How Would a Housing Market Recession Impact Multifamily Property Investing?

Many macroeconomic forecasters are saying that the United States (and many countries throughout the world, for that matter) is currently or is going to be in a recession soon, which has many investors concerned. During a housing market recession, (one angle of the economy that experts are forecasting may be entering recession territory) depending on your timing and the particulars of the strategy, it may not be the ideal time to invest in single-family homes. However, history has proven it can be an ideal time for multifamily property investments if you’re careful and diligent. While the impact of a recession is often felt in almost every aspect of business and investing, multifamily real estate can be a recession-resilient investment vehicle.

Why is Multifamily Property Generally Stable during a Housing Market Recession?

Although recessions can cause people to stop spending money on unnecessary consumer goods like luxury cars, housing is a must. However, the home-selling inventory is tight, and prices have skyrocketed over the past few years. This leads potential buyers to struggle as they search for an affordable home. These consumers are less likely to purchase a home because of the sub-optimal state of the housing market. Since purchasing a home is out of the picture for most individuals, they are more likely to rent. This means there is an increased demand for rental homes, like multifamily properties. In past recessions, multifamily investments remained stable in the midst of rising prices. Today, in the United States, there is an increase in demand for multifamily apartments, which is one significant reason it’s generally a great time to invest in them.

Multifamily Property Investment: Vehicle to Success

The economy fluctuates and markets can be unpredictable. But commercial real estate opportunities have built-in protections, for example—current trends of population growth in specific geographical areas. Investing in prime locations for multifamily apartments targets existing or new tenants because they want a safe, comfortable, and affordable place to live. Multifamily property areas need strong fundamentals like good neighborhoods and good job access, and when these criteria are met along with buying well, financing appropriately, and managing prudently, your investment will produce consistent cash flow via strong occupancy and rent growth.

Potential Risks of Multifamily Property Investment

There is a clear relationship between inflation and rising interest rates. The Federal Reserve has increased interest rates in order to decrease demand across the economy, and therefore prevent further increases in prices. Obviously, this makes borrowing money more expensive. Getting a loan after these interest rates rise can cause your debt burden to increase substantially. Although the purchasing power of money could decrease allowing future loan payments to be “cheaper,” it still can be a risky proposition.

Also, although the cost of housing might decrease, inflation causes the cost of construction materials and labor to rise. Having to invest more into a renovation could cause your return on investment to decrease. Therefore, having an experienced and resourceful investment partner is key. With the right team, tactics, and expertise implemented, multifamily property investments can be a dependable investment vehicle for profits and success.

Invest with CF Capital

During a recession that includes persistent inflation, certain markets across the United States may be affected by rising prices. Those who struggle to purchase a home because of skyrocketing prices and interest rates become more reliant on the multifamily market. This means having a diverse investment portfolio in multiple multifamily assets will help ensure that your cash flow continues to increase for the foreseeable future. Get in touch with our team at CF Capital, to learn about how you can passively invest alongside our team to protect and grow your wealth.

From the Desk of CF Capital: January Investor Report

So it's a new year. Does that mean it's a new market? Time will tell. In 2022, the historic speed at which the Federal Reserve raised rates led to tremendous market disarray, and a disconnect between buyers and sellers in our multifamily space for many months. Generally, commercial real estate markets are slow moving, and this type of rapid change to a critical factor in real estate investing, interest rates, were not fully integrated throughout the markets for quite some time. We anticipate that the calendar change to 2023 will more solidly imprint in sellers' minds that the previous market cycle is now truly history, and we're now operating in a completely new landscape. Further, it is anticipated that market distress is on the horizon, with a meaningful percentage of loans expiring this year on deals that may not be candidates for the needed proceeds on a refinance or may not hit investment metrics on a sale. We continue to scour the market for quality assets - we're mainly focused on B-Class assets at this stage of the market cycle - with a compelling story. While we were very active in December pursuing new investments, no new deals were officially secured (while two came very close) that were appropriate to acquire and offer to you for investment consideration at this time. We are optimistic that Q1 2023 will be more ripe with the right opportunities for your consideration.

We also remain hyper-focused on optimizing our current portfolio during this time. We're mid value-add on several assets right now, and a significant amount of our team's focus is on ensuring we're performing to projections. With a myriad of market headwinds, we're doubling our efforts and focused on results. After all, we're in the business of protecting and growing partner capital, because our relationship with our investors is for the long-haul.

