Notice: Function WP_Object_Cache::get was called incorrectly. Cache key must be integer or non-empty string, NULL given. Please see Debugging in WordPress for more information. (This message was added in version 6.1.0.) in /home/customer/www/davidpwitte.com/public_html/wp-includes/functions.php on line 5835

Notice: Function WP_Object_Cache::add was called incorrectly. Cache key must be integer or non-empty string, NULL given. Please see Debugging in WordPress for more information. (This message was added in version 6.1.0.) in /home/customer/www/davidpwitte.com/public_html/wp-includes/functions.php on line 5835
Real Estate Investing Blog Page - David P. Witte

Category Archives for Blog

Find Motivated Sellers Now! Post image

Find Motivated Sellers Now!

How to find motivated sellers without a big ad budget! 

Did you know that nine out of ten real estate investors fail miserably because they cannot find motivated sellers?

Here’s the problem you face.
Everyone is spending thousands on mailings and online ads to get leads. They’re out putting up bandit signs and knocking on doors. They’re calling every FSBO and Craigslist Ad they see. They are out in droves, spending money like a drunk politician.

This means you’ll never find motivated sellers now if you keep doing things the way you have. You’ll wind up buying overpriced deals from the big money wholesalers or off the MLS!

Luckily for you, there’s a solution. Let me introduce you to a way to find motivated sellers now that few, if any people are using!

I’m going to share with you some excerpts from my Motivated Seller Depot training program. It’s an in-depth study of how to find motivated sellers and beat the mob. It will help you find deals before anyone else even knows they are available!

Click this link to learn about finding motivated sellers now!

Before we dive into this, let me share why you should listen to me.

  • I’m a licensed real estate instructor, not some internet marketer trying to sell you some high-priced training program full of half-baked theory.
  • I’m a successful real estate investor with a strong track record as a wholesaler,   rehabber, and landlord.
  • I’m also a licensed real estate broker and Realtor, so I could lose my license if I feed you a bunch of crap that isn’t true.

So, let’s get rolling!

They Want to Sell, But Are They Motivated Sellers?

I know this sounds obvious, but if you do any kind of marketing, you’ll get a lot of calls from people that want to sell their home for retail.

Sadly, lots of investors have no idea how to tell the difference, so they tend to waste a lot of time trying to make something out of nothing.

In their desire to get a deal, they will drive all over town to meet with sellers without qualifying them first. You need a simple set of standards, a template of sorts that you can apply to a seller within the first few minutes on the phone with them.

When you start getting results from your efforts, make sure to prequalify sellers to determine their needs, motivation, and expectations before you invest much time with them.

Ask lots of questions.

Ask about their story and take some notes. If they spill their guts over the phone, keep them talking, get their story, and then close for the appointment. You can’t buy a house over the phone, so get the appointment. That’s the only way you can get the deal.

Before you hang up, make sure you know how long they have lived in the home and how much they owe on it. These two tidbits could save you time. If they bought it last year and didn’t put much money down, they may not be able to sell. They could be extremely motivated, but if they’re broke and heavily financed, you can’t help them without a short sale.

Ask pointed questions like

  • Do you live in the house?
  • Are you current on the payments?
  • How long have you owned it?
  • Is it currently rented? (if they aren’t living there)
  • Why are you wanting to sell? (if they don’t say)
  • Does the house need any work?
  • When do you need to sell by?

How to quickly determine if they are motivated.

Here are three simple criteria I use as a start to determining motivation.

1. Do they live in the house they want to sell?

If they are, that’s strike one.

Owners that are snug, warm, and safe in the comfort of their home aren’t usually motivated. If they don’t have a moving deadline that they have to meet, why would they be?

 It’s better if they do not live in the house, and better yet, if they do not live in the same state. From an owner’s perspective, when they live out of state, their perceived equity tends to lose value. The further away they are, the less it seems to be worth. These owners can become very motivated because of the maintenance responsibilities and costs that come along with owning out-of-state property.

2. Are the mortgage payments current?

People that are not in financial trouble don’t tend to be very motivated, unless there is another motivating factor applying pressure on them. Things like bad tenants, or deferred maintenance can cause seller motivation.

3. Do they have a story?

This is the big one!

I’ve never met a motivated seller without a tale of woe. Dreadful things sometimes happen to good people.

If they call about selling their house and invite you over, there is a slight chance they may be motivated. If you’ve got nothing better to do, go take a look.

But, if they start telling you a sad story of what’s happening to them, pay attention.

Motivated sellers use words like “must, need, or have to” when talking about selling their house.

If they have a sad story about why they need to sell their house, get the car started and head over there.

How to “cut to the chase” if you think they are unmotivated.

If they seem gruff or overconfident on the phone, they may just be fishing for an offer.

Sometimes sellers (especially old guys) feel like they just must see what you’re willing to offer, so they will call and preface the conversation with something like…

  • “I don’t need to sell…”
  • “I’m just wondering what it’s worth…”
  • “You said you wanted to buy it, so drive by and call me back with an offer…”

You will at once know that the seller isn’t motivated and is only fishing for a high offer.

At that point, consider using my stock answer that cuts to the chase with those “I don’t have to sell” statements.

“Great, I’m in the business of helping homeowners that have either distressed properties or a personal situation that requires they sell their home quickly. Do you have a situation that I can help you with?”

This is the “put up or shut up” question. Say it very nicely. Then stop talking. There is no telling whether their response will be positive or negative.

A truly unmotivated seller will hang up on you before you finish the question.

PERFECT!

You just saved yourself a lot of time and effort, dealing with some crusty old bored curmudgeon that was once a used car salesman. They do love to negotiate over anything.

Finding motivated sellers is your primary focus, but you may first have to weed through some time wasters. If you get good at that, it will save you lots of time.

Why mass mailings aren’t best for finding motivated sellers.

Once upon a time they asked a famous bank robber, “Why do you rob banks?” His reply was “Because that’s where the money is!”
drawing of bank robber

His answer seems perfectly logical to me.

That’s why it seems illogical to mass market to every person that owns a property. I mean, it’s very common for people to market to “out of town owners.” The theory is that they are more likely to want to sell. I tend to agree with this, but when thirty different investors are sending the same stuff to the same set of people, it stops making sense.

The most successful mail campaigns will give you a return of around 1% if you are lucky. The larger the campaign, the more likely you are to have a hit on a motivated seller. That’s not very good odds!

Wouldn’t it make more sense to spend your time focusing on homeowners that are in a moment of pain?

It’s kind of like this…

Have you ever noticed that trauma doctors do not do mail campaigns?

Can you imagine if they did?

joke doctor ad

Trauma doctors don’t have to advertise, because they already know where the trauma patients are…

THE EMERGENCY ROOM!

No extra effort needed.

Now wouldn’t it make sense for you to go where the motivated sellers already are?

Where is this magical place you ask?

Your local courthouse.

Nothing happens in real estate if the county government isn’t involved. Every sale, mortgage, lawsuit, lien, eviction, and probate case are on file there.

Whether it’s the Court System, Tax Collector, or Code Enforcement, if something bad happens to a homeowner, this is where it happens. There are a couple of exceptions, one is deferred maintenance, but even that will eventually show up in Code Enforcement.

When you consider what a gold mine the county offices are, why would you ever send out a mass mailing?

Let me give you a few examples of what waits for you at the courthouse.

  • Burned out or inept landlords
    By searching the local eviction filings you will be able to locate landlords in distress. I have done my fair share of evictions, but the irritation factor never seems to go away. Imagine the mental state of an inexperienced landlord that doesn’t have a lot of experience. Don’t you think they could me motivated to sell, or at least partner with someone to take the management burden off them?
  • Foreclosures
    In judicial foreclosure states, this is the most-worked category. These poor people get stacks of “I buy houses” mail in the months follow the filing of the foreclosure action. The trick is to get to them before anyone else, and to do that you just need to check every day. Don’t say that you don’t have time! It only takes a couple of seconds to pull up the county website and look. If you check every day you will usually know about the foreclosure filing before the homeowner. If your mailing shows up on the same day as the process server, it’s a good sign for them to call you.
  • Probate cases
    People that own property die. Often their heirs do not want the property or are too far away to deal with it. They are a rich source of deals if you get to them first.
  • Arrests
    Whether they are guilty or not, people that own property get arrested and need funds to defend themselves. If convicted, they should be even more motivated to make a deal with someone. It’s not always bad people doing bad things.
    I have a friend that once imprisoned for an accident. He is a great person. I can’t imagine him every doing anything to hurt anyone. One night he had a couple of drinks at a cocktail party. As he and a friend drove home, he hit another vehicle and it wreck killed his friend. He lost everything and was sentenced to five years in jail.
    He didn’t own property but imagine someone in his situation that did. I’m sure that even if they didn’t want to sell it, they would love to have a partner to rent it out and take care of it during their incarceration.
  • Property tax issues
    Nonpayment of property taxes is good indicator that the owner may be in financial distress. This would be the only list I would consider sending a blind mailing out to. It’s not foolproof as some owners may just be procrastinating but keep an eye on them as they progress through the tax default system of your county. Some will eventually pay, while others may want to sell.
  • Code enforcement liens
    If there is a “bird dog” to find distressed property this is it. Depending on how big your town is, there is a good chance that you can’t drive every street there looking for distressed and vacant property. Why not tap into the “nosy neighbor network?” You can count on neighbors with nice houses to call code enforcement and complain when someone starts bringing the neighborhood down. Keep an eye out for anything related to code enforcement and it will pay off.

We’ve just scratched the surface of what kind of deals you can dig up at your local courthouse. I have lots of intricate details to share with you on this topic. If you’re interested in learning the do’s and don’ts of finding motivated sellers quickly and easily, click here to find out more about my next Motivated Seller Depot training!

how-to-invest-in-real-estate-with-no-money

How to Invest in Real Estate with No Money

Knowing how to invest in real estate with no money is the key to quick growth. Although there will be plenty of nay-sayers in your path trying to tell you that it’s impossible, I’m here to tell you that it is possible. And not only possible, but preferred.

“When you have no resources, you must become resourceful.”

I have always done my best deals when I was short on cash. I know a lot of investors that will say the same. Having a large cash stockpile is not always the best thing for you as an investor. Let me explain with a quick story.

The Tale of Two Investors

Once upon a time, in a town far away, there were two aspiring real estate investors. The first investor’s name was Lot Zamoney, and the second was Noah Credit. Lot had a fantastic job and excellent credit. He had amassed $100,000 in his retirement savings. Noah, on the other hand, was just starting out in life. He had a decent job as a carpenter's apprentice but did not have much savings and no credit at all.

Which is better, money or no money?

As Lot and Noah began investing in real estate, Lot had a much easier time. He found a real estate agent and they looked at all the listed properties. As soon as he found one that looked good, he put it under contract. When he called a mortgage broker and applied for a loan, the broker said that since it was an investment property, he should put down 20% to get the best rate. Lot agreed and put $40,000 down on the $200,000 home. It was a beautiful house, and with the 20% down payment, the payments were only $860. If you add in the insurance and taxes, Lot figured that it would just break even.

As Lot and Noah began investing in real estate, Lot had a much easier time. He found a real estate agent and they looked at all the listed properties. As soon as he found one that looked good, he put it under contract. When he called a mortgage broker and applied for a loan, the broker said that since it was an investment property, he should put down 20% to get the best rate. Lot agreed and put $40,000 down on the $200,000 home. It was a beautiful house, and with the 20% down payment, the payments were only $860. If you add in the insurance and taxes, Lot figured that it would just break even.

Rich guy

Lot Zamoney

After closing, Lot did some minor repairs on the house and rented it out. He started looking for another property to buy, and within a couple of weeks, he had found one. This one was only $180,000, and just as nice as the first one. He made a full price offer, the seller accepted, and he was back to the mortgage broker for another loan.

No Amount of Money is Enough

Lot called his mortgage broker and they put together an application for another loan. When the call came back from the lender, Lot was a little surprised. The lender said they could do the loan, but he barely squeaked by, because his monthly debt was too high.

They said that they would need 20% down and the interest rate would be higher this time, because the earlier mortgage had lowered his credit score. Lot asked why his monthly debt was an issue? He had leased the house at once and had a slight positive cash flow.

Income that doesn’t count.

The broker explained that even though the first rental was producing cash flow, the banks would not count it as income because it had not “seasoned.” They said their bank required the income stream to be a year old before it would count as income. Lot was at an impasse.  He had spent most of his savings on down payments, and now he could not buy another house for a year. Although he was unhappy about the situation, Lot resigned himself to a slow growth plan.

Noah’s Struggle

From the onset, Noah knew that he had a challenge. He didn’t have good credit or money, so he couldn’t get pre-approved for a loan. Without a pre-approval letter, the real estate agents did not want to waste their time showing him properties. If he were to make it as an investor, he needed to find a way to start without a loan.  Noah started to do research online and soon discovered a local REIA (Real Estate Investment Association) group nearby.

Within several weeks of joining the REIA, Noah discovered several ways to buy property without money and credit. He continued his research and took an inexpensive wholesaling course. 

Noah Credit

Noah Credit

One of the most important things that Noah did at the REIA meeting was to build relationships with hard money lenders, contractors, and rehabbers.

Overcoming His Obstacles

Over the coming months, Noah defined his target market and started sending letters and talking to homeowners living in the area. He studied Zillow, Realtor.com, and Craig’s List to see what prices buyers paid for properties. He attended open houses on the weekends to see what condition the retail homes were in and put out bandit signs.

