Apartment Riches | Dave Lindahl - real estate investing

6 Early Warning Signs of a Bad Deal

May 022011

Your job as a real estate “rainmaker” is to find the deal and make it happen. Leave the building management and operations to others. The big money is made in the deal and that’s where your time is best spent.

Obviously you want to focus only on stellar deals. Forget the marginal ones. It takes just as much time to work on a deal that brings in peanuts as it does to lock down a deal that makes you wildly rich. There are 6 red flags that tell you quickly if a deal will be a time-waster. If you spot just one of these 6 warning signs, move on to the next potential property.

1. The numbers don’t add up.
The bottom line is you want to make a lot of money. If the numbers don’t add up and the seller won’t drop the price, or you can’t get better terms, move on.

2. Missing numbers.
If the seller can’t provide you with the year-to-date profit and loss statements, plus the actual numbers from the previous two years, move on to another deal.

3. Made-up numbers.
Pro forma numbers are pure guesswork. They may be educated guesswork, but they are still a projection. Lenders won’t give these made-up numbers any weight and neither should you.

4. Troubled property.
A property may look good on paper: The numbers are real and they add up. But a site visit paints a different picture… Major repairs are needed because the seller has been deferring the maintenance hoping to pass the headache on to the buyer. Don’t let it be you.

5. Wrong area.
Don’t spend your money trying to reverse a trend. If the neighborhood is in decline, the property carries that stigma. Tenants will be moving on, and so should you.

6. Months on the market.
Good properties go fast. Bad properties linger in the listings for month after month. With detective work you can figure out why it’s a dud. And that’s a viable learning experience. But your time will be better spent going after good deals.

You create a beautiful garden by getting rid of the weeds. It’s the same with building a real estate portfolio: you must quickly weed out the lousy candidates and focus only on the prime properties.

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Common Blunder No. 5: “I must do THIS deal!”

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Apr 252011

No matter what formula you use for analyzing a commercial property and deciding if it makes a solid investment, there is no “E” in the equation. “E” stands for emotion.

When I present my bootcamps on investing in apartment houses, there are always a couple of perplexed investors who come with stories about getting into deals that aren’t working out as they expected. For all practical purposes they’re taking a bath on the property and they want me to tell them how I’d fix it.

I’m glad they came to me for help. But the truth is, I never would have done the deal in the first place.

Yet invariably, they argue their rationale was solid. They remain convinced the square peg will fit into the round hole as long as they keep hammering away at it. What drives this wishful and irrational thinking? Emotion.

So I ask what “attracted” them to the property in the first place and I hear things like it was a trophy property and/or that other investors were also interested in it. Well, there isn’t a mathematical formula for “trophy,” so there’s your first clue that emotion has crept into their rationale. You don’t want a property because other investors want it. You want the property because the numbers work.

When I say this, I may hear that the “pro forma” numbers were solid. I’m quick to point out that pro forma numbers are fictitious. That’s like buying a car and finding out later that the 35 miles-per-gallon quoted by the seller was based on your putting in a different engine once you bought the car.

A deal must be analyzed with actual current numbers only. Never take numbers based on a historically ideal scenario where the property is 100% occupied, as compared to the real 70% occupancy that it actually has today.

If the current numbers don’t indicate a workable deal, guess what that means: They don’t add up. You need to scrap the deal.

Making up for lost time is how you lose money

New investors often feel that they’re behind the eight ball; that they should have invested long ago and need to make up for lost time. They take the plunge now even though the tide has gone out. This is emotion-driven thinking and needs to be kept in check. Wait for the tide to return. Rest assured that real estate is a tremendous wealth-building vehicle and you can build wealth quickly — as long as you go by the real numbers and not your emotions.

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How to Get Really Good at Real Estate Investing in 3 Steps

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Apr 192011

It’s a classic joke… A man on the street asks a passerby: “How do I get to Carnegie Hall?” And the answer he gets is: “Practice, practice, practice.”

Practice makes perfect. But how do you “practice” real estate investing? You can (and must) regularly look for properties and analyze deals. You’re not out to buy every property you look at so don’t intimidate yourself by thinking that window-shopping obligates you in any way.

