COVID-19 changed the commercial real estate investing landscape in 2020. Heck, Boise, ID, of all markets, experienced the greatest rent growth one year into the pandemic of 16%.
Now that we are over a year into the pandemic-induced recession, many commercial real estate experts are offering their advice on how you need to change your investing approach. One firm that is leading the way in providing such insights is Real Page.
Greg Willet, Chief Economist at Real Page Inc., was a featured speaker at this year’s Best Ever Conference. In his presentation, he outlined six investing and operational strategies to implement in 2021.
Tactic #1 – Throttle up your sun belt assets
One of the best strategies for 2021 is to get in front of the renter demand by focusing on markets that performed well throughout the COVID-19 pandemic. ApartmentList.com is a good resource that tracks rents across the nation on a monthly basis.
Many markets in the Sun Belt region (southern US from southern California to Florida) performed well since the onset of COVID. In fact, with the exception of the major MSAs in California and Texas, New Orleans, Nashville, Orlando, and Miami, basically all Sun Belt markets experienced rent growth rates greater than the national average of 1.1%.
Also, don’t rule out the Midwest. Outside of Chicago, Minneapolis, and Cleveland, the other Midwest cities posted positive rent growth rates in 2020 (most exceeded the national average, too). Demand is not as strong as it is in the Sun Belt regions, but low supply in the Midwest will drive demand in 2021.
Tactic #2 – Don’t bank on flight-to-quality
Historically, when a recession occurs, top-tier Class A products discount their rents. As a result, “flight-to-quality” occurs – the lower rents of Class A products attract renters which boosts occupancy. However, during the COVID-induced pandemic in 2020, these rent discounts did not result in an uptick in demand to the extent experienced in previous economic recessions. Instead, renters have had the tendency to move down and downgrade to Class B and Class C products to save money. This trend was also expedited by stay-at-home orders with people moving from expensive urban areas to the less expensive suburbs for more space at a lower rate.
Tactic #3 – Explore a low-capital value-add strategy
Similar to not banking on “flight-to-quality,” don’t pursue large value-add opportunities either. Hold off on the bells and whistles and focus on maintenance issues and the appearance of the asset. In doing so, the asset will be more affordable to a larger group of renters.
Another benefit of this approach is your ability to turn around a vacant unit faster (or keep the existing resident) with a lower quality upgrade. This will boost occupancy and support resident retention at lease expiration. Plus, the lower quality upgrade will leave money on the table for a future buyer.
Tactic #4 – Measure what is working now
It is the right time to adjust the recipe for your operational “secret sauce.” You do not want to be doing what worked well in the past. You want to be doing what works well now. For example, testing and measuring the success of technology at your properties.
Millennials overtook Baby Boomers as the US’s largest population in 2019. So, pay attention to what young adults are doing and how it impacts the types of units that are in demand. Then, determine how this impacts your marketing needs because certain marketing strategies are better and worse based on what is in demand.
The bottom line is to measure everything to see what is different now compared to two years ago.
Tactic #5 – Focus on renewals
Since the onset of COVID-19, there has been large variability in renewal rates across the country. However, you must make it a priority to hang on to the good residents who are making their full payments on time. Taking a hit on rent on a renewal lease might be a good thing if it is a high-quality resident.
Pay attention to the type of units with lower and higher renewal rates and ask yourself, “Why aren’t they renewing?”. It may not be the rental rate or other fees, so focus on the non-pricing factors, like maintenance and customer service.
Tactic #6 – Take back control of your brand
Know what you are selling and who the target for your product and message is in this marketplace. The overall message should focus on service, appearance, ease of living at the property, the location – don’t focus on price.
Six Tactics to Thrive in 2021
Focus on the markets that outperformed the national average in 2020, especially the Sun Belt and Midwest.
Consider avoiding top-tier, Class A+ and Class A products since many renters elected to downgrade to Class B and Class C in 2020.
Instead, consider a low-cost value-add strategy focused on addressing deferred maintenance and appearance issues.
Test out new operational strategies to determine what works today because what works now didn’t work two years ago.
One of the best operational strategies of 2021 is to retain your high-quality residents, even if it means not increasing their rent at renewal.
Focus your asset’s branding and marketing on lifestyle-related factors instead of pricing factors.
The Inc. 5000 is a list of the fastest-growing private companies in America. Scott Lewis, one of the speakers featured at this year’s Best Ever Conference, is the CEO and co-founder of Spartan Investment Group (SIG). SIG experienced 1,479% growth in 2020, ranking 308th for all industries and 8th for real estate.
In Scott’s presentation, he provided advice on the best practices to implement if you want your business to experience 1000%+ growth and make the Inc. 5000.
Defining yourculture
The three parts of your culture are (1) your why, (2), your vision, and (3) your values.
Your culture starts with your why. Why do you do what you do? Why do you go to work each day? Ask yourself these questions and write out the answers. Then, using these answers, formulate a one or two-sentence mission statement. For example, SIG’s mission statement on their website is “to improve lives through real estate.” That is their why. That is why they do what they do. With a company mission statement that reflects your why, you and your team are inspired to show up every day.
The next part of your culture is your vision. Your vision involves where you want to go. To determine where you want to go, you need to understand what success looks like to you. This is more than just a quantitative, “I want to control X dollars in real estate.” It must be a qualitative vision. For example, SIG’s vision on their website is “to build a company where a relentless drive fuels our growth and improves the lives of our team and our investors. To do this, our focus is to provide opportunities for our team to grow and achieve their dreams both personally and professionally. For our investors, we provide only investment opportunities that have been thoroughly scrutinized by our processes. Day in, day out, we work with determination to persevere through every challenge in achieving our goals.”
The third part of your culture is your values. What behaviors do you need to see in your organization to adhere to your mission statement and realize your vision? For example, SIG’s values on their website are summed up by one word, GRITT. That is, growth, respect, integrity, tenacity, and transparency.
Once your culture is defined (that is, you have a mission statement, vision, and set of values), you need to avoid the “say-do” gap. Make sure you don’t say one thing and do another. Otherwise, your culture isn’t believable. Therefore, you must live out your values in order to accomplish your mission and vision.
Developing yourplan
With a qualitative vision, you must now set quantitative goals, as well as create a strategic plan on how to accomplish those goals.
To create the best strategic plan, Scott recommends spending 90 days in education mode and another 90 days in development mode before going out and taking action.
When developing the strategic plan, set three overall goals to be accomplished in a three-year period. For each goal, create three to five objectives. For each objective, create at least three key results. For example, one of SIG’s three-year goals is to monetize $250M of commercial real estate with an average margin of 30% and develop $50k of monthly revenue from advisory services. One of the objectives set to accomplish this goal is to build an acquisitions infrastructure capable of nationwide marketing and monetizing 100% of opportunities. SIG has five key results associated with this objective (for example, create a seamless wholesaling process that drives contract to package in less than 3 weeks). Each objective also has a projected completion date and is assigned to a team member.
Overall, you need a goal, multiple objectives for each goal, a plan to achieve that objective, a measure of success, a timeline, and a person assigned to each objective.
Assemble your team
The third piece of advice Scott provided about making the Inc. 5000 list involves how to create your team.
Before finding a partner or bringing on team members, you need to understand your strengths and weaknesses. There are plenty of free and paid personality tests that can aid in this process. However, Scott believes the best way is to ask your circle of influence, like friends and family. The best person in your circle of influence to ask is your spouse.
What you really want to know from your friends, family, and spouse are your weaknesses. Once you know your weaknesses, you know who you need to hire – someone who excels at what you are bad at.
When you start to hire people, they not only need to have complementary competencies, but they must also have your company’s values. You can teach most competencies, but you cannot teach character.
Assuming they align with your company’s values and have complementary competencies, you want to understand their experience and track record. Mainly, you want to know if they were successful due to luck or skill.
How to Make the Inc. 5000
Achieving the massive growth required to make the Inc. 5000 list comes down to your team. However, before assembling your team, you need to create the right culture to attract the right people. This includes forming a mission statement, setting a vision, and creating values. Then, you need to create a strategic plan that aligns with your mission, vision, and values. Once this foundation is set, you can assemble your team, focusing on people who align with your values and have complementary skill sets.
In 2015, I had a few years of commercial Real Estate investing under my belt. Things were beginning to get competitive and a lot of coastal buyers were coming into the Midwest. I assumed the market was at a peak so I started to sell off my assets to buyers from New York and California. I was going to wait for the next economic downturn to start buying again. As the months went by, I sat on the sidelines and witnessed a lot of residential investors continuing to grow their business. Was I wrong? What were they doing that I wasn’t? Well it turns out that they were still grinding while I was making excuses. For the first time ever, I realized that I had to market myself. It occurred to me that a lot of my friends and family didn’t even know that I was in Real Estate. I kept seeing posts from residential investors showcasing their deals, their struggles and their successes. I followed their lead and did the same. One post was a video of me clearing shrubs around an office parking lot before the workday started. Another was my kids being dragged into construction sites because there was no one at home to watch them. I put myself out there and brought people into my world. My friends and family quickly learned that I was a commercial Real Estate investor. I also offered to mentor anyone who wanted to learn more about commercial Real Estate. These simple posts snowballed into numerous networking opportunities and long lasting friendships.
Fast forward five years and many deals later. One of my greatest friends, Jason Stanley was an experienced single family investor. He called me to let me know that he found a few industrial buildings going to auction. He informed me that he had been following my posts and was convinced that commercial Real Estate would yield stronger returns. In the same manner that I have helped many others, I offered to help him underwrite these deals and walk him through the process. Because this was an auction, I figured the field would be competitive and the chances of winning were slim. Nonetheless, I gave him a target of what I would want to purchase these buildings for. My numbers were based on published NOI plus a large cushion since we were not privy to inspections. I assumed the worst so I gave Jason a ridiculously low purchase price that he should not exceed. The morning of the auction, he asked me if I wanted to partner on this deal. 100% YES!
As the auction was underway, Jason was at the property nervously bidding on this parcel of three buildings. To our amazement, we won the auction for $150k. These buildings comprise of three tenants and a total of 15k square feet. We acquired the property for $10/ft.
Now it was time to dive into the details and figure out what we just purchased. Prior to the auction, we were given approximate rents, an NOI number and incomplete leases. My underlying thought was for $10/ft, we could afford to make the necessary improvements and re-lease the property if necessary. I called my banker to get him started on the appraisal and loan. While on the phone with him, he looked up the property, noticed the river and asked if it was in a flood plain. My stomach dropped because I should have known better and looked up this information (https://msc.fema.gov/portal/search) prior to bidding. Luckily we are in zone X and would not be required to obtain flood insurance.
The best we could decipher is that we had two tenants whose leases were expiring in twelve months and one tenant who’s lease would expire in 2024 with 2 rent bumps. These were all gross leases but the tenants were responsible for landscaping and snow removal. The rents are listed below:
Tenant 1 – $1600/month 6000 sq ft $3.20/ft
Tenant 2 – $1100/month 3000 sq ft $4.40/ft
Tenant 3 – $1250/month 6000 sq ft $2.50/ft
All of these rents are well below market. Each of these buildings comprises of a small office area and a warehouse/workshop space with ground floor drive in access. They would be very easy to lease to a variety of tenants. The property is also very close to Interstate 75, making it more appealing.
We immediately wanted to ease any uncertainty that these tenants had. When a business owner’s building is being sold, they are justifiably nervous for a number of reasons. I began to research and found the email addresses of the tenants then sent them an introduction letter and asked if we could meet with them. The next week we met with all of the tenants to let them know that we are full-time and hands on professional landlords and would take good care of them. We found out their pain points and assured them that they were in capable hands. Unfortunately, one of the pain points was a leaky roof, a 12,000 sq foot leaky roof. I suppose this was to be expected and was likely the cause for other investors not bidding as high as we did. Nonetheless, this would be a $60,000 hit to us. Fortunately, the appraised value of this property allowed us to work the roof replacement into our loan. The numbers for this deal are below:
Cash on cash returns are currently 58%. If we can get closer to market rents, the cash on cash return would be over 100%. With increased rents, this parcel would be worth $560,000 at a 8% cap rate. I attribute all of this to putting myself out there and offering to help other investors.
How Antonio Cucciniello Found Success Marketing On TikTok
The social media sphere is a hotspot for entertainment, community, and collaboration. Best of all, these platforms offer opportunities to expand your reach, market yourself, and promote your business. Antonio Cucciniello, a real estate investor, is proof that present-day websites and modern applications are practical advertising tools. TikTok, specifically, has allowed Cucciniello to gain new clients and investors.
Much like any functioning member of society, Cucciniello is no stranger to social media. For years, Cucciniello posted videos to YouTube. After four years and 500 videos, he only amassed 300 subscribers. Meanwhile, his Instagram following was lagging, which proved detrimental to his active and commercial real estate investing efforts. Eventually, Cucciniello discovered the power of TikTok.
In the hopes of advancing his career, Cucciniello hopped on the bandwagon. He got his first taste of social media success after publishing a TikTok video. Within one day, Cucciniello’s TikTok post received 52 views, and he gained 150 followers by the end of the week. Before long, Cucciniello went viral, earning 130,000 views on a video that poked fun at terrible tenants. Since his partial claim to fame, Cucciniello’s devised a sound strategy on how to market on TikTok.
In his experience, Cucciniello’s found that instructional videos typically gain the most traction. Whether you’re discussing how to scale a business or change a tire, Cucciniello maintains that audiences love to learn. He then goes live to talk more in-depth about the content. To increase consumer engagement, he welcomes questions. According to Cucciniello, being controversial is one surefire way to go viral. However, he usually sticks to humor, dancing, and general amusement to appeal to audiences.
Cucciniello is far from the first to unlock TikTok’s marketing potential. In fact, many are gravitating to this platform in an effort to gain more exposure. As a result, industry experts are providing insight on how to scale a business on TikTok. By heeding the following advice, you can reap the benefits of TikTok’s massive following and ever-expanding platform.
How To Market On TikTok
Know What You’re Working With
Arming yourself with pertinent information is a crucial first step. After all, to get the most out of the platform you’re using, it’s critical to learn, analyze, and monitor it. For instance, watch videos that are circulating the platform, note similarities between them, and develop ways to apply this knowledge to your specific content.
Don’t Overthink It
While it’s important to be deliberate in your approach, don’t give entertainment the back seat. In other words, infuse some fun into your content. Even if you’re talking about active real estate investing, you can find ways to inject lightheartedness into your videos. In essence, if you find a happy medium between informative and entertaining, you’re bound to reel in a wide audience.
Work With Other Influencers
On TikTok, there’s strength in numbers. Find someone who’s on your same playing field, and collaborate. Studies show that traditional marketing doesn’t interest Generation Z. With that said, you have to think outside the box. By partnering with other influencers, you can subliminally market your platforms while giving viewers the engaging content they desperately desire. Not only will you be able to reach a dynamic viewership, but you’ll also start making beneficial connections.