To start off the new year, we've got some exciting things happening on the horizon. For one, Bryan and Tyler will be attending the annual NMHC in Las Vegas at the end of January/first of February. If you'll be attending and we have not yet scheduled a time to meet, please reach out to Rachael via email at [email protected].

Don't hesitate to reach out to discuss your goals for your real estate investments for 2023 and beyond. We always appreciate the opportunity to connect with you directly to learn how we can support you further.

Here's to wishing you a wonderful start to 2023!

In Partnership,

Tyler & Bryan

Real Estate vs Stocks: Which is a Better Investment?

The two most popular investment vehicles are real estate and stocks, both of which can offer lucrative profits. As an investor, you are looking to grow your future wealth and ideally, you should consider diversifying your portfolio and investing in both. But investing in both is sometimes not possible, especially with the current economic state, and there are strategic considerations such as the weighting of your allocations. So, why should you invest in real estate vs stocks? Here are just 4 reasons why:

Real Estate vs Stocks: The Rundown

Real Estate is More Stable than Stocks

Real estate is generally more stable and easier to predict than the rather volatile stock market. While it’s not immune to the market cycle, the value of real estate has historically appreciated. Since real estate profits steadily increase over time, they can act as a hedge against inflation. This is because housing is a constant need and is considered a consumer good, and inflation can increase the price of consumer goods. Cash flows usually keep pace with inflation: as the cost of living grows, so does the market price for rent.

In the stock market, dramatic fluctuations can take place daily and losses can be significant, making investing in real estate a lower risk than the stock market. Stock markets can be a struggle to predict, even for investment professionals. A significant drop in the market can reduce your principle and if it is significant enough it could take years to recover your original investment.
Return on Investment

Typically, in the stock market, you make money by buying low and selling high, but most investors can’t do this consistently. Real estate practically guarantees ROI if you invest with prudence. Commercial real estate offers continuous value because you are dealing with individual properties that vary in features, location, size, and more. By locating and acquiring properties at a discount versus their market value, creating additional value, and optimizing operations, real estate can be a terrific vehicle to create very attractive ROIs. Investing in real estate gives you more nuanced opportunities to build on your wealth.
Commerical Real Estate: Source of Income

Commercial real estate is the type of investment that you can live on. Revenue from commercial real estate can be used to pay down debt or cover expenses associated with the property including mortgages, taxes, insurance, maintenance, etc. Unlike stocks, commercial real estate can have a day-in, day-out value in the form of cash-flow income that stocks typically cannot match. Commercial real estate properties can increase your personal cash flow if selected well.
Real Estate is a Controllable Investment

Your investment is important to you, so why invest in an uncontrollable stock market? Trying to time the market is nearly impossible, even for experienced investors. But with real estate, timing the market is more likely due to the overall inefficiencies in the market. The real estate industry is historically more stable and predictable than the stock market. Real estate is not affected by a company making poor decisions or committing fraud. Though real estate doesn’t exactly protect you from the economic cycles, it gives you leeway to make more stable profits.

Real estate isn’t something where you can go into and expect immediate results and return. But with an experienced team, you can be sure that you are making the right investments. The current economy has investors concerned, however, our team at CF Capital leverages our expertise and is dedicated to helping our current and future real estate investor partners. Get in touch with us today and learn about how you can passively invest with our experienced team!

From the Desk of CF Capital: December Investor Report

Hello Friends and Investors,

The holiday season is officially upon us, and the federal reserve continues their march forward on their fight against inflation. Our team at CF Capital has been in the spirit of giving by committing time to serve in our community and we've been hyper-focused on up-leveling our asset & property management teams in an effort to optimize the fundamentals of our investments as we navigate this market cycle.

Ahead of the December FOMC meeting next week, markets anticipate another hike, yet in a slightly reduced capacity from the November and four preceding months’ counterparts (all of which saw a 75 BPS increase). Recent comments from Federal Reserve Chairman Jerome Powell noted that “Despite some promising developments, we have a long way to go in restoring price stability." He indicated that policy moves such as interest rate increases and the reduction of the Fed’s bond holdings generally take time to make their way through the system. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.”

