Capital Market trends are a barometer for where the commercial real estate market is headed.
Bryan Shaffer is the Principal Managing Director at George Smith Partners. GSP is a boutique capital market resource providing owners & developers the structure capital needed to complete projects nationwide since 1979.
The value of utilizing a broker like George Smith Partners is that they are in the market every day, and know when it is more beneficial to utilize one option over the other. This compares with a bank who has one model. The capital market is continuously changing. They work for the client in hope to create a relationship that continues to help the borrower get the money needed to grow their business.
Large commercial real estate projects come with tremendous risk. The borrower sees opportunity, while the lender sees the risk. If the lender does not feel comfortable with the borrower or the project, they will not finance the deal. An experienced finance professional has the needed relations with the various lending products. They can help the borrower explain their project to a prospective lender that will assure the lender of the projects upside, and set them at ease with the potential downside.
Most new investors use their own capital and raise additional funds from family and friends. A proven track record with successful, profitable projects will attract investors with capital who are looking for lower risk.
Mistakes Borrowers Make
The most common mistake borrowers make is to not focus on one particular market. If you are constantly chasing the next hot market, you will never develop the intimate local knowledge that puts makes investors confident you know the market.
GSP is best suited to help the owner or developer who is focused on finding deals and needs help raising capital. In these situations, they can partner with the project owner to locate the capital needed to finance the project. This allows the developer time to find more deals.
An ideal partner for GSP is someone who has done multiple smaller deals in a specific market and has intimate knowledge of the market. They have the market knowledge, but need help with raising capital. This is the perfect opportunity to work with GSP.
Commercial real estate is all about relationships. For owners looking to grow their portfolio and needing help to solve the capital requirements, GSP can be the solution. Their extensive network of capital sources include traditional sources such as commercial banks and insurance companies. Additionally, they have multiple new capital disruptors such as crowdsource funding and private equity funds like BlackRock and Blackstone, which are not available to all mortgage lenders.
A perfect borrower is one focused on growing their portfolio, like the client they helped grow from two apartment properties to over thirty properties. GSP was able to help bridge the gap from $10 million properties to $50 million properties.
The capital stack needed for a deal is made up of debt and equity. For both single operators and syndicators, the traditional sources of equity come from the individual developer, friends and family while debt has come from banks and institutional lenders.
The recent disruption of the financial market has made crowdsource financing a viable source of capital. Additional private equity funds like BlackRock and Blackstone are resources available to GSP, which may not be available to all mortgage lenders.
The market is client specific. If you are a proven developer in one market, that does not guarantee success in a different, new market for you. Lenders look for the borrower who has knowledge of the market based on their experience in the market.
A mistake many developers make is trying to follow the hot market. Jumping from hot market to hot market is not the path to proven success. Lenders want to know that you know what you are doing, and that you have success in the market.
Lenders like larger markets that provide insulation from failure based on the large number of potential opportunities to guarantee your success.
Lenders want to know that the deal sponsor has experience and success in the market your project is located in. The lender wants to make a safe bet that you will be successful. This is different than the borrowers perspective. The borrower wants big returns, the lender wants small safe returns.
Each asset class has its unique risk. Lenders like to lend to a low risk opportunity where they know they their investment is protected and will get paid back. The following are some examples of assets and situations where George Smith Partners were able to provide financing solutions to their clients.
Hotels are considered one of the more risky asset classes. They are susceptible to the winds of the economy. If there is a terrorist event, economic downturn or similar event, people will not travel as much nor rent hotel rooms.
To make a hotel less risky, GSP was able to do some additional research and apply their experience in the market to recognize the upward trend and make the case to a lender and get they borrower their loan.
Multifamily on the other hand, has more predictable demand and is less susceptible to down turns. People need a place to live. When the economy slows down, people lose their homes and need a place to live, so they rent. As long as you operate and keep the property full, the lenders will get paid, and they like that.
Office A recent office project where GSP was familiar with the marketplace gave the developer the help needed to complete the project. Because GSP recognized the positive trend developing that other lenders had neglected to see, they were able to get the financing for the borrower to needed to complete the project.
