Doug Marshall's Blog, page 8

How to Retire Well by Growing Passive Income

Financial freedom is a desire most, if not all, of us want to achieve.  Yet very few of us do.  Fully 95 percent of Americans do not achieve financial independence by age 65 but end up dependent on the government, or charity of their families or keep working until they die.  It doesn’t need to be this way.  Let me begin by defining financial freedom.  Financial freedom is achieved when your monthly sources of passive income consistently exceed your monthly personal expenses. When that day happens you no longer need to work for a living.  Congratulations!  You’ve stepped off the hamster wheel.

Financial Freedom comes from Passive not Active Income

But notice I said passive income.  What is passive income?  Passive income is income resulting from cash flow received on a regular basis requiring minimal to no effort by the recipient to maintain it.  There are many sources of passive income.  The source of passive I believe hands down has the best opportunity for creating wealth and growing passive income is commercial real estate investing.  Active income, on the other hand, comes from performing a service. Your day job is a perfect example of active income.  In order to receive a paycheck, you must perform a service.  So what you do for a living is a form of active, not passive income.

Shown below are my nine steps to achieving financial freedom resulting from generating passive income from your rental properties:

#1 Set clear, written goals.

Yes, I’m starting with the basics.  I can just imagine how many of you reading this are rolling your eyes and shaking your heads at this idea.  I’ve never understood why most people are so unwilling to take this first step.  It baffles me.  As if setting goals is beneath your dignity.  All I know is that it works.  Supposedly there was a study of the Yale University MBA Class of 1953.  The three percent who had clear, written goals when they graduated were earning ten times as much as the other 97% of the graduates thirty years later.  I’m not sure if this is urban legend or not but intuitively it makes sense to me.

#2 Invest in yourself.

Be a life-long learner by taking classes, attending seminars, and reading books.  Become an expert in your profession.  Get the professional designations that set you apart from your peers.  Not only will you make more money at your day job, more importantly you will realize that those big, hairy, audacious goals you have set for yourself are achievable.  Sadly, many adults rarely read another book after graduating from their formal education.

#3 Spend less than you make.

George Clason’s classic book, Richest Man in Babylon, written in 1926, is a must read for anyone who wants to achieve financial independence.  In the chapter titled, Seven Cures for a Lean Purse, the second cure is Control Thy Expenditures.  “Now I will tell thee an unusual truth about men and sons of men” he states.  “That each of us calls our ‘necessary expenses’ will always grow to equal our income unless we protest to the contrary.”  He goes on to say that the second cure for a lean purse is to spend “no more than nine-tenths of thy earnings.”

#4 Convert the savings generated from active income, i.e., your day job into passive income.

This is where most plans for achieving financial freedom fail.  People will set goals, invest in themselves and maybe even save 10 percent of what they make.  But the hardest step of the nine, without any doubt, is to take their savings and invest in something that will generate passive income.  First resist the urge to spend your savings on a new auto or a larger home or some other “worthy purchase.”  Secondly resist the urge to put your accumulated savings into investments like stocks or bonds that generate little or no passive income.  Commit to putting your savings into a rental property that has the opportunity over time to increase in value and more importantly to generate passive income.

#5 Be prepared to take the leap into the unknown.

Buying your first rental property is scary.  I get it.  It’s a great leap into the unknown.  But I’ve written a whole book on how to overcome this fear of getting started: Mastering the Art of Commercial Real Estate Investing: How to Build Wealth and Grow Passive Income from Your Rental Properties.  It is near impossible to summarize a 220-page book into a few sentences. But as a new CRE investor I would focus on three things:

Choose carefully a team of real estate advisors.

First assess your own areas of weakness.  What gaps in your real estate knowledge do you need help in?  Then find the person who can fill that gap.  Possible real estate professionals to add to your team could include a real estate broker, a commercial mortgage broker, a real estate attorney, a general contractor, a property manager, a tax consultant to name just a few.

Create a method for analyzing potential CRE purchases.

