Financial Independence Through Real Estate

When I quit my job in advertising and moved into the real estate industry, I knew it was important to develop a central goal that would guide me throughout my professional life. I thought about why I wanted to become an investor in the first place. I thought about what I hoped to accomplish. And the answer was clear: I wanted to help people attain financial independence through real estate.

Perhaps you want to spend more time with your family, but your work schedule makes that impossible. Maybe you want to travel across the world and do crucial volunteer work. You might want to finally write the book you’ve been putting off for years.

Since my big career change, I have been able to achieve this goal by working with people just like you on fruitful investing opportunities.

In this section of my blog, I will help you understand what it takes to substantially improve your strategy for gaining financial independence through real estate and other business endeavors. I will walk you through the steps I took to become a successful investor. I will spell out seven key principles for attaining a net worth of half a billion dollars. With the help of financial planner Joshua Sheats, I will offer financial advice that can change your life forever.

Once you have read through all the posts, you can check out both of my books to learn more about financial independence through entrepreneurship. Additionally, for regular insights on the industry, you can listen to my podcast, Best Ever Show, the longest daily podcast on real estate investing ever made.

And if you want to schedule a planning session or feel ready to start investing with me, you can get in touch anytime by clicking here.

How a Passive Apartment Investor Interprets a Schedule K-1 Tax Report

DISCLAIMER: THIS IS FOR YOUR INFORMATION ONLY. SINCE I AM NOT A TAX ADVISORY FIRM, I REFER ALL GENERAL TAX-RELATED REAL ESTATE QUESTIONS FROM PASSIVE INVESTORS BACK TO THEIR ACCOUNTANTS. HOWEVER, I WILL SAY THAT INVESTORS OFTEN SEEK REAL ESTATE OPPORTUNITIES TO INVEST IN DUE TO THE TAX ADVANTAGES THAT MAY COME FROM DEBT WRITE OFF AND LOSS DUE TO DEPRECIATION. BUT I DON’T INCLUDE ANY ASSUMPTIONS ABOUT THESE TAX ADVANTAGES IN OUR PROJECTIONS.

Apartment syndications remain an appealing investment for passive investors due to the myriad of tax benefits—the foremost being depreciation.

Fixed asset items (a long-term tangible piece of property or equipment that is used in operations to generate income and is not expected to be consumed or converted into cash within a year) at an apartment community reduce in value over time due to usage and normal wear and tear.  Depreciation is the amount that can be deducted from income each year to reflect this reduction in value.  The IRS classifies each depreciable item according to the number of years of its useful life.  It is over this period that the fixed asset can be fully depreciated.

A cost segregation study identifies building assets that can be depreciated at an accelerated rate using a shorter depreciation life.  These assets are the interior and exterior components of a building in addition to its structure. They may be part of newly constructed buildings or existing buildings that have been purchased or renovated.  Approximately 20% to 40% of these components can be depreciated at a much faster rate than the building structure itself.  A cost segregation study dissects the purchase/construction price of a property that would normally be depreciated over 27 ½ years—and identifies all property-related costs that can be depreciated over 5, 7, and 15 years.

If the expense of the construction, purchase or renovation was in a previous year, favorable IRS rulings allow taxpayers to complete a cost segregation study on a past acquisition or improvement and take the current year’s deduction for the resulting accelerated depreciation not claimed in prior years.

You can learn more about how depreciation is calculated, as well as the other tax factors when passively investing in apartment syndications, by clicking here.

Each year, the general partner’s accountant creates a Schedule K-1 for the limited partners for each apartment syndicate deal. The passive investors file the K-1 with their tax returns to report their share of the investment’s profits, losses, deductions and credits to the IRS, including any depreciation expense that was passed through to them.

Click here for a sample Schedule K-1.

There are three boxes on the K-1 that passive investors care about the most.

Box 2. Net rental real estate income (loss). This is the net of revenues less expenses, including depreciation expense passed through to the LPs. For most operating properties, the resulting loss is primarily due to accelerated deprecation. On the example K-1, the depreciation deduction passed through to the Limited Partner is $50,507, thereby resulting in an overall loss (negative taxable income).

Box 19. Distributions. This is the amount of equity that was returned to the limited partner. On the example K-1, the limited partner received $1,400 in cash distributions from their preferred return of distribution and profits.

Just because the LP realizes a loss on paper does not mean the property isn’t performing well.  The loss is generally from the accelerated depreciation, not from loss of income or capital.

Section L. Partner’s capital account analysis. On the sample K-1, the ending capital account is $48,093. However, this lower amount doesn’t reflect the capital balance that the limited partner’s preferred return is based on. The $48,094 is a tax basis, not a capital account balance. Thus, this limited partner wouldn’t receive a lowered preferred return distribution based on a capital balance of $48,094. From the operator’s perspective, depreciation doesn’t reduce the passive investor’s capital account balance.

The capital balance is technically reduced by the distribution amount above the preferred return (i.e., the distribution from the profit split), which is a portion of the $1,400 in the “withdrawals & distributions” box. However, operator’s deals are structured in a way so that the LPs continue to receive a preferred return based on their original equity investment amount, with the difference made up at sale.

The majority of the other accounting items on the K-1 are reported on and flow through to your Qualified Business Income worksheet.  The net effect of these items will be unique to each investor based on their specific situation and other holdings.

If you want to learn more about each of the individual sections and boxes, click here to review IRS instructions for the Schedule K-1.

To better understand your own tax implications on any investment, it is important to consult a professional who has an understanding of your overall finances so that they may give full tax advice.  Therefore, always speak with a CPA or financial advisor before making an investment decision.

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What Financial Reports to Send to Passive Apartment Investors

After closing on an apartment syndication deal, one of the responsibilities of the general partners (GP) is to provide the limited partners with ongoing updates on the investment.

Here is a blog post where we outline all the GP’s duties after acquisition.

One aspect of this passive investor communication is providing financial reports on the asset. Not all general partners provide financials to limited partners. However, when they do, there is an increase in trust between the GPs and LPs, which is the number one reason why passive investors chose to invest with one operator over another.

The purpose of this blog post is to outline the process of providing your investors with deal updates by sending them financial reports.

What Financial Reports to Send to Passive Investors

The reason to send passive investors financial reports, aside from increasing transparency and trust, is so that they know what is going on with the investment. The information provided in monthly or quarterly recap emails is a good start, but a spreadsheet with hundreds of data points paints a more detailed picture of the asset’s operations.

Ultimately, how often you send financial reports and the types of financial reports you send is up to you and the preferences of your investors.

The two most relevant financial reports to send to passive investors are the rent roll and the T-12.

A rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income. The rent roll provides passive investors with a current snapshot of the investment’s revenue.

A T-12 is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement, the T-12 provides passive investors with current and historical revenue and expenses.

A best practice is to send financials at least once a quarter.

How to Obtain Financial Reports

The first step in the process starts before you even have a deal. Most likely, the financial reports will be generated by your property management company. When interviewing property management companies, make sure you set expectations. First, ask them what type of property management software they use and if it can generate custom financial reports. Ideally, they provide you with a sample rent roll and T-12. If they do, how detailed are the reports? Is the T-12 broken down into specific line items? Does the rent roll list out all of the important metrics?

Here are examples of how detailed a rent roll and T-12 should be.

Assuming they generate the right reports, the next question to ask is “will you send me financial reports upon request” and “what is the lead time?” In doing so, you will know if they are willing to send you financial reports and how quickly (or slowly) you can expect to receive them.

How to Send Financial Reports to Passive Investors

One approach is to include links to download the financials in the monthly or quarterly recap emails.

Create a Dropbox folder for each of your properties. Each quarter, upload PDF versions of the rent roll and T-12 to the property’s respective Dropbox folder and include the links in the recap email. For example, include a sentence like, “Also, you can download the quarterly financials (current rent roll and profit and loss statement) by clicking here,” and the wording “clicking here” is hyperlinked to the financial reports.

Another more advanced and efficient option is to upload the financials to an investor portal. Rather than linking to the financials in your recap emails, you can direct the passive investors to the portal.

