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Emily is available for speaking appearances and flat-rate consulting on the topics of personal finance and real estate. Please fill in the Contact Form for more information.

Archive for Private Capital

Aug
12

Real Estate Networking 2.0

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Lately I have been exploring new ways to network with people… first there was MySpace.com which my college roommate had joined.  Then there was Linked-In.com where all the professionals seem to meet.  After my high school reunion, I joined Facebook.com to see what all my old classmates were up to.

But now I have found the ultimate in online networking for real estate professionals.  This is a place where realtors are helping each other (no nasty back-stabbing competitiveness), leads are being exchanged (and money made!), and realtors are moving to the top of the search engines for local search – building their credibility and exposure, all for free!

Commercial Real Estate - Seattle, WA Emily J. Cressey: Commercial Real Estate Agent in Seattle, King County, Washington

It’s called Active Rain and after much (hours) of poking around there yesterday, I decided to create an account there.  I have started an industry-specific blog on commercial real estate investing in Seattle, WA, joined several networking groups (they have groups for realtors, investors, short sale gurus, mortgage brokers, appraisers, real estate trainers, escrow agents – virtually everyone involved in real estate!), and set up my profile.

In less than 24 hours, I’ve already had over 15 people welcome me to the community.  It’s an amazing place.

If you are a real estate professional and have been interested in building your business online, I encourage you to check out Active Rain.  One of the big agents there is getting 2 listing leads per week off her online presence there.  She is an agent and she also works a lot of short sales, so it’s clear that there is value here no matter which side of the fence you’re working the business from!

Hope to see you there!

Emily

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Aug
11

Balancing a Portfolio with Real Estate in it

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A 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:

  1. 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?
  2. Does the property have negative cash flow or positive cash flow on a regular basis?
  3. 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.)
  4. 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: 

  1. 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.)
  2. 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.)
  3. 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.
  4. 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!

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Mar
28

An Insider Report on a Private Fund Raising Campaign

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Greetings!

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:

  1. Put together a secure and attractive offering to raise funds quickly.
  2. Have your attorney do all the paperwork (this took us some extra time to finish, this time!)
  3. Start talking up the deal and generating interest.
  4. 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.

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I just put the finishing touches on an email going out to our private investors list offering a 12-15% rate of return on a cash-flowing loan.  Just before I sent it out, I got an email from my partner Steve, informing me that this opportunity was for "accredited investors" only.

If you’ve never heard the term before, the Accredited Investor designation is something that the SEC dreamed up to regulate who is allowed to participate in certain types of investments. The Securities and Exchange Commission (SEC) is best known for reigning over the stock market and those pesky insider trading allegations (right, Martha?) but they also have jurisdiction over private securities and loans offered by little old you and me. :) 

There are several ways you can qualify as an accredited investor, but the most common are:

  1. Having a net worth in excess of $1 million dollars.
  2. Having an income of $200,000/year if single or $300,000/year if married.

Once you meet these requirements, you are deemed to be financially "sophisticated" by the SEC and can then begin to participate in what may be viewed as "high risk" investments that are not offered to Joe-on-the-street by his stock broker or investment advisor.

It’s frustrating to me when my company puts together great investment opportunities and we want to offer them to all the people we know, but we can’t because the government (and our attorney…) won’t let the "little guys" participate.

Technically, we can find ways to include non-accredited investors in many of the projects we do, but the considerable added red tape and bureaucracy makes it inefficient, expensive, and impractical.  The challenge with the accredited investor rules (another example of the government protecting people from themselves) is that they prohibit a lot of smart (but not yet rich) investors from taking part in lucrative investment opportunities. 

What You’re Missing…

While my friends and I are busy participating in projects like this $1.2 Million loan to 34501 Quincy, LLC where we can earn a 12-15% rate of return on our money, Joe-on-the-street is limited to putting his money in "investments" like savings accounts, CD’s and money market accounts (currently earning 3% interest) or the stock market (haven’t checked today, but not having a good year).

People who run the numbers know that it’s worthwhile to find investments that earn an above-average rate of return in a relatively safe environment.  The stock market is great, but it’s not EVERYTHING.  We’re told to diversify, but then not allowed to participate in great projects outside the mainstream unless we are already wealthy.

It’s frustrating. 

The solution I have found is to take the bull by the horns and participate in putting together my own projects.  I don’t have to be an accredited investor if I’m a founding partner in my deals.  However, not everyone has that luxury, putting together commercial deals is time intensive!  And that’s why passive investments can make so much sense if you’re in a position to take advantage of them.

If you are an accredited investor and you’re not taking advantage of the many opportunities available to you off the beaten track, consider talking to friends who invest, and learning more about the pro’s and con’s of diversifying your portfolio a little bit.

If you’re not an accredited investor yet, keep learning, earning, and investing so that when that designation is one day suitable to you, you’ll be in position to take advantage of it.

If anyone would like to join my company’s mailing list of private investors (you can join whether or not you’re accredited), you can start to see what types of opportunities present themselves, and begin to educate yourself on what good opportunities look like.  I’ll keep sending out emails about opportunities – some for accredited investors and some available to everyone, and I hope that one day I’ll hear from you when you’re ready to take advantage of them!

Mar
06

Private Money Opportunities

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I had the opportunity over the weekend to teach a fun, energetic group of real estate investors some of the tactics and strategies behind raising private money.

As investors, one of the things that tends to slow us down is running out of money to put into new projects.  If you knew that you could always come up with more money than you needed to fund your deals, how would that change your approach to investing?

For me, it has really opened things up.  My breakthrough was when I was able to participate in a fund raising team that put together $5 Million dollars in 23 days to buy a piece of land in Colorado.  After that experience, I knew I could do more and better with private investors funding my deals in the future.

Right now, the same team is working on a $1 Million dollar fund raising project.  We hope to come up with the funds within about a month, and have already received verbal commitments for over half of this money, without even opening it up to our main list of private investors.

One of the reasons we’re able to fill the project so quickly is because we’re offering a good rate of return, cash flow on the investment, and a short term (2 years) in which we plan to pay off the money.  We can’t open it to the public yet because the participants in the deal (those who already have money invested) get first right of refusal.

However, if you would like to be considered for this opportunity, or others like it in the future, you can get on our private investor list by registering on our website – TheRealWealthCompany.com

It’s free to join, and by opting in, you give us permission to reveal more of the details of our projects than we can to outside investors.  If investing money in real estate or private notes and mortgages is something that you’ve considered in the past, I encourage you to jump on our private investor list for free and start to educate yourself about what types of opportunities are out there, and what types of returns and securities are available.  You may find that it is a compelling alternative to the stock and bond markets, especially given their dismal recent performance.

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About Emily Cressey

Emily Cressey is a real estate investor and licensed real estate agent living in Seattle, Washington. After graduating Phi Beta Kappa with an Economics degree from UNC-Chapel Hill (Go Tarheels!) her focus has been on building business for cash flow and investing in real estate for wealth. If you have questions about real estate investing, personal finance, or would like some flat-rate, affordable advice on one of these topics. Please fill in the Contact form.