Ask The Guys – Getting Started, Paying Off Debt, and Selling to Your Tenant

Lots of great real estate investing questions from our loyal listeners in this edition of Ask The Guys, including should I invest or pay off debt. 

Should I invest or pay off debt? How do I get started in investing? Should I sell my property to my tenant? Our producers said we had a lot of really good questions for this edition of Ask The Guys, so they wanted to bring in the BIG brains.

Sadly, they weren’t available, so we’re on our own for this show.

In the baffled box fielding your brilliant questions:

  • Your home-run host, Robert Helms
  • His choked up co-host, Russell Gray

Here are some of the questions our listeners pitched to us….

  • Is it better to invest or pay off debt?
  • Should I sell my property to my tenant?
  • What’s the best way to transfer real estate from parents to children?
  • Where can I find financing with foreclosure on my record?
  • And more …

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Should I wait until I’m debt free to start investing in real estate?  My wife is concerned about carrying too much debt.

Short answer:  The longer you wait to start investing, the longer until you profit from your investments.  So generally speaking, if you are wondering if it is better to invest or pay off debt, getting started sooner is better.

Obviously, there’s no one-size-fits-all answer.  Especially when wives are involved. 😉

But from a financial standpoint, debt that pays you to borrow is not bad.  In fact, we’d call it “good”…as in “good debt”. When looking at if it is better to invest or pay off debt, “good debt” is critical to consider.

Income producing real estate is one of the great vehicles for accumulating lots of “good debt”.  The key is to make sure of two things:

First, be sure the net cash coming in is enough to cover the debt payment going out.

Sounds easy.  But it’s also easy to forget about contingent and non-monthly expenses…the unpleasant surprises can make your easy life…not so easy.

So when you do your cash flow analysis, be sure you account for EVERYTHING.

Second, be sure you have adequate cash reserves.

Sometimes big expenses come up before you have time to build up reserves from cash flow.  Don’t count on credit lines because those can be shut off in an economic crisis.  And you never know when one of those pesky financial crises will show up. invest or pay off debt - A black swan is an unforeseen event which has a major negative impact on financial markets

So…if you’re able to borrow money (good debt) to acquire POSITIVE cash flow, you can use the positive cash flow from the good debt to pay down the debt (bad debt) which does NOT pay you. In this scenario, the answer is clear on if you should invest or pay off debt.

Of course, if YOU understand all that and your spouse doesn’t, you could be 100% right on paper…and dead wrong in the relationship.

It's better when life partners invest in learning about finances togetherYou have to decide what’s most important.  Just remember:  Happy Wife = Happy Life.  Just sayin’….

If your wife is concerned about your financial affairs, that’s a GREAT thing.  Consider it an opportunity to invest time studying together by attending seminars, reading books, meeting with advisors…even listening to amazing real estate investing broadcasts.

And until you find an amazing real estate investing broadcast, you can listen to The Real Estate Guys!

My tenant wants to buy my property.  Should I sell it?

Another great question!

Of course, whenever someone asks what they “should” do, we have to answer, “It depends”.

Ultimately, you have to do what YOU think is best…for YOU.  And YOU figure that out by getting ideas and information…and then considering your options.

So here are some things to think about…

You have the property now.  If you didn’t, would you buy it right now compared to whatever else is available for you to do with your time, equity and credit?

invest or pay off debt - Zero sum thinking asks if you didn't already own a current property would you buy itIf not, then you probably want to strongly consider selling it.  Of course, you have to think about timing and tax considerations.

If you’d like to keep the property for now but would like to sell it later, it’s likely you can make a deal with your tenant for a future purchase.

Maybe you want to time the realization of capital gain or need time to prepare for a 1031 tax deferred exchange.  Maybe the tenant needs some time to get their credit and cash lined up.

In any case, in most jurisdictions you modify your lease and provide your tenant with a future option to purchase.

You could also go with a protracted escrow, just be sure to consult with your tax advisor about when the tax law says you’ve actually “realized” the gain.

In the case of a lease option, your tenant might pay you an upfront fee and/or additional monthly payments as “option consideration”.  You might get a bigger number if you’re willing to credit some of it toward the purchase price.

There aren’t any set rules or formulas…which is the fun and creative part of real estate.  Just decide what YOU want and are willing to do, and what the tenant wants and is willing to do.  Then work out a deal that makes you both happy.

What’s the best way to transfer real estate from parents to children?

“Best” like “should” is always a dangerous question to answer.  After all, what’s best for someone is probably what they should do.  But who knows best what’s “best”?

You do…once you know what your options are.

What's the best way to transfer real estate to your children?So when it comes to transferring real estate from parents to children, you need to think about what YOU are trying to accomplish.

Sometimes, it’s about tax mitigation.  Sometimes you want to maintain control…even after you’re no longer here.

Once you figure out what YOU want, then you’ll want to consult with professional advisors who can help with the HOW to do it.

Typically, you’ll want an estate planning attorney and a tax advisor.

The tools you have to work with include entities (trusts, LLCs, etc.), contracts (options, purchase and sale agreements), and state specific laws (forms of title).

