5/4/14: Beyond Entity Structure – Proactively Protecting Your Portfolio

Sometimes you think you’ve covered, then you find there’s a big hole in your asset protection.  Not only is it embarrassing, it can be very expensive.

Sadly, most people’s assets are exposed.  But not in the way you think.  And you may be one of them if you think simply setting up an LLC has you covered.  If only it were that easy!

We’ve spent quite a bit of time over the years talking about using entities and off-shore strategies to protect your valuables. But there’s also been a glaring hole in our coverage of the topic of asset protection: insurance.

Wait!  Come back!  This is actually a VERY interesting and IMPORTANT topic.  It’s something long overdue to be discussed. And unless you’re among the very small group of sophisticated investors familiar with it, you’re very likely to learn some thing you didn’t know…important things that can save you a LOT of money.

So, to insure your assets aren’t shining naked for financial predators to abuse, we go on the road to talk with one of the top lawyers on the subject.

Under the cover of The Real Estate Guys™ Cone of Silence in San Jose, California:

  • Your mostly covered host, Robert Helms
  • His over-exposed co-host, Russell Gray
  • Special guest, insurance attorney Randy Hess

When it comes to insurance, most real estate investors think of property insurance and umbrella liability.  Both are important, but they’re really just the tip of the iceberg.

But because insurance is one of those products you pay for, but hope you never use, no one is standing in line excited to shop for it.

So right out of the gate, you may be wondering why we’re interviewing an attorney to learn about insurance.  After all, wouldn’t it make more sense to talk with an insurance broker?

But consider that insurance is really a contract between the insurer and the insured.  The contract contains promises.  You promise to pay the premium and the insurer promises to pay all legitimate claims.  Sounds simple, right?

Think about this:  When you enter into any other contract, isn’t it smart to have an attorney review the document to make SURE you know what you’re getting into?  And in the case of insurance, most of what your insurance agent says doesn’t matter.  It’s the policy (the contract) that dictates the parties’ (that’s you and the insurer) responsibilities.

And who writes this contract?  You got it…the insurance companies’ lawyers.  And even though it’s regulated by state insurance commissioners and all kinds of consumer protection laws, who do you think the policies are most likely to favor?  Right again…the insurance companies.

And one final point to illustrate that when you’re dealing with insurance, you’re out-gunned…like most consumer protection laws, they’re primarily designed to protect non-business people.  When you enter the realm of business (like real estate investing) the law considers you to be sophisticated enough to look out for yourself, so it does less to protect you.

So we think it’s REALLY important to have a good insurance attorney on your team of advisors.

But this is LOT more than simply making sure you understand your policy.  This is about MAKING SURE you get paid when you make a claim.

It starts with getting the right kind of insurances.  Once again, it sounds simple, but nothing having to do with insurance is simple.  In fact, to talk insurance, you have to go the cupboard and open up a can of alphabet soup.  Though far from comprehensive, here’s a list of  some of the kinds of polices EVERY real estate investor should be aware of:

CGL – Commercial General Liability insurance.  This is like your personal umbrella liability policy, except it covers your BUSINESS activities.  Running a rental property business, even as the property owner, is a COMMERCIAL enterprise.  Your PERSONAL insurance most often does NOT cover it.  So if you think your LLC and your umbrella policy have you covered, think again.

D&O – Directors and Officers insurance.  If you have an entity (like an LLC or corporation) that is holding and managing your properties (even if you’re operating through a professional property manager), there are living, breathing humans (probably you) making all the decisions, signing the documents, etc.  D&O insurance protects the INDIVIDUALS for the things they do while acting in their official capacities as Directors and/or Officers of the entity.  Once again, your PERSONAL coverages probably don’t cover your business activities.  But when your entity gets sued, you’ll almost certainly be named in your individual life (it’s how the predator goes after your personal assets) so you need this kind of coverage to protect you.

E&O – Errors and Omissions insurance.  This is a MUST HAVE if you’re syndicating.  It covers mistakes you make when providing professional services (like money management).

All of the above are in ADDITION to your personal insurance and the insurance you have on the property (fire, theft, damage, loss of rents, etc).

Wow.  That can be intimidating.  But it gets worse…

Each one of these policies can be laced with exclusions.  These are legal clauses which give the insurer the right to DENY your claim.

Now, insurance companies are NOT supposed to deny claims in order to increase their operating profits. Just like people shouldn’t judge you by how you dress.  Good luck with that.

But the law says if you have a legitimate claim, the insurance company has an obligation under the law to make a “good faith” effort to pay the claim.  Some companies are good about this.  Others…not so much.

When an insurance company refuses to pay a legitimate claim, just like when any other counter-party in a contract fails to perform their obligations, you need to sue them (or at least threaten to), which means you need a lawyer.  Someone like Randy Hess.

But even good insurance companies can write policies which exclude things you think you’re covered for.  And if you don’t read the contract, don’t understand what you read, or rely upon your agent’s representations and not the policy itself, you can end up with big holes in your coverage.  These holes can allow the insurance company to deny a claim…legitimately.

So we think it’s REALLY smart to have your coverage counsel (insurance attorney) review your policy BEFORE you buy it, to make sure it really protects you.

Now, if you’re thinking, “Oh, I don’t need all that.  I’ll just hide behind my entity and no predator can get through.”

That’s naive and here’s why…

When the predator sues you, you still have to defend.  That means you need to hire a lawyer to respond to the complaint and handle the litigation.  And even if you end up in mediation or arbitration, there are still SUBSTANTIAL costs.  In other words, you can win, but still lose.

But one of the aforementioned insurance policies will pay all your defense costs.  Do you know which one?  Do you know how much they’ll pay?  Do you know whether the defense costs come out of the total policy limits or are they in addition to whatever gets paid out to the plaintiffs?  Because if you have a $1 million policy and get sued for $1 million, but then spend $500,000 on defense (yes, it can cost that much), then there’s only $500,000 available to pay the plaintiffs if you lose.  Guess where that extra $500,000 comes from?  That’s right.  From you.

And if you can’t afford to defend, then you automatically lose, even if you’re not wrong.

Yes, it’s a jacked up system, but that’s the way it works.  So if you’re investing in U.S. property, even if you’re a foreigner, you’ll be dealing with the U.S. system.  It’s the same system that accounts for the vast majority of the world’s lawsuits and feeds the overwhelming majority of the world’s lawyers.

When you look at this way, insurance and your insurance attorney are a bargain.  You just can’t afford to be ignorant about how to buy polices that will really do their job when called upon.

That’s why we interviewed Randy Hess and why we strongly recommend you listen to this episode with a notebook.  It could be one of the most valuable broadcasts you ever listen to.

