How to Find Financial Freedom Through Real Estate Investing
Some people go from rags to riches … all by getting involved in real estate.
That may not be the case for everyone, but real estate IS one of the most reliable vehicles for building lasting financial freedom.
We’re talking with an investor whose story is a gripping tale of winning … losing … and making a comeback. See what lessons YOU can learn from his experience.
In this episode of The Real Estate Guys™ show, hear from:
- Your free-wheeling host, Robert Helms
- His free-loving co-host, Russell Gray
- Investor and author of Financial Freedom with Real Estate Investing, Michael Blank
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Real estate’s many paths to financial freedom
We have so many listeners who are brand new to real estate.
They’re trying to figure out if it really makes sense to build wealth with real estate. Is it really a vehicle for growth?
Real estate isn’t as simple as some other investments … but there are a lot of reasons to like real estate. It’s arguably the best financial vehicle on earth.
At this particular time in the economic cycle, some people are a little nervous about real estate … but you don’t have to be.
Walking into real estate is like walking into a big mall … there are so many different ways to approach it.
Real estate is just a vehicle … and it’s a vehicle to produce a financial result in your life.
When you figure that out, the first thing you need to do is develop yourself as an investor.
Think about who you are, what you want, what you have to work within terms of experience, financial resources, relationships … all the elements that help build your personal investment philosophy.
Then … you look at what the market is giving you to work with, and YOU work to put it all together.
You’re going to have to fill in some gaps in your education … and maybe your credit score or your income. You’re also going to need to position yourself to understand markets and teams.
The easiest way to do this is to surround yourself with other people who have been there, done that.
There are so many ways to approach the problem of making money in real estate … and that’s what we are talking about today.
Meet Michael Blank
One of the paradigms we have to break is this idea of scarcity versus abundance. So many people believe that there is only so much to go around.
By sharing, we all open ourselves up to better deals and more education. It’s called an abundance mindset.
In that spirit, our guest today is a fellow podcaster. He’s an author. He’s a teacher. He’s Michael Blank.
Michael’s latest book is Financial Freedom with Real Estate Investing. But the story of how he got into real estate … like every investor’s … is unique.
Michael has a master’s degree in computer science. He started off programming and joined a software startup in the late 1990s.
When the software company went public, Michael found himself with some cash in the bank. But he learned quickly that it doesn’t matter what’s in your bank account … it’s about what passive income you have.
“I quit my job and learned how to trade stocks and options, how to flip houses. My big idea was actually restaurants, and I got involved with a pizza franchise,” Michael says.
That worked for Michael until the recession.
“I lost my IPO, millions in the restaurant debacle. I almost lost my house. It was a low point for me, and I learned a lot during that time,” Michael says.
Michael clawed his way out with real estate.
Like so many people, Michael thought of real estate as single-family house investing. He started by flipping homes.
But he didn’t have any money … so he learned how to raise money and syndicate. He started buying two houses a month and flipped three dozen houses in a few years.
He ended up investing in an apartment building … and he learned a crucial real estate lesson.
“While house flipping was profitable, it was a lot of work. I couldn’t just take time off if I wanted. Meanwhile, this apartment building was just sending me money in my mailbox,” Michael says.
Today, Michael is one of the leading authorities on multifamily syndication.
Don’t wait to get started
Multifamily is just one of the many real estate options at “the mall.” But it’s an awesome niche to play in.
Deals might be a little scarcer … and cap rates might be a little compressed … but financial freedom means having other people get up every day and work hard and send a chunk of their money to you.
That’s what apartments are great at.
The biggest hold-ups to investors jumping into multifamily … money and experience.
They think that the smart thing to do is landlord for 5 to 10 years in single-family and then take that experience and “graduate” to multifamily investing.
“That plan is unnecessary,” Michael says. “The ability to raise money and be taken seriously by brokers and investors can be achieved in a very short period of time.”
Michael teaches people how to do just that.
You can learn all the details … how to read contracts and understand titles and escrow and market analysis … but you have to start with your mindset and your heart.
If you believe that you CAN learn what you need to know to be successful … then you are already on your way.
