Education: Learn About Real Estate Investment

Whether you are brand new to this industry or have been buying and selling properties for decades, you should always want to learn more about real estate investments. This driven mindset has helped me since I quit my advertising job and began to work for myself, and it will continue to serve me well as long as I’m working.

The best real estate education is not easy to find, though. Locating a helpful and trustworthy mentor, for example, can take a lot of time. Experienced, intelligent advisors willing to take people under their wings don’t exactly grow on trees.

And there is no shortage of books, blogs, social media accounts, YouTube videos, and podcasts to sift through. At best, listening to those offering poor guidance will waste your time. At worst, it will lead to destructive financial decisions.

Without question, finding and applying the right knowledge is vital for any investor.

Over the years, as I have gained control of more than $400,000,000 worth of real estate, I have been fortunate to receive help from fantastic mentors and locate a wealth of information that has sent me down a successful path. And now, I want to pass some of that wisdom down to you.

In this section of my blog, you will be able to learn about real estate investments from some of the brightest minds in our industry today. You will figure out how to approach a potential mentor, how to receive free or paid educational services, how to systemize your education, and more.

And for an exhaustive collection of resources that I approve of, click here to view books, podcasts, and pieces of advice that I recommend.

Raising Real Estate Capital with Crowdfunding

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.

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5 Ways to Win the Apartment Bidding War

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.

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Interest-Only Commercial Real Estate Loans – Potential Pros and Cons

As the name implies, when you secure an interest-only commercial real estate loan, the monthly debt service is equal to the interest on the principal loan balance. For example, on a $10 million loan amortized over 30 years with a 5% interest rate, the interest-only payment is $41,666.67. Whereas the debt service on a non-interest-only loan would be $54,486.03 (principal plus interest).

Generally, when securing a bridge loan, the debt service will automatically be interest-only. However, when securing an agency loan from Fannie Mae or Freddie Mac, you may have the option to receive one or more years of interest-only payments (even up to the full hold period for the most experienced borrowers).

When securing an agency loan and deciding whether to pay interest-only or pay principal plus interest from day one, here are some things to think about:

Potential Benefits of Interest-Only Payments

There are two main potential benefits to securing an interest-only period for a commercial real estate loan.

First is the higher cash flow during the interest-only period. When implementing a value-add business plan, you are forcing appreciation by improving the physical property and the operations to increase the net operating income. Typically, this process takes at least a year to complete. So, during this value-add period, the net operating income (and therefore, the cash flow) is lower. When you secure an interest-only loan, the lowered net operating income may be offset by the reduced debt service. As a result, you can use the extra cash flow to either reinvest in the property or, more likely, distribute returns to your investors. In fact, one of the best ways to achieve the preferred return during the renovation period is to secure an interest-only loan.

The second potential benefit of the interest-only loan is that you and your investors can receive cash sooner rather than later. The additional cash flow received during the interest-only period helps increase the IRR compared to receiving that cash at sale. Back to the $10 million loan example in the introduction, the difference between the interest-only payment and the principal plus interest payment is $12,819.36. Technically, all payments above the interest amount reduces the loan balance. So, rather than receiving that additional payment during the business plan, you would receive it at sale. Due to the time value of money, that $12,819.36 is worth more when received during the hold period than it would be worth in the future, say once the property is sold in 5 years. In addition, in the event of a massive reduction in property value, you and your investors will be much happier if you were able to receive those additional cash payments, especially if the value of the property is lower than the loan balance that would have otherwise been paid down.

Potential Drawbacks of Interest-Only Payments

There are three potential drawbacks to securing an interest-only loan.

First is that there is no principal paydown. As I mentioned above, this is also a potential benefit due to the time value of money. However, if the plan is to refinance or secure a supplemental loan after implementing the value-add business plan, the proceeds will be lower due to the fact that no principal was paid down during that period. Or, if the market cap rate increases and the value of the property decreases, you may become “underwater” on the mortgage and have to actually pay to sell the asset.

Secondly, once the interest-only period expires, the debt service increases. If you are not implementing a value-add business plan, unless the rental rates increase naturally, your cash flow will take a major hit once your debt service increases. If you are implementing a value-add business plan, you will need to increase the cash flow by an amount that is equal to or greater than the increase in debt service once the interest-only period expires. If you are unable to increase the cash flow as quickly or as high as projected, you may not be able to achieve your projected returns once the interest-only period expires.

Lastly, you may convince yourself to do a bad deal because of the lowered debt service during the interest-only period. For example, you may underwrite standard principal plus interest debt and the deal doesn’t meet your return projections. But if you underwrite three years of interest-only, the deal does meet your return projections. This isn’t a problem as long as you are conservatively underwriting the deal. Since you know the deal doesn’t make sense with a standard principal plus interest loan at the current net operating income, you need to be confident in your ability to increase that net operating income amount before the interest-only period expires.

Conclusion

Overall, interest-only loans are best when you are implementing a value-add business plan. As long as you are conservatively underwriting your deals and are confident in your rent premium assumptions, interest-only loans are a great way to distribute the preferred return to your investors while you are repositioning the asset.

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2021 Winners

Net Seller? Or Net Buyer? You decide…

As many of you know, we had an intellectual debate of sorts, last week, discussing whether net sellers or net buyers would be the winners in 2021. 

Moderated by Ben Lapidus with panelists: Brandon Kramer, Senior Associate and Associate Director with Marcus & Millichap, Anna Dwyer, Senior Acquisitions Associate with City Line Capital, Josh Satin, Vice President of Acquisitions with Gelt Inc., and Scott Lebenhart, Director of Acquisitions with Ashcroft Capital, the debate was informative and had several good points for both sides.

While I wish we could say we have a clear answer for you, we don’t. Truly, both have their benefits and drawbacks. A lot will depend on where you are with your real estate investing and what will work best for you personally. 

Though thoughts were divided, those that argued FOR net selling said, while buying is still on the table, there will be more opportunities to sell than buy in 2021 and this may be the last opportunity to take the chips off the table.

The FOR team also made the argument that the asset choice matters…several industries, such as self-storage or hotels, are consolidating rapidly and creating cap rate compression. Additionally, real assets move with inflation. And, with financial assets at an all-time high, where would you put proceeds from real estate sales?  Where else is there to invest?

Definitely food for thought.

Now, here comes the AGAINST net selling…saying CASH is king (which is hard to argue) and proceeds won’t need to be placed anywhere. Sometimes, the best answer is to take a knee, “be still”, and assess the operating environment. There is an opportunity cost to trapping your capital into long holds when greater opportunity could be just around the corner.

All in all, with audience participation, the team debating AGAINST the motion “Winners in 2021 Will Be Net Sellers” had audience sentiment at +13 points compared to the FOR team’s at +1 point. 

If you missed the seminar and would like to see the full playback, those that are ticket holders for BEC 2021 have access to it via the private Facebook and LinkedIn groups. So join the groups, if you haven’t already, and check in.

If you aren’t already a ticket holder for BEC 2021, BUY NOW. We have plenty of promotions and discounts that can help offset the cost of what is truly a ‘can’t miss’ conference for those in real estate investing. Check our social media sites for current offers: Facebook, LinkedIn, and Instagram. 

Next webinar will be announced soon and, we promise, you will be one of the first to know!

 

 

 

 

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The Meeting of Minds

Did you feel that? Those goosebumps aren’t from the weather getting colder outside; it’s this incredible lineup of speakers at the Best Ever Conference that’s giving us chills. If you haven’t been to BEC2021.com lately, we have added a stellar lineup of speakers covering a wide range of topics that can help you grow your business and avoid the expensive pitfalls that the uneducated make when building their portfolio. 

From CRE celebrities to authorities on financial freedom, the BEC will be covering every topic you could possibly want to learn about. Here are just a few of these commercial real estate masterminds you will be hearing from:

Brandon Turner

VICE-PRESIDENT | BIGGERPOCKETS & OPEN DOOR

Brandon Turner is the host of The BiggerPockets Podcast, author of several real estate books, and founder of Open Door Capital LLC, an investment firm that focuses on the acquisition and management of mobile home parks and apartments across the US.

 

JILLIENE HELMAN

CEO | REALITYMOGUL

Jilliene Helman is Chief Executive Officer of RealtyMogul and its wholly owned subsidiaries, RM Manager, RealtyMogul Commercial Capital, RM Adviser, RM Technologies and RM Communities. She has been involved in investments with property values over $2 billion, including over 15,000 apartment units, and is a pioneer in real estate crowdfunding.

 

MICHAEL BLANK

CEO | NIGHTHAWK EQUITY

Michael’s an entrepreneur through and through and passionate about helping people become financially free with real estate investing.  He’s the author of the Amazon bestseller ​“Financial Freedom with Real Estate Investing”​ and host of the popular Apartment Buildings Investing Podcast.  He’s helped investors purchase 5,000 multifamily units valued at $330M through his content and training programs.

As CEO of Nighthawk Equity, he controls over $90M million in performing multifamily assets all over the United States and has raised over $21M.

 

LIZ FAIRCLOTH

CO-FOUNDER | THE REAL ESTATE InvestHer

Liz Faircloth co-founded the DeRosa Group in 2005 with her husband, Matt. The DeRosa Group, based in Trenton, NJ, is an owner of commercial and residential property with a mission to “transform lives through real estate.” DeRosa controls close to 1000 units of residential and commercial assets throughout the east coast.  Liz is the co-founder of The Real Estate InvestHER® community, a platform to empower women to live a financially free and balanced life through over 30 Meetups across the US and Canada and an on-line community and membership that offers accountability and mentorship for women to take their business to the next level! She is the co-host of the “The Real Estate InvestHER Show” and recently published their first book, “The Only Woman in the Room – Knowledge and Inspiration from 20 Successful Real Estate Women Investors!”

 

BRAD SUMROK

OWNER/PRESIDENT| APARTMENT INVESTOR MASTERY


Since 2005, Brad has personally helped his students purchase over 2 billion dollars in apartment complexes, involving thousands of investors who have taken his training. Many of Brad’s students began with zero previous investing experience and, within a few short years, hundreds of students have retired and/or increased their net worth by over $1 MILLION. Even more are earning double-digit average annualized returns! Over the years, Brad has owned over 5,000 units in 8 US Markets. His mission is to impact and mentor over 1 million people to achieve financial freedom by investing in apartments following the proven Sumrok process and improving working class communities.

 

Also included in the lineup is:

  • H. Gregory Baker, Partner of Lowenstein Sandler LLP
  • Kathy Fettke, Co-CEO of RealWealth
  • John Chang, Senior Vice President, National Director Research, Marcus & Millichap Services
  • Frank Roessler, Co-Founder of Ashcroft Capital
  • Trevor Shakiba, Certified Financial Planner and President of Shakiba Capital
  • Ketan Patel, High Performance Coach of Ketan Patel Coaching
  • Whitney Sewell, Founder and Director of Life Bridge Capital
  • James Maffuccio, Co Founder and Chief Investment Officer of Aspen Funds
  • Monick Halm, Founder of Real Estate Investor Goddesses
  • Ashley “BadAshInvestor” Wilson, Principal of Bar Down Investments, LLC
  • John Burns, CEO of John Burns Real Estate Consulting

Now, if that doesn’t whet your whistle, remember, if you have been reading our blog (and of course, you have been), you know that we have already started events leading towards BEC 2021 FEB.18 – 20. So far, we have started a series of webinars that you really can’t afford to miss. We kicked it off in December with a discussion on the Biden presidency and what it means for commercial real estate, and yesterday our webinar was a debate on whether the winners of 2021 will be net sellers or net buyers. 

Though we have more webinars heading your way, if you purchase your BEC 2021 tickets now, you have access to exclusive groups with instant playpacks of the webinars and other content that the regular ‘Joe Blow’ isn’t getting. 

Buy your tickets to BEC 2021 now. The spots are filling fast and this something you won’t want to miss, really, that you can’t miss if you want to continue building your business and investing in the coming years.

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10 Ways to Promote and Market Your New Book

Whether you are a multifamily investor, fix-and-flipper, real estate agent, or any type of real estate professional, publishing an ebook or hard copy book is a powerful way to grow your business.

The main reason why is because whenever you publish a book, you instantly increase your credibility and reputation in the eyes of customers (buyers, sellers, investors, etc.).

“Wow, they’ve written a 450-page book on how to complete an apartment syndication. They must be experts.”

By positioning yourself as an expert with your book, you build trust with your customer at an accelerated pace. And as Bob Burg says in The Go-Giver, “All things being equal people will do business with, and refer business to those people they know, like and trust.”

He is a real-world example of the power of writing a book: I recently interviewed Max Keller of “Deals Chasing You.” On the podcast. He wrote the book on senior housing. When he sends direct mailers to generate senior housing leads, he includes a note that if they call, he will send them a free copy of his book. As a result of this simply tweak to his marketing, he quadrupled his response rate.

Writing a book = increased credibility = increase trust = more business.

We have previously written about the logistics on writing a book, which you can read here.

The purpose of this blog is to outline the best ways to promote your new book before and after it is published to ensure a successful launch, getting the book in front of as many of the right people as possible in order to maximize its impact on your business.

When creating a marketing strategy for a new book, it is important to keep top of mind that there are three parties involved in the publication of a new book:

  • The authors: you and any co-authors or ghost-writers
  • The end customer: the people who will purchase and benefit from your book
  • The contributors: anyone who contributed to the information in the book, including editors, formatters, the person who wrote the foreword, people who give testimonials, people who are features in the book, people who provided advice that was included in the book, etc.