Before sending the financial reports, make sure that your resident’s and investor’s personal information is removed. Sometimes, the investor distributions will be included at the bottom of the T-12. Only include the line items above the net operating income. Also, make sure you remove the variance column from the T-12. Your property management company’s software may include a column that has the difference between the actuals and the project (i.e., the variance). To avoid confusion, remove the variance column and only send to investors upon request. Consider removing the names of residents for the rent roll too.

How to Handle Passive Investors’ Questions About Financials

Like any questions received from investors, if you know the answer, reply in a timely fashion. If you don’t know the answer, reach out to your property management company.

The most common question you will receive from investors will be about how the T-12 actuals compare to the projections you provided in the PPM. If you are not hitting your projections, speak with your property management company to determine why there is a variance and what is being done to solve the issue. The best responses to investor’s questions include a diagnosis of the issue as well as the solution which should already be implemented.

 

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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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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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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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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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Top 10 Changes For Real Estate Investors – Under The Biden Tax Plan

As we prepare for the next President of the United States to take office, you might be wondering how the new tax proposals from President-Elect Joe Biden could affect real estate investors. In this report, I highlight some of the proposed tax changes that would affect both real estate investors and business owners, according to the tax plan Biden released before the election.

Overview

Joe Biden has proposed to eliminate many components of the Tax and Jobs Act (TCJA) which was implemented in 2017 by President Donald Trump. The TCJA was primarily a tax reform to help stimulate the economy by reducing corporate tax rates and provide additional tax incentives to real estate investors and businesses. Now with the possible reversal of this tax reform and other proposed changes, let’s uncover the potential real estate implications.

 Top 10 Changes For Real Estate Investors

 #1 Elimination of bonus depreciation – a tax incentive (part of the TCJA) that allows a business or real estate investors to immediately deduct a large percentage of the purchase price of eligible assets, rather than write them off over the “useful life” of that asset. For example, real property improvements (like landscaping) have a depreciation period of 15 years and qualify for bonus depreciation. If you spend $10,000 on landscaping improvements for a rental property, you can use bonus depreciation to deduct the entire cost in the year you spend the money. Other items that may qualify for bonus depreciation include the purchase of furniture, appliances, and other real estate property improvements.

#2 Eliminate 1031 Exchanges – a 1031 exchange is a swap of one investment property for another that allows capital gains taxes to be deferred. This is a popular real estate tax strategy that has been in place since 1921 in the United States.

#3 Raise long-term capital gains tax rates for high-income earners. Long-term capital gains tax would increase for those earning over one million dollars a year (taxed at regular earned income rates rather than long-term capital gains rates). As it stands right now, the top tax bracket for long-term capital gains is 23.8% if you include the (NITT) “net investment income tax” of 3.8% which is applicable to high-income earners. Biden has proposed raising the long-term capital gains tax brackets to 43.4% for those earning over one million dollars per year.

#4 Eliminate the step-up basis. This is essentially a “death tax”. Let’s say your parents bought a house in 1970 and paid $50,000 for it, and today the house is worth $500,000. If your parents were to pass away and leave you the sole beneficiary of the house, there is a step-up basis law in place which allows the original cost basis ($50,000) to “step-up” to today’s full fair market value for tax purposes ($500,000). If you were to sell the house the next day for $500,000, there would be no tax due on the $450,000 “gain”. Under Biden’s tax proposal, this step-up basis would be eliminated, and therefore, you would be responsible for the tax due on the $450,000 “gain”.

#5 Implement a $15,000 first-time homebuyer tax credit. In 2008, the Housing and Economic Recovery Act sought to encourage Americans to purchase homes by creating a tax credit worth up to $7,500 for first-time buyers. The next year, Congress increased the amount to $8,000. The purpose was to encourage homeownership and stimulate the US housing market during The Great Recession. Biden has proposed a similar plan, but would nearly double the tax credit amount. This time, the purpose would be to allow affordability and accessibility to first-time homebuyers rather than stimulate the housing market.

#6 Phase out QBI (Qualified Business Income Deduction) for income earners making over $400,000. QBI allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. This could affect a large number of real estate projects and businesses.

#7 Reduce the estate tax exemption from $11.18 million to $5 million. The Tax Cuts and Jobs Act doubled the estate tax exemption to $11.18 million for individuals and $22.36 million for married couples. This means a person can pass away with $11.18 million dollars in assets and not have an estate tax due; Biden has proposed that this be reduced to 5 million dollars. This would largely affect owned assets including real estate and businesses.

#8 Raise corporate tax rates to 28% from the current 21% level. Starting in 2018, the tax law radically cut the corporate tax rate paid by C corporations from 35% to 21%. There is also a proposed 15% minimum tax for corporations with profits of $100 million or higher. This minimum tax is structured as an alternative minimum tax; corporations would pay the greater of their regular corporate income tax or the 15 percent minimum tax. Note, net operating loss (NOL) and foreign tax credits would still apply. This change would primarily affect publicly traded companies, but also some real estate businesses.

#9 Raise the top federal income tax bracket back to 39.6% from 37%. This would affect income earners who earn over $400,000 per year. Though this is not directly tied to real estate, many accredited real estate investors are high-income earners and could be affected by this change.

#10 Social Security tax increase for high income earners. As it stands today, the 12.4% Social Security tax stops kicking in once you earn more than $137,700 per year. The Biden proposal would have this tax kick back in for any income earned over $400,000. Though this is not directly tied to real estate, many accredited real estate investors are high-income earners and could be affected by this change.

To Your Success

Travis Watts

 

Travis Watts and his affiliates do not provide tax, legal or accounting advice. This 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. Please note that all material is subject to change and is subject to interpretation.

 

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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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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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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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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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What is Affordable Housing and Should You Invest in It?

As you delve into real estate investing, your initial thinking may be to offer luxury properties that will draw big bucks from tenants. And who could blame you?

One aspect of real estate investing you may be overlooking, though, is affordable housing. What is affordable housing? Contrary to how it may sound, this is an investment niche that could very well be your ticket to a stronger bottom line in the years ahead.

The demand for this type of housing is on the rise, so it only makes sense to consider investing in these types of properties. Here’s a rundown on what investing in affordable housing involves and whether you should add it to your strategy.

What is Affordable Housing?

This unique real estate refers to properties that have relatively low monthly rents, or Class C properties. These properties include those erected via government-subsidized programs focused on providing housing for those who otherwise could not afford it.

Investing in affordable housing can benefit your portfolio, but it can also have a positive impact on the local community. When you invest in this type of housing, you’re helping families who may be struggling financially, and at the same time, you’re helping your bottom line.

Let’s take a look at some of the biggest reasons for pursuing this unique housing as a real estate investment.

Investing in Affordable Housing Offers Security

If you’re asking “What is affordable housing, and how can it help me,” a major draw of this property type is that it often produces steady, consistent rental income. That’s because local, federal, and state agencies subsidize the rents of those who qualify for such housing.

On top of this, the United States government provides many tax credits and deductions for those offering affordable housing to families with low incomes. These savings will no doubt help your bottom line.

In light of the above, it may come as no surprise to you that in many real estate markets, affordable-housing properties are completely occupied and are reliable performers. When you invest in them, you can expect a constant stream of income long term.

Investing in Affordable Housing Offers a Respectable Return on Your Investment

An affordable-housing property can usually be a safer investment compared with a Class A apartment building. That’s because the cost of the latter is climbing higher and higher, particularly in today’s coastal markets.

As a result, the return on investment for such premium apartment buildings is no longer greater than what you can achieve with the affordable-property niche.

Investing in Affordable Housing Will Lead to Numerous Tenants

The demand for affordable housing isn’t expected to drop anytime soon. After all, both tenants and multifamily property investors are becoming increasingly interested in this type of housing.

More tenants are looking for affordable housing because the growth of income has been slow in recent years. In addition, some families used to live in middle-market apartment rents years ago but can no longer afford them due to rent increases, so they’re turning to more affordable options.

Unfortunately, the current gap between poor and wealthy individuals in the United States only continues to grow wider. As a result, you can expect more people to transition from traditionally middle-class homes to more affordable housing in the years ahead.

