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.
Posted on July 12, 2007 @ 11:29 pm - Written by BawldGuy
While in Boise for a couple days, I’m spending as much time as possible meeting with builders who might like a BawldGuy to take out a bunch of their homes for them. You know, we pay low, low prices for well located product, with perks built in for our clients, and a nice premium for the guy with no hair and the company with the redundant name.
This is a great time to be buying property in growth regions — and Boise sure qualifies.
During our last visit we met and made a deal with a builder for his last seven townhomes. All the appraisals are in now, and say our clients bought under market — considerably in some cases. All their closing costs were paid as part of the deal too. The management company is cutting them a great price — 30% off if they pay a year ahead. Our investors said yes almost in unison. They’re happy campers, and the builder can now proceed to his next project (breaking ground this year) without the anchor of seven unsold homes. Everybody wins.
Today however, we didn’t run into a builder who has figured out his position in the market. First, he sent his dad to front for him. Then he wouldn’t answer our phone calls. When we gave up and told his father what we were trying to accomplish, he looked at us as if we were the ones smoking the funny smelling tobacco.
Tomorrow we’ll be talking to yet another builder who is sending us a spreadsheet on what’s available and what’s possible. We like this guy, even if it ends up without making a deal, because he’s not pretending it’s 2004 with the world as his oyster. Fear, and the anxiety that follows, can sometimes spoil the chance for clear thought, especially when one has to think of the consequences of facing the reality of losing money on a dozen homes.
The way the first guy looked at it was with a clear eye toward cutting his losses, turning the page, and moving to his next project. I’ve seen his next project, and he has an incredible winner on his hands. He’s also a magnificent old school builder who is proud of his work — and should be. It’s gorgeous. He’s not like others who think turning the page will lead to worse endings.
When I return next month to talk with more builders, I’ll give a call to the guy who wouldn’t return our calls. By August he’ll want to talk to anyone who will be serious. And we’ll be very serious — for less money per home than we’d of paid today. And he’ll also have lost another month’s carrying costs. Of course, we can’t buy everything out there, so we might not even have him on the A-List on our next visit. Who knows?
When you find yourself needing to cut your losses, facing reality is the cheapest way out — and there’s no substitute. Building homes is one thing, but building your own reality, especially one that the world doesn’t recognize, isn’t the way out. It’s the way to dig the hole deeper. This builder is a good guy, with a stellar reputation. This is something that happens from time to time to all of us. We’re in a little bit of a bear market. So What? It’s not the end of world — unless of course you make it worse by repeating to yourself and everyone else who’ll listen — “We’re just fine.” When the bear gets a little too close, it can get scary.
Losing everything can be scarier. Live to build another day. I’ve always wondered why builders don’t have massive Sominex accounts. Where would some of them be today if they’d had one? I’ll wager they’ll at least think about it next time out — though I’m thinking for some of them there won’t be a next time.
Next month he’ll be another $16,000 in the hole. He isn’t fine. And I forgot to mention, he’s pulled more permits. No kidding. You can’t make this stuff up — nobody would believe you.
I feel a tremendous sense of empathy for the builders who find themselves in this position, because for years they’ve been providing a product much in demand. What some of the smaller ones are learning now, is that the trend isn’t always up. Sometimes Murphy decides it’s your turn in the barrel. I speak from experience. I’ve been to the ugly side of the rainbow.
Just because one investor’s problem is another’s good deal, doesn’t mean it’s not hard to watch. So far, every one of these builders has been a very hard working and straightforward gentleman. (fantasy reality aside) They’re just caught in some bad timing as a result of their crystal ball being unreliable this time out.
Repeating the mantra, “We’re just fine”, doesn’t make it so.