What a long strange trip it’s been….

As the saying goes “So much to say so little time” seems so true and I apologize for not updating the blog more often for the 2 of you (my daughter and some random dude from Romania I think) who actually visit this thing.

Where do I start? The last real post was in the middle of May I think when I posted my 30 day challenge. At that time I decided to see if it were true that there were no more good deals to buy (I was a little worried this may be true).

The challenge was to buy 2 San Diego properties in the month of May (which I decided to increase to 3 because as the cool people say “that’s how I roll”) and I am sure the two of you must be curious how this so called challenge turned out… Be patient I will get there shortly.

Back to the “so little time” in Real Estate. Where has my time gone??? I ask myself that at the end of every day,week,month & year but looking back I have been extra busy I think with these 3 things.

1) Real Estate Interns

I brought on two interns from San Diego State University who are going into there senior year and board members of the SDSU Real Estate Society. I bit off quite a lot bringing on two full time people and was concerned about the time it was going to take me but Anthony & Seth have been great.

They’re assignment for the summer is

  • To document everything they learn as they are doing it. They will do this by making or adding to instructions I already have on how and why I do what I do. This will be helpful to me next time I have interns and helpful to them by having to spend the time documenting these systems I use.
  • To keep a daily journal on what they are doing
  • To update the blog with what they are doing and their point’s of view. I feel this is benefit for everyone. The two people who read this blog, for them by having to really think about what they are doing and to be able to articulate it to someone reading the blog and really sound like they are in College and me by creating valuable content to people on what the view from someone really is like from someone immersing themselves into the business and to get additional information on what is working (and not) in the Real Estate business (at least related to my world). Seth posted his first blog last week and Anthony is due to post any day now so stay tuned on that front.
  • To end the summer with a set of goals and business plan to help guide them into the future. They are finding this difficult as all of us do but I believe if they can set a course for their futures now and a plan of action the dividends they will receive in the future will be incalculable.

Just like anything in life they will probably receive a benefit in direct proportion to the effort they put into this.

2) FINALLY!!!! I have all my legal entities and documents set up for our Real Estate syndication

Well it’s taken me about 6 months longer than I was hoping and expecting but I finally completed our private placement memorandum with the help of Jillian Ivey. In addition I was able to complete our business plan with the help and push from Seth and Anthony, in addition to some other people who just graduated from the USD MSRE (Masters in Real Estate) program. Having the interns here really kept me on track and focused (they may disagree with my use of the word focus but trust me I know myself).

We have decided to selectively take in investor partners to the company. The original idea started out raising a million dollars in equity which would be used as capital in buying distressed single family 1-4 in San Diego. We would use leverage and estimated anywhere from 15-24 properties could be purchased with the money.

When we have done this in the past with Apartment buildings it was fairly straight forward. I would put a deposit on a building and get it in escrow and if I decided I wanted partners we would put an offering together for the building and close on it.

With SFR REO’s it is much more challenging because of the time frames are much more compressed and it is logistically impossible to raise the capital in this manner, the money had to be available first.

It seemed like every time we thought we solved one problem another came up that had to be solved. This made the process take much longer than expected since I was also buying and rehabbing properties at the same time.

A benefit of proper planning is that many times it tells you what not to do. I think a trait of an entrepreneur is optimism right? Otherwise why the hell would you work for free in the hope of getting paid some day? So sometimes it is better to learn what you shouldn’t do which then guides you in the proper way it should be done or helps you decide it’s not worth doing before spending countless amounts of money and energy on a project.

I believe the structure  should be a solid foundation for growth. In summary we are using a Delaware Series LLC which the investors will be members of and GII the manager. Instead of raising 1 million at a time and having to try to place it immediately we decided on doing micro funds of $150,000 – $350,000 each. This allowed a lot more flexibility and less pressure in having to place all the money at one time.

The funds are set up so as soon as the $150,000  is in we start buying properties. Each fund ends up being from $150,000 – $350,000 each in which we will buy 2-6 properties using about 80% leverage to increase the return for everyone. As each property is sold the money that was invested into that property and any additional profits are distributed pro-rata according to the partnership agreement with the final distribution at the sale of the last property.

