My strong belief is that everyone should have access to cash flowing real estate deals. Everyone should be able to invest in real estate to better their lives, increase their cash flow, grow their net worth, and secure their retirement. Many people who I speak with want to invest in real estate. However, I also get the sense regularly that people believe real estate investing is out of reach for those that are not in the really wealthy category. I wholeheartedly disagree.
Many of those that I speak with who want to invest in real estate also believe that there are too many risks. While there are numerous things that have to be considered, I firmly believe that those rewards outweigh the risks of real estate investing. When it comes to business and money, I am cautious and conservative. I do not like to lose money and I do not want my investors, friends, family, or readers to lose money. I have never lost money in real estate. I have broken even, and I have had a couple of challenging deals, but I have never lost money in real estate and I have never lost a property. Maintaining that type of track record is not rocket science. It really just requires constant learning and discipline. What I do believe is that investing in real estate requires focusing on your personal growth and development, thinking about what you want to achieve, thinking about the paths that will enable you to achieve your goals, maintaining both determination and patience simultaneously, and ultimately, making a quick decision once you choose a property that you want to acquire.
Real estate investing 101 is a combination of learning and self-reflection. Most people think you just need to learn about real estate terms, real estate in general, due diligence, processes to close the property, processes to close loans, and the people involved in a real estate transaction (brokers, title, escrow, lenders, property managers, attorneys, lawyers, and accountants), and then take action. However, there is another aspect of real estate investing 101 that is often overlooked by the beginner investor. Real estate investing 101 is all about self-reflection. It takes time and thought, but it must be done. You need to understand yourself. You need to understand your goals and what you want to achieve as a real estate investor. You need to understand what you know, what you do not know yet, how much money you have, how much money you need to make, and your big why.
Real Estate Investing Goal Setting and Investment Strategy
Real estate investing requires self-reflection, and it is important to thoroughly consider the questions below when you are just beginning to invest. Below the questions you need to ponder, I have included my thoughts on each topic. For those of you wanting access to forms and materials, we have a Members Only section where you can access more materials for an annual membership.
- What do you want to achieve by investing in real estate?
Although I grew up in a middle-class family, I did not start out with a financial advantage. I did have an idea about real estate from my grandfather who had been a small home builder in New York and Florida. I heard his stories about retiring at 45 years of age and how he only sold properties when he wanted to. In fact, his properties allowed him to collect cash flow and capital gains at certain points over his retirement, both of which funded his retirement until his passing at 99 years of age – 54 years in retirement. His strategy did not leave a lot of money left over, but he and my Grandma were able to live the life they wanted to live constantly traveling back and forth from New York to Florida biannually without concern for money. Frankly, I decided that I wanted to figure out how to have that level of freedom where I did not have to work for anyone directly. However, since I had no money to start and since I am conservative by nature, I went to work for a large real estate investment banking firm to learn commercial real estate finance and understand what my real estate investor clients were doing so that I could do the same as I grew in the business.
- What is your big WHY for investing in real estate to becoming financially free?
My little why for investing in real estate is to become financially free. My big WHY for investing in real estate is so that I could have the freedom to spend time with my wife and kids. The other part of my big WHY is that I want to provide a safety net for my family for the future. My children are young, but I have been talking to them about investing from a young age and I hope these lessons help them develop into good stewards of wealth over time. My dream is for them to grow the family cash flow and net worth so that they can focus on the things that are important to them in the future – their families, their hobbies, and their charitable pursuits.
- What location or locations do you plan to invest in and why?
I found that my clients had varying degrees of comfort with geographic investing. Some of my clients only invested in specific cities while some would focus on specific regions in a State, some would focus on a few States, and some were more focused on asset type than geography so they would invest all over the country. Then I met some investors who were actively involved in foreign real estate as well as real estate in their home country. This was very intriguing to me especially since I had already traveled to well over 20 countries by my mid-20’s and have now traveled to nearly 50 countries now that I am 42 years old.
As for me, though, my early investment strategy has not changed much. My underlying strategy has always been to invest in places where I have a need to travel and/or an ongoing desire to travel to. This focus makes real estate investing fun for me. I have expanded on that strategy over time especially when I am investing through my self-directed 401k for passive cash flow in deals marketed by other Sponsors. At present, I am invested in over 15 states in the United States. I am also invested in real estate in 5 countries. I am still looking at other locales where I want to invest, but while I am avidly seeking diversification, I also want enough critical mass in each location to make the travel and management scalable.