Therefore, when you are thinking about strategies for promoting your book, how to tap into the self-interest of each party must be top of mind.

Each of the following strategies benefits either the end customer, the contributors or both. Obviously, the authors benefit regardless from the book sales.

We marketed our most recent publication, Best Ever Apartment Syndication Book, in 10 ways, which I will outline below. However, one strategy that we didn’t utilize for our syndication book but do plan on utilizing for the book we are currently working on (the working title is Best Ever Passive Investor Handbook) is giving the book away for free.

This is the strategy Max Keller implemented (discussed above). Giving a book away for free adheres to something we consistently talk about here – adding value for free.

When Max Keller receives inbound calls from prospective senior housing leads, he not only sends them his book for free but also directs them to the chapter or chapters that will address a specific problem or challenge they are facing. By going above and beyond for these callers before they’ve even expressed interest in selling allows him to receive exclusive deals with no other active buyers or competitors.

Max says his goal is to give away 1 million books!

This is even something that can help you generate book topics. Do you receive the same questions repeatedly from customers? Right a book on the subject. Whenever you receive an inquiry, rather than answering the question (or in addition to answering the question), offer to send them the book for free.

As I mentioned above, we plan on utilizing this strategy for the passive investing book we are working on. Passive investors ask similar questions when presented with opportunities or when initial inquiring. Therefore, we are writing the go-to book on passive investing and will send a copy to investors.

In addition to sending the book for free, here are 10 other ways to promote a new book:

1. Social Media

One of the first ways to start promoting a new book is on social media. In fact, you can start marketing your book on social media before you’ve written a single word.

Here are some examples of social media posts ideas pre-launch:

  • Announce the topic of the new book you are writing
  • Ask for feedback throughout the process, like titles, questions to address, cover designs, etc.
  • Provide frequent updates on your progress (i.e., outline is done, first chapter is done, 50% done, etc.)
  • Provide advice on writing a book that you have learned along the way.

As an example of this last point, we created a post where I posted a few lessons he learned on how to effectively overcome writer’s block.

The purpose of pre-launch promotion activities is to engage your audience and would-be purchasers in the process of writing the book. That way, they feel as if they have a stake in the book since they were involved in its creation process. Plus, they are aware of the book and what will be included far in advance, which increases the chances of them buying (and maybe even promoting the book themselves).

Once the book is published, you can create a post on social, announcing that the book is now available for purchase. On Facebook, you can create a paid advertisement for the book. A 30 to 60 second spoken video explaining what people will learn from the book is the most effective type of Facebook advertisement.

You can also use social media to share some of the other promotion strategies I will outline below.

2. Pre-Order Page

Another effective pre-launch promotion strategy is to allow buyers to pre-order your book.

How to tactically setup pre-orders will depend on how you publish your book. If you are working with a publisher, they will likely need to be the ones who setup the preorder process. If you are self-publishing on Amazon, click here for the process we used to set up preorders.

Once the preorder page is live on Amazon (or somewhere else, again, depending on the publisher), you promote the page on social media.

3. Book Page

Creating a book page on your website is another way to promote your book. The timing of the book page can coincide with the preorder page going live.

Here are examples of the book pages we created for our three books:

Your book page needs to answer the question, “why should I buy this book?” Therefore, it should give would-be buyers an exclusive look, a sneak peek into the valuable information they obtain.

4. Free Giveaways

One of the benefits offered to those who pre-order the book, and something that should be presented front and center on your book page, is a free giveaway.

The free giveaway should be one or more resources above and beyond, yet related to, the book.

For example, for those who pre-ordered our Best Ever Apartment Syndication Book, they received eight free documents. We asked people to email us their receipt of purchase and in return we emailed them the documents.

I think this is the best strategy for promoting a new book. People are more incentivized to pre-order the book because of the fear of missing out (FOMO). Therefore, while writing your book, constantly think about excel calculators, PDF guides, eBooks, etc. you can create and give away.

So that people continue to purchase the book after it is published, you can still giveaway completely different documents or a portion of the ones given away to those who preordered.

Another twist on the free giveaways is to create a contest where people can win a free signed copy of your book. For example, when Theo and I used to do weekly Follow-Along Friday podcast, we did a Best Ever Trivia Question of the Week. The first people to email us (or comment on the YouTube video) the correct answer received a free, signed copy of our first book.

5. Reviews

For the people who organically find your book (i.e., people who are not already in your audience) will make their purchase decision on the reviews – both the quality and quantity. Therefore, you want to obtain many quality reviews as fast as possible after launch. The most effective way to accomplish this is to get reviews before the book is published.

You don’t want fake or generic reviews. These turn off would-be buyers. Instead, to ensure that the reviews are genuine, send a PDF of the book to people before it is published and ask them. Tell them when the book will be published and ask them to leave a genuine review within a few days of launch. Then, once the book is launched, follow-up with that person to make sure they left the review.

They benefit because they get access to your book before it is public for free.

For the Best Ever Apartment Syndication Book, each person on our team was responsible for getting at least five reviews and then following up to make sure those reviews were posted.

Once the book is published, you can generate even more reviewed by leveraging another free giveaway. For the Best Ever Apartment Syndication Book, those who left a review and emailed us a screenshot received a free document.

We were able to generate over 300 reviews for the Best Ever Apartment Syndication Book using this strategy.

6. Testimonials

Obtaining and putting testimonials in your book and/or on your book page is a great way to get other people to promote your book. Therefore, for whatever you are writing about, get at least five people who have already benefited from the advice in the book to write a testimonial. Or, even better, get one person who is well known. For example, I was able to get a testimonial from Barbara Corcoran of Shark Tank on my first book and Brandon Turner on my second book, which were featured on the front cover of the book.

They benefit by having their name and business included in a best-selling book. You benefit because you can use the testimonials to promote the book.

You can include the testimonials on your book page too. Then, people who view the page will not only learn what they will learn by reading the book, but also how the advice has already helped someone else achieve success.

Additionally, the people who wrote the testimonials are more likely to share the book on their social media and other platforms, allowing you to tap into their audience.

7. Foreword

You can use the foreword to promote your book in the same way as the testimonials. Except the person who wrote the foreword is even more likely to share the book with their audience. The foreword is usually multiple pages long compared to a one or two sentence testimonial, and their name is oftentimes included on the cover.

For example, Master Platinum Coach and former Tony Robbins’ Master Coach Trevor McGregor wrote the foreword to the Best Ever Apartment Syndication Book. As a result, we were able to get our book and name out in front of his high performing, large audience.

8. Other Contributors

In addition to the people who wrote the testimonials and foreword, anyone else who contributed to the book can be a promotion source.

This was how we were able to get exposure for our first two book – Best Real Estate Investing Advice Ever Volume I and II. For both books, each chapter was dedicated to a real estate professional I interviewed on my podcast. Once the book was published, nearly all of them shared it with their audience. And why wouldn’t they? The book was basically a biography of their investing careers and their Best Ever advice.

Other contributors that can promote your book, as I mentioned in the introduction, are:

  • Editors: the proofreader and/or copy editor may share the book with their audience to promote their own editing services
  • Designers: the people who designed the cover and/or any interior designs may also share your book to promote their own design services
  • Acknowledgements: anyone who helped in any other way with the book are usually included in the acknowledgments section. Since their name is included in the book and they benefited the creation of the book, they may share it with their audience

Overall, the more you can include other people in the book, the more potential promoters you have once the book has been launched.

9. Your Thought Leadership Platforms

Using a similar approach to promoting your book on social media, you can promote your book on all your thought leadership platforms, like your newsletter, podcast, blog, or YouTube channel.

Once the book is published, you can do a mini-series about the book. For example, Theo and I did a 10-part podcast series summarizing the Best Ever Apartment Syndication Book.

10. Other People’s Thought Leadership Platforms

Another way to tap into other people’s audiences is to promote your book on their platforms. The simplest approach is to be interviewed on someone else’s podcast. You would want to make sure you request that the episode air the week of the book launch.

In addition to providing a sneak peek into the content of the book, offer to giveaway a free document to anyone who buys the book or provide an exclusive discount code.

Once the interviews are live, share them on your social medial and other thought leadership platforms.

In Conclusion – Be Creative

My last piece of advice for promoting your book is to be creative.

The examples above are the things we did to market our three books. But there are countless more ways to increase the exposure of your book. So, for each of the 10 categories, brainstorm other ways you can leverage them to promote your book.

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Commercial Real Estate: What to Expect from a Biden Presidency

What does Biden’s presidency mean to commercial real estate? Last Thursday was the launch of the first of many monthly web series leading up to the Virtual Best Ever Conference 2021, scheduled for February 18-20. Our topic of conversation? Just that.

Commercial Real Estate: What to Expect from a Biden Presidency

President Donald Trump finally accepted defeat after one of the most divisive (or should we say interesting?) races in the history of the U.S. With three days of refusing to work with Biden’s team, claiming election fraud by the president and efforts to top the counting of ballots, the former vice president secured the election with wins in several states that Trump won in 2016. And, in case you missed it, Biden has hinted he will be pushing for changes in the real estate industry. Will these changes be good or bad?

We had an awesome virtual gathering of panelists that dialed in to discuss the Biden presidency and what it means for Commercial Real Estate. With more than 70 participants, the audience engaged the panelists in ways we didn’t anticipate and it truly made for an informative webinar with a lot of takeaways.

Panelists included John Chang from Marcus & Millichap, Rebecca Walser from Walser Wealth Management, Professor Anthony Grasso from Rutgers University Camden, and Ben Lapidus, from Spartan Investment Group.

What did you miss? Well, frankly, quite a lot. Now, while we won’t give you ALL the juicy details we can give you a few hints of what you can expect to learn. With the purchase of your ticket to attend BEC 2021, it gives you access to this webinar and all future webinars leading up to our virtual conference.

The discussion included the specific migration patterns of the US population into secondary markets, asset class winners and losers in a COVID era and post-COVID era, the three tax code changes to anticipate and the three recommendations for 2021 to protect against it, the down ballot results effect on the American consciousness and what this means for real estate investors, and more.

As real estate investors, these topics are important to discuss and familiarize yourself with in order to remain knowledgeable and aware of what will affect you, your business, and your decisions in the coming years.

For full access to this webinar and future exclusive content, visit BEC 2021 and purchase your tickets today. We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics, all from the comfort of your home.

Again, as we lead up to BEC 2021, we will be hosting monthly webinars specifically for ticket holders. We are still running 30% off through 11:59 a.m. for Black Friday (and now Cyber Monday). To receive the discount, just use code BF30 when checking out.

Our next webinar is: Debate: Will 2021 Winners be Net Sellers or Net Buyers?

We will have two teams of commercial real estate experts face off to debate whether you should focus your 2021 on buying or selling. Who will become the winners in the new economy and how will they get there?

We will be announcing the date and the real estate experts soon, so look for it in an upcoming blog and email.

We can’t wait to virtually meet you.

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Syndication Expert Theo Hicks Walks Through Apartment Turnovers

If your business is apartment investing, you know good tenant relationships are critical to long-term success. Not only do you want to retain responsible renters, but you need a smooth process for turning over apartments when they move out. This step may sound simple, but its management affects your finances, tenant retention, and your reputation.

Syndication School instructor and Joe Fairless Best Ever Show podcast host Theo Hicks takes a turn in the guest chair to discuss apartment turnovers. He talks about inspecting a rental unit and organizing your information for efficient results. He shares his process and a free handy checklist that you can use in your inspections.

About Theo Hicks

Theo Hicks is a syndication expert who co-hosts the Joe Fairless Best Ever Show and the Apartment Syndication School education series. He also co-authors the Best Ever Weekly Newsletter and Blog, which presents strategies for passive investing, active investing, and managing commercial properties.

Joe and Theo recognized the need for quality guidance on getting started in apartment investing and syndication. Theo hosts free podcast courses that include worksheets and other documents for your business use. He also runs a private program for investors seeking mentorship on investing in commercial properties.

Trained in chemical engineering, Theo purchased his first multifamily property in 2015 and never looked back. His passion is the intersection of personal development and success. Here, he shares tips for smooth rental unit turnovers.

Turning Over an Apartment

If you’ve ever moved into a residence with some damage or broken fixtures, you know how frustrating it is. Sometimes, a management company or owner walkthough of a vacated property is too cursory and misses needed repairs. You want to do better for your apartments, and there are practical reasons why.

Protect Your Investment

First, you want to provide a high-quality residence for your tenants. Not only is it the right thing to do, but they will thank you by taking better care of the property. They will also stay longer, which lowers your costs and supports a stable neighborhood and property value.

Theo stresses that happy tenants help preserve your reputation. Active investing means your name is out there. People tend to write reviews when they have complaints rather than compliments. In today’s online world, your apartment complex could be reviewed on several websites and easily found in searches by prospective tenants. Business associates and vendors also check your reputation as part of due diligence. You want to model how to manage apartment investing well.

Dive into the Details

Each vacated apartment merits a detailed inspection. Theo advocates using a template checklist to standardize your process and ensure you don’t overlook anything. The list should have columns for noting any damage above normal wear and tear. You can deduct these items from the tenant’s security deposit.

