80/20 Rule, Real Estate, and the Great Thing About America

80/20 Rule, Real Estate, and the Great Thing About America

Why Am I Not Succeeding in Real Estate?

While I was scanning the forum that I post on frequently I came across a thread that asked some important questions like:

  1. What is the amount of net cash flow of debt-free income properties [units] nationally divided by the number of individual private investors=what amount? That number would be ROI or cap rate.
  2. Do the similar math for total residential real estate commissions earned nationally divided by the number of licensed agents = what amount? Again, either some assumptions or raw data might be used.
  3. Take the ‘average profit/gain’  from residential sales nationally by investors both seasoned and newbies who either do wholesale flips or forced appreciation thru retailing. The ‘newbies’ would include those who have not done any deals yet.
Pareto Principle

Pareto Principle

In another post I came across, someone commented on the 80/20 rule (Pareto principle) which in summary states that, for many events, roughly 80% of the effects come from 20% of the causes. Personally, I like this rule, whether it is exact or not the principal is good. 80% comes from the 20% which helps keep me focused on the 20%.

Another posted that they read 95% of would be real estate investors lose money on their first deal then quit. Similarly, think about how many small businesses go out of business in the within 1, 2, 5 years of operation.

So after some more bantering about exact numbers and the 80/20 rule really being a 96/4 rule or a 60/40 rule my response was this.

Whatever % you want to use, the great thing about America is that it is possible to be in that top 20% or 2% or…

For me some important things I take into account when looking at a venture

  1. Can someone else do it and how did they do it?
  2. Can I duplicate what they are doing through hard work, perseverance and a little luck sprinkled in?
  3. In what time period can this happen?
  4. What is wrong with it and why WONT it work? (I keep on looking for this and until I find it I keep going. If I do find it, I’ll see if there is a solution and if not, I move on)
  5. I don’t want it to be easy because things that are easy that everyone can do get compensated less. i.e. digging ditches vs. finish carpenter.

One of the things that got me interested in real estate is that the potential is so broad. (I also did some MLM when I was younger and was able to make enough to make payments on the first new car I ever bought) 

You can be a mom & pop investor who buys a house here or there while working and have a great retirement. Or you can become Sam Zell who started buying student housing in Chicago while going to college who then was brave enough to acquire lot’s of property during a downturn while others were selling.

Real Estate can be your business, or just an investment vehicle. I would say the ratio of success and failure really depends on how soon and quick you try to make it your business.

People who try to immediately make it there business without any other means of income I believe exponentially increase there chances of failure. They fail like the majority of business’s they become under-capitalized and can not meet their overhead obligations.

They usually have no experience and lack of money – 2 things that are most often the cause of failures for businesses.

Real estate really is a simple business but it takes a tremendous amount of effort and hard work (like most business). What I find happens is everyone wants to be a millionaire…. Until 5pm hit’s and they want to go home or the alarm goes off at 4am and they decide to show up at 9am, or until it doesn’t work out exactly how they plan (hint – it NEVER does).

You get all these gurus and infomercials talking about how easy it is and you need NO money and NO credit to succeed. Well that may be true just like you can start a company that then becomes Google (obviously the odds are better than starting a Google but you should get the point).

Well there is my rant that really gave no answers to your numbers. The reasons for many of the failures are stated above.

p.s. Here is a question for your question… Do you fail when you do not accomplish your goal or when you give up and stop trying?

 

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Curtis Gabhart and Gabhart Investments, Inc – 2018 All Rights Reserved
The information presented in this article represents the opinions of the author and does not necessarily reflect the opinions of Gabhart Investments, Inc. The material contained in articles that appear on gabhartinvestments.com is not intended to provide legal, tax or other professional advice or to substitute for the proper professional advice and/or commercial real estate due diligence. We urge you to consult a licensed real estate broker, attorney, tax professional or other appropriate professionals before taking any action in regard to matters discussed in any article or posting. The posting of an article and of any link back to the author and/or the author’s company does not constitute an endorsement or recommendation of the author’s products or services.
Multi-Family Quick Tips When Doing An Exterior Inspection

Multi-Family Quick Tips When Doing An Exterior Inspection

By: Curtis Gabhart, CCIM

Here is a quick recap of some things I look for when doing a quick inspection of an apartment building or even a single family home and common issues I come across.

