Author: Lane

Cons of Private Money Lending

I am constantly pitched for random development deals and some times these phishing requests get annoying because I have little interest due to the poor risk adjusted returns and the fact that I would be a debt investor and not equity investor (upside).
More on private money lending deals which is offered in our investment club.
[CENSORED SCREENSHOT]
And no I am not going to pass you to someone in the Hui Deal Pipeline Club
This madness has to stop because I don’t do deals with people I don’t know, like, or trust. I lost $40k straying from this logic in my first passive deal in 2014. Although in my defense, that’s what you do when you are a newbie investor with no network of other passive investors.  To learn more about that deal and what I try to help new investors avoid. In other words, if we have not met, it ain’t going to happen and please do not try to offer 12-20% rates… that is just plain embarrassing.
Why do I not like these types of deals?
1) No exit strategy – If I am going to do private money lending I am going to do it in and area (secondary or tertiary) and non-luxury class (Class B or C) where I can achieve a 1% Rent-to-Value Ratio or more so if the economy corrects during construction I can rent the property out and not bleed holding costs. (More info – http://simplepassivecashflow.com/rv/) Also in primary markets and luxury classes the lows are a lot lower than secondary/tertiary markets for example in times of trouble a home in Hawaii might go down 20% value where a more boring market like Birmingham might lose 5-10% value or even stay the same because it was not a high appreciation frenzy market to begin with anyway. People talk about covering your self with a proper loan to value (LTV) Incase you have to take over the property from the flipper/developer who screwed up but when things go bad it’s a street fight and LTV means nothing. The more practical and likely exit strategy without having to pay more friction/transaction costs is to rent the property out to recoup some losses. By the way if you have $30,000 why not begin with the end in mind and start purchasing cashflowing assets now – start with a turnkey rental!
2) Commercial > Residential – Residential properties are so subjective and requires an emotional buyer on the end to pay a crazy price. Think House-hunters on HGTV where a couple set out to buy those dream home and you watch as one of the spouses manipulates the other to buy the one they want regardless of price. It great when it works as the developer (as a debt investor you don’t partake on the extra profits anyway). But the sale price it’s really outside your control as it is dictated by what other houses are selling for. I prefer math to dictate when our sales price goes as a multiple of the income minus expenses that the property cashflowand. This is something we have  control over and can have multiple exit stratergies.
3) Alright the development plan goes perfectly and gets a great sales price. Unfortunately as mentioned before you as the debt investor don’t see any of the upside.  Here are the problems a) your yield stops as you have to scramble for the next deal to go into and b) all this gains is active income taxes at the highest tax amounts. You don’t get any of the sweet benefits of depreciation or bonus depreciation from doing a cost segregation on a bigger deal as a LP. SPC Guide to Syndications.
4) Better options – when you get one or two syndicated deals from a plethora of asset classes outside the most competitive realm of single family home flipping that offer existing cashflow and value add opportunities where total returns range from 80-120% in 5 years then it blows 8-12% first lien deals out of the water in terms of risk adjusted returns. If you are looking for even lower risk investments in the same 8-12% range I would suggest triple net leases with stable multi-million dollar companies like Starbucks, doctor/dentists offices, or Walgreens. In addition, for even more non-correlated assets consider life settlements where you are getting on the sure thing… Death. Read more on this morbid non-correlated asset here.

Ep 153 – Lessons from the Wealthy w/ Frazer Rice

The audio was pretty terrible on this live recording from FinCon. Below is a little better audio version.

Buy the book we discussed here

Coming out of college—I worked for the department of economic development up in Albany New York, and it was a really interesting experience. I was charged with helping being a part of projects where we try to keep businesses in New York or otherwise help them locate there, which is difficult to do given the high taxes that are in New York.

Did that for a couple of years, didn’t want to be a civil servant my whole life, so I went to law school—like most aimless people do as they try to find their way.

They say a fool and his money are soon parted, and, for the 1 percent, this is especially true. The more wealth one has, the more risks to their financial security. But with the right knowledge, planning, and guidance, the affluent can not only preserve their assets but enjoy them as well.

Private wealth manager Frazer Rice has seen every challenge and success that the well-off can face. In Wealth, Actually, he shares his holistic, adaptable approach to wealth management. Through a combination of philosophical discussion, practical advice, humor, and anecdotes, he shows how prosperous individuals can determine what they want their wealth to do; communicate with loved ones about their fortune; avoid overspending; handle wealth threats; evaluate, grow, and protect investments; and choose the best advisors.

Money shouldn’t be the dream—but, when it’s managed right, it can be the perfect tool to make dreams come true.