Interest rates and inflation have been the central theme of 2022, and they continue to have a tremendous impact on the multifamily real estate investment market, and most assets across the landscape for that matter. No one can truly predict where things are headed in 2023, but thus far, we've seen a seismic shift from a historic sellers market, to a market that is beginning to favor buyers. Still, we're seeing ROI expectations diminish as a result of higher costs of financing, but the few deals that are actually trading are trading for substantial discounts (in some cases 15%+ less than two quarters ago, an intriguing proposition in reduced going in basis for long term investors like us). We're anticipating some further runway in corrected values as we enter 2023, and are optimistic for the resulting acquisition opportunities on the horizon. Deals we're targeting are being projected as longer term holds (ie. 7-10 years) in an effort to optimize fixed rate debt and weather any impending economic storm. It's more important than ever to be prudent in underwriting and stress test our acquisitions, which is exactly what we're doing. To date, we've completed a deep-dive underwrite on 170 deals, and offered on 55 deals at where we feel returns are appropriate commensurate to the risk profile of the asset. We've closed 2 deals in an otherwise tumultuous macro environment in 2022, and are looking to acquire somewhere in the ballpark of 4-6 deals in 2023.

Aside from the acquisition trail, in asset management we have been focusing on the fundamentals of maximizing NOI in all of our assets through leasing, collections, and expense management. All the while our substantial renovation projects continued across the portfolio.

Outside of the blocking and tackling of the day-to-day business, we welcomed a new Executive Assistant in Rachael Chapman, a wonderful talent with a background in the Air Force and administration in the medical field. We also were able to lend a "day of service" the day before Thanksgiving supporting prep for a meal that fed approximately 600 homeless people in the Louisville area.

Lastly, some of our team had the pleasure of attending the annual March of Dimes Commercial Real Estate Achievement Award (REACH) Breakfast Banquet at Churchill Downs, supporting families of premature babies, a cause especially near and dear to Tyler and his family after their experience in the NICU earlier this year.

In summary, while the December month seems to get busier and busier each year, we would like to challenge everyone to take time to pause and remember the reason for the season. Express your gratitude for all the good things in your life. Take a moment to help out someone else in need. As we continue to forge greater prosperity in our lives as investors, it is our duty to pay it forward to others and make our world a better place. Instead of complaining that "they" aren't doing what you think should be done in the world, take it upon yourself to be that leader and the change that you'd like to see.

Happy Holidays and Merry Christmas from all of us at CF Capital and thank you for being a part of our community!

In Partnership,

Tyler & Bryan

P.S. There's no higher compliment than you referring us to your friends, family, and colleagues. We'd be honored by the opportunity to become a part of their trusted networks. Share your experience investing with CF Capital & invite others to become an investor here.

The Two Types of Inflation: What You Need to Know

Inflation refers to the rising prices of goods and services, which typically happens gradually, however, the current inflation rate is far from gradual. At the time of this writing, the country is dealing with two types of inflation: demand-pull inflation and cost-push inflation, both influencing your purchasing power. Let’s discuss these types of inflation, the conditions that cause them, and how investors like you can hedge against them.

What is Demand-Pull Inflation?

Demand-pull inflation is the most common cause of inflation. It occurs when the aggregate demand for a good or service exceeds the aggregate supply. Sellers can meet that increase with more supply, but if the additional supply is unavailable, then the sellers can raise their prices. If something is in short supply, sellers will generally ask people to pay more for it.

There are a few reasons why demand-pull inflation occurs, this includes:

Growing economy: When the economy is booming and unemployment is low, consumers typically earn and subsequentially spend more money. This drives up aggregate demand throughout the economy, which can lead to higher prices.
Government spending: Government response to economic conditions, including providing a stimulus during the economic downturn or providing tax breaks can impact how much money people spend on goods and services. When the government spends more freely, prices typically go up.
Inflation expectations: Inflation expectation refers to the rate at which people expect prices to rise in the future. When consumers expect inflation soon, they tend to start buying more now to avoid paying higher prices later.

What is Cost-Push Inflation?

Cost-push inflation is a result of supply conditions, rather than demand. It occurs when the costs of delivery products or services increase, but demand is unchanged. Cost-push inflation often happens alongside demand-pull inflation. When raw materials prices increase, then businesses raise their prices to maintain profit margins, regardless of the demand.

