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RICH £4 DAD •OVIM'.KS FOREWORD BY ROBERT j HieABCs of Real Estate Investing The Secrets of Finding Hidden Profits Most Investors Miss KEN MCELROYThe ABCs of Real Estate Investment: The Secrets of Finding Hidden Profits Most Investors Miss By Ken McElroy The ABCs of Real Estate Investment will teach you how to: • Achieve wealth and cash flow through real estate • Find property with real potential – understand how to evaluate property and purchase price • Show you how to unlock the myths that are holding you back • Negotiating the deal based on the numbers • Increase your income through proven property management tools.This publication is designed to provide competent and reliable information regarding the subject matter covered. However, it is sold with the understanding that the author and publisher are not engaged in rendering legal, financial, or other professional advice. Laws and practices often vary from state to state and country to country and if legal or other expert assistance is required, the services of a professional should be sought. The author and publisher specifically disclaim any liability that is incurred from the use or application of the contents of this book. Copyright © 2012 by Ken McElroy. All rights reserved. Except as permitted under the U.S. Copyright Act of 1976, no part of this publication may be reproduced, distributed, or transmitted in any form or by any means or stored in a database or retrieval system, without the prior written permission of the publisher. Published by RDA Press An imprint of BZK Press, LLC Rich Dad Advisors, B-I Triangle, CASHFLOW Quadrant and other Rich Dad marks are registered trademarks of CASHFLOW Technologies, Inc. BZK Press LLC 15170 N. Hayden Road Scottsdale, AZ 85260 480-998-5400 Visit our Web sites: BZKP and RichDadA First Edition: September, 2004 First RDA Press Edition: January, 2012 ISBN: 978-1-937832-38-4Acknowledgements This book is dedicated to my wonderful wife, Laura, and my highspirited boys, Kyle and Kade. Thank you all for your constant support and understanding as this book was being written. Special thanks are also extended to Robert and Kim Kiyosaki, and of course to my partner, Ross McCallister, for never saying anything other than encouraging words as I took on this venture.Contents Foreword Learn from an Expert by Robert Kiyosaki Chapter One The Myths and the Magic Chapter Two You Gotta Have a Goal Chapter Three It Takes a Team Chapter Four Research Can Be Fun? Chapter Five Swampland for Sale Chapter Six Finding Your Diamond in the Rough Chapter Seven Is It Really a Diamond? Chapter Eight The Big Commitment Chapter Nine Due Diligence: The Easter Egg Hunt Chapter Ten Making Sense of It All Chapter Eleven You Own It…Now What? Chapter Twelve To Sell or Not to Sell Ken McElroy References and Resources Other Books by Ken McElroy Best-Selling Books in the Rich Dad Advisors SeriesForeword: Learn from an Expert Go to any bookstore, and you will find there are many books written on the subject of investing in real estate. If you are like me, you may have read several of them. While the books are written by people who claim to be financially successful, I notice that many of them are not really real estate professionals. One famous real estate author made a lot of money selling his real estate investment books, yet, in reality, he lost most of his money in real estate. Today, he continues to earn a lot of money selling his books and charging a lot of money for his seminars. Another famous author was a garage mechanic only a few years ago. He got into real estate after being fired from his job. Another book is written by an ex-banker who now sells his secrets on how to find foreclosure properties from banks. I recently ran into an ex-financial planner who stopped selling mutual funds after the stock market crash and is now holding seminars, teaching his investment secrets, and then getting his audience to invest in his high-priced properties. The Rich Dad Company asked Ken McElroy to write this book for five reasons: 1. Ken is a real estate professional. Right out of college, he began his career as a property manager. Today, Ken McElroy owns one of the largest property management companies in the southwestern United States. Ken is also a developer of multimillion-dollar commercial properties, the past president of the Arizona Multihousing Association, and has lobbied Congress for the real estate industry. 2. Property management is one the most important aspects of real estate investing. Many people do not get into real estate investing even though in my opinion it is the best investment class in the world because they do not want to fix toilets or deal with tenants. I do not blame them. Ken’s insight into the management side of real estate investing is priceless. 3. Property management is a long-term process. Finding a property, financing a property, and selling a property are, in most cases, relatively short-term events. If you are a true investor, rather than a speculator who flips properties for profits, the management of property is an ongoing process. In other words, the core of real estate is a long-term process of property management. 4. Property management is where most of the profits are made or lost. Many people lose money in real estate simply because they fail to manage their properties properly. If they cannot control the occupants, income, and expenses, the property soon goes downhill. The good news is that professional real estate investors love buying properties from investors who fail to manage their properties well. Why? Because you can often buy the property at a good price and then, with good management skills, you can increase the cash flow as well as the value of the property. 5. Ken McElroy is a great teacher. Ken McElroy is not only a Rich Dad Advisor, we are also partners in several property investments. Most important to you, he is a great teacher who knows what he is talking about. Ken often accompanies me to speak to large groups, where he talks about how to manage property, how to analyze an investment, and how to tell whether or not the seller or broker is telling you the truth. If you ever have an opportunity to hear Ken speak about investing in real estate, take it. As I said, there are many books on real estate investing and many people claiming to be real estate experts. What makes this book different is, first, it is written from the most important aspect of real estate investment, which is property management; and second, this book is written by a real expert. ~ Robert KiyosakiChapter One: The Myths and the Magic In every business and every industry there are people who just seem to drip with success. They seem to know all the right people, make all the right decisions, be in all the right places at exactly the right time. They seem destined for success whether they even try or not. Real estate investing is no different. In every city or town, there seem to be real estate tycoons that struck it rich through real estate. These are the people who just make success look easy. They appear confident, knowledgeable, savvy, and seem to see opportunities where others don’t. It’s easy for onlookers to think the achievements of these golden few are the result of luck or some sort of magic. But magic and luck have absolutely nothing to do with it. Over twenty years ago, I decided I was going to be one of the people I just described. I was going to make my own success, be my own boss, and achieve financial freedom. And I chose property management as my route. Call it instinct, call it impatience, call it burning desire. I wasn’t about to wait for a lucky break or a magic charm. I set out to make my dream happen, and I did it through action. In the early days of my first property management and real estate deals, there was a lot of trial and error and I made my share of mistakes. But for every one mistake I made, I learned ten lessons and got smarter every day. I started to see patterns, discover formulas and systems, and develop a network of people I could count on. It took time and it took work, but the more I pursued my dream, the luckier I felt and the more often magical opportunities presented themselves to me. Maybe there is a bit of luck and magic in success. But it’s luck and magic that comes from working hard and being prepared. At the Rich Dad Seminars, where I often speak, I see people all the time who are taking the first steps toward future success, much like I did nearly two decades ago. Many have what it takes: the drive and desire that will help them overcome obstacles and be prepared. Unfortunately, I also see at the seminars some who lack what it takes. They are the ones looking to get rich quick and have little or no idea of the commitment required to achieve business success. Others have a lot of desire, but lack the technical skill and the knowledge that can only come from experience. I wrote this book for them. This is not a get-rich-quick book. It is not a book written to motivate, although I hope you’ll be inspired to follow your real estate investment dreams. Instead, it is a book that will disclose proven methods, remove the unknowns, and shorten the learning curve for anyone who chooses investment real estate as his or her path to financial freedom. Before we get too deep into the how-to’s of finding, buying, and managing investment property, let’s take some time to drive out a few myths, myths that if you buy into them, will only hold you back. I think you’ll find the following list familiar. Have you or others said these very things? Are any of these statements echoing in your head and preventing you from moving forward? Are these untruths paralyzing you with fear? Let’s get rid of them right up front. It’s time to dump the baggage!Myth #1: You Have to Already Be Wealthy to Invest in Real Estate People think they need to have a large lump sum of money to invest in real estate. They think it is like saving for their first home or that it’s something they can only do once they have made their fortune elsewhere. Both of these thoughts couldn’t be further from the truth. You don’t need hundreds of thousands of dollars in the bank to invest in real estate and you certainly don’t need millions. All you need is a good real estate deal that makes sense one that has profit potential and is based on solid financials. My partner and I have been working this way for years. My very first investment deal was a condo that I bought furnished and rented out. It was a two-bedroom unit that I put into a rental program. People who wanted to get away from it all could call up and rent my condo or one of a hundred others for a weekend getaway. A cool $116,000 was what I paid and I put down $20,000 out of my own pocket. You’re probably thinking, “See, I knew you had to have some cash to get started in this business.” Well, I did that deal before I knew better. Contrast that with a more recent acquisition of a 182-unit apartment complex in Sun City, Arizona. The total cost was $9 million. Before you close the book and say, this is out of my league, let me finish the story. The down payment was $2 million, which we raised from other investors. My out-of-pocket was zip. I gave the majority of the ownership to the people who lent me the down payment; in essence, I formed a partnership with them. My salesmanship had nothing to do with it. The deal was the hero; it was so good that people wanted to be a part of it. What I’ve come to know is that there are a lot of people looking for good real estate deals. Some people are partner-averse, but I think partners are valuable. They help you spread your risk by allowing you to own smaller positions in a number of properties rather than a big position in just one. And it’s a fact that teams accomplish more. As for the return? Which deal would you rather do, the $116,000 property that cost you $20,000 or the one that cost you nothing and yielded you 10 percent of a $9 million deal? For the record, that’s $900,000 and I’d choose the latter any day of the week. Once you have located a real estate opportunity, the task is finding investors who are looking to earn a good return on their money. The first deal you do, granted, is the most difficult, because you are an unproven entity. But trust me: It gets easier and easier with every successful deal you put together. All things are difficult before they are easy. Today, my partner and I have people literally standing in line who want to invest in our next real estate venture. Not because we’re anything special. But because we are thorough. We look at a lot of deals and choose only the ones that are financially viable like the one above. We also communicate with our investors and treat them fairly. They make money when we make money. You may be surprised to learn that there are plenty of people interested in investing in real estate, particularly when other investment vehicles like the stock market and bonds are flat or declining. Just look around at a Rich Dad Seminar. There are thousands of people in every city in which we speak who are looking for real estate investment deals that make sense. One of the people in a Rich Dad Seminar could be your first investment partner.Myth #2: You Need to Start Small-Big Deals Are Too Risky There is nothing wrong with starting small. Perhaps you’re thinking about buying a $250,000 single-family home and making it a rental property. Or even a $320,000 duplex. But why rule out a $2 million, fifty-unit building? Believe it or not, any of these properties are within your reach. Of course right now you’re thinking, “No way! I can’t afford a $2 million mortgage!” And to that I say, you may be right, but you don’t have to be able to afford it. Here’s why. Mortgages on smaller properties like single-family homes are almost always guaranteed through the buyer’s own personal earning potential and wealth. You may be surprised to learn that larger investment property loans are secured by the asset itself. In other words, instead of the $2 million building riding on your own wealth, it is riding on its own valuation. This already is less risk to you. Let’s look at the previous example. The condo I purchased for $116,000 with a $20,000 out-of-pocket down payment was 100 percent my responsibility from mortgage to management. The $9 million project that I owned 10 percent offer no out-of-pocket cost was actually less risky because I had no cash invested and the property was professionally managed. The other property was mine, all mine for better and for worse. Five years later, I sold the condo for $121,000, a gain of $5,000. Recently we refinanced the 182-unit building, which we had owned less than a year. Its newly appraised value was $11.3 million, more than $2 million above what we paid for it. And since I own 10 percent of the project, I made over $200,000 in less than a year. A testament to the power of buying and managing right and managing well. This example also demonstrates risk related to valuation. When you buy a house or condo and rent it out, appreciation of the property rests solely on the appreciation of the surrounding neighborhood. You better have bought in the right neighborhood, because there is little you can do to increase the value of your property. By contrast, appreciation in commercial property, like apartment buildings, is based on the cash flow of the property itself. The more money it makes, the more money it is worth. Now you’re in control! When cash flow increases so does the value of the property. Manage your property right and you’ll increase the value. Don’t manage it right, and the value will stay the same or go down. Another way larger properties are less risky relates to occupancy. When a single-family home is rented, it’s 100 percent occupied. When it is empty, it is 100 percent vacant, and you are covering the mortgage out of your own pocket in its entirety. In a larger property, even an eight-unit building, if one resident leaves, you still have seven residents paying rent. Your exposure related to occupancy is greatly reduced the more residents you have. Myth #3: You Can “Flip” Your Way to Success or Get Rich Quick with No Money Down Many people think that flipping property, in other words buying it and quickly turning around and selling it for more than you paid for it, is the way to grow wealth. The people who believe strongly in this have been lucky enough to make money this way. But in my opinion, this is like day trading in the stock market. It isn’t easy, and it is very risky.No money down is another way of saying that the property is 100 percent financed. That means a much larger part, if not all, of your cash flow is going toward the monthly payment. In no-money-down deals, you’ll be paying higher interest rates because there is greater risk to the lender, have higher loan costs, and have virtually no money to improve the property or even repair it should something break. With this model, you are banking on the property appreciating to make money rather than improving the operations of the property and making money through cash flow. Let’s hope the market is high-flying and that you time it perfectly because you’ll be banking on external factors being just right. Appreciation, as you’ll see in great detail later, is only in your control when you’ve improved cash flow. In this scenario you have none! As you might have guessed, I don’t believe in zero dollars down, and I don’t believe in flipping property. Even in the example where I personally put no cash down on the $9 million apartment building in Sun City, we as an investment team put $2 million down. I believe that buying and holding income-generating assets like rental properties is how you build wealth. You may say, “But I need the capital gain” the additional equity I’ve made on this property to buy a second bigger rental