Real Estate Philosophy’s___________________________________
This meant to give the reader an inside look into the thinking
of the author. The thoughts below by no means apply to all transactions.
You
don't have to do that many great or good deals in life to be successful
just don't do bad deals: Warren Buffet said something like that and boy is it
the truth. Sometimes the key is not to grow or expand but to keep what you
have. There is a time for everything and
in real estate picking the timing that is good for you is critical. Do not be swept away with the tide, but try
to get in and out as you see fit. There are many components of what I call the
right timing. They include what’s happening in your personal life. Do you have 100% focus to work on the deal
without any major distractions, how full is your plate? By focusing on a new
project will it distract you from anything existing that you’re working on?
What is happening in the market place in terms of real estate trends, values as
well as access to financing. The timing has to be right for everything, because
it’s all part of the deal. Or you need to have the inter-strength and know how
to piece the parts that are not aligned. Example, if you’re ready and the
property is a good deal but the credit markets are tight like they are as of
this date, then you need to be creative and fine a way to do the deal. Think
outside of the box.
Do Not Fall in Love with a deal either before it’s yours or after
it is. Never be afraid to walk away from
a deal. Do not get emotional and fall in love, If you do it will be a one sided
romance as the deal does not love you. Remember its strictly numbers and
reality, do not let you emotions cloud either one.
More Companies and People Die from
Indigestion than starvation,
the reality is we are deal addicts but taking on too much is a sure fire way
for disaster. That once in a lifetime deal will be there when you’re ready. I
have seen the smartest of people with great intent implode because of this.
Make sure you take your time and fully digest the current deal before you take
on the next one.
There Is A Deal a Day, never get too attached to a deal before you buy it, be prepared to walk
away from it on the doorsteps of closing. There is a deal of a lifetime every
10 seconds if you have the buying power and talent. There will always be deals
coming your way. It is those once in a lifetime deals that I worry the most
about.
Put Your Partner’s Interests Ahead of Yours. I have a lot of partners and I think they
would all say two thing. This first is that I work 24/7 and give it my all and
the second is that I would jump in front of a bullet for them. It is my very
firm belief that when someone entrusts you with his or her hard earned money
you need to give your heart and soul too deliver.
The Devil Is In The Details, I can’t
even begin to count the number of deals I have looked at or have been involved
with that look like home runs at first glance, but as they say the devil is
always in the details. In this business there are a lot of details. Make sure
you measure twice and cut once or it will come back to haunt you. Spend a lot of time in all areas large and
small, it is those that are easily overlooked that are the most damaging. Do
not count on anyone else to do the due diligence; you need to do it yourself, especially the realtor and
seller. It is critical that you have a full and complete understanding as to
what the local township or city is looking for and will let you or make you do.
The costs are too great to not do your homework.
Talk to the township; show them the building, read the ordinances. Plan,
Plan Plan and then some.
The Art Of
Negotiation Is To Analyze, be prepared, listen and keep your mouth shut. Do not say or do anything
that will give your position away.
Remember you can always get more or less depending on which side you’re
on. Often saying anything or too much
will cost you. Do not negotiate against
yourself by giving a floor or ceiling.
Make sure you leave something on the table for everyone. Always have a walk away price in your mind,
do not get carried away or emotional about things. Its just business.
I Love the Sleepy Assets and could
never make money with the sexy ones. The problem with sex appeal in people or
assets is that it’s short lived. One of
two things happens. The first is you or
the market gets tired of it and it’s not in or sexy any more or it gets old and
looses its sex appeal. Give me something good, steady and reliable, without sex
appeal. I want something that will out last the market trends of the moment,
but will be here producing good reliable income in all markets for a long time
to come.
There Are 3
Main Parts of a deal and in order to be a success you need
to be a master of all three of them or know enough to know that your not an
expert and either outsource or partner with someone who can pick up the slack.
The First is the Buy: You need to know market values, trends and how to
negotiate a great deal. Included in this
are many other things, For example if the property needs work you need to know
how much work in dollars and cents is needed and how long will it take to
complete the work, who can do the work, as well as financing it. The Second is
to Manage the property and this includes property management, cash flow
management, fixing up the properly if needed as well as dealing with contactors
and tenants which in itself is an experience. The Third and final is the sale
or disposition of the property. As crazy as it sounds I have dealt with a lot
of people who are great at one or two of these but are lousy at the third, no
matter how you play it you need to excel at all three.
Assets Evaporate Debt Does Not- Important words to remember and live by. The value of any asset can come
down either temporality or permanently.
But the amount you owe someone will not come down unless it’s paid off.
In fact, if you do not make payments it can go up. It is a flawed assumption to think the value
of the real estate will always go up. It usually will go up but the timing of
this might not fit within your needs and time frame. In fact I can tell you that with me at least,
the timing usually is off. It’s called
Murphy's Law. The same is true with the cash flow of the property it can be up
one day and nothing the next. Either way
you have expenses to operate the property. The expenses do not go away when
tenants do not pay or leave the property.
Think Long Term: Do not think that things will
always go up in value or always come down in value. It is hard if not impossible to time
markets. Try to take a long term
approach with your thinking of values and holding periods. Another very important thing to remember is
history. While it is no prediction of
the future, when thinking of history with real estate and financing remember
that things are not
always rosy. Within the last 50 years we have had periods
of 15 years where real estate values went up very little. We have had periods
of time where getting financing was almost impossible and times when interest
rates where both 18% and 5%. We have seen times of peace and times of war and
everything in between. As they say the only thing you can be sure of is change
and I guarantee that you will experience it.
So think 2 and 3 times about every move you make and always be on the
conservative side of things.
Do Not Bet On Appreciation, as you
never know if you will have appreciation or deprecation. Most probable over
time pricing will go up and if you’re lucky you will not have to sell in a down
market, but do not buy based on this.
All buys should be based on the market value when you buy the
property. Make sure you make money on
the buy side of the transaction.
Power of Compounding, this is a wonder of the world.
If every year your income goes up by lets say a modest 3%, the compounding
factor on this over time is giant and should not be ignored or overlooked. Over
a 5 year period at 3% increases the total income increase is 12% and over 10
years its 30%, at 5% increases that’s 21% and 55% increases. Giant numbers for the same risk and same
work.
Power of Debt Repayment Is another Sleeping Beauty of the real estate business. It’s simple to take a 15-20 year loan and
just wait it out. Look at the repayments of principle as forced savings. Over
time it’s another giant and sleepy number.
A mortgage of 500k over 240 months at a rate of 7% the debt repayment is
as follows: Year 1-11k, Year 5-70k, Year 10-185k. It’s like a fine wine that
keeps getter better with time. Depending on what you’re buying and the debt
load these numbers can become giant real fast. While not to often there is
opportunity or benefit to assume a mortgage, keep a look out for debt that is
advanced in the amortization schedule as it becomes much more appealing as the
loan ages and the amortization tables become more tilted toward principle
payments. If you take advantage of this, watch out for phantom income that you
will have and will affect your taxes.
Cash Is King: This is true in good times and truer in bad ones. There is always a need
for it so never feel bad about accumulating it.
Everything will always be more expensive and cash intensive than you
think or plan for. As important cash gets you the best prices when buying and
keep you out of trouble.
Written in the 1st quarter of 2008 by
Jack Miller, no part of this maybe copied or reproduced without the express
written permission of the author. Jack Miller can be reached at Jack@GFCIB.COM
