Property flipping is an enticing strategy for new and experienced investors alike. ‘Flipping’, ‘Buy-to-Sell’ and ‘Trading’ are all phrases used to describe the same strategy. Buy-to-Sell is a good one to use as it describes the activity perfectly; properties are purchased with the intention of selling on at a profit, predominantly after programme of refurbishment.

So why might you want to flip?

Trading property is a relatively short-term cash flow strategy and something that can generate what we like to call ‘chunky money’. Successfully executed flips can make tens of thousands of pounds from one deal which could then be used to fund income producing assets such as a rental portfolio. Traders often flip property through a Limited Company and pay corporation tax on company profit which can be more appealing than the rate of income tax. It is important to note that this article is not intended to give you financial advice so you should check with a qualified professional before making investment decisions.
So how do you ensure that your flip is a success? Well, there are some key things to consider before jumping straight in with both feet. Flipping can be a lucrative and repeatable strategy but only if certain basic conditions are met.

Three things to research and explore before committing to a purchase are location, property type and circumstance:

Location

property-flip-location

When thinking about the place or location to flip properties, it is important to think about who is going to purchase the property from you. What kind of things do they want? A garden, off road parking and an ensuite may all be on the wish list but if it’s in a high crime neighbourhood then that might not be the best project for you to choose. If you are going to flip a three bed semi-detached house and are aiming to attract first time or second time buyers, then amenities and infrastructure are going to be just as important as the actual property itself.

Think about ease of access to get to work or school. Is the property accessible by road, rail or bus, but without being right on the side of a noisy motorway? Location is key to getting a timely sale. A property in an area that could be perceived to be undesirable will obviously stick longer than the worst house in the best street which has been brought up to standard.

Property type

A two or three bed house will have universal appeal to a wide variety of buyers, whereas a seventh floor flat might be more niche. This could affect the amount of time you are holding the property, which in turn will affect your bottom line when you take into account utilities (council tax, water, electricity, gas, insurance). Bungalows can also be a good type to flip if you can add genuine value through refurbishment or extension. Often your buyer will want a property that they can move straight into rather than do up over time.

Circumstance

The perfect storm for flipping property is when someone needs to sell urgently and you are in a position to act quickly. Fast transactions help not only you as a trader to secure your next project without a long chain, but also helps the vendor to move a property on and reduce their outgoings. Often, there is value to be added to properties that come to the market after someone has died, the owner is facing repossession or the property has been tenanted for a long period of time and not maintained. Competition can be fierce for these deals when they first come to market so don’t be tempted to get into a bidding war with people who are happy to overpay because they are a) less experienced and want less profit, b) intending to move into it themselves or c) fools that haven’t done their costings correctly.

Provided that the property requires a programme of updating or modernisation, profits can be achieved if you can secure the property at the right price, manage the refurb well and achieve a good sale value. If you can’t negotiate a good price, refurb to the required standard within budget and achieve the right ROI; walk away. There will always be other properties.

How to flip a property

Before committing to a purchase, it is vital that you have done your due diligence on the projected sale price and have been realistic with the price you will achieve. It would be foolish to assume that you’ll get £30k over and above other sold comparables (comps) just because you’re a nice person. You must compare apples with apples and you can use Rightmove.co.uk sold prices to check the sale price achieved recently by other properties nearby that exactly match what yours will be like when completed.

Once you know the end value, you should then work out the cost of the refurb by getting multiple quotes. You can either instruct a main contractor to do the whole project, or project manage individual tradespeople yourself. The latter is the more time intensive option but more cost-effective way. Don’t forget to include professional fees, stamp duty, buying and selling costs and utilities into your cost of sales, plus the interest you pay on any finance you require to fund the purchase and works needed.

Traders will often look for a minimum return on investment (ROI) of 20% when considering a Buy-to-Sell project. You should also assess the opportunity cost of proceeding with one property over another. It is surprising how many new traders will buy a property, do the works and then hope for a profit at the end. It is this kind of ‘finger in the air’ flipping that can lead to unrealistic expectations, overspend and upset. To increase certainty in your business you will need to be specific with your figures, pleasant with tradespeople and unemotional with your decisions. Only once you know all the costs can you work out how much you can offer for the property to make your required ROI.

Conclusion

Every flip is different but the foundations which underpin how to maximise the profit in every deal remain the same:

  • Buy for ‘market value’, or less!
  • Add value or complete the refurb to the highest standard it warrants, given the relative cost and profit potential.
  • Sell it for the best price achievable (but don’t be greedy!).
  • Don’t pay any more tax than you have to.

Now, this is an over simplified list of actions and you may be thinking, ‘well anyone can do that’ and quite honestly, you’d be right. The truth is anyone can; the reality is most people don’t. The majority of people in the world stick to one income stream – usually a job – and don’t give flipping property a second thought.

If you’re reading this article though, you’re probably on the path to flipping greatness and we wish you every success.

Tasha & Karen

Tasha & Karen

Buy-To-Sell Property Experts at Progressive Property

Tasha and Karen have been trading (buy-to-sell) properties for well over a decade and have a multi-million pound portfolio of single lets, high-end HMOs and holiday lets. They started out by literally having a go; there was no training available at the time so it was a matter of teaching themselves as they went along. Although this is not the way they would recommend that you start, it has given them the experience and knowledge needed to understand what is actually involved in a flip. They love to work with people who are motivated and want to make a real difference to their lives, which is why they have partnered with
Progressive Property to run their “Buy To Sell Bootcamp” which is a 2 day intensive course teaching others how they too can change their lives through property.
Tasha & Karen

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Analyzing The Office SectorDaniel Ismail, Analyst at Green Street Advisors, joined us on the podcast to discuss what is currently happening in the office sector.

Daniel is the lead analyst for Green Street’s office team and has been with the firm for two years. His research contributions include initiating coverage of JBG Smith (the spinoff of Vornado’s D.C. assets), deep dives into West Coast office market health, and extensive work on Gateway vs. Non-Gateway markets and office leasing economics.

Daniel started his career with Green Street as a research intern during graduate school. He has a strong background in fundamental research, asset allocation, commercial real estate, and investment manager due diligence. Prior to joining Green Street in 2016, Daniel was an investment analyst for four years at the Automobile Club of Southern California, where he covered equity and fixed income investments for insurance, pension, and corporate portfolios.

Daniel earned an MBA from the Anderson School of Management at the University of California, Los Angeles. He graduated with a Bachelor of Arts in Business Administration and a concentration in Accounting and Finance from California State University, Fullerton. Daniel is a CFA Charterholder.

Daniel’s Links

To learn more about the research done over at Green Street Advisors, you are invited to check out The Green Street Blog and to sign up for Green Street’s Newsletter.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

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Transcript

Tyler Stewart – All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as the basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing please consult your advisors. Hey listeners, Tyler here, before we start today’s episode I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free, six-week course on the fundamentals behind commercial real estate investing. That’s realcrowduniversity.com, thanks.

Adam Hooper – Hey, Tyler.

Tyler Stewart – Hey, Adam, how are you today?

Adam Hooper – Tyler, I’m good. And guess what, it wasn’t us that started talking about the weather today.

Tyler Stewart – No, it wasn’t.

Adam Hooper – It was not.

Tyler Stewart – It was Danny Ismail, from Green Street Advisors. He phoned us in from Newport Beach where apparently it wasn’t as perfect as it usually is in Newport Beach. So we kind of took pride in our Portland sunshine today.

Adam Hooper – We did. We did. Really technical conversation today. A lot of really good information. Danny with Green Street, they are a real estate analysis firm that covers private markets, public markets, everything in between, so he’s got a really unique insight into what makes the current real estate markets tick.

Tyler Stewart – Yeah, they’re a research company and Danny does a lot of the research in the office sector. We got the information straight from the source.

Adam Hooper – Yeah. So again, forewarned it does get a little bit technical, up front, but I think there’s a lot of really good information in there in the distinctions of how the public markets work, how valuations there might inform the private markets. We took a detour into talking a little bit about office, again that’s Danny’s specialty is the office market. So we talked about some trends that they’re seeing there, gentrification. We talked a little bit some of their favorite markets going forward, some markets that have been maybe a little bit more you know restricted in growth. And he gave us the forecast for kind of where he sees growth going forward in 2019 and beyond.

Tyler Stewart – All together just a great episode from the analyst really giving you the nuts and bolts of the research.

Adam Hooper – Yeah, and I guess I would request listeners out there if you have questions or comments or anything you want us to followup on? Is this too technical? Do you like it technical, let us know? Send us an email to podcast@realcrowd.com. We love that feedback. Always again, ratings, reviews, iTunes, Google Play, SoundClound, wherever you listen to us. So with that Tyler I think we should probably get to it.

RealCrowd – This podcast is brought to you buy RealCrowd. The leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd, invest smartly.

Adam Hooper – Well Danny, thanks for joining us today. From Green Street, which office are you located in right now?

Danny Ismail – We have three offices at Green Street and I’m in the Newport Beach office.

Adam Hooper – Ah nice.

Danny Ismail – Which normally has a pretty nice view but today’s a bit cloudy. I always feel like a jerk complaining about, you know, the weather in Southern California. But when we do get a foggy day, I do you know, miss the beach and miss the views a little bit.

Adam Hooper – We’ll relish in our sunshine here in Portland then. We’ll take it. So why don’t you tell us a little bit before we get into some more macro trends on the where we at in real estate, with the cycle and then specifically want to dig in on some conversation around the office market today. Can I take us a little bit back and how did you get in with Green Street? And a little bit about your background and how you got into the real estate game before we dig in?

Danny Ismail – Yeah, so in a prior life I was working in investment management. I was doing portfolio management for insurance and pension assets. Really high-level asset allocation type work for a few years. But while I was getting my Masters at UCLA I came across a posting by Green Street for an associate role and the more I dug into real estate and publicly traded REITs, the more I realized it made a good fit with my interests and with my experience in investment analysis. So joined Green Street shortly thereafter and have been covering the office sector for a few years and most recently made of head of the office sector and am leading the research on that sector.

Adam Hooper – Nice. And tell us a little bit for our listeners out there who may or may not have heard of Green Street, why don’t you give us just a quick overview of what Green Street does, what services you guys provide to the industry?

Danny Ismail – So Green Street advises as a commercial real estate research firm founded over 30 years ago with three main product lines. The first is our real estate analytics product which is essentially a platform that helps private market investors answer the question of does New York Office make a better investment than San Francisco apartments? So helping to answer those really high-level strategic questions. The second is probably what we’re best known for is our sector in REIT research which I’m a part of. So we cover over 120 publicly traded REITs across the U.S. and Europe. And we have the unique position of analyzing both the public and private market real estate markets. The third is our advisory group which is a consulting group which helps a variety of companies solve problems, across the world, solve real estate projects. Such as a retailer thinking about their real estate footprint or whether a company should convert into a REIT.

Adam Hooper – Got it, so you guys really have a cross section of all different areas of the industry right? Whether it’s all the way down to private to public and everywhere in between.

Danny Ismail – Yeah, I mean it’s really covering the entire gambit of commercial real estate. One important note is we’re an independent shop so we don’t have a brokerage or investment banking arms. So you know we can truly provide objective and unbiased advice and actual insight to our clients.

Adam Hooper – Good, and I’d be curious as we talked about this a little bit you know all the deals that are on RealCrowd are, and most in the space generally, are going to be private deals. So not a lot of either, I’ve seen a couple non-traded REITs, nothing public REIT that I know of in this space so I’d think it’d be curious to kind of get as we talk through these things kind of compare and contrast the differences which you might see in the public market versus how that would compare to what we might see more typically in the private markets as we kind of go through the conversation today. So we know Green Street obviously again for the research side and some of the stuff on the private markets, but maybe comparing and contrasting and let’s start with that. Between public and private do those market cycles behave identical or is there a lag of one or the other? Is one leading the other? Just broad market cycles, how do public and private markets tend to interact in the real estate space?

Danny Ismail – That’s an interesting question principally given how publicly traded REITs are traded today. So on average the publicly traded REIT market is trading at, call it a high, single-digit to their underlying property values. So essentially REIT investors are pretty skeptical about commercial real estate valuations, essentially saying they’re too high. And historically REIT investors have gotten this right. So a big premium has generally, in the REIT world, is generally predictive of property appreciation and the opposite is true there. So discounts have generally been predictive of property deprecation in the private markets. This linkage has broken down a bit in the last few years so REIT investors has been bearish for a few years now and although what we’re seeing is property appreciation hasn’t slowed down over that time period, values have been going down broadly. A few sectors where that’s been true but across the private real estate market values have been relatively flat for the last few years. And in REITs those discounts aren’t equal across all sectors so while the public market discounts most REITs, apartments, office, and retail trade at the larger discounts relative to their private market values. Interesting fact is that New York Office REITS trade up the biggest discounts since the global financial crisis which you wouldn’t really get that sense if you look at the private market for New York Office. Manufactured home parts and some of the niche sectors traded some pretty big premiums. And one of the main takeaways when we observe this you know this is a prime time

Danny Ismail – for a lot of the public guys to be selling their assets in the private market. So as I mentioned in general the public REITs are trading at a near double-digit discount to that underlying real estate it creates a good opportunity for these public traded REITs to sell at 100 cents on the dollar in the private market and either buy back their shares or retire debt at the company level. Fortunately not too many people are taking advantage of that today but it’s a dynamic that’s been in effect for the last few years.

Adam Hooper – Interesting. And so then investors that are looking at investing or acquiring assets in the private market those values are, well let me go a different way to question this. Do discount to REIT valuations drive private-market value or does private-market value drive the REIT valuations? Or are they completely uncorrelated?

Danny Ismail – Well eventually they should be correlated. Because the REIT is essentially a look-through or a pass-through to the private market. And generally as I mentioned earlier that the public REIT investor simply because you know you’re trading a lot quicker, you’re getting daily pricing of essentially that real estate it should be predictive of property pricing. But that linkage just hasn’t happened and when it will? That’s hard to say, as I mentioned New York Office has been trading at double-digit type discounts for the last two, three years now in the public market. In the private market you still see a healthy bid for those assets, you still see skinny cap rates and some pretty big trades. So eventually the public market is saying that commercial real estate valuations are too high though what it’ll take on the private market side to see it catch up to the public market is just hard to say.

Adam Hooper – And are there any data points or trends or indicators that you guys are watching that would suggest a change in either of those evaluation metrics?

Danny Ismail – On my end, on the Office side, so the Office sector, particularly gateway Office companies have been trading at the widest discounts in the public REIT land. I think if you were to see some of the bigger companies go away and really take advantage of that disparity between the public and private market pricing it could have a bit of a collapse in terms of that NAV cap that if public market investors thought that the REITs were serious about closing that gap that maybe you can have a bit of that disparity shrinking. Though what that catalyst will ultimately be is pretty hard to say. I mean we’re in fairly unique times in the economy given we’ve had ultra-low interest rates for a better part of this cycle. The cycle’s gone on longer than I think most people would have predicted. So it’s a pretty unique time that if you were to have looked back three years ago you would have said oh, well it looks like the public market is getting ahead of the private market, but we haven’t seen that convergence happen.

Adam Hooper – So we recently had David Pascale come on and we were talking about federal funds rate and how some of those key you know lending rates affect real estate and potentially going into an inflationary environment here. How did the public markets react differently than a private market would in an inflationary environment or an environment where you have rising cost-of-capital, essentially?

