More Related Content More from Realty411 Magazine for Real Estate Investors (20) 12. 12
32
Maria Sol Bruemmer:
Lending Consultant and
Partner of Entrepreneur
Funding Experts
Maria Bruemmer
36
The Capitalization Approach
to Income Property Valuation
Dan Harkey
49
Have You Considered Adding
Brownfield Development to
Your Real Estate Portfolio?
Patricia Gage
55
An LLC for Real Estate
Investing
Stephanie Mojica
TABLE OF CONTENTS
Serving Investors Since 2007
Realty411
Photo by Max Vakhtbovych from Pexels
17
Live Your Life with Intention -
My Interview with
Jason Oppenheim
Linda Pliagas
24
Selling Sunset and Beyond
An Exclusive Interview
with Jason Oppenheim, Esq.
Star of Netflix’s Selling Sunset
Stephanie Mojica
13. 13
60
Retirement Savings Lost After
Investment in Fraudulent Company
Resembling SDIRA Custodian
By Stephanie Mojica
67
Strength in Numbers: Victor Cuevas
Gives Us Advice About Crowdfunding
as a Tool for Investments
Victoria Kennedy
73
Investors See Average Return
on Investment Down Amid Tight
Market plus Labor
and Supply Shortages
Stephanie Mojica
77
Picking The Right NNN Lease
& The Downfall of CVS
Clinton Lu
82
The Non-Owner, No Income (NONI)
Loan Solution
Rick Tobin
91
Home Equity Loans: Should
They Be Used to Pay Off
Credit Card Debts?
Catherine Burke
100
Young California Homebuyers
Are the 3rd Most Likely
to Need a Co-signer
Lauren Thomas
107
Sponsored Section
Realty411's REI Resources
FEATURED
17. 17
LINDA'S LETTER
Hello everyone!
W
elcome to another
special edition of
Realty411. We have
another issue jam
packed with resources to help you
begin, maintain, or expand your real
estate investment career.
On the cover of this celebrated
issue, we feature Jason Oppenheim,
Esq., founder of The Oppenheim
Group. The Oppenheim family has
operated a respected brokerage for
generations in Beverly Hills and West
Hollywood.
Beginning with family patriarch,
Jacob Stern, who owned the land
where the world’s first fulllength
feature film, The Squaw Man, was
produced, studio chiefs and celebrities
have sought out the family for realty
By Linda Pliagas,
Publisher/Editor
Photo by John De Cindis
guidance with their real estate
transactions.
Now, five generations later, twin
greatgreat grandsons Jason and Brett
Oppenheim star in Netflix's hit
original series, Selling Sunset. The
reality show is based on the Oppenheim
Group agency on Sunset Boulevard.
Selling Sunset is best described as a
hautecouture soap opera focused on
luxury, fashion and Hollywood fun.
Live Your Life with Intention -
My Interview with Jason Oppenheim
The team from Selling Sunset, courtesy of The Oppenheim Group
18. 18
LINDA'S LETTER
The exquisite homes featured for
sale are exclusive estates in Beverly
Hills and West Hollywood, ranging
from the low millions to $50M and up.
It's an exclusive world of glamour,
creativity, prestige and influence. At
The Oppenheim Group, agency
commissions can be as high as
$250,000 per transaction.
Recently, it was reported by news
source Business Insider that the
Oppenheim twins have expanded the
family legacy by building a brokerage
transacting hundreds of millions of
dollars' worth of properties each year.
In fact, since opening in 2014, The
Oppenheim Group has had an
estimated total of nearly $2 billion in
estate sales.
The brokerage recently expanded
its operation to Newport Beach,
California, plus might be planning a
future launch in Las Vegas, Nevada,
and Cabo San Lucas, Mexico. Selling
Sunset has already been renewed for
two more seasons, plus the hit show
has expanded to spinoffs: Selling
Tampa and Selling the OC.
The success of the Oppenheim
twins is a wonderful tribute to their
greatgreat grandfather, Jacob Stern.
Founded in Hollywood in 1889 as The
Stern Realty Co., the Oppenheim
family have now operated five
generations of property development,
management and brokerage services in
Los Angeles.
The family's major professional
milestones include: a central role in
fostering Hollywood’s early
entertainment industry, becoming one
of the nation’s largest developers of
HUD housing in the 1980s, and a
fivegeneration legacy in the
development and brokering of luxury
residential properties.
I had the pleasure of interviewing
Jason and interacting with his
amazing team to prepare for his cover
feature in our publication. One of the
best business lessons I learned from
watching Selling Sunset and
interviewing Jason is the positive way
that he handles career stress.
Anyone who watches the show
knows that major drama can exist at
times in the office. There are tears,
fits, breakups and escrows that fall
out. Highlevel properties often equal
busy, jetsetting clients and the luxury
industry is highly competitive. Yet
despite all this high pressure, Jason
remains calm and composed.
He's a firm believer in spending
time with loved ones and taking all
the rest in stride. Jason actively
creates his own reality by surrounding
himself with a select staff and
customer base, people whom he
chooses to spend time with.
He is intentional about maintaining
his quality of life and his mental and
physical health.
What an important lesson to be
aware of. Too often people are
working themselves into a frenzy to
grow their wealth, but they neglect
themselves and their loved ones in the
process.
Jason is a reminder that in the race
to build a billiondollar business, we
need to stop, take a deep breath, be
grateful for all the blessings, and
share the wealth with others.
With this lesson in mind, I encourage
you to slow down on your way to the
top. Take in the beauty and magic of
each moment. Be intentional with your
actions and words and know the power
and impact they have on others.
My team and I hope you enjoy our
new Realty411 issue. Please share
your thoughts and feedback with us
at: info@realty411.com. As always, if
we can assist you, please don't
hesitate to contact us.
Linda Pliagas
info@Realty411.com
Celebrate our new issue featuring
Jason Oppenheim, founder of
The Oppenheim Group in Orange
County. Join us for this awesome
event and receive our new issue:
https://realty411.com/calendar2
24. 24
Selling Sunset and Beyond
An Exclusive Interview with
Jason Oppenheim
Star of Netflix’s 'Selling Sunset'
Interview by Linda Pliagas
Article by Stephanie Mojica
Photographs courtesy of The Oppenheim Group
25. 25
I
n an era when some people are
focusing more on Bitcoin and stocks,
Jason Oppenheim of Selling Sunset
fame is doubling down on real estate.
That’s no surprise, as Oppenheim
was born into one of the most prominent real
estate families in California.
The real estate bug runs deep in
Oppenheim’s family — from his twin brother
Brett, their father Bennett, and their great great
grandfather Jacob Stern.
“I think I got (my interest in real estate)
from my parents when I was pretty young,”
Jason Oppenheim said in a recent interview
with Realty411. “I didn't really follow that
passion until after a career in law. But I think
I'd always been genuinely interested because
my dad was a real estate agent.”
As a child growing up in the San Francisco
Bay Area, some of Oppenheim’s earliest
memories are of his dad conducting open
houses and selling properties in Fremont.
However, Oppenheim didn’t immediately
follow his father — first he earned a law
degree from the University of California,
Berkeley and then spent four years as an
attorney for the major international law firm
O'Melveny & Myers. When he finally entered
the family business, which has existed for five
generations, Oppenheim quickly made a name
for himself. Oppenheim’s clients include
celebrities such as Jessica Alba, Orlando
Bloom, Kris Humphries, Taye Diggs, and
Dakota Johnson.
Even before Oppenheim and his twin
brother got their own Netflix reality show, he
was consistently named Top Agent in Los
Angeles by The Hollywood Reporter and a
member of the Showbiz Real Estate Elite by
Variety. The Wall Street Journal and REAL
Trends honored him three times in 2020 as the
#1 Agent in Los Angeles, the #1 Agent in
Hollywood Hills/Sunset Strip, and the #8
Agent in the United States. The 20202021
International Property Awards named
Oppenheim the Best Real Estate Agent
Worldwide.
26. 26
“The things that I
think helped me the
most was my law
degree and my
practice as an
attorney; I think that
really allowed me to
instill confidence in
my clients,”
Oppenheim said.