When his marketing began to pay off, he was able to get a house under contract at a great price. He assigned the contract to a rehabber and received a $5,000 assignment fee. Over the next several months, Noah wholesaled several more homes, making $4,000 to $5,000 apiece.

Noah also studied hard and learned more strategies for doing deals. He soon discovered that he didn’t have any limitations because of a lack of money.  Rather, his limitation had been a lack of knowledge and skill. Once he discovered the concepts of owner financing, lease options, hard money lending, and partnering with others on deals, he blew the lid off his business. Over the next 12 months Noah marketed hard and bought house after house. Wholesaling some, flipping some by partnering with a rehabber and hard money lender, and keeping the ones that he could lease-option or had owner financing.

As a result of the work and study that Noah completed, and the drive he had to succeed, he set himself up to quickly become a full-time investor. If he continues this path, he will create a recurring income machine that will make him retire a millionaire.

The question you should ask is not, “how to invest in real estate with no money?” The question that you should ask is, “how do I become more resourceful?”

How to Invest in Real Estate with No Money...In real life!

Now that you know why being short on cash is not going to stop you, let’s look at some options for investing in real estate with no money.

The most important thing that you need to learn

Before we go any further, we need to talk about the one law you must obey. Following this law will save you time, effort, frustration, and embarrassment.

Only, Only, Only Ever Work with Motivated Sellers!

Not every seller is motivated, and if you talk to unmotivated sellers you are wasting your time.

How to find and determine motivation is a topic we do not have time for here. You can learn more about finding and working with motivated sellers here. Free Weekly Training Signup

Real Estate Wholesaling

Wholesaling is usually the best place to start out. It gives you the opportunity to work with sellers and buyers and learn how to manage a deal from start to finish. You can start with as little as $500, just know that you must act quickly once you have a contract.

The money you make from wholesaling will fund the small amount you need to do other deals. Learn more about real estate wholesaling here.

 

Seller Financing

Although every seller you meet will not finance the house for you, it’s an offer that you need to make on every deal. Before you go meet with the sellers, look them up in county records to see what they owe on the house. If there is a mortgage, make a note of the amount and lender. The fact that there is a mortgage on the property will make it tougher, but there are ways around this. One is to buy the property “subject to” the existing financing, the other is a “wrap-around” mortgage. We will discuss both a little further down.

As part of your discussion with the seller, you need to find out what is motivating them to sell. There are many factors that can cause motivation, and not all of them are because the payments are behind.

There are many reasons why a motivated seller might like owner financing.
  • The seller may have a large taxable profit on the sale.
    Just because a seller may be motivated, it does not mean they do not have money. The property may have issues that transcend money, a family member may be freeloading in their rental house. They do not have the heart to evict and cause a family rift, but they want to make the property go away. The freeloader may cause trouble if they know it is on the market, so selling to an investor is the best choice. If they finance for a couple of years, they can spread out the tax burden.

  • Some need a steady secure income.
    Some seniors would rather have $1000 per month coming in for years that having a huge pile of money. Nothing draws long-lost family bums out of the woodwork like hearing that a kindhearted aunt just got $200,000 in cash.

  • Others may want interest.
    Some sellers would rather get 5% on a 5-year loan that put it in the bank at 1%.

  • They are stuck on a high price.
    Sometimes people do stupid things like pay too much for a house. For some its not a problem, they take the hit and walk away. For others, the embarrassment of losing money on a bad deal can be too much to bear. Someone in their life is going to laugh and ridicule them.
  • For these people owner financing can work very well.
    Look at these two deals;
    $100,000 house with a 5% 30-year bank mortgage costs $193,256 including interest
  • $150,000 house with a 1.5% seller financed 30-year mortgage costs $186,356 total.
  • Can you see how you could manipulate the numbers to give the seller entirely too much for the house?
  • “I would gladly give you $200,000 for a $100,000 house. Just as long as I can give it to you with no interest, in $200 monthly payments.”                                                                                          Pete Fortunato
  • Finally, they just may not care.
    They just want it to go away. Sometimes the fear of the unknow, and the disruption in their life causes them to just walk away.

When trying to owner finance, the seller may want some down payment from you. This is best handle by doing a partnership with another investor if you do not have any cash.

Lease Options

Using a lease option will allow you to control the future appreciation of the property without buying it. A regular purchase option would work as well but would be a harder sell and cost money.

When you enter into a lease option agreement with a seller, there are two parts to the agreement. The lease, and the option. The lease controls the time frame and rules for the lease, and the option states the terms of the option, and the price for the property. (strike price)

If you use the proper lease option paperwork you will be able to sub-lease the property to someone else. This pays for your position in the deal, while you wait for your appreciation payday.

Hard Money Lenders

A lot of people fear hard money lenders because of the “interest rate shock.” When you read online that home interest rates are 4%, and then you hear that a hard money lender charges 12% it shocks your system. I hear it all the time, “it’s too much! they’re greedy!”

People will pay 18%+ on a credit card for useless junk but are not willing to pay 12% interest for a couple of months to do a flip with a $20,000+ profit.

Hard Money Lender

Hard Money Lender

When I first started in real estate home mortgage interest was 18%. People still bought homes.

Hard money lender may also add “points” to the loan. Points are added interest. 1-point equals 1% on a hard money loan. An example would be 1 point on a $100,000 loan would be $1,000.  

This causes the hard money lender to want to “turn over” his money multiple times a year. If he had a loan out at 12% interest for a year, he would only receive $12,000 in interest. If he adds two points to the loan, and loans the $100,000 two times, he would receive an added $4,000 in interest, bringing his true yield to 16%, if he has no downtime between loans. There usually is significant downtime in the lender’s money, and they struggle to obtain a 10% yield.

The hard money lender can be a huge asset for you. Here is a list of what a great hard money lender can pride for you.

The hard money lender can be a huge asset for you. Here is a list of what a great hard money lender can provide for you.

  • Speed
    A good hard money lender can close in just a couple of days. They have cash readily available to do your loan.
  • Credit score indifference
    They could care less what your credit score is. They are only concerned with the deal. They will want to hear an in-depth plan of what you plan to do to the property and what your exit strategy is. If you prove that you can perform, making money on your deals and moving them quickly, you will never have to worry about bank loans again.
  • Just remember that hard money lenders are for short term deals. They are best used for quick flips, or for doing rentals with the BRRR method (Buy, Repair, Refinance, Repeat). Generally, deals that will be over in less than a year. Something like a rehab flip that costs $150,000 but will make a $30,000 profit in 6 months. Paying $9000 in interest does not feel so bad when you are cashing a $30,000 check.
  • Experience
    New hard money lenders that get in the game without experience crash and burn quickly. If they have been a lender for more than a year, they likely have a good depth of real estate experience. Always take your hard money lender with you on your property inspection and pick their brain for ideas and strategy. You will learn a lot and they will be impressed with your willingness to take advice.

Private Money Lenders

The difference between hard money and private (soft) money is primarily length of term and interest rate. The private lender may be a self-directed IRA, a retirement plan, or even a family member or friend with a home equity loan.

Frequently the length of the loan exceeds 5 years and the interest rate could be in the 6% to 9% range. If you made a good deal on the property, it is possible to have a positive cash flow rental at 9% interest.

When using both hard money and private money, you will need to buy at a significant discount. The reason is that there is no safety net for them. If the market has a downturn, they do not want to be involved in an upside-down property.

Partnerships

One avenue that you should always be working on is partnerships. You need to find financial partners and cultivate relationships before you bring them a deal. You should also think through the deal structure carefully and get an attorney involved to write up an agreement. Thing are always good until they are not, and then it is too late.

Proceed with caution, I have seen a lot of these deals go bad, but I have seen just as many work out wonderfully.

In the words of John Schaub, “The greatest asset you can have is a financial friend or family, who understands what you’re trying to accomplish.”

Subject To

It is possible to transfer the title to property “subject to” the existing mortgage. It is a method that many people refer to, but not that many have done in recent history. It seems very straight-forward in theory, all you do is keep making the mortgage payments until the mortgage in paid off. In practice it can be complex, requiring a certain degree of secrecy to avoid the lenders “due on sale” clause.

Wrap Around

Another concept is the “wrap” mortgage. The idea in to leave a lower balance first mortgage in place and “wrap” another mortgage around it to finance the entire purchase price. The buyer sends a monthly mortgage payment to the seller for the “wrap” amount, and the seller continues to pay the original first mortgage. In some instances, the investor will physically pay the original first to protect themselves. They only send the wrap amount to the seller. This is another method that works well in theory, and not so much in real life.

So now you know how to invest in real estate with no money. By using the basic principles of real estate investing, and only working with motivated sellers, you can make your fortune without ever borrowing from a bank.

For those of you with a little money and the desire to take a slower, lazier approach, I have compiled a list of government mortgage programs that will help you buy with a smaller down payment.

FHA Loan
https://www.hud.gov/program_offices/housing/sfh/fharesourcectr

FHA Section 203(k)
https://www.hud.gov/program_offices/housing/sfh/203k/203k--df

USDA Loan
https://www.rd.usda.gov/programs-services/single-family-housing-guaranteed-loan-program

VA Loan
https://www.benefits.va.gov/homeloans/

HUD Section 8 loans
https://www.hud.gov/sites/documents/SECTION8HOMEOWNERSHIP.PDF

HUD Good Neighbor Next Door Program
https://www.hud.gov/program_offices/housing/sfh/reo/goodn/gnndabot

Local Grants & Programs
Check with your local agents

To learn more about real estate investing, sign up for my free book and weekly email training.

Enter your text here...

real -estate-option-handbook

Real Estate Options Handbook

Welcome to the Real Estate Options Handbook

Real estate options come in many types and uses. The purpose of this short post is to familiarize you with the most common real estate options and do it in such a way that you won’t fall asleep.

I will skirt most of the “legalese” and give you more “real world” info and examples.  I’ll explain them and go over some that you wouldn’t normally think of as real estate options.

Option Terms To Know

There are a couple of terms that you need to know with real estate options.

  1. Option consideration.
    This is the amount of money or something else of value traded for the option. I may be only a promise of something. Normally the option consideration is credited towards the sale if the buyer completes the transaction. There are a couple of instances where the consideration would be refunded.
  2. Strike Price.
    When working in real estate options, one of the most important factors is the price you agree to pay for the property. The "Strike Price" is the property sales price that the buyer and seller have agreed upon. 


The Purchase and Sale Contract.

This is by far the most common example of an option to purchase, but no one realizes it.

It has limited usefulness as an option, because the option becomes an agreement to purchase as soon as the inspection period is over. Some would argue that it’s not a true option, but for investor purposes…it’s good enough. Let me show you what I mean.

John the Real Estate Investor


Investor John was driving his farm area one day and noticed a new “for sale by owner” sign in a yard. Knowing that “fortune favors the bold” he stopped his car, got out and knocked on the door. A gentleman answered the door and said that they were selling the house and moving closer to the grandkids. John asked to look at the property and finally discussed price. There were a few misgivings about the house, but he didn’t want someone else to get to it.

He decided to put the house under contract, so he negotiated a little better price and had a contract signed. John couldn’t help but think “I wish I had more time to think about this deal. What can I do?” Suddenly a thought occurred to him, so he asked the seller “I’m leaving to go out of town for two weeks, are you good with a slightly extended inspection period?” The seller agreed and John filled out the inspection period for 20 days.

Was a Real Estate Option Created?

Did John just create a 20-day option to buy the property? I submit that he did, because John is using an As-Is contract that allows John to walk away for any reason during the inspection period.

There are a couple of other option possibilities for this contract.

The “Unintended Option”

Let’s suppose I gave you a written offer on your house. I filled out the contract but forgot to put a deadline for you to accept it. Unless I call you and withdraw the offer, I have effectively given you a “put option.” You now have the option to sell me the property at that price (which you will immediately shop all over town).

On the other hand, if you as the seller filled out the contract, and I put no inspection period or closing date (either one), I then have a purchase option.

I know, it’s a bit of a stretch, but it’s more to show you why you need to watch what you’re doing on your contracts.  

Be Careful With Contracts

I once had a buyer send me a custom contract for a property I owned. He said, “Just sign it and fax it to my title company and they’ll get to work on it.” It was kind of vague on the closing date, and I found this clause buried in the middle of the page.

“Seller agrees that closing shall take place no sooner than 60 days after such time as Buyer signs the contract and returns a signed copy to the Seller. Seller also agrees that Sellers agreement to sell is immediately binding and cannot be withdrawn.”

My first thought was, “You little stinker” but then I noticed that he had sent it in a Word file. So, in the words of Tim the Tool Man, “I rewired it!” and sent it to his title company. He wasn’t happy with my additions, but we did eventually come to an agreement and did the deal.

Read the contract carefully, in these days of you can change anything with a computer. I’ve had people try to hide all kind of things in contracts. Commissions, credits, all kinds of stuff.

The Lease Option

This is probably the most widely known of the real estate options. It was used extensively during the 2001-2007 run-up of the market. There are several uses, lets go over a couple.

Unfinanceable Buyers

There are a lot of reasons that buyers can’t get financing right now but will be able to in 1 or 2 years. If they are new to the area, new to their job, or need to pay down some credit cards to get their score up, then a lease option might look good to them.

The buyers can choose a house in a neighborhood they like and start living in it now. They can lock in an agreeable price up front and may even pay extra rent to be applied as down payment. On occasion the mortgage company will view their good lease payment record as an affirmation of their ability to repay the loan.  

Real Estate Investors

There are several ways that real estate investors utilize lease options to make money.