Look Into TikTok Advertising
As a powerhouse in the social media realm, TikTok’s introduced unique campaign strategies to its platform. Native content, brand takeovers, hashtag challenges, and branded lenses are the marketing resources they’ve created. Each offers its own perks, so you’ll need to gauge which option is best for your business. No matter what you decide, TikTok’s taken a calculated approach to ensure that your marketing methods breed some results.
Stay True To Yourself
Above all else, don’t attempt to be someone you’re not. While it’s prudent to emulate a person’s recipe for success, recycling someone else’s content won’t prove effective. Instead, highlight the qualities and strengths that set you apart. Most importantly, don’t shy away from topics that interest you. Even if you think that commercial real estate investing won’t attract viewers, you’d be surprised how many niche communities there are on TikTok. Simply put, don’t stray too far from your roots, and you’ll inevitably succeed.
Using the above story and advice as inspiration, you can effortlessly grow your business on TikTok. Whether you’re into active real estate investing or tree shaping, there’s a place for all on TikTok’s inclusive platform. Build your brand with confidence and ease when you start your TikTok journey today.
Projects: something you see in your area because most are syndicated
Referrals: from other operators
Your interview with the operator
Ask open ended questions: When interviewing operators, see if they are interested in what you have to say
Write down notes
Keep a log of operator Q&A
Portfolio projects
Referrals
Property location
Are they an operator or syndicator? Determine what role the company plays. How are they compensated, how are they aligned with you? Are they aligned with the success of the project?
Tell me about a deal gone bad? This is Ryan’s favorite question. Having no deals that have gone bad indicates low experience or a lie while having deals that have gone bad helps you judge the grit of the syndicator.
What is their mission, vision, and values?Does their mission, vision, values, align with yours? Ask them to give an example of how they’ve used their values recently.
Who is on the team? Are they a one-man band or do they have a deep bench? Are they vertically integrated? Are they using the fees they charge to hire a great team or to pay themselves?
What is their core business model? Selling education? Working elsewhere? Focused on deals? Gurus?
What is your investor communication plan? Ask for last three communications to get a better understanding of their communication style. Is the plan in writing? Can you verify property performance against projections?
What is the performance of their portfolio?
Historical performance (proforma vs actual): comparison is more important than absolute return since it gives you the right context
Was it project level IRR or investor IRR: total project may look better than investor level
Consistent metrics: Ryan likes to use equity multiple and how long it took gives true time tested return, IRR might be misleading or not the best metric
Obtain reference and conduct a background check
Don’t ask for a reference, find your own, because no one gives bad references
Find others that have invested in the company
BBB, Google reviews, 506 Group, etc. – search for the company name and name of the principles
Insurance
Does SEC attorney provide E&O insurance to cover for lawsuits
What exclusions are included on their title insurance?
Is there property insurance at least from an A rated Carrier?
Decision to exit
What would make an operator exit early? What is their justification for selling?
Have they sold early in the past? How many time and, how did the actual returns compare to projections?
How do they brief investors?
Market-Driven Strategies for Investment and Operations
Greg Willett, Real Page Inc.
Where we are at right now
We suffered sizable job losses which have impacted real estate market. However, occupancy rates are at healthy level and we’ve experienced rent growth in some places. Overall, there is huge variability in results in one part of the country and product niche to another – the highest I have ever seen.
Best rent growth is about 8% – Inland Empire, Sacramento, Virginia Beach, Memphis, Midwest
Gateway metros are really struggling – Bay area and metro New York: rents cut 15% to 20%
Three Investing Strategies
Throttle up your Sun Belt assets. Simply getting in front of renter demand can help fuel performance success: Really solid demand results across state of Texas, Carolinas, Tennessee, Atlanta, Phoenix, and Denver. Be careful in Florida markets, because there are a lot of tourism centers. Places like Tampa, Jacksonville are doing well. Don’t rule out the Midwest. Demand is not as strong as it is in the Sunbelt but low supply will drive demand.
Don’t bank on a flight-to-quality. Rent discounts at top-tier product are not delivering move-up renters to the extent experienced during previous economic stumbles: Renters have had the tendency to move down and downgrade to class B and C to save money.
Explore a low capital value add strategy. Lower price points are boosting occupancy and supporting resident retention at lease expiration: Focus on maintenance issues and appearance but hold off on bells and whistles to keep property more affordable for bigger group of renters. Turn around on a vacant unit is faster for lower quality upgrade and leaves money on table for a future buyer.
Three Operational Strategies
It’s the right time to adjust the recipe for your operational “secret sauce.” Measure what’s working now: You don’t want to be doing what worked well in the past, you want to be doing what works well now. Pay attention to what young adults are doing and how it impacts the types of units that are in demand. Then determine how this impacts your marketing needs, because certain strategies are better and worse. The bottom line is to measure everything to see what is different now compared to two years ago
Focus on renewals. Resident retention at initial lease expiration has gotten harder to achieve in some locations and product segments, so make it a priority to hang onto today’s best residents: There is large variability in renewal rates across the country. But the goal is to hang on to the good residents who are making payments. Taking a hit on rents on a renewal lease might be a good thing. Pay attention to the type of units with lower and higher renewal rates and ask yourself, why aren’t they renewing? Pay attention to the non-pricing factors, like maintenance and customer service.
Take back control of your brand. Know what you are selling and who the target for your product and message is in this marketplace: The overall message should focus on service, appearance, ease of living a the property, the location – don’t focus on price.
The Devastating Impact of Climate Change on Your Real Estate Investments in the Next 10 Years
Neal Bawa, Grocapitus
Impact of climate change in 2020 and questions to think about
2020 had $95B in damage from climate disasters
What will happen to your investments when taxes increase to pay for massive sea walls?
Where will the money come from to fix Texas’s power grid?
In California, the six greatest wildfires happened in 2020, and will double in five years. How will this impact California cap rates?
Cities with sea level rise exposure are already priced at a 7% discount
Many climate risks may become uninsurable:Insurance companies are starting to buy climate data from Moody’s and creating city-by-city insurance plans.
Climate data is being used to downgrade entire cities: When a city is downgraded, their ability to borrow goes down, making it harder to fund re-construction projects. As a result, people move out, and it continues to spiral.
The end of the 30-year mortgage: Full cities may change to 20 year or 15 year mortgages options
The cities with no climate risk will be the next gold rush.
Overall, the people who set ratings, cap rates, insurance rates, mortgage terms, as well as cities are taking climate risk into account, and so should you.
The State of Fundraising in 2021: Key Risk Areas for Capital Raisers in Today’s Regulatory Environment
H. Gregory Baker, Lowenstein Sandler LLP
Capital raising regulations have been relaxed over the past presidential administrations, but that is changing.
Section 5 of Securities Act: One of the most important rules in the federals securities laws. In 2020, 1/3rd of all SEC enforcement cases concerned offering of securities. The SEC does not need to prove that you intended to violate the rule: they just need to show that you violated the rule,
A security must be registered or have an exemption. The common exemptions are:
section 4(a)(2) of securities act, private placement exemption
Rule 506(b) of Reg D, private placement safe harbor
Rule 506(c) of Reg D, general solicitation
Reg. Crowdfunding,
Intrastate offerings
The consequences for violating Section 5 can be severe. The investors can get their money back from you. The SEC can fine you. And your reputation will be harmed.
How people or companies get tripped up on Section 5
Relying on 506(c) but failing to ensure that your investors are accredited
Relying on 506(b) but you advertise
Relying on intrastate exemption but selling to investors in multiple states
Expect to see more of these cases under new leadership. Gregory’s advice is to work with your attorney to ensure you follow rules, and document how you followed rules.
How to Scale Your Syndication Business
Michael Blank, Nighthawk Equity
Who should consider building a thought leadership platform? Anyone raising money for real estate. Anyone who has already raised some money 1 to 1. Anyone who is ready to scale capital raising ability. Anyone who wants to raise millions of dollars in a few days.
What will a thought leadership platform achieve? Automatically attracts the right investor, raise more money so you can do bigger deals, create more revenue, invest revenue back into market to do more deals, effortlessly scale and serve your investors
Three pillars of a thought leadership platform
Attract:
Identify your ideal avatar: in order to attract the “right” audience who is interested in what you have to offer, you have to identify your ideal potential investor
Capture leads: when you attract the attention of your ideal avatar you need to know who they are. The best way to do that is to offer them a “Lead Magnet” in return for their email addresses
Develop:
Serve and lead: Serve your audience and earn their trust with valuable free content that educates them about investing in syndications. Serving = content = trust
Lead them on their investing journey with continuous content
Scale: Make a compelling offer that generates revenue and reinvest a portion of your revenue to attract more leads
How to automatically attract more passive investors
Create a lead magnet: When someone downloads a lead magnet, they get tagged in system as “downloaded”, and put on email list to receive educational emails
Join the club: After downloading the lead magnet, they are invited to fill out a detailed questionnaire, and get tagged as “joined”.
Schedule a call: Included is the option to schedule a call after filling out the questionnaire. After the call, they get tagged as “deal ready” and are now prepared to receive upcoming opportunities
Follow up automation: Automatically send follow-up emails to people tagged with “downloaded” and “joined” until they move forward in the process and set up a phone call or unsubscribe.
Multiplying Your Real Estate Portfolio
Deborah Razo, Women’s Real Estate Network
The secret success system blueprint: find success habits, cultivate habits through repetition, achieve mastery. This is a system that deals with growing systems and expanding your mindset.
The success cycle: potential, action, results, belief. The more we believe in our potential, the more action we will take and the more results we will achieve. The more results we achieve, the more we believe in our potential.
How to cultivateresourcefulness: Write down a problem and come up with three effective, intelligent, and viable solutions. Because one choice is no choice. Two choices is a dilemma. But three options and you are in the space of choices
Accelerate Your Returns Through Construction Management
Ashley Wilson, Bar Down Investments
A team member with construction knowledge is critical to maximizing the investment’s returns
Get creative: There is more than one way to solve a problem, so your focus and end goal should drive your solutions
Balance between evaluation & equity: Your focus should be on increasing equity, not the evaluation.
Time is money: Figuring out ways to decrease the time construction takes will maximize your return on investment
Building a Social Media Content Engine
David Toupin, Obsidian Capital & Real Estate Lab
Social media = attention = influence = income
Where to start
Focus on 1-3 platforms at first to get traction
Create Facebook, Instagram, and YouTube account to start, or pick one or two that you like and want to go with
Block out one day every week to record a few hours of content to stock pile content and post throughout the week
Block out 2 hours every day to post and interact with followers: respond to every comment and direct message
How to create a social media content engine
Create lots of content one or two times per month: Either by yourself of hire a videographer for one or two sessions each month, and upload all the content to a DropBox folder
Hire an editor to create a content database: Use month’s worth of content to create longer videos, shorter videos, and pictures with caption. The goal is to create at least 10 social media posts per one hour of video content
Hire a content manager: The content manager will use the content database to compile one month’s worth of social media posts.
Determine what the focus of your content is going to be: All posts should be directed towards achieving your end goal
You approve the posts: Once the content manager has compiled a month’s worth of posts, you review and approve
Schedule the posts: After you’ve approved the posts, the content manger schedules them throughout the next month.
Rinse and repeat
Top social media tips
The number one secret to social media is consistency
The number two secret is focusing your niche
Be yourself, people will recognize if you’re not being real
Interact with your audience
Tell your story
You will automatically attract people that like the same things you like. That’s how the algorithm works
You do not need a fancy camera or equipment. Any modern cell phone is sufficient
Don’t worry about your current audience. Create your desired audience over time – either create a new account or start on your personal account
Don’t worry about what people might think about you. Have fund with it and be yourself
Comment on posts of other big influencers
UTH Workforce Housing: Pairing Private Capital with New Construction Workforce Housing
Scott Choppin, Urban Pacific group of Companies
What is workforce housing?
Built-to-rent, non-standard MF in historical terms – SF and attached townhome rental product
Below market rate rents
Housing for working families at 80% to 120% of median income: service sector/blue collar, large multigenerational family groups with 4-7 people
Housing for professional “location agnostic” roommate groups working remotely: location agnostic and use extra bedroom for remote work
Locations: urbanized suburbs of most major cities, close to amenities but not central business district
Work-from-home is accelerating absorption and rental rates
Sticky, long-term tenant base
Strong social networks: kids in school, family nearby
Economic sharing lifestyle: share income and expenses across the group
Naturally affordable rents without government subsidies
What is urban townhouse (UBH)? Designed and built-to-rent but lives like a house
Five bed/four bath, 1750 sqft.
Three-story townhouse
Two-car direct access private garage
Multigenerational and WFH space ground floor bedroom/bath
Located in existing urbanized suburban neighborhoods where families and work from home roommates want to live
Rent on average $3500 to $4000 per month
Value ratio $2 to $2.28 psf. (average 50% below market)
Per bedroom rent $700 per (40% to 50% below market)
Extended Stay Model – A Hidden Secret in the Hospitality Industry
Jennifer Maldonado, The Art of Raising Capital Program
Profitability and resiliency are the foundations to long-term profits.
During the pandemic, the extended stay hotel model worked well for first responders and essential workers.
Economy Extend Stay Hotels performed the best during the pandemic.
Top tier: occupancy is down 29.7% and average daily rates (ADR) are down 17%
Middle tier: occupancy is down 14.8% and ADR is down 13%
Economy tier: occupancy is down 3.1% and ADR is down 3.1%
Don’t chase the herd! Chase the returns!
Ash Patel, Rivershore Capital
By searching the MLS five times every day, Ash was able to know about properties before anyone else, even the brokers.
Don’t make excuses when things get hard.
As a commercial real estate landlord, your only job is to make sure that you tenant is successful: treat your tenant like a partner and they will take better care of your property
Success follows selfless acts for others.
Look for unconventional ways to by real estate.
Bringing Property Management In-House: Why, When, and How
Frank Roessler, Ashcroft Capital
Why bring property management in-house
To improve performance: The only real reason you to it. If you can’t do it better, don’t do it at all
Alignment of incentives: Move away from issues of fee-based management. No other clients of higher priority.
Improve communication:Faster awareness of property vitals. More involvement in property operations.
When to bring property management in-house
Pros and cons of bringing property management in-house day 1
Pros:
zero disruption
small overhead: won’t have to build out an entire organization, which is expensive and time consuming
reduced upfront costs: offices and employee benefits
Cons:
no best practices: you will be learning on the job at the detriment of the first few properties
starting at a loss: one property will not cover cost of managing the property, won’t breakeven until you have a couple thousand units
no industry top talent: don’t have a track record to attract best of the best
Pros and cons of bringing property management in-house when you have scale
Pros
Ability to attract top talent: people were eager to jump ship and provide a business plan
Starting with a profit margin: breakeven or make a little bit of money
Best practices: because you have the top talent
Cons
Major disruption: terminating contracts, providing notice, transition process, a million moving parts
Significant startup costs: hiring a full team before you even have revenue
Relationships can be hurt
How to bring property management in-house
Create a policies and procedures manual: a how-to guide for every single department and staff member in your portfolio
Hire a president to run the company: don’t reinvent the wheel, leverage that person’s knowledge, experience, leadership, and contacts.
