Preparing to Launch

Well, we are less than 24 hours from the launch of my new radio show ‘Pieces of the Puzzle: Journeys in Real Estate Investing’, premiering on News Radio 600 WREC, Memphis. This represents and exciting time for many people involved, and also represents a culmination of many dreams and lots of hard work to get to this point. I want to tell you about that today.

First off, let me begin by saying the staff at WREC 600 have been EXCELLENT in welcoming me into the fold. The sales manager and production crew have been outstanding, and have been not only very accommodating as we have been getting ready to get online, but also in making me feel like an actual member of the WREC 600 radio personalities. ‘You are part of the family now”, Tiffany Lemmons(sales manager) sent me in a text message the other day. It is that kind of warm reception that has made me realize that News Radio 600 WREC was the correct station for launching the new show, and the show itself is an outgrowth of many learning experiences that I have had in the world of investment real estate over the last 5 years. Additionally the addition of Andrew Clarksenior as my co host is a substantial addition to the quality of the show, and I couldn’t have asked for a better person to be assigned to help me as I settle into the new routine. Andrew’s talk show on Saturday and Sunday touches on sensitive issues, and he approaches these issues in a way that is not only professional but also very direct and to the point. So, I am really excited to see what is in store for all of us, myself included.

Most readers know that I don’t have a background in radio, but I do have a background in motivational speaking, teaching(I was a public school teacher for 9 years), and professional coaching. So, a radio show is simply an outgrowth of my true mission – to provide real estate education and inspiration for people of all socioeconomic backgrounds. I’m like a zealot in some ways, crying out in the wilderness for people to do their homework and learn how to successfully invest in real estate. The fact of the matter is, if real estate is the vehicle that allowed me to detach from my background of growing up in a low income, single parent home(and the legacy that generally goes with it), then clearly it is the vehicle of choice for many people. And it is the preaching of that message that I am so passionate about.

It’s important to know, however, that part of my passion for real estate education comes from having learned real estate investing the hard way, which involved buying properties in bad areas(because I didn’t know any better) and getting robbed, and then having the experience thrown in my face by my mother(“stop taking your little weekend real estate classes”). The fact that I was able to recover from those experiences, and in doing so actually prosper, tells me that real estate investing is a vehicle that carries a learning curve, but a forgiving one at that – the more you put into it, the more you get out of it, and that is the message the new show will focus on.

Providing quality real estate investing education and theories at no cost is what I want to do. Now, there is no substitute for hands on experience, but I will say that the combination of solid education and perspective combined with successful investing experiences allows an individual to experience financial success. Developing a mindset of success, and learning the techniques that allow a person to get involved in a real estate investment while maintaining minimal risk are the principles of successful real estate investing. In developing that success, you can help other people along the way. And that is what ‘Pieces of the Puzzle’ is all about.

Tomorrow from 11 – 11:30 AM Central time on News Radio 600 WREC is the first episode of Pieces of the Puzzle. Won’t you join me as we explore real estate investing together? Out of area listeners can listen here: wrecradio.com, and you can call with questions and commentary at (901) 535 – WREC.

Help me to make this show great – tune in tomorrow, and let’s start building wealth together!

Preparing Yourself For 2009

Things have been going so well this week, especially since the announcement of the new Radio Show deal that is taking place(I just signed a contract for a new show on AM WREC 600, Saturday mornings from 11 – 11:30) I realized that there is no better time than TODAY to focus on your 2009 financial priorities.

My wife and I have had the pleasure of a pre – tax planning session, and that pretty much indicated to us that while we purchased some investment properties this year, we did not buy enough investment properties. So, we find ourselves closing on properties in an attempt to build positive cash flow and shelter ourselves from the ever reaching hand of the IRS. Notable intentions, to be sure, although it certainly would have been easier to buy the homes throughout the year instead of in the last three weeks of the year, if you know what I mean.

But back to you and 2009. The question that I am asking here is if you have made a commitment to financial growth in 2009. Of course, many people are saying that the economy is so bad that they can barely keep their head above water, and that certainly is one perspective. However, for those of you that realize your financial destiny is in YOUR hands, then 2009 is simply the year that will provide you with the richest fulfillment of…whatever you set out to do. Now, if that is to generate wealth and subsequent security through investment real estate, then great. The double edged sword here is that maybe you plan on continuing doing what you have always done, and in doing so you can have similar expectations for what you are always receiving – for good or bad.

Assuming you want to make some changes(let’s call the improvements) in the coming year to your financial picture, have you considered:

1) Purchasing rental properties to add to your portfolio? Real estate’s sheltering effect for your pre – tax income is unparalleled. Adding positive cash flowing properties to your portfolio can not only add spendable cash to your pocket each month, but can also minimize the amount of money needed to pay to the IRS each year.

