BRRRR! BRRRR? Yes it's cold outside, but BRRRR is a widely used strategy used in the world of investment real estate. It stands for Buy, Rehab, Rent, Refinance, Repeat! It is a strategy that allows developers to grow their portfolios exponentially over time and recycle the same investment capital over and over again. This is how you can build a real estate empire essentially without access to cash being a bottleneck to your growth.
OK, now story time:
About 3 years ago, I got contacted by a real estate broker about a commercial property he was going to be listing in an area where we own property. When I asked him the price, my jaw dropped. The price was $1 million dollars! All those zeroes and commas! I have to tell you I ,was intimidated. We knew the property was worth a million but I offered $947,000 because, well, we were more used to 6 figures.
The seller immediately countered at $1,000,000. So I contacted my lender and asked if they could do 80% LTV and a 25 year amortization to make the numbers work better. (We had a required on cash on cash rate of return of 11%, and the only way to conservatively get there was by having the lender do a policy exception. They usually only do 75% LTV, 20 year amort or 80% ltv, 25 year amort.) Due to our relationship, they said "yes" and made a policy exception.
So I was going to need $200k for down payment, and $100k for closing costs, operating capital and some capital for some property improvements. $300k, which I didn't have... After getting the property under contract, I quickly got to performing due diligence and putting together my pitch deck to start raising the capital, another thing I never did before. I was used to presenting opportunities to lenders so I took the same approach to presenting to potential equity investors. Believe me, I was sweating. Especially after I put $50k in earnest money down.
Yada yada yada, so last week, we just closed the cash out refinance and I took home a darling check for $310,000, which was pretty cool to see in my bank account for 2 seconds before I wrote a check for $300k to pay my investors back! Now that I have your attention, if you want to review the very long winded manner in which we pulled this off, continue to read below. If you are happy with the yada yada yada version, you can stop here, mask up and give me a virtual (covid friendly) high five!
Raising the $300k was a lot easier than I anticipated. Why?
1.) The asset was in a great location.
2.) The projected numbers were very conservative; income conservatively low, expenses conservatively high; so the investors knew that I wasn't B.S.ing them with pie in the sky financial projections.
3.) The asset was 100% occupied and had history of strong occupancy.
The business plan was simple: raise rents to market value as leases expired (they were drastically under market based upon our market survey and the fact that it seemed to always be at 100% historical occupancy), and normalize expenses. The expenses were abnormally high. Utilities were God awful high and the management company had a maintenance employee stationed there for half the day, every day. AND they were paying for their snow removal company to salt and shovel the sidewalks to the tune of $10k a year. These were just a few items of financial waste discovered.
During our due diligence:
1.) We found that 20 hours a week was not necessary for a maintenance employee on a 20,000 square foot building. The management company swore that he was needed there... and the tenants loved him... and he would be sorely missed if he wasn't there everyday. Through right sizing and only having maintenance there on an as needed basis and for proactive trips, we were able to save $20k per year!
2.) In analyzing the utility bills with my energy consultant (shoutout to Enlightened Energy!), we found that the electric usage was just as high during the winter as it was during the summer. This didn't make sense. It was normal to be high during the summer with the usage of air conditioning with the expectation that the usage would taper off in the winter. The building was heated by steam during the winter. When we dug into it further, we found that the air handlers for the A/C units were not shut down at the end of each cooling season. Tenants had thermostats in their office suites that they had set at 68 degrees. The building wide thermostat for the steam heat was set at 70 degrees! So imagine that, the A/C and the building steam were fighting with each other the whole winter! Furthermore, we found out that the management company maintenance person had the pressure for the boiler dialed up so high that the whole steam system was packed with a head of steam (at all times!), so that the individual tenants had on demand steam. By the way, this is not way steam heat systems work. This was not only wasteful from an energy perspective, but it was also putting undue stress on the newer $50k boiler that was installed by the previous owner! Through a small investment in an energy consultant and having them integrate real time energy management, we were able to save about 30%, or $10k per year.
3.) I put the snow removal out to bid and we found a company to do it all inclusive, unlimited trips, and snow shoveling for $5k per year. $5k in savings.
4.) By increasing rents up to market as leases expired, we were able to push the annual revenue to $225k from $198k.
