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.
Posted on December 12, 2007 @ 12:06 pm - Written by BawldGuy
Awhile ago, 111 days or so, (But who’s counting?) I threw down the gauntlet on myself. Both elbows had gotten together behind my back, (try that sometime) and decided to stage a walkout of sorts. They’d function as required for everything but bodybuilding. Turns out I didn’t have any choice in the matter, and was forced to quit working out cold turkey.
The tendons were so tender I couldn’t even shake hands with Grandma without wincing, literally. The party was over.
Cutting to the chase, the days of BawldGuy Schwarzenegger were over. Three years later? The only measurement remaining the same was my height, 5′ 9″. The decent into the Valley of Lard was complete. What had once been a proud 182 pounds of well trained muscle seasoned with about 12-15% body fat, and a 33″ waist, was now BawldGuy Doughboy. My incredible expanding waist was now 41½” — body fat easily 35-40% — and I weighed in at a whopping 212! The photo ain’t me, but in another six months it could’ve been.
Holy Super-Sized Carl’s Jr. #4 Batman!
Time for a Purposeful Plan.
This is where I have to tie in bragging about how I got back into shape to real estate investing for retirement.
You’ve had an income property or two for several years now. They’ve grown in value, but you’ve let them get fat with far too much equity. Your capital has become fat and lazy, never having had to become stronger via tax deferred exchanges into more property. Capital only gets larger by way of constant vigilance and the disciplined execution of an intelligent Purposeful Plan.
By not exercising your equity when the opportunity(s) arose, you’ve turned it into stagnant capital, just laying around accomplishing little except being bigger than it was when you started. Other investors, the ones who’ve kept their capital/equity(s) moving when opportunity showed itself have grown their initial capital into a lean, strong, and productive portfolio.
The difference between a muscular and well performing real estate investment portfolio and a virtually moribund tub of lard, is the disciplined execution of an intelligently laid out Purposeful Plan.
Understanding that one concept will result in more investment success in 10 years than most investors experience in a lifetime.
The same goes for getting’ back into shape. (Ah, the segue master.)
Walking the talk, I went through the steps of a Purposeful Plan one at a time.
1. What is my level of exercise/nutrition expertise?
Answer — Pretty high, as I’ve been so fortunate to have been trained by a world champ when I was a young man. Also, in my running days, (marathons) I lucked into meeting a nutritionist used by Olympic athletes. I’m by no means a slam dunk expert in either discipline. I do however know quite a bit more than the average man on the street.
2. What is my current and complete physical status?
Answer — Pathetic as outlined above. Fat, weak, heart/lungs a disaster, and way low energy.
3. What are the sources of ‘capital’ for my ‘investments’?
Answer — Membership in 24 Hour Fitness. Wife who encourages me to get going — employing that special encouragement technique known well by husbands around the world. Above mentioned knowhow. 20-something workout partner with no known sympathy/empathy gene and the propensity to have fun at my expense whenever the opportunity presents itself.
4. Establish my ‘profile’.
Answer — 56 year old fat guy strong enough to lift food laden forks, and able to move quickly only when hearing the words, ‘who wants the last piece of pie?’
My goals were aggressive but realistic. OK, mostly realistic.
5. Decide whether I’m in need of becoming Mr. Muscle Dude or Mr. Lean Live-Longer.
Answer — The following goals were established.
Body fat content of 15% or less.
Waist of 32″ or less.
Weight — don’t much care as long as the first two goals are attained.
A whole new closet full of clothes way to small too fit a 56 year old fat guy.
Note: Experience led me to predict my weight would end up in the 155-160 range.
6. Establish how long it will take to obtain my goals. Is the time allowed sufficient?
Answer — Starting at the beginning of August, I gave myself ’till the end of this year to get the job done. Experience told me that was reasonable as long as I actually followed the detailed Plan.
7. Establish my Reserve Account (Sominex or Ambien for the younger crowd.)
Answer — Being human at Thanksgiving was allowed. Eating at a favorite restaurant for lunch was included in the Plan. Less food was consumed on those days in anticipation of planned gluttony. An occasional extra day of cardio exercise was included as a balancing point.