Investing in Affordable Housing Means Less Competition for You

The great thing about purchasing affordable housing today is that you won’t have a lot of competition with other apartment owners.

Why?

Because the cost of developing an apartment building is now quite high. That means builders won’t create apartment buildings with low rents unless they receive assistance from a government-funded affordable-housing program. And these types of programs are limited in how much brand-new housing they may build.

So, instead of charging low rents in newly created apartments, investors are charging higher rents and offering luxury amenities and finishes. They can do this because institutional investors who have plenty of capital often back these types of property investments.

The takeaway here? The demand for affordable housing is growing, but the supply is far from keeping pace with it. And that’s great news for you. The reliable, strong, and stable demand for affordable housing easily makes this niche a low-risk one and thus a smart one for the modern real estate investor.

Investing in Affordable Housing Benefits Communities

Yes, you’re in the real estate business to grow your net worth. But in the process, you can grow much more than that. You can grow local communities, and this benefit is priceless.

When you create a housing option for a senior citizen or a family who otherwise couldn’t afford housing, you can have a positive impact on many people’s lives. You’re offering tangible help to other people, and these individuals often pay it forward by adding value to their local communities in a number of unanticipated ways.

Important Considerations When Investing in Affordable Housing

When you own affordable housing, you’re restricted from increasing your rental rates. This means that your success as a property owner is contingent on how well you manage your controllable expenses with the help of your tenants.

So, as a landlord, you must empower your tenants to treat their homes with pride, rather than simply allowing them to wear out. For instance, you can communicate your specific expectations when it comes to keeping the apartments clean. And you can regularly perform inspections of the apartments. All in all, investing in an affordable-housing property requires not only a financial investment but also a social investment on your part if you want to succeed.

Start Investing in Affordable Housing Today!

If you’re asking the question “What is affordable housing,” now couldn’t be a better time to begin exploring the benefits of this type of investment. With the right approach, you can make an affordable-housing property your next lucrative investment.

The good news is that you don’t have to learn about and try to capitalize on affordable housing on your own. Get in touch with me, Joe Fairless, to learn how to tap into the many benefits of investing in affordable housing today.

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Key Improvements You Should Make to Increase the Value of Your Single-Family Property

You take pride in being the owner of an investment property, but are you getting the most bang for your buck—or, the greatest return on your investment?

 

The reality is that sprucing up your single-family property can quickly add value to it. That’s exactly why recent research shows that nearly 60% of people queried said they would probably or definitely undergo home renovations or improvement projects within the next 12 months.

 

Of course, as you explore how to increase property value, you may be asking yourself, “What improvement projects will yield the best results for me?” Here’s a rundown on key improvements you should make to increase property value.

Improve Your Curb Appeal

This is one of the smartest moves you can make relatively quickly. That’s because the outside is a potential buyer’s first impression of the home. Unfortunately, it’s one of the areas that many investors neglect as they focus on changes to the interior.

 

What Exterior Projects Can You Complete to Increase Value?

 

Perhaps your single-family home could use an extra coat of paint, or maybe you need to replace that dilapidated fence. In addition, your driveway might be due for power washing, and you may need to groom some shrubs and trees or plant some flowers.

 

It’s also a wise idea to make sure that your patio space or deck is functional if you’d like to increase property value. Adding extra lighting or even a small table and setting are easy ways of accomplishing this. Getting rid of overgrown weeds from your yard, painting and weather-stripping your front door, and ensuring that your storage outside is usable and clean are also great steps that may help you to improve the value.

Upgrade Your Countertops

When it comes to your single-family home’s interior, your kitchen should be one of your first priorities if you’re wondering how to increase property value. According to research, a minor kitchen remodel (of no more than $15,000) may recoup nearly 93% of its cost at resale!

 

Kitchen Projects to Focus On

 

First, upgrading your countertops can quickly make your kitchen more valuable, thus making it easier for you to sell your single-family home or demand a higher rent amount. Quartz and cement are especially popular in higher-end housing markets, but granite is also a great option. The most important thing is that your new countertop is stylish, functional, and durable.

 

You could also add some fresh paint or stain to your cabinets to make them stand out and look brand new. However, if your old cabinets are made of particle board, you might want to upgrade them to something more functional and modern if you want to really increase property value.

Improve Your Fixtures

You can’t go wrong investing in better light fixtures and faucets for the kitchen and bathroom, as well as adding ceiling fans. You may also want to add new locks, door handles, or even window blinds, with faux wood blinds being especially popular for adding a lavish touch to any space.

 

Upgrading your fixtures will make your single-family home appear more polished. It’ll also increase the durability of the items in your home that experience a lot of wear and tear over time. If your upgrade is professionally done, you can sell your property or fill it with renters more quickly, thus maximizing your real estate investment income.

Upgrade Your Appliances

If you are planning to rent out or sell your home after you increase the property value, be sure to upgrade your appliances as well. This is critical because appliances are some of the first items that renters and home buyers look at when entering potential new homes.

 

If your kitchen features mismatched appliances, or if your appliances aren’t functioning at their optimal level, you likely won’t get top dollar for your property when you sell it. This is why you should purchase an appliance package with matching appliances and make sure that it comes with a warranty.

Improve Your Flooring

Finally, don’t overlook your flooring when trying to figure out how to increase property value. A general rule of thumb is that you should install wood flooring versus carpet, as it can add a more sophisticated touch to your single-family property. Plus, if you’re renting, you may have to change out your carpet every other tenant, as a single juice or bleach stain can permanently ruin it. Constantly replacing your carpet can get expensive and, thus, negatively impact your rate of return each year.

 

More on Wood Flooring

 

Wood flooring is a broad category that includes not only hardwood but also laminate, plank/faux wood, bamboo, and laminate. A major benefit of this type of flooring, besides its appearance, is that it is better health wise for those who suffer from carpet allergies.

 

Still, some renters and home buyers prefer to have carpet in the children’s bedrooms, or during the winter months. Thus, it may behoove you to install carpet in all bedrooms and then use flooring throughout the rest of the single-family property’s living spaces. Also, if you have linoleum or vinyl in your kitchen or bathroom, you may want to replace this lower-quality flooring with classier travertine or ceramic tile, which renters and buyers generally prefer.

Start Making More on Your Investments

If you would like to increase the return on your investment in a single-family property, completing the above projects is a great start. Apply these tips to your fix-and-flip and wholesale deals!

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The 6 Steps to a 7-Figure Income

Who wants to be a millionaire?

No, not the popular TV game show. I’m talking about becoming a long-term, sustainable millionaire as a real estate entrepreneur!

 

Pat Hilban, who is a billion-dollar real estate agent, spent over four years self-reflecting, researching, and writing his New York Times Best-Selling book, 6 Steps to 7 Figures. The book outlines a 6-step, money-making strategy he, his mentors, and other successful entrepreneurs have followed to go from little to no money to over seven figures in annual income. In our recent conversation, Pat provided a blueprint you can follow to learn how to make millions and achieve the same.

 

Related: 5 Tips for Achieving Internal Success While Pursuing External Goals

Step #1 – Goals and Affirm

The first step is to set your huge, overarching, long-term goal. Then, break it down into smaller, bite-size pieces.

 

Pat said, “A lot of people just set really large goals. For instance, they set a goal ‘I want to be a millionaire,’ but they don’t set the small daily goals that it takes to be a millionaire, such as ‘I save $10/day,’ or even the goal before that is ‘What are you going to do to earn that extra $10 or save that extra $10?’” In this example, the long-term goal is to become a millionaire, but what you are really striving for is to save $10 per day by doing X, whatever you determine X to be.

 

Finally, you want to create a statement to affirm that goal. If your goal is to become a millionaire by saving $10/day, Pat said your affirmation would be “I am a millionaire. I save $10/day by doing X every day.”

 

Related: Set Goals + Don’t Be Greedy + Create an Incredible Team = Success

Step #2 – Track

Once you have set your overarching goal and broken it down into daily objectives, the next step in this money-making strategy is to track your progress. “I’m an avid tracker,” Pat said. “I’ve tracked everything for years. Every successful person I talk to tracks like crazy. People that tend to not get very far don’t track at all.”

