There are so many opinions on what the best investment vehicle is….there are so many cliches on how to invest …..there are so many books on investing strategies ……and on and on.  Why?  Well….because almost everyone is asking the same question and everyone has a different opinion.  The real dilemma is that there is not one answer….although any guru will want you to believe that there is…. and they do their best to convince you they have the answer.  Seen any ads on gold lately?

Sitting in the audience not too long ago, I heard a speaker/guru that I respected very much say the stupidest thing.  I heard him say “….investing in the stock market is a dumb thing to do because there is so much risk.”  Granted he was selling his “silver bullet” program but….what a dumb thing to say.  I know so many people that have done so well in the stock market in good times and in bad that I know the stock market is a great place to invest…..I say what with caution…keep reading.

I have also heard people say that real estate is a bad investment.  When we all know people that have done well in real estate as well…whether the market is good or bad….again…I say that with caution….keep reading.

Of course there are horror stories for any investment vehicle…whether real etate, stocks, businesses, etc.  BUT….there is one very clear statement that makes all the sense in the world in whatever investment vehicle you are investing in:

“Know what the hell you are doing…understand what it is that you investing in.” – me

In other words, have a good understanding of how your investment vehicle works.  If you don’t understand it, don’t do it unless you are willing to lose.  Then…if you lose….don’t #$%@!$ about it.

What I am saying is a knowledgeable investor will understand the risk, do what he or she can to mitigate it and roll with the punches of the investment.  A savvy investor will do all this while taking advantage of the cycles that ALL INVESTMENTS go through.

Savvy investors know that losing money is the cost of doing business….but the key is making more than you lose.  The way great investors do this is by spending the time educating themselves, seeking advice from successful investors and professionals, and mitigating risk.

Investing with little or no knowledge of what you are doing is what I call “Vegas Style Investing.”

So…then next time someone on stage or TV tells you their opinion on investing….take it with a grain of salt.  Remember there are success stories with almost every type of investment vehicle as well as horror stories.  The key is to understand the investment and know what the heck you are doing.

Until next time…..rob

Greetings!  My blog just got hijacked.  I wonder how that happens…..well….I guess the bright side is that the “blog terrorist” felt this blog was getting enough traffic to hijack.  Well….for those of you that had to endure the nonsense….I apologize.  I wish I could tell you it would never happen again…but then…I am not sure how it happened in the first place.

Anyways….

One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience.  As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing.  But with commercial real estate, the stakes are much bigger and the learning curve is much steeper.  But the “gurus” don’t tell you that.

My biggest mistake was I did not research the people I was learning from.  Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake.  Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program.  Yes…this happens a lot more than we think.

Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through.  Sometimes you can push so hard that you take down a wall.  Fortunately, at the time, it was the right wall.  But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.

Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.”  That is not what I am saying at all.  But….what it does take is the correct education and guidance.  Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.

So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….

Rob’s thoughts are ideas on getting started in commercial real estate:

1)  Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.”  When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.

2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp.  Now…there are good books out there that are trying to sell you something, but they give you a lot of value too.  One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti.  A great book in explaining the basics.  Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan.  The importance of reading up on commercial real estate is to see if you even have a true interest.  If the books above get you excited, you may have commercial real estate in your blood.

3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience.  The licensing class does not mean you have to get a license.  It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well.  I learned a lot in my licensing class.  More than I thought I would.  But I also learned that one of my instructors had no clue about commercial real estate….just residential 

4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend.  Yes…it is somewhat expensive and time consuming.  There are four classes and each class lasts five days.  But, if commercial investing is where you want to be, this is the course you want to take.  This will help you analyze projects at depths you had no idea existed.  You will also learn how to do demographic studies, leases, etc.  Plus the networking at these courses are invaluable.  When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test.   But…I digress.

5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling).  This is by far the best advice I can give you.  If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself.  This may take some time and it is uncomfortable at first….but well worth it.  Chances are this person/mentor will be a real estate agent/broker/CCIM investor.

If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.”  Real experience from real investor is by far the best way to find success in commercial real estate.

Until next time…..rob

Washington D.C. in the fall

Greetings from Washington, DC.  One of my favorite cities…..if not my favorite city.  I’d have to think about it.

As funny or odd as this may sound, Washington D.C. is a very romantic city.  There are so many positive emotions that bubble up that I think the word “romantic” is fitting.  But…not a place for a honeymoon….but then…what do I know.

Today….We spent a lot of time at the Smithsonian Art Museum.   Just amazing.  I have never been more captivated by art.  Living in New Mexico….the art galleries are endless…from Santa Fe to Taos.  Walking from art gallery to art gallary in New Mexico is great….but nothing like here in D.C.

