Managing your expectations is a prerequisite to getting paid

The following article on managing expectations was written by professional investor David Campbell for a publication distributed to professional real estate agents (Realtors).

Real estate is a people business.  Unfortunately, the people responsible for paying our livelihood don’t usually understand real estate.  Often times, concepts which are incredibly obvious to real estate professionals are completely oblivious to our clients.  Your livelihood depends on your clients having a positive experience and giving you their referrals.  I am sure you have seen agents do a terrific job managing the technical aspects of a transaction only to have an unhappy client at the closing table.   The reason was there was something that the client expected that he didn’t get.  Sometimes we can listen to the client’s expectations and find a way to deliver the thing they are asking for.   Other times it is more appropriate for us to help our clients recalibrate their expectations.

In my real estate business, I work exclusively with real estate investors. Some of my clients own multi-million dollar portfolios while others are in the process of buying their first rental property. One of my novice investor clients recently sent an email to their professional property manager regarding the lease renewal on one of their rental properties.  They copied me on the following email: “The current rent of $1,300 per month is very close to our breakeven point, so we can not go any lower.  More rent would be nice, but not at this time.”

Upon receipt of the email, I contacted my client with the following advice:

“Always price your rent at market rate regardless of what your personal expenses are.  A professional property manager will help you establish the appropriate rental rate.  If the market rent has gone from $1300 to $1,400 OF COURSE YOU SHOULD CHARGE $1,400 RATHER THAN $1,300.  If the market rent has declined to $1,200 and you keep your asking rent at $1,300 because that is what your expenses are, your property will sit vacant and you will feel stress.  Always price your rent at market price. Take your profits when the market lets you. Suck up your losses when the market forces you to.  Market price is set by the economy not by your financial need.  Your tenant will never care how big your mortgage payment is.”

A client who prices their property with the guidance of a professional will have set their expectations for success.   A client who sets their own price for a property based on personal need will eventually feel the stress of the marketplace rejecting their property at that price.  Inevitably the property owner will blame their realtor for not meeting expectations, when the problem was the client’s expectation was wrong from the outset.

Here is another maxim to run your business by:   “If you aren’t going to get paid for your work, you might as well stop working right away.” If your client has set themselves up for failure by focusing on their personal need while simultaneously ignoring the needs of the marketplace, you should counsel your client to establish more appropriate expectations, or fire your client and move onto the next deal.

To your success!

David Campbell
Professional Real Estate Investor, Developer, and Broker
(866) 931-9149 Ext. 1
David@HasslefreeCashflowInvesting.com

 

PS.  I look forward to helping you set and achieve reasonable expectations for your investment real estate objectives.

Real Estate Christmas Story

Last year I was at a friend’s home for a Christmas party.  As I was mingling through crowds of festive party goers, I was surprised to meet my friend’s landlord.  The party was at his rental house and my friend invited to be a guest of the party. I’ve been a landlord to over 100 properties and I’ve never once been invited to my tenant’s Christmas party!

The landlord, Mike, was a friendly man of about 68 years. We had a great time talking about real estate. In 1965, Mike took a job as a school janitor and he worked at the same job his entire career. Mike bought four single family homes over a period of 45 years and is now a multimillionaire with a $75,000 / year passive income from real estate. His passive real estate income is more than double what he earns from his janitor’s pension and social security.
What astounds me is the simplicity of Mike’s success. Mike purchased four “bread and butter” single family homes over 45 years. He always bought new properties, he always paid retail, and his cash flow was break even with 20% down and 30 year fixed fully amortized mortgages.  Mike never refinanced, never prepaid his mortgage, and he never sold. While this plan may not have yielded the highest return, it was powerful none the less. The fact that the plan was so simple is one of the reasons Mike was successful with it.

Mike purchased his first house in 1965. He paid $18,000 using 20% down ($3,600) and an 80% mortgage ($14,400). His mortgage payment was $86/month. That was a lot of money when Mike was a 23 year old school janitor earning $350/month. Today, this Northern California house is worth $575,000 and rents for $2,200/month.
Mike's home price
Mike purchased this $18,000 house with only $3,600 down and his mortgage was paid off by his tenant 15 years ago. His $3,600 investment is now worth $575,000. Mike’s annualized non-compounded return on investment has averaged 350% per year for each of the past 45 years. What investment vehicle other than real estate can do that?

mikes ROI with 20% down

In 1970, Mike bought a second house. In 1975 he bought a third house and, in 1980, Mike bought his fourth and final house. All four houses are now owned free and clear with $2.3 million of equity and positive cash flow of $75,000 year. Mike spent his career as a janitor and retired a multi-millionaire because he had the foresight to acquire four pieces of real estate over 45 years.