Entities are useful for eliminating probate, managing estate taxes, and maintaining control about how the property and its income are used.

The key is to focus on what you’re trying to accomplish.  Ask a lot of “what if?” questions until you’ve through a variety of potential outcomes.  Decide what you want to have happen in each scenario.  Write it all down.

Then go meet with your advisors and ask for ideas and strategies to create the outcomes you’re after.  Many times, experienced advisors will have seen how other clients have structured themselves to accomplish similar objectives.  So you may get some ideas you hadn’t even thought of.

After a reviewing all the ideas, options and expenses, we’re guessing it will be clear to see what’s “best” for you.

Where to find financing with a foreclosure on your record?

The lending landscape is littered with the walking wounded – folks who barely survived the Great Recession and whose credit reports are scarred with foreclosures, liens and other “derogatory” entries.

That’s the bad news.There are lots of walking dead borrowers after the Great Recession

The good news is that more lending is opening up for these walking wounded.  The key is to get someone on your team who is knowledgeable about the ever-changing array of conventional and unconventional financing options.

Because there’s a big population of folks with foreclosures on their records, there are specialty lenders who focus on serving their unique needs.

So job #1 is to find a competent mortgage broker experienced with working with investors.  Investigate non-government funding such as private lenders, community banks…even friends and family.

If you have consistent documented income, savings and a reasonable explanation for what happened, there are lenders out there who are willing to take a chance on you…if the collateral is good and the interest rate is right.

Even if you can’t find ideal financing today, you may still want to buy a good property as long as you have a reasonable plan for fixing the financing later.

Remember, you buy the property once, but you can change the financing later.

So if you meet with your mortgage consultant and they tell you you’re not lendable YET…then find out what YOU can do (in your control) to get there.  If the list and timeline seems reasonable, you may decide to accept less than perfect financing TEMPORARILY…with plan to replace it later when you qualify.

How to access home equity to invest?

At the risk of being redundant…again…one more time…

What's the best way to access home equity to invest?Get a mortgage pro on your team.  They can tell you what loans are available that YOU will qualify for.  And if the answer is “none”, don’t be dismayed.  You may find a private party lender who’d be willing to make the loan.

This of course assumes you wish to keep your home and just want to use the equity.  Otherwise, selling is the other obvious way to free up idle equity for investment.

Pre-2008, pulling equity out of Property A to investing in Property B (and C, and D, etc…) was popular because properties had equity and loans were readily available to extract the equity.

After the crash, those loans all went away.  So sad.

But they’re BAAAACK.  Yay.

However, there were some valuable lessons learned by those of us who went through the equity apocalypse…

First, when it comes to your HOME…be conservative.  Make sure, you feel comfortable making the new payment in case any or all of the investments you make with your home equity…flop.

As long as you can make your payment, you’re not homeless.  But if you can’t sell the house to pay off the mortgage, you might be trapped for awhile.

Be careful not to borrow short and invest long.

If you access equity in your home, be sure you understand the terms of the loan.  At today’s rates, we’re fans of long term, fixed rate loans.

Fixed rate long term loans give you stability of interest expense and payment.  And you don’t have too much risk that you’ll end up stuck with an above market rate.  It’s hard to imagine rates falling substantially from today’s level.There are an increasing number of mortgage choices when looking to finance or refinance a property

HELOCs (Home Equity Lines of Credit), ARM (Adjustable Rate Mortgages), balloons (i.e., 30 year amortization due in five) are all “short term” loans.  Meaning, the rates might adjust or the entire balance comes due in 5 years or less.

If you are SURE you can pay the loan back or handle the “worst case” scenario interest rate / payment adjustment, then MAYBE it’s okay to use the proceeds to invest.

The DANGER comes when whatever you invested in is NOT liquid when the loan comes due…or isn’t producing a high enough payment to cover the new payment after an interest rate re-set.

Now you may need to sell at a bad time.  Or you might not be able to sell at all.  Then you need to figure out how to pay off the loan or make the payment from other sources.

Again, avoid borrowing short to invest long.

Of course, if you’re hesitant to use your home equity to invest with, you can always find other people who have money available to invest.  They put up the money (or most of it) and you put up the time to find and manage the deal to a profit.  Then you divvy it all up.  That’s called syndication and we like it a lot.  You might like it too.

 

How to get started when properties are so expensive?

What do you do when properties in your area are too expensive?Another great question…

This listener makes $45,000 a year, has good credit and has been reading lots of books about investing.
BUT…he lives in Los Angeles and properties cost a fortune.  So he can’t qualify for a big enough loan to buy anything in his area.

One solution…

“Live where you want to live, but invest where the numbers make sense.” – Robert Helms

Sounds easy.  But how?

It’s a big topic, but in short, pick a few markets you think would be good.  Research those markets and then build relationships there.  Your market team will help you find properties.

Again…sounds easy, but how?

Relationships.

In this case, take your book (and radio show!) knowledge and go to places where more experienced investors gather.  Ask intelligent questions.  Find out what other people are doing and why.