So…as we made our way through all the exhibits at the Smithsonian….one painting captivated me….Repose by John Singer Sargent.  A girl….lounging on a couch.   You can tell this lady is deep in thought….possibly sad.  I wondered for a long while what was she sad about?…what was she thinking about?  I came up with my on conclusion….but I digress.

Repose by John Singer Sargent

Anyway….

Getting caught up in all the amazing emotions touring D.C. reminded me of how dangerous emotions really are.  We all are familiar with emotions when it comes to relationships.  The old saying “love is blind” is a great example.  Well…guess what, emotions are dangerous in business as well.

I remember as a “newbie” investor how wrapped up I would get in a deal…..to the point where blindness would set in.  Getting emotional over a deal is a great way to cloud your vision. All of a sudden you are compromising….or worse….justifying.

Think of it in terms of personal relationship.  Before you start dating someone, you have criteria….then all of a sudden you fall in love and the criteria goes out the window…all in the name of “love.”  All of a sudden the things that you would not compromise on become “cute” or “no big deal.”

Well…in a personal relationship….the relationship ends in heartbreak.  But in business….the results could be financially devastating.

So….

Here are a few ways to avoid getting emotionally involved in a real estate deal.

1)  “Fall in love with the numbers first.” This is probably the most crucial tip. Focus on the numbers first!  Knowing how to analyze a deal and understanding the numbers is crucial.  Letting the numbers dictate your next action is a great rule of thumb.

2) Use the facts. Real numbers should be your focus.  Proforma numbers are “hopeful” numbers.  Never use proforma numbers in your initial analysis.  Yes…proforma numbers have their place in the big picture of things….but not when you are trying to understand the asset.  Proforma numbers only help you fall in love with the property…which is a bad move.  By the way…come up with your own proforma numbers.  Never…ever…ever use a real esate agents or seller’s proforma numbers.

3) Try not to visit the property until you have fallen in love with the numbers.  You may be tempted to go visit the property….but…this may only impact you emotionally.

4) Have someone else look at the numbers too! Having a third party look at the financials will give you a different perspective as well as help you stay focused on the numbers.

5) Write down your investing criteria and stick to it.  In other words, write your plan…work your plan!

Of course…there is a lot more to this but the tips above should give you good start in the right direction.

Until next time…..rob

Let's see if he will take our crappy low-ball offer....

Greetings from Cedar Crest, NM….

Going to the zoo today….well, I hope to.  Albuquerque, NM,  believe it or not, has a great zoo.  City of Albuquerque has done a great job there.

Anyway….The Art of Negotiation

It is a fact that if you can master the art of negotiation, you can make the deal better not only for yourself but for both parties.  Yes…both parties.  There is so much to negotiation that investing time and money in learning the art will pay back dividends in whatever investment vehicle you choose.

My business partner, Steve Maxwell, is one of the best I have seen.  I have learned a lot from Steve.  Yes…I have taken negotiation courses but they usually teach on “how to stick it” to the other guy.  Not the way I roll and not the way Steve rolls either.   When both parties win, that usually turns into a healthy long term relationship.

In any case…..

Two key negotiating points ( there are hundreds more but here are just two)

Timing – Be Slow

Taking your time on a deal where you know you are giving away the farm…and feel you have no choice.

For the last few days I have been working with Zach from Jaxon Texas Property Mangement on leasing some vacant space to a nail salon.  Zach, being the middle man, was in a tough battle to get the best deal for us.  The owners of the nail salon business where shrewed and knew what they were doing.  Not only that…but the occupancy rates are dropping and as a result, the price per square foot is going south too.

I was in the position where I had the vacancy for a long period of time.  I had given up on getting another credit tenant in the space and now I was just looking for a solid tenant that could attract traffic and at the same time benefit from the traffic of the grocery store.  I needed to fill the space and I needed to do it at a close to market price.

The nail salon owners were beating us down on price and terms to the point where we did not know which way was up.  I just about gave up and almost gave in.  I had a scarcity mindset and I was thinking…”will this be the best deal I get the rest of the year?”  Luckily, I took my time and ran the deal by my business partners.  By taking my time, the nail salon owners got “itchy” and started to call Zach hoping for a “thumb’s up” on their offer.  Needless to say, Zach was waiting on me.  So, emotionally, the tenants were tied into the deal and already thinking the space was theirs.

Competition = scarcity

While I was taking my time and discussing with my partners, Zach received another offer from, you guessed it, another nail salon.  The offer was much better but they were slow to sign.  When the previous nail salon owners called again, Zach told them that we have another offer that was more inline with what the owners were looking for.  Immediately, the nail salon owners said “we will match the offer.”

In summary…..

