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Successful Property Procurement with Michael Pierce of Prodesse
Michael Pierce of Prodesse Property Group presents a guide on evaluating rental properties for purchase. Emphasizing self-assessment, property selection, financial analysis, and negotiation strategies, he outlines best practices for successful real estate investments. The presentation underscores the importance of due diligence, accurate financial forecasting, and having a clear execution plan.
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Successful Property Procurement with Michael Pierce of Prodesse
- 1. Michael Pierce, CPM,President Prodesse Property Group 1065 E. Hillsdale Boulevard, Suite 317 Foster City, CA 94404 Evaluating Rental Properties for Purchase Presentation to SJREI Members The Domain Hotel, Sunnyvale August 7, 2014
- 2. • Prodesse PropertyGroup • 20 years in business – established October 1993 • 1,900+ units under management • B+ to C product • SFR’s to 100+ unit properties – Santa Clara County – San Mateo County – Alameda County – Santa Cruz County (Capitola, Santa Cruz, Scotts Valley) • 150,000 sq.ft. Commercial Space • 70+ Employees
- 3. • Career Background– 35 years – Multi-Family Industry since 1979 • Valley American Properties (Santa Barbara) • Goldrich & Kest (Bay Area) • Tan Group (Bay Area) • Essex Property Trust (West Coast) • Prodesse Property Group - Co-Founder 1993 • CAA 24+ years – State President 2009 • CAA Tri-County Division – President 1997
- 4. Evaluating Rental Propertiesfor Purchase Defining Your Search • Know Thyself – What can you do? – What do you want to do? – What are you good at? – What have you been successful at? – What types of properties are you good at operating?
- 5. Evaluating Rental Propertiesfor Purchase Defining Your Search • Know Thyself… – Pride of Ownership? – Only cash flow matters & do not care what property looks like or what the neighbors might think? – Self Manage? – Hire professional management? – Return on investment requirements?
- 6. Evaluating Rental Propertiesfor Purchase Defining Your Search – Property Selection • What matters? – Only 2 Things you Cannot Cure in a Real Estate Deal – What are they? » Purchase Price » Location » All other things can be dealt with in some way » Good bones – can fix, but really expensive!
- 7. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Sale Package – What is real? – What can you believe? – Assume Everything is a Lie! • Getting into the numbers – Prove every number – Build your own operating budget – Forecast forward – Capital plan?
- 12. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Proving Existing Revenue – Rent Roll – Rental Agreements/Leases – Increase Letters/Tenant Files – Date & amount of last rent increases – Estoppels – Now rebuild rent roll from scratch
- 13. Existing Rent Roll ResidentUnit Type Rent Deposit John Doe A 2x1 $895 $800 Betty Smith B 2x1 $895 $900 VACANT C 2x1 $0 $0 Total $1,790.00 $1,700.00
- 14. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Forecasting Future Revenue – Assumptions re: rent growth, occupancy/vacancy » Market rents & Rent increases » Turnover – natural or forced? – Market knowledge » Subtleties of neighborhoods & direction » Remember you cannot control a market! » You can only chart the best course through it!
- 15. Assumptions Year 1Year 2 Year 3 Year 4 Year 5 Annual Income Growth 0.00% 2.50% 2.50% 2.50% 2.50% Annual Expense Growth 2.00% 2.00% 2.00% 2.00% 2.00% Market Rent Roll Per Unit Total Year 2 Year 3 Year 4 Year 5 Studio, One Bath 0 $0 $0 $0 $0 $0 $0 Jr. One Bedroom, One Bath 0 $0 $0 $0 $0 $0 $0 One Bedroom, One Bath 0 $0 $0 $0 $0 $0 $0 Two Bedroom, One Bath 3 $1,795 $5,385 $1,795 $1,840 $1,886 $1,933 Total Units 3 $5,385 Projected Cash Flow Average Year 1 Year 2 Year 3 Year 4 Year 5 Income Monthly Annual Annual Annual Annual Annual Rent (Current) $3,585 $43,020 $64,620 $66,236 $67,891 $69,589 Laundry $0 $0 $0 $0 $0 $0 RUBS $0 $0 $0 $0 $0 $0 Other $0 $0 $0 $0 $0 $0 Less Vacancy/Delinquency Loss 5.00% ($179) ($2,151) ($3,231) ($3,312) ($3,395) ($3,479) Total Income $3,406 $40,869 $61,389 $62,924 $64,497 $66,109
- 16. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Proving Existing Expenses – Verify utility costs » Copies of prior bills » Contact utility companies if you can – Property taxes – Insurance – What is missing from seller’s expenses? – Add back in
- 17. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Forecasting Future Expenses – How will you operate? » You know better than anyone what your operating style is for a property. – Build your numbers based upon your style & goals – What can be cut or eliminated from expenses? – Can expenses be reduced/eliminated via capital investments? » Trash bins, solar, drip irrigation, RUBs, etc.
