The Real Estate Espresso Podcast

We’re going to look at a sale offer of a commercial office building and we’re going to dissect the viability of this offer. The seller in this case is offering to sell a property that has an as-is appraisal for nine million dollars from a major brand name commercial brokerage house and appraisal firm. The seller purchased the building a couple of years ago for 5 million dollars. He is willing to seller finance the building with $750,000 in secured debt and another $2.25M in forgivable debt that would be unsecured. The offering prospectus has a plan to convert the building to residential, and the assertion is that the building would be worth $17M after the conversion is complete and leased up and stabilized. The building is currently 50% occupied. The question is whether this offer is a good deal? ------------------- Host: Victor Menasce email: podcast@victorjm.com

Isabel is based in Phoenix Arizona where she owns and operates a portfolio of residential assisted living homes. She also runs the RAL Academy which has trained thousands of owners and operators how to develop and run successful residential care homes across the nation. To learn more, and to connect with Isabel, visit RALAcademy.com.  --------- Host: Victor Menasce email: podcast@victorjm.com

Noel Walton is based in Killeen Texas, home of the US Army's Fort Hood where he and his colleagues have formed "The Joint Chiefs of Real Estate" (JCORE). They are investing in multi-family assets and are bringing military discipline to the world of real estate investing. To connect or to learn more, visit jcoreinvestments.com ----------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we’re talking about how this business looks easy from the outside. I had dinner with an investor last night and they kept marvelling at how easy we made these huge projects look from the outside. Well, I’m here to tell you that nothing could be further from the truth. Today’s show is all about problems. Problems, problems, problems. They seem to be everywhere. Let’s be clear. This is not whining or moaning and groaning. Although to some, it may sound like whining from a distance. Real Estate development projects are conceptually simple. But it’s the thousands of details and regulations spanning everything from design, to construction, to capital to entitlements and tax. Each of these steps represents an opportunity for a problem. On today’s show I’m going to just touch on a few. ------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about how to navigate economic cycles. In a rising market, everyone looks like a genius. The rising tide lifts all boats and celebrations abound each passing month. Some of that is real wealth creation, and some is paper wealth creation that might take a very long time to realize. We are absolutely in a destructive environment for many on a global basis. At the same time as we are experiencing supply side shocks to the economy, our government and central bankers are trying to tame inflation by increasing interest rates to reduce demand. An interesting thing has happened during this economic cycle in real estate. We have not lowered our standards for underwriting in order to meet the more competitive market environment. We know that economic cycles happen. The cause might be unknown. The timing is unknown. The depth is unknown. But you know that there will be an up cycle and a down cycle. Anything you do in the world of real estate investing has to be designed to span economic cycles. When you buy a building and sign a loan agreement with a 25 year or a 35 year amortization, you know that there is going to be a recession during that period. There might be three recessions or maybe five recessions during that period. Nobody knows how many. But you had better design your project to survive those up and down cycles. ----------------- Host: Victor Menasce email: podcast@victorjm.com

There are numerous articles out there in the mainstream media ranging from the Wall Street Journal to Fortune Magazine stating that we are now in a completely different market compared with the past two years. The articles then go on to assert that we cannot rely on historic data for comparable sales because the market conditions have changed. On today’s show we are asking the question about whether we truly are in a new housing economy? What methods can we use to determine property value? If you ask any appraiser, they will assert that the traditional method of valuing property looks at a trio of methods. Comparable sales Replacement cost Multiples of net income Professional appraisers look at all three of these metrics and then decide which of the three should take precedence in the specific circumstances for a subject property. --------------------- Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are talking about leverage and the impact of rising interest rates on apartment owners. Leverage in any transaction can be your friend and it can also bankrupt you.if you are over leveraged. Many investors have been betting on inflation continuing to rise uniformly across the economy. When prices rise, then eventually wages will rise too in order to keep pace with inflation. Operating expenses will increase, but on average rent growth will outpace the rise in operating expenses. But what about interest rates? What if interest rates rise so fast that the result is negative cash flow? Investors have bid up the prices of apartments over the past couple of years to levels that make no sense to me. We have read the reports of cap rates approaching 3.5% in many cities across the US including Austin, Denver, Nashville, to name just a few. When interest rates are pushing 4.5-5%, then the bank is earning higher yield than you are as an investor. That is very reminiscent of the 2007-2008 timeframe. It’s as if investors failed to learn the lesson from the 2008 financial crisis. ------------------ Host: Victor Menasce email: podcast@victorjm.com

On today’s show we are discussing a question that I get very frequently. So I’m not going to attribute the question to any single listener. The question is whether: A three story 30 unit apartment building with below market rent is a good purchase to reposition and increase rents up to market as a value creation play? The theory is that the property has been mismanaged and that by making improvements to the property you can increase rents and therefore increase the value of the property. The fact that the property has below market rents means that the building is very likely an older building. This means that the building is definitely going to be positioned as a C class building and it will be virtually impossible to position the building as anything but C class. ---------------- Host: Victor Menasce email: podcast@victorjm.com

Emma Powell is based in Salt Lake City Utah where she runs a multi-family investment club that had its roots in the syndication business. Yo connect with Emma visit http://highrise.group. You will definitely want to hear this fascinating perspective on another way to participate in the world of large scale apartment investing.  ------------------- Host: Victor Menasce email: podcast@victorjm.com

Loe Hornbuckle is based in Dallas Texas where he leads the Sage Oak group of Assisted Living and Memory Care homes. Loe is a business partner of mine in the assisted living business and on today's show we're talking about the lessons learned between generations of new service offerings being introduced into the marketplace. The Sage Oak is hosting the grand opening of its newest campus in the North Dallas suburb of Denton Texas this weekend. To connect with Loe, visit goodhorncapital.com, or thesageoakcompanies.com.