Why Your Realtor isn’t a Real Estate Genius

I see this misconception happen all of the time. “Well my realtor says ____________ about the market.” That blank is always something like “Buy now or you’ll miss out” or “The market won’t go down anytime soon” or my favorite “This isn’t 2008.” Yet, guess what? Realtor’s were saying that in 2008 as well ha.

Now, before I go any further there are a small percentage of realtors that go out of their way to learn from people like me and they do understand the market, but I would say that is less than 5% of realtors. These realtor’s are amazing assets to you and you should cherish them. I would assume most of you think this is your realtor, so I am going to show you a test I recommend people do with any realtor before you work with them any further later in this article.

I want you to understand 2 key items

  1. Realtors have no formal real estate training

I know what you’re thinking… “What do you mean Ken they go to Real Estate School and they sell property all day long. How can you say they have no experience in real estate.”   I will sit here and tell you they have no experience in real estate. In school, they are taught about contracts, rules, and regulations. They are never formally educated about the actual markets. They are taught to price units, obtain customers, and commission splits. This is the exact thing they do in their daily job. They don’t forecast market cycles, follow economic trends, and most don’t even own rentals themselves.

  1. They work on commission

If you went into a car dealership would you ask the  car salesperson “Is this a good time to buy a car?” or how about “With the increase in unemployment, do you think the price of this car I am considering may go down this time next year?” Of course you wouldn’t ask them that because you know that they don’t have a clue on how the economy will relate to car pricing and also they are going to tell you “Yes, it’s a great time to buy a car.” every time. Why? Well of course Ken they get a COMMISSION on the sale, so they will never tell you not to buy it! Well I am here to tell you realtor’s are the same way. I can’t say I blame them. This is their livelihood, but all too many times people believe their realtor’s perspective on whether or not now is a good time to buy and their perspective has a big motive to be skewed. Or frankly, they don’t follow real estate cycles and just don’t know. The same reason a car salesperson doesn’t follow car pricing trends based on the future of the economy. 

So where does that leave you?

Well to start, you need to be educated and do your own research and not blindly trust people when they tell you it is or is not a good time to buy. If you don’t know how to run your own numbers I discuss this in my bookThe ABC’s of Buying Rental Property.”

Secondly, an educated and honest realtor can be a great asset. This person will only send you true “deals” they come across and will really be educated on the market. Now I always say “Trust, but verify.” So you will still always want to run the math on the deals they send, however you need someone like this on your team.

How to Know What Kind of Realtor You are working with…

This is a test I recommend you put your realtor through upon hiring or continuing to work with them. I want you to find a property where the numbers obviously don’t work. It’s clearly overpriced or it needs too much work and you know it. It’s so obvious. Now, I want you to send this property to your realtor. Email them stating you really feel like the numbers could work at this property and say how excited you are. Tell them you are ready to make an offer on it, but first want their opinion on if it’s a good deal, since they are the expert. See what they say. If they tell you they don’t think it’s a good deal and you should walk away then you have someone on your team. If they confirm to you it’s a great deal and can send an offer letter over, you know they only care about their commission and you need to move on. 95% of you will be disappointed.

Secondary Markets Outperform Primary Markets

Primary markets as most of you know are suffering. What we are seeing is a lot of secondary markets by the big cities are heating up as the cities cool down. For example, as Washington DC cools, Virginia Beach heats up. Same with San Francisco -> Sacramento and Los Angelis -> Riverside. The truth is, these more expensive cities were already at their tipping point prepandemic. The pandemic only accelerated it.

The cities experiencing the biggest drop off in rent prices generally fall into two categories:
-Markets where the local economy is heavily dependent on tourism (Miami, Orlando)
-Expensive markets (San Francisco, Seattle, New York, San Jose)

Year-Over-Year Rent Growth:
San Francisco & Bay Area Continue Downward Spiral

  • Rents decreased 0.3% in August on a year-over-year basis, unchanged from July. Of the top 30  markets, year-over-year rent growth is negative in 16 markets, a slight improvement from the 17  negative markets in July, with Raleigh (0.4%) flipping positive in August.
  • The three markets with the largest year-over-year rent declines remained unchanged from July:  San Jose (-5.5%), San Francisco (-5.1%) and Boston (-2.5%). Rents in San Jose and San Francisco  have continued to deteriorate rapidly since March, while rents in Boston have remained steady.  Since March, overall rents have declined by $143 in San Jose and $97 in San Francisco.

