Skills

Check Out My Interview on TheBuyAndHoldGuys.com

by Brandon · 2 comments

Hey everyone,

Head on over to TheBuyAndHoldGuys.com and check out the interview I did with them. Make sure you “like” their Facebook page as well! These guys really know the real estate game and how to be successful at it.

Stay tuned also, later today I have a special blog post this afternoon.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

You Killed My Father, Prepare To Die… And Other Lessons in Finding Great Deals.

by Brandon · 0 comments

One of my favorite movies of all time is The Princess Bride, and one of my favorite scenes is the epic fencing duel between “The Man In Black”  and Inigo Montoya (of the “You killed my father, prepare to die” type).  Immediately after the duel begins, Montoya asks The Man In Black, “who are you?” Getting refused an answer, Montoya says, “I must know.” The Man in Black’s response?  “Get Used To Disappointments.”

This is the mood I am in today: Getting used to disappointment.  I found a house on the market several blocks from my own a few days ago, and instantly fell in love (mistake number one). Not only was it in a better neighborhood but it had a huge yard, had natural gas heat, and was priced almost half of what other homes in the area sell for. With a few weeks of labor and a few thousand dollars this home would have been both the perfect investment and also the perfect home for me to move into.

This was on Monday. Today (Friday) I decided to begin my pursuit on this marvelous home and much to my surprise: the house already has sold (well, “pending” anyways).  Just yesterday the house was listed as “active” and today it’s gone. Had I jumped on this deal on Monday, I probably would have had it.

Real estate is often looked at as a “slow” investment – and it often times is.  However, there are many times in real estate that you truly have to be on the top of your game to get the great deals.  This lesson hit home with  me this week (no pun intended), and clearly I was not on top of my game this week.  But rather than moping around, feeling sorry for myself, I am using this experience as a learning tool.

So what did I do wrong this week? When I looked at my mistakes in pursuing this house,  I came up with three principles that I dropped the ball on this week. The following are those three principles that must be adhered to in order to find success in finding great deals.

  1. Be Decisive –  If you want to find a property, you need to decide that is what you are going to do. Successful investing requires focus. Great deals are not going to magically find their way into your hands from your indecision.  I don’t believe you need to be decisive all the time, focusing on scoring great deals every day for the rest of your life. However, when you are ready to buy – commit fully.
  2. Be Aggressive – Once you find the property you want, make it happen. Don’t wait on the phone for a day for a call-back. Make it happen. Be the one making the waves, not the one riding them.
  3. Be Resourceful – One of my favorite quotes of all time is “You don’t lack resources, you lack resourcefulness” by Tony Robbins.  When you are trying to make a Real Estate deal happen quickly, you will run into bumps. Lenders will buckle, investors will get worried, and people flake out. You must have several strategies and back-up strategies in place so you can overcome these hurdles.

I’ve written these principles not just for your benefit but also for my own. Even seasoned real estate investors need a good reminder that good deals will pass by if we sit by and let them.

 

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Screening For Ghost Tenants

by Brandon · 1 comment

I don’t believe in ghosts.

I especially don’t believe in ghosts who apply to live in one of my two-bedroom apartments (I hear they are more attracted to creepy mansions). This is why when poor Miss Abileen’s name came forth on the background check I ran this week, despite her death in 1987, I didn’t immediately call the Ghostbusters. While there are a number of “protected classes” that are illegal to discriminate against, I’m fairly sure being dead is not one of them. Clearly something was wrong with the social security number provided. It was fake, probably purchased by the applicant who was lacking a social security number.

This event has made me revisit just how important screening a prospective tenant truly is. As a young investor, it is easy to want to just let a tenant move in based solely on impressions. After all, throughout high school and college we are accustomed to gauging the integrity of a person based entirely on conversations. However, properly screening tenants is the most important step in decreasing the headaches you will get while investing in Real Estate. I would even be as bold as to say 90% of all management headaches could be avoided by adequately screening.  Nearly every problem I’ve ever had with difficult tenants has been from letting my standards slide when screening for them.  I have learned from my mistakes and hope to teach you to avoid them as well.  The following is a list of the top six things to research before allowing a tenant to move into your property.