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4/20/14: Family Ties – Investing with the People Close to You

Would YOU invest with family?  SHOULD you?

It’s a controversial topic with lots of pros, cons and considerations.  The risks and rewards can be much more than financial.

Crowded around The Real Estate Guys™ mobile microphones for this episode:

  • Your son-of-a-gun host, Robert Helms
  • His father, investing partner and lifelong pal, Bob “The Godfather” Helms
  • Co-host and serial father, Russell Gray
  • First time guest and junior co-host, Sean Gray

Investing entails risk.  We usually think of those risks as financial, although most people realize there are human beings involved in all deals.

But when our only connection to the other party is the deal itself, if things go sideways, we know we can walk away (or into court) and when the dust settles we don’t need to ever see them again.  Or care much if we do.

HOWEVER, when your investment partner is your parent, sibling, child, grandparent or cousin, you have connections that run deeper than money.  They say blood is thicker than water (not really sure what that means), but what about money?  Or more specifically, the loss thereof?

Will YOUR personal relationship survive a sour deal?  It can be a scary prospect.  So why take the risk?

Well, on the other side of the equation is the joy of profiting together.  After all, if you REALLY believe in your deal, and you’re going to share with with someone, wouldn’t it be best to share it with someone you love?

And if you don’t really believe in your deal, should you be doing it all?  Is it right to put a stranger’s money at risk just because they’re a stranger?

Of course, there are other rewards to investing together.

There’s the camaraderie of searching for and researching opportunities; and sharing the challenge of working through issues.  Sometimes relationships grow stronger from pushing through life’s challenges together.

And what about the opportunity to mentor a child by involving them in your investing business?  When you pass on, do you really want to hand over your life’s work (your portfolio) to heirs that aren’t prepared to manage it successfully?

We’ve been actively working and investing with family members for years.  We’ve had ups and downs and made lots of mistakes.  Fortunately, family ties have proven stronger than financial setbacks.  And believe us, we’ve had some real setbacks.  Of course, we’ve also had some fun wins…so much so that we keep doing it!

So if you’re thinking about investing with the people your tethered to, listen in on this conversation and pluck some pearls of wisdom from three generations of experience.

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4/13/14: Using 1031 Exchanges to Build Your Real Estate Portfolio Bigger, Better and Faster

Equity is back for many investors!  That means it’s time to start thinking about equity optimization strategies again.

Ahhh….it reminds us of the good old days before the mortgage meltdown.

But until liberal lending comes back (yes, it eventually will…), a 1031 tax deferred exchange is a very useful tool for moving passive equity (the unrealized capital gains) from a particular property to another market or property (or multiple markets and properties!) that you think can perform better.  Or maybe you just want to diversify.

So to discover the latest and greatest in 1031 exchanges, we called up an old friend and invited ourselves out for lunch.  Our friend was delayed in a meeting, so we had lunch without him.  When we were finished, we sat our friend down in front of our mobile microphones and picked our teeth and his brain.

In sunny San Jose, California recording this interesting exchange of ideas:

  • Your talented today host, Robert Helms
  • His talent-deferred co-host, Russell Gray
  • Special guest, 1031 tax-deferred exchange expert, Ron Ricard

If you’re old enough and were bright enough to buy investment real estate a long time ago, you probably have some equity in your properties.  Some of it is the original purchase equity (down payment), and another big chunk of it is from amortized equity (pay down of the loan using the rental income), and (hopefully!) the BIGGEST chunk is from passive equity (long term price appreciation).  For that matter, you might even have a chunk of forced equity (appreciation directly tied to work you did to increase the value).

Or maybe, you were bold enough to buy property in the pit of the recession and now you’re the happy holder of gobs of new equity in a short period of time.  Good job.

In any case, if you have equity above and beyond your adjusted cost basis, you have capital gains.  And as long as those gains stay locked up in the property, you have unrealized capital gains.  That doesn’t mean you don’t know the equity is there. ;-)  It means you haven’t gone from cash to asset and back to cash again.  In other words, you haven’t sold the property and realized the gains.

Whew.  That was taxing…

But what do you do if the market or property you’re in is no longer the BEST place for your equity?

One option is to refinance the property and take some of the equity out with a cash-out loan.  Great idea, except those loans are hard to come by these days.  And that strategy only works if you still want to be in that property or market.

But what if you want to shepherd your equity to greener pastures?

If you simply sell the property, you’re off the hook for your loan (this might be important if it’s a residential 1-4 unit property and the loan counts against your Fannie / Freddie limit), and you have access to the equity…or do you?

Remember, you have a BIG FAT PROFIT.  Which is awesome, except when you file your tax returns and Uncle Sam says, “Hey!  Where’s MY cut?

And Uncle Sam’s cut can be pretty hefty in terms of absolute dollars.  Think about it.  If you have a $100,000 gain, your tax might be as high as $25,000!!!  That could be a down payment on a nice little rental property in Memphis, Atlanta or any number of low price, high cash flow markets.  Ouch.

That’s why a 1031 tax deferred exchange is a cool deal.

Simply stated, section 1031 of the IRS code (hence the name) provides an alternative to tax today IF you transfer your equity DIRECTLY (you can’t touch it in transit) into one or more other investment properties.  The tax is DEFERRED until such time as you actually realize it.  If you plan it right, you’ll NEVER realize it, but will still have access to all the money.  Of course, that’s the topic of another show….

For now, what you need to know is to get this WONDERFUL benefit, you MUST follow the rules.

Yes, there is a catch.  There are rules.  Like the 3 property rule, the 45 day identification rule and the 180 day rule.  Just to name a few…

But we’re not going to clog our blog with all the nitty gritty details.  First, we’re not tax guys and we’d feel really badly if you read this blog and make an important tax decision and that doesn’t work out.  Next, it’s WAY too much detail for a blog.  And lastly, you should ALWAYS consult with a qualified tax advisor when planning moves which have important tax implications.  Don’t be penny-wide and pound stupid.

The purpose of this blog and episode of The Real Estate Guys™ radio show is to make you aware that the 1031 tax deferred exchange exists…and is an important and powerful tool for repositioning and optimizing equity.  We also want to encourage you to get qualified advisors involved WAY in advance of making any decisions.  Yes, it’s a hassle and an expense.  But so is writing a HUGE check to the IRS.

The bottom line is NOW is the time to start getting educated about your equity optimization strategies and tools.

So listen in to this episode and our guest Ron Ricard will give you a great primer on 1031 tax deferred exchanges.

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3/24/14: Lessons and Opportunities from History with Simon Black

Imagine standing at your front window and suddenly you see a horrific car crash…right in front of your house!

You rush outside and see the driver open the door, get out and lean against the crumpled car.