-Among the markets that flipped negative on a  month-over-month basis in August were Austin  (-0.3%), Tampa (-0.2%) and Seattle (-0.1%).  Tampa fared the worst, declining 100 basis  points in August on a MoM (Month over Month)  basis.

-Tampa is one  of 12 markets where Lifestyle rent growth is out

performing Renter-by-Necessity rent growth.  The Lifestyle asset class in Tampa is likely benefiting from an exodus out of New York, where  renters are used to extremely expensive rental  prices, causing them to be unfazed by the price  of a Lifestyle rental unit in Tampa.

-The downward pressure on rents in Austin could  be from the large amount of completions in the  last few months. As of August, roughly 4% of total stock had been delivered in the past year. Another factor that could be affecting the declining rents in Austin and Tampa is the increasing  homeownership rate.

-While job growth in Nashville and Raleigh was  significantly affected by the COVID-19 pandemic, these two markets fall in the top half of our  Matrix top 30 markets for YoY job growth as of  June 2020. Job growth in Nashville as of June  2020 was -3.2%, while job growth in Raleigh was  -4.8%.

Long Term Impact

As far as longer-term impacts, the pandemic’s effect on rent prices will depend heavily on how quickly the economy is able to recover specific to each area. There are indications that the recovery will be more drawn out than many had initially hoped, making it likely that we’ll see a stagnation in rent growth or even a downward trend because due to large unemployment numbers, families will begin looking for more affordable housing. We may also see a significant slowdown in new household formation, as more Americans move in with family or friends to save on housing costs.That being said, we will see many homeowners become renter’s as well.

 These trends could mean that competition will remain tight for rental units at the middle and lower ends of the market, while luxury vacancies get harder to fill. As long-term remote work gains traction, we may also be seeing the beginning of a shift away from expensive downtown markets and toward more affordable suburbs.

5 Mistakes Most New Investor’s Make

In the current atmosphere everyone is a real estate investor. A simple search on Instagram will land you with everyone from realtors to marketing gurus pretending they know how to invest in real estate. The truth is, the last ten years in real estate have been easy. Basically anything you bought increased in value and it was really hard to make a bad deal. Yet, here we are in 2020. Real estate investing is going to get a bit trickier and take it from me you want to have a true “expert” leading you in your journey. I wanted to share with you some common mistakes I see investors making when they first start out in real estate.

1. Ignoring the Numbers

The numbers are the MOST IMPORTANT part of any deal. So many times I hear of investors trusting their realtor or a friend who knows real estate. When you purchase any property it is a big investment and there is risk involved. That risk decreases significantly with the more education in real estate you have. Any deal you make you should personally crunch the numbers on to ensure it is cashflowing. I go over this step by step in my book “The ABC’s of Buying Rental Property.”

The truth is Many people miss the costs associated with real estate and are overly optimistic on their numbers. I’ve seen first-time investors run the numbers on a new deal and miss critical costs like Cap X or property taxes on their spreadsheets. You need to know all of the costs associated with a property and the actual rent you can collect from capturing other similar properties in your area.

2. Not Properly Screening Tenants

Having a tenant is having a business relationship with someone and is not just putting someone in a unit. I see first time landlord’s rush on this critical piece, but here are the standards you must check before moving someone in. I listed them below, but go in more detail on this here.

