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Investing Outside Your Home Market? Do This First.

Investing Outside Your Home Market? Do This First!

I once had a student come to me with a 40-unit property in Eden, North Carolina for an unheard-of $13,000 a unit. The seller claimed he was getting $650 per unit in rent, but when we looked closer, we found only 40% of the property was occupied. Red flag #1.

We decided to investigate further. As it turned out, the major employer in town had just shut its doors, the area was sliding into a depression, and 3-bedroom houses were renting for $395 a piece. Red flags #2, 3, and 4.

We could’ve made the property work, but in the end, we decided to pass.

Why?

When you purchase a commercial multifamily property, you’re investing in a future income stream. It’s not enough just to see cash flow today. You need a reasonable level of assurance that your income will grow over time or, at the very least, remain stable.

Eden offered no such assurance, so we decided to let it go.

Why Analyzing Income Growth Matters to Your Multifamily Business

Income analysis is especially critical when you start looking to buy outside your home market (what I like to call your “backyard”). When you branch out into other markets, the stakes are higher. You can’t rely on anecdotal experience or personal knowledge; you have to dig into the numbers and get to know the market on paper.

 

 

It helps to think from two angles:

1.) the property;

2.) its context.

 

As you analyze a property, it’s important to know the specific ways you could improve it after closing. Where can you add value? How far are your rents off of the market? As I’ve written elsewhere, there are plenty of ways to increase your net income on a property. Scout out those possibilities beforehand and factor them into your analysis of every deal.

But looking at the property isn’t enough. You need to understand its room for growth in context—i.e., its neighborhood. You’ll never be a fortune-teller, but with patient attention to the relevant data, you can forecast an area’s stability and potential for growth.

Looking at income growth from both angles will give you important insight on every potential deal. More than that, it’ll help you grow in your market knowledge for a given area. Over time, you’ll be able to check your forecasting against actual market performance and learn to judge that market’s behavior more accurately.

Better judgment = stronger deals.

Where to Find Reliable Income Data

In a moment, we’ll talk about what you need to look for when analyzing a market’s income growth potential. Before we do, here’s a list of the best sources for the data you’ll need:

  • BestPlaces.net
  • Census.gov
  • Geometrx.com
  • City-Data.com
  • SocialExplorer.com
  • Costar.com
  • Colliers.com

Some of these sites (Costar.com, Geometrx.com) charge for their services. They may not be necessary for the early stages of your multifamily business but are definitely worth pursuing as you grow and expand into markets outside of your home territory.

What to Look For

It’s important to reiterate here that you’re not trying to tell the future. There’s a difference between reading data and reading the stars. More than your “gut sense” of a healthy market, you need a set of specific indicators to look for when evaluating the data.

That said, here are the most important questions to ask:

  • What is the current population in this market/neighborhood?
  • How have the population levels changed over the last 10 years?
  • Has the population grown consistently over the past 5 years?
  • Do you see job growth in the neighborhood?
  • How have unemployed levels shifted over the past 5 years?
  • What are the income demographics of the area?
  • How have per capita income rates changed over the past 5 years?
  • Do those changes correlate with the broader region (city, state)?
  • How does per capita income compare to the area’s cost of living? Is income trying to catch up? Or has income surpassed the cost of living?

It’s important to look for the story behind the numbers. If there is job and/or income growth, what’s causing it? What’s the draw? Are jobs opening up at a new factory? Has the state university opened up an extension site nearby? Is there a new soccer stadium going in? These are the sorts of developmental events that drive growth.

When it comes to cost of living, you ideally want to see a rent-to-income ratio of 30% or less. This indicates that the area residents have room in their budget to spend more on housing. Anything higher than 30%, and the market will be less willing to reward your efforts to add value to a property and increase rent over time.

As you continue to invest in an area, revisit the economic data periodically. Look specifically for changes in the data you analyzed above. Here are more questions to ask:

  • Has anything shifted significantly?
  • Has the market grown or contracted?
  • How does the present reality compare with your initial forecasting?
  • Is the are still a good investment? Why or why not?

Again, it’s important to look for the story behind any of these changes. What’s the force behind the change? Has the new factory shut down? Has a new one gone in? Have folks decided to commute into the local university from another side of town? Has there been an uptick in crime?

Conclusion

You’re never going to be able to tell the future with 100% accuracy. None of us has that ability. Nevertheless, there is an abundance of data out there on every market in the U.S. If you’ll take a little bit of time to look hard, ask insightful questions, and seek out the story behind the numbers, you’ll set yourself up for plenty of future growth.

As always, if you need help learning what to look for, or if you have a specific question about the data you’re seeing, head over to our Facebook Community. We have thousands of professional investors who are eager to connect and help you succeed.

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The Liability of Equity: Why Debt-Free Isn’t Always the Way to Be

The Liability of Equity: Why Debt-Free Isn’t Always the way to Be

You hear it all the time from financial gurus. Debt, they say, is like slavery. And the best thing you can do is break free of those chains as quick as humanly possible.

