📘 Confessions of a Real Estate Entrepreneur

Seller prepares a proforma for the next 5 or 10 years. Then Buyer reviews and makes own assumptions

Also include the cap rate

Negiotiate back and forth - including closing date and seller financing

contingency is an event that must happen before the obligation of a party to a Contract matures

Could be used as a free option agreement if worded correctly (Note that an option payment goes to the seller no matter what). Whereas a contract with a contingency, the deposit money is never at risk since can be returned to the purchaser

Be sure to phrase carefully with parameters. For example, instead of contingent upon ability to buy property #2 (where technically purchaser can be able to pay any price), you should say: contingent upon ability to buy property #2 at a price not in excess of $XX.

Spreadsheet (Pro Forma) that projects his income stream from a deal over a period of time (best guess)

Include the rents, vacancy, expenses, changes over the year, etc

Include the income from selling as well

you will need to follow up with brokers as they are busy with multiple deals and may not call you first

They want investors that can move quickly to get deals under contract and closed

Example, during underwritings for 10M downpayment, the institutional investor agrees to invest X ($8M or 80% of 10M) money and Y (9%) percent compounded return (hurdle rate) on X ($8M) money. But wants an overall taget rate of W (13%) percent. Thus the investor also wants Z (40% or 1.9M) percent of the upside (7.5M). The upside is the additional funds upon sale (after fees, debt repayment, equity repayment, Y percent compounded return, etc).

As for the author who invested $2M (20% of 10M), 9% compounded return (1M) and the rest of the upside (60% or 4.5M). Then author's total return is over 30% per year

Why will the institutional investor agree to this deal?

credible real estate player with track record of successful deals. they dont have manpower or expertise to find these deals. happy with 13% target return

1) Passion (more energy leads to success). Life's goal is to find and pursue exactly what you are passionate about

2) Work Ethic

3) Physicality. Exercise daily

4) No sense of entitlement (you gotta put in the effort and work for it)

5) Discipline

6) Networking (Treat everyone you meet in life with grace and courtesy)

If becoming a good networker is not part of your business model, then get a new business model

7) Visualization (believe and see yourself years into the future)

8) Grit and Perseverance (know that there will be setbacks), never quit,

9) Running Scared (have the confidence to know that he can deal with the inevitable curveballs almost any deal will throw at him

Analyze the risk, do your homework, and jump in

10) self-improvement (know what faults or bad habits you have or mistakes... and write our a prescription for yourself)

11) Grace and Balance (Integrity, respect other's time - only call busy people when you have helpful information, everyone has to make money, don't burn bridges, be courteous, play the risk level comfortable to you)

12) Karma (Those who give to life, get back from life.) those who have a generosity of spirit in their approach to their fellow human beings are often rewarded

Banks will lend money

add value to the real estate, increase rents, refinance it and take cash out of the deal (where this cash is tax-free since government does not consider loan proceeds to be income since you have an obligation to pay the money back)

99-1 investor wants a much higher hurdle rate, 12%. Since the operator is only putting in 1% which is not much to lose, investor wants an 15% IRR which will be 70% of the upside.

The author invested 1% (100k) and gets 12% compounded, and 30% of upside (1.6M). So 80% total return per year compounded

Constant of the loan = interest rates and amortization (this helps compare loans with each other)

For example, borrowing 1M and first year's annual interest and principal paymenrs are 85k, then constant is 8.5%

Find ways to back out of a potential deal or contract by limiting downside. For example, only commiting to a portion of the deposit

OR convince the seller that the property will appreciate large enough that there will be no damages from backing out

OR limit the deposit and have a time limit to back out

5) listen

6) stay focused

7) establish you limits in advance (both in buying and selling limits)

8) Become the other party (adapt your personality of the other party, in tone, manner, speech, and approach, to make them comfortable). People are most comfortable with others who are like them.

9) two beats before speaking. Think before you speak

10) don't push. Don't lose patience. Do not press.

Don't assume that the attorney will close the deal - call regularly to check on status (don't assume that no news is good news)

Don't assume that the attorney will read all of the docs

Don't be afriad to ask stupid questions

Don't negotiate fees or delay payment to your attorney

Understand how your attorney views yours and their risks

Partnership: income/loss flows through to individuals (partnership is not taxed on the income)

corporation: there is double taxation where both the corporation and the individual pays taxes

LLC: simplicity in formation and operation, protection from individual liability, no double taxation. And today the LLC is the vehicle of choice for most real estate investors.

If others think that you are genuine, will get the deal done, etc, people will call you

get the word out about yourself, what you are looking to buy, etc

takes into account the confidence in actually receiving the projected revenue income stream, current interest and inflation rates, and his view of the overall economy in general.

The lower the discount rate (the lower return that a buyer will be comfortable with), the higher price willing to pay

Acquisition loan for land purchased

Construction loan to build

Then refinance into long-term debt

Could get 2 mortgages - one from the bank and another from an individual. But if there is a foreclosure, usually the bank would get paid out first (based on what order priority or recordation (think: "first in, first out")

The lower the priority of the loan (a Second Mortgage has a lower priority than a First Mortgage), the higher the interest rate, because the greater the risk incurred by the subordinate lender.

periodical in your area that will list recorded documents, for example, Deeds, Mortgage

Deeds, Releases, Foreclosures, and Lis Pendens (document used by a lender to put word on notice that a property owner is in default of his mortgage

If there are 2 lenders on the property, the bank usually is first and the other (usually the seller, under seller's financing) will subordinate. Which means that under foreclosure or sale, the bank gets paid back first and then the secondary.

