Ben Leybovich

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
169 Articles Written
Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the
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Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at JustAskBenWhy.com.
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Personal Development

7 Steps Toward Next-Level Real Estate Acquisitions (I’ve Reached $40MM So Far!)

It’s 5:30 a.m. The kids are still asleep, and so is Patrisha. I am sitting in the backyard at my Arizona house hack, enjoying the reflection of the blue skies in my sparkling pool. It’s quiet. It’s blissful. And being that it’s the day after the Fourth of July, I am thinking about the sacrifices so many have made to protect my freedom. So, before I go any further, a big thank you to all of the veterans out there! Now, back to the purpose of this writing. How You Can Amass $40MM of Real Estate In the last 10 months, my company and I have closed $40 million worth of apartment acquisitions. We bought three apartment communities in Phoenix, and we are on the lookout for many more. Per our business plan, we strictly buy significant value-add assets, whereby we can project a $300 per unit increase in revenue within 24 months. If I am right about the re-positioned net operating income (NOI), the value of the three assets we currently own should capitalize to about $65 million when we are finished with repositioning. Here’s the thing. Unless you are independently wealthy and have $15MM just laying around, in order to be able to buy $40MM of real estate as we did, you will need to syndicate equity from partners. Therefore, in describing the steps to get there, what we are really talking about is what it would take for you to be able to mature as an investor to the point of syndicating large assets. Here we go. Step 1: Study You have to study. To get to this level, you have to become an intellectual. Even if your first purchase is a rental house or a duplex, try to understand the process on the deepest level you can. You must be able to see yourself in your mind’s eye as a person with $40 million of assets before you can actually be that person. Study is a critical component to give you the confidence to envision yourself larger than you currently are. Your intellectual worth has to always supersede your net worth. Step 2: Experience I’ve said this many times before. Underwriting numbers is nothing more than a process of describing the dynamics in a lifecycle of an investment. As such, we don’t start with the numbers; we back into them. Your job is to start with the dynamics (the “story”) and boil them down to the numbers. The more you can envision and predict the dynamics, the more accurately you’ll be able to express those with numbers. Guess what? You can’t internalize the story from a book. You have to experience it. Thus, start small, get smarter with every deal, and build upward. The more you can envision every little aspect of that story, the more dialed in your underwriting becomes. Related: To Syndicate or Not – This is The Question (What Would You Do?) Step 3: Network You just don’t know when and how a door will open. Be available to people. Connect with people. But be careful who you listen to… Step 4: Teach You don’t start learning until you begin to teach others! The reason for this is simple. A lot of what we do is subconscious. This is specifically the case for those of you who are truly talented, as talent can hide a lot of analytical deficiencies. This means that, in a lot of cases, we are not aware of the exact intellectual processes underpinning our decision-making and execution—they are intuitive. Things just work out. Well, you may be brilliant at doing something, but in order to teach it in a way that a student can internalize, you have to break the process down and bring it into the consciousness. This is the only way someone who is not you can retrace your steps. Bringing that which would otherwise be accomplished subconsciously into consciousness illuminates all kinds of elements and dynamics that the teacher themself may have been unaware of. It’s actually a really cool process for the teacher—one that provides perspective on how to hone your skills even more. This is why I’ve always taught. Every time I learned something new, I taught. At first, I taught students to play the violin. Then I taught students how to buy small multifamily with nothing down. Now I teach syndication. And somewhere in there, I managed to write a book on house hacking. Step 5: Learn More and Learn Differently Once you begin to teach, you start to learn all over again. This is where your knowledge transitions from mechanics (a lot of which may have been unconsciously executed by you in the past) to academia. You need to think deeper to grow! But… Step 6: Eventually You’ll Hit a Wall—Recognize It! Now that you really are a thinker—one who will continually learn, refine, and implement—I can guarantee that you will eventually hit a wall. At this point in your cycle, you’ll more than likely be the smartest guy in the room. You’ll know the answers to all of the questions anyone can ask. And yet, you’ll know that something is really off with you. Despite having achieved all of those things, something is missing. You won’t be able to put your finger on it, but you’ll know that something is wrong. I describe this condition in the following way: Imagine yourself standing in a cornfield. The corn is tall and you can barely see above it. It’s dusk. All of a sudden you hear church bells. You strain your eyes, spinning 360 degrees looking for the church, but you can’t see it. It’s infuriating—you can clearly hear the bells. You know the church is near, but you can’t see it… It is this feeling of so close and yet so far away that I describe as hitting a wall. And believe me, if you are as smart as you think you are, you will eventually hit that wall… This is going to be your greatest test! Related: 5 Ways to Jump Up to Large-Scale Multifamily Investing Step 7: Forget Everything You Knew and Learn the New Way I know this sounds a bit on the liberal arts side, but such is life. Figuratively speaking, the cup that you were yesterday is overfull. There is no more room for anymore knowledge—at least not such as you’ve always known it. So, this is the time to empty out the cup and fill it with something new. You must be reborn as an investor and as a thinker to move forward. You have to question and reimagine everything. It’s a painful process. You will eventually accept that almost everything you know is wrong, but you will not know a better way. This is indeed painful, but in order to be the big investor you want to be, you’ll have to go through this. Then when it’s your time, you will find your path and be ready to operate on another dimension. The Bottom Line This cycle will repeat more than once in your career. Every time you hit that wall, you’ll have a choice: either take the off-ramp and call it a day or forget everything you knew and start over. Each time that wall will be thicker and taller. And each time the process of reimagining everything will be more brutal. At some point, you’ll be done—with all of it—having accomplished everything you are meant to. Until then, this is the life of a thinker. Good luck to all! What do you think about the steps I’ve outlined above? Where are you in the cycle?  Let’s talk in the comment section below.   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate Deal Analysis & Advice

This Deal Analysis Proves the (Disappointing) Truth About the 2% Rule

Well, I have been on the road for four days now. With two kids. In the Tesla. WITH TWO KIDS. Oy vey. We’re headed to Arizona. Gonna see what’s what! Couldn’t be any worse than Ohio, right?! In the meantime, I do try to find time once each day to take a look at BP, see what’s going on, who’s making waves. I have to tell you — with me mostly gone, everything sure does seem to be rather quiet and uneventful. Go figure. 2% Rule I did come across something that triggered somewhat of an intellectual gag reflex. People are still talking and writing about the 2% rule as if it’s anything at all. It is such nonsense and such an easy target, I can’t help myself. Let’s Do Some Math Let’s take a 2% SFR, where the house can be purchase for $40,000 and rented out for $800. Since $800 is 2% of $40,000, we refer to it as a “2% house.” Now, even if purchased without leverage — which you will most likely need to do because most lending institutions don’t want to lend small amounts under $50,000, and most don’t like the asset class — there will still be expenses, right? You know what those are, and, let’s just say in the interest of keeping things simple, that expenses are 50% of the income, or $400/month. Related: Case Study: My Latest Deal Proves the 70% Rule Doesn’t Always Work If we annualize this, we realize that in exchange for a $40,000 investment, we would cash flow $4,800 per annum: $400 x 12= $4,800 What About the Sale? Well, typically these houses do not appreciate — which, by the way, is why banks aren’t excited to lend on them. So, best case scenario, you sell it for the same amount you bought it for — that’s the best case. Further, in order to sell, you will have to rehab it, which will cost you at least as much as your entire cash flow for the year. So the best you can hope for in the year you sell is just to get your money back. In a bit, we will build an IRR model to compare the investment and cash flows of two assets, but for now let’s just switch gears. The 1% House Here, we’ve bought a house for $100,000, and it brings in $1,000 of rent, which represents 1%. If we assume the same expense ratio of 50%, we are left with cash flow before debt of $500/month. Unlike the other house, however, this asset class is easy to mortgage, and thus our investment will be only the 25% down payment, or $25,000. Naturally, since we will have to carry a mortgage, at, let’s say, 5% over 30 years, we will have debt service of about $400/month. And thus, the only cash flow on this house will be $100/month, or $1,200 per annum. The exit on this house,will look very different from the 2% house, however. Why? Because this is a desirable appreciating asset, which can be sold to an owner-occupant. So, let’s just assume an exit of $140,000 in five years. And, by the way, in this five years, the tenants will pay the mortgage down from the $75,000 we started out with to $69,000. The IRR Model Look at this table: Yes, the cash flow seems stronger on the 2% house. But let’s consider what happens in Year Five: 2% House Presuming the best case scenario of actually getting a full $4,800 of cash flow but no appreciation, the exit CF would be $44,800, right? But in order to sell this house, you’ll have to remodel, which will eat the entire cash flow, which is why I show $40,000 in this line. Related: Put to the Test: Are the 2%, 50% & 70% Rules REALLY Useful to Investors? 1% House We start out with a sale price of $140,000. Adding in one year’s worth of cash flow of $1,200, subtracting remaining debt of about $69,000, and subtracting another $5,000 for rehab prior to sale, we arrive at distributable to you of $67,200. Conclusion I know this is very crude. I am not trying to give a math lesson, only to paint a picture with broad strokes. But which one looks better to you — 10% IRR or 25%?! The unspoken problem in the 2% asset class is the tenant quality. It’s true — your economic losses will indeed be higher in this asset class. You will likely have to turn units more extensively between tenants. You won’t be able to raise rents, and as such, will need to absorb higher LTL (loss to lease). You will be dealing with older assets as well, and there are additional costs involved with this. All and all, I need to caution you that the 2% scenario I outlined is really very rosy; it will likely not be as good as that. Do you use the 2% rule when analyzing properties? Have you found any real estate rules to hold validity? Let’s talk in the comments section below. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

