Strategies

What does the name “Pareto” mean to you?

Probably very little. However, the principle made famous by an Italian economist over 100 years ago has a huge impact on your investing techniques and wealth building ambitions.

“Pareto’s Principle,” also known as “the 80/20 Principle,” states that for many areas of life, 80% of the effects come from 20% of the causes. For example, Pareto noticed that 80% of the land was owned by 20% of the population and 80% of the peas in his garden were produced from 20% of the plants. You can see examples like this throughout nearly every field of study in our world, especially in business.  Often times, the ratio is even more staggering.

So what does this mean for a real estate investor?

Pareto’s Principle is useful in encouraging focus on productivity and results-driven business. As a real estate investor, this principle helps to find what areas of our business are really earning income and which areas are simply wasting time. Many of the activities that an investor performs on a daily basis are probably wasted time. By focusing on the 20% of the actions that are providing the most results, we can free up significant amounts of time to do the kind of things we want to do. This is key is beginning to “hack” real estate.

Several years ago I realized that most of my efforts were spent doing small maintenance jobs that seemed to take all day. By hiring a resident manager to take over the maintenance, I was able to gain 80% more time in my life – time that I now spend looking for deals, spending time with my wife, and blogging at RealEstateInYourTwenties.com.

Let’s look at a few more specific examples.

  • If you are trying to find leads for motivated homeowners looking to sell, what sort of action is getting you the most results? Are you spending most of your time putting up bandit signs when a simple Craigslist ad is driving most of your business?
  • If you are remodeling a home, what upgrades are actually contributing the most to the future value of that home?
  • If you are managing a small apartment building, what advertising methods are getting you the most calls?
  • Is 80% of your wealth being built by simple investing? Why are you wasting time with wholesaling deals?

What to do with Pareto?

Now that you have begun to think in these terms, its time to begin focusing on improving those areas of your business. If Craigslist is driving most of your leads – then focus your efforts on making your Craigslist ads even better. If new carpet will cause the most significant increase in value or speed of sale -get great looking carpet! Improve the things that matter and watch your investments take off.

I am not suggesting you quit all your other activities if they are not bringing you the most leads or income.   Often times, things that don’t seem to produce much income actually help in other ways. The important thing is to know what your efforts are producing – and prioritize based on that. Don’t waste time if you don’t need to.  The key is being aware of how you are spending your time.

It’s all about finding what works and maximizing those causes to explode your results. Your time is precious, and by looking for ways to increase your efficiency you can free up your time to do the kind of things you want to do. Only then are you truly living life on your terms, the goal of any real estate hacker.

P.S. If you want to learn more about the 80/20 Principle – check out Tim Ferriss’ book “The Four Hour Workweek”. While not a real estate book, the principles taught are invaluable to a real estate investor looking for more time to live to the fullest.

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.

Do you use Facebook to market your rentals? How about to attract private money for your investments? If not, check out the post I’ve written over at BiggerPockets.com! I was their featured blogger today! This was the first of many to come!

Unless you’ve been living under a rock for the last five years, you know Facebook. You probably can’t go two hours without checking your wall, “liking” your friend’s comment, and laughing at a video of a golden retriever playing the piano … (continue reading on BiggerPockets.com)

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.

I once asked Seth Godin (marketing genius and internet blogger) via email what he would change if he could go back and do it again.  His response:

If I went back and changed something,

then things would be different and I wouldn’t be me.

But I like being me. So I’ll take this life

He makes a valid point. If we were to go back, it would change who we are. However, what about if we could help someone else learn from our mistakes?

People don’t like to dwell on mistakes.  Our pride likes to say “I’m awesome” but the reality is we make mistakes all the time.  While I’m sure it will hurt my image as an “expert,”  I am going to talk about the mistakes I’ve made because I want to save others from making the same ones. This article is designed to help you learn from those mistakes and hopefully avoid them yourself! Without further ado, my five biggest mistakes I’ve had in my investment career:

  1. Not Saving Enough – I have been lucky, but stupid. When I started investing in real estate, I had no money. I bought my first property with close to nothing down and was fortunate enough to sell it and made a decent profit. While I am completely in support of investing with no money down, I believe any investor needs to have at least some money in savings because the road to real estate riches is a bumpy one.
  2. Using Credit Cards – Building off number one, because I didn’t have solid financial resources, I often turned to credit cards to finance various things. I wish I had never used them.  When I first started, I bought into the “credit cards are a tool” mentality, which caused me to quickly max out several cards during rehabs. This is fine when the market is great and the proceeds from the flip can pay off the card, but when the market turned and I turned those rehabs into rentals, the credit cards didn’t get fully paid off. I have spent the past four years tackling them now.  As Dave Ramsey likes to say, debt is slavery.
  3. Renting To Family – I’d heard it said a thousand times but still fell into this trap. Do not rent to family. Ever.  I’m sure you can think of many reasons that this could turn out bad – and they are all true. As a landlord, you will always be seen as a “greedy” S.O.B. by your tenants, so it is best not to have one of those tenants be in your family.
  4. Renting to Friends- Similar to number four above, renting to friends is a mistake. I have rented to friends and it has turned out great, but the few times it has turned out bad it turned out REAL bad.  It simply isn’t worth it.
  5. Not Learning From A Mentor – Most of my mistakes could have been solved by simply listening to someone who had been there before. If I could go back, I’d have joined my local real estate investment club immediately, followed around the good investors until they were sick of me, worked for free on a flipping crew to see how it was done, and become a real estate expert before ever spending a dollar on investments.

That said, I know that if I were to go back and change things, I would not be where I am today and I like where I am. However, I believe strongly in the importance of learning from mistakes as to avoid future ones and help others avoid the same.

