If Money Could Talk…

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By Reggie Brooks

Please don’t misunderstand me; I am not your miracle or your savior. I’m only a medium of exchange to be used as a tool to create your chosen lifestyle. I am not the root of all evil as some of you have believed over the years- I am vital to a prosperous society. Without me, mankind would probably do no better than a primitive agricultural society.

So many people all over the world equate me with power, probably because powerful people covet me. Want to know a secret? I’m sort of like a magnifying glass in that I have a tendency to make an individual more of what they are. Let me explain:

John Rosen of Culver City, California was a kind man. He and his wife and 3 kids attended church and contributed as regularly as their meager income would allow. John worked as a bus driver in Los Angeles and his wife Cathy was a homemaker. Having a family with 3 children assured the Rosens of serious financial challenges. Even so, John was known to give his last to someone whom he deemed as being more needy than he and his family. Everyone knew that John was a giving man.

John received a call one morning to announce that a wealthy relative had died, and that there was a very large sum of money that would be coming his way. The Rosens were saddened by the loss of the relative and happy about the impending financial windfall. It was obvious that their lives were going to make a change.

When the time came, the Rosens received a check of over $750,000! “WOW”! They were elated! They paid their bills off and got a new car. They gave some money to the church and they made some wise investments. Then they did something that I applaud – they looked around, first within their family, then outside the family, and they identified various friends and relatives that were in dire need of the Rosens financial support. Within the first 3 months of receiving that check, not only did they help themselves, they also gave necessary financial support to seven other families! They helped to make the lives of those seven other families better! Receiving that money made them more of what they originally were- a very loving and giving family.

Then there was Bart from New Mexico. Bart was a selfish, self centered man that had no time for the needs of others. Bart was also broke. He was a very poor manager of his funds, which was the reason he was broke. Bart had very few friends and no immediate family to care about. His negative attitude insured distance between him and his peers.

Bart needed to do a little grocery shopping one day, so he got into his pickup truck and drove over to the grocery store. As he pulled into a parking place he spotted a wallet on the ground. Bart jumped out of his truck, swooped the wallet up and got back into his truck. He was so excited about hopefully finding some money that he hands shook while he opened the wallet. $400! That’s what he found in the wallet! Oh, of course there were credit cards, business cards, pictures and identification in the wallet, but Bart wasn’t interested in any of that. They were introduced to the trash can as he approached the store.

He noticed something else as he approached the store. There were a couple of guys standing at the side of the store that got Bart’s attention. When Bart approached the two guys, they told him that they had a brand new 50 inch High Definition TV set worth over $2500, and they were willing to sell it right now for $600. Bart looked in the box and was thrilled to see the TV of his dreams. Bart had the extra $200 in his pocket for the TV, and he had the desire to make a killing of a deal. He told the two guys that he just needed to go into the store and pick up a few items and he’ll buy the TV when he comes out of the store.

Bart loaded the box onto his truck and sped home to enjoy his new toy. When he got home, he got his brother to help him with the box. They got the box to the living room and began to open it. Bricks! That’s what was in the box. Bricks that were meticulously bound and placed in the box! $600 worth of bricks! Is there a moral? How about, “If you are looking to steal, you’ll probably be stolen from. If you’re looking to take advantage of someone, you probably be taken advantage of.”

I’m only a medium of exchange to be used as a tool to create your chosen lifestyle. Use me, but don’t love me. I am not the root of all evil. The love of me is the root of all evil and will cause the weak to do evil things to procure me. When you use me, I will provide you with great things to enhance your life. When you misuse me, I will make your life a living hell. The choice is yours.

 

Reggie Brooks

 

Reggie Brooks, is an international speaker, author and educator, dedicated to inspiring others to achieve personal success through real estate investment. He is also the #1 Vacant, Abandoned & Distressed Property Specialist in North America.

Having risen above a life of poverty, he has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Today, Reggie delivers his personal philosophies for success at major business venues and expositions throughout the United States. Reggie attributes his success to faith, dedication to success, and to the invaluable coaches he has had along the way.

 

A House or a Home?

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By Albert Lowry

What’s the difference between a house and a home, and how do you make the best purchase choice in either case? Those seem like straightforward questions, but there’s a lot to take into consideration to make a smart decision.

First of all, a house is a property from which you expect to make money, and a home is where you live. There are some factors in common for choosing a good deal for either one of these but also some differences that you should be aware of.

In today’s market, for both houses and homes, it generally makes sense to avoid getting the biggest, most expensive dwelling you can. Buy only what you need, and you’ll have the opportunity to make improvements with the money you save. You can determine what would be right for a home size for yourself. In the case of buying houses for investment, the ideal size for a rental unit is 3 bedrooms and 2 baths. It’s what most renters want, so you have a better chance of charging a good monthly rental price and having high rates of occupancy.

Another factor that holds true for both houses and homes is the familiar real estate mantra of “location, location, location.” You can make more money from renting out a house in a desirable area. For the place you call home, you also want to be in a nice neighborhood where you enjoy living and your property retains its value.

That being said, don’t limit yourself to one area. There are good neighborhoods throughout most cities and towns, so it may be to your benefit to get out of your familiar zone and widen your circle to try to find some hidden gems.

When you’re out hunting for properties, one of the best suggestions I have for you is not to restrict yourself to drive-by shopping. A house or home may have little curb appeal, but be a real bargain for its appealing interior. You can always create curb appeal later with some sprucing up, so don’t let the initial let down of the exterior keep you from exploring further. Knowing that little trick will put you in line for some real bargains, plus you won’t be competing with others who passed up a bargain because they didn’t know this important tip.

Another common mistake people make when buying properties is to buy according to emotion rather than taking the time to do the necessary research. Judgement is distorted by emotions and that can lead to bad decisions. Instead, ask yourself whether the home you have your eye on will truly meet your long-term needs. And for a house, objectively determine its future profit potential and back that up with thorough research.

In both cases, you’ll want to consider the proximity of schools and shopping, whether it’s for your own quality of life, or for the house’s perceived value as a rental unit or as a resale. If promises have been made about future desirable development in the area, check for yourself that it really is a sure thing before paying a price that’s based on that expectation.

For any property you are considering purchasing, whether a house or a home, look for anything that has the potential to cost you a lot of money later on, even if it falls outside the scope of the professional inspection.

Now, suppose that you’ve found a property that you would like to buy. How can you get it for the price you want? I want to share with you some professional investor negotiating tips that have worked very well on a good number of deals I’ve made.

The first applies more to house purchases. To be a successful investor, it’s necessary to make a lot of offers. As a buyer, you always want to pay the price that you’ve determined to be a good value for what you’re getting. Plenty of sellers won’t see eye to eye with you, but there are others who will, and you’ll pay the right price.

There are the certain techniques that will help you achieve this. If a realtor has shown you a property you’re interested in, later try contacting the seller directly to ask some questions. Be personable and talk to him as a human being, not as an adversary. Ask him what the basis is for the price of the property. If you do a little research and find that it is not in line with comparable properties in the area, that can give you some leverage with the seller, especially if you present the facts in a reasonable and friendly manner.