For the most part, they’re right. When it comes to consumer debt (credit cards, personal loans, etc.), owing money all over town can be disastrous for your financial well-being.

But does that mean we should avoid all debt? Even someone as hard-core as Dave Ramsey would make an exception for one specific kind of debt: real estate financing.

Why? Real estate is in a class of its own. Land is the only thing they’re not making more of and, on the whole, real estate is one of the safest assets to invest in. Given the relative safety of a real estate investment, it makes sense to leverage your assets through debt.

 

 

That said, most of the guru-types who make room for real estate debt will still tell you to get debt-free as quickly as possible: double the mortgage payment; throw all your extra cash at principle; do whatever it takes to get that lender off your back. Debt is a liability, they say, and it’s better to get it off your balance sheet as soon as you possibly can.

Maybe, but let’s see how ‘debt-free’ can introduce you to a whole new level of liability.

The Danger of Owning Property Free and Clear

Imagine you’ve owned a property for about 10 years. You started out with a healthy chunk of equity, cash flow has been great, and you’ve been aggressive about paying down the loan. Today, the property is worth $450,000, and you own it free and clear.

Now, imagine one of your tenants slips on a set of broken stairs and severely injures her knee.

She’s going to need multiple surgeries, extensive physical therapy, and a few months off work. That all adds up to hundreds of thousands of dollars in costs to her.

You’ve decent insurance on the property, but you quickly learn just how fast medical bills and compensation losses can eat into a personal liability limit. Next stop: a lawsuit.

Thankfully, you’ve got the property in an LLC, so all your other assets are safe.

But what about that $450,000 in equity? It’s ripe for the picking.

Now, imagine the same scenario, but instead of owning the property outright, you’ve got it leveraged at an 80%. In other words, you’ve only got $90,000 worth of equity in the property, and the rest of that cash is leveraged against other investments.

For one thing, that makes you a much lower value target. $90,000 is nothing to sneeze at, but given the time and expense involved, your tenant may choose to forego the lawsuit altogether. Even if they do take you to court and win, that $90,000 hit won’t hurt nearly as bad as the full $450,000.

Using One Liability to Protect Against Another

The best way to protect yourself against scenarios like the one mentioned above—apart from fixing the stairs—is to structure your business appropriately.

First, that means holding each of your properties in its own LLC and meticulously keeping each one’s finances and operations separate from all the others. The last thing you want is for some lawyer to ‘pierce your corporate veil’ in court.

Next, you need a comprehensive insurance policy on each property, as well as an umbrella policy to protect you from any potential overages. Not only does this protect your assets, but it provides an added layer of protection for your tenants as well.

Note: Do not skimp on insurance.

Finally, you need to carry a healthy level of debt on the property.

The best way to protect yourself is by using non-recourse debt. Simply put, a non-recourse loan is one in which the property entirely secures the note, leaving the lender with no opportunity to come after you personally in the case of judgment or default.

Debt may read as a liability on your balance sheet. But, when used right, it’ll shield you from the much nastier liability of watching massive amounts of equity go up in smoke.

Conclusion

Is all debt bad? No! While much of the debt we bump into in our contemporary society is foolish, real estate financing is an entirely different animal.

In this post, we’ve looked at one narrow angle in which debt can be used as a tool to benefit and protect your business. But that’s only one aspect. In another post, I showed how you could use debt to increase returns safely and more efficiently put your money to work.

For more information on liability, business structuring, and multifamily real estate financing, check out my free book How to Create Lifetime Cashflow Through Multifamily Properties. As always, if you’ve got specific questions, join us on Facebook, where you’ll find nearly 20,000 investors eager to help you find answers.

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Why House Hacking a Plex is the Best Possible Way to Start Investing

Why House Hacking a Plex is the Best Possible Way to Start Investing

If you’re at all interested in multifamily real estate investment, then there are two words you need to learn right now: house hacking.

What does it mean to hack a house? The definition is simple: buy a residential multifamily (4 units or less) with strong cash flow numbers, live in one of the units, and rent out the rest.

New investors are discovering house hacking as the best way to get started in real estate investment. In this post, I’m going to share three big reasons why that’s the case.

Ease of Financing

One of the benefits of multifamily investing, in general, is economy of scale. One transaction gets you multiple income-producing units. As a result, per-unit acquisition costs on multifamily properties are typically much lower than single families. From a cash-on-cash perspective, that’s terrific news.

 

Economy of scale matters for financing, too. Especially with new investors, lenders like to see a property with multiple streams of income. They want to know you’ll have enough cash flow to keep paying the note even if a tenant disappears on you.

On top of that, lenders will typically count 75% of the income from those additional units in your favor. That added income will help you qualify for higher dollar amount than you could on a single-family property.

