Podcast Series 9: Understanding the Value of Small Apartments With Ed Craine

Cordell…

All right, hey everyone Cordell Davenport here with small apartment investment.com and I always say mindset the skillset was performance because results and with my show that I’m having I always talk about. What’s the main things that we all need to know about when it comes to apartment investing.  .

Real estate attorney, CPA, the commercial mortgage broker and property management. I have a history with Ed you guys, of course don’t know but probably about 2007. I got my real estate license when I got my real estate license.

Let me back up. I first got introduced to self-improvement. I started learning about self-improvement and I got hooked on self-improvement and from that I decided that I wanted to be able to change my financial situation when I changed my financial situation. I discovered real estate so at the time I bought these bootcamp stuff in San Francisco. Paid too much money for it.

Like foreclosures or expired listings and I did this and that and then I came across apartments and commercial real estate starting learning about certain things and then I heard about CC I am. Stands for a certified commercial investment member that was in the world is that. And then I said, okay.

I want to be able to get into it. I said okay we find this and so I started looking up and I said all right, let me look up the directory online. I’m in the Bay Area San Francisco, I found Ed’s name contacted. Ed says, you know, I’m here and I want to do this.

I want to do that and you welcome me at the time after full-time job and trying to juggle two things about going on back and I couldn’t really give the attention to that I needed but what I was there was this company I learned a lot have a lot of respect for him and his team highly credentialed.

So my website is a small apartment. I have a free book you can download to talk about how to make a cash flow that takes care of your family living expenses expenses, but I want to introduce someone really fast. All right and crane at the CEO of award winning Smith Crane real estate financial San Francisco and its originating negotiating to billions with the B on all tax properties, he has the statewide president of California.

Association once professionals is the end of this as president of the Northern California chapter 6. I am Southwest Regional VP for CCIM and a national board records of the CCM Institute, And this company has won many awards including his being recognized as a California mortgage broker of the year 2008.

Brought his career in has been a speaker instructor and ride for the mortgage and real estate industries is also a concrete offer for the four best-selling business books. It holds the CCM designation and an MBA in finance and marketing from Cornell University is proudest business accomplishment is the fact that he has been able to help thousands of clients get loans they need to buy, build and refinance their properties.

So for everyone, My goal is to have a showcase once a month to talk about certain topics and our topic today is to understand the valuable partners of commercial real estate. And I would before we start getting to the details besides this profile, that’s ready for you. We all know I just read you into Cornell, but how’d you get started in real estate in particular?

Ed..

Well that sounded and interesting thing that I. Long story short, my grandfather was a real estate broker and upstate New York in a small town and my father had an insurance agency. It was also licensed in real estate. I just grew up with it and you know when you grow up with something you don’t always go that direction, right?

You know, you see a lot of people now see your kids don’t want to don’t want to do what you do. They wanted to do just the opposite and I ended up finding it really interesting and real appealing. So I did a couple other things but, Came back to real estate.

Cordell…

So. No I know what it means CCM but you want to talk about what he’s saying is for those that don’t know.

Ed…

Yeah, so it’s it’s designation that you get through the National Association of Realtors, which has a whole spectrum of designations for residential real estate agents. And commercial for commercial sales and investments CCIM is the top designation and it’s unique I think in the world of real estate designations because it’s there’s there’s a heavy dose of academic work and then you have to submit a resume of the actual transactions that you’ve worked on should you know, because they want they don’t want to just have book knowledge.

For you to see them they want you to have practical knowledge and then you have to pass a comprehensive exam. And it’s rigorous. It’s so it’s I actually I’m prouder of my CCIM designation than I am of my MBA, that’s how much I think of it. It’s real , it’s a great program you need and along the way you it’s a great way to network. You meet a lot of terrific people.

It, you know, I’ve done business through the years with many fellow CCIMs and. They don’t necessarily go through and get the designation but they come for the knowledge and have a lot of people and my spirit from that so no when I was you. Actually took. Control.

Cordell…

Do they have to have a real estate license?

Ed…

I think you can still do it. There’s always been a track for people who are non-licenses, but. It’s you know, it’s not for everybody. I’ll just say that it’s it’s but there are corporate and corporate real estate departments that send people to for instance through the whole program.

Or what they want to be their strengths we all know this to real estate. The underwriting process some people may like when we are analytical so it makes a lot of sense for somebody to learn that process. Yeah, by the way, I did this. I was just thinking that one of my fellow CCIM guys, who was a property manager, had met at the.

There was one principal in particular that he did most of it most of his business is doing property management for that owner and he meant the owner NCC on classes because the owner wanted to get more knowledge just for his own for his own sake. That there’s that’s a good example of a non-licensee taking the program.

Cordell…

You just can’t say okay, here’s 20,000 dollars and. I want to be a real estate investor. Anybody here has some money, but what do you do? To stand the numbers it’s the business or even if you’re a method you have a property management company you need to manage that manager so you need to know what key metrics with key words or questions to ask it’s not like buying stocks you click the button boom, here’s money.

You know, real estate is not passive, it’s an active activity. If you want to go that route, of course. Occasionally still you need to understand the numbers. What does it mean so that you can just can’t take what somebody’s saying as true so I don’t want to go off on that tangent but today as I said.

What I try to have my show nothing’s rehearsed. We’re at the bar having a beer and. Have to talk about real estate but in particular this conversation. About understanding the value commercial real estates for those that don’t know anything about five above regards to the apartments that are considered commercial.

You can see that the difference is residential and you base it upon. But so I’ll let you take the floor and we can just you know, just go over the fundamentals for somebody who made like say on a triplex they know about that okay, they know about a four plus whatever might be but they want to step their game up they want to go from the triplex let’s say a 20 unit apartment, but what things should they know about commercial real estate value?

Ed…

That’s a great question and by the way that’s a terrific path for people who want to get into into apartment buildings to own rental homes or two or three or four unit properties because the ownership it and financing and management are a lot easier and and get kind of get your jobs, you know doing that and and then figure out if you if you like it too that you don’t want to just be good at something right you want to really enjoy it because, On if you know life is short into it enjoy the enjoy the trip, so anyway the.

So. Going get started there and then go in from there to to say 20 units as an example is a lot easier because you’re going to be doing many of the things that you’ve that you did when you when you bought your two or three or four unit property, you’re you’re going to be evaluating the what’s the rental market what are the sales comes and what’s the temp profile and what’s the location and what’s the opportunity to add value and you know, a whole spectrum of things that go into.

A bit evaluation of a property well. So do your hands on things to get your experience with the small properties and then when you go out. And I I like to say if you’re 16 units and up. You’re getting some leverage of time typically and because those are properties that you’re going to have on site managers required by state law and California and some other states.

But yet you change the management’s that structure the whole management concept so a lot of us might be self-managing smaller properties. And you could still self-manage a 20 unit property or 16 and above but you’re going to have to have an on-site manager right so now you’ve got to manage a manager not just on the property and deal with the tenants but give them instructional you’re the boss, this is what I want you to do.

To check. But if you don’t know that if you know, that’s yeah yeah and by the way, of course I’m talking about the hands-on investor here, you could also have a professional property management company and you still need to be able to manage that right now. They can’t read , they can’t read your mind and they may not do a good job if they don’t know what you are if you’re not an active person and giving them direction, anyway.

So well you’re also gonna be leveraging your capital break so you’re you’re you’re not instead of having several different properties and different locations maybe and you’ve got every you’ve got all your money or bigger tons of money on one place and that can be more efficient too and it also if you’re if you’re moving from several smaller properties to one bigger property, you’re you’re now also changing your risk profile and, There’s some so you’re taking on greater risk now right and until you build till you build a portfolio a bigger properties, you got all your eggs in one basket right when you go for your three units or your twenty unit or two or three.

Well. Yeah everything from local market conditions like employment unforeseen things we’re right in the middle of covet pandemic right, which has. Who are your tenants? How do they get so impacted by changes in unemployment or employment? How do they get affected by it? Things like pandemic now how do they get affected by ships in the neighborhood, you know, the shifting demographics in the neighborhood.

That’s right for better or worse right shifting demographics can cut both ways, so there are just a number of factors. You have to be cognizant of the fact you’re not taking on a greater risk. So you want to have with these bigger properties as you go up inside you you want to have your rates of return be higher so just this is just kind of theoretical talk right now right it’s talking about what happens when you’re moving when you’re moving from smaller properties to bigger so they say that is background for.

So a few key things the that I want your listeners to really focus in on when they when they go out and they look for something to buy so and these also they apply to the small ones too, but they’re more important with the bigger properties. You need to know your rent, you need to know you need to see so many apartments you need to go shop for apartments and both are prospective rentals let’s say but also are prospective buyers but to the extent you can get in to see properties that’s a whole other topic for another time but.

To be able to walk. Into any unit in the market that you’re going to invest in. On and just to sidebar here get to know the market, pick a market and really get to know it, don’t be chasing all over the place because you know, you’ll be a master of none right you’ll.

Yes. For you. Fresno or you know Portland okay, we’re important, you know, yeah great yeah great point, you know, Berkeley’s probably got 15 or 20 neighborhoods and more than that micro niches, right? Oakland has I don’t know how many dozens but maybe maybe hundreds if you really break it down, but at Saudi rate you should be able to walk into an apartment and say I know I can rent this property this apartment for whatever it is within a very narrow range right and, Each each apartment unit in that in that building.

You should have a good idea of what you can rent it for.

And it is related to this is the whole idea of. Our UMB passive or active investor and what can and can is it is it going to be a value add and not and all that so you have to understand where that property is positioned it in in the in the little market that any market niche that you’re looking at right so are you at the bottom and top end you need to value add?

I don’t know if a lot of people know what to do. Short yeah so value add is that basically buying a fixer upper right and then fixing our upper doesn’t have to be something where you do extensive renovation, although it could be but it could just be cosmetic. Could be designed, you have a better eye for design and than the average person and you make it, you know, you take a plane looking building and make it look really great with just a few cosmetic things.

