Tag Archives: 7million7years

Anatomy of a Commercial RE Investment – Part 3

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Hopefully, my last post gave you the numbers, and today’s will explain the ‘deal’:

Summary

So, here is the crux of the deal:

1. I have a property with one good tenant (they are cashed up … because I just gave them the cash!) and an easily rentable smaller area for a second tenant.

2. If I borrow 75% at 6.5% fixed for 7 years, I get $63,000 cash (i.e. TOTAL INCOME – TOTAL EXPENSES) in Year 1 to spend (well, keep some in reserve against future repairs, vacancies, etc.).

3. My deposit is $700,000 so that $63,000 is a 9% return on my own money (subject to those unforeseen costs that I mentioned in 2.) … not a bad return on cash AND I get all the upside on the property.

4. If the second tenancy is vacant for any reason, I still almost break-even.

5. If the second tenancy rents at only $6 / sq. foot I still net $43k per year; if I get $10 / sq. foot I net $83k.

6. Properties in this area sold for $80k – $120k per sq. foot; even though the market has softened somewhat (commercial generally works on a slower up/down cycle than residential) I am buying it for $60 / sq. foot … clearly, if a condo. developer knocks on my door in 7 years and offers me $120 / sq. foot, I’ve doubled the whole $2.6 Mill. (not incl. Realtor’s commissions) purchase price!

Note: Think about that – when people say that RE only increases with inflation, therefore stocks are a better option: I make $63k a year less costs (est. 25% as a contingency), say, 6.75% net. The property then increases to $3.4 Mill. over the next 7 years (that’s only inflation):

I earn: $362k in rents (after the 25% contingency against, repairs, and with a 3% rent increase each year)

plus: I net $700k on the sale of the property (I’m expecting to make close to double that, but let’s just accept inflation for now).

I return: That’s a total of $1.362 against the $700,000 that I put in (the bank put up the rest, and they’ve already been paid interest and their money back in these numbers) or 11.5% on my money

I expect: But, that’s only if the building appreciates by inflation; I expect to net at least $1.5 Mill. on the sale of the property (if not $2.5 Mill.!) which brings the return up to 20% … secured by real-estate, no less!

7. If no purchaser does come along, I am earning a neat 9%+ on my $700k until somebody does buy it!

So, by all measures, this is a great deal … some common sense and some simple number-crunching tells me that, no ‘cap rates’, ‘proforma’s, or any other complex financial manipulations necessary.

BTW: I did a quick ‘drive by’ but haven’t even been inside, yet. It doesn’t matter … I won’t be ‘living there’ 🙂

Next step: tell the broker to make the offer!

Anatomy of a Commercial RE Investment – Part 2

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OK – close your eyes (actually, keep them open so you can keep reading!) and imagine the complexity of analyzing cashflows and proformas for a real-estate deal north of $2.5 million …

Daunting, huh?

Well, that may be how OTHERS analyze a deal, but not me … all of my deals are done on the backs of envelopes … well one clean sheet of paper. I have this one right in front of me, in my own scrawly handwriting.

On the strength of it, I have authorized my Realtor to make a written offer, with a $200k ‘earnest money’ deposit on the $2.7 Mill. office/warehouse. Sure, the proformas will come later, but I’ll get him to prepare those for the bank … while I’m at the beach or off skiing someplace!

Here’s what the piece of paper says:

Purchase Costs

$2.7 Million (incl. $100k broker commission)

$5k Building / Environmental inspections

$15k Closing Costs (legals, bank fees, appraisals, etc.)

Of these, the $5k for the inspections is my only financial risk, as I need to undertake these during ‘due diligence’ (we’ll talk about this in a future post if the deal gets that far).

Finance

$2.7 Million Purchase Price (incl. broker’s commission)

$ 2 Million to be financed

Note: this is approx. 75% of purchase price to be financed; this is high for commercial which can be as low as 60% being the maximum that the bank will fund.

$700k – so this leaves me 25% of the purchase price, or $700k, to find as a deposit.

Note: I’m sure that the owner’s won’t ‘carry back’ a note on this one, as the whole purpose of the sale is to raise cash to keep their business afloat or growing.

So, that’s the purchase / financing side of the equation, now let’s see if it can make me any money …

Income

$175k – Rent for Tenant 1 @ $8 / sq. foot

Note: the current owners will lease 2/3 of the property for the above fee (probably 5 years, with a 3% yearly increase)

$80k – Rent for Tenant 2 @ $8 / sq. foot (we need to find this smaller tenant)

Note: the property is street front with car park, so we feel is should be easy to find a second tenant in the $6 – $10 / sq. foot price range

$255k TOTAL INCOME

Expenses

Note: the GREAT thing about commercial properties is that most expenses (and in a ‘triple net property, all expenses – unfortunately, this is NOT one of those) are handled by the tenant, leaving me just …

$45k Taxes

$7k Building Insurance

$10k Management Fees

Note: Rental management fees can vary from 4% – 6% of the rent if you don’t want to deal with the tenants yourself; keep in mind that commercial property is very different to residential and you won’t have as many issues dealing directly with commercial tenants – they are responsible for all repairs & maintenance … but, if the roof springs a leak, you’ll be expected to act quick! I will use an agent ( my friend).