 

Scale isn’t the only thing that makes financing a house hack easier than a commercial multifamily. Thanks to FHA, residential investors can take advantage of loan products with significantly lower down payment requirements and better rates than the alternatives.

 

A Smarter Way to Pay for Housing

Everybody’s got to live somewhere, right? House hacking satisfies that basic human need in one of the smartest ways possible.

Consider the following scenario:

You’ve got a decision to make: buy and live in a single-family or a duplex. You’ve only got 5% to put down, so you’re going for an FHA rather than a conventional mortgage.

Let’s take the single-family first. You find a house you love for $300,000 and put 5% down on a 30-year loan at 4% interest. Assuming a tax rate of 1.5% and insurance at $2000/yr., that’d put your monthly payment at about $2,000/month. You might decide to rent out a room or two. If not, that $2,000 is entirely on you.

Now, let’s imagine you choose a duplex instead at the same price point, down payment, and loan terms. Let’s put the rent at $1,250 (about the national average for a 2-bedroom). Congratulations. You’ve effectively lowered your monthly housing obligation to $750. Not bad.

Take that scenario a step further and imagine you went with a triplex instead of the duplex. Assuming the units you choose to rent are both 2-bedrooms, that puts your monthly gross income at $2,500. Now you’ve got a $500 surplus at the end of the month to plow into expenses, capital improvements, and so on.

This isn’t pie in the sky math. This is how house hacking works.

Of course, you’re going to have to trade off some things in the process—a bedroom or two, yard space, parking, etc. But this is just the beginning of your investment journey, not the end. Just a few years in a hacked plex will prepare you to move into the single-family of your dreams soon enough.

Learn on the Job

“Passive income” is a paradox. It doesn’t just happen; it takes years of hard work to establish a portfolio and a system that’ll put real money in your bank account every month without you having to handle the day-to-day.

One of the hardest parts of that early journey is learning to manage property. Nobody’s born with a filled-out property management toolkit. It takes time to build up the business sense and emotional intelligence needed to handle people and properties well.

The question is: where are you going to get that experience?

House hacking answers that question in the least intimidating way possible. When you hack a plex, you become your property’s on-site manager. From a tactical standpoint, that puts everything within arm’s reach. It’s much easier to manage a property from next door than from the next state over.

From an experiential standpoint, you get hands-on experience as a landlord: marketing property, showing units, screening tenants, writing leases, collecting rent, and fielding maintenance calls. You’ll outsource these things soon enough, but it’s always better that you understand these basic mechanics before you hand them off to someone else.

Conclusion

There’s no better way to learn this business than to immerse yourself in it. House hacking literally accomplishes just that. If you want to build a massive commercial portfolio someday, then that’s fantastic. I’m here to help you do just that.

But you’ve got to start somewhere. So, check out our Facebook page, grab a few of our free resources, and then let’s get to work on hacking your first plex.

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Mind over Mechanics: Why Real Estate Investors Need More than Skill

Mind over Mechanics: Why Real Estate Investors Need More than Skill

The mechanics of multifamily real estate investment are easy to grasp.

Funding, analysis, negotiation, due diligence, property management—these are skills that anybody can learn. All you need is a couple of books, a coach/mentor, and the willingness to get your hands dirty.

But, if that’s true, then why isn’t everybody a millionaire real estate investor? Why do so many would-be investors flame out before they even get their business off the ground?

The answer to that question lies in one place: mindset.

You can learn the mechanics of this business all you want, but without a mindset that says, “I can do this,” you’ll never put those mechanics to use.

What we’re talking about is a psychology of success and the basic idea behind it is this: mechanics follow mindset. The way we think about our world determines how we interact with it. If we adopt a defeatist mentality that says we can’t, then we never will. If we assume a positive mindset that says we can, then anything is possible.

It’s just like Henry Ford said, “Whether you think you can or whether you think you can’t, you’re right.”

Here are two ways to put that psychological insight to work in your real estate business:

Seeing is Being – Visualize Your Success to Make it a Reality

 

When I first got into real estate, I drove an ugly old Ford Granada. I was so eager to get out of that thing that I taped a photo of a red Corvette to the driver’s side visor. Every time I got in the car, I’d look at that photo and dream about the day it’d be mine.

Guess what? It worked! Eventually, I had my red Corvette. Since then, I’ve used visualization to grow my business and build my dream home in Sarasota.

What I was doing with that photo was something called visualization. It works off of the law of attraction—a principle that says our thoughts shape our reality.

I’m not the only one to succeed this way.

In 1985, a struggling Jim Carrey wrote himself a check for $10 million and dated it for Thanksgiving in 1995. Ten years later, Carrey landed his part in Dumb and Dumber.

