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What You Must Understand About Real Estate Before Closing Your First Deal

After almost eight years in the real estate business, I made one of the costliest mistakes of my career, losing over $1 million on a deal because I didn’t understand something important.

Yes: $1 million dollars! It makes me sick just thinking about it.

So, what didn’t I understand? I call them the three pillars of real estate: market cycles, debt, and exit strategies. If you understand the three pillars, you can mitigate much of the risk involved with real estate investing. Fail to understand these concepts and you’ll likely make lots of money in real estate, only to turn around and lose most of it during the next shift in the market.

By understanding these pillars, you will not only make more money, but also keep more money, which is ultimately the name of the game. So, let’s take a closer look at each one.

Pillar #1: Market Cycles

Markets go up, and markets go down. Prices go up; prices go down. What most people don’t realize is that market shifts are quite predictable. 

Keep in mind that all markets cycle—the real estate market, the stock market, apartments, offices, single-family homes. These are all individual markets and will have their own cycles independent of, and sometimes in sync with, the national economy. Understanding past market conditions will allow us to deploy the most accurate business model in the present. 

No one has a crystal ball, but you can follow a common pattern to maximize your real estate profits. The average real estate cycle lasts eight to ten years from top to top or bottom to bottom. If you are in a great economy now, you should reasonably expect an economic downturn in two to four years.

If you are in a down cycle and prices are low, buy everything! The market will recover in two to three years, and your assets will rise in value. 

Pillar #2: Debt

Without an understanding of debt (traditional or creative), you’re likely to underwrite a deal incorrectly or to accept a loan from a lender that may be counterproductive to the exit strategy. Most traditional commercial loans come with a prepayment penalty if you pay the loan off early.

What if your exit strategy is to renovate the property and sell it for a large profit in a short amount of time? What if you fix up your property and want to refinance to pull out cash?

If you get the wrong loan, you may see a fair amount of profit absorbed by the prepayment penalty. This is just one example of debt and its correlation to your business model. 

Pillar #3: Exit Strategy

The exit strategy is the first part of any good real estate analysis and arguably the most important of the three pillars. You must know the way out before you go in. 

How can you tell if a deal is a good one or not if you don’t know what you are going to do with it? Renovate and sell? Renovate and refinance? Hold forever and cash flow? These are a few exit strategies. For your analysis to be accurate, you need to know what the exit strategy is before you even consider making an offer.

Once you learn to analyze a deal by understanding which market cycle you are in, you can then figure out which part of the cycle you will likely be in when you own and ultimately exit the deal. 

The Three Pillars Together

To have real staying power in the real estate business, you must fully understand and be able to implement the three pillars in any market situation. This is what separates the investors who fade away from the ones who stick around for decades. So, I highly advise you to take the time you need to study and understand all three pillars and how they work together. 

Misunderstanding or misapplying one of these concepts can cost you fortunes. You don’t want to lose money—$1 million (or potentially even more)—like I did, right? Of course not. Thankfully, with this knowledge, you’ll be well ahead of where I was when I made that mistake.

For more advice on the three pillars of real estate, you can find Creative Cash on Amazon.

What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company.  With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.

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Want the Best Multi-Family Real Estate Deals? Start with Problems.

There’s one thing that is common among all people: problems! It doesn’t matter if you’re rich or poor. It doesn’t matter if you’re just starting in the real estate game, or if you’ve been here for years. Chances are, you have problems. See where I’m going with this? 

The people who have the deals you want to buy are likely to have problems, too. If you can find ways to solve problems for these sellers, then you will create cooperation.

Remember this simple equation: Cooperation = Cash

Most sellers have problems. At the very least, they might be having trouble finding someone to buy their property at the moment. They may have occupancy problems. They may have repairs that haven’t been done for a while. They may not be able to manage the asset anymore. They may be a “burned-out” landlord. 

If you can solve the seller’s problems by creating cooperation, then you don’t need to be rich to start in the real estate business. Creative and seller financing (CSF) is based around creating value through problem solving. There are a few easy ways to identify problems in your market. These problems are seller problems as well as investor problems. 

Here’s a list of problems to look for in your markets.

When Working with Sellers

These are some of the problems you can look for with sellers.

Distressed assets: This can include deferred maintenance, low occupancy and bad management.

Burned-out landlord: They’ll be tired of dealing with current management (bad management), tired of spending money on the property or are an “accidental” landlord. Some people inherit property and don’t really want to be in the business.

Can’t find qualified buyers: This can be a real problem in a down cycle for most sellers. Many buyers have exited the business or are waiting on the sidelines to get back in during an up cycle. Or you can look for sellers who’ve had a deal fall out of contract more than once. These sellers will be motivated and educated on the lower value of their property. 