“And I look for that
in (hiring) agents.
I've got a couple of
attorney agents and I
can't imagine a better
pedigree for real
estate than a law
degree."
Though the
COVID19 pandemic
affected all segments
of the real estate
industry, Oppenheim
believes the worst is
over for investors, homebuyers, and agents alike.
“The bottom line is with real estate, there's actual need,” he
said. “It's not like stocks or Bitcoin or where you don't need
those things. People need to live in a house, they need to
expand, they have a family, or they need to move.”
He adds: “I think it's one of those kinds of fundamental assets
and investments where despite the ups and downs, it's always
going to have a general trend upwards. It's really hard to keep
real estate down, and you can do it in the short term, but it's like
a bubble in water. It just finds its way back out.”
Less populated areas have become more popular because
people want more space due to more time at home. They have
legitimate concerns about the problems associated with crowded
cities, he noted. Newport Beach and Monterey are increasingly
popular in California and states such as Arizona, Florida, Texas,
Utah and Wyoming are also seeing a flux of investors and
residents alike, according to Oppenheim.
“I think it's too soon for us to see people coming back to
those major dense areas (Los Angeles and New York City),” he
said. “In L.A. specifically, the crime is out of control. And I
think homelessness is becoming an even more serious problem.”
Tax issues are also pulling people out of major urban areas,
Oppenheim added.
'I think it's one of those kinds of
fundamental assets and
investments where despite the
ups and downs, it's always
going to have a general trend
upwards. It's really hard to keep
real estate down and you can do
it in the short term, but it's like
a bubble in water. It just finds
its way back out.'
Photographs courtesy of the Oppenheim Group
“For example, a lot of people who've made a lot of money in
stocks and cryptocurrency are deciding to move to a state that
doesn't have a high state tax before they sell,” he said. And you
know, that makes sense to me.”
Another challenge was the varying COVID measures in
American cities and states, per Oppenheim.
“I think that the past mandates and government intervention
was pushing people out of certain states,” he said.
27. 27
“Now, Florida is a bastion for people
who don’t want to have government
intervention and mandates, but I think as
we accept whatever role COVID is
going to play in our in our lives, you
won't have the disparity between
different states as much as you do now.”
However, all these issues don’t
necessarily mean people won’t return to
Los Angeles and New York, according
to Oppenheim.
“Moving forward into 2022, 2023,
and 2024, I think that we will see people
returning to the big cities,” he said. “And
I think that those areas that have seen
that huge boom, we'll probably see that
they will come down a little bit.”
Overall, densely populated
metropolitan areas are still the best
investment, in Oppenheim’s opinion.
“I do think that these large cities will
eventually get a handle on the
homelessness problem and on the crime
problem,” he said. “And I think that
there'll be a sense of normalcy soon.”
For more information about
The Oppenheim Group, visit
https://ogroup.com/. The agency has
offices in West Hollywood and Newport
Beach, Calif.
'The bottom line is
with real estate,
there's actual need.
It's not like stocks or
Bitcoin or where you
don't need those
things. People need
to live in a house,
they need to expand,
they have a family,
or they need
to move.'
33. 33
F
lipping homes became so
popular it inspired
countless reality shows,
real estate coaches, and
speakers. However,
according to some investors flipping
homes is now less profitable than ever.
The number of people buying fixer
upper houses at low rates, fixing them
up, and then selling them for profit has
dramatically increased. But that isn’t
necessarily the problem — the ongoing
housing shortage is the main issue,
according to a recent housing report on
CNN.
Even homes in dilapidated condition
are selling at skyhigh prices. Another
challenge for wouldbe real estate
flippers is the increased cost of supplies
and labor shortages.
The proof is in the data. The average
return on investment was 32.3% or
$68,847, according to Attom (an official
data provider for the real estate industry).
Things haven’t been this bad for house
flippers since 2011.
However, investors interviewed
during the broadcast are making it work
— and not all are angry about the 32.3%
ROI. Danielle Green of Baltimore has
flipped houses since 2018. Before
COVID19, Green went to auctions and
bought properties for $5,000 to $10,000.
Now she pays $20,000 to $40,000 — a
400% increase.
One of Green’s challenges is that
auctions are held online rather than in
person, dramatically increasing the
number of competing bidders. Also,
fewer auctions were held due to a lack of
available properties.
Another issue is that people from
larger metropolitan areas such as
Washington D.C. and Philadelphia can
no longer afford real estate in their own
cities, so they look to Baltimore for
affordable real estate. However, Green
said outoftowners are more prone to
make notsogreat buying decisions.
'Investors come in
and think it is easy
to buy because the
houses seem cheap
— they'll think
buying a shell (of a
house) for $40,000
is a deal,' she told
CNN. 'But I know
that's not the best
neighborhood. You
have to know the
market and
understand what
you're buying.'
Green changed her strategy and started
buying multifamily homes with three or
four units as opposed to singlefamily
properties. Instead of selling immediately,
she kept some of her properties to use for
ongoing rental income. Now, she does
one to two “big deals” a year as opposed
to three or four. However, Green said it’s
still profitable for her.
Leah Wensink of Harrogate, Tenn.
(about 60 miles from Knoxville) has been
a real estate flipper since 2014 and paid
$170,000 cash for a house to flip this year
— her highest investment ever, according
to the broadcast. Wensink’s project was
delayed by a few months by supply and
labor shortages and is also unsure if she’ll
see a significant profit on the property.
Her philosophy, which sounds like a
solid one for other investors, is to set a
firm boundary about how much money
she will spend on a deal and do a lot of
research on her market.
Investors See Average Return
on Investment Down
Amid Tight Market plus
Labor and Supply Shortages
By Stephanie Mojica
Image by F. Muhammad from Pixabay
37. 37
Stated one more time: Capitalization
Rate represents the annual Net
Operating Income (NOI) divided by
the cap rate to derive the property
asset value (NOI/Cap Rate= Value).
Why do we use Capitalization
Rates?
The capitalization approach is a
“comparative method” of valuing
property with similar properties, similar
income streams, in similar geographic
locations, and similar risks that will yield
a comparable rateofreturn. Once the
value is established, the comparative
method can calculate the loantovalue to
determine if property value falls within
the lender’s loan underwriting
guidelines.
Cap Rates are only one
metric. Since the capitalization
approach is calculated as if the
property is debtfree the value
will be the same whether the
property has leveraged debt or is
debtfree. It represents a market
snapshot at the investment time
and does not consider loan debt
service or financing costs.
If an investor finances his acquisition,
as most people do, further analysis such
as cashoncash return will be helpful.
Sophisticated loan underwriters and
investors may also calculate an Internal
Rate of Return. These calculations assist
in establishing that the property is
incomeproducing and a worthwhile
investment.
A licensed commercial appraiser may
perform a rent survey to determine
market rents for a property type in a
geographic area. Market rents may or
may not be the same as actual rents
(contract rents). There are many
instances where the existing rents are
above or belowmarket rents. A tenant
with a longterm lease may have locked
in lower rents sometime in the past.
I once underwrote a loan transaction
on an industrial building near San
Francisco that was about 100 years old.
The property has a longterm lease of 18
cents per square foot, while the current
market was $1.75 a square foot. Since
current market rents were much higher,
the valuation metric used was based upon
the lockedin lower rental rate.
A property owner may own the
property in one title method such as The
Archie Bunker Corporation and occupy
all or a portion of the building in
different title method such as Archie
Bunker Limited Liability Company. He
may charge above or belowmarket rents
to himself for tax purposes. Actual rents
may also be higher than the market. In
this case, the appraiser would use market
rents rather than actual rents to determine
the Cap Rate.
There are other instances where a
conventional market Cap Rate analysis is
inappropriate. The alternative method is a
discounted cash flow analysis such as
original groundup construction. The
building cost and the cash flow from a
leaseup need to be projected over a
reasonable time to the point of stabilized
occupancy. This is done by a competent
appraiser who can construct a model
estimating a future projected cash flow
and using net present value discount
formulas to estimate the capitalization
rate. The result may differ from the
market comparison method.