If you find damage, you want to note whether it is a repair or replacement item. You will end up with an itemized list of what is ready for cleaning, what needs replacement, and what needs repair. This approach simplifies matters for your maintenance manager or vendors, such as the cleaning company.

Master Inspection Checklist

Theo cautions that you want to use a written checklist for each walkthrough. If you have done several of them, you may be tempted to rely on memory. However, it’s too easy to miss a small repair item that a new tenant will spot immediately.

If you focus on passive investing, you likely rely on a property manager or another owner to handle walkthroughs. Consider following up with them to ensure they are using a written process and documenting each turnover carefully.

Theo presents an overview of what to address for each section of your apartment. The below shows you the work scope you can expect, leaving full details to the checklist.

Outside and Mechanical

Theo recommends starting with the outside of your property and noting any issues. This is good practice regardless of whether a tenant has just moved out, as you can catch maintenance needs before they become serious. Also, check the unit’s patio, balcony, or yard for disrepair or landscaping needs.

Check the mechanical systems inside the unit, including HVAC and water heater. If the building has central HVAC, make sure heat and air are working in the apartment.

Laundry Facilities

The interior laundry room is a frequent site of water leaks and clogged connections that pose a fire hazard. If your building shares a laundry room, you can take the opportunity to do a spot inspection.

  • Washer and dryer operate normally.
  • Hardware connections are intact.
  • Hoses don’t have cracks or clogs.
  • There are no signs of water leaks, such as stains or warped flooring.

Interior Fixtures

Check fixtures such as lights that are common to all rooms. You want to ensure they work and don’t present a safety hazard.

Now is an excellent time to check walls and other surfaces, which can hide issues at first glance. Inspect walls, ceilings, baseboards, and flooring for cracks, nicks, stains, and holes. Look for mold or mildew that may need treating or indicate hidden water damage.

  • Light fixtures, bulbs, and switches work, are in good cosmetic condition, and are secured.
  • Electrical outlets work and are undamaged and securely fastened.
  • HVAC vents open and close. Air ducts are clear.

Entryway and Livingroom

Check the entryway interior and exterior for missing or broken items. The door should close smoothly, lock securely, and be free of damage or warping.

  • Windows open smoothly and stay in position. Glass is set securely in the frame. Locks work and are tightly installed.
  • All windows have screens in good condition.
  • Blinds and other window coverings operate smoothly and are in good condition.
  • Smoke alarms are present and operating.
  • If carbon monoxide detectors are installed, they work.

Kitchen and Bathrooms

These rooms are time-consuming to inspect because of heavily used fixtures and appliances. In addition to daily wear and tear, these areas also contend with moisture and heat.

Kitchen

You want to inspect and test each appliance even if it looks in good working order. Check the condition of each cabinet. Sometimes tenants don’t report minor maintenance issues.

  • The oven and broiler work on all settings and heat to correct temperature.
  • Range elements are intact and heat promptly and to correct temperature.
  • Range hood has a filter and working light and fan.
  • Refrigerator and freezer are operating at correct temperatures.
  • Refrigerator and freezer lights work. Shelves and bins are intact.
  • Ice maker and water dispenser operate without clogs. Replace the water filter.
  • Garbage disposal works.
  • Sinks and faucets function with no leaks or clogs.
  • Dishwasher works on all settings and doesn’t leak.
  • Microwave operates normally. Have it tested for leaks.

Bathrooms

You want to physically inspect each fixture to ensure it is working correctly and securely anchored. In Theo’s experience, escutcheons tend to loosen. An escutcheon is the metal plate covering the hole where plumbing pipes exit the wall. It can look intact but fall from the wall when touched.

  • Toilet is free of clogs and flushes without running.
  • Shower turns on and has expected water temperature and pressure.
  • Faucets have hot and cold water and operate without leaks.
  • Sinks drain properly.
  • The vanity has no damage.
  • Cabinets doors and drawers work.
  • Mirrors are intact.
  • Tile is free of mold, mildew, and damage.
  • Escutcheons are intact and well secured.

Bedrooms

Bedrooms and areas such as dining rooms have few fixtures and are straightforward to inspect.

  • Doors open properly, lock from the inside, and are free of damage.
  • Closet doors work and are in good condition.
  • Closet fixtures such as racks, rods, and shelving are intact and well-secured.
  • Hardware functions properly.
  • Mirrors are intact and anchored.

Take Final Inventory

Now that you’ve gathered your walkthrough information, it’s time to take inventory for your next steps. Do you need to make any repairs or replacements before renting this unit? The answer is likely yes, even with normal wear and tear.

At this point, you can quickly generate a list of replacements and repairs, by room or system, to give to your maintenance manager or vendor. After they address all items, the unit is ready for cleaning and a final walkthrough.

When you do the final walkthrough, try to see the apartment through a new tenant’s eyes. What’s your first impression? As Theo says, you should think, “Wow! I want to live here for a long time!”

If you standardize your turnover process, you’ll have happier tenants and better profits. Success lies in the detailed work behind an immaculate apartment.

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BEC 2021 Goes Virtual During Pandemic

Well folks, we have to acknowledge that COVID-19 isn’t going anywhere…at least not anytime soon. As a result (and as you may have noticed), BEC 2021 will be held virtually, for the first time, due to COVID-19. And, while we are disappointed not to be together in person, we are excited to funnel all our efforts into a virtual networking experience like no other. Seriously. As soon as you sign up, you will start reaping the benefits.

What do I mean? We really had to think out of the box on this one. The big question was: How can we make a networking event successful in a virtual environment? The Best Ever Real Estate Conferences are great because they provide attendees with the opportunity to network with fellow investors and industry influencers from around the world. That is it’s greatest benefit and we know how critical that is to you and your business.

In order to offer all attendees the opportunity to share business strategies, meet high net-worth individuals, and learn something new, we came up with a solution, several in fact, that I think you will love.

We’ll have video conferencing and chat rooms dedicated to hundreds of different networking topics. If you want to meet like-minded folks from around the country, if you want to find a partner, deal, or money from the comfort of your home office, or if you just want some good old fashioned new conversations in a world devoid of connections, then this virtual event is a can’t miss.

Exclusive to this year’s virtual event, when you sign up you will be thoughtfully placed into a Mini Mastermind group with your fellow attendees of groups no bigger than 8 people. No other conference provides you the opportunity to connect so intimately and learn as thoughtfully from your fellow attendees this far in advance from the actual date of the event. We’re making the virtual networking easy for you this year. The Mini Mastermind groups start as soon as you sign up, so make it count and register now.

Additionally, in the months leading up the conference, we’re offering all of our ticket buyers free access to exclusive monthly webinars discussing topics such as the current political climate and how the incoming Biden administration‘s decisions on a range of issues could impact the commercial real estate market and industry directly.

So, while 2021 has presented us with challenges from uniting in person, we are going to continue building the essential dialogues and connections in the world of real estate. We are looking at this as an opportunity to expand our network to include those that normally would be unable to attend and offer exciting new elements made possible by the virtual environment.

To find out more about BEC2021, visit www.bec2021.com.

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Kevin Riordan Shares Bold Insights on Institutional Investing

You may face a day when the funding needed for your target real estate deal merits an institutional investor. Though this is a sign of success, it can be daunting if you are unfamiliar with raising institutional equity. Real estate investor and longtime pension fund executive Kevin Riordan explains how to begin. As a guest on the Joe Fairless Best Ever Show podcast, he summarizes institutional raising and what entrepreneurs seeking equity can expect.

About Kevin Riordan

Kevin has deep institutional expertise stemming from extensive business and Wall Street experience. He took a commercial mortgage REIT, Crexus Investment Corp., public in 2009 and knows the process firsthand. A full-time professor of real estate at Montclair State University, Kevin grounds his investing in accounting and finance mastery.

Kevin’s career spans 30 years of institutional investing, focusing on raising capital for commercial real estate. As a young CPA, he moved from the accounting group to real estate at work after hands-on experience making transactions. At age 30, he moved to TIAA CREF, a pension fund for educational institutions, and broadened his investment analysis and real estate deals experience. Kevin leveraged 20 years there to create initiatives merging public capital with commercial real estate.

Kevin sees two sides to the business of providing institutional capital for equity. One side is through joint ventures with property developers handling the operations. The other aspect is funding entrepreneurs planning to buy or develop properties.

We Are the Money: The Equity Side

During his tenure at TIAA CREF, Kevin formed many joint ventures with real estate operators. The total project costs ranged from $12 million to $30 million, and the institution would cover up to 100 percent of the funding.

A typical partnership structure has the equity investor receiving a preferred return until reaching a hurdle rate. A hurdle rate is the minimum acceptable rate of return that an investor expects. At this point, the property developer receives a promote, which is an amount above the developer’s contribution. The contract should contain the exact terms agreed to.

Project costs vary with the type of property built. Kevin recalls one apartment building with 210 units in a quaint northern town that cost about $14 million. In contrast, a downtown Atlanta development with some construction challenges ran closer to $29 million.

The project begins with a construction loan to start operations. The institution uses its capital to pay off the loan and shares ownership with the developer. This arrangement grants the institution a preferred return on investment and access to the property’s initial cash flow.

Kevin provides an example of how these transactions typically work. If you put up capital of $1 million at a 6 percent return, your preferred return would be $60,000. The property’s first $60,000 return goes to you, and you and the developer split subsequent gains.

Funding Entrepreneurs: The Buy Side

What if you are a multifamily property investor seeking additional funding and not a real estate developer? Kevin speaks to this situation, too. Many investors start by using their financial resources and then raise funds from friends, family, and professional networks. They may top out and need to raise more capital to pursue their target transaction. Individuals often reach this point when they’ve rolled proceeds from multifamily properties into larger projects and face steeper equity requirements to continue growth.

When institutions invest in these types of projects, the funding is typically in the form of a mortgage instrument that allows the entrepreneur to buy a property or begin development. In return, the investor acquires a coupon or share of the mortgage debt.

If you plan on approaching an institution for capital, you want to present yourself and your business plan in the best possible light. Serious potential investors will conduct due diligence on you as a candidate and on your proposed projects. Kevin shares tips on how to prepare.

Document Your Track Record

A potential investor will first ask you, “What have you done?” The institution’s top concern is that you have a successful track record. Document and quantify your achievements and be prepared to discuss them.

Here are some foundational questions to be ready for:

  • Which transactions have you done?
  • What was your role in each?
  • How did each investment perform?
  • How were the deals structured?
  • Who were the other partners?

As in a job interview, expect to walk a serious investor through your process on at least one deal.

Create a Detailed Plan

Kevin describes his experience taking Crexus Investment public and meeting with major institutional investors for the first time. He had worked for a large pension fund and was now on the other side, taking his first company public. When visiting Fidelity Investments, BlackRock, and other large players, he found their concerns shared a common thread. In addition to his track record, they wanted to see a detailed and thorough plan.

Kevin stresses that despite differences in scale, multifamily property buyers and institutions must perform similarly to succeed. Nonetheless, the transaction must meet a minimum equity threshold for institutions to consider it. He notes that a $500,000 deal, a hefty commitment for most individuals, is too small for institutions.

Approach Investors at the Right Time

If you are considering institutional equity for your next project, should you approach investors before or after entering a transaction? Kevin suggests working with investors first to secure funding. At this point, they will evaluate you based on your track record and business plan. Ideally, you’re proposing adding one or two zeros to a solidly performing portfolio.

The alternative is to proceed with a deal on a contingency basis. One drawback of this strategy is that you may sacrifice some credibility with partners who prefer to have funding locked first. Another potential issue is not obtaining equity in time or being denied altogether. Lining up institutional financing first is a cleaner strategy.

Prepare for Due Diligence

Let’s assume you have passed an institutional investor’s due diligence, and you have the green light to put together a deal. The institution will draft a profile of your project, and funding is contingent upon meeting the requirements. Your job is to find or develop a suitable property and to check all the associated boxes, as Kevin puts it.

The institution will expect your project to satisfy given criteria such as:

  • Property location
  • Asset type
  • Expected rate of return
  • Deal structure

After analyzing the target project in depth, you should be prepared to meet the checklist. However, institutional investors also vet your company’s suitability for executing the project and managing it for the long haul.

Kevin emphasizes that investors assess a company holistically, looking for breadth as well as a compelling investment story. They want to understand how your business’s core people and operations will drive the project’s success. To do this, they look at history as well as current circumstances. For example, did your company triumph over a setback, such as a regional downturn or sudden loss?

Kevin suggests preparing for an evaluation of your past and present operations and any principals besides yourself.

Areas of scrutiny include:

  • Accounting systems
  • Reporting
  • Operating agreement or articles of incorporation
  • Other company principals
  • Financial history
  • Response to adverse conditions
  • Plan for operating the new property

How to Find Institutional Investors

Suppose you have your CV, company, and investment plan in place but have no institutional contacts. How do you reach out to these large equity investors?

Kevin suggests you partner with an intermediary such as a real estate consultant or mortgage broker. Many of these professionals arrange equity as well as debt and can facilitate the right introductions. When contacting mortgage brokers, for example, ask whether they work with institutional equity.

You and the institution will benefit from an intermediary’s services. Institutions prefer this approach because it weeds out the deluge of nonstarters and helps identify quality prospects. As an entrepreneur new to the process, you will gain valuable guidance from a high-caliber consultant or broker.

Make Your Bold Move

What is Kevin’s best advice for real estate investors new to institutional equity? Paradoxically, it is to act boldly while sensibly mitigating risk.

