Best Multifamily Real Estate Investing Blog

How To Create Baby Money Soldiers

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Leverage The Power of Compounding To Scale-Up Your Apartment Portfolio

We bought our first 25-unit property for around US$600,000, in 2013. In 3 years, we made all of our investment back from the property through a refinance. Now, here is where it gets interesting. Most people would have used the proceeds to buy a ultra-luxury car or similar liabilities. But, we knew better. Having or aspiring for a supercar is not a problem, however, we suggest to finance such liabilities from passive income generated from real estate further down the road. That way it is more sustainable and you won’t lose on wealth-creation opportunities while you are in wealth creation mode. Coming back to our story of the first deal, we refinanced all of cash and then some and we rolled that into another deal. It is a simple yet proven way to multiply money quickly. It is like creating baby money soldiers who go further and further in the market and generate multiple streams of income for us. Every dollar needs to procreate and have a specific job assignment.

Refinancing or Refi and Roll as it is more popularly known is an excellent strategy to access the equity you have accumulated in a property. At Jake and Gino, we have used reinvestment as a tool to consistently grow our portfolio of properties. To date, we have refinanced over US$20 million. The first deal is where it all begins. It is the factory that generates cash flows that can be reinvested. We made so much out of our first deal in terms of cash flows, appreciation in property value and cost aggregation benefits, etc. It is still making us over US$5,000 per month in positive cashflow. As the saying goes, it is not what you make; it is what you keep.

You too can achieve similar results through deploying baby money soldiers like us and leverage the power of compounding. To put it simply, reinvesting returns from investments to maximize profits will result in compounding. It is the smartest and surest way to build wealth in the long term. In Multifamily real estate, this works by reinvesting rental income or income generated from a refi into other properties. Every time an investor cashflows or refi’s a property, the profit should be used to reinvest in another property.

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Even if you decide not to buy another property, you can reinvest returns in remodeling your existing apartment homes. As a rule of thumb, remodeled apartments earn a higher rent because tenants are more likely to pay for properties with additional amenities and upgrades. Reinvesting returns into your property can appreciate the property’s value on an annual basis. Even a small increase every year can add up to a huge profit over a period of 5-10 years. Remodeled apartments also fetch a much higher price, should you ever decide to refi or sell. Cash flows from existing properties can also be used to make a higher down payment on other rental properties. A more significant down payment allows investors to get loans at attractive terms because such borrowers are seen as less risky by banks. This is especially true for Fannie Mae and Freddie Mac loans.

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Building wealth from real estate is scalable if you have a diversified apartment portfolio with multiple properties. Multifamily properties are lower-risk investments because even if there is one vacancy, there are other tenants generating passive income. If you want to build long-term wealth to take care of your retirement needs, reinvesting profits from real estate in other rental properties will generate passive income and save taxes. Even for those who have already reached their financial goals, reinvesting will generate and grow additional wealth.

But keep in mind that real estate compounding takes time. This is the get rich slow game. For investors looking to compound profits, now is the right time to start. It does not matter if property prices are high or if the economy is not doing well. You are investing in the long-term, so what happens right now needs to be evaluated over 10 year time periods. Investors always have the option to spend the money they make right now on liabilities, or they could defer that gratification and increase their wealth by investing in another deal. But do not expect to compound profits overnight. Real estate is a long-term game. Cash flows can vary over a period of time, in case of vacancies or repairs to the property. While apartment prices as a rule tend to rise over the long term, there can be fluctuations in property value. Again, think in decades.

Whether reinvesting real estate income or spending it depends on an investor’s financial goals. Any investor looking for financial freedom and a substantial nest after retirement to maintain their current lifestyle would do well to reinvest real estate profits into other deals. There are certain parameters that investors must keep in mind while reinvesting. The first is ensuring that they have enough cash flows to reinvest, taking the time to screen tenants before renting out properties so that tenant turnover rates are low, and managing existing properties well by hiring a good property manager. Good management of properties is absolutely essential to reduce tenant turnover rates, prevent sudden repairs, and appreciate property values.

Remember, if it don’t cashflow, let the grass grow!

– Jake Stenziano

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A 401(k) is Risky. Here’s a Safer Investment Strategy

[Excerpt from the article authored by Jake Stenziano, for Entrepreneur Magazine]

Real estate investment is arguably safer than traditional investment methods.

If you are reading this, you are likely wondering if there is an alternative to 401(k) to grow your wealth rapidly. Traditionally, investment vehicles such as the 401(k), where you invest throughout your career and do not see your funds until after retirement, have been considered the safest way to grow your money.

But is it really safe? In 401(k), you rely on compound interest to grow your money over a period — say 40 or 50 years. You have no access to this money during this time. In the case of most retirement accounts, you cannot take distributions until you reach the age of 59-60.

And when the time does come to withdraw money, typically after retirement, there is very little left because taxes work against investors. Gains are treated as ordinary income, taxed as high as 35%, and if you wish to take out your money early, you are penalized for it with an additional 10% penalty tax. Even if an investor needs the money and wants to take it out, they will still be penalized. In terms of returns, investors get a raw deal because they have no control over their investments.

There are many restrictions on investments with a company 401(k) plan. For instance, investments are limited to traditional investment options, such as exchange-traded funds (ETFs) and mutual funds. When adjusted for taxes and fees, returns from 401(k) investments tend to be lower, which can stop you from achieving your financial freedom goals.

Fortunately, there is an alternative way to grow your money steadily and have access to it before your retirement years. Investing in multi-family properties is an excellent option for those facing retirement or even for the young. Real estate has always been known for its high returns, especially multi-family properties.

Investing in apartment complexes pays the investor an assured sum of money every month. Ideally, an investor should look to make a minimum of $100 per unit every month from their property. This additional income will cover expenses such as education fees, medical expenses, a wedding or a vacation.

