Pushing Dirt

Believe it or not, seller-held financing has benefits for both parties.

One of the biggest advantages for the seller is that holding paper equates to an installment sale, which is a mechanism for deferring capital gains tax. The seller only pays capital gains tax as the principal balance is paid down. An interest-only seller-held note offers the greatest opportunity for savings as no principal is paid down during the term of the note.

This tax benefit is so compelling that a vehicle called a Deferred Sales Trust has been developed to take advantage of the installment sales rules to allow sellers to defer taxes without holding paper. Refer to http://likekind.org for more details.

The benefits for the buyer are fairly apparent: the seller might be the only source available to finance a particular project, or may offer better terms including higher leverage, a lower rate, or a longer amortization. A buyer can potentially, when permitted by the lender with the first trust, to secure a second mortgage from the seller to garner even greater leverage. While the seller may want to qualify the prospective borrower, the process of securing the loan is likely going to be less painful.

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Commercial properties generally require a lengthy study period during which the prospective buyer completes necessary due diligence. The due diligence requires the work of third parties like engineers (who complete environmental studies and boundary surveys) and appraisers. The prospective purchaser will also want to study the condition of the property, interview tenants, and work on lining up financing.

The buyer will customarily offer to put up an earnest money deposit to be held in escrow while this work is completed. Most buyers demand a 30 to 60 day due diligence “study period” during which their earnest money deposit is fully refundable if they opt not to proceed with the purchase. Even though the deposit is fully refundable during the study period, it conveys a certain seriousness in the purchasers intentions.

At the peak of the market, in some cases I saw buyers willing to put up a non-refundable deposit upon contract execution. Typically those buyers reviewed leases and other due diligence information rapidly and before signing the purchase and sale agreement — effectively mimicking an auction purchase.

That said, at the end of the day, the amount of the earnest money deposit is a matter of negotiation between buyer and seller. The buyer wants to keep the deposit as small as possible, and the seller would like to see a larger deposit.

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It is one method by which expenses are recovered by a landlord from a tenant. NNN is short for “net net net” and is used interchangably with the phrase “triple net.”

Terms like NNN or “triple net” don’t mean the same thing to every real estate professional so only a lease can give you a definitive answer. To most however, this means that on top of your monthly rental payment, you as tenant are going to be responsible for paying your pro rata share of all operating expenses, including common area maintenance, common utilities, real estate taxes, and insurance.

Some expenses like management fees and maintenance of the roof and structure are passed through in some “net leases” and not in others. Again, the lease governs.

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The term “CAM” is technically short for “common area maintenance.” In the narrowest definition it means just that: building expenses related to maintaining the common areas of a building.

It’s unfortunately in the parlance of the commercial real estate industry become interchangeable by some with “operating expenses,” ie all operating expenses.

I’d encourage you to be precise: if you mean “all operating expenses including real estate taxes and insurance,” say so. And if someone refers to “CAM,” you may need to press them to clarify what they mean.

There a wide range of methods by which landlords recover some all or none of various expense categories.

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Question - What is net operating income? Does it equal cash flow available for debt service?

Answer - The fact is that net operating income does NOT equal cash flow available for debt service.  Items like a capital reserve, major capital improvements, tenant improvement expenditures, and commission expenditures need to be subtracted from net operating income to get to that bottom line of “cash flow available for debt service.”

As such, a capitalization rate (net operating income divided by purchase price), while a good sort of yard stick or rule of thumb indicator, is not a necessarily a particularly good indicator of yield. Consider two different investments:

• Building A is a brand new 30′ clear warehouse leased to the US Government on a long term basis, and
• Building B is a 1980s office building with 20 tenants, local and regional credit, with gradual lease rollover.

Both trading at a purported “10% cap rate.”

Building B is going to require recurrent tenant improvement expenses and leasing commissions where Building A does not.

So why buy Building B?  Well, there are potentially lots of good reasons. Perhaps the rents in Building B are below market. There is arguably less risk in building B, because if a single tenant moves out, you’re left with an empty building. Perhaps building B is located in a better market with more dramatic rent growth. Perhaps the price per square foot of building B is well below replacement cost, and in the case of building A you’re paying more than it would cost to build the building.

So it just goes to show you that a cap rate should only begin your underwriting. You’ve got to take into account return of time (internal rate of return), the market, the building condition, and on and on.