As I’ve seen in my own life, visualization can be an incredibly powerful tool in building a successful investment business. Here are just a few examples of scenes to visualize:

  • Closing on a 100-unit Class A Apartment Building
  • Quitting Your Day Job
  • Sitting on a Beach, Watching Passive Income hit Your Bank Account

The best way to make visualization a practical part of your life is to develop a vision board. These boards are easy to make. Just grab a collection of photos that represent your vision, post them on a corkboard, and put it where you can see it every day.

The Power of Goal Setting

There’s a Hebrew proverb that says, “Where there is no vision, the people perish.” That’s exactly right, but so is it’s complement: where there is no action, that vision fades.

You can visualize all day long, but if you don’t put your vision to work, you’re not going to actualize what you’ve seen in your mind’s eye.

This is where goal setting comes in.

The vast majority of people you meet are drifting through life. They have a sense of what they’d like to accomplish, but they’ve never taken the time to put it into writing.

If you want to succeed in real estate, you need to devote serious time and attention to your goals-setting. Think short-, medium-, and long-term. Write down what Jim Collins would call “Big Hairy Audacious Goals.” Break them down into manageable segments.

For short-term tactical goals, follow the SMART acronym:

Specific

Measurable

Achievable

Relevant

Time-Indexed

Here’s an example of a great SMART goal for a multifamily investor:

Analyze 50 properties that meet my investment criteria in the next 50 days.

How does that goal match up with the SMART acronym?

 

Specific: You’ve got 50 properties to look at.

Measurable: It’s pretty easy to know whether you’ve analyzed a property or not.

Achievable: All you’ll need is an hour a day.

Relevant: Analyzing properties is a great way to uncover deals.

Time-Indexed: You’ve got 50 days.

 

Psychologically, the benefit to goal-setting is huge. It takes your vision out of the sky and plants it firmly on the ground. It gives you a concrete plan of attack for moving forward towards success. It also gives you something to which you can hold yourself accountable.

Conclusion

These are the most basic elements of building a business: get your mind right, craft a vision of success, and chart a path to get there. As basic as they are, though, very few investors will invest this kind of intentionality into their business.

Don’t be like everyone else. Tap into the psychology of success through visualization and goal-setting, and you’ll be well on your way to the real estate business of your dreams.

If you need help figuring out what that looks like, check out the Driving Force episodes on my podcast, Lifetime CashFlow through Real Estate Investing. There, I talk more about motivation, mindset, and the psychology of successful real estate investment.

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The 10 Biggest Mistakes New Multifamily Investors Make

The 10 Biggest Mistakes New Multifamily Investors Make

Zig Ziglar once said, “Some of us learn from other people’s mistakes, and the rest of us have to be other people.” The wisdom there is simple, yet profound: you don’t have to repeat other people’s mistakes. In fact, you’d be crazy to.

In my 40 years as a real estate investor, educator and coach, I’ve seen just about every mistake you can make in this business. I’ve even made a few of them myself.

 

In this post, I want to share 10 of the biggest mistakes I see new multifamily investors make over and over again:

 

Going it Alone

Multifamily investing is a team sport. To find properties, you need brokers. To finance deals, you need lenders.

To navigate contracts and closing documents, you need attorneys. To avoid mistakes, you need mentors. If you try to tackle any (or all) of it on your own, it could cost you dearly.

 

 

Waiting to Raise Money

New investors often make the mistake of finding the deal before the funds. By the time they line up their cash and/or financing, the contract’s up or the property’s gone. Save yourself the heartbreak; line up partners and lenders before you go looking for a property.

Moving Too Slow

Nervous investors wait too long to pull the trigger on a deal. Either they’re afraid to make a mistake, or they’re not sure what they’re looking for. Successful investors avoid both mental blocks by honing their search criteria and disciplining themselves to act on opportunities as soon as they present themselves.

Moving Too Fast

Other investors make the opposite mistake. Instead of moving too slow, they rush through the deal—cutting corners, skipping due diligence, and making mistakes that end up costing them tens of thousands. In contrast, veteran investors learn to operate with cheetah speed: fast, not foolish.

Buying the Wrong Property

Some new investors get into the business with a clear desire for success, but a muddy vision for how to get there. They want to buy properties, but they have no idea which ones. So, they grab at the first “good deal” that strikes their eye but end up with a property they can’t handle.  To succeed in this business, you need to know what you’re looking for before you start searching. Otherwise, you’ll have no way of knowing a good deal from a bad one.

Trying to Predict the Future

To win in multifamily investing, you have to check your single-family mentality at the door. Multifamilies are about income, not appreciation. When single-family-minded investors start looking to buy low and sell high, they completely upend everything that’s good, true, and beautiful about multi-family investing.

Gambling on Cash Flow

Buying a property with negative cash flow is risky. Even if you’ve got the operating capital to sustain your debt service, things can flip upside down in a hurry—especially, if you’re new to the business. Beginners, be warned: don’t bet on future cash flow.

Ignoring the Law

Every state and municipality has its own particular set of laws governing relationships between landlords and their tenants. New multifamily investors can get themselves in trouble when they inadvertently break laws they never took the time to understand. You can’t plead ignorance in court, especially when there are plenty of resources out there to help you get up to speed.