Investors must understand that you cannot build wealth by saving money. Inflation and other factors diminish the purchasing power of money over time. Consider the US dollar, which has lost 42% of its value since 2000. A $100 in 2000 is equivalent in purchasing power to about $172.05 today.

Read further on Entrepreneur media website.

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5 Challenges to Overcome When Investing in Multi-Family

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Often when we think about multi-family real estate investing, we think about all the “shiny” aspects of it: the scalability, the ability to invest large sums of money, the opportunity to force an asset to appreciate and much more. Indeed, all of this is possible and best of all what that means for us as investors, is the ability to build incredible wealth with great tax benefits. I would be lying if I said I’ve fully tapped into all the benefits of this asset class, though through some first-hand experience and seeing what some of my closest peers have been able to accomplish I can say with 100% certainty that there are many challenges associated with this investment.

1. Time Commitment: Unlike other forms of habitational real estate, multifamily investing is not passive (well, it can be). I’ve seen many (myself included) who started invested in single family. There’s certainly overlap when investing in these two assets, however, multifamily involves significantly more strategy and oversight to be an effective operator of an asset. Even when you have a third-party manager to manage the day-to-day operations, there’s still a good amount of work that you’d want to do to be an effective owner/ operator. You’ll need to manage the manager, assist in making key decisions (rental rates, unit turns, when to evict, when to fine residents, major capex, and most importantly building a sustainable culture within the apartment complex). While one of these items, in and of itself, will not create a ton of work, in aggregate it takes time and when you factor in multiple apartments communities, it will be a handful. As such, if your goal is to operate multifamily real estate, know that it is not a passive activity. That said if you like the concept of multifamily, the benefits associated with it, but don’t have the time/ would rather use your time for other activities, there is the ability to invest capital in with operators in what will allow you to invest “passively”. This is one of the coolest aspects of multifamily; you can have the best of both worlds.

2. Finding Deals:If only it was as easy as looking on Zillow calling the listing agent and submitting an offer. While technically that is possible, it’s highly unlikely. In any given market there are only so many brokers that handle a vast majority of the apartment deals. It takes months even years to establish a rapport and build credibility. Just like a plant, time is needed for that seed to grow and in this instance, quality deals to present themselves. For me, it took a year and a half. For some it might be 6 months. Deals can also be had by going direct to owners, I have had success with this, but from experience there seems to be somewhat of an art to the execution of this method rather than science. Through trying different calling scripts, language in letters, and text message templates, you can figure out what works best for contacting owners. All this to say, figuring it out takes time and cannot be had overnight.

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3. Funding Acquisitions:But I don’t have $10M. The good news is for a deal of that size or really any size for that matter, the capital stack can be structured in such a way where it’s possible to spearhead a deal for limited to no capital exposure through methods such as seller financing and master lease options. In the current seller’s market, however, owners aren’t as motivated to structure deals in this manner. As such, many buyers use sources of such as bank debt, bridge loans, hard money or Freddie Mac/ Fannie Mac agency products. At minimum, a deal will require 20% of the purchase price to be paid in the form of a down payment, however, with reserves and rehab budgets needed, the amount of capital needed for a project can be closer to 30-50%. At a $10M purchase price that’s still a lot of capital, for which most don’t have. That’s where the power of partnerships through the likes of Joint Ventures and Syndications can make funding deals seamless. Through one’s network, multiple people can take down larger deals. There are many requirements that lenders may have including net worth and liquidity as personally guaranteeing loans (and many others), however, with the right partners, anything is achievable.

Watch the Movers & Shakers Podcast with Nate:

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4. Selecting the Right Market(s):It is very easy to have your eyes on several “hot” attractive markets. But determining which market(s) you’re going to focus on is key. What are your ties to a given market? Do you live in it? Is it easily accessible? If you don’t currently live there, do you want to move there? Are there jobs being created? What are the demographics within? Is the area flood prone? What does crime look like? The list goes on and on but hopefully the point is clear that there is a lot to consider and it’s important to figure out which of these are important when evaluating your investment criteria. There is nothing wrong with looking at multiple markets at once, however, without the right team looking at 5-10 markets at once will be a challenge. Starting with 1-2 may end up being a much better use of time rather than going too wide and not deep enough in a given market.

5. You Don’t Always Win/ Make Money:This is not just multifamily, but investing as a whole. Often times you see all the wins associated with apartment deals, but what about the losses, they have to occur too, right? In the current market, with low interest rates, continued cap rate compression, and astronomical rent increases (leading to increases in valuations) it is hard to lose. Investors have made fortunes on bets that have paid off because of where we are in the current market cycle. That said, we really don’t hear a ton about those who were investing around 2005-2010, that’s because it’s more likely than not the folks who were investing then didn’t make money, potentially losing some or all of their capitals. Inevitably, interest rates will go up which will have an effect on how deals trade. While it seems unlikely that another financial collapse similar to 07-08 occurs in the near future, changes to interest rates, increases in operating expenses, inability to source labor, and large sums of capital expenditures (such as, HVAC’s, plumbing, roofs, electrical, etc.) are all factors that have the potential to force owners into selling, potentially at losses in the future. Obviously, this is speculative, however, the takeaway should be the importance of stress testing a business plan while underwriting and during due diligence. Ignoring these potential hurdles without a plan to resolve can lead to large losses down the road.

The bullets above lay out potential headwinds faced when investing in apartments. There is certainly many positives to it, as when done right, has the ability to change the trajectory of one’s life, as mentioned earlier. However, to get there it is key to surround oneself with experienced/ motivated folks, some of who that have been there and done that. Being able to level up through the right mentors and leaders is what allows one to achieve success in their multi-family business.

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The Pros & Cons of Multifamily Real Estate Syndication

In the previous article, we described what is a multifamily syndication. In this article, I want to present to you the pros and cons of syndication, and more importantly, if the strategy aligns with your goals. Jake and I amassed a portfolio of 1,000 units before we decided to syndicate our first deal. Should we have started syndicating sooner?