Taxes: Creative financing can be a way for sellers to mitigate tax liabilities. If a seller finances a deal to you, they will pay taxes only on the profit they receive. This is usually the interest you pay them for financing. Get with an accountant to verify any tax mitigation plan before making an offer. 

When Working with Investors

Investors can have their own problems. Look for any of these:

Getting low returns on current investments

IRA/401(k) giving low returns

Don’t know how to invest in real estate

Don’t have a real estate education

Can’t manage or run a property but want to be in the business

Don’t have the time to find good deals

Unaware that there are people who want to borrow their money and give them higher rates of interest

Unaware that real estate provides great tax benefits 

I built my entire portfolio on the single concept of creating value by solving problems. I started with almost nothing in a bad neighborhood. I clawed my way out of that area by creating more and more value through real estate problem solving. I found sellers and investors who needed my services, and I was rewarded within my portfolio and the income that it produced. I never had a job after that and have been my own boss ever since. 

What I’m suggesting is not easy. What I’m teaching you will take a lot of work. You will need to be prepared to bring a lot of “sweat equity” to the table when dealing with sellers and properties. 

Some people want the secrets to getting rich quickly. I hate to disappoint, but you will not find them here. What I’m teaching is how to build a real estate portfolio with as little risk and money out of your pocket as possible. To read the full article, visit: https://realestateraw.com/want-the-best-multi-family-real-estate-deals-start-with-problems/

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Want to Negotiate a Master Lease Offer? Here’s How.

Negotiating the Master Lease Option (MLO) begins long before the offer is made. A MLO is a contract between a seller and a buyer that does two basic things. It allows the buyer (you) to control the operations of the asset and the future sale of the property.

All good negotiations begin with gathering information, and it’s no different with an MLO. The first bit of information you gather will help you determine the motivation of the seller. If a property is a distressed asset (low occupancy, deferred maintenance, etc.), the seller is more likely to be motivated to sell the property. If a property is a money maker, the seller is less likely to be motivated to sell.

Not all motivated sellers are motivated because the property isn’t making money, but most are. Take a close look at the property itself. If you find, in your first analysis, that the property is distressed or the seller is motivated for other reasons, then this is a prime situation for an MLO.

Demonstrate the Big Picture

As I stated in the realtor section, do not approach a seller or agent and directly ask for an MLO deal. This can make it seem like you have no money.

A good negotiation will be based on your ability to make the seller see the big picture. You need to make the seller aware they have a problem without rubbing their nose in it. Create an objective situation with which to leverage your position. You will do this with your analysis of the deal. Gather all the financial data you can and calculate the cash flow or lack thereof. Gather all the data you can about repairs needed for the property, including the approximate cost of repairs. Calculate the value of the deal using the income approach.

You want to understand the value of a deal and be able to gently educate your seller on the value. Most sellers have an unrealistic view of their property’s worth. Your job is to bring their value back in line with reality and, at the same time, get them to realize the MLO is the solution to the problem.

It’s Up To You to Educate the Seller

Once you calculate the property’s value, you have its worth derived through logic and the property’s income. Your offer and valuation will be based on numbers that are logical and explainable. Otherwise, the seller may feel you are making a lowball offer just to steal a deal. Once you have an objective value for the property, make the seller aware of a few things:

A lack of cash flow will not allow the property to qualify for a bank loan.

If the property will not qualify for a bank loan, then the seller is looking for an all-cash offer.

If the seller gets a cash offer, it is likely to be about half of what the asking price is because it’s all cash.

If a buyer (besides you) were to come to this market with cash, would they buy something distressed, or would they leverage their money and buy something that is currently operational? Make the seller realize that all buyers will approach the asset the same way as you.

You also need the seller to understand that you did not create this problem, but you are willing to help them solve it. This is where the offer for an MLO comes in. You can gently make the seller realize the magnitude of the situation and then suggest the master lease as a possible solution to the deal. This takes time, but if you don’t spend time getting your seller to this point, your MLO offer may be misunderstood. Remember, a confused mind says no.

Educate the Seller if Necessary

Now you must put on your sales hat and get ready to sell! After all of this negotiation, all you are selling is yourself. You’ll need to convince the seller that the MLO is a way to solve their problems and you are the person for the job.

Also, keep in mind that sellers may not admit that they don’t know how MLOs work. If you think they don’t, then your job will be to explain how it works without making them feel stupid.

For more advice on negotiating master lease offers, you can find Creative Cash on Amazon.

What started out as a conversation at a live event one hot, sunny day in downtown Atlanta has blossomed into an amazing collaboration between Bill Ham, Jake Stenziano, and Gino Barbaro (Jake & Gino). Bill was instrumental in helping Jake & Gino launch their mentoring program and is one of the lead trainers in the company. With over twenty-five years of experience in operating vertically integrated real estate businesses, and over $100 million in assets under management, Bill, together with Jake & Gino, strive to teach others the strategies that have allowed them to become financially free.