In a huge metro like Los Angeles, there are investment clubs, seminars and conferences you can attend.  But don’t hesitate to travel to connect with the right people.  We do it all the time.

Once you’ve picked a few markets that look interesting, do some remote research.  Set news alerts.  Pay attention to the local economy.Your property manager is arguable the most valuable player on your local team

If it looks good, go there and start building a team.  And start with property management.

Property managers  usually aren’t trying to sell you a property.  But they can tell you where the tenants are most plentiful.

Remember, your true mission as an income property investor is to accumulate tenants.  That’s where the income comes from.  You buy the property to get the tenants and their income…at least a piece of it.

So your property manager is the MOST important member of your local team.

Lots of other great questions…so tune in as listeners Ask The Guys!


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05/03/15: Ask The Guys – Owner Financing, Land Development, Getting Started, Inflation and More

And yet another great collection of challenging questions from our fabulous listeners!

In the studio waxing down our microphones so we can surf the airwaves of radio excellence…

  • Your waxing on beach bodied host, Robert Helms
  • His wax off co-host, Russell Gray

In this edition of Ask The Guys…

Does it make sense to carry back financing with the threat of inflation looming?

Survey says…it depends!  Do the math and the math will tell you what to do.

Does size matter when flipping properties?

Hmmmm….that’s a hard one.  Why should flipping properties by any different than….anything else?

Where can a young guy with a day job and not too much money get started on the path to real estate riches?

Fantasyland!  Just kidding…

A day job can be a blessing too.  After all, when you don’t have much money…one of the easiest ways to get some is to borrow it.  And a day job comes in handy for that.

Is it possible to syndicate a deal with no money down?

We presume you mean none of your OWN money…and the answer is…YES!

Of course, if you have some of your own money in the deal, it may be easier to convince investors to put in their money.

Then again, if you have a “first round” of partners, the can provide the “down” money…and then the next round of investors can see that you (and your first round partners) are co-investing.

How do you choose a competent land developer?

Great question!  When you find the answer let us know…

Again, just kidding.

Finding ANY good team member is a matter of research…and often it means a referral from  someone you trust…AND is qualified to have an opinion.

And when you start interviewing prospective candidates, be sure to look at TWO things:  their COMPETENCY (credentials, track record, experience, satisfied customers)…AND their ETHICS.

A nice person who’s incompetent can be nearly as bad as a top notch pro who’d steal you last dime if he had the chance.

If the dollar is doomed as Peter Schiff says, then why would it cause housing prices to fall…doesn’t a weak dollar mean inflation…and RISING prices?

Ooooh…that’s a REALLY great question.  And one we spend a lot of time contemplating.

The answer (as we understand it) has more to do with the VELOCITY of money…as opposed to merely the QUANTITY of money.

In short a weak dollar means it takes more of them to buy the same item…IF there is the same demand and the same cost structure.

But when a soft labor market, stagnant wages or declining purchasing power are REDUCING demand and capacity to pay…it can more than offset the weakening of the dollar.  At least in the short term.

So don’t be surprised if prices fall before they rise.

How does someone avoid getting ripped off by a crooked turnkey property provider?

Don’t do business with a crook.

Okay, you probably already knew that.

But like the previous question about picking a good land developer, it’s important to evaluate someone’s competency AND their ethics.

So the real question is:  what should you look for in a quality turnkey provider.

Great question!  And it’s one we asked one of the best turnkey providers we know… Terry Kerr in Memphis Tennessee.

In response, Terry wrote a GREAT white paper called “Terry’s Tips for Turnkey Rental Property Investing“…and you can get one for FREE…right now, right here.

To hear EVERYTHING we have to say about these and other amazing questions, tune in to this exhilarating edition of Ask The Guys…

Listen Now: 

  • Want more? Sign up for The Real Estate Guysfree newsletter and visit our Special Reports library.
  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
  • Stay connected with The Real Estate Guys™ on Facebook!

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

1/4/15: Nine Steps to Jump Start Your Real Estate Investing Career

9 Steps For Learning How To Get Started In Real Estate Investing 

Learning how to get started in real estate or any new skill is a bit like being on a football team. At the end of each football season, teams and coaches do this…and then they begin preparing for the next season.

A big part of that preparation is focusing on essential fundamentals.  These aren’t just blocking, tackling, throwing, catching, etc.

Football teams also evaluate their strategic plan…including personnel, offensive and defensive strategies…even marketing and public relations.

So at the start of this new year, whether you’re just figuring out how to get started in real estate investing, starting over or wanting to jump start to the next level, we have 9 fundamentals every real estate investor can focus on to make 2015 their best year ever.

Sitting at the starting gate ready to put the pedal to the metal and our mouths to the microphone:

  • The Speed Racer of Speech, host Robert Helms
  • The Chim Chim of Chat, co-host Russell Gray
  • The Pops Racer of Pontification and Godfather of Real Estate, Bob Helms

Everyone wants to get rich quick.  That’s why it’s such a popular topic on late night TV infomercials.  The only thing more popular is get thin fast.

