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Category Archives: Diane Bowman

HAPPY NEW YEAR 2014!!!

2014There are hundreds of quotes to help motivate you to change what you would like to change. Unfortunately there is also the quote, “maybe next year”. Let’s pretend the second quote doesn’t exist and it is imperative that you make the change this year.

In order to accomplish that task, you have to believe that it is imperative. Look at your finances, work hours, spare time, and part time. What needs to give to make your dreams a reality?

It really irritates me when someone says to me, “if you were really successful you wouldn’t work”. Really! Because Warren Buffet, Bill Gates, Oprah Winfrey and Robert Kiyosaki are all wealthier than I am and they all still work. Success is not the product of laziness it is the product of desire.

My husband and I were very happy middle-income earners when we purchased the education. A few of our friends thought we were just going through a mid-life crisis when we purchased our first few rehab houses. As a matter of fact I had a friend who went out and bought a car that cost the same amount as my first investment home. During this time Bob and I were both working full time and our son was on a travelling soccer team. We had several hard choices to make and I want to share with you the questions we asked and decisions we made.

How many hours a week are you giving to your future? This was a tough one for us. We both worked, we both went to soccer games, Bob played golf and I did all types of crafting on weekends to donate to the church plus I love to read.

Our solution: We struggled with this and then began keeping track of our time as though we were contract employees. We kept track of all time by the quarter hour for one month. We then decided that each of us needed to carve out at least 20 hours per month for our business. We each decided on our own where we would create our time. There were definitely bumps along the way and as our business grew we needed to create more time. At times I would resent Bob having 5 uninterrupted hours to play golf, when I felt that my time was always being interrupted. Bob’s solution was for me to go with him to the golf course, take my book and sunscreen and have 5 uninterrupted hours with him. The result was we met many people who were able to spur our business forward, and Twelve years later we now play golf together on our days off.

How much of your net worth are you willing to lose in order to change your life? As a Mentor, I can tell you this is a very difficult question for many people. Bob and I had worked for 30 years to obtain what we had and I thought long and hard about what type of risk I was willing to take. Bob had the attitude of let’s go all in, we either make it or we don’t. I was not quite as ambitious. It took some very long and serious talks for me to decide I was OK losing everything as long as we had a house, not the 4 bedroom 2 bath with a pool and billiard room that we have now, but a house. As a matter of fact I decided that if we lost everything I would be OK moving into my $73K first investment house and starting again. Robert and Kim were willing to sofa surf and live in their car. Now this may sound drastic but I have to say it was very liberating. The reality was if we did nothing and retired with our small 401K’s and Social Security I would probably not even have the little rental house. Once I knew my risk tolerance it was much easier for me to work the business. I have had other investors tell me that these first two items changed their lives.

Ok the hard decisions are over, let’s work on building your business. First and foremost you must understand the numbers. This is fifth grade math and it is not the numbers that concern you it is what makes up the numbers. This is called “underwriting the deal”. The calculations you should master are Cash on Cash Return, ROI, Debt Service Ratio, and how to calculate the return on equity. It is fun and exciting to learn the techniques and work your marketing, but if you can’t recognize a deal from a dud, you will be spinning your wheels. Make it a point to learn this math from your classes and put a little extra effort into self-study. Trust me once you know how to recognize a deal you will then be able to be creative in the deal structure.

And finally, give yourself permission to be wrong. We all are, some maybe more than others, but we all make mistakes. It is what you do with the mistakes that will make or break your business. When a group of investors get together, there will always be “war stories” or “arrows in the assets” that will be discussed. We try to minimize your risk by sharing our mistakes, but that just means you will probably find some of your own to make, we all do.

My challenge to you for 2014 is by the end of January sit down with your business partner, spouse, significant other, or maybe just some self -reflection and answer the first two questions. By February you should have mastered the formulas for deal creation. For March and April, I would like you to schedule 3 business related meetings a week. At each of these meetings you should discuss your business model and work to build your power team. For each person you meet with ask for a referral of someone else that may be able to help you in your business.

If you follow the plan by May you should be working your new business, and you may even need to go back to step one and determine where you will find more time. I do not do that craft work for church anymore, but I am able to make donations to the charities I support. I am playing more golf and spending more time with my husband and very often we are working the business on the course.

This is the plan we followed and a year after starting the classes I left my employment of 17 years to do this business full time. A year later my husband left his job and at that time I started mentoring and then training for the organization that had given me the ability to create my own financial freedom.