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I’ve been touting REIT stocks as a group. I believe they are widely oversold. I’d steer well clear of any real estate service company stock such as CBRE, Jones Lang Lasalle, Grubb & Ellis. These companies are dependent on commission revenue to survive, and the volume of sales was down 80% last year on the commercial side, with not much improvement on the horizon for 2009. Wall Street analysts love the reliable income these firms’ property management arms generate, but the profit margin on property management is tiny.

Grubb and Ellis is sadly my pick for most likely to collapse in the next 12 months. There’s lots of internal strife at this company and with the stock down to 80 cents a share things are looking bleak.

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When you build a building for your business, make your best effort to design the building so that it lends itself to multi-tenanted use. So for instance if you have a distribution/warehouse use, build a rectangular shaped building with loading across the entire length of the building (either in the front or rear), ample truck courts and parking. For an office building, work with an architect to incorporate design features that a typical multi-tenanted building features: ample attractive lobby area, flexible floorplates with bathrooms and stairwell on a central core, etc.

You may think that the building will be your home until it crumbles to dust, but more likely you’re going to outgrow it, sell your business, or otherwise move. Nothing worse than trying to backfill say a 2 story call center with 100,000 square foot floor plates or a boxy manufacturing facility with minimal loading.

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REITs are now allowed to pay out dividends in stock and not cash. Simon is one of several that have taken advantage of the new rule, and will pay out 90 percent of their dividend in stock.

I like this idea, even though it’s been greeted with a great deal of hand wringing in the media by analysts in the media who are concerned about this diluting existing shareholders.

This new rule allows REITS to preserve cash, and this is an important time for any investor to preserve cash. And if I need the cash, I can immediately sell the shares. I’d rather get my dividend as cash than see my dividend cut.

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It’s coming to commercial real estate! Residential agents have been living in the world of short sales for some time. Now I’m involved in negotiating a few of them. In a short sale, the proposed purchase price falls short of the loan balance. That puts me in the middle of a negotiation among buyer, seller, and lender, trying to arrange a meeting of the minds all around.

I’m seeing slowly-increasing-willingness on the part of lenders to start discounting notes to get them off of their books. This will accelerate through 2009. This will also make for more opportunity plays for investors that want to buy these notes at a sizable discount with an eye toward hopefully foreclosing on the property or being paid off at par for a nice profit.

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Title insurance is a necessary evil, but many don’t realize how evil. You probably don’t realize that a full 70% of the title insurance premium you pay is kicked back to the settlement attorney handling the settlement.

In a commercial real estate settlement, this can be a very large figure. In a $5 million sale I handled recently, the buyer paid almost $14,000 in premiums.

While it doesn’t seem like a lot in the context of the sixe of the transaction, There’s no reason that you can’t negotiate with your settlement attorney, particularly in these tough times, to make sure you’re getting a fair break. The attorney deserves to make a living, but keep him or her honest, and let them know that you know about how profitable a transaction this can be for them and that you’d like to share in that.

Better yet, start a title company!

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We’re in a market where most owners are going to have to contend with some empty space. Here are some tips for getting your space moved, whether it be office, warehouse, retail, or multi-family:

1. Make the space presentable. That means fresh paint. In a warehouse, you might want to paint the ceiling white. In an office or retail space, replace missing or stained ceiling tiles. Open all the blinds. Vacuum carpet. Make sure all the lights come on, It’s not rocket science, but this stuff is inevitably overlooked by owner and brokers alike.
2. Market the space to prospects. Run advertisements in craigslist, in the local paper and appropriate trade papers. Use direct mail querying dun and bradstreet or other data services to create lists.
3. Market to brokers. Make sure you have a list of the brokers that are likely to bring you prospects. Mail them regularly with space details. Offer to pay them quickly for deals, or offer them gift certificates for showings. Offer them bigger commissions than your competitors. Now is the time.
4. Hire a broker. If you do it yourself, it’s time to hire a broker. Find one that’s active in the market niche that suits your product but doesn’t have too much product that directly competes. Listen to their advice but demand regular reporting from them updating on prospects. The squeaky wheel gets the grease.
5. Folllow up. When you have inquiries or showings, track them. Follow up regularly by phone or email. Be polite but persistent.

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Commercial Real Estate Lending has gotten a lot less complicated, so this won’t be too long a post.

It used to be that there were dozens of “conduit” lenders and life insurance companies battling to make loans. The loans came without personal recourse (ie default and all the lender can do is take the property, they can’t take anything else of yours). The loans ran at amounts of up to 80 percent or more of the purchase price. I saw loans with 10 years of interest only at rates down in the low 5 percent range. This kind of lending — which surprise, surprise, largely originated on Wall Street — fueled an unsustainable run-up in property values.