Inflation seems small because it is reported as a year over year number. However, inflation (and real estate prices) actually move as a compounding force.  Below is a chart of a basket of goods with prices from 1965 and 2010. I created a chart to illustrate the annualized compounding rate of increase for this basket of goods. Mike’s houses increased in price just slightly faster than the overall rate of inflation over the same period.
inflation basket of goods

Mike was the happiest guy at the party. He has the most abundant retirement plan of any of his peers, and he spent his entire career as a janitor not worrying about money or inflation.  He always knew that when he retired he would have four houses that were completely paid for by his tenants, and these houses would take care of him and his children forever.

It is nice when real estate investing has had such a positive impact on someone’s life. I asked Mike what he would have done differently 45 years ago and he said, “I wish I would have bought more houses.”

Merry Christmas and Happy New Year,

David Campbell
Professional Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

Please leave a comment on this article.

Real Estate Investing Rules

by Professional Investor / Developer, David Campbell

Real estate investing is full of success stories and horror stories.  Everyone loves to talk about their investing problems, but those who have been extremely profitable in their endeavors tend to keep their mouths shut.  Talking about personal financial success is socially unpopular.  Successful investors want to avoid lawsuits and protect their trade secrets.  Profitable investors are usually too busy “doing deals” to take the time to teach others how to invest. People who write about investing are often professional “writers”, not professional “investors”.  If professional investors aren’t writing about their successes, how can the average person learn to mimic their success?  When you find a professional investor willing to share his ideas, make sure you learn everything you can.  With that goal in mind, here are some of my best ideas for becoming a more profitable investor:

1) Surround yourself with successful investors. Real estate investing is like learning a foreign language.  You are always learning and practicing. To learn a new language, you need to converse with native speakers on a regular basis.  If you are studying real estate and you are primarily speaking with other newbies, you are likely to teach each other bad habits.  Real estate field trips can be a great way to immerse yourself in the way professional investors think and act.  Visit our field trip page to learn more about upcoming investor field trips.

2) If it sounds too good to be true, consult your mentors / investment team. There are a lot of charlatans and thieves in real estate that are trying to separate you and your money as quickly as possible.  However, real estate investing really does offer truly ‘unbelievable’ returns for experienced investors who are in the right place at the right time.  If you don’t use a knowledgeable team to help you make major decisions, you are taking unnecessary risks with your capital.  A good team includes partners as well as vendors.  When you are conducting business, try to understand what both parties have to gain from the transaction and strive for a win for both parties.

3) Slow and steady really does win the race.
While you can make enough profit to retire off of a single deal; virtually no one retires off of their first deal.  It takes time and repeated positive experience to develop the skills, relationships and confidence to hit a home run in real estate. Nine of out ten times you’ll be more profitable repeating “base hit” deals rather than going for the home run.  Acquiring multiple properties over a long period of time increases your probability of success. Learn more by downloading (and reading) a free copy of my ebooks “Hassle-free Cashflow Investing” or “Hassle-free Cashflow Lending”.

4) Solving problems creatively is the gateway to profitability. An investor gets paid when he or she effectively implements a solution to a problem. This could be applying capital in a creative way or re-purposing a property in a creative way or solving a seller’s needs in a creative way.  When two people are willing to trade for what the other has, there is usually a little bit of room for the coordinator to make a profit.  However, when three people have their needs filled in a triangle of events, there is usually an opportunity to make a much larger profit for the person the coordinates the flow of events/transactions.  Here is an example: of a “deal triangle” where there is room for the deal facilitator to make a generous profit: There is a baker who has bread but needs corn, a farmer who has corn but needs milk, and a rancher who has milk but wants bread. A person can identify the needs and capacity of each party and then create an exchange network whereby each party gets what they want by indirectly trading what they have.  The indirect trade of a “deal triangle” will result in more profit to the problem solver than just connecting two parties in a more typical direct exchange.  The fewer people there are who have the capacity and willingness to solve the problem, the higher the potential reward.  If you have a real estate, business, or financial challenge you are trying to solve, consider sending me an email with your situation.  I am gifted at finding multiple, creative, win-win, and highly profitable solutions.  I also really enjoy doing it.

