If you’ve ever seen a pro forma that is worse than the actual 12 month operating history, please let me know, because I’m pretty sure such a thing does not exist. My dad had a saying I thought was pretty poetic. It goes like this, “Buyer’s are liars… and seller’s are liars.” Perhaps it’s a bit cynical, but you have to be a little paranoid when it comes to this business. It’s simply to risky to take on someone else’s pile of garbage. A lot of this comes down to good due diligence and a big part of that is not trusting their pro forma. A pro forma is simply the seller’s estimated performance for the next year or so. Somehow the rents can always be raised, the vacancy reduced and the expenses lowered. Indeed, one might wonder why this hasn’t already happened, especially when the occupancy sits at 70 percent or whatever. Maybe there is a good reason, but probably not. It’s almost so taken for granted that a seller will inflate their pro forma that it’s not even dishonest, it’s just par for the course. Thereby it is expected that a buyer will adjust downward. After all, if one seller put in completely realistic numbers and a buyer then adjusted them downward because that’s what he’s used to doing (after dealing with so many other sellers), the pro forma would actually be unfair to the seller. So seller’s, even if they are completely honest, have a huge incentive to make the pro forma overly optimistic. Even with that being said, though, I’ve seen a lot of people get lured into buying vacant apartments in warzones because they were so cheap and the pro forma looked so good. However, if you are in the middle of such a bad area, you are not going to reach 10% vacancy and your rents will be so low that you will in all likelihood be over the 50% expense threshold. You can make money in rough areas, but out-of-state or passive or newbie investors should not give it a try. Make your own pro forma and base it off of the operating statement and your conservative estimations of what can be done with whatever value play you are going to attempt. If they don’t have an operating statement, or it’s poorly put together, well then you need to be all the more conservative. I call them pro fake’as for a reason. Always be wary of seller pro formas. One of the things about running a business is that regardless if it is a real estate business or not, you are going to have to fire people. It’s probably the worst part of being the “boss” but it’s necessary if you want to have any success at all. I can tell you that those bosses who are too afraid to let go of ineffective employees don’t succeed in this business or any other. People who aren’t getting the job done, are dishonest or unethical, unwilling to play by the rules or are infecting the rest of your staff with a negative attitude are effectively stealing from everyone else. It is not fair to you or the rest of your staff to keep that person onboard, and usually, it’s not fair to the person you’re firing as this job is obviously isn’t the right fit for them. The first thing I should say is I have almost never heard of someone firing too soon. It’s almost always too late. Once I read that the time you should fire someone is the first time it seriously crosses your mind. I think that’s too fast, but there’s a nugget of truth in it. People almost always wait too long. So here are my recommendations from my not so pleasant experiences letting people go: 1. Don’t Just Assume Someone Is Doing a Good Job It is important to have ways to measure performance. Some employees will try to hide information from you and this is almost always a bad sign. It makes them appear more valuable, but really they are hindering you. Bad employees will try to make you feel like they are irreplaceable or that the rules they are breaking don’t matter (or that they actually didn’t break them on some technicality). But where there’s smoke, there’s usually fire. If you are always having certain problems with a certain employee, it is probably more than a coincidence. Investigate it, trust your gut and don’t be pushed around by a bad employee. 2. Don’t Wait Too Long As mentioned above, if you know they aren’t working, it’s time to make a change instead of hoping they will change. 3. They Should Know Beforehand Something is Wrong It is always a good idea to meet with employees who are not getting the job done or have an attitude problem first to 1) explain to them the problem in hopes they change and more likely 2) make it clear they are on the edge. You certainly don’t want to surprise them when you let them go. For unethical behavior though, skip this step and just let them go. 4. Don’t Justify Yourself There is an immense pressure to explain why you are letting someone go when you actually do it. Avoid this. You should have already done it, but even if you haven’t, people don’t want to hear that they have both lost their job and weren’t any good at it. This will just make them defensive. Try to be as diplomatic and gracious yet as firm as possible. Words like “I have decided” and “it is no longer a fit” are good in these situations. 5. Don’t Say It’s Hard For You No one wants to hear how hard it is for you to fire them. 6. Take Extra Care in Hiring The easiest way to fire someone is to not have to. Make hiring a priority. Don’t just look to hire when you need someone, always be on the lookout for A players. I highly recommend reading Who by Geoff Smart and Randy Street for a how-to-guide on hiring. You will probably feel very anxious beforehand and have a strange mix of relief and guilt afterward. This is natural from what I can tell. Unfortunately, it’s just part of doing business. Fortunately, those feelings will pass. Every real estate investor should be an avid reader. Everyone, no matter how successful, can always become better at what they do and there is a ton of knowledge out there on both real estate and business that every investor should be trying to absorb. So here are my top 10 real estate books that I would recommend to other investors. 