Please join us for the third episode of The Real Estate Think Tank Podcast
Click the link below to join:
The Real Estate Think Tank: Episode 5: Foreclosures and Shorts Sales
Please join us for the third episode of The Real Estate Think Tank Podcast
Click the link below to join:
The Real Estate Think Tank: Episode 5: Foreclosures and Shorts Sales
1. Choose Your Market Wisely
The most effective way to navigate any real estate investment
is by carefully choosing the market in which to invest. Location, location,
location once again proves to be a sage cliché. Being aware of legal risks
and rewards is just as important to the analysis of any property as its income numbers
and property condition. The location of a property will not only determine
the set of laws that an investor must navigate, but it will also determine the
prevailing legal sentiment around the property. This sentiment will effect the laws passed in a given market and have a bearing on
how local courts will view real estate disputes like waste, nuisance,
foreclosures, evictions, etc. Understanding the local view of these issues will
allow investors to accurately estimate the legal costs and make an informed investment decision as a result.
2. Know The Laws That Affect The Property
Understanding the applicable laws influencing property can
be the difference between a profitable investment and a poor acquisition. Legal
frameworks like rent control, affordable housing zoning and industrial tax
credits will all effect the viability of an investment. This is especially true
with real estate development, as many jurisdictions have detailed, idiosyncratic
new development requirements that protect the rights of both the developer
and the community. These requirements may affect zoning, construction ordinances, restrictions on selling and transfer
of the property and even property taxes. An intimate knowledge of these regulations is essential, even if the purchased property is not newly constructed,
as an acquisition that is economic in some jurisdictions can be rendered
uneconomic by the prevailing local new development requirements. Please also keep in mind that recently renovated buildings
can be considered “newly developed” in some jurisdictions and subject to new
development laws.
In addition to new development regulations, investors must be aware of other laws that could affect properties. Building ordinances, for example, affect all properties, not just those that are undergoing construction and renovation. These ordinances are also present at every level of legislation from the federal American Disabilities Act and FHA guidelines all the way down to the village building code. Properties that are not compliant with the requirements of the local building code are subject to fines and violations, both of which eat into investment profits. Much of the same can be said for zoning ordinances. In most jurisdictions, there is a mechanism to apply for a variance or appeal for both zoning laws and the building codes. Variances to zoning are more frequent than building code appeals, as building codes are driven by use and public safety concerns, whereas zoning is primarily driven by municipal planning and use. Understanding local building codes and zoning laws is essential to real estate profitability. To do avoid doing so is to raise the risk of an investment by exposing it to additional risk that can be easily mitigated. Attorneys, expeditors and knowledgeable contractors are effective allies in mitigating this area of legal exposure.
3. Understand The City/Town/Village Plan
Every municipality publishes a plan of development for its
area. Much has been stated and written about the importance of the local plan. This
document outlines the areas that the local government wishes to develop and the
incentives that it will provide to stimulate such development. Often times unviable
projects become realities, because they are either moved to or fortuitously located
in a development zone. Understanding the presence of incentives is essential to
obtaining an accurate estimation of value for a property. The local municipal
planning document will assist with such a determination.
4. Hire Great Professionals
This point is mentioned in numerous articles on this blog and above,
so it won’t be expanded in much detail here. If legal analysis and/or real
estate planning is not a strength, it is important to hire professionals to
ensure that the necessary information is readily available.
5. Remember That It’s Not Personal
Laws reflect the dominant ideology of an area. Every area
has its own context, demographic and history, which leads to a prevailing
sentiment of how real estate should be managed by default. In other words, real
estate laws are a collection of the most popular ideas of how real estate should
be run in an area. Most people aren’t anti-investment, nor are they against
wealth per-se. Most voters, however, will vote to protect their
interests and this takes different forms in different locales. In most
instances, with notable exceptions, real estate laws are not enacted for
personal reasons and, in the absence of extreme lobby power, there isn’t much
any one investor can do to change the laws. The most viable course of action for
most investors is to be aware of the legal scheme that affects a property, earnestly
consider if the local laws work for the investor’s criteria and find viable
ways to navigate the relevant laws.
So, this is my take on how to navigate legal structures affecting
a property. This a high-level view of this topic. This post definitely could
have been substantially longer, but I am happy to discuss your comments below.