2) Improving yourself and your real estate education by making a personal commitment to attend educational events? Your real estate investment business is only as strong as your knowledge of acquisitions and procedure. Reading books, attending seminars, asking questions, posting on forums – all of these are integral components to having your business be a success. Build your confidence, and in doing so you will be empowered to work within the framework of investment real estate both comfortably, and more important, profitable.

3) Attending your local REIA meeting? The networking that takes place within a REIA group is a great opportunity for building a support network throughout your community. I was a product of REIA groups and attending REIA sponsored workshops – you should be, too.

4) Looked at other forms of creative, non – traditional real estate investing such as wholesaling and lease optioning houses to augment your financial picture? The use of these techniques can be an additional revenue stream for you, and this revenue stream can act as putting spending money in your pocket – a nice way to start of 2009.

5) Building your real estate library? When is the last time you added a book to your library – and, more importantly, read it cover to cover?

These things may not guarantee your success financially in 2009. But I do know that, if you choose to do them, you will be ahead of the mass of people who make New Year’s resolutions only to forget them quickly after the hangover of the last day of the year has dissipated.

Dreams Coming True

At the 2^nd Annual Feol – Hinricher Awards(known affectionately as ‘The Feol – Hinnies” by the staff), last Friday night, not only did we have an incredible time but we witnessed some truly stellar talent picking up awards for their achievements in 2008. Stephen Green picked up a nice award for his outstanding contributions to company security and preservation of proprietary information, while Shannon Feol picked up the Realtor® of the Year award. Hinricher nabbed an award for his excellence in leadership in Business Development as well, and let me say to you it was extremely well deserved.

 

Perhaps most importantly was Curt Davis picking up the coveted Feol – Hinricher Silver Cup award, the prize for the most homes sold in 2008. Curt logged in this year at a record 70 homes sold, and that doesn’t count upcoming closings that have yet to occur before the December 31^st deadline.

 

Here is a picture of Curt taking down the 2008 FH Silver Cup. On the ride to the restaurant told him that Hinricher said there would be no awards this year(just to play with his mind), so I do think he was really surprised.

What is so interesting is that the staff have had a stellar year, and the company has as well – but I don’t believe that this is by accident. Yes, there is lots of discipline and implementation of systems that have helped us become streamlined and set ourselves apart from others in the field of investment real estate. But I also think that there is something more…spiritual… that is happening here, and I believe that that started when Ryan and I decided to begin actively partnering with local charities and with the founding of The Memphis Investor Network.

 

Earlier this year, we made the decision that we would use The Memphis Investor Network to propagate incredible real estate investment education without the traditional REIA/Sales platform. For those of you unfamiliar with that ‘non – profit’(but let’s call it ‘for profit’) model, instead of people coming to obtain educational insight in real estate then being waylaid and getting sold some type of product, Memphis Investor Network offers monthly seminars which have a ‘no selling’ rule. That means that there is NO SALES, of anything, be it educational products, services, or real estate. No deal makers exchange, no sponsorship advertising – nothing. You come to an educational seminar, and 3 hours later you are on your way home with a full stomach, workshop materials, and your checkbook unaffected. Honestly, that is a nice and refreshing perspective in today’s educational environment where seminar attendees are often looked at as carrion by the workshop organizers.

 

Our partnership with Save One Pets has also been a really neat addition to our FH Companies community outreach program, as we have raised a substantial amount of money for their operating budget in 2008, and also recently at our annual Feol – Hinricher ‘Santa Paws’ event at the Petco in Collierville, not only did we raise money for Save One Pets by having Santa come and take photos with pets, but we also had a treasure hunt which yielded a record number of home placements for Save One Pets, both puppies and kittens finding new owners.

 

Evidently there is a press release about this event somewhere, but suffice to say that we have had the privilege this year of doing so much more than just sell homes, and not only has that been terrific fun for us but made us realize that we, as a company, are truly blessed. Our Partnership with carbonfund.org is another example of how we have been able to give back with a truly innovative green initiative, and through that partnership we have made many new friends while contributing to saving the environment. And there is so much more to come.

 

Santa Comes Early This Year

 

But just when I thought that 2008 couldn’t get any better, yesterday I found myself sitting at the offices of Clear Channel Radio, signing a contract for my new 2009 Radio Show on WREC 600 AM, which will be starting January 3^rd from 11 – 11:30 AM, every Saturday morning.

 

You aren’t reading this wrong. Robert Feol will be hosting his own talk radio show on creative real estate investing starting this January.

 

Santa came early this year, with a present that was not only a surprise and unexpected, but truly a gift that is going to allow us to reach out to real estate investors and help charitable organizations at the same time. The show will focus on real estate investing, the educational side of the business and how to get involved with a conservative approach that will allow you to build a successful portfolio while maintaining your sanity. We will be troubleshooting calls and have special guests for interviews. And more importantly, I will continue to further my commitment to no strings attached real estate education. While the barrier for entry into real estate investment may be low, the truth of the matter is that education is the key to doing it right. And, if our workshops presented by FH and The Memphis Investor Network have been any indication, this approach is going to continue with smashing success.