Learn more about how YOU can find financial freedom through real estate investing … and the different investment options available to you … by listening in to our full episode!
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Phoenix
Phoenix
In this desert paradise … demand for rentals is heating up!
In the heart of the Sonoran Desert sits the “Valley of the Sun” … and this valley is golden for so many reasons.
Phoenix consistently ranks as one of the most affordable areas of the United States …
So naturally rents have outpaced national growth since 2016.
In 2018, rent growth in the greater Phoenix area was more than double the national average … but overall rent prices remained significantly lower than the rest of the country.
The 2017 tax law changes had far-reaching impacts for Phoenix and the other Sun Belt states.
People living in high-tax states on the East and West Coasts used to mitigate tax costs by deducting state and local taxes from their federal income tax.
With that option removed, those same people are moving to low-tax jurisdictions like Phoenix instead.
The resulting steady population growth has made Phoenix one of the most popular markets for multifamily investments.
Demand for rentals is strong and supply is low … so there’s nowhere to go but up!
And since the ‘08 market crash, Phoenix demand and pricing has been doing just that … steadily going up and up.
Industrial space in the metro area fills up fast, rents are rising in the office sector, vacancy numbers are healthy, and the retail market is BOOMING.
In 2018, major retailers Costco, Lowe’s, Sprouts, TJ Maxx, and Nordstrom Rack announced plans to build new stores in the metro area.
The following year, Phoenix saw employment gains at nearly five times the national rate. Major industries in the area include finance, biomedical, and software development.
The western part of the valley is a popular location for warehouse and distribution space. Major distribution centers for Dick’s Sporting Goods, SubZero, and REI, Inc. operate from the region.
The surge in population since 2017 has jumpstarted the revitalization of downtown Phoenix, with revamped buildings housing expansions of University of Arizona and Arizona State University.
When it comes to recreation and entertainment, Phoenix has something for everyone … professional sports teams, national parks, and all-around wonderful weather.
Explore the resources below to discover what opportunities await in this one-of-a-kind desert paradise …
Radio Shows
- Coming Soon!
Reports & Articles
Market Field Trips & Property Tours
- Coming Soon!
Boots-on-the-Ground Teams
- P. J. Hussey & Associates, Inc. – Turnkey SFR, Multi-Family, Property Management, Construction
Clues in The News
- Where Buyers Are Cashing In! The Top 10 U.S. Markets for Flipping – October 14, 2019
- How the City of Phoenix is striving to become one of the most sustainable desert cities in the world – August 5, 2019
- Is Phoenix facing a potential affordable housing crisis? – July 31, 2019
- Solera Health expands its team and space in downtown Phoenix – July 25, 2019
- 2019’s Best & Worst Places to Rent in America – July 23, 2019
- Phoenix office market heats up as city leads U.S. in job growth – July 24, 2019
- Phoenix area named No. 77 most educated nationwide – July 23, 2019
- Verdigris Holdings bringing 210 jobs paying $150K to Valley – July 23, 2019
- Arizona lands $90 million to expand Interstate 17 north of Phoenix – July 22, 2019
- Visitors spent a record amount in Arizona in 2018, tourism office says – July 22, 2019
- Phoenix metro area has suddenly become a hotbed for prep basketball academies – July 19, 2019
- Phoenix overtakes NYC in Top 10 best cities for start-ups – July 18, 2019
- Multifamily Rent Growth Gets Serious – July 18, 2019
- These are the best employers in Arizona, according to Forbes – July 17, 2019
- Phoenix posts highest apartment rent increases nationwide in 2019, report says – July 15, 2019
- Arizona university leaders rank high on national compensation list – July 15, 2019
- Amazon’s $700M plan to retrain employees could benefit Arizona workers – July 15, 2019
- Multifamily Absorption Reaches 5-Year High – July 8, 2019
- A Nike manufacturing plant could bring 500 jobs to metro Phoenix’s west side – July 1, 2019
- Discount carrier Frontier Airlines adding Phoenix-Las Vegas service – June 25, 2019
- Sunbelt States Primed for Multifamily Investment – June 20, 2019
- Kuebix Announces Office in Phoenix, Arizona – May 9, 2019
- Aldi update: The latest on the discount grocery chain’s plans across metro Phoenix – April 12, 2019
- Downtown Phoenix’s Arizona Center: Its history and future development – April 8, 2019
- Home prices make smallest gains in nearly 4 years, but rents are hot – January 16, 2019
- How can we maintain a positive commercial real estate outlook? – October 10, 2018
- Rents continue to rise in Phoenix, according to new report – October 3, 2018
- Phoenix Real Estate Expert Says Home Buyers Should Act Quickly – January 5, 2018
- Phoenix job growth projected to double U.S. average – March 28. 2017
- Arizona leads construction growth forecasted in 2017 – October 28, 2016
- Scottsdale investor, Phoenix builder to finish 900-acre development – April 17, 2015
Cypress, TX Market Report
Cypress, TX Market Report
Everything’s bigger in Texas … including investment opportunities. High occupancy rates, rising rents, and a growing economy … welcome to Cypress!
