Book Review 005: The Slight Edge - Jeff Olson

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The book Slight Edge by Jeff Olson explain how our philosophies shape our attitudes, actions and results, which in turn shape our lives. This book has a repeating theme which is that small habits, if performed over time, will get you the results that you want. Many of these small things are easy to do, but because they are easy, people pass on further consideration such as choosing a cup of fruit over a side of fries, or deciding to buy the latest and greatest smartphone over using the one you have until it needs to be replaced. However, over time, the results of these small decisions produce massive results.

1. Power of the Slight Edge
You may have heard of the story where a person was asked if they want to receive $1 million dollars today, or take a penny, but double it every day for a month? Most of you would choose the million dollars, however, if you were to take the penny, the following would occur: the first day, you have 2 cents, the second day, you have 4 cents, the third day, you have 8 cents, but at the end of the month, you will end up with over $10 million dollars. They started with just one penny, but with time and compounding, it has produced 10x the results. This is the slight edge working either for us or against us. Once you embrace this philosophy, you will know that if you do something long enough, you will get the results you want. But, if you make the small errors of judgement long enough, you will also suffer the consequences.

2. It seems simple, but will you do it?

People may be wondering, if small actions will yield massive results, then why doesn’t everyone do this? Its precisely because its so “easy” and will not impact you immediately, people do not think twice about doing it. This gets even harder with the development of technology and instant gratification we receive through social media and the internet. For the slight edge to work, you have to do something, and keep doing it until you succeed. You need to follow the Plant-Cultivate-Harvest cycle. However, many people either expect something from nothing, or they want to go directly from plant to harvest. The results are not immediately visible. The small activities are undramatic and seemingly insignificant. In a society that tends to worship breakthroughs and quantum leaps, it’s easy to give up or stop doing the small actions required to deliver results.

Favorite quote from the book:

“The truth is, what you do matters. What you do today matters. What you do every day matters. Successful people just do the things that seem to make no difference in the act of doing them and they do them over and over and over until the compound effect kicks in.”

Good Luck!

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Real Estate 010: How to buy Real Estate through Seller Financing

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How to buy Real Estate through Seller Financing

A lot of newbie real estate investors have a common problem when first starting out - lack of capital. As discussed in previous blog posts, there is more than one way to successfully invest in real estate, and that includes financing. An investor can save their money and purchase a property all cash, obtain a conventional or commercial mortgage, or look for private or hard money lenders. Another method that experienced investors love to use is seller financing, or owner-carry.

This simply means that the seller of the property becomes the bank and the buyer will now pay the monthly loan amount to the seller, and not a bank/private institution. Let's take a quick look at some of the advantages and disadvantages of seller financing:

Advantages:

  1. Flexibility of terms (Interest Rate, Downpayment, Amortization period, payback period, balloon payment amount, etc.)

  2. Easier to qualify (No bank involvement means less paperwork, as long as you and the seller agree)

  3. Cheaper closing costs (No bank fees, appraisals)

  4. Purchase through an entity (Corporation, LLC - this is generally not allowed for conventional mortgages)

Disadvantages:

  1. Premium for flexibility (Higher interest rates/purchase price)

  2. Balloon payment

  3. No bank underwriting (No objective third-party that may identify blind spots in the deal that may make it a “dud”)

  4. Property may not appraise for expected ARV (After repair value)

These are general pros and cons, and typically, the pros far outweigh the cons. Experienced investors know that conventional fannie mae or freddie mac mortgages are the cheapest money that an investor will find in the market. This is because they are backed by the government, have no balloon payment, and the loan is amortized over 30 years, which drastically improve your cash flow numbers as long as you are a long term buy and hold investor. However, there may be situations where investors have issues with repairing their credit, do not have enough reserves to meet fannie mae guidelines, or want to purchase a distressed property to rehab and refinance down the road. These issues may lead to the investor not being able to obtain a conventional mortgage, and where seller financing comes in handy.

Case Study: Bo’s seller financed deal.

Let me give you an example of a recent deal I took down with a partner of mine in the midwest. These two duplexes that were in the same neighborhood (Not same street) were being listed on the MLS for above what I thought market prices were at the time. However, I knew the market well and wanted to explore the option of “making” it into a deal that would work for me.