Grant Cardone Is Fabulous, But He’s Wrong: Here’s Why

Unless you’ve been keeping residence under a rock someplace, you’ve by now listened to the BiggerPockets Podcast 108, which features entrepreneur and real estate mogul Grant Cardone. The show was one of the best for sure – almost as good as mine. Grant is the master of his universe. A lot of folks should be motivated by this podcast. However, if you listen between the lines — and you don’t have to dig too dip — Grant doesn’t not have too much love for the no money down (NMD) approach to investing. He makes this point of view known elsewhere as well. In fact, Grant and those who agree with his point of view don’t see NMD as investing at all. Since you absolutely can’t argue with Grant’s success, and he obviously must be taken very seriously, where does this leave Ben Leybovich, Brandon Turner, and 95% of the people on the BiggerPockets Forums and this blog? ‘Cause I hate to break it to Grant (like he cares), but most people have neither the kind of money to facilitate his style of investing nor the capacity to form businesses that can throw off this capital. Why NMD is Not Investing According to Grant Simple — the way he sees it, investing is defined as protecting and increasing equity, buying power, and magnitude of cash flow. In simpler terms, he thinks that an investor puts equity into the deal in order to convert the face value of it, as well as the cash flow that collateralizes it, from earned to passive. He and others believe that an investment of capital is the defining characteristic of “investment.” Related: The Book on Investing in Real Estate with No (and Low) Money Down I am not going to argue this point of view – his is the most bulletproof model. Liquidity is the mother of safety in many ways, and relative to this, a business has much more potential to generate meaningful cash flow than does real estate. Grant’s formula is one that many successful investors have used: Start a business. Grow it so it throws off a lot of cash. Take this cash, which happens to be rather highly taxed, and buy income-producing real property with it, which converts the face value of cash flow into a much lower-taxed real estate variety. And as Grant acknowledges, this cash flow is less but more stable, meaning that the equity it collateralizes is safer. Brilliant — and text-book effective. No argument at all! But is This the Only Way? How many out of 1,000 people who achieve some level of financial success via real estate do it Grant’s way? Perhaps one in a thousand? Sure, if you want to shoot for the stars, then look for way to model yourself after Grant. Follow the three steps outlined above. But I promise you, if you are starting out with nothing and want to retire with some element of dignity and cash flow that is a 100 multiple of that which your neighbors receive on their SSI checks, you don’t have to be one out of 1,000; you don’t have to be Grant Cardone. This is precisely what makes RE so good – you don’t have to be a genius! You just need to know a few things, and NMD by the way is quite helpful to most of us… Take Me for Example While my friends Brandon Turner, Serge Shukhat, and Brian Burke will definitely tell you that I am a genius — especially if you put a gun to their head  — I’m definitely not. I started out my college years intending to make money as a violinist, but this plan was interrupted when I was diagnosed with MS. My plan B… well, there was no plan B. There also was no income to speak of, considering I was making paychecks teaching kids at a preparatory department in a nearby college. I came into college with credits in advanced physics and calculus, and UC counsellors asked me why I bothered with music. I could be making so much more money going for a different degree. But I love music and was taught by my parents that if I do what I love, the money will come. Besides, I was better than the average Joe on the fiddle. So in spite of low income potential, I went for it. But as I mentioned, even that prospect of low income was taken off the table following my diagnosis. I am not a betting man; I like guaranteed returns, which is why I buy apartments. But if I were a betting man, I’d bet that 75% of you reading this are in somewhat of a similar situation. Well, here’s the thing. If you listen to Grant, you have no business investing in real estate. Why? Because the only way you can do it is NMD, and according to him, you’d be stupid to do it. According to Grant, you should either have the brains and the balls to create a business to facilitate investment in real estate, or go work for someone. I Disagree I started out with nothing. I had a spouse who believed in me and a capacity to think and learn, but that’s about it. I’ve built a portfolio of small to midsize multifamily units, which has allowed me not to work for a living. I am not rich (working on that), but I am not poor either. I have become an expert at creative finance and no money down because this was my only option. Today, as I write this, my partners and I are negotiating on a 90-unit. Maybe it’ll work out, in which case we’ll syndicate it, and maybe it won’t — that’s beside the point. Here are a few things to note: I had to work up to a point where a deal like this is even within the realm of possibilities. This wasn’t possible 4 years ago. It takes intellectual worth, you know what I’m saying? Guess what? It was the NMD deals that facilitated the learning. I have partners without whom I could not do this kind of a deal at this point. I need back-up. Both of these guys have more money and units than I do today (though this is not going to last). Both of them, I’d like to believe, take me seriously. Why? Because I’ve done a lot of things, and I’ve learned enough to not do even more things. They could be lying to me, but they tell me that I’m pretty smart. Guess what? I got “pretty smart” by doing nothing down deals. I’ve been using OPM for 8 years now, and if this deal comes through, I’ll be floating a PPM of $1,000,000+; I will raise $1M from investors who agree with my partners in thinking that I’m not stupid. Guess what? I got here by doing nothing down deals. Newbies, Listen Up! There is an important distinction I want you to wrap your heads around, and it is this: Nothing down is not the final destination. I don’t plan to retire carrying too much debt, and neither should you. However, NMD has been a stepping stone. For me, NMD has been the facilitator of critical mass in terms of both cash flow, balance sheet, and intellectual worth — and it absolutely can be for you as well! I am going to turn 40 in March. I have a portfolio (all bought with nothing down) that has allowed me to do vastly better financially than any music student I went to college with. It has allowed me not to work a job and instead to focus on learning RE. It has bought a margin of financial safety for my family, which is better than many (I’d say most) of my friends, even those earning high incomes! Related: How to Invest in Real Estate with No Money Down (4 Rules You NEED to Follow!) I get richer when I sleep, and it’s a nice feeling to know that my car payment is being made by my tenants. I love seeing my balance sheet going up by thousands of dollars every month. Amortization is a wonderful thing indeed! Even if I don’t make a dime of cash flow from any of the properties I currently own (as if), and if I never do another thing in RE, I am going to retire multimillionaire. Do I want to do it with the property I currently hold? No, probably not; I’ll trade up. But in concept, I am OK. My family is OK, and while I want more (and I’ll have more), I am OK. That’s a lot better than a violinist is supposed to be able to do. All of it was teed up by having the audacity to not listen Grant Cardone and go for it in the only way that I could: no money down. I am not a genius, and I am not special. If I can do it, you can do it. Appreciate and admire Grant Cardone. Listen to every last thing he has to say. But take him with a grain of salt as it relates to NMD. Done right, no money down works! Investors: What do you think? Is no money down truly “investing?” Is it a feasible way to build wealth?  Leave a comment below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Landlording & Rental Properties

Have “Rich Dad Poor Dad” Lessons Stood the Test of Time? Here’s What the Book Misses…

