing.

4. Work On Customer Retention Of Your Current Clientele

Keeping your already existing clients should be a major priority. When you work hard to maintain good relationships with your clients, they’ll appreciate it and return the favor. That makes them feel special goes a long way toward building trust. Try some of these customer service strategies:

  • Maintain a customer feedback loop
  • Provide personalized customer service
  • Start a customer education program
  • Give offers and discounts
  • Provide incentives

5. Grow Your Network

Never underrate the power of networking, as it can help your business stay afloat during recessions. You can build relationships with friends and associates to expand your business’s reach and abilities.

A more extensive network will help in acquiring new business leads, which you can work towards closing to improve sales. Additionally, it will help you keep abreast of the latest trends in the market and identify best practices.

Further, networking will increase your connections and opportunities to explore new markets.

6. Cut Expenses

Tough times call for tough measures. Everyone has to make sacrifices to ensure the firm makes it through an economic downturn, which means cutting costs. Reducing expenses is a brilliant idea even in good times.

Lower your expenditure by eliminating items that don’t offer much to the business, such as a cable subscription in the office. Alternatively, realign your financial spending by reviewing your insurance providers to get a better deal, consolidating bank accounts, and avoiding unnecessary debt.

Improving efficiency will also help in cutting down costs as it minimizes wastage. Purchase the right tools, go paperless, and improve time and project management.

7. Stick To Your Business Plan

Economic recession is part and parcel of every business cycle. You don’t need to panic and sell everything. Just stick to your original business plan with just a few adjustments. To stay focused on the big picture, make it a point to refer to your long-term objectives and plans regularly.

Moreover, set short-term weekly and monthly goals, and tweak where necessary as long as they tally with the master plan. You may need to restructure the business plan as recessions can be unpredictable.

8. Re-Evaluate The Business

A recession is the perfect time to take a step back and take a long hard look at the business. Since there’s plenty of time on your hands, use the time to evaluate the company and find any weak points that need fixing.

Maybe business is low because you’re not marketing right, your pricing doesn’t make sense, or you don’t understand prospects. Go over your data, try to work where problems are, and implement potential solutions.

9. Create A Unique Value Proposition

Creating a unique value proposition is one of the best ways to thrive in any market. In real estate, this means differentiating yourself from the competition. That means providing something the others don’t offer.

That could mean anything that offers extras to clients, like diversifying your business by partnering with a mortgage broker, so you offer mortgage provision services in-house.

Final Word

One of the key lessons to surviving a recession is never to stop marketing. That will help build your brand as well as bring in new business. Alternatively, create a unique value proposition, invest in technology, and grow your network to improve sales.

On the other hand, save money by cutting back on expenditure, sticking to the business plan, and retaining your current clients. It also helps to keep abreast of the current economic environment to find opportunities you had not considered before.

Despite the macroeconomic headwinds of recession, your individual economic success could be amazing, as long  as you can navigate and anticipate this crisis.  What outwardly appears to be chaos may be an historic opportunity.

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Real Estate Wealth Doesn’t Disappear; It Transfers

The economy is currently enduring a significant downturn, having recorded two consecutive quarters of a decline in the country’s GDP in July 2022 and also demonstrating a significant decline in productivity. The FED is purposely increasing the midterm interest rates to reduce historic inflation, it is not yet actually doing quantitative tightening per se, but is quelling economic by reducing consumer confidence. The FED is unlikely to recover until the 3rd or 4th quarter of 2023. For many, this is the textbook definition of a recession, and the signs are everywhere. There’s a bear market, consumer and small business confidence is in tatters, high inflation, and rising interest rates.

While the National Bureau of Economic Research refuses to call it a recession, many are feeling the heat, and the real estate industry is no exception. The Federal Reserve’s 20-year-high rate hikes have jacked up mortgage rates, putting the skid on a hot market. The last time consumer confidence in the housing market was this low (17%) was in 2011. The annual price appreciation rate dropped from 19.3% to 17.3%.

Two of the biggest real estate companies, Redfin and Compass, laid-off workers, with the Redfin CEO citing a 17% decline in expectations back in May 2022. Even REITs, traditionally investors’ safe haven, are taking a beating, with the S&P REIT index plunging 23% as of July 2022.

While the real estate industry may seem calamitous at the moment, it is often said that wealth, like energy, can’t be destroyed; it transfers. There’s a reason why real estate is touted as having produced 90% of the world’s millionaires. All you have to do is join the dots, follow the money trail, and you will be fine recession/downturn or not. Please keep reading to learn how to go about it.

How To Prepare For A Turbulent Real Estate Market

There is a lot of uncertainty in the markets, so real estate investors need to prepare for anything that comes their way. That means getting your house in order, including:

1. Reduce Debt

The average American is $90,460 deep in debt, but that doesn’t mean you have to sink to such depths. Huge debts will dent your credit score, diminish cash reserves you can use to improve your quality of life, eat into your emergency fund, and obliterate your ability to save or invest. Settle debts with higher interest rates and keep away from them. It would be best if you only kept debts with more prolonged and lower interest rate payments. Similarly, only sign up for debt whose investment will yield higher returns.

2. Diversify Your Investments

If you’ve just started investing in real estate, it is essential to diversify your investments because not all real estate forms perform the same. It means having a mix of hard assets in different industries that will help you weather any storm that may come your way. For instance, don’t just invest exclusively in commercial office blocks. Try malls, single-family units, multifamily units, REITs, or others.

3. If You Have The Money, Try A Hedge Fund

True, getting into and maintaining a hedge fund is costly, but it is one of the best vehicles during a downturn. Most hedge fund managers will employ different techniques such as derivatives, leveraging, and especially short selling, where you will make a profit if the value of an asset falls, which is perfect during an economic downturn.

4. Study About Returns

Since the market dictates that we watch the pennies, you have to assess the return promised by each deal before making a decision. For instance, you must be smarter in evaluating whether to pay off debt or invest. For example, instead of increasing payments towards offsetting the mortgage, you would be better off investing that money elsewhere, especially if the returns are much higher than the inflation rate.

5. Take Advantage Of Opportunities To Sell Your Home

Median home prices hit a record high of 440,300 in July 2022, the Fed continues to jack up interest rates, leading to higher mortgage rates, and the supply of homes is still lower than expected. Now might be the perfect time to sell your home if you wish to make the most out of the market. Since there’s little supply, there’s little competition, but you have to act fast before the spiraling mortgage rates lock out all potential buyers.

