Real estate investment strategy
The cornerstone of any real estate investor’s strategy must always be — having a Plan and executing it on Purpose. Clearly, there are plans, and there are plans. Also, it’s almost axiomatic that this or that strategy works best for this or that set of circumstances.
Don’t you believe it.
With notably rare exceptions, employing multiple strategies synergistically is what works best for the majority of people. It’s easy to say your strategy is cash flow, or capital growth — but those who execute 2-4 strategies, seamlessly interwoven, almost always enjoy superior results. In fact, I’ll go a step further. Cash flow or capital growth are, in my view, more accurately described as goals, not strategies.
What happens when things change?
Ironically, the changes that happen more often, requiring the most thought are very positive in nature. A long term hold can turn into three year hold, morphing into a tax deferred exchange. I’ve seen it happen dozens of times, and it’s almost always completely from left field.
But no matter — when circumstances change, you as the investor must respond in real time, and with solid, effective action. Here’s an example from my one of own clients.
Back in 1977 when I’d just transitioned into investments from traditional home sales, a couple was referred to me. They owned a local fourplex acquired in the early 70’s. For those who don’t know, ’69 was a recession year, and the years following weren’t exactly stellar. Then another recession hit, ending around the last quarter or so of ’75. But from then on, our market caught fire! Prices rose like a runaway balloon at a kid’s birthday party. Their fourplex went from roughly $38,000 in early ’75, to sportin’ a net equity of a few bucks more than their original purchase price.
A surprise change of circumstances.
In what was to be one of my first few tax deferred exchanges, they traded into just under $140,000 of income property. But wait — there’s more! In two short years those properties had appreciated to approximately $185,000. For those keepin’ score, that’s just short of a 1/3 increase in 24 months. Who predicts that? Not me, that’s for sure.
I was all set to execute yet another trade when Dad stepped in and counseled patience. Though their net equity had almost doubled in those 24 months, Dad’s experience told him the wind’s direction was changing, and it wasn’t gonna be one of San Diego’s patented ocean breezes. At 28, I tended to listen to the old fart.
Good thing, ‘cuz a few neck wrenching months later, the correction of late ’79 hit like a ton of bricks. Correction? Try double digit inflation, 21% prime rate, and an FHA interest rate of over 16%. THAT kind of correction. My clients were surprised. As a matter of fact they were a bit chagrined at our advice to stand pat. ‘Course, when the aforementioned (bleep) hit the whirling blades shortly thereafter, we were heroes.
Yeah, I know, it really was Dad and the mouse in his pocket, but I stood close enough to bask in the reflected glow. Gimme a break.
Think about it. Their original Plan was to buy the fourplex and hold, hold, hold. But then the first ever cycle of cartoonish appreciation hit San Diego, and holding woulda had them retiring years later than possible. Even that isn’t the factor with the most impact on their retirement, from where they sat at the time. By doing the first exchange, and eschewing the second, their income potential at retirement increased tremendously.
They moved back to their Midwest roots just before retiring in the mid-1990’s. They’d executed two more tax deferred exchanges — one in the last part of 1986, the last in 1988. They spent all their spare job income and cash flow paying down their loans. They retired in 1998. Between his modest pension, Social Security, and their cash flow, they were very comfortable. But none of that would’ve been possible if they’d not adjusted to what turned out to be constant whipsaw changes in the San Diego real estate market.
The history of changes during their investment ‘Plan’.
1973 — Bought first income property, a local fourplex.
1977 — Took advantage of huge change in economy by exchanging large capital gain into several small income properties.
1979 — Another massive change — high inflation, higher interest rates, dead market. No moves . . . thanks to Dad’s experience.
1981-83 — Recession, continued high rates, etc.
1985-89 — Another big time run-up in values. Two more very propitious exchanges.
1990’s — Not only the abrupt end to double digit appreciation, but the emergence of the infamous S & L Crisis.
Adjusting quickly, prudently, and correctly to significant and/or radical changes in the real estate investment landscape is what separates the mediocre to disappointed retirement from the magnificently abundant retirement.
Having a seriously thought out Plan, and executing it with relentless Purpose is, as I said initially, the cornerstone of any successful real estate investment strategy. But like any foundation, when big changes begin to shake things up, that cornerstone better be able to flex with what comes its way, or what you’ve built could come tumbling down.
Grandma was right — Man plans, God laughs.
Always be ready to adjust in real time.
When office hunting, don’t call a Realtor first
Often, a startup’s first step when hunting for offices is to call a Realtor, but that is not necessarily a good idea – do your homework first.
Are you getting ahead of yourself?
So you want to buy a building for your startup business? Do you really want to do that? Should you really do that? I am sure you have pondered over these questions in your mind a million times by now if you are actually on the phone asking a REALTOR to show you some places in the location of your dreams! After all, the REALTOR is the first step right? Finding a great affordable location?