I like to do a quick review to the outside condition of the property in order to gain insight as to whether it warrants further consideration for purchase or investment.

Now, before getting into the details, let me summarize the most important factors regarding the physical condition of a property.

Some of the important visible considerations are:

  • Reviewing the foundation and cement
  • Checking the siding
  • Reviewing the sprinkler systems
  • Analyzing the quality of the landscaping
  • Looking at the windows
  • Looking at the roof
  • Inspecting at the front door
  • Looking at the gas meters
  • Looking at the train gutters
  • Reviewing the quality of the paint
  • Looking at the overall neighborhood

When buying a property, whether it’s an apartment building or single-family house that you may plan on flipping, some of the concepts are going to be very similar, if not identical. With many investment properties, you will find an inside inspection is subject to an accepted offer. This means you will need to make some assumptions about the property before you submit your offer. This can prove difficult, especially when you’re not able to view the inside.

Starting Out 

I’ll look from the ground up – I’ll start by looking at the ground and taking an overall look at the condition of the property to see what level of care has been maintained. As a general rule, if it’s a piece of shit on the outside, it’s probably a piece of shit on the inside. There have been a few exceptions where I’ve been pleasantly surprised when I got inside a property, but that’s exactly what they are – exceptions. I’d use this analogy as a general rule of thumb – if you see a car that looks junky on the outside, it probably just as junky on the inside.

Foundation – I’ll look at the foundation, all the cement on the ground near the foundation, and all landscaping near the foundationI’m looking for things like sprinklers spraying on the building. I’ll then check if there is stucco peeling off the building, which can sometimes indicate moisture intrusion into the building. I’ll also check if the ground is sloping towards or away from the building; it should be sloping away from the building. If it’s sloping towards the building, it may indicate that a possibility of having a foundation or other problem that relates to water. If there’s cement, I’ll look for big cracks in the cement, which sometimes can indicate unstable soil or cracks in the foundation.

This could indicate further foundation issues

Landscaping – what is it going to cost me to improve the landscaping, what do I need to do to it, are there sprinkler systems, and are they automatic or non-automatic?

Building – what kind of siding is there? Is it stucco, brick, vinyl, wood? I pay close attention to the condition that it is in. If it’s wood, I will check for visible water or termite damage.

Eaves – Does the wood going into the eaves have damage? If there’s a lot of damage in the eaves, it very well could go into the attic rafters, which could be a lot more expensive. If it’s on the siding, what kind of siding is it? If it’s an old building, a lot of times replacing siding can get very expensive for two reasons:

the eaves is the part of the roof that meets or overhangs the walls of the building

  1. First is the fact that you may not be able to find that particular kind of siding anymore without having it specially milled.
  2. Second is anytime you pull something off an old building, you’re very likely to find unforeseen surprises. Because you can’t be certain of the magnitude of these surprises, it is safe to assume everything is going to cost you a little more than you think. Whatever you think the price is, assume it probably cost more than you originally estimated. 

 

Windows- Are they new or old? If it’s an old building, are they wood sash or aluminum windows? Is that something that’s going to need to be replaced? Typically, the double-wood-hung windows that you see in houses or old apartment buildings are not in very good condition. With aluminum windows, I essentially just look at them and decide if I’m going to replace them or not.  What you need to be aware of is in many areas where you replace these windows, there may be architecture review committees that require you to replace them with historical windows. This could prove to be very costly, especially if they are wood sash.

wood sash window

Building Corners – Does everything appear straight? If there’s siding, are the lines of the siding vertical or are they all straight? On the corners of the building, what does the wood look like? Is there stucco coming off?

Roof – Does the roof have something called a drip edge?  This is a little metal edge that goes into the lip of the shingle roof. Are there rain gutters? If there are no rain gutters, water may not have been running away from the building. Because of this, I will spend more time thoroughly inspecting the foundation.