Head north of Houston and stumble into a suburban paradise.
Cypress, Texas, is the area’s largest suburban community. Amid thick-forested areas and ranch land are single and multifamily properties filled to the brim with high-income tenants.
Reliable renters and rising rental rates make Cypress an excellent opportunity.
In this special report, the team at Fourplex Investment Group shares the most relevant data on the Cypress market. Discover:
- Why the market is shifting to high-density multifamily properties
- Data on occupancy rates and rent increase predictions
- Information on economic and infrastructure growth
- And more!
See whether Cypress is the right market for your next investment! Get started by filling out the form below to access the Cypress Market Report.
Magna, UT Market Report
Magna, UT Market Report
Find the next big boom town in the Beehive state. Make your mark in Magna, Utah!
Utah is a market defined by consistent and rapid growth … the population is exploding and jobs are popping up at a record-breaking pace.
New tenants are flooding the towns in the valleys south of the Great Salt Lake … and Magna, Utah, is particularly magnetic.
Magna is tucked right in the middle of a growing industrial space. It’s down the road from the expanding Salt Lake City International Airport, new UPS and Amazon centers, and all the amenities of Salt Lake City.
Plus, take advantage of new tax breaks for real estate investors by investing in this SLC suburb … Magna is one of Utah’s Opportunity Zones.
In this special report, the team at Fourplex Investment Group shares the most relevant data on the Magna market. Find out:
- Growth trends and predictions for the Salt Lake City area
- Future building projects and investment opportunities
- Stats on economic and business expansion
- And more!
Discover whether Magna is the market for you! Get started by filling out the form below to access the Magna Market Report.
Trump’s tariffs and your real estate investing …
Let’s take off our blue, red, and orange team colors … hold hands … and take a real-world look at trade tariffs in action.
Most nose-to-the-grindstone real estate investors may not pay attention to, or understand, trade tariffs … or how they could affect real estate investors.
But, like many things we obsess about after 2008, tariffs might mean more to your real estate investing than you realize.
Consider this headline from National Real Estate Investor Online …
Construction Costs Spike for Multifamily Projects
It’s short and you should read it, but here are some quick highlights …
- The cost of construction is rising for apartment developers and contractors … including materials, labor, and leasing.
- Lumber prices are “out of control” having “increased substantially” … with March prices up 25 percent over January and February. Yikes.
- “The U.S. has added trade tariffs to Canadian lumber of over 20 percent over the last year” and “government policy is also pushing up the price of steel”.
- “Prices of construction materials are outpacing consumer inflation by a factor of two”.
- “Contractors have been forced to offer higher wages to attract more workers.”
- “… apartment projects are becoming more expensive to build … ‘You can only pass so much of that on to consumer,’ says … the National Home Builders Association.”
- “The number of job openings in the construction industry rose to record-breaking or near-record-breaking levels in each of the last five months of 2017 …”
- “The number of people employed in the construction industry rose … more than twice the growth compared to … overall non-farm payroll.”
Okay, so there’s the foundation. Now let’s unpack it …
First, a boom in apartment building has caused a glut in some markets leading to rent concessions.