On. So anyway, so you it’s not good enough just to know what what the what. Rents for that unit. Will be when you when you if and when you own it. But could they be if you did one one improvement or another what could they be if you if you repositioned?

Property as a whole, right? So, um. Maybe you can go there and you know, they’re besides the the the, Just a. Value add in terms of fixing things up there’s a whole value add in terms of especially if you have a neighborhood that’s transitioning towards better, you know more upscale tenants.

How do you position the whole property exterior from the first time somebody sees the property all the way all the way to walking in the unit and what the amenities are and how do you reposition that? So you need to know what the rents could be and what it would cost you to get there, right?

So, When I’m what I’m saying I want you. So you know what the rents are gonna be when you walk in the door. You know what they could be? Whether you want to fix it up or not, it’s a separate question now, but you know what they could be, right?

So, there’s you. You should know more about Reds and the probably even most real estate commercial real estate agents and maybe not property managers but close to it, right? You should have seen so many units that you have a really good amount of my favorite websites for you guys if you want to figure it out.

Cordell…

Rentometer.com  you can go by zip code and it’ll tell you one bedroom two bedroom three bedroom with the need. But you can also call up different properties, you know within a two mile radius say I’m looking to rent what’s rent for you can do your own notes.

You can look at apartments.com and sometimes like it was saying, you know, you want to find out the rents are you can even like have a conversation with a local property management company because they may have some numbers for you. Not to work with it as well. Yeah, we’ll talk a little bit about the one way here about building a team too.

Ed…

This some still talk about your own personal knowledge, right? And the same thing with what’s the property? What other property sells for whether the what are the sales comparables and what what could it sell for when you fix it up what a you know, what are the what are the sales comparables for repositioned properties?

So what’s the so there’ll be a spectrum in any market, you know, what two bedroom one bathroom unit may run anywhere with let’s just say depending on the market of just make up some numbers could be fifteen hundred dollars to thirty five hundred dollars and in a fair. What most people might think of as a market it’s that’s probably they’re probably two, you know, two they’re in two different markets probably but but they could be geographically very close so people are thinking oh it’s you know, it’s West Oakland or you know, it’s with the layout or.

And and now it’s it’s not it’s we’re in Vallejo or we’re in West Oakland, but you could. You know, I don’t want to get too far in the weeds on that but you can get all the ideas. So you’re. You want to know that.

Based on the type of unit that you’re, you know, the units that you’re looking at. Per square foot per gross rent multiple owners of California, that’s a popular thing here, right it’s or by. Great. These are all kind of you know, very rough. Because the details the nitty-gritty is really important with any of these numbers that you’re going to use but um, so you you should have a really you should have a good idea of what?

Whatever the department building is, you want to buy or your system buying it. What other sales comparables are selling for per square foot per unit grossman multiplier cap rate for that particular property in that particular condition, right, so you want to elaborate on.

Yeah, so the gross rent multiplier is you just take the annual rents and you multiply. By a griffin multiplier and you get a value so if you had. You know, the hundred thousand dollars and gross annual rents and you had a ten restaurant multiplier you have a million dollar property right ten times a hundred thousand.

Or if you had a fifteen gross rent multiplier, you’d have a million five. So um, And how would a person know that that number is worth? So you just look at a lot of properties that that are for sale and it gets sold and you talk to you get to know real estate agents and I’d say a particular it’s not I find it’s good to find somebody who you really like and trust and and get to know them and some some of these really knowledgeable and that neighborhood that you’re that you want to be buying it.

Sales agents yeah and and they’ll show you comes and it’s got like all people all people in life summer better. And some are more honest some are not so good some are not so less straight so yeah you want to be really careful when you’re looking number one and number two.

Even if it’s an honest person who’s really good. You might have a difference. Right there, there is personal opinion allowed. So we can make a view and I am looking at the same property we might think it has very similar value or we might be. Part and I’d want to go since I know yet I trust it.

Tell me how what you’re thinking, you know how to come up with that so you want to have a person who can exchange ideas with right you might be thinking of something that I had and even thought of so. So that is kind of going along with the theme of building a good team right so when your team members you can also get to know what praisers.

Work on like brokers who you know, who typically worked for commissions praisers work? You might want to offer. Big you would spend giving them some. Hourly fee for you know, for help helping you understand so just as an idea. It would depend on the appraiser and the property type and I wouldn’t want to hazard a guess but.

You know, it might be a few hundred dollars an hour. I don’t know. Yeah, I know that it’s different designations.

To look for if a person wants to find. Yeah, they are different so MAI is the top tap designation yeah. And then there are some others you know, there are some really good people who don’t have that designation but. And then you know, there are a lot of data sources that are useful loop add co-star companies like that, you can get a lot of data online you can get on the mailing list these mailing list and dating myself right so emailing list distribution lists, whatever you’re going to call for or different apartment agents.

I got all kinds of stuff sent to me. I you know, I’m, I’m interested in and information about apartments more generally speaking that I’m talking about now because I have a finance property for people and a lot of different markets so I don’t I don’t really develop the expertise that it’s somebody who’s really good in their local market gets because they’re really an expert but I want to keep my my kind of my finger on the pulse of what’s going on and.

With cap rates and restaurant multipliers and that sort of thing so I get I don’t know a couple dozen. I agents sent me flyers so you mentioned multiplier,.

You divide the net operating income for a year. By the value of the property. So if you’re buying by the purchase price. So, Let’s go back to this 10 gross rent multiplier, $100,000 value of income in a million value. That $100,000 is gross income. It’s not that it’s not net money that you can use to pay your loan or put in your pocket if it’s pretty and clear.

So cap rate works with net income and that to say a quick rule with them and in the Bay Area’s. It could take 35 percent off of a gross income for expenses and have a net income and take a few percent for vacancy depending on the market you’re in but let’s just say, you know for round numbers well say you’re at 60% by the time you get a vacancy and it’s expensive.

So at $100,000 is really 60,000 from a cap rate point of view. And 60,000 divided by a million would give you a six cap rate. So theoretically if you paid it all cash you would have a bond that’s paying you six percent, right? Or be like putting your money in the bank at six percent interest.

That’s okay, that’s that’s that’s the idea and it’s considered a more accurate way of looking at the property because. Growth multiplier you youth especially in a say a city like San Francisco there are a lot of properties where the owner not only pays for its a water and garbage but they pay for heat and electricity for you know, their master metered properties still and so you could have you could have expenses there significantly significantly higher in one building versus another one right next door based on whether it’s a master meter attendance pay either utilities, so.

So that’s how camp rate came to be, it’s not the only reason why it came to be but one of the main ones. No. The sun investors they look at cash on cash and then look at high arm turn right at the turn. In your opinion is that really in which which from your clients which do they prefer they look at I know we haven’t even talked about cash in cash is or are it kind of talked about that but I’m curious to know what is the preference what what.

Was the gold medal who that way or just do your clients look at multiple things they look at they’ll get this and this and this and how do they do they talked to you about how they came up with the decision to go or not go.

Well the most sophisticated ones like these internal rate of return and that that’s a topic for another day, that’s a that’s a pretty it’s a pretty complex. It’s good I’ll just give a plug for CCIM education if you if you really want to understand this internal rate of return and you and you’re really scaling up your knowledge and you know, your business, your department business, it’s well worth it.

But basically it’s measuring your return based on time value of money and your risk factors, so you can plug those factors into your formula. What’s your cash flow coming in and what ‘s your cash flow sequence by the time the and this is going out like your down payment going out right and then you’re.

You’re annual cash flows and then when you sell so you take all of that whole spectrum of cash flows and you discount them based on a rate of return and the that you want to get for that particular property, so. So you can. If you’re the higher rate of return that you plug in.

The that you want to have that you want to get the the discount we discount the cash the future cash flows by this factor that you put in and hire it as the the the more we’re discounting the future cash flows to compensate for the risk. So you get the idea right that this wanted people to understand you’re trying to get a rate of return that’s that helps measure partly the riskiness of what you’re doing so that’s a little more it’s probably a little more than some people wanted to hear but yeah anyway, it’s just something to know so the sophisticated ones do that and they but they’ve got some real fancy computer programs and you know, they and they look some of them have.

They have a team they have they have analysts in-house, you know, like the the rates syndicated the big breeds all have they have staff of people running numbers all the time. But the people that I deal with a lot just average every day and mom and pop investors, you know using that colloquial term and do any.

Probably most of us on this call here would be much fit in that category, but it’s more like. A look at looking at grosser multiplier and cap rate maybe but it’s more a gut reaction to I’ve looked at a lot of properties and I know this is a good deal which is it, you know, it’s more that kind of criteria that people use and.

Can then they’ll start looking at that’s the first cut and then they start looking at the numbers to make sure that they’re going to get some cash on cash they want to be negative on their cash flow lenders want to let them do it anyway, so. And then that gets them into looking at some of the things we’re talking about price per square foot restaurant multiplier cap, rate.

Of all the apartments I’ve been so experienced here can I go to their county assessor office to look up past sales to do their own research or do they have to pay a fee to a service online service provider for them to do their own research if they wanted out you could you can do it it’s it’ll be arduous but you could definitely do it.

Cordell..

So what do you recommend for the easy way?

Ed…

Get a team so you know, good real good real estate commercial investment real estate agent, good property manager. A good appraiser. Could have a real estate consultant and also somebody who doesn’t really broker but who gets paid hourly. There’s a site I do.

I do work like that sometimes and yeah, it’s not my main thing but there are people who do that right now and then and then use that to use some of the stuff like costar and loopnet and. There’s another one prospect now there are a bunch of yeah a bunch of tools that you can use.

Cordell..

I think that people need to understand when it comes to commercial real estate to team sport. Everybody has their role and you do want to be able to form your team and be aware of how beneficial this is because you’re not going to know everything you don’t want to know everything.

