Pick a loan, any loan.

Sometimes you don't know there is a better deal out there.  That is the beauty of choices.  

I recently was looking to get a loan for a self-storage development.  Here were the two options I had:

Option 1:  

10% down

SBA portion of the loan: 5.4% fixed interest rate for 25 years on 40% of the project costs.  Prepayment penalty of decreasing rate from 10% to 1% over the first 10 years of the loan.  Loan is assumable, however.  

Credit Union portion of the loan: 5.5% fixed interest rate of prime rate plus 0.75% once construction is done and loan can be locked in.  25 year amortization with a balloon after 5 years.  Prime + 0.7% after that if another 5 year term can't be negotiated. 6.0% interest only during construction.  No prepayment penalty.  $7800 in closing costs, plus 20 included draws for the title company to pay construction costs - this is probably a $3000 value as they typically cost about $150 each.  

Option 2:

10% down

SBA portion of the loan: 5.4% fixed interest rate for 25 years on 40% of the project costs.  Prepayment penalty of decreasing rate from 10% to 1% over the first 10 years of the loan.  Loan is assumable, however.  

Bank portion of the loan: 5.45% fixed interest rate of prime rate plus 0.7% once construction is done and loan can be locked in.  25 year amortization with a balloon after 5 years.  No additional guarantee of rate or terms after the initial 5 years.   5.45% interest only during construction.  Prepayment penalty for the 5 years decreasing from 5% year one to 1% in year 5.  If an additional 5 year term is negotiated after the initial 5 year term, another prepayment penalty from 5% - 1% will be in effect.  Bank had 0.25% closing cost plus title fees (probably around $8,000) but weren't able to give me any free draws for the construction period.     

Initially, I loved Option 1.  And then I initially loved Option 2 more due to lower interest rate for the construction period and rent-up.  What I didn't like about Option 2 was the lack of perceived flexibility it gave me.  It seemed very restricting with the prepayment penalties without the assumable loan.  I also didn't like the uncertainty of having nothing to fall back on after year 5 when the balloon came due.  No adjustable rate mortgage, no additional 5 year term, nothing.  I felt a little bit naked, so to speak.  In the end Option 2 changed their term to allow for a 5/1 ARM with a prime plus 0.7% rate but wouldn't remove the prepayment penalty after the initial 5 years.  They allowed me to sell the property without penalty, but not refinance.  I struggled with that option although if it were my only option, it probably wouldn't be terrible.  

My philosophy on the overall market and interest rate conditions are this:  I think interest rates are going to go up a little but I think the treasury is going to do a lot of monetary tightening.  What this means to me is that I don't think interest rates will get too inflated but I think free cash will tighten a lot.  That may make it tough for me to get a new loan once mine expires.  Therefore I want some sort of safety net of an ARM for as long as I need to get a new 5 year fixed rate.  If I can't get another 5 year fixed rate due to fiscal tightening by the government and federal reserve, I want to make sure I have a mechanism for keeping the loan going as a safety net.  I could be wrong, but this is my main concern.  BTW, I think this will slightly impede our current economic tailwind (similar to raising interest rates) to keep the economy from getting too inflated too fast.  It might actually stifle growth a bit.  If things are stifled more than a "bit", I want to have protection.  I think I'll be making plenty of rent, but I know interest rates are going to pinch me a little and I don't need the added headache of a big balloon payment I can't get a loan on.  Anyhow, maybe I'm too worried about the downside, but I want to be super conservative in the down direction. 

I asked Option 1 to match the interest rate and reduce the interest-only rate for the construction and rent-up period.  They were able to do that so I was able to go with them.  I really felt confident I'd be able to renegotiate a new 5 year deal that was favorable after the initial 5 year term and if I couldn't, I had the 1 year adjustable rate to fall back on (which the Bank also was willing to do).  The biggest selling point for me was the lack of a prepayment penalty.  If I had to refi for some reason, I would only have to pay the SBA prepayment penalty.  We are talking about having the potential to save $50,000 when I'd probably need the money the most.  Anyway, like I mentioned before, I was thinking of worst-case scenario stuff here and I just felt way more comfortable going this route.  

