Financial Education 101


Thinking Like a Real Estate Investor

March 4, 2019

Speaking to you as somebody who loves Real Estate, it often shocks investors when I suggest they learn about Warren Buffet. But Warren Buffet is the champion of all investing.  And he understands the principles of successful investing like no other.


First off, Warren Buffet knows that money is made on the buy.  That's why he often refers to seeking out a "Margin of Safety" in his acquisitions.  Seeking a margin of safety simultaneously allows you to reduce risk, and increase your potential profit.  We as Real Estate Investors need a mechanical way of valuing properties.  But we must also make sure to acquire the property at a discount as to increase our probability of profit.


Secondly, Warren knows that markets aren't truly efficient. He knows that from time to time, markets have mood swings which put assets on sale.  That's why he's "Greedy when others are fearful, and fearful when others are greedy."  It's during these times that other people (including investors) are highly motivated to sell their assets at a significant discount.


Lastly, Warren Buffet understands the importance of stockpiling assets which produce cash flow for the long term.  In fact, Warren is able to objectively value businesses because he focuses so much at understanding a business's financials.  We as real estate investors should also strive to acquire more and more cash-flow properties.  We want to take ourselves to the point where our money starts working for us, rather than us constantly having to man our business.


Make sure you check out our upcoming Long Island Real Estate Networking Events here.....



Improve Your Odds In Real Estate

March 10, 2019

Over 90% of millionaires have made their fortunes through one asset above all others....real estate.  But that doesn't mean real estate is automatically a good investment.  There's a serious strategic process required for making sure you generate consistent profits.  Here are a few key concepts the real estate investor needs to tip the scale in their favor.


The first concept is called Margin of Safety.  Whether you're an E-Bay entrepreneur, or a value investor like Warren Buffet, a successful investor knows to avoid paying full price at all costs.  Part of the reason so many investors get burned is because they assume they're brilliant enough, or innovative enough to transform $1 into $2.  The problem is, sometimes the market doesn't agree with your predictions, or your opinion of what you think you're asset is worth.  So we make sure to practice a little humility by identifying assets selling at a discount.  Of course, the presumption is should already know how to value an asset. Otherwise you won't know what kind of discount you're getting (If any).  


The next concept is known as Cost Basis Reduction. Let's say you totally mess up the prior step, and you pay too much for a property. And the result of that mistake is you can't sell it for any kind of profit. One way to salvage the deal is to rent it out.  Even if you overpaid for the property, if rental income is passively building equity, and covering your holding costs, you're still getting richer.  Cost Basis Reduction is what allows an investor to make money even when they're wrong.  By investing in assets that produce Cash Flow or Passive Income, you slowly take your money back off the table.  Once your original investment amount is paid back, you essentially own a cash flow asset for free.


The last concept is Leverage.  I always mention Leverage last, because it should come last in your game plan.  Leverage is a double edged sword that magnifies the effects of your decisions making.  If you haven't found a bargain on an asset, or at least a cash flow producing asset, then amplifying the deal with leverage is just playing with fire. However, when you have the prior two concepts under your belt, borrowing money will actually help you manage risk.  Real Estate is the ideal asset for applying Leverage because the property acts as collateral.  Lenders are more willing to lend you money because they're promised a lien position on the title of the property.  This allows the investor to tie up less capital on one deal, and transfers most of the risk to the lender.


I just want to point out how all of these concepts come back to having humble mind set.  A wise investor takes steps to build a wide margin of error, get their capital back off the table as quickly as possible, and transfer risk.  Although these concepts add to our profits when we're right, they more importantly rescue us when we're wrong.  They also act as our criteria for knowing when to walk away from a bad deal.




Real Estate Doesn't Have To Be a Roller Coaster

May 14, 2019

For some reason, I hear many real estate investors portray the industry as being the "Wild West" of investing.  I constantly hear about supposedly savvy investors filing for bankruptcies, living on credit cards, co-mingling private money, and fending off lawsuits.  To some, this may seem adventurous, but I've watched the struggles of real estate break relationships, and even people.  And in my opinion, it isn't even necessary to go through such torture to successfully build a real estate investment business.


