The bloom is off the rose. The real estate market is in the tank. Foreclosures are popping up all over, real estate values are down, and you can’t find a house that will cash flow.
So Real Estate Investing Sucks!
Or does it?
If you bought property in the last few years (say 2005 – 2008), you might be thinking that real estate investing is no fun, you got sold a bill of goods by a guru, and you have no idea how you’re going to make money on your properties.
It’s easy to get impatient, especially if the current market downturn has treated your real estate portfolio to a royal trouncing. This might be a good time to bear in mind the adage: Don’t wait to buy real estate, buy real estate and wait!
Of course, it’s no fun to get rolled by a downturn in the market. If you want to avoid that happening again, and use the market to your advantage next time, I suggest you learn to take a look at market cycles and understand how they work.
However, even if you bought at the exact wrong time, don’t give up on real estate investing.
Look at the current disaster of a market as a great opportunity to get started in real estate investing (again!).
A lot of investors make money by being contrarian.
When people are fleeing the markets, they buy in.
That’s exactly what’s happening right now, so this might be a great time for getting started in real estate investing if that’s what’s going on in your neck of the woods.
Even if it’s not going on in your area, it’s going on SOMEWHERE – find out where and invest there!
However, you definitely want to make sure that you can afford to buy property before you invest.
What should you look for in your deals if you’re getting started in real estate investing right now?
1) Appreciation Potential. 
Generally speaking, appreciation is your largest profit center when you buy property. It beats out the other 3 profit centers (cash flow, debt reduction, and tax savings) pretty handily in markets where it is utilized. The challenge is that generally speaking high-appreciation market places (like California, Florida, Manhattan, Seattle, etc.) tend to have expensive property and it’s hard to find cash flowing deals there.
However, there are some great markets in Texas and other southern states where property still cash flows and goes up in value all the time. As you explore the markets you want to invest in, consider the potential for property appreciation over the next five years. You don’t want to bank on this appreciation, since it’s not a sure thing, but markets do have cycles, and if you can buy and sell at the right time, you stand to drastically increase your profit.
2) Price or Terms. A good price means 80% of the “market value” of the home or less. The more volatile/flat/falling your market place is, the LOWER I would insist on getting the price in order for the investment to make sense. Good terms are things like buying the property with a lease option or subject to the existing financing so you can get in with little/none of your own money and credit. (For information about investing with your IRA or getting private investors who want to do so, check out my IRA Real Estate Investing Series at www.TheRealWealthBlog.com)
3) Cash Flow. What is cash flow? In many markets around the country, this is an elusive beast. It seems that here in Seattle you have to put 40-50% down on a property in order for it to cash flow. In other areas of the country, you can break even month-to-month even when a building is 100% financed.
Personally, I like for a property to be able to cover all of its own expenses, including vacancies and repairs. This is easier to say, than to actually find these deals, but here’s the situation: What if you are doing well financially right now and want to make an investment? That’s great, even if the property has negative cash flow, you earn enough that you can feed it, right? So, no problem. However, what happens if you lose your job, get sick, or become disabled? You may no longer have the disposable income you need to feed your alligator (alligator is a nickname for property with negative cash flow) each month. If you have equity you could sell your property, but you may not want to do that, especially if the market is depressed when your financially emergency hits, like it is right now.
For those reasons, I like to see a property make a good rate of return from its cash flow without my having to feed it each month. If you live in an area where negative cash flow properties are the norm because property values are so high, you can consider your options.
- Use a higher down payment to get your mortgage payments down.
- Have a large emergency reserve fund to cover the negative cash flow on the property for several years, so you’ll be safe in the event of a loss of income.
- Invest in another part of the country. Personally, this is what I do…
If Your Personal Finances Allow It, Consider This A Great Time To Get Started In Real Estate Investing
Raw beginner or experienced pro, don’t let the current market conditions rattle you. Interest rates are low, buyers are scarce and sellers are motivated. Don’t worry about putting together a “power team” or spending too much time creating your perfect entity. Now’s the time to go out and take action!
