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Are You Using the “1 Degree” Rule to Skyrocket Your Real Estate Investing?

by Ben Leybovich on August 21, 2013 · 33 comments

  
Rocket

In the image to the right you see a toy rocket launcher. My kids were gifted this toy for their 4th birthday some time ago by a family friend. The action is pneumatic – you slide a rocket onto the launcher, step onto the air compressor thingy, and off it goes – pretty cool actually…they love it!

I was playing with the kids one day and my daughter decided that we should aim at the play set about 20 feet away in the yard. So – we did; we aimed the rocket at the play set the best that we could and launched.

We were off by a mile…my daughter Isabella looked at me puzzled. I smiled and said:

”Bella, I guess even though we thought we were aiming just right, we were off. Let’s try to aim the rocket again and see what happens” – we carefully moved the nose of the rocket a bit to the right and shot…

Missed by a mile again, but to the other side this time, at which point I found myself doing my best to explain to my four year-old daughter the One in Sixty Rule.

The One in Sixty Rule

One in Sixty Rule states that a trajectory which is deviated by 1 degree off course will place an object off of the intended destination by 1 mile for every 60 miles (57.3 to be exact) of travel.  This rule illustrates the immense impact that a very minimal change can have on the outcome in conjunction with other variables.

For example, while changing trajectory by 1 degree when traveling by foot for one hour we will note a very minimum impact on the destination point, but the same change in a jet airplane will take us to a point 1 mile away from the intended. In some cases this would mean that instead of landing on a strip at an airport you would land into the ocean or the mountains – neither of which will be particularly a pleasant experience.

How would you like to be in a 747 landing 1 mile off – all it takes is 1 degree?

What is the Implications to Us

Considering that the game of real estate is indeed a fast-moving enterprise in a lot of ways, the lesson seems to us investors seems rather straight forward:

Small Changes Can Make Big Differences in the Right Circumstances!

So – if small changes can have such dramatic impact on the transaction, then the job of a real estate entrepreneur is to find those small differences and circumstances, and to find the “1 degree” which in conjunction with time, or another relevant variable, will take us to a very different destination.

Something to keep in mind is that the larger the project the greater the impact of a miniscule change. Currently I am pursuing the syndication model of acquisition of large apartment communities (50 – 150 units), and let me tell you – WOW.

Consider This…

In a 10-plex situation, improving the NOI (Net Operating Income) by $25 per unit per month constitute an increase in valuation of $3,000.

Value = NOI / CAP Rate = ($25 x 10 units x 12 months) / 10% = $30,000

Nice – just increasing rent by a measly $25/unit we can create a value of $30,000! However, consider this in terms of a 150-unit apartment community:

Value = NOI / CAP Rate = ($25 x 150 units x 12 months) / 10% = $450,000 !!!

WOW!!! $450,000 – how’s that for a payday? And here’s the thing – how much work do you think will be required to increase the rents by $25/month? Would some mulch and flowers get it done..? What if I do a few other things which enable a rent increase in a $100/month range…

This is why having created hundreds of thousands dollars of value in small multiplex, I am choosing to throw my hat into the large apartment space via a syndicate – time to create millions…

Conclusion

Small changes can have a great impact indeed. The trick is to “see” the 1 degree. I quote Helen Keller:

“The only thing worse than being blind, is having sight but no vision”

In fact, this is the most difficult and abstract aspect of Real Estate Investing is seeing that which others can not. However, if you develop an ability to have a strategic vision, you will create a very formidable advantage for yourself over your competition.

Good Luck!

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{ 33 comments… read them below or add one }

Tony Tran August 21, 2013 at 7:29 am

Great article! Congrats on your progress thus far.

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Ben Leybovich August 21, 2013 at 7:43 am

Thanks so much Tony!

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Maurice August 21, 2013 at 8:23 am

Excellent and profound article Ben. I find it particularly interesting because I’m focused on muli-family (10 fourplexes) right now. So this really had resonance for me. Looking forward to your next article. Now…I gotta go adjust my crosshairs:0)

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Ben Leybovich August 21, 2013 at 9:44 am

Thanks so much Maurice! We hope that in taking the time to write down our thinking we are actually helping somewhat. I am very excited to know that you are enjoying my articles indeed!

