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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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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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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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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Over the past couple of months, I’ve been trying to tell you that the Commercial Real Estate wave is approaching, now it looks momentum is picking up:
From http://www.sfgate.com
Richmond, VA (PRWEB) November 17, 2010
After stumbling around on a wet playing field for three quarters, trying to establish momentum despite being mired in a soggy economy, the commercial real estate market has finally found its rhythm and is ready to snatch victory from the proverbial jaws of defeat. According to “Fourth Quarter Comeback,” the latest podcast produced by John B. Levy & Company (available online at www.jblevyco.com), institutional investors have switched from defense to offense, sending a clear signal to everyone on the sidelines that buyers have taken the field and that the outlook for the commercial real estate market is healthy.
“The real bright spot in commercial real estate is that CMBS 2.0 – the updated version of the old CMBS that fell off a cliff in 2007 – is back, and that’s no hype,” says Andy Little, partner at John B. Levy & Company. “We’re actually seeing a lot of deals getting done, and there’s a whole new depth to the market. While some businesses might look at the results of the mid-term elections and think we’ll have a lot more clarity going forward,” Little adds, “I believe we’ll have a lot more gridlock. Either way, commercial real estate is going to come out of all this just fine.”
One of the reasons Little is optimistic about the health and stability of the market is that he sees a pricing efficiency in place. Today, CMBS lenders are pricing loans within 5 to 10 basis points of each other. Six months ago, even three years ago, differences in loan prices ranged from 25 to 50 basis points. This tighter range of prices indicates that there are bond buyers in the market for CMBS securities and that there is a depth to those buyers.
“The mood of the institutional investor has changed,” says Little. “In the third quarter, investors took the defense off the field and put in the offense, and that move has set the stage for a fourth quarter comeback. What we need now is for banks to get back in the business of lending. There’s always a necessary tension between fear and greed that drives the market,” Little explains, “and banks need to stop operating in a fear mode and start working in the greed mode.”
Three of the four legs of the commercial real estate finance market are strong. Life insurance companies are actively lending, as is CMBS 2. The government sponsored entities – Fannie Mae and Freddie Mac – have remained strong throughout all this turbulence. The problem, according to Little, rests with banks. On the whole, banks just aren’t lending, and records show that they are still shedding real estate loans from their books.
“The top 25 banks – JP Morgan, Bank of America, Citibank, and the like – they’re going to lead us out of this,” says Little, “but it may take the next three to six months. But the smaller banks, the community banks . . . they’re another matter. Community banks are the ones who have the construction loans, who were doing retail. They are still heavily concentrated in real estate loans, and that problem will take some time to clear.”
Are you convinced yet? Hop on with me and my students and grow wealthy in this economy before it is too late! Call the office at 781-878-7114 and mention this article and my strategists will give you a free strategy session to see where you are in your real estate education and where you need to be next to be able to capitalize on this opportunity!
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Another article that you should find interesting:
From http://www.smartmoney.com
When Jana Sestili and her husband decided to move with their two children to a larger house in the Pittsburgh suburbs, some people thought they were taking a foolish risk. The refrain, says Sestili, was simple: “I don’t know how you’ll do this in this market.” But the couple ignored the doubters and forged ahead anyway. They sold their house for their asking price of $329,000, well above the $213,000 they’d spent to build it nine years ago. And they plowed the proceeds—and then some—into a four-bedroom, $400,000 dream house, complete with an in-ground pool, a brand-new kitchen and 4,500 square feet of living space. “For what’s in the house, we got a great price,” says Sestili, an official with the University of Pittsburgh’s alumni association.
It’s tempting to listen to the neighbors or glance at the latest headlines (foreclosures! falling home sales!) and cower on the sidelines of the real estate bust. But some folks are looking past today’s uncertain economy and concluding that in a number of markets real estate deals are just too good to pass up. Indeed, some housing experts have been arguing for two years now that with the combination of lower home prices and rock-bottom mortgage rates, the cost of buying a home is lower than it has been in years. David Berson, chief economist at the PMI Group, says that during the boom, the median sales price for a U.S. home reached 7.3 times disposable per capita income; today that ratio is five times. “Things are amazingly affordable,” he says.