There are 3 steps to getting really good at real estate investing:

Step One: Look at deals regularly.

Your goal is to analyze as many deals as you can so that it becomes a habit. You want to “comparison shop” properties so that you learn to spot real diamonds from cut glass. Get used to plugging in the numbers. Today’s market is clogged with inventory. Take advantage of this vast learning opportunity.

Step Two: Negotiate regularly.

Your earliest negotiations with sellers are not binding. Think of it as a dress rehearsal, or better yet, as an audition. You’re letting the seller know the terms under which you wish to strike the deal. And you do that with a letter of intent (LOI). The LOI buys you time to do further due diligence. It does not buy the property.

Step Three: Make offers regularly.

Making an offer is not something you do once in a blue moon. Do it regularly. If that makes you nervous, all the more reason to bite the bullet. Remember, you’re not going to make an offer that isn’t exactly the terms you can live with. The idea is not to compromise yourself into submission. The idea is to get your offer accepted on your terms. If it is rejected, move on to the next property. Once the seller knows you’re moving on, you may see an about-face.

Real estate investing involves risk. The greatest risk, however, is doing nothing because you let every moneymaking opportunity slip away. If you stay on the sidelines, the wealth never comes to you.

The next greatest risk is dabbling. Do not go at it halfheartedly. You need to be serious if you’re going to make serious money. And only by regularly analyzing deals, making offers and negotiating will you gain the skill and confidence to know a good deal when you see it and then lock down an absolute killer deal that hands you the terms you want on a sliver platter.

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Debunking Myths – Part 1

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Apr 062011

A myth can hang around so long that people think it’s the absolute gospel truth. Lets look at some common sayings and bits of conventional wisdom that could do you more harm than good if you adhere to them religiously.

Myth: Location Location Location
Reality: Location is more important to your tenants than it is to you

Sorry, but this famous triptych truism is wrong. Certainly, location plays a role in determining value. But it is not the ONLY factor. Nor is it even the most important factor for you, the property owner. Imagine if doctors lived by the mantra “exercise, exercise, exercise.” It’s sound advice. But it’s not the remedy for a broken leg or sore throat.

To assess location, you must first profile the property’s target market. You can then determine if a property’s location gives you maximum exposure to the target market. For example, bedroom communities outside the city center have A.M. and P.M. sides of the street, indicating the commuter traffic flow into and out of the city. Traffic flow is the lifeblood of many retail businesses. Donut shops want to be located on the way to work. Pizza on the way home from work. Traffic flow is less important for offices, industrial and apartment buildings. Here, access to public services like rail and schools will likely be more critical than which side of the street the building sits on.

Location is more important to your tenants than it is to you. It’s a great marketing tool for getting tenants, but it is not the pedestal upon which you should be basing the value of your building.

Myth: Future value is worth paying for today
Reality: Future value should not factor in your purchase formula

You may have heard me say that the term “pro forma” is not Latin for “pretend,” but it might as well be. That is because nobody can predict the future. Pro forma numbers are a calculated guess – and the calculation is often meant to deceive you… sellers give you a work of fiction when they deliver their pro forma numbers.

You don’t buy a new car based on its future “collector value.” Likewise, when buying real estate, don’t let pro forma numbers drive you down the wrong path.

You want to buy a property based on actual numbers. Focus on the profit-and-loss statements: Get the year-to-date and go back two years as well. Also get the current rent roll. These 3 numbers will reveal the true story — no crystal ball required.

We’ll be looking at more myths in upcoming blogs… stay tuned.

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The Real Estate Social Network

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Apr 042011

We live in the age of the social network. Just as the Agricultural Age was railroaded by the Industrial Age, which was given the pink slip by the Information Age, it can be argued that we have now entered the Social Age. Networking on Facebook has become a national pastime. I would not be surprised if it clocks in more hours than football, baseball, and video games combined.

Networking is certainly an essential part of almost everyone’s career. Networking is especially important for real estate investors. It is how you find pocket listings… get inside information to analyze markets… find private investors to fund your deals… and locate trustworthy people to manage and maintain your properties. Whether you stick to your hometown and invest in local properties, or follow the trail of opportunity to emerging markets far from home… networking is how you build your power team.