 

Pat lives by the following truism: “If you track, you succeed. If you don’t track, you fail.”

 

For an example, for the longest time, Pat’s goal was to become a hundred-percenter. A hundred-percenter is having 100% of your bills paid by rental real estate and passive investments. He said, “In order for me to get to a hundred-percenter [status], I need to do a couple of things. I needed to first of all earn money, and then with that money, save money, and then with that savings, investing that money and invest it wisely. So my ultimate goal is to become a hundred-percenter; my daily goal that I might track would be I needed to list a house a day, or a house every three days. My goal from that would be to save $10,000/month in commissions, and then from that it would to invest. Then I would obviously track… Everything was tracked, from what I did to get the listing, what I did to save the money, what I did once I investing the money, and then how the money paid me sideways.”

 

There are a million different ways to track, but the idea is to have a system that tracks your daily objectives based on your overall goal.

 

Step #3 – Learn from Masterminds and Mentors

Step three is to join mastermind groups and get mentors whom can each offer their money-making strategy for you to consider. “I’ve had over 50 mentors that I can count that I have learned form and stepped upon. Kind of used to climb the ladder of success,” Pat said. “Many of those mentors I was able to find at masterminds. A mastermind is just simply a collective genius, so to speak. It’s 5 to 100 people that are all thinking the same and are sharing best ideas and best practices where you could just learn in abundance from multiple people all at once. People that have gone through what you want to go through.”

 

As far as I’m concerned, to learn how to make millions, mentorship is a must. However, there are strategies to gaining an education and getting advice from a mentor-type figure for free! The articles, “Two Ways to Gain Direct Knowledge From Experienced Investors for FREE” and “How a Wannabe or Experienced Investor Can Obtain a FREE or PAID Real Estate Education” are a great place for you to start.

 

Related: The Secrets to Starting a Relationship with Someone You Don’t Know

I feel the same way about meet-up groups. You can follow Pat’s money-making strategy of attending meet-ups hosted by other investors in the area, or you can get even more out of a meet-up by creating your own. In fact, Anson Young, an investor I interviewed on my podcast, created his own meet-up group, resulting in over $100,000 in profit. Meet-ups are not only great places to find potential mentors, but a great way to find deals, create partnerships, and make money.

 

Step #4 – Act

Now it’s time to act – that is, the forceful act of moving forward.

 

After completing his book, Pat’s goal was to make the book a best-seller. He went out to find some mentors, and he landed on Gary Keller, who has written multiple best sellers like The One Thing, The Millionaire Real Estate Agent, and the Millionaire Real Estate Investor.

 

At this point, Pat’s money-making strategy was to friend request everybody he could find in the real estate industry on Facebook and post about his book daily. Gary told him that wasn’t enough. He told Pat, “What you need to do is you need to quit what you’re doing and you need to go out on tour and start speaking to real estate agents at offices throughout the country, talking about your book.” And that’s what Pat did.

 

Pat sold his real estate business to his top agent and went on a book tour. He spoke at 53 offices in 53 different cities across the county over a seven-month period and got all of them to commit to buying a book on the first day it came out.

 

“When my book was released, we sold 10,600 copies in the first week,” Pat said. “My point is that Gary told me that I needed to act. He said something I’ll never forget. He said, ‘You reap what you sow 100% of the time’ It’s so true… There’s no free lunch.”

 

Now that is what I call MASSIVE ACTION.

 

Step #5 – Build

One of Pat’s mentors used to always say “Build on a success, not from the ground up.” What that means is, you already have success with something, leverage it for more success. For example, when I am inviting guests onto my podcast, I always mention that I have previously interviewed well-known, successful individuals like Barbara Corcoran, Robert Kiyosaki, Emmitt Smith, etc. Those are all successes I’ve had in the past that I use as a sort of bait to get other successful people on the podcast.

 

Related: The Ultimate Guide to Getting Booked as a Guest on ANY Podcast

“For a real estate agent, if you have a house in a neighborhood that you just sold, don’t go to some other random neighborhood and try to prospect and farm it,” Pat explained. “Go to the neighborhood where you had the success and build on that success up, because you’re much more apt to get a listing in a neighborhood where you could say, ‘Oh we just sold a house up the street. You may have seen my sign.’”

 

The goal is to find every little success that you’ve had and keep building on those same blocks as a money-making strategy.

 

Step #6 – Invest

Finally, the last step is to use the money you’ve saved or created from steps 1 through 5 and invest in real estate. “Bust your ass, save money,” Pat said. “Be a good saver, be an excellent saver. Take the down payments and invest in real estate – that’s how I did it – and then live off the horizontal income from those investments.”

 

Conclusion

Pat’s 6-step process for reaching your million dollar real estate goal is:

 

  1. Set a HUGE goal, break it down into smaller steps, and continuously recite your goal in affirmation form
  2. Create a system for tracking your progress
  3. Find masterminds and mentors to guide you on your journey
  4. Take massive action
  5. Build and maintain momentum by leveraging past successes

Invest in real estate

Follow Pat’s 6-step money-making strategy, put yourself on the track towards your long-term real estate goal, and ultimately achieve financial independence.

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4 Steps to Financial Independence Through Real Estate Investing

On this day over 240 years ago, the United States of America declared independence from the British Empire. Over 7 years later, on September 3, 1783, the Treaty of Paris was signed in which Britain agreed to recognize the sovereignty of the United States.

 

To commemorate our country’s Independence Day, I want to provide a strategy for you to gain your very own independence – financial independence from your corporate full-time, 9 to 5 job.

 

Fortunately for you, unlike the original 13 colonies, gaining your independence will be much easier. There will be (hopefully) no bloodshed, and all you need to do is commit to following the tried and true 4 steps to financial independence that many investors have used to quit their full-time jobs and become full-time real estate entrepreneurs.

#1 – What is My Freedom Number?

The first step is to calculate your freedom number.

Your freedom number isn’t a unit or property count. It is how much income you will need to at least cover your current expenses, or be equal to the income you are currently receiving from your full-time job, or ideally, to be able to afford your idyllic lifestyle.

 

The best way to accomplish this is to open up an Excel spreadsheet and list out all of your current expenses. If you want to replace your current income and become a real estate entrepreneur, then your freedom number is your pre-taxed income. If your goal is to afford your ideal lifestyle, determine how much that will cost you and that is your freedom number.

 

Let’s say you are currently making $50,000 a year at your current job, and you calculate that you will need an additional $15,000 a year to achieve your ideal lifestyle. Your “freedom number” is $65,000, or approximately $5,500 a month.

 

Advice in Action #1: What is your freedom number? _____________

#2 – How Much Real Estate Will I Need to Achieve My Freedom Number?

Next, you want to calculate how many rental properties you will need to achieve your freedom number. This calculation will be based on your specific investment criteria as a real estate entrepreneur.

 

For example, when I was first starting out, my investment criterion was single-family homes that cash flowed at least $100 per month after all expenses. Other investors may have an investment criteria that is a cash-on-cash return – 15% for example.

 

Using the $100 a month in cash flow criteria, you will need 55 single-family properties in order to cash flow $65,000 a year.

 

If your investment criterion is to only purchase properties that achieve a 15% cash-on-cash return, you will need to invest $433,333 to achieve your $65,000 a year freedom number. That can be purchasing one apartment building for $2.2 million (assuming it is a 20% down payment loan and you have that amount of capital available), but most likely, it will be a combination of single-family homes and small to mid-sized multifamily properties worth $2.2 million in total. For example, purchasing 22 duplexes for $100,000 each.

 

Advice in Action #2 – How much real estate (number of units or overall value) will I need to achieve my freedom number and become a successful real estate entrepreneur? _______________

#3 – Create a Freedom Timeline

Next, you want to create a timeline for how often you will purchase properties in order to achieve your freedom number.

Timelines will vary widely, depending on your current situation, market, investment strategy, etc. I recommend having a “freedom date,” and then reverse engineering a timeline.