Kevin refers to a personal lesson learned. Following the Great Recession, he could have purchased $2 billion of Barclays Bank mortgage debt. Instead, Kevin bought only $750 million and left a significant profit on the table. He attributes the decision to caution over boldness.

If you haven’t already, you will eventually encounter a deal that seems like a fortune-changer. You will probably need to move quickly and irrevocably. According to Kevin, the key is to balance bold action with a clear understanding of the risks in a given investment opportunity. These decisions are always challenging, but isn’t that the fun?

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47 Recessions and Counting – Are You Prepared?

Did you know the United States has had 47 recessions dating back to the Articles of Confederation? The first started not long after the revolutionary war. In the 1800s a recession would occur every 3-4 years on average and in the 1900s they began to occur about every 4-5 years. 

In 1913 the Federal Reserve was created and the US Government began experimenting with trying to stop recessions from happening. Sadly, they have been unsuccessful in stopping them; however, the good news is we now only have recessions every 10 years or so… what a relief.

Why Not Prepare?

Stoicism (an ancient philosophy founded in early 3rd century BC) teaches us that there are things in life in our control, and there are things which are out of our control. The key is to focus on what we CAN control. What the government will propose, how the stock market will perform, and what the Federal Reserve will do are primarily out of our individual control; however, you and I can control our behavior, decisions, and actions. Therefore, we can take action and decide to be prepared. 

PS – if you haven’t read my blog Stoicism & Real Estate – How To Be A Stoic Investor check it out HERE

There Are Two Types of Preparation to Consider

  • Personal – (Health, Safety, Food, Water, Shelter) 
  • Financial – (Diversification, Multiple Income Streams)

Personal Preparation 

In the last recession 2008-2009 over 6,000,000 people lost their homes and jobs as their 401(k)s disappeared into the abyss. Though in terms of personal preparation, many Americans had a “Plan B”. Many doubled up living with friends, relatives or found places to rent. For the large majority, food, water, shelter, safety and health were not the biggest challenge; this was a financial crisis.  

Financial Preparation

When COVID-19 hit the United States financial sector this past March, the stock market collapsed. What did people do? Most ran to grab toilet paper, food, water, and gasoline. How many people ran to buy stocks at a 30% discount? 

Statistically speaking, Americans hit hardest by The Great Recession and this year’s Coronavirus Recession only had one source of income; a job. Imagine only having one source for water. What would happen if that source were taken away? Because of this possible risk, we have hundreds of sources of water in the United States from rivers, aqueducts, rainfall, underground springs, imported bottled water and so on. So why not create multiple income sources to prepare for the risk of having one single source taken away? Having one income stream going into a recession means you are vulnerable and potentially unprepared for what could happen. Even the best economists in 2019 did not predict a Worldwide shutdown in 2020. 

The Solution 

Whether we experience a quick recovery or a multi-year recession in the years ahead, there will be another recession around the corner and many more throughout our lifetime. We can’t avoid them from happening and it doesn’t help to get angry when they occur. The best thing we can do is be prepared and create multiple income streams, so we have a safety net in the event that 6,000,0000 more people lose their homes or jobs the next go-around and we find ourselves among the unlucky ones. 

Never depend on single income. Make investments to create a second source – Warren Buffett

The average millionaire has 7 sources of income – Fact

To Your Success

Travis Watts 

 

 

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Commercial Real Estate Lending: What is the Ideal Multifamily Loan?

Do you know what the greatest ongoing expense is for real estate investors?

Assuming debt was secured to acquire the asset, the great expense is the ongoing debt service.

Since the debt service is not included in the net operating income calculation, it do not impact the value of the investment. However, it does impact the cash flow, which in effect impacts the returns to passive investors.

Therefore, being the greatest expense and impacting the return to passive investors, securing the best loan is of the utmost importance.

The purpose of this blog post is to help active apartment syndicators and passive apartment investors alike to understand how to know what the most ideal commercial real estate loan for a particular multifamily investment is. To accomplish this task, this blog post will outline the following:

  • What lender should be use?
  • Should an agency approved lender always be used?
  • Should a mortgage broker or a lender be used?
  • When is the best time to engage with the lender/mortgage broker?
  • What are the qualifications of the borrower, deal, and market?
  • What are the upfront reserve requirements?
  • Are renovation costs included in multifamily loans?
  • What should be looked at when comparing multifamily loan options?

What lender should be used?

The ideal multifamily loan is an agency loan for most apartment syndications. The main exception is if the business plan includes an early exit – via a refinance or a sale. When this is the case, a non-agency bridge loan is ideal because a borrower won’t be required to pay a prepayment penalty (more on this in a later section) at sale or refinance?

When pursuing an agency loan, what lender should be used?

With an agency loan, a lender provides a borrower with debt to purchase an apartment. Rather than holding the mortgage loan on their books, the lender sells the mortgage to an agency. Hence, an agency loan.

The agency pools together thousands of mortgages, which are sold to private investors and investment firms on the open market as mortgage-backed securities (MBS).

The two agencies that purchase and resell mortgages as MBSs are Fannie Mae and Freddie Mac.

Both agencies guarantee the MBSs. Since Fannie Mae and Freddie Mac are government-sponsored entities (GSEs), the MBS are implicitly backed by the Unite States government. Therefore, in order to provide a guarantee, the agencies only buy certain types of mortgage from approved providers.

Fannie Mae was created first. Later, Freddie Mac was created to generate competition in order to drive down interest rates and fees for both the borrowers, the lenders, and the MBS investors.

Since Fannie Mae and Freddie Mac are buyers of mortgages, they do not work directly with borrowers. Therefore, to obtain an agency loan, a borrower must work with an approved lending institution.

Fannie Mae only buys loans originated from Delegated Underwriting and Servicing (DUS lenders). As the name implies, Fannie Mae delegates the underwriting and servicing of the loans underlying their MBS products to third-party institutions that meet their strict qualifications. Therefore, in order to obtain a Fannie Mae loan, a borrower must work with a DUS lender. Fannie Mae has a list of approved lending institutions on their website, which you can view here. Currently, 25 lending institutions qualify for DUS status.

Freddie Mac also has approved lenders called Optigo conventional lenders. The list of Optigo lenders is similar to the list of DUS lenders. You can view Freddie Mac’s list of approved lenders here.

Should an agency approved lender always be used?

One of the major benefits of an agency loan are the terms. Agency loans generally result in lower down payments and/or lower interest rates. Consequently, debt service payments are lower compared to non-agency loans, which means a higher cash-on-cash return.

However, as I mentioned above, the deal and the borrower (and their team) must meet the agencies strict qualifications.

So, yes, a borrower should always use an agency approved lender, assuming they and the deal qualify, and they projected hold period is longer than the prepayment period. If the borrower and/or the deal do not meet their criteria, or the plan is to exit the loan after a few years or less, the borrower may still be able to use an agency approved lender since most offer more than just agency loans. However, they will not qualify for the best rates and terms.

Should a mortgage broker or a lender buy used?

There is an exception when it comes to securing agency loans. Borrowers can secure an agency loan without working directly with an approved institution by working with a mortgage broker.

A mortgage broker acts as an intermediary between lending institutions and borrowers.

There are countless different multifamily loan programs offered at any given time. Rather than finding the best loan on their own, borrower relies on the expertise of a mortgage broker or lender. The borrower submits information about the deal and the mortgage broker or lenders returns the best loan program option/s.

A mortgage broker is not limited to loan programs offered by a single lending institution. They have a network of many lending institutions, which means they can find the lending institution that offers the best terms for that particular loan program. When a borrower works directly with a lending institution, their options are more limited.

Since the mortgage broker is an intermediary, however, they charge a fee for their services.

So, who should be use? I think it makes sense to work with a mortgage broker. Sure, the expense to secure the loan is higher. But since they have relationships with multiple lending institutions, they will likely underwrite a loan with better terms that offsets the broker’s fee.

When is the best time to engage with a mortgage broker/lender?

A borrower should already have engaged a lender or mortgage broker prior to looking for deals. Based on their and their teams background, the lender or mortgage broker will let them know which loan programs and how much debt they qualify for.

With this information, the borrower will know which type and sized deals to pursue.

Then, when the borrower is interested in submitting an offer an a specific deal, the mortgage broker or lender can quickly provide a quote (since all they need to do is fully underwrite the deal as opposed to fully underwriting the deal and the borrower). The borrower will have an idea of the down payment and debt service so that they can submit a more accurate offer.

When a borrower doesn’t engage a mortgage broker or lender before looking for deals, they may over-estimate the type and size of deal for which they qualify. They may submit an offer, get a deal under contract, and get forced to cancel the contract because they cannot qualify for financing (or the financing results in a higher than expect debt service). As a result, the borrower’s reputation is tainted in the eyes of the seller, listing commercial real estate broker, their property management company, and their passive investors (depending on how far into due diligence the deals was when the contract was cancelled).

To avoid these issues, the borrower should engage the mortgage broker or lender for even looking at deals.

What are the qualifications of the borrower, deals, and market?

Both the borrower and the deal must meet specified criteria in order to qualify for Fannie Mae and Freddie Mac debt.

The borrower includes the guarantor, key principals, and principals.

  • The guarantor is who guarantees the loan.
  • The key principals are any person who controls and/or manages the partnership or the property, is critical to the successful operation and management of the partnership or the property, and who may be required to provide a guaranty.
  • The principals are any person who owns or controls specified interests in the partnership. When the partnership is an LLC, a principal is anyone who owns 25% or more membership interest (this includes passive investors too).

Agency lenders will analyze the borrower based on the organization (i.e., entity) structure, multifamily and business experience and qualifications, general credit history, and current and prospective financial strength. What is considered passing criteria is based on the size, complexity, structure, and risk of the deal.

  • Organizational Structure: For most agency loans, only single purpose entities are eligible borrowers. This means you will need to create a new entity for each transaction. The exemptions are the small balance agency loans in which individuals and non-single asset entities are eligible borrowers.
  • Multifamily and business experience and qualification: Fannie Mae and Freddie Mac have different ways to qualify the borrower based on experience. Fannie Mae uses a service called application experience check (ACheck). ACheck checks the borrowers experience with Fannie Mae loans in the past. Generally, a member of the borrower must have been a member of the borrower on a previous Fannie Mae loan to “pass”.

Freddie Mac provides more specifics on how they qualify borrowers. The borrower must have a minimum of three years’ experience in the same capacity that it will have for the proposed transaction, and acquired, developed, or owned a minimum of three properties. Also, the borrower must own and manages other properties in the market where the subject property is located. If the borrower is lacking in one or more of these areas, Freddie Mac may require a higher replacement reserve deposit.

  • General credit check: The lender will conduct a general credit check on the borrower, checking for other loans and liabilities to determine their ability to fulfill the debt obligations based on the current and past debt obligations.
  • Current and prospective financial strength: The agencies do not have specific liquidity and net worth requirements for the borrower on their conventional loan programs, which means it will vary from deal-to-deal. They may require more upfront reserves if the borrower has weak finances.

We can get an idea of what the agencies require regarding liquidity and net worth by looking at the stated requirements for their small loan programs.

For Fannie Mae’s small loan ($750,000 and $6,000,000) and Freddie Mac’s small balance loan ($1 million to $7.5 million) programs, a minimum liquidity of 9 months principal and interest and a new worth equal to the loan amount is required.

Assuming the borrower qualifies for agency debt, the next check is the deal.

To qualify the deal, the lender will analyze the property, the occupancy, the property management company, and the market.

  • Property: The agencies only provide financing on certain types of properties. However, most multifamily properties you look at will meet their requirements. The requirements are standard characteristics like five or more units, accessible by road, the units have bathrooms and kitchens, water and sewer service, up to code, access to emergency services, etc.
  • Occupancy: The major factor that determines if a deal qualifies for agency debt is the occupancy.

Fannie Mae’s conventional loan program requires a minimum physical occupancy of 85% and a minimum economic occupancy of 70% for 90 days. The occupancy requirements are even higher at 90% for their small loan program.

Freddie Mac’s conventional and small balance loans require a minimum physical occupancy of 90% for 90 days.

  • Property management company: The property management company who will manage the deal post-closing will also be analyzed by the lender. The agencies do not have restrictions on the type of management company, which means it can be in-house or third party. However, the property management company must have adequate experience to ensure effective administration, leasing, marketing, and maintenance, and is staffed appropriately for the type and size of the property and the services provided.
  • Market: The agency will also analyze the strengths and weaknesses of the market in which the deal is located. They characterize strong markets as having low vacancy, minimal rental concessions, stable or increasing tenant demand, good balance of housing supply and demand, stable economic base, and employment diversification.

Also, certain loan terms will vary based on the market. For example, Freddie Mac has different minimum DSCR and maximum LTVs for top markets, standard markets, small markets, and very small markets.

What are the upfront service requirements?

The agencies have increased their reserve requirements in responses to the coronavirus pandemic.

Fannie Mae is currently requiring 12 months of principal and interest for loans of $6 million and more, and 18 months for loans of less than $6 million. However, if the debt-service coverage ratio (DSCR) is 1.35 or higher and the loan-to-value (LTV) is 65% or lower, Fannie Mae only requires six months of principal and interest. If the DSCR is at least 1.55 and the LTV is 55% or less, no reserves are required.

Freddie Mac is currently requiring nine months of principal and interest on loan with DSCR less than 1.40, six months on loans with DSCR 1.40 or higher, and 12 months on small balance loans.

