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Friday, April 30, 2010

What a fantastic goal!

Where are you going? What will you do once you arrive? Will you set your sights out past the horizon again and keep moving forward? Or, will you congratulate yourself, grab a bottle of your favorite bubbly, sit back and relish in your achievement?



This is a hypothetical question we frequently volley around our office in addition to the pile of cash Vs income stream question. What's the point in getting up everyday, heading out to the office, and working until dinner time if you don't have a goal insight? It might not be financial and that is fine. Any goal will do, but for this blog we are going to focus on financial goals.

I have a goal in sight which I posted about previously. I want to achieve $1,000 per day in net passive income. It's a long way off. Funny thing is I question what I will do when I achieve this dream. I do believe it is achievable no matter how far off it feels today. The reason I know it is achievable is because I have accomplished everything else I set my mind to do; service in the Navy, BS degree completed in 3 years, travelled all the way around the globe, move to California, bought my first house at 31 (which probably does not sound like a huge accomplishment to some, but I was only out of college and working 1 year at that point). So, $1,000 a day is just another goal and through consistent & persistent action it will be achieved.

I've only been in my current partnership for a few months, 8 to be exact. At first, we sat around and thought about buying a house. Then we actually bought one so we wondered if we could buy another. Suddenly, we were wholesaling a few a month. Now, it feels like normal operating procedure to come into the office and buy a property. I fully expect to buy one every day, but I can't imagine how it will feel to have a week go by without anything new on the board. I am always pushing the envelope and expecting a better month than the last. Why not, right? If I did it last month, why shouldn't I do it better the next? I'm always resetting our horizon.

I haven't netted $100,000 on a single deal yet though. But, I have come very close. I wrote this on my goals board over a year ago and am still working towards it. I believe once I do it, it will be much easier the 2nd time around. Kind of like the saying "The first million is the hardest to make." Once you achieve this accomplishment, it should be much easier to reproduce, as if you unlocked some secret code. The first deal is always the hardest right?

Upon achievement of my $100,000 deal goal, will I set my sights on a $150,000 deal? Of course! Eventually, I will expect to consistently do $100,000 every month. It is just the way I think and operate. Just like exercise, repetition is the key to (financial) fitness. I went from doing one deal, to a few deals, to consistently doing several deals every month. I have stepped up my game at every level. Makes me wonder if I will be able to break the addiction once I achieve my net passive income goal? I'd like to think so, but much better people have gone before me and haven't stopped yet. Maybe we need a 12-step program for RE investors?

Quick side note; I was at Best Buy picking up a new I-Phone today and saw a new Lamborghini in the parking lot. I'm just saying...

Wednesday, April 28, 2010

This Too Shall Pass...

If you don't know the story behind this saying you can read up on it at Wikipedia. I think this is a much better version HERE. For the impatient, I will give you a synopsis; A king challenged one of his servants to find him a ring upon which any happy person looked, it would make him sad and any sad person happy, hence the saying; This Too Shall Pass. It is great to have this saying handy when things are not going your way. Unfortunately, it does have the appropriate effect if read when you are happy. I had this saying written on a Post-It note and stuck to the bookshelf on my desk. There were times when it haunted my thoughts particularly, sometimes for weeks on end in the early stages of my investing. I used it as a mantra to defeat the negative thoughts hounding me. Fortunately, through hard work, persistent and consistent action, times have changed.

While walking my dogs tonight the saying popped back into my head. Not able to comprehend how things could ever be like they were in the early stages, I pondered this thought for the remainder of my walk. Not that I was ever much of a consumer, but all my debt, except real estate debt, is retired due to committed action to eliminate this drag on my financial freedom. Every time I had the opportunity, I plowed more cash into short term debt and down payments on new acquisitions, sacrificing a false sense of security for monthly cash flow. I would rather have a steady income stream than a pile of money any day. At least with an income stream, I have a budget to work with. I can build operating capital with a steady income stream to reinvest. An income stream gives me a yardstick to measure growth. The elimination of debt is one of the keys to financial freedom. (The formula for financial freedom is: Passive Income - Outgo = Something Left Over.) A pile of cash has a time limit. It has an expiration date. An income stream has a micro expiration date. If it gets screwed up one month, you get a do-over the next, and the next, and the next, and the next. One can just go on screwing up every 30 days for the rest of one's life and there will always be the next opportunity 29 days away.