  1. Valid Social Security Number: I’ll start with this, as it relates to the story above. There a number of reasons a tenant might have a fake social security number, such as immigration issues or trying to hide their shady history. While you might be tempted to allow a fake or non-existent social security number to slide – this is a terrible idea. Instead, just take all the money from your bank account and just mail it to me. Why? You are almost guaranteeing future financial problems. If they refuse to pay, trash the place, and skip town – you can’t garnish wages. If they hurt someone on your property, you can’t find them. Finally, without a social security number, you have no way of knowing who they really are and what they have done in the past. Do they have several evictions? Do they have seventeen felonies in the past year? Simply put, the risk taken when renting to tenants without valid social security numbers far outweighs the reward.
  2. Job Verification: Tenants may tell you they have an excellent job, but without verifying it from their employer, you have no way of ensuring that they are telling the truth. Even if they bring current pay stubs to you, it is still a good idea to call their place of employment because the job could be just a temporary position ending soon. Renting to tenants without a proper job is just asking for future evictions.
  3. Income Verification: I recommend setting a minimum income level for your property at 30% of the tenant’s gross income – and make this number visible from the start to avoid wasting time. I cannot tell you the number of times I have driven to a property to show a unit, only to find out that the tenant only makes $500 per month in social security and is looking to rent a $495 apartment. It is ludicrous, but it happens all too often. Tenants do not know how much they can afford, which is why you must. I now tell prospective tenants over the phone exactly our qualifications to minimize unnecessary trips to show units.
  4. Previous Landlord References: You do not want another landlord’s trash. Calling a previous landlord is vital to knowing the kind of tenant you might be soon renting your property to. However, do not simply just call the most recent landlord, because more likely than not, this landlord will give a positive review even if the tenant was terrible – simply because they want them gone! Instead, go back to other previous landlords and find out the quality through them. Additionally, a proper background check will include previous addresses for the prospective tenant. Make sure these addresses line up with the addresses they give you. Often times tenants will conveniently “forget” to include landlord information for the property they were evicted from.
  5. Credit – While understanding a prospective tenant’s credit is important, this is the only item on this list that is only necessary depending on the type of tenant you are looking for. Credit checks often just tell you one thing – they have bad credit. However, if you are renting higher income properties – by all means check credit. They way a person has paid their debts in the past is a huge indication of how they will pay you.
  6. Living Style: This includes a number of specific items of note about your perspective tenants that are pertinent to know before renting to the tenant. This includes items such as number of pets, other people who will be living with them, smoking status, and “how much cash do you have”. These questions will help you better determine the type of renter this prospect will be and how they will affect the condition of your home.

Screening tenants does not have to be a scary task, and can easily be subcontracted out to either a screening company or simply a trustworthy college student looking to make a little bit of money. I also strongly believe in charging a tenant for the cost of the background check. It is generally common practice and it will help weed out the tire-kickers and only get serious renters.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Cap Rates: The Magic Fairy Dust of The Investing World

by Brandon · 8 comments

How do you add $200,000 or more in value overnight on your investment property? Easy! Just sprinkle on some magic fairy dust! But if you are like me and used up the last of your fairy dust on your last flight to never-never land with Peter, you are in luck. You can still add incredible amounts of equity on your property, without magic, by using cap rates.

What Is A Cap Rate?

A cap rate is a tool used to discover the value of an income producing investment property. They are needed because, unlike single-family homes, most multifamily and commercial buildings vary significantly from one another – making it difficult to compare apples-to-apples. For example, it is fairly easy to determine the value of a remodeled 1200 square foot three bedroom, two bathroom home by simply looking at what other similar homes have sold for recently. However, trying to find similar sales of a 24-unit apartment building with a jumbled mix of one-bedroom and two-bedroom units in a low-income area proves to be too difficult. There are simply too many variables to use comparable sales as a means to determining value. Enter the cap rate.

The Cap Rate is a formula which lets us know the relationship between value and the amount of income a property delivers. I know this sounds confusing, and I’ll try not to throw too much math at you – but if you bear with me for two more minutes you will see why this is such an important piece of knowledge. Lets look at the formula (written three different ways) for determining a cap rate:

 

A.) Cap Rate = NOI / Market Value.

