January 2022

Have you read books that change the way you think about things that are important to you? I’ve read lots of books that help me form opinions or change my perspective, but not often do I take significant actions because of a book I read. I am now though.

Who Not How by Dan Sullivan has changed my thinking. We all read how it’s good to have someone do jobs that we don’t need to be doing. For example, property maintenance and bookkeeping. Maybe you’re good at them, but if you’re building a real estate business you shouldn’t be doing these jobs. The problem is, we arrive at that conclusion after having done the jobs for awhile and recognize that it’s consuming too much of our time.

Who Not How makes a strong case that you should start out every new initiative with this perspective, and I’m completely on board. I’m still trying to work out details of the how part, though, which I know is ironic. How to find someone who can do social media. How to decide what I want out of my marketing. How to integrate someone else’s bookkeeping work into my own accounting. It is a work in progress but I’ve seen the light.

My educational reading doesn’t often lead to course changes but this book changed my course. I strongly recommend it

Market Update

New Orleans, LA – Known for its resiliency, its ability to recover from catastrophic events like Hurricane Katrina, New Orleans remains strong through Covid. It continues to move forward and attract people. Trends are clearly mixed, though, but if you’re a bettor you might like the early indicators of an emerging market.

484,000 people called New Orleans home before Katrina and only 260,000 were left after the hurricane. What a wipe-out. By 2011 it was back to 321,000, climbed to 382,000 by 2016, but since then has not increased much, only to 390,000. Growing? Yes, but we have to decide if the growth is continuing or flattening. Hurricanes have not disappeared and we might have expected a warm climate region like this to benefit from Covid-related migrations. But so far it has not. Almost 100,000 fewer people than before Katrina.

What about jobs? That’s an interesting picture. From 2012 through 2015 job growth was reasonable, averaging about 1.7% although not spectacular (source: BLS). Then it was flat, and dropped like everywhere else during the pandemic.

But what has been happening over the last few months is impressive. Since April it has averaged 3.5% year-over-year growth and even the last three months of 2021 it’s been 2.2%, which is awesome. Something is clearly happening in this city, and because we’re mostly still not travelling, it’s not from tourism.

If New Orleans interests you, dig into job sources, confirm they’re likely to continue. Also be sure you know unemployment is higher than average, crime is much higher (City-data.com has given it the dreaded two red up arrows since they started keeping records), and choose your neighborhood because unquestionably many sub-markets are doing much better than these statistics.

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Finer Points

Lease Audits
You’re buying a multi-family property and it already has lots of tenants, but who are they? What can you learn about them? When do you need to get to know them?

You’ll need to know if these tenants are the tenants you expected when you first looked at the property. Maybe the seller said they are all good tenants with just a few sometimes late on rent. Or they said you’re going to have to replace a lot of them. Both are reasonable summaries of their tenant population, and either situation could represent a great opportunity for you. But you have to know what you want, and then verify that this property has the tenants you expected.

Start with your contract. Your contract needs to say that you get to see the leases. All of them. Right away, not at the end of your feasibility period. And in electronic form. It also needs to say you need the rent roll and it needs to include name, unit, unit type, square footage, rent, month-to-month indicator, other fee types itemized including both the recurring ones like pets and parking as well as the incidental ones like late fees, plus security deposit, move-in date, latest lease start and end date, and past due balance. I won’t say any one of these is less important than the others because they all need to be provided. In a spreadsheet. Don’t hassle with converting pdf to Excel. I’m pretty good with Excel but it’s just a mess having to convert.

Don’t let the seller get away with just showing you paper leases. If that’s all they have, it’s cheap for them to have an administrative assistant come in and scan them over the course of a day or so. I’ve taken phone pictures of paper leases in the manager’s office – don’t do that.

Your rent roll tells you what to expect from the lease audit. In the lease you should be able to confirm all of the information they provided in the rent roll. This includes the security deposit, increases in rent, other fees, unit number (tenant is no longer in the unit they originally leased? no problem but the lease needs to reflect that), and month to month (no problem if the lease expired as long as the original lease says it reverts to M2M).

Check the signature on the lease. Unfortunately there are unscrupulous owners/managers who sign other people’s signatures. Be sure you’re not seeing a signature that looks like another one you’ve seen.

Read the lease. Is there anything unusual in it? For example, I have seen leases with a provision preventing the lease from being assigned to a new manager. They sell the property, a new manager comes in, then the tenant has an issue and discovers this provision. Guess what, lease is null and void and you the new owner are out of luck.

You see a fee in the lease but it’s not in the rent roll? Is it being collected? Maybe off the books? Goes straight to the property manager? That’s a cost to the tenant and it has to be accounted for.

What if you find these problems. They all have to be solved. If the lease has issues, you need to work with the seller and your attorney to create a lease rider or some other addendum, and every tenant whose lease has this issue has to sign it. And they have to sign it well before the end of your feasibility period because if they don’t, you’re not going to want to move forward.

These are all reasons why you have to be aggressive early on with leases. Be clear about the books and records you require, give the seller a short amount of time to deliver them, and if they’re not delivered, your feasibility period needs to extend day for day.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.