Dallas Real Estate Market Update From Local Pros

dallas real estate market

The Dallas – Fort Worth metro has been one of the best real estate investment markets of the last 8 years.

Where’s it at today? Are the travails of the oil industry dragging Dallas real estate market down? And is Dallas still a darling of hedge fund and foreign investment? Do the recent reports of Dallas being the top market for real estate investment in 2016 still hold true?

To find out, we sit down with three boots-on-the-ground local Dallas real estate market experts…and take the residential real estate pulse of Big D.

Discussing how you can bring value to the table even when you have no dollars:

  • Your ask a question, but not in the form of an answer … this isn’t Jeopardy show host, Robert Helms
  • His “I’m no tv host. I just play one on the radio” co-host, Russell Gray
  • Residential Management Professional at Frontline Property Managment, Jay Hartley
  • Broker/Owner at Professional Asset Management and Sales, Pam Blanco
  • Sales Director at American Real Estate Investments, John Larson

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(Show Transcript)

Welcome

Robert Helms: Welcome to the Real Estate Guys Radio Program! Thanks for tuning into the show. We’re in Dallas, Texas today. Let’s say hello to our co-host, financial strategist Russell Gray.

Russell Gray: Hey, Robert!

Robert Helms: Always good to be in Texas!

Russell Gray: It’s awesome. I love it here.

Robert Helms: Yee-haw! A week now I’ve been in Texas. Probably heard us last week on the show. And we heard it was the number one market according to the folks at Price, Waterhouse, Coopers. Not that they’re the authority on real estate, but we look at all kinds of information, especially at the beginning of the year to see what markets are hot. A lot of folks are excited about the Dallas, Texas real estate market.

Russell Gray: Yeah, Dallas has been a market obviously we’ve been paying attention to for quite some time. Anybody go back and look at the archives, way back coming out of the great recession, you know, we’ve looked at different markets, and which ones were positioned to rebound well and do well, and we identified Dallas, Texas as being one of those.

Started coming out here, and of course, back then, properties were real inexpensive, and there was great demand, and good rental demand. And the rent ratios and all that stuff was really strong. And over time, the Dallas real estate market changed, right? Dallas was no longer the best kept secret.

 

Who’s Investing in Dallas?

And you’ve got people not only from the local area investing here – people all over the United States are coming here. But you’ve got people from all over the world coming here.

One of the statistics I was really surprised at that I looked at about a year ago, was about 11% of the sales were coming from China, which I thought was really interesting. Of course, now we understand what’s going on in China a whole lot more, and there’s been a capital flight; people trying to get their money out of China, and into good, quality assets, like US real estate. When they looked, even though they loved the coastal cities like San Francisco, they actually really liked Dallas because of the strong local economy.

 

How Current Events and Factors Will Affect the Dallas Real Estate Market

Robert Helms: Well we’ve seen other changes in Dallas, right? For years and years and years, property values didn’t change here very much. Nor did rents. Pretty stable. One of the great things about this market is the diversity of employment. There isn’t one industry here. There’s a lot of big industries here. And that’s also one of the things you look at when you look at real estate markets.

You can make money owning a house anywhere in the world, but the market is such an important driver that you’d really want to understand what’s beneath the demand for rent.

Russell Gray: Right, you know, we talk about this a lot. We look for jobs that are geographically linked. Jobs that cannot be easily moved. And two of those are things when you’re pulling things out of the ground, like oil and gas, which Texas is known for. That’s a job you can’t move off shore. That’s got to happen in the geography.

dallas real estate market affected by oil - oil well

You could make the argument about farmland, and some other things like that, too. In Dallas’ case, you’ve got distribution. That’s another huge one. Dallas is a major distribution hub. One of the reasons we like Memphis; it’s one of the reasons we like Atlanta. Of course, over the last year, or the last at least several months, we’ve watched the price of oil take a precipitous decline. It tanked, if you will.

Robert Helms: So to speak.

Russell Gray: It’s been a slippery slope. So, at any rate, the big question now is, how is that going to affect the Texas economy? And in our case, how is that going to affect the Dallas real estate market?

My gut tells me, not as much as it would maybe some other Texas cities, where that is a much greater percentage. You know, if you pie chart an economy, and look at the Dallas real estate market, it’s a piece for sure.

But they’ve got financial services here, obviously distribution like we talked about is here. There’s a lot of other industries that are here in Dallas.

Technology, for example, medical, it’s a huge educational city. There are a lot of great colleges here. So there’s lots of reasons why people want to live here. There are lots of reasons why businesses want to locate here.

dallas real estate market - businesses

There are lots of reasons why people want to stay here after they’ve come here. They want to settle here. You know, colleges are a great way of bringing people in.

So, Dallas has many, many things going for it. Now we’re in a place where people are saying maybe real estate’s in a little bit of a bubble. We don’t know. We’ll see. How resilient would the Dallas real estate market be? It was very resilient last time. So, we’re here to check all that out.

 

Jay Hartley and Property Management in the Dallas Real Estate Market

Robert Helms: We are in Dallas, Texas. Let’s meet native Texan, Mr. Jay Hartley. How are you, sir?

Jay Hartley: How are ya’ll?dallas real estate market update - Jay Hartley

Robert Helms: Good, good. Welcome back to the show. We’ve had you on a number of times. You know, it’s interesting, if you want to know the pulse of what’s happening in a rental market, talk to a property manager. So you’ve been in the property management business a quarter of a century. How is it today? What’s it looking like today in terms of tenants and just all that stuff, Jay?

Jay Hartley: We are rocking. The demand is just through the roof. Housing prices are going up. Rents are on the rise, and I love it.

 

Dealing With Rent Increases

Robert Helms: Well, that’s a good point, because when we see a market get strong based on appreciation and housing prices going up, doesn’t always means that rents go up, and we want them to as investors, for sure. You deal actually in a pretty wide range of property, but the bulk of what you guys manage is single family. So how is that working, and how do tenants take, say, a rent increase?

Jay Hartley: Well, they are coming to expect it. It’s becoming easier and easier to justify a rental increase because of the market the way it is. And it takes me about 30 minutes to convince a tenant, if they’re having any reservations about paying a higher rent, to let them go look at a couple of other properties and see what they’re renting for.

And most of the time any tenant that I have and I tell them that their rent’s going up, and they can renew for another year or two years or what have you, they’re okay with paying more, cause they know what it’s going to cost them to move, and pay the same rent or even higher than what I’m offering.

Robert Helms: Now are you seeing a change in terms of how frequently people move? Is that a change in the marketplace?

Jay Hartley: It is. Tenants are staying longer and longer, and it’s surprising. We’ve become accustomed to multiple year leases, and we’ve had to try and work that into our model to where we’re increasing. If somebody wants to do a long term lease, we’ll work it out, but we need to build in some increases so I’m not losing my client’s money.

 

Turn Around Time

Robert Helms: Now one of the things – a metric we look at, when it comes to marketplaces – days on the market, how long does it take to turn a property? And I can remember since we go back years and years, there were a few times in this market when it was a couple of months sometimes before you’d find a tenant. What does that look like today? A property becomes vacant, how long does it take to get it turned?

Jay Hartley: Typically it takes about a week. We could see anywhere from a week to 15-20 days. Whereas in the past, it was months at some point. A lot of times we’ll have the property leased to a new tenant, if the old tenant’s moving out. Or if we’re buying and rehabbing a property, before it’s ready we’ll have it rented and a new tenant scheduled to move in.

 

Trend: Are People Buying More or Getting Out?

Robert Helms: Now let’s talk about kind of the size of your company. You’re about 800 houses under management right now. So, we ask you that almost every time that we see you. And that number’s always gone up, so you’re continuing to add investors, your client base.

As typically a real estate investor who has a house or multiple houses is. How is that? Are you seeing your current investors doubling down, buying more? Is that the key? Or are people saying, well the market is going well, we’ve seen appreciation, it’s time to get out.

Jay Hartley: I’m seeing both and it’s hard to adjust. We are seeing the clients that have owned their homes for 8 and 10 years that now see such an increase in their values that they see it as an opportunity to get out. But, I also see others where they just want more and more. They see the market on the rise, they know we’re nowhere near the peak, so they’re buying as much as they can get ahold of. And as much as I can find for them.

Robert Helms: And that’s part of it, right? If I look at this marketplace and I say, I’m glad I bought houses 10 years ago, at the same time, a person coming in brand new, first time investor, maybe they don’t have a lot of property yet, there’s a lot of reasons that this market makes sense. Because of what we talked about in terms of the durability of the tenant base.

But is it too late? Are the properties still performing at today’s rent and price value?

Jay Hartley: You know, hindsight is always 20/20. And I’ve listened to so many experts come on your show for years and years, and I wish we could have convinced people 5 and 6 years ago to come in droves, cause we needed them as much as we could get, and if we could, we’d be wealthier and smarter for it. But, it’s not too late. There’s still opportunity to be had. And if you’re smart, you’ll get off the couch and get up and buy some real estate, and help us fill the demand that we have right now.

 

Not Managing Your Own Portfolio

Robert Helms: Well, one of the things we love about you, Jay, is you’re a guy that walks your talk. You’re an investor and a landlord, but you don’t manage your own properties.

Jay Hartley: No, I don’t. I found out a long time ago it’s not a good idea for me to be personally involved in my investments. So, in our company, no one manages their own portfolios. So, in actuality, my brother manages my homes, I manage my brother’s, and my mother’s, and all of our employees follow suit.

So, we don’t want to become personally involved. I don’t care what the tenant’s story is. If you can’t pay rent, you’ve got to go. I want them to pay rent. And if I’m personally involved, I’m liable to make a bad decision, so I don’t.

 

Landlord Laws in Texas

Robert Helms: That’s such an interesting mindset there. Now one more thing about property management that I want to cover quickly with you. For folks that maybe aren’t familiar with Texas, we always like to, when we go into a market, ask, is it tenant friendly in terms of the laws and so forth? Is it landlord friendly? And Texas, the answer’s obvious to us, but what say you there?

Jay Hartley: It is very landlord friendly. Some of the horror stories I’ve heard from other parts of the country just make me cringe when I hear the things that people have to go through in different states. We won’t name any of those. But in Texas, it’s very easy to be a landlord. We’re able to evict quickly if we need to. The laws definitely favor the landlord.

 

Challenge of Not Enough Inventory

Robert Helms: Good stuff. Now one thing I wanted to ask you about, and this is more about that eating your own cooking thing, you saw this market get strong, and one of the challenges last year when we talked was, just not a lot of inventory available. The hedge funds had come in, and we’d been squeezed out in terms of margins, so you actually took kind of a detour if you will, and looked at building some property. Talk about that.

Jay Hartley: You know we try to follow market trends the best we can. We want to be ahead of the curve, and know where the pitfalls are if we can avoid them. So, one of the issues we saw coming down the pipe was that we didn’t have enough inventory, and the deals were not strong as far as being able to buy properties and get them for investors, to where they could really make the great cash flow that they were expecting.

So, one of the ways that we tried to offset that was instead of buying, rehabbing, and leasing them out and selling them to investors, the turnkey model, we were having difficulty with that. So one of the solutions we came up with was we decided to start building our own homes.

So, initially I went out, and I hired a good builder – a very reputable builder. We started buying lots and land, and we started building our own homes, leasing them out, selling them to investors. A cheaper price than what they would have paid from a regular builder. And that was a very good model for us.

So we’ve enhanced that as much as we can, and that seems to be really growing for us. And I’m glad I took the risk. I was a little nervous about that at first, cause I’d never built a home in my life. But I got the right members together on my team, and we’re very successful at it.

Robert Helms: Alright, good stuff. Well, as always, great to see you. Thanks for the update.

Jay Hartley: Thanks! Appreciate you being here.

(Get in touch with Jay Hartley)

 

Pam Blanco’s Take on the Dallas Real Estate Market

Robert Helms: There’s Jay Hartley. We’re in Dallas, Texas talking about the market and what’s going on. Let’s say hello to our good friend Ms. Pam Blanco. How are you?

Pam Blanco: I’m good how are you?dallas real estate market update - Pam Blanco

Robert Helms: I’m good. I hear you’re busy.

Pam Blanco: We’re very busy.

Robert Helms: Yeah, tell us about the market. We are excited to be here. From afar, people are saying Dallas is strong. We wanted to get on the street level and say, you know, you’re working with clients. What’s happening here locally?

Pam Blanco: Well, obviously there’s a demand for inventory. We have a shortage. So, we’ve got a lot of buyers that are still looking for properties. We’re starting to see more inventory come back on the market. So, we’re seeing some foreclosures. So we’re able to get some deals.

Still, the hedge funds are in binds. So they’re a little bit more educated now, so they’re not just paying way over market value. So, some of our hedge funds are paying attention to market values, and ROI’s. We are seeing some good inventory come back, and we’re starting to see business pick back up.

Robert Helms: Well, this is interesting, because you work with a lot of investors, one on one, and you’ve got certainly a book of clients, but you’ve actually represented some of those funds in the past.

Pam Blanco: I have.

Robert Helms: Yeah, so you see both sides of it.

Pam Blanco: I do. And we actually still work with a couple of hedge funds now. They used to buy quite a few properties a month, so we’re starting to see that slow down. So, where they were buying 30-40 a month, they’re buying 10-20. Whether it’s been trial or error, they’ve educated themselves so they’re careful on the properties that they choose.

 

The Process for Your Investors

Robert Helms: Now let’s talk about the investors that you work with who come in, because you have a little bit different model sometimes with these folks. If someone is looking and interested in the Dallas real estate market place, you’ll go out and you’ll help them find a property, and then kind of manage them through the rehab of it.

Pam Blanco: So, we have investors, we’ll send them ROI sheets. We have a rehab team, or a research team that searches for properties. We’ll send them a list of properties. We’ll walk them through the whole process from you know, their selection through actual closing.

Once they close, we will actually perform the rehab for them. So they have a choice. They can either buy a turnkey property, or they can get a little bit better deal and do the rehab.

 

Avoiding Over-improving Properties

Robert Helms: Now how do you decide how much work to do? When we toured a couple of your properties, it was amazing to see that you kind of just had a sense, or you tell me of how much is too much work? Cause you can see an over-improved property, where you’re not going to get that return back, but enough where the tenant walks in and goes, yeah!

Pam Blanco: Well, most of it, you know, we’ll try to pick properties that don’t need extensive rehab, so you know, we’re looking at properties that we can work with some of the bones and some of the structure that it has.

So if we don’t have to replace the tile, we’re not going to replace it. So we’re going to pretty much design everything around what is actually there and what is functional. So, sometimes, you know, we have to replace cabinets. But I’m going to say our average rehab is going to be anywhere from $10,000 – $15,000.

Robert Helms: Ok.

Pam Blanco: So we’re trying to keep as much that is there, without having to replace it to save them money.

Robert Helms: And because there’s demand on the trades and so forth, what’s the time for a $10,000 – $15,000 rehab? What’s the turn around time on that?

Pam Blanco: Typically a week.

Robert Helms: Ok. So, you are looking at someone coming in, an investor coming in, buying a property that you know needs work, you’ve done a scope of work, or estimate of value?

Pam Blanco: We do. We actually walk the properties. We get a detailed list of what needs to be done. We give them the price, so once the property closes, our teams have already been in there. So we just send them and they can get it finished.

 

Apartments Demand in the Dallas Real Estate Market

Robert Helms: Now one of the interesting things as we’ve been getting to know each other over the years, is that you do a lot of single family, but you also do some multi-family and duplexes, four-plexes. How’s that part of the market right now?

Pam Blanco: Again, supply’s pretty low, but when we’re able to find some properties and we can rehab them, they’re typically in lower income areas, so we’re able to go in and offer a better product than what is actually there. So we’re able to get higher rents.

And so we’re starting to set some of those trends in those neighborhoods where we’re getting higher rent, and the expectation of some of the other owners is to rehab their properties, as well. So it’s kind of a win-win.

Robert Helms: Now in terms of kind of that tenant profile, how low do you go? I mean, are you alright working in some of the tougher neighborhoods? Or where’s kind of the sweet spot for what you guys are doing?

Pam Blanco: Typically, we’re going to stay in a little bit higher end. We’re going to try to keep – I think our lowest rent’s $1,095.

So we try to stay in neighborhoods where we’re not going to have a lot of theft, where we’re not going to have a lot of turnover. Because what happens when you’re into some of the lower income areas, these tenants typically don’t have any savings account, so one little thing happens – they get in a car accident – they can’t finish.

 

Choosing How Much to Spend on Fixing a Property

Robert Helms: So now imagine that you have somebody who comes in and they buy a property and they decide they don’t want to do as much work as you might suggest. Do you just say, “Well, that’s ok.” You handle it or… tell me about that part of it. Cause I might look at your sheet and go, “$15,000? Gosh that makes a really pretty house, Pam, but, can’t we rent this thing if I just slap on some paint?”

Pam Blanco: And sometimes the answer to that is yes. So there are some cosmetic things that we can do, that’s going to make a difference and still be able to get a certain amount of rent.

But obviously we’ve got things that we have to bring up to the landlord codes, so we have to make sure those items are taken care of. You know, but some investors will come in and say I don’t want to replace the appliances. You know, I probably have two more years left on the appliances. Or the AC; I probably have 4 years left.

They actually have a choice to go through our rehab list, and pick out the things that they choose not to do.

 

Strong Tenant Demand in the Dallas Real Estate Market

Robert Helms: Alright. Good stuff. Now, when you’re looking at the other side of it, which is tenant demand, is that, you’re seeing, strong? Tenant demand still?

Pam Blanco: There is a strong tenant demand. And, you know, but what we also hear is that there’s a lot of management companies out there that their rehabs are less than quality rehabs. So, you know they’ll go look at properties that are in really, really bad shapes, and they know when they come to one of our properties, that they’re going to look very nice.

 

Acquiring Properties and Financing For Rehab

Robert Helms: Well, and that’s a key. One of the distinctions is saving money, right, as Brian Tracy says, the pain of low quality often outlasts the pleasure of low price. If you cut too many corners, then you’re hurting yourself, because a tenant’s going to look at more than one property, and they’re going to go, “Oooh.” Right? Get that feeling.

Let’s talk about from the acquisitions side. If I buy a property where the work’s all been done, and I’ve got a tenant in there, and I financed that, then everyone knows what that looks like. But in this case, if I’m buying the property, and we looked at one earlier. It was $110,000 to buy it. It’s going to need maybe $15,000 worth of work. How does the financing work on that? Do I have just have to come up with cash for the rehab?

Pam Blanco: Most of the investors will come up with the cash, because they don’t want to finance that, but there are several lenders that will actually loan money for the rehab. So, they’ll put the rehab in with the actual loan on the property. So they can finance their rehab in, and chances are their payments aren’t going to be but maybe couple of dollars more.

Robert Helms: Alright, now, you’re a Texan by choice; you weren’t born here, right? And you and Jay know each other really well, and we always laugh at Jay because he’s been here his whole life. What brought you to Texas, and even more so, does this seem like a market that has enough legs that you’re going to stick around?

Pam Blanco: Well, I love the Dallas Texas real estate market. I’ve been selling real estate for 20 years in this market, and I love it. I’m actually from Ohio, but I came here as a child, so I didn’t have a choice.

Robert Helms: Ah, you were drug along, and you stayed.

Pam Blanco: I won’t leave.

 

Challenges in Dallas Real Estate Market

Robert Helms: What are the challenges in a market like this? Investors are coming in, Pam, and they’re saying, “Alright, I get it. Dallas is great.” But, what do they need to know before they come into a market like this?

Pam Blanco: They just need to make sure that they’re with a good team. So, that it’s somebody that understands the market, understands the neighborhoods, understands the schools, somebody that can help them, you know, in their decisions. They need a good property management company that’s going to you know look out for their best interests, and make sure that they’re managing that property.

Robert Helms: Alright, good stuff. Well, as always, thanks for your input, and we appreciate your time today.

Pam Blanco: Thank you.

(Get in touch with Pam Blanco)

 

John Larson and Choosing the Dallas Real Estate Market

Robert Helms: We’re talking about the Dallas real estate market, and so blessed to have some folks who are working in this market, and very excited to introduce our listeners to someone who haven’t talked to before. Let’s say hi to John Larson. Hey John!

John Larson: Hey, Robert! How are you doing?dallas real estate market update - John Larson

Robert Helms: I’m good! Welcome to the program. Now you came to Texas via Michigan. So tell us about your real estate background.

