Updated: Jul 4, 2020
We have a new investment opportunity here at Peoples Capitol Group. Find out why we chose to acquire these properties and how PCG is working with passive investors to build their wealth through NJ apartment buildings! The Passive Cash Flow Podcast is for beginner or experienced investors. Learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow! Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted. -- https://www.facebook.com/peoplescapitalgroupnj/
Aaron Fragnito: All right, ladies and gentlemen. Welcome back to the Passive Cash Flow Podcast. I'm your host, Aaron Fragnito with Peoples Capital Group. Today, we're going to talk about a 25-unit building we're buying. We're going to talk about why we're buying it, how we're buying it, and how we're structuring with investors, what the reposition strategy is, and why we think it's a good deal and why we're executing on it right now. We're going to break into today. Guys, if you want to learn more about how you can get qualified for one of our upcoming passive investment opportunities, this building included, go to peoplescapitalgroup.com. Put in your information. See if you qualify for one of our upcoming investment opportunities. Better yet, come to one of our investor luncheons or join one of our webinars or come to one of our events here at the office. We do them every single week. We try to make them available at good times for investors to come and learn more about our upcoming investment opportunities. Let's get into it here. Let's talk about this 25-unit property. Why are we buying it? What's the value of it? We look for apartment buildings that have value-add. Value-add means maybe the rents are below market value. Maybe there's other forms of income on the property that the landlord could be making, but they're not taking advantage of. Maybe their brother's on payroll making $50,000 a year and as some deadbeat who doesn't even help out of the property. You'd be amazed how often we find that. There's tons of ways that you can get your expenses down on properties. A lot of times, landlords are paying too much for things or they just have the wrong services or people they're working with. Again, they're missing out on opportunities to make more income on the property through maybe storage or laundry or parking and solar panels. There's tons of different ways to make more income on real estate. We look for value-add opportunity. Of course, the most common form of value-add is rents below market value. That's a pretty natural value-add to look for and find. A lot of tenants don't bother raising the rents because it's an awkward conversation to have with your tenants. It's a difficult conversation. Tenants do move out sometimes if you're raising rents 5% a year. By the way, 5% is known as a nuisance raise here in the real estate world because it's not enough to have you move out. As a tenant, it costs more to move out generally than the 5% increase on your rent, but it is enough to make a difference across the board for the landlord. It can be the difference between you building your wealth in an exponential rate or not. The first value-add we found in this 25-unit property was that the rents are about 10% below market value. Now, that might sound like not a whole lot. When you're talking about 25-units, 25 customers, you can think of them that way, paying you money and you're a company. If you realize, "Wait a minute. Everyone's paying 10% below what they could and would be willing to pay," then that's a pretty big difference. A lot of times with these properties, the profit margin is maybe 10 to 20% of the gross revenue at the end of the day after your debt service and all your expenses. Increasing the gross revenue on the property by 10% is a huge factor. Even if we just do it by 5%, that's still a good amount because that's straight to the bottom line because all of our other costs are already covered with all the income on the property. If we get our income up by 5%, that's 5% right to our net profit because all of our other costs are covered. When you can increase the rent by 5 to 10% on this particular building, rents are below market value by about 9.1%. You got to know your numbers. You got to know your numbers in this business. The rents are below by 9.1%. Because of that, we see value-add opportunity in the building. The rents, even if we increase the 9.1%, it still wouldn't be up to where the medium rent is in that area. Therefore, they have more room to grow, we feel. By the way, if it takes us two years to move the rent up to that amount due to rent control and other factors, then basically, by that time, rent is projected to be much higher then. Rent is actually growing at about 4 to 5% here in North Jersey. We know that part, you're not going to last forever. It has been growing that rate for about 10 years now. Even if that slows down, it's not the end of the world because there's room to grow on these rents moving them up to 9, 10% more of the next two years. At that point, the rent will be even higher. Ideally, 8 to 10% more at that point, so we'll still be catching up with rent as we go along through the years. The best value-add strategy is finding some play in the rent. Again, a nuisance raise is generally an easier raise. A 5% raise, that's what we're doing on this building. 