Danny Ismail – Green Street, you know we have a tool that we combined both the signals provided by the public REIT market as well as the corporate bond market. So when we look at the cost of debt we look at the yield on corporate bonds as well as the yield on junk bonds. So right now, traditionally, commercial real estate should provide you a return slightly above that of corporate debts and slightly inline with that of high-yield debt. Right now commercial real estate returns about a 110 bps higher than that of long-term, B/AA rated bonds. And about 40 bps less than that on high-yield debt. So you combine that and commercial real estate looks relatively fairly priced to fixed income. And that’s despite you know, a fairly decent rise in rates this year. But with respect to REITs, as I mentioned earlier, given that big discount the commercial real estate market and private market looks a bit expensive relative, given the signal by the private REIT or the signal by the public market. You tie this altogether and you would assume that given those factors that it starts interest rates rising, big discounts in the public market that property appreciation would get signaled to, or excuse me, that signal would be for the private market to decline, but Green Street’s opinion is just given the amount of debt on the sidelines, given how long this has happened, given how much capital there is to put to work it’s hard to see private market values doing anything different than what they have been doing over the last few years which is essentially not changing very much.

Adam Hooper – So to relate that to, I guess again, kind of a tough question, not the crystal ball but like in terms of relation to overall market cycle reaching a maturation point? Do you guys foresee anything that could trigger a pull-back in value or a correction? Or kind of more of the same fairly steady, maybe some slight growth going forward?

Danny Ismail – Yeah, you know generally we agree with you. It is very long in the real estate cycle, but if you look at fundamentals across most of the major property sectors, you know you’re generally looking at inflation type growth. I mean if you look across the metrics on the economy whether it be unemployment, consumption, the fiscal and tax stimulus. You know Office using job growth, venture capital, I mean all those factors continue to point to a pretty healthy economy so while we think that you know the overall cycle is long in the tooth it’ll be more of a deceleration of property price appreciation and financial growth rather than you know any near-term, immediate correction because the pillars of the economy are simply incredibly supportive of commercial real estate today.

Adam Hooper – Do you see that as differing across product types or that’s generally you know office, retail, industrial, fairly similar dynamic across all the different product types out there?

Danny Ismail – I think it’s, that was a general statement for commercial real estate in general. I think if you look at the individual property types, I mean there are some sectors that are in a better position today than others. I mean I can point to two at the opposite end of the spectrum industrial looks incredibly healthy today just given the tailwinds of ecommerce and the amount of reconfiguration of supply chains and overnight delivery and the immediacy that consumers are demanding of internet commerce. And the opposite end of that retail has generally been, has struggled the last few years. We’ve written down retail commercial property values on our end about 15 to 20% for malls and strip-centers. So generally tougher as you drill down into the sectors you can point to several headwinds and tailwinds for various sectors, as I mentioned for industrial and retail. But in general commercial real estate in general, probably will continue to trade sideways over the next few years.

Adam Hooper – And then with office it’s maybe we can dig a little bit more into office considering that’s one of the areas that you focus on primarily. Some of these changes that are happening with creative offices, and coworking and shared office space. Just the notion of how users interact with office space, right, how is that impacting some of your predictions or valuations or thoughts around that going forward.

Danny Ismail – On the office side I mean the biggest trends as you mentioned, you know creative offices or open office, however you want to define it. The biggest impact that we’ve seen on office fundamentals has been on the densification of office space. So let’s say in 2010 you signed a lease for 100,000 square feet for your employees. Then in 2018 you’re renewing that lease, well let’s say you no longer have the same amount of employees or even more you’re taking up say 15 to 20% less square feet, and you’re actually just packing in your employees in a smaller space. It’s a stat that doesn’t show up in the supply grow stats but if you think about it it’s essentially a tight of shadow inventory that’s been hitting most major office markets. And I’ll point to New York, which is you know a few weeks ago WeWork became the largest tenant in New York, and they tend to run their office space much denser than a traditional office company, a traditional tenant would. So you look at New York fundamentals over the last few years while supply growth has been elevated relative to recent history, supply growth in New York the last few years has been around 1% of inventory. That shadow supply via densification and the reconfiguring of office spaces in Green Street’s opinion has had a pretty big impact in terms of fundamentals. You really haven’t really seen net-effect of rent growth over the last year over year and for the next few years it continues to look like a tough environment simply because if you’re getting that same amount of job growth but your tenants are taking less space

Danny Ismail – you need to have essentially more, a higher amount of employment growth to compensate for that increased utilization. So it creates a real drag on office fundamentals that isn’t apparent in the commercial real estate if you just look at inventory growth stats, but it’s a type of hitting growth that’s had a huge impact over the last few years.

Adam Hooper – Is there any way, do you guys track or do you have any gut feel for where we’re at in that densification process? I mean is it still on the front-end of that? At what point does densification kind of reach it’s max, right? It seems like it continues to be more and more, again started with creative office, open office and now you’ve got WeWorks, again this coworking space, how far does that go?

Danny Ismail – Yeah that’s it, that’s a question we’ve been trying to answer on our end for a while. Green Street has you know a variety of data that we can look at but the issue has always been attempting to tie the total amount of employees to the square footage of a region. Generally those are two disparate data sources. You’re looking at either the Bureau of Labor statistics combined with you know one of the major brokerage houses or Green Street’s data and generally those don’t tie very well. But our gut feel in talking to both the publicly traded REITs and the private operators is it feels like we’re in the later innings of this, but it doesn’t seem like a trend, it seems more of a paradigm shift that people and employers will just be shifting more to, denser office configurations. So maybe call this cycle, you know what 15 to 20% denser configurations, on average, for your average tenant. How much further that has to go, that’s a tough question to answer. It depends on the type of tenants and how they’re using the space. Our gut is at Green Street is you know best estimate given the available data, has a little bit further to go but I don’t think it’ll be as drastic as you’ve seen over the last you know call it five, six years.

Adam Hooper – Yeah. And then once that kind of reaches max density, if you will, do you anticipate that some of those more traditional fundamentals of supply and demand and that impact on returns I guess, will return back to more fundamentals or will this have a shift on how we look at some of those key metrics?

Danny Ismail – Well I think it’s interesting because missing in this conversation is a CapX. So if you have an office space that is not, or own an office building that is not yet setup to accommodate that kind of denser configuration. We recently dug into CapX and we think that CapX in the office sector is by far the most onerous in all property sectors and that includes hotels. We use a normalized CapX estimate. We’re estimating that close to a third of your NOI is an appropriate amount to reserve as CapX reserve. If you think about that in terms of returning to normal fundamentals it seems like, well for those landlords that are setup to do that might enjoy some benefit but for those who are not they’re going to be struggling to keep up and have to put a lot of money into rebuilding simply to get market like or close to market-like returns for their assets.

Adam Hooper – Yeah, I want to kind of roll that back a little bit. So for listeners out there that might not have heard some of these terms before. So CapX is Capital Expenditures. So when you’re, an office tenant moves out and you need to reconfigure the internal offices or paint or carpet, you know kind of the improvements within the space, right, that’s what you’re considering a CapX Capital Expenditure for re-tenanting that office space, is that correct?

Danny Ismail – Correct, so essentially as you mentioned we have two buckets, the first being what you just mentioned sort of the tenant turnover. That anytime a tenant moves you have to clear out the space and reconfigure it to whatever they’re needs are. And the second would be maintenance. Just the normal maintenance that you have to put into a building to kind of keep it at the competitive level. So if you had an A type building what do you need to spend to keep it up roughly the same type of quality in the market.

Adam Hooper – Okay and then you said roughly one-third of NOI, Net Operating Income, is appropriate for a CapX reserve. So basically as an owner of a property the metric that you guys are looking at is roughly one-third of my annual net operating income. I should have that amount of cash in a reserve somewhere to cover these maintenance and re-tenanting costs, essentially?

Danny Ismail – Correct. So our methodology in terms of how we got to that figure. So where we sit, where Green Street sits in commercial real estate land is we have assets in both the public and private market data. And we have a pretty long time series through multiple cycles of both the publicly traded REITs and as well as access to the private market data. Both of those point to that one-third number I just mentioned so it sounds like an incredibly high number.

Adam Hooper – It’s really high yeah.

Danny Ismail – I know, yeah. And when you say that hey, the office business is a more capital intensive business than that of hotels you know it kind of raises some eyebrows, but you just look at the data both by the publicly traded REITs and the private market that’s what it’s pointing to. You know when Green Street put out that number I was expecting more pushback, you know from some of the public or private market guys and actually been the opposite. The feedback that we’ve received, now that seems pretty appropriate.

Adam Hooper – And how does that compare to other product types if you’re looking at multi-family or industrial I’m assuming is way, way less than that but hospitality, multi-family how does that compare?

Danny Ismail – So across property sectors as I mentioned office is by far the most expensive in terms of CapX. You look across the property sectors.

Adam Hooper – Oh it sounds like you’re shuffling paper there, you’re finding numbers for us. I like real numbers.

Danny Ismail – I’m getting specific numbers. Just ’cause I didn’t want to speak out of line for some line a sector heads here. So if you think about apartments or the resi type assets, that’s close to one-third less, or excuse me a third of office CapX. As I mentioned if office CapX is about a third of your annual NOI. Apartments or resi generally closer to 10%, so low-level digits. So when you think about your total returns that has a massive impact.

Adam Hooper – Right.

Danny Ismail – On your projected IROR, as I mentioned Green Street has been in business for 30 years, one of our hallmarks is we consistently think that both the public and private market underestimate the true cost of owning commercial real estate for a full-cycle. And we think the directionality for the office business as I just mentioned the headwinds given by densification or the WeWorks of the world all point you in that direction of it going higher. And lost within this is rising construction costs. You know it’s not getting any cheaper to build a building or to construct the materials of the building. So all this is contributing to rising capital expenditures across the board.

Adam Hooper – So I guess you said, since hopefully you have more papers there, you said about 10% reserves for multi-family. What does you guys see in hospitality or industrial? Do you have that?

Danny Ismail – Yeah. Hospitality would be among one of the more expensive ones. So not quite as expensive as office, so around that one-third mark but closer to that data point. Industrial will be significantly less than that. So call it about half of what you would for hospitality or an office building.

Adam Hooper – So similar to multi-family for industrial?

Danny Ismail – Correct.

Adam Hooper – Okay, good. That’s great info. That does seem shockingly high, a third of your NOI for CapX reserve. That does seem high but again when you think about it all the costs that go in with maintaining that. I guess do you think that will change I guess as the densification reaches that saturation point? Right I mean you can only open up your office in terms of creative office. Right, I mean that’s one of the benefits is you theoretically have a much lower, at least on the re-tenanting side, a much lower re-tenanting cost. Maybe not so much the maintenance side. Or maybe that offsets, right? The lower re-tenanting costs is your maintenance now increased because you’ve got more people in there? Have you guys looked at how that’s going to change with this densification trend?

Danny Ismail – Well, what’s interesting is that you know just giving a backdrop of the economy you’d assume that re-tenanting costs would be going down. You know fairly low unemployment, you’d think that pricing power which is essentially re-tenanting costs, right. Giving a concession to a tenant would be declining in this time, in fact it’s been the opposite. It’s actually been more costly to re-tenant over the last few years than at the beginning of the cycle. And it’s hard to see what causes that reversal, you know even if you’ve built out or reconfigured your space to be more accommodating to an open-office configuration. The next tenant that wants to move in there doesn’t want to do, you know, completely different. And reminds me a bit of a government subsidy or a government entitlement you know that once you give it away, once you start giving it you can’t take it back.

Adam Hooper – Right.

Danny Ismail – So it’s hard to see what causes that reversal. Because certainly you would assume at this point in the cycle that it would be the opposite. That you would be seeing more pricing power favoring office landlords, but you just haven’t seen that.

Adam Hooper – And do you see similar trends across urban office versus suburban office? Or are those two different dynamics?

Danny Ismail – Yeah, what’s interesting is when we revisited our CapX estimates is that where we increased our estimates the most has been more in the gateway side. So New York and D.C., CapX both on the maintenance side have increased over the last few years and again that’s both in the public and private market side. Suburban side we’ve always been more cautious on in terms of our CapX estimates. But it’s been surprising that on the gateway side one would assume just given urbanization and you know the growth of cities that office landlords may not have to give away as many concessions or put as much into their buildings to keep them competitive relative to their suburban peers, that hasn’t happened this cycle.

Adam Hooper – And are there between again kind of gateway or suburban do you see much difference in the outlook for overall trends, you know we’re kind of talking inflationary growth rates, do you see that different in one geographic location or the other?

Danny Ismail – Yeah, I would say in general we bucket how we favor market office fundamentals into three distinct groups. So our favorite markets would be the West Coast gateway markets, so I don’t think we touched on this in this conversation, but tech related job growth has really been the driver or a significant driver of commercial real estate returns, particularly office returns this cycle. The net absorption by tech-related, office job-growth has just dominated the stats. So the San Francisco’s of the world, West L.A. and Seattle all strike us as having some of the best fundamental growth over the next few years. We follow that by what we call our sunbelt markets. So Atlanta, Austin, Nashville, Charlotte, simply because it’s a really strong demographic trends, expansion by major employers strike us as another second strongest sub-group of office fundamentals in the country. And our least favorite markets are as I mentioned earlier, just given rising CapX and densification are East Coast gateway markets. So that would be New York and D.C., just given the amount of supply hitting those markets rising onto CapX and just relatively flat net effect of rent growth, those markets are probably going to be tough in the next few years. And if you look over at the public markets the public market agrees with that view. As I mentioned New York office REITs have been trading at some of the worst discounts to their private market values since The Great Recession.

Adam Hooper – So potentially a buying opportunity in the public markets then if again if you believe in the overall fundamentals and long-term growth, the discounts to asset value could potentially be a buying opportunity?

Danny Ismail – Absolutely if you were a believer in those markets and were making an allocation to office real estate in say New York, you know when you have some of these big, well-known companies trading at over 20% discounts to the private markets you’re essentially getting very similar or the same exposure at 80 cents-on-the-dollar. Right, that’s an extremely appealing deal relative to paying full price on the private market.

Adam Hooper – Yeah, and have you seen much institutional capital going outside of the gateway markets?

Danny Ismail – You know we’ve seen a little bit of that but not in a wholesale way that would be implied by the public market. So as I mentioned the public market has been heavily discounted to be New York centric REITs, but in the Sunbelt, REITs have been receiving relatively favorable pricing in the public market. So they’re trading closer to the private market values. But we really haven’t seen, we’ve seen a little here and there but not in a wholesale way that just given the demographic trends in our opinion relatively more attractive IRs we haven’t seen that happen in a big way. I think it’s tough for say particularly foreign institutions to make a big commitment to say Atlanta or Austin. You know when you’re pitching to your investment committee presumably it’s a lot easier to pitch a New York office building than one in say Nashville or…

Adam Hooper – Austin?

Danny Ismail – Yeah it looks better, the pictures look better generally on your annual reports, when your doing office tours you’re generally hitting the major markets, you know the San Franciscos, New Yorks, Austins, D.C.s of the world. In our opinion that created a pretty big bid for, you know New York Office over the last few years has been foreign buyers. But in the public market has been telling or at least sending a pretty strong signal that you know returns look a little bit better or a little bit closer to reality in the Sunbelt markets.

Tyler Stewart – Speaking of trends when you look at the West Coast market it is on the rise and the East Coast market may be on the decline. Historically do you have any data for how long those trends can last?

