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Due Diligence Road Trip – 10/22/12
10/22/12 Over the next nine days, I’ll be taking a real estate due diligence road trip and will journal the experience in real time right here on my blog. Here’s where we’re at today.
DOLLAR GENERAL: I have contracted to purchase three commercial properties in Georgia and Alabama leased to Dollar General. I am purchasing these at a package price and plan to acquire them using non-recourse debt from a local lender and syndicate the equity from my investor relationships. I’ve completed this exact business plan in the past and it worked well. My company earns a real estate acquisition fee at closing and a property management fee based on the gross income. Closing on these properties as a syndicator is a base hit. I really like the tenant Dollar General. I also like that we are purchasing these properties at a low price per sf lease rate and low price per sf purchase price. I would rather buy a low price property with a low rent rather than a high priced property with a high rent. There are more tenants at the lower end of the market than the higher end. Also, there properties are all in contract far below replacement cost.
CLASS B OFFICE: I have also contracted to purchase an office building in Louisville, Kentucky. We’re buying it at a good price and it is currently leased for five years to a human resources company at an attractive lease rate. I’ve located a lead investor willing to sign personal recourse on an 80% LTV loan from US Bank at 3.75% on a 5 year fixed rate. At this LTV and interest rate, this property is a CASHFLOW KING. I plan to syndicate the purchase equity from my investor relationships. There is another office building for sale immediately adjacent to the one we are buying and it is leased to Wells Fargo Insurance. While we are in Louisville, we’re going to see if we want to buy this second building as a way of getting economies of scale in this specific market. My company will earn a real estate an acquisition fee at closing and once acquired we earn a property management fee based on the gross rents collected. Another base hit.
POST OFFICE: I have also contracted to purchase two post offices in Florida. We’re buying it at a good price and it is currently leased for six plus years to the US Postal Service. A lot of investors are worried that the USPS will go out of business. That has driven prices down and CAP rates up (a good thing for buyers). If investor confidence returns to the general market or to post offices specifically the price of these properties should go up even though the rent stayed the same. My company plans to earn a real estate brokerage fee at closing and once acquired we earn a property management fee based on the gross rents collected. Personally, I don’t think the post office is going to shut all of their doors. If the post office closes the facilities we are purchasing we still own the real estate which can be leased to a new tenant. My company will earn an acquisition fee at closing and once acquired we earn a property management fee based on the gross rents collected. Another base hit.
Here is the purpose of our due diligence road trip:
1) confirm if the properties can be re-rented in the future at similar rents to what we are purchasing them for
2) confirm if there is anything about the property that would cause higher expenses than our forecast
3) confirm if there is anything about the property that would limit the marketability of the property in the future
4) learn as much as we can by asking lots of questions
5) solidify relationships with people that can help us with the acquisition and future management
6) gather additional market data and video clips that will help us raise the equity for these properties
7) create a photo graphic journal of the properties that will assist us in future management efforts
Here is our big picture Due Diligence Road Trip schedule:
10/23/12 Fly Oakland,CA to Orlando, FL stay at the airport Hyatt. I like that the concierge will pick my bags up from the baggage claim and deliver them to my room. I get in late tomorrow. It will be nice to walk from my plane to my bed without jumping on a shuttle or standing in line.
10/24/12 Drive to Vero Beach Florida where we are looking at a portfolio of 50 single family homes which we intend to resell one at a time to our investor network. More on this later. We’re staying at the Vero Beach Hotel & Spa (a kimpton hotel). IMPORTANT LESSON: make business and travel fun or you’ll dread doing it. As Mary Poppins says “Find the fun and SNAP the job’s a game”
10/25/12 Drive through central Florida where we will look at the two post offices we have in contract. I’m hopeful to meet the post masters of each post office. We’ll see if we can set that up. We then drive up to Georgia where we’ll drive by a net leased Fred’s Pharmacy that I tried to get into contract to purchase before this trip, but my offers were too aggressive and I didn’t get anything in contract. Looking at the “bird who got away” is almost as important as looking at the deals I was the winning bidder on. I want to see what someone else saw in the property that I didn’t and maybe the property will come back on the market for me to bid on in the near future.
