Advice For Investing In Real Estate at a Young Age

In last week’s blog we discussed the value of time in real estate investing and how starting early works out so well in the end. (http://www.sabanabooks.com/the-value-of-time-in-real-estate-investing/) Personally I started to read about real estate investing when I was 15 years old but didn’t buy my first investment property until I was 34. I lost a lot of time.

One of the reasons I didn’t pull the trigger earlier was that I thought I needed some money first. That isn’t necessarily true. In the first chapter of my book, ‘Cash Management in Real Estate Investing,’ I give various examples on how you can get started with little or no money – without having to resort to ‘BUY REAL ESTATE WITH NO MONEY DOWN!!!’ This was basically a letter to my younger self.

As the World War II generation passes on, they are leaving record levels of real estate and cash to the next generation, my generation, the Gen Xers. I urge the recipients of this inheritance to think about keeping the real estate they receive and investing any cash received into real estate. Getting the family involved in real estate is a great way to educate your kids about investing and set them up well financially.

Get your kids involved in their 20’s if possible. Urge them to invest their own money into real estate. Co-sign mortgages for them if you can and that makes sense. I often see people giving advice to the young to ‘live frugally and save your money’. That is certainly sound advice but it typically makes a young person’s eyes roll.

I would suggest that your 20’s is the time to take chances. You have lots of time to recover from mistakes. Look into doing some fix and flips to increase the amount of cash you have to invest or buy your first rental. From the age of 29 until I was 34, I lived and worked overseas. I made some really good money but more importantly had the time of my life and had some incredible experiences. I would highly recommend that to younger investors too. Step outside your comfort zone.

The amount I saved from those years allowed me to return home and really go hard in my real estate investments. I made some mistakes; made money and lost money in the following years. I almost went broke a couple of time while I figured stuff out. Who cares? I was young. You can afford those kind of setbacks when you are young far better than when you are older.

I heard a great quote the other day (sorry I don’t remember where so I can’t give proper credit), “When faced with a choice in life choose the path that will give you the best stories.” I have often taken chances in my life on the road to getting where I am today and I have some great stories.

Get your kids involved in real estate early. Teach them. Mentor them. Help them out financially if possible but most importantly let them try. Let them fail. Let them figure some things out for themselves. If they fail make sure they get back on the horse and try again. Don’t let them get caught up with naysayers or people who tell them it can’t be done. It certainly can. Time is your best friend when it comes to real estate investing. The trick is to start young.

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

The Value of Time In Real Estate Investing

The real secret to real estate investing is time. You start with buying a rental building for, let’s say, 25% down with the bank paying for the rest. Over time your buildings appreciate in value. As you go to refinance that increased value means the bank will be paying you back your 25%. Your tenants will be paying down your mortgage, bit by bit, month by month and you will be earning a positive monthly cash flow.

In effect, you put a bit down up front but over time your tenants and the bank buy your building for you and give you back your deposit. A few examples of the power of time in real estate:

A couple of years ago, I met a gentleman in his eighties. He was lamenting the fact that he didn’t buy rental properties back in the 1950’s. Apparently back then you could buy a small single-family home for $3,000. Those same properties are worth close to $1 million each today.

A J/V partner and I bought three apartment buildings from a man who had bought them in the late 1980’s for $10,000 per door. We paid close to $100,000 per door. His mortgages have long since been paid down so the money he received from us was pure profit. Not to mention the twenty five to thirty years of positive cash flow.

That same partner and I bought another eight condominium units last year.  The seller had purchased those units for less than $20,000 a door twenty years ago. My group paid $80,000 per door for them. Again, no mortgages left.

Yes, I know real estate doesn’t always appreciate every year but over time it almost always certainly does. It may appreciate slower in some areas vs. others. It may trend sideways for a while but over time it will appreciate. Buy real estate for the mortgage pay down and the monthly cash flow; appreciation will be the bonus. Let time work for you, but the secret is to start that clock ticking as soon as you can.

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

Buying Geographically in Real Estate Investing

There is a quick and dirty calculation that you can do to see if a potential rental property might cash flow. If the monthly gross rent is 1% or more of the purchase price then this property is a good candidate. You still have to investigate and run the numbers further to be sure but this is a good initial test.

With that in mind you should be able to see areas in your town or city where you have a greater chance of finding positive cash flowing, rental real estate and, vice versa, areas where you will have little chance of cash flowing. Typically this means you will have to focus on properties with a lower purchase price. It is hard to cash flow a property worth $600,000 or $700,000 when you have to have monthly rents of $5,000 or $6,000 to have a hope of cash flowing.

