All Forum Posts by: Don Konipol

All kinds of different advice here, mostly based on personal experience.  In my mind these are the most relevant points

1. Is your spouse’s “reluctance” based on lack of knowledge, or is it a deep seated fear of investment risk?

2. How confident are YOU that your knowledge, experience and talent will enable an acceptable risk return ratio?

3. Are the consequences of a loss of investment acceptable to your lifestyle, your psyche, and your marriage? 

4. How great is your "need" to independently invest? Is it just that you want a higher ROI, or is it that you hope it will lead to an independent financial life?

Sustainable success as a real estate investor is not the result of being able to guess/forecast/devine/luck out which, when, how much, etc. a real estate market will appreciate.  Sustainable success is a result of being an expert in a market niche, following sound principles of finance, being willing to take risks when the risk reward ratio is favorable, having backup funds to get by periods of negative cash flow, continually expanding your knowledge, experience and education, and saving/investing by spending less than you earn.  

The wanna be investors that aren’t ready yet - who need more focus, direction, education, experience - come on these forums and one day are interested in tax liens, the next day they’re  all set to “wholesale”, the next week they believe investing in notes is the golden ticket.  Once they get to the investment stage, they want to know WHERE to invest - where’s the most appreciation, where’s the best cash flow.  The best place to invest is the place you know best, the place where you’re an expert.  Ned, you’re the “expert” in tax liens in Baltimore.  You didn’t read a report two years ago that said Los Angeles was a better place to invest, pack up the family and move to LA and close down your MD operation. Because you would be giving up your competitive advantage by shifting operations to an area where you’re not the expert.  
The point is that asking should I invest in Austin or Memphis is the wrong question.  

In the long run all markets tend to appreciate in value……..Irving Fisher

In the long run we’re all dead anyway…….John Maynard Keynes 

 You’re unlikely to find a willing lender.  What you will find are intermediaries, brokers and middlemen asking you for a ton of documents, then stating that they could get the deal done, but you need to pay a due diligence fee upfront.  They will never deliver. 

Here’s two questions you need to answer. 1. Will the property being purchased cover the debt service of both the long term note and the gap funding loan?  Will it do so with “room to spare”?  Do you have funds in reserve  to cover periods of negative cash flow? If the answer is no there’s no need to go further.  You shouldn’t be purchasing additional property even if you could. The risk of total loss should the market turn south is too great.  
If the answers are yes, then we can go to the second question.  Is there significant equity in your current real estate portfolio?  If yes, then you can create second lien notes secured by your current portfolio properties.  Either find a seller willing to accept these notes as a down payment, or sell the notes to a note investor to raise capital for a down payment. 

In either case forget 6 or 7% interest.  You’re into the double digit + category. 

The real question is: can a deal be purchased, rehabbed, holding costs, etc. without any of your own cash (or personal credit line) WITHOUT giving up ownership or profit percentage and only interest paid at no more than a “reasonable” rate?

So, this eliminates the “technically” nothing down deals where (1) investor utilizes a personal credit line he has established (2) partners with people in it for a preferred equity type return and (3) gets “into” the deal for no personal cash and then spends twice as much with rehab and holding costs. 

This criteria is MUCH more difficult to achieve. The necessary ingredients are (1) an investor with a proven track record of success in this type of investment (2) a property being purchased at a low enough discount to FMV that the risk/reward ratio is extraordinarily favorable and (3) a low interest rate environment.

Most investors lack numbers 1 and 2 above.  They want to do “no cash investment” deals because they lack capital, but are inexperienced.  Further, closer examination of their “can’t miss” property purchase will most likely show that they incorrectly analyzed the property value, the rehab cost, and the holding costs.  Simply put, with little experience and little knowledge, you have a better chance to win the lottery than complete a successful no money invested deal.  

Hindsight is 20/20.  We really don’t know whether any particular real estate market will appreciate, let alone at what rate.  We take “prior performance” and ASSUME that the future will be linear.  It all seems so obvious IN RETROSPECT.

In 1973 I attended a real estate seminar that predicted a certain metropolitan area was the best for future investing because huge money was being spent - both public and private on rebuilding its downtown, on public facilities, and on its industrial base.  The same seminar (sponsored by the Urban Land Institute) predicted the continual demise of a different city because that city was bankrupt, its infrastructure was crumbling, and its industrial base was leaving.

Here’s what happened in the next 50 years.  The city that the ULI thought was the poster child for profitable investing lost more than HALF its population. Residential property lost so much value that houses were being torn down and property reverting to farmland. That city considered  the “best” for real estate investment was Detroit.

The city with no future, where landlords were burning down there buildings to not have to pay property taxes, and considered the worse for investing?  Well, in1973 Saul Steinberg, future billionaire, purchased a 24,000 square foot co op apartment for $240,000.  That same apartment sold in 2019 for $100 million.  The city to “avoid” investing in was of course New York.  

The investing analysis being discussed here assumes that we know with a degree of certainty what the rate of price appreciation (and that there will be price appreciation at all) will be in the future.  We don’t, not by a long shot.  Neither of course to we know what the future holds for rents, expenses, etc.  BUT we aren’t even making an attempt to project future values using any analysis - we’re merely expecting the future to be the same as the past.  

To me THIS is the major weakness in the “theory” being proposed.  

I’ve listened to all the chatter about “motivated” sellers being “don’t wanters”, “tired” of being a landlord, having negative cash flow, divorce situations, probate, etc.  And once in a while you as an investor can successfully work these situations and come across a very “motivated” individual.  However, the most reliable motivated sellers I’ve found in my 45 years of real estate investing is simply PEOPLE WHO HAVE A GREAT NEED FOR CASH NOW.  This is why the absolute best deals I’ve made (from the buy side) were HUGE discounts I was able to obtain because I had the cash ready to close immediately.  

Josh, some people are risk adverse by nature, and even if you “convince” them their reactions to the inevitable obstacles, disappointments, problems, disasters, etc. will severely damage any relationship. 

At a minimum, when one partner is not “on board fully”, you need to separate the personal from the investment.  A place to live is PERSONAL; with your spouse as skeptical, the personal residence should NOT be part of your investment plan.  With 2 good paying jobs you should be able to save sufficient money to invest in real estate.  If not, your problem maybe lifestyle spending that needs to be addressed.  

Once the family home is secure and not part of the investment equation, your spouse may be more amenable to your real estate investment plans.  If not, you have some assessing to do.  Is she so risk averse that anything other than bank savings is too risky? Does she lack confidence in your ability as an investor?  Does she have a good reason for the lack of confidence?  Is her “dream” for the future totally different than yours?  Is your “ambition” much higher than hers?  

Once you’ve identified the reason for her reluctance you’ll need to evaluate how strongly you feel about real estate investing.  I will tell you than although @Alan F. response was funny, it was true for me also. My wife was risk averse, and told me after 13 years of marriage that she just wanted me to get a middle management job, that she was tired of the ups and downs of the entrepreneurial life I led.  Even though I pointed out that my average income over our marriage was three times hers and that almost all our net worth can be contributed to my efforts, she still insisted that she couldn’t “live like this” anymore.  I immediately realized that there was no “compromise”, if we remained together one of us was going to be miserable which meant both of us would be miserable.  We amicably divorced and she remarried a “W2” guy and I remarried someone more stunned to taking risks.  Not suggesting your relationship is anything like that but just saying that sometimes people’s feelings about life decisions are so far apart that “compromise” isn’t possible, and to go one one has to “give in” to the other.