Investing In Real Estate

At What Point Does Someone Become Rich?

September 6th, 2010 |

Author: joe

I would feel rich if, I knew that I could live a nice lifestyle without really worrying about what was in the bank.

Assets that could comfortably provide 300K income while managed by others would probably get me there.

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Green logic, Bertrand Russell and a Girl Named Meka

September 4th, 2010 |

Author: joe

When I was a freshman in college I took an Introduction to Logic Class. As a business major I thought that taking the class would be a good idea; plus the girl I had a serious crush on was a philosophy major so I figured I’d see her in class.

The first 2 months of class were brutal. We studied proofs and theorems and no matter how much I studied I could not figure out how to decipher them. Proofs like this:

(A ? B) ? (C • D)
(C ? D) ? (A • B) / ? A ? C

My professor, Billy Joe Lucas, was very patient with me. I’d visit him during his office hours and we’d go through the proofs and he’d explain the logic (sic) behind the logic. I never got it. It was completely different language and after 2 months in and countless hours studying I had made zero progress. (You’ll see how this relates to green real estate in a minute).

One night after a typically bad cafeteria dinner I resigned myself to more proof studying. I was at it for about 2 hours when something happened. Somehow I started seeing the proofs in a new way and they made perfect sense. I flew through the proof I had just spent an hour working on and solved the next one in under a minute. At that moment it just clicked for me. Here’s what happened after that:

I got straight A’s in all of my logic classes over the next 3 1/2 years.
I never studied, never prepped for tests and did all of my homework on my 2-minute walk to class.
I ended up minoring in Philosophy (with a concentration in Logic).
I dated the girl (Meka) I had a crush on for 2 years.

Here’s how this relates to green:

Real Estate Investors want to go green just like I wanted to solve those proofs.
They will waste time and money going about it the wrong way. Just like I did by staring at the same proof for hours.
Investors don’t have many sources for expert advice. I had only had one person, Billy Joe, who, while he could cook a mean chili, couldn’t help me much in solving proofs.

What’s most important here is not the process of going green or becoming a Philosophical RainMan. The RESULTS are the key. Once I figured out the way to think about proofs, it became effortless and my results (grades) were excellent. It is the same thing with green real estate investing. Once you get it, you get it.

I have seen this time and time again with clients. In the beginning of our work, they count on me for everything green. We work hand-in-hand on their projects and they begin to experience success. After we’ve worked together for a while, they’re able to see how I think and begin to think differently about all of their projects.

It is then that they become true green CEO’s. It becomes an effortless process for them that is highly profitable and puts them light years ahead of their competition.

Put simply, once you learn how to ‘think green’ in your business it’s hard to stop. Going forward you can’t help but think green because you are conditioned to see that green is the clearest and easiest path to your success.

The key is to take that first step. While most people sit staring at the pool the truly successful jump right in. They take that chance and find that they have the whole pool all to themselves.

Is it time for you to jump in?

Green logic, Bertrand Russell and a Girl Named Meka

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The SAFE Act: Most Confusing Legislation of 2010?

September 4th, 2010 |

Author: joe

Today marks my 40th post for the BiggerPockets blog and yesterday I realized that up to this point I am yet to write a commentary. That changes today.

Pardon my rant, but I think the responses to this post will help a lot of people.

Ok, seriously? I can’t think of anything that has been more confusing as the Secure and Fair Enforcement Mortgage Licensing Act (aka SAFE Act) in the real estate investing community this year. The Act was first put in place in 2008, but recently there have been some updates made to the legislation (some of which won’t take effect until October 1). Depending on your strategy it may not mean anything at all to you, but as someone who leverages private money lenders and makes offers to homeowners that include owner/seller financing options, the SAFE Act has been a bit of a mind boggler.

I’ve spoken to real estate professionals and have also scoured the web for answers. A Google search on “S.A.F.E. Act and owner financing” or even a BiggerPockets forum search on “SAFE Act” will send your head spinning. So many different thoughts on the legislation.

I still have more questions than answers. For example,

1) How does it effect seller financing for properties my company wants to purchase? We make cash and terms offers all the time! If a homeowner wants to sell a property (one that is NOT his primary residence) to me and hold back a mortgage, does he need a license?