John Larson: Yeah, first and foremost, go blue! And, yeah. So I started off as a high-end, retail, real estate agent in Michigan. Things were good. You know, I learned a lot from there. I learned how to interact with buyers, what certain buyers were looking for, from a retail aspect.

But then, you know, I met a couple of investors who were doing a lot of high end flips in Michigan, and I just quickly realized I was getting a lot more steady business from the investors as opposed to, you know, the finicky “buyers are liars,” which is something we throw around in the retail real estate industry.

But yes, I was just looking for more of a consistent money stream, so I felt like working with investors was the best option for me at that time in my career.

Robert Helms: Alright. We’re focused, of course, today on what’s happening in the Dallas real estate market. And you specifically came to Dallas. So tell us, why Dallas?

John Larson: Well, plain and simple: jobs are why we came to Dallas. We are a turnkey provider. We do produce more of an A class type investment, which, you know it’s average sales price to one of our clients would be $170,000, average rent would be about $1,600.

dallas real estate market update - driven by jobs, job growth map

Growth in clean jobs by state 1998-2007

And we do believe that Texas is the best market right now, and the major cities in Texas, these are the best markets that support that A class model.

 

The Process For A Class Buying

Robert Helms: Alright. Let’s specifically talk about that model, because for a lot of folks, they want to look at a market and understand kind of the drivers behind it, right? In Real Estate Guys’ vernacular, the first thing is your personal investment philosophy – who you are. Next is the market. I’ve got to find a market that can deliver.

Once I’m pretty solid on a market, and the market is strong, then I’ve got to find a team, cause they’re going to help me, and then ultimately the property. But the property without the team isn’t going to work very well.

So if we’re talking about the market and how strong the market is, then the next thing is (of course you’re talking about jobs and drivers and so forth) but then, do the numbers work? So the A class model is for a person that comes in and says, “You know what? I don’t want to do any of the work. I just want to come in and I’m ready to go.”

So when someone buys a property – when an investor buys a property from you guys, what’s it like?

John Larson: Our properties are top notch. They’re beautiful homes. I mean, you’re looking at homes that range from anywhere from 1,500 square feet all the way up to I’ve sold properties that are 4,000 square feet. Fully renovated, you know we even changed down, everything out to all the light fixtures are brand new, the cover plates for the electrical outlets, and the light switches are completely replaced.

You walk through one of our homes, it almost looks like it’s a high end flip, but it’s a rental property. But we do also strategically make sure that we don’t overspend on these rehabs. It looks nice, it’s very appealing, it’s appealing to our clients, our owners – and it’s also very appealing to our tenants, as well. To where the homes rent out quick, the tenants stay in the properties for about average three years, and they’re actually willing to pay over market value for our rentals.

 

Investor and Tenant Friendly

Robert Helms: Well, this is interesting, and that’s part of our getting our pulse on the rental market today, that because the rental market is strong, we looked at a couple properties today that were representative, and very clean, very well done, but also with that eye of tenant friendly. Right?

A tenant’s not going to rip this thing up and have it be terrible, used a lot of nice materials, but wear and tear friendly I guess you might say. When a tenant comes there shopping, and they’re looking at three or four properties, and yours might be $100 a month more than the neighborhood property, but you can get that.

John Larson: Absolutely. And that’s the goal. I mean, I obviously I want to set my owners up for success as real estate investors.

Yeah, when they walk through one of our homes as opposed to a home down the street, they’re going to pay that extra $100 just because the home is completely renovated from top to bottom. Everything looks brand new. And it just is definitely worth that extra $100 for sure to that tenant, in that tenant’s eyes.

 

The Dallas Real Estate Market Versus Some Other Markets

Robert Helms: Now, most of what you guys do is in the Dallas real estate market, but you have some other markets you work in. So, since we’re kind of focusing on the Dallas real estate market, maybe compare and contrast a couple of the other markets that you guys are in, and what the main differences for an investor to consider.

John Larson: Yes, so our main Texas markets are Dallas, Fort Worth, Houston, and San Antonio. We also do produce properties in what I would say is a B class market, in St. Louis and Indianapolis.

Now, the reason why we’re in Texas with the A class model is because the median home prices right now are set at a rate where I can actually go in and produce fully renovated, turnkey asset, in a nice, stable market, and then provide that to my clients at a 6-8% return.

Coming from the Midwest, you see that the median home prices there are a little inflated, to the point where I cannot actually produce an A class property there, and then give that property to my client at a 6-8% return.

So, I do produce what I would say is a B asset. They’re more rent ranges from about $900-$1,100. And my price points on those I would say average sales price about $100,000. Now those are great markets for B class investment; however, like I said, I can’t do an A investment there. But I do have other options for my clients, as well.

Robert Helms: That’s such a great point, that every market is different, and where’s there’s opportunity is different. Right? To be able to produce the same quality of property we walked through today in one of those other markets – it’s not going to make economic sense for an investor.

But a lot of the folks that are selling property there are selling to end users. An owner occupant will pay more for a property. So you’re in a position where you’re primary client base are investors. Couldn’t you put some of those properties in the MLS and get more for them?

John Larson: Absolutely. I can sell any one of my homes in the MLS, especially here in Texas. The areas that we’re buying in strategically, there’s a lot of owner occupants in these areas as well.

I obviously don’t want to buy in neighborhoods where it’s strictly renters, but I do get a lot of repeat business, so many of my clients, they own one of my homes for 6 months to a year, they come back and they want to buy again because they have such a pleasurable experience.

Robert Helms: Well, that’s what you’re after, right?

John Larson: Absolutely.

 

Things to Learn for New Investors

Robert Helms: Good stuff. So now, I would imagine that you also work with folks that are early in their real estate investment career. Maybe it’s their first or second investment property. So, what do you see with those folks, and what are the things you wish they knew?

John Larson: Well, I wish that they knew a lot more of what went into actually buying these properties distressed, what went into the renovations. What we do, we go above and beyond. As a turnkey provider, we’re assuming all the risks of buying these properties at the foreclosure auction, or sight unseen.

We’re assuming all the risks of the renovation process where a lot of early or new investors might not know to check the foundation, and check the main drain stack, and things like that. Because these are costly expenses, right?

If you go through and just kind of throw some paint on a property, and change the carpet out and the cabinets and whatnot, and make it look appealing for a renter, but then a couple months down the line, all of a sudden, the drain breaks, you’ve got a costly repair there – or you know, the furnace goes out, I mean, these are things that we take care of on the front end, so our clients, our owners, our investors don’t have to worry about this stuff coming up months or years down the line.

 

Major Fixes Addressed With Goal of No Major Work To Be Done For 10 Years

Robert Helms: Well, you know, the way Pam had talked about a particular investor might say, “You know, I can squeeze two more years out of that,” and certainly they’re inclined if they want to, to do that. It’s their property at the end of the day.

But you shared with us as you were touring us through one of the properties, that you want to make sure that there’s no major work to the degree that you can ensure this, within ten years. You want everything to have serviceable life for ten years.

John Larson: Right, yeah, absolutely. So any major fixes, you know, roofs, all mechanicals, hot water tanks, HVAC – those things we need to make sure that there’s at least ten years left of life on those types of fixes.

So that’s another thing that we take above and beyond providing this turnkey asset. And I’m willing to warranty all these properties for one year after sale, because I do check to make sure all those big fixes, those big fix items, have at least ten years left of life on them.

 

Turnkey: Renovated and Rented Out

Robert Helms: Now we talk often about this idea of turnkey, and that means different things for different people. So, in your world, is that a property that a property that’s tenanted already? Or it is just already to go?

John Larson: Yeah, my properties, when I say turnkey, that means that this property is fully renovated, and there is someone in there paying rent, right when you close on the property. And if for some reason whatsoever, I mean, the rental market right now in Texas is unreal, so, I have no problem renting out my properties.

But let’s just say you close on a property that’s under renovation, and I don’t get it done on time, and you close on it. I’m still going to cover that rent, because I’m providing a turnkey asset, until we get that property finished, and I have someone in there physically paying rent each month.

 

Comparing Dallas and Other Markets in Texas

Robert Helms: Well, I know we’re here focusing on the Dallas Real Estate market. Let’s also talk just quickly about the other Texas markets and what you see there. If you’re within a state, and you see, you know, a lot of the top markets in the predictions show we did a few weeks back were in Texas.

Any nuances or differences there? What’s an investor going to see in San Antonio or Houston that might be different than what they’re going to find in Dallas?

Dallas real estate market update - Texas triangle, map of San Antonio, Dallas and Houston

John Larson: Well, it’s pretty similar. I mean, the price points are pretty similar right now. I think we’re seeing in Dallas, prices are probably higher in Dallas than in my other markets, and the prices keep going up faster in Dallas than the other markets.

But in terms of the quality of house that you can purchase in these markets, and what they rent for – we’re all pretty much in line, all four of these markets in Texas.

Robert Helms: Alright, good stuff. Well, this has been awesome. We’re going to plan to get you back on the show and talk in more detail about what you guys do, but really appreciate you sharing, kind of as the new kid on the block in the Real Estate Guys’ world, and the guy who strategically came to Dallas, what you’re seeing in the market. Good stuff.

John Larson: Yep. Thanks, Robert.

 

Considering Opportunities and Risks In Real Estate

Robert Helms: We’re in Dallas, Texas, talking about the market, and oh my goodness, sounds pretty good!

Russell Gray: Yeah, it’s great. So I guess in summary I would say the bulls are still running in Big D.

Robert Helms: It seems like they are.

Russell Gray: Yeah, and that’s good, because you have to do that, you know, the thing is you know, I love stats, right? I’m the research guy, financial strategist guy. I like to go back and look at the numbers.

The problem is, when you’re looking at statistics, you’re looking in the rearview mirror. You’re looking at what happened a year ago, last quarter. I mean, if you’re doing real good, it’s like, “This is what happened last month,” right?

But when you get a chance to talk to people, boots on the ground, people that are dealing with tenants, dealing with buyers, dealing with sellers that are tracking, they know how many people are standing in line right down to the neighborhood and product type. That’s where you get real time data. That’s your thumb on the pulse.

That’s why we do these types of trips, right? It’s the only way to do it. Because you see the data, you’re like, “Ok, I can see what’s going on.”

Well, we’ve heard the whisperings, right? “Oh, oil is coming down, and it’s going to have this detrimental effect on Texas economy, and Dallas obviously is a big part of the Texas economy. It’s the largest economy in the state of Texas.

And you have to wonder, what kind of effect is that going to have? Those things show up at the street level. They show up in demand, where tenants can’t pay if they don’t have jobs, if they don’t have incomes. Prices can’t get bid up if people aren’t moving there. Those are the types of things that you don’t see.

And a lot of times people think that housing, for example, is a driver of economic activity; you heard the Feds say that all the time. “Oh, housing – we’ve got to stimulate housing, because it stimulates the economy.” My personal opinion is that’s backwards!

Robert Helms: It’s the other way around.

Russell Gray: Yeah, housing is a reflection of a dynamic economy, so when I come into a town like Dallas, and I look at it in terms of its bones, you know, the infrastructure, the diversity, all the things we talked about at the top of the show. It’s like, “Ok, this market makes sense.” Now I want to take the temperature.

I want to see, is this really manifesting at the street level? Is it showing up in housing? Not is somebody goosing housing to create an artificial reading, but is it really showing up where it matters?

People like Jay, Pam, and John, who are at the street level, who are bidding on properties, who are screening tenants, who are placing people, or having to push through rent increases. And having, you know, Jay’s talking about saying to the tenants, “Hey, you know what? You’re going to have to accept this, because this is the market.”

Robert Helms: Right, look around you.

Russell Gray: “This is the market you’re in.” And so, for me, coming here and hearing all of this from these guys is exciting. Because you know, I started to wonder, is this over. Yes I know that you can’t buy the properties as inexpensively as you used to. I get that. And so, that’s just the price you pay.

If we do have an economic downturn, I hope everybody’s excited about that, right? It’s not something to run away from. It’s going to be an opportunity to step in and buy. Jay said, “Hey, if only you guys would have been buying 5 or 6 years ago.” Well, these things run in cycles. The big question is, is this bull, in Dallas, done running? And I think based on what these folks all had to say, not yet. Probably still time to get in and take a look at it. So I’m glad we’re here.

Robert Helms: Hearing John say that, “Well, the prices are higher in the Dallas real estate market, and they’re going up higher in the Dallas real estate market,” I mean, I don’t think you ever could have said those words in the past. Ten years ago in Dallas, I mean, the price was the same as it was last year.

Russell Gray: Well, you know, that was one of my big things. When we first started coming here on field trips, I was in Los Angeles in 1979 / 1980. I commuted from Rancho Cucamonga, which is way out in San Bernardino County, all the way into the beach cities, where I worked in Long Beach.

So I got a chance to cover a lot of ground. It was more than a 60 mile, one way commute. Back then there was open space between the cities, right, as I would come through.

Today, it’s not like that at all. It’s one big blur. When we first started coming to Dallas, I noticed that the cities, and all this open space, you know, Grand Prairie for example, used to be this grand prairie between the two metropolitan areas, right? And now it’s beginning to blur in. And when you start to see that, you realize that a market changes its personality.

You know, the old Neil Diamond song (and I know, I’m aging myself right now, clearly), but he opens up with “I am, I said,” he goes, you know, “LA’s fine, the sun shines most of the time, but the rents are low.” Well, nobody says rents are low in LA today, but the market changed. Right?

He was talking about New York, it was really crowded, really competitive, really congested, rents were high. You come out to California, open, and cheap rent. But then a funny thing happened – it all filled up. I see that same thing happening in Dallas right now. And the Dallas real estate market has gone from pre-crash, being kind of a steady rental market, to being an appreciation market. It still cash flows.

You know, to me, that’s a window of opportunity. If I could go back in time and buy in LA when property still cash flowed, and hold onto those things for the next 10-15 years based on locking in permanent financing, I’m going to see an escalation of rents, I’m going to see an escalation of value, and I fixed my debt. That’s pretty good.

I’m not saying – no predictions here from me – I’m just saying, when you look at it, and you kind of look at comparing one market to another market, there’s a lot of things I think, still to like about the Dallas real estate market.

dallas real estate market - dfw economic overview

Robert Helms: Well, there’s no real estate market that’s risk free, right? Clint Eastwood says, if you want a guarantee buy a toaster. But if you’re going to invest in real estate, you’re going to take risks. And I don’t think it’s if there’s going to be an economic downturn. It’s when the next one happens.

A property that’s purchased correctly, that has a bread and butter type tenant (it’s not about the tenant in it today, it’s about the person standing in line when the person moves out, right?), if there’s enough tenant base, you’re going to weather that storm. Buying right makes a lot of sense, and not buying into the hype.

What’s great about a market like this is the diversity of jobs and industries means that there’s a diversity of tenants. You know, buying something that’s at the high end, that might work today, but that isn’t going to work in every market. Buying at the super low end maybe doesn’t work in every market. But when you’re talking about those solid rental properties, you know, that’s a good thing to have in your portfolio. Doesn’t mean you put all your eggs in one basket, but it’s hard to go wrong.

 

Understanding How Various Markets Work With Each Other

Russell Gray: Well, this one of the things. You get a lot of market observers, and they try and dump real estate into an asset class, and say, “Well, you know, real estate’s in a bubble.”

Real estate’s not an asset class. Real estate can be down in one market, say, Detroit, Michigan, and it can be up in another market, say, Dallas, Texas, right? And so John’s story, about moving because there was jobs here. When there’s economic distress across the nation, then people move to where they have the best opportunity, where they have the best quality of life, where they can afford to have the things they used to have in a more expensive market. So let’s say that there’s a down turn.

You have to look at the major cities. Where would people want to move? I think Dallas, personally, has been actually a beneficiary of some of the weakness of other economic areas in the United States. Companies have moved here because it has a great labor pool, friendly business climate, friendly tax climate, great infrastructure.

Companies come here, they create jobs, and people come here for the jobs. I think that if we were to have another substantial downturn, and I would agree with you, I don’t think it’s a matter of if, it’s a matter of when – I still think Dallas is going to end up being a winner.

It’s going to be on the short list of places people will go seeking a better opportunity. I think there are other places in the country that are large population bases right now, that are not going to be places people want to go to. They are going to be places people and companies want to flee from. And I think that when they look at Dallas, Texas, as one of the choices, it’s going to be on the short list of places they want to be.

Robert Helms: So come see Dallas. If you’ve listened to the Real Estate Guys for any period of time, you know that we love to go out and do our field trips, and we’re going to plan one of those. We don’t have a date on the calendar, but if you go to the website at realestateradioguys.com and look at events, you’ll see the Dallas field trip, that’s a place for you to say, “Hey, I’d be interested in that,” and then when we have a date we’ll let you know, cause the fine folks you heard today are very interested in showing you this marketplace.

And you’ve got to see the market first, before you even think about buying a property – understand what the drivers of the market are. Now, if you’re ready to go before that, you’re thinking, “You know what? No, I get it. And I want to buy a house this weekend.” Well, awesome.

Go to our website, and you’ll be able to in our resource center, find links to find all of the folks you heart today on the program, and go ahead and reach out and make contact. They’d be more than happy to let you know what’s happening in their neck of the big Dallas woods.

Hey, big thanks to Jay, and John, and Pam for being with us today, and next week on the show, more good stuff. So, tell a friend about the Real Estate Guys.

Until then, go out and make some equity happen.

 


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Secrets for Successful Apartment Investing with Brad Sumrok

apartment investing with brad sumrok

Overview

Apartments are often the first big step most real estate investors make when they’re ready to graduate from single-family homes. What you may not know is that in some ways, apartment investing can be more simple than single family real estate investing.

In this episode, Apartment Investor of the Year winner Brad Sumrok shares his secrets for successful apartment investing.

Discussing how you can bring value to the table even when you have no dollars:

  • Your multi-family apartment investing wisdom machine, Robert Helms
  • His do the math and the math will tell you what to do co-host, Russell Gray
  • Apartment Investor of the Year winner, Brad Sumrok

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(Show Transcript)

Welcome

Robert Helms: Welcome to the Real Estate Guys radio program. Thank you for tuning into the show. This week, we’re talking apartments. Multi-family investing in real estate – what’s it take? How do you make the jump from single family to multi-family, and should you?

Lots to cover, this week in Dallas, Texas. Let’s say hello to our financial strategist and co-host, Russell Gray.

Russell Gray: Hey, Robert.

Robert Helms: Always fun to come to Dallas!

Russell Gray: It is, I love Dallas.

Robert Helms: Yeah, fun town, lots going on here. In fact, a few weeks back, on our predictions for the year (which isn’t our predictions, actually, but just us citing different lots of different sources), you may remember that one of the reports showed that the number one market across many, many sectors, poised for 2016 according to all the respondents of the survey, was Dallas, Texas.

So we said, “You know what we’ve got to do? Get in a plane and come here!” So we have a show here. Actually, we just got to Dallas, so we’re going to spend some time visiting some of the folks that we know here, and next week on the show, we’ll do a market update about this marketplace. So stay tuned for that.

 

Single Family vs. Multi-Family Apartment Investing

Today, really what we’re talking about is, based from a question we got from a listener, which had to do with single family houses versus multi-family.

Russell Gray: Yeah, I think when everybody thinks of real estate investing, the most simple way to begin is in residential, right? We all understand residential real estate. Most of us grew up in homes, have owned homes, maybe have rented homes or apartments. We get it.

The easiest thing to do is buy a single family home, because it’s the thing that we tend to gravitate to and understand. And you can make the argument that over the last few years, it’s been a great investment for rental. But apartments have been super strong, as well.

And so, if you’ve ever played the game of Monopoly, you know, the name of the game is you run around and collect those little green houses, and when you’ve got enough of them, then you move up to a big, red multi-family, or a hotel, you know, the big red hotel they talk about in Monopoly. Because you can get more income for your purchase price, right? It just provides better cash flow.

apartment investing - lots of greenhouses or move straight to red houses like monopoly

So, multi-family is kind of the first, big step that a lot of people take going to the next level of real estate investing.

Robert Helms: In fact, on our summit a few years back, we did a panel discussion on this very thing: how to go from little green houses to red hotels. And on our panel was Ken McElroy, whose first investment property ever was a little two bedroom.

And he was on the panel, and of course today, there are thousands and thousands of doors that Kenny and Ross control. Kim Kiyosaki was on the panel. She started with a little two bedroom unit.

My dad, Bob, the godfather of real estate, was on the panel. And of course, he started with a little two bedroom unit. Myself – I started with a duplex; each side had two bedrooms, so I’m kind of an over-achiever.

