Posted on October 13, 2007 @ 10:57 pm - Written by BawldGuy
When we first decided it was time to get our investors out of San Diego and into areas much better positioned for both short and long term capital growth, we 
made a list of what we thought might be the perfect region. It was meant to describe what we hoped would be the best of all worlds. Any real estate investor will tell you, if they’re being honest, they have their own secret Wish List.
I have mine too. Of course, part of making out a list like that, is the hope it can come true. In the back of your mind, there’s that little voice telling you that somewhere there are properties described by what’s on the list. As you read this list, (which isn’t all inclusive, by the way) try to visualize what it would look like to you. Maybe you have a wish you think should be added.
Here’s mine.
Calling it a Wish List would be abusing understatement. (Full disclosure. 
)
Job creating economy with obvious diversification — not a single industry area.
Median home prices at levels affordable to the majority of the local work force.
High rent to price ratios — Low prices with High rents.
Apply Leverage while using fixed rate loans — break even or positive cash flow.
High quality construction employing user friendly floor plans and great architecture.
See what I mean by Wish List? Doesn’t it remind you of what you might have told Santa as a six year old? And the list goes on.
Vacancy rates under 5% — Lease up periods taking 4-6 weeks or less.
Purchase terms including seller picking up at least some of buyer’s closing costs.
Tenants with excellent credit and high paying jobs wishing to sign long term leases.
A+ locations in high demand by owner-occupying home buyers.
Upgraded counter-tops, molding, carpeting, landscaping, appliances, etc.
Near modern regional malls catering to upscale shoppers — magnets for money.
Do regions like this even exist in real life? Who’s kiddin’ whom here? Since it’s a Wish List, we’ll keep going. The best part about wishing for something is knowing it might actually come true some day, right?
The surrounding neighborhoods should be much more expensive than ours.
Commute time to and from work is 30 minutes or less.
Can be acquired below lender’s appraisal.
Competing properties should sell for more, and generate higher rents.
Crazy, insane curb appeal — it knocks the socks of all who drive up.
World class university in the region.
Multiple, high level, and diversified entertainment venues nearby.
The name of the subdivision should be BawldGuy Estates.
Hey, it’s my Wish List. You can wish for what you want on yours.
The properties we saw Austin are just about what you’d get if my Wish List was converted into reality.
Window of Opportunity
No kidding — I was excited about a new region for the first time in, well, a long time. The window to invest in Austin, in my opinion is gonna be good for awhile, but not a long while. The timer was set awhile ago. Remember the last time you said to yourself, “I could’ve, and I should’ve, and next time I will?”
Do yourself a favor — don’t find yourself saying that about Austin.
You’ll not hear about specific properties or projects on this blog. I’m keeping our Austin discoveries so far under the radar, we’re gonna redefine the very concept of stealthy.
Yep, going to Texas was a solid move. Austin?
A Wish List come true.
Posted on August 11, 2007 @ 1:36 am - Written by BawldGuy
That’s a bit much for a Saturday title, isn’t it?
We’re in what Grandma used to smile and call challenging times. 
She was the oldest of eight kids in the depression. The family lived in Missouri. This was one of my all time favorite stories about life at the very beginning of the depression.
Her dad, (my great-grandpa) had found work in Nebraska shucking corn of all things. But a job was a job and he packed his raggedy, taped up suitcase and told the family where he was going and why. That’s when Grandma, his oldest daughter, volunteered to go with him. She was 17-19 years old, I forget exactly, but her dad didn’t hesitate long before giving his assent. The family desperately needed the money. Having two money earners was a huge bonus.
Grandma said they got there by way of freight trains — really. She said in those dark days it wasn’t uncommon for whole families moving via that mode. I can’t imagine what it must have been like for a teenage girl in the worst economic days of America’s history, traveling with her dad by freight train car. And it was hot she said, even though it was very early fall. She remembered the ’30’s as much hotter than any other time since.