In both cases, the true secret is simple… do the right things the right way in the right order long enough to achieve your goal.

Or as we say it, Vision + Knowledge + Discipline = Effective Action.

Vision is what YOU want.  Knowledge is knowing HOW to get there.  Discipline is the resolve and tenacity to DO what you know and not quit until the job gets done.

So with that foundation, let’s take a look at our 9 steps that are good for how to get started in real estate or take your investing to the next level:

1.  Decide Who YOU Are

Do you want to be a hands-on, jack of all trades, do-it-yourself real estate investor…buzzing around your local market making deals, rehabbing properties and managing tenants?

Is it a full time job…or something you want to do on top of your full time job?

Do you want to focus on working at whatever you’re already doing to make money and taking your savings and putting it to work through other people like your real estate brokers, property managers and fund managers?  This is the way most people invest in the stock market.

OR…do you want to go big and raise money from other savers, and spend your time watching macro-trends, analyzing markets, working with your advisors, making deals and overseeing your team?

They’re all valid. Just VERY different in terms of how you spend your time, who you work with, and what you need to know.

To get started, you might start in a specific niche like brokerage, property management, contracting, finance, or fund raising.

You also might start by working or volunteering with someone else, or simply investing your own money with someone else in exchange for the experience.

And don’t be afraid to get it “wrong”.  You can always change later.  But you can’t be all things to all people all the time.  And you can’t do everything all at once.  So CHOOSE.

2.  Take Inventory

Many businesses end each year by taking inventory of everything they have, so they can start the new year from a defined starting point…and they know what they have to work with.  Ditto for sports teams.

What do YOU have in terms of time, skills, relationships, cash, credit, cash-flow and equity?

What and who do you have ready access to in terms of people with time, skills, relationships, cash, credit, cash-flow and equity?

Make a list and figure out what resources are at your disposal right now, so you have a clearly defined starting point.

3.  Pick a General Direction (Vision) and Start Moving

We’re big fans of planning.  But planning is an iterative process.

First, you PLAN….then you DO…then you REVIEW.

Then you take what you learned in the review to adjust your plan, and you repeat the cycle OVER and OVER and OVER.

The problem with planning is it’s a safe place to get excited.  It’s all hope and opportunity.  Every play goes for a touchdown…on the chalkboard.

But in any business, momentum is essential. And the only way to get it is to get moving. So once you have a basic plan and general direction, you’re ready to start.  Get moving.

4.  Create an Identity

In step 1, you decided who you are.  So now you know.  But no one else does.

So it’s important to create an outward persona for your business that you can present to the world.

A business name, a title, a phone, address, website… it’s cheap, easy and fast. Keep it simple.

When you meet people, they will want to look you up online.  Clean up anything messy that’s out there, and build something that presents you more like the person you’re becoming.

Be careful not to stretch the truth beyond credibility. Showing yourself in the best light (spin) is much different than fabricating experience, credentials, resume etc.  Don’t lie.

And before we leave this one, consider this: how many times have you seen mega-corporations reinvent their brand?  A new logo, a new slogan, a new mission, etc.

The point is that even established businesses strategically decide to reinvent their identities in order to be more effective in the market place.

5. Get Out There

Today, “out there” has dual meaning…but it all comes back to networking.

Online, it’s called Social Media networking… Facebook, Linked In, a website.  Make it easy for people to find you, share you, and bring you opportunities.

Go to lots of meetings, seminars, conferences.  Learn the lingo.  Find the players.  Look for role models and advisors.

Your team and associations are part of your “brand”.  People will judge you (right or wrong) not only by how you look and act, but by who you associate with.

6. Lead With Value

Give more than you get. Look for problems and solutions and then connect the two. Be patient. Sew good will.

The more you help people, the more they will help you.

And every person’s problem is an opportunity for someone else…maybe someone who has something or knows someone that YOU want to know.  You can actually trade in problems and solutions.

This is REALLY important if you’re starting with very little money.  If you have tons of money, deals will find you.  If you have tons of money, you might not need to win friends and advisors, you can buy them.

If your financial resources are small, your relationship resources need to be BIG.

Always remember: it’s easier to make friends than money, and it’s easier to make money with friends.

7. Become an Expert

Pick something to become super smart about.  Not EVERY thing.  Just SOME thing.

It could be a marketplace, a neighborhood, a product type, an investment strategy, a marketing technique for finding deals or raising money, credit repair, deal negotiation, construction…something.

Pick something that interests you, that you’re naturally good at, and that can be directly applied to adding value to other people.

Hint: There’s two things that really matter in real estate investing. Deals and money (cash, credit, cash flow, and collateral)

Notice that you don’t become an expert BEFORE you Get Out There or Lead with Value. Expertise will come.

Get out there.  Add value.  NOW.

8. Help a Successful Person

Now you’re starting to build resources. You have a network of people who know, like you and are beginning to trust you.

You have a growing expertise that can be used to help other people. You’ve developed into a more valuable commodity in the marketplace.