Now that we’re down in the dumps, your source for a commercial real estate loan is in all likelihood going to be with a bank. These loans are going to feature lower loan to value ratios, amortizations in the 20 to 25 year range, and terms of 5 to 10 years with little to no interest only periods.

The good news is that with benchmark rates so low (for instance, the 10 year treasury in mid-2s) that rates are going to be relatively inoffensive, though loan constants of between 7.5 and 9 are going to be the order of the day.

Often these banks are going to want personal recourse, and they may want to do all your banking business.

When I was first starting out as a commercial broker I earned a few fees in a down market because I had a good client that paid me to make him aware of foreclosure auctions in my area.

Generally there are no real estate commissions paid at a foreclosure auction, so if you’re a broker, you’ll have to find a generous client like this one.

The auctions are advertised in the newspapers, and generally not the largest papers in the market. You’d think these foreclosing lenders would want more investors to show up at their auctions, but instead they look for the cheapest advertisements in the most obscure newspapers

Buying commercial real estate at foreclosure auction is a gutsy move: you have to be prepared to put up a significant non-refundable deposit - often 10 percent of the loan amount - if you make the winning bid. There may be some opportunity to walk the property, kick the tires, and review what little information the lender has on the property and its rent roll before bidding starts. That said, if you learn anything about the property between the auction and settlement you’re out of luck - settle or lose that deposit. There’s certainly no financing contingency either so ideally you should be able to take the property down on a line of credit or with cash on a short term basis if necessary, especially in today’s lending environment.

In many of these auctions, particularly these days, the asset won’t trade at auction. The lender won’t see a bid they like and will make that winning bid and take the property themselves. At the auction you may have an opportunity to meet the lender or at least their attorney, but not inall cases. Regardless, once the lender takes the property and own it, you can negotiate terms with them that include a study period - only you may not be able to get as great a deal as you might have with a non-contingent bid at auction.

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If you’re new to commercial real estate investing, consider making industrial real estate a focus. I did, and I don’t regret it. Why?

1. It’s not where “the others” are focusing. It doesn’t have the glamor of downtown office product It’s dirty. So there’s less competition all around.
2. It’s much simpler to learn. You don’t have to lean what a natural break point is, or a gross rent multiplier. You’re renting four roofs and a wall and some doors. You can be up to speed very quickly on market rents because it’s much or of a commodity.
3. It’s less volatile. Rents don’t swing as dramatically up or down. Nor does vacancy. I’m not saying that there isn’t risk associated with industrial product, but you will never see the phenomenon we are seeing in retail right now hundreds of stores closing, all across the country, all at once.
4. It’s easy to underwrite. There are only two major capital items that need attention in most industrial buildings: the roof and the pavement. Once you understand their condition, you’ve got a handle on how much to set aside in a capital reserve over the next 5 to 10 years.
5. You can dress casually :). Generally whether you’re canvassing, meeting tenants or owners or brokers, you’re going to find a lot fewer people wearing suits and ties.

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Whether you’re looking to buy deals or list them, you need to “farm” for them - develop relationships with prospective sellers over time and build the necessary connection to win the business.

The best approach is to start with a product and a geographic area - a city, town, county or submarket: whatever feels manageable.

Then you need to build an owner database. If you can afford it and they are active in your market, Costar can give you a headstart on this database building process as they make an effort to track every office, industrial, flex and retail building in the markets they serve (in the Washington DC area where I am active are weaker on the retail side; I don’t know about other ares). Costar gives you the list of buildings with locations, photos, maps and basic building details, but the tracking of owners is poor.

At this point you hopefully have a list of 25 to 100 buildings or so. Learn everything you can about these buildings. Visit them in person or virtually though Google Earth Street View, Windows Live Maps birdseye view, etc. Using public record data found on smartpages.net and from your state and county records, find who owns each building. I subscribe to Lexis Nexis for access to unlisted phone numbers.

You can track the data in a three ring binder, an excel or MS Access database, or a contact management program like Act!, outlook, or one designed specially for our industry like REA or Realhound.

Then you need to make regular contact. Start with the dreaded cold call by phone. Don’t just ask them to sell; build a relationship. Find out how you can help them to make money, what they want to accomplish. Capture their email address for future use.