Build out each department slowly and carefully before you take everything over: learning and development director, digital marketing director, revenue management, CFO, IT, HR, regional and area manager, regional maintenance director
Culture matters
Provide sufficient notice
Six Lessons in Becoming a Better Leader
Brandon Turner, BiggerPockets
The Four “Therefores”: Happiness and fulfillment is found through growth and achievement therefore, in order to grow, I need to focus on my superpower and less on other tasks thereforeI need to hire a partner or outsource my non-superpower tasks, thereforeI need to lead those people to where I desire thereforeleadership is not an option for an incredible life
How to change your identity: mindset -> actions -> identity -> confidence -> actions …
You can be anything you want to be if you change your identity through your mindset actions and confidence
Brandon’s new mindset about leadership
My job is to be a general
Management is not leadership and leadership is not management
When you work with people you love and care for, it’s not work, it’s a beautiful life, a symbiotic relationship of mutual growth and respect
Leadership is the most manly of skills
Freedom is found through great leadership
Leadership is a skill
6 characteristics of a great leader
Quitter: find a way to quit your job as soon as possible by paying an expert to do it
Cutter: the one or two things you need to be doing
Caster: write down the vision for where you want your company to go
Coach: ask the right questions to improve performance of team
Scout: find and attract talent
Student: recognize you don’t know what you are doing and that you need to continually grow
Step 1: Map out where you want to go: Determine your short-term (1 year) and long-term (3 and 5 year) goals. Define an overall vision.
Step 2: Take a personal inventory: Spend half a day figuring out everything you bring to the table from a credit (asset and liabilities), time, experience, skills, personality, and leadership perspective.
Step 3. Determine WHO you need to meet your goals and vision: Based on your business model, figure out the major roles you need to fill. Based on what you bring to the table, determine which roles you will fill and which roles you need a team member to fill
Step 4. Find people to gain alignment and diversity: The biggest mistake when building a team is lack of alignment (values, goals, expectations, entrepreneurial spirit) and lack of diversity (personality, risk, tolerance, skill set, experience). Leverage personality assessments to identify hires who complement your skills and gaps, and who are in complete alignment with your value.
Beyond the Pandemic: Adapting Investment Strategies to the New Normal
John Change, Marcus and Millichap
Vaccines are the key to the economic recovery: The amount of money in money market mutual funds and saving deposits are very high. There is the potential for $4.5 trillion to enter the economy once things are “back to normal” after the roll-out of the COVID vaccine.
Job growth and COVID: A record number of jobs were lost as 10 years worth of job growth were wiped out – 22M jobs. About half those jobs have come back. Hotels and restaurants were hit the worst and have yet to recover.
Retail and COVID: Retail was a mixed bag. It took a hit at the onset of the pandemic, hit a high after economic stimulus and has started dropping again. Restaurants, bars, electronic, and apparel sales were hit the hardest while home repairs and internet sales are at an all-time high.
Huge GDP growth forecasts: GDP is forecasted to grow between 5% and as high as 7.5% in 2021, which would be a 30+ year high.
Top myths of the pandemic
Huge wave of evictions are coming: rent collections are down YoY but are much better than expected due to economic stimulus
Widespread distress will spark significant discounting: distressed sales are 1% of total transactions, and delinquencies are well below distressed market levels
The retail apocalypses: rent collections on retail have surpassed expectations and are being dragged down by entertainment, restaurants, and health centers
2021 Trends
Class B and C multifamily: due to record levels of construction, Class A vacancy is increasing while Class B and C vacancy is at record lows
Self-storage: occupancy hit all time high Q3 of 2020
Seven Lessons Learned With $2.8 Billion of Real Estate During COVID
Jillian Helman, RealtyMogul
Lesson #1. Play defense before an economic crisis, not during a crisis: Three things to do during economic expansion to prepare for economic recessions: underwrite well and don’t do deals that don’t met your underwriting criteria; have a strong property management team in place; have open conversations with your lenders to ensure they will pick up your call during a recession.
Lesson #2. The proforma is always wrong: When creating your proforma for a new opportunity, have a minimum contingency budget of at least 10%, scale back the number of units you expect to renovate and lease, assume an exit cap rate that is 1% greater than cap rate at purchase, and increase vacancy and bad debt to stress test.
Lesson #3. Take a breath and be deliberate: Jillian’s top priorities are the health and safety of residents and team, keeping occupancy up, and shoring up cash reserves. This involved taking a deep breathe and deliberating to determine how to best focus on these priorities. She decided to halt renovations, rent increases, and all nonessential repairs.
Lesson #4. Don’t be afraid to innovate: For example, Jillian began using virtual, self-guided tours.
Lesson #5. Do experiments and test the market: In the example above where Jillian experimented with virtual tours, the conversion rate was higher than in-person tours with a leasing agent. Since the experiment works, she doubled down.
Lesson #6. Be a stellar communicator: Provide detailed monthly updates to investors, communicate what you are proactively doing, and be available and receptive to investors.
Lesson #7. Take a position: During COVID, this started by overcoming fear. Then, Jillian took an offensive position, assumed the world wasn’t ending, that the world would recover, and that data supported that investing still made sense.
What makes her afraid?
Silicon valley tenants/master leases with no credit quality a la We Work
Office with significant roll over (exception if the cash flow is strong enough to return full principal prior to roll over)
Retail unless it is main-and-main
Hospitality in all markets
Impact of insurance costs rising in markets like Florida and Texas
Modeling a refinance with Fannie Freddie debt less than a 4.5% to 5% all-in rate
Sitting in cash when inflation starts to rise
Where does she see opportunity?
Well-occupied apartments with reasonable bad debt financed with long-term fixed rate debt
New construction in growth markets with a late 2022/2033+ delivery
Growth markets – Austin, Dallas, Denver, Raleigh, Charlotte, Columbus, Phoenix, Jacksonville, Salt Lake City, Nashville
Office with long term credit tenants and a functional need to be in an office
NNN with great tenants
Retail at main-and-main trading at a discount
Not yet, but NYC, LA, Miami in 2022/2033
How to Bulletproof Your Mind for Extraordinary Real Estate Success in 2021
Trevor McGregor, Trevor McGregor International
Your mind is like a fertile garden. Whatever you plant, the soil will return, and your thoughts are the seeds. Plant positive powerful thoughts. To avoid too many weeks growing, you must stand guard at the door of your mind.
The two things that happen during the prime years of your life: The prime years of your life are between 25 to 65 years old. This is when you have the most opportunity as well as when the most regrets are formed.
TFEMAR: a thought turns into a feeling; feeling into an emotion; emotion into motivation; motivation to take an action; the action has a result. Therefore, your thoughts equals your results.
The 4S Success Formula: To be successful, you need to be in the right state, have the right story, the right strategy, and the right stands. Your state is your physiology, focus, and language. Your story is your identity – you are either a victim or a victor. Your strategy should be based on a character trait integration – what would so-and-so successful person do?
2021 Forecast for Apartment Investing
Brad Sumrok, Apartment Investor Mastery
2020 performance highlights
2020 ended up a pretty darn good year for apartments
Lost 22M jobs and now down 10M – correlated with apartments
Occupancy dropped 60bps
Rents went down only 1%
Price per door went up and cap rates went down, so investors ‘net worth went up by owning deals
Jobs and population growth are the top two economic factors that make multifamily tick: Migration growth is important but the market must also be landlord and business friendly
Sumrok process for double digit returns
1st investment is specialized education
Define why, SMART goals, investment criteria
Stabilized and value-add
Select the right market
Leverage OPE, OPT, OPM (including syndication)
>60 units for economic of scale
C and B class
Be dynamic (i.e., now A Class in recessed markets)
Exponential and expansive mindset
How to select the right target market
Landlord and business friendly
Above average cap rates
Above average job growth
Above average pop growth
Above average affordability gap: rent of median apartment unit < PITI of median SFR
Understanding local “markets” and cycles: boots on the ground
=highest returns and lower risk
2021 Forecast
3,695,100 new jobs up 2.6% and 2.9% in 2022
Job growth strongest in white collar (Class A)
Occupancy down 40bps due to new supply
Rents up 1% in 2021 and 4.1% in 2022
Construction up 14.5%
Top 2021 markets: Atlanta, DFW, Austin, Houston, Tampa, Jacksonville, Phoenix, Columbus, Denver, CO Springs, NC, Nashville, Knoxville, Indianapolis
In one year from now, if you waited, you will regret it.
How to Write Off Almost Anything
Karlton Dennis, Karla Dennis and Associates
The two kinds of tax payers you don’t want to be
Ultra-aggressive: don’t know how to leverage tax codes but goal is pay least amount of taxes as possible
Ultra conservative: don’t want to take any of the deductions they qualify for and are afraid to reduce taxes because they’ve been living in fear (listening to info online, news, past CPAs, etc.)
Four simple steps to following the tax code
You must have a business: run your business like a business, have a time investment in a business, have a mentor or coach, have a business and strategy
Your business expenses must have a business purpose: there is not a list in IRS handbook that says what you can and cannot write off. If it is ordinary, necessary, reasonable in pursuit of income, it can be deducted
Proof of payments: keeping copy of receipts is important because it is documentation of exactly what you spend your money on – what is business and what is not business. Take pictures of your receipts
Expenses properly reported: If you are trying to do tax planning on your own, you will fail.
Most common tax nuances
Not keeping property receipts
Recording keeping is muddled
Miscategorized expenses
Late on bookkeeping
How the wealthy stay in the 0% to 15% tax bracket: organization and a strategic tax plan.
Passive Investor Tips for Investing in Multifamily Syndications
Travis Watts, Ashcroft Capital
What is financial freedom? When your passive income exceeds your lifestyle expenses.
What is the right investment criteria? There is no right or wrong investment criteria. What matters are your goals and your risk tolerance.
Difference between passive and active investing
Passive: Lacks time, enjoys reading financial news, likes to own a little bit of a lot, seeks to match not beat the stock market
Active: Enjoys the business of real estate, may not value diversification as top priority, seeks to control investments, has an advantage of competition, seeks to beat the market
Active is hands on, passive is hands off
2021’s Place in the Housing Cycle
John Burns, Burns Real Estate Consulting
High demand:
Consumers made $1.03T more than usual last year due to government stimulus
Consumers spend $535B less than usually last year, despite spending more on goods
Consumers saved an additional $1.6T in 2020 compared to 2020
Most homeowners and potential new home buyers are far better off financially today than a year ago
Google search has risen 56% for new homes, 9% for new homes
Millions of workers no longer need to commute
Low supply:
Home listings are down over 40% YoY
New supply has fallen – 10% fewer communities to sell from YoY
Unsold new homes dropped 69% YoY
High demand + low supply = 2021 housing boom: John says we are clearly in an upcycle.
Unlocking the Fund of Funds Model
Hunter Thompson, Asym Capital
Traditional real estate partnership: Capital partner and operating partner form management LLC that purchases real estate
Co-GP model: multiple capital partners and operating partner form management LLC that purchases RE – SEC doesn’t like, especially with increasing number of capital partners
SPV/Fund of Funds:
SPV: special purpose vehicle
Considered a pass through entity
Doesn’t mean there are multiple assets
A bunch of investors invest in a SPV, there is a manager of the SPV (placement agent) who invests with another operator
Why would anyone invest through an SPV instead of investing directly with an operator?
Your clients desire your expertise
Gives them access to otherwise unavailable operators: high minimum investment
The dream clients you have attracted have picked you to rely on
Provides investors an opportunity to defer to your due diligence
Most investors are not like you
The economies of scale are not necessarily less favorable
Preferential treatment of SPVs
Operators prefer to focus on implementing the business plan not investor relations/fund administration
You can leverage what you are bring to the table as a negotiation tool to receive preferential economic treatment
Many operators are willing to forego some of the economies in order to receive larger checks
Three Things it Takes to Make the Inc 5000
Defining yourculture: Start with your why. why do you do what you do? Why do you go to work in the morning? Then, transcribe your why into a one or two sentence mission statement to inspire you and your team to show up.
Next is to know where you are going and what the end state looks like. This is your vision – what does success look like to you.
Third is to define your values. These are the behaviors you want to see in your organization.
Last is to avoid the say-do gap. Be care that you don’t say one thing and do another, because then your culture isn’t believable.
Developing yourplan: Understand what you are going before you do it, but set a time limit. A good rule of thumb is to understand and education yourself for 90 days, develop a plan for 90 days, then go out and take action.
A good strategic plan includes three goals, three to five objectives, and multiple key results over a three year period.
Assemble your team: First, understand your strengths and weaknesses. This is best accomplished by asking your friends, and especially your spouse. Then, find people who fulfill your weaknesses.
When hiring people, focus on their character more than their competencies. You can teach competencies but you cannot teach character. Then, focus on experience but understand their track record to ensure they were successful because of skill and not luck.
Why Consider Industrial: The Case for Industrial Syndications
Monick Halm, Real Estate Investor Goddess
What is industrial real estate: all land and buildings which accommodate industrial activities
Why consider industrial real estate
Escape the feeding frenzy that exists in other asset classes
Diversify your portfolio
Long-term NNN leases with excellent tenants
Increasing demand by companies (especially e-commerce)
Strongest performing asset class throughout the pandemic
What is the current state of the market for industrial real estate:
Industrial spaces are being used by essential businesses –
Industrial has been the strong asset class during the COVID pandemic
Rents are going up and occupancy is going up
Institutional Capital Demystified
Lance Pederson, Verivest
Having a fund is a more efficient way to capitalize.
Being an operator is like owning a trucking company and having to own a refinery create your own fuel.
Institutional capital is the equivalent of owning a job
There’s a reason why you’re seeing sponsors with 30+ year track records raising capital on crowdfunding websites because the cost of capital is much cheaper
Create Class A and Class B shares to attract HNWI, SPVs, institutional investors, etc.
Institutional readiness checklist
Conviction/differentiated strategy
Polished online presence
Pitch deck/executive summary
Due diligence questionnaire
Verified track record
Investor references
Secure data room
Quarterly reporting
If you focus on building your HNWI base, the rest well come.
Five Evolutionary Ideas for Your Business
Joe Fairless, Ashcroft Capital
Protect against biggest liability you’re currently not paying enough attention to: For 99% of syndicators, compliance. Most securities attorneys are really good at answering the questions you ask, but your are still at risk when you aren’t asking the right questions. The solution is to hire a an in-house compliance team member and acquire the proper insurance.
Bring the best out of your team: create a single KPI for each team member or a one sentence description of what their roles is so they know exactly what is expected of them and to motivate them to exceed their KPI for a bonus.
Enjoy better deal flow, deliver better returns, and create more sanity: create a fund instead of single asset purchases. It increases deal flow because you can be more flexible with the types of assets you target. It generates better returns because you can commingle capital within a fund, so there is less ideal capital.
Get better results on your thought leadership platform and in your commercial real estate business: Once your thought leadership platform matures, transition it to other people. They can focus on growing the brand and you can focus on growing the investing business.
The success paradox: The more successful you become in business, the less likely you will receive constructive criticism from your team members. The solution is to find three people in your circle who will provide you with honest feedback. Also, identify an event that didn’t go according to plan and think about how you were responsible for it taking place.
