Commercial Re Course By Peter Harris‼️.docx

Hiring (and Firing) a Commercial Property Manager You're about to discover how to hire a great commercial property manager as well as when and how to fire a lousy one. You'll learn the 3 main goals of a property manager, 3 powerful advantages to hiring manager (versus managing the property on your own), the single most important thing to look for, the best ways to find them, the 10 most effective questions to ask in the interview, the top 3 red flags to watch out for, tips on managing your manager and specific action steps that will set you apart from the crowd. All you need is one great property manager to build an fortune in commercial real estate and this training will show you how to find and hire that commercial property manager. https://youtu.be/iICO3ah_Zh0

3 Main Goals of a Commercial Property Manager   

1. Maximize Rental Income Potential and Reduction of Operating Expenses 2. Strengthen Tenant Retention and Relations 3. Enhance Property's Visual Appeal and Overall Value

3 Advantages of Having a Commercial Property Manager   

1. Look at Deals for You and with You 2. Valuable Third Party Opinion 3. Manage Your Property (so you don't have to)

The Single Most Important Thing to Look For 

Integrity! 1

3 Ways to Find Commercial Property Managers   

1. Referral from Another Local Investor 2. Commercial Brokers 3. Online Search: AllPropertyManagement.com, IREM.org, Yelp.com

10 Key Interview Questions          

1. What is the general vacancy rate in your area? 2. How many units (or square footage) do you currently have under management? 3. How long have you been in the business? 4. What are your management fees and in what other ways are you compensated? 5. Do you have your own maintenance staff or do you use third party independent contractors? 6. How do you market your vacancies (or upcoming vacancies)? 7. Will you help me set up an annual operating budget for the property? 8. What monthly reports do you typically send to your owners? 9. Are you licensed, and do you have any professional certifications or accreditations? 10. Do you own any real estate investment property?

Top 3 Red Flags   

1. Unable (or unwilling) to provide references 2. Excessive cost structure 3. Lacking proper licenses

3 Tips for Managing Your Managers   

1. Manager must be in agreement with your business plan and exit strategy 2. Must have a system of accountability (regular meetings, periodic visits, consistent reporting) 3. Don't be afraid to fire a poor performing manager

Next Steps   

1. Build and nurture a strong relationship when you find a good property manager 2. Send a "Thank You" note 3. Reward them with a management contractor All you need is one great commercial property manager to build an absolute fortune in real estate.

Office Building Investing for Beginners You're about to learn what most investors will never know about investing in Office Buildings and hopefully you are reading this before you have purchased your first office 2

property. In this detailed training, you'll discover 4 powerful reasons to invest in Office Buildings, the big difference between office and residential real estate, 3 Office Building basics, the different types of Office Buildings and which one you should avoid, 10 key Office Building investing terms that you must know, the ABCs of office leases, possible Office Building pitfalls to watch out for, the most important thing when choosing a Tenant and the top 3 trends affecting office buildings today. https://youtu.be/HNZdKNaGOeA Here's a summary of what you learned in the video above: PART 1: 4 Reasons to Invest in Office Buildings (2:08)  Long Term Income  Triple Net Leases (NNN)  Depreciation Tax Shelter  Strategic Location PART 2: Big Difference Between Office Buildings and Residential Real Estate (5:50) The value of Office Buildings are determined based on Income which can be improved by Tenant selection, Leases, Reduced Expenses, etc.  The value of Residential Real Estate are determined based on comparable sales 

PART 3: 3 Office Building Basics (8:18)20% of all Commercial Real Estate in the United States are Office Buildings but it is the most volatile property type of all commercial properties. (1) Economy  White Collar Job Growth: To get job data, go to the United States Bureau of Labor Statistics  Economic Growth: to get local economic data, go to the Local Chamber of Commerce Business Development Department (2) Supply and Demand  Vacancy Rate for the Area  Absorption Rate for the Area  Local Market Supply (3) Real Estate Cycle  Office cycle mirrors the economic cycle but lags by 4-5 months PART 4: Different Types of Office Buildings (14:31) 3 Main Different Types High-Rise: Skyscrapers Mid-Rise: 3- 24 floors Low-Rise: 1 - 3 Floors

  

3

Types of Tenants/Properties Government Medical Business Park Research and Development Office Condo

    

Office Building Classes A Class: Trophy, High Rents (Not for us individual investors) B Class: Older, Good Quality Tenants (Ideal for individual investors like us) C Class: Oldest, Least Desirable (Not for Beginners, Ideal for Value Add Investors)

  

PART 5: 10 Key Office Building Investing Terms You Must Know (19:45)  1. Gross Area  2. Rentable Area / Gross Leasable Area (GLA)  3. Price Per Square Foot  4. Gross Rent  5. Lease Type (Gross Lease, Modified Gross Lease, Triple Net Lease)  6. Reimbursments  7. Common Area Maintenance (CAM) Charge: Repairs, Hallways, Cleanings, etc  8. Tenant Improvements (TI): Allowance landlord gives the Tenant  9. Operating Expenses: Insurance, Taxes, Repairs, Roof, etc.  10. Capitalization (CAP) Rate: Net Operating Income / Sales Price PART 6: ABCs of Office Building Leases (24:14)  Gross Lease: Benefits Tenant the most  Triple Net Lease (NNN): Benefits Landlord the most  Modified Gross Lease: Somewhere in between Gross Lease and NNN 3 Quick Tips Leases are the lifeblood of Office Buildings Hire a professional when negotiating a lease Everything in a lease is negotiable

  

PART 7: Possible Office Building Pitfalls (27:35) Rental rates go up and down significantly with the economy. Tenants with the Largest Square Footage Expiring Leases Obsolescence

   

PART 8: Most Important Thing when Choosing an Office Building (31:02) Credit Worthiness  DnB.com  StandardandPoor.com PART 9: Top 3 Trends in Office Buildings (34:37)  Workplace Density: Today companies allot 185 sq ft per office worker, 10 years ago, it was 250 sq ft per office worker  Untethering of Office Workers: 30-40% of dedicated workspace is vacant in a given day 4



Telecommuting is OUT and Colloboration is IN: Yahoo! nearly stopped all telecommuting and wanted everyone not only in the office but in rooms together to give a start up small company feel

Shopping Center Investing for Beginners Shopping Centers can be a great asset class to invest in if you understand the fundamentals and choose your properties wisely. The following training provides extremely valuable advice on what every beginner needs to know before they embark on investing in a shopping center. You'll discover an overview of the different types of shopping centers, the 4 critical aspects of shopping center investment you must know, the 3 most common leases, the power of triple net leases and some guiding principles to follow when you invest in shopping centers. Prepare to be enlightened on this commonly seen yet rarely talked about asset class. You may never look at those strip centers you frequent the most the same ever again. Here is a very powerful training on shopping center investing for beginners: https://youtu.be/kDsYNNjP6OQ

Mobile Home Park Investing for Beginners You're about to discover what every beginner should know about investing in mobile home parks (MHPs). You'll learn the 2 types of deals, the 4 key demand factors and why you should invest in mobile home parks. You'll also find out the top 3 misconceptions about this commercial property type, 5 major things to look out for before you invest, 3 big pitfalls to steer clear of, how and where to find the best deals and the 3 most common ways to finance your first mobile home park. MHPs often fly under the commercial investing radar but they can be terrific investment opportunities for individual investors like us. Here is mobile home park investing for beginners: https://youtu.be/VB93pUNRy44 Here’s a summary of what you learned in the video above: PART 1: 2 Types of and 5 Figures that Demonstrate Demand for Mobile Home Parks (1:57)  Land Only  Land and Mobile Homes  8.6 Million Mobile Homes in the United States

5

   

50,000 Mobile Home Parks 60 Million People Earn $20,000 per Year $1,000 per month is the average rent for an apartment in the United States 8% of United States Population live in Mobile Home Parks

PART 2: Why Invest in and 3 Misconceptions of Mobile Home Parks (5:39) Growing Demand for Affordable Housing Stable and Predictable Limited Competition for New Parks Potentially Higher Returns Misconception # 1 - Crazy Lazy People live in Mobile Home Parks Misconception # 2 - Mobile Homes can pull out at anytime Misconception # 3 - You can't get loans on Mobile Home Parks

      

PART 3: 5 Tips on What to Look For and 3 BIG No-Nos (12:18) Increasing Population Areas Stay Away from 5 Star Parks Seek Out Mom and Pop Owned Parks Minimum 10% Cap Rate Best deals allow for easy rent increases and cost reduction options abound. No-No # 1 - Hurricane Zones No-No # 2 - Park Owned Homes No-No # 3 - Operating Permit Status Issues

       

PART 4: How and Where to Find Mobile Home Park Deals (21:36) LoopNet.com CIMLS.com MobileHomeParkStore.com 1031CommercialProperties.com Direct Mail Campaign Of the deals you look at, 20% will be potentially good deals, 30% deals will be marginal deals, 50% will be over priced.

     

PART 5: 3 Most Common Ways to Finance Your First Mobile Home Park (26:48) Bank Financing Seller Financing Seller Financing with Note Assumption

  

Self Storage Investing for Beginners Self Storage Investing can be a great way to obtain tremendous cashflow without the headaches of tenants or toilets. You're about to discover why investing in self storage facilities can be so profitable, how to find good deals, the 3 main types of self storage properties, the 2 ways these deals are structured, how to find funding for these properties, the 2 most common myths and perhaps most importantly, what to watch out

6

for. At the end, you'll walk through the numbers on a real life self storage deal. Enjoy self storage investing for beginners! https://youtu.be/mKe_sQUdKn0 Here is a summary of what you learned in the video above:

Self-Storage Investing for Beginners Why Invest in Self Storage Facilities: (1:28)         

Whether the economy is good or bad, people will always need storage 1 out of every 10 people in the US use self-storage There are 50,000 self-storage facilities in the US The self-storage business is a $220 Billion dollar industry 80% are owned by mom and pop operators Provides cash-flow The average stay in a self-storage facility is 1-3 years Lower turnover costs No toilets, no trash, no tenants

Finding Self Storage Deals (6:45) Internet:  Loopnet.com  Costar.com  Selfstorages.com  Bizbuysell.com  Selfstoragebrokersofamerica.com Broker Community: Build and nurture relationships with agents that receive storage unit listings Focus on commercial real estate brokers with a niche for self-storage facilities

 

Direct-Mail Campaign (Direct to owner):  Write a letter to the owners of the self-storage facilities  Expect a 2-4% response rate to these letters

3 Main Types of Self Storage Facilities: (10:05)   

Class A: 2000 or newer builds, in ideal neighborhoods Class B: Built in 80s or 90s, owned by mom and pop operators, with stable numbers Class C: Much older builds, more maintenance issues, often in poor neighborhoods, risky

2 Main Type of Deals Scenarios: (13:41) Turnkey (stabile) Deals: Class A and B Deals You buy, own, and cash flow Easier to get financing

  

7



Good location

Turnaround Deal  Distressed deal  Poor or no management  Poor location  Needs to be turned around

Things to Look For: (15:15) Size:  You must know the size of the self-storage facility  You need 30-40,000 square feet to be able to afford a fulltime manager  If self-managing you can start smaller, just know your numbers Unit Mix:  Have a Mixture of sizes of storage units  Need variation to offer customer base Location:  90% of your customer base will be within 1-5 mile radius of the storage unit  Do research on the radius area to make sure there is potential  Is there area growing or shrinking?  Is the city expanding in the area or away from the area?  Know your competition Traffic count:  How many vehicles drive by the facility every day? Signage and Visibility: Understand local laws on signage allowances An area that is easily accessible

 

Management:  Is property managed by the owner or a management company?  Are you going to self-manage or hire someone? Drainage:  Poor drainage will cause issues  When you do due diligence the Property inspector will help find potential issues

How to Fund Your Self-Storage Deal: (21:17) Bank requires 3 things for any income producing commercial real estate loans:  Property’s income and expenses and what is leftover  Property’s condition and location  Borrower’s credit and financial situation Sources of Money to Finance Your Self-Storage Facility:  Local regional banks  Credit Unions 8

   

SBA (Small Business Association) The 7A Loan Program and 504 Lending Program are specifically for storage units Private Investors Seller Financing

2 Biggest Myths of Self Storage: (26:35) Myth 1: It’s a hands-off passive income business In any commercial real estate business that is income producing you need the 4 M’s to be successful  Systems on handling the Money, the Marketing, the Management, and the Maintenance.  If one falls down they all can fall down  The better you are at managing your business the more money you will make 

Myth 2: It’s a quick turnaround business  Renovations take a long period of time to get stabilized  Takes the 4 M’s to succeed

Let’s Analyze a Deal: (30:00)    

Deal was found on Loopnet.com In a small town in Georgia, 270 units spread out in 32,000 sq foot on 3.5 aces Asking price of $485,000 80% occupied, 20 years old, gated, and brought in $79,000 last year

Is this a good deal? You need the annual income, the annual expenses, and to know the debt services (mortgage payments a year)  Income: $79,000 a year  Expenses: Self-storage rule of thumb: 40% of income so $32,000 a year  Income-Expense=NOI (Net Operating Income)=$47,000  NOI-Debt services (Mortgage) =cash flow/money in your pocket  Down payment is 25% of purchase price=$121,750  Asking Price $485,000-down payment (121,750)= $363,750  Mortgage rate is 5% 30 years  Mortgage payments= $1953.69 a month  Annual Payment is Mortgage Payment ($1953.69 x 12)= $23,432 = Debt Service  NOI ($47,000) – Debt Service ($23,432)= Cash Flow of $23,568 a year  Cash and cash return is Annual Cash Flow ($23,568) divided by down payment ($121,750)=19% Passes!!!

Apartment Loans 101 9

Understanding the fundamentals of apartment loans can be very helpful if you're looking to invest in apartment buildings because the sellers of many well performing properties will not go for a creative master lease agreement but instead may require a straight sale to which a loan would help you facilitate. In this training, you'll discover the basics of apartment loans, including how apartment loans differ from residential mortgages, how to qualify for an apartment loan, what apartment lenders like and dislike, the 10 steps to obtaining an apartment loan as well as what apartment loans are available in the marketplace today. https://youtu.be/23qNsfBffHQ Here’s a summary of what you learned in the video above: PART 1: Two Ways Apartment Loans differ from Residential Mortgages (1:19) 1. Apartment Banks qualify the property first and the borrower second. Residential lenders do the exact opposite and qualify the borrower first and the property second  2. Apartment loans have much larger down payment requirements, 20% at a minimum to as much as 40% in some cases, as opposed to many residential loans that may only require 5-10% down. 

PART 2: How to Qualify for an Apartment Loan (3:56) Cashflow Annual Net operating income must cover the yearly mortgage payment must be 1.2 times or greater, also known as the Debt Coverage Ratio (DCR).



Collateral  The property being purchased at or below appraised value as well as a large enough down payment so that the Loan to Value (LTV) of 75% or lower. Credit  660 Fico Score  No Bankruptcies in the past 7 years  No short sales or foreclosures in the past 3 years  No open judgments  Liquidity, cash in the bank  Net Worth Requirement PART 3: What Apartment Lenders Like and Dislike (9:06) Like Solid Cash Flow Good Price Evidence of Good Operational History (2 to 3 year back records proving the property has already been making money)

  

Don't Like  Poor financial records  Poorly maintained (larger down payment to mitigate their risk)  Weak market (high vacancy, plight or poverty) PART 4: Ten Step Apartment Loan Process (13:34) 10

The process typically takes 45 days or longer to complete. Phase 1 Step 1. Send financials and photos Step 2. Complete loan application and review borrower credit Step 3. Order appraisal and site inspection Step 4. Register loan into lender's system and lock rate

   

Phase 2  Step 5. More underwriting (1 - 2 weeks)  Step 6. Order termite inspection and title search  Step 7. Loan commitment (1 - 2 days)  Step 8. Approval! A letter of commitment (LOC) OR they are going to request more documentation  Step 9. Finalize closing  Step 10. Closing and Record Documents PART 5: Apartment Loans Available Today (19:28) Where do you go to get a loan?  Option # 1 - Mortgage Banker: Local small, regional or national bank  Option # 2 - Mortgage Broker: Works with all kinds of banks Fannie Mae and Freddie Mac Small Apartment Loan Program Planned to lend $60 Billion this year and have already used up over half of the allotment  5+ Units  Minimum $750,000 to Maximum $5,000,000)  20% down payment  1.25 Debt Coverage Ratio (DCR)  Low Fixed Interest Rates (5 or 7 or 10 years with a 30 year amortization)  Interest only payments option  These are non recourse loans  680 FICO score  No previous experience required if the property is local to you (If you are long distance, you will need previous experience) 

That's Apartment Loans 101

Fire Burns My Apartment Building One of my apartment buildings was partially burned creating a $1M insurance claim. In this video, you're going to discover what you can learn from this experience so that when disaster strikes (that's right, WHEN, no IF), you can be prepared. Here are the lessons learned from the fire that burned my apartment building: https://youtu.be/7GqpCPfQVu8 summary of what you learned in the video above:

11

Fire Burns My Apartment Building Teachable Moment: (1:20)   

One of my favorite shows is called “The Prophet” It is about an entrepreneur who partners with struggling businesses to bring them to the next level His business model for success is, “People, Process, and Product”.

People Your property management team



Process Represents your day to day operations



Product  The Property itself

Every highly successful, profitable piece of commercial real estate is based off of the 3 Ps: 



When you have a great team (People) running a great system with proper procedures (Process), combined with a nice looking property in a great area (Product) that is the formula of success. If you have an undertrained team (People) poorly running a property (Process), with a property that is in a poor neighborhood and in poor condition (Product), then it will fail.

Focus on the 3 Ps when working in Commercial Real Estate

How to Buy Your First Multi Family Small Apartment Building Discover how to buy your first multi family small apartment building. You'll also learn the personal benefits of owning small multi family apartments, the investing advantages of going "small", how to find the best deals, why you should start with 5 plexes and NOT 4 plexes or below, and finally, 5 different ways to finance your first deal, including if you are short on cash or credit. This is an extremely powerful training that may have a lasting impact on your financial future. Here's how to buy your first multi family small apartment building: https://youtu.be/lf9_SOZdOjs

How to Buy Your First Multi Family Small Apartment Building 12

Personal Benefits of Small Multi-Family Apartments (1:27)     

It is easier to wrap your mind around an 8 unit apt vs a 100 unit apt A smaller apartment requires less equity Easier creative financing Single investor Smaller property equals smaller mistakes

Investment Benefits:  Less competition  Less sophisticated  No large ownership approval  Higher cash-on-cash, IRR  Easier to wholesale

How to Create Your Own Deal Flow: (6:10) Real Estate Agents Ask yourself what you are looking for? Look for 5-20 unit apartment with some sort of upside

 

Loopnet.com Search for small apartment buildings in your areas



Make the Call  Call the agent and develop a relationship with them  You are not after the property you are after the relationship with agent Thank the agent for their time, exchange information Ultimate Goal When the agent gets a deal they send it to you first The best deals come from good relationships

 

Precision Direct Mail: (11:49)  

Develop a list of property owners and periodically send them letters so that they call you when they have a property for sale This is how you get the best deals

3 Unique Advantages:  No real estate agent involved  There is a perception that the deal is good because it is coming directly from the owner  Simpler to wholesale these deals because of perception that it is a better deal Keys (14:00) Target absentee and out of state owners first These type of owners tend to have problem with cashflow, repair issues, and property management  They are often mentally and spiritually detached from the property 

13

Use a fresh list from a reliable source It is a campaign You must remain in the minds’ of property owners. Send out your letter every 4-5 weeks, 3-5 times.

  

Why Start with 5 Unit Apartments not 4 (16:30) 4 unit apartments  Considered a residential property  Its value is constrained by the sales comps in the area 5 unit apartments  Considered commercial property  Its value is based off sales comps AND NOI  NOI is your income minus your expenses  As NOI goes up your property value goes up  Value equals NOI increase divided by your Cap rate

Financing Your First Small Multi-Family Apartment Deal (21:33) Conventional Financing Take loan package to a local bank or loan broker  Local bank: Salary person They submit your loan package to a board for approval or denial 



Loan Broker: Works off of commission Submits your loan package to 20 or more lenders to find financing Creative Financing Seller financing The seller becomes the bank for you and finances the loan



Seller-carry The lender might require 25% down that you do not have so the seller carries a second loan to cover what you do not have



Master lease You do not need a lot of experience or cash down Do not have to go through a bank I have a 20 minute video about “Master Leases” here



Wholesale A great way to make money if you do not have a lot of funds or experience 14

Find a great deal, get it under contract, then assign the contract to an investor buyer for a fee You collect the fee at the closing and the investor buyer takes over ownership

Apartment Investing for Beginners Apartments are an ideal asset class for beginners to get started in commercial real estate. You're about to discover why starting your commercial real estate investing career in Apartments is such a good idea, 7 things to look out for when apartment investing and 3 areas beginning investors go wrong. Plus, you'll here the story of Peter Harris' first apartment deal that helped him officially escape the rat race. And finally, you'll get an action plan on how you can get started right now investing in apartments. Here's a very detailed training on Apartment Investing for Beginners. https://youtu.be/jQFFLvGvZxE

Apartment Investing For Beginners Why Starting out with Apartments is a Good Thing (1:01) Demand  For apartments is huge and will continue to be huge  Jay Thomas Black “Echo Boomers” 18-34 years will propel apartment demand Availability More Apartment buildings then office buildings or shopping plazas



Ability to Understand  Simple Leases  Easier compared to office buildings or shopping centers Loans Readily Available Lenders love apartment lending Income stream is steady and consistent

 

7 Things to Look for When Investing in Apartments (4:11) Have a goal  Why are you buying this apartment building Area/Location  If a location is declining there will be a negative stigma to the apartment  If there are no jobs there will be no tenants  Call local property management company and ask how the job market is  Go to your city’s Chamber of Commerce and ask the same question The Property  What is the property’s condition

15

  

Know what you are walking into Look at the exterior and the interior In beginning stay away from major rehabs

The Numbers  Over the last 12 months make sure the property’s income exceeds the expenses  Get the numbers in writing  Do not use the broker’s brochure Management Strategy  Are you planning on managing yourself or hiring a management company? Exit Strategy Holding Longterm Flipping Refinance with lower rate Refinance cash out Holding Longterm Flipping Refinance with lower rate Refinance cash out

       

Ask Tough Questions  Take out the emotions  Do not fall in love with the property fall in love with the deal

The Three Areas Most Beginning Investors Go Wrong (10:53) They tend to believe their property financials based off the brochures  The numbers in the brochure are misleading  Get the numbers from the seller They underestimate the expenses of the property A property is like a body, it needs to be maintained Get expert advice from a mentor The expenses often equal 50% of the income

  

Property Management Oversight  Proper mindset,”If you have a steel suitcase full of 100,000 $1 bills, you get busy and need someone else to look over the suitcase. How careful would you be on who you hire to look over your suitcase?  Have the same mindset when finding a property manager

Perfect Deal: (15:55)   

A perfect deal does not exist Be smart, start small, get started, start practicing. Do not look for the perfect deal

Breakdown of My Very First Apartment Deal (16:32) 

45 units

16

 

Asking Price of 775k Purchase price of 720k

Location: Next to a major university with a medical school. Next to corridors where lots of grad students and university workers worked Financed: Went into the president of the bank’s office and explained why he should finance me. Took lots of tries but persistence paid off Put down 20% Cashback: I found a lot of flaws that equaled 50,000 worth of work. Received cashback of $40,000 to help cover the repairs Cashflow: $6500 a month

Action Plan for Getting Started: (21:15) Get educated, absorb as much information as you can Find a friendly broker who specializes in apartments Nurture this relationship by being friendly and communicating often You want them to think of you when they receive pocket listings



Start visiting apartments that are for sale See the difference between the brochure and what you see



Get your financing in order Do you have the cash available or not? Commit to a financing direction

 

Create a relationship with a local property manager Ask questions They can do driveby inspections on properties They can do the walkthroughs with you to evaluate the property

  

Get your mindset right You can do anything you set your mind to Believe in yourself

 

Do not give up It will take time to find deals One brick at a time

 

Mark Twain, “The secret to getting ahead is, getting started.”

UGLY Side of Commercial Real Estate 17

Just one really good commercial deal can set most people financially free, but the ugly side of commercial real estate is that also, all it takes is one really bad deal to financially ruin you for life. In this training, you're going to discover the ugly side of commercial real estate investing, including a real life example of a terrible deal that has the potential to economically flatten the beginner investor who bought the property. You'll learn priceless lessons on what NOT to do as his case example is broken down into great detail. You'll find out that commercial real estate laws do not have the same consumer protection laws that residential real estate has so if you make a mistake, forgiveness may not be an option in commercial real estate. Finally, you'll be equipped with the wisdom on how to ensure no commercial deal ever flattens you financially. Here is the UGLY side of commercial real estate: https://youtu.be/0Lmgx1yd2LU

Why This Deal was Bad Negative Cash Flow: After discovering that the listing broker had not included several real world expenses on the cash flow spreadsheet, rather than cash flowing a positive $1,800 per month, instead the deal lost about $1,800 per month. Predatory Lending Practices: The loan origination and interest rate costs were astronomically high and certainly well within the bounds of predatory lending. Bad Back Up Plan: When it was discovered that the deal lost money each month, the listing broker suggested the buyer perform a condo conversion on the 18 apartment units. However, there was no evidence in the surrounding community to support if this strategy was feasible. No Way Out: The contract the Buyer had foolishly signed included $30,000 of non refundable earnest money AND the seller could sue for specific performance if he didn't buy it. So once our team had reviewed the deal and we had pointed out how bad of a 18

deal this was, the Buyer tried to back out and forfeit his earnest money but the seller threatened to sue for specific performance as well which could have cost the Buyer an additional $100,000.

How to Avoid the Ugly Side of Commercial Real Estate Get an Advisor: Before you sign a purchase contract with a seller, before you go out and do your first deal, make sure you have a very well qualified adviser on your side. The problem with a real estate broker as your adviser is they have a financial incentive for you to buy the property because when you close, they will earn a commission. Instead, you need a non-biased adviser who knows exactly what they are doing. They will help you navigate the murky waters of commercial real estate and help you to stay out of the ugly side.

How to Avoid Bad Commercial Real Estate Deals Understanding what a good commercial real estate deal looks like can be extremely valuable. Knowing if what looks to be a good deal is actually a really bad deal, could save your financial life. Commercial real estate laws are not set up for buyer protection. With commercial real estate, it is caveat emptor (buyer beware). And if you make a mistake, it could turn your dream of financial freedom into a complete nightmare. Discover how to ensure you never purchase a bad deal in this video on how to avoid bad commercial real estate deals. https://youtu.be/0HEL1qdfXEY

What is Due Diligence?    

Doing Your Homework Gathering Facts Double Checking Assumptions 2 Weeks to 2 Months to Complete

Why Perform Due Diligence?    

Protects You Physically, Financially, Legally Uncovers "Elephants" in the Room A Good Deal Can Turn into a Bad Deal Quickly Commercial Real Estate Consumer Protection

19

7 Important Facts Before Starting Due Diligence       

1. Due Diligence costs Non Refundable Money (Travel, Inspections, Reports) 2. You can ask for an extension 3. You will ask for an extension 4. Findings set up renegotiation of the deal 5. Always keep your exit strategy in mind 6. Have a business plan on the table going in 7. Famous Due Diligence Proverb: "The plans of the diligent lead to profit as surely as haste leads to poverty." -- Proverbs 21:5

7 Tips That Will Save You a Fortune       

1. Be Present Physically, Emotionally, Spiritually 2. Know How Many Days You Have (What's at risk?) 3. 4 Contingency Clauses (Inspections, Finance, Title, Appraisal) 4. Never believe verbal info, always get it in writing 5. Get Property Manager to do a driveby inspection (go to crimereports.com) 6. Always follow inspector around and ask questions 7. Beware of "Pro Forma" or "Pre Forma" Numbers

A Critically Important Due Diligence Formula   

ADD Annual Operating Expenses and Annual Mortgage Payments Together DIVIDE by Gross Potential Income EQUALS Break Even Point Occupancy

My Personal Due Diligence Checklists   

Physical: In person viewing of the property, Market Comparison Survey Financial: Verifying all the number by obtaining actual rent rolls, reports Legal: Survey, Title, Code Compliance, etc

Due Diligence Checklists DOWNLOAD

20

How Deal Funding Works in the Protege Program https://youtu.be/ShaOlYZ9H3g

Master Lease Agreement for Commercial Real Estate Discover the power of the master lease agreement for commercial real estate. For beginners and experts alike, it allows you to control property without having to get a bank loan. It is a foundational tool for all commercial real estate investors. https://youtu.be/yLgtOk48vkQ

Master Lease Agreement for Commercial Real Estate    

Works with all sort of commercial real estate deals One of the most famous Master Lease Agreements was the “Empire State Building” Someone offered 2 million a year for a 114 year master lease agreement Payments today are still only 2 million a year but now the income is at 6 million 4 million dollar profit a year

How the Master Lease Agreement Works: (2:33)     

You buy the property from the owner with a small or no deposit At closing you get “equitable title” Entitles you to all the cash flow, all the tax benefits, and you get all the profits at the set price The terms are set in stone so any value increase on the property is yours to keep The seller gets a monthly lease payment from you

Joe’s Deal (3:50)    

168 unit apartment for sale The property was in disrepair and had many vacancies You couldn’t put a new loan on the property because there was a large penalty if the owner paid off the loan early Joe structured a 4 year master lease deal 21

  

Seller got down payment money for a new deal and got out of a problem property Joe paid the lease and then the seller used that money to pay the mortgage He created 800,000 worth of equity in just one deal in a 4 year period

Two things you must do to land your first Master Lease  

Get the seller motivation Construct a deal and terms based off seller motivation

In Simpler terms: (6:55) Seller gets: Lease Payments that cover the mortgage Easy Sale Freedom from involvement Rescued from any personal or financial issues pertaining to the property

   

Buyer Gets:  Purchase with little to no money down, no banks, no credit  Less risk because the loan is still in sellers name  Cash flow-any money left after lease is paid is yours to keep  Option to buy after the agreed upon years  All profits

3 Nuggets on YOU Doing a Successful Commercial Master Lease Deal (8:58)   

Get the seller motivated and construct the deal based on that motivation Unwind your mind on what a typical deal looks like Master Lease Agreement Document

What Property/Seller is ideal for a Master Lease Deal? (9:47)       

Seller that is tired and burnt out Seller lives out of state Seller is sick or has other personal reasons for selling Avoid capital gains tax Large prepay penalty on loan Has property management problems Vacancies over 90 days old

Conclusion (19:45)  

Learn how to solve other people’s problems The Secrets of the Millionaire Mind by T. Harv Eker “An Entrepreneur is a person who solves other people’s problems for profit”

22

How to Purchase Your First Commercial Property with a Master Lease How to purchase your first commercial property if you do not have 35% down payment cash, ideal credit, and millions in net worth? You must get creative. One way to do this is with a master lease. Master lease contracts have been around for hundreds of years. Think of a master lease as the “lease with the choice to buy” but over some sort of property. The term lease option is used in reference to single family homes, but for apartments and commercial property, it is usually called a master lease agreement.

In simple terms… You will purchase the seller’s property by giving him a minor (or no) down payment in exchange for all rights and freedoms of possessing and running the property without legal title exchanging hands. At closing, you get equitable title, instead of a legal title. You are authorized to the property’s cash flow above the master lease payment, all new equity, tax benefits, and every day managing. Because your fees and conditions are set, all of the benefits are yours to keep. The more competent you are, the more you will make. As the Net Operating Income (NOI) grows, the property’s increase in worth becomes yours. The seller only receives a monthly payment from you on the interest of the difference concerning the lease agreement price and what he owes. Once you sell the property, any amount over the lease agreement price is yours to keep.

In simpler terms… The Seller gets:   

easy sale of the property lease payments on the equity of the property paid every month freedom from participation in the operation of the property

The Buyer gets:

23

   

a purchase without banks, loans, or appraisal all Gross Income above the lease payment Option to purchase the property at a pre-fixed price within a set period of time despite how much the property value has gone up any profits above the master lease agreement price

Master Lease Upsides:     

no banks needed The seller and you can be as creative as you’d like on the deal terms speedy closing, small closing costs, closing as hastily as 7 days seller can create easy interest income every month buyer can receive a nice income flow as the equity builds-up

Master lease Downfalls:   

foreclosure by seller is easy if purchaser does not perform per lease agreement It might result in a due-on-sale clause on the seller’s current mortgage seller might not perform his end of the agreement

Master lease Must Haves : 

    



Must get an attorney to form the master lease agreement. Real estate law and contract law vary by state. Do not download master lease agreements online or buy them from office supply stores Must complete a title search to make sure the title is without liens or you are aware of what liens do exist Must involve the services of a holding company to preserve ownership of an executed deed and the original documents Must record the master lease agreement involving the property Must get an appraisal Must have a foul-proof exit scheme planned out beforehand. It should be conventional with nominal to no guesswork based on proper research and guidance To safeguard that the mortgage and taxes are paid when they should be, you must have a third party pay them (e.g. title company or another type of payment company)

24

When you see these words, jump on the chance speedily… Here are important words and phrases to look out for when trying to find properties perfect for the master lease method: owner motivated, seller financing, owner will carry, master lease option, creative offers welcome, open to all offers, JV partner wanted, investor wanted. In conclusion, here is the secret to doing creatively financed deals, whether it’s a big or small deal…ask!

Analyzing Commercial Real Estate Quickly and Easily Analyzing commercial real estate is not nearly as complicated as it may at first appear. In fact, once you have the basic information about the property, analyzing the deal can be done quickly and easily if you understand the 5 basic terms.  Income and Expenses: The income is all the money produced from the property (rents, etc) and the expenses are all the costs involved with owning and maintaining the property excluding the mortgage payment.  Net Operating Income (NOI): This is how much money the property brings in before paying the mortgage, or income minus expenses.  Cash Flow: This is actual profit you make, or the NOI minus the mortgage.  Cash on Cash Return: This describes how fast you get your down payment money returned to you, or Cash Flow divided by your down payment.  Capitalization Rate (CAP Rate): This is a simple metric used in commercial real estate that compares the sales price to the NOI. In the following video, you'll learn all about these 5 key terms as well as an example of a deal with real numbers. Here's analyzing commercial real estate quickly and easily: https://youtu.be/m8QIzxXRMGA

Analyzing Commercial Real Estate Quickly and Easily Commercial real estate is not as complicated as you think it is

25

3 Things You Want to Know About the Commercial Real Estate Deal You are Analyzing (0:32)   

How much money does it make What is your return on investment How does this investment compare to other investments

5 Key Investment Terms for Commercial Real Estate Income and expenses     

Every commercial property has both Income can be rents collected, lease payments, laundry income, and even late fees Expenses are insurance, taxes, utilities, repairs, landscaping, and property management fees One thing that is not included in expenses is the Mortgage payment It is a debt expense

Net Operating Income (NOI)    

Definition: Your income minus expenses One of the most important terms of these five As your net operating income go up your cash flow and the value of the property go up When it goes down so does the cash flow and property value

Cash Flow 

Definition: Your NOI minus your mortgage payment

Cash-on-cash return   

How fast is your money moving If you get your money back in 1 year it is 100% cash-on-cash return If you get your money back in 2 years it is 50% cash-on-cash return

Capitalization Rate       

“Cap Rate” is NOI divided by the sales price If you pay all cash for your investment what would be the return on that investment 500,000 property bought outright now mortgage, what is the return on that property? High cap rate property will be in a low to moderate income neighborhood The higher you go the higher the risk the higher the potential return but the price is lower Low cap rate is in a wealthier neighborhood Lower cap rate is a lower risk, but also lower return and higher sales price.

26

Rules of Engagement for These Five Key Terms (10:06)      

Do not make an offer until you calculate each of these terms For income and expenses you need the income to be greater than the expenses The NOI needs to be greater than the mortgage payments Cash Flow needs to be positive Cash-on-cash return must be greater then or equal to 10% Cap rate should be greater than or equal to 8%

EXAMPLE (11:43) 3 Assumptions for This Example: The property purchase price is $450,000 Down payment is 10% so $112,500 Mortgage Payments are 20,000 per a year On this property the income is 48,000 a year Expenses are 12,000 a year This means that the NOI is 48,000 – 12,000= 36,000 Cash flow is 36,000(NOI) – 20,000 (Mortgage) = 16,000 Cash-on-cash return is 16,000 (cash flow) divided by 112,500 (down payment) =14% Cap rate is 36,000 (NOI) divided by 450,000 (sales price) = 8%

        

Using a Letter of Intent for Making Offers on Commercial Real Estate Discover why successful commercial real estate investors use a letter of intent when first making an offer on commercial real estate and how you can too! In this quick training, you're going to learn what an LOI (letter of intent) is, the 3 main purpose of an LOI, the 3 biggest advantages of an LOI and best of all, at the end, you can download your very own copy of the Letter of Intent Peter Harris uses on his own deals! Here's the video training on how to use a letter of intent to make offers on commercial real estate.

Letter of Intent Form

27

https://youtu.be/hqovi3kA2Ts

Using a Letter of Intent for Making Offers on Commercial Real Estate Two Main Ways to Make Offers on a Property (1:04)  

First Way is a typical sales contract a purchase and sale agreement Second way is a letter of intent an (LOI)

Definition of a Letter of Intent (LOI) (1:28) A one or two page document where you make offers on commercial properties without all of the pages of legal terms and clauses associated with a 10-20 page sales contract

The Three Main Purposes of the Letter of Intent and How to Use it Effectively (1:56) 1. The letter of intent is to be a bridge between your intent to buy the property and a legal sales contract 2. The LOI is a way of making an offer in a very simple way to get the basic terms out on the table for the seller 3. The LOI is used to get the seller to come into agreement with you of the basic terms so that later you can negotiate all the other terms in the sales contract

The LOI is Not: (3:00)   

Not legally binding No legal force to the offer Not to be used to negotiate the terms of a sales contract

28

Three Advantages of Using LOIs (3:40) 1) You can make a lot of offers because it is only 1 to 2 pages long 2) LOIS are free 3) There should be no fear in making lots of offers because it is not legal binding I challenge you to make one LOI offer a week Lastly there is a link on this page directly above this summary where you can download your own letter of intent

 

5 Best Commercial Real Estate Types for Individual Investors You're about to discover the 5 best commercial real estate types for individual investors. Many of the iconic commercial properties you drive by everyday are owned or controlled by larger investment firms, such as real Estate Investment Trusts (REITs), Private Equity Funds, Trusts and other large institutional investors. Competing against those folks can be difficult because they have virtually unlimited amounts of cash and only require a small return on their investment dollar. For individual investors like you and me, we need larger returns with less capital. So what properties are best for people like us? https://youtu.be/2PSon3fkFos

5 Best Commercial Real Estate Types for Individual Investors 1.Apartments (0:48) 

5 units and greater are considered commercial real estate

Why Invest in Apartments?  Everyone needs a place to live  You can generate a large amount of Cash flow  Force appreciation by increasing rents or reducing expenses  Apartments produce great tax shelters  As you make your mortgage payments you reduce your principal and create equity  You create wealth by increasing your equity and cash flow  Easiest commercial real estate to get into SWEETSPOT of Apartments:  Between $500,000 and $5 million  Not worth it to go below  Too much competition above 29

CONS for Apartment Investing If your neighboring developers are building new apartments New builds will attract your buildings ability to attract new tenants Sometimes people do bad deals

  

2.Self-Storage (3:52)   

Self storage are commercial buildings with individual rooms where people store their stuff They come in different sizes Also include boats and rvs stored

WHY Invest in Self-Storage?  Same as Apartments but you are missing two things that are to your advantage  Missing tenants (easy evictions, not labor intensive)  Missing Toilet Repairs (Less maintenance)  Creates cash flow  Force Appreciation  Experts consider Self-storage economy proof Sweet Spot of Self Storage Buy a large enough self-storage facility to be able to employ a property manager Do not do this yourself

 

Cons of Investing in Self-Storage:  If the neighborhood has decreased in value your facility might not be desirable  Location is extremely important  It can take a while to occupy all of the units

3.Shopping Centers (7:38)  

Strip centers large or small Shopping malls indoors or outdoors

WHY Invest in Shopping Centers? Stability Most tenants sign a 5-20 year lease

 

Sweet Spot of Shopping Centers: Buy Small, start small, and scale up



Cons of Shopping Centers:  Capital Intensive  Need lots of cash  If a major tenant leaves It can take up to 30% of the income  You will still have to pay mortgage as you build up for the next tenant

4.Office Buildings (10:13) 

Single building with one tenant all the way up to a skyscraper that’s 80 floors and dozens of tenants

WHY Do We Invest in Office Buildings? 30

 

When the economy is booming their rents can be astronomical Can make a lot of money by holding onto them for a long period of time

Sweet Spot of Investing in Office Buildings: Start small, buy an office building with multiple tenants with long term leases Cons of Investing in Office Buildings: They depend on the economy If the economy goes down the office building goes down

   

5.Mobile Home Parks (12:20)   

You either own the mobile home park and the tenants bring the mobile home You own both the park and the homes and rent out both It is better to own only the mobile home park aka dirt because less maintenance and expenses

WHY Invest in Mobile Home Parks  They produce cash flow  Affordable housing demand is great  You won’t see many new ones being built  Tenants tend to stay a very long time  Most mobile home parks are seller financed Sweet Spot of Investing in Mobile Home Parks: Buy a mobile home park that is big enough to hire a property manager



Cons of Investing in Mobile Home Parks: They have a negative reputation Financing for mobile home parks is difficult to get

 

Conclusion: 

F.O.C.U.S

Follow One Course Until Successful  Choose one route to go and stick with it  Weigh the probability and the size of the investment

Commercial Real Estate Investing for Dummies Commercial real estate investing for dummies as described by the author himself. You're about to discover why commercial real estate is so powerful, what types of real estate are defined as commercial as well as a simple 3 step process for evaluating any commercial property quickly and easily. Although some are intimidated by commercial real estate, let Peter Harris "dumb it down" for you. 31

For those who have read Commercial Real Estate Investing for Dummies, in the book it is mentioned a special gift in the form of an Addendum. Here is a link to download that document:

https://youtu.be/tPl9K2dbS90

Commercial Real Estate Investing For Dummies WHAT is Commercial Real Estate? (0:43)     

Commercial real estate is anything other than a house Office building Shopping center Apartment building with 5 or more units Apartments are easiest for the beginner

WHY Should You Consider Investing in Commercial Real Estate? (1:41)    

Cash flow and the potential to create long-term wealth Commercial real estate is a lot less emotional then residential In commercial real estate you fall in love with the deal not the property One building with 20 units is a lot easier to tend to then 20 residential homes.

HOW Do You Evaluate a Commercial Real Estate Deal? (4:10)  

For a 20 unit apartment building with an asking price of $550,000. Each units rent is $525 a month

Step 1) Get the Income: $525 rent x 20 apartment units x 12 months = $126,000 a year There will be vacancies so enter a 10% vacancy factor of $12,600 Total income is $113,400 per a year

  

Step 2) Get the Expenses

32

 

(Repairs, Utilities, Taxes) $57,170 is the total I added up for the years’ worth of expenses

Step 3) Get the Mortgage Minimum down payment of 20% $550,000 asking price x 20% is $110,00 down payment $550,000 - down payment= $440,000 Conservative mortgage interest rate is 6.5% for 30 years Mortgage Payments a month come out to be $2748 x 12 months =$33,372

    

Now all you have to do is subtract the expenses and mortgage from your income and you have your cash flow. $113,400 - $57,170 - $33,372=$22,858 $22,858 is what goes in your pocket every year To find your return investment you divide your cash flow by your down payment and it comes out to be over 20% return

  

Getting Started in Commercial Real Estate Before getting started in commercial real estate, there are several questions you should ask yourself.  Why commercial real estate?  What do you bring to commercial real estate?  How much desire do you have to be in commercial real estate?  Where geographically do you want to be doing deals? After asking these questions, there are several other important details to consider that you're about to discover in the following video on getting started in commercial real estate: https://youtu.be/Y9JCr3uy1FY

Getting started in Commercial Real Estate 

Ask yourself the why the what the how and the where in getting started in commercial real estate

WHY(0:30) 

Why do you want to invest in commercial real estate? When the why is powerful the how becomes not so difficult the how becomes very clear.

WHAT(1:50)   

What do you bring to the table? What cash can your bring to commercial real estate investing? You don’t need a lot but you need some for expenses such as appraisals expenses, and travel. 33

How (2:26)    

How much desire do you have? Anything that you pursue that is great and worthy in life, is going to have obstacles. To come out successful you are going to have to have desire. If you have a strong desire it will outdo any talents or gifts when it comes to commercial real estate.

WHERE (3:30)     

The question is, " Where should you invest?" Invest in your own backyard first. Begin in your own city so that you can qualify or disqualify your own area first. It is easier to become an expert if you are a local. If you want to go out of your area, that should be a last resort because it can be risky.

Basic Requirements of getting started in Commercial Real Estate Investing (4:28)  

Get a basic understanding of commercial real estate bare minimum things you need

1) you need to have an understanding of what commercial real estate is 2) You need to be able to evaluate a simple commercial real estate deal  There are two videos that discuss these topics  Commercial Real Estate Investing for Dummies  The 5 Best Commercial Real Estate Types for Individual Investors Computer  Must have internet access  The world if flat, you can invest anywhere you'd like just by having a computer Cellphone  Setting up appointments and meetings Calculator Nothing fancy Use mortgage calculator online Calculated industries has real estate friendly focused calculators phone app calculator

   

Time  Anything that you go after there needs to be a focused amount of time on that endeavor  3-4 hours a week bare minimum

Things you do not need to get started: (7:41) 34

     

A real estate license fact it can be a liability You don’t have to start in residential real estate to jump to commercial real estate They are two completely different investment types You do not need a Masters or MBA to understand everything about commercial real estate You need experience focus and desire You don’t need to be rich You need a little bit of money and a lot of desire Check out Master Lease Agreement technique

Conclusion (9:39)   

Two things the super wealthy have in common. The super wealthy are people that make a lot of money but also use it to do good. First trait: They all own commercial real estate Second Trait: They are all known for their integrity. They do the right thing even when it hurts. How you do one thing is how you do everything. Always keep your integrity in tact

Is Bigger Better? Commercial vs Residential Is bigger, better? Is commercial real estate a better investment than residential. You're about to join me in the studio with a radio host as we discuss this all important topic. You'll learn about the economies of scale that commercial multi family properties create, the reduction in downside risks when experiencing vacancies, the productivity of using the same amount of time to do larger deals, the removal of emotions from selling decisions and much more. Most importantly, you can decide yourself if bigger is better: https://youtu.be/TaosfwtfbmM

Big Cash or Big Credit at Closing How to get Big Credit or Big Cash at Closing on Your Commercial Deals 35

Why Getting Cash or Credit at Closing is Good 1.

It makes you look good and it makes your deals even better.

2.

Your buyers come out of pocket less at closing by the amount you

negotiate.  If you can negotiate a credit or cash at closings, your buyer will come out of pocket less by that dollar amount you negotiate. In their eyes, you'll be a super star. 3. 

4.

Raises your cash and cash return a whole lot. Here's an example. If your down payment is $100,000 on your deal and you negotiate a $50,000 credit at closing or cash at closing, you have just doubled your cash and cash return by putting some language in a contract. That’s how powerful it is. You will have money now to immediately do repairs, renovations or

improvements. This allows you to immediately capitalize on their proper potential. If the property needs a new roof and you need some interior decorations or renovations to raise your rents, you now have money to do this and it's not your money. You got it from the seller.

 

What Exactly is Credit at Closing or Cash at Closing It's the process of negotiating a dollar amount that you'll be receiving at the close of escrow in hopes of increasing the merit of your deal.

What is the Difference Between Cash at Closing or Credit at Closing? Credit at closing reduces your downpayment. We negotiate a credit at closing, the closing agent will reduce your down payment by that credited amount. Cash at closing on the other hand, you will get a check or wire transfer at closing

Which One is Better?  

Credit may be better if you don't have all the downpayment dollar saved up.If you don't have enough money, maybe getting credit at closing is the best to go. Cash at closing may be better if you need money in your pocket to do repairs or renovations to increase the cash flow or property value.

3 Keys to Getting Credit at Closing. 36

1. You need to substantiate the credit amount you're asking for with more than one contractor's estimate.  Get at least 2 or 3 credible estimates to justify the credits you're asking for.If you need a credit for roof or some siding repairs, kitchen repairs, whatever it is, get 2 or 3 estimates so you can say here is a reason why I need to credit to make me want to move forward in this deal.  Look at these estimates and if you average the 3 out, this is what I'm asking for for the credit or take the highest one. 2.  

3.  

Expect for the seller to counter To counter your requested amount of credit with the lower amount, This is real estate 101, Consider slightly increasing your credit amount in anticipation of the counter. If you need a credit of $25,000 to make your deal super duper, ask for $35,000. Ask for $35,000 so when he counters you, you end up with $25,000, exactly what you want. Never agree to anything verbal Get it all in writing on the contract and make sure the closing agent has the amended contract. Everything you do in negotiating credit, once it's final and done, needs to be written down and amended in your purchase contract, in your purchase agreement.

Getting the Cash Back at Closing I had a student get back over $100,000 cash back at closing because the property needed some repairs and he also needed some help with his downpayment as well. We negotiate $100,000 cash back at closing. The Key to Getting Back at Closing. The key is the language that you use in the contract. This is key language I've been using for almost 2 decades. Here's the language. "Seller hereby agrees to sign at close of escrow to buyer's choice of entity, the sum of $100,000 in the form of check or wire transfer for property renovations."

4 Keys to Getting Cash Back at Closing. 1. Be upfront with everyone and explain very well what you are doing.  This can be a very confusing thing to do, but a very powerful thing to do once you understand it. Here's what I want you to do. In the wording, use the word assign and not credit if you want to get cash back at closing.

37



2.

Remember, assign means that you'll get cash at closing but credits means that the closing company will credit you that amount at closing towards your down payment. Big difference, Wording. I word the contract so that the money will be assigned to the buyer's

choice of entity. We use that wording so that the cash at closing does not go to you personally. That raises too much suspicion in my opinion and it maybe consider loan fraud if you're doing it wrong.  We want to make sure that we are doing everything by the book. 

3.  

When you assign the money to your buyer's choice of entity, that's a choice of entity that you have so you can just open up an LLC You already have set up or set one up in the future and assign the money to be paid to that entity. Another way of doing this is you can assign it to a contractor or you can assign it back to the bank.

4. Use the wording property renovations and not repairs  We're assigning $100,000 to a buyer's choice of entity for the purpose of property renovations, not repairs because the word repairs means there's something wrong with the property, it's in poor condition. That makes banks nervous. It makes people nervous, especially lenders.

Conclusion: Now I explained to you how to get cash and credit at closing, right? Again, it makes you look good. It makes your deal better. If you're a wholesaler, you come out of pocket less at closing.  It can potentially double your cash and cash return to pay in the amount that you can get credit or cash for.  Then if you get cash at closing, you'll have money to immediately do repairs, renovations and improvements.  It allows you to immediately capitalize on property potential and realize that the property's true potential.

