Over the past 12 months my partners and I have been buying single family home foreclosures. Homes are selling for deep discounts and providing high cash-flow rates once rented. Our strategy is not to buy and flip, but to buy, rehab then rent to provide cash-flow and capital appreciation. On the surface this may seem as easy as drinking coffee because of the high number of foreclosures available. But don't be fooled with high quantity and low prices. Buying foreclosure properties is not as easy as it may seem. Buying houses for cash has been our strategy which is one way to up your chances of success. Refer to my previous article "Buying Real Estate With All-Cash" In todays article I'll outline another strategy that when paired with all-cash works for us.

Buying homes at deep discounts for cash relieves vacancy pressure as there is no unerlying mortgage. You may still have a lean on the property held by a private lender but hopefully you have worked out the terms so that you have 60-90 days until your first interest payment. Racing out to find a tenant before your first payment is no longer a pressing issue. You can be more choosy when screening tenants. You can hold closer to your asking rent price and not decrease it just to get the property occupied. You can save money by performing more of the rehab yourself. These are just a few of the benefits.

As easy as it might seem to buy real estate at low prices, a problem has arrisen that must be addressed if we are to successfully close deals with banks. I have found, as with many of my collegues that seller real estate agents have all the control when it comes to you submitting your offer, deciphering which offers to submit, how much information they tell you ahead of time, and lets face it some blatently do nothing. As a buyer in the past I have typically used a buying real estate agent to help me track down candidate properties, perform showings and leg work. As a result I did not close many deals dispite offering near or above asking price. The reason...

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In an up and down market there are those investors that will dig up opportunities regardless of the state of the economy. In the current climate banks are holding on to their cash with a wait and see attitude. Savvy investors are finding that buying with "All-cash" works as a viable strategy for acquiring residential and commercial bank owned properties. Investors with a wait and see attitude for institutional lending and financing are missing a great opportunity to buy while everything is on sale. Rock bottom prices in the residential and commercial markets in part have been driven down by the scarce availability of credit.

A Hostile Lending Environment

Currently, savings and loan banks, an alternative to commercial lending institutions and private lenders, will typically finance up to 65-70% percent of property values. Buyers in some cases are required to bring 30-35% to the closing table to even be considered. The Commercial Mortgage-Backed Securities (CMBS) market which has traditionally produced many lenders eager to compete for loans has been stalled since the 4'th quarter of 2007. For example: In the first 3 quarters of 2008 only $12 to $13 billion worth of commercial loans were securitized. Already, 2009 is on its way to having the lowest production of securitized commercial loans in 10 years as stated by Commercial Real Estate Direct. Some banks, in order to finace a new project, are requiring developers to pre-lease roughly 70 percent of office/retail units and housing. Shorter amortization periods and higher interest rates added to the mix creates the perfect storm for an even more hostile lending environment.

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There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.

It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.

This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.

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When it comes to investment properties there are loopholes which create many options. For instance, Section 1031 of the IRS tax code permits real estate investors to sell their investment properties and in return allow a trade for comparable or similar matched investments in order to defer the tax as the capital gains amass. It seems that real estate is truly the most popular transaction permitted by this code. Something called the Triple Net or NNN otherwise known, as Leased Real Estate is considered appropriate as alternate property during such a transaction. What this really entails is a Net lease where a tenant foots the bill for all or most of the properties' active expenses over and above the rent. It is important that before we discuss the particulars of Net lease that we have an understanding of other kinds of leases as each serves a different purpose.

First there is the bond lease that makes the tenant completely accountable for active expenses encompassing the property's operating costs, which include regular maintenance, repairs and substitute costs for replacing materials etc. Second there is the Triple Net or NNN lease, which incurs actual restrictions on capital expenses. The tenant must pay for property expenses including tax, insurance and maintenance, as under this kind of lease, these are the tenants responsibility. Third taking from the NNN lease is the Net Net or NN lease. This is somewhat the same as NNN lease but returns the responsibility of the physical up keep of the structure to the landlord. They must make sure major items such as the roof are in good working order. Lastly the Modified Net lease infurs that the tenant pays for everything including utilities, maintenance, repairs and insurance. They do not pay property taxes.

