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Commercial Real Estate Pro Network

Commercial Real Estate Professionals who work with Investors, Buyers and Sellers of Commercial Real Estate. We discuss todays opportunities, problems & solutions in Commercial Real Estate.
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Now displaying: October, 2018
Oct 25, 2018

Insurance is required to close any Multifamily Real Estate deal with lender financing.  Recently, Rod Khleif invited me on his podcast, Lifetime Cashflow Through Real Estate to discuss insurance for Multifamily.

Rod Khleif is a veteran real estate investor syndicator, real estate mentor, and podcaster based in Sarasota, FL.  We discussed steps multifamily investors can take to be successful in procuring insurance for your property.

How to Chose Your Multifamily Insurance Broker

Insurance for Multifamily is very specific. To make certain you are working with a broker / agent that can help you, here are some questions to ask:

  • Ask your CRE Broker & Property Manager for a referral to an Insurance Broker.  An experienced Insurance Broker will be plugged into the Commercial Real Estate community.
  • Ask the Insurance Broker/ Agent to describe their experience with Multifamily real estate.
  • Find out if the Insurance Broke specializes in Multifamily.  So many agents have no speciality and may not fully understand the coverage needed.  
  • will writ isl If you are working with your home and auto agent, you are likely not getting all you need.

Property Questions You Need Answered

If you are purchasing a property that is more than twenty-five years old, you have to ask some questions not required for newer properties.  There are 4 Building Systems that every Insuance Underwriter wants to know about on older buildings. If you want the most affordable insurance, find the answers to the age and details of work done to  these systems:

  • Roof; what year the roof was replaced?
  • Electrical; what has been done to update the Electrical System and when?
  • Plumbing; what material are the pipes made of for both supply & waste lines.  If updated, when, and details as to what was replaced.
  • Heating and Cooling system, type and details of when and type of updates.

Sometimes, you can determine from the seller’s financials dates and significant amounts spent on system updates.  During the due diligence period, review the financials and ask quesitons.

For Liability you want to walk the property looking for trip and fall hazards.  Are the hand railings firmly attached, stairs in good shape, any uneven walking surfaces, or  cracks in the concrete? All of these are potential claims that the insurance company is looking to avoid.  If the insurance company’s inspection finds that your property has these, you will receive a cancellation notice, or inspection report requesting that these need to be repaired for the carrier to continue providing coverage.  

For your

48 Point Hazard Checklist,

click here.

Price and Coverage Tips

For your best pricing, start talking with your Insurance Broker early.  The older, more value add opportunity you are buying, the more information will be required, including Seller Loss History, to tell a story the Underwriter wants to hear.  

Insurance is complicated.  There are lots exclusions and endorsements that if you or your insurance broker do not ask for can leave you with big coverage challenges in a claim.  The following are a few specific items to ask for:

  1. Get a Replacement Cost Estimate from your Insurance Broker.  The policy is written on the expectation that if your have a total loss, it will be able to pay for a complete rebuild.  DO NOT USE the Seller’s coverage limits. I’ve seen too many buyers set themselves up for a problem by using old outdated values.  
  2. Agreed Amount Clause is a coverage option available on most Property policies.  When you select this option, you and the insurance carrier agree on the value of your property and ELIMINATE the possibility of a Coinsurance Penalty on a claim settlement.
  3. An Umbrella adds additional limits of Liability protection above your Underlying General Liability; will drop down if your General Liability limits are exhausted, and can pick up claims not covered by your Underlying General Liability.  They provide a tremendous amount of coverage for a little bit of money. Buy an Umbrella.

10 STEPS TO LOWER MULTIFAMILY INSURANCE

CLICK HERE

 

Oct 18, 2018

Cash flow must be the goal if you intend to replace your salary, so that you can quit your W2 job.

I’ve experienced first hand and conferred with other investors multiple ways you can screw it up.  The following are some ways to keep the cash coming.