6. Think Long-Term Investment

It’s easy to get caught up in the excitement of a good investment opportunity, but it’s essential to keep things in perspective. You could lose money if you lose your head and make an impulsive decision. Instead, take time to consider all options before making any moves.

7. Curb Appeal

If you have a home that needs some work before it’s ready to sell, now is the time to get started. Although home repairs can be costly, they add value to the property.

HomeLight research suggests homes with good landscaping fetch between 5.5% and 12.7% more than poorly landscaped ones. There’s even an instance where a new $20,000 worth of curb appeal returned $200,000 more for a home they had bought a year earlier. It would help if you considered painting the walls in neutral colors, manicuring the lawn, and replacing old and broken stuff and appliances.

8. Build Relationships With Other Realtors

You don’t always have to compete, especially in a low-supply environment. Instead, team up with other realtors to create a network of peers for the common good. That should improve your craft, get referrals, and serve your customers better as you exchange valuable input from each other and find the best deals for your clients.

9. Make Use Of Technology

Instead of requiring clients to make a trip to view the property, you can provide virtual reality tours to help save some money. Additionally, you could use customer relationship management (CRM) platforms to keep track of listings and customers to ensure they get the best service.

There are plenty of real estate platforms and apps that make it easier to market listings to a broader audience. Some even utilize AI to match buyers to their most preferred listings, making it easier to find suitable homes.

Wrap Up

Whenever there’s an economic downturn, you should note that wealth doesn’t disappear; it just transfers. It may not be transferring to another visible entity, but may be transferring in time, or it may be transferring in nominal currency (for example, the US$ is increasing in value compared to the Euro, and although US$ denominated Real Estate prices are declining, they are increasing against the Euro). Your job is to follow the trail to ensure you maintain a profitable real estate business.

Some ways you can achieve this include diversifying your real estate portfolio, reducing debt, trying other forms of investments such as hedge funds, making use of technology, and opting for investments that provide the best returns.

Categories
Blogs Real Estate

How Successful Companies Handle Crises

crises

Handling Crises 危機 (“Kiki”)

危機 (“Kiki”) is the Japanese word for crisis, it is composed of two letters:

(危) means “dangerous”

(機) means “opportunity”

Combined, crises are both an opportunity and a threat.

 

No matter your company’s age, size, or legacy, it is vulnerable to a crisis. Recently, some of the world’s most prominent brands have come under fire from the media. Like when Uber lost 200,000 customers after the hashtag #DeleteUber trended when they operated during the Trump strike. Or when United Airlines lost $800 million in value in a matter of hours.

A 2021 PWC study showed that 35% of respondents had a crisis plan in place when the COVID-19 pandemic hit, and only 20% felt the pandemic positively impacted their organizations. Seeing the consequences Uber and United Airlines faced, companies must have a crisis management strategy.

Crisis Management For Real Estate Companies

The pandemic brought unprecedented challenges to businesses, not just the real estate market. Statistics showed that nearly 100,000 businesses closed shop permanently. That forced many companies to reevaluate their crisis management strategies.

Many developers experienced stoppages and delays in their real estate projects, requiring companies to think outside the box to create safe and smart solutions.

Many companies tend to be reactive instead of proactive regarding crisis management, but lacking a crisis strategy may lead to the following issues:

● No designated spokesperson to coordinate communications can lead to a communications breakdown.

● A lack of clear messaging to stakeholders to address the situation can make them confused, scared, and angry, which is bad for business.

● Outsiders looking in will place your company on the list of companies facing a PR disaster in that year.

● Solving the crisis will take far longer, so you may hit some snags.

● If you do not take control of the situation, the company will face negative financial ramifications.

Crisis Management Examples

1. Cracker Barrel

In 2017, Bradley Reid posted on the restaurant’s corporate page, asking why they fired his wife, Nanette, after working at the restaurant for 11 years. Soon enough, the hashtag #JusticeforBradsWife began trending online. Shortly afterwards, someone started an online petition at Change.org, seeking answers. 17,000 went ahead to sign it.

The response the restaurant gave to the crisis was silence. They ignored the hashtags, petitions, and firestorm surrounding the situation. Cracker Barrel did run through the crisis without so much as a tumble in its net worth.

The key takeaway from this is that sometimes silence works best. It is a risky choice, but like Cracker Barrel, it may turn out well. A new video trends every other day, and people are quick to forget and move on. This strategy may just work out if keyboard warriors find something else to focus on.

2. Johnson & Johnson

In 1982, Johnson & Johnson faced a crisis where 7 people in Chicago died after ingesting over-the-counter Tylenol capsules laced with cyanide. To date, the incident remains unsolved. How the company handled the crisis is a textbook example of crisis management today.
Following the deaths, Johnson & Johnson immediately responded by stopping advertising for all its products. The company then sent out 450,000 messages to healthcare facilities and stakeholders, informing them of the crisis. Johnson & Johnson also sent out safety warnings to consumers.

Evidence later showed that the substance was accidentally introduced through store shelves and that it was not the company’s fault. However, the company still took full responsibility. This incident led to the company eventually manufacturing tamper-proof packaging.
Experts roundly regard the response as one of the best in the history of crisis management. The media praised how J&J handled the situation and how it also helped Tylenol recover as a brand. The key takeaway is that integrity and transparency go a long way towards building consumer and public trust again.

Crisis Management Planning Tips

Having looked at how some companies managed their crises using essential principles, below are a few steps to create a successful crisis management plan.

1. Anticipate Crises

Instead of waiting to scramble a team and a plan together after a crisis, plan ahead for the worst-case scenarios. During brainstorming sessions with the team you put together, quickly determine which situations are preventable. You can include variables in the plan that allow tweaking in response to a real crisis.

2. Create A Crisis Team

By default, the crisis team should include the management team, the CEO, and the PR manager. If possible, have web and social media managers on the team. Social media managers are on the frontline and can detect the public’s consensus and mood.

They can also gather insight from online mentions, hashtags, or posts that the company can use to steer the crisis on the right track.
Next, you want to choose the right spokesperson in place—one who is comfortable in front of cameras and people. If possible, the spokesperson you select should have some media training.