A fellow investor from Arizona, Shiloh Lundahl, posted a thread recently on the forums entitled Rich Dad investing principles — good or bad?  While the book Rich Dad Poor Dad is oftimes credited as having shined the light on many principles of personal finance and REI, the question is posed: Is it legit? Is the book that sold millions of copies — and the advice therein — actually legit? A Look Back at the Book Kidding aside, this is actually a very interesting question. Rich Dad Poor Dad was eye-opening for a lot of us. The interesting thing, though, is that while after having done a couple of deals, many of us felt like we were given the keys to the kingdom. Years and many hard knocks later, those of us still standing are now aware of how lacking (to say the least) — and possibly even misleading — Rich Dad Poor Dad actually is. Quite literally, unless you find a way to break away from that original mentality, your efforts could amount to treading water (if you are lucky), and lots of pain (if you are less lucky). I suppose, in the spirit of intellectual honesty, we must preface this conversation with acknowledging that Rich Dad Poor Dad was likely never intended to be a true how-to manual with any valid technical data — nor viable investment advice. Likely, the book was intended only as a big-picture motivational and inspirational tool. And as such, it was a complete and total success. And I, for one, have nothing but positive commentary to offer. After all, the book certainly motivated a slew of investors. However, continuing with this line of intellectual honesty, let us acknowledge that beyond being motivated, many of us started out with the belief that within the pages of that book was a bonafide formula — an actual, intellectually cohesive, mathematically stable formula for investing in rentals. If you believe that, you are shit out of luck. The image of real estate investing painted in the book is highly misleading from the technical and mechanical standpoints. And there are many items we could mention here, but there is one falsehood stand stands out more so than anything else. Frankly, I am not at all sure that even if this had been properly addressed in the book, that I’d have been able to internalize it. After all, our capacity to understand is tied to our intellectual worth, which in turn is tied to our experiences. I didn’t have any… Thirteen years later, here are some thoughts for you. Related: Book Review: Rich Dad Poor Dad Rentals Are For Cash Flow I understood this to be the central message in the book. Whether you don’t want to punch the clock (which was the case for Brandon Turner because he hated being a bank teller) or you can’t work (which was the story Ben Leybovich) passive cash flow from the rentals will pay your ticket, according to the book. Even in the accompanying board game, Cashflow, winning is a function of buying enough rentals to equal or exceed the amount of monthly liabilities. Whether in the book or the game, the main message is cash flow. This was my understanding. Maybe you saw something different. But this is how my intellectual worth lead me to interpret the messaging, which influenced my thinking to focus exclusively on the cash flow. I am willing to bet this is how most of you think about rentals. Unfortunately, this is wrong. We Buy Income Property for Appreciation This is something sophisticated players figure out sooner or later. The best way I can illustrate this to you is like this: Suppose you have a small six-unit apartment building. You bought it five years back. You financed 100 percent of it because you read articles by Ben Leybovich. It cash flows about $500 per month. Nothing special. But nothing wrong with it. Rich Dad would approve. You get an offer to sell it. You worked hard to get the building. You like having it. You were looking for cash flow, and that’s what you’ve got. And with no money in the deal, to boot. But, you realize that between the appreciated equity and principal pay-down, you would put in your pocket a x15 multiple on your annual cash flow if you do sell. In other words, if you sell, you’d get 15 years worth of cash flow prepaid. Do you sell? Or, would you hold and keep the cash flow? Don’t answer yet. Related: Life-Changing Lessons From 9 Awesome Real Estate Books Time Value Maybe you already know this, but for those who don’t, time value is a concept that alludes to the reality that there is a time and place when value of everything is maximized. This is as true with money as it is with food and relationships. For instance, if you read one of my articles before you are ready to internalize what’s in it, not only will you miss the point, but you will likely think of me as a jerk. I promise, I am not a jerk — you may simply be reading my stuff at a time that is not appropriate. Perhaps, sometime in the future, you’ll re-read these things and think highly of them. Time value is the concept. As this relates to money, the same $5,000 of cash flow 15 years from now is not all the same thing in terms of new preset value (NPV) as it is today. NPV essentially aims to conceive of future cash flows in terms of today’s buying power and opportunity premium. What this necessarily means is that even if you were able to achieve the same level of cash flows 15 years from now as you can today, and even if you did set enough money aside for capex so that you won’t need to cannibalize the cash flow, the value of these cash flows 15 years from now adjusted to net present value are much lower than you’d think. Indeed, you better plan on making much more cash flow 15 years from now. Mathematically this is represented with the internal rate of return (IRR), XIRR, and modified internal rate of return (MIRR) (which allows you to select your own discount rate). But, those are more than I want to get into today. So, Do You Sell? I did. I sold that six-unit. I had bought it about five years prior. I financed it 100 percent. It made about $6,000 per year of cash flow. But, I sold it and put about $85,000 in my pocket, which I was able to reinvest in a way that doubled my cash flow. Mathematically, the reason I sold is because doing so represented infinitely higher IRR than not selling. In fact, this was about a 40 percent IRR in 5 years. But, the important syllogism here is this: Major premise: If we want outsized returns. Minor premise: If appreciation is necessary to achieve outsized returns. Conclusion: We must buy for appreciation. Conclusion With that said, our “buy” decision has to be based on appreciation. Which, of course, means that if you’re focusing on cash flow as the goal, you’re not doing it right. Cash flow has a lot to do with it, but it’s not the end goal. This, to me, is the biggest thing missing in Rich Dad Poor Dad. Have you read Rich Dad Poor Dad? What advice do you agree or disagree with? Share your thoughts below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate Deal Analysis & Advice

Raising Rent (& Risking Tenant Turnover) vs. Playing it Safe (& Missing Out on Rent): Which Wins Out?

I used to say that not everything is as it seems in real estate. I don’t say that anymore because it simply doesn’t do justice to the truth as I know it. What I say now is, “Nothing is as it seems.” As it relates to income-producing real estate, neither the income nor the expenses are what you think they are going to be, which in and of itself is the only constant. I know, that sounds weird — welcome to real estate! The Secret to Success The secret to achieving success in this sport is first coming to terms with the above reality — the only dynamic you can count on is that nothing is as it seems. Once you accept this, the path to success is a function of developing an ability to see that which is not obvious. Basically, it goes like this — now that I know that nothing is what it seems, how do I figure out the real truth?! The Flow of Money The flow of money in income property is at first glance obvious. You have income, and you have expenses. The income includes rents and fees, and the expenses include, well, you know what they include — you’ll find all of them in the BP Calculator. What you may not know, however, is that there are forces at play that silently impact both the income and the expenses, which can dramatically impact our bottom line. These forces of evil are typically referred to as economic losses. Related: How to Estimate Future CapEx Expenses on a Rental Property One subset of these economic losses are all of the costs that are the result of tenant turnover. For example: Loss to Lease Let’s say you are renting a unit for $1,000. The tenant signs the lease for one year, and things go well. When renewal time comes, you send the tenant a notice that their rent will be increasing from $1,000 to $1,040. The next day, the tenant walks into your office and says that they are not comfortable paying more than $1,000, and if her rent goes up, she will need to look for another place to live. Now you have a dilemma. You think that you can rent the unit for $1,040. But on the other hand, you realize that it’ll take a month to turnover and re-rent the unit. You’ll also need to clean the carpets, replace some blinds, and perhaps do some painting. So, it ain’t like re-renting this unit will cost nothing. The question is, will it cost more than keeping the tenant’s rent at $1,000? And the answer is, in most cases, yes! In this case, lost month of rent is $1,040. Plus repairs, let’s say all in, you lose $1,500 on the turnover. On the other hand, not raising rents by $40/month will only cost $480 for the year. Which loss is better — $1,500 or $480? Think on that for a minute. 🙂 You Lose Either Way! Yep, you sure do. Why? Because even if you chose the lesser of the two evils, it’s still costing you money (be it less money). After all, if the market for the unit is $1,040 but you keep your tenant at $1,000, you’ve signed up for a loss of $480 on your bottom line — say hello to LTL (loss to lease). And if you are going to be intellectually honest, you are going to show a 4% loss to LTL somewhere in your pro forma. This is why when I see people throw around 5%-10% vacancy, I just laugh! Related: 3 Little Known Factors to Help Minimize Vacancy Rates Tenant Retention The moral of this story, in a roundabout kind of way, is that while not always, in many cases it is cheaper to keep a paying tenant in place, but doing so costs money. The lost revenue is but one aspect of this. You may also paint an accent wall or replace a few blinds for them. Happy and paying tenants, producing stable cash flow for us, is worth the effort and cost! Conclusion Very few costs in real estate are obvious. I read on the forums this week some dude say something like, “It’s all about the numbers; plug the numbers into a spreadsheet, and if they work, they work.” Yeah — but you’ve got to know which numbers to plug into that spreadsheet. Investors: How do you approach this dilemma (risking tenant turnover due to raised rent)? Do you agree with this assessment? Leave your thoughts below, and let’s discuss. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate Investing Basics