Once the money from the current fund is placed the next fund is mobilized. The attractiveness of this being that I can keep the flywheel moving. Real Estate is really a momentum business and nothing happens quickly.

Just like in brokerage or many sales jobs you have a pipeline of opportunities you create for yourself. The work you do today (sowing the seeds) you reap in the future. Real estate can have very long cycles and very sporadic cash flow.

A good analogy to getting your pipeline flowing is like moving a train. It takes a tremendous amount of energy to make it move but once it gets going it’s also hard to stop.

Buying properties are the same way. If this is your business you need to constantly be working looking for opportunities and you need to be able to take advantage of them when they come up. You do this by letting agents, owners etc. know that you are looking (sowing) and over time they start calling you (reaping) with these opportunities (9 out of 10 are not opportunities). As soon as you tell them you are not looking anymore they find someone else to work with and then you have to start all over again once you are ready to buy.

In the future when the time is right we can purchase other investment that are kept for the long term and apartment buildings again.

2) Buying San Diego Real Estate

Originally the 30 day challenge was 2 properties by the end of May. Well like many goals they don’t turn out exactly how you planned but it almost 100% of the time turns out better than if you had none.

We bought 3 properties with a 4th closing next week. I will post more information on these properties later but all is going well. 1 of the 3 went on the market and went into escrow right away. We are scheduled to close in about 40 days. Two more should be on the market by august 1st and the 4th one which is a much bigger rehab 60 days after (we have to deal with the city and take care of some violations from the last owner so that will probably delay us 30 days).

I plan on following up with a video post of how I found the properties I purchased. I attempted to spend about 15 days tracking my activities so I could report back to everyone

  • how many agents I had to call before I found something worth driving
  • how many properties I had to drive before I put in an offer
  • how many offers until I got a property under contract
  • how many properties did I have to get under contract before I purchased one.

By having these numbers you can set your goals and work backwards on the activities necessary to accomplish them.

Click Here are 3 of the 4 properties I am buying and how we underwrite and put them together for ourselves and investment partners when we have them.

I have finally gotten around to putting together some numbers from my last 6 properties into a website that I hope to post soon. I have gotten the numbers and some pictures together so far. The next step is to do a little summary with how I found the properties, what I did wrong, what I did right, etc. All this stuff always takes longer than I estimated (like almost everything else in life right?)

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Change order #1 on Flip #6 in Escondido

Spent most of the day at the site today looking over some things that needed to be done at the Escondido flip now that some walls were open. Our construction contract here is a cost not to exceed and I could probably force some of this on the Contractor and win in the short term. But when I needed something on my end I would pay for it and then some and mess up the trust.

I do my best to have as strong a contract in my favor as possible and to have paid less than the work that has been done so far (they can always put a lien on the property if I don’ pay them as opposed to me trying to chase them down and sit on an empty building). I also try to have incentives with pay points so a certain amount of work has to be done by certain pay points otherwise they have to wait for the next pay period which is twice a month. This will keep them working longer to get something done they otherwise may wait an additional day to do.

I also make sure to stay fair even though I have a solid contract in most cases. On the other hand it protects me if someone try’s to take advantage of me (mistakes my kindness for weakness) or get’s behind schedule due to their effort.

I Had our first change order today for our Pennsylvania flip. I go over it more on the Penn site what I had to do and why.

The good news is I saved $150 on the roof and $150 on the Granite counters.


to see the actual post and updated time line and pictures go to the pennsylvania flip site by clicking here

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In the office today working on my 2010 Real Estate business plan & PPM

Business Planning for Real Estate

I am still working this Saturday evening (after being here all day) putting pen to paper (more like fingers to keyboard) coming up with my 2010 strategy of buying real estate. I plan on 010 being a good year with no plans to hit a grand slam but just trying to stay in the game with singles and doubles.

