AUGUST Edition 2012
BUILD your
Nest Egg
Commercial &Residential
Investing
Lakeview Village Opp, Alabama
Throughout history as incomes have declined the demand for lower cost housing has risen. While it is difficult to pinpoint, some say the first appearance of the mobile home dates back to the travelling European gypsies of the 1500’s. In the states our first glimpse was on the outer banks of North Carolina in the 1870’s. When the tide rolled in teams of horses were used to relocate the home. Next would come the automobile pulled trailers of the 1920’s, originally made for camping. The Great Depression caused a major population shifts as hundreds of thousands of people moved to other regions to escape poverty and to start new, fuelling the need for a family to be mobile. World War II saw veterans returning home to find a lack of affordable housing & jobs difficult to find, fuelling the demand for an alternative.
Today, there are over 38,000 mobile home parks ranging in size from 5 to over 1000 home sites (with all the amenities) in the U.S. alone. These parks create an abundance of opportunities for Investors to capitalize in any economic climate. Ironically, the City of Opp, Alabama (also known as the City of Opportunity) is home to another of our recent acquisitions, Lakeview Village. Featuring over 45 acres, 112 pads & situated within an hour drive of the sugar white beaches of Florida’s Gulf, Lake View is symbolic of the many reasons why we acquire such assets. • As of 2010, over one billion people, one-sixth of the world’s population reside in Mobile Home Parks • High demand in down markets • Affordability • Cash flow • Income Stability
Warren Buffett made a substantial portion of his fortune by manufacturing trailer homes. As we regularly leverage the current economic climate, our acquisitions team was able to negotiate a purchase based on the income stream of 35 units out of the 112 in the park itself. This discounted opportunity has made a solid piece of our client’s portfolios. Since the acquisition, our management team has been working aggressively to increase the number of units added to the park and leasing up the vacancies. With the high demand of affordable housing, this investment type is continuing to show a strong income stream with more promise for the future. To find out more about how you can get involved in income producing projects like these, contact our office and we will be glad to schedule a one on one consultation.
Highlights • 45 Acres • 112 Lots • Beautiful Lake • Florida Gulf Coast
create a budget of the essential property improvements that will have to be executed over time to increase the property value. Please note that the operating expenses do not include the debt service (mortgage). Know what ROI you want to make:
Commercial Real Estate Make your money when you buy!
I
t doesn’t matter if you have been in the real estate investing business for 2 months or 20 years. We all know that we make the money in real estate when we buy, especially a commercial income producing property. Though the buying process is one of the most important components of investing, many entrepreneurs don’t have a clue how to determine the true value of an income producing property or it’s potential. Here are some simple tips to help you build more confidence in taking action. Leave your emotions at home: Many investors find a beautiful property where the seller promises the world of returns. Because of this beautiful property they “fall in love” with and end up paying more than the true property value. The real pain begins when the property does not perform the way it was promised in that pretty picture and the deficit begins to hurt the cash flow. Investing in commercial real estate is like investing in a business. You find the true value in the income it generates vs. the costs associated with running and growing it. Don’t fall in love with the property; fall in love with the numbers. Let the seller prove it to you: How did you arrive at that price? Don’t just take the seller’s word for their opinion of the property value; ask them to prove it to you. You need to evaluate the property numbers to determine the true value, so begin by asking the seller or representative to provide you with all of the supporting evidence that proves the value of the property
(financial statements, tax returns, bank statements, rent rolls etc). Once they provide you with their case, you must always verify that the information is accurate and up to date. If you are unsure of some of the information they give you, be honest and ask for more clarification. What you are looking for is the actual operating expenses and the actual rental income this subject property is producing. Here are some common expenses for commercial properties. • Insurance: Liability • Insurance: Workers Comp • Insurance: Property • Advertising • Legal/ Accounting • Maintenance Labor • Rent Discounts • Repairs • Reserves (Capital Improvements) • Supplies • License and Permits • Property Taxes • Management: Onsite • Management: Offsite • Telephone • Utilities: Gas, Electric, Water & Sewer and Trash In most cases you will not find capital reserves in the seller’s numbers. This really should be addressed in your initial evaluation during your due diligence period. You should
You need to decide what kind of returns you want to make as an investor. These returns can come in several ways. (Monthly Income, Tax Savings, Appreciation, Rental Increase, Mortgage Pay Down and Equity Build Up etc.) After you come up with the actual income the property is currently generating and deducting from that the anticipated expenses including your reserve budget for property improvements, you will come up with what is called the Net Operating Income (NOI). Here is a simple formula that you can use. If you take the NOI and divide it by your potential purchase price you will get the Capitalization Rate (Cap Rate). This rate tells you the projected annual rate of return you would receive if you would pay cash for the property. As an example, if the NOI is $100,000 and your purchase price is $1,000,000 the Cap Rate would be 10%. You can also divide your NOI by the preferred Cap Rate to determine the purchase price you would be willing to pay. So here is the big question… What is a good Cap Rate? The answer is really up to the buyer and the ROI they desire to make. Some buyers say they want a minimum Cap Rate of 10, others at 7 and some at 12 (Many times their Cap Rates are too unrealistic in my opinion). By knowing what you want to make and creating your own criteria you will have a clearer picture when evaluating properties. Note: Because we don’t always pay cash for commercial property, we have to dig deeper on the numbers. Whenever you are using any kind of financing (debt), you will want to find what your Cash on Cash return is. Start by calculating your debt service, subtract it from your NOI and you will have your cash flow before taxes. You can then divide that annual cash flow by the amount of capital you have invested to get a quick snapshot of your possible pre-tax annual Cash on Cash return. Can you add value?: At times you will find some deals that appear to be just shy of your desired returns. When this happens you will want to take a closer look to see if the property cash flow can be increased in a short period of time. Here are some examples.