You might even have to go outside of your local town or city to another municipal area to find things that cash flow. This is especially true if you happen to live in an expensive, major metropolitan area. Sometimes smaller towns / cities have more opportunities.

I can see this happening more and more over the next few years as house values increase all over, quite significantly in certain cities. The days of finding a multitude of positively cash flowing properties in your own neighborhood might well be behind us.

As you go outside your local area make sure that you:

  • Buy only in areas with a strong rental market and an active economy. You don’t want to buy in ‘one horse towns’ or areas with only one employer. Look for a strong local GDP with multiple industries and good prospects for long term growth.
  • Buy in areas where you can find strong property managers. The farther you go from home the less active managing you will be able to do.
  • Try not to buy in areas where you have to travel farther than 2 or 3 hours either via car or plane. Factor in travel costs into your purchase and operating costs.
  • Keep in mind that any renovations will be more costly and take longer if you are not there to physically manage the work. Buy properties that require less work the farther they are from you.
  • Save the higher positive cash flow in strong economies to help pay for higher vacancies and lower rents when the economy turns.

I know of one fellow investor that happens to live in a part of town where you can buy rental properties relatively cheaply. He owns several single family homes, all within four or five blocks of his own home. That is the way he wants it. He has a very nice little retirement portfolio set up.

I have another friend that went with me to a real estate seminar a couple of years ago. He came out all excited to do something and he spent the next month looking at all options. However, he lives in an area where all of the properties are valued at around $600,000 and up. He did not want to go outside his local area and as a result, after a month, he had found no valid candidates. I counseled him that he would have to buy elsewhere in the city and he refused. To this day he has not bought a rental property.

Because I am self-employed and often have trouble finding traditional financing I have had to learn to ‘follow the deal’. I have to go where I can find properties that have some physical or managerial problem that I can buy at a deep discount. As a result I have properties all over the place. However, this allows me to buy properties significantly cheaper than I could have bought the same property in my own (expensive) home city.

If you do end up buying in smaller towns you should be aware that:

  • Banks will have more concerns about lending in secondary or tertiary markets – especially in a slow economy. You might be able to finance it in the first place (albeit at a higher interest rate or a higher loan to value) but have trouble refinancing it years later if the economy takes a dive.
  • Properties in smaller centers tend to appreciate at a slower rate than a similar building in a larger center.
  • You have a better chance of converting multi-family properties to condominiums in a larger center than a smaller one.
  • If you are developing land or building new homes in a smaller center the absorption rate will be less and it may take your longer to sell your new lots / homes. i.e. A smaller town might be able to accommodate 15 new home sales a year. If your plan is to create a new 25 unit development it might take two or three years to sell out. Make sure to phase the project and account for this extra time / carrying costs to offset this.

Once you get your feet wet in real estate investing don’t be scared to branch out and buy in areas that may not be real close to home. Just do your homework first. Buying outside of expensive cities can be very profitable.

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

Keys to Succeeding In Real Estate

Nike had it right, ‘Just Do It’.

Or we could look at the ancient Chinese proverb, ‘The journey of 1000 miles begins with a single step’.

The real key to real estate investing is just to get started. After that time takes over and will usually end in a positive result. Yes, you have to find a property that cash flows positively. Yes, you have to do proper due diligence. Yes, you have to buy in areas with a strong rental market and multiple industries but the hardest part is to take that leap of faith and buy that first property.

Hey, I get it. It is scary to buy that first rental property. You will be taking on debt. You will be dealing with tenants for the first time. You will be constantly second guessing if you did the right thing or bought the right property. It is far easier to hit a few keys and buy 100 shares of Coca Cola or put down $5 for a lottery ticket.

Trust me, though, if you do your homework up front and take the time and trouble to ensure you get good tenants then, over time, nothing beats real estate investing for a profitable retirement investment. Real estate isn’t about getting rich quick it is about getting very rich slowly.

The second personal attribute that you will need for success is persistence and stick-to-it-iveness. You will make mistakes. You will even fail at times. You will get a crappy tenant once in a while. The real life numbers will be different from the spreadsheet you did up prior to buying the property. The real question is: how will you react to that adversity? Will you give up, sell the property and get out? Will the fear of these issues stop you from getting involved in the first place? Or will you learn from your mistakes, redouble your efforts and keep going.

I heard once that all the rentals in the county are directly owned by only 4% of the population (i.e. not REIT’s or Trusts). That means that the vast majority of people will never pull the trigger and even buy a property. Of those that do most will only ever buy one or two properties. The trick to building a successful portfolio is to get started and then push through the tough times. Get a strong mentor. Read. Learn. Join an investing network. Every obstacle that you will face has been dealt with before by somebody.