WRONG. Your REALTOR is actually the person that you should be talking to LAST. Now I know this seems counter-intuitive, but there are some pretty important steps that must be taken first before looking for a location. Any REALTOR out there that either sends you active listings or takes you out looking for space without the following steps being completed first is either just hunting for a paycheck, or isn’t worth their salt in the industry and is about to make some pretty big mistakes on your behalf.
Before you look for your space…
Here is a quick protocol someone should do before they even start to look for space:
- A well-built business plan. This should be at least 5-10 pages long. You can actually get great examples and templates at SBA.gov or your local Small Business Administration where you live. Have that business plan ironed out. That is going to then provide you with a monthly rent or loan payment allowance and based upon the information in the business plan that figure may also be altered.
- A personal financial sheet is going to be needed. This will tell the landlord or the lender, if you and your business will be bankable.
- Money. Bottom line, it takes money to make money. It doesn’t have to be your money, but it does have to be accessible to you at all times. There will be things that your lender or landlord won’t cover and that will be on you. Consider this the term you probably by now have heard “skin in the game.” Oh yeah, and whatever figure you think you will need to have in your head, double it.
I have had the painful privilege of dealing with hundreds of small business startup’s in my day, and I have also witnessed REALTORS unknowingly destroy a business success before the doors even open. Most of which could have been avoided if the startup would have had these three things figured out before they called the REALTOR.
Housing’s silver lining: turning REOs into rentals
While housing sputters along near the bottom, most entities are cynical of the market, while one company is expanding rapidly and seeing success in turning REOs into rentals while revitalizing communities and getting involved in the up-and-coming real estate hot spots.
With a continually struggling housing market, the prognosis for the sector is still poor, but there are areas of the nation and types of investments that are improving greatly, pointing to signs of life in real estate. One company embodies the signs of health, a family-owned company in Memphis that focuses on the REO-to-rental market.
Memphis Invest converts distressed REO properties to rentals, and they place a tenant, so it is a performing asset for private investors. The company recently released their first quarter activity report, showing a 67 percent year-over-year increase in the number of its homes sold to investors. Of those, 82 percent were REO, thus providing the nation a great example of how the REO to rental strategy can help revitalize communities one home at a time.
Chris Clothier, Partner at Memphis Invest is one of the nation’s leading experts in single-family rental real estate services and attributes the company’s growth to lower prices and lower interest rates, as he notes they have “removed many barriers for both novice and experienced investors, and these individuals are now getting heavily involved in the single-family rental housing industry.”
Clothier added that many investors have no interest in being a landlord, so they work with companies like theirs to allow remote involvement. “That ease of entry and passive involvement also lead investors to move beyond two or three properties and into portfolios of seven to ten,” said Clothier.
Cities primed for growth
The REO conversion market is heating up, and Clothier points to Memphis, Dallas, and Atlanta as hot spots. “We obviously like Memphis and Dallas,” said Clothier, “and feel that they will continue to be strong markets for single-family rental investments, and we continue to look toward expansion into Atlanta and possibly Nashville. These southern cities are some of the fastest growing areas in the country and have solid, fundamental economies in place. Large employers, solid infrastructure and solid future demand for their core industries mean consistent demand for good housing in these markets. In light of the shift from home ownership to renting, much of that housing demand will be for high quality rental housing.”
Making an important distinction, Clothier adds, “So MSAs with growing economies, solid fundamental industries and growing populations are prime areas – not simply cities with high concentrations of foreclosures.”
What government programs should be expanded or contracted?
In an election year, there is much focus and introspection as a nation as to what our government is doing to help or hurt the economy, and Clothier takes an optimistic look at which programs are beneficial.
“A federal government program that I would like to see expanded is the Federal National Mortgage Association’s (FNMA) role in providing funding to SFH investors,” said Clothier. “This is a group that can and will adhere to stricter guidelines designed to offer protection to FNMA’s portfolio. I would love to see FNMA expand their financing options for investors beyond 10 properties and couple that expansion with tighter lending requirements such as higher down-payments. If investors were asked to put 35 percent to 45 percent down on investment properties in order to obtain mortgages number 11-20, I feel this would draw many investors who are sitting on the sidelines holding 10 mortgages back into the market. These are typically investors who would like to be participating but would prefer to stretch their capital further by using financing.”
Clothier noted, “In addition, I would love to see the federal government work with local governments to turn over foreclosed properties in extremely blighted areas for the local government to remove dwellings and take the properties back to unimproved land. This would greatly reduce crime in these areas, discourage vandalism and blight and when the time is right, allow a community to re-invest and rebuild areas.”
