‘How to get into industrial real estate’ was the topic of Episode #58 of The Morales Show, in which I spoke with Carlos Serra, an executive of one of the largest industrial real estate firms in Southern California. It was fascinating learning the ins and outs of the industrial real estate niche, which has its own unique advantages, difficulties, and napkin-calculations that one has to do in order to find and execute the most profitable of deals.

What is an Industrial Real Estate Property?

The first thing Serra made sure to point out was the broad scope of the industrial real estate niche, and how it actually covers a number of commercial properties that are not of interest to even your large real estate investor. Industrial real estate can cover manufacturing, storage, logistics, distribution, and warehousing, but for the average real estate investor who is looking to purchase a building, add improvements, and rent it to tenants, only the light-manufacturing and ecommerce-storage sub-niches are important.

It turns out that in the logistics and heavy-manufacturing (think car plants) sectors, tenants are generally the sole occupants of their space, usually try to own the buildings they use, and have extremely long occupancies due to the high cost of setting up all the complex equipment required to do run their businesses. This means that just buying a million-square-foot building and hoping to find a tenant is a bad play even if you have the capital to do so.

Instead, Serra pointed me toward the growing sectors of urban industrial real estate, where small businesses are clamoring for large spaces to engage in ecommerce storage and manufacturing, setting up ‘ghost kitchens’ to profit off the rise of food delivery apps, and even setting up businesses with large space needs like a crossfit gym. These kinds of businesses, he said, will act more like traditional tenants than the heavy manufacturers, with short- to mid-term leases and comfortability with renting in a multi-unit building.

For this kind of industrial real estate, square footages are are usually 10,000 or less, and right now are generally considered ‘infill’ properties -- newer-build industrial buildings that are scattered throughout urban areas, packed in-between residential and commercial properties. Serra believes that the future of infill is going to be in multi-story, multi-tenant industrial properties that will facilitate the explosion of ecommerce that we have seen during the COVID-19 pandemic -- a fascinating foresight.

What are the Benefits of Investing in Industrial Real Estate vs Other Asset Classes?

I asked Serra what makes getting into industrial real estate such an appealing opportunity -- especially when compared to other asset classes. Though he noted that it has a smaller ROI than most real estate niches, what he finds so appealing about it is that it has very strong fundamentals and is a market ripe for entrepreneurship.

Essentially, we are at the end of the previous generation of industrial real estate’s lifecycle. There are millions upon millions of square feet of industrial real estate in this country that has been owned by mom and pop outfits for 30 years or more, who are now looking to retire. In general, Serra says, they have put little money into these properties in the last 30 years other than routine maintenance, making them great opportunities for a value-add play to bring the property up to market rates after getting the building at a fraction of the cost of modernized properties.

Due Diligence in Industrial Real Estate

For anyone looking to get into industrial real estate, you should know that though your due diligence will be mostly the same -- checking a building’s roof, checking its plumbing -- there are a few tricky problems that arise in this unique asset class.

For one, Serra told me, you need to get a proper environmental inspection: it is not uncommon for these buildings to have contamination in the air, water, soil, or even the concrete slab itself. Furthermore, he said, it is not just your building you have to worry about: neighboring buildings can sometimes have spills that enter the ground water and come up into the slab from nextdoor. Just like with a residential home, these environmental problems can be a huge unexpected cost that takes a deal from an amazing opportunity to a big loss.

Another thing Serra suggested investors should look out for was seismic activity compliance. Since these buildings are so large, there are very strict code regulations as to how they should be constructed in order to avoid collapse in the case of a seismic event. However, for some older buildings -- the ones you will likely be looking to buy as a smaller player in the industrial real estate niche -- they may not be up to code. This will either skyrocket your insurance costs or require that you engage in costly upgrades.

Finally, Serra talked about location. While industrial infill is often in undesirable neighborhoods in which square-footage is cheap enough to not be immediately converted into residential units, it can be the case that a neighborhood is so undesirable that tenancy will be an issue. Like with all real estate deals, you should become intimately familiar with the neighborhood so that you can see problems like this coming.

Crunching the Numbers When Getting Into Industrial Real Estate

Finally, I spoke with Serra about how new players in the industrial real estate niche might do some quick math to calculate the value of a property. While Serra said these things vary wildly, he did give me a few rules of thumb:

1. Calculate the square footage. In Southern California, it will be worth around $0.90-$1.00 a square foot, while in New York, New Jersey, or Chicago it will be $0.60 or so.
2. Determine how much of that will actually be rentable space.
3. Determine how much you will be able to charge for ‘common area maintenance charges’ -- basically a flat fee that all tenants are charged for use of the common spaces and utilities in the building such as bathrooms or water.
4. Adjust for an average vacancy rate of 3-7%.

