#realestateraw

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Real estate is difficult. Real estate is not a get-rich-quick business. There’s nothing in this book that is going to teach you anything about getting rich quickly. This book is about teaching you how to build a business. What will the product of this business be? Real Estate. Keep in mind that real estate is simply a product of a business. If you don’t understand the business that surrounds the product, you’ll fail at the product and at the business.

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This book is about information, not motivation. Whatever your motivation is to be in real estate, it won’t be addressed in this book. If you’re looking to be told how great real estate is and how it’s the solution to all your financial problems in life, keep searching. If you’re looking for information, you have come to the right place.

If you have already decided to take the real estate journey, then you will find Real Estate Raw to be the definitive guidebook through the jungle of building a real estate portfolio. This book is a step-by-step, comprehensive guide to the buyer’s journey. It delineates the process in which you will go from locating a market all the way to closing a deal.

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Real estate is difficult. Real estate is not a get-rich-quick business. There’s nothing in this book that is going to teach you anything about getting rich quickly. This book is about teaching you how to build a business. What will the product of this business be? Real Estate. Keep in mind that real estate is simply a product of a business. If you don’t understand the business that surrounds the product, you’ll fail at the product and at the business.

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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.

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Barrier #2: Qualifying for a Loan

To qualify for a loan, the borrower usually needs to have at least the same amount of net worth as the loan amount. In many cases, net worth needs to be 1.3 times the loan amount.

So if I want to qualify for a $1,000,000 loan to buy an apartment complex, then I need to show the bank at least $1,000,000 in net worth—possibly $1.3 million. The net worth for the loan can also be a collection of your net worth plus your partner’s net worth, but in this case, you’d need millionaire partners to sign on the dotted line.

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If you’ve been in real estate for decades or are just starting out, there’s one truth I’m sure you know well: it’s hard to find good deals. When you’re using creative and seller financing (CSF) to close deals, there’s another wrinkle you have to consider in your hunt for good deals: the condition of the properties. Most likely, you’ll be dealing with a distressed asset.

Because if a property is up and running and making tons of money, why would sellers finance it to you? They probably wouldn’t. They would just sell it on the open market to a qualified buyer.

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Over the last 2 decades capitalization rates (cap rates) have been steadily falling. The compression of cap rates basically means that investors are willing to pay more for less cash flow. Capitalization rate is the relationship between the price of and asset and the amount of revenue it produces. As investors pay more for assets the cap rates fall. In turn the cap rate rises as the income of the asset rises over time (rents being raised).

Real estate has always followed the traditional market cycles of business (Recession, Expansion, Peak, Decline). If this holds true, then the multifamily market is set for a pricing correction. If the current pricing trends hold true, then we are facing a new paradigm shift in the way we value income producing real estate as it will cease to actually produce income.

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The book is divided into three sections:

· Section 1: The Real Estate Business

· Section 2: The Three Pillars of Real Estate

· Section 3: Advanced Concepts

The first section will teach you the basics of the real estate business, and it also is what I call the buyer’s journey. This is the full cycle of going from market selection to closing a deal. The second section discusses a concept I developed called the three pillars of real estate. This section will show you how to be successful in any economic market cycle. The third section covers an assorted list of advanced real estate topics. My goal for this book is to take someone who knows nothing about real estate and walk them through the entire process of building a real estate portfolio.

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 Create massive deal flow

The more deals you analyze the faster you will find a seller that will agree to a master lease option offer. Consistent deal flow and analysis is the key to all real estate investing. You have to know the values of the assets in your market and you need to watch the market regularly. If you do this you will know when a seller is selling a good asset at a discount. No matter where you live or what market you are looking in…there are always deals somewhere. Realtors can be a great source of apartment deals but using a MLO can be a bit tricky here. The main focus when offering a MLO through a realtor is to get the realtor on board with the offer first. The best way to do this is to show how they will get PAID!

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Once you have analyzed the deal, you’ll be ready to make an offer for seller financing. If the seller accepts this offer, you will need to verify the seller has equity in the deal to give you the financing. This is one of the drawbacks to seller financing. If the seller has a mortgage on the property, then they can’t finance it to you, and you won’t be able to take possession of the title. If the seller has a mortgage, a Master Lease Option (MLO) may be a better way to go.

Important Note: Some investors will do what is called a “wrap” or “subject to” financing. This is where a seller keeps the existing mortgage in place, and the new buyer makes the payments for the old owner. I don’t agree with this type of financing at all! The seller is giving you interest they don’t have. They are “wrapping” your mortgage around the existing mortgage or allowing you to take over the deal, subject to the existing mortgage.

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By doing this you accomplish several things at once. You now have the inspection done and you know what is right and wrong with the deal. At this point, you will know how much cash you are going to need to get the repairs done after closing. Make sure you have all your estimates in writing. That part is very important to begin negotiations with the seller. These written estimates can be used to negotiate the price, or if you are doing some form of creative financing, you can use this to lessen the down payment or terms. By having estimates in writing, it helps to take the pressure off of you and puts it on the contractors as well as brings validity to your argument.

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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.

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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.

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Barrier #2: Qualifying for a Loan

To qualify for a loan, the borrower usually needs to have at least the same amount of net worth as the loan amount. In many cases, net worth needs to be 1.3 times the loan amount.

So if I want to qualify for a $1,000,000 loan to buy an apartment complex, then I need to show the bank at least $1,000,000 in net worth—possibly $1.3 million. The net worth for the loan can also be a collection of your net worth plus your partner’s net worth, but in this case, you’d need millionaire partners to sign on the dotted line.

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What is a Distressed Asset?

The term “distressed asset” can refer to many things including:

Deferred maintenance

Low occupancy

Bad management

Units that need to be rehabbed (multifamily)

Bad tenant base (large number of non paying tenants)

Exterior building damage

These are common areas of distress I’ve encountered while building my portfolio. It’s worth mentioning that in all the real estate I’ve dealt with, I’ve never done a deal that didn’t have some level of distress or upside (the ability to raise its value through renovations) to it.

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Over the last 2 decades capitalization rates (cap rates) have been steadily falling. The compression of cap rates basically means that investors are willing to pay more for less cash flow. Capitalization rate is the relationship between the price of and asset and the amount of revenue it produces. As investors pay more for assets the cap rates fall. In turn the cap rate rises as the income of the asset rises over time (rents being raised).

Real estate has always followed the traditional market cycles of business (Recession, Expansion, Peak, Decline). If this holds true, then the multifamily market is set for a pricing correction. If the current pricing trends hold true, then we are facing a new paradigm shift in the way we value income producing real estate as it will cease to actually produce income.