Are there things you wish you had known? What would you change if you could go back? What can you teach others from your mistakes?

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.

So you want to buy a house.

Unless you have all cash, you are going to need to obtain a loan – called a mortgage.

So how do you get a mortgage?

Whether it is for an investment, a personal home, or any other reason – mortgages in today’s market can be tricky and difficult to obtain. However, mortgages are not a mystery and the rules are fairly straightforward when trying to obtain a mortgage. This post is going to look at the top three different areas that a lender is going to analyze before saying “yes!” to your mortgage request.

  1. Your Credit –  This is most widely known and the easiest of the bunch to understand. Your credit score is a number given by one-of-three private scoring companies. Your score is determined using computer-driven algorithms that take into consideration the amount of debt you have, the amount of late payments you have had, the length you have had that debt for, and several other factors.   A credit score can range between 300-850.  Lender’s want to know they are making a safe investment lending you money, so before applying for a mortgage, make sure your credit is at least 640. The higher your credit score, the lower you will pay on your loan.
  2.  Your Debt-To-Income:  This number is a ratio that looks at the amount of monthly debt you have compared to the amount of income you make. In other words, a lender looks at all the loans you have (credit card minimum monthly payments, auto loan monthly payments, other mortgages minimum monthly payments, etc) plus the monthly payment on the new loan and divides it by the total gross income you make per month.  For example, if I have a $300 car payment, $100 in credit card payments, and I am looking to pay $800 per month on my new mortgage, my total debt would be $1200 per month ($300+$100+$800).   If my total gross (before taxes are taken out) income for the month is $3800, my debt-to-income ratio is $1200/$3800 or roughly 32%.   In order to qualify for a mortgage, make sure your total debt-to-income percentage is below 50%, but ideally below 40%.
  3. Loan-to-Value: The loan-to-value (also called LTV) is another ratio that looks at the amount of the loan you are trying to get compared to the total value of the property. Generally speaking, the difference between the loan amount and the value is going to be your down payment. For example, if a property is worth $100,000 and you put down 20% and obtain a loan for $20,000 – the “loan-to-value” would be 80%.  This number is also important when you try to “refinance” a home.   What is an acceptable LTV? It differs widely between lenders and programs, but for a normal loan lenders do not like to loan at higher than 80%.  However, if you use an FHA loan (a loan guaranteed by the US Government), you can get up to 96.5% loan to value.

If you fall within the guidelines of the three areas above, there are still several other features that a bank will looks at before giving you money. For one, they like to see consistency at your job. If you recently (within two years) changed jobs, getting a loan can be much more difficult. Also, if you have never used any “credit” before, obtaining a loan can be difficult as well. Finally, remember that each lender has different programs and even within the same programs some mortgage professionals are simply much more competent and can help you get the loan you want.  If you are interested in buying a home for yourself, your first step is to talk with a mortgage professional. The meeting is always free and you will learn exactly what you will qualify for.

 

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.

What do Fred and Barney, Bert and Ernie, Abbott and Costello, and Starsky and Hutch all have in common?

Successful partnerships.

I am a big believer in partnerships.  I believe everyone is equipped with different skills, abilities, and positions in life and by finding the correct corresponding puzzle piece, you can achieve together much more than you can achieve apart.

In a recent post I suggested using a partner’s income and down payment to secure property. This is a technique I have used several times, with great success. I received an email recently asking how to overcome a potential partner’s objections to doing this.  The underlying question is

“why would a partner put down all the down payment plus their income and credit to get a 50/50 partnership when they could just do it by themselves?

This is an excellent question.  I am often asked this by others when I mention this strategy. The funny thing is – I have never been asked this by my partners. Why not? There are four reasons why this is not an issue and how to overcome those objections when they do arise:

  1. 50% is better than 0%.  The truth is, most people with good income, stable jobs, and perfect borrowing ability don’t invest. It’s not because of lack of resources, but rather a lack of knowledge and motivation.  The simple truth is that although they could buy a real estate investment on their own – they won’t.
  2. My 50% is worth it. It is important that a partner knows that although I am not putting any money into the deal it doesn’t mean I’m not putting anything into it. I am putting years of experience, knowledge, and deal-making ability into the deal.  In many cases, I am going to be running the day-to-day operations of the rehab (if needed) and managing the property for years to come.
  3. I’m selling a valuable product – When I seek out partnerships, I do not come “begging” for help. I am not looking for a favor. I am offering a solid return backed by years of experience and the probability of profit many times greater than the stock market. When I made this shift in my thinking, my investment world was transformed. I have the deal – I found it, put it together, ran the numbers, and got the property under contract. I have an amazing investment opportunity, and I am giving others the chance to be a part of it.
  4. The property is an amazing deal – I believe that if you have a great deal, the financing is the least of your concerns. If you are having difficulty finding financing or partnerships – you need to ask yourself: “Is this deal really that great of a deal?”  I only buy properties that cashflow extremely well and have great amounts of equity (its worth more than I owe) . I only buy incredible deals. If you do the same, you’ll find eager funding.

Will some partners still have problems with this? Yes.  They will say “Well, I could just do it myself.” However, when you find a killer deal and make it work, those same people will regret not working with you. They will see that they have done nothing while you made a killing. You can guess who will be first in line to be your 50% partner on your next deal.

 

 

 

 

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.

I recently had the honor of having John Fedro write the first of three posts here on RealEstateInYourTwenties.com.  If you haven’t checked out his site yet head over there!

While you are there, check out the article I wrote for him as well! I wrote a post on his blog titled “Don’t (Just) Invest For Retirement.”  Make sure you head over there to read my article!
(Click Here To Read It!)

 

Peace!

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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