I look at the shingles of the roof; if there are many noticeable curved edges, it is likely on its last leg. Then, if I think I may need to replace the roof, I will look at how many layers of roofing there are. Typically, you don’t want to go past two or three layers of roofing. What that means is that if you replace a roof that has two or three layers, you need to put in your budget funds to tear off that existing roof before replacing it. You also will need reserves for unexpected issues when you pull of the old roof because you may need to repair the plywood underneath. Depending on how much work you do around the roof, you may have to re-sheet it.

re-sheeting a roof

Fence  Do I need to replace or paint it? Is the fence wood? Is it leaning, does it look like it’s on my property line, does it look I could add private yards for apartment units? Many times, you will find large open areas in the back of apartments that are shared. What we can do is put up a fence around the units and now each unit has their own backyard – a very inexpensive fix that not only can help you get higher rent but can reduce costs because you may not have as much landscaping to maintain

Paint (for older buildings) – If it’s pre-1978 and you have peeling paint, you’re probably going to want to get a lead-based paint test conducted. That’s going to tell you whether you’re going to need to do any kind of abatement or work on the property. If work is needed, you may need to use lead-based paint best practices, which can prove very costly. I usually recommend getting a test. Paint used in older buildings in San Diego is less likely to have lead in it compared to the east coast, where the weather is harsh and requires more durable paint.  Most of the properties I have tested did not contain lead, but it is still important to get it tested.

If it is tested and comes back negative you do not need to follow lead based paint best practices. If you have a pre-1978 property and decide not get it tested, you still must work on it like it contains lead based paint – which is a good reason to get it tested in the first place.

peeling lead-based paint

Click here for information on lead-based paint best practices

Front Doors – Aesthetically, are they looking good? Are there any gaps? If I look at top of door, I will look for a little pie-shaped gap at the top. If this is present, it indicates there may be some settling in the property.

Meter Boxes

Meters  Is it gas or electric? Are there gas meters for all units? If the property runs on gas and there is one water heater, there should be gas meters for each unit and also for the building.If it’s a multi-unit building, I count how many individual meters there are. There should be as many individual meters as there are units, plus one additional one, which would be for the common area. If you’re missing a meter, you may have something called a bootleg property, which means one of the units may have been put in unpermitted (just something to look at).  These are important things to note because in San Diego the tax assessor will charge for all the units, and state on the public website that it is X units, but that does not necessarily mean they are legal units.

Electrical – As far as electric meters go, I’m looking at what kind of panel it is. If it’s old, it could be something called knob and tube, which could indicate that I’m going to have to put a lot of money into upgrading the electrical. This will likely increase the interior costs as well. I then look at the circuit panel – is it updated? Then, I’m looking at how many amps each unit has. Ideally, you want 100 amps, but for many apartments, you’ll have between 30-50. Newer apartments should have 100.

Knob & Tube Wiring

I’m also looking at the type of panel; Murray Lampert typically have problems, so I want to check what kind of panel there is. Are there circuits in the units? Is there any room to add additional circuits if you want to add appliances or anything else inside the property? Is the inside of the panel painted? If so, it could indicate that the previous people who worked on the property weren’t doing things the proper way. This would lead me to believe other things were not done the proper way.

This is quite the mess!

I’m looking for bunches of electrical or cable lines running all over the place. We’ve bought properties where it looks like spaghetti running all over the building, and we’ve ended up having to rip it all off and start from scratch simply because it’s easier to do instead of trying to sort it all out.

 

 

Staircases – When I walk on the stairs, I make sure to walk very heavy. I’m looking to see if it seems squishy. Is termite damage visible, are the railings stable? In compliance with code, railing spacing should be about three and a half inches. For me, if I can make a fist or place my hand through the pickets of the railing, it is most likely not up to code and I’ll have to replace it depending on my insurance company and how bad it is. I look at the stairs to see if the tread rise and depth are consistent. It should be around 7” of rise and 11” of depth. If they are not to code they may need to be replaced.

Inconsistent stair depth

After An Inspection  Once the inspector gets into the property and finds things that I may not have found, do I decide not to buy the property? No, not at all. It just helps me to figure out what it’s going to cost to fix or if I even want to fix it, and what exactly I’m getting myself into. That’s what is critical about the inspectionYou can make a well-informed decision on the property rather than going in blindly and being surprised later.