Now, go find someone who is doing what you want to be doing, connected to who you want to know, or knows how to do something you want to learn, or has access to deals and/or funding you want to get closer to…

Then study them and see if there any way your expertise can be applied to helping them get what they want.  This is your ticket into the relationship.

Referring someone else isn’t good enough. Unless your value add is you hustle up other experts. Otherwise, your expertise needs to enhance their business.

It’s like looking for a job without the paycheck.

Does that mean you work for free?

No. It means you work for something other than money.

ALWAYS ALWAYS ALWAYS remember and NEVER EVER forget…

It’s about relationships.

If you’re like most people, you want to know how to do everything. You think knowledge is power. And the more knowledge you have, the more powerful you are.

Yes and no.

If it was all about tactical know how, then lawyers, real estate agents, loan brokers, CPAs, would all be the richest. But they aren’t. That’s why they work for guys like you.

Tactical knowledge is MISSION CRITICAL.  But YOU don’t have to have it…at least not all of if.

You just need to have a good relationship with people who do.

So while you’re expert in 1 or 2 things, and you use that expertise to build strategic relationship, the knowledge junkies will study and study and study all about how to do every little thing…trying to be expert in 20 different disciplines, not being great at any, and having no time for relationships, strategic thinking or uncovering rare opportunities.

Don’t be Mr. Know-it-All.  Be Mr. Known (and liked) by All (or at least as many of the right people as possible).

9. Learn by Doing

The best way to learn how to get started in real estate is by doing.

When you get into a real life situation, it forces you to focus and follow through.

If you get over your head and have no relationships…you’re screwed. All you can do is hire expensive help…most of whom have never really done what you’re trying to do.

But if you have patiently laid a foundation of relationships with the right people, then when you get in over your head, you call your friends for advice.

YOU must be willing to ask for help. YOU have to be someone other people want to help.

When you are learning how to get started in real estate, the next best way to learn is to attend live events. Podcasts, videos, webinar and books are all great…and you should be consuming all of that. But not for the reasons you think and not all by yourself if you can help it.

You consume online content to stimulate your creativity, learn the jargon, get ideas you can use in conversations with people you want to build a relationship with. You learn so you can share knowledge…not hoard it.

Live events are best because they force you to focus and interact with other people.

Expensive events, as soon as you can afford them, are better than cheap events. Cheap people are at cheap events. Expensive people are at expensive events. Who do you want in YOUR network?

Live events let you study people in action…how they present themselves, how they interact with others.

Go to all the networking. Stay late. Mingle. If you’re shy, make one friend. Just make sure that one friend is social!

Shadow programs are great. If someone will let you ride around for a day or two or five, do it. If you have to pay, give it serious consideration. Maybe you can barter.

Imagine trying to learn to walk, talk and ride a bike locked in your room as a kid.  You learned by going out and playing.

The complicated stuff like throwing a ball or riding a bike, you had a teacher…a mentor…who not only showed you what to do, they protected you from serious danger, while encouraging you through the awkward progression of learning the skill.

Becoming a real estate investor is NO different.

Imagine if you approached learning to ride a bicycle the way some people approach learning to invest…

You study physics, mechanical engineering, bio-mechanics.  You learn about risk mitigation like bandaging, treating abrasions, setting broken bones. You read the bicycle manual over and over.

Have you seen some of the successful real estate investors out there? Some of them can hardly spell.  There are people driving cars every day who have no idea how to change the oil.

The secret to getting started in real estate investing…or anything else…is to get started.

And you start with getting to know YOU, what you have, want and need.

Then you go where like-minded people are (online or real world) and find out what they have, want and need. Then you make friends and help each other.

And when you have money, you’ll have more and better friends, you’ll do more expensive things together, but the basic formula is the same.

Build your brand (how people feel when they think of you) and your network (how many people you know), and be obsessed about adding genuine value to the world strategically…being careful to associate with people who are doing the same.

Do this for at least a year…and DON’T LET UP.  You’ll be AMAZED  at what happens.

 

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  • Don’t miss an episode of The Real Estate Guys™ radio show.  Subscribe to the free podcast!
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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

8/10/14: Ask The Guys – Getting Started, Using Leverage and Strategic Default

One our favorite things to do is answer listener questions!  And as the show grows (now up 3.5 million downloads!) we get lots of them.

So we asked our email room manager Walter to send us a stack of emails and we picked some fun questions to talk about for this edition of Ask The Guys!

In the studio for another episode of powerful pontifications:

  • Your brainiac host, Robert Helms
  • His brainless co-host, Russell Gray
  • The oldest brain in the business, The Godfather of Real Estate, Bob Helms

How to get started as a real estate investor is…by FAR…the most popular question we get.  But there are always variations on the theme.

This one is about…

Finding a Mentor

In this episode, a listener wants to know how to persuade an experienced investor / developer to mentor him.  Now that’s a GREAT question!

Of course, this isn’t really an investing question.  It’s a sales question.  And that brings up the whole topic of sales as an essential skill for everyone…including real estate investors.

Sadly, many people consider sales simply as a vocation…and not a very noble one at that.

