Terms To Memorize Flashcards
Property Classes (meaning A & B & location)
Property classes make it easier to investors to communicate the quality and perceived rating of a property. Class can refer to the property itself, the asset, the building, the location, even the tenant (even though we are not supposed to talk about the class of the tenant).
There can be A,B,C,D. It can also be AA, AAA, B+, C=, C- etc.
These are perceived concept ideas. It’s a way to communicate with other people about what they say the type of product, the class of the product, and then the location of that product.
A Class: Newest and shiniest product. Typically 1-5 years sometimes less than 15 years old. For example: new apartments with attached garages (pull in and you’re apart of your community), pools, gyms, movie theaters, etc. A Class properties come with much lower CAP Rates. The nicer the property gets the lower returns (Meaning that cash returns will be lower for the first 3 years but likely increase after that, at which point the appreciation can be huge). That being said you have to wait. See 10 years out from a brand new property will still be new, where properties in a B-Class are probably going to start feeling old.
B Class: These are properties that are between 10 and 20 years old. But don’t confuse the year as the sole indicator. It could be a brand new, built this year property, in a c class location and c class quality and amenities. These generally serve white and blue collar communities. These typically also have some level of deferred maintenance. Meaning the owner stopped paying attention to upkeep like new paint, new carpets, woods, paints, toilets, and the new materials that are out there. B’s will come with a good mix of cash flow with the possibility of appreciation in the future. You’re going to look for 5% to 7% returns on your capitols before you get appreciation and make your profits. On B Class properties, again blue collar and white collar combinations; decent neighborhoods, working class, median rents not high end rents, nice amenities not great amenities, probably not going to have parking inside your building - it’s probably going to be parked card and walk it might be a 2 story or 3 story - it might be called a wrap where it wraps around your swimmer pool. It probably doesn’t have elevators. Might have a gym but it’s nothing fancy. It might have a pool with chaise lounges that are kind of old. Nice neighborhoods; not a great neighborhood.
C Class: C properties are going to cash flow without you having to carry a gun there. You’ll always have a buyer and renter for and you’ll always have cash flow. These are properties that are 25 years old with significant maintenance needs. Probably less than desirable locations however you can have C-Class properties inA class Neighborhoods (such scenarios can make good cash flow for a while and then you sell it to someone who wants to tear it down to build an A class location). Look for cash on cash returns of at least 8% or more, because it’s going to be more work. There will always be a buyer for a C-Property as long it’s in a good area. If the area is dying then a A-property can have trouble selling as well. When you go to sell C properties tends to lure less experienced investors with these promises of higher cash returns.
D Class: This is the lowest class of property. These are often not just property considerations but also city considerations. For example buying in a shitty neighborhood where nothing is doing well and everything is dying off. Some cities are just a no go due to the risk. The issue with these aren’t the cash flow, it’s the exit. Cities that are D-Class have higher unemployment rates. This will make it hard to rent and even harder to sell. D-Class properties also tend to be more labor intensive. Tenants tend to be less experienced tenants (more likely to break things and mismanage their finances where even cable bills are hard to pay). So many people lured in with this thought that they were going to better manage the property that was going to get 14% cash on cash that was going to turn into 24% cash on cash. Just a warning: D Class Property is a seedy building. It’s not a place you want to bring your sister or your kids.
Different Types of Real Estate Investments
- S.F.H. Single Family Homes.
- Wholesalers. These people are flipping contracts not flipping houses.
- Duplexes, Fourplexes
- 5 Units an about are referred to as commercial real-estate but between 4 an 20 getting a loan is really difficult but beyond 20 it gets a lot easier. 5 units require a larger downpayment. You also have to have the ability to manage the property (and prove it). With even 10 you will have to manage to property on your own because it doesn’t produce enough income. Expect to have to prove to the bank that you can actually manage a piece of real estate.
- Retail
- Storage
What are the 4 big checkboxes for knowing an apartment is a good investment?
A lot of people only look at price and cap rate and that’s not what you want to foley focus on. Ask yourself:
- Is this a good asset with a good number of units
- In a good location
- Do I get cash flow
- Will I lose money
- Do I have leverage
Look at the balance sheet, look at the profit and loss statement, look at the trailing 12 of revenue/expenses/income. And evaluate your risk based on the numbers provided and then do your own due diligence. Don’t trust the bank or the performer by the broker. Keep your mind on the future while you’re looking at the deal. Keep your mind between being the optimist and the pessimist while looking at these deals.
What is the multiplier effect?
The multiplier effect is when the value of your apartment rises due to a raise in the price of rent in the marketplace (and the more units you have the more your increase in earning is multiplied).
Why invest in apartments? What are the 4 big reasons why apartments are a good investment?
- It’s a real asset (it’s not stock at a company that you can’t actually visit).
- As long as you purchased it right, they produce positive cash flow from month one.
- When rents rise (which they do over time even renters know that) apartment values increase to. This is called the multiplier effect.
- You can leverage this asset with debt. When you buy a home you are limited to your income. When you are buying a piece of property that produces 5 million dollars worth of income, the deal is instantly approved to get a loan. You are not limited by your income.