Generally, when I hear and watch investors approach real estate like whimsical intuitive speculators, it just tells me that these investors haven't committed themselves to the more technical aspects of running a real estate business.  In fact, in any other industry where entrepreneurs dared to be so reckless, their competition would chew them up and spit them out.  Real Estate seems to be such a wonderful asset that even many sloppy investors seem to linger.


GO BIG OR GO HOME....


Real estate investing does require a fair bit of instinct.  Particularly when it comes to designing layouts, selecting themes, and properly staging.  But in my opinion, that's where such talent needs to stay.  When it comes to the "Nitty Gritty" details, it's time for the starving artist mentality to take a seat so that the team member with a methodical, critical thought process can implement the most efficient processes possible for growing your business.


Large thriving businesses reach the level that they do because they know the strength of implementing systems for everything they do. If you don't have a process, then you don't get predictable results.  If you don't get predictable results, then you can't scale up.  If you can't scale up, then you'll just wind up stuck being the small business workaholic that nobody working a 9 to 5 job would envy.


Systems mean having a plan in place for every function of your business including generating deals, analyzing deals, transaction completion, managing projects, capturing profits, and keeping solid books. Systems are written down and specify roles members are expected to adhere to.  Systems also allow you to hold yourself and others accountable when they aren't being followed.  They squash debates, fend off confusion, and sift out who's actually performing.


CAPPING YOUR DOWNSIDE....


Implementing systems solves the problems of inconsistency, aimlessness, and incompetence showcased in far too many businesses. But even the best systems have cracks that certain problems can fall between.  That's why after you systemize your business, you also need to put contingencies in place.  


For example, a good property management system would help prevent many issues with tenants.  But that doesn't mean there won't be that one tenant looking to file a lawsuit.  If that happens, you need to have the proper entity, contracts, and insurance in place to cap your downside, and limit your liability.  


When it comes to implementing contingencies, we need to determine the type of entity that needs to be structured based on your business model.  We need to have contracts in place that insure all the proper terms are present when it comes to structuring our deals.  And we need insurance that protects our assets AND OURSELVES.  I've come across way too many entrepreneurs who never think how their business and their families will be affected if something happens to them.  


The Bottom Line.....


Sometimes the best people for starting businesses aren't the best people for growing and sustaining them.  That's why as you operate your business, you should always be looking for the next team member who can compliment your weaknesses.  


If you're great with systems and analysis, but lack extroversion, you many never get your business off the ground.  And if you're doer more than a planner, things you can get away with on a small scale can be the seeds of destruction of a growing business.  


Real Estate is a team sport.  And the whole point of having a team is having different players who excel at different aspects of the game. But it takes humility to realize you can't do it all.  And it takes courage to start trusting in others to do the things you can't.  If you truly want to win, get used to adopting those traits as quickly as possible.




Why Real Estate is the Best Investment

May 14, 2019

Real Estate has been a measure of wealth that's spanned through the ages. Not only has it been a measure of status in prior centuries. Even today, almost all billionaires and multi-millionaires have made their money or hold their wealth in real estate. 


Why? All of us small-fries working at our 9 to 5 jobs are told to build up our IRAs and 401(k)s investing in mutual funds.  Are we missing something?  Let's take a look....


REAL ESTATE HAS INTRINSIC VALUE...


One of the wonderful things about Real Estate is that whether the market goes up or down, it puts a roof over your head.  In other words, real estate will always hold value so long as people need to live in houses, and businesses need to operate in buildings.  


This provides wonderful downside protection that other more speculative investments may not have.  When an asset has intrinsic value, it means that as market prices fall, price to value ratios keeps getting better.  Eventually investors will be tempted to buy into the asset knowing that sales don't last forever.