 

What is neat is that I had always envisioned a talk radio show specifically of this nature, but it was more of a dream than something that I ever thought would materialize. I guess all of the articles, writings, theories, and speaking engagements are finally paying off. For some reason I have always seen myself as an educator, and I guess it is in my background(obviously), but the size and scope of the incredible opportunity that I just received makes me realize that such things don’t occur by happenstance. So, as we look back at 2008 and forward to 2009, what I really see is a crystal picture of the rich blessings that we have received. Yes, it has been great selling lots of houses. But what is far greater, to me, honestly, is the people we have met and been able to make new friends with, not only through FH Companies but also through The Memphis Investor Network. It is those things that I treasure even more than a successful business year, and I hope that my gratitude for the people and relationships are reflected in my desire to make the new show simply an extension of my commitment to real estate education.

 

If you have ideas for topics for the new show, please feel free to email me at robertfeol@gmail.com. I am in the development stages of the programming and welcome community input. Also, you can download the show as a podcast if you can’t catch it live, so you can always catch up on the latest tech on real estate investing.

I look forward to your thoughts and feedback. As the year 2008 comes to a close, I also want to express my thanks for your support and readership throughout the year. May your 2009 be as rich and blessed as our 2008 has been, and may Santa be as good to you as he has been to me!

Real Estate For The Common Man

Those of you familiar with my real estate theories know that it is really unlikely that you will find any formulas here. The Gary Eldred, Ph. D school of examining real estate deals doesn’t really apply to me, for better or worse. Where as Eldred tends to introduce a deep analytical /mathematical way to arrive at an answer to the question “Should I buy this deal?”, I tend to subscribe to a much more grass roots style of real estate investing, which is as follows:

1) Can I buy this house really, really cheap?

2) Is it in an area where I would send my wife to pick up the rent?

3) Will this house bring a check to my mailbox every month?

Now, #3 is more of the Lonnie Scruggs School of Thought(read: Mobile home Paper Guru who’s philosophy is ‘don’t walk by your mailbox daily without picking up a check’), but even Lonnie uses a financial calculator to help make his decisions, although his reasons are less analytical than more of a ‘show me the money’ type of record keeping that allows him to demonstrate substantial 3 and 4 digit returns on his money, and in doing so sell lots of books.

Robert Feol, on the other hand, is quintessentially more ‘I am never going back to where I came from’ mentality, and if this house will insulate me from that road, then it is definitely in the portfolio. The only problem with this is that, for most investors as of late, Fannie may has conveniently said ‘no’ to more than 4 properties, and the question on investors’ minds are how can they continue to accumulate assets in a way that they can legally build wealth as opposed to try to ‘game the system’ as Hinricher so conveniently says when discussing people who are trying to get one over on us.  The crux of the question, therefore, becomes “can I turn to real estate, still, and use it effectively as a wealth building vehicle?”

Naturally, the answer, of course, is yes, but before you go running off to those Saturday workshops promising to tell you how you can ‘make a fortune’ off the 700 billion dollar bailout(read: if the automakers can’t survive from the bailout, chances are you as very small time real estate investors probably cannot use that as a reliable source of future wealth planning) let’s get back to Real Estate for the Common Man – 5 Principles of Why Real Estate Investing Works.

1) Positive Cash Flow: Properly purchased residential homes should offer true net positive cash flow, money left over after your total debt service is paid, that you keep as income.

2) Instant Equity Positions: Since you are looking for ‘deals’, then you should not be paying full retail for properties, and should be trying to buy them as cheaply as possible.  Doing so creates you equity, the difference between what you owe on a home and what it is worth.  Hint: get as much as you can with each purchase.

3) Equity Pay Down: The paying off of your debt owed on the home by the tenants you place in the house.  Essentially, the tenants shoud be paying all bills and expenses associated with the home.

4) Appreciation: The increasing of the value of yoru real estate, over time, and demonstrated to be consistient by geographic and historical patterns.

5) Tax benefits: The government, generously allowing you to shelter your income from certain elements of taxation, due to the benefits traditionally associated with being a landowner.

These, essentially, are the 5 revenue streams associated with owning real estate.  Memorize them.  In doing so, you will be more advanced and sufficiently prepared to become a successful real state investor.  Remember, most new investors looking at cash flow homes measure the house’s value ONLY by how much cash flow it provides monthly.  Tsk tsk!!!

Now, back to the question of ‘will purchasing real estate be a great way to build wealth”, contrary to what book publishers are doing right now(running scared from real estate books), you can, of course, build wealth.  And now is actually the greatest time ever to do so.  But, the question for most people is, ‘how?” – especially after you hit 4 properties.

