Archive for Commercial
Balancing a Portfolio with Real Estate in it
Posted by: | CommentsA recent caller I heard on The Dave Ramsey radio show had an interesting question about balancing her portfolio when she was investing in both stocks and mutual funds. Her husband loved investing in real estate and liked to be very hands-on with their properties. She was more comfortable with owning stocks and mutual funds because they offered liquidity – she knew she could get her hands on the funds quickly if something terrible happened and she had to cash out her stocks in a day or two.
The call caught my attention because it’s a topic my husband and I have discussed extensively as well.
Here’s What Dave Ramsey Says About How Much Real Estate to Own:
For the record, the "expert" Dave Ramsey said he would recommend somewhere between a 50/50 portfolio split and a 75/25 portfolio split (that’s 75% real estate and 25% stocks). Dave is a big real estate fan and he said his personal portfolio is weighted 75% toward real estate because he doesn’t mind the hassle factor that real estate presents and he thinks it’s worth it to get superior rates of return.
The big BUT here is that Dave Ramsey only buys real estate free and clear. After going bankrupt himself, he does not believe in taking on debt, so he buys properties all cash at a discount, with no loans at any time. Therefore, when he owns $100,000 in real estate, that means one property worth $100,000; not 4 properties with $25,000 equity each and $300,000 in debt in total.
This is an important distinction because debt (also known as leverage) can improve your rate of return on a property, but it can also increase the risk. If you are buying real estate WITH DEBT, as most of us are, I think it makes sense to be a little more cautious.
If You Leverage Your Properties, Grow Your Portfolio Prudently
I’ve talked before about the importance of being able to pay for your properties long term. With a mutual fund investment strategy, if you go through a rough patch – like a job loss – you can stop making contributions to your funds for a few months while you get back on your feet.
With real estate, you don’t have that flexibility. If the property has negative cash flow, goes vacant, or needs repair, you have to keep writing checks to take care of your property, whether it’s convenient or not. (And face it, when is it EVER convenient to feed a property?)
My partners and I own an apartment building that suffered roof damage in a recent storm. It’s needed over $200,000 in repairs which we’ve had to pull together from our personal accounts. It’s been important to have the liquidity to handle that type of emergency to avoid the property being further damaged due to the problem going unresolved.
As You Buy More Real Estate, Stockpile More Cash
So, how much of a cash reserve do you need if you own real estate that’s leveraged? It’s hard to create a specific formula in the abstract, but here are some issues to take into account:
- How much equity do you have in the property? If you needed to liquidate quickly (within 6 months) would you be able to do so? Would you walk away with cash or would you have to pay out at closing?
- Does the property have negative cash flow or positive cash flow on a regular basis?
- How well diversified are you? (The more different properties you have in different areas of the country, the less likely you would suffer from a "catastrophic" down turn in the market in terms of falling rents or property values.)
- What is the sales and rental market like? If you have a waiting list of buyers or renters there is less risk than if there are relatively few people shopping for what you have to offer.
Personally, I keep a "real estate cash account" separate from my other mutual fund investment accounts or personal funds. In this cash account, I keep about a 3-month reserve to pay for each property’s mortgage if it were to go vacant. (If you have a smaller number of units, this is an appropriate sized reserve, if you have a lot of units, you probably don’t need to keep that much cash on hand. You’re well diversified and chances are not EVERY unit is going to go vacant at the same time.) I also keep funds available for major upcoming repairs and capital expenses.
This account is just good safety/housekeeping for my real estate portfolio, I don’t include this balance in my "investable assets" column. I would not spend these reserve funds on a down payment for a new property, for example. I keep them liquid (and therefore, not "invested") so I can always safely manage the properties I have. Kind of like a trust account or operating account that you might keep with your property manager
Deciding Where To Invest Your Next $25,000
In terms of portfolio balance, right now I would say my net worth is balanced at about 80% equity in real estate and 20% in mutual funds. That’s mostly because I’ve been working full time as a real estate investor for the past several years and acquiring property at a rapid rate, much of it purchased with private funding. So, my real estate portfolio has grown very quickly through my efforts. However, I haven’t been generating lots of CASH to invest in mutual funds. (You still can’t build value in your stock portfolio through sweat-equity work, as far as I know… 
)
At this point, my husband and I still want to continue acquiring real estate, but we are focusing our CASH INVESTMENT efforts into building up our mutual fund portfolio, so that our investments are balanced closer to a 50/50 mix.
