Posted on January 30, 2008 @ 10:32 pm - Written by BawldGuy
It’s a perfect time to revisit the concept of cash reserves, which as regular readers know, is called a Sominex Account here. Sominex is a brand of sleeping pill. Get it? A generous cash reserve account allows us to sleep even when life’s little surprises land at our doors. Of all the factors involved in real estate investing, cash reserves almost always get short shrift. As an integral part of every Purposeful Plan, (see podcasts) cash reserves cannot be ignored. It’s easy getting caught up in the various opportunities these days. In a buyer’s market investors tend to get not only a false sense of security, but superiority. Memories are short, aren’t they?
In the best of times cash reserves are a must. There can be no debate on this point. Brown and Brown has been touting this from every mountain top we can find. If reserves are a must in the best of times, how critical are they today? Right, don’t answer cuz that was a rhetorical question.
Our company policy is very clearly stated: No Sominex Account means we can’t work with you.
Why such a ‘take no prisoners‘ policy? I’ve lost property myself, and it ain’t fun.
The question arises — how much in cash reserves do I need? That depends. But here’s the rule you surely want to follow: Error on the side of too much, not too little. It’s just common sense.
If you’re a big wage earner and don’t live up to your eyeballs you may not need as much as certain others. Still, Murphy knows where all of us live, and sooner or later it’ll be your turn in his barrel. Count on it, as nobody escapes The Barrel.
If we could prepare for these random attacks of real life, I wouldn’t be recommending you harbor such generous cash reserves. See how it works? Preparation isn’t possible, hence the reserves. 
Also, if you’re looking to get a deal on some of the builder inventory around the country, you should pad your Sominex Account. Here’s why.
Though sometimes builder properties come with refrigerators, 
window coverings, and complete landscaping, sometimes they don’t. If you’ve acquired a 3 bedroom home, an apartment sized refrigerator just ain’t gonna cut it. A side by side will cost you at least a grand, and probably more. Window coverings shouldn’t be had on the cheap either, as they should be congruent with the quality of the property and tenant. Landscaping is often the difference between a potential tenant stopping and looking or driving by to the next place on their list.
Many of our clients invest in several properties each in multiple locations. Knowing in advance how many properties with which you’ll end up is obviously crucial to the decision on the size of your Sominex Account. For instance, in certain regions most of the tenants assume they must have their own refrigerator. (80%) Since some builders willingly pay some or all of the buyer’s closing costs, the investor has already saved between $3-7,000 per property. That alone can finance an appliance, and maybe some window coverings. If you’re really fortunate the builder will deliver the place to you fully outfitted, landscaped, and devoid of closing costs.
The fly in that sweet honey is the dim view most (all?) lenders take. Most will put a ceiling on what they label as buyer credits. Usually it tops out at around 3%, though not long ago there were some allowing 4-5%.
Still, if you’ve allowed for a generous Sominex Account, the savings you reap from investing in multiple builder properties can actually add up to an 
extra property or two. We recently had a client who was able to acquire an extra property due entirely to credits and savings in upgrades. It matters.
You’ll notice I haven’t set up a specific formula for the purpose of calculating the size of your reserves. And you’ll not see one here. Each investor is different, with different financial circumstances, earning power, and sometimes most importantly, different comfort zones. Here are some examples of Sominex Accounts I’ve recently approved.
Client acquires 4 properties and has $100,000 income — $35,000
Client acquires 4 properties with $60,000 job — $50,000
Client invests in $10 Million of property — $300,000++
Client acquires 2 properties with $48,000 job — $40,000
Your Sominex Account should be established both in size and in deed before you make the first offer on any property whatsoever. If you must decide between getting that extra property at the cost of thinning your reserves — always, sans a guaranteed cash windfall in the very near future, land on the side of your reserves.
When it’s your turn in The Barrel, you’ll be sleeping too soundly to care.
Posted on January 16, 2008 @ 11:22 am - Written by BawldGuy
Had an interesting conversation today with a very cool client. 
She’s a first grade teacher here in town. At 50ish (for a couple years now) her only retirement is a semi-worthless annuity, and a relatively handsome pension from her ‘teacher’s fund’.
She’s gonna be buying some income property, almost a million bucks worth. The contracts are signed, and the lender dude, some guy with suspenders, from Philly, says she’s good to go. The transactions are structured as follows.