Anyway, they arrived in Nebraska and did get the jobs. They went from field to field in conditions that pretty much wouldn’t be allowed today. But that was the way it was. They didn’t whine and complain about how bad things were. They lived their lives — and got things done.
The jobs offered shucking corn in another state was viewed by Great-grandpa and Grandma as a golden opportunity to simply survive — while earning it fair and square. The money they earned, though absolutely paltry by any of today’s standards, allowed the family to make it through the winter. Not just because of the money they brought back, but because of the time that money bought for Great-grandpa. See, he was a preacher. Preachers didn’t exactly make the big coin in those days. That money not only helped the family survive, it brought Grandma, when they got back home, into contact with the guy who turned out to be — Grandpa. He was a preacher too.
She told me that story when I was around 35 or so. The look in her eyes was a new experience for me, because as she was talking, her mind was back in the ’30’s. She was living it all over again. When I asked her how Great-grandpa handled those times, she lit up with a look of pride only a daughter can have for her father.
She said, “Your great-grandpa acted just like he did over 20 years later when he was in much taller cotton.” She told me he never looked anything but relaxed and confident, even while rocking back and forth in the railroad car. It was just another job. One that, as head of a pretty big brood, was par for the course. In other words, he simply did what was necessary to do.
Grandma had never told me a story like before. It answered a lot of questions for me, that’s for sure. Like how was Grandma always so calm in what seemed to me to be bad times? When they were first married, later in the depression, Grandpa was already an artist. He was a preacher first, but his talent for painting was well known.
He had to use that talent to feed his family too. 
With a new wife, and my mom on the way, he had to paint store-front signs for a living. Honest work for sure, but not exactly what an artist dreams of. Grandma told me that story after Grandpa died in 1992. She said his biggest thrill, was being able to spend an extra 10ยข on a Friday afternoon once, for a couple big, nice pork chops. She said that dime was a pretty big deal back then — not to mention having thick pork chops for dinner. That dinner happened about 60 years or so before she told me about it, but you could tell it was one of her fondest, and proudest memories of Grandpa.
What does this have to do with real estate investment or retirement income? Is there some kind of connection with tax deferred (1031) exchanges and Purposeful Planning? Plenty.
The year she told me this story, I had two young kids, my own real estate firm (and its expenses) — and the worst set of national economic circumstances I’d ever seen. Times were tough. I’d done a couple small sales and exactly one tax deferred exchange that year — through June. The latest correction was underway when the S & L Crisis hit like a falling anvil. To make matters more challenging, two of San Diego’s largest employers took a powder and left the area. Wow! I was feeling pretty sorry for myself.
Grandma lived an hour away, and I wanted a day away from everything, 
so we packed up the kids and off to Grandma’s we went. She took one look at my hang-dog face, and asked me if some of her muffins would brighten my outlook. (Uh, yeah — they were only the best muffins in the free world.) As the kids played in the yard, and I was drinking coffee to chase down half a dozen raison/bran muffins, she sat down — with that look she got on her face when you’d disappointed her in some way.
Real estate was going through a tough time she said. It was very hard to make a lot of money, much less a simple living. I’d have to really get creative, work longer hours, and make a lot less money. I looked up and smiled — it wasn’t a happy look, trust me.
I was told in a stern voice, and in no uncertain terms, that I was to deal with these bad times the same way I did with good times — with hard work based upon integrity, and the knowledge that all things would work out. If she was anything, she was a woman with massive faith. She told me if Grandpa (who’d passed away a couple months earlier) could paint signs to feed his family, I could wear a suit and tie with a smile while doing what I already loved to do. She had fire in her eyes, which for such a happy and gentle woman was inspiring.
She said I was to work harder, longer, with a smile on my face and a song in my heart because even in very difficult times — I didn’t have to paint store signs to eat. 
I’ve never felt sorry for myself in bad times since. And those bad times lasted for another four long years. How bad were they? They were bad enough — I literally took a year off. I started another business — my version of painting store signs, and made it through just fine. If I’d known as much then as I know today, would things have been any different? I think so, but am not in anyway sure. I really don’t know.
