Hidden costs that hike housing prices …

As the political cycle ramps up, housing affordability might get some attention. And it’s more complex than you might think.

Obviously, housing policies have the potential to affect YOUR real estate investing … so it’s smart to pay attention.

Of course, there’s always risk in talking politics. Everyone has heroes and talking points. Sometimes it’s hard to take the filters off and consider all perspectives.

Fortunately, we’re not here to promote or protest a policy or a politician. Life’s too short for that.

Instead, our focus is on what people in power are thinking and doing … and how it affects our strategic investing.

In case you missed it, President Trump recently signed an Executive Order to take on the lack of affordable housing.

According to the announcement, the EO establishes a White House Council tasked with “tearing down red tape in order to build more affordable housing.

This ONE sentence reveals much about how the President views the problem … and reflects his background in real estate.

So let’s put our red or blue foam fingers down and consider the landscape the way it’s being planted by the powers that be … and how things might change if a new sheriff comes to town.

Components of Affordability

Housing affordability is a relationship between incomes and mortgage payments or rents. It’s not about price as much as it is the gap between income and housing expense.

It’s no secret housing prices and rents have been rising faster than real wages.

And the longer this goes on, the more people get pushed off the back of the affordability bus.

Ironically, it’s often the attempts at creating affordability which inadvertently makes things unaffordable. Will that happen this time?

Past national policy efforts focused on increasing the availability of financing, while many local efforts include legislating lower rents.

History shows easy financing actually makes housing more expensive … just like student loans made college more expensive.

This confounds typical politicians.

But it’s simple. Financing increases purchasing power … and newly empowered buyers bid prices up. Of course, sellers are happy to oblige.

Consider what happened to housing after the Clinton Administration lowered government lending standards in late 1999 …

Looser lending combined with the Fed’s then unusually low interest rates (trying to reflate stocks after the dotcom bust and 9/11 attacks) …

… drove real estate prices up, up, up in the early 2000s.

Everything was great until derivatives of those sub-prime mortgages imploded the bond market and crashed not only real estate prices, but the global economy.

So again … easy money doesn’t make things affordable. It inflates price bubbles which eventually collapse. Not a great plan.

Interestingly, President Trump is badgering the Fed to drop rates.

He says lower rates are necessary to keep the U.S. competitive in international trade … and to lower the interest expense of ballooning federal debt.

Some claim Trump’s trying to prop up the stock market heading into the election cycle, which is probably true.

In any case, based on this EO, Trump’s push for lower rates doesn’t appear to be intended to drive housing prices UP.

Of course, that doesn’t necessarily mean he wants to drive prices down either.

After all, there are many constituencies with vested interests in keeping values stable or growing.

Banks depend on property values to secure the mortgages they make.

Local governments depend on high values for property tax calculations.

And of course, property owners (who also happen to be voters), use high property values to feel rich or to tap into for additional purchasing power.

On the other hand, there are a growing number of disenfranchised voters who struggle with rising rents and are watching the dream of home ownership become more elusive.

When we asked then-candidate Donald Trump what a healthy housing market looked like in a Trump Administration, he simply said, “Jobs“.

Fast forward to today, and we know President Trump has been trying to re-organize the economy to produce more higher paying jobs.

Of course, the jury’s still out on whether he’ll succeed. But that’s the plan. And if he is successful, it will help close the housing affordability gap.

Of course, rising wages are useless if housing prices continue to outpace them … which brings us back to this affordable housing executive order.

When we put all this in a blender and hit puree, it seems to us crashing housing prices can’t be the goal.

Instead, we suspect the purpose of increasing supply is to moderate excessive price growth … while giving incomes a chance to catch up.

So on the housing supply side, President Trump’s Executive Order presumes to stimulate development by REDUCING regulation.

This is an unusual tactic for a politician. Politicians of both stripes are infamous for MORE government, not less.

Maybe Trump is still thinking like a real estate developer.

In any case, we visited the National Association of Home Builders website to see what active home builders think of the Trump approach.

They describe Trump’s EO as “a victory for NAHB” because “it cites the need to cut costly regulations that are hampering the production of more affordable housing…”

According to NAHB, regulations add SIGNIFICANT costs to development

“… regulations account for nearly 25% of the price of building a single-family home and more than 30% of the cost of a typical multifamily development.”

Think about that. These are YUGE numbers. 😉

Of course, the odds of reducing regulations and their costs to absolute zero are … absolutely zero. There’ll always be some regulation.

But even if regulatory costs are substantially reduced, there are other factors to consider (we told you it was complex) …

Components of Cost

When bringing a real estate development to market costs include land, material, capital, labor, taxes, energy, and regulation.

Once built, you can tack on marketing, sales, and costs of operation until the product is sold or leased up. So, regulation is just one of many pieces of the equation.

Watching President Trump operate, it seems he attempts to manipulate components of cost as you’d expect from a typical real estate developer … making trade-offs to get things done in time and on budget.

The Opportunity Zones program is an attempt to move economic activity to where land is less expensive.

As mentioned, he’s aggressively calling for lower costs of capital (interest rates).

And the already passed Trump tax reform is delivering tremendous tax incentives for real estate investors.

As for energy, Trump opened up domestic oil production while pushing for lower oil prices.

And with his recent EO, Trump is going after costly regulation in the home building sector.

All that checks a lot of boxes.

Of course, there’s the issue of tariffs … which (at least temporarily) are adding to the cost of building materials.

(There’s much we could say on the touchy topic of tariffs … but we’ll save it for another day.)

Meanwhile, we’re chomping popcorn watching this play out … and trying to decipher what it means for Main Street real estate investors.

Here’s our bottom-line (so far) …

While interest and energy costs are macro-factors which affect the broad market, a reduction in federal regulation makes a smaller dent.

That’s because regulation is both a federal and regional phenomenon.

Our guess is markets with more local regulations will continue to attract less investment than those with less. Conversely, markets with less regulation will attract more.

This push to stimulate development is an obvious opportunity for real estate developers.

Meanwhile, we’re not staying up at night worrying about a supply glut collapsing housing prices any time soon.

If housing prices fall, it’ll probably be because credit markets collapse again.

For that reason, we continue to think it’s a good time to liquefy equity, lock in long term cheap financing, and tighten up operational expenses.

If prices do happen to fall … for whatever reason … as long as you have resilient cash flow and low fixed-rate financing you can ride out a storm as an owner.

And with some dry powder, a collapse isn’t a crisis for you … it’s an opportunity as a buyer.

Of course, you can stand at the plate all day waiting for the perfect pitch. Meanwhile, the market might continue to boom.

You can’t profit on a property you don’t own.

So even though there’s arguably some frailty in the financial system, it’s an ever-present threat you need to learn to live with and prepare for.