Surprisingly, my most successful real estate clients use very simple approaches for valuing potential CRE purchases.  Buying rental properties is not rocket science.  It’s mostly common sense so avoid the tendency of making it more difficult than it has to be.

Choose a property type and submarket as your primary focus.

The fastest way to become a savvy real estate investor is to focus on one property type.  Get to know the idiosyncrasies of that type of rental property.  Then find a submarket in an area close to where you live and get to know everything about it.  How is the market trending?  What is the vacancy rate?  How much have rents increased in the last year?  Become the expert for that submarket.

#6 Roll the dice, a.k.a. taking action.

If you have done those things to get prepared for purchasing your first rental property identified in Step #5 above, then act.  Fight the tendency to wait for the perfect time to launch because there is no perfect time.  Fear of failure will keep you from pulling the trigger.  As the Nike commercial says, “Just do it!”

#7 Have an investment mindset that “You either win or you learn.”

As I mentioned in a recent blog post, “Six hurdles newbie CRE investors must overcome to be successful,” all of us who invest in rental properties need to  adopt a mindset of “You either win or you learn.”  In everything we do, we either win (we make the right decision) or we learn an important lesson so next time we have a better outcome. Winston Churchill said it best when he said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” And that is particularly true in CRE investing.  Sometimes your CRE investment is a home run, and sometimes you learn what not to do so next time has a better probability of success.

#8 Dissociate from negative people.

Some people are toxic to be around.  They will tell you all the reasons why your approach to achieving financial freedom will not work.  You need to completely break away from the Negative Nellys that masquerade as friends, family and professional associates.  You need to guard yourself from people who can potentially have a negative impact on your thinking.

#9 Surround yourself with successful people.

“After 25 years of research, the choice of a reference group is more important in determining success or failure than any other single factor” says Dr. David McClelland of Harvard University.  For improving your chances of success, associate with other successful real estate investors.

Those are my thoughts.  I welcome yours.  What would you add to the dialogue?

Do you have a need for financing? Contact me at doug@marshallcf.com to set a time for us to talk.

Sources: The Myths & Realities of Achieving Financial Independence by John Cummuta, www.nightingale.com; 31 Passive Income Ideas to Get You Off The Hamster Wheel, by Candice Elliott, www.listenmoneymatters.com; Passive Income, Wikipedia.org; Insane Productivity by Darren Hardy

The post How to Retire Well by Growing Passive Income appeared first on MarshallCf.

How to Achieve Financial Freedom by Growing Passive Income

Financial freedom is a desire most, if not all, of us want to achieve.  Yet very few of us do.  Fully 95 percent of Americans do not achieve financial independence by age 65 but end up dependent on the government, charity of their families.  It doesn’t need to be this way.  Let me begin by defining financial freedom.  Financial freedom is achieved when your monthly sources of passive income consistently exceed your monthly personal expenses. When that day happens you no longer need to work for a living.  Congratulations!  You’ve stepped off the hamster wheel.

Financial Freedom comes from Passive not Active Income

But notice I said passive income.  What is passive income?  Passive income is income resulting from cash flow received on a regular basis requiring minimal to no effort by the recipient to maintain it.  There are many sources of passive income.  The source of passive I believe hands down has the best opportunity for creating wealth and growing passive income is commercial real estate investing.  Active income, on the other hand, comes from performing a service. Your day job is a perfect example of active income.  In order to receive a paycheck, you must perform a service.  So what you do for a living is a form of active, not passive income.

Shown below are my nine steps to achieving financial freedom resulting from generating passive income from your rental properties:

#1 Set clear, written goals.

Yes, I’m starting with the basics.  I can just imagine how many of you reading this are rolling your eyes and shaking your heads at this idea.  I’ve never understood why most people are so unwilling to take this first step.  It baffles me.  As if setting goals is beneath your dignity.  All I know is that it works.  Supposedly there was a study of the Yale University MBA Class of 1953.  The three percent who had clear, written goals when they graduated were earning ten times as much as the other 97% of the graduates thirty years later.  I’m not sure if this is urban legend or not but intuitively it makes sense to me.