As we get into the pros and cons, the answer to that question will be clearer. Jake & I run a vertically integrated company, which means that we control all aspects of the business, from acquisitions, to management, to disposing of the asset. It is much more challenging for us to acquire thousands of units per year because we need to scale our hiring for our property management company, and as you may know, we are in a challenging environment for hiring.

We do not want to run the risk of over expanding our infrastructure. If we employed third party property management, this would be less of a concern. So for us, our goal is to acquire up to five hundred quality units per year, and we do not need capital from investors. We can fund the deals ourselves. Early on in our career, we were fortunate to have formed a partnership that had a strong balance sheet for us to qualify for financing.

We were also fortunate to be able to refinance in excess of $15,000,000 out of our current portfolio and utilize that capital to invest in the next deal. Our goal was to hold these assets long term, utilize the cost segregation from the deal as a generous tax break, and own as much equity in the deal for ourselves. If we did not have access to capital, then syndicating sooner would have been a no brainer.

Remember, focus on your goals and what you are trying to accomplish long term. And also remember, you can buy some deals with partners, and you can syndicate other deals. As we said in our previous article, syndication is only one “tool” in your Buy Right toolbox

Let’s jump into the pros & cons.

Pros:

Other People’s Money
Great Strategy To Get Into Multifamily.
Get Into Bigger Deals.
Control More Units
Scale Quicker
Create A Business
Collect Fees

One of the huge benefits on investing in real estate is the ability to employ Other People’s Money (OPM). Syndication takes this benefit to the next level. You are pooling capital from investors to invest in an asset that would normally be much larger than you can take down by yourself, and you are able to own part of that asset with as little as 10-15% of your own capital in the deal.

For most investors, the limiting belief of not investing in multifamily is the fear of where am I going to find the money for the down payment. Syndication crushes that limiting belief by raising the capital from investors. Don’t let lack of capital stop you from pursuing deals in multifamily. Seek out a mentor or coach to teach you the multifamily space, and then utilize syndication to start taking down deals.

Watch the video version:

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With syndication, you will be able to invest in larger deals, control more units, and achieve economies of scale with more units. There are many investors out there who have controlled thousands of units, and have become wealthy the past few years from cap rates compressing. These syndicators may own a bit less equity in each deal, but they control thousands of units. Power comes to those who can achieve economies of scale in multifamily, and syndication is an excellent strategy to achieve it.

Syndication allows you to scale your business much quicker, and to achieve the economies of scale. Remember our path to growth. We did refinance the majority of our assets, but it did take time to reposition the deals before we were able to refinance. In some instances, it took 18-24 months, but our goal was patience and steady growth. For those who want to scale much quicker, syndication is excellent.

Isn’t one of the reasons you want to invest in real estate is to become an entrepreneur. At Jake and Gino, our catalyzing statement is We Create Multifamily Entrepreneurs. It wasn’t that way when we began our investing career. We were not looking at real estate as building a business. We were only looking at buying a few deals that would cash flow. Scaling up, economies of scale, and systems were foreign to us.

With syndication, you can envision yourself becoming an entrepreneur and creating an amazing business. You start by building your database of investors, begin to generate fees and cash flow from the deals, and begin to generate residual fees, such as asset management fees. We treat our syndications as another stream of revenue. We generate asset management fees, acquisition fees where we roll into the deal, profits from general partner side, and passive income derived from investing on the limited partner side. As you can see, once you’ve executed a few syndications, the snow ball begins to grow exponentially!

Cons:

We’ve presented the pros! Now, it’s time to transition to the cons of syndication:

Less Control (More Cooks in The Kitchen).
Investors Are Your Boss.
Investor Relations Is Another Task.
Sharing The Profits.
More of A Fix & Flip Model.
Less Equity inThe Deal.
Another Level of Complexity.
Less Deals That Qualify in This Part of The Cycle.

Before I became a full-time investor, I was the pizza guy. That’s where I got the too many cooks in the kitchen analogy. I enjoyed the simplicity of doing our own deals, not running it by multiple partners, and not having to take the investor’s needs into consideration. As a syndicator, you are a fiduciary for your investors. They are your boss, and your goal is to maximize their returns, not yours.

It was so much easier in the beginning for us to focus on our needs, and what was best for the property. Some months, we deferred the cash flow to utilize for repairs. That may not fly too well with investors. The complexity of a syndication, with the legal documents, the capital raise, the investor relations, was also a huge hurdle for us in the beginning. That being said, we have had countless Jake & Gino students syndicate their first deal with the guidance of our Wheelbarrow Profits Academy and our coaches. Please do not underestimate the hard work that goes into executing the steps throughout a syndication.

In this part of the cycle, Internal Rates of Return have diminished, and it is becoming more challenging to find deals that will generate an appropriate return for investors. It doesn’t mean that they aren’t out there, they just aren’t as prevalent.

One of the biggest cons for myself and Jake is the nature of the syndication model. Remember, our goal is to buy these assets for the long term, generate cash flow, and take advantage of the tax benefits. One of the biggest ways a syndicator gets paid is on the back end. What does that mean. They generate the majority of their profits when they sell, and split the proceeds with the investors. Sometimes, we take months and months to find an amazing deal. We do not want to kill our golden goose by selling. You may be forced to sell prematurely in a syndicated deal if you have achieved your returns for your investors.

This leads me to my last con. When we buy a deal by ourselves, there is no sharing of the profits. They are all ours! Our mantra has been to build us as much equity for ourselves as possible. We live by the saying “Transactions pay the bills. Equity makes you rich”. With a syndication, your limited partners get paid first, and they receive the majority of the profits.

Also read:

As you reflect back upon the words you have just read, my hope is that you become crystal clear with what your goals are, and what you are trying to accomplish long term. To some of you, syndication is a no brainer. And to others, syndication may not be the right fit for your business model. If you want to learn more about syndication, visit our YouTube Page.