5% a year, year-over-year. That is enough to really grow your wealth over time. Not anger your tenants too much, not have a high amount of turnover, and make sure that you're hitting that mark every year on the rent growth. Now, as you collect more rent, not only is it net profit right to your bottom line, but it exponentially increases the value of a building. A lot of people have questions about this. How are these apartment buildings valued? Why does a 5% increase in rent not only increase my building by 5% in value, it actually increases it more? The reason is because properties, commercial real estate is valued at a calculation of your cap rate divided by your net operating income. Actually, your net operating income divided into your cap rate gives you your property value. If you have a 6% cap rate and you make another $10,000 in net profit, that increases the value of real estate by $600,000. It's crazy. If you're able to make more capital on the bottom line, it's crazy how much you can increase the value. It's an exponential increase in value. By increasing the rent roll that connect cash flow of a property, lowering your expenses, increasing your income, you exponentially increase the value of the building due to the cap rate valuation as long as your cap rate is below 10%, which our cap rates are always below 10% in these areas that we're buying in. The exponential increase of the real estate value as you increase the rents, an increase in that cash flow over time is a way to just build that wealth continuously through the years. Not only you're getting more cash flow quarter-over-quarter, but the value you're building, which is even more important, has risen in value exponentially due to the increase in rent. If you don't fully understand this, come to one of our events or go to our website peoplescapitalgroup.com. Sign up there and we can maybe sit down for one-on-one if you're a qualified investor. I can explain this to you in more depth rather than quickly talking through a 15-minute podcast. This is the strategy, one of the strategies off the bat to increase the value of the building, increase the cash flow of the building. Of course, the rents are going to go up over time. By increasing the better management of the building, we're also finding different ways to make additional income on the property. This building here, it actually appraised at 3.5 million. We're buying it for 3.1 million. Right off the bat, we're getting a nice discount of about $400,000. That's our job, is to find good discounted properties. This is actually brought to us by a professional real estate broker who brought it to us as one of the first buyers on the property. Now, there were actually offers that were higher than ours, but the broker and the seller decided to go with us because they knew we were good investors. We worked them before and the broker vouched for us. He said, "Hey, Mr. Seller, these guys are good. We know they're professional. We know they move quick. We know they're not going to nickel and dime us too much. We know that they're going to work with us to get this thing done in a professional matter." Because of that, because of a good reputation we have in the market, because of having these relationships existing with these brokers and wholesalers, which is one of our greatest value-adds we bring to our investors, one of our greatest benefits to our investors is all our networks to find these awesome deals at great prices. The broker brought to us first. There were actually offers that were higher than ours at 3.2 and 3.3. They went with our offer because they know we're a strong buyer. A lot of times, sellers, they just want to go to a good buy. That's not going to waste their time or insult them and make sure that they're moving towards a closing table. The broker knows that sauce. He knows that's Peoples Capital Groups. Because of that, we got a better price on the building. Your reputation is everything in this business. Of course, we got the building for about $400,000 below what it's a value at. The rents are 10% below market value. As those increased, the value of the building will increase even more. Also, we're buying the HOA on this building. We're buying 25 condos out of a 31-unit complex. The developer re-designed the whole building. It was an old warehouse that was turned into fancy condos, loft-style condos with high ceilings, stainless steel appliances, granite countertops, hardwood floors. Nice new apartments with parking and everything and all the forced hot air heating, AC and everything, so a nice building. I'd say it's about a B-minus right now. We're going to turn into a B-plus. One of the cool things about this building is that we are going to become the HOA. We're buying 25 condos out of 31 condos. In the past, those other six condos sold for around $200,000. We're buying the package at 125 a condo. The condos individually sold for around 200,000 in the past, we're buying the package of 25 right now for $125,000 a condo. Obviously, getting a really good price per condo, getting a really good price on the building, on the package of condoms we're buying. A nice turnkey package is fully occupied and cash flows from day one. It should be an awesome opportunity for our investors and us here at Peoples Capital Group. By buying the HOA, we collect HOA fees from the other six units. We have another form of income there and you want multiple forms of income on your property. It's just very important to have multiple forms of income. Now, the laundry is inside the unit, so we can't do laundry in the basement. No one will pay for that, of course. The laundry is in the unit. That's something we can't do. We're looking for additional storage locations in the building. There might be a couple, but it's looking like it might be a little tight. Maybe one or two storage spots we can make in the building, but that's not a guarantee. Even if that's not the case, with a good home inspection, a little bit of wear and tear on the building. In most case, a very nice building, in good shape. We are going to try to renegotiate with the seller for a bit of a discount. That is always our goal whenever we have a home inspection done, is to negotiate as much as we can with the seller to be fair and respectful, but at the same time, work out a better deal