Are renovation costs included?

Both Fannie Mae and Freddie Mac offer loan programs which cover the costs of renovations.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan (mod rehab). This is a supplemental loan that can be secured in addition to the conventional DUS loan to cover renovation costs. Unlike standard supplemental loans, the mod rehab loan doesn’t have a one-year waiting period. The main requirements for the mod rehab loan is that Fannie Mae must be the only debt holder on the property and minimum renovation costs of at least $10,000.

Freddie Mac offers two renovation loans – moderate rehab loan and value-add loan. The main different are the renovation costs requirements. For the value-add loan, renovations must be between $10,000 and $25,000 per unit. For the moderate rehab loan, the renovations must be between $25,000 and $60,000 per unit with a minimum of $7,500 per unit designated for interior work.

Therefore, if renovations are less than $10,000 per unit or greater than $60,000 per unit, a borrower will have to cover 100% of the renovation costs with passive investor capital or secure a bridge loan through a mortgage broker.

What should be looked at when comparing multifamily loan options?

Here is a list of factors to be aware of when you are analyzing loan options.

Debt service is the payment owed to the lender each month. The lower the debt service, the greater the cash flow. However, the loan option with the lowest debt services isn’t automatically the best option. The debt service may start low and gradually increase if the interest rate isn’t fixed. The debt service may be low but the closing fees are too high, or the loan may not be assumable, the prepayment penalties may be high, etc. Therefore, the other factors which are outline below must be taken into account in addition to the debt service.

Loan amount is the total amount of money a borrower will receive from the lender. The different between the loan amount and the total project costs is the amount of equity a borrower will need to raise.

Loan term is the number of months until the loan must be repaid in full. On shorter-term loans, a borrower may have the option to purchase one or multiple loan term extensions. Ideally, the total possible loan term is at 2x the projected business plan. For example, for a value-add business plan with a renovation timeline of 24 months, the maximum loan term should be four years. That way, a borrower isn’t forced to sell or refinance. However, the longer the loan term, the higher the interest rate, so the longest term isn’t necessarily the best term.

Amortization is the time period the principal and interest payments are spread over. The greater the amortization, the lower the debt service. Usually, the interest payments aren’t spread out evenly during the amortization period. Instead, the first payments are mostly interest (so the lender makes their money upfront) and the interest gradually reduces over time.

Interest-only period is the number of months of interest-only payments. At the end of the interest-only period, principal and interest payments are due.

The main benefit of interest-only periods is the increase in cash flow, resulting in a higher internal rate of return (IRR) since money is returned sooner. This increase in cash flow is even more beneficial on value-add deals because cash flow is generated from day one before the increase in revenue is realized from the renovations.

However, there are a few potential drawbacks. Firstly, there is no principal paydown, which impacts future supplemental loan or refinance proceeds. Secondly, once the interest-only period expires, the debt service increases, which reduces cash flow. Lastly, a borrower may convince themselves to do a bad deal because of the lowered debt service during the interest-only period.

Debt-service coverage ratio (DSCR) is a ratio of net operating income to debt service.

This is one of the factors the lender will use to calculate the maximum loan amount.

Loan-to-value (LTV) is the ratio of the loan amount to the appraised value of the apartment community. All lenders will provide financing up to a maximum percentage of the appraised value.   

The higher the LTV, the more leveraged the deal. This is beneficial because of the lower down payment but is also riskier since a borrower has less equity in the deal as a protective cushion against market fluctuations. Therefore, don’t secure a loan with an LTV that is greater than 85%.

Interest rate is the rate the lender charges a borrower to borrow their money. The interest rate is either fixed, meaning it will remain unchanged during the loan term, or is floating, which means it fluctuates up and down during the loan term. Generally, the initial interest rate is lower when floating. But it doesn’t mean it will remain lower.

If the interest rate is floating, a borrower will want to know what the rate is tied to, which is referred to as the index. Then, they can see how the index is trending to determine if your interest rate will go up or down during the hold period (to the best of their knowledge, of course)

If the interest rate is floating, a borrower may also want to consider purchasing an interest rate cap. For an upfront fee, they can place a ceiling on how high the interest rate can rise. This is always ideal since it is impossible to predict whether interest rates will rise or fall during the hold period.

Whether the interest rate is fixed or floating, a borrower will also want to know when the rate is locked in. If interest rates are raising, they want to rate to lock as quickly as possible. Sometimes, a borrower has the option to expedite the rate lock period for a fee.

Click here to learn more about fixed rate vs. floating rate interest rates.

Recourse determines if the guarantor is personally liable for the loan. If the loan is recourse, the guarantor is personally liable. If the loan is non-recourse, the guarantor is not personally liable.

If the loan is non-recourse, a borrower will want to determine what the exemptions are that converts the loan to recourse, which are typically fraud, misrepresentation, and gross negligence.

Tax and insurance escrows: a borrower may be required to submit monthly deposits into a tax and insurance escrow account, even if taxes and insurance payments are due quarterly or annually. If monthly escrow deposits aren’t required, they may need to raise extra money upfront to cover lumpsum tax/insurance payments, depending on how quickly each is due after closing

Lender reserves is the amount of money the lender requires each month to be deposited in a reserves account. Usually, lenders require between $200 and $300 per unit per year.

Besides the deposit amount required, a borrower also wants to know when they stop making deposits and when they can pull the money out if it isn’t used.

For agency loans, expect to continue to make the payments until payoff the loan. Also, don’t expect to be able to access the funds until payoff of the loan either. For non-agency loans, the lender reserves are usually negotiable.

Prepayment penalties is a fee incurred if a borrower pays back the full or a certain percentage of the loan amount before a specified date.

The prepayment penalties are important if they expect to refinance or sell before the prepayment period expires. If this is the case, they will need to include the prepayment expense into your sales disposition calculations.

Click here to learn more about prepayment penalties.

Assumable: if the loan is assumable, when you are ready to sell the deal, a prospective buyer has the option to either secure new debt at new terms or assume the existing debt at the existing terms. This is attractive to buyers if the existing terms are better than the new terms currently available.

Typically, there is a fee incurred to the buyer who assumes the loan.

Supplemental loans: these are secondary loans taken out on top of the existing mortgage. If a borrower is allowed to secure a supplemental loan, they will want to know how many they can secure and when they can be secured. Generally, they are able to secure a supplemental loan one year after the origination of the first loan.

Click here to learn more about supplemental loans.

Require reports: the lender will order reports to be conducted on the property. These generally include an appraisal, property condition assessment, and phase I environmental, at minimum. A borrower will want to know which reports are required, when they are due, and the costs associated with each.

Click here to learn more about the different due diligence reports.

Financing fees: these are the fees charged by the lender (or mortgage broker) to put together a loan. Common fees are applications fees, processing fees, origination fees, good faith deposits, and interest rate lock fees.

Want to learn more about commercial real estate lending and multifamily financing?

Click here to download a FREE document with more detailed information on the different types of agency loans, bridge loans, and multifamily financing options,

Also, click here for more blog posts on apartment financing and lending.

 

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Real Estate Investing Advice from 7 US Military Veterans – Happy Veteran’s Day

Many former US military service members become real estate investors after transitioning to civilian life.

Discipline, a strong work ethic, loyalty, collaboration, leadership, effective communication, problem solving and many more skills obtained in the military are also beneficial to growing a real estate business.

Additionally, because of their background, they bring a different perspective to real estate investing – things that civilians like me may not have thought of. Fortunately for you and me, many veterans have come on the podcast to share these unique insights.

In honor of Veteran’s Day, here is the Best Real Estate Investing Advice Ever from 7 US military veterans interviewed on the podcast.

1. Think Big, Act Small

Seth Wilson: Founder and Managing Director of Clarity Equity Group

Military experience: Four-time combat veteran of 14 years, and currently serves in the Missouri Air National Guard as a pilot of the C-130 tactical airlift aircraft

Episode: JF2208 Veteran To Founder

Best Ever Advice: Thing big but act small. When setting goals, always aim high. But make sure that you paying attention to the details and taking massive intelligent action every single day in pursuit of your goal.

2. Get Out There and Take Risks (That Won’t Destroy You)

David Pere: Founder of From Military to Millionaire

Military experience: US Marine Corps since 2008

Episode: JF2102 From Military to Millionaire

Best Ever Advice: Just get out there, do it, and take risks. Having a safety net (in David’s case, his job in the military) can give you more confidence to take greater risks. But, David did put a ceiling to the level of risk one should take – if you take a risk and fail, it shouldn’t utterly break you. That is, you should be able to mentally and financially dust yourself off, recover, and get back in the game. The greater risks you can take, the larger the payoff.

3. Find Your Own Unique Niche to Reduce Competition

Phil Capron: Multifamily investors and Senior Mentor with Michal Blank

Military experience: Naval Special Warfare Combatant Craft Crewman

Episode: JF1984 From the Military to Multifamily

Best Ever Advice: When in the military, Phil’s smaller special ops unit did the missions other crews weren’t able to. The other, bigger units lacked the tactics, training, equipment, or personnel. Similarly, Phil pursues deals and strategies that other, large operators aren’t willing or able to do.

Whatever the big operator’s investment criteria is his is the opposite. As a result, he has access to deals that they don’t have access to, which has allowed him to do deals in competitive markets.

Therefore, if you are having a hard time finding a deal, ask yourself what you can do differently to create a niche for yourself with minimal to no competition.

4. House Hacking and the Real Formula to Success

Eric Upchurch: COO and Co-Founder of Active Duty Passive Income and Senior Managing Partner at ADPI Capital

Military experience: Army Special Operations

Episode: JF1890 From Military Life to Civilian Work & Real Estate Investing

Best Ever Advice: First is to use the VA loan if possible (the similar option for civilians is the FHA loan). Zero (or minimal) money out of pocket for a cash flowing asset. Target a four-plex, live in one unit for at least one year and one day, and repeat. You will live rent free(ish) and/or generate cash flow each month.

Second was Eric’s real formula to success: “Learn, network, add value, take action. If you do those things over and over again, success will hunt you down.”

5. Always Follow Through with Commitments

Jamie Bateman: Founder of Labrador Lending

Military experience: Captain in Army Reserves

Episode: JF2224 Note Investing Strategies

Best Ever Advice: Jamie’s best ever advice was three-fold. First is to focus on your strengths and outsource your weakness to others. Second is to consistently think about how you can add value and contribute to something bigger than yourself – both in business and your personal life. Third is to just do what you say you are going to do. Keeping your word is very important. There are many people who make a commitment to do something and then disappear, never follow-up, or follow-up too late.

6. Set 10X Goals Based on Your Potential, Not Current Abilities

Vincent Gethings: Co-Founder and COO of Tri-City Equity Group

Military experience: 14 years in Air Force

Episode: JF2204 Investing While Overseas

Best Ever Advice: Set goals based off of your potential and not your abilities. Many people have limiting beliefs, which force them to set goals based on what they think they can accomplish based on their current experience, education level, relationships, etc. As a result, they set the bar extremely low. They use the SMART (specific, measurable, achievable, realistic, and time-based); Vincent hates SMART goals because of the R, realistic.

Instead, Vincent is more of an adherent to Grant Cardone’s 10X rule. Set big, scary, audacious goals, and then take massive action toward them. Don’t be realistic, because that doesn’t give you any chance to grow.

7. SHUT UP!

Bill Kurzeja: Owner and Founder of Professional Success South

Military experience: 8 years of service as a Sergeant

Episode: JF2155 sales Skills to Improve Your Business

Best Ever Advice: Shut up and listen. We have two ears and one month, so use them accordingly. In sales, most of the time people will tell us exactly what they want and how to win them over. We just need to listen, use the information, and apply it back. This starts by setting the table – that is, proper preparation beforehand, which includes research and practice.

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Tax-Free Wealth by Tom Wheelwright (Book Review)

I first read the book Tax-Free Wealth written by Tom Wheelwright in 2015. What an eye-opening experience! There are not many places where you can get 1,000X value from a $20 investment. Whether you are an entrepreneur, investor or business owner, I would highly recommend reading Tax-Free Wealth for a better understanding of how taxes affect our lives and how you can take control of your tax situation. You might be thinking…a book about taxes? How boring! I assure you; this book is easy to understand and is filled with actionable steps and it contains stories throughout to help you understand the practical takeaways.

Here are several important points that Tom Wheelwright covers in the book:

  • Tax laws are meant to encourage certain business and investment activities 
  • The single biggest tax shelter is real estate
  • 95% of the tax code is not intended to raise money, it is to stimulate growth
  • How and why entrepreneurs and investors get most of the tax breaks
  • Why traditional retirement vehicles and financial planning may need to be re-evaluated
  • Why a competent CPA with specialization is key, and how to find a great CPA.

Tom also discusses the “CashFlow Quadrant”, a chart that Robert Kiyosaki designed that illustrates the four types of ways you can earn money and how taxes affect each of the quadrants. For more on the CashFlow Quadrant and how it works, check out my blog post HERE

Tax-Free Wealth single-handedly opened my mind to the world of taxes and taught me how to use the tax code to my benefit using real estate and I can confidently say my perspective on investing changed altogether. After reading this book in 2015, I decided to switch CPA firms and hire a more qualified tax professional to help navigate the tax-code as it pertained to my business and real estate investments. I also decided to double down on investments where the government is trying to stimulate growth and as a result, reduce my taxes in the process. Even if you only pick up one or two strategies or tips in this book, it would be worth the investment. 