$130k – Bank Interest @ 6.5%

Note: this is the ‘biggie’ and I haven’t spoken to any banks, yet; obviously, that’s my next port of call but my Realtor friend tells me that I shouldn’t have any problem getting funding fixed for 7 years (or a 25 year P&I loan with a 7 year balloon) around these rates. Variable can be as low as 4%, but I prefer to ‘fix my costs’.

$192k TOTAL EXPENSES

In the final part [AJC: when I return from my ‘winter break’ on Jan 5], I’ll summarize this all for you and explain why I like the deal so much …

Anatomy of a Commercial RE Investment – Part 1

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I just answered a question on commercial real-estate investing and thought that there’s no better way to explain the process than by showing …

… coincidentally, I have been working on a commercial RE deal in the $2.5 mill. price range, so I thought that I should simply share.

Warning: like most deals, this deal could simply fall through at the first hurdle. Let me explain by sharing the story so far:

All good real-estate transactions, in my opinion, start with finding a good broker who is working for you.

As it happens, I have a close friend who is a commercial real-estate broker who meets the ‘trifecta’ that I mentioned in that last post: (a) I like/trust him, (b) he works with commercial RE in the area/s that I am interested in, and (c) he invests heavily in commercial RE himself (buy/hold).

I have been pestering him for the last 4 years to find me a deal … interestingly, and this is something that you should take mental note of, he says that he is asked by most people he meets to ‘find them a deal’ but almost none ‘pull the trigger’ …

… so, forgive your broker if they don’t fall all over themselves with excitement until you actually close on your first deal with them 😉

Anyhow, finally a deal came up that seemed to fit my criteria. I didn’t even request financials at that stage or see the property: on the strength of my friend’s recommendation (it was a deal he wanted, but the $700k deposit was a bit too steep for him) I authorized him to put in a written offer.

I don’t recommend that you do this, you will pick up where this post leaves off …

Anyhow, the current owners occupy the premises (they were planning a sale/leaseback i.e. they sell the property to me, then lease 2/3 of it from me on a 5 year lease) and decided to first see if they could simply refinance their loan and take some cash out.

Naturally, in the current market this has proved difficult, so they have put the property back on the market … my friend is the listing broker, so I have first ‘dibs’ on the deal.

So, I am now at Stage 1: I have a deal in front of me; presumably, motivated sellers (we’ll find out, if they accept the new offer); and, I need to decide whether and how to proceed.

In Part 2 I’ll step you through exactly how I decided this was the ‘deal for me’ …

Rich Rat, Poor Rat

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This video is essentially an ad for Robert Kiyosaki’s (Rich Dad, Poor Dad author) board game … a game that I own but have NEVER played. But, the video is also a snapshot of how you can use assets to buy consumer goods. Watch the (visually OK, but aurally uninspiring) video, then read on as I have some comments …

[AJC: Finished watching? Good …. now read on ….]

1. The assumption is that you are smart enough NOT to finance a depreciating ‘asset’ (actually, liability) and save up enough money to pay CASH for your boat: GOOD

2. Can you see how Robert Kiyosaki then suggests that you buy a cashflow positive property, using the cash that you saved for the boat as a deposit on the property instead? Robert implies that the property produces enough cash to then pay for the loan repayments on the boat: BETTER

But, Robert is suggesting that we BREAK a key making Money 101 Rule: that we should borrow to by a consumer item (this is BAD debt); Robert also suggests that ‘delayed gratifiction’ is good. So, let’s make use of this to see if we can come up with a better outcome.

Using a very simple loan calculator, I find that the $16,000 boat will actually cost us $21,600 over 4 years (assuming 10.5% interest, and $343 / month payments) …

… but, if we instead SAVE the full $750 / month that the property spins off as money in our pocket (after mortgage, etc.), we will have SAVED up enough to pay CASH for the boat in just under 2 years (21 months)! What’s more, over the four years that we have NOT been paying the boat loan, our money has been earning us approx. an extra $100 – $400 in bank interest.

OK, so the $100 – $400 extra interest we earn (if the money just sits in CD’s) is not exciting, but also SAVING $5,600 … a total of nearly $6k … surely is? So waiting less than 2 years, then paying cash for the boat, thus saving ourselves nearly $6,000: BEST

There is an exception: where the expense is a business expense it may be OK to finance … Robert gives the example in one of his books about how he was going to buy a Ferrari, but his wife (who’s obviously smarter – as well as better looking – than him) told him to buy a self-storage business instead, and use that to fund the payments on the Ferrari.