Getting started and persistence: those are the two strongest attributes that you need to succeed in real estate investing. Come to think of it – those are the probably the two strongest attributes you need to succeed in life too. (Whoa, that was uncharacteristically deep J )

Read more about this in Comparing Real Estate Strategies.

How Does the ‘Super Strategy’ Work in a Down Economy?

Last week we looked at a ‘Super Strategy’ that mixed the best of ‘Fix and Flips’ and ‘Long-Term-Rental’. You can review that at:

http://www.sabanabooks.com/a-super-strategy-merging-flips-rentals/

With this strategy we:

  • buy a property that is really beat up at a wholesale price;
  • renovate it;
  • get it rented out at higher rents;
  • refinance it, based on its new, higher value;
  • get most or all of your original investment back, and then
  • continue to hold it as a long-term investment.

This merged strategy helps to eliminate the major drawback of flipping; which is selling into a down market. It also helps to eliminate the major drawback of long term rentals; which is the long time required to recoup your money. It also works with any type of property and any budget – from single family homes to multi-family to commercial and industrial.

It makes sense that this strategy would work best in an economy where real estate prices are increasing (or even flat; i.e. you original budget shows the finished product being worth $x and it actually is when you are done). In these markets this strategy is a ‘home run’. But how does it work in a market where values are falling? Even in that scenario it is still a solid ‘double’.

From 2011 to the end of 2014, in the area where I invest, the economy was very positive and robust. Real estate values were increasing at a very healthy rate. In late 2014, with the fall of the value of oil, the local economy started to retract and eventually started to recede. Currently, in the Spring of 2016, with the price of oil not showing any sign of a quick rebound, values continue to drop.

In the Summer of 2014 a partner and I bought three apartment buildings with a total of 33 ‘doors’ in a smaller market. We didn’t get a screaming deal but we didn’t overpay either. They were well bought. We took possession in November of 2014 which is about the time that oil started to drop. Still, at that time, we had no real fear of the economy going into a tailspin.

The buildings didn’t have any major issues; the previous owner had owned them for close to 30 years and simply hadn’t put a penny into them more than he absolutely had to. They were simply run down and needed some love. He also had let anybody rent a unit if they paid a bit more money.

Our plan was to fix the units at an even rate over the next four years as tenants turned over, with major common and exterior issues being dealt with in the first year. We had a higher interest, private lender mortgage for the first year with the plan to refinance after one year with traditional lenders.

Almost immediately however, with a contracting economy and a new sheriff in town, we had 1/3 of the tenants move out. That meant that through most of 2015 our projected rents were significantly lower and our renovation costs were double our original estimates. Cash flow became an issue and we had to have a cash call from the owners. Not good.

However, by the end of 2015 we had the situation under control, the units were full with better tenants and we were ready to go back for refinancing as per the original plan. As we went back for refinancing, even though we had spent all of this money on renovations and the buildings were full, the newly appraised values were barely higher than what we paid for them. Instead of being able to get most or all of my partners money back we barely refinanced for enough money to repay the higher interest lender and get the partners back 10% of the money they invested.

The economy really kicked us in the butt. We were able to get better tenants into the suites but the sluggish economy and higher vacancy rates meant we couldn’t raise rents. It was considered lucky that we had full buildings. Remember that the values of apartment buildings are based on the profitability of the buildings and comparable sales in the area – both of which are compromised in a down market.

So we have little choice now but to continue to own the buildings (which was always the goal) with a significant amount of money still invested (which was not the original goal). We also had no choice but to lock in the new financing for five years (to even get financing in a small market and to get a decent interest rate).

As time goes on and the economy inevitably improves we will be able to refinance and get a second mortgage to help get the partners more of their money back. The buildings are in much better shape than when we first took possession with a tremendous upside in both future rents and valuation. The underlying assets remain strong. Not the home run we had at first thought but still a really good investments and our plans were just delayed a couple of years – a good solid double.

So, even when it doesn’t work out perfectly, the Super Strategy should still work out okay no matter the economy – good, flat or down. Just keep the above, real life example in mind if you try to do this strategy in a falling economy.

Read more about this in Comparing Real Estate Strategies.

A Super Strategy: Merging Flips & Rentals

The Best of Both Worlds

As real estate investors we tend to stick to a single strategy that works for us. For most that either means fix and flip or long term rentals. But those two strategies don’t have to be mutually exclusive. If you mix them the right way it can lead to a very profitable hybrid.