I believe that my fellow BiggerPockets blogger Clint Coons has addressed this in his recent post “Are You Safe to Sell Under the SAFE Act?” and my take from that post is that the sellers I’m making offers to do not need to have a mortgage license in order to provide seller financing to me as a buyer. I think we’re relatively clear on this issue. However, I’m much less certain about the following:

2) How does it impact how my company works with private money lenders? Do they now need to have a mortgage brokers license to lend my company funds to purchase properties for long term hold? If so, is there a reasonable workaround?

3) Does each state have its own separate version of how this works and how it will be regulated?

I’m also unsure of how the federal and state governments will enforce all of this. There seems to even be confusion among attorneys at the title companies regarding what’s ok and what’s not. Thanks in advance to anyone who can shed some light here on what may be very well be the most confusing legislation impacting real estate investors in 2010.

So? Your Thoughts?

The SAFE Act: Most Confusing Legislation of 2010?

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Open Question: what is the quality of jaypee group in construction?

September 4th, 2010 |

Author: joe

does Jaypree group deliver its flats on time, do they have cost overruns and what is the quality of construction

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Open Question: how to arrive at the ideal lease amount for a house?

September 4th, 2010 |

Author: joe

i am planning to take an apartment on lease. the rental amount for the house is about 16,000/month. how to arrive at the lease amount. (the sum i need to pay while signing the lease agreement, which will of course be returned to me on the lease agreement termination)

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Series LLC – Advantages?

September 4th, 2010 |

Author: joe

Yeah….there are obviously a lot of issues in entity formation and it is difficult to weigh all of them in one thread for all instances. I originally held my long-term assets in a FLP and later switched it to a LLC. I hate to switch again to a series LLC, but it may be worth it instead of peeling properties into separate entities as the equity position grows in each one.

Does anyone have any comments or experience about the different series being challenged? If you switched to a series LLC what prompted the change?

This seems like a great tool to provide a legal firewall between assets without the hassle of additional tax returns. I definitely don’t want to complicate life more than it is already complicated though!

Our new private equity fund is set up as a series LLC, which prompted me to think this may be a good structure to hold my rentals in.

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Brand New From Chicago

September 4th, 2010 |

Author: joe

Thank you Mr. Perkins for the warm welcome

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Introduction to Internal Rate of Return (IRR)

September 2nd, 2010 |

Author: joe

Today’s Quiz:

What is my return on the following investment:

I bought my first investment property back in August 2008. I paid $63,500 for the house using my own cash. I spent the next two months rehabbing it with $34,000 of my own cash. It sat for about 5 months before I lease-optioned it for $1000/month in rent, starting May 2009. In August 2010, I refinanced and pulled out $66,320 in cash. It cost me about $2300 to do that refinance. I spent $1400 on property taxes in August 2009 and another $1200 in property taxes in August 2010. I’m expecting the tenants will be able to purchase the property for $120,000 in July 2011, and I’ll end up netting about $50,000 after all fees, commissions and loan payoff.

If you don’t know how to calculate the correct answer to that question – and as a real estate investor you SHOULD know – I highly recommend you keep reading…

Anyone who reads my BP blog posts or my blog probably knows that I’m a hard-core numbers guy. While I don’t discount “gut feel” when it comes to investing, if the numbers don’t work, it doesn’t matter how excited my gut might be. I like to examine the financial aspects of a deal before I buy, while I’m holding and then after it’s done. That way, I can mitigate the risk of financial surprises as much as possible.

Seeing as how I’m such a numbers guy, I find it very surprising when I speak to investors who don’t seem to have clue how to analyze a deal or how to determine how profitable a deal was after it’s completed. It’s not that most investors are stupid (far from it!), but many investors have never spent any real time learning the basics of analyzing investment numbers.

I’ve spent many of previous BP blog posts discussing how to analyze a deal upfront to determine if – in theory – the deal is a good one; today I want to tackle the other end of the deal and discuss how to determine whether a specific deal was profitable after all is said and done.

First, let’s clear up some common misconceptions. I’m sure most investors have heard terms like “cash-on-cash return,” “total return,” “return on investment,” etc. These are all terms that indicate in some way, shape or form how successful a particular deal is. The most common I hear people referring to is Return on Investment, or ROI. For many investors, this is the one number that summarizes the entire success or failure of a particular investment.

For those not familiar, ROI is calculated as follows:

ROI = (V1 – V0) / (V0), where V1 is the ending balance and V0 is the starting balance.