For the NNN situation first the situation may allow less property management issues to be a problem for the investor. This is especially true for investors dealing with multi-family units, complexes considered commercial because they want the profit and income without the hard work or heartache. They also want to postpone their tax accountabilities without having to play the role of landlord 100% of the time. Savvy investors use NNN leases because they insure income but still allow for ownership to stay in their name and portfolio while maintaining a good level of capital. Another aspect of the NNN is that it also makes the transfer of real estate to beneficiaries easier.

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During this time of financial uncertainty as giant powerful cornerstones of the American banking community fail, you have to wonder, is my money safe? What happens if my bank is no longer doing business? Should I take my money out? What about small, regional banks and even credit unions? Are they immune or will they suffer the same fate? Should I worry about my long-term investments? Is it finally time to get organized and figure out my finances?

For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice.

Oprah has Suze Orman on her show as a way to elevate the worry but still there are very few answers and still more questions. We can take a moment to answers the questions but you also must keep in mind, the answers are changing for from minute to minute.

How can I tell if my bank will fail? Well you really can't. There's no easy way to know and I'm certain the bank will try to ease your worries. You should look at indications within the market because there is no a hot list of banks going bad. The Federal Deposit Insurance Corp does not publish one. Furthermore, according to the American Bankers Association many banks rebound and recover so quickly that it's next to impossible for them to produce a list.

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 It happens all the time when you engage in acquiring a new property through contract, there is not much information about the property known at that stage.  All you may know is the details of the financial statement and rent payroll or you've visually inspected the place by driving around the block.  This is more than enough details to make a solid educated offer on the place but it does not by any mean represent the actual value.  There's a lot more information you'll need to know to determine the real value.

Really this is the job of the Due Diligence process.  What is the purpose of this process?  Due Diligence is an analysis by which your risk is assessed.  Much like discovery in a court case, you will have at least 30 days to figure out what exactly the property entails and what owning the property requires you to be responsible for.  Finally, also what kind of benefit you will receive as a result of purchasing the property.  What will be your cost benefit and profit?

There are four ways risk can ruin this success and by you knowing the potential risk involved, you can steer clear of these situations.  The following potential risks for these transactions are: Market, Financial, Tenant, and Physical. 

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Commercial real estate can lead to just about any lifestyle you can dream up, but if you're not careful how you play your cards, you can find yourself living through some expensive lessons. Fortunately, even in today's housing crunch, crossing the line from multiple homeowner to one who invests in commercial real estate isn't all that difficult, as long as you plan out a realistic strategy and game plan.

 Some people start out by buying a rental property, others rent out their own home, and move on from there. After acquiring a few homes this way, they branch out with a duplex or a small apartment. If this continues eventually the bank is going to put on the brakes by telling you that your portfolio is beyond their lending protocol for multiple residential properties.

If you've grown too big for your britches but want to continue expanding your mini-empire you'll have to learn the "how-to's" of commercial real estate. Possibly you acquired one commercial property and everything went off without a hitch. But the next one didn't. Suddenly you find you "hit the wall" - you're in property owners no man's land.

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If you are a real estate professional then you know about the gross income multiplier, GIM or the formula that determines the value of rental real estate. It has been used for decades.

There are many schools of thought on how to determine the value of rental property but I always use my readings as a rule of thumb.  Any real estate textbook will tell you not to invest in a property with a GIM of more than 8.  The formula is simple enough: divide the price by the gross annual rents to get the GIM.

With this definition in mind it seems that particular author wants me to never pay more than 8 times the annual rent for a rental property.  This helps the buyer open their eyes to mow much of a rental property they can afford to buy.  It makes plenty of sense really.  Seems that if a property was selling for 6 times the rental income, then that was a really good deal.  I mean anything higher than 8 times the rental income and that becomes a dangerous proposition.  This simple method makes it easy for the average Joe to know what they are getting into. 

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 One important aspect of due diligence is to know your documents but specifically understanding the details of the lease, insurance policy, and title policy.  The lease, out of all of these is of utmost importance because it remains the roadmap for future events concerning the property.  Part of the issue with the lease is language.  There is a lot of strange stuff, interesting jargon presented in the terms of a lease.  Really I wonder when legal ease will be common enough for an ordinary person to understand.  Such examples of strange amendments to a generic lease include: First options on purchase, the right to take over adjacent space, tenant ownership of plumbing fixtures (really!), agreements for new carpet every year. Really anything is possible.