But as long as deals you’re doing today are structured to weather a storm, you’re probably better off collecting base hits than taking strikes.

Until next time … good investing!


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Main Street needs Main Street investors …

When the 2008 financial crisis hit, the mortgage industry was at the epicenter … and the disruption of funding feeding real estate crushed housing values.

But it’s important to remember, the problem was NOT real estate.

After all, people still needed and wanted places to live.  So the demand for housing remained stable.

It was credit markets that failed.  And in a credit-based economy, everything stops when credit markets seize up … including home loans.

Without a steady influx of fresh debt to fund demand, prices collapsed … taking trillions in equity with it.  And it wasn’t just real estate.  Stocks tanked too.

Mortgage and real estate is just where it started.

The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …

… and then the negative equity led to a rash of defaults by even prime borrowers …

… all of which caused a credit market contagion that scorched financial markets world-wide.

Of course, this all created huge problems for Wall Street, the banks … and for Main Street.

So Uncle Sam and the Federal Reserve got heavily involved to “help” … and to no surprise … Wall Street and the banks came out on top.

The banks needed relief from realizing their losses on their financial statements, while finding a fast path to re-inflating values.

After all, property values are the collateral for all those mortgages.  And when values drop, borrowers walk … along with the prospects of loss-recovery.

So Wall Street rallied and raised many billions of dollars to buy up Main Street houses …

… even as millions of homeowners were being demoted to the rank of tenant.

So now instead of collecting mortgage payments, they collected rent.

As a real estate investor, you probably think that’s better.  Who wants to be a lender, when you can be an owner … enjoying tax breaks and building equity.

But Wall Street doesn’t think like you … and that’s our point.

Today, those Wall Street buyers are landlords.  And by some accounts, they’re not doing a very good job for the Main Street tenants.

Shocker.

Don’t get us wrong.  We’re all for investors stepping in to clean up a mess.

Investors are like the white corpuscles of the economy … bringing capital to damaged areas and healing blight and distress.

It’s one of the reasons we’re excited about Opportunity Zones.

We just hope Main Street investors and syndicators don’t get pushed aside again by the wolves of Wall Street.

The issue is there’s a BIG difference between the way Wall Street money and Main Street money behaves.  And it’s not about savvy … it’s about heart.

Big money guys (and gals, we suppose) have a way of looking at things.

Remember this classic 2012 quote from mega-multi-billionaire and legendary investor Warren Buffett …

“I’d buy up ‘a couple hundred thousand’ single-family homes if I could.” 

Of course, we all know money’s not the gating issue for Buffet.  He can buy anything he wants.  So what could his hesitancy be?

Maybe he agrees with Sam Zell, who’s been quoted as saying this in 2013 …

“An individual investor can buy 25 houses and monitor them. I don’t know how anybody can monitor thousands of houses.”

Really?  We know Main Street investors like Terry Kerr at MidSouth Homebuyers who successfully manage thousands of houses.

So it’s not impossible to manage a big portfolio well. You just need to be committed to doing it … one tenant at a time.

The folks we know who excel at single-family property management really care about their tenants as human beings … and deal with them as individuals.

They’re focused on creating cash-flow as the PRIMARY investment result … as opposed to simply a necessary evil to offset holding costs until a capital gain can be realized at sale.

Buffett and Zell are smart guys.  Buffett saw the opportunity in single-family homes … but had the good sense to know he wasn’t the right guy for the job.  Ditto for Zell.

Big money moves in broad strokes, which is fine when you’re dealing with commoditized assets and you can buy and sell in bulk.

But real estate … especially single-family homes … is not an asset class and can’t be effectively commoditized.  And neither can property management.

We think Main Street tenants are much better served by Main Street landlords … like YOU … so long as you remember the main thing is happy tenants.

Happy tenants means longer tenancy, less turnover and vacancy, and better real-world cash flows.

Of course, you don’t need to be a small-time investor to build a portfolio of single-family homes.

When you learn to syndicate, you can combine bulk money with individual property investing … and build a portfolio of hundreds or even thousands of homes.

Being big isn’t bad.  Wall Street’s problem isn’t its size.  It’s its mindset.

As the legendary Tom Hopkins says …

“Don’t use people and serve money.  Use money and serve people.” 

Because when you do, you’ll end up with both.

Until next time … good investing!


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The role of housing in economic growth …

Some people think housing is a driver of economic growth.  But that doesn’t make sense to us.

Sure, a robust housing market creates a lot of jobs from construction all the way back through the supply chain.

But housing itself is a by-product of prosperity, not a creator of it.  After all, who buys a house first … and then gets a job?  It’s the other way around.

So we think housing is not a leading indicator, but a trailing indicator.

With that said, in addition to reflecting economic prosperity, housing definitely plays a role in driving economic activity.  But not in the way most people think.

So let’s take a look …

Economic activity isn’t about asset values.  It’s about velocity … transactions … how fast money is flowing through society.  That’s why they call it currency.

But it isn’t really money that’s flowing.  It’s credit. It’s a subtle, but important difference because you can’t create money from nothing.  Only credit.

If you’re not familiar with the VERY important difference between money and credit, you should strongly consider investing in the Future of Money and Wealth video series …

… because G. Edward Griffin (author of The Creature from Jekyll Island) does an amazing job of explaining it all in an easy to understand way.

The fundamental principle to understand is that a loan is an asset to a bank.

When a bank makes a loan, they effectively create “money” from nothing by issuing credit.

Obviously, the biggest loans in most people’s lives are mortgages on houses.  So that means banks are creating LOTS of “money” by extending credit.

Meanwhile, governments issue bonds, which are simply humungous, glorified IOUs … like a mortgage.  Except the collateral isn’t a house … it’s the citizens’ earnings.

And when the mother of all banks, the Federal Reserve, buys government bonds, they are effectively creating “money” by issuing credit.

Now when all this “money” gets into the financial system it pushes asset prices up.  But not evenly.  And no one know for sure where it will all end up.

If lots of the new “money” goes into bonds, bond prices go UP and interest rates go DOWN.  There was a LOT of that going on over the last decade.

Similarly, if it goes into stocks, then stock prices go up.  There was a lot of that over the last decade also.

One big driver of rising stock prices has been corporations pigging out on cheap debt and then using the proceeds to buy back their own stock.

But remember, this isn’t economic activity … it’s just inflation of asset prices.  So it’s a mistake to think a rising stock prices means a booming economy.

In fact, “stagflation” occurs when prices go up, but economic activity is slow.

And just last week, former Fed chair Alan Greenspan said he sees stagflation coming to an economy near you.