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What is Multifamily Real Estate Syndication

When Jake & I began our investing career, we only knew of one way to buy real estate. Buy it by yourself! We had never heard of syndication, and to be fair, over ten years ago, the economy and the real estate market were a bit different. Those were the days of 1% GDP growth, low rents, a difficult environment to raise capital for investments, and deals that languished on LoopNet for months and months. Oh, do I miss those days.

Seriously though, the strategy of syndication received a huge jolt from the JOBS Act (Jumpstart Our Business Startup Act) of 2012. The intention of this act was to allow funding of businesses in the U.S. by easing some of the security’s regulations. This is the impact of the JOBS Act from Investopedia:

It lowers reporting and disclosure requirements for companies with less than $1 billion in revenue and allows the advertising of securities offerings. It also allows greater access to crowdfunding and greatly expands the number of companies that can offer stock without going through SEC registration.

You can see the effect it has had on syndication, and multifamily in general. An explosion has taken place over the past decade, which has allowed the average investor to partake in the gains in multifamily.

Before we go any further, let me define to you what a syndication is. Let me turn to Investopedia again, as they have the most succinct and accurate definition:

A syndicate is a temporary alliance of businesses that joins together to manage a large transaction, which would be difficult, or impossible, to effect individually. Syndication makes it easy for companies to pool their resources and share risks.

In effect, you are pooling your money and your investor’s money to be able to invest in bigger deals than they could afford on their own. It is a fantastic way for an investor with limited capital to invest in larger deals.

Watch the video version: “What is A Syndication”

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You can also look to the Howey test on the legal definition of what is a syndication in the eyes of the SEC (Securities and Exchange Commission). The Howey Test refers to a U.S. Supreme Court case to determine if the transaction qualifies as an investment contract, and if it does, then it is considered a security and subject to the rules of the Securities Act of 1934. In this case, the Howey Company sold tracts of citrus grove to investors, who leased the land bank to the company. Howey was in charge of the groves, taking the role of what we consider the sponsor. The company did not register with the SEC, and the court ruled that this transaction qualified as an investment contract. More importantly, the Supreme Court created criteria to determine what is an investment contract:

An investment of money
In a common enterprise
With the expectation of a profit
To be derived from others

(Thanks again Investopedia)

If you are partnering with others, taking their capital, and performing all the work while the partners are passive, be careful. It appears that you are creating a syndication and need to register with the SEC. The only way to be sure is to schedule a call with an attorney who specializes in securities law. At Jake & Gino, we use the services of Kim Lisa Taylor. Always seek the guidance of licensed professionals when dealing with law and taxes.

Who are the parties involved in a syndication? A syndication consists of a sponsor and investors (limited partners). The sponsor is the party that has the experience, puts together the deal, manages the deal, and signs on the debt. They typically put up between 10-20% of the equity. It may seem a bit unfair that they put up so little capital and receive a sizable portion of the equity, but remember. They are the ones who are managing the deal, and assuming most of the risk. The syndication is generally set up as an LLC and the limited partner owns an interest in the LLC.

The sponsor typically gets paid an acquisition fee, a percent based on the total price of the deal (typically between 1-3% of the deal). For example, if the deal is purchased for $5,000,000, and the syndicator charges a 3% fee, then the acquisition fee would total $150,000. Not a bad pay day!! In another article, I will dive deeper into other ways sponsors get paid.

The investors are referred to as limited partners, and their risk is limited to the investment they make in the deal. They are normally passive, meaning that they invest in the deal and rely on the sponsor for managing the deal.

Some of you may be saying the limited partner is not getting compensated enough. I want to introduce a term to you that has changed my paradigm on this statement. I always thought the fees and structure always favored the sponsor. Not anymore!

ROE= Return on Effort

I agree that the syndicator gets compensated generously, but there is a ton of value to an investor who doesn’t have the time or expertise or capital to invest in their own deals. The limited partner has very little effort in this deal once it’s funded, and can focus his efforts elsewhere, while receiving mailbox money.

Three other terms that are extremely important that I would like to touch on are the preferred return, internal rate of return, and the sponsor promote.

Preferred Return:

With a preferred return, the limited partner is entitled to a certain return, before the sponsor begins to receive compensation. This preferred return is also referred to as a return hurdle. Preferred returns have been averaging between 6-10% the past few years. What this means is that the limited partner receives all of the preferred return before profits are split with the sponsor. For example, if the preferred return is 8%, and the deal produced a 9% return for the quarter, the limited partner receives 8 of the 9% of the profit, and then the remaining profit is split up as per the agreement that was signed amongst the two parties.

Sponsor Promote:

Once the preferred return is met, profits start to get split between the limited partners and the sponsors. The piece that goes to the sponsors is called the sponsor promote. The sponsor promote is based on a couple of factors, including the experience of the sponsor, their track record, and what the market is bearing.

Our deals have been structured as a 70/30 split, 70% of the profits going to the limited partners and the remaining 30% going to the sponsor. For example, if our “pref” rate was 8%, then the limited partners would receive the 8%, and the remaining 4% would be split 70/30 between the limited partners and the sponsor.

Many deals are created with what is called a waterfall structure, where the sponsor receives a larger return based on the performance of the asset. As the IRR (we’re about to get to IRR) increases, the sponsor’s returns increase. You may be saying “Why complicate things?” This is an excellent way for the limited partners to incentivize the sponsor to perform on the deal. Win-win for both sides! The limited partners get paid more, but so do the sponsors.

Internal Rate of Return (IRR):

IRR, simply put, is the annual rate of growth an investment is expected to generate, and combines profit and time into one formula. The key is that it takes into effect the time value of money. We could write an article dedicated solely to IRR, and would barely scratch the surface. It is what the vast majority of limited partners will ask when pondering whether to invest in your deal or not. Internal Rates of Return in the low 20% were common back a few years ago, but as cap rates have continued to compress (go down) and pricing has accelerated, most sponsors are now targeting around a 12-15% IRR.