If you are going to ask the seller for a lower price or for concessions, it’s a good idea to bring their expectations down with some finesse. One way to do this is to avoid showing interest in a property and point out its shortcomings in a way that allows the seller to save face and see your point of view.

You’ll find that if you perform your property search diligently, make rational judgements, submit a lot of offers, and negotiate effectively, you will pay the right price for either the home of your dreams or investment houses that have big profit potential for you.

Your partner in prosperity,

Dr. Albert Lowry

Investor Dilemma: Hold, Refinance or Sell Your Property

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By Dani Beit-Or

As you continue building up your real estate portfolio, it is easy to become complacent and not maximize the full potential of your assets.Even if your initial investments have had some success, you should have decent cash flow, equity and appreciation.  Thus you’ve reached a point where you can be content with what you have or you can substantially improve on the gains you’ve already made!  Regardless of your decision, take a quick moment to analyze your options and let the numbers help decide your next step.

When reviewing your portfolio, the goal is to figure where you will obtain the best return.  In some cases, you’ll discover that refinancing a property and using the cash to purchase additional properties will yield you a higher return.  However, there are times when holding your properties and doing nothing might be the right answer.  Let’s look at a couple of examples that will illustrate what I mean.

Property Example One:

In our first example, we will be reviewing a property that currently has a house value of $420,000.

As you can see, the initial assumption that holding the property as is in our portfolio isn’t a bad decision as it will still yield an annual return of over $19k.  However, after reviewing all three options, you’ll see that selling this property will yield a higher return on our investment and, will give us just over $169k to put into the purchase of 3 to 4 additional properties — growing your portfolio and setting you up for a much higher overall annual return.

Property Example Two:

In our second example, we are reviewing a property that currently has a house value of $140,000.  

With this property, you’ll see that we are open to a couple of different options.  Yes, you could sell this property; however, with the funds you’ll receive, you can only afford one new property.  Depending on the value of the next property, selling one to purchase another one might not yield you the highest overall return.

However, if you were to refinance this property, you would be able to purchase a second property and still maintain ownership of this property.  That option will give you two properties and the opportunity to make a much greater profit down the road.

How to Decide Which Road is Best

It’s a good rule of thumb to review your real estate portfolio annually.  Depending on the market, your current situation, and your long-term goals, you’ll want to review each of your properties individually and decide on each one and not your overall portfolio.

Looking for a little guidance in what your best strategy might be?  Then contact your Advisory Team at Simply Do It! Our industry experts are here to help you throughout your investment life-cycle and not just during the purchase process.  We’ll review your portfolio with you and work with you to come up with the most strategic plan to fit your goals and yield you the highest return on investment possible.

3 Unique Ways to Turn Your Property Into a Money-making Machine

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By Ashley Lipman

Almost any property is capable of turning a viable ROI if managed with savvy and foresight. Even bare vacant land can turn a profit if you know where to look for the right kind of customer.

Making money through real estate is as old as real estate itself (which is to say, “as old as dirt”), but we want to present here three often un-thought-of ways you can turn a profit from your land and/or building.

  1. Contract With a Cell Phone Company

There are some 300,000 cell towers in the US at present, and that number is growing by around 10,000 new towers per year. If you have vacant land in a strategic enough location, given the right zoning requirements are not an obstacle, you can make a lot of money by letting a cell phone company build a tower on your land and then collecting ongoing rent for the use of your land.

If a cell phone company approaches you with an offer, that makes it a lot easier (and gives you more “negotiating clout”), but you can also advertise or contact companies to make offers.

But don’t cut yourself out of a solid profit margin needlessly. Rent is this niche area varies greatly, from $100 to $50,000 per year (not month). In fact, you’re better off talking to an expert consultation firm to find out how to get the most cell tower rent before making any final decisions and signing on the dotted line.

  1. Run Your Rental “Empire” Smarter

Owning rental property is about as common a business venture as you’ll find, but the fact is, many landlords aren’t getting the full benefit out of their investments. There’s quite a learning curve involved in taking on land-lording, and so, it isn’t surprising if new landlords (and even experienced ones) have significant room to improve their profit margins.

The number one reason that property owners lose money on leases is, harsh as it may sound, that they lease to the wrong people. Having a unit sit empty can be frustrating, but you’re much better off being patient and upholding high standards. You need to combine two elements: an attractive “deal” to draw in good tenants and a thorough screening process to keep out bad tenants.

That means you make it clear that you will promptly respond to legitimate tenant complaints, make all reasonable and necessary repairs, don’t invade tenants’ privacy, provide (if possible) a tenant-only laundry facility and a game room/social lounge, and of course offer only well renovated and attractively decorated units. You charge slightly more than your target ROI, then you grant a year’s-end discount for paying rent on time or otherwise reward reliable, timely payers.

But also have strict rules for not disturbing other tenants, not destroying your property, and as to late fees and eventual evictions. Also monitor tenants for illegal subletting and other ploys. If all that sounds like work, don’t be afraid to hire a property manager: with the right policies in place, you can still do well. And you can still afford to be reasonable, patient, and generous with tenants with legitimate reasons for occasional late rent. It’s all a matter of having reliable, good renters in general, not perfect renters who never have a problem.

  1. Use Your Home to Generate Extra Cash

Another angle for homeowners is to simply use their home itself to generate extra cash. There are many ways to do this, so we can’t quite be exhaustive here. But here are a few prime ideas:

  • Set up a home office. Renovate, say, your attic or basement, or simply use a spare bedroom. If you can work from home even part of the time, you will save lots of money on transportation expenses. You’ll need a computer and Internet connection, but most people already have that anyway, so it’s not an extra cost. And you can typically deduct the cost of your home office from your taxes each year as well.
  • Offer storage and/or parking. Storage facilities are very popular these days, and they charge a hefty price monthly in many cases. If you have an extra shed, garage, or room, (or if you’re willing to put a new outbuilding up for the purpose), you may be able to attract people willing to pay a much-lower-than-normal monthly storage-space rental fee. Or, if you live in a neighborhood nearby a sports stadium, concert hall, or other popular venue, you may be able to advertise cheap, convenient parking and frequently get takers.
  • Take on a roommate. Anyone with a spare bedroom and bathroom, and who is willing to share their kitchen and living room with a “reasonable person,” should consider taking on a roommate. It’s easy to advertise online, in the newspaper, or on local bulletin boards, and you can save your new roommate money with lower rent at the same time you make extra money yourself and maybe gain a new friend.

 

Invest for Success!

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By Dr. Albert Lowry

You no doubt want to be a successful investor, but you need to know how to move beyond the wishing stage. I have some tips to help you get started and learn what to do to keep yourself on the right path. We’ll take a step-by-step look at how you too can go from just a dream of being a real estate entrepreneur, to having your own real estate portfolio that is your key to financial freedom for life.

First, you must set goals. Don’t just think about them, but instead put them in writing. The act of writing has the effect of making your goals more real and getting them into the subconscious part of your brain, so that they are always there in the background, motivating you.

