Learn the insider secrets on successful property procurement from a proven pro: Michael Pierce of Prodesse! SJREI is the Bay Area's premier association for real estate investors to hear the industry's most elite speakers, network and learn.

2. 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

3. • Prodesse Property Group
• 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

4. • 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

5. Evaluating Rental Properties for 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?

6. Evaluating Rental Properties for 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?

7. Evaluating Rental Properties for 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!

8. Evaluating Rental Properties for 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?

13. Evaluating Rental Properties for 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

14. Existing Rent Roll
Resident Unit 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

15. Evaluating Rental Properties for 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!

16. Assumptions Year 1 Year 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

17. Evaluating Rental Properties for 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

18. Evaluating Rental Properties for 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.

19. Average Year 1 Year 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

20. Evaluating Rental Properties for 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

21. Evaluating Rental Properties for 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

24. Evaluating Rental Properties for 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

25. Capital Improvement Reserves Total 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

26. Evaluating Rental Properties for 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

27. 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

28. Evaluating Rental Properties for Purchase
Determining (Your) Value
• Finalizing your Budget & Plan
– Review all assumptions
– Recheck all figures
– Develop your Acceptable Price Point

29. Evaluating Rental Properties for 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?

30. Contract Price $705,000.00
Less:
Termite Report 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

31. Evaluating Rental Properties for 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!

32. Average Year 1 Year 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%

33. Proposed
Total Units 3
Purchase Price $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

34. Evaluating Rental Properties for 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.

35. Evaluating Rental Properties for 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!

45. • Examples of Prodesse Approach

71. Evaluating Rental Properties for Purchase Handout
• Evaluating Rental Properties for Purchase
• 1. Defining Your Search a. Know Thyself
• 2. Property Evaluation & Due Diligence a. Revenue
• Proving Existing Revenue
• Forecasting Future Revenue
• 1. Market research & market knowledge
• b. Expenses
• Proving Existing Expenses
• Forecasting Future Expenses
• 1. How will you operate?
• c. Physical Inspections
i. Who is on your team?
• d. Capital Improvements
i. What is your Capital Improvement Plan?
• 3. Financing
a. What options are available to you?
• Determining Value
– Finalizing your Budget & Plan
– Developing your Acceptable Price Point
• Negotiation Strategy
– What can you ask for?
– What will the market allow?
• Go Decision
• Negotiation & Execution

72. Thank You!