property with more units. That means I have to sell the first one.In my experience this just isn’t true. What you need is a second investment deal that makes sense that you can bring to investors. They will help you raise the down payment on the second property and you will reward them as the investment makes money. We recently finished construction of a 208-unit property located in Goodyear, Arizona, which cost us $13.8 million to build. Upon completion it appraised for $16.3 million. We have received numerous offers to sell this property and brokers were standing in line for the listing. As tempting as it was to walk away after two years’ work with $2.5 million in cash, we did not sell it. The problem is one of taxation. Had we taken the $2.5 million gain, we would have been forced to place that money back in the market to avoid a pretty hefty tax bill. Sure we had appreciation, but we also had what is known as a “taxable event.” Imagine the tax bill of 30 percent on a $2.5 million gain. That’s an unnecessary $750,000 tax payment. If you want the money out, you don’t need to sell. You refinance the property and pull out what equity you can. There is no taxable event, and you are not forced to put the money into another investment. In the case of the 208-unit property, we will refinance and we will use the equity that we pulled out of the property to pay back our investors with interest. It’s a great system and best of all you still own the property, you continue to receive cash flow from the building in the form of rent, and as the building appreciates, you can refinance and take the gain “tax-free” again. That’s the money that you can use for other deals and it’s what I do every day. Property 95 percent of the time is going to become more valuable, not less valuable as the years pass. Especially if you follow the methods in this book that teach you to buy property right so you can afford the necessary improvements that will revitalize the neighborhood and make it a better home for residents. All that adds value and it makes sense to ride the wave of appreciation long term. Myth #4: Some People Just Have the Midas Touch It is easy to think that people who are successful investing in real estate have some sort of Midas Touch. But there is no such thing. They are just people who see opportunities and know how to make them real and profitable.Take any ten-acre piece of land. Let’s say this parcel is flanked by significant retail presence on all sides and most of the big retail chains are represented in adjacent centers. There’s also a large microchip manufacturer nearby that employs 1,000 people. Ask a tract home builder and he’ll see forty single-family homes on that ten acres. Ask a custom builder, and he’ll see ten luxury estates. Ask a retail commercial developer and she’ll see a new shopping center anchored by two large retailers, with specialty stores and restaurants as fill-in. Ask a multifamily developer and she’ll see a 150-unit apartment community with clubhouse, pool, and workout facility. Another commercial developer who specializes in office space may see a three-story office building. In other words, everyone sees the property differently, and each vision will deliver a different level of payout some better than others. The important part of recognizing opportunities is common sense. People who seem to have the Midas Touch use their common sense when looking at property and opportunities. In the example here, common sense tells me that building custom homes would be a tough sell on a ten-acre parcel flanked by heavily trafficked retail. Single-family tract homes may be just as challenging. Additional retail may be viable if the developer can lure high-quality anchor tenants to the location. But they may already be operating in other nearby centers. By far in this example, either multi-unit housing or office space are the most viable options. Why? Because of the nearby employment base, the absence of apartments in the area, the proximity to retail, and the lack of office rentals. The developer in this instance who builds offices or apartments will have the best chance of success and will appear to have the Midas Touch. There’s no magic, just common sense. How do you know you’re relying on your common sense? It’s easy. If everyone you talk with is having difficulty seeing your vision for a property it can be either one of two things: A revolutionary idea that will prove everyone wrong. Or a bad idea that everyone recognizes as a bad idea, except you. In 99 percent of the cases, the latter proves to be true. Remember, if you have to hard-sell your vision for a property to everyone you share it with, it is likely your project when completed will be a hard sell, too! And that will cost you money. Myth #5: You Need a Great Deal of Confidence Not true. People underestimate themselves all the time. They listen to that little voice of self-doubt that whispers and sometimes shouts in their brain telling them all the reasons why they can’t do something, why they shouldn’t even try. I believe there are two voices: the voice of reason, and the voice of self-doubt. The voice of reason is common sense; the voice of self-doubt is your past leading your future. I made a conscious decision not to let my past dictate my future. I grew up in an average middle-class home. There’s nothing wrong with that. In fact, in my estimation, there’s everything right with that. I worked for what I got. I learned solid values. A good deal of that came from my parents. My father was not particularly entrepreneurial until later in his career. Hardworking, yes, but not entrepreneurial. He worked for the same company for most of his career and earned a stable living that supported our middle-class lifestyle. It was a good life for me, my brother, and two sisters. When I got out of college I followed in my dad’s footsteps and got a job. But while in that job, I began to meet people-people who showed me their entrepreneurial ways. They became my mentors, and from them I became entrepreneurial. Then I combined the innatevalues I received from my parents and my own newfound entrepreneurial spirit and I became whole. Nothing in my upbringing would have prepared me for what I’m doing now. And yet everything did. I believe it is up to each of us to let go of the memories and the scars of unsupportive fathers, ultra-critical mothers, ridiculing friends, and teachers who labeled us from the first day of school. Everybody has had negative influences in their lives and every one of us will have lots more. Look at Hollywood. What’s a celebrity profile on E! without the struggles, without the strife? Everyone must rise from challenging situations…that’s what successful people do. They decide to get beyond their past, whatever it may be. I’ve chosen to accept my past, learn from it, copy what was good, and realize the bad stuff only makes me stronger. Real estate investing is a business where you will need to draw on your strength. My advice is not only to look for strength in all that is good in your life, but also to use the hard times for what they are: character-building experiences. And contrary to what most people think, we can never have enough character. That’s my soapbox on confidence and character. The rest of this book is dedicated to building your property investment business. Myth #6: You Want to Do It but Don’t Really Have the Time This really comes down to choices and priorities. There is always time to do the things we need to do like go to work every day, mow the lawn, feed the dog. Often there isn’t time to do the things we really want to do. Learn to speak a second language, build a bookcase, or volunteer in the community. There is a difference between need and want. We’ll often do what we need and put off what we want. Unfortunately our wants are what truly enrich our lives. The investment real estate business is something you should want to do and may even need to do. It’s work. To be truly successful, especially in the beginning, you will be involved in the day-to-day activities of finding and evaluating property, negotiating deals, overseeing contract repair work, possibly even managing the property once it’s yours. I can honestly say, I find the business rewarding, fun, and because of that, it is profitable. I fell victim to the myth of not having enough time myself, and I take full blame. Robert Kiyosaki asked me to write this book several years ago. Finally I embraced the idea and actually started wanting to get it done; but wanting was not enough. What got me going was a do-it-or-else deadline. That got my attention and made me realize I needed to get disciplined and write the book. That’s what got the book done. If you don’t have the time to begin your real estate investment business, maybe in your mind, you don’t really need to do it. Maybe you simply want to do it, and “want” alone may not be enough to get you started. After all, if you work during the week at another job, you will have to search for and evaluate property on the weekends. You’ll need to make phone calls when you can during the week or in the evenings. There’s always a way to make your dreams come true…as long as they are truly your dreams. Myth #7: You Have to Know Somebody to Get Going in This Business While knowing a few key people such as a real estate agent, an attorney, or a banker may save you some time, you don’t need to know anyone even remotely connected with investment real estate to get started. In this book, you’ll discover the key people you need tohave on your team. And you’ll find that the goals you set for yourself will actually define the team. People you know today may or may not be the ideal people for your team once you determine what you want to gain from your real estate investment business. Just get started and you’ll be surprised how many people you’ll get to know and how much they will teach you. You’ll have “friends in the business” before you know it. Here’s what I mean. We’re doing a deal in Portland, Oregon. I live and work in Arizona. I hadn’t been to Portland in over ten years. Anyone I had once known there was long since gone. Neither I nor anyone else in my company knew a soul in Portland. What we did know was that the city was situated on two rivers and that unemployment was high. The latter meant that the people who owned property were probably not doing so well. And to me that spelled buying opportunity. We had one big problem: We knew about the city, but we didn’t know a single person in the city. We figured the market conditions were at least worth a plane trip and a few days in Portland. Before our trip, we made our minds up to find our team, at least the start of it. So we went on the Internet and looked up property managers, city officials, brokers, and so on in preparation for our trip. We were not about to travel that far and not meet with anyone who could educate us about the market. As a result, we had ten or twelve meetings over a period of two days. It cost us a few lunches and dinners, but we had the beginnings of our team. Myth #8: You Have to Be a Seasoned Negotiator and Businessperson Again, this is just not true. Experience in business may make that first walk into an investor’s office more comfortable, but that’s all it will do. Your true power and confidence won’t come from your past experience. Instead, it will come from the solid deal you assemble that is a win-win for everyone involved. This book will show you how to find and evaluate property with the ultimate goal of establishing a realistic purchase price that maximizes your monthly income and appreciates the asset. Find a deal like that and everyone will want a piece of the action. Over the years, I’ve walked away from a lot of deals, and negotiation had nothing to do with it. One of those deals was a 205-unit building in Glendale, Arizona. About a year ago the listing price was $7.9 million, and the broker told me there were other offers the highest one being $7.2 million. We did our homework on the property and by my estimation; $7.2 million was fair based on the operations of the property. The seller declined every offer and pulled the listing. Six months later, the seller relisted the building for $8.1 million. If I had still been interested in the property I would have made an offer based on operations. It would have been the same $7.2 million offer I made before. The seller would probably kick me out, along with everyone else who made him an offer based on operations. Are you surprised to learn that he still owns the building today? With the method in this book, you’ll find out that the listing price is meaningless. There is no point negotiating based on this number, and actually doing so is a recipe for disaster. That’s because in most cases, the listing price is the seller’s opinion of what the property is worth. It is not founded on the actual operations of the property. What most people consider negotiation meetings are for me more accurately described as presentation meetings. That’s when I present the numbers, and they are pretty much take-it-or-leave-it deals. When I get kicked out, and in truth, usually it is a mutual parting of the ways, it’s because the numbers don’t work. Walking away is a good thing.Myth #9: You Have to Know a Lot About Real Estate This myth holds people back every single day. They feel they have to already be experts in a field in order to be successful, whether it is real estate or stock investing or dry cleaning! First of all, success is a journey, it’s not a destination, and all successful people start at the same place. One day they wake up, they throw their legs over the side of the bed, they yawn and they begin. Only by beginning and by continuing day after day do we ever become experts. We gain expertise through experience. By reading this book, you’ll get a solid framework from which to begin. And you’ll gain enough knowledge to sound really smart at cocktail parties and backyard barbecues, but more importantly you’ll learn tons more from your first deal. And more still from your second and third. And even more from your fourth. I learn something new with every venture. Some of the buildings we recently bought in Portland were built on an old wooden pier constructed in the 1930s. Who would have guessed when I embarked in this business that I would have to learn everything about the structural integrity of seventy-year-old piers? Not me, but we needed to find out everything about the condition of that pier before we went forward and purchased the property. I live in the desert. So you can imagine how foreign it was for me to hire divers and a boat and structural engineers to do the inspections. It was a real learning experience. I’m always encountering something new. That’s part of what keeps it all interesting. The only way you’ll know a lot about real estate is to begin in real estate. Once you do that, you’ll meet people, learn your market, see the patterns, and understand the trends. You’ll encounter your own seventy-year-old wooden piers, but that will keep it fun. And before you know it, you’ll be wowing people at cocktail parties and barbecues with experiences you’ve lived rather than just read about. Myth #10 You Can’t Be Afraid of Failing Show me an entrepreneur who says he or she isn’t afraid of failing and I’ll show you a liar! A bold statement, absolutely, but a true one. Everyone is afraid of failing. The difference is that some of us let that fear of failure hold us back. Sometimes fear stops us from beginning altogether and that’s unfortunate. If that’s the case, make the decision now to just begin putting one foot in front of the other, making one phone call at a time, visiting one property, and then another. It’s not hard, but it can seem so if we focus on the end result instead of the tiny—and very doable—steps in between. Sometimes fear of failure occurs when it comes time to “pull the trigger’’on a property. I call it analysis paralysis and people fall into it all the time. They overanalyze an opportunity and are never quite able to sign on the dotted line. This book will prove especially helpful to people with this sort of fear because it will show you exactly what you need to know to analyze an investment property. When the numbers add up, no further analysis is necessary. Frozen in fear will be a thing of the past. Another way fear of failure presents itself is through regret. In other words, we’ve pulled the trigger, but then when difficulties occur—and they will occur, they always do— we regret the decision and waste energy by asking “Why did we do this?” instead of “What can we do to get past the hurdle?” This form of fear can turn an otherwise great opportunity into a bad investment. In my life, I don’t regret decisions. I just consider the place where I’m at as the starting line and go for the gold every day.I admit when I was just starting out I had an acute fear of failing. The difference is I knew that if I did nothing and remained frozen in fear, I would fail. I felt I had a better chance of success by just going forward one step at a time to make some opportunities pay off. That’s the thing about fear of failure, if you don’t use it to your advantage as a motivator, it becomes a self-fulfilling prophecy. Myth #11: You Have to Know the Tricks of the Trade There are no tricks of the trade in the purest sense of the term. But there are secrets to success in life. And as long as you know those, you’ll be successful at anything. First, you have to set goals. Goals will be the foundation of the roadmap for your success. They will also tell you when you have arrived, so you can pat yourself on the back. Everyone needs that reinforcement. Not coincidentally the next chapter is all about goal setting. Second, you have to persevere. Quitting when things get tough doesn’t produce winners. In fifteen years, I could have quit a hundred times. I’ve