Basically, we do this:
- When we get cash – from the sale of a property, from contract or employment income, or as a gift, we first make sure we have enough money on hand to fund our day-to-day expenses and we check to make sure our reserve accounts are topped up. (Outside the real estate reserve fund, we also keep 3-6 months of living expenses available to us in a money market fund. We tend to go for a big "emergency fund" because we consider our investments illiquid. We don’t want to be forced to pull money out of our mutual funds, retirement accounts or real estate.)
- Our second step is to make sure we’re getting the employer match on Ben’s 401(k), fully funding our Roth IRA’s, and then we put additional budgeted amounts into the 401(k). (The tax-exempt annual contribution limit is $15,500 for a 401(k), I believe.)
- Any savings after that get divided up into our investments. Right now we are working on building up our mutual fund account balances so we’ll be closer to a 50/50 split with our net worth divided between real estate and mutual funds.
(Unlike Dave Ramsey, we DO believe in good debt, so we’re just counting property equity, not property value, in that figure.) One conservative way to estimate the value of your real estate’s equity is something my friend Steve Maxwell taught me. Rather than using the "appraised value" to determine your real estate equity, use the "liquidation value." For example, if I had to sell a property and anticipated paying a 6% realtor commission plus 2% in other costs (repair, vacancy, etc.) and I thought I would get about 4% less than appraised value because the market was slow, I would subtract those costs from my appraisal of the property’s value, to estimate how much I would really net if I were to sell the home. In this example, that would mean taking 88% of the appraised value and then subtracting the loan balance to determine my equity.
- Each year my husband and I review our holdings, we re-calculate how much we have in real estate and how much we have in stocks and what our goal is for that year. We might want to acquire one house at 70 cents on the dollar, one commercial property through Grassland Investments, LLC with 100% financing, and put a certain amount into stocks each year. Then we set up an automatic purchase plan to buy the mutual funds at Vanguard and get to work looking at the types of properties we are interested in buying.
You’ve Heard It Before: Slow and Steady Wins The Race
One thing that I learned from acquiring a lot of houses in quick succession earlier in my career is that you don’t want to just buy as many houses as possible. You want to buy the best houses, and make sure that for each one you buy, you’re keeping a certain amount of money liquid, too, so that you can afford to take care of the house after you’ve purchased it. A big mistake that a lot of investors make is buying a ton of houses with leverage, only to have the house of cards come tumbling down once they hit a down swing in the economy had have several extended vacancies, lowered rents, or expensive repairs. It’s much better to grow your portfolio in a sustainable way.
Holla’ Back
So, now you know what I do, and what Dave Ramsey recommends. I’m curious to hear how you handle this issue. How much of your portfolio is in real estate versus the stock market? Do you have any other investment categories that you allocate a significant portion of your investable assets to? Comment below!
Popularity: 85% [?]
Who’s Making It in Land Development?
Posted by: | CommentsWhile land development is not an area of real estate that appeals to everyone, it’s one of the most lucrative (and potentially high risk) investment vehicles out there. Many of the land developers I know, including my Grandpa David Cunningham, my partner Rob Powell, Rob’s father-in-law David Karam, and my co-teacher for Team Gold Mine – Jeff Carter, have years of experience, scars from failure, and a bit of a cowboy or maverick attitude that allows them to keep moving forward even when success is not guaranteed.
Jeff Carter, who lived in California when he got going, started his real estate development career with rehabbing and doing condo conversions on small duplexes and four-plexes and often making a few hundred thousand a pop on those little projects. Then he broke out of the mold and spent several years developing a large parcel of land in Oregon (which he found while he was on vacation there).
After making over $1 Mil on that project (sweet!) he and his wife decided they could leave their W-2 jobs and go into real estate full time instead. They moved to Colorado where they work with other friends of mine, Susan and Stephen Wilklow, developing property in Winter Park, CO.
One of their current projects is a mixed-use retail/luxury condo facility right in the middle of downtown Winter Park. They’ve got retail space to lease on the street level, and luxury condos for vacationing skiers on the upper levels.
Can Anyone Get Started In Land Development?