This is exactly how value investors like Warren Buffet view the market.  Unlike Wall Street, Warren will go through the trouble of finding the businesses with the best intrinsic value.  That way, every time the market has a meltdown he knows exactly what bargains to load up on.


Both successful Real Estate Investors, and Warren Buffet tend to drastically outperform Wall Street consistently.  The reason being is that successful investors know that the key to building wealth quickly is targeting the assets with the best price to value relationships.  That's hard to do when you're investing in a mutual fund spread out over hundreds or thousands of stocks.


OTHER PEOPLE LOVE TO BUY YOU REAL ESTATE...


Real Estate is one of many assets that can generate cash flow.  I could just as easily buy a dividend paying stock or a bond.  The problem is that you can't very easily rent out a share of McDonald's.  You have to come up with the cash, buy the shares, and then hope your principal maintains it's value as you collect your less than exciting yield.  


This simply isn't the case with real estate.  Real Estate attracts other people's money like no other asset.  Banks and Lenders are incredibly eager to loan you money when you find a piece of real estate at an attractive price.  They will often loan you 70% of the capital or more for you to own your very own peace of real estate.  They will let you hold onto their money for a very long time.  And they will charge you relatively low interest as you use leverage to own the asset. When you use leverage in a deal, it means your performance is magnified.  If a property is paying 10% positive cash flow, but is 50% leveraged, the cash-on-cash return becomes closer to 20%.  


Remember, the bank isn't the only one helping you buy real estate.  Your renter is really the one paying for everything.  For some reason, many investors forget that cash-flow isn't the only way a rental property rewards you.  Equity is also being built as rental payments are applied to the mortgage.  In addition to the passive income, your outstanding mortgage balance continues to get paid down incrementally increasing your net worth.  Once the equity is high enough, refinancing can allow you to draw out a portion of your equity as available funds to buy more properties.  And since the capital you receive is through a loan, the lump sum payment you receive isn't treated as income.


HAVE AN APPRECIATION FOR DEPRECIATION....


Depreciation is a huge bonus for rental property investors.  You should always invest in properties with the intention of making money, and covering holding costs.  But what sweetens the deal is the additional tax benefits one gets for maintaining a rental property.


Uncle Sam more or less allows you substantial tax savings to compensate an investor for the wear and tear on their property.  But the truth is that real estate actually appreciates in value over time. And even though repairs and maintenance are real costs for the investor, depreciation generally allows the investor to come out ahead.


Of course, there are other highly useful tax strategies that can give real estate investors a major edge.  Part of being an effective investor is finding the right tax professional who can help you maximize your tax strategy.


The Bottom Line....


There's no doubt about it.  Real Estate has benefits that other types of investing simply don't.  And that's why the rich love real estate.  The question is, which rules are you going to play by?


Are you going to rely on your 401(k)? Or are you going to start playing the game the way the rich do? 







The BRRRR Method

July 3, 2019

Let’s get real. Reality TV has made flipping houses the trendy new hobby that everyone and their mother wants to get into. But that movement has created its own headwind, with many new investors struggling to get deals in this hyper competitive market. That doesn’t mean you can’t find those deals. But it probably means you need to step up your marketing and networking. However, there’s one strategy that never seems to get the same publicity. A strategy that actually has numerous advantages over flipping. A strategy that’s arguably much easier to pull off. It’s called the BRRRR method.


BUY, RENOVATE, RENT, REFINANCE, REPEAT…


The BRRRR method starts out like a fix n’ flip, but ends with you owning a property that pays cash flow and builds equity. In other words, it combines the best of both worlds. This strategy requires us to find distressed properties selling at a discount. However, we’re targeting properties in rental markets as opposed to residential markets. This creates our first set of advantages over flipping.