Danny Ismail – Yeah, well historically I mean this is a bit of a shift because New York is generally, over the last say 20 years, has historically outperformed in terms of an office market. So really one of the things that we spend some time here internally has been looking at supply barriers. And what are true supply barriers in these markets and as I mentioned New York outperforming historically has generally been because it’s basically flat to no supply growth over that time period. And now with the opening of Hudson Yards on the far west side and also because of densification you’ve seen New York underperform over the last few years. And it’s hard to see what causes a reversal in that trend. As opposed to that on the West Coast, San Francisco and West L.A., you have true high barriers to meet new supply in those markets. So in San Francisco with Prop M you know an artificial limitation on the amount of new office space that you can have constructed in the city each year. And in West L.A, I went to UCLA and if you’ve ever driven around L.A or lived in L.A., it’s just a horrible market to put any new supply in. Incredible amounts of nimbyism, terrible traffic. It’s really hard to envision any type of meaningful supply growth west of the 405 anytime soon that you know is not in a specific concentrated area, like Fly Vista was. So just really true barriers to supply that we think will continue to have that trend of West Coast office outperforming that of the East Coast. Where you just have structurally lower barriers to supply. As well as the demand drivers seem stronger on the West Coast as well

Danny Ismail – where you just have, that’s where you know tech and media are centered. Venture capital flows the strongest, so it’s hard to see what causes reversal in terms of those geographic areas.

Adam Hooper – Yeah, that’s good. And we’re here in Portland which is seeing I think a lot of the similar dynamics. Maybe not as institutional or a lot of public market activity here but I think that’s a similar trend that we’re seeing here in Portland for sure and other. We had I guess on the podcast talking about these kind of technology hubs, right. The change of economies from more physical labor based towards this knowledge based economy, I think where we’re seeing that again has a lot of those core fundamentals for office growth going forward.

Danny Ismail – Right and I think you’ve seen that you know in some of the markets I just mentioned not doing as well as the West Coast being some of the more old economy whether it be financial services or real estate, insurance, you know lag in kind so as you mentioned the more tech-centric economy.

Adam Hooper – Good, well as we’re about to turn the corner here, 2019, what does your crystal ball say for us?

Danny Ismail – Yeah, as I mentioned you know the economy still seems on pretty strong footing and you know just the amount of, in terms of whether it being tax cuts or fiscal stimulus or you know just incredibly low unemployment rates it still seems like the economy will be supportive of commercial real estate. As I mentioned it seems like most, you know this is across all markets, all sectors, but it seems like demand and supply are roughly in check. So it seems like inflation like rent growth will be the story of ’19. In terms of property values, as I mentioned, both the public REIT market as well as the commercial bond market are both pointing to roughly flat values that we’ve seen over the last few years. But I think some of the trends that I’m paying attention to on the office side is that it still seems like office using job growth remains healthy, we saw a bit of a deceleration heading into ’18, particularly in some of the more tech-centric markets you mentioned. But just given the amount of venture capital as healthy as the tech sector seems to be it seems like it’ll be another very similar to ’18 in terms of fundamentals and property appreciation.

Adam Hooper – And are there any indicators or statistics or market trends out there that we can maybe share with our listeners that you guys keep a special watch on that might be a leading indicator either it’s the good or bad, of some of these things we’ve been talking about?

Danny Ismail – Yeah, traditionally as I mentioned the public market would be a leading indicator, excuse me the public REIT market would be a leading indicator of the private market. But that linkage is broken down over the last few years and if anything at least in the office side discounts to underlying private real estate values have widened this year. Which is a bit surprising given how healthy the economy has been. So that’s been one of the signals that we continue to watch. The others are your traditional how well is the tech sector doing? So over the last few years venture capital funding has been either at record or near record highs. And really if you see a pull back or a decline in terms of the amount of funds either invested or being raised by venture capitalists I think that would be a decent signal of hey is there something going on here? Is there a lack of available opportunities or is the tech sector cooling off? I think that would, excuse me, we think that would be an interesting stat to continue to monitor. And of course interest rates as well, you know sometime today I think we’ll get a notification that the FED raised rates again and of course the pace and the velocity will continue to be worth monitoring as well.

Adam Hooper – Perfect those are some good things to keep an eye out for for listeners out there is for seeing what 2019 brings us. Well, Danny I don’t know if you have any information about how listeners might be able to learn more about Green Street? I know you guys do a lot of webinars have some educational materials out there, if you want to take a second to do that we’ll include links in the show notes for where people can get to those resources?

Danny Ismail – Yeah, so we have a lot of resources at our website at greenstreetadvisors.com and we recommend signing up for emails to be alerted to any research or insights that we offer. We’re also on social media, so LinkedIn and Twitter. Follow us there and keep aware of what we’re publishing.

Adam Hooper – Perfect, again we’ll have links to all that for our listeners. So is there anything else that we didn’t cover? Anything else you want to add or ask us for the show today?

Danny Ismail – Yeah, I think one thing we didn’t cover, you know I mentioned a few times just how big the discounts are in the public REIT world is you would assume that there’d be more M&A activity and you’d have bigger institutions buying out some of these REITs, I’ve seen a bit of that early in the ’18, its cooled off a little bit over the last few months, but you know we think that’ll be another factor to keep an eye on into 2018, ’19. Is are you seeing this big institutions actually committing capital and capitalizing on the big discounts of the underlying private real estate market? ’cause again that’s another indication of where the private real estate market is going is if no one is buying these big REITs at these big discounts what does that spell for the underlying private market value?

Adam Hooper – Suggesting that again a bigger institution might come in, acquire the REIT stock essentially and then be able to liquidate that in the private market and then you’re building in that delta when you buy the REIT, essentially right?

Danny Ismail – Correct, yeah it should be have made a pretty favorable world for continued M&A, whether or not that continues, Green Street thinks it will, but again another trend to look into 2019.

Adam Hooper – Well maybe we’ll have you back on here as we get to 2019 and see where we at with that.

Danny Ismail – Yeah, that’d be great.

Adam Hooper – Perfect, alright Danny, well thank you for your time, we appreciate a lot of really good information today. Listeners out there as always we appreciate reviews and ratings on iTunes. If you have any questions please send us an email to podcast@realcrowd.com and with that we’ll catch you on the next one.

Tyler Stewart – Hey listeners, if you enjoyed this episode be sure to enroll in our free, six-week course on the fundamentals of commercial real estate investing. Head to realcrowduniversity.com to enroll for free today. In RealCrowd University real estate experts will teach you the important fundamentals like the start-with-risk approach. How to evaluate real estate sponsors. What to look for in the legal documents and much more. Head to realcrowduniversity.com to enroll for free today. Hope to see you there.

RealCrowd – This podcast is brought to you by RealCrowd. The leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music or SoundCloud. RealCrowd, invest smarter.

Beginner's Guide To Real Estate Investing

Would you invest in real estate in today’s market? There are people who tense up at this question, their thoughts focused on a looming housing crisis.

Investors know better. They know that portfolios are not built overnight. They have a strategic long-term plan in constant action, one that dictates what to do and how to do it when the markets turn. One man’s crisis is another’s opportunity.

Adam and I recently sat down with Paul Kaseburg of MG Properties Group to talk about how to create these opportunities. As Chief Investment Officer at MG, Paul’s been involved with the purchase of over 12,000 units totalling $1.7 billion in total consideration. He emphasized that it all came down to strategic planning.  

Develop the Mindset of a Healthy Investor

Paul’s first piece of advice for investors is to stop chasing the one perfect deal and start developing a personal plan that fits your own tolerance for risk.

“Investors must first talk to their financial planner, their accountant, and their attorney to make sure they understand their own situation before going out to make investments,” Paul says.

Real estate must be seen as an allocation and not necessarily as a way to go in and pick the highest returning deal you can find. 7 years since the true recover of the 2008 financial crisis, short-term strategies have become a bad habit, where we got used to pumping money into the highest yield deals without any real appreciation for risk tolerance or risk capacity​​​​.

Instead, Paul wants us to consider the following questions:

  • What does my current investment portfolio look like at the moment?
  • What is my overall timeframe to invest?
  • What is my need for liquidity during this timeframe?

The answers to these questions will help you decide which investments make sense and how much money you have to allocate. It becomes crystal clear where to put your focus, whether it’s core, core plus, value add, or opportunistic deals.

“Once you decide how much money you have, start breaking it up across different parts of the capital stack,” Paul says. “The more you can diversify your product type and location, the less concentrated you are in one area, minimizing your overall risk.”

Your Risk Profile Determines What Asset to Invest In

Once you know where you stand on risk and available capital, decisions become easier to make. Paul says that most institutional investors categorize deals into the following 4 risk profiles:

  • Core
  • Core plus
  • Value Add
  • Opportunistic

Core Investments

Core investments are the least risky of the bunch. They are well-located, newer buildings that attract high-quality tenants. “We’re talking major metro markets with very high household incomes ,” Paul says. “Generally the buildings have been built recently so you’re not risking major repairs.”

Because these buildings attract ultra high-quality tenants with great credit, you get consistent cash flow, but not so much appreciation. “Typically for core investments, we see lower leverage, in and around the 50% mark with yields hovering between 6-7%,” Paul notes.

“They tend to be low, long term return deals,” he adds. The risk with core are the interest rates. “When they go up, you can have an impairment to value, for sure.” Core deals check all the boxes—Good location, good product, good tenant.

Core Plus

Core Plus starts to erase one or two of those checks. “Perhaps a deal is in a great location, but maybe it’s 30 years old,” Paul says. This allows for the cap rates to increase slightly and as a result, you get slightly more leverage.

Paul typically sees Core Plus deals with “6-8% cash-on-cash return over a 10 year period, depending on how the debt shakes out, and IRR is in the 9-11% range,” he says. Core Plus deals are fairly stable opportunities, in stable markets, but are a little bit higher risk than a core deal.

In both core and core plus deals, investors can expect to go long-term. Deals can be held anywhere from 10-20 years. “If you have a deal with an expected low return, there’s no real incentive to get in and out to maximize IRR,” Paul says.

Value Add

Value Add deals are where sponsors start to play a key role. “Value add, for the most part involves some heavy lifting from the operator. At MG, we deal with apartments, and that’s where we go in and renovate units, replace kitchen flooring or lighting, or tackle the common areas,” Paul says.

Beyond physical changes, the building may be mismanaged. These deals require an operator who has a solid vision for the outcome and the business plan to accomplish their goals. Because of the added risk, the returns are also better.

“We start to see the shift over in terms of composition of those returns from cash flow to appreciation,” Paul says. These deals also allow lenders to make decisions based on the investment plan of the sponsor, and not just past performance.

Opportunistic

Opportunistic have great returns and great risk. “Development tends to fall in this category. So do unusual product types or use of real estate like a land entitlement play, ” Paul says. This is where GPs really add value.

It’s all about the vision of what can be created. “Maybe GPs are using their contacts with municipalities to get something approved or relying on their expertise in construction to build something unique.”

It’s really all about appreciation for the most part for those deals. But  you can’t really lever as much either. Sometimes there are capital structures where you can go out and get hard money loans or unique lenders to really put a lot of debt.

They also tend to be shorter term, although there’s situations, for instance, land entitlement, that can take a long time. While these are rare, investors in the opportunistic deals are looking for IRR, so the goal is to get in and do whatever you’re going to do, and then get out.

Narrow down deals by product, sponsor, and location

When you first join a crowdfunding site or attend a local investment group, it’s easy to feel overwhelmed by the sheer amount of deals available. Besides knowing your risk tolerance (discussed in part 1), here are few other strategies you can use to build a well-rounded portfolio.

Build a portfolio by product type

The first decision to make is what kind of product you’re after. “Let’s say you have a $4M portfolio, and want 25% of that in real estate,” Paul says. “$1M in available capital can get you at least 10 deals at $100K each.”

“One way to look at it, is to select two multifamily deals, two office, two retail, two industrial, two self-storage, and disperse the remaining capital across various other options,” Paul says. This level of diversification limits your concentration risk, negating the pressure to select the one product that will beat all the rest.

In the private syndication space, spreading $1M is easy to do. Deals range from as low as $25K all the way to $100K or more. There’s no reason to limit yourself to one type of asset.

Choose a sponsor who shares your vision

Once you know what product you’re after, it gets easier to have conversations with prospective sponsors. Paul highlights that in the current market, investment profits depend more on strategic execution than market forces.

“At MG, it’s really been about the micro strategy in each market, and what’s happening with that specific property, as opposed to just a bet on a larger metro area,” Paul says. This is especially true for value add deals, where opportunities lie in the relationships sponsors have with other industry professionals.

Look for sponsors that view real estate as a long term asset. “That doesn’t mean that you can’t go in and create value. We’re value add players, we do physical improvements, we do operational improvements, but we’re also here to hold real estate for the long term and generate income and capital gain for our investors,” Paul says.

Rely on your sponsor’s expertise about a certain area

“Not one manager is going to be the best at office in core New York City locations and also suburban multifamily in Tulsa, Oklahoma, right?” Paul notes.

Those are generally not the same group. And so, if you’re diversifying, you’ll want to leverage the expertise of respective teams. This can be a relief for busy professionals who don’t have time to visit development sites, and it really is the whole point of investing through a syndication in the first place.

“Part of the fun about real estate is going out and seeing the buildings you are investing in, but ultimately, you are paying the sponsor to know the real estate better than you,” Paul says.

What is your staying power?

If you can avoid the need to sell when the markets are down, the risk of loss goes way down. “As you start to get later in the economic cycle, there’s more of a chance that there can be a downturn,” Paul says. At the moment, we are about 7 years into the true recovery of the biggest economic collapse of recent times.  

Having a plan keeps you disciplined in the face of fear. It also prevents disasters. “If you’re over levered or if you have short term debt and the economy takes a dip, you could end up being forced to sell at a time when the market doesn’t have much liquidity or values are down, and that’s a situation we aim to avoid,” Paul says.

That’s why it’s so important to avoid short-term gains. That is a strategy that can end up getting you in trouble. “One of the ways we look at it is, in real estate, you want to really make sure you have staying power. Staying power means if the market is rough, you can ride it out and wait for a better day,” Paul says.

How to find deals that survive a downturn

The trick is to find sponsors who make it their strategy to find investments that are robust in downturns. “We’re seven to 10 year holders for the most part. Our assumption is there’s going to be a downturn at some point in those 10 years, whether it’s year two or year seven, it’s probably going to happen,” Paul says.

With the disposition volume down, there’s a lot of competition for new deals among sponsors. Sponsors are having to rely on their reputation to close on deals. “There’s a lot of preparation to get those deals awarded, and you need a solid reputation to get them. Then, you really have to follow-through on your plan,” Paul says.

Make it your goal to find sponsors who have a track record of experience. While surfacing their respective websites is a great start, nothing beats a personal conversation where you can ask your most pressing questions.

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Investing in real estate is a long-term game. Unlike the stock market, big capital is used to secure, improve, and dispose of high-value assets. This takes time and meticulous planning to be execute well.

Taking the time to develop a plan narrows your focus and allows you to perform the necessary due diligence on individual deals. That’s when you can start interacting with sponsors and professional advisors to mitigate your risk further.

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*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

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Tyler Stewart is VP of Investor Relations at RealCrowd. All opinions expressed by Tyler and interviewees are solely their own opinions and do not reflect the opinion of RealCrowd. This article is for informational purposes only and should not be relied upon as a basis for investment decisions.

Technology Real EstateMichael Beckerman, Founder of The News Funnel and CEO of CREtech, joined us on the podcast to discuss how technology is impacting real estate.

Michael Beckerman is a leader in the commercial real estate tech sector. He entered the sector in 2012 after a 25-year career in commercial real estate public relations, in which he started and built Beckerman Public Relations into one of the largest firms in the country before eventually selling the agency.

Michael now serves as CEO of CRETech, the largest event, data and content platform in the commercial real estate tech sector. He also owns other successful brands such as The News Funnel, the largest commercial real estate news aggregator and The Content Funnel, a social media and blogging platform for the commercial real estate industry.

Michael blogs at www.cretech.com/michael-beckerman/ and is active on the commercial real estate tech speaking circuit.

Michael’s Links

CREtech – CREtech is where the commercial real estate industry comes to discover all things tech.
The News Funnel – The News Funnel is the largest content platform in the real estate industry, containing news from 5,000+ media sources and companies.