Timing and competition are key to helping you close a deal.  In this case, a lease.  Even though the market is going south and vacancies are increasing…and values are dropping.  If you can be patient and add competition to your deal, your chances are good that you can close your deal in a way that benefits you and your “nail salon owner.”  “Rob!  How does that deal benefit the nail salon owners if they now have to pay a higher rent then what they initially offered?”  Great Question…and the answer is that if I would have signed the initial offer, I would not felt good about it and I would have looked for the first chance to find another tenant.  I probably would not go out of my way to help with other leasing items because I felt they stole that space and I was not about to give them more.  On the other hand, by checking the market, the nail salon owner would know they are getting a fair price and not feel taken advantage of.  So…both parties win.

Until next time……rob

Are you living the good life from passive income?

Greetings from the Inn Of The Mountain Gods in Ruidoso, NM.  Enjoying the weather before heading to El Paso, TX to hang out with family and friends.  I will also visit some of our retail shopping centers and discuss some vacancy issues with our property management company, Jaxon Texas Property Management as well as our asset management company, True North Asset Management.

Before landing in Ruidoso, NM, I just returned from Sucre, Bolivia and trying to get my head around what I experienced.  Seeing Food for the Hungry in action was an incredible experience and looking forward to going back.

Anyway….

Today’s blog post is a topic that is a difficult one to learn becuase it is not a lot of fun.  Although most of the post is “definition” on thing I would like to point out is that “falling in love with the numbers” is a priority.  Many investors, especially inexperienced investors get emotionally involved before they study the numbers and their emotion will help them “fudge” the numbers.  This is a terrible mistake….but I digress…..

So…..evaluating cash flow….

In the evaluation process of determining whether the property can and will generate enough income, you must analyze the numbers. According to Kiplinger.com, you need to look at several different variables to make the best decision. An interactive worksheet is available at: http://www.kiplinger.com/tools/renthouse/

These variables include the following items, which have been defined based on input from investorwords.com and Kiplinger.com:

• Mortgage Balance: The mortgage balance is the amount remaining due on the mortgage. A mortgage balance is a debt against the asset of the property. There are many creative financing tools available that can help you assess the options with the lowest balance.

• Interest Rate: An interest rate is the rate you pay to use money. IT is often expressed as an annual percentage of the principal (amount of someone else’s money you are using). Interest rates are calculated by dividing the amount of interest by the amount of principal. Interest rates are subject to change based on the rate of inflation and policies of the Federal Reserve.

• Loan Term: A loan term is the period during which a loan agreement is in force and during which the loan is repaid or renegotiated for other terms.

• Building Value At Purchase (including capital improvements): Building value at purchase means the numbers used to calculate your tax basis and annual depreciation. For tax purposes, residential real estate depreciates over 27.5 years, which allows for an annual 3.6% write off of the property tax’s basis. Building improvements are included, but lot value is not. This is different than net present value. Net present value is the difference between the present value of the future cash flows from an investment ant e amount of investment. Present value of expected cash flow is computed by discounting them at the required rate of return.

• Modified Adjusted Gross Income: MAGI is the income from taxable sources less adjustments. According to the IRS, you can deduct up to $25,000 of rental losses annually to reduce your tax bill on other income if your MAGI is less than $100,000. If your MAGI is too high, passive loss rules put your losses into suspended animation, which means that they have no value at the time but will resurface to offset taxable profit when the property is sold. MAGI is calculated for passive activities by subtracting the following from your grow income (not including rental income):
o Job related moving expense
o Penalties for early savings withdrawals
o HSA Deductions (health savings accounts)
o Deductions for qualified plans and self-employed insurance
o Alimony Payments
o Penalties for early withdrawals from tax savings or deferred plans.

• Annual Property Tax: This is the local tax assessed on owned property.

• Active Management Expenses: These include expenses from actively managing a property.

• Private Mortgage Insurance: PMI is mortgage insurance provided by a non-government insurer that protects a lender against the loss if the borrower defaults.

• Inflation (used as a yearly percentage increase in rent, property tax and insurance): Inflation is the upward price movement of goods and services in an economy usually measured by the Consumer Price Index and the Producer Price Index. Over time as costs rise, the value of the dollar decreases because you can’t buy as much with the dollar that you could before. The Federal Reserve actively tries to maintain a 2-3% rate of inflation but the annual rate has greatly fluctuated.

• Income From Rents: This is the amount that tenants or lessees pay you to use the property.

• Utilities: This is the amount spent on heating, cooling, providing water or gas to a property.

• Parking Costs

• Homeowners Insurance

• Advertising

• Maintenance and Repairs: Maintenance can be deducted from the cost of the property. Improvements are not deducted but recovered through depreciation.

• Other expenses: Other expenses include points, commissions, tax return preparation, travel expenses, rental equipment and other expenses related to maintaining your property.

Until next time……rob