Feb 052014

When you are searching for new investment acquisitions, do you know your exit strategy before you close on the deal? What measuring stick do you use to determine if you are going to hold a property short term or long term?

Once you think you’re going to get into real estate investing, you should set up either an LLC or a similar entity. This helps protect you and your investments. It will also help boost your chances of getting tax benefits thanks to your business dealings.

Investors use varying matrix’s to determine how long they are going to hold a property. Depending on your investment strategy, you might achieve your financial goals sooner than later, so a short term hold may be the answer. You might be in a high growth market and want to hold longer to capture more of the appreciation.

Find people that are in this business and learn everything you can from them. There are lots of people that want to get into investing in real estate. There are a lot of people who like to speak about this subject. If none are located in your area, you can find forums online where other investors hang out. Get out there and learn from your peers can teach you.

I recently interviewed one of the successful investor who built large portfolio in short time period. Here’s how he determines if the exit strategy will be short or long term:

Problems with tenants can waste a great deal of time for you.

“If I see property, and I do my rehab, and if my rents per square foot are below 70 cents, that’s going to be what I call the Casa. Casa’s usually are deals that I’m going to hold for two years because I’m below 70 cents (per foot per month), usually I’m in a submarket that – it’s okay. It’s not the strongest, and I don’t believe that submarket is going to actually improve maybe for the next five years. However, I’m buying that property for a very good discount.

Be sure to choose regions that have good reputations and where lots of people want to live. This is very important as it will give you the most amount of resale value when you go about your purchase. Try finding property that you can easily be maintained.

If I’m in a submarket that my rents per square foot are above 70 cents, I call that property a Villa. Villas are properties that my holding time is going to be anywhere between 3 to 5 years, or even more than that. I’m going to be in a submarket that I have a much stronger retail – not only mom and pop – but you’re going to find a Home Depot; maybe we’re going to find a Wal-Mart.

Properties near businesses or water can earn you a lot of money.

If I have a Casa and I have a Villa, my rehab changes a little bit. It’s going to be a little bit cheaper for Casa’s. For villas, everything’s a little bit more expensive because it’s directly related to my tenant profile. All my rehab is going to change a little bit, depending whether it’s a villa or a casa.

Understand that your time is money. You may love rehabbing properties, but is all the manual labor really the most productive use of your time? Or would you be better suited to looking for the next opportunity? This will let you to focus on the important details.

It gives us very good direction. For us, before we buy the property now, we have a very clear plan. If it’s above 70 cents it’s a Villa and below 70 cents it’s going to be a Casa. We always have a plan. “

Be very patient when you are first starting out. Your initial real estate investment transaction may not happen as fast as you expected. Don’t get anxious and the perfect investments. That is not a recipe to waste money. Wait a great investment that’s great.

Decide on a short term or long term plan and exit strategy for your properties. If your properties are in low growth markets, and you can quickly realize value, then a strategy to sell sooner may make sense. If your properties are located in high growth markets, then riding the appreciation tide may be the answer. Whatever matrix you use, make sure you have a strategy and a plan for your properties.

Jul 192011

Some people consider commercial mezzanine loans are complex; some people over simplify mezzanine loans by describing them as a second mortgage. It is not so true for either case.

Typically, commercial first mortgages have clauses that second mortgages are not allowed on the property. Even if they don’t have a specific clause about this, they effectively accomplish it with low LTV percentages like 70%. That is the incentive that   created mezzanine loans because they are not secured by the commercial property.

A mezzanine loan is fundamentally different from a mortgage loan because its collateral is equity, not real estate. With a standard mortgage loan, the lender lends money to the owner of a real estate project. The mortgage lender’s primary security for the loan is a lien on the project. If the borrower defaults, the mortgage lender can foreclose on the mortgage. Whoever purchases the project at a mortgage foreclosure sale —most often the mortgage lender itself — becomes the new project owner.

One common way is for the lender to be secured in some way by the equity the owner has in the property. This can be done by directly partnering the property owner and the lender. Essentially the lender becomes a part owner in the corporation or LLC that owns the property. Part of the contract will entitle the lender to a portion of the cash flow from the property. Once the first mortgage is paid, the mezzanine lender takes their payment before the owner is entitled to the remaining cash.

How this can be used?

The one good example is for Value-add, or non-stabilized properties.  Those properties where cash flow is not stabilized. This could be for any number of reasons, but let’s assume it’s because the property requires significant improvements in order to attract new tenants and increase lease rates. A borrower that has identified a potential opportunity to reposition a property would look to a mezzanine lender for the capital, in excess of what the senior lender will commit, needed for them to execute their plan to create value.

Given the dependency on the borrower to successfully complete the repositioning in order for the project to work, the mezzanine lender will closely look at the borrower’s and/or the project manager’s resumes when underwriting the deal. Therefore, it is extremely important for both (if the borrower is not the project manager) to have experience and expertise in value-add investments.  Value add investments are not for everybody.  Stay away from hypes and repositioning fallacy.

May 202011

Real Estate-unlike some other purchase such as cars, boat, etc. appreciates in value over time.  Some real estate appreciates a great deal because the location or some other feature makes many people want to buy it.  Other times, real estate actually depreciates, because the price the buyer paid for it was too high, and no one wants to pay that amount again, as we are currently experiencing in many areas in the nation.  The trick is knowing how long to hold it.   Hold it too long, and you risk having your money tied up in property that’s not appreciating in value nor producing positive cash flow as well as some other property might.

You well may have been holding a piece of property too long when any of one of the following things occurs:

1. You begin eating up your profit with interest and other carrying costs.

2. You just cannot stand the maintenance and repairs anymore.

3.  You are frustrated because you cannot find a good tenant, and been vacant for too long.  Vacancy of residential property kills cash flow.

4. You are tired of many annoyances of managing a difficult property.

5. You find that the property is simply adding a lot of anxiety to you daily life.

Bottom line is that before you buy property, be sure you know how long you can hold it before it starts to eat up your profit.  Having a clear plan for selling the asset is so important (exit strategy).  Do your homework so that you know what the true cost of property is going to be.