#2 Invest in yourself.

Be a life-long learner by taking classes, attending seminars, and reading books.  Become an expert in your profession.  Get the professional designations that set you apart from your peers.  Not only will you make more money at your day job, more importantly you will realize that those big, hairy, audacious goals you have set for yourself are achievable.  Sadly, many adults rarely read another book after graduating from their formal education.

#3 Spend less than you make.

George Clason’s classic book, Richest Man in Babylon, written in 1926, is a must read for anyone who wants to achieve financial independence.  In the chapter titled, Seven Cures for a Lean Purse, the second cure is Control Thy Expenditures.  “Now I will tell thee an unusual truth about men and sons of men” he states.  “That each of us calls our ‘necessary expenses’ will always grow to equal our income unless we protest to the contrary.”  He goes on to say that the second cure for a lean purse is to spend “no more than nine-tenths of thy earnings.”

#4 Convert the savings generated from active income, i.e., your day job into passive income.

This is where most plans for achieving financial freedom fail.  People will set goals, invest in themselves and maybe even save 10 percent of what they make.  But the hardest step of the nine, without any doubt, is to take their savings and invest in something that will generate passive income.  First resist the urge to spend your savings on a new auto or a larger home or some other “worthy purchase.”  Secondly resist the urge to put your accumulated savings into investments like stocks or bonds that generate little or no passive income.  Commit to putting your savings into a rental property that has the opportunity over time to increase in value and more importantly to generate passive income.

#5 Be prepared to take the leap into the unknown.

Buying your first rental property is scary.  I get it.  It’s a great leap into the unknown.  But I’ve written a whole book on how to overcome this fear of getting started: Mastering the Art of Commercial Real Estate Investing: How to Build Wealth and Grow Passive Income from Your Rental Properties.  It is near impossible to summarize a 220-page book into a few sentences. But as a new CRE investor I would focus on three things:

Choose carefully a team of real estate advisors.

First assess your own areas of weakness.  What gaps in your real estate knowledge do you need help in?  Then find the person who can fill that gap.  Possible real estate professionals to add to your team could include a real estate broker, a commercial mortgage broker, a real estate attorney, a general contractor, a property manager, a tax consultant to name just a few.

Create a method for analyzing potential CRE purchases.

Surprisingly, my most successful real estate clients use very simple approaches for valuing potential CRE purchases.  Buying rental properties is not rocket science.  It’s mostly common sense so avoid the tendency of making it more difficult than it has to be.

Choose a property type and submarket as your primary focus.

The fastest way to become a savvy real estate investor is to focus on one property type.  Get to know the idiosyncrasies of that type of rental property.  Then find a submarket in an area close to where you live and get to know everything about it.  How is the market trending?  What is the vacancy rate?  How much have rents increased in the last year?  Become the expert for that submarket.

#6 Roll the dice, a.k.a. taking action.

If you have done those things to get prepared for purchasing your first rental property identified in Step #5 above, then act.  Fight the tendency to wait for the perfect time to launch because there is no perfect time.  Fear of failure will keep you from pulling the trigger.  As the Nike commercial says, “Just do it!”

#7 Have an investment mindset that “You either win or you learn.”

As I mentioned in a recent blog post, “Six hurdles newbie CRE investors must overcome to be successful,” all of us who invest in rental properties need to  adopt a mindset of “You either win or you learn.”  In everything we do, we either win (we make the right decision) or we learn an important lesson so next time we have a better outcome. Winston Churchill said it best when he said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” And that is particularly true in CRE investing.  Sometimes your CRE investment is a home run, and sometimes you learn what not to do so next time has a better probability of success.

#8 Dissociate from negative people.

Some people are toxic to be around.  They will tell you all the reasons why your approach to achieving financial freedom will not work.  You need to completely break away from the Negative Nellys that masquerade as friends, family and professional associates.  You need to guard yourself from people who can potentially have a negative impact on your thinking.

#9 Surround yourself with successful people.

“After 25 years of research, the choice of a reference group is more important in determining success or failure than any other single factor” says Dr. David McClelland of Harvard University.  For improving your chances of success, associate with other successful real estate investors.