Well, for you advanced investors out there we at Feol – Hinricher do have some solutions for financing properties beyond the four threshold,  fyi, but today I want to talk about a different type of solution to acquisition:

Owner Financing.

When I started in real estate, owner financing was like finding a unicorn in your backyard – it didn’t happen. In fact, I remember calling thousands(yes: thousands) of FSBO signs and asking about owner financing, and was essentially turned down every time.  Undeterred, I did wrest some owner financing out of one guy who was like 100 years old, but his properties were in poor condition and he basically sold them to me at full price.  But, I still own those properties and they aren’t on my credit report, so yay me.

Anyway, what is interesting is that, while a few short years ago owner financing was a mystical non-existient theory that many people talked about, thanks to the government’s colossal mismanagement of taxpayer’s money and the resulting punishment that has ensued(read: real estate investors, who revitalize neighborhoods and broaden the tax base, are being forbidden to continue to do what they do while Wall Street pays big bonuses thanks to the ‘bailout’) today owner financing is become a reasonable way to acquire AND sell property.  Fascinating.  For example, if I told you that I could sell you a 65k home for 40k, already rented for $650/month, and you only have to put 10k down, would you do it?  You might – it sounds like a good deal.

But what if I told you I would owner finance the property?

Remember, with owner financing:

1) There is little to no qualifying .

2) It doesn’t go on your credit bureau

3) Price, terms, and amortization(payment amount) are all negotiable

4) There is no origination or fees

5) All of your down payment goes to principal.

Well, now you would take a more serious look at the possibilities that such a deal offers.

You don’t need a financial calculator to become a solid investor.  Some common sense can get this done.  Shop around, look at lots of opportunities, and when you find the right one, go for it.  Remember, using owner financing is like getting houses without the cumbersome hassle of underwriting by financinal institutions.

And, it’s a great way to add pieces to the puzzle.

PS: We have owner financing available on a  few select properties in Memphis.  If you are interested, email me at robertfeol@gmail.com

Breath of Fresh Air

My Memphis…

After a lot of doom and gloom in the economy and stock market this week, I’d like to share this video I received from fellow Memphis real estate investor, Chris Wark.   Take a look.

Facing Reality: Tenant Headaches

Amidst all the cheerleading by local Memphis wholesale ‘experts’ about how they have sold ‘x’ many properties, and the promise of ‘turnkey, headache free’ solutions, comes something unexpected:

Reality.

Time and again, at The Feol – Hinricher Companies we watch as investors who purchase through other wholesalers get caught up in the hype of cheap Memphis real estate, plunking down hard earned money based on promises of equity and cash flow, only to forget about such things as vacancy, maintenance, and appropriate rent ranges, and in doing so wake up with a little surprise known as 30 years of negative cash flow.

Has this happened to you?

I pray it hasn’t, and in order to help you avoid such situations I have put together a little guide to owning Memphis rental property that some of you may find enlightening, although it may clash directly with the snake oil you have been sold from wholesalers who are interested solely in whacking you over the head for a massive commission.

Rental Property Ownership: Guidelines

1) You will rarely, if ever, have 100% occupancy.

I am speaking from experience here, but let me say that, even when you think your portfolio is purring like a cat, there IS something unexpected around the corner. Last month, for example, I was riding high with 100% occupancy only to have one tenant declare bankruptcy and another have to get evicted for refusal to pay rent. The point? You have to accept such elements as an integral part of property ownership, and be prepared to deal with such things without getting emotionally involved. Such is the key to successful property ownership(and don’t forget good tenant screening!).

2) Rent ‘ranges’ are easier to have success with then singular rent values.

What happens if a wholesaler tells a new investor that a property should rent for $750? It is month one, and the new investor receives offer to rent the property $695. What does the new investor do? Well, of course he(or she) turns it down because they were told $750 was the rent, and they allotted for that in their cash flow figures, so maybe at $695 the numbers don’t work so well.

So they wait. And wait.

Finally, 3 months later, they take $675 because what REALLY happened was they were told(by a wholesaler, trying to make a quick sale) that the property would rent for $750, which was the quintessential high end, when really what should of happened is they should have been given a rent range of $625 – $725, and then all of a sudden $695 looks really good. In the meantime, they have serviced the debt for 3 months, which has eaten their cash flow for the next 14 months. Oh well, maybe they can be profitable in 2010.

3) You do not have to over – improve a house to get a great tenant.

Too many times, new investors come in and over – improve the house, trying to emulate the lifestyle that they would want to live in such a house. Really, I try to stress to new investors the importance of purchasing properties that need only cosmetic repairs. Why? Simply put, because it easier to paint, clean, and carpet than it is to do massive renovations and have to make the decisions involved(cognitively and monetarily), plus it is an easy guideline for what to do when a tenant moves out. Just wash, rinse, and repeat. So, don’t spend that extra money for granite countertops when formica will do.