If increasing leasing expenses, construction loan interest; materials, and labor costs are all increasing … builders will need to either raise rents or stop building.
Both can be good for nearby owners of existing inventory over the long term.
But in the short term, be attentive to property maintenance and customer service … or you might lose some tenants to those short-term concessions.
But beyond the impact on builders, what about the impact of tariffs on markets, labor, and industries?
If tariffs successfully reset the pricing of commodities like lumber, steel, copper and concrete, there are many potential ramifications.
The motivation behind tariffs is to wean domestic buyers off cheaper foreign goods … and make it more profitable to produce those goods domestically.
The goal is to create domestic jobs in lumber, steel, and mining.
In other words, if Chinese steel or Canadian lumber become more expensive, it could pull up domestic prices to where it’s profitable for businesses to expand domestic production … and hire more workers.
This could mean job growth and subsequent housing demand in those markets which produce these items.
So we’re watching this whole tariff tussle carefully for clues about which geographic markets might end up catching a boom … just like the energy industry markets did after 2008.
But rising commodity prices can creep into consumer goods too … making MANY things more expensive.
And if prices rise faster than wages, people will actually be poorer in terms of purchasing power … which puts downward pressure on prices … including rents.
Squeezed far enough by rising costs of living … people will move to more affordable housing … and even to more affordable areas.
So again, this is something to pay attention to. In spite of the current economic “good times” … we’re still fans of the more affordable markets and properties.
Lastly, we’ve learned to be cautious about construction driven employment and wage booms. We think it’s dangerous to invest long-term based on a short-term boom.
Think about it … construction is about building something. But after it’s built, the work is done. Then what do those workers do?
Unless there’s perpetual building, workers need to change industries or move to where there’s more building going on.
So it’s good to remember that housing is a reflection of economic growth, not a driver of it. Housing is built for and occupied by people who work at something else.
In other words, you don’t want to be buying apartments to house people who are building apartments … or anything else that will be “done” at some point.
Whereas a business is a “going concern” and generates on-going revenue, sustainable jobs, and a long-term pool of tenants.
So even if you’re a residential investor, pay attention to commercial, industrial, warehouse, and office in terms of construction, absorption, and occupancy.
These are leading indicators of where residential property demand might increase. Because when businesses are expanding in an area, it’s a pretty safe bet residential will too.
Until next time … good investing!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android or YouTube!
- Stay connected with The Real Estate Guys™ on Facebook and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.
How to Step Up to Multi-Family
How to Step Up to Multi-Family
Is it time to take the leap from single family to multi-family properties? Look no further than the fourplex.
In this special report from the fine folks at the Fourplex Investment Group (FIG), delve into the three big reasons fourplexes are a great long-term investment.
Discover a concise explanation of cap rates … and take a look at FIG’s recommendation for getting a good cap rate, avoiding competition, and adding value to your property. Finally, check out the four crucial factors to selecting the right market … a market where tenants want to work and live.
Whether you’re a new investor or are looking to expand your portfolio, this report will give you the information you need to take steps toward investing in fourplexes.
Get your complimentary report! Simply fill out the confidential form below, and you’ll receive a fresh copy of How to Step Up to Multi-Family today!
Let the Government Fund Your Next Multi-Family Deal
Let the Government Fund Your Next Multi-Family Deal
Imagine creating MORE CASH FLOW, re-positioning your equity for MORE TOP LINE REAL ESTATE … and doing it all with LESS RISK!
The government is going to insure this dream for you!
You own, or are thinking of owning, a portfolio of multifamily properties … What keeps you awake at night?
Let us guess … Losing control of cash flow!
Did we read your mind? Of course. You aren’t alone.
This is exactly why Paul Winterowd and his team have invested hours to share this special report on this crazy-good loan. They understand real estate investors and the things that keep you awake at night.
Here’s just a few reasons to learn about this FHA loan:
- Favorable Interest Rates
- Higher Leverage
- No Balloon Payment
- No Recourse
- Longer Amortization
Since you are familiar with multifamily properties, you know exactly what all of this spells…
MORE CASH. MORE PROFITS. LESS RISK.