3. Know Your Stakeholders

The internal and external stakeholders are the first people you should communicate with. Develop communication channels that will resonate with stakeholders individually.

4. Develop Holding Statements

With the proactive planning in place, you should already have pre-planned holding statements ready to release inside the company’s online newsroom. The main aim of a holding statement is not to plead for forgiveness or grovel; the idea is to acknowledge the situation and provide contact information that the public can use.

5. Post-Crisis Review

As insignificant as it may seem, this is a step that major companies focus on that helps evaluate and update the crisis management process. Develop, assess, and discuss strategies to update potential scenarios that may happen.

This is a crucial process as you now have data and facts regarding how the company reacted to the crisis, the public’s response, and stakeholders’ reaction to the situation. You can use the information to ensure the company creates an even better crisis response.

In Conclusion

Any company can implement the same strategies big companies use for their crisis management. Combine the swift and transparent response that Johnson & Johnson used, with the crisis plan outlined above, to ensure your company stays ahead in any crisis it may face.

I personally look forward to times of crises, it dramatically improves my returns and allows me an opportunity to test myself against unknowns. The most important thing that crises brings to the forefront are my inherent weaknesses in my structures, it allows me an opportunity to prune dead wood and recharacterize / recast the future. Look to crises as an opportunity, not a threat.

www.redpillkapital.com

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at info@redpillkapital.com

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Categories
Real Estate

Questions For The Syndicator

I Thought I Would Share The Exact Questions I Get Asked As A General Partner, Which Are The Same Questions I Ask Of People That I Invest With Who Are General Partners. I Invest In Other People’s Deals, And I Have My Own Deals, And I Want To Share The Commonality Of Questions That Are Super Important To Ask. I’m On Both Sides, And I Want To Share This Information.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We are Red Pill Kapital, with a K.

How Long Have They Been Actively Engaged In Real Estate Investing?
I want to vet the general partner. I want to figure out how long they’ve been engaged in real estate investing.

• Did they just start a year or two years ago, or have they been in this for 20 years?

• What’s their track record?

• What’s their experience?

I want to look at their comparative analysis of this offering versus other offerings, look at an analysis of the things that they’ve actually completed, and look at their actual results delivered.

I want to know what they offered before and what the result was from that offering. In other words, what was their pre-offering package, and what was their final result? I want to get a copy of their previous deal. I want to get a copy of their investor communication that they’ve provided, because more than likely, how they communicated with other investors is how they’re going to communicate with me.

I want to know how long they’ve been doing syndication. I want to know what their investment strategy is. Is their strategy to just kind of shoot everywhere, or are they a highly refined sniper? Both things are good. You could have a wholesaler that was buying houses, and that might be one way to approach it – not the way that I would approach it. You could have a targeted sniper that looks at hundreds and hundreds of potential real estate deals or targets, but then picks the one out that’s super important and super necessary.

I Want To Know About Their Strategy.

• Does it correlate with the current and future market conditions?

• Can they describe their strategy?

• Can they describe how the macro trends affect their hyperlocal neighborhood, where this specific piece of real estate is?

• Do they understand what’s going on with this local neighborhood and how the job trends are going to make a difference?

I Want To Ask Them Before I Do Their Background Check:

Is there anything negative that they want to discuss with me? Is there anything negative they want to disclose? I pay very close attention to the vocabulary that people use and their style of communication. That vocabulary is going
to determine how clear and standardized they are and how their verbiage is going to come out, because if they’re not clear with me, and they’re not using standard vocabulary in the real estate vernacular, then there’s going to be a problem, because they’re not going to be able to deal with the banks. This might be their way to learn, and I don’t want to pay for people’s education.

That doesn’t mean that people don’t make mistakes. It doesn’t mean that things won’t happen.

What It Means Is I Don’t Want To Pay For Somebody Else’s Education.

I want to know if what they’re telling me is a fact or it’s an opinion, or if they’re mixing opinion as if it’s fact. Everything has a rational basis underneath it, but do they understand what that rational basis is, or are they just opening? I want to make sure that they’re using industry-standard metrics, not something that they made up, not something that they think they can derive.

I Need To Know What Locations Do They Invest In?

• Do they invest in the location that this project is in, and why are they investing there?

• Are they investing there because there’s a demographic reason?

• Are they investing there because they heard this was a good place from their buddy Joe, and they’ve listened to some real estate shows and everybody says, «Austin is hot, so I’m going to Austin»?

I want to know how well they know this hyperlocal environment that they’re currently investing in. Do they have a team that’s ready to undertake the investment? That doesn’t mean that
they have to have a team that has a general partner with an attorney, an inspector, a loan broker, insurance broker, and property management. All of those things can be hired out, but is it assembled? Is it ready to go? Do they have an attorney? Have they specified out who the inspector’s going to be?

• Have they picked out the loan broker?

• Do they have a relationship?

• Have they talked to an insurance broker?

• Have they even talked to somebody who’s going to help on the taxes? Because who knows?

In certain areas like Arizona, once you buy a property, your tax rate may go up a few percentage points, whereas if you buy a property in Texas, it may go up a few hundred percentage points.

Really, the functionality is to make sure that they’re prepared for this, and that they’ve anticipated this. Not all the team members are part of the general partnership. Some are just simply independent contractors.

• If there’s going to be major construction, have they identified the team that’s going to do the construction?

• Have they identified the rehab budget?

• Who’s going to manage that construction?

• Has that construction management cost been built into this?

• Has a pro forma that matches the construction, that’s specifically going to determine the cash flow, been done on a monthly basis, rather than some sort of nebulous percentage basis of the whole year?

Because the reality is you can’t take a percentage basis to the bank. What you can do is take the monthly income to the bank, so you need to know exactly what your pro forma is going to be per month – not as a global number, like an IRR, you need to know what the cash flow’s going to be. Cash flow you can deposit. IRR you can only look at.

I want to know what asset classes do they regularly invest in and what grade of asset. If they invest in multifamily, which makes sense, but they only invest in grade A, and this is a grade C, I don’t think they’re going to do as well, because what they’re going to try to do is take a grade C and upgrade it to a grade A, and that’s never going to happen. You might be able to get to a
grade B-minus, but you’re never going to get to a grade A, and you’re just going to spend a ton of money for nothing.