        1      HEALTHY CREDIT HISTORY

        2      CLEAN BACKGROUND CHECK

        3      CLEAN EVICTION HISTORY

        4      STABLE EMPLOYMENT HISTORY

        5      SUFFICIENT INCOME

        6      POSITIVE LANDLORD REFERENCE CHECKS

3. Repairs and Maintenance

No matter how nice the property is there will be maintenance issues that arise. Most new investors don’t calculate this. An experienced investor will know to put aside at least 2% of the value of the property every year to account for any of these potential costs. This can at times kill a deals profitability, but it has to be considered.  Finding a good, affordable, and reliable handyman is someone you need to have on call in these situations to mitigate the cost.

4. Getting Too Attached

Do not let your heart rule on any of the decisions when it comes to buying or selling a property. If you let your emotions get involved you could end up making the wrong choice. I never get attached to any property I am looking at. I buy based on the numbers, it’s as simple as that.

I have seen this too when people already own a property and go to rent it. They are worried about the tenant staining the countertops, or scratching the wood floor. Once again, don’t be emotional. Get a nice sized security deposit to cover these incidents, because they will happen, and move on. Your rental properties are your business and you can’t get attached to them.

5. Not Knowing the Market

The worst deals are made when someone who isn’t a local comes in knowing nothing about the market and starts purchasing. I always advise small investors to stay in their local markets. You know that market better than anyone. You know what areas are good to be in and where you would run. If you are going to invest in a market you are not extremely familiar with then go there and get to know the area. Also, chat with people in the community to better understand the pros and cons of that area.

If you’re looking to get into real estate investing you should know it’s not easy. It’s going to be a whole lot of work and there are going to be a whole lot of things you need to watch out for.

Make sure you know the numbers and that you’re willing to walk away from the deal if it doesn’t work out for you based on those numbers. Rushing in could cost you a lot of money, but knowing what you’re doing could make you a lot of money.

Being a Real Estate Investor 101

Real Estate Investor 101

Many people see investing in real estate as a way to generate cash flow, build-up a nest egg and have tenants pay your mortgage for you. While that is a successful strategy for many people, there is a technique to it. It isn’t as easy as simply buying a property and renting it. Uneducated investing is how you get into trouble. There are certain principles you need to follow to help ensure a return and be a successful investor.

  1. Don’t Assume Rents will continue to climb.

I see a lot of green investors bank on the appreciation of rents over time. While that is something that can happen with a value add structure, it is not something you want to make a purchasing decision on. Rent growth at the top of a real estate cycle is a very risky play, because when a recession hits a lot of the time you will have vacancies and rent stagnation.

  1. Run Your Numbers

They key to any property is cashflow. The problem is a lot of investors simply look at the rental income vs the mortgage. They forget you also have to take into account property tax, insurance, utility bills, repairs and maintenance, property management fees and other regular expenses. While also including an allowance for vacancies and future capital expenses (roofs, new A/C, etc.).

After all of this, if the property still cash flows then it is something you should consider purchasing.

  1. Know Your Market

I love investing in markets I live in because you will never know a market better than the one you are in daily. Never go into an unknown real estate market by yourself, always have an experienced local team who thoroughly understands it. This point cannot be emphasized enough.

  1. Hire a Professional Management Company

So many investors try to save money by self managing. While this can be done, it is a lot of work and you have to stay on top of it. If you or the people you are investing with are planning on self managing make sure they are experienced and capable of taking this on.

  1. Understand Real Estate Cycles

This is a big one that gets overlooked by many investors. You have to understand how the market cycles. From Recovery, to Expansion, then hyper supply, and finally a recession. Things are more predictable than you think and there is a right time to buy in the cycle and a time to wait and hold. The only way you can know if it is a good time to buy is by understanding this cycle.

  1. Invest with a Reliable Real Estate Company

In the past seven years who could have failed in real estate? Each year everything appreciated and rents grew. You honestly had to try to fail, but now is very different. MC Companies has a proven track record both when the market is up and when it goes down. It is important that whoever you invest your money with has this kind of experience. The next few years there will be massive opportunity, but you need  a company that is experienced to navigate it for you, because there will also be massive room for error.

 

 

The 4 Keys to CORRECTLY Invest in Real Estate..