I believe that the people who can stay in the game, whether Real Estate or any other business will be able to take advantage of the opportunities that are going to come up in the future, its times like these that make great people, Not when its easy. I just wish sometimes the thoughts from my brain translated easier to paper and then back up again to the reader’s brain. I am hoping by writing in my blog it will help loosen the wheels since I seem to have had writer’s block.

First I need to ask myself where are the opportunities going to be that I can take advantage of?

  • I think the opportunities for the average investor will be in the residential market at least for the next 12-18 months.
  • I believe this segment seems to have the best risk vs. reward ratio with the lowest/easiest barrier to entry. I would love to sit here and say Commercial will be the play but for most people this will not be the case. I do expect that to change in the over the next 12-18 months as sellers (including banks) who need to sell sale which will set the prices the market is willing to pay. This has already happened in the residential side on the low and mid price points, upper end is still in for a hurting. The problem is right now the average buyer of the commercial is worried that if they buy today it will be worth less tomorrow and the sellers are holding on to hope that values will go up. On top of that the people who are out there looking to buy are having challenges getting attractive financing which is making it so less people can buy, Which allows the people who can are able to be choosier.

At some point there will be a clearing of prices until we hit and test the bottom. My business goal is to be prepared to take advantage of that opportunity when it arrives through buying, selling & holding onto these residential projects. These (commercial) deals out into the future will be bigger opportunities or the so called triples, home runs and grand slams of the business. At this time though the risk to me is not worth it and it is critical at this stage in the market not to take any unnecessarily large risks and that is why I am enjoying buying a flipping the residential homes. If any one of the homes loses money it will not be an amount that can’t be recovered from or the money tied up won’t change my life if we can’t sell. This is not the case on larger deals (for me).

So that leads me to where I am right now and right now I am ready to pull my hair out!( j/k sorta). Actually right now I am doing more than a business plan I am actually putting together the outline of the PPM or otherwise known as a private placement memorandum so the attorney can take that and do there legal mumble jumbo. Part of my plan this next year is to combine my money with investors so I can scale up what I have been doing. Up until this point I did not want any more money even though I get asked quite a bit to invest with me. I wanted to establish that it could be done with my money and it seems to be the case.

Back to the PPM (private placement memorandum)

Here is an outline of some things a PPM should have that may help your attorney understand what you are trying to accomplish (remember don’t be a cheap ass and try to create your own. You should not create your own, but you may want to answer some of these questions so you can give to your attorney to help you create a good one)

1) Coversheet A brief statement of

a) Contact information

2) Summary of the Offering

a) This section contains brief bullet points with the highlights of the offering.

b) Should discuss the terms,

c) The structure of the company

d) The purpose of the investment,

e) Management

f) Distributions and compensation of management.

3) Terms of the Offering

a) The price,

b) The length of time the offering will be open,

c) Escrow conditions,

d) Over-subscription,

e) Maximum and minimum offerings.

4) Description of the Business

a) Describe the project or the business. In a real estate context

b) Describe location,

c) Improvements,

d) Neighborhood,

e) Occupancy,

f) Purchase agreement terms,

g) Financing, reserves,

h) Construction issues,

i) Environmental factors,

j) Management and

k) Anything else which would be material.

l) Identify matters which are the belief of management as opposed to observed facts. It is helpful to reference any appraisals, title work, studies and other due diligence matters, but it is not necessary to attach these to the PPM.

5)  Management

a) Describe the management of the company and the experience of the principals.

b) Disclose any negatives, such as prior syndications which have ended in bankruptcy or foreclosure.

c) Describe all prior experience with syndications.

d) Discuss all experience in the type of project being syndicated, as well as other real estate experience.

6) Compensation of Manager and Affiliates all compensation to managers and affiliates must be disclosed in detail.

7) Financial Summary

a) The PPM should contain financial forecasts or projections. These can be done by an accounting firm or by management. (some attorneys will tell you not to make forecasts)

b) If forecasts are included, significant assumptions must be explained, after in the form of footnotes.

c)  Show perspective of the company and the investor. Most people like to see an internal rate of return for the investor (if you don’t know how to calculate this email me)

8) Conflicts of Interest

a) Describe any conflicts of interest which the issuer and its principals might have. This is a good place to describe conflicts

i) The issuer’s law firm might have.

ii) Are you going to compete in the fund by buying other properties?