Those are my thoughts.  I welcome yours.  What would you add to the dialogue?

Do you have a need for financing? Contact me at doug@marshallcf.com to set a time for us to talk.

Sources: The Myths & Realities of Achieving Financial Independence by John Cummuta, www.nightingale.com; 31 Passive Income Ideas to Get You Off The Hamster Wheel, by Candice Elliott, www.listenmoneymatters.com; Passive Income, Wikipedia.org; Insane Productivity by Darren Hardy

The post How to Achieve Financial Freedom by Growing Passive Income appeared first on MarshallCf.

Mistakes that make CRE financing difficult, if not impossible.

Make your property lender friendly

I’m surprised how often I am asked to find financing for a property that for one reason or another is obviously not financeable. It’s as if the borrower wants the lender to forgo the use of common sense. I’m going to let you in on a little secret: IT ISN’T GOING TO HAPPEN!!! Anyone who is at all knowledgeable about commercial real estate lending realizes that lenders are risk averse. They are not in business to take on any more risk than is absolutely necessary.

So if you want to either refinance your property or to sell your property there are four things you must do a year or two before financing is needed to get the property to the point where I call it, “lender friendly.” Not doing so will likely make it much more difficult, if not impossible, in getting a lender interested. Here are four common mistakes:

#1 Property is in poor physical condition

It’s a big turn off to lenders to see a property poorly maintained. Why would a lender refinance a property for a borrower that is not willing to maintain his property? If you want to refinance a property that has a lot of deferred maintenance you better have an excellent reason for it’s in poor condition. Better yet would be to get the big ticket items fixed prior to refinancing your property.

#2 Property’s occupancy rate is below market

Refinancing a property whose occupancy rate is below market calls into question the owner’s ability to own commercial real estate. If the property is self-managed you’re in deep trouble. If the property is for sale some sellers or listing brokers think that providing a rent guarantee on the unoccupied space will satisfy a lender’s concern. WRONG!! It does just the opposite. It’s a great big red flag that something is wrong with the property. A better solution is to offer as much free rent as needed to get the vacant space occupied. Offer the free rent at the beginning of the lease. Once the free rent has burned off, then refinance or put the property up for sale. You still need to disclose the free rent to the lender but it is much better to have your property at stabilized occupancy with free rent than to have a property with a high vacancy rate.

#3 Operating expenses are well above normal

Do you know what’s causing the higher than normal operating expenses? Are some ongoing maintenance expenses actually capital expenditures? Can you explain why? If you can determine that the additional expenses are costly one-time expenses then capitalize them and operate the property for a year or more to show what your operating expenses would be for a normal year. If you rush to refinance the property with higher than normal operating expenses it will likely lower the loan amount because of the lender’s minimum debt coverage requirement.

And if you’re trying to sell the property, the value of the property could be adversely impacted.  If the Net Operating Income for the property is lower than it should be it could likely lower your sales price.  A lower NOI could reduce the loan amount requiring a larger down payment by the buyer.  And the larger equity contribution may be more than he is willing to invest in the property killing your sale.

#4 Most tenants are on a month-to-month basis

This is not a concern for apartment renters.  However, month-to-month tenancy for most other property types, or even tenants having a year or two remaining before their lease expires, is problematic for many lenders.  Simply put, lenders will not accept rollover risk. Proposing a rent guarantee on those tenants whose leases have expired or will expire shortly is a big turn off to lenders. One way to mitigate risk is to identify when each tenant originally moved in. If they have been a tenant at the property for several years then it is much less likely they plan to move once the lease expires. But the best thing to do before you sell or refinance your property is to get as many tenants re-leased for as long as possible. Once you’ve minimized the rollover risk then seek financing.

Bottom Line: Get the lender comfortable

Remember, it’s all about getting the lender as comfortable as possible with financing the property. You’re asking the lender to lend you or your buyer lots of money. Take some common sense steps prior to requesting a loan that makes it easy for the lender to say yes.