Talk to real estate agents (like me!), call FSBO’s and FRBO’s from the newspaper, get a mentor if you need one, and start taking action – a little bit every day – that will move you in the direction of your goals.
Emily
Popularity: 21% [?]
Although I’m not the biggest fan of Suze Orman, it’s hard for me to pass up the opportunity to read some well thought-out financial tips from a nationally recognized advisor. If you haven’t heard, you can download Suze’s latest 2009 book for free from Oprah’s website until Thursday, January 15 at midnight. You can also buy it for $10 at Amazon.com
Suze Orman’s Advice on Saving For College
Since I have been working on setting up baby Blake’s college savings recently, I skipped to page 160 to read her chapter about college savings. It was focused primarily on “What to do about college now that your college savings tanked when the stock market took a dive…” There was a lot of discussion about loan options and financial aid that didn’t really interest me.
What did interest me was the following few points – my personal takeaways from the chapter:
- Keep your child’s college savings 100% invested in stocks until your child is 14 years old. Between the ages of 14 and 17, gradually divest until none of the portfolio is in stocks. – My husband and I have talked about this one, he feels that 100% in stocks is still too risky. My rule of thumb is: Don’t put anything in the stock market that you can’t afford to keep there for at least 5 years. With that in mind, I might start shifting the portfolio balance toward bonds/cash a little earlier than this.
- Use a 529 Plan. She mentioned Coverdell plans, but 529′s were the emphasis.
- Don’t get a private loan for college under any circumstances.
- Save for your retirement first and THEN put away an appropriate amount for your child’s savings. Don’t put your child’s college savings ahead of your own retirement, in terms of saving priority.
- Visit www.saveforcollege.com to get more information on saving for college.
I actually did visit this website, which had a handy-dandy college-savings calculator. It told me that I should be putting away $602/month for my child’s college savings. Not far off from the $641/month I calculated on my recent article on financial planning for college.
A lot of the advice in the book seems to be working under the assumption that you have been negatively affected by the recent stock market crash and are experiencing job loss, panic selling, getting behind on your house payments, going through a personal credit crunch, or experiencing other problems with your finances right now. It’s pretty much a back-to-basics tome coming from a conservative, “the sky’s not falling, but you do need to be safe” perspective, encouraging you to pay off your credit cards and make sure you have health insurance.
This may be timely for some families, but I did not find it especially relevant or inspirational. However, it’s free, so I can’t complain. Thanks, Suze! Be sure to pick up your free copy and let me know what you think!
Emily
Popularity: 20% [?]
When the economy’s down, non-profits suffer.
When we talk about wealth building, our money, our spending plans, and retirement savings, we very often forget to mention a tiny little thing called CHARITABLE GIVING. For some, this is really a small or non-existent part of their budget. For others, it’s a lynch pin. Many people believe that they should give 10% of their income to their church in the form of a tithe. Many who don’t believe that feel that they are “off the hook” and not “required” to give, so they don’t.
Overall, though, Americans are fairly generous givers, and many of us enjoy the feeling of satisfaction that comes from supporting groups that we believe in, religious or not, with our time, talents and money.
However, when the economy is down, giving suffers, too. Many of us take the position that charity begins at home, and when we’re forced to pare down discretionary spending, spending on our charities is often one of the line items found on the cutting room floor.
I recently had the opportunity to mastermind with the pastor at my church about this phenomenon and what could be done about it. I warned her ahead of time that as a business owner, I was coming in with my “sales and marketing” hat on and looking at this thing as an entrepreneur. She concluded that was an entirely appropriate approach, since the church really is a small independent enterprise very much like a business. It just doesn’t happen to sell a product or service.
Ways For Churches To Make and Save Money In A Down Economy
We decided that the church could do a couple of things to increase its bottom line:
- Increase income by increasing membership
- Increase income by increasing donations contributed by each member
- Decrease expenses by cutting programs
- Decrease expenses by using “sweat equity” and volunteer labor from people who would be in a better position to donate time than money.
