Everyone at RE Mentor would like to take a quick moment to thank & think about all of those who have dedicated their lives to help us better our own:
May 272011
May 122011
Going deep into debt is generally considered a bad thing. People don’t like the idea of being at the mercy of a creditor, whether it’s Ebenezer Scrooge, MasterCard, or their neighborhood banker.
Fear of debt causes some investors to pay 100% cash for properties, which is a lousy way to leverage their money. Owning a building with zero debt (no mortgage) does not give you the best return on equity. Yes, your cash flow is great, but look at how much you had to invest to generate that cash flow.
Let’s say your Aunt Nellie left you $1 million. You could buy a $1 million apartment building with 6 units and pay all cash. If the units each generate $1,000 a month in rent, you’re $1 million gets you $6,000 a month.
However, if you split the $1 million into the down payments on five 6-flat apartment buildings (30 units total), your $1 million gets you $30,000 a month in rental income. You have mortgages now, of course, but you control five times the equity. Which is why I say, don’t just tell me what your cash flow alone is. Rather, tell me by how much cash flow you generate compared to how much you invested.
Effectively leveraging your cash and managing your debt gets you a higher ROE (Return On Equity). Going into debt can be a very good thing. In fact, it’s how you get ultra rich.
Choose your lenders as carefully as you choose your properties. Here are 5 major money sources:
Local Banks: Neighborhood lenders generally have shorter terms and higher interest rates. They like to keep their loans close to home and work with people they know, thus you can build long-term relationships. When you need money to rehab, use a local bank.
National Lenders: The big-name banks tend not to hold the loan. Rather, they sell it on the secondary market. Use a national lender when you have a straightforward deal that does not require creative financing.
Conduit Lenders: When you get into the big leagues and want to borrow millions of dollars, you can approach Wall Street. Firms like Citigroup pool their loans into mortgage-backed securities that they sell on the open market. Other mega lenders include insurance companies and pension funds.
Private Investors: If you’re just starting out, your most viable path will be to partner with private investors. You can quickly get the down payment or even enough funds to pay 100% cash. A student of mine went to his first local investment club and within a week had $250,000 in funds committed from private investors.
Friends and Family: Finally, although you can’t choose your relatives you can choose whether or not to borrow money from them. Just remember that any dysfunctional relationships your family may possess will likely be put on steroids when money is involved. And perhaps nothing ruins a friendship faster than borrowing money.
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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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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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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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April is officially “Earth Month” and Friday of this week marks the 41st anniversary of Earth Day. I did some “Q&D” (Quick and Dirty) research and came up with the 5 easiest ideas your tenants can get on the Green bandwagon. The light bulb has long been the graphic symbol for a bright idea, so lets start right there with one of the biggest wastes of energy on the plant… the antiquated incandescent light bulb.
1. Kick out Thomas Edison
Thomas Edison may have invented the familiar bubble-shaped incandescent light, but it’s time he got the LED out. Incandescent bulbs are notorious wasters of energy. If you pay the electric utilities at your building, you have an even greater incentive to make the switch.
2. Grow a green thumb
Indoor plants clean the air. More plants mean cleaner air. Your model apartment should make good use of them because it drops the hint that green is beautiful and welcome.
3. Use the dishwasher
Dishwashers use less water and less soap. Plus, they are more sanitary. And when you’re finished in the kitchen, turn off the light. It is a massive waste of energy to light space that nobody is using.
4. Be a bag-free person
Instead of accepting plastic bags from retailers, bring your own tote. Many supermarkets sell tote bags and you may even be able to strike up a deal with a green-friendly retailer near your apartment complex and get free tote bags for your tenants. (There’s an added value: when you carry a tote you tend to buy only what you need because you carry less. So now you’re not only saving the planet, you’re saving money.)
5. Change by degree
Adjust the thermostat to be one degree cooler in winter and one degree warmer in summer. “Spring ahead; fall back” refers to changing the clocks, but now it can also refer to the thermostat. If you like it set at 72 in the summer, set it ahead to 73. If you like 76 in the winter, set it back to 75.The temperature difference is negligible, but multiply that slight energy reduction by tens of millions of thermostats around the globe one degree makes a big difference.
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A double-dip is great if you’re talking ice cream. But if the subject is the U.S economy it’s not so good.
Some experts predict the economy is headed for a double-dip… a very rocky road indeed. The culprit is consumer confidence, which is dropping fast: March saw the 10th steepest decline on record. Gloomy consumers purchase less. And since homegrown U.S. consumers account for 70% of our economy, that spells trouble.
Why are U.S. consumers depressed? A possible war with Libya and the meltdown of Japan certainly made for gloomy headlines. But other factors are closer to home and our pocketbooks… Hourly wages continue to fall, which deflates consumer confidence like a pin to a balloon. And home prices continue to decline, which makes people feel poorer as their primary nest egg evaporates. The S&P/Case-Shiller 20-City Home Price Index dropped 3.1% in the year ending this past January, which has some housing industry watchers predicting that the market bottom has not been reached and a double-dip is just around the corner.
You’ll always get conflicting predictions on the Web. Take the idea of buying a home right now… One expert will point to the combo of cheap prices and low interest rates and say it is a great time to buy. Another expert will say signals are mixed and you should wait at least until the foreclosure backlog stops depressing prices. Still others say houses don’t beat inflation and you should rent.
So… should you wait until consumer attitudes improve before you invest in commercial real estate? Well, that’s kind of like striking gold but waiting for the price of gold to rise before staking your claim.
Let me explain:
If you do your real estate homework and follow my strategies, you’ll have found and negotiated a stellar real estate deal that gives you positive cash flow, instant equity, and possibly a big check made out to you at closing. Plus, the property will be in an emerging real estate market that has it’s own micro economy acting independently of the national trend. There’s no reason to put on the breaks, no matter what economists, politicians and pundits are predicting on the web.
When you have a great deal, you have a great deal. And that alone is all the reason you need to take action.
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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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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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