Regular phone contact should happen every quarter at a minimum unless the first call was a disaster and you were hung up on.

Accompany your phone contact with regular mailers: I use post card mailings or email to announce new listings and sold transaction. An investor can announce new acquisitions and the like.

It’s not rocket science, it’s the way brokers and investors have found deals for decades. We just have many more great new tools at our disposal.

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If you’re a broker or individual investor and you don’t own a VERY expensive software program called Argus, you probably have struggled with underwriting a commercial property in Excel.

Even completing the most simple analysis (say an internal rate of return) is a challenge in excel. They make things awfully difficult.

There is good news: thanks to the CCIM Institute you can work with an amazing excel template that allows you to complete discounted cash flow analyses and look like a financial expert. It runs on excel and you can download it here.

Cash flow template courtesy of and with permission of the CCIM Institute/Copyright 2008.

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In the residential real estate world, you often hear stories about the couple that gets the house even though they didn’t have the highest offer. Typically accompanying that successful offer was a letter pleading the couples case, telling their personal story and how the house is a perfect match, and how much they want it despite their limited means.

In your pursuit of commercial real estate acquisitions, it’s time to incorporate a variation of this strategy. Sellers are proving slow to adjust to the new pricing reality (i.e. prices are down 20 to 30 percent from their 2007 highs!). Accompany your letters of intent with a letter of explanation. Explain your underwriting carefully. Share comparables that are relevant. Highlight specific data on ailing market leasing fundamentals, the cost of financing, and the “cost” of equity (for instance, clearly equity can find double digit returns from REIT stocks or by investing in CMBS debt).

A seller might be fixated on getting to “his” capitalization rate. You need to show him or her that the return over time (the internal rate of return) is potentially very boring because of impending vacancy risk and associated re-tenanting costs.

Highlight your ability to perform and execute. If you have seller references to offer up and have performed as promised in the past without renegotiating terms midstream, highlight that too.

This kind of effort can help sell an offer that might otherwise be “tossed’ by a prospective seller as a lowball. Put the seller in your shoes and you might just make a deal.

Precedent indicates that industrial rents and industrial values are the least volatile among all the major commercial property types. A look a current circumstances verifies this: retail is taking the the biggest hit with millions of feet of negative net absorption. Office is generally falling out of favor as well. Industrial rents in the DC area for instance are off slightly - generally 10 percent give or take - but the warehouse fundamentals are reasonably sound.

As an investment class, it’s best to focus on small bay, multi tenant industrial product with ample truck courts and desirable locations with easy access to road networks. This product compares favorable to “big box” distribution product which is more sensitive to swings in the economy: with less product to distribute to consumers, there’s less demand for distribution space. The small bay space, full of plumbers and electricians and the like that generally manage to hang on through these sorts of downturns.

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If you’re a commercial real estate broker, owner, investor, or other professional and you’re not familiar with the CCIM Institute, it’s time to check it out.

The core offering of the CCIM Institute is a series of four courses on real estate financial analysis (course 101), market analysis (course 102), user decision analysis (course 103), and investment analysis (course 104).

At the bare minimum you should give serious consideration to taking the 101 course. It is taken over five full days of intense instruction, cram style. You will walk out of the course with a greater understanding of how to underwrite a real estate investment than 95% of your colleagues who know little more than how to calculate a cap rate. You will learn how to use a financial calculator. You will learn how to calculate an internal rate of return. Most importantly, you will become fluent in the language of commercial real estate financial analysis.

In my personal experience as a commercial real estate agent, this knowledge has made me the “go to guy” among the brokers of my company when they need to have a dialog with their clients about real estate values. I’m regularly brought along to help win and execute sales business.

Complete all four CCIM courses, take a test and complete a lengthy resume and application and you can earn the CCIM designation and full membership. The CCIM designation affords you networking opportunities and also lends you credibility among your peers. It’s a particularly beneficial designation to earn if you work for a “boutique” firm.

At the risk of blogging burn out, I’ve developed a new web site - http://www.likekind.org - that discusses the ins and outs of completing 1031, tax deferred, like kind exchanges.

The like kind exchange is an amazing opportunity to defer capital gains taxes unique to real estate investing and a few other asset classes. If you have been or want to be a real estate investor and these terms are unfamiliar, it’s time to get educated. Also feel free to drop a line to me with preliminary questions. I don’t give out tax or legal advice but I’m glad to get you started

One of my clients - an investor and owner of a commercial mortgage brokerage business - confessed earlier this week that he was having a chicken little moment.