For example, let’s say you love steak tacos from your favorite restaurant, but the price of beef keeps going up. Eventually, they will have to raise the prices of their tacos regardless of demand.

Another cause of cost-push inflation includes increased labor costs. This happens when there is a mandatory wage increase for production employees causing product prices to increase. Also, a work strike will likely lead to a decline in production. Natural disasters and government regulations can also make an impact.

How You Can Hedge Against Inflation

Inflation is a decrease in your purchasing power and the decrease in the value of each dollar in your pocket. This means it takes more money to buy the same product, asset, or investment. A growing economy will bring with it steady inflation, but economists and consumers prefer to see prices rise slowly, unlike what is happening now. When inflation increases faster than usual, consumers tend to worry about paying higher prices for gas, groceries, rent, and other products and services.

Fortunately, there is a way to hedge against today’s current inflation, and that is investing in multifamily properties. Though any investment property can be a good hedge against inflation, investing in multifamily provides more protection due to the nature of the asset. Generally, rents reset every 12 months, and rent typically outpaces inflation. Those who live in multifamily communities are obligated to their lease, and over time the rent (and other income generated) can pay for the investment itself plus excess cash flow.

Though inflation is currently rampant and at a historically high rate, you can use real estate to hedge against inflation to protect your capital and purchasing power, along with so many other financial benefits. At CF Capital, our experienced team can help you invest in the future. So, if you are ready to explore your options to passively invest in real estate, get in touch with us.

From the Desk of CF Capital: November 2022 Investor Report

Dear Friends and Investors,

We hope you're doing well and having a wonderful beginning to your November. Our CF Capital family has settled into our new Downtown Louisville Office, our families had an eventful Halloween, and we've been productive on the asset management and acquisitions fronts. Tyler shared a Halloween Horror Story on the highly acclaimed "Real Estate Guys Radio" Program, and you won't want to miss it. (Listen to the podcast on Apple Podcast or on Spotify.

As of October, upon returning from the phenomenal New Orleans Investment Conference, we finally settled into our new space on Main Street in Downtown Louisville! We'd love to host you the next time you're in town, whether you're in to enjoy the world-famous bourbon trail, check out a world-class horse race, or get onsite to some of our collectively owned properties in the area. We're always welcoming you with open arms to come say hello, and have enjoyed hosting several investors over the recent months.

On the business front, we've been investing heavily into the execution of our investment business plans at our current communities via detailed asset management, working with our on-site and regional teams in an effort to exceed our property goals for the quarter and for the year. On the renovation side, we're currently investing over $7mm in capital expenditures across our portfolio - in amenity enhancements, unit renovations, and exterior improvements. This past month, we repaved and re-striped two of our most recent acquisitions' parking lots, overhauled the landscaping and installed new on-site signage. Our rehab teams are busy renovating dozens of units each month, and our leasing teams are busy securing qualified residents at premium rental rates. We're focusing on driving occupancy, revenue and optimizing net operating income (NOI).

On the acquisitions side, we're very active in the market making a healthy amount of offers on deals; we're seeing some more attractive opportunities than we have in the past few years. The recent market turmoil is starting to shake loose more compelling deals, and we're anticipating our next opportunity for you to invest with us to be coming soon. While the cost of debt has substantially risen in recent months, the resulting market dynamics are more compelling than we've seen in a long time; it's now just a matter of putting the Rubik’s Cube of the capital stack together in a manner that allows us to amplify returns, protect capital, and optimize our investments. As you know, we remain picky, patient and prudent, and when we secure an acquisition, it's passed the rigorous standards that we have set. Stay tuned, and we hope to be announcing the next new deal soon.

In Partnership,

Tyler & Bryan

Is Commercial Real Estate Really a Good Hedge Against Inflation?

Many experts are predicting inflation will continue to grow higher and higher. While there is uncertainty about the broader economy, it is important to apply sound economic strategies during this time and for the long haul. This has led investors like you to ask: is real estate really a good hedge against inflation? In this blog, the CF Capital team investigates this question through the lens of commercial real estate.

How Does Investing in Commercial Real Estate Hedge Against Inflation?