Intellectual Debate: Interest Rates Will Be Higher in 24 Months
Hunter Thompson, Asym Capital; Neal Bawa, Grocapitus Investments; John Chang, Marcus and Millichap; Ryan Smith, Elevation Capital Group
Winner – Interest rates will not be higher in 24 months
The question shouldn’t be, “will interest rates be higher,” the question is “how low will interest rates go and when will they go negative?” Hunter says many industrials countries already have zero and negative interest rates.
Japan is the new mode: in response to an 80% drop in their stock and real estate markets, they decided to print money to halt unemployment. This money printing will not end in the foreseeable future, and is being mimicked by other industrialized countries. Therefore, rising interest rates would blog up the global economy
The trend is your friend and don’t fight the Fed. The trend has been down and to the right for more than 40 years. Fed said they will keep the funds rate at 0% through 2024
Losers – Interest rates will be higher in 24 months
There isn’t evidence that the Fed will continue lowering interest rates. The prediction is based on the desire of real estate investors to see lower interest rates
Fed will rise interest rates to control inflation: $5 trillion in stimulus money was injected into the economy, increasing the money supply to an all-time high. GDP is forecasted to grow between 5% and 7%, which means inflation.
Fed always rises interest rates after recessions
Fed sees pandemic as a short-term risk, which means the Fed has changed its position
State of Multifamily Market: Apartments in the Age of COVID
Robert Calhoun, CoStar
The spring leasing season wasn’t lost: It was just pushed back later into the year. We lost 61k units in demand between March and June 2020 and gained 69k units in demand between July to November.
Demand in the suburbs are strong while multifamily continues to underperform in downtown areas
One bed rent: drop overall at onset but suburban bounced back while downtown dropped significantly
NYC rents by commute time: 12% increase in rents in areas with 51 to 60 minute commute times, 9% reduction in rents for areas with commute times less than 10 minute
Densely populated metro areas had really bad net absorption
Change in asking rent from March to Dec: Downtown markets top list of markets with greatest decrease and suburban markets top list of markets with greatest decreases
2021 YTD rent change: mix of downtown and suburban areas with increases in rents
Concessions: nearly triple for downtown and only slightly higher for the suburbs
Availability rate: spiked nationally, getting better which was driven by suburbs. Rates were massively elevated in downtown areas but improved quickly
Rent trends by unit type: two-bed are in more demand than one-bed, underperformance of studios
Starts and under construction: massive supply wave over last five years but constructions have rolled over in 2020 especially starts
Under construction by star rating: vast majority are high end expensive properties largely in downtown areas, lack of supply of affordable housing
Rents by star rating: 3 star rents returns to normal seasonal patterns while 4 and 5 star has underperformed
Ask open ended questions: When interviewing operators, see if they are interested in what you have to say
Write down notes
Keep a log of operator Q&A
Portfolio projects
Referrals
Property location
Are they an operator or syndicator? Determine what role the company plays. How are they compensated, how are they aligned with you? Are they aligned with the success of the project?
Tell me about a deal gone bad? This is Ryan’s favorite question. Having no deals that have gone bad indicates low experience or a lie while having deals that have gone bad helps you judge the grit of the syndicator.
What is their mission, vision, and values?Does their mission, vision, values, align with yours? Ask them to give an example of how they’ve used their values recently.
Who is on the team? Are they a one-man band or do they have a deep bench? Are they vertically integrated? Are they using the fees they charge to hire a great team or to pay themselves?
What is their core business model? Selling education? Working elsewhere? Focused on deals? Gurus?
What is your investor communication plan? Ask for last three communications to get a better understanding of their communication style. Is the plan in writing? Can you verify property performance against projections?
What is the performance of their portfolio?
Historical performance (proforma vs actual): comparison is more important than absolute return since it gives you the right context
Was it project level IRR or investor IRR: total project may look better than investor level
Consistent metrics: Ryan likes to use equity multiple and how long it took gives true time tested return, IRR might be misleading or not the best metric
Obtain reference and conduct a background check
Don’t ask for a reference, find your own, because no one gives bad references
Find others that have invested in the company
BBB, Google reviews, 506 Group, etc. – search for the company name and name of the principles
Insurance
Does SEC attorney provide E&O insurance to cover for lawsuits
What exclusions are included on their title insurance?
Is there property insurance at least from an A rated Carrier?
Decision to exit
What would make an operator exit early? What is their justification for selling?
Have they sold early in the past? How many time and, how did the actual returns compare to projections?
How do they brief investors?
The Devastating Impact of Climate Change on Your Real Estate Investments in the Next 10 Years
Neal Bawa, Grocapitus
Impact of climate change in 2020 and questions to think about
2020 had $95B in damage from climate disasters
What will happen to your investments when taxes increase to pay for massive sea walls?
Where will the money come from to fix Texas’s power grid?
In California, the six greatest wildfires happened in 2020, and will double in five years. How will this impact California cap rates?
Cities with sea level rise exposure are already priced at a 7% discount
Many climate risks may become uninsurable:Insurance companies are starting to buy climate data from Moody’s and creating city-by-city insurance plans.
Climate data is being used to downgrade entire cities: When a city is downgraded, their ability to borrow goes down, making it harder to fund re-construction projects. As a result, people move out, and it continues to spiral.
The end of the 30-year mortgage: Full cities may change to 20 year or 15 year mortgages options
The cities with no climate risk will be the next gold rush.
Overall, the people who set ratings, cap rates, insurance rates, mortgage terms, as well as cities are taking climate risk into account, and so should you.
How to Automatically Get More Passive Investors
Michael Blank, Nighthawk Equity
Create a lead magnet: When someone downloads a lead magnet, they get tagged in system as “downloaded”, and put on email list to receive educational emails
Join the club: After downloading the lead magnet, they are invited to fill out a detailed questionnaire, and get tagged as “joined”.
Schedule a call: Included is the option to schedule a call after filling out the questionnaire. After the call, they get tagged as “deal ready” and are now prepared to receive upcoming opportunities
Follow up automation: Automatically send follow-up emails to people tagged with “downloaded” and “joined” until they move forward in the process and set up a phone call or unsubscribe.
How to Create a Social Media Content Engine
David Toupin, Obsidian Capital & Real Estate Lab
Create lots of content one or two times per month: Either by yourself of hire a videographer for one or two sessions each month, and upload all the content to a DropBox folder
Hire an editor to create a content database: use month’s worth of content to create longer videos, shorter videos, and pictures with caption. The goal is to create at least 10 social media posts per one hour of video content
Hire a content manager: the content manager will use the content database to compile one month’s worth of social media posts.
Determine what the focus of your content is going to be: All posts should be directed towards achieving your end goal
You will approve the posts: Once the content manager has compiled a month’s worth of posts, you review and approve
Schedule the posts: After you’ve approved the posts, the content manger schedules them throughout the next month.
Rinse and repeat
When to Bring Property Management In-House
Frank Roessler, Ashcroft Capital
Day 1: Pros and cons
Pros:
zero disruption
small overhead: won’t have to build out an entire organization, which is expensive and time consuming
reduced upfront costs: offices and employee benefits
Cons:
no best practices: you will be learning on the job at the detriment of the first few properties
starting at a loss: one property will not cover cost of managing the property, won’t breakeven until you have a couple thousand units
no industry top talent: don’t have a track record to attract best of the best
When you have scale: Pros and cons
Pros
Ability to attract top talent: people were eager to jump ship and provide a business plan
Starting with a profit margin: breakeven or make a little bit of money
Best practices: because you have the top talent
Cons
Major disruption: terminating contracts, providing notice, transition process, a million moving parts
Significant startup costs: hiring a full team before you even have revenue
The performance of real estate notes was a bellwether for the economy in the last recession, so in this Best Ever Webinar we explored the performance of 1st position and 2nd position notes, how the market has been affected by COVID, and what the data indicates about the real estate market at large.
As a servicer of tens of thousands of first position notes, Jorge Newbery pointed to the $4MM loans currently in forbearance, which are on the precipice of foreclosure after government intervention comes to an end.
The counterargument speared by Kathleen Kramer was that the $4MM homes don’t represent the volume of homes in trouble, but in part those taking advantage of the situation. She also pointed to all-time highs in homeowners equity relative to average debt amounts and record low interest rates that could allow troubled homeowners to be bailed out by refinances.
Jim Maffucio added that we see the unemployment rate dropping and average HHI of homeowners being significantly higher than the last recession where subprime mortgages were provided to low wage earners.
Regardless, all agreed that the amount of unpredictability in the future has returned to normal along with pricing for notes, suggesting that for the time being the market has an optimistic outlook on the future of residential real estate.
What the future holds for commercial notes is a larger question with retail and hotels going to double digit CMBS special servicing rates. Will there be opportunity to buy distressed office notes? Whispers of the opportunity are just beginning and it could be too early to see what the future holds.
Watch the on-demand playback of this webinar and past webinars on our conference platform NOW! Our networking has started for this year’s Best Ever Conference, don’t miss out! Use code WINNERS30 for 30% off your ticket here.
Stephane Rochet shares how making a plan for success also means creating a plan to push your own boundaries
In the early 2000s, Stephane Rochet worked as a police officer in his community. During his shifts and interactions with his fellow officers, he noticed many of them were often discussing their real estate investments and what was happening in the world of “alternate investments.” After leaving the police force in 2007, he still recalls that environment as the place where he first learned about the potential of real estate investing.
“It was just a realization that the traditional stocks, bonds, put money into your 401(k) and hope for the best, wasn’t working for me,” remembers Stephane. “So, I started to look for other alternatives, and that’s where it started me [into real estate investing], and then the journey continues.”
Stephane moved with his wife and two children to San Diego, California, to pursue a career in the field of athletic performance, specifically around the strength and conditioning of athletes. He also started investing in single-family houses, kickstarting what would become a very active interest in multifamily syndication and the alternate investments he used to hear so much about.
To grow, Stephane began to seek networking opportunities to build relationships and connections with like-minded investors. After several lackluster experiences with local meetups, Stephane realized that the Best Ever Conference presented serious options for personal growth and learning opportunities.
“I made three simple goals. I’m a little bit of an introvert, so going to this, I said, ‘Hey, look, you have to get out of your comfort zone and meet people.’ There were a few people that I had met with or talk to, or emailed or Facebooked before going, and I said, “Well when I’m there, I’m going to actually meet them in person and talk to them.” remembers Stephane. “I had a list of about four names of people who I had contacted previously, had been in touch with, and I sought them out, met them, we had discussions, and they introduced me to other people.”
Meeting people beyond Stephane’s known network was the ultimate goal. He found it easy to achieve, given the conference’s tools, to connect with attendees and plan your experience before arriving on-site.
“I was just determined to meet five new people every day, and that was easy because you had presenters. You’d go sit in a room with presenters, and you just talked to the people beside you while you’re waiting,” said Stephane. “Because I’m new and learning, I wanted to make sure to take advantage of the presenters that were there, so I looked at the schedule beforehand and set out my schedule and made sure I got to see all the presenters that I was interested in.”
As with most conferences, the real test is what you’re able to do with the knowledge you gained once you arrived home. For Stephane, it was not only useful but remained to be empowering on his real estate journey.
“I don’t know if I really realized it until I was on the flight home, but I just felt really excited and a lot more confidence that A, we could do this thing, B, we were on the right track, and C, you didn’t need to be, especially gifted,” said Stephane. “I mean, obviously, you have to get the knowledge, and you have to have some skills, but there were so many regular people just like me out there that were plugging away and doing the same thing.”
In the landscape of COVID-19, Stephane believes that the environment of meaningful relationships and networking comes slightly more complicated. However, not all things have to get harder. In fact, it’s Stephane’s philosophy on real estate investing as a whole that truly relies on keeping things simple.
“It’s so easy to get into the weeds, but an investor doesn’t really care about that, especially on the first call or anything,” said Stephane. “Just remember to keep it a simple, broad picture, and explain things in a way that people can just grasp it and understand why it’s a good investment or why it’s a good path to follow.”
This year at the Best Ever Conference, taking place February 18-20th, there is a full day dedicated to networking. Start networking now and use code WINNERS30 for 30% off your ticket! Register here.
As any real estate investing pro can attest, networking is an irreplaceable factor in the success of active and passive investors. In a world catapulted into the virtual space during 2020, many investors have struggled to find how to network impactfully.
With meet-up groups delayed and in-person meetings on hold, the virtual space is now the only space to network. While many are postponing conferences, some are taking advantage of the opportunity to join in on virtual networking from right where they are.
A previous conference attendee said, “This is the lowest barrier to entry because you don’t have to leave your living room. You don’t have to buy a plane ticket. So if you’re thinking about going, you really don’t have an excuse.”
The goal of our virtual Best Ever Conference is to provide maximum value to each attendee in both insights and networking opportunities. The conference is filled with speakers and content focused on our audience’s curated needs and interests. We have a whole day set aside for networking and we strongly encourage you to take advantage of our exceptional platform that makes virtual networking easy. Some of the ways you can connect:
• Set 1-on-1 Meetings with Other Attendees
• Join Q&A Rooms for the Latest Topics
• Enter the Networking Lounge with Custom Table Topics
• Speed Networking to Make as Many Connections as Possible
• Playback Any Keynote Speaker on Demand
Our platform is open to attendees NOW. Start your networking. Use code WINNERS30 for 30% off your ticket! Register here.
How artist-at-heart Marc Cortez evolved his technology and media business success into a passive investment career
Creativity and connection fueled the early stages of Marc Cortez’s career. He thrived in competitive, start-up environments where the stakes were high, but the growth opportunities were endless. After building thriving social presences for some of the world’s biggest brands, Marc evolved his business savvy into advising budding entrepreneurs to raise capital and develop their business plans. It didn’t take Marc long to start formulating business plans of his very own.
Almost ten years and several successful ventures later, Marc finds himself exclusively in the investor seat at his firm Cortez Holdings Group. The creation of this investment group was made possible by the successes achieved in his earlier career.
“I’m an artist at heart, but my passion for real estate was inspired by the freedom I can create in my life,” said Marc. “Professionally, I spent the last ten years in tech and media turning big wins into passive investments by way of syndications. I’m consistently pursuing ways to grow my portfolio and increase my cash flow.”
Growing his portfolio and increasing cash flow has been significantly impacted through attending conferences like the Best Ever Conference. A long-time attendee, Marc began attending as a volunteer to help a friend. What started as a simple act of friendship turned into a consistent presence each year, where Marc now ushers VIP guests throughout the event.
Beyond simply attending the event, Marc’s most memorable takeaway is essential for investors of all skill levels to keep in mind.
“Make one really good friend. It’s easy to run around dropping ‘cards’ off and playing the quantity over quality game. But one incredible connection can open up an entire world,” said Marc. “I’ve seen deals and business partnerships sprout and excel from these relationships. So build a healthy connection with at least one person and be amazed at the future potential.”
Personal connections have changed the way that Marc views his personal investments, finding that the personal element often helps propel deals far faster than they would otherwise go.