Please join us for the third episode of The real Estate Think Tank Podcast
Click the link below to join:
The Real Estate Think Tank: Episode 3: Should I Buy A House Now?
Please join us for the second episode of the The Real Estate Think Tank Podcast.
Click the link below to join:
Please join us for the first episode of the The Real Estate Think Tank Podcast.
Click the link below to join:
The Real Estate Think Tank Podcast: Episode 1: Welcome to TRET
This may seem harsh, but please
let me qualify my statement by saying that it is not easy to maintain consistent
motivation. Having sufficient motivation to push through real estate losses,
market downturns, bankruptcies or even years of unfruitful prospecting takes inner
strength. During down times and after particularly difficult lessons in real
estate, it can often feel like the experience was a sign to quit or move in a
different direction. It takes true motivation, self-confidence and some self-delusion
to look at a negative real estate experience, learn from the experience and continue
on. This motivation is intrinsic and it only comes from a goal-driven approach
to make it in a real estate. Quitting can never be an option. To that end, I want to share the following link to
“The Strangest Secret” by Earl Nightingale, in the hopes that it is helpful to
someone.
The Strangest Secret: Earl
Nightingale
Having addressed the role of
motivation, let’s take a look at the primary reasons for not succeeding in real
estate and address them:
Not Enough Money, Credit,
Funding
The financial barrier to entry
into real estate deters most people trying to enter the market. I have written about this many times, but
I have no problem reiterating that there are many ways to get started in real
estate without using money or credit. I want to be clear, however—real
estate investment is not the only way to make money in real estate. I definitely
believe it to be the most lasting and transferable way to accumulate real
estate wealth, but there are other ways to make money in real estate. Obtaining
a real estate license or securing employment in as a real estate professional are both ways to begin a real estate career with little or no
financial investment. A career as a loan officer, appraiser, attorney, property manger or any other real estate service professional will not only expose you to real estate
markets and provide you with an invaluable real estate education, but can also
lead to wealth through hard work. This wealth is bounded by the amount of
hours that you can work and is not necessarily transferable, but it is feasible
and requires a much smaller financial investment upfront. Moreover, the knowledge and
experience gained in a real estate service career can lead to a transition to a
more informed investment career.
Focusing on the real estate investment
arena, there are a number of ways that you can begin with little or no money upfront.
Birddogging and whole selling are both real estate investment methods that can
require little to no money down. If your sphere of influence includes people
with disposable income, creating a presentation and requesting investments from
those that know, also takes a minimal financial investment. It may take an
emotional investment to try to make such a presentation, but such experiences
are part of growth. You can also save up over time, work on your credit place yourself in a position to invest in the future. Keep in mind the quote by Bill Gates:
“Most people overestimate what they can achieve in a year and underestimate what they can achieve in ten years.”
No matter what your financial position right now, you can become a viable real estate investor with a down payment through focus and determination. If ten years seems like a long time, plan to do it in five or three. The bottom line, however, is that three, five or ten years will pass even if you don't work to improve your financial situation, it only benefits you to make sure that you do so while this time is passing.
Markets are cyclical and we inevitably
find ourselves in a down market at some point. A down market, however, is never
an excuse not to start your real estate career. Although down markets may affect
real estate hiring and the availability of funding, there are opportunities to
invest and enter the real estate service market during any market. A down market merely signals a shift in strategy. I have written
previous posts about how to navigate a real estate downturn. Please feel free to scroll through this blog and read them. As reminder, however, the lack of funding that usually takes place during a down real estate market necessitates creative
financing like seller financing, buy-leasebacks (commercial real estate only),
private lenders and syndications. Landlords can avoid pitfalls during these
downturns by keeping reserves during times and prosperity, being very meticulous
at all times with vetting tenants and by searching for ways to improve expenses
and management during the lean times.
I Don’t Have the Time
This reason is a very popular
one. Many people feel that they have the desire to succeed in real estate, but
lack the time. For this reason, I have one question:
What occupies your time?