9) Investor Suitability Standards Explain if it is it open to accredited investors only or (if under 506) can non-accredited sophisticated investors participate (this may dictate how much money you can raise).

10) Sources and Uses of Funds describe all the money coming into the project from the offering and how this money will be spent. Do this with both the minimum and maximum raise.

11) Summary of Operating (or Partnership) Agreement Provisions

a) Summarize paragraphs concerning distributions of cash and allocations of tax items. Also consider summarizing paragraphs relating to withdrawal of members and restrictions on transfer.

b) Discuss management issues; including any rights (or lack of rights) the investors have to participate in significant management decisions.

12) Risk Factors probably the most important part of the PPM because it will be relied upon by the issuer to protect itself from claims of misrepresentation and omissions of material information by the investors. The idea is to be as comprehensive as possible. The risks are two types:

a) General and

b) Specific.

c) There is a broad statement at the beginning that it is a speculative investment. Some risks common in real estate syndications are:

d) Lack of liquidity in the investment (always true)

e) Risk from competition, both in the general market place and in the location of the property (almost always true)

f) Financing risk, (always true, even if the property has permanent loan, it will expire some day and rates might be higher or money harder to get)

g) Environmental risk, (always true, even if there is an environmental study, the engineer might have missed something or there could be a future spill

h) Lack of appraisal (unless there is a fresh MAI appraisal for the syndication)

i) Development risks (permits, wetlands, cost overruns, etc)

j) Dependence on manager’s activities (always true, what happens if something happens to the key people)

k) Conflict of interest

l) Foreclosure

m) Unreliability of financial forecasts

n) Arbitration, if applicable.

Try to think of every possible doomsday scenario.

13) Tax Aspects should have some discussion although each investor must be counseled to seek his own tax advice. Explain basics of pass-through entity, passive activity rules, at risk limitations, tax allocations, depreciation assumptions, tax audits and other matters. Unless it is tax shelter syndication, no tax opinion is expected. The discussion would be much more detailed if it is a tax shelter deal.

14) Subscription Agreement is important.

a) It contains the investment representation of the investor needed for compliance with Rule 506.

b) Also should include representation as to accredited status and residency.

c) Provide signature page for operating (partnership) agreement. Investor should acknowledge receipt and review of PPM; disclaim oral representations and other normal contractual matters.

Ok time to get home. If you find this helpful please tell a friend and let me know also. If you have any questions you would like me to answer go to the interact page to ask it and I will try to answer ASAP.


Curtis Gabhart


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Not that hard a decision! A Hard Money Lender, a Partner or Both?

Not that hard a decision! A Hard Money Lender, a Partner or Both?

It’s the age old question in real estate, Do I get a hard money loan or should I get partners? Some people choose to get partners because they feel that hard money loans are too expensive and other people choose to get hard money loans because they think partners are too expensive. While at the outset one may think that hard money lenders are too expensive, it may be surprising to note that they can actually turn out to be cheaper than a partner or when used with partners allow you to increase your buying activity. This is because you will be able to leverage other people’s money and will not be required to invest as much yourself. Therefore, you can complete more deals if you chose to and even further improve the overall return on investment. However remember, leverage is not a good thing unconditionally, so use it carefully.

Here is a simple comparison.

Lets say a rehab deal takes 6 months with the following details:-

Purchase Price: $200,000
Rehab & Selling Costs: $50,000
Sale Value: $300,000
Partner share: 50/50
Total Profit: $50,000
Your Profit: $25,000
Your Investment: $125,000
Return On Investment: 20%
Annualized ROI 40%

Here is the same deal if you went with a hard money lender:-

Purchase Price: $200,000
Rehab & Selling Costs: $50,000
Sale Value: $300,000
Loan Amount (65% of sale value) $195,000
Loan Costs (4 points): $7,800
Carrying Costs (13 PITI for 6 months) $12,675
Profit: $29,525
Investment: $75,475
ROI: 39%
Annualized ROI: 78%