Hiring the Wrong Property Manager

I know from personal experience that even a veteran investor can slip up and hire the wrong manager. I survived, but new investors aren’t often so lucky. Take the time to properly vet a property manager before you give them your business.

Not Reading Leases

Rookie investors often make the mistake of taking on existing leases without reading them over. They just assume that, if it worked for the previous owner, it’ll work for them. Nothing could be further from the truth. Take the time to look over every existing lease agreement with your attorney and/or property manager. Skip this step and you might inherit terms and concessions that cost you your profit and your sanity.

Those are the 10 biggest mistakes I’ve seen. I haven’t shared them as a way to scare you off from multifamily investment. Instead, I want to help you learn from others who’ve gone before you. Bad experiences are master teachers; even better when they’re not our own.

The good news: each one of these mistakes is 100% avoidable if you’re willing to take your time, learn the business, and surround yourself with people who can help.

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5 Ways to Increase the NOI on Your Multifamily Property

5 Ways to Increase the NOI on Your Multifamily Property

There are two main factors that affect the long term profitability of an investment property – market appreciation and increasing cash flow.

Outside of curb appeal and capex, market appreciation is pretty much out of our control. On the other hand, driving value by increasing cash flow is absolutely something we can control. Easier said than done some might say. Well, here are 5 ways to increase the NOI and add value to your property.

 

#1 – Increase the Rent

Increasing the rent to match market rates seems obvious, but knowing how much to increase takes a little more thought. First, you need to figure out the market rent. Compare your unit rent to other similar units in the area. To help keep everything equal, make sure you are comparing apples to apples.

 

Look at similar size units in similar age buildings with similar amenities and handling of utilities. You can also ask local property managers and brokers what they’ve seen as market rents.

 

 

You will only be able to increase the rent when you get a new tenant or at a lease renewal, depending on the terms of the lease agreement. If you increase the rent too much, too fast you could end up with a vacancy. Weigh any rent increases with the possibility of having to replace the tenant and the costs of the turnover. Whenever you can, add some value when increasing rents. Small improvements make rent increases much more palatable to your residents.

#2 – Decrease Your Expenses

Go over the past 3 years of expense statements and see where your money is going. Look for ways to reduce utility expenses. Installing thermostat timers can dramatically reduce heating and cooling costs. Something as simple as upgrading to energy efficient light bulbs can cut costs as well. Even if your units are separately metered, you will be able to charge a rental premium if you can prove cost savings.

Preventative maintenance can save hundreds in repairs. Make sure that you or your property manager are doing bi-annual inspections, and ask your tenant if they know of any repairs or problems.

Also, consider using a maintenance man to fix simple plumbing or electrical repairs instead of a licensed professional, if legally permissible in your area.

#3 – Refinance at a Lower Interest Rate

A reduction in interest rates by even ½ of a percentage point can make paying closing costs on a new mortgage beneficial. Before rushing out to refinance, make sure you calculate the break-even point. Determine the costs of the refinance and divide that by the monthly savings. That is how many months it will take to recoup the cost.

 

#4 – Improve the Appearance

A rental premium can be charged on buildings that are well maintained, visually appealing or offer upgraded features that appeal to that tenant group. Often some simple upgrades such as new hardware, faucets or cabinet doors can make a unit feel more modern. Increase the exterior appeal by improving the signage, striping the parking lot, adding some landscaping or improving the lighting. Additionally, make sure your units are immaculately clean when showing them. It is amazing how most tenants equate value with cleanliness.

 

#5 – Offer Value Added Services

Tenants, are often willing to pay extra for amenities and services. You start with the market rent and then add al a carte services. Here are some examples:

Value Added Services

  • Pet Fees
  • Trash Concierge
  • Housekeeping
  • Laundry Services
  • Parking and/or covered parking
  • Storage
  • Small Garden Plots
  • Furnished Units

The application of these suggestions could easily increase your annual NOI by 10% or more. An increase in NOI means an increase in cash flow which will result in an increase in market value.

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Is Debt Really That Bad? Utilizing Debt vs. Equity

Is Debt Really That Bad? Utilizing Debt vs. Equity

If you’ve already purchased investment property, you may already have some knowledge about the information presented in this article. Although I go fairly deep, you could skip this one if you like. If you have never owned investment property, this information will definitely add value to you.

“Debt is bad” or so we have been taught. Over and over again it has been pounded into our heads to reduce debt; get rid of credit cards, buy with cash, not credit and so on.

But is all debt really that bad? No!

Can debt actually build wealth? Yes!

 

First, let’s clarify that personal debt, such as credit card debt, or a home equity line of credit that is used to pay for personal expenses is almost always considered detrimental to your financial health. However, debt which follows the acquisition of an income producing property can actually help you build wealth.