  • To sell a property at a “futuristic” price
    When a savvy investor lease options a property to a buyer, they will set the strike price at or above current retail. The contract may also include an annual increase of a certain percentage or amount, and a requirement that the optionee (buyer) pay additional yearly option fees.
    This guarantees at least some additional appreciation for the seller.
     
  • To lock in the price of a property at todays price and have a renter pay the bills.
    An investor with a bullish attitude about future appreciation will attempt to lease option as many properties as possible at the best strike price possible. Properly orchestrated, this plan could create a very large payday in a rapidly appreciating market, such as 2012 – 2019. A quick look at US median home prices shows that if the investor lease optioned a home for $220,000 on Jan 1, 2012, it would be sold $338,000 in December 2017. That’s over $100,000 profit.
  • To lock in the price of a property and then “sandwich” the lease option to a tenant.
    The “sandwich” lease option is named as such because the investor “sandwiches” themselves in between two lease options. It’s a scenario like this.

    Investor Steve lease options House A from the seller with a master lease with an attached option to purchase any time in the next five years under the following terms
    Strike Price                      $150,000
    Monthly Rent                   $1,200
    Security deposit              $1,000  
    Option Consideration     $0
    (Homeowners don’t understand option consideration, so he didn’t bring it up).

    Then Investor Steve lease options House A to a buyer under the following terms.
    Strike Price                       $175,000 plus a 3% increase per year
    Monthly Rent                    $1500
    Security Deposit               $2000 + last month’s rent in advance
    Option Consideration      $8,000 + an additional $500 per year renewal fee


The Investors Position

The investor is in a very good position at the moment.

He is making a $300 per month profit on the monthly rent, and he has already pocketed $8000 in option consideration. (it is my understanding that option consideration profits are not taxable until the option is either exercised or extinguished. Check with your tax advisor on this.)

He is in a good position. If the market drops, he can walk away…or so he thinks. He cannot “walk away”, he has a contractual obligation to sell House A to his buyer for $175,000. This can go wrong in several different ways, the most likely on being that the seller refuses to close for some reason, like maybe death. If anything happens the investor has a real mess to clean up. While doing sandwich lease options can be very profitable, I don’t recommend them.
If you want to really deep-dive into lease options, pick up The Secrets To Lease Option Profits by Mark Warda and Jack Shea.

The Purchase Option

Builders use real estate options for large transactions. It works like this.

Fred the Builder is having a great year. The market is booming, and his latest subdivision Fleabag Acres is nearly sold out. He just broke ground two months ago on his next 100 home project, Mosquito Haven, and already has a lot of presales.

Fred is concerned though. The available land inventory is drying up, and prices are starting to escalate. The cost of raw land has gone up 20% in the past year. If it keeps going up, he’s afraid that he will get pushed out of the market. He talked with his lenders, and he can’t purchase another tract of land until Fleabag Acres is finished and Mosquito Haven is 60% complete.

The Cost of Waiting


He knows that if he waits it will cost him hundreds of thousands of dollars. Fred decides to see if he can make something happen now. There is a large ranch about 2 miles outside of the prime building area that is for sale by owner. He contacts the owner and buys a 5-year option to purchase the land. His strike price is $3,000,000 and he agrees to pay the rancher $75,000 per year for the real estate option. He also agrees that the rancher can continue using the land at no charge, as this will keep the taxes on the land to a minimum.
Great deal for both.
He locks in his price for the future, and the rancher gets some extra income.

Purchase Back Option

This option would allow the seller to sell that property today and reserve the right to purchase all or part of the property back at an agreed upon price on a later date.

This works well when investors want to partner on a deal but keep it simple.

Johnny Nobucks finds a great deal that he wants to rehab and retail. He goes to hard money lender Friendly Frank (we actually had one that used that name) and asks to borrow the purchase and fixup money. Friendly Frank thought the deal was good but knew that Johnny had no bucks. Frank agreed to purchase the property in his company name and fund the entire deal. Johnny would provide all the repair labor, and then they would sell the house. They created a “contract for option” that allowed Johnny to purchase a 50% interest the property for $1 at the time of closing on the sale and paying off the mortgage that Frank had placed on the property.

It was a good deal for both.

As you can see there are many things that you can do with real estate options. They can be bought, sold, and traded. There are many more exotic types that I don’t see the need to go into here.

To learn more about real estate, sign up for my free weekly training emails below. You will also get notification when special training events become available.

Thanks,

David


Best Places to Buy Rental Property in 2020

Just like every year in the past, the best places to buy rental property in 2020 depends what you expect as a return on your investment and how much risk you are willing to take.

This is not going to be your usual “Best places to buy rental property in 2020” article, because those articles cannot consider your unique situation and preferences.

Right now, you may be saying “What the crap?”

I promise that if you give this article a read, I’ll help you find where to get the best rental returns with the least stress and risk.

Let me share a story with you to help you understand where I’m going with this (The names have been changed to protect the idiots…woops I meant innocent, or something like that).

John the Investor.

John is a real estate investor in Sarasota, FL. He has a fantastic job and wants to invest some of his extra income. John has watched the real estate market rise since its low after the crash of 2008 but was hesitant to buy. Watching several of his friends and family members take severe financial hits in 2008, he wanted to avoid that.

He watched and waited and waited and watched as the market climbed and climbed. Finally, in late 2018 he decided that 2019 would be the year. If he was going to jump onboard, he needed to do it now.

He had heard in the news that rental rates were at an all-time high, and that property owners were raking in the cash. It was extremely exciting.

Time to Pounce.

John started watching Zillow and Realtor.com for deals. He called agents and asked for help finding a good rental property. John looked at a lot of properties and studied what properties were renting for. He soon concluded that the market was saturated and overpriced! Where were all the good deals that he read about? Where were the $60,000 houses that rented for $1200 per month? He asked his realtor contacts about this, she said that those deals all went away several years ago, and the best he could hope for now was an 8% return.

More Bad News.

8% return? That didn’t sound so bad. He was only getting 1.5% at the bank. So, he questioned the agents further, “Where can I get an 8% return?” The agents explained that if he bought a $250,000 house and rented it out for $1,700 per month, he would get his 8% return.

John was more than a little shocked by their math. He had taken enough business courses in college to know that there was no way this equated to an 8% return. What about taxes, vacancies, and repairs? The agents told him that these were a normal cost of doing business, and that he would have to do his best to mitigate their effects.

A little disillusioned about the “pretty house” market, John started looking into workforce housing, properties in the lower 1/3 of the market. He did find that the numbers were a little better, and that he could get a 1% gross return on his purchase price per month, but that was the best he could find. $100,000 would bring in about $950 - $1,000 per month.

The 1% Rule.

He asked one of his agents about this and the response was, “That’s how the price of rentals is set, it’s the 1% rule. You take what it should rent for and multiply by 100 to get your asking price. In a good market you can sell anything using the 1% rule.”

It seemed to John that the great return numbers he had heard about were all from people that had bought in 2012-2015 and were now reaping the rewards of the market escalation.

He had missed it. The market had passed him by. What would he do now? Should he buy in now when the prices are high, and risk losing money on the downturn? Should he wait for the next correction and be ready this time?

Midwest Dream Deals.

John struggled with this for a couple of weeks and discussed it with his friends. One day a friend of his said he had heard that prices on houses were cheap in the Midwest. They were practically giving them away. People were buying houses up there for under $30,000 and renting them out for $500-$600 per month.

It was music to John’s ears! He could buy 3 or 4 houses and bring in $2400 a month!

He at once started making calls to agents in Detroit, Chicago, and Pittsburg. It took a few calls, but he finally found some areas where the homes were at “bargain-basement” prices. After setting up some showings, John took a couple of vacation days off and booked a flight to the Midwest to start his quest.

Reality Sets In.

He arrived in Detroit early in the morning, picked up a rental car and drove to the agent’s office for the first appointment. When he met his agent, the conversation wasn’t what he expected.

“Are you sure you want to invest in this area? It’s really depressed. There are lots of abandoned houses, and most tenants avoid this area if they can qualify for a rental somewhere else. The city has been considering taking the whole place over and bulldozing the homes.”

This was NOT what John wanted to hear. He had made the trip, so he pressed her to show him the properties. She was right, it looked like a war zone. Lots of boarded up homes and derelict cars. Tall grass and trash covered most of the yards.

As they drove, he asked the agent if there had been a big influx of investors buying houses. Her answer didn’t make him feel much better.

“Yes, we have had a lot of investors come to town, and some of them bought. What really got it started was a few “investors” came in and bought a lot of the properties and resold them with their own firm doing the management. A lot of people jump into buying “turn-key” investments, based on estimated numbers. Some of them do ok, but the vacancy and turnover rates usually kill any real profits. The only people making money are the management company and the repair people. Most of the investors are dumping them and leaving.”

An All Too Common Story.

The story that I just told you is one that I’ve heard far too many times.

It’s too high here, let’s go over there! The grass is always greener on the other side.

Long-time investor guru John Schaub has said many times,

“I won an award for owning investment property in 10 states. It was the worst thing I ever did. I should have saved my money and just bought the wall plaque for myself. My advice is to buy properties that you can drive by.”

I totally agree with John Schaub. If you don’t know the intricacies of your local market, how can you hope to know one that is thousands of miles away.

Florida has a long history of con men selling swamp land to unsuspecting northerners. Why shouldn’t we expect other places to be the same.

I want to share with you some of the immutable laws of real estate investing.

  1. If it is really a good deal, they should not have to go to another state to sell it.
  2. If it is still on the MLS or any other public listing after 30 days, it’s not a great deal.
  3. You will never know a market better than the one you’re in.
  4. No one cares for your assets like you, so buy houses you can drive by regularly.
  5. If you are not 100% certain who’s getting the shit end of the stick in a deal, you should probably go wash your hands.

Understanding the Problem.

I do understand the problem you are facing, as I’ve helped a lot of investors in the past find good deals. The primary issue is that the only deals that your agents are bringing you, and the ones that you are finding yourself are retail deals.

These deals are on the market in the hope of making a profit. It is almost impossible to get a great deal from someone that has no urgency to sell. There are still profitable deals in a hot market, you just need patience and a little training. With a little networking to find a real estate wholesaler, and some digging on your own, you will be able to find below-market deals in any area. People get tired, get lazy, or panic, and want to sell their home fast.

Here are a few reasons that people have sold me property below market in the past.

  1. Worn Out Landlord
  2. Inexperienced Landlord
  3. Drug Addiction
  4. Need $ For Attorney
  5. Pending Jail Time
  6. Divorce
  7. Probate
  8. Pre-Foreclosure
  9. Moving for Job
  10. Baby on Way, Need Bigger House
  11. New Grandchild in Another State
  12. Sick
  13. Old
  14. Tired
  15. Need $ for Nursing Home
  16. The List Is Endless

Take Back the Reins.

To make your market one of the best places to buy rental property in 2020, you will need to stop relying on an agent and take personal responsibility for your success. A lot of real estate agents have ZERO ability when it comes to marketing for and finding killer deals.

If they were to find a seller that was willing to take a discounted price, law limits them to certain fiduciary duties. If a seller asks them, “What’s my house worth, and what can you get me for it?”, your great deal just went out the window. For them to mislead a seller so that you can get a great deal runs counter to what they are taught (and I know, I’m a FL State Licensed Real Estate Teacher).

A real estate agent obtains the highest price possible for their seller (unless instructed otherwise), and the “best” possible price for their buyer. Training to be your “bird dog” and find low priced sellers is not part of their curriculum. Their fiduciary duty to the seller over-rides any desire to help you once they sign a listing.

Also, since they get paid a commission on the sale, there isn’t a lot of incentive to lower the price. Getting you to pay more protects their fiduciary responsibility to the seller and protects the commission.

Let’s look at this formula. It will help.

Higher Price = Higher Commission | Lower Price = Lower Commission

But I Use a Buyer’s Agent!

You may be saying, “I’m different, I use a buyer’s agent. They represent me!” That works in some instances, at least for a little while before reality sets in on them, and you.

While there are a lot of good buyer’s agents out there, be prepared to kiss a lot of frogs. When a brand-new fledgling agent starts their career, Investor Buyer’s Agent is one of the first things they want to do. It seems like easy money to them.  It’s safe, because at first there is no rejection. Every investor they talk to says, “Sure, find me a deal.”

It does not take long for them to realize that

  1. There are no smoking investor deals on the MLS
  2. The other agents say they are wasting their time
  3. They get embarrassed making Low-Ball offers
  4. They are not making any money

If you do find a great buyer’s agent, make sure you treat them well and be loyal to them. Another one may be hard to find.

How to Overcome the Problem

I’ll give you a list of easy things you can do to find better deals in every market.

  • Join and attend local real estate investor meetings.
    This is a wonderful place to find out what kind if deals are available and locate wholesalers and tradespeople that you will need in the future.
  • Google Search.
    Do a search for “sell my home in ---------“, and “sell my home fast”. Call everyone who has a “I buy houses” website. They will be getting some deals they may want to wholesale.
  • Social Media.
    Put it out on Facebook that you are looking to buy a house. When you get the inevitable onslaught of agents, just tell them that you are looking for a distressed deal and don’t want to waste their time. One or two of them may surprise you. A few of them are good at finding motivated sellers, and this is an effective way to find them.
  • Download a free copy of my wholesaling book.
    10 Steps to Becoming A Real Estate Wholesaling Rock Star!
    You may not want to become a wholesaler, but the book offers some insight into finding motivated sellers.

Download for Kindle
For other e-readers
Download pdf

Final Thoughts.