The Pros and Cons of Flips

Buying property that has been mismanaged or that is in bad physical condition and turning it around is a time tested strategy. It can be very lucrative; the time needed to complete the job is relatively quick compared to rentals and you get the satisfaction of seeing the beginning, middle and end of a project while helping to revitalize a neighborhood.

The downside is that it is speculative in nature and you can find yourself having finished the renovations and ready to go to market just as the economy turns on you. If you happen to hit an upswing, you look like a genius; if you happen to hit a down market, you can lose a significant amount of money.  The risks are high. Flips are also not conducive to regular cash flow as you don’t see any return until the final sale.

The Pros and Cons of Rentals

The beauty of rental real estate is that you have three streams of income working for you:

  • Long term appreciation (typically & historically)
  • Month to month positive cash flow
  • Long term principal pay down of the mortgage

Time works in your favor to make rental real estate investing one of the safest options available. Long term rental real estate isn’t about getting rich quickly; it is about getting VERY rich slowly.

The problem with rentals is that it takes a long time to get your original investment back. You either have to wait a few years to refinance or sell the property. Plus there is usually not a lot of cash flow available to you during the first few years of your investment. Finally, you are usually buying your property at full retail and not a wholesale price.

Merging the Two Strategies Together

A better way to invest may be to merge these two strategies together. The general concept is:

  • buy a property that is really beat up at a wholesale price;
  • renovate it;
  • get it rented out at higher rents;
  • refinance it, based on its new, higher value;
  • get most or all of your original investment back, and then
  • continue to hold it as a long-term investment.

With our merged strategy, we take the best of these two strategies and eliminate the worst. By buying a building that is beat up at a wholesale value (it doesn’t matter if it is a single-family home, a multi-family apartment building, a commercial unit, or an industrial building), you can get an immediate profit boost once it is fixed up.

As we have seen, normally long-term buy-and-hold makes money in three ways: long-term value appreciation, month to month cash flow, and mortgage pay down (done by your renters bit by bit each month). Buying wholesale adds a fourth element to that mix. This is a definite plus.

Not selling that property once it is fixed up eliminates the speculative nature of that strategy. By renting the newly renovated property instead of selling it immediately, you can wait until the market is right for you to sell at a high profit thereby eliminating a lot of risk.

Keeping it over a longer period can even ease some of the hit you would normally take if you spent too much or took too long to complete your renovations. A $20,000 overage doesn’t look quite as bad over 10 years as it does over 10 months.

Finally, because you are refinancing the property as soon as the renovations are done and getting most or all of your original investment back, the cash flow that does come from that property is mostly free.

You have an income stream that you put little or no money in to. So as long as it cash flows positively (which it should or you shouldn’t have done the investment in the first place), whatever cash flow it does provide is a bonus.

This strategy is very resistant to down markets; in fact, it can work in any market. In a down or flat market, hold onto the status quo and rent it out, making sure that you are at least breaking even. In an up market, you can decide whether you want to sell the property for a nice profit or increase the rents and continue to hold for the long term.

This strategy works for all budgets as well. It works on a single-family home just as well as it does on a fourplex, an apartment building, a commercial property, or an industrial property.

A Real Life Example from My Own Portfolio

The following example is an eight suite apartment building that I renovated but the concepts would work just as well with a single family home.

A joint venture partner and I bought an eight suite apartment building out of foreclosure. It had been empty for two years. The roof leaked and as a result there was grass and mushrooms growing on the carpet on the top floor. There was no heat, light or power to the building and most of the windows had been broken by kids.

We bought it for $900,000 with my partner putting up the 25% down payment. We then obtained an 8% loan from a private lender (banks tend not to loan on mushrooms and grass). After that we spent $500,000 to renovate the building.

Once completed the building looked great and we were able to fill it with great tenants within six weeks. The rents we were able to charge were on the higher end of what similar suites in that neighborhood could command. We then went to a normal lender and had the property appraised at $1,750,000 as an apartment building. The building had also been condominiumized and as eight individual units it appraised at $2,000,000.

We had several choices. We could have flipped it relatively quickly as an apartment building and made between $350,000 and $400,000 after commissions. Alternatively, we could have sold the eight units individually, which would have taken longer, but we could have made closer to a $500,000 profit after commissions. Instead, as a third option, we decided to refinance and keep the building long term.