“Discussing a potential sponsor with people in the same sphere or community also helps with diligence. It’s easier to get a recommendation or review,” shared Marc.
Understanding another key component of relationships is critical in bringing value to investments: how people handle adversity.
“I have a longstanding relationship with the partners [at an investment group], and I trust that my best interest as an investor is a priority, but even more so that a great relationship is a priority,” said Marc. “I can recall countless examples of how they’ve supported me inside the investment and out.”
Dave Allred discusses what it looks like to define a path for success while making the most of each moment along the way
Discussing finances was something that wasn’t done in Dave Allred’s family growing up. Having never had those critical conversations around money or money management, Dave realized in his early adult life that he wanted more for himself around financial understanding and financial freedom.
At age 21, he committed to becoming a lifelong student of finances and investing. While he actively continues pursuing knowledge and personal development today, he credits much of his success, both personally and professionally, to that commitment very early in his life.
“I think it’s really important in our personal development is that we’re always teachable and coachable,” shared Dave. “That’s just been a guiding principle of mine is to always be a lifelong student. Not only in finances but also in real estate, personal development with my own family.”
While networking may be a topic that can make some uncomfortable, Dave rethinks networking as truly prioritizing relationships. It’s authenticity and relevancy that distinguishes the development of relationships from mere networking, which Dave believes can often come across as “gimmicky” or forced in certain situations.
“I feel like relationships are the new currency in business. My best deals, the business that I’m most proud of, has actually been with my friends, with my network,” shared Dave. “They’re people that I trust and that we have similar interests; we’re on the same mission in life.”
Relationship building has never been more critical than in our current environment, where how those relationships are built has had to be rethought due to the ongoing COVID-19 pandemic. While conferences like Best Ever Conference are transitioning to a virtual platform to foster a sense of community and connection, Dave believes that meaningful relationships can continue to form beyond these virtual events.
“The power of social media and staying connected through Facebook groups, my Instagram page allows me to put a lot of content out there just to keep adding value for others. I follow on Instagram a lot of the people that I really respect,” said Dave. “While that’s not as personal as meeting in-person or on a call, I feel like we can still stay very connected, know what we’re working on, what we’re up to. I’m inspired by a lot of others in the space through social media. It’s a very powerful tool to be able to still communicate, add value for each other, and really collaborate.
Beyond a continuous drive to learn also lives a desire to document and measure success. Dave spent a significant amount of time creating his “lifestyle design”, or what he calls a blueprint for his own life. By documenting his core values, mission statement, non-negotiables, and more, he could use those as a foundation to build financial success on top.
“People overestimate what they can accomplish in one year, but they underestimate what they can accomplish in three to five years. I found that to be true over and over,” said Dave. “If we can get clear on what we really want in the long-term and have the right habits and behavior then we can actually accomplish amazing, significant things, but it takes time.”
Start your networking today at the Best Ever Conference, taking place February 18-20th. Use code WINNERS30 for 30% off your ticket! Register here.
Rob Withers explains how the world around him inspires his philosophy behind real estate
Born and raised in Arizona, Rob Withers moved to Colorado for college and found his home. He spent a large bulk of his life fully engrossed in all the outdoor activities that Colorado has to offer. From mountain biking to hiking to skiing, Rob took advantage of being outdoors whenever he could. The only time that seemed not to be possible was when he worked as a technology consultant for more than 25 years but discovered real estate investing on the side.
Only a few years out of college in the 1990s, Rob invested in several single-family rental homes in Arizona and Colorado. The time commitment of his family and a full-time job at a multinational consulting firm kept him from fully investing his time to learn what was necessary to attain true success and the desired returns on his investments. Leaving the investing world feeling discouraged, another opportunity presented itself that changed how Rob invested both then and for his foreseeable future.
“Around 2010, a good friend of mine who was a realtor said to me, “Lakewood Housing Authority is selling off all this inventory, duplexes, single-family homes. The income’s great. You should really look at this. I know you dabbled in real estate a while ago.” And he had the contract to sell off 40 or 50 doors,” remembered Rob. “And so at the time I bought three duplexes, and the math was totally different than it was in the ’90s. Since then, I expanded buying more rentals and developed a partnership with a builder to build single-family homes and duplexes in Denver.”
The transition from single-family properties to duplexes opened Rob’s eyes to the multifamily syndication model. Rob bought and sold a 64 unit multi-family property in 2019. Over the last few years, he’s been transitioning more of his time, energy, and financial resources to diversify his investment portfolio and develop relationships in the real estate investing community.
Attending conferences like the Best Ever Conference in 2019 was an easy decision for Rob to make, given his close geographical proximity to Keystone. He was also inspired to lean into his desire to learn and do more within real estate.
“I was impressed with the quality of the people at the conference. Many have had successful careers and are learning the business” said Rob. “But then there are others that are a little bit more mature and have been around the block a bit longer but are still very approachable and still willing to discuss deals. I feel like I learned a lot and met great people.”
When thinking about the impact of what COVID-19 has on the reality of networking in 2021, Rob believes there are definite impacts for new relationship building, especially if real estate investing is not your primary occupation.
“For me personally, I still feel like there’s so much more I could do on the real estate side, simply around networking if I didn’t have the challenge of 40 to 50 hour a week job. So that does impact me,” reflects Rob. “But there are certainly tools that can help; I think a key for a conference where there’s a larger group setting is to create a form of engagement where there can be joint participation.”
This year at the Best Ever Conference, taking place February 18-20th, there is a full day dedicated to networking. Start networking now and use code WINNERS30 for 30% off your ticket! Register here.
Lifelong pilot Tait Duryea shares how his passion for real estate soared after the Best Ever Conference experience.
An active lifestyle was always in the cards for Tait Duryea. Alongside his avid love of flying, Tait had always been intrigued by real estate investing. Not long after he started his career as a pilot, he purchased his first rental property in Las Vegas, Nevada at the age of 24.
“It was just a single-family house in Las Vegas. I put a property manager between me and the tenants, so they wouldn’t know how young I was,” remembered Tait. From that single-family home onward, he fell in and out of real estate investments without a particular strategy. Being newer to real estate, he discovered the Best Ever Conference taking place in Denver in 2019 and decided to take part.
“The catalyst for getting me more active with [real estate] was Best Ever Conference. It was the first conference that I had ever attended and it just catapulted my career from being someone who was new to the ropes from reading books and listening to podcasts, to being someone who did real estate and had a real estate network, because it’s all about relationships,” said Tait. “It launched my true real estate investing career, got me out of single-family [investments] and into commercial and syndication.”
Passive investments, like multi-family syndication, weren’t something that Tait was even aware existed prior to the Best Ever Conference. During the event in 2019, a mock debate whether active or passive investing was better took place, prompting some new thinking.
To many, the concept of networking can seem artificial, forced, or even trite. However, relationship building proved to be an essential element that Tait took from the Best Ever Conference, retaining relationships forged over that weekend into his real estate transactions today. The absolute, exponential power of relationships in the real estate investing business is something that Tait believes is worth experiencing and contributing to.
“Just having a network of like-minded real estate investors who you know personally and that your friends with is rocket fuel,” said Tait. “And unless you’ve been to a conference and you start talking with other people who are doing things like you are and have ideas and contacts and people that can help in what you’re trying to do, it’ll change your investing career.”
Attending the Best Ever Conference ultimately changed how Tait invested, shifting 50% of his investment portfolio into finding, vetting, and investing in limited partnership syndication deals instead of all active investments in single and multi-family homes.
Tait believes there’s never been a better year to try it out.
“This is the lowest barrier to entry because you don’t have to leave your living room,” said Tait. “You don’t have to buy a plane ticket. So if you’re thinking about going, you really don’t have an excuse.”
Start your networking today at the Best Ever Conference, taking place February 18-20th. Use code WINNERS30 for 30% off your ticket! Register here.
TOPIC: Looking to Note Investing in the Global Health Crisis
When a recession hits the commercial real estate market, an under the radar asset class flourishes while the rest flounders. Distressed notes are derivatives of real estate ownership that express a low-risk alternative to real estate, often highly discounted. Join us to hear how experts in the space have been deploying multiple strategies to produce stellar ROI even during the toughest of times.
TIME: Feb 11, 2021 [02:00] PM in Eastern Time (US and Canada)
With over 30 years of experience in distressed asset management, community development, and borrower advocacy, Jorge founded preREO with the goal of bringing stability to neighborhoods challenged by the blight of vacant homes. He is driven to empower local small business partners to revitalize and improve their communities while creating investment opportunities for themselves. Throughout his career, Jorge has utilized optimism and resiliency to find opportunity in adversity and he has a proven record of developing innovative solutions that can be mutually beneficial for lenders, borrowers, and communities alike. He founded American Homeowner Preservation, the country’s first crowdfunded distressed mortgage investment platform; AHP Servicing, a nationwide mortgage servicer; and Activist Legal, a law firm facilitating default legal services nationwide. He also authored Burn Zones, sharing lessons learned through his challenges and successes as an entrepreneur.
James Maffuccio
Co Founder and Chief Investment Officer Aspen Funds
Mr. Maffuccio is a 30-year real estate veteran and an expert in mortgage notes. He is deeply networked in the secondary mortgage industry and is responsible for acquisitions and underwriting as well as relationships with primary sources and key vendors. During his real estate career, Mr. Maffuccio developed, and/or rehabbed multiple residential projects in Southern California, including infill subdivisions, affordable homes, luxury homes and homesites, multifamily, and planned developments, such as the Gold Nugget Award-winning “Traditions” community in Fillmore. Mr. Maffuccio has personally executed and/or managed every aspect of the development process, including site selection
and acquisition, project conceptualization and design, procurement of entitlements and permits, regulatory compliance, entity structuring and capitalization, construction management, marketing, sales, and investor relations.
Kathleen Kramer
Real Estate Broker 1 Oak Advisory, LLC
In her 25+ years as a licensed Real Estate Broker and Mortgage Originator, Kathleen Kramer has closed over 2500 transactions for more than a $1 billion in volume. She ran a successful Real Estate club in Huntington Beach from 2002 to 2006. She and her husband, Michael, have personally invested in a variety of real estate backed investments including single family, multi-family, office, land development, reg D syndications and non-performing notes in several states. Investing in real estate gave Kathleen the financial liberty to take a sabbatical from her Real Estate and Mortgage Brokerage business for the last two years. She spent the time rehabbing her house in Huntington Beach, travelling, homeschooling her daughter, caring for the older generation and planning what is ‘next’.
Ben Lapidus
Chief Financial Officer for Spartan Investment Group LLC
Ben Lapidus has has applied his finance and business development skills to construct from scratch a portfolio of over $100M assets under management, build the corporate finance backbone for the organization, and organize over $20M of debt capital from the firm. In addition to completing over 50 real estate transactions at and prior to Spartan, Ben is also the founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC.
All previous webinars will be featured on demand during Best Ever Conference on February 18-20th. Use WINNERS30 to get 30% off your ticket here.
Investing in 401(k)aos: Highlights from Andy Tanner’s Book
The 401(k) retirement plan has taken its place alongside Mom and apple pie as a pillar of American wholesomeness. Most private-sector employees invest in a 401(k) where offered, and the public sector has its equivalent accounts. As workers, we learn that contributing to an employer-sponsored retirement account is the best way to fund retirement. Andy Tanner, in his book “401(k)aos”, questions this one-size-fits-all assumption. On this Actively Passive Investing Show podcast, we discuss Andy’s five main points and add our observations on the 401(k)’s potentially chaotic role in lives and markets.
1. 401(k) to the Rescue
To understand why the 401(k) is an agent of chaos, we need to look at its history. Invented in 1978 to help workers fund retirement, the 401(k) plan was meant to supplement other options such as IRAs, pensions, brokerage accounts, and personal savings. Ideally, the average American worker would draw from a diverse financial portfolio in later years. A financial strategy could include commercial investing and active investing in providing retirement income streams.
Fast forward to today, and many people rely on their 401(k) as their primary retirement strategy. They expect this account, along with social security and homeownership, to support them throughout retirement. In reality, most people won’t have nearly enough saved to cover their expenses. According to Andy, relying on the 401(k) has created a tragic and chaotic situation. He echoes the original architect Ted Benna in asserting that it was never intended as a primary retirement account.
Another aspect to consider is whether your financial goals are congruent with the 401(k)’s purpose. These plans build net worth, not provide cash flow. If you are involved in passive investing or commercial properties, you care about cash flow. Placing significant assets in a 401(k) may not be your best option, as withdrawing cash before retirement age could incur steep taxes.
2. The Peril of Mutual Funds
If you are an active investor, consider the lack of agency you have with a 401(k). These plans rely on mutual funds as investment vehicles. Further, they offer limited choices and stratify them according to risk. The conventional advice is that younger workers can tolerate more risk and should invest in riskier but potentially higher-yield funds. Older workers should invest more conservatively. Plans usually guide employees through a friendly online algorithm designed to help them allocate their contributions according to risk tolerance.
The issue here is with applying the same general investing strategy to all people. This approach also assumes that age primarily determines risk tolerance, irrespective of individual goals and circumstances. If you are an active investor, you know this view is shortsighted.
Andy flags historical mutual fund performance as a risk. Mutual funds generally track the stock market. If the S&P and Dow Jones indexes are down, your account probably is too. Reallocating a 401(k) is cumbersome and tied to specific time windows. You cannot react agilely to a volatile market, and you can’t plan to hedge losses.
The fundamental issue is that mutual funds are part of the Wall Street system and tied to its fortunes. Real estate and other assets can hedge against Wall Street, especially if they focus on people’s basic needs for goods, services, and housing. Retail shopping centers often survive market downturns. Other commercial properties, such as well-managed apartment complexes, usually thrive.
When you manage your own brokerage account, you can set a stop loss against sudden stock price drops. You can create other alerts that help you succeed with active investing. If your 401(k) nosedives, you wait for better days.
Retirement Fund Waiting Game
You may wonder if you need that flexibility in a long-term savings plan. After all, isn’t the 401(k) meant to be the ultimate vehicle for long-term passive investing? Don’t you want to let compounding and historical market trends work their magic? After all, many Americans lack the resources or knowledge to pursue commercial investing.
Let’s think back to the Great Recession. In many cases, the value of conventional retirement plans dropped by 50% or more. People lost half their retirement savings overnight. While the losses were unrealized, they quickly became real to the many people who needed to draw on the money within ten years. Employees approaching retirement did not have time to make up for the losses. Younger workers waited five years or more for their accounts to regain pre-recession value. If you were planning on borrowing against your 401(k) for an imminent home purchase, medical bills, or your children’s college expenses, you were out of luck.
If we look at the math behind the drops, the portfolio performance needed to recover is greater than the loss. If your account plummets by 50%, for example, you have to gain 100% to return to the initial value. In other words, you have to double your money to break even. This is an odd calculus for an investor, particularly when applied to mutual funds.
3. Feeding Wall Street
According to Andy, you should realize that the 401(k) was invented to enrich Wall Street. Though it may offer some advantages to individuals, its purpose is to promote mass participation in the stock market. Wall Street reaps fees and other profits from this vast investor base.