It is naïve to think you can figure out how to hit a certain number or certain profit, or how to stay within a tight budget, without being informed of all the problems. This is valuable while I’m negotiating in the beginning. If I’m coming in lower than the initial offer, I can right away talk to them about some of these problems, which, most likely, the owners already know about but haven’t disclosed yet or many times they had no idea there were these problems which make it easier to negotiate.

Final Remarks

Keep in mind, none of this is 100%. These are just good rules of thumb when looking at a property. They have served me well to establish if an investment property warrants further investigating and analysis, and if so, what kind of offer to submit. This obviously isn’t everything. I depend on inspection in most cases. I will be posting an interior walk through an article in the weeks that follow. I’m interested to hear your story and what else you may look at when walking a property. Please share your take in the comments below.

**Disclaimer** – make sure you are walking the property with the consent of the current owner. Please keep in mind we are in the San Diego market and practices in your area may be different.  I highly reccommend you get a building inspector to look at the property unless you are highly confident in your ability. 

Curtis Gabhart, CCIM President Gabhart Investments, Inc.

Edited By Blake Imperl, our newest intern at Gabhart Investments. Check out his Linkedin page by clicking here.


Gabhart InvestmentsGabhart Investments, INC. (GII) is a privately held real-estate investment firm based in San Diego, California. We operate in a rapid paced project driven environment.  The employees at Gabhart Investments, INC. (GII) are close-knit, highly qualified professionals, possessing the necessary competence to meet our clients’ goals. GII promotes ethical balance for continuous training, leadership, and teamwork. Since 2000, GII has acquired and converted multi-family properties into condominiums throughout San Diego County. The new real-estate market has presented us with many opportunities to take advantage of. Along with our equity partners, Gabhart began to grow its portfolio in, arguably, the strongest housing market in the country. Thus, we consistently generate superb risk-adjusted rates of return for our investors. In 2005, Gabhart’s private investment portfolio had transactions in excess of 40 million dollars.  We intend to accelerate our business model by maintaining our focus within the purchasing and rehabilitation of bank owned real-estate property. Our additional services include consulting, brokerage, venture funding, development, construction management as well as property and asset management.

Check out our other blog posts here

Commercial Real Estate Internship Update #1 – Blake Imperl

Commercial Real Estate Internship Update #1 – Blake Imperl

How My Views on Commercial Real Estate Are Changing

By: Blake Imperl

As I am approaching the end of my first month as an intern at Gabhart Investments, I’d like to reflect on what I’ve learned, and what has changed thus far.

What I’ve Been Doing

Over the past few weeks, I have been spending a lot of time reading the material Curtis has provided me on Property Valuation & Investment Analysis. Although it is mainly an overview of the subject, it has proved to be some highly valuable content. This material essentially picked up where I left off in my Real Estate Investment Analysis class that I took last semester at San Diego State. I have been brushing up on subjects like tax benefits, 1031 exchanges, expenses, leverage, returns, evaluating cash flow, and much more. I still have a great deal of learning to do on these subjects, but it is exciting to see how what I’ve learned in the classroom correlates to real world applications. It is my intention to continue to read up on these subjects and ask as many questions as I can.

I’ve also been observing how Curtis and his team assemble marketing packages for commercial properties they are listing. I was doing things similar to this at my last internship at Realty National, so I’ve enjoyed seeing how this translates in the commercial arena

Commercial Real Estate Blog Posts

Another task I have taken on is the editing of Curtis’s blog posts. My first edit was a post on property walkthroughs. One tremendous benefit of doing this has been the information I’m learning is sticking much deeper than if I just glanced over it. It’s proved to be a great learning tool for me and I’ve even taken on the task of researching some of the topics I was curious about. Writing has always been a passion of mine, so getting the opportunity to revise and write some stuff has been great. I’m excited that I will get to continue to edit blog posts during my time here.

Property Walkthroughs

This past week I had a great learning opportunity with Curtis to do a walkthrough of a 13-unit apartment building in Fallbrook. I was able to learn about some of the things you should be looking for in a property, both on the interior and exterior. This was a neat real life application after reading Curtis’s article on property walkthroughs. This is certainly the kind of stuff you’d never learn in a class room.