We wholesaled 2 more properties today and found an investor for our Equity Participation Program. Now in escrow: 4 houses & 1 lot (all closing tomorrow), 2 new condos, 1 EPP house. Everything is spoken for so if you are interested please let us know and we will put you on the list.

Tomorrow is a new day and there are more opportunities to dig up. Going to work reminds me of being a kid on the beaches of New England. We would go clamming in the summer. It is easy to do. Grab a bucket and slowly walk down the beach at low tide and watch for water to spout out of the sand about 12". Once you see the squirt, you dig! The pressure from your weight causes the clams to squirt water out of their foot. Every step is a surprise. It was always a lot of fun digging and seeing how big of a clam we would find. Every step is another day in the office and I never know what kind of deal we will create when the phone rings and we are focused on loading up the bucket with keepers.

OK, that is a pretty corny anology, but being in the office can be as much fun if not more fun than a day at the beach. Although I can't work on my paddle ball skills, I don't get sunburned and there aren't any seagulls to crap on me.

Thursday, April 22, 2010

A Rolling Stone

gathers no moss so the saying goes. It is my new personal goal to put a house a week into escrow. So far so good! The end always looks so easy to achieve from the starting point. Just closed on another wholesale deal and locked up an REO that we will be dropping into our Equipty Partnership Program. I created a nice tag line for that program: We Find It, You Fund It, We Collect The Rents, Deduct Expenses and Pass The Cash Flow On To You. It's That Easy! I wonder if I can modify the Staples' "That was easy!" botton to use as a marketing piece?

After my last post I realize how much work I have ahead. I am also thinking "if things are this good now, it is going to be awesome finding properties once interest rates start to rise". A nice long drawn out down cycle will be really great too! It certainly would put an end to the objection "I am going to wait for the market to turn around". Once the idea of owning investment real estate puts a scowl on the faces of the general public, as I have heard happened in the past, things will get even easier. Of course, past performance doesn't necessarily predict future results. I have heard from the investors who worked through the last down cycle that they generally cannot believe the government intervention happening today.

We currently have one property being rehabbed, one almost ready for it's first tenant, five houses and one piece of land in escrow. Four of the houses are already assigned to wholesale buyers. We're keeping the land and, as I mentioned above, dropping the other house into the EPP.

I am working a deal that is kind of interesting and affords an opportunity to practice creative finance strategies. The seller has a condo worth $135,000. She wants $140,000 with $30,000 down. She will carry the $110,000 at 4.5%, 30 years. The condo is currently rented below market for $1,000. Market rent is about $1,400. She needs the $30K because her roof is leaking on her primary residence and she has a lot of water damage down the walls and under the mohagany floor. She is liquidating this asset to repair her primary residence. She tried to sell the property to the tenants, but she said they coundn't come up with the down payment.

I know what I want to do. If you have an idea, email it to me and we are going to give away a few Happy Hour calls to the most feasible and creative idea. Maybe we will post them and let you vote on them?

Spinning the Flywheel

If you haven't heard of Jim Collins of "Good To Great" fame then you don't really know what I am referring to. I will do my best to explain; Mr. Collins says that a company working towards greatness is like the spinning of a heavy flywheel. The first few turns are agonizing and difficult. Once momentum starts to build, it still takes effort to turn the fly wheel, but it spins faster and faster. Building a great company takes lots of work and sometimes it can be agonizing. My partner and I meet outside of the office, sometimes several times a week, and discuss our business model. While none of this is agonizing, it definitely is a lot of work just like those first few turns of the dormant flywheel. Even fun work is still work.