Episode 152 – Kyle Jones Apartment Investor & 7 lessons learned

7 Lessons learned from first few deals

7 – Not Googling the crime on the property

6 – Not communicating enough through the closing process with LP’s (1031 story)

5 – Not following up with the mortgage broker enough (going through a mortgage broker)

4 – Not having a relationship with the leasing person (found out she was working multiple props)

3 – Not asking if the PM can handle investor checks

2 – Not firing a Property Manager fast enough

1 – Not starting soon enough (invested in SFR’s, but scaled with MFH)

Episode 150 – Apartments to Mobile Home Parks with Paul Moore

Take the hint from other high level investors and be aware that MFH Apartments is where a lot of new syndicators are starting businesses and where all the gurus are teaching about the space. It might be time to look elsewhere other than Apartments and into mobile home parks.

Learn more about the asset class here – https://simplepassivecashflow.com/mobile-home-park-investing/

The Newbie Wall

I have had over 1,000 calls since 2017-2019 with investors just like you. And now that I am not working… I admit that’s a few calls a day while I was taking my extended breaks at work.

All kinds of investors some not listening to my directions of checking out the first 20 podcasts and those who are getting into larger deals and unloading their turnkey rentals too.

If we have not spoke (I don’t want to talk to wholesellers or flippers because flippers don’t understand taxes and wholesellers evade taxes) you need to schedule a call with me now.

Some words of wisdom.

Most people starting out get really excited and burn out in 3-6 months. There is usually something that motivates people to get out of the house, to google “passive real estate investing”, or schedule a call with a dude name Lane. Let’s call it what it is… “pain”!

Pain from something that happen at work. Getting fired, passed up for promotion, or getting tired of meetings.

Or just the realization that you will not be financially free if you keep doing the same old stuff (that just makes Wall Street rich).

Humans are amazing, we heal. And the Pain eventually goes away (in 3-6 months) and you are back to the same old same old. I’ll say it… like a bad relationship you just stick it out. 😛

If I had a super power I would force people into a decent deal in the first few months before this healing mechanism ever takes place! Success breeds success and if you see the returns come in yourself you will be hooked. If you have an addictive personality? Well this one might be good for you.

I’m sorry if you overwhelmed by deal past deals, future ones, as well as get access to our share drive by signing up for our Hui Deal Pipeline Club in the first 60 days. I just have to strike while the iron is hot and I may know what is best for you here.

If you don’t like it then keep doing what you are doing. As an engineer good with spreadsheets I know without a doubt where you will end up net worth wise in 30 years if you continue to invest in retail garbage investments.

In closure, use all the free content on SimplePassiveCashflow.com to get as far as you can. Just know that you are missing a lot of the nuances, insider info, and relationships with other professionals across the USA in the Group Coaching Mastermind.

Top 25 questions to ask a property management company during interviews

 

For passive investors the property manager is the most important person on your team. That said it is very underpaid and extremely difficult to find one and keep them. From a property manager’s standpoint, its not a really good business to be in because you get to see the worse side of owners and tenants, there are low margins, and turnover is high.

 

What do Property Managers Do?

  • Advertising for tenants
  • Screening tenants
  • Inspections and maintenance
  • Collecting rent
  • Evictions or working with judges
  • Reports
  • Takes trouble tickets from tenants and source out contractors
  • Takes trouble tickets from owners

 

Here is the list of questions to interview a Property Manager

Dummy waring: don’t be a jerk when asking these questions. Let it guide a conversation instead of playing stump the chump. You need a good property manager more than a good property manager needs you… make sense?!?

Remember: There must be a personal level of connection. Can they carry on an intelligent conversation than give you the text book answer?

  1. How long have you been a property management company?
  2. What types of properties do you manage?
  3. What type of insurance do you carry? What happens if someone sues me?
  4. How many units are you currently managing?
  5. How many property managers and assistant property managers does your company have?
  6. What associations do you belong to?
  7. How many vacancies do you have right now?
  8. Avg. Time to fill a vacancy Lease Structure?
  9. Do you have a sample lease? Do you do a 1 year or 2 year initial lease?
  10. What is your late-rent policy?
  11. Do you keep late fees or owner?
  12. Perform regular property inspections? How often?
  13. What % of tenants do you evict?
  14. What is legal charge of eviction and process?
  15. What are management fees?
  16. Any other fees? (Cancelation, eviction, lease renewal ($200-500, or nothing), marketing, account set up)
  17. What do you charge for finding new tenant & leasing?
  18. Do you charge a fee when my units are vacant?
  19. If I decide to sell my property, do I have to list it with you?
  20. How do you market your properties?
  21. What is your repair process? And at what dollar amount am I notified for approval? How do you handle communication with me. Via a portal? Phone calls? Do I have a “point person” in case of larger stuff?
  22. How do you screen prospects?
  23. When will I receive my net income monthly?
  24. Do you do direct deposits? Can tenants pay rent electronically?
  25. References if available to talk