Another important point to understand to prepare yourself for success, is that risks and sacrifices are involved. You already know that just about anything that has big potential rewards means that you need to push yourself out of your comfort zone, and this is no different.

Simply put, if you don’t make the effort, you won’t experience the reward. Here’s the level of effort that I suggest: at least one hour per day devoted to studying real estate investing concepts and their real-world applications.

On weekends especially, you have the opportunity to explore the real estate market in your own area by touring neighborhoods, looking at houses, networking with people, and building up a base of knowledge about prices, amenities, desirable areas, and more. You’ll sacrifice the time that you would have spent napping or watching TV, but the potential payoff is long-term financial independence for yourself and your family.

As I mentioned, there is risk involved. Any investment that can make money for you can also lose money. That’s a fact of life, but there are ways to tip the balance sharply in your favor. You can protect yourself by ensuring that contracts are written to your advantage, by paying attention to both what is in a contract, and also what’s not. It is imperative that you read and understand everything that is contained in the contract, including all clauses, and also foresee any contingencies that are not mentioned. You may even choose to have a real estate attorney to help you review property contracts to be sure that there are no “gotchas.”

Now, I promised that I would provide you with step-by-step instructions to Invest for Success. This is a quick thumbnail sketch of the 7 steps involved in the process and important points to know. You’ll tailor a plan for yourself, but this will give you a good start.

  1. Develop a simple plan. Keep your real estate portfolios local and plan to focus on single family homes at the beginning.
  2. Learn your market. We touched on this earlier because it’s important to know prevailing costs per square foot, develop the capability to assess quality, and have a good working knowledge of which amenities are desired in your area. That will give you the ability to spot bargains. Using a mentor who has succeeded in real estate investing can help you fast-track this process.
  3. Think like a businessperson. Like any business, you will want to buy at wholesale and sell at retail. You’ll make businesslike assessments of each property to determine whether it should be held for rental income or sold for resale profit.
  4. Learn to identify hidden bargains and act quickly. Acting quickly does not mean acting impulsively, though. You still will carefully structure your contracts with contingencies and the option to assign the contract, which will protect your interests and profit potential. If your plan is to flip, be sure beforehand that no “major surgery” on the property is required. Any improvements you plan to make should be visibly beneficial and have the potential of raising the rental price or the resale value.
  5. Learn landlording. Even if you plan to turn the task over to a professional management company, you still need to know the fundamentals of how to manage properties and tenants. Otherwise, how will you know whether a management company is doing a good job for you, or not?
  6. Establish trade accounts with companies such as building supply stores. This will enable you to save money, get into the loop with local tradespersons and other real estate professionals, and build your line of credit. It will also help you establish good bookkeeping, which gives you a sound basis for business decisions on your properties. I suggest keeping a daily log for your expenses. You’ll be glad you did when you’re doing your recording keeping, and at tax time.
  7. Borrow money for your investments. You can use banks, 50/50 partners, or private individuals. When you use seller-assisted financing, creative financing terms are often possible, such as shared future appreciation on the property or no-money-down deals.

In summary, decide what you’d like to do, and ensure that you have the proper knowledge and formula for success to make it happen. Remember that nothing at all happens for you unless you take action, so why not get started on your dream today?

Your partner in prosperity,

Dr. Albert Lowry

The Solution to the Investment Guru Gap

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By Russ Keith

How did you get started in real estate investing?

Maybe someone else…a friend, family member…or even your spouse, was bitten by the property investing bug and you caught it.

Or maybe you were invited to a weekend property investing seminar and found yourself thrilled with all of the prospects for financial freedom that property investing holds.

There’s no doubt about it…investing in real estate can be a real life changer, but what happens when all of the energy and excitement you felt after the seminar begins to fade?

After all, investing in property is no cakewalk…if it were, everyone in the world would be doing it.

And as fun and educational as a property seminar can be, what happens when everyone packs up and goes home, and you’re left with the feeling of “what now?”

Maybe you start by watching the videos on the guru’s website. But what happens if confusion begins to set in after watching them? Or maybe you understand what you need to do, but you can’t get answers to specific questions about your market.

What do you do then?

More than just an education in investing

Through their investment meetup group called Crush It, REI Systems Academy founders Russ Keith and his wife Kim noticed a trend.

Some investors would come to the meetings for about 8 months or so, but then would simply disappear. When Russ called them up to find out how they were doing, he discovered these investors had run out of money or just got frustrated, disheartened and then quit.

When he drilled down further into what was going on, Russ discovered that once the “new” had worn off from the investment seminars these people had attended, they were left without a compass.

The videos, website and other material left by the property investing guru couldn’t really help the investors with the mental shift they needed to move from an “employee”  to a “business owner” mindset.

Nor could it address the particulars of the investors’ marketplace.

Filling the guru gap

REI Systems was created with the goal of filling in the gap between the education investors receive at property seminars and the day to day investment decisions every investor needs to make.

What makes REI Systems different?

Investors receive a real education in property investing, from real educators who have been teaching high school and university level students for more than two decades!

Russ and Kim have also flipped properties for nearly 30 years, earning between $14,000 and $80,000 profit on each homestead flip.

How does it work?

You’ll meet with Russ and up to 9 other investors in a classroom setting once a week for three hours over a 16 week period. At the end of each class you’ll be given homework and told what to do, step by step.

If you have any questions between sessions, Russ is always available to help. He’ll answer your question(s) and if he thinks it can help the rest of the class he’ll share the information with them at the next class.

When you begin putting your knowledge to the test, Russ will be there every step of the way. He’ll even walk with you as you inspect a potential investment property.

In fact, if Russ hasn’t heard from you in a while you can expect to receive a phone call to find out what’s going on.

Your success is that important!

Bottom line, you can pay tens of thousand of dollars for one 30 minute call a week and a bunch of videos with a travelling investment guru, or spend much, much less and be mentored by local investors – and educators – who know the market and know what it takes to succeed in that market.

It’s your call.

 

 

Property Value: The Capitalization Approach

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By Dan Harkey

When arranging a loan or investing in real estate, understanding the use of capitalization approach (“Cap Rates”) is critical to the decision-making. This subject is important to commercial realtors, lenders, developers, and investors.

Definition of Capitalization Rate (Cap Rate)

Cap Rates represent the ratio of Net Operating Income (“NOI”) to the property asset value (NOI / Value = Cap Rate). The income capitalization approach does not consider whether the property is free and clear with no debt service. NOI is simply gross rents, less a vacancy allowance, less operating expenses. If you have similar properties with similar characteristics in a similar geographical location that have recently sold in arm’s length cash transactions, you can calculate the comparison cap rates. Also, cap rates may vary, even in the same geographic location, depending upon the multiple types of properties.  Examples are, Class A vs Class C office, industrial, apartments, new modern styles with amenities vs older dated properties.  Additionally, the strength of the tenancy from national credit tenants with long term leases, vs a mom and pops’ month to month tenancy would result in a different cap rate. Most likely the mom and pop tenancy would reflect a higher cap rate. An exception would be where the national credit tenant locks a lease/rental rate that does not increase as the market dictates or anticipates, reflecting what is referred to as below market rent. The mom and pop, on the other hand, could be converted to a market lease relatively quickly, by either acquiring a new tenant or by renegotiating the lease with a higher rent

Market rents should be used rather than actual rents.  In most cases, actual rents are lower. When there is a lease up period, such as with new construction of an income producing property, future cash flows need to be estimated to the point of income stabilization, then the future stabilized income is discounted, utilizing an estimate of a capitalization rate, and a discount rate. Work with a good appraiser on this?