Offers he’d made earlier in the year to buy product that had been turned down - he’d been third or fourth in the bidding sometimes - were now coming back to him. He had more opportunities than he knew what to do with.

It was exciting at first, until he realized there were no lenders out there to finance the opportunities. Loans offered last week were no longer on the table. Many of his sophisticated equity partners were “on the sideline” for now.

It’s time for brokers and buyers to go where the market is taking them — and that is to distressed assets. My primary focus is on talking to the most motivated sellers: cash hungry sale leaseback prospects, lenders with troubled loans or REO to sell quickly at a discount, troubled owners, and the like.

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Try C-loans.

They maintain a database of 750 commercial lenders eager to make a loan.

Enter your criteria at this link and their database will spit out at no charge the 20 or so lenders best-suited to work with you.

You can then submit your loan application to them electronically or give them a call to discuss!

No charge to query the database - it’s free!

A cap rate, or capitalization rate, is an expression of return calculated as follows:

Net Operating Income/Purchase Price = capitalization rate

A cap rate does not take into accout return over time, as it only focuses on one year’s income.

As such, to only evaluate a real estate investment by looking at its cap rate is foolish. What does the 2nd year’s income look like? The 10th year’s income? Where are rental rates in place compared to market? Are you paying more or less than it costs to replace the building? What will cash on cash returns look like after the property is financed? What is the internal rate of return after a 5 or 10 year hold?

It’s your return on an investment over time.  It calculates the present value (ie the value today) of cash coming to you or leaving your pocket in the future.

In the case of evaluating a real estate investment, you have to project cash flow for a period of time into the future to give yourself a series ofcash flows to use in your calculations.

Then, because a dollar today is worth more than a dollar tomorrow, you discount the future dollars. The farther into the future, the bigger the discount.

IRR calculations are subject to big time manipulation in negotiations. By changing the sale price at the end of the analysis you can drive the IRR up or down dramatically.

Take a class from the CCIM Institute — on line or in person — to learn how to calculate an internal rate of return. Or just use Excel…but then you’ll never really understand how it works.

I got the question the other day, “where do I go to raise $50 million to create a distressed properties fund?”

Is may sound snide, but I’m thinking, “if you have to ask…maybe you’re not ready to manage $50 million yet?” My observation is that those who have a track record of success acquiring property, creating value and generating excellent returns for their clients do not have difficulty raising money. Do you have experience buying distressed property and profiting? If not, perhaps you need to look at starting smaller. If you have a modest amount of this experience at a smaller level, a good way to “level jump” is through a one-off joint venture with an equity source on a single larger acquisition. A typical deal structure for these JVs will have you putting up 5% of the equity and the partner putting up the rest. Partner gets a preferred return, you benefit from a large part of the upside. Partner gets control over major decisions, you get to run the asset day-to-day and benefit from associated fees.

Here’s a how-to. Let’s say you’re going to start with duplexes….

I’d pick a particular neighborhood that interests you — or cal it a submarket. I’d build a conclusive database of duplexes and four-plexes in that neighborhood. This will take some driving around. pick small enough a geography to start off with so that you’re not overwhelmed.

For each property I’d track asking rental rates and availability - that will get you a vacancy rate and an understanding of market rents. I’d use tax record data — often search able for free on the internet — to gather comparable sale data and build a list of owners. I’d even take pictures. I’d dump all the information in a contact management program.

I’d start canvassing the owners of the these properties asking them if they’d sell. Phone is best but you start with an introductory letter if you like. Properties not marketed by a broker often sell for less!

Track their responses. Some sellers will be extremely unreasonable! It will take persistent and patient follow up, but I’ve observed new investors have a lot of success with one variation of this method or another.

There’s no magic easy method to finding deals, and focusing only on property listed with brokers is going to give you a lot of heartburn (agents are paid to get sellers the most money possible and most are good at it!)

Are you old? Are you out of depreciation? do you feel like you’re stuck on the real estate roller coaster but can’t get off because of the tax consequences? Talk to your financial advisor about a charitable remainder trust. I don’t give this kind of advice, but here’s how it works:

-Put your building in a trust

-Trust sells the building, gets the cash

-You get a tax deduction

-Trust pays you income as long as you live…you can set the income within limits

-You die, charity gets the cash in the trust

Kids worried about disinheriting the kids? Buy them a life insurance policy!

I know, a dry topic, but if you don’t work for an institutional owner or a national brokerage firm, you may be lacking in access to good analysts for Argus modeling and other financial analysis.