At the same time, fellow former chair Janet Yellen is warning of excessive corporate debt.  We were just talking about that in our last commentary.

Funny.  Neither Greenspan or Yellen has said anything about the Fed going insolvent.  Pay no attention to that man behind the curtain.

Meanwhile, Fannie Mae’s economics team recently announced their prediction of slowing economic activity in 2019.

And just so you don’t think they’re merely jumping on the bandwagon, Fannie Mae Chief Economist Doug Duncan predicted this in his Future of Money and Wealth presentation on our last Investor Summit at Sea™.

All this to say, there are some notable experts saying the economy could be in for some headwinds in 2019.

So back to housing and its role in goosing economic activity …

Anyone paying attention knows housing prices have bounced back nicely from their 2008 debacle.

And almost everyone who bought early in this last run-up has built up gobs of equity.  Good job.

Unsurprisingly, consumer confidencecash-out refinances, and consumer spending all surged in 2018 … as households became equity rich … and then tapped that equity to SPEND.

In other words, credit flowed through housing to consumer spending which drove a lot of economic activity.

So it’s not housing construction that’s a leading indicator … it’s rising prices and equity.

But as housing price appreciation slows … it’s no surprise consumer confidence is dipping too.

Remember, consumers are usually the last ones to realize what’s coming.

So again, it’s the flow of credit into home prices and equity … and then the flow of credit through home equity to consumers … and then from consumers into the economy … that be a leading indicator of what’s coming down the line.

There’s one more nuance to consider …

As we’ve been pointing out for the last few months, there are LOTS of reasons to think more money is heading into real estate.

A combination of the best tax breaksOpportunity Zones, and nervous stock investors fleeing Wall Street in record numbers to seek a safer haven in housing … all could have real estate setting up for a nice run.

But be cautious.

Because if Alan Greenspan is right about stagflation … rising prices without rising real wages and economic activity …

… then real estate PRICES could rise from big money seeking safety … while the rents you use to control the property could be under pressure.

Consider RentCafe’s recent year end report, which found the most popular things renters searched for in 2018 were “cheap” and “studio.”

So as we’ve been suggesting for quite some time …

… it’s probably safer to focus on affordable markets and product types… using long-term fixed financing … and focusing on solid cash-flows to position your portfolio to ride out a slow-down.

We’re not saying there will be slow down.  But others are.

And it’s better to be prepared and not have a slow-down, than to have a slow-down and not be prepared.

And remember … asset prices and economic activity are NOT one and the same.

Until next time … good investing!


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High performance wisdom for the New Year …

Sometimes the most profound tidbits of wisdom are unexpectedly found in unlikely places.

Here’s a great one we picked up along the way …

“Most people figure it out … eventually.  The GREAT ones figure it out EARLY.”

We heard this during a casual conversation in the bleachers at a small college football game.  The subject was athletes, but it really applies to any endeavor … including real estate investing.

Most of us want to be great.  We want substantial success by whatever criteria we define it.  And we usually want it quickly … which brings us to our next profundity …

“More sooner is better.”

It all SEEMS so obvious.  But too often we find ourselves distracted and delayed with half-started projects, trivial pursuits; urgent, but unimportant tasks.

Meanwhile, minute by minute life speeds by … and we fall further behind.

But over time, we become more productive.  Through trial, error and pain we slowly learn to focus.  We gain skills and get more organized.  We learn when to say yes and when to say no … eventually.

But … the GREAT ones figure it out EARLY.

And when it comes to skills, organization, wisdom, discipline, and all the results those bring … more sooner is better.

Of course, this applies to ALL of life … including the business of real estate investing … so let’s think about HOW we can “figure it out” faster.

First, no matter how old you are, today is as young as you’ll ever be.  And no matter how young you are, it almost always seems life is too short.

So using today as ground zero, the goal is to figure it out early … and gain more (knowledge, wisdom, relationships, assets, cash flow, etc.) sooner.

Another lesson from athletics is learning to slow down and relax in order to go faster.

If you’ve ever been trained to sprint … or watched a slow-motion video of a world-class sprinter … you’ll see they’re very focused, relaxed, fluid … with no wasted motion.

Amateurs are tight … they try too hard … they’re inefficient … and they waste a lot of energy.  They work harder to go slower.

Sound familiar?  Sometimes the busiest people are the least productive.

Now here’s the next paradigm breaker … direct from furry green lips of Master Yoda in The Last Jedi 

“The greatest teacher, failure is.”

Of course, this doesn’t mean we seek failure.  Or does it?

While we don’t set out to do something intending to fail, whenever we attempt something we always run the RISK of failure.

So occasional failure is inevitable … especially when doing something new.

But just as you don’t have to save money in order to invest, because you can syndicate capital from people who’ve already saved it …

… you can syndicate wisdom from people who’ve already failed and gotten the lessons.

Or, as Bob Helms, the Godfather of real estate says …

“You don’t have to give natural childbirth to ideas.  You can adopt!”

 So we don’t seek out failure, but it’s not bad to seek out failures … people who’ve already failed and gained valuable wisdom through the process.

The key is to find the right people … and then get close enough to learn from them … and it’s about MUCH more than simply information.

It’s about culture.  It’s about the environment you’re in … the peer group you’re a part of … the ideas, attitudes, and opportunities you’re consistently exposed to.

As the new year rapidly approaches and you consider how to “figure it out” faster in 2018 … so you can get more sooner … take a strong look at your environment.

Do you have enough exposure to people who are pushing themselves through failure and are striving diligently to figure it out faster?

Are you as focused as you need to be to avoid resource-wasting distractions?

And perhaps most importantly, do you have a healthy attitude about your own failures … or do you let setbacks put you on the sideline too long?

Here’s more wisdom from brilliant minds … 

“Winners are not afraid of losing. But losers are. Failure is part of the process of success. People who avoid failure also avoid success.” – Robert Kiyosaki 

“I never see failure as failure, but only as a learning experience.” – Tom Hopkins

(By the way, both Robert and Tom will be with us again for our next sensational Investor Summit at Sea™)

Every year, in every economy, people find a way to win … and others find a way to lose.

And if both can happen in the same conditions, then the difference must be in how each individual behaves in the same environment.

Most of us are somewhere in the middle of the pack in whatever we’re working on … some folks are ahead of us, and some are behind.

In a marathon, each runner has to run their own race … but smart ones use the power of the pack to pick up the pace and pull them forward.  Sometimes it’s uncomfortable.

Of course, if it were easy then everyone would do it, and the achievement would be unremarkable.

“What is the point of being alive if you don’t at least try to do something remarkable?” – John Green

We hope you’ve had a successful 2017 and are eagerly looking forward to a remarkable 2018.

We appreciate having you in our audience and hope to see you very soon at a live event.