Buying Commercial Real Estate without Bank Loans Discover how to buy commercial real estate without using bank loans. You'll learn about creative financing techniques such as master leases, seller financing and installment sales. This is a must watch video for anyone interested in commercial real estate investing. https://youtu.be/luvLffIo-98

38

7 Reasons to Use Creative Financing in Your Commercial Real Estate Deals 1. The first reason is leverage, lower down payment, not having to deal with banks. 2. You have the cash resources but not the credit. 3. If you are whole selling this deal, creative financing gives you the immediate impression that the deal is unique, special, and desirable. I guess for you whole sellers out there, this is really important for you guys. 4. It’s a way to finance a property that's in disrepair or distress whereby bank financing just couldn't happen. 5. If you have seller who wants to avoid or delay capital gains taxes on a sale 6. Seller is ill, old and tired, or burnt out, very, very common reason to use creative financing in commercial deals. 7. It's just a fun and cool thing to do.

What's the Secret to Structuring Seller Financed Deals of Any Size? This goes for apartments, self-storage, mobile home parks, office, retail, all the above. What's the secret to structuring seller financed or creative financing? Ready for the secret? The secret is asking. You have to ask. There's power in asking

My 1 Rule in Asking Don't ask about seller financing or anything creative during your first phone call. That might tell them that you have no money and scare them away. Wait until the second or third phone call to do that.

The 3 Simple Creative Financing Methods For Today 1. Owner Carry First Mortgage This is must-know for you. You just have to know how to do these. If a seller has, for example, no debt on his property, he can act as a bank for your financing needs, for your

39

purchase. Simply put he hosts the mortgage for you. Here's an example. If the purchase price is 500,000 and you put down 50,000, and then you will make a monthly payment on the remaining 450,000 balance. Follow me so far? That balance is called owner carry. As for the loan terms and things like that, that's up to the unit seller. That is called an owner carry first mortgage.

Why would the seller do this for you? Reason number 1. The seller may not want to pay taxes on the sale. The seller can avoid capital gains taxes at the sell and spread out his tax consequences over a period of time if he wants to. That's the beauty of a seller carry first.  The seller will get a down payment, will get monthly payments for as long as agreed.  Eventually, he'll get paid his entire payment depending on when the owner carry amount comes due.  For tax consequences, the seller will only claim as income the money you pay him, down payment plus the payments for the taxable year. 

Reason Number 2  Let's say their property is well below market vacancy. There's lot of occupancy and it’s in poor condition. This means that the bank will not lend on the property unless you can show profit and have this physical condition remedied. You’ve got to fix it up.  This is what we call a non-performing or distressed commercial property, with high vacancy and an ugly property. Banks don't like those types of properties. This is ideal for creative commercial financing.  Now, tell me this. How many of those properties have you seen out there? I'm sure you've seen a few, and you had no idea what to do with them. This is how you buy them. Reason Number 3 Let's say the property is in good condition, but the seller kept poor or non-existent financial documentation, such as bookkeeping. Banks will refuse to lend fully on that type of property.  If you don't have good books and records, how can a bank verify what the historical income has been? They can't. If you do get a loan, the loan terms won't be that great.  What you can do is you can purchase this property with creative commercial financing with the seller being the bank for you. You can nurse their property back up, and then later on when the seller financing expires, and the building is working great, you can finance into A class or A level loans, a good loan term. 

Reason Number 4 The seller may need a quick sell because of personal circumstances, such as illness, relocation, divorce, or a need for quick cash



40



I'm positive that some of you have seen situations where sellers are sick, they have to relocate overseas, there's a divorce going on and he need quick cash. Seller carry first mortgages are ideal here, so you must know how to do those.

By the way, the 4 reasons I gave you, these are what I call seller motivations that you really need to watch out for. You want to know why? It's because seller financed deals are put together around seller motivations. If you ever wanted to know how to put together a creative deal or a seller financed deal, get the seller motivations, number 1.

2. Owner Carry Second Mortgage They've been around for quite a while, since the origination of mortgages. Let's say the buyer does not have quite enough saved up for down payment. Let's say that you only have 15% of the purchase price and the lender wants 25%, so you're a few dollars short. What the seller can do is help you buy the property by honing a second mortgage for the remaining down payment proceeds. Again, you have 15%, the bank wants 25%. The seller can hold the remaining 10% as a second mortgage, thereby satisfying the lender's 25% requirement. Let's say that you do not have quite enough saved up for down payment and the bank wants 25%, you only have 15%. The seller can help you by holding a second mortgage for the remaining 10%, and thereby satisfying the lender's 25% equity requirement. Let me give you an example how that works. Let's say you're going to purchase 10-unit apartment building and the purchase price is 500,000. The down payment requirement is 25% or 125,000, but you only have $75,000. You only have 15%, but you need 25%. In order to satisfy the down payment requirement spot of the bank, the seller agrees to hold a second mortgage against their property for the remaining $50,000 or %10. Now, everyone is happy because seller gets to sell their property, You get to purchase the property, and lastly, the lenders active requirement is satisfied. That's how you do an owner carry second mortgage it is a very, very popular way to leverage yourself into a commercial property, very popular way. All right. 3. Master Lease Agreement where you need no banks, no credit, no experience for this strategy. It's one of my favorites. To get started here, I'm going to share with you an example of a deal that we did. It was an office building from one of our students. Her name is Karen, and she found her deal on LoopNet.com, a vacant class A, 8,600 square foot former Remax real estate office.

41

The Remax office went out of business. The owner was 3 months behind in their mortgage. She's sunk her life savings into the building and the business. She wants to basically avoid bankruptcy and foreclosure. She is facing financial ruin, so she's very motivated. Karen came to me, "Peter, this is what I found." After hearing her, I go. "This is ideal for master lease, Karen. Here is what I want you to do." To make a long story short, Karen's idea was to turn the office space into office suites, after studying the area's needs. Basically what she did was she called a professional leasing company, and she asked them point blank, what does the area need? They said the area needs office suites very badly. We decided to convert this Remax offers into office suites. In this building, all the copy machines were there. All the furniture was there. The break room was all outfitted with nice tables. Everything was there. This was just ideal for this situation. Here's the deal. The purchase price is $1.3 million. We use a master lease agreement. We put down $75,000, and we took over the mortgage payments, the tax payments and the insurance payments for the owner. This $75,000 down payment was used to catch up with the late payments, pay off the liens and pay broker commissions. To make a long story short, once this property was 80% leased up, their property will be worth $2.3 million at a 7 cap. Remember, we bought it for 1.3, empty, and 80% occupied is worth 2.3 million dollars at a 7 cap, in which the area can easily afford a 7 cap. It's probably below 7 cap today. Now, maybe they're asking, "How did Karen come up with the 75,000?" She borrowed it from a mother and a sister. Here are the terms that she paid her mother and sister. She gets her mother and sister 8%, annually, plus she gave them 25% of their profits when she sells. 8% interest paid annually, plus a 25% kicker on the backend. That's what you can do with the master lease. Now, here's a good question that many of you maybe are wondering. Why was a master lease ideal for this situation? When Karen brought this deal to me, why did I say this is ideal for a master lease? The reason why is the seller was distressed. She had missed mortgage payments, she had a failed business. The building was empty, and she had her life savings at stake, again, seller motivations. The seller may have been a good real estate agent, but she was not a good investors. How many times have you seen that these days? 42

Now, another reason why this was ideal for a master lease is most banks will not lend conventionally on an empty commercial property. If we wanted to take advantage of this situation, buy this property, we had to deal with a master lease. The fourth reason why it's ideal for a master lease is Karen didn't have a down payment or the credit or the net worth to buy a property herself. She just didn't have it. Many of you are like that. That's where the master lease comes into play.

Secret Sauce to Master Leases? I'm going to give it to you in imaginary quotations. Here it is in quotation mark. "Mr. Seller, I will give you your price if you give me my terms " Let me repeat that. "Mr. or Mrs. Seller, I will give you your price if you give me my terms." That is key language. If the owner of that Remax office wanted her price, she needs to give us our terms, and then we have a deal. How Do You Come Up With the Terms? Well, it depends on the deal. Right now I'll give you a few examples of what some of the terms look like, just so you can maybe fit them to the deal, maybe one of the current deals you're looking at, or perhaps one that you passed up in the past.



Term Number 1. No money down. Term Number 2. No money down at closing, but down payment split into payments as certain thresholds like occupancy is achieved. Term Number 3. No money down and a joint venture with the seller. See how creative we can be with this stuff. Term Number 4. Let's say you do 5% or 10% down and you just take over his or her mortgage payments. How about 5% or 10% down and take over mortgage payments, but not payments are made for the first 12 months. How about this? 20% to 25% down, take over mortgage payments, but seller pays a monthly premium. Again, I can go on, and on, and on, and on, and on with these terms, but they depend on the deal. How Do You Come Up With These Terms? You come up with the terms by discovering what the seller motivations are, and then you structure the deal around those motivations.

43

Commercial Cash out Refinance There are some things in the commercial real estate business that you want. There are some things that you need, and there are some must-haves. The commercial cash out refi is a must-have.

What Exactly is a Commercial Cash Out Refi and How Can it Help You? The commercial cash out refi is a very common strategy of putting your property into position to refinance the current loan and pull out your original down payment as cash. It's also a very important skill to have if you want to be a successful syndicator of commercial real estate deals. It's a vital skill. Once you pull the cash out, you can use the cash with various things like renovating the property, You can buy another property, and you can pay back your investors and be very popular amongst them if you do that. You can also have a nice fat savings account. The end-game, with the commercial cash out refi is to build well. The cash out refi equals wealth building when you get down to it.

The Cash Out Refi Concept Remember the good old days in residential, single family home investing when you could buy a rental home, wait for it to quickly appreciate and then refi, pull the cash out and hold on to the property? Then, you would take that cash, well, hope you did, and buy another rental and another new rental and another and another? Then, you could do this for years as long as the market kept going up. As you all know, the market has stopped going up like it did back in those good old days and those good old days of residential are gone. The market crashed for a few years and left many residential investors in shambles. I'm sure many of you remember those days. Well, guess what? The cash out refi is alive and well in commercial real estate and it is not so market-driven as residential real estate. It is more income-driven than anything else.

44

Example: Yes, the market still does have a little say but the net operating income has a bigger say. I will give you an example right now to show you how powerful the net operating income is when considering a cash out refi and how it plays into that. Here's basically how it works. Let's take a 12-unit apartment complex as an example. Let's say you purchase it for $1.4 million and let's say all their rents are $750 a month for each unit. But let's also say that the rents are $125 below the market. The rents can actually go from $750 to $875. Then let's also stamp the market with a 5% cap rate. I'm out here in California and that's pretty common. Some places on the East Coast and in Southwest, that's pretty common too. We'll use 5% as the market cap rate. We have a 12-unit and the rents can go from $750 to $875 so $125 bump. Let's also say that we can also cut the cost of the water utility by transferring those water cost to the tenants. We'll put in separate meters and we'll charge the tenants the cost of water. Let's say also, we're going to be really good property managers, so operationally, we're going to be way more on top of things than we were in the past and so we're going to have a total monthly savings of about $1,000 a month which is about $12,000 a year. We get that from the water savings and just better management. A total savings of $1,000 a month or $12,000 a year. You follow me so far? So far, we have a rent bump of $125 across all 12 units and also we're implementing water utilities to the tenants and being a better manager so we're saving $1,000 a month. Now, let's say that the price is $1.4 million, 25% of that is $350,000. That's the typical down payment on the commercial deal of 25%. So, 25% of $1.4 million is $350,000. Follow me so far? After you put down the down payment of $350,000, you're going to owe $1,050,000. It's just simple math. Remember that number. You owe a $1,050,000 after your down payment. Just remember that number. As I mentioned before, your rents can go from $750 to $875. We're going to do that across the board. We're going to do $875 a month times 12 units times 12 months. That gives me $126,000 a month. Now, we have the income of this 12-unit, the new income of this 12-unit.

NOI Now, we're going to subtract expenses. To make a long story short, we're going to take 35% of the income as expenses. So, 35% of $126,000 is $44,000. I'm going to subtract 45

the $44,000 from $126,000 and I come up with a net operating income of $82,000. Follow me so far? So, $126,000 in income minus $44,000 in expenses gives me a NOI, net operating income of $82,000. The net operating income or the NOI is a very important number in commercial. Hopefully, you follow me so far.

Cap Rate If you recall, I also have a savings of $12,000 because I pass on the water and I tightened the management. That goes to my bottom line to my NOI, so $12,000 for the year. My new NOI is $82,000 plus $12,000. It's $94,000 now. I have a new net operating income of $94,000, new NOI of $94,000. Now, there's an equation I need you to know. Many of you, know the basics of commercial that a cap rate formula, cap rate is equal to the NOI divided by the sales price. Cap rate is equal to NOI divided by the sales price. I can flip that equation over and say the sales price is equal to the NOI and divided by the cap rate. All I did was flip that equation over. The sales prices is equal to the NOI divided by the market cap. Now, if you recall, I have an NOI of $94,000 and I stamped a cap rate of 5%. Now, I have my new sales price. Remember, sales price is equal to NOI divided by the cap rate so it's $94,000 divided by 5%. My new sales price now is, I do the math there, it's $94,000 divided by 5% equals $1,878,000. So, $1,878,000, follow me so far? Now that I have increased my NOI, I have a new value. As the NOI goes up and the cap rate stays the same, the property value goes up. You can just use this new equation if you want. New value is equal to your new NOI divided by the cap rate. That's all I did, new value is equal to my new NOI which is $94,000 divided by 5%. I have a new value of $1,878,000. Let's continue. Commercial real estate lenders allow you to refi 75% of your new value. Once the property is stable, they will look at this new value of [$1,878,000 00:08:07] and they will do a typical 75% refi. What's 75% of $1,878,000? The 75% of $1,878,000, $1,408,500. I'm going to go ahead and get a refi loan in the amount of $1,408,500. Now, do you recall what we owed? We owe from our original loan $1,050,000. I'm getting a refi loan at $1,408,500, my old loan is $1,050,000.

Cash Out Refi My new loan is going to pay off the $1,050,000. What do I have left? After my new loan of $1,408,500 pays off my old loan, I have $358,500 left. That's cash to you. Do you 46

recall what your initial down payment was? Your initial down payment was $350,000. At the close of your refi loan, you got a check for $358,500, you originally put in $350,000, you have essentially paid yourself back with this refi loan. This is called a cash out refi. It's a very popular thing to do, something you need to learn how to do, very powerful thing. Basically, all I did was increase my rents. I pass over the utility to the tenants and I tightened my operations all in the spirit of increasing my NOI. Then, I apply for a refi loan with a new value and then I got the cash out and I paid myself back. What do we learn here? We learned here was to always look for ways to increase your net operating income. I discovered that my rents can go up $125. I discovered that I can pass off my water cost to my tenants. I discover that I can be a better operator and better property manager and tightened things up and increase on bottom line which is my NOI.

Force Appreciation Always look for ways to do that because as your NOI goes up, your property value also goes up. Now, as your NOI increases, it can come from, as I mentioned, rent increases or expense reduction. This is what we call force appreciation. When you do a force appreciation, you're forcing appreciation by increasing the NOI. You're not relying on the market. Remember what I said, this is not so market-dependent as more NOI, income-dependent so we can force your appreciation by doing those things.

Why Cash Out Refi is Valuable That's tax-free money that you're taking. Now, again, let me review why is this so valuable to know how to do? First of all, you can pay back your investors and keep your property 100% to yourself. Secondly, you will become a very popular investor among your peers and private money investors. Why wouldn't they want to do another deal with you if you can pay back their investment and keep them in an investment? Why wouldn't they want to do another deal with you? Thirdly, answer this question, what is your cash-on-cash return with zero money left into the deal? The answer is what? Infinity, your cash-on-cash return with no money into the deal is called infinity.

47

Creative Financing Using Second Carry Mortgage It's really important that you know how to structure deals that no one else does to give you the upper hand. A typical real estate agent may or may not know how to be creative but for the most part, they're not interested because it may affect their commission. From my experience, nearly 95% of all property owners, the sellers, don't have a clue on how to safely structure creative deals.

Why Second Carry Mortgages? Have you ever heard of these terms or these phrases before when you're looking on LoopNet or online listings or getting things from brokers or even sellers? If you’ve heard this before: "seller may carry a small second to help get the deal done". How about "seller may hold a second" or "owner may carry some paper"? How about "owner may carry"? How about the emphasis "owner financing possible"? I'm sure some of you that are active in the market have seen these terms someplace somehow. What does this all mean? This is actually code language telling you, "Here's an open door, an open window for you to explore creative financing." You just have to know what to do with it. Why seller carry second mortgages? Being creative allows you to close on more deals and make more money. That's the bottom line. Seller Carry Strategies Assist You in Leveraging for Example:  Lowering your down payment amount.  Helps you increase your cash and cash return or ROI immediately and immensely,  Makes your deals very attractive and unique.  It allows you to take advantage of motivated sellers where loan assumptions are available.  You'll be able to overcome financing obstacles that normally the average person would walk away from, but not you, after this training here.

Seller Carry Second Mortgage Example Understanding seller carry second mortgages is an absolutely important tool to have in your arsenal of deal making tools. Let's do a quick example. Quick and easy, okay? I know you guys can't see the number but just try to follow me along in principle. Let's say

48

the purchase price of an apartment building is $500,000, and the down payment is 25% or $125,000, but you only have $75,000 so you only have 15%. There's a 10% shortage. Here's how seller carry mortgages can help. In order to satisfy the down payment requirement of the lender, which is 75%, the seller may agree to hold a second mortgage against the property for the remaining $50,000 or 10%. That's called a seller carry second mortgage. Now, if agrees to do that, everyone is happy. The seller gets to sell the property. You get to buy the property. Lastly, the lender's equity requirement, a 25% down payment is satisfied. In a nutshell, that's what a seller carry second mortgage is. You're going to have two mortgages. You're going to have to pay the first mortgage and the second mortgage. You're going to have to evaluate this and figure your cash flow out by subtracting two mortgages from the NOI. How does this affect cash in cash return if you don't do a seller carry second mortgage? If you don't do a seller carry second mortgage in this case, you have to come up with the entire 25% or $125,000 instead of $75,000. You'll be only taking care of the first mortgage. You know, that can have a huge difference on your cash and cash return. Now, in the first case, you have a seller carry second mortgage. You have a certain cash in cash. In the second case, there's no seller carry. You're putting down the entire down payment. There's a certain cash in cash there. The difference is you putting 15% as opposed to 25%. That's over a 30% improvement on your cash in cash return. If you can organize a small seller carry of 10%, your cash in cash return can potentially be over 30%. It can be a 30% difference there. For example, let's you're able to produce a 25% cash in cash return with the seller carry second mortgage. That's if you don't have a seller carry second mortgage. It can be 15-17%. You can go from 15-17% up to 25% with the seller carry second mortgage so that's huge.

Second Example Let me go over a second situation with you. Let's say we have the same apartment building at, $500,000 purchase price. The seller this time has 4 years remaining on a current loan in the amount of $300,000. The buyer must assume the loan because the seller has a large prepaid penalty if the loan is paid off, so he can't just sell it to you. You have to assume the loan, but there's a gap there right? He owes $300,000, but the purchase price is $500,000 so there's a $200,000 gap there to cover, but again you only

49

have $75,000 so there's a $125,000 shortage. The question is what do you do? How do you buy this deal? Here's what you do. Again, this is about seller carry second mortgage. You're going to take your $75,000 and you're going to apply to the gap of $200,000, and then the seller is going to carry a second mortgage for the remaining $125,000. Okay? You got it? You're going to put down your $75,000 to the bank. The seller's going to take out a second mortgage against the property for $125,000 so that gap is covered now. You become the owner of that property, but, guess what? You again have to take care of the first mortgage and you have to take care of the second mortgage. Basically, you're assuming the seller's loan with the current terms, and by the way, it's going to cost you about 1% a loan amount to assume it, plus closing costs. Again, you're assuming the seller's loan. That's what a loan assumption is. When you hear the term "a loan assumption", this is exactly what it is. You're going to assume the seller's loan, the $300,000 so you're making payments on the $300,000 plus you need to service the $125,000 second mortgage. That is what we call a loan assumption with a seller carry second mortgage. What would the cash in cash return be without assuming a loan and not taking a seller carry second mortgage? This is even a more drastic change. In this case, Let's say there's no assumption so you're going to cover the $200,000 difference just out of your pocket. Boom. Down payment, $200,000. Your cash in cash is going to be X-ed. Now, let's say that in case B, you only have $75,000 so you're going to apply the $75,000 and he's going to do a seller carry of $125,000. There's a huge difference there in the cash in cash return. Guess how much? 50%, over 50% in this case, in the difference in the cash in cash return. If your cash in cash return, without the assumption, you plop down $200,000 as 10%, for example, your cash in cash return with the assumption can be over 25% so that's over 50% there. We saw the huge problem. The huge problem was the seller wanted to sell. He has a loan assumption with a large prepay penalty. You don't have all the equity so the solution is a seller carry second mortgage.

Basic Rules on Seller Carry Second Mortgages For Commercial Deals. 50

Some of you are going to be thinking, "Peter, how do I calculate what my interest rate should be on my seller carry second mortgage?" Here's the answer: Always start of with 5% interest only payments if you don't know where to start. Always plug in 5% interest only on the second mortgage.  Try to negotiate no interest payments for the first six months. This allows you to have higher cash flow before having to take on the second mortgage payment.  Never over-leverage or over-debt a property. Try to maintain, at the minimum, 10% equity in a property.  My last tip here is not all lenders will allow second mortgages, and I found that here's the reason why:The lender's figure you’re going to pay the second mortgage before spending the money on maintaining the property. The lender is concerned about the property looking well and being taken care of. You're more concerned about paying the second mortgage so you don't go into default. That's the reason why not all lenders will allow seller carry second mortgages. 

When Seller Carry Second Mortgages are Good to Use: Number 1: It's good to use when you want to be creative and seller motivations are evident. Number 2: They're good to use when you have enough time and a good plan to increase the property value through appreciation, forced appreciation, or principle pay downs. You need to give yourself enough time to pay off the loan. Number 3: Seller carry second mortgages are good to use when you need or want to leverage your down payment or the amount of money that you have. Number 4: Seller carry second mortgages are good to use when a seller has to pay a large prepay penalty if he pays off his loan too early. Number 5: Seller carry second mortgage when you're assuming loans. For those of you that are active, over time, you will run into one of these situations. Believe me. You will. Now you know how to handle it

When is Not a Good Time to Use Seller Carry Second Mortgages? Number 1: When it creates a situation where there's too much debt on the property. For example, negative cash flow. If you were to evaluate a deal where you have the two mortgages an there's negative cash flow, this is not a good time to use that.

51

Number 2: When your debt coverage ratio equals 1.0. By the way, debt coverage ratio is basically your NOI divided by your annual mortgage payments. When that formula equals 1.0, that means you're breaking even, it's not a good time to use seller carry second mortgage. Number 3: Seller carry second mortgages are not good to use if the seller's current mortgage matures soon, within the year, it matures. It's probably not a good time to use seller carry second mortgages because you need time to fix up the property, get the NOI up, get the value up so you can pay it off. Number 4: If you don't have a clear plan or extra strategy to pay off the seller carry second mortgage when it's due, it's not a good time to use this strategy. Number 5: If you don't have enough time to allow the property value to increase, to pay off the second mortgage, it is not a good time to use seller carry second mortgages.

Some Technical Things About the Seller Carry Second Mortgages. Second mortgages, by definition, must be recorded after the first mortgage. You are pretty much the seller that gives you the second mortgage will be in second position. The first mortgage from the bank will be in first position and then you will, the seller will be in second position. Second this is, first mortgage be paid off during the term the second mortgage, the second mortgage becomes the first mortgage. All right. Just going to switch positions once that first is paid off. Standard real estate law does not differentiate between the first and second mortgages. From a legal perspective, recording a second mortgage follows the same procedure as a first mortgage. For those of you wondering, how do you record a second mortgage, It's the same as the first mortgage. We won't go into detail so you're going to have to know that. Lastly, this is important. If you default on a second mortgage, the lender can start foreclosure just as you would on the first mortgage. The lender's interest is second to the first mortgage. The first lender must be paid off completely before a second mortgage lender receives any money. If you default on your second mortgage, they can foreclose on you, but the person in first position is still in first position, so in order for a second mortgage holder to get any money, the first mortgage has to be paid off.

Conclusion 52

All of you now know how to evaluate a deal with or without a second mortgage. You also know how to calculate and include both mortgages properly. You all know now when it is ideal to use as well when it's ideal to not use. You know what the benefits are of using a seller carry second mortgage and how to be creative there. You now know what the risks are and lastly, now you're able to create more deals from deals you may have walked away from.

How to Make Commercial Deals With Distressed Sellers We teach our students and clients all across this nation how to find commercial property owners quickly, and then we show them how to talk to them, how to find the seller's motivation, and, lastly, how to structure deals around those motivations. As you go out there and you generate leads and run into owners of commercial real estate, you're going to run into owners who are doing okay, and some owners who are not doing okay. We're going to focus today', on those who are not doing okay, and have some level of distress on their property or in their lives causing them to be potential motivated sellers. Understanding the nature of distressed sellers and how they think and act is critically important when convincing them to sell their property to you. Distressed sellers are no different from you and I in that they are in the midst of the trials of life, and need resolute solutions. Don't you agree?

Three Most Common Types of Distressed Sellers 1. The Out of State Owner. 2. The Local Owner 3. The Life Issue Owner

Distressed Out of State Owner 53

What does that person look like? Well, these owners tend to have a mindset that their property is out of sight and out of mind. Their property is in disrepair, either knowingly or unknowingly. They may have vacancies that are over ninety days old. That's a great sign that there's something wrong there. They may have poor records or no records of the financial positioning of their property. There could be negative cash flow for a long time. They're not in denial of their property issues. But, I tell you what, they have put in their own money to support their property. Those are tell-tale signs of a distressed out of state owner. There's plenty of those out there. Another thing about the distressed out of state owner is most of them do keep their mortgage, insurance and tax payments current. Most of them do, right? Let me tell you this. They, also, originally bought their property for cash flow, but they have little to no training on how to run their property profitably. That's a big sign of them, and that's a big problem. A few of them bought their property sight unseen, which I highly, highly do not recommend you do. Nearly all of them regret buying their property. The key thing is they are motivated to sell. That's the bottom line. They are motivated to get out of their negative cash flowing position. That's who the distressed out of state owners are.

Distressed Local Owner These owners are local. They're physically there near the property, but mentally checked out. They may admit that there's property cash flow, but there really isn't. Most have small or manageable loans on their property, which allows them to financially afford being negative cash flow, but they still are distressed. In fact, they've been distressed for years, and they have no clue what to do. We run into these owners more often than you think. Another sign is the landscaping around their property is very poor, not kept up. Interestingly, most of them do their own property management, and they do it because they have many failed attempts at hiring good management themselves, mainly because they didn't know how to manage the management. That's something that we teach here. Next, there are management skills. Their "self-managing" methods have failed to improve their property over time, and this is a huge issue. In my opinion, fifty percent of local owners are motivated, and the other half are not motivated, and they are in denial.

54

These first two types, the distressed out of state owner and the local owner, there are so many out there. You're going to run into them. I can guarantee it. If you do a good job of finding commercial property owners that we teach, you're going to find a lot of these owners.

The Distressed Life Issue Owner These owners have personal life circumstances that dictated or caused their property distress to occur, such as an illness in the family, a divorce, death in the family, partnership dispute, an unplanned relocation, all the above. These are life issues out of their control, and this has caused them and their property to be distressed. Their property may or may not be in poor condition, but I'll tell you what, selling the property will remove a burden from their lives. For these guys, creative financing may not work for the reasons above. They need a quick sale and something concrete. I want you to be aware that these sellers are motivated, but, also, are prone to disappear for periods of time handling their life issues. They're not the most stable people, and because of that, you need to move fast, because they're likely to make rash and emotional decisions to sell to someone else, so you really need to recognize who the distressed life owner is and be concrete.

Priority Levels: In my opinion, the first priority, the first guys to focus on and the guys that are most distressed is the distressed life issue owner. They are the most motivated, but they're, also, the most volatile. Secondly most motivated is the distressed out of state owner. Be prepared for misdirection, sometimes lies. They don't know a lot of things, and be prepared for the lack of information on their property, so get good commercial training so you can pick up these things. On the third level of motivation is the distressed local owner. They're likely to be the most difficult negotiator of the three

How to Deal with Them The Distressed Out of State Owner 55

Wholesaling works well, because they don't care who buys their property, as long as it sells. If you can structure a good deal, you have a buyer lying in wait, you can wholesale and make big dollars working with a distressed out of state owner, because, remember, they're not only out of state, they're out of touch with their property and their mindset is far from being attached to this property. Also, creative financing fits here because of their motivation to stop the cash flow bleeding. Remember what I said, you want to gather as many motivations as you can, and structure the deal around their motivations. I have several trainings on how to do creative financing, so go check out those. You may want to start off with a master lease agreement. Many of you know that's one of my favorite techniques, so start off with a master lease agreement with a low down payment. Give them terms and give yourself enough time to fix the property. That's how you deal with the distressed owner. You can look at wholesaling, creative financing, and with that creative financing, it could be a master lease, because these guys are motivated.

Example We had a student client named John, and we taught him how to find apartment owners, and he became really good at it. John ended up finding the Chins. The Chins lived in Southern California, and they purchased a seventy-five unit apartment building several years ago. They did not hire a third party property management company, because they thought they could save on the six percent management fee, which is about twenty-three hundred dollars a month, and they wanted to do the management themselves. You can already see where this is going. This is mistake number one. But soon, the Chins realized that they were not good managers from afar. They were absentee owners, out of state owners, and they were suffering from high turnover, meaning that there was lots of people moving in, moving out, moving in, moving out, and because of that, they were barely breaking even. The husband decided to spend one week per month down in Texas. At least, that's what he told John. I doubt it, because John toured the property and learned from the onsite janitor, or the person cleaning the grounds, that the Chins were doing much worse than what appeared or shared by the Chins. That's what John found out.

56

John and I got together. We gathered all the facts. We looked at all the motivations, and looked at the financials, and we made an offer on the property with a sizable cash back at closing to handle the needed repairs and deferred maintenance. The offer was accepted after maybe a week or so of negotiations, but during due diligence, John found out that the rents were under market by forty-five to fifty dollars per unit. There was, also, an opportunity to bill back the tenants for water utility costs, because the rest of the neighborhood, the competition were doing this as well, so why not us. That's additional savings right there. With the combination of the rent increases and the water reimbursement, we've projected that the property would have a fifty-four thousand dollar increase of NOI per year. Now, NOI cap, that fifty-four thousand meant a six hundred and seventy-five thousand dollar upside in value. John was in no position cash wise to buy this property, so he contacted a local buyer who is very busy and buying property in this area, and John ended up wholesaling this deal for forty thousand dollars. This was how to deal with a distressed out of state owner, and it worked. We found the motivations. We understood where the seller was. We understood what he wanted to do, and we made an offer around all those things. What Can We Learn From John's Deal? We can learn that the Chins should have hired a reputable property management firm, right? John, also, put together an attractive deal for his buyer that included cash back at closing, upside in the rents, and an upside in water reimbursement. You have to look for these little upside things. Also, the Chins didn't take advantage of either the upside in rents, because there were too busy playing property manager and doing a poor job. Unfortunately, the bottom line is the Chins, as inexperienced self-managers, are pretty common place in commercial. You are going to run into these type of folks. How do you deal with them? I just shared with you how to deal with them.

The Distressed Local Owner This guy is local, but he's kind of checked out. Here's how you deal with a distressed local owner. What I want you to do is beat them up on price first, so before you introduce creative financing, I need you to beat them up on the price first to soften them up a little. This may take awhile, some finesse, but beat them up on price first. Remember, they are motivated.

57

Then, next, I need you to get a fresh perspective on the property and the market from another local property manager. Many of you are beginners. Don't make conclusions on the property without consulting an expert, a market expert like a property manager. A property manager can tell you what the vacancies are, what the rents are, the plan you want to do to improve the property. You need someone with experience to come in agreement with you as to how and if this can work. If you don't have a coach, a mentor, the next best thing is to get a property manager. A property manager can't help you structure deals like a mentor could, but they could help you look at the market trends, which are very important when dealing with distressed local owners. Beat them up first, soften them up a little, and then get a fresh perspective from a local expert, how the property can really perform.

The Life Issue Owner Remember, these guys have personal circumstances going in life. This property is not a priority for them. Here's how you deal with those guys. You may have one or two shots to make the sale, so do your homework as best you can when making offers. Be prepared to write the offer. Be prepared to write the sales contract immediately after the first phone call if necessary. Letters of intent are useless with these guys. We need to get the property under contract now. Lastly, promise to them to make the sales process as smooth as possible. You know why? So they can focus on their life issue. You see the mindset here? It's not about you. You're putting the focus onto them to get what you want.

Three Seller Situations That You Should Avoid 1. If you come across a seller who is far under water, meaning high debt, high mortgage and low property value, stay away from these guys. It may take too long to recapture the loss equity or build it up. It may take so long that by the time your creative financing expires years from now, there still may be no equity there, so avoid sellers that are far under water with high debt and low property value. 2. As a beginner, I want you to avoid seller's properties that are fully vacant, and that's because properties that are a hundred percent fully vacant most likely need an extensive

58

amount of work, and money, and skill to get it in workable shape for tenants to occupy it. I don't recommend this if you are a beginner. There's too many moving pieces, too much at risk here. If you want to do a vacant property, start with something very, very, very small, and have lots of cash available for when things go wrong. Not IF things go wrong, WHEN they go wrong. It's just the nature of the business. You need to scale. 3. The third seller situation I want you to avoid is if the seller's court proceedings for foreclosure have begun, because, by the time a property has entered court proceedings, this gets too risky, because a seller has lost too much control of the property, and this puts you in too much of a shaky ownership position, so I would pass on this seller.

Creative Financing for Commercial Real Estate It's really important that you know how to structure deals that no one else does. What if you don't have enough of a down payment? How do you close that deal? What if you find a great deal that's distressed? How do you finance something like that? What if the seller has a great property with great upside, but has no financials? How do you creatively structure and close that deal? Well, in my experience, real estate agents are not the best source to learn how to be creative in commercial real estate. They're more concerned about the commission, and rightfully so, because they have to make a living, so they're not a good source. Also, in my experience, nearly ninety-five percent of all sellers have no clue how to creatively structure anything creative. They're not a good source either. Who's left? It's you. It's going to be up to you to learn this topic very well. In this video, I'm going to dive deep into details on how to show you how to creatively close deals that you otherwise would have possibly passed on.

59

The Power in Knowing How to Structure Creative Financing for Commercial Property 1. Leverage Don't you agree that there's power in knowing how to lower your down payment? Right? There's power there. Don't you also agree that there's power in learning how to avoid banks and lenders and creatively structuring your commercial deals? There's great power there. 2. CASH You have the cash, but not the credit or experience. These guys have recovered well from the recession. They have built up a little bit of savings, but they have no credit, and they have no experience. They're not favorable to the bank. How do you structure a deal like that? They found a great property, they have the money, but they don't have these two requirements here to get to commercial property. There's power in knowing how to do that. 3. Commercial Wholesalers Or, those of you wanting to wholesale commercial properties out there for big dollars. We teach that in our company here how to structure wholesale deals that are small and on the large side. If you were to structure a creative deal, let's say with a master lease, where the seller carries second mortgage, seller carry first mortgage, all those type of things that are really, really cool, that I'm going to teach you in a few minutes. If you were to structure a deal like that and take it to your buyer, it will immediately give the impression to your buyer that you're deal is unique and very desirable. 4. Knowing How to Structure Creative Deals It gives you a way to finance distressed properties that a bank wouldn't touch. You're going to run across quite a few of those as you jump into commercial real estate. 5. How to Deal with a Seller Concerned About Capital Gains Taxes How do you deal with that? You're going to run across quite a few of those sellers, and you must know how to structure deals where you can, "Avoid or delay," their capital gains returns. I'm going to show you how to do that, an example in a few minutes. 60

6. Dealing With a Seller Who is Ill, Elderly, or Burnt out How many of you know a seller who is ill, elderly, or burnt out? Either residential or commercial? I'll bet a lot of you have seen those type of sellers. All right? How do you deal with those? I bet some of you have unknowingly passed through or passed on quite a few of those deals because you had no clue of how to handle those sellers. Well, after this training, you're going to know how to deal with them. 7. FUN Putting together creative commercial deals is just plain fun. It's so fulfilling for me and for my students. I would say that roughly half of the deals that we do have some type of creative component, so it's just a lot of fun.

One Secret to Seller Financing There is power and importance of knowing how to creatively finance commercial real estate deals. The one secret for creative commercial financing is to ask. There is power in asking. In life, if you do not ask, you do not get. That's how it works. In real estate, the same thing. Especially when you're doing something creative, you must ask the seller.

Here's How You Ask You would say, "Mr. Seller, would you be open to any type of seller financing?" You see? Pretty simple, right? Now, if the seller says, "Yes, what do you have in mind?" You would just say, "I'm not sure yet. I just want to see if you're open to it. I'll get back to you." That simple. If the seller says, "No," to us, no means not yet or yes to something else. That's the mentality you have when dealing with sellers with seller financing. No means not yet or yes to something else.

One Rule When Asking One rule I want you to follow. The one rule is never ask for seller financing on their first phone call. That will tell him that you have no money and you will scare him away.

61

Three Fundamental Strategies of Creative Commercial Financing 1. Owner Carry First Mortgage The owner is carrying the first mortgage. He is being the bank for you.

Example Let's say the purchase price of a property is a hundred thousand dollars. I'm just making it up, and the down payment is ten-thousand dollars. That means the mortgage is going to be ninety-thousand dollars, so the seller is going to carry the mortgage for you. This is great for properties that are owned free and clear.

2. Owner Carry Second Mortgage Like the first, the owner's carrying a second mortgage for you. That means the first mortgage is with the bank, the second mortgage is with the owner. Here's a quick example. Let's say that the bank is requiring a twenty-five percent down payment, which is quite typical, right? Now, but you only have fifteen-percent of the twenty-five. What happens to the other ten percent? Now, in this strategy, the owner can carry that shortage, that ten percent for you. The bank will carry the fifteen percent mortgage, and the seller will carry the ten percent mortgage, equaling twenty-five percent. It's a great way to leverage and to increase drastically your cash and cash return.

3. Master Lease Agreement

Examples of Each Owner Carry First Mortgage 62

Let’s say you have an eight unit apartment building, and the purchase price is fivehundred thousand dollars as an example. You found this property. Now, just quickly compute the income and the expenses. All right, so we had eight units at eight-hundred dollars a month, times twelve months is equal to seventy-six thousand dollars, eighthundred, okay? Now, we have the income. Next is the expenses. Now, we're going to take away thirty-five percent for a typical and normal expenses. Thirty-five percent of seventy-six thousand, eight-hundred for expenses. Do that subtraction and I come up with forty-nine thousand dollars. Income minus expenses equals forty-nine thousand dollars. That's by the way the net operating income, very important term. Now I have the income, I have the expenses, what's next? You got to figure out the mortgage. In this deal, we have negotiated a ten percent down term. Why? Is because the owner owns it free and clear and he can be the bank, so we're going to offer him ten percent down on this property Ten percent of five-hundred thousand dollars is fiftythousand dollars, so your mortgage is going to be four-hundred and fifty-thousand dollars. Now, let's figure out what the payments will be. I'm going to make this up again. Payments going to be five percent with a thirty-year amortization. Pretty typical. Those payments will be about twenty-four hundred dollars a month, which would be about twenty-nine thousand dollars a year. We have mortgage payments at about twenty-nine thousand dollars per year. Mortgage payments. What I do next is I'm going to subtract my mortgage payments from my NOI. If I do forty-nine thousand dollars minus twentynine thousand dollars, equals twenty-thousand dollars per year in cash flow. That's my cash flow, twenty-thousand dollars per year. Now, to do ROI calculation, or a cash and guess calculations, basically you would divide your annual cash flow by your down payment. Twenty-thousand dollars divided by fifty-thousand dollars, that's a pretty good cash and cash return. That's only possible because you put down ten percent. It's only possible because he owns the property free and clear. Owner carry first mortgages are great for free and clear properties, very useful. The next time you find an owner who owns his property free and clear, check out this strategy and see if it works with him. You now know how the math works. It's also useful for distressed owners. It's also useful for when you have little cash, no credit, or experience. Why? Is because if you have little cash, let's say you wanted to buy this property, from a bank it would probably cost twenty-five percent

63

down payment, but because he can be the bank for us, we're able to put down ten percent. You don't need credit or experience because the seller is the bank. There's no credit requirement other than what the seller wants to see. Installment Sale Next is, this is really cool, if the owner needs to delay paying capital gains taxes if he sells. The owner carry first mortgage works really, really well for that. In fact, that little technique is called the installment sale. Installment sale is a very, very effective technique if the seller needs to somehow split up his capital gains taxes over the course of years. Example Let's say that he owns this property free and clear, and he's about to make a huge profit. He doesn't want to pay one lump some of taxes, you can do an installment sale with the owner carry first mortgage, and you can buy his property over the next five years, twenty percent at a time. Something like that, so you can be creative as you can be on this type of strategy. Now you know how to calculate the cash flow, the cash and cash return, and this is what it's useful for.

Owner Carry Second Mortgage. Let's say that you have an eight unit apartment complex, commercial property, fivehundred thousand dollar purchase price. The down payment from banks are typically is going to be twenty-five percent on average. Twenty-five percent of the purchase price of five-hundred thousand dollars is a hundred and twenty-five thousand dollars. What if you couldn't come up with the entire one-hundred and twenty-five thousand dollars, but the seller's motivated? He wanted to sell, but all you had was fifty-thousand dollars, but the bank wants a total equity of a hundred and twenty-five? What do you do? What you do is you have the seller, the owner, carry a second mortgage in the amount of seventy-five thousand dollars. He carries the seventy-five, you have the fifty, you meet the bank's a hundred and twenty-five thousand dollar equity requirement. The bank is happy, you get the buy the property, and the seller gets to sell his property. One of the small but important detail I need to add is when you do your calculations on cash flow, don't forget that you're making a second mortgage payment, you're making a

64

interest only payment on the seventy-five thousand dollars of the seller. That means that you're going to have two mortgages to pay, so make sure the numbers work out.

How It’s Useful Now, again, let's say you have a motivated seller, but you only have fifty-thousand of the one twenty-five. Well, this is useful for when you need to leverage. You're leveraging your fifty-thousand dollars into this deal, because you have a down payment shortage, so it's very useful for that. You need to have a motivated seller for that to work. When you have a motivated seller, and a ready and willing bank that will allow a seller to carry second, you can leverage your fifty-thousand dollars into a five-hundred thousand dollar property. Now, what it does is when you're putting down fifty-thousand dollars, that's your outlay, your investment. Instead of the one twenty-five, basically it's going to increase your cash and cash returns. In this case, your ROI, your cash and cash return is going to more than double than would be if you were to put down the hundred twenty-five thousand dollars. Leverage The owner carry second mortgage is a great way to not only leverage, but to just go through the roof on your cash and cash and ROI. When you see this language here, let's say that you're on LoopNet, or any other type of online community where you see commercial properties, or even maybe in a flier. You see this language here, "Seller financing available." You see that, or you see, "Owner may carry." That is code language for motivated seller, for seller needs to move this property. This is code language for, "Bring me something creative." Now you know what to bring them. You see this language, you bring them an owner carry second mortgage offer

Why Would a Seller Consider Creative Financing I'm going to share four reasons of why that may be possible. I am going to answer the question, "Why would a seller even consider creative financing? Why wouldn't the seller just go ahead and just put their property on the market and just sell it? Why wouldn't he just pull in the cash buyer and sell the property for the price he wants and be done with it?"

65

Well, in many cases, he may not be able to. The reason why is because of these four reasons. You guys have just learned how to put together, conceptually, a seller carry first mortgage, a seller carry second mortgage, and a master lease. You can now take those three strategies and see if your seller falls in one of these categories or reasons, and apply what you just learned. 1. The first reason why a seller would even consider creative financing is if this property has high vacancy, is in poor condition. These days, if a property is eighty percent occupied, it's considered distressed these days, all right? A bank wouldn't want to qualify the property for a loan, so how could you sell it for top dollar with high vacancy? Same thing with poor conditioning. The property's in poor condition, same situation as this here. If a property suffers from this, and the seller still wants to sell the property, the only way to get his price is to do creative financing. 2. Let’s say the property is in good condition, condition's okay, but the seller's not. What if the seller kept no books and records on the property? Amazing as it sounds, a lot of commercial owners keep very poor records of their income and expense. It doesn't allow you to validate how much the property makes. If it doesn't allow you to validate it, the bank is going to have the same problem, so the bank is not going to give you the dollars you need to buy the property. The banks may do that, but they may want to ask for a large down payment to protect their downside, and the deal makes no sense. When the property's okay, but there's nothing to substantiate the pricing, that's when creative financing may come into play. 3. Let's say the seller has concerns about paying capital gains taxes if he sells. Where you already learned from previous video about the master lease, which is a creative financing technique. You also learned of the owner carry first. In both situations we can mitigate his concerns about paying taxes when he sells. We can mitigate it by spreading out over time his capital gains taxes. You can look at an installment sale. You can look at a master lease. You can look at an owner carry first mortgage as a way to mitigate this. 4. The seller needs a quick sale because of a life situation. For example, if the seller is ill, going through divorce, or being relocated, he needs to sell the property quickly. Sometimes, for privacy's sake, a seller does not want to list a

66

property on MLS or online, and wants a quick sale. In any case, when a life circumstance requires a quick sale, the best way, the best way is to do creative financing.

Most Important Mentality to Have When Structuring Creative Commercial Deals? Here it is. It could be summed up in one sentence. "Mr. Seller, I will give you your blank if you give me my blank." This is going to set your posture moving forward when you structure anything creative in commercial real estate. Watch this. "Mr. Seller, I will give you your price if you give me my terms." That's your posture. Always. That's the single most important mentality to have when you're structuring anything creative. If the seller wants his price, you get your terms. When you want to put together anything creative, like the seller carry first, seller carry second, or master lease, this is your posture. "Mr. Seller, I'll give you your price, but I want my terms."

"How do you come up with the terms?" 

 

The terms will come up via the seller's motivations. We do, we ask the seller a bunch of questions, we visit the seller, we look at financials, we do an evaluation, we listen very carefully, and we come up with the seller's motivations. We take those seller's motivations and we structure the creative deals. Terms come from seller motivations. I'm going to give you a quick example here of how that works. Here you have one question, but two potential answers, and it will put together how you come up with the terms from the seller's motivations.

Three quick examples. Example 1. If the seller inherited their property that's in high distress and wants a quick sale, what's most likely to work? A, is it a small down payment, ten day due diligence, and fifteen day close? Or, is it a large down payment, with a sixty day close? The answer is A, Because what's the motivation? He's distressed. He needs to quick sell, so a small down payment may be okay. Ten day due diligence as opposed to sixty would be great, and the fifteen day close. That's how to measure the motivations versus the terms. Example 2. If the seller wants to delay paying capital gains if she were to sell. What's most likely to work? An outright sale with a wealthy cash buyer and close in seven days? 67

Or, a master lease term over an extended amount of time that you and the seller agree upon? The obvious answer is B, the master lease where you extend a deal out, because their motivation is what? She doesn't want to pay, or she wants to delay her capital gains. Again, what's the motivation? We set the terms Example 3. The seller wants to sell, but would like to maintain some type of monthly income from the property. What's most likely to work? A master lease where you structure a monthly payment plan to him over and above paying his mortgage? Or, B, a master lease, a joint venture, where he shares in the profits when you sell the property years down the road? The answer is A, a master lease where you structure a monthly payment to him over or above the mortgage payment.

Exit Strategies For Commercial Real Estate Well, first things first, you've got to know your exit strategy before you invest in any commercial real estate investments. If you don't, what you're telling yourself is that it's okay to not maximize your cash flow and it's okay to not maximize your profits when you sell, but knowing only your investment goals is half the story. You must also know how and when to sell the property.

Question for You What's the commonality between an exit strategy and an astronaut? NASA astronauts wouldn't dare venture up into space and not have strategically planned outcomes and escape plans. A typical outcome may be to collect moon dust and arrive safely back home or an escape plan may be to eject their space cap in case something goes wrong mid-flight. Any wise commercial real estate investor should have their desired outcomes and/or escape plans strategically planned as well and well in advance mind you. We call these exit strategies.

68

Definition of an Exit Strategy for Commercial Property My definition is this: An exit strategy is your escape plan for the money you put in and want to get out of the investment

The 2 Types of Investors That Exist Today 1. Finders: Those whose primary exit strategies fall into the short term investment landscape. Their goal is to get the net operating income, the NOI as high as they can, then sell the property. They tend to look for property with a quick upsight that will appreciate quickly such as small retail centers in great locations or an apartment building that has been undermanaged where there's great upsight potential. Their exit strategy may look something like this:  One to five years, my property will be a 100% occupied with tenants paying higher rents than when I bought it. When that happens, I will sell it for lower cap rate producing a higher return on my investment.  Short term, increase the upsight in the property, sell the property, and make a profit.

2. Keepers 



Long term holders who want to keep a property for 20 to 25 years. They're also known as coupon clipper investments where these properties provide the consistency of monthly income with limited headaches for the owner. The overall returns maybe a bit lower, but they're safer because of the stabilized NOI. These investors bank on the fact that their property appreciates just in the cost of construction over time alone. They increased the return investments by ensuring their property is managed well and professionally. All right. For the keeper, property management is crucial, crucial, crucial, and crucial.

What Type of Investor are You? Are you a finder, a short termer or are you a keeper, a long termer? Whichever one you are, exit strategy before, during, and after you own a property is crucial.

69

3 Questions to Ask Yourself Before Investing in Any Commercial Real Estate 1. Why am I buying this property? It could be for retirement. It could be for personal and wealth creation. It could be to pay for your kids' college tuition down the road. You may want to sell and buy larger, larger, larger properties. That's what I've done. Or you may want to ease out or quit your day job. That's what I did. Or your property buying could be for use as a tax shelter. Those are possible reasons why you are buying this property 2. How long do I plan to hold this property? Now let me tell you this. When answering this question, your loan terms, the loan that you get on a property will dictate how you answer this question. If it's a short term hold, like a finder or less than 5 years, then select that type of loan. If you plan on holding for more than 10 years, 20, 25 years, then look for long term loan options. If you end up selling the property too soon, then you may have to pay a very large prepay penalty. If you want to convert your short term loan into a long term loan, the long term loan terms today may not be available tomorrow. 3. How will a sell affect my taxable income? Very important question, because Uncle Sam will likely get his hands on as much of the income that you earn from a property sell as possible, right? This is the IRS. Tax planning as early as possible is one major asset to your real estate exit strategy. The sale of a property could put you into a higher tax bracket and take a large buy out of your profits. What I want you to do is consult with a tax professional and organize way to reduce your tax burden at the very beginning.

The Different Types of Exit Strategies        

You could be a long term holder for cash flow. You could be the type that wants to maximize and flip the property for a profit. Sell outright and pay capital gains taxes Sell the property and do a 1031 tax deferred exchange Cash out refinance the property, pull out some money and continue to hold the property. Sale leaseback. That's a great strategy if you have a lot of equity tied up in a property. You need to pull it out quickly. Give the property to your heirs, to your kids. Wholesale the property or flip the contract. 70

Hold Long Term for Cash Flow  

 



  

You need to get a good long term loan as long term as you can. You need to get really, really good at managing the management. That's where the money is made long term. Managing the management, having good property managers. Set up an income and expense budget every single year. If you don't know how to do it, what you do is you get your property manager set up for you and they're supposed to do it every year for you. On our properties, our managers have their annual budgets for the following year are due at the end of November each year. If this year is X, so X year that budgets are due at the end of November for X plus one year. Get a good real estate tax advisor. Do not use one of those franchise tax advisors. Yes, they're cheap, but let me tell you this. Being cheap can be very expensive. When you're buying commercial property, there's so much money, there's so much taxable income involved. Don't use a tax advisor like an attorney or a tax advisor who only does tax returns. Use a real estate-based tax advisor. I need you to be anal. That's right, be anal, be a micro manager because no one cares more about your investments than you do. You need to watch your numbers. Some people say that commercial property is a passive business. It is not. It is not a passive business. You need to be on top with everything, everything.