10. Confessions of a Real Estate Entrepreneur – James A. Randel I have never done commercial real estate, but this book certainly made we want to give it a try. Randel gives a lot of very sound advice on a whole host of various commercial investments. If one is looking to get into commercial real estate, there is no better place to start. 9. Investing in Real Estate with Lease Options and “Subject-To” Deals – Wendy Patton Lease options and subject-to’s are a good way to get into real estate, especially if you don’t like owning property or don’t have a lot of money to start with. Wendy Patton gives a good description of these methods to buy (or more accurately, control) and flip real estate. 8. Multi-Family Millions – Dave Lindahl Dave Lindahl is definitely the quintessential multi-family real estate investment guru. Here he gives a very helpful guide on how to find, negotiate, structure and manage the acquisition of a large multi-family property. If that is the direction you want to take your real estate business, this is where to look. 7. The Pre-Foreclosure Property Investor’s Kit - Thomas Lucier While it is a dry book, foreclosures are very possibly the best source of good leads in real estate investment and this is a very valuable resource on that front. 6. How to Buy Real Estate for At Least 20% Below Market – John T. Reed John T. Reed give a good rundown on finding, negotiating and analyzing real estate deals, and does so with a no nonsense approach. 5. The Art of the Deal – Donald Trump This is more of an autobiography, but it’s a helpful or perhaps inspiring one. Donald Trump drops the annoying act for a bit to describe some of the massive real estate development projects he has undertaken, many of which are quite fascinating and illustrative. 4. Flip - Rick Villani and Clay Davis Flip is the best book I have seen exclusively on flipping real estate. The example stories are a bit boring, but the rest is pure gold. It is a step by step process of everything you need to do to find, buy, rehab and sell properties for a profit. 3. The Landlord’s Survival Guide – Jeffrey Taylor I believe the best road to wealth lies in ownership. Unfortunately, ownership requires property management, which is a sorely neglected subject. Jeffrey Taylor is easily the most innovative property manager I have come across and his methods for tenant retention, leasing, raising rents and screening are a precious resource to landlords everywhere. 2. How I Turned $1000 into Five Million in Real Estate in My Spare Time – William Nickerson This is simply a classic on real estate investing. William Nickerson gives a very thorough and detailed overview of what you need to know to get started in real estate. This is the third version of this book, the first version was only one million and the second to three million. 1. The Millionaire Real Estate Investor – Gary Keller The Millionaire Real Estate Investor is the first book I would give to anyone who wants to become a real estate investor, and that includes both flippers and holders. In my opinion, it is the best place to start for any beginner and a good reference for any pro. You probably would not be surprised if I told you that a large amount of my time is dealing with investors looking to invest in their FIRST good investment real estate opportunity. Either as a sole investor in the property or as one of my investment partners. The reality of this is this apartment investment that they are going to make is really their most important investment. Whether they are investing $200,000 or $20,000 it IS THE MOST IMPORTANT INVESTMENT. How so? This first apartment investment established what I call the “BASE” to grow your wealth and from this first apartment can come many things. For example. I have an investment group that purchased a 30 unit property a couple of years ago for $500,000. Some of the investors that are involved in this property are FIRST TIMERS. Today, the property has a value of around $760,000+. Of course this is good news but what this DOES do is it not only gives those FIRST TIME investors a nice return and cash flow it now allows them to grow their investment even more. How so? We refinanced this apartment property recently and purchased more properties like this one and in two years’ time have another apartment property giving us the same kind of benefits as the FIRST ONE did. But don’t miss the point here. It all started and was all possible BECAUSE of the first one. That is why the first one is so important because this ONE INVESTMENT could launch many investors into multiple properties with multiple returns and cash flows. Not only that the FIRST INVESTMENT really gives you a good sense of just how all this works, what is REALLY involved and whether you would want to do this again or even recommend others to do this too. Today I will have locked up two such IDEAL FIRST INVESTMENTS. Do you ever feel like a failure? The reason I ask is because like you I have felt like a big failure in all sorts of aspects of my life from time to time. Ideally we should raise ourselves to a very high standard, way above the standards that others hold us to. Each of us has so much potential power and energy that can be used for good and to build something great:
While I don’t have the schooling or answers to these questions I do have a little secret that helps me get through the tough times I’ve made mistakes in my real estate investing past (watch video). Some of the past real estate mistakes that sting and come to mind are:
Pro Tip: Never make the same mistake twice. Seems obvious right… When you know an error has been made, here are some simple steps to follow to help insure the lesson is not repeated.