This doesn’t mean a 401(k) has no place in your financial strategy. Just keep in mind that the vehicle was not designed to benefit the individual. The tax situation illustrates this fact. If you want to withdraw from your account before retirement age, you face a stiff tax rate and penalties. To avoid this, you need to take a hands-off approach to that money or leverage the few exceptions, which still tax you at ordinary income rates.
Let’s take a mutual fund purchase as an example. If you buy a fund on your own through a broker, you can hold it for over a year and then sell at a long-term capital gains tax rate. This rate is 15% for most people. If you buy the same fund through your 401(k), hold for more than one year, and then cash out at retirement age, you may pay up to 37% in taxes on ordinary earned income.
Andy asks the question we should all ask ourselves: Do you plan on making more or less money in retirement than you do now? People’s answers vary depending on their goals. If you plan on making more, however, you are likely an investor. Does it make sense to take a 401(k) tax advantage now and pay much more tax later on that money in a higher income bracket? You may want to calculate scenarios in light of your investment strategy.
4. Abdicating Investing Responsibility
Andy points out an insidious side effect of mass reliance on the 401(k). If you trust your sponsored retirement vehicles to secure your future, you may forfeit owning your financial destiny. It becomes too easy to remain ignorant of basic investment and economic principles. Many people don’t learn financial literacy at home or in school. Without an incentive to learn fundamentals, they may pay excessive taxes because they don’t understand the system. Over decades of hard work, they may overlook opportunities and even risk life savings because they abdicated responsibility.
Structurally, the 401(k) reinforces dependence by offering limited investment choices. You typically have a small portfolio of mutual funds at various risk ratings, sometimes only one fund at each risk level. Your company may also offer a stock fund, but consider that you already invest in the firm by working there.
If you invest privately, you can choose from thousands of individual stocks, mutual funds, and other vehicles. You can complement real estate investments such as retail shopping centers or other commercial properties. Crucially, you can enter and exit investments as you need to.
5. Artificial Market Demand
Not only does the 401(k) affect individual financial habits, Andy describes its impact on the market. The millions of Americans regularly contributing to these plans create artificial demand for mutual funds, stocks, and the behemoth infrastructure that supports them. It is hard to cast the situation as a traditional bubble because retirement vehicles are funded so predictably and on a mass scale. We don’t yet know the consequences of this systemized influx.
The Takeaway
When viewed as an asset among several in your portfolio, the 401(k) offers some advantages. Often you can take out a loan against your vested balance. If your employer matches your contribution up to a certain percentage, you’re receiving free money. Before contributing above the match amount, consider weighing your particular situation’s pros and cons.
Andy’s key takeaway is that investing is a life skill we all need to own. You don’t need a degree in finance or a Wall Street job, but you want to understand tax code and market fundamentals. Know some history for context and be able to soundly evaluate your investment vehicle options. The better you can do this, the better you can invest in your financial future, not just Wall Street.
When considering your debt options for a commercial real estate deal, you have two main options:
Secure new debt
Assume the existing debt
If the owner pre-negotiated an assumption right into their loan documents, once they go to sell the property, potential buyers have the option to assume the existing the loan. That is, the existing loan is transferred from the current borrower to the new borrower at the same terms.
When you are analyzing an on-market deal, there is typically a section in the offering memorandum that states whether the loan is assumable. When you are analyzing an off-market deal, you will need to ask the owner if the current debt is assumable.
There aren’t absolute pros and cons of an assumable loan because the benefits and drawbacks vary based on the buyer’s financials and experience, the terms of the existing loan, the type of existing loan, and the market conditions. So, instead. Let’s focus on the potential pros and cons of assuming a loan.
Potential Pros of an Assumable Commercial Real Estate Loan
Time Savings: Loan assumptions can be approved in as little as 30 days (maybe even sooner) whereas a new loan may take a few months to complete due to the extra documentation required.
Money Savings: Because the loan assumption process may be shorter and requires less documentation, the costs incurred via lender fees are typically lower than the costs incurred from securing a new loan.
Better Terms: The buyer has the opportunity to receive better loan terms – a lower interest rate, fixed interest rate, longer term, etc. – than they would of if they secured a new loan.
Lower Down Payment: When a buyer assumes a loan, the down payment is equal to the difference between the amount owed by the debt and the sales price (i.e., the equity). If the owner doesn’t have a lot of equity in the deal, the down payment may be lower than the down payment on a new loan.
More Attractive Deal: Because of the aforementioned pros of the assumable loan, a seller may attract more buyers as well as sell the property faster.
Potential Cons of an Assumable Commercial Real Estate Loan
Longer Approval Process: if the current loan is overly complicated, the loan approval process can take longer than the process of securing a new loan.
One Lender: The buyer who is assuming the loan is forced to work with the lender that holds the existing debt.
Higher Down Payment: If the owner has a lot of equity in the deal, the down payment may be higher than the down payment of a new loan.
Worse Terms: if the terms of the existing loan aren’t as favorable as the current market terms, the debt terms could be worse than the terms of a new loan.
Won’t Qualify for the Assumption: Lenders have broad discretion when qualifying a buyer for an assumable loan. For example, they will want the buyer’s financials and experience to be similar to those of the current owner. So, the buyer may not qualify for the assumption.
Because of these potential cons, it is important to have financing contingencies in place in your contract and have a few lenders on back-up in case you don’t qualify for the assumption.
Passive investing is a strategy that’s designed for the clear purpose of maximizing the returns that you obtain by effectively minimizing any buying and selling. In many situations, passive investments are considered to be long-term investments that you hold for a lengthy period of time before selling. For instance, it’s possible for a passive investor to make investments in art pieces.
No matter the strategy you use for making passive investments, it’s important to set goals that will guide your decision-making in the months and years to come. However, setting goals with this form of investing can be tricky when the returns are difficult to calculate. This guide offers some tips on how you can properly set goals when utilizing passive investments.
What Is Passive Investing?
This is a portfolio strategy that centers around buying and holding investments until they have appreciated in value. Because of its flexibility, there are many types of investments that can be made with this strategy. It’s common for investments to be held onto for a very long time. Keep in mind that this type of strategy hardly uses any market trading.
Likely the most common type of this investment is index investing, which centers around replicating and holding a market index or indices. The primary benefits of using this investment strategy is that it’s considerably less expensive and less complicated when compared to an active investment strategy. Additional benefits associated with passive investments include:
Very low fees because of much less oversight
Your capital gains tax should be low each year
It’s far easier to create an effective strategy with these investments when compared to active investments
Can help you diversify your portfolio
How to Properly Set Goals As a Passive Investor
When you want to make passive investments, it’s important that you understand how to properly set goals for your portfolio. If your expectations are unrealistic, you could be disappointed in the returns on your investments. While the returns that come with passive investments aren’t exceedingly high, they can help you bring in passive income and increase your wealth. Before you start implementing a passive investment strategy, take a look at the following tips that can help you along the way.
Make Sure That You Set Modest Investment Return Goals
When you engage in passive investing, your main goal should be to obtain modest investment returns. In fact, you should rarely expect to get high returns that beat the market. While this form of investment comes with much less risk than the majority of active investments, it’s important to understand that the returns are generally random. Even though the returns for passive property investments are somewhat predictable, not all passive opportunities can be calculated beforehand. If you set modest investment return goals, you’re portfolio should be able to withstand a slightly worse return than you expected.
Use the Right Strategy
There are many different types of passive income investments that you can make, the primary of which include real estate, dividend stocks, index funds, and peer-to-peer lending. The strategy that you choose depends largely on your preference and your knowledge of the investment in question. Real estate investments are very popular because of the ongoing rise in property values that has occurred in most locations over the past 10 years. If you want to obtain long-term returns that you can count on, this shouldn’t be a bad investment.
If you invest your money into real estate for the purpose of bringing in passive income, you can gain ongoing income source from rental properties. You could also invest in REITs, which are designed to pay out around 90 percent of taxable income to investors as dividends. Crowdfunding is another great option that gives you the full tax benefits of being a property owner.
If you’re not interested in making investments in properties, you could look into dividend stocks, which are an easy way to generate income. When public companies earn profits, these profits are sent to investors as dividends. You could then choose to purchase additional shares with dividends or cash out. Keep in mind that the yields that can be obtained with dividend stocks vary with each company. Consider searching for companies that are classified as dividend aristocrats, which indicates that significant dividends have been paid out for at least 25 years.
As touched upon previously, among the more popular types of passive investments are index funds, which are mutual funds that are linked to a market index. Index funds are passively managed and won’t change significantly unless the underlying structure of the index changes. Management costs are very low with index funds. The fourth type of passive investment strategy that you should consider is peer-to-peer lending, which is also known as crowdfunding. Currently, crowdfunding is highly popular and is used for everything from buying properties to funding different types of loans.
Crowdfunding involves numerous investors lending money to a business entity or person via an online platform that connects the borrowers and lenders. These platforms include Lending Club and Prosper. Aside from funding the actual loan, you aren’t required to do much in regards to managing the fund. You can expect a return that ranges from 6-12 percent when making crowdfunding investments, which can help you with your wealth building efforts.
Each of the four aforementioned strategies has its own positives and negatives that you will need to take into account. With the right approach, all four options can provide you with sizable returns that you can use to increase your wealth or to open up additional investment opportunities. The goals that you make can be dictated by the strategy you choose.
Identify How Much Money You Should Save
Whether you want to make passive investments to bolster your wealth building efforts or to increase the amount of money that you have for retirement, it’s important that you set a goal for the total amount of money that you want to earn and save from your investments. When saving for retirement, it’s recommended that you set aside enough money to cover 70-85 percent of the income that you bring in before retirement.
If you want to travel the world upon retirement or invest in a new hobby, your savings may need to be even higher. Other investment firms recommend that you save around 10 times the amount of income you generate in a single year by the time that you turn 67. If you earn $100,000 per year, this means that you should have around $1 million in savings by the time that you’re 67. Once you know how much you want to save, you will have a better idea of what your goals should be.
Know How to Overcome Investment Hurdles
There will always be hurdles and challenges that you will be required to overcome when making passive investments. If you want to reach the goals that you set for your investments, it’s important that you know how to overcome any challenges that you face. Even though passive investments are less risky than active ones, it’s still possible to lose money on your investments. Keep in mind that this type of investment is meant to be a long-term strategy, which means that you will want to sell your investments when they have reached an acceptable value that will allow you to generate a sizable return.
Along the way, you may notice that the investment dips in value at one time or another. Some investors will panic in these situations and choose to sell, which is typically a bad idea. Passive investments aren’t meant to fluctuate substantially in value, which is why you should be patient while awaiting favorable returns. The key to a successful investment is to react to volatility in the markets with a calm and measured approach.
Set a Clear Timeline With Each Investment
It’s highly recommended that you set a clear timeline with the goals that you have for each investment. If you want to net a return of 10 percent after 10 years of holding an investment, you should stick close to the timeline that you’ve set. By creating a clear timeline, it should be easier for you to avoid selling too early or to hold on too long while you await higher returns. Keep in mind that the right passive investments can be held until well after retirement age. If you set these timelines as early in your life as possible, it’s more likely that you will earn enough income to reach your goals.
If you want to be a successful investor, making passive investments is a great way to diversify your portfolio. Most of these investments are simple and easy to manage, which helps to reduce overall risk. Though goals aren’t always easy to define with passive investments, setting some basic ones should help you avoid making costly mistakes when you invest your money. With patience, the income that you generate could be higher than anticipated.
When raising capital, real estate investors often graduate from personal contacts to complex partnerships or institutions. Another option to consider is crowdfunding. On this Best Ever Show podcast, real estate investor and CEO Chris Rawley explains the power of crowdfunding as a capital source and how to tell if it’s the right option for you.
About Chris Rawley
Chris Rawley has been a professional real estate investor for over 20 years. His portfolio includes single-family, multifamily, and commercial properties. He currently focuses on income-producing agriculture as an opportunity for passive investing. His platform, Harvest Returns, matches quality agriculture deals with investors to raise much-needed capital for U.S. farmers.
Why Crowdfunding?
If you’re doing real estate investing, the conventional funding path usually goes like this. You first use your own money and then approach friends, family, and business contacts for passive investing. When those sources run dry, you may turn to institutional funding or spend considerable time developing partnerships from scratch. Institutions have a high lending threshold and are suited for larger commercial properties such as retail shopping centers. They also come with significant oversight and conditions.
Many individuals engaged in commercial investing have quality deals that don’t meet institutional criteria. Crowdfunding provides a robust, flexible funding alternative. As the deal sponsor, you have access to suitable investors. You also gain legal and regulatory resources that would cost you considerable time and money to build on your own.
Advantages of Crowdfunding
Assembling a syndication deal involves adhering to complex financial regulations and drafting the requisite documents. If you do it yourself, you spend significant time and money on accounting, tax, and legal services. You need to understand the role of the various oversight agencies such as the SEC and hire the right experts. The beauty of crowdfunding is that the platforms handle much of this groundwork for you.
Each platform differs in the type and amount of guidance it provides. For example, Harvest Returns offers its sponsors the benefit of the legwork Chris initially did for his real estate ventures. His business spent considerable money to have securities attorneys put all legal and regulatory requirements in place. As a result, his platform’s listing sponsors benefit directly from this expertise and documentation. They still need to learn the legal environment, but they do not start from scratch and slow the deal.
Another major advantage of crowdfunding is the built-in pool of investors. You don’t have to find and vet your backers. You also have access to a more extensive and diverse group that you would likely discover independently. When the platform accepts your listing, you are guaranteed eyes on your project. You are not guaranteed quick results, but your deal will have the attention of the right audience. This alone is gold for commercial investing.
Crowdfunding may be right for you if:
You have exhausted non-institutional resources.
You have a successful track record.
You have a niche asset class, such as income-producing agriculture.
You have a partially funded deal that could benefit from additional investors.
Choose the Right Platform
Crowdfunding investment platforms took off around 2015 and today offer diverse opportunities for various real estate asset classes. You can find platforms tailored to single-family flips, wholesaling, and commercial projects such as retail shopping centers. You can also find options for specialized assets such as specific financial instruments or agriculture.
Chris advises beginning by defining the type of investor you are. Do you fix and flip houses? Do you wholesale apartment buildings? Are you targeting niche real estate markets such as sustainable development? You want to identify the crowdfunding platforms catering to your project niche and research each one to find the best fit.
Most platforms expect sponsors to list exclusively with them rather than attempt to raise funding on several sites. This requirement eases regulatory compliance, and you will likely sign an agreement with the platform you finally choose. A way to feel more comfortable about exclusivity is to speak with other sponsors who have succeeded on that platform. Most sites are happy to provide references. Chris suggests you be wary of any platform that won’t do so.
Your next step is to determine if you qualify for the platforms you’re interested in. They have listing criteria that syndication sponsors must meet. They also differ in the resources they offer, such as regulatory forms. Your best bet is to reach out to them and learn their guidelines and support for sponsors. Most have sales and marketing teams to provide information and perhaps speak with you about your particular situation. Established platforms have more stringent listing criteria, while smaller or newer players often have more flexible requirements.