We were able to obtain a new first and second mortgage for a total of $1.45 M, which as you will recall, is higher than the original purchase price ($900,000) plus total renovations and interest costs ($500,000). In short, we got all of my J/V partner’s money back plus paid back the higher interest lender AND still owned the property. The property has a positive cash flow of $1,500 per month and that income is FREE as neither my partner nor I have a penny invested in the building. Plus the equity of $600,000 is still there waiting for a future sale to be claimed.

Recycling Your Money

We were able to accomplish the above in about 18 months. Think about that. A normal J/V partnership o a long term rental typically takes five years. During which time the money partner’s money is at risk. While real estate is far less risky than most investments anytime your money is out working for you there is an element of risk.

By getting my J/V partner his money back early we eliminated that risk while at the same time greatly increasing his yield. The yield of an investment is the return compared to time. The shorter the time frame the greater the yield. Not only that but we were able to redeploy that same money on another investment. We recycled that money. If you are able to do this every 18 months you could conceivably use the same money three times over the same period of time as a normal joint venture partnership. That is a very effective use of cash.

Summary

You might say this is a unique experience but I have been able to do this several times in my investing career with properties of various size and dollar amounts invested. Sometimes I have gotten 100% of mine and my partner’s money back, other times I have gotten a significant portion back. It is definitely possible. Once I was even able to refinance and received $100,000 profit over and above getting everybody their initial investment back.

To make this strategy work look for properties that are in rough shape or that have been badly mismanaged without any serious structural defects. Then instead of flipping, as you normally would as a flipper, or ignoring it altogether, as you might do as a rental investor; give some serious thought to what the returns on a fix and hold might look like. You might be pleasantly surprised.

Read more about this in Comparing Real Estate Strategies.

Staging Your Real Estate Purchases & Exits

Staging your Purchases

“Hello. My name is Darcy and I am a real estate addict.”

I love to buy real estate. My wife says I never saw a building I didn’t like. I love to look for deals. I love to do the quick analysis to see if something is going to work for me. I love to calculate the cash flow and cash-on-cash returns. I love to negotiate the terms and conditions with the seller. I love to come up with a plan and a J/V partner to buy the property with me. I love all of that stuff. In short, I love the hunt.

All of my life, whenever I have had money to invest, I would make sure all of my money was working for me. I thought money not invested was being wasted. For example, as a teenager with a few hundred dollars I would invest in Term Deposits. The minute it came due I would be down at the bank reinvesting it. As I grew older and I started doing flips, the minute I sold a property and collected my money I would be on the hunt for the next property.

So I used to buy, buy, buy. Unfortunately, that often left my finances in a precarious position as all of my cash was always fully invested. Invariably, I would have cash flow issues and be left wondering if I would be able to buy groceries. I was the poster boy for asset rich and cash poor.

To break out of that cycle I decided to a) work less with my own money and more with J/V partners and b) stage my purchases better. For example, in 2012 my wife and I were able to buy 9 properties – all with our own money. Then, normally, we would have bought more properties in 2013 too, but this time something strange happened.

I went cold turkey (something very new for me) and didn’t buy a single property in 2013. Instead, my wife and I used that year to normalize the properties that we bought in 2012. We renovated the suites that were in bad shape, kicked out the bad tenants we inherited (legally of course), increased rents accordingly, filled empty suites, cut operational costs, found new forms of revenue, and refinanced several properties.

By the end of 2013, a surprising thing happened (at least surprising to me); we were in the best financial shape of our lives after normalizing these buildings. Our cash flow was higher than ever. Our cash-on-cash return across our entire portfolio was higher than ever. Our cash reserves were higher than ever and our loan-to-value percentage (the amount of our total mortgages vs. the value of all of our buildings) was lower than ever across our entire portfolio (around only 58%). In short, we made money by NOT buying real estate.

In addition, this activity caught the attention of some new joint venture partners. As a result, in 2014, we went on another buying spree and bought 6 new buildings. But this time these were all bought with joint venture money. This helped keep our financial house in order. Following the pattern, 2015 was another year of normalization.

By purchasing at a slower pace and using J/V partners more frequently, I am nowhere near as stressed as I had been nor am I flirting with cash flow Armageddon all of the time. I have learned to stage my purchases and work in plateaus. Now my wife and I will buy new properties, let that level off in a plateau and then when we are in control, we buy more properties again. The financial benefits of this new approach have been noticeable as well.

Timing the Exit of Your Properties

When you buy real estate 100% with your own resources the monthly cash flow is 100% yours as well. When you buy a property with a Joint Venture partner traditionally (as the real estate expert) you won’t see any return from that property for five years or so until your sell or refinance. One option is great for cash flow while the other allows a long term return with no money invested.