Until next time … good investing!


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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.

Intoxicating investments can be toxic …

It’s the time of year to get together and have a good time celebrating the holidays.  Sometimes this involves indulging in some intoxicating activities.

Those who want to enjoy themselves know their limits … and prudently rely upon a sober person to get them safely home.

Naturally, we’re talking about investing.

Just take a look at just a few of the many recent intoxicating headlines …

It’s important to remember … investing vehicles are supposed to get us to our financial destination SAFELY.

Crashes are DANGEROUS … which is why sobriety is advised.

Of course, in a room full of intoxicated partiers, a sober person can come off as a party-pooper … and NO ONE likes a party-pooper.

So let’s see if we can serve up some investing eggnog and with a dash of optimism … and no nasty hangover or risking a life-threatening crash.

First, let’s take a quick dive into the aforementioned headlines …

Housing

Home-builders are REALLY confident … presumably because they believe conditions are ripe for them to buy land, materials, and labor … turn them all into homes which they can sell at a profit.

That’s because home prices are UP … unlike those dark days in the wake of the recession when existing homes were selling below replacement cost … making it nearly impossible for home builders to build profitably.

Stocks

The U.S. stock market … and most global stock markets … have been rocketing higher.

In fact, the U.S. stock market has taken out all-time highs … over SEVENTY times in 2017 … an all-time record.

All this amid rabid share buybacks by corporations flush with cheap cash from low interest rates… and now from tax breaks which appear inevitable in the new tax bill.

Of course, when corporations take stock OFF the market (reduce supply), while demand surges as bullish investors are piling in … prices rise.  Go stocks!

And speaking of rising prices …

Bitcoin

Of course, the meteoric rise of Bitcoin is THE asset price boom story of the year … perhaps of our lifetime.  It’s gotten to where accidental Bitcoin multi-millionaires are even starting hedge-funds.

Are we jealous?  Maybe just a lot.  But we’re not sure missing the Bitcoin boom makes us stupid … any more than Bitcoin billionaires are suddenly investing geniuses.

“Stupid is as stupid does.” – Forrest Gump

Pre-2008, we knew a lot of people who thought they were real estate investing geniuses because real estate was going up fast everywhere.

They’d put $20,000 down and buy a little house, and a year later it was worth $100,000 more.  There’s NOTHING wrong with that.

BUT … it’s a mistake to think you’re an investing genius because you bought a bubble asset at the right time.

Of course, if you’re not smart enough to get out before the bubble deflates, it can take all gains … and your investing “genius” … with it.  We know.

“I may be drunk, Miss … but in the morning, I will be sober … and you will still be ugly.” – Winston Churchill

Rising asset prices are FUN.  Easy equity is intoxicating.  Who doesn’t like to see the spread between assets and liabilities grow?

But asset price parties can turn ugly fast if you’re not careful, which brings us to the point of today’s musing …

In good times and bad, always remember what REAL investing and wealth are …

… and no matter how intoxicated with bubble wealth you are, be sure you get home safely.

How?

To our way of thinking, the purpose of investing is to accumulate units of real value and the productivity of others.

Wealth is measured by how many useful items you own … like buildings, trees, crops, barrels of oil, ounces of strategic or precious metals, etc.

These are things people MUST have in order to live, work, or make things of value.

When you have more units of real value, and more people sending you a portion of their productivity, you are WEALTHY.

And when you pick items of real value which also reduce exposure to counter-party risk, your wealth is even safer.

Intoxicated investors look at their balance sheet and celebrate their net worth … perhaps even borrowing heavily to spend on consumption.

In fact, this is EXACTLY what the government and banks WANT you to do.

Sober investors look at their balance sheet as merely a tool for building their CASH FLOW statement.  Spending comes out of the productivity of the asset … not it’s equity.

This is no small differentiation … because what you do with equity defines you as an investor.

The investor who buys low, sells high, skims some spending money, then pushes the stack back in and rolls the dice again, needs to keep playing the game … or the cash flow stops.

You can be a full-time investor, but you’re still on the treadmill.

The investor who buys low, then uses equity gains to acquire streams of positive cash flow will eventually become free from the need to personally produce to eat.

Robert Kiyosaki calls this “out of the rat race” … and it’s an enviable place to be.

The world is awash in paper (balance sheet) equity right now … in stocks, real estate, and now cryptos.  None of them are bad.  Equity is awesome!

But the market giveth equity … and the market taketh equity away.

We think it’s smart to take equity off the table before Mean Mr. Market takes it first … and then use your new equity to acquire productivity … cash flow.

It’s even better when you can pair equity with cheap long-term debt, so you can own MORE units of real value (properties) and income (tenants).

Of course, the right real estate is an ideal vehicle to acquire an income producing asset with cheap long term debt.

If prices decline, the income provides a basis of value and control.  And if prices take off, your bigger collection of assets will create even more equity faster.

If you haven’t already, now’s a good time for a portfolio sobriety check.  It doesn’t mean the party’s over … but it just might make it a bit safer.

Happy holiday and until next time … good investing!


More From The Real Estate Guys™…

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

Avoiding bubble trouble …

Between Bitcoin, Nasdaq, and yes … even some real estate markets … there’s a growing concern about bubbles blowing up on giddy investors who’ve been partying like it’s 1999.

Of course, if you sit out to play it “safe” … you might miss out on all kinds of exciting gains. Buy into the hype … you might be left without a seat when the music stops.

So what’s an investor to do?

Fortunately, these are much easier problems for a real estate investor to resolve than for those investors playing purely with paper assets.

That’s because real estate is unique among investment vehicles.

First, real estate is almost impossible to commoditize.

Every property is a one-of-a-kind collection of condition, location, potential, financing structure, and seller motivation.

And unlike nearly all other investments … you can influence many of the factors which contribute to the financial performance of real estate.

On the other hand, every Bitcoin, ounce of gold, share of Apple stock, or 10-year Treasury are essentially identical anywhere in the world …

… and there’s virtually nothing you can do to influence the supply, demand, or financial performance of any of them.

Of course, this doesn’t necessarily make those “investments” bad.  But they are very different than real estate.

Our point is that when pundits toss real estate into the commoditized investments bubble warning basket, it’s not a completely valid argument.

Real estate provides a level of safety and control not available in commoditized investments … and the key is basic analysis and underwriting.

Now don’t be intimidated.  It’s not that complicated.

However, income property analysis and underwriting is a different process than analyzing a stock, bond, or commodity.

As for crypto?  We’re the first to admit we haven’t the slightest idea how to analyze or underwrite a crypto-currency.

But back to the business of analysis and underwriting …

In simple terms, “analysis” is simply looking at the numbers and drawing some conclusions about what they mean.