Relieved that the driver doesn’t seem to be severely hurt, you pick up your phone and call 9-1-1.

BUT….

While you’re dialing your phone, what you don’t see is your panicked neighbor running out of her house screaming frantically.

Because blocked from your view is a small child, who’s been violently thrown from the car, and is now lying bleeding and limp against the curb.

You missed the horrific consequence of the accident because your perspective and focus didn’t allow you to see the whole scene.  But your neighbor, who had a different view, could see more of what happened and was able to react more appropriately.

The point is that one’s perspective and focus often has a profound affect on one’s reaction to an event or set of circumstances.  The lesson is that it’s crucially important to maintain a broader perspective, especially when potentially cataclysmic events are looming and the stakes are high.

But because history moves slowly and we’re so busy with our noses planted firmly against the proverbial grindstone, it’s easy to miss or misinterpret high stakes events which are unfolding all around us.

As we’re shared many times on our radio show, we missed some of the warning signs leading up to the sub-prime crisis and subsequent financial crisis.  Since then, we’ve been substantially more attentive to the bigger picture, including spending time with and listening to really smart folks who spend most of their time looking at the bigger picture.

Our 2014 Investor Summit at Sea™ had one such person as a late addition faculty member, so we didn’t miss the opportunity to grab the microphones and have a chat about what the lessons and opportunities today’s investors can glean from a closer look at world history.

Sitting in Honduras behind the silver mobile microphones of The Real Estate Guys™ radio show:

  • Your historic host, Robert Helms
  • His archaic co-host, Russell Gray
  • Returning guest, world traveler, history student, entrepreneur, investor and quintessential Sovereign Man, Simon Black

Simon Black could be called the most interesting man alive, except he doesn’t have a beard or drink Dos Equis.  Of course, we don’t find either of those two things all that interesting, but what do we know?

What we do find extremely interesting is Simon’s background in military intelligence and his passion for sharing great ideas with people.  He’s an intense, data driven student of history, economics, business and investing.

Simon is a perpetual traveler.  He visits dozens of countries every year.  Along the way, Simon invests, establishes business and personal relationships, and sends out his daily thoughts and observations, which he calls Notes from the Field.  We read them every day.  Good stuff.

Simon’s presentation on our 2014 Investor Summit at Sea™ was one of the most popular and created a lot of excitement.  He had lots of charts, graphs, data and historical references.  The bottom line is that history tells us that the United States’ reign as the world’s dominant economy and currency is coming to an end.

Find that hard to believe?  You’re not alone.  But it’s hard to refute the evidence.  It’s just our normalcy bias that wants to override our intellect to tell us, “It can’t happen here”.

The facts remains that we’re due for a change.  The conditions which precede change exist today, just as they have in the past when similar substantial changes have occurred in global history.  The U.S., like the many dominant powers before her, aren’t immune from the consequences of economic decisions that always precipitate the forfeiture of preeminent status.

And while change can be scary, it’s usually only really bad for those who are completely unaware and unprepared.  Simon’s mission (and ours too) is help make sure you’re well prepared.

Simon says this is an unprecedented era of opportunity.  Why?  Because the flip side of any problem is an opportunity.

Such as…

The Calorie Crunch

One of the greatest opportunities Simon sees is in agricultural investing.

The evidence says more people are coming and less arable land will be available for food production.  Obviously, there’s a real estate play here.  But it’s more than that.  Your tenants are crops, which are commodities.  And commodities often respond well to falling currencies.  It’s something we cover in our Real Asset Investing report, which was the theme of the 2014 Summit.

Simon thinks agricultural investing is an even more obvious opportunity than trying to profit from or hedge currency fluctuations.  The best we can hope for is that food prices rise because of supply and demand.  It’s possible we could have food shortages.  In any case, the owner’s of farm land (the means of food production) stand to do very well in the decades to come.

Bet on People

Simon closed his remarks on the Summit and in our interview with optimism.  Although history tells us that some chaos is coming, it also tells us that humans have a long and remarkable track record of re-organizing themselves into a better world after each major shift.

Part of that process is education and entrepreneurship.  If you’re reading this, then you’re probably a part of the solution.  Good job!

Simon holds an annual entrepreneurship camp for young people to help accelerate their development and prepare them for a brave new world.  Our youngsters are our future and we applaud any and all efforts to develop them.  Kudos to Simon for making this a priority.

We encourage you to invest in the young people around you.  Share your time, wisdom and encouragement.  If you are a young person, invest in yourself.  And encourage your friends to pour their energy into learning how to build businesses and investment portfolios that provide products and services that serve people.

Simon says this is a GREAT time to be alive.  We hope you agree. It’s an era of unprecedented opportunity.

So listen to this insightful interview with sovereign man Simon Black and consider how you can position yourself to earn profits and serve people as the world undergoes continued change.

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3/9/14: Stepping Up to the Next Level through Syndication

Real estate is going to the next level.  Are you?

Raising money for real estate investing is a great way to become a full time real estate investorIn case you hadn’t noticed, real estate prices have been rising in many markets.  This is because money has been flowing steadily into real estate and driving prices up.  And this is in spite of a generally weak economy.

We could go into all the reasons why there’s still plenty of opportunity in real estate, but that’s not the focus of this episode.  Instead, we’re talking about how YOU can put yourself into the flow of money into real estate by aggregating capital to do more and bigger deals.  Sure, we’ve talked about this before…but do you ever get tired of doing more and bigger deals?  We don’t.

Stepping up to the microphones for this episode of The Real Estate Guys™ Radio Show:

  • Your syndicated talk show host, Robert Helms
  • His low level co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms

No money down real estate has been the fodder of late night TV infomercials for decades.  And we love it.  No money down, creative real estate is a great way for someone who is literally starting with nothing to get into real estate.

However, the vast majority of people who engage in real estate investing start out with their own cash, income and credit.  It’s just easier.  But when you have the real estate investing bug and market conditions are right, it doesn’t take long to run out of your own money.

When this happens, you can sit out until your personal financial batteries recharge.  Not a good choice…because when the market is great, it’s smart to get all you can.

You could order a late night TV course and go out looking for no money down scenarios.  A better choice, but very limiting.  While no money down deals certainly exist, they are undoubtedly more rare than the many other profitable deals where you will need to have funds available for earnest money, down payments and due diligence expenses.

Another option (our preference), is to leverage your experience and relationships to help other people put their money to work in real estate.  This is called “syndication”.

Real estate syndication is a great way for you to aspire higher and reach for the stars!Another great reason to syndicate is the real estate version of the law of attraction.  That is, if you have purchasing power (money), deals will come to you.  You just have to let the world know you’re open for business.