They think just as some people know how to cook, do carpentry, perform brain surgery, or program computers…that salesmanship is simply something people do to make a living.

Wrong.

Salesmanship is a LIFE skill.  Like reading, writing, arithmetic, budgeting and tying your shoes.

In other words, EVERYONE needs to know how to do it.

Think about it.  If you’ve ever tried to get a job, win a lover, negotiate a good deal on a car, ask for a raise or promotion, etc….you’ve been using salesmanship.  And the better you are at it, the more good things you can attract into your life.

Okay…off the soapbox…

So in this case, the answer to getting into a relationship where someone who doesn’t need your money (that is, you can’t pay them to mentor you even if you could afford it), is to uncover some unmet need, want or desire.  This requires asking good questions and listening carefully.

Most inexperienced people will go in talking…pitching all the features of whatever they’re offering.  Or worse, they lead with their own needs…like a beggar.  Ugh.

Don’t be that guy or gal. Look for things that you can do to help your prospective mentor, investor, lender, seller, employee, partner, vendor…and then negotiate a relationship where you exchange benefit for benefit.

We know.  It sounds so simply and obvious.  But watch the people around you.  Most do not do this consistently or effectively.  So they don’t attract as much into their lives as they could or would like to.

Using Leverage…

In case you hadn’t noticed, equity happened to a lot of folks smart enough to acquire properties when everyone else was scattering like cockroaches.

So a question came in about what do with the equity…leave it, reposition it, or sequester it?

Another GREAT question!

So we dusted off some of our old equity optimization strategies and shared some thoughts.

First, it’s important to remember that equity is wealth on paper.  It’s based on a differential between the market value and the loan balance.

The challenge is that market values can change, and because the loan balance doesn’t change, when it comes to equity, the market giveth and the market taketh away.

Unless you beat the market to it.Cash out refinancing cen be used to reclaim equity before the a market down turn takes it away.

If you don’t like the future prospects of the particular property or local market, you may decide to sell the appreciated property and 1031 exchange the equity into a more promising market and property.

But if you still like the current property, you may decide to reposition the equity by refinancing the existing property and using the proceeds to purchase another property.

Of course, the downside of this is that you potentially negatively impact your cash flow.  Usually, a bigger loan means bigger payments (unless you replace a higher rate loan with a lower rate loan).

But if the property’s income has increased, your net cash flow may end up being the same.

And if the new property cash flows at a rate higher than the cost of the loan on the first property, you could create positive cash flow on the loan proceeds.  That is, if you take $100,000 out at a 5% rate, your cost of funds is $5,000 per year (deductible).

So if you invest the proceeds in a new property that returns 10% cash-0n-cash, you have $10,000 per year coming in.  You just created a positive spread of $5,000 a year.  Nice!

Meanwhile, you own more real estate.  And if values keep going up, then appreciation occurs over a larger base.  That is, 5 % appreciation on $1 million in property is $50,000.  While 5% appreciation on $200,000 in property is only $20,000.

Of course, there’s a dark side…

Your equity is thinner.  After all, $50,000 of equity on a $100,000 portfolio means you have 50% equity.  But $50,000 of equity on $500,000 of property means you only have 10% equity.

So if the market pulls back, you could end up underwater.  A LOT of that happened in 2008.Is strategic default the best answer when a property is underwater?

Of course, if you have good cash flow, and plan to hold long term, it really doesn’t matter.  You simply wait.

Even if the market NEVER recovers, eventually the properties are paid off.  And no matter what the pricing structure, in any economy, paid off properties are nice to have.

If there’s concern about the cash flows on real estate, you might use harvested equity to invest in some other cash flow instrument or investment.

Even though we aren’t fans of being a creditor in a falling dollar world, if you’re using loan proceeds from property A to make a higher interest loan to on a property with a lot of protective equity (i.e., a $100,000 loan on a property worth $200,000), it can still make sense.

Let’s say you borrow $100,000 at 5% and loan it back out at 10%.  You just created $5,000 positive cash flow with less exposure to falling values.

So if the market drops 20%, you have negative equity on the first property with the cheap loan, but you have positive protective equity securing your loan to the borrower on property B ($200,000 less 20% decline means the property is only worth $160,000).

Now if the borrower defaults,  you foreclose and own a positive equity property.

There are other variations, but you get the idea.

As long as there are better things you can do with your real estate equity than leave it in the property, and it only costs you a modest interest rate and some fees to extract it, it can be a very powerful tool to accelerate your cash flow and equity growth.

However, if you have negative equity AND negative cash flow, you might decide that it’s not worth writing a check each month from other resources simply to save your credit score or hold on to a property you’ve lost faith in…which brings up another question about…

Strategic Default

We had a great question come in from a guy with a nice home in the Phoenix area.  It’s underwater and he can’t rent it out for enough to cover the mortgage and expenses.  Ouch.

So he’s trying to decide if just handing the lender the keys (deed in lieu of foreclosure) might be worth it.

A deed in lieu is a form of strategic default where you simply turn over the keys and deed in lieu of a foreclosure.He’s got a non-recourse loan so the lender can’t ask for anything else besides the house.  So his personal assets are safe.  That’s good.