Rental Markets tend to have higher turnover than residential markets. Landlords often have numerous reasons for turning over properties including problem tenants, compliance issues, retirement needs, and the rolling over proceeds into new investment properties. In comparison, residential markets attract residential buyers that will spend years in a home before moving. In hyper competitive markets, having more consistent opportunities can keep our capital working more effectively.


The next advantage we have in targeting rentals pertains to our scope of work. Flipping a property means your renovations need to capture the hearts of your prospective buyers. This generally means you need to go higher end, increasing the estimated costs of your rehab. However, a BRRR investor can come in with significantly lower numbers because renters don’t generally hold the same standards. Many deals will have the potential for both a flip or a rental exit strategy. However, BRRRR investors will tend to be more competitive with their offers as the margins aren’t suffering from the higher renovation costs.


THE GIFT THAT KEEPS ON GIVING...


The attraction to flipping over renting generally comes from the idea making fat profits as we turn over homes. However, the BRRRR strategy has its own way of generating lump sum capital. After we buy, renovate, and rent out our property, we now have the opportunity to refinance the property. Since we found a bargain property, and fully renovated it, the refinancing of the property will be based on a significantly higher appraisal. This will often allow the investor to borrow even more capital than was originally invested. The rental income can be used to cover the new mortgage, while the investor can simultaneously enjoy making lump sum capital from the richer loan amount.


But wait it gets better. When you get lump sum capital from a flip deal, that capital is treated as income, and is potentially subject to tax. However lump sum capital received through a mortgage is debt, and not income. This allows us to potentially keep more of our capital. Not to mention, rental properties have their own set of potential tax advantages over properties held for shorter term flips.


The BRRRR strategy can be a major tool that sets you apart from your competition. While many newer investors will enter the market only flipping, you can put yourself in the running playing by a different set of rules.

The Power of Leverage

July 8, 2019

Real Estate Investing creates more millionaires than any other type of investing. And the number one reason is leverage. Real Estate attracts other people’s money like no other investment. Private money lenders and hard money lenders alike feel more confident lending capital when it’s protected by collateral. Unlike investing in stocks or a business, investors are often able to obtain 70%, 80%, or even 100% of the capital necessary to do a deal.


But isn’t that risky? Why not just use our own money? The most obvious answer is that most people can’t afford to. After all, most of us don’t have an extra $300K - $500K sitting around. So newer investors will need financing to get off the ground. But there’s also additional reasons.


LEVERAGE AMPLIFIES PERFORMANCE...


Let’s say you find a fix n’ flip deal that will cost you a total of $300,000.00 to complete. You expect to sell the finished property for a profit of $60,000. If you use 100% of your own money, your estimated Return on Capital will be about 20%.


Now let’s say you find a deal, but you decide to use hard money to finance your deal. You borrow enough to cover 75% of your total costs. After everything's said and done your costs total $320,000.00, and your estimated profit is $40,000.00. Since you used 75% leverage, you only need $80,000.00 of your own capital. This creates a cash-on-cash return of 50%. As investors, the higher our return on capital, the more we can accomplish with less, and the quicker we can compound our wealth.


LEVERAGE TRANSFERS RISK...


In the above example we talked about how we can generate greater cash-on-cash returns using less. But financing also allows us to cap our downside. If we were to risk a full $300,000.00, all of our investment is at risk. However, when we use hard money it limits our risk to the amount of our own capital used. That means even if we can afford to do our deals all cash, leverage allows us to limit our risk per deal, and spread out over more deals. In essence, a mortgage acts similarly to an insurance policy.


Real Estate is all about using leverage to compound your wealth far more quickly. But don’t underestimate leverage as a tool to manage risk, and create more stability in the performance of your investments.

What Investors Don't Understand About Getting Rich

July 22, 2019

It doesn't matter how many times he proves himself right.  It doesn't matter how many more BILLIONS of dollars he makes.  There are always cocky newbie investors who think they know better than the "Oracle of Omaha", Warren Buffet.


