Monthly Archives: January 2016

If You Ever Hope to Reach Financial Freedom, Master This Concept

Here’s a wonderful piece from my friend, Andrew Syrios of Stewardship Investments, Kansas City…..Enjoy it!

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There is one major prerequisite to becoming a successful real estate investor or entrepreneur that any aspiring person must master. That prerequisite is the deferral of gratification. Namely, to live below your means.

Unfortunately, this is not something that has been embraced by most of the American population. As recently as 2006, Americans actually had a negative savings rate. And in 2014, the average household had a whopping $15,611 in credit card debt!

On the other hand, though, the most successful entrepreneurs are almost always frugal. As an article on Yahoo.com about the traits successful entrepreneurs share puts it,

“Amazon founder Jeff Bezos may believe that being frugal can help with innovation, but living a frugal life is championed by many other entrepreneurs and business leaders. For example, Warren Buffett, despite having the money to purchase anything he wants, lives a modest lifestyle. Instead of toys and mansions, Buffett’s riches come from loving what he does and doing it well. Facebook founder Mark Zuckerberg famously drove an entry-level Acura even though he was worth more than $7 billion.

“Being frugal doesn’t mean that you have to be cheap. It means not being careless with your money. Instead of taking loans out to purchase a luxury vehicle, save that money so that you can expand your business.”

 This should not be surprising. High interest credit card debt chips away at your future wealth by forcing you to pay back money for things you’ve already used up. It’s anti-wealth. I’m not a huge fan of Rich Dad, Poor Dad, but Robert Kiyosaki’s advice to “pay yourself first” (i.e. to save) as well as to vividly see the difference between an asset (that which produces income) and a liability (that which consumes income) are key insights.

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Time Preference

What this boils down to is what economists call time preference. An individual’s time preference is the relative value one places on a good now versus that same good at some later point in the future. The less time you’re willing to wait, the higher you time preference is. And the higher your time preference is, the more you’ll end up paying because of the interest that will accumulate during the time it takes to pay off the debt incurred to purchase that item.

Rent-to-own televisions, computers and furniture and even things like car loans are simply transfers of wealth from the impatient to the patient. This is all bad debt. Good debt, such as the mortgage on a rental home, allows you to leverage an income-producing asset and increase your income. This simple distinction is critical. Now, sometimes bad debt is necessary, such as with medical debts. But whenever possible, bad debts should be avoided.

Bad debt simply means you are obligating yourself to work in the future to pay off whatever you’re buying today. You’re demanding your future self to work to pay off whatever pleasure you are enjoying in the here and now.

Why make such obligations?

Why treat your future self so poorly?

Bad debt is the ultimate treadmill; it’s running to stand still. The work you do should pay for the present and build a nest egg for the future, not just allow yourself to pay off something you’ve already used up. Nothing better illustrates the importance of this than the famous Stanford Marshmallow Experiment.

 The Marshmallow Experiment

In the experiment, young children were given a simple choice; eat one marshmallow now, or wait in a room alone with the marshmallow without eating it for 15 minutes and get two. The majority failed miserably and yielded to the temptation of the first marshmallow.

 But a few succeeded. Most of them had to bite their sweet  tooth and nail to get by. But they somehow managed and got to indulge in two marshmallows after the long and torturous wait.

Many years later, the researchers followed up with the kids in the experiment. James Clear notes the results as follows:

“The children who were willing to delay gratification and waited to receive the second marshmallow ended up having higher SAT scores, lower levels of substance abuse, lower likelihood of obesity, better responses to stress, better social skills as reported by their parents, and generally better scores in a range of other life measures.”

Saving may feel like an impossible task sometimes. Too often, our lifestyles, materially speaking, act like water being poured into a jar; it takes the form of whatever jar it is poured into. So if we make $50,000 a year, that is the jar that our lifestyle will fill.

But if you make $50,000 a year, you can probably live on $40,000 a year. Maybe even $30,000. After all, most of us have lived off of less in the past. Excess savings is a key factor in being able to build a real estate investment career or even just a comfortable nest egg. Yes, there are ways to buy real estate without much money, but 1) having money makes real estate investment much easier, and 2) even if you make money in real estate without using much, you need to have the wherewithal to save it if you are ever going to reach financial freedom.

