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Working with investors

I have been given the task of conducting our weekly office meeting tomorrow and the topic suggested is Real Estate Investing. I have put down a few thoughts to talk about and have found that a good way to organize my thoughts for a class, meeting, etc. is to post a blog about it! Sounds crazy, but it gives me a good outline and gives my peers somewhere to turn to if they didn't take notes or were not able to attend.

To begin with let's discuss, why is Real Estate Investing so important?

These are my top reasons to invest in real estate:

1. It's a tangible asset. You can see it and touch it. Unlike a stock certificate it is real.

2. It's a great way to leverage your finances. If you buy an investment property for $150,000 and put $30,000 down (20%) and five years from now it has increased in value to $180,000, you have now made $30,000 on your $30,000 investment or 100%. Or if you can purchase for 10% down or $15,000, and it increases by $30,000 in 5 years in value, your return on investment is 200%!

3. Tax benefits - you can offset some of your income with your real estate investments and you can depreciate this asset - make sure to talk to your CPA.

4. Cash flow - if you purchase a home and the payment is $600, while you rent it for $900, you have a $300 a month positive cash flow.

5. It's accessible - anyone can purchase real estate

6. It's improveable - you can rehab the property and built sweat equity which means it adds to your net worth.

7. It's appreciable - I know it doesn't feel like it right now, but historically real estate has always appreciated. The market will come back and when it does those that have invested in this downturn will reap the rewards.

7. You can be creative with your purchase. This is hard to do in the stock exchange, but with real estate you purchase on lease options, seller financing, you can also purchase fixers, rehab them and flip them. There are many options when purchasing investment properties.

Next, let's talk about why you are not investing in your profession? Why is it not part of your budget as an agent? Is it money, time, fear....do you not know if this is a good time to invest? THIS IS THE TIME TO INVEST! RIGHT NOW! In our inventory currently there is a tremendous amount of opportunity.

And if you are not ready to invest, are you working with investors? I know you're getting calls from investors and what are you doing with them? If you don't want to work with them, send them to us - The Mode & DurhaM Team! We love investors and have worked with many over the years.

Even though in 2006 the real estate market nationwide was already in a slowdown, there were still 1.6 million properties sold to investors. The average sales price was $150,000.

54% of these investors used Real Estate agents
66% said they would buy again within the next 2 years
12% said they would flip within a year
63% bought 1 property in 2006
23% bought 2 properties in 2006
9% bought 3 properties in 2006
2% bought 4 properties in 2006
2% bought more than 5 properties in 2006
32% PAID CASH

Wouldn't you like to be part of some of the commissions on those 1.6 million properties sold? If you don't start learning how to work with investors now, you will miss out on an opportunity. Investors are going to be part of what turns this market around!

So now, how do you find investors to work with?

Attend Real Estate Investor meetings - there are REI meetings locally monthly - and go to real estate investment conferences
Meet and network with real estate attorneys and CPAs. Investors look to both for advice and guidance in their investment transactions.
Newspaper advertising and internet advertising - a good portion of the for rent ads are real estate investors - call them and see if they are interested in purchasing more investment property
Attend real estate auctions
Hold Millionaire Real Estate Investor Seminars - use the MREI Book and system for your seminar. It's a great tool for us from Keller Williams Realty.
Real Estate investment websites - chat or blog on real estate investments and investors will start coming to you through the internet.
And don't forget your past clients! Now is a great time to help those past clients build their passive income through real estate investing. Get in touch with them, consult with them and they will be clients for life!

Once you find them, what do you do next? Consult them just like you would another home buyer. Ask lots of questions and listen to their answers! You need to understand why they are investing in real estate. Is it for the tax advantage, is it to build passive income for retirement, for their children's college eduction, to buy and flip, to buy and rehab to build sweat equity. Getting to the core of why they are investing will help you to determine the type and location of the properties they are interested in. Then you must act quickly - when an opportunity arises you must be ready to act and the investor must be ready to act, because we all know those opportunities don't hang around for long!

Now, you are asking how do I learn to work with investors?