Very supportive Trophy Wife. 20-something workout partner/son who has impeccable timing when it comes to ridicule.
No, ‘backup capital’ wasn’t gonna be my problem.
8. Explain the general process. It’s time for the Purposeful Plan.
The Plan
Limit daily food intake to about 1,500 calories
No processed or fast foods allowed — nothing in a box
Water Water Water
Weight training (super-sets) and abs work combined with cardio 5-6 days a week
Regularly scheduled though reasonable food ‘cheat’ days
Constant monitoring of progress — adjusting flexibly as required
As of December 1st here are the results of executing the above Purposeful Plan.
My waist is now a little under 32″. This is verified by tape measure and 32″ slacks that are a little loose.
My weight, the factor least important to me, has settled in at 157-159. It could drift lower over time.
My body fat is around 15-18% which is short of where I’ll ultimately end up. Time is on my side though, as I’ve successfully modified my lifestyle. My diet has returned to what’s it’s been the vast majority of my adult life. Daily exercise including weight training, abdominal work, and cardio action are now the rule.
Lessons relearned?
If we take in less calories than we put out we lose weight and inches. There’s gotta be a way we can make money from that idea.
A reasonable program combining cardio, weight training, and abdominal work will not only make you stronger and in better overall shape, but will turbo charge your daily caloric deficit. Factoid: A pound is lost for every 3,500 calories which are burned over your caloric intake for any time period.
Being slim and lean with more strength and endurance beats being a middle aged tub of lard.
Imagine enjoying your retirement for 40 or 50 years! Imagine living those years as incredibly lean and healthy and energetic. Pretty cool, eh?
Mission Accomplished through an intelligent and knowledgeably laid out Purposeful Plan.
Posted on November 30, 2007 @ 12:59 am - Written by BawldGuy
Have you noticed lately how Deals of the Century are comin’ out of the woodwork these days? Got an email a few days ago touting stuff in several cities. The emphasis was on price and cash flow.
I know folks out there in real estate investment land get all fluttery when they think they’re buying something below market. We all do, including me. Add their favorite spice to the mix — cash flow — and we’re talkin’ party time.
Reality Check
For every project Josh and I get excited about, we waste our time viewing at least 10, uh, less desirable developments. We don’t start the car, or click print for our Southwest tickets based on price — ever, never — without exception. Price is at best, third on our list of things that make a hill of beans difference to us.
The Location
Worst case scenario, has to be B+. A bad or mediocre location cannot be solved without Divine intervention. It is what it is. This requires not only our own tootsies on the ground, but experienced local knowledge. In San Diego for instance, I can show an outsider some neighborhoods that would impress. I wouldn’t let Mom live there with a body guard, but they’d impress an outsider. The same is true where you live, right? Thought so.
BawldGuy Development Rule: Quality of location cannot be compromised — exceptions allowed through Divine intervention only.
Operating Expenses
This one’s easy. Templates are fine, but the line item approach rules. Look, after nearly 40 years of this, I know about where the expenses are gonna land. This isn’t rocket science. For the most part, sixth grade math’ll do ya just fine. Don’t be fooled by the most aggravating comment heard in so called investment circles. “Well, you know, the annual income is around $20,000, and the expenses are running right at $4,000 a year.” Huh?! Is your rich uncle gonna be renting from you, and paying some of the expenses?
Different regions will have higher/lower amounts for each expense. Real estate taxes in California for a $225,000 property would be in the range of $2,500-3,300 yearly. ‘Course you’d be living in about 1999, but that’s a whole different post. In Texas those same taxes would be about a zillion bucks. You have to account for that difference in expenses everywhere you go — every single time — for every single property. In Arizona tenants pay expenses not normally paid by tenants in California. Oops, didn’t know that? Refer to local knowledge above.
Making mistakes on operating expenses before you buy, will keep Murphy away from you. He doesn’t like competition.
BawldGuy Development Rule: Every expense is listed. If you don’t know the number, find out, cuz I guarantee you it ain’t a state secret. Our local teams learn quickly about Brown and Brown’s policy on this subject. No guessing allowed — we ain’t playin’ Go Fish.