We certainly make time for the things that we deem essential. Many times, however, the non-essential items can inadvertently sap our time and energy. To that end, its important to be acutely aware of things that slowly leech away your time like TV, Netflix, and mobile games. It is also very important to take the time to truly self assess and make sure that you are not prioritizing items falsely labeled as essential. Committing to success in real estate will require a serious level of candor during this time of reevaluation.
I Can’t Find Deals
Finding investment opportunities is certainly a large concern for new investors. It can take some time to find the first set of deals, but consistency definitely yields results. In my experience, very soon after the first few deals come in, continued consistency leads you to a point where it feels like the floodgates have opened and soon the issue becomes that there are too many deals to be serviced. That said, below are a few ways that you can find your initial deals. This is by no means an exhaustive list:
I am happy to explain these
strategies in more detail in the comments, if you have any questions. I also want to mention that realtors and
attorneys are restricted from undertaking some of the strategies.
Real Estate Is Not For Me
Now, this is the reason that I
respect the most and my answer is very simple—“Don’t waste your time with real
estate.” There are many ways to build wealth and real estate investment requires a
certain level of passion and motivation, as described above. Real estate should
be a path to and not a distraction from wealth generation. Realizing that real
estate isn’t your arena is important step to finding your true area of
interest. I encourage you to seek that arena and pursuit with your whole heart.
In the words of Kevin Garnett, “Anything is possible!” Motivation is key. The best thing that a new or seasoned real estate investor can do is to find ways to kindle and feed that spark. Regularly revisit your "Why" and remind yourself of why you are seeking to succeed in real estate. Join a group of like-minded individuals and to continue to motivate one another. Read, attend classes, continue to learn and continue to improve.
Well, that is my take on the impediments to success in
real estate. Please feel free to comment below.
In service to this idea, I spent a few weeks attending
business classes and drafting a business plan in order to present the idea to
potential investors. Once the business plan was complete, I brought it to the
Small Business Administration to have another set of eyes on it. The plan was
essentially complete and required some quick format changes to meet the SBA’s
format. The changes were made quickly and the submission process was promptly completed.
A few days later, the SBA gave me a final opinion on the business plan. The
review wasn’t groundbreaking—it merely confirmed that the plan was complete,
but the necessary next steps were Earth-shattering in their simplicity.
The SBA suggested that I seek out angel investors and pitch
my idea to my sphere of influence, however, it also offered an alternative:
It really is that simple…at least in theory. Believe or not,
it is also very possible for most. This strategy is an expanded version of the
popular BRRRR-Buy, Repair, Rent, Refinance, Repeat, strategy that is frequently
discussed on the Internet and in real estate investor circles around the
country. I didn’t receive it from a local investor or from a get-rich-quick
website or even from a seasoned member of the real estate community trying to
market a coaching program, however, but instead from the federal government.
There can be no greater confirmation of the reliability of this strategy.
There it is. I’m definitely not the first to reveal this to
the world and I won’t be the last, but let’s explore each step of the process
more in depth:
Save Enough Money
The cost of entry is and lack of credit are the most
popularly used reasons cited for not investing in real estate. According to the
NAR, the National
Association of Realtors, the median home price in the United States is
$310,880. Admittedly, saving $63,000 can be outside of the means of most, but
there are many local markets which have properties for sale for less than
$200,000. If saving $20,000 to $40,000
seems to be an untenable amount, the average cost of a new car in November of
2020 was $39,259, according to Kelley
Blue Book. Assuming a poor/fair credit, causing a higher interest rate of
6%, a new car financed at 100% for the typical 5 year term, would cost $682 a
month. A used car costing $20,000 with the same interest rate and no down
payment would cost $387 a month. If those payments sound to high, a $17,000 car
under the same circumstances would cost $329 a month. Due to the interest built
into those monthly payments those hypothetical cars would be purchased at a
near 16% mark-up. Interestingly, placing $333.34 a month in a savings account
with 0% interest would allow a person to save over $20,000 in 5 years. If five
years seems like a long time to save, please keep in mind that five years will
pass whether or not you save at all. Furthermore, most people have bills that
they have paid consistently for more than five years for services, cars, cell
phones, etc. If necessary, a down payment can simply be thought of as another
bill—your Independence bill. There are certainly quicker ways to amass a down
payment—credit, borrowing from friends and family, birddogging, whole-selling,
but one things is clear, the barrier to entry is not an impossible hurdle.
