Get Your Young Adults Involved In Real Estate Investing

I say all of the time, to whoever will listen, how great real estate investing is and how everybody should get involved. I truly believe that it is the best way for the average person to control their own retirement.

If you have got bitten by the bug too and have started to invest, I would recommend that you get your kids involved as soon as possible. If they are really young just have them tag along as you go and do repairs. As they get older have them cut the grass or go with you as you view new prospective purchases. Teach them about the numbers and how the rent comes in, then you have these costs with a positive cash flow at the end.

If possible purchase a rental property when they are young. Make them a partner in that property. Have them do work every year so they associate themselves with that property. By the time they hit college age a sale or refinance of that property should go a long way to pay for their tuition – all paid over time by your tenants.

Alternatively buy a multi-family property when they go to college. They can live in the property and rent out the other suites. They would be the on-site manager, collect the rents, deal with small repairs (either personally or by calling in the proper trade) and handle tenant squabbles. This teaches them responsibility and some valuable management skills, but also the income from the other tenants would pay for their living expenses while in college.

My dad was a farmer who was starting to ease into retirement when I was in my mid teens. He got interested in real estate investing and used to take me along with him as he viewed potential properties. We would then go home and I would key in the important numbers into an Excel spreadsheet that I had created to analyze cash flow and return on investment. At the age of 15 I had learned about leverage, mortgages and positive cash flow.

While I never actually bought my first rental property until I was 33, I knew way more than my peers about investing and finance. I bought my first personal residence when I was 20 years old.

Read more about this in Cash Management in Real Estate Investing.

Dealing With High-Net-Worth Individuals as Potential J/V Partners

Late night infomercials talk a lot about how easy it is for you to start with no money and no experience and find a J/V partner. They will tell you, for example, that your chiropractor makes scads of money, is way too busy to invest on their own and is just waiting for you to walk into their office and suggest a J/V.

Now I am sure that does happen sometimes, but my experience with dealing with high-net-worth individuals is that they aren’t really interested in you using their money while you gain experience. You typically need to know what you are doing before you can start to attract high-net-worth individuals.

Here are some tips on how to deal with these individuals once you are ready:

  • Typically, high-net-worth individuals are notoriously quiet about their activities. They don’t want just anybody calling them. You will need an introduction from somebody they know and trust.
  • High-net-worth individuals think differently than the average Joe on the street, too. An average Joe, when presented with an investment opportunity, will usually immediately ask, “How much profit can I make?”

A high-net-worth individual will ask, “How much of my capital do you need?” “When will I get my             capital back?” “How much risk is involved?” “How can we mitigate that risk?” “Who are you and                 what have you done?” “Who else is on your team?” and a boat load of other questions before finally           getting around to asking, “How much profit can I make?”

Can you see the large difference between those two groups? Preservation of their existing capital               and doing whatever they can to reduce risk are infinitely more important to a high-net-worth                     individual than what the potential profit might be. They know that another deal is coming just                     around the corner so they don’t need to take chances, period.

  • These individuals will want their investment capital back as quickly as possible. You need to paint yourself and your team in the best light to show and to emphasize the need for this particular project; all of which goes to reduce the level of risk involved.
  • Another way to lower risk in the eyes of a potential high-net-worth individual is to give them plenty of exit strategies. Explain what the plan is but also talk about different things that you can do if things don’t go as planned for whatever reason. You may think that this makes it look like you are unsure of the plan and are waffling. But, to an experienced investor, having multiple exit strategies is just prudent business.

For example, if you are pitching a fix and flip of a single-family home, a backup plan might be to turn that home into a rental if the economy takes a downturn and you can’t sell for the projected price. A fix and flip of a fourplex might turn into a long-term rental or a condo conversion. Keep your options open.

Read more about this in Cash Management in Real Estate Investing.

Tips On Being A Better Landlord

A lot of people shy away from being a landlord because they fear that proverbial “busted toilet” in the middle of the night. That rarely happens. In actuality, the most uncomfortable part of being a landlord is dealing with tenants. Here again, though, you have control over this. You have control over who you put into your property. If I have one piece of advice with being a landlord it is to spend time and money up front verifying the prospect before you give them the keys to your place.

Most new landlords try hard to impress the prospective tenant to get them to like the property and the owner so that the prospect will sign the lease. It should be the other way around. Is this prospective tenant good enough to live in your building?

This is, admittedly, easier said than done in a bad economy, but if you are doing the other things right, i.e., properly pricing your property and having a well maintained place in a good location you should still have more control than your competition.

Check the prospects references and pull a credit bureau report every time. Ask some simple questions and make sure what you find out matches what they tell you. It is amazing but only a very small percentage of landlords will actually do any of those three things.