I think that’s very correct you just said and it’s like I listened to a podcast and somebody was saying like a at the end like what’s what’s the biggest mistake you made and I forgot what he said but he basically said that he put he put his team he tried to build his team last set of build his team first.

And depending on where you want to go a lot of times a lot of people say okay find a real estate sales agent, a broker that’s local to the area, not that you want. But the thing is a lot of the times too is. If depending on what the person wants to do and you can go with a real estate agent who may already have networks but you know, you can also go directly to the owner if you want to buy another property.

Can buy mailing lists like from Prospect now or some other ones similar letter in the mail they come back to you and see you they have an interest in buying but now they if they supply which is information say yeah, I want to sell my property you have to be educated on what those numbers are and what they represent.

I think the key to really having a criteria is that you want what is it that you want, what kind of things are you looking for, what kind of areas that you want to do and sell what this I want this this this this and within this area here.

This is what this equals out so as it comes through now it doesn’t work it didn’t work it doesn’t work does work so as I’m talking to you guys. I’m not saying I’m not coming to you like oh I got all this property and I’m big really walking around here with the gold medal, you know, I am learning myself but I do know I have direction or what I want to achieve.

But the team is very very very keen to hear that. The edges said through some other podcasts that I’ve heard that you guys have to develop a team it all depends on what you want to do though too, you know, you’re gonna be a passive reactive. To find a contract.

Find a handyman if you want to go that route now. The NOI is very important. Of course now for yourself and when it comes to underwriting the person wants to understand underwriting. And go through let’s say that a person does want to sell their property, what do you suggest that they do besides contact someone who has experienced but if they wanted to be able to get better handle things understand the process of the whole underwriting process in itself to understand the value of the property, what do you suggest well?

Ed…

I got a few things to invite the way I you when you’re talking I’ve realized I forgot one really good resource people can use. For apartments, join the local apartment owners association and the market that you are really interested in because then you network with not just professionals but with your peers right away and if you develop good relationships.

You people will mostly be truthful about what’s going on with their properties, you know, not a hundred percent people like to put a positive spin on sometimes but you’ll get a lot of knowledge so it may be what I used to view. Journals, you didn’t see them monthly the other day.

But it wasn’t because it was a California apartment association or I forgot. Yeah, you’ve learned a lot just by reading the magazines, so you may have an attorney talking about something you may have a whoever and that’s how you learn. Yeah, so anyway to the underwriting question. I can really geek out on this but I’ll try not to. I used to teach underwriting classes to bankers and CPAs and attorneys and Mortgage brokers and.

Real estate agents but here’s my long story short you look at enough at enough properties that are for sale and and that of sold and get your team to you know, your property manager you appraiser your real estate agent to get you some local knowledge about.

I benchmark numbers if you have a really good CPA by the way, some suits some CPAs are good at real estate and they are very knowledgeable and others are but if you have a good one, they’ll know they’re a good resource also. And then there are some publications that you can get.

Someone some most of them tend to be like for bigger properties and for you know markets that are broader markets, but you can get. Average price per square foot for operating costs different operating costs for different types of apartments and different locations and I’ll just keep you one of the one of the ones that’s like the sister association to CCIMS I REM institute of real estate managers and they put out publications that they go into great detail of.

And I’m not saying those are appropriate for people on this call but you know what you want to do is be able to say okay this this owner is or real estate agent is saying that the repairs. The property is X number of dollars for repairs. I don’t want to pay attention to that because that’s what they they that that’s what they want to show or what’s it’s what they’ve maybe it’s off of even off the tax return that’s what they did one year.

I want to know what every year my repair cost is likely to be right and then with each one of the numbers you want to be able to do that and some of them you can verify you don’t have to go by theoretical numbers like PG&E, you can just have it as part of the contract that you’re you’re going to see.

The last 24 months worth of PG&E belts that you get to inspect them right or the water bills, trash bills, whatever so. So what you want to do is take the numbers and start verifying them because you know the old saying trust but verify. That’s your money, nobody’s going to care for it about it as much as you do.

So please even the number you get from people who are on your team. Just make sure that you that you get back up have them explain have you know, let’s let’s get down into the weeds here and by the way, sometimes in a hot market you’re not able to get as much as you’d like and you’ll you can make a business decision to go ahead with what what your own opinion is because you’ve looked at enough different properties for sale that you know, what what the PG&E would likely be for instance, let’s say anyway, I digress but you want to go through basically line item and reconstruct your own budget.

Right. And that’s what a lender is doing: lenders underwriters when they give them an income and expense statement for a property that you want to refinance your buy and they’re looking at their book. Their iron book or whatever and you know, when. They’re saying now that those of that number are not right, that number is not right, you know, and they come up with their own and they said to debate whatever you present for the refund.

Yeah, let’s not necessarily run but you know, they’re allotted databases again used at that in the world for underwriting right? Banks could have their own in-house lawn, could be iron, could be. You know an appraisal board. So, so how’s it? How does it work? So they have their standards in so you are doing a refi for somebody for an apartment building, but you have your numbers and they have their numbers.

Cordell..

How do you draw a middle ground? Well, when you really are experienced you end up being pretty close. So it’s not that far off. But sometimes we’ll get down to, you know, a discussion about where we’re located. The typical number for repairs would be say three percent say so.

I love three percent from an owner’s point of three percent. On lower rents may be too low of a number and so the blender may be the same for not going to use three percent. I’m going to use, you know, five dollars a square foot or so. That’s some other number that they think is more realistic.

What we do then is we just get into a discussion about well, okay, you know, we understand you’re using this number we’re using this number. But look at the condition of the property and and the condition of the property we just put on a new roof we just did well we rewrite the plate you know, we did it all these different.

 

Upgrades and so we’re not going to have that level of expense for another 10 years, so let’s you know, and we can come up with a compromise. And eight by the way in the end lenders also always go with the more conservative of what they come up with or what an appraiser comes up with.

So you could have this discussion with lender and then the appraised the appraisal comes in and you hit and you can have the whole discussion all over again because the appraisers got a little different view so just saying here it’s a little more this isn’t like you, you know, I one of those like easy glide paths no but with no bumps in the road this the underwriting process is a little bumpy, so.

It’s also for the base. It’s like let’s say that I am underwater at a bank and then you submit an application to me alone. I go through my diligence and then I have to go ahead and present the same thing to my boss or to like a mini board and then from that decision they make that come back to you and say yes we want to go with you is that the process yeah pretty much yeah there’s a lot of there’s a lot of pure review of going on right so because it’s, uh, That’s a team of protein so the idea is you know, let’s have a lot of eyes on this because we want to make sure we don’t make a big mistake.

And and and we it’s the reason for us to have teams ourselves, right let’s get some other eyes on because. We may be missing something people can have valuable, important input for us. Yeah, I do think that the, Route that I’ve heard many many times has been a very good method to buy.

One blank you buy something by a property you fix it up, you rent it out and then you refinance. I’m missing something else but you get that proceed and go to the next you buy who fix up you’re not refinance boom, boom boom boom boom in before, you know it you got to look portfolio and that’s actually that’s my game plan that’s what I want to what my goal is trying to achieve it’s it’s to utilize that and I’m kind of digressing but when it comes to refinancing, What tips do you have for a person does have a commercial property or let’s see yeah you have a commercial property and they want to refinance what what will increase the odds of getting what?

And having property that’s in good shape and and and really good records. And. Being realistic is probably more than anything right because sometimes people want to borrow more than than the lenders are willing to lend them. It’s just getting a good realistic view.

Okay. Well, I’ve got I’m gonna have you back multiple times it, you know, I think this is just like an introduction to know about you and there’s other toppers that we’re gonna talk about later on but do you have any last stops in regards to understanding the value? Just get out get out and do where your shoe leather right so look at properties until you get until you get the experience and then you know, you can have other people who are doing that for you but you yeah again, I think we’re tucked talking mostly to people who are kind of hands-on to just get in started right and that’s it’s how you get the knowledge so that then you can manage people you want to have you want to have that obviously the thing about to because you know for myself I thought about Trying to get my portfolio jumping off in central California.

Because it’s cheaper but like I thought about what’s my ultimate goal and so anyway, I got like I got a list of apartments and I did before I have expressed you like you were representing he was like, okay but these down so I can know what the numbers are so I can know what I call across the deal what’s good was bad.

I mentioned to you early by renting meters, so I know what the rents are so I’m expressing them just zip code for one bedroom and two bedroom three bedroom is this so if I come across something I already know. But I kind of transition I say, you know, I don’t want to really go that route.

I’m going to stick to the Bay area where my home is, you know, some people say best for your ad a lot of people say well California so expensive but my I’m back it up and say what’s called ultimate goal my ultimate goal for me to buy a manage, you know want to be able to be active in it but have systems in place but you reminded me now.

I have more problems. I have more research and projects to do. Where I’m going to get some stuff in Alameda County and start making up my list and one idea that well, somebody can have to those are listening you can hook up with a title company and make a request for go through agent and say I want to buy some properties well, I want to list of properties.

I’ve done it before for like five to fifty units and this county and you get a spreadsheet that’s fresh you have all the you have the address of the property you have where the owner is so you can email them or several letters. And then from that you can develop your own expression.

You can based on city or zip code and then like whatever saying you can start figuring out what’s the growth rate multiplier, what’s the cost per unit, what’s all this stuff and like for me now I’m in that process right now where I’m transitioning. From what I thought about you know, the central valley when we focus on alligator county where I’m at but anyhow how can people get in contact with you?

 

Ed…

So God, easier steps to email me, um, it’s ed at Smith crane.com. And crane is the CRA INEE, so at s m, i t h, c r a i n, e.com. Um, always happy to spend a few minutes getting to know somebody and. See if you know, give them a little coaching and a little guidance and see what they’re up to. Love hearing people’s stories.