10% down payment + reduced closing costs, as she’ll receive credits
Fixed rate amortizing loans at 6.25-6.5% +/- .25%
Close analysis shows each property pays for itself easily, plus a little cash flow
She’ll max out on tax shelter — resulting in about $625/mo. tax savings
She has a Sominex Account (Ambien for those under 40) of over $40,000 — all of it liquid. Don’t forget her worthless (her words too) annuity, which could fetch, after penalty, another $40,000 or so.
The point — points?:
Four small and well located income properties, all with itty-bitty cash flows. Between the four of them she’ll receive roughly $4-5,000 a year — or not as the case may be. When cash flow is that close to the bone we usually say break even to a trickle.
The maximum tax shelter allowed by the IRC. She’ll increase her take home pay by $500 monthly almost immediately by increasing her exemptions at work.
Over the five years or so she may hold them, her loan balances will have been reduced over $55,000.
Note: We tell all of our clients to condition themselves to respond to the words ‘break even’ by saying to themselves — Liar! This underlines the real world truth, that no matter how conservative we are in projecting income, expenses etc., nobody is so good they can predict cash flow to the dollar. That’s what you do when you say a property breaks even — Liar!
She had it in her mind I was being relatively aggressive with my approach to her retirement. Why? Cuz I told her so. Apparently telling women over 50 you’re being aggressive tends to stick. She was getting a tad nervous. Of course she was. Her investment guy needs to choose his words much more carefully.
It reminds me of what Dad used to say on the subject. “Sometimes folks put the emphasis on the wrong syl-LA-ble.
Effective communication can at times appear to mimic a minefield of potential misconnects. If the speaker or the listener put any particular word or concept in a an unintended context — the rest of 
the conversation potentially becomes virtually moot. It’s my experience the 80/20 rule applies. That is, 80% of the time it’s really nobody’s fault. Hundreds of ‘postmortems’ performed on what I’ve come to refer to as communication train wrecks, happen when all parties had great intent, and were paying full attention. Human beings aren’t computers. Context is the wild card. While everyone’s busy nodding their heads in agreement, one is seeing a picture of sunlight while the other is painting a picture of rain clouds. It happens.
It took a few minutes explaining — again — about what was happening, and what she could expect. She then returned the lender’s phone call, and proceeded to have the same conversation with him. She was calmed by his words, especially as they were layered in her mind over the words she’d just heard from me.
Words mean things, and even when they’re taken somewhat out of context, it’s up to the pro to ensure there’s total understanding of that context. Of course, in reality that is, in the real world, Mission Impossible. Communication is never perfect on a good day. These things happen from time to time. You say one thing to someone and they hear another. It happens.
Over the years I’ve been able to keep miscommunications — outgoing and incoming — to a minimum. Yet it still occasionally happens.
I tell this story to remind you how easily this can happen. Fortunately, this turned out to be a minor episode. Uh, that would be minor in the larger context, but no doubt not minor at all to her. Words do have meaning, but if filed under an erroneous context, it’s possible to find ourselves traveling entirely different roads than those with whom we’re communicating. 
Think of times in your lives when you’ve said or done something while holding a picture in your mind of the context you envision. The kicker is, life often throws us into circumstances in which the context or ‘picture’ isn’t quite what we’re expecting.
How many times have we all done this with our husbands or wives? I rest my case.
This is why double and triple checking to ensure understanding at every turn is the only way to fly. It’s still not foolproof, but it beats the alternative. We all wanna be understood — and we all need to feel we understand what we think we’re hearing.
Posted on January 15, 2008 @ 12:18 am - Written by BawldGuy
Though it’s my policy to keep emails private, those communicating the following to me have personally given me their official Okey Dokey to pass on their thoughts anonymously. The subject was increasing traffic from people expressing an interest in buying/investing in real estate the last 2-3 months.
I’ll boil them down to bullet points.
The number of calls/emails has risen measurably since school started
The percentage of people actually doing something has also risen visibly
It doesn’t seem to be geographically bound either
Arizona, Texas, Oregon, Minnesota, even New England and Canada reported in
Most, but not all said market times have decreased a little bit
Lenders are proactively reaching out — all but one mentioned this
Brian Brady, my go to mortgage guy, said today lenders are bringing back 80% non-owner occupied stated loans. What will they think of next?