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Real Estate Loan Due Diligence

The greatest mistake you can make in life is to be continually fearing you will make one.”  Elbert Hubbard

We all face fear on a regular basis and most overcome the fear with experience and knowledge.  As a Real Estate Speaker it scares me how some new investors will spend days and months analyzing every aspect of Due Diligence on a property and then blindly sign loan documents without even reading, let alone understanding, the terms.  So to help alleviate both our fears I am going to discuss loan due diligence this week.

Unlike most residential loans the commercial loans are not “Set it and forget it” documents.  During the term of the loan you as the borrower will have ongoing responsibilities in order to stay in compliance.

Let’s begin with shopping for the loan.  Everyone understands comparing interest rates but in many cases a few other terms may be more important.

  1. What is the term of the loan?  While most loans are amortized over 25 or 30 years in many cases commercial loans will need to be modified in 3, 5, 7 or 10 years.  If interest rates are low and you plan on holding the property for more than five years you may chose to pay a slightly higher interest rate to gain a longer term loan and avoid paying modification costs and possibly much higher interest rates when you modify the loan in a few years.
  2. Recourse, Non-Recourse, Partial Recourse – Full Recourse means that if the loan goes bad the Guarantors are responsible for the entire unpaid balance.  Partial-Recourse sets a percentage or cap on the obligation of the guarantor, and Non-Recourse means that if the loan defaults the only recourse for the lender is to take the property.  When obtaining a Non-Recourse loan be sure you understand the carve-outs.  Carve outs are defaults or conditions that may cause a loan to become recourse.
  3. Multiple Guarantors – If there is more than one person signing on the loan are the guarantees several or joint and several?  Are they in proportion to the signors interest in the investment?
  4. Reserves – If the loan includes the establishment of repair or construction escrows it is important to negotiate before closing how and when you will be able to access the funds.
  5. What may constitute a default on the loan?  With commercial loans defaults may occur for reasons other than just non-payment.  Be sure you understand your reporting obligations and the consequence of failure to report.
  6. When you have found a potential lender, before you start spending money, it is important for you to understand the lenders interest.  Has the lender actually committed to fund the deal or have they only provided a non-binding term sheet?  If they have made a commitment it will be subject to conditions.  It is important for you to understand the conditions and determine if they are items within your control.
  7. Timing  – Is it reasonable for the lender to close your type of loan within your contract deadlines.  What targets will you need to meet for that to happen?
  8. It is important for you to understand going into the loan if the committed amount can be reduced for any reason.
  9. Are you prohibited from subordinate borrowing?  If you are prohibited from borrowing additional funds after the close of the loan be sure your first position note is sufficient for not only your purchase but also any repair or construction funds that may be needed.
  10. Is the lender taking control of management?  Some loans will state that you must have professional management and that the management may not be changed without the lenders approval.
  11. Are there any prepayment or defeasance penalties and if the loan is assumable what are the requirements and the assumption fees.
  12. Exit Fee – Yep you guessed it! Some loans require a fee at the time of payoff.

I encourage everyone to practice your loan due diligence to compliment your physical and financial due diligence to curb your uncertainty and fear.

   Fear defeats more people than any other one thing in the world.

 Ralph Waldo Emerson

 Conquer the fear and prove yourself a winner.

Keys to Finding a Broker who will help make you a pro!

Real Estate Broker

Real Estate Investing: Working With Brokers

Building a relationship with your real estate brokers seems to be one of the great mysteries for the beginning real estate business.  Some business owners take the approach of “I am the customer they should be happy to have me.” Others assume the broker does not understand real estate investing, or many assume the broker knows the buyer is new and doesn’t want to be bothered.  Any of these scenarios may be true, but more likely the buyer is the problem.  Let me break down each of these situations, and you will see the answer has a common thread.

First up, let’s discuss the attitude of “I am the buyer I am always right.”  From someone who has retail experience, I can tell you the end of that phrase is “except when you are not.”  You may not be correct in assuming the broker should be glad to have you as a client.  Just like everyone else, the broker has a limited amount of time and resources to invest in making a living.  A broker does not get paid for spending hours with you; they get paid if a deal closes.  When you speak with a broker, it is your job to explain your criteria.  It is then the broker’s job to explain his or her criteria.  The two of you should then decide if this is a good fit.  Part of this process is you knowing exactly what your product is.  For example, explain that you are buying multifamily units in B and C neighborhoods throughout the greater Ohio River Valley.  Now the broker knows your product and your area.  If that is not their market, it is not a good fit.  Do not change your market to fit the broker. Find a broker who specializes in your product ask for referrals.