Investing in “Cheap” Real Estate: A $10 Million Pig Is Still a Pig

On occasion, a few have tried to disagree. But where I come from, pigs aren’t kosher. Over the years, I’ve written quite a few articles describing a concept in real estate investing that I coined as buying a “pig.” In the past, I was essentially referring to buying “cheap” properties—something I think many investors should avoid. The concept of pig properties keeps coming up in the forums with persistent regularity, so I’m going to kick it up a few notches. Instead of talking about pigs in the context of a $30,000 house in the Midwest, I want to discuss a $10 million pig in the large multifamily space in one of the fastest growing markets in the country. It’s a bit of a different breed of pig. And it’s definitely bigger. But—it’s still a pig. And it still ain’t kosher! A 100+ Unit Pig My partner Sam and I considered but walked away from this asset, opting to make a run at something else instead. It was a completely off-market property. We considered the deal for about three days and underwrote the numbers, but we ultimately decided to walk. The interesting and educational component of this, however, is the fact that the numbers looked gorgeous. Everything lined up beautifully… on paper at least! We still walked. What Is a Pig Exactly? First things first. Real estate investing is a synergy of two elements: Risk Reward Every transaction is a matter of buying down the risk by lowering the price to the point where the reward is more attractive than the risk premium. A pig is a deal in which the risk, for one reason or another, is so high that the amount of discount on price necessary to right the ship is simply not possible. In some cases, this means that the property is worth $0. And believe it or not, in some cases, it may even mean that the property is worth less than $0. Related: 5 Ways to Protect Yourself When Buying Cheap Real Estate Secular Definition of Pig This conversation could get very technical and scientific in a hurry—so let’s not. Let’s think in terms that all of us can understand instead. The way I see it, more so than anything else, risk in real estate is mitigated by growth. And growth is driven by desirability. The more people want what you have, the lower the risk profile. Think about this. If you own something that everyone wants, then it appreciates due to the demand. This means that you can feel good about deploying capital into CapEx as needed because you know you’ll get it back. If you own something very desirable, then in times of an economic downturn this asset will have the greatest chance of maintaining value. Why? Because where it is and what it is, is desirable and will always be desirable. The value will fluctuate, but you should be OK. Or if you experience personal distress, or if having made a bunch of money you experience a feeling of “screw it, I’m done,” well then you’ll have no trouble selling. Why again? Because where it is and what it is has always been and will always be desirable. Simply put, an asset that everyone wants is the opposite of a pig. Assets that possess a lot of desirability also possess a lower risk profile, which is the opposite of a pig. The inverse, however, is also true. If you have concerns about the intrinsic desirability of an asset, well then you are probably looking at a pig. Don’t buy a pig! Teachable Moment The tricky thing about desirability is that it has to be considered over a period of time. It’s easy to put lipstick on a pig and fool a lot of people for a minute—especially less experienced people and especially in a hot market. But the question really has to be asked: “This asset may be desirable today, but will it be desirable 10 years from now? Why or why not?” So, Are Pigs Always Cheap? In the case of a $30,000 single family residential (SFR) pig property that I wrote about in the earlier articles, the market value is equal to its purchase price. They are both $30,000, which makes it financially obsolescent. It was what it is, what it will always be: $30,000. You could put gold-plated toilets in this SFR; it’s value will remain $30,000. In many cases, this works the same way in multifamily. If today you are buying multifamily for $30,000 per unit and with stabilized rents in this location being $500, you are definitely buying a pig. In a world in which the average rent across the nation is $1,470, you have to ask yourself why the rents you are buying are capped at such a low amount. More importantly, you have to wonder what these rents will be in the future… Those rents will always be what they are, and those units will never sell for more. Repeat after me: PIG! Why is this the case? The rents will always stay low because there is not enough economic activity to facilitate growth. The value will stay at $30,000 because, if there is no growth, the market will forever discount the value. This will lead to deterioration of the physical structure, because you’ll hate to put money into new mechanicals since you’ll never be able to get it back due to the lack of appreciation. It’s a vicious cycle that leads to slums… or pigs. This is the cheap version of a multifamily pig. Related: Don’t Buy That Cheap Property! (UNLESS…) The $100,000 per Unit Pig Above is one version of how the story goes. However, Sam and I just walked away from a pig that would have cost us close to $100,000 per unit. The asset appreciated like crazy over the last decade because it’s in a very high growth area—Phoenix. While the in-place rents were low, we could have gotten the rents way up. This wasn’t a $30,000 pig. This was a different breed of pig. But it was still a pig. This asset penciled very well on paper, but relative to operations over an extended period of time, it wasn’t desirable to us and wouldn’t have been desirable to our buyers when we wanted to sell. So relative to the exit, I felt that it wouldn’t be desirable to the widest cross-section of my potential buyer pool. There wasn’t enough sustainable desirability. Yes, Sam and I could have gotten the rents up, but there was only one strategy that would have done it. These units would have been attractive to a particular class of tenant, but that class of tenant is not the majority. Therefore, if something went wrong with this business plan, it would amount to a big oops. Furthermore, the age, mechanicals, and footprint were all such that this would have been a difficult asset to sell. Everything sells today, but that’s not going to last forever. I want things that have lasting desirability! Conclusion Real estate is not about the numbers. Real estate is about stories. Every story has a beginning, middle, and end. The very difficult part for so many of you to understand is that the underwriting rationale begins with the end. Nothing else matters if you can’t clearly see the exit. This is not because you want to exit. If you want to hold onto this asset, fine. But hold it knowing that everyone wants it and you can get out whenever you want. This is what defines safety. And this is what you want. There are many ways to characterize a pig in real estate. Today’s characterization is an asset without a clear exit. Whether it’s because the asset is worth today no more than it was worth yesterday, or if for any other reason the exit is cloudy, it’s a pig. Don’t buy a pig! Have you ever invested in a pig? Do you know someone who has?  Tell us the story in the comment section!   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate News & Commentary

Waiting to Invest Because the “Market’s Too Hot”? You’re Missing Out—Here’s Why

Are you one of the proponents of this point of view? If so, you are not in the majority, but your feeling is valid enough to engage in a discussion. Let’s talk this through. “The Market”: What Is It? I know this may sound to you like semantics—a bit of hair-splitting or nit-picking—but when you say something like “this market is too hot,” what exactly do you mean by “market”? Is all of the United States one market, as far as you are concerned? Do you view Dayton, OH same as Denver, CO? Do you see Peoria, IL the same as Phoenix, AZ? Sounds stupid, doesn’t it? But aside for beginning with the same letter, these locales have nothing in common. Interestingly, all of them are doing well in this cycle, but while some are leading the way with solid economic fundamentals, others are simply riding the coattails of the overall booming economy. We need to make this distinction first in order to have a meaningful conversation on this topic. There is no such thing as “the market.” There are many, many markets, and all of them need to be spoken of separately. “Rents Are Historically Too High and Unsustainable” I used to feel this way, but then I used my brain. The Fed’s stated policy is 3% annualized inflation, which they see as neutral. This has been their position for many years. And if this is the goal, then necessarily, each and every year, rents are supposed to climb to new historic highs. Related: 4 Simple Steps to Assess Reality & Make an Offer in a Seller’s Market So I am not sure what exactly the statement “rents are historically too high” means. I’m sure rents are much higher today than they were in 2003. So are the S&P, the NASDAQ, and real estate. Furthermore, as we already settled, all markets are not created equal. Let us agree that rents have inflated because everything else has inflated. But in some cities, the inflation is accompanied by population growth, job growth, and income growth—while in other cities, it’s not. With this in mind, I think it’s fair to say that just like pricing of real estate, rent increases in some localities have staying power, while these increases in others are likely much more questionable. But we do have deflationary economic cycles, and surely rents have to be impacted to some extent. Rents can’t go up in good times and in bad. So, let’s take a look at that. Case in Point I moved from Ohio to Phoenix, AZ about three years ago. I had a portfolio in Ohio but never syndicated in that market. The main reason for this was that I just wasn’t comfortable projecting structural growth. The Midwest is a place characterized by an aging, declining population, high property taxes, limited employment opportunities, and bad weather. When putting people’s money into a deal, my first concern is safety. Safety in real estate is a function of growth—period! Growth solves many problems. Growth solves physical vacancy issues, economic loss issues, and rent growth issues. Growth is what you want as a sponsor. I know that many of you will point to cities like Indianapolis, Cincinnati, Columbus, and Tucson—and the historically low cap rates those cities are trading at—and say, “See, Ben, this is growth.” But is this growth sustainable? This is why I stopped buying there in 2013, and it’s why I couldn’t put people’s money in play there. This is also why while I have had many opportunities to buy in Tucson, and I just can’t pull the trigger. When I get calls from brokers telling me they are moving 1980s product at a 5.5% cap rate in these markets, I just laugh. I can buy in Phoenix at that price. But, What Makes Phoenix More Sustainable? Well, Phoenix MSA is nothing short of a population explosion. At over 5MM population, Phoenix is now the fifth largest city in the nation. Maricopa county has been the number one growth county in the nation for several years running. Last year, Phoenix clocked in rent growth of over 7%. This year, Marcus & Millichap is projecting over 6%, and others are projecting higher. Is that sustainable? No, not in perpetuity because nothing is sustainable in perpetuity. However, while average rents nationally sit somewhere around $1,470, Phoenix is only at $1,070. Related: How I’m Preparing for a Potential Real Estate Market Crash So, Will the Rest of the Country Come Down? Perhaps, but here’s what I know. I started buying small multifamily in 2006 in a town you’d never heard of before you listened to BiggerPockets Podcast episode 14. By 2009, I had about 12 units. I stopped buying in 2009, but picked it up in 2011, and by 2013, I’d gotten up to about 30 units. So, I had rentals throughout the Great Recession, in a town that hasn’t gained population in five decades. Do you know how much my rents went down? They didn’t. Do you want to know how much rents went down in Phoenix MSA during that time? Approximately $50, according to Department of Numbers. And this was at a time when Phoenix was a different market, without a diversified economy, driven mostly by construction at the time. Night and day to what it is now. This $50 constituted about a 6% decline from the average rents in the MSA at that time of around $813. Phoenix grew by more than that in 2018 alone! If a similar decline were to take place again—frankly, whatever—there would be not much of an impact on my business plan long-term. That would simply take us back to 2017 levels. This exact scenario is exactly what we saw in Phoenix during the Great Recession. We saw our rent peak in 2008, before dropping the aforementioned $50 by 2010. However, 2010 rents were still higher than 2007, which gives me more reason to buy! Just in case, though, I stress test a $100 decline in rents on every deal I syndicate. And $100 is double the decline we saw in the Great Recession in dollar terms, which would constitute not a 6% decline, but an almost 9.5% decline from the current averages. Real Estate Cycle “It’s too late!” they scream. “Wait for the downturn!” they exhort. Oy vey. Just as we can’t talk about the entire country as one market, we cannot consider the entire country on one cycle. Some places have been in the recovery for over a decade, while others only kicked into gear four of five years ago. Should this play into your decisions? Yes. But, does the statement “the cycle is too late” apply in equal measure to all of the country? No. “But the Downturn Is Coming!” Yes, it certainly is. It always does. What’s your point? “I’ll Wait to Buy Until Prices Come Down.” OK! I might point out to you, however, that I am much more likely to get that call than you. Why? Because I am a known commodity. I am a brand. People know me as someone who signs on the line and then performs. You, on the other hand, are known as the smart guy who’s waiting for the downturn. See any problems in that? Things I Would Not Syndicate Today I would not syndicate in secondary. I think you’ve got to own property where most people have a reason or desire to be. The vast majority of this is driven by jobs, which pushes us into primary markets. I would not syndicate in tertiary markets. I learned this, among other things, from Brian Burke. He had an unfortunate and costly experience with this early in his career and makes it a point to advise against it. Sometimes we refer to these markets as “one-trick-pony” markets. Perhaps there is one very large employer in town—or even two. Or perhaps there is a military base driving all of the economic activity. That’s just scary on many levels! I would not syndicate in any market with declining population. Big no. I would not syndicate in any market that is late in the recover cycle. I suppose if you’re prepared to stay in for 10 years—and not as a contingency, but as your primary option—then this wouldn’t matter. But since there are much younger recovery markets, I see very little reason to be anywhere else. I would not buy in any market with high property tax. I think this is self-explanatory. What are your thoughts: Are there still markets you feel comfortable investing in? Or are you sitting on the sidelines for now? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Personal Development