Those are my thoughts.  I welcome yours.  What road blocks have you experienced that makes it difficult, if not impossible, for commercial real estate to get financing?

Do you have a need for financing? Contact me at doug@marshallcf.com to set a time for us to talk.

The post Mistakes that make CRE financing difficult, if not impossible. appeared first on MarshallCf.

How to write a blog post that will actually get read. Really!

I have to get this off my chest: Most bloggers are terrible at their craft.  This is not an assertion that wins me a lot of friends in the blogging community.  I get that, but unfortunately it’s true.  They’re lousy at blogging because they consistently violate the unwritten rules of blogging.  Here are my common sense tips for writing blog posts that will actually get read:

Quit selling

The purpose of blogging is to develop a trust relationship with your readers. Think of blogging like you were at a business social.  Imagine if you were at a party and someone went from one small group to the next interrupting the conversation by handing out business cards and telling everyone how great they are at what they do. What would you think of that person?  When you’re blogging and you consistently sell your product or service you are like that annoying person at the cocktail party trying to get everyone’s business.  DON’T DO THAT!!

Provide great content

Instead of selling, provide your readers with great content. Always answer the question your readers are asking themselves, “What’s in it for me?”  Imagine you’re back at the business social.  Instead of selling yourself, you respectfully listen, ask insightful follow up questions and when the conversation begins to wane you provide an interesting tidbit that actually benefits the listener.  How do you think they would respond to you?  Wouldn’t they want to get to know you better?  Of course they would.  In the same way when you provide great blog content, you become a trusted advisor that may eventually lead to real business down the road.

The blog’s title is everything

Over the years I’ve written what I believe is excellent content that unfortunately very few of my readers elected to read.  Why?  Because the blog title did not grab their attention so they chose not to open it. I am convinced that creating interesting blog titles is an art.  And without a creative, thought-provoking blog title your blogs are not going to get read either.  Find an online site that helps you create intriguing titles for your blog.  I use CoSchedule.  I suggest a title and CoSchedule gives my title an overall score.  It allows me to try various words until I finally have a title that yields an optimal score.

Write content your readers want to read, not on topics you’re qualified to write on.

One of the most common mistakes bloggers make is writing solely on topics that they are qualified to write on.  I keep track of the open rate and the click thru rate for all of my blogs so I know what my readers like to read.  My blogs can be divided into one of nine categories.  Shown below are my readers’ preferences on what topics they like to read from most the popular to least popular:

Current Events
The Economy
CRE Market
Interest Rates
The Federal Reserve
Principles to Live By
CRE Investing
Miscellaneous
CRE Financing

Notice that the topic I’m most qualified to write about, CRE Financing, is at the very bottom of the list.  Apparently my readers are not really interested in how to finance their properties, the topic I’m most qualified to discuss. Instead, my readers would prefer I write on all sorts of topics that I have no qualifications whatsoever to write on.  Go figure!  So I’ve learned to write on these topics that my readers prefer to read, not on topics I’m qualified to discuss.  You need to do the same.

Give your opinion

Want to be boring?  Never give your opinion on anything.  Most bloggers are fearful that stating an opinion on a controversial topic will backfire.  But they’re wrong!  Yes, you may lose a reader or two that asks to be removed from your distribution list.  That may happen but deep down most of your readers want to hear what you think on  controversial topics.  In 2016, during the presidential race, I first made my opinion known on what I thought of Donald Trump.  A few months later, I gave my opinion on Hillary Clinton.  Neither opinion was favorable to the candidate.  Those two blog posts are among my top five most read and most commented blog posts of all time.  Yes, I lost a few readers but it was worth it.

Write so it’s easy to scan

People are busy these days.  They are inundated with emails littering their inbox, of which, most are junk.  In order for them to easily read your article make it effortless for their eyes to quickly scan.  Have an eye-catching picture, use bullet points, and have plenty of white space.  Make sure your paragraphs aren’t too long and your sentences are short.  When you do these things, you’re making it easier for your readers to get the gist of what you are trying to say, in the shortest amount of time.