In the next article, we are going to dive into the pros and cons of syndication. We are also going to focus on your goals as an investor and if syndication is the appropriate strategy for what you are trying to accomplish.

It is important to understand that syndication is only one of many strategies when investing in multifamily, and the more “tools” (strategies) you have in your toolbox, the more likely it is that you will find a way to close your next deal.

To become an investor with Jake & Gino, click HERE to sign up to receive more information.

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The 5 Languages of Appreciation In The Workplace

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When I was first introduced to the 5 Love Languages, I was a bit skeptical. My initial instinct was, “Isn’t being a good provider enough to strengthen the relationship between myself and my wife?” I was brought up to think that actions speak louder than words, and the Golden Rule, “Do unto others as they would do unto you.” To say that reading Dr. Chapman’s book was enlightening to me would be a vast understatement.

But the epiphanies didn’t stop there. I was introduced to the 5 Languages of Appreciation In The Workplace, written by Dr. Paul White and Dr. Chapman, when we had the honor of interviewing Dr Chapman on the Multifamily Zone podcast.

https://jakeandgino.com/5-love-languages-w-gary-chapman

What a timely book it has been for our company. As most business owners should realize, people are the most important asset in any business. At Jake and Gino, we stress three keys to scaling any business:

People
Systems
Culture

As you can see, we put people at the top of the list. The truly great companies, such as Chick Fil a, and Publix Supermarkets, empower their employees, treat them with respect, and value their opinion. It is much more than just a job; some say it feels as if they are part of a family. How do they achieve this success with their employees? The 5 Languages of Appreciation in The Workplace is a great place to begin learning and implementing ways to cultivate an amazing work environment.

Dr. White points out in his book that the cost of replacing employees is the #1 non-productive cost for businesses and organizations. It is tied directly to declining productivity and a lowering of morale. Coupling the exorbitant costs with the fierce competition for skilled labor should make any entrepreneur out there run to the bookstore (or Amazon), and begin to implement the languages of appreciation.

The languages need to permeate throughout the entire organization. It all begins with managers and supervisors, but it can’t stop there. Dr. White found the importance of peer appreciation, and goes on to explain the power of appreciation from colleagues. Communication will improve dramatically, and morale will increase!

Let me list the 5 languages of appreciation:

Words of Affirmation
Quality Time
Receiving Gifts
Acts of Service
Physical Touch

The 5 languages of appreciation are ways that we can show our fellow workers how we value them. One person may feel appreciated with words of kindness, while another may like a hand written thank you card. The goal is to make the appreciation personal, and understanding the person’s language of appreciation will help you achieve it.

Dr. White issues an important word of caution in the book. You want to communicate authentic appreciation, where everyone involved wins, and not fall into the trap of “making people feel good.,” where all you are looking for is personal gain. Your goal is to convey a sense of respect and value for the person, and the appreciation does not always have to be focused on the work accomplished.

I also enjoyed Dr. White discussing how the workplace has changed since the younger generations have begun entering the workforce. Younger employees are more apt to work in teams and with others to complete tasks, and he states that the supervisor-employee relationship is declining due to the fact that more younger employees are being hired. To me, this means that it is now more imperative than ever to teach employees to learn these five languages of appreciation and use them amongst their peers.

Dr. White continues on in the book to teach the reader how to figure out what their primary language of appreciation is, and to discover what your coworker’s language is. There is also appreciation when a company is dealing with remote employees and virtual teams. There are benefits to working remotely, but there are also major challenges. The key is to be proactive and to follow the other advice that Dr. White has laid out in the book.

I have shared the book with my entire team at Jake & Gino, and a few of them are creating a book club to dive into how they can improve their communication with their coworkers. If you are looking to retain key employees, and create a company with an amazing culture, one that lives its core values, then The 5 Languages of Appreciation In The Workplace is the next book on your reading list.

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Want to Protect Yourself On a Master Lease Offer? Do Your Due Diligence.

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The following is adapted from Creative Cash.

When you use creative and seller financing (CSF), which is a non-traditional or creative way of buying land or property, there’s a higher level of risk involved for you. This makes conducting accurate due diligence (DD) on a property and seller just as important as analyzing the financial data.

You’ll want to do your DD as if you were buying the property and paying all cash. After all, if you were about to spend that much of your hard-earned money, then I imagine you’d want to know what you were buying, right? The DD for a Master Lease Offer (MLO) deal is no different.

I’m going to show you how to conduct DD on all items from the seller to the existing mortgage on the property. Your DD into the MLO is a crucial part of the deal if you don’t want to be left with an expensive mistake.

Once the Offer Is Accepted

Once the offer is accepted, then the real DD starts. My suggestion is to do as much “free” DD as possible before you start spending money. What is “free” will be different for each deal, so start by making a list of DD items to be accomplished, ranging from the least to the most expensive.

In some cases, walking the property and looking at the condition of the area may be the cheapest step to start with, but if the property is in another market or state, then that may need to be placed further down the list. Keep in mind you want to spend as little money as possible until the offer process is much further along and the deal is more likely to close.

Record the Contract

The MLO contract must be filed with the court system at the time of your signing. This is called recording the document. You will add the MLO contract to the title documents in the legal system. The point in doing this is to “cloud” the title.

By recording the document, anyone who pulls the title to this property will find your MLO contract. This prevents the seller from selling the property without you knowing it.

When the next buyer/attorney researches the property’s deed, they’ll find the contract and it will prevent the sale. If the document is not recorded, it will not be found. This is an extremely important part of the MLO process and protects your interest in the deal. This is yet another reason to have a local attorney involved in every step of an MLO deal.

Loan Review

Before you sign the MLO contract or give any option money, have the seller disclose all the loan documents as part of your DD work. A seller cannot give interest in a property they don’t have.

When you review the loan documents, look at the time frame for the loan. If a seller has a loan for 2 years, they can’t give you a master lease for 4 years. This would be giving you interest in a deal they don’t have.