Most borrowers are excited to get a low rate for their loan. However, too often, borrowers fail to think through their plan for the asset they are financing. Is there a yield maintenance penalty that prohibits the borrower from selling or refinancing early? Failure to recognize this can on the front end can ruin your otherwise profitable deal.
The Real Estate market cycle goes up and down. For the past 10 years the cycle has been on the increase, compressing CAP rates, and driving prices higher. As the cycle continues, markets that have been hot are cooling as investors refuse to push prices higher, and instead they look to secondary markets for higher returns.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it's not such a risky loan, you pay three or four percent. So we're always looking at risk.
But if I look at a more global risk to my business and really to the market as a whole, I think you've got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don't move.
For more go to:
Darrin: [00:00:08] Brian Schaffer, what is the BIGGEST RISK? [00:00:10][2.4]
Bryan: [00:00:12] To me, I mean, you know, we are in the risk reward business. I mean, people get loans based on the level of risk. If it was a very risky loan, you pay twelve percent. If it's not such a risky loan, you pay three or four percent. So we're always looking at risk.
But if I look at a more global risk to my business and really to the market as a whole, I think you've got to think about the economy and what causes a real estate downturn and what influences a market to go from being a very hot market to a very cold market. And really its activity. So when activity dries out, when people stop buying properties, people stop selling properties and people have fear when people are thin or they don't move
And as you said, like the insurance provides a level of safety for those people so they can sleep at night and say, you know, if my property burns down while I'm sleeping. I'll be OK because the insurance will cover that. And then I think when you look at the real estate market, the risk is really people becoming too fearful that that is no longer good to buy, that there's there's no upside in buying. And that can happen really quickly. It's you know, 2008 was probably the best and the worst real estate market in the last 40 years. So, you know, you had everything peaking out and reaching its height. And then all of a sudden people's attitude changed and they decided that there was too much risk to keep buying properties and keep growing their portfolios. And that risk, the impact of lenders who then took a step back and said there's too much risk to lend. And then once they said there's too much risk to lend, it froze the entire market. So I think everybody's got a plan for and know that there will be a day again where risk outweighs reward. And you have to plan for that, just like you buy insurance. You've got to have a margin of safety. People that are well capitalized, I've never seen lose a property. But people that buy on a whim and, you know, aren't sure what's going to happen tomorrow and don't have the money if there is a bad year, get burned when there is a bad year. So to me, the BIGGEST RISK is that that that change in the marketplace, that freezes everybody. But the solution to it is just like buying insurance is a solution and knowing that if there's a buyer, you'll be saved. The solution to being a real estate investor is balancing your capitalization with the amount of your outflow. You should never be at a point where if something goes wrong tomorrow and it can't be fixed for six months, that you're out of business.
Passive Income is the goal of all investors seeking wealth creation.
Lior Gantz is the founder and editor of the number one rated financial newsletter, Wealth Research Group.
At 12 years of age, Lior had to go to work out of necessity. His father’s business was struggling, and there was no money. He hustled, babysitting, teaching basketball, and delivering goods to others. By the age of 16, he had saved $20,000.
His banker suggested he invest his money to earn greater returns. In order to do so, Lior needed his parents to sign a waiver, which they gladly provided. His grandfather gave him two books on investing, and Lior was hooked on passive income.
In 2015 his friends urged Lior to publish his thoughts and ideas, which was the creation of Wealth Research Group. This is where Lior publishes his thoughts and observations for readers who want to learn about wealth creation.
Lior’s father’s business was furniture and upholstery. It’s demise was due to the changing global economy that is full of new, cheaper goods from foreign countries. His failure to adjust forced Lior to learn a new way early in life. The blessing to experience this at an young age helped Lior create an expectation based on global competition rather than tradition ready for disruption.
Western corporations have taken advantage of cheap labor overseas. This cheap labor provided a greater profit spread for investors. The downside is loss of traditional jobs and trade in balance. The ultimate question that needs to be answered: are cheaper goods more valuable than the loss of jobs? While cheap goods are good for consumers, the loss of jobs depletes the consumers needed to consume the cheap goods.
The price of progress is the pain of change. Consumers like cheap goods. Within an economic system, wages only go up. So, how does a system convert from a traditional economy to a nimble world economy?
There are 48 countries that produce for less than China. You cannot regress to compete against cheap labor. Change requires skills. Workers need to be trained for the jobs in the new economy so that they can contribute to the new economy.