Have software that tells you your open and click thru rate

In order to excel at blogging, you need to know how successful each blog post is.  Which blog topics are popular?  Which blog topics are not?  Who is reading your blog?  Who are your most avid readers?  I use ActiveCampaign which provides me all sorts of interesting information that helps me understand how to improve my blogging skills.  If you don’t know this very basic information, you’re flying blind.  You will never get better at the art of blogging without having this basic information.

Those are my thoughts.  I welcome yours.  What would you add to my list?  What would you delete?  And most importantly, why?

Do you have a need for financing? Contact me at doug@marshallcf.com to set a time for us to talk.

The post How to write a blog post that will actually get read. Really! appeared first on MarshallCf.

Six hurdles newbie CRE investors must overcome to be successful

I find it fascinating to observe a newbie CRE investor in action. You know you’re dealing with a newbie because they openly admit they’re novices and say something like, “Please can I ask you one more question,” which leads to ten more questions. For the most part, I don’t mind answering their questions. Generally, those who have an abundance of common sense and humility do just fine as first time real estate investors. But to increase the chances of success at real estate investing, newbies have six hurdles they need to overcome.

1. Overcome the fear of failure.

Hey, I get it. It’s scary the first few times you invest in commercial real estate. A lot of that fear could be eliminated or at the very least significantly reduced, if the newbie investor does their homework before he or she buys their first property. See Five questions new CRE investors should answer before buying their first property.

But even if you have these five questions answered in spades the newbie CRE investor needs to adopt a mindset of “You either win or you learn.” In everything we do, we either win (we make the right decision) or we learn an important lesson so next time we have a better outcome. Winston Churchill said it best when he said, “Success is not final, failure is not fatal: it is the courage to continue that counts.” And that is particularly true in CRE investing.  Sometimes your CRE investment is a home run, and sometimes you learn what not to do so next time is a success.

2. Focus on one market and one property type.

The fastest way to become a savvy real estate investor is to become an expert in one property type and in one market, or better yet, one submarket. Don’t try to understand all the nuances of each property type. Instead invest all of your time and effort in learning the peculiarities of the property type of your choice. To become an expert quickly, focus on one submarket. If apartments is your focus, then devote your energies to knowing all about the apartment market in your defined geographic area. What demographic factors influence this market? How have rents increased in the past year? What is the current vacancy rate for the area? How is the market trending? Seek out the answers to these questions and you’ll soon become a market expert.

3. Don’t attempt to do this by yourself.

You need a team of knowledgeable advisors. There is absolutely no need to invest in CRE based solely on your expertise. How foolish would that be? Here’s a list of advisors you should consider:

a. Real estate broker

b. Mortgage broker

c. General contractor/handy repairman

d. Property management company

e. CPA/accountant

f. Real estate attorney

g. Insurance agent

Do an honest self-assessment of your CRE skills and experience. Wherever you fall short, hire someone to fill in the gap. For example, if you’ve never managed a property before, at the very least hire someone to do it for you until you think you’re ready to try it on your own.

4. Stay the course.

Investing in commercial real estate requires “staying power.” Investing in CRE is typically a long-term hold of several years. Don’t expect to buy and flip like some residential investors do. When I invest I expect to own the property for 5 to 10 years, or possibly longer. Staying power also requires that you have working capital set aside for those unexpected expenses, typically capital repairs or tenant improvements needed to get a space ready.

5. Treat everyone with respect.

Your reputation is everything. How you treat people eventually catches up to you. Do you treat your team of advisors respectfully? How about your tenants? Do you treat them like you would like to be treated? And do you have a win at all costs mentality when negotiating on the purchase or sale of your properties? Or do you try to negotiate in such a way that both sides feel like a fair deal was achieved?

6. Be a person of integrity.

It only takes one shady transaction to permanently ruin your reputation. The real estate community is surprisingly small. If you’re caught doing something unethical the news gets around very quickly. Once your reputation is tarnished, it takes years of consistently doing the right thing to ever have the chance of rehabilitating your good name.