In the course of our discussion, I was also able to draw upon research I had done on fundraising for a speech to college students I delivered in Chicago last year. In my research I discovered that many people become involved in charities through their friends and associates (personal invitation/referral) and that many people chose to volunteer their time first, before contributing significant amount of money to a cause.
Therefore, in our situation, we decided that action steps would include:
- Surveying members to see how the church was meeting their needs and how it could improve it’s service offerings to members and participants. (This would let us see which programs were most and least valued, as we decide whether anything would need to be expanded or cut).
- Educating members to the financial challenges facing the church and asking them if they are personally willing to do anything (volunteering, giving more money) to help ameliorate the problem. This will help us get a better sense of what resources will or will not be available to us in the upcoming year (Revenue forecasting).
- Adjusting our social events to incorporate more education about church programs and educational activities. This will allow us to consistently draw uninvolved members more deeply and consistently into church activities, and help visiting members and friends become aware of what type of programs they will be able to take part in, should they become a member of the church.
At our church it is very important to us that people not feel hounded for money or that they are being “sold” on giving cash whenever they come. This probably applies to most business customers too. If you say you want to have a relationship with your customers, you need to find ways to have conversations with them that don’t involve pushing them into buying your next product or service. Instead, focus on providing good old-fashioned value, human interest, referrals FOR THEM, etc. when you talk to them, and they will be much more likely to view you as a friend than a salesman. People enjoy doing business with friends, they only do business with salesmen when they have to.
Re-Visit Your Value Proposition
So, we are re-embracing our mission of providing meaningful spiritual experiences, community support, and family-friendly activities to make sure that our congregation continues to have its needs met in full without being pressured to give financially. In this way, we hope to re-inspire and re-excite people about the idea of giving, as they always do, in a way that is respectful and appropriate for them.
Emily
Popularity: 9% [?]
A Day In The Life of A Small Business Owner
By · CommentsOk, I think I’m back – again.
Ben and I both got a viral pink-eye infection that seemed to be accompanied by a pretty severe cold. Blake was spared. It makes us very grateful for the invention of Kleenex, Tylenol and indoor heating. Every time I get sick, I wonder what it must have been like for the pioneers and other people who didn’t know what they would have, if it would kill them, how it spread or how to get better.
So, in 2009 I am very thankful for HEALTH!
Today is “peek over my shoulder” day. Here’s a list of some of the things on my To-Do List:
- Write a series of 5 posts (2 already completed) on investing in real estate with your self-directed IRA. This will be posted on our commercial real estate investing blog.
- Interview Real Estate Brokers – still have 2 on my list to meet for the first time and 2 to follow up with.
- Do real estate coaching for some single-family home investors.
- Put up some affiliate marketing ads on some of my other web sites. Have been doing this to generate some extra cash flow. I wrote 10 articles recently, one featuring a little pitch for a dog training manual and have garnered 1 sale so far – $68.
- Review test results from Google Analytics… I am comparing two sales letters for my how to knit dog sweaters ebook. If one is clearly more successful than the other, I can improve my conversion rate. I already get plenty of traffic.
- Meet with bookkeeper and property manager to write quarterly investor updates for some of our commercial properties.
- Read The Long Tail by Chris Anderson. I recently got a copy of this after learning more about long tail and small business.
- Deposit rent checks and pursue collections from my tenants.
It’s not exciting – but it’s real, it’s honest, it’s transparent. There will probably also be a nap and lunch thrown in there somewhere.
I’ll try to make it more sexy next time. Maybe I’ll sip margaritas, have a party by the pool, or go sky diving, but the truth is moving forward is about small steps every day. It’s also about FOCUS – something I need to work on a little more. 
But that’s for another post.
Emily
Popularity: 10% [?]
What Brokerage Should I Join as A New Real Estate Agent?
By · CommentsI’m on the warpath again. Yesterday marked my first post-Christmas interview with a real estate agency.
This time, it was Keller Williams in Bothell, who I was fairly impressed by.
So far, I have interviewed with or applied to the following real estate brokerage houses:
- Prudential Northwest Realty – They pay for a lot of your mailings and have a great online corporate presence and relocation business. However, there’s a lot of expense in supporting the franchise.