Why I Don’t Love Real Estate—But Just Acquired $20MM of Property in 6 Months

This is the story of how and why I acquired $20 million of property in half a year.  Well, that’s not exactly the whole truth. My partner and I paid about $20MM; the repositioned stabilized valuation ended up being $30 million-plus. Why I Invest in Real Estate I started like many of you—with a diagnosis of Multiple Sclerosis. No, not you? Hopefully not. Most people look to real estate because they don’t want to work for “the man.” My good friend Brandon Turner (you know, the dude on the podcasts and webinars with an out-of-control beard who’s wearing a checkered shirt) tells the story of how he went from a bank teller, to house hacker, to landlord, to mogul. Why did he do this? Because he didn’t want to work for “the man.” My partner Sam Grooms went from a U.S. Securities and Exchange Commission-reporting CPA, to house hacker, to flipper, to passive investor, to syndicator. Brandon and Sam weren’t working for the same “man.” Sam’s paid a whole lot more than Brandon’s, but in the end, that wasn’t enough. Neither of them liked to be paid (read: owned) by their respective men, and so both of them looked to real estate for a way out. In my case, though, doctors told me that whether I like it or not, in a matter of time, I wouldn’t be able to work due to my diagnosis. So, for me, it was less about not wanting to work for “the man” and more about being unable. That necessity, more so than any desire, pushed me toward real estate. Fortunately, I got good at real estate. And today, you would think that I love it. But, dear friends, I have just one positive thing to say about real estate: it works! That’s it. I’m hard-pressed to think of anything else positive about it. It’s a stressful business. It’s at times a nasty business. Many of the situations and people you come across in real estate are not ones you’d choose. When I first started, an experienced landlord told me, “If you stay in the game long enough, you will lose all hope for humanity.” You know what, he was freakin’ right! But, though I don’t exactly like it, I sincerely respect the power of real estate. It is simply not possible to ignore how effectively it can solve some of life’s problems (provided you know what you’re doing).   So, here I am. I’ve acquired $20MM worth of real estate in six months, and that number is likely to at least double in the next 12. Why I Chose Real Estate Syndication There are many reasons I choose to syndicate apartments. Aside from the fact that it’s simply the best use of my professional skills, I discovered that single family is much more trouble than it’s worth. In most cases, for me, the numbers just don’t make it worth it. Then, I moved on to small multifamily. I discovered that, while a bit better than single family in most cases, the numbers indicated these properties still can’t absorb professional management. I concluded I was essentially buying a job. So, as you would expect, I began studying mid-size assets, thinking that the numbers would work better. I studied up. Here’s the thing. Twenty-four to 60 units, which sort of defines mid-size, is likely the worst space to be in, in my opinion. In order to work as it should, this size requires more or less a professional—I would even say institutional—approach as it relates to management, maintenance, and financing. And although that’s what it requires, you usually can’t absorb any of it into the operating expense because the size doesn’t produce enough income. As such, these “assets” oftentimes end up being a job that takes over your life. In the end, there were a lot of structural components that forced me into larger properties. But an important, though perhaps a bit liberal-artsy distinction, is the caliber of people you get to be around at the institutional level. I have worked very hard to gain an ability to live on my own terms, to not do things I don’t want to, to not share space with people I don’t enjoy, and to never be anywhere I am not wanted and appreciated. Well, in real estate, to attract high-caliber people, you’ve got to play at an institutional level. This may sound a bit lofty, but I don’t live my life for real estate. I live my life for finer things than that. I live my life for the people in it. I live my life to make some sort of a difference. Real estate is a multifaceted tool, and you get to chose how to use it. Use it the wrong way, your life turns to crap. Use it the right way, your heart sings. You pick! The type of people I interact with at the institutional level make my life better—both more fun and easier. That’s what I want, and that’s why I syndicate. Related: How to Buy a Small Multifamily Property: A Step by Step Case Study What Does $20MM of Real Estate Look Like? In this instance, $20 million looks like 215 units spread over two apartment communities in Phoenix. My partner Sam and I closed on the first complex in August 2018. It’s a 98-unit value-add for which we paid $8.15 million, with a renovation budget of $1.4 million. We raised about $3.5MM of equity for that deal. We closed on the second more recently. This one is a 117-unit value-add. We paid $10.75 million for this one, with a renovation budget of about $1.5 million. We raised $4.5MM this time. The acquisitions are very similar in a lot of ways. Both are mid-80s construction. Both are located in what we call “the path of progress.” Both represent very significant repositioning opportunities, where we were able to underwrite $300 per door income bumps, of which about $175 is a recapture of the loss to lease and the rest is a renovation bump. In both cases, we were able to underwrite, practically doubling the net operating income (NOI) in three years. Let me say that again: doubling the NOI in three years. Finding Deals and Identifying Hot Markets There are many voices out there yelling that the market is too hot and that you should wait to take action until another recession occurs. I disagree on many levels. First of all, if any of you harbor the notion that the next downturn will in any way resemble 2008, you can stop with that nonsense. What we saw in the Great Recession was a once-in-a-generation event; we will never see anything like that again in our lifetimes. The next downturn will be more cyclical in nature and constitute a flattening, not a cratering like we saw during the Great Recession. This means, if you can’t find any deals now, you likely won’t find them in the next correction either. Secondly, you need to understand that a “deal” is defined by the delta to the market. In other words, whatever the market is, a deal is: Market – Discount Margin = Deal Because of this, it doesn’t really matter what the market is doing. A deal is that needle in a haystack. While it is incredibly difficult to find, it is not contingent on the market, rather it exists in every market. Related: Want to Find and Close More Deals? Get Better Data! Real Estate Deals in Phoenix Phoenix is different from other places. In most cities, you can find a mismanaged apartment building, where the rents are $50 or so too low, but there are a bunch of vacant units. In these situations, the bulk of the value-add is to simply manage the building up to stabilized physical vacancy, and then put some lipstick on it and bump rents $50. Phoenix is different in that, for the most part, there is no physical vacancy. The population growth is so strong that even the most poorly managed buildings are operating at full occupancy. Well, I can’t reasonably underwrite full occupancy, so I actually have to assume I’ll manage the asset worse. This is why the only way to add value in Phoenix is to increase rents by about $300. For starters, I need to offset those higher economic losses in my underwriting against the current market. And then, I actually need the value-add to create returns for myself and my investors.   Believe me when I tell you that finding an asset that allows for this is truly challenging. Add in the other hurdles listed below, and you begin to understand why Sam and I only hope for a few deals per year. Here’s a list of obstacles we’ve identified: $300 per door of value-add Practically doubling the NOI in three years 14% internal rate of return on a 10-year model (more on five- and three-year) 1980s construction Specific community footprint Specific mechanical setup Original interiors Conclusion Each one of the items in the list above begs for a post of its own. For now, I want to leave you with the following thoughts. Real estate is not sexy. Real estate requires extreme levels of fluency. But real estate can certainly make you rich! Deals are out there in any market. The money is in the delta. You just have to know how to identify it. Are you waiting on the next recession? Or are you going after deals now? Do you prefer single or multifamily, and why? Let’s talk more in the comments below.  Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Landlording & Rental Properties