The second obstacle is thinking that the broker does not understand what I want.  That may be true if the broker does not specialize in your product or does not work with investors.  However, it is possible that you are not sure what you want. Therefore, you cannot communicate your need effectively.  A good broker is only going to offer the best products to buyers they know can close the deal.  If you are not able to convince the broker that you understand the product and have a method for analyzing and closing the deal, the broker will not be confident to present you as a potential buyer to the seller.  The best way to overcome this hurdle is for you to take the lead during your first meeting.  Let the broker know your business model.  In addition to the product and area, you may want to discuss how you analyze a deal. This will let the broker know that you will be doing your own due diligence and buying on actual not proforma numbers.

The third and probably most prominent problem is “the broker knows I am new.”  Everyone has a first deal.  It is more about how you view and present yourself than about how the broker views you.  In order for the appointment to go well, the broker needs to know that you have a business model.  The problem for many new real estate business operators is they don’t know their business model.  If you don’t know, you cannot expect everyone else to know. So let’s address your business model.

What is Your Business Model?

When describing your business model you need to hit the highlights and answer the questions before they are asked.  Begin with what is most important to you.  The most important thing for me is the area.  I can change a building and change the tenants, but I can’t change the area.  I look at the economics of the market to determine if it is stable and up and coming.  Then I look at the neighborhoods. Is it an A, B, C, or D neighborhood? These are very subjective so I want to be sure the broker understands what I think a B or C neighborhood is.  Next, I address how I am going to analyze the numbers and what targets meet my criteria.  Last, and most important, I let the broker know how I am going to purchase these properties.  For example, currently I am buying with Fannie Mae financing and Reg D syndication to raise capital for the upfront costs. On some occasions I will use bridge financing to stabilize a property.  When I am finished showing the broker how I do business, I always finish with, “How do you see us doing business together?”

At this point it is time for you to take a breath and listen.  If you feel comfortable then it is time to move forward, and go back to step one and begin again. You can never have too many good brokers bringing you deals.  Just make sure that you have a Broker that understands you and your needs so that you can form a symbiotic relationship.

Diane Bowman
Rich Dad Education Elite Commercial Course Instructor

Commercial Lease Terms for Due Diligence: Frequently Asked Questions

Commercial Lease Terms

Commercial Lease Terms

In a previous blog, I introduced Commercial Lease Terms for Due Diligence.  Based on that article I have had a few requests for more information.  The following are some of the most frequently asked questions after Due Diligence begins.

Tenant Improvement Allowance:

As a rule of thumb we give an allowance of about $5.00 a sq. ft. for cosmetic rehab or renewal incentive.  If you are bringing in a new tenant with a complete build-out, you may be looking at closer to $15.00 a sq. ft.  If you are purchasing a property with a TI be sure the work has been completed and paid for prior to the purchase or receive a credit from the seller for the liability.

Turnkey:

I believe this one causes confusion because I have seen it used in two very different ways.  Some real estate professionals will refer to a finished unit as a turnkey unit, meaning what you see is what you get.  No allowance for improvements just turn the key and use the space.  These types of units would have very little upfront expense for the landlord.  The other way Turnkey is used is to imply completely furnished or equipped as in all the tenant needs to do is walk in.  Clearly there is a wide spread in these operating costs so be sure to ask the necessary questions to determine your ongoing costs.

The next few items are numbers the lender will review.

Expense Ratio:

This is the percentage of expenses to the Effective Gross Rent (EGR).  When you are analyzing Office, Retail, and Industrial there will be variations based on the tenant expense reimbursement for Net, Net Net or Triple Net Lease.  While apartments still have some variations, you can assume that any expense ratio under 30% may be suspect to a lender.  A newer building may have an expense ratio of 30 to 35%, but most apartments will be 40 to 45%.  In order to stay on top of current trends and variables, you may want to investigate the National Association of Realtors reports “Income and Expense Ratio – Apartments” and “Income and Expense Ratio – Office.”

Difference between Initial Capital Improvements and Reserves for Capital Improvement:

The Initial Capital Improvements are items that you will do within the first 12 to 18 months of ownership to improve or repair the asset.  Often the lender will want to see this money in a reserve account prior to approving the loan.

Reserves for Capital Improvement are funds you are setting aside to insure the ongoing integrity of the asset.

Initial Capital Improvements will depend on the current condition of the property however the following are guidelines for a few commercial products.