Once you understand commercial multi-family real estate investing, what are the 3 biggest mistakes that you can make?
- Not buying deals.
- Buying too small.
- Not buying enough (units).
Look at enough deals to know when you’re not going to lose on a deal.
Don’t look to buy the cheapest products. Look to buy good products at a fair price rather than fair products at a good price.
What are some of the questions you want to ask yourself to assess your risk in a deal?
- What’s the income going to be?
- What’s the vacancy going to be?
- What’s the NOI (Net Operating Income) going to be?
- What are my expenses?
- What am I going to need to pay someone to manage or fix things?
- What happens if there’s a storm?
- What’s insurance going to be today and going forward?
- What are my property taxes going to be? Is the state going to keep assessing higher and higher property taxes because the state is broken (Like California, Illinois, New York).
These are the things you have to know. If you can figured out that you won’t lose money, you have positive cash flow, and that you have a have a good location, you have a winner, and you need to pull the trigger.
What are some examples of the risks that you need to be pessimist enough to make sure you don’t lose money when everything goes wrong?
- Nuclear devastation
- Tornado
- Etc.
But what are likely risks:
- Everyone starts building up new developments around the location.
- Or houses in the neighborhood get put on some kind of foreclosure and it makes the neighborhood go bad.
- The big shopping mall and all the retail near the location goes out of business and the area is void of any traffic and it’s a place where crime can happen.
- Not making sure that you can have an exit. Maybe down the line you won’t be able to sell the place can nobody wants it.
How many deals do you likely have to look at before you can choose 2 or 3 for purchase?
- Grant says it used to be 4 or 5 out of 100 but if you start looking at more expensive places you need to further scrutinize to make sure you don’t lose money. If you look at enough properties to say no to, you will find a few that are definite yes’s. Be patient in your looking.
You want to be ready with cash (of your own and of people you can call to put in on the deal) for when you see a great deal you can pull the trigger.
Don’t invest in anything that seems iffy. Brokers will lie to you, good but desperate people will lie to you, banks can make mistakes. DON’T lose money. Do you homework to make sure you don’t lose money. Keep in mind that these investments can either be really good to you for a long period of time or really bad to you for a long period of time. Do you due diligence.
What does a Trailing 12 or T12 mean, a T6, a T3, T1…
It means the Trailing 12 months of profits and losses.
What is the Cardone Test?
- Do people need this? For example, maybe affordable comfortable, more safe, or luxury apartments aren’t really being requested in the area you’re looking to buy.
- Is there any technology that can replace an affordable place to live? Is there going to be a new development that takes footing that can competed and drop your rent? Is new development cut off or two expensive (good for you as the real estate investor).
- Is there some cash flow. Do not by deals on a budget. If you need to buy the right property and if you need to go get capital from other people that’s okay.
- You must be able to scale. And scaling requires management. You need to hire an expert of a manager who’s getting paid enough not to leave. This is a huge piece of it. If you don’t scale you will not get rich in real estate. The property management is not a perk. It is a requirement. The manager needs to be at that property, who knows the neighborhood, knows the tenants, knows the terms. knows the customer service. This is where it almost turns into a customer service, hotel similar scenario. If you can’t prove that you have this experience available for the deal, then the bank will not give you a loan or a good loan. They will look at your ability to manage the property BEFORE they consider your credit score and net worth (PS: your net work will be more important than your credit score) and then will require 30% time. Hire a management company that can prove they can manage through good times and bad times.
- Understand the Neighborhood and location. Neighborhood is different than location. Location is down to the yards and feet not miles. You need to have an idea of where these places are going to be in 20 years. You need to know about the jobs in the area, the housing costs, the close neighborhoods, access to hospitals, school systems, income, cost of living, weather reports for years, etc. Pay extra to be in a great neighborhood rather than a questionable one.
What is the likely time length that you would own an apartment complex for?
10 years. This is why it is so critical to pick the right deal. It’s a big commitment. You don’t want to get involved in a deal that is going to be good for a year and then hell for the last 6.
When is losing Cash Flow an possible and okay thing (but should still be avoided if possible still)?
You might buy a place that has cash flow for 5 years and then you refinance it (basically selling it without selling it), and then you use that money to upgrade all the units but then you lift the cost of the units a lot as well and then are back to being cash flow positive after that. Meaning that you still benefit a ton on the whole deal but for a time period you might break even or loose a little cash flow while boosting it up.
What’s the benefit of buying more doors?
- More doors means less rent.
- More doors the more rent.
- More doors means diversification
- More doors means you can control a neighborhood, the tenants in that neighborhood, the rent rate, and you have enough influence to make the neighborhood safer and more attractive as well.
- No matter the doors you’ll be driving monthly income. So going small is less income having more is more income.
- More doors means more capitol per month for fixing things, management, etc.
- Also more doors means all of these things in one location rather than spread out amongst a ton of little spaces.
Multi-multi-family unit deals are?
When you own, or plan to own, multiple multifamily buildings in one area that makes management and repairs easier since you get to use the same for all of the same places.