Here are some folks who have expressed interest in doing this kind of work, or do it for a living:

rebackoffice. http://www.rebackoffice.com/analyticsResearch/investmentAnalysis.html. $250 plus $10/tenant and $25/assumption. rebackoffice has a wide range of real estate outsourcing solutions. Overseas solution.

Cherie M. Hardgrove, MAI, CCIM. chgrove@columbus.rr.com. $90/hour.

Global Realty Outsourcing, Inc. T: (212) 209-0772. Wide range of pricing depending on format of data provided. Can do lease abstracting and other due diligence projects. Overseas solution.

Carey Guiberson. Carey [carey@ont.com]. Will refer assignments to his graduate students. $50/hour.

Market rent growth is as important, if not more important, than in-place cash flow. Novice buyers focus solely on barometers of the “here and now,” e.g. capitalization rates and in-place returns. Learn to make cash flow projections and calculate an internal rate of return. You can buy a fancy program from Argus or you can do it in Excel. Don’t know where to start? Take the ccim 101 class. Take all their classes for that matter. They will pay for themselves many times over if you are making a career in real estate. Doesn’t matter if you’re flipping houses or buying million square foot warehouses, it’s a great program.

With all the hype of flipping houses for profit, think about the tax consequences.

You suffer ordinary income tax treatment on your gain if you sell less than 12 months after acquisition.

Hold for a year and a day and save yourself potentially 25-35% of your profit!

In these leaner times, might make more sense to collect a year of rental income before you pull the trigger.

They never appreciate in value. Never never never. Research research research. buyer beware.

1. Find a tenant that needs space. Find a building to buy. Contract to buy the building, write the lease. Finance based on the credit of the tenant and the cash flow.

2. Buy Veterans Administration homes which can be bought by investors with 5% to 10% down.

3. Get a real estate license. Find a niche with little competition (car washes? Mobile home parks? small multi-family buildings? little strip centers) and excel.

4. Think big. Find a bigger opportunity. Joint venture partners will contribute 95% of the equity required if the deal is a good one and give you much of the upside. It takes as much work to do a big deal as a small one. You do have to bring some expertise to the table to pull this off.

5. Be contrarian. Now that everyone is down on real estate, start thinking about buying it.

6. Look for sale leasebacks: an owner and occupant of a building who wants out but will continue to occupy the building and rent from you.

I sell warehouses for a living, so I think a lot about roofs.

When I’m underwriting a warehouse, I use these rules of thumb:

-flat roofs generally last around 15 years. You might get more out of a particularly well maintained one, and you might get less if the job was poorly done…particularly if the new roof was laid over the old.

-It’s costing about $3 to $4 per square foot right now in my area to rip off an existing roof to the deck and replace it with a new rubber membrane roof.

I would never select one through any manner other than a referral. It’s too big a task to be carried out by someone you’ve found in the yellow pages, a google or yahoo search, or by responding to mass mailer. Whether it be residential or commercial. Ask a friend.

If your mortgage broker extols the virtues of a “conduit loan,” i.e., lower rates, longer amortization, and so forth, be wary. I’m not telling you to avoid conduit loans, but if you’re accustomed to dealing with banks, say farewell to a customer service-oriented experience. Also beware of

-Lengthy prepayment lockouts

-Arduous reporting requirements

-Prepayment penalties (called defeasance) that make prepayment unfeasible

If you want to sell your building in the next year or two, I would discourage you from using this sort of debt.

If you and your business own and occupy a commercial property and need commercial financing, do yourself a favor and look beyond your bank and talk to life insurance companies and conduit lenders.

Higher loan amounts, lower rates, better terms and a structure that includes little to no recourse (ie lender cant seize your personal property) are often available depending on the credit of the occupant.

Hire a good mortgage broker — one who has been referred to you — to handle the process. They will charge you a fee (a point or less) but will earn it back many times over if they are good at what they do.

Loan constant = annual debt service ÷ loan amount.

So for example, $100,000 annual debt service ÷ $1,000,000 loan = 10% loan constant.

Who cares?

If I’m buying a property at a 11% return before the debt, the debt is improving my return.

If I’m buying a property at a 9% return before the debt, the debt is worsening my return.

Use a loan constant to quickly evaluate the impact of a loan on your return.

We use this calculation more often on the commercial side of the real estate business because commercial loans are often locked out from prepayment or expensive to prepay.