For their part, investors are looking to mitigate risk. They examine each deal in light of questions such as:
Is this project viable?
What return can I expect?
Can this sponsor deliver results?
Can I safeguard capital gains or income?
What are the tax implications?
Chris stresses that many investors want to make personal connections and to believe that their capital helps the greater good. If you can demonstrate how your project will benefit the local community or causes such as sustainable farming, your support will grow.
As with any deal, investors look for strong fundamentals. Platforms differ in their due diligence procedures, but you always want to prepare a solid business case and be ready to speak to it.
Build Your Team and Track Record
Investors want to see that a sponsor has a successful track record. As Chris puts it, they don’t want to invest in a newbie’s mistakes. You are best off trying crowdfunding after you have done at least a few successful deals.
For investors, a sponsor’s experience is often the differentiator between two similar offerings. Even a short track record builds credibility. Before attempting crowdfunding, do one or two syndications on your own, either with personal contacts or an established partner.
A credible sponsor has a strong team as well as a track record as an active investor. Investors want to see that you have accounting and legal experts as well as any other business advisers appropriate for your asset class. This shows that you have some experience, are serious, and run your active investing as a business.
Present a Winning Deal
Many platforms conduct a thorough background check on potential sponsors before moving forward with them. They examine the deal’s structure and numbers to determine if it is a viable investment.
Each platform has requirements for putting your listing in front of investors. Your listing needs to differentiate itself from other concurrent offerings. At a minimum, it should include essential details about your project, such as location and asset type. Also, your platform may ask you to provide supplementary information for investors such as a business plan or pitch deck.
Once the raise is underway for your project, potential investors want a thorough understanding of the deal and expected return. Some platforms handle all of the interfacing for you and cater more to passive investing. Others treat the process more as active investing. You might host a webinar or answer questions in a formal round table for the active investor who wants a voice in your project.
Chris has found that people respond well to webinars, as they can interact with the sponsor and ask live questions. They can also meet the members of the sponsor’s team, such as the attorney or CPA. In Chris’s words, the process lends tangibility to the deal and builds trust.
Crowdfunding for Agriculture Investing
The food supply and related issues are hot topics today, and many investors are curious about agriculture opportunities. Crowdfunding is a good option because the platforms present you with curated projects appropriate for your goals. Chris’s platform structures agriculture deals similarly to the real estate deals he’s done for years. They have debt offerings from 7% to 12% and equity deals in the teens. They also offer opportunities in AgTech, which is the application of computer technology to farming. These offerings are higher risk but offer potentially greater returns as much as 40%.
Unlike most real estate, agricultural properties are unique. Each farm is distinctive and should be evaluated on its own merits. Indoor projects have gained momentum and include vertical and hydroponic farms. These options allow more locally grown produce and some refuge from climate and transportation infrastructure impacts. Successful investments enjoy a high rate of return.
Chris keeps the minimum investment in his projects as low as $5,000. This threshold allows more investors to participate and to diversify their portfolios. As for farmers interested in funding sources other than banks, Chris urges them to reach out to his team.
Crowdfunding for syndication is a relatively new and evolving space with numerous platforms catering to all asset classes. If you’re ready to move beyond personal capital, take a look at what it has to offer. Not only might you fund your next deal, but you might also find lucrative investment opportunities you never knew existed.
Whether you are new to apartment syndication investing or an active investor expanding your portfolio, you will compete for deals. Other bidders may have more experience or higher offers. How do you win the seller and the contract? Let’s look at five ways to make your offer stand out.
Keep in mind that even in competitive markets, sellers don’t always take the highest bid. Sellers differ in their motivations, and the five tips below will help you craft the best possible offer for the deal you are pursuing.
1. Offer Hard Earnest Money
Hard earnest money is a non-refundable deposit. It is a good-faith move that shows the seller you are serious enough to leave money on the table should something go wrong. It also signals that you can afford to buy the property.
In a typical deal, the earnest money is refundable. You provide a deposit as soon as possible after signing the contract, preferably within three days. The amount is often about 1% of the total price. If you purchase commercial properties for $500,000, you pay the seller $5,000. If you or the seller cancel the contract, you receive your money back.
A bolder move is to make the earnest money non-refundable. Even if the contract is canceled or falls through, the seller keeps the deposit. Sellers are rightfully concerned about buyers tying up the property in contract and then backing out or losing funding. The buyer may find a better opportunity or walk for financial reasons. Meanwhile, the seller has effectively taken the property off the market. Backup buyers may lose interest, and the market could shift by the time the seller relists.
You can view a non-refundable deposit as compensation for the risk the seller assumes by entering a contract with you. First, you want to decide when the money goes hard. The most straightforward option is to make the deposit non-refundable from day one. Sellers find this attractive as they can keep the money no matter what.
However, it may be in your best interest to tie non-refundable earnest money to a contingency clause or other stipulation. You could require that the funds harden at the end of the due diligence period. Alternatively, you could make a portion of the deposit immediately non-refundable and include the remainder after meeting a condition.
Include Contingencies
Even if you harden your earnest money from day one, you still want to include contingencies for events beyond your control. This approach protects you against deal-breaker concerns such as severely failed property inspections or title issues. It still covers the seller in case you back out due to funding or other reasons within your control. If a seller demands a no-contingency hard deposit, consider this a red flag.
2. Shorten the Due Diligence Window
Another way to woo the seller is to shorten the time to closing. If an active investor, you can often shrink the time needed to close from a boilerplate period to a realistic estimate. Advantages to the seller include faster closing and the assurance that you are serious about owning the property. Sellers often have stakeholders in passive investing and are motivated to provide a smooth transaction. Buyers keeping their options open do not press for fast closing. In turn, assuming you have your financing in place, you obtain your investment faster.
The most effective way to shorten closing is to compress the due diligence window, which is when buyers discover most issues. Be aware that the due diligence period protects your right to cancel the contract and reclaim your deposit should you find problems. The average window is 30 days. If you invest in retail shopping centers or other commercial properties, you may need that time or more.
After the due diligence window closes, you can’t cancel the contract or get your earnest money back. This applies even if you find a related problem. To protect yourself, be realistic about the scope of work. Determine the time you will need to conduct all activities, such as inspections and title verification. Build in some cushion for repeat inspections, inclement weather, or other factors that could slow progress. Then see if you can save a week or more without jeopardizing your interests.
3. Sign an Access Agreement
Typically, your property access for due diligence begins after you and the seller sign the purchase sale agreement. An access agreement gives you limited rights to begin property inspections early. Sellers like this option because it shows you are serious and potentially willing to shorten the closing time.
In an early access scenario, you sign an access agreement once the seller accepts your letter of intent and agrees to move forward with your offer. A contract negotiating period follows, which can be brief or extended depending on the deal. An access agreement lets you begin due diligence early by allowing limited property access for inspections.
If all goes well, you can complete at least some of your due diligence before signing the purchase sales agreement. You can even tie the formal due diligence period to the access agreement by starting the clock then. For example, your due diligence window could expire ten days after contract signing. However, you want to be confident of the property and the deal before you shorten your protection under contract.
4. Use the Seller’s Purchase Agreement
Once the seller has accepted your letter of intent, you begin contract negotiations. When active investing, you often provide your version of the purchase sales agreement prepared by your attorney. The seller compares yours with their contract version, and your teams hash out the details until reaching an agreement. The agreement becomes the final contract that all parties sign.
This negotiation process may be fast and smooth on a smaller residential property or with a seller you have previously worked with. If your focus is larger commercial investing, such as in retail shopping centers, finalizing a contract will likely be more complex and lengthy. Backers who are passive investing may not realize that contracts sometimes collapse due to non-financial discrepancies. During negotiations, you risk the deal falling through due to disagreements over legal language or similar matters.
You can mitigate risk by using the seller’s purchase sales agreement instead of drafting your own. Take their documents and have your attorney mark them up with proposed changes. Submit the revised contract to the seller for review. This way, the seller quickly sees which changes you present instead of comparing your version with theirs. The process makes it easier to negotiate specific terms under contention and validate those that are not. You and the seller can reach a final contract more quickly and with less chance of a legal stalemate.
5. Guarantee a Closing Date
A strategy often used in residential purchases is to guarantee closing by a specific date. Sellers frequently have personal contingencies that make a hard close date very alluring. Commercial investing is more impersonal, but timing the close still offers advantages in certain situations.
One scenario is to help the seller secure a tax advantage. If the deal is near year-end, the seller may prefer to close either in the current year or in January. Active investing requires considering the capital needs of any other investors as well as complex financial requirements for short and long horizons. Further, some sellers may have a fiscal cycle that differs from the calendar year. As a motivated buyer seeking a win-win, try to learn the seller’s timing preferences.
Sometimes non-financial events trigger a desire to close before or after a specific date. Major elections, local laws taking effect, and other situations may spur a seller to choose the buyer who can guarantee a closing window. Most often, the seller seeks an early close, but sometimes not. Be clear on which timing scenarios you are willing to accommodate before engaging with the seller on this point. If they ask for a 90-day close when you were expecting 60 days, will it work for you?
Target the Deal
In addition to a favorable price, which strategy should you include in your offer? The answer depends on the deal. Though the market for apartment investing is competitive, your job is to focus on this particular deal. It’s the one you want.
To help you plan your offer, try to learn:
About other offers on the table. If they all include non-refundable earnest money, you want to offer more.
The seller’s motivations. This will help you understand whether a committed buyer, quick close, highest price, or other terms matter most.
Other factors important to the seller. Are there tax considerations driving a desired close date? Did a previous buyer walk, leaving a skittish seller who would appreciate a non-refundable deposit and access agreement?
Keep in mind that you can combine strategies to craft a top offer. An access agreement facilitates a shortened due diligence period, for example. If other buyers are going with hard earnest money, perhaps you can meet an earlier date or raise the amount. With perseverance and flexibility, you can be the dream buyer sellers want.
“Is the real estate market currently overvalued?” Many active investors and entrepreneurs are asking this question, and you probably are as well. The housing sector is strong despite the fact that the U.S. is officially in a recession. Home prices and rental rates are jumping in many metro markets. During unpredictable times, wise investors take cues from historical patterns. Market analytics expert Stefan Tsvetkov talks with Joe Fairless on The Best Ever Show about the power of quantitative analysis to help you find undervalued opportunities. As with other markets, your best bet is often to focus on value rather than attempting to time cycles.
About Stefan Tsvetkov
Stefan owns the data analytics firm Envvy Analytics, which specializes in business and market analysis. Its mission is to help real estate investors find exceptional opportunities and leverage market inefficiencies. Stefan brings ten years of experience in financial engineering, a field that develops and applies quantitative techniques to tackle financial problems. Stefan is passionate about using data analytics to help investors make better decisions.
Stefan has three years of personal experience as an active investor. He has privately purchased multifamily properties and knows firsthand the impact of current market trends on individual owners and businesspeople. His portfolio includes a New Jersey triplex and fourplex and a New York duplex.
Stefan found early inspiration for an analytical approach to real estate in the work of hedge fund manager John Hussman. Hussman developed a predictive metric for stock market drops by determining whether the stock market was overvalued. Stefan contrasts this valuation measure with the typical Wall Street emphasis on price-to-earnings ratio. He determined that Hussman’s metric outperformed the price-to-earnings ratio, which further motivated him to deep dive into market valuation analysis.
Look Beyond Demographics
When considering a potential real estate market, you probably look at job and population trends. You’re in good company, as commercial investing advisers stress demographics when evaluating opportunities. However, Stefan advises people to focus on market valuation. Why? For one thing, he notes, real estate markets are inefficient. It’s challenging to get a qualitative read on values for a given market.
Another compelling reason is that historical market cycles are best analyzed quantitatively. Data analytics finds patterns that qualitative analysis might overlook, allowing financial engineers such as Stefan to develop predictive models. Critically, data analysis can validate models for robustness. When you use a metric such as the one Stefan recommends below, you know its performance history. You are not guessing.
A Gold Standard Metric
Stefan’s research has yielded one metric he considers the gold standard for valuing markets. The ballpark measurement to start with is the historical ratio of housing prices to income in a given market. You then determine the current ratio and calculate its deviation from the historical norm. Typically, the metrics refer to household income and the price of single-family homes rather than commercial properties.
As an example, let’s assume that the historical housing price-to-income ratio in Texas has averaged 5. If today it is 8, you should consider whether that market is overvalued. If it is 4, perhaps the market is now undervalued. You would then consider other potential factors such as housing shortages, employer flight, or other socioeconomic influences.
Does Stefan’s metric hold true for larger investors? Whether your interest in commercial properties is via active investing or passive investing, the good news is his measure still applies. Stefan explains that the price-income formula is about 95% accurate for multifamily units. Over time, differences in appraising and returns even out. Household income still drives valuation, however, and so the metric best suits commercial investing in one-to-four-unit properties.
Lessons from the Great Recession
Stefan’s interest in quantitative real estate valuation was partly inspired by a seeming prophet of the big crash, Ingo Winzer. As early as 2005, Winzer declared on CNN that specific markets were significantly overvalued. A year later, he reiterated his belief that certain metro areas were dangerously overpriced.
By 2007, the most overvalued U.S. real estate markets were Arizona, California, Florida, and Nevada. These states ranged from being 49% to 68% overvalued. Stefan estimates that the subsequent market falls correlated 83% with these markets’ deviations from their historical price-to-income ratios. Their prices plummeted 45% to 56% after being overvalued and held steady when their values aligned with historical norms.
According to Stefan, the median market deviation from historical ratios preceding the crash was 26%. A 22% price plunge followed this peak in value. In contrast, real estate markets with variations under 10% could be considered fairly valued. Price drops in these areas averaged only 11%. A clear correlation seems drawn between the percent deviation of a given market from its historical price-to-income ratio and its percent drop in a recession.
Overlooked and Undervalued
The Great Recession has lessons for investors seeking quality undervalued markets. Stefan emphasizes that it’s easy to forget that some state markets were undervalued during this time. About 12 states, including Texas, experienced price drops in line with their undervaluation. Texas was undervalued by 5% in 2007 and dropped only 4%, in contrast to the historic losses experienced in many other regions.
In parallel, national income declined 4%. This loss of household spending power hit over-leveraged homeowners particularly hard. However, the story isn’t as bleak for undervalued states. When considered with single-family home prices, income and homeownership costs kept pace in many regions.
Stefan believes these historical patterns still apply, and today’s markets offer opportunity. Regardless of whether the overall market peaks next year or in five, undervalued markets should resist the steep losses of a correction.
Scaling Market Peaks
How do you identify a market peak, especially in today’s volatile landscape? Stefan insists that you can’t. He explains that a market peak is when prices top out and then drop significantly. Prices can plunge quickly or bottom out over two to five years. We identify market peaks in hindsight. We can’t predict them, and even an active investor shouldn’t hinge a strategy on timing.
Quantitative market valuation offers tools to navigate cycles in the absence of timing peaks. In consideration of complex housing markets in certain metro regions, Stefan is refining the price-to-income metric. He cites San Francisco as an example of a complex housing market. San Francisco housing is expensive due to supply and demand and thus should not be assumed to be overvalued. Prices there are driven by a housing shortage.