Smart … but, I’m sure the IRS would have some words about the deductibility of a Ferrari as ‘company car’ for a self-storage business 😉

Accumulating 7 million dollars worth of property in 7 years?

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I wrote a series of posts about how to build a Perpetual Money Machine, and Caprica asks:

I thought the title of this blog was called 7 million in 7 years, not 1 million in 20 years?

How do you go about accumulating 7 million dollars worth of property in 7 years and be in a net cash flow positive position by the end of 7 years?

Here’s how I made it to $7million net worth in just 7 years, Caprica:

http://7million7years.com/2008/04/25/my-7-million-dollar-journey/

But that’s not the question that you actually asked; you asked how to build up $7 Million dollars worth of PROPERTY (i.e. real-estate) in 7 years, and that’s another matter entirely.

For example, you will notice that I didn’t reach my 7m7y from real-estate alone (and, you’re not likely to be able to, either): my ‘energy source’ was a business (actually, more than one), but my ‘capacitor’ was (largely) real-estate.

If you are asking if you could build a $7 Million real-estate portfolio in 7 years, using just your income from a job (even a pretty high paying job) I would have to say “not bloody likely, mate” …

… your income just can’t ‘fuel’ enough real-estate deals to produce the annual compound growth rate that’s required!

To see what energy source and compound growth rate combination that YOU need, FIRST you must start with knowing your Number / Date:

If you need, say, “1 million in 20 years’ (and, let’s assume that you’re starting from, say, $10,000 in the bank instead of my $30k in the hole), a job (as your ‘energy source’) + real-estate together with stocks (as your ‘capacitor’) should do the trick.

But, if it’s “7 million in 7 years” you want (starting with the same $10k), then you’ll be needing a more aggressive set of ‘energy sources’ and ‘capacitors’ for your perpetual Money Machine, i.e.:

Your own business (excess cashflow) + real-estate.

It’s all in your required annual compound growth rate … find yours, and work backwards from there …

… but, Caprica – as I suspect do many of my readers, after all of this time – already understands this:

I realized after I posted my response I already knew the answer …, which was to start one or more businesses to help you generate enough money to buy your passive income source.

A journey with George …

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Perhaps I just like this video because the ‘talking head’ is a fellow Aussie – although, I don’t know who he is or what his credentials are (I do know that if you watch all three of the videos listed on his blog you’ll end up with an ad for a new ‘personal finance’ educational board-game) …

… but, I do like his neat little whiteboard summary of the problem of ‘investing’ to chase capital appreciation. This was the sort of ‘wrong thinking’ that fueled the property market booms, both here and in Australia.

And, after every boom comes the bust 🙂

Commercial RE … first steps!

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strip-mall-gilmer-rd

I am working on my first US commercial real-estate deal right now and by coincidence received the following question from MoneyMonk:

I plan to buy commercial Real Estate (strip mall) in the near future within the next 4 yrs. I want your advice on some things.

I want a property between 350-400k, I plan to put down $80K <- which will take me 4 yrs to save/invest

I want a commercial re agent to search for me, Im think Im looking at 8-10% commission to give the broker;
I want to form an LLC for my company, apply for a federal id, get a good CPA, a lawyer to form the LLC, umbrella insurance for about 1 million (u never know, The U.S. like to sue).

For as cap rate I want something above 7%. Am I’m missing something???

I also want to visit a banker and ask about financing. Is commercial re different from personal RE? for as terms?
I know any decent bank want you to show a good income, credit and some cash in the bank. What are good questions to ask a banker?

First I would like to congratulate MoneyMonk on being so forward thinking; it doesn’t hurt to talk to a Banker upfront, but my suggestion as to the very first place to start is with the following four steps:

1. Identify the type / location / price ranges of properties that you want to buy – MoneyMonk is targeting “strip malls … between 350-400k”.

2. Start researching the types of properties in the areas that you are interested – with 4 years to go before MoneyMonk has saved sufficient deposit, nothing else matters right now other than the research: LoopNet and RealtyTrac are great places to do this research.

That’s it for now; when the deposit has been saved:

3. Find a real-estate broker – you’re looking for the trifecta: (a) a broker that you like/trust, (b) one who works with commercial RE in the area/s that you are interested in, and (c) somebody who invests in commercial RE herself.

Keep in mind that the best deals are NOT usually on Loopnet /Realtytrac – they are what the brokers haven’t been able to offload, so are probably NOT the best deals around – the best deals are still probably with the brokers. It’s still an “old boy’s club”, so don’t expect your broker to bring you these deals first time around … your first acquisition is unlikely to be your best!

4. Find a property that you like / can afford / that meets your criteria and put a refundable deposit down (subject to: finance, partner’s approval even if you don’t have a partner, and due diligence).