Often what happens is, the applicant fills out a form and the landlord hands over the keys. Shameful. It is worth having the place sit empty for a month rather than putting in the wrong tenant. Here are some questions you should be asking prospective tenants, and these should be done over the phone or via email even before you get in the car to meet them:

  • How many people will be living here?
  • Are you all employed?
  • Where at?
  • How much do you each make?
  • Where are you living now?
  • How long have you been there?
  • Why do you want to leave?
  • When do you have to be out by?
  • Did you give proper notice at your current place?
  • Tell me about yourself?
  • I need to check references and run a credit check; is this okay with you?
  • What will I find when I do my checks?

What you are doing is building a picture of this prospective tenant(s). The first few questions tell you if they have a job and whether they can pay the rent. They don’t have to be employed but they have to have some form of income. If not there is no need to go any further.

The next few questions focus on their current living arrangements and why they want to move. Does it look like they are hopping from apartment to apartment or town to town every few months? If they are, why do you want them in your place? They will probably do the same thing to you.

You want responsible, long-term tenants. You don’t want to go through this every few months. Did they give proper notice to their current landlord? If not, why do you think they will give you that courtesy when it is time to leave your place?

You then want them to tell you their story. We all have a story about ourselves, who we are, what we do, etc. When you do your checks, you want what they tell you and what you find out to match. You don’t want surprises and you want the truth.

The last few questions deal with reference and credit checks. CALL THEIR REFERENCES. You must do these every time. You ask them if this is okay not because you won’t do the checks if they say no but because they are obviously hiding something if they do say no. I pull a credit bureau report on everybody before I let them into my building. No exceptions.

A little time and effort up front can save you from a world of hurt down the road. Stay within the law as set out by your local Landlord / Tenant Act but other than that you are free to rent to the best tenant available.

Read more about this Comparing Real Estate Strategies.

The Three Sources of Real Estate Rental Income

Rental real estate allows you to benefit from three different revenue streams:

  1. Appreciation: Over time, real estate values traditionally rise in value.
  2. Mortgage Pay Down: Every month, your tenants will be paying your expenses and most importantly your mortgage. Part of the mortgage payment is interest, but part of it will be principal. This part increases your ownership stake in the building bit by bit, month by month.
  3. Cash Flow: Every month, what you receive in the form of rent less your expenses will be your profit. Typically for the first few years of the purchase, this will not be huge, but eventually, after 3 to 5 years, you should be in a position to either sell the property or go back to the bank and refinance the mortgage. If you refinance it with a longer period, you will lower the monthly payment resulting in more money being kept in your pocket. If you have enough properties (or units if you own apartment buildings), this monthly cash flow can grow to substantial amounts in a relatively short amount of time. This happens as you still make money from the other two points mentioned—appreciation and mortgage pay down.

Don’t buy real estate assuming the property will grow in value. Buy long-term buy-and-hold real estate for the cash flow, relative market stability, and mortgage pay down. Appreciation is the bonus.

Historically real estate will appreciate in value over time. It is a slow and steady thing—usually 3% to 5% a year with an occasional up tick where you make more money than that and an occasional downturn where the growth is either lower than that (maybe closer to zero) or maybe negative.

In the long-run, it is a lot more predictable, reliable, and stable than most other investments (the stock market for instance). Your property may go down in value a few percentage points in a down market, but it won’t drop 20% in a day like your stocks can. It simply doesn’t have the same volatility.

Read more about this in the long term rental chapter of Comparing Real Estate Strategies.

From Dream to Design to Reality

I have a framed picture set on my wall that I created myself. It contains three different pictures. The first is a bird’s eye, artist’s rendering of what I envisioned my villa project to be. The second is the site plan – the engineer’s technical blueprint of the different buildings and roads and where they would appear on site. The third picture is an aerial photo of the finished project. All three are taken from the same point of view and show the project as it moved through the various stages. From Dream to Design to Reality.

This picture set is important to me for a number of reasons. For one it represents a completed job. I can look at it with pride and think, “I did that.” For those times in your life when you are feeling down and the world seems to be getting the better of you it helps to be able to look at something like that and reassure yourself that you are capable of accomplishing great things.

It represents the stages that all projects must go through – no matter what you are doing. Everything starts with a dream. What is it that is important to you? What do you want to accomplish and how do you picture it looking when complete? Dream big, you never know what will happen.

Of course, a dream is nothing if you don’t take it to the next level and actually start to work on it. Get it physically designed. Find the money to get it built. Put together the proper team to help you. Ask questions at your local municipality. You begin to add structure to your dream, you start to see how realistic it is and you learn what hurdles you will have to overcome.

Then you have the ultimate moment of truth. The “Go / No Go” moment where you have to make the final call on whether or not you are really going to go for it. When you make that decision my advice is to jump in with both feet. Up until this stage you won’t have spent a great deal of money and have simply been dipping your toe in the water. Once you decide to proceed then go hard. Time is money.