4) Price is important, but location is superior.

Buy a house in a good area, that is friendly to tenants and able to provide the amenities necessary to attract a good tenant. In Memphis, I like to purchase near ‘optional’ schools, city schools that have a program for gifted students, admitted by intelligence test only. Why? Parents WANT their children to live in these districts, and are willing to rent these houses specifically to send their children to these programs. Caring parents = great tenants, and an ample supply of them. Don’t purchase a property based on price alone. Houses are cheap for a reason, and you need to investigate why they are cheap, and not just assume that it is because you are getting a good deal.

All told, I have told my wife to expect the ups and downs that rental property ownership brings, and in doing so, we see owning investment property as a truly long term investment, a game to be played patiently, with conservative approach and sound judgment. Remember, there are not always clear cut answers when you own rental property, but wise judgment and sound decisions usually are the keys to win the day.

Also, while it may be simply common sense, it is critical to evaluate the due diligence provided to you regarding a property you are considering buying. Look at the numbers given to you by your seller: have they been verified by experts in their independent fields? For example, has the estimate After Repair Value been validate by a certified appraiser? These are the questions you need to ask as you begin to construct the foundation of a successful Memphis real estate portfolio,

Embracing Destiny

Earlier this week I was talking to one of my mentors about success, and how it can be difficult at times to envision your success. Like, it is easy for people to think about buying houses but maybe it is more difficult for them to see themselves as a full time real estate investor. There is a significant difference between the simple act of purchasing a house for investment purposes and doing it successfully so many times that you can leave your job and live off of the income generated by such investments. The first one(buying a property) seems easy because it is a simple act that can be executed. The second one(becoming a successful real estate investor) is not simply something that can be crossed off a list – it’s win conditions are ambiguous at best, shadowed in the lines of success, failure and personal growth.

Anyway, I was talking about this with my mentor, very successful in his field of business, a very competitive one at that, and he said a few things to me which I found personally inspiring, and want to share with you today. First, he said ‘my father told me that success and luck don’t matter: work hard and continue to work, and in doing so you will find the success you are seeking.”

Now, that makes sense. Let’s throw away arbitrary standards of comparison and focus on ourselves. In doing so, if we work diligently, then we can potentially reap the success we are looking for to begin with. I like that idea. But, I like what he said next even better…

We were talking about the merit of a champion, what it takes to become one, to really excel in a field of your peers. The problem is, I think, that too often as children we are taught that if people are ‘good’ at something it is because they are ‘special’ and we are not. Often, we begin to believe that there is something supernatural about people’s success in any given field and it is almost like they were ‘destined’ to succeed, while the rest of us go on with the daily routine, waiting to hit the lottery or something. But my mentor Bernard said to me something fascinating, and I now share it with you. He said:

“You know Robert, at some point when all of the thinking and wondering about success is done, you just have to believe in yourself. You just have to believe.”

Now, I am coming to a crossroads in my life, and it has to do with this last statement. You see, I have been, like many people, so close to success, so many times, only to see it slip away. And, I think for the reason for this is that it was very difficult for me to believe that I was meant to be a champion. But I realized yesterday that maybe the difference between people who are champions and those who aren’t is that the champions realized exactly what they were before there was validation of their status. For example, at some point before Tiger Woods was recognized as the best golfer in the world he just did the same things he does today: hit balls, practice a lot and visualize about his success. My point is, he had the heart and merit(makings) of a champion long before he ever won a major. He knew he was going to be a champion. It was only a matter of time before everybody came along.

Fast forward to the world of wholesale real estate 2008. What we find is, among competitors, there is just so much cheering about how so and so is # 1, who has sold the most deals, and just lots of cheerleading and bullying about facts that are, at best, clearly unsubstantiated. At it was in this sea of cheerleading and saber rattling that I found myself at the Hudson and Marshall Real Estate Auction last evening in Memphis, surrounded by interesting people who did things in a very…well let’s say unorthodox…way.

It was my first auction. But I went there with a very specific purpose, and with very clear objectives in mind. There were three properties I was planning on buying.

I walked away with two.

I would have gotten the 3rd one but some jackass got really competitive and kept bidding up my bid(evidently this is common at auctions, obviously) to the point where the house was no longer a deal. And what was interesting is that I stopped bidding at 15k, and he was the only one left bidding but in the frenzy he kept upping his own bid, and ended up paying 19k. He felt like he was a winner, anyway.

The interesting thing though is this: when I left the auction, something in me clicked, and I began to realize that maybe the greatest gift I have ever been given is the art of finding deals. I think this skill had never really been praised in me, either by myself or people that I had worked with previously, but I knew at that precise moment that something had taken place, and I was finally realizing that, over 400+ deals later, there is a reason Ryan and I are transacting so much business. And, if finding deals that are great investment opportunities for clients is my small contribution to The Feol – Hinricher Companies, then I am ok with that. I think what I realized is that I have been doing this for a long time, but really playing it down, when I should have been focusing on it. As if finding deals was some byproduct of real estate investing, when in fact it is an incredibly critical and integral component.

