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PODCAST EDUCATION

7 Important Questions to Ask Yourself Before Investing In Real Estate

Episode 043

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the 7 questions you should ask yourself before investing in real estate.

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream. 

Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys. 

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John. 

John Larson: Hello. Hello. Hello. Welcome everyone to another episode of the Real Estate Cowboys. This is your host John Larson, and this week I’m going to be giving all of you seven important questions to ask before investing in real estate. So this is really geared towards my new investors; my investors out there that are hungry for information, searching for information, taking courses, watching webinars, listening to the podcast. This is all for you. This is for new investors and these are seven questions that you really need to ask yourself before you invest in any type of real estate opportunity. Really any investment in general, but you know we’re talking mainly about real estate here, so you want to ask yourself these seven important questions before deciding to put any money into the market or put any money into any real estate investment vehicle. Okay. And you know that we’re pro passive here at the Real Estate Cowboys, we talk a lot about passive income, real estate opportunities because we want our investors to take action through education and utilize groups like ours to do the heavy lifting. 

So you can just sit back and collect a check. That is the goal here is to put your money to work for you and put it with the right team and the right market so that team and market can get you back the return that you’re looking for. Very, very important. You know, there’s more ways it seems to invest in real estate than ever before and each type of real estate investment delivers different experiences for the investor. Whether you choose to invest in a REIT real estate investment trust, a debt syndication, equity syndication, private placement opportunities, residential or commercial real estate property, you’ll get different benefits and experiences from each one. Some are more passive than others, some can be very hands-on, depending on what route you want to take. So we’re going to talk about that on the show this week. And I think it’s also important to understand that there are different risks associated with each kind of real estate investment and there are varying levels of complexity with each type of transaction. 

Definitely believe that. I’ve done a lot of different real estate investment transactions, commercial properties, single family homes, single family homes as rentals, single family homes as retail flips to regular homeowners. It seems like every transaction there’s a different process and some are easier than others. You know, with single family homes and commercial property, there’s inspections you’ve got to get through. Buyers get jumpy and want to cancel for whatever reason. With single family homes, especially when you’re selling to retail investors as well. Or I mean retail home buyers, they can get a little jumpy about little things that don’t even matter, but they’re just inexperienced and they are buying this property to live in so they can be a lot more prone to, you know, get just get a little jumpy during the deal, during the process of the deal. so. 

But then you look at deals with a real estate investment trust. This is basically just a cash transaction, sign a document with a, you know, a promise to pay a certain, rate of return with our debt syndication, same type of deal. It’s a private placement memorandum, PPM, that you’re going to sign, review and then you’re just going to send money and then just like a bank, you’re going to collect a monthly dividend from the borrower. Equity syndications could be a little bit more complex because a big portion of your return or maybe all of your return is going to be based on, you know, the sale of a property. So you really want to look into the market conditions. You really want to like forecast what those market conditions are going to look like in a couple of years, two, three years, five years, whatever it may be, before that equity syndication is going to pay back. So you want to do a little bit more forward thinking with that one. 

But the same thing on a debt syndication as well. I mean although you hold first lien position on a project, which really mitigates your risk, you know, you still, depending on the term, if it’s anything over two years, you really want to look at that market and think to yourself, hey, we’re coming up in some times of uncertainty. The economy’s been running really good for the past 10 years. The housing market’s been really good for the past 10 years. You know, is it going to hold strong? Is this market going to hold strong? Is this market going to be resilient during another downturn? And so you want to be careful about potentially putting some money in a market where a downturn, economic shifts, recession, it could have a really big negative impact on that market to where it’s going to drive population from the area and drive businesses from the area. That’s what you want to avoid. 

So before you invest in real estate, I think it’s very essential to ask yourself these questions. And the number one question would be, what are your goals? What are your investment goals? Very, very important. Everybody has a different reason for investing. So although the most commonly cited reason for investing would be to acquire money, the question to ask before you invest in real estate, delves deeper into your actual goals. Do you want to generate monthly cash flow? A rental property could provide that through the rental income, or a monthly dividend from private lending could also meet that goal. Are you looking for a higher rate of return? If you are, a high rate or return? Right? I see some investors, they come to me, they say, Oh, I’m looking for 18%. Okay, well you need to understand that high returns, like 18% are generally going to come with a much higher risk, you know, or with equity syndication, you’ll see that a payment of up to 30% can be paid out toward at the end of the syndication once it’s sold, as a project’s sold off. 

