“They understand that market position is paramount to having great investments. When too many investment dollars are chasing the same product, it often indicates that the market positioning is coming to an end. Instead of adjusting their investing criteria and settling for less, these investors simply adjust where they invest. They know that real estate is all about location. To an investor, that means the location that is most economically viable to buy right today and which will provide the longest duration of sustainable cash flow and equity growth.SIBKIS—to the seasoned investor, this means seeing the big picture and not deviating from the intended outcome. Keeping it simple means establishing your criteria and sticking to it. It means making only minor adjustments to the strategy, but never adjusting the investing criteria.”
Larry Arth for Personal Real Estate Investor Magazine
For many adults who are nearing their 60’s (and even some adults much younger than that), one of their biggest financial concerns is being able to save enough for retirement. The average American who reaches age 65 can expect to live for about another 20 years, so if that individual plans to stop working once they retire, they will need to have accumulated a significant nest egg to cover their ongoing living expenses. Many adults find that they haven’t save enough.
So what happens if you find yourself in this position? What do you do if you believe that you’ve saved too little for your retirement?
Click below to read Quest IRA’s response:
Today, I found a real estate article by ILYCE R. GLINK AND SAMUEL J. at the Washington Post concerning the need for buyers to be careful when considering the purchase of a bank-owned property. The information is timely; as there seems to be a sense of entitlement and expectation among banks that believe buyers should pay close to market price for properties requiring significant rehab work and/or serious environmental remediation like mold, asbestos, lead paint, etc. The way banks have been, they would prefer to transfer some or all of their losses to a buyer, if they could. Bank REO departments would not be doing their job if they did not try to do this. However, there is a line that often gets crossed where it concerns fixers that require a significant amount of repairs. This article is right on point by warning buyers to beware when considering bank-owned foreclosures by pointing out that when homes sit vacant for a long time, this is the time when new problems can develop. Mold is one problem common to vacant homes in regions where there is a lot of rain. Mold can be a costly problem; especially when there is a bad roof, or if water is seeping through the walls into house. These things are not always visible, but a certified inspection report can alert you to the need for a more specialized inspection.
When there are severe problems, these problems should be accounted for in the sales price; otherwise, there is a risk of overpaying on account of significant rehab costs, and resulting interest expense. The result of overpaying for properties is–at best–a break even scenario; or it can mean the assumption of a portion of the banks’ losses. Proper investment fundamentals say that an investor should earn more of a return for the increased risks taken. Some fixers are higher risk than others; especially environmental issues that require the investor to deconstruct a house to the frame in order to treat and eradicate a serious mold problem.
“When you buy a bank owned property, you take risks. The bank has not lived in the home and the bank doesn’t have knowledge about the home’s history. You, as the buyer, must take extra care when buying a foreclosed home” (Glink and Tamkin, 2013).
Create interdependence: No one wins unless everyone wins. Period. This is the best way to get a team to function like, well, a team. It also fosters insights, flexibility, and resilience. Create shared metrics. Partner team members from different disciplines. Have members with similar skills swap tasks often, even in the middle of working on a deliverable. Share responsibilities, ideas, concerns and alternatives. If these principles make sense to you, you might want to give them a try. But I’d like to suggest you do so only on one condition: that all team members voluntarily want to adopt these principles. via Four simple principles for highly effective teams | LinkedIn.
Jobs, jobs, jobs…this is what we need to see economies grow; but what happens when people do not show up for work after they have been hired? If you are just starting out as a real estate investor, and you are building your first real estate investment team, then you might be feeling a little like a revolving door because the process can include working with several people before the right person clicks; but take heart. The learning curve will surely pass. Here are some ideas and suggestions to make this process easier, while making your real estate business more rewarding.
A Common Challenge
At some point, every real estate investor meets with the challenge of building an efficient investment team in any given market. It really takes the right combination of determination and perseverance by everyone on the team regardless of whether that team member is a real estate attorney, a real estate agent, a property inspector, or a project manager.
