Yesterday I received what I perceived as being a death threat from a student whose property deal wasn't selected for the partnership opportunity.
First of all, I have no control over which properties my invest partner decides to select. I did notice that he took a liking to properties strewn between Texas to Florida but he never -- at any given time -- told me in advance that he was selecting properties in those immediate areas. I'm thinking that, after receiving the boatload of deals he received through me, he'd devise his own "real estate empire" strategy in which he would minimize how far-reaching these properties would be from where he's located. I'm only guessing because I really don't know.
Sometimes I feel like I'm an American Idol judge. You know...there are those contestants who can't sing worth a shit. You know he can't sing. I know he can't sing. So when Randy says, "It just wasn't good, dog," the contestant storms off insisting that he'll "be big one day" and that they'll all "regret" not choosing him because nobody knows what they're talking about.
But...he sucked. Everyone knows he sucked except, well...him. He's the only one living in the fantasy that he doesn't suck.
Okay, so maybe that's a little far-fetched of an example. Most of the properties that were submitted in were actually pretty good. Some had some pretty kick-ass cash flows. But, again, I'm not even a "judge" but rather just the "assistant" who passes on paperwork and takes orders from "the man," in this situation. I had absolutely NO CONTROL over which properties were chosen.
Now, what happens to the "death threat" student? A police report has to be filed since I do have his full name and his address. (He did attend the seminar, after all. What a freaking bonehead!) And since my investor is actually considering a couple more deals, he's taken out of the program altogether, never to be considered for ANYTHING ever again. Talk about burning bridges with millionaires...not a good plan!
Let me address something again that I talked about last month. Doing partnerships isn't all what it's cracked up to be. You essentially become a slave to a millionaire (or, in some cases, a billionaire) much like being a Pinocchio working in a salt mine, day in and day out for little payout. In the case of my Texas investor partner, it was a 67/33 split. He got the 67%. You, the student, gets the 33% portion.
Okay, fine. That worked out really well for my student with the $12.4 million property but that was the largest property that was done in this program. Other properties ranged from $1.5 to $8 million. The smallest cash flow was, I believe (if I recall correctly), about $8,000 (and change) per month (but it may actually have been less: I get my "8s" and "6s" confused sometimes). On a 67/33 split, my student was only making a paltry $2,640 (or so) per month on the cash flow split. The gained equity wouldn't come into play for years, if at all, depending on if the property could be sold for higher than what they paid for it after the contract period expires (in 2018).
So...here this student will be doing all this administrative work, generating umpteen reports for my investor partner, working like a dog to manage the property, and still having to hold down a full-time job because the $2,640 per month isn't enough for him to cut out on his current day job.
Yes, partnerships are awesome when the property is a MULTI-MILLION-DOLLAR BUY but...not so much when it's on the "lower" end of the financial spectrum.
So...what I tell my students who weren't able to get their partnership deal done is...it was ablessing in disguise but you just don't know it yet.
This is part of the reason why I personally no longer do partnership deals with these multi-millionaires and billionaires. I got tired of being the "whipping girl" in the deal because I'm fairly convinced that we've abolished slavery, yet I felt like every bit of a slave in every single one of my partnership deals with these Big Boys.
Back to you, my dear student.
I think many of my students feel intimidated in doing deals on their own and would prefer someone to take them "under their wing" to do their first deal or two. However, if you truly knew what a partnership set-up looks like, you'd know that the person doing the partnership with you expects YOU to do everything and to KNOW everything already. There is no one-on-one training, no crash course, no "nurturing," and no education that they provide. They throw you out of the nest the second you show up and you damn well better know how to fly instantly otherwise you're screwed.
Here's a better way...
Do your own deals. Do smaller deals. Stop trying to set up a $10,000,000 deal off the bat. Stop wanting that 300+ unit apartment building as your first deal. Ain't gonna happen!
Furthermore, many of you don't know that doing smaller deals are:
1) Easier for a newbie to do from a psychological standpoint; you can easily wrap your head about doing the deal so you don't get cold feet when you get into contracts (if you get that far).
2) Better for negotiation because smaller deals are owned by mom-and-pop investors who will do partial owner financing, lower the price, do creative financing deals, etc. Larger buildings...you just can't do any of those things.
3) Better because of the lower operating cost. You can get a smaller building down as far as a 30% expense ratio against the GOI (gross operating income). The average for a smaller building is about 45%. The average operating expense ratio on a larger building is well over half and, in many cases, up into the 70%+ threshold. This means that 70%+ of your rental receipts is going back out in expenses to operate the property, and that's if you're lucky. We had a 600+ unit building in the south that cost 85% of the GOI to run...and we had to cut it loose back in 2009 because we were at a 96% occupancy and could barely break even on the cash flow. And that's freaking ridiculous. Never again will I go after larger properties because of that reason.
4) More profitable than you think; technically you need anywhere from 3 to 7 smaller buildings to gain enough monthly cash flow to meet (and exceed) your current monthly income requirements. By "smaller" I mean buildings between 5 and 24 units each. Many of my newbie students think that they need 100 buildings to make decent money and that simply isn't the case. I don't know about you but I'd rather have under 10 buildings that are small and more manageable (and more profitable) than even a couple of over-sized properties that are nothing but a management nightmare. (But that's just me. What do I know, right?)
Need I say more?
Okay, so how does someone with no cash and no credit acquire real estate?
There are a few ways:
1) Start off as a bird-dog where you get a cut out of the deal when you can "flip" it to another investor. This will allow you to get your feet wet in the business while building up your "pot" to be able to invest in your own deals. One of my students in one of my current mentorship groups just recently made $27,500 off a bird-dog deal just did. That's a nice chunk of change, don't you think?
2) Use your 100% LTV option. The main one is the 100% LTV Bond Funding Program (144a). When finding a kick-ass cash flowing property deal that can support a 100% LTV, this is definitely the route to take.
3) Get bank-direct funding. This is done by acquiring REO foreclosure properties (multifamily assets) that a small- to mid-sized bank still has in their inventory. Yes, these are still very much available and now these banks are trying to flush them out of their system so that they can lend on new mortgages (which they cannot do as long as they have heavy loads of toxic debt on their books). When a bank opens a new mortgage on what was otherwise considered a "toxic debt," it then reverts to being classified as something else on their books which is a high motivating factor for these banks to do this type of arrangement with any investor wanting to buy an under-performing property.
This is definitely something you need to listen to if you want to understand what's going on for this last-ditch multifamily trend that's going on for 2015, which should end by the end of this year!
See you at the top!
P.S. We're still accepting enrollment for the Internet Cash Flow Boot Camp Seminar in Los Angeles on March 14th & 15th! We're not quite full yet but we're pretty damn near close to full. Click on this link for more information: www.monicamain.com/la2