*If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — RealCrowd University.*

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Transcript

RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Tyler Stewart – Hey listeners, Tyler here. Before we start today’s episode, I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That’s realcrowduniversity.com. Thanks.

Adam Hooper – Hey Tyler.

Tyler Stewart – Hey Adam, how are you today?

Adam Hooper – Tyler, I am doing pretty well today.

Tyler Stewart – Yeah?

Adam Hooper – Yeah, I am.

Tyler Stewart – How come?

Adam Hooper – Well, we had another great episode. It’s sunny out. We kind of harp on that a whole bunch here–

Tyler Stewart – We do.

Adam Hooper – But it’s fall now. We got to take it for what we can here in Portland. Another good day though, another good episode, who is?

Tyler Stewart – Michael Beckerman who is the CEO of CREtech, and also the owner of The News Funnel.

Adam Hooper – Yeah, Michael is all things real estate media, and technology. You’ll probably hear a lot of themes in this conversation today similar to what we talked with Brendan Wallace at Fifth Wall, kind of how technology is affecting the real estate space. We’re seeing more of the investments in the space. We’re seeing more of the traditional players start to adopt technology, and just again an embrace of technology industry finally, which is a nice thing to see.

Tyler Stewart – Michael is also a master of building relationships and networking in the commercial real estate space. He delved a bit into his secret tips for how to build relationships and how to go to networking events and get to know people and start to build mutually beneficial relationship.

Adam Hooper – Again, I also love his emphasis on basically being a never ending learning, always trying to identify new things and kind of grow your own knowledge base to make you a better investor, a better user of real estate, and just more knowledgeable overall.

Tyler Stewart – Continue to learn and continue to grow, and just develop those skills as a real estate investor.

Adam Hooper – Perfect. Well, as always, we love your feedback, we love your comments, ratings on iTunes, SoundCloud, Google Play, wherever you might listen to us. So with that, Tyler, let’s get to it.

RealCrowd – This podcast is brought to you by RealCrowd, The leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper – Michael thanks for joining us today. We’re excited to talk a little bit more about what’s going on in the real estate and technology world. Where are you joining us from today?

Michael Beckerman – Well thanks guys, I’m really excited to be on the podcast, I’m a big fan of the podcast and your platform. Today I’m fortunate to actually be home, for once in a long time. I don’t know if my wife and kids are so thrilled about that, but I’m home in central New Jersey. Most days I am either in New York or I’m traveling, but today you find me in bucolic, horse country, central New Jersey.

Adam Hooper – Very nice, and we were just talking before we started recording, fresh off of the San Francisco conference you put together. You said about 500 in attendance there?

Michael Beckerman – Yeah, it was last Thursday we were in San Francisco, so I guess, depending on when this podcast airs, we were recently in San Francisco for our annual CREtech conference, and it was just an extraordinary event. It’s become so much less about us as a company, and as a site and a platform, it’s so much about, the industry and its evolution. The great thrill for me is to sit back as an audience member, in the back row or move around, listen to the crowd, and listen to the conversations. It’s to see how much progress, you guys have been in this is for as long as I have, how much progress has really been made. I measure that by the quality of the conversation, the substance of the conversation, the speakers, the amount of transactions that are taking place at our conferences, and of course the size. Last time we had the CREtech San Francisco, it was about 500, as you said. Which was terrific. The other thing that’s really great is that it’s all food groups within the industry, so obviously it’s heavy on the startups, but also now increasingly heavy on the investor side. We’ve got a lot of investors both institutional, and so we see private equity, as well as family office high network, individuals that are just angels that are looking to invest in this space. Then the occupiers, the developers, the landlords, then the service professionals, like the brokers, that want to discover tech. It’s been an extraordinary evolution in this space, I’m blessed that I get sort of a first row seat on what’s happening.

Adam Hooper – Good, well now take us a little bit back. We know you had a career and more of the public relations side, and then have transitioned now into what you’re doing with CREtech. Why don’t you take us a little bit through that transition, your background, and how you come to where you are today with CREtech.

Michael Beckerman – I started working I was in my early twenties. I had a love for media. I didn’t really have much formal education, but I loved media, and I loved content, and so I thought that anything in that industry, that space, would be something that I would enjoy doing. I started a PR firm in the late 1980’s, in a time when we were in the midst of a really horrific real estate cycle. Some of my first clients, as a publicist, were real estate. I found that there was a great void in an agency that specialized in mostly, commercial real estate, we did do some residential, but it was mostly commercial, multi-family office, retail, industrial hospitality. it took me a little time to figure out the importance of specializing in a particular industry. At some point I started to really see that this was a career path where I could build this agency, and we could focus on one category, commercial real estate. Worked really hard, scaled the business and got up to about 70 or 80 employees, and a couple of offices across the country, doing almost exclusively media relations. At that time , the media looked very different than it did today. There was actual print, there were actual magazines, there were actually very sophisticated reporters that were covering the beat. My job was to build brands using the media, and I did that for a very very long time. Then at some point in the late 2000’s, I started to understand when this thing called the internet was really starting to get traction, the world of content was changing. Just look at what we’re doing now,

Michael Beckerman – this is content, real crowds, podcasts, this extraordinary podcast, you’re your own media, and I kind of saw this coming. It didn’t take a rocket scientist that print was suffering, everything was going online. I eventually wanted to restart my career, wanted to reinvent myself. I just became completely bored with me, number one, and what I was doing. I worked on an exit plan and eventually was able to exit the agency. I wanted to go into something that I knew nothing about, that felt like real estate PR, 25-30 years ago. What wasn’t happening in our industry? What wasn’t anybody doing? That was in technology so, I migrated from the PR world. My first foray in this space was a site called The News Funnel, which is a content aggregator, it’s the largest in the industry, so that was the first thing that I built. Our job and our focus there is to take all of this wonderful content that, folks like RealCrowd and startups, but also just real estate companies were doing, and distribute that to the industry. We built that and it’s really thriving and taking off. I had an opportunity cause I really got into the tech world as a founder myself, to acquire CREtech about two years ago, which was, well you guys were a part of it, which was really kind of a volunteer community of founders that which were getting together and having some small meet-ups and talking about real estate tech. I saw that it could be a lot more than it was, they needed some investment. The fellow that started @Pierce9ken, who became my partner,

Michael Beckerman – is a wonderful, wonderful ambassador for the industry. He was at CBRE, took a job at Airbnb, in their real estate department. He was sort of looking for a way to scale it, and we came along and bought it two years ago. So CREtech has come into my life in a meaningful way, and that’s a big part of what we’re doing everyday now as well.

Adam Hooper – Good. And just for listeners out there, CREtech, a great source of content like you said, maybe you can just take a couple of minutes and tell listeners what you guys are doing at CREtech, and how that might be beneficial for them to get on board.

Michael Beckerman – One of the things I found was, as a founder myself, building my own content platform at The News Funnel, that there was really no place for the industry, the real estate industry, to discover all of these startups, all of these great emerging technologies and platforms. When I bought CREtech, it was with the sole purpose of bringing technology to the real estate industry, and being this one hub for anybody to come and discover all theses great platforms, all these great tools, and also to just have the industry just connect. We got a hold of the company, we acquired it, we started to reinvest it, we rebuilt the website, so the website’s a place where we’re aggregating news everyday and distributing that. We hand-curate about ten stories in the industry, that we think are most noteworthy everyday, whether they’re on funding announcements, new product launches, new hires, expansions, fundraising. We distribute that to our audience daily. We have a directory of startups there. We are doing a lot more there as well, we’ve pushed into consulting and advisory work. A big part of the platform is our events. We do large events in New York, San Francisco, LA, every year. You’re looking at anywhere between 4 to 800 at those events. Then we will do smaller regional events in Chicago, Austin, we’re thinking about going to Seattle. That’s where someone will say, “Hey, we want to bring CREtech to our community. We want to try and spread the word about what’s going on in commercial real estate technology. Will you guys come?”

Michael Beckerman – That’s core to our mission, so we’re like, “Absolutely.” We work with local startups, or local developers or owners, or investors, to help bring the community to their location. At the events, we are not a pay-to-play platform, so our speakers are 100% curated for merit and content. That’s very heavily me, and what I’m picking, that is interesting. You’ll come to the event and you’ll see startups have booths. You could see anywhere from 30 to 40 to 50 start-ups, and they’re really terrific. Then at the speaking level we’ll usually have something to do with venture investing or angel investing, and we’ll get a bunch of investors together and talk about what they’re investing in. What they see and what the hot topics are. Typically we’ll get some of the commercial real estate brokerage firms, the big names, to come and speak, their CTO’s and CIO’s. Then we’ll get developers to speak as well. Whether it’s Hines, or Prologis, or Equity, or Boston Properties. Those are the one’s that are talking about what they’re investing in and what they’re using, and what have you. It’s great content and it’s great connectivity, and networking, and the events are just really really scaling. Like we were talking before, the thing that I notice is that, it is the caliber of the conversation that people are having, it’s not just these puzzled faces anymore, “How does this compare to that? How does this impact my business immediately?” There’s also a lot of integration amongst the startups, that’s happening.

Michael Beckerman – I would say in the two years that we’ve been doing the event side of CREtech, it’s been extraordinary, the growth and evolution of this tech. We’ve got people coming, at the last event we had people from Europe, people from Asia, we had people come from New Zealand. All just extraordinary investors. I don’t want to reveal all the names but, that aren’t even speaking, that are just walking around, looking for opportunities to invest and to learn. I can’t wait for the next one, which is LA.

Adam Hooper – You talk about caliber right, so just today you guys announced your leadership team. Looking through this roster, a lot of folks we know. You’ve got Tom and Rich, Tom Byrne and Rich Boyle, early LoopNet. You’ve got Brad and Brennan at Fifth Wall. You got Colliers, Berkadia, Elie, formerly of CBRE, now Metaprop. JLL, Pierce at Airbnb, Newmark Knight Frank, ICSC. Our friend Steve Weikal at MIT. That’s a pretty solid list of folks that are involved in this.

Michael Beckerman – Yeah thanks. Our mutual friend Steve Weikal is just another one of our partners. Important I mention the event that we do with Steve and the MIT Center for Real Estate in Boston, We did our first together this year, and it was just extraordinary. Anytime you do anything with Steve and the Center, you know it’s going to be great. Our two companies combined really produce something amazing. Steve speaks at a lot of our events, he spoke at our recent Atlanta meet-up. The thing about the leadership board is, what we’re really trying to do is advance the conversation to really elevate it, and I don’t consider myself a quote-unquote, tech person. I consider myself an infinite learner. somebody that’s constantly trying to take my own knowledge to the next level, and push myself, and challenge myself. Technology is not something that is intuitively, guess cause I’m old , I’m 53. That I was not born with a phone or swiping in my hand. I’m constantly learning, and the way that I learn is to surround myself with the best and the brightest people that I can find. That’s the leadership board, and those are people that we will frequently just tap into and say, “What does this space look like? What are your thought on driver-less cars? What are your thoughts on Blockchain, or AI?” Whatever the topics are. Just to give us some feedback, and also to create some content for us, so they’d be blogging for us. We’re not journalist, we want to crowdsource the best content. That’s the purpose of the leadership board.

Adam Hooper – A lot of that and I think, the real estate industry, has always been about relationships and networking, and I think that’s one of the things we try to do here at RealCrowd is, bring people that, historically didn’t have access to that network, primarily on the investor side, with real estate managers, and try to build that network through this digital media versus traditionally just the dinner meetings or golf rounds, whatever that might be. What is your approach or secret or how do you approach networking and building this kind of collective of such high caliber people? Is there anything special that you’re doing, or secret that you’re doing, or is it just a genuine enthusiasm for what’s going on, and that just kind of builds on itself?

Michael Beckerman – It’s a terrific question, thank you. It’s one I was actually talking with a couple founders the other day. We got together in New York and we were talking about building their particular platforms, and how they went about it. The general consensus, and the exact same thing that I found myself is, it’s a very very physical business. The reason for that, and what I mean by that is, you have to go out meet and talk to everybody you possibly can. We’re in a new industry, an emerging industry. One that is not mature in the sense that there’s no central place for people to connect. It’s not something that you can merely use social media for, or organically grow. We’ve got to take, and RealCrowd’s done amazing, this is why you guys have been so successful. you have to literally take your product, get it to the market, get in front of people, and see them. Demo the product or just meet with them. Everyday, in my case for instance, I take virtually every call from every startup that wants to demo their product to me, and I simply say “How can I help? What can I do to help you?” Everybody’s boat rises then, alright. “So what are you looking for? Are you looking for introductions for investors? Are you looking for introductions to get adoption?” And it’s the same thing on the investor side. “What are you looking for? Are you looking for deal flow? What can I do to help?” It’s very very physical, the networking. I go out, I meet, I travel. That’s why we go, we’ll do an event in Atlanta. We’ll do one in Austin. We’ll go to any place we can where people want

Michael Beckerman – to talk about commercial real estate technology, because we have to physically build this thing. This is the largest business category in the world, real estate, and there’s no tech ecosystem. Of course if you are in consumer tech, or even fintech now is a mature industry, as you guys know well. Healthcare is coming along pretty aggressively, there’s big conferences in all those categories. Even Blockchain now, it has its own sort of ecosystem. Our world doesn’t have one yet. So the only way we’re going to do this is, we just have to go out and old school network. Like I did 30 years ago. Thankfully I got the energy and stamina to do it . But it’s a lot of work, but it’s fun, it’s exciting.

Adam Hooper – Now if listeners out there where to find themselves at an upcoming CREtech conference, they’re not industry participants typically, right? They’re kind of maybe coming from outside, maybe less of an ingrained kind of knowledge about the space. How would you suggest they approve something like that? Or when they’re having conversations with the manager in the space? Educate themselves, and that’s a lot of what we do with the podcast but, what would you say a good approach for people that are trying to get into the industry might take out when they go to conferences or have these conversations, and then start networking?

Michael Beckerman – What a wonderful question. I’m somebody that tries to do as much preparation as possible always so, when I’m meeting with somebody or I’m going somewhere, I really do a little bit of homework. I would suggest, let’s say if you were coming to our most recent event in San Francisco. You go on to our website, you see who the startups are that are there. You try and schedule meetings with people, whether in advance, you get in a day before, or if you’re local and it’s easier to do. You can do it the day before or what have you. This is also what I tell people that want to get a job in the industry, or are looking to invest in the industry, or don’t know what it is. Go talk to people. But set up meetings, do some homework, get there early, don’t just show up and you get lost. I see it happen all the time. People show up, they get their name badge, and there’s a crowd of 500. It’s pretty intense, it’s only 3 or 4 hours. It’s not like it’s 3 days, so that’s a tough thing to navigate. Look at the thirty or forty or so startups that are there, look at who the speakers are. A lot of these speakers also open up their calendars to people as well. You could reach out to some of the speakers and just make a point do some preparation, both in knowledge and in connectivity. Again, just reach out for us and our team and say “Hey, we’re coming to your XYZ event, how do we navigate? Can I get a few minutes with Mike?” We’re a small company, about 10 of us, so we’re extremely accessible. That’s the best way.

Michael Beckerman – The worst way, I always find this, to show up blind, not have any real agenda. It’s just common sense, just preparation.

Adam Hooper – Yeah, and engage, don’t be afraid to engage and ask those questions.

Michael Beckerman – Yeah, again, completely. We take Q and A’s afterwards, but again, I typically will see, we’ll have some of the venture capitalist there, like one in the top names in the space, they get off the platform, and there’s a line literally trying to get to them. Somebody will come up to me and say “Hey, can you get me to that one or that one?” I’m like, “I would love to try and help, but that’s not the way to do it.” Same way I would do it, if I went to a conference and I didn’t know anything about it, I would literally connect to people on LinkedIn and say “Hey, I’m going to be at this event and I would love to meet up.” You know, for coffee a bit before, or find them and go in, you know, just step into it, but do some homework in preparation.