All of this will give you your net operating income, which will generally be in the single digits, which is why this space is underexplored yet still doesn’t necessarily translate into higher profits. However, despite this low ROI, Serra is convinced that the need for same-day and eventually same-hour deliveries in the ecommerce space will push the value of these spaces higher and higher over the coming years.

If you would like to pick Serra’s brain about this fascinating real estate niche, you can contact him at 310-703-2064 or cserra75@gmail.com. 

In Episode #57, I talked to Cameron Frederickson, a loan officer with VP Lending, about several different mortgage loans for self employed people who may find it difficult to borrow using more traditional methods. Frederickson told me that, “There is a loan product out there for everybody,” and after talking with him I absolutely agree. It really is true that if you want a mortgage loan, there is a product out there that is right for you, no matter your circumstances.

What is a Bridge Loan?

The first loan that Frederickson walked me through was called a ‘Bridge Loan.’ Bridge loans are meant for people who have lived in their home for a while, established equity in it, and now want to move into a new home. For these people, it can be difficult to get a more traditional mortgage loan, as their debt-to-income ratio is rather high because of their existing mortgage, but the bridge loan has them covered.

With a bridge loan you can take equity out of your existing home -- up to 75% -- and use it as a downpayment on your new home. In addition, it is a non-contingent offer, so if you don’t wind up closing on the new home, you aren’t stuck holding the downpayment in cash and owing a bunch of interest on it. Rather, it is done altogether: the refinancing of your old property and the loan for your new property are all closed at the same time, making for a seamless transition.

There are tons of benefits of bridge loans. You don’t pay any payments on the old house for 12 months, it just accrues interest at a 6% rate while you sell it to pay off the bridge loan. (That said, there is a bloom rate at the end of 12 months, but that’s only if the house doesn’t sell.) The mortgage loan it gets you for your new home is totally standard, with no boosted interest rate, which is a huge plus. Finally, there are no early-payment fees: when your old home sells, you pay back the lender and that’s the end of the bridge loan. Best of all, bridge loans close in 30-days or less, since non-traditional mortgage lenders have an incentive to move faster since they don’t have the volume of traditional FHA lenders!

This loan is geared toward borrowers with FICO scores of 740+ and is great if you are competing against other non-contingent offers.

What is a Bank Statement Loan?

For 1099 employees, small business owners, and other self-employed people, mortgage loans can often seem out of reach: after all, it is hard to prove you have a sustainable income when you have been writing off everything you can on your taxes in order to reduce your business’ tax rate. But with a ‘Bank Statement Loan,’ mortgages for self employed people are totally viable.

Basically, with a bank statement loan, you provide the lender 1-2 years of bank statements -- either personal or for your business accounts -- and they go through them to determine exactly how much income you actually have, before any tax trickery. You can provide them with multiple accounts, or just the ones that have the most positive cashflow.

These loans are very competitive with conventional loans: with a good FICO, you’ll only have to put 10% down, and with a FICO score as low as 600 you’ll need only 20%. The par rate right now for these loans is 4.25%, which is absolutely fantastic, and you can do the standard fixed or adjustable rates at the standard 15/30/40 year periods. Plus, since these are non-standard loans, you can actually do a really interest 40-year loan where you only pay interest for the first 10 years, fixed at 4.25% and without a bloom rate. This can be great for a real estate investor who is going to sell the property within 10 years and wants to keep a high positive cashflow in the meantime.

What is a Debt Service Coverage Ratio Loan?

Finally, Frederickson told me about a really unique product called a ‘Debt Service Coverage Ratio Loan’ that is an amazing opportunity for first-time real estate investors. Essentially, for 20% down, and with proof of 6-months of reserves in the bank, you can take out a loan on any property that you plan to rent out. The only catch is, the lender sends an appraiser to ensure that the monthly rental income will be equal to or greater than the mortgage payment.

Though the rates are a little higher for a DSCR loan -- 5-7% -- this is an absolutely amazing opportunity that allows anyone with a little savings to buy their first rental property and get their career in real estate investing off the ground. Plus, for veteran investors, it is a great way to maximize your cashflow and keep buying new properties even when you have a high debt-to-income ratio because of other mortgages.

Best of all, the same 40-year package mentioned above is available, meaning you can be paying just the interest for 10 years while pulling in all that rental income for just 20% down! These loans do require a high FICO score of 760+, but for anyone that is serious about getting into real estate investing, that kind of creditworthiness should be a given.

