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Capital Formation and Capital Placement
Capital Formation and Capital Placement
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s Your Real Estate Investment Structured To Lower Risks While Increasing Profits?
| Posted on 5 June, 2013 at 18:48 |
Is Your Real Estate Investment Structured To Lower Risks While Increasing Profits? David Campbell One of my most prized skills as a
professional investor is my ability to sniff out amazing real estate
investment opportunities and then engineer creative and lucrative deal
structures to lower investment risks while increasing investor profits. While
choosing a strong market and property are certainly important
pre-requisites to a successful real estate investment, I view individual
properties as pawns in a larger game of financial strategy; the
financial and ownership structures surrounding a real estate investment
have more impact on my bottom line than the sticks and bricks in the
transaction. I've simplified some of these strategies
into sound bites to help you do this. Even though investing tends to
be based on each investor's personal investment philosophy than
universal rules, I call these sound bites "Hassle-Free Cashflow
Investing Rules" . Hassle-Free Cashflow Investing Rule:
Buy what tenants want. It's a lot easier to purchase a real estate
investment your tenant wants to live or do business in than it is to
convince a tenant to want to live or do business in a property you
already own. In today's buyer's market, there are a lot
distressed commercial properties that need to be repurposed to a higher
and better use. The economic collapse of the community banking business
model as well as technological advances in online banking have resulted
in a slew of vacant bank properties and very few banking tenants
looking to lease them. It would be a bad business plan
to acquire a vacant bank and try to release it to another bank. My
partners and I recently acquired a vacant bank property we are
converting to a Class A medical office building because that what
tenants in this area are looking for. We started with the tenant and
then located the property. My team brought the active management /
sponsorship / development resources to the project and several of my
clients provided the passive equity for the project. Hassle-Free Cashflow Investing Rule: Start with a real estate investment business plan not with a property. Our
business plan is to purchase vacant (bank) buildings and convert them
into medical office. Our real estate investment strategy was to
identify a strong primary care physician group to be the anchor tenant
and then go shopping for a desirable property together. The anchor
tenant physician located a vacant bank building in a fantastic location
where he would love to locate his business. The property
is on a major thoroughfare with good signage visibility, close to a
hospital and in a large population center. These are promising
attributes for any medical office, but there were positive attributes
about this particular property that appealed to the tenant which I would
have never thought of. First, the tenant needed a property that could
easily accommodate ambulance access. Second, the tenant wanted a
property in a "health professional shortage area" (HPSA) with a specific
HPSA score that increased the amount of government subsidies doctor
tenants in this building would receive. If your HPSA score
isn't strong enough you may have difficulty attracting doctors to your
building and you may have to lower your rents to do it. HPSA scores
change street by street based on census data. In effect there is an
invisible line down the street that says "this property is more valuable
as medical office than the property next door" because of where the
line is drawn. Hassle-Free Cashflow Investing
Rule: It's essential for a prospective landlord to listen to their
tenants and discover what they value most. I steer
new investors towards owning houses as their first investment because
it is fairly intuitive to understand the amenities residential tenants
will pay for and what they won't pay for (number of bedrooms, proximity
to jobs, etc.). When you are in the world of commercial real estate,
prospective tenants are fewer and their needs are more exact. Instead
of starting with a property, it can be much more lucrative to go
shopping for a property with a prospective tenant or buy a property with
a strong anchor tenant in place and fill up the surrounding vacancies
with those types of tenants who have a proven history of success
co-locating with your anchor. Hassle-Free Cashflow
Investing Rule: For a real estate investment partnership to be
successful each partner needs to offer a resource the other does not
possess. The basis of my value proposition to the
primary care "anchor tenant" looks like this: "You become the anchor
tenant in our multi-tenant office building and invite the doctors who
receive your patient referrals to lease additional space. My team will
put up most of the money as well as the real estate skills needed to
purchase a vacant property, redevelop it into a large multi-tenant
office, and then manage the mechanics of the property and a complex
financial transaction. We each bring something unique to
the partnership and we'll co-own the property in partnership together."
