In this episode Seth Martinez, Managing Member of Peoples Capital Group, joins the Passive Cash Flow Podcast to explain the details of a recent acquisition of a $3M, 25 unit building in Paterson NJ. Listen in to learn how the property was found, how the acquisition was structured, how the bank loan was acquired, the exit strategy, the value add strategy and how the capital was raised.
2:37 How did we find this deal?
4:48 How did we determine our purchase price?
7:00 Value add
9:55 How did we structure this deal?
12:21 What is our exist strategy?
18:00 Investing long term
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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.
Seth Martinez: A lot of our investors ask us that because a lot of our investors are unable to get mortgages, and that’s why they come to us and invest with us because they can take part in the advantages real estate without having to get the mortgage. We get mortgages by simply having a good reputation. It’s a combination of things. Reputation, having a good track record on making prior mortgage payments with a particular bank, or just in general.
It also goes to having a BBB, Better Business Bureau ranking, being accredited with them, and just generally having good relationships. A lot of times bankers will come into our office. They’ll sit in this conference room, they’ll interview us, or we’ll interview them and they’ll look around the office and we’re established. We’ve been here over five years. That’s one of the things banks look at before they make a mortgage.
Aaron Fragnito: All right. We are live on Facebook. We are recording right now. This is the Passive Cash Flow podcast. I’m your host, Aaron Fragnito. We have Seth Martinez here today. Say hey Seth.
Seth: Thank you, Aaron. Hey everybody.
Aaron: All right. Glad Seth can join us. We’re here at the PCG office. A snowstorm is about to come but we’ve decided to do the Passive Cash Flow podcast today because what better time to talk about real estate when the skies about to open up with some beautiful snow landing on all the rooms of our well-managed real estate. We are ready for the cold weather. We are ready for winter. We’re just talking about any winterizing of vacant homes today very important things. Always want to make sure your vacant homes are winterized.
Aaron: Anyway, let’s not get off-topic. This is the Passive Cash Flow podcast. This is a sponsored by People’s Capital Group. We work with passive investors to buy apartment buildings and short-term rentals. In Vermont, we focus on apartment buildings in North Jersey. Seth and I have been investing real estate together and helping investors passively get involved in real estate and make strong consistent returns through real estate in last 10 years or so and we just bought a $3 million building. Hurray, hurray, hurray [unintelligible 00:02:10] applause.
We purchased 25 units in Paterson, New Jersey, great purchase for us nice turnkey property was value add. We’re going to talk about how we found the deal today. We’re going to talk about how we structured it and the value add strategy, the exit strategy as well. Let’s get started here with the Passive Cash Flow podcast be sure to hit the subscribe button, the like button, the notification button, and check us out for new episodes every couple of weeks here in People’s Capital Group. All right, Mr. Martinez, you’re
Seth: Yes, sir.
Aaron: Excellent. Excellent. First of all, how did we find this deal?
Seth: All right. Well, we found this deal after about six months of looking for it. It came to us when we least expected it, which actually happens a lot in real estate. The contact person was actually a realtor this time and we had looked at one of his older buildings six months earlier, and it was a property in Hasbrouck Heights. It was a similar type building. It was around $3 to $4 million.
We built the relationship with them and what we toured the property. We told them what we were looking for. When the next building of that type came up, we were one of the first people he called. We did a quick analysis and we were able to put a letter of intent in rather quickly and follow it up with a continuation of the relationship and demonstrating that we were definitely able to close on the property. That’s what we ultimately did.
Aaron: Excellent. A big part of our job is communicating with these owners for years and years on end. Just like how when I go to raise capital from an investor, I need to build that relationship, build trust. Especially someone finds us on the internet, there’s a process of getting to know each other on them doing their homework, us doing our homework to make sure it’s a fit for the investor.
It’s the same thing when you’re looking to buy real estate. A lot of the owners were buying real estate from of an older demographic and really appreciate a good handshake deal, integrity, doing business with people they know and like and trust. It’s very important to really all demographics, all people of course. Seth works these relationships with owners and landlords for years and years.
Often they’ll sell us a number of buildings over time, similar to how an investor will reinvest multiple times through the years. Those relationships are so important. Real estate is a relationship business. There’s no doubt about it. Our relationships are what help us to do these things like buy a $3 million building in the middle of a pandemic. That’s how we found the property direct mail marketing, negotiating with sellers, building those relationships with property owners over time. How do we determine our purchase price?
Seth: All right. Good question. We get that question a lot and a lot of our clients and investors ask us how do we determine our purchase price and what’s a good purchase price. In fact, a lot of our investors come to us saying they never know when to or where, or what price point to buy something. That is one of the reasons they invest with us because they feel like we know how to make a good offer.