Cordell…

Well, thank you and as I mentioned when I first read your profile, I read your biologist today to my wife was like man, he’s accomplished and I was just for those that don’t know. Because I mentioned I worked with Ed for a while I recently got back in contact with him. We haven’t chopped it up, you know, talked just recently but I was telling him.

That I was the conversation before we started it. I said I was driving down the street and I seemed like a contractor, a plumber, an electrician , whatever had this truck up and they’re slowing us. There is no substitute for experience. And air definitely got the experience so my vision of course is once I get my thing going like I want to like I am of course of my reach out to Ed hopefully you guys too can do the same when it comes to commercial financing.

To stuff so well. I’ll talk to you guys later on and hope everything goes well and your family’s safe. And make it happen go to websites fall apart in the best of.com, get my free ebook stay safe be everyone.

Podcast Series 10: Due Diligence When Buying Small Apartments with Francis Fernando

Due Diligence Process When Buying Small Apartments.  Featuring Francis Fernando.

Cordell

It’s recording all right, hello everyone Cordell Davenport here with small apartment investors and this is my second go-around where I’m bringing across someone who can be very beneficial to you and I and I said before is that my vision of coming up with these shows is not just to let me find somebody let me find somebody new and we find somebody new.

I want to have a core focus of people who really know what they’re doing that can be able to teach and have a message to say and so, Once again those people are going to be a real estate agent University a real estate attorney and a mortgage broker. I’m a property manager and a real estate attorney does say that I think I’ve screwed him up yeah he did yeah yeah, so anyhow so what I try to do.

My ultimate goal is to own and manage a small apartment portfolio and it’s funny that I met Fernando. I am kind of following his steps not knowing I’m following his steps. I listened to an interview with him and learned some stuff about him.

On smallapartmentinvestors.com  I have this free ebook have your family living expenses covered by small apartments you own and guess what that’s my goal and I know that if anything it’s all about mindset so mindset but skill set plus performance equals results and when it comes to property management that’s a huge portion of skillset..

Is going to read his little brief bio and we’re going to learn some more about this his message his tactics and how we can all benefit so Francis bought his first income property 2003 with no formal training or experience in real estate by 2006, he started a property management business that grew to operate 40 million and residential multifamily and represented prestigious clients such as Wells, Fargo, California National Bank in US Bank.

He is the author of a trademark book titled job plus real estate equals wealth. I have that book FYI that serves as a guide on how to invest in multi-family properties while working full-time today after selling his property management business. Francis, they saw after a real estate coaching speaker that helps new and seasoned real estate investors start and grow their portfolios.

He also helps real estate agents become authority figures in their community by creating sales funnels that nurture and convert into sales. Francis also works at auction.com the largest marketplace of distressed real estate he coordinates and helps the auctioning of foreclosed properties. Francis the graduate University of Buffalo, we earned his bachelor’s science and master science and electrical and computer engineering.

Francis is a dad of two incredible sons, ahusband, a yogi and fitness enthusiast and lives in Buffalo New York where its cold, and I’m in California. It is about 80,

 

Francis

Oh man, hey now getting colder every day. The night it’s getting colder, although this week we do have a nice warm week.

Cordell I will start talking about my mantra right and mantras don’t come in as part of who you are as a being. I mean, there are I guess there are certain mantras about your personality that you hang tight to like your down.

But I’m gonna step away from values for a second and talk a little bit about them. The journey and then I’ll tie it back into what my actual journey is but my mantra as it pertains to real estate is I call it hashtag how much will I make right and the reason for that is it sounds like it’s driven purely on how much money I will make and yes that is a component but it’s more a higher level look into it saying if I’m going to get involved in real estate.

Or if I’m going to get involved in a business or if I’m going to get involved in any kind of entrepreneurial endeavor, I might looking back and breaking that transaction and that deal apart from the infrastructure right so from an infrastructure perspective do I have what it takes to take care of or and I get into that end every.

Right now can I facilitate that with the current status and current involvements that I’m doing right now with my family involvement with my current job can I actually take that off or am I getting into a headache where I’m going to get involved and then like below? Just can’t logistically take care and the reason that’s important to me is because as I look back at my journey, I went through those kinds of situations.

I had a job. I got involved in real estate and I logistically blew up a little bit in my real estate portfolio because I didn’t have the, Structure to take care of those. So as I look back, you know, they say, you know hindsight 2020, right? I look back and I go wow.

I wish I knew what I know today. I wish I knew that when I got into real estate. So that’s really what the mantra is, so it’s not as much as it sounds like it’s all about making money really that hashtag how much will I make is really how much of how much do I know is my brain going to learn by getting involved?

So that’s oh yeah and then I’m gonna tie it into a little bit of my journey so really really at a high level. I’m an engineer by profession. I became an engineer because my come from a family of engineers my dad was an engineer we traveled around the globe my dad worked in various minds copper mines in central Africa Southeast Asia, and then eventually in Canada and then you know, I moved to the US.

So that was sort of in my blood engineer but I always say I was an engineer up here not down here. I think I had the want and desire to become a business person or an entrepreneur but I didn’t really know how to do it so my first kind of leap into it was my first formal.

I had a few informal leaps into business but my first formal leap into business as it pertains to real estate was in 2003. From Buffalo, New York to New York. My nine to five job. I was I was an engineer at Verizon my nine to five job moved me out to New Hampshire and I loved the area there was something a unique about that area it was a little bit north of Boston real estate prices were a tad bit cheaper than the big metropolis of Boston, so all your investors were coming from Boston unable to buy in Boston and buying up north in Manchester New Hampshire and, The time I found it attractive to buy real estate, so I was buying I was using my corporate.

Saving it up and I was always one to buy assets, you know, I had red rich dad poor dad and I had learned the difference between a massive versus a liability and that was kind of a you know, wake up moment for me so I was using that money buying acids which my choice was larger apartment buildings, but.

Here it’s actually sorry for the definition of your show it’s smaller. Families and it’s not the two families but I was more attracted to the five to six to eight unit, that was my sweet spot so actually I will redefine that smaller apartment complexes. And so yeah and that’s what I was doing.

I was buying up smaller apartment complexes. I got to a point where I had 22 unit 20 22 units my portfolio sizes changed here and there 22 units and I got logistically stuck and I’ll expand on that later as we get into the show, but logistically stuck in the sense couldn’t manage my job and I couldn’t manage the assets so I decided to take a leap of faith and go, you know, my first entrepreneurial venture outside of buying the real estate was to start it.

He manages the company to manage those assets. You can be a real estate agent in that area to be a property manager. Yeah, yeah so that it’s pre, you know, depending on the state and the local ordinance for the most part most instant this is if you’re managing third-party money.

So if you’re managing your own assets or if you’re working for one individual, you don’t need a license, but if you’re if you’re co-locating what you should be collocated co-mingling funds, but if you’re managing multiple funds for various different owners, then yes you do need.

 

Cordell

Yeah, you know when you were saying something in before about your mantra and everything and how much you want to make and I was thinking is like to me success is to know what you want and to get it. So what is it you want? Whatever it is you want. a person can say well I want to buy this. I want to buy that or personally say, you know, I have a kid and I don’t. Iwant money for college or my IRA right now sucks. I need some money or I’m just tired of working or whatever may be so we.

We do certain things we strive for certain things because of what it gives us we all know that money is just to a vehicle money is important but what is going to give you what’s the end result and I think a lot of it was down the time free time to to pick and choose what you want to do.

 

Francis

I like that you said that because for me it was time until and it still is right because I do value my time very verymuch but I heard something that was really.

Recently that was interesting It was speaking to a young lady and she said you know I asked her why she was getting into real estate So I do some coaching for people that are trying to get into real estate and I do some coaching on people that are trying to build they’ve already got real estate but they’re trying to build up there property management companies.

So this particular young lady was getting into real estate. She had a really good job, so she was really clear on what she wanted to do. She had trimmed her liabilities over the last, you know, 12 months. So that she could free up capital and didn’t have too much expenses.

 

And, She was ready to take that leap of faith. So after the basic question I said, so why is it that you want to get in? Really. And why was she sayingFrancis? I’m always so shocked that every generation has to start from scratch. She’s just recently married and I think she’s about to have kids or probably close in the in the near future she will be having kids and so it could be a thought and in her mind of hey why does every generation meet to start from scratch and she doesn’t she wants to break that cycle in her family and be able to create generational wealth that she can pass down to her children who?

 

It hopefully passes it down to their children and that’s the beauty with real estate; it’s one of those transferable assets.

Cordell

Yeah and unfortunate you know sometimes for people like myself who grew up in the inner city parents and have anything and there is this could they call it a long money, you know, where it’s generational and but if you grew up in the area where your parents and own a home or they were always renters, there’s nothing transferring there’s no life inheritance and it’s great if we can have a whole different discussion about generational wealth, you know, sometimes we could look at back in the civil rights days where they called a red line where you couldn’t get a property because You know, you were you where you were black you’re Latino you were whatever maybe and then you just get black ball so I don’t want to deviate because I have a habit of deviating sometimes no no let’s get them from good but I think that no it’s true so it all points down to okay, what is it that you guys want what do I want what you guys want so great?

Good so I have Francis on a talk today about physical due diligence everyone but before we start talking about that did I interrupt you on your line of thought Francis no no not at all. I’m ready to jump into the content and yeah, all right so everyone when it comes to buying apartments there is a lot of due diligence that needs to happen there’s financial due diligence they look at leases look at the rent rolls look at the t-12 to trailing teeth trailing.

12 months, you have to look at the market with due diligence and understand what’s the norm but when it comes to physical due diligence, that’s a whole different ball game, you know, there’s it involved with. HVAC roofers and the thing about Francis because he’s been doing it. He hopefully can share some insights of the top five things that we should always be aware of when buying a property.

I’ve heard of times where if I want to buy an apartment I can hire property management and say, okay when I pick up this property, I’m going to manage it once you come to the due diligence with us. I’ve heard where someone just says I’ll come and find a general contractor and then have them walk.