Thanks for leaving a comment Maurice!

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Glenn Schworm August 21, 2013 at 8:59 am

Good Stuff Ben,

Good analogies, I have heard it said that airplanes are off target about 90% of the journey but through constant course corrections they end up at the target. Not the same but it was in the plane family. :-) YOu are so right in that the small things can make a huge difference if we simply choose to look at things with the right set of eyes. Best of luck to you in your larger ventures! I think thats great!

Glenn

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Ben Leybovich August 21, 2013 at 11:00 am

Thanks so much Glenn!

I haven’t thought about it this way before – we can, and are indeed expected to continuously make corrections to the flight path. Excellent!!!

Thanks so much Glenn,

Ben

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Sharon Vornholt August 21, 2013 at 10:54 am

Ben – this is a great post. I love your analogy too about small changes and the path of the jet.

Darren Hardy of Success Magazine wrote about book a couple of years ago called the “Compound Effect” which was also about how small changes can have a profound effect on your business (and your life).

Sharon

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Ben Leybovich August 21, 2013 at 11:01 am

Thanks Sharon!

I am going to look this book up; I haven’t heard of it before – thank you :)

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Sharon Hiebing August 21, 2013 at 11:16 am

So I’ve been spending a lot of time in the multi-family forum, and I constantly see the more experienced investors saying to investors who have at least been in the SFR space to not move to 20, 10 or even 5 unit multis. They say start small and buy 2-4 plexes first, then graduate to the bigger ones.

How do you feel about this advice? With the proper training, can someone jump from a single families to a 10 or 20 plex, or do we have to pay our dues? Can this be considered a 1 degree correction that is necessary for larger cash flow, or will we end up in the ocean?

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Ben Leybovich August 21, 2013 at 2:22 pm

Hey Sharon,

I asked myself the same question yesterday. I am working on a syndicate at the moment – should I start with 50 or go right ahead into 120 units? The answer is two-faced:

One the one hand there is the emotional component – intimidated of 120 units, are you Ben? But, strictly by the numbers 50 units just isn’t worth the effort. You have to have a resident manager either way, but it’s so much easier to swallow the cost when there are 120 rents coming-in. Works this way across the board…

Now – there is a learning curve, but you can study; it doesn’t have to be the school of hard knocks. On the other hand – will you be able to attract the money to pull down a 10 or a 20? Financing is certainly easier and SAFER on the residential side…

But, the bottom line is simple; is it’s cash flow that you want, it’ll be very difficult to get there buying duplexes. So, the answer to your question -no, you don’t have to start way small, but you should look at a 4-plex for your first one in my opinion. This will provide significant enough cash flow while allowing for the very safe 30-year fixed rate financing. You’ll figure things out from the management and reporting stand point and then go for the big one. You don’t have to wait, but you do have to have the intellectual worth – makes sense?

Thanks so much for your question.

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Sharon Hiebing August 21, 2013 at 2:33 pm

Hey Ben! Thank you so much for the feedback. I really needed it. I honestly was starting to doubt my decision – the guys in that forum can be somewhat intimidating :)

But I’m a pretty smart cookie, a great student, and I’ve been in real estate one way or the other since 2000, so while I feel like I could handle a 10 unit off the bat, I have been debating whether it would be more prudent to do a 4-plex (and yes, you’re right, duplexes aren’t worth it at all, especially in my market). I also have NEVER done anything for purely safety’s sake – just not in my personality – and it’s served me well so far.

Appreciate your pensive perspective, as always…

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Ben Leybovich August 21, 2013 at 3:18 pm

Hahaha Sharon – those guys…

Listen – they have a point. But, through out previous exchanges I am cognizant to the fact that you are not a newbie. You may not have bought a 10 before, but you are definitely not void of experience and capacity to reason. This is why I think that if you study up a little, you can do it and you should. This is not necessarily my advice for everyone.