One would think that there is a cookie cutter answer to the common lease agreement.  It seems very few properties have what is commonly termed as a "standardized lease template" mainly because over the lifetime of the property management, the owner is faced with signing new leases and making concessions for each individual tenant.  Some tenants will be more nit picky than others.  Some tenant may agree to paint the living room or include other repairs that will amount to a profit for the owner in the long run but mainly benefits the existing tenant.  A lot of the time, much goes unnoticed by property managers and it is at the owner's discretion to know the lease backward and forwards.



Every word of the lease is crucial.  It is important that everything remain clear for both the owner and the tenant.  It is a good idea to have an outside party review the lease and compare notes.  If there are questions, please ask them and be straightforward about any concerns.  This process is usually so important that I do not let anyone else handle it.

It is in my best interest that I understand every detail of every lease.  Otherwise I am just setting myself up for failure with these tenants and sometimes even the owners.  Sometimes the owners don't even know the specifics of each lease.  That is why you need to ask questions and understand each situation.  It is the nature of the job that sometimes people tell me too much and I must remain objective. Still this creates a level of honesty I have come to respect of my clients.

Well as it happens with more and more questions come up things that the client remembers about the leases and something I may not have been aware of from the get go.  So I cannot stress enough how important to ask lots of questions in the process.  The way I see it is, this is a chance to find out about information that may not have already been discussed.

Remember to get a payment history from tenants.  This does not lead to many surprises.  For instance, if there is a problem tenant, someone who is consistently late with the rent, then I want to beware of that issue upfront.  If it is chronic problem, I may see the need to discount the cash flow, which in turn leads to a lower price offer. 

There is also the situation where the owner or property manager does not have a system to tracking the cash flow, or documentation of the rental payments, or even a way of verifying with their bank, this proves to become a much more risky situation for me and everyone involved.  Here too, the risk translates to a lower bargaining price.  It has been my experience that in these cases, the paperwork magically appears.

One can always tell a lot of vital information from the insurance policy, especially in the case of a building with some age.  Mind you, a lot of times insurance inspectors know all the tricks of the trade and if you are able to get a hold of the last risk assessment you will be ahead in the long run. You can request this from your client usually the insured is the owner but a copy is a must.  If it is at all possible, get a claims history as well.  This can be a grey area because lot of times, you will have to jolt the owner's memory and this can become issue if they changed carriers every year.  Here there is no real worry, people change insurance providers all the time shopping the best rate is so common but be cautious if they have failed to pay a policy.  What is best in this situation is to make sure the owner can get an affidavit discussing the truth of the claims represented as being complete to the extent of his knowledge.  This can be important for future possible litigation because many sellers want the warranties to survive closing. 

 When in doubt look to the existing title policy.  This will inform you the obvious information regarding easements, rights of way, etc.  Be on the lookout for any special exceptions to title. It is best to have a General Warranty deed if you can get one.  A smart seller will offer a Special Warranty deed as incentive, which will only guarantee title for the time they owned the property.

To further the argument, it is also important to keep in mind the amount of resources and the type of property when completing a due diligence process because some steps may not be warranted.  Really when it comes down to it, there is no other proper substitute for due diligence, but this does not stop people from not understanding its importance. No property is perfect and unfortunately there is no way of preventing this without further investigation. In the long run it protects all parties.  Depending on one's needs, it is fair to say that each transaction will decide what level of due diligence is needed.  There are companies out there that all they do is specializing in this practice.

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The due diligence officer has the very important task to verify, verify, verify. Of course there area exceptions to the rule and one major are the true triple-net property. There's a misconception about what is a real and true triple-net property. Seems that commercial real estate professionals to the point where their definitions not only confuse the buyer but also mislead them to have thrown around a bunch of jargon and terminology.

Honestly speaking the true triple-net, multi-tenant property is an extremely rare find. What this means with a true triple-net leased property is that the tenant takes on the responsibility and expenses of operating the property and this can include a long laundry list such as property taxes; property casualty, and liability insurance; all maintenance including: structural components, mechanical systems, plumbing and drainage systems, glass, and the roof. This just does not happen with most commercial properties.

For the owner, they have a vested interest in the property, which boils down to a small amount of inclusive rights relating to real estate. The only thing this owner needs worry about is where the rent check is sent. Sounds like a property manager's dream come true. The only real way to make the property work that well for you, in the case of a multi-tenant property, is to set up a master lease for the entire building. What happens is then the lessee sublets to each individual tenant. It's almost as if the lessee acts as your agent in the continued transactions for the property.

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