Basically, we do center our offer around the returns, we get for our investors. We want to make sure our investors get a solid return, and that we’re not over-promising, and that we’re able to do the work on the project. Our investors are able to get the returns that they are asking for and that they’re not required to do any work. We manage the property and give our investors a good solid return. If it’s a return that we don’t think is good, we’re not going to make an offer, or we’re going to make a very low offer. In this case, the offer was in line with the range of what this seller was asking for, and it worked out.
Aaron: Exactly. People ask us that all the time. How do you analyze these properties? How do you determine them? Not only always do we have in-depth spreadsheets and software to analyze the properties, there’s also it’s really an art too. It’s not just a science, especially for value add and things like that, which is the next question. When you’re looking at a property, it’s not just numbers, it’s a lot of common sense too, the rules and regulations in the market, what type of work you’re doing, what type of demographics you’re dealing with and the market, what type of rules you’re going to be dealing with.
Of course, we all work that together and we know our investors want to make around 11% to 12% cash on cash return around 15-plus, internalize rate of return taking into account their tax benefits. We structure these deals so our investors have that. If the opportunity doesn’t make those types of returns for our investors, then it’s not a good opportunity and we move on to the next one. The first way we underwrite a deal is we look at it can it give our investors, these double-digit returns? We try to target for our investors year over year.
If the answer is yes, on the surface, then we go dig deeper into multiple levels of due diligence. Let’s talk about value add. We want to buy properties where there’s room to increase rents and lower expenses and find more ways to make income on the property. What’s some of the value add for this property?
Seth: All right. Good question. Well, with every property, what we do is we do an analysis before we buy it. It’s part of our due diligence and we want to look at the three parts of it the legal due diligence, the financial due diligence, and the physical due diligence of the building. We get an assessment of each project. In this case, the rents were actually pretty good and close to market rate, which is another part of understanding how to add value. We have to understand what the rent control is.
In New Jersey, each municipality has their own guidelines for rent control. Some have no rent control. Some have very stringent rent control. We want to know what that is going in. In Patterson, in this case, it’s actually rather light. It’s still there, but it’s rather light. It’s up to 5% a year, in most cases on rent increases, and there’s certain exceptions for no rent control at all. Part of it is creating value by raising the rents, decreasing expenses and together, you increase the net operating income, and that increases the value of the building. Then other ways are just improving the physical appearance of the building as well.
Aaron: It’s all about value add. If you buy a property, and there’s no way to increase the revenue over time, so we focus on properties where they’ve been mismanaged for some time. The expenses are out of control. Rents are not up to market value. There’s lots of other forms of income, like parking or storage or laundry in the basement that we can implement and take advantage of to create more forms of income. Of course, we have to work within the rules of rent control, always with these properties in North Jersey, where rent control is pretty prevalent.
It’s a bit of a delicate dance but we are usually able to increase the value of properties by 5% a year or more. It may not sound like a big number when you’re talking about a multi-million dollar building. Over year over year over a year that 5% really makes a difference and can be exponential. The second reason we like apartment buildings is because the way apartment buildings are value is based on net operating income.
The more we force the net operating income up, that’s called forced equity, the more equity we create. The higher net operating income, the property is worth more. It’s like a business. The more money a business makes, the more it’s worth. Same with commercial real estate. We force that net operating income up, that’s called forced equity, that’s called value add and that’s our value.
Not only do we negotiate prices below market value, because we have years-long relationships with property owners, then we buy the property. We have our own management company to manage the properties to a tee, increase the value of the real estate by increasing their net operating income and therefore producing better cash flow better returns to our investors and rinse and repeat. Excellent. How did we structure this deal?
Seth: All right, good question. Well, we structure the deal with both a mortgage and with our investors. We were able to offer this to investors so they can come in and take part in the deal. We also were able to do that while getting a mortgage and taking advantage of the very low-interest rates, which we can then share with our investors as well. Our investors, were able to get in the deal and get a great interest rate for part of the purchase price. That’s what’s called syndication. In this case, it was 75% mortgage, 25% investors, and little on top for closing costs and it worked out well. Again, this gave our investors the opportunity to join us in this venture.
Aaron: Absolutely. We brought in about, I think it was 15 investors overall. We raised about a million dollars. The bank brought in a loan for a little over $2 million. We purchased the building for just over $3 million. Seth and I personally guarantee that mortgage that allowed for an interest rate, I think around 3.75%. It’s a perfect storm for buying commercial real estate right now, because interest rates are low, and rent is high. Rent prices are high so the money coming in from the building is strong, and high rent demand is strong right now. We’ve lines out the door for our vacant units most of the time.