Networking is also how your personal reputation spreads. All of which means if you do not have networking plan, then you’re probably going about it haphazardly and sporadically—and thus you’re not making the most of the opportunity.

You can build a good reputation by adhering to 3 simple rules:

1. Say what you’re going to do and do what you say.

2. Don’t be a pain in the butt.

3. Make doing business with you easy.

A reputation for being direct, honest and trustworthy is a prized asset. But lets face it, any nasty S.O.B. can also have a reputation for being direct. That’s why it’s also important to distinguish yourself being easy to work with. Some contractors may even choose you over other jobs where they’ll make more money because they know you present fewer hassles. Being nice pays off.

Time is Money For Everyone Involved

You can also add a fourth vital characteristic of a good reputation: timeliness. Just as you appreciate vendors who meet due-dates and don’t waste your time, others will appreciate the same from you.

When you’re checking references, it’s okay to ask how timely, honest, direct and easy to work with someone is. After all, people will be asking the same questions about you.

Another “Age” will inevitably come along and people will log off of the Social Age. In a sense, it has always been the Age of the Entrepreneur whether farmers, industrialists, communicators, or Internet junkies ruled the world. As an entrepreneur, you know how important it is to maximize all resource available to you. Don’t overlook the emerging power of the Social Network.

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My 3 Favorite Words

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Mar 292011

Ask 10 people on the street what “Cash Flow” is and it is likely 10 people won’t have a clue. That’s why none of them are millionaires.

Cash Flow, of course, is the tide of money that flows in and out of your financial life. When you have more money going out the door than coming in, you have the average debt-burdened American.

To be rich you need POSITIVE CASH FLOW, the 3 most powerful words in the English language (or any other language you translate it into.)

“Positive” cash flow means you are just the opposite of the average American: you have more money coming in than going out. Reaching this point was the definitive game changer in my life. You ought to write “Positive Cash Flow” on your bathroom mirror because this is the ultimate prize. It sets you free.

Now if you’re job brings in more money than you need, that’s great. But you’re still WORKING. With real estate, the cash comes in whether you work or not.

Here’s how positive cash flow creates effortless wealth with real estate…

Say a tenant pays $1,100 a month in rent for Unit 101. And this unit’s share of the mortgage and other building expenses is $600 a month. That’s gives you $500 a month in positive cash flow. You’re making $500 while the tenant pays off every penny of your investment.

Multiply $500 by every unit you own… a 3-unit building gives you $1,500 a month is extra cash… a 6-unit gives you $3,000. Life is good.

The money doesn’t end here. Your building is increasing in value. And there are big tax benefits. I hope you’re starting to see why owning an apartment building is better than a goldmine. During the Gold Rush days more than 99.99% of the prospectors went bust. But the entrepreneurs who sold them picks and shovels made millions. They had tapped into the real Mother Load: cash flow.

I want you to be the rich entrepreneur offering a basic service everyone needs: a roof over their heads. It’s a great trade off… you provide people with a place to live… and they provide you with Total Financial Security.

Financial freedom is a great thing. Look at what comes with it…

- No more unpaid bills piling up.
- No more credit card hassles or late payments.
- No more feeling you’re at the mercy of the economy.
- No more bosses or worries about keeping your job.

I could go on, but you get the point. Financial free is liberating and Positive Cash Flow is what makes it possible.

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Watch Out For Knob & Tube Wiring

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Mar 082011

Knob and tube wiring was very commonly used in the last century and if you are looking to buy a home that was built somewhere between 1880 and 1930, then you will probably find this kind of wiring in the house. No one uses this kind of wiring right now. We now have more loadbearing kinds of wiring and we need them too simply because of the fact that we use a lot many electrical devices than we were using back then. Hence, if you come across some property that has knob and tube wiring, you have to be very careful about it. It may not be the best idea to buy such a property, unless you intend to change all of its wiring, which could hike the expense of living in the house.

The knob and tube wiring used open wires, mostly made of copper, running through the floor or any flat line and held together by means of ceramic supports which were known as knobs. The knobs were used to support the wires on the flat surface and they were also used when wire intersections needed to be made.

