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Real Estate News & Commentary

“The State of the Economy: Pain Management or Redemptive Suffering?”

I am not Catholic, and I beg for forgiveness from those who think I may be blaspheming by using the term ‘redemptive suffering’ in a non-religious context. Whew. Now that we have that out of the way … Watching the news media, you’d think the world is about to end. Markets are in turmoil. Economies are contracting. Capitalism is dead (if it were ever truly really alive in the first place). Compared to 1998, the world is indeed looking pretty bleak right now. After all, if you’re used to drinking water out of a pitcher and then someone takes that pitcher from you and replaces it with a small glass of water, you’re going to say “wow, I just ‘lost’ 50% of my water’. But, you still have water, though, don’t you? And, chances are, that glass is a bit bigger than the glass you had before you got that pitcher to begin with. So, yes, times are tough. And there’s certainly a trickle down effect caused by one sector after another ‘collapsing’ (residential, financial services, jobs, auto, jobs, etc). However, how bad is it REALLY? For commercial real estate, here are some facts … from National Retail Online: Across property types, what is shaping up to be a prolonged recession is already dragging down occupancy rates and cash flows as tenants grow averse to new lease commitments. Three consecutive quarters of negative absorption drove up the national office vacancy rate to 13.7% in the third quarter from 12.6% a year earlier, according to Reis, a New York-based real estate research firm. Meanwhile, the national retail vacancy rate climbed to 8.4% from 7.3% during the same period. Even the typically dependable apartment sector hasn’t been immune to the economic and financial strife, with the vacancy rate climbing 40 basis points over the past year to reach 6.1% in the third quarter. So, office vacancy went up 1%, retail up 1% and apartments up 4 bps. Wow, I feel a depression coming on!</sarcasm> Finally, in closing, I can’t sum up my feelings on this topic better than commentator Roger Kimball in his blog entitled “How Bad Is It?” The economy, I mean. The President-elect warns that “the worst is yet to come” and “millions of jobs” might be lost. Olivier Blanchard, head of the International Monetary Funds, agrees: “The worst is yet to come,” he told a German newspaper recently. Type “economy bad news” into your search engine: you’ll find plenty more where that came from. Jim Cramer, the excitable, “progressive” financial analyst, set the tone some months ago with his “this-is-Armageddon” video. Maybe so. Or maybe the current turmoil is, well, the current turmoil. Let’s get a bit of perspective on things. Yes, yes: my 401K is a 201K now, too. As I write, the market is hovering around 8000, down from a high of more than 14,000 not so many months ago. In October, unemployment jumped from 6.1 to 6.5 percent–ouch! Inflation this year is about 3.7 percent, up from 2.7 percent last year (and 1.6 percent just a few years ago). Not good, what? How does it compare with, say, the golden age of Ronald Reagan. Well, by the end of 1982, unemployment was 10.8 percent, up from 8.6 percent the year before. The Dow was 700–that’s seven hundred . Inflation peaked in 1980 at 14.76 percent, dropping over the course of 1982 from 8.39 to 3.83. Thinking of buying a house? The prime interest rate in 1980 touched 21.5 percent. In 1982, it went from a high of 17 to a low of 11.5 percent. It is about 4 now. What, Sherlock, do you make of all these numbers? Here are two things: One, the market, and all associated economic indices, fluctuate. Two, we are a lot richer now than we were in in 1980. So, yes, things are bad. And, yes, I believe things are going to get worse (more jobs lost, more foreclosures, deeper credit crises). But, I believe that — even when we ‘bottom’ out — things have been much, much worse in the past (I don’t think many of us will need to stand in bread lines for example). However, this ‘worsening’, also opens up opportunities as I’ve blogged about in the past. So, as entrepreneurs and investors, we have to be nimble, open-minded, and work smarter AND harder to take advantage of them and benefit in the long run. So, my suggestion to anyone serious about not just surviving, but THRIVING during these crazy economic times: turn off the CNBC and get to work! Photo Credit: Fillmore Photography 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

Simple Rules for Raising Capital, Part 2 (Now It Gets More Complicated)