Having said that, if there is someone reading this whose ultimate objective is Cash Flow – do not start with singles. Management of a single family cash flow asset bares very little resemblance to multi. Duplex is too small. 4-plex is good but can present some challenges on the first deal, which are outside of the scope for this post. My preference for your 1st deal is a 3-plx. Take it or leave it :)

Sharon Tzib August 22, 2013 at 7:30 am

Ok, Ben, I hear ya loud and clear. I’ll tune out the non-applicable stuff and focus in on what I know I can do. I’m sure they’re just trying to give the best general advice possible, since they can’t know every detail about every poster.

Now, however, you’ve piqued my curiosity about why purchasing your first 4-plex has its own set of challenges. Perhaps a blog post for another day :)

Ben Leybovich August 22, 2013 at 7:38 am

Haha – perhaps Sharon.

Incidentally, as I write this response, I am uploading an eBook to Kindle called “13 Steps to Analyzing Your First Multiplex – A Step by Step Guide”. It should be available within about 12 hours, and at $3.99 you might dig it. This is a rather small sliver of what I cover in CFFU, but it is good (not to toot my own) You may get your answer there :)

Sharon Tzib August 22, 2013 at 8:03 am

Thanks for the heads up, and congrats on the book! I’ll definitely go check it out.

Al Williamson August 21, 2013 at 11:51 am

I’m right there with you Ben. I love this fact about real estate investing. I’ve finally found a way to cash in on my wild imagination and creativity.

I just can’t understand why any owner would want to simply do business as usual when there is so much untapped potential inside every multifamily complex.

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Ben Leybovich August 21, 2013 at 2:03 pm

Birds of a feather Al – love it!

Thanks so much for reading man!

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Michael Dorovich August 21, 2013 at 12:10 pm

Hi Ben, great post! The Compound Effect is very good, it is based off of The Slight Edge by Jeff Olson, which mentions a similar reference to the Apollo spacecraft being off track 97% of the time.

A question – I was looking for single family homes and a residential broker sent me a 14 unit building in Columbus, Ga. Having been to local meetings discussing multifamily properties, I too was fascinated by the difference that small changes can make in the value of these properties.

Does it make any sense for me to look at this type of property if I don’t personally have the financing in place to do this type of deal?

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Ben Leybovich August 21, 2013 at 2:09 pm

Michael,

I’ll say this – financing should never be the thing that stops you. Open your mind! There are trillions of dollars of investment capital out there. If you can’t come up with enough to close on a 14-unit then either:

1. You are not looking,
2. You are looking in the wrong place,
3. You are looking in the right place but do not sufficient knowledge for the money to stick

I am a big believer in multi, so I will never tell you to stick with singles. However, multi does represent a learning curve indeed, and the surest sign that you don’t know enough is the notion that you can’t come up with funding…Open your mind :)

Thanks so much for commenting Michael!

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Jeff Brown August 21, 2013 at 3:31 pm

Hey Ben — Stellar post, but you’ve taught me to expect that from ya. So often the 1 degree is found in the details others ignore. You’re clearly a detail guy to the max.

Also, on the question about staying with smaller properties vs moving on to larger ones. There are definitely a couple schools of thought on that one. You and many others have made the case for going bigger, very well. Just a few of the many reasons others remain with the smaller properties are flexibility, financing, the ability to sell/exchange quickly, and the rate of appreciation when present, relative to much larger properties.

Flexibility may be the most valuable and persuasive. The ability to address both positive opportunities for portfolio improvement, or a negative life ‘event’ by messing with just a few percent of your holdings can prove invaluable. At some point though, either they go big or begin to incorporate discounted notes into their existing overall strategies.

Make sense?

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Ben Leybovich August 21, 2013 at 4:14 pm

Jeff – right on!

I’ve spent the last few years buying up small multi precisely for the reasons you mention. In fact, it has always been part of the qualifying criteria – ease of liquidation. There are certainly a lot more players able to bring down a 4 than an 120 – granted. You know that for me personally, where I am going I would have to own an ungodly number of these small multi – I have to play in the commercial sector therefore.

Having said this, am I better off buying a 20 or 200? It is a bit counterintuitive, but I think that I could actually sell 200 hundred faster and better than 20 – there are certainly fewer players, but they are different kind of players; players for whom 20, 30, or even 75 would not be interesting…makes sense? Jeff – this is not for the average retail player, but for a serious guy or gal who has made a commitment to building wealth and financial freedom through RE I think small deals are not logical. Thoughts Jeff?