If they’re used to grade C, and they’re buying a grade A, they probably may not have the skillset to deal with the grade A tenants, because grade A tenants have a much higher need basis, and you’re basically creating an experience
for them in which you take care of things. Grade C, not so much. You want to know how many years of experience do they have with a particular asset class and how many years of experience in this grade of asset.

I Want To Look At Their Credibility

Are they going to put their own money in the deal beyond the acquisition fee? A lot of times all they’re putting in is the acquisition fee, which is the money that you’re putting in, and the acquisition fee might be 3 to 5 percent of the deal. It might be 7 percent of the deal. Just depends on the deal. But if that’s all of the money that they’re putting in, they’re not putting in anything. They don’t really have anything to lose.

Yeah, they spent a lot of time. They may have looked at a lot of projects, but I want them to feel the pain of failure if there is failure. I want to know: have
they ever had a deal gone bad? I don’t invest with people that have never had a deal gone bad, because a deal gone bad creates a whole different feeling and creates a whole different set of skills for the syndicator.

I want to know if they’re sponsoring other investments. How many other investments? Where are they at? Because I don’t want their attention overly diverted. That doesn’t mean that they can’t do other investments, but I need to know how much of their bandwidth of time is going to be spent on this investment, because this is the one that’s important to me. Can they give me names and contact information of past or current clients? Can they provide contact information for other investors so I can talk to them for a reference?

Credibility Questions

• Do they put their own money into the deal, beyond the acquisition fees?

• Did they ever have a deal go bad? If so, how did they handle it?

• Are they sponsoring any other investments? If so, how many?

• Can they give you the name and contact information of their past/ current clients?

• Can they provide contact information for other investors, that you can speak to them from a reference?

Deal Structure

I need to know what the deal structure is.

• Is there a preferred rate of return?

• Is there a waterfall?

• What’s the split?

• How do we structure this deal?

• Do they change the split between the general limited partner after a certain threshold?

It might be 70/30 going in, but then it might become 50/50, and you need to understand that.

• Are they only allowing accredited investors in, or is it also sophisticated?

• How are they making that decision that they allowed certain sophisticated investors in? Because that could impact the entire investment.

• How many key principles do they have?

• If there are no other partners, what’s going to happen if the investment goes south? Because if there’s only one general partner, and something happens to that one key person, everything is going to go south.

• What are their sponsor fees?

• How long are they usually holding an asset for?

• What’s their investment strategy?

• Is this a value-add?

• Is this a buy and hold?

• Is this a value-add with an intended refinance?

• What are we doing here?

• Where are we going to?

I want a map that tells me exactly what they’re actually thinking. If they can’t describe this to me in probably two or three sentences, they haven’t thought hard enough about this. This investment strategy is an elevator pitch – it should be that refined.

Reputation Search
I Will Always Do A Reputation Search

That might include just a simple online search looking for complaints. I want to look for positive comments. I want to look for negative comments. I want to do a UCC background check. I want to do a criminal background check. I want to check if they’re a prohibited party from the Securities and Exchange Commission.

I want to look for references on social media about this specific syndicator.

• Are they on a podcast?

• Do they have other websites?

• Do they have YouTube channels?

The more web presence they have, the less likely that they are going to be anonymous, and more collateral information is available that keeps them from behaving poorly later. I want to know if I can discuss this offering with one of my trusted advisors. More likely than not, I’m going to have to sign an NDA to make sure that everything is okay.

I want to contact the syndicators’ past or present colleagues or employees, and I want to know what their opinion is. I want to ask details about the past deal that the syndicators handled.

Legal Documents
When I look at the documents, I want to make sure that they’re professional – that they’re legal, they’re accurate, they’re complete. For me, they have to come over by DocuSign or one of the other electronic means. If they’re sending me paper, I kind of wonder about that, because in this day and age, that’s highly unusual. I want to make sure that all the documents are there, and that they look professionally prepared – that there’s not any typos in there.

I want to make sure that it’s an actual syndication attorney that signed off on this and not just some online tool that they’ve used to create a private
placement memorandum. I want to analyze the property, the market, the major employers in the area, the location, and the proximity to shopping centers and employment hubs. That should be described all in the offering memorandum.
I want to cross-validate it later, but I want to make sure that’s in there.

I want to review their pro forma and their underwriting and their hold period, and I want to determine for myself if this is conservatively written. Has this been stress tested? If need be, I’ll use a third-party underwriter to validate. Using a third-party underwriter to validate a plan, to validate somebody’s pro forma, is a very cheap insurance policy and can save me a ton of heartache later. Typically, this runs about $2,000 by the time that I’m done.

When I’m getting my offering memorandum, I want to make sure it was professionally prepared, that it’s not full of typos and mistakes. I want to make sure that it’s concordant with the property. I want to make sure it hasn’t been copied.

When I Deal With People, I Want To Know:

Is this a pressure situation? Because if this is a pressure situation, it is possible that they’re making a mistake. I want to make sure that there’s been plenty of time for me to analyze it and that I’m getting the appropriate amount of attention that I need in this deal. Are they answering my questions, or are they brushing me off?

I Want To Make Sure That They Understand My Particular Situation, My Goals, And My Needs. What Does That Mean?

Well, if I’m investing with an IRA, it means something totally different than if I’m investing with my own cash. If I’m investing for a five-year horizon, and this is a ten-year opportunity zone project, I’m not in the right deal. You can’t manipulate an opportunity zone project for ten years and expect to make a five-year return.

I Want To Know:

is this a pressured sale, or was this a pressured piece of information that they’re putting out? How many other deals did they look at before they selected this one to present? Did they look at three deals and this is the one? Because usually I find that, at minimum, I’m looking at 20 to 40 deals, and sometimes
a lot more, to find one that is worth analyzing. I want to make sure that they’ve verified, that they’ve evaluated, other similar assets of similar grade in a similar demographic. I want to know why they rejected those deals.

Pressured Sales?
• Is the deal sponsor giving you enough time and attention?

• Are they answering all your questions?

• Do they understand your situation, goals, needs?

• How many deals did they look at before they selected this one to present?

The Actual Deal
When you actually get to the deal, and you look at the market comps that are provided by the syndicator, you want to make sure that it’s in the right neighborhood. If you look at the market comp, and it’s plotted out, and it’s from two miles away, it’s probably not the same neighborhood. So, that’s not reliable. There are all kinds of online tools that you can use to validate a particular neighborhood.

