BawldGuy Development Rules — Price Isn’t Everything By A Long Shot
Posted @ 12:59 am - Filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Builders, Sominex Account
Have you noticed lately how Deals of the Century are comin’ out of the woodwork these days? Got an email a few days ago touting stuff in several cities. The emphasis was on price and cash flow.
I know folks out there in real estate investment land get all fluttery when they think they’re buying something below market. We all do, including me. Add their favorite spice to the mix — cash flow — and we’re talkin’ party time.
Reality Check
For every project Josh and I get excited about, we waste our time viewing at least 10, uh, less desirable developments. We don’t start the car, or click print for our Southwest tickets based on price — ever, never — without exception. Price is at best, third on our list of things that make a hill of beans difference to us.
The Location
Worst case scenario, has to be B+. A bad or mediocre location cannot be solved without Divine intervention. It is what it is. This requires not only our own tootsies on the ground, but experienced local knowledge. In San Diego for instance, I can show an outsider some neighborhoods that would impress. I wouldn’t let Mom live there with a body guard, but they’d impress an outsider. The same is true where you live, right? Thought so.
BawldGuy Development Rule: Quality of location cannot be compromised — exceptions allowed through Divine intervention only.
Operating Expenses
This one’s easy. Templates are fine, but the line item approach rules. Look, after nearly 40 years of this, I know about where the expenses are gonna land. This isn’t rocket science. For the most part, sixth grade math’ll do ya just fine. Don’t be fooled by the most aggravating comment heard in so called investment circles. “Well, you know, the annual income is around $20,000, and the expenses are running right at $4,000 a year.” Huh?! Is your rich uncle gonna be renting from you, and paying some of the expenses?
Different regions will have higher/lower amounts for each expense. Real estate taxes in California for a $225,000 property would be in the range of $2,500-3,300 yearly. ‘Course you’d be living in about 1999, but that’s a whole different post. 
In Texas those same taxes would be about a zillion bucks. You have to account for that difference in expenses everywhere you go — every single time — for every single property. In Arizona tenants pay expenses not normally paid by tenants in California. Oops, didn’t know that? Refer to local knowledge above.
Making mistakes on operating expenses before you buy, will keep Murphy away from you. He doesn’t like competition.
BawldGuy Development Rule: Every expense is listed. If you don’t know the number, find out, cuz I guarantee you it ain’t a state secret. Our local teams learn quickly about Brown and Brown’s policy on this subject. No guessing allowed — we ain’t playin’ Go Fish.
Quality of Construction
Does this even have to be discussed? If it’s shoddy, we’re down the road. This also covers floor plans designed by the builder’s wife, who took a class once at the local junior college. Compromise on this one, and you’ll surely have problems at every stop along the way. Maintenance will skyrocket. Tenants will move out. Rents will plummet. Need more? Didn’t think so.
BawldGuy Development Rule: Our own inspectors spend as much time as needed to give us the real story. Don’t need that cuz the property’s never been lived in? We’ve found some of the worst screw-ups in those. Think builders will point them out? When you were little, did the Easter Bunny hide eggs in your yard too?
Professional Property Management
Again — another no-brainer. Let’s review: It’s in another state, or at least another part of your state. Besides, let’s see a show of hands. Who wants to manage a bunch of rentals — hundreds if not over a thousand miles from home? Is this part of the discussion really necessary?
BawldGuy Development Rule: Professional property management will be hired before one property is acquired by one client. The only exception to this rule are days when the sun sets in the east.
Cash Flow
In my experience, 80% of our real estate investment clients want their capital to grow. They want cash flow, but when they retire, not when they’re making more money than every before at their day job.
Cash flow only comes into play while we’re ensuring properties pay for themselves or better. We do all our analysis before and after tax. If a project isn’t showing positive cash flow after tax — it gets smaller and smaller in our rear view mirror quickly. We structure them to be break even or positive before taxes too. However, sometimes Murphy appears, and changes that plan. You know, 3% vacancy rates turn into 7% without the courtesy of even a phone call.
This is why we won’t work with clients until we’ve ascertained the amount and relative liquidity of their Sominex Account. (See podcasts on Purposeful Planning, or search for Sominex Account. Translation: Cash Reserves)
For those in fact looking for cash flow, we’re constantly looking for projects suited for those investors. They’re harder to find. When we do find them, we sell them out quickly. We think we may have just located a few dozen promising cash flow properties. We’re inches away from securing them.
Price and Terms
This is almost always the last thing on the list, at least for us. This is because most projects we fly to see, simply don’t get to this point. If we have arrived at this point, it gets — interesting.
Details aren’t important here. Price and terms tend to take care of themselves when the project has a B+ location or better, is built well — with a stellar floor plan — and don’t seem to be flying off the shelves. Different regions call for slightly difference approaches. Different financing. Higher or lower down payment amounts. Seller financing. Buyer’s costs paid — lender, escrow & title, an appliance or two, window coverings, and a free 10 word coffee order at Starbucks.
Experts are coming out of the woodwork. Everybody’s gotta deal. Most of ‘em I wouldn’t wish on folks I don’t care for, much less my own clients. Price and cash flow seem to be the main attractions.
Everywhere we go, we speak with investors who tell us their personal stories of woe. It’s almost predictable — they went for price almost exclusively. If they’d have looked at all the other factors involved, (not all of them listed in this post, by the way) they would’ve bought tickets to a movie that day instead.
You only pay once for a bad movie, and you generally won’t lose sleep over it — not by a long shot.
This entry was posted on Friday, November 30th, 2007 at 12:59 am and is filed under Real Estate Investing, Purposeful Planning, Real Estate Markets, Builders, Sominex Account. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
