SESSION 1: Investing 101
The First StepsTo build a successful real estate investing business, you need a portfolio. Your portfolio is the showpiece for your investing accomplishments. Who should see your portfolio? Future investors, partners and clients. The key to beginning your portfolio is to make that first investment. Chris’s advice? Just do it! Many real estate professionals hold themselves back because they’re scared. Chris encourages everyone to take the leap, and he shared some essentials practices and investing terms to set your investing career up for success. Make sure you have an investment plan that answers these questions: who, what, when, where and why. For example:
- Who: Me or partners?
- What: Condo, 2 flat, retail, etc.?
- When: Now, three months, six months, etc.?
- Where: In an established area, in a path of growth?
- Why: Quick cash, medium hold, retirement?
Essential Investing TermsQualifiers of Return All investment properties should be measured by Qualifiers of Return. There are many kinds of qualifiers: ROR (rate of return), ROI (return on investment), ROE (return on equity), IRR (internal rate of return), COCR (cash on cash return) and more. Chris recommends finding a model that works for you. Net Operating Income (NOI) How much NOI does the property generate today? And how much will it generate when you’re done with it? Calculating and understanding NOI is crucial to producing a profitable property. Familiarize yourself with this basic calculation:
- Income – Operating Expenses = (NOI) Net Income
- Cap rate = NOI / purchase price or your value
SESSION 2: Understanding Cap Rates & Identifying Investments
Key Term: Direct CapitalizationDirect Capitalization is a percentage that relates to the value of an income-producing property to its future income, typically expressed as Net Operating Income (NOI) divided by Value (or purchase price). When calculating cap rates or understanding how a cap rate was calculated, you should be familiar with Direct Capitalization. Rental Income & Calculating NOI Of the many kinds of rental property incomes, these are the most popular:
- Absolute Net Lease: tenants pay all operating expenses – most common in investment sales
- Hybrid Lease: negotiated between the two parties
- Absolute-Gross Lease: owner pays all
- Potential Rental Income (PRI) – Vacancy & Credit losses = Effective Rental Income (ERI)
- ERI + Other Income = Gross Operating Income (GOI) – Operating Expenses = NOI
- NOI / Value = Cap Rate
SESSION 3: Building Wealth Through Buy & Hold Properties
Implementation & OperationsMaintaining and operating a buy and hold property means you need to manage your property with reliable systems. Jessica defined two kinds of systems:
- Hard System: procedures and manuals
- Soft System: property management software
StabilizationStabilization means you’re finding the right balance of rent to get the best NOI possible. To do this, you need quality renters. If you had these quality renters in mind when you acquired and renovated your property, this shouldn’t be a problem.
Exit StrategySo, you’ve acquired, renovated and held a property for some time, and you’re ready to move on. What’s your exit strategy? Refinancing isn’t necessarily the end. “The end” is when you sell your investment property and purchase something else. Jessica challenges us to think of the next steps, the next property or the next big source of income.
SESSION 4: Diving Into Fix & Flip Investments
Five Keys To Success:
- Make money when you buy.
- Know your numbers.
- How will you produce the capital to pay for the property?
- Selling time to make a profit.
Buying A Place to FlipKnow the neighborhood! For a first flip, Mark recommends looking for a standard one to two or three to four-bedroom place. Look at the property not only as a source of profit but also as a place where you can add value. Mark warns against making your first flip a full gut rehab.
Analyzing A Fix-And-Flip PropertyThe approximate cost for a rehab can be calculated by multiplying the total square footage by $25 per square foot. As a real estate investor working with fix-and-flips, you should learn how much it takes to do a bathroom or a kitchen remodel off the top of your head. Knowing these costs will come in handy when calculating your After Repair Value (ARV). Know the demographics of the area. A smart investor knows the neighborhood, the market, the turnover rate and more. When you do the research, you can choose smart, accurate Comparables (Comps). Mark recommends starting with the best rehabs you see and working your way down.
Key Formulas: After Repair ValueAcquisition + Project Cost = ARV In the deal breakdown, once you calculate the total cost of the rehab, your ARV should hover around 70%. Why 70%? To mitigate risk. You never know what complications may arise. So, you’ve identified the property you want to invest in, you’ve completed your neighborhood and market research, you’ve run some early calculations for ARV, and now you’re ready to make the purchase. Where can you go to get capital? There are tons of sources at your fingertips! Traditional banks, private lenders, high net worth individuals, family & friends, institutional hard money, joint venture partnerships, equity and an entity/LLC/corp.
SellingWhen selling your flipped property, don’t feel constrained by the date the property will officially be finished. Pre-selling the property and involving the buyer in the finishing touches will make your investors really happy. Mark recommends having a minimum of five “wow factors” in your details. Build those moments for your ideal buyer so they don’t have to do all the work when it comes to imagining themselves in the space. And last but not least, always stage your property.
SESSION 5: The Client Experience: Putting This Into Practice
Confidential Property EvaluationA Confidential Property Evaluation is the commercial real estate version of the CMA. When looking at this document, you should also include what the building next to the property is selling per square foot and what they’re selling for an average cap rate. A Confidential Property Evaluation is your homework which proves your research and your knowhow. Numbers don’t lie. There is no emotion in commercial real estate because the bottom line is all about the NOI and the Value.
Build a TeamYour team should include:
- A commerical lender
- A commercial attorney (heads-up: they tend to charge by the hour instead of a flat fee)
- An insurance broker
- Property management firms