Purchase An Undervalued/Affordable Property
This is probably the second easiest step of this the method.
I don’t want to be misleading, it certainly takes a great deal of effort to
locate a property that works best for your personal situation, but this is the
step during which the most support is usually offered. Finding a real estate
agent with whom you can work is essential to this process. Although it is both
possible and likely that the property that is chosen for investment is not
found through an agent, the access to market information that good agent has, as well as the benefit of
their transaction experience can be invaluable. That said, it is important to
look for a property that is at least in your price range and at best is
undervalued. It is also essential to stick with an area of familiarity, if you
have any. If you are a businessperson or are familiar with a certain type of
industry, then commercial real estate may be your forte. In most instances, however,
residential rental real estate is the easiest way to enter into the market as
most people are familiar with either living as a tenant or living in
residential real estate.
Although I highly recommend using a real estate agent, it is
important to seek off-market properties sales, as well. Estate sales,
for-sale-by-owner, speaking with local investors, tax lien sales and even
memberships to local real estate investment clubs are all viable ways to find
deals. REO sales are also a great way to find value, but those sales are very
much on market and are always listed with an REO broker. I generally recommend
not approaching a large REO broker directly as a new investor, as they
typically have a long list of investors with whom they already deal and usually
to whom they steer business. Anything that a new investor receives from such a
broker has usually been passed by numerous times by other investors and for
good reason. Establishing a relationship with small or “up-and-coming” REO
broker, however, could prove to be very valuable, provided that their REO
vendors are truly servicing that agent and not merely using him or her to test
the market for their properties. Tax liens are also a great opportunity for investment,
so long as you have time to investigate the property and a good title company and
a good ESA company to ensure that there are no serious restrictions or
environmental issues with the property.
A good lawyer, mortgage professional and home inspector will
ensure that you avoid any and all of those pitfalls. If you don’t know where to
find reputable real estate professionals, an experienced realtor or real estate
investor can provide you with contacts to professionals willing to assist you.
Above all, it is important to maintain a balance of not rushing into a
purchase, while not indefinitely sitting on the fence and never closing a deal.
Although the old real estate adage—“The money is made on the buy,” is true, it
is very important not to develop analysis paralysis.
Prepare The Property For Rental
Although I do not want to gloss over this step, as is it is
a key step to this process, to ensure that this post doesn’t turn into a book,
I will keep it short. Careful purchasing will ensure that the necessary repairs
are not substantial. In order to ensure that you can handle minimal repairs, it
is advisable to save an additional $5,000 to $10,000 for repairs. If this
additional amount to save seems to be prohibitive, then please reduce the
intended purchase price by $5,000 to $10,000.
Further, a reputable contractor is key to this step,
however, there is no substitute for attentiveness. An owner’s presence during
this phase of investment is key, both to show engagement and also because this
is an important time for an early investor to learn more about the process of
rehabilitating property.
Find Tenants To Rent The Property
If money is made on the buy, then finding tenants is where
the money is secured. Tenants can be found through effective advertising and
real estate agents. It may take some time to find the strategy that works best
for you and the property’s market, but it is possible to create a pipeline of
tenants for your rental or future rentals. It is also equally as important to vet
your tenants to increase the likelihood that they will pay on time. Credit and
reference checks are important to this process. You can either learn to how to
perform these checks, which are not difficult to learn, or hire a vendor to do
so. There are a few tricks of the trade, like never calling the current landlord
of a potential tenant, as they are never honest about a bad tenant, but this can
all be learned with time and research
Use The Rent To Pay The Mortgage And Build Up Equity
The beauty of owning a cash-flowing
asset is that it pays for itself. Even if you were to break even with the rent
after the mortgage payments is factored in, equity would still accumulate. In
some instances, it may even be worth taking a loss merely to build equity,
because appreciation works in tandem with equity accumulation. I would be very
careful, however, not to take losses on a property in a depreciating market.
That said, if you have acquired and rented correctly, this step is very
passive.