A simple scenario for using ROI to calculate an investment return would be as follows: On January 1, you put $1000 into a bank account. On the following January 1, you cash out the account for $1100. Your ROI on the investment is:

ROI = (1100 – 1000) / (1000) = .1 (or 10%)

You start with $1000 and end up with $1100 after a year for a return of 10%. Seems pretty straightforward and even the most non-mathematical among us should be able to do that type of calculation.

Now what if I give you the following scenario: On January 1, you put $1000 into a bank account. On February 1, you put another $500 in the same account. On September 1, you removed $250 from the account. And then on October 1, you removed another $250. On the following January 1, you cash out the account for $1100. Like the first example, you started with $1000 on the first day of the year, and you finished with $1100 on the first day of the following year.

So, is your return still 10%? At first glance, you might think so. In fact, using the ROI formula above, the ROI on this investment appears exactly the same as the previous investment. But, given that you had $1500 invested for several months of the investment period (from February through September), you’d think that a 10% return should have resulted in a higher ending balance. So, in actuality, your ROI is probably a good bit less.

As you can see, the ROI formula has two big limitations:

For any investments that involve sums of money going in and coming out through the life of the investment, ROI will pretty much ignore every in-come and out-flow other than the first and the last;
ROI doesn’t take into account the amount of time an investment was held. For example, let’s say in that first example, the $1100 was cashed out after 5 years instead of one – according to the ROI formula, the return is still calculated at 10%.

This is where Internal Rate of Return (IRR) comes in. IRR is the much more powerful cousin to ROI, and while also more complicated than ROI, it’s an essential tool that all serious investors need to understand. I’m not going to go into the nitty-gritty of how IRR is used (and yes, there are some downsides to using IRR that I won’t go into here), but I do want to review the basics…

First, you may hear IRR referred to by different names – on your mortgage truth-in-lending statements as annual percentage yield (APY), as the “effective interest rate” of a loan, as the discounted cash flow rate of return (DCFROR), or sometimes even as the generic rate-of-return (ROR). All of these things essentially mean the same thing, and serve to underscore how important and versatile the concept of IRR is when it comes to investing and finance.

(For the other hard-core finance geeks out there, IRR is most specifically defined as the discount rate that makes an investment’s net present value (NPV) equal to 0.)

Second, and most importantly, I want to do a quick summary of how to calculate IRR for a given investment. Unlike ROI, you can’t calculate IRR in your head. In fact, even doing it with pencil and paper is practically impossible. But, calculating IRR using Microsoft Excel (or any other financial software) is a piece of cake.

In Excel, list the monthly (or annual) dates of your investments in sequential order in one column. Next to each date (month or year), list the aggregate in-come or out-flow for that time period (in-comes are positive and out-flows are negative). Then use the XIRR function in Excel to calculate your IRR. Using the example above where we deposited $1000 into a bank account on Jan 1, deposited another $500 on Feb 1, removed $250 on Sept 1, removed another $250 on Oct 1, and then removed the remaining $1100 on following Jan 1, our Excel calculation would look as follows:

IRR Calculation

As we suspected above, our return was a good bit less than 10% (almost 25% less!), despite our ROI calculation of 10% return. As you can see, doing a quick ROI calculation in your head would left you feeling a lot better about your investment than it probably should have.

If there is enough interest, I’m happy to go into more complex uses of IRR in future posts, and am also happy to discuss some IRR nuances that sometimes affect the ability to accurately determine returns of some types of investments. In the meantime, if you’re interested in learning more about IRR and how to calculate it using Excel, there are some good online tutorials.

Introduction to Internal Rate of Return (IRR)

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Real Estate Investing Rules from Richard Branson

September 2nd, 2010 |

Author: joe

“Even after careful research, not all ideas are good; sometimes your competitors have better ideas or they’re faster than you. The modern entrepreneur takes failure in his or her stride and moves on.” ~ Richard Branson, Screw It, Let’s Do It

Sir Richard Branson made a cameo appearance on the HBO show Entourage this week and it got me thinking about him and the life he leads. I actually had the pleasure of listening to him speak last year in a room of only a few hundred other entrepreneurs and the thing that stuck with me the most is how simple he keeps things. With hundreds of companies to run, I don’t think you could live life any other way. And a few nights ago as I contemplated what to write today, I thought about the life lessons he shared in one of his books, and how those can be applied to real estate (and should be applied for successful – and simple - investing success!). I mean – think about it – every house you buy is essentially a small business with it’s own target market of customers to rent or buy from you, it’s own expenses and it’s own marketing needs. So if you have hundreds of houses then it’s, in a smaller way, like Richard Branson owning hundreds of companies.