Once the market Cap Rate has been determined, you can apply it to the NOI and cap rate analysis of the property under consideration to indicate the probable market value.

At this point, I want to credit competent commercial appraisers, who can assist us to find the correct Cap Rate. I would not try to do it myself, without the assistance of an appraiser with local experience.

Let’s say for example that: The market Cap Rate for a commercial property with triple net leases (“NNN”) has been determined to be 6.5%. The 10,000 square foot multi-tenant property under consideration generates monthly rents of $1.50 per foot. After applying a 10% vacancy collection and loss factor and expenses of 5% for management and reserves, the NOI is $153,900.

10,000 sf X $1.50 = $5,000 Per mo. X 12 Mos. = $180,000 gross income

$180,000 – $18,000 10% vac. = $162,000 – $8,100 5% exp. = $153,900 NOI

$153,900 NOI / .065 Cap Rate = $2,367,692 asset value

From an investment standpoint Cap Rates can also indicate a prevailing rate of return before debt service and can help a lender/investor to measure both return on invested capital and profitability based on cash flow. An informed lender/ investor should understand that there may be dramatic variations in a property’s value when unsupported or unrealistic Cap Rates are applied.

Why do we use Cap Rates?

The capitalization approach is used as a “comparative method” of valuing property based on similar geographic locations, similar properties, and similar risks that would yield a comparable rate of return. Once the value is established, the loan to value ratio can be calculated to determine if it falls within loan underwriting guidelines.

Of course, Cap Rates are only one metric. They represent a snapshot of the market at the time of investment and they do not take debt service or financing costs into consideration. Therefore, if a borrower is going to finance his investment, as most people do, then further analysis such as cash on cash return would be useful. Sophisticated loan underwriters and investors will also do an Internal Rate of Return calculation. These calculations assist in establishing that the collateral property is not only income producing but a worthwhile investment.

Cash on Cash Return

Cash on cash return is a quick analysis that can be done to determine the yield on an initial investment. It is developed by dividing the total cash invested (the down payment plus initial cost), or the net equity into the annual pre-tax net cash flow.

Assume the borrower purchased the property which costs $1,200,000 and provides an NOI of $100,000, with a $400,000 down payment representing the equity investment in the project. The cash on cash return for this property would be:

$100,000 / $400,000 = 25%

If the borrower were to purchase the property for all cash, his cash on cash return would be:

$100,000 / $1,200,000 = 8%

It is clear from this formula that leveraging or financing real estate transactions will yield a higher cash on cash return, provided the transaction is financed at a favorable interest rate.

Internal Rate of Return

The internal rate of return (“IRR”) refers to the yield that is earned or expected to be earned for a given capital investment over the period of ownership. The IRR for an investment is the yield rate that equates the present value of the future benefits of the investment to the amount of capital invested.  The IRR applies to all expected benefits, including monthly and yearly cash flow and the proceeds from resale at the termination of the investment. It can be used to measure the return on any capital investment, before or after income taxes. Ideally, the IRR should exceed the cost of capital.

Is there an ideal Cap Rate?

Each growth/investor should determine their own risk tolerance that will reflect the ideal for their portfolio. A lower Cap Rate means a higher property value.  A lower Cap Rate would mean that the underlying property is more valuable but that it may take longer to recapture the investment. Whichever Cap Rate is targeted will represent the annual return overtime (before financing costs and taxes) an investor can expect to make on the investment at the time the property is acquired. If investing for the long term one might select properties with lower Cap Rates. If investing for cash flow, look for a property with a higher Cap Rate. It’s valuable to look at historical Cap Rates and Cap Rate trends on the specific property type in a specific geographical location. Declining Cap Rates may mean that the market for your property type is heating up. A Cap Rate that is either at the top of the range or at the lower end of the range is likely to change and it may be wise to adjust the analysis and/or investment strategy accordingly. And make certain, when comparing Cap Rates, to compare the same geographical locations and property types, apartments to apartments.  For Cap Rates to remain constant on any given investment, the rate of asset appreciation and the increase of NOI it produces will occur in tandem and at the same rate.

Below are examples of the affect changes in NOI and/or Cap Rates on asset values:

As NOI increases and Cap Rates remain the same, asset value increases.

NOI CAP RATE ASSET VALUE

$300,000 / .06 = $5,000,000

$350,000 / .06 = $5,833,000

$400,000 / .06 = $6,666,666

$450,000 / .06 = $7,500,000

The effect on Asset Value when the Cap Rate varies.

NOI CAP RATE ASSET VALUE

$500,000 / .03 = $10,000,000

$500,000 / .04 = $ 8,333,333

$500,000 / .05 = $ 7,142,857

$500,000 / .06 = $ 6,250,000

Cap rates are driven by property type, geographic location and market sentiment. During the recent recession, as property values fell, Cap Rates increased dramatically for some property types in certain areas of the country. The improving economy has reversed that trend.

Correlation Between Cap Rates and US Treasuries  

The US Ten Year Treasury Note (“UST”) is deemed to be the risk-free investment against which returns on other types of investments can be measured. Interest rates on UST have been on a broad decline for many years but have recently began to rise.  There is now concern that as interest rates begin to rise, so will Cap Rates will rise and consequently there may be reduction in asset values over time? With so many uncertainties in the market, and growth projections constantly being revised, the spread between UST and Cap Rates have not remained constant.

Also, the discussion of the above, affect of cap rates resulting from artificially low interest rates, inflationary expectations, and anticipated increased interest rates need to be discussed in another article.

Summary

Cap Rates are a good starting point in analyzing a property’s value, but they should not be the only analysis. It is prudent to look at the cash on cash return and the internal rate of return as well. Factors such as changes in NOI, vacancy rates, and changes in neighborhood property values are just a few other considerations. Also recognize, that Cap Rates may vary widely in different geographic areas. Property appreciation, perhaps one of the greatest reasons for investing in real estate, is not part of the Cap Rate calculation. For investors, the tax benefits of owning commercial real estate may, in and of themselves, be the driving force to make such an investment. If the property is to be leveraged, then there may be write-offs for loan fees, interest expense, depreciation and investment expenses. Taking all these factors into account can help achieve the basis for making a sound business decision.