The purpose in writing this blog is simply to share with you a resource that has helped me and many others along the way to financial independence. I am asked by investors all the time about which “good business books” to read. This one is in my top 3. 

You can pick up a copy of Tax-Free Wealth HERE (This is not an affiliate link)

I am not affiliated or compensated by Tom Wheelwright, Robert Kiyosaki or The Rich Dad Company 

To Your Success

Travis Watts 

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Stopping Self-Destructive Behaviors: Mindset Myth Debunked

Success is 80% psychology and 20% mechanics. 80% mindset and 20% action. 80% thinking and 20% doing. 

What does this mean and why is this principle universally accepted in real estate investing?

Simply put, the amount of time spent on your business is not directly proportionate to the success of your business.

Someone who works 12 hours days is not by default going to be more successful than someone who works 12 hour a month. 

Trevor McGregor, my personal coach, talks about the events leading up to action. First, there is a thought. Then, there is an emotion. Then, there is an action (or no action). 

The actions we take are based on our thoughts and resulting emotions, every single time.

Therefore, our quality of thought (i.e., our mindset) is the only factor that determines our actions. So technically, success is 100% mindset.

Whenever I speak with someone on the Best Real Estate Investing Advice Ever show and the topic of mindset comes up, I always want to know what actions listeners can immediately take in order to improve their all-important mindset.

Recently, I spoke with a guest who provided unique insights into how we can effectively improve our mindsets and ultimately stop self-destructive behaviors. The reason it was unique was because it goes against the conventional wisdom – that we can improve our mindsets by ourselves. No help is required. All we need to do is journal, mediate, or work more and BOOM, our problems are solved.

However, this is impossible. 

As I stated above, all actions are caused by our thoughts. There is no getting around it. Good thoughts lead to good action. Bad thoughts lead to bad action. Therefore, to overcome bad habits, you need to alter the cause – the bad thoughts.

Since all you have are your thoughts, how can you overcome your bad thoughts with your bad thoughts? It is not. Bad thoughts beget bad thoughts beget even worse behaviors.

That is why the help of outside factors is the only way to transition from bad thoughts to good thoughts. 

There are many obvious ways to accomplish this, like books, seminars, and mentorships. But Vahan Yepremyan provided a unique approach during our interview.

He said to ask someone close to you “which of my actions are holding me back from being successful?” Rather than attempting to subjectively determine your had habits, enlist the help of an objective third-party. Ideally someone who knows you extremely well and is more successful than you.

Once you’ve identified your bad habits, you need to determine if the cause of the habits are based on fact or fiction. 

A simple example is public speaking. Let’s say you ask an investor friend “which of my actions are holding me back from being successful?” and they say, “you aren’t picking up the phone enough to cold-call apartment owners” or “you have not started that thought leadership platform yet”.

Your immediate thought is, “well, that’s because I am afraid of speaking to stranger.” 

What is your justification for that fear? And what is the evidence for that justification. 

Maybe you are afraid to say something stupid. Well, have you said something stupid while public speaking in the past? And if so, what were the ramifications? Unless it killed you (which I assume is not true since you are reading this blog post), then your justification is usually based on a fictional, fabricated story, or at best partial truths.

Creating a new story based on reality may be as simple as becoming aware of the false one. Other times, it may require further help from outside factors. Following the example above, you may need to take a public speaking course or ask a friend to punch you in the face if you don’t cold-call a certain number of owners per week.

Overall, all bad actions are caused by bad thoughts. In order to overcome bad thoughts, you need the help of outside factors to identity your bad actions and thoughts. Then, you need to become aware of the story behind those thoughts. 

And the best way to accomplish this is with the help of objective, third parties who know you well and are already successful. They can help you identify the bad habits which you (and your bad thoughts) likely deny and help you create positive thoughts by altering the story.

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People Are Fleeing Urban Centers for the Suburbs – What This Means for Apartment Investors

One of the main metrics I look at when analyzing a prospective market to invest in is the population growth. 

The thought process behind this is simple: if the population is increasing, the demand for real estate is increasing, and vice versa. 

Of course, there are other relevant factors like the supply side of the equation. However, there are some investors I’ve met who ONLY select markets based on the net migration. If more people are moving out of the market than are moving in, it is automatically disqualified.  

U-Haul is actually a top source for migration data, which they release annually. you can view their migration reports here.

When you understand where people are moving to and moving from, you can adjust your apartment business plan accordingly. If you are in a market with a positive net migration, you are sitting pretty. However, if you are in a market with a negative net migration, there may be trouble on the horizon.

One of the biggest migration trends resulting in part due to the coronavirus pandemic is the urban-to-suburban pipeline

Not only are more people interested in leaving urban markets, but in some states, such as New York, the exodus has already begun.

The Hill, in their article “Americans leave large cities for suburban areas and rural towns”, says that approximately 250,000 residents plan on moving out of New York City while another two million consider moving out of the state altogether. Also, more than 16,000 New Yorkers already moved to suburban Connecticut. 

And this trend isn’t unique to New York. 

“A record 27.4% of Redfin.com users looked to move to another metro area in the second quarter of 2020,” reads a Redfin analysis performed in July 2020

The most popular destinations are Phoenix, Sacramento, Las Vegas, Austin, and Atlanta. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origin.

 

The locations with the large outflows were New York City, San Francisco, Los Angeles, Washington DC, and Chicago. Here is a breakdown of the top 10 metros by net inflow of Redfin users and their top origins.

 

Are any of your investment markets on either one of these lists?

There is also an increase in demand for rural markets. For example, according to US News, 57% of realtors who responded to their survey said they’ve seen an increase in interest in rural Montana. The main reasons were because of its low coronavirus infection rate, as well as because they grew up and had family there. The same The Hill article cited above said real estate sales in Montana were 10% higher year-over-year, and that rural Colorado, Oregon, and Maine experienced similar increases in sales.

So why are people leaving the urban centers? 

Another telling article was written in NASDAQ entitled “The Urban-to-Suburban Exodus May Be The Biggest in 50 Years.” This article provided more data on the reasons why New Yorkers were fleeing urban centers. The top 5 reasons were cost of living, crime, looking for a non-urban lifestyle, concern over the spread of the coronavirus and the ability to work from home.

One of the major COVID-related changes that is driving more people out of urban centers is working from home

According to MARKINBLOG, 88% of companies are encouraging or requiring employees to work from home due to COVID and 99% of people prefer to work remotely. Compare this to just 3.4% of the US population working remotely pre-COVID, this has the possibility to massively disrupt real estate, especially the type of real estate that will be demanded.

Since employees aren’t required to go to the office, they are choosing to live in areas that are more affordable, closer to family, and closer to local amenities while still having direct access to a downtown. Hence, they are leaving urban areas for the suburbs. 

However, they are also choosing to head to the suburbs due to the type of homes that are offered. For example, people are looking for more outdoor spaces (whether that is a private yard or nearby greenspaces and parks) and homes with an extra room to convert into a home office. Greenspace is universally nonexistent in a lot of urban areas, and the cost of an extra bedroom in urban areas is also financially unrealistic for many would be buyers and renters. Therefore, if they want to see real green grass and trees, as well as have a home office, the suburbs or rural areas are their only options.

What this means for you?

As a multifamily real estate investor, you need to understand the population and migration trends in your investment market.

If you are heavily invested in major urban centers, it may be time to consider a pivot and diversify into suburban areas.

This is great news for those already invested in suburban areas, as you should benefit from both an increase in rents as well as an increase in value due to falling cap rates.

Newer investors can take advantage of the low barrier of entry since real estate is generally more affordable in suburban and rural markets.

No one knows for certain what the future holds for real estate post-COVID. However, due to other factors leading up to the pandemic (which I outline in my article about why I am confident in multifamily) combined with the migration trend outlined in this article, I believe multifamily real estate in suburban areas will thrive in the years to come.

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Residential Lenders Tighten Their Lending Standards – Why This Is Good News for Multifamily Investors

A little more than a year before the onset of the coronavirus pandemic, I wrote a blog post entitled “Why I Am Confident Multifamily Will Thrive During and After the Next Economic Correction” (which you can read here).

The economy was experiencing a record long expansion and showed no signs of stopping. However, like most economic expansions, various economic and real estate experts were warning about an impending recession.

“The stock market is inflated” and “real estate prices and rents will not increase forever” they said. 

However, whether the economy continued chugging along or experienced a minor or massive correction, I was confident is multifamily real estate’s ability to continue to perform. 

My confidence was not emotionally driven or biased because I am a multifamily investor. It was based on my analysis of the facts. The most telling fact was the change in renter population

Historically, more people rent during recessions (which is one of the reasons why I was attracted to multifamily in the first place) and more people buy during economic expansions. The former held true for the 2008 recession as more people began to rent. However, during the post-2008 economic expansion, the portion of renters continued to increase (more US households were renting in 2016 than at any point in 50 years). 

Therefore, I predicted that the portion of renters would increase or, at minimum, remain the same during and after the next correction. 

Then, coronavirus hit and induced an economic correction (or a temporary slowdown, depending on who you ask).

But, sure enough, a study published on June 17th, 2020 projected a decline in homeownership and concluded that  “the demand for rental housing will increase somewhere between 33% and 49%” between 2020 and 2025.

In both my January 2019 article and the June 2020 study, one of the reasons why more people are renting is due to tightened lending standards (other reasons were student loan debt, inability to make a down payment, poor credit, and people starting families later).

A metric that is used to measure lending standards is the Mortgage Credit Availability Index (MCAI). The MCAI is based on a benchmark of 100 set in March of 2012 and is the only standardized quantitative index that solely focuses on mortgage credit. A decline in the MCAI indicates that lending standards are tightening while an increase in the index are indicative of loosening credit.

Between December 2012 and November 2019, the MCAI was steadily trending in the positive direction, increasing from the high-80s to the high-180s.

  

However, starting in December 2019, the MCAI began to decline. The three largest drops were in March 2020 (decline of 16.1% to 152.1), April 2020 (decline of 12.2% to 133.5), and August 2020 (decline of 4.7% to 120.9, the lowest since March 2014).

Joel Kan, Mortgage Bankers Association’s Associate Vice President of Economic and Industry Forecasting said in the August 2020 report, “credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales shows a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

People will always need a place to live. Their only two options are to rent or to own. As indicated by the massive MCAI declines since the end of 2019, less and less people will be able to qualify for residential mortgages. The programs available to people with low credit or who cannot afford a high down payment have disappeared. 

Therefore, by default, more people will be forced to rent.

One last interesting thing to point out is how the MCAI during the current economic predicament compares to the 2008 recession. 

Here is an expanded MCAI graph that shows credit availability back to 2004. The pre-2011 data was generated biannually, making it less accurate than the post-2011 monthly generated data. However, the graph still highlights an important point. At least as it relates to the availability of credit at the time of this blog post, the current economic recession is nowhere near as severe as the 2008 recession.

To receive the monthly MCAI report, click here.

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The CashFlow Quadrant – How I Save Thousands on Taxes (Legally) 

One of the most life-changing discoveries came to me years ago when I realized I was earning income the wrong way. This was uncovered when I read the book, “Cashflow Quadrant” by Robert Kiyosaki. It’s a powerful book that helped guide me to become a full-time investor and to make financial freedom a top priority. Additionally, this book has single-handedly helped me save thousands in taxes over the years.  

Source: https://www.richdad.com/taxes-stealing-your-money

 

As you can see in the diagram above, each quadrant (E, S, B and I) represents a different way to generate income. Some people earn money in only one of the quadrants, while some earn money in multiple quadrants. There are advantages and disadvantages to each quadrant.

The two quadrants on the right side (B and I) are the primary paths to financial freedom. The majority of the Cashflow Quadrant book is about the unique skills and mindsets required to succeed on this path. If you haven’t checked out this book, it’s a worthwhile read. You can learn more here.  

Let’s Explore Each of The Four Quadrants:

E – Employee

An employee earns income via a job. This is the quadrant where most people earn their income. The job itself is owned by a business, which could be a single person or a large corporation. The employee exchanges his or her time, energy, and skills to an employer in exchange for a paycheck and often other benefits such as healthcare coverage and/or a retirement account match.

Employees can make a little or a lot of money, but when an employee stops working, or if the business goes under, the income stops.

The lack of control over income is a serious consideration of the E quadrant and something I became intimately aware of when I worked in the oil industry and layoffs began to occur around 2015. An employee’s financial freedom is dependent upon the success of the employer and the ability to show up to work and exchange time for money. 

Kiyosaki points out that the reason as to why most E quadrant workers pay around 40% of their income in taxes (as shown in the diagram above) is simply because most personal expenses aren’t deductible. You can’t, for example, deduct the expense of your personal car from your taxable income. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information. 

 

Tax Example: 

Federal Tax: 27% 

State Income Tax: 5% 

Social Security Tax Rate: 6.2% (half paid by the employer) 

Medicare Tax Rate: 1.45% (half paid by the employer)

Total = 39.65% in Tax

 

S – Self-Employed

Many employees eventually get tired of the lack of control over their pay and schedule and choose to work for themselves instead. A self-employed individual still exchanges time for money, but they “own” their job. 