So “no money down” is exciting when you’re thinking small and don’t have anything to work with but want to get started.  But don’t expect to attract deals when you have no money.  You’ll need to turn over a lot of rocks to find a deal you can really do with no money.

All that to say, syndication is one of our FAVORITE topics.  Especially right now.

There’s a lot going on at the macro-economic level that is pushing money (currency…i.e., dollars) into the economy.  We won’t get into the mechanics here, but the evidence is in rising asset prices (stocks, real estate, commodities) when there isn’t robust underlying economic growth.

As a result, interest rates remain low…which is great if you’re a borrower.  But not so great if you’re a saver.  And with interest rates so low, bonds (IOUs which pay interest) aren’t attractive investments.  Worse, the downside risk on bonds is high because if interest rates rise, bond values drop.  Again, we won’t spend time on that here, but if you want to raise money, you need to understand other asset classes so you can explain why your offering is better.

So Main Street investors looking for decent returns often think they are stuck with “investing” in a stock market whose gains are largely speculative.  You have the opportunity to help investors get into an attractive alternative to stock speculation: income producing real estate.

Once you’re convinced of that (and we’re guessing if you’re reading this blog, you’re already a believer in real estate as an investment), then the bigger question is how do you do more, bigger and faster?

Syndication is the answer.  It’s where investing and entrepreneurship meet because what you’re really doing is setting up a business to invest.  In other words, you become a manager of other people’s money. If that freaks you out a little (or a lot) because of the responsibility of managing other people’s hard earned money, then you’re exactly the kind of person the business needs.  Sadly, lots of people get into the business who don’t really care about other people…they just want the money.

Now, once you decide to get into the business, there are essential steps you must take to get set up properly.  This is important both for your own safety and that of your investors.

You’ll need to set up an entity structure.  This will usually mean forming a management company which you will operate, and a holding company which will own your equity.  Later, when you find a specific deal, you’ll probably form a single-purpose LLC to hold the property.  We’re not lawyers, CPAs or investment advisers, so check with your own team.  But in our experience, this is usually the way it gets set up.

A word of caution…when you’re selling shares in an LLC, you’re dealing with securities, so you need to have professional advice.

Speaking of advisers, one of the most important things you need to do is build a team.  You’ll need lawyers, accountants and business advisers.  And all of these need to be in your budget.  So you may need to front some of the money, but once you start operating and raising money, you can usually be reimbursed for some or all of these expenses.  Just be sure it’s all in the budget and disclosed to your investors.

Does all this sound daunting…like a lot of work?  It is.  But that’s good.  Because once you get through it, it creates a barrier to entry which reduces the competition.  Getting a college degree is a lot of work too (more than setting up a syndication company), but a college degree gives you a competitive edge when seeking employment.  Same concept.  Seriously, if it was easy, then all the pretty people would’ve already done it.

So don’t be dismayed by the effort it takes to set up a syndication business.  You’ve probably successfully done other things in your life which are much harder.  Just make sure you take the process seriously and put in the time and effort to do it right.

This episode of The Real Estate Guys™ will help you understand the opportunity and some of the steps you’ll need to take step up to the next level through syndication.  This could be your chance to reach for the stars!

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2/23/14: Clues In The News – Cloudy With a Chance of Sunshine

Have you heard?

There’s been some bad weather lately….and it seems to have sub-marined much of the U.S. economy.  At least that’s the official spin.Severe weather is being blamed for gloomy economic data

But is it all doom and gloom or is there a chance of sunshine?

Here to rise above the clouds of confusion to see what the latest economic stats mean to real estate investors…

  • Your sunny host, Robert Helms
  • His gloomy co-host, Russell Gray

You may have heard it said, “Figures lie and liars figure.”  And we’ve learned that 87.2% of all stats are made up.  Or is it 27.8%???

So when you hear about new housing starts, existing homes sales, mortgage applications and jobless claims, they’re all a bunch of stats that the tea leaf readers on TV and newspapers try to interpret.

The problem is those financial talking heads, as smart and attractive as they may be (at least when compared to the hosts of The Real Estate Guys™ Radio Show), aren’t real estate investors.  So the paradigm, spin, interpretation and context they have is all for paper asset investors and real estate owner-occupants.

So what do all these economic metrics mean to real estate investors?

First, home sales get divided into two categories.  The biggest chunk is EXISTING home sales and is reported by the National Association of Realtors. Existing home sales is an indicator of prosperity because new home buyers are entering the market and existing home owners are moving up. Presumably because they can afford to.

But take by themselves, existing home sales don’t tell the complete story.  And for investing purposes, you have to dig down into geographic regions, price categories and buyer demographics.  After all, who’s buying and who’s not, which area is hot and which is cooling, and whether prices are rising or falling, all begin to shine the light of opportunity or danger on specific places, price points and property types.

New and existing home sales are considered a leading indicator of economic recoveryFor example, if you knew that the fastest growing segment of price point was in the $1 million and up price range and the fastest declining segment was in the <$100,000 price range, would that affect where you might choose to flip versus where you might choose to invest in rental property?

The other component of housing sales is NEW home sales.  But it’s a much smaller chunk.  So why do so many talking heads care so much about housing starts?

Think about it.  People who watch financial shows are often trading stocks.  If housing starts are slow, it means home builder stocks are negatively impacted.  Whereas if existing home sales slow, it only means some real estate agents don’t make as much commission.  Sad for real estate agents, but meaningless to stock traders.

Another index that stock traders fixate on is home builder confidence.  The idea is that if home builders are optimistic they’ll build and sell new homes.  They means demand for labor and materials, plus all the goodies new homeowners spend money on when first moving in.

Sounds good.  But if more people are buying homes, does it mean less people are renting?  Which is better for landlords?

Again, the news is prepared for the audience it’s presenting to.  And if you’re a real estate investor, financial TV is NOT talking to you.

Before we leave the topic of housing, think about this:  Lots of people, including those who pull the levers of the macro-economy, think housing LEADS economic recovery.

Really?

Now, we’re just a couple of dudes on the radio, but it seems to us that housing REFLECTS economic recovery.  See the difference?

If someone is overweight and they stand in front of the mirror, they can see the reflection of their condition.  But the image in the mirror isn’t the person’s actual body. It’s only a reflection.  So if someone didn’t like the condition there body was in and they modified the mirror to make their reflection thinner, does it make their actual body thinner?  Of course not.

So, if people buy houses because they’re selling below replacement cost in the wake of a recession, and government subsidized interest rates and tax incentives make is easier to make a down payment and stretch the monthly payment into a bigger loan; or the down payment is coming from cashing in stocks whose value was inflated by easy monetary policy, does the activity reflect a healthy and robust economy?  Or is it just a funny mirror that makes you appear to be in better shape than you really are?