had plenty of tough problems. Financing that falls through, employee problems, and downright frightening resident issues. But successful people work through difficulties and they come out on the other side stronger, more confident, and better prepared for the next challenge. And trust me, there will be more challenges. Finally, you have to understand the process. That’s what this book will do. It will take you from beginning to end and every step in between. From setting goals to setting up your team, to finding property, to evaluating it, to determining a purchase price, to managing it, I’ll let you in on fifteen years’ worth of experience. I hope this book will become your handbook for success. CHAPTER ONE ACTION STEPS • Understand the myths in this chapter. • Ask yourself if there are any others. • Identify the ones you believe to be true. • Determine which myths have been responsible for hindering your success. • Make the commitment to abandon these unproductive myths. • Make the commitment to learn techniques and preparedness so magical things happen.Chapter Two: You Gotta Have a Goal The title of this chapter spells out pretty clearly how I feel about goals and real estate investment. Having a goal is not optional. Goal setting is step number one in the process. In this chapter, you’ll learn how to set your goal, what a realistic goal should look like, and set milestones to achieve it. You’ll come to understand the benefits of goal setting and discover how “goal power”can be your key to success. When I first started out, I had a goal. I wanted to be my own boss. I was tired of working for someone else, and wanted to start some sort of business on my own. Admittedly, I never actually wrote down my goal in those early days, and I didn’t tell too many people either. In fact I barely verbalized it to myself. More accurately, I felt it. It wasn’t until years later that I really understood goal power, the power you feel when you’ve set a target and you concentrate all your efforts on hitting it. It makes you focused. It makes you decisive. And ultimately it makes you successful. I don’t know if anyone else before me has used the term “goal power.” It just seemed to accurately communicate a fact that’s important right now: that having a goal makes you powerful. What’s a Goal? It’s easy to get hung up on terminology. Is that a goal? Is it a vision? Maybe it’s an objective? Maybe it’s a mission? Forget all that right now. And don’t worry about textbook definitions. My goal with this book is for it to become the best-selling guide that simplifies the process of real estate investing by showing you how to find, buy, and manage property right, and I may as well start with goal setting. A GOAL IS SOMETHING YOU PLAN TO ACHIEVE Simply stated, a goal is something you plan to achieve. Maybe your goal is to buy one investment property in a twelve-month period. Or maybe you want to earn $5,000 per month in income within two years. You might even set your goal so high that you decide you want to be the number one rental property owner in your town within five years. Whatever goal you set, make sure it is something you plan to achieve. Nothing is more valueless than a goal that sits on a shelf and never receives any action. Those are simply dreams. There’s no real power in dreams unless they are acted upon. YOUR GOAL SHOULD BE MEASURABLE Your goal should be measurable. My goal of wanting to be my own boss wasn’t really a good goal. As I said, it took me years to learn how to set goals and to take advantage of the power they harness. A much better goal for me would have included a time limit, say within one year, to become my own boss, or an earnings level, like earning $75,000 per year. Goals that are vague are hard to attain and are even harder to stick to. If there is no time limit, dollar amount, or rank comparison, for example, how will you know you have “arrived” ? It’s virtually impossible.One real estate investor I know has a very measurable goal to acquire one two-unit property per year. Another has a goal of acquiring ten homes a year. The point here is that the goals are achievable and measurable. What will your goal be? YOUR GOAL SHOULD BE ATTAINABLE Goals must be realistic and attainable; otherwise they will either be shelved and never acted upon or modified midstream to something more realistic. The latter alternative is acceptable, but goals that are set too high can trigger feelings of failure if not attained. On the other hand, they can be exhilarating if actually achieved. My first goal of becoming my own boss was very achievable looking back on it. But at the time it seemed like an ambitious dream. After all, I had a steady job that paid for my car, my house, my lifestyle. Deciding to give all that up was frightening, but I knew it was something I had to do. The goal, while lofty, was not impossible. And that gave me hope, motivation, and a desire to achieve it. Setting Your Goal Goal setting requires you to be honest with yourself and reflect on what you really want in life. That means taking the time to think about what you want for yourself and your family right now, in the years ahead, and long into the future. It may even include aspirations you have for your children. If you think this level of goal setting is a waste of time, you may want to reconsider. I learned about two fantastic goal setting programs through my involvement in an association called the Entrepreneurs’ Organization (EO). I’m past President of the Arizona chapter and my involvement has been one of the best business decisions I’ve made in my career. The first program is called Strategic Coach, and it’s founded and run by Dan Sullivan. This program is centered on the “seven laws” for experiencing continued personal growth and helping you develop a life plan. Strategic Coach meets with you every quarter to see how you are doing to achieve your goal. The Strategic Coach Seven Laws of Lifetime Growth: 1. Always make your future better than your past. 2. Always make your contribution bigger than your reward. 3. Always make your learning greater than your experience. 4. Always make your performance greater than your applause. 5. Always make your gratitude greater than your success. 6. Always make your enjoyment greater than your effort. 7. Always make your confidence greater than your comfort. TM & © 2002, The Strategic Coach, Inc. All rights reserved, There’s another terrific program called Setting Family Goals by Charlie and Barbara Dunlap. This program focuses on balancing your marriage, family, and business. Think about it, how much time do you spend planning your workday? How much time do you spend planning your family or your marriage? If you were like me, planning work was at the top of the list and I spent very little time planning my family goals.After meeting with Charlie and Barbara Dunlap, I now have a solid plan for my marriage, my family, and my work. Work is now in third position, behind marriage and family. Once I developed a marriage and a family plan, I actually became a better businessperson because my personal goals integrated with my work goals. Charlie and Barbara say your goals should be general, but it is the specific to do’s and the objectives that need to pass the SMART test. “S”• specific “M” measurable “A”•agreed upon in writing “R”•realistic “T” time activated Charlie also happens to be my personal mentor and I meet him once a month. Strategic Coach, Charlie and Barbara Dunlap, and a host of other similar organizations enroll thousands into their programs every year. People are setting goals and shaping their lives…intentionally. If you think this is crazy, know there are whole industries built on this, and people everywhere are using goal setting to make their dreams realities. It’s been said “a goal not written down is a wish.” I’ve also heard “a goal is nothing more than a dream without a time limit.” I made a decision a long time ago not to risk my future on wishes and dreams. Instead I got smart and set goals with the help of people like Charlie and Barbara. You can reach Charlie Dunlap at [email protected] for further information. These are the people who are setting courses for their lives and living them. Sure there will be bumps in the road and sometimes they will get off course-even change their courses purposely along the way. But the bottom line is that their goals empower them. YOUR GOAL MAY EVOLVE OVER TIME After many years of working for myself as one of the two principal owners in Arizona- based MC Companies, the real estate investment firm my partner and I still own today, I began to discover that my goal had evolved. I wanted to be more than just my own boss. I realized that I wanted freedom. Freedom financially to do the things in life I wanted to do. Like spend time with my children. Coach Little League and travel with my family. I knew this goal could only be attained through the accumulation of wealth, wealth that would appreciate over time. So my partner and I, in addition to managing properties, began investing in them as well. Today, I have a measurable goal related to financial freedom. I’m not there yet, but I’m working on it! There’s nothing wrong with a goal that evolves over time, unless you are changing your goal every time you hit a roadblock. That’s called avoidance. Over time as you are working to achieve your goal, your experiences will make you smarter. You may even see things a whole new way. Your goal may shift as a result of new awareness. My first goal was to be my own boss. That evolved into a goal of financial freedom, and now my goal is to help others who want to do the same.MAKE YOURSELF ACCOUNTABLE TO SOMEBODY When I set a goal for myself a few years ago to get back in shape, I knew I’d have a better chance of succeeding if I had a partner. You know, someone who I’d meet at the gym every morning. Someone who would egg me on to do just one more set on the bench press machine. Someone who I knew, on those mornings when I just didn’t feel like running, would be waiting for me up the road at 5:30. This is accountability and goals are easier to attain when there are one or more people supporting and encouraging you. At MC Companies I have my partner, Ross McCallister. Ross and I help each other stay on course with our five-year strategic plan. We also share the plan with the entire company of over 200 employees. By including everyone in the vision everyone knows how they fit in. We’re also accountable to one another, and we’re all working in the same direction. The person or persons you are accountable to could be a business associate, a friend, your husband or wife, even your investors and employees. The important thing is to find a person who is encouraging and supportive of your venture. That’s not to say you’re looking for a person who never challenges your decisions. On the contrary, you’re looking for a person who is based in reality and supportive of your dream. Achieving Your Goal Setting your goal is certainly an important first step, but what you do after that really defines the level of success you will ultimately achieve. Achieving my goals meant I had to do four things really well: Communicate, plan, persevere, and stay focused. Let’s look at these important concepts in more detail. COMMUNICATE YOUR GOAL CLEARLY If you have goal fear, that is the fear of telling anyone your goal in case you don’t achieve it, get beyond it. When you have your goal set on paper and burned into your psyche, tell everyone. Tell your real estate agent, tell your attorney, tell your friends, family members, business associates, I mean everyone. These are the people who will help you attain it. And in case I haven’t made it clear yet, goals are never achieved alone. Here’s an example of a hypothetical goal: We will acquire one eight-unit property in your metro area within the next twelve months that will generate at least $4,000 of average annual income over the next five years. That’s a goal. It’s measurable and it’s clearly defined. It’s certainly attainable. All that is really left is to make it happen. Contrast that goal with this uninspired and non-motivating goal statement: I want to invest in some real estate and am looking for a good rental property deal that will supplement my income. This goal is extremely vague. It’s hard to realistically attain and difficult to execute. And forget about communicating it! But unfortunately, that’s how most people set and communicate goals, if you can call this statement a goal. It really sounds more like a pipe dream. If you share a goal as written in the first example with a few real estate agents, a few mortgage brokers, and some property managers, I know you will get calls. They will bring you opportunities because they can tell you are serious, that you know what you want, and that you have a set time limit. If you go to the same group with the goal as written in thesecond example, they will probably not respond at all because they don’t know how. There’s nothing there for them to sink their teeth into. Few if any opportunities will come to you; instead, you’ll be forced to find opportunities yourself. And given the vagueness of the goal, you have a lot of work ahead of you. Communicating a goal effectively puts you in the driver’s seat. In the first goal example, you’re in charge. In the second goal example, if any real estate agents respond to you, they will be showing you the properties that are in their interest to sell, not necessarily in your best interest to buy. That’s a dangerous position. You’ll know whether or not your goals are concrete by listening to what you say. Should you find yourself saying phrases like, “If you hear of anything, let me know…or “Tell me if you see anything that looks good…then you need to define your goal further. Those phrases are telltale signs of vagueness. PLAN AND SET MILESTONES Once you have your clear, measurable goal defined, you’ll also want to lay out the path you plan to take to achieve it. That means drafting a plan and setting milestones so you know when you’ve achieved important steps along the way. There are fundamental milestones that relate to personal behaviors and financial freedom. What behaviors should we change or eliminate? Behavioral Change To-Do List Taking the same route to work every day. Hour-long lunches. Watching TV every night. By changing these three simple behaviors you are setting milestones that help you achieve your goal. Taking a different route to work gives you new scenery and helps you learn about the market and the properties within it. It helps you understand traffic patterns and gives you new perspective on new areas. Using half your lunch hour to eat frees up the other half to make phone calls, meet with your team, and even visit properties. And in case you’re a numbers person, a half-hour per weekday adds up to ten hours per month! Finally, eliminating TV, or at least reducing your viewing time, frees up countless hours in the evenings to work on your business. Look at your own behaviors and modify them to achieve your goals. How much money do you need to make to be financially free and what are you going to do to make it happen? Financial Freedom To-Do List Add up your personal expenses. Determine what you can reduce, eliminate, or do without. Figure out how many properties you need to buy to cover the total.Over the years I’ve established a system that I use every time. It’s the system you’ll discover in this book. You should also communicate milestones clearly to your network of business partners, and everyone you meet. You never know who will be the one to reveal the perfect property opportunity to you, so the more detail you can provide up front the better. Business To-Do List Find your team. Evaluate the market. Find a great property. Assign a valuation to the property. Establish a property plan. Develop a budget. Manage the property. Use the chart to help you map out your goals. Be honest with yourself and write in those things that you really plan to accomplish. PERSEVERE AND DRIVE THROUGH ALL OBSTACLES If you’ve ever been part of anything entrepreneurial or even if you ever built something from scratch, then you know endeavors such as these take twice as long as you think, require twice as much work, and cost a lot more than you expected. Those are facts of life, so I am never surprised when they prove to be true. Every project brings with it obstacles. Things that make work work, if you want to look at it that way. Or, things that keep work interesting. I prefer the latter. In Portland, the acquisition of our waterfront building is destined to be a great investment. It’s right on the Willamette River, and as I mentioned earlier, part of the building is built on the pier. There are waterfront views and the entire project is over 300 units. There’s nothing else like it in the whole city. Sounds like a dream come true. Well many would have viewed the dream more like a nightmare from the start. From problems stemming from years of deferred maintenance to battling numerous structural inadequacies, you name it and we encountered it. We could have let these obstacles and dozens of others stop us a hundred times from closing on this deal. But we knew in our hearts this property was worth the effort. It was worth driving through every one of these obstacles.We found solutions and invested the money necessary to bring this amazing project to its full potential. When it comes to property investing, the saying “where there’s a will, there’s a way” has never been more meaningful.KEEP YOUR FOCUS There’s a funny thing about goals and success. The closer you get to achieving your goal and the more successful you become, the more opportunities will come your way. You’ll be tempted on almost a weekly basis with new properties and other business opportunities that promise to increase your revenue. The “sure things” will come out