I’ve heard. People outsource to third parties but the problem that I see that I’ve encountered is because my niche is 50 units unless a lot of people go for the big bucks, they don’t really go over 50 or they go a hundred. I I was listening to a seminar and it was a niceguy who gave a good presentation on due diligence and he’s his company that takes pictures and does all kinds of things but.

But because my niche is 50 units he’s not gonna even touch it.  That means that how do people who have 50 units unless they get around or what should they do when it comes to doing the physical due diligence?

 

Francis

On a property they want to buy right ready so critical question and and before I even jump into that, you know, you said that there’s that sort of middle of the market, you know, the 50 units and below and that’s sort of the untapped market and this is a call out to all entrepreneurs that see those kind of opportunities right so typically when you look at real estate the the largest size properties, whether it’s due diligence property management or or any aspect of servicing those.

50 units and greater there are I call it the big boys and the big girls that are gonna service those right and then they’re really small ones are either self-managed or the portfolio sizes small enough where it may not make financial sense for you to even get involved in that.

But there’s that sweet spot where most people don’t get involved in right and if you can figure out how to create business within that sort of untapped market right that is you know, it’s a call out to all entrepreneurs that look in that sweet spot because there’s not a heck of a lot of competition it’s exactly what I did in Manchester New Hampshire is there was a speed sweet spot of third party real estate of third-party property managers, most people didn’t want to manage other people’s real estate, especially for residential.

Right then andthere was that sweet spot of that underrepresented market and I said wow this an opportunity there, it’s tough it’s really tough but how can I get into it and make an ad profit from it? That’s just kind of my entry into that. I’m going to touch a little bit on all due diligence but I’ll focus a little bit heavier on the short right and the the reason is I I kind of flows for me the entire due diligence because I think a lot of times when people see properties they get they get hung up on you know, how do I how do I?

And they’ll spend so much time on the spreadsheets analyzing it and by the time they go to buy or put an offer on the property either it’s sold or they make an offer which doesn’t make sense right so I’m gonna go all the way right to the start.

First step of due diligence for me is financial pro forma, right so I’m going to run a financial pro forma on the asset now that the whole section is a whole separate discussion, right? I’ll give you the basic elements of a financial performa how much is that asset going to make right so you’re simply going to have and there’s performance that you can get.

I have a performer reach out to me. I’m sure Cordell you have a version of a pro forma bigger pocket that says versions of profarmac. Essentially in a nutshell a pro forma as your income and your expenses are right and then certain key ratios like cap rates cash on cash return debt service coverage ratio.

So there’s some really important ratios that’s going to tell you what the property is going to perform like. So performa is a sound that is complicated. Word all it says is all it stands for is projected performance. Not real performance projected performance. So it’s your first step into saying hey, it’s even worth doing physical due diligence on this, right?

We want to be disciplined investors so we want to do our first step being in financial performance. I want to just evaluate this idea of a funnel. This is the top of the funnel. I’m filtering out anything that doesn’t make financial sense too. Me. So super important to do that it’s going to tell you based on what kind of returns you want.

This is a good asset. One more thing on the financial performance that I’ll kind of end on that is. A lot of times the philosophical question a lot of times people, you know will look at a property and there’s a sale price on it. Let’s just say it’s an open property on the market.

Let’s say it’s on MLS. It’s an active listing on MLS and I’m gonna make fictitious numbers here. Cordell the sale price is $250,000. Most of the time as buyers, we’re looking at that we’re running our pro forma on $250,000 and then we’re basing our offer on $250,000 or a function there on.

Right? I’m going to offer this much less than 250 right but we’re not offering it based on the performance of the pro forma. So super important to understand is that whenever I do a financial performance. Care what they’re asked. Me I don’t even base it on the asking price

Cordell

Yeah you’re right because when you buy commercial property or buying a business unlike a residential no it is listed for a hundred thousand.

I’m going to offer 33% less and just whatever it is and then buy but knowing you’re buying numbers or you’re buying a business that’s why you have to go in detail go ahead.

Francis

This is not perfect and this is where it takes the emotion out if there’s a real estate agent involved in this transaction right it can get kind of sticky because the agent’s going to push to get the highest price on that, whether it’s whether it’s a buyer’s agent or A seller’s agent, right?

Their primary motive is to make sure that they own the propertycells and rightfully so that their job right is to get the maximum price. So when it takes the emotion of when you give an offer immaterial of the asking price because you’re saying, hey, my offer is based on the performance of this asset and the financial viability to me as a purchase, right?

And you know, take no offense to the offer that’s gonna make So that’s step one for me. The second step was the physical so it’s more about what we’re talking about here is the physical if it passes that litmus test of the financial viability then I’m going to do a physical inspection so I do a couple of different physical inspections the first one is obviously just a drive through but once I’ve gone through and it’s kind of checked off the location the access to schools depending on the type of building so if it’s a if I’m in the B slash lacy range, that’s the market that I want to be in from a renter perspective then I’m going to.

Make sure it’s you know, within all the facilities of what is needed for a B, slash sleek see property, if my intent is to take it from a like doing a reposition so I’m saying I’m taking a seat property and I want to make it a B. A Mayana be location right like am I taking a C property and bringing it into a B physical asset but I also want to be make sure I’m going to be location from the perspective of schools, you know access to amenities and all of that, so I’ll do my quick sanity check on that.

Do a physical drive through but now when I’m going into my actual physical inspection, I’m wearing a couple of different hats right so the first hat is my I call it my my basically my contract a hat, right? I’m looking for deferred maintenance, right so is there anything in this property that in the next five to ten years one year what I didn’t care your time frames are that are going to be exhausted in other words, they’re at the life expectancy or they’re at their maximum life expectancy, so of course the main mechanicals right the roof the windows the the HVAC systems and and then I will do a physical walk through of the units too because if the units are you know in, Decent shape.

You know from a visual perspective but if I get into the internal, you know internal guts of the apartment and I’m looking at you know, really old plumbing really old toilets really old tub surrounds then I know when those tenants move out right my rehab cost is going to be that much more my unit turn costs are gonna be that much more so I’m looking for.

Diffeeral maintenance, that’s my first first thing major mechanicals, that’s my second thing then after I’ve worn that my contractor had I’m then going to wear my elect my my insurance auditor. Right I’m gonna sell yourself doing this process if you have a team with you usually I’m by myself yeah usually I’m by myself I will take a I will take a maintenance contractor with me, you know, usually my own when I ran my own team I had my maintenance contractor with me on occasion if it’s a property that I’m a little questionable about I may take my insurance agent to depending on my relationship with my insurance agent, so I might actually take my insurance agent but I’ve been schooled enough to know what to look for so I’ll wear my insurance hat and now I’m going to walk the property from the perspective of an insurance.

Agent right because typically what happens is when you close on a property you’re going to get a binder for it. Be 30 to 60 days at. 30 to 60 days after the closing the insurance is completely the insurance company’s going to send an inspector to do a physical inspection of the property to make sure that it’s in compliance with what they’re underwriting okay and if they start seeing things I’ll give you a quick example, they see knob and tube wiring right or they see fuse panels right they’re going to write recommendations on your not not even recommendations, they’re actually going to write non-compliance items as a checklist of correction.

So that need to be made if not they’re going to drop your insurance or they’re going to decorate your insurance rates up significantly. Right so you want to go through from an insurance perspective and look like how an insurance inspector is going to look at that property so I’m looking for Northern tube wiring.

I’m looking for electrical fuse boxes. I’m looking for old plumbing, you know old cast iron plumbing and anything that antiquated were insurance agents going to be you know slip and then the slips and falls and all that so of course, I have it so with the insurance company give you like a form you fill it out once you go to the property give it back to them and then They’ll give you a quote on on what will cost to ensure it possibly how does that there yeah, so on the initial they usually just get an address on the initial on the initial for for closing purposes, they’re going to give you an initial they may have a questionnaire for you like what kind of electrical right and you’re just simply answering those right so you might get coverage and you’ll get bound coverage but it’s it’s a you know, it’s it’sit’s contingent upon a 60-day walk through of an insurance inspector, all right, so once the inspector goes through it says a bit.

You know, this is not what we thought it was right there’s a buried oil tank there is not a two wiring there is you know antiquated facilities we’ve got a we’ve got a re-up on these or you’ve got to correct these okay make sense. Yeah, so yeah, so that’s yeah, that’s that’s you know, my next step on the physical inventory is going through wearing my insurance at my third is to make sure that I do an inspection of the inventory.

Right so I a lot of times when you buy let’s just say you’re buying a four fan the listing agreement is going to say four family four bathrooms your four apartments, four bathrooms, four refrigerators four dishwashers, and it’s going to have a listing of all the equipment that you’re going to ultimately own at the transaction number sale.

I am going to walk through because I am ultimately buying those four refrigerators for dishwashers. I want to make sure that you know, I’m looking at cereal numbers. I’m looking at ages of those products. And the relative condition of those right are they near the end of life and if you’re in there looking at those and it’s an occupied unit then likely you’re going to be able to hit up a lot of other things which I’m going to get into next which is speaking to the tenants, hey if you had it have you had any issues with this refrigerator oh yeah this is a fourth time I’ve called the landlord, you know, this thing keeps going out on my it keeps leaking and that’s why you if you go downstairs you’re going to see leaks on the unit below right it starts opening up the quote-unquote can of worms but this is a good can of worms because you want to know this.

Desire mm-hmm, yeah, yeah so from a physical standpoint that’s what I’m looking at if I get really into depth or I’m questionable about certain things then I will get like an engineer in there if there’s certain things about the basement that I’m not liking foundation issues or I see lolly columns, you know sort of recently put up there.

I may have some concerns with you know, settling basements or settling subspurs, so I may get people in there for that but for the most part if everything looks fairly good. That’s that’s it on a on a physical inspection and then let’s say that you do your physical expectation and you say man all these damages you go back to the seller and say, hey you’re gonna give me credit on this or you’re gonna let’s work something out yeah absolutely so I’m gonna I’m gonna write all of those down, you know, I’m taking copious notes as I’m going through this inspection right and my copious notes are going to then translate into you know, how does this affect the overall deal is this something that hey, this is part of my offer this was.