As interest rates go up, will this automatically cause Cap Rates to rise, and values to go down. Not necessarily in the short term. Remember that increased debt service based upon higher interest rates is not considered in the capitalization approach.  But, over time as interest rates go up, borrowers will feel the sting of higher debt service payments.  Some property transactions may become less appealing financially.  As purchasers and borrowers elect not to purchase, that may compound and create more unsold inventory.  Some sellers may get desperate and reduce price to sell quicker.  The lowered price would result in an increased cap rate.  On a macro level, this could result in lowering all real estate prices.

How dramatic can lowered real estate prices be over time? As we witnessed 10 years ago that the contagion effect could spread and result in dramatically lower values, and substantially increased Capitalizations Rates.

Dan Harkey is a business and private money financial consultant. I have been active in the real estate and financial services industry since 1972. I have taught courses on private money lending and underwriting of commercial/industrial properties at over 350 educational seminars. This and many other articles I have written are available to read on my website Danharkey.com

You may also reach me at my office (949) 521-7115 or by e-mail at [email protected] you can also find me LinkedIn.

Dan J. Harkey

Business and Private Money Lending Consultant

Mobile: 949.533.8315

Office: 949.512.7115

[email protected]

 The article is for educational purposes only and is not intended as a solicitation

 

Molding a Million Dollar Marketing Mind Set

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By Kathy Kennebrook (The Marketing Magic Lady)

When you are getting started in the real estate business, I know that putting a solid marketing plan in place is going to be one of your first priorities. This will be the main strategy that will separate you from your competition.

Decide what your focus is going to be regarding the type of properties you initially would like to purchase in your Real Estate Investing business and create a plan of action that will begin to bring in motivated sellers in droves and create deals for you. If you don’t know what exit strategies to use, make getting educated one of your top priorities. Getting a good education in the buying and selling of real estate will quickly separate you from most of your competition. You can check out my website at www.marketingmagiclady.com for some really powerful tools for your Real Estate Investing business.

Don’t be afraid to do what those around you will not. Dare to be different and consistent in your marketing efforts and the results will be amazing. Niche your marketing and become an expert in your market place. Become educated within your market place so you know what your property values are and what your personal target market is going to be.

The first step that I take is to find out what my real estate market is doing. Are there a lot of pre-foreclosures? Do you live near a military base where a lot of people are being transferred? Are you in an area where there are a lot of ugly houses you can purchase inexpensively and then wholesale? Have you run demographics to find out what kind of income levels there are within your market area? Is the market slow and are there a lot of houses for sale?

If this is the case, then you know that it is a buyer’s market and there are a lot of good deals to be had. You just have to learn to be a little more creative in the way you sell your properties. If there are very few houses for sale and they are high priced, then it is a seller’s market and you need to adjust your marketing strategies accordingly. This is all part of discovering your niche within your market. Don’t allow yourself to be influenced by various advertisers or those who profess to be real estate experts in your area, take the time to discover what works best for you in your marketplace and stick with it.

The next step I suggest is to figure out what your marketing budget is and which marketing strategies will reach the highest number of sellers within your budget. For example, your budget may include signage, business cards, direct mail, flyers, ads, websites or a combination of all of these.

You should always have between three and five marketing strategies in place at any given time so you are reaching the largest segment of your market in a variety of ways. This way a higher number of potential sellers will see your message. For example, you may reach sellers by using direct mail that would never see your message in any other way.

I continue to test and track my results just as you should so you can make sure the marketing dollars you spend bring in the highest number of quality leads. If necessary drop the things that don’t work well and put that money back into the marketing techniques that are working well for you.  This is also how you will learn which marketing strategies work best for you.

Track your real estate market changes so you can change your marketing accordingly as you go along. Using this strategy in your real estate investing business will assure that you always have the highest number of quality leads possible coming in. More quality leads mean more deals and more dollars coming into your business.

Be aware of the special problems of your market. Are there a lot of layoffs? Are there a lot of folks who are part time residents? Is yours a very high end market with a lot of luxury homes? Discover these special differences and market directly to these folks. Figure out what it is that everyone before you has done and then you do it differently. Believe me when I tell you that this one strategy alone can make you big profits in your business.

For example, in my market almost no one does direct mail on a consistent basis, so I have made this my personal niche. By doing this, there is virtually no competition for properties whatsoever. Figure out what your niche is by figuring out what your competition is not doing and do more of it yourself. We created specific direct mail campaigns targeting specific sellers who are more likely to work with us. Then we send out our message on a residual basis and watch the deals continue to come in.

Make sure you take the time to begin to build your dream team along the way. These are the people who are going to be helping you to locate deals and get them closed and then sold. This is how you make huge profits in the real estate business, by surrounding yourself with team players who want to see you make money so they can make money as well. There are many ways to use your vendors as “bird dogs” to find deals for you that you have virtually no marketing cost in whatsoever until you actually purchase the deal. At that point you would probably want to pay them a finder’s fee. This is a good way to keep them motivated to help you find even more deals.

I suggest that you make sure that you take a portion of the profit from each deal that you do, especially in the beginning, and put it back into your marketing so you can continue to grow your business. At the point at which you decide you have enough deals coming in each month, you will be able to determine exactly what your monthly marketing budget needs to be in order to bring in the number of deals that works for you.

Remember to set specific goals for your business and yourself and strive to meet those goals each and every day. By doing this, you are planting seeds of success for today and for your future. You won’t be able to see a clear picture regarding where you began or where you are going unless you do this. This is one way to keep focused and keep your business on track.

For everything you need to know about locating motivated sellers, buyers and lenders for your real estate investing business and creating a business plan to buy and sell properties quickly, visit Kathy Kennebrook’s web site at www.marketingmagiclady.com. While you are there be sure and sign up for our FREE monthly newsletter!

Kathy Kennebrook

Kathy Kennebrook is the ultimate success story. She spent over 20 years in the banking industry before discovering the world of real estate. After attending some real estate seminars this 4 foot 11 mother of two got really excited and before you know it she’d bought and sold hundreds of properties using none of her own money or credit.

Kathy holds a degree in finance and has co-authored the books- The Venus Approach to Real Estate Investing, Walking With the Wise Real Estate Investor, and Walking With the Wise Entrepreneur which also includes real estate experts Suze Orman, Robert Kiyosaki, and Dr. Wayne Dyer.

She is the nation’s leading expert at finding highly qualified, motivated sellers, buyers and lenders using many types of direct mail marketing. She is known throughout the United States and Canada as the Marketing Magic Lady. She has put together a simple step-by-step system that anyone can follow to duplicate her success.

Kathy has been speaking throughout the country and across Canada for over 14 years and has shared the stage with Ron LeGrand, Dr. Phil, Dan Kennedy, Mark Victor Hansen, Ted Thomas and Suze Orman to name a few.

Kathy is going to share with you how she generates a seven figure income by mailing a handful of letters throughout the year to highly selected targets by knowing exactly what to send them, who to send them to and exactly how to deliver her message. She will teach you the secrets of pre-screening and automating your marketing and follow up systems to put your entire Real Estate business on auto-pilot.