So now, I’m on a different tack – focusing specifically on finding deals that are so incredible that investors will look at them and wonder why they looked anywhere else. I have come to accept who I am.

At some point, you just have to believe in yourself.

Acquisition Strategy: Dollar Cost Averaging

What is so interesting about real estate investing is that you can take techniques from other forms of investing and apply them, usually more profitably, to acquiring investment real estate. With that being said, dollar cost averaging is generally applied to the stock market, as defined below:

Dollar Cost Averaging: is an investing technique intended to reduce exposure to risk associated with making a single large purchase. The idea is simple: spend a fixed dollar amount at regular intervals (e.g., monthly) on a particular investment or portfolio/part of a portfolio, regardless of the share price. The premise of dollar cost averaging is that the investor wants to guard against the risk that the market may lose value shortly after making his investment.

Putting it into simpler terms, when you are buying stock in a company, if it doesn’t increase(suppose it decreases in value), then you average the cost of your dollars by purchasing more stock at the lower price. The theory is, if you have done your research on the company’s fundamentals, then you should have no problem buying at lower price, and should actually see it as bargain shopping. You get more of the stock you wanted, and paid a lower price.

Of course, that works if the stock price then proceeds to go back up. But, what if it goes down? Then, you feel like you made a bad mistake. “I never should have bought that stupid stock”, you say. “Now I have lost my money.”

So you sell. Then, 2 years later, the stock quadruples.

Fantasy? An extreme example, you say?

Perhaps. But take this scenario, and apply it to residential real estate. What if you could buy bargains, but they paid you valuable monthly dividends, giving you massive returns on your investment, and realizing 3x – 5x what you paid for them, over time, through historical appreciation?

This scenario is happening, right now, in Memphis. The house prices are actually falling a little. Yet, investors all over the country are running scared and hoarding cash. “Things are too scary”, they say. “Let’s hang on to cash”. And, credit seems to be getting a little tighter(can you say credit crisis?) So, why would an investor even consider, in this volatile environment, purchasing investment property?

Dollar cost averaging.

The prices in Memphis are dropping right now. Why? Is it because the properties are no longer sustaining their values? Not at all. Prices are falling in Memphis because the amount of foreclosures negatively skew the comparables and make it look like no houses are retaining their value. Often, when you discard the foreclosures, what you find is that recent normal sales are still strong – and that is very positive news.

Now, some readers of this will say “well, it doesn’t matter, appraisers can’t necessarily just ignore foreclosure comparables,” and that of course is true. But, it is also true that appraisers offer an opinion of what a property is worth, but the insurance professional has to furnish a number that is much more important: replacement cost.

Replacement cost is the total cost of reconstructing a home that has been destroyed. All insurance policies have to include the replacement cost, at least in their estimate – homeowners ultimately decide what they will insure a home for, but one thing is for certain: the replacement cost dictates what the actual cost is to furnish a replica of the home, including labor, and especially, materials.

With the skyrockerting cost of commodity prices today, real estate investors are given a pretty good tip about the fact that home prices in areas such as Memphis cannot realistically stay this low forever. The falling/depreciating dollar, coupled with rising commodity prices, clearly point to home values increasing in value, even if we see a short term decrease in prices. Naturally, at The Feol – Hinricher Companies, we advise investors to consider residential real investments for the long term. But, with that being said, even the intermediate term holds great promise if you do the following things:

1) Buy your properties correctly, with careful attention being paid to location, appraised value, amount of work needed.

2) Focus on purchasing properties as cheaply as possible. Often, you can buy two properties today for what you could have bought one for 2 years ago, and contrary to popular belief that is actually a good thing.

3) Look to construct a viable portfolio – don’t try and ‘dabble’ in the Memphis market by purchasing a single investment home and then letting it ‘work out.’

4) Use a team that is reliable and that you can trust. There are merits to using a company that offers a host of ’in – house’ services, such as overseeing renovations and providing property management. While this can, depending on the integrity of the vendor, be a workable solution, at The Feol – Hinricher Companies we believe that a jack of all trades is, generally, a master of none. We try to leave all of these things to experts in their respective fields. Either way you go, make sure you have the relationships in place to make a purchase and have peace of mind and an action plan if something goes awry.