Governments have a few tools available to change the course of the economy; lower interest rates or impose tariffs on foreign imports. Historically, the US has preferred low cost foreign goods and chosen to lower interest rates rather than impose tariffs.
The challenge with any governmental use of its tools, is whether or not the desired results will happen. When the US lowers interest rates to make borrowing money less expensive, the hope is to make low cost capital available for companies to borrow. This allows them to make additional purchases.
Millennials are gainfully employed and paying down their student debt. As they progress professionally, they are inheriting higher paying positions vacated by retiring baby boomers. Millennials income is projected to peak in 2030. At the same time, they are coupling up and looking for suburban housing to raise a family.
This momentum will continue and will shift the demand for housing from the multifamily to the single family. This will be the new wave of housing demand.
Private Equity is flexible. Where they see opportunity with a positive return, they go. It is projected that these funds that acquired huge real estate portfolios in the crash will look to sell these as the millennials become buyers.
If the cost to acquire a home is beyond the cost to rent, millennials may continue to rent.
Neighborhoods access to good schools, safe neighborhoods will continue to attract parents of small children. But, home ownership is no longer sacred.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: You have to know what you are investing in and who you are investing with. If you invest in large proven companies, you are investing in the culture more than the people. You can trust that the culture will continue to drive profits. However, when you invest in small companies, this is speculative, because it is not proven. In this case, it is important to know the who.
For more go to:
Darrin: Lior, the BIGGEST RISK question there, but I appreciate you, you kind of taking us through it.
Lior: If you asked me what risk is, risk is not knowing what you're doing. That is that is the BIGGEST RISK. The second biggest risk is not knowing the people you're investing in. The smaller the business, the more you need to know about the people running it. The bigger the business, the less you need to know about the people running it because the the culture is already set for growth. So when you invest in Google, you don't need to know the 40,000 employees and how their life are going, etc. You need to know that, hey, this is a culture of a company that is growing at such and such. This is the industry that it's in. These are their competitors. But you don't need to know like everything about the CEO. When you invest in a small cap company or in one particular house, you need to know all about it because the risk is huge. So when you asked me a risk, when the more you go towards I'd say safer investments, the less research you need to know about the actual people. The more you dove into a speculative areas where you can make much more money. That is true. You need to know all about what you're doing. So it's a function of how much time you have and what is your capability to self assess yourself. Can you even, Is your research worth something? In other words, do you know what to ask? Do you know what to look for? And if you don't, then look, there is there is a machine out there that makes you about 8 to 9 percent your money every year if you do nothing but invest in one thing and just stay the course. So 8 to 9 percent a year, you double your money in every five to six years. I think if you have a good career, which is always the number one thing to take care of, then, you know, investments can be very profitable for you.
Mindset is the first thing Real Estate Investors have to get right to become successful.
Rod Khlief is an experienced investor, author, podcast host and mentor. He has owned over 2000 single family residents and hundreds of apartments. He also lost millions in the crash and has since recovered. His ability to rebound is directly attributed to the power of mindset.
Rod immigrated to the US from The Netherlands with his mother and brother. They were poor, ate expired food, and wore clothes from thrift shops. To make ends meet, his mother babysat the neighbor kids. Over time, she was able to save up enough money to purchase the house across the street for a rental.
One day she explained to Rod that the home had doubled in value overnight. That’s when Rod made the decision to get his brokers license as soon as he graduated high school.
Year one was slow, he made only $8,000. Year two, he made $10,000. But by the end of year three, his income had grown to $100,000. How was this possible?
How is it possible to grow your income 10x’s in one year? Truly 80 to 90 percent of your success is anything is attributed to mindset.
Rod focuses on mindset with his podcast, live events and his students. The framework he uses to help others design their life requires that you take some time, an hour when you will be uninterrupted. Take this time to focus on what you want your life to look like, design your life. If you want a private island, write it down. List the income you want. What do you want to learn? Who do you want to help? Write it down. Do not limit your thoughts and don’t analyze.
To make it possible, you have to attach your goal to a timeline. Set a timeline for when you will have accomplished each goal. People overestimate how much we can accomplish in one year and underestimate how much we can accomplish in ten or twenty years.
