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SHOW NOTES FOR EPISODE 258: 10 TIPS TO PREVENT RUNNING OUT OF MONEY – RUNNING OUT OF MONEY – PART 2
Running out of money is one of the leading mistakes made by real estate investors. There are many reasons why this happens but the bottomline result is always the same — it can kill your opportunity for success. In part two of his series entitled “Running Out of Money,” Bill shares ten (well, really eleven) tips on how you can avoid falling into this trap that has messed up way too many investors.
In part one of this series, Bill talked about:
- How to get started
- Where to find the money to begin investing
- The power and pitfalls of leverage
- I also shared an example of a first purchase property to illustrate the incredible return you can get out of just one single family home purchase.
In fact, all my examples in both podcasts are with single family homes. I use those examples because it is simpler for most people to relate to, however, as most who have listened know, my preference is multifamily.
See episode #090 – “If I had $100,000 to Invest in Real Estate…” and you’ll better understand while that is my preference. However, my examples here with single family homes can also work and work well.
Let’s take a look at some of the ways you can get into trouble and how you can prevent those situations from happening.
When I shop for properties, the best deals are the “off-market” deals that might be distressed one way or another. One of the most common distressed properties, especially for multifamily, is a value-add project that runs out of money on the rehab – investors grow impatient as they try to get the funds to finish and the investors push for a sale just to hopefully get there original investment back.
This is a prime example of “Running Out of Money”
In hindsight, you could say they obviously launched into something that they did not carefully plan or estimate accurately. But maybe they did but contractors lied and low-balled to win the bid but now the “true” numbers are coming out
While You are Building Your Portfolio
Most of us are building our portfolio as we go along. We have a certain amount of money to start with, allow money for rehab, capital improvements, upgrades, re-positioning, etc. and we use that money to launch our portfolio building effort. Then, we use leverage to continually grow the portfolio.
You can avoid the “leveraging out” situation by…
- Not leveraging — Purchase a property in full that will generate all you need for your retirement
- For example, if you can find a property or group of properties that you can purchase out right, for example, you pay $1,000,000 out of your retirement savings to purchase an apartment building (or group on diverse properties) that generates $20,000 per month cash flow, after all expenses, you can live off of that income
- Or, you may try a more conservative leverage approach to acquire the properties you need over a series of years – 5, 10, 15 or 20 years – to reach your goal.
- Pay cash for some properties
- Finance others
What does the classic leverage approach look like?
- You buy a property with as little cash as possible. 20% down with a mortgage
- Do improvements to the property
- Increase rents
- NOI goes up which means the value goes up
- When value goes up, so does equity
- You do a cash-out re-fi to pull money out of the property to buy more properties
- Rinse and repeat
Of course, you have to meet certain goals
- Buy the right properties
- Finance right
- Rehab right
- Have the right team in place to implement
- You need contingent alternative plans A,B,C and D in place
To keep this train going, you need to depend on the prior property’s performance, but what happens when there’s a train wreck
- There’s a major market correction or recession
- The local market crashes and properties lose value
- You lose your high-paying job
- Natural disaster hits (floods, hurricanes, earthquakes)
- You can’t get cheap loans
- You pay too much for rehab
The train comes to a resounding halt and all of a sudden your cash flowing locomotive becomes a cash sucking black hole that is costing more than it’s generating
You need to invest wisely… especially as we are approaching a market correction
Here are 10 Tips to Help Prevent You From Running Out of Money
1. Write and Follow a Strategic Investment Plan
- Every successful real estate investor has a strategic plan
- A Good plan outlines your mission/vision goals and strategies
- A good plan is a “living plan” that is regularly revised and optimized to account for shifts in the market and other changes impacting your plan. This will help make your operations that much more efficient
- Your STRATEGIC PLAN or STRATEGIC BUSINESS PLAN is your “blueprint for success” that maps out specifically how you are going to achieve your goal
- We’re coming to the end of the year – Start writing your 2019 plan NOW!
2. Get Investment Partners
- If you don’t have the cash in reserves, and even if you do have the funds in reserves, make sure you have partners who can help you out in a financial crunch – are direct investors or banks (a line of credit) – who can throw in the emergency funds you need to:
- Finish a rehab project
- Cover unexpected expenses
- Cover a necessary marketing campaign
3. Double your goal
If you have a “break-even income number” to cover your budget and all regular operating expenses, I say to double that goal. If you need $50,000, make it $100,000 your goal. The extra can just go into your reserves to give you the cushion you need at that major time of need.
Why do I say that:
- Cost of living is always going up, inflation, etc.
- There will always be unexpected expenses (emergency, major disaster, etc.)
- You will build your reserves with the extra funds you generate and that buffer will always be of value
4. Build a Large Reserve
- This is hardest for most of us but crucial to long-term success
- Have an account to not cover 6 months of expenses, but make it 9 or 12 months
- Set up an ROA Account (what I call a Recession Opportunity Account) – an account that allows you to buy bargain properties during a recession
- What do the wealthiest investors do? — Buy when everyone is selling and sell when everyone’s buying! Right?
- Are you in a position to buy if the recession hits next week? next month? a year from now?
5. Buy Every Property at a Discount
- In today’s market, some say it’s impossible to find “under market deals” – I beg to differ
- How do you find discounted properties?
- Get broker “pocket listings”
- Direct to owner/seller marketingl
- Become an expert on finding distressed properties and owners
6. Accelerate Mortgage Pay Downs
- Kiyosaki says mortgages are “good debt” but that doesn’t mean it is the “preferred solution.” It just means that it’s a necessary place to be to grow real assets and for maximum leverage
- The reality is… it’s better to own properties outright – especially during recessions!
7. Buy Properties in Cash
- Especially if you are over 50
- If you are 10-15 years away from retirement, you don’t want to retire with tons of debt
- To take money out of your current retirement nest egg (but keep it within a self-directed account) can be a great way to invest your money for higher long-term returns
- When you turn 59 1/2, you can withdrawal without penalty
- Many have the mentality “NEVER TOUCH THE NEST EGG!” and I get that because I’ve been there
- However, if you are investing in real estate, are you going to get as good or a better return to from something other than real estate?
- Las week, in this episode entitled “How to Retire in 5 Years,” I showed you how you can pull as little as $150,000 from your nest egg to set up a plan that sets you up to be financially independent in 5 or 6 years.
8. Relentlessly Pursue Reduced Expenses
- Are you operating your properties at the absolutely lowest expenses numbers?
- Do you have the best rate on your insurance?
- Have you tried to petition the county for a lower property tax rate?
- Make friends with cheapskate landlords and use their best expense-reducing ideas
- Low flush toilets, faucets
- Energy efficient homes
- RUBS programs
- Become an obsessive miser!
9. Become a Loan Expert
- Debt service can make or break a deal
- Become a student of loans
- High interest loans with bad terms can eat you alive
- Build relationships with excellent bankers and mortgage brokers who can offer you the best terms – ask them what you need to have to qualify for the best loans and them make those things your goals
- Know where the best loans are
- Know and build your business around the criteria you must achieve for the best loans
- It you don’t qualify, get someone onto your team who does (a sponsor)
10. Don’t Over Leverage
- This can be its own podcast
- It can be your best friend and your worst friend
- Now is not the time to use heavy or long-term leverage
11. Last Resort – Loans and Lines of Credit
- There are expenses and opportunities you can’t ignore – if you must, borrow!
- Only use this option if you have a rapid pay back plan
- Personal loans
- Hard money loans
- HELOCs
- 0% credit cards
- To name a few
Well, that’s it for today!
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