Quite understandably, this kind of wiring poses huge electrical hazards. In those old homes, these kinds of wirings were installed in ‘safe’ rooms, which people didn’t frequent much. This was possible in those times because homes were bigger and people could afford to have a room solely for their wiring needs. Also, there was the fact that people had grown accustomed to such a kind of wiring in their homes and they knew how to live with it. In today’s times, it is simply inconceivable to have such a kind of wiring. The open wiring can be fatally dangerous to people living in the house, and we certainly don’t know how to live with such a kind of hazard. We cannot even begin to describe how lethal this kind of open wiring system could be to pets and children in the house. Knob and tube wiring is best avoided; there are no two ways about that.

You will find homes in which knob and tube wiring is present and insulated. Your real estate agent might tell you that because the wiring is insulated, it is safe. However, this is not the case. Knob and tube wiring can heat up the room significantly, and if such heating happens a lot of the time, it is possible that the insulation will melt down. This can pose a big risk of electrical fires and shocks. So, insulated or not, knob and tube wiring is always perilous. And, if you read between the lines here, you will have understood that knob and tube wiring can cause your home to become unduly hot.

Also, such wiring is only capable of driving a small amount of electrical power within the house. In those days, most of the electrical and electronic gadgets that we use today weren’t discovered. People still relied on their fireplaces for warmth and there were simple iceboxes to keep their foods cold. Today, each room consumes more electricity than a whole neighborhood did in the 1880s. Definitely, knob and tube wiring is not cut out for our electrical usage in the 2010s.

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Documents Needed When Buying a House with Cash

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Feb 152011

If you are in the fortunate position of being able to afford to buy a house using only cash, and with no requirement to rely upon the additional support of a commercial lender in order to make up the shortfall of the asking price, then you need to be aware that you will be required to produce some documentation.

The reason for the need for purchasers who conclude a transaction using cash only to produce relevant documentation is to prevent, deter, detect, and catch fraudulent and criminal activity.

Specifically, many criminals seek to launder their ill-gotten profits that they have made through their various criminal enterprises by the purchasing of real estate with cash. By making a large purchase with their dirty money, they then have a plausible and legitimate excuse for having such a significant amount of wealth to their name and so this can further muddy the waters for law enforcement who are trying to competently investigate the conduct of the criminal.

That said, purchasing a home with cash is actually much easier and speedier a transaction than by paying with alternate forms of credit such as with a home equity loan or mortgage, and the level of paperwork involved is fairly minimal. Once you have identified a particular property that you are interested in purchasing, make sure that you do your due diligence, determining the structural condition of the property along with a search of the title deeds of the property.

Should both of these searches (which are entirely voluntary by the way, however, it is strongly recommended in the most emphatic terms possible) turn up no adverse results, you will then need to initiate contact with the seller and provide them with an offer.

Once you and the seller have finally reached a consensus as to the purchase price, the next step will involve the purchase and sales agreements being verified and signed by a qualified property attorney. The attorney will probably require that you provide a bank statement, proof that you have the necessary amount of funds, along with photographic identification such as passport, drivers license etc. This both confirms that you do indeed have the requisite amount of funds and that you are actually legally competent and entitled to conclude the transaction in question.

In the interests of both safety and convenience, you may want to convert either all or part of the funds required for the final settlement of the transaction into cashier checks. The benefit of cashier checks is that unlike money, they can only ever be used by the recipient and so this means that if they are stolen, they can be easily traced and the thief apprehended.
Once the settlement has been duly concluded to the satisfaction of both parties to the transaction, the deeds will be transferred as appropriate. Your real estate attorney will be better able to explain the precise mechanics involved in this specific part of the process.

And there you have it! The property is now legally yours, for you to use as you see fit.

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Why You Need To Continue To Market Your Property

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Jan 272011

As Benjamin Franklin once very aptly noted:
“There is nothing certain in this life, save for death and taxes.”

Given the significant downturn that the US economy has taken in recent times as a result of the global recession and credit crunch, this has meant that unemployment levels have shot up, and more and more people are either bankrupt, facing bankruptcy or are out of work. In addition, the average credit rating has diminished which means that people find it harder than ever before to secure financial support from commercial lenders.