Part of my original Proforma when I ran the pro forma, I knew this was gonna be part of it and then of course I’m looking at you know, sort of from a market perspective, you know, is this something that I can absorb or is this property going to sell with these conditions at that price right if it’s going to sell with the so for example property is listed at 250 and that’s a pretty good going.

Market or properties are selling at 270 right now so 250 is right within the market but I know the reason it’s 20,000 below market is because also it means a new roof which is 15 grand so the owner was smart enough to know to accommodate for that and it’s reflective in his asking.

So I’m gonna do a quick sort of sanity check on that but I’m taking copious notes and I’m gonna translate those copious notes into a dollar per line item, yeah. Of course. I’m going to separate. My capital work is right So these are immediate capital expenses that need to be taken care of and I’ll break those up into what Icall life safety versus long-term improvements and then I’m going to look more into beautification common hallways that need to be painted that kind of stuff through routine maintenance.

That’s all part of performing anyway typically yeah yeah and when I when I make my offer a lot of times I will include that I’ll include a pro forma in my offer so that I’m not offending anyone and I’ll include my breakout of you. Don’t do the breakout of repairs right up front, but I’ll do step one I’ll do my offer.

If I get kicked back then I’ll say the reason for my offer is boom and I’ll include my pro forma and oh by the way, if you want to know further detail, it’s because of and I’ll take my copious notes and say just so you know, I mean, I did observe that your roof is leaking and I’m not here to buy a leaking roof.

I’m here to buy it. Asset that’s producing income hashtag how much will I make right and you know that roof needs to be replaced. Yeah my next one and these kind of like all mesh in together is after the physical inspection.

I’m going to do an occupancy inspection. All right, so my occupancy inspection is who is my tenant base, right? I want to meet all my tenants, right? I want to meet all of my tenants. I want to see all the tenants at least. This is a big part of what people miss the expiration date of leases, right?

I took over a 12 unit building in Manchester New Hampshire, the owner bought it as a 12 or 18 unit building. The owner bought it within six months of owning the building and there was a lot of capital work that he had accounted for but within 12. Months six months of closing the building the building went 50 percent vacant and had he gone through and just done due diligence on the leases and even just one within the leases just one aspect of the lease and that one aspect is what is the expiration date of the least had he focused on that he would have seen holy crow, you know, 50% of my leases come do within six months of me buying this building, right?

This is an expense that I didn’t anticipate because now not only do you have lost income for them moving out you have. Rehab fees for each of those units and then you have releasing fees to your property management company to release those. Problems. Yes. Yes. So, I’m gonna do tenant leases.

I’m gonna meet my tenant base and speak to them. It’s unbelievable what you learn from people when you speak to them. You know a simple question like hey Cordell, yeah everything good at the apartment. No, that’s that’s all I need to say and it’s just gonna blow up into a conversation, although you know, not real.

Or well, you know, I’ve been telling the landlord about this and. You know, it explodes into a great conversation and I’m also gonna look at pending lawsuits are there any lawsuits are there any, you know, potential lead issues, you know lead laws are pretty hefty are there kids in the building is there an ongoing lead inspection or lead violation is there and,

I’m gonna ask a tenant one how tenant two behaves. I’m gonna ask ten at two how tenant one is and I’m gonna do my trust functional look do they when they’re selling do they have to say if they have section eight tenets as you’re doing review yeah it’s going to it’s typically gonna state it on your retro it’s gonna say the source of income so a lot of times they will say section eight and the source of the income okay, and and the lease will typically say to okay?

Yeah so I’m gonna ask for a tenant file for each of the each of the tenants I do review the file to look at any vouchers that are coming in from because also if you go historically, even if they’re not on section eight, there could have been periods of time where the tenant fell into trouble and they needed some form of government assistance to build them out, so I’m gonna look and see if those and that’s not necessarily a bad thing people good people get into trouble but I just want to know historically has this tenant been employed or had they’ve had periods where they’ve lost their job as a seasonal work.

Would vary you know, typically in the wintertime they don’t have they’re out of work and they’re you know, they’re on some form of government assistance, so I want to just know all that well. It’s like a person really needs to have a good checklist, oh absolutely to make sure nothing is good skip go ahead yeah and then my final one is verification, so I’m gonna run through these again first is financialperforma second is physical inspection third is the occupancy and my final one is I call it verification and this is where I go, it’s a phrase that I love it’s trust but verify mm-hmm right when someone says, hey for us is you don’t trust me, oh no, I trust you.

I trust you but I verify, Right so when you verify you’re just keeping an honest person honest, yeah and I’m not that’s that’s my my you know, I I like to be verified upon because I want to make sure that I’m doing my work and anyone checking upon me.

I love the fact that they will verify what I’m doing because it keeps me on it keeps me as an honest person, it keeps me honest and honorable to my role so on the verification. I’m just gonna give you a few ideas on verification back deposits.

Okay so typically if a person is organized with their real estate assets, they’re going to have a separate bank account for that asset or they might have multiple assets, but they’re going to have. One bank account for those multiple assets. Right. I would hope that people are like that and they’re not commending rents with their own personal accounts and all that if that is the case it’s a great way to verify the stated income so if they’re saying, hey, my monthly rents are that I’m getting on this building is 3,000 a month, right or 36,000 if we’re annualizing at 36,000 a year, it’s not hard to ask for copies of bank receipts deposit slips bank receipts or access to the bank statements and they can black out the, Their own numbers and you just want to say hey if it’s 3,000 a month how come I’m not seeing 3,000 a month.

And a lot of times Cordell you’re going to get people that say well it’s really complicated no not really it’s a rent check that comes from a tenant and you go to the bank and you deposit it and you’re going to get a deposit slip that’s that’s it’s complicated as it gets so verified the,

Same bank account you can verify these you go back like 90 days like how far do you go back I’ll go back 12 12 months from outside, yeah, I’ll go back I’ll ask I’ll ask for 12 months because it’s fairly easy to do a quick sanity check because then I can get a trend a lot of times I do get pushed back from that from bank statements a lot of people are uncomfortable with getting vaccinated so I will put it as a contingency in my my PS right contingent upon bank statements or if I can’t absolutely get bank statements because they’re commingling there’s a lot of the owners that kind of ran at all.

Mobile school they have your mom and pops yeah yeah and they just kind of put it into their own checking account then I’ll ask for tax returns schedule yeah, yeah. So you cantrack not only your income but also your expenses so you can look at all the checks that are being written out and just cross-color correlate that with yourprofana okay and then one more check that I do is on any utility expenses that they state.

I’m gonna do a quick phone call to the utility companies to get the account number and just say, hey what’s been the average? Water. Here’s the account number. And if I don’t have permission to do it. I’ll have them, you know, have me on the call and make that phone call so I’m not easy.

I’m not an easy buyer. I’m not an easy purchase. I’m not I’m not very much like to buy this sellers but where where I don’t mess around Cordell is that once I’ve gone through those I make a financial transaction really easy, all right, you know makes sense, um, All right well I have a question like I know there has to be people out there.

Cordell

I know you mentioned you earlier. Provide coaching and things like that but what if someone wants to buy a small apartment but they need some hand holding on a due diligence process does your services include?

Francis

Cordell the three tiers of what I do is the first tier that I offer is if you’ll get it if you’re new and you’re getting into real estate. I’ve created resources right, the first resource being the job plus real estate equals wealth book, right? I also have that as abundle with an online video course right and it is a soup to nuts course that the course sort of encompasses.

I took the 15 years of managing over 40 million dollars worth of real estate, so I get into depth with you know, due to Legends how to analyze properties what type of properties to buy where to buy you know, how to negotiate with people how to surround yourself with the success teams and I give copies of the performer it’s my own version of the Proforma so it’s everything is in that and so that’s sort of my entry level, you know, you get the book and that program.

The next level is if you. ‘d be a solutionfor me like I have a client now that he flips high-end, you know, one to two million dollar homes in Massachusetts. The agreement or the work that I’m doing with them. Properties so I’ve created a funnel for him and I’ve created sort of a marketplace for him that people know if they’re selling a high-end property in the Seacoast or the South Shore of Massachusetts, he is the guy because he’s well he’s well not leverage he’s well financed right he’s liquid right he’s wealthy he’s he’s got cash in hand.

And he’s able to move rapidly on an acquisition so I’ll work with someone like that on a onon a strategy so the point being that anyone who’s got a very specific strategy right and that’s what super important if they’re very specific on what they want to do, so if someone comes to me and says, hey Francis I am thinking I want to get this as soon as I hear that I know they’re not sure exactly what they want to do, but them in your funnel yeah yeah, you know what you you’re probably likely better off reading the book getting some clarity on what you want to do and then when you come to me with a clear strategy.

Hey I am looking at properties on the South Shore of Boston, or the east side of Buffalo, this is the criteria. I’m looking for right? I know you’ve been through. Lack of a better word level one of my programs I know you’ve fundamentals you’ve been through the fundamentals. I like that yeah, so I’m able to work with you so I love projects where it’s like so you know, I don’t like corner people into hey this is I only work with people like this know that second level working with me is you have an interesting project as it pertains to real estate due diligence analyzing a property creating a marketplace for yourself a real estate agent that wants to stand out absolutely.

I’ll work with you. And then my last offering which is really where my sweet spot is is I will work with clients who are seasoned real estate investors that own portfolios small, you know, probably 10 to two 300 units in smaller portfolios but and they have a property manager or their self-managing it but they’re dissatisfied with that that portion of it.

And it’s vertical integration they don’t want any leakage of income in their business they want to create their own property management solution that’s where I come in and I go soup to nuts turn key operations for them to bill their own problems.