1. Andre-Francois Raffray In 1975, at the age of 90, Jeanne Calment signed an agreement with young, suave attorney named Andre-Francois Raffray. The agreement read that Raffray would pay 2,500 francs ($500) per month to Calment for the rest of her life, with the condition that he would purchase her apartment home when she passed away, paying only what he had already given her. The obvious benefit to Raffray is that he would purchase this elderly woman’s home for pennies on the dollar when she inevitably passed away in a number of months or years. However, time rolled by. Months turned to years, and years turned to decades. After 30 years of waiting for his apartment home, Raffray died himself, leaving his wife obligated to pay this $500 per month debt. Jeanne Calment went on to do the improbable. Calment lived to be the oldest living person in recorded history, passing away at the age of 122 in 1997. The Raffrays eventually paid over $180,000 for the home, twice what the apartment was worth at the time. 2. Ponte City Apartments In 1975, the tallest building in Africa was built. This pinnacle of luxury, located in Johannesburg, South Africa, stands an impressive 54 stories high. In addition to being the tallest building around, the property also boasts a cylindrical shape with a massive atrium area in the middle, known as “the Core,” to let added light in for the luxury residence. However, while the luxury was evident, the higher-end residents never came. Soon after the construction ended, gangs moved into the building, and the crime rate soared. More and more lower income households moved in, and during the 1990’s, the building was even considered a “high-rise penitentiary.” In 2007, new owners purchased the building with plans to revitalize the area and remove the gangs. Plans were underway until the sub-prime collapse of the real estate market withdrew the needed funds to complete the project. The building was given back to the prior owners and currently sits in disrepair, a reminder of a once-great dream turned into an epic failure. 3. George C. Parker George C. Parker was an ambition business man and real estate mogul in the early 1900’s living in New York City. Parker’s prestigious rel estate company sold many landmark properties, such as the original Madison Square Garden, the Metropolitan Museum of Art, Grant’s Tomb, the Statue of Liberty, and the Brooklyn bridge. Parker was certainly doing well for himself. Many of Parker’s customers were other immigrants just arriving to the country and eager to invest. The only problem with what Parker was doing was that he did not own or represent any of these properties. Parker is still one of the most brazen con-men to have lived, oftentimes placing no more than a “For Sale” sign on the Brooklyn Bridge and waiting for his victims to come to him. He once sold the Brooklyn Bridge for $50,000. Parker was sentenced to life in prison after his third arrest and conviction for fraud. Conclusion A takeaway from these tales is that it is important to remember that we as real estate investors are here to help others, both buyers and sellers. Oftentimes, humans can be too money hungry to see past the harm we may knowingly or unknowingly cause others. For most of us reading this article, we have never made a deal that killed anyone, displaced a section of the population, or destroyed anyone’s life. Stay busy everyday and know where you are headed. And as always… love what you do daily. John Fedro A Real Estate Investing Power Team can help you with:
Where To Find Your Power Team Go where your best customers, competitors, and prospects meet.