(Note: The best advice I got from my mentors is that in real estate, you only need to win ONE of the two: purchase price or terms. If the seller is focused on receiving an X amount for his properties (within reasonable range of course), then you can dictate the terms to make it into a good deal. Contrarily, if he was Y terms, you can negotiate the price to still win on the deal).

I flew out to the market and looked at both duplexes and knew that it needed a little bit of work to get it to my standards (read: meat on the bone). The properties have been on the market for quite some time so I knew I can negotiated. My first order of business was to talk to the seller and agent to understand why they are selling and what their motivation was. Through multiple conversations, I found out that the seller was an experienced investor who has owned the duplexes for 20 years free and clear, looking to retire and move to another state. I verified this information through online searches as well as looking at his other properties he had in the area that he was selling off one by one.

This taught me three things: 1) The seller is motivated 2) The seller may also benefit from a stream of cash flow, and not necessarily a lump sum. 3) The property is owned free and clear which is perfect for owner financing (No bank involvement and triggering of the “due on sale” clause).

I ran my numbers conservatively and made the following offer:

  • 40K off of purchase price X

  • 6% interest

  • 10% downpayment

  • 10 year balloon

  • 20 year amortization

Quickly thereafter, the seller accepted my terms, but countered at only 20K off of the purchase price. I called the seller myself explaining my reasoning for requesting 40K off of the purchase price (read: its very important to build rapport with the seller/agent and not get emotionally tied down). He agreed at came down to 30K off of the purchase price. I agreed to the terms and we signed the contract.

I quickly performed full house inspections, sewer scoping, termite inspections on both properties and found multiple issues, and estimated that the property needed atleast $15-20K worth of work after closing. This was not too far off from my estimate at $10K, but still higher than expected.

I went back to the seller and told them I will need to go back to my original offer of 40K off of the purchase price for the above reasons. (At this point, the seller was irritated that I was attempting to “retrade”, however, the inspections discovered new issues that I was unaware of before, as such, this is normal in the due diligence process and I knew I needed to be courteous, but firm in my numbers and reasoning).

After multiple emails and not gaining any momentum, I decided to let go of purchase price X, and focus on terms Y. I adjusted the numbers in the calculator to make the deal still work for me. As I am a cash flow investor, I crunched the numbers with the following new terms:

  • 30K off of purchase price X (Same)

  • 5.25% interest (Down from 6%)

  • 12.5% downpayment (Increased from 10%)

  • 10 year balloon (Same)

  • 30 year amortization (Increased from 20 years)

As you can see, I left the purchase price and balloon payment period the same, reduced the interest amount, and amortization period, thereby increasing my monthly cash flow, but also increased the downpayment amount by 2.5%.

Negotiations is a relationship game (refer to my blog post on Book Review: Never Split the Difference), and I knew that if I only “took” from the terms without giving anything back, the seller would feel it as another loss and possibly want to increase the purchase price or back out of the deal. As I realized from previous conversations that purchase price and cash at closing was somewhat important to him, I increased my downpayment by 2.5% (couple thousand dollars), but reduced the interest rate and amortized it over 10 more years. This move allowed my property to cash flow $150/month better than the previous offer and made this financing much more competitive that a traditional conventional mortgage which would have required 25% down for 2-4 units and had quotes for 5.875-6.125% interest rates at the time of this deal.

I knew that in 10 years, we would have heavily paid down the loan, property appreciate it value, and cash flowed enough that we could refinance the balloon or pay it all off if we wanted to. In the end, the seller accepted my terms and we created a win-win deal. The seller received steady monthly mortgage payments and a nice interest rate on top of his equity in the property, and I did not have to use my conventional mortgage slots, and obtained 4 units with only 12.5% down. Further, I feel with the relationship built with this seller, I can reconnect in 6-8 months to inquire about purchasing his other 10-15 properties in the area.

The biggest lesson learned for me was that to succeed in real estate, you have to have many tools in your toolbelt and think outside the box. Figuring out the seller’s why, solving their biggest problem, and offering multiple options is a sure method for you to get your deal accepted.