Just like you can stage the purchases of your properties you can also time their sales. What if you time the exit of your various Joint Venture assets so that you create an annuity and get paid something every year? What if you could treat real estate like Term Deposits?

Term Deposits at your bank typically have terms (the length of time that you hold the investment) of 1, 2 and 3 years; the longer the term the better the return. Buyers, usually retirees, will often split their available investment money into different groups and buy one term deposit of each term.

For example, they may start out by buying a 1 year term, a 2 year term and a 3 year term. At the end of year one, they will take the principal from the 1-year TD that has come due and buy a new 3-year term deposit. Then, when the original 2-year TD comes due in year two, they will buy another new 3-year term TD. This process repeats itself; every year one of the TDs comes due and a new 3-year term is purchased so that within a short period of time the investor has nothing but 3 year TD’s with one coming due each year. In this way the investor can maximize the return and ensure interest money is coming in each year.

Spend the first few years of your real estate investing career buying long-term rental properties with J/V partners. Then after a few years, you can stop buying and just sell a building each year earning a nice retirement annuity. Those properties you bought with your own resources will create cash flow in the interim.

Joint ventures are great for long-term profits to the real estate expert who doesn’t have to put any money of his/her own in. However, they don’t typically help with your cash flow in the short term. For that reason, I tend to use my own money to buy properties that have exceptional cash-on-cash return with large positive cash flows.

I focus my own money (where I own 100% of the profits) on cash flowing, rental properties and use joint ventures as a long-term return. In this way, you get the best of both worlds. It is your own cash that will make you a positive cash flow in the short term while you wait for the J/V deals to payout some time down the road.

Merging Flips into This Strategy

Just because your main focus may be on long term rentals there is no reason not to mix in a flip or two along the way. For example, with the six purchases I made in 2014 (see above) I intend to convert one building from an apartment building into condos. Another of the buildings was boarded up due to fire damage and will be brought back on line as a rental. A third building had unbelievably low rents but not a lot of physical things to fix up—those rents will be adjusted and the final three buildings were close to 20% vacant and were in really bad shape. They need to be renovated and the quality of the tenants brought up while at the same time increasing the rents and filling the buildings.

We will sell the condominium conversion to bring in some short-term profit, while the other buildings will be refinanced and kept as long-term rentals with very good cash flow and cash-on-cash returns. Sometimes opportunities present themselves and a particular property might make more sense as a flip than as a long term hold. Never be scared to take profit.

 

Summary

Timing is important in most investments but you can turn it to your advantage with real estate. Learn to purchase your properties at a pace that makes sense for you and your situation – both your financial reality as well as your experience level. When you have your last purchase under control then go ahead with your next one. Buying too many properties at once can lead to financial headaches and a lot of lost sleep.

Similarly you can use time to your advantage on the way out too. Long term rentals that you own 100%, kept for cash flow, with a few joint ventures sprinkled in and sold occasionally can give you a nice mix of short and long term returns. This is also an effective use of your own cash reserves as you are buying when you can and using Joint Venture money when you are low on funds. This can definitely be the best of both worlds.

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

How You Can Get Started With Fix & Flips

Fixing and flipping is an advanced strategy. If you are just starting out and trying to decide if flipping is right for you, I would recommend you do a couple of normal, long-term rentals first. Do some minor repairs to those properties.

Then, as you gain experience and confidence and start to meet some sub-trades (i.e. plumbers, electricians, painters etc.), you can focus strictly on flips if you wish. If you are dead set on starting with flips, please, start small so that your potential downside is minimized. There are lots of ways to lose money when you flip.

I would recommend having a mentor that can guide you through your first few jobs; plus don’t do any deeply flawed renos (really nasty mold, asbestos, foundation issues, or grow ops) until you have a few ‘lipstick and rouge’ jobs under your belt.

Finally, I would also recommend not doing a full-blown renovation in an apartment building until you have a) owned an apartment building as a rental; and, b) renovated a few single family homes or smaller buildings first. An apartment building as your first flip is a big mountain to climb.

In terms of financing, you shouldn’t do any 100% leveraged projects until you have 10 or 12 regular jobs under your belt. (I am not talking about joint ventures here; I am talking about where you borrow all of the money in a ‘Buy Real Estate With No Money Down Deal’.)

If you are going to be renovating property that is not in the same city/area where you live, please make sure you have a few normal renos under your belt first. Renovating from a distance can be very difficult. You need to be there a lot to oversee things.

I own several rental properties that are not in the same city where I live. One group of buildings is two-and-a-half hours southeast of me and the second group of buildings is two hours northwest. Both can be driven to, but it is a bit of a pain.