So break the jar and live below your means. The second marshmallow of financial freedom awaits.

Why Real Estate Investors Should ALWAYS Verify Seller Information

It has become very imperative to ensure you validate any information you receive from a seller, especially, as hands-free investing becomes very popular with busy executives and out of state investors who may not have the investment climate in their local market environments. Scams and misrepresentations are common in all businesses and real estate investing is not an exception.

DAVE VAN HORN could not have put it better: You must always verify seller information…….read on….

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Probably one of the best skills to learn — and a way to really reduce risk — is to become proficient at not only knowing what data to trust, but also verifying that information.

Let’s face it: The most money that’s made in investing usually comes down to whoever’s best at due diligence and to whoever’s the most creative on the exit. That’s why we often hear people say, “You make your money on the buy.”

Even when you buy a car, it’s probably good to get a CARFAX report, run it through AAA, or at least get your local mechanic to check things out.

So, whether you’re buying an apartment complex, a note, or doing a simple rehab on a flip, our decision making is only as good as our information.

Fix and Flips

Let’s start with a simple rental property. The seller or real estate agents tell us what it’s worth. We run our numbers. We look at the seller’s motivation, market values, market rents, location, and needed repairs.

We make a decision, pull the trigger, and then it comes to financing, where either our hard money lender or a traditional bank starts their due diligence process, which for many of us is our due diligence process.

Sure, we can send out our home inspector to verify condition, but then the bank requires most other things. Not only do they perform due diligence on us for things like our credit, our job history, our residents, our backgrounds, our bank accounts, and even whether we have child support, they also verify title (taxes and liens), condition, value (through an appraisal), flood maps, termites, and even past insurance claims. It’s pretty amazing all that they look at.

Although I don’t live too far from Lancaster, Pennsylvania, where the Amish buy properties on a handshake, I can tell you that it’s definitely much different today with the banks. It’s more like they don’t trust anyone or anything, and they verify everything.

Commercial Real Estate

Now, with commercial real estate like apartments, it’s somewhat different. Whether you’re buying mobile home parks, storage centers, or office space, it’s all about the numbers and things like cap rates.

Sellers will juice their numbers to try and look good, and buyers will look for holes in the data for negotiating points. This allows for more creative financing and terms, like seller assists, repair credits, and lease backs to make a deal go through.

For example, I used to raise capital for a company that was investing in mobile home parks. There was one park in particular where the property manager actually ended up fleeing the state. After the sale, the company uncovered that certain units (marked as vacant in the books) were actually leased and the manager had been pocketing the cash from rent. The company ended up getting a better deal, as they had less vacancies than they expected. But this could just as easily not have been the case.

Notes

With notes, we always take as much data as we can get from a seller, but to be quite honest, we never take it as gospel. We rely on our own due diligence and data to make our buying decisions. But herein also lies all the opportunities.

With notes especially, it’s a data intensive business. Much of the data provided could have changed, been outdated, or maybe it was even unobtainable.

Sometimes, a note investor will tell us that our BPO (Broker Price Opinion) on a deal was wrong. This is fairly common, as roughly a quarter of BPOs are incorrect, but what some investors don’t understand is that they can be wrong both ways.

I’ll often say to them, “So you mean to tell me if the BPO was underestimated and you found a gem, you’d give me a call and we would split the profits?” You can see my point.

These areas of incorrect information are situations where data can be used in your favor to get a better deal. Maybe it’s higher back taxes or a detrimental property condition that pushes your short sale attempt over the goal line.

Sometimes it is creativity that wins. After you digest and verify the information on your deal, then the next consideration might be how to get the highest and best use out of the property.

For example, let’s say a property you’re looking at was listed and priced as a two-bedroom. You might go to the property to view it as part of your due diligence process and realize that the attic could be easily converted into a third bedroom.

Or, maybe the next step is getting creative financing terms after you’ve uncovered some valuable information about the goals of the seller.

So, let me ask you: What are some of your best ways to verify seller information?

Let me know with a comment!