13-Unit Apartment Building In Fallbrook

La Jolla Multi-Family Building

Another property we looked at was a 5 unit multi-family building in La Jolla. This was a very intriguing property because it had great bones, was less than a block to the beach and offered several routes for renovation. When walking the property, we looked at things like the condition of the floors, the bathrooms, kitchens, balconies, electrical, etc… It was far from move-in-ready, however, at the right price this could prove to be a great deal.

Curtis and Abe inspecting the condition of the upstairs balcony

the interior of the detached studio

Co-Star Lunch & Learns

In addition to the property walkthrough, I’ve also attended two Co-Star lunch and learns with Curtis and his assistant Dianne. The one that stood out to me was on the housing forecast over the next few years in San Diego County. I enjoyed this meeting because this is a real problem we will be tasked with fixing over the next decade. This past semester in my investment analysis class I did a great deal of research on this subject, so it was neat to hear the industry take on the issue.

Other Opportunities

Lastly, I have very much enjoyed the opportunity to pick Curtis’s brain. He’s always offering me valuable tips and knowledge about real estate and just life in general. Whether it be tips on client relations, listing properties, or even just financial management, I’ve been trying to act like a sponge of knowledge. He’s always honest about things and I respect that.

My views on real estate are growing stronger than ever and I’m excited all the learning opportunities that lie ahead. I am finding that the San Diego Commercial Real Estate Market contains more possibilities than I ever could have expected. Stay posted for my final update in August!

In a bit,

Blake Imperl

Intern, Gabhart Investments

13704 Rosecroft Way in Stallion’s Crossing

13704 Rosecroft Way in Stallion’s Crossing

Del Mar-48

This stylish Tudor-style home has 4 bedrooms, 3.5 baths, a bonus room and an office. It is over 12,000 SF lot, situated on a large cul-de-sac road and nestled in an elite neighborhood of Stallion’s Crossing which is located in a private area behind the community of Del Mar to the north of Carmel Valley & at the start of the prestigious & highly-regarded Rancho Santa Fe Community.

Coffered ceilings above the dining area

Del Mar-43

Wolf Kitchen Appliances

7It has state-of-the-art Wolf appliances & more, creating a kitchen that people who love to entertain guests can only dream about.  It boasts a water filtration system that runs throughout the house, custom ironwork and woodwork.

3Fireplaces in living room, family room & sitting room in the master’s bedroom

Del Mar-16

This beautiful home has 2 balconies – where one looks over the Del Mar fairgrounds that stretch to embrace the vast blue of the Pacific Ocean in a picturesque view.

Large Pool Size Yard with Waterfall & Jacuzzi

Del Mar-51

It includes a flawlessly landscaped property with waterfall that cascades directly into a relaxing & sumptuous Jacuzzi.

Extremely Private & Gated Community

2016-06-24_9-08-08-0009

 

Del Mar-34

It is also home to many excellent walking trails and features a pristine coastal boardwalk that provides a spectacular view for both neighborhood residents and nature enthusiasts alike.

 

Del Mar-28

 

 

Surrounded By Dedicated Open Space & Trails

2016-06-24_9-07-38-0010

Perfect for a family, this home is ideally positioned to enjoy the proximity to  the world-famous 2-mile stretch of the Del Mar Beach, The Bluffs, and the Torrey Pines State Park. It is one of the most highly-sought after spots in Southern California for people who love watersports. The area is also a critical nursery habitat for some of the world’s endangered species of ocean fish and birds who used to span from Siberia to South America, such as the Light-Footed Clapper Rail, the California Least Turn, and the California Brown Pelican. The nearby San Dieguito Lagoon is a beautiful coastal estuary with over two hundred acres of wetland, which has been recently restored. This lagoon is situated near the San Dieguito water-park, which stretches well over 55 miles from Julian to the PacificOcean, and it only manages to increase San Diego’s already beautiful natural landscape.

2016-06-24_9-11-33-0006

More info about the home…

More info about Stallion’s Crossing…

Go for a tour!