“Underwriting” is fact-checking the inputs which create the numbers you’re analyzing to be sure the numbers are rooted in reality.

“Technical” analysis is looking at the supply, demand, and price trends.  It’s about patterns, and using the past to help predict future price action.

“Fundamental” analysis is looking at the operating income, the market, the management, and other competitive factors, to estimate prospects for future success.

Fundamental analysis is what Warren Buffet is famous for.  And because he’s really good at it, he often finds companies whose stocks are cheap relative to their potential.

So a “good deal” is something selling for less than it’s potential … so long as you have the funds, expertise, and control to develop the potential.

When it comes to stocks, Warren Buffet is big enough to have some direct influence on how a company develops its potential.

Unfortunately, Main Street investors can’t play the stock game at Buffet’s level.

The great news is real estate lets you get your Buffett on much better than just some speculating amateur playing pin-the-tail on the hot stock donkey.

So here’s a simple way to approach real estate deal analysis and underwriting so you can recognize a bargain … even in a hot market.

The goal is to buy a property that isn’t already at the top of its value range (a bubble).

For this discussion, we’ll assume you’ve selected a market and neighborhood that’s in good shape and stable, or trending in the right direction.

When it comes to the actual property, you’re analyzing it for acquisition, improvement, and long-term production of income.

Already, the distinction between real estate and a commoditized investment should be apparent.

When you acquire a commoditized investment like Bitcoin, Apple stock, gold, or a bond, you’re bidding into a very competitive environment.

Sure, there may be a little wiggle room in the price, but it’s based on timing … not negotiation.

But with real estate, there’s often the possibility of negotiating price, concessions, carry-back, equity participation, etc.

Often, you’re only competing with a handful of other bidders, so your negotiating skills can make a big difference.

Real estate is personal and individual.  It’s NOT a commodity.

So one way to mitigate the risk of buying at the top of the value range is to simply negotiate a better deal at the start.  Skill matters.

But that’s just the beginning.

Most properties aren’t perfect when you buy them.

Depending on the condition and potential of the property, there’s often a variety of improvements a new owner can make to create additional value.

If you’re smart, creative, and cost-effective, you can make micro-investments into the property and improve its macro performance.

For example, our friend Ken McElroy likes to add washers and dryers to his apartment units.  When he does, he can get a $600 investment per unit to yield an increase in rents of about $300 a year.

You can’t do that with Apple stock.  Even if you buy 100,000 shares.

This is where your “cap ex” (capital expenditure, or “fix-up” budget) ties in directly to your income analysis.

So you have the acquisition costs and the cap ex as your “cost basis” going in.  It’s the amount of capital you need to get a return on.

That “return” is called Net Operating Income.  It’s simply revenue less expenses before debt service.

Once again, this is where real estate sets itself apart from commoditized investments.

With real estate, the line items of your revenue and expenses often contain things which you can improve with good management and creativity.

So as you analyze and underwrite the deal, make a note of each item over which you have some degree of influence or control.

When you do this, you’ll see the potential and probabilities for improving the financial performance, and thereby the value … and you’ll develop a solid foundation for a viable business plan for the property.

This is “duh obvious” to seasoned real estate investors.  But for newbies, it’s a VERY important distinction.

Real estate isn’t a good deal simply because it’s real estate.  And real estate isn’t dangerous simply because values have risen in the aggregate.

Real estate can’t be measured in the aggregate.  Each property is unique.

That’s what makes real estate fun and challenging.

But to our way of thinking, what’s dangerous is buying a commoditized investment you don’t understand, can’t control, with no plan … hoping it will do something awesome all by itself.

It might.  But it might not.

In ANY investment, there are ALWAYS stories about people who get stupid rich by dumb luck.

But for every lucky winner, there are a hundred gamblers who get crushed trying to get lucky … with no plan.

Be smart.  Do your homework.  Make executable plans. And when you see a deal that makes sense … just do it.  And don’t let bubble talk scare you.

There might be bubbles forming all around you, but you don’t have to buy one.

Until next time … good investing!


More From The Real Estate Guys™…

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

Comparing can make you … or break you

We just saw a SUPER sad headline pop up in our news feed …

Self-harm, suicide attempts climb among U.S. girls, study says

What does this have to do with real estate investing?

More than you might think.

We’re not psychiatrists, psychologists … and we’re certainly not girls …

But according to the article, even mental health experts are “unclear why”, so maybe our guess is as good as anyone else’s.

So here it is …

Could it be that in a hyper-connected world of 24/7 social sharing, including an inordinate amount of shameless self-promotion … some girls just don’t feel adequate?

And if it can happen to young girls, can it happen to investors too?

We think so.

In fact, we’d say it’s essential to develop and maintain a healthy self-image … especially when it may seem like everyone else is doing so much better than you.

After all, if you FEEL like a loser, you might start to act like one.  If that happens, the negative feelings become self-fulfilling.

That’s because what you think and believe directly affects how you behave.  And how you behave directly affects the results you produce.

So if you want positive results, it starts with cultivating positive thoughts and beliefs … starting with yourself.

Of course, that’s easy to say.

But if a deal goes bad, or an investor says no, or the daily news makes it seem like the end of world is nigh … how do you stay positive and moving forward?

Tom Hopkins teaches that failure is an event and not a state of being.  It’s something that happens to you, but not who you are.

Tom says, even better, failure is an opportunity to learn, to grow, and to develop your sense of humor.

In fact, failure is the vital feedback needed to make adjustments.

So failure is a gift.  Obviously not one you actively seek, but one you readily welcome as an important part of the process of growing.

That’s why we collect Halloween Horror Stories all year round.  It’s why we talk openly about the tough times we’ve been through.

We can’t afford to forget we’re fallible.  It keeps us humble, curious, and alert.

Interestingly, as we’ve sought out bright, successful people to glean great ideas from (which we ALWAYS try to record and share with you!) …

… we’ve found almost without exception they are humble, curious, and have a history of failures too.

So we feel right at home … even though most of our friends are FAR more successful than we are.

So we don’t compare our riches, fame, or fan base.  If we did, we’d be depressed too.

Instead, we compare our experiences and interests, and look for ways to share and receive lessons from those also interested in improving … no matter where they already are.

So as you head into this holiday season and turn towards a brand new year, think about how you really see yourself and how you see others.

If you’re on top of the world, set a goal to climb a higher mountain in 2018 … and make it a point to share wisdom and encouragement with people who are working their way up.

Sometimes a kind word from a successful person can be just the lifeline needed for someone who’s feeling a little inadequate at the moment.

And if you’re the one in a temporary pit of self-doubt, remember … this too shall pass … as long as you keep focusing forward.