The average person doesn’t know how to get started investing in real estate, and therefore, gets their cash flow from a nine to five job. That scenario is the exact opposite of being financially free, because cash flow doesn’t come from depending on a job you have to go to everyday in order to get paid. Financial independence happens through investing in things that make money for you.

Now, real estate investing may look like risky business to some, and that’s true, because it definitely can be. But just about anyone who works smart enough, and hard enough, can use real estate investing as a way to increase their wealth. Many people ask why they should invest their money in real estate. I say because future retirement based on cash flow from a rental property isn’t a dream, it’s a real-life possibility.

So here are a few of the keys, from a much larger list, to investing in real estate:

• Pick Moderately Priced Properties. Keep in mind that expensive homes in sought after areas like the oceanfront usually have low cash flow returns. You’d be better off investing in a more moderately priced property with a higher cash return.

To learn what the other three are click here!

 

Facebook Forum – Question of the Week

If you are a premium member of KenMcElroy.com you are invited to join my new Facebook group! I’ll be jumping in to answer questions from you about real estate, leadership, entrepreneurship and life. I’ll hope you’ll join me in this new forum. If you’re not a premium member sign-up here, and then send a request to join us on the inside.

Each week I’ll pull a question from the forum and present it here. Below is this week’s question.

Do you think we’re close to another market crash like in 2011?

Ken McElroy:

“I don’t. That crash was excessive lending that led to poor buying decisions which was all unmanaged. Lenders are much more stringent right now which is good. Right now we might see crashes in Retail RE and possibly Malls and Office (mostly due to direct to consumer) purchasing. Multifamily and Industrial is VERY strong and shows no sign of weakness into 2020.”

Finding a Mentor

People always ask me to mentor them.

I probably get at least 3 messages a day for this request.

A true mentor is going to walk you through their experiences bad and good and look at your experiences and warn you of things they see going good or bad in a potential deal. They are going to show you how to handle questions and problems as they arise. They are going to be your teammate through it all.

Clearly, I can’t do that for every request I get. This is why I made the forum at KenMcelroy.com. Click here to check it out. The point of this forum is not only for me to answer your questions, but also for you to find mentors in one another. I absolutely will answer the questions you post on there, but also the connections you make if you try can be life changing. I believe there are all levels in the group, so finding someone to mentor you is something you should make a priority.

Other places to meet mentors would be meet up groups, networking events, LinkedIn, and even the old fashioned way of stopping by real estate investment offices! When you introduce yourself please remember if they don’t know you they may want something in return. I don’t recommend paying them a lot of money, because you haven’t even seen what they will offer. I do however believe you need to make it a win win situation for them.

How can you do this? It depends on you and what you’re good at. You can offer to work in their real estate investing office part time for free, yes I said it free! What you can learn could be life changing. You could actually start a real estate investing networking group. If you are the leader of the group people will be more apt to help you. You could even start a podcast and have real estate guests on your show. You have to be creative, but take your skills and offer them something useful in return.

Some of you may be saying, “I’m not working somewhere for free.” or “This is a lot of work.” I am here to tell you starting a business, even a real estate investing business is a lot of work. So if you aren’t prepared to put in work then it will be very hard to become successful. Those that put in the work and really learn the trade are the ones that can really kick some ass in the industry.

Until Next Time,

Ken

 

Facebook Forum – Question of the Week

If you are a premium member of KenMcElroy.com you are invited to join my new Facebook group! I’ll be jumping in to answer questions from you about real estate, leadership, entrepreneurship and life. I’ll hope you’ll join me in this new forum. If you’re not a premium member sign-up here, and then send a request to join us on the inside.

Each week I’ll pull a question from the forum and present it here. Below is this week’s question.

Jay asks:

After you raised equity, how did you secure financing?

Ken’s Answer:

“We typically have the DEBT first which tells me what EQUITY I need. Debt can be 60-80% of the total purchase or project and the equity is the balance. I rarely if ever do personal guarantees. These can take you down quickly…as I saw happen too many, many people.”

Are you going to be a successful investor?