Loans do renew but not always. Don’t let the seller give you a time frame for your MLO that extends past the terms of the loan.

If the bank doesn’t renew the loan, then the seller must refinance elsewhere. If they don’t, the property will go into foreclosure, which overrides your MLO contract and you will lose the deal. You also need to look at the term of the loan and make sure it gives you a long enough time period to do what you need to accomplish, such as working on renovations.

Also, look at the terms, such as the monthly payment and escrow accounts. Make sure the numbers you originally analyzed are the real numbers. Defeasance for prepayment penalties is something else to keep in mind when looking at loan documents.

Some loans have prepayment penalties if the loan is paid off early. If you plan to exercise your option to purchase and pay off an existing loan as an exit strategy, this may be an important factor. A prepayment penalty has to be paid from the owner’s profits, or it could raise the cost/price of the deal. This is something to negotiate into the option price if the penalty exists.

When You Shouldn’t Do a Master Lease Option

Here are some situations you may encounter in the DD process that are major red flags and that indicate you should not do an MLO deal:

A property won’t ever cash flow. Some properties will never make money simply because the seller paid too much. Don’t assume someone else’s problem unless the work will be profitable.

The property is too big for you. Don’t do a deal that puts you on a property that is far above your level of experience

The seller doesn’t have a clear title. Don’t do an MLO with a seller who cannot show you a clear title. They may not have the right to enter into the MLO with you.

The terms of the existing loan are too short. Don’t do an MLO if the underlying loan term doesn’t give you enough time to complete your exit strategy.

You can’t identify a clear-cut exit strategy. Don’t go into a deal when you don’t have a great plan to get out of it. Identify your exit strategy early in the analysis process.

Anyone who has experience in multi-family real estate will tell you that most of the work in this business consists of finding good deals. If you add creative and seller financing (CSF) to the mix, a non-traditional type of financing, it becomes even more complex.

Position Yourself for Success

Begin your DD with the seller. Why are they selling? What is their plan B if they don’t accept your offer? How can your offer solve their problems? If cash is the only reason a seller is willing to sell, CSF probably won’t work. Look for distressed owners.

Have an attorney clear the title before executing a CSF contract. You need to make sure the seller has the right to commit to the offer.

You also need to do a full inspection on any property if you are getting a CSF. Act as if you are paying cash or getting a loan.

With these tips you’ll be better positioned to make your MLO a success. Now is not the time to cut corners. When you do your DD, you’ll protect yourself and your interests.

For more advice on doing your due diligence, you can find Creative Cash on Amazon.

What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company. With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.

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Avoid These Mistakes When Analyzing Multi-family Real Estate Deals

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The following is adapted from Creative Cash by Bill Ham, Gino Barbaro, and Jake Stenziano.

Analysis is key with creative and seller financing (CSF), a type of financing that doesn’t fall into the traditional form of lending by banks. Analysis isn’t that exciting, but when you spend your time and attention on it, you’ll reap the rewards that come from good real estate deals.

If you’re just starting out with multi-family real estate and CSF you will likely make some mistakes in your search for good deals—and these mistakes can cost you a lot of money, which is something you definitely want to avoid. Luckily for you, I’ve made many mistakes, and I’m going to share them with you here so you don’t have to suffer the consequences.

Know Your Market and Occupancy

When you begin valuing a deal, you’ll want to look very closely at the market surrounding your property. You can lose big if you don’t know your market. It almost happened to me but it ended up okay only because I bought for cash flow, not for sale value. If I bet on selling at a profit, I would have gone into foreclosure with that deal.

You also need to find out the average occupancy of comparable properties in your area. If you look at an apartment deal and see that occupancy is 70 percent and you will cash flow at 85 percent, getting those units rented is a value play for this deal. If you look within a 3 to 5 mile radius and all the properties in the area are at 70 percent occupancy, then this is not a value play at all: it’s the market! Remember, you can rehab a property, but you cannot rehab a market.

Watch this video as well:

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Check Out the Competition and the Amenities

Don’t look at a property with two-bed units and then look at other properties with three-bed units and simply compare the rents. Other properties may charge more for a two-bed unit than you are, but if they have bigger units, then increasing your rent is not a value play. It will make you less competitive in the area. Compare price per square foot (total rentable square feet divided by the rent) to make sure you are competitive with your rents.

The more amenities you have, the more you can charge for rent. Make sure when you compare rents you also consider the value of your competitor’s amenities. If they have a pool and you don’t, they can charge more in rent for a similarly sized unit.

Get to Know the Neighborhood

You should never buy a property in an area that you don’t understand. This is easy to say but hard to do. I suggest you really get to know an area before doing business there. Low-income areas tend to be harder to manage, but high-income areas tend to be more expensive.

You’ll need to find a balance between what you can afford to get into and what you can afford to deal with. A Master Lease Option (MLO) may allow you to get into a deal easier than if you bought it outright, but you must keep in mind that you still have to deal with it day in and day out. If you wouldn’t spend the night on your property, then you probably shouldn’t own or manage it.

Getting the Cash Back

When you look at the value of a property, you need to look at the terms by which you will take control of the deal. The agreement you strike with the seller can affect the value as much as anything else. Try to figure out how many months it will take to cash flow back your option money. If their answer is that you won’t get it back or that it may take most of the contract time to recover your money, then you need to reduce the value of that deal considerably.

In general, the terms can make or break a deal. You may have a great property that cash flows a lot of money, but if the seller will only accept an MLO offer contingent upon them getting almost all of the income, then it’s not a good deal, regardless of the property. Likewise, if you have a deal that makes less income but the seller defers a year’s worth of payments or doesn’t require any option money at all, then the value is higher.

Analysis is the Key to Avoid Mistakes

Avoiding mistakes comes with spending time on analysis.

Most people think building a real estate business or portfolio consists of driving around and looking at deals, meeting realtors, and high-profile closings. An exceedingly small percentage of your time will be spent doing these tasks. Money in real estate is made on spreadsheets, not at the closing table.