Or

B.) Market Value = NOI / Cap Rate

Or

C.) NOI = Cap Rate x Market Value

 

Let me explain. The NOI is the Net Operating Income. This is a term you will hear often which simply means the annual income left over after all the bills – except the mortgage – are paid. So, if a property makes $120,000 per year in rental income, and has $50,000 per year in non-mortgage bills (utilities, taxes, insurance, vacancy rate, etc), the “NOI” for the property would be $70,000.

Remember how earlier I mentioned that houses are compared with each other to determine value? With multifamily and commercial investments, it is the cap rate that is compared. If a nice apartment complex in Seattle recently sold at a 6.5% cap rate, it is safe to assume that other nice apartment complexes in Seattle will sell around a 6.5% cap rate. Generally ranging between 5% and 12%, the cap rate changes significantly from one location to another.  In general, the higher the cap rate, the higher the cashflow.

If you want to determine the average cap rate for your area, ask a seasoned real estate sales agent that specializes in commercial or multifamily properties in your town or use the above equations to determine the number for yourself. It is best to analyze a number of properties and determine their cap rates and average your results.  To help make this concept clearer, lets look at a possible scenario as an example.

The Example of Farmer Fred

Farmer Fred is trying to determine the value of his 24 unit apartment building. Last year, he collected $154,500 in rents and spent $75,000 in bills (not counting his mortgage payments). Therefore, he knows that his net operating income (NOI) was $74,500 last year. To find the value of his property, Farmer Fred must first find the cap rate. To do this, he looks at another property that has recently sold:

Property X recently sold for $1,500,000. It’s NOI is $100,000. Therefore, using Equation A above, (Cap Rate = NOI / Market Value) we find that $100,000/1,500,000 =.0667. Farmer Fred has now discovered that Property X sold at a 6.67% Cap Rate.

Fred analyzes four other properties and knows that this cap rate is the average for his area and his style of property, so he uses this number to determine his value. Using equation B above, Farmer Fred knows that the market value of a property = NOI/ Cap Rate. Therefore, Farmer Fred computes  $74,500  / .0667  to find that his apartment complex is currently worth $1,116, 941.53.

So How Does This Help Me?

Earlier I described cap rates as the magic fairy dust of a real estate investment – sprinkle them on and whatch your investment fly! Okay, they may not physically lift off the ground but they will take you to new heights nevertheless. Here’s how:

You do not have a lot of control over a cap rate, but you do have a lot of control over your NOI (net operating income). Remember, your NOI is the amount of income that comes in during a year minus your operating expenses (but not counting your mortgage payment). Changing your NOI can dramatically change the equation, resulting in a much different market value. How do you change your NOI? There are two ways:

      1. Decrease Expenses

There are many ways to decrease expenses. Effective management, better marketing, fewer vacancies, lower utility costs, use a resident manager instead of high-cost property management, etc. Most properties are not run at their highest efficiencies, and many times there is dramatic room for improvement.

      1. Increase Income.

Often times, rents can be increased without negatively affecting your vacancy. If so, do it. If not, there are other ways to increase income. Enforce fees more effectively, rent out storage rooms for extra income, or increase prices on (or add) laundry services.

Simply put, when your expenses decrease or your income increases, you end up with more money in your pocket. More extra money means a higher NOI, which means the value of your property is increased. 

Adding $200,000 in equity overnight:

 Let’s look back at our example of Farmer Fred. Fred looks at the property he just bought and notices several things. He is currently paying $15,000 per year for property management. He knows that an on-sight resident manager can do the job in exchange for free rent, saving him $8,000 per year. He also decides that his rents are a little below average for the area, so he increases his rent by just $25 per month per unit, bringing in an extra $300 per unit, per year or $7,200 in extra income per year total.

Doing just those two small acts, Farmer Fred immediately begins keeping an extra $15,200 per year. To Farmer Fred’s wallet, this is awesome; but even better, in investment lingo, his net operating income just increased by $15,200. His old NOI was $74,500, but now is $89,700. Now, keeping the same cap rate from before and using the new NOI value, Equation B (NOI/Cap Rate = Market Value) now shows:

$89,700/.0667 = 1,344,827.59. Farmer Fred has increased the value of his property from $1,116,941.53 to $1,344,827.59, a total change of over $200,000.

Even if you do not yet own a piece of real estate, imagine how powerful cap rates can be on a property that is under-performing because of poor management.   You are in a terrific position to purchase the property at a discount, improve the property, and resell it some day for the new value that you have created.  While harnessing the power of cap rates may not be magic, the results can nevertheless do wonders for both your future and your bank account.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

My Muse

by Brandon · 3 comments

 

Real Estate is my muse.