Cordell

I’m going to be there in a couple years and we are going to be working together. We will build that together on this show. Yeah, that’s why I do I believe to achieve all right well, um, I thank you for your time, how can people get in contact with you?

Francis

Okay a couple of different ways Instagram, which is how you got all of me. Cordell right my my handle on Instagram is at how much will I make hashtag how much will I make so if you search that you get my Instagram I’m on Facebook Francis Fernando on Facebook, if you email me Francis at Francis Fernando com my website Franciscoanda.com multiple different ways.

I’m on LinkedIn, so I’m everywhere just Google my name.

Cordell

Well, thank you, thank you thank you thank you and we’ll look forward to next time we hook up so we can chat and learn from each other. We’ll learn from you. I don’t know what you learned from me, but I’m learning a lot from you but once again thank you and we’ll see you next time Francis.  everybody like I said go to the website small apartment investors.com .

I am constantly trying to feel that website with a lot of content will see you later bye.

Podcast Series 11: How to buy Small Apartments with Joint Venture. Featuring Real Estate Attorney John Gutierrez

Cordell:

Hello everyone Cordell Davenport here with small apartment investors and I’ve have a YouTube channel and I have a podcast that I talk about mindset skill set when it comes to small apartments and my very first podcast I mentioned that I want to introduce different people and bring people the main pillars when it comes to being successful and those are CPAs real estate attorney ,a mortgage program property management those like the four main pillars, you got to have somebody like that on your team and what I have today. I have John who represents the wheelhouse so to speak for the real estate attorney side of things everyone but on camera is not working right now.

I’m going to give a little intro about John he’s going to tell us about himself and then today he’s going to talk about joint ventures. John is and has been real estate attorney in good standing with the state bar of California. For 30 years specialized in practice his exclusively transitional real estate land use and business law practice includes among other things business information joint ventures partnership corporations limited liabilities buying and selling businesses, which is a great one.

I didn’t know you did that actually John that’s a good thing. Buying a selling leasing real estate both residential commercial subdividing property to create. Lots and condominiums and developing an entirely property for residential commercial use purposes use a graduate of University Wisconsin Badgers, I’ve been in Wisconsin. He went to UC Berkeley School of Law.

So now I welcome everybody John.

John:

Hey everybody, thank you for that introduction. Cordell. I appreciate the opportunity to be one of the first people to participate in your adventure. Thank you. It sounds very interesting. And I appreciate the opportunity to meet anyone or every one of the people who are listening.

Yeah, I name it. Sorry. I’m just going I’m just adding good good, all right. So, my name is John Gutierrez. As Cordell has read to you. I’ve been practicing law for 30 years. I grew up. I was born in Mexico came to the United States at a very young age grew up in the Midwestern part of the United States at.

Attended the University of Wisconsin studied economics and political science, of course and attended the University of California. School of Law formerly known as Bolt Hall School of Law. And. My initial incarnation as an attorney was as a corporate and securities law attorney. I practiced in Chicago for a few years and then moved back to California after a couple of winters and summers reminded me what the weather was like in the Midwest came back to California.

Continued practicing corporate and securities law. Took some time off and managed political campaigns state local and national campaigns. And then returned to the practice of law this time practicing business and real estate law. And I have to say that in general, I have found real estate law practice to be more satisfying and fulfilling.

Than some of the other more esoteric areas that I practiced and really it comes down to real estate is something you can see. It’s something you can touch. It’s something you can feel and it just made it more interesting to me.

The simplest explanation is that. I decided in my first year of law school that I did not want to be a trial lawyer. I preferred transactions to litigation. There’s a certain pro lack of a better word. There’s a certain personality that does better as a litigator and that sort of showman is just not me.

I’m much more sort of practical and I like connecting dots and make. Things which is how I view transactions as opposed to personality conflicts and clashes, which is how I see litigation no disrespect to my brothers and sisters who practice litigation but as I said, it just wasn’t for me and I found transactional work to be much more satisfying.

It’s collaborative. It’s working with someone on the other side to arrive at a mutually satisfactory conclusion, whether it’s a joint venture, whether it’s to acquire real estate. Whether it’s to develop real estate. And to have something standing after I finish my representation is satisfying to me as opposed to just having a notch in my belt of having one or lost the lawsuit, so that’s that’s the short answer.

Cordell:

All right so now we’re going to get into joint ventures and the thing about a joint ventures everybody is it’s something actually that I’m going to try to do next year myself. But the thing is for joint ventures is that you can basically accomplish more by 20 forces of other people and sometimes where you have a strength the other person have a weakness or vice versa a person may have money my person may not have money with I know the one thing that John is going to probably talk about is that everybody has to have an active role in comes to a joint venture and joint ventures are.

John:

All right, well we’ll just sort of wing it here, okay? So joint ventures are is just a fancy way of describing collaboration, it’s two or more people as you said Cordell two or more people with different strengths different weaknesses combining with each other to create synergy to create something bigger than two people or three people.

There are different ways people do that they form partnerships, they create corporations or limited liability companies. They all become owners of the same entity whether as shareholders or as members or as the partners. Or they do it as joint ventures where they can either be separate but connected in a variety of different ways or the members of the joint venture can all operate under a single umbrella such as a corporation or a limited liability company or a partnership so one of the things that’s interesting about joint ventures is that there are many different ways that you can structure the joint venture depending on what the needs and objectives.

Cordell:

Of the different members of that joint venture or JV how do you slice up the pie though in regards like one person may do let’s say asset management or paying how big the property is or what kind of property it.

One person may say okay well I’m come up with the down payment and I come up with earnest money and one person makes a young. I’m gonna manage all the contractors. I’m gonna manage to rehab. I’m gonna do whatever it is. How does that typically work? And setting up my percentages of who gets what within a joint venture.

John:

That’s a good question so let’s assume then that the joint venture is you and I and a third person coming together the first thing we decide is what is each of us bringing to this opportunity. Is it money is it real estate is it a skill set is it some or all of those things?

And presumably the reason people create or become part of joint ventures is because they’re lacking in something of the money the expertise and knowledge the motivation even so let’s assume that in this particular joint venture there are three of us and we organize ourselves as a single limited liability company.

Or an LLC. Each of us will be a member of that LLC each of us will have an ownership interest in that LLC. In terms of dividing the ownership interests. First and foremost we look at what is each of us bringing to this party. Cordell, you may already own the real estate or it could be that you’re going to be the primary person who scouts.

A location for a particular type of property and you find that property it might be that you have the deepest pockets among all of us, you’ve got the most cash. Available. For again you have the expertise from your property management background from your mortgage lending background, all of those different things have taught you things that perhaps I or the other member of our venture don’t have or not as strong in so often enjoyed ventures, the property has already been either identified or has already been acquired.

And sometimes it’s one person who already owns the property who is going to contribute. That asset to the joint venture. In that scenario where you’re the owner of the property your probably the biggest player in in the joint venture. So your share of ownership is going to be bigger than say my side which might be I have no money but I have a lot of expertise and so we put some value on my expertise and the third person who’s joining us.

May also have a an asset in the form of a big pile of cash. So with one of us already owning the real estate, another person who’s going to provide the sort of lubricating Greece the money to make things happen and the third person who’s going to be the sort of engine that’s pushing whatever it is that’s going to be done with that real estate.

So often the purpose of acquiring somebody else’s real estate as part of the joint venture is. To change that real estate in some way to make it bigger more productive oftentimes someone who is a member of the JV will own raw land or they’ll own property that has either a single family home or a small number of residential units on it and the plan of the joint venture is to scrape that land and redevelop it into 10 units 15 units 20 units30 units, etc.

So again in that scenario you the landowner probably have the biggest piece of the pie typically we try to create some sort of financial profile to value all of the different assets that each of the members are going to contribute. My know how your real estate somebody else’s cash and the percentages will probably flow according to the relative.

Percentages that each of the three of us or the values rather of the assets that each of the three of us is going to contribute. So as the owner of the of the biggest asset. And again the purpose in the scenario that I’m describing is we’re going to take an asset that’s worth let’s say a million dollars the real estate that you already own and we’re going to scrape it and we’re going to get it entitled for 20 residential units and we’re hoping that those units will either be rentable and a high market rate or they’ll be saleable.

Typically as condominiums. At a much higher value. So we’re hoping to take our million dollars and turn it into 10 million dollars.

Cordell:

But let’s say that someone’s going to buy a 30 unit apartment building and but now is it like five is max? I heard regardless of JV members live about five people.

John:

No. Well, there’s no. Well, let me say it this way just to try to keep it simple.

JV’s can any any collaboration any joint venture any? Investment to organization that two or three or four individuals might create together.

May look simple on the surface and has a lot of complexity below the surface and one of the complications or potential complications is that and in this case I’m speaking specifically about the law and the mechanics of creating an operating a joint venture. So one of the first questions in determining the organization of of a joint venture is who are the members?

What are their backgrounds and qualifications both intellectually asset-wise sophistication? And net worth. And how many people do we need in order to hit the target that we’re trying to reach? One of the questions that comes up is that generally speaking selling somebody a membership interest in a joint venture can be considered a security.

When people think about securities they think about the stock market. However, a stock in a corporation is just one form of security. A security can be anything that. Arises from one person investing in the knowledge brain power and capital of another person who is going to take that money and try to make it grow.

So party a giving money to party B in the hopes that B will turn the money into a three times five times ten times return. Potentially can be treated as a security. And as a security it has to comply with either registration requirements before the membership can be offered and sold.

And the people who are acquiring security may need to have certain qualifications in order to minimize the process. Or avoid the process of having to register securities with the commissioner of corporations in California. So determining who are the members of the JV what their backgrounds and qualifications are will lead to the conclusion that selling them an interest or having them invest either will result in a security that has to be registered because they are a passive investor which is often the I’m sorry the other way around.