Buy Right & Cash Flow on Day One

My friends Jake & Gino from Wheelbarrow Profits stress, “Buy Right”!  This is the critical first step. If you don’t buy right, it can take years to recover, and keep you from reaching your goal.  To make certain you are buying right, you have to know ALL of your numbers. Use something like my Deal Workbook to account for your expenses.  

I remember the first couple of single family rentals I purchased.  Needless to say, I left some expenses out, because I only accounted for the mortgage, taxes & insurance.  What could go wrong when the a repair was needed, the tenant was late, or the unit was vacant. That’s right, if you don’t budget for these expenses you will pay.  So, know your numbers and BUY RIGHT.

Operations

Operations includes the day to day operating of the property.  Taking applications, rent collection, maintenance, etc. When you have a property manager in place, it’s your job as an asset manager to ask questions and follow up to make sure things are as they should be.     

This includes providing regular reports; income & expenses, applications, turns, maintenance, etc.  An empty unit is a lost income opportunity and a cost to you. If a property manager is not proactive and waits until after the unit is vacant to coordinate with the needed contractors, your vacancy loss will inflated.  

A professional property manager will minimize the down time by communicating and actively marketing the unit as soon as it is known there will be a vacancy.  It’s been said, “inspect what you expect”, otherwise you will be disappointed, and end up with less than you could of.

Capital Expenses

Capital expenses are related to replacing systems; roof, HVAC, plumbing, electrical, parking lot, kitchen & bath remodel, etc.  They last for years, and should be budgeted for. If you do not budget for them, they can mess up your projected returns.

For the most success, make certain to include your capital improvements in your startup funding budget.  This allows you to improve the property right away and increase the rents for the improved property. Paying for capital improvements out of cash flow will take significantly longer to reposition the property and will drain any potential investor returns.  Been there!

An experienced investor will not only budget for these, but also account for them as capital expenses, outside of the operating budget for maintenance.  When you include capital expenses as maintenance they will lower your NOI and your property’s value. Don’t do it!

Disaster

You don’t expect a disaster, but it is always a possibility.  Your ability to collect rent could suddenly stop if your property is damaged.  The risk can mostly be transferred to an insurance company, through the purchase of a policy that provides Business Income coverage.  Be careful, not all policies include Business Income nor cover all perils, causes of damage.

Common Perils

Fire, Hail, and Frozen pipes, are some of the common perils typically covered by a property policy.  Windstorm including tornadoes & hurricanes can be an extra charge depending on where your property is located.  

Not Common

If your property is located in a Flood Zone, your lender will require Flood coverage be in place prior to closing.  However, this does not mean that if your property is not located in a flood zone that it cannot suffer a Flood loss.  

Earthquake and Landslide are rarely required by a lender, but regularly purchased by investors whose primary source of income comes from their real estate. if your property is located in an active fault seismic zone.

To learn more about protecting your cash flowing property from disaster, email J. Darrin Gross

darrin@jdarringross.com

Oct 11, 2018

The Letter of Intent and the Purchase Sale Agreement are significant steps towards closing your multifamily purchase.  

When you find a multifamily property, you run the numbers.  If the numbers show promise, it’s time to engage the seller to see if you can put the deal together.  The initial non binding offer used by buyers is a Letter of Intent. If you and the Seller find agreement in principle, you will formalize the offer with a Purchase Sale Agreement.

CLICK HERE

FREE Sample Letter of Intent & Cover Letter

Letter of Intent

The Letter of Intent is a non binding presentation to the seller that spells out the framework of your offer, your intent to purchase the Seller’s apartment building.  This should be addressed to the selling broker, not the Seller. To see a sample Cover Letter & LOI used by Vinney, click here.

 

The Cover letter should summarize your intentions.  It should also include any relevant experience you or your team has closing on Multifamily Properties, to give the buyer confidence you will close if they accept your offer.  