In this special report, Paul reveals exactly how you can take advantage of FHA loans for your multifamily properties. Before you finance any other property, you really should consider what Paul has to share.
Paul’s knowledge just may save you millions and make you millions!
Use this form to request your free copy of Let the Government Fund Your Next Multi-Family Deal …
Ask The Guys – Markets, Mentors and Kissing Frogs
In another intriguing rendition of Ask The Guys, we dig deep into the email grab bag and pull out another great batch of listener questions.
Behind the mics but ahead of the times for this Ask The Guys edition of The Real Estate Guys™ radio show:
- Your Answer Man host, Robert Helms
- His questionable co-host, Russell Gray
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How to Invest in Out of Area Real Estate
This questions comes up ALL the time….especially from people living in high cost, low rent areas like California.
We always say, “Live where you want to live, but invest where the numbers make sense.”
Easy to say. But how?
The answer isn’t complicated, but it does take some work.
First, get in touch with your inner investor. That is, decide what you want your real estate investing to do for you…and what you’re willing to do to get it.
Sometimes travel’s involved. You’ll definitely need a team.
Next, pick a market that is likely to provide the kind of real estate opportunities you’re looking for.
Some areas are tight supply relative to high demand. That means they’re expensive and likely to increase. But they probably won’t cash flow.
Other markets provide solid cash flows and abundance of working class jobs. But don’t hold your breath for huge equity gains…unless you force it through adding value.
Once you have a market, it’s CRITICAL to build a TEAM. And the most important, yet most unappreciated and overlooked team member is the lowly property manager. This is the MOST important person on your team.
After all, your property manager is the primary person responsible for managing income and expenses. But your property manager can also help you identify prospective properties to purchase. It’s something we put a big emphasis on in all our market field trips.
Sadly, most newbie investors get excited about the property and pro-forma financials…and then figure out the market and management later. BIG mistake…and one you should avoid.
What’s the Best Investment for a Sixty-Something Passive Investor?
That’s like asking what’s the best medicine. It really depends on what’s ailing you!
With that said, we think the first and best initial investment for ANY investor is in education.
As Ben Franklin said, “An investment in knowledge pays the best interest.”
But as much as love books, podcasts, webinars, seminars, summits and field trips…sometimes a great way to learn is simply to talk with some experienced investors. Especially those who don’t have anything to sell you.
Generally speaking, “best” is really a matter of suitability. The goal is to pick an investment vehicle and strategy which is most likely to produce a desired outcome with minimal risk.
With that said, ALL investing decisions have risk….including a decision not to invest…or a default decision not to invest by not deciding anything at all. In other words, inaction is an action by default.
So when you know you need to do something, the trick is to think about what you’re really aiming at.
In financial planning, it usually comes down to the following categories:
- Preservation of Purchasing Power (some call it Preservation of Principal, but we think that’s a misnomer. Because if you’re sitting in a currency which fails, or a bond or note which pays in a currency that fails, you may get paid back, but you won’t be able to buy anything)
- Income (interest, dividends or profits from ongoing operations…like rent)
- Capital Appreciation (equity from buy low, sell high)
- Growth and Income (a balance between growth and income…something income producing real estate does quite well).
Then you have to look at time frames and liquidity. How long can you leave the money in the investment? What if you have an emergency and need the money out sooner than expected?
If not being able to get to the money creates a unbearable hardship, you can only choose investments which can be quickly sold or otherwise converted to cash.
Typically, the more liquid an investment is, the lower the return (think savings account)…or the more volatile the pricing (think stocks).
Real estate is relatively stable, but not very liquid.
This a bigger topic than a blog or a broadcast, but an important one.
Basically, it comes down to knowing your needs and understanding your options. Both require asking good questions, verifying the answers, and thoughtfully considering how to best select the investment choices whose features most align with the needs you’re trying to meet.
Where to Get Money for Building and Investing?
Another common and popular question. The great news is there are LOTS of options!
Typically when people ask this question, it’s because they aren’t lendable or banks aren’t lending.
So aside from traditional loans where you need to qualify based on your credit, income, net worth and (sometimes) your investing experience, private money is a place many investors are turning to these days.