It was really fascinating talking to Cameron Frederickson -- he was incredibly knowledgeable and taught me all about these unique loan products that are useful for people in all sorts of unique situations. If you are looking for a loan and don’t know where to start, contract Frederickson at 661-350-5872 or cameron@vplending.com. And on VP Lending’s website, https://www.vplending.com, you can find a template for prequalifications that will get you started even faster.

In Episode #56 of The Morales Show, I spoke with Byron Enriquez about ITIN mortgage loans, a fascinating and important financial product that more people without a social security number should know about. It was fascinating talking to Enriquez, who specializes in non-traditional loan products, about how ITIN loans can help people who don’t think they qualify for a loan onto the path toward home ownership.

What is an ITIN Mortgage Loan?

Mortgage loans in the United States require that you have a Social Security Number as a borrower. Immigrants and guest workers who have a permit to work legally in the United States are given a tax ID known as an Individual Taxpayer Identification Number (ITIN). ITIN mortgage loans, then, are specialized loan products made specifically for people with this kind of tax identification rather than the more traditional SSN.

Enriquez told me that he hoped two kinds of misconceptions might be cleared up by the spread of knowledge about these kinds of loans. First, he noted that it is a common misconception that immigrants and guest workers do not pay taxes -- in fact, they not only pay taxes, they receive refunds when they have paid too much tax during the year! Second, he hopes that more people will learn about ITIN mortgage loans because too often workers without SSNs think home ownership is out of reach, even though they have the savings to purchase a home.

How Does an ITIN Mortgage Loan Compare to a Regular Loan?

For the most part, ITIN mortgage loans work exactly the same as a regular mortgage loan. It takes 17-45 days to get one, just like a normal loan, they are available in 10-30 year packages at fixed and adjustable rates, and they require a downpayment at an interest rate affected by federal interest rates and the credit worthiness of the buyer. All the fees for underwriting, processing, and escrow are all the same, too. However, there are a few differences in degree. 

While a normal loan through the FHA can require as little as 3.5% down at a 3.5% rate, ITIN loans are a bit more expensive. ITIN loans generally require a downpayment of 10-15%+, with interest rates of 6-6.5% credit, depending on the borrower’s FICO score. And while the FHA likes to see a credit score of 580+, the absolute lowest an ITIN loan can go is 600, with 640+ being preferred. However, for individuals with no credit, loans are still possible at 25% down and 7% interest. The ideal clients, Enriquez says, are those with a 720+ FICO score looking to buy a single-family home. 

How to Get an ITIN Mortgage Loan

The first thing you need to get an ITIN loan is… an ITIN! Specifically, you need to have two years of tax returns filed under that ITIN number. Though some people may switch jobs or change their ITIN numbers or file under corporate tax numbers, that doesn’t cut it for an ITIN loan.

Second, you need to speak to a loan officer who specializes in ITIN loans. As these loans are not available through the FHA, it takes a brokerage that specializes in non-traditional loan products to get an ITIN mortgage loan. These brokerages have a bit more flexibility in who they choose to work with, and thus have close relationships with financial institutions that allows them to get these kinds of products for their clients.

Finally, you need to be honest with your loan officer. Enriquez stressed that, because it is a non-traditional product, people sometimes try to hide information from their loan officer such as a previous bankruptcy or child support they owe. This, he said, was absolutely the wrong move: the financial institution will find out about it, and after they see that you have omitted that information they will scrutinize your loan all the more, leading to its rejection or a steep price increase. For those who are honest, however, Enriquez says that it is easy to explain to lenders how these kinds of things will not present a problem for your ability to repay, and thus being honest will save you time, money, and a huge headache. 

If you are interested in getting an ITIN loan or another non-traditional loan product like construction financing, a bridge loan, or other products typical lenders tend to shy away from, contact Enriquez at byron@jssfinancial.net, 1-818-584-6712, or through his website https://www.jssfinancial.net. His firm is hands-on and will help you out every step of the way.

Speaking with Caleb Lopez for Episode #54 about how to retire early with real estate investing, I was struck by just how far you can get in this industry on the sheer power of having a good work ethic and good mindset. Over and over, Lopez reiterated that his success was due to his willingness to sacrifice, work hard, and surround himself with people who were driven and had something they could teach him. From buying his first home at 21 to his current semi-retirement portfolio of 20 paid-off properties, Lopez walked me through his journey and gave plenty of tips on how to retire early with real estate investing.

