A wise man once told me to look at money like little soldiers.
Each dollar bill is a soldier and a lot of soldiers is an army. These soldiers can work for you anytime you need, but you must give them instructions. The key is to send these “soldiers” to places where they can work for you and recruit more soldiers.
In real estate that would be in investment properties, developments, or REIT’s. However, you don’t want to send your soldiers into the battlefield blindly. You must get intel first. Study the terrain, the weather conditions and the logistics of the battlefield - so to speak. You want the least amount of casualties when going into battle. In real estate, we call that Due Diligence, and you get a set amount of time (ex. 15 days) to perform it “diligently.”
Hiring contractors such as inspectors, appraisers, engineers, etc., will be the first line of gathering intel. Be careful not to solely rely on this 3rd party intel, or you may be in for some surprises after you close on the property. Instead, be involved in the due diligence as a Captain would be involved in a battle, and actively seek out potential issues that may arise such as deferred maintenance, code violations, tenant viability, geography, and also economic factors such as growth trends and demographics.
To gain a better perspective of the battlefield, there is no greater tool than Google Maps. Yep, you read that right - Google Maps!
Aside from predicting the flow of growth, one can zoom to street view and begin a visual inspection of the exterior of the building. What does the roof look like? Who are the neighbors? What about ingress/egress? Keep in mind that not all street views are updated and some may be a couple years old. At The Outlier Group, we perform what we like to call “pre-diligence,” which allows us to verify historical records, rent rolls, profit & loss statements, and physical attributes such as HVAC and roof conditions. We want certified statements from previous years to verify the data provided in the Proformas.
As Ronald Reagan famously quoted… “Trust, but verify.”
Suzanne Massie, an American writer, met with President Ronald Reagan many times between 1984 and 1987. She taught him the Russian proverb Doveryai, no proveryai (Trust, but verify), advising him that "The Russians like to talk in proverbs. It would be nice of you to know a few. You are an actor – you can learn them very quickly."
The proverb was adopted as a signature phrase by Reagan, who subsequently used it frequently when discussing U.S. relations with the Soviet Union. Using proverbs that the Russians could relate to may have helped relations between the two leaders.” - Wikipedia
Many of the pre-diligence items will be clarified in the listing Broker's Offering Memorandum (OM). While most experienced Commercial Brokers will have an OM put together on their listings, many unexperienced brokers will not. This means you will have to send them a long list of questions they may not have thought about asking their seller. This likely will cause delays.
We have learned that the advertised CAP rates and proformas of commercial real estate listings are vastly exaggerated. Even the operating memorandums leave out significant expenses to help support the inflated numbers advertised in the sale. The pre-diligence we conduct helps provide us reasonable time to sort out the financials and locate expenses or issues that otherwise go under the radar until it's too late.
To summarize, if you are sending your soldiers to conquer a new location, be sure to get your intel and study the battlefield as if you were going to battle. The goal is to win the battle with the least amount of casualties and to conquer a the location that will provide the best place for recruiting more soldiers (positive cash-flow).
Check out our previous article on How the Wealthy Use Phantom Income