In our Secrets of Successful Syndication Seminar we talk about how private investors can serves as lenders or as equity partners, or as both.
And with interest rates so low and the stock market so volatile, many people are looking at private placements back by real estate as a great place to invest their savings.
Many of these private investors are discovering they can use funds from their self-directed IRA, in additional to their other savings and investments, and enjoy the benefits of real estate without the hands on hassle.
So if you have investing expertise and can show a private investor how you can put their money to work in your deal and pay a good return, you’ll probably get some takers.
You still need to “qualify”, but it’s personal based on the relationship, the deal, and your’s and your team’s ability to execute.
Where Can I Find an Experienced Investor to Mentor Me?
This is a GREAT question for several reasons. First, it implies the need to learn from someone more experienced. Real estate investing attracts a lot of mavericks and they naively dive in because it looks easy.
Then, when they get in trouble, they don’t have anyone to turn to for help. Or they’re embarrassed and just try to figure it out on their own.
If you push your limits (and you should), you’re bound to get stuck at the upper limits of your ability. This is where your mentor can help you break through.
They key is to have the right mentor with the right access and relationship.
This is a TALL order because most successful people are very busy. So when you find a prospective mentor, you’ll need to provide something of value.
So the first thing is to decide what kind of investor YOU want to be. Then go look for someone who’s been successful doing what you want to do.
Next, figure out a way to get close. You want to learn as much as you can, so you can look for ways to add value.
Obviously, sometimes people who love to teach create mentoring programs. And if they’re credible and qualified, these can be great investments.
Other times, you might find someone to mentor you in exchange for your helping them. For example, you could volunteer time to do research, vet deals, inspect properties or assist an active investor in some way.
A GREAT way, if you have the ability, is to help an expert investor write a books, create a seminar or develop a training program. Now you’re on the inside, and you get a front row seat for all the best ideas.
You’re Just One Good Idea or Relationship Away from a New Success
While it’s true you need to kiss a lot of frogs to find the Prince Charming real estate market, team member, deal, investor or mentor…when you find that winner, it suddenly all becomes worth it.
And because most people don’t have the fortitude to keep pressing forward, you’ll find the longer you stay in the game, the less crowded it is.
So keep on kissing those frogs and it won’t be long before you leap frog to the top!
More From The Real Estate Guys™…
- Sign up for The Real Estate Guys™ Free Newsletter and visit our Special Reports library.
- Don’t miss an episode of The Real Estate Guys™ radio show. Subscribe on iTunes or Android!
- Stay connected with The Real Estate Guys™ on Facebook and our Feedback page.
The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.
Finding, Financing and Syndicating Multi-Family Properties
Apartment buildings are the logical step up for most single-family home investors. And apartments are where many of the “big boys” play.
In a low interest rate world, the cash flows on multi-family properties has attracted gobs of capital…creating a many funding options, but also a lot of competition for viable deals.
In this episode, we visit with a multi-family lender, investor and syndicator to discover what he sees…and what he’s doing…in one of the hottest apartment markets in the U.S.
Taking part in this apparition of The Real Estate Guys™ radio show:
- Your A-class host, Robert Helms
- His C-class co-host, Russell Gray
- Our multi-faceted special guest, Michael Becker
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Apparently Apartment are Appealing
Except for an under cheek sneak rate hike of 25 basis points back in December, the Fed hasn’t been able to pry interest rates off the floor in nearly 8 years.
Since the depths of the Great Recession, investors have been faced with taking their hard earned funds into the Wall Street casinos…OR…putting them into hardly earning savings accounts and bonds.
Once the dust settled after the mortgage bomb went off, apartments emerged as one of the most appealing asset classes…for lenders, investors and institutions. So much so that gazillions of dollars poured into the space…pushing prices UP and cap rates (yield on capital) DOWN.
In spite of that, apartments remain a VERY high demand product type….especially in the right markets.
Apartment Lending Today is as Good as It Gets
Assuming your definition of “good” isn’t indiscriminately lending to unqualified borrowers against poorly performing over-priced properties in pathetic markets (say that fast 10 times…that, that, that, that, that, that…..)