I wanted to update/upgrade these rental units, but not do anything major like knocking down walls, etc., just some simple “lipstick and rouge,” such as new flooring, paint, and some newer (not new) appliances. I thought, This is something my management company does every time a tenant moves out if there is any damage, so they should be able to handle this without me. Well, that is both true and untrue.

Yes, they could do it, but for some reason in both locations, they were not able to do it with any level of quickness. Unless I was there to oversee everything, things just didn’t get done as quickly. This is most often the case. Plus they spent more money than I would have.

If you insist on having a management company do your renos in a distant locale, make sure you add on a lot to both the dollar budget and the time schedule. The same thing happens when you go on vacation while you are doing a reno in your own town. If you are not physically there, your trades will do stuff but not nearly as quickly as when you are looking over their shoulder.

Another question I get asked by aspiring new flippers is: what should I do first, find my trades, find a property or find money partners. My favorite answer is ‘Yes’. Unfortunately, you really do have to work on all of these at the same time. A lot of people when they just start out want to find their trades first so that when they do find a property they can get an accurate quote quickly. Realistically though until you have a real job to quote you won’t get very accurate estimates from tradespeople.

Also until you find a property with real potential you won’t know for sure if your potential money partners are really in or not. That would lead us to believe that the property is the starting point. Well, you can find a property and then be left scrambling to get realistic quotes on renovations and money to buy the property.

So work on everything bit by bit all at the same time so that when you do find a good property a few calls to those trades and money partners that you have already contacted will move things along quicker.

The key point is not to get stuck worrying about finding trades, or setting up corporations or designing business cards and websites or analyzing potential purchases to the point where you never make offers or actually pull the trigger. That is called ‘analysis / paralysis’.

When it comes to getting started with fix and flips, Nike had it right- Just Do It. Get started. Be active. You will make mistakes when you first start out. Just protect your downside as best you can and keep those first deals small. You can always get bigger after.

Read more about this in Comparing Real Estate Strategies.

Tips On How To Maneuver Through a Personal Financial Crisis

In a down economy things can quickly get out of hand financially. A layoff at work, lower rents in your real estate investments lead to lower cash flow mixed with high debt can put you in a very precarious position. You start missing payments. Then your creditors start calling. The stress levels increase exponentially. I know. I have been there.

During the last recession, in 2007 / 2008, I was in the middle of finishing a 36 unit, bungalow villa, land development & new construction project. Between my bank and my sub-trades, I owed $3m when the bank told me they wouldn’t renew the loan because of the sub-prime mortgage crisis. Things went from bad to worse and by mid 2008 I was 10 days away from personal bankruptcy. Thankfully I managed to turn things around.

Here is some advice on how to deal with this situation – both how to avoid it and what to do once it becomes a real problem.

Be Honest and Open: It is human nature to just hide and hope things go away. You can’t do that. Honesty and open communications with your creditors is crucial. Answer their calls. If you miss a call make sure to call them back. Then as things progress, call your creditors with status updates instead of waiting for them to phone you. Without any response from you they will assume the worse and take matters into their own hands. They will either lien you, sue you, or start foreclosure or bankruptcy proceedings (whatever is applicable in your case). You want to avoid that at all costs. Once the first domino falls the rest begin to fall too. The more liens or lawsuits you have against you the harder it is to get out of trouble.

Have a Plan: Once you are communicating with your creditors have a plan. Nobody wants to lien you or sue you. Not because people are so nice but because it is a real pain and it is expensive. It is much easier for them to work with you. Have a plan and communicate that plan.

Be Aggressive With Getting Out of Trouble: With that in mind you have to be aggressive on finding a solution to your situation. Be creative. Think outside the box. Do you have assets to sell? Can you refinance something? Can you bring in new equity partners into your investments to raise cash? If you have a business can you issue bonds? Can you consolidate your higher interest debt into a single lower interest payment (known as debt consolidation)? Can you negotiate smaller payments or smaller interest rates? Can you negotiate a temporary stop to payments? In short, can you increase cash and/or lower debt?

Proactively Connect with Creditors: If possible you want to build relationships with your trades, material suppliers or creditors before things get scary. That way, when things get rough, you are not just a number but somebody they already know. For example, when I was building my villas I made a habit of going down to the Accounts Receivable departments of my larger suppliers every month to physically hand over my monthly payment. I got to know the A/R people personally; I saw pictures of their grand kids and knew where they went on holidays. When things started to go downhill for me I was able to talk to them as people. It saved my butt. I am proud to say that out of 25 creditors only 7 ended up liening me. The rest trusted that I would get them their money and I did.