We think housing is strong when people have good jobs and incomes, living costs are low, and they’re able to save up enough for a down payment and qualify for a loan.  That is, the  housing sale is a reflection of their success, NOT the cause of it.

If that’s true for an individual, wouldn’t it be true for a collection of individuals like a country?

We think so.

So do people have good jobs and incomes?

The jobless claims and labor participation rate says no.  And with healthcare costs, food and energy costs rising, people are actually being pinched.  Are these the conditions we’d expect in a healthy economy and a sustainable housing recovery?

Probably not.

Does this mean we’re bearish on real estate?  Not at all.  In fact, we still think this is a good time to acquiring income producing property in the right markets and price points.  Though we do encourage caution in the aggressive use of leverage.  We still see downward pressure on wages and discretionary income for the working class.  So for long term buy and hold, cheaper markets with a good business climate and low costs of living are probably safest.  Along with fixed rate loans and good operating margins.

If you’re a fix and flipper, the higher priced markets actually look better.  At least according to the stats.

The point is, like any business, you must know your target market.  If you want to sell the use of your property to a long term tenant, that’s a different game than flipping a pretty property to an owner-occupant.  And the clues you need to make better decisions are in the news every day.

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2/16/14: Ask The Guys – Loan, LLCs and What To Do About a Big Fannie

If you want great answers, you have to ask great questions.

In this edition of Ask The Guys, we take on several great questions from our amazing audience!

Broadcasting from the beach in beautiful Belize because we can:

  • Your unbelizeable host, Robert Helms
  • His rummy co-host, Russell Gray
  • The Godfather of white sand real estate, Bob Helms

You’d think with that tee-up that this whole episode is about Belize.  But it’s not.  We just happened to be in Belize when we did the show.  Not sure how we got there.  Rum may have been involved.  But when we realized it was time to do the show, there we were in Belize, so sometimes you just do what you gotta do.   You have no idea the sacrifices we make to bring you The Real Estate Guys™ Radio Show.

There are few things we like better than answering your questions.  Mostly because we don’t have to think of a topic for an episode. ;-)   But also, because we always get great questions.  We wish we had time to answer them all.  Since we can’t, we pick out those we think are most relevant to the audience.

How do we know what the audience likes?  By reading all the questions that come in.  So add your views to the discussion by sending your question to us on our Ask The Guys page.

Remember!  We’re not lawyers, CPAs, or investment advisors.  In fact, we’re not even that bright.  So before you run off and put real money at risk because “The Real Estate Guys said so”, remember we’re only sharing ideas and personal opinions.  Always check with your own qualifed advisors before taking action on anything you hear on the radio, find on the internet or read on the bathroom wall.

With that said, let’s get into it…

Should I dump a great loan so I can put the property in an LLC?

We get this one a LOT.  And like nearly every question we get, the answer is…it depends.

In this listener’s case, he has a below market interest rate on a loan he got when he was the owner-occupant.  Great!  But the bank may call the loan if he moves it into an LLC.

Stop right there.  Why would the bank do that?

Well, in the real world, as long as you’re making the payments on time, they probably won’t.  At least, we’ve never seen it happen.  But they have the right to because nearly every loan contains a “due on sale or transfer” clause which “accelerates” the loan in the event of any change of ownership.

But even if you make the payments on time, if you have a below market interest rate, is the lender motivated to get the money back from you so they can loan it to someone else at today’s higher rate?  Maybe.  It’s a risk you take.

Now if you call up the lender and ask ahead of time, our experience is they almost always say “no”.  So you can try to sneak it by and hope no one notices, which happens all the time, but you run the risk of losing that lush loan.

Or, you can go ahead and transfer the property into the LLC and get a new loan.  Which begs the question, “Is it worth it?”

First, the loan will undoubtedly cost more.  Not only will you pay today’s higher market rates, now that it’s a rental property, you’ll pay the additional risk premium (higher interest) for it not being owner-occupied.  Plus, you can’t get government subsidized loans like Fannie, Freddie or FHA if you are using an entity like an LLC.  So you’ll pay even more.

Add to that the time, expense and hassle of forming an LLC and transferring the property, plus the ongoing expense of maintaining the entity, and it really starts to add up.

So if it’s a somewhat expensive hassle, why consider it?

It’s all about asset protection…and perhaps about privacy.  Let’s deal with each individually.

First, asset protection.  An entity like an LLC creates a firewall which isolates the liability created by the property.  In order to get to assets not owned by the LLC (like everything else you own), the plaintiff (the person suing you) will need to “pierce the corporate veil” and prove in a court that you’re personally liable for whatever damage they suffered.

BUT…before it ever comes to your other assets, they will need to get past your insurance policies.  In most cases when you or your entity is sued, your insurance policies will defend you.  And because the lawyers really don’t want to go to court, they’ll just work together to get the insurance company to settle.  Sometimes, they’ll ask you to kick something in too, which is no fun.  But it’s less expensive than going to trial.

At least that’s our experience.

So, when you look at all the added expenses of giving up the great loan, it might be a better use of money to beef up your insurance policies.

Of course, if there’s millions of dollars of net worth exposed to the liability of the property, then the added expense might be worth it.

This is why we say, “it depends”.  Check with you own professional advisors and they’ll help you make the right choice for you.

How do you build a great local team when investing out of the area?

This is another great question and is less complicated to answer.

First, look for referrals from other successful investors in the area.  Just being referred by someone is an edge because now the service provider is risking both your business and his current client’s (the referrer) if they do a poor job.  That alone is worth something.

Next, find the real estate agent who controls most of the kind of inventory you’re looking for.  That is, what name seems to show up the most on the For Sale listings?  This is obviously a person who’s very active in the market.  And with the internet, it’s easy to find them and check our their on-line reputation before you ever meet face to face.

Property managers can be a great starting point in a new market.  Someone who primarily or exclusively does property management often has less of a sales agenda than nearly anyone else on your real estate team.  Why?  Because while the agent and lender will handle your transaction and get paid all at once then are off to the next deal, the property manager is looking into a long term relationship where they’ll make their money over time…like you do.

Local market real estate expos and investment clubs can be a great place to meet fellow investors and service providers who are active in working with local investors.  You may have to fly into a town a few times to network and have meetings, but once the team is built, you can operate fairly easily from afar.

What’s the optimal amount to put down on a property?

We LOVE this question. In fact, we cover this topic extensively in our out-of-print book Equity Happens (we’re working on an update) and our Real Equity Home Study Course.

The short answer is:  Use as much leverage as you can comfortably debt service when allowing for unexpected expenses and inability to raise rents substantially.