What we are doing in our business is working. It's just that sometimes, it is not always apparent what it is that we should be doing. Even in the short time we have been in business together, we have pondered different ideas on dozens of occasions. However, we have never taken our focus off of our main objective and the methods we use to achieve it.

I am always trying to understand the bigger picture of exactly what I am doing and working towards. I see many investors with much more success than me still doing deals and moving their goals out to bigger and further destinations. One has to ask; "How fast does the flywheel have to spin before one decides it is fast enough?" Yes, I am building a real estate investment company. One that I hope, will provide for me until the end. One that will continue to provide for those that come after me. The question I ask myself is "At what point is it enough?"

I have only known one investor who, from what it seems by posts on Facebook, has decided it is enough and started traveling extensively, continuing to do so. So much in fact, I eventually hid this person from my wall because I was growing tired of all the updates on different countries being visited.

I plan on growing my company. To what level I am not sure yet. I currently know in which direction, but not really sure where I'm going or will end up. As Mr. Collins would say, "I have the right people on the bus. We just don't know where the bus is going." I think it is better to set monthly passive income goals than # of door or house goals. I hear investors ask how many properties I own or the number of doors I control. Really? Do you actually care how many houses I own? What if I have 100 and they all lose money? Are you still interested? Probably not. I like the questions "How many houses can you take if they each produce $1 of real positive income every month? How many if they lose $1 every month?"

I currently have set my goal at $1,000 per day net income after taxes. However, I do not want this $1,000/day to be coming all from one property. I wouldn't want one mobile home park or apartment building to be the sole source of this income. Talk about all your chickens in one basket. A little off topic, but do you know what a tornado and a divorce in Texas have in common? Someone's losing a mobile home. I do like the idea of mobile home parks. Finding quality education is another story. Lots of info out there about doing Lonnie Deals, but I think my days of flipping mobile homes in other people's parks are over. Great cash flow, but I am tired of dealing with park managers.

If I want to produce $1,000/day from single family houses, I figure I will need 50 houses generating between $1,200~$1,500 per month in rent. This will produce $66,310 in gross monthly rent. Deduct 45% for expenses and I am left with $36,470 net. Deduct another 15% for taxes and I arrive at my $31,000 a month in after tax, net, passive income. This is why I really do not want to be in the single family house business. To much property producing to small an income. A geographic management headache. A mix of residential and commercial is the only conceivable way I believe I can achieve my goal. If 1/2 the income can be generated from an asset class such as mid to large sized mobile home parks and the rest from small apartment buildings and houses I think it will be a nice mix of investments to produce the sustainable income I seek.

I am on the right bus and it is moving. I'm just not sure where it is going to end up.

Wednesday, April 14, 2010

Strangle Hold

Today was one of those days. You know, the kind where everything seems to be circling the drain. We had a deal accepted on Friday, found a wholesale buyer Tuesday morning, and the seller backed out Tuesday afternoon. $10,500 wholesale fee down the drain. I have been negotiating with this seller's agent. This of course, is mistake number 1. NEVER waste your time dealing with someone who cannot make the decision. This seller's house is occupied by non-paying former owners. The current owners sold the house and carried back the financing. When the buyers stopped paying, the sellers foreclosed, took the house back, but never kicked out the old owners. They have been living there for over a year rent free.

So, instead of selling this problem property to me after we had already reached an agreement, they decided to list the house and see what they can get on the open market. "What in the World are they thinking?" is all I can ask myself. They have been avoiding dealing with this property for over a year and now expect a buyer to come along and take care of the problem for them AND pay close to retail? They listed the house for $10,000 more than I had it sold for. For some reason, they expect a buyer to come along with agent representation, get access to the property, make an offer, all the while the former owners who have been foreclosed on are still living in the property. I guess they also expect the new buyers to evict the former owners before they can move in?