 

The Letter of Intent is not binding, so it does not require legal review, but should contain::

  • Property details, address, number of units.
  • Identify that your offer is based off of the numbers provided by the selling broker.
  • General terms & conditions to purchase by your company or assign:
    • Purchase Price
    • Estimated requirement for Capital Expenses
    • Earnest money, Vinney recommends at least 1% of the sale price.
  • Timeline to complete the purchase:
    • Due Diligence timeline
    • Inspection Period
    • Extensions if needed and conditions to extend
    • Closing period
  • Financing period:
    • Lender approval letter
    • Down payment funds
  • Readiness of Property, including occupancy percentage required.
  • Inspection documents required from the Seller:
    • Financials
    • Rental Agreements
    • Survey
    • Phase I Environmental Assessment

 

Because you will be offering less than selling price offered, it is to be expected that the Seller will either reject or counter your initial Letter of Intent. After some back and forth, if you are able to reach agreement in principle with the Seller, you need to put the property under contract.  This is accomplished using a Purchase Sale Agreement.

Purchase Sale Agreement

The Purchase Sale Agreement is a legal, binding agreement.   The PSA includes all of the items in the LOI and spells out all the legal performance requirements for both you and the Seller.  Each property is unique and requires that you have your attorney prepare and review to protect you.

 

Vinney advises that you communicate early and often with the Seller during the Due Diligence period to avoid any surprises.  He suggest that your compose a Repair Letter as soon as you know the condition and any additional capital expenses that you were not aware of prior to your offer.  

 

Similar communication regarding the financing should be made to keep the Seller in the loop.  When you do this, the Seller is more likely to credit you additional funds to fix the problem, or accommodate the time needed to obtain financing to keep the sale on track to close.  

 

For more, go to:

www.vinneychopra.com

Text: SYNDICATION to 474747

Multifamily Investment Syndication

 

Prior CREPN Radio Multifamily Syndication episodes with Vinney Chopra

CREPN #145 - Why Multifamily Real Estate Investing with Vinney Chopra

CREPN #149 - Why Multifamily Syndication is a Great Option for Real Estate Investors

CREPN #153 - Building Your Multifamily Syndication Team with Vinney Chopra

CREPN #157 - How to Attract Capital & Communicate with Investors with Vinney Chopra

CREPN #161 - Multifamily Underwriting with Vinney Chopra

Oct 4, 2018

Environmental Risk assessment needs to be part of your real estate investing due diligence.

Mike O’Connor is the Pincipal at Assessment Associates, Inc, an environmental consulting firm that specializes in working with real estate transactions.

Why Test?

The reasons to test range from: “it’s a good idea” to “lender requirement’.  If you don’t need to borrow money, and you elect to forgo the assessment, you could end up with the liability and cost associated with any cleanup.  However, if you are borrowing more than $1M, the lender will require a Phase I Environmental Assessment for a clean bill of health, guaranteed.

Potential Environmental Risk

The primary risk comes from leaky underground storage tanks, but you would be wrong to think that you don’t need to be concerned unless you are buying a gas station. 

Why your ask?  Do your know what's going on on at the neighbors property? Is there a leaky underground heating oil tank? Each of these can create plenty of problems for you.  

To learn how to DIY the initial Environmental Assessment  

and know what to look for, get your

Free Tips and Tricks Guide.  

Degrees of Environmental Assessment

A Phase I Environmental Assessment consists of a visual inspection at the property and a review of all available public records.  The consultant will visit the site, interview the seller, neighbors, etc to assess the historical use and potential for an environmental problem.  If evidence suggest a potential problem may exist, the Phase I recommendation will call for a Phase II Environmental Assessment.

A Phase II Environmental Assessment involves sampling the soil beneath the surface.  It can start with a Geophysical survey to identify inconsistencies below the surface.  The results will identify where further looking should occur.

Then actual soli samples are puled to test the soil for toxins.  This is accomplished by using a well drilling like rig that pulls cylinders of soil to the surface for visual inspection. The samples that look suspicious will be sent to a lab for testing.  If results are positive, the site will need to be cleaned before going forward with the transaction.

For more go to:

https://www.aaiconsulting.com/

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