Over the years I’ve been fortunate to have had many clients that I’ve enjoyed working with. Occasionally, I’ve had clients who are either unethical or treat me or others disrespectfully. The next time they contact me to use my services they seem a bit surprised that I’m not available. In reality I could be twiddling my thumbs and I wouldn’t work for them again. Life is too short to work for a paycheck. So treat everyone like you would like to be treated.

Those are my thoughts. What are yours? What advice would you give a newbie CRE investor?

Do you have a need for financing? Contact me at doug@marshallcf.com to set a time for us to talk.

The post Six hurdles newbie CRE investors must overcome to be successful appeared first on MarshallCf.

After 11 years of CRE investing, this is what I would do differently

We’ve all heard the saying, “Hindsight is 20-20,” meaning it’s easy to know the right thing to do after the fact, but when you’re in the moment it’s all together a different matter. And so it is with my real estate investing. I’ve been investing in commercial real estate since 2007 and when I look back from the vantage point of time, I recognize six things that I would do differently if I could wave my magic wand and go back in time and do it over. I would have:

#1 – Started CRE investing sooner

I was in my mid-50s before I invested in my first rental property. I wish I had started sooner. Though I’m very grateful for my current financial strength, I wonder where my net worth and liquidity would be today if I had started investing just five years earlier. But looking back, my priorities were where they should have been. I had two kids in college and tuition was a major financial hurdle to overcome. And I was in my third year as a solo entrepreneur and much of my time was rightly devoted to making sure Marshall Commercial Funding would survive the Great Recession. I have no regrets. My priorities were good. At least I wasn’t throwing my money away on a bigger house or on expensive man toys. Still it would have been nice to have started my CRE investing sooner.

#2 – Bought more properties at the bottom of the real estate cycle

The properties that I purchased during the Great Recession have been home runs. Actually, one property was not a home run. It was a grand slam. I doubt if I will ever sell these properties as they cash flow beautifully. The saying that “You make your money when you buy” is certainly true. Where would I be financially if I had invested in one or two additional properties between 2009 and 2011?

#3 – Been more discerning with who I invested with

My approach to CRE investing is to be a passive investor. I let someone else be the sponsor who makes all the important decisions. This sponsor assembles a group of investors to buy a property. Surprisingly, the most contentious confrontations I’ve had in the last eleven years have been with these other investors. Sometimes investors have different priorities. For example, some want to fix and flip. Others want to hold long term. Occasionally a difference in investment strategy causes friction. But the biggest battles have more to do with strong personalities wanting to dominate instead of building consensus among the investor group. If I had to do it all over again, I would be far more selective with whom I invest. At the first investor meeting I would do my best to try to determine whether there is anyone in the proposed investor group who has an over inflated ego. And if so, I would run, not walk away from the deal as fast as I can.

#4 – Focused on appreciation over cash flow by leveraging more

One way to gain net worth faster is to leverage your properties with more debt. One way to improve a property’s cash flow is leveraging it less. This debate has been an on-going internal battle with me over my investment years. Do I want to maximize equity appreciation or maximize cash flow? Early on, I wish I had tilted more towards equity appreciation. If I had, I would likely be that much better financially. Now that I’m in my 60’s, cash flow is my #1 priority.

#5 – Sold my “loser” properties sooner

I need to make a confession: Not all properties I invest in are “home runs.” Yes, I know that’s hard to believe (not). One of the biggest lessons I’ve learned these past 11 years is that if your initial capital improvements are unsuccessful in turning around a poorly performing property then future capital expenditures will likely have little positive impact either. Even with a strong second effort in time and money, the best we were ever able to do was to get only modest improvements in appreciation and/or cash flow on these loser properties. So if I had to do it over, I would dump them sooner. There is no benefit keeping a property that doesn’t perform well. Sell it and use the equity from the sale to buy another property that has a better chance at success.

#6 – Kept closer tabs on the property managers managing my properties

I believe that the on-site property manager has more influence on how well a property performs than any other single factor. Let me say it another way: The on-site property manager can make or break your investment. And because that is true, I wish I had monitored my on-site managers much more closely than I have. The saying, “You get what you inspect, not what you expect” is absolutely true.