You Want To Look At Their Projections Of Those Market Comps, and are they in line with neighborhood comps, not from something two miles away? I
guarantee you that if you invest in St. Louis, and you’re investing in University City, which I’ve invested in, if you go two blocks, you’re in a hellhole. If you go two blocks in the other direction, you’re in the business district, and the cost differential in housing is that one side sells for 40,000 and the other side sells for 400,000. One side rents for $350 a month, and the other side rents for
$1,800 a month – and they’re within blocks of each other.

You want to make sure that the overall offering makes sense in terms of the returns and the duration of the syndication. You want to make sure it makes sense for this particular syndicator and their background and the proposed plans. You certainly wouldn’t put up a high rise in the middle of farmland, so you want to make sure that this specific plan makes sense.

• Have they stress-tested this deal?

• Have they looked at what would happen on this deal if you went to historic vacancy rates – 30 percent vacant?

• Would they still be able to pay debt service?

• What would happen if taxes jumped 150 percent?

You want to look at the reversion cap rates. That’s what would happen to the value at a particular net operating income if the cap rate goes up.

Let’s say that you’re buying at a cap rate of six and you’re going to sell in five years. I usually increase the cap rate by 0.2 percent per year. So I’m looking at a reversion cap rate of seven, and then I want to know what it is for value. You also want to know if and who the lender is that’s underwriting. If it’s Freddie Mac and Fannie Mae, then it’s probable that you have additional eyes on this loan, because Freddie Mac and Fannie Mae have amazing underwriters. Those are the people that I use to underwrite my deals, and I think it’s very important to have that level of underwriting because it means the deal will stand on its own. Freddie Mac and Fannie Mae do not lend you money unless this deal is going to stand on its own.

You want to look at your cash-on-cash return. You want to look at your equity multiple. You want to look at your average annualized return, and the bank wants to look at your debt service coverage ratio. If your debt service coverage ratio is below 1.2, this is a no-go deal. If my average annualized return is below 7 percent, for me, that’s a no-go deal. If my equity multiple is not at least 1.9, this is a no-go deal.

I want a cash-on-cash return that’s significant. I don’t want to do deals that I’m not going to make a decent return on because I know what I can get in the market, and so I want to be very careful. When I look at the actual deal, I also want to impute what the depreciation value is to me, specifically.

The Actual Deal
• Evaluate the market comps that the syndicator has provided. Are the target rents competitive for this neighborhood in this grade property?

• Are the projections in line with the comps?

• Does the overall offering make sense in terms of returns, duration, syndicator integrity and background, and proposed plans?

• Have they stress-tested this deal? Vacancy rates? Taxes?

• What are the reversion cap rates?

• Is this a loan being underwritten by Freddie or Fannie?

• What’s the COC, Equity Multiple, Average Annualized Return, DSCR?

Thoroughly Understand The Capital Stack And Distributions

Equity Distribution

• Equity split at refinance or sale
• Asset management fees before or after pref
• Catch-up clause
• Refinance contingency
• Waterfalls

You have to understand what the capital stack is, so I’m going to just go over what a full capital stack is because I think it’s relevant. When you buy a piece of property, a portion of it is going to be equity and a portion of it is going to be debt. The debt is what you’re going to get from the bank. There are two levels of debt: senior debt and mezzanine debt.

Senior debt is the debt on the property if you’re not doing a rehab, so let’s just take an example. Let’s say that you’re going to buy a property.

Of that 70 percent debt, if there’s a rehab in it, it’s likely that about 50 percent of that is senior debt, and the other 20 percent is mezzanine debt. It’s a lender that is not going to give the full amount of money. It’s going to be at a slightly higher interest rate, and they’re second in line should anything bad happen. But if there’s no significant construction, then the whole thing is going to be senior debt.

So you’ve got 30 percent left that you have to raise equity for. The preferred equity gets the preferred return. The common equity gets the non-preferred return. The preferred equity is you; you’re the limited partner. So you’re going to get a split, and it could be a 70/30 split, or it could be a 50/50 split, or some combination thereof.

Inside that preferred equity, there’s usually a percentage. The first 6 percent goes to the preferred equity, and then it’s equally split, so you want to take a look at those numbers very closely. I usually map out my full capital stack. I usually just take this diagram and I put it down on paper so I can visually interpret this.

• What’s the mezzanine debt?

• What’s the senior debt?

• What’s preferred equity?

• What’s the common equity?

This is the easiest way for me to figure out exactly who’s going to get what, and what my expectations are going into this.

Then, when you look at the equity distribution – and you need to look at the equity split – what’s going to happen if it refinances versus sells? A lot of places, a lot of folks, will do an equity split at refinance or sale of 70/30, but if they’ve refinanced it, and you’re still in the deal, then the subsequent part is usually 50/50. It’s difficult to tell, but you’ve got all your money back, so for you it’s an infinite return anyway. Really, the ongoing risk is to the syndicator.

So, you want to take a look at that equity split at refinance or sale. You want to look at those asset management fees. Do they come out before or after pref? I’ve seen it done both ways. I think it’s very reasonable to do it before, and I’ve seen it very reasonable to do after. Most of them are done before the preferential payment.

There’s also something called a catch-up clause. The catch-up clause is we had enough money to pay the asset management fee. We had enough money to pay the 8 percent pref or the 7 percent pref, but we didn’t have enough money to do an equity split at all. So next year we do the same thing, and the next year we do the same thing. Eventually, the general partner catches up at the time of sale.

It’s very important to know whether there’s a catch-up clause or not. You want to know about any refinance contingencies. You want to know about waterfalls. Waterfalls are shifts in percentage based upon particular targets. There might be waterfalls because of construction. There might be waterfalls because you hit certain numbers. These are additional kickers. It’s very important to understand them.

So What’s My Process?
My average time to preliminarily analyze a deal is about four to six hours. I have people, though, that help me. I’ve got two full-time paralegals. We’ve got a full-time attorney. We have an in-house financial analyst, and we outsource our Freddie Mac underwriting for an extra look at deals that have gone forward.

