Discussing Due Diligence for Passive Investors: How to Use Our Checklist, Part 1 of 2

Are you one of the many busy professionals working in offices day in and day out? Do you wonder how some people grow their wealth fast, retire early and play on work days? Well, you're in luck because Ginny Bolling hosts this show Pivots of Prosperity where she interviews people that can do just that play on work days. Many guests have become financially free. She also interviews people that are on their journey and people that are in support roles like attorneys, contractors, brokers and others. Commercial real estate is the common element. She is on a mission to be sure. Busy professionals know they can own substantial commercial properties too, like apartments, self storage facilities and others, and not have to do the work managing them. Passive investing is the key. Syndications are the typical method. Tax write offs are some of the biggest rewards. Ginny and partners find the deals, build a strong team and business plan, then offer the investment opportunities to passive investors. New episodes are released every Tuesday at 12, so watch for new releases. If you want to get involved, let us know. You need to get pre qualified to hear about most deals. See the show notes for contact information.

Hi there, I am Ginny Bowling with Pivotal Real Estate Investments and I would like to talk with you about investing in commercial real estate passively. And with that you can build cash flow, build wealth and also improve communities, which is what I think is wonderful. So I have on the website that's called pivotalrealestateinvestments.com a due diligence checklist that a lot of people don't see for some reason. So I wanted to do a little recording on this and I will share my screen so that we can go through it a little bit together because it's not entirely self evident what is meant by some of the questions here. Apartment syndication due diligence for passive investors. So it's very different when you're the passive investor because you have the business plan that you're able to look at and the benefit of all the due diligence that the general partnership team, the people that have been that found the deal, that have been analyzing all the different attributes of the property and the, and putting together the plan. And so that due diligence is very different from that of the passive investor that's debating about placing money into the investment. So let's go on down here. You need to know your goals first and foremost. That's what this says here. So you'll see on the left margin that this is all about the sponsor. Now we call the sponsor now. That's the general partnership team. It's also Referred to as the jockey. Oftentimes they're the operators. There's a lot of names that we use to describe the sponsor, but you want to know like and trust them. These are key factors. Everything here in this column is a key factor. And then these questions may be questions for you to ask yourself or for you to ask them. So right here, top, most important, do you know like and trust the lead sponsor or group with your money? That's critical. And it says here, this is the most important factor. If you answer no here, you can stop here and pass on the deal. Very big time saver. So think about that. First and foremost, I'll quit waving this around. Then there's the team. Who are the key members on the team and what are their roles? You want to ask that if it's not told to you. Usually we'll do a webinar and introduce an opportunity, an offering, and then you will be able to meet everybody on the team, which is one of the great things about syndications. Very different from REITs and other things where you don't know the people and don't get to go to the property. You don't know the property in advance. Most syndications, you can know all that now. More and more there's funds, whole big funds, where they have set criteria that they are going to invest in and they raise capital in advance to scale super fast. But for the typical syndication, especially if you're starting out, the idea is a one asset type of syndication. So you want to know who the key members are, the track record, what is the sponsor team's track record as a general partner, how many years of experience, how many units? So you can tell a lot by how many units that they own or have transacted and how many years they've been doing syndications in particular. But being in real estate now, I've been in real estate over 40 years. I bring a lot of experience to different teams, but I have not been doing syndications for years. So I have more experienced people with me that will ensure that there's plenty of experience so that there's not a concern for not knowing how to properly operate a syndication. So then going on, you have equity contributions. That's skin in the game. How much does the sponsorship team put into the deal? You can ask that and find out. We oftentimes will have. The team needs to keep a certain amount of liquidity. And so it's not going to be as high as you might wish, but it just depends on the deal and what's going on. So here we're into the market now and is it a primary, which is the lowest risk, Secondary, which is good, medium risk or what you can have tertiary and emerging markets, some of those can be really good too. But you just want to think about what it is and write your notes over here so that when you look back, you know if indeed it was something that you felt good about. So you might not want to invest in in small markets or you might want to pursue only those. Everybody's different. Is it landlord friendly? This is critical. Now remember this is. We're talking commercial real estate. So most especially in the multi family world, you want to know if it might take three, four months to do an eviction because that is a lot of money that you can lose when you're operating apartments. And so it's a whole different environment. Nothing that I will get involved with. Population growth. Do you see population growth in this market in the last five years? How many percent? You want to be sure that it's growing. You don't want to ever buy into a shrinking market. That's not good. That's pretty self evident. Income growth. Do you see income growth in this market in the last five years and how many percent? These things are usually quoted by the sponsors and you can double check by just googling it or any of a number of ways. You can go to the census Bureau. It's not that tough. Home value do you see home value increases in the market in the last five years?

So.