In the end, both offers were really pretty great but I was able to take a loan that I thought gave me the most flexibility going forward.  Not to mention, very low closing costs once the 5 year initial term wrapped up.  

Deal flow - How I come across opportunities.

So far I've had enough deal flow (new opportunities for investment) to keep me busy so I haven't resorted to alternative methods at this time.  With that said, that doesn't mean I've stopped looking even when we have a project that either taps us out financially or will take up most of our time.  It's basically a form of marketing.  When a typical business stops marketing, sales usually lag at some point.  When I was working for the construction company, we would get super busy in the summer and it would be almost impossible to market.  Then fall would come around and we would run low on work and then it was too late to start marketing again.  This is bad.  I think I learned my lesson. 

The key is to always be looking (or marketing).  You never know when the next great opportunity will strike.  And let me tell you, if the deal is that good, you won't have to worry about finding funding.  Just go on BiggerPockets.com forums and post about it.  If you do a little homework, you'll be able to find partners.  Or better yet, go to some meetups and build your network of people looking for deals BEFORE you find the next deal.  But again, the search is on for good deals.  If you find one, you'll find the funding. 

But back to deal flow and how I have found my properties.  In general, I'm looking for a little more bottom-end property.  I'm looking for industrial properties or land that can be used for self-storage.  So far I've found two deals on Craigslist and another by looking at a deal I found on Craigslist (it was across the street from the one on Craigslist).  I've found another deal by bidding and losing on a mini-storage facility and missing out on it but buying the property next door which I developed into maxi-storage.  I've found another property by knocking on the door and asking if it was for sale (it was).  Door knocking doesn't always work - sometimes you get told to buzz off - but you have to be able to deal with failure in this business anyhow.  I see it as practice! 

A couple other deals I've found out about (but not closed on) are from knocking on doors, networking with past realtors or just asking people who are in the real estate industry if they know of anything that might be available.  ALWAYS ask if they have something else available.  I've never encountered someone who was mad because I asked.  The answer is always 'No' if you don't ask.  If you ask, it might be 'Yes'.  So basically this is networking.  Tell everyone you know about what you're looking for and go out and try to meet others who may be able to help you find what you are looking for.  If you like a property in an industrial park, go in and ask if it's for sale.  If they say 'No', ask if they know of any properties in the park that are for sale.  A lot of times they know of someone who is interested in selling. 

One final word on this subject...Always be marketing.  If a property isn't for sale but the owners appear to be on the elderly side, keep in touch with them.  People typically want to sell the property at some point.  Sometimes they pass it down to kids.  Sometimes the kids don't want anything to do with the real estate.  If you keep checking in, you'll likely be the first person they inquire with to sell the property.  This isn't foolproof by any means, but it gives you a better chance than if you sat around waiting for things to pop up on Loopnet or the MLS. 

How we got our site plan approved.

These back-to-back blog posts are probably kind of annoying but I feel like this information goes hand-in-hand with my last post. 

I saw some other developers at the council meeting last night and they had a great project, but they were trying to feel it out rather than have a plan moving forward.  A lot of this hinged around them not knowing the local zoning laws.  I think they could have been better educated in local zoning laws by their advisors.  In the end, the council really liked that the developer brought their project before the board to discuss what they wanted to do to get feedback.  That was a positive outcome.  I know I've done the same in the past with another town board and they were annoyed.  So your outcome may vary. 

So while they went in and had lots of questions as did the council, I was able to go in with a plan for a project.  I researched the local zoning laws and knew exactly what would fly and what wouldn't.  The council had a few minor comments and questions but otherwise it was a slam dunk. 

The difference is that I spent approximately 2 hours researching the zoning laws and getting familiar with them while the other developer didn't.  I'd suggest that it's worth your time.  You still may have a lot of questions but at least you'll have a really good feeling about what can and can't be done on the piece of property you have invested time and possibly money into. 