I would imagine they are in for a shock because after the property doesn't sell, which it won't, my new offer will be $10,000 less. Real estate is a gamble and they decided to play their chips on the open market and see what transpires. If it works out for them, and I truly hope it does, that would just be a nice ending to a long, unnecessarily, drawn out story. If it doesn't work out for them and they come back to me, I will have to explain that by listing the house and not selling it, they have established what the house is not worth. It is worth somewhere south of that number and I still need to make a reasonable profit. Whether I pay $30K, $50K, or $300K for a property, I want to make $5K~$10K, minimum. Since they will have established a value that the house won't sell for retail, I have to buy it for much less so I can make my profit and still sell it to a wholesale buyer with enough equity in it to get my buyer interested while still allowing them to make a minimum 10% profit on their side of the deal.

Because I have consist leads coming into my office I simply let my buyer know that this deal is sidelined for the next few weeks and moved on to the next lead in my pile. I quickly learned that having a consistent flow of leads is what keeps me from strangling this one to death trying to force a deal when there is obviously not one to be made. The sellers are just not that motivated. Time and circumstances changes all situations. By consistently following up and working the fresh leads that come into my office every day I don't have to maintain a strangle hold on this non-deal hoping for a payday that is not going to happen. I can simply set it aside, work the hot leads looking for new opportunities and deals to create and revisit this lead after a few weeks. I like to refer to this as putting it on the back burner and letting it cook a little more. Just like a cake in the oven, when I stick a toothpick in it, if it comes out wet, I know it isn't done yet and I need to let it cook a while longer. Time and circumstances changes all situations.

Monday, April 12, 2010

The Snowball Affect

After every deal closes I tend to get a bit fidgety about dropping another property into escrow. Even now, I have 5 properties in escrow all with wholesale buyers lined up, I am jonesing for my next deal. I much prefer the long term holds to the quick flips especially this time of year! (Check the date and think Uncle Same.) When I lock up a long term hold property I know that that piece of real estate is going to continue to provide for me until the day I liquidate it. Closing a nice cash flowing rental is about the greatest feeling I get in this business. I like to see my monthly cash flow much more than I am interested in looking at the monthly wholesale income. It is the cash flow that will retire me and it gives me a very secure feeling rarely afforded in this business, but always sought after.

When I worked in construction sales, it took about 6~8 months after I had started to accumulate a nice monthly stream of commissions. It was usually a few weeks or even months after I sold a contract that the general contractor would even start construction on the project. Eventually, the project would need my product and the superintendent would place an order. As the job went along these orders would continue up until the end of the project. Payment came about 90 days after an order was placed. In the mean time I was still getting contracts signed and other jobs were starting. In the business, this was referred to as the Snowball Affect. Like pushing a snowball around a yard, it slowly starts to grow until it becomes monstrous.

I still try to replicate this process in my real estate business. In this world, I refer to it as the pipeline. On one end, deals are falling into the pipeline through a funnel, in the pipeline are my deals cooking in escrow, and out the back are wholesale checks, deeds, and rehab-for-retail projects. As long as the pipeline stays full I am a happy camper.

Where I get into problems is the week after a stellar week and the let down that comes with it when nothing seems to be popping. That is when the Jonesing starts. Where is the next deal going to come from? What will it be like? What kind of house? On and on. Of course, the phone keeps ringing and the next deal comes along. I typically don't even see the houses I am buying and selling. On average, I think I have about 10 leads a day to follow up on and 2 or 3 more new ones come in. I find that I still have a lot of time on my hands during the day. I would like to get the phone ringing 10 times a day and have 20-30 leads to follow up on and I am sure that day will come. I want to fill that pipeline up like Brim.

I like the saying "Do what you have to for as long as you need to so you can do what you want for as long as you like." I am getting up and going to work every day so why not make the most of it? If I bought two houses last week, why shouldn't I be able to buy at least two more this week?

Marketing is the key to my business. It is a constant process of coming up with marketing ideas and there is not much real help out there in the world for us real estate investors except for Dan Kennedy. We ran numbers at my office and found that we have closed 4 to 1 more seller lead deals than REOs. That probably is quite surprising to most investors and maybe slightly unbelievable in this market. I have never been much of a herding animal, always kind of doing my own thing, and when the pack all ran after trustee sales and REOs it just kind of made sense to me to go where nobody else was going. If I am able to fill my pipeline at my current level in this market, I am very excited to see the volume of leads when the market shifts again and it will be in our favor.