People always tell me they want to be a successful real estate investor. My answer is always the same. Success is never luck. Success only happens when preparation meets opportunity. So if you are “lucky” enough to find a property you can invest in and have raised investor capital, how do you ensure you are successful? How do you prepare?

The first thing I recommend (and basically require) you to do is market research. I think it is really important that you use data and don’t rely on what people are saying. What happens is people are at a cocktail party and Joe says “Vegas is booming and my properties are killing it.” So then people jump on that and want to invest in Vegas. They haven’t researched the market. They don’t know the job growth, they don’t know the best place in the area to invest, and they don’t know that Joe may be losing his shorts on his investments and is just trying to raise money/save face. So market research is where you should aways begin. To watch the YouTube video and hear all 5 of the qualities I think are necessary to be a successful investor then click here!

Until Next Time,

Ken

Facebook Forum – Question of the Week

Each week I’ll pull a question from the forum on Facebook and present it here. Below is this week’s question.

Kathi asks:

When negotiating with commercial lenders, do you have a specific format you use to compile and present your financials and a history of property management? If so, do we have access to examples on your website?

Ken’s Answer:

Great question. Lenders typically have their own format for underwriting, however they do want you to have all your financials and projections together to hand out during the meeting. They want you to understand and support your income projections via actuals and market information, if applicable. The expenses will need to be verified too. They typically look at a DCR or debt coverage ratio against your NOI or net operating income. Each lender is different. Basically they look to your cash flow after expenses to pay the monthly interest payment…so be prepared to know this figure. It’s one of the most important things to know. That figure determines the loan.

Are you a good leader?

If you want to improve your business and your life in general, you need to learn to be a better leader. Too many times people are either a pushover, a worker bee, or use their power to “lead” aka push people around. Yet none of that is being a true leader. I interviewed one of my closest friends and one of the best leaders I know, Tod Davis on my podcast. Todd started Life Lock from the ground up and sold it for a billion dollars. 1 billion! If you ask him why he was successful, he will tell you the learned how to be a true leader. These are the qualities he feels you need to be a real leader and have success in your business.

1. Allow yourself to be challenged. All too often we get in a position at work, with our family, or in our company where we shut down when someone challenges us. Why are we shutting down? It’s because we don’t want to be wrong. We think we know everything. Having an open mind is something every leader needs to have.

2. Make sure people can ask you for help. Make sure they don’t feel stupid when asking a question. You should be open to all questions and be patient with your answers. To found out the other three qualities of a leader and to have Todd motivate you to get your ass up and be successful. Click here to listen to the podcast.

Until Next Time,

Ken

Facebook Forum Question

Be sure to check in on the Facebook group each week where I answer questions that are asked by the community.

Jay asks:

I’m a believer in surrounding yourself with a team and we do that in new home construction. However, when we select a realtor, we do not put realtors on our team who also have their hands in building new homes. We avoid this because we know who’s product will be shown first.

My question is about property managers. We are wanting to enter multi family properties with long term hold, cash flowing, models. We would also like to work toward your strategy of value adds with cash out refinances to provide returns, tax free. The area we are exploring is about 85k people or so. The larger and better appearing property management companies own several of the larger apartment complexes in this market. How would you approach this, or what would you consider, to avoid simply paying your competition to fill their vacancies and aggressively represent your interests instead of only their own? Thanks!

Ken Answers:

A great question. Not all PM companies are created equal. I know large ones that are horrible. I know small ones that are horrible.

The key is the individual and a MF property manager may not do a great job on single family.

Find a local realtor or local investor that OWNS rentals. Ask them for referrals. Look for housing associations in your area where they have ongoing education, this could be a small owner group inside a larger apartment association. I know these are available in AZ, Texas and California. Just check your state.

6 Skills you have to master in order to be wealthy

There are six skills that every future millionaire must master. These six skills will put you in the millionaire mindset and prepare you to stay in that mindset throughout your life. When you build on the six skills; persuasion, reading people. Sharing the wealth, leverage, problem-solving and saying no, you set a foundation for the life that you want to have. They are skills that you have to hone and work on every day of your life and when you make them a priority, you will begin to master them.