Inflation is one of the most significant risk factors for those looking to invest their hard-earned capital. However, commercial real estate is considered a safe haven against that insidious and sometimes invisible force. Here’s why:

The cost of rent rises generally at the same rate as inflation. As currency devalues, average property values increase with commercial real estate—new or old—as lease renewal rates rise. Multifamily real estate, in particular, resets rent annually per resident and is generally a sounder hedge against inflation versus other asset classes in commercial real estate as a result.

Inflation will typically increase the cost of the rent. When the rent increases, the investor’s income will increase. The higher income possibilities lead to higher sale value when selling real estate (assuming your income growth exceeds expense growth). Commercial real estate is a quality inflation hedge because of its intrinsic properties making it a compelling investment during inflation periods when prices rise rapidly.

Benefits of Investing in Commercial Real Estate

Commercial real estate can be a highly profitable investment vehicle. On top of that, it’s also considered exceptionally reliable regardless of market cycles since it has little correlation with stocks and bonds. Of course, all real estate is hyper-local, but generally, there are many inflation-hedging benefits to investing in commercial real estate. Investing in it is not only about generating cash flow, but also building on your own wealth over time via appreciation and tax mitigation. Here’s how:

Ensures streams of cash flow
Equity appreciation through NOI enhancements
Allows you to utilize powerful leverage
Cash flow is taxed at a lower rate than earned income
Appreciation is taxed at capital gains rates, a significant savings versus earned income
Improvements can be depreciated, generating powerful “paper losses” for investors

Selecting the Best Property Type

Here comes the question: which type of commercial property will work in the current economy and as things continue to unfold in the broader market? It depends on the specifics and your goals in particular. At the current state of the economy, investors are leading toward the safe haven of multifamily real estate. Of course, CF Capital specializes in apartment investing. Multifamily real estate has grown in popularity over the past few years because it can offer a secure and more reliable investment where there are multiple sources of cash flow coming from different tenants, and everyone needs a place to live (in a strong or weak economy). That means there will always be income, as long as the operator can meet the market.

The market can seem unpredictable. When it comes to commercial real estate investing, including multifamily investing, it is always good to monitor the economic situation and plan out your strategy carefully. If you are interested in passively investing in quality multifamily real estate, sign up for our investor list.

Capital Appreciation: Evaluating Performance of Real Estate Investments

If you are new to the world of real estate investing, it won’t take long to come across a lot of different industry specific terms such as capital appreciation. This term may seem confusing and daunting at first, but the good news is we are here to explain what it is and how to implement it in your investments.

What is Capital Appreciation?

By nature, the market value of investments changes over time with prevailing market conditions. When the value of your investment increases, there is appreciation, and when the value of your investment decreases, there is depreciation. Simply defined, capital appreciation is when the market price of real estate rises. It is the difference between the initial purchase price and the eventual selling price of an investment. It is used to determine the performance of real estate investment. It happens when the price of a stock, the property worth of a home, or the value of your real estate grows. For example, if you pay $1,000 for a stock investment and its price increases to $1,500, you could say that the investment has appreciated by $500.

Here are two important definitions that are connected to capital appreciation:

Cost Basis: Cost basis is the context of commercial real estate. It’s the original purchase price of investment property and any out-of-pocket expenses or closing costs related. Consider this scenario: you bought a rental property for $500,000 which is now worth $550,000. Sounds like a $50,000 gain, right? Not exactly. Keep in mind, during the closing you might have paid $10,000 for title insurance and another $10,000 in loan fees. This means your initial basis in property is $520,000 and your gain is $30,000.

Market Value: Market value is the sales price of a property in the market if you were to put it on the open market. Market value is usually determined by the market through a combination of comparable sales, projected rebuild costs, and the income approach. Generally commercial real estate, including large multifamily investments, are valued with an emphasis on the income approach, via the market capitalization rate derived from the Net Operating Income (NOI) of the asset.

Capital appreciation is different from income and total return. Income is the money that is paid out from owning an asset, such as operating expenses and debt service. Your total asset return is defined as a combination of capital appreciation and ongoing cash flow.

How Commercial Appreciation is Calculated

There are two ways to go about calculating capital appreciation: either by dollar amount or as a percentage.

Dollar Amount

Calculating a capital appreciation dollar amount involves subtracting the cost basis from its market value. For example, let’s say your real estate’s cost basis is $200,000 and the market value is $230,000, the formula for your capital appreciation would be:

Cost Basis - Market Value = Capital Appreciation

$230,000 - $200,000 = $30,000

The capital appreciation is $30,000.