5) Be prepared to identify and act on opportunities quickly.
There are opportunities to make huge profits in real estate if you are willing and able to take action quickly when the opportunity presents itself.  The first step is to identify your personal strengths (assets) and weaknesses (liabilities).  The second step is to formulate your personal investment philosophy (financial objectives) so you can articulate as specifically as possible what a suitable investment looks like. A suitable investment is one that aligns with your resources while offering the potential to bring you closer to your financial objectives.  The third step is to learn to “thin slice” deals.  Malcolm Gladwell writes about “thin slicing” in his excellent book “Blink: The Power of Thinking Without Thinking”.  The fourth step is committing to thorough yet speedy due diligence. It is possible to spend years doing due diligence on a single deal, but great deals won’t wait that long. An investor must filter out the interesting digressions and improbable “what ifs” and focus their research only on the most relevant points  and most probable outcomes of a deal.  While it is possible to evaluate the risks of a tornado hitting your apartment complex, it is more profitable to focus on more relevant due diligence such as rental rates, occupancy, maintenance expenses, market conditions, etc.  Focus 90% of your effort on the highest probable outcome, and 10% of your effort on your contingency plan.  The fifth step is to consult your team with your business plan and your research.  The sixth step is taking decisive action.  The seventh step is reflecting upon the process to determine what can be done better next time.

If you are looking for financial or real estate coaching or if you are looking for active or passive investment opportunities, please send me an email or give me a call.  I would be happy to help you.

To your success!

David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com

Texas Will Steal Market Share in Coming Years

According to the Real Estate Center at Texas A&M University, the Texas economy gained 133,100 jobs from August 2009 to August 2010. During the same period, the U.S. economy added 278,000 jobs. Texas produced 48% of all the new jobs in the country in the past year. The state’s private sector posted an annual employment growth rate of 1.4 compared with 0.3 percent for the United States.

The population of Texas is growing faster than any other state. Political and economic conditions are preventing new housing from being created.  Occupancy rates in Dallas have increased over 3% in the past year. Many economists are forecasting a housing shortage and rising rents.

The Dallas-Fort Worth area’s population has grown by nearly 1.3 million from 2000 -2009.  That is more than any other metropolitan area in the United States.  The Dallas-Fort Worth-Arlington MSA is the largest metropolitan area in Texas, the largest in the South, the fourth-largest in the United States (SOURCE: Wikipedia on DFW) The Dallas, TX metro is forecasted to add 4 million new people from 2010 – 2040 according to the Texas Data Center and the North Texas Water Board.  That’s one new person every 4 minutes!!! In 2009, the population of Texas grew by 231,539.  That is more growth than Florida, Arizona, California, Nevada and Colorado, combined. A demographer at the Brookings Institution attributes the population growth to a more diversified economy in Texas and more conservative lending practices during the real estate boom. When combined with the state’s steady growth earlier in the decade, Texas is projected to receive three new seats in Congress. SOURCE: Recession Cuts Migration to Sun Belt, New Figures Show New York Times

Part of our series of articles on investing in Dallas

How to Profit from QE2 (Quantitative Easing) – PART 2

By: David Campbell, professional investor, developer, and founder of Hassle-free Cashflow Investing

This article is a sequel to my last newsletter, but can easily stand on its own.  You are invited to read and comment on part 1 and 2 of this article on my blog.

I am absolutely certain we will (continue to) see high rates of inflation for the foreseeable future.  Inflation doesn’t mean commodities will increase in value, it just means commodities will increase in price because of a devaluation of our currency.  If you understand what inflation is, and you believe it will continue, you can either be a victim or a beneficiary of the phenomena.  I went to the grocery store recently and was amazed (but not surprised) at how much food prices have increased.  Rising prices is confusing and frustrating to most Americans, but it is a fact of life we must come to accept and financially prepare for.  Inflation has a winner and a loser.  Unfortunately, most people come out losers because they cannot out-earn or out-save inflation.  When I observe signs of inflation (rising prices) around me it does not affect me emotionally, because I have prepared to WIN from inflation. When inflation happens, savvy investors like me get richer while workers and savers get poorer.  This doesn’t make me feel good about the situation, but it is the economic reality we live in.

