News & Updates
July 31, 2020
Real Estate Investing can be extremely lucrative when done right. It can also be very a very stressful, time suck and miserable experience when mistakes are made. There are some questions to first ask yourself.
Are you Active or Passive? – Do you have 10-20 hours to manage active investments a week. Do you have the expertise and tolerance for stress and to solve problems. Active investing requires a lot of problem solving, it often never stops. Some of the problems are easy, some hard, many can really boost values and profits.
Do you have capital or need financing? – using OPM Other People’s Money is very powerful. In addition to banks, there are many private lenders and hard money lenders who would love to lend on a good project and earn 8-12% on their money secured.
Do you have contractors or time and knowledge to do repairs yourself? – find an experienced rehabber, ask them about the mistakes they have made with contractors. The list will be long and wide. Most will laugh or cringe when you ask them if they have their system to find contractors down.
Leverage your strengths, find experts who can help you in the areas you are lacking. Real Estate is a team game. If you try to do everything, you will hold yourself back. In most cases, people like what they are good at, and hate what they are not good at. Write down on a piece of paper what you like and dislike, get experts to do what you don’t like. You will thank yourself endlessly.
Find “The How”, even more powerful find “The Who” – who can you contact and learn from that is an expert in an area you are lacking? If you approach them in an appropriate manner with good intentions to add value to them, you will be surprised at how willing they will add value and help you. It is then up to you to execute, and please reciprocate to these kind people and others. Always add value to people, places and things.
Passive Investments include:
Private Lending – common is 8-12% secured with a Mortgage and Promissory Note, not to exceed 70% of After Repair Value. Some investors will offer more when they are trying to build their business. Make sure they are capable, have the track record and values to successfully complete the project and return your money and return. If not you will end up with the project back.
Real Estate Funds (PPMs) – Private Placement Memorandums, allow investors to pool money and provide an annual return, equity split or combination. Very Savvy investors such as David Swenson who manages the Yale Endowment Fund and is said to be the best institutional investor on record highly recommends diversifying with Fixed Income Real Estate Funds. I agree with him, of course I have a Fund, I love my market and model and the mutual benefit created with my investors.
REITs – Real Estate Investment Trusts. Large institutions that pool money for their model.
Active Investments Include:
Wholesaling – freelance acquisitions. You are connecting an end buyer to a discounted property and making a fee in the middle via an assignment contract or double close.
Rehab Flips – buy, fix, flip to homeowners or investors. Most people have seen HGTV, it is far different in reality but the general idea is understood. One key here is to be weary of Sexy deals. The boring deals are usually the ones that have the best profit and lowest risk.
Wholetailing/Prehabs – buy trashed properties, clean them up and fix the negatives that scare off buyers. Then sell for solid profits.
Rentals – Buy and hold with renters. This can be a great way to accumulate wealth. Just be realistic, this is not completely passive. You will have to manage and make decisions.
AirBNB/Short Term Rentals – Social Distancing is not going away. And people still want to travel, go to events and see sports. Instead of staying in a hotel with thousands, you can stay in a place with just the people you came with. I see this strategy becoming even bigger. Properties that are really nice, furnished nice with great amenities and service perform best.
Lease Options – Agree to a purchase price with a buyer, they pay a down payment and monthly amount on top of rent, then they can buy it at the agreed upon purchase price after usually a 3-5 year term.
Land Contracts – own the property and become the bank for the new buyer. You do not have to maintain the property, pay the taxes, insurance, utilities, etc. But you need to make sure the buyer is.
Whatever strategy you choose, market or how you are involved, Real Estate can be very lucrative when done right.
July 31, 2020
Historically the Market has always gone through cycles. While Real Estate has been more stable, it too has ups and down like the stock market. There are huge opportunities during changing markets. Savvy investors insulate themselves from the volatility and position them to capitalize in a big way.
Choose of market – Primary markets such as LA, Chicago, NY, Miami and many of the big markets and coastal markets usually see huge peaks and valleys in values. They follow the stock market. Tertiary markets like the MidWest do not see the huge peaks. Values stay more stable like a wave. I choose the Indianapolis market which is widely considered the most stable market.
Entry Level Homes – High end homes are beautiful. They are sexy and fun to show off. They also are very high risk. They don’t have multiple exit strategies and the buyer and tenant pool is small. Entry level homes have the largest buyer and tenant pool. They are much more affordable and provide many exit strategies. They are not as sexy, much less risk.
Buy at Huge Discounts – Industry standard is the 70% LTV rule. Purchase and Rehab should not exceed 70% of the After Repair Value. Most of our properties are 40-60% LTV.