Financing Properties Through Sheer Willpower & Sacrifice

Since Lopez bought his first home at 21, I asked him what advice he had for people looking to get into real estate: how should they go about financing their first purchase? His answer was striking: “People don’t buy a house because they don’t realize they have to. It provides stability.” he then went on to explain how that first purchase is built on sweat and sacrifice: establish good credit with credit cards, buy a vehicle to get to work, and save money any way you can while you save up for that first downpayment. With 3.5% interest rates, anyone can save up enough for a home if they work hard enough.

After that, he said, everything is easy. Putting sweat equity into your first home will let you leverage it into a second, third, fourth, and soon enough you’ll be able to spend your time doing what you like -- but only because you were willing to sacrifice and work hard enough to get yourself there.

Low-Risk Investing By Focusing on a Positive Cashflow

Though Lopez adopts different strategies for every potential deal he considers -- flipping, holding, developing -- he says that the key to low-risk investing is focusing on two things: what the purchase would mean to your livelihood right now and whether its worst-case scenario would still benefit you.

This means examining how any deal will effect your cash-on-hand, potentially closing you out of other, better deals, how it might increase your leverage such that a market crash (like the pandemic) might take you out altogether, or even just what it will mean for your monthly income and for how long -- will you be eating lentils for 5 years because it’s too expensive of a deal for your current worth?

But it also means examining whether or not a property will still be able to generate a cashflow even if its primary strategy fails. If a property is meant to be flipped, can it still make money as a rental? If a property is meant to be a rental, is it in a hot enough market that you could flip it if need be? Finding properties that meet all these criteria keep your exposure low and will lead you to success with much fewer setbacks.

Invest in a Neighborhood, Not Just a Property

One thing that Lopez told me that I thought was absolutely genius was how he invests in “the worst home on a bad block” and does his best to uplift the entire community around him to give his property more value. When he paints his house, he sees if his neighbors want to hire his painter. When he tiles a bathroom, he finds that people ask him if his guy is free to do their home next. This kind of community building, Lopez says, is incredibly rewarding. Not only does he get to make a killer profit, but he gets to better the lives of all those around him.

Look for Opportunities Everyday

Lopez’s final advice to people looking to retire early with real estate investing was to be always looking out for opportunities -- literally every single day. He says that he devotes 15 minutes every day to searching MLS, calling realtors, or even just driving around and looking at homes. That 15 minutes isn’t a lot, but it adds up if you stay dedicated to it day in and day out. With a success story such as Caleb’s, it is clear that this last bit of advice is probably one to take to heart.

Lopez says that he is always willing to help people who are really looking to get into real estate -- and willing to have the right mindset of hard work and sacrifice to be successful. If that sounds like you, reach out to him at calcoastconstruction@gmail.com and check out his website at https://www.calcoastconstruction.com.

In Episode #52 of The Morales Show, I spoke with Carlos Delherra about how owning a student rental property was the start of his real estate portfolio’s journey from $0 to $100 million. Having been born and raised in Compton by poor immigrant parents from Mexico, Delherra used his hatred of poverty as fuel for a mindset of personal growth and a dedicated work ethic.

In 2001 he began a meteoric rise in real estate, accumulating $25 million in real estate in just a few years. However, because he was overleveraged with an investment strategy focused on equity appreciation, after the 2008 crash he found himself almost half-a-million dollars in debt. Tenants had stopped paying rent, his properties were worth well below their purchase price.

In 2009, Delherra decided to liquidate his holdings and start over again with a new strategy that took into account this experience, focusing this time on tangible cash-flow rather than speculative equity appreciation. He was ready to make $200 a month on residential rental properties to rebuild his wealth, but then he talked to a friend who had a student rental property that was clearing $2000 a month due to the premium students are willing to pay and the market inelasticity of student housing needs. He then bought his first student rental property and hasn’t looked back, now being worth 4 times what he was in 2008.

How to Optimize Cash Flow from a Student Rental Property

Delherra told me that the most important part of maximizing cashflow from a student rental property you own is increasing the number of units that can be rented out. With the 2018 changes to California’s ADU laws, Delherra put almost every dollar he made back into his properties, building 7 ADUs, converting junior ADUs to regular ADUs, building ground-up duplexes on his properties’ large lots, and otherwise expanding the number of units that he had on the market.

As his holdings increased, he also been buying land to develop apartments, with a 53-unit, 7-story building finishing later this year. Scale, it turns out, is hugely profitable to the student rental market: an apartment building still has only one roof and four walls, just like a residential home, but it services dozens more units. In addition, the due diligence of a multi-unit investment takes about the same amount of time as a single-family home, yet its profit margin is orders of magnitude larger.