I look at the people first. I look at the syndicator first. Then I look at the general demographics of the area, specifically looking for jobs. Then I look at the hyperlocal environment of the particular deal, and then I look at the deal. I don’t get to the deal until I’ve vetted the people and I’ve vetted the demographics. I’ve looked at the hyperlocal environment, then I look at the deal, and the least important thing that I look at is the entry cap rate.

People always talk about, “Oh, so-and-so has this cap rate. So-and-so has that cap rate.” Almost all of my deals are value-add. So what I’m looking for is not the entry cap rate. I’m looking for the exit cap rate, and I’m looking at the net operating income. Based upon the net operating income, that’s going to drive my value. I look at that delta between current net operating income and anticipated net operating income. That’s my value-add because that’s going to drive that value up.

I rebuilt the entire pro forma. I don’t want to use unintended math errors that might be hidden in a formula in their pro forma. So I basically copy the rent roll. I look at the T12, which is the last trailing 12 months, and I also look at the T3. I copy out all of the data, and I apply the rule of thumbs to costs. I want to make sure that I’ve done my own independent pro forma.

If my preliminary analysis is good, then I usually go visit the site. If I have to visit the site, that’s me adding about another 24 to 36 hours into my analysis. I don’t need to visit every single unit in the site, but I need to get a feel of it. I don’t invest remotely.

Last 6 Months Of 2019

Passive Investment

per 17 Offers (total received 51 offers, 43 different syndication groups)
6 Preliminary analysis
2 Site visits
1 Investment
did 3 passive investments last 6 months
added 17 syndication groups to my no-fly list
Active Direct Investment

>150 properties analyzed (actual site visits on 19)
4 offers made (full due diligence)
1 purchased and closed
In the last six months of 2019, in my passive investments, per 17 offers, I received basically 51 offers in 43 different syndication groups. From these 17 offers, I had six preliminary analysis, I had two site visits, and I had one investment. So it went from 17 to 1. I’ve basically done three passive investments for the last six months, and I added 17 syndication groups to my no-fly list.

These are 17 syndication groups that sent me offers, and I did the preliminary analysis on the people in the syndication group, and they had significant red flags. I know that I don’t have to reanalyze their deals. I might wait a year or two and let them back into my group to fly, but for the next year or so they’re locked out. I’m not even going to bother looking at their offers, because there’s something in there that I’ve identified in that particular group or those particular people that’s super dangerous.

It could be an SEC violation. It could be a pending bankruptcy. It could be a bunch of UCC liens. It could be some other criminal behavior. So, they go on my no-fly list so I don’t have to analyze them again. When I look at my
active direct investments, I looked at over 150 projects. I did actual site visits on 19 of them. I made four offers, and then did full due diligence with those four offers. I purchased and closed one. Greater than 150 down to 1, versus passive investment 17 down to 1.

Final Thoughts
Syndications are long-term prospects. You really need to understand the people that are in the syndication, because most syndications are going to outlast the average marriage in the U.S., which is about 8.2 years. The average syndication deal is between five and nine years right now. If you’re investing in an opportunity zone, that’s a minimum 10-year hold, which definitely outlasts the average marriage in the United States.

You’re creating a contract and offering memorandum. You’re looking at disclosures. You’re looking at PPM. These are all just the prenup to the marriage. The longer the syndication, the higher the risk, the greater the mischief that can go wrong, and the less likely that that prenup will even apply.

You want to make sure that there’s always a contingency plan to remove a bad actor. You don’t want to be stuck with a bad syndicator, and you don’t want to get bamboozled by beautiful graphics and beautiful pictures that somebody’s put together. I want the data. I want the math. The pictures are nice, but they don’t mean much. I can’t eat a picture. I can’t put a picture in the bank. I want to know what the cash flow is that’s associated with these beautiful graphics and pictures and how I’m going to get that into my bank.

Again, it’s a combination of the syndication team, the demographics, the hyperlocal environment, the actual deal, making sure it’s stress tested, looking at the exit, and how does it interact with my specific situation?

If You Need Help Underwriting A Deal, Let Me Know. Just Send Me An Email: Info@Redpillkapital. Com. If You Need Us To Help You Underwrite A Deal, It’s Pretty Cheap. It’s About $1,900, But That’s Not Specific, Because Some Deals Are Very, Very Complicated. But $1,900 Is Really Cheap Compared To Getting Into A Really, Really Bad Marriage.
Now this doesn’t mean that we’re going to go do a site visit for you, because that takes a lot more time, but at least we can help you with your underwriting and the reputation analysis research.
That’s one way to do it. But if you just have a couple of questions, that’s always free. Just email me info@redpillkapital, and just put in the subject line, call me. Give me your number, and we’ll chat, because we want to help other investors. We don’t want people to go into bad deals.

So What’s Red Pill Kapital?
Red Pill Kapital is a physician-owned commercial real estate investment and education company. It allows you to invest passively alongside us. We find the property or we find the investment group. We create and validate their plan. We look at how to improve the cash flow. We negotiate the deal. We manage and oversee the asset. Your passive investment provides you with an opportunity to earn an income without the nine to five because physicians don’t work nine to five; we probably work six to nine. We create a unique business strategy that fits your financial investment goals because we understand the specific needs of physician professionals.

Is Red Pill Kapital Right For You?
Your passive investment provides you with an opportunity to earn an income without the nine to nine, because physicians don’t work nine to five. We probably work six to nine. We create a unique business strategy that fits your financial investment goals, because we understand the specific needs of physician professionals.

Are you looking to enhance your financial wealth and truly live the life that you deserve? Are you an accredited investor who’s interested in learning more about passively investing and cash flowing
commercial real estate? Are you interested in investing alongside us? Because we don’t need your money. What we’re trying to do is do bigger projects with more leverage, and the bigger the project, the less the risk because the leverage improves. We only make money if you make money. If you have any questions, please email me at info@redpillkapital.com and that’s Kapital with a K.

We search for value-added real estate for our passive commercial real estate partners, and we actively manage that investment long-term for a successful exit. We are Red Pill Kapital.

Find us at Redpillkapital.Com

www.redpillkapital.com

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at info@redpillkapital.com

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Categories
Real Estate

Dr. Gurpreet Padda: Creating Wealth With Real Estate For Healthcare Professionals

OVERVIEW:

Jason A. Duprat, Entrepreneur, Healthcare Practitioner, and Host of the Healthcare Entrepreneur Academy podcast speaks with Dr. Gurpreet Padda, MD, MBA and entrepreneur. Dr. Padda is an avid real estate investor. He shares the lessons he has learned as an early entrepreneur and also provides tips for healthcare professionals interested in creating wealth through real estate investment.