 

For example, let’s say your goal is to quit your job in 10 years. Following with the previous examples, your freedom number is $65,000 a year and you need to purchase 55 single-family residences (SFRs) that cash flow at least $100 a month. The amount of money you will have available as a budding real estate entrepreneur to use as a down payment will be any money you have saved up, as well as money you set aside from your full-time job. So, you first want to determine when you can purchase your first SFR.

 

After purchasing your first SFR, you will have an additional income stream – the $100 a month. How long until you can purchase your second property? At that point, you will have an additional $200 a month towards your next down payment.

 

Also, at some point, you will have enough equity in your earlier SFR purchases (from appreciation and principal pay down) that you will be able to refinance and pull out capital to buy even more SFRs.

 

Using the amount of money you will save from your job, the added income you will receive as you purchase properties, and the money obtained from refinancing, you can create a timeline of when you will be able to purchase each of the 55 properties over a 10 year timespan and officially become an independent real estate entrepreneur.

 

An important note: This is a high-level timeline. Do not expect things to follow your exact timeline. Things will undoubtedly change – you will set aside more or less money from your job, you will have unexpected expenses, you will achieve a higher or lower rate of return, you won’t be able to find properties that meet your criterion, etc. This is strictly a guide to show you how long it will take to achieve your freedom number so that you can plan accordingly. As President Dwight D. Eisenhower once said, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.”

 

Advice in Action #3 – Create your freedom timeline

#4 – Start Implementing Your Freedom Timeline

Finally, after calculating your freedom number, determining how much real estate you will need to purchase, and creating a high-level timeline, it is time to actually start making purchases as a new real estate entrepreneur.

 

One of the best purchasing strategies out there for achieving your freedom number is the BRRRR strategy, coined by Brandon Turner at BiggerPockets.

 

BRRRR is an acronym for buy, rehab, rent, refinance, and repeat.

  • Buy – Purchase distressed rental properties (the level of distress you are comfortable with will determine what properties to look for, as well as how quickly you will be able to achieve your freedom number)
  • Rehab – Hire a great general contractor to repair the property (Related: How to Screen and Hire the Best General Contractor and How to Find the Right Contractor for the Right Job)
  • Rent – Lease your newly renovated property to great residents (Related: How to Create the Ultimate Tenant Experience)
  • Refinance – Obtain a new loan on the property to pull out the equity created from the rehab
  • Repeat – Use the money from the refinance to repeat the process again and again until you achieve your freedom number

 

Learn how real estate entrepreneur Andrew Holmes (whom I interviewed on my podcast) implemented the BRRRR strategy on over 160 properties here.

Conclusion

The four-step process for achieving financial independence is:

 

  • Calculate your freedom number
  • Determine how much real estate you need to achieve your freedom number
  • Create a freedom timeline
  • Purchase real estate, ideally using the BRRRR strategy

 

Achieving your financial independence may seem daunting, but compared to the sacrifice required to create our great nation, it’s a walk in the park. However, it will require patience, effort, and resourcefulness to navigate the many obstacles along the way.

 

Hopefully, this four-step blueprint will help mitigate the number of obstacles you will face as you become a real estate entrepreneur. But it will be the launching point for you to strategize and execute your plan to quitting your full-time job through real estate investing.

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The 3 Principles to Achieving Financial Independence Through Real Estate Investing

 

Escape the corporate rat race and gain financial independence.

 

That is the main goal of many who decide to enter the real estate investment game. However, it’s much easier said than done, and learning how to create wealth investing in real estate can be challenging.

 

Fernando Aires, who designed computer chips in the tech industry for over 25 years, was able to achieve the coveted financial independence through real estate and leave his full-time job in 2014. In our recent conversation, in regards to quitting his job through real estate, he said, “the key for me has been to buy enough properties, mostly with long-term fixed rate financing and some cash, in order to achieve this parity with my corporate income.”

 

For Fernando, it was a long process, but the juice was definitely worth the squeeze. Along the way, he discovered some tricks that enabled him to expedite the process.

What are those tricks?

#1 – Tax Benefits

Firstly, Fernando didn’t pursue zero or little money down loans or a creative strategy or really anything fancy as he sought financial independence through real estate. “Most of my properties are financed,” he said. “I try to get as much long-term fixed financing as possible, so by itself, the property doesn’t generate lots of cash flow. My typical cash flow for financed properties is about $250/month.”

 

That’s $3,000 a year. When you have a corporate salary of a quarter of a million dollars to replace, that’s a lot of properties. However, he was able to slash the amount of money he needed to replace his salary with nearly in half because of the tax benefits real estate offers. “With income property, due to depreciation, which is the best tax write-off that you can imagine, you end up paying very little in taxes when you take that into account,” Fernando said. “When I was working for Apple in California, I was roughly paying 50% of my income to the government, which means that I only need to make about half gross that I was making in corporate America in order to be at the same point, due to the tax situation.”

 

Right off the bat, the tax advantages of real estate will allow you to have a “freedom number” that is significantly less than your current pre-taxed income from your corporate career. This involves hiring an accountant who has experience in the real estate niche you are pursuing. Here is a video where I outline exactly how to find the best accountant.

#2 – Appreciation

Another thing that accelerated Fernando’s financial independence through real estate was appreciation. “Appreciation is certainly something that comes into play,” he said. “Over time, the properties have appreciated and some of them I’ve been able to do an equity strip from the properties due to the things that I’ve made, and you can also do an equity strip from the properties and you don’t have to pay any taxes when you borrow money against the properties.”

 

In other words, the equity that was created by appreciation can be pulled out, tax-free, to use as a down payment to purchase additional properties later on in the business plan. This is money on top of the cash flow from your portfolio and the money you are saving up from your corporate job.

#3 –Leverage

Fernando journey to financial independence through real estate also benefited from another form of appreciation – inflation. And since he was leveraging the properties with debt, meaning he was able to control 100% of the property by putting less than 100% down, the benefits of inflation were compounded.

 

“A quick example for most of my properties is if you put 20% down on a property with a long-term financing fixed rate in place, which is what I recommend, you’re essentially leveraging your money 5 to 1. Five times 20% is 100% of the property. What that means is if the property goes up by let’s say 5% a year – basically tracking inflation numbers that we’re given – you’re actually making 25%, because it’s five times your leveraged money.”

 

When taking the compounded effects of appreciation/inflation into account, Fernando’s returns far exceeded what he could achieve investing in the stock market.

 

“If you add that 25% with a relatively low cash-on-cash return of 8%-10%, your already at 30%-35% for a property that is leveraged. Try to beat that with buying any stock. As a matter of fact, I’ve compared – since I’ve worked to Apple – Apple stock’s annualized return from 2012 to 2015 with my real estate portfolio, and my real estate portfolio beat the Apple stock,” Fernando explained. “My numbers were 14.8% averaged over the period, and Apple stock was 12.1%… So it’s just no comparison.”

Conclusion

Without the advantages real estate provided from a tax, appreciation, and leverage perspective, Fernando would not have been able to achieve his financial freedom, or at least not as quickly and efficiently as he did.

 

If your goal is to replace your current income with complete financial independence through real estate, you must become familiar with these three principles. Like Fernando, it will increase both your chances of achieving financial independence and the speed at which you will be able to do so.

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The 22 Tactics to Go from a Corporate Job to $400,000,000 in Multifamily Real Estate

 

On May 18th, 2017, I was on the other side of the mic when I was interviewed on the BiggerPockets podcast, one of the most downloaded real estate podcasts in the world.

 

During our conversation, we covered 22 different topics on how I went from my corporate job in advertising to controlling $130,000,000 in multifamily real estate – and now over $400,000,000.

 

Below, I included hyperlinks for each topic. Clicking on a link will send you directly to the time in the conversation when the topic was discussed. That way, you can skip around and find exactly what it is you are looking for.

 

If you want to listen to the interview in its entirety, ​click here.

 

[7:20] – My corporate background in New York prior to buying my first investment property

 

[11:44] – Why I began investing in single-family homes in my hometown of Texas while continuing to work my corporate job in New York.