Michael Becker says lending today is as good as you can get. And that’s GREAT news for serious investors.
Becker reminds us that 8 years ago, in the wake of the meltdown, banks were effectively in the fetal position licking their wounds. They weren’t interested in lending. They just wanted to survive.
Today, regional and community banks are actively engaged in commercial real estate lending. Fannie and Freddie have HUGE bucket of over $30 billion to place this year. And even paper asset investors are beginning to have an appetite for CMBS (Commercial Mortgage Backed Securities) again.
That’s all AWESOME…because funding is the fuel that powers your portfolio. It’s hard to go very fast without it.
How To Qualify for an Apartment Loan
The first thing to understand when it comes to apartment loans is that it’s all about the DEAL. Well, at least mostly.
The lender knows the payments are coming from the operations and not from your personal paycheck. Whew!
So the lender will take a good look at the property and especially the income and expenses. If there’s plenty there, getting the loan will be a LOT easier.
But YOU still matter.
The lender wants to know you know how to operate an apartment building. So EXPERIENCE really matters.
Now, just like your first job, you may wonder how do your get your first deal if you have to be experienced. After all, if this is your first deal, then by definition you have no experience.
Sounds like a Catch-22. And it is. Sort of.
The secret is to partner with someone experienced so you get a deal on your resume. Then, “Voila!”…you’re experienced.
It’s not rocket surgery. But you do have to know someone who’ll help you lose your apartment investing virginity.
What Are the Risks of Investing in Apartments?
Big question. The short answer is not knowing what you’re doing. That’s why the lenders want to see experience.
But even when you KNOW what you’re doing as an “operator”, you also need to make sure you’re structured to weather stormy weather. And we’re not talking monsoons or hailstorms. More like financial earthquakes.
So our chat with Becker reminded us of some brilliance we penned in Equity Happens…
“Cash Flow Controls and Reserves Preserve”
It’s really common sense. But when an asset class gets hot, price speculation is SO much more exciting than boring cash flow. And who likes to sit on piles of idle cash for a rainy day?
But sufficient “debt coverage ratio”…a fancy term for Net Operating Income (Gross Rents less Operating Expenses before Debt Service) being MORE than the mortgage payment is not just required…but a good idea. Lenders usually want about 20% more…or more. And so should you.
But besides having enough cash flow to comfortably pay the mortgage, it’s important to have enough cash reserves to handle unexpected capital expenses…like a new roof, sewer or parking lot.
After all, if you can’t maintain the property, you’ll lose tenants…and income. And if you REALLY neglect the property, the regulators might come shut you down completely. That would be bad.
Always Have a Plan A, B and C
Real estate investors tend to be optimists. We buy properties because we expect things to go well. Otherwise, why would we bother?
And most of the time, most things go pretty well. At least well enough to manage. And many of the problems are things we can control…or substantially influence.
But sometimes stuff just happens that’s hard to deal with and outside our control. So in addition to adequate cash flow and reserves, it’s a smart idea to have more than one plan for the property.
As a rule of thumb, you should never get into a deal…or structure a deal…so you don’t have at LEAST two ways out. Call them Plan A and Plan B. And tossing in a Plan C is usually a good idea too.
For example…since we’re on the topic of financing…based on today’s climate (stupid low interest rates) it’s wise to lock in as LONG as possible. Even if you’re plan is to pump up the rents and refinance out all your new equity or sell to the highest bidder in a couple of years.
What if interest rates rise and there are no good loans available to both you or your potential buyer? Are you prepared (Plan B) to stay in the deal and ride out the storm? You should be.
And if you’re syndicating (raising money from private investors) and the property’s doing great (good job!), it can be REALLY tempting to highlight your brilliant investing skills and cut all your investors big, fat checks.
But this drains your cash reserves, and if you fit a speed bump on that rocky road to riches, a little cash can smooth things out. If you don’t have it, then you might need to make a dreaded “cash call” on your investors. Yuck. That’s no fun.
What IS fun is listening to a smart and accomplished guy like Michael Becker talk about how he went from small time to medium large time in just a few years. Over 3,000 doors and counting.
Now THAT sounds like a good plan!
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