Adam Hooper – One last bit on your recent conference in San Francisco. One of the ones that I always enjoyed going to is ICSC, the big convention in Las Vegas. That was always a good way to take the temperature and sentiment of the market. There’s a ton of deal-makers there. You have investors, landlords, tenants, you got the whole gambit down there at ICSC. At your last conference in San Francisco, what would you say the sentiment was? I guess, just in terms of industry outlook. What’s keeping people up at night? How was the energy in the overall real estate space at this conference?

Michael Beckerman – Wow.

Adam Hooper – We’re hittin’ you with the hard ones today.

Michael Beckerman – No, it’s the good ones. Really good, I love these questions because they’re really insightful. Which, I wouldn’t expect anything less from you guys. It’s interesting because I’m so, sort of deep into the ecosystem, and I’m talking to all the sectors, so I know the startup’s pains. I know what the developers and the owners are doing, and I know what the brokers are trying to do. You can look at numbers and sort of see, you can get excited about how much money is, for instance, is being invested in the space. You go, whoa! Every year it’s doubling, I mean it’s literally doubling. Month-to-month, year-over-year basis, it’s doubling. Now but, that’s kind of misleading so the things that I look for is where’s the traction, who else is growing and why, and what are companies trying to do with these tools. Are they deploying them or are they just investing in them? Et cetera. I think when I look at the sentiment, I look at it and say wow everything’s going really fast, everything’s growing, money’s definitely coming in. JLL Spark, as you guys know, they just announced 100 million. Metaprop just raised 40, Camber Creek around the same, out of New York, and Fifth Wall with their 400, and many more that are coming. RXR in New York, and now it’s 50 million from Ranmore, Brookfield, I think is 200 million. Prologis is massive in terms of their investment. That’s real material progress. What I look for is, I really go deep into the ecosystem and say, “Where’s the traction?”

Adam Hooper – But is anybody doing anything important that money?

Michael Beckerman – Correct.

Adam Hooper – Just putting money in the system is one thing, but what’s actually being done with it. I think that’s the bigger indicator, right?

Michael Beckerman – That’s what I look for. Not to get too much into the weeds. I’m looking for which sites are brokers using more than others, which sites are investors using more than others, which sites? Is VR finally getting some traction or not? I mean obviously, really very little of the Blockchain, but it’s a big topic. So what I really try and understand from my perspective, from my knowledge is, where’s the traction. A lot of it’s happening within organizations. If you could open up the boiler room into the big brokerage firm, and see what they’re doing, and people inside are going to the HUD, you would see where traction is. That’s what I look at. What are the brokers using, what are investors using, what platforms, what tools, and so, my takeaway is always, “Oh, that site is really scaling. That one is really scaling, or this one, they’re not there yet.” So that’s one thing without giving you too much specific that . I think the thing is that I see, it could somebody going, “What’s the takeaway, besides the individual sites that are scaling, and the money that’s coming in?” We’re at this point in the evolution of the space where we’re starting to see startups and platforms integrate and work together, and collaborate via API’s and what have you. I think that’s a very very important trend in the space. You’re starting to see multiple solutions come together to try and create a more coherent solution for the end user, and I think that’s an important evolution. If you say to me, “What’s the one sort of trend that

Michael Beckerman – you’re starting sort of seeing?” I would say, “It’s that!” The users of these products and these tools are saying, to the startups, “There’s too many of you, and you’re in too many silos. You need to understand from the user experience side, “that you need to make it simpler for us, and we can’t bounce from app to app to app to app.” I think we’re at that stage in the evolution, and that’s very very exciting.

Adam Hooper – That’s one of the things that we focus on, so we recently partnered with IMS, Investor Management Services, to provide that backend process. That’s what we’ve seen, and I would completely agree with you. Each one of these segments and each one of these companies that’s attacking their specific segment, it’s such a specialized business, that it’s really hard to do one thing exceptionally well, and near impossible to do more than one. Mediocre at best. I agree with you, I think we will see more of that integration and partnering with best-in-class providers to make that end-to-end solution for the customers as seamless as possible, rather than everyone trying to build everything internal. Leveraging the best-in-class with these different silos. The more you can build an integrative platform across all those different services, I think that’s going to be great for the industry.

Michael Beckerman – Well I remember meeting, I think you guys put that out sometime in May, about the IMS partnership. You used those words like seamless, end-to-end, life cycle. I read that and I was like, “Oh my gosh, these guys are so ahead of the curve.” That’s what your users are probably saying, “Yeah, give us more of that.” That’s just you, and this is why RealCrowd has done so well. It’s really a breakout platform, is because you’re really understanding what your users are looking for. Your customers, your clients. There’s a tendency sometimes, as you know so well, when you’re in tech, that you’re just so focused on the tech. You’re so focused on your own opportunities and challenges, that you don’t listen much, and I think all of us get into those traps. That’s why, when I saw that partnership, I was like, “Oh, yeah yeah, they’re listening, they’re listening. They’re being very intuitive about what their clients are looking for.” Kudos, kudos, you’re ahead of the curve–

Adam Hooper – We’re trying, we’re trying. You mentioned VR, AR, autonomous vehicles, Blockchain, we’ve touched on a couple of those. What are some of the more exciting areas that you are tracking, or that you see potential in? What gets you excited about the technology space right now? Where do see some of those going?

Michael Beckerman – We had a very small event in Utah a couple months ago, we had about 50, really at the highest level, thought leaders in the space. We got together at this beautiful lodge, Stein Eriksen, in Utah We had speakers, the world’s leading experts on Blockchain, cryptocurrency, and robotics, and what have you. I spent a lot of time reading and thinking, and talking about autonomous vehicles. I spent a lot of time talking to people about machine learning, and what have you. A lot of the stuff that we talked about is not practical today. It’s not being implemented now. It has transformative powers and applications down the road. When that comes I think it’s going to be extraordinary, I mean just the driverless cars, and the impact on all of us that either work, or live near cities, or what have you, Or what it can do. Parking garages, and the way we commute, congestion, and everything. But I think today, what’s on the ground today. I think the biggest revolution that I see, The thing that is having the most impact is simply, data. And this is where you’re at as well. First time in my lifetime, people in the industry have access, open access in many cases, to real-time data in ways and to degrees that have never existed before, that they can do so much more with now. Types of decisions they can make on investing, or leasing. So for instance, recently I was with Savills Studley, a massive tenant brokerage firm, who had built something with Leverton, an AI and data project that gives their professionals extraordinary access to information and trends that they never would have had a year or so ago.

Michael Beckerman – I could get into that for an hour but, it’s too much in the weeds. More so than any time in my 30 year career in this space, it’s all about dating now, and you look at companies like Reonomy or RealCrowd and or Comstack, it’s just an extraordinary amount of data, which is transformative, both for investors, for occupiers, tenants, owners, developers. That I think, is the game changer in the industry now. It’s the access to data and what it represents.

Adam Hooper – Now with some of those, what could be more transformative technologies that you mentioned, but now is not necessarily the time. Because you’re talking to all the different sides of this equation, what do you see as some of those barriers for adoption? Is it just that the technology isn’t advanced far enough that there’s practical uses for it? Is there a resistance? Real estate is always been a fairly slow industry to adopt technology, period. We talked with Brendan Wallace at Fifth Wall, in a prior podcast. One of the things we talked about was, can I use a generation of executives coming into the space be much more embracing of technology, we grew up with it. Do you see that playing a role? What do you think is going to be one of the tipping points that gets more adoption with some of these more industry-changing technologies?

Michael Beckerman – Oh boy, my crystal ball right? Personally, let’s say we’re in a new world of data, and that’s never going back, and that’s the new reality, and it’s wonderful, it’s amazing. We’re in that now, forever. Data used to be exclusive to either one company in our industry, or it would be exclusive to a professional, so I have information, and I have knowledge. Now flood gates are open, everybody’s got it, anybody can get access to it. When I think about it, the most transformative I would say, obviously the blockchain. Then again, that hasn’t even really materialized in other industries yet. I think that that could be extraordinary. That there is this open ledger that could profoundly impact the way that information is stored, and shared, and transacted. Again, moving this industry, this massive industry into the Blockchain, we haven’t even been able to move this industry into virtual reality, or augmented reality–

Adam Hooper – Or even just what we’re doing online with the same process as doing it on a website, right. We’re having conversations today that we were having five and a half years ago when we first started the company, same conversations.

Michael Beckerman – Exactly, exactly, but I think the thing that I get most excited about, as a consumer, as a dad, as a commuter, is the autonomous vehicles. Every article that I read, I am like, I just hope that this comes sooner. I hope my kids don’t have to ever drive. I don’t have to go through these New York commutes anymore. I hope that in other parts of the country, DC, or Austin, or LA, that this can be a solution for traffic and congestion, and open up and make more green spaces. Get rid of parking garages. Just the way the cities are built, the design, and green spaces. I think the one I am personally most excited about, the one that I can’t wait for, I never got my jet pack that the Jetsons told us was coming. If the driverless comes, the autonomous comes, when that comes, I think that’s going to be very… you still got to get through regulatory issues, municipal issues. It just has so much potential. Again, from the horse and buggy to the car, hopefully from the car to the autonomous.

Tyler Stewart – Do you have any sense for the timing on when we might see some autonomous cars out there?

Michael Beckerman – It’s so hard because, somebody’s that not working at Google, or Lyft, or Jaguar, Uber. I’m not in Pittsburgh and I’m not in Silicon Valley. It’s really just kind of what I read and who I talk to. We had a conference in La last year on this very topic, and the CEO of Gensler did an extraordinary presentation, led by a good friend of mine, Jeremy Neuer of CBRE. He was very very passionate about it as well. He went through this whole thing about what the future of design and construction looks like, et cetera. He had said five years. I’ve read other things that are sooner, and other things that are later. Hopefully we are not that far off, but I would say when you start to see them on the roads and having a material impact, I would say hopefully within the next five years but, your guess is as good as mine.

Adam Hooper – There’s a lot of different avenues that can impact our space, and so we can kind of tie it back to our listeners on this podcast, as potential investors in real estate. How can some of this change or how will this change the investment landscape, or what are some of those hot points we should be looking out for, and maybe some resources that they can go to? Obviously CREtech. But to keep apprise on what’s going on and start forming some opinions or thoughts on how that might affect their investment philosophy.

Michael Beckerman – As it relates to specifically real estate, right? Directly? It’s really been the most transformative period in my career, in terms of the physical space over the last couple years, due to tech I attribute a lot of it, whether you’re a fan of the company or not, I don’t think you can dispute the impact that WeWork has had on physical space. I’ve been a tenant my whole life, I’ve invested. I have a lot of friends that are investors. On the office side, you cannot deny that paradigm has shifted, and in every city now there’s coworking, in every community that it’s available. That has real implications on the investing side and the ownership side, and we’re starting to see it now. A lot of these conferences you’re hearing major landlords changing the dynamics of their properties to accommodate a different kind of workforce. A workforce that wants to have more communal space. That’s why you’ve seen startups like Convene thrive. Have more mixed use, so it’s co-working, and it’s retail, might even be some housing in there now, some residential.

Michael Beckerman – Fundamentally, WeWork has had a profound impact on the nature of occupancy, so that’s really important, a trend that I think is here to stay, and growing. The other thing is e-commerce has just exploded, so if you look at the warehouse industrial space, there’s no surprise as to why that’s done so well for the last couple years, with the likes of Amazon, and what-have-you, really expanding. Also, I spend a lot of time looking at robotics within industrial, and listening to folks like Will O’Donnell at Prologis, and what they’re doing. How buildings are being operated better through technology, is something that’s really really interesting. It goes on and on and on and on, all of these technologies are having a real impact on the nature of space. What’s the implication then on investing in that space, and what becomes the new hot product? You can come to these conferences and you can understand. I don’t know that I would be owning parking garages anymore– That’s a good opportunity to start selling or what have you. There’s also this whole trend towards office buildings becoming hotels.

Michael Beckerman – It’s the way that they’re configured, so that’s something to really pay attention to. An investor co-living, same sort of thing. I don’t think these things are bubbles, I think these are the real trends. If you just look at the demographics they all support, that the nature of physical space is changing and evolving, because of technology, and therefore there is a direct correlation to what is a good thing to be investing in or not. I’m not that smart, that’s you guys, but, there’s a correlation there.

Adam Hooper – It’s what we talked about with Steve Weikal on our episode middle of last year, the whole concept of real estate fracking.

Michael Beckerman – He should get a dollar for every time someone mentions that now, cause he would be a multi-billionaire–

Adam Hooper – I’ll send him a check. The concept for changing the nature of the use, right. You talk about data, don’t kid yourself for a second that every time somebody walks in or out of the door, in any of WeWork spaces, they’re collecting data on that. The insight how tenants use space, I think will have huge impacts on what gets done going forward. Like you said, no one’s really ever had access to the amount, and the kind of data that we have now, and so, my thought on this is I think we’re still early enough in that kind of data aggregation part of this phase, that once we have a meaningful dataset to start using to inform decisions going forward, that’s when we’ll start to see some even more dramatic changes. I think we’re still trying to wrap our heads around how can we use this data, now that we have the ability to collect it. I’m curious to see what happens in the next 5 to 10 years. Once we have that dataset, how can we actually use that to inform these decisions were making about the usage of space or new development, or retrofits. I think it’ll be interesting to see.

Michael Beckerman – Right, exactly right. That’s really well said, spot on. If you think about it, like in my lifetime, the dynamic was, you sign a lease or you became the owner and you signed a lease with an occupier as the tenant. You’re kind of done, that was it it would be five, seven, ten years, kind of wait till it rolls over, check back in and hopefully do it again, or whatever, figure out what they needed. That would also be on the multi-family side. You build the building, you get the tenant, and you see them when the lease rolls around. That’s forever change. I do attribute a lot of it to WeWork, I do give them a lot of credit for being bold enough to re-think that dynamic, and say “Hey, there’s another way, which is going to be short-term, and flexible, and creative.” Like you said, “Now we’re going to just put sensors on the ceilings, we’re going to capture all your data, we’re going to build apps to communicate with you while you’re in our building, and we’re going to know everything about you, on a real-time basis.” That has never happened in this business. Who’s in the building and what they’re doing, is now captured, like you said. What everybody does with that, that’s the next iteration. That’s where the smartest investors will be, smartest landlords will be, understanding that data. In one of conversations we were having yesterday, one of the things I really try to write about in my blog, and whatever speaking opportunities I’m fortunate to get, is I’m really talking to people in my generation and my community and and say “Look.” The other thing that’s happening and that everybody

Michael Beckerman – should pay attention to, is that jobs will be lost. You’re kidding yourself to think that technology plus real estate, equals efficiency, equals job losses, results of job losses. People are going to do more with less, it’s why you’re starting to see so many virtual assistants. Executive assistants are getting impacted or marketing people are getting impacted. But, on the flip side, there’s great opportunity. So if you’re somebody that loves research and data, go get whatever information you possibly can to educate yourself to become a data scientist in real estate, and you will go to the top of the food chain, based on what we were just talking about. That’s a little side vent of mine. Trying to get people to wake up and see there are opportunities here, but there is also going to be some pain as a result, which always happens. I mean, one of the things that I always talk about and I know you know this world well, is like when I do my presentations is I always point to fintech and say, if you look at like, what AI or what machine learning and all have done to Wall Street and the financial community, I mean, there have been massive job losses that, and there’s only more coming because they’ve gotten so efficient and I can’t even know the number of stock brokers, or people that pick stocks that have been lost but so now we know it’s coming to a hiring issue so get in front of it.