 

[13:44] – How I purchased my first deal in 2009 without ever visiting the property

 

[17:00] Tactic: How to invest in out-of-state real estate without viewing the property

 

[21:40] Pros and cons of investing virtually

 

[23:13]Why I quit my job and transitioned to large multifamily investing via syndication

 

[26:30] Tactic: Shifting your mindset when making the leap from small to large investing and how I found my first apartment deal

 

[31:04] Tactic: 3 factors for qualifying a multifamily market

 

[33:58]What’s the strongest multifamily market in the nation?

 

[36:20]My overall real estate investing goal and why it’s cannot be all about the money

 

[37:40]Outlining how I completed my first deal: What comes first, the deal or the money?

 

[40:53]The Master Lease: Pros and cons of buying apartments with a master lease and why it benefits the buyer and seller

 

[47:50] Tactic: How to leverage your existing network to raise private money for your apartment deals

 

[54:15]Why putting your own “skin in the game” results in additional alignment of interest with investors

 

[55:32] Tactic: How to find off-market deals in a hot market

 

[59:25]Three ways I, the syndicator, make money on the deal?

 

[1:01:52]When underwriting deals, what metrics/criteria must an apartment meet in order for me to invest?

 

[1:03:54]Difference between economic occupancy and physical occupancy

 

[1:04:20]How do I find on-market and off-market deals?

 

 

FIRE ROUND Q&A

 

[1:08:09]Question #2: “I’ve been discussing potential investment opportunities in apartment syndications with my network. The toughest objection I’m coming across is ‘what if I need to get my money out early.’ How do I overcome this?”

 

[1:09:16]Question #3: “What are the downsides to apartment buildings with only 1-bedroom units?”

 

[1:10:46]Question #4: “How do I check to see if an investor group is real and not a slick organization trying to steal my money?”

 

 

Did you like this blog post? If so, please feel free to share it using the social media buttons on this page.

 

I’d also be VERY grateful if you could rate, review, and subscribe to the Best Ever Show on iTunes by clicking this link: http://bit.ly/2m2XyM1

 

That all helps a lot in ranking the show and would be greatly appreciated. And if you have any comments or questions, leave a comment below.

 

 

 

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How To Get Rich By Investing: 7 Principles for Attaining a $500 Million Net Worth

 

There’s rich, and then there is super-rich. If you are rich, you stay in the nicest hotels, eat at the fanciest restaurants, and drive the trendiest cars. The super-rich own those things. If you’re wondering how to get rich by investing, there are seven key principles to follow.

 

John Bowen, who founded four multi-million dollar businesses, authored more than 15 books, and is a regular columnist at HuffPo and Financial Planning, is a leading expert on extreme wealth, which he defines as a net worth of $500 million or more.

 

These are not your everyday entrepreneurs. In fact, according to the Credit Suisse 2016 wealth report, there are less than 2,500 US citizens with a net worth of $500 million or more. With an estimated population of 322.8 million, less than 0.0008% of the population meet the requirement for the “super-rich” designation.

 

Obviously, these are great individuals to look to if you’re attempting to learn how to get rich by investing in and/or creating successful companies. So, John recently conducted a study of elite business owners with the purpose of identifying exactly how they were able to achieve such high levels of success. Upon analyzing the results, he found seven principles that were common between these super-rich individuals. In our recent conversation, John outlined these seven principles of the super-rich. Adhere to them and maybe, just maybe, you will join the ranks of the top 0.0008%!

 

1 – Commitment to Extreme Wealth

The first principle was an expressed commitment to extreme wealth.

 

Extremely wealthy individuals share a similar mindset. They consciously decide extreme wealth is what they want to pursue.  At the same time, they’re also willfully committing to the amount of work and effort required to attain the millionaire and billionaire status.They understand how to get rich by investing their time, not just their money.

 

What it is not is a commitment to an abstract goal. It’s a commitment to a defined number. “What’s your number? That’s what you’re asking,” John said. “Commit to extreme wealth – just determine whatever that means to you. For some people, it’s a million dollars. For some people, it’s a billion. It’s anywhere in between.”

 

It’s both quantifiable and personal.

 

What’s your number?

 

2 – Enlightened Self-Interest

The super-rich knew exactly what they wanted- which varies from person to person- had at least a working knowledge of how to get rich by investing, and consciously decided it’s what they would pursue. Then, they engaged in enlightened self-interest.

Here’s how John explained enlightened self-interest: “What you want to do is you want to determine your counterparty – whoever you’re going to do the deal with, [who] you’re negotiating with, [and who] you’re partnering with. What is their criterion for success, too? And then you’re going to find that and leverage it to use it.”

 

Business isn’t done in a vacuum, and people who know anything about how to get rich by investing realize it is extremely difficult to become super wealthy on your own merits and work. You’ll need to work with others. And it shouldn’t be just anyone.

 

When the super-rich are going to do a deal with someone, John says, “I’m the first to make sure that whatever I’m doing is going to be aligned for my success criteria. Then, I’m going to try and gain a better understanding of what [they] want to accomplish. Can I help [them] advance what [they] want to achieve, and will that move me toward my success? Then I’m going to go ahead and negotiate in good faith to have that happen.”

 

This isn’t a lesson on how to get rich by investing or making deals with selfish self-interest, but enlightened self-interest. John says, “You never want to burn the counterparty, whoever you’re working with, because we’re in it for the rest of our lives. You want to make silence, and one of the things you’ll find about billionaires is they’re silent a lot. They’re letting you do a lot of the conversation, and one of the biggest risks of all is so many people negotiate with themselves. They’re going through all these mind games. What we want to do is hear from the counterparty how we can help.”

 

To earn extreme wealth, you want the “I’ll scratch your back, and you’ll scratch mine,” reciprocal relationship, not “I’m going to exploit this person to achieve my goals and then throw them to the wayside once I’ve done so.” The latter, which may seemingly work in the short-term, is a recipe for disaster in the long run.

 

3 – Put Yourself in a Line of Money

Principle number three of how to get rich by investing in real estate or business is: the super-rich put themselves in a line of money. “[For] people with $25 million or more of financial assets, 9 out of 10 made it being an entrepreneur (business owner),” John said, which includes real estate.

 

“If you’re going to be successful, you want to be successful on purpose,” John said. “If you’re going to do a nine to five job and you’re going to do it well, you can have a great life, but you’re not going to become extremely wealthy. You’re not in the line of money. Unless you have an equity ownership, you’re not in the line of money.”

 

If you are loyal Best Ever listener, you are either already a real estate investor or are in the process of becoming one and learning how to get rich by investing, so you should already have this principle covered.

 

Related: How Skateboarding Legend Tony Hawk Accomplished the Impossible

 

4 – Pay Everyone Involved

A common stereotype of the wealthy is that they are cheap with their employees and/or business partners. However, according to John’s study, this isn’t the case. The super-rich are “very deliberate on who they hire,” John said. “They work with the top talent, and they make sure they’re taken care of.”

 

You want to motivate and inspire your talented employees. They strive to make money and grow as entrepreneurs themselves, and good pay is a must to ensure an alignment of interests.

 

5 – Network is your Net Worth

business networking is how to get rich by investing

The super-rich who have become experts at how to get rich by investing are extremely well connected. They focus on deliberately forming relationships that create value, result in economic gain, and are always win-win scenarios.

Someone in a super-rich network, John said, is “somebody that I can get on the phone, and we can have a conversation and create value together in our collective, enlightened self-interest, and we’re going to maintain that relationship over time.”

 

More than likely, this is not your best friend, family, or college network. These are the business people that can help you reach your extreme wealth goal while you’re going to do it for them as well.

 

Related: How to Effectively Network at a Real Estate Meet-Up

 

6 – Failure, Refine, and Refocus

Another characteristic of the super-rich is their acknowledgment, acceptance, and recovery of failures. They don’t fail and go sulk in a corner. They fail, determine the root cause, analyze their mistakes, refocus, and try again.

 

Even more importantly, they are confident enough to test different strategies without fear of failing. They seek out failure as a natural part of learning how best to get rich by investing.

