Posted on February 22, 2008 @ 12:05 am - Written by BawldGuy
This market, for the most part, is terrible. Plain and simple, it’s a long way from just being down a tad. Though not nearly the worst I’ve seen, it’s bad enough. Is it bad enough for you too? 
What would motivate you to trigger a tax deferred (1031) exchange into another region in another state? I promise to give you more than one reason.
We’ll get back to that.
There are a couple reasons, generically speaking, motivating folks to invest or execute a tax deferred exchange. One is to end up with more money than they have now. The other is to create more cash flow (income) than they have now. Sophisticated stuff, eh?
The people reasons are infinite, and for the most part absolutely appropriate. Obviously whether for growth or income, retirement is the #1 reason people invest in real estate. The end game is always the same — the highest retirement income possible. They also want to easily pay for their kids’ education. Or be able to take care of their parents if necessary.
Let’s take a mini-detour here for a BawldGuy Axiom: More is better than less. Sooner is better than later. More, sooner, is much mo’ better.
Paradox: Sometimes selling for less, means ending up with more.
Focus on what’s happening now. Loan underwriting has been tightened. (New candidate for understatement of the year.) Selling real estate has become more difficult, or as we’ve discovered in some markets, more than difficult. Prices have gone down — more or less in different markets. The plain truth is, your property isn’t worth what it used to be. Usually though, it’s just not that big of a deal.
Let me show you why.
Investors who wish to sell in this market think denial is a valuable trait. They don’t respond well to the naked facts of today’s market reality. Sometimes they’re even unkind. That’s because maybe they haven’t thought this market all the way through.
Now it’s time to ‘get back to that’.
I’ve been through this kinda market a few times before. You know, the whole been there, done that thing. The script doesn’t change. The scenery is different, but that’s about it. This correction is worse than ‘74-’75 — but not as ugly as the early ’90’s. Many, including Warren Buffet most recently, have made the observation that the early ’80’s were worse. It’s not close, at least so far.
There are some real perks to a down market for those in the right position, and armed with a well thought out Purposeful Plan.
Let’s talk about what the right position is.
The rightest position is having a boatload of cash burning a hole in your Levi’s. Next best? An investment property(s) with sufficient equity to do some serious damage. The next in line is your home with lots of accessible and affordable equity. Affordable meaning, of course, you can make the potentially increased monthly payments that could result when taking money out.
For now, we’ll bypass 1 & 3. Both involve showing up as the Buyer With Cash, which in this market, doesn’t exactly make you a pariah. Instead, let’s talk about the investors holding income property with a good bit of equity.
Let’s not get caught in the trap in which amateurs sometimes find themselves. They’ll use a formula found in some real estate investment book, telling them to make their move once their equity reaches a particular percentage of the property’s value. For instance, 40%. That figure might work well in one region, while it’s seriously way late in another.
There are too many factors involved to handcuff yourself to impotent one size fits all templates. Numbers may or may not work the same in different regions. Kingman, Arizona ain’t Mansfield, Texas. Southern California isn’t Boise, and Kansas City is just not comparable to Phoenix.
This is where the pro comes in. I’m in San Diego. Let’s say you’re in, ah, Kansas City. A duplex in San Diego goes these days for $450-700,000 give or take. In Kansas City you could probably go to Duplexes R Us and get 2-3 duplexes for that much. So if you have a SD duplex worth $600,000 with only $200,000 gross equity, the average owner would probably role their eyes at the thought of exchanging their equity elsewhere — especially in this market.
Looking more closely, we see the net equity of the SD duplex is a little over $150,000. If that were a brand new KC duplex, with a value of $235,000 and the same percentage equity to value — the net would be far less, around $60,000.
Let’s also agree the prices for both properties are easily less than they’d have received a couple years ago. Hence, the anxiety. “Why should I exchange, losing money in the process?” Of course, that’s a false statement based upon a false premise. (Again, more on that one later.) Because your value has fallen from its high point, doesn’t mean you’ve lost money. It simply means your crystal ball failed you — again — not telling you the exact day the damn thing was worth the most.
What’s the most relevant question at this point?
Easy.
Will a tax deferred (1031) exchange result in your position being significantly improved? Yes? or No? If it’s not a no-brainer — don’t do it.
In many of today’s growth regions an exchanger can better their position — sometimes more than significantly. The SD investor? (Or, just for giggles, how ’bout the Palo Alto investor? Their prices make San Diego look like the Dollar Store.) He could easily go from selling a single, 40 year old duplex to owning nearly $1.5 Million in new or nearly new properties. The KC guy? His net wasn’t nearly as much, but given the same opportunity, they could just as easily acquire triple (or almost) the value of what they left — really. No kiddin’.