If you are looking at a property that has leases $35 to $50 under market and through your due diligence you know that you could increase the rents in a short time and increase your NOI, can that become a higher Cap Rate? What if you came back to the seller and told them that you want to close but in order to move forward the financial institution or lending source requires that the seller notify tenants of a fair market rent increase in order to get the cash flow to their satisfaction before closing. What if through your research you find that the expenses can be lowered by 25% in just a few short months because the seller was not being prudent about his or her spending? Another factor to take into account is how much your financing will cost. Depending on the seller’s situation you may even find that the seller is willing to owner finance 15-30% of the sales price at a reasonable rate. This leverage may offer you higher returns now and over time. Take Action: Though what I have given you in this article is a simple starting point, if you don’t take action and start making offers, running numbers and putting properties under contract you, will never get to the next level. There is an old saying that says “Think long and strike fast.” This is how you should approach real estate investing. Think on the opportunities that you have in front of you and when the numbers work, “strike fast.” If you don’t feel comfortable or don’t have the time to seek out these investment opportunities look to invest with buying groups. Many of our clients love working with us because all the work is done for them. They just evaluate the final numbers and if it works they invest. Regardless of which direction you want to take, when you approach investing, you must leave your emotions at home. If you are interested in learning more about our investing services, feel free to contact our office and schedule a one on one consultation. Rick Melero
W
e want to thank all of our private investors for giving our organization the opportunity to work together and for growing with us in this real estate investment journey. Our team was recently doing some research about our current client base abroad and we found some interesting facts we felt would be great to share in this progress report. The following are the findings of our research:
1. Age
Demographics: This pie chart represents the demographics of the average age group for our current client base.
2. Type of Investments: This pie chart represents the t ype of funds our clients have utilized to invest in real estate assets through our organization.
3. I n v e s t m e n t
Statistics: This graph represents the average capital commitments that our customers have allocated with our organization to invest in real estate.
4. Marketing Statistics: This
pie chart represents the type of marketing that was used in order to introduce our products and services to our current customer base.
By continuing to perform and cultivating a relationship based on trust, many of our current clients are using word of mouth to introduce our business to their friends and family members. Interestingly enough, this activity has produced the majority of our new clients over the last few years. We will continue
to aim our efforts towards performing, regularly reporting and cultivating a long term relationship with our clients.
For those of you who have yet to work with us, below is a recent testimonial from one of our clients.
“I
am corporate counsel for a North American Retailer headquartered in Vancouver, BC and have been investing with HIS Capital Group for almost two years now. As a passive investor, I am very happy with the returns they have provided as well as the diversification of assets in both residential and commercial real estate. Investing with this organization I am able to safely employ my investment dollars while being involved in large projects I otherwise would not be able to acquire and manage on my own. I believe they have my best interest in mind and their commitment to performance is clearly seen in their reporting and quick responses. As a professional, “I would gladly refer any of my friends/colleagues to participate in these very passive and lucrative opportunities available through HIS Capital Group.� -Amy Frankel
What are your financial goals?