Also, be careful about feeding your insecurity by comparing yourself to others, or listening to people who pump themselves up at your expense.

It’s always a mistake to compare your low point to someone else’s high point.  No one gets a struggle free life … no matter what image they project.

Your mission is to live YOUR life, build YOUR portfolio, and be the best version of YOU … better today than yesterday while working to be better tomorrow than today.

The paradox of growth is it requires constant dissatisfaction with the status quo. 

But in the right environment, growth becomes the culture … the norm.  And status quo becomes unsatisfactory.

It’s where you learn to be comfortable being uncomfortable because your peer group isn’t about fortune, fame, or beauty … they’re about a commitment to growth, contribution and encouragement.

So as our pal Ken McElroy says, “If you want to change your life, change your crowd.”

If the crowd you run with … or the crowd you watch … isn’t inspiring and empowering you to grow towards your goals, it’s probably time for a social overhaul.

And this is a great time of year for introspection, housecleaning, goal setting, visioneering, and fresh resolve.

The world is full of problems, which is GREAT.  Because the flip side of every problem … including yours … is an opportunity.

It’s true in business, investing, and in personal development.  And they really do all go together.

Happy holidays and best wishes for a happy and prosperous New Year!

Until next time … good investing!


More From The Real Estate Guys™…

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

Bitcoin vs Real Estate

Unless you just arrived on earth, you’ve probably heard about Bitcoin mania.

In case you haven’t, here’s a 7-year chart which clearly illustrates what all the excitement is about …

Source: CoinDesk.com

In case that pattern looks familiar … here’s what the NASDAQ looked in the late 90’s during the dotcom mania (the big spike in the middle) …

Source: BigCharts.com

And to be fair, here’s housing … note the run up from ’99 to ’07 ….

Source: Calculated Risk Blog

The only difference between Bitcoin and the Nasdaq or housing charts is we know the rest of the story for tech stocks and housing.

Is Bitcoin going to crash like tech stocks and housing did?

Not necessarily … though we wouldn’t be surprised.

But we do think there are some lessons and opportunities in taking a closer look at what’s going on with Bitcoin.

Price Action

The price of anything is almost always the direct result of supply and demand with capacity-to-pay (you can want something, but if you can’t pay, you can’t bid).

When demand exceeds supply, prices are likely to get bid UP.  And if you add capacity-to-pay to a demand that’s over-whelming supply, prices can go hyperbolic.

Bubbles

Bubbles form when enthusiasm for a particular “asset” causes bidders to cross over from buying “fundamentals” to buying “momentum.”

When we say “fundamentals” we mean income and not supply vs demand.

With stocks, “fundamentals” are earnings per share.  The ratio between price and earnings is cleverly called the price-to-earnings ratio (P/E).

When a stock gets “hot”, investors are willing to pay a lot more for the same earnings.  Here are examples where the relationship between price and earnings are all over the place …

Apple recently announced their earnings at $2.07 per share.  Apple’s stock price is about $175 per share.

Exxon reported earnings of 93 cents per share at a price of about $84.

Amazon reported earnings of 52 cents a share at $1045 per share.

Google had earnings of $9.57 per share at $1022 per share.

If you’re buying fundamentals, it seems Apple and Exxon are better deals than Amazon or Google. You pay less for the income.

But the price action says the market is more excited about the future of Amazon and Google.  Clearly, bidders are buying something more than income.

Of course, we’re not stock investors or analysts, so we’re not recommending anything.

The point is when investors see future growth, they’ll often bid the price UP in an attempt to “buy low” … presumably hoping to “sell high” later.

But sometimes investors get TOO excited and they buy something simply because “it’s going up” … and they want to get in on the action.

Forget fundamentals.  The only things that matters is everyone else is piling in and pushing the price up.

That’s what happened with tech stocks in the late 90s.

Investors bought the idea of a “new” economy … one where “old-fashioned” concepts like revenue and profit fell by the wayside.

Back then companies were going public … with little or no profit … and eager investors would bid the prices up to double and triple digit increases in just a matter of hours.

It made no sense.  But it happened.  Many people became multi-millionaires by getting in early.  Some stayed multi-millionaires by getting out early too.

Bubbles occur when more people are coming in than getting out.  Bubbles deflate when that reverses.

When there are no fundamentals, it’s all about getting the timing right.

Real Estate

The real estate bubble was similar … but different.

In the dotcom mania, most people were investing cash, though some used debt (margin).

With real estate in the early 2000’s, the price boom was fueled almost exclusively by debt … specifically, mortgage-backed-securities (MBS).

Debt allows people to pull future earnings into the present to bid up price today.  Cheap mortgages let people lever their paychecks into big loans.

In the beginning, people who had legitimate income and reasonable down payments were the buyers.  Lenders underwrote for income (fundamentals).

But after the dotcom bust, the Fed pumped lots of money into the financial system and Wall Street needed someplace to put it.

Stocks had a big black eye, so the money ended up in bonds, which drove down interest rates (when bonds go UP, yields … rates … go DOWN).

As bond yields fell, bond investors went looking for yield.  So Wall Street served up mortgages as a “safe” place to invest for better yield.

As more money poured into real estate, real estate prices rose further.  Real estate got “hot.”

Wall Street investors fed mortgages backed by real estate “going up” … without regard to the income of the borrower.

Soon, fueled by cheap money from Wall Street, Main Street was buying real estate without regard to their own income or the rental income.  All that mattered was prices were going up.

It was all good … until it wasn’t.

When the fundamentals (income and rents) couldn’t support the debt load and loans inevitably began to default (starting with sub-prime), no one wanted to buy mortgage-backed securities anymore.

So all the money going into MBS and fueling real estate stopped.

When it did, buyers lost the capacity-to-pay, and the supply and demand imbalance flipped in favor of supply.  Prices crashed.

Bitcoin

We’re the first to admit we’ve missed out on the Bitcoin “boom” so far.

When we first heard of Bitcoin, it didn’t make sense to us because it was being presented as a currency … a medium of exchange.  A way to buy and sell things.

Of course, today almost no one is using Bitcoin as a currency … any more than people still use gold as a currency. And Bitcoin, like gold, has no earnings.

Just as we don’t consider gold an investment, but rather a place to store wealth outside the dollar, we don’t think of Bitcoin as an investment either.

What we didn’t see was the potential for a huge supply and demand imbalance to cause Bitcoin prices to go hyperbolic.

It’s well known the supply of Bitcoin is allegedly limited to only 21 million Bitcoins.  We have no idea how anyone could verify this … but we’re admittedly ignorant.

However, there seems to be no limit to the number of other crypto-currencies which can be created.  Time will tell whether the supply of cryptos will catch up to or exceed demand.