… then approach the banks for funding.

The Lazy Way To Riches

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picture-2

I am indebted to KC for showing me the lazy way to riches …

… well, I already live like this (have done so for years) and it hasn’t appeared to have hurt my bank balance – indeed, it seems to have helped!

But, it’s always nice to see all of these Great People of History who agree with me 😉

Special Announcement!

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billboard2

I have been working on a project … call it a labor of love (when you find out what it is, you’ll decide that if this is my idea of ‘love’, I need psychiatric treatment) … and, I want you to participate!

Let me take you back to where this project had it’s genesis:

In 1998, I was struggling financially and directionally … I had my two break-even businesses, a lovely wife and two babies, but no money and no major prospects: it would take a miracle to get the businesses above break-even.

Then I came across the concept of the Number.

A simple idea: your Number is the amount of money that you need to have set aside (by whatever Date you happen to decide upon) so that you can be financially free to [insert goal of choice: retire; play golf professionally; write a book; volunteer abroad; move into the old-people’s home or Florida, which pretty much amounts to the same thing; etc.].

At the same time, I found my Life’s Purpose: to be constantly traveling mentally, physically, and spiritually …

… which means nothing to you, but meant everything to me (which is all that counts, right?).

Understanding my ‘life after work’ dream (in my case, it meant discovering my Life’s Purpose) told me that I needed $5 Million within 5 years. A major wake-up call considering that, at the time, I was $30,000 in debt!

If you’ve read my $7 Million Dollar Journey you will know that, because I found my Number, I made it.

I decided that I had to give back, by helping others to understand, find, and achieve their Numbers, as well …

… so, to help you figure out your own Number (and, Life’s Purpose … if you so desire) I have created a new web-site.

I have also created a unique home for you on the Internet, a place where you can Share Your Number with like-minded people … hopefully, you will connect with others who can help you on your way, and you may even be instrumental in helping them!

Take a look at these sites, then join up and Share Your Number … it’s easy, fun, and could be very, very rewarding for those who actively participate.

As readers of this blog, and ‘charter members’, your membership will always be free. And, tell your friends, they can be charter members, too 🙂

The only ‘catch’ is that I have not officially launched this site, yet, so you will be the ‘beta testers’ … try it out and let me know what you think using the form, below (just type then ‘submit’):

Blogs, blogs, and more [bleep'ing] blogs!

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blogs-illo

It seems like I am embroiled in a torrent of writing; even my 11 year old daughter asks why I am working at my computer all day on something that makes me absolutely no money … she suggests that I go out and get a ‘real job’.

I guess neither my daughter nor I actually understand the concept of ‘retirement’ 🙂

Which leads me to Dustbusterz’s e-mail opinion, which may be shared by others, hence my posting it here:

You post on too many places, and it becomes confusing and difficult to keep up with the concept. It seems you go to one site, get a little info, then go to another site, get a little info , then get a bit of info in email. And trying to tie it all together just wracks the mind. I believe it would be much simpler for everybody if you chose one concept(such as video posting every day) instead of this post here post there kind of treatment.

Thanks for sharing, Dustbusterz!

If it helps, here’s how it works:

Blog 1: 7million7years.com – This is my main blog where I share ideas and strategies on Personal Finance. The rough framework is sketched out via the tabs across the top (eg Road Map to Riches; Making Money 101; etc.).

Blog 2: 7m7y.com – Because blogs (yes, even mine!) can be ‘theoretical’, I thought that I would start a 7 year ‘experiment’ by helping 7 volunteers (and as many of our readers as want to participate) to make their Number (hopefully, in the millions). This is a sequential process, albeit tailored to the needs of each of the 7 … making money takes time, so the ‘lessons’ will inevitably be spaced out over a long period of time.

Blog 3: ajcfeed.com – This is not really a blog at all, but my live Internet chat show … my son’s idea; not sure why I am doing it, but I enjoy the ‘real time’ aspect. And, my Youtube videos (posted at yet another site: ajcvault.com) get multiple viewings. I guess some people like to hear an Aussie with a funny voice/accent speak!?

Whereas Blog 1 is random/theoretical, Blog 2 is paced/practical and centered around the needs of each of the 7 MITs.

Blog 4: findoutifyoucanmakemoneyonline.wordpress.com (which has taken a pause, while I set about launching Blog … actually, Site … 5) – This is purely for fun and to see whether it’s possible to make money online … with this blog it’s ME who is the subject of the ‘experiment’!

Blog 5: There isn’t one (officially) yet … but, I will be making an announcement very shortly! In the meantime, you can get a ‘sneak peek’ here.

Read one or all blogs/sites, together or independently … it doesn’t really matter as long as we can all get something out of it.

Thanks for your suggestions, Dustbusterz, I’ll see what I can do (like this post for example) to make it all easier to navigate!