EPISODE HIGHLIGHTS:

Dr. Padda grew up in India during war and uncertainty. He moved to the US when he was 8 and started his first business at the age of 10 selling cards door-to-door. At 16, he had a team of 30-year-old men working for him. He states – I was an entrepreneur before I went into medicine. Dr. Padda made it through medical school by hustling, which he did through real estate auctions. During his first year of residency, Dr. Padda rehabbed an eight-unit building in Chicago. After his residency, he went into pediatric anesthesiology for heart, liver and lung transplants. His medical path also included addiction and interventional pain management.

Dr. Padda’s practice has 7 locations and he provides $1.5 million in free care. “Option” is when you purchase a sale contract with an option to buy. You have three months to decide if you want to buy and the price is held at the same level. If you decide not to buy, you’re usually only out $100. Dr. Padda uses option contracts, where he’s looking at zoning and municipal plans. He researches what’s being planned for development in the area. Option contracts are low risk and offer a high reward.

There are two types of wholesaling. “Ugly” includes houses below $80k requiring a lot of work. “Pretty” is when someone wants to sell and is having a hard time finding a buyer. This option provides great margins and it’s the one Dr. Padda recommends physicians to use. Dr. Padda also recommends going big with real estate vs buying single units. Cap rate is the net operating income divided by the price. Become a passive investor with somebody first, watch and learn from their mistakes, and then become an active investor. To get started in real estate investing, talk with people you know. Work referrals through friends and contacts. Don’t blindly trust people on the internet.

3 KEY POINTS:

The most valuable resource on earth is not money but time. You have to look at both active and passive methods of gaining wealth. Passive income is what people pay you while you’re sleeping. The biggest impediments to becoming wealthy are ourselves and our taxes. The number one impediment is our personal wealth operating system and how we think about money.

TWEETABLE QUOTES:

“Time is like a water hose and you’re watering a particular concept or project. The more water and fertilizer you apply to it, the better it grows.” – Dr. Gurpreet Padda

“I think entrepreneurship is the ability to ask questions of yourself, realizing you don’t know, and then trying to figure out the answer.” – Dr. Gurpreet Padda

“Leverage what you know.” – Dr. Gurpreet Padda

RESOURCES:

Red Pill Kapital: https://redpillkapital.com/

Dr. Gurpreet Padda’s LinkedIn: https://www.linkedin.com/in/gurpreet-padda

Michael Blank podcast: https://themichaelblank.com/podcasts/

Adam Adams podcast: https://podcasts.apple.com/us/podcast/creative-real-estate-podcast/id1285094279

www.redpillkapital.com

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at info@redpillkapital.com

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.

Categories
Real Estate

What Is A Cap Rate?

Today, I’m Going To Talk A Little Bit About Cap Rates. I Think That Cap Rates Are Very Important For Professionals To Understand And Frequently They’re Misinterpreted. I Want To Spend A Few Minutes Going Over What Cap Rates Are, What They Actually Mean, And How Do You Best Utilize Them.

Real estate is the most powerful way to accumulate wealth. More people have become millionaires through real estate than any other means. We know how to find the property, create a plan for improving the cash flow, negotiate the deal, and manage the asset. Your passive investment provides you with the opportunity to earn an income without the nine to five. We create a unique business strategy that fits your financial and investment goals. Get the financial freedom you need to do more of what you love. We Are Red Pill Kapital, With A K.

Risk And Reward: The Greater The Risk, The Greater The Opportunity For Reward.
In real estate, one of the most important things that you can figure out is how do you define what something is worth. I think that this is one of the most important formulas in real estate, so I’m going to spend a few minutes on it. It is essentially net operating income divided by the value equals the cap rate. The cap rate is inherent and specific to different asset types, different locations, different quality of asset, whether it’s an A, B or C type location, whether it’s a major metropolitan area, or whether it’s rural.

What Is The Asset?

Is it an industrial building? Is it a farmhouse? Is it farm rental land? Is it a multi-family apartment unit? There’s an inherent cap rate that we measure one asset against another and this is a different way to look at risk than just reward and having a generalized principle, and we do that through cap rate. If something has a 10 cap or a 10 percent cap rate, that’s going to have a different value than something that has a five cap. Let’s go over that net.

Net operating income is equal to income minus expenses. You take all of the income, you take all the expenses away, and that’s what you’re left with. For example, if an investment property has $50,000 of net income before you look at any debt service, you have $50,000 of net income and its value in the market is a million dollars. That means that its inherent cap rate is 5 percent.

Now let’s take a look at it a different way; let’s play with the formula. Let’s say that I want to figure out what the value would be if I changed my net operating income. What would the value be? What would be the value in a different market if my net operating income was higher, but I was able to buy it for the same amount of money? Let’s take that example. Let’s say that I went to a different market and the thing was generating $80,000 as opposed to $50,000, but I was only having to pay a million dollars. In both situations, the value’s the same.

One cap rate, the first one where I was generating $50,000, is a cap rate of 5 percent. Where I’m generating $80,000 in net operating income, my cap rate is now 8 percent. That’s a 3 percent difference in cap rate and that can be very substantial. It can tell you a lot about the demographics. The higher the cap rate, the higher the perceived risk for that asset group by people that are far smarter than you and I.

It’s a summary total. It’s people that have already invested in this kind of asset class, in this kind of city, and they’ve kind of sat down and said, «Hey, this is what I am willing to pay.» “Well, this is what I’m willing to pay.” You and I have probably done a few real estate transactions, but this is the summarization of 10,000, 20,000, or 50,000 real estate transactions of that asset group, of that asset type in that community with that demographic.

The Cap Rate Is An Easy Way To Compare Different Rates Of Return. It Also Can Have The Formula Manipulated So That If You Know The Cap Rate, You Change The Net Operating Income. You Haven’t Changed The Property—It’s The Same Property—So The Cap Rate Stays The Same, But You Change Your Net Operating Income. What Happens To The Value?