Because they. I’m sorry. I’m confusing myself here. Securities generally speaking must be registered, however, there are certain sales of securities that can be exempt in order to determine whether or not registration will be required or that the sale of interest to different members will be exempt hinges upon whether or not the people who are investing contributing are of a certain net worth.

Incredibly right. Accredited or sophisticated in California, it’s not merely accredited it can be people that have done business transactions with the promoter in this case you a promoter or sponsor it can be people who have a net worth of a million dollars independent of any equity in in their home or it’s people that own individually $200,000 per year or as a couple hundred thousand dollars per year.

So determining who the membership is important because it has consequences or potential consequences at the very beginning of the transaction even before anything has happened in terms of taking money from people or starting the the business of the joint venture. So as I say oftentimes joint ventures look fairly simple on the surface, but when you scratch them and you look below you discover that maybe there’s a wide variety of potential investors and they vary according to their net worth.

They vary geographically. If you are trying to solicit money from people outside of the state of California, then you have to be mindful of the laws of the state where the person you are soliciting reside. And again, generally speaking it’s securities laws that we’re looking at because you’re selling something to someone who has the expectation that they’re going to make a return or a profit on their investment and depending upon whether they are actively involved or passively involved that may have some bearing on how you manage the securities law compliance process.

Cordell

Good something to add on to that, so I know it’s syndication yet a GP yet the LP General Partners under Department so analogy. I was told is like a airplane. Everybody in the car kick are the GP’s they’re the one deciding or the land and make decisions the people who are the passive investors are the LPs, so they can’t they can’t make any calls they just put up their money and get a return but because of joint ventures everybody has kind of quote-unquote say so right they all have.

All have a viewpoint how is it worked out when the disagreements come about and like what are the most common disagreements that are within a JV structure that people should be aware about if they want to go that route sure.

John

That’s a very interesting question often the most challenging part of the JB first let me just say that again, there are different ways to structure a joint venture there are many joint ventures, whereas Cordell is suggesting everyone is an active participant there are also JV’s where some people are more active or less active than the other members and again sorry to keep harping on this going back to securities law if everybody is inactive player.

And there’s a California resident then generally compliance with securities laws it’s very simple if somebody is a passive player then there may be more need to understand that person’s background there may be more paper to push with the state but assuming we get over that that hurdle the disagreements that arise in JV’s are similar to the disagreements that arise in life in general.

Either because there’s a assumptions that are erroneous. Or because information has not been communicated clearly and there’s a misunderstanding or there’s disagreement and they can fail for personality reasons as well generally the kind of joint ventures that we’re talking about are small, they’re not necessarily limited to five people but I think most people have found that big events are great in certain instances, but in other cases keeping its.

Small is better it’s more intimate it’s more manageable communication is easier administration is less bulky and expensive and like any small group personalities can differ so I think one of the important things is you pointed out Cordell is to understand at the very beginning what are the strengths and weaknesses of the different participants and to try to assign roles in a way that capitalizes on somebody’s expertise and in a way that minimizes.

The risk by putting responsibilities on others who may not be qualified to handle those responsibilities. A big drivers generally speaking in a joint venture are the expectation of making money. And. The disagreements often arise when the amount of money then it costs to run the joint venture to try to make it successful exceed what the projections were.

So again, very important to have a very sober view of what it is that you’re trying to achieve and how you think you’re going to go about achieving it best not to let yourself get carried away with you know, pie in the sky. Projects that you’ve never done before dollar signs that are you know, unrealistic etc.

So that money doesn’t become the divisive problem that it can be. And again, it’s money in the form of. Suddenly the members are told that it’s going to take more money than we originally projected. And the questions are going to be why did that happen? Why didn’t we anticipate thisin the first instance?

It can be a problem at the back end. Everything went smoothly during the joint venture, but the market just wasn’t where everybody hoped it would be when the joint venture started a year two years three years into the joint venture when again depending on the type of. Investment we’re talking about here if the intent was to rent at a certain level possibly rents have dropped as we’ve seen during this pandemic residential rents around the Bay Area have started to move significantly.

There are a lot of projects that have been in the pipeline for which this covetine pandemic is just completely out of left field. It’s skewed all the numbers and even the feasibility or practicality of projects as we’re discovering now people. So thrilled to live in high-rise buildings that have elevators and common hallways.

So the numbers that the promoter and the investors were operating on 18 months ago, when they first started the project now suddenly look different not necessarily through the fault of anyone but the numbers are different because rents are dropping or the value of condominiums in high-rise, for example. Another joint venture project has dropped and some.

Of their disagreements and disappointments that arise because of the failure to achieve expectations either because the projections were wrong to begin with. Or something completely unpredictable like a pandemic happened. So, people disagree about what their roles are they disagree about. Whether or not you’re doing your job properly, they disagree about why it is costing X and not why?

Why is my return X and not Y. And then there are. As you can imagine all sorts of misdeeds that happen when we’re talking about money.

Cordell:

Yeah. In fact, the checks and balances things like have someone who’s going to deposit a check to reconciliation. Now. For the memorandum, that is the document that I guess is that everybody goes off.

Does it work for you when you work with people like? You say okay here you guys here’s a checklist or here filling a blank. You fill in a blank and then I’ll get this document and then I’m going to make up your legal document and then this is what is going to be so everybody’s on the same page is it?Does it work something like that?

John:

Um, there’s some people like you mentioned okay, we’re going to sign rolls okay, you’re going to do this you’re going to do this you’re going to do this. But the point is how would you even know what to look for? You know? Yeah, that’s a good question.

So again, I guess the short answer is it depends on and how many participants you’re looking?

Is it is it a handful of people? Is it three people? Is it 10 people 15 people?Generally, there’s sort of an upper limit of 35 people for securities laws purposes. But we’ll leave that out because I think what we’re talking about is something smaller. Yeah, the bigger the venture.

The more burden there is on the promoter to define what that venture looks like to define what it will entail. Including to define what are the risks associated with the venture? So the bigger the bigger the joint venture you intend the more people you intend to solicit than generally the more information you or the core group will need to put together in a presume what you’re referring to Cordell is a private placement memorandum.

Yes a PPM. A private placement memorandum refers to the fact that, Securities can either be offered publicly or privately. So, in this instance, it would be a private offering of a security. Ownership interest in this joint venture. And the,

The information about the joint venture. About its scope about its risks about the projections of what you hope it will generate in a return is something that generally the promoter puts together. You may know. Who you want to go out to who the pool of people are that you want to go out to and you might structure the joint venture in a way that that fits the interests or needs of those people but generally speaking if again if if we’re talking about a handful or more of people then it would probably be on you or the core promoters to come up with the plan including some sort of written offering statement.

PPMs are not required in all transactions but generally speaking again depending on who your audience is again based on their sophistication and experience based on their net worth etc. You may need to provide more information in some cases or less information in other cases in order to attract those investors.

But it’s a function that the core group or individual puts together then circulates. The two potential investors and you can get feedback from investors that say I don’t like this type of venture. I don’t like this type of structure. I don’t like this type of return and so you might modify it before you actually start taking money.

Cordell:

Okay, one more question for your time now for things at a person to do this to generate a joint venture, what is the cost illegally to do all the paperwork around what’s the range?

John:

Well, that’s a good question. Just to keep it very simple and again folks we’re talking in generalities today.

I look forward to having more conversations with you Cordell where we can dig deeper into some of these points. So today is not definitive legal advice for orally talking about generalities what it will take in terms of paper what it will take in terms of structure and management what it will take in terms of cost will depend.

On your specific project. But, in and this is a gross generalization based on looking back over the last few years the transactions that I’ve handled for small groups of investors. The cost is the cost typically of organizing an entity and the more entities that you want to use and by entity I’m referring to a limited liability company or an LLC or a corporation.

There’s cost associated with organizing an entity if you plan to have multiple entities then obviously the cost of organizing those entities goes up according to the number that you have there will be at least one or more different contracts that find the different members, it could be a single operating agreement or a shareholders agreement and operating agreement is the is the, Just as it suggests the operative document for the members, the owners of a limited liability company in the case of a corporation, we call it a shareholders agreement in the case of a partnership we might call it a partnership agreement, but it’s an agreement that defines what the rights and the obligations of each of the parties are in some JV’s there is a management company that exists as a separate entity and the JV LLC will contract with the management company to handle.

The management there is a loan documents or there are loan document. To be reviewed in the case where the JV is borrowing money either to acquire property or typically to acquire and renovate or construct property, so there might be construction loan or purchase loan documentation there is depending on the nature of the project applications that have to be made or may have to be made for land use permits for building permits to a city or a county.

Again, very important to define what the project is to understand what the different aspects of it are and what are the different paper needs of all of those different aspects of the project but to boil down your question to something really simple and basic generally speaking a an operating agreement for a small number of investors again a handful of investors typically you could go anywhere from five to ten thousand dollars.

It can get even crazier than that depending on again the complexity of the project the type of investors the number of investors, so just the cost of creating an agreement that ties the joint venture together. For ten and then the other costs associated with other contracts and applications that you make for permits etc. all have the their own costs but the organizing costs are generally the cost of creating an entity in California.

Filing articles of incorporation or articles of organization is measured in hundreds of dollars low hundreds of dollars. The state of California requires an annual minimum payment of $800 to the franchise tax board in order to maintain and operate an LLC or a corporation. And then there’s the cost of creating the operating agreement to shareholders agreement or partnership agreement.Those are your basic setup costs.

Cordell:

Okay, well right that’s going to be it for this one. So everyone hopefully next time sometime next month, we’ll have John back. John how can people get in contact with you?

John:

Thank you. Cordell, it’s been a pleasure. My offices are in Berkeley, California.

My telephone number is 510-647-0600, my email address is John J. O H n at metal long string of letters without breaks at J the initial. Gutierrez law the outcome that. It’s one word j g u t i e r, r e z l a w.com. John F. J. Gutierrez law.com, okay, all right all right then now it’s been a pleasure have a good day stay safe everyone look forward to meeting you with you again, okay bye for now.