Maximize the Value then Flip the Property for a Profit 

  

You're doing this, if your strategy is to rehab or retain it and to get out, then do it decisively and quickly because the longer you hold the property, the more things I can go wrong. Take it from me. If you get close to your strike price, note that the lowest price you want to take, take it and run. Get your profits and get out. Have you thought about the tax consequences? Talk to your tax advisor before closing.

Sale Outright    

I don't know why you want to do that, but you maybe forced to do that for some personal reasons. Just remember this, it takes 12 months to plan a good exit and it takes 3 months for the sale to actually happen. If you want to sell your property, you should plan to sell it a year in advance to set up the numbers, to make sure everything is good, the NOI is good. Then when you decide to sell it, it takes 3 months for actually to happen, so planning is very important. Next, be prepared to pay capital gains taxes.

71

Capital Gains   

Tax that either a short term rate which is 25% up for investments held under year or for long term, it's 15% for investments held one year or longer. Twenty-five percent tax it for investments held under a year and 15% for investments held one year or longer. Talk to your tax advisor on those specific numbers. Again for the person selling outright, what are you going to do with the profits? You may want to research if there's a better way to get the profits out of their property before selling outright.

Sell and Do a 1031 Tax Deferred Exchange. 

 

According to the IRS rules, you can sell your property and not pay capital gains taxes as long as you move forward all of your equity into a more expensive property. Obviously you would do this to buy a larger property with more cash flow, right? You can indefinitely do this as long as you teach your kids or heirs the same thing. In my opinion, this is the best way to build long term wealth is the best way, is to buy property, increase the value, pay down the mortgage. Then when you sell it, buy a larger property and do this over and over and over and over again. This is what I've been doing for years.

Cash Out Refinance and Then Hold the Property   



I would say 80% of the properties that I've held, we've done this. In this case as the property has increased in value, you can pull out cash and then hold on to the property. It's called a cash out refinance loan. With the additional cash, you can buy more properties to fix up or you can just fix up the current property you have to make it more valuable and then pull out more cash later, right? Beautiful thing. By the way, most commercial lenders allow cash out refinancing. Look into that.

Sale Leaseback      

To free up money tied up in your property, you can do what we call a sale leaseback. You would sell your property to an investor for cash, then lease it back for a long period of time as an agreed upon price, rent price. If the seller or a tenant that's you, you're very strong financially, then your investor can get good financing. That's a win-win. This strategy not only frees up cash, but the seller that's you retains use of their property with the long term lease. This is ideal for doctors and attorneys that own their property in which they practice their business. They're ideal candidates for sale leasebacks. Just to let you know, typically the price of the sale leaseback should be set by an independent appraisal.

Give the Property to Your Heirs 72



 

 

I call it gifting it to your heirs. If you wish for your children to own a portion of your commercial real estate while you are still alive, you can gift portions of the real estate to them each year in the amount of the annual gift tax exclusion which I believe today is about $13,000. Every year you can give them $13,000 worth of their property and you can gift it to them. Here's one caveat. Unlike inheriting real estate in which the heirs' basis is a fair market value with their property as of the date of the inheritance, a donee's basis from a gift is the same as the basis of the donor. Your children may wish to consider a 1031 exchange or another options when they sell the real estate to avoid a big capital consequence. In a nutshell when you gift this to your kids, make sure they get a tax advisor before they decide to sell those property because they could be in for a big surprise if they do.

The Wholesale 

If you have an excellent property under contract and you decide that you don't want it for yourself but you would still like to make money from it, consider wholesaling your property to a qualified buyer. Basically what you're doing is you're assigning the contract, you're flipping the contract to another buyer for a fee. Okay, that's called wholesaling in commercial property.

Real life example of having a razor sharp exit strategy can do for you. There's this LLC which owns a property that's called Goshen Investments LLC. They purchased a 112-unit apartment building and they called it Goshen Villas. They bought it more than 15 years ago. That 3 partners' investment objective was to pay themselves a certain cash flow every month and they end up doing this for several years quite successfully so it worked out really well. However, the partnership as a whole decided to sell Goshen Villas and part ways, but 2 of the partners faced huge capital gains consequences at closing if they did sell. They were really concerned about that and they consulted their advisors which was me. I advised them to refinance their property, payoff the third partner, continue to sell the property, and then perform a 1031 tax deferred exchange.They end up doing that and exchange their "tax" re-profits into another property that had even greater cash flow. It was a win-win for everybody. Here's a lesson in this. If you don't have a razor sharp exit strategy when you sell a property, be prepared to pay Uncle Sam heavily. Okay.

Tips for Exit Strategies for Long Term Success 1. Don't be married to your exit strategy. Allow yourself some flexibility due to market changes, market timing, and personal situational changes. 73

2. Have more than one exit strategy at a time. Ideally you want to have an exit strategy going in the investment, during investment, and as you come out of the investment. At that point, there maybe 3 different types of strategies there. 3. If you don't have an exit strategy thought of, you are telling yourself that it's okay to lose your investment or that you're not looking forward to any profit. That's how important an exit strategy is. 4. The best exit strategies come from wise investors. You will limit yourself and your options and you may leave thousands if not hundreds of thousands of dollars on a table if you don't get help in designing your exit strategy. Don't try to be the expert or the know it all here. You are not the expert on exit strategies because you don't have experience.

Distinguishing Good Deals from Bad Deals in Commercial Real Estate You're about to discover a very powerful way to determine what a truly good deal in commercial real estate looks like and what a bad deal looks like. On the surface, it can be quite different; but below the surface is where you really find out which ones are the winners and which ones are the losers. You'll see examples of real deals to help you better understand the methodology of distinguishing the good deals from the bad deals. Plus, you'll learn invaluable tips and rules of thumb that can greatly reduce the amount of time it takes to make insightful and accurate determinations. This is a commercial real estate investing training you can't afford to miss. https://youtu.be/dTy-6gx9d3w

Secret to Commercial Real Estate Success The Secret to Commercial Real Estate Success Let me start off with this, do not buy or invest in any commercial real estate of any type without knowing what I'm going to share with you, just give me a few minutes and you'll see why. Let me start off with three questions.

74

Question 1 Have you ever over paid for a property? Do you know of anyone who have ever over paid for commercial property? It's not a good feeling, and it's not a good position to be in.

Question 2 Do you know how to properly value a commercial property comfortably in any city, in other states? That's a necessary skill, and it's a required skill to be excellent at commercial real estate investing.

Question 3 Number three is, do you know of anyone who had plans and dreams of cash flowing massively on their commercial property, but it never happened? It's not a good feeling, it's not a good position to be in. Everything here, there's a secret to it. What I'm going to show in this video, the bits and pieces of it are out there in the internet world, and in various books. In this video I'm combining it all into one training to put you in the best position to make the best decision in your next commercial real estate deal. https://youtu.be/0gSGg2dusgE

The Secret Let's get started. Here's the secret, the secret is you must be in blank in your sub market. What's a sub market? A sub market is your neighborhood. If you are investing in a commercial property down town, your sub market is down town, it's your neighborhood. Here's our secret, you must be an expert in your sub market. It's foolish not to be an expert in your sub market, how do you know where the opportunity is? Based on what, right? I'm going to share with you four things that you must know to be an expert in your sub market. You must know these four things before buying any commercial real estate.

75

Four Things You Must Know in Order to Be an Expert in Your Sub Market Let's say that someone that you trusted sent you a great commercial deal, and you believe it to be a great commercial deal. It's a cash flowing, twenty four unit apartment building that's in an excellent neighborhood, right? Three great things going for it. Number one, it's cash flowing. Number two, it's a decent size, it's twenty four units. Number three, it's in an excellent neighborhood. A decent deal, it seems, right? Let me ask you this, how do you know if it's cash flowing? How do you know? That's based upon what, right? How do you know that expenses that the broker gave you are true and accurate. How do you know that the sellers information they gave you, the expenses are true and accurate? Based upon what? You have to know that. Number two we said that this was a decent size. How is it decent compared to their price, and their neighborhood? A twenty four unit in different neighborhoods at the same price may be overpaying, or may be a great deal, right? Twenty four units is a decent size, based upon what? Lastly, it's in an excellent neighborhood. How do you define excellent? If a neighborhood is not excellent, how do you define it? How do you measure it? What I'm going to do in the next few minutes, I'm going to share with you how to determine all these things. These four things, I'm going to share with you how to determine in a typical deal, all right? Again, do not buy or invest in any commercial real estate without know first these four things that will make you an expert in your sub market. I'll see you there.

The Truth All right, the four things needed to become an expert in your sub market, right here. Before I start though let me share this with you, this truth. There is no such thing as a national real estate market that's relevant and useful for us. What we need to know, what you need to know is what's happening in our own sub market, what's happening in our own neighborhood? From a national perspective, it doesn't help us much. We need to know locally, what's happening in our sub market, okay? Got it? All right. Number One: Price Per Unit Let's move onto these four. Number one on the four things to become an expert in your sub market, is you need to know what the price per unit, or per door is. Now, in these 76

four examples I'm going to use a large apartment as an example. They're easy to understand, there's a lot of them out there. Number one, know the price per unit, or per door in your sub market. For example, let's say you have a ten unit apartment building, and a hundred thousand dollars purchase price. That's ten thousand dollars per door. In your sub market, you need to know what the price per unit is, price per door is, in your sub market, it does exist.

Number Two: Cap Rate Number two, you need to know the cap rate for your sub market. You see, every sub market in a city, let's see there's two sub markets in a city, let's say that one sub market is very expensive, and one sub market is lower to middle income. The cap rates for the rich neighborhood is going to be here, the cap rate for the poor neighborhood is going to be here. You can see you have different cap rates for the different sub markets. Whatever sub market you're located in you need to know the cap rate, got it?

Number Three: Sub Market Rent Number three is you need to know the sub market rent. For your given sub market, what is the rent for a typical one bed room? What is the rent for a two bedroom, what is the rent for a three bedroom? In your sub market you need to know those ranges for the one, two, and three bedroom rents. Okay, got it? All right.

Number Four: Expenses Per Unit Number four is you need to know the expenses per unit or per door for your sub market. This is where a lot of people mess up because they just don't know. This is where a lot of properties don't cash flow because this was either miscalculated, or never known. If you want to give yourself the best chance of not overpaying, of cash flowing and having a good long term deal in your sub market, you need to know these four things.

Why You Need to Be an Expert at These Things Price Per Unit

77

Here's number one, why you need to know the price per unit or price per door in your sub market. The reason number one is you need to know what to offer. If this prop is worth making an offer on, and you come up with an offer price, what is it based upon? It should be based upon the price per unit, or per door in that somewhere, all right? What this does, this prevents you from overpaying. A few weeks ago I talked about if you know anyone who overpaid for their commercial property, they probably overpaid because they didn't know the price per unit, okay? Got it? Now, here's something for you whole sellers out there. You need to know what the price per unit is because for you whole sellers, how do you know if you have a good deal or not? If you have a probability under contract for thirty thousand dollars per door, right? We know that price per unit, the price per unit or price per door is forty thousand in that sub market and you have it under contract with thirty thousand dollars a door, we know we have a good deal, okay? Got it. That's important. That's why you need to know that.

How Do You Find This Information? Next is how do you get that information? How do you get the price per door, right, or price per unit. Here's the answer, you need to get comparable sales data. Just like when you buy a single family home, you need to compare it to something. What we're going to do here is we're going to get comparable apartment buildings in this sub market, and we're going to compare the price per unit or price per door to each other. Now, the key word here is comparable. They must be comparable. That property that you compared it to that is fifteen miles away is not comparable. If your prop is built in 1980, and the property that you're comparing it to was built in 2000, that's not comparable, okay? The key word is they must be comparable. Ask How do you get it? What are we you going to do? You're going to ask two or three commercial estate agents for a sales comparibles, and you're going to average out the information. Okay, got it? Now you know why, it's important to know in your sub market what the price per door, or price per unit is, and now you know how to get it. All right? Okay.

Cap Rate

78

Let's next move onto the why we need to know the cap rate in your sub market. See you there. Number two, why you need to know the cap rate in your sub market. Remember, this is all about becoming an expert. Here's what you need to know, every sub market has it's own cap rate stamped upon it. A neighborhood that's considered a very rich neighborhood, would have maybe a five or six percent cap rate stamped upon it. Whether a poor neighborhood would have a cap rate of nine or ten stamped on it, so you can see the difference there. If you were to do an evaluation of this type of property using this cap rate, guess what's going to happen? You're going to mis-value the property because all commercial real estate is based upon the cap rate. You must know the cap rate in your sub market to properly value the real estate, got it? Okay. In my previous videos I talk about the cap rate, and how to calculate it, and the importance of net income, all of that. Look at my other videos, but I can't go over here in this video for the sake of brevity. Here's a third reason why you need to know the cap rate in your sub market, the higher the cap rate, the lower the price. You got it? Now conversely, the lower the cap rate the higher the price. It's really important that you know the cap rate in your sub market so that you don't overpay, or over value, or in good cases if you can purchase an A class property in a C class neighborhood, that's a good thing, all right? Okay. How Now let's move onto how to get this information, how to get the cap rate information. Well, it's pretty simple. Number one, you need to look at a lot of deals. You need to do a lot of evaluation of deals and do your own cap rate calculation, some of the deals that you look at on Loop Net for example, or from brokers, the cap rates are already calculated. If you can look at a certain sub market and look at a lot of deals, you'll see what cap rates they are projecting, okay? You have to look at a lot of deals, what's a lot? Not five, not ten, minimum of twenty five deals just to get a feel for what cap rates are in your sub market, okay? Not five, but twenty five, got it? Ask You can also ask two or three commercial estate agents, just call up and ask them, "Hey, what's the cap rate for B and C class apartments in this neighborhood?" Let them give the answer, call two or three, then average them out. Cap rates don't move that much, and they're not that dynamic. They pretty much stay put for a long time. Number three, there's several online resources that you can use. Now you know the importance of 79

knowing the cap rate in your sub market, okay? Let's move onto the next category, okay? I'll see you there.

Sub Market Rents Number three, why you need to know the sub market rents. If you recall a few minutes ago, every sub market has rents, a rental range for the one bedroom, for a two bedroom, and a typical three bedroom. You need to know what those rents are for one, two, and three bedrooms in your sub market. The reason why is, it will help you determine if there's any upside potential in the rents. If the agent, real estate agent says that you can increase the rents by fifty dollars on your one bedroom, what is he basing that information on? For you to vent that out, for to see if that's true and accurate you need to know what the sub market rents are yourself. Don't believe the agent, know this information yourself so that you can spot it yourself. The other important thing is if you're dealing with the seller directly, and let's say the seller is elderly, is ninety or a hundred years old, and is property free and clear, and most likely he hasn't raised the rents, what you need to know if you're dealing with him is how high can you raise the rents, or how much upside potential do you have? Now, the reason why you want to know how much upside potential you have is because as the net operating income goes up, guess what goes up? Your property value. The more upside potential you have, the more potentially the property value can go up. That's why it's really important to know what your sub market rents are, it all starts here. All right, got it? Okay. How? Next is, how do you get this information? It's very simple, there's several online resources that you can go to immediately and get the information for one bedroom, two bedroom, and three bedroom. Just look online, they're all there. Now here's a special note, when you go online and you look for that information on comparable rents for the apartments, make sure you're not compare your rents with single family homes. A rent on a two bedroom home will be completely different and higher than a rent on a two bedroom apartment. Make sure when you're looking online you're not looking at single family homes, got it? All right.

Expenses Per Unit 80

We're going to jump into the last one, right? Number four, and that's why you need to know what the expenses are per unit or per door. Number four and the last thing you need to know to become an expert in your sub market, the fourth part of the secret. It is knowing the expenses per door. Why? Why do you need to know that? Well the number one reason why is, it's the biggest reason why beginners do not cash flow is because they don't know what the expenses are per unit for their sub market. They end up not cash flowing because they underestimated what it took expense wise to operate the property. That's the biggest reason why beginners fail to produce cash flow in their property. Single family, commercial, you have it. Number two, agents and sellers, they never give you accurate information. In my experience, when we plug the agent or seller information into the property and operate it, and we look back a year at what happened, our actual expenses will be higher than what they gave us. Okay? My experience is they never give you accurate and clear information, all right? Number three, the reason you need to know is because this is what experts know and do. Sub market experts, people who are experts in the sub market in the apartment business, they know what it takes expense wise to run their apartments. They know expenses per unit, got it? All right. How? Next thing is how do you get this information? Again, you have to look at a lot of deals. Repetition, repetition, practice, practice, look at a lot of deals and you will come to a conclusion on what the expenses are per unit or per door for that sub market. Also, you can ask a local property manager. That's what I did because I didn't understand what the expenses should be, so I went to a very established property manager and had him lay out the budget for me. He showed me what expenses are. What I did was I gathered all the expenses, and I divided it by the number of units, and I got my calculation expenses per unit moving forward in that sub market for all the deals, okay?

Mentor Lastly, you can get a mentor, get someone who's been there and done that so they can look over what you're doing so that you do not experience what most beginners do, which is a negative cash flow. Okay, you got it? That's number four, so what I want to do 81

now is I want to give you a quick summary and compelling reasons why, again, you need to become an expert in your sub market.

Summary All right we're finally here, here is the summary of the secret to commercial success, and the four things you need to know to become a sub market expert.  Number one, you need to know the price per unit in your sub market.  Number two, you need to know the cap rate in your sub market. Remember, every cap rate has a ... every sub market has a cap rate stamped on it.  Number three, you need to know the market rents for a one bedroom, two bedroom, and three bedroom, and what the typical rent ranges are in your sub market for those bedrooms.  Lastly you need to know, and this is probably the most important thing, is you need to know what the expenses are per unit, right?

Benefits Now, here are the benefits for just understanding why you need how to get them, here's the benefits. You won't overpay on your commercial property any longer, your cash flow will be predictable, you're going to learn how to properly value commercial property, and lastly you're going to meet your investment objectives. That's what it's about, that's what it's about in creating wealthy commercial real estate is meeting your investment adjectives, right? Through knowing this secret, knowing these four things and becoming an expert in your sub market, hope you got it.

7 Commercial Real Estate Terms You Should Know You're about to discover 7 commercial real estate terms that you should know if you plan on investing in commercial real estate. These 7 terms are mandatory to understand on any property you are looking to purchase. There's a quote I want to share with you from the Greek philosopher, Aristotle. He says, "Educating the mind without educating the heart is no education at all." I truly believe that. What I want to do in this short training is very quickly share with you what's in the heart of every commercial real estate investment deal that you will find and come across.

82

There are 7 commercial real estate terms that you must know before you make any commercial real estate investment decisions. I've taken the most important terms from my YouTube Channel and I condensed them right here for you. https://youtu.be/JPfj6P5m5wE

1. Net Operating Income (NOI) The first of 7 commercial real estate terms you must know is Net Operating Income, also known as NOI. The net operating income calculation is NOI is equal to your gross rental income minus your expenses.

NOI = Rental Income - Expenses Those expenses do not include mortgage payments or depreciation; but specifically property expenses. NOI is at the heart of every commercial real estate deal you'll ever evaluate. It will determine the property worth now and in the future, what your cashflow will be, and how you will make an offer. It's important because as the NOI increases, the property value will increase as well. If the NOI goes down, the property value goes down. We teach our students to find deals with net operating income upside. Meaning, they find ways to get the NOI to go to a new and higher level over two or three years.

Commercial Cash Out Refinance: This leads me to a technique of all commercial real estate syndicators and our students. It's called the commercial cash out refi. To learn more you can read my blogpost called Commercial Cash Out Refi. It's basically buying a commercial property, increasing the NOI through rent increases and spends reductions, and then refinancing the loan to pull out the original down payment or your investor's down payment while keeping the property. Let me ask you this. After you put your money in, you fix at the property, refi, you take your money out, what is your return on investment if you have no money in? It's infinity. That's the power of the NOI.

2. Cash On Cash Return

83

Cash on cash return is also known as your ROI, or return on investment. It is the heart of your money or your investor's money and is basically your annual cash flow divided by your down payment.

ROI: Return on investment or your ROI is a very important term because it's not how much money you spend on the property, but how fast your money is coming out of the property. If all you have is $50,000 to spend and it takes 20 years to get back your $50,000 through cash flow, that's not too exciting. That's only a 5% return. Perhaps that's okay for a stock broker, but not for us in commercial real estate. We are expecting a double digit return minimum. Instead, it would be better if you could earn back your $50,000 down payment in three years.That's a 33% return on investment and that's good and very doable in commercial real estate. When you can achieve a 33%, or sometimes even 50% return on investment, it is because you are working on what we call value added opportunities and that is what we focus on here in our company. Value add commercial properties. Another thing I want to share with you is when you are raising capital from an investor, how you determine what you can pay them is your cash and cash return, because it comes straight off the top. That's why it's really important to know this term.

3. Capitalization Rate If you look at the commercial real estate industry as a whole, and are looking for a singular calculation that everyone uses in the industry, it is the cap rate. It's an industry standard to use the cap rate which is the NOI divided by the sales price. It's important to know this because the cap rate is used to measure a building's performance, without considering the mortgage financing. For example, if you paid all cash out without investment, how much money does it make? What's your return? That's what a cap rate is. In layman's terms, a cap rate is your return on investment if you paid all cash for the property.

High and Low Cap Rates: A high cap rate which is 10, 11, 12% usually typifies a higher risk investment and a low sales price. High cap rate investments are typically found in poor, low income neighborhoods. In comparison, a low cap rate, such as 4, 5 and 6%, usually typifies a

84

lower risk investment but a high sales price. Low cap rates are usually found in upper middle class to upper neighborhoods. Therefore, neighborhoods within cities have stamped on them their assigned cap rates. Every neighborhood has a cap rate. If you know what the NOI is and you know the cap rate, then you can calculate what the sales price would be.

Sales Price: If the cap rate is equal to the NOI divided by the sales price, you can flip that equation over and the sales price is equal to NOI divided by the cap rate.

4. Debt Coverage Ratio We call it DCR. This is a term used frequently with your lenders. The DCR is at the heart of commercial real estate and financing. It's defined as the amount of cash flow available to pay your mortgage. The formula is the DCR is equal to your NOI divided by your annual debt. All commercial lenders want you to be able to pay the mortgage and have something left over. Debt coverage ratio tells you how much is left over. One of the reasons this is so important is because it's the first number the lender will check to see if a deal is lendable. Lenders usually want to see a debt coverage ratio of at least 1.2 or more. You may be wondering what 1.2 means. Let me give you the quick calculation. In the formula DCR equals NOI divided by your annual debt service, debt service is your annual mortgage payments. In other words, DCR is equal to NOI divided by your 12 months of mortgage payments. If it calculates to 1.0, that means you have no excess cash flow, and your NOI is equal to your mortgage. If it goes over one, that means you have cash flow. Banks want to see an average of 1.2 and I think a good target for a strong deal is 1.4 DCR.

5. Price Per Unit and Square Footage Price Per Unit: This term is at the heart of determining what a property is worth and also what to offer when you're considering buying a property. It also varies depending on the neighbourhood or what sub-market you are in. Price per unit is a term usually used for apartments and is calculated by dividing the price of the property by the number of

85

units. If you have a $500,000 apartment building and you have 10 units in it, that's $50,000 a unit. That is how you calculate the price per unit.

Price Per Square Footage: We use price per square foot for office buildings, retail centers, and industrial buildings. To determine the price per square foot, you use the same calculation as price per unit, but instead divide the price by the square footage. So, a $500,000 building that is 10,000 square feet would be $50/sqft. If you know the price per square unit in your sub-market and compare it with the price per unit of your property it will help you:  Gauge your offer price  Not over pay for your deal  Know if a seller's asking price is realistic

Wholesalers: Commercial Wholesaling is when you find a good deal, get it under contract, find a good buyer and flip it to the buyer. Knowing the price per unit and square foot is a valuable skill for wholesalers to determine whether they have a good deal and position themselves to make a lot of money. Again, knowing the price per unit and price per square foot in your sub-market and your property is at the heart of determining what your property is worth and what your offer price will be.

6. Building Classification Commercial buildings are separated into three classes. These classifications mean different things to different types of investors.

Class A Building: Class A buildings are the newest and highest quality, with the best location and highest rents. They are beautiful buildings in beautiful neighborhoods and attract the highest quality tenants. They are typically downtown with commercial on the main level and residential units on the top. As a beginner investor, Class A is not for you. The reason is because the price is too high, with low returns and you get steep competition from institutional buyers and funds. They can pay all cash and are okay with the low returns.

86

Class B Building: Class B buildings are usually a little older, but they are still good quality and attract average, working class tenants. Oftentimes value added investors target these types of buildings as investments since well-located class B buildings can be returned to their A class glory. These are the most stable properties. As a commercial real estate investor, your goal is to find a B class building in an A class neighborhood and then renovate that building to get A class rents.

Class C Building: Class C is the lowest official classification and the buildings are older and need updating. They have the lowest rents and you'll find lower to middle income tenants in them. If you are an apartment investor, class C is the way to go because the ratio between the price per unit and the rents are still good and you can get the highest returns. There will always be a demand for them because they are the most affordable, especially with the rising rents of Class A and B apartments. However, you need to be careful because the buildings tend to need a lot of maintenance and the neighborhoods and tenants could be challenging. Managing these properties requires skill.

Class D Building: There is also another class but it is not an official class. The buildings are often vacant and in need of extensive renovation. Class D properties are for experts who have deep pockets. If you're a beginner, don't even consider a class D building.

7. Types of Leases Leases are the lifeline, they're the life blood of a commercial property keeping the money flowing, thus protecting you from foreclosure. They are legally binding written agreements between the property owner and tenant. Let me briefly highlight several types of leases. In a previous blog, I went over it in great detail.

Apartments: For apartment buildings the lease could be a one year lease, a 9-month lease or a month to month lease. All our leases are strong leases written by our attorney. Why are they strong? Because you are in the income business. Leases give you the legal right to collect rent, evict people and take them to court if they don't pay. If you don't have a strong

87

legal instrument your tenants can take advantage of you and stay in your apartments without paying rent. So, having a strong lease is really important.

3 Types of Leases for Office Buildings and Shopping Centers:  



Full Service Lease: The tenant pays a flat fee and landlord pays for everything, including insurance, taxes, repairs and utilities. Triple Net Lease: The tenant pays for everything. This is a passive option, where the landlord only has to pay the mortgage. Watch my video Truth Behind Triple Net Lease to learn more. Modified Gross Lease: The tenant and landlord split certain expenses.

Again, leases are the lifeblood of any commercial real estate investment. Another way to look at it is, you're buying the building for free and you're paying for the leases. The building is worth nothing without the leases.

Bonus Term: Relationships I have a bonus term I want to share with you and it is probably the most important term of all if you want to have long lasting success as a commercial real estate investor. Knowing this will: Help you get the best deals. Convince the seller to work with you instead of others. Help you work with their broker that will send you his or her off market deals.

  

The bonus term is relationships. Commercial real estate is a relationship based business. This is probably the most important term of them all because if you don't get this part right, none of the other 7 terms matter. Here's the question. What do you think will get you the best deals, knowing terms or knowing people? What will convince a seller to work with you instead of others, is not knowing terms but understanding the needs, motivations and building rapport of the seller.

Commercial Real Estate is a Relationship Based Business There's a saying that you have probably heard, "No one cares how much you know until they know how much you care." That is so true in commercial real estate, with commercial property owners and brokers as well. Study the terms and know them, but I want you to start with relationships first. Commercial real estate is a relationship based business. I want you to build relationships with brokers, sellers, mentors, and other successful people. That's where success happens first.

88

Choosing the Right Commercial Real Estate Broker Years ago, I spent several years working for a prestigious commercial real estate firm while researching for my Dummies book. What I discovered is that commercial real estate agents are a different breed. They're a different breed of people. They're highly skilled but well-respected. Getting to know how they work and function in their jobs is critical in choosing the right one to work with. Don't you agree? Well, many people like yourself are intimidated by commercial real estate agents. I know I was intimidated. They didn't look as friendly as residential agents. They wore suits always. Their suits were in big buildings, and they seemed so professional, especially the way they spoke. Sometimes the words that came out of their mouth just went completely over my head. Like everything else in life, I just have to jump in. I called them. If I messed up, I messed up. I get a second chance, I get a third chance, and so on, but they had something I wanted: deals. Eventually, I learned how to relate to them, and I prospered. Today I can thankfully say that I have fantastic working relationships with commercial real estate brokers all across the country.

What You Will Learn in This Blog Two Things I Learned About Commercial Real Estate Agents 1. They are regular people. They are no different than the guys at my gym, at my church, and the guys that I ride my bike with on Saturdays. They are regular people with the typical issues of life. They worry about their jobs, their wife and their kids, their health, their finances, and many of them have told me, "Peter, I need to do what you do. I need to have investments so I

89

don't have to rely so much on closing a deal to pay my bills." You see, they're like normal people. The lesson here is don't be intimidated. 2.

There's a big difference between commercial real estate agents and

residential real estate agents. Here's the difference, a commercial real estate agent is business-focused. He's business. He's focused on business. A residential real estate agent, their job revolves around the wants and needs of a homeowner and his or her family. You want to know what that means? That means that commercial real estate agents rely less on emotions than residential agents do. They rely more on facts and figures than school districts and cozy streets. You must really understand that if you don't already.

What You Want From Commercial Real Estate Brokers It makes sense to first understand what your goals are. Why are you looking for a commercial real estate agent, and what do you want from him or her? That's the question.

Here are your goals. Here's what you want. 1. You want pocket listings or off-market deals. That's what we ultimately want. There's deals all over LoopNet and CoStar and other things online. We want the deals that are not online, that are not on an MLS, that are not on LoopNet. We want their pocket deals because those are the best deals. Those deals are going to make you the most money. Those deals don't have the competition that you have with deals that are online. Let's face it, the deals that are online, they've been picked over, and those are basically the left-overs. You want the pocket listings, the off-market deals. 2. We want them to return our calls. The number one complaint I get from my students is that the agents don't return their calls. We want to work with someone that will return our calls. 3. We want them to provide us information on the current listings.

90

4. We want enough market data concerning whatever asset type you're looking for, whatever commercial type you're looking for, to make buy and sell decisions. We rely on them to get us that data. It could be sales comparables, rent comps, demographics information, all of the above. We rely on them to get that information to us. 5. We want to have a sound and professional business relationship. That's what we want, and that's what they want as well. 6. We want referrals from them to key personnel in the industry, such as property managers, lenders, attorneys, inspectors, surveyors, other investors, things like that. It's really important because they are in the industry, and the best source of a property manager, lender, attorney, and inspector is by referral. We want to work with someone who is happy with theirs. What you want, pocket listings, returned phone calls, providing information on current listings, enough market data to make buy and sell decisions, sound and professional relationships, and key personnel referrals.

How to Choose a Commercial Real Estate Broker Two Ways 1. Referrals. Here's what I want you to do. Find someone who is happy with their broker, their commercial broker, and ask them these questions about their broker: "What were their broker's strong points?" "What were the broker's weak points?" "Would you use the same broker again?" After you gain the strong points and weak points from the person who's going to give you a referral, ask the question, "Would you use the same broker again?" If their answer is yes, then proceed to working with them. If not, move on. That simple. Okay, so that was method number one, by referral. 2. Online resources Just the top 3

91

  

LoopNet CoStar Google "commercial real estate brokerage,"

Broker's Area of Expertise Now, here's something that applies to both referrals and online resources. The question is, is the broker's area of focus the same as yours. What I mean by that is most brokers focus on an asset type. For example, I work with an awesome team of commercial real estate brokers here in my area, and if I'm acquiring multi-family appointments, I go to Brian. If I'm acquiring an office building, I go to Bill. Their expertise are in their niches. Brian's is with multi-family, and Bill's is with office buildings. You need to work with an expert. The best thing to do with that is if you are looking for an office building, then you need to focus and ask questions about the person's ability and understanding of office buildings. Something That's Not Important When Finding Brokers The thing that's not important is the size of their office. Some of the best firms I work with are called boutique firms. There are 3 guys in the office, and they are the best in that area of the country, 3 guys in the office, and they rule. They rule that city. Just because the firm has 100 brokers or has this amazing marketing and software system, doesn't mean that they're good or they're going to work for you. This is an individual business. It's all about the individual broker. This is a relationship business.

The 5 Qualifications You Need From a Commercial Real Estate Broker 1. The first qualification is you want them to be experts in their niche, in their asset type, and in their location. 2. Excellent communication. Again, you want to know the biggest complaint I get from my clients and students concerning an agent: "The agent doesn't return phone calls." 3. You need them to be well-connected in their market so they can connect you with other valuable industry professionals. 92

I can't tell you how many times that I had a great relationship with a broker and he connected me to other sellers, so I can produce commission, he connected me with other investors so I can do more deals, he connected me with lenders that were having problems with their properties I can go and buy. You want someone that's wellconnected in his or her market. 4. You want your broker to be full time employed in the business of commercial real estate brokerage. We want no part timers. We want full-time employment in commercial real estate brokerage. Not in single families but in commercial real estate brokerage. 5. They need to understand your needs The fifth qualification is really important. I want you to see if they ask you any questions because if a commercial advisor does not understand your needs and objectives first, then it may not be a good fit. I don't know what's more important, having an expertise in a niche and location, or this one, to see if they understand what you need first. Okay, it's a toss-up between the two.

How to Start Working With a Commercial Real Estate Broker 1. First define what exactly you want them to send you. Let's define that first. I'm going to define it for you. If you are in the apartment business, I'm going to tailor this for the apartment investors out there. Here's what you want. When you first start working out with a commercial real estate broker, this is the first phone call, and you introduce yourself, and they ask you, "What is it that you're looking for?" Here's what you say, "Mr. Broker, I am looking for B and C class commercial properties," or you can say, "I'm looking for B and C class multi-family or apartments within a price range of $500,000-$2 million, and I want it to be in the downtown market." That's it. You gave them 4 things. You gave them the class, classification of properties, the type of properties, you gave them the price range, and you gave them the location. That's it. Give them no more information. Don't talk cap rate or ROI initially because both of those are pretty subjective. I want you to resist talking about cap rate and ROI. If you tell them you're looking for an 8 cap deal and they're located in a 5 cap market, 93

guess what they would do. They would never contact you again. Do not talk cap rate or ROI. 2. Jump in. That's right, I want you to jump in feet-first. Stop over-analyzing and start analyzing deals. You know who you are. Stop procrastinating. Give the agent feedback after you analyze the deal. That's how they're going to get educated from you, is by you giving them feedback in what you like and what you don't like. How to begin working with them? Make the call, jump in feet-first, and stop over-analyzing. You don't need to know everything or be the expert. You don't have to read my book 7 times to call him. Read it once or twice, make the call.

Why Would a Commercial Real Estate Broker Choose to Work With You I know that this is about you choosing to work with a broker, but it goes both ways. Why should he or she work with you? The question is, "How can you position yourself so commercial real estate agents want to work with you?" What I did was I asked one of my broker buddies who's one of the best in his market, and he's very successful, does transaction after transaction. He is so well-known, and here's what he told me when I asked him. I asked him this question, "Hey, could you give me a few attributes that you look for when choosing to work with a client?"

He told me 4 things. 

He said he wants you to be responsive when he calls you.

Aha. Interesting, huh? Interesting that that came out of his mouth first because remember the biggest complaint that we get from brokers is the brokers don't call back. He's asking you to be responsive when he calls you. I wonder if those two are connected. That's the first thing he wants you to do. He wants you to be responsive. He wants you to make a commitment to work with him.



If he's going to put in the work and bust his butt and get in there and fight and bringing you deals, he wants you aboard. He wants you committed to working with him and not just treating him like 1 of 10 brokers. He wants chemistry.



94

He wants chemistry, and what he means by that is he wants a productive relationship with you. He wants to work with people he likes, so you need to be enjoyable. You need to say what you do and say what you do, and return his phone call.  Here's one thing he didn't say and it may surprise you. He didn't say he wants a client with deep pockets and lots of cash He didn't say that. He didn't say he wants a super-wealthy client. In our conversation, that wasn't even mentioned. What's most important to him is for you to be responsive, committed, and relationship-focused. That's why a broker would choose to work with you, being responsive, you committing to him, and being relationship-focused. Got it? All right.

Two No-Nos When Working With Commercial Real Estate Brokers 1. If you are a beginner, and I'm emphasizing beginner, do not sign exclusive representation agreements Again, I emphasize beginner. These agreements mean that you are signing a piece of paper that's going to lock you in working with that broker in that area. If you signed a document and the broker is a horrible broker who brings you no deals, you are locked in for that time period. If you buy anything in that market, you have to pay him whether he helped you or not. Me, as an experienced person, I can sign these all day long because I'm experienced enough to know if I want to jump into this relationship with them. I can get a feel for their track record, the type of transactions, I can get a quick feel for if we have chemistry because I've been doing this a long time, but if you're a beginner, my advice to you is do not sign any exclusive representation agreement because in my experience as a beginner, it does not work. You're just going to get trapped in there. 2. Stop Procrastinating. Call a commercial real estate broker today, right now, right after reading this. Call him. You don't have to have all your ducks in a row. You don't have to have all your financing ready to go. You don't have to have perfect credit. You don't have to have a downpayment ready to go. No beginner does. Yes, you make mistakes, and that's okay. You get a second chance.

Conclusion 95

Let me end with this. In the end, we only regret the chances we didn't take. Isn't that the truth? Get out there today and get busy created relationships because they have what you want, and choosing the right commercial real estate broker is what it's all about, choosing the right one.

Arnold Schwarzenegger Started His Empire with a 6 Plex Arnold Schwarzenegger's empire did not start with a 6 pack; it started with a 6 plex! You're about to discover how Arnold Schwarzenegger, the Terminator, started his empire with a 6 unit apartment building. Even before Schwarzenegger became the godfather of modern bodybuilding, before he became a mega movie star, or even before he was the governor of California, he was a beginning commercial real estate investor. The foundation of Arnold's success was not his 6 pack abs. The foundation of his success was a 6-plex apartment building he purchased in Santa Monica, California a long time ago. https://youtu.be/rc2ipORcVx8

Arnold's Beginning When Arnold first came to this country, he needed to figure out a way to pay for his competitions, to pay to get to auditions, to pay to market himself, because he had a vision. To do all that, without having a 9 to 5 job, he saved every last penny he had from earning money in competitions, in giving workshops, and giving seminars, until he had enough money to purchase a 6-plex. Arnold had a vision, and in that vision, he had a belief. That belief was he should first buy an income producing property. First, before buying a home to live in. That's exactly what he did. He purchased a 6-plex, he lived in apartment number 6, and he rented out the other 5. That afforded him to do what he had to do. Growing His Commercial Portfolio Three years later, he sold his 6-plex, and bought a 12 unit. From his 12 unit down the road, he sold it, and bought a 36 unit. At this point, now he's seeing the possibilities of the power of commercial real estate, so it led him to build his empire, that consisted of

96

hundreds of apartment units, office building, and retail space, in west Los Angeles. Today, Arnold has a real estate empire worth 300 million dollars. That's not the moral of this story. The moral of this story is, Arnold did all of this, all of that, before he became Governor of California. What I want you to get here, is Arnold used his real estate, his income producing real estate, to fuel his passions, and to fuel his dreams. Fund Your Dreams Arnold didn't have a lot to begin with when he got started. Something I want you to think about. Us here, at commercial property advisors, I personally believe that we are the best in getting people started here. We can't guarantee you, that you're going to build a 300 million dollar portfolio, no one can. We can surely help you here, to get started on this journey. Again, the moral of the story is, to let your real estate endeavors and investments fund your dreams and your passions. I want to share a quick story with you, hopefully to encourage you. This is the license plate to our car, California. It says Dad, that's me, and high 5 PJ, Peter Junior, that's my son. You see, I had a dream many years ago, driving down the California coast with a Daytona yellow Corvette stingray with a 427. Some of you car buffs know exactly what that is. To me, it was the most beautiful car in the world. That was my dream. I mentioned that to my mentor, my mentor challenged me. "Peter, buy the car, but buy it with your real estate." That's what I did. I bought a small apartment building that cashed over 1,100 dollars a month. I saved up 6 or 7 months of the cash flow, went out and got the car. The payments were 300 per month. With my cash flow, I'd pay it off in a year and a half, but the coolest part was on one chilly April morning, it was really foggy that day, my son and I jumped in that car ... I was a single parent, and a full-time engineer, and just a part time real estate investor. That morning, we drove down the California coast, and my dream was realized. It was funded through my apartment investment. The Question is: What are Your dreams? What do you want to do in life? I hope this has encouraged you that it's never too late to start. Here is the youtube link that's going to show Arnold Schwarzenegger's interview. 97

It's going to take you through this entire journey. I hope you enjoy it. It's very encouraging, very inspiring to me.

Can Anyone Invest in Commercial Real Estate? Are you intimidated by the thought of buying a commercial property? Well what I am about to share about commercial estate is no more complicated than buying a single family home. Are you thinking that you need lots and lots of cash and perfect credit? Not so the case. In this blog I am going to share how you can buy your first commercial property creatively. https://youtu.be/ztv2l6RnDx8

Where Do You Begin? It begins with my book, "Commercial Real Estate for Beginners" and it's free for you today by clicking on this link to download a copy. You see, I wrote this book for beginners and professionals. For the person like myself who was stuck in a corporate job, wondering if this job was going to be my retirement vehicle. The answer is no, of course. A job is not a retirement vehicle. I want to teach in this book how to be the CEO of your own life by investing in commercial real estate. I also wrote this book for the person who's maybe has a lack of retirement or no retirement at all and you're getting up there in age. You know who you are. There's no better time than right now to invest in commercial real estate. It's never too late, no matter where we are in the market. I wrote this book for the single family home investor who wants to take their cash flow and net worth to the next level. Commercial real estate is your ticket. Let's go over a few things that you're going to find in this book. 1. I'm going dispel the myth that commercial real estate is difficult. It is not difficult. All you need to do is have access to the internet, have a cell phone, and have the ability to do simple math. There's no licensing required. There's no college degree required. 2. The 10 commercial real estate opportunities that exist today  Apartments  Sub-storage  Office buildings 98

  

Shopping centers Mobile home parks and the list goes on 3. I'll share with you the 4 guiding principles of investment.

You do not buy any commercial property or any income-producing property without first understanding these 4 guiding principles of investing. Anyone can do this. 4. I'm going to show you how to calculate by using 3 examples. How to calculate the cash flow and ROI which is your return on investment. These are the 2 pillars of any income producing property. Do not buy any property without first knowing how to thoroughly calculate the cash flow and return on investments, and why you should become a commercial real estate investor.

Why YOU Should Become Commercial Real Estate Investor I learned from my mentor that when you have a why and it's clear and it's powerful, then the how becomes not so difficult. Let me share with you 3 compelling reasons why to become a commercial estate investor. 1. You're in Control You're going to have 6 controls that you would not have in any other investment. For example, if you were to buy a stock in the company, you would not have these 6 controls. The owner of the company has those 6 controls. I want you to have control of these 6 items by owning commercial real estate. You have control of the income, how much income is coming in, how much income is going out on the expenses. You have control of the asset. You want to sell it or refi it. You have the ability to put debt on the property. Management, you have, be able to hire and fire the management at will, and lastly insurance, just in case of loss. Again, when you buy a stock in the company, you did not have these 6 controls, but in commercial real estate, we have these 6 controls. Why is this so important? It's important because these 6 controls equal predictability. In this day and age, in this world economy, in this national economy, we all need predictability. 2. You're going to have life options. Commercial real estate affords you life options. Wouldn't you like to have the option of working less or pursuing a passion without having to worry about the bills or possibly paying cash for your kids' college. Commercial estate affords you those options. 99

3. All it takes is 1 commercial deal to dramatically effect your financial life For the rest of your life, including your children's lives.

Tax Benefits of Commercial Real Estate What are the tax benefits of commercial real estate? I recently received two very intriguing questions from my YouTube channel comments. The first question was, "Peter, how does Donald Trump and other billionaires make a billion dollars in a year and not pay income taxes? How is that possible?" The second question was, "And with Donald Trump and other billionaires, how can their tax returns show a paper loss of $975 million in one year and that be a good thing? How can that be?" Well, the short answer to both questions in both situations is "commercial real estate ownership advantages." https://youtu.be/EfNspaR-r2E Commercial Real Estate Advantages I am going to lump every US taxpayer into three categories. 1. A person who has a full-time job and owns no real estate Can you relate to this person? They are working a full-time job and own no real estate. 2. A person who has a full-time job and owns some real estate. 3. A person who works in real estate as their full-time job and owns real estate. This person is what's known as a "Real Estate Professional." It's actually an official IRS designation. You do not have to be licensed or go to school to be a part of this category. Which Category Do You Fit Into? If you are currently a member of Category 1, working full time with no real estate ownership, your goal is to get to Category 2. If you are at Category, working a full time job and own some real estate, your goal is to get to Category 3, which is full-time real estate investing, because this is the category where true financial freedom begins. If there is anyone out there reading this that is already at Category 3, I say, "Welcome to the Club". Quick Disclaimer: I am not a CPA. I'm not a tax attorney or a tax expert. I am a commercial real estate investor and mentor. My taxes are done by professionals and their companies. My 100

advice is to always get the advice of a tax expert when you make any types of personal financial decisions. Finding Your Category Next, I want to review all three persons' situations and see if you can relate to them and put yourself in their shoes. Then I will share how to get out of their shoes and into the next level. Before I start, all three people I'm referring to have the following tax status; they are married filing jointly. It's important to make that designation of their tax status, for the purpose of these examples. Person 1 If you recall, person number one has a full-time job but they do not own any real estate. Do your best to not stay here too long if this is you. This person has the standard writeoffs that the average American worker gets. That's about it. You're going to pay the most in taxes and basically get to take advantage of zero of the tax loopholes. Person 2 This person has a full-time job and owns some investment real estate. This person has some restrictions that the IRS sets forth. They are as follows: As long as your income is $100,000 or less per year, you can take a real estate loss like a paper loss of $25,000 per year against other income. This is an incredible thing, which basically allows you to wipe away $25,000 in income so you end up paying less in taxes. However, if you make over $150,000, you can't take any real estate loss. If you make between $100,000 and $150,000 you can take some loss, but as you approach the $150,000 mark that loss phases out. However, person 2 is able to take more advantages then person 1. If you make over $150,000 a year, your advantages are basically phased out. What do you do if this happens? You have a really good job, you're buying real estate, but you have losses on paper that you are unable to claim. Person 3 Your best option would be to become Person 3. Become a full-time real estate professional. You can either be a full-time investor, a real estate agent, property 101

manager, or other real estate job. Under IRS rules, this is defined as a real estate professional. You must basically work in real estate more than any other job and you must work at least 750 hours per year in that real estate job. Got it? Now, as a designated real estate professional, you can take unlimited amount of real estate paper loss against your income no matter how much you make or how much your real estate loss is. Remember, you don't have to be a millionaire or billionaire for this to work for you. Donald Trump This is exactly what Donald Trump did to avoid paying taxes. In some cases you can carry forward losses to future years to wipe out those taxes too. This is what Donald Trump did when he reported a $975 million loss. He carried it forward to a future year, which means he paid no taxes for several years. I heard he didn't pay taxes for around 18 years because of his losses. This is completely legal and in my opinion a smart thing to do. It's all legal. Tax Benefits and Write Offs as a Real Estate Professional As a real estate professional you can write off all of the following. You can write off property mortgage interest. You can write off directly against the income. You can write off property depreciation. o Property mortgage interest and property depreciation, those are your two biggest deductions. They can be hundreds of thousands of dollars if you have enough property.  You can also write off property repairs, trips to the property  Educational seminars, Mentorship costs  Your home office, your car, and the list goes on and on and on and on.   

Two Interesting Facts Our federal tax system collects $2.1 trillion every year from taxpayers. Basically the government takes in 2.1 trillion, but it gives out 17.1 trillion in tax savings to real estate investors and other business people. Why?

102

Why is there such a huge difference between the two and what they're taking in and giving out? It's because there is a huge lack of education of our tax system of how real estate professionals work. Real estate investors, including commercial real estate investors and even some tax accountants don't take full advantage of that designation. They prepare these tax returns for their clients but they're not getting all of the deductions and tax benefits that they deserve. If you are a real estate investor, are you claiming all of the benefits that you have rights to? Do you have the right CPA working for you, where you're not just a number, and you're not just receiving the basic benefits. You must be the type of person that is going to look at your file, your goals, and everything you are doing, and maximize your benefits.

Definition of a Real Estate Professional To be a real estate professional,a taxpayer must provide more than one-half of his or her personal services in real estate in which he or she materially participates in and performs more than 750 hours of services during that tax year. That's the best definition I can find. Example I want to give you a practical example by sharing a real life person example and their tax situation and what they did to maximize their tax savings. Dr. Rob is an engineering manager for a local tech firm here in the Bay area. He's single and earns about $250,000 per year including his bonuses. He has a pretty good job and he has a PhD from Stanford, so he is also a pretty intelligent person. Over the years, Dr. Rob has also purchased a 12-unit apartment building near Silicon Valley in Santa Clara and a downtown strip center in Santa Clara. He owns those two properties and they cash flow about $82,000 per year. When he does his tax returns, Dr.Rob's returns show a paper loss of $90,000. He cash flows about $82,000 a year but he has paper losses on his tax returns of $90,000 a year but guess what, he can't use those losses against his cash flow because he earns too much. If you recall, if you make over $150,000 and the job is not real estate related, you cannot deduct those pass up losses. What could Dr. Rob do to increase his tax benefits? 103

Here's what he did. He got married. The good doctor marries Joan who ends up managing the apartments and strip mall full time while being a housewife. In fact, the housewife is probably a harder job knowing Dr. Rob. Anyway, she qualifies as a real estate professional and because she qualifies as a real estate professional and they're filing a joint tax return, they both get to take advantage of her being a real estate professional. Now they get to deduct that $90,000 loss on Dr. Rob's properties, which are now their properties. They end up saving tens of thousands of dollars in income tax. To me what a great basis for a successful marriage. What advice would you give this couple, Dr. Rob and Joan? My advice would be to buy more cash-flowing commercial real estate. Enough so that they end up paying no taxes on their properties or on his income. Buy enough incomeproducing properties to accomplish earning as many tax benefits as possible. Again, if Dr. Rob did not get married and he continued to be an engineering manager, he would pay taxes through the roof. But because he got married and his wife's job is now a real estate professional, they qualify jointly as a real estate professional.

Today's Three Takeaways 1. Learn Commercial Real Estate I want you to learn how to invest in commercial real estate. After you learn, get help doing it. Do not try to do it by yourself, it's putting too much at risk. For most people, investing in commercial real estate will be the biggest investment you will ever make in your life. Next, I want you to become a real estate professional period. Learn about commercial real estate, get help doing it, and become a real estate professional. 2. Hire a CPA/tax planner who specializes in tax planning for real estate investors. All CPAs are not created equal. You will want to find someone that is creative and will explore different ways to maximize all of the benefits and rights you have as a real estate investor. You want a CPA that wants to help you become a real estate professional.