But like I said, that’s also if everything goes according to plan, you may see that 30% return. Are you seeking to build a family legacy for your heirs? The 1031 exchange makes that very possible because you can keep deferring capital gains. And then when you go to leave your property to your heirs, your heirs get a step up cost basis. So let’s say you purchased the property for your first property for $200,000. After doing a few 1031 exchanges, you now have a property that’s worth $750,000. You pass away, you leave that property to your heirs, your heir then takes that 750,000 property and sells it. There are no capital gains at that point. Okay? So really there’s no tax hit on that money because in the eyes of the IRS, you just inherited a property that’s worth $750,000 and you sold it for $750,000, okay? So in their eyes there would be no capital gains. So very, very powerful tool, the 1031 exchange. Do you need to diversify your investment portfolio? If that answer’s yes, then certain real estate investments can do that for you. Or are you just looking for a long-term investment that builds wealth slowly over time? A number of real estate asset types could fit that bill. And so you know, figuring out what you want out of your investment will help you narrow down your options. 

The second question I would ask is, do you want a passive or active experience? On the Real Estate Cowboys We’re very pro passive. We really believe in you using your funds and leveraging a team of experts in a good market to put those funds to work in good real estate investment opportunities. And so we are very firm on a passive experience. We’re not guys that are going to teach you to go out and flip houses on your own. Trust me, I’ve done thousands of them. They are very stressful and it’s a lot of work to flip a house. It’s not as easy as it looks on TV. You got to consider what type of person you are and how much time you have to devote to real estate investing. You know, if you would prefer to have a passive experience than I recommend going the private lending route, number one, because it’s very, very passive and very hands off. Even using a turnkey provider with a rental property, you’re still dealing with people. You’re still dealing with a property that can break; you know, things can break from time to time. You’re still dealing with the property manager on a monthly basis. You know, and things can go wrong more frequently than with a private lending debt syndication, something like that. 

Uh, with rentals you have vacancies, you have maintenance, it can make the experience anything but passive. So remember that. And that’s even buying a turnkey property, let alone going out and rehabbing a property yourself; that’s extremely active and not passive at all. So it’s something that you have to watch on a daily basis to ensure that it gets done right. So if you have a full time job and a family and other responsibilities or interests and you want passive experience, look at some of the options that we offer or other companies out there. There seems to be a turnkey provider in almost every major city at this point, at least one. So do your due diligence and you know, I recommend going out and meet these providers before you work with them and see the neighborhoods, see the type of properties that they’re producing before you decide to put new capital into that. 

But yeah, I mean my investors, the reason why they love the private lending debt syndication so much is because it’s so passive. They give us money, they sign the documents, the money sits in escrow until we close on the property. The property closes, they get a check every 30 days. They only hear from us every 30 days and it’s me giving you money. So it’s a pretty good experience. That’s one that I really, really enjoy with my investors. Think though. If you’re, on the other hand, if you’re the type of person who likes to dive in and be heavily involved with the details of a project, then maybe flipping houses might be your bag, so to say. But for those of you that don’t have the time or energy or knowledge to do that, turnkey or private lending can be the better option for you. 