Importance of Having a Mentor in Student Rental Property Real Estate

Delherra attributes much of his success to the help he has gotten along the way -- and his mindset of knowing that he should be seeking out opportunities with mentors in order to further his education. As an example, Delherra told me that, though he knew little about ADU zoning regulations, an architect he had long worked with walked him through the 2018 changes well before they ever became law. This allowed Delherra to make smart investments on properties that he knew he would be able to expand in just a few years time. Similarly, Delherra said he knows his local council members and stays on top of local regulations so that he can keep abreast of how things will change in the future.

How to Find Student Rental Properties to Buy

While some people go wide, Delherra’s belief is that going deep is the best strategy in student rental real estate. He has spent the last 10 years working exclusively around the USC campus, and at this point he knows exactly where students like to live (and will pay a premium for), which houses are over-valued, which are under-valued, and he has reached out to nearly every homeowner in the area such that when a home does come up for sale, he’s likely to get an off-market deal without competing with other bids on MLS listings. Delherra says that often out-of-town investors will come in and buy over-valued properties or homes on streets students don’t like to live, only to lose big on their investment.

Throughout our conversation Carlos exuded this mindset of working hard, learning hard, and keeping a laser-like focus on what matters, and it has clearly paid off for him. If you want to ask him questions, reach out to him at https://facebook.com/carlos.delgado.100, on his website https://www.livewithmosaic.com, or email him at carlos@livewithmosaic.com. And if his story has inspired you as much as it has me, check out his book Success Habits of Super Achievers, available on Amazon.

Talking to Lars Hedenborg about building a successful real estate business for episode #49 was one of the most fascinating conversations I have had on The Morales Show. Hedenborg, founder of Real Estate B School, the Business Freedom podcast, and author of the book Scale or Die, is a fascinating example of how building a successful real estate business is a combination of smart sweat and smart mindset -- and what I mean by ‘smart sweat’ will become clear as I explain what Lars told me about his journey in real estate and how he got to the point where he works one day a week while selling hundreds of homes a year.

How Lars Hedenborg Built a Successful Real Estate Business

Looking back on his career, Hedenborg told me he was surprised with what he was willing to do -- and put up with -- to build his business. He started by working for a local agent as an investor, before getting his license and working as an agent. He worked seven days a week for 22 months and sold 71 homes before he realized that he was letting work keep him from being with his son as he grew up. He didn’t want his business life to get in the way of things that mattered, and so he took a radical approach to reevaluating his career: he decided to value his time.

According to Hedenborg’s calculations, despite his wild success at selling homes, in those first 22 months he was working so much that his hourly income was only $18. He decided then and there that he was going to get to the point where he was making $250 an hour, or $500,000 at 40 hours a week. With that mentality, he was going to sweat smart, only doing the most valuable-per-hour work and delegating the lower-value work to others. He started small, spending a couple years getting to $50 an hour, but soon enough he reached his goal.

Why a Time Study is Important for Building a Successful Real Estate Business

What Hedenborg explained to me was that this kind of personal business development is applicable to anyone, not just real estate agents. Having the mindset that your time is valuable, and working toward optimizing your use of time, is vital to success in any business.

At the Real Estate B School, the first thing they have their new students do is a ‘time study’ called the Business Freedom Planner. For two weeks, these students document their use of time in 15-minute increments from the moment they wake up until the moment they go to sleep. While these kinds of studies show just how much time we waste on social media and television, they also help give a sense of exactly how you spend your time working, broken down by task.

By figuring out which tasks are taking the most time, but pay the least, you can then begin to understand what activities you should begin delegate, hiring administrators and employees to do this low-value work for you. Only by ridding yourself of these time-wasters will you ever manage an hourly salary that supports a life of financial freedom.

Hiring Your First Assistant

It is shocking, but 85% of real estate agents don’t have administrative support, even though the overwhelming majority of their daily tasks are administrative. Yet at some point, you have to focus on what makes you money: making sales. As you scale, Hedenborg suggests that you spend 10% of your topline GCI on administrative support: if you’re making $200,000 over 20 deals, $20,000 of that should go to an administrator.

While that may seem like a lot, you only need to save three months of that salary before you hire, which is only $5,000. Yet with that 10% spend, you can probably make $100,000 more in a year just with the time you have freed up. As you continue to scale, you’ll need to hire more administrators and employees, and this is why it’s good to think about your business processes as scalable systems. Lars: “How would you have to think about your business differently if you had to replicate it 10,000 times?”