of the woodwork. At least this is how it was and still is for me. All these opportunities are great, but you can’t let them steer you away from your goal. Here’s what happened to me. After we had built our property management business to a significant size and had begun looking for ways to increase revenue, I decided to start a carpet cleaning company. It made sense at the time; after all, we had thousands of apartment units with carpets to clean, why should that business go to some other company? That single lesson cost me a quarter of a million dollars. But even more than the money, it took my eye off my goal for at least a year or two. It slowed the pace of our growth. Our company would have achieved its goal a lot quicker if it hadn’t been for this diversion. I guess I should say I learned more than one lesson on that deal. As opportunities present themselves, ask yourself, “How many balls do I want to juggle? If I take on this project can I manage ten more balls in the air? And more importantly, will taking on this project get me closer to achieving my goal?” If your goal is to buy an eight-unit property and earn an average of $4,000 per year in the next five years, will a hot deal on a single-family home get you closer to achieving that? No it won’t, and in fact, it will divert your attention from the original goal and certainly not net you $4,000 per year in income over the next five years. If you are set on your goal and you should be sometimes it means passing up great deals that don’t support it. Focus equals discipline. Goal setting is not an option; it is a requirement for success. The sooner you begin establishing your goal, the sooner you’ll be ready to take the next step establishing your team. CHAPTER TWO ACTION STEPS • Understand and believe in goal power as a means to accomplish your dreams. • Search within yourself and set a goal for your real estate investment business. • Overcome goal fear, which is the fear of telling others your goal in case you fail. • Find someone to whom you can be accountable. • Tell everyone you see about your goal. • Set milestones, the baby steps, for achieving your goal. • Tell everyone about your milestones.Chapter Three: It Takes a Team Who was it that said “No man is an island”? Whoever he was, he could have been living in the twenty-first century because today we don’t do anything without the help of other people. Even when movie stars win Academy Awards, they never walk up to the podium, face the crowd, smile, and say, “Thank you. I am quite wonderful for having done this all by myself.” Instead, it practically takes a vaudeville cane to yank them off the stage as they thank the hundreds of people who helped them all along the way. Everyone has a team. Even the Lone Ranger had Tonto and Silver! Well, in the business of investment real estate, you can’t afford to be a lone ranger. In fact, it’s impossible to accomplish your goal on your own no matter what your goal is. And no one is expecting you to. Quite the opposite. We’re expecting you to build an extensive network and a close-knit team that will be your most valuable resource. Why Have a Team? Having a team of experts on call is not free and it is not cheap. Those are the two biggest reasons why many inexperienced investors make a rookie mistake: They try to do almost everything themselves. Sure, they may save a few dollars in the short run, but they usually lose in the long run. Without experts on your team, deals take longer to find, evaluate, and close, so there’s the value of your time and the loss of valuable opportunities. Do-it-yourselfers miss details that experts would see in a minute, like clauses missing in contracts, obvious defects in construction, and hundreds if not thousands of other issues experts would point out up front. An expert team on your side means you’ll have fewer surprises as you wade through the sometimes turbulent waters of purchasing and managing a property. Surprises are wonderful on birthdays, but the kinds of surprises that come from investment property are usually not very welcome. Real-World Case One investor who decided to go it alone is a man from Seattle who called us right after he purchased a 100-unit property and asked us to help him manage it. The key word here is “after.” The property is in Phoenix and he had absolutely no plan for it. He had never walked into any of the units; he never called anyone to inquire what the resident mix was like. He never even checked what kind of neighborhood the property was in. When we talked it was obvious he had not done any research at all on the property; he bought it sight unseen. The property was in massive disrepair—a nice way of saying it should have been condemned—and worse than that, it was full of gang members. Even the Phoenix police department was instructed to never enter the premises without backup. This man’s laziness on the front end cost him tons of money. I wonder why now, but we did take on the management contract for this property and the price tag was pretty steep to get this place back in shape. Outside contractors of every kind, lawyers, you name it, we hired them all. We sent eviction notices that nearly evacuated the entire place just to get rid of the riffraff. That meant the owner endured months of significantly reduced income and sky-high marketing costs to get the property leased. It was a mess that took the better part ofa year. If this man had taken the time to establish a network of people in Phoenix before buying property, they would have either steered him clear of this property or flushed out all the issues so he could have established a plan to turn the property around. This is just one example. There are thousands of others. The point here is simply that the wise investor pays on the front end and reaps the rewards on the back end. The fees it would have cost the property owner from Seattle to have his Phoenix team visit the property and file a report or two were a pittance when compared with what it cost him out of his own pocket to get his investment in shape. Had the work been identified up front, the cost of the property improvements would have been factored into the seller’s listing price. Build your team now. You’ll save money and be prepared for whatever you encounter along the way. And here’s one more bonus. Often it is the team you establish that becomes the foundation for your entire network. Think of your network as your lifeline. Not only will they help you with the deals you’re working on now, they are usually the ones who will bring you your second, third, and fourth property opportunities—particularly if you have voiced your goal to them clearly, as discussed in the previous chapter. There’s no need to do all the work yourself. You need experts. I’ve been doing this for years and I still rely on my team of experts. I wouldn’t do a deal without them. My Brother-in-law Is an Accountant People have wildly different views on partnering with family members. Some say go for it and save a bundle. Others say avoid it at all costs. I fall somewhere in between. I believe that having family members on your team, or even partnering with them, is a good idea as long as you make an informed decision and know what you are getting into. You’ll want to go in with your eyes wide open on this one, because, let’s face it, next year’s Thanksgiving dinner is on the line. Plenty of families can mix business relationships with personal relationships and do just fine. Others have not mastered the art. Only you know where your family fits in. Having family members on your team has some pros and cons as you can see in the table below: The Pros and Cons of Working with Family Members Pros: • It’s easy. This is definitely the easy way. If my brother-in-law is an accountant, I have that chore done. No need to spend time shopping around. • Keeps the peace. In some families, hostilities may occur if you don’t use the in-house pro. • Low cost or no cost. Often family members will give away their services to relatives for nothing. Cons: • Loss of objectivity. It’s hard to have the tough conversations you need in business with a family member and still “pass the turkey” the next day. • Loss of bargaining power. I evaluate rates and fees annually with all my suppliers; this is tough to do with family members. • Loss of relationships. Families have been destroyed over bad business dealings.Whichever route you choose—to employ the talents of family members, or to not employ them—know that your degree of success will be directly proportional to your degree of integrity. People like to work with fair and honest people. This book and its methods are based on those values. Master them and I guarantee you’ll sleep better at night and not surprisingly, people will line up to work with you. Partners—A Good Thing or a Bad Idea At MC Companies my partner, Ross, and I have been together since almost day one. His skills and my skills dovetail perfectly. He handles the construction and development and I handle the management and operations. We both handle acquisitions and together we each bring to the deal our own unique perspectives. It’s a great relationship and because we have mutual respect and honesty, it works. We also push each other along, as I recommended in the last chapter. It’s great to have someone to whom you are accountable. We’ve accomplished a lot more together than we ever would have accomplished alone. QUALITIES OF A GOOD PARTNERSHIP Some partnerships are destined for success and others are doomed to failure right from the start. What makes or breaks a partnership? Here are some qualities good partnerships have in common: • Healthy debate: You should have room for debate before decisions are made. • Open-mindedness: You shouldn’t have to spend valuable time continually convincing your partner of your goals. • Commitment: You should be committed to each other and your goals. • Similar values: You and your partner should share the same values. • Accountability: You and your partner should push each other to achieve objectives and have mutual accountability. These qualities will guide you in establishing a partnership in your business. Now we’ll look at how to partner with others outside your company: setting up your team. Your All-Important Team The following lists include all the people and professionals you will eventually have on your team and how to evaluate and select them. While the lists may appear overwhelming, understand that you will accumulate these contacts over time, and you don’t need all of them at all times. There’s no need to run out and start interviewing paving companies, for example, when you don’t have a parking lot that needs resurfacing. You just need a few key team members to get started—an attorney, an accountant, a real estate broker, and a property manager. But here are the full lists to get you prepared: YOUR BUSINESS TEAM Before you do anything, even print your business cards and letterhead, get your business set up correctly. To do that you’ll need to talk with an attorney who will advise you aboutsetting up your company. Should you set up a corporation, a limited liability company, or some other business entity? You’ll need to know the pros and cons of each to make that decision. Regardless of which you choose, having a formal company established will protect your personal assets and provide tax advantages to you. If you need more information before choosing your own business team, you should contact: • Your own attorney. You’ll need this person to file the paper work with the corporation commission. There are do-it-yourself kits, but unless you know what you’re doing, I advise against them. • Your own accountant. This person will be able to give you tax advice based on your own personal financial situation. THE PROPERTY SEARCH TEAM The property search team includes people you will most likely have to find on your own. I recommend interviewing several professionals in each field until you find people you like, who know the market, have your same level of integrity, and who understand they are there to help you achieve your goal. Both of these professionals can also help you establish the rest of your team especially for the property inspections commonly called due diligence once you get into escrow. • Real estate broker. The real estate broker will help you understand your market and help you find properties. • Property manager. This person will help you assess the properties you are considering from an operational perspective. They will give you a solid idea of what you are getting into. THE OFFER TEAM Your property search team will most likely refer some or all of these professionals to you as you need them. That’s another reason why who you choose as your real estate broker and your property management contacts are so critical. They set the tone for your entire team and therefore your entire work experience. Choose wisely! • Attorney. Your attorney will certainly help you set up your business, but he or she will also help you wade through letters of intent and purchase and sale agreements. • Lender or mortgage broker. Find a lender or broker who understands the business of property investing. Not only will they lend you money, but they will also provide you with leads on other properties that are ripe for sale. • Investors. By communicating your goals and doing the work of building your team, you should find several sources of equity who will entertain investing in rental property. • Contractor/Rehab specialist. Contractors see things you and I don’t when it comes to walking a property. Before I sign any deal, I have a contractor perform a detailed inspection and file a report of all critical and noncritical repairs. OTHER TEAM MEMBERS From time to time, you may find you need these professionals to assist with projects that arise when either considering a property or once you own it. As with the professionals on the previous list, these team members will come to you through referrals.• Accountant. Your accountant will help you not only with your own business finances, but also help you put together profit-and-loss projections for the properties you are considering. • Appraiser. An appraiser is an important team member and should be a person who specializes in both your market and the types of properties you are targeting. This professional will help you determine the appraised value of property before and after the sale. • Architect. Some properties need more than just a coat of paint and the bushes trimmed to get them into shape. An architect can help you with new design ideas and renovations to increase curb appeal and operations performance. • Insurance agent. The insurance agent will help you place the proper protections when you own the property. Having the right coverage for the right price will be necessary if you acquire property. • Property tax consultant. Property taxes are realities in this business and property tax consultants can ensure that your taxes are being assessed fairly and accurately. • Income tax consultant. The tax laws are complicated and it is always good to have the advice of someone whose job it is to keep up with tax law. • Estate planner. As your real estate assets grow, an estate planner can help you shelter and dispose of them in the event of illness or death. • Environmental company/industrial hygienist. If you suspect mold, asbestos, or any other environmental hazard, you’ll need one of these to help you through the process of testing and removal if necessary. • Surveyor. As you are rehabilitating a property, you may need the services of a surveyor to assess boundary lines, elevations, and other such matters. • Structural engineer. Your contractor may find a problem that jeopardizes the structural integrity of the building. Call in a structural engineer, who will analyze the problem and recommend a strategy to repair the building. Teams are just that: People who work together to get the job done. They should be on your side and have the mentality that when you are successful, they are successful. Keep searching until you find people whose goals and business methods gel with your own. CHAPTER THREE ACTION STEPS • Understand it takes a team to be successful in this business. • Determine whether you want a partner. • Evaluate partner candidates based on the qualities of a good partnership. • Establish your business team first—an attorney and an accountant. • Begin networking to find other team members for your property search team, your offer team, and other team members you’ll need from time to time.Chapter Four: Research Can Be Fun? At Robert Kiyosaki’s Rich Dad Seminars where I sometimes speak, attendees always ask me, “How do I find good investment property?”This has to be the most commonly asked question, and for good reason. There is a needle-in-a-haystack sort of quality to this whole endeavor, or at least it seems that way, particularly if you’ve never done it before. Do you look in the newspaper, grab sales sheets from real estate offices, check out the Internet, drive around? The whole thing seems so haphazard. Truth be told, there is a lot of information out there about property and a lot of ways to get that information. Maybe too many ways. Knowing which resources are valuable and knowing how to access them can save you time and frustration. In this chapter, I’ll reveal a research strategy that you simply cannot do without. By walking you through my experience of buying a property in a new market I knew nothing about, you’ll see how this research method works and what you can gain from it. There’s no real trick to this at all. It’s just having fun, being open to the information that’s available about your market, knowing where to look, and committing yourself to do it. Researching a market can be a lot like doing the preliminary research for a college paper. Maybe you remember the feeling of stepping