Dollar cost averaging is an interesting concept, but the concept of timing is perhaps even more critical. For example, everywhere in the world right now(at the time of this writing), gold supplies are dwindling, to the point where Mints around the world are no longer making certain types of gold coins, yet the prices of gold keep falling. From a free market perspective, this makes no sense, but we know that the value of gold relative to the number of dollars in circulation(essentially, an undisclosed number since the discontinuation of the M3 report, reporting newly printed US Dollars in circulation) would be in the thousands of dollars per ounce – yet gold’s price today is about to drop below $800/oz. So, nobody really cares and points to the crazy markets, but bargain hunters who understand that, at some point, there has to be a correction in the market to commodity prices, are snatching up available gold(hard to come by), knowing that free market economic laws, while suppressed and manipulated by various financial/government institutions, will come calling some day. Memphis homes are identical in this way – there exists an incredible and robust opportunity for people who are willing to look, beyond the crowd, and take advantage of investment opportunities that make sense. The timing of the market and the price points make purchasing and constructing a portfolio in Memphis a logical and sound decision, nothing more, and nothing less.

The next time that you are considering making some investments, stretch the purchasing power of your dollar further – look to acquire assets as cheaply as possible, and capitalize on a robust rental pool to make some substantial gains.

Determining Probable Outcomes: Analyzing Real Estate Prospects Using Historical Data

I bought a house yesterday for $11,500 on a street named Willowview in Memphis, Tennessee. It needs about 5k in work, and will produce $600/month in rental income. I manage our own properties, so we are looking at true net cash flow here, not counting vacancy and maintenance.

Good deal, perhaps?

What if I told you that the house was sold 8 months ago for $62,750 – right before the owner stopped making payments?

Clearly, on paper, now this is a great deal.

The massive 82% discount that I received on the property(be all in a property at 18 cents on the dollar, anyone?) however is certainly not enough to justify the acquisition of this property. Anyone who is familiar with some of my real estate theories knows that ‘pieces of the puzzle’ cannot be broadly defined solely by purchase price. Many other factors need to be taken into consideration.

However, for the conservative real estate investors in all of us, when we are looking at prospect properties, purchase price, rental numbers, and other ancillary figures, while helping to paint a picture of probable success, do not clearly give us a complete picture of what the investment may hold for us. To examine such paradigms, we need to look retrospectively – at recent empirical data.

Now, I am no math wizard, and while at time to time I tend to introduce certain simple formulae to real estate analysis in my writings, I am more of a ‘let’s get in the field’ type of investor. I almost failed pre – calc in high school, so let’s be clear – looking at empirical data is relegated to examining facts and figures that are easily accessible and easily interpreted. Figures that can easily be found while sitting at your home computer.

For example, when I purchased this property on Willowview, I looked back at the sales data and saw the following numbers posted on the tax assessor’s web site:

Date of Sale Sales Price

01/02/2008 $62,0000
10/21/1998 $54,000
06/02/1998 $17,600
11/17/1977 $23,150

Now what does this tell me? I see that a transaction took place in January of this year, for $62,000. The title search showed that the transaction actually was for $62,750 – but really, the extra money isn’t that important. What this tells me is AN APPRAISER LESS THAN 8 MONTHS AGO, FELT THAT THIS HOUSE WAS WORTH AT LEAST $62,000.

Looking back even further, I see that over 10 years ago the house was STILL worth $54,000. So, for $11,500, I am getting a deal here, at least from a price point.

But again, price alone is not sufficient to justify us pulling the trigger on an investment home. I need to look at rental comparables and the rental area itself.

Resources such as rentstalker.com and property management companies, as well as your local network of investors and your local Real Estate Investor Association, can be great sources of information for the viability of a potential rental area.  I happen to own another home on the same street that rents for $600/month, has the same number of bedrooms and baths, and has much smaller square footage and amenities. So, this data I know for a fact gives me a strong indication that I can expect an equal performance from the new prospect property, if not a slightly stronger one.

When analyzing real estate investment prospects, it is critical that you review historical data as a possible forecast for what the future holds. The past, does in fact, sometimes seem to repeat itself. If a property has a history of high price values compared to what you are able to buy the property for, the area looks good, and the rental comparables are solid, you may want to think about taking a shot and putting the property into your portfolio.

On the other hand, if historical data indicates that the empirical strength of strong sales prices, rental numbers, and low crime statistics are not in place for a property you are considering, you may want to think about moving on to the next deal.

Remember, as my partner Ryan Hinricher says “the deal of the century comes around once a week.”

Don’t be afraid to examine the historical precedents that have been lain out before you to help forecast future performance.

Acquisition Strategy: Bridging the Gap

Come around you rovin’ gamblers and a story I will tell
About the greatest gambler, you all should know him well.
His name was Will O’ Conley and he gambled all his life,
He had twenty-seven children, yet he never had a wife.
And it’s ride, Willie, ride,
Roll, Willie, roll,
Wherever you are a-gamblin’ now, nobody really knows

– Bob Dylan

What is so interesting about real estate investing is that many(non – investing) people think of real estate investing as akin to gambling, with the idea that buying houses is really a crap shoot – you may get lucky or you may bust. Being a ‘gambler’ of some sort in my (rare) spare time, and also being a real estate investor, I get the unique perspective of looking at these two very different disciplines somewhat objectively, and I can tell you with great surety to that these are two entirely different worlds.