Still, I hear the whispering.
That is pretty cool, but don’t you understand, we’re taking a ‘loss’ here. Why do that?
I’ll let the ‘loss’ propaganda pass. You don’t think anyone’s actually feeling sorry for you, do you?
In today’s markets, we’re negotiating deals for our clients, some as buyers, some as exchangers, saving them literally thousands of dollars. In some cases, this is not only in property value discounts, 
but upfront money too. Money in various costs and immediately require capital expenditures. Even when the deal is fine without a discount, our clients are miles ahead of where they started.
Huh? What’d he just say?
Either no closing costs, or 60-80% reduced closing costs.
Other credits based upon the property and lender.
In the most recent transactions — most recent meaning they haven’t even closed escrow yet — the average upfront savings (credits/upgrades) per client turns out to be over $15,000! Add to that the properties were bought as duplexes but will be sold as two separate units, and what have you discovered?
Again — easy.
All that money you ‘lost’? You made it all back and more simply by closing escrow on your exchange.
We won’t even talk about the next 10 years, except to make one observation. 
The difference in capital growth and additional cash flow over that period of time, will be easily measured in hundreds of thousands, if not in excess of a million dollars. It’s my intention you take that statement literally. Your choices could be crying in your beer about ‘what could have been’, or breakin’ out the champagne to celebrate your great judgment.
In the case of the SD investor, who thought they’d lost over $50,000? They gained $60,000 by their ability to buy with almost no closing costs, loan points, or paying for various upgrades. I’ll grant you it sounds pretty mundane, so I’ll make you a deal. If you don’t want the savings, pass ‘em on to me.
So far, I’ve already had a client who was able to purchase an extra ‘bonus’ property as a direct result of all the savings on his earlier purchases. That extra property will result in at least an additional half a million bucks over the next 15-20 years. Again — please take that statement literally.
Seriously, most of the properties available today, can be acquired with prudent leverage — as were the properties mentioned above. In fact, each of those properties, very conservatively speaking, were put into escrow for our clients with low downs, and fixed rate loans. They all break even or better.
Now, I double-dog dare you to tell me again about how much you’ll lose by selling your properties?
If you come here regularly, you know I like to have fun while passing on my experience and expertise.
Today was no different, but there’s a serious lesson to learn here.
Even without gaining any of the advantages shown so far, you can still sell for far less than you think your property’s worth and come out way ahead.
Think about what happens when you triple the value of what your equity controls. In SD you’re going up what, 0% a year lately? It’s far more likely decreased in value, and you’re acutely aware of that fact. Imagine our guy with the SD duplex, selling for $600,000 — ending up with nearly $1.5 Million in property. At only 3.5% appreciation the first year of ownership, he’ll have made more than $52,000 in increased value. Surveys show that beats 0% on $600,000 11 times outa 10.
Furthermore, they’re now in a much more flexible position, as instead of one property, they now have six. They’re all new. Their tax shelter has nearly quadrupled. Their capital growth rate has almost shot off the chart. And please folks, remember that capital growth, NOT appreciation is the name of the game.
Oh, and by the way — their yearly after tax cash flow has gone from about $5,000 to $15,000.
Not exchanging out of areas like California (Which includes you, Palo Alto.), Arizona, the northwest, and almost the entire midwest, makes no sense.
This is the kinda market where selling for a so called loss is actually the most profitable thing you could do. Really. 
Moving your equity, when it’s (And therefore, you too.) essentially mired in quicksand, puts your Purposeful Plan back into the game. Until you, as a real estate investor, realize this, your Plan will remain on hold. (stuck?) Meanwhile, your life isn’t on hold, and more importantly, well — tick tock. Another year, another birthday.
Time stops for nobody.
Don’t be captive to the whims of the market. Instead, turn this market into your personal capital growth machine. Learn how to win by selling for what everyone else thinks is a loss.
In this market you can truly lose your way into a far superior position.
Try it, you’ll like it. Be dumb like a fox.
Posted on February 20, 2008 @ 11:47 pm - Written by BawldGuy
While real estate investment offers plenty of benefits, sometimes it also provides, uh, time challenges. There are situations when time is your best friend. Sometimes it’s not much of a factor. Most often it’s a minor irritation requiring small tasks accomplished during transactions. It’s all part of what I’ve called Document Dictatorship. Sign this, initial that, scan, copy, email, FedEx, blah blah blah.
You’ll know it when Time with a capital T ceases being your best bud.
The following list isn’t all inclusive, but will give you a peak into time critical scenarios.