In my last blog, “Simple Rules for Raising Capital”, I hit some very basic high points that I think you must follow to become a world class capital raiser. This blog gets into more detail on that subject. What follows is what I call “The Four As of Capital Raising” 1 – Accredited This one is pretty simple. Your investors must all be accredited as defined by the SEC. You do not want non-accredited investors. Trust me on this. I’m not going to get into why. Just trust me. Your investors must be big boys and girls and know that they could lose it all. You will not be investing someone’s retirement or college fund. 2 – Advisers You MUST have the absolute best security attorneys and CPAs you can attract (‘not knowing I couldn’t do that’ is not a free pass the SEC or IRS will give you — I mean, people go to jail for this stuff). You also need at least one very good mentor (not a ‘guru’ that you pay for but someone who likes you personally and has actually made many many people very very rich just by sitting with them a few times a year … what if you had 5 minutes with Warren Buffet every six months for example?). One way to develop this is to create an Advisory Board. You will not only be able to raise (and protect!) capital, you will be able to have a better operation that will most likely yield higher returns on that capital because you’re not wasting the operations’ money on bad advice. 3 – Affinity As I wrote about in my last blog, the relationship first concept is absolutely critical. I won’t repeat it here again except to say that if you don’t see capital raising as a relationship development exercise FIRST (before a capital raising exercise) you will not succeed long-term. Period. 4 – Authentic You must be authentic, your investors must be authentic with you about their concerns, desires, financial profile, etc, and (this one seems obvious but it’s as important as #3), YOUR OPPORTUNITY MUST BE AUTHENTIC (i.e. must be “real”, must be grounded in reality … you must be able to concisely answer the question: why should I invest in this opportunity quantatively and common sensically?). Do NOT waste your investors’ time on half-baked ideas, etc. Get it dialed in. Think the opportunity all the way through. Do you REALLY think you can hit your projections? What if you can’t? Can you live with yourself if you lose all your friends’ money? TAKE YOUR TIME. NEVER LET ANYONE RUSH YOU THROUGH DUE DILIGENCE! If you had $2M of your and your family’s hard earned money to invest, would you throw a couple hundred grand at the opportunity personally? If you can’t AUTHENTICALLY answer a resounding “yes!” then you need to pass and come back when you can. You are a fidicuiary and you must act like one. Invite that mentor, get those trusted advisors, and some of your closest investor friends to poke holes in the opportunity. Let them ‘bang on it’ a bit.  If it still stands up, you probably have an authentic opportunity that most accredited investors should get in line for. 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

Simple Rules for Raising Capital

Piggybacking on my last post, “The Importance of Being Nimble“, I’d like to blog today about something that is absolutely critical to your ongoing investing success: raising capital. In my opinion, it is a skill you must develop. Must. Not should. Must. Once you become very very good at raising capital, any amount of capital, you can accomplish anything. Start any business. Buy any asset/investment. Build a nonprofit. Run a political campaign. Anything. Get my point? OK, now to the ‘how’. This blog may disappoint some of you because raising capital is actually not a science. It’s an art. And you won’t become an expert by reading this blog. But, I hope it will open your eyes to a few things. First of all, here are some ground rules. Rule # 1: GET OFF THE COMPUTER! You cannot raise capital in chatrooms and forums. You have to get outside and network and mingle and talk to people. In person. Find common interests. Love golf or tennis? Join a high end country club. Get involved in charities. Like poker? Get the point? This is especially true for those of us among the ‘younger’ set. Rule # 2: Relationships. Relationships. Relationships. Relationships. Relationships FIRST. GIVE first. Focus on the RELATIONSHIP first. You will be engaging with very wealthy people who get hit up all the time for donations, investment opportunities, etc. They can invest with anyone. Why you? Why your deals? You don’t want to be one of those people looking for a hand out. You want to be a friend who also happens to have some good deals from time to time. Take your time. I sometimes know people for over a year before I even bring up a specific deal (after I’ve played tennis with them several times a week, gone to poker night after poker night, went to their parties and vice versa, hung out with their families and vice versa, etc …. they know what I do and most of the time actually end up asking ME if I have anything for them … “I don’t know, John, let me see if you’d qualify”). This will help you: (a) establish trust and (b) learn more about their personality/demeanor, investment criteria, financial profile, and snap shot of current cash position (the last thing you want to do is put the wrong investment in front of the wrong investor). Rule # 3: See rule #2. Rule # 4: You still have to have a GREAT deal. You can have a strong relationship, but you ultimately want to establish a reputation for yourself as someone who deals happen to just follow around wherever you go. You’re a deal magnet. And you work hard to attract those deals and vet them before spending any of your investors’ time and money. Rule # 5: See rule #2. Rule # 6: You are not a salesperson. There is no SELLING involved here. After you have a great relationship and a great deal, either the investor will be interested in seeing a presentation or they won’t. If not, just leave it alone. They’re missing out, but just leave it alone. After all, you are not SELLING investors, you are SORTING through investors. Finally, you must communicate with your investors once they’ve invested with you. You must keep them informed, briefly and concisely, that you’re working hard on their investment to ensure their return materializes. So, this should be enough to get you started. Work hard at building relationships first. Consistently bring great opportunities and don’t be bashful about asking for interest (and referrals once they’ve invested and have become cheerleaders of your deal). 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