By partnering with my anchor tenant, I am 100% confident our building
will have higher rents and a higher rate of occupancy than if I were
trying to do this real estate investment on my own. Hassle-Free Cashflow Investing Rule: Privacy can be a valuable tool in your real estate investment arsenal. My
anchor tenant physician located the property he felt was perfect for
his practice. It became my team's job as the real estate professionals
to negotiate a favorable price and terms with the seller. We put on our
best poker faces and made sure the seller did not know the identity of
our high profile physician tenant by writing the offer in the name of an
entity controlled by my team. It appeared the seller was
distressed because the property was vacant and the seller's prospects
for finding another bank tenant were slim, but if the seller knew who
our tenant was our intended use of the property the price would have
surely gone up. It was easier for my team to negotiate aggressively
with the property seller because we were not as emotionally involved
with that specific property, as our anchor tenant was. Although
we had a property identified and an anchor tenant lined up, there were
still miles and miles to go before we had a viable project. It took a
lot of time and resources for my team to develop financial forecasts
based on rental income, operating expenses, redevelopment costs,
availability and costs of capital, etc. It took months to create
architectural drawings and use those drawings to entice prospective
tenants to sign binding leases in our property. It took
weeks to get our building permits and change of use permits approved by
local government. And then there was the financing! A huge risk in
purchasing any property in this economy is the availability of
conventional financing. A lot of banks that issue attractive terms
sheets for commercial loans only to back out at the closing table,
leaving you scrambling. Hassle-Free Cashflow
Investing Rule: Shift as many financial risks as possible from the Buyer
(you) to the most motivated party in the real estate investment
transaction (usually the Seller). In our project,
we were able to negotiate a four month escrow with the ability to extend
the escrow an additional three months if required by our lender. We
used this extended escrow to complete all of our pre-development
activities. Architectural plans were drawn, leases were signed, permits
were approved, guaranteed maximum price bids were solidified with our
construction contractors, and we had time to shop the debt and equity we
needed for this project. Our long escrow period shifted
all of our pre-development carrying costs onto the seller and more
importantly we drastically reduced investor risk. In the event we were
unsuccessful leasing the building during the escrow period, we
structured the purchase contact such that we could cancel with no
penalty and thus dodge the bullet of purchasing a vacant, unleaseable
building. We eventually closed escrow on the property
without ever putting a dollar of earnest money at risk and all of our
architectural fees were paid at closing after we'd raised all of the
capital through syndication! This business plan worked out
well and I am grateful to have a strong team and partners to work with
which is why I can write this newsletter with a smile on my face, but
not every real estate investment is smooth sailing. I invest a lot of
resources into real estate investment projects that never go anywhere;
that is just part of the cost of doing business. As a professional
investor, it is my job to forecast where the hurdles of each real estate
investment might be and determine the probability of clearing these
hurdles while putting the least amount of capital at risk. Hassle-Free Cashflow Investing Rule: Novice investors will make mistakes and that's OK as long as you've started small. A
great place for new investors to start is the acquisition of like new
construction, entry level single family homes purchased from a developer
who offers a builder's warranty and investor-friendly terms is. The
process is not complicated, you can do your due diligence while putting
little or no capital at risk, and the opportunity to learn from the
experience is high while the risk is low. This is more than a shameless
plug for my homebuilding company that sells positive cashflow, like new
homes with creative investor financing. I really want you
to take this paragraph to heart and not overextend yourself on your
first few deals. When you are a new investor, your first few deals
should be as simple as possible so you gain experience, confidence, and a
positive track record to set you up for future deals. As
you grow and diversify your real estate investment portfolio into more
complex transactions, consider becoming a passive investor in group
investments with sponsor who can mentor you through the process. My
first venture into medical office development was simply writing a check
to another developer who did all the work and mentored me through the
process. You can read about real estate investing all you
want, but until you've jumped into a deal with both feet, you're still a
newbie who doesn't know what he doesn't know. If you want to lower
your real estate investment risk while simultaneously venturing into
potentially more lucrative ventures, let's talk. I am a
teacher at heart and I love mentoring new and part-time investors. If
you are looking for a real estate investment to work hard so you don't
have to, my team can also help you become more of an armchair investor. Regardless
of your real estate investment style. If you'd like help lowering your
investing risks while increasing your real estate profits, please reach
out to me and I'd be happy to help. ### David
Campbell is formerly a member of the teaching faculty of California
State University Fullerton, Santa Ana College, Azusa Pacific University,
and has taught on the eight day Investor Summit at Sea with Rich Dad
Advisors Ken McElroy (author of ABCs of Real Estate Investing) and Wayne
Palmer (Real Book of Real Estate). David is a Real Estate Investment Strategist and he can be reached at: (866) 931-9149 or by emailing him at: [email protected] © 2005-2013 www.ValueHoundAcademy.com
All Rights Reserved. Reproduction without permission prohibited. |
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