The Good, Bad, and Ugly of Real Estate Investing
A lot has changed in the world of real estate in the past couple of years. Let me give you the good, bad, and ugly of it all as we prepare to enter 2013.
Let's get The Ugly out of the way first:
- Real estate agents and brokers are still losers, even more now than ever because of their lengthy time in starvation mode. It's like letting a caged dog out of a hot box after starving him for a couple of weeks. Not a pretty sight. And yes, he will attack you, probably eating you in the process. And no, none of them got any smarter, more professional, or kinder in the last few years. I have to say that it's probably the meanest and angriest group of "professionals" since the lynch mob in the 1800s.
- There are still some very creepy unscrupulous characters out in the world of lending. Although they can't get away with the former lending practices that got us into all that financial trouble a handful of years back because of so many newly implemented federal regulations, they are a little more brazen with their front-end scams such as "money-up-front" loans, ridiculously high loan application fees, equity partnership scams, due diligence legal fee scams, and a wide variety of other illegal behavior that's pretty obvious unless you're emotionally desperate to do your deal, then you may actually fall for the scam at hand. There are still Uncle Guido loan shark types out there with super high loan points and borderline illegal interest rates that make investing in any type of property not only incredibly risky but just plain stupid.
- Many sellers still think they are selling at the peak of the market, even after watching their property rot on Loopnet with no activity for years and years. They also think that their property is the hottest thing since the Gold Rush in California and won't budge on their price, probably even thinking their building was built out of 24K gold bricks; this is how deluded many of them still are. Yet on the flip side, because the market heating up so fast in the commercial real estate realm, many of them can actually hang on for a little longer and get what they're asking for. Maybe more.
- Competition pretty much took over the commercial real estate investing market virtually overnight, especially with apartment building investing. This happened because everyone realized (at the precise same time) that the market wasn't getting any lower on pricing, interest rates weren't going to get any lower and commercial banks started lending with much less strict mortgage criteria. This "perfect storm" happened over the summer, probably while you were at the beach. Tighter competition means that the days of 100% owner financing are officially over. So is expecting a lot of seller carry.
- Investors are picking up properties so fast (expecting that they'll start going up soon) that they are limited to choosing stabilized properties in order to manage their cash flows and/or appease their investor partners. Most of them are notin the position to rehab or lease-up an underperforming property. This leaves the REO and underperforming property market pretty much wide open for you.
- Investors are leaving smaller properties alone. This includes 4-plexes ("quads"), SFRs (single-family residences), smaller MHP properties (up to 20 pads), and smaller apartment buildings (5 - 16 units). The good news about this is that smaller properties are much cheaper to function. Your operating expenses usually never exceed 35% on these properties and can be as low as 20%. (Bigger properties have operating expenses as much as 65% or higher in some cases!) Having a bunch of smaller properties is the way to go because the cost to operate them is much less, thus putting more cash into your pocket.
- Becoming part of an equity partnership deal is super easy now. Every investor and wannabe investor with money wants in on real estate right now. Long gone are the days of twisting an investor's arm to get him or her to invest in a deal or convincing them how awesome apartment building investing is. Their pens are poised to write checks. Now! You just have to find these people through a variety of specific methods that I've taught over the years. (Now is time to use these methods; get my point?)
- Commercial mortgages are actually much easier to get than you think. If you have good personal credit, you're in. Even if you have no built business credit yet, you can still buy a building under a newly formed LLC and use yourself as a personal guarantee since all loans under $1,000,000 are recourse loans (requiring a personal guarantee) anyway.
- Gaining access to unsecured lines of business credit has never been easier because of a newly implemented government program encouraging commercial banks to lend more money to businesses to get the economy rolling again. Banks get special incentives for lending money to businesses. Of course, this requires that you take some time to build some business credit which takes anywhere from 3 - 6 months. Good business credit can put you in an unsecured line of business credit in the low- to mid-six figures which can, in turn, be used for down payments on properties. Since you're going to be focusing on smaller properties from now on (priced $100,000 to $1,000,000), having unsecured cash will easily give you the 20% required for the down payment on these deals.
Like I said, I've been warning everyone for a couple of years now that the window of opportunity is closing for getting your foot in the door on apartment building investing with little or no money down, owner financing, and by using creative financing methods.
And I also mentioned that the window of opportunity has just officially closed.
Instead of letting it depress you, instead you need to look at what's left on the table for you to make a killing with.
1) Smaller properties like small apartment buildings, MHP properties, and even SFRs.
2) REO apartment buildings and unstable properties requiring a revamp on management.
But...if you're going to get these properties, you're going to have to put some "skin" in the game. This means putting money down. And you can get this money by changing the face of your personal credit and building business credit.
My students with good credit get anywhere from $300,000 to $500,000 in unsecured lines of business credit.
Students with marginal personal credit but with built business credit get anywhere from $50,000 to $150,000 in unsecured lines of business credit.
Whichever category above you'll end up in by this coming summer will still get you in the investing game because you'll be able to raise the money for your EMDs, due diligence, and down payments to play the investment game.
See you at the top!