Luxury House Hacking: How to Have Your Cash Flow, Equity Appreciation—and Live for (Almost) Free, Too

The main idea behind house hacking is to offset the burn of home ownership, making it possible to live for free or almost free. Mechanically speaking, this can be accomplished either with equity appreciation, income, or both. In my mind, there are a couple of ways to look at house hacking: Equity House Hacking Cash Flow House Hacking Blended House Hacking The equity house hack relies on equity appreciation, either organic or forced, and often the easiest way to perceive this is as a live-in fix and flip. You move into the house while you fix it up, and then you sell it for more—a flip. But, as is the case with any flip, there is no income component here. A cash flow house hack is just the opposite, meaning that all of the emphasis is placed on the income, with total disregard for equity growth. This is a lengthy discussion—and not appropriate for this article—but I’ve learned that healthy cash flow always rests upon healthy equity appreciation, and healthy equity appreciation always rests on healthy cash flow. It’s not me saying so—it’s the IRR. The main reason for this is that most of the OpEx and CapEx is not a percentage, but is a fixed number. For more on this, please read this article Serge and I wrote a while back. I knew, therefore, that while offsetting my burn was most important to me, there must also be an appreciation component. Not only that, but I am rather risk-averse, and instead of asking, “Will I win,” I wanted to ask, “How will I win first?” For this reason, I needed a blended house hack, with significant income potential and substantive rationale for appreciation. Related: The Tax Implications You MUST Understand Before House Hacking Asset Class I chose against multifamily. The competition for multifamily is fierce. You’ve got investors. You’ve got BiggerPockets-style house hackers. Both are willing to pay more than I think property is worth, specifically in a location I’d find attractive for my family. Besides, as has been discussed in the previous articles in this series, we weren’t looking to compress our lifestyle, and living in a 900 square foot apartment next to, under, or above a tenant is not exactly how you 10X your lifestyle. We wanted comfortable and luxurious. So, multifamily was out. But this seemingly left us with the single family asset class, which wasn’t going to work on the income side of the house hack equation. What now? Multi-Generational Floor Plan The idea is simple. Looking at the demographics of the Phoenix MSA, we realized that this was where young people came to work and older people came to retire. Combine the two, and the notion of a floor plan capable of accommodating both is not so far fetched. He is coming down for a job. He’s got his wife and kids with him. His dad has passed away, but his mom is coming along. She will be living with them, but she needs privacy. They call it a “multi-generational floor plan.” Imagine a main house with 3, 4, or 5 bedrooms and 2 or 2.5 baths—and a guest house, which may or may not be physically attached to the main house, but has its own bathroom and its own entrance and sometimes a kitchen/kitchenette. In the Midwest, we called this a mother-in-law suite, but in the Southwest, they call it a casita. In my household we call it “cha-ching!” Think about this, guys. The casita, in order to be any good, has to be designed for maximum privacy. Most often, what this means is that if it is attached to the house, it is attached by way of a garage wall, but doesn’t share any walls with the main house. Try doing that in a duplex. There are other advantages. First, this is still considered a single family residence, which means the best financing terms for a mortgage. Second, the pool of buyers for a house like this is infinitely larger than for a duplex. Whenever you buy anything, you owe it to yourself to understand your exit. This type of footprint has lots of exits because the casita is actually very multi-purpose—you can do a lot with it. But most importantly, you will typically not find these in entry-level locations. These are well-located and well-amenitized homes. Think upscale—a world apart from that duplex your 24-year-old BiggerPockets friends are living in. Related: Life Hacking in Pursuit of Financial Freedom: How I Add $1,500+/Mo to My Income My Financial Guidelines This is actually pretty simple. Upon leaving Ohio, we sold our house. It cost us about $1,350 per month to live in that house. We built it in 2006, and it was a fine house, but without the “finer things.” I essentially wanted to scale up in the new location, but I wanted to keep my burn at $1,350 per month. I wanted to be in South Chandler because this is where the twins’ school is. But I think it’s fair to say that this submarket is one of the most desirable within a county with county-wide population growth at almost 2% each of the previous two years. I wanted the pool in the backyard. I wanted the fireplace. I wanted the granite and travertine. I wanted mid-2000 or later construction. I wanted 11-foot ceilings, solid-core doors, and tile on the floor. I wanted high-grade Andersen windows and sliders. I wanted a big kitchen with stainless. I wanted a designer master shower in travertine. Guys, this is all about the lifestyle. We were moving to live it up, not compress. I wanted it all, and I wanted it in a hot market—but I wanted it for $1,350 per month. We Found the House! We made a ton of offers on a ton of houses. I looked at all options, and then we found it. The house was listed for around $380,000. It is in an area that ranges between $320,000 and $575,000. Patrisha had her license by then and represented us in this process. The first offer was $300,000. I am pretty sure I pissed some people off. I did not get a counter.  The house sat for about a month, and the ask was lowered. I came back with a higher number. In the end, we went under contract at $355,000. This is a 2,400 square foot house. There are 3 bedrooms, with 2 baths in the main house, within about 1,800 square feet. There is a room above the garage that makes for a brilliant office for both my wife and me because it is so private and quiet. There is a 2-car garage, a pool in the backyard, and a casita that is attached to the house by sharing a wall with the garage, but it is across a 25-foot courtyard from the main house, making it totally sound-proof and separate. This casita is the rental, you guys. And because of the great location and the remodel I did, in spite of only being about 234 square feet, it is a very viable rental. Again, there are a lot of specifics to fill in, but for now, let’s look at the results. The Result: We Are Living Almost for Free! We chose to go the short-term rental route. I’ll outline the rationale in the following article. As of this writing, the casita has been operational for about 6 months. We’ve got about $9,200 of cash flow (after fees) on the books. I am projecting that we will finish the year with about $15,000-$16,000 of cash flow. My PI (principal and interest) on this very nice house is $1,708. All in, my burn totals about $2,050, plus or minus $50 per month. In the book, I go through the complete underwriting of all of the numbers, which took a lot of thought and market research. A very reasonable (and conservative) expectation for our average monthly cash flow is right around $1,300. Some months will be less and some much more. But on average, we should net $1,300 per month. With this $1,300 rental subsidy against the PITI, our monthly burn delta should average plus or minus $750. It’s All About Life Design Guys, you can have anything you want, as long as it makes money! My family and I are now living in a much nicer home, in a much more economically diverse town, in beautiful and sunny Arizona, where we have blue skies, palm trees, and sunshine almost every day of the year, for 50% of what it cost us to live in Ohio in a town you’ve never heard of and in a house half the size. We’ve 10X-ed our lives and yet cut our burn! Conclusion A few points to underscore and focus this conversation: You cannot rent a remotely decent apartment for $750 in Chandler, AZ. My tenants in Lima, OH are paying $700+ for my 2/1 apartments, and that’s Lima, OH! We came to Arizona looking to improve our family’s quality of life while keeping our burn down to $1,350 (same as it was in Lima). I am not sure, but I think $750 burn is better than $1,350. We are living in beautiful Chandler, AZ in a house almost twice the size, with a pool, granite, travertine, and all the rest for practically 50% of what it cost us to live in Lima, OH. Think about what we’ve done. As real estate investing goes, I’ve been playing the game for 11 years now, having bought my first property in 2006. I currently still manage a portfolio of rentals in Ohio. I promise you, this casita house hack is by far the easiest and most pleasurable cash flow I’ve made in real estate, ever! Consider how difficult it would be to replace this $15,000 of cash flow with an investment property. Think it through with me: In order to end with $15,000 of cash flow, the NOI would need to be at least $45,000, but probably more like $50,000. Out of that, you would pay about $2,500 per months of debt service to end up with $15,000 of annual cash flow. Consider what this would take to buy. Capitalized at 8% (if you can even find an 8 cap today), this means you’ll pay over $550,000 for that NOI of $45,000. You’ll most likely have to make a 25% down payment, which is almost $140,000. And, you’ll have to manage that beast. By contrast, this casita came with my house. It was free, people! There was literally no added cost. It is 234 square feet and easier to maintain than any other piece of real estate I own. It required no additional down payment aside for the 5% I put down on a conforming Fannie Mae note. Why? Because I am an owner-occupant and this is not a multifamily but is a single family dwelling. Best kind of financing you can get! It produces the same income, but with much less headache than the multifamily. You choose! And if you make the right choice, you 10X your life with luxury house hacking! What are your thoughts on this strategy? Would you consider trying it? Why or why not? Weigh in with a comment. Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Real Estate Deal Analysis & Advice