104

3. "The greatest investment on earth is earth." There's nothing like having tangible assets like a piece of commercial real estate I can touch and feel and look at and go, "Wow, that's mine." You have that so you can maximize your cash flow and your tax savings. There's no other investment like it.

Secrets to Refinancing Commercial Real Estate Why Refinancing Commercial Real Estate? What's so important about refinancing commercial real estate? I have three compelling reasons. 1. 1. It can immensely increase your cash flow and your cash-on-cash return, your ROI, on your investments. 2. You can pull out cash from the property that's tax-free to either buy another property, to do necessary repairs or to do renovations and increase the rents. In my opinion, win, win, win. 3. It's what most successful investors do to keep their money moving. https://youtu.be/sSd9-P_YmWg What is Refinancing Commercial Real Estate Refinance (and how does it differ from a home loan refi?) Most of you are familiar with refinancing a home. As your equity in your home goes up, you can refi into a better loan with better rates or even pull out cash. Most home loans mature in 30 years and are amortized over 30 years. Commercial loans, however, may amortize over 30 years but they also mature. They mature in five to ten years, which means, you can sell the property or refinance it into a new loan all together. The other major difference is that commercial refinances depend on the NOI, the net operating income of the property but home loans do not. Therefore, the higher the NOI you can create, the better loan terms you can get, the more cash you can pull out and vice versa. If your NOI is lacking or unstable, your commercial refi loan may be denied. Three Real Life Examples 1. Dave's Story

105

Dave and his wife own a 56 unit apartment building in Florida. They bought it distressed four years ago from a bank for a very good price, and two investors supplied the down payment. They would need to put money and work into the property, but Dave was not a very good property operator. He was not a good manager, which caused the property to suffer. The complex did not have a great reputation in the community and the rent collections were very poor, which meant the investors were not getting paid. So Dave came to me for advice and actually wanted to sell the property and quit real estate all together. But, I saw potential, not only in the property, but in Dave and his wife if we could get the property to run properly. Over the course of 18 months we repositioned the property with better tenants and improved looks on the inside and out. We painted the building, cleaned up the landscaping to approve the curb appeal, redid the kitchens, bathrooms, and installed new flooring. Rent collections are now consistently over 95% and the rents have gone up over 25%. To Sell or to Hold? It was now time to make a decision on whether they should sell or hold onto the property. As their coach and mentor, I advised them to refinance now because the NOI has gone up significantly and is now stabilized. As everyone knows, as your NOI goes up, your property value goes up. I then recommended that they pull out the cash to pay back their investors, which would make them happy. Then I suggested that they keep the property and reinvest their money and investor's money into another property to keep the commercial real estate investing journey going. The end result was a happy wife, pleased investors who had now spread the word and helped him raise more capital for his next property, and renewed confidence to do this business full-time. They are now full-time real estate syndicators. The Lesson The lesson is to get help if you have a property with potential. Make sure you realize the potential and work your butt off to meet that potential. Then refi because cash pleases everyone. 2. Daryl's Story Daryl has worked in sales for the last 28 years. He's really good at it but works long hours and is pretty much 100% commission. It is stressful and exhausting work.

106

12 years ago, Darryl purchased a 14-unit property in New York City as a retirement investment. Once, he began to tell me more about the property I realized he could possibly retire sooner or work a lot less hours sooner with a smart refi. His original loan balance when he bought the property was 1.6 million at 6% interest and it was amortized over 20 years. His payments were about $11,000 a month and he had been paying down his mortgage for 12 years, making his mortgage balance now around $800,000. He had a ton of equity in the building and a really small loan balance compared to the profits he was making. Daryl's Two Choices 1. He could continue to pay the $11,000 per month for another eight years, and then his property would be completely paid for. 2. He could refinance at his current loan balance of $800,000, with a lower interest rate and longer amortization schedule which would increase his cash flow and reduce his payments. $800,000 at 5% interest amortized over 30 years, would drop his mortgage payments to about $4,000 per month, for an increase in cash flow of about $7,000 a month or $84,000 a year. 3. Alan and Myra's Story Alan and Myra's situation own a small shopping center, midtown, in an excellent location. They love the property and it has been in the family for years with decent cash flow. The issue is their loan matures next year, which means they're going to have to get a new loan at that time. When you refinance a home, the lender will value your refi based upon the comparable sales in the neighborhood. They'll find a comparable commercial property and the lender will put a huge emphasis on the NOI, the net operating income, to be at a certain level and stable for a certain period of time. Alan had not been the best landlord lately and has about 3,000 square feet of space that's been vacant for two years, not because of the demand in the area, but because he hasn't done anything with it. His second problem is that he lets a few of the tenants not pay their full rent because he's friendly with them. I warned Alan that it's likely that his lender for his refi will not approve the refi at the loan he wants, because of these issues. When Alan applied for a new loan with a local lender they said they would do the loan, but the interest rates were way too high and the other terms were horrible. They wanted him to put money in the escrow and the amortization schedule was way too low. I explained to him that they gave him terms as if the property was high-risk and

107

distressed, because to lenders, t poor rent collections and too high vacancy, mean high risk. Alan and his wife didn't see their property as distressed but the lenders did. In the end, they were able to refinance their commercial real estate property with good terms once they paid closer attention to the needs of the property. Alan got the 3,000 square feet leased out and they started requiring all of their tenants to pay on time. The Lesson. 1. Always run a tight ship because every property with a loan on it has a refi right around the corner. 2. Keep your eye on the NOI. In Summary 1. You can use refinancing commercial real estate as a tool for, repositioning your investing journey of the property. If you improve the property's financials and performance, it will enable you to pull out cash, repay yourself, repay investors, buy another property, or do whatever you want. The journey will not only continue, it can take you to greater heights. Look at a refi as a repositioning tool for, not only the property, but for yourself. 2. Look at refis as a way to increase cash flow. What's the biggest indicator that you're ready to work less hours or leave a job? It's not net worth or equity in the property; it's cash flow. Here's a quote from Jim Rohn, "Your income needs to exceed your outgo. That's when you know you're ready." 3. Keep an eye on when your loan comes due. Paste it on a board some place and make sure your property's financials are stable and strong. Don't let the property's condition, occupancy, or NOI fall apart or else you may not qualify for a refi. Keep the property's curb appeal looking nice, maintain at least 90% occupancy, and maximize your NOI continually.

Commercial Real Estate News You Can Use You're about to discover the best news sources you can use to stay up to date on what's going on in the commercial real estate world. These are the very same information outlets that our team uses to stay on top of trends and changes in the industry. Not only must the news source be of the highest quality and accuracy, but furthermore, it's critical that each come from a slightly different perspective. Specifically, the 5 different perspectives we choose to focus on are; National, Asset Type, Brokerage, Local Economy and Lender. Together, they create a well rounded view of the commercial real estate world.

108

https://youtu.be/pWyA8lOzUYI

1. National Perspective When looking at Commercial Real Estate as a whole, from a national perspective, I suggest National Real Estate Investor Magazine. It features stories and informative articles on a variety of asset types, such as; apartments, self-storage, office, retail, and more. It is a very relevant source of commercial real estate information, the articles are very educational and enjoyable to read, and it also has an excellent rankings section with lists of the top commercial property brokers, lenders, and owners.

2. Asset Type Perspective Every Asset Type has its own industry leading publication. Here are other authoritative news sources for specific asset types:  Apartments: Multi Family Executive  Self Storage: Mini Storage Messenger  Office Buildings: Building Owners and Managers Association  Shopping Centers: International Council of Shopping Centers  Industrial: Society of Industrial and Office Realtors

3. Brokerage Perspective The brokerage firm with the very best research department is Marcus & Millichap. Specifically, the Marcus & Millichap Research Reports are absolutely fantastic at providing the most authoritative and factual information on today's commercial real estate economy.

4. Local Economy Perspective Although the national news can be of some value, having a good understanding of your local economy is critical for commercial real estate investors. The Business Journals is a great resource for accurate and relevant information on the local economy of just about every major city in the United States. Although each individual city may have a different publication, they all have a similar format and the articles are written with the business reader in mind. Consider getting a subscription to your local business journal to stay up-to-date on the current real estate market and local economy. If you live in an area that doesn't have a business journal, you might have a regional

109

news source that has a business section you can read.

5. Lender Perspective The news source most commercial lenders turn to is National Mortgage News. It provides information on the newest financial regulations and laws, current mortgage rates and changes, and lists of the top loan originators by year. Since you'll most likely be borrowing money to acquire commercial real estate, reading commercial real estate news from a lender's perspective is very helpful. Together, these five different perspectives provide a commercial real estate investor with a well balanced view of what's going on in the world of commercial real estate. Those five sources are among the most authoritative commercial real estate news providers available. That is commercial real estate news that you can actually use!

How to Get a Commercial Hard Money Loan You're about to discover how to finance commercial real estate opportunities that normal banks will not lend on by using a Commercial Hard Money Loan. In this detailed training, you'll learn the basics of Commercial Hard Money, an example of a deal funded with hard money, the major differences between hard money and traditional commercial bank financing, answers to the 3 most common questions people ask on the subject, how to steer clear of fraudulent hard money lenders and the best resource for finding hard money (Hard Money Locator Tool). Here's how to get a commercial hard money loan: https://youtu.be/69KJjJ4Zed0 Hard Money Locator Tool

110

Question One:  What do you do if you find a great property that has lots of potential, but is greatly distressed?  Based on your research, you have found that this property would cashflow very well, but how do you finance a distressed property with great potential? Question Two What do you do if you find a property in a great neighborhood with great upside, but the owner has run it into the ground?  Based off your research you have found that this property could be worth millions if you could just fix it up and run things the right way, but how would you finance this type of property? 

What is a Hard Money Loan? Hard money loan is a non-bankable loan. This is a situation where a conventional lender would not lend on the property for a specific reason. A hard money loan is also an assetbased loan secured by the property's equity. Why is it Called Hard Money? It's called Hard Money because a hard money loan is backed by a hard asset. Example: There is an eight-unit apartment building for sale for $400,000. It is distressed and four units are vacant, making the occupancy rate 50%. The property needs many repairs such as the roof, siding, and loose handrails, which will cost around $25,000. The apartment also has city housing fines of $15,000 and delinquent property taxes of $10,000. That’s approximately $50,000 worth of issues that will need to be taken care of. Another important detail is that a similar eight-unit apartment across the street, that was not in distress just sold for $650,000. So basically if you bought the property for $400,000 and fixed it up with $50,000, you could still create $200,000 in equity. A traditional lender would not like this deal because the apartment is not producing enough income with that 50% vacancy. A hard money lender might say yes to this deal but they would not lend as much as a conventional lender. The hard money lender would lend you around 60% of the project cost, which includes the acquisition cost ($400,000) and any rehab/fines ($50,000). So, they would lend you 60% of the $450,000 which is $270,000. This means that you would be required to put down a deposit of 40% or $180,000. You don't need to have a good credit here, you just need to have $180,000.

111

Why is This a Great Commercial Real Estate Deal? Let's say that you come up with the $180,000. The goal after you close the deal is to take care of all the repairs, pay the taxes and fines, and re-rent the property at a 100% occupancy rate. Once the property has been stable for a period of time it is ready for a more permanent financing scenario. Most hard money lender's interest rates are 12, to 14, or even 16%. This is very expensive so the goal is to fix up your property, get out of your hard money loan, and qualify for a more traditional conventional loan. After the repairs and stabilization of your property you will be able to get a loan from a conventional lender. Exit Strategy I want to go over to an example of an exit strategy so I can show you how this is a good deal. After you have fixed up your property and are in good shape you can bring the apartment to the lender and show them that it is now worth $650,000. The traditional lender will then offer to lend you around 75% of the value of the property, which is $487,500. Once you have your new conventional loan, you can use this money at closing to pay off your hard money loan. Property Worth: $650,000 Conventional Loan Amount: 75% of Property Worth so $487,500 Hard Money Loan Amount: $270,000 If you pay off your hard money loan with money from your new conventional loan you are left with $217,500. This is known as a cash-out refi. I have a video on YouTube called, “The Secrets to Refinancing Commercial Real Estate”, that you can check out to learn more.

What Can You Do With This Money? When the bank hands you a check for the remaining $217,500, you can use this money to pay yourself back the $180,000 deposit you put down on the original hard money loan. You can also keep this process going by using the money to obtain another hard money loan on another property.

112

Or if you had investors help pay the original deposit, you can use this money to pay them back, and still have enough left to pay yourself an ownership interest. What’s Your ROI on this Deal? If you put none of your own money into this deal then your cash return on investment is actually infinity. To summarize this, what you did was find an eight-unit property for sale real cheap due to some issues it has. You then obtained a hard money loan which you used to buy and fix up the apartment. After fixing up and stabilizing the property you applied for a permanent loan for 75% of the properties new value. You used this new conventional loan to pay off your hard money loan, which is known as a cash-out refine.

The Five Major Differences Between a Hard Money Lender and a Conventional Lender Interest Rates A conventional loan’s interest rates are lower than a hard money loan. In fact, hard money loan interest rates can be up to three times higher than a convention loan. Upfront Costs In a conventional loan, your upfront costs can be as low as 1% of the loan amount. On the other hand, a hard money loan will charge 2-5% just to use their money. Loan Terms A conventional loan term can be as little as five years or all the way up to 30 years. A hard money loan term is typically between 6-12 months. Borrower’s Credit Your credit is very important to a traditional lender. Hard money lenders check for major flaws, but because the loan is based on the equity of the property, you can hustle flaws in your credit and still qualify for a hard money loan. Closing Time Closing time is the amount of time it takes to close a deal. A conventional loan is more time consuming because they have to underwrite the deal, order inspections, go through their legal department, get a “yes” from their loan committee, and put together their closing paperwork. This can take 30-60 days. Hard money loans can close in as little as 7 days because the hard money company is usually owned by one or two rich individuals who are lending out their own money. 113

The True Purpose of Hard Money Loans A hard money loan is also known as a bridge loan, it bridges you from a temporary situation to a more permanent situation. The goal is to be bridged from a hard money situation to a more conventional situation where you're going to go from a very expensive interest rate payment per month to something much lower.

The Three Most Common Hard Money Questions 1. Does My Credit Matter? The answer is maybe. When a hard money lender goes through the process of qualifying the deal and you, they look at the deal in three ways. They look at the property, they look at the area and then they look at you, so you're third on the totem pole. However when looking at you, if you have bankruptcies or foreclosures, you have some explaining to do. If there is not a good explanation why you have these two things, your loan will be denied. 2. Do I Need to Put Money Down? The answer is yes because there is no 100% financing for hard money loans. You will have to put between 20-40% down depending on your commercial hard money deal. This is the down payment plus the closing cost, which can be up to 5% or 6% of the loan. The great thing about hard money lenders is that they are open to creative deals. I recently had a student purchase a 90-unit apartment for 3 million dollars with 10% down. The hard money lender required a 30% down payment so the student negotiated with the seller to carry the other 20% for three years as a second mortgage. The hard money lender was open to this deal because, their 30% down requirement was satisfied. 3. What's the Secret to Getting My Loan Approved? You need to have a realistic exit strategy that everyone involved in the deal agrees with. Everyone involved would be yourself, your lender, the person you're borrowing your money from, your property manager, and your mentor. Having everyone agree on an exit strategy will put you in the best position to get your loan approved.

How to Identify Fraudulent Hard Money Lenders 114

Red Flags to Watch Out For: 1. Do not pay hard money lenders any upfront fees until they have looked at your deal, visited the property, and reviewed your capacity to make sure it is realistic. If you come across a company that says, "Hey, send me $750 for me to look at your deal" before they do anything, that's a red flag, don't do that. 2. Do not use a hard money lender that is unwilling to divulge their source of money or provide references. This is a sign that they have no money. 3. If the terms are too good to be true they usually are. If a hard money lender offers you 100% financing, and promises to close within five days with low upfront cost, and low interest rates, it is mostly likely too good to be true. 4. 100% financing. Anytime a hard money lender offers 80% loan to value or higher on a commercial loan it is a red flag. These are the four red flags. If you see any of these warning signs I want you run and use someone more reputable with more realistic terms.

Commercial and Residential Hard Money Lender Database The Hard Money Locator is a resource for finding hard money lenders all across the country. This is a great tool that enables you to search for a hard money lender based on the criteria of your deal.

6 Ways to Raise Down Payment Money for Commercial Real Estate Let's face it , commercial real estate deals oftentimes require big down payments. Many new investors run into problems trying to save up that money themselves. They may even come across a great 36 unit apartment building that cash flows $5,000 per month, but they may not have the $200,000 to close a deal. What should they do? Give Up? In this training, you're going to discover how to raise money for commercial real estate from private investors using creative investing, self directed IRAs, crowdfunding, peer-to-peer lending, and commercial wholesaling so that even if you don't have the cash on hand to cover the whole down payment, you can still do the deal. https://youtu.be/TuL7sjVHi0o 115

The 6 Ways to Raise Money for Your Commercial Deal 1. Raising Capital From Private Investors. There are two reasons why you need to learn how to raise capital.  You're eventually going to run out of your own money  It's the best way to leverage your limited resources to do larger deals. When you see a new commercial building being built, for the most part, it's not just one rich individual financing these buildings. More than likely, a group of people pooling their money together to finance a larger project. You want to be the leader of that pool. You want to be the person that knows how to raise the money.

How Do You Structure a Deal With Private Investors? If you know one or two investors that are willing to put up all of the money for a deal, and you plan on having an active role in the investment, this can be as simple as using an LLC. Your attorney can establish the LLC and write up a operating agreement to spell out what each of your roles is. You will be the managing member of the LLC and they will just be members with a title. This is one of the most common structure when dealing with investors because it as simple as it gets. If you have two or more investors that are passive; meaning they're not active, then things change quite a bit. This is called,"Real Estate Syndication" and there is a lot more paperwork and disclosures involved. You will actually need an attorney with SEC experience to help you. SEC stands for the Security Exchange Commission which is the branch of government that monitors fraud and scams when dealing with raising capital and the financial market. In fact, my next video will cover syndication in detail. It's called, "The Basics of Real Estate Syndication".

116

How Do I Know if My Deal is Good Enough to Attract Investors? Good deals attract money. A good deal will attract interest and this is exactly what we teach our students.

Five Elements of a Good Deal 

Your deal must be priced under market

You don't want to bring an overpriced deal to your investors. People like good deals. You want your deal to have income upside.



In other words, you want the rental income to be capable of going up over time instead of down. As the net operating income of a commercial property goes up, so does the value. You need to show your investor that you have a plan and that the property is fully capable of increasing income, therefore increasing in value. Your deal must have excellent cash and cash return.



What's your 401K or IRA cash return? If you're getting 4 1/2 to 5% return on investment on your IRA it's going to take 16 years for your investment to double. That's a very long time and you could be way past retirement by then. The market must be a good one capable of sustaining your investment for years to come.



You must know all of the market demographics; the economic trends, the vacancy trends, population, and migration.  You must have a razor sharp exit strategy that's realistic and conservative An exit strategy is a design that you have in place to return the investor's money plus more.

2. Raising Money For Commercial Real Estate Using Creative Financing There are four different methods for raising money using creative financing. They are the master lease agreement, seller carry first mortgage, seller carry second mortgage, and the hard money loan.

Podcasts and Videos on These Methods   

A video on the master lease agreement A podcast on buying commercial real estate without banks. A video on commercial hard money loans

117

Example This is an example of how to use creative financing to help raise capital or structure a deal where the capital requirement is very small. This is an actual deal from one of our students. A three-story office building that is 40% vacant or 60% occupied is considered a high risk investment, which means it will not qualify for a typical loan. The property does not generate enough money to pay for the loan, because of it's high vacancy levels. Even though a typical bank wouldn't loan on this property, a hard money lender would. The seller was willing to sell for $1 million, but if the property goes from 60% occupied to 90% occupied, it would be worth $1.6 million. 

How He Got the Deal Funded

That's a $650,000 upside if the property was purchased, fixed up, and reached at least a 90% occupancy. A typical hard money lender would lend about 70% of that million dollars on the deal. This means that they gave our student a loan for $700,000, which made the down payment $300,000. But what do you do if you do not have that $300,000? In this example, we negotiated with the seller for the seller to carry a second mortgage in the amount of $250,000. So my student's down payment was only $50,000. The reason the seller was willing to be in second position for so much money is because the property was distressed and if he had just put it out on the market and sold it as is, he would have most likely only gotten half of what he was asking for. We agreed to give him the 1 million dollars so he was willing to hold the second mortgage in order to get the deal done. 

Closing the Deal

So my student got the deal financed and closed, and over the next year he was able to secure a 90% occupancy. The hard money loan was only good for one year so at that point my student went to a local lender and put a longterm loan on the property to pay off the hard money loan, and let it cash flow.

118

The exit strategy is to get out of the hard money loan by putting longterm permanent financing on the property and letting it cash flow. That's using creative financing to create a win-win-win situation for all. Win for you, win for the seller, because he got a million dollars, and a win for the lender who gets their equity requirements taken care of.

3. Raising Money For Commercial Real Estate Using Self-Directed IRAs. In this case you can use your own self-directed IRA or someone else's to fund your down payment. You can partner someone that has a self directed IRA and they can help you fund the deal. Did you know that there's close to 8 trillion dollars sitting in IRA accounts today? What did you earn last year in your IRA or 401K? 3, or 4, or 5%? That small of an amount will not get you anywhere close to retirement. I personally coach syndicators and their goal is to double their investor money in five years. That means a good 20% return over the next five consecutive years. It's doable and it's being done.

Common Ways to Invest in Real Estate Through a Self-Directed IRA  

 

Direct Purchase: Where the IRA buys the entire property outright using funds in the accounts. Partnerships: You can use partnerships and combine IRA funds with other people's IRA funds in conjunction with your funds, even non-IRA funds to do a deal like this. With the right company and the right structure, you can fund all of your deals using self-directed IRAs. You just have to Google self-directed IRA real estate and a few companies will pop up Mortgaged Backed Purchase: Basically you would use an IRA as a down payment against a mortgage to buy the property. LLC, a limited liability corporation: In this case, the IRA holds an interest in the LLC, rather than title to the investment.

Important Things to Know When Using Self-Directed IRAs  

The property's buyer is the IRA, not you. All of the expenses and income must go through the IRA. Expenses must be paid directly by the IRA and any income must remain in the IRA.

119





You cannot use the property for personal reasons. The property must be treated as an investment, not for your immediate benefit or your family's benefit. It's for the IRA's benefit only. All of your maintenance repairs on the property must be done by a third-party. If the IRA owner, provides any sweat equity like changing a light bulb in the property, there could be significant penalties.

4. Raising Money For Commercial Real Estate Using Crowdfunding Crowdfunding is a method of raising capital through the collective efforts of friends, family, and individual investors. This approach taps into a larger pool of people in an online platform called a crowdfunding platform, and it leverages their networks for greater outreach and exposure. Let me put it in layman's terms for you, you have a internet company that goes out and recruits rich people to put money into their company. Then the company goes out and recruits the person needing the down payment, and inputs their deals into the system. The system will then decide if the deal is approved to use the investor money or not. This process is done completely online.

Popular Crowdfunding Websites  o o

RealtyMogul.com RealtyShares.com

Getting Your Crowdfunding Deal Approved Go to a crowdfunding platform like Realty Mogul or Realty Share and submit an application. Put in all of your deal information and everything you need. Once the deal is approved there is an approval process, that requires additional information about your background. If that's approved, they're going to send your deal out to their platform's investors to gain attention and get funded. Then once the capital goal is reached, it can anywhere from 24 hours to a month altogether to get the deal funded. Once you're approved, the money's dispersed right away. The drawback to this is you can spend a month trying to get your deal funded through crowdfunding, but if you only reach 90% of your goal, you get none of it after it expires.

120

One of the most important parts to getting approved for a crowdfunding down payment is that you must be experienced, have a track record, and some funds to invest. If you're a beginner than most likely, crowdfunding is not for you.

5. Raising Money for Commercial Real Estate Using Peer-to-Peer Lending Peer-to-peer lending is peer-to-peer. The first peer is the internet portal that rich investors put their money into for return on investment from you. The first peer in peerto-peer is the investor, the second peer in peer-to-peer is you, and in between that is an online platform that makes sure the investor's needs are met, as well as qualifying you as a borrower. Have you heard of companies like Lending Club, or SoFi, or Prosper? Those are peer-to-peer lenders. It's an online platform that gathers people to invest in each other. Example This is something my team only uses for small deals requiring between $25,000 and $100,000. We had a student that needed $60,000 to close a small commercial property deal. He had a good job, good credit, decent income, and was able to borrow the entire down payment at 7% for five years through peer to peer lending. With peer-to-peer lending the better your income and credit is, the lower the interest rate is. You also have to factor that loan into your overall returns. If you look at a simple analysis of commercial property, we have income minus expenses minus the mortgage equals cash flow, right? If you use peer-to-peer lending, you have your income, minus expenses, minus your mortgage, minus your peer-to-peer loan, equals your cash flow. In other words, make sure that your deal can afford peer to peer lending.

6. Raising Money For Commercial Real Estate Using Wholesaling Most of our students have limited funds to invest in commercial real estate, yet they do have a great desire to do so. We have a whole program to teach them how to wholesale their deal to buyers to create capital for themselves. If they do this multiple times, they can stack up and raise their capital so that they have enough money to do their own deals.

121

Basically, what they do is find a deal, get the deal under contract, and then flip it to a buyer for a fee. You can do this several times and the goal there is to build up your own down payment. Consequently, if you do not have a lot of money; you can still raise money for commercial real estate by wholesaling your deal.

My First Experience Raising Money For Commercial Real Estate Deals I was in sort of a mastermind buddy group, where most of us had exhausted our personal money, and were forced to go out and raise the money. I found an investor who was actually a coworker of mine. We found a small deal, which is a great starting point for a beginner investor. Small deal equals small mistakes, and small deal equals small amount of money to raise, which this was the case. It was an 11-unit apartment rehab project. It was very light rehab, I'm talking just paint and get rid of a few bad tenants. As your first deal, you do not want to do extensive rehab, or do a whole bunch of evictions, You just want to keep it nice and simple. 

Closing

After I negotiated and got the property under contract we flew down to the property together. I wanted him and I to both be convinced that the deal was very doable. My investor put up the entire $66,000 down payment, but we applied for the loan together, which means both of us would have skin in the game. I wanted to show my commitment to the deal, because, he was the one putting in all of the money. So by putting my name on the loan I was putting my credit and holdings at risk if the deal was to fail. We were personally guaranteeing this loan. My attorney drafted up the LLC and we closed on our project. I did all of the asset management; oversaw the manager, made sure the bills were paid, and took care of the taxes at the end of the year. This means I was able to collect an asset management fee every month. 

Exit Strategy

After about 18 months we sold the property and we split the profits 75/25. 75% to him, 25% to me. I gave my investor a large split because I wanted to gain some experience on how to raise capital for deals. I wanted to show potential future investors that I had already raised money and had a project succeed. Equally important, I wanted my 122

investor to reinvest with me, and I thought it was enticing for him to receive a larger split. As you get into syndication and learn more about it, you'll see that that split is quite normal.

Basics of Real Estate Syndication Real Estate Syndication is the phrase used to describe the concept of pooling the resources of and bringing together several different real estate investors in order to do a large commercial deal. In this video, you'll discover the basics of real estate syndication; from the 4 most important things to know when raising capital, to the 3 way you can profit from syndicating real estate, how to find private investors, how to convince investors to invest with you, the top 3 questions all investors will ask you (and how to answer them) along with a very detailed real deal example. https://youtu.be/tSl2qjSQhqI

Executive Summary Download

What is Real Estate Syndication? Real estate syndication is when you raise capital from private individuals. It is an effective way for investors to pool their financial resources together to invest in properties much bigger then they could afford on their own. If you were to find an outstanding deal, but didn't have the funds to afford the down payment, you could syndicate it by finding other people to help fund the deal. Or, if you had the down payment, but no real experience or confidence to operate the property on your own, you could use real estate syndication to get experienced partners to help with the project.

123

Real estate syndication allows you to close on more deals because it allows you to leverage partnerships and other financial resources. You can even use real estate syndication for retirement planning. Many people, including myself, use syndication as our pension. You might want to consider doing real estate syndication because you can make a nice amount of monthly income through asset management, acquisition fees, or if you are the agent, you can earn lots of commission from selling your own deals.

The Four Most Important Things to Know When Raising Capital 1. It is a relationship-based business It is important to relax and be yourself. I want you to be genuinely interested in the potential investor you are dealing with. Be sure to call them back when you say you're going to call them back and do the things you tell them you are going to do. Commercial real estate is a relationship-based business. If you do not understand that, you're not going to be successful in raising capital.

2. Put the Investor First and Yourself Second When you’re raising capital I want you to have the mentality that your grandmother is the person investing in your deal, ,and that she is doing so, with her life savings. If this is the mentality you have, then you will be very careful with the money and not put it towards any iffy deals.

3. Your capital raising efforts need to be structured for efficiency and legal reasons Real estate syndication is about compliance to the strict laws, rules, and regulations that are set up to protect the investor. Before syndicating a deal, make sure you understand those laws and regulations.

4. Get an attorney who's experienced in real estate syndication Do not try to set up a real estate syndication without the help of a good attorney. An experienced attorney will make sure you have the exact documents you need, give you

124

the lawful disclosures you need, and provide legal protection when you close a deal with a private investor. If you were to forget just one of these things, and you could open yourself up to a lawsuit or worse. There is a government agency called the SEC, the Security and Exchange Commission, and their purpose is to protect investors from dangerous or illegal financial practices or fraud by requiring full and accurate financial disclosures by you, the syndicator. This is something an attorney can handle for you.

The Three Ways You Can Profit From Real Estate Syndication 1. Acquisition Fees A syndicator of real estate will receive compensation for finding the deal, doing the due dilligence, and even structuring the deal. These fees can range anywhere from 1% to 5% of the project size. For example, if it was a 5 million dollar deal, 5% of that is $250,000 dollars. Or you can choose a flat fee, like 25 or 50,000 dollars. These fees are generally negotiable with the investors that you bring into the deal, but make sure your fees aren't too high, or the investors may be leery to invest with you.

2. Asset Management Fees. The asset management fees are generally 1 to 5% of your gross monthly income on the property. To get an asset management fee, your role is to manage the partnership and deal syndication. You must send out notices with updates for investors, oversee the property management, and help organize the tax preparation. This role does not include property management, it is just asset management, so you are overseeing the property management and the entire structure of the partnership. When you take over all of these roles, you're entitled to a monthly asset management fee.

3. Equity participation. You can be compensated through equity participation in a project, which is basically your ownership stake or your equity stake in a project. It can range between 5% ownership to 50% ownership, depending on your experience and what you bring to the deal. Are you bringing money and experience, or just money, or just experience?

125

You can also participate in the equity splits on the back-end. On the back-end means when you sell the property, there's a split between you and the investors that decides how much you are going to give them and how much you are going to keep for yourself. For example, your deal might stipulate that 50% of the profits fo to you and 50% goes to the investor when the deal sales. This allows you to almost double or triple, and investors rate of return on investment.

How to Find Investors When you are talking to a potential investor, there are three things going through their mind. 1. They’re thinking about you "Can I trust you?" 2. They’re thinking about the deal. "Is it a good deal? 3. They’re thinking about the risk. "How risky is this deal?

Where to Find Them If you are a beginner investor, your humble beginnings will probably be the same as mine. You have to start someplace, so start by going to real estate club meetings, like REIA meetings and meetup.com, or other get-togethers that are real estate meetings. You can also check out Chamber of Commerce meetings, but I suggest you start in your inner circle, such as your friends, family, coworkers, and former coworkers. Now, I know some of you might be thinking, "Peter, I don't know anyone with money. All of my friends and family are broke, and I'm too embarrassed to ask my coworkers.” This is a lame excuse. The truth is you do not know anyone with money YET. There is a lot more money out there today then there are deals. Deals are difficult to find, but money follows good deals. Your job is to put together good deals and the money will follow it.

Challenge: I want you to make a list of 24 people you know that have money or might know people with money. Once you have this list, I want you to contact them and send them the executive summary. An executive summary is a one-page summary of the deal. If you go

126

onto YouTube and look at this video called "The Basics of Real Estate Syndication," there is a link there that you can download, and it's the exact same copy our students use that we send out to potential investors, just to gauge their interest. If you send this out to 24 people out of those 24 people, 12 will look at it. That means the other 12 are not even going to read it. Out of the 12 that did read it, 6 are going to show some interest and the other 6 not going to be interested. Out of the 6 that show interest, 3 are going to want to talk to you and out of those 3, 1 will invest. The ratio for beginners is a 24-to-1 ratio. There's no shortcut, because no one is going to hand you investors. You have to go out and find them yourself.

How Many Investors Do You Need? The short answer is you need double, but here's a long answer. If you need 250,000 dollars for a down payment, then your goal as a beginning syndicator is to raise 500,000 dollars. Why? It's because people will be people. Some will back out, some aren't ready, and some just don't want to do it. So to raise $250,000 dollars, you need commitments of double, $500,000 dollars.

What comes first? The deal or the investor? If you are a beginner, find the investors first. If you are a seasoned investor, the deal comes first.

How to Convince Investors to Invest With You? When you are sitting face to face with investors, or you have them on the phone, they are wondering, "Can I trust you?", "Is this a good deal?", and "Is this a risky deal?" I'm going to address the you, the deal, and the risk in seven components that you must have to convince an investor to invest with you. These seven things will position you for the investor to say yes.

1. Your deal must be under-priced. It must be priced under market value so people know it's a good deal.

127

2. The deal must have some income upside, meaning that there's potential to raise the rent. There's a potential to get higher lease rates, because in commercial real estate , as your income goes up, so does your property value, so if your deal has that attribute to it, it's a good one.

3. You need to have an excellent cash and cash return. Your ROI must be better than what they're getting with their IRA or their 401(k), so make sure you have excellent cash and cash return. I would suggest a minimum of 8%.

4. Your deal must have good demographics This means that the investment must be in a good neighborhood with good job statistics. Basically the area of the market must be capable of sustaining your investment for years to come.

5. Your exit strategy must be realistic and conservative If your exit strategy is too aggressive, they will see that as too risky, and they will not invest.

6. Have a track record It doesn't have to be your track record. You can bring in someone else's track record and make them a partner in the deal.

7. You need to prepare an executive summary As I mentioned before, you can go on to my blog "Basics of Real Estate Syndication," to view this executive summary. If you have those seven things, you put yourself in the best position for the investor to say yes. I'm going to leave you with one word of wisdom on convincing your investor to invest with you. The word of wisdom is to start small. Don't start off by having to raise millions of dollars. Make it easy for yourself.

Top Three Questions Investors Will Ask

128

1. Is there a guarantee that I'll get my money back? The answer is no. There is a risk in every investment on the planet, and it's not just the investment, it's everything. Investors lost a lot of money in 401(k) and stocks in the last market bust. Let them know that the investment is secured by the property, which is in an LLC. Property insurance will protect them against loss, fire loss, flood loss, vandalism, things like that, so they'll have that security, but you can't guarantee them anything.

2. "When will I get my money back?" It depends on the exit strategy. When you meet your investor have the exit strategy in terms of years already figured out. For example, you can tell them, "The deal goes on for five years, then I am planning on selling the property"." It’s deal-dependent, but most investors don't want to see their money tied up for more than five years, so typically an exit strategy is three to five years.

3. "Do I get tax benefits?" The first answer out of your mouth should be, "Please contact your CPA to get advice on tax benefits, because I am not a tax professional.” You can also let them know that the IRS will probably call them a passive investor, therefore they would not qualify for tax write-offs directly from the property. The cash flow they receive might be sheltered by the LLC's write-offs, such as the property expenses and depreciation. This means that it's possible a good portion of their cashflow, won't be taxed. It's going to be sheltered by the LLC's expenses, but each deal is different so check with your CPA.

Real Deal Example This example is from a student in our protégé program, who purchased a 24-unit apartment for 925,000 dollars. The down payment was $200,000 dollars and he was able to raise the down payment from two investors. The great thing about this deal is the rents can be raised by 150 dollars per unit. That's substantial, because the seller lives in another state and has virtually no debt on the property, so there's no large mortgage. The seller has been getting steady cashflow, but kept the rents low, so he has not

129

optimized the rents. If you do the math, $150 per unit x 24 units, is $3,600 income per month, or multiply that by 12 months, that's $43,200 more per year. In this case, if I divide my additional income of $43,200 by 8%, my 8 cap property value increase is $540,000. If I were to take that $540,000 increase in value and add it to the purchase price of $925,000, the apartment building is now worth $1,465,000. The question is, "How did he structure the deal with his investors?" He agreed to pay his investors, 8% return per year for the use of their money for 5 years, and then at the end of 5 years, he's going to sell the property, and do an equity split with them. He's going to give them 25% of the profits when he sells the property.

His Exit Strategy His exit strategy is to complete the rent increases over the next 18 months, and then do a cash-out refi and pull out all of the investor money to pay back the investors. In that case, investors would have their money back, but he wants the investors to maintain a small piece of ownership, so they'll get checks every quarter. The investors would have no money in, but they'll still be getting money from the property. This increases the chances that the investors would be willing to invest in him again. So that's how he structured his deal, kept it nice and short and simple.

Why Aspiring Commercial Investors Fail While many commercial investors succeed beyond their wildest dreams, there are other commercial investors fail miserably. What causes such a great disparity? Why do some aspiring investors fail? In addition to all we have learned from decades of mentoring others, we also reached out to the best and brightest in the industry to assemble a list of the most costly mistakes that commercial real estate investors can commit. The following are 7 incredibly destructive reasons why some aspiring investors never reach their full potential, or worse, when commercial investors fail. https://youtu.be/9NnOMclHw8

Advice From the Best I sought the wisdom of some of the most successful professional commercial real estate investors and ask them one very important question. "If you could start all over again, what would you do differently to avoid the biggest rookie mistakes and failures? In other words, what costly mistakes did you make when first starting out?"

130

I want to share what their answers were and offer you a few solutions to these common reasons real estate investors fail.

Failure 1: Missed Opportunities Many of these successful investors said that their biggest failure or mistake was that they waited on the sidelines for the perfect time to jump on a deal, but it never came. Nothing is more expensive than a missed opportunity. A direct quote from one of the investors was, "All of our all-time best deals were created, not waited upon." So the question is, why were these opportunities missed? I have a list of five reasons why opportunities are missed.  Fear: The fear of moving forward with a deal or of making a mistake.  Misinformation: There is a lot of misinformation floating around. What you believe and who you take guidance from will make all the difference. Analysis paralysis: This means doing too much homework, but not taking enough action. You can go to seminars, watch webinars, and books, but this is missed opportunity, if you do not apply action.  Lack of knowledge: We are constantly seeking knowledge.  Isolation: When you try to do everything on your own without getting any help. You have the mindset to do everything yourself, but then you end up doing nothing at all.

People typically learn in one of three ways. 1. People rely on the experience of their friends and family to show them what to do, but most of the time, they do not really have the time to walk you through the entire process. 2. The second way people learn is by trial and error. This can be very expensive, time-consuming, and frustrating. 3. The third way to learn is to secure the aid of a mentor, who cares about their vision, wants to shares their vision, and has a vested interest in your success.

Failure 2: Inability to Analyze a Property One of the biggest reasons why a commercial real estate property fails is because the operating expenses of a commercial property were underestimated. The industrystandard property expenses for commercial properties, can differ from state to state by as much as 30% . If you compare a commercial property that's in Denver, Colorado, and similar property in Dallas, Texas, the property expenses are 30% higher in Texas. Same

131

purchase price, same income, but the property expenses are 30% higher. This is something that you need to be aware of. If you don't know how to estimate expenses accurately, do not rely on the seller's property information, or broker's property brochure because both of these are 100% incorrect, 100% of the time. Key Performance Indicators After investing and teaching in commercial real estate for about two decades now, we've developed, I would say, 12 different calculations, or what I call KPIs. KPI is short for Key Performance Indicators. Those indicators tell us right away if a deal is good, average, or ugly. It's taken years and tons of good deals, average deals, and ugly deals, to be able to share these with my students, in a very understandable way.

Failure 3: The Inability to Analyze Your Market Effectively You have to know which market trends are important, which are the ones that are the hardest to find. You also need to know which ones are not important and the easiest to find and used by everyone. Experience in investing will help you know how to decide which trends are important to your investment objectives. Secondly, you must know about supply and demand. You need to know when your market will reach its tipping point, or your equity in the property could be trapped until the next market cycle. This is not good if you're using commercial real estate as a retirement vehicle. You also need to know all of the little things that can have a huge impact on your property. Rent control laws and how to get around them, unwrapping large profits in lease audits and lease restructures, and having strategies for realizing the upside potential on the property. Those things are what equates to real wealth. I took a class in commercial estate leasing, and a professor told me, "When you're analyzing commercial real estate and there are leases involved, the leases are so important that when you buy the property, you're actually buying the leases, and the property comes for free." That's how important leases are. Leases are so important to analyzing your market effectively. The solution is information utilization. This means you need to be able to roll your market and you deal date into the appropriate deal technique. It takes experience to shortcut you to success.

132

Failure 4: Poorly Designed Exit Strategies Creative financing can be one of the greatest ways to acquire commercial real estate, and it's one of my favorite ways to buy. But if your exit strategy is not well-designed, you could lose all of your profits and credibility, waste all of your hard work, and it could even cause a swift departure from the commercial real estate investing business. Having multiple, well-thought-out, razor-sharp exit strategies is the key to making money and having lasting power in this business, instead of being a one-deal or twodeal success. . The key is to have an exit strategy figured out before purchasing the property.

Simple Strategies Exit strategies shouldn't be complicated. It must be simple enough to execute in a conservative and a timely manner. Some exit strategies include a cash-out refinance, a sales leaseback, a 1031 exchange, a reverse 1031 exchange, and many more. The solution is to get good at designing these exist strategies.

Failure 5: : Not Being knowledgeable Enough in Structuring Deals This one was probably the one where we did the most research on, because we got the most feedback on it. When you are not knowledgeable enough in structuring deals it will cause missed opportunities for motivated sellers.

Examples of Seller Situations 



 

A seller who is ready to retire and owns a property free and clear, but has capital gains tax concerns. This is a great situation to take advantage of and create a winwin for you and the seller. A burnt out seller who's commercial loan is assumable, but has a large pre-pay penalty. Next is the seller's nearing foreclosure, has lots of equity, but neither of you qualify for a loan. What do you do in this case? The seller lives out of state is absent from the deal physically and mentally. He wants to do a 1031 tax-deferred exchange. The seller wants to "JV," or joint venture, with you. This is a great opportunity, but you have to be very careful. He has already set up a profit split structure of 50/50 the first tier, and 80/20 the second tier. If a Joint ventures reaches a certain benchmark, the profits are split 50/50. If you reach benchmark number two, then the profits go 80% to you, and 20% to him. This is not typical, but it's something that we've done in the past that you should be open to. This is also, again, a missed opportunity.

133

These are quite typical seller scenarios that you're going to run into once you're in the real estate investing business. You must know how to approach each and what technique to apply. If you can't, then you're going to lose out on that one deal. As the deal fits, you're going to have to learn where and when to incorporate things such as a master lease agreement, seller-carry first mortgage, seller-carry second mortgage, installment sales, and other creative commercial real estate strategies.

Failure 6: Thinking Too Small When my fellow investors looked back, they regretted thinking too small, but also their self-limiting beliefs. When faced with decision to buy a 5 unit or 60 unit apartment, many chose the 5 unit apartment building. By the time they bought and closed the 5unit, they realized that it would have been the same amount of work as the 60-units, and I totally agree. The two big differences here were that the 60-unit would have allowed them to exit the rat race and meet their goals in half the time. Plus, they would have been setting their bar higher by buying the 60-unit, and that's what this business is about. It's about growth. Once they had acquired a 60-unit building, there's no reason to buy anything smaller ever again. There's a saying, "If you already know how to make a dream come true, then you're thinking too small."

Failure 7: Quitting Before Even Starting The biggest reason why people quit pursuing commercial real estate is because of a lack of focus. The person who chases two rabbits catches neither. The entire acquisition process is actually the same for an apartment building, a shopping center, an office building, self-storage, mobile home park, etc, and the principle behind the process is the same, too. An investor who does not follow a proven and focused process will chase multiple rabbits at once, catch neither, and will go home with nothing but an unfulfilled dream. Nearly all of us, myself included, can really relate to that. How we have chased many things over the years, but because we didn't focus, we're holding onto nothing with no real results. I have an acronym for focus. F-O-C-U-S equals Follow One Course Until Successful. That's what I do and what I teach my students to do. Our most successful students aren't the ones with the most money. They are the ones that follow our process to the T and focus on the right things. 134

Why I Invest in Section 8 Apartments Apartments and you're about to discover why. The reality is that if you have terrible Section 8 tenants who destroy your property, that is your own fault. What's so wonderful about Section 8 is that the government guarantees payment on 80-100% of your rents, will give you a rent increase of 5-8% a year and there is also usually a large pool of tenants to choose from on a verified wait list! What you're about to learn is is how to own and operate Section 8 Apartments like I do so that you maximize your results while minimizing the risks and hassles. https://youtu.be/4OOH36r-3cA

What is Section 8? Federal Housing Assistance programs were started during the Great Depression, a time of great struggle in the United States. The poor were in great need of housing assistance, so in the 1960's and 1970's, the government created subsidy programs to increase the production of low-income housing and help families pay rent. Then in 1974, Congress started the Section 8 program to provide rent assistance to low-income families. Typically the tenants will pay around 30% of their income towards the rent. This balance is subsidized by the government federal funds, which is a program overseen by the HUD, the Department of Housing and Urban Development.

Section 8 Vouchers The main Section 8 program involves a Voucher Program, which can be "project based"; where its use is limited to a specific apartment building. Or the voucher can be "tenant-based"; where the tenant is free to choose a unit in a private sector, but is not limited to specific complexes. If you want to rent to Section 8 tenants, you have to register as a Section 8 Landlord, which puts you on a list that potential tenants can use to contact you. After qualifying the tenant, you show them the property, and the Section 8 tenant will set up an inspection with the Section 8 office so that your unit, can be approved. Once your property passes the inspection, you will negotiate the rent with the Section 8 office and sign the lease so that the tenant can move in. This is a basic summary of the section 8 process.

135

If the tenant's rent is $1,000, then the tenant will typically be responsible for paying $200. Section 8 will pay the remaining balance of $800, which in my experience, is a pretty good deal.

Section 8 Advantages 1. On Time and Convenient Payments. You will receive your rents directly from the HUD every single month as a check or direct deposit.

2. Protection From Tenant Financial Hardships I had a tenant named Marcy who disappeared on me for months at a time. I was never sure where she went, but if she hadn't been on Section 8, she most likely would have been evicted due to non-payment of rent. Instead, because HUD pays 100% of her rent, I didn't have to worry because HUD was still paying me 100% of her rent every single month. Section 8 protected me and Marcy from her financial hardships by paying her rent.

3. Free Access to a Large Amount of Potential Tenants There is a verified waiting list of Section 8 tenants available online that you can use to find potential tenants in your city. You can also list your property on these websites and let the tenants contact you. Two websites that I have successfully used over the years are GoSection8.com and WeTakeSection8.com. Both of these websites are great places to list your Section 8 properties, and for a small fee, you can even review tenant profiles. You can pay a small fee to upgrade to a premium listing which gets more attention focused on your property, when tenants are searching. I suggest checking these sites out as a great and free way to access the large pool of verified potential tenants.

4. Higher Rental Rates This might not be true everywhere, but in general, the rent you can get from a Section 8 tenant exceeds what you could get for your typical not-in-the-best-neighborhood property.

136

5. Short Vacancies Most cities have a mile-long list of Section 8 participants with vouches, who are seeking housing. Filling a vacancy is a pretty quick process once your property has been inspected and approved for Section 8.

Section 8 Disadvantages 1. Government Bureaucracy One of the biggest disadvantages of Section 8 is dealing with the government's regulations and red tape. Government bureaucracy is one of the reasons it is costly to qualify and maintain a property for Section 8 housing. Even worse, HUD is often understaffed which results in slow and sometimes unreliable services. I have experienced great service, mediocre service, and horrible service, from the HUD department, so you never know what you will get.

2. Delay of Payments. The entire Section 8 process can be very slow which results in a delay in getting a tenant into your property. Then, after the tenant moves in, it can take up to 60 days to receive your first rent payment. The only upside that is in 60 days, you will receive double the payment, since it's been two months.

3. Strict Inspections Properties qualifying for Section 8 housing must pass strict inspections, which can often make it easier to just rent properties to private paying tenants. Sometimes, it can be quite laborious just to get past all of the inspections.

4. Delinquent Tenants Even though the majority of Section 8 rent is paid for by the government, the tenant is still responsibly for paying a portion of the monthly rent. If a tenant doesn't pay their portion of the rent, you can go through the Section 8 eviction process, but this often results in you settling for less profit, or possibly even losing money after you calculate in any maintenance repair costs.

137

Sometimes Section 8 landlords are reluctant to report a tenant who is late on their rent payments, because it could lead to a long bureaucratic process to have the tenant removed. Once the tenant is evicted, the entire Section 8 Process has to be repeated in orderto find a new tenant. Landlords deals with both private and Section 8 delinquent tenants, and the Section 8 delinquencies are definitely costlier due to the bureaucratic regulations.

5. No Compensation for Damages If a Section 8 tenant damages your property, the government will not compensate you for any damages. Since the tenant is obviously low-income, getting any money from them will be a challenge as well, even if you take them to court. Generally because Section 8 tenants are less financially invested in your property, they to be a little less concerned about proper upkeep as well.

Section 8 Investing Tips 1. Remove all ceiling fans, garbage disposals, screen doors, and storage areas. These items will not help you earn higher rents, but will cost you to maintain. They are unnecessary, and Section 8 does not care whether you have them or not, so I would just take them all out.

2. Do Monthly or Quarterly Inspections Visit the property regularly to ensure it is being properly take care of. I specifically look for water leaks because a running toilet can cost you $75 a month, and a dripping faucet or showerhead can cost you $20 month. This can become a huge expense over the years.

3. Train the Tenant Train your tenant, do not let them train you. Section 8 tenants are kind of like children. It is important to provide structure and enforce the rules, or you will end up with terrible experiences. You should always remain professional and not get emotionally

138

involved with your tenants. You are the parent and they are the children, so you must enforce the rules with a firm hand.

4. Fair Market Rents You can find out what the Section 8 rental rate is in your city by googling, "Fair market rents," and then your city. Click the HUD link and it will show you what Section 8 will pay for one-bedroom, two-bedroom and three-bedroom properties. You can simply compare it against the market rents in your city.

5. Know When to Not Rent in Section 8 If your property is in a good location, well-renovated, and could be rented out privately quickly, with higher rent then a Section 8 tenant, do not rent to Section 8. In other words, if your property's in a great neighborhood and in great condition, you're probably going to attract a better tenant who can pay a higher amount than what Section 8 can pay.

How to Attract and Choose the Best Section 8 Tenants (and Avoid the Worst Ones) My all-time best tenant was a Section 8 tenant who was a single mother of four little girls. She was very clean, kept the property in good shape, always paid on time, and was a very responsible person. My all-time worst tenant was also a Section 8 tenant. Of course, I learned nothing from the best tenant, but I learned a whole bunch from the worst tenant.