Site plan approval

Two nights ago we received approval for our site plans for our Hudson Storage Garages LLC project.  It will be a large-scale self-storage facility catering to boat and RV storage.  To my knowledge, there is nothing like it in the area.  Most boat and RV storage is shared space within a large pole shed.  Sure there are places around that have larger storage units but they usually don't have a ton of room between buildings to actually pull large trailers in and out.  This should hopefully fulfill the needs out there.  Sure it'll be a bit more expensive than a mini-storage unit but it should still be quite a bit cheaper than other options out there for large-scale storage.  The other options are typically industrial or warehouse space which is typically reserved for business needs (and therefore business budgets). 

The units will be 18' wide by 40' deep or 720 SF.  This space will cost $325/month or $0.45/SF.  Pretty reasonable for a space with 16' ceilings and 12'x14' overhead doors.  This is basically the going rate for mini-storage per square foot so I like to think we'll be competitive. 

I think that mini-storage and storage condos are going a bit too main-stream for me lately.  I'm trying to stick within the storage space but change it up a little.  I'm spending more money to build these units and renting them out for the same price compared to mini-storage but I feel like the long-term needs and future ability to raise rents neutralize these initial negatives.  Not to mention, it's good to have a product that isn't a commodity.  I'm hoping my bet pays off.  Mini-storage is probably a safe bet as new construction is filling up nearly as quickly as it's being built, but I like the idea of having a little different product to offer people. 

Keep your eyes on the prize!

I came to the conclusion that I was starting to think I was too big for my own britches.  I was starting to think I could do anything I put my mind to.  

For example, I went to the Minnesota Cup entrepreneurial competition info night to pursue some ideas I had about an off-the-wall business for rental equipment vending machines.  I thought my idea was so good.  I thought that my idea was hard to execute but doable.  Then I talked about it.  Out loud.  To other people.  That's when I felt like I was full of BS.   I mean, yes, I could probably see this through.  Yes, I could probably make a lot of money at this.  But the realization that I probably wouldn't want to swept over me at this MN Cup info night.  I suddenly got the feeling that I was out of my mind.  I know self-storage and railroad construction.  Why am I trying to go in another direction when I haven't tapped out the things I have real knowledge and expertise in?  Why?  I think it had to do with the idea in the back of my head that by venturing off on my own, the storage and/or railroad business would not happen fast enough to really ramp up.  Ironically, I thought something that I had no real knowledge in would move faster or equally fast.  Again, I realized that I was REALLY wrong.  

With that, I decided I need to concentrate on maximizing profits on my current projects and network.  I was hoping that if I networked more, I might be able to find more funding and potential partners for future projects.  So that's what I set out to do.  Within 3 weeks I have about 6 more leads on projects and 3-4 potential project partners and I can feel the momentum starting to snowball.  I just need to keep my head down, continue to meet and learn from other investors and this thing WILL happen for me.  I can see in my progress over just the past 3 weeks that this IS going to work the way I loosely envisioned when I gave my 2-week notice to leave my job.  

And maybe, when I get very comfortable with my current financial position, THEN I can start chasing other opportunities outside my expertise.  But not until my current expertise has run it's course.  

I need to FOCUS because I'm not as good as I think I am.  I have a long way to go before I get there.  

What to do with a windfall?

We received a windfall with the sale of our construction business in 2014.  We started to think of all the stuff we needed.  We "needed" a new car, redo our bathroom, redo the carpet in our house, redo the deck, redo the driveway, finish the basement, and so on and so forth.  After doing the math, we would have been left with about $25K for 3 years of sacrificing life to chase the dream of starting a business.  And you know what would have happened to the last $25K had we went this route, right?  Yup, it would have been frittered away too.  We came to the quick conclusion that trading 3 years of life for some material things was just plain stupid. 

We decided to buy a couple of rental properties (mini and maxi storage buildings) to preserve our principal at the very minimum.  We didn't know what we were doing other than not spending our capital and maybe making a few bucks every month to grow our next egg.  At the time, our thoughts revolved around paying off the mortgages in 10 years and being able to retire (whatever that means). 

Then I started researching how to become a millionaire and came across Robert Kiyosaki and the "Rich Dad, Poor Dad" series of investment/self-help books.  It started with a YouTube video of Robert or Oprah.  His philosophy on rich people spending their money on assets rather than liabilities was earth shattering for me.  I read everything in the Rich Dad, Poor Dad series and then decided to go after more properties.  This time with an emphasis on cash flow.  I also started listening to Bigger Pockets Podcast and Jason Hartman's Podcasts and I went down the rabbit hole. 