BUT…it means a big hit to his credit score.

However, he says he hasn’t really used his credit score for anything for nearly 9 years, and he knows that it will heal itself over time, so why not just take the hit and get out from underneath the negative cash flow?

Another great question!  Though not exactly the way he asked it…

He’s looking for reasons to walk away from the property.  Emotionally, he’s done.

We, on the other hand, see the value in a high credit score, and would like to see him keep the property if possible.

Why?

First, about the property…

It’s a very nice executive home in one of the top retirement metros in the U.S.  And last time we looked, over 11,000 baby boomers are retiring EVERY day.  AND…they’re looking for big city amenities at a more affordable price.

In fact, if only 5% of the 11,000 boomers retiring every day want warm weather, big big city amenities, and quality infrastructure (travel, shopping, health care, entertainment, open space, golf, etc…), that’s 550 people each day who may choose a place like Phoenix.

So even though there’s a glut of properties on the market in his neighborhood right now, that probably won’t last forever.

Next, we know the Fed and the government are doing everything they can to prop up the value of homes.  There’s an old saying in investing – Don’t fight the Fed.  You might disagree with their policies, but they’re inflating real estate anyway.

Also, remember that prices fell because of de-leveraging when the mortgage industry imploded.  But recent headlines tell us lending is loosening up…especially at the higher end of the market.

So we think there’s a good chance more purchasing power is headed into his property niche.  That’s positive for long term values.

Also, he’s got a good loan on the property.  Good loans are nice to have.  Especially in an inflationary environment.  Every dollar in debt gets to be paid back with a dollar of lesser value.  Borrowers win when inflation is present.

Second, about his credit score…

Banks are loosening guidelines right now because they want to make loans.  They’re trying to attract borrowers.  But not on the low end.  They want good credit scores, solid balance sheets and documentable income.

This guy has all three.

So, his credit score is valuable asset because he can get his hands on cheap capital. And he can make money with cheap capital.

In fact, he can probably very easily make enough money with just his credit score that he could more than make up the negative cash flow on the underwater property.

But, you say, doesn’t that put his credit score at risk?

Yes.  But he’s already decided he’s willing to throw it away.  So why not go for it?  As long as the future deals are all set up non-recourse, the only thing at risk is the credit score.

And the only thing missing is knowledge about how to do it.

The point here is that before you get emotional and simply throw in the towel, it’s important to explore ALL the options.  And when your focus is on how to make profit versus simply cut losses, a whole new world of opportunities open up to your imagination.

So listen in to yet another imaginative episode of Ask The Guys!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

6/24/12: Ask The Guys – No Investor Left Behind

Interest in real estate investing is picking up based on the number of questions coming in from our listeners.

Of course, it probably helps that The Real Estate Guys radio show is the most downloaded podcast on iTunes and Apple is one of the most successful companies on earth.  It’s fun to be us.

So, sitting humbly behind the microphones in the palatial recording studios of The Real Estate Guys radio show’s international headquarters:

  • Your right up front host, Robert Helms
  • Your left behind co-host, Russell Gray

In this episode of Ask The Guys, we field a variety of excellent questions from all over…including Indiana, New York, Alberta (Canada), Washington DC , Montana, Facebook (wherever that is), and more!  Wow.  The Real Estate Guys are a global farce….er, force.

Included in today’s list of questions:

  • Is it a buyer’s or a seller’s market right now? (Hint: If you can use cheap long term financing to get a property in good condition that cash flows well, for a price that is well below replacement cost, in a market with solid economic and demographic fundamentals – buy it!  Right now, that’s possible.  Just sayin’…)
  • What do you do when you live in a market with lousy economics and you can’t get the numbers to make sense?  (That’s why they have moving trucks.)
  • What the heck is leverage?  (Besides the 9th wonder of the world and one of our favorite things?)
  • In Getting Deals Done, you say it’s important to find out what the other party wants.  But how, when your real estate agent is in between you and the other party?  (We took the question because we always show up when someone says there’s another party).
  • Once you’ve built up huge, massive, ginormous amounts of equity (critical mass), how do you convert it to cash flow to fund a lavish lifestyle without getting slammed with taxes?  (We brought Paris Hilton in to help answer this one…just kidding. But we’re not really experts on lavish lifestyles)
  • How to invest when I don’t have much money? (We get this one a lot.  Probably because there’s a lot of people who don’t have much money.  The good news is that you really don’t need much to invest in real estate.  That’s what partners, lenders and investors are for.)
  • What are the 7 essential investor resources you always talk about? (Cash, Cash Flow, Equity, Credit, Time, Talent and Relationships)
  • How can I learn how to analyze markets?  And how can I use my 401k to invest in real estate? (Hey, only one questions per player.  Not really.  These are both great questions, so we answer them both.  Plus, he’s got $250,000 in his 401k, so he’s our new best friend.)

There’s more, but we’re getting writer’s cramp.