I couldn’t have the type of job where I would be doing the same thing every day. That would drive me nuts. I love my projects. I love to have a beginning, a middle and an end. I love to be able to step back when the project is done and get that feeling of pride and accomplishment. I revel in that for a while and then off I move to the next dream.

Read more about this in the land development chapter of Comparing Real Estate Strategies.

To Refinance To The Maximum or Not

When you first purchase a property or when it comes time to refinance an existing property, you will have to decide how much of a mortgage you want. The maximum amount you can mortgage differs from jurisdiction to jurisdiction around the world and is subject to change – however it is usually around 75% to 80% of the value of the property.

The natural assumption is to simply finance / refinance to the maximum mortgage amount. This may or may not be in your best interest. Going to the maximum will require the least amount of funds with a new purchase or maximize the amount you get back in your pocket with a refinance. Both of which are good things. The offset to that is that your mortgage payments will be the maximum they can be too.

After you run the numbers on the property will you still be able to have a positive cash flow with a higher mortgage payment? Perhaps it makes more sense to make a larger down payment (on a new purchase) or receive less cash back (from a refinance), take a smaller mortgage and have a smaller monthly payment.

The smaller your monthly payments the smaller your risk of having a negative cash flow and the better you will sleep at night. You are also more immune to the effects of an economic downturn. It is almost always a lack of cash that results in people running into trouble and getting foreclosed on.

Of course, the decision is out of your control if you are making a new purchase and you only have the minimum amount required to put towards the down payment. If you do have a choice take a moment and think what combination of more cash / lower monthly payments works best for you at that moment. You don’t automatically have to go to the maximum loan amount available.

Read more about this in Cash Management in Real Estate Investing.

A Decision of Quality In Real Estate Investing

A decision that you will regularly have to make whenever you do renovations is the quality of your material. It is great to install the lowest-priced item in order to save money, but sometimes low quality items cost you more in the long run.

A great example of this was a shower that I did in one of my renos. I was at the local hardware store one day rummaging through their bargain bin. This is a table where a) they put stuff that has been discontinued or b) the box has been damaged or c) is on sale at a deep discount for some reason. I bought a cheap imported shower kit for less than $60. Perfect.

With the next reno I did, I had the plumber install this kit. So I saved a lot of money on material and labor. Almost as soon as the plumber was down the street, the shower started to leak by the handles. I had the plumber come back to fix the leak. He couldn’t because the valves were cheaply made.

I had no choice but to go back and buy a better quality set. The plumber came back (third time now) to install the new set. Oops. The “guts” of the new shower kit didn’t match what I had before so he had to cut a hole in the sheetrock (drywall) of the closet that backed on to the shower and do repairs from behind the shower.

I then had to put in a hatch cover to hide the hole in the closet wall. At the end of the day, I spent close to $700 in material and labor to install this showerhead. If I had done it right the first time, I would have only spent around $300.

Read more about this in Comparing Real Estate Strategies.

Get Your Own Financial House In Order First

The first step towards investing in real estate is to get your own finances in order. If you don’t have your own financial house in order adding more debt to your life through investing will compound your issues. There are several steps you should take before you start investing, be it real estate or anything else.

The first step is to have a positive cash flow in your regular life. If your salary (and that of your spouse) isn’t enough to pay your household bills, then you shouldn’t even begin to think about investing. Review your personal income and expenses and see if you can increase your income or cut costs.

Next, you should deal with high interest debt. Pay off high interest loans (like credit card debt) first. Paying your credit cards in full at the end of the month and not having any interest charges is the same as getting a 19% return on investment.

There are two types of debt: positive and negative. Positive is debt that helps to make you money or buys an asset that appreciates. Examples of this would be a retirement saving plan loan, the mortgage on your house, or borrowing money for a real estate investment. Providing your investment produces a positive cash flow don’t be afraid of positive debt.

Negative debt would be debt that you incur to buy things that either don’t appreciate or have extremely high interest rates. Examples of this would be a loan to buy a nice boat with a matching trailer or a really large TV. Most of us go through a stage right out of high school or college when we get our first real job and go nuts buying toys. That is negative debt. My advice for you is to sell your toys, pay off the negative debt and use your credit card wisely for only stuff you need. The toys can come back later.

Throughout this entire process you should be saving. Save as much as you can each month. Put gifts, inheritances, or windfalls into savings. Ideally you should try to save 10% of your net earnings but every little bit helps.

At that same time you need to (legally) minimize the taxes you pay. I am not condoning tax avoidance, which is illegal, but proper tax planning, which is perfectly acceptable. Get some professional help here. Any tax money you legally don’t have to pay is money you can eventually invest.

At this stage you are ready to invest. I, obviously, would prefer you to invest in real estate but once your finances are stable you have a good base for any structured investment you may wish to tackle. When you invest, don’t try to hit a home run. A lifetime of singles and doubles with very few strike outs will leave you with a very nice retirement.

Read more about this in Cash Management in Real Estate Investing.