Obviously, prevailing interest rates, local competition, the strength of the local job market, macro-economic factors that affect cost of living (interest rates, oil prices, healthcare costs, etc), all affect the durability of the rental income and must be carefully considered when pushing the leverage ratio higher.

But rather than just dump money into paying down a loan when mortgage rates are still dirt cheap, think about taking the extra cash and buying income producing investments that outperform the cost of the mortgage.  For more ideas on this topic, check out Using Oil to Lubricate Your Investment Portfolio and Real Asset Investing.

How can I keep investing if I can’t get any more Fannie Mae loans?

Another great question that comes up a lot.

First, even though post 2008, it seems like the only loans available are government backed, that’s starting to change.  So when you Fannie (portfolio) has gotten too big, you have the option of switching to private (non-government) money.  This could be owner-carry back, hard-money lenders, mortgage pools or any number of independent funds that have stepped into the pick up the pieces after the mortgage meltdown wiped out most the mortgage banks.

You can also go commercial by moving into apartment buildings (5 residential units or more), commercial, industrial, retail or office properties.  For the average rental home owner, the natural progression is apartments.  But you could look at mobile home parks, self-storage, or even parking lots.

Assuming you want to stay in the residential 1-4 space and collect more Fannie loans, you could take on credit partners.  These are people who have virgin credit scores when it comes to Fannie / Freddie, and you partner.

Whew!  If you read all the way to here, you’re a hard core information junkie.  Great!  So are we.  So you keep reading and listening, and we’ll keep reading and talking.  Then let us know what you think on our Feedback page.  And if you love the show, please give us some love on our iTunes page.  Each positive review not only inspires to keep working, it improves the show’s ranking, which is helpful for attracting sponsors to support the effort and VIP guests to interview on the show.

Thanks!  Now, please enjoy the latest edition of Ask The Guys, where believe it or not, there are additional questions discussed that didn’t make it into this mega-blog.  But we’re getting callouses on our finger tips from typing, so enjoy the podcast!

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2/2/14: Getting to the Front of the Line – How to Get In and Stay In the Deal Flow

Find a great deal on investment real estateEveryone wants a good deal.  In fact, everyone wants a GREAT deal.  But how do you organize your real estate investing business to be sure you’re always among the first to know when a great deal comes available in your preferred market(s)?

Great question!  So let’s move you to the front of the line and answer it right now.

Lining up another great episode of The Real Estate Guys™ Radio Show:

  • Your deal flowing host, Robert Helms
  • The Godfather of Real Estate, Bob “Flomax” Helms

As every child quickly learns, life isn’t fair.  And as much as politicians and community organizers try to “level the playing field”, the brutal fact of life is that some people get treated better than others.  As Don Henley croons, “Get over it.”

So now, rather than complaining or opining about how it should be, let’s just deal with the way it is.  The good news is there are lots of practical things YOU can do to enhance the quantity and quality of real estate investment opportunities that come your way.

First, you have to get the right mindset.  That is, you need to operate from the basic belief that your reputation is the foundation of earning preferential treatment.

Think about the brands you love and those you hate.  We all have them.  For example, we LOVE Southwest Airlines.  We travel all the time and we’ve found Southwest to be great the vast majority of the time.  Perfect?  No.  But when something goes sideways, we let it slide because it’s rare and they work hard to make it right.  Consequently, Southwest is usually the FIRST airline we will book with, even if we have to pay a little extra (which seldom happens).

On the other side of the coin is Delta Airlines.  In our dictionary, DELTA stands for Don’t Ever Leave The Airport and Don’t Expect Luggage To Arrive.  We hate Delta.  We go out of our way to avoid Delta.  And if we have the opportunity to take a cheap shot at Delta (like this one), we will.

See the difference?

In your real estate investing business, who do YOU want to be?  When a great deal comes across a broker’s or a wholesaler’s desk, do you want to be the person they would crawl naked across a freeway of broken glass to avoid, or do you want to the the FIRST person they call with that really amazing opportunity.

So step one is understanding your reputation is IMPORTANT.

Side note: Just so you don’t think we’re just shallow, vindictive, grudge holding, petty guys…you should know we had a HORRIBLE experience with American Airlines just this month.  REALLY bad.  Russ was ready to file them in the Delta file.  It was THAT bad. 

But Robert was a more gracious.  So even though American completely screwed up a very important trip when it was easily within their power to help us, Robert realized it was their FIRST egregious offense.  So because it was just one particular supervisor at the DFW first class counter who shall remain nameless (“Kirk”) we gave the company a chance to redeem themselves.  And they did.  First, by hearing the complaint and taking steps to compensate.  And even though it was too little too late to make a practical difference, it was a nice gesture.

But more importantly, American won Russ back by providing a genuinely fabulous customer service experience through flight attendant Charlene on a return trip from our Belize field trip. So, as Harry said to Lloyd in Dumb and Dumber, “Just when I think you can’t be any dumber, you go and do this….and totally redeem yourself!”.

All that to say, Delta hasn’t redeemed themselves.  But we’re not bitter….not at all.  Now back our story….

So HOW do you get to the front of the deal flow line?

First, be clear about what you want and what you’re willing to do, so you can make fast, accurate decisions.  You don’t have to always say yes (more on that later), but when you do, you can’t come down with a bad case of buyer’s remorse.  Let your yes be yes, then aggressively perform your duties under the purchase contract.

When thinking about that “right” deal, consider the market, price point, property type, cash flow, property type, available financing, deal terms, upside potential, long term equity potential, etc.

Yes, it’s a lot to think about.  So the time to think about it is NOT when the deal is sitting on your desk for your review, or worse, after you’re in contract and your due diligence period has begun.

Get all that figured out before the deal’s on your desk, so you can tell the marketplace what you’re looking for, and you can say “yes” or “no” decisively when the deal arrives.

Don’t Blow Your No’s

Unless you’re willing to buy anything anywhere from anyone at any price, you’re going to get deals that won’t fit your profile.  That’s okay.  Just don’t waste the deal.

Remember, every deal coming across your desk is looking for a buyer.  That’s why it’s on your desk.  But if you’re a “no” more often than a “yes”, you can bet it won’t be long before those deals stop calling.  It’s like dating.  Too many no’s and the invitations stop coming.

So, we think it’s a really good idea to build a big network of fellow investors.  Take the time to find out what other investors are looking for and keep good notes.  Then, when a deal comes across your desk that doesn’t fit in your wheelhouse, you get a chance to take a double dip in the goodwill pool by referring it out to someone that it’s a better fit for.

Now, you’ve helped the deal find a home (the seller and his agent will really appreciate that, and will probably bring you a deal again), AND you’ve helped another investor find something they’re looking for.  Wouldn’t you want someone bringing YOU good deals?