After executing this plan we were able to squeeze an additional $60k per year in NOI (Net Operating Income)! In order to capitalize on the low interest rates and positive lending environment, we jumped on getting the asset refinanced. The property reappraised at $1.4 million so we were able to refinance and pay our investors back. Now we have an appreciating asset that cashflows over $40k per year! Now we're looking for our next $1,000,000 BRRRR deal in Rochester, NY so if you know anyone who owns commercial property in a great location please think of us! Or if you'd like to invest with us, get on our distribution list here to learn about our next opportunity!
Successful investors correctly and consistently find the upside in investment opportunities and that's what makes them successful, right? We always hear about how the savviest investors like Warren Buffett got into the right opportunity at the right time, and that's why he's a billionaire. You usually see the highlight reel, because that's what's sexy. What you never really hear about are the investments that he didn't make. Because that's not important, right?
Wrong. Contrary to popular belief, the ability to understand risk is the single most important ability in investing and building wealth. Billionaire investor Warren Buffet, coined the following rules of investing:
"Rule no. 1, never lose money, Rule No. 2, Don't forget rule number 1."
It is far more important to understand the downside of an investment over the upside. For instance, consider Investment A that has a potential upside of 300%. And another Investment B that has an upside of 10%. You might be drawn to the A because of the upside. But what if I told you that A had a downside of 1000%, meaning you could lose more than your original investment and B had a downside of 5%. Every investment involves risk. You cannot make money without taking risk, so it is imperative for you to understand the risks involved with any financial investment decision before making one.
Today, we are going to cover liquidity risk, because liquidity risk is probably one of the single biggest risks involved with real estate investing. Liquidity risk is defined by Investopedia as follows:
"Liquidity is how easily an asset or security can be bought or sold in the market, and converted to cash."
In other words, if you needed cash today you wouldn't be able to convert a real estate investment into cash very quickly at all, at least not for what the property is worth. It takes several months to sell a property and convert it to cash. This is one of the principal reasons why financial advisors shy their clients away from holding real estate assets. At the very most if you ask you advisor about owning some investment real estate, they will sell you shares in a real estate investment trust (REIT). That way, if you need cash today, you can sell those shares today. Yes, owning shares in a REIT gets you exposure to real estate... kind of. But it lacks a lot of the benefits of having direct ownership of real estate: control, tax benefits, higher cash flow (REITs on average produce 3.7% dividend yield according to Commercial Property Executive.), the list goes on an on, but I digress.
Now, let's run this scenario. Call your financial advisor today and let them know you want to sell all of your stocks because you need the money. I will bet you they are going to ask "why" and will most likely put up a fight with you. They might say something like this: "These stocks are a long term investment. You don't want to sell them right now. This is a 10+ year hold." 10 year hold, eh? Weren't they just telling you to avoid real estate because of the liquidity risk? Which begs the question. If stocks (like real estate) are meant to be held for a long time, why aren't you being compensated for this liquidity risk?
I am fine holding my investments for a long time. I just expect to be compensated for carrying that long term commitment and so should you! This is one of the primary reasons why I like this type of risk in real estate: because it's a manageable risk. If you allocate your assets properly and have plenty of cash and other marketable securities like stocks, you shouldn't ever have to sell your real estate in panic to meet short term obligations, aaaaaand you get paid for it. Bonus! Or at least should be paid for it. Make sure that when you invest in real estate, that you expect to earn more than average stock market returns.
The second reason I actually like the illiquidity of real estate is that it forces you to be disciplined in long term holding and to best be positioned to capture the maximum upside.
A brief story: I used to manage my own portfolio of individual stocks. I would research individual companies and buy ones that had strong fundamentals. I started buying Apple stock back in 2008 for $3.20 a share. I accumulated and added to that position for several years because I believed in the long term fundamentals of the company. I had conviction. However, the stock started skyrocketing during 2010 (it hit $13.60 a share), so I sold a little of my position. It would go up another 20% and I'd sell some. I kept doing this until 2015, until I was completely out of Apple. It was $27.63 a share. To my horror, I watched over the years, absolutely hating myself. Every time I bought a new iPhone, I would check the share price. If I just held on, or even forgot about my investment in the company, my $5,000 investment would have been worth $213,000! Mind you, this is not the only stock investment I have done this with. I just do not think I would ever have the discipline to hold onto a liquid asset like a stock and watch it go up 1000% and not be inclined to sell it.