Percentage

When calculating a capital appreciation percentage gain or loss, take the dollar amount of your capital appreciation, then divide it by your cost basis, and then multiply by 100.

Let’s take the example from above. Your basis is $200,000, your market value is $230,000, and the dollar amount of your capital appreciation is $30,000. Here is the formula:

(Capital Appreciation/Cost Basis) x 100%

($30,000/$200,000) x 100% = 15%

The Importance of Capital Appreciation

Capital appreciation is important for you as an investor to be aware of and fully understand. Every commercial real estate investor needs to consider capital appreciation when planning their investment property strategy to get the most out of their investment. Capital appreciation provides one of the best ways to make a large return on their investment.

CF Capital is here to support you in achieving your real estate investment goals. We are a national real estate investment firm that focuses on acquiring and operating multifamily assets that provide stable cash flow, capital appreciation, and a margin of safety. Contact us today and learn about our passive investment opportunities!

Fun Experiences: Q&A with Tyler & Bryan

“Life is either a daring adventure or nothing at all.” – Helen Keller

Another good quote tied to this one is by Nina Dobrev, “Even though you’re growing up, you should never stop having fun.”

I think both of these are appropriate for our Q&A session today.

Moderator (Will, COO): Let’s kick this off with something juicy to break the ice. Can you both talk about the situation when you had your strangest conversation on the job?

Bryan: Our industry serves people of all different backgrounds, cultures, socioeconomic status, etc., which certainly allows for conversations that might be out of our standard day-to-day or comfort zone. My wife is always fascinated with our pre-acquisition due diligence walks and asks me what kind of things I see and the conversations I have when we are walking all of the units onsite. I always tell her that it could be anything and everything that you could ever imagine. Sometimes the residents know we are coming and why we are there, other times the residents aren’t expecting us or could be unclear of our background which allows for very candid conversations. While many of these conversations are discovery for us as the new owners, the conversation with one particular resident that was convinced his neighboring unit was “haunted”. While we thankfully didn’t find any paranormal tenants next door, that conversation stuck with me and always gives me a bit of a chuckle!

Tyler: It’s always an adventure to be on site and engaging with residents, whether it be for due diligence where we’re inspecting every unit prior to acquisition, or when we’re on site conducting our asset management regular site visits with our staff. There was a time when we were walking units with a broker prior to making an offer on a target community acquisition where we encountered a resident with a pet parrot in his apartment. I couldn’t tell you the content of our conversation now, because it seemed like the parrot was interrupting every few words and repeating things we were saying. You always hear “Polly, want a cracker?” type of things when you think of a parrot and it was bizarre how this animal could listen and respond. Made me forget for a moment we were evaluating an investment getting lost in that experience.

Moderator (Will, COO): How about a time when someone completely shocked you with their comment or comments? Is there anything that, when you look back, really makes you laugh?

Bryan: Nearly every time I visit a property I find a reason to laugh. This could be one of the properties in our portfolio or one that we are touring to acquire. Being in a business that serves people is fun, rewarding, and provides us with the opportunity to meet new people on a daily basis. Whenever I am onsite I make it a point to interact with residents to ask them how they are doing, what they enjoy about living at the property, where there are opportunities for improvement, and/or just shooting the breeze with them. Inevitably someone leaves me with a one-liner or thought that makes me grin.

Tyler: I am sometimes shocked to learn what some deals trade for, whether it’s on a cap rate basis, price per unit basis, or overall acquisition value. We’ve been in a “bull-market” in the multifamily space for a while now, but some deals just make your head scratch. Sometimes we wonder who would actually buy certain deals for numbers that are being reported, and how they could be successful. There are deals where we’re baffled as to “whisper” prices that are shared with us from our broker relationships that ultimately don’t trade which leaves us feeling a bit vindicated.

Moderator (Will, COO): Have you experienced anything interesting with pets while you were on the job? What story sticks out the most? If not, talk about the weirdest pet you saw while on-site at an apartment complex.

Bryan: While cats and dogs are your typical pets at any community, many residents do seem to have an affinity for reptiles - I’ve seen too many snakes, many different lizards, some turtles, and even small alligators!