for us and our investors and work on getting that price down on the building. The home inspection has happened. The appraisal is done. At this point, we're just lining up. Investors are finishing up. Who's going to be investing in the building? We buy a new building every three, four months. A lot of times, it's a combination of about half older investors, half newer investors. With this opportunity right now, we are wrapping up. There is a couple of spots left for a couple of more investors. Once you hear this podcast, it may be too late. Still, go to peoplescapitalgroup.com. Fill in your information. See if that property is still available to invest in. If it is, we can sit down and go over the details of it. The way we work with investors on this building is we're going to give equity away to the investors. About 70% of the equity will go to the investors. The investors will own about 70% of the property. The more you put in, the more of that 70% you own. Investors will get passive cash flow checks every quarter. They'll get financial documents every quarter as well, a balance sheet, a profit-and-loss sheet, a distribution sheet. Also, they're going to get monthly updates from me with very detailed updates on the property, so they learn what's happening as we reposition the property. So far, we have about 13 to 15 investors lined up for this property. Again, our goal this year is to work with new investors. Instead of picking up the phone and me calling one of our accredited investors we work with for years, I would really prefer to work with a new investor, sophisticated or accredited. Someone with $30,000 in their IRA or 30 million in their checking account. At the end of the day, we work with investors all along the spectrum. Working with new investors is our goal this year and last year. By doing that, we build our investment firm and we're able to complete more syndications in less time. At this point, we are opening up to investors. Additional investors, to get qualified, go to peoplescapitalgroup.com and see if you qualify for this building. Again, we're about a B-minus, so we're going to try to make it to a B. That's a very good spot. It's not the fanciest building in the block. It's not the cheapest building in the block. It's right in the middle of the road and that's the good spot to be for real estate. There's a lot of development going on around this building. It's located in Paterson, New Jersey. There's a ton of development right around it. There's a ton of development in the downtown area. This is by the Great Falls, by a big park. There's a racetrack coming in it. There's a lot of entertainment coming in. There's a bunch of high-end condos that are going to be hitting the market or are already hitting the market. That's great because that is going to overprice where we're at. Those fancy, high-end condos are going to be a whole lot more than we're asking for in our unit. If you move into our building, you get a lot of the same amenities. It just won't be a brand new condo. It'll be about 10 years old. It's not that big a difference though at the end of the day. By underpricing the new stuff coming into the market, by being a middle-of-the-road property that white-collar, blue-collar tenants can afford, families feel comfortable living there. It's a nice environment with a nice building. Everyone has a parking spot. The building was just renovated less than 10 years ago. It's a good investment and it's in good shape and it's also going to be a better deal for the tenants. A better deal for people looking to rent in that area. We're going to offer a cheaper unit. Because of that, we're going to have a line out the door to rent any vacant unit. We generally underprice the competition by buying the building in a good price, not being the fanciest property in the block and, therefore, being able to still give the tenant a very good product, a very good place to live. We're not going to be the most expensive guys. Therefore, we'll be open to more tenants wanting to rent our unit. By having a well-priced building, a well-maintained building that you're going to keep bringing tenants, you're going to keep building that cash flow over time, that 5% increase will be understood because tenants feel like they're getting a good price for their building. When their service calls get answered quickly, when their needs are met, when they have a nice unit and a nice building that's well-taken care of, they don't mind paying 5% more per year, especially because rent is going up everywhere else at 5% as well. Even if it's not, even if rents are a little stagnant when you hit a market slowdown, people still appreciate the building they're in. They will pay that increase in rent even if the market slows down because they like where they live and they don't want to move and it's worth it. It's worth it because we're cheaper than the other option down the street. That is an important thing, that your tenants are happy. A happy tenant pays their rent on time. Tenants that pay their rent on time means that the building cash flow is very nicely and happy tenants equal happy investors. Guys, if you want to learn more about how you're going to invest in this building, our website again is peoplescapitalgroup.com. I'm Aaron Fragnito with Peoples Capital Group. Subscribe to our podcast for a new podcast every single Friday. We also have a YouTube channel you can check out. That's called Peoples Capital Group on YouTube. Subscribe to that as well. If you want to learn more about how you can get qualified to invest in this building or another upcoming building or just learn about what we do here, go to peoplescapitalgroup.com. Put your information in. We'll get in touch with you right away and we'll talk to you about upcoming investment opportunities here at PCG. Have a good day.