Where do I find a property manager:

  1. Referrals are the best way: BiggerPockets forums if you don’t have any network already but be careful with “Cheap Easy Free” options –  make a simple request for property managers in that area or private message a few investors local to that area
  2. Yelp.com
  3. Google Reviews
  4. See who are the property managers on listing sites like Facebook Marketplace or Craigslist

 

Other discussion happening in our Passive Investor Accelerator & Mastermind

  • Does anyone have opinions about these “tech-enabled” property management companies like mynd.co and greatjones.co? Has anyone used them? Would love feedback.
  • Also, what are people typically paying for property management? 10%? or less?
  • I was plugging in 10% into all my numbers. Some give discount for portfolios e.g. 9% when you have 5+ But recently when talking and analyzing stuff with ABC TK they have some PM in certain parts of country as low as 6%. 10 is the most I’ve seen and most common though.
  • When I was looking at Turnkey’s, 8-10% was the range, with most being 10%. I think I’m paying 8% now, but that extra percentage point or two would not be a deciding factor for me on Turnkey management.
  • The big thing is what the lease up fee. I’d rather pay 6% and 50% of the first months rent than 10% and 25-50% of the first month. Plus you have to think about the price of rents. When I had rentals in seattle I was paying 6%. And its good to not nickel and dime these guys too because they control your fate. Who cares if they take an extra few points if they are passive aggressive and upcharge/lazy bid your 200-600 on repairs every few months.

 

7 Questions I used to Interview my last Commercial Property Manager

  1. What types of properties do you manage? Normal sizes/asset classes?
  2. How many units are you currently managing?
  3. How many property managers and assistant property managers does your company have?
  4. Air filter policy (how many changes per year) and cost?
  5. What are management fees?
  6. Any other fees? (Cancelation, eviction, lease renewal ($200-500, or nothing), marketing, account set up) What do you charge for finding new tenant & leasing?
  7. What is your repair process? And at what dollar amount am I notified for approval? Weekly calls?

Sample interviews are available in the eCourse material

Don’t do this…

Here is a sample of a contract from a turnkey provider that a Mastermind member redlined.

Not giving any legal advice but the sheer amount of revisions to the turnkey providers contract may make them balk at having you as a buyer especially in a strong sellers market.

Its like that time you went out with a date with someone and did not really like them (redline the heck out of their contract) and you want to politely never want to see that person again… well same thing.

PS – Check out the tip on the 2% seller paid closing costs language

Word document provided in the Mastermind share drive.

The “Talk” with your parents

Its reality (and a little morbid) that your parents are aging you be one of the main caregivers. If you reading this they you understand the saying “sandwich generation” squished between taking care of kids, a demanding career, and aging parents.

I have had calls with investors who have had their parents give a greatly appreciated property before death (losing all the step up basis tax advantages) or give an asset to only to have a person get injured at the property and now everyone in the family is on the hook for the lawsuit.

How can we plan for this proactively and strategically without falling victim to traditional methods (taxes and a commission based financial planners).

Its definitely and emotional time with a money on the line… like wedding planning… yikes!

 

Taking Status

Although you came from the same DNA strain and upbringing you will be surprised on what is behind the financial status of our parents. Going in with a non judgmental mindset enables you get the truth and arrange a mutual plan.

Start by gathering the following:

  • Bank statements
  • Investment portfolios
  • Passwords associated with these accounts
  • Safe deposit boxes
  • Outstanding loans

We have all coaching clients download and complete this personal financial sheet which help facilitate conversations.

It’s not as simple as die with less than $22 million in assets. We can help with our Family Office consultation to navigate the complex situations of designing a game plan.

 

Where are we?

See where the money is coming and going. Inventory current bills and whether or not those are being paid on time.

Run credit reports with Equifax, Experian, and TransUnion. Be kind when understanding that your parents will have the traditional mindset to debt than you.

Inventory social security, retirement accounts, real estate, and cash.

 

Medical

Inventory medical history and any current medications they’ve been prescribed. Automate appointments and get involved with the relationship with their health provider.

You may consider the power of attorney (POA) should they become incapacitated. Even if they are in good health you should have a trust setup. Let us know and we can refer you to someone we trust. A will is not acceptable because it will go into probate.