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Jeff Brown August 21, 2013 at 4:26 pm

Wouldn’t disagree with that at all, especially for you. 20 vs 200 is a no-brainer when selling. My guess, counterintuitive as you suggested, is that there’d be more qualified buyers for the larger property pretty much every time out.

It’s my take that you’ll eventually cotton to the idea of discounted note income for a variety of very practical reasons. The real estate you keep will, in the end, tend to default into more of the Bank of Ben. Also, if you begin with the notes sooner rather than later, they’ll provide income while growing organically, demanding far less of your valuable time in management. Once you pull the chord and stop investing in real estate, those notes will continue growing, providing ‘raises’ while in retirement.

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Ben Leybovich August 21, 2013 at 4:44 pm

:) Jeff – the adoption papers are in mail…

Why do I want to syndicate – because of OPM. Once I’ve got serious CF to take care of today, all of the access cash will go into notes – give me a few years Jeff :)

Paul Grgurich August 21, 2013 at 11:46 pm

Thanks Ben, excellent information – as always – and definitely value added. Have you ever done a piece on an area that the rental units are full and the area could possibly support building a new complex?

Thanks, Paul

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Ben Leybovich August 22, 2013 at 7:40 am

Paul – I have not. To me, building apartments in today’s environment is a foreign concept – there is so much stuff out there that you can’t touch with the cost of building. But, I am in Ohio :)

Thanks so much Paul!

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Nick August 23, 2013 at 7:42 am

I cannot wait to hear more updates about your upcoming syndicate deals!!!!

Are you planning on putting any of your own money into the deal or are you going to raise 100% from investors? I’m just curious as to the estimated equity percentage of the deal you are looking to own for the amount of capital (if any) you are putting into it.

Rock on!

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Ben Leybovich August 23, 2013 at 9:44 am

Hey Nick –

BP will be the first to know of my progress. For now, I have meetings scheduled to go over things with potential players and their advisors.

Nick – do you really have to ask me whether I’ll be putting money in? You know the answer to this question. As to the equity position, this is negotiable so I will not speculate at this time, however, the industry standard is about a 70/30 split. As the syndicator, there is no deal without me, and this is why I get paid…we’ll see :)

Thanks so much for your comment Nick!

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Nick August 23, 2013 at 10:36 am

Haha…That’s what I figured but I thought I would ask just to make sure.

I know some syndicators out there charge acquisition fees, management fees, etc. Is that something that you are considering as well or would the 30% ownership be the only way you get paid?

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Jeff Brown August 23, 2013 at 11:03 am

Hey Nick — I’ve done many group investments as the head guy. Some I charged the fees you mention, some not, depending on the time required. In none have I put my own money, as I put the groups together for the investors. As one of my long time clients told me once, “Jeff, charge whatever fees seem appropriate, cuz without this group most of the investors inside it wouldn’t be investing nearly as well.” (A loose paraphrase I’m sure.)

I’m about to put new groups together for the first time since Reagan was in office, something I foolishly swore I’d never repeat. :) The nature of these group investments will require quarterly reporting (my requirement) so a CPA will be hired to represent the group, not me. An attorney will also be hired. Make sense?

Ben Leybovich August 23, 2013 at 11:26 am

Hey Nick,

Everything is negotiable and therefore everything is under consideration. A lot depends on the deal as well…

Hey Nick – do you want in? Call me and I’ll be happy to tell you what I am proposing to people :)

Nick August 24, 2013 at 8:00 am

Thanks for sharing that Jeff. That makes a lot of sense.

Pete September 15, 2013 at 6:11 am

Ben, this was the perfect piece for me to read. I currently own nothing bigger than a 4, but I have been talking to my wife about selling a SFH and using that as downpayment for a larger complex. I know, it is great to use OPM for everything, but it will allow me to do it now w/o a partner. Any input from group would be appreciated!

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Ben Leybovich September 15, 2013 at 9:27 am

Hey Pete,

I don’t have any problem with selling a SFR to roll the money into a larger multi – that’s exactly what you should be doing in my opinion. Good luck!

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