So in this correction, which is not by anybody’s standard comparable to the early-mid ’90’s, I work harder, longer, and with as many clients as possible. My experience is helping regular folks to keep their Purposeful Plans moving forward, so their retirement income will not suffer. San Diego is horrible for investment property? Then find areas that are much better. So I have. Loans are harder to get and more expensive? Figure a way — there’s no crying during a 1031 exchange. You don’t kinda do an exchange. It’s executed on time or it isn’t an exchange. You get it done.
It’s times like these, when experience and the ability to see through all the happy talk and doomsday warnings can make the difference. What difference? The difference between becoming immobilized by fear, and making well thought out moves, based on prudent analysis and solid Purposeful Planning. Sometimes opportunities show up when we least expect them.
For Grandma it was finding a job a state and a freight train ride away in the midst of mind-numbing poverty. For us, today? It’s knowing that whatever this correction brings, it’s not even in the S & L Crisis league — much less the depression. And because that’s true, those of you who are able, can fly under the radar into growth areas where sellers are waiting with open arms. And just like those who bought San Diego property in the mid-’90’s — the sellers think the buyers are idiots.
Those idiots today? You know that answer, don’t you?
Many, many people, including me, think that’s possibly the perfect positive storm. Lenders in chaos, prices falling. Builders looking for a way out. And interest rates still at historical lows — though pretty costly these days.
We think our version of grasping opportunity and working harder and longer in today’s challenging times, includes opening an office in another state. It’s in no way remotely comparable to hopping a freight train car in order to work 12 hour days shucking corn. 
But it’s my way of following Grandma’s admonishment. Like I said — there was no whining around that woman. Period. She’d already shucked her share of corn — and reaped the benefits for a lifetime.
Great retirements are earned through hard work, faith, and the willingness to do what most folks just won’t. In times like these there are many, many opportunities to enhance the size and quality of your retirement income. The ability to prudently acquire investment properties in growth regions during hard times is rare. In almost 40 years this is only the third time I’ve seen that kind of opportunity.
Great-grandpa and Grandma had their own Plan to get through the winter. Hop the train — get the jobs — shuck the corn — come home with the money.
Ready to fly under the radar and start some of your own shucking? These times, especially for those owning investment properties in high priced and stalled, sluggish markets — are the perfect times for such a move. Sell low — but buy lower — and in a far better market(s).
Grandma would be proud of you.
Posted on August 8, 2007 @ 8:22 pm - Written by BawldGuy
Builders, at least some of them, are demonstrating that Denial isn’t just a river in Egypt.
But why should they be any different than investors in markets like Southern California? If I’ve heard it once, I’ve heard it twice — “I simply am not gonna sell my property for less than it’s worth.” I don’t think you will either. As a matter of fact, I think you’ll sell it for exactly what it’s worth.
I heard that very statement from a very nice, and amazingly asute lady yesterday morning. She wasn’t being emotional at all. Her success in the last few years, has of course been fueled by the cartoonish appreciation we all witnessed. The problem?
The property she won’t sell for a penny less than $XXX hasn’t sold since May. I told her either she is over priced, or if that isn’t the case, her broker ain’t gettin’ it done. She said her agent is pretty good. I’ll accept that — but you can’t have both. 98% of the time, if indeed your agent is solid, almost four months on the market might just mean the property is priced too high.
“But we reduced it twice!” Really? What’s your point? The buyers are apparently unimpressed — in droves.
Before I continue — did I tell you she was willing to eat a grand a month in negative cash flow to keep the property for another three years? In the investment game we call that an alligator. She figured, (maybe correctly) that in three years the market would be better, and she’d get a better price. The $1,000 a month out of her purse? She didn’t even blink an eye.
