Getting the right financing for each property is critical. It’s a good thing if the real estate fiasco of 2009-2010 is still fresh in your mind. It should make you extra careful. Some of the key factors in commercial loans are: interest rate, term, amortization, recourse vs. non-recourse, balloon payment, etc. It gets more complicated for real estate syndications. We won’t cover that in this book. Relationship with lenders and capital markets expert is critical. We are lucky to have Robert Damigella on our team who is a capital markets expert who can raise debt and equity, fast!
If you go in for an adjustable rate mortgage, you could face much higher payments when interest rates rise that could kill your cash flow. You need to be aware of these potential changes before you buy the property and the math should still work. Our underwriting model factors in these interest rate changes and spits out expected returns and cash flows. We at Income Properties Portfolio are more cautious than optimistic when evaluating a deal and love to play devils advocate. We have seen too many times where new investors are just so eager to acquire that first property that they sometime overlook the very basics that could make or break the deal.
As it goes with real estate, it’s all about location, location, location! It’s true. If you buy a property in a part of your city that is falling apart, there is no way you will get quality tenants. You can expect things such as late or no payments, vandalism, break-ins, robberies, abandonment, etc. As mentioned elsewhere in this book, you want to lease to tenants who have something to lose, people who have decent or better credit, good employment or studying and the financial ability to pay rent. All these things can be verified before you rent it to a tenant. This is why we see very little evictions across my own properties or my partners 1,400 units.
Over estimating rents and growth in rental rates can also kill your cash flow. Anything that kills cash flow means you might have to dip into your pocket to pay for expenses and the debt service. You NEVER want to be in that situation. You need to have a solid understanding of your market and what rents you can collect for your property. You also need to be aware of rate of increase in rents. This is critical because this will have an impact on your cash flows and investors’ return on investment. We discuss these in detail in our Saturday strategy session.
Finally, you need to have a good general contractor. Reputation matters. GCs (short for general contractor) are notorious for underestimating the cost and time when giving you a quote. Of course the good ones will not play those games. But if you cheap out, you will run into someone who quotes you say $50,000 but the actual bill turn out to be $75,000. For smaller properties, banks generally don’t finance construction costs so you might have to fork that out of your pocket. That kind of a sudden surprise can completely ruin a project and ruin your financial situation because remember you still have to make payments on the property while the contractor is working on it. So you need to know what you are doing.