Capital Expense Reserves:

  • Apartments: $300 per unit per year
  • Retail:  between 3-5% of Effective Gross Rent
  • Office: between 3-5% of Effective Gross Rent
  • Industrial: between 2-4% of Effective Gross Rent

*A conduit loan may be .15 per sq. ft. per year for Office and Industrial

  • Self-Storage: between 3-5% of Effective Gross Rent
  • MHP: between 3-5% of Effective Gross Rent

One final item to remember is the importance of professional management in securing your financing.  Even if you plan to self manage your onsite personnel, please build in approximately 5% of the EGR for asset management.  If the lender will consent to self-management, the money is in the budget to compensate you. If they require licensed approved management, you have the funds to cover the expense.

Diane Bowman
Rich Dad Education Elite Commercial Course Instructor

Commercial Lease Terms for Due Diligence

Commercial Lease Terms

Commercial Lease Terms

When you purchase commercial real estate you are purchasing the leases that are already in place.  In order to properly evaluate the investment, I have highlighted a few terms to assist you with the analysis.

Rent Types:

Gross vs Net:  Look at this the way you would look at your paycheck.  When a lease is a Gross lease you as the landlord still need to pay expenses such as repairs, and taxes and insurance from the rent you receive.

With a Net lease the tenant pays rent plus additional costs so you as the landlord are able to keep all the rent charged.   From a Due Diligence standpoint it is important for you to understand exactly what is to be paid by the tenant and what is to be paid by the landlord. The most common types of Net Leases are a single Net, which means the tenant will pay either Common area maintenance, real estate taxes, or building insurance.  Double Net or NN is when the tenant pays two of the above, and triple net is when the tenant is responsible for a share of all three.

Lease Length:

This is definitely a case where not everything you see is what you get.  You may have a lease that appears to be a five-year lease, but on closer examination you will see that it is really a two-year lease commitment and the tenant has the right to renew for 3 one-year periods, but not the obligation!

For instance the lease may say the tenant has a five-year lease through 2018.  When you read the lease it states that the tenant agrees to lease the space through 2015 and reserves the right to 3 one-year renewals through 2018.  What that means to you is that the tenants have locked you into a lease agreement long term and have given themselves the ability to cancel after two years.

Insurance:

As an Owner we typically want three types of insurance.  Replacement insurance to replace structures or equipment, liability insurance to protect from the operation or an accident, and income replacement insurance that will replace lost income from an insurable claim.  In order for you to get accurate quotes from your insurance agent, you will need to know what insurance your tenants are required to carry.  By example, if the lease states that your tenants are required to carry 3 million dollars of liability insurance you cannot purchase a policy that requires them to have 5 million.  You will also need to know what your lease states that the landlord and tenant obligations and rights are if the rental unit cannot be occupied.  This will make a difference in the type of income replacement insurance you may purchase.

Early Termination:

The “Break Clause” allows either party to terminate the lease early under certain conditions. By example, some well-known national tenants will sign long term leases but will build in a termination clause after 3 years.  This clause will allow the tenant to evaluate the market and determine if it is better to pay a fee, close up operation and move on or to continue the lease.

In most cases the termination fee should be significant in order to force the tenant to only terminate the lease under extreme circumstances.  I have, however, seen a few leases where the termination fee was as little as six months.

While the Break clause may sound scary it may also be used by landlords to eliminate tenants that are not adding value to a property.  This is especially true of a retail tenant.  Very often retail leases have performance clauses that state if the sales of a tenant drop below a pre-established amount, the landlord has the right but not the obligation to terminate the lease.

Subordination:

As a landlord you will want a subordination clause that states, “The tenants subordinate their rights to allow future financing and sale of the building.” Most lenders will not look at financing a property unless this clause exists because the Mortgage would then be in second position to the leases.

Holding Over:

Does the lease state what will happen if the lease term expires and the tenant remains in the unit?  The value of your commercial rental may be negatively impacted if you do not have leases in place.  Your goal is to have your tenants sign a lease renewal or give proper notice of intent to vacate so you can find another tenant.  If the tenant is indecisive and does not sign a renewal or give a notice of intent to vacate, they are deemed to be in a holdover period.  Many times a landlord will have a clause in the lease that states if the tenant goes into a holdover period the monthly rent will go to two times the last contract rent.  The goal of this clause is to force a tenant to make a decision.

Hopefully these few tips will help you to move forward in your analysis and I look forward to hearing about your progression.

Diane Bowman
Rich Dad Education Elite Commercial Course Instructor

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