- What types of properties do you plan to invest in and why?
There are many different types of real estate assets that you can invest in. The four (4) main food groups for commercial real estate investing are multifamily apartments, office, industrial, and retail. There are a variety of additional real estate asset types that investors may want to consider, as well, including single-family residential, hotels, self-storage, student housing, senior housing, and land. Investors can also look at investments in mortgages, trust deeds, and loan portfolios.
My first investment was in a mortgage trust deed. The first reason for that investment was that my career was as a lender. I understand finance and I understood the return on my investment. The second reason for that investment was, at that point, I also did not know what I did not know about direct real estate investments. The final reason was that I was able to start with $10,000 in the trust deed investment. I did not have a lot of extra cash at the time so that investment allowed me to dip my toe in the water.
My next investment was a single-family residential property in Hawaii. I bought that property emotionally because I love Hawaii, I had lived in Hawaii previously, and I wanted an anchor to keep bringing me back to Hawaii year after year. Even though I ran the numbers and they did not meet my criteria, I justified the purchase on emotional rather than financial grounds. I broke even on that deal after 7 years of ownership.
Even early on while owning the Hawaii property, I concluded that it was not my wisest investment from a return perspective, so I decided that I would continue to stick to my investing principles and rules rather than allow my emotions to make the decision. While invested in the Hawaii property, I started making more money from my investment banking job. That allowed me to make investments in residential real estate, multifamily apartments, commercial real estate including office, industrial, retail, hotels, senior housing, affordable housing, single-tenant net lease, parking garages, gas stations, and loan portfolios.
My why is that I want to take care of my family. To do that, I want passive and semi-passive cash flow, and I want diversification so that I feel more secure in knowing that I have diversified revenue streams. I want diversification from asset type, geographic location, and Sponsor. That even means that I do not invest solely on my own or by myself. I know that I am a good investor and steward of capital, but I know that I cannot be good at everything, so I invest with other Sponsors that I know and trust who are very good at what they do too.
- Which real estate investing strategies do you intend to employ (e.g. buy-and-hold, fix-and-flip, lending, mortgage investing, ground-up development)?
I have been involved in all of the strategies listed above. My favorite is buy-and-hold. That does not mean you hold forever, and it does not mean that you do nothing to improve the real estate. What I try to do is find some way to add value to the property through property renovations, re-tenanting, financing or refinancing, management, finance, and accounting, or a combination of these strategies. My least favorite strategy is ground-up development. The reason for that is that many aspects of ground-up development are out of your control including governmental approvals to develop, economic downturns, market demand, market rent changes, and availability of financing. But my least favorite part of ground-up development is that there is no cash flow coming out of the property for 2- to 3-years. That does not sit well with me because too much can change in that time period. Ground-up development is sexy because you get a new building, but I would prefer to own “B” and “C” class apartments and “B” class commercial properties in “B” and “A“ locations that have a good cash yield.
Things to Think About
While there are a number of things to think about related to real estate investing, some of the most important things to think about are included below with my thoughts on each topic:
- How much cash do you have to invest?
Frankly, I hate the saying, “It takes money to make money”. I do not believe that is always the case, however, there are very few low-risk real estate strategies that do not require some level of cash equity investment. To get a return on your cash, you have to invest cash. Lenders want to see the amount invested by a Sponsor. Even investors who may co-invest with you want to know how much you will invest in the deal that you are Sponsoring. I started with $10,000 in a mortgage trust deed. I have invested in single-family properties with as little as $15,000, however, investing that little also means that the property is likely smaller and oftentimes, the return will also be lower.
- What percentage return do you need on your invested cash?
Everyone will have a different answer depending on their particular circumstance, age, and risk tolerance. I have a range of investments that are generating different cash flow levels. My worst deal right now is generating about a 5% return. My best deal has already given me about a 400% return on my original equity over the past 7 years from cash flow and cash-out refinances, and I am still getting a 19% cash-on-cash return on the original equity invested. My personal goal is to get a cash-on-cash return no less than 6% and to generate an internal rate of return (IRR) of at least 15% over a 5-year hold. Sometimes the IRR will be less and sometimes it will be more, but I know and believe that these return expectations are realistic and achievable with real estate investing.