But looking at the Bitcoin chart above, it seems apparent something happened in the last few months to create a HUGE demand.  To our knowledge, nothing happened to supply.

Based on the news and all the geo-political unrest, one potential demand driver could be wealthy people trying to get big money out of totalitarian regimes.

ChinaVenezuela and Saudi Arabia come to mind.

Such a surge of demand with capacity-to-pay could cause a big spike in prices.

Then, when everyone else sees Bitcoin going up … for WHATEVER reason … they all get in to ride (chase) the wave.

Because there’s no way (that we know of) besides the price action to really know what the Bitcoin supply and demand numbers are, it seems dangerous to go all in with real money.

Remember, just because it’s going up doesn’t make it safe.

If the momentum turns, now you’re in a race with everyone else to get out.  And that almost always ends badly.

However, if you have some throw away money and you want to take chance on a moonshot … we’ve certainly blown money on less interesting things.

We first heard about Bitcoin in 2010 and could have easily put $100 in just for the fun of it.  It would be worth over $200 million at today’s price.  Instead, we bought sushi.  Oops.

Real Estate vs Bitcoin

You’ve probably already figured out … there’s no comparison.

Bitcoin and real estate are two very different financial vehicles and they play different roles in your portfolio.

Bitcoin is about betting on price action … getting in while demand is growing in the face of limited supply.  Then being fast enough to get out before it turns.

Real estate is about buying streams of income by using debt to acquire a tangible asset with thousands of years of history of being in demand.  Humans will always need places to live, work, farm, and play.

Of course, if we use some “throw-away” money to buy Bitcoin and it goes up 10,000%, we wouldn’t complain.  We’d probably just cash out and buy some gold and real estate.

One thing’s for sure … the future of money and wealth are changing … and there will be unprecedented risks and opportunities as everything unfolds.

Until next time … good investing!


 More From The Real Estate Guys™…

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

Expecting the Unexpected – Investing in Uncertain Times

Real estate investing is full of ups … and downs. If you haven’t experienced the downsides, we guarantee you will eventually.

As a real estate investor, you have to be on top of your game. You didn’t get into this business to pull the sheets over your eyes … you’re here to build wealth, and that requires planning and preparation.

You can’t bet on disasters NOT happening … they most likely will. Careless investing is a sure recipe for a crash. Careful investing, on the other hand, will help you survive crashes without losing the wealth you’ve accumulated.

In this episode of The Real Estate Guys™ show, we discuss how YOU can prepare for storms that come out of nowhere. You’ll hear from:

  • Your careful host, Robert Helms
  • His criminally cautious co-host, Russell Gray

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The nature of real estate

The real estate market is naturally volatile. Economies change, local markets evolve, natural disasters arise … sometimes overnight.

The downsides are ALWAYS looming.

But real estate investors are always looking for the upsides … sometimes so intently that they forget to look at the downsides too.

We caution you to do your due diligence AND have a back-up plan.

Some excellent words of wisdom are to always have a little cash on hand. The downsides are rarely in your control … but you can control your ability to react when they arise.

Four ways to be prepared for a downturn

As real estate investors, we weigh risk and reward every time we look at a deal. But some risks aren’t so obvious.

Being a successful investor means playing defense and offense at the same time.

While you can’t predict the future, you can take practical steps to make sure you’re ready to fend off threats and take advantage of smart deals.

Step No. 1: Get in touch with a demographic that can weather a storm.

Tapping into the right demographic is the key to recession-resistant investing.

It’s a smart idea to look at markets where someone who is a bit under the median income can afford to live.

In tough times, people who are well-off can downgrade to your market. And in good times, people on the lower end of the income scale can move up.

Either way, your area will be in demand.

Many factors can cause a downturn … rising interest rates, slow wage growth, tax increases, or geographic factors to name a few.

Downturns aren’t solely due to nation-wide economic slowdowns. Make sure you pick a demographic that can resist small ebbs and flows in your market.

Step No. 2: Invest in towns that have multiple “stories.”

Every town has something it’s known for.

Even better is a town that’s known for many things … the stories that draw people and growth.

A big industry would be one story. Two big industries? Even better. A major sports team might be another story.

Don’t bet on a single story. Make sure the jobs in your market are tied to multiple industries … that way, when one industry fails unexpectedly, you won’t see a mass exodus or decline.

And be sure an area is appealing for more than one reason.

Step No. 3: Monitor your inputs.

Look at what inputs make the numbers on your financial statement move. These are the inputs to keep track of.

Compile data, set up alerts, and don’t be remiss about digging deeper when an alarm goes off in your head.

All the information you need can be found in one way or another. The internet is a treasure trove of data. Your local Chamber of Commerce is another resource for keeping track of essential information.

Don’t be casual … especially if you’re an experienced investor. Treat every deal like it’s your first.

Monitoring your inputs can help you stay ahead of the curve and react to changes before others even know there’s a threat.

Can you see the advantage?

Step No. 4: Key into experts.

We live in the information age … it’s almost ridiculous how much information is available.

But some of the best information comes from people who have been in your situation and figured out solutions.

Listen to and read information from multiple sources … even if you disagree.

Learn what other people are saying BEFORE you interject your own opinion.

You can’t expect the unexpected if you only listen to people who share your point of view.

Navigating the three rings of risk

We’ve learned a lot over the years.

One piece of advice we think highly of is to always own a property or two with no loan. The return won’t be as high … but you can sleep at night.

In investing, it all comes down to the rings of risk.

Every investor should have three rings of risk in their portfolio.

The center ring is your livelihood. It should be isolated from all the other risks you’re taking.

The second ring is those bread-and-butter properties that bring cash flow and provide long-term equity growth from modest appreciation.

The third ring is where your risky investments happen. You should only expand into this area after you’ve established the first two rings of your investment portfolio.

In the outer ring, you can be more speculative. You may lose quite a bit in this ring … you’re taking on way more risk. But you could also win big.

Another thing to keep in mind is your Plan B.

In any short-term play, make sure you have a Plan B and even a Plan C to take you through the long term.

Sometimes the market changes in the middle of your play. In that scenario, financing structures and a property’s ability to cash flow can be really important.

If you are house rich and cash poor, it may be time to sit down with a financial advisor and considering refinancing so you can leverage the equity you have in your properties.

You may also want to consider selling and buying new properties so you can get some cash on your balance sheet.

When the market turns, you want to be in a position to snatch up a bunch of cheap real estate … and you won’t be able to do so unless you have cash on hand.

Another consideration to take is whether to diversify your liquidity. If the dollar falls, precious metals will retain their value … and the more wealth you have, the more important it is to put your equity in a stable medium.

Your best strategy is a strong network

Knowing how to sell is the essential survival skill in a tough market.