The lesson here: 25-70% equity in investment properties located in moribund areas are like canoeing with a concrete block as cargo. Prudently increasing your leverage (different levels for different investors and areas.) while simultaneously doubling, or sometimes even tripling your total property values will act as a turbo charger to your capital growth rate. The higher the equity from which you’re trading, (leaving) the bigger the hit for your capital growth. Those who choose to wait their high priced market out hoping for appreciation to return will find the demand is less than they’d hoped. Make your move now — 5-10 years from now you’ll be at the backyard BBQ braggin’ about how you made this move under the radar when prices were pretty low.
Here’s what I told her. You’re enormously successful as a business lady and real estate investor. Your net worth requires two commas. Listen to the following numbers — I’ll be brief
If you take $50,000 less, your equity can still get you into a million bucks in growth-region properties via the execution of a tax deferred (1031) exchange. 
If those units don’t go up an inch the first year, you’re at least not out the $12,000 negative cash flow. If they go up just 5% you’ve made — wait — here it comes — $50,000 in capital growth. Either way you’re better off because you know So Cal is gonna be one of the last places to come back. (Not to mention an extended hold of three more years has a price tag of $36,000. So even if the property appreciated that much, she’d only be even.)
Can you say Purposeful Planning? Her businesses produce so much income, she could very possibly be the rare exception to the Sominex (Ambien) Account rule.
However, areas like Kansas City, Denver, Boise, parts of Texas, parts of North Carolina, (and others) will begin to visibly appreciate before most of the country.
This lady is in her early sixties with the mind of a 40 year old, and has energy to burn. She’s been buying and selling properties, 
(fixing some) and selling them — so she could pay taxes. (?) We’ve had two short conversations so far, and already I’m already in the starting blocks eager with anticipation at what she can accomplish in the next several years. She said she’s like my mom, who’s 76 and still working. (By the way, it was lunch at Mom’s today!) She said she’ll never stop working. She’s scary good at making her businesses pay, and really enjoys her work.
In the five to six years we had silly price run-ups I’d guess she’s made a few hundred grand net, buying and selling real estate.
Even with relatively far lower annual appreciation rates over the next decade, I wager she’ll at least triple what she did the last five. I think she senses that too.
She’s a very smart lady with a nearly vertical learning curve. Lord I love this part of the business.
I hope we get to work together. I know one thing, my wife already loves her — and as most of you know, wives are very rarely wrong.
Posted on July 20, 2007 @ 11:06 pm - Written by BawldGuy
Several times monthly I’m asked a recurring question. If someone doesn’t have a ton of money to invest, would I still consider working with them? Before I answer that question, let me shed some light on what makes me tick.
I love the part of this business that allows me to take folks from where they are today, to a very nice retirement — hopefully earlier than they had anticipated. It’s like a drug for me. If I don’t get to talk with new people with enough frequency I begin to get a tad jumpy. I love it. It’s those first couple conversations that puts me in a totally different state of mind.
Athletes call it the zone. I’ve also experienced it as a bodybuilder, and most recently as a college baseball umpire. But when it happens at work — there’s simply nothing better. I work harder for that feeling than I do for money — cross my heart.
Last night I nearly ODed.
Between talking with a very cool Brooklyn couple, and again to Bill (from Boise seminar - spoke about him the other day) and his wife Jenna, I was nearly unconscious.
Since both conferences took place after work hours, while at home, my 
(trophy) wife had to put up with me walking all around the house as she was trying valiantly to do some work for her company on her laptop. She long ago reconciled herself to my pacing. (Sometimes at the office Josh and I will both be on the phone, with both of us pacing like hungry lions. With non-verbal communication we figure out which patterns the other is using, and weave our separate laps without running into each other.)
After the second phone conference was concluded, I sat down to relax. But no luck. I was already thinking about what I could do to help them get going. In what region should I put them? Would the latest builder deal we made work for them? Oh, stop it, and relax. Good luck.
Neither couple has tons of money. Do I work with relatively sophisticated investors who are fat with cash? Yep.