Suppose you have income properties
with similar characteristics in a
geographically close location sold in
arm’s length cash transactions, and the
income stream data is available. In that
case, there are webbased databases that
track comparison capitalization rates
(Cap Rates.)
Market rents are the amount of rent
that can be expected for a property,
compared to similar properties in the
same geographic areas. Contract rent or
actual current rent is what the same units
are being rented for today. Many lenders
will request a rental survey from an
appraiser as an addon task to the
requested appraisal job.
There is an essential difference
between market rents and current
actual (contract) rents in the Cap Rate
valuation process. Compare two different
buildings, both identical, but the first
property is wellkept and rented at a
market rate, and a second building that
has deferred maintenance. The property
with deferred maintenance is rented for
undermarket rates by under 30%. In
both cases, a lender and the appraiser will
use market rents to determine the (NOI).
The assumption about the second building
is that a new owner will upgrade the
building and adjust the rents upward to a
market rate. The value of the second
building would be adjusted downward or
discounted to offset the cost to cure (cost
to upgrade the building).
Photo by MOHAMED ABDELSADIG from Pexels
38. 38
The only time that a lender, or
appraiser, would use the lower rents is
when those rates were locked into a
longterm lease or a rentcontrolled
property. I underwrote the following
example: A prospective loan for an
industrial building in Richmond,
California. The property was leased fee,
leased out to a third party for 99 years,
with 50 years remaining. The lockedin
rent was only 18 cents per square foot
triple net. The property owner and
broker argued belligerently that current
value should be based upon today’s
rents.
An inconvenient fact in this example
is that the property owner is locked into
an 18 cent per square foot monthly
income stream for the next 50 years.
Capitalized rents will be based upon 18
cents per square foot lease rate. The
capitalized value with an 18 cents per
square foot will have a dramatically
lower NOI compared to a similar
building next door that rents at $1.75 per
square foot lease rate monthly.
A historic rents comparison databases
are available to determine market rents
to calculate a correct capitalized
valuation. Historic market Cap Rates
may vary, even in the exact geographic
location, depending upon the building
improvements, effective age, class of
construction, offstreet parking, furnished
or unfurnished, condition, compliance
with zoning, easements or lack of needed
easements, and amenities. Examples
include ClassA vs. ClassC office,
industrial, apartments, older dated,
economically obsolete and under parked
compared to a new modern building with
adequate parking and currently popular
amenities.
Advantages and disadvantages
of the Capitalization approach
to value:
Advantages:
1. This method converts an income
stream into an estimate of the value of
the incomeproducing real estate.
2. The method is a common standard in
the appraisal, lending, and
development business.
3. While the income capitalization
approach is common in evaluating
commercial incomegenerating
properties, it can theoretically be
applied to any income stream,
including businesses.
4. Commercial appraisers are a reliable
source for determining market Cap
Rates.
5. Commercial Realtors® provide an
excellent source of cap rates with
websites such as Costar and Crexi
6. There are online databases such as the
CBRE/USCapRateSurveySpecial
Report2020 to obtain reliable data.
https://www.cbre.us/researchand
reports/USCapRateSurveySpecial
Report2020
Disadvantages:
1. The method is used for “comparison
only with similar properties in a close
geographic area.” The method does
not consider liens on the property and
debt service. A Cap Rate calculation is
done as though the property is debt
free. Cap Rates cannot be used to
calculate overall net cash flow or cash
oncash yield when a loan attached to
the property (Income, less operating
expenses, less debt service).
2. The results of a Cap Rate calculation are
specific only to a similar area with
similar properties in certain segments
of the market. You could not use
Newport Beach, California cap rates
to compare with a similar building
with similar usage in Riverside,
California. Also, the demand for
properties and Cap Rates for different
segments of the real estate market
change. Current examples are residential
income properties and Industrial are
and will continue to be in demand. I
read one estimate that industrial in the
U.S. will require an extra billion
square feet of warehouse by 2025.
Office and lodging/resort related
properties, not so well. Patterns change!
3. The method contemplates stable
economic market conditions. If a
market experiences a significant
downturn, collapses, or is subject to
extreme political uncertainty, the
calculations using market cap rates
may be rendered irrelevant.
Photo by Tima Miroshnichenko from Pexels
Historic market Cap rates may
vary, even in the exact geographic
location, depending upon the
building improvements, effective
age, class of construction, offstreet
parking, furnished or unfurnished,
condition, compliance with zoning,
easements or lack of needed
easements, and amenities.
39. 39
4. Relying on a Cap Rate with an unstable
market condition is difficult. Using
market rents may become suspect
because higher rates of foreclosures,
tenants default much more frequently,
vacancy rates go up, and replacement
tenants will ask for higher rent
concessions, thereby bringing the
market rents down. Additionally,
owner operating expenses may
become constrained.
5. Calculating forecasting future income
streams involves a high degree of
professional judgment, and therefore
subject to variation.
6. Professional judgment is subject to
subjective vs. objective interpretations
about expectations of future benefits.
7. The method may result in miscalculations
when estimating the cost of capital
outlay for upgrades to bring the
property up to current standards. All
subsets of the job have a cost, time
and frustration allocation, including
municipal approvals, reconstructing
the building, modern materials,
safety, zoning, environmental, and
social equity requirements.
8. Property amenities, parking, easements,
recorded encumbrances, and
compliance with building and zoning
regulations require a complex analysis.
9. The leaseup period is only an
estimate and may not be correct.
10. Alleged appraiser and lender biases
for racially segregated neighborhoods
have been known to exist.
Tenancies: A landlord and tenant may
enter into four types of rental or lease
agreements. The type depends upon the
agreedupon terms and conditions of the
tenancy. All rental amounts and terms of
a lease will be reflected in the
capitalization evaluation.
Types include:
1) Fixedterm tenancy is a tenancy with
a rental agreement that ends on a specific
date. Fixed terms have a start date and an
ending date. According to the written
lease document, time terms may be short
or long such as ten years with multiple
extensions.
A landlord can’t raise rents or change
lease terms because the terms are
codified in a written agreement. A key
advantage for a landlord is to receive
today’s market rents.A key for a tenant is
to lock in a longterm lease where the
rents are or become below market over
time.
A tenant’s company’s profits are
enhanced if they pay substantial under
market rents. On the other hand, if a
tenant’s company is making a good profit
with rents substantially below market and
a lease is coming due soon, the increased
or negotiated upward lease rate may wipe
out some or all the profits.
2) Periodic tenancy is a tenancy that has
a set ending date. The term automatically
renews into successive periods until the
tenant gives the landlord notification that
he wants to end the tenancy. Monthto
month tenancies are the most common.
The strength of the tenancies from
national credit with longterm leases and
corporate guarantees down to mom &
pops monthtomonth tenancies will result
in a substantially different Capitalization
Rate. National credit tenants with
corporate guarantees have a considerably
lower Cap Rate. Mom and pop tenancies
will reflect a higher Cap Rate because
they inherently have more risk.
The lower the market Cap Rate, the
lower the perceived risks of property
ownership. The higher the market Cap
Rate, the higher the perceived risks. An
exception would be where the national
credit tenant locks in a lease rate that does
not increase as the market dictates or
anticipates increases. Eventually, over
time, this tenant will reflect belowmarket
rents.
A momandpop tenant could be
converted to a market rent more quickly
because the term is usually shorter.
Market rents are obtained by surveying
local brokers and appraisal databases of
local market rents.
3) Tenancyatsufferance (or holdover
tenancy). This form of tenancy is created
when a tenant wrongfully holds over past
the end of the duration of period of the
tenancy.
Image by Gerd Altmann from Pixabay
The lower the market Cap Rate, the lower the perceived risks of property ownership.
40. 40
I bring up this type of tenancy
because of COVID. The government
allowed tenants to skip out and default
on paying rents without consequence.
The tenants either defaulted on the rent
or overstayed the term. In either event,
the tenant becomes delinquent, and the
owner attempts to evict them. The tenant
or affiliates may become illegal
trespassers.