- How much control do you want to have?
There are so many ways to invest in real estate deals. Most people think that they should or need to invest by themselves, however, investing by yourself is not the only way to invest in real estate and many times it is not even the best way to invest. The reason it is not always the best is that you can make a lot more money in real estate on larger properties where you can obtain levels of scale. Having said that, you generally will give up some level of control investing that way because you will likely be a passive investor in that example.
Direct Real Estate Investments are investments where you invest directly in a piece of property by yourself. Direct real estate investments are the ultimate in control. You do not have to answer to anyone else except the lender (if you choose to have a loan). You get to keep all of the free cash flow. You have the risks inherent with ownership of the property, but also all the returns generated from the property. Upon a successful sale or refinance, you get the benefit of the capital gains.
Indirect Real Estate Investments are typically passive or semi-active investments. Generally, these investments are managed by someone other than yourself. This Managing Member or General Partner maintains control of the decisions of the property and investment more so than the other investors. The investor receives a return on their investment, but the investor is generally passive in all other aspects of the deal. The plusses are twofold – the first is that there is not too much active involvement needed related to the business decisions of the asset and the second is that you receive a return on investment plus a share of the profits. The negative side is that while you are obtaining a return on your investment, there is also not too much active involvement related to making decisions about the asset or how to improve upon the investment. The plusses and minuses of indirect real estate investments are two sides of the same coin. The additional plus of these types of deals is that you have the power to choose which properties to invest, where, and with what Sponsor. In that way, you have control over where to place your money. These deals can be structured as Partnerships, Friends and Family, and/or Reg 506 Crowdfunding.
My company, NCRE Group, acts as a real estate Sponsor where you can co-invest with us in the deals that we Sponsor. My team and I oversee the acquisition, financing, property management, asset management, investor distributions, and sale of the assets that we acquire. If you are interested, please sign up on the NCRE Group website and we will keep you apprised of future deals.
The ultimate form of indirect real estate investing is through a Real Estate Investment Trust (REIT). REITs are privately-traded or publicly-traded vehicles where you invest in shares of a company that owns various real estate assets. The plus side of these investments is that they are generally more liquid than direct or other indirect real estate investments. REITs also usually have embedded diversification of asset types and geographic locations. However, where they benefit from diversification and liquidity, you will have almost no say as an investor. REITs typically are management intensive with more administration and management expenses than most other real estate companies, investors have no say as to which investments the REITs decide to purchase, and there is no involvement related to the amount of debt that the REIT places at the property level or at the corporate level. Given that the underlying investment is real estate, you really need to look at the Price to Earnings ratio, the Debt to Assets ratio, Funds From Operations, and Net Asset Value. I would also pay attention to the Dividend Rate. REITs have to pay out 90% of their net income to unitholders. In a downturn, this can have negative unintended consequences. We will look at REIT analysis further in future articles. The bottom line is that you have to do analysis in all of your real estate investing activities – REITs included.
- Who will manage the property?
Property Management is vitally important to the success of your property. If you have a good property management company or a good property management team, you will have an efficiently run property. If you have a bad property management company or a bad property management team, you will often have ongoing problems that can become systemic to the property. We have had excellent property managers and awful property managers. My recommendation is to interview property managers, do not sign long-term contracts without a trial period, and make sure to constantly stay on top of your managers to ensure that they are doing the best job possible for you and your investor team. In the Members Only section, we have forms and questions to ask in interviews. We also have regional contact lists available.
- Which lender will you use to finance the property?
Different lenders invest in different property types and different geographic locations. Some lenders can only focus on a given State while some lenders can only focus on certain property types. My domain has always been Commercial Real Estate Finance. If you would like to obtain quotes for financing or refinancing of a commercial real estate loan greater than $3,000,000 then you can reach out to my affiliate company, Guardrail Finance. For Residential loans, I recommend that you reach out to Quicken Loans in the USA and to local banks in other countries that you may look to invest in.
Real estate investing often seems shrouded in mystery. Real estate investing can often times seems complicated. It can also feel a bit out of reach since you generally need cash to be able to close a deal. But the truth of the matter is that real estate investing follows processes that are fairly straight forward. If you assess your goals honestly and determine what you really want to gain from real estate investing, you can do well and you can increase your cash flow, grow your net worth, and secure your retirement.
Until next time, happy investing!