The Real Wealth Expert Panel

Greetings from the metropolis of Cedar Crest, NM!

Today’s post comes from a question from a friend of mine.  It is a detour from real estate, but like most of us, we have investments in different types of vehicles….stocks and mutual funds for example.  So…I thought this may be helpful for some of you…..

Rob, I have a meeting with my financial planner next Tuesday.  I primarily invest in mutual funds and stocks.  My portfolio has dwindled buy 50%.  I would like to know what questions I should ask my financial planner in order to right the ship.

I took the question to my good friends Emily and Steve….you can read both of their replies below….

There is a lot of information here….so feel free to print out…..

Response from Emily:

Hi Rob,

Emily Cressey Real Estate Investor and Coach

I think it’s a great question, and I would be glad to weigh in with some thoughts.

There’s nothing like suffering a down market to make you stop and re-evaluate your investment strategy.

However, a down or volatile market is rarely the best time to sell off mutual funds.  These are the days to stick to your strategy and dollar-cost-average your way into the market while prices are low.  (As I write this, I don’t think the market is particularly low or undervalued, I’m just speaking in general about when the market is “down.”)

Most mutual fund investors invest for the long term with the assumption that the market will go up approximately 11% a year on average.  However, with the current political climate and anticipated changes in increased government spending and government debt, as well as the potential government-takeover of the private medical sector, I think it’s reasonable to question these underlying assumptions, and hedge your bets a bit in case the next 100 years in the stock market don’t perform as well as the prior 80 years have.

One of the biggest things to look at is your asset allocation.

Within the stock market, you may have created some diversity.  Personally I invest in the following funds:

• S&P 500 – 35% of portfolio
• Small and Midcap Index Fund – 35% of Portfolio
• Total International Fund: 25%
• REITS: 5%

I don’t have a larger share of REITS because I have real estate investments outside of my stock investments.

I am more heavily invested internationally now than I have been in the past due to concerns about the future of the US economy.

I hold no bonds because their primary purpose in a securities portfolio is generally to provide stability – at the cost of lower returns.  I am young enough that I don’t seek security in my portfolio at this time.  I am chasing the higher returns.  This may change as I get nearer to the age at which I plan to start pulling money out of the portfolio or living off its returns.

I do have about 5-10% of my investable assests available as liquid cash reserves that are available to invest in various things including real estate or stock should an excellent opportunity present itself. This also lends some stability to the portfolio should something terrible happen.

In addition, I keep a 6-month emergency reserve for my family, separate savings accounts to save up for things like furniture or a new car, and operating capital for my businesses in case a rental property goes vacant or I need to do a repair on a house, pay my accountant, etc.

I think as far as questions to ask your financial planner go, I would focus on evaluating your overall portfolio strategy at this time to see if it still meets your needs.  Do you have the cash reserves, the portfolio-stabilizing bonds and cash, and the life insurance and operating capital you need to meet your needs?  Are you comfortable with the overall risk and return of the assets you are holding?  Do you need to re-balance anything?  And finally are there other asset classes that it makes sense for you to diversify into… real estate you own and operate, businesses, private mortgages, gold, etc.  My parents says their best-performing asset last year was a loan they made to me.  Personally, my cash-flow real estate is doing well, it’s always nice to get checks in the mail!

There are lots of ways to invest – but they are not all “easy” things for your financial planner to sell.  If you are willing to put the time into other types of investments, start with some books at the library (Or this blog, if it’s commercial real estate), and find out what people do who are successful with those investments, and what the risks are, as well as the ramp-up-time.

A lot of people are risk-tolerant on paper, but then when there is a shake-up, they have trouble staying the course.  It’s no fun to lose a million bucks just because the stock market has a bad day.

If you’re not comfortable with the losses you’ve taken, don’t just “Sell” to stabilize things, but look toward starting to buy some different asset classes that will create a more stable base for your net worth.

Also, remember to see what you need to do for your different goals – saving for kids college is a much different time line and should have a different strategy than saving for retirement.

I invest for retirement and my son’s college separately.  Our goal is 20% of our income going into retirement savings.  After we’ve covered that, our extra savings goes into paying down our mortgage.  Currently we’re not putting any more money into real estate at the moment, because it already represents a significant chunk of our assets, and we’re trying to diversify a bit to spread out the risk and return.  The nice thing about paying down debt is that you get an immediate, guaranteed, tax-free return!

Well, that was long-winded, but it hopefully will give you some good things to think about.

The challenge about financial planning in the abstract is that there is so much that is about YOU, and your situation, and not just “What the book says.”  I think you’ll have a great conversation with your financial advisor, and please let us know if you have any further questions!