Don’t Get Caught in the ‘Attract, Convert, Deliver’ Cycle

In real estate we have a saying: “Attract, Convert, Deliver, Scale,” but Hedenborg noted that agents get into what he calls a ‘vicious cycle’ of “Attract, Convert, Deliver.” Agents attract a potential client, convert them to a listing agreement, and deliver their service by selling their homes. However, since they spend all their time being hands-on at each stage of the process, when they have delivered their service they must go back to attracting new leads, meaning there is never time to scale!

The reason that delegating is so important to building a successful real estate business is that only with a support staff who can attract and convert leads while you deliver, you will never be able to grow, forever stuck chasing new clients instead of spending time scaling your business.

If you think you are trapped in this cycle, head on over to https://realestatebschool.com to check out Hedenborg’s podcast, a ton of free tools that can help you understand where your time is going, and to sign up for a coaching session with Lars. And don’t forget to watch Episode #49 in full, Like the video, and Subscribe to our channel. 

In Episode #48, I spoke with loan officer Martha Salas from Nations Lending about the pandemic after effect on mortgage rates, how right now is a great time to get a loan, and all the details about how to do so. Salas is a favorite guest of mine, this being her third time on the show, and it was a true pleasure to access her deep knowledge in the loan process.

What Determines a Mortgage Rate?

While everyone may know what a mortgage loan is, buyers and sellers alike often struggle to understand what determines the interest rate of a mortgage loan. Fortunately, Salas laid it out for me in a comprehensive way that was still easy to understand.

Simply put, an interest rate is the cost of money that you borrow, which accrues as time passes without the loan having been repaid. The federal interest rate is managed by the Federal Reserve, the banking system of the United States, and serves as a kind of baseline or default rate for anyone in the country borrowing money. It is determined in the short-term by things like national credit card debt and home equity lines of credit (HELOCs), and in the long-term by economic factors like inflation, employment, world events, and real estate sales.

When you go to get a mortgage loan, this federal interest rate is where you start, but depending on factors personal to you and to the property you are looking to buy or refinance, the rate you end up getting will change. On a person-to-person basis, the first thing that a lender looks at is an individuals FICO credit score, which helps them determine if you are a good risk or not. Lenders like to see a FICO score of over 700. They also look at the property type -- single-family homes have the lowest interest rate, while apartment units have the highest -- whether you will live in the property and how much money you make.

All of these factors determine what your mortgage rate will be, but it can be further altered by how much money you can put down (‘equity’) and how long the loan will be for. Lenders like the FHA will only require 3.5% down, but will also require mortgage insurance; for most loans however, borrowers generally put 20% down to avoid the need for this expensive insurance. Loan length is entirely up to the borrower, with lenders offering different loan packages that range from 10-40 years. With these decisions made, your loan officer can present you with a final mortgage rate.

The Pandemic After Effect on Mortgage Rates is Great for Buyers and Sellers

What has been so great about the pandemic’s after effect on mortgage rates is that interest rates are currently at all-time lows, just over 3%. That means borrowing money is cheap, giving more people access to credit.

For potential buyers, now is a fantastic time to get a mortgage and lock-in via a ‘fixed rate’ mortgage, giving them this low rate for the lifetime of the loan. They can afford bigger, more expensive homes because there are larger loans available to them.

For potential sellers, as well, now is a fantastic time to sell for the same reason: buyers have easier access to credit and can spend more on a home. This has driven up demand for homes and increased their sale prices.

While the pandemic has been rough for all of us, perhaps its one saving grace has been its after affect on mortgage rates, making the real estate market absolutely boom.

Salas’ Tips on Applying for a Loan 

Salas gave me some tips for mortgage loan applicants that I wanted to share with you:

1. Call your loan officer before you start looking for a home. They can help you understand what you will be able to afford and help you make other decisions that will get you the best deal possible when it comes time to apply for a mortgage loan.
2. Don’t make any big purchases like a car before you take out a loan. The interest rate of your mortgage loan includes an examination of your debt-to-income ratio, and something like a new expensive car lease can make your rate spike.
3. Be mindful of your credit! Building good credit can mean the difference between a 5.5% rate and a 2.5% rate, which comes out to around $900 in savings on a $500,000 loan.

If you are thinking of taking out a mortgage loan or want help understanding how mortgage rates work, Martha Salas is available at 805-890-2008 to schedule an appointment.