4 Absolute Rules for Setting Appropriate Rent Prices

You will have to come up with answers to many questions when you consider acquiring a multifamily property. The first, and likely the most important question is: what will the rents be? This conversation may be more appropriate for a book (I’m actually thinking about writing that — should I?) than a blog post. But, there are, as far as I am concerned, some absolutes in this conversation. That’s something I can cover in an article. If you simply follow the precepts I lay out here, you’ll save yourself lots of heartache. Let us cover those highlights. Here are the absolute rules for setting rent prices in your rentals. 1. Minimum Rent Requirement Let’s think about rents in the most simplistic terms. As the rent comes in, it has to be high enough for you to be able to afford all expenses, and for something to be left over as your cash flow. Well, I don’t like rules of thumb, but for the purpose of this conversation, let’s just assume a 50-percent expense ratio, which covers both the economic losses and the operating expense (as if, but let’s pretend). Thus, in the case of a $500 rental, a 50-percnt expense ratio would leave us with $250 to cover three very important things: Debt service CapEx reserve Cash flow Unfortunately, for all practical purposes, $250 is simply not enough to cover all three of the above. And since debt service is mandatory, the choice we face is between our profit and CapEx reserve. What we often see is landlords pocket the money left over after debt service, and then go write an article for BiggerPockets about how great their cash flow is. This goes on for a couple of years, and then their house gets trashed and they find themselves needing to replace the flooring, the water heater, and a stove. And what they suddenly experience is that tragic feeling in the pit of their stomachs, which accompanies the flow of cash flow in reverse: All of the cash flow they thought they’d made over the two years prior suddenly transfers from their account to their contractor’s. Related: How to Really Calculate Cash Flow on Your Next Rental Property Guys, this is what happens when one has to make a choice between CapEx reserves and cash flow. And while there is no hard-and-fast rule to suggest the minimum blended weighted rent, we are certainly not talking about anything less than $650 in apartment setting — and likely more like $750. And as to single family rentals, this minimum rent requirement is much higher. Incidentally, I’ll have you know that the picture I painted above holds true for 80 percent of the midwest markets. Five-hundred-dollar rents are just not enough to cover all of the costs. And yet, that’s 90 percent of small to mid-sized towns in the midwest. Watch out! 2. Maximum Rent Requirement We are always looking to fulfill two objectives — to protect our investment, and to grow our investment. We discussed above that low GSR exposes us to high risk. Beyond this, protecting our investment is a function of operating at a price point that’s attractive to an economically stable tenant base but is not so high that it limits our audience. In other words, unless you are in a very select boutique market or asset class, we do not want our rents to be in the 90 percentile. Most people can’t afford that. This conversation is very market specific, but we are talking about owning rentals that are within the 55th to 70th percentiles, within the range of what’s available in the market place. So, if in your market rents range from $400 for total slum and $1,200 for class A, you probably want to be in the $625 to $900 range. This will be appealing to tenants who are stable enough to protect your investment, but it won’t be so exclusive that only a tiny sliver of the marketplace can qualify. And if you happen to be in a market where rents range from $900 to $4,200, you probably want to be in the $2,000 to $3,000 range. Regardless of the market specifics, the rationale sticks. So, just like there is a minimum requirement for rent, there is also a maximum. We have to be able to appeal to the widest cross-section of the potential audience. If you buy rentals that are too high within the scope of your market, this becomes difficult. 3. There Has to be Value Add Just trust me on this. The IRR doesn’t work otherwise. 4. Underwrite Price Per Square Foot In order to truly compare apples to apples, you have to price your rentals on a per-square-foot basis. A friend of mine sent me a deal a couple of weeks ago that he wanted to partner on. I tell all of my investor friends that if they find a deal worth doing, I’ll partner with them on it. Well, my friend sent me one because he thought there was a ton of value add. He did some research online and sent me screenshots that seemed to indicate upside of at least $150 per unit. This is to say that while the in-place rents were around $525, his research indicated that rents of $675 were achievable. Related: The Top 5 Ways to Make More Money on Your Rental Properties The thing he was missing is that the comps indicating the higher rents were, on average, 250 square feet larger than the subject. For example, an 850-square-foot unit that rents for $675 a month is $0.79 per square foot. $675/850 =$0.79 If we now apply $0.79 per square foot to our size unit, which is 600 square feet, we realize that the achievable rent is $474. $0.79 x 600 = $474 Now, in most markets, as units get smaller in size, the per-square-foot price goes up. This explains the in-place rent of $525. That is $0.87 per square foot, which is $0.08 higher than the comps. And considering how much smaller the subject units are, it makes sense. But, is there any value add? Can you convince people, for example, to pay even $625 if units that are 250 square feet larger are available for $700? Unlikely. Both are 2×1 units. A world apart! Thus, as an absolute statement of truth — underwrite price per square foot. Conclusion There are many other elements to consider when underwriting rents. But if you follow the rules above, you will avoid 95 percent of mistakes. Good Luck! Do you have any tips for setting rents to add here? Share them in the comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Landlording & Rental Properties