Leverage, the term used for debt financing

Leverage, the term used for debt financing, is an important part of most real estate deals. Using leverage to purchase an income producing property can increase your Cash on Cash Returns. The key to understanding leverage is knowing how much to use and when.

Looking back on the 2008-2009 downturn, it is clear to see that there are times when too much leverage on an asset can create catastrophic losses. Thus it is key for us to understand leverage – to be familiar with the risks associated and know what level of leverage is prudent in a given situation.

 

Loan-to-value is another term used to describe the amount of debt (leverage) on a property in relation to its value. Just prior to the recession of 2008-2009 there were many five-year loans being issued with very high (85-90%) loan-to-value rates. Two key mistakes that we can see here – very high leverage (85-90% LTV) and loans based on peak property values. As we all know, when those notes came due and the property values had dropped, then the need to inject equity to keep those properties was impossible for many investors. A better strategy is to reduce leverage as the market gets “hotter” and to write longer terms loans (10-20 year balloons payments instead of 5 years) as prices become increasingly unsustainable. Thus when the inevitable correction comes, you are prepared to weather the storm, maintain your cash flow, and are at very little risk of ever losing the income generating asset you worked so hard to attain.

…compare two deals with different amounts of leverage…

As you look at deals, a great way to compare two deals with different amounts of leverage is to compare the Internal Rate of Return (IRR). For a little background, the internal rate of return (IRR) is a widely used investment performance measure in commercial real estate, yet it’s also widely misunderstood. Simply stated, the Internal rate of return (IRR) for an investment is the percentage rate earned on each dollar invested for each period it is invested. Ultimately, IRR gives an investor the means to compare alternative investments based on their yield.

For instance, if you have one deal that shows an IRR of 10% and has lower leverage while another shows a 14% IRR with higher leverage, you should ask yourself whether the additional risk (due to the higher leverage) is adequately compensated by the increased return. If not, the lower return may actually be the better return!

Use Debt to Increase Your Return on Investment

 

Let’s take a few moments to show you how using debt impacts return:

 

 

 

In this first example above, the investor spent $800,000 out-of-pocket to purchase this investment property (not including closing costs). He will receive a Net Operating Income (NOI) of $60,000 which results in a Cash on Cash Return of 7.5%.

Let’s now look at the return if he would have 25% equity in the property by utilizing debt:

 

 

In this example, the investor spent $200,000 out-of-pocket to purchase this investment property (not including closing costs). He financed the remaining $600,000. After paying the monthly mortgage payment, the investor will earn $17,826 annually. This creates a COC return of 8.9%. In addition to the higher return, when the investor used leverage or bank financing for the purchase, he still has $600,000 remaining to invest into additional income properties.

Imagine if he used the remaining $600,000 to invest into three additional income properties. Not only would his NOI probably be greater than the $60,000 in the previous example, but he would have four properties appreciating instead of just one.

 

Use Equity to Counterbalance Leverage

The strategic use of existing equity can also dramatically increase your return on your real estate investment. Over time, as the mortgage is paid down and market values increase, the equity in your investment properties will also increase. This equity can then be pulled out and used as the down payment on another investment. Once again you use leverage to increase your returns. As mentioned above it is prudent to maintain 25-30% equity in your property. Currently most lenders require this amount of equity as a precaution against repeating the harsh lessons of 2008-2009.

Remember, not all debt is bad. Stay away from personal debt but use investment debt to build your net worth, property portfolio, and increase your cash on cash returns. Then as retirement nears, focus on paying off all the debt and enjoy the multiple streams of Lifetime CashFlow!

Join Us for #MultifamilyBootcamp
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If You’re Ready to Take Your Multifamily Real Estate Investing to the Next Level…
Check out Rod’s Extensive Multifamily Course & Coaching Program!

6 Powerful Negotiation Strategies To Use With Sellers (And In Life)

6 Powerful Negotiation Strategies To Use With Sellers (And In Life)

Throughout your life, everyone you meet is uniquely different They have different temperaments, personalities, educational levels, status, and experience. They have their own goals, dreams, and desired outcomes. Throughout life, and certainly in your multifamily real estate business you will be negotiating for your own desired outcomes. You’ll be negotiating with brokers, sellers, buyers, renters etc. You’ll also be negotiating with co-workers, your spouse, and your children. You can’t escape the need to regularly negotiate. Fortunately, negotiation is a skill you can study and learn. Here are 6 quick strategies that will help improve your negotiation skills.

1. Using the Deadline

It’s critical to use deadlines when you’re negotiating. They keep the negotiations under control and are very helpful in getting results. When you start a meeting or even when you’re negotiating over the phone, tell the other party that you need to be somewhere at a certain time. Let them know they may not hear back from you for a few hours. It’s also very helpful to set a date when the offer will expire. This will motivate people to take action.

 

2. Using Competition

Using “competition” is always helpful on either side of a real estate transaction.