Self-Storage Investing with Scott Meyers

In Episode #46 of the Morales Show, I talked to self-storage investor and educator Scott Meyers about how to get started on self-storage investing. Meyer, a long-time real estate investor who began his career buying, rehabbing, and renting single-family homes -- eventually expanding to over 75 properties -- summarized the appeal of working with unique asset classes like self-storage in one pithy quote: “Renting real estate would be great if it weren’t for the tenants!”

If you have been having tenant troubles, maybe it’s time to get started with self-storage investing. Read on for a summary or watch the full episode for even more of Meyers’ fascinating insights into this unique asset class.

How Is Self-Storage Investing Different From Other Asset Classes?

In terms of real estate, there are only two asset classes that you can invest in which do not require that you deal with tenants in the traditional way: parking and self-storage. Whereas in habitation real estate, a tenant who is behind on their rent can destroy their home or just live in it for free while the eviction process winds its way through the courts, in these storage-based asset classes, missed rent allows you to lock tenants out after 6 days and the legal right to sell their things after 90 days in order to recoup costs. The fact that a tenant’s use of your space provides collateral against the lack of payment makes these investments much more cash-flow stable than the habitation rental market.

There is also another unique upside: turnover costs in self-storage are negligible, dramatically lowering your need to kowtow to tenants in order to keep those costs low. As Meyers explained, it was costing him $1300 per turnover for each of his apartments, including cleaning, repairs, and lost rent. Now that he’s made the switch to self-storage investing, Meyers’ staff just take a leaf blower to a rental unit’s concrete slab and the turnover is complete in no more than an hour!

How to Get Started in Self-Storage Investing

While Meyers got his start in self-storage after selling off his rental properties and finding an undervalued self-storage property via a direct-to-owner deal, he gave me a lot of advice that is applicable to anyone who is wondering how to get started in self-storage investing, whether they are real estate veterans or just starting out.

The Best Self-Storage Investments are Value-Add Properties

In the self-storage business, there are tons of mom and pop properties that are not maximizing their value. Maybe they aren’t making the most use of their land, have unnecessarily high management costs, or have high vacancy rates due to a lack of marketing prowess on the part of the owners. Meyers told me that these kinds of properties are fantastic value-add opportunities with simple fixes.

When he completes the deal on a property, he buys any adjacent land and builds more storage units on it, sets up automated kiosk systems to dramatically reduce management costs, and sets up a website (which many of these mom and pop outfits do not have!) with a full-court marketing press to ensure maximum tenancy. With all that value add, he can continue to run the business for a steady cashflow, or he can turn around and sell it for sometimes twice or more what he paid for the property.

Which Markets are Best for Self-Storage Investing?

When considering a property, Meyers suggested calculating a supply index for the local area. This involves some competitive research, calculating the square footage of your prospective property and any competing self-storage facilities within a 3-mile radius of your prospective site and the estimated population of that area. The magic number, where supply meets demand, is between 6.5 and 7.5 square feet per person. For any property to be a good bet, the local supply you calculate should be under 6.5 -- the lower the better!

One great tip from Meyers was that you can sometimes make a self-storage deal in an area that is currently oversupplied in terms of square-footage, but is expected to rapidly grow in population. For expanding metro-areas, there can be excellent profits to be made by getting in just ahead of the wave and having supply ready to meet demand when it arrives.

If you are considering a value-add play that includes new-build units on adjacent lots, you will also need to ensure that local zoning laws either permit that construction or are easily changed. Since zoning varies wildly between every town and city, Meyers said he just talks to the local zoning board and they are always willing to walk him through the local process and explain whether it will be difficult to be granted an exemption or to change that area’s zoning permanently.

Underwriting a Self-Storage Investment Deal

In this episode, we got a little mathy, with Scott Meyers explaining to me the ins and outs of underwriting a self-storage real estate investment deal. While you can get all the details by watching the episode, the quick summary is that, as a rule of thumb, any new build you’ll need to do will be $40-45 per square foot for a simple all-metal, single-story building, while higher-end, climate-controlled facilities will cost you between $55-90 per square foot.

To underwrite that kind of construction, there are plenty of financial options to dedicated investors who can crunch the numbers and demonstrate the financial viability of the deal:

1. Look at rental rates in the current market for each size unit and calculate the average rental rate per square foot
2. Look at the size of the prospective facility to estimate your square footage and estimate the number of units it holds
3. Calculate your potential income: Number of Units * Average Rental Rate per Square Foot * 85% Occupancy = Potential Income
4. Then, subtract 28-35% for operating expenses, taxes, and insurance, and that gives you your estimated profit.