Don’t Make Promises: Do not make promises that you can’t keep. Don’t tell somebody you will get them $2,000 next Tuesday if you aren’t sure that you can get them $2,000 next Tuesday. This destroys your credibility. When you are communicating your plan, stay at a high level until you know for sure when money will be coming in.

Pay Everybody: When you do get some money it is better to get all of your creditors something as opposed to paying off one creditor 100% and not paying anything to anybody else. That is general advice. Each situation is different. It depends on the security level that each creditor has. Secured creditors rank above non-secured creditors and must be paid in that order. Groups that are on title on your property, for example, like banks will get paid out first. However, when you have a group of creditors all on equal footing try to pay them all something if you can. If a creditor receives 25% of what you owe them one day, then two weeks later they receive another 15% they can see that you are trying and that you are true to your word.

Renegotiate If You Can: When you first start having problems and have no money you aren’t in a very strong negotiating position. You are relying on good will from your creditors. If you go up to your creditor and ask to pay 85 cents on the dollar most likely your creditor /supplier will simply say no. As time goes by, however, the supplier will begin to doubt whether they will get paid or not and will psychologically write off your debt in their heads. Once your plan starts to come together and it looks like you will get some money soon you can now go back to your creditors and maybe negotiate a smaller payout. Again, well secured creditors like your bank will not have to move on price; but lesser secured creditors or unsecured creditors will probably accept a discount. This is because if you do end up going into receivership the receivers will take most of the money and they will get nothing. Use this leverage to your advantage.

You Will Get Through This: I know it doesn’t look or feel like it when you are in the middle of the hurricane but this too shall pass. September 2007 to June 2008 was by far the darkest period of my life but I got through it and eventually my life got back to normal. Just stick with it. Persevere and don’t give up. Continually be looking for a way out.

I hope this advice helps you. The key is to have good communications with your lenders / trades / creditors and get them to work with you. Be proactive and don’t stop until things work out the best they can.

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

Uncovering Hidden Gems While Investing in Real Estate

Sometimes you get lucky and uncover a gem inside a property that you just bought that will save you a bunch of money. For example, houses that were built in the 1950’s and 60’s were quite often built with hardwood floors. Then it became fashionable to put carpet down.

Beautiful hardwood floors were simply covered up with carpeting. On several occasions, I have gone into a home of that era and pulled up the carpet to find a perfectly good hardwood floor underneath. A little finishing and polish and you have a gleaming hardwood floor at next to no cost. This can save you thousands.

Another time I renovated a 21-room turn of the 20th century apartment building. Inside were seven cast iron, claw foot tubs. They were badly beat up, but after getting them sand blasted, refinished and painted I was able to sell them for a considerable profit. If I had been doing any high-end renos at that time, I could have used one in my own reno. Keep in mind that you can sell or use things that you find.

In the basement of that same apartment building I found the chassis of an old motorcycle. Really just the frame, seat and gear box it was missing the engine, the tires and everything else of importance. However, it was old and looked really cool. My foreman on the job was a big motorcycle guy and we traded the bike against his services. That saved me some money.

I once bought a home to flip that had been previously owned by a house painter. After I took possession, I went downstairs to find dozens of cans of house paint. I guess there were too many for him to move. At first I was mad, thinking that I was going to have to spend a lot of money to dispose of them properly. Instead, I ended up using them. Some of the colors were too wacky for me to use, but I was able to others on future renos and even in that same house.

Another time I got an entire parcel of land for free. I had purchased a fourplex in a small town and didn’t even realize I had also bought the 50 foot x 100 foot lot next door. Six months later I received a tax notice in the mail for both properties.

I called my lawyer who had handled the fourplex purchase and he said, “Yes, you own the lot next door, too. I thought you knew.” I didn’t. The vendor had never mentioned it nor was the purchase price higher than comparable fourplexes for sale at that time. The previous owner had just thrown it in for free because that is how bad he wanted to get out of that situation. That lot was probably worth $15,000.

Recently, I bought an older, single story motel out of foreclosure and converted it into a regular long stay apartment building. Along with the motel came a house that had been used for the past 50 years as the managers home. I had the option of selling that separate property or renting it out. I decided to sell it and used the proceeds to pay down some of the mortgage AND reimburse myself for some of the renovations that I had done.

Keep your eyes and mind open for things in your new purchase that you can reuse, sell or barter to your benefit. These items do exist.

Read more about this in Comparing Real Estate Strategies.