In the book, “Acres of Diamonds” the writer conveys the story of an African farmer who desperately wanted to be rich. After hearing stories of others discovering diamond mines and becoming millionaires, he sold his farm and went off to scour the African continent for diamonds.

He spent the rest of his life wandering the African continent searching unsuccessfully. Finally, worn out and in the throes of depression, he threw himself into a river and drowned.

The man who had bought his farm happened to be crossing the small stream on the property one day, when he saw an unusual stone in the water. He brought it home and put it on his fireplace mantel and forgot about it.

Sometime later a visiting friend saw the stone and almost fainted. He asked the farmer if he knew what the stone was. When the farmer said, no, that he thought it was a piece of crystal, the visitor told him he thought it was a diamond. The farmer didn’t believe it, as the creek was full of stones like that one.

In hopes of finding his fortune, the first farmer sold what turned out to be one of the most productive diamond mines on the entire African continent. He had owned acres of diamonds but sold them so that he could go and seek his fortune.

The moral of the story is clear.

Focus on finding the opportunity in your own back yard before looking elsewhere. If you take the time to learn how to find motivated sellers and good deals, you may find that you do not want to leave.

David P. Witte

To learn more about real estate investing, sign up for my free weekly email training in the form below.



Land-trust-cover-image

Real Estate Trust: How and Why to use a Land Trust

If the thought of a real estate trust makes you imagine a complicated morass of legal jargon and attorneys, have no fear. While all trusts have value, they are usually far more complex that what is needed in a common real estate trust scenario. Let's go over some trusts and see which ones you need as a real estate investor.

Trust Basics

First let’s go over some trust basics. While there are several different types of trusts, the basic structures are either revocable or irrevocable.

Revocable Trusts

Revocable trusts are created while the trust maker is alive and can be modified or revoked by the maker. Sometimes these are referred to as a living trust.

The trust maker transfers the title of a property to a trust, serves as the trustee, and could remove the property from the trust during his or her lifetime.

Revocable trusts are good for avoiding probate. Property owned by the trust at the time of the trust maker’s death usually will not be subject to probate.

Irrevocable Trust

An irrevocable trust is one which cannot be modified or revoked. Once a property is transferred to an irrevocable trust, no one, including the trust maker, can take the property out of the trust.

The Land Trust

A more simple and common form of real estate trust is the Land Trust. Its simplicity makes it easily utilized by the lay person.

Once a person acquires a complete and properly formatted set of trust documents (created by an attorney), it is common that they copy and reuse the documents for all future transactions.

Most investors only change the name and date of the trust, and the legal description of the property being placed into that trust.

This simplicity leads most investors to create a separate trust for each property.

A Little History

Records show that land trusts date back to at least the Roman era and are well documented in England in the 1500’s where they were used to hide land ownership to avoid military service. Henry VIII even passed a law in 1536 trying to stop the abuse. It became prevalent in the 1900’s in Chicago, IL. There city officials used land trusts to hide ownership of property so that they could vote on city projects. The Illinois supreme court upheld the use of land trusts later.

The Mouse and the Land Trust

Probably the most famous use of land trusts to hide ownership happened in central Florida in the 1960’s. Walt Disney started buying up vast areas of farmland near Orlando.

To ensure that no one knew he was behind it, and try to block him for their own gain, he used land trusts. It wasn’t until November 15, 1965 that he announced his plan, and by then the buying was done.

Today the Land Trust is used in thousands of real estate transactions. Florida enacted the Florida Land Trust Act in 2006 to legitimize and control the use of the trust. The current version of the law is located here. http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0600-0699/0689/Sections/0689.071.html

Several other states created laws regarding their use, so check your state. If your state does not have a law on the books, it doesn’t mean that it’s unlawful to use one.

Some attorneys will say that it is, merely because it’s not in their best interest for you to use one. Much better for them that you pay them to create a custom trust. (Probably better for you as well, but that’s a discussion you need to have with a licensed attorney.)

Why I like the Land Trust

I like using the land trust because;

  1. It keeps my name out of public records. Once you acquire a lot of rentals, having your name in public record as owner of the properties makes you a target for nuisance lawsuits. Any slip and fall attorneys are going to research your name before deciding whether it’s worth their time to file a contingency fee-based suit. It’s not a foolproof system, but it helps.
  2. The ownership interest becomes personal property when in a Land Trust.
    This means that ownership can be transferred without disclosure in the local courts. Any state taxes or fees due for the transfer are still due but are payable on the state level without local disclosure. This sets up #3.
  3. Ownership can be transferred in private. Once a land trust is set up, the trustee has rights to lease, sell, or encumber the property, and is listed on the deed and in public record. However, the ownership of the property lies with the beneficiary, who is hidden. A good land trust will mention the beneficiary as being listed in an attachment to the trust. (Such as “Appendix A”). This document is kept separate from the trust and not disclosed.
  4. Also, the transfer of beneficial interest is not required to have a notary stamp, as it is not recorded in court records. I’m not going to discuss it, but if you think this through, you may come up with some instances where being able to play the “shell game” with ownership rights and transfer dates might come in handy.

The Trustee

One of the best pieces of advice I have ever heard is “Have a Trustee you can trust.”

In a real estate trust of any kind a "trustee" is named to oversee the assets of the trust. In most land trusts the trustee has full power of sale or encumbrance, and it is usually stated on the deed. This allows the trustee to sell the property without producing the trust and a directive from the beneficiary.
Does this scare you? Well, it should.

Imagine if you made your cousin Larry the trustee of your trust. Everything rocks on nicely until one day you find out that Larry was arrested for buying drugs. Wow, he had kept it hidden and no one in the family even suspected. What he had also kept a secret is that he had borrowed money on the house and spent that money on his habit. Don’t laugh, it can happen. And now the beneficiary (you) will have to sue and let the court figure it out.

Shaky Advice

A lot of gurus will tell you that you need a trustee that is out of state or living under a rock. Their thought is to keep the trustee from being discovered. They will say that it’s good “asset protection.”
They say that if you get sued, they will have track down your trustee to serve the subpoena. While that is going on, they say you transfer the trusteeship to someone else.

In the real world it doesn’t quite work that way. I’ve never met a judge that liked playing games. When faced with the possibility of jail time for contempt of court, your trustee, Aunt Mable is going to spill her guts and tell everything she knows.

The other concern with distant and disconnected trustees is the question, “Who’s collecting the money?”

The first question that an attorney is going to ask the tenant/plaintiff is “who did you see on a regular basis?” Those are the people who will be subpoenaed, and deposed. If you show up and manage the property, the finger is going to point at you, no matter how much you try and hide. Being charged with perjury wouldn’t be much fun.

Then come the issue of rent collections. Most people pay rent with a check, and to do business you will need a checking account to cash those checks and pay for repairs or expenses. Banks don’t like opening accounts in the name of a blind trust. They want to know all the parties involved. If you have to disclose the beneficiary to get a checking account, you have created that paper trail that the attorney is going to be looking for.

Another issue is insurance. I have spoken to multiple insurance companies, and I can’t find one that will issue an insurance claim payment check in the name of the beneficiary. They all say they issue to the trustee.

So how do you get around all these problems and still hide in the shadows? You Don’t.

Your Corporation as Trustee.

I’m not an attorney or CPA, so this isn’t legal or tax advice, but I can say that this is what I do.

Forget about the shell game. Make your life simple and start operating in the sunlight.
When I asked my attorney what the best asset strategy was, he said…
“Have good insurance, a corporation, and don’t do stupid shit!”

By creating a corporation to act as your trustee, you can bypass a lot of day to day issues.

  1. Income and expenses
    As an officer and employee of the corporation, you can handle the day to day operations. You can collect funds, manage the property, and whatever else you need to do. All income and expenses are held separate from your other properties. If the corporation is properly structured by a legal professional and properly maintained, the corporation should offer protection to your other assets. (Please check with your attorney for best structure)
  2. Receiving income without a paper trail to you as beneficiary.
    The IRS likes to see individuals that receive income have a balanced portion of it in the form of payroll income. By making yourself an employee of the corporation, you can receive profits and have a good excuse for doing so. If not, how do you justify receiving compensation from the trust? As a property manager? Are you licensed as a property manager?
    Obviously, there are ways around it, but why bother?
  3. How can you maintain anonymity?
    If you’re a nervous Nelly, you could maintain some level of cloak and dagger by using a Delaware, Wyoming, or New Mexico corporation. These states do not publish the names of members of the corporation. Are they bulletproof? Of course not. But they will keep the average person from looking you up. For a more thorough breakdown, check out this Regular LLC versus Anonymous LLC breakdown. Are they automatically suspect? Probably.

If you would like more resources and information on Land Trusts, contact me at david@davidpwitte.com

  To learn more about real estate investing in general, sign up for my free weekly email training below


REIA-handbook

REIA: The Real Estate Investor Meeting Handbook

Your local real estate investor association. How to find one, and how to make the best use of your time there.

Why join a local REIA?

When I was a young man in Central Florida, I struggled with getting educational materials on real estate. I took the real estate exam and got my license, but I really wanted to build a portfolio of properties.
I was tough. Where could you get money to buy? I had a good relationship with the bank, but their rules were very tight on what they would loan on. They wanted the property in perfect shape but buying nice properties didn’t make financial sense. I made some headway, but not a lot.

Eventually I move to a larger town, and one day a friend introduced me to a real estate investor association. It really changed everything. They information that was available was overwhelming. I discovered new strategies, met investment teachers, and learned how to work with other investors and hard money lenders to get deals done. It made a huge difference in my career and made me the investor that I am today.

If you are an aspiring investor, one of the hardest things to do is to gain the contacts that you need to do business. Also, learning your local market conditions and best neighborhoods can be confusing.

Sizes of REIA’s

By seeking out and joining a local real estate group, you will be introduced to like-minded individuals. The participants range from newbies all the lay up to crusty old hard money lenders. A well-established group may have several hundred, if not thousands of members. In a well-established group depth of experience in the room is hard to duplicate in any other setting. Some groups are smaller, and some are merely Meetup groups that get together without a defined structure.

How to Find a REIA

A lot of the larger groups are members of the National Real Estate Investors Association, and this link is a good place to start looking for a group in your area. https://nationalreia.org/find-a-reia/  If that doesn’t get you anywhere, do a google search for “reia near me” or “(insert your town name) reia. Finally, is Meetup.com, it won’t be a structured group, but you will meet some people. If you are interested in starting your own real estate investor group, email me at david@davidpwitte.com and I’ll help you along.

REIA Financial Structures

There are two basic types of REIA

  • Non-Profit
  • For-Profit
The Non-Profit REIA 

The Non-Profit REIA is usually set up as a 501c3 Not for profit corporation. The goal of the group is to serve the members, and members customarily rotate as elected members of the board of directors. Excess funds collected from dues or other activities are customarily used for member activities, parties, and training opportunities. Anything left over may be donated to an appropriate charity.

The For-Profit REIA

The For-Profit REIA is usually a for profit structure of some kind. The goal of the group is to create a profit for the owners, who are customarily the permanent members of the board of directors. Excess funds collected from dues or other activities are customarily distributed to the owners.

Which is Best?

You’ll have to choose that for yourself. The For-Profit REIA may possibly be more proactive with scheduling activities such as training days to create income, but you have to wonder if the Non-Profit REIA may have your best interests more in mind. The best way to find out which one your REIA is, is ask.

What to wear to a REIA meeting?

Business casual is the normal dress code. However, you will see a range of attire. A real estate attorney may show up in a tie, and a local handyman may come straight from the jobsite after work. What you wear should reflect the image you want to portray. People still make snap judgements about other people based on their initial reaction.

It’s kind of like this….

I go to the courthouse on a regular basis to make deposits, pay for auction that I win, file evictions, etc..

I normally wear dress pants and a shirt, or sometimes nice shorts. When entering the courthouse, everyone is required to empty everything from their pockets and pass through the metal detector.

If you are filing an eviction, the clerk prepares the paperwork, then hands you a receipt and tell you to go to the cashier, pay, bring back the receipt, then she will file the papers.

One morning I happened to be going to a meeting and had decided to wear a suit and tie. One the way, I ran by the courthouse to file an eviction. Upon entering the front door and approaching the security area, the deputy standing guard waved me around the metal detector and said to come on past. I walked up to him with a puzzled look on my face and asked why. It turns out that he assumed I was an attorney on my way to court. I explained that I wasn’t, we had a chuckle, and back I went to the security line.

When I arrived at the clerk’s desk, she took the papers and immediately processed and filed them. She then handed me my copies of the filed documents and a bill for the $300 fee for me to pay on the way out. She didn’t even mention that I should pay, she just assumed I would and said, “Have a nice day!”

Two entirely different experiences at the same place. The only difference was the suit.   

A Word of Caution

One thing to consider when you are going to a REIA as a new investor is that not everyone in the room has good intentions. While most people that you meet will be of the highest character and more than willing to help and offer advice, there may be a few bad apples.

I once had a crusty old hard money lender give this piece of advice about going to a new REIA;

“When you go to a new group for the first time, take a note pad and a pen with you. When they ask for visitors to introduce themselves, stand up and give them your name. Tell them that you are brand new to investing, that you just came into some money and want to get your start.”

He paused for a moment, and I admit, I was a little puzzled. But then he continued.

“After the meeting, stand around by yourself. Most people won’t say much to you, maybe just “Welcome” or something like that. The ones that do come up and strike up a conversation about deals or money, you’ll want to write their names down.”

He paused again long enough for me to ask “Why?” Then replied...