Tyler: I’ve seen a lot of bizarre pets in apartments. I mentioned the parrot earlier. I’ve also run into massive fish tanks, turtles, snakes, tarantulas, and gerbils. People love their pets. I, however, can do without the snakes and tarantulas, specifically!

Moderator (Will, COO): What was the most outrageous thing you have discovered during the due diligence process?

Bryan: Ha - where to even begin with this question?! After so many years in the industry you tend to become more accustomed to sites and scenes that may have surprised you in the past. Many times the way the current owner is running the property is more outrageous than anything that we find at the resident level. Sometimes we are made aware of these overlooked or mismanaged issues ahead of time, other times the discoveries are made while onsite by our team. We handle due diligence a bit like a treasure hunt where you are given clues and it’s up to us to track down the issues that aren’t readily apparent to us.

Tyler: I’ve almost come to never be surprised at anything we find in due diligence these days. In an earlier part of my career I would find myself shocked at the way people live - messiness, dirtiness, and overall lack of organization in their home life. I have since tempered my expectations and avoid placing any label on the way that people live their private lives. However, I would say “outrageous” findings in due diligence tend to lend themselves to items found to be less than revealed by the seller prior to our deal agreement. There was a time when a property owner was adamant that all roofs were in great shape and that we would see as soon as we started our inspections. That turned out to be the exact opposite of what was true. Like we always say, trust but verify.

Moderator (Will, COO): This one is on the darker side… sort of. Have you ever had to go through a haunted apartment or apartment complex? If so, I want details! If not, what story from the past creeps you out the most?

Bryan: I mentioned the fear of a haunted unit earlier, however, I unfortunately can’t confirm any spirited residents or sites at any of the properties that we have toured. With that said, it might be scarier to think about the way that some of the properties we have been through are run by mismanaged and derelict owners! Typically these mismanaged assets present opportunities for our team so I will be sure to be on the lookout for a haunted story in the future when we are acquiring one of these!

Tyler: I recently went to Savannah, GA for my sister-in-law’s wedding. Many people know Savannah to be “America’s most haunted city.” We did a ghost tour, and I am totally open to ghosts (and believe they exist!), but I have to sadly report back that I didn’t experience any paranormal activity. I’d love to see it, and am hopeful that one day I can tell you that I made my encounter. Hopefully the ghost will be friendly!

Moderator (Will, COO): Can you think of your own most embarrassing moment on the job? Let’s hear it!

Bryan: Ask Tyler or any other members of our team and they could likely make this an entire blog post!

Tyler: I embarrass myself daily. It’s a prerequisite to do what we do - make mistakes - and hopefully learn from them and improve. One embarrassing thing I did earlier this week was congratulate one of our property management team members for an accomplishment that actually was accomplished by another member of our team. It’s a little embarrassing to miss the opportunity to show appreciation appropriately to people we count on for day to day execution.

Moderator (Will, COO): The last one is a topic that is in high demand: what story do you think of when you think about the most fun you’ve had together?

Bryan: Thankfully this is an ongoing story! While Tyler and I enjoy giving one another a hard time on a daily basis, it’s truly a joy to build a business, improve our communities, and deliver for our investors alongside him. When we aren’t working specifically on CF Capital we are typically discussing (in no particular order) our family lives, macroeconomics, personal development and fitness, or our beloved Kentucky Wildcats! We both enjoy traveling for business and always try to blend in a bit of personal time as well. And when we get to do it together, even better! Doing great business with a great friend is what it is all about!

Tyler: Bryan and I are fond of thinking back to how CF Capital all started - which was through a series of casual meetings over beer and sometimes coffee. Mostly beer! We also have fun traveling together, having dinner with our wives and talking about personal development or personal goals, and attending conferences. Recently we went to Indianapolis to celebrate a couple successful deals with our debt team and attended the Indianapolis Colts game as well as had a fun night with a nice steak dinner and stopping at a couple other nightlife spots. It pays to do business with someone that you have fun with constantly, and we really have fun evaluating deals together, building a business together and talking macroeconomics together. Who says you can’t mix business and pleasure?!