Sunday, April 4, 2010

Working On Vs Working In the Business

So I spent ALL weekend doing my books. 12+ hours on Saturday and more than 10 on Sunday. I had a lot to catch up, let's just leave it at that. I am now ready for the CPA and the tax man though so that is a good thing if you're into that kind of stuff. I had set a goal to have my corp books done by Sunday night and I finished at about 11PM. At least up through the date the tax man is concerned with. I am positive I will be more proactive in entering my transactions. Even a few weeks leaves me puzzled why I withdrew or deposited thousands of dollars??..

In the beginning I had hired a bookkeeper off of Craigs List and that was mistake #1. I should have asked around at one of the many RE investor meetings I used to attend. Which, by the way, is what I eventually did and I couldn't be happier. My books were so screwed up. Of course it is my own fault for not understanding what was being entered and how it was being assigned. I was implementing the "work on my business, not in my business" philosophy and it cost me many thousands of dollars and just as much wasted time. I understaning very well how to do my books now. I even made my own reference book with screen shots for tricky transactions. I will have better luck turning it over to someone else next time because I will be able to read the reports and actually know what I am looking at/for. Each mortage payment has potentially three parts; principal paydown, interest, and impounds and they each get assigned to their own special account and class. I learned this after taking a few Quickbooks classes and spending hours with my new wondeful bookkeeper.

I do have some interesting updates! We put 4 houses and a parcel of land into escrow last week for $300,000. We wholesaled the package for $315,000, but kept the parcel of land free & clear. If only we could do that with a remainder house! However, this opens up a great 1031 exchange strategy which I will talk about at another time.

On Friday we received a call from a former customer (repeat business!!). He sold me a condo in Rancho Cucamonga recently which I paid $210,000 for and wholesaled for $230,000. We hit a few small speed bumps in that escrow, but I did what I said I was going to do and closed when I said I would. This particular condo he wanted to sell me now had a much better view, he claimed. "You can see the whole city of Ontario" he told me. Well, I'm not much interested in a view. I told him I bet the view from an airplane is much better. If he kept pushing it as if it were worth something to me, I might have told him I am afraid of heights and that view has a negative value to me. What I realize is that it is my job to liquidate real estate fast and at a fair price for not just the seller, but the buyer as well. I do this by writing simple, contingency free contracts, not peforming any inspections, using cash to close, and funding quickly.

A view might be wondeful to a home owner, but it really means nothing to me. I have always thought that if you can see everybody, can't everybody see you too? I'm buying a house, not a view. I can't wholesale a view. He said the least he would take would be $240,000 for this special view condo. The other one of his I wholesaled is on the market for $299,000. He told me he has a tenant in the one he wants to sell me and the lease runs through the end of June. I told him I would get $210,000 cash in his hands in 2 weeks, I'd put down $10,000 earnest money and take it with his tenant in place. I told him I needed to buy this property fast because the guy selling the other one has no sentimental connection to the property he has on the market. It is inventory to him and we both know he has a lower number he can sell it for. If we wait until the end of June when the tenant moves out, my profit margin could get squeezed by the investor if he lowers his price. Before leaving the office on Friday, I asked my partner to email him a written offer under the terms 'we' discussed. I firmly believe in getting an offer into the seller's hands. Even if they tell me over the phone they will never sell the property to me for the price I mention I still want to shoot them over something hard in writing to look at and ponder. This was a hot lead and we needed to act fast.

He countered via email at $220,000. Just like that he knocked $20,000 cash off his bottom line sales price. He also mentioned in the email that he had room to 'wiggle'. I asked my parter to send him back an email clarifying that our offer was $210,000 cash in his hands in two weeks. He got back to us the next day and said he'd take it. We already have a buyer lined up and I think we can get him at $230,000. That is a nice wholesale. And why not? The property has this amazing view!