6/13/13: Ask The Guys – Mentoring, Math and Management

Real estate investing, like ogres (as Shrek explained to Donkey), is like an onion.  As you peel back one question with an answer, you find another question.

Not that we’re complaining.  It’s what’s kept us on the air for these 16+ years!

In the studio for this edition of The Real Estate Guys™ radio show:

  • Your jolly green giant of a host, Robert Helms
  • His little ass co-host, Russell Gray
  • The Godfather of Real Estate, Bob Helms

We wooed Walter in from his cooing and had him fly into the email grab bag and pull out another amazing collection of listener questions.  After sorting through them, we picked out several we liked. And before we know it, we’re pontificating powerfully for an amazing hour of broadcast excellence!

First, we discuss picking a market when you’re just starting out. Is a new construction property in Houston better than an older, cheaper property in Memphis?

Survey says….

It depends.  (We’re sure you saw that one coming).

We maintain there is no one size fits all answer, so we grab our onion peeler (is there such a thing?  Hey, we’re real estate guys, not cooking guys) and start collecting more questions.

What are YOU trying to accomplish?  Do you want cash flow or a better chance for long term appreciation?

Each market will have it’s own supply / demand / capacity-to-pay personality.  Those local dynamics get thrown in the blender with macro-factors like interest rates, taxes and lending guidelines.

So when cash on hand is limited, sometimes it’s best to take the market and property you can best afford,  while still maintaining prudent cash reserves.  A new property will likely be less expensive to maintain, but costs more upfront, which means a bigger down payment and less reserves.  And while YOU might be okay with lighter reserves on a new property, what does your lender want?  That’s why it’s a good idea to include you mortgage advisor in these conversations from the beginning.

Now an older property could have great expenses (as in, low), but if it’s cheaper to get in to, you’ll have more reserves going forward.  And if the cash flow is better, you can potentially afford slightly higher expenses.  Assuming the older property is rehabbed, perhaps some of the more costly items were already upgraded by the seller or as part of your initial capitalization at acquisition.

Last, but not least, a more expensive property could mean more depreciation and passive activity losses on your taxes.  This is great…IF you can use them.  If not, then perhaps less great.

All this to say, if you like both markets and have good teams (primarily property management) in both places, then just “do the math and the math will tell you what to do”.  But you’ll probably need input from your mortgage and tax advisors to make sure your match includes accurate assumptions about interest rates, payments, cash reserves and tax benefits.

Hey, if it was really as easy as the infomercial guys say, then everyone would be doing it.  So just accept that you’ll have to do SOME work, right?

And speaking of working…

What do you do when your market heats up (yes, it’s happening again…amazing what a few trillion dollars in freshly printed money can do for asset values!), and cash flows are getting thin?  It’s a dilemma more investors will be facing as hedge funds, home buyers and Mom & Pop investors pour into real estate.

When (not if) cash flows get tight in hot markets, you have a some choices.  You can go look for new markets that cash flow better.  Or you could shift your tactics to take what the market is giving you (equity!) and focus on total return versus cash on cash.  You could “force equity” through re-hab and hope to get better rents for a better property.  Or you can do all of the above.

The point is that when markets shift, you may need to adapt.  The good news is that you can make money in any economy or market, but you need to be careful to not fight the market. It’s bigger than you and you will lose.  Go with the flow and your life will be better.

Not sure how to approach this changing market?  That’s where having an experienced mentor can be worth a fortune!  And speaking of mentoring…

Is it really necessary to pay many thousands of dollars for a mentoring program to learn the commercial apartment investing game?

Hmmmm….good question!

As we just said, having an experienced mentor can be worth a fortune.  Of course, if you’re inexperienced, how do you know if your mentor is the real deal or not?  And even if he or she is, does that make it a good investment?

Of course, the answer is (drum roll please)….it depends.  (You should know that by now.)

Don’t hung up on price.  Focus on VALUE.  If your mentor is teaching you things that work in the real world  AND you do what you need to do, then it’s way more expensive (in opportunity costs) if you don’t hire a mentor.

But if you pay a ton of money for a cookie cutter program that dishes our theory and busy work, or if you aren’t ready, willing and able to do whatever it takes to succeed, then save your money.

With all that said, there are practical ways for someone on a budget to get access to a street smart mentor.

First, you need to identify who you’d like to apprentice with.  It might be a commercial broker or an active investor.  The advantages of a broker are 1) they are easy to find, 2) they will often welcome slave labor (that’s how you “pay” for their time), and 3) many of their clients will be investors, so you you may end up finding other prospective mentors.

Word of caution:  when working in someone else’s network, tread lightly!  Be respectful.  Stay mindful of your role and whose relationships they are. Always expect to give more than you get.  Ironically, if you do this, you’ll often get far more than you expect!

And speaking of relationships…

Is it smart to share all of the financials on a deal with your prospective property manager?

Generally, we would say yes.  After all, your property manager is the best source of valuable anecdotal data about rents, trends, demographics, expenses, etc.  We think of them as virtual partners.

BUT (and it’s a big one)…if you don’t have the deal locked down, be sure to get a non-disclosure / non-compete agreement in place.  Even though most property managers are ethical pros, sometimes you get one that will cut your legs out from underneath you.  Bow just because you have an agreement, doesn’t mean you’re safe.  It just makes it easier to make your point if you decide to sue.

Well, this is only half the show, but we’re getting carpal tunnel typing this blog.  So do us (and yourself) an favor, and just kick back and listen in as we humbly dispense copious quantities of real estate investing wisdom on this episode of The Real Estate Guys™ radio show!

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