Michael Beckerman – Anyway, getting off topic but that’s just, it’s a passionate topic of mine– The great opportunity here.

Adam Hooper – Well, lets take a minute if we can and just kind of go through maybe the four major food groups, you know, office, retail, industrial, multi-family. Maybe you can just kind of pick off by level maybe a couple, two or three, either interesting technologies or interesting companies that you’re seeing in that space that you think we should be watching out for? Can we do that a little bit?

Michael Beckerman – Specific companies?

Adam Hooper – Yeah or just themes, right? Something like if we start with office, right, obviously you got We Work, co-working, you know, what are some other things that you’re seeing maybe that will impact the office market?

Michael Beckerman – Without getting in too much trouble because I know our larger audiences, if I started picking off specific startups. On the office side, the big sort of theme right now is apps that are enabling landlords to communicate and bring amenities to the workplace. You’re starting to see a lot more focused on applications that you can broadcast food services, you can do yoga classes. Whether it might be emergency situations to what have you is that, you know, the landlords are really waking up to the possibility, the potential, the opportunity, having direct communication with their specific tenants. On the office space, it’s very, very sort of big into the community apps and communication apps, I think it’s also obviously on the data, so on office it’s very, very much about data right now, and I think again, that’s not going away, so again, that calling out specific startups if you just, you know, looked into, you know, data, you’d find a lot of…

Michael Beckerman – Lot of the startups that are attracting the most amount of money are they’re scaling or in that space. Same sort of thing on the industrial side. On the industrial side, it’s really interesting because there’s two parts of that, that I see, that are really accelerating because of growth. Specifically on, there’s a great deal of innovation on the construction side of the business. Which is a really exciting and fascinating to see, you know, what robotics can do, what so and so, I’ve seen some stuff on 3D printing, and extraordinary. Then I think just on near the industrial side it’s interesting because it’s a little quieter, they don’t broadcast as much because, you know, the companies at the top of the food chain are so massive and so large but some of the things that like, Prologis is doing within their warehouses in terms of data now it should see, is just, and robotics is mind boggling. Maintenance is another big thing that’s there’s just tremendous advances in maintenance and energy efficiency, and things like that also in the office side. I mean, on retail, I think retail’s a, you know, you mentioned ICSC, we were just at an innovation lounge at their big Las Vegas show. I mean, retail’s interesting because I find that like, you know, they were a little late in seeing the threat and now they’re really making up for it in a very exciting way and there’s just profound, exciting technologies that are coming to retail, everything from sort of, the Amazon Go to, you know, to motion detectors,

Michael Beckerman – sensors, just amazing, but again, I think you could just look at Amazon Go and see that’s the future of what retail looks like, for better or worse. On the multi-family side, it’s also one that’s really exciting, whether it’s like, building access, whether it’s amenities, and again, communications. Much innovation happening on a multi-family side. What you see now is that the landlords, and the owners, and the managers, are all recognizing that technology can be a way for them to differentiate themselves, get a competitive advantage in the marketplace. It’s sort of like, you know, used to be like, who had wifi and who didn’t. Who’s got just the most extraordinary technology in the unit, in the home, and outside. It used to about like, who’s got the cool? And now it’s like, who’s got the most state of the art, you know mail, locker systems rather–

Adam Hooper – Right, who’s got the most room for all my Amazon deliveries?

Michael Beckerman – Yeah, exactly. There’s so much happening, it’s a lot. Again, it’s wonderful, it’s wonderful. We don’t dabble as much as a hotel side but, you know, I think the major food groups: office, industrial, multi-family, retail. There’s innovation happening in every food group and at our conferences, we really do try with have everyone represented.

Adam Hooper – What are some things out there that are maybe super early or not on the radar of the most that you’ve been tracking, or what aren’t we talking about that we should be watching out for?

Michael Beckerman – Wow, that’s a great one. One thing that I really notice… I don’t know, again, what the application is specifically to your audience but that because of all this technology that’s being invested, it’s really become now more of a global community real estate and so what we’re doing here in the US, is also taking place in the UK. It’s also taking place in India, it’s taking place throughout Europe. There is this sort of global community that’s forming that it’s very exciting. From an investment point of view, from a startup point of view, we’re getting a lot of foreign investment into the US, in terms of VC’s and what have you that are interested in the space. I think the other thing that I think about is that there’s clearly an arms race in the sense that the firms that are able to are investing substantial dollars into the space. That is going to give them a clear leg up. So if you’re a middle-market firm, you’re getting squeezed right now because, you know, this is proving out, day to day, that middle markets and brokerage firms are struggling in some cases because the channel house, the CPRE’s, you know, the Newmarks, the Colliars, I mean, they’re investing tremendously in tech. At both they’re creating, like, look at Colliars and their collaboration with Techstars, they’re one of the world’s great accelerators, you should have on the show. They’re incubating technology that’s going to be proprietary to theirs, JLL Spark, same thing. I equate it to fintech’s…

Michael Beckerman – It looked like Goldman’s doing or some of the other, they’re getting competitive advantages based on the technology investments that they make. Just because they’re throwing a lot of money at it doesn’t mean that they’re going to win, but they’re bringing in people from outside the industry, Silicon Valley, and tech, to being really leading. You’re starting to see CTO’s could gain, and CIO’s getting increasingly importance on brokerage, and development, and innovation people. That’s one of the things I’m really, really, really paying attention to, and then on the, sort of on the investment side, if you’re a small investor… When I say small, not dollars, just you’re a regional and you’re buying in your particular community, and you’re not like, a global investor on a couple of markets, you’ve got like, you know, again, and I come back to Rilke, you don’t like opportunities now to be more competitive than ever before in your market, where you can have a leg up on your competitors. It used to be like, you know, you got a call from that broker, or you got a call from somebody because you’re in a relationship with them, and you have a strategic advantage because you’ve got some inside information in a good way, not in a bad way obviously. Now, you could use RealCrowd to communicate and source, you could use so many other tools that are out there to gain a competitive advantage.

Michael Beckerman – I’m starting to see more and more individual investors come to our conferences looking for tools and applications that could give them a competitive advantage. As you guys can attest to, they’re becoming, investors are becoming much, much, much, much more sophisticated in the tools that they’re using. That’s really the great surprise for me is that I’m walking around San Francisco and I’m seeing a couple dozen local investors and multi-family, or office and industrial, talking to startups to use their products in their marketplace, and I think that is extraordinary because oftentimes we get lost in the tree tops but we’re talking in the beginning of the podcast, it’s really about what’s happening locally and individually within each office. That 10 person, 20 person, five person, two person investor or company in real estate can now compete with the 100-person operation because of tools like RealCrowd and others. That to me is thrilling, and that’s what technology at it’s best can do.

Adam Hooper – There you go. That’s some good stuff. There you go, absolutely. Get optimized, get optimized. That is a good, that’s a good mic drop, Moe. What’s next for you and CREtech, and maybe, yeah, we’ll put again the link in the show notes so that all our listeners out there can attend some of these conferences, right? I think it would be, from an educational standpoint and what we’re trying with, you know, helping our listeners understand this asset class better, would highly recommend they check it out and attend, and see what’s going on in the space.

Michael Beckerman – How about this, how about my team’s going to listen to this and get crazy, how about any listeners to the RealCrowd Podcast, we can give a discount to an upcoming event, so we’ll work on that together. I love you guys, you’re so supportive of the ecosystem, you’ve been involved in CREtech from day one, showed great leadership, amazing content. We want to encourage your community at RealCrowd to come out and come to a conference. Next for us is really just, continue to scale the events, continue to source, you know, great ideas and themes or what have you. We’re looking at our fall lineup. We’ll be in LA, coming to Austin in October, we’re coming to maybe a couple other places, I know Chicago’s on the docket. We’ll have another small meetup in New York, and then our big meetup at the end of the year, in December, in New York, which is our largest event. Continue to scale the event. We’re producing more video on our websites so please sign up for the website’s free, at CREtech.com. For me personally, I’m excited to head over to London in a few weeks to check out the CREtech, or as I like to say, pop-tech world over there. Find out what’s happening over there, and bring some ideas back here. I’m just excited everyday, I’m excited about tomorrow. I’m excited about everyday in this space is again, as the infinite learner, I’m just trying to learn and educate myself as to what the smartest folks in this world are doin’

Michael Beckerman – like you guys at RealCrowd and try and bring it to the rest of the my community.

Adam Hooper – Perfect.

Michael Beckerman – Takinh it day to day, so thanks again, guys. I really enjoyed this and big fan of RealCrowd, and everything you’re doing, and it’s been an honor, and a pleasure to be on the podcast.

Adam Hooper – Well, likewise, we appreciate your time coming on today. If there’s anything else you want to add or anything you want to ask us?

Michael Beckerman – You know, I want, well, yeah, how about what’s next for RealCrowd, how about that? Give me a scoop on something and we can put it on the website.

Adam Hooper – I will say, keep your eyes out for, and so, a big thing for us has always been, and we’ve talked about a lot on this podcast, is helping people understand this asset class on a risk-adjusted basis. We’ve given people tremendous access to this asset class, we’ve made it, you know, available, $4.5 billion worth of real estate through the platform now.

Michael Beckerman – Wow.

Adam Hooper – A lot of work still needs to be done on giving people the tools to look at things on a risk-adjusted basis. An individual investor doesn’t have the underwriting arm that a global investor has. They don’t have those risk-modeling capabilities and so you’ll see something from us on that pretty soon.

Michael Beckerman – Well, great, can’t wait.

Adam Hooper – And then also blockchain. We could talk for weeks on that. So many interesting applications of the fundamental concept of block chain that could have very far reaching impacts for our space and the financial industry in general. Where the biggest kind of hand-wavy, ethereal conversations is, how does this concept of a distributed ledger, what does that mean for the whole notion of ownership. Can a blockchain own a thing? And then my token is a license to that, that bundle of rights that come with ownership, right? Can that challenge this whole notion of just the typical ownership structures? What does that mean from a regulatory standpoint? From a tax standpoint? Absolutely fascinating, fascinating conversation. There’s hard to summarize but we’re very aggressively looking at that space and I’d say also keep your eyes peeled for, depending on when this podcast launches, you’ll probably hear from us on that front as well.

Michael Beckerman – Well, keep us posted because all those themes, those topics, are fascinating to me– And our community. You guys are so far out there in terms of innovation so any time you’ve got something that you’re going to market to announce, let us know and we want to support it as much as we can–

Adam Hooper – Perfect.

Michael Beckerman – Thanks for the opportunity and continued success to you guys at RealCrowd.

Adam Hooper – Likewise. Again, we appreciate your time comin’ on today. Listeners, I hope you enjoyed the episode today. As always, if you have any question for us, send us an email to podcast@RealCrowd.com. With that, we’ll catch you in the next one.

Tyler Stewart – Hey, listeners, if you’ve enjoyed this episode, be sure to enroll in our free six-week course on the Fundamentals of Commercial Real Estate Investing. Head to RealCrowdUniversity.com to enroll for free today. In RealCrowd University, real estate experts will teach you the important fundamentals like the Start With Risk approach, how to evaluate real estate sponsors, what to look for in the legal documents, and much more. Head to RealCrowdUniversity.com to enroll for free today. Hope to see you there.

RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit RealCrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smatter.

Real estate investing is on the rise. Middle class entrepreneurs are finding opportunities to boost their income by investing in fix and flip (or fix and hold) real estate investments at an exciting rate.

This blog is courtesy of  Eric Krattenstein, Chief Marketing Officer of Asset Based Lending. You can find more information about their services at http://www.abl1.net

What exactly is a flip?

Thanks to the success of several primetime television shows and the rebound of the US housing market, house flipping is on the mind of new and experienced real estate investors alike. These savvy investors find a distressed property that can be purchased at a discount, 26% below market value on average, with the goal of renovating the property and selling it for a profit or holding it for rental income.

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Smaller investors are making money…

According to RealtyTrac’s 2015 US Home Flipping Report, residential property flipping is the most popular it has been since 2007; counting over 110,000 active flippers. Out of those 110,000 flippers last year, the average number of flips per investor was just 1.6–the lowest it has been in 8 yearsa strong indicator that smaller investors are entering the market.
[bctt tweet=”Residential property flipping is the most popular it has been since 2007.”]
Why the rise in new real estate investors? Quite simply, they are making money. According to the research, the average finished flip was appraised at 5% above market value and sold for an average gross profit of $55,000 if it wasn’t held long term for rental income.

But where do they get their money?

The name of the game here is leverage. By bringing in a lender or equity partner, investors are able to fund these investments with just a fraction of the cash coming out of their own pockets.

Conventional Financing

The first source of funding beginner investors try is their local neighborhood bank. Banks tend to offer lower interest rates than the alternatives, and some investors feel more comfortable using a federal institution. However, investors that are not exceptionally healthy with an outstanding profile have trouble getting the financing they need from banks for a few reasons.

First, institutional financing is almost impossible to obtain with a mediocre credit score and not a great deal of liquidity. Perhaps even more importantly, bank loans take time that investors usually do not have. Time is money when it comes to real estate investing, and a delay in funding almost always means the inability to snatch up that perfect listing and a missed opportunity.

Hard Money Lenders

The option most investors turn to for leverage then is what is known as hard money lending (or asset based lending). A hard money lender is willing to finance “riskier” loans for borrowers that don’t meet institutional criteria in exchange for higher interest rates.

As opposed to banks, hard money lenders are more interested in the deal itself rather than the profile of the borrower. These alternative lenders use different underwriting criteria that tend to offer significant leniency when it comes to credit scores, income history, and other traditional underwriting factors.

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Hard money lenders want to know that you’re getting involved in an investment that will be profitable–whether the goal is to sell quickly or hold and rent. Unlike conventional financing, these alternative lending firms were born out of necessity in the real estate investing market so their processes are designed to support those specific needs.
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In addition to closing loans fast, hard money lenders help investors leverage their capital by financing some or all of the purchase price of a property as well as the renovation costs. As a hard money lender ourselves, we typically fund up to 80% of the purchase price and all of the rehab costs. This means in exchange for paying more money per month in interest, a borrower is able to get involved in a real estate transaction with just 20% of the purchase price coming out of their pocket. Investors looking to hold a property for rental income typically refinance out of the hard money loan with conventional financing once the property has been stabilized.

Key Takeaways

1. New investors are entering the real estate market at the highest rate in a decade.
2. The average fix and flip or fix and hold project is purchased at a steep discount and ultimately worth several percent above market value.
3. Individual investors that are not independently wealthy are leveraging alternative financing to fund investments with just a fraction of the deal out of pocket.

This blog was written by our special guest Eric Krattenstein, Chief Marketing Officer of Asset Based Lending. You can find more information about their services at http://www.abl1.net

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What Questions Must a Real Estate Investor Ask While Finding Hard Money Lenders?

Finding Hard Money Lenders

Finding hard money lenders is easy, but they aren’t all created equal and it’s very important to be selective.

In order to do your homework, these are the key questions you must ask when seeking out a hard money lender and submitting your loan application:

1) How Much Experience Do You Have?

Make sure you choose an experienced hard money lender for your project. With an experienced lender that has been in business for years, they understand the cyclical nature of the industry. These individuals can suggest an appropriate loan for your real estate investing business, including some advice on avoiding potential risks and pitfalls in your business.

2) Are You a Licensed Lender?

If a lender is licensed and State approved, that individual is bound to follow state mandated rules which provide customer protection. Their website must display their license ID, which can be researched on the licensing state’s website. One example is the Texas Real Estate Commission website, which allows you to check the licenses of Texas real estate lenders.

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3) Can You Show me Your References or Testimonials?