The Inspection Period When Buying
It’s different in each state but generally the buyer is allowed 10-17 days to do all of his inspections. In Texas our contracts allow for 10 days. Texas also has a clause for an additional amount of money to pay for the inspection period. The money goes towards the purchase price if you close the sale, but to the seller if not. (This money is separate from your deposit.) Our contracts charge a courtesy $200 for this. I like this approach. Make sure your ducks are in a row, so when your time starts running you’re not wasting 2-3 days scheduling various inspections. Remember, you’re interested in the reports generated by the inspections. Reports take time. Going over them takes time. Writing requests for repairs takes time. Tick tock. If the seller is particularly cold blooded your deal could go south as well as your money.
Your Lender
Here’s where time is an assassin. Since investors are used to contractual timelines they tend to slow play their lenders. This is just plain dumb on so many levels. Seriously? You should time how long it takes for you to respond to anything your lender wants with a stopwatch.
Your delay can cause you to lose out on lower rates — move it or lose it.
When your lender emails or calls — get to them NOW! They’re your best friend.
When asked to FedEx info — don’t use snail mail. The lender needed it yesterday.
Murphy lives with lenders — act accordingly and expect underwriting silliness.
The Delayed Tax Deferred Exchange (1031)
Thankfully there are only two ‘drop dead’ dates for this one. (normally) Even better, they both begin on the same date — which is the close of escrow of the property you’re selling. The IRC refers to it often as the Relinquished Property. Think they’ll believe your excuse about the dog eating your homework? When it comes to these deadlines yer the nail and the IRS is the hammer. There will be no debate if you dawdle. How serious are they? They count Christmas regardless. ‘Nuff said.
1. You have 45 days in which to Identify the property(s) you are to Acquire. This is easily documented. They don’t take prisoners when it comes to this deadline.
These properties are often referred to by guys like me as Uplegs. (slang)
2. You have 180 days in which to close the property(s) you Identified. (Your uplegs)
Fail to meet either one of these two deadlines and your exchange is steam in the air. You either identified on or before the 45th day or you didn’t. Same with closing on or before the 180th day. Again — both time periods begin counting on the day you close the sale of the property you’re relinquishing.
The Current Market
The window is closing as I write this. There are those who will disagree. My frequent flyer miles say differently.
Everywhere we go, inventory is becoming more scarce. We’re already feeling shut out of certain regions because some of those sitting on the fence have begun their swan dives into the pool. Once builder inventory is decreased past a certain point, the really cool deals will mostly be history. Those who get in before that happens will brag about it years from now when their relatives are over for Thanksgiving. Don’t cost yourself that opportunity.
Starting Your Purposeful Plan Past 50
This is where it can get tricky. The problem is this — if 
you’re retiring at 65, you have 15 years to make it happen. Sounds like a long time. Trust me, 15 years can fly by — but you already know that since you’re already 50. Most folks that age begin to edge over to the financially conservative side. It’s a natural tendency. But if ever there was a scenario in which time isn’t your friend — it’s now. At this point time can get downright mean spirited.
I’m not saying you should swing from the chandeliers — just don’t go all Grandpa on yourself. Here’s the real punch line. If you don’t heed the clock ticking away, getting louder each birthday, you’ll find yourself one morning, 59 years old and having to accomplish 10-12 years worth of investing in just six years. Tick Tock.
Don’t do that to yourself. Be your own best friend. Once you do that, sometimes time sidles over and smiles on you.
Posted on February 7, 2008 @ 7:07 pm - Written by BawldGuy
As Josh and I go from region to region we’re able to meet current and beginning investors. Depending upon the city and the host, we speak to 2-4 seminar groups averaging 10-15 ‘entities’. (Single, married, or partnership investors.) An ‘A’ list of questions has emerged as a common thread, no matter where we speak.
Why is (fill in region) better than ours?
If their taxes are so much higher than ours, why is the price the same?
Should we fly to (fill in region) to see the properties & the management?
Why is (Dallas, Boise, Denver, Austin, Kansas City) better than our city?
Generally speaking it may not be. If you’re from Detroit, (and with apologies and sympathy) pretty much everywhere is a better destination for your investment capital. Every region is different and will have its own set of pros and cons.
Let’s review some of the pros & cons first.
Wanna go to one of the great investment spots in Texas? Be prepared for abject terror when you see what they charge for real estate taxes. It’s just silly. Don’t bias yourself against a local market by overlaying a statewide factor. It’s only one factor — use it but don’t endow with power it may not have. You’ll miss some great opportunities.
Wanna go to Boise?