So, you know, you can make money both ways. It just depends on how much of the heavy lifting you want to do. I’ve flipped houses, obviously tons of houses, rentals, retail flips. My retail flips, I’ve been more involved in. My rentals we have a good process in place so I can be a little bit more hands off for me personally. But both of them come with a level of attention that I need to give to the project. And I prefer to give less attention. So I haven’t been doing as many retail flips. One, I don’t think the market’s really conducive for it right now. There’s been a really big slowdown on flipping or, uh, buying properties because of the increase in interest rates. I think it’s kinda cooled. Also, it’s the time of year, but, uh, that’s kind of cooled. So I haven’t been doing it as much as that. Plus, it occupies too much of my time. And at this point in my life, I’m really trying to compress timeframes and get a lot more done and make a lot more money in a shorter amount of time, right? It’s everybody’s biggest value in my opinion, is their time. Their biggest asset is their time. And so, you know, that’s why I talk a lot about what’s your return on life is. I think you can get a better return on life by, you know, looking for good passive investment options that can help you grow your worth, your retirement accounts. You know, maybe your wife can retire from her job and stay at home with the children or maybe it’s just more vacationing for you and your family. You know, think about it. What is your return on life? And that comes really down to time and time spent working. That’s another thing, passive or active experience. You really need to ask yourself that. And that will help you steer in, you know, steer you into the right investment option for you and for your lifestyle. 

The third question I would ask is what kinds of resources, what type of resources do you have to invest in real estate? However you decide to invest in real estate, you should know as much as you can about how the investment works. If you decide to do something like invest in single family rentals, you might be looking at a market outside of where you live. In most cases, a lot of my investors come from California, New York, New Jersey, Arizona, Colorado, even those in Texas are starting to look elsewhere, uh, for more affordable options. You know, if they want to diversify their portfolio to buy some low B properties, I think there’s some better options in some other areas of the country, where a low B property here in Dallas, it doesn’t really give you a better return. It’s going to come back, come with, uh, the typical risks that are associated with a B minus property, which could typically be, you know, maybe some higher crime neighborhoods, um, tenants that don’t have that consistent income, the best jobs. Uh, so you could see more vacancy and turnover with that type class of property. So you got to decide what market is best for you. And then you got to do a little bit of research. Okay. Do you have the time and money and other resources to travel to that location? Scout out neighborhoods, find a viable property, hire contractors and a property manager to take care of the renovations and everything else that’s what’s needed in order to make it a profitable venture. So I recommend before investing in real estate, take stock of your resources so you can make a practical decision based on your circumstances. And so this is where hiring a good turnkey provider might make more sense. But like I said, still go out. You’re going to want to spend a day with this company, meeting the team, seeing if they have the proper infrastructure in place to actually produce these homes, quality homes, and then manage them professionally. And also make sure, you know, take a drive around the neighborhoods, make sure you feel comfortable with the type of properties that they’re producing before you invest any money in that group. 

Number four would be how much liquidity do you need? You know, if you have a limited amount to invest, consider the impact that will have on your liquidity position to tie up that money in an investment you need to look at. You know, is there a likelihood that you’ll need to cash out early and take a hit? If so, you might want to invest in real estate in a way that only ties your money up for a short period of time. Our debt syndications do that. Other debt syndications do that. Many of them are maybe a six month, 12 month, 18 month, 24 months term. So your money’s not tied up too long working for you for that duration of that term. And then at the end of the term it is paid back to you. So you get, you know, your initial principle investment back and then at that point you can make another decision and where you want to put that money. Uh, speaking to an a client on the phone yesterday and you know, her main concern was, and she’s invested in two of my private lending opportunities, but she said, John, you know, I’m looking for something, you know, can I invest in your company? Can I invest in your company for some sort of equity position? Because, you know, I’m also getting a little tired. Uh, I have a lot of deals going on. I have to vet out deals a lot, you know, and that takes away from her passive experience because when this money gets paid back, there’s a new opportunity that’s available. Then she has to go through her due diligence process and so she’s looking for something that’s even more passive than what we can offer on the private lending side, which is also already very passive, but she said just at this point in her life, even reviewing all these deals that are available out there, it can become a little tiresome and time consuming and I can understand that. Also on the other end, if your liquidity amount or liquidity availability is lower, you can consider a single family rental because the leverage options are so powerful. 

With Fannie Mae, you only have to put 20% down, so on $100,000 home, you only need $20,000 to purchase that property. Whereas if you’re doing a private placement deal and the minimum is $100,000 then you need $100,000 liquid to get into that deal. In most cases. That’s also going to put you in the realm of being an accredited investor. So we had an episode of a couple of weeks back where we talked about, you know, what is, what are the qualifications of an accredited investor, how do you go about becoming accredited? And so if you want more information on that, you can listen back to one of our past episodes. Like I said, I think it was about two weeks ago we had that show. Um, obviously, so a lot of investors who get into single family rentals, a lot of times, maybe it’s because they don’t have that much working capital available at this time and they want to take advantage of the powerful leverage options that are available on single family homes through Fannie Mae. Uh, we’re going to take a quick commercial break when we come back. We’ll finish off with five, six and seven from the seven most important questions to ask before investing in real estate. 