Finding deals, and avoiding the mistakes that can come with them, is about how you analyze a multifamily deal. Deal analysis is about long hours in front of a computer, looking at financial statements and creating pro formas. Sound boring? It is, but it pays.

Become a true master at analyzing and identifying profitable multifamily deals both quickly and accurately. The Deal Analyzer is an online suite that consists of 6 powerful and easy to use calculators to help breakdown and analyze numbers like a real investing pro! You’ll get access to all 6 calculators that include: Deal Analyzer, Net Worth, Budget, Schedule of Real Estate Owned, Lease Audit and Apartment Turn. These calculators will save you time, make you money, and put you on the fast track to future success!

For more advice on analyzing multi-family real estate deals, you can find Creative Cash on Amazon.

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Multi-family Real Estate Exit Strategies for Creative Financing Deals

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The following is adapted from Creative Cash by Bill Ham.

Know the way out… before you get in! This is a key strategy with creative and seller financing (CSF). A good investor or business owner always has a solid exit strategy before they get into a deal. Ideally, you should have several exit strategies. This is especially important with CSF, when you’re not entering into a deal in the typical or traditional way.

Closing on a property is not the key in real estate—getting out profitably is!

Many people have gone into foreclosure or bankruptcy in past market cycles. Those people didn’t have trouble getting into deals. They had trouble getting out financially intact.

The following are some exit strategies for creative financing deals.

Refinancing

This is one of my favorite exit strategies. It can also be one of the most difficult but creative types of financing, as many possibilities are open for this exit. Typically, to refinance with a traditional lender, the property must no longer be a distressed asset. This means the repairs need to be complete. If it’s multifamily, then the property needs to be stabilized.

Most lenders want to see 90 for 90, meaning the occupancy needs to be over 90 percent for at least 90 days. This will get you the best terms with most lenders. This is the beauty of creative seller financing (CSF). The financing you get from the seller allows you to take over the operations of the property and make the necessary adjustments to make it profitable (exactly how the lenders like them).

If refinancing is an exit strategy you want to use, there are several things you will do.

Get in touch with at least three lenders and get verbal approval for the refinance before you take passion with CSF. I say “verbal” because you can’t get any other kind of approval unless you are in an actual application process.

Show the lenders your plans for the project. Show them the purchase price and the amount of money you plan to spend on fixing it up. Show the occupancy and your plans for management. You want to have a feel for the lending market and which lenders will have an appetite for refinancing the project before you get into a CSF contract.

When planning to refinance a property, don’t forget the “seasoning period.” This is the length of time a traditional lender wants you to own the property. Ask about this when you first contact the lenders.

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Refinancing in Action

In late 2008 to early 2009, I bought seven houses with money I borrowed from a private lender. I had been purchasing houses with the backing of this private money for a while. I would close on several houses, and once I had a pack of them, I refinanced with my local bank.

It was going well until the credit market crashed. It crashed while I had the seven houses I paid for with private money. I had planned on refinancing quickly, but it didn’t happen. I went past my loan due date and couldn’t pay the lender back. I was in a foreclosure situation.

The lender was good to me and didn’t foreclose. He did, however, charge me a small fortune to continue the loan! Many months and a ton of high-interest payments later, I qualified for bank financing and paid the private lender back.

This is why you need to know your exit strategy when going into a deal. If refinancing is your preference, then get to know your bankers before you close with CSF. This will increase the chances of a successful exit and keep you from making the same mistake I did.

Flip or Wholesale

Creative financing is a great tool for people who plan to flip or wholesale properties. If you can secure a great price for a property and control it with CSF, then you’ve bought yourself some time to go out and find a buyer.

Be sure to include any of your down payment money and rehab costs into the price of the loan, but don’t get too greedy. Being greedy is one of the most expensive habits you can have.

If you are trying to make some quick cash by selling a property you just took control of, you’ll want to leave some value in the deal for the next person. Keep in mind they may need to qualify for a loan to be able to purchase it from you.

They’ll want to feel they are getting a good deal, too. They’ll have to deal with the same lending parameters and time frames that you did, so allow for this in the terms the seller gives you when you first set up your CSF agreement.

Master Lease Option Assignment

If you are doing an MLO, then you have a tradable item. A master lease can be assigned to someone else if your attorney sets the document up correctly. A person would buy a master lease from you to collect the income stream created by the property. Keep this in mind when you originally set up the agreement.

You can also sell the option to purchase if you have kept the documents separate. You can keep the master lease that allows you to control the property and sell the option to purchase to someone else. This gives them the right to purchase the property for the price you previously negotiated.

The MLO is a great addition to a wholesaling strategy. Wholesaling is when you put a property under contract and then assign the contract to another buyer for a fee. The point of wholesaling is controlling the property with a contract for a short amount of time while you find a buyer to purchase that control from you for a fee.

An MLO assignment is not much different and can follow a similar strategy. Once you take control of a property with an MLO, you will then have time to market the property and find a buyer. You can draft your MLO contract to be assignable. If the seller agrees for the contract to be assignable, then you can sell your option interest to someone else for a lump sum of cash. Have your attorney draft the agreement to be assignable.

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Hold and Operate

This is a great long-term exit strategy. If you can get CSF for long enough to hold and operate, great! If not, then refinance the deal and operate it under the new financing.

I mentioned talking to lenders before closing with the CSF. Here is another reason to do so. If you know the general terms in which you’d refinance the deal before you take control, then you know what terms and price to set up with your CSF. Traditional lending should have a longer term and less interest than the CSF. Once you get the loan in place, you can hold and operate the property even more profitably than before.

Get Out Successfully

Regardless of what your long-term exit strategy is, if you plan to hold and operate the property for any length of time, make sure the term of any loan allows you to cash flow. This is part of the analysis that you should be doing for every CSF deal.