So What does this story have to do with real estate?
The point of the story is, if I would have had less liquidity, or if it was harder to sell my position in Apple or any other companies that I've owned, I would probably be a million dollars richer right now. With real estate, it takes a long time to even come to the decision to consider selling. Appreciation in Rochester, NY is pretty damn steady and nothing crazy happens with wild fluctuations in value. At the very most, if one of my properties has appreciated a bunch, I don't sell it; I refinance it, pull cash out and buy another investment property or two!
Bottom Line: don't fear liquidity risk, embrace it and make it work for you!
At the beginning of every new year, I get inundated with requests from friends and colleagues to "pick my brain" about becoming a real estate investor. Of course, I want to share all of the how to's of building wealth in real estate. I WANT to give back and help promote the use of this most effective tool in becoming more financially independent!
I start off with any "brain picking" session by asking the person: "Why do you want to be a real estate investor?" I have to say that the most frequently heard answers to this question are as follows:
A typical investment property in a good location in Rochester, NY is usually going to run you anywhere between $100k to $200k. Thanks to our strong banking system, a lender will usually allow you to borrow between 75%-80% of the appraised value of your property! So to buy a decent property you will need to put down anywhere between $20,000 and $50,000 of cash. Lets assume you want to buy a $100k property for the purposes of this scenario...
The average cash return on investment real estate is anywhere between 8%-11%. So your average yearly cash on cash rate of return would be between $1600 - $2200 a year. If you are looking to make extra money, is $183 a month going to change your life? If you are struggling financially is $183 a month enough to lead you to salvation or financial nirvana?
These are obviously rhetorical questions. And the answer is, unequivocally "no" based upon the reasons that were set forth for having an interest in the endeavor of investing in the first place. If this is your "why", I encourage you to find another way to make or (better yet) save $183 dollars a month. AND you can achieve this without parting from twenty thousand plus dollars. AND without having a property with tenants occupying your time or mental space.
Eating out less, buying private label brands, purchasing commonly used house hold staples in bulk, trading in your car for a less expensive one. Print out all of your bank and credit card statements over that past 90 days and highlight all unnecessary purchases and you will quickly find several hundred dollars in savings. No $20k investment needed, no tenants, no brain damage.
In regard to augmenting your income, there are a many ways to achieve that. Before you start selling essential oils, make up, vitamins, or protein shakes, start with your main occupation (sorry to my multi level marketing friends but I used to sell Amway, :-) so I have earned the right to make fun). Is it possible to earn overtime? If you work on commission, is it possible to hone your salesmanship skills and sell more of your company's product. I am a real estate sales person, I know there is always a better way to scale my company's revenue. Truth be told, I have invested more time in reading sales and personal development books than real estate books. If additional commission and overtime are off the table, perhaps you can find a way to perform your occupation better, identify ways to help your company perform better, i.e. make yourself more valuable. Employees who get promoted do so for going outside of their job description. They create more value than what they are paid. I all three of these are not options at your place of work or business, then figure out a side hustle based upon a unique skill or passion you have. For example, my brother Chris, loves vinyl records. He might actually be addicted haha. He turned that passion into income. He would troll craigslist and Facebook marketplace for vinyl record collections that were undervalued. He would purchase them and then run a weekly auction on Facebook live for a couple hours and rake in $300+ a week. This is just one example of monetizing a skill or passion. Again, all things that do not need $20k, don't involve tenants; no brain damage.
So now that I have thoroughly trashed a couple of reasons for investing in real estate, let's get to finding the right "why."
Investing in real estate is AMAZING for building long term wealth. By long term, I mean 10 to 30 years. I was able to turn a $16,000 real estate investment and turn it into a property portfolio worth close to $9 million. BUT it only took me 15 years of consistent daily action.
The reasons that I refuted above, were indicative of short term thinking. You have to get to deep personal reasons to establish a noble "why." Reasons that, if expressed publicly can make you feel vulnerable. I have an old investor client who started off with her "why" being the "extra money" thing. When I started asking more probing questions, it turned out that she wanted to use real estate as a way of funding her daughters college education. The reason this was so important to her was rooted in her immense financial struggle to obtain a college education for herself. She took on hundreds of thousands of dollars in student loans, tirelessly worked nights and weekends to pay for room and board, and ultimately wasn't going to be able to pay off her student loan debt until her late forties. She did not want her daughter to go through the same struggle she did. So we tailored a plan for her to find an investment property in alignment with her "why." I ended up finding her a property for $200k. She put $50k down, and we found a lender that would put an 18 year mortgage on it, so that by the time her daughter turned 18, she could sell or refinance the property and have college paid for.