A good hard money lender should not hesitate to show you the reviews and testimonials by his/her previous clients. These reviews are often on  lender’s own website, but better reviews can be found from third party sources. Considering the lender’s length of time in business, if he or she doesn’t have enough satisfactory reviews, you should be on high alert.

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4) How Do You Fix Your Interest Rate?

Generally, hard money interest rates are determined by the property type, risk analysis, and your credit rating. Hard money loan interest rates are higher than bank rates and range from 8% to 18%. There is greater flexibility in hard money loan rates and you should keep this in mind when you negotiate with the lender.

5) How Fast You Can Approve My Loan Application?

Hard money lenders are known for their quick approval of loans as they have very few requirements. The lenders approve loans within a week (or in some cases, the same day) if they determine you’ve provided satisfactory information. Asking about the lender’s funding timeline, and indicating your own need,  is crucial when you want to close the deal on time to increase your cash flow. Providing proper documentation, project status, and a solid exit strategy will improve turnaround time on this approval.

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6) How Much Loan to Value (LTV) Can You Offer?

Since property values are the key driver of a hard money loan’s value, it’s important to talk about the Loan to Value (LTV) on your investment. The LTV is the funding amount a lender provides on the basis of the existing value of property. It will vary from lender to lender.

LTVs are typically lower on land, commercial property, and rural houses due to the greater risks involved in these projects. Some hard money lenders provide funds on the After Repair Value (ARV), which is the value of the property after remodeling.

[bctt tweet=”How much Loan to Value (LTV) can you offer? This is one of 7 questions you need to ask a hard money lender.”]

7) What Types of Loans Do You Offer?

Some lenders are specialized in a niche loan category, while others have a broad loan portfolio. If you need a loan for buying and remodeling a property, you will want to select a lender that is more accustomed to a broad loan offering. You are more likely to see success working with a lender that is more aligned to your project’s needs.

The Last Word

By asking these questions, you can get a good sense of the lender’s services and criteria, helping you to find just the right one for your investment property.

Author Bio

David Mixon, owner of Loans 4 Investors, has been in the real estate business for 20+ years. His company specializes in Private Hard Money Lending for Real Estate Investors and Home Builders. He and his wife also have lots of fun traveling across the US in their RV exploring new markets and developing their power teams as they go! David was raised on motorcycles and it is still a huge passion of his to ride his Harley Davidson for the pure pleasure of it.

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I’m going to do something a little bit different today, because I’m going to dissect an article, which was published on the front page of a well-known tabloid newspaper a couple of weeks ago, because it’s all about the property market. It’s quite unusual for a national tabloid to devote the frontpage to a property article.

Now, it does happen sometimes. The Daily Express, for example, quite often has articles about the property market. While I say quite often, regularly is perhaps a better way of describing it. Once every 3 or 4 months, The Daily Express will often have an article about the property market. Generally speaking, depending upon what’s happening in the world and in the economy, it happens to be quite a positive article. Now, this is a different tabloid. I’m wondering, if I should name it. Okay, well, you’ve twisted my arm, it’s The Daily Mail. On August 16th, The Daily Mail rant a sort of a shock horror, “The Property Market Is About To Crash” type article on the frontpage. We’re going to look at that. We’re going to dissect it. We’re going to think, are there actually grains of truth in this, or is it just hyped? Because the interesting thing, is that, The Daily Mail is much less likely to write an article on the frontpage than The Daily Express. 

So, I’m just wondering why they did that. The answer, is probably, because it was published on August 16th. If you think about that, that’s the height of the silly season. The silly season is when all the Politicians are away on holiday. Nobody is really arguing about Brexit. Donald Trump’s probably been a bit quiet, and hasn’t twitted very much recently. The journalists who aren’t on their summer holiday, who are left in an almost empty office to keep the show on the road, and to keep pumping out newsprint, are looking around for something to publish. What do they see? 

Well, it was a report by the Office of National Statistics all about the property market. Very, very interesting. Because the thing which strikes me, is, it’s interesting, isn’t it, how we can take the same statistics, but give them a completely different spin, depending upon our mindset, and depending upon perhaps even our political leaning. Because all of the newspapers definitely have a different political leaning we know that. But it’s also evident when they talk about properties. So, for example, The Guardian, which is quite left leaning doesn’t like landlords. The Daily Express as I say, is usually quite positive and encouraging the property market. The Daily Mail in this particular instance, was quite negative.

So, let’s have a look at the article. This is on the front page. As I say, this is their prime real estate in terms of newsprint. So, they obviously want to make a bit of impact with this. It says, As Property Sales Fall Across The UK, Are House Prices Set To Take A Tumble? A big dramatic headline, is, the body of the copy. Fears are growing that Britain’s once red-hot property market has run out of steam. A string of indicators yesterday triggered warnings, that it could be heading for a correction, or even a crash. Oh, my word, gosh? Prices in London are falling at the fastest pace since the financial crisis! Really, okay. Well, we’ll certainly look at that. But the declines are not limited to the capital. Houses are also losing value across the North East as well as in towns and cities such as, Winchester, Oxford, Wycombe and Blackpool. Pockets of Devon, Derbyshire, Lincolnshire, Hertfordshire, Berkshire, Staffordshire, Cumbria and Surrey are also affected. 

My word, I wished I’ve stayed in bed this morning. The number of property sales has also tumbled, by as much as 65 percent in some areas as buyers worried about rising interest rates baulk at the ‘silly money’ demanded by sellers. House prices have enjoyed almost a decade of strong growth since the financial crisis, but experts fear that this has left property overvalued. Estate agents said prices are now being cut to tempt buyers back in, particularly those worried about rising interest rates as they struggled to raise enough money to secure a mortgage. 

Reuben Young, Director of Priced Out, which campaigns to make housing more affordable said, there can be no doubt that we are in a bubble. Okay, Reuben, there is no doubt. We’ll take your word for it. We might look at that a little bit closer though. People buy housing not just for security, but in expectation that prices will rise in the future. At some point, the bubble will burst. But in a warning to first time buyers hoping to take advantage of lower prices, he said that the fall seen so far does not mean it’s bursting now. It’s a very interesting point. 

A report by the Office for National Statistics and Land Registry yesterday showed:

  • Overall UK house prices rose by only 3 percent to £228,384 in the 12 months to June – the slowest increase since August 2013. 
  • London prices fell 0.07 percent, or by £3,400 to £476,752. I say that again, £476,752, the sharpest decline since September 2009, when the UK was in deep recession in the wake of the financial crisis. Interesting, £3,400 on a £500,000 property is the sharpest decline since 2009. Very interesting.
  • Prices fell by 23.8 percent or £220,000 in the City of London. 13.9 percent or £187,000 in Kensington and Chelsea. 12.1 percent, or £132,000 in Westminster. 
  • Prices were also down year-on-year in the North East, by 0.6 percent, or £825 to £127,271. 
  • There are also falls of 5.3 percent in Purbeck in Dorset, and 4.9 percent in South Buckinghamshire. While home owners in Winchester, Wycombe, Stroud, Oxford and Blackpool saw declines of between 2 and 3 percent. 

Experts warned that prices have risen too far in parts of the country, resulting in a dramatic collapse in a number of sales as buyers are put off by sky high asking prices. Many sellers face with demands to cut their prices have refused to do so, instead withdrawing their house from the market. Again, a very interesting point actually. 

Across England, the number of transactions fell 19.3 percent between April last year and April this year. Sales were down 13.9 percent in Wales. A similar amount in Northern Ireland, and 9.4 percent in Scotland. But in parts of the UK, the falls were even more dramatic. In Newham, in London, they were down 65.6 percent. A shortage of supply has helped prop up prices in some areas as a large number of houses hunters chase unlimited number of properties. A crucial point. Experts warned that when sellers accepted the market has softened, and are willing to accept lower prices, a flurry of homes coming onto the market could push prices down further. 

Howard Archer, and let’s face it, they always will borrow Howard out, didn’t they, to comment on everything. Howard Archer, Chief Economist to the Ernst and Young ITEM Club said, the downside for house prices is being limited by shortage of houses for sale. If a significant amount of supplies starts to come on to the market, you would expect to take away some of the support for prices. Lee Pendleton, Founder Director of Independence Estate Agents James Pendleton said people have been asking for silly money. Sellers need to be realistic. If a house is not selling, it is usually down to price. In South West London, where we operate, house prices rose 180 percent in 10 years. It’s insane!

Separate figures from the UK Finance revealed that there has been a sharp fall in the number of landlords buying properties. Let me just repeat that. Separate figures from the UK Finance revealed that there has been a sharp fall in the number of landlords buying properties. Some 5,400 buy-to-let mortgages were completed in June, down 19.4 percent on the same month last year. Both the Government and the Bank of England have launched clampdowns on landlords in recent years through higher taxes and tough lending rules. Paul Smith of Haart Estate Agents said, areas of the market are suffering. Government Policy on buy-to-let is clearly having a detrimental effect. But he added, the UK property market remains buoyant. Middle England is thriving. 

So, that’s the end of the article. There we are, at the very last paragraph of this doom and gloom article actually, finishes on quite a positive note. It says the UK property market remains buoyant. Middle England is thriving. Now, contrast that with the headline, which is, Are We About To Have The Mother Of All Crashes? There we go. this is the press for you, isn’t it? It’s a very interesting article though.

So, it starts out suggesting the whole market is completely bombed, isn’t it, and that we’re heading for this horrible crash. But actually, there’s not a lot in there to support this. So, there’s interesting phrase like, Reuben suggests that we’re definitely in a bubble. He also, sort of, said that, as if that’s just taken for granted, taken as red, is a bubble. We’ll come back to that. But one of the things, which I thought was very interesting, which did come out through this article, is the fact that, there is a shortage of properties in the market at the moment, and that’s supporting prices. 

This is one of the things, which we’ve seen since the credit crunch I think, that there’s been a scurrilous game of cat and mouse, between buyers and sellers. The reality seems to be that many people who would have sold house and moved perhaps, prior to 2007 have decided that they’re going to stay put, and they’re not going to move, and they’re going to improve the property therein. You’ll see, if you look at the figures for finance, for example, the number of re-mortgages has gone up, because people are re-mortgaging their homes to undertake, well, get finance their home alterations and improvements rather than selling properties, and taking out new mortgages to buy new properties. That seems to be the case. 

Now, one of the things, which this article does highlight, is, the fall in values for the very, very top values stuff in London. It talks about properties in the City of London, and Westminster, and Kensington and Chelsea, where hundreds of thousands are being knocked off the price of a property. But the reality, is that, probably hundreds of thousands being knocked off properties which worth multiple millions. So, as a percentage of the asking price, it’s probably not a lot. I mean, it’s obviously to you and me, it’s a fair chunk of change, but in terms of the actual overall value of the property, it’s probably not telling us an awful lot. You’ll probably expect that, there are fairly niche markets with only a limited number of buyers. If there’s only a handful of properties sold in a month, that probably distorts the market. You could easily see that, if in an extra few properties were sold next month that could distort the market, in the way they could go up disproportionately. It’s a bit of a strange market. You certainly couldn’t put behind your hat on that, as being evidence of anything within the property market. 

But what I think, is happening here, is that, as so often happens, I mean as I’ve said right at the beginning, The Daily Mail, they’ve got to sell papers. They’re trying to be a bit dramatic. But it’s a very London-centric view, isn’t it? Because, if you look at the property indices, which I would say, produce the best evidence, and if you’ve been to the Masterclass, you’ll know which one I’m talking about. I’m not going to talk about it now. Come to Masterclass. But there’s a particular index, which I love, because it’s one which is used by valuers and bank valuers. Interestingly, that came out today. 

One of the reasons why I wanted to record this podcast today, is because I wanted to look at that index, to see what’s actually happening. Because it’s a monthly index, and it shows values across the whole of the country, but not regionally. It actually talks about specific towns. If you look at it, it’s quite clear what’s happening. London is taking a breather. But outside of London and the South East, probably the rest of the country is pushing on particularly, in the Midlands and the North. That’s classic of what happens with the ripple. If you understand the ripple, you’ll understand what I’m saying. Because ripple theory is this: London values go up, and then values ripple out from London, and the value of properties increases almost in a line coming out of London. Over time, that line moves across the country from North up to the north, and values increase in the wake of that. It’s a bit like literally, dropping a stone in a pond, and seeing it ripples out, or the stone would sort of drop on London and the ripples, the values ripple out of London, and they wake up. I’m sure you understand what I’m trying to say.

That’s what we’re seeing, because values in the North, values in the Midlands are still pushing on. I invest up in the North East so I’m particularly interested in what is happening in Newcastle. According to my favourite index, and this isn’t why it’s my favourite index, by the way, because I had to take bad news as well as the good news. But the good news, is, this month it’s reporting that values are not only going up in Newcastle, but they’re actually going up slightly faster than they were last month. So, we’re not seeing this sort of rush towards a crash. We’re seeing outside of London, things were actually doing pretty well. But I thought it would be interesting to contrast that article with the one produced by the RICS. 

So, I have in front of me the July 2018 UK Residential Market Survey produced by the RICS, The Royal Institute of Chartered Surveyors, my eminent body of which I’m a member. If you want to find it, you can Google it. Just Google RICS UK Residential Market Survey. You’ll find not just the one for July, which is the latest one, but you’ll find back copies for previous months, which you can read, should you wish to. Anyway, the July one has a headline of “Landlord Instructions Fall As Rent Forecasts Edge Up”. So, let me just go through this. As I go through them, I’m just going to highlight some other points, because I thought it will be quite interesting to contrast this, which is kind of be like, with that one, it sounds naughty, but the professional viewpoint, which we can contrast with the sort of the media hype. So, this is what the RICS say..

They say, the most striking feature of the July 2018 RICS Residential Market Survey is the worsening trend in new instructions in the letting sector. This was something that was highlighted in the June Report on the basis of monthly non-seasonal adjusted data. However, a broadly similar pattern is visible in the preferred indicator. Whatever that means, it basically is saying, that the number of New Instructions in the letting sector is going down, less landlords. We’ll come to that. The results show that New Landlord instructions in the latest 3-month period has slipped to a net balance of -9 percent. This is the 9th consecutive quarter, in which this indicator has recorded a negative number, albeit only modestly on some occasions. This pattern is symptomatic of the shift in the mood music in the buy-to-le market in the wake of tax changes, which are still in the process of being implemented. Significantly, the drop in instructions is evident, in virtually all parts of the country to a greater or lesser extent. 

So, what they’re saying, is, they’re saying basically the number of landlords bringing properties to the market has decreased quite significantly, since the Government start to bring in the tax changes. What tax changes? Well, it’s our old friend, Section 24, which is stopping us from offsetting mortgage interest against our rents when we’re calculating our income tax, if we own properties in our own name. Also, of course, stamp duty. Now, if you think back to The Daily Mail article talking about the big falls in the London prices in that little inner ring, at the most central part of London, which is Westminster, Kensington and Chelsea and the City of London. That’s where the changes in stamp duty is going to have the biggest effect, isn’t it? Because that’s where the highest value properties are. So, that’s no surprise. The RICS are confirming that, that and Section 24 are beginning to bite in the investment market and the buy-to-let market overall. 

Let’s carry on with what the RICS have to say. While the implication of this feedback, is that, the supply of fresh rental stock of the market is increasingly constrained, the Tenant Demand indicator remains resilient. So, well, you’ve got an imbalance. The number of properties to rent out is diminishing, but we’ve still got a very strong demand from tenants. The upward momentum in the latter appeared to have slowed in recent quarters. But the numbers remain in positive territory at the headline level, +11 percent in the latest 3 months’ period. One consequence of this imbalance, is that, expectations for rental growth appear to be strengthening once again. Over the next 12 months, rents are projected to increase by a little short of 2 percent nationally. But the shortfall in supply pipeline is more visible over the medium term with a cumulative rise of around +15 percent expected by the middle of 2023. East Anglia and South West are viewed as likely to see the sharpest growth over the period. So, there we go.