Company growth plans
Where does Memphis Invest see their company headed? “Our growth demands are predicated by the appetite of our clients,” said Clothier. “We are constantly being asked for more options to diversify portfolios and are answering that demand by entering Dallas and Atlanta.”
The company says they will be managing over 2,000 properties in Memphis, Dallas, and Atlanta by the end of 2013, representing $200 million in real estate value. “Future plans involve identifying additional markets that include Nashville, among others, and continuing to meet the demand of the new investor,” noted Clothier.
Millennials learning from their Boomer-parents’ mistakes
As Boomers lost their pants with IRAs and 401Ks, Millennials are increasingly seeking out real estate investments and planning out their retirement, taking into account the losses of the previous generation.
A sizable Millennial clientele
Though the percentage of my clientele who’re 35 years old or younger is less than half, it is significantly sizable, and happily so. Roughly 20%. In any given year, I now have more clients in that age group than in any 10 year period between the time I opened my real estate investment firm, January of 1977, and 2006. This is an excellent trend, if six years can be counted as a trend — and for just one firm.
I bring this up in order to sound the alarm to the children of Boomers. As a Boomer, I view this development as possible evidence of Millennials and their big brothers ‘n sisters eschewing the advice of their elders. This is a good thing.
Millennials learning from others’ mistakes
I view that as a silly question. Boomers as a generation, are retiring ugly, or at best, boring, generally speaking. Millennials and their older sibs are simply using their heads, nothin’ more and nothin’ less. Would you take shooting lessons from a guy with three missing toes? Nor would I — and I wouldn’t take retirement advice from a 69 year old barely makin’ it, whether it was a parent or not.
Based upon first hand experience, I’ve come to admire Millennials. So many of ’em seem to be from Missouri — in other words, ‘show me’. They don’t necessarily buy the story sold them about 401Ks and IRAs being the likeliest road to a solid retirement. After all, it worked so well for their parents — NOT.
I applaud them. The fact so many of ’em are landing on real estate as a vehicle to retirement, shows freshly gained wisdom — and a lotta reading. History shows us that in good times and bad, in recession and in boom times, even, maybe especially in times of economic inflation, real estate not only holds its own, it triumphs. And no, citing your Uncle Fred’s disastrous experience with real estate doesn’t change any of it. People have lost fortunes investing in gold, yet it remains on the ‘A’ list of wise, long term investors.
Staying away from 401Ks and IRAs
So, in case I’m not being clear, the point is to STAY AWAY FROM 401Ks AND IRAS.
They will suck you dry for no readily apparent reason. Sometime around your 45th to 50th birthday it will hit you like a red hot anvil, falling from the sky. ‘Holy crap, I’ve screwed the pooch’. This nasty little thought bubble happens when a 40 to 50-something realizes they have $132,000 in their so-called ‘retirement plan’ at work. This is followed by the horrifying epiphany that there’s no way in hell they’re gonna build that paltry figure into even a laughably viable figure, allowing them to retire to a life of bitter resentment, and endless ‘StayCations’.
Here’s my advice: Get out of your 401K/IRA — period, end of sentence, no exceptions.
If ya can’t get out, at least stop throwin’ good money after bad, and stop contributing. And no, your next objection about forgoing the ‘hugely beneficial’ employer match, is better left unsaid, to avoid embarrassment. Remember, the vast majority of your parents had employer matches too. Let’s review, OK? How’s that been workin’ out for THEM lately?
Invest in real estate.
Get outa your 401k/IRA if allowed. Pay the taxes and penalty. You’ll be lucky to end up with 50-60% of the original balance. That’s the bad news. The good news? If a solid real estate investment program, beginning with half your current capital balance can’t slaughter the ultimate long term results of your crummy employer retirement plan, then somebody’s not payin’ attention.
Let’s conclude with some real numbers, shall we?
If your parents had invested when they were your age, say back in 1975, they’d of enjoyed two impressive upturns, and one historically colossal upturn in real estate values. Same with rents. If their luck was less than cool, and they retired a couple days before the aforementioned historical bubble burst, where would they have been then, and where would they be now?
So happy you asked, as I lived through those times and know how the final chapter works out. They lost big time — give or take about a third of the value of their real estate investment portfolio, almost faster than they could watch it happen. Yet, having spent just over 30 years investing and/or exchanging when times were good, and waiting when times were bad, they easily built that portfolio into $2.5-3 Million. They paid off their home too. They’re debt free. Imagine that. They never bought into the myth of the employer match or any other such Barnum and Bailey hokum.
From the day they retired their monthly income has never fallen below five figures monthly. Most likely $12-15,000. Know what you’ll never hear them paid to say?
Hi — Welcome to WalMart! I rest my case.
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