If you want to invest in real estate, start with "why" first!
Upon David Martin and my professional journey, we have come to realize that the reason the participation of these projects remain in the hands of the very few is due to HIGH barriers of entry. It takes a lot of money and experience. For us it has taken decades of experience and to forge the relationships with the people who make our projects happen: our investment partners. Who happen to all be high net worth individuals. People who can spare anywhere from one hundred thousand to half a million dollars to partner with us on our projects. To see some examples of some of our recent completed projects click here.
We realize that this system is extremely exclusive.
Our company OakGrove Companies seeks to be more inclusive with all parts of our company, but have not been inclusive on the curation of our investment partner base. The reasons for this are simple. Having a hundred small investment partners on a project instead of one large investor is very cost prohibitive. The cost of compliance, financial reporting, and just the simple logistics of having to communicate with a hundred partners as opposed to one.
Crowdfunding technology and securities law reform over the past 10 years has been a game changer and will allow us to be way more inclusive to our partner base. So that being said, our New Years resolution in 2021 is to widen our audience of potential partners! So if you are interested in receiving information on our upcoming development opportunities, please request to subscribe to OakGrove Capital's upcoming investment offerings here!
Cheers and Happy 2021!
Partnerships are a great way to level up in real estate investing and development. The three components of a successful project requires an opportunity, experience and capital. Investors are often lacking in one or two of these components, so what do they do? They oftentimes partner with others who can bring these components to the table.
One critical error that a lot of people make is not structuring an exit strategy for that partnership. Things can be euphoric when you first enter a partnership but that relationship can change over time so you want to make sure you have a very well defined partner buyout plan to wind that partnership down in your operating agreement. Incidentally we made a presentation talking about this very subject and posted it below!
Let us know if you find it helpful and what other real estate related content you'd like to see!
A real estate developer is an individual or organization that acquires real estate with the intention of transforming it or increasing its value in many ways. OakGrove Development is always seeking to acquire undervalued real estate assets in great locations with historic value. A development project might not always be a vacant piece of land or a vacant dilapidated building. We have acquired buildings that were fully occupied but had some aspects that were missing in reaching highest, best use and value. Such as buildings with low rents, high expenses, or a less than optimal tenant mix. So what does is take to be a successful developer?
A successful developer possesses the following qualities:
At OakGrove Management Group LLC, you can trust that your property investment will be in the best hands. Unlike other management companies, OakGrove's staff is committed to driving high tenant retention for our clients. As investment property owners themselves, OakGrove Management Group's founders David Martin and Matt Drouin, know that high turnover means high expenses for property owners. However, most management companies do not assign this as top priority. These expenses include: vacancy loss, make ready costs, leasing commissions, utility expenses, etc. The National Apartment Associations estimates that these costs usually average between $1000 and $3000 per turnover! Did you also know that 60% of tenant turnover is controllable with staff performance the largest determining factor according to Satisfacts Research?
So what does OakGrove Management Group do to drive customer satisfaction to help retain your tenants?
If you want to get your valuable time back, have peace of mind, increase value and cash flow; know that your properties are being managed by best in breed real estate professionals, then contact us today for a complimentary portfolio review, where we will survey your properties, analyze your income and expense statements, and make recommendations on how to increase your cash flow, how to streamline your operations, and reduce your headaches. We will do all of this whether you hire us or not! So if your properties collectively produce over $10,000 a month or more in rent, call us at 585-413-4410, you would be an ideal candidate for our management services!
Our City and County leadership needs to embrace a strategy to foster the development SMALL retail.
Our local officials seem to always be wanting to attract the Moby Dick's of businesses to our area at the expense of identifying what the bottlenecks are for fostering the growth of small business; and then opening those bottlenecks to create the walkable neighborhoods we all want to live in!