With these kinds of numbers, it’s easy to go to the Small Business Association (SBA) to get a loan, since self-storage real estate is treated as a business. They offer 7A and 504 loans which reach 85% LTV at 4-4.5% interest rates for only 15% down. Plus, since self-storage investments have the lowest loan default rate of all real estate, plenty of community banks, credit unions, and savings & loans companies will be willing to help you out for around 25% down. It’s a recession and inflation resistant real estate asset class, meaning investors absolutely love it.

My time talking to Scott Meyers convinced me that, for anyone looking to get into real estate, there is no better place to start than self-storage investing. If you have any questions, Meyers has a coaching program that includes home study systems and software, DIY education, and someone watching over your shoulder to point out your blind spots. At higher levels, Meyers’ students have even partnered with him and his teams on some fantastic deals.

Visit https://selfstorageinvesting.com to join, or, if you’re looking to add self-storage to your portfolio, head over to https://passivestorageinvesting.com.

What are ADUs and what impact have they had on homeowners?

ADUs- Accessory Dwelling Units are on the rise and have played an important role in addressing access to affordable housing for many families. In California, regulators see the construction of ADUs as a possible solution to the housing crisis in the state. 

ADUs are affordable types of homes to construct in California because they do not require the homeowner to incur costs such as paying for land, major new infrastructure, structured parking, or elevators. Upon construction, an ADU should add a source of income for the homeowner while providing people with an option for affordable housing. 

What are the developments in laws governing approvals of an ADU?

It is now incredibly fast to get approval to construct ADUs as compared to the past where the decision would take at least 120 days, the new law requires the decision be made in 60 days. This is a relief to many homeowners as the backlog of ADU applications can finally get approved meaning an opportunity for income generation assets.

How much value does an ADU add to a property?

The impact of adding ADUs to single-family properties is that the property’s value increases. However, ADUs do not necessarily add value to the value of a property as they can require a lot of money to construct.

Although market-rate rents for ADUs tend to be slightly higher than those of similarly sized apartments, they represent the most affordable rental choice in neighborhoods with single-family houses. 

Why build an ADU?

In many cases, it is not sustainable for the elderly or low-income families to live independently in a household. An ADU provides a very realistic and practical option for the family if they want to provide support without being overbearing since the house can preserve a significant degree of autonomy for the person living there.

What is the future of ADUs?

With the rising prices of rentals and prices of properties sky-rocketing at a high rate, ADUs are likely to become an even more popular trend in the coming years as demand for affordable, multi-generational living space grows.

Who is a mentor?

A mentor in real estate offers advice and coaching as you begin your career in the real estate industry. Mentoring can be a tough job and it requires the mentee and the mentor to establish mutual respect between each other and to have goals that align allowing the mentee to learn and advance in their career. How to choose a mentor, therefore, becomes a critical topic that requires careful consideration. 

What are the alternatives to getting a mentor?

The real estate market requires the expertise of qualified agents, realtors, brokers who have the potential to grow in confidence and in decision making due to the competitive nature of the industry. An alternative to getting a mentor in real estate is enrolling in an academy or looking for a program online.

What mindset should you have before approaching a mentor?

Our guest Sam Weaver, President of Fortune Weaver sat down to speak about his experience when he started out in Real Estate specifically in flipping properties.  What was interesting about the discussion was that he mentioned that when he started out, he did not work for free because he had to, the mindset that he had was that his teacher had what he wanted and he needed to do whatever he needed to do in order to get it. He was willing to spend as much time as possible learning from him while at the same time bringing in investors and adding value to his mentor’s business.

After spending a couple of months working for his mentor and bringing him investors, he realized that he was spending money and not making any, which is a dangerous position to be in. When he asked his mentor about the possibility of getting paid, his mentor’s response was ‘I thought you would never ask’ and that taught him a very important life lesson. You should always ask for what you want in life or else no one will just give you things if you do not ask.

Should you work under a mentor for free?

What we can pick from this interview, is when starting out in Real Estate, always have an open mind when it comes to starting small, with or without pay. If the opportunity you have will give you:

• Real-life experience, 
• Legitimate exposure
• An affiliation that will add value to your Resume

Go for the free, awesome learning experience and overlook your current situation in order to get to your long-term goals. Accept opportunities that come that will allow you to achieve your career goals.

What are some of the lessons that a mentee can learn from a mentor in real estate

Important lessons that a mentee can learn from a mentor include generic lessons such as business strategy, career planning, and leadership qualities, as well as more tailored lessons in real estate such as client onboarding, real estate trends, and how to close a sale. These are just a few of the topics that can be expounded on, the list is endless!