Who Should Be on Your Team Bringing in professionals and other investors from all areas affected by your business to give expert advice and support will only take your real estate investing off the ground or take you into a higher volume of transactions to which you will be profiting from. Here is a 6- step quick guide to help you choose who should be on your real estate investing power team:
Building a Real Estate Power Team is rather simple. Using the list of Power Team Players above – approach these people and request a short meeting or chat over coffee where you’d have the opportunity to ask them some relevant questions about your business that they would completely relate to. Invite players that can validate what your doing, offer special advice and provide an avenue where your could also support them to make money together. Try to have a casual interview per se where they get to know you and vice versa. 10 Specific Questions To Ask Power Team Players
In today’s widely fluctuating economic and financial world, it is quite challenging to find investments that offer any true positive net annual returns. Many U.S. and European banks today are offering their customers anywhere between negative and just 1% savings rates. After factoring in increasingly escalating bank fees, taxes, and inflation rates, more and more people are earning NEGATIVE NET RETURNS each year. Our planet has numerous economies and financial markets that are all interrelated and connected to one another. The USA (3rd largest populated country) economy is affected by the U.S. Unemployment Rates just as much and it is by trade deficits, import and export numbers, and currency exchange rates with other countries. Positive and Negative Currency Trends When foreign currencies are much stronger as compared with the U.S. Dollar, then more foreign investors can afford to buy U.S. Stocks, Real Estate, and American Goods and Services. Conversely, weakening foreign currencies can lead to declining U.S. exports since they are not as affordable abroad. The Canadian Dollar has risen and fallen in value to the U.S. significantly in both directions since the official start of “The Credit Crisis” back in 2007. The Canadian Dollar reached a peak closer to one (1) Canadian Dollar being exchanged for almost $1.30 U.S. Dollar (or a 1.3 Currency Exchange or Conversion Rate) the last time in 2009. The Canadian Dollar last reached a low near 0.91% (0.91 Canadian Dollar = $1 U.S. Dollar) in 2007. Why does the strength of the Canadian Dollar matter to U.S. investors interested in Real Estate? ANSWER: Canadian investors are some of the biggest Real Estate investors for single-family homes in warmer climate regions such as Palm Springs / Palm Desert, Phoenix, Texas, and Florida. A high percentage of Canadian investors are all cash buyers who can close escrow very quickly. When the Canadian Dollar is strong, then Canadians can afford to pay higher U.S. property prices. On the other hand, a weaker Canadian Dollar typically leads to less demand for U.S. properties. Fortunately, the Canadian Dollar has strengthened in recent months, and is now closer to peak highs than peak lows. Negative Interest Rates: When Customers pay their BanksRecently, the governing Danish Central Bank called “The Nationalbank” slashed its benchmark interest rate to well below zero percent (0%). As of February 2015, the Nationalbank benchmark interest rate reached a low of -0.75% (negative .75%) after four recent rate cuts. A few Danish banks have stopped offering any adjustable rate one to three year mortgage-backed bonds due to the wildly fluctuating rates. In February 2015, one-year mortgage bonds in Denmark were trading between -0.3% and -0.4%. How many American investors have ever heard of negative rate mortgage products? Historically, Swiss Banks are considered the most sound and safest banks worldwide. Yet, the Swiss National Bank has also cut their Swiss National Bank’s key benchmark rates from - 0.25% to -0.75% in recent months. These same negative Swiss rates are making their Swiss Franc “Safe Haven” currency less attractive to investors. Rumors abound that Switzerland, Denmark, Greece, other European nations, and even the U.S.A. may continue onward with their downward interest rate trend. Bank Bail-Ins: Worse Than Negative RatesWhile most investors are usually concerned about generating high interest rate yields, other investors these days are focused on protecting their original principal amounts. Inflation, a hidden form of taxation, is truly a destroyer of a family’s Net Worth. Yet, the loss of principal is even worse than negative interest returns. Greece, the USA, and several other countries around the world have openly discussed the possibility of “Bank Bail-Ins” should banks run low on cash. A “Bank Bail In” is when the bank grabs their customer’s cash in order to pay the bank’s expenses. The questionable financial solvency of the FDIC (Federal Deposit Insurance Corporation), and their ability to protect depositor’s funds after one or major large banks fails, is another valid cause for concern. As a result, the number of people who wish to risk both their potential interest and principal amounts with banks continues to decline as more investors seek non-banking alternative investment options like Real Estate as either an Investor or a Lender. Investment Yields and The Rule of 72One of the easiest ways to project future compounded returns on various investments is to calculate and divide the annual rates of return offered by the investment options, and then divide it into the number 72. The number calculated will then give the investor a solid idea of how long that it will take to double their original investment amount. Investment Option: Real Estate Investments as a Private Lender or Investor 1.) 