Posted on March 13, 2008 @ 9:54 pm - Written by BawldGuy
As written recently on these pages the internet isn’t the end all be all for data collection — especially income property stats. One of the most egregious errors a real estate investor can make is the purchase of a property based upon erroneous rent assumptions. Since it’s called ‘income’ property one would assume it’s potential to garner that income would be important. One might even take it a step further and insist on empirical evidence. 
Way back in the days of pen and paper, the only acceptable way to acquire concretely reliable rent info was to hit the pavement — literally. Grab yer clipboard and yer basic comfortable shoes and start walkin’ and knockin’. I’ve been doing exactly that since the late ’70’s. It’s not sexy work, trust me. Though most people are more than happy to help, some folks can get downright rude.
BawldGuy Axiom: Nothing beats first hand research done at street level, in person — nothing. The gold standard for research is always first hand — their lips to your ears — in person. Hearsay just doesn’t cut it.
Still, when a client asks us what makes us so confident in our rental figures as stated on our after tax cash flow analysis, we grin and pull out ours, or sometimes our team’s rental survey. (Note: The minute I find out a team member hasn’t done a required rent survey, they’re fired.) This isn’t done by phone, fax, email, or channeling the local apartment tenants in an area. You do what needs to be done — you knock on doors yourself. 
Management firms will tell you, “You’ll easily command $XXXX a month in rent for that unit — no problem.” When it ain’t their butts on the line, it’s never ‘a problem’. Most management firms make their rental decisions based upon their own relative convenience. I ran my own management division for a decade and know what it takes — and it ain’t hangin’ ’round the office when you’re not sure of what the rents should be.
Agents/brokers will be smother. “Our experience in the area says you should get this amount.” Whereupon they give up a number. Rely on that number the same Mom relied on me having all my homework done before bedtime.
Builders are the comedians of potential rents. It’s long been my theory they size you up and decide in the middle of their answer what rent figure to give you. If they discern I’m from California, it goes up at least 10%. Exceptions: I’ve met two builders in the last 18 months who gave me rents backed up with empirical evidence — one in the Kansas City area, and one in the Dallas/Fort Worth Metroplex area.
Short diversion.
The first thing a California real estate investment broker/advisor learns when leaving the state is the strange thing that happens to their forehead — In bold lettering a message appears. CALIFORNIA FRUIT LOOP — I’LL BELIEVE ANYTHING.
Tomorrow I’ll give specifics on how I’ve conducted rent surveys over the last 30 years. I’ve learned a ton, and it’s all come in handy. Meanwhile, keep this in mind: Buying investment property without slam dunk, sun-settin’-in-the-west reliability is foolhardy at best and a quick way to lose a bunch of your hard earned money at worst.
Remember: It’s called income property for a reason.
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 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 February 6, 2008 @ 9:18 pm - Written by BawldGuy
One of the smartest investors I’ve met began as a rehabber. He was more successful than the typical rehabber by far. He did this for a few years, quitting his day job, which wasn’t as a greeter at Wal-Mart. His annual salary was easily six figures.
This is from memory, but the basic facts are absolutely true life — and ongoing.
His wife also worked and though she wasn’t pullin’ down the heavy coin he’d been, she was pretty steady at $65-75,000. This enabled him to work full time without the full time pressure of taking deals just to take deals. 
The first few years he made good money, doing 1-2 a year. He used some for living, put some away (Sominex Account), and kept some for the next deals. This worked out for him as he’d quit his job due to overwork and near terminal boredom.
Then the market began to change for him, and there were simply too many amateurs overpaying for marginal properties, generally making his life miserable. This forced him to hold on to his latest project, a house with a triplex in back, and four garages. The same thing happened to him in his wife’s home state. He’d acquired some land, and instead of building on it quickly he decided to hold hit while going through the splitting process.
Allow me to skip to the chase here for those gulping coffee or eating lunch at their desk.
A living, sometimes an excellent living can be had through rehabbing. You’ll pay ordinary income tax rates on your profits. You’ll spend time nursing little nicks and cuts, while sometimes working your butt off for little if any progress. There will be times your spirits will soar with the heady wine of success. A closed escrow yielding a net proceeds check can be addicting — and is to many.
It’s also the reason 99% of rehabbers never graduate to the big leagues of real estate investors. Their net worth won’t know the long term growth which results from a big picture view combined with a Purposeful Plan. They’re too busy luxuriating in their last kill to worry about all the winters ahead.
Rehabbers generally don’t retire well. There are those that do, but they tend to be the exceptions proving the rule.
Rehabbing, as will be discussed later this week, is a tool, a means to a much better end. It can easily morph into your master if yer not careful. I’ve seen it happen many times. Your life turns into a treadmill which never stops moving. Or, using more accurate terms, it is downright addictive, leading its victims on the side of the road as they become older. It’s not a pretty story most of the time.
Meanwhile, back at the ranch, everything he bought to turn quickly isn’t cooperating. This isn’t a problem as he always bought properties needing fixing, not rebuilding. His savings account, which had been fed with strict discipline was now large enough to weather a couple years of no rehabs.
He did a minimum fix-up and refinanced for some cash — which he invested out of state. Remember, until then he’d never held a property longer than 3-8 months. Let’s fast forward to the happy ending, shall we?
His portfolio now includes a 50-something unit building a stone’s throw from Dallas. A recent sale of a bunch of subdivided land in Wisconsin, some smaller Texas rentals, and a bank account with enough for 3 Sominex Accounts. His net worth has grown to point where he needs two commas to carry it around.
It’s around that time he gets a letter from yours truly, offering him a way to look at real estate investments he’d not employed before. So he called.
Turns out the forced two year hold of his last rehab has made him more money than all the rehabs he’d completed — combined. And he didn’t even lift a finger the whole time. Oh sure, he decided to sell and had some stops and starts doing it himself, a path I’m sure he’ll avoid from now on. 
His four units are about to increase the value of his holdings by around $1.5 Million. The irony is they’ll all be brand spankin’ new. He’s come a pretty long way from buying old San Diego crapola.
Matt’s learned you can make a living rehabbing, but you become wealthy and create current and future cash flow by Purposefully Planning your way to a magnificently abundant retirement.
You wanna rehab? Go ahead. We’ll talk about when it makes sense in a few days.
Posted on February 5, 2008 @ 6:39 pm - Written by BawldGuy
If I guesstimated at least half a dozen failed escrows before this one closed the number might prove low. I didn’t list or sell the units as Matt always seem to have some local agent with a ’sure fire’ investor for his units. Needless to say, his luck would have been nonexistent if it hadn’t been all bad. Deal after deal after deal went awry for every reason in the book, and some new ones. About 3 years after we met, he’s ready to go.
That’s all water under the bridge now ‘cuz his cash is already at the accommodator waitin’ for travel orders. The plans are Mansfield, plus Burleson and/or Austin. He really likes Austin, so we’re gonna try to make that work. Our guy there is the best, so I’m countin’ on success.
His Purposeful Plan is now hittin’ on all 12 cylinders.
We’ll go over his increased tax shelter, capital growth rate, and flexibility in a later post. I just wanted to update you on Matt’s progress, as this has been more than an ordeal for the poor guy. Remember, he’s no beginner. He’s a professional investor
already a veteran in three states. He’s also a recovering attorney, but we’ve already forgiven him that.
This should be done and tied into a pretty blue bow no later than the end of February.
We’ll be deciding upon degree of leverage, length of loans, how many properties to acquire, and whether or not the mix will include more or less duplexes vs town homes or single families.
We’ll keep you updated as the plot thickens. Any questions I can answer without violating anyone’s privacy are welcome.