Don’t underestimate the value of being a connector.  Sometimes, there’s room in the deal for you to get financial compensation.  But even if there isn’t, you should do it any way.  The good deal “karma” should provide an even better long term reward.

Be a Boy Scout

The boy scout motto is “Be Prepared”.  Good  idea!  But what does that mean in the context of pushing to the front of the deal flow line?

First, as previously discussed, know what you’re looking for.

Next, know your market.  A “good deal” is always “compared to what?”.  If you don’t really know your market, you might not recognize a good deal (or a rip off) if it hit you in the face.  By the time you’re holding yourself out to the world as Ready, Willing and Able, you should have invested the time to know what prices, rents, etc are in your target area.

Also, be liquid.  That means you have your earnest money and down payment cash ready to wire.  If you’re a syndictor and need to collect funds from your investors, at the very least, make sure they all have their funds ready to go.  Don’t assume they’re standing by to wire you money because they said they were in six weeks ago.

Line up your lender.  If you’re planning to use financing, make sure you’ve got your mortgage funding sourced and you know what the underwriting looks like.  In some cases, a pre-approval is appropriate.  In any case, you should be aware of all the documents you’re going to need to provide when formal underwriting begins.  They’ll be plenty of paperwork to sift through that’s related to the property, so it’s a good idea to have all the paperwork necessary for the borrower as prepped as possible.

In addition to your lender, have your other team members on deck.  There are some technical team that are near you, like your advisors for tax, asset protection, estate planning, etc.  They deal with you more than the property.  Your lender may be in this camp too. Sometimes, the lender will be part of your “away” team (the people who need when you’re investing someplace other than where you live).

Your primary local market advisors include property management, inspectors, property insurance and real estate law.  Most of the time, these advisors needs to either be near the property or be licensed and expert in the laws of the area where the property is located.

But if you have 1-3 weeks for due diligence after you’re in contract, or you have a 24 or 48 hour period to review the deal before it get’s passed on to the next person, then you don’t want to waste one minute chasing down your team.  Have them lined up, too.

Okay, now that you have your head screwed on straight and your team line up, it’s time to go wade into the deal flow.

There are two schools of thought, but they’re both based on the same concept.  Opportunities that everyone sees tend not to have as much profit meat left on the bone.  They’re a little picked over.

School #1 says, “Anything in a public listing is crap that won’t sell, therefore it’s a bad deal.”

School #2 says, “Anything in a public listing is crap that won’t sell, therefore the seller will be more pliable and I can negotiate favorable terms from a motivated seller.”

Both are right.  You just need to decide how much time you want to spend trying to find the elusive silver lining in a deal that most other people saw fit to pass up.  It’s not that you can’t get a good deal, but how hard do you want to work?  And are you REALLY that much smarter than everyone else who passed?  We’re not.

We think there’s a better way.

Pocket listings are a good source of good dealsFirst, understand that in the investment world, it pays to be an insider.  With paper assets, you risk jail time.  But not with real estate.

So while real estate agents who deal in owner-occupied residential routinely advertise, it’s because they need to get maximum exposure to find that one person or family that the home will be a good fit for.  The parties will come together and do that one deal, then they may never see each other again…at least not for several years.

But investment agents play differently.  They have clients who are serial buyers.  They’re often more loyal to the buyer than the seller because the buyer are a source of more repeat commissions.

Which brings us to the next topic…

Real estate agents will typically take the shortest path to the surest payday.  Bigger is good.  Faster is better.  Bigger and faster is best.

If you want to be first in line, don’t slow things down by being wishy-washy and disorganized.  And don’t try to get into the agent’s commissions.  Because if bigger and faster is best, then slower and smaller is worst.

When you go to the big concert and are trying to get backstage, and there’s a big dude in black clothes holding the red rope, do you ask him for a five-spot or do you introduce him to your friend Benjamin (Franklin that is)?  Get it?

Great investment agents that control inventory are the gatekeepers to something called “Pocket Listings”.  These are deals that the market doesn’t know about.  If you want YOUR phone to be the one that rings first, remember that bigger and faster (commissions) is best.  If the deal can’t support that, then it’s not a “great” deal.

We could go on (and on and on and on)….can you tell?

But right now, we’re looking for the shortest path to a back rub and a cold beer.  So listen into this episode of The Real Estate Guys™ radio show and discover how YOU can take your real estate investing to the next level by getting to the front of the line for great deal flow.

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1/26/14: From the Archive – Practicing Safe Syndication

Many people are seeing the big opportunity in raising private money to do more and bigger deals.

So we thought it would be a good idea to go into the Archives and dig up an episode we did with our friend and attorney Mauricio Rauld.  After all, we don’t want anyone getting into a syndicationally transmitted debacle.

Providing prudent policies for practicing safe syndication:

  • Your carefree host, Robert Helms
  • His cautious co-host, Russell Gray
  • Attorney and wet blanket, Mauricio Rauld, Esq.

Raising money from investors can be a great way to to fast track into full time real estate.  It’s an alternative to the typical “how-to-get-started-with-nothing-in-real-estate-investing” techniques such as wholesaling or bird-dogging.

Even better, it gives you a chance to build a portfolio of your own right from the beginning.  Wholesaling is about generating quick cash today.  But you need to keep finding new deals all the time.  So while it’s a great way to make fast money, it’s a treadmill of feast and famine.

Whereas (we just wanted to say that because it sounds kind of legal), building a portfolio of income producing properties and earning a recurring management fee can be a a way to earn money from a real estate portfolio that you build using investors’ money.

But this episode isn’t about convincing you that starting a fund or taking on partners is the best way to go.  It’s more about important things you need to be aware of once you decide to go down that path.

Many real estate investors don’t have much legal background.  So they go buy a few houses in their own name and rent them out.  After a while, they move up to apartment buildings or small strip centers.

At some point, hopefully sooner rather than later, asset protection and estate planning attorneys get involved.

Meanwhile, your friends and family see you doing well (or they read the papers and see real estate is doing well) and they want to get into a deal with you.

Great!

So you all put something into the deal and you’re elected to manage it.

Oops.

Here’s where it starts to get sticky…

(Remember, we’re just radio guys, not lawyers…so check with your own attorney…or call Mauricio…before you take any action on anything you find on the internet, including this blog)

If you take money into a deal where you’re in control of the deal, even if you’re not offering shares of an entity like an LLC or corporation, you might be offering a “security”.  And when you offer a security, there’s a few important things you need to be aware of.

First, all the the risks that you can reasonably be aware of need to be disclosed.