There are many examples of a
landlord attempting to get rid of an
illegal tenant only to be jerked around
through the court system, with multiple
appeals requested by the tenant. They are
usually granted.Then comes multiple
bankruptcies, not only of each tenant,
one by one, but unknown people who
supposedly moved in without notice to
the landlord. Then comes the transients
and fictious folks who show up declaring
that they are a tenant and request that the
process start all over because of their
fraudulentlyclaimed tenancy. The
courts, particularly in states like
California, just turn their backs on this
behavior.
The focus for the property owner
becomes using legal avenues to evict the
tenants and regain occupancy of the
property. This process has great cost and
frustration.
4) TenancyatWill. This form of
tenancy reflects an informal agreement
between the tenant and landlord. The
landlord gives permission, but the period
of occupancy is unspecified. The term
will continue until one of the parties give
notice.
Rehabilitated Property or New
Construction:
Establishing market rents becomes
essential in underwriting a rehabbed or
new building. When there is an extended
time delay for a leaseup period, such as
with the new construction of an income
producing property, future cash flows
need to be estimated to the point of
income stabilization. Then the future
stabilized income will be discounted, using
an estimate of a market capitalization rate
and a discount rate formula.
Work with a competent commercial
appraiser to assist and calculate the
correct market Cap Rate. Do not try to do
this yourself without the help of an
appraiser who knows the type of real
estate and local market.
Below is an example: The market
Cap Rate for a commercial property
with triple net leases (NNN) has been
determined to be 6.5%. Triple Net or
(NNN) refers to a leased or rented property
where the tenant pays all expenses related
to the operation such as taxes, insurance,
maintenance, and occasional capital
improvements. The 10,000 square foot
multitenant property under consideration
generates monthly rents of $1.50 per
foot. On a (NNN) example for a Cap Rate
analysis, one would apply a 10% vacancy
collection and loss factor and 5% for non
chargeable expenses that tenants usually
do not pay including reserves. The NOI
would be $153,900.
The NOI and Market Cap Rate
are known so you can calculate
the value:
10,000 SF rentable X $1.50 = $15,000
Per mo. X 12 Mos. = $180,000 =
potential gross income.
$180,000–$18,000 for 10% vacancy =
$162,000–$8,100 for 5% nonchargeable
expenses to the tenants = NOI = $153,900
$153,900 NOI /.065 Cap Rate = value =
$2,367,692
From an investment standpoint, market
Cap Rates can show a prevailing rate of
return at a time before debt service. The
Cap Rate procedure will assist a lender
and investor to measure both returns on
invested capital and profitability based on
cash flow. An informed lender or investor
should understand that there may be
dramatic variations in a property’s value
when unsupported or unrealistic Cap
Rates are applied.
Image by Paul Brennan from Pixabay
Work with a competent commercial
appraiser to assist and calculate the
correct market Cap Rate. Do not try to
do this yourself without the help of an
appraiser who knows the type of real
estate and local market.
41. 41
Cap Rates as well as demand for
incomeproducing properties will move
up or down depending on market
conditions. The term Cap Rate
compression reflects a movement of
the rate down because investors
perceive real estate as a lowerrisk,
higher reward asset class relative to
other investment options. Cap Rate
decompression may result from demand
for real estate purchases where Cap
Rates increase, reflecting lower
valuations. This may be a byproduct of
higher interest rates or government
intervention such as rent control.
CashonCash Return:
Cashoncash return is a quick
analysis to determine the yield of an
initial investment. The cashoncash
return is developed by dividing the total
cash invested (the down payment plus
initial cost) or the net equity into the
annual pretax net cash flow.
Assume the borrower purchased the
property, which costs $1,200,000 and
provides an NOI of $100,000, with a
$400,000 down payment representing
the equity investment in the project.
The cashoncash return for this
property would be:
$100,000/$400,000 = 25% = cashon
cash yield.
If the borrower were to purchase the
property for all cash, as contemplated in
a Cap Rate calculation, then the cashon
cash return would be:
$100,000/$1,200,000 = 8% (this example
the 8% is both the cashoncash yield and
Cap Rate).
It is clear from this formula that
leveraging or financing real estate
transactions will yield a higher cashon
cash return, provided the transaction is
financed at a favorable interest rate.
Internal Rate of Return (IRR):
Internal rate of return (IRR) refers to
the yield that is earned or expected to be
earned for an investment over the period
of ownership. IRR for an investment is
the yield rate that equates the present
value of the outlay of capital and future
dollar benefits to the amount of money
invested. IRR applies to all dollar
benefits, including the outlay of the initial
down payment plus cost, the positive
monthly and yearly net cash flow, and
positive net proceeds from a sale at the
termination of the investment. IRR is
used to measure the return on any capital
investment before or after income taxes.
Ideally, the IRR should exceed the cost of
capital.
Is there an ideal Cap Rate?
Each investor should determine their
risk tolerance to reflect their portfolio’s
ideal riskreward level. A lower Cap Rate
means a higher property value. A lower
Cap Rate would imply that the underlying
property is more valuable, but it may take
longer to recapture the investment. If
investing for the longterm, one might
select properties with lower Cap Rates. If
investing for cash flow, look for a
property with a higher Cap Rate.
Declining Cap Rates may mean that the
market for your property type is heating
up, and demand is intensifying. For Cap
Rates to remain constant on any
investment, the rate of asset appreciation
and the increase of NOI it produces will
occur in tandem and at the same rate.
42. 42
Below are examples of changes in NOI
and Cap Rates that cause asset values
to rise or to go down:
As NOI increases and Cap Rates remain
the same, asset values will increase.
($300,000 reflects net operating income
and .06 reflects a 6% cap rate)
$300,000 /.06 = $5,000,000
$350,000 /.06 = $5,833,000
$400,000 /.06 = $6,666,666
$450,000 /.06 = $7,500,000
As NOI remains the same and cap
rates rise, asset value will go down:
($500,000 reflects net operating
income and .03 reflects a 3% cap rate)
$500,000 /.03 = $16,666,666
$500,000 /.04 = $12,500,000
$500,000 /.05 = $10,000,000
$500,000 /.06 = $8,333,333
Correlation Between Cap Rates
and US Treasuries:
The US Ten Year Treasury Note
(UST) is deemed to be the riskfree
investment against which returns on
other types of investments can be
measured. USTs yields have been on a
broad decline for many years but may
soon rise. As interest rates increase those
investors who bought USTs at a lower
rate will find that their bonds will go
down in value. Bonds purchased at the
new higher rates will be in high demand.
As interest rates rise, Cap Rates will
go up, and consequently, there will be a
reduction in asset values over time. With
so many uncertainties in the market and
growth projections constantly being
revised, the spread between UST and
Cap Rates has not remained constant.
When the government intrudes in the
market, the results are artificial. This has
caused capitalization rates to go down,
reflecting higher values. Nearzero
interest rates have also caused a dramatic
inflationary spike in all goods and
services.
Summary:
Property appreciation from excess
demand has been one of the most
significant reasons for investing in real
estate Appreciation is not part of the Cap
Rate calculation. For investors, lower
interest rates, tax benefits of owning
commercial real estate may, in and of
themselves, be the driving force to make
such an investment. If the property is to
be leveraged, there may be writeoffs for
loan fees, interest expenses, operating
expenses, depreciation, and capital
expenses.
Interest rates have been forced down to
extremely low rates, below inflation, by
government mandate! Refinancing at
lower rates has resulted in lower debt
service payments. Cash flows of income
producing properties have gone up,
reflecting a higher net operating income.
The government intentionally
creates market distortions that benefit
the insiders at the top of the economic
spectrum. The results are artificial.
This has caused capitalization rates to go
down, reflecting higher values. Nearzero
interest rates have also caused a dramatic
inflationary spike in all goods and
services. All asset classes have now been
“spiked with 200proof illusions” that
make everything seem fantastic on the
surface. But hangovers the day after
the party ends are no fun.
Photo by Mikhail Nilov from Pexels
When the government
intrudes in the market,
the results are artificial.