Pick your top goal and the two or three goals you want to accomplish in one year. Under each, write a paragraph using emotionally charged words, why this is so important. Next write what pain you will experience if you fail to reach your goal.
Why is it important to attach your goal to pain if you fail to reach them? Humans will work harder to avoid pain than reach pleasure. This will motivate you and get you out of your comfort zone. Go for it! Live a life of no regrets!
Visualize your goal. Immerse yourself in the goal. Find a picture, go experience the goal, to inspire you for when you reach your goal. Put the picture on your phone, screen saver, or in your wallet. You need a constant reminder of your goal.
Professional athletes practice visualizing the event, and the success. When you practice visualizing, the exercise prepares you similar to the physical practice prepares you.
What do you call it when you loose $50,000,000? In the crash of 2008 Rod loss $50,000,000 in real estate. Instead of crying, Rod considers this a seminar. This is because not only did he lose money, but he learned a valuable lesson. What was the lesson?
Q: Why did his single family properties struggle while the multifamily did well during the crash?
A: Logistics. The logistics of multifamily make multifamily much more efficient to operate compared to single family houses spread out all over the city or cities.
In an apartment complex, each unit has the same type of systems. This allows your team the luxury of learning once and having multiple opportunities to repeat the lesson learned. This saves time, allows you to buy in bulk and save money.
In single family homes, each one is different. Different plumbing fixtures, faucets, lighting, appliances, etc. Each home is its own lesson, never to be repeated just like the last one. Every lesson learned can be drawn from, but not replicated for efficiency. Each home has its unique fixtures and appliances, which prohibit purchasing in bulk. Don’t forget that each home is located in a different location which requires travel, time and money.
Summary: Multifamily allows for systems and you have less of a downside when considering vacancies. They are easier to scale and purchase. Lenders look at the property’s cash flow to approve the loan rather than your balance sheet when buying single family homes.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: Irrational exuberance. In today’s market, people are overpaying for properties that do not support the price. You have to communicate with your team, and look under every rock. Double check your numbers. Don’t overpay for a property.
For more go to:
Podcast: Life-time cash flow
Darrin: Rod Khlief, what is the BIGGEST RISK?
Rod: [00:00:12]In my life? I will tell you my BIGGEST RISK as I see it, and I thought about this before we started this podcast. Is we are right now in the inner stage of the market called irrational exuberance. And I just told you, I've got, I don't know, 220, 230 coaching students. And my biggest risk is, is communicating to them, they damn well better not buy a property without running it through our system first and making sure that it's been stress tested and and and they're not taking people's money. And and so that's my biggest you know, and I talk to my team about all the time, because we we walk our students through their deals, we evaluate them, we respond and and tell them, you know what, rocks to look under and questions to ask. And some of them, you know, some people think they can do it without any help. And there's some mistakes being made right now. There's deals, you know, that we bid on. And and I'm. And we find out what they traded for. And I'm scratching my head thinking, how did they make those numbers work? It's just astounding to me that they got that they were able to get financing as well. And it's just reminiscent of 2006 and 2007 to me. And so that's I think that's my biggest risk is just protecting my students and making sure that those mistakes are eliminated or mitigated. Because, again, what I went through, it's it's really top of mind for me. But we do a pretty darn good job. So but it's just it's just that communication and making sure that that they're asking for help.
FEMA is the agency within the Department of Homeland Security that controls the National Flood Insurance Program.
Scott Van Hoff is the Flood Insurance specialist with FEMA. Real estate investors need to know, now more than ever, how to determine if a property is in a flood zone that will require flood insurance.
FEMA stands for Federal Emergency Management Agency and is responsible for the National Flood Insurance Program, NFIP. Communities enroll in the FEMA which makes the NFIP available to its residents.
In exchange, the community agrees to actively manage new construction in the floodplain by not issuing building permits below the base flood elevation related to the 100 year floodplain. This agreement makes insurance available to people in the floodplain who would not be able to purchase flood insurance, and keeps additional people from building in an area likely to flood.
FEMA is required to periodically update the flood zone maps based on priorities set by Congress. The path of water changes due to natural causes such as erosion and development. And the mapping technology continues to improve, which provides for more accurate maps.