If a team member is not 100% on the same page, it shows in their behavior, and then it impacts the team by slowing it down or stalling it altogether. For the most determined investors, which are typically those investors who know that real estate is their blood, they know it is only a matter of time before they find the right people to fill the important roles on their team; but for investors who are new, or who do not have the tolerance for learning how to lead teams effectively, they may give up after encountering the first one or two “bad apples.” Generally speaking, the hiring and management of investment teams requires a lot of patience, as well as the ability to keep communication open, honest, and solution-based.
Three Ideas to Overcome Challenges
Here are three ideas to manage the challenge of finding the right people for your real estate investment team.
Solution 1. Realize that the interview process is just the beginning.
In a perfect world, we hire people and they are always a perfect fit . In the real world, however, a persons’ true character and work ethic does not come through until after working with them for a little while. This might happen after the first one or two deals, if they make it to a deal at all. To manage the uncertainty of this process, it would be a good idea to set up a trial period, and understand that the hiring process is just that–a process. It cannot be rushed; it can only be managed to reduce the wasting of time and resources. A good team member recognizes this, and works through the “thick-and-thin” of developing long-term wealth-building partnerships.
Only when you have good people on your team will your real estate business ever grow to the next level; so be diligent, but do not be discouraged.
Solution 2. Going in with expectations in check – Establishing realistic expectations.
Real estate is neither easy, nor glamorous. The daily work of sifting through countless properties in constant search of financially feasible properties requires a non-stop commitment, tenacious perseverance, and the determination to get things done, as required. This is what it takes to keep up with a constant supply of good deals. Finding a steady supply of financially feasible properties is fundamental to the success of any real estate investor whether a wholesaler, rehabber, landlord, or lease-optioner. With expectations in check, and an acceptance that not all personalities are a good fit for the role we need to fill, it could provide a shift in perception that is needed for the adoption of a mindset; making it easier to manage the team over the long term in a sustainable way.
3. Watch for tell-tale signs of behavioral incompatibility.
Non-responsiveness, slow, or lackadaisical behavior is a red flag. Seeking to understand the issues that might be preventing a team member from doing his or her job effectively is always the best first step; but when the problem continues to be a growing problem, then a decision must be made. Usually, the best path forward dictates the decision, and the decision may be to let that team member go–whether they were asked to do so, or they volunteered. Whatever the circumstances, when people can not communicate and work through the issues together, they cannot really work effectively together; but when people are on the same page, expectations are realistic, and everyone is committed to building a successful real estate business together that is when a business reaches the next level of growth, and growth is what we need to feed our own economy.
“We have seen and noted the recent recovery in the housing market, but are other sectors of the real estate market being left behind. vice president and ceo of kim co. we have seen the housing market take off. that’s the good news. where are we on commercial? commercial real estate has been doing well for the last couple years after a very tough great recession.”
Companies are aggressively tapping the public markets this year, but no industry is as gung-ho about selling stock as real estate.
Including IPOs, follow-on offerings and equity conversion deals, the real-estate sector has raised $29.3 billion this year, up more than 90% from the prior year and the highest volume on record through late May, according to Dealogic.
Real-estate investment trusts have been the biggest driver of activity.
Of the 83 deals that had priced, 79 were REITs, with equity REITs making up slightly more than half and mortgage REITs the remaining, according to the data provider.
“Perhaps the best strategy for dealing with distressed properties is to forestall them by watching for early warning signals. The difficulties of most problem properties usually can be traced to one of the following factors: poor management, operating deficits, lack of capital improvements, or owners who need greater liquidity. Sometimes the problems are physical–deterioration of interiors and exteriors, problem tenants, neighborhood deterioration, functional obsolescence, adverse changes to frontage, increased traffic congestion, or worsened access in and out of the property…Fixing these problems before they become major obstacles can save everyone a lot of grief. It helps the equity investor because he or she may be able to avoid foreclosure. Working hard to turn around a property may also allow the equity investor to borrow again another day” (Shilling, 2002, p. 190 – 191).