People often discuss historical market peaks as singular events. In reality, market cycles vary regionally. During the Great Recession, some areas peaked in 2005 while others topped out in late 2007.
Does this uncertainty mean that you should stay out of hot markets? Not necessarily. Large, strong markets in areas such as Texas tend to hold their value across cycles. Stefan believes that large states with robust economic activity offer the best opportunities. What you need to watch for is significant overvaluation that could signal a powerful forthcoming correction.
How to Find Undervalued Opportunities
According to historical performance numbers, undervalued markets are less likely to drop substantially in a downturn following a peak. If you want to invest cautiously, focus on identifying undervalued markets. You can work with a financial expert like Stefan or do your research based on Stefan’s guidelines.
Your investor profile matters when deciding on potential markets. If active investing, you have more control over responding agilely to changes in markets or investing goals. If passive investing, you generally have little say in the timing of market exits. You want an undervalued but strong market that lets you sleep soundly at night.
Your investing scope matters as well. Buying a triplex in a residential neighborhood differs from investing in retail shopping centers.
Along those lines, Stefan notes that we should distinguish between metro and state scope. Though an undervalued state such as Texas may hold reasonably steady, specific communities may fluctuate more widely. Factors such as employment and migration affect individual cities and counties.
The key is to find strong markets that are undervalued and weigh their strengths against weaknesses. Many U.S. states are undervalued by Stefan’s criteria, but not all of them offer equal opportunity. Currently, Stefan names the most undervalued states as being Arkansas, Connecticut, and Illinois. However, Connecticut has issues that make it unattractive to investors.
In contrast, Indiana is 6% undervalued and up 27% from its 2007 peak. If you are an investor starting small, you would most likely consider Indiana over Connecticut. Larger investors looking at retail shopping centers or other commercial investing should consider big markets.
The Bottom Line
When overarching factors such as the current pandemic muddle qualitative analysis, a quantitative view brings objectivity and historical context. Rather than try to guess the market’s peak, focus on identifying undervalued yet strong markets. If you’re a larger investor, choose big metro regions. Accurate market valuation supports portfolio growth while buffering against plunges. It outlasts rollercoaster cycles, and so can you.
When you decide to list your apartment deal with a commercial real estate broker, the are paid a commission. Unlike residential transactions where the realtor’s fee is essentially fixes, the commission on commercial real estate transactions is negotiable. However, depending on the size of the deal and if it will be listed on-market or kept off-market, there are general guidelines for the commission structure and amount.
Here are the three main structures for compensating a commercial real estate broker:
Compensation Structure #1 – Percentage of Sales Price
The percentage-based commission is the most common structure for on-market deals. The percentage generally decreases as the purchase price increases.
Sometimes, the commission is split between the buyer’s agent and your listing agent. This is referred to as co-brokerage split. But it isn’t uncommon for your agent to also find a buyer and receive 100% of the commission.
It is uncommon to see a commission of 6% (the standard fee on most residential transactions – 3% to each realtor), unless it is a very small deal under $1 million. Generally, the commission is 3% to 4% of the sales price. And the commission is capped at a certain amount. It is possible but rare for a broker to receive a commission of $300,000+. For larger deals, the commission can be less than 1% of the sales prices.
Generally, the percentage-based commission is set by the market and the sales price.
The advantage of the percentage-based commission is that your broker or a buyer’s broker is incentivized to maximize the sales price. The higher the sales price, the higher their commission.
The advantage of the co-brokerage split is that it increases the number of potential buyers. Rather than one broker – your broker – finding buyers, any broker in the market can find buyers for your deal. Plus, your broker is incentivized to put forth a greater effort to find a buyer so that they receive 100% of the commission.
Compensation Structure #2 – Flat Fee
The flat fee commission is the most common structure for larger apartment deals. T considers sales prices of $8 million or more as large deals. Once the sales price exceeds $8 million, a flat fee commission between $150,000 and $250,000 is standard, but may be lower or higher depending on the market.
Flat fee commissions are also common if you want to sell your deal off-market with a broker. Expect to pay a higher flat fee for a large on-market deal than a large off-market deal since on-market deals require more effort on the part of the broker.
Generally, the flat fee is negotiated between you and the broker.
The major drawback of the flat fee compensation structure is that it doesn’t incentive your broker to maximize the sales price. No matter what the sales price is, they are paid the same amount.
Compensation Structure #3 – A Hybrid Structure
A hybrid compensation structure can be negotiated for any sized on-market or off-market deal.
Once you determine a strike price (i.e., the expected sales price), you offer a commission that is slightly below the market commission rate. Then, offer a significantly higher commission on any amount above the strike price.
This compensation structure is better than the percentage-based structure because your broker is incentivized even more to sell the deal above the strike price.
Example
Let’s say you are selling a deal on-market and you determine that the strike price is $42 million.
Compensation Structure #1 – Let’s say that the market commission rate is 0.75%. If the deal sells for $42 million, the broker makes $315,000. If they can sell the deal for $44 million, they make $330,000.
Compensation Structure #2 – Let’s say you negotiate a flat fee of $275,000. If the deal sells for $42 million, $44 million, or even $50 million, the broker makes the same $275,000 commission.
Compensation Structure #3 – Let’s say you negotiate a 0.65% commission up to the $42 million strike price and 5% thereafter. If the deal sells for $42 million, the broker makes $273,000, which is less than Compensation Structure #1 and #2. If the deal sells for $44 million, the broker makes $373,000, which is higher than both Compensation Structure #1 and #2.
This example illustrates why I prefer Compensation Structure #3. If the deal sells at the strike price, you pay the lowest commission. However, if the deal sells above the strike price, you and the broker make more money! So it is a win-win.
These unprecedented times have hit retailers hard, but the news rarely highlights the fallout for smaller landlords. Retail shopping center investor Beth Azor shares the inside story on a Joe Fairless Best Ever Show podcast. Investing in commercial properties catering to retail is ideal for the active investor who enjoys hands-on management.
About Beth Azor
Beth owns Azor Advisory Services, a retail real estate development, management, and education company. She has over 30 years in commercial investing and currently manages a portfolio of retail shopping centers worth $80 million. Based in Fort Lauderdale, Florida, Beth owns six local shopping centers. She has adapted to competition from online selling and the current pandemic and has tips on thriving in this market.
Why Retail Shopping Centers?
Beth enjoys active investing and the variety of working with different types of businesses in this challenging sector. She also appreciates that managing commercial properties means dealing with companies instead of individuals as tenants. Beth prefers not to be responsible for an individual or family losing their home because they could not afford rent. Though evicting anyone is always uncomfortable, she finds it a little easier when it’s a business and not, as she puts it, a person losing a bed.
When asked about the perk of receiving discounts from her retail tenants, Beth stresses she forbids the practice. Accepting a concession or freebie means the retailer might leverage a quid pro quo situation and not pay full rent on time. Though tenants often try to offer breaks to Beth’s employees and family, the potential fallout is not worth it.
Manage the Rent Rollercoaster
Like many other landlords during COVID-19, Beth spends considerable energy on obtaining rents from distressed tenants. She learned the hard way that the time and emotion involved could overtake her week. She also discovered that small business owners behaved differently than national retailers and needed a different approach.
As a result of these insights, Beth started blocking off set times each week to work with both types of tenant. She reserved Tuesdays and Thursdays for small businesses and Mondays and Wednesdays for national companies.
Mom and Pop Struggle to Survive
The pandemic has shut down many smaller stores reliant on in-person traffic for sales. Beth has her share of these tenants and tries to work with them to persevere for mutual benefit. She finds that these businesses are often unable to pay full rent due to being effectively closed. The owners are understandably upset but eager to discuss options.
When evaluating the best recourse for a distressed tenant, including payment programs, Beth considers several variables. One factor is how easily she expects to lease the space if vacated or when the lease is up for renewal. Other considerations are whether the tenant has significant infrastructure installed or exclusive rights to sell a specific service, such as nail care. Sometimes a business will retain the rights to services but not offer them. If the tenant leaves, the landlord can recruit another retailer in that same popular niche.
Beth notes that she and many retail landlords prefer to grant rent deferrals rather than outright waivers. For example, a struggling tenant might pay half rent for two months and allow the landlord to take the difference out of the security deposit. The tenant agrees to pay any remainder the following year when in-person shopping presumably recovers. Beth avoids moving the balance to the end of the lease as she wants to encourage the tenant to renew at the market rate.
As part of giving back to her local community, Beth interviews small businesses for her YouTube channel and website. The increased exposure raises their profiles and helps bring in more customers. Beth does this marketing work gratis and finds it very rewarding.
National Tenants Play Hardball
Working with national retailers presents different challenges. These tenants quickly adapted to pandemic conditions by offering online, pickup, or delivery services and associated customer incentives. Though their revenues have fallen, deep corporate pockets will keep most of these businesses solvent and able to pay rent.
However, Beth finds many of her national tenants demand forbearance and aren’t always polite about it. Their message is, “I can pay this month’s rent, but I’m not going to.” The nationals often have representatives tasked with delivering the harsh news to landlords and other business partners.
Beth has dealt with real estate managers, lawyers, and CFOs in her quest for resolution. Perhaps because they feel ambivalent pushing for potentially unfair concessions, some representatives communicate unprofessionally. Negotiating with them is time-consuming and often unpleasant, and so Beth siloes time each week to do so.
To illustrate, Beth notes the national coffee retailer that sent well-publicized letters to landlords demanding rent deferrals for a year. What observers may not realize is that many commercial landlords are small investors such as Beth. These owners have far less financial backing than the nationals, and a drastic cut in rents could prove catastrophic.
Hold ‘Em: A Retail Portfolio Strategy
Beth favors a hold strategy for her portfolio. She bought her oldest holding in 2008 and has averaged an acquisition every two years. She then focuses on developing the new center, sometimes from scratch. As one example, Beth bought and demolished a vacant former strip club and built a shopping center in its place. The new center has five tenants, including Starbucks, Verizon, and Blaze Pizza.
In another transformative move, Beth bought a dated office building from the 1970s, razed it, and built a shopping center featuring a Starbucks on one side of the land. She is holding the other half to develop when the opportunity is right.
Beth’s holdings are a mix of anchored and unanchored developments. Anchored shopping centers are those with a well-known tenant to drive traffic, such as a supermarket. The anchor tenant typically pays less rent while the smaller tenants pay more to benefit from proximity to the anchor.
Unanchored shopping centers feature tenants of similar size where no one business draws significantly more customers than the others. For example, one of Beth’s developments boasts Verizon, Starbucks, Blaze Pizza, Select Comfort, and an ice cream store.
Prospect on Social Media
When prospecting for tenants, Beth has found that smaller businesses respond well to social media outreach. Unlike national retailers with marketing departments, small business owners usually monitor online channels to keep tabs on customer satisfaction. Beth has had particular success with high response rates on Facebook and Instagram.
For example, Beth might direct message business owners on Facebook and receive a 40 percent response rate within a day. Out of that pool, about 10 percent will express interest in her properties. This return is excellent compared to the old world of knocking daily on numerous company doors.
Prospecting national retailers requires a different approach that relies on networking. These large companies work through exclusive tenant representatives, local market experts who broker deals between landlords and tenants. The landlord pays the broker for a successful match.
If Beth has a vacancy and a tenant in mind, she reaches out to that company’s rep about doing a deal. She likely would not even meet the corporate real estate manager until a property walk-through.
Fund Managable Deals
Beth chooses to focus on smaller deals that she can personally fund. Her sources include income from other properties, personal assets, or funds from friends and family open to passive investing.
As is common in commercial investing, Beth used to work with institutions. She stopped this practice after a major deal funded by BlackRock went south.
Beth cautions not to let one stellar success blind you into overconfidence. Giddy investors can quickly become wedded to one perspective at their financial peril. In her case, she and a partner were doing a BlackRock-funded deal and leased one space to Staples for a pricey $20 per square foot. Emboldened, she and her partner decided to hold out for $15 for the remaining space, even though Walmart expressed strong interest at a lower rate. They ended up losing the property and $5 million.
How to Get Started in Retail Investing
You may be wondering how to break into the business of retail shopping centers, especially if your background is in passive investing. First, keep in mind that this niche is best suited for the active investor who enjoys operations and social interaction. Your best bet, says Beth, is to shadow a property owner to learn the ropes.
Beth started as a leasing agent with a real estate license, a path she recommends for those interested in active investing. Owners are looking to fill vacant suites, so be the person who can deliver the tenants. If done well, this role is gold.
Beth cautions against starting at a brokerage as you must obtain your own listings, which is extremely difficult. If you shadow an owner, you may land an internship and possibly a paid position. The upside of this apprentice approach is that you can trial the work while maintaining your current activities. Even if you are a seasoned real estate investor, a firsthand look at the dynamic retail world is well worth your time.
In our recent interview with Slocomb and Phil, we looked at the importance of real estate investing and tax planning. If you use tax mitigation techniques like cost segregation, your real estate investments could reduce your tax bill to zero today. In many cases, you can create a net operating loss in the present. Then, this loss can be carried into future tax years as well.
Tax Deductions Help You Boost Your Cash Flow
Whether you are actively investing or prefer passive investing, your cash flow is king. Sometimes, people buy a property because they expect the value to appreciate significantly. These investors do not care about cash flow because they just want to sell the property in a few years for a tidy sum.
In other regions, investors buy a property because it brings in a consistent revenue each month. Over time, they get to enjoy a passive income source that can fuel their retirement account or build intergenerational wealth. Whether investors are seeking cash flow or appreciation, they often forget one important thing.
With tax planning, you can immediately boost your cash flow. Even if you primarily care about your property’s appreciation rate, you can still benefit financially by reducing your tax liability and enjoying a higher tax flow. Unlike many other investment types, real estate investing is ideal for improving your cash flow and lowering your tax bill.
This is because the tax code was designed to spur economic activity and fund the government. While we can argue about whether the tax code achieves these goals, the result of these goals has been a range of tax deductions and credits for investors. If you run a business or have a rental property, there are portions of the tax code that were made to incentivize your company’s growth.
If you look at the different entities that make up the economy, they look like a quadrant. You have employees, self-employed individuals, business owners and investors. When you consider the tax rate of each quadrant, employees typically pay the highest rates. This is because employees do not have the same access to tax deductions that the other three groups get to use.
Out of the four groups, investors generally pay the least amount in taxes. Investors pay a capital gains tax when they sell their investments. Depending on factors like how long they held the investment, the capital gains rate can be 0, 12 or 15 percent of their investment.
Because they do passive investing, investors do not have to pay a self-employment tax bill. Normally, self-employed workers have to pay things like the Social Security tax and FICA tax. When employees work for a company, the business is responsible for paying half of these tax costs.
Ultimately, the tax code is designed to make people pay less if they contribute more to the economy. Business owners, self-employed individuals and investors are generally charged a lower tax rate because they fuel the economy. By spending money on an investment property or starting a new product line, these groups help to provide new jo