Stick to Fundamentals – Buy at a discount, add value, higher and better use, pass inspection, increase the buyer and tenant pool, supply and demand in your favor, maximize exposure and profit.
Be Properly Capitalized – Being under capitalized makes it nearly impossible to capitalize on opportunities. Being over capitalized can make you a motivated buyer and do marginal deals. Find the happy medium where you are properly capitalized and have abundant funding sources for when opportunities arise.
Multiple Exit Strategies – Selling for retail is one exit strategy, what if that becomes a challenge. The supply of homes spikes while the demand shrinks. What to do then? It is highly advised to have a plan B, C, D, E, etc. Renting, AirBNB, Lease Option, Land Contract are some of the other exit strategies that protect investors from market changes.
For us at Fall Creek Asset Management, we watch the trends and plan ahead. These strategies put us in a position of strength. We are always able to capitalize in up and down markets as we are insulated from the volatility. The only thing that can hold us back is our attitudes and mindsets. Happy investing to All!
July 31, 2020
The Stock Market has long been the conventional investment vehicle for the masses. Fortunes have been made and lost. Many have strong opinions that the stock market is the best way to invest. There are positives, especially when done right. There are things that are not disclosed to investors however, that can greatly impact their portfolio over time. 67% of American owned stocks in 2007, that is down to 56% in 2020. Now I am not a financial advisor, this is a quick educational article to help people understand reality and some other options when comparing Real Estate as an alternative to the Stock Market.
Stocks average 7%, does your portfolio? When averaging the yearly stock market returns, they come out to around 7%. So a 1 million portfolio should grow to 3.869 million over 20 years of 7% returns. What they don’t tell you is how do fees and losses impact your portfolio value. There are management fees, transaction fees, etc. And what if year 1 is similar to the 38% loss in 2008? Then your portfolio only grows to 2.242 million during the same period and that is before fees. When investors look at their statement 20 years ago and compare it vs now, they will be surprised to see that it usually has not grown even close to 7%.
Stocks are liquid. Recently the market went down 29% in a very short period of time. Investors have the choice to liquidate their holdings. Many people who feared further loss did liquidate. What happened? It shot right back up. Will that always be the case? No, nobody knows. Many investors do like having the choice.
Everybody is doing it. We are taught to go to school, go to college, get a job, invest in the stock market, have a family, etc etc. Many can relate and they like being able to discuss it with their friends, families, colleagues and peers.
Real estate on the other hand has some amazing positives. I am the first to admit, it is not for everyone. Watching HGTV shows and buying expensive houses in your neighborhood and trying to do all the upgrades yourself just to make a small profit and not factor in agent commissions and soft costs can be a real bum deal. Doing it right however and you can double your money.
Buy Real Estate at a Discount. Industry standard is 70% LTV rule. The purchase and rehab does not exceed 70% of the After Repair Value. We buy our homes at 40-60% LTV.
Add Value to Real Estate – renovations can skyrocket values of homes. I bought a home for 15K recently, after 35K of rehab it is now worth 120K, over double what we have in it.
Reposition Real Estate for a Higher and Better Use – A property could be worth one amount to an investor who would hold it as a rental, to a homeowner some are worth around 50% more. Another example is a house could rent for $1000, but as an AirBNB it could bring in 2-3K per month which makes it much more valuable.
Multiple Exit Strategies. Flip to homeowner, hold as a rental or AirBNB, lease option, land contract, there are many exit strategies with real estate that insulate investors from volatility.
Real Estate is Stable, especially in tertiary markets – many remember 2008 when half the neighborhood in Vegas, Phoenix and primary markets were short sales. That was not the case in tertiary markets that do not see the spikes in values or the lows. Indianapolis for example dropped 7% while many markets dropped in half.
Use Leverage – Instead of doing 2 deals at a time, leveraging financing and you can do 10 at a time. By sticking to the fundamentals you can easily
Over 100% annual returns – my firm for the 3rd year in a row is more than doubling our money annually. Our average deal is around 60K for purchase and rehab and we profit almost 40K in 6 months. So we can do that type of deal twice a year. 60K turns into 100K then we can almost do 2 deals the 2nd time. Now the key is for us to average 4 months so we can turn it 3X a year. That is realistic, we are making great progress to achieve over 50% cash on cash return in 4 months so we can do it 3X and earn over 150%. Not all markets or models are like this. Our team combined has done thousands of deals. We made most of the mistakes you can make, and now we have it dialed in.
July 17, 2020
What is a good profit on a rehab flip? Opinions will vary, especially across different markets. Some will not do a deal unless there is a 100K+ profit. Often they have to put in upwards of 1 million dollars and far more rehab than profit. Here I will show you 5 Tactics that experts use to maximize their profits on flips.