And then of course we had Tom Wheelwright, as a CPA talking about the product types.

And the reason I bring up whatever we started with is that, that was the path that all these super successful investors had taken. They started with a little green house.

And so, how do you get from that? Or do you even need to start there to get to apartments? That’s what we’re going to talk about today. And how apartment investing differs.

When I rent a single family house, probably the biggest difference between that and a multi-unit is the possibility of use. The vast majority of single family houses in most countries are occupied by people who live there; that’s their use.

Now, we talked about forced equity a few weeks back, and we talked about the idea of a conversion – and there certainly places where what were formally single family houses today are doctor offices or other offices, because of the way the development of a town has grown up over time. But the idea of multi-family is that it was built with only one purpose – to rent out units.

It’s very hard to buy an owner-occupied 20 unit building. Because most people are not going to do that. Now, one to four is a financing category that would allow for someone to live in a property. And it’s possible; you could live in a unit, like I did in my duplex, and rent out the other unit. But for the most part, multi-family is a different animal, because it has only one exit strategy; that is, you’re selling to another investor.

Russell Gray: To a large degree, buying multi-family, where you’re only dealing with investors, is actually a little bit safer, and here’s why. When you go to purchase a multi-family property, you’re bidding against other investors. These are people who tend not to overpay, based on the math, right?

I mean, there’s going to be a variation; if people really want something, you know, they can overbid. Anybody can overbid. But when you’re bidding on a single family home, you’re bidding against owner occupants.

And you’ve got a government that’s creating an environment that’s really trying to stimulate home ownership, and so they give you subsidized loans. They give you high LTV’s.

And when a home owner is looking at a home, they’re not looking at the rental value of the home versus the purchase price. That doesn’t have to make sense to them. They’re looking at their own income and the ability to leverage that through an owner occupied mortgage, which always has a lower interest rate, and then that affects the value.

So when you’re bidding for a single family home that you want to rent out, you could be bidding against an owner occupant who’s willing to bid above what the rental value would justify. So it’s really important that you understand that when you’re bidding on single family homes.

The flip side of it, though, is on your exit. Because when you go to exit a single family home that you bought as a rental property, and you go to sell it, there’s the potential you could get a higher price than the income would justify, because it’s become a hot owner occupied market. You’re probably not going to have that happen with a multi-family property.

Robert Helms: In fact, you might already have your buyer renting it from you. Very common that a renter figures out a way to get to the cash and credit they need over some time period. Things like lease options can be tools for that.

But really when it comes to apartment investing, there are some basic things that are the same as single family houses. People live in your building and pay you rent. That part’s the same.

Where it gets different is in several areas we’re going to concentrate on today. The first has to do with the location. Single family properties are often coveted by location. So, a particular school district or a particular part of town. With multi-family property, there are those distinctions, but they may not be as clear cut.

 

Classes of Properties: A, B, and C Class Apartment Investing

And one of the nomenclatures that we use for multi-family is A, B, C class properties. So you hear people say, “Oh, I bought a B class apartment building.” What is that? Does the apartment counsel come out and grade your building? No. Here’s what it means.

 

A Class Apartment Investing

A class property: a multi-family property, is generally the newest, nicest, best quality property you’ll see in multi-family. These are the big, fancy apartment buildings in the best parts of towns often, with the greatest amenities. They have pools. They have elevators. It’s high demand rent.

That’s A class. Now A class can be great because of the value of the asset, and because of the surety of the rent. The challenge with A class tends to be they don’t perform as well.

Russell Gray: Right, well it comes down to people paying more for the quality. Quality things cost more. And they may not necessarily rent for a proportionate amount more. But the owner would be willing to take on that, because they’re going to get a better quality demographic. They’re going to get a better quality facility in terms of longevity and condition. They’re going to be in a better neighborhood that will continue to demand above average sales price, right? And so these are investors who are willing to take a smaller yield for less hassle.

Robert Helms: All things being equal, A class is the least amount of return (ROI) on a property, and they tend to be big.

So who buys these things? Usually not you and me. A class apartment buyers are pension funds, insurance companies, real estate investment trusts – big behemoths of companies and groups of folks who go and buy these buildings and just hold these assets for a real long time.

Russell Gray: And they also because of their size and experience, they have the ability to operate on better margins. Because they’re able to operate more efficiently. They have economies of scale that you know, a mom and pop operator just doesn’t have. And often they have a low cost of capital, and sometimes – many times, they go in without any financing. Right?

So they’re just looking for raw return on investment. They pay cash for the property, and then they just look at the net operating income as a yield on their capital. And they’re very, very happy. You can imagine in an environment right now, where we’re getting yields on treasuries, you know, 1%, 2%, 2 1/4 %, whatever’s considered pretty good. If you can get 4% or 5%, or 6% or 7% yield on a property like that, that’s very attractive.

B Class Apartment Investing

Robert Helms: Now once an A class property kind of falls out of favor, it’s a little bit older – maybe 20 or 25 years old, and it’s not the newest, nicest, shiniest – that becomes a B class property.

B class properties today are typically one or two stories. They maybe don’t have the amenity set. They’re nice places to live, but they vary in the degrees of quality, because if I own a B class apartment building, and I continually keep up the work on it, it could be just as valid as an A class today.

Meanwhile, there’s lots of B class properties that have fallen out of favor, lazy landlord’s syndrome, the coverage of the debt is easily [met] by the current tenant, so we don’t have to do much work to change that. And so, there’s opportunity for investors at the B class.

We often talk about the model that Ken McElroy uses for MC companies, and wrote the book, The ABC’s of Real Estate Investing and The ABC’s of Property Management. Kenny – this is what he does. He finds undervalued, B class apartment assets and increases their value. So that’s a B class apartment building.

 

C Class Apartment Investing

C class is a more specific definition. It’s a property that’s deemed to be at its highest and best interim use, but not its current use. So that’s a whole bunch of words. Let me explain that. The appraisal community goes out and looks at highest and best use. The problem an appraiser is trying to solve (and that’s what appraisers do) is the valuation problem that’s posed by a property, and what is its highest and best use?

The extreme example is I go to an appraiser with a raw piece of land, and say, “What’s the highest and best use for that?” They’re going to look at the area and they’re going to give you some ideas. It’s not the same as a company that you would hire for that information, but they’ll tell you that, and part of its valuation.

So a property that it’s highest and best interim use according to the appraiser means that it works fine the way it is now, but what really it should be done the highest and best use for the property is to scrape it. Knock it down, rebuild it. But the interim part is this: that might not be financially viable today. That may not make economic sense. It may not be functionally obsolete yet, but it’s on its way there. So, slap a coat of paint on, put some new carpet, rent that thing out, and it’s going to work.

So those are C class apartments. Lots of money to be made in C class, but what tends to happen is C class buildings were often built in the 60’s and 70’s, and in tougher parts of town, and over time they’ve developed a reputation.

Russell Gray: Yeah and maybe when they were built, they were nice parts of town, but parts of town shift. You know, we go out and do the Memphis field trip. They talk about the white flight, right? And this is just a term they used to talk about how everybody from downtown moved westward out into the farther suburbs, you know.

apartment investing - c class apartments

And then the downtown got a little bit more blighted. Of course, it’s been starting to revitalize, but, you know, when you have those demographic shifts, sometimes your building. You can have a B property, and take really good care of it, but what’s going on in the neighborhood around you, you don’t really have a lot of control over, and it’s sliding down the scale, you know. B minus, and pretty soon C plus, and then C.

And you’re not able to attract because of the shopping, because of the schools, because of other amenities in the area, or the demographic – you’re just not able to attract the kind of tenants that are going to pay the kind of rents you need to have to be at a certain level. And so you end up with properties that fall into disrepair, and then they attract a different demographic. And then you look at the cash flows, and you say, “Well gee, I can buy this property so cheap!” That’s because nobody’s bidding on it, relative to the rents that are coming in.

And on paper, it looks fabulous! But you have to really factor in when you’re down at that level, a much higher rate of expense, because you’re going to have more turn, you’re going to have more collection problems, you’re going to have other issues from a management standpoint.

Now with that said, there are people who are absolute specialists in dealing in that demographic, and in that particular product class, and they can make it work. It’s not for the faint of heart. It is not for the inexperienced, but there can certainly be money made there.

So, A, B, C – those are the different categories.

Robert Helms: Alright. And you know what? C class you can make a fortune in, but you better know how to operate that. It’s like the difference between being able to drive a car and driving a tractor trailer. It takes a different level of license, expertise, practice – all of that. But a lot of folks love C class.

I spent the early part of my real estate career in C class, got to love C class. Today, happy not to do as much C class. But folks are great at it, and you’ve got to decide. So that’s one of the distinctions of property.

 

Multi-Family Financing

The other primary difference when it comes to apartments is financing. And we’re not going to spend more than 60 seconds on this. But the categories of loans available for 1-4 unit properties is completely different than the lenders and the types of loans available for 5 units and above when it comes to multi-families.

So, great resource for that is going to the Real Estate Guys archives and look for a show that we did with Michael Becker, who is a commercial lender, who lends on multi-family. And you can really get the distinctions between the financing. But financing has a lot to do with multi-family, because it isn’t as easily changeable as single family financing is. So that’s another big difference.

Introducing Brad Sumrok

We’re talking apartments today, and the man you’re going to meet here is going to break a myth long held by real estate investors. But first, let me tell you a little bit about him. In 2012, he was named apartment owner of the year by the National Apartment Association, which means he’s pretty good at what he does. Let’s say hello to Brad Sumrok. Hey Brad!

Brad Sumrok: How you doing Robert?

Robert Helms: Great, great. Thanks for taking time today to talk to us about apartments.

Brad Sumrok: I’m excited to be here.

Robert Helms: We’re excited to hear your story, because most folks think you have to start with houses. You buy a house, you buy another house, you buy another house, and then pretty soon, one day, you’re going to graduate up to apartment investing, and yet, your very first was an apartment building. Tell us about that.

 

More Units Are Actually Easier To Manage

Brad Sumrok: That’s right, well I used to think that too. I thought I would buy a rental house, and then a duplex, and then a 4-plex, and then an 8-plex. But my very first deal back in 2002 was a 32 unit building, and then I actually went bigger. And it’s actually easier as you go bigger, which is sort of counter-intuitive for a lot of people.

Robert Helms: Well, it is, a huge paradigm to break. “Well, wait a minute, more units is easier?” Explain that.

Brad Sumrok: Well, after I had about 1,000 units, I actually went out and bought one rental house. And with the rental house, I have to do the property management, I had to meet the tenant to sign the leases, I had to collect the rent. The tenant didn’t pay me and there was an eviction. And I actually had to go and do an eviction which I didn’t know how to do, because when I owned apartments I had a management company and a property manager who did all that for me. So, it was actually easier for me, believe it or not, to manage 1,000 units than it was 1 rental house.

 

Brad Sumrok’s Background Before Apartment Investing

Robert Helms: That is such a great story! So let’s talk about how you got into the business. Cause you kind of have a corporate background. Talk about where you were, and what made you gravitate to real estate.

Brad Sumrok: Well, I grew up middle class, in Pittsburgh, and I was taught to study hard and get good grades. My dad never finished engineering school. He had three years of engineering school.

My dad’s boss was an engineer, and made good money. And their family went on nice vacations, and we didn’t. So I decided I wanted to be an engineer when I grew up. Through the encouragement of my parents, I studied hard, got good grades, didn’t figure out until after I became an engineer that I didn’t really like engineering –

Robert Helms: Whoops!

Brad Sumrok: Went back and got an MBA, because that’s what society and that’s what they taught me to do; that’s what we do, right? You want to move up in the corporate world, you go back for more school, for more training.

And after I got an MBA, I actually made more money, but it didn’t teach me any business skills, or how to be an entrepreneur, or even give me the mindset or desire to be an entrepreneur. So I was an employee. I made good money.

You know, I would see these ads in the newspaper about going to real estate seminars, and learning how to get financial freedom. And I thought they were kind of hokey, and I didn’t want to go.

But the thing is, I read this book that a lot of people know about, and the book is “Rich Dad, Poor Dad,” and that book changed my life. That whole paradigm shift of being a business owner, being an investor, ESBI, the cash flow quadrant. And that mindset shift for me was huge.

And so that opened my mind. It enabled me to go to a seminar, and invest in specialized education, not like the education you get in school, where you learn to become an employee. You learn to become an investor, you learn to become a business owner, and that’s how I got started.

Robert Helms: Well that’s interesting because you were able to invest part time, still with a job, still building up your portfolio, but pretty quickly, you were able to replicate your income from your job. So talk about how fast that can happen.

Brad Sumrok: Well I help people retire in 5 years or less. Now, I did it in 3, and I’m my first success story. So, now I have students who are doing it anywhere from 2 to 5 years, and some people are like, “Well, Brad Sumrok, I love my job.”

And I’m like, “Well, you don’t have to quit your job. You could just expand your means, and have more income, more freedom, more security.” But many of my students were like me. They feel like they’re in the rat race. They make good money. They can’t just quit; they have too many bills to pay.

And the other thing I love about apartments is that it just takes too many single family rentals. I mean, look. If you’re making $80,000 / $100,000 / $125,000 a year, how many single family rentals does it take to replace your income so that you can walk away from your job?

Robert Helms: A lot.

Brad Sumrok: So when I learned that, I figured I needed like 40 or 50 houses. And then I’m thinking, you know, they teach these formulas. You know, if you have to have 50 houses, then you need to make 500 offers, and analyze 5,000 deals, and I’m just thinking, “God, that just seems like so much work! I could buy one building, have all my units under one roof, hire professional management, and I don’t have to quit my job!”

So that’s exactly what I did. And that’s exactly what people that I train do. So I would say it’s a 2-5 year process.

Robert Helms: Yeah

Brad Sumrok: It’s a 2-5 year process.

Robert Helms: So what are the things that you need to learn if you already know a little bit about real estate investing? I know there’s a lot more as you get into apartments, right? I started in the apartment space as well, and it’s a lot. So, how do you break that down and make people understand – students, potential students, people listening on the air? “Hey, there’s a lot to learn, but it can be learned.”

Brad Sumrok: Well, it’s like any other recipe. You know, and what I tell my students is if you have the ability to follow a simple set of instructions, then anybody can do this.

Robert Helms: Yeah.

 

The Limiting Belief That Funding Is Hard To Find

Brad Sumrok: And it could be from: I can teach people how to analyze deals, how to find deals.

And then the question is, “Well, where do I get the money?” And so one of the things we do is we teach a syndication model where people can raise money from other people. So a lot of people, that’s the other paradigm shift, is people think, “Ok, Brad Sumrok, I love the economies of scale from apartments. I love having all my doors under one roof. I love the fact that I don’t have to buy 40 or 50 of these to retire. But now where am I going to get the money?”

And so many people have the limiting belief that money is hard to find, and I can just say that, if you find a good deal that provides good returns, which to me is double digit, average annualized returns, and double your money in 5 years or double your investor’s money in 5 years, people will invest with you. And then you’ve just got to find where to go to find those people.

 

Three Different Ways To Invest In Apartments

Robert Helms: Well in fact you talked today specifically about the three different ways you can invest in apartments because there’s not just one way. You could certainly buy an apartment building for your own account, like you did your first time out. Or, a lot of folks today get that apartments are better because of the economies of scale, because I can be diverse across multiple marketplaces, but a way to do that is to invest passively in one of these syndications you’re talking about.

Brad Sumrok: Yeah, so passive apartment investing is awesome because you know, you have the opportunity to make great returns: double digit average annualized returns with truthfully little to no work. And the work that you need to do is as a passive – is you need to be a sophisticated or an accredited investor, because that makes you SEC compliant, which is important.

Robert Helms: Very important. And then the third, of course, is if you wanted to be that very syndicator, and I know that as you have increased your portfolio, that’s a lot of what you do. You’ll put deals together where you’ve got your own money in, but you’ve also raised money from other folks.

Brad Sumrok: Yeah, and being a sponsor is a great way to even fast track you know, that early retirement. You know, I put money in my deals. I teach my students to put their own skin in the game. You add more credibility. But you also can make more money than simply the return of your capital investment, because sponsors are doing the work, and they are, you know, investing more in their education. They are spending more time. They have more responsibility.

So for the people that want to (and this is not a full time commitment to be a sponsor, by the way; I’ve sponsored many deals when I had a full time job) – being a sponsor is not passive. It’s not a completely passive investment, and you need to let people know that. But being a sponsor is you not only make a return on your money, but you can command an additional form of compensation, whether it’s an asset management fee, or additional equity in the deal, or something like that for the expertise and time and effort that you put into the equation.

Robert Helms: Well, I think especially in apartment investing, you see it as eventuality. A lot of folks get to the point where they’re kind of deal junkies. Right? They like looking at a lot of deals.

But at the same time, once I’ve got 3 or 4 or 5 buildings, and my cash flow’s kind of good, but maybe I’ve run out of my personal investment capital, why not bring other people on board? Because the nature of the size of the deals, you usually do need several million dollars as a down payment on some of these deals.

Brad Sumrok: Exactly. And there’s everything right with buying your own deal with your own money, except that you are limited with your own capital.

So, some of my students start off that way. They might buy a building that’s the husband and wife could afford with their own assets, their own balance sheet. And it might be like a 10, 20, or 30 unit building, or maybe even a 50 or 60 unit building, depending on their own individual means. But then they’re stuck.

And so prior to meeting me, they would think, “Well, we’re stuck here. We’re going to wait 5 years, sell our building.” They come to my training, and then they realize that no, they’re not stuck anymore. They can leverage that experience. They have a proven track record. They can go out and raise money from other people, and go out and buy more deals.

And look, they’re helping themselves. They’re helping their investors, and they’re transforming their communities that they own. So it’s a feel good business all the way around.

 

Choosing a Market that Makes Sense

Robert Helms: So, speaking of communities, let’s talk about geography, right? Apartments are in a lot of places. How do you find markets that seem to make better sense for apartment investing than maybe other markets?

Brad Sumrok: Well, you know, I’ve personally researched a lot of markets, Robert, but there’s no way I could research them all. So I came up with a recipe, just like buying an apartment building, there’s a recipe; there’s a proven, step by step process. And it’s the same with finding a market with apartment investing. So some of the things I look for, is first of all, is it a landlord and business friendly environment? If the tenant doesn’t pay, they can’t stay. And there are certain cities, or states, or municipalities that it’s just really hard to evict somebody that doesn’t pay.

Robert Helms: Absolutely.

Brad Sumrok: So there are other markets like Texas and Colorado and Florida – are just three – they’re not the only three – but those are three that are fairly easy to get somebody out if they don’t pay. And as a business owner that’s important. For those that want to be charitable, they can do that with their own money, but not with their investor’s money, right?

Robert Helms: Well, this is critical, because you don’t necessarily think about that. People think, “Well, I want to invest where I live, or in an area that seems strong.” But tenant landlord law varies greatly between jurisdictions. So understanding that is huge.

And then, the business friendly nature, right? Because here’s the deal. If you have leverage, you need to make that payment even if your tenant isn’t making their rent.

Brad Sumrok: That’s correct. And other things that I look for in the apartment investing recipe: Has there been job growth? And is there continued, projected job growth. The same with population growth. So, if we see you know, high population growth, or positive population growth, positive job growth, business friendly, landlord friendly environment.

And I also like to look at the pricing relativity formula – you know, if a single family home costs a million dollars for a 4-2-2, in maybe a certain place in California, and then you could come to Texas or Oklahoma or Indiana and buy that same house for $200,000, that’s also a good indicator of where you know I believe the sweet spot is for multi-family.

Buying deals that are going to make you a double digit cash on cash. Cause see, you could buy deals in some of these expensive areas, and you’re really buying for appreciation, or the hope of appreciation. But I don’t buy based on the hope of appreciation. We buy based on cash flow and a proven, predictable capital gain based on realistic underwriting.

 

Specializing In a Particular Class

Robert Helms: We’re talking with Brad Sumrok today, about investing in multi-family. It’s not as hard as you might think. In fact, as Brad Sumrok demonstrates, it’s not as hard as you might think. In fact, as Brad Sumrok demonstrates, sometimes it’s easier to invest in multi-family.

Brad, let’s talk about kind of the nature of buildings, right? You hear people talk about what A class – that’s some of the nicer, top of the line buildings – B class, C class. Is there an area that you specialize in with apartment investing, or does that matter?