Quality of Construction
Does this even have to be discussed? If it’s shoddy, we’re down the road. This also covers floor plans designed by the builder’s wife, who took a class once at the local junior college. Compromise on this one, and you’ll surely have problems at every stop along the way. Maintenance will skyrocket. Tenants will move out. Rents will plummet. Need more? Didn’t think so.
BawldGuy Development Rule: Our own inspectors spend as much time as needed to give us the real story. Don’t need that cuz the property’s never been lived in? We’ve found some of the worst screw-ups in those. Think builders will point them out? When you were little, did the Easter Bunny hide eggs in your yard too?
Professional Property Management
Again — another no-brainer. Let’s review: It’s in another state, or at least another part of your state. Besides, let’s see a show of hands. Who wants to manage a bunch of rentals — hundreds if not over a thousand miles from home? Is this part of the discussion really necessary?
BawldGuy Development Rule: Professional property management will be hired before one property is acquired by one client. The only exception to this rule are days when the sun sets in the east.
Cash Flow
In my experience, 80% of our real estate investment clients want their capital to grow. They want cash flow, but when they retire, not when they’re making more money than every before at their day job.
Cash flow only comes into play while we’re ensuring properties pay for themselves or better. We do all our analysis before and after tax. If a project isn’t showing positive cash flow after tax — it gets smaller and smaller in our rear view mirror quickly. We structure them to be break even or positive before taxes too. However, sometimes Murphy appears, and changes that plan. You know, 3% vacancy rates turn into 7% without the courtesy of even a phone call. Stuff happens. If a project isn’t positive after tax — easily — walk, no, run away.
This is why we won’t work with clients until we’ve ascertained the amount and relative liquidity of their Sominex Account. (See podcasts on Purposeful Planning, or search for Sominex Account. Translation: Cash Reserves)
For those in fact looking for cash flow, we’re constantly looking for projects suited for those investors. They’re harder to find. When we do find them, we sell them out quickly. We think we may have just located a few dozen promising cash flow properties. We’re inches away from securing them.
Price and Terms
This is almost always the last thing on the list, at least for us. This is because most projects we fly to see, simply don’t get to this point. If we have arrived at this point, it gets — interesting.
Details aren’t important here. Price and terms tend to take care of themselves when the project has a B+ location or better, is built well — with a stellar floor plan — and don’t seem to be flying off the shelves. Different regions call for slightly difference approaches. Different financing. Higher or lower down payment amounts. Seller financing. Buyer’s costs paid — lender, escrow & title, an appliance or two, window coverings, and a free 10 word coffee order at Starbucks.
Experts are coming out of the woodwork. Everybody’s gotta deal. Most of ‘em I wouldn’t wish on folks I don’t care for, much less my own clients. Price and cash flow seem to be the main attractions.
Everywhere we go, we speak with investors who tell us their personal stories of woe. It’s almost predictable — they went for price almost exclusively. If they’d have looked at all the other factors involved, (not all of them listed in this post, by the way) they would’ve bought tickets to a movie that day instead.
You only pay once for a bad movie, and you generally won’t lose sleep over it — not by a long shot.
Posted on October 22, 2007 @ 1:16 pm - Written by BawldGuy
No, smart aleck, it’s not buy low, sell high. That’s always been true, right? If that one’s a myth, we’re all in deep…trouble.
Let’s first construct a profile for a first or second time investor.
We’ll make them a married couple between 35 and 45 years old. They live, with their kids, (Maybe one is already in college?) in a suburb located anywhere in the country.
The husband is a hospital administrator making $69,500 a year + benefits. He usually gets a small bonus, normally around $5,000 or less. And, let’s say he’s going bawld. Yeah, that’s the ticket. His wife, once the youngest was in high school, she started a home based business selling diet supplements. She worked around 20-25 hours weekly, and has averaged around $25,000 a year.