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Secure Protocol: Let’s Talk About Due Diligence Reports…

“Learning is not attained by chance, it must be sought for with ardor and diligence.” -- Abigail Adams

Due diligence is a comprehensive, complex, and critical stage in any commercial real estate acquisition. You don’t want to leave any stone uncovered, and you want the most time available to review all documents and look for any and all possible red flags with the property, title, tenant relationships, and numerous other considerations.

That’s why we’ve created the checklist below, which outlines many of the key documents, records, and financial information needed for a full and complete due diligence on a prospective property acquisition.

In most transactions, we usually incorporate this checklist into our purchase and sale contract and require that the specified due diligence period will not commence until the date that the seller produces the last of each of these deliverables.

Simply put, when you’re the potential buyer of a property, you deserve to have all the necessary documentation in your hands before you start the intensive due diligence process.

Whether you’re a growing business looking for your first real estate investment, or a developer with an experienced deal team conducting diligence on multiple acquisitions simultaneously, we hope this checklist will serve as a helpful guide for the items you’ll need to make the most informed decision possible on your next real estate acquisition.

The (non-exhaustive) Checklist of Due Diligence Reports

1. The most recent title policy or title commitment on the property in the possession or control of the seller together with all related documents.

2. A recent ALTA survey and topographic study for the property and a copy of the construction blueprints, engineering plans and as-built drawings in the possession or control of the seller.

3. Legal description of the property.

4. Zoning Compliance Certificate for the property and all zoning approvals (including variances and any pending applications).

5. Declaration of covenants, conditions, restrictions, reservations and easements for the property.

6. Seller’s third-party engineering, environmental reports (including but not limited to Phase I and Phase II reports, NFR letters, mold abatement reports and underground storage tank testing and closure reports), appraisals, soil tests, boring reports, foundation reports (logs of pilings), termite or radon studies.

7. A true, correct and complete copy of each written lease and each guaranty (together with any amendments), and a certification that there are no oral leases or oral understandings, if any.

8. An accounting of all rent and other income, common area maintenance if applicable, security deposits and real estate tax contributions paid by any tenant at the property, including, without limitation, a certified rent roll, showing current rent, previous rent if applicable, delinquencies, security deposits, years of occupancy, lease commencement date and lease termination date.

9. All security deposits and any other amounts to which any tenant, vendor, or any other party may be entitled.

10. A copy of the last three years’ real estate tax bills, including special assessments or incentives, copies of all tax protests, related correspondence and protest results for the property and copies of the prior two years’ utility bills for the property.

11. A true, correct and complete copy of each written service contract (together with amendments thereto, if any) and a true, correct and complete written summary of each oral service contract, together with copies of any and all other contracts and agreements relating to the operation, maintenance and repair of the property.

12. An accounting of all income and expenses related to the property, including collection reports and tax statements for the last three years.

13. A list of all personal property, if any, owned by the seller, located at the property, and used or useful in connection with its operation and maintenance.

14. A list of all permits, partial certificates of occupancy, certificates of occupancy, warranties, government notices, special assessments, code violations and unexpired guaranties and copies of same in seller’s possession or control.

15. A copy of existing insurance policies and certificates and any pending claims against the property.

16. A schedule of pending litigation, if any, affecting the property or seller’s ability to convey the property.

17. Any and all other matters as purchaser may deem reasonably necessary to satisfy itself, in its sole discretion, concerning the property and the status of the property’s title.

Bottom Line

This list may seem way too long, I know. But to be honest there are other reports that could be added to the list.

Don’t let the steps overwhelm you. They are 100% worth it – I promise. Think of it this way, “It’s to be safe than sorry.”

Additionally, our philosophy in due diligence is to trust, but verify. When we’re entrusted with the preceding requested documentation, it is our responsibility to verify its relation to reality.

With that said, there are a number of “musts” to follow:

First, we must conduct on site interviews with the staff, with tenants, with the community.

Then…

We must conduct a full lease file audit. We must physically inspect all components of the property. We must conduct a comprehensive forensic investigation of all components of the asset to uncover hidden risks or opportunities.

As we do so, we gain a clear perspective of the asset we’re acquiring, and we make any business plan adjustments as we project our way forward upon closing the acquisition.

We invite you to do your own due diligence, whether you’re an active or passive investor. For our passive investor community, we are fully transparent in the findings we uncover during due diligence, and you are entitled to reviewing that information and making the most informed decision as a prospective partner of our deals.