Brad Sumrok: Well, there is. And to me, the sweet spot again, the goal – my goal – and what I teach others is that you’re looking for double digit cash on cash returns. So there’s nothing wrong with buying a property, but that’s what the REITs buy, and if you invest in a REIT, you know, you’re going to get a single digit return. So, single digit returns are better than no returns, but they’re not going to help you retire in 5 years or less, ok. And remember the rule of 72. I’m sure a lot of people know that.

So you want to maximize your rate of return. So, the C class are generally 1970’s, 1980’s, maybe 1960’s property. And they’re occupied by a working class demographic. And so that is a sweet spot, where most of the REITs and the big companies are not competing, and they’re not buying that market. They’re buying the A’s and the B’s. Ok, and so the individual investors like us, you know, the people that can pull a little bit of money together, or go out with their own money and buy a building, you know, you could start with 10 units with your own money, or you could do 300 units with an apartment investing syndication. And that’s the sweet spot. So that’s the class C.

I’ve progressed into buying B’s just because they look nice, and you know, you can show your friends your property and be proud of them. But they make great returns, too.

But the B’s you really want to make sure that you always want to make sure you’re buying it right whether it’s a B or a C. And a B is just you know a property that’s a little bit newer and a little bit nicer. And it also has a little bit higher quality demographic. And by higher quality, I mean, you know, education levels, income levels.

So the A’s are the professional class and that’s you know, we don’t buy those. You know, the rates of return are too low, and you’re competing with huge hedge funds and Wall Street, and companies that own hundreds of thousands of units.

So, the little guy, you know, which is what I do and people that I help – that’s our sweet spot – are the C’s, and maybe the B’s.

 

Optimal Range to Look For

Robert Helms: And let’s talk about deal size. Cause you talked about a 32 unit property, and you also showed us some couple of hundred units. What’s kind of like the biggest property you have, smallest? What’s kind of the range people are looking at today in multi-family apartment investing?

Brad Sumrok: I started with 32 with my first one and went up. In 2015 alone, my students did 25 apartment complexes. The smallest was 10 units, and the price was $300,000. The largest was 305 units, and the price was about $14 million.

The truth is, my students, most of them start with no experience, or maybe they have single family experience, and they decided multi-family apartment investing was the next step, and they did somehow graduate. But most of them after they hear an event like this or maybe a training seminar, they realize that they can get into this, and they don’t have to start with single family.

So, yeah, between 10 and 300 units. A good size starter property might be 60-70 units, and why 60-70? It’s because to me, that’s the minimum size where you can really get a manager or a maintenance person or a management company, and that actually makes your life easier. It’s easier to do 60 than it is to do say 30, and even though 32 is the first one I did, and I did well with it, it would have been easier to buy 60.

Robert Helms: Interesting, another paradigm. You’d think 10 units is easier than 60 – other way around, right? Efficiency, economies of scale, vacancy being spread out before more units, all that kind of stuff.

Brad Sumrok: That’s correct.

 

Who Can Benefit From Brad Sumrok’s Apartment Investing Training

Robert Helms: Now let’s talk about your students. Who comes to you, and who’s kind of your ideal person that comes and says, “You know what? I want more. I want to put away money through real estate investing.” Who’s kind of the Brad Sumrok student?

Brad Sumrok: Well the Brad Sumrok student is somebody that, you know, like me. I had a college degree. I made decent money. I wasn’t rich. I wasn’t poor.

Ok, this is not no money, no credit, no problem. I need to say that. But if you have decent credit, if you have a little bit of money, you don’t need tons of money. You don’t need all the money to do it yourself.

But say a professional class person, not necessarily needing a college degree, but maybe someone that makes in the high 5 figures, or low 6 figure income, has decent credit – that’s my ideal student. Somebody who’s been investing in conventional investments and they feel frustrated. Somebody that – what I used to do, Robert. I used to put my money in my 401k, and pray when I opened up the account statement every month that it went up.

apartment investing with brad sumrok and student

Those are the people that come to my training, because they want to make better returns. They want to get out of the rat race. They want to make a positive return on their investment and they want to have more control over their investment. Multi-family apartment investing offers that.

Robert Helms: Absolutely. Well let’s talk about the training. You every so often get together a group of folks. 300 last time. Tell us about the training that you do. You’ve got one coming up Dallas, Texas in March.

Brad Sumrok: That’s right. So it’s March 12 & 13, and it’s a weekend training, and I do my own training events. And I teach the whole event. So this is not a multi-speaker event. I teach the whole event. I’ve been doing this for 14 years. I know enough, Robert, to walk people through the entire process.

Robert Helms: Right.

Brad Sumrok: Now obviously when you’re buying a deal I’m going to refer you to service providers with proven track records. At my events, I do them three times a year, generally in March, July, November. The next one is in March 2016.

We actually do a bus tour as well on Sunday morning – a half day. We put everybody on a coach bus, and we will show you – I will show you properties that either I own, or one of my students have recently purchased. So there’s nothing like seeing and feeling, and I might even say with a smile, smelling these properties. And they don’t smell bad, by the way. But there’s nothing like the experience of actually getting out there in the field to actually see the deal, and then it’s complimented with in class training.

Potential Mistakes in the Multi-Family Business

Robert Helms: Alright, good stuff. So before you’re done today, we’re going to show you how you can get signed up for Brad’s training. Now you’ve mentored a lot of folks, talked to a lot of people. What are some of the mistakes you see people make when they’re eager to get into apartment investing, but they miss the turn.

Brad Sumrok: Well, I had a mentor when I started, so I didn’t make a whole lot of mistakes, but I see people making mistakes, and one of them is just trying to do it yourself. And whether you have a mentor or not, honestly it sounds self-serving but I think having a mentor is important.

You know, you want to leverage other people’s experience. And one of the things I teach in my training is, leverage is important. Leveraging not only other people’s money to fund your deals, but what about other people’s experiences.

You know, I don’t go to 20 banks. I go to a mortgage broker that knows 20 banks. I don’t call 20 attorneys. I go to one or two that I know that have a proven track record in real estate. You don’t want to have the attorney who did your personal will be your real estate attorney.

And a lot of people do that. They use their friends. They use their family. They use their single family realtor to help them find apartments. And that’s a mistake, I believe, because you’re not really leveraging somebody that has what I call a level of mastery in multi-family. So you want to build a team with people that have multi-family apartment investing experience.

 

Where You See Multi-Family Going in the Future

Robert Helms: You know a couple weeks back, Brad, we did our predictions of the year, which isn’t us predicting. It’s going to all these different sources of folks, taking a look at the beginning of the year, and saying “Alright, this year’s going to look good, bad, or indifferent for real estate.”

One of the concerns in multi-family is just the cap rates have been squeezed down a little bit. Yet, this is a long term asset. We have more people renting than owning today. So, give us kind of the big picture of multi-family apartment investing and what you see in the coming years.

Brad Sumrok: Well, I’ve been fortunate that I’ve been in this business since 2002. And I’ve seen the market go up, and I’ve made a lot of money. And I’ve been in the market when the market went down in 2008, and I made a lot of money, truthfully. I didn’t go out of business, and I’m not one of these people who’s like, “Oh, I was young and I made tons of money, and I lost it all, and now I’m going to teach you all my mistakes.”

Robert Helms: Right.

Brad Sumrok: I’m like, “Yeah, that’s great, but wouldn’t you rather talk to somebody that didn’t lose all their money in 2008, and 2009, and 2010.” To me, it’s all about having conservative and realistic underwriting.

You don’t want to underwrite a deal which is a model of a deal based on you know, say, in DFW have 8% rent growth today. Well, you’d be crazy to project that out over a five year period. So I look at historical growth rates, and I model the property based on historical growth, and historical occupancy, and not what’s actually happening today. And my experience is, when you do that, and if you do go into a down turn, which I can’t tell you when it’s going to happen –

Robert Helms: Unfortunately, you won’t learn that at the training, when it’s going to happen.

Brad Sumrok: Yeah, and if I knew that I don’t know if I’d be here, I’d be doing something… But the point is, is that conservative underwriting will get you through a down turn. You know, we’ve had apartment investing deals where we’ve bought, at the last market peak in 2008, we made money, but we held them a little longer than we projected. We held them for 7 years, and I like to get in and get out within 5, for example. But you know, there were some deals that we held a little longer, and fortunately, because we had long term financing at a fixed rate, we were able to weather that down turn.

Robert Helms: Well in fact, financing is one of the pros of this particular niche, because it’s pretty good, and it continues to be affordable.

Brad Sumrok: Financing I will say is still awesome. I mean, we’ve just done some deals personally, that I’ve been involved with under 5%, fixed rate, for 12 years. You have the ability to go back to the lender and pull out equity as the value goes up several times, amortized over 30 years, 80% of the price, the rehab, and some of the closing costs. And then non-recourse, by the way – imagine having no personal liability on a $22 million loan. Or if you’re a beginner on a $2 million loan.

Robert Helms: Well, we sure appreciate your time today, and the passion for teaching what you do. That’s good stuff, my friend.

Brad Sumrok: Awesome. I was glad to be here, and it was a lot of fun.

 

Apartment Investing Show Recap

Robert Helms: Boy, I feel richer just talking to Brad Sumrok. What a nice guy.

Russell Gray: You know, one of the things that I love – and there’s many, many things I love about being the co-host of the Real Estate Guys Radio Show, but getting a chance to get around people that are just at a high level of practice in whatever it is they do. We get a chance to get around subject matter experts that are really, really good at whatever their particular niche is.

And of course, in this case, Brad, we’ve heard about, we’ve been following, we’ve attended some of his events, and just really impressed with the detail of knowledge you know, this guy’s got a background as an engineer, detailed oriented, but he loves to teach. And he’s just the real deal.

You know, he practices what he teaches, and he teaches things that are actually making a difference in the lives of people. You know, we attended a conference where Brad was speaking, and we got a chance to visit his booth, and he had several of his students actually working – volunteering their time for free, to give back, because they felt like they had received so much value from Brad. And you’ve just got to love a guy that has that kind of a following.

Robert Helms: Yeah, clearly he’s passionate about it. I mean, we spent a lot of time off mic – more than we spent on the mic. And the guy’s passionate for it. He’s got some really, really, great, practical stuff.

So he’s got this training coming up for two days. And part of me is like, “Well, how can it take two days to teach apartments?” But then, many of the ideas on apartment investing that he gave were just seat knowledge, meaning, here’s a guy that’s been through every part of the process, from researching the markets, to looking for providers and brokers for the right ones, to weeding out between all the information that you might get in the packages you get, to making offers and negotiating, to walking the units and understanding the physicality of apartments, and he’s rent rolls, and third party management.

He also, as he mentioned, after he owned 1,000 apartment units, bought a single family house.

Russell Gray: Well, this is one of my favorite things, because for so many people, the assumption is, “Hey, I’m going to start with a few single family homes, and then I’m going to move up to apartment investing.”

And probably before meeting Brad, I would have said, “Yeah, that’s the way to do it.” And then you meet him, and you’re like, “Hmmm, well maybe not. Maybe it’s possible to go directly to the top. I kind of like that.”

You know, the old game, “Chutes and Ladders,” if you rolled right, you kind of shot up right up to the top. I always wanted to roll and land on that spot. And to hear Brad say that not only that’s what he did, but he’s been able to teach his students how to do that, that’s impressive.

apartment investing like chutes and ladders board game - straight to top

Robert Helms: Well, this will give you a little more insight into Brad, because the reason he bought a single family rental house, after being successful in partnerships and on his own buying multi-family, why would you buy a single family house? And here’s why. He’d been teaching apartment investing for a couple of different groups. He would occasionally come and talk about apartment investing and what he did.

And he was asked to lead a course on single family investing. And he thought, “Well, I’ve been an investor a long time, and I’ve done that, but I don’t really understand single family. I mean, I’ve lived in a single family house, right?” So he literally went out and bought a rental property, so that he felt he could stand in front of the room and talk about single family homes.

Russell Gray: Well, you learn by doing. I mean, that’s for sure, right? But I mean, that again, to me – very impressive. You know, a guy that is really taking a lot of pride and making sure that he’s walking his talk.

Robert Helms: You know, it’s interesting, we talk about real estate syndication, which Brad has done a lot of, as a way that you can do more deals than your wallet allows. Well, for Brad, even though he does syndicate some deals, and that’s one way, the other way he does it is by teaching. I mean this guy gets as much of a kick watching his students go out and do this, as his own portfolio it seems like.

Russell Gray: Yeah, well, I can relate to that. You and I’ve been teaching together, for what?

Robert Helms: Seems like forever!

Russell Gray: Seems like for – I think it’s been 14 years. We’ve been together for 14 years now. And 10 years doing our monthly mentoring clubs, and the seminars we were doing, and all of that, and it became apparent to us that the hunger for knowledge was so great that it was going to exceed our abilities, so rather than just teach out of our own knowledge base, you know, that’s where we started reaching out and looking for guys like Brad, Kenny McElroy, other people you know, Gene Guarino, people that are doing very specific niches, and doing them really, really well.

And asking them, please come share with our audience because we’ve got people out there who want to be at your level. And we can get them started. We can get them enticed, but we can’t take them to where you can take them. And so, it’s really fun now to go out and find these people.

I’m learning every day, and I think that’s why I never get tired of doing this. And I think, you know, I’ve learned as a teacher, I learn by teaching. When I sit down and do financial strategy or teach sales (those are kind of my two areas of expertise), when I teach that to people, I learn. I get more clear and more focused in my thinking.

And I see that in Brad. I see that Brad is the kind of guy that really enjoys not only sharing and watching the light bulb going off about apartment investing for students, but he also likes what’s happening inside himself. You get sharper. You get more clear. You get more precise in what you’re doing. It’s just a ton of fun. And we love hanging around guys that are experts at what they do, and even more so when they love to teach it.

Robert Helms: So, if you’re interested in multi-family apartment investing, obviously you should consider coming out to his course. The only thing that’s crazy about this course is it’s so inexpensive. I mean, he literally could charge a lot more than he does, and maybe that’s just because he doesn’t need the money. Whatever it is, he’s got a great course coming out, 2 day course March 12th & 13th. Get all the details on realestateguysradio.com under events.

A couple of closing thoughts on apartment investing, right? The difference. Making the jump. Hopefully at least Brad’s given you the concept, that you know, “I can do this, that it’s possible.” He talked about a couple of really interesting things.

The whole idea that it might be easier to own 60 units than 20 units – just think about that as you’re making this mental jump to be an apartment owner. A smaller apartment building of 10, 15, or 20 units, is as much work as maybe one that has 60, 70, 80 units.

So, as you’re thinking about it, and this also creates the opportunity for a sweet spot, as you’re looking at buying an apartment. The 500, 600, 700 unit – guys like Brad are buying those. You’re probably not starting there.

But there is this sweet spot of 20 to 50 to 100 units where there aren’t as many competitors. The big dogs aren’t playing. The institutions aren’t buying those properties. And yet, they’re big enough that they fit the loan parameters available. So there can be a real sweet spot there.

Russell Gray: I think one of the things, (and it really has to do with psychology, and just some practicality, right?) when I used to teach at the GRI program for the California Association of Realtors, I’d get a lot of realtors coming into the class. I was teaching finance.

And you know, I’d poll them, and I’d ask them, you know, what’s your niche? Where are you starting? And I was looking for the realtors who were interested in selling investment property, right? I’d get a lot of people, “Well, I want to do that somewhere down the road, but right now I’m starting with single family homes.”

My conclusion was I could have 70 people in the class, and 65 of them were going to specialize in single family homes. I said, “Do you understand you’re going in the crowded door? Everybody is going into single family homes, because they think it’s easier. But it’s not easier; it’s harder, because it’s so crowded. If you would just expand your thinking, and specialize your training, you could go into the investment niche, and you’d have it largely to yourself.”

This is a passion your dad has had since forever. You know, this comes up a lot when we talk to people who are in this space. They realize, why aren’t more people doing this? And I think a lot of times it’s because psychologically we limit ourselves.

 

Sell in the Place You Feel Worthy

Got a chance to talk to Tom Hopkins once, and we asked him for a piece of advice, and I believe he did this the very first time we interviewed him on the show. And he says, you have to sell in the place where you feel worthy.

If you feel like, “Hey, apartment buildings are too big for me; I couldn’t do it.” Then you’re probably not there. But I’d also encourage you to think like Brad, and realize, “Hey, you know what? Maybe I could do apartment investing. And if I could do it, let me put my education into really learning how to do it, and then go really try to do it.” Because, your point, it is a sweet spot.

When you’re in that mid-range of apartment investing, you’re not competing with all the mom and pop investors that are starting in single family homes because it’s “easy.” And you’re not competing with the giant REITs who can’t be bothered with the 60 units. They won’t look at anything less than 120 or 150 or even 200 units, right? So there’s a place where you can actually go in and compete, that isn’t as crowded, and it could in some ways actually be easier, with the right education.

Robert Helms: Now in addition to Brad’s training class, which you’ll find on our website, he’s prepared a great little report for our listeners. If you’re interested in learning more from Mr. Sumrok, just send an email to Sumrok, that’s S-u-m-r-o-k, Sumrok@realestateguysradio.com

One last caveat, and that’s this. We didn’t talk a lot about financing because of the time, but many times apartment lenders have a minimum. So folks go, “You know, I found this great 8 unit apartment in this really inexpensive place. I can buy it for $225,000.”

Excellent chance you won’t find a loan on that property, because apartment lenders have some minimum – often a half a million or a million dollars. Again, get with a great lender before you buy any property, so you know how leverage can work on that property.

Big thanks to Brad for his time, and for also his appearance at the Secrets of Successful Syndication a couple weeks back. Next week on the program, we’ll be talking about the Dallas market. So we have between now and next week to go figure that out. And we’ll bring that to you next week.

Until then, go out and make some equity happen.

 


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Ask The Guys – How To Invest In Real Estate With No Money

how to invest in real estate with no money - wallet

Overview

Ever wonder how to invest in real estate with no money? No money down is the Holy Grail of late night TV real estate infomercials.  But can you really do it?

In this edition of Ask The Guys, we field questions from around the world about how to buy real estate…even when you have next to nothing to start with.

Discussing how you can bring value to the table even when you have no dollars:

  • Your ask a question, but not in the form of an answer … this isn’t Jeopardy show host, Robert Helms
  • His “I’m no tv host. I just play one on the radio” co-host, Russell Gray

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(Show Transcript)

 

Welcome

Robert Helms: Welcome to the Real Estate Guys Radio Show, I’m your host Robert Helms. With me as usual co-host, financial strategist Russell Gray.

Russell Gray: Hey, Robert!

Robert Helms: You know, this is one of our favorite shows.

Russell Gray: It is, “Ask the Guys”.

Robert Helms: We do “Ask the Guys”, you know, every 6, 8, 10 weeks – whenever we can, and we could do it every week – we’re now to the point where we get enough questions that we could almost do this show every week, although there’s so many other things to talk about.

But here’s the idea – our listeners, like you, have questions. They go to the website, www.realestateguysradio.com. They click “Ask the Guys”, and we try to answer as many as we can that we feel will have some relevance to the entire listening community, not just one person.

We don’t answer them individually usually. But, here’s our only disclaimers – we are not tax or legal professionals. We don’t give advice; we only give ideas and information. Your job is to take that and to turn it into actual knowledge by enrolling whatever professionals you need. And we’re big proponents of using professionals, and that’s how you get things done.

 

How to Invest in Real Estate with No Money

So here we go, in no particular order. Number one, this question comes from Edward, in Surrey, United Kingdom. So he’s in the UK, and he says (and this will ring home, cause this is true for a lot of people in a lot of places).

“I have zero money to invest. Can you help me? I live and work in the UK at a very ordinary, low paid job, without a car. Can you help a guy in my circumstances?”

Well, you know what, congratulations for having the interest and wanting to invest, and recognizing that you don’t have much to start with. Almost everybody who does well in real estate investing started with practically nothing.

 

How to Invest in Real Estate with No Money – Invest in Education and Building Your Skills

Russell Gray: That’s true. And I would say, if there’s only one thing that you could invest in, it would be your education, and if you were going to focus on one thing to learn about, I would say sales skills.

Because if you learn sales skills, then you can go out and recruit all of the other resources you need. If you know how to sell, then you can find investors, you can make private loans, you can negotiate owner carry-backs. There’s all kinds of things you can do if you have the basic skill of knowing how to sell, and communicate with people, and get deals done.

how to invest in real estate with no money - educate yourself

And then, number two, some basic concept of how real estate gets done in terms of structuring deals, and the benefits – why somebody perhaps would want to carry-back, or make an investment, because again you’re going to be brokering your knowledge and your network in order to track all of the other resources you need.