Response from Steve:

Rob,

Before I give my answer to your friend’s question, I’m going to answer a that wasn’t
asked but that I believe is very relevant …

“How can I optimally work with any advisors”?

I strongly believe in and use advisors myself (attorneys, book-keepers,
CPA’s, physical training, financial mentoring, business mentoring and have
in the past used financial planners for years).

I believe three of the most significant keys to the effectiveness of your
advisors are:

1. Are my advisors really advising me for my best interest?
Are they teaching me HOW to think about things or just saying “do this”?
You of course have to expect and ask for this as often people want to take
the easy way out and just have someone tell them what they need to do.  For
example I really like my Iron-Man triathlon coach … except she doesn’t
really want to explain WHY we’re doing certain things.

2. Is my advisor actually DOING what’s being advised or are they simply
making money from giving the “advice”?
This is especially true in the area of financial planners, many of whom are
doing poor financially themselves.  This is why I’m following my passion of
teaching/coaching others as their “personal CFO” … to teach them HOW to
think financially what’s best for them.

3. And lastly and this is an important one … The quality of my advisor
depends on ME and the questions I ask.
While I greatly appreciate the advisors I use, the quality of the questions
I ask makes a big difference.  For example notice the difference with the
following two questions about the same topic.

“Should I invest in this opportunity”?

“What should I think about before I choose to invest in this opportunity,
and what are the risks I should consider before doing so?  How CAN I
optimally make this investment”?

For example if I was asked the 2nd question I might reply with the following
helping you think through the following.

“It depends” … What upside do you see (is it worth considering assuming
this works out as planned and will you do this type of investment again …
if not why bother looking further?  Let’s review the risks associated with
this type of investment.  (NOTE this may heavily depend upon YOU … for
example since I invest in cash-flow apartment complexes I view them as safe,
while I’m no longer involved with stocks and thus for me they’re more risky.
WHATEVER type of investment you choose you should at least understand the
basics of them (see attachment).  Many people invest in mutual funds which
are very easy but not many know that if you purchase towards the end of the
year you’ll likely be charged taxes as though you’d owned the fund all year.
As you grow as an investor you’ll learn to ask better questions and hence
get better answers.  You do NOT need to know all the details but at least
how the basics work.  ASK your advisor to explain them to you.

Some suggested questions first for YOU (not your advisor):

1. What is the goal of this investment (i.e. have enough money in 10
years for most of my daughters college education)?

2. Do I understand the “basics” of how stock and mutual fund
investing     works?  If not you may want to read “Take on the Street -
What Wall     Street and Corporate America Don’t Want You to Know & What
you Can Do     to Fight Back” – Arther Levitt, former chairman of SEC.  I
am NOT     saying you shouldn’t invest in stocks or mutual funds … I did for
years and others are still doing it successfully.  I have more of a     bias
for real estate as I have advantages there vs. the stock market
where I don’t.  I would recommend you learn about options, puts, and
calls which can protect you if you’re investing in the market vs. the
advice “just invest for the long term” … which by the way mutual     fund
companies don’t do (i.e. their turnover ratio is often greater     than 1 where
they sell every stock in the fund at least once a year).

OK, so I’m a little long winded and as you can see I have an opinion on
this, let’s get back to the “original question”

Questions for your financial planner?

1. How are you compensated from my investments?
* Is it a flat fee (i.e. % of your $’s invested) or commission / loads on
your investments?  For example in the insurance world brokers receive a
larger commission for selling more expensive “whole life” policies vs. term.
It helps to understand any potential biases.
* There are some great financial planners and some really do know about the
stock market, but interestingly enough last I heard about 80% of the index
funds (such as S&P 500 index) outperform the actively managed funds with
much higher fees.  If my portfolio over time isn’t doing better than “the
market” … such as S&P 500) maybe I should just invest myself in low cost
index funds, and then as needed pay an advisor (maybe for services rendered
or by the hour) for advice.  Again, I DO recommend advisors but in the right
context.

2. What changes would you suggest, and why?
KEY follow-up question – “will you guarantee that”?  In most cases the
answer will be “no, of course I can’t guarantee that stocks on average
return 12%”.  The reason I mention this is to learn to recognize someone’s
opinion vs. fact.  You can’t always get facts but often opinions are
presented as fact

Thanks Steve and Emily….

Until next time…..rob

"You are who you hang out with"

Greetings from a coffee shop somewhere in the mountains of New Mexico.