As can be seen from the example above, the investment required has decreased by 40% (thus freeing up capital for other deals) while there is also a corresponding increase of almost 100% in the ROI. So if you used the balance of your funds to complete another similar deal, your ROI would turn out to be 4 times that as if you had partnered with a financier for 50% share.
Apart from the above financials which speak for themselves let’s look at some other aspects of hard money lender funding vs. partnership funding below:-

Advantages of working with Partners:-

If they are real partners (and not just investors) they will split the work load. There could be synergy if your partner has experience and contacts in the business.
Can close very quickly if you are paying cash
Can do more deals than you could do by yourself.
Usually a safer and more conservative route
However, here are the disadvantages of working with partners/investors:-
You do most of the work, you may invest as much as they do, however you need to split the profits equally.
There can be disagreements resulting in the opposite of synergy
Consensus may take a longer time to reach and may cost you money
You will be limited in the freedom of your decisions
Legal issues & securities laws

While on the other hand here are the advantages of working with a hard money lender:-

It usually works out cheaper than a partner on a return on your money basis

Because of leverage you can buy more property (this is a double edged sword and can be good when making money or can be devastating in a declining market if you do not buy right).
Potentially will need very little or no money down. It usually is based on the value of the asset.
However, one needs to be wary of the following when working with a hard money lender:-

Leverage, as mentioned above, can become a double edged sword.

This is short term financing, usually between 6-24 months, and therefore may become a problem if your exit strategy is not working out and you can not find take out financing.

If you do not have a good relationship with someone you trust and they do not fund the loan you can lose out on the deal and more importantly your credibility

You need to be careful on who you chose to work with as Hard money lenders are notorious for being sharks, therefore it is important to get a referral.

I only choose to involve partners when I can see a clear synergy between our efforts or work with some investors that with whom I have built a good level of mutual understanding.

Many times what we do is use our funds combined with investors and hard money/private money loans to purchase properties. This allows our investors to get a better return than going out and paying cash for the property themselves and we use our expertise and time to complete the project and they collect a check.
Good luck in your search and if you need a list of money lenders feel free to drop me an email as I have an excellent list of hard money lenders which I would be open to sharing with you.

Here is a real life example of a recent transaction we used a hard money loan to purchase. For comparison purposes I put a scenario of using cash.

Cash Flow

Here are the before and after pictures:-

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How to choose a Lender for your Multi Family Apartment Building

When you’ve got your eye on a new multi family apartment building, you’ll most likely want to use a commercial loan to buy it. So how do you go about choosing a lender?

First off, understand that commercial lending is very different from residential mortgage lending. Rates are slightly higher – usually one point or so – because the lender knows that the loan isn’t secured by your own personal residence, as is the case in residential real estate lending.

When you choose a lender, you want someone who understands the commercial real estate business, knows the local market, and knows the ins and outs of commercial loans.

For example, if the multi family apartment you are buying contains five or more units, you can usually obtain a 75% loan-to-value ratio. This means that for a 6-unit building appraised at $500,000, you can get a loan for $375,000. Thus, your down payment will be $125,000.

However, if the multi family unit you want to buy happens to be in one of the 10 most expensive zip codes,
then your lender might require you to make a down payment of 30% to 50%. So for that same $500,000 building, you’ll need to put down $150,000 to $200,000.

In those more affluent areas, commercial lenders will generally do loans for higher dollar amounts than in average locations, but the multi family apartment building still has to produce enough revenue for you to service the debt. Rest assured the lender knows that, and he or she won’t make the loan without doing due diligence to make sure you’re not getting in over your head.

How much should you expect to pay for a property? Your lender should be able to give you a rough guideline, but generally, in most parts of the county you can buy multi family apartment buildings for anywhere from six to eight times the annual rents. In affluent areas, make that nine to eleven times the annual rent.

So buying in a less-expensive area lowers your cost per unit, but you won’t get as much rent. Buying in an affluent area brings in higher rents, but your purchase price is higher. You will have to perform a balancing act between the two by considering your financial investment capacity.

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