 

John says, “The nice thing in today’s world [is] the cost of testing anything has gone way down, whether you’re creating products, the ability to 3D print, whether you’re doing it electronically, the Internet, buying a few ads digitally. It’s very low cost.”

 

“Good business people always mitigate risk – we’re not big risk takers. But what we want to do when we fail, we want to fail quickly, and then [ask] how do we avoid making the same mistake repeatedly? And more importantly, doing an autopsy so we can see ‘Is there some value here that we can capture and tweak it, refine it, [and] refocus it to create value?’”

 

The key takeaways for this principle are having fearless approach, and, when testing something, if you’re going to fail, fail quickly!

Related: Two Valuable Lessons from a Start-Up Enthusiast on Success and Failure

 

7 – Stay Focused on Extreme Wealth

The final principle may seem redundant, but that is because it’s the most important principle when you’re learning how to get rich by investing. The super-rich didn’t just make the initial commitment to extreme wealth and then forgot about it. It is always top of mind and something they continuously focus on.

 

John said, “It’s always keeping number one in place. One of the things I like to do is to take a look, from the standpoint of ‘Where are you spending your time, your money and your energy?’ because really time isn’t an [infinite] resource, its energy. [So] take your calendar … and look at it for a week. We can really get caught up in going ahead and thinking because we’re so busy, we’re doing well; what I find over and over again (and it’s one that I struggle with, too; and many business owners and entrepreneurs do) is it’s so easy to lose track of what’s working and get defused… And as we get defused, boy, we’re in trouble. So it’s focus, focus, FOCUS.”

 

Whether it’s daily affirmations, a vision board, or getting your number tattooed on your face, you must constantly remind yourself of your commitment to extreme wealth and to spend your limited time and resources accordingly.

 

Related: The Four Archetypes of the Mastery Process

 

Conclusion

Based on a study of the super-rich, who are entrepreneurs with a net worth over $500 million and experts at knowing how to get rich by investing, there are seven common principles they all follow:

  • Commitment to Extreme Wealth
  • Enlightened Self-Interest
  • In the Line of Money
  • Pay Everyone Involved
  • Networking like a Machine
  • Failure to Refine and Refocus
  • Stay Focused on Extreme Wealth

 

I hope to see you in the Forbes millionaire or billionaire list one day!

 

Did you benefit from this blog post regarding how to get rich by investing? If you did, please share it with other investors via the social media buttons here.

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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BRRRR Strategy: Formula to Buy 5 Rental Properties in 2 Years and Payoff in 7

Last Updated 10/26/18

 

One of the main reasons why people become interested in real estate investing is the allure of financial freedom. Purchase enough real estate to cover your personal expenses and voilà, you’re financially independent. For some, one of the hardest parts may be learning how to determine whether the rental property in question is good investment.

There are many strategies and tactics to implement in order to accomplish the feat of financial independence, like Josh Sheets’ integration of personal and professional financing, Fernando Aires’ three principles to achieving financial independence, committing to this straightforward four step process, and passively investing in apartment syndications, among many others.

However, the fastest financial freedom strategy I’ve ever come across is Andrew Holmes’ 2-5-7 strategy. He has successfully implemented this strategy, which is a version of the renowned BRRRR strategy (buy, rehab, rent, refinance, repeat) on over 160 properties. In our recent conversation, he outlines, in extreme detail, his exact step-by-step 2-5-7 formula for how he purchases a minimum of 5 properties every 2 years and pays them off in 7.

 

What is the 2-5-7 Investment Formula?

Andrew’s investment strategy adheres to what he calls the “2-5-7” formula. In 2 years, the goal is to accumulate a minimum of 5 properties and using the cash flow pay them off in 7 years. Andrew said, “The formula doesn’t change, it’s just the number of properties, how much cash flow you want to create, and you scale based on that.”

In order to achieve his specific investment goals, Andrew has the following four additional requirements at are not necessarily included in the original BRRRR Strategy:

1. Deal Location – “Most people, whenever they own rental properties, they tend to buy … in areas that are rather challenging. We have a different philosophy, which is we tend to buy in bread and butter areas, right next to what we would call premium areas. Basically, if premium areas are A, we tend to buy B- or C+.” Click here for my ultimate guide on selecting a target investment market.

2. Minimum 25% equity– “Whenever we’re buying a property, after rehab, it must have a minimum of 25% equity.”

3. Small Ranches– “We focus on buying small, three-bedroom, one and one-and-a-half bath ranches.”

4. $400 to $450 cash flow– “They must cash flow to the tune of $400 to $450 per property after all expenses, including management.”

Similar to the BRRRR Strategy, you start with the end goal, which will likely be the amount of cash flow required to cover your personal expenses, your current salary, or your ideal lifestyle, and then reverse engineer your 2-5-7 strategy to determine what market to invest in, how much equity you need (more on that later), the property type, and the monthly cash flow requirement for each deal.

 

Related: How to Find a Cash Flow Friendly Real Estate Market

Example Deal

Here’s an example deal Andrew provided to see the 2-5-7 formula in action:

“Let’s say you’re buying a bread and butter property: three-bedroom, one bath ranch for $65,000. You’re going to put $20,000 to $25,000 into rehabbing the property. You have a carrying cost of another $5,000 to $6,000, so you’re all in cost into the property is somewhere around $90,000.”

“This is the most critical part, which to me [distinguishes] investing versus what most people do, and that is the property needs to appraise on a conservative refinance appraisal for $120,000 to $130,000. That’s the key thing – that’s the only way you’re going to be able to get all the capital that you put into the property out, so that you can efficiently recycle the same money over and over and over.”

“So the property appraises for about $125,000. The lender is going to give you about 75% of appraised value… That’s the key thing. That’s the benchmark people have to look at. If the property appraises for $120,000 to $135,000, now they’ll give you the $90,000 to $95,000 refinanced.”

“So you take that loan, you pay your first lender off – the loan you used to buy the property and to do the rehab – and then you just recycle the same funds. Or if it’s your own money, that’s fine also, but you just repeat that process over and over and over, [with the] goal being you need to get to a minimum of five.”

 

Related: How to Secure a Supplemental Multifamily Loan

How to Finance the Properties, Completing the “Buy” Step of the famous BRRRR Strategy?

BRRRR Strategy for apartment investing On the front-end, Andrew explained that there are three major ways he funds his deals:

1. Partnership– “Number one, you can partner with somebody that has the capital and do a 50/50 joint venture. They buy the property, they put up the money for capital [and] you’re the driving force. You’re doing all the work, but you’re giving up 50% of the returns. That’s where I started initially”

2. Hard Money Lender– “The second way to do it is the traditional route, which is you borrow money from a hard money lender, and put in some of your own money.”

3. Private Money– “The third route, which we tend to use the most [is] private money… Join your local REIOs, join the local groups; whichever town you’re in, there are tons of them. There are people that are willing to make loans out of their IRAs, they have personal money, and you end up paying anywhere from 8% to 12% and that’s what we tend to do and that’s what we always try to get people to understand – there’s a lot of money out there where people are willing to loan for the front end of the transaction.”

As an apartment syndicator who sometimes uses the BRRRR Strategy myself, this last option – private money – is my bread and butter. Here are posts on the most effective methods for raising capital from private investors:

 

On the back-end refinance, the biggest challenge Andrew faced in regards to following this take on the BRRRR Strategy and buying 5 properties in 2 years is that most residential lenders will usually only provide up to 4 loans. However, he has found a solution to his problem: commercial loans at small, local banks.

“Basically, a five-year balloon with a 25-year amortization. It’s a commercial loan at five, five and a half percent,” Andrew explained. “The speed at which you can scale and grow is much faster.”

 

Related: How an Apartment Syndicator Secures Financing for a Multifamily Deal

 

“We tend to go to the small banks that are in town. Typically, they’ll loan on anywhere from one to five, ten, fifteen, twenty ranches. We’re not going to go to Chase Bank and we’re not going to go to the big lenders, because they don’t really offer these programs for small investors.”