This morning I received and email that took me back a few years ago.  I  was quickly reminded of my old blog “WealthLifelines.”  A few years ago I had a blog that focused on building relationships in order to build “wealth” in all areas of life.  I still believe that is the most important success factor.

I continue to tell my students, “being successful in whatever you do depends on your ability to build relationships.  Not just ‘business card’ relationships but deep, meaningful relationships.”

I think there are two people spreading the “relationship” gospel best…..Keith Ferrazzi and Tim Sanders.

If you are not familiar with Tim Sanders…..I would encourage you to start now.

I first learned about Tim Sanders when I picked up his book Likability Factor which I highly recommend.  Then I read Love is the Killer App.  Another excellent book.  I have not read his new book Saving the World at Work….but that is next.

Tim spreads the word about how crucial relationships are to our success in business…but most of all, in life.  We take “relationships” for granted and I see it as a dying art form….of course only used by those who are truly wealthy….and I am not talking about money.  It is not a secret….but we try to substitute what is truly worth our time with “gimmicks” and “goofy myths” hoping to avoid meeting people and hoping to be successful while living in a closet.

When I hear someone call themselves “A self-made millionaire”….I whisper to myself….”what a liar.”  And if….there is a very slim chance that is true….”how sad.”

Until next time….rob

Residual Income....that sounds sooo good!

Greetings from The Pit @ the Univesity of New Mexico.  Watching my boys play at Steve Alford’s basketball camp.  Good times and good people.  Today’s topic is one close to my heart because it has been my passion for most of my life.  Not specifically residual income…but the lifestyle residual income provides.  I hope you enjoy.

Residual Income

Most people who invest in commercial real estate are focused on generating profit (cash flow). One way investors generate profit is though residual earnings, which make up the net income an investment can earn over the minimum rate of return. Residuals are a source of passive income that generates income without requiring continuous active participation. Artists and intellectual property owners also generate residuals through royalty income.

Why Should I Focus on Residuals When It Just Seems Like a Small Amount Every Month?
If you spend all of your time working on the tasks that require the most effort for the littlest reward, at best you will only get the littlest reward. Instead, it would be better to spend a minimal amount of time on achieving the maximum reward (i.e. increasing residual earnings). If you are not creatively inclined or unable to invent something requiring a patent, real estate investment is a relatively easy way to begin earning residual income.

How Does This Work?
For example, let’s say you spend 40 hours a week at a job making $25 per hour or $52,000 per year. Theoretically, you are working every minute of every hour to earn $25 per hour. Now, let’s say you invest in an apartment building for $75,000. The building has four units that each rent for $400 per month, for a total of $1,600. If the mortgage on the building is $600 per month and the property management company is $100 per month and the remaining expenses are $100 per month, that means you earn $800 a month or $9,600 a year for spending at most 30 minutes a month writing a few checks. If you spent 15 minutes a month handling the apartment building, that equates to three hours or work a year, which would mean that you earn $3,200 per hour.

I can’t live on $9,600 a year. I Still Need My Job. Now What?
The explanation behind the above example applies to multiple buildings also. Let’s examine the same idea only with five properties. Following the same logic and using the same numbers, you would take home $48,000 a year, which means you earned $16,000 per hour.

Just because you earn residuals, doesn’t mean that you need to give up your job. Residuals allow you to have regular income of a potentially sizeable nature without a lot of work. They can provide you with financial security as well as legal rights to income that can be passed to your children or heirs. Take the time to think about residuals and other passive income streams. With a clear understanding of where your money comes from and how much work you must put in to earn that money, you too can begin to work smarter.

Until next time…..rob

Just watch me....win or lose!

This is the first time we are announcing this publicly!

My partner, Rob Powell, is working on buying a $15 million deal in Texas, and we want you to follow along in real time as he works this project.

Follow on Twitter: http://twitter.com/RobAPowell and Subscribe to this blog for more detailed updates!

We don’t know if this deal will close… we’re doing this in real time without a safety net. But we’re going to be sharing what happens step by step and we want you to be a part of it.

As an extra incentive, we’ll be providing special “bonuses” like some of our closely-kept property documents as a gift to you to help you follow along and to assist you as you work your own commercial real estate deals.

Heck, you may even have a chance to participate in this as team members… we’ll have to see how things play out.

CAVEAT: The Internet is a big, exciting and PUBLIC place. Our only limitation is that we don’t want to give away too much insider information that could get back to parties that are not as nice as you, so some identifying details will be left out of the public conversation. Shhh! However, we strive to give enough information that you can follow along just like you were doing the deal with us!

The Deal Itself:

This commercial real estate deal is a $15 million apartment building in Texas with approximately 500 units. It is a “C” class property in a “C” area with an 80% occupancy rate.