When a map is revised, and the property zone changes, from flood insurance being not required to required, it may not be realized by the seller. This scenario typically comes to light when a seller who has owned a property for many years and has either a private or no mortgage.
Unfortunately, this happens all the time. The seller does not know, and the real estate brokers do not ask, nor want to know. A buyer may assume, by omission, that the sellers information is correct. Then the bank provides a closing estimate the day before funding. On it you learn the requirement for Flood Insurance needed to close the loan.
You have invested all this time, and money into the purchase. Are you going to walk away from your earnest money?
To protect yourself from this scenario, check the FEMA Flood Maps in the beginning of your due diligence. It can save you a lot of time and money.
The Base Flood Elevation is the required height above the one hundred floodplain needed to avoid the requirement for flood insurance. If a property has a stream or body of water that runs through or adjacent to it, it is likely that the entire parcel will be designated within the flood zone.
In order to remove the structure on the parcel from flood zone, it will be necessary to prove that the structure is elevated above the base flood elevation. FEMA provides a process to do this called, “Letter of Map Amendment”, LOMA. This is a process that requires an elevation certificate be produced by a surveyor and submitted to FEMA with application for LOMA. Upon approval, FEMA will file and provide you with a Letter of Map Amendment. When you show this to your lender, the requirement for flood insurance will be dropped.
If your property is truly in the flood zone, it is possible to lift your building and raise the first floor above the base flood elevation. There are companies that specialize in this type of work and can raise the building and build a taller foundation then set your building upon the new foundation.
Flood insurance is required by any lender when lending on a property located in a flood zone with a greater than 1% chance of flooding. The zones are rated as follows:
Historically, Flood insurance was only available through the National Flood Insurance Program, NFIP. Recently, the market of available insurance companies has grown to include private carriers. The private companies will likely only insure less hazardous zones, for less than the NFIP program.
When an area suffers wide area flooding, FEMA shows up to help the local residents and coordinate relief. A common misconception is that FEMA hands out money to help you rebuild. FEMA will make available to those who suffer great loss, small grants from $2,000 to $4,000. FEMA does not make low interest loans, but the Small Business Administration, SBA does, and works with FEMA to help you if you are in need.
Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: The rising sea level, especially in our coastal areas. From the perspective of a homeowner or somebody who's making a long term investment, you might be, you know, in this location, in this home or owning this property for a few decades. There certainly may maybe a likelihood, certainly an opportunity that there's going to be greatly increased risk in increased cost to the homeowner as a result of changing flood and changing risk conditions.
All too often I see that especially retired people living in a retirement home, working and literally be priced out of their homes because of the cost of covering or covering that risk, the cost of insurance. This is something it does concern me private, because we have so many people in that situation in these coastal areas. Coastal areas attract people, especially in their retirement years, it seems. And I'm concerned about that increasing risk in people's ability to adapt to that financially.
For more go to:
Maps: FEMA Map Service Center
Darrin: [00:00:08] Scott Van Hoff what is the BIGGEST RISK? [00:00:10][2.9]
Scott: [00:00:14] Well, the biggest risk. Well, what concerns me, looking looking forward when we're talking about the issue of flood insurance is this this changing of the sea level rise and the changing of the risk, especially in our coastal areas. This especially thinking from the perspective of a homeowner or somebody who's making a long term investment, you might be, you know, in this location, in this home or owning this property for a few decades. There certainly may maybe a likelihood, certainly an opportunity that there's going to be an greatly increased risk in increased cost to that homeowner as a result of changing flood and changing risk conditions. Certainly you see that at the time that FEMA updates a map. You often see people move from one zone to another zone because the boundary lines of change or the flood elevations have gone up and they've suddenly faced with a greatly increased cost of ownership from that from property. And and all too often I see that especially retired people living in a retirement home, working and literally be priced out of their homes because of the cost of covering or covering that risk, the cost of insurance. This is something it does concern me private, because we have so many people in that situation in these coastal areas. Coastal areas attract people, especially in their retirement years, it seems. And I'm concerned about that increasing risk in people's ability to adapt to that financially. And unless they think about it ahead of time and taken some steps to try to mitigate that risk and mitigate that potential for cost increase in the future with map changes and changes in flood risk.