Because of their lack of money, both in terms of personal savings alongside their eligibility for loans, this means that the number of people who are able and willing to purchase property is at an all-time low. Indeed, many people are now having to cannibalize their pensions and saving accounts in an attempt to stem the ever increasing tide of debt that looms over them menacingly and threatens to engulf them entirely.

In these financial turbulent times, it is every man for himself and so the average purchaser is not going to lose much sleep over the idea that they let down a seller who they were going to purchase a home from.

Therefore, it is imperative that if you are selling your property that you keep your options open and are prepared to relist your property in the event that the transaction should fall through. Gazumping, as unpleasant and frustrating an act as it is, can never be truly contained or controlled, and when the economy is in distress, the temptation to perform gazumping rises in turn.

However, so far we have considered the worst case scenario for a seller, i.e. where they have a property for sale but they are unable to conclude and finalize the deal because the purchaser withdraws from the transaction due to financial constraints. The seller may actually receive an offer from a more qualified buyer, i.e. someone who is able to meet the full balance of the asking price in cash and immediately as opposed to an undecided purchaser who is trying to secure a loan from a bank.

By leaving the property listed on the open market, the seller will not only protect themselves from disappointment (not to mention loss) in the event that the current purchaser should withdraw, they can also potentially make more money. For example, a seller may have a property that is in a prime location with plenty of access to educational facilities which renders the property especially desirable to a couple who either have children or who are trying to conceive. Such a purchaser maybe more willing to pay above market value of the property in order to secure the property of their dreams, and this in turn means greater security, more money, not to mention peace of mind for the seller.

Never take anything for granted, especially when it comes to something as potentially lucrative as real estate.

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The Safe Island Technique When Talking to a Seller

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Jan 132011

When you are talking to a seller of a property, trying to get the best deal from them, you should inevitable gear up for a lot of questions. You are, after all, the buyer of property. As such, it is good if you get to know as much about the property as possible. This is where you can use the Safe Island Technique, which was popularized by an internationally famous speaker named Floyd Wickman. So, what is this Safe Island Technique all about and how does it help you in your selling process?

The Safe Island Technique is a way of getting to know everything in advance. This is wonderfully put into use by doctors. When they are performing any procedure on a patient, they continuously keep telling the patient what’s happening and what’s going to happen next. This removes the suspense from the daunting scary procedure and makes it not-so scary anymore.

This is what the Safe Island Technique is all about. When applied to the real estate selling process, it employs asking a lot of questions to the seller so that you know what is going to happen next.

Why does this become a good technique for handling real estate property investigations? The main factor here is that it removes the stress out. When you know what’s coming next, what part of the procedure is the next in line, then you aren’t unduly worried about what you will have to do next. It also helps put the sellers themselves at ease.

When you are going to see a property, you can make things easier on them by using this technique. For instance, you can tell them that you would like to ask some general questions about the property first. Then you would like them to show you the property. You would like them to tell you what you need to know. Like, tell you about the number of rooms in the house, the amenities and features available, the windows that open to the east, any potential problems and so on. This helps you make a proper judgment about what you would like to ask more about the property.

Then you tell them that you would like to sit down and discuss more about the property. This would be a talk about the price, and negotiations about the property could come in. you can tell them that you would like to bring in an assessor or inspector to professionally look over the property and give his or her opinion about it.

So, in short, the Safe Island Technique is a way of “guiding” the seller through the entire process. They are relaxed about what they are doing, because you have laid out to them what exactly they are supposed to do. There are no surprises waiting to be sprung, either on them or on you, and that makes the whole process become quite a streamlined process for both parties involved in the real estate selling process.

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Older Entries Newer Entries

6 Early Warning Signs of a Bad Deal

Common Blunder No. 5: “I must do THIS deal!”

How to Get Really Good at Real Estate Investing in 3 Steps

Debunking Myths – Part 1

The Real Estate Social Network

My 3 Favorite Words

Watch Out For Knob & Tube Wiring

Documents Needed When Buying a House with Cash

Why You Need To Continue To Market Your Property

The Safe Island Technique When Talking to a Seller

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