The collection of rent is strong. Rent prices are strong, but the cost of money, the cost of debt is low. It’s really a good time to be investing in first real estate we find because of those two reasons. The way we structure our syndication is the investors bringing the capital for the down payment and an operating costs and we bring in the mortgage. We personally guarantee the mortgage, so our investors don’t have to, which is a huge benefit because if you were to buy real estate yourself, you’d have to personally guarantee that mortgage. That’s a huge risk. You’re personally liable for that mortgage, that large amount of debt, and in commercial real estate that could be millions of dollars.
Seth, and I personally guarantee that because of our faith in our business, our faith in our selection of real estate, and our ability to manage that real estate long-term with our management company and our investors have that faith in us as well as to our banks because we’ve been underwritten by them many times and banks, like people that have bought real estate well. We are able to secure a very good terms on that mortgage, because of the way we look on paper and our bank relationships. All right. That leads to how we secure that bank loan, which I partially answered. Seth, how do we secure these bank loans?
Seth: That’s a good question. A lot of people ask us that as well and a lot of our investors ask us that because a lot of our investors are unable to get mortgages and that’s why they come to us and invest with us, because they can take part in the advantages of real estate, without having to get the mortgage. We get mortgages, by simply having a good reputation. It’s a combination of things reputation, having a good track record on making prior mortgage payments with a particular bank, or just in general.
It also goes to having a BBB, Better Business Bureau ranking, being accredited with them, and just generally having good relationships. A lot of times bankers will come into our office. They’ll sit in this conference room. They’ll interview us, or we’ll interview them, and they’ll look around the office and we’re established. We’ve been here over five years and that’s one of the things banks look at before they make a mortgage.
Aaron: We show them all the properties on the wall. We give them the grand tour of the office. Our relationships with banks are priceless. We’ve been working with them borrowing from them paying them lots of money for years now. Those relationships allow us to refinance properties very quickly, have our selection of banks who we want to work with when it’s time to refinance or time to purchase a building. Therefore, we have multiple options. Interest rates are not we want them to be or banking situations and cost change over in the future, those relationships help us get a different type of deal than the average bearer is going to get from a lot of these banks.
Commercial lending is very relationship-based. It’s not as cookie-cutter as FHA homeowner loans, which kind of regulated by the federal government and there’s rules regulations on what you can charge or not charge for that. Commercial banking is a little more Wild West. If you have a good relationship with a bank, you can really negotiate very good terms on that mortgage and that’s exactly what Seth and I do. The better the terms are on the mortgage, the more cash flow, the more value we bring to our investors. All right. What is the exit strategy, Mr. Martinez for this property?
Seth: Good question. In real estate, I think Aaron and I have come to the conclusion that selling real estate is really not an ideal situation unless you’re doing a single-family flip, which we do as well, but we focus on the apartment buildings and long-term wealth, which means holding properties for a long-term, and not just benefiting our company and ourselves, but our clients, and our investors. That really means 15, 20, 30 years, although we do allow our investors to exit a deal every three to five years when we refinance it but long-term the money is really in holding the real estate and taking advantage of the market appreciation.
Markets always go up historically, in real estate. They do have their down moments but historically, the long-term trends are all up. We want to hold those real estates, especially in a good market like the New York City metropolitan market or if you’re on the West Coast and LA the two largest markets. History always shows them going up. That’s the long-term plan.
Aaron: Absolutely. We execute the buy renovate refinance strategy. Not only does that allow us to harvest that equity growth that we forced into the property over time and in harvest natural growth of real estate. We should be buying good areas like we do. We’re buying a building right now in downtown Newark. We just bought this $3 million building in Paterson area, the downtown area, the Great Falls area near opportunity zones. These areas increase in value naturally as well as long as the property is professionally managed, as ours are.
We execute that buy renovate, refinance strategy that allows our investors to harvest that equity growth, get a large check deposited into their account themselves, but not have to pay taxes on it if they choose not to exit. Investors have that exit option to exit and to refinance, get back their initial investment, keep the funds earned from the cash flow, keep the funds earned from the refinance. Then you’re going to have to pay taxes on that money you earned. A better tax strategy and this is what Seth and I implement. This is how we pay ourselves. This is why we pay very little tax.
It’s a great strategy is we buy renovate, refinance. We stay invest in the properties long-term. We refinance three, maybe four times over time, and then we go to trade into a bigger property with the 1031 tax exchange. That’s a whole another podcast. I’ve done podcasts on that so check them out. We plan on selling the building, working with a third-party company trading into a bigger building to deferring all taxes, and then rinse and repeat.
It’s the tool that the wealthy use to get wealthier and wealthier and it’s a tool that we should be using in any regular role investor should be using to build their wealth, give less money in the taxman, and it’s really a tool real estate that’s quite popular. You can’t necessarily do with stocks or things like that. It’s a credible tax tool in real estate, the 1031 tax exchange, and whatever you’re paying that professionally, well-managed real estate and in high demand markets, a lot of real estate syndicates, they’ll buy and they’ll sell three to four years later they’ll get in and they’ll get out.