So if the home values are going up and you're investing in markets, then that makes it all the more substantiated that people aren't going to be able to afford housing and they're going to need to rent. Crime rate what is the crime rate in the market in the last five years? That's pretty self evident too. And then you're coming down here to the submarket which is getting down to the neighborhood level. Household income. Good neighborhood. Is it a good neighborhood? Higher income compared to the surrounding neighborhood is a good indicator. So you can take a look at if it's in a city, you can go to the city data. If it's a small city, if it's a big city, you probably want to zero into more of the subdivision area. And a lot of those are publicized. As far as population, household income, unemployment rate, you can go to citydata.com or any of the number things and get this information. Same with demographics. Is there a concentration of ages more than others? Apartment renters tend to be 18 to 40 years old. I don't know that that's. So that seems to be turning on its head a little bit, especially as more and more boomers are downsizing. We're not as reluctant to pay rent as we used to be. Major employers, this is critical. Who are the major employers in the market and submarket? Look for diversification of different employers and sectors. Not all jobs are created equal for sure. So some take heavy science backgrounds, some take heavy hospitality backgrounds. You know, you want to know where your property is located and what kind of employers are near there. If it's hospitality oriented and a lot of people are low wage workers, you don't want to be buying into a luxury apartment project that's in the wrong place. Just saying. Neighborhood retailers. Check for retail stores within 5 to 10 miles radius. Starbucks, Walmart. Dollar stores are key indicators of a thriving market because they do heavy duty due diligence on the market area. So you can pretty much follow especially the new stores that those market areas are. Really solid. Number of units. How many units does it meet your requirements? This is about the apartment project itself. It may be you only want small projects. You might want large projects. The class of the property. Class A, high end luxury apartment which is under 10 years old. Usually has high rent, white collar occupants, low to none repair. Class B is 10 to 25 years old, well maintained, mixed of white and blue collar, some maintenance required. Class C is 30 to 40 years old. Need maintenance, blue collar and lower rents. Your neighborhood can also be ABC too. I can't recall if that's in here. Occupancy. What is the current occupancy at the property? If it's less than 85%, how is this deal going to be financed? Because some banks will not do that. Then we get down to the financing. The type. What type of financing is it agency or bridge? Bank loan or seller financing. So seller financing you may already be familiar with. That's when you assume a loan or the seller is smart enough to realize that they don't want to give up the income stream so they'll finance part of it or all of it. Then they still have that income stream even though they don't have the property that they have to manage. Agency is Fannie Mae, Freddie Mac. Bridge loans and bank loans. They're different in that bridge loans are considered to be temporary. It's almost like a hard money loan. A lot of things go into that. We're not going to belabor that though right now. Loan to value the range from 65 to 80% is pretty normal. Higher the number means higher the leverage of debt, which is higher risk as well. The loan term, agency loan 5 to 12 years, bridge loan 1 to 3 and interest only is usually 1 to 3. And is there a balloon payment? When is it? Got to think about that. Because if there's a lot of assumptions on a property going in and it's interest only say for two years and you have a market that's been like we ours was going up, up, up for an extended period, then you may want to get something that's got a more stable interest rate for a longer period of time. Lender reserve Are there any lender reserve requirements for the selected financing option? That's very important to know too. The sponsorship team will be raising capital for the reserves as well as for the capital expenditures to improve the property. And we're coming up on halfway through, so I will stop after this probably. But the market cap rate. What is the market cap rate? So I talk about this one a lot. You can derive that a lot of ways brokers in the area can know for a certain asset type and location what kind of cap rate you might want to apply there as well as a broader generality as far as a cap rate. Lots of people talk and cap rate speak and I'm one that likes to do my best to research right down to the comps, the comparable sales that are being used for the property. Find out what that income was and what the sale price is. And then you've got genuine organic cap rate, purchase cap rate. That's the. What is the cap rate at the property for when it's being purchased? Exit cap rate. What is the exit cap rate if the property were to be sold or refinanced? Look for greater than the purchase cap has a rule of thumb kind of going along with that that you use a tenth of a percent per year that you're holding the property. So if you're buying a property at a 6 cap and you hold it five years, your exit cap rate would be 6.5 in this, in this approach. Now for where we are September 2024, where we've had high, high interest rates and the cap rates, it's been an inverted situation. Cap rates have been lower than what the interest rates are and you can't continue with that and you can't, can't hardly make money that way unless you do some other creative things. But in any case, the cap rate when you're exiting is normally higher. And when interest rates like now are going to be going down it could be lower and I'll leave it at that for now. We can debate this for hours, but annual rate increase is it 1 to 3% is conservative for assuming how much your rent will increase per year. The rehab budget, is there any rehab budget? If so, is it reasonable now, how would you know that? So the more deals you look at, the more you get to know. But pretty much 5 to 10,000 per unit is a fairly normal on the light side, amount to budget per unit. If you're looking at like one, maybe two bedroom units, the bigger the square footage, the more money. Of course it's very common also to be 15 to $20,000, especially if you're looking at a 1980s or or older type property. Just depends on what you're dealing with there. Revenue increase. What is the plan for revenue increase? Once closed, list them out so the presenting sponsors will explain to you what exactly is expected to bring the rents up higher and how much higher and see if that feels realistic to you. You've got to do a gut check on a lot of this stuff. These are assumptions that, that the sponsorship team has and so now we're down to profit split. I will stop here, page eight. We're halfway through and we will finish this another time. So hopefully that's helpful. I feel like there's a lot to talk about in some of these areas and so feel free to ask questions or make comments and thank you for listening and listen to the podcast like and share that would you? Because that helps a lot. And if you have any topics you want me to cover, please let me know. Thank you very much. Bye.