We even respond to one listener who didn’t like a political comment made by one of our guests.  Well, it is that season and… do you smell that?  Yes, politics is in the air.  And as long as politicians and their policies affect investors and our investing, we’re going to have to talk about what those rascals are doing.

Not sure why people get their undies so knotted up when it comes to politics.  After all, that’s just one of many things we can all disagree about.  Some people like to drink light beer and cheer for the Cleveland Browns.  Can you imagine?  Whatever.

Anyway, we had fun doing the show and love getting your questions. So keep ‘em coming!  Meanwhile, tune in and enjoy this exhilarating edition of Ask The Guys!

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The Real Estate Guys™ radio show provides real estate investing news, education, training and resources to help real estate investors succeed.

2/5/12: Ask The Guys – Super Bowl Edition

Super Bowl Sunday is the biggest media event of the year – even bigger than The Real Estate Guys™ radio show (hard to believe, we know).  For perspective, consider that the projected 110 million Super Bowl viewing audience is 5 times bigger than American Idol’s nearly 20 million person audience!

And what does that have to do with you and your real estate investing?  Well, pretty much nothing.  Because unless you’re somehow connected to the business of football or lucky enough to place a winning bet (how ’bout those Giants?), the Super Bowl doesn’t really have any positive impact on your financial life.

So, being the ever faithful hosts that we are, for those who are more interested in how to score points on their financial statements, we’re in the studio for another educational edition of Ask The Guys!

Sitting all alone behind the silver microphones in The Real Estate Guys™ studio:

  • The quarterback of the show, your host Robert Helms
  • Running back (and forth to fetch Robert’s coffee), your co-host Russell Gray

As always, our Ask The Guys playbook has more questions than we can get to in one episode.  But keep ’em coming!  We love reading them, and when we see things that come up over and over, we know it’s something we should take time to address.  To submit your question, use our Ask The Guys page.

When we reached into the Ask The Guys e-mail  grab bag for this episode, here’s what we pulled out:

  • How can a young person, saddled with student debt and just starting out, get their dream of real estate financial independence started?
  • What can you do with a credit score of 800 (besides brag about it to your friends)?
  • Are low down payment deals still out there?  Where and how to find them?
  • Help! I’m a brand new landlord and my tenant just went Chapter 13!  What can I expect?
  •  I’m under 30 and have saved up $100,000.  Now what?
  •  I just got out of college and noticed you can get a lot more money each month by renting out 1 room at a time.  What do you think?
  • How do I get cash out of a property in an LLC to pay off a property I bought with my 0% interest credit card?
  • MORE!

Sometimes we know the answers because, after all, we are brilliant (and humble!).  Sometimes we need to use our powerful positioning as big time radio talk show hosts to call up subject matter experts for help.  In any case, we LOVE answering your questions because we always learn something, and it reminds us that there really are people out there in radio-land (and now podcast-lands) listening to us week in and week out.

So THANKS for keeping us company during the Super Bowl and keep your questions coming!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

12/26/10: Getting Started in Real Estate Investing…for the First, Second or Third Time!

Donald Trump is probably the most famous “real estate guy” who made it big, lost it all, then made it all back bigger and better than before.  What took him down you ask?  In his book, The Art of the Comeback, the Donald says it was complacency and The Tax Reform Act of 1986.   Remember that one?  It was that wonderful piece of legislation that crashed the real estate market and wiped out the Savings & Loan industry.  Oops.

Our point?  Actually, there’s a few, such as how important it is to pay close attention (the opposite of complacency) to ANYTHING (including boring politics) that might affect the flow of money into any asset class – especially real estate.  That’s one reason why we’ve had so many economists on over the last several months.  Which brings us to the main point of this episode of The Real Estate Guys™ Radio Show, which is to address the question: What is the best way to move forward in this market based on all of the lessons of past markets?

Pulling the sleigh of broadcast excellence over the mountains and through the hills (and valleys) of the currently snow covered real estate landscape:

  • Robert, the red-nosed show host, Helms
  • Russell, the noseless co-host, Gray (brown was the only color left in the box and he didn’t want to wear it)

When navigating your own real estate investing sleigh through the foggy night of post-recession real estate, it’s very handy to have a shiny red nosed guide (beer consumption does serve a valuable investment purpose!).  There’s nothing like experience to light the way for those just starting out.  And with low prices, a growing population, low interest rates, more renters, and less new building, it sure looks like a GREAT time to get started – or for those who got lost in the last financial blizzard, re-started and pointed in the right direction.

Focusing on the right fundamentals is essential to long term success.  Legendary football coach Vince Lombardi is said to have begun each year’s training camp by addressing his team of professional athletes. Lombardi would hold up a football and state the obvious, “Gentleman, this is a football.”  In other words, start at the beginning and build your career on a solid foundation of fundamentals.

So whether you’re brand new or a seasoned vet looking to kick off the New Year on the right foot, listen in as we unwrap some of the lessons of markets passed and hang ornaments of wisdom on your real estate investing tree.  Lots of people paid a big price for all these valuable lessons, so even though you get them for next to nothing, don’t overlook their importance.

May the New Year bring you and yours health, wealth and happiness!

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