And welcome back from the commercial break. This is John Larson with the Real Estate Cowboys. This week we are talking about seven questions that you should ask before investing in real estate. And we are now on number five, which would be what is your risk tolerance? I think that this is a very, very important question to ask as well. Uh, everybody seems to have a different type of risk tolerance and a lot of that will have to do with the your age. Uh, the point you are in your career, how much money you have saved up. A lot of that will tell you what type of risk tolerance you have. 

So to answer this question, uh, you need to basically look at where are you at in life. Typically, financial experts say that if you’re younger, you may be okay with a higher risk investment. Older people who might have be investing with retirement funds may have, may be better off with investments that have lower risk, right? And a lot of people, once you’re retired, you don’t have any working years available, right? All those years of working hard and making all that money and saving all that money, you know, those are over. So if you’re investing retirement funds, I think it’s a good idea to look at some safer investment opportunities that might yield lower returns, but you don’t want to lose that money. You don’t want to lose that nest egg. So I think it is accurate. You know, when you’re younger, you’re able to take more risks when you’re older, I think it’s best to go for, you know, as close to the sure thing as possible. But as we know, that’s not really gonna spin off the highest yield. So make sure, you know, you’re investing wisely. Maybe take some risks that have some big paydays as you’re younger so you can build a substantial nest egg to where you’re comfortable when you’re in your retirement years. So then that way you can take more safe calculated investment risks. Or look at some safer opportunities that, like I said, may yield a lower return, but you’re not going to lose your retirement savings, right? That I think would be a good goal to set for yourself. Uh, when you start getting into your late fifties and your sixties and you’re retired and you know, you still want to invest and I think it’s still important to invest because you’re not working every day. And I think it’s important to grow those retirement funds, but I think it’s important to grow them in a safe, risk averse manner. Okay. I think that, like we said, your risk tolerance is going to also be greatly impacted by your financial position. And so if you have a high paying job and million dollars in the bank, you might safely invest in more complex investments like a private placement deal. You know, it’s, it’s more complex in terms of, like I said, a client that I was speaking with a couple of days ago or yesterday, she was just concerned with having to go through the PPMs, which can be lengthy at times. It can be a little bit more complex during your due diligence period, uh, determining if this is a safe investment for you and a good investment for you. But once you do decide to invest in that project, like I said, at that point, your experience becomes very passive and very hands off. 

But there is some work to be done initially to review the deal. With these private placement offers, in most cases they’re only available to accredited investors. You want to speak to your financial advisor though. Don’t take my word for it on everything. Speak to your financial advisor to determine what your risk tolerance is. You know, where you should be at in terms of your, your age and the point that you are in your life. Like if you’re just living off retirement funds at this point, living off savings, I think it would be in your best interest to go for more safe, more moderate yielding investments, uh, in my opinion. And that’s what I would tell my own grandmother and mother. And, and also understand that rentals, uh, like we discussed, especially lower-end rentals can be a bit more risky. We’ve talked about that on the show a lot. Lower end rentals, C and D class rentals, they’re just not in the best neighborhood so they don’t attract the best tenants consistently. And you know, they’re very high crime. And so those ones tend to be higher risk. So I really don’t recommend, you know, if you’re in your sixties and are investing in retirement funds to be going after these low end rentals. They might look like great yielding properties on paper. But trust me, you don’t want to buy yourself a headache and another job at this, at that point in your life. You just don’t. So I recommend avoiding those at all costs. 