Common examples of the S quadrant workers include dentists, doctors, insurance agents, realtors, handymen, among many other skilled trades. It is possible as a self-employed individual to earn a large income, but like an employee in the E quadrant, when they stop working, so does their income.

Self-employed workers have more control compared to an employee, but more often than not, they also have more responsibility. As a result, success usually means working harder and working longer hours. Over time, this can lead to burn out and fatigue as I also experienced first-hand in 2015 when I was actively investing in real estate with fix and flips and vacation rentals. 

Kiyosaki points out that the reason why most S quadrant workers pay the highest taxes, around 60% of their income (as shown in the diagram above) is that Social Security and Medicare Taxes are paid 100% by the self-employed individual (they are not split by the employer as is the case with an employee). Additionally, an S quadrant individual often earns more income compared to an employee and therefore can be in a higher tax bracket. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

 

Tax Example: 

Federal Tax: 37% 

State Income Tax: 5% 

Social Security Tax Rate: 12.4%

Medicare Tax Rate: 2.9% 

Total = 57.3% in Tax

 

B – Business Owner

Those in the B quadrant own a business system and they lead other people. In this quadrant, the business often has 500 or more employees. The systems and employees who work for the business can run successfully without the business owner’s daily involvement.

Unlike the S quadrant where a plumber, for example, might own and work in his own plumbing business, a B quadrant business owner might create a plumbing company and hire 500 or more plumbers, administrators, managers, and other staff to run the systems in the company.  

 

The wealthiest individuals in the world typically own B quadrant businesses. A few of these individuals include Bill Gates of Microsoft, Jeff Bezos of Amazon, and Mark Zuckerberg of Facebook.

Kiyosaki points out that the reason why most B quadrant business owners pay around 20% in taxes (as shown in the diagram above) is because businesses can deduct a wide variety of expenses from the income of the business, which can lower the businesses income taxes. Additionally, the recently passed Tax Cuts and Jobs Act in 2017 allows for a qualified business income tax deduction of an additional 20% for eligible businesses. You can learn more here. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

Tax Example: 

C-Corporation Flat Rate Tax Rate = 21% 

Total = 21% in Tax

 

I – Investors

Now to my favorite quadrant. The I quadrant is comprised of investors who own assets that produce income. This is the quadrant for truly passive income.

Investors in this quadrant have usually accumulated capital that was earned in one or more of the other quadrants and now they place that capital into income-producing investments to produce even more income. This is the magic formula for financial freedom. 

For example, an investor might purchase shares of a company privately or publicly owned in the form of stock. This influx of capital from the investor helps to fuel the systems created by the business owner, and this fuel can lead to even more growth in the business and for everyone involved. Investing in real estate is a common example of an asset that can produce passive income from collected rents and other income-generating aspects on the property. Investing passively in private placements (apartment syndications) has been my preferred asset class in the I quadrant. 

Kiyosaki points out that the reason why most I quadrant investors often pay as little as 0% in taxes, legally (as shown in the diagram above) is that long-term capital gains tax rates (for assets like stocks or real estate held the long-term) are between 0% and 20% depending on the individual’s tax situation. You can learn more here. Below is a simple illustration for educational purposes only. Please seek professional, licensed tax advice from a CPA for more information.

 

Tax Example: 

2020 Long-Term Capital Gains Tax Rate (For Single Individuals) Earning $78,750 or Less = 0% 

Total = 0% in Tax

 

Conclusion:

There are many paths to financial independence, but most of them lead to the right side of the Cashflow Quadrant – B and I. If you want to achieve financial freedom, it will pay to learn the skills and mindset required to make this move to the right side. I have earned income in the E, S, and I quadrants but the I quadrant has been the most impactful. This is because of a concept I refer to as “Time Freedom”. Which to me, means having freedom and flexibility over your time. When you have more passive income than you have lifestyle expenses, you become financially free. This is where a new world of opportunities and possibilities open up and the world becomes your oyster.     

To Your Success

Travis Watts 

Disclaimer: Travis Watts does not provide tax, legal, or accounting advice. This material in this blog/article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction, investment, or other change. 

 

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The CDC Eviction Moratorium – What You NEED To Know

You may have seen recent headlines referring to an “eviction crisis”: 

The COVID-19 Eviction Crisis: an Estimated 30-40 Million People in America Are at Risk – The Aspen Institute 

 

Experts fear the end of eviction moratoriums could plunge thousands of people into homelessness – CNBC

President Trump signed an eviction moratorium order that effectively bans evictions nationwide through the end of the year. According to the Centers for Disease Control and Prevention (“CDC”), the moratorium order has been issued to provide housing stability and to prevent the further spread of COVID-19. However, it is important to note that rent is NOT cancelled through the end of the year. Let’s dive into how this order effects landlords and owners of real estate…

 

According to the moratorium, there are stipulations in order to receive this “eviction protection.”

Those who are eligible must meet additional criteria before presenting their landlords with a declaration, which will be made available on the CDC website. This criteria includes: 

  1. The resident has sought all available government rental assistance
  2. The resident will earn no more than $99,000 in 2020 (or $198,000, if filing jointly)
  3. The resident can’t pay their rent in full due to a substantial loss of income 
  4. The resident is trying to make timely partial payments, to the extent they can afford to do so
  5. The resident would, if evicted, likely end up homeless or forced to live in a shared living situation

What to do if you (the landlord) receives a CDC Declaration from a tenant?

 

According to Colton Addy from Snell & Wilmer Law, if a landlord receives a CDC Declaration from a tenant, the landlord should respond in writing to the tenant to encourage the tenant to make partial payments of rent (and similar housing-related payments) to the extent the tenant is able, in accordance with the CDC Declaration. Additionally, the landlord’s written correspondence should remind tenants that the rental amounts are not forgiven and will ultimately need to be paid. 

 

Additionally, many tenants may not be aware of the government assistance programs that are available to tenants to help tenants pay their rent during the COVID-19 Pandemic. Landlords should include a list of available resources that tenants can use to pay their rent. The Department of Housing and Urban Development (HUD) has stated that nonprofits that received Emergency Solutions Grants (ESG) or Community Development Block Grant (CDBG) funds under the CARES Act may use these funds to provide temporary rental assistance to tenants. 

 

The following websites provide information on federal assistance that is available:

 

www.hudexchange.info/programsupport

https://www.hud.gov/coronavirus

https://home.treasury.gov/policyissues/cares/state-and-local-governments 

 

Additionally, landlords should include other programs that may be applicable in their jurisdiction. Landlords may also consider filing an eviction proceeding for one of the reasons permitted by the CDC Order, but landlords should use caution in pursuing such actions as eviction proceedings in the current climate are likely to draw additional judicial scrutiny.

 

Penalties:

 

The penalties for individuals who violate the Order are severe, including:

 

 

  • A fine of up to $100,000 and up to one year in jail, if the violation does not result in a death; or
  • A fine of up to $250,000 and up to one year in jail, if the violation results in a death.

 

The penalties for an organization violating the Order are even more severe.

In summary, the moratorium order provides temporary relief to those residential tenants facing eviction who submit the required declaration, through the end of the year.  The order, however, does not absolve a tenant from paying rent or restrict a landlord from applying penalties, interest, or late fees on the tenant’s account for non-payment of rent.  Additionally, the order does not relieve landlords of their debt service obligations if a tenant seeks relief under the order. 

 

Disclaimer: The materials contained in this blog post are for educational and informational purposes only. Nothing in this blog post is to be considered as the rendering of legal advice. Readers are advised to obtain legal advice from their own legal counsel. Additionally, please note that the orders and laws related to the COVID-19 Pandemic are changing on a daily basis and your jurisdiction may have stricter rules related to evictions in place. Please verify the rules currently affecting your property at any given time.

 

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9 Things to Consider When Converting Apartments to Condominiums

Besides the traditional three apartment investment strategies (turnkey, distressed, and value-add), condo conversions is another less common business plan that can be very lucrative.

The condo conversion investment strategy involves purchasing an apartment community, converting it from individual rental units to individual condos, and reselling the individual condos for a profit.

This post isn’t going to discuss which investment strategy is the best, because like most things in real estate, it depends on what you are interested in and what your goals are. However, if you do decide to pursue the condo conversion investment strategy, here are the 9 things you need to consider:

 

  • Speak to an attorney: First and foremost, speak with a real estate attorney that specializes in condo conversion projections. You need to know the state and local laws on condo conversions and the step-by-step process you must follow.
  • Vacating the property: The largest potential challenge is the process for vacating the apartment building. An attorney will tell you the laws that protect the rights of the existing residents. In some markets, the residents must be given a specific time frame of the notice to vacate. You may even be required to cover their relocation costs and give them a chance to purchase a completed condo. The longer it takes and the more expensive it is to vacate the property, the greater the holding costs.
  • Hidden fees: There are a lot of hidden fees involved in condo conversions, which the attorney can help you uncover. There are application fees with the city, surveying fees, attorney fees, and fees related to code compliance. Once the conversion is completed, the city will inspect the condominium for code violations, which you will be required to address. Therefore, another fee is associated with hiring a private condo pre-inspection specialist to inspect the property to give you an opinion on potential code violations and the costs of the repairs. Another hidden fee is the increase in insurance costs. Insurance on condominiums is generally higher than apartment insurance, so make sure you obtain a quote for the new insurance premium. Last are the upfront and backend fees you charge for putting together and managing the project.
  • Financing: You will need to speak with a mortgage broker who specializes in condo conversion projects to securing financing. This conversion needs to begin prior to placing the deal under contract so that you can estimate the debt service and other important loan terms, like I/O periods, loan term, interest rates, prepayment penalties, financing fees, and closing costs.
  • Timing: To determine the holding costs and hold period, you need to know the estimated timelines for each step in the condo conversion process. First, how long will it take to vacate the building? Once vacated, how long will the renovations take? How long will it take to list the condo units for sale after the renovations are completed (i.e., post-conversion requirements like setting up the HOA, inspections, etc.)? Lastly, what is the average days on market and closing timeline? Add these all together and you have the hold period and can calculate the holding costs.
  • Holding costs: The holding costs are the ongoing expenses paid during the hold period. These include insurance, taxes, utilities, and debt service. Since you will be generating no cash flow (or some cash flow in the beginning while vacating the property), these expenses must be covered by initial equity.
  • Renovation costs: There are four aspects of the renovation costs to consider. One is the cost to convert the apartment units into individual condos. Two is the investment amount is required for the common areas. Three is the cost to address deferred maintenance. Last is the size of the contingency budget.
  • Sales process: The first thing you need to know is the projected after-repair value of the condominium units, which requires a sales comparable analysis. You also need to consider the costs associated with marketing and selling (i.e., the broker’s commission) the condo units.
  • Limited partner compensation: Lastly, you need to determine the compensation structure offered to the limited partners who invest. What type of return will you offer (i.e., preferred return, profit split, or both) and when are they paid (i.e., after each condo is sold or when all condos are sold)?

 

To address all the above, you will need to work with at minimum an attorney, a mortgage broker, and listing broker, and a contractor – all who specialize in condo conversions.

Purchasing an apartment community and converting the rental units into individual condo units is an alternative to the traditional apartment investment strategies. However, you need to understand the laws surrounding condo conversions, the added costs, and the required team members to properly underwrite the deal, successfully complete the conversion and conserve and grow the investors capital investment.

 

 

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Why Multi-Family? Why Now?

Why Real Estate? 

Most people who are career focused and have money to invest or people who are coming to the end of a professional career, often look to real estate as a viable investment option either for building equity or for income generation. Unfortunately, real estate investing is typically thought to be a sole ownership strategy. Very few people are aware of the passive investing opportunities in multi-family private placements or “apartment syndications”. 

Why Multi-Family?

Syndications and/or private placement offerings are all about “pooling” your money together with other investors to purchase large assets that may otherwise be unattainable as a sole ownership purchase (for example, a 300-unit apartment building). If you have 10 million dollars to use as a down payment, you might have the means of purchasing an asset like this individually; however, if you prefer to only invest $100,000, that’s where a syndication structure can be a huge benefit and allow you to participate in a deal of this size. 

Why Value-Add?

I tend to invest in value-add projects. In this business model, the General Partner or Managing Partners and their teams often add value to the apartment community in a number of ways. Common value-add strategies include renovating the units, updating to modern appliances, countertops, in-wall USB ports, smart thermostats, on-site storage lockers, improve the landscaping, renovate the clubhouse, gym, pool, parking lots etc. Every property is unique and the business plan will be different for each; the overall goal is to update the property and match the current market demand while increasing below market rents along the way.

The value (price) of an apartment complex is primarily derived from the NOI (net operating income), which is comprised of the total collected rents and income minus expenses to operate the property. When the net operating income increases, the value of the complex increases. For example, let’s say the annual net operating income on a property increases by $100,000 a year. A $100,000 a year rent increase could potentially bump the purchase price up by nearly one million dollars (for example/educational purposes only). 

Why Invest? 

Multi-family real estate investing has a lot to do with diversification of an investment portfolio. There are two common reasons why people invest in real estate. Most people either invest and wait for the property to increase in value or “force” the appreciation (equity investing) or they rent it out and collect the cash flow (income investing). Why not do both? Value-add business plans are often designed to capture both of these strategies. 

