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

The Bank Allowed What?

Wow…has is been a long time or what?  I have been so busy with a real estate class (six weeks) and purchased an apartment building within the same time frame.  Just plain crazy so a lot of things got neglected…especially this blog.  Looks like we have another apartment building in the works (thanks to KB Realty)….things are looking busy for the next few months…at least I hope!

Anyway….

There is one thing I never heard of when it comes to investing… A Bank Approved Wrap.  BUT this one thing is a HUGE deal.  I have done several wraps before…..but never a bank approved wrap.  Now…remember…a wrap is when you “wrap” an existing mortgage with a brand new mortgage.  Read more about wraps HERE.

So what is the big deal?  Well, usually on wraps, there is always a small risk that the loan can be called due to the fact that the asset has been sold yet the loan is still in place.  This is a small risk because banks usually do not exercise the “due on sale” clause call if the loan is in good standing.  In other words, the payments are still coming in on time.  But…there is always a chance.  In any case, when we first approached the seller, the seller did a “no no” and asked if the lender if it would be okay to wrap the note.  Surprisingly, the lender said “yes”…..at first I thought there was a mistake….and I just felt someone misunderstood something.  But….I was wrong.  So, in the last week of December, we closed on an apartment building with only about 6% into the deal (commissions and closing costs).  No joke!

I even talked to my lender friends….they all NEVER heard of of such a thing….especially in commercial.

The beauty of the deal was that it was 80% occupied and still cash flowing.  The issue with the property was mismanagement.  Bad management with out-of-town owners is a great formula for opportunity.

Now…I have to give credit where credit is due.  Preston from KB Realty found this deal and made it happen.  James, a.k.a. “J” our attorney, worked hard during Christmas to get things right.  Having solid relationships was the only way to get this done….but I digress.

There were problems with the deal….more specifically, timing.  The sellers wanted to close before December 31, 2009….which only gave less than 30 days to close.  Now…. trying to close in 30 days during the holidays is impossible….so I thought.  I told Preston “there was NO WAY we could do it.”  Due diligence, attorneys, inspectors, banks, title companies….are hard to round up to work on a project anytime of the year….especially during the holidays….Forget about it!  Well…Preston pushed and pushed and the rest is history.

My partners and I learned something…..we don’t know everything…but thinking we do can lose us opportunities.

Thanks to Preston…David….J….

On to the next project!

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

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

My name is Emily Cressey and I have been investing in real estate ever since graduating from college in 2002. In that time, I’ve gained a huge amount of experience and my partners and I have invested in over $50 million worth of real estate.
I quickly scaled up from working on buying single family homes with no money down to investing in multi-million dollar apartment buildings, land and shopping centers.

I wouldn’t have been able to do any of this without the help of partners.
I’ve worked with a variety of people as partners over the years, and some relationships have turned out better than others.

If you can avoid the potential minefields of business partnerships, you can replicate my experience and launch your real estate success like a bottle rocket on the fourth of July.

My partners and I have prepared a FREE mini-course for you on the best ways to work with partners. It’s available for you for FREE when you register below. You’ll receive one lesson per day in your email box.

In Your FREE Mini-Course, You’ll Learn:

• How investing with partnerships can actually be safer than investing alone.
• How partnerships can inspire trust from outside investors who will infuse your business with millions in cash for your projects.
• How to write up agreements between you and your partners so when conflicts arrive, they won’t unravel your business.
• What are the 7 things you and your partner should discuss before deciding to go into business together.
• What is the single most important thing your partner MUST do
  before you decide to work with them.
• How to evaluate whether or not you want to work with a partner in the first place.
• How to end a partnership that is no longer meeting the needs of both parties.
• A step-by-step process for making your partnership, happy, long-lived and profitable.
• How to protect yourself in the event your partner goes crazy!
• And much, much more!

Sincerely, Emily Cressey