Keep in mind — Whatever Bernanke does or doesn’t do with rates is, in his thinking, secondary to money supply. Keep a watch on how much cash he’s continually dumping into the system. It’s been going on for months now, without the appearance of the inflation monster. Many of his harshest critics are now reduced to calling names, cuz he won’t play by their rules. Yet, as much as they complain he doesn’t get it, things have improved. Even his critics now grudgingly admit his mission to add liquidity is having a positive affect. The jury’s still out, but my money is still on Dr. Ben.
This Thursday Josh and I are winging our way to Kansas City. 
We’ll be speaking to a couple small groups of local investors, giving them a better understanding of their current investment options. It’s invitation only, and you must already own investment real estate to attend. Don’t tell anyone, but though I’m excited about speaking to these folks, of equal importance is getting to finally find out first hand about Kansas City BBQ. Our goal is to be able to walk on our own power and fit into the airplane seats on the flight back.
Very soon, you’ll be able to see for yourself the results of what I’ve spent the last three years molding and shaping. The ‘other’ Brown will begin publishing his own stand alone blog. There are a few who’ve met or talked with him, 
but he’s remained pretty much a mystery since replacing me in the part of ‘Son’ in the Brown and Brown movie. I was first cast in the part back in the ’70’s at about his age. We’re looking forward to launching his blog, and will announce it loudly when it’s imminent. It’s past due, but he’s carrying his weight, and has been from Day 1. Being Dad in this sequel has been eye opening. There have been times when I’ve been in conversations with Josh about one thing or another, when it suddenly dawned on me — wow! I’ve had this conversation before, except I was the son, not the ah, elder statesman. Yeah, that’s the ticket.
Meanwhile, back at the ranch — buy low, sell high, and remember to keep yer Sominex Account topped off. Man, I gotta start goin’ to bed earlier.
Posted on January 10, 2008 @ 1:10 am - Written by BawldGuy
A potential real estate investor is becoming serious about get started. What’s the first thing to do? I have this conversation many times weekly. Most of the time something crops up needing attention before anything can move forward. There’s a long list of reasons why. The common thread running through most of the reasons is they’re no-brainers. Not enough capital, less than stellar credit, too much debt, and the list goes on.
The steps you might consider taking are what we at Brown and Brown do with new clients. The following is a sorta Reader’s Digest version for you to follow. I hope it helps.
One last note.
We go through this process whether the new client has never invested or owns millions in real estate. The fundamentals still need to be observed. Or, as I’ve taught many, they need to be honored. Shortcutting the basics at the beginning is no doubt the quickest way to self-generated problems later.
1) Be honest with yourself — what’s your level of sophistication?
2) Figure out your complete and again, honest, financial status. An experienced lender (experienced in investor lending) can help with this, as you’ll need lender pre-approval anyway.
3) Where is your investment capital? Find it.
Cash — surveys show cash acceptable to most sellers as down payments
Home equity — use today’s value, as lenders couldn’t care less about ‘05
Stocks, bonds, annuities, existing investment, & my personal favorite — other
4) Create a profile of yourself.
How old are you?
Are there any retirement plans in force now? Pensions — 401(k) — IRA — annuity
What do you think about your job? Like it? Hate gettin’ up in the morning?
Are your goals realistic? Not ambitious enough? Too courageous for your own good?
5) Do you need capital growth or current cash flow?
In all my experience, I’ve run into three beginning investors who actually needed current cash flow.
6) How much time is available ’till retirement?
Is there enough time?
Is it possible to retire sooner than you’ve always thought? (Good one, eh?)
7) Decide what amount your Sominex Account (cash reserves) should be.
Very important — based in part on amount of capital invested + financial status.
Needs to be liquid
8) This is one most folks can’t do. Explain the process — execute steps 1-7.
It’s understanding the process that stops most folks in their tracks. This is where we come in. Duh.
If you’re even flirting with the idea of becoming a real estate investor, go through these steps. Don’t rush through them though, as that’s how you can create future train wrecks. Worst case is you’ll know a bunch more about where you are and what you can accomplish.
When you’re finished — get in touch with us and we’ll take it from there. Really — no problem. We have an office with phones and everything.
Posted on January 4, 2008 @ 12:41 am - Written by BawldGuy
So Wednesday was the big day! Yeah, I know it was Tuesday. Don’t know ’bout you, but I didn’t lift a real estate finger on Tuesday. The New Year seems to hit the road running at breakneck speed — and regardless of the intense planning in which many of us invested so much time — we often seem caught unawares.