Let’s examine, first, the similarities between gambling and real estate investing:

In gambling, you can:

– make money
– lose(lots) of money
– Fall victim to sick twists of chance and luck.
– Put your ability to make money into the hands of fate
– Be swindled

Real estate investing share theses same traits, clearly.

However, here are some traits that gambling DOES NOT share with real estate investing:

In gambling, you cannot:

– select the hand you are dealt
– be redealt a new hand when the odds are not in your favor
– Make a conscious decision to choose the odds that favor you
– Beat the ‘house’

However, real estate investing holds all of these things to be true – you can:

– choose where, when, and for what reasons to invest – in a poker game, the cards that come to you are the only opportunity you have to make money, good or bad. Real estate allows you to make very selective choices about the properties you consider acquiring, and due diligence allows you to gather enough information to do so.

– resell poor investment opportunities that do not perform. In a game of chance, such as Roulette, you cannot ‘exit’ or resell a poorly delivered outcome that results in a loss.

– Make a conscious decision to emulate investments that, historically, have performed well(see: Determining Probable Outcomes: Analyzing Real Estate Prospects Using Historical Data by Robert Feol)

– Choose where, and when, to engage the ‘house’

The thing that I like about investing in real estate, and let’s be clear here: I am talking about residential real estate investing with the idea of garnering positive cash flow and appreciation through intermediate to long term holding of the asset(think land lording here) is that the choice to invest ultimately lies in YOUR hands. Too many times I hear investors who have made poor investment choices(real estate) talk about how they ‘didn’t know it was in a bad area’ or ‘the person who sold me the house really took advantage of me.’

The problem with this type of logic is that it was YOU who sat at the closing table and signed your name to the documentation that gave you title to the property. You made the choice to buy the house, and no one held an assault rifle to your head to do so. As such, there is a certain gravity of the situation that is real estate investing, and the onus of responsibility is on YOU to insure that your house(s) is/are not a poor investment. Naturally, you do this by verifying due diligence, collecting numbers, analyzing rents and appraised values, and in doing so you allow yourself to sleep at night knowing that you bought a great deal or you walked away from a potentially disastrous one.

Bridging the Gap

I refer to ‘Bridging the Gap’ as the distance between looking at a property and becoming an owner and taking title to it. For most new investors, they are afraid of ‘Bridging the Gap’. They look at investment opportunities the way they would look at a high end luxury car – something that is nice to dream about having but they will never own.

Rather than having this approach to real estate, it would be easier to institute a system that allows you to identify potential investment opportunities and determine if they would work for you, and become a possible candidate to move forward with and purchase.

A crude but simple flowchart would be:

1) Is the property in a reasonably safe area? If so, move on to question 2.

2) Is the property priced at a substantial discount? If so, move on the question 3.

3) Is the property structurally sound? Does it seem solid and free of structural repairs that could be costly over time? If so, move on to the next question.

4) Does the property need cosmetic repairs(read: paint, carpet, and cleaning?) If it needs more than this, a new investor would certainly want to turn away.

5) What are the projected rents for the property? Will they produce positive cash flow? Move on to the next question if this is the case.

6) Are there hidden expenses associated with the property that you need to be aware of? For example, is the property taxed commercially, which will add to your taxation each year? (This happens often with multi – family units.) What does the insurance look like? Is it exorbitant? Or, are the ancillary expenses in line with normal projections for the area?

Assuming that a property meets all of this criteria, you may want to consider looking at purchasing the property, because it really could be a great deal.

The key to “bridging’ the gap is to have a set of guidelines that allow you to objectively evaluate a property and determine if it warrants further consideration or if needs to be passed upon. And, for those of you looking to make real estate investing a substantial or even full time portion of your income, you need to be looking at LOTS of opportunities. Sift through the dog properties and find the ugly ducklings that can easily become swans.

By taking pride in your portfolio and seeing it as an overall package of vibrant, well – valued properties that perform, you are giving yourself a huge advanage over many investors who see residential real estate investing as a segmented and disjointed hobnob of properties which may or may not effectively work together.

By learning how and when to “Bridge the Gap’, you are effectively avoiding being a real estate gambler who has nothing to show for their time except ‘bad beat’ stories.

Most gamblers end up going broke.

So all you rovin’ gamblers, wherever you might be,
The moral of this story is very plain to see.
Make your money while you can, before you have to stop,
For when you pull that dead man’s hand, your gamblin’ days are up.
And it’s ride, Willie, ride,
Roll, Willie, roll,
Wherever you are a-gamblin’ now, nobody really knows.