Whatever exit strategy you plan to employ, you need to know what it is before you get into the deal. And by implementing these tips you can prevent devastating consequences such as foreclosure or bankruptcy and ensure a successful exit.

For more advice on exit strategies for CSF deals, you can find Creative Cash on Amazon.

Read this article on LinkedIn.

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How to Find Good Multi-family Real Estate Deals

The following is adapted from Creative Cash by Bill Ham (author), Gino Barbaro (contributor), Jake Stenziano (contributor).

Anyone who has experience in multi-family real estate will tell you that most of the work in this business consists of finding good deals. If you add creative and seller financing (CSF) to the mix, a non-traditional type of financing, it becomes even more complex.

That’s because you likely won’t find public-facing listings for the best deals. So, where do you find these deals? In my fifteen years of experience, I’ve found a number of sources that are reliable for good deals. It’s not easy, but using the right tools will help you find good multi-family real estate deals and maximize the efficacy of that work.

So, if you’ve been struggling with where to look, take heart! I’m going to share those tools and several strategies here to help you find deals and increase your deal flow.

Direct to Owner

Contacting owners directly works well with smaller assets and becomes less effective as you move toward larger assets (100+ units). Direct mail campaigns work great for single-family homes and have a decline in response rate (closer to 0 percent) as you move to larger assets.

I have sent thousands of letters and postcards in my career. Here are some tips for two types of direct contact techniques: mail campaigns and contacting owners directly.

Mail Campaigns

Automate these if you can. Get a list of names and addresses and outsource the mailing.

Choose a specific market. Don’t waste time and money randomly blanketing an area with mailings. Set mail campaigns to run in the background of your business. This should not take up more than 5-10 percent of your time or resources.

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Contacting Owners Directly

Get a list of contact information for owners of buildings in your area. Call or contact them and simply state you are interested in buying their property. Building rapport with a potential seller is important, but once you have an owner on the phone, get to the point:

How much are you willing to pay? That’s all the seller will care about.

Before you call, look at comparable sales in the market and use an average capitalization rate (cap rate) for similar assets. Know what your numbers are before you reach out to sellers.

Be willing and able to give a reasonable price on the first call. You don’t want to call someone and throw out a low-ball offer. You aren’t making a full offer here; you’re simply letting the seller know what you’re willing to pay for an asset like theirs.

Networking

Good old-fashioned networking can be a great source for creative deals. I highly suggest you get involved in your local real estate clubs and meeting groups if you aren’t already. If there aren’t any good groups in your area, start one.

Most of these groups hold a “haves and wants” meeting where people can discuss deals they have for sale and what they are looking for. This arena is a great place to find potential sellers who may have deals they’re willing to finance for you.

When networking for creative or seller financed (CSF) deals, you must be more strategic than simply waiting for someone to stand in front of the group and offer you CSF. You need to listen for problems that could be opportunities for you. Listen for people complaining about a property they have. Listen for clues that indicate they are “burned out” with an investment property.

They may not be done with the real estate business in general, but they may have a headache property they’d like some help with. This could be an opportunity for you to get started. I suggest listening to people in your everyday life the same way. Listen for people complaining about rental properties they own. Burned-out landlords tend to be vocal about it!

An important note to remember: don’t start a conversation with an agent or seller by asking for CSF. Again, it’s okay if you don’t have money, but that’s not how to get a new prospective agent or seller to take you seriously. You need to let them know their distressed asset is a problem and that you can provide a solution.

From the Other Side of Sourcing

I have personally financed other people on distressed assets I didn’t want to deal with anymore.

I owned a 4-unit building in a high-crime neighborhood, which I had purchased when I was new to the real estate business. It finally cash flowed, but it required a lot of management attention.

As my portfolio grew beyond hundreds of units including large apartment complexes, it was no longer good use of my time to deal with this asset. I could have my managers deal with it, but that would have kept them from managing more profitable and productive properties. My larger complexes made much more than the small 4-unit building.

The way I solved my own real estate problem was by offering a master lease to a local church. This church used these units for a battered women’s shelter. The church was paying my mortgage, covering the monthly expenses, and managing the property. I was no longer creating cash flow from the property, but I still received the tax benefits of owning it and didn’t have to waste time and money dealing with it.

That church could have been an investor like you. If I had found another investor looking for a break, I would have financed that property to them in the same manner.

To reiterate, there are plenty of sellers who have problems or properties they don’t want to deal with. If you find these kinds of deals, you get to collect the cash flow. But it’s up to you to find sellers who are willing to help you help them.

Build a Reputation as a Problem Solver

Building a reputation as a problem solver in your market can bring you more CSF deals than anything else, but this will take some time. You need to close some deals and solve a few problems first. It’s not good enough to tell people about what you can do; you have to show them. Once you’ve done about three to five deals, make sure you get the credit you deserve.

This is when you go back to your networking. Start making more appearances at your real estate clubs. Offer to get up in front of the class and discuss the deals you’ve done and how you did them. You’ll instantly be elevated to “expert” status. People will talk about you and how you did those deals. Word will eventually get around to sellers and agents, and they will start calling.

At one point, I had an agent bring me a large commercial apartment complex and suggested I make an offer of a master lease with an option to purchase. He knew my reputation for solving problems with creative financing. As a result, I took control of a $5 million asset with only $25,000, all because I had solved problems for other sellers in my market.

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Now You Know Where to Look

Finding deals is the hardest part of the real estate business. If finding deals were easy, you wouldn’t be reading this. My hope is that sharing some of my favorite deal sources—along with the mindset it takes to increase your deal flow—will give you a newfound sense of direction and momentum. Because once you get rolling, other people will start to take notice.

For me, it all starts with mindset. You might find good deals here and there, but things really take off once you develop the kind of reputation I talked about. To do that, you need to take on a problem solver mindset. It’s an essential long-term strategy for finding good deals.

For more advice on increasing your deal flow, you can find Creative Cash on Amazon.

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