 

How to Invest in Real Estate with No Money – Recognize and Use the Resources That You Do Have

Robert Helms: And the other thing is that you’ve got a lot of resources that are not necessarily money, and income, although you do have a job, right? So having a job is great, number one rule: Live below your means, just like you should in any productive society. You earn more than it costs you to live, so you’re putting away a little bit.

That little bit isn’t going to grow at a huge investment rate quickly, but it doesn’t have to. Because what you do have, is you have more time. Even a full time job, you still have time that you commit to learning, and networking, and listen to the show we did back on the idea of building your network in the new year, and figuring out some ways that you can add value.

Get around the real estate investors who have the opposite problem that you do – they have not enough time, and way too many deals, and way too much to go do. Figure out how you can help them, and learn as you do it.

 

How to Invest in Real Estate with No Money – Look for Ways to Get Experience, and Networking Opportunities

Russell Gray: And that’s a great way to potentially either earn a little extra money, if it’s a paying gig, or expand your knowledge, where maybe instead of paying to be in the room to go to the seminar, you are volunteering. And so you get to hear the material, and even though you’re not making any money, you’re not spending any money. So, there’s creative ways to get what you need by bringing what you can, and that’s ultimately what it always comes down to: adding value first, and then looking those opportunities.

One other thing strategically, Edward, is think about the people that would need to get to know. So, look for ways to get things onto your experience resume by volunteering with people, or working with people that are going to position you more professionally, or from an experiential point of view, as being better qualified later on. Because, in sales, it’s not just knowing how to communicate, or to negotiate a deal, or to uncover someone’s needs and match things up; it’s your positioning. It’s how do they view you?

And so, when you have things on your resume, or you have people in your network who are recommending you or endorsing you, then that becomes part of your credibility. And it may not be as good as having credit in terms of financials, but in terms of opening up doors when you get into relationships, when you have that kind of credibility from people, then it begins to help you access the resources you need until you can have more of your own resources.

 

How to Invest in Real Estate with No Money – Keep a Steady Job

Robert Helms: And if you are looking down the road to a point where you could qualify for a mortgage to buy real estate, then every job counts. Yeah, it’s a low paid job, but you know what? Don’t hop around from job, to job, to job.

If your resume looks like you’ve been at 10 different places in the last 20 months, that looks very different than if you’ve been at one place for 20 months. Even if it’s not a great job, sticking with it looks good in the eyes of a lender.

 

How to Invest in Real Estate with No Money – Meet With a Mortgage Professional to Discuss Goals

Russell Gray: It goes back to the idea – you’re painting a picture. That’s what we talked about building your brand, building your network. And you’re painting a picture. You’re painting a picture to the lender.

One thing you may do is go visit with a mortgage professional, and ask them to tell you how lendable you are, and if you could make changes, what changes should you make in order to become more lendable. Because it’s much easier to hit a target when you actually know what it is.

Again, these are things that don’t really cost you any money. It just takes some time, and a notebook, and you go listen. You take notes, and then you go do the things that you can do. And when you start having that action-oriented, can-do attitude, you’ll begin to start making some progress. It begins to pick up momentum, and pretty soon you will start feeling not so far out of position.

You won’t quite feel as despairing, and you’ll go, “Wow, really? You know what, maybe I don’t have a great, high paying job, maybe I don’t have a bunch of money in the bank, but I do have a lot to work with, and I’m getting more every day.”

Robert Helms: And the great news is, absolutely this is possible for you. We know so many people that started with less than zero, and have been able to acquire portfolios. It just takes time and diligence and doing the thing. So, congratulations on listening to the podcast. Listen to a lot of other stuff out there – it’s not just us – there’s all kinds of great information available, most of it for free. But great question, Edward, and good luck to you in the UK.

 

How To Learn about My Real Estate Market

This next question is from Toras in Lithuania.

“I wanted to ask you guys what should I begin to learn about the real estate market in my area? I intend to buy an apartment for life. Maybe what would you recommend?”

All right, well I’m confident that there’s a little bit of an English challenge there, but I’m certain that this person speaks better English than we speak Lithuanian.

Russell Gray: I would say that’s a for sure.

Robert Helms: So ok, so this is great. What do you begin to learn about a market in your area? If you’re new to real estate investing, and you don’t know, there’s a lot you’re looking for. I often say, live where you want to live, but invest where the numbers make sense. So just because you live somewhere doesn’t mean necessarily that it’s a good market to invest in, but it sure could be.

So what are you looking for? In a real estate market, you’re looking for a couple of macro factors.

The first is what we call net migration. Are more people coming into a market, or are more people leaving a market? Every single day, people are coming into your market. People are leaving your market. The question is, in which direction is it trending?

And then within that, who’s coming in? Are there companies locating, are there jobs coming in? Is there reason for people to be spending more time in your marketplace? Are there what we call drivers that are bringing folks and money into your marketplace? If so, that means the potential exists for rents to go up, for there to be good opportunities to buy investment property.

On the other hand, if it’s not that kind of a market, and your market doesn’t deliver those kinds of metrics, then you start looking at a larger area. It could be the next town over, the next city or state, right? You start to look at the areas geographically that you can get to.

I’m no longer limited by the geography to where I personally invest. But when I was starting, my thing was, anywhere I can get in a day would be fine. So when I started, I invested mostly 150 miles from my house, until I realized that a two hour drive by car was the same as a two hour flight, and there was a lot more real estate I could get to if I was willing to take a two hour flight, and again I’m thinking, “can I get there in a day and back? Can I fly in the morning, check out whatever I need to check out, fly back in a day.”

Today, that’s completely gone away, and it’s pretty much anywhere on this planet and any of the adjacent planets. So, you start with what’s close because that’s what you know.

how to invest in real estate with no money - jobs market analysis - scrabble words of jobs

And the kinds of things you want to find out in the market are: What are the jobs like? The people who are paying rent – those people would be your tenants – where are their jobs? How much are they getting paid? How regularly are they employed? What’s unemployment like? What industries are there, and how are they paid? There’s a lot to find out about the people who are in your real estate market.

Russell Gray: You know I get the feeling he might be asking about a personal residence – you know, an apartment for life. This is going to be a place I’m going to buy, and a place that I want to live. And then the questions you’re going to ask are completely different.

Because it may not be necessarily about all those other things, although you’re going to be interested about the local economy, and sure you care about the value of the property. And it’s obviously better if you buy a property and if you think somewhere down the road “I wouldn’t want leave,” it would be nice to be able to rent it back out. So all the questions – all those things you mentioned, Robert – are important.

But if it’s your personal residence, then there’s a whole other host of questions. Right? Is it where you want to live? Is it where your friends and family are located? Is it a part of the world that you enjoy being in? Is the floorplan, the neighborhood, and all of the things, and of course, the trend of the neighborhood right for you? So, lots of different things to think about, and the biggest thing is, you know, you said apartment for life. And I just wonder, are you talking about buying a property you’re planning on owning for the rest of your life?

Robert Helms: I don’t know if I would assume that just based on the disjointedness of this, because he specifically asks about the real estate market. So that terminology has me think investment. Apartment is also terminology that we think of as an investment, but not all over the world. You can buy apartments in many places. So, I think it’s ok on either side. Russ brings up a great point. Depending on your use, that’s going to dictate the questions that are important. And with different uses, there are different questions.

Russell Gray: And if you’re married, “A happy wife, happy life.” Just remember that.

Robert Helms: Do it her way.

Russell Gray: Do it her way.

 

When to Start Investing in Real Estate

Robert Helms: But congratulations, and hello from Lithuania. Our next question comes from Chris in Montreal, Quebec, Canada.

“Hey guys! I’m 30 years young. I want to start investing in revenue real estate.”

Well, hot dog! That’s awesome.

“I have over $100,000 in savings, and no debt. However, the market here in Canada seems to be very expensive, and has never had a price correction like the US did in 2008. The pricing of the average rental property in my city goes for 15 times yearly rental income, or around 3-5% ROI. Should I wait for the correction, or get started right away?”

Well that is great. So, before we get to what you should do (and again, we don’t give advice but ideas, and we’ve got a lot of them), let’s talk about this idea of the return.

He says, “In my city, the rent is 15 times yearly rental income,” which we can assume from his note, that translates to a 3-5% ROI. There’s some big assumptions there.

Russell Gray: Yeah, so 15 times is a little bit on the high side, even with today’s low interest rates. So that’s definitely a little bit frothy for income producing real estate.

The other thing is, just in the big picture with Canada, I mean right now, the big part of the Canadian economy is oil. And the Canadian economy is going to feel the impact. So I’d be paying a lot of attention; we talked about this quite a bit on the show and in the newsletter and in the blog, because oil’s a big story all around the world, and it’s especially a big story in a place like Canada.

canada oil production - oil tanker

Robert Helms: Not so much in Montreal; Montreal’s much more diverse. That’s definitely a place that has a lot of different stories, and probably less driven by oil, but Canada as a currency, right? For sure.

Russell Gray: Well you’ve got that going on, so your currency potentially could be a little bit weaker. And real estate is kind of a lagging type of an indicator, you know. When the economy gets strong, then the real estate gets strong as people can afford. When the economy gets weak, real estate kind of hangs on for a while. People don’t like to let go of what they think the value is.

You know, Robert’s spent a lot of time selling real estate, and one of the hardest times to sell real estate, especially retail real estate – residential real estate, is when you go talk to the home owner and he goes, “Well, wait a minute, you know, you come back with my comparative analysis and do the market report, and you tell me my house is worth this, well, a year ago, it was worth this plus 20%.”

Robert Helms: Right.

Russell Gray: “Well, that was a year ago, and we’re in a different direction.” And they don’t want to let that go, and they resist. And so, there’s some of that. So you have to really understand where you’re at in the local economy. So, real estate timing is a difficult thing to do. It’s really more does the individual deal make sense.

Even though a marketplace could be going for 15 times, you may find a unique opportunity. You may find an opportunity where something is being under-managed, where it has more income potential. Or maybe you can find a way to change the property, or the structure somehow, add a room, create a little extra storage space, add an amenity, and you can get more income than the current owner, and all of a sudden that 15 times drops down the more like 12. And then that starts to get more within spitting distance of numbers that make sense.

You may be able to find a neighborhood that’s in kind of the path of progress, and moving up, and maybe you want to stretch a little bit because you believe in this particular location.

Sometimes you can find a particular seller that is able to sweeten the deal a little bit. Maybe he needs to get his price for whatever reason, but he might be able to throw something else into the deal that would make sense. It could be personal property. It could be some other set of terms that would work for you.

So, the idea is that you know if you wait for a correction that never comes, then you miss out. A lot of people have criticized some of the perma-bears. You know, Peter Schiff gets this all the time, “Hey, gold’s going to 5,000. Gold’s going to 5,000.”  Well, meanwhile it went from 1,700 to you know, 1,100 or below.

Robert Helms: Well, he’s not wrong yet.

Russell Gray: He’s not wrong yet, but for the people who were bought in and then took the hit, well… but what if he would have been right? What if it went from 1,700 to 5,000? Everybody says, “Well I’m waiting til it goes back down to 12.” The point is, you don’t really know.

Robert Helms: No, I mean, you can’t try to play a correction. I would say this – the best time to invest in real estate was 20 years ago, and the second best time is today. Don’t wait.

Not only that, there’s other places in Canada and in the world where it’s not 15 times. Live where you want to live. Invest where the numbers make sense. When I see a market that is 15 times yearly rental income, I think that’s a great, great opportunity to develop property.

There’s much better returns when I get involved. And I know you’re thinking, “I only have 100 grand; I’m trying to buy my first property. How am I going to develop?” You don’t have to do the work. You can find a developer who needs what all developers need – capital – and figure out how to partner. There’s a lot of hot markets around the world right now where folks are making good money by producing the kinds of inventory that are getting these kinds of returns.

Russell Gray: The one thing, Chris, that I like about the question, is at least you’re thinking about whether or not it’s a good time. And so, the one thing that I would say, is just be very careful about you know, I agree with Robert – don’t wait, but don’t chase. Don’t chase the market. Don’t try to make a deal be something that it’s not.

In a market that’s a little hotter, you’re going to have to do more work to try to find a deal that makes sense. Just don’t try to squeeze a mediocre deal in just because you want to get started now.

Just work harder, look at more deals, crunch more numbers, look for out of the box ways to make a deal make sense when maybe on the surface it does. See something that somebody else doesn’t see, and then that’s probably where you’re going to end up finding a deal that’s going to make sense, no matter what the market. There are always deals in every market, but sometimes they’re easy to find, and sometimes you’ve really got to work to find them. 

 

How to Structure a Deal With a Private Lender

Robert Helms: It’s “Ask the Guys” – the first three questions from three different countries. This question comes from Dan in Reno, Nevada.

He says, “I’m messaging you today in hopes that I may get some advice on how to approach a private lender (my parents) in regards to financing my first turn-key real estate investment. I only need a down payment from them, as I should be able to finance the rest myself from a mortgage lender. Question – though I can pay my parents back in interest, I would like to know the best strategy for paying them back.

For example, option one, should I pay them back the monthly cash flow for an estimated 5-6 years until they’re paid, which will leave me with the refinance money to invest in another property. Or, option two, pocket the cash flow myself, and pay them back in whole with the cash out re-fi.

My priority is to start accumulating rental properties, so losing the cash flow in the first property to get started is not a big deal, if it means that I can use the cash out re-fi for my next property. I don’t know if my debt to income ratio will be adequate, though, after re-financing the first property. Thanks for your time. I will try to make the message a little shorter, next time. Love the show, and all of the great content.”

Alright, Dan. Well, there is no one way to skin a cat. There’s lots of different ways. And although we don’t have advice for you, we definitely have some ideas.

Russell Gray: Well I think this is deal making 101. What’s optimal for you, is going to maybe be a mathematical decision, but what’s optimal for the other person may not be what’s optimal for you. And so, if you’re going to make a deal, the first thing you have to do is determine optimal is what both parties are willing to do.

And so, you have to have a conversation with your folks. It’s like, “Hey guys, what are the options here? And I don’t know exactly how we’re going to put the deal together, but I want to get all of the pieces of the puzzle on the table. So let’s just hypothetically say, if you had to wait 5 years to get your money back, and we did it as a sale, or a cash out re-fi, how would you feel about that? What kind of return on investment would you want to see? If I were to pay you a monthly payment, is that something you would be interested in? Or you know would that create an income tax problem for you?”

Here’s another thing: you have more to work with than just the cash flow or the equity. You also have the tax breaks on the property depending on how you structure the deal. Sometimes an investment partner is going to be just as interested in getting a tax break, and if you factor in the value of that break into their scheme, it actually sweetens the return on investment without any money coming out of your pocket. So, that’s where you have to understand a little bit about what their criteria is, and then involve the appropriate professional who can help you understand it.

You also talked a little bit about debt to income ratios, which is great understanding. You just need to make sure that you’re working with your mortgage professional, not just today, but projecting forward in these different scenarios, because giving up that, if you promise to give someone a cash out re-fi and it puts you in a DTI where you can’t do that second or third property in your plan, maybe that’s something you think you’d be willing to do today, and then you realize, “Well, gosh, if I do that today, then in two years I’m going to be out of position.”

Robert Helms: Well, that’s a great point anyway. Anytime you look at investor financing, when you’re trying to finance a property that you’re going to hold as a rental property short term or long term, you always want to begin with the end in mind.

Lenders: I love lenders, they’re very necessary, but they look at the deal on their desk today, and they try to close it by the end of the month. They’re driven that way. They don’t necessarily look at you being the first of seven or eight or nine or ten or one hundred transactions. You need to start with that. “Listen, I’m going to buy a house every year. How do we structure my first loan in such a way that I get that win?”

For instance, a lot of lenders aren’t going to want to see a second or third party second on the property, which is what this would be, alone from your parents, but because it’s your parents, it’s maybe not documented that way. I’m not suggesting doing anything that’s not legal, I’m just saying, parents have more flexibility.

You start with a conversation, which is, “Mom, Dad, thanks for the help. What’s best for you?” Maybe it does make sense for you to give them 100% of the income until they’re just off and paid, and now you’ve got the property. That might make sense.

But think about the way most people put money to work who are lenders. They put out money, they expect a monthly return that is somewhere in the 4-10% range, depending on the kind of lenders they are. Maybe that works for them. So for sure, no matter who the partner is, what does the partner want to see, what do you want to see, and how do you come to common ground that works for everybody?

Russell Gray: Yeah, and part of it is the source of funds, you know, wherever your parents are coming up with the money, because whatever you’re going to offer them in their mind is compare to what? What else might they do?

Now because you’re their child, of course, they have a vested interest one would think in seeing you succeed, and maybe that’s good enough. Maybe they’d say, “Hey, you know what? I could make a higher rate of return on XYZ investment, but part of the return is seeing my son, Dan, get into his real estate investing career, and I want to be a part of that.”

And so, again, it goes back to what I said at the top of my comments on this question, Dan. It’s about really understanding the person on the other side of the table, and everything that they have to work with, everything that they are looking to get out of the deal. Then, you taking what you have to work with, and everything that you want to get out of the deal. And then looking what the deal will actually make available to both of you. Then figure out how to carve out each piece, so that everybody gets what they want out of it, and everybody can walk away.

And some of that’s going to be math. Some of that is going to be negotiation and understanding. Some of that is going to require technical expertise maybe from a tax adviser or a mortgage broker, but it’s actually one of the most fun components of being a real estate investor, being able to sit down and create these kinds of deals because this is creative real estate.

You may not even need to go to a conventional mortgage lender. You may decide not to do that. Maybe your parents or somebody else has better lendability, or perhaps they have other resources. “Well gosh, if you’re going to pay the mortgage company 4 %, I would love to get 4% or 5%, secured by a piece of real estate. So why don’t I make that a private loan, and now, you don’t have to worry about the down payment. I’ll give you the whole thing at 5%.”

Robert Helms: Now, you bring up another great point, Dan, which is perhaps a nuance, but I think it’s worth talking about. And that is this idea that you recognize you don’t necessarily need the monthly payment. You don’t need that red income, because you’ve got the ability to pay for the loan.

Too many real estate investors don’t think about that. All they focus on is “I need to get positive cash flow,” and they create a scenario where they go out and get a house, they save up a down payment, and they qualify for a loan, and they create $200 a month positive cash flow, and now what? $200 a month is nice, but it’s not going to turn you into a wealthy real estate mogul. Two hundred dollars a month if you’re accumulating that for every house or three hundred, pick a number, it takes a lot of houses to get to a meaningful number.

So the fact that it’s not all about the monthly positive cash flow today by you giving that in this case to the lender or your parents instead is a tool you have.

And I think most people should be more creative of what all the tools are. Russ mentioned tax benefits. Again, consult your tax professional, but there may be some ways to make it work out in their benefit and give them that much more reason to want to invest with you. So, great question.

And if you’ve got a great question for the Real Estate Guys, or even a mediocre question, send it to us. Go to our website at realestateguysradio.com and click “Ask the Guys.”

 

How to Invest in an Expensive Market

This question comes from Diana in Miami, Florida. Alright. She’s asking about a loan in California.

“Hi again, I’ve written you guys before and you answered my question on the podcast. Thank you. So, I’m reaching out to you again.”

You know, rarely do we let a second one slip through, but this time we will.

“My friend lives in Arcadia, California, and has a $240,000 combined income with her husband, great credit – but, saving 20% for their down payment has proven tough. Property there is generally more than $600,000, so FHA doesn’t apply. Could you guys offer any suggestions as to any of their options that may be available to her?”

Well, we sure can. When you go into an expensive market, whether it’s New York, or California, or even parts of Miami, then you’re always up against saving the down payment.

What’s crazy is you go to Memphis, Tennessee, and the people there also have a hard time saving the down payment, even though it might only be $10,000. So, someone making a quarter of a million dollars has a hard time putting away 20% – half of that for a down payment.

expensive california real estate - how to invest with little or no money

Well, sure, how many people could put away half of everything they make for a down payment? Only the most disciplined. So, what’s a person to do?

Well, in California, there’s a lot. In fact, there are particular loans, and you want to have your friend probably talk to a local lender, or perhaps you’re in that business because you seem to know a lot about it – about what local loans may be available.

California’s one of the states that has some good first time buyers’ programs. So, we don’t know about the situation here, if they’re a first time buyer, but if they are – that’s a potential opportunity. And there’s other things to consider.

Russell Gray: Well, yeah, I mean the big strength here is a good credit score and $20,000 a month of documentable income. So, that’s highly leverageable.