“Cause they’re the sharks. If there's new blood in the water, the sharks always come and circle first. Write down their names and don’t do business with them without checking them out first.”

He had a harsh way of putting things in his slight Irish accent, but I can’t think of a better way to get the point across.

Getting the most out of it.

To get the most out of the group, you need to create relationships. Ask questions and listen. Everyone in the group has some knowledge to share, and are usually happy to do so. When someone announces to the group that they have a service to offer, be it repairs, deals, or hard money, be sure to write done their info. Then ask around about them. One note on this...when you inquire as to someone's character or value, do it with members one-on-one. If you ask in a group setting they will give you a whitewashed version of their opinion. Ask in private to get the real scoop.

Final Thoughts.

If you want to make it in real estate investing, having a group of other investors to associate and draw strength and ideas off of is almost a requirement. Most of your family and friends aren't going to understand what you're doing, so any attempt to share your wins or failures with them will feel hollow. Standing in front of a group of people that understands what you've accomplished always feels best.

That's all for now. Go find or create a REIA. If you need help, email me.

David

To learn more about real estate, sign up for my free weekly training emails below!


Investment Realty

Investment Realty: Choosing the Right Firm for You

Choosing the best investment realty company for yourself is a decision that shouldn’t be taken lightly.

Should you go with the biggest firm in town?

Maybe not, for a couple of reasons. First, at the big firm, you’re just another client. You most likely will get passed of to the “newbie”, so that they can get some experience. And if somehow you do get one of the top salespersons, you are low on the pecking order. They have clients that they have sold to for years. You can bet they will get first crack at any hot deals that come up. You are going to be at the end of the line, picking up the scraps.

joke-real-estate-agent

Maybe a smaller firm?

Your chances of being the biggest fish in the pond increase, if you go to a smaller pond. But then you still need to make sure that the agent that you work with has the depth of experience that you need.

I am a Florida Licensed Real Estate Teacher and Broker. I can assure you that holding a license to sell real estate does not make you a real estate professional. The state requires that agents be “minimally competent “with regards to real estate regulations. The curriculum barely brushes on investments.

Go it alone?

For this reason, many real estate investors choose to “go it alone” when searching for good real estate deals. I commend them for that. No one is more focused on your needs than you are. However, if you are not an old hand at real estate investing, there is a huge learning curve ahead of you. I’ve watched a lot of investors make deals that look good at first blush, but they didn’t have the experience to “see behind the curtain” and lost money.

So, What Should You Do?

If you have the time and desire, learning the ropes yourself is always a good long-term play. If you’re young and just getting started, it will pay big dividends later.

But let’s suppose that you don’t want that. You may have a great career that keeps you extremely busy, and time is money to you. Or you may a seasoned investor that’s working a new area and needs some input from a local agent.

If either of these is the case, I recommend the following.

  • Go to a few of the older, medium sized firms.
  • Ask for a list of their agents who have been licensed more than a couple of years
  • When interviewing each, ask how many properties they own.
  • Ask them for specifics, like what kind of return they are getting, and how long they’ve owned
  • Ask what kind of returns they expect to get for you.

The downside to dealing with any agent that is also an investor is that they may poach a great deal before it gets to you. That’s just a cost of doing business and should be less likely at the smaller firm. One way to mitigate against it is to offer to partner with the agent on deals. If you can find a real go-getter and play your cards right, they can make you a lot of money.

If you have any questions email me at david@davidpwitte.com

To learn more about real estate, sign up below for my free weekly training emails.

If you wish to talk to me about representing you as an agent in the Sarasota and Manatee county area, please note that I am affiliated with Florida Internet Realty, LLC and a Broker Associate.

David P. Witte
Licensed Broker Associate
Florida Internet Realty, LLC

David P. Witte, LLC
Licensed Real Estate Instructor
Real Estate Investing Trainer
Real Estate Investing Coach
Real Estate Investor

Cell 941-504-7807
Office 941-870-4351

Florida Internet Realty, LLC is a Florida licensed Real Estate Brokerage.
Our office is located in Sarasota, Florida at; 3236 Southgate Circle Sarasota, Fl. 34239
Stephen C. Rider, Principal Broker

Disclaimer: I am not a licensed attorney, nor a licensed CPA. All statements made above are to be considered opinion only.


Equity Real Estate Deals

Equity Real Estate Deals: Make money before you close!

If you are looking to build lots of equity into your real estate deals before closing, here is one trick you should know about.

Options:

There are a couple of ways to build a high equity deal, one being to get a better price. However in real life, getting someone to give away tens of thousands of dollars in real estate equity is a hard sell. I feel that it's much easier using the option.

Let me tell you a story to explain how they work.

John is a dairy farmer. He owns 500 acres of land just outside of town. The land has been in the family for 4 generations and his great granddad started the dairy farm.

farmer

Over the years the new home subdivisions have been creeping slowly towards his dairy farm.
One day he gets a call from a large home building company and they ask if they can meet with him. The next day a few men in a new SUV show up, look at the land and tell him that they would love to buy his property for a new subdivision and golf course. They say they’ll pay top dollar. He’ll be rich, he can quit the dairy life, and they say they’ll even name the subdivision after his family. They say that they’ll give him as much time as he needs to shut down the dairy. And they say they’ll pay him what he would have made from the dairy until they close.

Sounds like a great deal doesn’t it?

The Downside for the Seller:

There are a couple of issues that could come up for John.

An option is an agreement to buy the property for a certain price, some time in the future. Usually a clause is included allowing the buyer to extend the time frame. Big housing corporations do this all the time to tie up huge tracts of land when the market starts appreciating quickly. This locks down the property so that no one else can buy it and lock in the price.

They will go to a farmer and make an offer to buy their property for what the farmer sees as a great deal in the present. The trick is, they tell the farmer that he can still use his land. They are going to pay him a yearly amount (the option consideration), he can stay on the land, and they will buy it soon.

Usually the sellers don’t really consider the big picture of what they're getting in to. They see a multi-million dollar payday when the closing comes, and a check for a yearly amount that could be over $100,000.

What they don’t see is the potential downside. The market is hot and going up, and the seller will miss any future appreciation gains from holding the property.

One Sided Agreement

Another big issue is the very real prospect that the sale may never happen. The option is only binding on the seller, which is why it’s called an “option.” The buyer is buying the “option” to purchase.

Let’s look back at John’s situation for a moment. Let’s say that he took the deal and started to shut down his dairy operation. He’s all excited, telling his friends he's hit it rich. It takes a while to get everything shut down, get all the cows sold and start the cleanup. A couple of years pass, and John has the dairy shut down, started taking some vacations on his option income, and started looking at houses to buy when the deal closes.

This is when things start to turn for the worse. New home sales slow and inventory starts to pile up. John doesn’t really take note of it, he’s just waiting on next month so that he’ll get his option renewal check. One afternoon the phone rings, and on the other end is the home builder’s attorney, who explains to John that the builder decided to cancel plans for the subdivision and golf course.

Now what?

Sadly enough, John has no recourse. And he’s in a bad situation. The cows are gone, and the dairy is shut down. The price of raw land has been dropping, and no one is interested in buying a 500-acre farm. He spent the money that he got from the sale of the cows, so he can’t start the farm back up. He’s left with two choices. Either sell the 500 acres at a bargain-basement price or divide it up and try to sell off smaller parcels individually.

If John had held out for a real offer instead of taking the option, he would have been much better off.

For the builder it was a great deal. He locked in a good price on the land and protected himself from the downturn.

How is all of this going to help you?

You are most likely not buying 500-acre farms to build subdivisions, but you can use some of the same tactics in your real estate business.

In most cases it wouldn’t make sense for you to just buy an option on a house. It would be a drain on your cash flow and the seller may damage the house. How can you get an option and get the seller to leave?

The Lease Option

The best way to accomplish this is with a lease option.
A lease option works because you are going to lease the property with a master lease that allows you to sublet the property. You lease it, get an option for a good sales price, then lease it to someone else.
This could work extremely well for resort area properties that could be rented out as Air BNB or vacation rental. If your lease was for an annual rate and then did vacation rentals, the extra profit would be in your pocket. Also, the likelihood of the property appreciating is greater. This could make you tens of thousands on a future sale.

Control Without Investment

Another great thing about lease options is that it allows you to have control of the property without a large investment. If the option is in place, they cannot sell the property. You can draft an option that requires your approval before they can alter the financing.

This can create some interesting scenarios for making money without ever closing on the property.

BEN 

Let’s say that you found an inexperienced landlord named Ben. Ben had purchased a 3-bedroom house in a good middle-class rental area a couple of years ago. It was a good area, but Ben was doing a poor job as a landlord. He wasn’t very thorough in checking out his tenant applications and had already had to do two evictions and had lost several months of rent. As a result of this, he had been pulling money out of his own pocket to cover the mortgage payments.

You meet with Ben and offer to help him out by lease-optioning the house for five years. You set a target sale price that would give Ben a small profit over his purchase price. Ben agrees, and you lease for enough to cover his expenses, and you give a $1,000 security deposit and $1,000 option consideration.

You immediately go to work and find a quality, qualified tenant and lease to them at a small monthly profit. If you did your job well when qualifying the tenant, and are a good landlord, you will not have a lot of turnover (I go more in detail on choosing tenants in my landlord training course. Email me for more info).

A couple of years pass by and the market is heating up. Home inventory is low and selling for a premium. Ben had given you an option to buy the property for $120,000, a $10,000 profit for him. One day you get a call from Ben, who tells you that someone had approached him with an offer of $180,000 for the property (no pie in the sky, this is based off 2014 to 2017 appreciation numbers in FL).

Ben is very irritated that he allowed himself to get into this mess and feels that you took advantage of him (almost always happens).

You calm him down and explain his options:

  • You can close on the property, then sell it for $180,000 or more on the MLS.
  • You could assign your option to someone else for a very large fee, and they would close on it.
  • You could find a buyer and do a simultaneous closing and pick up $60,000 for yourself.

But you let him know that you are a fair person, and you understand his situation and want to do the right thing. You offer to sell him back the option for $20,000 at the closing of his $180,000 sale.

Ben doesn’t like it, but it’s the best option that he has.

This is just one possible scenario of what can happen with a lease option.
The market could go down instead. If it did you could step out of the purchase deal at any time. The lease may be a little stickier, but I put a 30-day lease cancellation clause in my lease that gives me an out.

Important considerations 

When doing this type deal there are some thing to be aware of.

Other investors:
A savvy real estate investor would want a large option consideration and a large deposit, but the average Ben will be more flexible. When you are new in this game, it’s always best to do business with other people who are new. An old real estate investor with years in the game didn’t get there by being naive. You may think that you have the upper hand on them, but that’s what they want you to think. Usually it’s because you missed something, and they will spring it on you later if needed.

 

Option consideration amount:
One thing to note about any option consideration paid. If you eventually buy the property, it is credited towards the purchase price. If you don’t buy, you lose the money.

This is a good reason to keep the option consideration as small as possible. If someone wants more money in the deal, give them a larger security deposit, not more option money.

Be careful of the double option:
I have known investors in the past that have done a “sandwich” lease option. This is where the investor lease options the property from a seller, then immediately lease options the property to a buyer. The investor attempts to charge the buyer a higher monthly rate and more option money than he paid the seller.

This sounds like a great deal for the investor, but I’ve seen it go wrong before. Usually it all goes well until the end, when the investor tries to get the timing of the closings right. If the closing is set for a certain day and the buyers mortgage is postponed, the investor has an issue. If he cannot get an extension, he could possibly lose the deal, and his option consideration.

If for any reason the seller doesn’t close, then the investor is very likely to be sued by the buyer for damages, and possibly be accused of fraudulent business practices by the state attorney.

I think that it’s better to be safe and stick with a single-sided option. That will keep you busy enough.

If you enjoyed this, please like, link and share!

For more on real estate, sign up for my free weekly training below, or email me to talk about getting into my EZ Real Estate Cash Training. It will set you on the right path for real estate success!

Email- david@davidpwitte.com

Hard Money Lender

How To Find A Hard Money Lender

I just want to offer some insight about finding and working with a “Hard Money Lender,” and you first interaction as a new investor with a hard money lender.

You know, that’s one person that you’re really going to have to come to terms with, you need to find a friendly, hard money lender that you can do business with long term. The best thing you do is go to a REIA (real estate investor association) meeting and find one there. That’s the easiest place to find one. Another good place is to check with local real estate attorneys and CPA’s. If there’s a lender in town, they’ll know about them. Also check the local courthouse and look at mortgage filings and look for individuals or small company names instead of major lending companies.

Sometimes lenders are a little standoffish because they’re concerned about the return of their money. I think it was a Will Rogers that once said, “I’m more concerned with the return of my money than I am with the return on my money.” So they’re going to be a little skittish. They’re going to be a little bit standoffish and you’re going to have to develop a relationship with them. You’re going to have to convince them that you have the mental tenacity to do a deal from start to finish because, that’s the first thing they want to know.

Your plan?

Their big question is, if they give you money, are they gonna get their money back, and when. That’s like the most important thing to them. So you’re going to have to put a solid business plan together and the faster you can get their money back to them, the happier they’re going to be. They don’t want to hear, you know what, if long term, you know, if something goes bad, we’re going to be in this thing for five years. They want to hear how you’re going to turn it around in six months guaranteed. So first thing you gotta do is obviously you gotta have a good deal. If you don’t have a killer deal, it’s not going to fly. And that hard money lender is going to know it because he’s been in the business for a long, long time. Second thing is you’re gonna have to have solid, solid after repaired value numbers on this house.

They want real numbers.