I spend a lot of time talking about inflation and taxes because these are the most important and misunderstood concepts in your financial life.  Inflation is a hidden federal tax upon every dollar in circulation worldwide.  If you are the US government, inflation is an ingenious invisible tax; if you are anyone else, inflation is taxation without consent (and, for most people, without knowledge).  I am about to show you ways to profit from inflation, but in no way do I believe inflation is a good thing for society. If I could stop inflation, I would. Since I can’t stop inflation, the best I can do is make a profit from it.

Here are four ways to profit from inflation:

1) STEP ONE: purchase durable commodities today when the supply of dollars is less than the supply of dollars will be in the future.  The durable commodities you purchase become assets on your balance sheet that maintain constant value while inflation drives prices up.  When the supply of dollars increases and the supply of commodities remains the same, prices rise because more dollars are chasing the same basket of goods. Inflation as a result of increased money supply assumes demand for commodities has remained constant. If demand for commodities increases or decreases, there is a change in VALUE which may or may not result in a change in price. Value and demand are synonymous price is a metric of demand, money supply, and the velocity of money.  We will talk about the velocity of money another day. Commodities may increase or decrease in value/desirability/demand, but inflation will make the PRICE of the commodity go up because of a looser money supply.  For example, let’s say you bought a hammer in 1960 and it cost you $2.72. Over the past 50 years, the design and demand for hammers hasn’t really changed and therefore the value of a hammer in 1960 and in 2010 is exactly the same.  Because the US currency has devalued (inflated), the price of the hammer is now $20.  Over 50 years, the hammer has increased in price by 15% per year.  RECAP: the value of the hammer didn’t change, but the price increased 15% per year because of inflation (15% per year is  simple interest, but it can also be expressed as 4% annualized compounding rate of increase which is how inflation is usually described). If you had purchased a truckload of hammers in 1960 (for $2.72) and resold them at today’s inflated prices ($20), you would have a healthy paper profit that outpaced most investments even though the VALUE of the hammer DIDN’T CHANGE.  While it is nice to find commodities that will increase in VALUE because of increased desirability or demand, it is easier to find commodities that will increase in PRICE because of inflation.  Because of increases in the money supply (or increases in the velocity of money), it is possible to have a commodity drop substantially in value but resell at a higher price / profit.

2) STEP TWO: purchase durable commodities using as much debt as can be paid for by leasing out the durable commodity.  Cash-flowing real estate is the perfect example of this.  Real estate and hammers are examples of durable commodities, while oil or soybeans are examples of consumable commodities.  No one will rent soybeans from you because they must be consumed to have value.  Many people will rent real estate from you because it produces utilitarian value without consuming it.  A bank will loan you most (sometimes all) of the money you need to buy an asset and the income from leasing the asset will pay off the loan. FREE MONEY! Now, let’s add inflation to the mix.  Let’s pretend you bought a house in 1960 and the value of your house is 6,250 hammers and the price of a hammer was $2.72.  (6,250 hammers x $2.72 per hammer = $17,000 house).  Over the 50 years between 1960 and 2010 we know the money supply went through the roof and the price of things followed suit.  Let’s assume the value of the house you bought in 1960 didn’t change over 50 years due to deterioration or increased demand and neither did the value of a hammer.  In 2010, the value of your house would still be 6,250 hammers. However, as the supply of currency increased, the price of everything increased. Hammers went up in price and so did houses.  If hammers now cost $20 ($20 per hammer x 6,250 hammers) your house must cost $125,000 even though the value didn’t change.  What happened to the value and price of the debt?  Let’s assume you had a 50 year interest-only loan on the property and you purchased it with 100% financing (eg. $17,000 of debt in 1960 and $17,000 of debt in 2010).  This assumption is highly unlikely, but it makes our illustration easier to understand.  Over 50 years, the price of the debt stayed the same while the value of the debt decreased.  When you purchased the property, your debt was equal to 6,250 hammers or 100% of a house or $17,000.  Sixty years later, $17,000 is only worth 850 hammers or 14% of a house.  Inflation made the VALUE of debt decrease.  If you know inflation is coming, you want to be a borrower of good debt (good debt is debt serviced by your tenants) and hold the debt as long as you can while the supply of currency increases.  Thirty year fixed interest rate mortgages are on sale right now. Get as many of these mortgages as you can while the government is still subsidizing low interest rates.