 

In Tim Ferris’ book “The 4-hour Workweek” he discusses the need for a “muse” in which to satisfy that little craving in our life called “money” without needing to fight rush hour, punch the time clock, or suck up to your sexist boss. (If you haven’t read my review yet or want to buy the book for yourself, click here). To quote The 4-hour Workweek:

 

Our goal is simple: to create an automated vehicle for generating
cash without consuming time. That’s it. I will call this vehicle a
“muse” whenever possible to separate it from the ambiguous term
“business,” which can refer to a lemonade stand or a Fortune 10 oil
conglomerate—our objective is more limited and thus requires a
more precise label.

 

For Ferris, it was an online business that sold nutritional supplements for weight lifters. For me, my muse is real estate.

 

A muse is simply a tool you use to generate income, that is not dependent on you working a 9-5 job to make it happen. In the investment world, we call that “passive income”, which comes to you passively (as opposed to “active income”, which – shocker – comes to you through active work). Stocks are passive income, but require large amounts of cash to begin with weak returns.

 

Real Estate, for most, is not a passive activity. Many investors are (literally) knee deep in crap half the time and saturated with headaches the other half. Buildings require work, tenants require training, and toilets will always need to be plunged.

 

But that won’t be you.

 

Hacking Real Estate is about using shortcuts, tips, techniques, and systems to turn a normally “active” investment into a “passive” muse. Its about making the choice to automate your investments. Its about making the choice to control your investments, not have them control you. Its about making the choice of how you want to live, rather than simply following the herd.

 

Your muse can be real estate, a supplement company, stocks, or an infinite number of other sources of income. The important thing is making your muse passive. This doesn’t mean you will never do any work to maintain it. It takes time, patience, and work to create a muse. But it does mean you make the continual and conscience choice to fine-tune your muse into a well oiled cashflow machine that will allow you to live the life you want.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

About Me: Captain Maximizer.

by Brandon · 2 comments

 

“Maximizer.”

 

It was the result of a five hour test I had taken to determine my greatest personality strength, so my boss could better “guide me into paths of increasingly productive work behavior”. Out of 50 or so strengths, I scored highest in being what the test described as “Maximizer”. My first thought involved spandex, a damsel in distress, and a ray-gun to fight crime. I can handle that. The truth, however, was not so glamorous.

As it turns out, a “maximizer” is simply a person who’s goal in life is to find the shortest distance between starting and ending, thus “maximizing” results with minimal work. In other words, I seek to be get as much as I can for as little effort as possible.

Accurate? You bet.

Flash back to 4th grade. My punishment from my parents for the crime I had committed was to “write sentences”. I’m sure most of you are familiar with this cruel and unusual form of punishment, but for those of you brought up by more civilized forms of punishments like beatings and public humiliation, “writing sentences” was inflicted to brainwash a simple phrase or sentence into the heads of children by writing the words over and over and over.

Like Bart Simpson on the chalkboard, I was forced to write thousands of sentences in a notebook, stating important promises like “I will not take off my pants in public” or “I will not shave a mohawk into my sister’s hair”. That is until my maximizer strength kicked in.

In a moment of genius and inspiration(or endless boredom), I took two pencils, taped them together side-by-side, and began writing two lines at a time. This worked so well I decided to see how many pencils I could tape together and still write. The answer?

24.

My “thousand” sentences turned into just over forty, and within minutes I was finished. I was on my way to maximizing my way through life. Throughout high school, college, and my beginning years in the corporate world, I instinctively found every shortcut, trick, and tip to get things done faster and with less effort. That’s when I discovered Real Estate, and began plotting the shortest path between the life I had and the life of freedom I wanted.

I am not rich by the worlds standards, I don’t drive a million dollar car, live in a million dollar house, or have a million in the bank (yet). But four years later, I now sleep-in in the morning when I desire. I vacation when I want and where I want. I spend my days working to better my life and the life of those around me, rather than a multinational corporation that exists for the benefit of the shareholders. I am living the life that I want to live. This blog, my friends, is dedicated to teaching you how to do the same, using real estate to fire your boss, fund your adventures, and secure your future.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

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