Not what you think, but what you can prove. And they need to be conservative because hard money lenders don’t want to play with possible appreciation during the time you’re holding it. They want to know what works right now and if it was fixed, what would it be worth right now?

That’s the most important thing, the solid numbers that you give them when you start talking to them. They got to be based on today, what the market’s doing right now and they’re going to look for a little bit of leeway for if the market drops 5% during the time they’re holding.

So don’t expect to come to a hard money lender and say, “I think that by the time we get done with it, the market is going to go up and under so many percent. You know, the longer we hold it, the better it’s going to get.”

They don’t want to hear that. They want to hear what the numbers are now, what the numbers are going to be, how good you are, and how you can pay for it.

Have some referrals, or impress them.

If you have some referrals, talking about deals you’ve done in the past, that’s great.  But just starting out, you’re not going to have that. You’re going to have to find some way to prove your worth, so to speak. The best way to prove your worth is knowing your numbers. On a wholesale deal, and you’re not doing a rehab on it, it makes it a lot easier to get the hard money lender involved, because he’s not looking to you to get the fix up done. He’s basically a backup just in case your wholesale deal falls apart and he’s looking to see if the deal is good enough that he would want it for himself if it didn’t resell.

First deal has to be smoking good.

That’s how it works. You’re not going to look for him to go in and partner a rehab.

If the wholesale deal starts falling apart, and he decides that he’ll back you at closing, it’s going to have to be good enough deal that within a week or two you could find another buyer and get his money back.

Relationship is key

That’s the crux of the situation.

  • You’ve got to find him.
  • You’ve got to set up a relationship with him.
  • You got to talk to him, and more importantly, you’ve got to listen to him.

I say him, but I know several nice ladies that are hard money lenders. They’re usually tougher than the guys, because they’re serious about their money. The guys can sometimes be a little more benevolent, because they want to help get you started and that’s one of the things that you need to key in on.

If you can find a hard money lender that will mentor you, he’s going to feel more comfortable because you’re listening to him, you’re playing by his rules and you’re going to learn a lot from him. Usually these guys, if they’ve been in business any time at all, they’ve been in business a long time. Because hard money lenders either crash and burn pretty fast, because they didn’t have enough experience when they started out, or they got a lot of experience first by going through the tiers of being an investor, and finally made to hard money lender. By that time they really know what’s going on, and they can give you a lot of information.

Take them to the house, then for coffee.

Walking the lender through the house is of upmost importance. You wouldn’t try and sell someone a used car over the phone without them seeing it would you? So don’t try to do your first few deals over the phone. Preferably take the lender there, don’t meet there, and then take them to lunch or coffee afterwards. Ask them their opinion, take notes on what they think. They will provide value, but also you will be making a good impression as a borrower. I can assure you, if a lender thinks you are bull-headed and unreasonable, they won’t lend you money.

So have good numbers, get a conversation going, listen to them, do what they say. You’ll find that the hard money lenders can be your very, very, best friend. It just takes a little bit of time getting to know one. It’s like anything else, it’s almost like dating a girl. She’s not going to marry you on the first date, it may take a little time to get a lender to be willing to invest in you.

If you want to get more good stuff, sign up below for my free weekly email training.

Thanks

Real Estate Market Predictions Guide

How to Make Real Estate Market Predictions

How to Make Real Estate Market Predictions - If you want to predict where we are in a real estate market cycle at any time, you should learn to read the economic indicators. In this real estate market article J. Scott shows us how to read the indicators and make judgments for ourselves. 

The information within is a transcript of a seminar that J. Scott gave to investors,  which he gave me permission to record. 
Mr. Scott holds an MBA, and is a successful real estate investor and co-host of a top rated Bigger Pockets podcast. 

About J. Scott

What I’m presenting today is mostly data and my interpretation of the data. No doubt, some of you are going to disagree with some of my interpretation of the data. Great. I brought my wife, she's here, she'll tell you how often I'm wrong. So, there should be no surprise if you disagree with my interpretation of the data, and I’d be happy to discuss it. Now quickly about me. My wife and I moved to Florida with our kids about three months ago. So we're new to this area. We have a tech background. We both spent most of our careers in Silicon Valley in the tech world.

We moved into real estate back in 2008. We started flipping and from flipping we went to rentals. We've done notes, we've done new construction, we've done a little bit of everything. We’ve done over $60 million in transactions over the last 10 years. If I'd known about Pete Fortunado a few years earlier, that would probably be double or triple by now. But, I'm a slow learner. I've written four books and my wife and I do in podcast called BiggerPockets.com business podcast. So, anybody that's interested in entrepreneurship, and if you're real estate investors, you should be interested in entrepreneurship, feel free to tune into our podcast. Based on number of downloads, we're in the top one 10th of 1% of all podcasts in the world.

I don't sell anything, but I will sell my wife, and then you can make her an offer. My wife is helped me write all these books, but she was instrumental in writing this one. It’ll cover negotiating real estate. She's the best real estate negotiator I've ever met. She has her own boutique brokerage. She does staging, she does design, she does consultations. She mostly focuses on higher end stuff, but always happy to work with investors. So, if anybody needs a great broker, a great designer, a great stager, somebody to help you negotiate or just consult, get in touch with my wife, Cal Scott.

What we are going to cover.

Okay, so let's jump in. First, we're going to talk about why understanding the economy is important. We're going to talk about what an economic cycle is and just go into a little bit of history about economic cycles. We're going to talk about where I think we currently are in the economic cycle and I'll have the data and other information to, uh, to back that up. And then finally we're going to talk about how we as real estate investors can take advantage of at different points in the economic cycle, and use that information to increase our profits, minimize our risk, minimize our headaches. How we can change up our strategies, our tactics, at different points in the cycle, especially the point that I think we're in now, to improve our real estate business.

Understanding the Economy

So first let's start with what an economic cycle is. Why is this important? Why is this whole topic important? First of all, anybody that started investing around 2008, or start paying attention around 2008, probably thinks that economic cycles are driven by real estate. That when real estate goes up, the economy goes up. When real estate crashes down, are there lending issues? The economy goes down. That happened in 2008 but historically that hasn't been the case. Historically, real estate isn't the thing that drives economic cycles. Real estate gets dragged along through economic cycles. In 2008 yes, it was massive lending crisis, a massive real estate crisis that caused the downturn. Go back to 2001 and it was the attach of 9-11 caused the downturn, and back to the late eighties it was the savings and loan crisis.

Back to the 70s, it was oil go back all the way to the 30s and we're talking tariffs and wage issues. So, lots of things cause economic downturns and upturns. Real estate typically isn't the cause.

It's important to understand the economy, because the economy impacts real estate more so than real estate impacts the economy. And again, there are going to be exceptions. 2008 was an exception, but typically speaking, the economy is going to drive real estate more than real estate drives the economy. Generally real estate is a trailing economic indicator; however, housing starts are a leading indicator. So basically, what that means is what we see in real estate, the data, the impact on real estate is generally three to four months, about a quarter behind what we see in the broader economy. When we see the broader economy start to crack, when we see issues, generally, we're going to see those same issues about a quarter to four months later in real estate.

Historically, everything I talk about today is going to be based on history. I'm a big believer that history is the best predictor of the future, but there's always going to be exceptions. And we're going to talk about some exceptions that we're seeing today. We're going to talk about some exceptions we've seen in the past. So, everything I talk about is historically accurate, which means it’s a pretty good chance that it's going to be accurate to the future, but there's always exceptions. So historically, real estate is a lagging indicator to the economy, and understanding cycles are going to allow us to maximize our profits, minimize our headaches, minimize our risk as real estate investors. If we understand where the economy's going, if not in detail, just in general terms, we can modify our strategies, we can modify our tactics to help us improve the way we invest in to minimize your risk.

The Economic Cycle

Let's start with what is an economic cycle. So, we have this little curve. The up part of the curve, that's what we call an economic expansion. The economy's going up and I want to go over what drives an economic cycle, because once you understand this, it kind of makes it a little bit easier to everything else. There are only two big factors that impact an economic cycle. Lots of little stuff, but two big things that impacts economic cycle. One is inflation. Everybody goes and plays. It's a general increase in prices. And then there is recession. Well, recession is an effect of the economy. The second is interest rates, inflation and interest rates. Those two things go together to basically create this curve, this economic curve.

So, what we typically see is when we are right around the bottom of the curve, we're generally coming out of recession, we're recovering. Businesses are finally getting back on their feet. Consumers are getting back on their feet, people are getting jobs again, employment is going up, unemployment's going down. Things get better, people start to spend more money. As people spend more money, businesses do better, and businesses get bigger. Their employees benefit because they're getting paid more and management is getting paid more in bonuses. They hire more employees. Basically, we snowball upwards in our economy. People spend more money, businesses do better, employees do better. They spend more money. So that snowball continues to go until we get somewhere around the top.

When we get somewhere around the top, and we saw this probably somewhere around 2016 or 2017 things got so good that businesses had to start hiring more employees, building more factories, bringing in more inventory and product, and they had trouble doing it because when unemployment's at 3.6%, where are those new employees coming from? Two places. You either have to encourage people to come out of retirement, or you have to steal them from your competitors. How do you encourage people to come out of retirement or steal from your competitors? You pay them a lot more money. So right around the top, businesses start to see this problem where they had to start paying employees a lot more money so that they can keep up with the increased demand and they have to start spending more money on their factories. They have to spend money on real estate. They have to spend money on the extra inventory.

Inflation

So right around the top, businesses start spending a lot more money to keep up. Who ends up paying for that? We do. We do. And that's inflation. They increased their prices because their prices are increasing because they're hiring. More workers are buying more inventory, they're building more factories. So, we start to see it plateau around here. Government doesn't like inflation because it hurts our ability to live. If we had to spend more for our housing, spend more for our food, spend more for our fuel, that impacts our quality of life. So right around the time we're seeing this the government's going to step in and say, how can we slow down this inflation?

Slowing Inflation

Basically, they have two ways to do it. One is they can print more money; they can print more, or they can pull money in. But the big way that they control inflation is with interest rates. They can raise and lower interest rates. Everybody knows what interest rates are. If you raise interest rates, what happens? It becomes more expensive to borrow money, and it becomes a becomes more beneficial to save money. So, when the government or the federal reserve increases interest rates, two things happen. People stop spending because it gets more expensive to borrow money and they start saving because they gain more benefit by putting money into a savings account. So, like raising interest rates, the government basically encourages us to spend less. When we spend less businesses slow down, growth slows down, inflation slows down.

Oops, too much!

The goal is slower inflation, but the result is a slower economy overall. So, near the top the government's generally going to start to raise interest rates. Things are going to slow down and we're going to get to this top and generally the government is bad at modulating and they'll wait a little bit too long or they'll raise rates a little too high. We'll have too much of a slowdown and we will start to snowball down the other side. So just like we snowballed up, we'll start to snowball down. Now when we get towards the bottom here, the government will do just the opposite. They will lower interest rates, and lower interest rates will do two things. Again, it'll make it cheaper to borrow. So, people want to spend more money and you'll get less money in savings. It's cheaper to borrow so you don't want to save money. What are you going to do? You're going to spend. People start spending. We get to the bottom and we see the growth go up again. So, this is what drives these economic cycles. Two things, inflation, interest rates.

Okay, so when we have back to back to back to back to back cycles, which we have had for the last 160 years in this country, this is what it looks like. Well, not really like this actually looks more like this. Not every cycle is going to be the same. Some cycles are going to last a little bit longer. Some are going to be tighter or shorter. Some recessions are going to be worse, some expansions are going to be better, so we're going to last longer and shorter.

So, this is more what an economic cycle looks like or back to back economic cycles look like, but actually not really. This is what economic cycles in our country, so this is the past 65 years or so worth of data. This is GDL. Everybody here know what GDP is. Gross domestic product.

So, this is the key measure for if we're in a recession, U S government defines if we're in a recession, your GDP, which is the total output of all industry in this company, in this country. If that growth of that output slows for two straight quarters, they say we're in a recession and it starts growing again. When it's positive number, that growth is a positive number. We're out of the recession, so these gray bars, these are all the recessions since 1950 and the blue line is the GDP growth. For each quarter since 1950 and we'll get back to this in a minute, but this is what our economy has looked like for the last 65 years. So, then the question becomes, where are we today? Because this is important. We're probably gonna treat our business differently, depending on where we are in the curve. How we want to treat our businesses as real estate investors. It's good to find the strategies and the tactics that we're going to want to put into play to basically maximize your profits, minimize our risks.

Where are we today?

Oh, where are we today? I like to figure out where we are. I like to try and discern where we are using three techniques. First tiny, we'll talk about timing means, second about observation, third about economic data. So, these are the three things that most economists use. These are the three things that I look at. I'm certainly not an economist. But, I'm a big fan of economics. I have an MBA, I study economics, but I'm not an economist. But these are the three things that any economist will look at to determine where we might be in an economic cycle and where we may be heading. So, let's talk about these a little bit more to see probably where we might be today. Let's start with time. I mentioned that this is what our economic history looks like for the last 65 years in the US, these are our recessions.

This is just a smooth down curve. This is not 70 years’ worth of data. In that 70 years we've had 11 recessions. Who here can do basic math? We want to know how often a recession tends to occur in the US you can divide 70 by 11. You know what, every six and a half years historically, if you go back even farther, it's closer to five and a half or six years. But over the last 70 years, we've seen a total cycle including a recession, including an expansion, about once every six and a half years. That's a good historic data. Now again, doesn't mean that every recession is going to be six and a half years. Some are going to be longer; some are going to be shorter, some might be that exactly. But on average, we see a cycle full cycle occur every six and a half years.