This has caused
capitalization rates to go
down, reflecting higher
values.
43. 43
Interest rates are increasing because
the government realizes that inflation
will only accelerate if they do not stop or
slow it. Increased interest rates will
result in newly originated loans having
higher payment structures. Higher loan
payments indirectly and over time cause
Cap Rates to rise and values to go down.
Values may not go down immediately,
but the demand to purchase income
producing properties will subside
because ownership makes less economic
sense. To add flames to this fire
government, including federal and state,
is passing legislation that will destroy
investor motivation to own.
Over time the four
pronged whammy will
become apparent. 1)
Rising interest rates, 2)
increase in interest rates
reflecting larger loan
payments, 3) general loss
of investor confidence in
the overall economy, 3)
loss of investor interest in
purchasing an income
property, 4) overburdening
& abusive government
intervention into property
ownership will come
home to haunt the entire
real estate market across
the United States. 5) All of
the above will cause Cap
Rates to go up, and
property values go down.
Remember that increased debt service
based upon higher interest rates is not
considered in the capitalization approach.
But, over time, as interest rates go up,
borrowers will feel the sting of higher
debt service payments. Some property
transactions may become less appealing
financially. As purchasers and borrowers
elect not to purchase, that may compound
and create more unsold inventory. Some
sellers may get desperate and reduce the
price to sell quickly. The lowered price
would result in a higher Cap Rate. Higher
interest rates will lower all real estate
prices on a macro level.
How dramatic will lower real estate
prices be over time? Between 2007 and
2010 we witnessed the downward value
contagion spread resulting in substantially
lower values and increased Capitalization
Rates.
The fourpronged
whammy is not a new
phenomenon. It has just
been forgotten while
enjoying the Federal
Reserve’s 'freeforall 200
proof infused financial
punchbowl.'
A onetotwo hundred basis points increase in lending
rates (1% to 2%) would shatter the punch bowl into
fragments. It is my opinion that an imediate 2% interest
increase would collapse the economy overnight. Main
Street and small capitalist entrepreneurs would bear the
brunt of the widely spread financial damage.
MEET DAN HARKEY
Dan is President and CEO
at California Commercial
Advisers, Inc. He consults
on subjects of Business
Growth & Private Money.
Dan often creates articles interrelated to
these subjects. He has been active in the
real estate and financial services industry
since 1972 and possesses a lifetime
teaching credential for secondary and
adult education. He has taught over 350
educational seminars on subjects related
to real estate lending, private money
lending & loan underwriting for
commercial/industrial properties.
Contact Dan today
Mobile: 949.533.8315
Email: dan@danharkey.com
Image by Gerd Altmann from Pixabay
49. 49
I
t’s understood that having a real estate component
within your investment strategy is a triedandtrue
way to diversify your risk and increase your
investment returns. And while most people and
companies find real estate opportunities with more
common approaches, there is a less conventional way
to turn a profit in real estate: brownfield development.
According to the Environmental Protection Agency, “a
brownfield is a property, the expansion, redevelopment, or reuse
of which may be complicated by the presence or potential
presence of a hazardous substance, pollutant, or contaminant.” It
is estimated that there are more than 450,000 brownfields in the
U.S. Some l brownfields are obvious, like a former oil refinery.
Others may be a surprise, for example, an urban infill site that
housed a dry cleaner in the 1950’s may now be the ice cream
shop you’ve loved since you were a kid – who would ever think
it could be contaminated?
Assuming the developer of a brownfield property has acquired
a Phase One environmental assessment (and a Phase Two
environmental assessment if recommended by the Phase One)
By Patricia Gage, Principal, RE Solutions
and is ready to move forward with the project, potential project
investors should consider the following financial questions:
1. What is the cost of the land? In general, there should be a
discount for a brownfield parcel. When compared to an
equivalent clean site, the price of a brownfield should be
discounted by the cost to remediate the site plus some amount
to compensate for the risk inherent in the cleanup and the
additional profit that should come with cleaning up a
contaminated site.
2. Does the development budget include sufficient contingency for
normal construction risk as well as the risk of remediation cost
overruns or delays? While a 45% contingency is typical for a
greenfield site, the development budget on a brownfield should
include that standard contingency PLUS 2025% of the expected
remediation cost if the remediation contractor is working under a
costplus contract, which is typical. The contingency should
also be sufficient to cover any delays if remediation takes longer
than expected.
Have you considered adding
brownfield development
to your real estate portfolio?
Image by Dr StClaire from Pixabay
50. 50
3. Has the developer obtained environmental insurance? A
Pollution Legal Liability policy will protect against unknown
contaminants and thirdparty liability claims.
4. When you make your investment, will the balance of the
capital (debt and equity) be in place? If not, recognize that a
construction loan on a brownfield property will likely be
underwritten more conservatively than a loan on a greenfield
property. Some commercial banks won’t consider lending on
a brownfield. When a loan is available, the loantovalue and
loantocost ratios may be 510% lower than for a clean property.
5. Is there a financing gap that wouldn’t occur on a similar
greenfield property? Because debt and equity may be less
available for a brownfield site, the developer will often have
the option to cover remediation costs with a public finance
mechanism such as tax increment or special district financing.
Many municipalities have a Brownfields Revolving Loan
Fund to provide developers with lowcost debt to cover
remediation costs, which incents developers to clean up toxic
sites. Some states also offer tax credits for brownfields cleanup.
6. Is the project return reasonable given the risk associated with
a brownfield site? Developers expect a premium return for
taking on the risk of a contaminated property – investors
should be rewarded with a portion of that premium.
This is by no means an allinclusive list of due diligence an
investor should consider, or of the risks associated with brownfield
redevelopment. We always recommend obtaining appropriate legal
and tax advice before investing. That said, the best riskmitigation
strategy lies in underwriting the developer. Invest with those that
have significant brownfields experience and a proven track record.
Ask about their relationships with the regulatory agencies, lenders,
design professionals, contractors, prior investors, insurance
providers, and environmental consultants.
Real estate developers often raise money from individual
investors in relatively small increments, allowing qualified investors
the opportunity to participate directly in the success of a single
development project. These investments are not without risk, and
your due diligence should be thorough. Along with understanding
the project’s market, projected returns, construction risk, and
competition, an investor should be fully aware of the site’s prior
uses and any contamination that may be present.
Everyone can win in a brownfield redevelopment – you as an
investor, the developer, and the overall community. Financial
benefits are compelling but contributing to the elimination of blight
and toxic contamination in a neighborhood is the true reward.
MEET PATRICIA GAGE
Patricia Gage is a principal at RE Solutions, a
company specializing in creating value for
brownfield development projects. She can be
reached at patricia@resolutionsdev.com or
303.482.2618.
Image by Gordon Johnson from Pixabay
We always recommend obtaining
appropriate legal and tax advice
before investing. That said, the best
riskmitigation strategy lies in
underwriting the developer. Invest
with those that have significant
brownfields experience and a proven
track record.
Image by Arek Socha from Pixabay
55. 55
A
critical step for new and existing real estate
investors is to form an LLC or Limited
Liability Company. In the simplest of
terms, an LLC protects an investor’s
personal assets — whether those are cash,
bank accounts, or personal property.
Whether the investor is into flipping houses or being a landlord,
an LLC ensures that the person himself or herself does not actually
owe any debt. The company is responsible for any contracts, debts,
lawsuits, leases, and liabilities.
If business goes bad, the people and companies that believe they
are owed money can only pursue the LLC — not the individual(s)
behind the company unless fraud or another crime was involved,
according to Yahoo! Finance.
However, there are some critical steps to take even after a real
estate investor forms an LLC. Any properties must be purchased in
the company’s name, not an individual’s name. This ensures the
ultimate protection.
If someone buys a home to flip or rent out and ends up owing
more on the mortgage than the property is worth, the bank cannot
come after the individual if the home is officially owned by the
LLC.
A caveat is that many banks do not want to issue mortgage notes to
a new LLC, because it’s risky for them. That’s why a business plan is
so important. (See our past article 'House Flippers Need a Business
Plan' for a more indepth discussion on this topic.)