8% Annual Real Estate Investment Returns: Annual Rates of Return: 8% (72 / 8 = 9 years). The investments will double and compound in size every nine (9) years. Year 0: $100,000 Year 9: $200,000 Year 18: $400,000 Year 27: $800,000 Year 36: $1,600,000 Year 45: $3,200,000 Year 54: $6,200,000 Year 63: $12,400,000 Year 72: $24,800,000 Investment Option: Bank Savings PlansFor the purpose of this investment scenario, we will use the highest potential current annual rates of return for a bank customer with a mid to large-sized U.S. bank in 2015. This projected annual yield will be 1%. 1% Annual Bank “Investment” Returns: Annual Rates of Return: 1% (72/1 = 72 years). Please be very patient as these investments will double in size every 72 years. Year 0: $100,000 Year 72: $200,000 Hopefully, the investor will live long enough in order to see their original investment amount grow. With negative returns from the start, then investors can sit back and watch their principal amounts vaporize fairly soon. Where do so many banks take their customer’s bank deposit funds and invest? ANSWER: Real Estate. So, banks take your money, make double digit returns in Real Estate, and give you truly nothing to show for it. Why not invest directly in Real Estate, and generate your own positive returns instead? Anger is such a strong emotional force. Many of us are familiar with the emotion of Anger being a destructive-force; from raising our blood pressure to fighting wars against our enemies, anger has caused much destruction and devastation globally. However when anger is focused and harnessed into taking constructive action to positively change your life the results can be just as trans-formative. Many of the real estate investor-clients I work with confide that they want a change. Most newbie investors want to quit their jobs, work their own flexible schedule, and make enough passive income to support themselves and their families. Above all other emotions I listen for anger in a new investor’s voice.
By far the highest percentage of successful investors I have helped have been angry and at a low-point with regards to their real estate investments and actions. Starting today you may choose to begin using anger as a catalyst to propel you to create realistic monthly goals and start implementing correct daily-action. Below is a small list of people and things to help you get angry and create change… Family and friends: Do not allow family members and friends to belittle your real estate dreams and positive spirits. Often times while trying to take care of us, our loved ones have a way of projecting their own goals, fears, and weaknesses onto you. This ill-placed advice from a person you respect can have huge damaging effects to your forward progress and the overall health of your business. When this happens stay firm to your goal of learning enough about real estate investing to make these people eat their words. Naysayers that offer no help: Similar to family members naysayers plant negative seeds in your brain making you think possibly that you are inept, that real estate is “dead”, that mobile homes won’t make any money, etc. ** In the beginning of your career it is important to have faith and soak yourself in education about your local market and REI in general** Main stream media and Guru’s: Whether it is the local News telling you that real estate is at an all-time low or House-Flipping shows telling you the market couldn’t be better – turn it off and tune it out. Depending on how gullible you are it is important to make your own conclusions rather than to blindly take the opinions of others [with ulterior motives of selling ratings or products]. You are the Investigator and it is your job to dig deep enough to find out the real estate investing facts from investors actively investing in your local market right now. Find, sign-up and attend your next Real Estate Investor Association (REIA) club meeting or Real Estate Investor’s Meetup.com group now. Your inner-self: If you are like me then perhaps your worst enemy is yourself. If you suffer from negative and self-defeating thoughts please understand that they are most likely not accurate. The lens through which you see the world has been created overtime and you are likely missing the key to release you from the rut you find yourself. With that said you will grow leaps-and-bounds faster with help than without. Invest time into reading self-help books, real estate investing blogs, and biographies of people you admire. Do this daily and socialize with like minded people. Other seasoned R/E investors and professionals: Caution: Do not get angry at other investors or real estate professionals that bad mouth the local economy and real estate market. These folks likely know something you don’t so listen to their reasoning, ask for other active investors’ opinions, do some research online and make your own informed decision. Even after a decade of real estate investing I push myself to get Angry with the limited-progress I have made. The reason I am angry with myself is because I know I could have accomplished more with the time I am given, however I like to watch