This is what it actually looks like.

So, this is the last 33 cycles covering the last 160 years. Again, if you do the division, you'll get closer to five and a half or six years because cycles used to be much shorter. But basically, these are each of the cycles, each of the last 33 cycles over the last 160 years. This is our average of about six years per cycle. This is where we are today. So, we are actually, I did this slide a few months ago, so we're a few months past this, so we're about 140 months into the current cycle that we're in. Typical cycle last somewhere on the order of 70 to 75 months, we're almost double what we typically see. So, from a timing perspective, it's safe to say that we're overdue for a recession. Does that mean that's going to happen next week or next month or even next year? Absolutely not. But this is a good indication that we're probably closer to a recession than we are to, let's say the beginning of the expansion.

We probably don't have 10 more years. So, it's just one piece of data and this piece of data that tells us that if a recession were to happen tomorrow or next week or next year, we shouldn't be too surprised.  Next is observation. When we talk about observation, this is the least quantitative measure of where we might be in the cycle, but this is just looking around us and saying, how are people acting? How are people reacting? What is the personal level of optimism? What's consumer sentiment look like? We're all real estate investors, so we all know anybody that's been doing this for a few years knows what this industry was like two or three or five or 10 years ago, and so you have some idea of is there irrational exuberance? Are we more like 2007 right now or 2009?  I think it saved to say that we're probably closer to 2007 than we are to 2009. Not saying we're necessarily in 2007 levels of exuberance and craziness, but closer to 2005 and 2009 so that observational data is another piece of the puzzle.

When I look at where we are in the economic cycle, all the data, I think of it as a puzzle and you've got one piece of a puzzle, you have no idea of what the picture on that puzzle is. If you have two or three are 10 pieces of a thousand-piece puzzle, you don't know what the puzzle looks like, but the more pieces you put into place, the clearer the picture becomes. So, observations, just another piece of data. So, when we talk about observation, a lot of people talk about consumer optimism or consumer sentiment.

Consumer Sentiment

Just to give you a good idea of over the last, what is this? This goes back to that 20 years, 30 years of what consumer sentiment is look like. And typically, again, the gray bars are the recessions. The blue is the data. Typically, what we see is before a recession, consumer sentiment tends to drop during a few months to a few quarters before the recession. In some cases, the consumer sentiment doesn't drop until the recession. So, again, not a perfect indicator, but just to give you an idea of where consumer sentiment is today, people tend to be very confident in our economy.

Some would say just by looking at that graphs, what I see in the past, is a lot of more unstable ups and downs and quick drops, than when you look at this last 10 years. It's kind of a more of a steady rise, just a little ups and downs. You showed more recessions back 70 years ago, there were smaller gaps and that was the industrial age. Now we're in the informational age and there's more data and more availability and more technology to stabilize the economy. So, they would say they don't see another recession for eight to 10 years.

I think pretty much every economist out there would be surprised. But I've talked to people that wouldn't be surprised and certainly there are exceptions and maybe this time is different. That's actually a big common denominator of all downturns. Is there's always going to be people who say, this time is different. Something's different this time around than for the last 33, something's different this time. And eventually they are going to be right. Eventually something's going to be different. Is it this time?  I don't have a crystal ball. I'm not an economist. Even if I were an economist, I'm not going to try and predict if this time is different, I’m just presenting the data.

One thing I'll throw out here is that a big piece of consumer sentiment isn't necessarily what the number is, whether we're at 60 or whether we're at a hundred, or whether we're at 120. It's more than the trend, and the trend has been more indicative of where we're headed than with the specific number is this is missing one data point, which was the August consumer sentiment number, which was down the most that it's been down since 2012  just in the last month or two, consumer sentiment has dropped tremendously.

It's the media’s fault.

Now, I'm sure a lot of people will say, well, yeah, it's the media's fault and I'm not going to get into politics. But I will point out that I've been paying attention to recessions for about 30 years now and it's always the media's fault at this point in the cycle, the media is always going to glob onto whatever that bad piece of news is. It's not necessarily because they hate the president, or they love the next candidate, or they love the president. Typically, it's because they try and sell newspapers. They try and get people to tune into the TV show. So, they're always going to tell you the bad stuff. Nobody wants to hear the good stuff, that's not going to get you to buy newspapers. So, you can think the media has an agenda. The media does have an agenda. It may not be the agenda you think, but maybe it is. So again, I'm not going to try and get into that.

Sentiment drives the economy.

The point is because consumer sentiment plays such a big role. Consumer sentiment isn't just an indicator of where the economy is, consumer sentiment actually drives the economy.  If you think that the economy is going to sink tomorrow, if my wife thinks that the economy is going to sink tomorrow, what are they going to do? They're not going to go out and buy that car. They're not going to go out and buy a new house. They might buy. less real estate. They're not going to want to buy a watch. They may not go out to dinner as much, because their optimism is reduced. And when they stopped going out to dinner, when they stopped buying the watches and the cars and the houses, what happens? That impacts the economy. So, consumer sentiment isn't just an indication of where the economy's headed, consumer sentiment actually drives the economy to a large degree. So, when we see a drop like this one mitzvah indication that people are less optimistic, but two, it means they're going to start acting in a way that's less optimistic, that's going to have a snowball effect. So, a lot of people say the media is causing a recession. Yes, the media is always going to cause a recession and public sentiment is always going to cause a recession.

A difference this time?

If we're going to say today is different, this time is different. One of the big things that has been different the past decade or so is the rise of the internet, the rise of information. There was a lot of differences. There was a whole ton of quantitative easing or flooding the market with money in 2008. There's a global comedy now that didn't exist 20 years ago, but the internet and information age is a big part of one of those things that's different. There's public access to a lot of data. People share information, people share public sentiment. So, this is a big piece of it.

Last piece of economic data. This is purely quantitative. You can interpret it however you want to. It's like a puzzle. If I give you one piece, you're not going to be able to tell me what it is, but if I give you a hundred pieces or a thousand pieces, you're going to have a better idea of what you're looking at.

One of the big pieces of economic data that we're looking at these days is the yield curve. You may not know what it is, so we'll talk about that in a little bit.

Economic Data and Indicators

There's something called the Buffett indicator, which has been historically a good indicator of where the economy is headed. GDP or gross domestic product, we talked about that.

Business investment is a huge one. How much businesses are spending to expand their business spending on factories, spending on inventory, spending on people.

The unemployment rate, that's a big one, tends to be a trailing indicator, but it's still a very good indicator of where the country's headed.

Housing starts, while real estate tends to be a lagging indicator and we don't plan to generally look at real estate, determine where are the economies edit. It mostly tells us where it's been. Housing starts as a good forward-looking indicator. Housing starts is basically the number of private permits that builders are applying for them. It’s an indicator of how many houses they're getting ready to build.

Foreclosure rates have been a good one.

Historically, stock market or stock market volatility has been a good one.

And we talked about consumer sentiment.

These are all good pieces of quantitative data. I could list a hundred or maybe even a thousand more that are probably less important. But again, it's a puzzle.

 So, let's talk about the yield curve because who here has heard the term yield curve the last few weeks? Okay. A bunch of people, but a lot of people don't know what the yield term is. This is a big one and I just want to cover it because we all like to be able to have conversations at cocktail parties and sound like we know what we're talking about. If you pay attention to this, you might be able to seem a little bit smarter at the next cocktail party.
The yield curve has to do with government bonds. We often call them T-bills or treasury bills. Long story short, two pieces of information you need to know;


1) government funds itself in large part, because we're running at a deficit, we spend more money than we take in, the government funds itself in a large part by selling bonds. Basically, a bond is just a note. The government says, lend me money and I'm going to pay you back interest on that money for some period of time, and then eventually I'm going to pay you back your principal. Does that make sense? The interest on bonds referred to as yield instead of interest, which is why we have the word yield, it's interest on debt.


2) The government's going to loan you money for different periods of time. They may loan you a bond that might expire in one month, which means you give the governments some money, they give you a one month bond, they pay you interest for one month, then they get your principal back after that one month.  They may lend money for three months or six months or 12 months, or longer periods of time. And so, there are different expirations and there’s like 20 different expirations for government bonds. In general, the longer the maturity, the longer you lend the government money, the more they're going to pay you in yield, and this makes sense.

But the government doesn't decide how much they're going to pay you. It's all driven by market forces, supply and demand. But in general, if say to you, I want you to loan me $100,000 for a month versus I want you to lend me $100,000 for 30 years. Would you to be willing to loan me at the same rate for a month? Are you willing to accept the same interest rate for a month as you are for 30 years? Probably not. You’re going to want more interest to lend for 30 years because of opportunity costs. You have the risk that that interest rates go up at that time. Loaning me money at 3% interest rates, but in 15 years you can get 6%, so you’re taking a risk by loaning money for longer periods of time. So typically speaking, when you loan the government money, the longer you loaned the money for, the more they're going to pay you an interest.

Okay, so let's take a look at what that looks like.

This goes back to January 2004, these are actual data points. If you loan the government money in 2004 let's say you lone them money for three months, they were going to give you about 0.7- 0.8% interest for that three months. Two years, they're going to give you closer to 2% on your money. In five years, they're going to give you closer to 3 ½ %, seven years closer to 4%, 10 years closer to 4 ½ % percent, and if you loan the government money for 20 years, they give you more than 5% back. And again, this was 2004, now how many people wished they had lent the government money for 20 years at 5%. A lot of hedge funds wish they did. So, these are the data points for each of the yields for the different expirations of bonds back in January of 2004 probably a particular day in January.

If we draw a line through each of these pieces. Each of these points we get a curve. This is what's referred to as the yield curve. So, a yield curve is for any given day for any specific set of explorations. Does that make sense? So, everybody now knows where the yield curve is. So, what does the yield curve mean? This is what we've generally referred to as a healthy yield curve. Low expiration bonds at low interest or low yield, higher expiration bonds have higher yield and basically goes up linear from there. 

This is what we tend to see in a healthy economy. Now when investors, and when I say investors, I'm talking about people that invest in treasury bonds. And when I talk about people who invest in treasury bonds, I'm typically talking about hedge funds, big companies, governments, people that are investing not thousands of dollars, not millions of dollars, but typically investing hundreds of millions or billions or even trillions of dollars. 

When they start to get scared, they do two things. Typically speaking, I mentioned that yields for treasury bonds are driven by market forces, supply and demand. And as demand goes up, the yield goes down. If everybody in the world wants a seven-year bond, what's going to happen? The rates on those bonds are going to decrease. Because why should I pay more when everybody wants this product, I'm going to pay less interest because there's a lot of demand for the product. Does that make sense? So, when demand goes up, yield goes down. When demand goes down, yield goes up. So, when investors start to get a little bit worried, two things happen. One, they start to buy long-term bonds. They want a place to put their money long-term. They don't want to risk the market crashing tomorrow and having their money in real estate. They don't want to risk the market crashing in two months and having their money in three months bonds and then not having anything to do with it in three months. So, when investors start to get scared that something bad is going to happen to the economy, they buy lots of 30-year bonds, or 20-year bonds, or 10-year bonds, longer term bonds that drops the rate. They don't want their money in short term bonds because short term bonds are bad. It doesn't provide them a lot of protection like longer term. If something bad is going to happen next week, they want to be protected for a long period of time. So, they stopped buying the shorter-term bond and those rates go up, those yields go up.

So, what we see when investors start to get scared, and that was 2004, now this is March of 2006.

What we see is a flattening out in this curve, long term rates drop, short term rates go up, middle kind of evens out. This is what the yield curve tends to look like when investors just start to get concerned about what's going on in the market, what's going on in the economy, whether it be local, whether it be global. This is what we start to see. And then when things get really bad, you see the yield curve that looks something like this.

This is called an inverted yield curve. This is when investors start to get really scared. Historically 90% of the time when the 10-year yield and the 2-year yield invert, that’s when the 10 year yield is less than the 2 year yield, 90% of the time that means the recession has happened in the next six to 18 months.

It doesn't mean it's going to happen next time. Obviously, we don't know. You can't predict, but 90% of the time with only two exceptions, that inversion of the yield curve has led to a recession in the next six to 18 months. We started seeing an inversion in the yield curve back in December 2018. It wasn't the big 10-2 inversion, which is kind of the big predictor. We saw the 10 – 2 inversion about a week and a half, two weeks ago. So, there are a lot of people who look at this data and say “90% of the time when we see this happen, we've had a recession the next six to 18 months, and it just happened. Does that mean we're going to see a recession in the next six to 18 months?”

I don't know. I don't have a crystal ball, but the data indicates that historically we would.  Is this time different? I don't know. So anyway, that's the yield curve.

This is where we are now.

This was December 2017 a healthy yield curve. By March of this year, we had flattened out and this is where we were about a week and a half ago, so we had the inversion of the yield We saw an inversion of the yield curve and I'm just going to go through what we're seeing today for each of the economic indicators. It may give us an idea of where we might be in the cycle.

The Buffet indicator.

I won't talk a lot about this, but Warren Buffett is a big believer. He didn't invent this or make this up. But he's a big believer in the idea that the value of all the public equities in the country, so the stock market basically. If you compare the ratio of that value to the GDP, the total output of the country historically speaking, if it's somewhere around 0.9, the stock market is valued correctly. So, in a healthy economy, the ratio of all the equities, all the public equities in the U S to GDP is somewhere around 0.9. If that ratio is higher than 0.9, Buffett would say, and a lot of economists would say the stock market's overpriced. If that ratio is under 0.9, a lot of people would say that the stock market is underpriced. Back in 2007 the Buffett indicator got to 140%. Today the Buffett indicator was 144%.