Armed with Jeff’s expertise and my organizational skills, we are leading Team Gold Mine, a group of Mentor Financial Group, LLC students committed to learning and DOING commercial land development, through their first land development projects. Our goal is to make a million dollars in profit with the team.
As far as I know, this is one of the few (only?) mentorship programs available for people getting started in land development.
Team Gold Mine has been in operation for about half a year, looking for the right deal – our target acquisition is land for sale for $1 Million or less that can be used for residential development.
After a slow start due to having too many people on the team, Team Gold Mine has thinned its ranks and really hit its stride. We now have not one, but four deals that we’re actively working on:
- Under contract – a 38-home site in Canyon City, CO. They’re now working with an architect and an engineer getting ready to take this project through city planning.
- Possible Joint Venture Opportunity with an established builder/developer on bank-owned (REO) land that’s already entitled… also in Canyon City, CO. Team Gold Mine would be coming in with private financing to make this work for the builder who can’t get funding.
- Penn State – a beautiful forested 214 acre site suitable for 5-10 acre home sites to be built. This one was found through a referral from another Mentor Financial Group student – Patty Smith – who lives in the area and has had this property under option for a few years.
- One of our team members, Yoko who also lives in California, has been working on a deal in Craig, CO for some time and is getting ready to submit her next LOI to the seller out there, after some good negotiations and coaching already.
It’s exciting to see this group of absolutely new investors tackling these exciting land development projects.
They are minimizing risk by writing up contracts that allow them to delay actually closing on (buying) the properties until they’ve gone through the necessary approval process with the local government. But there are still some fixed costs involved in having soil tests, engineers, land surveys and other things necessary to bring them through the land entitlement process. All told, they’ll probably have to invest $20-$40K in research and preparation to determine whether the project is a ft.
Their next big step will be raising private funds for these deals. Once they master that, there’s no telling how far they’ll go!
Stay tuned for more updates on the progress of Team Gold Mine and the Land Development Challenge!
Popularity: 11% [?]
Is Market Timing Possible in Today’s Residential Real Estate Market?
Posted by: | CommentsOkay, if you’ve been reading this blog regularly, you know I’ve just bought a rental property in Charlotte, NC – near my in-laws. (One of the few housing markets that’s doing well at the moment, btw. Seattle is currently experiencing a price decline and Charlotte is the only city that hasn’t…) And I’ve also been searching for the next great place to invest… I’ve been looking here in Seattle in my own back yard, as well as in other markets like Dallas-Fort Worth, for cash flow and Mobile, AL and Biloxi, MS for the Go-Zone tax benefits.
Once you free yourself from the idea that you can "only" invest where you live, you dive into the more complicated question of – "If I can invest anywhere, where should I invest?"
It’s hard to know where to invest when the news is sending out lots of contradictory information about what the markets are doing and where you should go. Plus, if you do find a hot market, like California, Phoenix, Las Vegas and Miami have been in recent years… how do you know how long to ride the wave up and when to get out (before things crash)?
Well, that’s the million dollar question, and a few weeks ago I happened across a gentleman who purports to have discovered the answer!
How Can We Improve Our Investment Returns?
Ken Wade is a 30-year veteran of the real estate investing industry. The initials behind his name include a CPA designation and an MBA from Harvard Business School.
Ken was frustrated to realize in the course of his investing career that even though he was spending hundreds of thousands of dollars on marketing to motivated sellers and employing a giant staff to handle the leads, his know-nothing-about-real-estate friends were beating him in their investment returns simply through the DUMB LUCK of being in the right place at the right time.
I had a similar experience, acquiring about rental homes from motivated sellers I found with blood sweat and tears and renting them out for five years in a flat market with no appreciable gains in value, only to have a friend in a different state buy two random rental properties from a realtor and sell them two years later for a $200,000 profit.
In real estate, there are really four main profit centers to be aware of:
- Cash Flow
- Tax Write-Off’s
- Loan Pay-down
- Appreciation
Of these, appreciation is by far the most powerful profit booster.