J
ust as each individual is completely unique, so are the needs of every investor. In fact, it would be foolish to think that there is one simple financial solution for every investor out there. Would you not agree? That is why it makes perfect logical sense that people require different financial goals based on their needs in order to build their custom nest egg. Of course, always looking at things logically with respect to investing and finances is another issue entirely (and removing emotion from sound financial planning and investing decision-making another series of articles in and of itself). But let’s say this at least about goals: goals, after all, are a complete reflection of who you are and what level you are currently in life. What may be important to a young 20 year old investor may be extremely different from someone over the age of 55. In fact, your personal goals are likely to change over time as you reach different levels and have different needs. Let me make this simple… Normally, your financial goals will be defined by the time it takes to realize your return. Here’s a simple example. In one of the coaching sessions I had with a young investor I learned his short-term goal was to go on a vacation to backpack through Europe. His mid-term goals were to own his very own home in Florida for his family and his longer-term goals were to own a 200 unit apartment complex. Other more mature investors in our client base are focused on other priorities; both immediate and far off into the sunset. Some of their short-term goals are to have a decent retirement account that keeps them in their comfortable lifestyle. Now, if you would have waited till this point of your life to consider your choices for providing the type of income you would need to continue with this comfortable lifestyle, you will certainly find yourself under a mountain of pressure. Do you follow me so far? Whether you are young or older, to retire with comfort you need a strategic plan to both save and invest your money to build a solid nest egg. Saving and investing are critical in ensuring that you achieve your financial goals. Here is the way I highly recommend you look at Saving & Investing
• S aving is putting money aside (normally in a savings or money market account) for a limited time period. One great reason for saving is to build up lump sums of cash to invest in opportunities that will put your money to work for you. Simple enough, right? • I nvesting is buying assets of value- such as bonds, currency, stocks, real estate etc. These types of investments have the potential to generate monthly income, increase the underlying asset value over the long term or, preferably in most cases, do both. Many people feel overwhelmed or intimidated when they talk about investing because of the great variety of investments out there. To keep things simple I will show you a simple way of understanding the different asset classes. Same as Cash: Any asset that you can convert to cash with little to no loss of value is considered cash equivalent. Certificates of Deposit (CD’s) and Treasury Bills (T-bills) are examples of owning assets that are the same as cash. These relatively high-liquidity savings-investment vehicles offer less risk which means that they typically will yield lower returns. Debt Securities: If you purchase a security such as a note or bond, you are in effect lending your money to the government, agency or company responsible for backing the debt security (i.e you are lending your money to the party offering the security). In essence, you have become the bank! In return, the debtor is promising to pay you interest in addition to your principal. These notes or bonds will typically have a fixed maturity date. Each loan will be differentiated by the terms and conditions of the written agreement, collateral and credibility of the debtor— with corresponding differing values for risk and returns. Equity Securities: If you own an equity security (AKA Stock), you own a piece of the company who issued the security—no matter how small that piece happens to be. You can hold stocks directly or indirectly through other funds that own a multitude of securities. Bottom line: when you own a stock you partake in that company’s success or failure. Though many consider stocks to be a bit risky they can also offer great returns.
Tangible Property: When you own tangible property (AKA hard assets), you own an actual thing (not its derivative or a division thereof). The best example is real estate such as land, property, commercial buildings etc. The beauty of owning real estate is that history has proven that it doubles in value every 10 to 14 years. Another valuable element of owning tangible property is that it not only offers growth in value, it also can offer monthly income, thus increasing your profit potential. This is one of the many reasons why our investment group specializes in acquiring commercial assets (Great Cash Flow and Value Appreciation). Other hard
assets include gold, other precious metals and commodities in tangible form. To Recap: To become a successful investor you will need to begin setting solid financial goals, understanding your needs (now and in the future), identifying the types of investments that best suit those needs and, finally, executing your plan of action. If you are interested in strengthening your investment plan and looking to diversify in tangible income producing assets, schedule a one on one consultation with us by contact our office. Rick Melero
Passive Investors Tired of earning low interest rates in CD’s, Stocks or Bonds? Let us show you how to make your money work for you safely through income producing real estate. Please call (877) 452-6569 Option 1 for the Investor Relations Department or go to investor@hiscapitalgroup.com or access our website at www.hiscapitalgroup.com
Customer Support Do you have questions regarding your investment statements or online portfolio access? We have many resources available for you, so give our Support Department a call at (877) 452-6569 Option 4 or send your questions to support@hiscapitalgroup.com.
Win a Royal Caribbean Cruise! We are very fortunate to have grown exceptionally these last few years, so we have opened up some incredible opportunities to share with each of you by giving away (3) Royal Caribbean Cruises to the top (3) individuals who provide us the most names of friends or colleagues in the next (60) days. The steps are very simple and we will take care of the rest and update you on the referrals send our way. The cruises will take place over a (3) day weekend and more details can be provided by calling (877) 452-6569 Extension# 118.
The Bottom Line:
We provide everything you need! We provide you the education, research, maps, data, tools, opportunities, process, due diligence checklists, and contacts, along with personal, financial, and asset portfolio tracking and analysis to help you chose the right income-producing assets to add to your portfolio.
www.HISCapitalGroup.com