So people that believe in this indicator would look and say the stock market could be overpriced by up to 50%, and if I showed you the graph, you'd see that typically speaking, the reversion back to the straight line than you would expect typically happens in six to 12 months.  We've been well over that 0.9 for a long time. So again, maybe this times an exception, maybe it's not, I'll let you draw that conclusion. I'm just providing the data.

GDP

What we've seen over the last several years, is about 2% growth for much of 2010 to 2017.  Back in 2018 we saw big tax cuts; we saw GDP jump to about 3.5 % to 3.6%. And now we've seen GDP dropped back down to about 2%.

So, GDP is pretty much where it’s been for the last half dozen, eight years. So a lot of people would say GDP is pretty healthy. Other people would say, well, we went from three and a half percent back to 2%. That's a really bad trend. But by the same token, we went from two to three and a half and that was a really good trend. Tax cuts played a large part of this. So, what does this mean? We don't know, but there's no reason to think that GDP isn’t pretty healthy right now.

Business investment

Future business investment in this probably had a lot to do with public sentiment, corporate sentiment, CEO sentiment, business investment in Q2 was down considerably. This is one of the biggest indicators. CEOs tend to think that the economy is getting ready to turn. They spend less money, they buy fewer factories. They might have less inventory. They lay off workers. You stopped hiring workers. They stop spending money again, so it's a self-fulfilling prophecy. When they spend less money, they're actually causing harm to the economy. So, this is actually a pretty bad indicator.

Unemployment

Unemployment at 3.7%, that's fantastic. It got down to 3.6% we've been 3.7% for the last eight months, I think it was. Historically, that's a fantastic number. Now the problem with 3.7% is that unemployment's always great, until it's not. So, it's probably not getting any lower from here. Hopefully it doesn't get any higher than this for a while. But 3.7% is pretty healthy, or very healthy.

Housing starts.

Housing starts to kind of been all over the place where this is the number of permits that builders are applying for. And again, this is one of those self-fulfilling prophecies.  When builders stopped building, that's a large segment of the economy. When builders get scared and say, I'm going to slow down and I'm going to stop building because I think we're at the end of the cycle. They actually impact the cycle. They stop hiring contractors, they stop hiring and they actually impact the economy. So, housing starts is important. What we saw earlier in 2019 was a big drop off in housing starts summer of 2019 we saw that pick up a good bit. So that's kind of been all over the place. We don't really know what builders are thinking, but across many parts of the country, builders are still optimistic.

Foreclosure rate 

The foreclosure rate started trickling up in July and August, certainly not anywhere like 2007 or 2008 but that number's starting to pick up a little bit.

Stock market

Stock market is obviously up. That's a good thing. It tends to be a lagging indicator. Stock market volatility is the thing that's the biggest leading indicator when it comes to the stock market. And we've seen a ton of stock market volatility, whether that systemic or whether that's just a result of what's going on in politics, I'm not going to try and try and predict. But we've certainly seen more stock market volatility than we've seen in a long time. And then consumer sentiment as we discussed, consumer sentiment is down to good bit. So, you look at all of these, and again, there are a hundred of these indicators. I picked the ten or so that I think are our most interesting and are really very much a mixed bag.

Some of this data's measured quarter to quarter, some of it's month to month. Some of its semiannually. So, it's all based on the most recent data. Economics is a lot like the weather, what you see in San Diego isn't necessarily going to be what you see in Buffalo. Buffalo weather's going to be a whole lot different than San Diego, but in the summer, both are going to be warmer. In winter, both are going to be cooler. So, what we're seeing now is we're kind of changing seasons.

We're at the inflection point road at the top and we're starting to see different things in different markets. I've been in Seattle and I've seen San Francisco numbers, their housing markets have dropped 15 to 25% of the last six months. You come down to Florida and you see a strong market. I lived up in DC up until the last few months, DC is tremendously strong. So, we're starting to see different things playing out differently in different markets. And that's a good indicator that you're at one of those inflection points, either at the top or the bottom. Because if you're strongly on the upswing or strongly in the downswing, you're going to see pretty much the same type of movement in every market.

You won't see the exact stuff in every market, but you'll see the same types of trends in every market. What we're seeing is very different trends in every market. So, everything's a very, very mixed bag. When I put everything together, my take is that right now we're somewhere right about here.

Typically, if you go back to the last 33 cycles, that peak, what we call the inflection point at the top lasts three to six months. You get there for a few months and then you go over the other edge. If I look back at the data, I was saying the same thing a year ago. I think we've been there for another six to 12 months.

At this point I am confident, and you can disagree with me. I'm perfectly happy with that. I'm confident to say that we are not going up much from here.  Now, whether we're going to stay at the peak for another week, month, year, two years, I don't know. I don’t know when the downturn will occur again. Week, month, year, two years. I don't know, but I am confident saying, and maybe I'm wrong, but I'm confident to say that we are not going up much from here. We're not seeing this leveling off and then suddenly something's going to happen that we're going to take off.

It may not be next month. It may not even be next year. But I think we are closer to the peak that the expansion.  That's the best I'm going to do with prediction. Keep in mind a lot of things factor in politics, and global economy. It’s always been the big wild card. You could say that US economy is tremendously strong. In a lot of ways, the US economy is tremendously strong, but these days the US economy doesn't live on its own. It doesn't stand on its own. We take cues, there's enough global trade and when other economies are hurt or hurting, it's going to impact us. Just like consumer sentiment. So, there's a lot of things that could happen that could influence whether the recession starts tomorrow or next week or next month or next year, or five years from now. I'm not smart enough to figure out exactly what it is, but I believe it's closer than 8 – 10 years.

What Should You Be Doing Today?

Then the question becomes, how do we make money today as real estate investors? And for a lot of you, this is all that matters. The details don't matter. How do I make money? How do I reduce my risk? So, I'm going to throw out a few tips. If you're a house flipper, yes, you can still flip houses. I'm still flipping houses. My partners are sitting right over there, and we flip a bunch of houses. But here's some of the things that I'll say.

Don’t Get Bogged Down.

Keep projects quick. We're not doing new construction anymore. We're not adding square footage anymore. We're not doing pop tops where we added a second story. We're keeping projects down three months, four months at the most because if the downturn starts, we don't want to be in the middle of a project. We don't want to be in the middle of a 12-month project, waiting for permits when the downturn starts. So, we're sticking with projects that we can be in and out of quickly. So, if we see the downturn come, we can finish up and get it sold quickly.

Watch Your Margins.

Next, keep your margins greater than your worst-case scenario. So, my wife and I did a lot of houses in Washington, DC up until a few months ago. When deciding what projects to take on in Washington, DC what we decided was to use the worst-case scenario we could expect in most markets around the country, and we flip in a lot of markets around the country. Pretty much the worst-case expectation is what we saw in 2008, I think that's safe to say? At some point we may see something at some point we're going to see something worse, No doubt. If you study economics, you know there's going to be another depression at some point, 5 years, 50 years, a hundred years. We could go into that, but for the most part, 2008 is probably as bad as we're going to see in the next recession and probably won't be that bad. Just statistically speaking about basing it on the date and just historically, we're probably not going to see another 2008. So, if you assume that what happens this time is going to be as bad as 2008 and you take steps to ensure that you mitigate your risks to 2008 levels, you're probably pretty safe. So, for example, in DC in 2008 we had a 16% drop. So, I can infer that during the next recession, probably the worst-case scenario is that that market drops in DC up to 16%.  Is every one of my flip projects is generating a return on margin of greater than 16%? If so, I shouldn't lose money.

Now in Atlanta, we saw drops at 30 - 50% in some areas. So, if I'm flipping in Atlanta, I'm not going to be happy with 16%.  I'm happy with 16% margins in DC because I know worst case I'm going to break even. In Atlanta I'm not happy with 16% margins because there's a good chance I'm going to lose money if we see anything even half as bad as 2008. So, what I would suggest to all of you, if you're flipping houses, is figure out what your area dropped in 2008. That's your worst-case scenario. Then sure that your margins are greater than that. Or, if your margins are less than that, you're willing to accept the risk. So maybe in 2018 things dropped 20%, and you're willing to lose 5%, then you can do a 15% project. But look at historical data to help you mitigate your risk moving forward, and always have multiple exit strategies.

Have Multiple Exit Strategies.

If you're a flipper, make sure that you can rent the house, you can lease option in the house. Make sure you have multiple exit strategies. Five years ago, if you were flipping a house, you didn't need a backup strategy because you knew you're going to sell the house at a profit. These days have multiple backup strategies.

Rentals 

If you're a buy and hold investor, you can always buy rentals. Know the numbers. Now we look back historically in 2008, in a lot of areas, market rents didn't drop. In some areas market rents dropped dramatically. Typically, what we saw, the worst case drop in most markets, and there were certainly exceptions, you go to places like Atlanta or Detroit, things are much worse than this, but in typical market, worst case drop was about 10% of market rents, same with vacancies.

In a lot of markets vacancies didn't increase. But there are plenty of markets where vacancies did increase. Pretty much worst case in most markets was about 10%. So, if you are modeling a rental property, multifamily or single family, if you model a pro forma that assumes 10% drop in rents, 10% increase in vacancies, see if it still pencils out to numbers that you're willing to accept. Basically, you have to decide what you're willing to set except, but if you're willing to accept 10% increase in vacancy and 10% drop in rent, then you're probably going to be safe in a worst-case scenario.

Focus of “C” Properties.

Typically, what we see during a recession is what's called rent compression. This means the nicest houses tend to see the largest drops in rents. If you're in class A, your properties are going to see up larger percentage drop in rents than your class B properties. Your class B properties are going to see a larger percent of drop in rents and your class C properties, your class C properties probably are not going to see a big drop off.

That's why things like class C properties, things like mobile homes tend to be pretty recession resistant. So, if you're buying rentals now and you're trying to decide between A class, B class, C class, D class mobile homes, tend towards the lower, if you're concerned about the recession. Maybe your strategy is different than mine, but I'm focused on C class. I just invested in eight mobile home parks and I'm pretty comfortable with that investment. There aren’t a lot of syndications that I would invest in these days, but I'm comfortable with mobile home parks.

Lending

If you're the lender, yes, you can still lend. I'm actually lending a lot these days. But I'm not lending to flips anymore, because flips scare me. I'm scared when I do my own flips, but I'm extra scared when somebody else is doing flips with my money. So, I'm doing a lot of lending to buy and holds. Everybody’s familiar with the BRRRR method? Buy, Rehab, Rent, Refinance, Repeat model? I'm doing a lot of lending to people that are doing that. They're buying properties, they're renting them out, then they’re refinancing in a year, I'm getting my money back. Worst case, the market drops, they can't refinance, they're still generating cashflow, they can probably still pay me. Worst case, they pay me a little bit less. We work out a deal, and in five years when the market returns, I get my money back plus back interest. So, I'm not too concerned. I like cash flowing properties because they are going to pay every month. It’s going to pay my borrower every month, so they don't have to default and hand back the property. If somebody wants to give me a cash flowing asset as collateral, I'll lend against anything.

Raise Your Rates.

If you're a lender, now's a good time to be raising rates. A lot of people are lowering their rates right now. I'm raising my rates. I'm adjusting for my risk. I think there's a higher risk these days. Does it mean I'm making fewer loans? Yes. I’m making fewer loans, but I sleep better at night. So if you're a lender decide should be lowering your rates just to compete, or should you be leaving the rates where they are, or raising them to sleep better at night? But that's what I'm doing.

Know Your Foreclosure Laws.

Know your foreclosure laws. So, depending on what state you lend in, foreclosures work very, very differently. I'll lend in Georgia much faster than I'll end in Florida because in Georgia I can foreclose in 90 days. In Florida, I'm going to spend a year and a half. In Maryland, I'm going to spend a year and a half. So, I'm very careful about knowing my foreclosure laws. David Witte is the guy to talk to if you want to know about foreclosure laws.

Commercial

If you're doing commercial stuff, yes, you can still buy commercial. I like mobile home parks, they’re recession resistant. I like self-storage. Self-storage tends to be very recession resistant. When people start losing their jobs and have to downsize or have to move back with mom or have to move in with other people, they don't like to sell their stuff or give their stuff away. What do they do? They stick it in a storage compartment or storage container. So self-storage tends to be really good during the recession. Another thing is people go to school during the recession, college admissions increase during a recession. People lose their jobs and decide l may as well go back to school and get qualified to do something else. So, college rentals tend to do very well during the recession. Medical tends to do very well during a recession. If you're into retail, go find a retail strip center that is anchored by a grocery store. Find someplace that has a liquor store in it. Because these things tend to be recession resistant. People still need groceries. People are, if they're drinking before the recession, they're going to be drinking during the recession. These needs can be very recession resistant. So, figure out what things are recession resistant and focus on those. Don't go out and buy a high-end multi-use commercial, class A commercial because that's going to get crushed. But there's plenty of commercial out there that'll do well.

Notes

I’m starting buy a lot of notes. I like notes. One, know your bankruptcy laws, or talk to David Witte again, probably give you some good tips there. I like buying second mortgages. If you know anything about notes, thinking about buying seconds, but know your borrowers. Focus on exiting through the borrower. And look for big discounts on notes.

That’s about it, if you want to know more pick up J. Scott’s book “Recession Proof Real Estate Investing” on Amazon.

For more tips, tricks, and training, Subscribe to my weekly email training below!

1 2 3