What I Learned from my Worst Tenant I learned how to screen and filter through potential tenants, in order for them to qualify for my rental properties. Over the years I have developed a process that I believe is the best you will find anywhere. It is a point-based system that leaves all emotion out. If the tenant has a good story but doesn't have enough points, they get denied. Even if they come highly-recommended but don't have enough points, they are denied. If they have

139

enough points, they get in, if not, they are denied. In one building, our evictions have gone down 70% in just one year by switching to this simple point system.

The Point System 1. Rental History Each person is given a certain amount of points for being a long-term renter, and points are subtracted for any evictions or issues with prior landlords.

2. Income A potential tenant must make three times what their rent portion is. So if the rent is $1,000, Section 8 will pay $$800 and the tenant is responsible for the remaining $200. This means the tenant must make $600 a month to qualify for a point in my system. If they do not make at least three times what the rent is they get -3 points.

3. Credit and Debt Ratio Next we look at their credit and range it from excellent credit all the way down to good. fair, poor, bad, and even no credit; with each tier getting a different amount of points. The debt part is based on their debt to credit ratio. After examining each of the sections, I tally up the points and that score determines if a tenant is approved. If they are slightly below the approved point value, I require a double security deposit for them to be approved. If they are below two points they will not be approved. This is a well-refined system that makes it easy for property managers and leasing agents to make a quick decision.

Real Estate Investment Trusts for Dummies Over the years I have been asked many times, "What is an R-E-I-T?", commonly referred to as a real estate investment trust. People want to know how they can invest in REITs and whether or not Real Estate Investment Trusts produce good returns. There are many benefits and disadvantages of investing in an REIT and I would love to share them with you in this blog. I will provide you with some Real Estate Investment Trusts basics to help you decide if they are right for you or if you are better off doing your own investing. https://youtu.be/nltALA6dLeI 140

What is a REIT? A real estate investment trust is a company that owns, and in most cases, operates income-producing real estate. REITs own many types of commercial real estate ranging from office and apartment buildings, to warehouses, hospitals, shopping centers, hotels, storage facilities, and even data centers. They can own pretty much any asset type. Real estate investment trusts are basically dividend paying stocks that focus on real estate and allow average individuals to invest in large scale, income-producing real estate. People invest in REITs because they earn a share of the income produced through commercial real estate ownership without having to purchase commercial properties. I call REITs, "Investing from the sidelines", because you are investing in commercial real estate without actually participating.

Types of REITs 

Equity REIT

In this type of REIT the group of investors actually own the physical property.  Mortgage REIT In this type of REIT, the investors are investing in the mortgages of the commercial properties. Exchange Traded Funds REIT



ETFs are basically stocks that invest in other REIT stocks and then they pull them together. It offers a diversified basket of Real Estate Investment Trusts holdings and they trade on the stock exchanges as well.

REIT Qualification Rules In 1960, Congress created the REIT and designed it to be similar to a mutual fund overseen by the IRS. To qualify for a REIT, the REIT must have a long term outlook or a long term investment horizon. It cannot be a quick one year, or even two year investment plan, it must be a long-term investment. Also, a REIT must invest at least 75% of its total assets in real estate and derive at least 75% of their gross loss income from rents, interest on the mortgage, or from a sale of real estate. The key qualification is that the Real Estate Investment Trusts must pay at least 90% of its taxable income in the form of shareholder dividends each year. An REIT cannot hold onto its earnings and must be an entity that is taxable as a corporation per the IRS. They

141

must be managed by a board of directors or group of trustees and have a minimum of 100 shareholders with no more than 50% of its shares held by five or fewer individuals. That's a lot of qualifications for a REIT.

Most Common REITs 

Retail REIT

Retail REITs account for 24% of all REIT investments made in the US. These REITs make money from rents from their tenants so it is important that the retailers are doing well in their businesses so they are able to pay the rent and provide regular cashflow for the company. Just remember that retail REITs invest in shopping centers and malls and these have struggled over the last few years, leaving us uncertain about retail REITs. Make sure you do your research when considering a Retail REIT. Residential REIT



Residential REITs focus on large and beautiful class-A apartment buildings and manufactured housing. I personally invest in this sector and make sure I pay close attention to the demographics, the movement of people, and the job creation. In this sector, if there are no jobs, there are no tenants and you will suffer. Office REIT



Office REITs invest in office buildings and earn income from a tenant's rent. Most tenants in office REITs have long term leases. Investors considering an office REIT should consider the local unemployment rate, the local economy, and vacancy rate. Mortgage REIT



The most popular REIT is the mortgage REIT. They basically produce income from the interest generated from lending money. They invests in mortgages. Healthcare REIT



Healthcare REITs take up a pretty sizeable share of the market and are very popular. They own real estate properties such as hospitals, medical centers, nursing facilities, and retirement homes. These REITs depend on factors such as occupancy fees, Medicare and Medicaid reimbursements, and private pay in order to be successful.

How Can I Invest in REITs? Real Estate Investment Trusts can be purchased through any major broker just like a stock. To get a full list of REITs to invest in, you can go

142

to REIT.com, Dividend.com, Marketrealist.com. These websites will share how well the REITs perform in terms of investor returns and dividends paid out. Keys to Assessing Any REIT 1. You have to understand that REITs are, what we call, "total return investments". They provide high dividend yields along with capital appreciation. Look for an REIT company that has historically done a good job producing yields and long term capital appreciation growth. 2. Find out if the REIT is traded on the stock exchange so you can diversify yourself and not be locked in long term. Liquidity matters, so that's key to assessing any REIT. 3. Strong management makes a big difference, and this is from the mouth of Warren Buffett. Look for companies that have been around for a while or possess an experienced management team. 4. Quality counts so only invest in REITs with great properties, great real estate, and great tenants. 5. Consider buying a mutual fund or an ETF that invest in REITs and leave the research and the buying to the pros.

The Benefits and Advantages of Investing in a REIT One of the primary reasons investors invest in REITs is because REITS are required to pay out at least 90% of their income as a dividend to shareholders. The higher dividend could equal something better than what someone could do in the stock market alone. The second benefit is that the income is secured by long leases. REITs own physical assets and often have long term lease contracts with their tenants. This leads to a secure and stable income stream over a long period of time. Another benefit is that REITs are liquid. Since they're traded on major stock exchanges, this makes buying and selling rather easy. If you don't like what's happening, you can sell it and get your money out. REITS are also professionally managed by highly skilled and experienced real estate professional managers. The average investor, might not have the skill to manage large properties on their own. The next advantage would be transparency. The SEC or the US Security Exchange Commission requires registered REITs to make regular disclosures to the government

143

and this makes REIT operations more transparent to investors. You can keep informed through public disclosures via the SEC.

Disadvantages of Investing in a REIT One big problem with REIT investing is the lack of diversification. If you only purchase one or two REITs, you could end up with problems because most REITs specialize in a single property type. If they do not have experience in a particular type of real estate, it could ruin your portfolio. The second disadvantage is that REITs grow at a slower pace. Remember, REITs pay out 90% of their income but that means they can only reinvest a maximum of 10% of their annual profits back into the core business each year. This may cause some REITs to grow at a slower pace than a normal company would on Wall Street. REITs are required to pay at least 90% of their disposable income to their shareholders, so they don't have to pay taxes on profits. However, investors and shareholders will have to pay income tax on the annual dividend as though it's personal income, not a capital gain. This means investors in a higher tax bracket may be at a disadvantage because they have to pay higher taxes. Although capital gains pass to REIT investors, losses are trapped in the LLC. Losses are huge for REITs, because the write-offs you can get from commercial real estate are not available in a REIT. Physically owning a piece of commercial real estate is advantageous compared to a REIT in this circumstance. The REIT may be able to use losses to retain cash in the REIT, but unlike a partnership, investors in a REIT will not be able to use the losses on their own tax returns to offset income.

Is it Better to Do My Own Investing and Not Invest in Real Estate Investment Trusts? With Real estate investment trusts, you have no landlord responsibilities because the REIT does everything for you. With a REIT, you have no landlord responsibilities. They buy the property, manage it, and do the accounting, so there's no responsibility when investing in a REIT. Also, a REIT is liquid, so if you don't like what the management is doing, you can sell and get out.

144

On the other side, if you do your own investing and purchase your own commercial real estate, you are in control to buy whatever you want, wherever you want, whenever you want. You can refinance or improve cash flow by increasing your income, whenever you want. Because you are completely in control of your property, you can even choose to sell it. You will receive a greater cash flow and greater returns, and also reap all of the tax benefits. When you invest in a REIT that is a huge property with huge depreciation, as a shareholder, you do not get to experience that benefit. But if you buy your own property, you get the full benefits of depreciation. 

Leverage

If you invest on your own you can also use leverage. You can take $100,000 and purchase $100,000 worth of shares in a REIT You can leverage by using your $100,000 as a down payment on a $400,000 mortgage, to purchase a $500,000 property. 

Syndication

You create your own personal REIT by getting people to invest with you to purchase large pieces of commercial real estate.. This is called syndication and I have a podcast called, "The Basics of Real Estate Syndication" that will teach you how to gather people to purchase a property, that you couldn't purchase on your own. In this case, you're going to pool everybody's money together and buy large pieces of cash-flowing commercial properties.

Do You Have the Right Mindset to Own Commercial Real Estate? Most people do not have the right mindset to own commercial real estate and that's why they don't own any. In fact, of all the difficulties with becoming a commercial real estate investor, arguably the most challenging is the replacing of the wrong mindset with the right one. In this training, you'll discover what the wrong mindset looks like, where it comes from and why so many people have it, and most importantly, how to overcome it so that you can think like a wealthy commercial investor and begin your journey to becoming a successful commercial real estate owner. https://youtu.be/biQ900xUVfg

145

Do You Have the Right Mindset to Own Commercial Real Estate? For most people, the answer to this question is no, which is exactly why they do not own commercial real estate. There are many challenges involved in purchasing your first commercial property, but the biggest obstacle you must overcome is “Stinking Thinking”. Stinking Thinking is when you have the wrong mindset on how you look at potential opportunities or potential problems. I am going to teach you what that wrong mindset is in commercial investing and why it stops you from being successful. I will also share with you what the right mindset is, so that you can begin your journey to purchasing your first commercial property.

What is the Wrong Mindset for Purchasing Commercial Real Estate? Before I share what the right mindset for purchasing commercial real estate is, I would like to share what the wrong mindset is. The wrong mindset is something I also call the "Customer Mindset". This is a person with a mindset focused on the cost of something instead of the benefit. Someone with a customer mindset focuses on whether or not they can afford something instead of what benefits something can bring. They believe that spending money will result in less money. This results in a belief system that only the rich can afford commercial real estate which is the number one reason a person with a customer mindset does not own any commercial real estate. 1. A person with a customer mindset immediately starts to count themselves out 2. A person with a customer mindset is intimidated by the cost of commercial real estate As a result of these two things, a person with a customer mindset becomes mentally blocked. This mental block is detrimental in commercial real estate because a mentally blocked person does not consider creative financing techniques, such as; Seller Financing or Master Leases, which can be used to finance their first acquisition. Because they count themselves out and feel intimidated by a deal, they create a mental block that causes them to negate every commercial real estate opportunity that they come across. They believe that they cannot do the deals because of their customer mindset. The real question is, do you have a customer mindset?

146

3 Examples of a Customer Mindset 1. A person with a customer mindset believes that property renovations cost too much. They focus on the cost of something instead of the benefit. One of my students recently purchased a 24 unit property with only one water meter which was costing him $26,000 a year, because he was paying for all of the tenants’ water. Because this student had the right mindset, he decided to pay for individual water meters for each unit. It will cost him $1000 per an apartment unit to install the individual water meters, which makes the total conversion cost $24,000 for all 24 unit. Once the conversion is done, the $26,000 a year he was spending on water will be passed off to the tenants, and be added to his cash flow. So the first benefit of this property renovation is an increase in cash flow. The second benefit is something I have mentioned in previous blogs, which is that when the NOI goes up, so does the property value. If the NOI goes up by $26,000 and he's in a 8% cap rate area, we can divide the $26,000 by 8% and come up with $325,000 in increased property value. A person with a customer mindset would not spend $24,000 to get that benefit.

2. A person with a customer mindset is a person who buys a low cost commercial property only because they can afford it. In the world of commercial real estate, there is no such thing as a low or high price. It just simply does not exist. There is also no such thing as cheap or expensive. These things are just unimportant to a real estate investor with the right mindset. Instead, a person with the right mindset focuses on whether a deal has a low ROI or high ROI. They are focused on their return on investment, not whether something is cheap or not.

3. A person with a customer mindset does not recover from failure Our country goes through lots of ups and downs in the economy and when there is a recession, financial hurt can happen. People lose properties, and properties lose property value. A person with a customer mindset will let a previous failure cause them

147

to give up the dream of owning commercial real estate. They believe that real estate is not for them or that they are unable to recover from that failure.

Where Does the Customer Mindset Come From? 1. Your Parents and Upbringing The first source of the customer mindset probably came from your parents and upbringing. The customer mindset has been ingrained in you since birth.

2. Society Companies spend billions of dollars for advertisements on the Internet, TV, and radio to bombard you with a customer mindset to keep their companies going. This causes you to conform to what they advertise, which is to be average, and stay within your limits. A person with the right mindset does not conform, does not have a goal to be average, and certainly does not stay within his limits.

3. Easy Thinking You see thinking is difficult and that's why a lot of people don't do very much of it. A person with a customer mindset desiring to own commercial real estate just does not go together. It is like mixing oil and water together. In fact, they're probably better off not owning commercial real estate, because it will probably eventually lead to failure.

What the Right Mindset Looks Like The right mindset to have in commercial real estate investing is something I call the “Entrepreneur Mindset”. This mindset is focused on ROI. Return on investment. A person with an entrepreneur mindset will ask themselves four question when an opportunity appears. 1. How can I acquire that property? 2. What funding sources would love to be part of my deal? 3. What benefit would I get out of buying this property? Will it get you closer to retirement or the ability to leave your job? There should always be some sort of benefit with any deal you do. 4. What actions do I need to take to meet my investment objectives? Whether your objective is to leave your job, build a retirement plan, or even ministry or charity work, there always needs to be massive action taken to meet your goals.

148

Wealth Ratio The secondary focus of a person with an entrepreneur mindset is their focus on their wealth ratio. Wealth ratio is passive income stream divided by your monthly living expenses. Once your passive income stream equals your monthly expenses that means that you are out of the rat race. The focus is to develop and increase your passive income stream through commercial real estate. Ideally if you can get your wealth ratio up to 1.5, I would say you are safe to leave your job. Reaching 1 is monumental and it's great, but get to 1.5 before you leave your current job. That's something you should shoot for.

How to Make a Comeback from Failure Many entrepreneurs have had failures in their lives. A person with an entrepreneur mindset makes a comeback, and does not let past failures define their future. I am going to share with you what a comeback plan looks like. This comeback plan has been tested and proven to work. 1. When you're coming back from failure, don't take your failure personal. Get over it. It happened. It's in the past, and you have to move forward. 2. Get knowledge that you haven't had before. Get a mentor. Do something that you haven't done before. 3. You need to jump back in. Once you get your knowledge and a mentor to help guide you, you have to jump back into the game. Except this time, you are going to measure twice and cut once, because you have the knowledge and help you need to get back into commercial real estate investing. 4. This step is a really important part to making your comeback. You must only only invest in cash flowing commercial real estate. Cash flow commercial real estate, long term. Gone are the days of speculating and gone are the days of waiting for the market to turn to invest. The time to invest is now, but only invest in cash flow commercial real estate. That's what our company focuses on. This is the winning mindset. If you want to own commercial real estate, you need to have this entrepreneur mindset. You focus on return on investment, you focus on the benefits a deal will bring and you have a can-do attitude. That's how you become successful in this business.

What an Entrepreneur Mindset Look Like 149

Let’s say you found an apartment deal and it can significantly dent your wealth ratio. In fact this one deal can most likely put you out of the rat race, but you're short on a down payment. You’ve just recently gotten back on your feet, so you have some credit issues, and past failures, but you have been working on your mindset and are ready to get back in the game. A person that is in this situation, with the entrepreneur mindset, is going to get help. They're going to get a mentor. They're not going to try to do this by themselves. It's too risky. It takes too long and there's too much at risk. Next is, they're going to evaluate the deal, but this time they're going to evaluate the deal with expert help. Then they're going to find the money and a credit partner. If you watch my previous videos on real estate syndication and raising capital you can learn exactly how to find money for a good investment deal. Lastly, a person with an entrepreneur mindset is going to get things done.

Second Example Another example would be if you found a commercial building that once again can significantly put a dent in your wealth ratio, or possibly take you completely out of the rat race. It's a significant deal that could utterly change your life. You have a little bit of money saved up and good credit, so perhaps you even have a down payment, but guess what? You never jumped in out of fear or some other excuse. A person in this situation that has an entrepreneur mindset, would get expert help. Don't try to do this by yourself. Next you would get knowledge. The reason why knowledge for this person is really important, is because if you don't get knowledge the fear will dominate you and you'll never jump in. Next you would assemble your team, which is a smart move. Next you would jump in. An entrepreneur with an entrepreneur mindset is a person that would jump in after you have your expert help, your knowledge and your team.

How to go from a Customer Mindset to an Entrepreneur Mindset? First, you must focus on building the new. Secondly, I want you to watch all of my videos and I can almost guarantee that you mindset will shift to the entrepreneur mindset because those videos are built for success.

150

How to Buy Distressed Commercial Real Estate In the commercial real estate business you will eventually come across a distressed commercial property. Some of these distressed properties could turn a huge profit if you could just find a way to buy them and fix them up. I am going to share with you not only what a distressed commercial property is, but how to locate and buy them. https://youtu.be/wVJrp_St-3g

What is a Distressed Commercial Property? A distressed commercial property is an under-performing asset that significantly challenges the owner in one of three ways. 1. Physically A distressed commercial property could be physically challenging the owner by being run down, obsolete, or having deferred maintenance such as a leaky roof or exterior/interior problems, but no money to fix it. 2. Financially A distressed commercial property could be financially challenging the owner if it is producing a negative cashflow each month, which forces the owner to pay out of pocket. Insufficient cashflow to handle the typical operations of a commercial property could cause it to become distressed. A financial distressed property could also mean a property underwater, meaning they owe more than it is worth. Or it could be in financial distress due to some sort of personal issue such as divorce or sickness. 3. Personal Issues The third type of distress an owner can experience is legal distress. This could be anything from pre-foreclosure, liens, lawsuits, building violations or even partnership situations, where partnerships could be going south

"In Every Crisis Lies the Seed of Opportunity." All of the issues found in distressed properties, can be turned into opportunites. You can fix most of these issues, and once you fix them, it could equal great profits. If I am

151

personally unable to fix something for one of our student deals, I can pick up the phone and call someone more experienced to help me out. Get the Story Each deal has a story. Your job is to get the story, and the more of the story you get, the better you are able to buy the property and know how to buy it. You will know which financing strategy will work and what your exit strategy should be. It is very important to get the story on any distressed property you are interested in. Get Help If you are a beginner, do not try to do this yourself. Our students are able to get expert help from our company, because we help them put these deals together with military like precision. It is crucial that you have an expert guided plan to do distressed commercial property deal successfully.

When Does it Make Sense to Buy a Distressed Commercial Property? When the after repair value of the distressed property is greater than the acquisition cost, the repair cost, and the holding cost, that's when it makes sense to buy. The after repair value (ARV) means the market value when a property's stabilized. So when the ARV is greater than the sum of the acquisition cost, repair cost and holding cost, it makes sense to buy a distressed commercial property. Example:  Acquisition Cost: $1 million dollars  Repair Cost: $300,000  Holding cost/Loan cost: $50,000,  Total Cost: 1.35 Million Dollars We know that we want the ARV to be higher than the total cost of a property, but by how much? My magic number is 75%. So you would take the total cost of the property and divide it by 75. 1.35 million Divided by 75= 1.8 million So if my after repair value is 1.8 million dollars then it is a good deal. The 75% target is important because it is important to have a goal number and it is also important for refinancing reasons. When you are done repairing your property and it has stabilized, it is going to have an after repair value.

152

If the ARV is 1.8 million the lenders will lend you 75% of your after repair value as a new, permanent loan. You typically buy a distressed property with hard money or a bridge loan, so after it is fixed up you will need to refinance into a more permanent financing called a, “take-out loan”. So if the ARV is 1.8 million and the bank will loan 75% of that then that equals 1.35 million which was your total cost of the property. This means the loan will pay off your original hard money loan, plus reimburse you for your repairs and holding costs.

How to Find Distressed Commercial Real Estate? You can find distressed commercial real estate the same way you find performing commercial real estate.  Online using LoopNet, or other commercial real estate investing sites  Broker relationships  Lender relationships  Direct mailing  Networking Now you can use these five things to find good deals, but GREAT deals are created. Great deals are found by getting the story of a distressed property that you have come across. They are also found by getting expert help on how to proceed with a distressed commercial property.

Have the Right Mindset In order to purchase a distressed commercial property, you have to have the right mindset. The average investor will know the signals of distress, but do absolutely nothing. They have a customer mindset, which causes them to focus on what something will cost rather than the potential benefit. Now the opportune investor, has an entrepreneur mindset, and focuses on how to get a deal done. His focus is on how do I get this done? How do I find the help to get this done? I have a very helpful video on the mindset of investing in commercial real estate called, “The Right Mindset For Investing in Commercial Real Estate”

How to Finance Distressed Commercial Property 153



Conventionally

Conventional means a bank or traditional loan office. With conventional financing, the lender will look at three things to underwrite a deal. They will qualify you. They will qualify the property, and they will qualify the area of the property. The lenders will also look at the financials of the property which is a problem with distressed properties. Most likely the financials of a distressed commercial property won’t qualify for a typical loan. If you are unable to qualify for a typical loan, you can use a hard money loan. I have a video on how hard money loans work and how one of our students used a hard money loan to purchase his first commercial property. Hard money loans are expensive and do not leverage very high. The interest rates can be between 12 to 15%, and it can cost 4% to 6% upfront origination points as well just to use the money A bridge loan, on the other hand, is a gentler form of hard money. It’s called a bridge loan because it allows you to buy the property, fix it up, and then it bridges you towards permanent financing.. So a bridge loan is a temporary loan. The interest rates are 7 to 8% and will only cost you 1-2% upfront origination points. My team and I typically purchase distressed commercial properties with creative financing. Most distressed properties have financial and physical issues that cause traditional funding to be difficult or sometimes impossible. With creative financing you can create your own terms and be as creative as you want, as long as the seller agrees to the terms.

Types of Creative Financing: 

Seller Financing:

This is where the seller becomes the bank. The seller can give you your first or second loan on the property in order to close the deal. I have a video on Creative Financing With Commercial Real Estate that explains seller financing in more detail. Master Lease Agreement



A master lease agreement involves putting a mortgage over the seller’s mortgage. There is no bank, credit check, or appraisal required, and you can be as creative as you want when using a master lease agreement. I have an extensive video on this concept as well. Joint Venture with the Seller



If the seller had code violations with the city but no money to fix them, you could come in and contribute money to fix the violations with part ownership of the property.

154

Exit Strategies for Distressed Commercial Properties If you have watched any of my videos, you already know I stress the importance of having an exit strategy before buying a property. In fact, when you are making an offer you should have several exit strategies already planned out. Three Examples of Exit Strategies for Distressed Properties 1. You buy the property, fix it up, and sell it. You can take the earnings as payment or invest it in a larger property in order to do a 1031 exchange. 2. Buy the property, fix it up, and then hold long term for cash flow. You will need a long term loan with a low interest rate. Many people choose this strategy as a way to fund their retirement. They replace their 401K or self-directed IRA with this exit strategy in order to establish long-term income. 3. You buy the property, fix up, and cash out refinance. A Cash out Refi is where you pull the cash out that you put in and then hold long term. This is called the syndicator strategy because a syndicator pools other people’s money together in order to purchase real estate. Their strategy is to buy it, fix it up, pull the down payment out over time and then hold it long term for cash flow. In my opinion, this is the best strategy for wealth accumulation and portfolio growth. I find it to be the most rewarding and fun strategy as well. You buy a great property, at a good price and eventually get to the point where you can pull out all of the cash and hold on for long-term cashflow.

Example Deals: 1. A student of mine found a large apartment building with 100 units that had a 60% occupancy rate. Lenders consider any property with a 20% or more vacancy rate to be distressed. Not only did this property have a 40% vacancy rate, it also had a 50% economic occupancy. This means that even though the property has 60 tenants inside, only 50 of those tenants are actually paying their rent. The property was also very close to foreclosure so the seller was in big financial trouble. The apartment building was financed through a hard money loan on top of a seller-carry second mortgage. We chose to use hard money because the occupancy rate was an issue for traditional loan offices. A seller-carry second mortgage was used because the student had very limited funds and it was the only way to get the return on investment required to make the deal happen.

155

We are currently 1 ½ years into the project and in four years, there is a 2.5 million dollar projected profit. It turned out to be an amazing deal and everything has been working out great. 2. The second deal was a 6300 square foot building located in a great area but in very poor condition. The owner spent a lot of time out of the country and had become very disinterested in the property. Because the owner is so disinterested, most of the tenants have stopped paying their rent, even though it is well below market. The property was purchased at $57 per a square foot using 100% investor money. Comparable sales of similar buildings in the area sold for $98 a square foot. The exit strategy is for the student to do a 1031 tax deferred exchange once he sells the property. The process can take up to two years, but once it sells, the student can buy a larger property with the profit, thus deferring the capital gains tax payments.

7 Tips When Buying Commercial Real Estate From Long Distance Many successful commercial real estate investors find their most profitable, cashflowing deals out of state. Unfortunately, out of state deals can also be the biggest headaches and the biggest financial losses. This blog is meant to help you differentiate between a good deal and a bad deal. These tips will also teach you to stay on the successful side of purchasing commercial real estate out of state. https://youtu.be/YbeGZ6zI564

Tip 1: Understand Why Buying CRE Out of State is so Attractive 1. Affordability The first reason is affordability, which translates to higher return on investments, greater cash flow, and faster growth Example:



A 12-unit C-class apartment building in San Francisco, CA will cost you roughly $7.5 million, but a 12-unit C-class apartment building in Dallas, Texas will cost you roughly

156

$1 million. This means that if you take your California money to Dallas, you can buy an 80 to 150-unit apartment building. This is a huge difference in affordability. Some of our students have a goal of building a portfolio of 1,000 apartment units in five years, through syndication. This would be rather difficult to achieve due to affordability. But this goal is highly achievable in a more affordable state. 2. Diversification A lot of investors do not want their real estate holding all in one area, so they search out for good, economically sound, and growing areas. There is no such thing as a national real estate market. It is all about sub-markets when dealing with commercial real estate. The Portland, Oregon sub-market, is completely different from the Portland, Maine commercial real estate market. Just because one area in the US is at the top of the market cycle, doesn’t mean every other area is. It is smart to diversify your holdings into economically stable areas. 3. Deal Flow To increase your chances of finding more commercial real estate deals, you might need to expand your search territories. As an investor in high price regions like California or New York, you might want to take your search inward to states like Tennessee, or Florida, in order to increase your deal flow

Tip 2: Never Buy a Property You Have Not Seen There is never a situation where it is wise to purchase a commercial real estate property without seeing it first. In most cases, commercial real estate investments are the biggest financial investments people have ever made. It would be very foolish to invest so much money into a property, you haven’t physically been to. It is irresponsible and poor stewardship. Purchasing a property you have never seen is a very risky business. In residential real estate such as: single family homes, duplexes, triplexes, or fourplexes, most states require the seller to provide a property disclosure with a list of anything wrong with the property. If the seller lies on this disclosure and you find out after closing, there’s recourse, and you can sue.

157

In commercial real estate there are no consumer protection laws like that. There are no property disclosures required by law, it is purely buyer beware.

Tip 3: Alternatives to Purchasing Commercial Real Estate If you want to invest in commercial real estate out of state without traveling, here are two alternatives. 1. Let someone do the investing for you. Syndication is the process of pulling money together to buy a property larger than you could afford by yourself. Syndicated deals happen all around the world. You could live in Hong Kong and invest in a syndicated deal in Phoenix, Arizona. With Syndication you are basically a passive investor that invests money for a return on investment on that money. I have a Youtube Video and Podcast on, “The Basics of Real Estate Syndication”. 2. The second alternative is to invest in a REIT. A REIT is short for Real Estate Investment Trust. A RIT basically buys large commercial properties and forms a company that sells shares to investors. You can literally invest in a brand new 300,000 square foot downtown office building from your computer. You act as a type of shareholder in the company, like a stock. I have a YouTube and Podcast on REIT if you want to learn more about them.

Tip 4: You Need Guiding Principles When you purchased your home, you had guiding principles that helped you find what you were looking for. You knew the neighborhood you wanted to be in, the number of bedrooms you needed, and even the amenities that you wanted. You also need a set of guiding principles if you are investing out of state. Smart Guiding Principles When Investing in Long Distance 1. You need 10% cash in cash return. This should be the minimum number on any out of state deal. If it's less than 10% and there are some vacancies or needed repairs, you risk breaking even or having negative cashflow. This is not a problem you want to have from far away. 158

2. The second guiding principle is to have a property management company that is well vetted, proven, and have other happy investors as clients. You need to lead your search with the property management company. 3. The third guiding principle is population. It is okay to invest in a small population, but the surrounding cities must be healthy and growing. These bigger cities help support the small city, hence providing it with a healthy flow of renters. Do not invest in a small rural town in the middle of nowhere with no big cities to support it. 4. Invest in cities that are investor and landlord friendly. Cities that have very expensive eviction costs are not conducive to successful investing.

Tip 5: Buy a Commercial Property That is Big Enough Out of state commercial investors need to purchase a property that's big enough to afford a professional property management company. You cannot manage it from afar yourself, especially if you're a beginner. Some people try self-managing because they think they can save money, but being that cheap can actually be very expensive. A beginner investor doesn’t have the necessarily skills needed to manage the money, maintenance, and marketing. The best deals our students find are actually from out of state owners who chose to selfmanage and failed. Despite the property's enormous profit potential, the owner wants out due to poor management. Look for deals that were self-managed by out of state owners. These people are not in good shape and are eager to sell.

Tip 6: Have Realistic Underwriting You need to evaluate a deal thoroughly and also do your due diligence. One of the most misunderstood and miscalculated numbers that causes failure in commercial investing is property expenses. Property expenses are operating expenses that recur, every month. This number also include capital expenses like roofs, parking lots, siding, and major property updates. If you evaluate a property that has failed, you can typically find the spot where the owner misunderstood or miscalculated, because he or she didn’t have the necessary 159

advisers or expertise. You can overcome this potential problem by acquiring a mentor who is willing to share their knowledge. You need to have expert due diligence. Due diligence is doing your homework on the property physically, financially, and legally. It is super important, but it becomes ultraimportant when buying property out of state because you are unfamiliar with the area and all of the inner workings of that area. Due Diligence Tips: 1. You must be at the property during the inspections. 2. It is important that your property manager is also there. 3. Get familiar with the property market by doing a rent survey by yourself or you can have your property manager do it. It is important to understand the vacancies, expenses, landlord laws, and trends. 4. Develop contractor relationships. This is especially important when investing from afar.

Tip 7: Benefits of Buying CRE From Long Distance • Greater Cashflow • Greater Profits • More Deals • Grow Your Portfolio Faster • Create Valuable Relationships.

BONUS Tip: Don’t Invest Beyond Your Knowledge Get a coach that can sit down and share the inner workings of the industry. You need to realize and acknowledge that this is a team sport. It is very risky to try to invest in commercial real estate on your own. You need a coach or mentor to help you step by step and also protect you from common mistakes.

160

How Many Doors Will it Take for You to Exit the Rat Race? In other words, how many apartment units do you need to exit the rat race and become financially free. This could mean leaving a job, reducing your workload to part time, or simply having financial options. How many doors will it take for you to exit the rat race, and how do you calculate that number? This is exactly what I will explain in this blog. Today you're going to learn how many doors it will take for you to exit the rat race. Over 20 years ago, my then mentor, Robert Kiyosaki, taught me what I now cal the ABCs of exiting the rat race or leaving your job. https://youtu.be/GPZ-O6QNDXE

A: Calculate Your Exit Rat Race Number Your rate race number is the bare minimum passive income that you need to generate in order to leave your job. I personally needed $4,200 a month in order to leave my corporate job.

B: Set a Plan and Go Get it Don't stop working towards this plan until you achieve it. In the middle of the journey, Robert taught us to avoid people that do not believe in you. One day, I arrived to church early, to find a woman sitting alone. I walked over her to say hello and we began to discuss what we did for a leaving. She was in high tech, and I told her that I was as well. I also shared that I was a single parent who participated in commercial real estate. It was then that she said something that completely startled me. She told me that there is no way that I could do all of that at once, and so I got up and walked all the way down the sanctuary and sat in the front row. I did all this just to avoid people that did not believe in me. You need to do the same when someone does not believe in you.<

C: Do NOT Let the Little Voices in Your Head Direct Your Life

161

Listening to these voices will cause you to lead a very, very average life. Most of my work with Robert Kiyosaki involved mindset. It involved getting beyond limiting beliefs in order to discover and go after our true potential. Everyone has these limiting beliefs, these little voices that tell us that we cannot achieve our dreams. I have a video called, "Do You Have The Right Mindset to Own Commercial Real Estate?" I want you to watch it so that you can see the mindset you need in order to own commercial real estate, as long as the wrong mindset which will cause you to never own commercial real estate.

The Missing Piece Those are the ABCs of exiting the rate race, but there is still one key ingredient missing. The Method. The method of how to to do all of these things in the ABCs. Robert didnt give this to us on purpose, instead he brought in experts who were already doing what we wanted to do. He brought in commercial real estate experts to teach, coach, and mentor us, which was a brilliant thing to do.

Commercial Property Advisors Commercial Property Advisors is a company that supplies the tools, methodologies, and strategies to get these deals done. So if you are interested in getting started in commercial real estate, give us a call and one of our staff will talk to you about it. The very beginning of determining the number of doors you need to exit the race race is to verify the ABCs.

How to Calculate Your Rat Race Exit Number? The next step to figuring out your door number, is to calculate you rat race exit number. If you recall, my rat race exit was $4,200 a month. That number comprised of the cost of my mortgage, insurance, taxes, medical insurance, cell phone, utilities, food, and my son's football expenses. It was the bare minimum I needed to leverage up. Bare minimum passive income is defined as the cost to live, without any vacation money, eating out, Starbucks, or other extras. It is the bare minimum income you need without any extra unnecessary costs.

162

The Big Question My big question for you is, "What is the exit rat race number that comes to your mind right now?" I am sure there is a number that comes to your mind, but it's not the right number because you're including things that you should not include. This number needs to be the bare minimum number. I would love for you to calculate it right now and share it in the comments below. There is a monthly figure that you need in order to exit the rat race.

How to Calculate How Many Doors You Need to Exit the Rate Race? The next thing I want to do is share with you how to calculate how many apartment units you need to exit the rat race. Let's calculate how many doors you need to exit the rat race. I'm going to use an example here:

16-Unit Apartment Building purchased for $1.3 Million at a 7 CAP If we have 16 units with rents of $850 per a month, then that would equal $163,200 in rent a year. You will not be 100% full for those 12 months so you can subtract a vacancy of 5% from this number to get a total of $155,040 per a year. Next when you analyze any commercial real estate deal you have to take the income and subtract the expenses and mortgage from that number in order to figure out your cashflow per a year. Next you have to subtract about 40% for operating expenses which include taxes, insurance, repairs, property management, supplies, turnover, and any other operation expenses. After you have subtracted all of these expenses you wind up with $93,024 per a year.

So your income minus all expenses is $93,024 per a year. This number is called the NOI or Net Operating Income. Next you have to calculate the mortgage per a month x 12 months. In this example, I bought the apartment building for $1.3 million with 25% down and a 4.5% interest rate amortized over 30 years. When you calculate these numbers your mortgage payments end up being $4,940 per a month.

163

You multiple this number by 12 months and discover that your mortgage payment is $59,280 per a year. Next you subtract your mortgage payment from you NOI which is $33,744 per a year and your cash flow per a year number. This is a critical number because it is the total you will cashflow per a year on this 16-unit apartment building that was purchased for $1.3 million at a 7 cap. When you divide your cashflow by 12, you come up with your total cashflow per a month, $2,812. Since we are calculating how much cashflow we need to produce per a unit or door, we then divide this number by 16 units and get a grand total of $175 per a unit.

Your Personal Door Number So this property produces $175 per a door in cashflow per a month. You need to follow the same steps in order to come up with your personal door number, but this number is a pretty average industry wide number, so you can use it as a general example. Now it is time to calculate how man doors you will need to exit the rat race. If you recall, I needed $4,200 per month to exit the rat race, so if you divide your rat race number by the amount per a door you will get your rat race door number. So for me, $4,200 divided by $175 per door equals 24 doors. So my example deal of 16 doors will not be enough for me to exit the rat race. I need a total of 24 doors in order to exit the rat race. 

Further Learning

I want you to watch a video called "Analyzing Commercial Real Estate Quickly and Easily." It's a video I did a while back that will help you further understand these calculations.

What I Did to Exit the Rat Race 1. I printed out eight copies of my one goal. My one goal was to achieve that $4,200 in passive income per a month by a certain date. I printed out eight copies of this date and put them on piece of white paper. Then I hung these copies in places I would be sure to see them regularly. I put one in my office at my engineering job, one in the refrigerator, the hallway, my bedroom, my living room, and anywhere else that I would be sure to see them. 164

2. Make These Goals Visible to Everyone This first step will help you to hold yourself accountable because everybody needs accountability. We all set these grand goals but what forces you to take responsibility to get these goals accomplished? I had mine visible so that when friends and family came over, I could share with them what I was doing, to help me stay on the right path. Wherever I went, I was reminded of how badly I wanted to achieve this goal. I wanted so badly to not work for someone else, and to have true financial freedom. I wanted to have financial options. So I slowly began to weed myself off my engineering job by working less and less each week. You can do that if you can achieve steady passive income. If goals are not written down, they probably won't get done. 3. I Kept a Running Tally of Cashflow That I Achieved I kept a tall on my refrigerator where I wrote my goal number. Then every time I closed a deal, I would subtract the cashflow from that deal until I reached my final goal. I actually ended up exiting the rat race two months early which I attribute to staying focused and being held accountable for something I wanted very badly.

What You Must Do to Exit the Rat Race 1. Calculate your Rat Race Exit Number. 2. Calculate the Number of Doors Needed to Make your Exit

3. Get Educated. You must watch videos, read books, and do whatever you can to get educated. You must learn how financing works, and all of the different financing options available. I also recommend watching all of my videos and reading all of my blogs from start to finish.

4. Set an Exit Date Goal You need to figure out a reasonable date that you want to exit the rat race by. Then you need to print out that goal and make it visible so that you can hold yourself accountable and put a little bit of pressure on yourself. You must show people that you are going to do this, and get out there and do it.

165

5. Get in Touch With Us Have one of our advisors give you a call back and discuss the options and next steps for you. They are very intelligent and kind people that will help you figure out this next step, even if you do not end up working with us.

6. You've Got to Want it. You have to want it and be willing to put the work in to get this goal accomplished. There are no excuses allowed, because this is not an easy business. The most successful people in commercial real estate are the ones that are the most determined.

What to Look for in a Commercial Real Estate Mentor I've had a total of four mentors my entire life. I even have one today. I want to teach you what to look for in a commercial real estate mentor, and how they can help you fast track your commercial real estate goals. The mentor you might be most familiar with was Robert Kiyosaki. He truly changed my life and I would love to share with you the story of exactly how he did this.

Robert Kiyosaki When Robert Kiyosaki was my mentor, we were at a "Rich Dad" event with about 20 other people. It was a close knit group that he coached personally for four years. We would meet up at a hotel in Scottsdale, and learn about real estate until 11 pm at night. So we were sitting at one of these meetings playing, "Liars Poker", which is a game where you challenge your mindset and your boundaries. At the end of the game, I had totally blown it. Robert was sitting on a stool, when he looked directly at me and called me a loser. Here my mentor was, calling me a loser, and it completely shocked me. He told me that he wanted to motivate me bcause he saw the potential in me, but thought I was taking the easy road in life. So he shook me, and from there on out, my real estate investing just took off. I needed that kick in the butt to get things done.

My Other Mentors

166

My first mentor's name was Nick. He was the mentor that believed in me, because we all need someone to believe in us. I also had a mentor named Curtis who gave me the tools, the methodology and strategy on how to be successful. Finally, me mentor Ron had a mutli-family portfolio that produced C$83,000 a month, which is significant cashflow. Well he taught me how important operations are in the investing business, and to know my operational numbers on an intimate number.

Who Doesn't Need a Mentor There are basically two groups of people in the commercial real estate world. The first group, most likely own commercial real estate by default, such as an inheritance or family business. This group also includes people that only want to purchase one deal and that is it. These people do not need a mentor. If you are part of this group you don't need to invest in advisors to help you, because you can figure it out on your own. You can hire a real estate agent to help you find a deal, and then you are on your own.

The Second Group The second group is the group that I work with, which is people that want to do commercial real estate with purpose. These are the individuals that want to invest fulltime, or in order to leave their job, or build a retirement nest egg. This group will need a commercial real estate mentor. If you are part of the second group, you have a big decision to make, because hiring a mentor will cost you money. But the good news is, mentoring provides you with a shortcut. It helps you to achieve your goals faster. I would not be where I am today without having a mentor. In fact, my being a mentor, actually gives me an unfair advantage. Everyone complains about lack of deals in the market, but I get to view hundreds of deals every week because I work with students all across the country.I get to oversee and close on deals every single month. So if you are a person in the second group, you need an advisor to help you evaluate and find deals on the market.

Commercial Real Estate is a People Business

167

Relationships in this business that you nurture and develop will help you raise money and solve problems, in order to increase your cashflow. One thing I focus on with my students in our mentoring company is the relationships they find and grow. You often hear people say that your real wealth is the network of people that you know, and that is so true in this business. You will run into a lot of problems in this business, but these problems can be solved by reaching out to someone that you have a relationship with.

My Secret In this day and age, we have the internet, email, and texting, which are all ways of avoiding human contact. We have to remember that this is a people business, and people want to work with people they enjoy working with. One secret to my business, is that after you speak with an agent, property owner, or some type of industry professional, if you foresee a business relationship, send them a thank you note. Send them a card that says," I just wanted to let you know that I appreciate the time you spent with me today." Then put the card in an envelope and mail it to the person, because people really appreciate personalized letters. Then when the time comes that you want to reach out to them, they will pick up their phone when they see your name on the caller id, because you sent them that letter.

How to Know it is Time for a Mentor In 2012 I began doing triathlons, but soon discovered that I was struggling with the swimming part. Some friends suggested that I get a coach, but because I was older, I thought I could train myself. But guess what? Even after trying to train myself, I was still getting the same results at every event, and not improving at all. So I decided to get a coach. Her named was Rachel and she was a personal trainer that was a phenomenal athlete and had done a gazillion triathlons. We started working together and after adjusting my diet and the way I was training, I actually was able to work out less. At the end of the day, I got faster and had way more fun doing triathlons.

So a person needs a mentor when they get to the point where they can get no further on their own and are feeling frustrated.

Market Cycle 168

Market timing goes through ups and downs, and I am stoked for the next one coming up, which I expect to happen in three to four years. In real estate there is a different market curve for each type of commercial properties. So an apartment building and an office building located in the same city, could be in totally different phases of the real estate curve.

Only Invest in One Asset Type My solution is to focus one asset type at a time. Become good at one type of property before investing in another. You have to consider the demographics, politics, supply and demand, and social patterns for each asset type. I also consider the taxation, job market, income growth, and all general market sentiments.

Types of Commercial Property Assets      

Apartments Offices Retail Mobile Home Parks Self-Storage Mixed-Use

Market News There is no such thing as a national market. Some of the information you hear on the news, might tell you how to the market is doing, but it is not true as a whole.San Francisco's apartment market is completely different from New Mexico's apartment market. There are sub-markets for each location and on each asset type, so to be successful in commercial real estate you must understand your sub-market.

Expectations in Commercial Real Estate If you wanted to become a commercial real estate agent, because you wanted to make it big and become very wealthy. It would take you three to four years, just to be able to pay your bills. This is as an agent, where you need obtain experience in order to get the clients, find the properties, and obtain a good track record.

Real Estate Investor As a real estate investor, I would say you need to bust your butt for one year. Three, six, or even nine months is not going to cut it. You need to take big action in commercial real estate because there's lots of competition and it keeps growing every day. Back in 2003, 169

I did my first commercial deal as a 1031 exchange. There was a plethora of deals available for me to choose from, but nowadays that is just not the case. So if you think you're going to get into commercial real estate and close on your first deal within three months, that is probably not going to happen.

How a Mentor Helps A mentor will better your chance of it happening because it will fast track your results. In our program, I can teach someone a marketing method to put in front of property owners in less than a month. I have developed my methods and teachings over the course of years by working with students and doing my own deals. It took me a very long time to perfect and grow that process My best students are the ones that showed perseverance. When things got tough, or deals dropped out of contract, these students never gave up. The most successful students are those that join wanting to be successful, really, really bad. They are the easiest to coach because they are willing to do all of the work that I put in front of them. So having the most money in this business does not qualify you to be the most successful in this business. It's the people that want it the most.

An Example I had a student named Vicky, who came to me right after her divorce. She told me that it was a very bad divorce that involved abuse, so she was now a single mom. She wanted to invest in commercial real estate, in apartments in particular. So I taught her how to analyze, evaluate, and set up financing for deals.

How She Raised the Funds She had about $40,000 and a credit line, and wanted to put the money towards an apartment complex, She raised the money by approaching a client of hers that she had known for many, many years. She wanted to purchase a 64-unit apartment complex, and he funded her entire down payment, and they are now 50-50 partners. The property was in great shape, but did not qualify for financing because it was only 50 percent occupied. So she purchased it through creative financing with a "Master lease agreement", and after two years of busting her butt to raise the occupancy and stabilize the property, she was able to afford permanent financing.

170

At the end of the day, she created a million dollars in equity in one property. She put in no money herself, thanks to her investor, and still has a $40,000 credit line. The property is worth $2 million more now than it was when she bought it two years ago.

What to Look for in a Mentor 1. The mentor should have a track record of success. They must own a lot of commercial real estate, because commercial real estate is a business. You have a staff, city laws and ordinances, housing laws, utilities, and many tenants. You need a mentor familiar with all of the operations of a commercial property. 2. The mentor needs to be available I found this out because I realized that my students are about to make the biggest, most expensive purchase of their lives. It would be very cold of me to backoff right before they close their deal. How dare I not be available for the most important purchase of their life.

3. Every Mentor Should Make their Money from Commercial Real Estate I believe every mentor, should make the majority of their income from commercial real estate deals and not mentoring. They should own commercial properties because they need to understand how to do teals and create training from these deals. Everything you see on my YouTube channel is from good and bad deals I've done over the course of my life.

4. Your Mentor Must be a Good Teacher I believe mentors need to be good teachers because that is exactly what they are doing. We call the people that join our program students because that is exactly what they are.There are attributes that make a good teacher and a bad teacher, so you have to look for them.

5. The Mentor Should be Invested with the Student We actually share in the profits from our students. They pay a tuition, and then we share in the profits. So if they don't make money, we don't make money. There's an investment on both sides.

Tuition 171

First each applicant goes through an extensive interview process. In our mentoring company, I am the only coach because I do not trust anyone else in making these big decisions in people's lives. I don't have time to coach 100 people a year, so there are only a select number of people chosen each year. Then, once they make it in, there is a tuition to pay upfront, that we call a retainer. After that we split the profits 50/50 up to $250,000. After they make that $250,000 the split goes away and they keep all of the profits, even though I still help them close deals.

Find a Complete Mentor Students are not a number, they are human beings with desires and goals. You need to find a mentor that will not only teach you how to evaluate and find deals, but who will also stick with you to help operate the property.

How to Make an Offer on Commercial Real Estate Discover what no classroom would ever teach you on how to make an offer on commercial real estate. You'll learn the absolute essential things you need to make an intelligent offer, including the 4 phases you must go through BEFORE you finalize your offer. Most importantly, the lessons in this video will educate you on how to avoid overpaying as well as the dreaded negative cash-flow scenario that some commercial investors experience when they first purchase. Lastly, you'll get access to a file that step by step, shows you exactly how to make the best offer on any commercial property. So you're ready to make an offer on a commercial property? What information are you going to base your offer amount on? A broker brochure is a glossy and beautiful pamphlet that lists the price and property information? You should never use it to base your offer off of! If you use the broker brochure to base your offers, you're going to overpay. Likewise, if you solely base your offer on the seller's three years of financials, you will experience lower cash flow and a lower return on investment. https://youtu.be/TUhvesQX2F4

The Four Phases of Making an Offer on Commercial Property 172

These four phases are four different perspectives of looking at the deal. You must use each of these to ensure that you get the best, most profitable deals available.

1. Broker Brochure The broker brochure is a multi-page booklet with beautiful photos, prices, demographics, and other useful information.

2. Seller Financials You will typically receive three years of seller financials to show the income, expenses, and NOI of the commercial property.

3. Performa A performa is the best case scenario for a property. First of all, the broker brochure will include the performa, but it important to research and determine your own performa. Determine where the rents can go in your opinion, as well as any expenses you can reduce. Phase four is your offer. It's based upon your numbers, it's based upon your goals. Okay?

4. Your Numbers The last phase is the numbers and information based off of all of your research and goals.

Essential Things You Need Before Making an Offer 1. Income. You need to know what the property's income has been over the last 12 months, and the last 3 years, including the current month. 2. Expenses This category is where a lot of new investors really mess up, so pay close attention to your expenses. You have to really learn to calculate these expenses, so that you can distinguish good deals from bad deals. Net Operating income, or NOI is a very important number. As the NOI goes up, the property value goes up. As NOI goes down,

173

property value goes down. So this is the driver of your commercial property value therefore, how you can force appreciation. 3. Mortgage Why is the mortgage so important at this point? Because income minus expenses equals NOI and NOI minus your mortgage is your cashflow. You must know the mortgage rate in order to determine your cashflow. I recommend taking your deal to a few lenders in order to establish what your downpayment and interest rate would be so that you can calculate what your yearly mortgage would look like. 4. Cashflow Use the previous calculations to determine the property's cashflow. 5. Cash and Cash Return This is the term that determines how fast your money is moving. A high cash and cash return means that your money is moving fast. A low cash and cash return means that your money will be staying in investment for a long time. In our investments, we like to target a double digit cash and cash return. It is possible. Don't let anyone else tell you that it's not. 6. Cap Rate Cap rate is defined as your return on investment if you were to pay all cash for your property. 7. Capital Expenses Does the property need repairs or new appliances? Capital expenses are the expenses not included in the typical costs of a deal. You need to determine these expenses prior to making an offer on the deal. For more information on these 7 terms you can view my video, " The Seven Commercial Real Estate Terms You Should Know". How the 4 Phases Use These Commercial Real Estate Terms  The Broker Brochure: This is an introduction to the deal. It is a pretty little sales tool that's purpose is to evoke emotion, to encourage you to take action. Unfortunately as emotion goes up, intelligence goes down. Therefore, we do not make offers based off the broker brochure.