So, assuming the ratios are fine, it may be possible to actually borrow the down payment from a private lender, not secured by the real estate (maybe secured by something else on the balance sheet if there is something else, or maybe just a private, unsecured loan based on the strength of their credit profile, and their income.

And then you get those funds, it’s a private loan, you stick it in the account, you let it season for however long your mortgage professional tells you it needs to be there, you know. It still needs to show up on your balance sheet as a loan, but it isn’t showing up on the properties as an encumbrance, and so if the lender would not allow a second loan – and a lot of lenders will, so that’s not even an issue.

Robert Helms: Well, the issue is getting the money up front and then having it attached to the piece of property later – that takes a particular person to be willing to do that.

Russell Gray: Yeah, but again, that’s quite a bit of income even by California’s standards, and so I would think that you would be able to offer somebody a relatively attractive return, especially if you give them a term that’s reasonable. Meaning you’re not asking them for the money for 30 years; maybe you’re only asking for it for 3 years, or 5 years. And that way you’re in the property, and you’re counting on the property going up, maybe it’s a property that you have the opportunity to do what we call force equity; it’s a fixer upper, or somehow you can add something or do something to it to make sure that the value goes up even if the market doesn’t go up as fast as you’d like it to.

Robert Helms: The challenge with that is that a lot of fixer upper properties are going to have even less LTV because lenders aren’t going to want to be as exposed. So if we’re assuming a 20% down scenario, the collateral might not be well enough.

What about an 80, 10, and 10? What if you found a seller who is willing to not carry the entire thing, cause that doesn’t happen very often, but would carry 10%. You know, someone who bought this house that’s $300,000 and today it’s worth $600,000, they’re going sell and have whatever gain or whatever that looks like.

We don’t know if that’s an investment property to them, they’re residents, or whatever. But could they take 10%? See, if your friend only had to come up with half as much, would that be do-able?

Russell Gray: Yeah, so I mean, owner’s equity is always something that you should inquire about, and the way you do it is you ask, “Well, what are you going to do with the proceeds? Because maybe I can make you an offer that would be just as good or better backed up by a property that you already know and like. And maybe you’d be comfortable with that.”

Because if someone’s going to go stick the money in a CD and earn you know one quarter of one percent, or one percent, or two percent, and you’re offering them three, or four, or five, I mean that’s like triple the return! And that could be very attractive to somebody.

The other thing is, if you’re buying an owner occupied property, you know, maybe they’re going to say, “Hey, it’s tax free money to me.” But if it’s an income property, and they’re going to realize a capital gain, or if it is over the threshold, and they’ve got more than half a million dollars of appreciation in it, for a couple, they’re going to be looking at paying a capital gains tax on that.

Especially in California, maybe they don’t want to realize that just now. Maybe they want to wait a little bit. Maybe you can work out a deal with them. Again, this is where you have to have a decent working knowledge of the tax ramifications of decisions not just for yourself, but for the party on the other side, as we were sharing earlier. So it would be something to look into. Owner’s equity is always something that you want to ask about.

Robert Helms: I think a lease option would be possible – find a property that they can rent for a year that becomes the potential to be the property that they can purchase. That gives them time at a $240,000 income to put that money away, cause that’s a good income. And I’m sure they’re able to save some, but if they can’t save up 20%, give it a little more runway and a little more time, maybe they could. Maybe a 2 year lease option would make sense.

Russell Gray: Yeah, sometimes the seller, especially a seller who is either maybe asking a little bit higher price than the market wants to give in an area that maybe isn’t selling as fast as you know some areas are, would be willing to do that, because they can get more cash flow today. And even though, let’s say for example, you rent the property (and I’m just going to toss out numbers), let’s say it’s a $3,000 a month property at market, but you pay $4,000. But they’re giving you $1,000 a month credit towards the down payment.

That’s really equity build up to you, and that is receipt of equity to them. Of course, if you don’t close, they get to keep that money, but in the meanwhile, they get the cash flow. And based on your strong income, or your friend’s strong income, maybe that’s something they could swing.

Meanwhile, that gives you the opportunity to continue to work on the down payment, so down the road, when you get ready to do the loan to take out the seller completely, you’ve already got some down payment credited in the transaction from the $1,000, plus whatever else you’re able to save up outside of that.

Robert Helms: You know, we look at conforming loan limits today. They vary based on the areas of the country. Some are higher, some are lower. In a high area like this, you’re going to be right up at the top. I don’t make it a habit of staying right up to date on these things, but last I knew, about $417,000 was the conforming limit.

So if that were true, you’re not that much more than a 20% here, and maybe it makes sense to figure out some in between.

I’d come back to a local lender. Local banks have different lending parameters than the big guys do, and certainly the FHA does.

So, look around. You know, kiss some frogs, and get out in the market and see what’s available. But just think creatively, which I think we’ve demonstrated in the last 8 minutes, but there’s a lot more I’m sure. So come out to an event, and let’s continue this conversation over a beer.

 

How to Structure to Protect Your Assets

It’s our favorite guest! It’s you! “Ask the Guys” – your questions, our answers. This one comes from Arnold in Bur Ridge, Illinois, and he says,

“What’s the best structure to use to protect my assets? All my properties are currently in separate in LLC’s. Should I put these LLC’s into a trust? Should it be a domestic trust or international trust, revocable or irrevocable? What should I do?”

Alright, well great question, Arnold. And as you probably heard today, we don’t give advice. And “best” is such an interesting thing. “Best – what is the best structure?” and we’ve covered this before, the best structure is the one that works the best for you. We don’t know enough about your personal situation, but we can certainly talk around these various issues you bring out.

Rusel Gray: So without getting too far into the weeds, a basic structure is, you’re there at the top of the food chain, and off to the side you would have a living trust that kind of catches all of your personal property and avoids probate, and any good estate planning attorney can help you understand the benefits of a living trust.

You brought up the topic of an asset protection trust, which can be both domestic or foreign, and so depending on how private you want to be, depending on how inter-jurisdictional, or international you want to be, you might consider using a combination of domestic and foreign entities. And again, a good international attorney can help you with that.

Robert Helms: Well and certainly worth some time getting educated about that – you know, part of that is, it’s a whole order of magnitude more complex when you add an international structure in. But there’s a lot of great reasons to do it. So, you really have to begin with the end in mind.

If you plan to live all of your days in Illinois, and never leave the United States of America, never own anything or create any income outside of the US, probably not worth a lot of time and toil figuring out international structures.

If on the other hand, you like to travel, you might consider owning property in other places, you know, it’s a big old world out there with a lot of opportunity, then now you have the wonderful benefit of the fact that not every country’s laws are the same, not every asset protection structure is the same.

There’s a lot you can do, a lot when it comes to not only asset protection, but taxation and privacy. So it’s certainly worth getting educated about.

Russell Gray: Yeah, I mean there’s so many different ways. It’s just a complex question. You know, Robert, you brought it up great, it’s like, well, best, what is best? Well, I mean, you can really set the thing up bullet proof, and it can cost you a fortune. But you’re bullet proof, you’re private, you’ve got everything all set up.

Robert Helms: Well, let’s use an example. A lot of attorneys will say, put every property in a separate LLC, like you’ve already done here, Arnold, and well, I can see why attorneys would say that. They’re in the business of creating LLC’s, and that is the most bullet proof.

But you know what? Often, if I have 3 or 4 single family homes in the same neighborhood, I might put them all in one LLC, because I don’t perceive that there’s a huge liability hanging out, unless it’s a really low risk neighborhood. And they’re all about the same kind of asset, and they’re all in the same neighborhood. I’m comfortable with the risk. I’m just talking personally.

So, why am I putting them in a LLC? To protect assets. What else could I use? Insurance protects assets. So, there’s different ways to come out of it.

You might say, “I want every property in its own LLC, and I want that LLC owned by an offshore trust.” Ok, you could do that. I might say, “I’m going to put 4 properties in the same LLC. It’s going to firewall between the rest of my life, but not within each other, because I’m willing to take that risk.”

So part of it is getting out who you are, as an investor, and how much risk you are willing to take, and how much you are willing to pay to avoid that risk.

Russell Gray: Yeah, so, it’s a combination of asset protection structures, entities like LLC’s, and then jurisdictions, and then privacy, and then insurance policies. There’s a whole combination of how you put those together.

For example, if you have 5 properties all in 1 LLC, and there is 100% financing, no equity – there’s really not that much to go after, except the income streams on the individual properties.

And depending on if you use things the way you do the ownership structures, all anybody may end up with is the charging order, which means they realize the tax, but they don’t end up getting any of the income. And so, that’s a whole different structure. It’s kind of like this little poison pill that your attorneys can stick inside your deal.

So, it’s difficult to answer the question in great detail when someone asks a question like “best,” but I think big picture is, the idea that you have living trusts and asset protection trusts, Then underneath that you have holding companies that don’t do any business with any third party people. Because when you do business with third party people, that’s when you create a liability port, or a door, a way they can get to you.

And then you have operating companies, and management companies, and the operating companies would be these individual LLC’s, and you might have one management company with a directors and officers, or as an errors and omissions insurance policy that is operating all of these different LLC’s, each one holding an individual property, and each one of those properties would have a commercial, general liability policy, which would cover you against slip and falls, and some of those types of things.

It would trigger a defense. And if somebody went after the holding companies, or the managers, meaning you, then that’s where the directors and officers insurance, or your errors and omissions insurance would kick in.

So you have insurance that are funding your defense, you have insurance policies that can pay out a settlement, and on top of that, you can use a technique called equity stripping, and that’s where you might have a separate holding company somewhere else put a lien on your property for the full amount of the equity.

So when someone does an asset search on the property, they go, “Oh, well this property doesn’t have any equity in it. There’s a first lender, and there’s a second lender, which means that I would be third in line at best, and there’s nothing to go after.”

You know, someone who takes the time to sue you, and gets you all the way through, that they win, and then they do what’s called an order of examination to have you reveal where everything’s at – they’re going to find all that stuff. But the person who isn’t going to find it easily is just the opportunistic attorney who’s just running around looking for properties with bunches of equity that they can go after easily.

You just don’t want to be having your assets hanging out there uncovered, you know, where people can take a shot at them. So, if you use privacy, if you use insurance, you use asset protection, and you use multi-jurisdictions, you make it very, very difficult for the opportunistic, lazy, predatory people to come after you.

The only people who are going to get you are going to be the government if they’re coming after you for taxes, or somebody who really has a solid, legit claim, that they’re going to push all the way through the whole structure, and then have you come reveal where everything is.

Robert Helms: And two of the parties really to be involved in helping you make this decision, obviously, your tax attorney, and that may be a separate attorney than the person who sets up your entities, but then also your estate planner – whoever’s going to help you with that, because that has a lot to do with those, too.

 

How to Find Real Estate Investors

Good question, Arnold! If you have a question for the Real Estate Guys, go to our website at realestateguysradio.com and click “Ask the Guys.” This question comes from Dave in Mountain Home, Idaho.

“Hey guys, I’d like to find out the best way to find equity partners for our manufactured home community investments. We have two projects in Montana, and one in Colorado. All three are C-quality projects that need better management and a few homes brought in to fill up the vacancies. The initial cash flows are approximately 10%, and will go up to about 18% in 3-5 years. Any ideas in today’s world?”

Thank you, Dave. Well, Dave, yeah. Here’s the deal. There’s lots of money out there, and this is the kind of opportunity people are interested in. Right? A kind of value add opportunity.

Certainly mobile homes and manufactured housing have good returns as an asset class. So, pretty easy to find money for those deals. In fact, we have a couple of students that do exactly this. Mobile home parks in little cities all around the United States, and they’re offering, you know, 18% returns, 16% returns, 21% return.

So yeah, you can go out and find money for that. Where? Probably not institutions.

Russell Gray: Yeah, exactly. It’s really interesting, cause there’s that best again. What is the best way? The best is whatever works best for you. But at the end of the day, it’s going to come down to building your brand and building your network, something we talk about all the time at the syndication seminar.

It is getting to a place of professional positioning, where people believe that you’re credible, that you know what you’re doing, that you do quality projects, that you’re a reputable business person, someone that they can invest with.

So you start by building that up. You show people who are credible, like CPA’s and attorneys, and people that have networks of high net worth people. And you begin either retaining them to help you with your own practice, because now there just is a nature of networking. Business people refer other business people to business people. So the more people you have on your team, the more likely they’re going to bring people to the party. And so, you begin to do that.

The other thing is, you learn how to tell your story. You get good at telling your story. You may go to join investment clubs, or go other places where there are investors, and you begin to tell your story. And you start getting really, really good at it, so you can explain to people why what you’re doing makes sense, why it’s compelling, why it’s interesting.

And so now you’ve got some good endorsements, you’ve got some good professional communication skills. Now you want to think about the people that you want to be partners with.

Because, if you’re looking for private investors, these people are going to be your partners. They might not be voting partners, they may be limited partners (and hopefully they will be), but nonetheless they will be people that you have a degree of accountability to, you’re going to have to  interact with, and so you have to decide what kind of people that you want to do business with.

how to buy real estate with little or no money - fundraising word written in chalk on pavement

Now, once you’ve figured out who those people are, where are they? Where do they congregate? They do. Their eyeballs congregate somewhere, somewhere they socially congregate – could be a rotary club, it could be a networking event.

And here’s the great news: It used to be, until a couple of years ago, that you were not even able to advertise. But today you can. We’ve been talking about this for quite a while.

In fact, we have a report on this in our special reports section. I believe you can get it if you send an email to monopoly@realestateguysradio.com, because the new law that has come out basically allows you to go out and advertise these types of opportunities to accredited investors.

And then recently we did a show with attorney Mauricio Rauld about how even non-accredited investors it’s beginning to open up.

So the ability for someone who has a credible deal to go out and find investors with whom you did not have a prior relationship from a legal perspective, is opening up.

But that doesn’t mean you still don’t have to work on your brand, and your reputation, and your ability to communicate your offer. And of course, that means you’ve got to have an offer that’s compelling.

And so, if you take the time to go meet with a few people, and instead of trying to pitch them the deal, you ask for their feedback – say, “Hey, here’s what I do, here’s how it works, here’s how I’m thinking about putting it together. What do you think? What kind of questions do you have? What kind of returns do you think people out there would be interested in?”

Some of the people whose opinions you ask for are actually going to want to invest. You’re not really trying to sell them, you’re trying to get their opinion, and if that’s all you get out of it, you’ve won. But you may end up getting a lot more than that.

Robert Helms: If this is more than just three properties, if you’re thinking about doing more of this, Dave, I think I would strongly recommend you come out to the Secrets of Success full Syndication. It’s two full days and a big workbook, and a lot of great faculty.

Not only that, the people that come to the syndication event are top notch. It’s amazing. We are humbled every time at the great people we meet that are already doing deals and many that have a lot of property in their own account and are looking to get to the next level by raising capital.

You’ll meet great people, you’ll get all kinds of great advice, and who knows, maybe you’ll find another few folks in this same space that can give you some ideas. I know of a couple of guys who will be at the syndication seminar who do exactly what you’re doing, and they’ve raised money to do it. So that would be a great place to go meet folks like that. But, good good stuff. Those deals are absolutely do-able.

 

San Diego and Southern California Water Concerns

Time for one more question today. This comes from Laura in San Diego. She says,

“You and your podcast are awesome, and I listen to every show religiously!”

Well, thanks a lot, Laura!

“I would like to get your opinion on the drought situation in San Diego, California, and how it may change San Diego in general, and real estate market specifically. You know, prices for both rent and sales, in the short and long term. What are the best strategies” – there’s best again – “for real estate investors to hold real estate properties long term if it was planned originally, or sell everything and run away from San Diego before it runs out of water and becomes a desert? Thank you.”

Well, Laura, in case everyone is not up to speed on this, San Diego is one of many cities that faces a little bit of a drought issue in the fact that they are running out of water. Now having said that, do we think, as the Real Estate Guys, it is going to turn into a desolate desert, and no one will ever want to go there again? Not very likely.

Here’s the reality. If the business people and stake holders in San Diego have to ship water in in one pint bottles, they will get this problem solved. We’ve seen this happen again and again. We’ve seen this happen in multiple markets.

I remember more than 10 years ago when Las Vegas, Nevada, had the same exact issue, and they were running out of water, and developers weren’t even getting permits because there weren’t going to be water rights. Guess what? Today there is plenty of water in Las Vegas. It’s thriving. It’s all good.

I’m not trying to make light of the issue. I’m trying to say, don’t be alarmed about it, and don’t say I’ve got to cut and run and get rid of everything before it becomes a desert. Now just looking at where the market is price wise, who knows? Maybe you’ll look like a hero two years from now if you sell everything you own in San Diego today. Don’t know.

Russell Gray: I think the big picture is there’s a lot of things to worry about, and I probably worry about as much as anybody there is. I mean, I listen to everybody, I try to take everything seriously, and then you just have to ask yourself, “what’s most likely?”

And it always comes down to this notion that when you have a major economic population center, and you have a key piece of important infrastructure, and it’s hard to imagine anything much higher on the food chain than water, as far as being an important piece of infrastructure, there is enormous resource in political will to fix the problem.

Water exists somewhere. I mean, think about it right now. We have gone back and forth through this keystone pipeline, right? The idea that there’s tons and tons of oil way up north. And all we have to do is get that pipeline built over how many thousands of miles to bring that oil from where it is to where it’s needed.

There’s water in this world. It may not be in southern California, but there’s a big enough population base and economic base that they will build a pipeline – probably not one pint bottles, right? They’re going to build a big pipeline to get it where it needs to be. Not to mention, San Diego’s right on the ocean.

Robert Helms: Hello!

Russell Gray: There are people that have manufactured desalination plants. There are entire populations – islands, you know – where you get fresh water, and it comes straight from the sea water.

Robert Helms: The entire island of Grand Cayman is desal, and it’s desal by a publicly traded company. And the water is of high quality. It’s wonderful, and it’s easy to do.

Plus, they have so much beer produced in San Diego, they go through a lot of water there. I can’t imagine that they’re not going to want to brew more of their great hopped ales, with more water. So, you know, you’ve just got to look at whatever the risk you think is. I think San Diego’s a great marketplace for a lot of reasons. I also think it’s high up there, right? The prices are high, so.

Russell Gray: Well, I think the thing is, whatever thing you’re concerned about, what you need to do is figure out the people who are qualified to have an opinion on the matter.

In this case, it could be people in the water community, it could be people, you know, involved in civil engineering and planning – I mean, I don’t exactly know who, but you study the issue for a little while, you’re going to figure it out pretty quickly, and once you figure out who’s qualified to have an opinion, then try to understand what agenda they might have in swinging their opinioni one way or the other, and listen to a lot of different people, and then sit down and think about what really makes sense to you.

If you really believe in your heart of hearts that it’s on its way to become a desert waste land, then absolutely, the best strategy for you, is to sell everything and get out of dodge. If like us, you think, you know, that’s probably not a very likely scenario, then pay attention to it, but then turn your attention to other things that are more likely to help you make good investing decisions going forward.

Robert Helms: We have some great investor friends who own more than a dozen properties in San Diego, and are looking to acquire more, and they’ll be with us on the 14th annual Investor’s Summit at Sea. You can pick their brain. They’re going to do a round table discussion about their properties in San Diego, and I promise, they’re up to speed on this issue.

So come on out to the Investor’s Summit at Sea. There’s still a couple of cabins left. Join us, join sales legend Tom Hopkins, join best selling financial author in history Robert Kiyosaki all live, all in person at the Investor’s Summit at Sea, and get all the details on our website at realestateguysradio.com.

Big thanks to all the folks who submitted questions, whether we got to them today or not. If you have a question for the Real Estate Guys, get to that website, realestateguysradio.com, click “Ask the Guys,” and maybe next edition of “Ask the Guys,” we’ll answer your question.

Until next time, go out and make some equity happen.

 


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What do Trump and Sanders primary wins say to real estate investors?

Trump and Sanders and a Bigger Economic Picture

In the recent New Hampshire primary vote, Trump and Sanders brought home big wins. Donald Trump summed it up in his New Hampshire victory speechTrump and Sanders NH Primary Wins - Donald Trump won the New Hampshire Republican primary by a large margin

If we had 5 percent unemployment, do you really think we’d have these gatherings?

He could be right.

In spite of “glowing” employment reports and a Fed so confident in the “strength” of the economy it raised interest rates a “whopping” 25 basis points for the first time in nearly a decade…the ire of the electorate (and the stock market) could be telling a much different story.