CON — Due to the current market correction, things change there in real time faster than you can recognize the change. I’m convinced there were more wannabe investors per capita in Boise than even Las Vegas or Phoenix. They’ve learned to walk on their hands by watching all the upside down investors move around town.
I’ve already seen vacancy rates go from over 10% to under 4% to “Why isn’t my dang unit rented yet?” And all that took place in far less than 12 months. Rent/price ratios don’t allow levels of leverage available in other solid markets.
PRO — Nobody doesn’t like Boise! Four seasons, none of which are extreme. Demographics studies all showing a doubling of their population by around 2021. A culture more reminiscent of Mayberry than a typical half million population area. Virtually unlimited outdoor recreation — 20 minutes to 2 hours drive away. Family oriented lifestyle — see Mayberry reference. Job producer. Growing job market. It’s also the state capital, almost always a positive.
Like Austin do ya?
CON — Been there a few times now, and it so reminds me of San Diego sans beaches. I love Austin because it has such a young and educated population. This bodes well for the future. Duh. Still, though rents are rising as we watch, surely a good thing, downtown is about to drown in new condos.
Apparently they didn’t watch the movie — Downtown San Diego Condos Slump. It was in all the theatres.
PRO — Austin rocks! Every possible type neighborhood is there. GenX, Y, Boomer, hi-tech, and it’s all green. They’re maniacal about preserving open space. The prices start below the affordable line. No matter what you want there, it’s probably lower priced than almost anywhere else you’ll look — as long as the area is actually comparable. Remember, I’ve likened Austin to San Diego, so the standard is high. Their rents are on an upward swing, which should be a trend. The job market is fabulous and you can’t swing a dead cat without running into a college or university. It’s the state capital which never hurts. They’re possibly the youngest city of their size in the country — a plus.
You a Rocky Mountain fan?
CON — The problem? It takes more down payment to make things work ‘cuz the rents aren’t as high as other areas. For those wanting better leverage this means adjustable rate loans, which these days are wicked on the margin — 
as opposed to the good ol’ days. Where I once used neg-am loans, I now avoid them with rare exception. They’ve morphed from a tool in our financing quiver to a bad apple.
PRO — Denver is awesome. Did you realize much of the California brain drain ended up there? Yep, a whole bunch. It’s already showing. They’ve already voted in a new rapid transit light rail system, which will be ready in 4-5 years. There are current and planned projects all along the route. Every pro with whom I’ve spoken says the same thing — Denver is gonna blow up in a very positive way.
Yer a good ol’ boy who’s always liked Dallas?
CON — Understand though the metroplex is huge, it’s a double edged sword of sorts. Mostly it’s a good thing, but for those who are allergic to the whole metropolis thing, you may want to go elsewhere. Of course, we’re staying on the edges, avoiding the noise. Still, at 6.5 million people and counting,
it’s already more than the combined population of San Diego and Phoenix. (county populations) (Picture is Mansfield, TX)
PRO — I can’t get enough of the Dallas area myself. Again, we’re goin’ to the growth paths, planning to cross our capital with the inevitable economic growth. What we’ve seen many times there is a hospital rising 2-4 stories with an adjoining medical clinic. Hospitals are for-profit operations, but they’re very risk averse. If they’re planting roots in a new area, we pay attention. They know something very cool about the area, and it ain’t how good the BBQ is.
Is the land of BBQ, Kansas City your preference?
CON — For the same money per unit their annual rents are lower than some areas mentioned here. Also, the city is bipolar for Heaven’s sake. Pick a state, wouldya? As others with predictably cold snowy winters, their rental markets kinda sorta blow chunks when potential renters are shivering. 
Duh. Since we know winter will come every year, we simply plan. Another duh.
PRO — KC is much like Boise in that their culture is heavily tilted towards the family. They also are known for living below their means. This is seen in their high national ranking for disposable income. High disposable income is great for almost every part of a local economy. They’re not wasting money on a new Lexus, but have plenty for all the local businesses. Tenants are of higher quality. There’s more money available for down payments. And on and on. Jobs? KC is one of the places to be. Expansion is happening everywhere. We couldn’t be on a freeway for half a mile before a new project was pointed out. Business loves KC.
Love San Diego?
CON — Me too — just not in any way shape or form as an investment destination. You want an example? Always ready to serve.
Duplexes in a very cool area of La Mesa have been put on the market for as low as $430,000 recently. That’s more than $100,000 below ‘05 closed sales prices in the same exact neighborhood. Still, using 40% down will only net you a $160 positive annual cash flow. Yeah, that’s what I want. The same capital would get you about $1.5 Million worth of brand new duplexes in Texas. Geez, I dunno, a 50 year old So Cal duplex OR 6 brand new Texas duplexes. Go ahead, no rush, take yer time. We’ll wait.