174

Do not base your calculations off what the broker brochure says the property's income or seller's financials are, because these are not always accurate. You must do your research to get a better idea of the true value number. The seller's motive is to make the numbers look good enough for the property to sell. You should always determine your own numbers and calculations for each commercial property deal.

Your Offer: Once you have calculated these seven essential costs and numbers, you will be ready to make an offer, based on what works for you. Come up with a cash and cash return that you are happy with, and also a cap rate that works for you. Next, calculate in all of the expenses, and come up with a conservative number that you can afford to purchase the property at.

Your Goals When Making an Offer 1. Positive Cash Flow 2. Cash and Cash Return in the Double Digits 3. Deal Must Have Upside Potential Upside potential means that you have the ability to raise rents over time and the ability to reduce expenses. You might even have the ability to chargeback tenants for utilities. All three of these things are going to increase your NOI. 4. The Property Must Be in a Stable and Growing Neighborhood.

The End Result Now again, if you want to get further understanding of how this works, you need to watch the video that I talked about earlier called, "The Seven Commercial Real Estate Terms You Should Know". Watch that video and review it.

175

If you calculate the above 7 essential things before making an offer it will result in the following things: You're going to avoid overpaying You will also avoid day one negative cashflow You will gain credibility, because professionals know a valid offer when they see it.

  

BONUS Lastly, I would like to give you a bonus to the lesson. It's a download of just a PDF that's will break down how to come up with the actual numerical offer. How to Come Up With an Offer Price (.pdf download)

Starting Small in Commercial Real Estate Discover how you can start small with commercial real estate and work your way up into bigger and bigger deals. If you have limited capital, are risk averse, have very little experience or are intimidated by the big numbers of commercial property, consider starting small. You'll also discover that small commercial deals can be extremely profitable and there are far more small commercial properties than large ones so you have more options and opportunities. You'll also learn the natural progression of a successful commercial investor, the ladder of succes and many more details that will help you along your journey. This is the perfect training for anyone who wants to get into commercial real estate investing but has been held back by fears and trepidation.

https://youtu.be/EUVdo07ql0E The Natural Progression of a Successful Commercial Real Estate Investor 1st. You buy a small deal 2nd. After the first deal stabilizes, you buy a small-to-medium deal. 3rd. After the small-to-medium deal stabilizes you buy a medium deal 4th. After the medium deal stabilizes, you progress to a large deal with some sort of syndication This is a natural progression that we call the ladder of success, in commercial real estate.

What is a Small Commercial Real Estate Deal? A small commercial deal is defined by three definitions. Number one, a small commercial estate deal is an apartment building that's between 5 and 20 units. An

176

apartment building that consists of five units and greater, is considered commercial. Anything that's four units and lower is considered residential. The second definition of a small commercial deal is a commercial building that goes up to about 3,000 square feet.? That could be an office condo, retail center, single-tenant commercial space, or any other commercial property as long as it is up to or around 3,000 square feet. Lastly, I would define it as a commercial building that you can envision yourself owning. Something that you can afford to buy in your current financial situation.

Why You Should Choose Smaller Commercial Deals Affordable Down Payment Since small commercial deals have smaller numbers, they are easier to understand, and more affordable. In commercial real estate, you have to put a down payment down of around 25%, so that will be 25% of a smaller number, as opposed to a large deal, where there's a large number.

Creative You're more likely to do something creative with a smaller deal, because of the ownership. On a larger property, the ownership is more sophisticated but most smaller properties have smaller owners that are willing to do something creative like a master lease or seller carry second mortgage.

Less Risk There is also less risk with a smaller property, because if you make a mistake you will not lose out on as much money as you would a larger property.

Most Availability There are a lot more smaller properties available to buy than there are larger commercial properties. In the U.S. there are about 450,000 apartment buildings between the range of 5-20 units. From 20-100 units that number goes down to 95,000, apartments in the US. That is a 5/1 difference in large and smaller properties, which means there's five times more smaller commercial real estate deals.

177

Make Sense to You The final reason why you should consider doing something small, is because it just makes sense to you. Wherever you are in life, it just makes sense for you to start with a smaller property.

4 Investment Strategies for Small Commercial Deals 1.

Conventional Bank Process

One of my students purchased a six-unit property with a current cashflow of $15,000 a year. After taking a look at some local rent surveys, we discovered that the rents could be bumped up if we painted and cleaned up the property. So my student fixed the property up, increased the rent, and cashflow increased to $24,000 a year. As the NOI goes up, cashflow and property value go up, so she sold the property after a year and made an $80,000 profit. Next she purchased another six unit next door to the property to repeat the entire process again. Her strategy is to buy, fix, and sell, so she can build up her capital base for larger property purchases. She is currently pursuing a 40 unit apartment building. I have a video on, "How Conventional Banks Work" for further information on this investment strategy.

2.

Do Something Creative, like a Master Lease

A Master Lease deal is one of my favorite techniques in creative real estate. I purchased a seven unit apartment with 15% down and a three year master lease agreement seller financing. It only took me a little over a year to get out of the master lease and qualify for a permanent loan. I held onto the apartment for 12 years and just sold it a few years ago. 3.

Wholesale the Deal

A student of mine who was a nurse, had zero experience in real estate, and limited funds. So we taught her how to find an off-market deal and at the same time, find a buyer. So she networked and got the off market deal, found a buyer, and flipped the contract to the buyer to make a $26,000 profit at closing. $26,000 just by flipping the contract to a buyer.

178

4. Buy Something Distressed Buying a distressed property is considered an oppurtunistic deal, and is not for everyone. It is an oppurtunity to make a decent amount of money on small properties. My student purchased a five-unit building that needed rehab, so he had to pay all-cash, which was $160,000. He did this because he saw potential in the property. At closing, he sold what the property could be to the bank , which resulted in them giving him $80,000 in the line of credit. The goal is to go through each of the units, fix them all up, let the property stabilize and it'll be worth 320,000. Then, the goal is to do a cash-out refinance and pull out his entire capital that he spent. At the end of the day, because he'll do a 75% cash-out refinance, so 75% of 320 is 240. In that sense, he's gaining out everything that he put in. Now, some of you may be thinking, "Well, he's over-leveraging." He's not. The bank will only allow him to pull out 75% of what it's worth, to make sure it's still a cash loan. I actually have a video called How to Buy Distressed Commercial Property, so check out the video.

The Ladder of Success I'm going to share with you the natural progression of a typical commercial real estate investor, going from a small deal, all the way up to a holder of a large portfolio of commercial properties. This applies to you if you have a 9-5 job, if you have no experience, or if you're starting off with very little money. This is the natural progression of success that we call the ladder of success. There are four phases, you're going to go from a small deal, to a small-to-medium deal, to medium deal, to a large deal. After that, the sky is the limit.

Phase 1: Small Deal Purchase a small deal with a conventional bank to either wholesale or master lease. When you wholesale, it's not ownership, it's completing your first deal, whether it be something creative, wholesaling, or something conventional, through a bank loan.? A small deal, right? Once you're done with this, you're going to graduate to the small-tomedium phase.

179

Phase 2: Small-to-Medium Deal When you graduate to this deal, your credibility is going to be kicked up a notch, because you completed the small deal already. Commercial real estate is not the type of business where you're going to get wealthy in six months. It's what we call a L-O-N-G game. Once you complete phase 2 with a small-to-medium deal, you're going to graduate to the medium-sized deal.

Phase 3: Medium-Sized Deal This deal is going to have a definite financial impact on your life. You will see the light and the light will tell you, "Oh, I think I can do this and eventually leave my job." Once you get your medium deal, you're at a whole new level, a different language, and your mindset is different as well. Now you can see the potential of what real estate can do for you and your family and the options you have of working part-time, pursuing a passion of yours, or just leaving your job.

Phase 4: Large Deal At this phase, your track record is now good enough for you to start using other people's money. This is called syndication. I have a video on the subject called, "The Basics of Real Estate Syndication" Basically, syndication is the pooling of other persons' money together, to buy a property. You're just raising capital for a down payment to buy the property, Also, when you participate in large deals, you're going to have to start doing this fulltime, because if you have a 9-5 at this phase, it will start to get in the way of your real estate success. You're going to have to leave your job. All right, so, small deal, small-to-medium deal, medium-sized deal and large deal. After this, there's no limit, the sky is the limit of what you can do in your commercial real estate career. This is a natural progression of success that we use with our students in taking them from small deals, all the way up to becoming a holder of large commercial properties.

The ONE Question You Should Ask Yourself Would you prefer A. A 12-unit apartment building that produces $20,000 a year in cashflow,

180

Or Would Your Prefer B? A 12-unit apartment building, that you wholesale to earn a $40,000, one-time commission.

So, A or B? That's the question. If you prefer A, which is the $20,000-per-year in cashflow, you're going to experience passive income, that you can use to build up your nest egg, retirement, or use it as is your 401K. Would you prefer that? Or would you prefer B, which is making a one-time lump sum fee of $40,000 by wholesaling a commercial deal that you filed. In this case, you're going to receive a lump sum of cash, you can use it to pay off your student loans, or perhaps you're going to do multiple wholesale deals to build up your capital base or your down payments so you can purchase your own property.

Let Me Know Your Choice! What I want you to do now is, in the comment box, I want you to choose either A or B. Just put an A, if you'd prefer the $20,000 a year in cashflow, or the letter B, if you prefer the one-time lump sum fee of $40,000. Go ahead and do that, I would like to see your answers, because they will tell me a lot about where you are and what your goals should be.

How to Make $10,000 in Commercial Real Estate without Down Payments, Loans or a License Discover how Anthony made $10,000 in commercial real estate without a down payment, loan or a license! Step by step, in vivid detail, you'll learn how you too can make $10,000 or more with commercial wholesaling. From how to find the good deals to how to locate qualified buyers so you can be the "middleman" and put real cash in your pocket. Maybe you want to buy your first commercial property so you can leave the rat race but you don't have the down payment money or the ability to get a big commercial bank loan? Wholesaling commercial real estate could be your stepping stone to achieving your dream! Learn more below: 181

https://youtu.be/4eh8kR-NhK8

Turning a Bad Commercial Real Estate Deal Into a Good One The very best commercial deals are not found, they are created. Many people believe that all of the great deals are already taken, everything is way overpriced. They don't invest in commercial real estate because they don't believe there is any real cash-flow. I want to teach you how to turn a bad commercial deal into a good one, and how to tell if a bad deal is worth purchasing, and new ways to look at deals that will put you in a state of creating rather than competing. https://youtu.be/FhQQdiidUNw

Diamonds Right Under Your Nose There was once an African farmer who had heard of others making millions of dollars in diamond mines, so he got really excited and decided to sell his farm, and go out and find his own diamond mine. He spent years just wandering the deserts of Africa looking for his treasure. After many years of searching and finding nothing, he became so broken and discouraged that he threw himself into a river and drowned. A very sad story. The farmer, who purchased the first farmer's farm is walking around one day and notices a large, unusual stone sitting in a stream on the property. It turns out that rock was a diamond and soon the farmer discovers that the entire farm is covered in acres and acres of diamonds. Had the first farmer educated himself, increased his knowledge, and prepared himself to know and understand what diamonds look like in their rough state, he would have realized that he was already sitting on his treasure. He was literally sitting on acres of diamonds. There was no need for him to go out searching for diamonds, because they were in his own backyard. Moral of the Story 1. Diamonds don't look like diamonds in their rough state and neither do good commercial real estate deals. 2. You could be standing on your own acres of diamonds and not even know it. 3. You must learn how to spot commercial real estate diamonds.

182

How to Spot A Commercial Real Estate Diamond I am going to show you how to turn a bad deal into a good deal. I guarantee that you will find deals like this in your market. You need to identify them and unpeel the levels until you find something good about the deal, and see if you can turn it from a bad deal into a good deal.

Bad Deal # 1 A 12 year old apartment building with an asking price of $900,000. The market value is $850,000 according to the sales comp. This means that the deal is overpriced by $50,000. There are 12 units in the apartment, which are all priced under market by $150 a month. The reason why is because the property needs $25,000 worth of repairs. There's peeling paint on the exterior, terrible landscaping, and a bunch of pending city fines for the poor condition of the property.

Three Questions to Ask Yourself Before Passing on a Bad Deal On the surface this property is not a good deal. It looks scary on the surface so most people will pass this deal right by. But here is a want you to do. Before you pass on any deal you must ask yourself three questions. 1. Is the deal priced under or over market? 2. Can I raise the rents? 3. Can I use creative financing? So when applying these questions to our example, number one, this property is priced over the market. This is not a good thing. Number two, the rents can be raised by $150, which is a good thing. Number three, can I employ creative pricing? Well, the answer is we don't know. We haven't asked yet. But the real answer is we haven't dug deeper into the deal yet to find the seller motivations. Because remember, to do anything creative, in all of real estate, you need to find out what the seller motivations are, and then restructure the creativity around the seller motivations.

183

The Impact of Raising the Rents If there is a $150 rent upside for each of the 12 units that is a potential annual rent increase of $21,600. This is really important because, as the NOI goes up, the property value goes up. The NOI has a huge impact on the value of a commercial property. This does not apply to a single family home or residential deal, only to commercial properties. If you take your increase in NOI of $21,600 and divide it by the market cap rate, ($21,600 divided by 7%), you come up with $308,000. This means that because you increased the NOI by $21,600, the property is now worth $308,000 more. This is what we call forcing the equity on a commercial property. You can't do this on your residential property, only on a commercial property. If you are wondering how I got the 7% cap rate, this is the market cap rate in my area. To find out your market cap rate, you will have to call a bunch of brokers local to your property and ask them what the going cap rate is for a 12 unit apartment building, C class, in the area. You get their answers, and average it, to come up with a reasonable estimated cap rate. average it, and hopefully it'll come out to a certain number. In this case, it came up to be 7%, which is a reasonable cap rate.

Can This Example Be Turned Into a Good Deal? Is it okay to buy it at $900,000 if you can increase it by another $300,000? The answer is yes, in my opinion. The $25,000 in repairs will scare away most buyers but in order to take advantage of the upsides of the deal, you will have to spend the money on the repairs.

Bad Deal #2 A 3000 Square foot office building that is listed at $900,000, which market comps show us is $50,000 above market value. There is no possibility of a rent increase, which means the income that the property is capable of producing is currently maxed out. The owner has also expressed some concerns about paying capital gains taxes.

The Three Questions: 1. Is the deal priced under or over market? Over 2. Can I raise the rents? NO

184

3. Can I use creative financing? Possibly due to the seller's concern about the property gains taxes.

Can This Example Be Turned Into a Good Deal? Creative deals are structured around seller motivation, which is exactly what you have with this deal. In this case I would use a master lease agreement with the following terms. I would pay a 10% down payment and pay 5% interest payments to the owner for five years. This would mean that with a Master Lease Agreement the seller would only have to pay taxes on the 10% downpayment. Conventional VS Creative Financing Bank financing would require 15% down, interest, plus would require a much larger mortgage payment every year, which would make your cash on cash return 5%. With creative financing and the master lease agreement your lower down payment, and five year max interest payments would decrease your mortgage and expenses and increase your cash on cash return to 15%

The Importance of the Three Questions Question 1: Is the Deal Price Under or Over Market? I believe that if you want to be a good steward of your money, you need to know what you're buying and if it's a good deal or not. A bad deal is if you're way overpaying with nothing in the future to accommodate for the overpaying. You need to know where the deal stands in the market. I want you to watch my video called, " The Secret To Commercial Real Estate Success", so that you may fully understand how not to over pay on your deal, what to look for, and what terminology you need to know to make sure that you are a responsible investor.

Question 2: Can I Raise the Rents? That's the story of all investors all around the country. We want to raise the rents, because we know if we raise the rents and raise the NOI, our property value goes up. That's how we force the value to create millions of dollars over the years, by inching up the rents over the years to create massive wealth. Small companies, medium size companies, and super large companies do the exact same thing. Raising the rents, raising the NOI, gives you options so that you can enjoy greater cash flow, sell the 185

property and buy a larger one since it's worth more now, or you can do one of our favorite techniques, which is the cash out refinance. Cash Out Refinance It's just like doing a cash out refinance on a home, where you get a higher value and a lender gives you money at closing that's tax-free. I share how to do that in a video, called Secret to Refinancing. Very powerful information and the theme of all rich people in commercial real estate. We all refinance at some point, and pull out cash to either pay ourselves back, pay investors back, or do improvements to the property. The property creates the wealth by your strategy, which is, "Can I raise the rents?"

Question Three: Can I Employ Creative Financing? Many of you know one of my favorite techniques is the master lease agreement, we've done a gazillion deals that way, all across the country. This method works really well so long as your paperwork is tight. I have a video called "Buying Commercial Real Estate Without Bank Loans." That is important if you want to learn how to turn bad deals into good, Hopefully you now understand the importance of these three questions. Once you get a good understanding of everything I shared in this blog, you will start to know how to turn bad deals into good deals, and lastly, you'll be able to start finding your acres of diamonds in your own backyard without selling the farm.

How to Make $3,000 per Month Passive Income for Life Discover how you make $3,000 per month passive income for life using this tried and true method that has worked for millions of people over hundreds of years. No fluff. No hype. Just real world wisdom that you can apply to your own financial life. https://youtu.be/jEvrs8nW15U

What Could You Do With $3,000/mo Passive Income?

186

What could you do with $3,000 per month in passive income for life? How would it change your life? For some of you, it will be a total game changer. For others, maybe not, but how would it affect your life if you were the owner of a commercial property that produced $3,000 per month for life? 1. Security and Confidence An extra $3,000 a month in passive income would give you security and confidence in case you were laid off from your job or even downsized. You could still afford the basic necessities of life. 2. Out of the Rat Race? Some of you reading this today have a very low cost of living. If you live very frugally, the $3,000 a month you generate could equal your rat race number. Your rat race number is the amount of income that you need per month so that you're out of the rat race, out of the corporate world, and have the option of choosing to leave your job, or work parttime, do ministry, volunteer, and pursue the desires of your heart. Or you could even work full-time in commercial real estate. That is exactly what I did after exiting the rat race. 3. Roadmap to Success The process of making $3,000 per a month in passive income is a roadmap to generating $5,000 per a month, $10,000 or even $20,000 per a month in passive income FOR LIFE!

$3,000/mo Property Example I have an example I would like to use in this blog to serve as a teaching point on how to make $3,000 per a month in passive income in real estate. We are going to assume that this is a small office building or 20-unit apartment building with a purchase price of one million dollars. You're going to put down a 25% down payment, which is $250,000. After your down payment, what's left over is your mortgage of $750,000. Just like buying a house. You're going to pay an interest rate of 5% with a 30-year amortization. The payments are going to be $4,026 per month, but in commercial real estate evaluation, we always use a yearly figure, so I'm going to multiply this $4,000 per month mortgage by 12 months, which comes out to $48,312. This is your annual mortgage payment.

187

In this small office building or 20-unit apartment building, the income is $156,000 per year, but I'm going to reduce that income by a 5% vacancy factor. You should always do this because you cannot expect to be 100% full for 100% of the year. That's just not going to happen. Someone's going to move out or not pay rent, so be conservative and take away 5%. That leaves us with $148,200 for the year. Next you must subtract 35% of the income as expenses because there are expenses for property management, insurance, taxes, repairs, administrative, and more. The industry standard for expenses is 35% so if you subtract 35% from $148,200 a year, we are left with $96,333, $330. This is called the net operating income. Very important number to remember in commercial real estate. Again, income minus expenses equals NOI. Now that we have the NOI, we can calculate the cashflow, I'm going to subtract the annual mortgage, from the NOI to get the cashflow. The NOI minus the $48,000 mortgage leaves you with a cash flow of $48,018.

5 Ways to Finance the Purchase of a $3,000/mo Cashflowing Commercial Property 1. Use Your Own Resources This means using your own cash. You will need $250,000 for your deposit. Do not get too hung up one this number, you can start with a smaller deal and a much smaller amount of cash. I am just using this as an example so you can watch the process. 2. Self Directed IRA or Solo 401K If you have IRA or a self-directed IRA you can use that. You can also cash out your 401k. 3. Home Equity Line of Credit (HELOC) I really like to use lines of credit and situate deals where the properties actually pay for the line of credit payments. If you borrow $250,000 from your line of credit, then the commercial property you purchased is going to make the monthly payment on that line of credit. So if you borrowed $250,000 at 5% interest, amortized over 30 years, your payment is $1,342 a month, or $16,000 a year. Remember, the property cashflows $48,000 a year, so if you pay $16,000 a year for your home equity line of credit, you are left with $32,000 a year. One of our students recently used his home equity line of credit to purchase a five-unit property that needed some work. He discovered that if he renovated each of the units, 188

he could raise the rent substantially. He worked hard over the next eight months, but eventually, he was able to raise the rents, which increased his net operating income. In commercial real estate, if the property value goes up so does the cashflow. He was able to produce $700 a month cashflow from just one five-unit property. Next he found another five-unit property in the same city, and that one produces $600 a month. After this, he ran out of money, so he did a cashout refi on both of his current properties, to purchase two more properties that each produce $900 a month. In total, he generate $3,100 a month in cashflow from his commercial real estate properties. 4. Other People's Money (OPM) Again, the property costs a million dollars. You need a down payment of $250,000 and it's going to produce a cashflow of $48,000 per year. The goal is to attain $250,000 from investors. You're going to pay the investors a rate of return of about 6-8%. To be conservative, I'm going to choose 6% for this example. If you borrow $250,000 from investors at 6% interest, you're going to be paying $1,250 per month, which is $15,000 per year. This is your annual obligation to your investors. If we take the cashflow of $48,000 per year, and pay the investors $15,000, you're going to have$33,000 per year leftover.Not quite $3,000 a month but really close. Again, don't get stuck on a number. I want you to focus on the process and the principles here. 5. Creative Financing One of the reasons why we incorporate the Master Lease is because you don't have a lot of money. Let's say you don't have $250,000, or investors, but you don't want to deal with banks. Maybe because you have bad credit, maybe because you have no experience and they won't give you a loan. The Master Lease Agreement works well in these types of situations. You just have to be patient and be a very good detective and a good listener to find out what the seller's motivations are. We structure everything creative around their motivation, their personal situation Let's say that the property owner did not want to sell the property and pay capital gains taxes You can use the Master Lease Agreement because we can defer capital gains off many, many years down the road.Now, let's do some quick math to show you how this works. As a default, we like to start off our Master Lease Agreements with a 10% down payment once we understand the motivations. 10% down payment's $100,000. That

189

means your mortgage payment is going to be based on $900,000 at 5% interest per a year, making your mortgage payment 3,750 per month, $45,000 per year. The cashflow is the NOI minus your mortgage payment. The NOI of $96,330, let's round out to 96,000, so 96,000 minus 45,000 is $51,000 per year.I know some of you are thinking, "Where do I get the $100,000 from?" I don't know, but I'll tell you what you have to do. You have to find it on a deal like this. You really do. The money flows to good deals, so you have to know how to create these good deals. Now, let's say that you found an investor, and you're going to pay him a 15% return on his money. That's a lot in commercial. We want to entice him and make it really attractive for him. If your investor puts in $100,000, you will pay him a 15% return. That's high, but guess what? This property can afford it, because if you borrow $100,000 from your investor and pay them 15%. That's $15,000 per year you have to pay additional to your investor, but you're making $51,000 a year, so you can afford to pay the $15,000. $51,000 minus the $15,000 to your investor equals $36,000 a year, so you're making $3,000 per month in passive income after you pay your investor.

Final Thoughts The question is, why are you reading this blog? What's driving you to learn this material? Two really important questions. I really implore you to really understand your why because nothing great is accomplished without understanding and knowing the why. There's a saying that, "Once you know the why, the how is not too difficult." What I shared here was the how, you supply the why.

How to Catch up on Your Lack of Retirement Savings Discover how to catch up on your lack of retirement savings using commercial real estate. You'll learn how Protege Program member Jim was able to purchase his first commercial property and earn $2,400 per month, investing only $60,000 upfront for the investment as well as creating an additional $400,000 in equity! And the very same process and formula that Jim used, can be repeated by anyone who watches this video. Learn how you can invest in commercial real estate and make up for lost time in your quest for a financially secure retirement: https://youtu.be/osiMLXqjf_8

190

Do you have retirement savings already built up and will it last all the way to the end? Are you getting older and haven't been able to save for retirement? Perhaps life has zoomed by and you were too busy to focus on it. Or maybe you are going through a tough time financially, lost your retirement savings and you're starting over today. Whatever your retirement situation, this article will open your eyes to the possibilities of using commercial real estate to help you catch up on your lack of retirement savings.

Invest in Something Tangible I recently watched an ESPN episode of 30 for 30, called Broke. It detailed professional athletes who made tens of millions of dollars during their playing careers, and once they retired, they had no money left. They were flat broke. That's unfortunate, and it really doesn't have to be that way. The mistake these players made was investing in risky investments like restaurants, a relative’s farfetched start up company, or spending their money on jewelry and cars. They should be investing in something safe and secure with growth, and most importantly, in something tangible that you touch, feel and measure. Measure the worth of it in real time and cashflow. You need to have investments that produce the type of cashflow that puts money in your pocket to buy groceries, pay the mortgage and support your family. Of course, they didn't do that.

Catch Up on Your Retirement Savings with Commercial Real Estate Commercial real estate can be that vehicle for you and help you catch up for a lost time in your retirement savings. When Jim, one of our Protégés approached us, his dilemma was that he was in his sixties and didn’t have adequate retirement savings. He said his goal was to retire in three years, and he didn't even have a retirement plan. In one year, with our help he was able to create a $400,000 nest egg that’s providing him decent cashflow and is still growing. It took twelve months of focus, hard work and coaching, but it was well worth it. Can you save enough for a comfortable retirement? I was reading a New York Times article that gave me pause to think. It said that if you're in your sixties with $1 million invested in municipal bonds, and begin withdrawing 4% per year when you retire,

191

there's a 72% probability that you'll exhaust your retirement savings before you die. We need a better solution than this.

The Solution is Commercial Real Estate I believe commercial real estate is the best vehicle for retirement planning because it has six investor controls that other investments do not have. These are investor tools that are necessary in any retirement plan.

Six Investor Controls 1. 1. 1. Management: In management of commercial real estate, you have a say of who you put in charge and what they do. You have a say on the day to day operations to ensure that your money is safe and your investment's going to work. No media or controversial CEO is going to take your company down. There's no fake news that's going to smash your property value and affect the investment. You have control over the management. 2. Insurance: What if there's a fire or major catastrophe that totally levels your commercial property? Using your insurance company, you can fully recover that property and build it up even better than before at someone else's cost. 3. Predictability: In commercial real estate, because there's a neighborhood and not only a piece of property, there is a market. You can see the volatility happening months in advance. This allows you to be proactive. If you hear of something happening in that neighborhood and market, maybe a company expansion or an upcoming loss of jobs, you can react now and adjust to it before it happens. There's predictability in commercial real estate that you don't have in other investments. 4. Leverage: You can buy a $1 million property, not for $1 million, but with 25% of that. The investor in that New York Times article who saved up $1 million and was drawing from it, should have taken that $1 million and bought a $4-5 million commercial property. The cashflow is two or three times more than what he's pulling out of his $1 million. That is an example of leverage. 5. Tax Advantages: How does a company like Amazon get away with paying no income taxes? They plan and they strategize accordingly, and they get to pay little or no income tax. You get the same legal loopholes and tax advantages as Amazon, even though you own something small, like a five-unit apartment building. In fact, the recent tax breaks and incentives from the White House just made real estate investing even

192

better. Tax advantages are an investor control that you get investing in commercial real estate that you would not get in investing in stocks. 6. Cashflow: It is the lifeblood of business when contemplating retirement; you get to control the cashflow. If you manage your commercial property well you get more cashflow. If you were to invest in stock, no matter how good you are you have no control of the cashflow. It's in the hands of someone else. Cashflow control is of the utmost importance when contemplating a retirement plan.

Jim's Problem Jim's in his sixties. He has some money saved, but not enough for retirement in three years, and he has no retirement plan.

The Solution We had Jim focus on commercial properties where the owner was out of state. The reason we did this is because we believe these owners are probably more motivated to sell and easier to deal with. At Commercial Property Advisors, we are good at helping find these properties, although almost anyone can find them if they know where to look. However, what do you do when you find them? A lot of our training goes into how to build rapport, ask the right questions, evaluate and find motivations, and discover what's going on with the seller to structure the best deal. That's how we trained Jim.

The Property Jim ended up finding an eight-unit property with the asking price of $500,000. We found out the owner was in distress and the property was horribly mismanaged. Remember, the owner is out of state and the property manager was taking advantage of her. We made an offer for $500,000. The offer was accepted, however we found out that the property was in worse shape than we initially thought, reducing the price to $450,000. At that point, we had contractors come in, and finding out there were some structural issues and with more detailed quotes, we decided we couldn't pay more than $385,000. We went back to the seller thinking that she would say no way. She disappeared for a few months, so we figured she's wasn’t interested, but we kept at her. Eventually, she agreed to $385,000.

Financing We went ahead and Jim found financing for the deal. He found an 80% loan, which means the lender is going to loan him 80% of the acquisition costs, the $385,000 plus

193

80% of the renovation costs, which we thought was great. The renovation costs came up to be $65,000. Unexpectedly, the appraisal came in at $350,000, so it was $35,000 short from the agreed upon sales price. What did we do? We went back to the seller and said, " The appraisal came in at $350,000 not $385,000. We are not going to come to the table with when an extra $35,000. It's just not worth it for us." We drew a line in the sand, and thought the deal was dead. To our surprise she agreed to the new price. She had already psychologically closed this deal with Jim and moved on to the next deal. When we gave her this news, that kind of blew her paradigm out the water and she agreed to $350,000.

Upside Potential During our due diligence, we discovered that the property had some good upside potential. We found a sales comparable apartment complex for $1 million. That means if we can buy this for $350,000 and put in the $65,000, we have a pretty good deal. We also did a market rent survey and found out that because of the poor management and the condition of the property, the rents for all the units were way under market.

The Execution This is when the real work begins. We did three things: evictions, renovations, and increased the rents after the renovations. Jim started off with a net operating income of $26,000 per year. After a little more than six months, he more than doubled the NOI to $57,000 per year. As you know, for commercial property, as the NOI goes up so does the property value. Jim was able to get a substantial increase in property value.  His all in was $415, 000; the $350,000 plus the $65,000 of renovations. How do we calculate the new value? If you recall from my videos, we can figure out the value of a commercial property by dividing the NOI by the market cap rate.  The NOI is $57,000 a year, divided by the market cap rate in this case of 7%, is $814,000. His new property value is $814,000, which is an increase of close to $400,000 in equity.  The cashflow starting off was about $700 a month, but today is at $2,600 a month. 

Exit Strategy Every good deal has an exit strategy and is repeatable. Jim found another deal that he wanted to do, but he doesn’t have the money. What do we do? He is waiting for his NOI to season a bit and then when the lender revalues the property, he will do a cash out refinance and pull out some of the equity. In this case he will be able to pull out his entire down payment and put that into another property. 194

Watch my video Secrets to Refinancing Commercial Real Estate to learn more Jim closed a great deal with all the investor controls in place. He accomplished his goal of retiring in three years by creating a $400,000 nest egg and increasing his cashflow.

3 Questions to Ask Yourself 3.

Do you have money working towards your retirement? Not just saved up, but at

work for you creating cashflow? 2. Are you playing catch up? Many people out there are playing catch up and that's okay, because that leads me to the third question 3. Are you willing to play a bigger game of commercial real estate? Hopefully, the answer is yes. All it may take is one good commercial deal to financially impact the rest of your life.

3 Tips to Get Commercial Sellers to say YES to Your Offers Do you know exactly how to get commercial real estate sellers to say YES to your offers? The last position you want to find yourself in, is to have a great deal and not know how to get them to say YES to your offer. Here's a scenario: You're on the phone with a motivated seller of a once in a lifetime commercial deal and they've just told you why they want to sell, what's going on with the property and how their ownership of the property is affecting their personal lives. Those three pieces of information are probably the most important things you need in order to structure offers to motivated sellers and get them to say yes. The issue is, most average investors have no clue how to do this. That's what this lesson is all about. https://youtu.be/VBc-Y1UwMYQ

Tip 1: The Two Keys to Working with Motivated Sellers There are two keys to working with motivated commercial real estate sellers. The first key is to work with sellers of off market deals.

Key 1: Off-Market Deals Off Market deals are commercial real estate deals that are not listed on the MLS, Loop Net, or anywhere else online. That is why they are called "off-market", because they are not on the market. Some 90+% of the deals our company does are off-market deals. Those are the best deals when working with motivated sellers because there's no agent

195

in the middle, stopping the communication between you and the seller. The second key is to to acknowledge that there are two sides to every deal. There's the property side and there's the human side. We are going to look at the Human Side.

Key 2: The Human Side Author Tony Robbins talks about the six basic needs in human life: Certainty, Variety/Change, Significance, Love, Growth, Contributions/Desire to give beyond themselves. On the real estate "human" side, there are six basic needs of every commercial real estate seller. Certainty: Sellers want to be sure that you are going to close their deal. They want certainty.  Urgency: For example, in a commercial estate sales contract, we have contingencies that force you to put money in their earnest money deposit account if things are not moving along at an appropriate speed. You must have your financing in order, your inspections scheduled, and so forth, at an urgent speed. Urgency, needs to happen with a motivated commercial real estate seller.  Gain: Gain is not only about the money, it is also about the actual selling of the property. People can even gain something by selling a property, with no profit. Every seller has a gain need. Make money or get rid of the property.  To Be Understood: Every seller has a need to be understood and feel heard. You must understand why they are selling the property, what is going on with the property, and what's going on in their lives. It is really important for you to understand what their needs are for you to get towards yes.  Motives: Make sure that he seller's motives are addressed. In a few minutes, I'm going to give you three really, simple but important questions to ask a seller. These questions can but very revealing and if you structure your offers around seller motivations, you're going to create win/win deals.  Trust: We all know what trust is, specifically that trust is not the same as certainty. For example, there could be a seller with $10 million in his pocket, but he could be untrustworthy. From a mentor mindset, you cannot do a good deal with a bad guy. Trust is really important. Trust is about relationships. Commercial real estate is a relationship based business. Relationships are what help to funnel the deals, raise the money, and solve any problems that emerge. 

When working with motivated commercial real estate sellers, you must address all six of these basic needs. But what's next? How do you extrapolate?

Tip 2: Three Really Important Questions That You Must Ask a Motivated Seller   

How Long Have You Owned the Property? What's Prompting You to Sell? If You Were to Sell, What Would You Do With the Profits?

196

Tip 3: Exploring Those Questions and How to Respond to Their Answers Question 1: How Long Have You Owned the Property? If the seller says they have only owned the property for a year, that's not really enough time for them to be a truly motivated seller. Once a seller reaches the seven year point, our company's statistics say their motivation starts to grow. For this reason, seven years of ownership or longer is your magic number. Now, if they say they've owned it for 20 years or more, that means they are nearing the end of their mortgage or they've already paid it off. If they already paid off the mortgage and own it free and clear, than they can be the bank for you with a seller carry first mortgage, which is a technique that we teach in one of our previous blogs . It's called How to Do Commercial Deals Without Bank Loans. I highly recommend you read that blog to learn techniques on how to buy commercial property without traditional bank loans.

Question 2: What's Prompting You to Sell? If their answer is it's time to move on and do something else, that really means they're not happy with their investment for some reason or another. It might not be performing the way they expected it to. If a seller says they are tired of managing the property, it really means, that the property is not making them any money. They could even be feeding their own money into the property every month. Being in a negative cashflow position can create a highly motivated seller. If their answer is that they'd like to retire, but will miss the monthly income, we have two solutions for that. We can use either of these solutions to purchase the property, but also, provide the sellers with some monthly income. The first solution is to use a master lease agreement. The second solution is a seller carry second mortgage, Really important you watch those videos after this blog, so that you can learn these techniques that will help close deals.

Question 3: If You Were to Sell, What Would You Do With the Profits? The third question is if you were to sell, what would you do with the profits? If they say they want to buy a larger property, good for them. Wish them the best, and purchase their property. If the sellers' are planning on retiring, that is the ultimate life goal, so

197

congratulate them, and make them an offer. The number one roadblock answer a seller gives, is that they are unsure whether they would like to sell or not. Or that they are concerned about paying taxes on the profits they earn from selling. Our simple solution is to use a master lease agreement, to help them defer from paying their capital gain taxes for two, three, or even ten years.

How to Turn 2 Houses into 34 Apartment Units Discover how you can convert equity in your single family home investments into the bigger game of commercial multi family properties that generate much high cash flow, much better upside opportunity and are much easier to manage so that you can get closer to your goal of financial freedom. It's common for residential real estate investors to sell a single family home and buy a duplex, triplex or quad. And while that can slightly improve one's path to economic independence, it's still remaining in the residential investing realm which is not nearly as lucrative. In this training, you'll learn how one of my Proteges sold his two single-family home rentals and purchased 34 apartment units which increased his cash flow by $2,677/mo and instantly gave him an additional $275,000 in equity. https://youtu.be/jl9XJ5rczKY

Play a Bigger Game You can convert the equity in your single-family home investment into the bigger game of multi-family properties, generating high cash flow and better upside opportunity. This article could also be called “Playing a Bigger Game” because that’s what upgrading from single family rentals to commercial multi-family real estate is all about. To play a bigger game in life, and in business, three things must happen: 1. You must be mentored by someone who’s already playing the bigger game that you want to play. 2. Get out of your comfort zone. If you want something that you don’t have now, you are going to have to do something that you’ve never done before. 3. You need to take bold action. If you want to make a big change in your life, or accomplish something great, it’s going to take a little bit of risk. Life rewards action. In our company, we take educated, calculated, and measured risk. That’s the difference and that is the key to being successful in this business.

198

The Problem Single-Family Homes: Lots of Equity, Little Cash Flow Our student has two problems. First, he owns several single-family home rentals. They have decent equity but minimal cash flow; he is only bringing in $100-$200 a month. His second problem is that because he has equity but very little cash flow, he feels stuck buying single-family home rentals and it isn’t helping him achieve his goal of working less in his professional job and gaining financial freedom. He is stuck investing in single-family homes and is unsure what to do. Does he buy more? What does he do next?

Opportunity Costs Our Protégé knew he needed help to get unstuck, and that’s when we came in as his advisors and as his mentor. Acknowledging the problem is important because it’s the first step to avoiding lost opportunities. This is called opportunity costs, which is the benefit an investor misses out on when choosing one investment over another. As he chooses to invest in more single-family homes, what is he missing out on? After nine months of focus and hard work, he discovered that he was missing out on greater cash flow, more equity, increased net worth, and playing a bigger game. However, there is a solution for him and for you as well.

The Solution Convert the Equity in Your Single-Family Home Investment into a MultiFamily Commercial Property First, you need to prepare and sell your single-family homes. What I mean by prepare is do any repairs or maintenance needed so that it will show well. Hire an agent, do your research on sales, and lastly get an advisor who you trust and is experienced. Having an advisor is important because the step from a single-family home investments into a commercial deal is most likely the biggest investment of your life. It’s too risky to do it by yourself, you need get help.

1031 Exchange When you sell your single-family homes, you are going to sell using a 1031 tax-deferred exchange strategy. This is an IRS tax code that real estate investors really like, and for

199

good reason. If you take all the profit you make from the sale of your property, all the equity and move it into the next property, a larger property, you do not have to pay capital gains taxes. You can defer it and use all that to grow your portfolio. If you take all the equity at close, you won’t have to pay capital gains. You can just trade it up and continue trading up to larger properties over the years. It’s a phenomenal way of increasing your wealth and building your portfolio in commercial real estate. This is what we had our student do. Watch my video and learn more about how to do a 1031 Exchange

The Basics of the Deal    



Our student purchased his two single-family homes for $360,000. His cash flow is limited at $100 to $200 per month. He sold them for $625,000 seven years later using a 1031 Exchange and made $265,000 on the sale. He purchased a 34 unit apartment for $1.225 million. He used the entire $265,000 as a 20% down payment. Over the next year or so he increased the rents by $50 a month per unit. As you may know, in commercial real estate, as the NOI goes up so does the property value. He increased the NOI by $22,000. The $22,000 NOI increase divided by the market cap rate of 8%, equals $275,000 in increased property value.

The Power of the NOI What he did was he forced the equity upward. You can’t do this with single-family home investments, only with commercial. That’s the power of the NOI; a $275,000 increase in nine months compared to a $265,000 increase in seven years investing in single family homes. It’s amazing what it can do for your cash flow, for your net worth, and for the property value.

Increased Cash Flow Before our student was making $100 to $200 per month renting out single family homes. Now with his 34 apartment units, he’s bringing in $2,877 per month. That is almost 14 times more than before in cash flow.

Play a Bigger Game If any of you are sitting on single-family homes with equity, that perhaps aren’t performing well in cash flow, consider selling and investing in multi family apartments.

200

It will bring you closer to your financial goals, financial freedom, working less at a job, or having security just in case you lose your job. I don’t often recommend books, but there is a fantastic book that will help you take steps if you are stuck in your business. It’s called How to Get Unstuck by author Matt Perman. It will help you identify your mental barriers and habits.

97% Return on Investment in 1 Year Commercial Real Estate Deal What does it take to generate a 97% return on investment with commercial real estate? It takes a high level of skill and knowledge, but also it takes work, sacrifice, risk, admitting what you don't know, and getting out of your comfort zone. Are all of these qualities attainable by you in one or two years? I would say no if you are doing it by yourself, because I personally, find it too risky. But if you have a high-level adviser helping you out, a mentor willing to get in the trenches with you, then I would say yes, it is possible. https://youtu.be/ZswSSU0t9xM

Commercial Property Advisors Protege Example: We have a commercial real estate protege named Kevin that has all of these above qualities. He bought a commercial property with seller financing, meaning that there's no bank involved at the onset. He raised the down payment himself, and performed minor renovations to the property, that resulted in him increasing the rents by 30%. As the NOI goes up in the property, so does the property value. So when Kevin accomplished raising the rents by 30% he increased the property value by $536,000. And this was not a five or ten year process, this was all done in a little more than a year. This $536,000 property value increase allowed us to execute our ultimate exit strategy, which was a refinance where Kevin was able to pull out his entire down payment, thus reimburse himself for his down payment, meaning that he no longer had any of his own money invested into the deal, yet he still owned the deal. This makes his overall return on investment 97%.

201

A Breakdown of Kevin’s Deal Kevin runs a small family business as a commercial flooring contractor in Panama City, FL. He began working in real estate 4 years ago and connected with Commercial Property Advisors approximately 2 years ago.

Why Commercial Real Estate? (Why not flip houses?) Kevin felt that commercial real estate would mentally challenge him more than residential real estate. He also felt like there were a lot less people investing in commercial real estate, because most of the people he knew had already jumped on the “fix and flip” houses bandwagon.

The Deal: Kevin found a 24 unit apartment complex that was being sold by a real estate attorney who was willing to finance the deal for 24 months. This means that Kevin was able to just make payments until the end of 24 months, when he was then able to refinance and pay the owner off.

Seller Financing: After discussing the deal with the owner, Kevin soon discovered that the numbers for the property would make it difficult for him to obtain bank financing. The owner knew that Kevin was getting help from Commercial Property Advisors and felt comfortable that Kevin knew what he was doing, so he agreed to a creative deal.

The Down Payment: The property was purchased for $925,000 with $50,000 earnest money, and another $100,000 due at closing. $50,000 came from a personal loan Kevin received from his parents, $50,000 came from Kevin’s savings, and the rest was either owner financed or borrowed from someone.

The Exit Strategy: The exit strategy was to do a cash out refinance. To cash out all of the money Kevin had invested in the property, and then refinance with a loan from Fannie Mae. When Kevin purchased the property, the units were being rented out for $550 a month. Over the next 24 months Kevin renovated 17 out of 24 of those properties, in order to increase the rent to $775 a month per a unit. During this process he was able to increase the property 202

value from $925,000 to 1.46 million dollars. This means that when he went to refinance he was able to cash out all of the money that he had invested in the property. He even pulled enough out to replace six roofs on the building as well.

Renovation Break Down: Seventeen units received a complete cosmetic face lift which included painting, new flooring, new toilets, and washer/dryer hookups connection installed. There was no major construction needed. Why hadn’t the seller done this himself? The owner lived six hours away and just had other things on his mind, besides taking on such a large project from far away.

Words of Encouragement from Kevin: Listen to your mentors. Work diligently. Work Smartly. You will find a deal eventually, and then just work hard to pursue it and make sure it comes to a realization. Other than that, you know, work hard, listen to your mentors, and follow their direction, and you can be successful.

Summary of Kevin’s Deal Kevin purchased 24 units for $925,000. The seller was able to finance the deal for Kevin. After Kevin put down $150,000, the remaining balance was financed over the next two years. The down payment came from two things: Kevin's home equity line of credit, and secondly, he borrowed money from his parents. Both of these were paid back when we refinanced the property. Out of the 24 units, 17 units were fully renovated, producing a rent increase of $225 per unit. The other 7 units had a slight increase in rent by $50-$75. $225 x 17 PLUS the remaining seven units rental increase = approximately $4,200 per month more cash flow a month. This is about $50,000 more per a year, and as you know, the NOI going up results in the property value going up as well. The end result was an appraisal for $1.46 million, so he bought it for 925, and over the course of a year and a half, increased the value by over half a million dollars. Our exit strategy was to refinance the property with a Fannie Mae small balance apartment loan. In the refinance, he paid off the seller, paid himself and his parents

203

back, plus got enough money back to replace roofs on the property. Once all that's done, he keeps the property and the cash flows.

3 Keys to Kevin’s Success 1. Kevin was a good student 2. Kevin dug out the seller’s motivations 3. He focused on his exit strategy

How Chris Became A Millionaire in One Year Can you become a millionaire with just one commercial real estate deal? YES! Can you do it without years of previous experience? Of course you can! Can it be done in today's real estate market? Absolutely! In fact, you're about to discover the incredible true story of how an airline pilot from Houston Texas recently accomplished this feat. Plus, you'll learn exactly how he did it so you can do the same. https://youtu.be/jm8m2fU7Hzc

Meet Chris Chris started flying with the Navy in 1977. He eventually began flying for airlines and is currently still employed by a major airline. Chris has a rather large family; seven children and many grandchildren. His entire life consists of family, flying, and now, managing the managers of his 90 unit multi family commercial property.

Overcoming a Slow Market Many people say there aren't any good deals left in Texas or in any other major city. But while Chris did experience challenges with finding good deals in his market, he was able to find people motivated to sell that were off market. Chris testifies, that even if you think the economics look down on the outside, that there are still a lot of motivated sellers out there, that just need to be found.

The Million Dollar Deal In March of 2016 Chris began researching commercial real estate on the internet and found Commercial Property Advisors on Youtube. He was then interviewed and accepted into our mentorship program. 204

When his big deal that made him a millionaire came into the picture, Chris had already found three properties that our team was helping him write contracts for. One was a four-plex, one was a 16 unit, and one was a 26 unit. With the owners so close to signing, our advisors recommended Chris begin interviewing the best lenders. Chris began scouring Houston for lenders, brokers, bankers, and mortgage companies. He touched base with many brokers, lenders, and mortgage companies, making connections and resources. I gave him the information for a mortgage company I knew in the area, and Chris asked them to send him any properties they heard about. Two weeks later, they called and told him they had found a property.

The Property It was a 90 unit property in Downtown Houston. The broker who sent Chris the apartment had financed the property for years, so he felt motivated to help the seller before he went bankrupt or was forced to foreclose.

The Challenges While doing his due diligence on the property, Chris discovered that sections of the building smelled like sewage and there was a severe roof leak. There were also some under-management issues that would need to be handled. He quickly began rehabbing.

The Opportunities Once Chris and I got together and put together our EPartner Pro Forma together we discovered that the average market rents in the neighborhood were $200 higher than what the apartment was currently charging. Once you factor that into the pro forma we found that we could afford a $600,000 rehab, and still have this considered a very good deal.

Financing the Property The property was selling for 3.1 million dollars. The owner was highly motivated and agreed to take interest only for a year on a million dollars. Chris tried to take the deal to the same mortgage broker that had brought him the property, but they would not finance him because he did not meet their loan criteria. We had anticipated this because the rehab needed was so great and approximately 1/3 of the 90 units were empty.

205

Chris then began spending eight hours a day for three or four days looking up hard money lenders until he finally found one willing to lend him the rest of the money (2.1 million for the property and 600,000 for renovations) at 13% interest. Just to clarify, the purchase price was 3.1 million, the seller carried back a mortgage in the amount of 1 million and then you Chris found a hard money lender who paid the rest of the amount PLUS the rehab costs at 13 % interest.

Refinancing After a year, the property was stable enough to get refinanced by a Fannie Mae lender out of California. It was a 30 year amortization loan with a 4.1 interest rate. The loan did not require any down payment money besides holding costs.

New Appraisal At the time of the loan the property appraised at 3.8 millions dollars, but after a few months of full stabilization, it is currently appraised at 6.3 million dollars. This means that after closing costs and commissions, Chris could sell the property today and profit 2 million dollars.

Chris's Next Step: By April 2019 Chris wants to borrow against the property in order to purchase a new property. He is currently looking for properties off market in the local area.

Encouraging Words From Chris "First you have to decide whether or not you have the knowledge and experience to get involved with one of the most difficult businesses out there that you would be owning and operating. I would encourage you to look for the very best mentor who will not only give you the information, but train you and stay with you very step if the way.I looked at nine or ten mentors and Peter Harris and his background, resume, and books, all spoke volumes to me. If you want to do this and you want the knowledge and you want to get the experience with someone at your side, go with Peter Harris. "

Summary Chris found a property through a mortgage broker that had huge potential if he was able to purchase it. He did not qualify for conventional financing so he went to a hard money lender who gave Chris money to acquire the property and conduct the rehab. Over the

206

next 12 months Chris was able to finish up the rehab, stabilize the property, and refinance the property with a Fannie Mae Loan. Once the property was completely stabilized it was worth 6.3 million dollars. So Chris bought it for 3.1 and now it's worth 6.3 in little more than a year plus hard work If Chris were to sell today after paying the commissions and closing costs he would pocket over two million dollars in profits.

Finding Great Multi Family Apartment Investments in HOT Markets Discover how to find great apartment investments in hot markets. Multi family real estate investors have been complaining that there aren't any good deals left in today's market. But the reality is that there are always great deals if you know exactly where to look for them, even in the hottest of markets, such as what is illustrated on this video, in the Bay Area of California. You'll learn how others are doing it and how you can too. Don't wait to invest in multi family real estate just because some people think all the good deals have been taken. Instead, find out how to find them and go out and use the hot markets to your advantage! https://youtu.be/NlqPOg2oqLA

The Hot Market Are you having a hard time finding great apartment deals in your market? Many investors complain that all the great deals are taken, everything is overpriced, and there's way too much competition. These three comments are very valid, very legitimate complaints if you are in a hot market. The multifamily apartment industry is hot. It has been hot for years and will be for years to come. So the question is, how do you find great deals in hot markets?

Finding the Deals We have two students, Dave and Andrea that bought two apartment buildings back-toback, month one and month two, in what I believe is the hottest apartment market in the entire US, Northern California. Not only did they find and land these two deals, but both deals were priced under market, with under market rents, which is a huge upside. Shadow Inventory

207

Our students find the best deals are found off the radar screen. Brokers don't know about them, they can't be found on Loopnet, or even on the MLS. You must find your deals in what our company calls the "shadow inventory".