The best way I have found is to invest yourself! You will get an incredible education through this process and you will be building your own passive income. My first investment was a great learning experience! I purchased a small starter home, 3 bedroom, 1 bathroom in the Tahoe Park area of Sacramento for $45,000 with $5000 down! I inherited a tenant, who decided I had no idea what I was doing, which of course, I didn't. He decided not to pay rent, we went through eviction proceedings, ended up in court and I learned a ton! Especially what not to do when evicting a tenant! I kept that property for about 18 years - I received great tax benefits from it and it was a great rental. I sold it 18 years later for about $250,000 - where else can you make $200,000 on a $5000 investment? It allowed me to exchange into 2 duplexes and another single family home.

Other ways you can learn how to work with investors:

Read the MREI Book by Gary Keller - I wish this book had been around when I started investing and when I started working with investors. And give this book to every investor you are working with - they will thank you!
Real other books about real estate investing. FLIP by Gary Keller is another great book to read.
Take some classes! Check out the classes at SAR, at our office, through your local junior college
Learn Landlord-Tenant law in your local area
Learn about rents in the local area. Check out www.rentometer.com to help you with current rental values
Learn how to do a cash flow analysis on investment properties - go to www.MillionaireSystems.com for free downloads on investor worksheets
Learn the values in your market; you will then know when there is a great opportunity!
Partner with investors - you don't have to be just an agent in a transaction; you can become the investors' partner in it
Learn about 1031 exchanges - our local title companies have classes on 1031 exchanges - make sure to attend
Have a network of contractors that you can provide to your investor clients
Join the Keller Williams MREI network - this is an opportunity to network with other agents across the country who work with investors
Here are some websites to check out to learn more about real estate investing -

www.creonline.com

www.reiclub.com

www.InvestingTours.com

www.MillionaireSystems.com

www.BuyHoldWealth.com

Currently there are over 900 active listings in the Sacramento area under $100,000! That's an incredible amount of opportunity out there! Investors are coming back into this market and will continue to do so over the next few years.

For more information on investing, go to www.ModeandDurhaM.com. Take action today...now is the time to start investing in your own future! Don't be afraid to get started in real estate investing. Acquired knowledge will come and as it does so will your financial success!

Lori Mode, The Mode & DurhaM Team in Elk Grove, CA

The Mode and Durham Team in Elk Grove, CA

www.ModeandDurhaM.com

Posted by Lori Mode and Bruce Durham on 08/06/2008 10:37 AM

Comments (7)

the mode and durham team in elk grove, real estate investor seminar, buying investment properties, investment properties

Originally posted at: Lori Mode's Blog: Working with investors

Post is included in group: Realtors®
Post is included in group: Investors
Post is included in group: Millionaire Real Estate Agent Book Club

7 Comments on Working with investors

AUG

2008

I think you have it outlined very well. You should have no problem wiht that class.

I've read that book and it is fabulous. He makes a lot of great points.

I'm not sure about the 20% down. I own lots of real estate and have never put 20% down. I typically buy them cheap with either 10% conventional or seller financing or private financing. Heck very few people have 30K to put down on an investment property right now - this is almost unrealistic in this economy. The last one I bought in December, I got 100% investor financing from a private lender.

#5 I disagree with. Not anyone can purchase real estate. Only people that have cash or that can get financed. That eliminates about 60% of the people out there right now.

Also the 150K price would not make sense from a cash flow point of view. A 150K house will be in a negative cash flow situation unless a huge down payment is put down. Single families have to be bought for under 110K or else you will lose money. Multi-families need to be purchased for under 100K per unit to make economic sense. You cannot bet on appreciation.

Maybe some thoughts on how to increase value as soon as you purchase. Look at if you increases the rents by just 50 per unit per month. You just increase the value by 2400. Use an appreciation chart using just 5%. figure if you bough 300k worth of property each year for 10 years, without paying down mortgage or cash flow you would have 1 Million in equity. Let me know how it goes. Your on the right track. I have own just about every sort of property there is. I get tried of agents who rent or never own a piece of anything but they are out there selling it. The checker can only check as good as they know how to check.

AUG

2008

Another thought is to employ a professional property manager that knows the local market, how to pick tenants, and how to get things repaired quickly and for the right price. Hard to figure all this out for a beginning investor.

Travis - thank you. The meeting did go well today.

Rob - in our market currently it is difficult for an investor to get 10% financing although that's what we have used in the past; as an investor it is very important to leverage your money, so the less down the better! And oddly enough in our market, with 20% down of course, a $150,000 home may cash flow - not by much, but it can work. We have recently done it. Thanks for the comments; I went back and changed my post a bit because of your comments. I appreciate it.