Combining leverage of putting 20% down or less on a property and appreciation (nationally 6%) a year, investors can expect a scenario similar to this:
$20,000 invested to buy a $100,000 house. House goes up $6,000/year for 5 years. That’s a 30% annual return. More realistically, it’s a $30,000 increase in value after 5 years, and if you have 6% transaction costs to sell (realtor fees, etc.), you walk away with $22,200 in profit over five years. That’s closer to a 22% rate of return per year. Not a ton, but significant, twice the average rate of the stock market returns and enough to put you well ahead financially when you look at the results compounded over time.
Well, the problem is you can’t buy the "average American house" – you have to buy a particular house in a particular market area. Local markets experience up and down cycles, often going up in value for 5 or 6 years, and then declining in value for several years (or staying stagnant and letting inflation due its corrosive work).
The question when it comes to real estate market timing is – Can we predict these market cycles enough so that we can stay in the market when it is going up 5%-10%-15% or 20% a year and get out before the market starts to fall? If so, we can harness these price trends and the power of leverage to make our investable funds compound much, much more quickly…
What is Technical Analysis in the Context of Real Estate Investing?
So what Ken Wade has done is to capture the real estate trends in charts and graphs so you can see the up and down cycles of the market place. You can know when the market is going up, when the market is going down… that tells you when to buy, and when to sell.
Technical Analysis is the name by which the process of analyzing these trends is known. The math behind technical analysis was developed hundreds of years ago by Chinese rice merchants and it is currently used extensively by stock and commodity traders. Although there are mixed reports on the effectiveness of technical analysis for use in the stock market, there are reasons to believe that technical analysis is VERY useful when it comes to analyzing the real estate market.
In fact, I called the developer of this real estate market-timing product, Ken Wade, and spoke with him extensively (for over an hour) about his system and its effectiveness in predicting the performance of the real estate markets. Although nothing is ever fool-proof, he said that doing technical analysis trading in stocks, you’d be lucky to get your trades right 60% of the time.
Doing technical analysis with real estate investing is much more effective because the real estate market is more cyclical, slower moving, and less volatile than the stock market. He said it was like putting a college economics student in a fifth grade math test to see how well she did on the exam. It’s a no-brainer…
He encouraged me to personally go into his data set (which I have to subscribe to have access to, of course, and personally spot-test data points to my hearts content to see how accurately they were predictive of correct actions in the market place. He said he had done just that after developing this program and was amazed by the results!
Ken had personally been doing technical analysis calculations on specific markets he was interested in for the last 10 years and having great results. Now, with this software system, he was able to look at results from across the country very quickly and choose the best market places to invest in.
If it works as well as he said, this is absolutely got to be the biggest boon for real estate investors since I don’t know what… no-money down investing, sliced bread, short sales… it’s tremendously powerful.
I would love to chat about this one, guys. If anyone has the chance to go through Ken’s sales information and get some background here, I think you will be very impressed. Let me know what you think! I am thisclose to moving forward o this myself, but still doing a bit more research. I’ll keep you posted on what I decide and what I think of the program once I get inside. I’ve heard from a friend, Byron Walker who promotes emerging market real estate opportunities, that it really is as good a program as Ken says it is!
Emily
Popularity: 14% [?]
An Insider Report on a Private Fund Raising Campaign
Posted by: | CommentsGreetings!
I know one of the reasons you may have subscribed to this blog is to get a "look over the shoulder" of how commercial real estate investors like my partners and me do business when it comes to raising the buckets of private money we need to fund our deals.
It has been a busy week in the world of fund raising, and this time around I want to share an update on the process we’ve been using for our private money raising efforts for a $1.2 Million loan we’ve been funding for 34501 Quincy LLC. You can use this same process when you’re raising funds for your next deal, be it an $80,000 rehab house or a $10 Million Apartment complex like the one we’re looking at in Texas right now.
(Some of my students in Team Gold Mine are doing their first fund-raising project for a $500,000 residential development project in Colorado and I am so excited to be able to coach them through this process!)
Where we stand with 34501 Quincy LLC
As a recap, Quincy is a large 955-acre commercial manufacturing and office space complex which we purchased a year and a half ago with a 3-5 year hold plan. The bank financing we used to purchase the property has a 2-year balloon on it, so as we approach the 2-year mark, we’ve been looking at refinancing the property with the same lender, paying off a portion of the loan balance (10%) and getting some additional working capital – that’s why we’re raising a million dollars this month.