What’s the tipping point?
Do you have enough for one property, or several? I’m no fan of diversification, but diversifying your real estate investments via geography is a luxury you should include in your Plan if possible. IBM having a bad year in Austin doesn’t necessarily hurt KC, or even Dallas for that matter. A problem in Boise with major local employers wouldn’t be a problem for Denver or anywhere else.
Also, if you’re into capital growth and investing a couple hundred grand or more, I’m a big fan of ‘down payment diversification’. I’ll be writing more on that soon, but it allows for a growing Sominex Account, plus acting as a separate kinda buffer during market corrections.
A tipping point shouldn’t be whether a potential investment candidate is local or not. Unless you’re a pro at this, it’s just not a factor. Don’t kid yourself about this. Keep in mind your capital doesn’t know and doesn’t care where it’s invested. You do — especially how that investment ends up on the return side. There’s nothing magical about your city — get over your control issues.
A Purposeful Plan is more important in these times than ever before. Look on the top right hand portion of this blog site for PODCASTS. Make time to listen to them, or do what many of my clients do and put them onto CD’s for use while driving. They have solid useable info.
The best tipping point?
The realization your retirement is getting closer each passing year. You’ll need more income by far than you’ll have sticking with the status quo. You’ll likely live longer than you might have thought. Acting to increase your retirement income now is the best thing you can do for your future.
Of course, living down the hall from one of your kids could be an option. Sound good to you?
Posted on December 16, 2007 @ 6:12 am - Written by BawldGuy
Late yesterday morning we held a seminar here in Austin. Those in attendance were friends of our hosts, Benn Rosales and his wife Lani. Our practice is to invite those who wish to join us for lunch after the seminar. Normally about 2-4 people will show up. Today, every single seminar attendee joined us for lunch. That’s a first. It’s simply never happened. Our best was several months ago in one of our Boise seminars when about half of those in attendance ate lunch with us.
Benn made an astute observation last night concerning the responses of those attending the seminar. As he was watching them, gauging their responses to the different concept explanations, he began to notice a common thread in their response pattern.
Every time I referred to either Purposeful Planning or doing something on purpose, they visibly perked up, many adding to their notebooks. I was of course pleased, but not surprised. Purposeful Planning has always had this affect on investors.
At lunch, a pretty formal affair, held at Fudrucker’s, the atmosphere is relaxed and more one on one. We talked a lot of real estate investment, but the latest in the baseball steroids to-do was brought up, along with all the normal topics.
Everything went as smooth as silk — a direct result of the organizers, Benn and Lani. My job was to show up with my shirt tucked in. Pastry, a couple kinds of burritos, and other cool stuff awaited people as they arrived. Everything those two do is first class then a little bit more. The three of us worked hard this weekend. Our days have started relatively early and ended relatively late. Our brains have slowly morphed into likenesses of the mashed potatoes and gravy we had for dinner with our chicken fried steaks.
Yeah, honey, the healthy diet I’ve been eating went to hell in a hand basket while I’ve been in Texas.
The best thing coming out of this working weekend has been the successful creation of a new language — BawldBennese. Slowly but surely, like mice making fewer and fewer wrong turns in a maze, Benn and I can just about communicate using the new language.
Lani is, how do I put it? Different? She’s different alright — in all the best ways. Smart, gracious, discerning, and possibly the best all around wife/assistant I’ve ever seen in action on the planet. Josh and I need a Lani, but we’d have to pay her six figures. Remember the movies back in the good ol’ days when the powerful exec had an assistant who seemed to make whatever was necessary happen like magic?
That’s Lani. It’s a good thing she’s Benn’s wife, cuz otherwise, he couldn’t afford her. Professionally they’re a well oiled machine and impressive as all get-out.
If it’s Sunday morning, I must be on my way to Dallas. The agenda there is twofold — conclude negotiations with a stellar builder and a good man on a couple dozen duplexes give or take — and hopefully meet Benn’s brother Michael to check out some pretty cool homes nearby. The ambiguity is intentional as we’ve gotta stay under the radar, remember?
A heartfelt thanks to Benn and Lani for a seamlessly executed weekend. Your gracious hospitality, attention to detail, and competence was appreciated — and the coffee cups are very cool. Can’t wait for our visit next month.
Posted on November 30, 2007 @ 12:59 am - Written by BawldGuy
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. Stuff happens. If a project isn’t positive after tax — easily — walk, no, run away.
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.