We’re hosting our yearly How to Win Funds and Influence People event this year … a workshop that teaches participants negotiation strategies that result in win-win deals.

We host events like these because networking is SO important. The best way to prepare for the unexpected is to get around smart people and take note of their strategies.

Getting around people who’ve been in your shoes is essential … and most successful real estate investors are more than happy to share what they’ve learned.

We don’t only host events for investors like you … we also attend them! We’ll be at the upcoming New Orleans Investment Conference learning about all things investing with some of our most knowledgeable investor friends.

Join us!

Your net worth is defined by your network. Make those crucial connections, and you have the key to staying strong through ups AND downs.


More From The Real Estate Guys™…

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

Property Management – The Key to Profitable Investing

Buying a property is one thing. Operating it is another.

Many investors buy property but fail to think about where their money will really be coming from … the tenants.

If you can’t take care of your property or your tenants, your income stream will be in big trouble. That’s where a property manager comes in.

In this episode, we invite a special guest to discuss the finer points of developing your property management philosophy.

He’ll offer tips on how to find a stellar property manager, what to expect from your property management company, how to manage a team, and MORE.

You’ll hear from:

  • Your philosophical host, Robert Helms
  • His phil-o-what? co-host, Russell Gray
  • Property management professional, Ken McElroy

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Why do real estate investors need a property manager?

We want to make it really clear … property managers are the unsung heroes of the real estate business.

As a real estate investor, your money is coming from your tenants.

Property managers interact directly with tenants. A good property manager will maximize the return on your investment by finding … and retaining … paying tenants.

If you’re a new investor, you may be fulfilling the role of property manager yourself. As your investments increase, however, you’ll soon find it necessary to outsource property management tasks to someone else.

Every real estate investor is running a business. If you want to grow your business, you need to make sure that every vital function is scalable as you move up the ladder and acquire new investments.

Overall, scalability means two things:

  1. Making sure that every aspect of the business you handle personally is either scalable (you can handle more of it as you get more properties) or can be delegated
  2. Making sure the people you rely on are also scalable

Make sure the system you set up has redundant life support systems. In other words, if one part of the system fails, you have a back-up plan to ensure everything is running smoothly and your cash flow won’t be interrupted.

And make sure your property manager has a back-up plan too and won’t be overwhelmed when you add to their workload.

Your property manager is essential to your process.

We’d caution you to consult with property managers BEFORE you even purchase a property … they have their fingers on the current state of the market and know what’s happening now.

And make sure you are not only thinking about how your property manager can help YOU, but also how you can help your property manager.

What does a property manager do, exactly?

Property managers are responsible for two essential tasks:

  1. Finding, vetting, and placing tenants
  2. Providing ongoing support for the tenants and property

Different property managers have different philosophies on how to fulfill these tasks.

You can approach working with your property manager in several different ways:

  1. Establish your own policies and require the manager implement them
  2. Pick the right person and let them do their job, using their own established policies
  3. Work with your property manager to establish a routine that’s somewhere in between.

Whichever route you choose, you want to keep your main goals in mind … to keep your property manager happy, to keep your tenants happy so they stick around, and to keep your property in good shape … and, just as important, to make sure your cash flow is stable.

Sometimes, the best option can be trusting your manager’s experience and letting them decide maintenance and marketing strategy.

Picking a property manager can be tricky, but the VERY LAST criteria you want to use when shopping for a good manager is price.

DON’T pick the cheapest property manager.

If your property manager is poorly paid, they’ll be unmotivated to do a good job, and you’ll end up losing more than you save.

Don’t begrudge your property manager the money they get for doing the easy jobs, like handling long-term tenants.

You want your property manager to be happy … it’s a win-win for both of you.

The bottom line is that real estate is a people business, not a property business.

Your managers and tenants aren’t widgets. Value them, and they’ll value you.

Want to help your property manager without giving them a raise? Consider referring them to other investors in the market for a manager.

Referring a good person or company is a win-win-win for you, your investor friend, AND your property manager.

Pro tips for property management

Ken McElroy started managing properties as a college kid who wanted a free place to stay.

Today, he runs a 250-person property management company that manages properties in Washington, Oregon, and California.

We asked him what he’s learned about property management over the years. Here are some key questions and answers:

What are the basics of finding a good property manager?

First, look for experience. Collecting rent is harder than you think.

Second, look for people who can hold down the rules without being too confrontational.

What should investors expect from good property management?

Two things:

  1. The return you budgeted for
  2. No issues

Ideally, Ken says, there should be no reason for you to call your property manager … in other words, your property manager should be responsible and responsive enough to handle issues as they arise and get you your return.

How do you manage a large team?

Ken’s company employs 250 people who work at the corporate office or on the ground at the properties.

“The key to everything is communication,” Ken told us.

One of his strategies is to have on-site managers hold daily meetings with all staff members, including workers responsible for maintenance, landscaping, and leasing.

Is it better to outsource maintenance and repair services or hire in-house teams?

This comes down to what the residents need.

Retention comes first, says Ken, and to retain tenants, managers want to handle any issues immediately.

A tenant will not want to stick around if you don’t handle a broken heater or jammed plumbing as quickly as possible.

Whether in-house vs. outsourced is better ultimately comes down to what strategy will allow your property manager to solve problems immediately.

What’s your client retention strategy?

Ken implements a policy of making sure one of his employees reaches out to every resident, every month.

He also hired a relationship manager to contact new tenants about the move-in process right away.

And he has his team reach out to tenants well before their lease is up … six months before, in fact … to check in and get tenants thinking about renewing their lease.

He shoots for a 50 to 60 percent retention rate.

What kind of tenant screening do you do?

Ken runs a criminal background check and a sex offender check. Someone with terrible credit and multiple evictions is obviously not the ideal tenant.

What advice do you have for new investors?

Going into property management as a new investor with no prior knowledge can be a recipe for disaster.

If you really, truly, have the time and can show up, you could successfully be both owner and property manager, says Ken.

But if you’re just doing it to save money or don’t have time to have your boots on the ground, disaster is a certainty, not a possibility.

The golden rule of property management

We love talking to Ken because he has a “No BS” policy. He has a ton of experience, and he’s not afraid to share it.

He’s also always looking to learn. For example, he’s been incorporating social media into his marketing strategies over the past few years and is always looking to learn how to use new technology.

If you want to read a whole book of tips and tricks, we highly recommend you check out his book, The ABCs of Property Management.

Looking for more property management advice? Check out Terry’s Tips for Happy Tenants, a report compiled by business owner Terry Kerr that you can find on our website.

Want to know our golden rule for flawless property management? Treat each tenant like they’re gold.


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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.

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