A commercial asset sale process can be lengthy. From marketing to close, the process can take a year or more, and I’m going to argue that you should like your real estate broker before you go through such a long process with them.
Find a Broker Well in Advance of the Sale Process
I don’t mean a month in advance, I mean closer to a year. Why? You will work with this person for at least a few months. Sales are intense, require daily communication and sometimes simply don’t work out despite everyone’s best effort. This is likely to be a lengthy interaction with someone who will leave an imprint on your life.
From the get-go, you should like the broker’s “type”. We are all different as individuals and now, more than ever in history, we have the option of choice in almost all aspects of our lives. Do you prefer intensity, or a more analytical approach? Are you annoyed getting piece-meal information and prefer a thought-out, spaced-out process, or do you simply need to know where the listing/deal is “at” on a daily basis (at the very minimum)?
The Broker should be able to prove to you that:Continue reading
The excitement and stress of negotiations have reached their peak as initial negotiations are concluding for your apartment acquisition. Now the realities of due diligence are rearing their ugly head.
Due diligence is an unglamorous but vitally important part of any deal. At face value, it involves the careful review of a mountainous amount of documentation. But if done right it also requires discussions with a diverse array of employees, vendors, lenders, government agents, and the current owner. These are parties that you must work with carefully, hoping that they will be honest and forthcoming with you.
Unfortunately, due diligence is perhaps best approached with the belief that the vendor is trying to hide something from you. That level of caution is what is needed, because although there is tremendous momentum when a deal is moving through the offer process, a prudent purchaser should always have in mind the option to withdraw from the process if faced with a realty which you are unwilling to accept.Continue reading
Financing is vital in real estate transactions. Be it a 10-unit building or 1,000-unit portfolio, investors want positive financial leverage. In parallel to this, lenders (including CMHC) are eager to finance acquisitions, but only on their own terms. While the purchaser would like to put no money down, few lenders will accept this. Finding a middle ground between these two perspectives is what informs what percentage down payment the buyer will need.
Too often, investors make mistakes when estimating the down payment needed for an acquisition. This is because the needed down payment is a moving target for every lender involving many variables. These include the cost of funds for the lender, what the asset’s stabilized net operating income is, whether there are any capital expenditures needed, and are the rents in place real or do they need to be normalized.Continue reading
One of the things that we commonly observe in the apartment building market are broker listings that state “potential revenue.” What this really means is that the rents in place are not up to market standards. A new buyer can purchase this property and slowly increase the rents as tenants leave, thus increasing the value of the building.
To put this into perspective, here is an example. Let’s assume that a building that generates $100,000 in net income would receive a bank evaluation of approximately $1.667 million in today’s market. However, if the same building were to generate $110,000, the bank would value the property at $1.833 million.
Submitting an asking price of $1.85 million and informing potential buyers that there is potential in the rents is a strategy that may backfire. If the buyer is working to increase the rents, they would want to ensure that they are getting a good return on their investment. This is why owners must ensure that the rents are in line with the market average.
A portfolio of apartment buildings can potentially produce a good revenue stream, but just as is the case with any large-scale real estate purchase, buyers must do their research and observe market trends before closing any deals. A combination of proper research and assistance from a trusted real estate professional can help you find a property that suits your needs
Investing in real estate offers the chance to make money through smart decisions and good timing. But there are always two sides to every story. Money can be lost almost as easily as it can be made.
In his book entitled The Black Swan, author Nassim Taleb discusses the concept of losing money. He begins with a simple, yet memorable quote: “Well, I can lose money.” This quote is applicable to several facets of our daily lives, especially where some form of risk is involved.
Taleb goes on to say that “this phrase is not informational unless you can attach a quantity to that loss.” This is true, as it is often difficult to predict how well your investments may fare in the future. If you invest in or own a company, there is a chance that it could be out of business as little as a year from now.
Real estate is an entirely different investment vehicle. In fact, some people prefer it over other types of investments because, unlike stocks or bonds, it is a tangible object. It is, however, not immune to generating losses for those who invest in it. Even if you focus on an up-and-coming area with a strong demographic, you might operate it at a loss for a while before turning profits on your holdings. Sometimes a real estate investor underestimates the costs of renovations, or the time it takes to find tenants thus not meeting the cash flow objectives set.
Elements such as inflation and price asset depreciation can cause other losses for buyers. But if they maintain and manage their assets properly over the holding period, the properties will eventually appreciate in value.
Maintenance and management are crucial parts of the ownership process, as is dealing with tenants and collecting rent. If a property is well-kept, it will be more likely to attract tenants, thus allowing the owner to generate cash flow, and with time obtain the capital appreciation.