Other potential drawbacks to an LLC come at tax time and when an
individual transfers assets to it, so an attorney is probably a necessary
resource, according to LegalZoom.com. Also, each state has different
laws regarding an LLC.
However, done properly, an LLC seems to have more benefits than
downsides. Other good news is that the costs are usually minimal. As
always, before making any major decisions in such areas speak to a
qualified real estate attorney.
Sources for this article:
https://finance.yahoo.com/news/formllcrealestateinvesting
194323289.html
https://www.legalzoom.com/articles/forminganllcforrealestate
investmentsproscons
http://reiwealthmag.com/houseflippersneedabusinessplan/
By Stephanie Mojica
An llc
for Real Estate
Investing
Image by Gino Crescoli from Pixabay
60. 60
A
Wisconsin woman lost her entire retirement
savings by investing with a nowdeceased
friend’s business, My IRA, LLC, according to
the Milwaukee NBC television affiliate TMJ4.
It seems the company attempted to resemble an
SDIRA a SelfDirected Individual Retirement Account custodian.
My IRA, LLC was started by a tax preparer and purported
investor, Michael Cuccia, who suddenly died in November 2020,
according to TMJ4. When people who had invested in his company
sought the return of their assets, they were stunned to learn that most
of them were nowhere to be found, according to TMJ4.
Attorney Anne Cohen stated that her client Diane Conklin had a
401(K) account, but needed to figure out her best options when she
broke her back in 2012.
'She had learned that she could no
longer work and wanted to make sure that
the funds she had in her 401(K) were in a
secure account,” Cohen told TMJ4.
“Because she quickly was learning that was
all of the wealth she was going to amass in
her lifetime due to her disability.'
According to Cohen, Conklin knew Cuccia professionally and
also considered him a friend. Cuccia told Conklin to take her money
out of her 401(K) account and invest in his My IRA, LLC company,
according to a lawsuit Conklin filed against Cuccia’s estate.
Cuccia claimed Conklin had no risk of losing her assets and she was
guaranteed a 5% return on investment each year, according to Cohen.
“...after years and years of friendship and going to him for tax
advice, she trusted his advice,” Cohen told TMJ4.
After Cuccia’s sudden death, Conklin and others could not reclaim
their assets, according to Cohen.
People had invested anywhere from $5,000 to $200,000 with
Cuccia’s company, according to Cohen. The total was $1 million, but
Cuccia only had about $200,000 in assets, according to Cohen.
Anyone considering making an investment should be automatically
suspicious if they are told there is no risk involved, according to Robin
Jacobs from the Wisconsin Department of Financial Institutions
Enforcement Bureau.
Retirement Savings Lost
After Investment in
Fraudulent Company
Resembling SDIRA
Custodian
By Stephanie Mojica
Photo by Mikhail Nilov from Pexels
61. 61
'When you invest your money in
something, it means you're going to take
a risk in exchange for getting a return,”
Jacobs explained during her interview
with TMJ4.“Of course there's no
guarantee.'
Investors should also steer clear if one or more of the
following warning signs are present:
• A vague or confusing business model.
• Time limits on when you can invest.
• Highpressure sales tactics.
• A lack of disclosure documents.
• No audited financial records.
Wouldbe investors should also research whether the person
they’re talking to has the proper training and licensure.
In Wisconsin, that can be cleared up with a phone call to the
Department of Financial Institutions Enforcement Bureau.
“...we can tell (you) whether that person is registered either as
an investment advisor or a brokerdealer and if they're not
registered...I would be very suspicious of that person,” Jacobs
said during her interview with TMJ4.
Some brokerdealers and investment advisors must register with
FINRA (the Financial Industry Regulatory Authority) or the SEC
(the Securities and Exchange Commission), while others do not. It
depends on whether the professional does business in one or
multiple states.
The regulation bodies for other states include:
• California Department of Business Oversight
• Texas State Securities Board
• Idaho Department of Finance
• New York State Attorney General
• Arizona Corporation Commission
• Nevada Secretary of State
• Florida Office of Financial Regulation
Any inquiry to your local business licensing or permits office or
a quick Google search should point you in the right direction.
Back to Cuccia’s purported victims, the future is unknown.
Conklin and other people who claim they were swindled by
Cuccia are waiting to see if the courts will award them any of
what’s left from his estate, according to TMJ4.
Attorneys representing Cuccia’s estate declined to be
interviewed by TMJ4.
Image by mohamed Hassan from Pixabay
67. 67
A
n important caveat to
real estate investment,
quite simply, it’s
expensive. It requires
more capital upfront
to get going, and for a lot of potential
investors, it just isn’t feasible. But Victor
Cuevas, founder of Griffin Crowd and
Capital, just might have the answer, and
it’s a surprising, but innovative one. He
suggests using crowdfunding!
When we typically think of
investments, the stock market comes to
mind. However, real estate is emerging
as a competitive alternative to stocks,
one that is safer and can often yield
higher returns. But like so much else in
business, real estate investments lead to
portfolio diversity.
Whatever side of the fence you are
currently on, as either a borrower or
investor, see below for a few tips from
Cuevas to get you started.
Learn about Splitting the Bill
As it turns out, investing in real estate
may not be as costly as it seems. With the
rising popularity of crowdfunding —
online platforms for sourcing capital for a
given project — a creative new approach
has emerged for breaking into the
prohibitively expensive, but wildly
lucrative field of real estate investment.
With a little help from crowdfunding,
you could soon be on your way to
making big bucks, while at the same
time, shaking things up along the way.
Cuevas recommends crowdfunding as a
way to expand your possibilities and
adapt to the rising cost of homes. In the
past year alone, Griffin Crowd and
Capital has crowdfunded over 100
residential apartment complexes totaling
tens of millions in profit as a result.
Find Strength in Numbers
David and Goliath was a close one, but
ultimately, the “little guy” triumphed by
sheer ingenuity. Now imagine if it had
been 10 Davids, all equally resourceful,
taking on that single Goliath — it would
almost be unfair. And that’s the idea here.
Cuevas recommends using crowdfunding
as a way of teaming up and pooling
resources to collectively achieve what is
too often reserved for the already wealthy.
It is a great way to challenge the
longstanding dynamic of the “fat cat”
being the one at the top.
Strength in Numbers:
Victor Cuevas Gives Us Advice About
Crowdfunding as a Tool for Investments
By Victoria Kennedy
'Borrowers using a crowdfunding portal have an
advantage because they can get funds from a
wider pool of investors,' said Cuevas. 'While they
typically have to accept a higher interest rate in
order to get additional funds, the access to those
additional investors is typically worth it.'
Victor Cuevas
68. 68
A Man’s Game? Don’t be So Sure
Any number of factors can explain
the demographic disparity of real estate
investment, and investment in general.
From systemic and interpersonal sexism
and racism, to toxic notions surrounding
women and investment in general,
there’s no question: it’s an uphill battle
for women and minority investors.
But one thing is for sure, regardless
of this inadequate representation, there’s
zero truth to any notion that nonmale,
individuals are in any way, shape, or
form “less fit” for the field. The truth is,
there’s just more to work against. While
this may seem so obvious, nevertheless,
the myths floating around can still be
damaging. The key is to try not to be
dissuaded by all these ‘tall tales’—you
know what you’re capable of. As Cuevas
said, “it’s a fastgrowing market” and
now is the best time to get involved!
Learn Where to Invest Sensibly
Real estate is a huge field encapsulating
all sorts of different subcategories
within it. If you’re seeking to maximize
your returns all while keeping your
overhead to a minimum, Cuevas
recommends looking at multifamily
residentials. These have emerged as
popular living arrangements, and they’re
generally cheaper and easier to invest in
than larger properties. Between
collecting rent and easier mortgage
terms, there are numerous advantages
that should put the multifamily
residential towards the very top of your
list when it comes to prospective real
estate investments.