The Importance of Being Nimble

Remember the Oscar Wilde play, “The Importance of Being Earnest”? Well, I’d like to blog today about “The Importance of Being NIMBLE.” The turmoil in the markets and the contraction in the global economy reminds each of us of the old cliche: “the only thing that’s constant is change.” So it is in business and, especially, investing. My business partner and I founded our investing company with one very simple idea in mind: we wanted our business to outlive us. We want it to be around long after we’re gone. So all of the major decisions we make are colored by a long term perspective. What’s best long term for Live Oak? What’s best for our investors? How do we ensure that the projects we’re developing are benefiting the long term success of Live Oak (not just the next five plus years, but over the next decade and beyond) and have our investors benefit in much of the same way. For example, our private equity company has only invested in commercial real estate to date. However, we are now expanding that. We are now investing in businesses and the passive cash flows they produce. Our criteria: the businesses must have a very high rate of return (20%+ per annum), are likely to be wildly successful even in down economies, and the management teams behind those businesses must also have a long term vision for their companies. So our latest project, for example, is investing in a business that develops multi group dental centers and manages the practices within those centers, across the US. Dentistry is a high cash collection business, 99% of all new dental centers succeed (i.e. remain open and thrive beyond the five year start up phase), and for every 6,000 dentists retiring this year only 4,200 are coming out of dental school. So, we think this is a great play (it doesn’t hurt that the returns are phenomenal). And 65% of all Americans visited a dentist last year – up 10% from just 10 years ago (and as the population ages, particularly the baby boomers, that percentage is more likely to go up than down). Yes, there is a real estate component to it (the centers are stand alone office buildings after all) but the investment is really in the business of the dental practices (the returns are higher there than in the real estate actually). It’s an opportunity to get in on the inside of a deal which should produce a high amount of stable cash flows for many years — our investors will be able to invest in these very lucrative medical practices which are not usually open to private investors very often because of the hard work we’ve done and the nimbleness we’ve shown. We’ve spent over 6 months of due diligence on the project (and, more importantly, all the players involved) so we took our time. But, if we were not nimble and remained closed to investing in only commercial real estate, we would not have this opportunity open up for us. The opportunity opened up for us because of some key relationships we’ve cultivated over many years — again, another thing we take a ‘long term, take your time’ view on (relationship building, that is). Now, instead of waiting on the economy to come back around before we start seeing some great commercial real estate deals again, etc, we can monetize our nimbleness and continue to provide great opportunities for our investors who have to put their money somewhere while the options of where to place that capital are getting more and more limited by the day (stock market? CDs?). They say: “why NOT throw some capital at a private placement deal with a reputable firm and a strong offering?” Even in the worst case, it can’t be worse than losing 40% of my assets in the stock market! If you’re sitting on $1M+, why not throw 10-20% of that into this deal (as an overall percentage of your portfolio that’s not much risk exposure … and the upside could be enormous). So, for us, this opportunity will open up other opportunities (for us and our investors). And it’s not the only opportunity. There are still commercial real estate deals and other private placement opportunities to look at. The point here is that all we, at Live Oak, care about is developing great opportunities for our investors and ourselves so that we both can benefit from them for many many years to come (although the dental centers, for example, will stop being developed in 2-3 years, the centers will still be kicking out returns for decades to come most likely or there might be even more lucrative exit strategies sooner to be looked at). So, I encourage you to keep your eyes open and remain nimble not just during these rough times, but through all times. I know that we will continue to make that a mantra for ourselves. In closing, one of my favorite market commentators, John Mauldin, has a newsletter entitled: “The Frontline”. I highly suggest you subscribe to it at http ://www.frontlinethoughts.com/gateway.asp. In last week’s newsletter entitled “The Problem With Deleveraging” he gave a great history lesson on recessions and it was all pretty discouraging, negative stuff. But he concluded by saying: “All is not gloom and doom. The last major recession and problem period, in the ’70s, saw a number of new businesses start and prosper (Microsoft, Apple, Intel, etc.). Businesses that have access to capital are going to be able to take market share and come out of this recession in much better shape. It is just a recession, after all, and will end. But I would suggest keeping your powder dry and being nimble. There are opportunities which will arise, as they do in every downturn. Just don’t expect this recession to be like any past recession. Make your plans accordingly.” Who knows. You may be sitting on a business right now that could be the next Microsoft, Apple, Intel, etc. If you have a long term, deeply compelling vision with a business model that can stay nimble while you keep your eyes wide open to the opportunities that are all around you right now, you may be able to generate a wealth of abundance for not just yourself and your loved ones but for generations to come. Maybe even become one of those businesses John Mauldin will write about. Photo Credit: Mayr This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation. 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