If you’re the buyer, reminding the listing broker and the seller that you’re looking at several properties is an effective technique. If you’re the seller, letting prospective buyers know that there are other people interested in the property also works well. This can be a very powerful strategy.

 

 

 3. Using the “Flinch”

A “flinch” is a small facial expression or sound that subtly communicates displeasure with whatever was just said or presented. Although a flinch is subtle, it can create serious concern in the other party’s mind. Use flinching to react to a financial offer or when the other party is becoming too aggressive in the negotiation. This is an extremely effective negotiation tactic.

 

4. Using Silence

Everybody becomes uncomfortable during silence. People want to fill the silence when it happens. After you express an important point in a negotiation, just look at the other party and smile. 

 

 Don’t say a word.

The longer you can wait without talking, the more uncomfortable the situation becomes. Eventually, someone will have to break it. Typically, the first person to speak during these situations loses an edge in the negotiation. Very often, that first response will be unguarded. It could give you valuable information, as well.

 

5. Leaving the Negotiation

 

Preparing to leave a negotiation, or actually leaving, is a very powerful strategy. It can backfire, as well. It can really upset the other party, which you may have to deal with later on in order to reopen negotiations. Remember if it’s a buyer’s market, the seller could be more willing to negotiate only because there are less buyers. But if you are competing in a seller’s market, walking out of a negotiation could mean they simply select the next buyer in line. If you are the seller, you should also remember there is always another property for sale. The buyer could just shift their attention to another property.

 

6. Using Valuable Concessions

 

Ask for more in your offer than you expect to get…

…because it leaves room to negotiate and give up non-essential pieces. It can be very helpful to negotiate valuable, non-monetary perks or concessions into your contract. These perks could satisfy the buyer or seller without impacting the financial terms. An example of this could be a quick closing. Never say yes to the first proposal. You could likely do better. When you immediately say yes, the other side is usually not happy, because they feel like they may have given too good of a deal.

 

Negotiating For a Win-Win

Arriving at a solution that leaves both parties feeling as if they have won is ideal. A win-win solution requires preparation and knowing what motivates the other side. People are not always focused on the things we think they are. We never know what the other side is thinking. Sometimes some gamesmanship is required. If you will have an ongoing relationship with this person after the negotiation, such as in seller financing, seeking a win-win is critical.

I hope that you have found this information to be valuable and I encourage you to study and practice negotiation in your life. I know that it will help you get closer to achieving your goals of investing in multifamily properties.

 

Join Us for #MultifamilyBootcamp
MultifamilyBootcamp.com
If You’re Ready to Take Your Multifamily Real Estate Investing to the Next Level…
Check out Rod’s Extensive Multifamily Course & Coaching Program!

10 Steps to Your First Small Multifamily

10 Steps to Your First Small Multifamily

Are you ready to purchase your first small Multifamily Property?

The small Multifamily real estate market (2 – 30 units) is a niche with little competition that’s ripe with opportunities. The majority of the owners of these size properties are “mom and pops” which often means below market rents, value-add potential, and seller financing possibilities. Don’t overlook these small properties! Follow the 10-step plan below to take one down and start building Lifetime Cash Flow.

I’ve compiled this 10-step plan to help you start building Lifetime Cash Flow

1. Evaluate personal finances.

Before you start looking for deals, you should do a self-evaluation of your current financial situation. Do you have money to invest or do you need investors? Can you qualify for an FHA loan? How about an income property mortgage or commercial mortgage? What can you do to improve personal finances?

 

2. Identify if you want to focus on residential 2 – 4 units, or a small commercial property, 5 – 30 units.

You can clearly focus on both but it’s important to know that there are a variety of differences between residential and commercial multifamily. If you’re interested in “house hacking” or FHA loans, you’ll need to focus on residential. There are many other differences as well such as the loan process, balloon payments, and even your exit strategy options.

 

 

3. Determine where you will focus.

There are 2.25 million multifamily properties in the U.S, and you can’t chase all of them. When selecting your market area, focus on four things: employment and job growth, income growth, population growth, and multiple large employers.

 

4. Connect with a local agent/broker and a local banker.

As you know, the journey to Lifetime Cash Flow is not one you take alone. Two of the most important team members you will need include a motivated and active agent/broker that focuses on multifamily, and a local banker that you’ve discussed loan options with and/or have a relationship with. The first team member will help you find deals, and the second will help you take them down.

 

5. Start to build relationships with potential investors.

 

Whether you think you need investors or not, I recommend starting to build those relationships. Remember, you are building relationships, don’t just talk real estate! They key is to find commonality and build strong and sometimes lifelong relationships.

6. Become professional.

 

One of the most common mistakes new investors make is treating their multifamily endeavors as a hobby, not a business. Don’t go and form an LLC yet, but spend a few bucks and order yourself some business cards, a basic website from Fiverr.com, and a free business phone number via Google Voice.