 

8 Simple Steps To Riches In Real Estate Or In Any Other Field, For That Matter

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By Reggie Brooks

Before I got involved with real estate I tried various other potential money-making ventures.  I created a company called Advanced Video Productions, and spent the first 4 weeks designing the all important ‘logo’.  I might have thought that my income was totally dependent on a well designed, slick logo. I hadn’t learned anything about time management yet.

I created another company that sold satellite systems. This was way back when satellite dishes were huge.  They could have been mistaken for UFO’s.  My  success?  I sold 1 satellite system, period.  And that one system was sold to a friend.  I hadn’t learned anything about marketing. 

Another time, I got involved with a Multi Level Marketing group and ended up with a garage full of water filters.  Well, it really seemed like a good idea at the time…..

Through the many successes and failures that I’ve either experienced over the years or witnessed others experience, I’ve identified 8 steps you can take that can put you on the fast track to wealth.  These are  simple, powerful steps that really work!!

The 3 Cornerstones Of Success

I’ve taken a lot of seminars and classes over the years, and I’ve learned that personal and financial growth requires an investment. You must be willing to invest your money and your time. Then you must make a commitment to discipline yourself. What good is having a superior knowledge  of creative real estate if you don’t discipline yourself to use it?  Many successful real estate investors have invested many thousands of dollars in their creative real estate education.  Their libraries are bulging with books, tapes, CD’s, DVD’s, and any other form of media necessary to put money-making techniques into their heads.  They understand the power of “The 3 Cornerstones Of Success”.

The 3 Cornerstones Of Success are like a 3 legged stool. As long as there are 3 legs, the stool will support your weight. However, if you loose just 1 of those 3 legs, you’ll crash to the floor.  This is a perfect parallel to the 3 Cornerstones Of Success.

  1. The 1st Cornerstone Of Success is continued education. As successful investors, we make our money buying distressed property from motivated owners. In order to do that, we must learn how to creatively solve the problems that owners have with their properties.  None of us were born with this creative knowledge. We have to invest our money and our time into our education, and we have to learn the smart, money-making principles and techniques.  Then, we use these smart, money-making principles and techniques as tools to creatively structure win-win deals. This is why we continue to read books, listen to tapes, and take classes.  This brings us to the 2nd Cornerstone Of Success.
  1. The 2nd Cornerstone Of Success is discipline. You must discipline yourself to use the smart, money-making  principles and techniques that you’ve learned.  This doesn’t necessarily mean that you have to spend 15 hours each day to work your business.  It could mean that you simply discipline yourself to write that offer, or send that letter out, or talk to that owner or neighbor, or anything else that you been procrastinating about.  So much of the time we’re so close to success, but we give up just before we achieve it.  Most of the time we give up because it is to scary or to painful to proceed on.  Anticipating an owner who says no instead of yes can be both scary and painful.  Dig down as deep as you need to and find that spark of passion that you can use to generate the discipline that you need.  Use it like a magic carpet to fly above the pitfalls to success.
  1. The 3rd cornerstone is productive action on a daily basis. You must continue to learn, you must discipline yourself to use what you’ve learned, and now you must put it to work on a daily basis.  It may be that the productive action of the day may only take 15 or 20 minutes. Success comes to the person who has made him/herself worthy of the success that they seek.  And you make yourself worthy by following the 3 Cornerstones Of Success.  Then, you’re prepared whenever opportunity comes along.

People sometimes ask me, “Come on, Reggie, tell me”.  “What’s the secret to being successful in real estate”? There is no one individual ‘secret’  that will make you an instant millionaire in real estate.  It’s more of a matter of doing a whole lot of little things correctly that empowers us to create a tremendous wealth.   Doing smart things systematically toward your goal every day will breathe life into the 3 Cornerstones Of Success.  There is nothing on this earth that can stop you if you simply follow the 3 Cornerstones Of Success. Here are a few other ideas that can help you to achieve your own level of success.

  1. Don’t Take Your Financial Advice From Broke People

When I first got involved in real estate, I let everyone know that I was launching into a new career.  I told them that I was studying courses on how to perform creative real estate deals that would make me rich.  I told them I was learning  about no money down deals, how to get owner financing, how to rehab to increase profits, and so much more.  I was so excited about my new real estate career that I had real trouble shutting up about it.  As a matter of fact, I think that I got a little cocky.  I’d tell anyone who would listen to me about the wealth that I was going to build in real estate.

I finally realized that I was sharing my excitement with the wrong people.  I was sharing my dreams with people who had no respect for them.  They would find ways to tell me that my dreams would never work. “There’s no such thing as a win-win deal”.  “When someone wins, someone else has to loose.”  They also said things like, “You can’t do no money down deals because there’s got to be some money in the deal someplace”.  They never stopped to think that the money doesn’t have to come from you.  It can come from the seller, the lender, the realtor, from private sources, or a great number of other places. It doesn’t have to come from your pocket.

This is when I realized just how important it is to share your ideas with the right people, and not the wrong people.  Share your ideas with other investors or students who are of like mind – either doing deals and making money or learning and growing in creative real estate education.  If you share your dreams with people who are not educated or not experienced in creative real estate techniques,  you leave yourself wide open for opinions.  When you get opinions from people that you respect, you have a tendency to believe them.  This can be especially hazardous for new investors.

Always ask yourself the question, “By what authority does this person give me this advice.  Has he/she been trained in this field?  Has he/she worked in this field and made money?”  If the answers are no, don’t listen to him/her.  No matter how much you love or respect the person, you have to protect your financial future from well meaning people who are not qualified to give you financial guidance.

If you have a new born baby, you wouldn’t dare even think about exposing that baby to the harsh elements that could make your baby sick.  You wouldn’t leave your new born baby outside in the rain or the snow.  You wouldn’t leave your baby in the heat of the sun, or with unsavory characters as baby sitters.  Treat your new real estate business just as you would your new born baby.  Expose your baby to the people who can help it grow big and strong, but keep it away from those who will do it harm.  And the difficult part is that for the most part, our uninformed friends don’t mean any harm.  But if you let their unfounded opinions influence you, it can be fatal to your business.

If you will continue to learn the right things – the things that create win-win situations between you and the owner – the things that make you money, now you’re ready for the next lesson.

  1. Don’t Get Greedy

My friend and mentor, Dr. Albert Lowry tells his students that it’s OK to be a bit of a pig (I call it good negotiating). It’s OK to structure a deal where you make a lot of money.  But don’t be a hog. You can blow a good deal by trying to hog all the profits. Don’t forget about the seller’s needs.  Dr. Lowry says, “Pigs get rich, but hogs get slaughtered”.  Makes sense, doesn’t it?  Keep this phrase in mind.  We’re going to talk about a principle that was so important in changing my life.  As we discuss this principle, keep in mind that you can get rich faster by doing a lot of $20K to $30K deals than holding out for that big $100,000 deal. So, without further ado, I present to you “The Win Principle”.  Caution: This principle works best when used with The 3 Cornerstones Of Success, which we talked about earlier. Here’s how it works:

The “WIN”  Principle stands for “What’s Important Now”.  Once you’ve educated yourself in creatively investing in real estate, you’ll know what you should be doing at any given time.  Whether it’s using what you’ve already learned, or, if you’re a little short on knowledge, maybe taking in a seminar, workshop, bootcamp, or listening to books and tapes.  It may be that you need to take a break, or the rest of the day off, or even a vacation.  Whatever it may be – you know deep inside exactly what you should be doing at any particular time.