We don’t really like that plan. Not only do you get nailed on taxes, but then you lost your cash flow machine. You lost your tax depreciation machine. Real estate offers tax write-offs in cash flow and if done right, large cash-out refinance over time. We use the buildings to continue to make returns for our investors through those multiple avenues. Why sell and get taxed? We might trade into a bigger building over time is our long-term strategy.
We find a lot of other syndicates don’t offer that long-term indefinite option to invest. We offer multiple exit options through the years but if you choose to invest long-term, which is the best tax strategy, we do offer that indefinite option, where a lot of other syndicates say, “You can’t invest with us indefinitely. You’re going to have to exit year five or seven years.” That’s fine but then there can be tax consequences to that.
Seth: To add to that sometimes they make the decision for the investor when they can leave. With us, it’s every three to five years, it’s the investors choice.
Aaron: Exactly. The option exit multiple option, exit options and that flexibility is one of the things our investors love. That’s why they keep on coming back for more and more investment opportunities through the years. That brings me to my final question, Mr. Martinez. How did we raise the capital for this opportunity in the middle of the pandemic?
Seth: In the middle of the pandemic who would have funk it?
Aaron: Funk it?
Seth: A lot of businesses have taken big hits this year, and they’ve gotten smaller and not grown. We actually grew through the pandemic. That was a big accomplishment and a testament to both of us and our clients. That’s the big question. When I brought this deal to Aaron a year ago, it was a million-dollar raise on a $3 million purchase and we didn’t know if we were going to raise the money. I handed it off to Aaron and he got it done. Aaron, how did you do that?
Aaron: Well, man, it was really, really challenging. I’m not going to lie. We have a great pool of investors but only about a third of the investors involved in this deal about 5 out of 15 were original investors that have invested with us before. Obviously, those are much easier conversations than people that are finding us on the internet or finding us through our webinars on meetup.com. They may have never met us in-person. That’s a longer-term relationship.
You need to really build over time, which is not always easy to do when you can’t meet in-person. Also, this was a during the summer. We’re talking in May, June, July, August. This is a wild time when people really didn’t know what the economy was going to do. Now there’s a bit more of a light at the end of the tunnel. We see a wave coming out of this. There are a lot of talking heads this summer, saying that the economy was going to bomb out and of course, the true effects of the pandemic still yet to be realized, but we do see a light at the end of the tunnel. Raising a million dollars in the middle of a pandemic from new investors, we’re meeting online, on Youtube, on Facebook, right? It was really quite a challenge, a lot of phone calls, a lot of conversations, but I think it’s a testament to our track record, to the testimonials from our current investors, and just sort of infrastructure that we have in place.
I mean, we have our own management company, we manage everything in-house, we personally guarantee the mortgage which really shows we’re in it to win it, our skin in the game. Seth and I, we’ve been doing this long enough to know the important parts of this business– know that important parts that have to be just nailed to a T. Property management, banking relationships, bookkeeping and accounting, communication with your investors, these are areas you cannot falter.
You have to be focused on year after year, month after month. You have to hit the marks and keep that communication going through good times and bad. I think we’ve done that pretty well this year. We bought a million-dollar building over the summer. We bought a $3 million building in fall. We did two more real state syndications in Southern Vermont over just the last couple of months. We’ve done four syndications this year in the middle of a pandemic.
Where a lot of other companies were closing their doors and not pivoting, we actually, really, really were able to pivot and succeed, and all right, very good stuff. That’s it, for now, everybody. We talked about how we acquired this $3 million, 25 unit building in the Great Falls section of Paterson, New Jersey near a Federal Opportunity Zone. We explained how we structured it, how we found the deal, how we raised the capital, how we worked with the bank to purchase it.
If you want to learn how you can get qualified to invest in these properties and start making consistent cash flow, consistent tax benefits, and a large check upon refinance, go to peoplescapitalgroup.com. Check out our website, we got podcasts there. We have tons of information. We have webinars you can sign up for that are coming up, we have recordings of past webinars, and click the button to apply to invest, to apply to qualify on our website that’ll bring you to a simple application form that you can fill out, and if qualified, you can start learning more about upcoming private offerings here at People Capital Group and it all starts at peoplescapitalgroup.com. Go there to learn more. That’s it for today.
Seth: All right.
Aaron: Thank you Mr. Martinez for joining us.
Seth: Thank you.
Aaron: Do you have snow tires on your cars?
Seth: No, but I going to look into that.
Aaron: There is no snow, it’s two, three o’clock. Currently going on New Jersey, there is a state of emergency. You look outside, it’s a beautiful day, a little overcast. State of emergency, it’s overcast. Who knows probably be 6 feet of snow in two hours. All right everybody. Thanks for watching. I’m Aaron Fragnito at Peoples Capital Group.