 

7. Buy or build your property and owner database.

Having a properly built property and owner database is worth its weight in gold. This will be a vital resource for direct mail marketing, cold calls, and overall knowledge of the area. You can build your list in Excel or use a free or low-cost CRM.

 

8. Get that first direct mail campaign out the door!

Direct mail is one of the best strategies to find off-market deals for any type/size of real estate, especially small multifamily. As stated above, a lot of these owners are older “moms and pops” and you’re not going to reach them via Facebook or PPC (Pay Per Click) ads.

I just interviewed a young couple in Houston who took my advice and mailed 300 letters and just closed on a 32-unit property which will net them $10K per month!

9. Implement other marketing strategies.

Don’t put all of your marketing eggs in one basket. Implement other strategies as well to ensure you have a consistent deal flow. Utilize auctions, driving for dollars, Craigslist, and the dozens of other ways you can find great off-market deals.

 

10. Practice, practice, practice analyzing deals.

When it comes to small multifamily you need to become an expert at analyzing both residential and commercial deals. You need to know that 2 – 4 unit properties are valued based on comparable sales and that 5-unit and up properties are based on the NOI and Cap Rate. The only way to become great at analyzing deals is to practice. Spend time every day reviewing deals and kicking the tires. Practice, practice, practice.

 

Join Us in Chicago!  August 24th, 25th & 26th!
MultifamilyBootcamp.com
If You’re Ready to Take Your Multifamily Real Estate Investing to the Next Level…
Check out Rod’s Extensive Multifamily Course & Coaching Program!

12 Tips For Successful Networking

12 Tips For Successful Networking + Checklist

Some people say the key to success in real estate investing is location, location, location! That’s true, but I tend to think it’s also network, network, network!

 

In any business, you need to network. In multifamily real estate, you absolutely need to network. Think of all the primary connections you need to have: sellers, investors, brokers, and lenders. Now think of all the secondary connections you need to have: attorneys, appraisers, title companies, mortgage brokers, and many more.

 

It’s impossible to be successful in real estate without a strong team.
The road to Lifetime Cash Flow is not one you take alone.

Many people say, “Well, I’m an introvert” or “I’m not a people person” or “Networking makes me uncomfortable.” But guess what? Greatness doesn’t happen in your comfort zone. Your success depends on how comfortable you can become with being uncomfortable. Bottom line… you need to get out there and network to become a success in multifamily.

In order to help you with your networking goals, we’ve put together a list of our Top 12 Multifamily Networking Tips. In addition, we’ve included a comprehensive “Multifamily Networking Checklist” at the link below.

1. Don’t just network anywhere

Focus on the right groups such as your local REIA’s and real estate Meetup groups. If there’s not a multifamily specific Meetup group, start one!

2. Develop a short elevator pitch and practice it!

Tailor this specifically to the event you’re going to, and what you’re hoping to achieve from it. People need to know what you do and/or what you’re looking for in just a couple of sentences.

 

3. When networking, remember you’re playing the long game.

Please don’t go trying to buy or sell when you first meet someone. You are building lifelong relationships. Multifamily real estate is a tight knit community and nobody likes the pushy first timer.

4. You need to add value.

What can you offer to help? What skill sets do you have that might add value? If someone is new to the area, tell him or her about the best restaurants. Your assistance does not have to be something huge. Just focus on adding value.

5. Focus on quality over quantity.

People will brag and say, “I met 50 people!” 5 deep quality connections are better than 50 that go nowhere.

 

6. Focus on receiving business cards

Not passing yours out. That way you’re in control and can reach out as soon as possible.

 

7. Research attendees before the event and be prepared

Know who you would like to meet and what you want to ask them. People are very flattered when you have some knowledge of their business. (google)

 

8. Develop and practice an “ice breaker” question, comment

Or create a statement that you are comfortable using and rehearse this with your spouse, friends, or family and become a master at it. My personal favorite is; walking up to someone with my hand outstretched to shake theirs and saying ‘I don’t think we’ve met…I’m Rod Khleif.”

 

9. Google yourself

Ensure that you have a professional online presence. Keep in mind that when people search your name after the event your social media profiles will typically show up before any personal/business websites. It might be time to clean up those personal profiles.

 

10. Focus on how you make other people feel 

If you can make sure they’re having fun, enjoy speaking with you, and don’t feel awkward; they’ll surely remember you! Read the book; “How to Win Friends and Influence People.” One key is to ask people questions and let them speak.

 

11. Whenever possible, be a “connector.”

Whenever you’re speaking with someone, be thinking of anyone you know that might be able to add value to them. Focus on being an introducer and connecting people who can benefit one another. These introductions go a long way, in building relationships.

 

12. Follow the 6 steps in the “After the Event” Action Plan in the link below.

The absolute key to successful networking is your follow-up. Make calls, send emails, set up phone calls or meetings. You are developing relationships.

 

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