Now – not to worry – I’m not going to relive each and every lesson in an effort to motivate you to get off your duff and start taking action towards your real estate investing goals. I did think I would share my favourite five lessons from the book and apply them to real estate investing … but guess what … lesson #1 is basically just that:

Lesson #1: Just Do It

I really can’t say it any better than Sir Richard does:

“If you really want to do something, just do it. Whatever your goal is you will never succeed unless you let go of your fears and fly.”

Lesson #2: Be Bold but Don’t Gamble

As a real estate investor you have to take some bold steps. There is always uncertainty as you can never really know exactly what will happen but there is a big difference between gambling and taking calculated risks. Calculated risks are things you’ve thought through and mitigated in whatever way possible. A gamble is just taking a leap of faith that it will all work out. If you aren’t sure what the difference is or how to mitigate risks there are some great posts kicking around BiggerPockets that can give you a good basis of real estate investing fundamentals like:

Lesson #3: Have Fun! Life is Too Short to Be Unhappy

I guess his passion for fun is why they featured Sir Richard Branson sandwiched between two beautiful blondes on Sunday night’s episode but I don’t think you have to find two beautiful people to go bowling with to make your life complete. I think that as a real estate investor you have to make sure you take time out for your family, your friends, and your fun time. This probably sounds a bit silly for people who are getting into real estate for the free time it gives you – but the reality is that many investors that are working to really get their business rolling also find themselves working all the time to keep up with everything they are trying to do.

Keep things simple. Focus on WHY you are doing what you are doing and remind yourself it’s not about owning more houses than the next guy or being the richest woman in your book club it’s about creating the life of your dreams and then living it!!

Lesson #4: Have Respect

I’m not going to tell you all the times we’ve been cheated by folks in the real estate business but it has been more than once. And it’s been by just about everyone you can think of from the property manager that robbed rent money from us to the tenant that worked the system so well she got three months free rent from us, and of course our joint venture partner that ditched out on a deal at the very last minute leaving us holding on to a pretty big potential problem.

There are people out there that don’t live by this rule but I believe that it’s one of the most important in all your dealings … treat others with respect. Just because a seller is in distress does not mean it’s open season to take advantage of them. Find a good solution for them and for you.

If you are doing something that will haunt you at night – stop – and don’t do it.

I believe what goes around comes around and karma is a big witch.

Lesson #5: Do things with POW/Shazam

To me, no entrepreneur embodies this more than Sir Richard himself – but you don’t have to rappel down the side of a sky scraper to do things a little differently. Real estate investors can take a page out of his book simply by trying to solve problems with a unique approach. Just because a deal has never been done the way you want to do it – does not mean it’s not possible. I can’t tell you how many times a real estate agent has told us “you can’t do that” only to learn that it’s possible and actually pretty easy with the right lawyer. Folks who’ve been in the business for decades aren’t always the best ones to listen to -many of them are pretty set in their ways as to how things are to be done. Come at things with a little pizzaz – try different angles to solve your problems.

“Sometimes when you start from scratch with a clean sheet of paper, with the principle of keeping things simple, you get results that wouldn’t be possible by leaving it to the so-called experts.” ~ Richard Branson, Screw it, Let’s Do It.

Every property you buy can be considered it’s own small business – so maybe these little lessons from the worlds most interesting and inspirational entrepreneur (in my opinion) might help you enjoy your life, find more success and have a little more fun with every single deal.
Image Credit: Ftvkun

Real Estate Investing Rules from Richard Branson

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Open Question: Should I sacrifice location for a great house?

September 2nd, 2010 |

Author: joe

I am a young renter. We have been looking for an ideal rental for several months now. We have found one which includes 90% of the things we want, so it seems like a great place. The catch is, it is in an area of town that I don’t really like. It’s not that it’s terribly dangerous, or violent, it’s just that people don’t keep their homes up at all and it the neighborhood looks disheveled. It is, however, only a few blocks away from the area we would LOVE to be in, so it’s really not THAT bad. Just not ideal. Also, the outside is rather ugly, but not enough that it’s unacceptable. Should I pass on this house because of the looks of it and the looks of the neighborhood or does the inside matter more?

Sorry I know that was long, thanks for reading!

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