Pick a Winner: Choose the
Right Bank
When investing in real estate, it’s
essential to choose a bank that’s a good
fit for your investments. Cuevas suggests
paying close attention to the experience
and track record of the institutions you
consider. It’s important to be certain that
the bank you go with has enough
experience in the area you’re investing in
to best assist your specific needs. For
example, at Griffin Crowd and Capital,
Cuevas puts his 30plus years of specific
experience in the field at the disposal of
his clients — all the knowledge, know
how, and vital industry connections go
into helping clients ensure the maximum
possible return on their investments.
It can be a daunting prospect, but with
the right approach, investing could
become your next successful venture.
With crowdfunding, it doesn’t have to
cost an arm and a leg, and by focusing on
real estate, particularly multifamily
residentials, you can start generating
wealth easily and with little risk. While
there may indeed be some obstacles
standing in your way, with the help of
creative solutions, careful planning, and a
little teamwork, it might not be such a
distant dream.
MEET VICTOR CUEVAS
Victor Cuevas is
an industry
professional with
over 30 years of
mortgage finance
experience,
including extensive
knowledge in both residential and
commercial properties. He is a successful
serial entrepreneur with a multitude of
accomplished companies and ventures.
Among them, Victor built a mortgage
empire, spanning 36 offices in several
western and central states. He currently
serves as the founder of Griffin Crowd &
Capital, the next chapter in an already
illustrious career. For more information,
visit griffincrowdcapital.com
Image by Júlio Cesar J.Cesar from Pixabay
Image by Credit Commerce from Pixabay
77. 77
O
n paper, a NNN lease
might seem like a
lowrisk longterm
investment. But like
with any investment,
paying attention to the details can mean
the difference between profit and loss.
This is especially true now more than
ever in our ever changing, fastpaced
world.
In this article, we’ll discuss NNN
leases and what makes it a good
investment. We’ll also offer a case study
(specifically CVS) in order to
demonstrate how investing in a NNN
lease can go wrong. Risk is built into any
investment, but there are ways you can
minimize these factors to set yourself up
for greater success.
What is a NNN Lease?
The triple N acronym describing this
particular lease stands for the following:
● Net of property taxes
● Net of maintenance
● Net of insurance
These types of leases describe a
commercial property that’s often leased
for years at a time. Most of the time,
tenants are bigbox stores that plan on
taking up residence for a long period.
After all, it’s hard to do business and
keep your loyal customers if you keep
relocating.
Why is a NNN Lease a Good
Investment?
In terms of risk, NNN leases score
lower than most investments. At the
same time, that doesn’t mean they’re
without risk completely. As long as you
have the right tenant and right
property, the risks are low enough to
make a NNN lease an excellent source of
passive income.
Another — and potentially the most
attractive — reason NNN leases are low
risk lies in the relationship between
landlord and tenant. In a typical landlord
tenant agreement, the tenant is responsible
for upkeep and maintenance, along with
taxes, insurance, and, of course, rent.
This potentially makes NNN leases a
great investment if everything goes well,
but that is not always the case.
What Makes for a Good NNN
Lease
As we mentioned, it’s important to
choose the right tenant and right property
when it comes to investing in a NNN
lease. Passive income loses definition if
you have to be constantly involved, so
making a smart decision here could save
you time, money, and headaches later on.
The right tenant, in this case,
resembles a quality candidate with a
strong balance sheet and a nationally
recognizable name. Highquality credit
tenants do the best.
Though the right tenant may look
different in each circumstance, the right
property certainly has similar qualities
across the board. For instance, buildings
that are newer may be more desirable,
since the upkeep costs should
theoretically be less. At the same time,
new doesn’t always translate to quality,
so be cautious.
The bottom line is that NNN leases are
longterm investments. Most tenants will
sign a 10 to 20year lease. This makes
NNN leases a powerful investment, even
if inflation occurs. In most leases there
will even be a provision built into the
terms to help combat inflation.
Picking The Right NNN Lease
& The Downfall of CVS
By Clinton Lu, TFS Properties
Image by mohamed Hassan from Pixabay
78. 78
How a NNN Lease Can Go
Wrong
If you’ve kept an eye on the news
recently, you’ll know that CVS plans to
close roughly 900 stores over the next
three years as they shift their focus away
from their drug store facilities to a more
health care based model. For landlords
who hold the NNN leases for those
particular stores, what began as a lowrisk
investment has now become a need to
reinvest and, in some cases, recoup
losses.
While CVS might be at the forefront
of the public eye, it’s not alone in
responding to the changing consumerism
market. In fact, industry projections
demonstrate “that if online shopping
grows from 18% of retail sales today to
27% in five years, it projects that some
80,000 retail stores will close while
others may arise.” Why keep the brick
andmortar doors open if all your
customers are purchasing from you online?
This pivot from drug store to
healthcare facility also gained momentum
with CVS’s acquisition of Aetna in
2018, alongside the possession of
Caremark. With the pressure of online
prescription drug retailers, CVS began
shifting their business model and
liquidating many of their brink and
mortar locations. For landlords, losing
such a large tenant (and income source),
meant that the search had to begin again
to find a quality, longterm tenant. Often
times this is a tricky process and in the
face of rapidly growing ecommerce,
those tenants may not be as easy to find.
Choose the Right Investment
Here at TFS Properties, Inc., we
foresaw the closing of CVS and
Walgreens and advised our clients
accordingly. With an eye on the push to
drive pharmacy business online,
accelerated by the pandemic’s impact on
sales, it was only a matter of time.
In general, we have steered our clients
away from these types of investments
and more towards industries that we find
are more recession resilient. Changing
ways in how consumers spend their
money makes it hard to compete,
especially where technology is involved.
As such, we put our investors into the
types of investments that have proved
their resilience during the previous
recession as well as the pandemic.
Owning a property with recession
resilience is something every investor
should integrate into their game plan.
We hope you’ve found this article
helpful in differentiating between
profitable NNN lease opportunities.
There are many options out there and
picking the right NNN Lease can mean
the difference between making or losing
money on your investment.
For further questions, feel free to
reach out to us at 6265514326.
'that if online shopping grows from 18% of
retail sales today to 27% in five years, it
projects that some 80,000 retail stores will
close while others may arise.'
Image by mohamed Hassan from Pixabay
82. 82
A
re all loans second to
NONI (NonOwner,
No Income) for cash
flow purposes? Does
your investment
property give you a positive annual cash
flow with or without significant vacancy
rates, repairs, nonpayment of rents due
to tenant moratoriums or other reasons,
and costly management expenses? How
many investment property owners are
stuck with high 7% to 10%+ private
money or an expensive 30year fixed
mortgage that creates negative monthly
cash flow? The NONI interestonly loan
or fully amortizing loan with 7, 10, 30,
and 40year fixed terms is an exceptional
financial choice.
NONI InterestOnly Loans
First off, can you afford your monthly
mortgage payment? Without positive
cash flow and the ability to pay your
mortgage payments on time, your
investment properties may be at risk for
future forbearance, loan modification, or
distressed sale situations where you
could later lose your positive equity in a
future foreclosure. The combination of
positive cash flow and compounding
equity gains should be the primary goal
for investors instead of having
unaffordable mortgage payments.
Here’s some eyeopening NONI loan
products highlights that keep customers
coming back for more NONI products,
especially if the investor owns 2, 5, 10, or
20+ rental properties:
• Starting interestonly rates as low as
3.875%*
• Designed for business purpose 14 unit
residential loans in most states
• No income or employment collected
on the loan application
• Loan amounts to $3.5 million for non
owner properties
• No 4506T, tax returns, W2s or pay
stubs
• Qualification is based on property
cashflow, NOT borrower income
• First time investors allowed
• Multipurpose LLC allowed
• Unlimited cashout up to 75% LTV
• As little as 0 months reserves (use cash
out for reserve qualifications)
• NONI doesn’t care how many
properties a borrower owns
• The lower I/O payment (when I/O
option is chosen) is used when
calculating DSCR and cash reserves
• 85% LTV available for purchase and
rate/term transactions (680+ FICO)
• Rental income is taken from an
existing lease or the rent survey from
the appraisal and compared to the
mortgage payment to determine debt
coverage ratio. (ALL program
guidelines and rates subject to change
and qualification.)