Cap Rate: Comparison Of Net Income For The Same Dollar Investment Between Different Investments
Cap rates allow you to compare what you do with net income for the same dollar investment between two different investments, whether they’re the same class of investment like, for example, multi-family compared to another multi-family or the same class of investment such as a retail shopping center compared to another retail shopping center or comparing between classes of investment, comparing a multi-family to a commercial office building.

Cap rate says this is my net operating income for this dollar invested. Cap rate is a comparison of net income for the same dollar invested between two different investments. An example is, if I have $1,000 invested and I get $100 of net operating income per year, that gives me a cap rate of 10 percent.
Another example would be that I get an $80,000 return for an $800,000 investment, and that’s a cap rate of 10 percent. Let’s say that I get a $90,000 return for an investment of $800,000; that’s an 11.25 percent cap. If you go further and you get a $60,000 return, which is less, for the same $800,000 investment, your cap rate is 7.5 percent.

Or, A Comparison Of Value-Driven By NOI

If you look at it a different way, if you take the cap rate formula and you take the net operating income and divide it by the cap rate, you end up with a presumed value, and this is very relevant because this is how frequently brokers discuss what a particular value is. They’ll say, «Oh, this is an eight cap and its net operating income is X, Y, Z, and therefore its value must be Y.» This is a value derivative and this becomes very, very important when you’re starting to talk to people and ask them, «What’s your cap rate? What’s your net operating income?» That’ll give you what the presumed value is but this can also be very, very confusing and we’ll go through that in a few minutes.

Given A Cap Rate Of 5%
Let’s give you an example. Let’s say that you know what the cap rate is for the area, for this kind of property. It’s about 5 percent and you know what the net operating income is, it’s $100,000, so what’s the value of that property? Well, if you’re paying more than two million dollars, you’re an idiot because based upon cap rate it should be two million dollars. Now, that’s what it should be and there’s some manipulations that you can do to that but that’s, in essence, assuming all things equal, a five cap with
$100,000 of net operating income should give you a translated value of $2 million.


∆ NOI And ∆ Value
Let’s say that you change your net operating income slightly — $10 per unit per month for 100 units. You go up 10 bucks, which doesn’t seem like a lot, but you do it for 100 units and there are 12 months in a year, so you get a $12,000 increase in your net operating income. On that five cap, you changed your value by $240,000, which is a very significant portion of your purchase price, so a small subtle change creates a huge leverage effect on value.

Changes In Cap Rate, With The Same NOI

A change in cap rate with the same net operating income dramatically changes the value. The higher the cap rate, the lower the value; the lower the cap rate, the higher the perceived value.

∆ NOI And ∆ Value

You can also use the cap rate formula to decide if you make a change in the operations of a particular facility or particular commercial office building or particular multi-family. If you change the net operating income, given that the cap rate stays the same, what’s going to happen to that value? Let’s take an example.

Let’s say you have a 100-unit apartment building and you change the rent just merely $10 per unit per month. That works out to about $12,000 per year. Let’s say that the going cap rate for that kind of
building is 5 percent. That changed the value for a $10 rent change for 100 units by $240,000. That’s a very significant leverage effect that occurs because of this division by cap rate.

Slight Change In NOI Can Have A Disproportionate Effect

Any slight change in net operating income has a disproportionate effect and it’s in the same direction as the value. In a low cap rate environment – i.e., if the cap rate’s about 2 percent – a $1,000 change results in a $50,000 value change. In a high cap rate environment, so let’s say 10 percent, a $1,000 change in net operating income only results in a $10,000 value change. Why is this relevant? This
is relevant because there’s certain markets, such as in California and other places that are relatively mature, like New York, that are very low cap rate environments for the same asset class as would be compared in the Midwest.

You would think because the cap rate is higher, you’re getting better bang for your buck, but that’s not necessarily true. In a low cap rate environment, a smaller change in net operating income drives a
greater value change. This is very important because you can make money whether the cap rate is high or low. It’s really a derivative of net operating income. Keep in mind that cap rates are an explanation of risk, so if the cap rate is super high for a particular asset group and in a particular city, that just might be because that’s a very high-risk area or a very high-risk asset.

Is It Really That Simple?

No. Cap rates are an artifice. They’re a calculation; they’re a derivative; they’re not real. Cap rates are looking at your back or rearview mirror trying to figure out where you’re going to get to. Cap rates are a translation of existing market behavior into a number that allows a comparison between asset groups or between demographics. Cap rate is an explanation of market sentiment, and it doesn’t mean much more than that. It’s like a numerical pain scale. One person’s pain might be an eight, another person’s pain might be a two, another person’s pain might be a three. It’s a scale and it’s highly subjective.

We objectify it by putting the formula in of essentially net operating income divided by value equals cap rate, but it doesn’t mean much – it’s looking at it backwards. Cap rate is a measure of forward-looking financial safety and
wealth preservation. It’s really a marker for potential market risk in a particular environment. You should never be lulled into a sense of safety by looking at a cap rate.

The cap rate is often used by brokers to obscure the real facts, and it confuses the individual investor. You have to remember that real estate is a hyper-local environment and cap rates are typically regional. They’re usually citywide.
Nobody really defines a cap rate for a neighborhood or a three-block area. I know that in the city that I live in, if I literally drive 250 feet from one residence to another residence or one street to another street, I can go from a war zone into some of the most expensive areas in the city, so the hyper-locality of real estate is not explained by cap rates and it’s very easy to confuse.

You can make money whether your cap rate is highor low.

It’s really the property that matters. It’s the management and what the management does with the net operating income. The hyper-local environment determines the value of that particular property, and the time horizon in which you’re going to hold property. The cap rate is really a look at supply and demand and risk. If the demographics are declining for that area—i.e. people are leaving the city – you can expect that the cap rates would go up because the risk goes up. It’s proportional to the risk. Keep in mind the cap rates do reflect the net operating income, so if you have a low cap rate and a high-interest rate, you’re going to find a very tough time financing a particular property because your net operating income may not be sufficient to pay for the debt service.

We search for value-added real estate for our passive commercial real estate partners and we actively manage that investment long term for a successful exit. We are Red Pill Kapital.
Find us at Redpillkapital.com

www.redpillkapital.com

If you simply need more information. have questions, or want to discuss a specific deal, I’m always excited to help. Reach out to me at info@redpillkapital.com

If you are ready to start your journey to financial freedom but want specific additional educational materials, we have a course designed for physicians.