Dave & Andrea's Story: Dave and Andrea connected with our company, Commercial Property Advisors, for hands on training and step by step coaching every step of every deal. They knew that they wanted to get involved with Real Estate and began researching online for someone to train them to invest in commercial real estate until they found our Youtube Channel and ultimately joined our team.

How They Found Two Deals in A Hot Market Dave and Andrea soon began connecting with our team and doing the homework that we require in order to learn all of the ins and outs of the business. Soon they were instructed to start making phone calls to reach out to brokers and get a real feel for their market. Dave and Andrea began sending out letters diligently. Many owners are in tough situations, and taking time to talk to them personally can make a world of difference. Dave and Andrea spent hours building and nurturing relationships with owners and brokers, before finding a deal. A Relationship Business Commercial real estate investing is a relationship business. You have to give your time and energy to the owner, because no matter how good the deal looks, if the people you are working with do not form a connection with you, the deal will not happen.

Deal 1 Their first deal was a five unit apartment building that needed work, but had a lot of upside potential. The next step for Dave and Andrea was to find a lender that could see the property's potential. Soon they found a local banker who knew the market well enough to immediately get excited about their deal. He offered them a loan-to-value of 75%, which is almost unheard of in Northern California where the average LTV is 55%-65%. Upsides: As a property's NOI goes up, the value of the property will also go up. Dave was able to increase the rents, thus forcing the property's equity by fixing and repairing the 208

apartments. This allowed him to refinance and take money out to purchase a second property. Exit Strategy Dave and Andrea's exit strategy was to refinance the property, pull out the down payment, and then use that money to purchase another property.

Deal 2 The second deal was once again directly with the property owner, and found through batch letters. It was a six unit apartment below market rent.

Words of Encouragement from Dave If you are thinking of entering the world of commercial property investing, then you should really focus on your "Why". What is your driving force that's going to create the passion to really work hard and accomplish your goals. One thing Peter mentions is having the right mindset to be a successful investor. Do not make excuses, just believe in yourself, and go for it. Hard work pays off.

Summary: I am so thankful to both Andrea and Dave for sharing their story. I truly hope you have found it encouraging. Here are some of the key learning points you have learned from this blog. 1.You don't need a certain degree or profession to be successful in commercial real estate investing: Dave is a truck driver and Andrea is a nanny. 2. Have Powerful Whys: Dave and Andrea had powerful whys. They wanted to buy back their time by trading time for dollars. They focused on their retirement goals. 3. Target Owners Directly: They did not use any brokers, they used CPA's proprietary techniques on creating letters and a very targeted list of property owners to go after. There are certain specifications and criteria that helps determine which ones are most likely to sell. We figured that out over years and years of practice. 4. Learn What to Do Once You Find the Deal. Many people understand how to find owners directly, but our training is based upon what you do after finding great deals. What you say and how you build a rapport to understand a owner's motivations is what helps you structure a great deal.

209

I have a video on Youtube called "The Three Tips on How to Get Owners to Say Yes to Your Offer."Watch that video after this one to learn exactly how Dave and Andrea got owners to say yes. 5. Market Rent Increase: Both of Dave and Andrea's deals were able to be renovated and have their rents increased. The first deal actually resulted in a 45% increase in rents once renovations were complete. 6. Having the Right Mindset: Dave mentioned my video called, "Do You Have the Right Mindset to be Successful in Commercial Real Estate?" The video has really helped Dave get over his fears when it was time to speak with owners and brokers, interview property managers, so you have to be in the right mindset to win. 7. Caring is Key: Lastly, we are a commercial real estate company, which is a company that must work directly with people and in order to do that successfully we must really honor them. You have to be patient, work hard, and you will get results.

How to Pay Off Your Student Loans in 3 Months Millions of people are saddled with tens of thousands in student loan debt, unable to pay it off. Commercial Property Advisors Protege, Jeremy, was in that same position. But as you will see, on his first commercial wholesale deal, he earned enough money to payoff his entire student loan debt. You're about to discover exactly how Jeremy did it and how you can too. Commercial real estate wholesaling is a powerful technique for generating large amounts of cash in a relatively short period of time. https://youtu.be/-G3d42ztllY I want to bring to your attention a national crisis. There are 44 million student loan borrowers in the US today and one out of four are either in default or can't make their payments. The average college graduate will owe more than $39,000 by the time they graduate, and they will spend the next 22 years paying off their student loans. This is a huge problem, for you, for your children, and for any of your loved ones with student loan debt. When they graduate, the reality of life hits students very hard. It's no wonder the millennial generation can't buy homes and they put off getting married or having kids

210

because of their student loan debt. What about taking a job because you love it? You can't do that, and you can't file bankruptcy either. What do you do?

How to Pay Off Your Student Loans I have a tried and true way of getting rid of all your student loan debt. It's called, pay it off. That's the only way you will be free of it. We have a student Jeremy, who did just that. He was ten years in on paying down his student loan debt and he still had more to pay. Within three months of working with us at Commercial Real Estate Investing, he wrote a check and paid it off. Just like that.

Jeremy’s Story Jeremy was in active duty serving in the Air Force for five years and then served two years in the Army Reserve. During that time, he finished an Associates Degree at Community College, then later completed a bachelor’s degree in Computer Operations Technology and a master’s in Cyber Security. After working hard to achieve his goals and landing a well-paying job, he realized he wasn’t satisfied. He wanted to build wealth and pay off his student loans.

How Jeremy Paid Off His Student Loans In 3 Months Jeremy wanted to get involved in real estate and began researching online for someone to train him to invest in commercial real estate. He discovered our YouTube Channel and ultimately joined our Protégé Program for hands on training and mentoring.

Commercial Real Estate Wholesaling In the first month, Jeremy began four weeks of foundational training. This involves learning the basics of commercial real estate, teaches you how you do evaluations and how to talk to sellers. During week four and five, we teach you how to market commercial real estate. Jeremy focused on learning about wholesaling commercial real estate because he could get the deal done without having a lot of money. He learned through our program that the way to market and find a good deal was by sending letters. He began his mailing campaign, sending out 800 letters which generated a few leads, connecting him with some motivated sellers. Through negotiations he was able to get the price of the property down, get the property under contract, and found a buyer using our marketing techniques. 211

The Importance of Lead Generation Jeremy discovered that lead generation, or finding motivated sellers, is crucial but it is also one of the most difficult aspects of wholesaling commercial real estate. Finding a good deal requires a lot of marketing. You may receive a lot of responses from people, however, they aren't always in a position of needing to sell. Sometimes they just want to hear what your offer is or want you to make them an outrageous offer. You need to find someone that is looking to sell and has a reason to sell.

Jeremy Closes the Deal and Pays Off His Student Loan With no experience in commercial real estate and very little money, Jeremy’s deal was done two months after finishing his training. Jeremy learned everything he needed to know within that time frame, and he his results showed it. He had been gradually paying down his student loans for ten years and he still had $20,000 remaining. It was a longterm goal of his to pay off his loans, but he needed to find another source of income. Within three months of joining the Protégé Program and closing his first wholesaling deal, he was able to pay off his student loan debt completely. As Jeremy puts it, “It was just a great feeling to be free off it”.

Jeremy’s Goal: Financial Freedom Jeremy plans to do more wholesaling deals in the future to build up enough capital to get his own commercial real estate property and eventually replace his nine to five income. Ultimately, his goal is to build wealth and be financially independent.

Summary: 1. Commercial Real Estate Wholesaling Jeremy used this technique to generate the income he needed to pay off his student loans in three months. Commercial wholesaling is a powerful technique for generating large amounts of cash in a relatively short period of time. A lot of our students use this same technique to build up their savings so they can invest in their own commercial property.

3 Steps In Commercial Real Estate Wholesaling 

Find off market commercial deals. Commercial Property Advisors is good at this, and you need to get good at it too if you want to be successful in wholesaling.

212





You need to get sellers under contract. You're not going to make money on any deal that you don't have control over. You get control of a deal by putting the seller under contract. How to Make an Offer on Commercial Real Estate Wholesale the deal to qualified buyers for a fee. That fee generated by Jeremy was the fee he used to pay off his student loans. So, the better you are at finding off market deals, and I think we're the best at it, the more money you will make wholesaling to your qualified buyers.

2. Act Now Our commercial real estate wholesaling techniques are perfect for the person with a student loan debt burden. Don't just sit there, do something about it. It’s ridiculous to wait twenty-two years to pay off your student loan debt. The mindset I want you to have is “never let good enough be good enough”. Don't settle for twenty-two years or even ten years before paying it off. Never let good enough be good enough for you.

3. Get Educated I'm going to offer you a copy of my new bestselling book, called Commercial Real Estate for Beginners. Click on the link and download your very own copy. Commercial Real Estate for Beginners

3 Persuasive Negotiating Tactics for Real Estate Investors How do you get the upper hand when negotiating your real estate deals? After 20 years of negotiating mine and our students' deals, we have learned exactly how to do this using three persuasive tactics. I am so excited to share these tactics and the importance of utilizing them in every single real estate deal you are interested in landing. https://youtu.be/L1T8xoxrU_I

Tactic 1: Come Up With Your Take Price Before You Make the Offer A take price is the highest price you're willing to pay for your deal. It is the price where you'll take the deal, hence the name, "take price". Once you come up with your take

213

price, put it in your back pocket. Don't share it with the broker or the seller, this price is for you, and perhaps your coach, only. Once you've decided on your take price, you are ready to make an offer. Your very first offer should be your take price, minus 5% or 10%. We do this because we want you to anticipate them countering your initial offer price. For example, if your take price is 500,000, then your initial offer would be around 450,000. That way if they counteroffer you are able to take anything between your offer and your take price and still feel good about it. Any offers above your take price you pass on or try to negotiate harder in order to keep it at or below your take price. Negotiations are More Perception Than Reality I have a very basic example to prove this, that I guarantee will happen to you. You are going to make an offer, and the seller is going to say, "You're offer is too low. I've already received offers higher than yours." This statement is more perception than reality and is quite possibly false. The seller probably received a verbal offer that could be higher than yours, but it must not have ever materialized. Because if he had received an offer higher than yours, why did he not take it? Because it is not real. Don't fall for this trick. Come up with your take price because it anchors you. It encourages you to fall in love with the numbers and not the property. A huge mistake people make when just starting out in real estate is getting too emotional with the beauty of the property, and forgetting about the numbers. A take price causes you to not overpay during negotiations. Negotiations can become very emotional causing people to overpay, but with a take price you are anchored to your price. Persuasive tactic number one is come up with your take price.

Tactic 2: Meet the Seller in Person When Negotiating When you negotiate a deal on the phone or through email, the seller is building their own idea and perception of who you are and most times, it's not a good one, because you're negotiating with them. The only way to overcome that negative image is by meeting the seller in person, in order to forge a human connection. Forming a human relationship with a seller can help give you the edge in the negotiation. For example, we had a student that was stuck at $775,000 with the seller, and the deal was going nowhere. They were stuck and both the student and the seller were holding their ground. I told the student to go visit the property with the owner face-to-face, walk

214

around the property, ask a lot of questions, develop rapport, and go to Starbucks afterwards. That's what they did. To make a long story short, in that two-hour period, the price went down from 775 to 705. He saved $70,000 off the price in two hours. That's $35,000 per hour. That is what meeting the seller will do for you. When you meet the seller, I guarantee you, you will win. The human connection is very important in the real estate negotiating game. More important than you think. Creative Real Estate If you wind up short some funds for your down payment, or need to do something creative like a seller carry second or master lease agreement, forging a human connection and meeting the seller in person will increase your creative financing chances by 10 times. If you are short on money and you need to do something creative with your deal, meeting the seller in person will increase your chances of doing something creative, guaranteed. When you meet the seller in person during negotiations, your real estate negotiation period is more about your relationship than how much money you have in the bank. Real estate investing is a relationship-based business. It is today and always will be.

Tactic 3: No One Likes to be Coerced into Something Persuasive tactic number three is very important to remember when negotiating with a seller. A smart investor will encourage the seller to think they are in control by giving them a quick out. I personally use this on my wife all the time and it works. (Sorry dear wife, but I just have to share this, I hope you forgive me.) Studies have shown that if you use affirming subtle language like, "You'll probably refuse this, Mr. Seller, but would you consider it?", it increases their compliance a dramatic amount. If you want the seller to agree to what you want to do, not only do you have to state what you want, but you also need to give them an out. An example would be, "Mr. Seller, would you pay for the closing costs in order to close the deal?" If you leave it like that, he'll probably say, "No. Why would I pay for closing costs?" But if you rephrase it like this, "Mr. Seller, would you pay for closing costs in order to close the deal? You're free to say no, of course but would you consider it?". If you add that subtle affirming language at the end, their perception is that you put them back into control. They are the boss and they get to make the decision whether you move

215

forward or not. A subtle language, a persuasive tactic is to give them a quick out to get what you want. This works, and it's scientifically proven.

3 Persuasive Negotiating Tactics for Real Estate Investors   

Persuasive tactic number one is come up with your take price. Persuasive tactic number two is to meet the seller in person. Persuasive tactic number three is to subtly encourage the seller to think they are in control.

How Beginners Can Beat Experienced Investors If you are just starting out as a beginner commercial real estate investor, you might be trying to figure out exactly how to get the best deals from commercial real estate brokers. How do you beat out the most experienced investors that the brokers have access to and get the broker to give you the deal, even though you are just a beginner investor? You're about to discover the story of one of my Proteges, who had no previous experience, just acquired 16 units in a Seattle suburb, that many would consider one of the hottest in the nation. https://youtu.be/GejZ5iPGSG0

Value-Add Deals That 16 unit property described in the video is a great value-add deal because the value can be increased and equity can be forced up on it. By not only increasing the rents by $75 immediately, he also found a vacant closet where he is going to install a washer/dryer hookup for the complex, in return for implementing an additional $75 rent increase per unit. In total, that is a $150 increase. If you do the math and multiply $150 x 16 Unit x 12 Months you get almost $28,000 per a year in additional income, that equals out to approximately $500,000 increase in value. That makes this an amazing deal for my Protege. The thing is, my student's offer was not the highest offer, and as a beginner investor, he came with absolutely no track record, yet his offer was the one they accepted. He beat the more experienced investors, even though he was a novice beginner investor. But how did he do that?

3 Tips for Beginners to Beat Experienced Investors   

1. Learn the Language 2. Have the Money for the Down Payment 3. Play to Win 216

1. Speak the Language There are two languages in the real estate world. There's commercial real estate language and there is the single family residential language (which is a big no-no in the commercial property investing world). If you want to be taken seriously as a beginning commercial real estate investor, you cannot use any type of single family residential language. You must learn the broker language, because they do speak a certain language. You must learn the apartment language; learn the terms of the cap rate, cash and cash return, price per unit, NOI, etc. It helps build immediate credibility with the broker. If you want to be taken seriously, you have to learn these terms. 7 Commercial Real Estate Terms You Should Know That was step one of what my Protege did. He studied the terms and learned the language to help him defeat what I call, "Beginneritis". Which is when you're a beginner that wants to be taken seriously, but you lack confidence. By studying and learning these terms and using them when speaking to brokers, you will build credibility and be taken seriously. It is the first step to beating the more experienced investors.

2. Have the Money for the Down Payment Have the money needed for the down payment. This doesn't mean that all of the money needs to be immediately available. This can become a mental block for a lot of beginner investors, because they fear that they have to have their ducks in a row before they can call the agent or make an offer. That is not true at all! In fact, I have a blog on 6 Ways to Raise Down Payment Money for Commercial Real Estate. My Protege didn't have all of the money available, but he had it available in various places. Have all the money for the down payment available, that's the second tip towards landing the deal. When you're talking to a commercial broker about a potential deal, they are going to ask you various questions to determine whether or not your are wasting their time. Your answer to where the down payment money is coming from is going to dictate how much time or how many deals they are going to send you. We instructed our student to inform the broker upfront what he had available and he had enough available through various means to complete the down payment. That's all he needed to tell the broker and the broker never brought it up again. When you have the money available, it evens out the playing field if you are a beginner investor.

217

Available could mean cash, savings, retirement accounts, or even other investors. If you add all of this up you can come up with hundreds of thousands of dollars available for your deal that you didn't think you had before. To be taken seriously and to beat out more experienced investors, you must have tip number two. You must have money for the down payment.

3. Play to Win Play to win, don't play to lose. One of my favorite book has a great quote I would like to share with you. The book is called "The Art of War" by author Sun Tzu. He says, "Knowing the enemy enables you to take the offensive. Knowing yourself enables you to stand on the defensive." That means that if you're going to play to win, you need to know your stuff. You need to do extensive market research and have a great plan. As coaches and mentors, our company does exactly that for our clients. We are able to put our students in the position to know how to play to win. Here are the three things we did to help win the deal and beat out the competition. 1. Our offer was slightly higher than the asking price, just like everyone else who bid. In order to throw our hat into the ring, to seriously be considered, we had to do that.  2. We used their in-house lender. The in-house lender is the guy who sits next to the listing broker. We wanted them to communicate how well qualified our student was to help us win the deal.  3. We kept the inspection period in the contract to 21 days. This gave us 21 days to do all of our due diligence, and all of our financing. We were determined to show that we were committed to this deal. If after 21 days, we decided to back out, our earner's money would be non refundable. Our competition offered 30 or 40 day inspection periods, but we offered 21 days because we were so confident in the deal. 

Know Your Deal Why were we so confident in this deal? We were confident because we knew there was a rent income upside of $150 which equates to almost $500,000 in forced equity. So that's why we were able to offer slightly higher than the asking price, because we knew the deal. We found out during our research that there were two identical properties behind this property. I saw the potential of not just 16 units, but up to 48 down the road. As I am writing this blog, my student is contacting those other owners. The property had a great location as well, is in a suburb of Seattle with a 30 minute commute to downtown Seattle. We did our due diligence and knew this deal had fantastic potential.

218

Secondly, there were two identical properties behind this property and I don't think anyone knew, because no one ever brought it up. We found out during our research, so I saw the potential wasn't just 16 units but possibly 48 units down the road. Right now as I am writing this blog, the student is contacting those other owners. Thirdly, their property is in a suburb of Seattle with a 30 minute commute time from that city to downtown Seattle. That's a great area. As you know, that's one of the hottest multifamily markets in the nation. That city had a 15% population growth since 2010 and there is a community college and two elementary schools within walking distance. What's not to like about this deal? So that's why we were able to be so aggressive and play to win.

Truth Behind the Triple Net Lease Would you like to invest in a truly passive commercial real estate investment for the next 15 years where there are no management responsibilities, no landlord duties, no evictions, and no toilets to clean? It's like clipping coupons, or getting mailbox money on a monthly basis. Sound too good to be true? Well, surprisingly it's not. That is what we call a triple net lease investment. In this blog I will illustrate to you exactly how a triple net lease works in commercial real estate. https://youtu.be/JBSgdKaNXrw

What is a Triple Net Lease? When you go to a Starbucks, someone owns the Starbucks. Starbucks doesn't own the building, there is an individual who owns it.If you were the owner, Starbucks would pay you a lease payment every month. Let's say this amount is $20,000 a month. Under the triple net lease terms, Starbucks will pay for all of the expenses for the next 15 years. That's the best part about a triple net lease. Starbucks would be paying for your insurance, your taxes, all the building repairs, the parking lots, windows, roof, electrical, and more. They pay for everything. So you receive a $20,000 a month lease payment from Starbucks. You then use this money to pay the mortgage if there is one, and everything left over is your cashflow. That is what we call a triple net lease, where Starbucks does not own the building, they're just the tenant, and they pay you a lease payment and cover all of the expenses. You just pay your mortgage and the rest if cashflow. You have no landlord

219

responsibilities, no management duties, no evictions, and no toilets to clean. It's like getting mailbox money.

Second Example When you visit a large grocery chain, most likely, that grocery chain does not own the building, they're just a tenant that pays the owner of the building a triple net lease payment. The grocery chain pays all of the taxes, insurances, repairs, and other expenses. The same goes for most major restaurant chains, banks, and single buildings. They are not the owners of the buildings. There is a landlord who owns the building and the company leases from them.

Pros of Triple Net Lease As I mentioned before, one of the great advantages of the triple net lease is the lease will last 15 to 20 years, and within that lease, every five years or so you're going to have rent increases. So, over these 15 to 20 years you're going to have rent increases that go up incrementally, and they are fixed within the lease, so that's a great and huge thing. There will also be no landlord duties because your tenant pays for all the expenses. They pay for the taxes, insurance, repairs, roof, and everything in the building. There is nothing for the owner to do, other than collect your check, pay your mortgage, and experience cash flow. The best part is this type of cash flow is stable because of these three things, the long-term lease, no landlord duties, and the tenant pays for all of the utilities and expenses. Plus, there is potential for rent increases every five years. Lastly, you have a low turnover, because they are in for such a long time. It's not like apartment buildings where the tenants last on average a year to 18 months. With a triple net lease, the tenants will stay a minimum of 15-20 years on most occasions.

The Ultimate Goal For some of you, the triple net lease might be the ultimate goal. You may have invested for 20 years in your single family homes or apartment buildings, and worked your butt off to get where you are. Now you are pretty successful, but still involved in day-to-day doings of owning those rental properties. Now you think maybe you ought to back up a little, retire perhaps, and it will be ideal for you to go into triple net lease investments because of all of these advantages.

220

Cons of Triple Net Lease But there are cons, there are minuses, there are disadvantages to all of these pros. Number one, there's a risk when the lease ends. If you owned a triple net lease property with four tenants; a hair salon, a shoe store, a large grocery chain store, and a pharmacy. Let's say that the grocery chain store lease ends after 15 years and they choose to relocate. Now you are only collecting three out of four rents, and your largest paying tenant is gone, leaving a big dark empty building. What do you do now? That's a risk. Let's say that you have a triple net lease on a single-tenant bank, and the bank moves out. You are now 100% vacant, which can be a big problem. So the risk of doing a triple net lease investment, is what happens when the lease ends? A lot of planning involved can help to overcome and mitigate that risk, but it is still there.

High Capital Cost Next is the high capital cost when the lease ends. Let's say you own that bank building, and the bank lease expires, so they move out. Now you have to get everything ready inside the bank building for a new bank or a totally different store. And guess what? Those costs are yours. You're paying hundreds of thousands of dollars to get that building ready for the next tenant. That's a con. There is also limited upside if the market gets hot, because you're in a longterm lease that's fixed with increases. So if the market gets hot there's nothing you can do. You can't take advantage of it, you can't break the lease and increase the rents. When the market gets hot, you are held to the terms of your lease, so there's a limit to the upside.

All Triple Net Leases are Not Created Equally Would you rather lease your single tenant building to Starbucks or to Joel's Coffee who only has one store? Of course, you want to lease to Starbucks because if they close down the store after five years, they will write you one check for the remaining 10 years. If Joe's Coffee go out of business that's it, you're left with an empty building. Even though both are triple net leases, a Starbucks will guarantee nearly all their rent that's remaining, whereas, a mom and pop shop cannot.

221

Who Should Do a Triple Net Lease? In my opinion, it's the retiree looking for stable cash to live off of. I have a very good friend, who has owned her apartment buildings since we were kids, maybe in our twenties, inherited from her dad. She's an awesome person with a wonderful job, but last week she asked me, "Peter, what do I do when I turn 70, I don't want to continue to operate apartments, they're too much work?" She is the ideal person for a triple net lease, because now she's ready to just kind of pack it in, do something that's extremely passive so she can enjoy the future grandkids. I explained the pros and cons to her and she understood them. In the next few years she is going to consider the triple net lease as a retiree option.

Example 2 The next type of person that should do a triple net lease is someone that owns a five cap rate property. If this is you, then you're going to sell your five cap rate property and buy an 8% triple net lease property out of state. If you are in a high price area like I am in California, you're going to sell your high price, low cap property with all the equity. This might not produce tons of cashflow because the price is so high, but you're going to maximize your equity by buying an 8% triple net lease out of state in the Midwest. You're going to buy a strip mall, or a bank building, or some triple net lease buildings out of state in the Midwest, or Southwest, some place, to maximize the equity here. So this is ideal for a person who has a high price property, lots of equity, who maximize their equity with cashflow while kicking back.

Example 3 The third type of person is, when you're ready to park your money. If you're lucky enough to be a trust fund baby, or if you received a large inheritance and you're not sure where to put the money, but you need to put it someplace to start earning 4%, to 5%, to 6%, you would put it into a triple net lease investment for the next 15, 20 years. Or, sometimes international investors will take their money out of a very unstable environment, like in their foreign country, and they bring it to the most stable country, the United States, and invest it into a 15 to 20 year triple net lease property. That happens a whole lot and this country.

222

1031 Exchange Step By Step Case Study Selling your single-family home rental and trading up into a large commercial property without paying taxes is one of the greatest wealth building tools that ever existed, and still exist today. Let me explain. This is what I did. I took my single-family home rental, and a little bit of cash flow, and I sold it. I took 100% of my profits, or 100% of my equity, and I purchased a 44-unit apartment building without paying taxes again. Not only did I increase my net worth with a 1031 Exchange, it also increased my cash flow enough where I can leave my job as in as an engineer. Let's say that this is you. Let's say that you have multiple single-family homes. You bought them with the intent of using them to assist you with your retirement, or at least set you up for the retirement, but it quite didn't work out that way because of the low cash flow, the number of repairs, and maybe the management issues. What do you do? How do you get on track towards retirement? https://youtu.be/-zBXsOAuW8g

What is a 1031 Exchange? How about bundling your multiple single-family home properties and selling them without paying taxes again and trade up into a Starbucks, into a Triple Net Lease investment where you have no landlord responsibilities and perhaps you have a 15-year lease. Not only does this increase your net worth, but also stabilizes your cash flow for the next 15 years. How do you do that? Well, that's what we call the 1031 Exchange, it's also known as a 1031 Tax-Deferred Exchange. I'm going to illustrate how to take your rental property and trade it up into a larger commercial property, increasing your net worth, and increasing your cash flow without paying taxes. I can't stress enough that if done the right way, the 1031 Exchange is one of the most powerful tools out there to build wealth in real estate by paying no taxes or by deferring taxes. I'm going to start this case study off by giving you the problem and then the solution, and then moving on from there so you can really get it.

The Problem The problem is you have a single-family home with equity. That's a good problem. Secondly, you have a little bit of cash flow, which is also pretty good. But here's the issue, your intent when you started purchasing single-family homes, were to buy multiple single-family homes so that you can increase your cash flow. Your hope was

223

that this would set you up to retire or leave your job, or perhaps if you were to get downsized at your job, you could still pay the bills with the cash flow from the multiple single-family homes. Many of you, that's your goal. Or maybe it's to pay the kid's college tuition when the time comes. Here's the problem. Your plan isn't working out the way you intended. The main reason why is because it's taking too long. Buying single-family homes is the long way of achieving the goals. That's the problem.

The Solution The solution is based upon the 1031 Exchange. The solution is to sell your single-family home rentals, all of them or the ones with the equity, and performing a 1031 Exchange or 1031 Tax-Deferred Exchange where you pay no taxes and purchase either a:  triple net lease investment  a large apartment building  a shopping center  industrial building  office building warehouse  mobile home park  self-storage If you do it correctly, you can multiply your cash flow and net worth. The next thing I want share with you is the three main things you need to know when considering or doing a 1031 Exchange.

3 Things to Consider Before Your Do a 1031 Exchange: 1. You need to know the 1031 Exchange basics. The numbers 1031 is code word for an IRS, Internal Revenue Service, tax code. 1031 Exchange is a law and stipulates that you can sell your investment property and trade up into a larger property and defer your capital gains taxes if you follow certain rules. I call those the 1031 Exchange basics. 2. Know what your profits are. It doesn't make sense to know this when you sell your property. You need to know what the profits are so you know exactly what you can trade up into. 3. What are you exchanging into? What is your replacement property? Are you selling your single-family home rental and trading up into an apartment building, selfstorage, office building, retail or raw land? We'll go over what you can exchange into and what you cannot exchange into.

224

4 Basic Rules of 1031 Exchanges 1. Your property that you exchange into must be equal to or greater than the property that you're selling. The property you are selling is called your relinquished property, and the property you are exchanging into is your replacement property. If you are trading up from a $500, 000 to a $1 000,000 property, your replacement property is greater than your relinquished property. 2. The amount of equity that you move forward must be equal to or greater than the next property or properties you buy. You must take all your profits from your relinquished property and put them into your replacement property. If you do not, if you make $250,000 in your sale and you only move forward $200,000, that means your 1031 Exchange has failed, and you're going to pay taxes on that $50,000. It defeats the purpose of what you're trying to do, which is build wealth and buy more assets. You must bring your total profits 0f $250,000 into the new deal. Then you have your corresponding mortgage which is the leverage part. Again, the value and the equity must be equal to or greater than the property that you relinquish. 3. Once you sell your property, you have 45 days to identify your new property. Then you have a total of 180 days to close your deal. Once you sell your property, you have a 45-day period to identify your new property, and then from the day you sold up to 180 days, meaning an additional 135 days, to close your deal. You have six months to do everything. If you go beyond those six months, it's considered a failed 1031 Exchange, and you have to pay the taxes. We call that boot. 4. You must use a qualified intermediary, or a qualified 1031 Exchange Company. You can find one on the internet or ask your escrow company for who they use or who they approve to do your deal. Not anyone can complete your 1031 Exchange, they must be a qualified Company. It's called a Qualified Intermediary or a QI.

3 Rules of the Identification Period 1. The first rule when identifying your next property is called the three-property rule. You can identify up to three properties, and then you can close on one of them, just so long as the value is greater than or equal to your property that you sold. That's the three-property rule. 2. Next, we have the 200% rule where you can identify an unlimited number of properties, but it can't exceed 200% of the value of the property that you relinquished. 3. Then we have the 95% rule where you can identify more than three properties, but you must purchase at least 95% of all the properties that you identified. The most popular out of the three is the three-property rule because it's the simplest. That means that once you sell your property, you can identify three properties and just purchase one, so long as it's greater than or equal to the value of your relinquished property and you move all your equity forward.

225

Which Properties Qualify? Another thing to highlight is the properties that won't qualify for a 1031 Exchange. Your personal residence does not qualify, you may not use that for a 1031 Exchange. You can't trade into stocks, into developed lots, or into foreign property. Those are the four main no-nos when doing a 1031 Exchange. Now let's dive a little deeper into the case study, so you can see how it really works. If you have a property or properties that you are considering selling to trade up, you can just follow this guideline. The first one was the 1031 Exchange basics, so now that you completely understand those basic rules let's move on to the second and third main things you need to successfully perform a 1031 Exchange.

Determine Your Profit The second thing is determining your profit that you're going to have to move forward into your exchange. I'll give a quick example of how you're going to calculate what your profit is. You have your sell price, let's say you're selling your property for $500,000. You're going to pay off any loans that you have, pay the commission, and you're going to pay closing costs. Whatever is left over, that is your equity that you are moving forward. Remember, in an exchange, all of it needs to move forward into your replacement property. The profits to move forward to buy a new property, that is your down payment. Your down payment will then help you to determine what your replacement property will be. For example, let's say after you sell your property, pay off your loan and closing costs, you have $250,000 left over. You're going to put that into your 1031 Exchange account, and then you can purchase a property of up to a million dollars, that's a 25% down payment. You can do that if you want to leverage that much.

3 Considerations in Choosing Replacement Property 1. What Are Your Goals? When considering your replacement property, the first question that comes to mind is; what are your goals? Are you going to sell your single-family home and go into a larger

226

apartment building to increase your cash flow? Are you going to buy a self-storage, a retail, an office building? It's important to think about your goals. There are two goals I can think of right away. One would be to increase your cash flow. The second goal would be to restart depreciation. Maybe you've had your rental property for many years, and you can no longer depreciate it, so now you want to do a 1031 Exchange, buy a bigger building, and restart the depreciation. You can do that. Again, the beauty of commercial real estate. 2. What Can You Afford? Just because you have $250,000 and you want to leverage it into a million dollar property, doesn't mean you can afford it. You need to determine whether you are able to do that financially and if you will qualify for that loan. 3. Get Started Early The third thing, probably the most important these days, is to get started early. Back in the day when I first started doing 1031 Exchanges, there were plenty of properties to choose from all around the country. That's no longer the case. Now it takes time and execution, so give us a call, get some advisors in your team so you can be successful in this endeavor.

1031 Exchange Case Study Here is the case study. I kept it simple because, if you plan well, it can be simple. I'm going to sell my single-family home. Right now the cash flow's about $300 a month. My goal here is to increase the cash flow, because buying a single-family home was a good idea when that first started, but it is just not enough cash flow. My goal is increase the cash flow and get my retirement track going once again. I'm going to sell my single-family home for $500,000. After I pay off my loan, pay the realtor, pay the commissions, and pay closing costs, I have about $250,000 in profits. That goes into my 1031 Exchange account. Remember, it has to be a 1031 Exchange company, a qualified intermediary that will hold the money for you to make this legal. Then I have 45 days to identify my next property. This is key, you must identify in 45 days. I'm looking at an apartment building, at a Dollar General store, and I looked at an office building nearby. I decide to go with the apartment building. It is an apartment building called the Village Creek Apartments, it has 16 units and I'm going to buy it for $750,000. Remember the rule that when you sell the property, with a 1031 Exchange,

227

your replacement property has to be of equal or greater value. With this example I go from $500,000 to $750,000. Why Buy This Property? The goal is to increase the cash flow, so let's go over the numbers so you can see why I selected this property.  It brings in $112,000 a year in gross rental income.  I pay all of my expenses, taxes, insurance, repairs, and property management, which is $43,000.  I'm left over with $69,000. That's my NOI. Income minus expenses equals NOI. This $69,000 is what I have left over to pay the mortgage. Let's do a quick calculation on the mortgage.  I'm buying this for $750,000.  I'm putting a down payment of $250,000 and have $500,000 leftover, so I will have a $500,000 mortgage. If you do the quick calculations at 5% interest, amortize over 25 years, the payments are about $2,900 a month. Multiply that by 12, and it comes out to be $35,076 per year. I have my NOI, minus my mortgage for the year, which equals my cash flow for the year of $33,924. That's why I'm buying this property. I'm going from $300 a month to $33,924 per year which is a significant jump. That's what you can do, and the best part, it's tax-free. So, I identified this property. I like it and I'm going to buy it. I then have additional 135 days to close. This is really important. I have 45 days identify. Once I identify the property, let's say on the 45th day, I have an additional 135 days to close, for a total of 180 days. If I go over that 180 days, I have failed my 1031 Exchange, and I have to pay the taxes.

Mission Accomplished I close on my deal and Village Creek Apartments is mine. Did I accomplish my goals? First of all, my exchange was successful and I did not pay taxes on the $250,000, so my taxes were deferred successfully. Secondly, I increased my cash flow by nine times. I'm going from $300 a month to $2,900 a month. That's a significant jump. Thirdly, my depreciation restarts. I had this single-family home for a long time. I used all the depreciation and all the tax write-offs. Now I'm buying this 16-unit apartment building, and I can start writing off once again all the profits or the cash flow that I make from the property. Then lastly, the most important thing for me personally, I'm back on my retirement track because if you recall I bought this single-family home, and was

228

dismayed because it was taking too long. Now I'm back on track by exchanging into this 1031 Exchange property. I have another post called "How to Turn Two Houses Into 34 Apartment Units". You can read that and see an example of what one of my students did. He did a 1031 Exchange, and he took his two single-family homes and bought 34 apartment units. I go over exactly how he did it and all the numbers. It will probably be very helpful for you to read this blogpost as well.

How To Maximize Your Retirement Investments If you are in your 40s, 50s, 60s, or even 70s, and you have money in your retirement account, you should be asking yourself this question. Is what I'm doing in my retirement account going to allow me to retire when the time comes? In other words, is your retirement portfolio growing, and producing enough cashflow that you can pay yourself enough every month and not run out before you pass away? You're about to discover how to maximize your retirement investments by getting safety, growth, cash flow, tax breaks and complete control over your investments. When you are in your 20s and 30s, it can make sense to invest some of your retirement money into stocks and mutual funds. But as you age, you're time horizon reduces, and those traditional investments become less and less effective. There is, however, a tried and true investment that works better than any other, especially when you have limited time to "catch up" on your retirement savings. Welcome to the powerful world of commercial real estate investing; where you can have your cake and eat it too! https://youtu.be/Ef0oJ8MohjA

Meet Kathy We have a student, her name is Kathy and she has a substantial amount of money in a retirement account, but she has a problem. It's not growing, and she feels uncomfortable taking money out to spend on her bills because she doesn't believe that's going to last her entire life. She came to us and hired us as her mentors. We had her take out 15% of her retirement account and invest in commercial real estate. When we did this, I wanted to show her the benefits of commercial real estate and how in contrasts with investing with stocks and mutual funds.

229

Benefits of Commercial Investing  







She's getting cashflow that she can spend comfortably, continually and confidently for many years. There is growth in the value of her property, where she's not going to lose principle and she's not going to run out of money. We'll call her property her retirement account. Her commercial real estate purchase is going to be safe compared to stocks and mutual funds. Safe means predictability and in commercial real estate we have predictability. Therefore, when interest rates rise, or when something happens in the economy, we know what to do because we do nothing other than real estate and we've been in this business for so long. It's tax friendly. Every month Kathy is going to put money in her pocket that she can spend on bills and at the end of the year, that money she received should not be taxable. If done well, there should be no income tax to pay because of all the write offs she has and because of the legal tax loopholes that she has as a commercial real estate investor. Most importantly, Kathy will have control of her property. You don't have control over your stocks and mutual funds. Kathy has control over the property, where no bad news from the media, no political environment, and no corporate corruption can take away her value or her cashflow.

Five Pillars to Maximize Your Retirement Investment In order to maximize your retirement investments, you need these five things: 1. Control 2. Cashflow 3. Growth in value 4. Safety 5. Being tax friendly

Control of the Cashflow: In commercial real estate, we can increase our rates, reduce our expenses, and produce more cashflow on the spot. Can you do that with the stock and mutual fund?

Growth in Value: Did you know that in commercial real estate, as the net operating income goes up, so does the property value? We can force the property value upward, so much so that we can refinance that increased equity and pull out our down payment. Then do a cash out refinance, put it in our pocket tax free, and keep the cash flowing property. You can’t do

230

that with stock and mutual funds, however you can if you have control over your investment.

Control Over the Safety of the Property: What I mean by safety is predictability. With commercial real estate, you have control over when things happen. You also have control over the management; you can hire and fire any management you like. If you have stock in a mutual fund, you can't do that because it's up to the shareholders.

Tax Friendly: Did you know that if you have a commercial property, for example an eleven-unit apartment building, and it has 11 refrigerators or 11 air conditioners or 11 sets of new carpet, you can do what we call cost segregation? You can rapidly accelerate the depreciation of all those items. Over five years, you can write off all the refrigerators, all the air conditioners, all the carpets, and all the other fixtures. We call that hidden cashflow in your pocket during tax time at the end of the year. That is not possible with a stock and mutual fund, but this powerful strategy, cost segregation, or sometimes called chattel depreciation, exists when you control your real estate.

Kathy’s Deal Using a commercial real estate agent, Kathy is buying a 16-unit apartment building. Her purchase price is $640,000 and she’s buying it in an 8% cap rate area. (For those of you that want to make the best decisions, wherever you buy, you need to know what the market cap rate is in your area.) She's putting down 25% of $640,000, which is $160,000. Her rents are under market, meaning that we can raise the rents. The property is in average condition and needs some work. Can you find a deal like this? Of course, you can. However, Kathy created a great relationship with her agent, and it took her going through probably 40 deals with us to find this one. So, don't think you're going to just read this post and go on to a website and find a deal like this. It takes time and focused effort, but this is from an agent, so these deals are out there. Below I have her deal numbers broken down for you. First you will see the "today numbers;" the actual numbers related to her investment as they are now. As well, you will see the "predicted numbers," which represent the goals we intend to meet in about

231

two years. I know two years is a long time, but I'll show you that it's worth it to reach these numbers.

Current Numbers Let's go over her today, or actual numbers. Her rental income per year is $90,000. Because she is not going to be 100% full for the full 12 months, I'm going to subtract a 5% vacancy factor of $4,500. That gives me an effective gross income of $85,500. I'm going to subtract her operating expenses of $32,142. That includes taxes, insurance, property management, repairs, and supplies. Then it's going to leave me with an NOI (income minus expenses) of $53,358. Then from there I'm going to subtract her annual mortgage amount of $30,912. That's based upon her putting down 25%, a 5% interest rate, and a 30 year amortization. The NOI minus the mortgage equals the cashflow. Her cashflow is $22,446, or $1,870 per month. She ends up with a 16% cash on cash return and an 8.3% cap rate. Now, this 8.3% is slightly above the market cap rate, which means she's slightly overpaying for the property. However, in markets today it's okay, especially in this case, as you will see.

Projected Numbers Our two-year plan is to raise her rents $125 per unit. As the tenants move out, we're going to go in and spend about $3,000 per unit in upgrades, and then we're going to raise the rent $125 more. That's going to give us a new income over the next two years of $114,000 per year. I'm going to take out my 5% vacancy factor of $5,700 and what's left over is $108,300. We have the same expenses of $32,142. I'm going to subtract the expenses from my income. That gives me a new NOI of $76,158 and an increase of about $23,000. That's key because as the NOI goes up so does the property value, and it is one of the reasons why we slightly overpaid. The NOI minus the same mortgage of $30,912, gives us a new cashflow of $45,246. Over two years, we raise the rents $125 on 16 units and it doubles our cashflow. Here you can see the importance of buying more units. That gives her a monthly cashflow of $3,770 per month, 32% cash on cash, and the cap rate comes out to 11.8%.

232

Does this property meet the five pillars to maximize your retirement investments? Control Does Kathy have control over this property? She sure does. She bought it herself and no one forced her to do it. She hired the management and she's overlooking the numbers. She has full control over this asset.

Cashflow She’s walking in with cashflow and then two years later she doubles her cashflow. Guess what? This is going to go up even more and it’s consistent. Every year she's going to make this until she raises the rent. Can you say the same with your stocks and mutual funds?

Growth in Value Kathy came to us because she was not experiencing growth in value in her portfolio account. Instead, it was going down. So we had her buy this property to show her that it can grow. You may have to read some of my other blogs to fully understand this concept but let me explain it. Commercial Cash Out Refinance If you take your future NOI and you divide it by your market cap rate area, that's going to give you your new property value. Kathy’s projected NOI of $76,158, divided by 8% gives her a new property value of $951,975. She bought it for $640,000, but through the process of increasing the rents, maintain the expenses and boosting up the NOI, we increased the property value from $640,000 to $950,000. Then, one thing she can do that you can't do in a stock and mutual fund is she can do a cash out refinance. She can go back to the bank, show the banker her new numbers, pull out her original down payment and keep her cash flowing property.

Safety, Predictability and Management Kathy hired the best management in the area. She has full control of hiring them and firing them and overseeing them. As a company, we show our students how to manage the management, which is extremely important.

233

Tax friendly To me something that's tax friendly simple means that at the end of the year there's no income taxes to be paid. Her cashflow is $22,000. She’s paying $30,000 a year in mortgage, $20,000 of that is interest she can write off. There's also around $10,000 of depreciation she can write off as well. With the legal tax loopholes and all the write offs, she can write off that $30, 000 against the $22,000, so she's paying no taxes on this first year.

Next Steps to Maximize Your Retirement Investments Ask yourself this question: is my retirement portfolio performing in such a way that I can pull out money and still have the value in my retirement account grow? If you can't, then you need to get educated because no one cares about your money more than you do. Your investment advisor who handles your retirement account is educated in what they do, but you need to decide if you want to put your investments in the hands of someone else or do you want to take control of it yourself? The last step is to contact us. We're here to help, serve and listen. We'll be glad to talk to you about what you have going on with your retirement portfolio. Maybe we can help you add something to it and maximize your retirement investments.

Why Diversification is Investor Ignorance I'm going to humbly group myself with Warren Buffett and Mark Cuban because we focused on one thing and made our fortunes in our area of expertise. Warren's expertise was in his company Berkshire Hathaway, Mark’s was in software, and mine is investing in commercial real estate. That approach differs from the everyday investor who's trying to diversify by creating multiple streams of income and building on them. This is what they call diversification, and they never become an expert in anything. They're always dabbling in things and trying to grow their income that way. Here's why diversification is investor ignorance... https://youtu.be/g-hXp-FKDA4

234

Focused Investing Produces Extraordinary Results When we focus, we become experts in a certain area producing extraordinary results. Remember, Mark and Warren are famous because of they can produce extraordinary results with their investments. You may be reading this blog because of the results I was able to produce with commercial real estate. This is the opposite of the everyday investor because they want to have the multiple streams of income. There's no discipline and it leads to frustration. I can relate to this. In my first five years of leaving my corporate job to do commercial real estate full time, I had too many things on my plate. I could get nothing done or become an expert in anything and became very frustrated because it wasn’t producing the results I wanted. Now that I am focused and disciplined like Warren Buffet and Mark Cuban, I can produce extraordinary results. I'm a big believer in this acronym for FOCUS: Follow One Course Until Successful

Focused Investing Produces the Capital to Diversify Because we have an area of expertise and are highly focused, unique opportunities present themselves to us and we invest in them. That's what we call diversification. We were able to invest in these opportunities because our expertise and results produce excess cashflow and equity. For example, I was able to invest in syndications, other people, companies and other specialized funds because we had the extra cash flow and equity built up waiting for these opportunities. The everyday investor who isn’t focused and tries to diversify their investments in the early stages can't take advantage of any unique opportunities because they have no money. The result of this approach is they don’t have the capital to take advantage opportunities because they're spread too thin. Having an area of expertise and being focused in the beginning provides the opportunity for diversification later.

Focused Investing Enables You to Build a Team Now that we have been successful in our area of expertise and been able to diversify by investing in these unique investment opportunities, we must build a team to manage everything. By building a team, it builds upon itself and you will not believe the massive leverage that can be attained in commercial real estate by having the right team. That's what we teach our students, assemble the right team and have things build upon each

235

other. The everyday investor doesn’t have a team and they're struggling because they must do everything themselves. Do you now see the difference between Warren Buffett, Mark Cuban, and myself versus the everyday investor? We are increasing in wealth and the everyday investor is still struggling to get results. Which one do you identify with?

3 Tips on How to Correctly Diversify Within Commercial Real Estate: 1. Choose Commercial Real Estate You need to study it like crazy. Start small, there’s no reason to start with a $10 million property because it’s too risky. You can make money by starting small and then go bigger and as you go bigger, make more money.  Always focus on making money, this is not a speculation business. The properties will start to produce excess cashflow and equity buildup that will allow you to diversify to other things.  

We do the opposite from the traditional investor. We focus on becoming good at something first, creating the cash flow and equity, and then we diversify. That's what Warren Buffett does, that's what Mark Cuban does, and that's what I do. 2. Focus on These Commercial Property Types  Cash flowing properties. We don't do any speculations, everything is conservative, and we focus on cashflow and we focused on the statistics.  Favorable demographics, for example the job outlook in the city. Wherever we invest, you must have jobs. If there are no jobs, then you have no tenants.  Deal upside. What do I mean by that? Deal upside is where we can increase the NOI in their property, through rent increases by charging back utilities, redoing the leases, or reducing expenses. When NOI goes up, so does the property value.  Only invest in B and C class properties, no A class, and no D class. A class is too expensive and D class is too risky.  Find motivated sellers. This is the key to the rest of this. It’s called lead generation and that is what we are good at. 3. You have limited time on earth. This is from me on a personal level. You have limited time on earth, especially if you're in your late 30's or your 40's and upward. You don't have time or energy to become an expert in four different things at that age. So, what I want you to do is to focus on one thing and become an expert at it so you can participate in what Warren Buffet, Mark

236

Cuban and I do. Having an area of expertise and being focused in the beginning builds equity and cash flow and provides the opportunity for diversification later.

How to Make Big Bucks with Value-Add Commercial Real Estate You're about to discover how investors make the "big bucks" by doing what are called Value Add commercial real estate deals. The most successful commercial real estate investors do value add deals. That's where they make their millions (including myself and my Proteges). In this training, you'll learn what value add deals are, how to locate them, how to evaluate them and most importantly, a road map that you can follow to make the big bucks yourself!

Adding Value 101 Adding value to a commercial property is done in one of two ways... Adding Value by Market Appreciation The first way that commercial real estate owners increase the values of their property is to allow the forces of the market to slowly increase the value. If you're a good operator and consistently raise rents to keep up with the general market, in 20 years, by making no improvements or adjustments, some commercial properties can literally double in value. Simply by allowing time to elapse, most commercial real estate rises slowly in value thanks to market appreciation. This is not always the case, as some markets do go down if the population leaves overtime. But normally, all things being equal, if you continue to increase the rents of your commercial real estate to keep up with the general market, your property will appreciate and the value will increase. Adding Value by Making Improvements Instead of simply waiting for the market to hopefully appreciate, you can increase the value of a commercial property by applying "value adds" to it. In the example of an apartment building, you could remodel the kitchen (installing granite counter tops, stainless steel appliances and tile floors) and install washers and dryers in each unit. Those improvements allow you to charge more in rent and that increase in rental income can increase the NOI and when the NOI increases, so too does the value of the property.

237

When you add value to a property through improvements or other such adjustments, that's called a "value add" deal...because you added value. The most successful commercial real estate investors look for properties that have great "value add" potential. Using the apartment building example, wise apartment investors look for properties that need certain improvements which provide the biggest bang-for-yourbuck return on investment (ROI). Remodeling kitchens and adding washers and dryers have proven to bring the highest ROI of any improvements, in recent years. Brand new built properties rarely have any value add potential so you are stuck with waiting for appreciation to provide any value increases over time. Some large institutional investors want brand new properties but we mentor individual investors on value add deals so they can produce enormous results, far more efficiently, than what typical large institutional are seeking.

Value Add Commercial Real Estate Investing You're about to discover... Definition of value add commercial real estate How to locate value add deals How to evaluate the best ones Roadmap on how to create your own commercial value add deals An example of a real deal from one of our Proteges that purchased a $3 million property and increased the value to $6 million in two and a half years

    

What is Value Add Commercial Real Estate? Value Add commercial real estate is when you can add value to your commercial property. It can be an apartment building, a shopping center, a retail center, office building, industrial warehouse or any type of commercial property. Basically, it is when you add value to the property by doing certain things. What is this value and how do you add it? Let me explain. If you are watching my videos, you know by now that as you increase the net operating income, or the NOI, the property value goes up as well. Some of you may be asking, what's the NOI? The NOI is your rental income minus your operating expenses. As that number goes up, so does your property value.

How Do You Increase the NOI? 1. Increasing the rents as the leases come up.

238

2. RUBS: Ratio Utility Building System. This is where you bill back the tenants for the utilities. Taking the burden off you increases your cashflow, thus increasing your NOI as well. 3. Add other income. We just recently discovered that everyone around our property was charging $400 for a pet. We started charging anyone with a pet $400 plus we increased the monthly pet fee to $75. We had no pushback at all from them because they love their pets. 4. Reduce your expenses by:  Being more efficient with your property operations. You can do this by being a better operator and hiring good property management who are efficient.  Contesting your property taxes. If you believe your property tax is too high, you can hire a company, a firm, or an attorney, that will go in and contest your property taxes to get them reduced.  Cutting expenses some other way. If you really look at your income expense statements, there may be something you can start cutting out that's unnecessary. As you increase your NOI, you increase your property value. That is how you add value to your commercial property, hence the phrase, value-add commercial property.