Where We Found It:

Just like we’ve taught our private coaching students, some of the best deals are to be had through creating relationships. We call them “Wealth Lifelines.” This deal was found by networking with real estate agents who knew Rob was a serious buyer looking for a good opportunity.

The Numbers:

When Rob found this apartment complex, it was hovering around 80% occupancy after some management transition had increased the vacancy from it’s historically lower levels.

He was attracted to the deal because it cash flowed at that level, so there was good upside potential.

Even though the cap rate was in the “7″ range when he first saw the property, Rob was able to negotiate $1.5 Million off the purchase price to get it locked up at an 8-cap.

If nothing changes when they do the financial review, Rob should be able to get an 15% cash-on-cash return on this deal.

What’s Next:

Rob is just starting the due diligence phase of the process. He has 45 days for due diligence and it started yesterday (4/20/2009).

He is hiring an asset management firm, and a property management company he’s worked with in the past to cooperate in doing the research necessary to complete the due diligence.

Want to know what he’s working on NOW?

Follow him on Twitter to find out!
http://twitter.com/RobAPowell

This is an exciting deal and I am looking forward to revealing more as we get further into the process!

Passive Income Makes Me Want To Dance...or something. photo by corey robinson

Passive income is the money generated from real estate or business transactions in which the investor is not actively involved. There are several ways to generate passive income from investments in commercial real estate. To understand the value of passive income, it is important to understand how income is generated from commercial real estate.

Commercial Real Estate Income—Understanding Valuation
Commercial real estate is valued in a different way from residential real estate in that the property produces income directly proportionate to its worth. This means the property is worth more if it creates more income. Residential real estate is valued based on comparable real estate in the area, otherwise known as market comps.

Generating Cash Flow
Commercial real estate investment also generates greater liquidity through larger cash flow. For example, if you were to invest $250,000 in a residential home, you would expect to rent that house for $1,800 while the underlying mortgage payment would be around $1,600. This would leave you with only $200 in profit with all risk resting on one tenant. If you were instead to purchase a 10-unit two-bedroom apartment building at an investment of $25,000 per unit and rent each unit for an average of $500, you would generate $5,000 per month while spreading the risk among 10 tenants. That is a little over three times the amount of cash generated for the same amount spent.

Forced Appreciation
With commercial real estate valued at its ability to produce income, you can increase the value of the property (appreciation) through increasing income. If you cosmetically upgrade a property through inexpensive updates, you can increase the value of the rents. If you decrease costs of maintenance or pass some maintenance expenses to the tenants, you increase the income from the property. Many small tweaks can generate a much higher income and value of the property.

Passive Income
Commercial real estate investment generates passive income when a person acts as a silent partner, invests in an investment pool or invests in a Real Estate Investment Trust (“REIT”).

A silent partner investment can provide high reward but can carry a high degree of risk. Silent partners usually provide cash or access to capital but do not manage or participate in the daily operations of the property. Generally silent partners may not mandate business decisions but can require accountings of their investments. Silent partner agreements exist at many levels from limited liability corporations, limited liability partnerships or partnerships. These can be extremely lucrative business ventures but require a substantial amount of research to find the right fit for the investor.

Investment pools are created when a group of investors pool their assets to own property. The investors do not participate in managing the property or any activities associated with the property. Income dividends are paid directly to the investors minus fees and other stipulated costs. Some investment pools are heavily structured while others have more fluid rules. These can generate substantial income for investors depending on the structure and policies of the pool.

REITs provide a regulated market for investors to purchase securities sold on national exchanges that directly invest in real estate via mortgage or properties. REITs offer tax considerations that can eliminate or substantially decrease corporate income taxes. They can be public or private. Some REITs invest in multiple types of commercial real estate and some focus solely on one area. REITs are required to pay investors, at applicable tax rates, 90% of the income.

REITs are designated as mortgage, equity or a hybrid. Mortgage REITs focus on ownership and investment in property mortgages with revenues generating from mortgage loan interest. They purchase mortgage-backed securities, existing mortgages or provide loans to real estate owners. Equity REITs own and invest in property, which means the investors retain the value of the real estate asset. Income is generated from rents. Hybrid REITs provide a combination of mortgage and equity REITs.

Would you like to know more about Passive Investment Income Opportunities?
The principals at Grassland Investments, aka The Real Wealth Company, are active investors continually looking for profitable investments. If you would like to know more about future deals or participate in one of the investment opportunities available, please enter your email address in the box. You will receive up-to-date information about the market as well as property valuation tools to help you make the best investment decisions.