John Burns Consulting recently issued a report confirming something we’ve been projecting for quite some time:

Americans Are Leaving Big Cities for More Affordable Cities in the South and Northwest

When it comes to real estate, for homeowners or renters (and therefore for landlords), the basis for growth isn’t from foreigners snapping up U.S. real estate as a safe haven…or from hedge funds pumping billions of dollars into single-family home speculation…The real driver underneath fundamental real estate strength is real growth in both jobs and wages.

But in spite of the 4.9% unemployment rate touted by the government, that same government says labor participation is historically very low.

Look at this chart from the Bureau of Labor Statistics:

trump and sanders win - U.S. labor participation rate has seen falling substantially for the last 10 years

U.S. Labor Participation Rate – Source: Bureau of Labor Statistics

Boomers to blame? 

Some say the decline in labor participation is due to baby boomers retiring, but the government’s very own stats don’t support this assertion…

From 2004 to 2014, the only age group to INCREASE in labor participation was age 55 and OLDER.

Labor participation for anything UNDER 55 was actually NEGATIVE.

Clearly, baby boomers aren’t driving down the labor participation rate.  They’re the main group propping it UP!

What about wages?

Back in October 2014, Pew Research revealed that real wages have been stagnant (at best) for decades:

Trump and Sanders and the economy - purchasing power chart

Source: Pew Research Center

More recently, the Bureau of Labor Statistics reported real earnings notched up a tad, but a big chunk of the tiny gain came from a lower CPI (Consumer Price Index).

So small pay raises supplemented by lower prices produced a slight increase in purchasing power.

Is that enough to sustain the robust rental increases landlords have been enjoying the last couple of years?

No.  That’s probably why people are moving to more affordable markets.  A trend we expect to continue.

As you can see, it’s easy to get lost in the statistical weeds.

But the New Hampshire results are telling an easy to understand message on both sides of the aisle.

This economy isn’t booming for working class folks.

Trump and Sanders NH Primary Wins - picture of bernie sanders

Presidential candidate Bernie Sanders

So the voters want to kick the bums out, make America great again, return the power to the people, and stick it to the Wall Street elites…which explains (at least partly) the surprising popularity of candidates like Trump and Sanders.

Will the Fed continue to raise rates in an attempt to instill confidence?  

Based on the market’s reaction, it’s hard to imagine they will.  After all, the stock market’s been throwing a hissy fit since the December “hike”.  Just like Peter Schiff said they would.

As we discussed in a recent newsletter, the Fed rate increase resulted in a DECREASE in mortgage rates.

That’s because investors dumped stocks for the “safety” of bonds, pushing yields down (yields or interest rates DECREASE when the prices of the bonds are bid UP by growing demand).

Great!  Cheaper money is always nice for real estate investing.

It’s a reminder that bad times can be great times for investors, so don’t be dismayed by economic uncertainty.

Oil’s still not well…

Another big concern for 2016 remains the impact of lower oil prices on the credit markets.Falling oil prices threaten to implode the bond markets.

If oil prices remain suppressed for whatever reason, while it’s great for consumers (your tenants), it makes it harder for indebted oil companies (employers) to meet their debt obligations.

No surprise U.S. oil bankruptcies have spiked 379%!

And if Wall Street levered up on oil bonds the way they did with sub-prime mortgage bonds, a meltdown in oil bonds could trigger another epic financial crisis…maybe even The Real Crash Peter Schiff has been warning about.

We don’t know.  We just keep watching.

For real estate investors, the message is the same as it’s been for a while…

Affordable properties in tax and business friendly states with good infrastructure, diverse economic drivers, and quality of life amenities will probably see a disproportionate influx of people and businesses.

So while real estate, like everything else, will be impacted by a financial crisis…it isn’t an asset easily dumped by panicked investors.

And the powers that be, from governments to central banks to big business, are all highly motivated to prop up real estate.

Even better, if you’ve locked in super cheap mortgage money for the long term, and picked properties which conservatively cash flow, you’re in a position to ride out a storm.

And if you’re really prepared, you may have converted some of your equity into cash in case prices fall.

As he told us before he was a Presidential candidate, Donald Trump says in the down times, it’s always good to have some cash on hand to go bargain shopping.

For now, the Trump and Sanders freight train seems to be telling us Main Street isn’t drinking the “all is well” Kool-Aid.

So our focus remains on markets, properties and financing structures which position real estate investors to prosper in an economy that isn’t yet on solid footing for Main Street.

After all, that’s where our tenants live.

Until next time…

Good Investing!

Strategies to Force Equity in Real Estate

strategies to force equity in real estate

Overview

It’s always nice when demand and inflation drive up your property values…and your equity in real estate. But when hot markets cool off, it doesn’t necessarily mean your equity growth has to slow down too.

In this episode, we look at strategies to increase property values even when the market is flat of declining. And it’s a lot more than just prettying your properties!

So listen in and discover strategies you can use to make equity in real estate happen to you!

Discussing unique and creative strategies to force equity in your properties:

  • Your “I make equity happen in my sleep” show host, Robert Helms
  • His “I make spreadsheets happen in my sleep” co-host, Russell Gray

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(Show Transcript)

 

Welcome

Robert Helms: Welcome to the Real Estate Guys Radio Program. Sometimes you don’t want to sit around and wait for equity to happen – you want to make it happen. Today we’re going to talk about strategies to force equity. I’m your host Robert Helms, and with me is financial strategist, co-host, Rusell Gray.

Russell Gray: Hey, Robert.

 

Creating Value, Forcing Equity

Robert Helms: It is a wonderful topic we have here today, and that is that you can create equity out of thin air, practically. That is, you can force equity to happen. But, before we talk about that, let’s talk about the different ways that investors find and create equity.

Russell Gray: Well, way back in the day, in our book, “Equity Happens,” we actually covered this topic, and we talked about the different types of equity. We gave it terms so that you could begin to think about strategically: When I’m approaching a property, what am I going to do to create value?

And so a lot of it’s been about cash flow lately, because cash flow controls mortgages – mortgages control property, and then over time, we say equity will happen. One of the ways equity happens is through amortized equity. That’s when the tenant is paying you, and you’re using the money the tenant pays you to pay down the mortgage, and a little bit of that payment every month goes to paying off the mortgage and giving you a slice of equity by reducing your debt. Of course, that assumes that the property price stays even.

Robert Helms: Well, don’t even assume that. I would just say as far as the loan part goes, it’s principle and interest. When you make a payment every month, part of the principle amount of your loan is principle (if it’s amortized, and not interest only). And that principle pay down is essentially you gaining back that much ownership on your property.

So as hopefully your tenant makes that payment instead of you, then you gain back more and more of the equity in the property. Now, separate from that is what is happening to the value of the property. So if we just sit back and say, “Well, my house has gone up in value. My apartment building has gone up in value, because all the apartment buildings in the area have.” That’s more what we call market equity, where the market giveth and the market taketh away. You’re not doing anything for that equity, but a lot of us live in say, single family homes, where we bought it at a price, and today it’s worth a lot more. That is – congratulations – market equity.

 

Passive Equity’s Different Forms

Russell Gray: In the book, we refer to it as “passive equity,” and that’s because you’re really not doing anything. It comes in two forms, and I want to kind of address that word, “value,” because we’ve been talking about this a lot lately, when we think about denominating our wealth in dollars.

As dollars go down in value, anything denominated in dollars goes up in dollars. And so, it’s easy to go, “Oh, my house went up in value, because it went up in dollars.” But that might not necessarily be true, because if the dollar is falling, it means that the things you could buy with that extra money also went up in value, and so relatively speaking we use the example of cars. If I could sell a house for 10 cars in any given marketplace, and 20 years later the house is worth more, and the cars are worth more, but I can still sell the house for 10 cars, then I could still only sleep say 3 people in a three bedroom house, then the value really hasn’t changed in terms of utility, not to be too confusing.

For the course of this discussion, we’re talking about a property going up in value in terms of dollars, so it’s worth more dollars. Whether those dollars are worth more in the real world? I don’t know.

But then you take a look at the concept of dollars in terms of equity growth, and it comes from two sources. It comes from inflation, which is dollars being worth less, meaning things that are real like real estate and gold and oil and things like that going up in value – and then there’s also the supply and demand in-balance; when you have more people bidding for a property than actually have properties available, or you have an increase in the purchasing capacity, meaning lower interest rates, better incomes, the ability for people to get better loans or easier qualifying.

So there’s a lot of things from a purchasing power standpoint that can drive properties up. In all cases, though, all of those things are out of your control. So, if you pick a good market where you’ve got a good supply-demand in-balance, if you pick a time when maybe interest rates are declining, then maybe you could catch a wave. It doesn’t really matter; you know, you can be strategic about it, but most of those things are out of your control and largely speculative, but if you get it right, equity happens to you, and you really didn’t have to do much for it, except own the property.

 

Understanding Appreciation Versus Inflation

Robert Helms: Right, so sometimes that increase is inflation, and sometimes that increase is appreciation. And a lot of folks call one the same as the other; they use those terms interchangeably, and they’re not quite.

Appreciation is when there is more demand for something, and its relative value does go up. When everything goes up, well, that’s inflation. Now of course, we have to layer that with the fact that we may be sitting in a time when we have a strong or a weak currency – whatever our current currency is. In many parts of the world, real estate is denominated in a currency other than the local currency, which even makes it more confusing.

For instance, a lot of, say, Caribbean countries value their property in US dollars, even though they don’t use that currency in their country, and so that makes it even more confusing. Our job is today to make it less confusing, and to talk about ways that we can create value.

 

Found Equity

Robert Helms: So when we talk about forcing equity, we’re not talking about inflation. So one of the ways you can create equity – and probably my favorite equity – is found equity, otherwise known as free equity. This is when you find a property that has more value than the seller can recognize in it. And sometimes that’s just about their use and your use, sometimes it’s because you have inside knowledge of a marketplace – but there’s a reason why the property is “worth more” than what you’re paying for.

Russell Gray: Yeah, distress often plays a major factor in that. You know, you’ve got someone who can’t afford to make the payment. They’ve got to get out of the property to save their credit score or to facilitate something else going on in their life; maybe they’ve got a job change and they need to move quickly.

Or maybe you’ve got somebody, for example, we did a deal once where a guy had accumulated I think 10 or 11 different properties, and he needed to do a 1031 exchange, where he needed all 10 or 11 of those properties to sell at exactly the same time. He was willing to give a big discount to a buyer that could take down all of the properties in one transaction.

So, the properties individually were worth more, but to him, it was worth it to sell them for less. And so, for us, when we came in and bought that property, we made about a million dollars on that collective collection of properties, because he needed to move quickly, and we were able to get the deal done. And that’s found equity; that was just sitting there for the claiming.

 

Phased Equity in New Developments

Robert Helms: Now another interesting type of equity which you could even include in the forced equity discussion except it’s a little bit outside of your control is what we call phased equity, and that’s when you buy in a new development, and the prices go up.

In any new development, you typically see prices increase. Say there’s 100 houses that are sold in 5 phases of 20 houses each, you’re going to pay more in the 5th phase than you would in the first, and that’s kind of independent of what’s happening in the real estate market at the time. That’s just kind of a builder or developer’s model, and part of the thinking is the person who buys the first house out of 100, arguably takes more risk on the project than the person who buys the 100th house out of 100, and so sometimes phased equity, if you buy early, is another way you can create equity.

equity strategies in real estate - phased development equity in new neighborhood

Russell Gray: Yeah, it’s forced to the developer, because to a degree, he’s controlling the rollout, and again it’s not unusual for a developer to sell the first few properties of the development at cost or even maybe a little bit below just as traction – just to get some proof of concept. And then as the offering begins to take acceptance to the marketplace, they can begin to work the pricing up. But from your perspective, you really don’t have control over that, because it’s up to the developer, so we don’t really put that in the category of forced equity. In our nomenclature, forced equity is something you have direct control over.

 

Purchase Equity

Robert Helms: Which is what we’re going to spend most of the show talking about. And quickly, the last kind of equity that we cover in the book is what we call purchase equity. That’s your initial equity. If you bought a property with 20% down, the part that down is the equity stake you have to start with.

What we’re all concerned in is equity growth: Cash flow while we hold the property, perhaps, and equity growth over time. So, now that everyone’s caught up, let’s talk about forcing the equity; using the force. This is a way that you can not sit on your hands and wait for the market to give it to you, but rather this is a way for you to take the reigns and create value. There’s three broad categories that we like to use.

 

1) New Development: A Fresh Slate

Rusell Gray: So the first one is new development; this is something that you know, you see all the time, and this is what developers do. They go take a piece of dirt and they improve it somehow. The most obvious visual improvement that you see is a complete structure. But there’s a lot of other things that you can do to a piece of dirt to improve it, that may or may not result in something you can see.

Robert Helms: And we’re going to talk about several examples under each of these categories.

 

2) Redevelopment: The Fixer-Upper

Russell Gray: The next one is redevelopment, and this is your quintessential fixer-upper. Right? You find a house that is in bad condition, and you redevelop it. In other words, you fix it up; you make it look better.

This can be done with a single family home, it can be done with a commercial building, it could be done with a mall; it can be done with all different kinds of properties. The key is, you’re going to go in and make that property better, but it was already there to start with.

Robert Helms: Yep, that’s the distinction between those, and last but not least –

 

3) Conversion: Changing the Use

Russell Gray: – is conversion. So, conversion is really just changing the use of the property. You know, you see this could be a zoning change. A common one, especially before the crash, was condo conversion. Somebody would buy an apartment building and then they would change the zoning, convert it to condominiums, and then sell each individual apartment as a stand alone unit – as a condominium. And people were forcing a lot of equity in real estate and deals doing that.

Robert Helms: Absolutely. Today we’re talking about things you can do to a property to increase its worth, and that is forcing equity in our vernacular. You’re turning the property into something different, or you’re creating it out of nothing, or you’re making a change that has it worth more.

 

Further on New Developments: Ground-Up Construction, Or Even Just The Ground

So, let’s start at the beginning with what we called new development. So, the obvious thing is ground-up construction. You take a piece of dirt, and you turn it into a building that sells for more.

But, before we even get there, there’s a really interesting part of new development that can be quite lucrative, and that is land development.

There’s a lot of folks that we know, that’s what they do. A good friend of ours, he doesn’t ever want to touch anything above the ground. His whole mindset is hey, I’m a land developer. Give me raw dirt; I’ll do what it takes to make sure that that becomes entitled, utility worthy land. And so now, a builder can come in and develop the rest. So he fancies himself “The Guy Below the Dirt,” and he’s happy to create lots, and tracks, and places for developers to go build from the ground up.

Russell Gray: Yeah, when I was a young man, my wife and I used to go up to the Sierra Nevada mountains, and we’d always look around at properties, and there was a lot of just empty land up there. And then every once in a while you’d see somebody that says, “build-able lot.”

Well, what is that? That’s somebody that took a piece of raw dirt, maybe that trees on it, and it didn’t have any utilities, it didn’t have any zoning, and they took and they did exactly what you’re talking about; they went through the process of getting the zoning approved, and getting the utilities plotted in, and laid in – in some cases, all the way up to the building pad, and sometimes you’d see that. You say, “Hey, this is a build-able lot with pad.”

So there are different levels that you can do, but there’s a big difference between simply raw dirt, and something that has actually begun to be ready for a developer – a builder – to actually come build on.

And the reason you might want to consider land development is because your take out purchaser is not a home owner, but it could be a builder, or a developer, or a business, and depending on how big the plot is, and the level of work you do, you can create equity in real estate without having to deal with any of the hassle or the detail work, or the risk of the takeout, because you don’t have to deal with the architecture or any of all the things that can go wrong, and the liabilities that come with giving a new buyer like a 10 year builder warranty. That all falls on the developer or the construction company, not on you.

Robert Helms: And in more rural areas, sometimes there’s not much you physically do to the property. It might just be about zoning and plotting utilities – not even putting them in. As you get to more in-fill and more CBD (central business district) areas, then sometimes your land developers take it all the way to curbs and gutters and streets, and everything but the construction of the unit – the building – whatever that looks like.

force equity in real estate by changing the zoning - zoning map

And so when we talk about improvements to a property, we’re talking about all of those things – the physical improvements, you see a house on the lot, but also the curbs, the gutters, the streets – everything that had to go into the property to get it ready. So before we get to building anything, there’s the land development side, and the reason it can be lucrative is the value drives in any piece of property from the time it’s raw land til it’s a finished building, and a big chunk of that increase is going to the second step.

We also should talk about something called “entitlements,” and that’s kind of the catch all for any legal requirements the property has to build what you want to build. If it’s raw land, and it’s not zoned, or it’s zoned in some vague zoning criteria, you can come in and petition to change that, and get different entitlements. I’m entitled to build so many units per acre; I’m entitled to build a building of such height and such densities. Just think of those kinds of things when you hear someone say, “entitlements.” It’s changing the permissions associated with development.

And some folks are really good at that part. If you can just figure out some of that, then there’s equity to be forced there. So that’s the ground up part.

The major way we think about new development is when the developer comes by and builds something. And sometimes the developer does go from raw land to a finished product. But a lot of times, a builder would come, say a home builder, and they’d buy 60 lots that have already been readied by a land developer. Now their job is to add materials and labor in such a way that the finished product is worth more than the sum of the costs.

 

Who’s Your Take Out Buyer?

Russell Gray: Yeah, the secret to success in all of this is knowing who your take out buyer is. What you’re doing is you’re preparing the property for the target market. And you have to do an assessment in your local market as far as what that market needs. And again, if you are preparing a lot to be developed, then you maybe don’t have to be as precise with that, but if you’re going to actually going to build a finished building, then you are going to have to be really precise, right?

You could build an apartment building, you could build a shopping center, you could build an office building, you could build a medical building, you could build a storage facility, you could build all kinds of different things that could go on there, depending on what it is that that particular community needs.

And so, when you begin to figure that out, then you assemble the proper team, and of course the complexity of the team you need when you’re going to actually build something is a lot different than the complexity when you’re just going to entitle a property, or bring in utilities.

 

Master Planning

Robert Helms: Now before we leave new development, another way of looking at that is what we call master planning. A lot of times a land developer will come in and create more than just a lot or some entitlements, but they’ll actually go through and create a master plan development.

That can add additional nuances such as architectural control, a homeowner’s association, common area amenities, and that can be a way for you to get properties ready to increase value for everyone involved.

One of the first projects I was ever involved on the sales side was we had listed 5 lots inside a development of 27 lots, so the master developer took an old elementary school, turned it into 27 luxury home lots, and they only allowed builders to buy 5 lots at the most. Their mindset was, “We don’t want every house to look the same; to drive the most value; we want to get different developers.”

Some developers just bought a single property, sometimes an owner bought a property, but there were three different builders that each bought 5 lots, and some builders bought 3 or 4 lots, and so it took on an interesting kind of dynamic, and each of these builders had different products, different floorplans, different styles.

A master developer can come in and say, “No, architecturally this entire area is going to look a certain way, a certain feel; limitations to how many stories certain lot corridors and view corridors.” There’s a lot that a master planner can do, and that really creates equity for everybody.

Russell Gray: You know, it’s interesting, Robert, that you bring that up, because you and I of course didn’t know each other back then.

Robert Helms: Back in the day.

Russell Gray: But I actually attended that elementary school in the 6th grade, and then one day I went back to that and there was a big development there.

Robert Helms: Yeah, sorry.

Russell Gray: And I was shocked, and then when I met you I found out you were the guys that actually had listed the properties there, so that was just a funny interlinking of our pasts way before we got to know each other.

Robert Helms: Well it brings up another interesting thing, which is, as cities go through population changes. This was a city that grew very, very quickly in an area that was growing fast, and they were building new schools. Then it got to kind of this level of stagnation, and all of a sudden they said, well we don’t need as many schools, and so that’s a big part of urban development and planning.

So it’s beyond the scope of today’s show, but the idea’s the same; as we make changes to real estate, it changes and affects the value.

Russell Gray: Right, that’s really the lesson, and this is how you see opportunity. A lot of times, especially, here we are, and we did a prediction show, and you think, “Oh my gosh, you know, there’s so many things changing. The world is changing; it’s changing so fast, it’s scary.

Well, it’s only scary if you’re not adaptable and you’re not entrepreneurial. If you’re adaptable and you’re entrepreneurial, all the change creates these pockets of opportunity.

In this particular case, the demographics of this area was changing. When my parents bought into that neighborhood, they bought a brand new house that had been built on an apricot orchard. So, the developer came in and bought the orchard. They got the whole thing, planned it. It was a little community (of I don’t know how many homes it was), and they bought that home. And I ended up going to that school which had been there for a while.