Regardless of what type of investing you're interested in, I highly recommend you read up on Warren Buffet and his right hand man, Charlie Munger. The truth is that there is a ton of overlap between the various arenas of investing, whether it be stocks, real estate, or even private equity.  And I plan to connect the dots in this post.


One thing that you'll hear Warren and Charlie talk about is what it means to actually INVEST.  There are 2 types of participants in markets.  You have those who pursue the idea of buying low and selling high.  And then there are those who buy things that produce cash flow.  Warren and Charlie are only interested in the second kind of investing. In fact the first isn't investing at all.  It's speculating.


But it's not just him.  Literally every billionaire on the planet is predominantly involved in purchasing assets that produce cash flow.  So let's analyze some of the greats to get a better understanding why.....


WHAT ROBERT KIYOSAKI SAYS....


"Kim and I invest 90% of the time for cash flow, aka passive income.  When we do invest for capital gains, we know it's gambling.


If you haven't heard of Robert Kiyosaki, author of the Rich Dad Poor Dad book series, frankly you must be living under a rock. Robert is one of the major pioneers in making financial education available to the mainstream. And his message has been pretty straight forward.


"Assets Feed You.  Liabilities Eat You."


When Robert first hit the scene, he got a lot of heat by claiming your home is not an asset.  And the reason he so adamantly claimed this is because your house doesn't produce cash flow.  If you stopped working, your house would drain your bank account, rather than fill it. 


To this day, Robert Kiyosaki advocates the "Monopoly" method of real estate investing.  Accumulating enough "green houses", and rolling them over into "red hotels" is how the majority of real estate investors continue to exponentially grow their wealth, taking advantage of numerous tax and transactional advantages not available with trendier flipping strategies.


DAN PENA, THE BAD BOY OF BUSINESS...


His lectures are not for the squeamish.  He will insult your friends, your family, your religion, and anything else necessary to get the right response out of you.  This billionaire oil tycoon turned high performance coach takes credit for helping his mentees accumulate billions of dollars, and is now closing on over a trillion of.  His approach predominantly entails the accumulation of private businesses.  So what's his take on building wealth?


"It's easier to buy revenue, than to create it."


Dan Pena is a private equity arbitrage specialist who teaches his students how to find, run, and sell off businesses for huge profits.  In addition to teaching his mentees about the proper mental attitude, business building activities, and financing ventures, he also goes into great detail about analyzing businesses based on their true cash flow.  What is the cash flow after all expenses, debts, and other less than obvious costs?  


BACK TO BUFFET...


So what does Warren actually have to say about investing for the cash flow of an asset?  Perhaps this quote will sum it up....


"If you don't feel comfortable owning something for 10 years, don't own it for 10 minutes."


In Warren's career, he has seen his own portfolio drastically outperform day traders, hedge funds, and mutual funds alike.  He attributes his success to looking at the underlying business rather than the price charts.  Is the business profitable?  Is it growing?  Is the debt under control? And does it have a durable competitive advantage that will keep the profits coming?  These questions are all part of Warren's due diligence process.  And the answers to these questions is what gives him reasonable certainty that the asset will continue to produce more and more profit every year.


To this day, Warren Buffet has a net worth exceeding $80 Billion.  So perhaps we out to consider his words of wisdom.

Disclaimer of Investment Risk


Investing in financial and real estate markets involves a substantial degree of risk. There can be no assurance that the investment objectives or returns described herein will be achieved. Past performance is no guarantee of future performance or that such investment opportunities will become available.


These materials are intended only for discussion purposes and should not be relied upon in evaluating the merits of investing in any securities. Potential investors who express an interest in investing will be provided with additional materials.


These materials contain certain forward-looking statements regarding the investment objectives and strategies. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, political and competitive market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Surreal Property Solutions, LLC.


 Although Surreal Property Solutions, LLC. believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in these materials will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Surreal Property Solutions LLC and/or its affiliates, any placement agent, or any other person, that the objectives and strategies of the Surreal Property Solutions, LLC will be achieved.