Refinance Or Sell The Property At The First Available
Opportunity
This is the payout. Just like the purchase, this is also a
step where you will find a great deal of support. Every real estate
professional loves working for a motivated seller and profit will be your
motivation. Although any number of things can happen to delay a sale and
marketing times may be longer than expected, depending on the market
conditions, the finish line is in sight at this point. It is important to
remember that all pricing should be well-informed and aggressive, if possible.
It is always greater to take a hit of a few thousand on the asking or purchase
price than bare the risk and cost of additional carrying charges, especially
when a deal is imminent. Flexibility and creativity in closing terms and
financing may also be helpful in avoiding unnecessary standoffs and allow both
parties to walk away feeling like their needs were met through the transaction.
If the opportunity presents itself sooner, it might even be
best to skip steps 4 and 5 and merely flip the property. That decision is
entirely up to you. The most important part is that profits gained are used
wisely and hopefully to buy more real estate.
Well, that’s my take on how to get rich in real estate. As I said earlier, the concept is simple, but the execution takes effort. Feel free to leave your comments below and please stay tuned for my next article—“Why Most People Don’t Get Rich In Real Estate."
2020 has been a life-changing year for everyone, literally everyone. From the global pandemic, to the fluctuating economy, not to mention the seismic shift in the perception of "going to work," it is safe to say that the world is different place than it was 12 months ago. Now what?
The lack of presence of real estate in this list is yet another illustration of what was obvious to all real estate professionals--2020 was not the year of the major real estate transaction. As people hunkered down during to quarantine, the economy fluctuated and work-from-home became the norm, the real estate market dramatically changed. Mortgage delinquencies rose, office spaces became more available, the cost of materials trended upward and permits for new projects trended downward. Migrations from urban areas also took place en masse in March and April as those with the means and desire to seek less crowded surroundings during the spread of the pandemic did so. Although the amount and duration of this recent migration may be disputed, the effects of this exodus have noticeably shifted the dynamic in many local real estate markets, for better or for worse.
As asked earlier, "Now what?" Anyone that has paid even a little bit of attention to this blog over the years knows that I do not "do" doom and gloom. There is always opportunity in change and if there is one thing that 2020 has done well, it is that it has exposed a number of opportunities. From the rise of Special Purpose Acquisition Companies to the consideration of rezoning in urban areas, opportunities to add value, create wealth and thrive in the real estate market are going to present themselves throughout 2021. Rather than make a brief list of some of these opportunities in this post, I will attempt to explore them more in depth in posts throughout the upcoming year.
![]() |
See you in 2021.
Watch the Market
The market always is always newsworthy, but for real estate
professionals certain metrics will indicate expense tendencies. One such metric or
indicator is Housing Starts. Housing Starts are an indicator that closely
predicts the residential real estate market. It tracks the number of
construction projects that have started construction after filing for a
building permit. This data is tracked by the Census bureau, which conducts
random surveys of building permit filers. Other such indicators are the prices
of timber, copper, steel and raw materials. Movement in the Futures for these materials is even more indicative of how the market believes these materials
will fare, as these are the prices that people are willing to pay in order to make sure that they are not hurt by pricing changes.
Speak with Professionals
No one is more up to date on the trends of expense pricing than the very people whose livelihoods depend on them. Below is a short list of some real estate professionals that could be helpful:
Accountants: These number crunchers are great general resources for expense pricing, as they are usually deal with many different types of business and are privy to the costs amounts of many different markets.
Contractors: Few professionals are as heavily affected by material and labor prices as contractors. As such, they are usually keenly aware of pricing trends.
Local Governmental Employees: Assessors and other county, state and local staff are usually awesome resources for filing and governmental fees. They are also usually aware of any upcoming changes in these fees.
Local Vendors/Suppliers: No one knows prices and pricing trends like the professionals selling materials.
Remain Flexible
Flexibility is crucial to proper prediction. Whenever forecasting or modeling, it is important to build in fluctuations into your expense assumptions. I typically account for an ambitious 5% year over year increase, with the understanding that if prices increase by a lesser amount or drop, my projected performance will only improve. Once notified of a significant change in a particular expense, it is important to update your models or calculations accordingly to ensure accuracy.
Accounting for expenses is an ongoing process that takes attention to detail. Accurate expense assumptions, however, can make or break your deal, so the effort is well worth it. That is my take on expense accounting. Please leave your thoughts below.