into the library for the first time. Looking around at all the books, magazines, computer databases, and microfilm (if you’re as old as me) was overwhelming. You knew the information you were looking for was in there somewhere; the problem was finding it and making sense out of it. Your first paper was always the hardest. But once you got familiar with the best sources in the library the next papers get easier and easier. (Well, at least that was what I was told.) My college professors would be proud of me today, because I did eventually learn how to do research. And I learned how to make it really fun. We have a great time researching markets and properties because research to me is nothing more than using the resources around you to gain information and insight into a particular subject. In this business that means talking to people, touring an area, taking in the sights, even within your own town. Kind of sounds like a purposeful, tax-deductible vacation, doesn’t it? Well it can be, so let’s get the party started! The research techniques described in this chapter will help you three ways. First, they will give you a snapshot of the various markets and submarkets within your city or town. The more diligent you are about doing the research the more vivid the picture will be. And in the chapters ahead you’ll see why a very vivid picture here will save you time and money later. Second, this research will show you how the market will influence your property investment. And third, you actually may be lucky enough to find property leads during the research phase (but don’t count on it). The most important fruit from your efforts is the picture of the market. The properties will come later. I grouped the research I do into three easy-to-define and easily understood categories. The descriptions for each are in the sections that follow.Level One Research Level One Research is what I call the very preliminary stuff. To do it, you don’t even have to leave your house. This is research you do before you even set foot on a property, or in the case of the true story of our acquisition of the waterfront property in Portland, Oregon, before we even set foot in the town. You should know we didn’t just pick Portland out of a hat. Before we settled on Portland, our goal was to do Level One Research on all the major markets in the Western United States. It was time to expand our company’s reach, and the question was where to go. One of the first things we did was look at all the newspapers and business journal newspapers in every major Western city via the Internet. We followed the online hyperlinks to every interesting lead. For example, we’d type in a city like Denver into a search engine and up would pop a story about population growth. We’d follow it. Then as part of that story there’d be a link about school funding. We’d follow it. What we found was very interesting, particularly in Portland. First we discovered that the city has an urban growth boundary that we felt would limit the supply of rental property in the future. That’s a good thing! Next we found that the city of Portland was progressive in their downtown planning and progressive in terms of transportation with their light rail, bus system, taxi system, streetcar system, and even plans for a future water taxi on the Willamette River. We also found that living and working downtown was in high demand and that the downtown employment picture was favorable. We were beginning to get our picture of the market. It was looking good. Then we started to uncover some of the city’s limitations. On the downside we found statewide unemployment was leading the country with a whopping 8.1 percent. This was an important finding because when we saw that statewide number compared to unemployment in downtown Portland, we knew for us the only opportunity was downtown or possibly a few other suburban bright spots. Furthermore, downtown was mostly all built out and had even greater supply restrictions than the rest of the metro area. Our job was not going to be easy. We found out this information in less than a day all from my desk in Phoenix, Arizona. Although there were some negatives about the market, overall we were pleasantly surprised and impressed with Portland. It was nothing like we expected it to be. We thought it would be a place with major corporate layoffs, a place plagued by downturns in the logging industry and agriculture, and one that was especially hard hit by other economic woes including declines in the stock market and the aftereffects of the 9/11 tragedy, which had happened just four months earlier. Our preconception of the area was based on the broad brushstrokes painted by the media and, boy, were we wrong. We saw Portland as a progressive city that was concerned about the quality of life and that had long-term plans for building a wonderful community for today and tomorrow. We also found that downtown Portland was one of the least affordable places to live in the Northwest. Portland was a mixed bag, but the negatives didn’t scare us. In real estate, you’ve heard the saying buy low and sell high. In most cases the opportunities to buy low are when the economy is down and the press is making a living by saying bad things about you. That was Portland. The point here is not to sell you on Portland, but to tell you that we would have never known any of this unless we decided to do Level One Research in that area. We would have never found out that downtown Portland was a market with good employment, that it was progressive and forward-thinking, that it had a very high cost of home ownership, and that it was in high demand. This was all good news for rental property investment, contrary to the picture the media painted. We knew it was worthy of a site visit.Level Two Research In Portland, we were a couple of desert dwellers from Arizona who came armed with information but hadn’t seen rain in months let alone trees that actually bear leaves. We were as green as the Portland landscape. We plunked right into this market knowing no one. We were prepared, however, to conduct Level Two Research once we got there to develop a team that would help us understand the market and maybe even lead us to property. Research plays an important role in establishing yourself within the market and finding the people who will help you make things happen. Level Two Research is about meeting face-to-face and we didn’t waste time. Even before we arrived we had made phone calls to set up meetings with property managers, commercial brokers, commercial lenders, city officials, and businesspeople like the publisher of the local apartment guide. When we arrived we met with each of them. First of all, they were amazed at how much we knew about the area and the depth of our knowledge. They affirmed the things we presumed to be true and set us straight on the assumptions that were off base. For instance, they confirmed our assumption that the limited supply of housing in downtown Portland was greater than in any other area of the city. They confirmed that there was a high demand to live and work in the city. They confirmed that the downtown area was not only a vibrant, progressive community for those who lived there, but that it was also a draw for people who lived elsewhere through its Saturday markets, jazz festivals, holiday events, convention center, Rose Garden, parades, and more. It was a true city center. We didn’t get everything right during our Level One Research, though. The people we met with surprised us by painting a gloomier picture of the outlying suburban areas than we had painted ourselves. There was more overbuilding than we had assumed and there was more available land than we had assumed. Nike and Intel had a very large presence there without much other employment of any size. The overall picture was clearly a risky one. It was during this time that we really started narrowing in on our submarket. In any economic downturn, it’s always smart to be in the market that will turn positive first. That’s true of anything in business whether it’s the stock market, a business sector, or real estate. So we looked at several submarkets and determined that downtown Portland was strongest at this point and would be the first to rebound based on the simple economics of supply and demand, its diversified employment base, and lack of affordable housing. We learned that as the economy rebounded, the downtown market would be the area that rebounded first. While we were meeting with all our contacts, we clearly communicated our goal to buy a 200-plus-unit apartment community and asked them a variety of questions like: who their favorite property management people were, what lawyer they recommended for legal work, if they knew any good accountants. We asked for recommendations for every team member we listed in the last chapter. By the time we left two days later, we had a vivid picture of the market, and we had narrowed our search to a viable submarket. We had some good leads for our team, and we were told of several properties that were possibilities. We also took in the sights, ate wonderful dinners, and generally enjoyed our time in Portland.Level Three Research When we returned to Arizona, we not only vividly remembered what green trees looked like, we knew Portland was an investment opportunity. But we still needed a bit more information to feel good about making a move there. That’s where Level Three Research came into play. We first called every team referral and asked them all the same questions we asked of our initial contacts in Portland. Not only did they give us their opinion and insights, they pointed us in the direction of numerous Web sites, analyst newsletters, economic development offices, city government contacts, and other Portland businesspeople who could add the finishing touches to our picture of Portland and could keep us on top of happenings in the area for as long as necessary. Through this exercise we started to discover who should be on our team. We signed up for free online newsletters, got on the mailing lists and e-mail lists of real estate agents, commercial brokers, loan officers, and other professionals helpful to us. We are forever in the know and hooked into the network. No longer do we have to seek out all the information, a lot of it comes automatically to us. During this whole process we felt like detectives following up on leads and putting the evidence together to arrive at a conclusion. By involving others, we were able to maintain our objectivity and keep our perspective. All this took was some time on our part. The biggest out-of-pocket costs were our economy seats on Alaska Airlines and one night at 5th Avenue Suites. We’re talking shoestring. And best of all, we paid nothing for the information we received during the process. On top of it all, it was a good time. Why wouldn’t you do this? Ultimately, our vision of an apartment community evolved into a condominium conversion project. The research we did took our vision of an ordinary project and made it extraordinary. We were able to redevelop an area, deliver exactly what the area needed, and give the city and the people what they wanted. I don’t buy anything without researching the market first. Even in Phoenix, which is a market I know extremely well, I do research before I buy anything. Things change, markets and submarkets go in and out of favor, big projects like highways change the patterns and flow of a city. There is always something. Today, thanks to the Internet, research is easy and takes virtually no time. Everything is online and available. For as difficult as researching that first college term paper was, this is a breeze. And there’s never been more riding on getting an A. CHAPTER FOUR ACTION STEPS • Become familiar with the resources available online like: newspapers business trade publications government Web sites trade organizations • Realize that government officials and staff people work for you and that meeting with you is part of their job. • Test your research abilities see how much information you can find out about your hometown: online through face-to-face meetings through in-depth follow-up phone calls.Chapter Five: Swampland for Sale Next time you drive to work, take your son or daughter to school, or race down a highway you’ve traveled hundreds of times, look to the right and the left. Maybe I should say glance. Repeatedly. (It’s safer that way.) But what I mean is this: Take the time to really look around. I travel roads, the same ones every day, just like you do. I think I know the area. You probably think you do too. After all, you pass by the same houses, the same stores, the same apartment buildings, the same office parks every day, right? Well, caution here. This type of complacent “knowledge”, the knowledge you get by passing by, can be dangerous when it comes to property investing. First impressions and outward appearances of cities or towns and the neighborhoods within them also called markets and submarkets can be deceiving. So can buying anything in a market that you know nothing about. You’ve heard the saying, and it’s true, a lot of swampland gets sold to unsuspecting buyers not just in Florida but in every city and town across America. Every town has its swampland. You know, it’s the investment that sucks up all your resources and offers nothing in return. And let’s face it, getting people to venture into the murky water is a lot more challenging with alligators lurking around. If we learn anything from all those poor people who have purchased swampland with the hopes of striking it rich, we should take away one lesson: The market is more important than the property. I’m always amazed by how much there is to know about a specific market or even a small submarket just a few blocks in size. What you see on the surface is just the beginning. And just when I think I know an area really well, something changes. In this chapter, I’ll show you how to get beyond the appearances, avoid the swamps, and see the true picture of a market and its smaller submarkets. And in the process you’ll gain objectivity a very good thing indeed when it comes to real estate investing. The Problem with Gut Feelings Too many people purchase investment real estate on a hunch or a gut feeling. And while it is important to have instincts, understand that they are the products of experience, not a right of birth. This gets back to the myths. People are not born knowing this stuff. I believe it is impossible for a person who has never done a single investment deal to have an instinctive knowledge that one deal will be better than another. It’s not that simple. In fact that’s the kind of naive thinking that gets investors off to the wrong start. Save your gut instincts for twenty years down the road. Starting off on the right foot involves doing one thing really well: evaluating your market and submarket. You must get to know your target area and become an expert in it. Not for the sake of merely being an expert, but for the ultimate purpose of finding a great property investment that is viable and profitable for the long term. That’s what we’re shooting for here. If you can accomplishthat, the rest becomes easy. And that goes for Swampland for Sale, which directly impacts your cash flow and profitability. I’ve been in business for a long time and even I don’t rely on instincts alone. Before we invested in the Portland River District, we did our homework. You read about our online research, our site visit, our marathon of meetings during our two-day tour and our follow-up phone calls. That was covered in the last chapter. To be honest, we had no choice. Knowing everything about the Portland market and the submarket of the River District was the only way for me to make realistic projections about future profitability. It was the only way I could feel comfortable about making an investment. Knowing the market inside and out was the key to knowing if the project would be viable. Fact finding is the opposite of relying on gut feelings. In the last chapter as I discussed my research method, I touched on a few important concepts that are worth defining further. These concepts are critical to understanding the total picture of the market and submarket. Supply and Demand When it comes to investing in property of any kind, particularly rental property, I make sure my first objective is to get an accurate read on the supply and demand in the area. I’m not talking anything complicated, just basic economics. Supply is defined as the number of rental properties available in a market or submarket. Ideally, supply should be low and demand should be high. Demand is defined as the number of people looking to rent. Supply is easy to determine. In Portland, we asked our emerging team, specifically brokers and property managers. They had detailed data, including property names, sizes, addresses, and dates of construction. Seek out this help; why do all this work on your own? Demand on the other hand is a bit trickier. I estimate demand based on occupancy rates in the area. If a submarket has high occupancy, demand is great. If occupancy is low, demand is soft. Another indicator of demand is the prevalence of move-in incentives and specials. If there are a lot of move-in specials advertised, demand is low. If rental properties are offering no incentives at all, demand is high. These are some outward signs. Another factor to consider when determining supply and demand is future supply. By future supply I mean any and all new rental property that is in various stages of development, from planning to permitting to construction. Future supply is a critical indicator of how properties in the area will perform long term. If through your research you find that supply is greater than demand, you may want to stay away or at least keep looking for a better market. Your job of finding