A will is not acceptable. Get a trust setup to avoid probate and giving up 2-10% of the estate value to lawyers. Smart lawyers who create wills for you know its guaranteed work for them ($$$) in the future.

Familiarize yourself with long-term care which is designed to help pay for chronic diseases and disabilities. The money can be used for medical to non-medical activities like bathing, eating, and dressing, assisted living options as we will discuss below, as well as skilled care by nurses or other professionals.

Not to scare you or feed into a insurance broker’s ploy but:

The department of health and human services says that those who are age 65 today has a ~70% chance of needing some type of long-term care services. And those aged 55-60, only 5% of them have long-term care coverage. The cost of coverage can be $2000-3000 per year.

Based on Social Security Administration info, the average lifespan of a man who has reached 65 is around 84 and for a woman who’s reached 65 is almost 87.

 

Assisted living options

We all know about investing in assisting living deals but now we are the customers.

Learn your parents’ wishes regarding the type of care facility they would prefer based on their (and your) financial situation.

Would they want to live with others while they still can get around or would they rather live in their current home until they break their hip and can barely use the restroom themselves?

Check their insurance coverage and what the government will and won’t pay for relative to Medicare benefits. Here is where it would require a tax/legal professional (not your typical tax guy) to advise you how to equity strip your parents to quality for the most coverage while gifting off as much assets as you can.

Clients who engage in our family office and coaching clients may reach out for assistance with these issues and get setup with our best advisors.

 

Accessory Dwelling Unit (ADU) Option

You parents might be find going to an assisted living facility or “old people home,” however they may not have the funds to do that or you may prefer to have them nearby…

… but not too close.

One solution maybe constructing an Accessory Dwelling Unit (ADU) on your current property. One advantage to this is that you can have free childcare in the backyard and forge a stronger relationship between your kids and their grandparents 😁

 

Putting in an offer

When you put in an offer on something simple as a turnkey rental… lets face it. Its mostly about price. But there are some terms that I usually put in there such as a credit back for the maximum seller paid closing costs (~2%) in order to minimize the money out of pocket.

Other common things to watch out for especially if you are working directly with a turnkey provider as a non MLS transaction are terms of how your earnest money goes non-refundable (goes hard) and how long you have for an inspection period. And other basic contingencies such as financing contingency or sale pending completed and inspected scope of work and tenanted property.

As much as I don’t like brokers, their job is to walk you through these legalities and be a fiduciary to you. Also you can hide behind their errors and omission insurance. Going directly through a turnkey provider gives you little protection however assuming people are working in good faith there should be no problems. Big deals or small deals I don’t work with people I don’t know like or trust. But starting out we all make mistakes.

Unlike owner occupied properties “Letter To Sellers” for investment grade properties have little impact. Normally these letters humanize the process and helps connect you with the sellers but investors don’t care. In my opinion, you time is better spent researching more vendors or networking with other investors than to write a lame letter.

Set a Deadline – Give the seller a reasonable expiration date usually 3-5 days from the day you submit the offer. This gives them a little pressure.

Earnest Money is typically is suggested to be 1-10% of the property or $500-5,000. Putting down a larger amount of earnest money can make you seem more serious.

Another way to make you offer stronger is to waive contingencies in the contract. These include the mortgage contingency, a home sale contingency, an inspection contingency or an appraisal contingency. A lot of times the appraisal price may come up lower than the sale price you can agree before time should this happen how you will react to that.

Closing date – Most deals these days when using one of our Hui lenders are closing deals in 45-60 days. The seller wants the property sold the quicker but they also know that its a bit outside of your control. Again a broker can help advise you here. I was in one transaction where I was using 1031 exchange money and basically got extorted an extra $5,000 because I need to extend the closing period.

Can I negotiate with a Turnkey Seller? Answer is not really or you risk being seen as that unsophisticated investor who a pain in the butt. Here is the landscape, its been a bull market for over a decade, and there is a line of turnkey buyers around the block. That said you might be able to get $500 off the list price but its not worth it losing your social capital off the bat. My personal negotiation style is to offer full price but I make it clear that I am buying a property with certain expectations on the condition. As we move through the inspection that is where I try to be fair and knock down the price or get extra work done to the property.

I am not going to write that here because its too much to capture in a blog post but that is where it is critical to get someone experienced to look over your shoulder on an inspection report who will advise you on what is fair game to ask for. This is another reason to sign up for a year of group coaching or pay for an hour of consulting.

If you would like to get my form letter for my “letter of intent” (LOI) an offer letter for 2-300+ properties please apply for the Group Coaching Mastermind.

 

PS – Join the club…