Multi-family real estate is a diversified asset in itself. This is largely due to the fact that when you buy an apartment building, you are investing in many units. With single-family homes, you have (1) unit and (1) tenant. If your tenant moves out or doesn’t pay rent, you are 100% vacant and 100% unprofitable. With a 300-unit property, it is not uncommon to have the ability to lose 70-90 tenants at any given time, and still be profitable. The diversification does not stop there. Many people invest passively in syndications because they can spread out their risk geographically among several properties and Sponsors.  

Why I Decided to Invest in Multi-Family

In 2015, after a complete burnout of trying to expand my single-family portfolio, I decided to return to the drawing board in search of a more sustainable and scalable approach to investing in real estate. I was desperate to become a hands-off investor after realizing how active this business can be. In 2015, after reading 52 books, listening to podcasts, networking in real estate groups and seeking mentors, I ultimately decided that multi-family real estate was my solution. More specifically, investing passively in apartment communities via private placement offerings (syndications). 

These Were a Few of My Reasons:

  • I needed a hands-off approach to invest in real estate 
  • I wanted tax advantages equal to or exceeding single-family 
  • I wanted geographic and asset type diversification 
  • I was seeking a recession-resistant asset class
  • There was (and still is) a nationwide demand for affordable housing 
  • I wanted to leverage other people’s expertise, track record and deal flow

Whether you decide to be active or passive in the multi-family space, I wish you success in your journey. This asset class has truly been a blessing for my family and I. I have a passion for helping educate others in real estate. If you have any questions, please reach out anytime. I would be happy to connect on a call or email to help in any way I can.  

 

To Your Success

Travis Watts 

 

 

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“It is Too Difficult to Invest Out-of-State” Real Estate Investing Myth Debunked

There are three phases to a real estate rental investment. 

  • Find the deal
  • Acquire the deal
  • Manage the deal

Most real estate investors find it is easier to handle the three phases in a local market. 

Finding deals requires implementing lead generation strategies. Lead generation strategies are either remote (i.e., direct mail, online advertising, cold-calling) or in-person (i.e., bandit signs, driving for dollars, door knocking). If you are investing in your local market, you can take advantage of both lead generation categories.

Once you find a deal, you can drive to the home or building yourself to perform due diligence to determine and offer price. 

After you have acquired the deal, you can either self-manage or oversee a third-party property management company.

When investing out-of-state, your options for finding, acquiring, and managing deals are limited…or are they?

Theo recently interviewed Andrea Weule on my podcast, Best Real Estate Investing Advice Ever. She lives in the highly competitive Denver, CO market, so she buys rentals out-of-state. In that interview, Andrea debunks the myth that you cannot invest out-of-state and provides interesting ways to generate leads and perform due diligence remotely.

The first phase is to find a deal. Andrea finds her out-of-state deals in three ways. First, she works with a real estate agent who sends her on-market deals off the MLS. She says that ignoring the MLS results in ignoring low hanging fruit. 

Secondly, she creates a list of motivated sellers. Andrea’s targets home that have been owned for more than 20 years and where the owner is 55 years old or older. She finds that these owners are often motivated to sell. They are approaching retirement and are thinking about the next phase in their life, which may require the selling of their home.

Andrea uses ListSource to create this list.

Then, she sends a sequence of three mailers for each address. Rather than using a generic “we buy houses” letter, she creates a message that speaks more directly to the 55+ years old demographic. The letters include questions like “are you looking for your next adventure?” or “do you want to eliminate the stress of owning a home?” 

These first two strategies (direct mail and MLS) are remote lead generation strategies. The third strategy Andrea implements is traditionally performed in-person – bandit signs. However, rather than flying to the market and placing the bandit signs herself, Andrea hires someone local to the area.

The process is simple. She creates a job posting in the “gigs” section on Craigslist with the purpose of hiring someone to place bandit signs in the local market. Andrea sends them the bandit signs, which have a GPS tracker. The GPS tracker allows her to confirm that the sign was places in the correct location. Once the bandit sign is place, she requests that they send her a picture. Lastly, Andrea will send them their payment via PayPal.

Andrea uses a similar strategy for the second phase of the real estate investing process – the acquisition. If someone is interested in selling her their property, she performs basic due diligence to determine an offer price. 

Back to Craigslist. She will create another job posting. But this time, she is hiring someone to take pictures of the prospective property, as well as to do a Zoom Tour. With the combination of the pictures and video from the Zoom tour, she has all the information she needs in order to submit an offer.

 

Overall, it is a myth that it is harder to or that you cannot invest out-of-state. All it takes is a little creativity and the use of technologies.

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A Life Changing Technique – How to Read 52 Books A Year

A key ingredient to success is having the ability to consistently expand your knowledge and skills through reading. While it is true that many successful millionaires and billionaires dropped out of school early in life, most have continued the pursuit of knowledge and education in order to improve themselves.

Tony Robbins, a world-famous success coach coined the term “CANI”, which stands for Constant-And-Never-Ending-Improvement. Robbins emphasizes the importance of reading and improving ourselves if we want to be successful in our lives. From his book “Money: Master The Game” Robbins says…

“As a young man, I decided I was going to read a book a day. I didn’t quite read a book a day, but over seven years, I did read more than 700 books…”

 

A Few Additional Case Studies

Warren Buffet

The Chairman and CEO of Berkshire Hathaway and one of the richest men in the world spends 5 to 6 hours a day reading.

Bill Gates

The former CEO of Microsoft and one of the richest men in the world said that he reads about 50 books a year. 

Mark Cuban

Mark Cuban, a billionaire and the owner of Dallas Mavericks spends about 3 hours reading every day and he attributed his early career success in life to reading. 

Oprah Winfrey

Oprah is widely known for being an advocate for reading and she strongly recommends her talk-show viewers to adopt the habit of reading. Oprah often refers to reading as her “path to freedom” due to the tough start in her career. 

Mark Zuckerberg

Mark Zuckerberg, the founder of Facebook and a billionaire with a net worth of more than $70 billion is a strong believer in reading. Mark believes that if you want to improve the quality of your life, you must commit to personal growth and development. 

Elon Musk

Like many other successful billionaires, Elon Musk devoted a huge chunk of his time to reading when he was young. When he was in grade school, he read about ten hours a day. 

How Can YOU Benefit?

 

After realizing how many successful “reading advocates” there are, I decided to take a stab at an aggressive reading strategy in 2015, in the midst of transitioning from an active real estate investor to a passive real estate investor. 

 

I made a New Year’s Resolution in 2015 to read 52 books in one year (one book a week). But I knew I would fail if I tried to read books in the traditional fashion… one page at a time, front cover to back cover. So I decided to take a couple speed reading courses and I learned a powerful reading technique from a mentor of mine. Below is a technique that allowed me to read 52 books in one year. I continue to use this strategy today when I read non-fiction “How-To” or “Self-Improvement” books. 

 

A Reading Technique That Can Change Your Life 

 

Step 1 – Set aside (3) 15 minute or 20 minute intervals for reading each day (ie morning, afternoon, evening) and set a timer if needed.

Step 2 – Decide ahead of time what your goal is for reading the book. What are you seeking to learn from the book and how will that help you in your life or career? 

Step 3 Use a bookmark or sticky notes to save important pages or sections, use a pen to circle or underline key tips or ideas.

Step 4 – Read the front cover first, then the inside jacket, and then the foreword/introduction and first chapter. 

Step 5 – Then read the last chapter in the book. Next, circle back to the table of contents and select the most relevant chapters for your goals and only read those. 

 

The goal of using this technique is to extract a few key ideas, concepts, or takeaways that you can implement in your life. Statistically, most people only retain about 10% of what they read. This reading technique allows you to retain information quicker, more efficiently and offers you the ability to go back later and skip directly to the most relevant information by using bookmarks, notes and annotations. I hope this technique helps you expand your knowledge and skill sets and I’m sorry you were never taught this in school.  

 

To Your Success

Travis Watts 

 

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Turn a Decade Into a Year – How to “Knowledge Hack”

I love helping other people cut the learning curve. There have been several instances in my life where I condensed years and even decades of time by using a simple “Knowledge Hack” strategy. 

 

I Have a Question For You…

Have you considered having a mentor? Is it worth your time to read books, listen to podcasts, watch how-to videos, and network with others? 

 

Today I was researching some of the most successful people in America from the Forbes 400 List and realized that almost all of them had mentors at some point, and many still have mentors today. 

 

A Few Examples Include:

 

  • Bill Gates had Ed Roberts as a mentor
  • Oprah Winfrey had Mary Duncan as a mentor
  • Mark Zuckerberg had Steve Jobs as a mentor
  • Warren Buffet had Benjamin Graham as a mentor
  • Sam Walton (And family) had L.S. Robson as a mentor
  • Michael Dell had Lee Walker as a mentor 

 

Rather than thinking about having a “mentor” think of the word “coach” instead. It’s essentially the same thing, but using the word “coach” helped me put all of this into perspective years ago.   

 

A Quick Story

From 2009 to 2015 I did everything on my own as an active real estate investor in the single-family home space. It wasn’t because I thought I knew it all, it was because I did not see the need for a mentor or coach at the time. 

 

What I finally realized in 2015 (after 7 years of trial and error), was there were other people in the active real estate investing space who were operating much more efficiently than I was. They had more connections and were finding better deals and had a broader range of skill sets and ultimately… they were more profitable than I was. I had to do some soul searching, self-reflection, and take a long, hard, look in the mirror. Was active investing really the best use of my time and skills? 

 

What Happened Next?

I made a decision to start partnering with investment firms who had better skill sets, track record, connections, and efficiencies than I did. I essentially “piggybacked” off their success by becoming a limited partner investor in other people’s private placement offerings (mostly in multifamily apartments). This provided a hands-off approach to investing where I had the best of both worlds. I could participate in real estate, which I love and enjoy, while not having to be “in the business” of real estate in an active way, which I did not enjoy. 

 

After dedicating some time to networking, reading, listening to podcasts, watching how-to videos and seeking mentors, I inevitably became a full-time passive investor in real estate. I left the active single-family strategy behind because I was tired and burned out from trying to do it all myself, trying to make the right calls and know all the ends and outs. In addition, the hands-on approach was taking too much time away from the things I loved doing. I had far less spare time because my real estate projects were consuming more and more of my availability. 2015 was the beginning of an entirely new education process that has been life-changing to say the least.  

 

Takeaway

Mentors can come in many forms. The best advice I ever received was to seek out a mentor or “coach” who is doing what you want to do and is successful at doing it…because success leaves clues. 

“If I have seen further than others, it is by standing upon the shoulders of giants” – Sir Isaac Newton

 

To Your Success

 

Travis Watts

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Can You Digitally Invest In Real Estate?

Can You Digitally Invest in Real Estate? – How to Leverage Technology in 2020

Welcome to the digital world of real estate. Though it’s not an entirely new concept, it can be done 100% online…if you choose to embrace a digital model.

Do you remember…

  • Driving local neighborhoods looking for properties?
  • Meeting with brokers and realtors to walk the properties?
  • Going to your rental properties to show them to a potential resident?

Those days are still here…but they are completely optional. Today you can also…

  • Take virtual tours of properties and read through detailed property overviews
  • Leave walkthroughs and broker meetups to a General Partner or Sponsor Team
  • Leave resident showings to a professional property management company

The digital model I am referring to is investing in apartment communities through a syndication. Real estate syndications are a way for investors to “pool” their capital together in order to invest in properties much larger than most can afford or want to manage on their own. For example, let’s say a 300-unit apartment building requires an $8,000,000 down payment. This property could be purchased by 80 individual investors who each invest $100,000 and then share in the profits.

A Quick Story

I made a life-changing decision in 2015. From 2009 to 2015 I was actively investing in real estate, buying my own properties, managing my own properties, and building my own network. The problem was, the more I expanded my real estate portfolio, the less time I had. I had set out in 2009 with a goal to one day acquire 50+ single-family homes and retire with the “good life”. Before reaching 20% of my goal, I was already burning out and I was increasing my stress levels with each property I acquired. Was I building a life of freedom or a part-time job?

The Break-Through

After a mental reboot and several months of educating myself on how to become a passive investor, I finally found the solution; investing in syndications. More importantly, it was exciting to learn how to reap the benefits of real estate that I loved so much (the debt leverage, the tax advantages, the cash flow and the appreciation) without having to be hands-on and without having to trade time in exchange for money. Partnering with an experienced team and leveraging their resources opened a new world for me. The best part was, it was much easier than what I was doing already.

The Digital World of Real Estate

After switching investment models, I began to realize the impact digital tools can have on your real estate success. For example, the ability for a California-based investor to meet a New York-based Syndicator over a Zoom call. Or the ability to attend a webinar or conference from the comfort of your home, or the convenience of using Google Maps to drive out of state neighborhoods to vet out investment opportunities. Over the years, I developed a passion for helping investors learn how to scale their real estate portfolios digitally and passively, so they too can benefit from the power of “Time Freedom” which has had a major impact on my life and the lives of many others.

What Is Time Freedom?

Time Freedom is the ability to do what you want, when you want, as much as you want with your time. It is essentially having freedom over your time, but it is not for everyone. If you are looking to create more time in your life and focus on the things you love doing and reduce the time you spend on the things you do not enjoy doing, then it might be worth pursuing. It has been an enlightening journey to be an educator on this topic and to help others achieve success. Feel free to reach out anytime if you or someone who know would like to learn more about passive investing and how it could benefit your specific situation.

“Being Rich is Having Money; Being Wealthy Is Having Time” – Stephen Swid

To Your Success In 2020,
Travis Watts

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