“Tom” and “Sharon” “Tillman” bought their current home in back in 1993 when Sharon was pregnant with their third child. Their condo had been cramped for a number of years, and with the third child on the way, a larger place, a house, was on their menu. They paid $91,500 for it. In ‘00 they refinanced, and took out a modest amount of cash to add on a den for Tom, and a family room with a fireplace. The loan was for $125,000 — and their interest rate dropped almost 2%. Their payments went up less than $300 a month.
It’s now 2007, and Tom is beginning to give consistent thought to their retirement — and their lack of planning for it. He’s now 41, and Sharon is, well, younger than Tom.
Their long time friends, Greg and Debbie, are clients of mine. While having dinner at the Tillman’s home one weekend, Debbie said you should call our real estate investment guy.
They called, and came into the office several days later.
What do you think is the first thing they asked me? It’s almost predictable.
We can’t invest like our friends, because we don’t have enough savings.
You gotta know what’s comin’, right?
The #1 Myth when it comes to getting started as a real estate investor is…
We don’t have the money to invest.
Really? You’re making almost $100,000 between the two of you. Your lifestyle isn’t exactly keeping up with the Jones’s. Your house payments, including taxes and insurance, are just over $1,000 a month, which is about what most folks are paying for a decent apartment these days.
Your home is worth how much?
They try to come up with a figure, finally settling on around $300,000 give or take. Between the cool run-up in values we just experienced, and the family room & den addition, they’ve seen the home’s value go up nicely. What this meant was…
Their equity had grown to about $190,000 — a tidy sum, Grandma used to say.
I asked them — What would happen to their current lifestyle if their house payments, including taxes and insurance, doubled to around $2,000 a month? Sharon, at least at first, was just a tad dubious. Tom however, paused only slightly as he began to see the light. He knew they could afford the higher payments easily.
They’d be borrowing about $240,000 at 6% on a 30 year loan. That would put $130,000 in their new investment kitty. They already had, in addition to his 401(k), about $30,000 in savings, held in a liquid account.
Making a long story short — they refinanced their home, which indeed, appraised for a little over $300,000. Their net after loan costs was $129,000. They started a separate investment account. 
I advised them their Sominex (Ambient if yer under 40) Account should be roughly $40,000. So we took $25,000 from the loan proceeds, and $15,000 from savings, and they had themselves a genuine Sominex Account. I prefer my clients sleep like babies when Murphy visits — and he will visit you sooner or later.
That leaves them $104,000 for their first round of real estate investing for retirement.
The #1 Myth is once again exploded easily.
It makes me a little sad, knowing their are literally hundreds of thousands of Baby Boomers, and their ‘Echos’ who’re in the same position as Tom and Sharon. Yet they are wondering how to better provide for themselves in retirement. They truly think they don’t have the money. Why do they believe that?
What I’ve heard first hand as the reason most believe in the #1 Myth, it’s because they’ve been following the same path as Grandpa did. Boiled down to its essence — use all extra income to pay down your home’s loan. The goal is to arrive at retirement with a free and clear home.
It makes sense then, that if your goal is to pay off your house, it would follow you’d believe you didn’t have the money to invest for retirement. It makes sense from that perspective.
What really needs to happen? They need to grow their capital.
But then you know it doesn’t make any sense in real life. Folks following Grandpa down his old, beaten path, discover sadly it now is a dead end — with now room to turn around. The combination of Grandpa Economics and belief in the #1 Myth is resulting in reducing the potential quality of life Boomers can have in retirement.
Tom and Sharon now have the next 20-25 years, maybe less, Lord willing and the creek don’t rise, to grow this $104,000 into a robust net worth. That purposely created wealth will be the source, the foundation of a retirement income they never knew was within their reach.
I love this part of the business. There’s simply nothing like it.
Posted on October 8, 2007 @ 12:47 am - Written by BawldGuy
How many times have you wondered how to get started investing in real estate without feeling like you’re in the latest Friday The 13th movie?
After doing this for almost 40 years I’ve seen that look before. Or maybe you’ve kept your first home since Carter was in office, and wonder if you should have done something different than just holding on to it. Read on, because I may have at least some of the answers for you. Before I start ‘answering’ questions, let’s ask some.
- Why should anyone invest in real estate?
