educational article

Are Apartments Really Commercial Properties?

November 6, 2019 by Team RE Mentor Leave a Comment

If you ask any banker, he’ll tell you that anything over 4 units is considered a commercial property. If you ask any municipality regarding their trash pick up, you’ll get the same answer, ditto with insurance companies but are apartments really commercial properties?

When you think of commercial property, do you think of tall skyscrapers, office buildings, and warehouses…and possible large apartment complexes?

Well, apartments over 4 units are commercial properties but there is one big difference between apartments and offices. One space is occupied by residents and the other spaces are occupied by businesses.

That’s a big difference! Did you know the 3 out of 4 businesses go out of business after the first year? Ninety percent are out of business by year five! If you're renting to businesses, chances are, your turnover rate is going to be higher than a residential property and you should know that tenant turnover is your biggest expense in any multi-unit property.

People always need a roof over their heads If they move out of your place, they are moving into someone else’s (if you treat them with respect, they will stay longer!) Businesses just disappear and when they break the lease, it’s hard to get money out of a bankrupt company!

A lot of commercial properties rely on 3 or 4 big tenants. If they lose a tenant, they’ve lost 25% of the income. If the property cost you $1,000,000 and you lose 25% of your occupancy, you could be at a breakeven point or worse…upside down.

Statistics show that it takes an average of six months to fill commercial space. The main reason is that the pool of potential renters is not that big. In contrast, with a residential property, there is a vast pool of potential renters and the turnaround is one or two months instead of six.

For the same million dollars, you could get a 20 – 60 unit property (depending on where you invest), if you had 20 units and lost one, you’ve only lost 1/20th of your rent, you still have plenty of cash flow and more importantly, plenty of spendable income.

There is one other thing you should consider, when you’re attracting a commercial tenant for your property, you usually agree to do a “build-out” which means you change the space to make it conform to the business. This could cost you thousands of dollars.

With an apartment unit, the “make ready” usually consist of paint and carpet. If more is needed, it’s usually paid for from the previous tenants security deposit.

Yes, apartments over four units are considered commercial properties but as you can see, they are in a class by themselves when you compare risk versus reward.

14 STEPS TO ACQUIRING A PROPERTY

October 23, 2019 by Team RE Mentor 1 Comment

These steps will help you save time and eliminate risk with your investments:

Decide what size buildings you want to start investing in.
Decide where you want to invest.
Determine what types of multi-family properties you’ll buy.
Put your team in place.
Market to get your deal.
Analyze the deals.
Create the offer or letter of intent.
Negotiate the deal.
Create and sign the purchase-and-sale agreement.
Do your due diligence.
Renegotiate the deal.
Start your financing.
Choose a management company.
Close the deal.

Let’s go through each step.

Allowing Your Real Estate Business to Run Your Life

October 9, 2019 by Team RE Mentor 1 Comment

We all get so wrapped up in the thrill of real estate investing (once you start buying, selling and cashing those big checks you will know what I’m talking about), that it begins to become all-encompassing. We have cell phones, so we don’t miss a call. When the phone rings at our home office we go running like a bat out of hell from the dinner table because this could be the Next Big Deal.

We take calls from contractors and suppliers at all hours and somehow especially on Sunday nights. We allow tenants to have us at their beck-and-call because we fear that if we don’t say “how high” when they say “jump”, they might move out.

Before we know it, our lives are consumed with nothing else. We left our jobs so that we could stop working for The Man, and be our own boss. Now we’ve come to realize that we are working for a much worse boss, a tyrant. That tyrant is ourselves.

How does this happen? It happens because we don’t effectively plan our businesses. I talked about planning earlier in this report. One of the benefits you will achieve from planning is you will be able to create systems and checklists to control your real estate investing business.

Once these systems and checklists are in place, you will know what needs to be done in any situation. You will look at the checklist daily, to review what has been accomplished and what still needs to be done.

You should have checklists for every aspect of your business. Here are some key checklists:

Property Evaluation: Buying right, market analysis, property analysis
Property Inspection: Estimating repairs, formula worksheets, room-by-room analysis
Contractor Management: Bid process, contracts, and agreements
Renovation Management: Cash flow, required activities, scheduling, and contractor management
Tenant Management: Application process, move-in process, leases, and contracts

These are just a few of the many checklists and systems that you’ll need to create and use on a day-to-day basis. Then you’ll be running your business and your business will not be running you.

One of the benefits of systems and checklists is that—as you grow your business and hire people to work for you—you’ll train them by teaching them how to use the checklists and systems. You will train them to complete the tasks associated with each system and checklist. You will supervise them by revising the systems and checklists that they are working on.

This is the fastest way to grow your business.