Next, you want to be very careful about “blue sky” (as in “there’s all sunshine in the forecast”) and other “forward looking” statements.  It’s a fine line between saying what you HOPE will happen and making a PROMISE that something will happen.  You might know what you mean, but if it’s stated the wrong the way and things go sideways, a plaintiff’s attorney can twist those words into a liability producing commitment that you failed to meet.

Also, when you’re conducting business on behalf of an entity, it’s important to always follow proper corporate formalities.  If you say or sign something in your own name, without properly putting all parties on notice that you’re functioning in the role of manager or officer of an entity, then you may have inadvertently created “a hole” (our nickname for the lawyers of financial predators) in your corporate veil.

That means EVERYTHING you own is potentially at risk.  Yikes!

Are we trying to scare you away from syndication?  Certainly not!

But we are trying to scare you into being sure you’re smart about it.  Just like when you took driver’s training in high school and had to watch all the movies about nasty car crashes.

Syndication is something people do safely all the time, just like driving cars.  But like cars, it’s a big responsibility and one you should take seriously.

Once you get some experience, you can operate your syndication business with great speed and skill.

So if you’re new to syndication or want to get started, listen in to this episode as attorney Mauricio Rauld shares important things you need to know about how to practice safe syndication.

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1/19/14: Creating Power Partnerships – Finding and Becoming the Right Partner

Real estate investing is a business that often attracts loners and mavericks.  Freedom from bosses and co-workers is often as much the motivation for going full-time as is making gobs of money.

But we’ve noticed that many of the most successful investors we’ve met usually end up in partnerships, whether they are temporary of permanent.

So we thought it would be good to talk about our experiences and observations when it comes to putting together powerful business partnerships.

Partnering up in the studio to produce this powerful episode of The Real Estate Guys™ radio show:

  • Your howdy partner host, Robert Helms
  • His hoe-down co-host, Russell Gray

Power could be described as the ability to create motion.  Planes, trains and automobiles are powerful.  So are rockets, tanks and bulldozers.

People and animals can be powerful too.  Think about a strong man who can move heavy weights, or a big plow horse tearing up fallow ground.

But people are unique when it comes to power.  It’s more than brute force.  Sometimes people are powerful because they can make things happen through persuasion, planning or effective decision making.  These skills put other people in motion.  It’s why a CEO or national leader is powerful.

So when it comes to real estate investing…and really business in general…the ability to get things done with and through other people is powerful.  But sometimes it’s overwhelming or beyond the scope of one’s personal skills or resources.

That’s where having partners comes in.  The right partners can bring critical skills, perspectives, relationships and resources to any endeavor.

But the wrong partners can bring strife, distraction, confusion and chaos.  If you’ve ever been in or around a bad partnership, you know how awful it can be.  There’s still energy, it’s just not positive, organized and focused forward.

The same power that can launch a rocket into space can blow up a city block.  The difference is focus and control.  Ditto for a trained and harnessed horse or a bucking bronco.

So how do you make sure you get into positive, effective partnerships?

First, it’s important to have an alignment of mission, vision and values.  It sounds trite, but it’s not.

Your mission, vision and values are your guidance system.  They keep you focused and channeling your energy towards specific outcomes.

So it’s important when considering a partnership to spend time first just getting to know YOURSELF.  Then into having an HONEST conversation with your prospective partner.  Be careful to stay true to your MVV no matter how attractive the partner is.  No amount of money is worth hating who you look at it in the mirror every day when your brush your teeth.  There are lots of people in the world.  Take the time to find partners who share your MVV.

Next, you have to make sure you TRUST your partner and vice versa.  Keep in mind that trust is a two-sided coin.

One side of trust is ethics.  It’s critical that your partner is trustworthy.  Not perfect.  God didn’t make any perfect people.  But transparent enough that you know who and what you’re dealing with. You need to know that you’re partner is the same even when you’re not looking.  And that he or she has your back when things go sideways (as they always do).

The flip side of the coin is competency.  It’s great to have an honest, transparent partner.  But if he’s incompetent, then he’ll feel bad when he blows it.  But he’ll still do damage.

Conversely, a skillful, but unethical partner, will surgically separate you from your money…and maybe your relationships and reputation.

So make sure your partners are both ethical AND competent.

It’s also really important to play a fun game of “what if” with your prospective partner.  As in, “what if this or that happens?”.   While it isn’t possible to anticipate all the variables, it’s worth talking about how you’ll handle things when there are disagreements or unintended outcomes.

When you get to deciding how to put the deal together, try to be clear about what needs to be done, who’s going to do it, and how all the compensation will be handled.  Simply going through this process can often flush out potential problems way before there’s real risk involved.

If your prospective partner doesn’t value you or your contribution fairly, or isn’t willing to take on their fair share of risk and responsibility, you may want to think long and hard about that partnership.  If you’re already feeling it’s not fair in the planning stages, how will you feel when you have real blood, sweat, tears and cash going out?  Resentment will be your constant companion and that can kill the positive energy you need to be effective.

When you finally get through all the dating and you think it’s a match, then take the time to document the major deal points in an MOU (Memorandum of Understanding).  Some people think it’s an old-school badge of honor to do a handshake deal.  We think it’s better to get few bullet points down and make it clear about your Mission, Vision, Values; who’s contributing what and roles and responsibilities; how money will be handled and how decisions will be made.  And very importantly, how disagreements will get settled.

Usually (and remember, we’re just talk show hosts, not lawyers), you’ll want to form a legal entity.  Your tax and legal advisors can walk you through all of that, but your aforementioned MOU will help them create your entity’s Operating Agreement or By-Laws.  Having done the work up front with save you a TON in legal bills.

Sound like a lot of work?  It is.  But a few pounds of hard work on the front end can save you several tons of pain later.  It’s like the old carpenter’s adage: measure twice, cut once.  Like failed marriages, business divorces can be ugly and expensive.  They’re to be avoided.

Here’s the good news.  A great partnership can be worth a lot more than your partner’s weight in gold.  Even if he or she is chubby.

So how do you attract a great partner?  By being a good partner.  Be the kind of person a powerful partner would want to work with.  Work hard. Be honest.  Develop skills and valuable relationships.  Be attentive not only to your own needs, but the needs of others.

It’s really no different than in any kind of relationship.  And the right partner won’t expect you to be perfect.  Keep that in mind when you’re looking for and working with a partner.

People are package deals.  If you want all the good stuff, you’re probably going to have to accept some stuff that bugs you.  Just make sure those things aren’t deal breakers for you.

The best news is that when you get good at putting together power partnerships, you’ll find yourself doing more better, bigger and faster than you ever dreamed.  And you’ll find that your slice of a partnership pie is probably a lot bigger and better tasting than the tiny pie you would have if you went it alone.

So tune into this episode and discover how you can create power partnerships to do more faster!

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