If you will discipline yourself to do What’s Important Now, you WILL accomplish your financial goals.  What do you want?  Do you want to be rich??  You can be rich!!  If you will diligently exercise the 2 principles that I’ve outlined above, you will accomplish your financial goals!!!  Does it sound easy?  It does to me.  I think it’s a simple thing to do, but it’s certainly not an easy thing to do.

  1. Failing To Screen Your Sellers

As investors, we make our money when we buy property from motivated sellers.  I had to find that out the hard way.  Very early in my career I found an little old lady that lived in a huge old house in Hollywood, California.  Her name was Alice Jordan and she was part of a big mailing campaign that I was working at the time. When she responded to one of my letters, it felt like my heart was going to jump out of my chest an on to the floor!!  My  palms were sweaty, and my voice trembled.  She said that she wanted to sell her house!!  We immediately made an appointment to meet at her house the very next day.

It was sheer agony having to wait until the next day to meet with the lady in the big house.  The thoughts running through my head were non-stop!  Will she contact someone else?  Will someone else contact her?  Maybe a family member.  What if she changes her mind?  Am I really ready for this?  This is a huge step!  What if it doesn’t work?  What if I fail?  I don’t want to loose any money.   Does any of this sound familiar to you?  I think we all suffer with Uncontrollable Thought Syndrome.  There’s nothing like doing a good deal and making yourself $20,000 to $40,000 to make all those negative thoughts disappear.  You might still have those uncontrollable thoughts running through your head, but they’ll be a little different.  Let’s see, I wonder if we should go to the Bahamas, or if we should go to Hawaii?  Should I go for the Mercedes, or should I go for the BMW?

Back to the little old lady.  For three weeks, we went back and forth.  Every time I thought we were close, she’d throw some garbage into our deal that would bring negotiations to a halt.  Then I’d call her after a few days, we’d reach what I thought was an agreement, and we would resume.   This would happen over and over.  You’d think I’d have gotten a clue about this one, but I didn’t.

I happened to be talking with a friend who was a fellow investor, and I mentioned Ms. Jordan, the lady that I was dealing with, and how frustrated I’d become.  He looked at me with a little sly smile on his face.  He said, “You mean Alice Jordan”?  I said yes.

Needless to say, I was stunned.  The uncontrollable thoughts started again.  I quickly took control by feebly asking, “Uh, how do you know Ms. Jordan”?  His answer cut like a knife.  “Everybody knows old Alice.  She gets lonely and calls on someone’s newspaper ad or direct mail piece.  That’s how she entertains herself.  She never leaves the house.’

I was crushed.  I was merely an old lady’s entertainment.  Everyone else knew about Ms. Jordan. I didn’t.  My friend even called her by her first name!!  That’s when I learned how important it is not to waste time on sellers that are not motivated.  By the time you make an offer based on your profit criteria and you get a counter offer back from the seller, you’ll know whether  you have a motivated seller or not.

  1. Lack Of Focus

There are so many different ways to make money in real estate.  You can buy, fix up and sell.  You can buy and hold for cash flow.   You can wholesale to other investors.  Come to think of it, you can even make money without ever owning the real estate.  You can buy mortgages, and you can lend money and charge hefty interest rates.  And this is just to name a few.  It’s easy to see how a new investor can jump from one strategy to another.  A new investor is usually excited about the prospect of getting money worries out of the way, and as a result they’re usually more than just a little impatient.  The expectations are high, but the patience is low.

Success in real estate investing is directly dependent on your ability to take action, analyze your results, make your adjustments and take action again.  It’s a sweet little cycle that you use to get rich.  A success cycle, if you will.  The best way to capitalize on this cycle is to focus on a system that is simple and easy to work, like Creating Wealth With Abandoned Properties.  As you begin to work your system of choice, make sure you continue to learn from your results while you fine tune and tweak your business.  This is how you become a master of your investment system.  This is how you get RICH!!

You must stay focused on your goals.  I read a book that my wife gave me when we first got together, called the Peak To Peak Principle.  This was another one of those life changing experiences.  I say experience because that’s what it was.  It wasn’t just ‘reading a book’.  It was the experience of learning a principle that could help make me rich.

Here’s how the Peak To Peak Principle works.  Visualize yourself as a mountain climber doing what you do – climbing a mountain.  If  your goal is to reach the top of this mountain, then you’ll do well to keep your focus on your goal – the peak of this mountain.  However, if your goal is to conquer other peaks then, before you reach this peak, you must shift your focus to the next peak.  If you don’t shift your focus, you allow the first peak that you reach to become a plateau.  It will take a lot of energy to get your momentum moving in the right direction again. 

When you relate this principle to your real estate business, your plateau becomes a comfy little haven where you’ll find yourself sitting and relaxing.  You might eat a sandwich, read a book, or listen to the radio.  You might be so comfortable that you decide to spend the night, or the week, or the month, or the rest of your life.

Since you have your momentum going in the right direction, go with the flow.  If you apply the Peak To Peak Principle to your real estate business, you can get to your goals a lot faster.

I THINK WE’VE JUST FOUND THE SECRET TO GETTING RICH!!   It’s a matter of learning these and other ‘wealth-building’ principles and using discipline to operate my real estate business under those principles.  For the first time, I can see the how of getting rich!

Having the scientific type mind that I have, that just made this revelation even more powerful.  I can actually see in my mind’s eye exactly how I’m going to get rich!!  I floated around on cloud 9 for a long time after that.  As a matter of fact, I’ve never come down, and I never will.  It’s almost like having a ‘secret weapon’ that most other investor don’t know much about.  Learning and using the wealth-building principles can give you the edge over your competitors.

  1. Managing Your Fears

Every human being on the face of the planet has experienced fear in some form or another.  I’d even be willing to bet you that every animal, insect, rodent, and every winged creature as well, has experienced fear.  Fear definitely has a useful place in our lives.  It’s purpose is as a early warning system.  To alert us about possible dangers so that we can modify our path and create a solution to eliminate the danger. Fear was never meant to scare us into non-action.

Here’s an interesting idea.  I believe that there is a purpose for every living creature on earth.  Beavers build dams, humans solve problems.  If you take a careful look around, you’ll see a whole lot of stuff that was created by the human species.  If you look deeper, you’ll find that the purpose of each one of these inventions was to solve a problem.