TV and socialize with friends more than I probably should. I am angry with negative-minded investors because I see the limiting-beliefs stopping them dead in their tracks and I understand that with enough inner momentum anyone can change their current status in life. I see it happen every month when a new investor invests in their first successful real estate transaction in years… or ever. Get angry. Get focused. Make a difference. Dear Investor, What happens if you’re looking for property in a location that’s not on our beat? Finding a good real estate agent overseas should always be a top consideration. Finding a good real estate agent overseas can save you thousands of dollars on you purchasing your international investments, travel costs and time of course. Questions For International Real Estate AgentsHere are the top 10 questions you should ask any overseas real estate agent you’re going to work with:
Finding a reliable overseas real estate agent takes a bit of effort and patience, but it’s worth it – and it could save you thousands of dollars. Canadian Investors – Have you ever thought about Investing with a Commercial Asset Management Company? We recently had a chance to connect with successful investor – Richard Crenian – who explained the “Ins and Outs” of commercial investing in Canada. This is what he shared with me: Real Estate Investment Firms“Certainly, six years or so ago, at the heart of the Great Recession, the willingness of Canadians to invest a greater portion of their portfolio – or even any portion of it – was at a low. Markets were reeling and people were not just fiscally scared, they were doubting the core fundamentals that the financial markets rest on. But, in the past several years, as the economy has slowly clawed its way out of the Great Recession, Canadian’s portfolios have similarly seen a steady uptick in value. Many Canadians are returning to the idea of investing their assets. But there’s still a notable difference in the state of mind of investors in this post-recession climate. Many average investors are considering alternative sources of investment to stocks and bonds and the other tools offered by traditional investment vehicles. Simply recall the falling out of the markets in 2008 at the start of the recession, the sudden withdraw of capital and the effect this had on people’s portfolios. It’s no wonder investors tiptoeing back into the investment frame of mind are looking for alternatives. Indeed there are other investment options. One can invest in property, art and even coins and wine. One can also invest in companies that purchase and manage real estate properties.” Richard Crenian, then continued to explain more about commercial asset management companies and their benefits to investors: “What these real estate investment companies do is use the capital you give them to purchase real estate assets; either on the residential side of the market, such as purchasing housing or condominiums, or on the commercial end of the market, such as the purchase of office complexes or retail complexes or shopping plazas. One of the incredible values that real estate investment firms offer is a tremendous amount of industry experience and knowledge. Many real estate firms have the knowledge and experience to know what a wise investment is and what to stay away from. In many respects, that makes putting your assets with them a much safer and potentially financially rewarding option.” Real Estate Investor EducationLike any investment opportunity, an individual would be much better off having a bit of knowledge under their belt. REDEV Properties is a Canadian-based commercial real estate investment firm. As an experienced investment firm, it has over 25 properties under its management. It’s founded by Richard Crenian who truly values the idea of investor education and knowledge. “That’s one of our jobs as a responsible company,” says Crenian. “Not only are we responsible for providing a return on investment for our investors, through our asset purchase and management process, we’re also responsible for making sure our investors understand what they’re putting their money into.” This point about investor education made by Crenian is indeed a valuable one, especially when considering the complexities of commercial real estate investments. After all, do most people unfamiliar with the commercial real estate market, know what terms such as ‘non-recourse mortgage’ or ‘triple-net lease’ mean? Probably not. And yet many people will favor trust over knowledge and put their money in organizations or in markets that they are dangerously unfamiliar with. Richard Crenian succinctly sums up the point: “That’s exactly what we don’t want to have happen. It’s great that investors trust our knowledge and experience in the commercial real estate market. We want that. But, we also want our investors to know what we’re doing with their money,” says Crenian. “Commercial real estate in particular is a fairly complex market and that’s one of the reasons why we make an effort to educate our financial backers on the fundamentals of the industry – that’s an important part of our process.” Editor Note: This sound advice is good for ALL real estate investors – Take the time to get educated or work with a reputable company that has a strong footing in the area that you wish to invest in! |
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February 2017
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