So number six would be what is the current market like? That’s important. What does the market look like now? What has history told us about this market? When we go into recessions and dips in the economy, how does that market, uh, handle those type of circumstances? And then also look at, you know, hey, how, how did things look when, historically when things are going good. With the uncertainty that we have here coming into a another possible recession, another possible housing crisis. When is that going to come? You know, I know no one really knows for certain, but is there a possibility that this market is going to go through another one of those cycles where prices drop, people move out of the market because there’s no jobs, there’s no job growth, but that’s probably not the market you want to be looking at to buy rentals right now. You know when it, when the market starts coming back, then maybe yes, ride that wave, that upward trend, still get a deal. But a market where you have a potential to grab some good appreciation, some good equity growth because the market’s coming back on an upward trend. But you do not want to buy in a market where it’s about to go on a downward trend. I don’t recommend that. You’re going to be buying a property at the top of market. You’re gonna have to wait for it to come back. So it’s gonna be a cycle. And like I said, if you run into a situation where you need to sell that property and get that capital back to you, it might be tough to sell it at the price that you purchased it for. So just be careful with that. And so basically what I’m getting at is don’t try to go against the market. Instead, you’re going to want to pay attention to the market trends that favor one type of investment over the other. So just pay attention to that for sure. 

And the last thing would be who are you working with? You know, if you’re going the passive route, you’re going to be working with a group, a sponsor of a commercial deal where they may be syndicating funds for debt or equity. Uh, so you want to know who those people are, what their track record is, or if you’re going on the turnkey side, who’s producing the home, what’s their track record? Do they produce a quality product? And then with the management team, you know what, what type of reviews that they have. Management companies get beat up quite a bit. A lot of times you get bad reviews from tenants who are just unhappy with certain situations. But you know, I, I definitely recommend meeting these individuals, talking with them, discussing their processes. We did a show, uh, that was 89 questions you should ask any property manager, although that’s very lengthy. I think you should know those questions and have those in your tool belt. You don’t need to ask the property manager all 89, but you know, it’ll give you a good basis to ask them the questions and hear their answers. And based on what they tell you from those 89 questions, you should be able to make an educated decision on whether they’re the right company to work with or not carefully that any company you’re thinking of investing with, how long have they been in business? Reputation’s important. They have a solid team of industry professionals running the day to day operations. Do they have strong financial backing? What’s the history of their deals? What’s the success rate? Uh, how well do they handle obstacles? Ask them, give me an example of a time when something went wrong. How’d you correct it? If they tell you, oh, well, nothing ever goes wrong, well, come on. Then you’re a pretty good con man. Because things go wrong, especially in real estate. And your investment experience will be heavily influenced by the ease of communication, organization, and expertise to the company that you partner with. 

So those are the seven questions that I have. Hopefully you found this episode informative. Hopefully you are a consistent listener of the Real Estate Cowboys. If not, if this is one of the first episodes that you listened to. You can go to RealEstateCowboysDFW.com or subscribe to us on iTunes and you can get all of our old episodes. 

There’s a ton of great information in there. Also, we have our book, or my book, The Passive Income Guide: What’s Your Return on Life. It’s a short read that pretty much breaks down everything we talk about weekly on the show and a short read. It’s really all about earning money passively in real estate. And so it’s a very, very good book and you can get that on Amazon or you can get that from our website. The Passive Income Guide: What’s Your Return on Life? 

We have a new private lending opportunity right now that’s paying our investors 12% annually. So it’s the highest rate that we’ve offered yet. We’re also giving our investors the opportunity to collect and accrue interest while their money sits in escrow before we close on the property project. That’s something that we’ve never done before. But a lot of our investors were voicing concerns about that. 

So we are now allowing your money to collect 12% interest. It will accrue interest while it sits in escrow. So that’s great, great news. We have an awesome opportunity out there for our investors to get involved with, if you’d like to find out more information, you can go to RealEstateCowboysDFW.com or AREIusa.com. That’s my company, American Real Estate Investments website and you can speak with a member of our team about our current offering. They can get you out the PPM and you can decide if this is a deal that you want to get into. But sounds like a good opportunity. 12% we’re paying on this deal. Uh, so like I said, if you’d like more information, visit our websites and a member of our team will reach out. That is all I have for this week. This is your host, John Larson signing off. Remember, what is your return on life? Have a great week, everybody. 

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.