10/26/12 Drive by the three Dollar General stores in Alabama and Georgia. These stores are in small towns which mean the acquisition CAP rates are higher (better cashflow) I want to feel comfortable that these towns are not going to disappear; the town needs the store; there is no where else for the tenant to move that is cheaper than my store; if the tenant does move out I will be able to place a new tenant. There are pros and cons to buying properties in rural markets. I think technology shifts and cultural beliefs are going to enable a resurgence in small town living. I also like that Dollar General thrives in small towns where they basically have a monopoly on the local retail market. It’s like walmart for small towns. I also like that the tenant is national credit. We’re staying at the Chattanooga Choo Choo. It’s a song; It’s a train; It’s a hotel! My son loves trains.
10/27/12 We’re doing a second drive by on the Dollar General Stores. We’ll have seen them at night (yesterday) and during the day. That gives us an important perspective on a retail property. Then we head off to Knoxville where we check up on a strip mall our company currently manages. We completed a lot of construction at the property in the last few days so it is a perfect time for me to do an inspection and shake hands with our tenants. This night we’re staying in a very unusual and very old hotel named after Daniel Boone. The hotel has super high ratings and the pictures look amazing! Whenever I can I like to stay at a place with character. The breakfast at this hotel is supposed to be AMAZING!
10/28/12 We have a short drive to Louisville, Kentucky where we will explore the local office submarket and do a walk through on the two office buildings we are contemplating purchasing. Then we drive to Indianapolis where we get to meet up with some old friends and clients. Overnight in Indianapolis.
10/29/12 We drive to Chicago where we meet with a developer who buys old duplexes and fixes them up VERY NICELY and rents them out. I’m impressed with the photos and math that I’ve seen online. The owner of the development company lives near me in California and we’ve discussed how to joint venture on his Chicago rehab projects. If the properties and team are strong, I’ll be introducing these duplexes to our investor group.
I’ve been planning this due diligence road trip for about three weeks. Today is the final prep day. I’m getting everything in my office set on autopilot and also finalizing meeting details with all of the team members we are meeting with over the next week.
Here are today’s important lessons for real estate investors.
1) I have specific properties in contract before going to the local market. I have a business plan to acquire the specific properties and why they make sense for me to own and manage. I’ve conducted 90% of my online due diligence before getting on a plane. My due diligence road trip to the market isn’t to find a property, but to confirm my decision to buy something I’ve already researched and control. I may find something new to buy, but that isn’t the reason I’m getting on plane. I can be VERY efficient during my travel because I have everything scheduled out down to the 30 minute increment. I have my hotel’s booked etc.
2) I am making sure to pace myself during a long due diligence road trip. I’ve planned to be in bed at a reasonable hour and up early. Daylight is the most precious time of a due diligence trip because you don’t see much at night. When I’m looking at lower income areas I have planned my schedule to do a double drive by… once in the day and once at night. This is potentially less important in more affluent areas.
3) I’ve scheduled some unique experiences to have as part of the trip. I’m looking forward to staying on the Atlantic ocean, seeing the train museum at the Chattanooga Choo Choo, seeing old friends in Indianapolis, staying at the Boone Tavern on the list national registry of historic places, etc. This is undoubtedly a business trip, but I’ve made sure to include activities which make me very excited about going on the trip. Real estate investing is a marathon not a sprint. Make sure you enjoy the journey.
Here are my travel tips for the day:
1) I like flying Southwest because there is no change fee. You never know what’s going to come up when you’re on a road trip and need to stay an extra day or fly home early. I once flew to Detroit to look at a property and I’d budgeted 30 hours to be in the market. I knew within 30 minutes that I had no interest in Detroit and was ready to come home. I booked that trip on an airline other than Southwest and it was cost prohibitive to change flights. I spent my one day in Detroit at a bar celebrating with Red Wings fans.
2) I keep all of my project critical documents in an online file storage system like google docs or drop box. This enables me to be productive while working from my office remote. I can also give a password to one of my team members and ask them to process a document while I’m on a plane.
3) PRICELINE is awesome when you don’t care exactly where you want to stay. For example, I didn’t care exactly which four star resort I stayed at in Vero Beach. I let priceline pick for me and I saved 40%. Google has a new hotel search feature that has helped me narrow down my hotel choices. I also like using hotwire when I am looking for a good price on a specific hotel. There are iPhone apps for priceline and hotwire.
This due diligence road trip blog is a fun experiment for me. Please comment or say hello down below so I know whether it is worthwhile to keep my travel journal online like this.
If you are going to be in any of the cities we’re visiting during our due diligence road trip, send me an email and maybe we can connect over a meal.