Real Estate Joke of the Day – “The Balloonist”

“The Balloonist”

A balloonist is blown off course and is forced to land. He is
in a field close to a road, but has no idea where he is. He sees a
car coming along the road and hails it.

The driver gets out and the balloonist says, “Howdy! Can you tell me where I am?”

“Yes, of course,” says the driver. “You have just landed in your
balloon, and with this wind you have obviously been blown off course. You are in the top field on John Dawson’s farm, 12 miles from Albury. John will be plowing the field next week and sowing wheat. There is a bull in the field. It is behind you and about to attack you.”

At that moment, the bull reaches the balloonist and tosses him over the fence.

Luckily, the balloonist is unhurt. He gets up, dusts himself off and says to the motorist, “I see you’re an appraiser.”

“Good grief,” says the other man, “you’re right! How did you know
that?”

“I employ appraisers,” says the balloonist. “The information you
gave me was detailed, precise, and accurate. Most of it was useless, and it arrived far too late to be of any help.”

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Newest acquisition is a short sale

Short Sale Deal Points:

Purchase Date 6/28/2011
How did I Find the property? Through my website. Property was pending and scheduled to close in a couple weeks & current buyer was backing out. This was a pending MLS deal
Who represented us The listing agent
Location East San Diego
Purchase Price $195,500 click here for property pro-forma
Rehab Estimate $15,000 (+/- 20%) click here for scope of work
Estimate After Repaired Value $265,000 – $305,000 click here for property CMA

This San Diego short sale that was pending in the MLS  came directly from our website which always surprises me since I don’t specifically try to get investors or sellers from our site.

The Realtor called to inform me this short sale had already been approved with the bank and the current investor/buyer was backing out and that if I could remove contingencies immediately (within 3 days) and close on the currently scheduled closing date so it didn’t get foreclosed on I could probably get this investment.

At first glance the price of $195,500 seemed a little steep for this property. I assumed the sales price to be about $265,000 and construction to be about $35,000 (the agent said it didn’t really need any work but that’s what they all say!) which is about average for a typical (not major) rehab of this size.

I get LOTS of calls & emails about “great real estate deals” and I need to be very careful about how I spend my time since 99 out of 100 Real Estate investments don’t fit our conservative criteria.

I told him it probably wasn’t my deal but I would do a little more research and call him back if I changed my mind. Knowing Realtors don’t get paid unless I they close on a deal I never want to jeopardize their lively hood by being selfish and saying yes if I really don’t mean it.

I do not subscribe to theory of making offers unless you are almost 100% certain that if you get a yes you are willing and capable of closing.

So I only write offers on deals that I know I will close on or otherwise you risk getting a bad reputation and stop getting deals.

So that means if I know I am going to close a deal I put an offer in that means I need to spend a decent amount of time on research to make sure I can execute successfully on the project and buy it like I said I would.

To do that successfully I can’t research EVERY property that is sent to me and that means I have to learn to say NO quickly so I don’t waste my time or just as important the person who is bringing me the deals time.


On the other hand you need to be careful that you accidentally don’t turn away great deals. It’s definitely more of an art than a science and also qualifying the deal quickly up front by playing red light green light as I have talked about in previous posts.

After verifying there really was not a lot of work to be done and a very light rehab and making some phone calls to agents and investors who worked that niche market I came to the conclusion that although our subject property had a converted garage and shared driveway the almost 360 degree views would give it a conservative (re) sales price of $275,000 (I was told $270,000 – $305,000) it made sense as long as I could quickly remove contingencies and get it closed right away.

So quickly I called the agent back, made an appointment to check it out on the inside to make sure it would not be a major construction job I checked it out, made an offer the same day and closed a couple weeks later.

Below are some pictures of the project and a video narration of the deal. For more insight into this deal including our scope of work for construction, our comparative market analysis on pricing and our estimated costs and profits go tohttps://sites.google.com/a/gabhartinvestments.com/sullivan/

In case many of you aren’t aware we have websites set up for all our active properties (look under the projects tab and then click on the property to take you to it’s website), in addition to the left of the screen you will see an RSS feed that updates every time I post on the property website.


 

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