Is my relationship with them any different than with my clients who start with just enough to get them in the door? Nope.
I get a bigger kick out of taking newbies and getting them from point A to point WooHoo! than I do working with those who’re well-healed by years of impressive success.
I still work with the bigger fish, because they’re just as cool, and they let me know how much they like what I bring to the table. Still. the younger couples who just aren’t sure what to do — I love them to death.
So who’re Brown & Brown’s clients?
They’re regular folk — no matter how much money they have.
Here’s a peek at the latest group to join up with us.
A 30-something couple with a couple kids making $50-70,000 a year. Refinanced their home to get started.
A young couple with one child (more planned) making $40-45,000 a year. Like so many others they just took some cash from their home’s equity, and are chomping at the bit to get going. They’ll buy one property to get started. He’s 25 — wow. His company is paying for his slow but sure march to a college degree. After I spoke with him the first time, I was higher than a kite. Talk about starting from ground zero. He and his wife have a super vision of their future — and I’m jazzed to be able to contribute.
A pharmaceutical salesman, who travels more than a diplomat during a crisis. $Six figure income. Married with one child. Late 30’s — I think. Again — refinanced home to get going.
A executive in North Dakota, married and in his 30’s. Again, refinanced to get some capital. Will start with one property and work from there.
A father partnered with his son and daughter-in-law. The father is a retiree in his 70’s — the son is a truck driver making $45-60,000. Between them, cashing out annuities, they’re starting with a few hundred grand.
See what I mean? Regular folk.
And they’ll have something in common down the road apiece. They’ll be retired — with a bunch of dough coming in every month. And they’ll all be using their Social Security for spending money.
Posted on July 20, 2007 @ 12:06 am - Written by BawldGuy
If you don’t know how to properly analyze income property, meaning before and after tax cash flow, you could find yourself walking in a minefield without a grid map. Numbers are crucial. Chris Lengquist published a piece Wednesday, that underlined that truism. He mentioned it in passing, almost as an afterthought, as he linked his readers to a site showing how much money they’re losing by watching TV. Chris knows his numbers inside and out. He’s a pro. He published a post yesterday talking about a young guy he defined as a property collector. The guy invested, but apparently had no real plan. His posts inspired me to address what else goes into investment real estate, in addition to crunching numbers.
Countless times I’ve selected properties for clients producing inferior numbers to others in the pool for consideration. The following is a list of some of the reasons why.
Location — This seems obvious given the most well known of all real estate cliches. However, if the investor is going for capital growth, Captain Obvious says, “Appreciation is clearly paramount.” That said, in most regions, the areas yielding the highest cash flows (everything else equal except location) will generally not be in the most desired areas. Don’t get me wrong — they don’t have to be bad areas, just where folks who can’t buy want to live, and can afford.
Tenant Quality — If there’s a lesson one of my all-time favorite clients learned early, it was the correlation between headaches and the quality of renters she was approving. Even though it goes against the grain of much of our modern culture, character matters. 
Decent credit, being employed, and not showing up to meet the landlord for the first time looking like a drug dealer are all positive indicators, but great managers develop a sixth sense with folks. They’ll pick out the solid citizen 95% of the time. My Grandma would’ve been the best screener ever! Getting bad character past her was like getting a pork chop past a hound dog.
Age — In some areas, San Diego is a good example, a property’s age doesn’t bother folks as it does in other regions. With the exception of recently developed areas here, a young home is 20 years old. There are places though, where age is a huge deal — but usually to the locals, not outsiders. This is true to a large extent in Boise. My So Cal investors will by a rental there built in ‘82 without batting an eye. A local would not even consider doing that. When, down the road, the older property is sold for a nice profit, the investor will get the same grin on his/her face as the seller of a much younger property. At least that’s my experience.
Potential Maintenance Cost — Do your tenants have their own refrigerators, or are they yours? Does your fourplex have one giant water heater, (You pay for hot water.) or one for each unit? (Tenants pay for it.) Is there one gas and/or electric meter, or one for each unit? (Same result as water heater.) Is the parking/driveway asphalt or concrete? Big difference over the long haul — especially when you’re in an area that really heats up in summer.