As an investor, should have a clause to have seller (in this case) be subordinate for multiple mortgages if the strategy is to first get a construction loan and then refinance into a permanent loan

Got somewhat lucky that the subtetant agreed to pay higher rent (after 5 years) else the income would have stayed stagnant for the whole 9 year lease

Same rent wouldn't allow them to get a higher valuation until the 9 year lease ended

Author converted an old factory (leased to a low-end retailer) into a factory outlet shopping center

Got the seller to accept sellers financing for 80% and got the rest from current tetant (termination fee and loan)

up-front money to modify the space.

This can allow for higher rent price per square feet. And will have a higher net operating income at sale.

Whenever you come across a seller who is not entrepreneurial, there may be an opportunity for you.

Author bought a large industrial building where it's tough to get a single tetant for the large space, so built a wall to split into 2

Option payment is usually 1-2% of the sales price (usual deposit is 5%) and duration of 1-2 years before closing (real estate contract is 3-4 months).

Used for riskier deals where the buyer needs time to research and/or get approval. Pays the seller an option payment and has a set duration to either buy or forfeit the option payment. Good for rezoning and development where the value is unknown

A good broker will have large groups of potential buyers

1) Know how to position the property to be attractive (think like a buyer)

2) know how to negotiate the price and terms of sale. Might be helpful to file paperwork for rezoning or similar before putting on the market

Or if selling to institutional-type who wants to collect rents with no headaches, then ensure HVAC is in good shape and have service contracts in place; have new, long term leases in place

Banks would want recourse or gurantee that they can get all of their money back BUT investors would likely not want recourse since they only want to risk their investment in the property but not their other assets

What can an investor do to protect but also get the bank to approve their loan without recourse? OR does the investor take the risk with recourse knowing that they have a strong chance of success? What is the point of LLC if bank can just sue directly via recourse?

As an investor, try to limit the extent (how much) or duration of the Guarantee (when it expires)

Lender may propose a margin of XX basis points which is how they make money. This is added to your interest rate (usually index of 10 year rate on US Treasuries)

Essentially, the smaller the margin, the lower the rate

Negiotiation: borrow less (lower LTV) which is less risk for lender then may lower margin

increase loan amortization pace (larger principal payments) which lowers lender's risk then may lower margin

1) Prepare

2) The more they like you, the greater the probability of Success

Connectibility, finding commonality quickly, leveraging that into "likability"

3) Keep control of the discussion

Once you make your point, then stop talking; more details, questions or information may cause you to say mistakes

\* once you obtain a concession or agreement from the other party, cement it with a handshake and contract and go forward

4) Know your subject matter

Sometimes blame someone other than the seller/buyer/tenant for questions - blame the lender OR ask if their lender or investors will help provide credit or capital

Note that the 6 months of free rent was too risky for the landlord. So instead gave 2 months upfront and then after 2,3,4,and 5 years.

Does this mean the tenant pays more rent on the months that rent is due? and then no rent on the first 2 months and the last month of each year (totalling 6 months)?

laws about raising money from individual investors

Target qualified or accredited investors; rich people

an offering to these individuals is called a private offering and the laws do not require that you register this type of investment with state or federal authorities (since these investors are sophisticated enough to fend for themselves)

So is this basically asking the seller to be a bank (seller financing) where buyer will owe money to seller.

Then the buyer gets a loan from another bank to rehab but the bank wants to be first position. So the seller financing interest rate might be higher than the bank's rate in order for the seller to agree being in second position. If the property gets foreclosed, the bank gets paid first and then the seller.

Good to reread

The author came up with multiple dialogue to understand what the potential tenant wanted and why

Then worked to spread out the costs in the beginning (since the tenant is a young business and needs cash flow) to help the tenant but to not place too much risk on the land lord:

delay comissions to broker

spread out free rent

get approval for the contruction changes and to provide budget for half first then the second half once approved.

If the investors received the preffered return, then the author received a promote (receives a reward out of proportion to the investment)

In this case, if the investors received the 8% per year return, then author received 50% of the cash flow above the 8% return and 50% of the net proceeds on sale. (investors received the other 50%)

Author rasied the rents which increased the property value and allowed author to get a bank loan to pay back all investors. Then split the cash flow and 50% of the profits at sale in 8 years

This meant that the investors received an infinite return on their money (though the money was tied up for 2 years while author stabilized rents)

Ground lease (option if seller is not willing to sell): a potential buyer will lease the property instead to occupy the property for 99 years after which time possession recerts to the owner

Although not owning the land, the rent cost in the beginning will be less than the mortgage. And the land will appreciate at a higher rate than inflation

Should also include a clause to buy the property within 30 days of another offer (match the other's offer). So might be able to buy property at below market value.

Convince Retailer/renter that their business will grow and thus rent will increase.

Mortgage rate is fixed BUT rental income increases so annual return on equity increases

the job of the real estate broker is to match people with their needs

The distinction of being a broker is that he or she can operate a real estate office or company under his or her name, while the salesperson has to be aligned with a broker in order to function