So, in the short term, because of this imbalance between the number of properties coming onto the market, but with strong tenant demand, they’re expecting +2 percent, an increase in rent of +2 percent as an average across the country. But over the next 5 years, they’re expecting a 15 percent increase in rents. Now, here’s the thing. If rents are going to go up 15 percent, what’s that going to do for property values? Because the two can’t be in isolation, can they? It’s very hard to imagine it. So, all good stuff. If you’re thinking about, if is this the time to be in property? Well, maybe that’s suggesting, that now is the time to be in property. Very interesting that the RICS are highlighting that the Government measures to try and disincentivise buy-to-let investors. It’s clearly beginning to work. Let’s carry on.

Turning to the sales market, the underlying message is a little different from that reported in June. The headline price balance edged up from +3 percent to +4 percent in July, following two months when the results were very slightly negative. There we go. The Daily Mail, you haven’t mention that at all. The RICS is saying that actually far from being in a position, where prices and values are about to fall, they are actually edging up. They’re edging up more quickly. They’ve gone from +3, +4 percent. Okay, it’s not great shakes. But it’s certainly not indicative of an imminent crash, is it? It’s actually going the other way. Meanwhile, the Newly Agreed Sales net balance remained close to zero for the 4th month in succession. These results are consistent with a broadly stable housing market when viewed through the prism of the national perspective. 

There we are. The RICS aren’t predicting a crash. These are the people who own the estate agencies. These are the people who are out doing valuations for mortgages. They’re saying that the market is actually broadly stable. That’s very interesting, I thought. As we’ve highlighted previously, the feedback to the RICS Survey continues to suggest a stronger market in Scotland, Northern Ireland, much of the North of England, the Midlands and Wales. There you are. That’s the ripple effect that I was talking about. Outside of London, things are doing pretty good. Thank you very much.

The London Price balance was little changed over the month at -40 percent. But it does represent a shift from the reading of -66 percent in April. Now, to better explain, that’s not saying that prices in London have gone down 40 percent. It’s just saying that 40 percent more surveyors expect to see a price fall than a price increase. But that’s less than we’re expecting a price decrease in April. So, if anything far from concurring with The Daily Mail, the RICS are actually saying things are coming back in London a little bit. So, there we go.

It’s perhaps no surprise that as speculation built ahead of the August Bank of England meeting, which was to see a quarter point rise in base rates, the headline New Buyer Enquiries series was a little changed over the month with a net balance of +2 percent. The New Instructions measures similarly signalled a flat picture of following 2 months in a row of very modest increases. We acknowledged last month, harbouring some doubts as to whether the pipeline of new supply into sales market would continue to improve in the light of the feedback received on appraisals being conducted by valuers. For the record, the appraisal balance in July, was once again firmly negative. As a result, our judgement is that the average inventory on the books of the estate agents, is likely, to remain close to historic lows. Let’s say that again. As a result, our judgement is that the average inventory on the books of the estate agents, is likely, to remain close to historic lows. The impact of this is visible, in both of the 12 months’ sales and the price expectations, while the former recorded a reading of -7 percent, is most negative number since October last year. The latter was much firmer at 25 percent. 

So, what are they saying in all of that? Well, they are saying, despite the fact that The Daily Mail are telling us, that buyers are scared, because of interest rates. They’re saying that actually, the number of buyers went up slightly only by 2 percent. But this going is into positive territory, not negative territory. So, there’s slightly more buyers out there. But because the number of new properties in the market hasn’t increased, they’re expecting that prices are going to increase. The net balance of the price expectation graph is +25 percent. More surveyors expect prices to go up than there are surveyors expecting prices to go down, in other words. The RICS, putting it crudely, are expecting prices to go up, because there’s slightly more buyers, and there’s no extra sellers. We continue.

Each quarter an additional question is inserted into the survey in an attempt to capture the trend in the gap between asking and sale price. The latest set of results tell a broadly similar story to that seen in April, and generally, reflects of regional skew in the performance of the housing market. So, for properties put on the market at a price in excess of £1 million, roughly one in 10 are sold at a discount of more than 10 percent. Okay, that’s what The Daily Mail are saying. Those are really high value properties in London, taken a bit of a hit. The RICS are saying that properties, which worth more than £1 million, expect to have to discount the price by 10 percent to get them sold. Actually, that’s not an unusual thing, because there are far fewer buyers at that level. But obviously, one of the things, which we’re struggling with, is, with this whole stamp duty, in which we’ve already alluded to.

In addition, around 3-quarters of survey participants cite there being some negative gap between the initial asking and an eventual sale price. For properties put on the market between £0.5 million and £1 million, the comparable numbers show only 2 percent of respondents seeing prices achieved coming in more than 10 percent below asking although a still sizeable 62 percent contributors report sales prices coming in below the initial asking price to some degree. 

So, basically, what they’re saying, is, they’re saying that between £0.5 million and £1 million, you’re going to have to discount a little bit, but not nearly as much as for the properties over £1 million. You’re going to have to knock a little bit off, but it’s not going to be the 10 percent that you’re going to have to knock off, if you’ve got a property of more than £1 million. 

Meanwhile, and this is probably, most of us are going to be interested in. Meanwhile, for the mainstream market, which is, homes priced under £0.5 million, the largest share of respondents noted asking and sales prices being at the same level. The same level! Significantly, the feedback in this area of the market actually shows one in 5 properties with a completion price, above the asking price. 

So, there you are. Daily Mail, certainly no evidence of a crash in that. So, what are they saying? Well, if we sort of pick out some of the main headlines from that article, they’re saying it’s a relatively stable market. It’s doing better in the Midlands, and the North, and Wales, and Scotland than it is in London. If the properties are below £1 million, you’re probably not going to have to discount them, because there are more buyers. There has been no increase in the number of sellers, which means that it’s kind of a sellers’ market in a way although the buyers may disagree with that, because we’re told there’s not that many buyers. But there’s enough buyers for there to be a slight imbalance, which means, that prices are stable, and that below £1 million, you probably don’t have to discount. You may even be able to get more than the asking price. 

So, there we are. That’s what the professionals think. I thought it’s very interesting just to contrast that with the article in The Daily Mail. If anything, it just proves that you need to know what you’re talking, and get your own information. Do your own interpretation. Don’t let The Daily Mail, or the press, or anybody else interpret the data for you. Don’t let me interpret it for you. You get your own data. You come to your own conclusions. But certainly, don’t just read the headline, and think, ah, that must be true. Because when you start digging into it, there’s an awful lot going on, which isn’t reported, and which isn’t said unless you go to the right sources and information. 

So, I recommend that you perhaps, get a hold of the RICS Residential Market Survey every month, just to keep an eye on what they’re saying. Because, whether you agree with them or not, what they’re saying is going to be clouding the judgement, or influencing the judgement of valuers who are going out to value your properties, if you’re applying for mortgages. If you’re wondering why you’re being down valued, you’ll find it in here. If you’re wondering whether you’re going to get a more positive valuation, you’ll find it in here. So, it’s always good to see what they’re thinking.

Peter Jones

Peter Jones

Peter Jones is a Chartered Surveyor, an author and a serial buy to let property investor. He has been involved in property for over 30 years having graduated from the College of Estate Management, Reading University, and then qualifying as an Associate member of the Royal Institution of Chartered Surveyors in 1983, before being elected a Fellow in 1992.

By the age of 35 he was a Salaried Partner in a well respected firm of Chartered Surveyors, and was managing partner of their West End of London Office. His specialty was commercial property but during the recession of the 1990’s his specialisation became redundant, and so did he.

Peter Jones

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What Do I Do When My House Floods?house floods

Dealing with the aftermath of a house flood is always difficult. It is an emotionally difficult time for everyone – both landlord and tenant. Damage from flooding only gets worse as time goes on, thus it is important to act quickly! As an owner of a rental property there are several things you should know and understand about your responsibility as you begin the recovery process. The most important fact is, home flood coverage is typically NOT included in a property policy. Flood coverage can be purchased, but it requires a separate policy and most times the flood policy requires a 30 day waiting period before it takes effect.

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Most landlords are not responsible for insuring their tenants. However, a landlord could be responsible for covering replacement of items if they are responsible for the damage. But in most cases, your tenants should have their own renter’s insurance policy to cover their belongings. Renters insurance is generally fairly cheap and something all landlord’s should recommend their tenants own.
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Landlord’s Responsibilities

  1. The landlord is responsible for the building structure itself as well as flooring, wiring, plumbing, and appliances; i.e., pretty much anything you provided to the tenant as part of their rent.[su_spacer]
  2. The landlord has responsibility to repair the unit so that it’s habitable and livable once again and this means that the repairs must be made as quickly as possible. If the repairs are not made within a reasonable time, the tenant could withhold rent, hire the work to get done, or even notify local authorities.[su_spacer]
  3. When a flood happens and you learn there is damage, immediately report the claim to your insurance company. (Please note: most insurance policies require you pay for home flood coverage separately from your regular policy.)[su_spacer]
  4. Whether you have home flood insurance or not, it will be very important to carefully track the expenses incurred as a result of the flood, including all material purchases, labor, travel, etc. If your insurance covers the flood, you will need to submit your expenses to them for reimbursement. If your insurance does not cover the flooding expenses, at the very least you will need the receipts for the next tax filing season.[su_spacer]
  5. In most states, landlords must provide 24-48 hours notice before entering the rental property; however, in the event of an emergency this does not apply.[su_spacer]

Tenant and Renter Insurance Information

  1. Renters insurance, most known for providing coverage for replacement of personal items if your stuff is damaged, ruined or stolen, also has other benefits.[su_spacer]
  2. Most renter insurance policies cover the cost of temporary relocation and normal living expenses in the event the location where the renter lived was damaged in such a way to make it unlivable. When the house floods, if the renter’s insurance policy does not specifically include home flood coverage, the damage and loss associated with flood will not be covered. Each policy has different limits and terms. It is important your tenants understand the limits of their policy. Regardless of how the event occurred resulting in damage, the landlord should encourage the tenant to report the event to his/her insurance company.[su_spacer]
  3. If the tenant has to relocate as a result of damages due to the house flooding or other significant damage, the tenant is not responsible for paying rent during that time.[su_spacer]
  4. The tenant will have the opportunity to cancel the lease at that time they are displaced due to the damages. However, they must notify the landlord or property manager soon after leaving the property.[su_spacer]
  5. If the damage does not require relocation but is a significant inconvenience, the tenant may request a rent adjustment.[su_spacer]

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[bctt tweet=”Home flood coverage is typically NOT included in a property policy. 10 things you need to know as a landlord.”]

This is a broad-level overview of the things to know about being a landlord when your house floods. Every situation will have its own nuances. When in doubt, go to your attorney, accountant, or insurance agent and get the guidance you need.

Here are some additional links that provide some good information:

What’s My Flood Risk?
What to Do When Your Apartment Floods
Post-flood Tips for Residential Landlords
What Are My Rights If My New Jersey Apartment Floods?
Natural Disasters – Who’s Responsible?
The 6 Most Important Clauses in a Landlord Insurance Policy

Happy Investing!
Jeri

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illegal rental duplexThe almighty rental duplex. It’s such an attractive option for investors because you get two tenants under one roof.This reduces some of your management and logistical efforts, and increasing your rent per square foot…a 50% increase in some cases. Some rental duplexes are almost like complete units that are only sectioned off by a firewall; for example, a newer condo duplex. Other duplexes may just be a house that has been specially converted to a rental duplex. In this case, owners split off one of the bedrooms and one of the bathrooms, add a kitchen, and call that an efficiency that is able to house another tenant.

Example:

An investor, who we’ll call Tom, picks up a 3 bedroom/2 bathroom (later referred to as a 3/2) apartment in Miami and is able to rent it for $1,700 per month. This investor has a great understanding of his market and knows that 1 bedroom studio efficiency apartments in the area can rent from $1,000-1,200 a month. He decides to add another kitchen, put a wall in, and carve off a separate 1 bedroom/1 bathroom (or 1/1) unit for a second tenant. Now, he essentially just created a new unit out of “thin air” that rents for $1,150. Of course, his original 3/2 apartment is now a 2/1 apartment after the conversion.
[bctt tweet=”How to Avoid Purchasing or Rehabbing an Illegal Rental Duplex”]
What is the net effect? Well, in a larger city like Miami, you often pay a premium just to live there. In Tom’s case, the $1,700 per month 3/2 has been converted to a $1,550 per month 2/1 apartment, creating a second unit within that property.

Put it all together and you have a 2/1 for $1,550 and a 1/1 for $1,150, which adds up to the original 3 bedroom/2 bathroom house that Tom purchased. The total rent for this house, which was originally just one 3 bedroom/2 bathroom house (at $1,700), is now $2,700 per month of rent! If Tom already bought this rental unit for positive cash flow, he just kicked this puppy into overdrive. It just sounds perfect doesn’t it?

Until you realize that Tom’s unit is now an illegal rental duplex…

Why is that? Well, Tom did the conversion without notifying the proper authorities. He also didn’t ensure his improvements were fully up to code by having them inspected. You might argue that Tom was a little negligent here, but it could’ve just been an accident.

Let’s look at another investor, Jessica. She is looking for a rental duplex and Tom just so happens to be ready to sell his. Jessica thinks it’s a great deal, even after Tom’s inflated the price to account for the new income the duplex offers. It is a really nice looking property and the numbers look great. Nothing to worry about, right?
[bctt tweet=”Watch out for illegal rental duplexes that have been incorrectly converted, especially in large cities.”]
Jessica works with her Realtor and buys the property. The Realtor ended up pushing the appraisal through with the seller anyway, despite the fact that it was illegally converted (this is based off of a true story–beware of this and make sure to have those units checked out.) After purchasing the property, Jessica did notice one problem–she had to pay utilities of that unit because there was only one meter in the building and they couldn’t be separated out by tenant. Furthermore, someone could report her to the city. Other questions such as “what happens when I have to sell it?” crossed her mind. She’d either have to hope that the appraisal was approved again (which is taking a huge risk) or find a cash buyer that wouldn’t try to get an appraisal.

So what happens if the city found out? The bad side is that the units would have to be converted back to original drawing specs. This means tearing down the added kitchen and opening up the walls that connect the illegal unit to the main residence. Often this would also mean evicting the tenants from the illegal unit while all of this is going on.

So what’s someone like Jessica supposed to do to avoid this situation from happening? Here are four ways you can help ensure you aren’t getting an illegal rental duplex like Tom sold and Jessica purchased.

1. How many units does the property have?
2. How many bedrooms and bathrooms does each unit have?
3. Are any of those units illegal units?
4. Does each unit have their own water and electricity meter?

Asking these questions will make sure you don’t run into problems in the future. Having these illegal units may seem profitable at first, but they really aren’t worth the risk! Due diligence, as always, is important, but when you buy a rental duplex, you definitely want to make sure you take extra steps to ensure you aren’t stuck with a huge mess on your hands!

Helpful Links:

Find out any changes, repairs, and taxes from your local assessor’s site.
National Assessor’s Site

Get an estimate on how much rent you can charge. This is also an average.
Rentometer.com
Zillow.com 

Infinite Returns,
Bill

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If your tenant wants to stay in your property at the end of their contract and you are happy for them to remain, you have two options. You can issue them with a new Assured Shorthold Tenancy (AST) or you can simply allow their original tenancy to become ‘periodic’, in other words it will roll on from week by week or month by month, depending on whether they pay their rent weekly or monthly.

Continue Reading…

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