Grant Cardone is Both Very Right and Very Wrong: Let’s Pick Apart His Advice

When you get to be pretty smart and rather accomplished, you find yourself in somewhat of a danger zone. The danger is represented by the fact that your prior successes tend to back you into a tunnel-vision perspective on life and business. Because you know what has worked for you in the past, you can fall into believing that the same will work in the future, that your way is the only way, etc. Well, it doesn’t take a genius to note that everything in life changes over time, that life and everything in it is cyclical. And if so, your perspective and frame of mind necessarily and proactively must evolve. One way to help facilitate this is by surrounding yourself with smart people of differing perspectives, and one vehicle to accomplish this can be a mastermind group. I am fortunate to have many, many smart people on speed dial, and last week I had the pleasure of spending time with two of the smartest guys I know. The setting is Hawaii, Honolua Bay on the Island of Kawaii. Do you recognize these two gentlemen? In case there is any confusion, the one with the out of control beard is Brandon Turner, and the other is our good friend Darren Sager. On Darren’s plate is a gluten-free waffle. He loved it, and it helped him maintain his figure, which, considering his age, is no small thing. While in Hawaii, Darren turned 50. Happy Birthday, Darren! He looks fantastic, doesn’t he? What Did We Discuss? We talked about lots of things. It was a very productive getaway, indeed. One topic, in particular, comes to mind, and it is this: Grant Cardone loves to offer advice that folks shouldn’t mess with houses and small multifamily and should go to the big stuff right away. Brandon, Darren, and I talked about this in detail, and in my opinion, we have to accept that Grant’s advice is both very wrong and very right at once. In this article, we will explore both sides of the argument. Why I Think I Can Help You Brandon, Darren, and I talked a lot on the subject, but of the three of us I may be most equipped to speak to this. I started with single family residences (SFR), and it only took four of them for me to figure out that structurally SFR as an asset class is a fool’s game. The numbers are not there, and the management infrastructure is a nightmare. I switched over to small multifamily in 2006 and stayed there for about eight years, working with everything from a duplex to 10 units. I remember looking at some 24-40 units, but never pulled the trigger on those; something didn’t feel right. I wasn’t sure what felt wrong about these at the time. I know now. And nowadays I syndicate apartment communities. So, this conversation is right up my alley because I’ve stood on every step of this ladder and have internalized the benefits and drawbacks of each. I am hoping you find value in this. Related: Why You May Have Grant Cardone’s Concept of “Massive Action” Dangerously Wrong Grant Cardone is Right Let me start out by saying that structurally, Grant is right—going bigger is simply a better idea by any investment return, OpEx, and CapEx line item. Investment Returns This is a long—in fact, very long—conversation. But the term I want to coin today is #exponentiality. In simple terms, a 1% return on a basis of $100,000 is $1,000. But, the same 1% return on a basis of $10M is $100,000. Now, I’m not sure about you, but I’d rather get paid $100,000 than $1,000. Thus, in terms of the amount of money being made, this is not a contest—go big or go home. Cardone is right here. Management I’ve written about this on the BiggerPockets blog as well as mine, but as it relates to management the truth goes like this: A professional property management operation is one that has a construction arm, legal department, and an accounting/reporting department. This is an operation with well-tested systems, which come from years in the business and thousands of units under management. This is an operation with deep commercial contracting relationships, in-depth knowledge of and relationships with the representatives of the municipalities they operate in, etc. In addition to the above, a professional management infrastructure for apartments involves payroll for on-site employees and a regional manager overseeing them. Now, the thing to understand is that all of the above costs money, and in order to underwrite this cost, the project needs to be of a particular size. Let’s just call it “large.” Such a property manager as described above knows that you can’t afford them on a 40-unit, and they can’t afford to service you properly on a 40-unit. So, they are not interested. I will address in a bit why this is such a problem. For now, let’s just say that there are only two options available to you from here: You are forced to either do the property management yourself or hire the gal or dude at a local real estate brokerage office who handles 100 units for small-timers. Neither of the above is a particularly enviable circumstance. In fact, I did it for a decade—and, well, no freaking more! Cardone is right here as well: Go big or go home, as it relates to property management. Construction Efficiencies We only buy value-add deals. Why? It’s a separate conversation as to why, and if you want to have that conversation, we can, in another article. For now, let us agree—we only buy value-add deals. That said, there is a lot of construction happening in these deals. And with construction, we have issues of material cost and sourcing, labor cost and sourcing, and project management. Relative to project management, we are right back to talking about management, and the same realities exist—either you are pulling your hair out to keep subs on task, or someone else does it for you. On a small project, it has to be you because you can’t afford for it not to be you. On a large project, there is enough income to pay people so you can have a life. So, here again, going bigger makes sense. Then there is the issue of sourcing materials. Do you think you can get better pricing on kitchen cabinets and granite if you do 4 units or 100? How about flooring and paint? How about fixtures? And how about labor? Two months ago, we closed on a 98-unit. It was at that time called Silver Tree. Now it’s Canyon 35. You can read about it here. As we speak, work is going on: I can tell you that we can do a 1×1 apartment at a cost of about $7,350 if the bathtub does not need to be resurfaced—and $7,550 if it does. Add to this about $100 for 2×1 and about $300 for 2×2. This includes new cabinets in the kitchen and bath, granite for kitchen and baths, underhung sinks throughout, appliances, lighting and plumbing fixtures, hardware, paint, and all of the labor. There is absolutely zero chance I could touch this pricing remodeling a small multifamily. And in SFR, if you are good at what you do, you’ll spend $8,000 on the kitchen alone, more if you go with granite. That’s if you are good! So, once again, Grant is right—going bigger affords efficiencies. Financing Dude, I’ll tell you what. The most difficult financing to obtain is residential mortgages for your 4 units and less. The qualifying process is akin to a colonoscopy. They look at everything and they look everywhere. Not much better is commercial portfolio lending. It’s definitely better but still requires personal recourse, and while more emphasis is placed on the asset, the bank still looks at you quite personally. Related: BiggerPockets Podcast 108: Building a $350 Million Real Estate Empire Using the 10X Rule with Grant Cardone On the other hand, with the big stuff, the options for financing are endless, and the qualifying process is easier. Why? Because they look at you, but not really. They know you can’t and won’t repay the debt if things go badly, so they focus on the asset and who will be managing said asset. The thing is, lenders won’t even think about loaning to you if you think you can manage the asset yourself—it’s a professional job that a professional should do. They know that professional third party property manager will be managing the project. As such, the lender is underwriting the property manager more than they underwrite you, which takes me back to the earlier discussion: If what you’ve bought is too small to afford/attract professional management, this is a problem in a lot of ways, including the debt. By default, this pushes you into larger assets since this type of a professional property manager will not manage small stuff. Grant is right again—go big or go home. But… Grant Cardone is Wrong! Here’s the thing. Any suggestion that a newbie who can’t tell a rafter from a footer, who’s never signed a lease, who’s never qualified for a loan, who’s never experienced the joys of eviction, and who’s never written a business plan much less executed it should stick his/her nose into the big stuff is insane at best, criminally misleading at worst, and big-time guru on balance. It’s not like you know anything about construction. It’s not like you can raise $5M from partners. And, most importantly, it’s not like you know what a good deal looks like. And something else you don’t know is how much mistakes in real estate hurt! So, What Should You Do? I have no idea. I don’t write articles to give you answers. I write to make you think. And all I can tell you is what I did and what my friends did. You figure it out from there. I can tell you that I learned from making mistakes. I could not conceptualize large apartments any other way than growing into them. But I eventually arrived at a point in my intellectual worth that now enables me to play in the big leagues. I still have a portfolio of small multis, but likely not for too much longer. My partner Sam Grooms is a CPA with a Deloitte pedigree, who can see stories in numbers that 99 percent of people just aren’t able to see. Aside for syndicating with me, he seems to always have two flips going on. And now, he is starting to teach as well since we are doing a live event in Phoenix in January. Darren, aside for being a hugely successful realtor to the investors, is continuing to stick to his model of buying extremely well-located small multis in Northern Jersey, close to transit and with the eyesight of Manhattan. He is of the mind that fewer doors equal more cash flow. Works for him! Brandon Turner makes good cash flow on his portfolio, buys mobile home parks, and writes books that generate very good residual income. Both Darren and Brandon invest with me for diversification and access to other markets—and for the fact that both of them are kind of maxed out with how much they do, and it’s time to diversify into more passive forms of cash flow. You see, everyone has angles. Everyone is diversified with activities and revenue. Whether it’s classical training or trial and error, all of us study and learn. One thing none of us did was jump into large multifamily right away. What do you think? Is Grant Cardone’s “go big or go home” principle feasible for newbies? Weigh in with a comment! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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Mortgages & Creative Financing

How to Raise Money for Your Next Deal—Without Legal Issues

I am sitting on an airplane. My family is with me. We are flying to Hawaii. Tonight we are going to see a good friend, Darren Sager. It’s been a while and we are excited! And in another two days, we’ll see another good friend, Brandon Turner. We are notably less excited about Brandon, as you can imagine, but have made peace.  We are meeting in Hawaii to mastermind. All three of us have been increasingly active in real estate over the past year, and once in a while, a getaway like this is necessary. Now, while we are here to work out some plans, at least one day will be more play than work. Darren turns 50 next week! Overall, this trip has a bit of a surreal flavor for me. You see, I like clarity. I like definiteness. There is nothing less appealing to me than lack of definiteness. And yet, that’s exactly how I feel. I feel like I am stuck in no man’s land. Darren, let’s face it, is an older guy. I mean, a quite good-looking and accomplished, but an older guy. Brandon is just a baby.  And then there is me—at 43, neither this nor that. What am I? How do I fit in? Am I not old yet, or am I not so young anymore? Am I just starting, or am I finishing? That feeling of not knowing your place that I am trying to describe is prevalent among new investors. I certainly felt it in my day. So, today, with some very simple advice, I am trying to clear up that feeling for you newbies as it relates to one of the most important aspects of REI: raising money. When you are done reading this article, you will have clarity!   To Preface This Discussion In the world of real estate investing, we have two main hurdles to clear: finding deals and finding money to finance those deals. Both are challenging, and both are often used as an excuse to not get into the game. There was a time not so long ago when finding deals was easy, but funding was hard. Some people used that as a reason to stay on the sidelines. Today, funding is everywhere, but good deals are not. I am telling you this to forewarn against excuses. Excuses are easy to find in any cycle if you look hard enough. The question should never be why should I not do this; the question is how can I do this?! Related: 6 Aspects of Real Estate Investing You MUST Understand Before Your First Deal How to Raise Money This is where I tell you that I am not a licensed professional and cannot offer specific legal advice. I am going to outline to you my understanding of the laws in very generalized terms. But, please, seek professional advice from a qualified licensed professional. That said, as you should know by now the SEC is rather specific as to who you can and cannot ask, why, and how. But, the reality is that if you don’t ask you don’t get, and that’s not an option. With this in mind… What Does SEC Want? What the SEC really has a big problem with is a combination of these words: general solicitation. Now, this is not always an issue, but to be totally clear of any wrongdoing, if you can simply avoid doing things that can be described as general solicitation, you should be just fine. To me this easier let’s consider this one word at a time. What is “general”? Well, the easiest way to understand that is in terms of relationships. If there is no pre-existing relationship, then the relationship is general. What is “solicitation”? Well, asking for money is solicitation. What is general solicitation? General solicitation is you asking for money from people with whom you do not have a standing relationship. If you do not do something that is both “general” and “solicitation” at once then you should be fine. How This Works in Real World Suppose you are at a party and someone you hadn’t previously met asks you what you do. And you answer that you pool money together from people to buy large apartments and that you’ve been really busy lately because you are under contract to purchase another asset. Now, since you don’t really know the person you are speaking to, this relationship should most likely be considered general. You are OK, though, because first of all, you are not making a public announcement—you are speaking to one individual. Secondly, you are not triggering the conversation, but merely answering a question posed to you. And lastly, there is no solicitation going on here. You are not asking for money. You are not offering up an investment opportunity. You are simply telling this person what you do. So, you should be OK. Another Situation The following weekend you get together for a brunch with three friends and you proceed to tell them about the opportunity to invest in your deal. This time, you actually are offering them to invest. However, this is totally legal as well, because you are talking to a group of friends—people with whom you’ve had a standing relationship. Related: 7 Life-Changing Lessons I Wish I Knew as a Real Estate Newbie Remember, what gets you in trouble is the “General + Solicitation.” You can have general conversations without soliciting, and you can solicit from pre-existing relationships. You just can’t solicit money from strangers, at least not under Reg D 506b. What About Social Media? Well, I am not a huge fan. It’s true if your post on Facebook goes out under the setting which permits only your friends to see it, then I suppose you can argue that you are talking to people with whom you have a pre-existing relationship, making it OK to solicit. I get uneasy with this, though. How well do you know your FB friends? Have you had meaningful contact with all of these people? Do you see the thin line? Conclusion You have to ask for money if you are going to succeed in real estate investing. But, next time you are about to ask, or about to make that post on a social network, just remember—what gets you in trouble is general + solicitation. Any questions about general solicitation? Ask them below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

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