3) STEP THREE: Protect your profits from income taxation. As the price of real estate goes up with inflation, there is no income tax on the gain until the property is sold for a profit.  It is also possible for an investor to “borrow the profit” out of a property  and reinvest it without paying a single penny of income tax.  Many types of investments (interest income, business income, mutual funds, oil and gas, etc.) must pay income taxes on their profits every single year.  Annual taxation of your profits radically erodes your return (earning power) because you lose the ability to generate compound earnings on the portion you paid in taxes.  If you could double your money every year ($1 : $2 : $4), one dollar would equal one million dollars in twenty-one years.  Apply a 30% income tax rate before each year’s doubling and twenty-one years results in only $41,000.  Can you see how ESSENTIAL it is to have income tax deferral as a central component of your wealth building strategy?   The equity growth in real estate is automatically tax deferred (like an  IRA) while also creating a tax shelter for the ordinary income through depreciation of the real estate structures.  Depreciation is a topic for another day.

4) STEP FOUR:  Acquire income streams whose value will be enhanced by rising prices.  Let’s assume rent has a fixed value of 60 hammers per month. In 1960 rent would be $163 per month (60 hammers x $2.72) and in 2010 rent would be $1200 per month (60 hammers x $20). The value of rent didn’t change, but the price changed because of increases in the supply of dollars (fiat currency).  Let’s assume our rental house in 1960 had operating expenses of 28 hammers per month (taxes, insurance, maintenance, management) and mortgage payments of 30 hammers per month. There would be 2 hammers per month left over as the investor’s profit (60 hammers of income – 28 hammers of expenses – 30 hammers for mortgage). Over time, the PRICE of operating expenses will increase in direct proportion to the rate of inflation. However, the VALUE of operating expenses is not going up, the increase in the currency supply is making the PRICE of everything go up.  Over time, the PRICE of your fixed interest rate mortgage will stay the same thus reducing its VALUE. In 1960, your mortgage is 30 hammers x $2.72 = $81.60/month.  In 2010, your mortgage is still $81.60, but the price of a hammer has gone up with the money supply.  Your mortgage in 2010 is $81.60 divided by $20 per hammer = 4 hammers.  In 2010, you collect 60 hammers of income less 28 hammers of expenses (income and expenses didn’t change) less 4 hammers for mortgage = 28 hammers of investor profit (28 hammers x $20 = $560).  The value of rent and expenses stayed the same, while inflation caused the VALUE of the mortgage to decrease therefore increasing the investor’s profit.  Real estate is powerful because it allows you to control a very large amount of debt whose value is eroded by inflation.  As the value of debt is eroded, the borrower of the debt wins. An investor doesn’t need the PRICE of his debt to decrease, to make a profit, he just needs the VALUE of his debt to decrease. If the cost of debt is 5% simple interest, but the rate of inflation was 15% simple growth between 1960-2010 it is obviously profitable to be a borrower of good debt during inflationary times (eg. borrow at 5% and earn 15% = 10% profit on the funds borrowed).  Government inflation numbers are reported as compound rates of growth and that confuses people into thinking inflation is less of a factor than it really is.  4% inflation compounded annually over 50 years is the same as 15% simple interest.  Here is an easy to use inflation calculator if you want to see how much the price of things have changed over the past 100 years.

In my next newsletter, I will prove the Federal Reserve  must inflate the price of real estate by 50% or banks will continue to fail in huge numbers.  There were 140 bank failures in 2009 and 149 bank failures in 2010.  Here is an interesting interactive map showing where bank failures are occurring.  What is worse for our economy, widespread bank failure or rapid inflation? The Fed has been explicit in its public commentary on this issue; aggressive  inflation is preferable to continued bank failure, therefore  heavy inflation must be targeted at the real estate sector to pull the banking industry out of its nose dive. The Fed has made its decree public knowledge.  What are you going to do about it?

If you are like me and believe inflation is inevitable, how will you prepare yourself for it?  Doing nothing means your savings and wages will be eaten up through increased consumer prices. Acquiring positive cash flow real estate with 100% financing makes you the ultimate winner during inflationary times.

Don’t become a victim of inflation! Acquiring Hassle-free Cashflow Real Estate is a very simple step towards prosperity in the coming years.  If you would like help building a successful real estate portfolio, please call me right away while prices are low, long term interest rates are low, and banks are still lending to qualified buyers.  Inflation is coming, and this beautiful buyer’s market will not last forever.

Best regards,

David Campbell
Real Estate Investor / Developer / Financial Mentor
Founder of Hassle-Free Cash Flow Investing
707-373-9966
David@hasslefreecashflowinvesting.com