The Non-Owner,
No Income (NONI)
Loan Solution
By Rick Tobin
Image by ErikaWittlieb from Pixabay
The combination
of positive cash
flow and
compounding
equity gains should
be the primary goal
for investors
instead of having
unaffordable
mortgage
payments.
83. 83
Loan amount: $1,000,000
30year fixed rate payment:
$4,702.37/mo. (principal and interest)
10year fixed interestonly:
$3,229.17/mo.
Loan amount: $2,000,000
30year fixed rate payment:
$9,404.74/mo. (principal and interest)
10year fixed interestonly:
$6,458.33/mo.
Loan amount: $3,000,000
30year fixed rate payment:
$14,107.11/mo. (principal and interest)
10year fixed interestonly:
$9,687.50/mo.
*APRs from 4.79%: The 10year fixed
loan converts to an adjustable for the
remaining 20 or 30 years with 30year
and possible 40year loan term options.
There are also 30year and 40year fixed
interestonly loan programs at higher
rates (ALL rates and programs subject to
change.)
For traditional loan programs, many
lenders will take 75% of your gross rents
to qualify for a new mortgage loan
because the lender assumes that you
have vacancies, repairs, and property
management fees. For easy math, a
rental property with $1,000 per month in
gross income is underwritten as if it were
$750 per month and another pricier
property with $10,000 per month in
rental income is analyzed as if it were
$7,500 per month.
For NONI, on the other hand, you can
qualify at 1.0 DSCR (Debt Service
Coverage Ratio) or breakeven levels.
For example, your rental home averages
$2,000 per month, so your newly
proposed mortgage payment (including
property taxes, insurance, and
homeowners association fees, if
applicable) must be equal or lower to
that same gross rental income. As a
result, it’s much easier to qualify for a
NONI loan product than any other
residential mortgage loan that I know of
today.
30Year Fixed vs. 10Year
InterestOnly
A 30year mortgage payment doesn't
usually begin to pay down any significant
amount of loan principal until after the
7th year. The average mortgage borrower
keeps their loan for nearly seven years,
so an interestonly loan product can be a
much more solid choice today for many
borrowers.
Let's compare the fully amortizing 30
year fixed payment with a 10year
interestonly payment with cashout
options to see the difference for the same
3.875%* rate:
Loan amount: $250,000
30year fixed rate payment:
$1,175.59/mo. (principal and interest)
10year fixed interestonly: $807.29/mo.
Loan amount: $500,000
30year fixed rate payment:
$2,351.19/mo. (principal and interest)
10year fixed interestonly:
$1,614.58/mo.
Loan amount: $750,000
30year fixed rate payment:
$3,526.78/mo. (principal and interest)
10year fixed interestonly:
$2,421.88/mo.
Image by Gerd Altmann from Pixabay
Image by Precondo from Pixabay
84. 84
MEET RICK TOBIN
Rick Tobin has a
diversified background in
both the real estate and
securities fields for the
past 30+ years. He has
held seven different real
estate and securities
brokerage licenses to date, and is a
graduate of the University of Southern
California. Rick has an extensive
background in the financing of
residential and commercial properties
around the U.S with debt, equity, and
mezzanine money. His funding sources
have included banks, life insurance
companies, REITs (Real Estate
Investment Trusts), equity funds, and
foreign money sources. You can visit Rick
Tobin at RealLoans.com for more details.
Image by mohamed Hassan from Pixabay
Increasing Inflation and Rates,
Decreasing Dollar Value
The more money that is created
together between the US Treasury and
Federal Reserve, the lower the purchasing
power. Inflation can severely damage the
purchasing power of the dollar while
generally benefiting real estate assets.
US M1 Money Supply (February
2020): $4 trillion
US M1 Money Supply (March 2020
October 2021): From $4 to $20 trillion
Or, 80% of today’s M1 Money Supply,
or an additional $16 trillion dollars in
circulation, was created within just 22
months (March 2020 to October 2021).
Most Americans create the bulk of
their family’s net worth from the
ownership of real estate, not hiding cash
under their mattress or holding stocks or
bonds. Inflation is also a hidden form of
taxation. One of the best ways to offset
weaker dollars is to buy and hold real
estate as a hedge against rising inflation
while also generating monthly cash flow.
Today’s younger investors may not
remember 10% to 20% fixed mortgage
rates from years past. If your rental
properties are losing money at a 3% or
4% fixed rate today, then any future
properties purchased with higher rates
will lose even more money unless you
select a much more affordable interest
only loan product.
Let’s take a look next the average
published 30year fixed rate for owner
occupants who qualify with full income
and asset documentation by decade:
• 12.7% in the 1980s
• 8.12% in the 1990s
• 6.29% in the 2000s
• 4.09% in the 2010s
The common link between each of
these decades was that perceived inflation
risks were usually a core reason why the
Federal Reserve increased interest rates
in order to quash inflation. Today’s
published inflation rates are at 40year
highs. Yet, they are still underreported
and are actually much higher as partly
noted by annual used car prices rising
almost 48% in just 12 months near the
end of 2021.
Doubling Asset Values
If you keep the old Rule of 72 (how
long it takes to double an asset value by
the annual gain or interest return
projections) in mind with rising inflation
trends continuing to boost housing prices,
you will clearly see the potential to boost
your net worth. For example, a home
doubles in value based upon the gains
such as a 7.2% annual increase that will
take 10 years for the home to double in
value (72 / 7.2% = 10 years).
Between November 2020 and
November 2021, it was reported that the
average home price, including distressed
properties, increased more than 18%. If
that home price gain trend continued at
the same annual pace, the average home
price could double in value every 4 years
(72 / 18 = 4 years). In many pricey coastal
regions, homes have appreciated 30% to
35%+ per year over the past few years.
As a result, many investors have seen
their home values double in just two or
three years.
As rates are more likely to increase
than decrease in the future, the interest
only loan products that can be fixed for 7,
10, 30, or 40 years make more sense from
a cash flow and peace of mind standpoint.
While NONI keeps your payments
low, your net worth may be boosted sky
high as the soaring inflation trends
continue and properties may double or
triple in value!
92. 92
Y
ou are not alone
if you have
recently faced
financial
challenges, such
as a loss of
employment, significant medical bills, or
a tragic incident. The majority of the
world's population is affected by the
COVID scenario. Over 57% of
American adults, for example, are unable
to pay medical costs, which are the
leading cause of personal bankruptcy.
Some people may attribute their
financial difficulties to illogical spending
or bad saving practices. If you're one of
them, and you have a significant
outstanding balance on one or even more
credit cards, you might be finding it
difficult to get out of debt. If you can
only afford to make minimum monthly
payments, paying off your credit cards
might take several years, if not decades.
If you own a home, you might apply
for a home equity loan and use the funds
to pay off your credit card debt. You
might be able to handle highinterest
unsecured debts like credit card debt or
payday loans using a home equity loan.
Let's look at the best ways to do that
through a home equity loan.
But before going further, let’s know a
bit more about Home Equity loans.
What is a Home Equity Loan?
A home equity loan helps you borrow
against the value of your home that has
grown over time. If your home is
currently worth $500000, but you owe
$200,000 on your home loan, you have
$300,000 in equity.
A financial institution, credit union, or
other lenders might be willing to give
you a home equity loan equivalent to a
percentage of your equity, depending on
this information. Other criteria, such as
your credit score, will influence how
much you may borrow and if you can get
a loan at all.
Requirements to Borrow from
Home Equity
Analyze your requirements, how they
would fit into your finances and style of
living before taking out a home equity
loan. The criteria differ depending on the
lender, but in general, you'll need:
• A specific amount of equity in the
house (15 percent to 20 percent)
• Creditworthiness
• Low debttoincome ratio (DTI)
• Having enough income
• A decent payment history
The balance between the amount you
owe on your home loan and the home's
market value is known as equity. Lenders
use this number to compute the loanto
value ratio, or LTV, which determines
whether you meet a home equity loan
criteria.
Image by mohamed Hassan from Pixabay
Image by mohamed Hassan from Pixabay