Other cities have a vibrant and eclectic mix of small retail in their retail corridors. This creates many options for city residents and having several 750 to 1500 square foot retailers creates a critical mass that brings people near and far. People like options and having 8 to 10 retailers in a walkable area is better than having one 9000 square foot Morton’s, let’s say. The truth is, I would never go to a Mortons, and I never did since it opened back in 2017. Well I lied, I did go to Morton’s. I went there. Looked at the menu and the prices at the bar, politely put the menu down and walked to Aunt Rosie’s instead. My wife and I never looked back.
But if we had a small steak house, a regional Italian restaurant, a sushi joint, a craft cocktail bar, a dive bar, a greasy spoon, and Mediterranean street food place, and a vegan spot… that’s what is going to motivate us to walk the 15 minutes to that area.
So why don’t we have plenty of these epicurean hubs in Rochester? There are two short answers: 1.) lack of economic capacity (poverty) and 2.) The onerous building and zoning code regime we have in our city and state. In this essay, I will go into expanding on the latter, and offer up some recommendations to policy makers on what they can do to create fertile soil for the vibrant & bustling retail corridors we all wish to see in our community.
I have been in real estate brokerage, management, and development for 14 years. 95% of my focus has been in the City Of Rochester. One of my biggest frustrations of working in this municipality is in the leasing of small retail spaces. Let me run a real life scenario for you…
I own a mixed use building on the corner of Monroe and Meigs in the Pearl Meigs Monroe neighborhood. I had a nail salon that I inherited as a tenant. It is a space that is a little under 700 square feet. The nail salon was month-to-month so I gave them notice to vacate and they left. I wanted to get a food or beverage retail operator in there so that my residential tenants in the area would have a space to get food or drink, hang out and build community.
It took me a year of offering 6 months free rent in order land a lease with an operator that was willing to take this project on. Why did it take so long? It wasn’t for lack of interest to be clear. I had hundreds of inquiries from great start up businesses and existing businesses who were very excited about the space. When we would get to the point of getting serious, they would check with the city about what they would have to do in order to locate their business at my building. This was the point at which the prospect would disappear into the ether, never to be heard from again!
So what happened? Well, when they would go to the city, zoning would tell them they would need an alternative parking plan; a public hearing for this, a public hearing for that. If they were able to get through all of that, they would also need to talk to building code. If they had a certain occupancy above X amount of people, they would need a public bathroom, and a public bathroom that had a wheel chair accessible 5 foot turn radius. If they had an occupancy above Y, which is not very many people, they would need to put in two bathrooms. If that took up too much space in their 700 square foot bar/eatery then, guess what, you would need to have another hearing!
It is intimidating enough as it is opening a new business. When they build up enough courage to draft a business plan, save up enough money to pull the trigger and actually find a space, the City throws the book at them and really offers no support system for helping them navigate this system, that is, without forcing them to spend thousands of dollars on architects and engineers. I have seen this policy regime stamp out many potential small businesses from sprouting up in our community.
The City Of Rochester’s 2034 Comprehensive Plan is helpful and does attempt to address some of the outdated zoning red tape, but I do not think it goes far enough. So what’s the solution? I have a couple suggestions:
1.) Create a full-time position in City Hall which will serve as a small business creation advocate. This person will serve as a point of contact who will “connect the dots” for local entrepreneurs trying to navigate the zoning and building code system. This person will be an expert on all things building and zoning and be able to identify back doors and efficiencies for proper space planning. They will also be able to provide architectural services and space planning free of charge. If there is no other option besides having a hearing for a building code or zoning variance, this person will be able to work hand in glove with the entrepreneur in preparing the application and the supporting documentation needed to have a successful hearing.
2.) Expand the $8000 50/50 match grant program that is administered by the City’s Office Of Business and Neighborhood Development. To not only have a match grant for furniture fixtures and equipment, but for build out costs as well. If a prospective tenant is looking to change a bodega, liquor store, or nail salon into a higher impact retail use, such as a small bar, restaurant, or coffee shop, it is very hard to try and convince a landlord in putting a substantial amount of capital into this prospective tenant’s build out. The main reason is that restaurants and the like have one of the highest percentages of failure out of any business. So landlords pass on financing these types of build outs because of that risk.
This is just two recommendations; what are your ideas on fostering more smaller retail?
This blog serves an an outlet for all of our invaluable team members to share their insight on development, property management, and all things affecting real estate in our community.