residents, generating cash flow, and increasing the profitability of the property will be more difficult. And remember, the value of a rental property increases based on its operations and cash flow. In Portland, demand in the River District submarket we chose for our waterfront project certainly exceeded the existing supply. We knew that based on our face-to-face meetings and the fact that nothing was available in the area to rent. But by contrast, in the small mountain community of Fountain Hills, Arizona, the opposite is true. Here rental properties,including large apartment communities, and uncountable numbers of duplexes, condos, and single-family homes seem to be everywhere. Many were purchased by hopeful investors. And now they are competing head-on for a relatively small number of renters. The reasons for this lopsided market state are no mystery. Rather they are totally explainable. Have you figured them out yet? The Three Drivers of Supply and Demand Simply, there are three drivers of a market’s or submarket’s economics that come into play. As an investor in real estate, you’ll want to keep each of these variables in the forefront at all times. They are true indicators of supply and demand. EMPLOYMENT This is the first and possibly most important indicator of demand and for good reason. If a market or submarket has lots of jobs, people will come to fill those jobs. Very basic stuff. It is a fact that jobs drive residency, so with all things being equal, property that is near to employment is in greater demand. That’s not to say that people won’t drive to live in a highly desirable city or town or that people won’t drive to their job. But just be aware of the market condition. When you’re looking for indicators of supply and demand, look at employment. In the case of Fountain Hills, Arizona, there is little to no employment base at all. Nearly everyone who lives in the town, who is of working age, works elsewhere, like in neighboring Scottsdale. Scottsdale, by contrast, has many employers. Both Fountain Hills and Scottsdale are desirable places to live and both communities are beautiful places with excellent qualities of life. But Scottsdale wins in terms of employment and therefore in terms of demand. People have to really want to live in Fountain Hills, and many do. But the lack of a large employer or large office complex that brings workers to the town means that Fountain Hills will find it difficult to balance the supply and demand for rental properties for many years to come. This same theory is also true for the town’s retail businesses and restaurants. Employment opportunities bring customers. It is a fact that population follows employment. The saying that people go where the jobs are is true. It’s what attracted people to Houston, Texas, in the late 1970s and early 1980s and it’s what has been attracting people to Phoenix, Arizona, for the last twenty years or so. Create jobs and people will come. High employment can be beneficial for rental property investments, but be sure to look at the whole picture. Even communities with lots of jobs can still be overbuilt, thus throwing off the delicate balance of supply and demand. Scottsdale has been smart to limit the supply of rental properties. That has helped keep the vacancies low and the rents high. Fountain Hills, with its plentiful land by contrast, allowed the construction of too many rental units and therefore vacancies are higher and rents are lower. Fountain Hills could have been a premium rental community even without a strong employment base and oncewas before a boom in rental properties occurred in the mid- to late-1990s. After all, the town is a tremendous draw for winter visitors and part-time residents, a good market for rental communities. Employment stability is also something to consider. As you evaluate your market and submarket for employment, look at how stable the employment base is. Are the companies reputable? Are their products or services in ever growing demand? Is the mix of companies diversified? These are indicators of stability. Just look at Houston in the 1980s. Rental properties were booming and then the oil industry came crashing down, taking with it banks, hotels, home-building companies, and numerous other businesses. Apartments were vacant all over town, so to lure renters, owners and property managers were offering ridiculous move-in packages, including six months’ free rent, free televisions, and no security deposits. A significant drop in the local employment had a significant impact on the economy. POPULATION In a world of choices, choose to have your first well let’s face it, all your investment rental property where the people are! We’ve already established that you need a stable and growing employment base, so it makes sense that you’d also want to be in an area where there are lots of people. People who are your future customers. That may be a bit cut-and- dried for the new investor who’s thinking about taking advantage of a “great deal” on a single-family home on the outskirts of town, off the beaten path. While it may be a wonderful property, and seem like a great deal, that’s meaningless if nobody is around to lease it. In this book, you’ll find that once the market is selected, the key to success is in the property itself and valuation is a function of its operations how well it operates now and how well it will operate in the future. By operations, I mean how much income the property generates, what the expenses are, and what the overall profitability is. Operations success in this business relies on a market of renters. People certainly go where the jobs are. But they also migrate to places that have a certain persona or living experience built into the area. That’s a somewhat vague concept, I know, so it may be best to use examples rather than try to explain it. If you’ve ever been to Venice Beach in California, you know that it’s a submarket of the Los Angeles market that has a definite persona or living experience. First of all, it’s a California beach town that conjures up all the fun and freedom that the California Office of Tourism, Hollywood, and the Beach Boys spent decades promoting through commercials, movies, and songs. Next, it’s a submarket even among other beach town markets that has a reputation for being edgy, avant-garde, and youthful. Purchase investment property in Venice Beach and you wouldn’t have to say much more. Lots of people are drawn to this lifestyle and the persona of what living in Venice Beach means. Contrast that with the Phoenix submarket of Dobson Ranch. There are rental properties in this master planned community, but the area has no real persona that drives the multitudes to it. Sure it’s a nice place to live and a great place for families, but there is no major image that draws population. I’m sure most everyone reading this book has never even heard of it. Other areas that come to mind when I think of living experience and persona are Key West, Florida, and Coronado Island, California. They both are exclusive beach resort communities. Whistler, British Columbia, is another example and the name is almostsynonymous with skiing and stunning alpine scenery. Gig Harbor, Washington, is a mecca for boating enthusiasts. Aspen, Colorado, is the place to ski and be seen. And finally Scottsdale, Arizona, is known for sun, golf, spas, and shopping. These are famous places that possess personas, but there are other less famous areas in every community that have unique personas and living experiences that are known to those who live in the region. Take some lesser known areas in Arizona: Litchfield Park, which was once known as the location of Luke Air Force Base and a lot of farms, is now readily known in the Phoenix metro area as a boom-town with lots of development, a sports arena complex in neighboring Glendale, and retail everywhere you turn. Mill Avenue, a submarket of Tempe, Arizona, is well known as a youthful, happening, artistic college center. Do you understand through these examples the concept of persona and living experience? Places that have clearly defined personas are population draws almost as powerful as employment. The lure of charming buildings in towns that lack employment and a solid persona have tempted even the best of us, myself included. But don’t be caught! Charming buildings in towns with lots of people stay charming after the sale. And they get even more charming when they are making money. Unless you’re a Vegas gambler who always tries to beat the odds, stay away from markets and submarkets that are not drawing people. Now that you know some of the reasons why markets attract people, you’ll need to know how to quantify the population in your area. Here’s another time when the team comes into play. Talk to your city or town officials, visit their Web sites and set up meetings. Remember, as a taxpayer, you are paying their salaries. You are their customer. Do whatever it takes to get realistic population projections, and when they rattle off blue- sky numbers ask them to elaborate on the factors they see that are contributing to this optimistic growth scenario. If any of your sources project population to decline, that’s a bad sign. But at least they are honest. I always look for real indicators from people, not blue-sky, and value them for telling it like it is. In addition to employment and town persona as population draws, your contacts may also refer to the following: • New highways or highway extensions. These create new traffic patterns and transform areas that once seemed a long distance away, into places that suddenly seem close by. If a new highway project is slated near that single-family home off the beaten path we talked about earlier, it may not be such a bad investment opportunity after all. • Master planned communities. These large residential projects combine home and work and with them draw lots of people. New communities in particular are usually backed by big-dollar advertising campaigns and the older ones like Dobson Ranch mentioned earlier in this chapter become yesterday’s news. • New sports stadiums and arenas. So often the hub of urban redevelopment is a sports stadium or arena complex. These facilities bring tens of thousands of people to an area and open up all kinds of opportunities for investment real estate. The Phoenix Coyotes hockey arenas as well as the Cardinals Stadium in Glendale were two of the most important projectsfor the emergence of neighboring Litchfield Park, the boomtown we talked about earlier. Another example: The Reno Aces Triple-A baseball park is transforming the downtown area in Reno, Nevada. • Universities and university expansion. Universities are always population drivers because just by the nature of what they do, they bring a steady stream of students, faculty, and supporting businesses to an area. The Mill Avenue submarket of Tempe that we spoke of earlier is in walking distance of Arizona State University. • Redevelopment areas. Our River District project in Portland is an excellent example of a redevelopment area. The ideal central locations, community goodwill, and an aura of “coolness”• often associated with redevelopment makes these kinds of projects population magnets. People love the “˜wow factor’ associated with before-and-after stories. • Casinos. Casinos bring with them the masses who every weekend and a lot of weeknights want to try their luck and win big bucks. They say that in the Gold Rush of 1849 the people who made money were the ones who housed the miners and sold them goods. The same is true here, except the gamblers at the slots are the modern-day miners. • Military bases. Not all military personnel live on the base. The property around government installations is often a good investment. Just be careful of base closings, which are often in the news around government budget time. • Regional airports. Scottsdale airport is a prime example of how valuable real estate can be around airports. The Scottsdale Airpark is a haven for small businesses and a real driver of rental communities and single-family homes in the area. A brand-new highway linking the airport to the rest of the Phoenix metro area didn’t hurt either. • Company relocations. When Boeing moved from Seattle to Chicago with it went thousands of jobs. Bad for Seattle, great for Chicago. Corporate relocations are instant population boosters. • Major events. The 1962 World’s Fair redeveloped downtown Seattle and the legacy of that event, of course, is the Space Needle, which is still a tourist attraction decades later. Olympic Games also have a way of transforming communities, as the 1996 games did in Atlanta and the 2000 games did in Salt Lake City. Even annual events like the Super Bowl can completely revitalize an area through huge injections of new money. These are just a few population drivers and when you see, hear, or read about them, they are good indicators for growth. Projects and developments such as these tend to reshape the face of a community, and change of this type is potentially lucrative for real estate investors. But there are also a few things to watch out for: • Resilience. Make sure that the growth of a market or submarket isn’t too heavily reliant on one thing. In other words, if one major employer is responsible for nearly all the population in a given area, think twice about investing. If the employer moves, so will your market. You want a market that can withstand the ups and downs. Motorola has significantly scaled back its Phoenix operations, which could have been devastating to many cities. But Phoenix’s strong, diversified economy and vigorous small-business community minimized the sting. • Economic Diversity. I steer clear of areas that don’t have a good diverse economy. It’s happened before and it will happen again that an entire market falls victim to an industry sector that goes bust. It happened in Pittsburgh, Houston, it happened in Detroit, and most recently in the San Francisco Bay Area when the dot-com bubble burst.• Pioneering. Pioneers have a romantic place in history, but I make a point of never being one. Being too far out on the fore front of things can be expensive and dangerous. I try not to create the wave, simply catch a wave I see beginning to build and ride it in. • Affordability. I always look at the affordability of housing in a particular market. If a single-family home is out of reach for most people, apartment living becomes a valuable option. This is the case in big cities like New York and San Francisco, which attract large populations, most of whom cannot afford homes. Look for markets where the cost of home ownership far exceeds the cost of renting. The closer the two variables are to each other, the harder it is to find renters and the harder it is to keep them. LOCATION Location is the most important thing when it comes to real estate, at least that’s what everyone says. And I agree. But to me, locations have to be evaluated not based on geography alone, but based on how they measure up in relation to supply and demand. After a location has met the criterion of being in an area with good employment prospects and a growing population, I look for a few important physical features that experience has shown to be valuable: • Great locations have drive-by visibility. The more cars that pass by your property and see your “ For Rent” sign, the better your chances of success. Drive-bys are one of the most effective forms of advertising and certainly one of the most cost-efficient. When your property is on a street with no traffic, you’ll have to resort to more expensive and less effective methods of advertising. This almost inevitably reduces your profitability because lower occupancy means lower cash flow. • Great locations possess a rare quality. There’s a one-of-a-kind quality about great locations that you can’t find everywhere. Our Portland project was one of the only waterfront properties left in a wildly popular area. It was an island waiting to be found. That’s the rare quality I’m talking about. • Great locations are in demand. Some investors think they can’t afford to even look at property in the hot locations. I hear this often. But the truth is affordability is everywhere, even in the hottest neighborhoods, if you buy the property based on operational performance and not on the sale price. You’ll be reading more about this concept in chapters to come, but for now know that you should never rule out A-plus neighborhoods. Take another look at these three characteristics of great locations and what you find is that they add up to one simple truth: Great locations are low in supply and high in demand. This is at the heart of your market evaluation. Be realistic with your analysis and look at the future of the market with a keen eye on the present. Property investing should pay off now and later. The first step in buying right is knowing your market better than anyone else. Focusing Your Market After all the evaluation is said and done, you should be armed with the information you need to narrow your market. A few chapters ago we talked about goal setting. I put forth as an example the goal of finding an eight-unit property in Phoenix. The goal was as follows: We will acquire one eight-unit property in your metro area within the next twelve months that will generate at least $4,000 of average annual income over the next five years.After reading this chapter, you should now be thinking that “your metro area” as a market is way too broad. That should be narrowed considerably. As you learn more about your own market, you will find yourself continually refining your goal and your search. That’s perfectly fine. This gradual focusing is necessary and those who can’t do it effectively find this type of work… well, a lot of work. So let’s now refine our market to Scottsdale. That’s much better. And we’ll focus it even further to the