Annualized vs Cash on Cash Return – What if you make 80K profit in a year on a deal that you buy for 120K and put in 120K. That is a 33.3% annualized and 33.3% Cash Return. What if you make 40K in 6 months and only did 20K of rehab on 60K all-in. That is a 66.7% Cash on Cash Return but a 133.3% annualized return. Which one is better? Most will go for the 80K profit in a year, that is were most of the competition is. My model is to target the less competitive, easy flip projects and do volume. And we are getting closer to averaging 4 months so our annualized return is creeping up closer to 200%. So now what would you prefer? Consider your return on time and return on rehab when evaluating and underwriting your deals. You may find that boring deals are way more profitable and much less risky in your market.
One chance to make a first impression – take them on a journey. Buying a house is an experience, it’s like going on a roller coaster. It starts when you are driving in the neighborhood. This is how they will come and go from their home. Consider cleaning up neighbors properties to avoid buyers not even getting out of the car. Staging is key, our properties sell far faster and for more when we stage them. Virtual tours are not common, but part of our standard marketing and they are phenomenal with social distancing likely sticking around long term. Make this the best roller coaster ride they have ever been on. Where buyers can’t wait to go inside upon arrival, then you are invoking emotions through out the walk through. They are imagining themselves living there, eating and enjoying family, holidays and get togethers. Spending quality time and getting ready to live their lives.
Kitchen Bathrooms, Curb Appeal – These 3 items are were you can add the most value, the best bang for your buck. People want open kitchen concepts. Make it awesome with high end materials and put in nice appliances. Bathrooms especially master baths are also key. Don’t skimp, put in nice tile surrounds, shower heads, new toilets and vanities. And make the curb appeal pop. The first thing seen is the front picture, if it pops you will be amazing how many showings you can get when the rest of the property and pictures are done right.
Make it pop for Pictures and Walk-Throughs – What you see in pictures vs with the naked eye during a walk through can be completely different. Imperfections may now show in pictures but immediately turn buyers off during walk throughs. And some times properties look amazing in walk throughs, but the pictures don’t pop. Color contrast is key with pictures. Consider both, buyers and agents almost always see pictures first, they have to appeal enough to get
Leave a Project Folder at the property – List all of the upgrades that have been done. Include scopes of work, invoices and contractors license info. It gives a perception that the work is high quality and that items can easily be addressed during inspection. We often inspect properties ahead of time and list what we have fixed, even offer them to call the same company back out to reinspect for free.
October 5, 2019
Recently a number of investors have communicated concern over the direction of the economy. The media has been a buzz about trade wars and the stock market has seen large drops. They also stated the belief that real estate is volatile. When I asked why, they all pointed to the sub prime mortgage boom and bust from the last recession. Makes sense being so recent, however my understanding has always been that real estate is typically very stable, even with the economy and stock market roller coaster rides. So I dug into some historical real estate values.
Summary of Findings:
Stable – US Real Estate as a whole is very stable, the exception was the subprime boom that peaked in 2005
More Volatile – Typically Coastal and big markets have more peaks and valleys
Most Stable – Indianapolis is the #1 most stable market, even during the subprime boom it peaked at 147K and dropped only 7% to 137K at the bottom 7 years later in 2012
If you look at the 3 graphs below, you can see in the 1st graph for US has a slow, steady climb. You can almost draw a straight line from start to finish without too much deviation above or below. The main exception is the huge boom around 2005 that came back down and resumed the climb almost right where it left off.
The 2nd graph shows Los Angeles, a coastal market that has peaks and valleys. When drawing a straight line from the start to finish, it often goes quite a bit above and below the line. This is typical of many of the big markets and coastal markets.
The 3rd graph shows Indianapolis, ranked the #1 Most Stable Market you can see it did not have a huge peak or valley and is incredibly close to a straight line. Even during the sub prime boom and bust, Indianapolis went from around 147,000 in 2005 at the top to 137,000 in 2012 at the bottom. Indianapolis does not see these crazy peaks that should not be reached, then plummet. It only went down 7% over a 7 year period from 2005 to 2012 while many coastal markets dropped in half.
United States: Pretty consistent trend upwards with exception to the subprime boom then picked right back up on a similar upward trend.
Los Angeles: Coastal and big markets are typically more volatile
Indianapolis: Ranked Most Stable Market. Only 7% dip from 147K peak in 2005 to 137K 7 years later
Stability is one of the reasons I picked Indianapolis. I could go on and on about Why Indianapolis, such as the #1 Job Growth and Population Growth in Midwest. Next, I will be writing about how I have navigated and built my model in such a Stable market.