- If I’m over fifty, how can it possibly make a difference for my retirement?
- Are you going to tell me I have to use my home equity?
Only two bottom line reasons to invest in real estate
You either want cash flow or growth. Of course, there are a myriad of reasons why folks want one or the other, but those two are the basic results investors seek. If you are going to be working for the next 5-10 years before you retire, then you should definitely try to grow whatever capital you have available.
Do you need Cash Flow?
The more capital you have at retirement, the more monthly income you can generate. It simply makes no sense to worship at the altar of cash flow before
you really need it. Most people, when closing in on retirement are earning more money than they’ve ever earned before. Or at least they’re making more than they need to live. They need to take whatever assets they have and grow them. Which brings up the age old question – What are your current assets, and how much retirement income would you like?
Increasing the Value of Your Estate After Age 50
If you are in the 50+ age group and are still working, then taking an inventory of your current assets is your first job for. What do you have which will allow you to invest and start growing? It’s never too late as long as you have either cash or other income to live on while growing your investment capital.
I have to use my home equity?
Remember, if you’re like most of us, you simply want to have a stress free monthly retirement income. The more the better of course, but surely more than if you didn’t invest, right? Right. So where’s the capital you ask?
For the vast majority of folks, it’s in their homes. If you own your home and its value is roughly $XXX,000 with a loan balance of about 60% of that or less -– you’re in good shape — or at least better shape than you might have imagined.
In 90% of my cases I’m able to help clients refinance with a bunch of cash left over while sometimes reducing their monthly payments to boot! Much of the time the reduction in payments exceeds $500 a month. In this example it would be no problem in pulling out $100,000-$150,000. So let’s say you pull out $150K.
Reserves Are Important — Crucially So
I’m pretty much ‘Old School’ when it comes to reserves. I insist my clients have an abundance of cash reserves before embarking upon what I call a 
Purposeful Plan. As a matter of fact, reserves are part of The Plan. In this example I’d probably have my client put $30K in the bank. I’ve come to call it my Sominex Account for obvious reasons. I say obvious — but have since learned from my son Josh, that if my audience is under the 40-50 range, I should be saying Ambien Account.
I’ll pause here to mention why folks with an existing comfortable retirement would want to invest. If they don’t want more income, (kinda rare) growing their estate for their heirs has proven an attractive motivation. Most of the time, cash flow can be safely increased by simply reassigning capital to better producing investments like real estate. What’s even better, real estate cash flow is, for the most part, sheltered from income taxes. I’ve never met an investor for whom that didn’t produce a smile.
Decide on your long term goals
I’ll conclude with this final thought. Retirement income isn’t taken seriously enough in my experience. We tend to think in today’s terms and don’t realize that our retirement income is fairly well set, with few exceptions, at the time we stop earning — and make retirement our new reality.
Think about it. Are you ready to retire and live with the income you will now receive? The average person could have their home free and clear and still not live a comfortable lifestyle with their current plan. That’s not only sad, but more than a little bit scary. It’s time to take steps to insure your retirement isn’t going to have you sitting at home 12 months a year for the rest of your life.
Learn a lesson from Grandpa
We all know what folks mean when they say their neighbor retired comfortably — not nearly as well as he would have liked. His retirement was never supposed to be spent on his front porch.
I look back at my grandparents. 
Grandma didn’t work after she left the farm. Grandpa was one of the exceptions who made a solid living as an artist. (oil paintings) When Grandpa passed away Grandma moved close to one of her kids. She rented her home out for enough to cover payments and expenses. When she passed away the house hadn’t been sold, (still hasn’t, but that’s another story.) All the saving and prudent financial behavior didn’t make her retirement any better. She was merely ‘comfortable’, and passed away with a net worth that was probably under $500,000. They had never invested in anything but their own home.
If not for four very well raised, honorable children, her last years would have been far more challenging.
If they had simply invested, even very conservatively in the second half of their lives, they would have been easily worth a couple million dollars 20 years before they died. Think about that and what difference it would have made.
Now look at your approaching retirement.
If you continue down the current road — what will your retirement destination be?
Are you smiling?