A few months ago, we decided to do a $1.2 Million fundraising project and started working with our attorney to draft the appropriate documents. According to our company Operating Agreement, we have to give first priority to the current owners/investors for any new private loans made on the property.
We opened up the opportunity to our Class A shareholders with an informative email letter and a Q&A phone call to make sure everyone had the opportunity to learn about the investment and decide whether they wanted to participate in the loan.
After we gave all the Class A investors their chance to invest, we were able to open up the opportunity to people outside the company.
- We’re offering great loan terms in order to make the loan attractive and get the funds together quickly and easily.
- We also put a deadline on the submission of the funds – April 11th – to encourage people to get their funds in promptly. People who submit funds after this date will not qualify for the higher interest rate investors get if they invest before this date.
- To increase security, we are positioning this loan (and collateralizing its payback) in front of all our Class A investors, so the loan money is actually very safely positioned.
After deciding what we were going to offer for terms, and getting commitments from people about what they’re going to invest, (We’re up to $920,000 in verbal commitments on our $1.2 Million goal), we continue to follow up with people personally to make sure that they’re still feeling comfortable with their decision to invest, have read over and signed the paperwork we need, and are sending in their funds in a timely manner.
We also continue to approach new investors to get additional commitments. We still have $270,000 to go on our raise, so the show’s not over yet.
It’s not as hard as you think!
However, raising the funds is just not as difficult as we always thought it would be before we got started. Just last week, one of our board members was talking about the fundraising project in one of his mastermind groups and garnered a $200,000 verbal commitment from someone in the group as a result of the conversation! Wow – talk about having some good wealth lifelines created there.
It just goes to show that you never know who might be interested in investing until you start to share the project.
So, the next time you raise funds remember:
- Put together a secure and attractive offering to raise funds quickly.
- Have your attorney do all the paperwork (this took us some extra time to finish, this time!)
- Start talking up the deal and generating interest.
- Follow up with interested parties to make sure they follow-through.
It’s not rocket science, but it does take work! The first time you raise funds is always the hardest. We have a strong belief system around here… We know we can do it easily, but we have to do the work to make it happen!
If you are interested in getting more information about future private investment opportunities, make sure you’re on the list as one of our approved private investors.
Emily
P.S. One thing about our deals is that we always make the numbers and security good enough that we feel confident putting our own money into the deals. We not only invest our own funds, but encourage friends and family to invest as well.
Popularity: 15% [?]
Emily Cressey To Appear In Real Estate Success Stories Book!
Posted by: | CommentsWhoo Hoo! I’m having a good day! I have just been invited to be a contributing author for a new book on real estate investing. My friend and former student, Robert Kraus, is compiling a book of success stories from real estate investors who are involved in single family home and commercial real estate investing.
This will be the second book he’s put together and I am so honored to be a part of it.
From working as a real estate investor, coach, and speaker for the last several years now, I have a number of really good war stories on different real estate transactions I have participated in. Robert only wants one, though! It will be tough to choose, but I plan on selecting a deal from the beginning of my career as I feel it will be more "accessible" for readers to know that they are following a long with a relative newbie at the time. The old "If she can do it, I can do it!" vibe will resonate a little more strongly, I think.
From the business side of things, I will go ahead and tell you now that I’m not being paid to contribute to this book. Why, then do I spend the time working on it? What’s in it for me?
I read an excellent book, How To Position Yourself As The Obvious Expert, that talked about a number of great low-cost ways of marketing your business and building credibility. (I will have to do another post on this sometime, since it was a really great resource (and one tip got my business partner, Steve Maxwell, published in Reader’s Digest!) In one of the chapters, this book covered ways to get free publicity and get your name out there… one of them was to look for opportunities to be quoted in books, magazine articles and newspaper columns.
Therefore, when Robert told me about this book he was putting together, I said – "Yes, I would love to be included!" – but made sure to negotiate for an "About the Author Box" at the end of the article, that would give information about me and a LINK TO MY WEBSITE! I also negotiate for resale rights for the book so that I could take responsibility for distributing and selling it (to get it out to more people) to further leverage my investment in writing my chapter!
So… we’ll see how it turns out. This is all still in preliminary stages, but it’s exciting to be approached and I am very much looking forward to be able to reach and inspire more people and build my business at the same time, leveraging somebody ELSE’s efforts!
Popularity: 9% [?]
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