Of course, just because homes prices have declined doesn’t mean they can’t go any lower. While careful buyers can find bargains in almost any market, experts say some cities look a lot better than others. According to PMI’s risk index, which uses measures like economic conditions and family income to predict the direction of home prices, more than a quarter of the country’s 381 metro areas have less than a 30 percent chance of seeing lower prices two years from now. (Pittsburgh’s risk: a modest 12 percent.) And many of them happen to be in the Heartland. That’s partly because while the coasts were booming, housing prices in much of the Midwest and South advanced at a slower pace, so they didn’t have as far to fall. Some of these places are also benefiting from a welcome dose of good news about the local economy, whether it’s a new ballpark in Omaha or a growing regional shale-gas industry bringing jobs to Pittsburgh.
Nationwide, the picture is fuzzier, with every shred of good news seemingly countered by bad news. Inventories of unsold homes are down 13 percent from their peak, but there’s still a 12-month supply at the current sales pace (in a healthy market, it’s more like a six-month supply). The government’s tax credit for home buyers helped for a while, but sales fell when the credit expired. Default notices have declined from their April 2009 peak, but they still approach 100,000 a month. Amid the crosscurrents, even real estate experts are stumped. “I don’t think anybody knows where the market’s going in the near future,” says Yale economist and housing guru Robert Shiller.
Years from now, of course, we’ll know the exact bottom of the housing market. In the meantime, experts say buyers can mitigate their risk by looking at markets with steady economies and low odds of falling prices. We scoured the numbers to find metro areas that appear to be past their bottom and where unemployment—a key measure of real estate health—is below the national average of 9.6 percent. The result: 20 metro areas where things may finally be looking up.
I saw this article this morning and thought that you should all read this:
– From http://www.foxbusiness.com
San Fransisco Bay-area couple Kate and Dale never expected to be landlords. But that’s exactly what happened when they decided to buy a three-bedroom townhouse for their daughter in her sophomore year at University of Washington in Seattle.“Some of the campus housing we saw was horrible, and it was expensive, too,” says Kate. “We decided we could create a safe, good quality home for her and we thought it would be a good investment on top of it.”
Kate and Dale represent a new trend in the already-popular college town real estate market: they’re called “parent investors,” a savvy group of homebuyers who are opting to purchase a house in their kids’ college town instead of spending money on rent or dorm fees. A new survey from Coldwell Banker found that 64% of its real estate agents are seeing a “significant number” of parents investing in homes for their kids to live in while attending university.
“Interest in college towns is always going to be high, especially for people who once went to school there — and people are seeing value in this investment,” says Jim Gillespie, CEO of Coldwell Banker.
The lure of college real estate appears to be recession-proof. Seventy-three percent of those surveyed said they see a significant number of investors buying homes near campus and renting them out despite the economic downturn, with only 21% seeing a decrease in this trend over the past five years.
For Kate and Dale, the investment didn’t exactly pay off in spades. The $520,000 townhouse they bought three years ago has dropped in value, so they’ve decided to hold on to the property for a few more years until the market turns around. (Their daughter Sarah has since graduated and moved out.) Still, Kate says the decision to buy a home saved her a lot of unnecessary worry. They installed a security system, it was close to campus and two roommates helped to pay the mortgage.
“The rent in some of these college towns is so high and in my mind, I’d rather pay myself rent,” she says.
Costs are a big factor: Room and board fees for 2010-2011 have seen a 4.6% jump at a public four-year state universities and a nearly 4% rise for private nonprofit universities, the College Board reports.
But not all college towns are as pricey as Seattle. Coldwell’s college home listing report provides the average home listing price of four-bedroom, two-bathroom properties for sale in markets home to the 120 schools in the Football Bowl Subdivision. The listing finds that nearly two-thirds of the college town markets have an average home listing price of less than $250,000.
Topping the most-affordable list is Muncie, Indiana — home to Ball State University – where the average home listing price is $105, 115. (By contrast, Stanford University’s Palo Alto, California is the most expensive college town market, with an average home listing price of $1,385,652.)
And college towns aren’t just for investors: Fifty-one percent of the survey respondents noted they’re seeing a lot of alumni homebuyers, and 49% see a significant number of retirees moving to their college town.
Gillespie is one of them. Last September he bought a 3-bedroom townhouse for $120,000 in Champaign, Illinois to be near his alma matter, the University of Illinois. He travels from his home in New Jersey to Champaign about six times a year, often to cheer on the Illinois Fighting Illini. He says the value of his home has already increased, and it will likely serve as his retirement home some day.
Besides the sporting events, college towns have plenty to offer in terms of culture, restaurants, medical facilities and a robust economy, Gillespie says.
“This is quintessential America. People have a special spot in their hearts for these places,” he says. “Some of the best times of their lives were spent in college.”
Markets in college-towns can rebound from a market drop very quickly. Have you ever thought about investing in college-housing?
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