So many times we find ourselves in that position because we simply haven’t been completely honest with even ourselves. Purposeful Planning, especially in these ah, interesting times, requires nothing less of us.
Planning sometimes makes us reach into where we live. It requires an honesty with which most of us are either uncomfortable or not acquainted. As an example, if you are in middle management, you have to be honest with yourself about the time it might take to become president. Writing a goal saying, “By end of year 2008 I will be president of Widgets Inc.,” forces you to be brutally honest with yourself.
Can you make that kinda leap in 12 measly months?
Which leads to — Do I even have what it takes to be president?
That’s honesty.
When setting your investment goals, both for the next year and the long run, don’t shortchange yourself. Don’t talk yourself into being Donald Trump, but don’t underestimate what’s possible. Times are changing. Paradoxically, they already have. Both are true. The correction is old news. The current change is in lending. (underwriting)
Yawn.
If a borrower’s credit is a tad sub par they’ll pay a little more for the loan. Sorry, but that’s not only the way it’s supposed to be, but the way it was for the first…….30 years of my career for Heaven’s sake. Change?
How ’bout Back To The Future?
Now back to planning, setting goals, and being honest with ourselves.
There are two very common mistakes investors make when planning.
They woefully underestimate what they can accomplish with the capital available
They magnify a setback into the hairy spider that ate Ohio.
Both mistakes can produce unwanted, even totally unintended consequences. In the end they both leave large stashes of cash, your cash, on the table.
If you think you can grow your capital to $X by Y date, ask yourself how you arrived at that number and that date. Ask an experienced pro what is possible. You’d be surprised to find out what’s possible in today’s economic environment.
Flowers still grow in the meadows — amongst the trees still standing tall around them. Forest fires seem permanently destructive in the moment, but years later they’re more beautiful and healthier than the day before the fire.
Substitute correction for forest fire, and you begin to get the picture.
When the seasons change from summer to fall to winter, we don’t gather around the kitchen table for a family meeting. We crank the heater on, or grab our coats to stay warm when outside and go about our business.
Understand the ongoing correction. Notice it’s affecting different regions in varying degrees. Some not much, some drastically. I have an idea. Why don’t we invest where the flames of the correction are running into natural ‘fire breaks’?
$100,000 in 20 years can easily grow into $2 Million or more. I’ve seen folks take $200,000 +/- and turn it into over a million bucks in five years. ‘Course you gotta have a few years of cartoonish appreciation. Don’t underestimate what’s possible in a market where cartoonish appreciation is no longer the star of the script.
All this changing market means is you actually have to know what yer doin’ to get ahead now.
BawldGuy Axiom: Don’t ever invest based upon anything more than pedestrian appreciation. Investing has its own built in risks without making new ones as we go. In fact, because we counsel the long term, big picture view, counting on appreciation at all is at times, folly. Long term are you up or down? The last 50 years says you’ll be up over time. That’s time measured in years, not months people.
Been knocked down by this correction? Join the club. In today’s investment atmosphere you can do more with less than you might think.
Think of your own situation and dollar amounts as you read the following.
Let’s say you own property valued around $4 Million give or take a mil. You used to have a million+ in net equity, but it’s currently down to $750,000. IF it makes sense on every level for you to execute a tax deferred exchange (1031) you can literally turn that ‘loss’ into either turbo charged capital growth, OR increased cash flow. As a bonus you’ll also enjoy potentially improved tax shelter. And how ’bout the fact your new stuff is, well, new?
A seasoned pro can look objectively at your current situation and give you a better and surely more clearly focused picture.
Then you can Plan and set goals like a maniac — only you’ll be dealing with reality — honestly.
Here’s how to make your 2008 much better than you might expect.
Understand the market in which your properties are now held.
Be nakedly honest with yourself — is the area worth staying in?
If not — tax defer (1031) your equity to an area with a better future.
If yer in a solid area AND your equity is kinda sorta impressive — now’s the time to — you guessed it — trade (1031) for the Purpose of significantly improving your position. Turning yourself into a Buyer these days is a great improvement.
Above all else — do whatever you do based upon a well thought out Purposeful Plan or don’t do it.
It’s hard enough out there without creating problems. Always — in the strictest sense of the word — establish a generous Sominex Account. I know I harp on this all the time, but not having massive cash reserves is foolish. As my clients will tell you, their eyes rolling, ‘yeah, we know, they call it risk capital for a reason’.
Why else would you have massively generous cash reserves?
And another year begins.