As Brandon Turner from biggerpockets often says, to an investor who only has a hammer, every problem is a nail. Many investors say, I cant invest because I dont have THIS: time, knowledge, money, confidence, etc. I highly encourage you to think outside the norm and ask yourself the question “how can I do X”. By changing your mindset from a fixed mindset to a growth mindset, you will be able to force your mind to come up with new solutions.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Advisor before making any investment decision.

Good Luck!


FSBO

Book Review 004: The Richest Man in Babylon

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The Richest Man in Babylon is a story about a wealthy man and his common sense approach to creating wealth. Written by author George S. Clason, a businessman and writer who drafted pamphlets about generating wealth in the 1920s. His book has sold over 2 million copies, and his work has been the foundation of countless other personal finance advice that coined the term “pay yourself first”.

Summary:

1. Pay yourself first

“Every gold piece you save is a slave to work for you. Every copper it earns is its child that also can earn for you.”

Algamish advises the young Arkad to always keep part of his earnings. At first, Arkad thought that he kept everything he earned, but in fact, he earned money, spent it on expenses such as food and clothing, but did not have any savings. Algamish told him that by keeping a part of his earnings off the top and using those funds to invest, those monies will bear “children” and those “children monies” will create even more children, Arkad would eventually be rich.

2. Never invest in something you don't understand

(“A small return and a safe one is far more desirable than risk.”)

Arkad took the Algamish’s advice and began to save, but he used his savings to invest in jewels with Azmur, a brick maker, who promised him big returns. However, it turned out to be a scam and Arkad was given worthless glass trinkets instead of jewels. Algamish then warned Arkad to invest only with experts. If he wanted to buy jewels, he should go to a jewel merchant, not a man who made bricks. When it comes to money, he said, always seek knowledgeable advice.


3. Save early and often , seek out opportunities

“A man’s wealth is not in the purse he carries. A fat purse quickly empties if there is no golden stream to refill it.”

Arkad had become a wealthy man following the principles of Algamish, and he began to teach others how to create wealth. Arkad explained that the most important investment rule is to protect your principal. He warned the men against get-rich and fly-by-night schemes, and told them to be as careful choosing their investments as they were when choosing their wives. To invest, he said, they should seek wise counselors who knew about both gold and life. Arkad told them never to invest their gold in ventures they did not understand or with men who were not skilled in the enterprises they promoted. He told them to buy homes instead of renting them, thus taking advantage of one of life’s best investments. He cautioned them to plan carefully for their later years when low energy, illness, decrepitude and age would make it more difficult to work. Finally, Arkad advised every man present to increase his knowledge, expertise and skills, to become wiser so he could earn more.


4. If you have a strong desire, you will find a way, if not, you will find an excuse

“Good luck waits to come to that man who accepts opportunity.”

A trader who had once been a slave, and still would be one if not for the kindness of his mistress, who took pity on him and helped him gain his freedom, shared his story. His mistress gave him two camels, some bread and a jug of water, and told him to ride across the desert to flee for his freedom. He was greatly afraid because the desert is vast and cruel. Then his mistress asked him if he had the heart of a free man. If so, she said, you will take your chance. If not, you will stay here and remain a slave. Dabasir took her dare and rode into the desert. He journeyed for weeks, his food and water long gone. He thought often of death, but the words of his mistress spurred him forward. He vowed to trek on until he was safe and free.

Thus, one day he finally came out of the desert and made his way to Babylon. From that day on, he always used determination to forge ahead, no matter what difficulties lay in his way. Dabasir looked hard at the young man by his side and told him that he, too, had either the heart of a free man or that of a slave, and that a free man would find a way to repay his debts. Tarkad rose and thanked him for the story, assuring him that as a free man he would repay the money. The next day he did. Where there is a will, there’s a way.


Key Take-Aways

  • Always save at least one-tenth of your income. Invest your savings. Put your money to work for you.

  • Be thrifty. Budget carefully. Do not spend on needless things.

  • Seek the counsel of knowledgeable experts before you invest.

  • Never put the principal that you invested at unseemly risk.

  • Increase your knowledge, expertise and skills, so you can earn more money.

  • Good luck comes to those who know how to seize opportunities and act on them quickly.

  • Be cautious with your money. Lend it only to those who are sure to repay it.

  • Take comfort in hard work. It is your best friend.

  • If you are determined to get ahead, you will.

Good Luck!

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