Assessing Risk is an Important Part of Conducting Due Diligence
We are having a very interesting class discussion regarding assessing and mitigating the risks that surround real estate investing. A very important point was made that an assessment of risk should be conducted as part of the due diligence process. As cited above, the best way to avoid becoming a distressed statistic is to take preemptive and preventative measures; for example, establishing quality management, ensuring that cash flow is sufficient to cover expenses and yield a positive return, establishing and maintaining reserves for capital improvements and maintaining greater liquidity, etc. These are all things that are within an investors’ control; however, there are some factors that go beyond the control of an investor; for example functional obsolescence and neighborhood deterioration. These uncontrollable factors will have a direct and significant impact on the quality of tenants, and thus quality of the investment; which in turn raises the risk of the cash flows and risk of the investment in the long-term.
The Greater the Risk, The Greater the Expectation of a Return
For the average real estate investor, these conditions are best uncovered during the due diligence period and avoided. However, for an experienced investor with vision, resources, local knowledge, and community backing, there could be a tremendous opportunity to re-develop deteriorating communities; to be sure, it is a specialty not for the faint of heart. In the case of deteriorating neighborhoods, these investors are buying up whole blocks of homes for pennies on the dollar, eradicating the neighborhood of criminal element, demolishing old vacant homes, and then re-developing / re-building clean affordable homes and rentals. When the market recovers, their hard work will have paid off handsomely, because they properly assessed the risks, created a preemptive plan of action, and followed through with all things considered. Since they assume a greater level of risk, they can expect to earn greater returns, and rightly so. These investors are angels–in my opinion–because they are the ones that revitalize and renew ailing neighborhoods; they encompass what it means to be “green” in the quest for sustainability and the triple bottom line of, “people, planet, and profit.” These Angels have my undying respect and admiration for the good that they do for people in their pursuit of profit; they are social entrepreneurs to the core. Spectacular!
In a world without flaws, people are honorable in their business dealings, and life in general. There is a spirit of abundance, open communication, and collaboration towards a common goal. There is good will, and good faith. Honorable people deal with each other honorably by talking straight about all material issues; they deal equitably with each other by seeking first to understand before seeking understanding, and establishing clear expectations with mutually agreed rules of engagement to nurture mutual respect, consideration, efficient business dealings, and eventually, mutual trust.
Under-Handed Tactics Benefit Nothing and No One
When people use under-handed tactics to gain an advantage; when they add questionable items in their agreements and avoid addressing the concerns or questions; when they expect someone to produce results or work without any assurance of compensation, they are operating in ways that are less-than-honorable; it is the mark of a fearful and protective soul with bad intentions.
In an industry where people will no doubt run into each other again over the course of doing business, it is worth the time and effort it takes to communicate in a manner that does not diminish the value of the other person. It’s all about addressing the tough issues with the intention of maintaining and developing fruitful business relationships over time.
Aspiring Towards a New Norm
It is the quality of our relationships–whether business or personal–that makes life rewarding. Good relationships are worth the effort; the rewards are beyond measure and they are self-evident. It is about collaboration, and not competition; it is about aspiring to a spirit of abundance, and not adversarialism. We can raise the bar in our industry; we can change the landscape from cut-throat to cooperation, and we can all still thrive regardless of any differences we might have. We can do this!
In the multifamily market, the cap rate or “capitalization rate” plays a dominant role in determining the market price of a property. By definition, it is the calculation used to “determine the ability of the property to carry debt as well as for a measure of overall returns” (Miller & Geltner, 2005, p. 298). However, there are drawbacks that makes the cap rate insufficient for determining investment value. Firstly, the cap rate offers a limited perspective; it only looks at the first year forecast of cash flow; it does not take into consideration the impact of financing and taxes (CCIM Institute, 2005, p. 6.6).
