Monday, December 21, 2009

The Sub2 Chihuahua Rides Shotgun!

his is my Terrier/Chihuahua mix Wolfie resting on the way home from a prospecting journey.

We checked out a new farm of multifamily income properties that look like fabulous Sub2 deals in the making.

Nobody knows these properties are for sale! YES! And the sellers are scared spit-less about the vacancy rates in the area, and don't have the courage to weather a storm. YES!

Not to mention that the unit prices are shaping up to be fantastic high cash flowing deals for a knowledgeable investor. Meanwhile, taking over poorly operating buildings and getting them turned around without any financing obstacles is REALLY nice, if not just a giggly thing to ponder.

Did you know the most cash flowing properties are the same ones the bank is least desirous to lend on, or likely to finance for a decent rate?

Yes, we can find the baby cash-cow dumps with a potential 25% capitalization rate, but because those properties are located in C-minus or D-plus areas, the bank holds its nose and says, "no thanks" to our requests for loans. How come the most secure deals are the ones banks don't like, I ask?

Here's one hypothesis. Banks are like low-return pride of ownership types of buyers. They like to plow money into low-return ["A"] projects that they can point to and say, "We lent on that!"

How nice.

Now if you ask the bank's borrowers what their returns are on those same "A" properties, they might say, "Uh, about 2.5 percent." Uh, huh.

Well, I like bigger returns. We prefer meaningful returns, not ones that can't even match the costs of rising energy. We find these juicy returns where the average investor doesn't want to shop, and the average bank doesn't want to lend. Yay!

There are so many opportunities waiting for the courageous and the proactive.
Meanwhile Wolfie, the Sub2 Dog, will ride soon again looking for stray cats and bicyclists to bark at while we talk with sellers who don't know how to turn a lemon into lemonade the sub2 way!

If you would like to know how Wolfie buys cash-flow opportunities without a credit check or down payments, click here: "Screw The Bank!"


MattJohnson said...

The Sub2 Chihuahua...LOL.

A 25 cap? Now that's impressive. If you don't mind me asking, do you typically do a lot of rehab on these type of deals, or is it more of a management turnaround, boot-out-the-druggie-tenants type of project (or both)?

Thanks and Merry Christmas to you!


Jay Palmquist said...

25 caps are not unusual, but they have to be created by getting in cheap on mostly mismanaged projects. Also the larger the building the easier to achieve these rates.

The more we have to do, the better the cap rate needs to be.

If I'm rehabbing units; doing mass evictions, repositioning the project in the market; implementing a complete management and maintenance turnaround, etc, then we can easily expect 25 caps after all is said and done --- or why bother, is my question.

What's more, once we've got the building at optimum operating temperature, we've got every profit option available to us; cash flow, borrowing out new equity; selling at lower cap rate; paying off the mortgage, etc.

Yes, I've had to do some rehab (or upgrading) on the high cap projects (to get them to a high cap). However, it doesn't always take expensive upgrading. For example, paint does wonders. Detailing the exterior is a cheap "must to."

Awnings and shutters installed on the street-side windows and entrances is a miracle worker for otherwise plain-Jane buildings.

Foundation plantings, evergreens, and palms are also excellent, cheap marketing tools.

Paying attention to detail is profitable. I like to reroute all visible cable, telephone, and when possible, water/gas pipes from the building's exterior. There are more usually more elegant ways to distribute these lines than attaching a bunch of stuff to the outside walls where everyone can see. My maintenance guy can do what professional can't do for half a much money. After all I'm already paying a couple of them full time, so I'm just keeping them busy

Drug abusers are no more difficult to deal with than the typical deadbeat...however, the dealers are a different story.

I was able to put two dealers in prison a few years back. My building became so much easier and pleasant to operate after the "trash" was gone.

However, these situations are the same ones where we need to get in "light" and be prepared to face a several issues all at once. Time is money.

MattJohnson said...

Wow; thank you for the detailed response! Very cool stuff!

Jason said...

Hey Jay,

Awesome stuff.

Are you focusing on multi units more so than SFHs these days?
Also, are you finding these in the same "places" as the SFHs?
Not geographically, rather, do you farm for these using the same criteria as SFHs?


Jay Palmquist said...

Hi Jason,

The search criteria and marketing approach are completely different between SFH, and multifamily, but the mechanics are identical.

I am pitching the upper price point houses that are less than 8 years old. I am also pitching either really new owners of ghetto property, or long term owners. Either category wants out for different reasons, but both offer leverage.

I'm driving a lot.

Jason said...

Being a fellow $Cash Now$ sub2 colleague, I'm familiar with the equity/seller criteria with SFHs, but was unsure about your sellers' qualifications with commercial.

So, the only common denominator is that you're merely purchasing sub2?


Jay Palmquist said...


The primary commercial qualification we want is a management problem that needs solving.

However, what's interesting, is the number of relatively low-leveraged projects that get in trouble via mismanagement. I would offer that mismanagement is the number one deal creator.

Absentee owners (of any size property) with poor on-site managers are very good prospects. These owners thought they could just turn their nest egg over to a professional management company and then receive a passive income for the rest of their lives with minimal engagement. Wrong. Oh, so wrong.

Once they realize this is the real world, and the management company is siphoning off every single penny of cash-flow, dinging them for hundreds of dollars (if not thousands) in repairs every time they turn around, and watching the vacancy factors fluctuate widely, they become frustrated at the prospects of increasing levels of personal involvement and often change their minds about multifamily and want out.

A big difference between pithcing SFH owners and commercial is that commercial owners are more practical (sophisticated) and open to financing alternatives to solving their problems than residential sellers.

In my experience, it's generally easier to negotiate with commercial owners. They do take the same 30 minutes of questioning to get past the lies about why they're selling, but once we get past the lies, they'll negotiate forthrightly.

Something I've been reminded of recently is that sellers respond well to a reasoned offers that spell out the benefits of each term requested.

That's to say, the better we couch our offer terms as benefits to the seller, the better deals we get. That's not news, or new, but...

I love to conspire with a seller in reaching a conclusion. Sellers will cough up genuine reasons for needing certain things, and their guard goes down to a great degree in the process. I become a consultant/friend who is helping them accomplish what they're after.

HOWEVER, it's never wise to forget that we're not "friends", and barf up what WE are going to do after we buy their property. Seller's are not usually stupid. So, if we're not careful, we can end up giving them the strategies for solving their own problems, and suddenly decide not to sell after all. That's not good!

The seller's pain should be relieved after closing, not during the negotiations. :D

Does that answer your question at all?


MattJohnson said...

Now I gotta break out my Barney Zick/Zig Ziglar tapes, LOL.

GREAT article and posts, Jay. Thanks for the info.

Merry Christmas to you and your family.

Jay Palmquist said...

Merry Christmas!