 

Related: Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

Meet the Bank’s VP

When Andrew walks into a small bank to get a loan and implement his BRRRR Strategy, his goal isn’t to speak with a teller or a manager or a loan officer. He wants to go straight for the bank’s Vice-President. “You always want to go and directly talk to the VP. Typically, at these small banks, the VP is pretty much the main guy there, and that’s the person you want to approach.”

When approaching a conversation with a bank VP, the first thing Andrew does is explains, in two minutes or less, his business plan. A condensed version of his two-minute elevator pitch is, “Hey, we’re buying foreclosure type of properties or investment properties that are rentals. When we come to you, they’re going to be purchased, they’re going to be already stabilized (they like that word) and there’s already an existing tenant. We do two-year to three-year (minimum) leases only; we don’t do short-term leases.”

Next, Andrew explains he has his version of the BRRRR Strategy, the 2-5-7 formula, as well as his philosophy of aggressively paying down the properties in 7 years. Then, he goes into more details and shows the VP a couple of successful past deals. However, if you’re brand new, just show them a property or two that you have in the works.

How to Find Local Banks

A great resource for finding a local bank in your target market is https://www.bauerfinancial.com/home.html. Also, Andrew advises, “whatever community you live in, I would draw a 10 to 15 mile radius around it, and then start with the ones that are closest to wherever you’re going to buy properties. Especially if it’s in a B-market, a C+ type of market, then the banks that are local in that area, they have depositors from that particular area and they need to make a certain amount of loans in that particular market. So that’s the first place to start.”

Advantages of Local Banks

Besides the ability to provide more loans than a standard bank, Andrew said local banks have three additional advantages:

  • Building Relationship– “As you start developing relations, as you start having credibility with a particular bank, they’ll scratch their arms a little bit, but in general, the place to start always is the community banks – they want to have a relationship; it’s a relationship sort of lending, and they really like that word. If you go in and say, ‘hey, we want to develop a relationship with you’ and you tell them that you’re going to put your rental deposits in their bank, they’re all over that because that’s really what in the long run they’re looking for.”
  • Flexible Loan Qualifications– “They don’t have stringent criteria. For people who may not have a W-2 income, they’ll work with 1099. If somebody doesn’t have a W-2 or 1099, but has retirement income, they’ll work with. If somebody doesn’t even that but has some assets, a good portfolio in the stock market, or just cash, they’re much more forgiving and they’re not as sensitive, even in the department of credit scores.”
  • Loans to Business Entity– “As you work with these commercial banks, you can buy properties in your LLCs, you can buy properties in your S Corps, you can buy companies under a trust.”

 

Related: How a “Rich Dad Advisor” Directs Investors to Transfer Title to an LLC

 

Conclusion

Andrew follows the 2-5-7 investment formula (which is similar to the BRRRR Strategy): purchase a minimum of 5 properties in 2 years and pay them off in 7 years.

The three ways Andrew finances his deals on the front-end are partnerships, hard money, or private money loans. On the back-end, he refinances the properties with a commercial loan from a small local bank. When walking into a bank, Andrew goes directly to the Vice-President and explains his business plan.

For those interested in following this strategy or just want to find a small local bank, visit: https://www.bauerfinancial.com/home.html. The three main advantages, among many others, of using a small local bank is the ability to form relationships, flexible loan qualifications, and loaning to your business entity.

 

Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Best Financial Advice to Achieving and Maintaining Financial Freedom


In my conversation with financial planner Joshua Sheats, he explained how integrating personal and professional financing is beneficial and almost a requirement to the speed and longevity of building wealth. He also provides the best approach to truly achieving and maintaining financial freedom.

 

Personal vs. Professional Technical Financing Defined

 

Personal finance is all the stuff that you do with your money. Classic examples of personal finance advice are:

 

  • Don’t buy a latte everyday
  • Invest in real estate
  • Get out of debt
  • Fund your 401k

 

These are the “should and shouldn’t” pieces of advice that are commonly promoted in financial articles and financial shows.

 

The world of professional technical financial planning is more specific.

 

  • If I am going to buy a piece of real estate, should I purchase it within a trust or a business entity?
  • When investing in a retirement account, should I use a solo 401k or should I establish a defined benefit pension program?
  • If I am going to buy life insurance, should I buy term life insurance, universal life insurance, or whole life insurance?

 

Personal vs. Professional Technical Financing – How it’s Sold?

 

Typically, personal finance and professional finance are sold and promoted in very different ways. Personal financial advice, especially in the realm of real estate, is usually sold through motivational seminars.

“You can get rich if you buy rental properties. With only $10,000, I can teach you how to create an empire with no money down!”

These types of seminars and forms of education are very influential. However, they promote a mentality that may land you in trouble when the going gets tough. Joshua finds those investors who avoid getting into the specifics (i.e. technical planning) will always try to solve all financial difficulties by simply buying more and more properties. For example, if an investor wants to increase their rental income to fund a vacation, instead of taking a deep dive into their budget, refinancing, etc., they will just buy another property. In other words, they take massive action with minimal details.

 

On the other hand, if you only focus on technical financial planning, you will lack the motivation and practice. For example, someone will worry about how to optimize the asset allocation in his or her retirement account when they should be sending out direct mailers or putting in offers. In other words, they have maximum direction with minimal action.

 

Therefore, the combinations of personal and technical financial planning are required to be fully successful financially in the long-term.

 

The Best Approach – Setting Goals

 

The best approach to financial planning always starts with goals. You should always build from precise, stated goals that are specific to YOU. However, often times, this isn’t the case. When Joshua asks people how much real estate they want to own, they will almost always throw out round numbers. “I want to own 10 rental houses.” “My goal is to own $10 million worth of property.” “I plan on owning 25 units.”

 

In response, the first question that Joshua asks is “why?” Usually, these whole numbers come from reading a motivating book. Maybe they came from a motivating speaker that talked about how rich they are and all the things that they can buy. Going back to the best financial planning approach, “are these goals specific to what you want and what you need?” If the answer is ‘no,’ then it is time to sit down and reevaluate “why” you are investing in the first place.

 

Real estate should simply be a funding mechanism for your life. Therefore, take the time to sit down and actually figure out how much money you need. The median household income in the US is in the $40,000 range. Depending on your market, you can hit $40,000 in net profit with 4 to 5 rental houses once they are debt free.

 

However, many people don’t actually take the time to sit down, look at there expenses, figure out how much money they need, and create an investment strategy to meet that goal. Instead, they wind up pursuing an inefficient or riskier plan to hit a financial number that they read in a book or heard from a motivational speaker.

 

The Best Approach – Create a Foundation

 

Joshua doesn’t think that there is anything wrong with wanting to spend more money (i.e. have more life expenses) or trying to accumulate a bigger portfolio. But, he believes and has seen that the quicker you can get to a place of financial stability and the lower your goals are, the easier it is to get there with minimal risk.

 

Therefore, place your $10 million goal to the side – at least for now – and do the following first:

 

  • Determine your monthly expenses (Joshua believes that you can have a great lifestyle on $4000 a month, but ultimately, that is up to you)
  • Create a plan to achieve a monthly income that covers your expenses
  • Once that income level is achieved, aggressively pursue the clearing all of the leverage on the portfolio (with zero debt, no matter what the market condition, you will have total safety)
  • After you’ve created a foundation, then begin pursuing your $10 million goal

 

Creating a solid foundation to launch yourself from will set you up for a lifetime of wealth. Then, if you choose, pursue the big fancy personal finance goal of $10 million. That way, in the pursuit of this lofty goal, if you make mistakes and lose everything, you’ll still have a solid foundation. This is much better than losing everything (like many investors did in 2008) and having to start from scratch.

 

Real Estate Is a Means to an End

 

The idea behind taking this approach is to recognize that owning real estate is not an end in and of itself. Rather, it is a means to an end. As soon as you have your foundational goals achieved, you should be working to stabilize it. It is far better to achieve a basic goal, stabilize, and move on from a place of strength, than it is to be always extending out your hand for more, more, more. Joshua believes that real estate is a fine investment class that has created many wealthy people. However, it still has it’s own problems. Without focusing on something like good financing and minimization of financing, you end up stretching to far. Then, if the market conditions change, the immature investor has to start all over again.

 

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