Frank - I like your thoughts on how to increase value after the purchase. I think we will use it in our next Investor seminar. Thank you!

Robert - We always like to suggest to first tine investors that they need to speak to a Property Manager. In fact, we have told a few to please call the Property Manager to get their input first before making the purchase.

I've been a broker for over 33 years and bought several rent houses in the early '70's when I was about 22 years old. I was a Certified Property Manager for 26 years and managed 8,000 units of multifamily property and many other investments. I've managed 15 million dollar apartment complexes. I've seen investors start from zero and amass a portfolio of 400+ million and go bankrupt in a blink of an eye.

With all that said, I get a chill up my spine when an average real estate agent becomes a self-appointed "real estate investor expert" without first gaining some basic knowledge of the animal.

First and foremost, you need to classify real estate investing into 2 basic categories for the average investor and average real estate agent (1) there is Multifamily and (2) Single family. Multifamily is NOT a "house" and cannot be sold as "real estate" but rather you're selling "Cash Flow". To do otherwise, you're going to look like an idiot in the face of an astute investor that understands cash flow and you don't. Single family can be sold as Cash Flow OR as Residential Real Estate. That's a much better investment for a beginner investor. If you purchase a duplex...you're multifamily and you're selling Cash Flow. When you sell it...you're selling Cash Flow...not a "house".

I have yet to see a real estate agent that sells Residential real estate in my area that lists a multifamily property that has a Cash Flow or Cash on Cash Return Investment Analysis. My first question is "what are you selling"? How can you not provide (1) # units (2) current rents (3) tenant tenure (4) rent roll (5) details of Actual Expense and Projected Expenses all the way down to NOI (Net Operating Income)

Secondly, all real estate investing in this discussion has to be analyzed from the standpoint of an ALL Cash Investment for calculation purposes. ie: you purchase a $100K house...convert it to a rental and the market indicates a rate of $700 per month....then that's a 8.4% Gross Return. Deduct Taxes $1,104, Insurance $540, Repairs $500, 10% Management Fee $840, etc., you're probably looking at an NOI of $5,416 per year or a 5.4% return. Considering the risk...is it worth the risk?

In the old days investment property was sold on the basis of NOI. NOI for those not extremely well informed is Total Income minus TOTAL Expense (except debt service). The IRR or Internal Rate of Return or CAP rate (Capitalization Rate) which is nothing more than a cash on cash return yield tells you straight up if you pay $10 million for a property you can get $X in return. Now a days, CCIM's don't even seem to get it. All their projections and CAP rates are based on "UPSIDE POTENTIAL" income. What is that? What happened to REAL income. Now you are using fairy-tail income to justify a rate of return. Upside Potential is the "bonus" you get for all your hard work in taking on the risk of buying a piece of crap if I can state it properly and turning into something valuable. Shouldn't you be rewarded for your hard work? If you have to pay for Upside Potential in the purchase price, then I'd prefer to have a "Upside Potential Guarantee Performance Bond" lol OH...and note that "Capital Improvements" are always "below" the NOI line. I assume that means you NEVER will have Capital Improvements to make. I call that a KNOWN and CONTINUED Expense and it IS a factor....so go ahead and calculate for NNOI...Net Net Operating Income, "after" deducting required capital improvements were are nothing more than expenses but larger than normal. That would be air-conditioners, carpet, painting, etc. If you write a check...it's an expense.

Bottom Line: If you get in to selling "Income Producing Property"...take off your "house selling" hat and put on your "Cash on Cash Return" hat and treat it like Income Producing Property.

David - I appreciate your comments and I agree with you that there are 2 different categories of investment properties - the Multifamily units are definately different animals than the single family and do have to be classified differently. As an agent for over 20 years and an investor in single family homes and duplexes myself, I always let investors know that my specialty is not large mutlifamily units - I always refer those to an agent whom I know specializes in them. I do not pretend to be a "resl estate investor expert" in multifamily properties. I have sold several properties up to 4 units but above that I'm out of my element.

And yes, the bottom line is you have to "take off your house selling hat and put on your cash on cash return hat and treat it like income producing property when working with investors.

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