- 18. Average Year 1Year 2 Year 3 Year 4 Year 5 Expenses 2.00% Monthly Annual Annual Annual Annual Annual Advertising $0 $0 $0 $0 $0 $0 Onsite Payroll $0 $0 $0 $0 $0 $0 Landscaping $75 $900 $918 $936 $955 $974 Pest Control $0 $0 $0 $0 $0 $0 Property Taxes 1.20% $677 $8,126 $8,289 $8,454 $8,623 $8,796 Insurance $125 $732 $747 $762 $777 $792 Gas & Electric $0 $0 $0 $0 $0 $0 Water & Sewer $0 $0 $0 $0 $0 $0 Trash $0 $0 $0 $0 $0 $0 Management Fees 5.00% $170 $2,043 $3,069 $3,146 $3,225 $3,305 Other/Misc $100 $1,200 $1,224 $1,248 $1,273 $1,299 Maintenance $250 $3,000 $3,060 $3,121 $3,184 $3,247 Total Expenses 41.03% $1,397 $16,002 $17,307 $17,668 $18,037 $18,414
- 19. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Physical Inspections – Who should be on your team? » Property Manager or friend in the business » Property Inspector and/or Pest Control » Roofer » Plumber » Electrician
- 20. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Physical Inspections – Walk every unit » Talk to tenants » Ask questions » Look for issues – occupancy, cleanliness, etc. » Posture with seller/seller’s agent – Walk common areas » Boiler rooms, shops, etc. – Afterward – adjust budget & assumptions
- 23. Evaluating Rental Propertiesfor Purchase Property Evaluation & Due Diligence • Capital Improvements – What is your capital improvement plan for the property? » What will you do? » Timing? » Impact on existing residents? – Adjust budget & assumptions accordingly
- 24. Capital Improvement ReservesTotal Per Unit Window Replacements $2,925 $975 Signage $0 Landscape Improvements $20,000 $1,500 Unit Interior Renovation $37,500 $12,500 Concrete/Asphalt $5,000 Railing Replacements $0 Termite/Structural Pest Control Issues $7,500 Exterior Painting $5,000 Garages $0 Roofing $7,500 Fencing $7,500 Total Capital Improvement Reserves $92,925 $30,975
- 25. Evaluating Rental Propertiesfor Purchase Financing • Develop your financing options for the property. – What debt level will you carry? – What type of financing? – What rates, terms, amortization? – Will there be a balloon payment or interest rate reset? • Adjust Budget & Assumptions Accordingly
- 26. Financing Options Yrs. Yrs.Yrs. Fixed Prepayment Loan Fixed Amortize d Variable Rate Pts. Penalty LTV 65% Single Member LLC 30 30 0 5.45% 0.00% None Over 417,000 LTV 65% Multi-member LLC 30 30 0 5.90% 0.50% 5 yrs. 20%/yr. 1% of balance LTV 70% Multi-member LLC 15 15 0 5.30% 0.50% None? LTV 70% Variable Fixed 7 yrs 7 30 23 4.65% 0.50% 4 yrs. 1% of balance LTV 70% Variable Fixed 5 yrs 5 30 25 4.00% 0.50% 4 yrs. 1% of balance
- 27. Evaluating Rental Propertiesfor Purchase Determining (Your) Value • Finalizing your Budget & Plan – Review all assumptions – Recheck all figures – Develop your Acceptable Price Point
- 28. Evaluating Rental Propertiesfor Purchase Negotiation Strategy • What can you ask for? – Inspection results – Reports – Market changes? • What will the current market environment allow? • What is the seller like? – What have you learned for the seller’s agent?
- 29. Contract Price $705,000.00 Less: TermiteReport Items 3,720.00 Insurance Repair Items 6,480.00 Buyers Agent Commission 2.50% 17,625.00 Total Deductions 27,825.00 Net Adjusted Price $677,175.00 Net Adjusted Price per Unit 3 $225,725.00
- 30. Evaluating Rental Propertiesfor Purchase Go Decision • What do the numbers tell you? – Have you been honest in your assumptions? – Is the return meeting your goals & needs? – Do you need a price reduction and/or credits? » What if the seller is unwilling to give them to you? • What does your gut tell you? • What do other trusted friends & advisors think? • Time to Decide!
- 31. Average Year 1Year 2 Year 3 Year 4 Year 5 Monthly Annual Annual Annual Annual Annual Net Operating Income 58.97% $2,008 $24,867 $44,082 $45,256 $46,460 $47,695 - Cash on Cash Return (All Cash) 3.13% 5.55% 5.70% 5.85% 6.01% Debt Service 4.60% $2,256 $27,078 $27,078 $27,078 $27,078 $27,078 DCR 1.15 0.92 1.63 1.67 1.72 1.76 Cash Flow After Debt Service -7.29% ($248) ($2,210) $17,005 $18,178 $19,382 $20,617 - Cash on Cash Return (Financed) -0.62% 4.81% 5.14% 5.48% 5.83%
- 32. Proposed Total Units 3 PurchasePrice $677,175 Price/Unit $225,725 Down % 35.00% Down $ $237,011 35.00% Loan Amount $440,164 65.00% Loan Rate *Note 1 4.600% Loan Term 360 Loan Payment $2,256 Purchase CAP Rate 2.80% Proforma CAP Rate 3.67% Current GRM 33.49 Proforma GRM 15.74 Current Gross Rents 20,220 Current NOI 18,993 Required Funds Down Payment $237,011 Reserves, Closing Costs, LLC Formation $116,678 $38,893 Total Investment (Required Funds) $353,690 44.55% Total Property Cost $793,853 100.00% Total Cost/Unit $264,618
- 33. Evaluating Rental Propertiesfor Purchase Negotiation & Execution • If the answer is yes – Go! – Present your case for any desired reductions to seller and seller’s agent » Know where you are willing to settle, where you are not. – Follow your plan » If you need a price reduction &/or credits and you do not get them, be prepared to walk away.
- 34. Evaluating Rental Propertiesfor Purchase Execution • If you get the deal? • If the answer is yes – Go! – You have built a strong budget – You have built a strong plan – Now - Execute your plan! • Good Luck!
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- 45. • Examples ofProdesse Approach
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