It has been said that we learn better by doing, rather than by reading.  In other words, at some point, you’re going to have to get out there and get your feet wet – you’re going to have to get started.  I know, I know…  It’s scary.  Whenever you launch into something so big and significant that it can change your life, you’re going to get a little scared.  Here’s a good way to handle your fears:

This solution to handling your fears is so simple that even I was able to master it.  First of all, arm yourself with an abundance of knowledge about the situation.  Be careful not to over-analyze the situation.  You only need enough facts to make an intelligent decision.  If you have a fear of writing your first offer, you may have to pick up a book, or take a seminar.  You might have to make a bunch of copies and practice writing offers. Do what ever you have to do in order to arm yourself with the knowledge that you need.  Then, keeping the WIN principle in mind, you simply take action.  Isn’t that simple?  It really is.  The one antidote for fear is action.  Intelligent, systematic action will not only make fear disappear, it can also make you rich.

Sometimes we have a certain type of fear that robs us of an important part of our growth.  We’re afraid of making mistakes.  Even though we’ve only been involved in real estate for 5 minutes, we have this crazy notion that we shouldn’t make mistakes.  After all, we did take that 1 ½ hour seminar last year, we should be rich by now.  If you have a problem admitting and accepting mistakes, you’re missing out on one of the greatest tools that you could have in the creation of wealth.

I was in my early 20’s when a 17 year old kid taught me something that will be with me for the rest of my life.  He taught me that mistakes are our friends.  He said that every mistake that we make has within it a lesson for us to learn.  Some people are so busy trying not to make mistakes that they totally miss the lessons in the mistakes that they do make.  By learning these lessons, then making the correct adjustment in our paths to success we can get to our goals at a very fast rate of speed.

What if you were able to look into the future.  You might see that, in order for you to become a millionaire, it will take you making 175 mistakes, learning the lessons in each of those mistakes, applying those lessons to your business, and moving on to the next mistake.  You might find yourself jumping out of bed and hurrying to meet the day!  You can’t wait to make the next series of mistakes, because you know that at the end of your mistake making, lesson learning day, you’ll be closer to your goals!  If you only made 5 mistakes yesterday, you’re going to kick it up today.  You’ll make 10 mistakes today!!  And, by the time you learn your lessons and apply the changes, you’ll be surprised at how quickly you can be very far along in reaching your goals.

You’re A Winner – Read On, And I’ll Prove It To You!

Always remember the winner that you are!  You came into this world to create.  So, create!!  You have an ability within you to create whatever solution you need to overcome whatever problem that you think is standing in your way.  If you will follow the principles that I’ve outlined in this article, you can do much to accomplish every one of your financial goals.

You are a winner. Remember?  Three and a half million sperm chasing one egg.  You won!  You’re here!  That’s evidence of the winner in you.  Peace and prosperity to you and your family.

 

Reggie Brooks, is an international speaker, author and educator, dedicated to inspiring others to achieve personal success through real estate investment. He is also the #1 Vacant, Abandoned & Distressed Property Specialist in North America.

Having risen above a life of poverty, he has achieved what many people consider to be impossible. He went from making $36,000 per year at the local telephone company, to making over $40,000 per month in his real estate business. Today, Reggie delivers his personal philosophies for success at major business venues and expositions throughout the United States. Reggie attributes his success to faith, dedication to success, and to the invaluable coaches he has had along the way.

 

Dealing With Negative Cash Flow

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By Bruce Kellogg

The Problem For Investors

As property prices rise in many markets across the country, it is becoming increasingly difficult for investors to acquire properties with a positive cash flow. Nowadays, it is all the more important to know how to deal with negative cash flow (“NCF”). Here are a number of solutions.

Intelligent Property Selection

Although it should be obvious, the first step to avoiding NCF is to resolve to acquire only properties that don’t have it, or can be structured not to have it. Especially in strong markets, some investors adopt the position that NCF doesn’t matter because the market will bail them out through appreciation or rising rents. This doesn’t always happen! Buy intelligently in the first place!

Increase the Units

It’s pretty well known in real estate investing that the more units acquired the greater the cash flow for any given price range. For example, in Silicon Valley a 7-plex for $1.4 mil. will probably cash flow better than a $1.2 mil. 4-plex. Generally-speaking, for more cash flow, buy as many units as possible.

Buy Better Quality

It is also well known that “low-income” properties suffer from greater turnover, more vacancies, and higher maintenance expenses. They are also more management-intensive. Buy better quality whenever possible. Leave the “war zone” properties to the commando’s!

Transaction Structuring

After a qualifying property is identified, structure the transaction for success. This involves the right price, the right down payment, the right entity (e.g., partnership), the right loan terms, and so on. Over the long term, proper design of the transaction is probably the most important step.

Lower the Price

Although intuitive, the first step toward reducing NCF is to negotiate a lower price. Go back and forth several times if necessary. It will benefit throughout the entire ownership period.

Set Up A Cash Reserve

When structuring the purchase, if there will be an unavoidable NCF, set up a cash reserve for the period that cash flow is projected to be negative. It could be a cash account, or a tax refund, or a note payoff, pending inheritance, whatever. But get it done!

Offsets

Another approach is to designate a specific note or specific property in the portfolio that has a sufficient positive cash flow to serve as an “offset” to the NCF. But be sure to tie the two together. Don’t just say, “The portfolio can cover it.” Often, that kind of “loose thinking” can get an investor overextended as more properties are acquired.

Recruit Partners

Usually, an effective way to handle NCF is through the use of a partner. There are several kinds of these. An investor/partner could be brought in with a Limited Partnership (LP), or a Tenancy-in-Common (TIC). Or, in some instances, it is possible to partner with the seller using a Lease-Option or a Shared-Appreciation Mortgage (SAM). It is also possible to partner with a tenant using a Lease-Option (“Rent-to-Own”) or Equity-Sharing. These all work well under the right circumstances.

Creative “Carryback” Financing.

If there is seller financing in the transaction, there are several note terms that will reduce NCF. One is to delay the first payment as long as the seller will agree, perhaps a year. Another is to agree to interest-only or principal-only payments. How about accruing all payments until maturity? (That’s a risky one!) And on commercial property transactions, the Graduated-Payment Mortgage (GPM) is still possible under Dodd-Frank.

Improve Operations

Many times when an investor purchases a property, it is with the objective of enhancing its performance. This typically involves raising rents, reducing expenses, increasing occupancy, and improving management. All of these actions will reduce NCF.

AIRBNB

A new investment type, AIRBNB, has come on the scene, and generally offers impressively strong cash flows. This is outside the scope of this article, but the reader is advised to investigate it to see if it is for them. Start with an internet search.

Conclusion

Even in highly-appreciated markets, it is still possible to invest and deal with NCF. You just have to learn how, or work with an expert who knows. Because market conditions change, it is prudent to factor a possible 10-15% rent decrease or vacancy factor increase into the calculations. You don’t want to get caught short at an inopportune time. Having an unused credit line is also a good idea.

Good luck!

 

Bruce Kellogg

Bruce Kellogg has been a Realtor® and investor for 36 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches.

Mr. Kellogg is a contributor and copy editor for two national real estate wealth-building magazines: Realty411, and REI Wealth Mag.

He is available for listing, selling, consulting, mentoring, and partnering. Reach him at [email protected], or (408) 489-0131.