Tenant Demand — Surprisingly, this is a factor often overlooked by investors, especially new ones. Let’s use San Diego as an illustration again. My daughter lives nearby, and attends the local university. The duplex she rents is walking distance from a trolley stop. It takes her directly to school and back. Do ya think that’s a big deal to other students? 
Or folks who can take the same trolley to two huge regional shopping centers? Or to their jobs? Of course, it’ll be different factors in different areas. Remember, real estate is nothing if it’s not local in nature. Her duplex is also two minutes from a freeway on-ramp. And at almost 23 (next week) she feels safe when arriving home after dark — no small thing for women. She can also afford the rent while enjoying all these neighborhood perks. It’s no surprise rentals in that neighborhood rent mostly by simple word of mouth.
Vacancy Rate — Again, we’re getting into Duh Theory. Knowing the vacancy rate is considered normal at around 5%. 
There have been many cycles in San Diego when the vacancy rate for the county was a virtual concept. You rented your vacancy by putting a 3 X 5 card on the tree in front on Friday, and after your first cup of Saturday morning coffee, you drove over to gather the 13 applications from the impatient folks loitering in their cars. In Boise the rate is now around 2-3%. The point is to know what you’re dealing with so you can plan for potentially longer rent-up periods in areas with higher rates. It’s not rocket science, but thinking you’re gonna rent your vacancy in a week, when the vacancy rate is 16% isn’t realistic. (He said, remaining solidly in Duh Territory.) This doesn’t necessarily mean you shouldn’t buy the property, it just means you should plan for longer periods of zero income every now and then.
In Boise, it wasn’t too long ago when we were facing double digit vacancy rates. But we still bought like crazy because our research and analysis told us rates were about to plummet and rents were about to go up, up and away. Vacancy rates alone shouldn’t sway you to buy or not — low or high. You should have an idea though, what the tea leaves are saying about the future in the region.
Functional Obsolescence — This is something most folks don’t even have on their radar. When a woman walks into a place she’s considering buying or renting, 
and the kitchen reminds her of an I Love Lucy episode, her next step is usually back towards the door. Those old kitchen designs (He says, slaughtering the very concept of ‘design’.) require a couple to really be in love in order to be in there at the same time. Outdated plumbing, using galvanized pipes usually isn’t a big hit either. Or how ’bout one of my favorites, no A/C? Or wall heaters? Here’s a test. If Grandma had central heating, so should your rentals, ok?
Quality of Construction — This, it turns out, is a subject more apt to generate disagreement among investors. Some will buy less than the highest quality buildings, while others won’t compromise an inch. 
I’m of the first camp — it doesn’t have to be perfect. Still, we’re not gonna buy something that looks like the local high school woodshop class built it as an extra credit project either. There’s a difference between cutting corners aesthetically, and taking shortcuts in the actual construction of the building. On my last Boise trip I saw some construction that on its best day would be called shoddy. We walked away shaking our heads.
Numbers are crucially important, but of little or no value when you’ve not paid attention to the whole picture. Accurate, conservative numbers are worthless when the property is a poorly maintained, badly constructed, I Love Lucy special, located on the wrong side of the tracks with tenants better suited to act as extras in the local production of The Grapes of Wrath.
Collecting properties vs acquiring a Purposefully Planned portfolio of excellent investments will find you in dire straights sooner or later. 
In this kinda market it’s more likely to be sooner. Much of my time this year has been spent helping new clients deal with the consequences of their ‘collections‘ acquired during the last few years. This usually ends up being at least a little painful, as they see their investments really take off — just not the way they planned it.
Everything went wrong — “But the numbers crunched BawldGuy, really.”
Kaboom!!
Property Collectors — good one Chris.
Like I said, doing the numbers isn’t the be all end all to real estate investing.