Old Town area, a sub-market of Scottsdale. I now know that my property choices will be in the hundreds, not the tens of thousands. Do you see what I mean about a lot of work? Focusing your market makes things manageable. CHAPTER FIVE ACTION STEPS • Select one market in your state, preferably one close to home, that you may be interested in. • List every submarket or separate neighborhood. • Define and describe the employment picture of the area. • Define and describe the unique persona of the submarket. • Determine supply-and-demand estimates: ask your team read the visual signals • Check your findings against the information in this chapter. • Rate the submarkets based on the criteria. • Select your submarket.Chapter Six: Finding Your Diamond in the Rough Identifying investment property is like dating. You want to make sure you choose wisely because you will be committing time, energy, and money. You’ll be putting your heart into the effort and have big dreams of where things may lead maybe a long-term commitment, maybe marriage. Dating just anyone, like targeting any old property, can be a huge time waster and even cost you a lot of money. I speak from experience on both counts. After the last five chapters you can see that choosing wisely involves setting a goal, building your team, and evaluating and focusing on your market. There’s a lot of preparation required before you actually select a property. And what you are looking for isn’t necessarily the winner of the beauty pageant, but a diamond in the rough. This is the one with the most potential, and potential, as you’ll see in later chapters, means bottom-line dollars. Time and again, investors start at this stage they work on finding a property and completely skip the preparation work. This is why the word “risk” is so often associated with real estate. Selecting the property should come only after you have assembled a team to assist you, decided upon your goal, and done the work of identifying a market or submarket. Never should it come before. It requires a level of trust, but like I always say: Trust but verify. By now you have found your market and a submarket or sub-markets within it. The next step is finding the property that will achieve your income and profitability goals within your chosen area. This chapter will show you how. To do that, I’ll take you through the same steps I use to find property. We’ll save the evaluation of that property for Chapter 7. This chapter and the one that follows are critical to your success in this business because this book isn’t about just buying property, it’s about buying property right. For the right price, in the right area, with the right expectation to achieve your goal. This is the only way I buy, and the reason is simple. When you buy right you spend your days tending a garden rather than digging out rocks, Life is too short. Setting Target Property Parameters Let’s go back to the hypothetical goal of finding an eight-unit property. In the last chapter we focused our market to the Old Town area of Scottsdale. Now it’s time to focus our property parameters. Our goal currently reads: We will acquire one eight-unit property in Old Town Scottsdale within the next twelve months that will generate at least $4,000 of average annual income over the next five years. You know what’s coming, don’t you? We need to get more specific about our eight-unit property. That’s a vague term. When I was just starting out in this business, I searched for property myself. Now I hire someone to sift through property that is listed and not listed tofind what fits my parameters. You might think that’s a luxury only established investors can afford. Not so. The person who works for me is a broker and he gets paid when he finds a deal that closes. Anyone can afford this kind of help. And helpful it was for both of us. Together we were able to focus our search, hold each other accountable, and improve our chances of success. Now, we meet for an hour every week. It’s not a huge commitment of time, but it adds a lot of value. For me, it helps a lot to have a precise idea of the kind of property I’m interested in. It saves a lot of time, keeps my broker and me focused, and helps make the work manageable. I am very specific about what I want to consider. For example, we’re looking in one market right now for a 150-plus-unit community in a good location with high visibility, drive-by traffic on major streets, and constructed after 1988. Even more specifically, I’m looking for owner-managed properties where the owners live out of state and have just one or two properties in the entire city. These parameters are not arbitrary. I want properties that are of substantial size so we can afford to have a professional property manager on site to handle the day-to-day issues. That works well within my company’s structure. The year 1988 is important because many properties older than that take a lot of money to bring up to the standard of other apartment buildings in the area. You will find it’s normal to replace roofs, paint, install new carpeting, and so forth. But if all the other apartment buildings in the area have washer-dryer hookups and yours doesn’t, you will either have to spend lots of money remodeling and updating if possible, or charge below-market rents. Neither is a good alternative. See what I mean about knowing your market? By targeting properties that have owner-managers who live out of state, I have found there is a higher likelihood that they are not managing the property to its full potential. There are a number of likely reasons for this: • Travel. Often people buy property in hot markets that are far away from their own hometowns and underestimate how much time and energy is required to manage it. Add in travel time and expenses to that, and you can see why absentee ownership is prevalent. • Complacency. It’s easy for out-of-towners to lose interest and become complacent over time. Especially if they are making money and their property isn’t one they drive by every day. • Perception. Many owners wrongly believe that the investment real estate business is an investment and not a business. They think it is like a stock or a bond that they can buy and forget. In truth it is a business they need to operate. • Lack of information. This actually happened with a property my company manages; the owners have no idea at all about the market, the market potential, or the condition of the property itself. The owner bought it sight unseen! That is beyond my comprehension. Learning about your market to the level of detail that will make you successful in this business continues during this phase of the process. At last, you are drilling down to individual properties and there are a lot out there. You’ll want to make sure your target market isn’t too big or you will end up considering thousands of properties. Recall in the last chapter the concept of markets and submarkets. In San Diego, you have the Gaslamp Quarter, Balboa Park, Sea World Area, Old Town, and Coronado Island. In New York, you have Greenwich Village, SoHo, Upper West Side, Upper East Side, TriBeCa, Harlem, Midtown. Then there are submarkets within those areas. Know where you want to bespecifically, and start there. You may have to work your way outward or to other submarkets if there is nothing in your first-choice market. The more established you become in this business and the more people you tell about your goal, the more opportunities will come your way. At least they will appear as opportunities; many of them are distractions cloaked as opportunities. As tempted as you will be to jump on a plane and fly from California to Florida or from Virginia to Texas when you see what looks or sounds like a great deal, stay focused and resolute on your goal. It’s too overwhelming to try to consider everything at once. Becoming an Expert You need to become an expert in the submarket you select and a good deal of that learning happens during the market evaluation phase. But it also happens as you are evaluating properties. Adopt the mind-set that learning is ongoing and forever. You never know enough about a market and the market is constantly changing. I look at everything around me in terms of real estate. Call it a sickness, but every story I read in the paper, every conversation I have, every retail center I see, every stoplight erected on a street corner, every new employer or employer expansion has real estate implications to me. I see them everywhere. My eye is trained. But if your senses are not as honed as mine, here are some guidelines to help to achieve expert status: USE YOUR RESEARCH The research you have done in preparation for property investment should be organized and usable. I have market and property information organized so that I can refer to it at any time. Just because I’m in the property-targeting stage doesn’t mean that I stop looking at my research. The work that you did before should become your bible. Scan it more intensely now that you’ve chosen your market more specifically. The research that you did months ago should be continually updated. Real estate is a fast-moving business, so I do research all the time. Anything that I see that pertains to my target markets I catalogue and keep. Anything that pertains to markets I’m not currently targeting I catalogue and track. You just never know when a sleepy community like Litchfield Park, Arizona, will pop onto the radar and become a boomtown, unless you track it! Then, you’ll see it coming often before anyone else. READ EVERYTHING I read every article I can get my hands on in our target markets. Sure I glance at the property listings, but more important, I look at the news, the sports, the neighborhood happenings. That’s where I get a real picture of the market. For example, I look for any big events that relate to the area. Take, for instance, the school district passing a bond initiative to build another elementary school. That’s the kind of news that will draw people to a community. Similarly, things like new retail centers, rezoning of a land parcel, declarations of historic landmarks, crime reports, all have real estate implications. So do feature stories that rank communities with the wealthiest zip codes, that have the lowest crime, and that have the best school test scores. Even the morning traffic reports tell you something about a market and its desirability.LOOK AROUND Before you seriously target a property, look hard at the neighborhood. I know this from experience. There are several apartment buildings we manage but do not own. One building, when we took over managing it, was so full of gang members, drugs, and violence that anyone reputable was long gone. It was a haven for criminals. Worst of all, it was right in the center of a neighborhood riddled with crime. Things were so bad that in one apartment I entered during the site visit there was an M-16 propped up next to the door. Honest truth. We managed to clean up the apartment community through mass evictions and the hiring of off-duty city police officers to patrol the property twenty-four hours a day. We made it undesirable for criminals and slowly good people moved back in. But the apartment building was all we cleaned up. We did not change the neighborhood. And that’s the lesson. You cannot change the neighborhood, so make sure the property is in a place that you’re prepared to manage. As a reminder, you want to be riding the front of the wave, not creating the wave. There’s a difference. Let the hero be Spiderman. LISTEN MORE THAN YOU TALK Listen for the word on the street. The buzz. Not just what the news is saying, but rather what people are informally talking about. Shop owners, other apartment owners, neighbors, utility meter readers, cable technicians, mail carriers, UPS carriers, everyone who spends time in the market. Listen to what the insiders on your team are talking about. Listen to where they say they are going next. But don’t be fooled by rumors. If you hear something, verify it with your team of experts and others with opinions that matter. I believe in my network, and I make a point of keeping in touch with everyone in it regularly. There are people who I go to lunch with just to listen to what they have to say and to find out what they are doing. Eventually, you’ll hear about things you’ll read in the papers weeks later. That’s being on the front of the wave. JOIN A BUSINESS NETWORKING GROUP OR TRADE ASSOCIATION Often you can find groups that meet regularly that have similar goals as you. I am active in the local Arizona Multihousing Association, The National Multi-Housing Council, The Urban Land Institute as well as in the National Apartment Association and the Institute of Real Estate Management. These are good places to meet people who might be valuable additions to my team, to find people I may want to hire, and to stay on top of issues that could affect my investments. Search on Your Own or Hire Out? You can do all this pavement pounding yourself and it’s probably a good idea regardless of which path you choose to hire or not to hire. For one, you’ll be smarter about the property you inevitably purchase, and two, it will make you a better judge of properties presented to you by the broker you hire. But hiring this service out has its benefits. Brokers will help you find property in your market and will do it on a 100 percent commission basis. That’s what they do. When you close the sale, a commission is paid, often by the seller. First, brokers tend to specialize in their markets, so choose one who is a specialist in your target market. If you make a good selection your broker can be a wealth ofinformation to you. They know the new retail stores that are coming into town, the new roads and highway projects, even employers who are expanding or downsizing. Second, brokers save you a lot of time. They will be able to find property quickly and present you with choices. Third, brokers can make calls to property owners for you so you can cover more ground. You probably won’t strike a deal on the first call or even the tenth call. Finally and this is a big benefit there are no up-front costs to you. If you choose to hire a broker, make sure you have a person you trust and that he or she matches your high degree of integrity. As with everything, there are good brokers and bad brokers. A good broker will be focused on building a relationship with you long term versus working to obtain a commission. Good brokers really do know what’s going on in the market. Moreover, they are known for knowing what’s going on in the market. They are quoted in the paper. They are active in the community. Good brokers communicate with you often via letters and e-mail. They are proactive in the way they do business with you by following up on the details. They are usually the top producers in the market. Remember, trust but verify. The hardest road is the one you travel alone. No man is an island. Nothing Is for Sale After weeks of narrowing your market, defining your submarket, learning everything there is to know, and talking with business leaders in the community, your broker gives you the bad news: There’s nothing for sale that meets your criteria. So now what do you do? Should you move on? Start looking in another part of town? Wait until something suitable comes on the market? Of course not. You simply make a move to buy a property that isn’t technically for sale! Often times when a property is listed, it’s too late. By that point, you’re competing with other prospective buyers, and working with a seller who has established a purchase price that he or she may want to stick to. When I see a wave worth riding in a particular area, I don’t wait for the “For Sale” sign to get plunked into the ground. I go for it. Often, the “For Sale” sign never makes it in the ground because other people recognized the trend before you did and beat you to it. The issue here is about the real estate and buying it right. It’s not about whether the properly is for sale or not. You’ve heard the saying “everything is for sale, for the right price.” Well, the same is true here. Many of the properties we purchased, all since early 2002 were not listed for sale. They were all acquired by making the first move and contacting the owner. So how do you do that? Contacting the Owner When you begin working in the investment real estate industry, you’ll quickly realize there is no privacy in this world. I mean it. In less than ten minutes on the Internet, I can find the value of the house you are living in, how many square feet, how many bedrooms and baths, what you paid for it and when, what it looks like, where it is located, and in many cases see an actual aerial photograph of it taken by a satellite camera! Does that surpriseyou? Well you won’t be surprised for long because this is exactly the type of information you’ll be pulling off the Internet yourself as you investigate properties. Everything I mentioned in the paragraph above is a matter of public record. None of the sources to find this information are illegal or shady. In fact most all of them are government agencies. My point here is simply, if I can find out that information about your house, you can find it out about any building you are interested in purchasing. That includes the name, address, and phone number of the owner. That’s one easy way to find out information about a property, and you’re always better off knowing as much as you can. You can also take the direct approach and ask residents, the property manager, real estate brokers who work the area, the tax assessor’s office, and title companies. Sometimes as you look for the owners of a property you’ll discover it is owned by a corporation, not a person. Don’t let that stop you. Call the corporation commission in your state and you’ll be able to get the names, addresses, and phone numbers of the corporation officers. Nothing is secret! Once you have enough facts about a property, you’ll want to call the owner. This is the best way to find out more about a property and see if the owner would entertain an offer. Making the phone call can be scary at first but not if you are honest from the get-go. There’s no need to tapdance. Just ask the question and be prepared for rejection. To help you through the first conversation with the property owner, I’ve set up the following table. It maps out a typical conversation and what to say. The Owner You Say Comments Says Hello, my name is (your name). At this point the owner is thinking Hello. Are you the owner of the property at (state the address)? you are a mortgage broker trying to Yes I am. get him to refinance. He’ll want to I might be hang up. interested in that. What did Your property is one of ten on the Now the owner is thinking, “Who is you have in mind? list that fits my parameters of an this guy and is he reputable? Is he a eight-plex in Old Town Scotts broker just trying to get a sales dale and I’d like to talk to you listing or is this a real buyer?”