- Edmonds Realty – This was a Mom & Pop I interviewed with last year. They say they have great training, but they have a high (50%) commission split when you get started.
- Marcus & Millichap – Read about how that started and ended. They have a great platform to provide value to sellers (namely, lots of inventory throughout the nationwide office, and a nationwide internal MLS to help clients access that inventory. They also have a lot of 1031 buyers). The downside is that you’re at a 50/50 split. Also, Marcus & Millichap focuses just on investment property sales, and they don’t do any leasing.
- Fursse & Hall (local Mom & Pop commercial firm). Generous split (30/70 til you reach your cap, which is also low), but they aren’t a big name and don’t have too many agents or any training.
- CBRE - I heard rumors that this public company was courting the big BK? This is the 200-lb gorilla in our marketplace. They have a lot of corporate clients and don’t focus much on working with individual Mom and Pop investors.
- GVA Kidder Matthews – This commercial real estate firm is big around here (Seattle) and won over a lot of converts from Marcus & Millichap. Their big advantage? 90% commission split. They do leasing and sales, and have a lot of signs up in my neighborhood, but they weren’t hiring when I interviewed there, so I don’t have many specifics.
- Zip Realty – This is a great firm if you want to be a buyer’s agent and drive people around in your car all day. There is no out-of-pocket lead generation. Their agents average 1 closing per month. Only 10% of their business is on listings, they are working on getting more listings, but they are all about buyers. Between the discounted commission and fees to the house, you would only make about $3,000 commission on the sale of a $300,000 house, though. In my market, if I were an average agent there, I would make about $36,000 per year working full time with lots of nights and weekends, presumably. The top agents seem to do about 3-4 closings a month, so you could make in the low 6-figures with this firm if you were good. This is perfect for a buyers agent who wants to be in real estate full time and focus just on fulfillment and follow up, not on marketing.
They don’t charge any desk fees here, but the commission splits are really weighted toward the house. You’ll keep about 30% of your 3% gross buyer’s agent commission.
- Connect Realty – This is the MLM of real estate companies. This one is pretty intriguing and I would probably pursue them if I just wanted to focus on being a real estate investor and have a place to hang my license for the occasional deal. They charge $200/year as a desk fee and you are locked in at an 80% commission split (if you’re a new agent your first 5 deals are at 70% because you’ll pay a mentor 10% to work with you and help you get going). The MLM part of it is that 15% of your commission (taken out of the 20% that you don’t get) goes to the people who brought you into the company… your “upline.” This means that if you recruit a lot of new agents, you can profit from their deals and their commissions as well as your own.
However, I don’t think this model makes a lot of sense to me as a new agent. I need training and support, which Connect doesn’t seem to have available yet. Perhaps if you had a supportive sponsor to bring you into the business and help you get started you could do well, but I don’t know anyone who is in this firm.
Since agents essentially get paid to bring you into the company, it’s harder to find a lot of balanced feedback online – everyone is trying to recruit you.
Keller WIlliams Realty – This is the firm I interviewed with today. I really liked them. You have an $18,000 yearly commission split cap and after that you’re at 100% commission. The desk fee is only $32/month, so it’s very affordable. They pride themselves on having extensive training. 50% of the office’s profit is split with the agents (the other 50% goes to the franchisee).
Even though they’re not a big brand in Seattle, yet, I like what I see here. They pride themselves on a great training program, which I think is critical. They also encourage team building so you can work your way into a leveraged business model (e.g. hiring personal assistants, buyers agents, listing specialists, etc.). They also have a residual income model similar to connect realty, but it seems to be much less of a focus (more the icing on the cake, than half the cake, itself).
- Windermere Realty – This is the big “prestigious” local player in the area. I haven’t interviewed with them yet. They seem to lead with the company attitude of “you need us more than we need you” when it comes to their agents, and don’t give agents much freedom to agents to market themselves prominently.