Apricot orchard - forcing equity in real estate properties - developing on an orchard

We were an in-fill project; there was already all kinds of houses built in that area, but there was this little orchard that was still available. The developer bought it, built the houses, forced equity for himself, and then my parents ended up buying the home.

Well, the school that I attended was in that same general vicinity, and as you said, Robert, as we all kind of aged out, and the people who bought those properties, many of those people still live in those houses to this day. They bought the house and they’re still in those houses today. And that’s a whole different thing about passive equity that happened to them. I know that neighborhood well, right? My parents bought that house for $46,000 and it’s worth $3 million today.

Robert Helms: Wow.

Russell Gray: And it’s the same darn house except 40 years older. There’s a whole lesson there. But the point is, is that when you are paying attention to a neighborhood and you’re paying attention to the changes, and you see these little pieces of properties that are available, even something as what you’d think as permanent as a school, could actually become available, if you’re paying attention. And then you do pay attention, and then you just kind of wait; you stalk your opportunity. When the opportunity comes up, you’re ready to move, because you already thought it through.

Redevelopment: Remodeling, Additions, Rebuilding

Robert Helms: So new development is certainly interesting when it comes to forcing equity in real estate. For most listeners, you’re probably not going to go buy 60 acres and develop a housing track. So, let’s talk about re-development. Something already exists, and we’re going to do something to it to change the value.

Russell Gray: Yeah, so as we mentioned earlier, re-development – I mean, that’s the thing that everybody thinks about. That seems to be the easiest. You know, everything’s already entitled, all the utilities are there, I’m just going to go buy the property, and I’m going to fix it up. I’m going to somehow improve it.

I could be doing an addition, I could be doing a remodel, I could be doing a complete tear down on a basic foundation, and then build something much bigger.

I remember one of the projects you guys had, and we were in an area of town where back in the day, before it had become largely populated, they built these little tiny houses on these great big lots. So you’d have a 1,200 square foot house on an acre lot, right? And that was very, very common in California back in the day when there was land forever like it’s been in Texas, and then they’d you know just have modest little houses.

Today the average size of the house is up, and the average size of the house is down. And so, you would come in and you’d say, “Ok, things are already zoned for a single family residence, but instead of a 1,200 square foot residence, we’re going to build a 3,500 square foot residence. And you could do that.

Robert Helms: Well, and there’s rules around that. I remember a couple of the architects in the area, they were specialists at that, because in a couple of the towns we worked in, you could not change the footprint of the front of the house. The offsets had to remain the same. And so, they would come in, and they would take everything down except the little front corner of the house, and as long as that stayed, even though you completely created this mammoth, different house, it didn’t count as ground-up construction.

Russell Gray: Yeah, those are the little things you have to pay attention to. And if you’re working with an experienced architect in that particular area, that really knows the local ordinances, you can do that. Because sometimes you just have to leave one stick of wood up. If you leave one stick of wood upright, it’s considered a remodel and not a new build. It’s crazy the way these laws work, and it’s different in every jurisdiction, so you just have to be aware of that.

Robert Helms: So a big part of rehab is the folks that come in and are trying to heal America one house at a time. They find a dilapidated house – give you an example of the folks who bought houses 40 years and haven’t done anything – those could be prime candidates for someone to come in, buy that house with all its deferred you know, maintenance and all the work, and all the outdated fixtures – fix that up, and sell it for a profit.

So, we see all kinds of television shows on flipping this house and that house; we just met a couple of hosts of shows like that this week, and that’s still a very vibrant part of real estate.

Now, we would say that buying a house to flip could make a great opportunity for somebody, but it’s probably not real estate investing. It’s more of a business, a business of buying something, adding value to it, and selling it for more.

It’s forcing equity, but that’s different than being a real estate investor. But understand this: the idea of buying a house that needs a lot of work, and doing the work, doesn’t mean you have to sell the house. That’s a way to force equity – to keep a house. If you force equity into a house, and then keep it as a rental, you’re now the beneficiary of that upside.

Russell Gray: Yeah, we call that flip and hold. The strategy is that you’re going to flip if you will, or rehab the property – but you’re going to flip the financing. And then that way you hold the property and you just flip out the financing and you take your equity off the table to the extent that the mortgage company will allow you to do that, and then use the income on the property to service the debt, and then hold onto it for the long haul so that you can have passive equity and amortized equity, and all the things we enjoy about buy and hold real estate.

Robert Helms: One of the strategies of that today – and this has been this way for a long time – is that when you buy an asset that is in really rough shape, many lenders aren’t going to like that collateral. So there are lenders who will make those types of loan, whether it’s a bridge lender, or a hard money lender, construction or permanent financing – come and get you a loan to buy this lousy property.

You’re going to add value to it, actual materials, labor, paint, carpet – all that. And now, another lender – or it could even be the same lender – will come in and give you a new loan once that property has been completed. You’re probably going to get a better rate, a higher loan to value, it’s going to be an easier loan to live with.

Russell Gray: This is actually something that’s a very active strategy in the current market conditions. You’ve got lots and lots of people who want to put their money to work. They’re in search of yield.

I want to make a distinction about flipping, because a lot of times the word flipping is not considered to be legitimate investing, and I don’t mean investing like the difference between passive investing, where we’re talking about where you just put your money to work and let somebody else do it, versus active investing, where I’m out there working, finding houses, fixing up like a turn-key operator would, forcing the equity as an active business.

The term flipping that people look at sometimes in a negative way, is people that buy a property and don’t do anything to it, and then just try to mark it up and flip it to somebody else.

Robert Helms: The hot potato property.

Russell Gray: Yeah, you haven’t added any value. Again, we’re not opposed to that, but, we do hang out with some people that are negative about that type of activity, because you haven’t added any value to it.

I could make the argument on the other side, hey, if you’re smart enough to find a found equity deal and get control of it under the fair market price, and you can give it somebody where there’s still some meat on the bone – nothing wrong with that.

Robert Helms: You just described what wholesalers do. They look for opportunity. They rarely touch the property in any way. Do they add value? Only a ton of value, because I as the person who might buy one of those, am too busy to foster the relationships, beat the bushes, find the deals – and they have a pipeline of deals. They can be great.

So we’re not trying to pass judgment on real estate today. We’re happy to do that at cocktail conversations at a seminar or something. But the idea today is what are ways that we can do something as investors, grab the reigns, and create an increase in price or value.

Russell Gray: Well the rehab thing right now is a big opportunity, and again, there’s lots of private capital that is looking to fund those forced equity deals, and give you short term use of their money for a high interest rate, which is a good rate of return on their money – but in terms of your cost, it’s really small, because you’re only going to hold the money for a short period of time. So, the short of that is you have a lot of working capital that’s available to help you do these kinds of deals in this particular market.

 

Increasing the Rent as a Means to Increase Value

Robert Helms: Absolutely. We’re talking about forcing equity in real estate, when the investor does something to change the value of the property. So many people just wait for the market to give them equity, and that maybe works out, but here are some things you can do to create it.

We’re talking about this category of re-development, or second development chances, or rehabbing property, and so forth. And we talked about buying a property, increasing the value, something as simple as carpets and paint all the way to ripping it up and changing the walls and adding and all that stuff as a way to sell a property, or as a way to keep that property in your portfolio.

Another way is buying a property, increasing the rents, therefore increasing the value. This is what Ken McElroy does.

Russell Gray: Yeah, this is corporate raiders, people who take over companies, you know like Bain Capital with Mitt Romney back in the day, these were guys who would buy companies they felt were underperforming – undermanaged. They would improve the management, improve the profitability, and then flip the company by selling it. So it’s the same thing.

So basically what you’re saying is you’ve got maybe a lazy landlord, you’ve got a management company that isn’t paying attention or a landlord that is not paying attention, and then you can go in there and begin to improve the actual operations of the property.

So an operational expert could come in and run a property, and this typically pans out better in a multi-family, where you’ve got more units, but you could do it on a single family home, too, because if you’ve got somebody who’s not paying attention, they could be renting a property for way less than it’s worth in the market, just because they are too lazy to evict the person, or they have a personal relationship and they don’t want to increase the rent, or whatever, and you get your hands on the property and you can bring it up to market.

 

Considering Comparative Market Values, And Other Factors

Robert Helms: Well I think the reason that you make the distinction is based on the way appraisers value property. Most single family houses, regardless if they are rental properties or not, are valued by the comparative market approach, what are other properties similar selling – not the rent so much, whereas apartments tend to be the income approach of that evaluation, and it’s more about “What is the income?”.

So if I increase the income on a property, let’s say I have a way to do that through management that doesn’t affect the physicality at all; I just rent it differently, and raise the rent. Did I raise the value of the property? Absolutely I did, because an income property is based on the value of the rents that it generates. So that’s the concept, and you can do both. Ken McElroy typically improves not only the physicality of the property in some way, but also the operations.

Russell Gray: Yeah and so it goes two parts; it’s just like any business. You know, you improve the physicality or the desirability. You add a washer, dryer, covered parking, some amenity, and then you’re able to charge more, so you raise the revenue.

forcing equity in real estate by improving net operating income in apartments - ken mcelroy

Improve operations to force equity in apartments.

The other part of it, by being a great operator, is you operate more efficiently. Maybe you keep tighter control on your expenses, you know, payroll, or you use more efficient purchasing on supplies, and carpets, and things like that – things that maybe don’t make any difference on profitability but drive more profit to the bottom line. When we talk about a property being valued by income, it’s not rents; it’s net operating income.

When you calculate a capitalization rate or a cap rate on a property, you divide the net operating income, which is revenue (the incoming rents), less expenses (everything going out), and you get a number – net operating income. You annualize that number by multiplying it by 12, if you did the calculation on a monthly basis, and you divide it into the purchase price. And that gives you your cap rate. And when cap rates are coming down, that means that the purchase price is going up relative to the amount of income. It can be a dangerous time to buy. There’s a couple of ways that you can improve the situation.

One way is if you can re-finance later down the road at a lower interest rate – right now, that’s a dangerous game to play, because interest rates are super low, and they’re not trending down. They’re trending sideways and up.

So you can’t count necessarily on being able to re-finance to create more bottom line. But you could do things like property tax abatement, or challenging the evaluation – sometimes that can make a difference.

There’s things that you can do in operating a property to drive more profit to the bottom line, and that’s the key. So if you’re going to buy a property that is at a small cap rate, meaning that you’re paying a lot for the available income, and you can’t count on re-financing, make sure you have a plan in the operations to either raise the revenue, or decrease other expenses besides your interest expense.

 

Conversion: Beyond Physical Changes – Zoning and Entitlements

Robert Helms: And our last broad category of forced equity is conversion. When you’re changing the use of a property, and Russ, you mentioned this idea of condo conversion that was popular for a while, and it probably will be again – the idea of buying an apartment building. Still, today, many apartment buildings exist that are separately plated. They have separate APN numbers (partial numbers), and they were built that way so they had a versatility of their use.

And whether they were or not, it’s possible for a developer to come along and say, “Ok so it’s a 100 unit apartment building. You know what? These are really nice apartments, class A apartments. We could convert this into a condominium building and sell the individual units, probably at a premium.” What I pay for per door as a buyer of 100 unit A class apartment building, is the lesser than what they would sell for individually in many cases.

So, the reason to consider a conversion is if there’s a higher and better use. In the case of a condo conversion, it’s because, you know what? There’s more buyers than there are apartments. Why did that happen when it happened? Well, think about when that happened, it was 2000, 2002, 2004. At that time, we had better, and lower, and less LTV financing than ever before; all these amazing first time loan programs.

So folks that were tenants, who couldn’t buy because they couldn’t save up 20% down payment, all of the sudden became buyers, and we needed inventory. And there was nowhere to build in a lot of these places. So, smart developers figured out how to convert.

We saw how that worked out when we took too much existing apartment inventory and turned it into condominiums. But it’s only one example – lots of other ways that we can create value through a change of use.

In addition to taking an existing property and changing it, sometimes all we convert is the entitlements that we talked about earlier, say the zoning. A simple zoning change can have a marked difference in the value of a property.

Russell Gray:  Yeah, we’ve talked about this before, but when we very first started working together, we were looking for an office. You guys were working out of a mobile home, because it was available and convenient – and you used that as a home office, if you will, away from your regular brick and mortar office with the brand that you were affiliated with at the time.

Then, later on you bought a commercial building, but prior to that, when we were out looking for a property, we found a home. And this was one of these ranch homes that had been part of a farming family and they owned acres and acres and acres out in a part that was once rural, that had now become very developed.

And so, this little stand-alone house that had been there since forever was there, but it was right on a main street, and it really should have been a commercial property. But we looked at it and we said, “Man, let’s go buy that property, and convert it.” And we went down to the city planning commission. We talked with them. “You guys, would you be willing to do this?”

I remember taking the pictures, and going and saying, “Hey, I really think this thing should be zoned commercial.” And they said that they would consider it. It would be a $5,000 fee to get it done. And we went back to the people who were selling the property, and said, “Hey, we’d like to make an offer on the property.” And they wanted a lot for it, right? I think they wanted 1.2 million at a time when the house on it was probably only worth about $5- or $600,000.

Robert Helms: As a house.

Russell Gray: As a house.

Robert Helms: They recognized there was better use for it than just being a house.

Russell Gray: So, we ended up doing a lot of the homework, and we said, we want to put a contingency in the contract that says we will go through with the deal if we can get the zoning thing approved.

And we were willing to spend the $5,000 to do that, as long as we had an out on the contract. Well, they ended up not taking our offer, but a funny thing happened. They took the idea and today there’s a medical office building on that very same property.

Robert Helms: In many, many cities across our country and lots of countries, you’ll find this. If you go downtown, and look at a bunch of say, law offices, many times they’re inside of what used to be a single family house. So that’s exactly what we’re talking about – changing the use.

A lot of other great examples – we just looked at a property on one of our field trips that used to be a big, empty box store, and has been converted to indoor sports fields, so people can play soccer, and other sports, inside, which is important when you’re in a market where the weather gets really, really hot or really, really cold. That’s a great use.

Sometimes you’ll go downtown and you’ll see what was once old office being converted to new apartments, because people are moving downtown: lofts.

So there’s a lot of different ways you can change the use of a property, and you get creative. Now it does usually entail having to get that legal entitlement part. You can’t just take what was an industrial building and decide you want to do raves there on the weekends.

In fact, there was a nightclub years ago in northern California that was exactly that. Did you ever go to, “One Step Beyond?”. That was a nightclub in Santa Clara, California that was in this industrial area, where they got the permission at night, when there was plenty of parking. This was a building that was challenged because, as an industrial building, with a few people working there, it didn’t take a lot of parking, but the use was really more for manufacturing and so forth, so there wasn’t very much parking for a building of this size. So these guys said, well we have a solution – write to the city, we will only park cars from 9 o’clock at night til 2 o’clock in the morning, at the opposite time, so the neighboring folks all got together, they got a reciprocal parking agreement, and total change of view. So, you have to get creative when it comes to changing the use.

Russell Gray: There’s another one, too, that comes up. Sometimes there’s these churches that have occupied industrial buildings. Somehow, some way, there were able to get an exemption; maybe at the time, business was soft, office buildings were available, and they get in.

And it could be that you get your hands on a church that maybe has grown and has moved to another facility, and now this church building that can be rezoned back to commercial, where it’s got a lot more value – if, again, the economic circumstances will support that.

Robert Helms: I saw the Red Hot Chili Peppers play at the Limelight in New York City, which was an old church converted to a nightclub. So, all kinds of ways to convert – we could go on and on about that one.

 

Keys to Making Forced Equity in Real Estate Work

Let’s instead wrap up the show with some keys to making forced equity work. Because, this is all good stuff, but you’ve got to really, number one, think about the end game. Why is it that you’re either changing the use, or rehabbing? Is that really going to drive enough value?

And in order to do that, you’ve got to know the comps. You’ve got to know the comps going in. If I’m going to, say, improve a house that is the dilapidated house on the street, I better know the market value at the completed side. And also, what’s the demand for that property?

Russell Gray: Yeah, because one of the things that a lot of rookies do, is they go in and they do what they want to do, and they try to make the property give them what they need. It doesn’t work that way. You have to give the community what it needs, and what it’s willing to accept.

One of the keys to doing that is having the right people on your team. Because you’re not going to be able to know everything. You can start with a hypothesis. You can say, hey, this is what I think. And then you need to ask around.

Like, Robert, I’ve seen you go in and do development. And you think, “I think a retail center would go really good here.” And so, before you start breaking ground and building your retail center, or hiring an architect to design a retail center, what you do is, you go to the leasing community, and you go, “Hey guys, if I were to build this building here, could you lease it?”

And if they say, “Yeah, that’d be great,” well, okay, that’s a point on the curve, right? That gives you an indication – it validates your hunch that this is what the market would need.

Robert Helms: You can take that a step further than that. There are companies that specialize in these kinds of studies, where they will go out and do a market study for you. And I tell you what, that is worth its weight in gold.

A couple of times, we held from pulling the trigger on something we thought was a great idea, because these guys said, “No, it’s overbuilt. There’s too much of that here right now.”

We use to build office condominium, which was a hot product. We went into a couple of markets as the first or second developer to do it, and did really well. And then suddenly there were 15 developers doing it; it got overbuilt. So pretty soon, I said, “Well that was a really good idea two years ago.” So the point is, do your homework on that. Make sure you know what the values are.

 

Predicting Costs, Setting Up a Timeline

Robert Helms: You also want to make sure if you’re not doing the construction – and I hope you’re not – that you get accurate bids.

Russell Gray: Yes, because controlling your cost is important, right? In anything, if you say, “Hey, this is what it’s worth on the take out.” That is, understanding the market value, as you just talked about, Robert, then the next thing is, “What’s it going to cost to get this thing ready to sell?”

And if you miss on that mark, you can suck up all your gross profit, and then some, and now you’re underwater. So, controlling your cost is really important. So the strategy there is making sure that when you’re getting those bids coming in, you get guaranteed bids, and there’s a whole strategy in that that we don’t have time to get into, but make sure you know what you’re doing.

Robert Helms: The other part of that is not only that you know the cost, but the timeline. If you’re talking about permits, zoning changes – that stuff doesn’t happen overnight. Sometimes it can really languish on. So make sure you know, “What’s the time period?” Not only the time period for getting things done, but what if there are consultants involved? What if there are third party appraisers, and those kinds of folks? Architects? That all takes time to do, and time tends to expand beyond what you allow for it.

Russell Gray: Yeah, and this goes back again to being really aware of what’s going on in the market. We personally had this situation happen where we did our due diligence, and our due diligence said that it should take 6 weeks to get a permit. So we did our homework, and the word on the street was it was going to take about 6 weeks to get this thing done – this zoning change approved.

Well, it ended up that everybody and their brother was doing this particular zoning change at the time, and it ended up, instead of taking 6 weeks, it took 6 months. And when you’re using hard money in particular, which is very expensive on an annualized basis, and you’re trying to get in and out quickly, these time delays can be crushing.

And when you’re holding a property, and you’ve got to deal with security, and you’ve got to deal with insurance and interest carry, and then you are stringing that out with no revenue coming in, because you can’t get done what you’re going to get done until you get all these things in place, it can really eat into your profits.

So really make sure you do your homework on your timelines and all the factors that could affect your timelines when you’re doing your budgeting. And you make sure that you always put in a fudge factor, right? You want to make sure that you don’t let the thing overrun too much.

Robert Helms: And you also just want to be cognizant of your transaction cost. You know, a lot of times folks will find a great vein of property, or an area where they can buy a property that needs work, rehab it, and sell it for a profit. But every time I do that, there’s a pretty substantial transaction cost, right? Commissions, county and city transfer fees, and all that – so always do the math. The math will tell you what to do.

But, there’s a great opportunity out there. What we love about forcing equity is it’s not market dependent. A lot of folks can only make money when the market goes up. You can force equity and make money when the property’s going up in value, generally when the area is flat or stagnant – even when values are trending down, a change of views can be a profitable thing. Just be careful out there.

Hey, next week on the show, it is your chance to submit a question. So if you haven’t done that recently, go to our website, www.realestateguysradio.com and click, “Ask the guys.”

Anything that has to do with real estate, we’ll answer your questions. We’ll answer a bunch of them next week on the program. Coming up in future weeks, a lot of good guests are scheduled, so we’re looking forward to 2016. Until next week, go out and force some equity to happen!

 


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