After that I was on the hunt for anything worth buying.  I found a 2000 SF retail property on a busy corner in Green Bay by Lambeau Field and rehabbed that with the help of a cousin.  We did a great job but got a lousy tenant.  Upon evicting the tenant and putting the building up for rent, we got an offer to sell from our neighbor.  We settled on a price that was good for both of us and we were able to sell with a nice profit.  It was a buy and hold property but realized it was a handful owning a property so far away.  Frankly, that was my fault for not turning it over to a property manager, but live and learn. 

About a year after we bought the GB property, we tried buying a self-storage in Houlton, WI which we got outbid for.  The silver lining was that we ended up buying the vacant property next door.  We tried a few things before landing on developing the property into large storage units that were big enough to accommodate businesses and the big stuff they have.  So with cash-flow in mind, we refinanced the first two properties to take out equity to develop the new property.  This was all done while holding down a day job. 

And on and on.  The interesting thing about all of this is that if we spent that money in year one, our life wouldn't be any different than prior to starting and selling our business.  But because we bought an asset rather than liabilities, our life has been changed.  We aren't exactly Paris Hilton, sipping champagne and hanging out on Yachts in the Mediterranean Sea, but we've gotten to the point where we might not need another regular job again.  That's the ultimate freedom. 

So next time you get a windfall, don't buy stuff, invest in your freedom.  It'll come sooner than you think. 

The beauty of Meetups

I've been reading books and listening to Podcasts for a long time now.  They give me a ton of energy and get me all excited about real estate and investing in general.  I highly recommend this to everyone looking to get into a certain field or just learn more about something.  It's pretty safe to assume that there is a podcast about what you're interested in.  If not, maybe you should start one! 

At the beginning, podcasts and books (audio books included) filled 100% of my needs.  But now that I'm becoming more experienced, these shows only fulfill about 75% of my needs as an real estate investor/developer/professional.  Why, you ask?  It seems there are two main reasons for this: 1.) These podcasts or books only go so deep and it seems I'm getting to the same level of learning each and every time, and 2.) you can't ask that follow-up question when you're listening to a podcast or book. 

That's where Meetups come in.  I've been using Meetup.com with great success.  I've mostly done some local meetups here in the Twin Cities but I've also explored other cities in this manner too.  I'll get into that below.  Regarding real estate meetups, it's been so much fun.  It's refreshing to know that there are other people out there with LESS experience than you.  It's great to meet some people out there with MORE experience than you.  It's an ability to meet people you can help meet their goals.  Remember karma works in both directions.  I've also met people from banks and investment funds, people who syndicate deals, realtors who are also investors, etc.  It's also interesting to know that people are out there willing to pay commissions for you to find them deals.  There are also people out there who just look for deals for you (wholesalers). 

My biggest suggestion is to not be shy at these meetups.  I always feel like I'm putting myself WAY too far out there, but so far it's worked out well.  I've found an alternate lender for my deals, I've found a person who is, along with a few friends, looking for passive investments to invest in.  I've also listened to mortgage brokers talk about financing that I thought were only fairy tales.  I've also heard about a syndicator who brings deals to people who have money to invest. 

I've also attended a real estate meetup in Memphis, TN while on vacation and a running meetup in Madison, WI while in town on business.  I had been interested in learning about the Memphis market and this meetup was so helpful in understanding the market.  There were people with deals everywhere but in the end, I just didn't feel comfortable with the area in general.  There is no doubt money can be made in Memphis, I just had a hard time envisioning where I would invest.  Therefore, I've put it on the back burner.  Had I just jumped in and invested without visit the area and visiting with local folks, I probably would have made an investment I wasn't comfortable with.  I believe you can invest from afar, but you need to be comfortable with your decision. 

I'd say meetups are super valuable and if you are mildly interested in something, get out there and try a meetup.  I think you'll know pretty quickly whether this is your "thing" or not.  But if you don't try it, how are you going to know?