- Redfin – This is an online broker who pays you “by the job” – you go show a property, they give you $120. You go let the property inspector in, they give you $50. This is a great “part time job” or “independent contractor” model. You can earn a little extra money with your license without needing to build a business or have marketing expenses. This would be ideal for the person who wanted to be a freelance real estate agent. Unfortunately, after they initially responded to my resume, I’ve called and emailed about 7 times and haven’t been able to hear back from them.
My conclusions as a new agent looking to choose a real estate broker:
Based on my research of the residential real estate brokerage model, I don’t see that any individual firm is able to offer sellers a distinct advantage. (Am I wrong here, experienced agents?) What one firm can offer you is pretty much as good as another. When a consumer chooses to buy or sell a house, he is most often making the decision to work with an individual AGENT rather than choosing a firm. The exception to this may be the one or two “name brand” firms that dominate a given marketplace.
What that means to me – as an agent – is that I should set up my business to be able to market MYSELF, through blogging, websites, postcards, signs, etc., rather than marketing my COMPANY first and foremost. I should also align myself with a company that lets me keep as much revenue available as possible (low commission splits and caps) so I can reinvest in marketing myself.
Although most sellers choose to work with the first agent they meet, some (about 30% as I understand it) interview multiple agents. When they choose an agent, what are they going to make the decision based on?
What sellers are looking for in their real estate agent:
- Is my house priced correctly so it will sell in the desired time frame?
- Is my house marketed correctly? What investment in marketing is my agent willing to make?
- Communication – how often does my realtor get in touch with me? Is she/he pleasant to deal with, return my calls, etc.
- Negotiations – How good is the realtor at negotiating on my behalf?
- Closing details – How much hassle will I have in getting the closing together?
- Price – Will the agent discount his/her commission?
What Does the Brokerage Offer That The Individual Agent Doesn’t?
When push comes to shove, most agents don’t sell their own listings any more. The buyer and the buyer’s agent usually come through different venues – not through the listing agent. That reduces the listing agent’s job to primarily just exposing the property, making sure it is priced correctly, and then coordinating communication to get the deal done. As agents, we offer these services and our expertise in performing them. Assuming we offer excellent service, the only other place for us to compete is price. The question of whether or not to cut commissions is one that could develop into a completely separate blog post. I don’t know the inside perspective from the realtor’s view point yet, but as a consumer, I can say the following…
I continue to maintain (sacrilege, I know…) that the reason so many realtors flood the marketplace is that it is such a profitable high-margin business. Especially when realtors market themselves on the basis of availability and relationship (I’m friendly and smiley) rather than expertise, it seems that there is very little to differentiate one agent from another. We’re ALL nice when we want your business, right?
Brokerages that serve their agents well, will ultimately build a reputation for serving their clients well, too.
Plus, what do agents do with all the profits that they earn in business, they plow it back into marketing… and not marketing to SERVE clients, but marketing to FIND clients. This giant inefficiency is my primary gripe with the real estate brokerage industry. It would go away if it was less profitable, and it would be less profitable if consumers insisted on using discount-priced agents. While some clients use these, many believe that you get what you pay for in life, and are more comfortable going with a full-price agent. So be it.
So, what it comes down to – if the well-informed consumer were really able to make an educated choice is finding an agent who is good at doing their job, and getting the best possible price for the agents services.
Hint to Clients – ask the agent if they’ll negotiate on commissions.
Hint to Agents: Don’t offer to negotiate on commissions – show your value and then stand firm on your price, Americans hate to negotiate, so if they’re not sold on working with you, it’s rarely because of price… find out what their other objections are.
In my opinion, finding an agent “who is good” comes down to training and hard work. As a new agent, I want a real estate broker who offers me in-depth training when I get started, and ongoing training to help me get better and better. I don’t just want to be trained in how to get leads (this is good for ME) but how to implement systems and serve my clients better. (This is good for THEM.)
In the long run, I think the best agents will choose the brokerage that allows them to serve their clients best, and make the most money. Brokerages that serve their agents well, will ultimately build a reputation for serving their clients well, too.
Popularity: 32% [?]
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