How to Calculate a Value-Add Commercial Deal The first thing you need to understand are the basic terms in commercial deal evaluation. They're not complicated. In fact, you can learn them from my video called The Seven Commercial Real Estate Terms You Must Know. You can watch it and learn these terms to ensure you understand what I'm teaching here. Once you increase the NOI in a property, the property value goes up as well. How do you calculate that increase in property value? Value-Add= Increase in NOI divided by Market Cap Rate What is the market cap rate? The market cap rate is a compilation of similar commercial properties. If they're all multifamily properties, you find out what they've sold for. Then you find out what the cap rates are and average it all together. The result is your market cap rate. If you want to find the market cap rate in your market, you can call a local commercial real estate agent and ask them. Ask them what the market cap rate for Cclass apartments in your neighborhood are, and then use that number to calculate the value-add.

Examples Increasing the NOI I'm going to compare a single-family home with a 16 unit, and I'm going to compare that with a 90 unit. This will enable you to see the differences between the properties. For the market cap rate in my example, we're going to assume it's 8%. 239

Single-Family Home   

Rent Raised/month: $200 NOI Increase/year: $2,400 Value-Add: $0

In other words, $200 times 12, that's $2,400 per year added to my bottom line. That’s the NOI increase per year. How much value did I add to my single-family home by increasing the NOI? Unfortunately, none. This formula does not apply to single family homes, only to commercial real estate. It applies to five units and greater for apartments, and anything else that's commercial. However, it does not apply to a fourplex, triplex, duplex or a single-family home. This is why investing in commercial real estate is so powerful. We can force the appreciation, force the value up very quickly. In a single-family home, you can double your rent, but the property value stays the same, because the property value is determined by your neighbor's property down the street.

16-unit Apartment Building   

Rent Raise/month: $200 on every unit NOI Increase/year: $38,400 Value-Add: $480,000

In this example, I raised the rent $200 per month on 16 units, and multiplied that by 12, which equals an additional $38,400 to my bottom line. Using the value-add formula (increase in the NOI divided by the market cap rate), I divide $38,400 by 8% equaling $480,000. Therefore, I have a value-add of $480,000. My NOI went up $38,400, but the property value went up $480,000. You can see the correlation and how important the NOI is. This is the beauty of commercial real estate.

90 Unit Property   

Rent Raised/month: $200 NOI Increase/year: $216,000 Value-Add: $2.7 million

In the final example, the rent was raised $200 per unit, times 90 units, times 12 months, giving me a $216,000 increase per year in NOI. I then divided $216,000 by an 8% cap rate, which gives me $2.7 million. That’s the power of the NOI.

How to Find Value-Add Commercial Deals Next, I'm going to show you how to find value-add property. You may be expecting me to give you websites or show you how to search with certain search words or keywords. 240

I'm not going to do that because there are no websites to go to. Instead, you need to develop a new way of looking for value add opportunities.

Establish a New Mindset First, you need to develop a new mindset. Looking with that new pair of eyes is very simple. You're looking for the value of a property. You need to see how much you can increase the NOI on a property per year divided by the market cap rate. Again, I showed you that if you can increase the property value on a 16 unit, by $200 per unit, that's $38,000 a year which increases the property value by almost $500,000. You need to approach every commercial property that you look at this way. Those are the new set of eyes.

Raise Rents Look to see if you can raise the rent, perhaps bill back the utilities, or reduce expenses. How do you know if you can raise the rents or add other income? If it’s an apartment building, you can go on to rentometer.com to see if the rents can be raised. If you want to know the current rates for an office building or a warehouse and whether you can raise the rent, go onto LoopNet. There are two options on the site, acquisition and leasing. Leasing will show you what other office buildings and shopping centers are getting for rent per month.

Reduce Expenses Can you reduce expenses? Always ask this question of your properties as well. How do you know if you can? Your first line of communication should be with the property manager because the property manager pays the bills every month for his properties, so will know if expenses are high or not. Getting an advisor or mentor will help you to see if it is possible for you to reduce expenses. Now, I guarantee you if you choose 10 properties in your market, in two out of those 10 you'll be able to do this formula and see the upside in value. To summarize, you find value-add commercial real estate by looking at every single property the same way and asking, “Can I increase the NOI?”.

241

Roadmap to the Big Bucks with Value-Add Commercial Real Estate 1. Get educated. You must become a student of the game. You can also become our student, but you need to become a student of commercial real estate by watching my videos, reading books, and meeting people. 2. Focus on one property type. Do not do shopping centers, apartments, and grocery stores. Choose one and become an expert at it. There is power in focus. I don't know anyone who's extremely good at apartments and shopping centers. I know people who are really good at one or the other and make a fortune with them. 3. Get your team in place. Hire a property manager, agent and lender. Get us involved. Assemble your team so you can be taken seriously when it's time to buy your property. 4. Evaluate lots of commercial properties. This is so you can see if they do have the value-add component attached, to see if there's upside. You need to go through quite a few to find the property with the numbers that make you excited. Start examining lots of deals and making lots of offers. 5. Buy a commercial property with value-add. You're going to buy a value-add commercial property by following the first four steps. 6. Execute your exit strategy. A well thought out exit strategy is of extreme importance in commercial real estate. The big bucks are made on the exit, so the exit strategy must be precise, razor sharp and conservative. If you are a beginner, don't try to do it yourself. You need someone with experience to help you out with this.

A Real Student Deal In conclusion, I'm going to share with you a real deal that one of our students did and provide a link at the bottom of the page to his story. He took a $3 million property and he increased it to $6 million in value in about two and a half years. Chris wanted to invest in commercial real estate. He had a retirement fund that was doing okay, but he was nowhere near reaching his retirement goals. For this reason, he came to us and his first deal was a 90-unit apartment complex. We helped him develop a value-add strategy for fixing up the property, raising the rents, hiring good management, and putting all that together in the first 12 months. Truly, his story is an example of the power of valueadd commercial real estate. Here's the full story on Chris: How Chris Became a Millionaire in 1 Year

242

How to Calculate Cash Flow…No More Spreadsheets! Recently, I have come upon numerous amazing apartment deals all over the US with incredible cash flow and benefits. Way more than last year or even the year before! I questioned “why?”, and found the answer to be fairly simple. Several investors, who purchased these apartment investments, did not see to the necessities to guarantee the success of their investment. I was astonished that the sole most significant thing they didn’t comprehend is calculating cash flow. Isn’t that apparent? Well, maybe to you and me, it is. As for them, my guess is that they were too overeager and sought to be “an investor”. Thus, skipping over the important step of seeking an advisor to aid them. The simple understanding of calculating cash flow is a completely essential skill. You cannot succeed without it. . You just can’t! I realize I am getting enthusiastic, but the typical investor, I found, does not have this basic skill. You need the fundamentals to be prosperous in anything. I advise to not use a spreadsheet when you first begin investing. I really do. Spreadsheets cause you to lose focus on the property. Calculating on a single sheet of paper first, makes the numbers you are computing truly mean something. You should never skip over the basics. Never. I’m presently assisting 3 investors improve their distressed apartment building. I found a mutual reason and source for their demise. The first reason is that they made a bad investment most likely because of calculating the cash flow incorrectly. This is not brain surgery. In actuality, it’s fairly easy, but it is often disregarded even though it’s a no-brainer. Once you discover an apartment deal to assess, you’ll want to find the answer to the most significant question fairly fast:

Does the property make money every month? In assessing any apartment deal (or any other income-producing property), there are 3 golden rules of “number-crunching” that you need to know about.

243

3 Golden Rules of Number Computing Step 1: get the income per year Step 2: get the expenses per year Step 3: get the debt service per year This is all you need in the beginning to assess any apartment deal!! After you do this, the final part is easy subtraction: Step 1 amount minus Step 2 amount minus Step 3 amount = Cash flow per year Step 1 is to find out what the overall rent payments are each month for every unit. Add it all up and then find the yearly amount by multiplying by 12. Step 2 is to calculate what the functioning expenses are on a month by month basis. The functioning expenses do not comprise of mortgage payments or interest, but do consist of typical bills like taxes, insurance, utilities, repairs and upkeep, property management fee, wages, admin costs, publicity, and supplies. Step 3 is to calculate what the mortgage would be every month if you purchased the property and then multiply that sum by 12 to get a yearly mortgage total. You see? It’s easy as pie, right? Be familiar with how to do this before you start using a spreadsheet of any sort. Steps 1, 2, and 3 should be deep-rooted into your brain. If you depend on spreadsheets early on, you’ll lose focus on how the property really performs. Too many have lost focus on their apartment investments and lost their cash flow. Don’t let this happen to you. Go back to the fundamentals and build from there.

How to Become a Millionaire by Flipping Apartments Over the last several years, a large amount of people, mostly new investors, bought apartments, big and small. These newbie investors assisted in keeping the economy stand strong by their buying and selling. Brokerages were thriving, lenders were exploding in development, and longtime owners were collecting loads of money by selling to these new investors at all-time high amounts. I individually partook in both sides. Here lays the problem that’s now coming into play – here’s how to make millions in apartment investing if you have the courage. Many of the same apartments that these new investors purchased are deteriorating and are not performing the way they were planned to. The proof is astonishing. Go onto Loopnet and see for yourself, how many apartments are “distress sales”. Not only are your creditors foreclosing on thousands of homes a month, they are also foreclosing on apartments, big and small. It’s a growing problem! Attaining 244

success in real estate requires you to “see a need and fill that need”. That’s how companies are started, how new skills are started, and how “new real estate investing” openings are shaped.

7 Hazardous Signs of a Failing Apartment Investment: Sign #1: Mortgage, tax, and insurance expenses are larger than 50% of your total earnings Sign #2: Vacant units are staying vacant for 90 days or more Sign #3: Appliances and other parts are being taken from empty units to be used for typical maintenance Sign #4: The property’s curb appeal is unsatisfactory. Sign #5: The Property bills are not getting paid on time Sign #6: Occupants departure (turnover) and not renewing their leases is growing Sign #7: Property’s tenancy is worse than the economic average for more than 90 days If you notice these signs on the next venture you’re looking into, get enthusiastic because an amazing deal could be in the making. To sum it up, if the owner does nothing to fix these issues they could be facing mortgage default. Here is where you could come to be part of their resolution. In a previous blog, I wrote about a low-money or no-money down buying method using a Master Lease Option. This is a wonderful way to tackle a property that’s about to nose dive.

Example of How This Works: 

You discover a distraught apartment building based off the above signs. 2. You buy it with a master lease (read my earlier article on how this works)and repair the building over time. In the time being, the cash flow and income made is yours to keep. 3. After the building’s problems have been repaired and it has become stable, you can either sell it

245

for a giant sum of money or 1031-exchange all of the profits into a bigger building taxfree.

Three Reasons Apartment Investments Fail 1.An unsuccessful and ineffective property manager is in care of the property 2. A bad deal was made 3. The owner did not watch over their investment correctly.

In Conclusion: Your answer to flipping apartments effectively is hiring great and knowledgeable property management, executing and closing on good deals (doing thorough due diligence), and holding those running the apartment on a daily basis liable for what they assure to contribute. As I stated before, if you have the aspiration and courage to take on rehabbing and flipping apartments and decide to go for it, you have a new occupation for life. There will always be deteriorating and non-performing apartments all over the place in the US. Let’s make the leap and make millions together shall we? Who’s game?

All You’ll Ever Need to Know About Finding Financial Partners…(Sort of) A couple of months ago, I found myself an amazing apartment rehabilitation deal. I believed it was a huge score, a no-brainer. After finishing up the contract and performing some due diligence, I came to an astonishing realization. My financial partners that I worked with for years had disappeared! Some were purely just fearful of the times we were in. Some had monetary wounds from their businesses and from the stock market. To sum it all up, I did eventually close the deal, but it was the toughest money-raising challenge I’ve ever come across. And I was not the only one. Once I shared my experiences with other investors, they told me of comparable scenarios, many turned out far worse than my own. Consequently, I consider myself starting from the ground up on finding new financial partners. I enjoy doing things together, so let’s do this as a group shall we? Here are a few questions I began with myself. See if they resonate with you too.

246

Questions to ask yourself: Question: When do I need to start looking for financial partners? Answer: NOW! There is no way to know what deal will need a financial partner. For that reason, always search or qualify, and always be on the lookout for monetary partners. Wear your “money partner-finding hat” at all times. Family events where friends are invited is a great and approachable place to share your successes. Any time you’re networking, always “be involved” in whose standing next to you. Ask them what they do for a living so that they will also ask what you do. Once this happens: you’re on! Question: What should I say if I were to run into someone that’s a potential financial partner? Answer: Easy, just say the following. “Hey Fred, do you know of anyone who might be interested in this amazing real estate deal I’m pursuing?” That’s what gets the ball rolling. You’re not selling or putting any pressure on Fred. You’re requesting his assistance and people usually like to help other people. Fred might reply that he is interested personally or he might know of somebody who might be (like himself!). Question: What should I say if they ask how much monetary gain they can earn on the deal? Answer: By law, you cannot guarantee them a set sum or range or calculation. All you can say is that it look like an amazing deal, but every deal has risks. Get their contact information at this time and follow up with them in the next couple of days with the deal facts and particulars. Once you follow up with them, put your “advisor” hat on instead of your “salesman” hat. Nobody likes to be sold. Almost everyone likes to be counseled. Know the variance and it could make all the difference. Question: What is THE ONE most significant thing in locating financial partners? Answer: ASK. You must ask! This is a worldwide rule. It’s fairly normal to be anxious, careful, and even overwhelmed in asking. The only thing I can say to that is, “You have not because you ask not”. In a later blog post, I’ll talk over how to prepare yourself to ask.

247

We’ve Got Your Bailout Money…Right Here! Last year, we bought via short-sale a 200 unit apartment rehabilitation project that was only 20% inhabited at the time of closing. The entrance of the property is positioned on a very busy street and has numerous decent sized retail shops attached to the building. The shops are entirely occupied and doing fairly well. This is apparent with all the car circulation and overcrowding in the parking lot. With everything going on throughout the apartment’s all-encompassing rehab, we let the retail part of the project run itself and did not give it any attention. We thought, it’s only 5 shops and there are 6 acres of dreadful apartment building to deal with. That’s logical, right? During due diligence this past year, we went over rental rates of all of our apartment’s competition, but did not go over our retail rate competition because we reckoned it’s only 5 shops. Those renters were paying around $2 per sq. ft. and we paid their water every month. After we began to catch up with the apartment rehabilitation, we decided to do a market survey for comparable retail shops. What we discovered made us unbelievably happy! First off, the retail rent hadnt been raised since 2002. The standard rate is $7 per sq. ft. Next, the water ought to be sub-metered, but nobody thought it was a big deal for only five shops. Wow, were we mistaken! Once we increased the rent on the five shops to $6 per sq. ft and correctly sub-metered their water (which saved us $5,000/month), we saw our net operating profits on those shops alone go up by $160,000 per year. If we do some fast math here: the area that the building is located on is certainly at an 8 cap. So, if we divide our new additional $160,000 net income by our 8 cap, we get an amplified property value of $2,000,000!! We just produced our own bailout money!! A lot of it!! The moral of the story: In commercial real estate, EVERY single dollar is important. It’s all about the profits. To be specific, it’s all about the net operating income, or also referred to as “NOI”. If the NOI goes up, the dollar value of the property goes up. It’s that easy. As the NOI goes down, so does the property value. It’s that easy. This is of course assuming that the area’s cap rateremains decently level and unchanging. Here’s some super easy math in case you would like to test it out on your own business deals or property: Since cap rate = NOI divided by sales price, we can flip this math formula around and find that sales price = NOI divided by the cap rate. Let’s substitute “sales price” for “added value”. So, we get “added value” = increase in NOI divided by the cap rate. 248

3 Ways to Make Your Own Bailout Money: 1: Raise the rent even if it’s a small amount. On an 8 cap property, for every $100 of growth in the NOI per year, your property income goes up $1250!! This is not complicated at all! Find ways to grow your earnings by billing back tenants for garbage pick-up, putting in new laundry equipment and by charging extra, 2: Reduction in overheads will increase your NOI. Find ways to lessen your operating expenses such as sub-metering any utilities, having your property insurance re-quoted, shrink tenant turnover, or bring contracted repairs in-house. 3: improvement on the tenant profile and enhancing the properties beauty, you can actually force your lower cap rate to decrease. A lower cap rate inevitably raises your property value if your NOI is unwavering. The point I am trying to make is…real commercial real estate prosperity is made in making the most of what’s left after you pay all the operating costs except the mortgage. Until next time…

R HARRIS REAL ESTATE 

HOME



BLOG



CONTACT

Official Site of Commercial Real Estate Coach, Author and Investor Peter Harris

Million Dollar Views from a World Class Coach October 8, 2015 By Peter Harris

249

I have coached over 1000 new and experienced investors on apartment deals since I began coaching in 2003. I truly believe that what you teach you become extremely sharp at. Training and coaching apartment investing has truly aided my own investing significantly. The marketplace has altered radically since 2007, but coaching investors are still going solid. For this article, I believe it would be beneficial to share my understandings from a coach’s viewpoint of what apprentices nowadays are doing and what they are up against.

5 Observations I Currently See As a Coach Observation #1: From the 10,000 foot level, I see lots of misunderstanding and distress on both sides – sellers and buyers. The inquiries I get from apprentice investors most frequently are: have we gotten to the bottom yet, what if I purchase and the market crumbles even more, and what is it I should invest in – apts., retail, self-storage, duplex, etc. Sellers fall into two categories: ones that are doing well and two, ones that are frantic to sell. The ones that are frantic to sell are being guided by brokers who have essentially given up on them. These sellers need imaginative student investors to salvage them! That could be you!

Observation #2: Banks and loaning institutes are producing the most barriers to getting a deal completed. Enough said on this point. But truthfully, the answer to this problem is: avoid using the banks and use Master 250

Leases or Land Contracts to purchase apartments. As I stated in Observation #1, sellers are being stranded by brokers, but sellers still want to sell. This is where you come in. Make those deals happen!

Observation #3: Values of properties in many areas are down to 2002-2003 prices. I also see cap rates from 2004 levels in amazing cities to capitalize in. Big office buildings here in SF are retailing for 2003 prices per square foot. In Texas, areas that were 7 or 8 cap a couple years ago are now 9 and 10 caps. I presume cap rates to sneak up even more. Check out the website www.loopnet.com to see what I am talking about.

Observation #4: You must think long-term now for financial growth purposes. A 7 year grip on cash flow is a wise strategy to have. As an alternative to buying and flipping apartments right away, you’ll want to hold onto it to make the most of your earnings. This is a transformation in our personal outlook, but it’s how things were done in the olden days (when things were stable). You must realize, the economy and the way we do things has transformed forever. Don’t give up, just make modifications.

Observation #5: Students and others I meet at seminars must be extra aggressive in making offers to sellers. We are in a buyer’s market which means we set the market price, not the seller or lender. The apartment is only valued by what you are willing to pay for it.

BONUS Observation: Don’t give up! The bumpiness and coarseness of today’s market is a “smoothing out” course. This down market is a strainer so to speak and will significantly repay those who stay in the game. It’s okay to sit out for an inning or two to catch your breath, but don’t leave the game. Never give up. Filed Under: blogTagged With: investing advice, real estate advice, real estate investing tips, real estate investors, real estate observations

251

10 Professional Tips to Handling Your Property Manager #1) Vital Information: The majority of property managers are not up to par!! In other words, 90% of experienced property managers can’t run your property to its maximum levels. Let’s be real, the property management business is a hard trade to make a profit in. They typically promise more than they can deliver. It requires years to be prosperous in it, let alone thrive financially. Plus nobody could possibly care more about your investment then you!

#2) Be positive the property management firm is on board with your business plan and exit plan for the property. Did you finance this property for monthly income for you to support yourself, or for your retirement years in the future, or as a tax-shelter? Whatsoever the circumstance, be sure your property manager is familiar and more important, agree with them.

#3) There is no way to foresee if a property managemer is talented or not, until you hire them for a few months. Disappointing, right? Partnering with a property management firm is like being married, you’ll discover if they are able to do the job only after they’ve been hired and began working for a while. Select your property manager carefully.

#4) To guarantee you find an amazing property manager get a recommendation from someone who is pleased with their personal property manager’s accomplishments. This is by far the smartest way to employ a new property manager effectively. Find somebody such as a colleague-investor who is satisfied with how their property manager is running things.

#5) Make sure you come to an arrangement where they send monthly performance reports – request a sample of their personal reports during the interview. Bluntly, ask what their property performance recording abilities are for owners. Get an example of what they presently send out, then inform them of what you need every week and month, as far as reports and updates on the building. If they are incompetent, then you have some degree of holding them responsible. 252

#6) Hold the property manager responsible for regimented monthly meetings and “weekly accountability reports”. Each and every month a conference needs to be set up between you and the property managers. If you do not keep up with monthly conferences and accountability reports, think of it like an undisciplined, no consequences child. What happens?

#7) Regularly visit the property (sometimes without notice!). After taking possession, I recommend visiting the property at minimum once a month (more if it is being rehabilitated) for the first 6 months. Later, visiting 4 times a year should do.

#8) Oversee a yearly customer service approval assessment of the renters which is typically called a “resident satisfaction survey”. These are fairly easy to do yourself or there are third party companies you can hire to conduct the survey. The assessment should talk about the following: upkeep of apartments and grounds, upkeep of communal amenities (pool, gym, etc.), upkeep of utilities (heat, water, garbage), resident relations, leasing amenities, and safety. Keep it uncomplicated with a self-addressed stamped envelope, with the option to remain anonymous.

#9) Be prepared for bumps in the road because things happen = shape reserves. Money is the number one thing that destroys business relationships Money complications look as if they never appear until it’s required and there is none to be found. Create and uphold fallback funds for emergencies.

#10) Do not be afraid to terminate the property manager if they continue to perform poorly. Here are some signs to lookout for that show it’s probably time to find a new property manager: failure to collect rent, deteriorating tenancy, routinely late reporting, and bookkeeping errors.

Creating a Plan of Action for Your First Apartment Building.

253

Establish Your Goal: To buy your first apartment in 90 days. Typically, this strategy is for purchasing cashflowing, income-producing apartment deal with its own equity. Do Your Economic Examination: one of the most significant rules on what location to purchase apartment buildings in to buy where there is WORK. If there is a lack of jobs and job development, there will be a lack of people to rent to. If there is nobody to rent to, your apartment investment will probably bomb. The simplest way to find a strong job environment is to call your resident chamber of commerce and get associated with the economic development department. Inside this division are all of the data you’ll require to see what the present unemployment rate is as well as what the future entails. You should also get information directly from the source. I’ll call numerous local property managers and ask them the question flat out: “How’s the job market in your area?”

Start Off In Your Own Neighborhood: I recommend beginning your market research and intending to invest in your personal neighborhood first. It is definitely the simplest and most adequate way to start out. Investing in another state for the beginner should be your last resort and only be done with the assistance and leadership of a veteran-advisor or hands-on consultant. Beginning locally will enable you to drive around, encounter people in person, keep in touch with the property without difficulty, and learn the business quicker.

Be Clever and Locate a Local Property Manager: Clever business folks band together with cleverer partners. Property managers know all the ins and outs of operating and sustaining apartments – that’s how they earn their paycheck. So why not have them as your guide now as you’re learning the business? Property managers know the area very well, if they’re nice, how desired their location is, and how steady they are. As soon as I locate a possible deal, I get my property manager on the phone and question them about the area and the apartment complex. This is my way to “kick the tires” before I leap right in. In the end, it will save me an excursion to the building and give me more time to assess other deals.

254

Start Generating Leads: Since you already have a goal, some market research experience, and an area to begin with, you’ll want to start locating sources of deals or leads. The easiest way to get leads is to begin calling local real estate agents or brokers. I advise calling them on the phone first and if you feel like you’re on the same page, meet them for a cup of joe. Even though you are qualifying them, you must be concentrating on developing a relationship with them. If you don’t like each other, it’s not worth working with them. Life is too short people! I stressed, many times, that the real estate investing is a relationship business. So, after you spend some time building a relationship, start sharing what you’re watching for.

Start Networking: Here’s the big “R” word again. Relationships. Join a nearby real estate group and begin going to their meetings. Attend investment seminars to not only learn the newest skills, but to encounter new people. One of the most well-off people I know has only a small amount of money, but is the king at making contacts and meeting people. I consider him to be truly rich. There’s fruitfulness in the relationships he develops. The best deals are not found on the computer. The funds you need for the down payment are not going to magically appear. These two things WILL certainly come as a product of new relationships you progress.

Study Hundreds of Deals: Locating a deal worth making a bid on is a numbers game. You’ll have to sort through a lot of jokers to find the ace. The more deals you examine and look into, the faster you’ll grasp your goal of purchasing apartments. The advantage of looking at many deals is that you’ll become better and better at assessing them. Soon, you’ll be able to qualify deals in only minutes, at times even seconds.

Acquire Your Financing: It’s at no time too soon to begin thinking about and figuring out just how to get your deals financed. More than likely you fall into one of the two following groups: one, you have your down payment already saved up and it is available. Or two, you have limited money for a down payment and you’ll have to go and find it. It is possible you could even fall into a mixture of the two? One group or the other, let’s get them going! 255

Get Your Apartment on the Right Path: What this means, is that you need to change your frame of mind from a homeowner/renter to a business owner. After you purchase your first apartment building and have renters, you are officially a business owner whether you planned on it or not. Being a business includes large obligations and burdens. It is time to develop an entity (LLC, LP, Corp., trust, etc.) that will own your apartment building and business.

How To Keep Your Apartments Occupied – For Years to Come! Last week, I met up with a 25 year old veteran property manager and apartment leasing expert. I listened earnestly just like an A student would. I jotted down lots of notes and asked a lot of questions. How often do people get the helpfulness of someone so knowledgeable and eager to share their wisdom so willingly? There are quite a lot of people that will show you how to locate, negotiate, and purchase apartments, but not much is taught about how to keep your apartments full of paying renters – continuously. In the Southwestern region of the United States, roughly 60-70% of apartments are turned over every year. What this means is that if you owned a 200 unit apartment building, 120-140 of those units would have someone move in and out within 12 months. That’s way too many renters moving in and out! In other words, only 60-80 of those units will have one singular occupant for more than 12 months. Wow. So, this means you’ll have a never-ending marketing job of “replacing” residents. Even if you were 100% full, you should never stop advertising, because it’s very probable that somebody will be moving out in a couple weeks. That’s just the way the apartment business goes– turnover is unavoidable. So, the question I had for “my newfound expert” was “How do I keep my apartments occupied at all times”? Her answer was, “Peter, you need to identify who you’re advertising to. Don’t try to be a be-all do-all apartment owner. Your multifaceted is eye-catching to a particular renter profile. Advertise powerfully and cunningly to them. If your building is near a college and is suitable for students, it’s pointless to market to families and retirees. That makes perfect sense, right? That’s a simple fact we already know, right?

256

The next thing I know, all those years of leasing and advertising skill just started pouring out of her. What I plan on sharing with you today is just a small part, but a tremendously significant one on marketing. It’s called Generational Marketing.

Generational Marketing There are three generational categories of tenants that every apartment owner should be aware of and understand when setting a marketing strategy. They are: Generation Y: Born after 1981 Generation X: Born between 1965 and 1980 Baby Boomers: Born between 1946 and 1964 In order to market successfully to an age bracket you need to discover a way to grab their attention, by using a message that feels familiar to them. Here are top ways to get these specific generations you are targeting to show up for an appointment, sign a lease and move in!

Generation Y: • They need admiration and love immediate satisfaction. • This generation grew up with a superior lifestyle than any prior generation • They are multi-taskers and have been since they were young • Get monetary assistance from their parents and grandparents • Information motivated – if you don’t give it to them – they will find it elsewhere • Text messaging is their conventional way of interacting and replying to questions or even setting appointments • You need a web existence and to be easily reachable or they go “bye-bye” • They don’t like bulk-marketing. They’ll be gone in an instant if you even try

Generation X: • Gen Xers are independent and resourceful • They do a lot of studying on the web • They recognize what they want and need less assistance • Like to live close to work and be close to top-rated schools • The design of the apartment is very significant in terms of bedroom and bathrooms • They adore theater rooms • Gen Xers tend to be doubtful so you must to be ready in advance

257

Baby Boomers: • Boomers love food, travel, amusement, health, and entertainment • They like to work from home-based • This is the age bracket of the high-status country club societies • These are the most problematic customers to reach – you have to try it all • Some still are not up to date with the latest technology This makes a lot of sense to me and explains why early on in my career my “excellent” marketing approaches did not work well. It’s because I didn’t know the needs of the people I was marketing to. Does this make any sense? I hope so because it will save you thousands of dollars in marketing and in turnover. I think I owe my new friend a dinner!

Huge Apartment REO Secrets At this time I would like to share 3 secrets you BY NO MEANS identified about large apartment REOs:

Secret #1: Banks are able to hold apartment REO assets on their books for a time of up to five years.

Secret #2: Not all apartment REO assets are retailed for super cheap simply because they are REOs.

Secret #3: Asset managers will not want to work with you. You most likely have a slight understanding of single family REOs and how they function. Commercial REOs have little to nothing in common with residential REOs. An asset manager for an REO division is usually in control of a bunch of properties at a one period. A commercial division REO asset manager is in control of a certain area, an asset type, a loan type or a mixture of everything. Since the assets they are handling are further operationally extreme, they handle a far smaller amount of properties. This means they normally will be familiar with their assets closely. Don’t forget, they are not a production line (like a residential asset manager), but are actually working with specialty products that are distinctive. Therefore, you’ll want to approach them in a different way as well. 258

This is what you ought to know about banks. Since banks are seriously controlled, given the current economic atmosphere, and being that bank regulators are observing all transactions very carefully, this means that you most likely won’t be receiving many deals from them or asset managers. It is the job of the bank to demonstrate that they are making every single effort to get the maximum payback on every REO they sell. (I know it doesn’t always seem like it) The smartest way for them to do this is to take the property to market (using a r/e broker) and perceive how much the marketplace (you and I) is prepared to pay for that property. This means, if there is ever a watchdog auditing a reduced sale price of an REO property, they can respond by saying they did all they could to sell the property. The price was purely what the market said the property was valued at. There are a few allowances, of course. One is if the bank is a minor local bank, it might sell some of their REOs to local investors they have solid connections with. There’s that word “connection” again people! Banks might also be eager to sell their “bad loans”, loans that they refer to as “non-performing” loans to investors that can achieve. This relieves the bank of going through the total procedure of foreclosure on a property they want nothing to do with. Essentially, the buyer of the loan would turn into the new note holder of the property, giving him privileges to foreclose and taking physical control of the property. If you are located in an area or know of an area where a bank is holding a collection of commercial REOs, to come to be an “insider”, performing a little investigative work could pay off majorly. Discover what agents they are using to liquidate their properties and shape a connection with those agents. Likewise, learn the sales prices and the properties that they have sold to figure out their hot knobs. What made the lender sell one property for a smaller amount than an alternative property? Different banks are scared of different concerns you’ll notice. By figuring out what those conditions are, it will aid you in negotiating improved deals.

5 Methods to Getting Lucky on Your First Apartment Investment There are people that continuously seem to get lucky in locating and attaining ideal apartment deals. I bet you wish you were one of them! Don’t people that are always lucky drive you mad sometimes? How do you turn into one of the lucky ones? What is it that you are not doing? What should you be doing differently? Who wouldn’t love to get lucky and not only discover your first deal, but in fact close on it? Well, read on my comrade… I received this email the a few days ago from a leadership trainer and it contained something I have confidence in being insightful, yet so guileless. His email discussed five ways to make yourself luckier. After reading the email, I contemplated these 5 things and regarded my life

259

achievements and approved 100% of what he stated. Here’s what he said and I will even add further information as it relates to real estate investing.

-5 Ways to Create More LuckFlow – Live in the moment. Be unstructured and stay that way! Have you ever gotten into the flow with one thing and when everything is going amazing, you crawl your way out of the flow? This is from overthinking things. Next time you are in the flow, be aware of the negativity creeping into your brain. Your mind controls what you choose to do in each situation. So when a amazing opportunity comes along, do not push it away because of doubt or fear. Push forward no matter what and flow with the deal so that it can take its course because this could be your lucky deal.

Arise from Love – There are only two ways to walk through life: With fear, or with love. Arising from love means you are coming from “more than enough” – and that’s a pulsation that others’ can sense. Then, move in on your deals with love and consideration and watch the magic enfold. People are not interested in what you know until you demonstrate that you care. If you use this approach, I assure you deals and prospects will come to light! I am sure of it!

Originate from Service – Most individuals are caught in WIIFM: “What’s In It for Me?” Truly prosperous individuals are service-minded people who are tweaked to WCIDFU: “What Can I Do for You?” This is the key to reaching extraordinary accomplishments in real estate. Originate from this outlook when you’re attempting to get the seller’s enthusiasm or throughout negotiations and you’ll upsurge your odds of a prosperous result by 10 folds.

Trust – Understand that you do not need to know everything before you begin. Just go for it.

Action – Just do SOMETHING. Taking no action is the most disastrous action of them all. Remember, indecisiveness is a decision all its own, and has its own penalties. If you do not take action, events will govern you, you will be continually reacting instead of acting. The bottom line is life rewards action.

260

These are 5 qualities of really prosperous people. The wealth I’m speaking of involves money, relationships, family, and wellbeing. So, if you are ready to place yourself into a place where you can “be luckier” and experience life to the fullest (the way it should be!), take a long look at these 5 qualities and ask yourself if you have any or all of them. It’s just a matter of time before your ideal deal turns up because of them. If not, it is never too late. Be purposeful in making the alterations required to be successful and to display each of these traits.

The Easiest Way to do Apartment Deals without Real Estate Agents When that annoying real estate agent is getting in your way of making an amazing and creative deal with the seller, what can you do? This is quite a smart question, and something you should definitely know the answer to. Time and time again, I am faced with this dilemma with investment deals. It can be very difficult to go around a real estate and deal personally with a seller, but it is possible. This is how you do it. First, you must gain the trust of the agent. You need to make sure he or she knows that you’re not going to whisk away their client or the listing or do anything without their consent. No matter how long it takes, work on earning this trust and understanding. When you ask the agent questions about the building, also begin inquiring about the seller (you’re gradually opening the door).

Three Questions to Ask the Agent:   

“Why is the owner selling?” “How long has the owner been investing?” “What does the seller do for a living?”

Next, keep an eye out for questions you can ask the agent, that he will not know the answers to. The agent will then ask the sellers these questions for you. Once he returns with answers, ask the same questions again, looking for additional clarification. Make it seem like you’re not content with the answer. Give it a day, then reach out to the agent asking if you can speak with the seller directly with him (the agent) on the phone too. If the agent believes that you are honestly attracted in the property, chances are he’ll agree to the call. Once you are on the phone with both seller and agent, come equipped with good inquiries as well as commendations. The following step is vital. Prior to the phone call ending, say the following: “Mr. Seller, I am grateful for your time. Once we are finalizing this transaction and headed for a closing, is it conceivable that I could meet you at the apartment building? For instance, it would be helpful if you could possibly meet me there during my walk-through assessment for a few minutes. Would that be a possibility Mr. Seller? I’m guessing he says “yes” to your invitation. In the next couple

261

days, schedule a walk-through of the property with the agent and suggest that the owner “stops by”. Only arrange this if the seller is available to meet with you. Once you have the seller there, exchange contact information with one him/her. You are now able to call him directly. Just remember to use this tool wisely. So there it is…a guaranteed home run on getting by the real estate agent and being able to speak directly to the seller in a moral way.

How to Collect $100,000 in Seconds Collecting funds has been the most asked question of me in the last few years; and I wager it’s something you’ve been pondering as well. Most new apartment investors are frightened at even the idea of collecting money. You’ve undoubtedly had the thought at least once, “How the do I even ask somebody to give me $100,000 to purchase a multifamily investment?” Well people, here’s the answer…you DON’T! Being the smart apartment investor I know are capable of being, you never ask for cash. Instead, you present prospects to people who then come to be tremendously engrossed. It’s a different way to go about raising capital, but I guarantee you, it’s the most beneficial route to go.

Your 10 Second Pitch It’s all about connections! When folks know what you do, and know you are zealous; they will go out of their way to send checks for you apartment investment. Trust me, raising funds is not quite as difficult as you might think. In reality, one of my students just raised $100,000 in just 10 SECONDS! That’s correct; 10 seconds! He told me precisely how he did it, and I believe that you can copy the way he did it and attain the same outcome. He penned out a ten second pitch (I’ll even give you the one my student used!), committed it to memory it and practiced it until the words just flowed from his mouth. He said that he went to a networking affair where they were only anointed 10 seconds to describe what their business is. After he gave his pitch, an investor sought him out and said that he was precisely the kind of person he was searching for. They’ve now shaped a very solid relationship, and that investor is very dependable to my student. I know many of you are wondering “Peter, what did he say?!” Well my friends, here it is: “Hi, my name is ___(Your Name)___, and I invest in apartment buildings in emerging markets across the United States. We join forces with investors who are displeased with the 1-2% return they get when working with an IRA or Mutual Fund. Then we buy, sell, and run multifamily properties to deliver clients with money made from the cash flow and equity when the units are sold. Anyone who wants to acquire more information can talk to me after the meeting.” With this elevator speech, I know that you can go out and collect lots of funds for your multifamily investments.

262

Three Steps to Seeing the Light Multifamily investors are constantly looking for troubled or underestimated properties where the cost to purchase is considerably under true market values. The following three steps are essential to assist new and veteran apartment owners find value that others do not.

1. Realize Value You must recognize where the current market is at as far as appraising; cost of rents, home values, costs etc. Distinguish where the market is and where you reason it will be. Will you be able to obtain the property at a markdown compared to impending values? To be able to recognize value in anything, especially investing in multifamily real estate, you need to have highly comprehensive assessment principles grounded on present and historic market facts. You have to recognize your current monopoly and what apartment buildings are currently trading for. Next you need to know what the worth of your apartment building is now, and what it could be in the new couple of years. This is not guesswork. What I am getting at, is being informed about your market so you are able to estimate rent progress, demand evolution, and other basics.

2. Study your Market What happenings are occurring in your market? What’s the resident government doing? What businesses are thriving or failing? What market cycle are you in; up, down, stationary? What do apartment investing ground rules look like? You must have answers to these inquiries. Having a respectable comprehension of where things are currently and where they are going will aid you in spotting gaps in appraising apartment investments. Began analyzing local magazines and newspapers, and frequently set up meetings with apartment specialists such as brokers, property managers, financers, and construction individuals to get their outlook on what’s going on and how they see things going in the future.

263

3. Know your Investment Plan Without a plan you will be unable to concentrate, and without focus you cannot be prosperous in apartment investing. If you did not have a plan for your investment, you will be just be selecting up any deal that comes along without knowing where you can take it. As a result, you will most likely get trapped up in the emotions a lot of apartment investors make blunders with. You must select a plan of action and stick to it, so that you do not get lost in the emotions that cause sloppy mistakes. Selection of an exit plan for your next purchase is essential to your victory in making a profit for yourself and your financial team. Partaking in these three comprehensive investment tactics will aid you in finding value that a lot of other amateur investors are unable to see. You will be at the top in your market, and brokers will recognize that. Once you have a strong understanding of market assessments, basics and what your exit plan will be, you will be ready for triumph with your next multifamily venture! Good Luck!

Accessing Apartments Rocket Science October 17, 2015 By Peter Harris

As apartments are how I earn my income, I pretty much go over numbers every single day. They’re either my financials or somebody else’s. While I’m meeting with property managers or customers, the attention is on numbers every time – earnings collected, negligent income, income we will never receive, vacancy calculations, and money available in the operating account at the

264

end of the month, just give a couple examples. Even after all of this time, I am still not a “numbers person”. I do not feel passionately about them but to review them thoroughly and recognize them is an essential requirement in running a business lucratively and dependably. Here are 2 extremely imperative things when going over numbers on your apartment investment BEFORE you purchase. Then next I will share 2 very significant things to lookout for after you buy.So, BEFORE you purchase any apartments or even when you’re assessing a deal, take a careful look at these 2 things:

Number 1 FINANCIAL thing to look at: The actual income, which is not the agent’s “proforma” earnings from his pamphlet. Proforma income is best-case, ideal situation earnings, this is not genuine earnings, don’t use it. In fact, totally disregard it. On every occasion you have monetary data from the agent or seller, ask where it came from. Did it come from an accountant? Did it come from the property manager’s software? Those two are used often and are pretty good places to start. But if you pick up a colorful flyer or handwritten data, or gives the look like it was made up, halt right there and probe this question – does the profits shown here match what’s stated on the property’s tax returns? This is a smart question! Which one would you lean towards believing: an agent’s or seller’s “imagined” income statement or a tax-return displaying the revenue? You know the answer to this question!

Number 2 FINANCIAL thing to look at: The operating costs over the last few years. If you were to do a deal at this exact moment, acquire expenses for 2013, 2014, and 2015 year-to-date. Compare every year’s costs and search for the following: reliability in the yearly total expenses, huge variations of any one expense (such as electric or any utility), and any other expenditure that you don’t comprehend. What I have discovered to be true nearly 90% of the time (that’s 9 out of 10!) is that the costs given to you are what I consider to be too low for standard operations. This is done to make the property seem like it’s accomplishing more than it really is. So, as an alternative I want to give you a few rule of thumbs I use to hypothesize overheads in EVERY deal I view at BEFORE I purchase. For 5 units to 20 units, I track my expenses at 35% of the active gross earnings. And for 20 units to 50 units, I track my expenses to be 40% of the effective gross earnings. And lastly, from 50 units to 100 units, I track my expenses to be 45-50% of the effective gross earnings. Throughout the years, I have discovered two truths about those two thumb-rules: one, agents continuously give expenses that are below the rules and two, the largest blunder inexperienced investors make is underrating the costs.

Filed Under: blogTagged With: apartment financing, apartment investing, assessing apartment deals

265

Inspiring Words on Picking Yourself Back Up After Real Estate Failure…A Must Read October 16, 2015 By Peter Harris

“Pain is temporary. It may last a minute, or an hour, or a day, or a year, but eventually it will subside and something else will take its place. If I quit, however, it lasts forever.” That’s a quote straight from Lance Armstrong, the ultimate American road racing cyclist.. I make it a habit to study extremely prosperous individuals and you should too. As many recall, Lance came out of retirement on his mission for an 8th Tour de France win but was hit by extreme bad luck. He suffered unfortunate flat tires and terrible crashes on successive days. His hopes and visions of tour success vanished…just like that. BAM! All that time and money spent preparing was for nothing. You’ve probably been in a similarly defeated state. You’ve been chewed up and spit out by life and cannot seem to get ahead no matter how hard you try. Day in and day out…nothing changes. Does this sound familiar? In the game and life of real estate investing, a lot of people are going through the same defeated state. You have two choices…give up or keep trudging along. Please make the decision to not give up. You may be two feet from gold!! Lance had no chance of winning that one race, but he did not give up. He finished the race to the end and continued to work towards his next win. This needs to be your outlook too. A day is

266

imminent soon, if you don’t give up, you too will make your very own comeback. Yes, times are tough right now, but this is not the end to your real estate journey…No Way! I’m begging you to not give up YOUR race. You will succeed if you don’t give up. I want you to take a break each day and meditate on 6 things that will give you a lift in upholding your race:

#1 – In your retaliation, reject rejection. #2 – In your retaliation, see failure as fleeting. #3 – In your retaliation, see your failure as a secluded occurrence. #4 – In your retaliation, see your impending success as a course. #5 – In your retaliation, be prepared to try a new tactic. #6 – In your retaliation, know that ALL prosperous people have had to bounce back at some point. You must also. Lastly, I want to reassure you with a true declaration of life…your setback is just a setup for your comeback.

Filed Under: blogTagged With: investing failure, real estate advice, real estate failure, real estate investing

Saying Goodbye to Your Job To Do RE Investing Full Time October 16, 2015 By Peter Harris At what time should I leave my job to do real estate investing full time? This is a question for the ages (and for the courageous!). As my 10 year anniversary of saying goodbye to the corporate world to follow my dream of being a full-time real estate investor, I can look back and reliably answer that question. I wish I had further space and time to write about this, but I don’t, so I’ll go over the basics to get you thinking and on the correct course.

267

The Two Most Significant Things For You to Do: #1) Keep your full-time job until you save up adequate cash flow from your real estate investments to pay your everyday living costs. In reality, it is sensible to do this for a minimum of six months. At the six month mark, you have solid evidence that it can be done. As your portfolio develops, you’ll discover that your job will begin to get in the way of your investing. Even though you won’t find a picture-perfect time to leave your job, you’ll recognize when it’s time. #2) Within those six months, save up six months’ worth of living expenses. This will become your reserves during the “snug” months – and there will be snug months, I assure you. Prior to saying a final goodbye to your job, you’ll have to learn to be somebody you’re not right now. Do you recall the theory of “Be-Have-Do”? Well, that theory is unfitting. The accurate theory is “Be-Do-Have”. In order to have something, you foremost have to Be that person, then the Have arises by Doing. Okay, I apologize if I confused you (it’s a Monday!), but to get right to the point, you must cultivate an entrepreneur’s mentality. Going from an employee way of thought to an entrepreneur’s way of thought is crucial to effectively leaving your job (and remaining gone!). After I left my employment to do real estate investing full time, I recognized that in order to have independence, I had to let go of sanctuary. So, what I did was let go of my sanctuary (my pay check) a small amount at a time by spending my free time operating my real estate business and then altering my job to a part-time thing. It was a four year (yes, 4 years!) era of ambiguity, continuous planning, investing, and hard work (plus raising a teenager). At the four year mark, my job was getting in the way of my real estate business which had developed fairly well. At this time, I had to make a choice. I had a good job with benefits plus I had plenty of real estate revenue to live off of. Life was grand. But was it really? Was I living a focused life? Could I grasp the potential my real estate business had? On Dec 31st of that fourth year, I offered my letter of resignation. Life has certainly changed. Nowadays it seems like I was designed to do this full time. But had I not strategized this prudently, worked on my character, and dove into real estate, I never would have revealed that the grass is in fact greener on the other side. The moral of this story is that although you cannot foresee the future, your future will be decided by what’s going on in your head, the movements you plan and take, and your yearning to stick with it when rough times come and go.

268

The Single Key to Creatively Funding Deals Several apartment or aspiring investors have approached me to learn how to create innovative funding for many different reasons. Almost all of the motives as to why a person would require creative funding are because:

• you have limited cash • you are unable acquire a loan due to bad credit or lack of credit • you want to leverage what funds or assets you have • you need short-term seller-financing prior to permanent bank financing If you aren’t part of one of those classes, then you’ll be joining a very crowded group. But don’t worry because today’s market is ripe for inventive funding. Firstly, how do you catch those creative apartment contracts? Below, I have listed 5 “owner circumstances” that are crucial for some sort of creative funding. If you see an apartment owner in any these circumstances, chances are they are prepared for somebody creative like yourself to arise and assist them with their circumstances. Here are 5 owner “circumstances” that you must always look for to discover creative funding deal prospects. They’re all over the place!

269

If you come upon a property owner who: #1 wants to dodge capital gains taxes on earnings after a deal #2 would be required to pay a hefty pre-pay loan fine if he sells #3 is sick or has private situations that thwart him from operating the property, resulting in it being in poor operating and physical state #4 Has to sell the property for some sort of reason, but there’s no equity in the property #5 is exhausted and worn out and/or if the property is underperforming These are all probable cases for creative funding to occur.

On another note, if you notice in a property listing or get the following words from agents or owners, it is a sign that an imaginative funded deal is welcomed: “owner motivated”, “seller financing”, “owner will carry”, “master lease option”, “distraught property”, “any offer considered”, or “investor sought”. An easy way to go online and find tons of these deals is to go onto Loopnet and enter those key words directly above into their key word search box. When you get down to the core of the matter, here is the secret to undertaking creatively funded deals, no matter how big or small: You need to ASK! That is the secret!! If you did not ask for your wife’s hand in marriage, you would not currently be married to her. If you didn’t ask your boss for that promotion or pay increase you’d still be where you were beforehand. You see? That’s where it all begins. Thus, the basic way to obtain and accomplish anything greater than what you have today is to…ASK! How do you apply this to innovative financing you say? Simple. First, get the owner’s enthusiasm for selling his or her property. Then, create an innovatively funded offer that meets some or all of his or her needs. Next ask the owner by sharing your offer. That’s where it all begins. If you do not ask, you will never know. And if you never know, you’ll never grow. So go out there and ask, ask a bunch

270

Getting Investors on Board to Say YES! Let’s say, $150,000 is what you require to complete this amazing deal you’ve landed. Supposing you’re currently at the time where you have plenty of information on your deal and you have a number of potential investors you could reach out to for your deal. What’s next in succeeding in getting investors to hop on board?

The Trust Factor Once more, it all comes down to the trust matter. Do the investors have confidence in you when it comes to their money? Let’s talk about trust for a moment. Do you trust somebody personally? Perhaps a significant other, a close relative, or a friend? Why is it that you trust them? I am sure it’s because you are familiar with them and they in return are familiar with you. The intents of both sides are worthy, correct? Well, how did you develop this level of trust in a relationship? You’ve done numerous things. You spent quality time together even in the little sum of time you might have known one another. One of you or both of you are probably good listeners. There is also mutual respect for one another. Well, to get investors to finance you, you must institute the same bond and conviction in each other.

Selling as Opposed to Counseling Since you almost certainly don’t have ages to grow this with all the possible investors you have lined up, you’ll need to take action and progress hastily. Here’s how: don’t sell to them. Counsel them as an alternative. Remember the old motto, “People will not care about what you know until they know that you care.” Every prosperous fundraiser is an active counselor. How do you respond when somebody tries to sell you something before they know if you require what they’re selling? You put up an instinctive safeguard, correct? To overpower this automated response, they should have questioned you a bit first, then they most likely would have been a tad bit more effective. Take a counselor’s attitude instead.

271

5 Guidelines to Becoming a Superior Money-Raiser Counselor #1 Build the Relationship First. #2 Investor Necessities. Ask questions such as do they require monthly or periodical pay-outs or are they able to wait until the investment is finished?

#3 Investment Objectives. Ask questions about why they decided to invest. Is it for their children’s college trust? For retirement? To create a trust fund for charity or the underprivileged?

#4 Risk Lenience and Return Anticipations. Ask questions relating to their prior investments, such as stock or other real estate. Ask how chancy it was to them. Next, ask what their anticipations are for profits on the investment. Are they expecting a 5%, 8%, 10%, or 50% profit on the investment? Remember to communicate to them that you’re number one concern is to guard and preserve their investment with you.

#5 Life Goals with Investments. Ask what their vital goal in life is. Is it to retire and move to Fiji? Become a missionary in Africa and live there for the subsequent 10 years? Is it constructing a school for at-risk kids in deprived neighborhoods?

https://youtu.be/JPfj6P5m5wE- 7 COMMERCIAL TERMS I MUST KNOW

272

Educational LINKS 6 ways to Raise Down Payment Money When Buying Commercial Real Estate http://realestateinvesting.ontraport.net/c/s/ba/GrSRtad/s/vhS/vt22/6TH243/sHUpE Ghdg0/P/P/Yx Funding Commercial Deals http://realestateinvesting.ontraport.net/c/s/ba/GrS1CVc/s/vfw/vt22/6TQCXg/vQlohFi HID/P/P/5t

273