To get help on systematizing your business, read this book, The Multi-Family Manifesto. It’s a great book that will teach you how to look at your business in its proper perspective.

If you don’t want to create all of those systems and checklists yourself, find someone who already has a successful real estate investing business and find out what they are using. The sooner you systematize, the sooner you will be free to make choices based on what you want to do, instead of what your business needs you to do.

Convince the Broker You’re Serious

October 4, 2019 by Team RE Mentor 1 Comment

Are you a broker or an agent?

If they’re an agent, then ask them for a little information about their broker. An agent reports to a broker so you need to know about them.

What kind of education have you had?

College or professional in-service trainings are good.

What kind of experience have you had?

You want to see experience in the local area as well as in the property type you are seeking.

What professional associations do you belong to?

These could be national or local associations. Check out the various association websites to see if the members follow any stated Ethical Standards.

What local meetings do you attend on a regular basis?

This will give you an idea of where they network. Those networking opportunities might be good for you as well.

Where are the popular areas in the city and why?

You want to know if the city is investing in certain areas.

What type of properties are you seeing for sale?

You want them to match what you are looking for.

Anyone you know of that’s thinking of selling? Anything coming up on the market?

This will give you an idea of how extensive their network is.

What types of properties does their firm seek out?

Do they match your needs or present new opportunities that you have not considered?

Where are you seeing CAP rates and Cash on Cash Returns?

The higher the better.

Who needs 10X when you have Deal Lab? New new monthly membership with constantly updated investor resources, latest real estate trends, mind blowing case studies, and a portal to connect with real estate professionals.

3 Ways To Increase Income Without Raising The Rent

September 26, 2019 by Team RE Mentor 91 Comments

3 ways to increase income without raising rent

Charge "Cuddles" rent, By that I mean … PET RENT

Almost 70% of all households in the U.S. own pets. Charge Fido a small fee and you won't be isolating a large population that could become your tenants, and also the same tenants would love to pay for a convenience upgrade like a pet-sitting or dog walking feature.

Extra Space

Here's a win-win. Set up storage units on the property that a tenant can rent at-will. That way they are not violating their lease and any fire codes by over-stuffing their unit with their keepsakes, toy collections, or seven extra coaches they found on Amazon, or whatever they click-bought yesterday.

Offer Upgrades

Make life a little easier? Sold. Occupied. Laundry services, dry-cleaning, UPS Dropbox, Netflix subscriptions, free WiFi… Pick one or invent your own. Small conveniences go a long way to make a tenant's life even smoother.

Need more ways to increase income? Check this out.

How Important is a Good Credit Score For Real Estate Investors?

September 25, 2019 by Team RE Mentor 1 Comment

Your credit score can have a lasting impact on your ability to invest and get a mortgage.

Not only can it change a loan from being approved to being denied, but it can affect other aspects like interest and insurance rates, among others. You’ll want to make sure your credit score is good enough to allow you to take advantage of the real estate market. So, how important is your credit score when you’re looking to buy real estate?

A low credit score will impact the cost of your loan because it represents the level of risk to a mortgage lender.

A high score indicates that you pay your bills on time and will be able to repay your mortgage; a low score, on the other hand, means that you could be a potential risk to a lender. To compensate for the extra risk, lenders will increase your interest rates to protect themselves. Therefore, the higher your credit score, the lower your interest rates. But what should your ideal score be?

The short answer is that, ideally, your credit score should be above 740 and your total debt payments, including your future mortgage payments, should not exceed 43% of your gross income. The primary benefit of a higher credit score is that you’ll pay less interest. Forbes illustrates that the difference between a 3.5% and a 4.5% interest rate on a 30-year $250,000 mortgage is over $50,000 in interest.

The importance of a good credit score is illustrated by other benefits, like better credit card terms, higher credit limits, and lower insurance premiums.

Another important factor for home buyers is homeowners insurance. The insurance premiums you pay once you purchase a home will be greatly affected by your credit score. Unlike your regular credit score, your credit-based insurance score isn’t publicly available. To evaluate your risk factor, insurers use your credit report for many of the same things as traditional lenders. FICO estimates that 85% of home insurers throughout the United States use insurance scores to determine monthly premiums in states that allow it. The reason for this is that the Federal Trade Commission determined that these scores accurately predict risk, or the likelihood of filing a claim, to underwriters. What, then, can you do to improve your credit score?

Your credit score calculation is a bit complex. Some of the factors considered are your loan repayment history, the total balances on your accounts, how long those accounts have been operating, and the number of times you’ve applied for credit in the past 12 months. The best way to keep a high credit score high is to pay your bills on time, every time. Additionally, you’ll need to pay your existing debts, like credit card balances and other loans, and avoid opening new accounts, credit cards, or loans.

Content written for RE Mentor

By C. Mendoza