These are important considerations in the overall determination of investment performance. Among investors, it is a “common misconception when using the term ‘cap rate’ that some investors assume the overall cap rate is equal to the return on their invested capital; this is rarely the case” (CCIM Institute, 2005, p. 6.6). Yet, investors continue acquiring properties at 4% – 5% cap rates. It is keeping the price of properties inflated in certain markets. An investor that buys an apartment building at a 7% cap rate could still find themselves earning very low returns–or losing value–if the property does not cash flow as anticipated. Therefore a cap rate is insufficient, because it does not include important considerations such as investor preference, capital investment, or material financial information that would impact how a property performs over the term of the anticipated holding period.
A true reflection of investment value also takes into account the total cost of the property, which includes capital investments, the cost of capital, and the impact of taxes. A cap rate does not accomplish this. It may offer a starting point as to understanding market sentiment; but in order to make an accurate determination of how much a dollar truly earns while it is invested requires that an investor focus on “IRR,” or internal rate of return, instead of focusing on the cap rate. An investor must examine the cash flows that a property produces; they should also determine the perceived risk factor of those cash flows, assign a required rate of return for the level of risk assumed, and then apply that required rate when examining the cost of acquiring, renovating, operating, and maintaining the property. Otherwise, an investor may find themselves realizing paltry returns, if any return on investment at all.
Two properties in the same market might have the same market value by cap rate, but if one property has a higher cost of operation or requires a significant investment of capital to make it rent-ready, it will increase uncertainty and, thus, increase the risk of the cash flows. This increased risk should also increase an investors’ required internal rate of return, which is “the percentage rate earned on each dollar invested for each period it is invested” (CCIM Institute, 2005, p. 6.10). In a low cap-rate environment, many sellers cling to cap rate driven trends and many of them remain firm on price regardless of circumstances surrounding the property. While this is certainly a sellers’ prerogative, a savvy apartment buyer will not let emotion drive the investment decision. Apartment buyers must know up-front how their money will perform and only choose to invest in apartment buildings that will provide attractive internal rates of return—which should be in the range of 15% – 20% for multifamily properties—give or take—depending on the level of risk perceived and assumed by the investor.
Owning and operating an apartment building carries more risk than parking money in a CD or savings account; because of this risk, it should earn a higher return on investment, “To compensate an investor for more or less risk relative to other investment opportunities requires a change in the required rate of return” (Miller & Geltner, 2005, p. 336). Assuming more risk should be a factor in investors’ perception of investment value and what they ultimately pay for the property. If not careful, apartment buyers that rationalize acquiring properties at low cap rates may find themselves earning returns comparable to “safer” investment vehicles such as CDs and savings account. Savvy apartment buyers know that when “determining investment value of a property, the investor decides what to pay to achieve given performance objectives,” (CCIM Institute, 2005, p. 6.2); the sellers’ desire for top dollar does not come into play. Basing investment decisions on a market cap rate alone is the equivalent of catering to sellers; it leaves apartment buyers at risk of finding each dollar invested underperforming—or losing value. Apartment buyers must be sufficiently compensated for the level of risk they assume, or else money is better off invested in a “safer” vehicle—not real estate.
In order to obtain a perspective that would allow an investor to make an informed decision, an investor would need to look beyond the first year using historical operating data within the context of the intended holding period (typically 5 or 10 years). A cap rate cannot do this, so a cap rate should not be used as the basis of establishing investment value. Investment value is “the amount that an investor would pay for a specific property, given that investor’s investment objectives, including target yield and tax position” (CCIM Institute, 2005, p. 6.3). Please notice that this definition of investment value does not include the involvement of seller preferences.
CCIM Institute. (2005). CI101: Financial Analysis for Commercial Investment Real Estate. Chicago: CCIM Institute.
Miller, N. G., & Geltner, D. M. (2005). Real Estate Principles for the new Economy. Ohio: South-Western.