Persuasion

Persuasion is the ability to convince someone to see things in the way that you want them to. You have to be able to persuade your family to support you when you start a business. You have to have the ability to persuade investors to invest in you and employees to work for you. You also have to be able to persuade yourself, that you can accomplish what you set out to do. You have to be able to persuade yourself to keep moving forward. Persuading is not a perversion of the truth, it is a form of selling. Therefore, if you are a good salesperson, you will be good at maintaining the skill of persuasion.

Reading People

Reading people is a very important skill. You need to be able to have good instincts about people and knowing who you can trust. You have to be able to know how to read your investors, your customers, and even your family. You need to be able to read the signals to know what your investors need to feel assured in their investment. You need to be preemptive about understanding your customer’s needs and being able to read your customers is a good way to give them what they want before they even have to ask for it. Behind ahead of the game is a great way to make sure that you never fall behind.

Share the Wealth

You cannot be greedy when it comes to building your wealth. Sharing your wealth is a very important skill to maintain throughout your life. Ways that you can use this skill include; hosting charity events, gift cards, letting people test your product for free. You have to be willing to put some of the work in for free. You need to be willing to give things away in your business in order to help you build a reputation and referral source from clients.

Leverage

Leverage is an important skill to hone. You have to be able to leverage people to see how they can benefit you in the most productive way. You have to be willing to leverage your contacts, your friends and even your family. Leverage is more than just about how they can help you, but also how you can help them. You cannot leverage on only one side of the playing field. You have to be willing to give as much as you get.

Problem Solving

You have to be able to solve problems rationally. You cannot let problems distract you from your end goal. You have to learn to calmly handle these problems as they come up. If you cannot learn to handle problems quietly and calmly, then over time they will start to have an effect on your business. This is why you have to be consistent with how you solve the problems and when possible, keep them at an arm’s length.

Saying No

You have to be willing to say “no” more than you say “yes.” There is a guilt that can sometimes come up when we say no to things. You have to remember that your time is valuable and you need to give your time to the things that are consistently making you money. This is why it is an important skill to know when to say no and stick to that as your answer.

Conclusion

These are six skills that all millionaires maintain. These skills are important to work on and hone over the years because they will make you more successful and better respected in your life. They work hand in hand to help you build your life without anything getting in your way. This is how you begin to set a foundation for the life that you want to have.

For more articles like this click here to access my weekly blogs.

Until Next Time,

Ken

Fear of Missing Out….

I have been seeing this a lot lately on the private forum that I host each week. Click here to join. People so afraid of missing their opportunity to buy, that they are looking to buy right now when prices have went down by a few thousand dollars. I keep trying to explain we are in month three of a national shutdown. People are still getting federal and state unemployment, and businesses still have hope they can rebound from this. In other words, this is just the very beginning. Very few people have felt the economic pain yet, and until that happens the market won’t even begin to significantly decline.

As my motto of late has been “Don’t catch a falling knife.” Essentially meaning don’t buy while prices are still going down. Even though I say that often, I still get people nervously asking, “When will I know the right time to buy?” Everyone is so concerned they are going to miss something. It’s as though they think they have a thirty day window to get a good deal once the time is right.

I don’t know how to best explain this except by saying, “I never try and time the height of the market and I certainly don’t time the market low.” I can promise you this, if you are patient you won’t “miss out.” The last recession in 2008 real estate prices went down for years before they hit the bottom in 2011. That was three years of falling prices. That is what I would have called the “falling knife period.” After 2011 they slowly climbed back up, but even if you bought in 2012, 2013, even 2014 you probably got a really good deal.

Market bubbles deflate slowly, and they rise back up slowly after their decline. So don’t feel the pressure or rush to buy. Don’t have fear of missing out. You will have a big window to buy when the time is right. I also will let you know my thoughts along the way as the market corrects over the next few months or even years.

Talk to you soon,

Ken