Assessing Distressed Debt Opportunities

We all understand the fundamental philosophy that  generally drives winning investing (or at least I hope we all do): “buy low,  sell high”. Well, real estate is getting  pretty “low” across the  board these days. The billion dollar question, of course, is: is THIS “low” THE “low”? We’ll have to leave that question for another blog  since I have no idea nor does anyone else. But,  given that real estate operates in an imperfect marketplace (therein lies the  opportunity), chances are that all current “low real estate” has some  kind of distress associated with it (either personal and/or debt driven  distress). This blog will focus on assessing the distressed debt  opportunity. As due diligence consultants, we’re asked all the  time to assess deals with some sort of distressed debt association. There are  those, such as Matthew Landau who spoke recently at iGlobal Forum’s real estate private equity summit in New York, who believe that the government’s  plan to repurchase troubled real estate-related assets from financial institutions is likely “to make for price discovery in the market and  provide a minimum price, or floor, for the asset prices”. Landau noted that  Lehman Brothers, for example, “made a good call in not selling its real  estate-based assets at very steep discounts, considering that the government  could pay more for the assets”. Ok, I’m following you. That makes sense. But what about the following? From National Real Estate Investor Online In fact, the troubled asset  relief program (TARP) could even contribute to an upward pressure on prices,  Landau believes. As for the possible risk of buying too early in the cycle and  missing out on good deals, he noted that it is always difficult to time the market perfectly and investors need to buy whenever they feel comfortable and  leave room in case things don’t go right. Wow, that’s not very helpful is it. That’s like  saying: “hey, do your due diligence”. Yes, I know that, thank you very much.  But, HOW?!? What specific things do I need to know about, watch out for when  dealing with a distressed debt opportunity? I’ll get to that in a minute, but  here’s more on the current state of the  distressed debt opportunity … Jeff Gronning, a managing  principal with Normandy Real Estate Partners, agrees that the government  program makes for price discovery and could provide some direction to a  cautious market in which everyone is waiting for a bottom. Even then, he says,  “The problem is so much greater than what TARP is designed to handle,” which  means that until there is some kind of catalyst, people will not buy. Thomas Deane, head of structured transactions and special assets at Wachovia Securities, noted that considering the problem is based on billions  of dollars in assets, there won’t be a bottoming out until the first or second  quarter of 2010. “Too much stuff needs to go out the door,” according to  Deane. Deane has seen a lot of buyers pull back since they don’t want to buy  at the wrong price. “Nobody is going to call the bottom. Do sensitivity  analysis and have confidence in your abilities,” is his advice. From the buyer’s perspective, Lawrence Ellman, North America head of  investments for Citi Property Investors, expects that prices will come down  and become more attractive. “So far, we haven’t seen prices to our liking,” he  said. “We need more deal flow and sense of urgency on the part of sellers.”  However, lenders that are working with developers on assets in transition are  beginning to see reality — such as a possible need for a haircut on the loan —  and the borrowers are following along. Ok, that’s a bit more helpful, but that still doesn’t help me figure out  how I can take advantage of this historical opportunity. All of these experts seem to be saying the same thing: there’s a huge  buying opportunity out there right now in distressed debt. We don’t really  know when it will bottom and we don’t really know how you can profit from this  opportunity, but it exists. Well, I can tell you how to profit. What will determine whether you will  either make money or get swallowed up is one thing and one thing only: due  diligence! There are “deals of the century” out there in waiting right now,  but you have to know how to make sure they don’t blow up in your face. Here’s  a high level review of a starting due diligence checklist when evaluating a  distressed debt opportunity: 1 – Remember that you really have two major due diligence projects: (1) the  property and (2) the debt. 2 – Understand the lender’s business rules: the visible (organization  charts, documents, forms, processing guidelines, etc) and the invisible  (office politics, relationship between who originated the loan and who’s servicing it, history of bank and the players involved, etc). 3 – You have to work with whatever the lender gives you, which won’t be  everything you need. You’ll need to review the documents with one eye on the  documents they give you and one eye on what’s missing. So, you’ll need  your detective hat on and be able to read between the lines and fill in the  blanks. 4 – You will have to really understand all the security documents, so  don’t skimp on legal/advisory help. 5 – You’ll need to understand who has recourse. What other liens are  attached or, better yet, could get attached? 6 – You’ll need to do all your normal due diligence on the property  itself. Environmental, title, appraisal, management, lease analysis, financial  solvency of leasebackers, local political environment review, use analysis,  market supply/demand dynamics, trade areas, employment trends, absorption  rates, etc. Don’t forget about that while focusing on the distressed debt due diligence. So, there you have it. There is a great distressed debt opportunity out  there right now and it’s only going to continue to get better and more  prevalent in the months and years to come. If you become an expert at  assessing those opportunities, you will thrive during these turbulent economic  times and be in a great position when the market comes back and make fortunes for  you, your family, your contractors, your investors, and your community. After all, remember that – although I do not believe we are heading into a  depression – more fortunes are made during depressions than at any other  time in economic history. Make yours now! 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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