• about buying it. First thing is I’m not a broker The owner is thinking the looking for a listing, and I’d like to confidentiality agreement is very professional. He likes that. This say that everything we talk about sounds legitimate. here is confidential and I am prepared to send you a confidentiality agreement. I’ll fax it to you immediately, signed by meWhat kind of I’m not prepared to make an offer At this point, you are not in a money are we today, but once I find out more position to make any kind of offer talking about? about your property and its because you don’t know how the operations, I’ll get a formal offer property is operating. Remember, What kind of to you within a week. If you can buying right is about buying based information do give me some basic information, I on operating performance. you need? could get an offer started right away. The seller may be reluctant to give I don’t want to this information or he or she may send you that My offer will be based on a return be open to it. information. on my investment. And I won’t know what that return is until I You must make the owner look at the operations of the understand that he or she is risking property. nothing by giving you this information and that he won’t ever get an offer unless he does. For starters, I’ll need the rent roll The rent roll and current occupancy rate are the two key indicators of [which is a listing of the units and how a property is operating. These two pieces of information are how much they rent for] and your critical to establishing the purchase current occupancy I’ll also need price as you’ll see in the next chapter. your operating expenses. You will likely find you are educating the seller here and helping him determine what the property is really worth. Okay, I can make you an offer The owner needs to understand that without this information, but unless I know how the property is there is no risk here. This is operating, the offer may change information you’ll need to know dramatically should we decide to go forward and I will see this sooner or later, and sooner is better. information during the buying As you’ll see in the next chapter, process. you’ll review the property I’d rather be informed now and operations in detail before you buy provide you a reasonable offer anything, so there’s no point right up front. If nothing else, you’ll get an assessment of how keeping this information secret. much your property is worth. I’d rather not have to renegotiate further down the line.Tell me a little We are a real estate investment If the owner asks this question, be bit about you company in (your town) and are prepared with your thirty-second and your looking for properties in this one- speech about your company. company. mile area near the Old Town Scottsdale center. With the right The owner at this point may want to That sounds information we are prepared to have one more credibility check. fine. I’ll get make an offer within one week. The idea here is to make sure he or you the she knows you are professional and information To summarize then: You’re going credible and that you mean you need. to get me the rent roll and the business. You must demonstrate occupancy and operating expenses that you are capable of pulling off I’ll look by tomorrow morning. I’m going the deal and that you are decisive forward to to send you my confidentiality about what you want. hearing from agreement immediately, and I’m you. Thank going to send you my offer letter To conclude the call, restate the you. Goodbye. within a week of receiving your action items and set up the information. deliverable dates. Great. I’ll get back to you. Thank Conclude the call on a cordial, you for your time. Goodbye. optimistic note. If the Seller Is Not Interested The Owner You Say Comments Says I see. Can I send In the event of rejection, don’t burn the bridge. Many No, I’m not you my information of the properties I own today were originally owned interested. and keep in touch? by people who were not interested in selling at first. Stay in contact with these people and call once a And please call me quarter. Put them on your mailing list if you reconsider.Contacting the owner can be easy, provided you steer the conversation in the direction just demonstrated. The goal with the first phone call is to try to educate the seller and build a relationship. There are two kinds of sellers: one trusting and the other untrusting. Some people may give you lots of information and that helps. Others may be secretive and not want to divulge anything. Either way, keep accurate notes of everything stated, because what is stated in this conversation is highly material to any future negotiations. Learning and Networking Whether your first contact with a property owner leads to an eventual purchase or not is not that important. The whole exercise is worth the practice and the learning that can only come from doing. I find that no matter how much I think I know about a market, I always come away from conversations with property owners knowing more than I did before. You’ll be surprised at how quickly you will come to know a market or submarket by talking to property owners within it. As a side benefit I also know I’ve established another entire network of people for future leads. I’ve found several properties this way. One building I now own came my way from a property owner who didn’t want to sell the building I initially contacted him about. Instead, we ended up doing a deal on another property a few miles away. This happens often. This whole process is about becoming an expert, putting out feelers, and getting some action going, so don’t be discouraged if your first calls are rejections. It’s like fishing. You put the worm on the hook, cast it out, and see what comes back. Eventually one or two will bite and then the real action begins. And that’s the focus of our next chapter, determining the initial valuation of the property. CHAPTER SIX ACTION STEPS • Narrow your target property parameters further based on your initial review of properties in your targeted submarket. • Find out everything you can about the properties in your targeted submarket: use your team to help you get specifics on every property create a spreadsheet or chart that compares, at a glance, the rents, features, and amenities • Continue to read the business, government, and news sections of newspapers and recognize how any changes can impact real estate. • Find all the real estate associations in your area and join them. Attend their functions and make a point of meeting people. • Decide whether you want a broker to help you find property. • Locate and target a few properties you may be interested in buying. • Find the owner information on the Internet. • Call and meet with residents, shop owners, and property managers to get more information. • Get ready to make your first phone calls (you 'll need the in formation in Chapter Seven to follow up on any properties that may be for sale, so hold off on making your calls!).Chapter Seven: Is It Really a Diamond? Someone once told me that the average person remembers only three to five concepts in a business book. Just three to five! I know already in this book there have been dozens of concepts presented. So which ones are going to be remembered and which ones forgotten? I found this statement hard to believe until I started to think back on the books that I read recently. And I had to admit that if I remembered three concepts in each of them I was lucky. (I always knew I was average.) Well, I’m not going to assume that with this book I’m going to change the reading comprehension rate of the typical human. And I’m not going to take it personally if after reading this book, you don’t retain every single thing. But I will be disappointed if you don’t remember the concepts in this chapter. In fact, if you forget everything else you read in this book, this is the one chapter I hope you not only remember, but refer to often. Because if you master the process I’m revealing in the pages ahead, your life as an investor in rental property will be infinitely easier. Infinitely! It’s true that your success in this business is the result of your preparation. That’s the message and the purpose of the early chapters of this book. But regardless of how prepared you are, you can create a disaster for yourself in a matter of seconds if you can’t tell a diamond from a cubic zirconium. That’s the time it takes to sign your name on the dotted line of a bad deal. I know that sounds pretty scary. There is little gray area separating a good deal from a bad one; and to me, gray area is made up of black and white. A deal is either good or bad and fortunately a bad one is easy to define. It is simply a deal where the numbers don’t work. In other words it’s when the projected cash flow income minus total expenses equals a low or negative number. In good deals the numbers work. In bad deals, they don’t. Does this seem terribly obvious? Of course it does. But you’d be surprised how many times investors ignore this simple truth. They purchase property based on the seller’s asking price, or something close to it, instead of the operational performance of the property. Here are a few principles about property investing we need to get out on the table right now: • The seller’s asking price is irrelevant. • You determine the property value, which becomes your offer. • With multiple units, the property value is based on the current cash flow of the property. These three principles are the foundation for everything else in this chapter. That’s because in this chapter, I will walk you through my own personal system for determining property valuations for multiple units. It’s called the Five Step Property Evaluation and I’ve used it for the past fifteen years with outstanding results. Here it is in a nutshell: 1. Verify property income. 2. Verify expenses. 3. Determine net operating income. 4. Find the capitalization rate and valuation. 5. Calculate the loan payment and your profit or cash on cash.I use those five steps to come up with the initial cash flow for the property and arrive at an offer price. To do that, we look at everything associated with expenses including our loan payments and everything associated with income during our analysis. In the end we have a solid picture of the bottom line for the property and are in a position to make our offer. You’ll realize the importance of this process when you think of it this way. Would you put your money into a mutual fund without looking at its past earnings performance? Would you put your money in an annuity if you didn’t know the annual interest rate? Probably not. Well, why invest in real estate without a reasonable estimate of what your return on investment will be? In real estate investing, return on investment is also called “cash on cash” and it is your net cash flow as a percentage of your down payment. For instance, if you put $100,000 down on a property and it brings in $1,000 of income per month, your cash on cash is 12 percent per year. Not bad. But if that same property brought in $500 per month, your 6 percent return may not seem worth your time. As you read on, you’ll see why it’s too early to make that judgment. Furthermore, the process I will describe in this chapter will enable you to value property without actually doing a physical inspection. You heard me correctly. In over 95 percent of the offers we make, I do not visit the community before I complete the valuation and make an offer. What could I really gain by doing a property visit that I couldn’t learn from the seller at this point? If I personally visited every single property my company is considering, we would be forever visiting properties and have no time left to actually purchase them. At this stage, I rely on my team to fill in any gaps I may have in my knowledge about a property. Case in point, we just opened escrow last week on a 172-unit apartment building in Glendale, Arizona. I had one of my team members visit the property while we reviewed the numbers. The negotiation lasted about three weeks as we went back and forth on the offer price. The figures we used for our evaluation came entirely from the seller and the broker listing the property. Don’t misunderstand. I will not buy the property without walking each and every unit, performing a thorough inspection, and verifying the numbers. I just let my team do a lot of the preliminary screening for me. Another property in the works right now is in San Diego. We’re in the second round of negotiations and I have yet to actually visit the property. This shows the level of confidence I have in my partners and my team members. They feel good about the property, so I feel good about the property; I trust them implicitly on what could be a $66 million acquisition.My point with these two stories is that offers are nothing more than an opportunity to look at the numbers and make an educated guess about how a property will perform in terms of cash flow, based on a brief, top-line evaluation. As you’ll see in a later chapter, you’ll find out about the property in minute detail once you “tie up” the property by getting it under contract. That’s when you begin the inspection period known as due diligence. But let’s not get ahead of ourselves. Let’s take a look at the Five-Step Property Valuation. That will give us the information that we need to say “go” or “no go” to a property investment.
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Bookmark File PDF Rich Dads Advisors The Abcs Of Property Management What You Need To Know To Maximize Your Money Now Rich Dad's Advisors THE ABC'S OF REAL ESTATE INVESTING 3 CDs Boxed Set ̃Sealed̃ $19.23. Free shipping. ABCs Of Real Estate Investing By Ken McElroy R.D.A. Press. $15.99. Free shipping. The ABCs of Real Estate Investing: The. All properties that are offered are pre-vetted, institutional quality assets managed by the top real estate operators across the United States. A commercial real estate (CRE) investment is any property that produces rental income and is purchased with the anticipation of producing a proﬁt. Administrative Law I Cases And Materials. This note covers the following topics: The Public Administration, Administrative law Key features, Administrative authority and the entailment to the legal principle, Special nature and typology of administrative action, Sources of administr: ative law, Regulations as specific source of administrative law, Administrative structures, State.
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And buy this book to get the exact strategies to make offers, ensure you have a profitable deal, and boost profits once you own it.
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Yes, this trial is available for both Windows and Mac OS. You need to invest your money in some fashion or you’ll fall behind financially. If you work hard to study the markets and property, properly evaluate the real income and expenses and property worth, and improve operations, real estate investing lets you sleep well at night while building unbelievable wealth that will change you and your family’s life.
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Title: ForPrinting_ConditionOfPropC Created Date: 5/19/2017 10:39:47 AM. Location: The property is located on the E a s t s ide of South Atlanta St. just s o u t h of Historic Roswell and backs up to the Chattahoochee River National Recreation Area. The site has 147± feet of frontage along S. Atlanta Street; 425± feet along the south boundary and 53± feet along the eastern boundary. Brandon Turner is an author, entrepreneur, and active real estate investor with more than 500 rental units and dozens of property rehabs under his belt. He is Vice President of BiggerPockets, co-host of The BiggerPockets Podcast, and author of six best-selling business books–including The Book on Rental Property Investing and How to Invest in Real Estate–with which he enjoys showing others.
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The assumptions for these projections are as follows. The Mindset of a Real Estate Investor.
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When looking to buy a rental property, look at the rental income claimed by the seller to make sure that the rent charged by the seller is not the highest rent you can possibly charge. For example, John is selling his two unit property…. DOWNLOAD NOW » Author: Dr. Gyath Alhusseini. Publisher: Xlibris Corporation ISBN: 9781493132416 Category: Business & Economics.
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One word: Management. Hundreds of thousands know bestselling author Ken McElroy as a real estate investment tycoon. In this book, Ken reveals the key to his success: Exceptional property management.