The #1 thing I would not change if I had to do it all over again is taking the plunge into CRE investing. Without a doubt, that decision has changed my life for the better.

What would you do differently with your CRE investing if you had to do it all over again?

Need financing. Email me today at doug@marshallcf.com to schedule a time to discuss your financing need.

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5 Things You Must Do To Prepare For A Weakening Real Estate Market

As mentioned in my last blog post, I believe we are at the very beginning of a slowdown in the real estate market. And from the responses I received from this article, it is readily apparent that I am not alone in my assessment. Let’s assume for the moment that we are correct, that the real estate market is weakening. If true, what do real estate professionals and investors do to prepare for the downward phase in the real estate market? I have five suggestions:

1. Stop buying.

As the saying goes, “If you find yourself in a hole, stop digging.” By that I mean don’t continue buying expecting that the market is going to turn around soon. This cycle in the real estate market will not be a temporary downward blip. It will likely be a long-term trend. And it will likely be years before it bottoms out and begins the upward cycle again. Don’t be a lemming. Don’t continue buying commercial real estate because everyone else is buying.

2. Get rid of your loser properties now.

If one of your rental properties is performing poorly during the good times, how much less are you going to like it in a weakening rental market? Now’s the time to dump it. I believe in the Greater Fool Theory. Find a greater fool than you were when you purchased this property to unload it on.

3. Hunker down with cash.

Instead of doing a 1031 exchange on the sale of your loser property (see #2 above), consider paying the capital gains taxes in order to add cash to your balance sheet. A good accountant should be able to provide a ballpark estimate of what your capital gains tax will be well before the actual closing date. If the tax amount is not too onerous then don’t go through the process of finding your exchange property. Instead deposit the money into savings. Not only will this help you bolster a rainy day fund should there be a prolonged downturn, but it could be the seed money needed to buy your next purchase when the market bottoms out.

4. Continue waiting for the “fat pitch.”

In baseball, a pitcher that’s behind in the count, has to get the next pitch across the plate or risk walking the batter. The pitcher knows that and more importantly the batter knows that too. Even in a down market there are bargains. Granted, they are harder to find but they’re still out there. Be patient and wait for the “fat pitch.” Kiss as many “frogs” as you dare to so you can eventually find your next “prince” of a property to purchase.

5. Refinance properties with less than 3 years remaining on the loan term.

During the Great Recession many investors lost their properties when it came to time to refinance. These real estate owners didn’t have their properties foreclosed on because of non-payment of their mortgage. No, they were current on the loan. But when the loan came due their properties were not financeable. Either the vacancy rate was too high or the few lenders who were lending were offering very conservative underwriting criteria resulting in a loan amount that was less then the loan they were paying off. Regardless, borrowers had to come to the closing table with cash in order to get a new loan. And if they hadn’t socked away cash during the good times they lost their properties to foreclosure.

If you have a property whose loan term is less than three years from coming due, I suggest you consider refinancing now. Refinance even if there is a small prepayment penalty. Why? Two reasons:

Interest rates are rising and now is the time to lock in historically low interest rates; and
No one has a crystal ball (including me) that can guarantee you that when your property’s loan comes due that you will have the ability to refinance it. If we truly are in a downward real estate cycle, don’t get caught in the same predicament as those investors who found themselves during the Great Recession unable to refinance their properties.

Those are my thoughts. I welcome yours. What do you think we should do to prepare for a weakening real estate market?

Need financing? Email me today at doug@marshallcf.com to schedule a time to discuss your financing need.

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Are we at the beginning of a real estate market slowdown?

Yes. I believe we are at the very beginning of a slowdown in the real estate market.  Actually, it probably started about a year ago, but we are just now beginning to feel the effects.  So what has happened in the last year to cause our current situation?

Evidence of a real estate market slowdown

The dramatic increases we’ve seen in rents the past three years have begun to level off. No longer is the market getting double digit rent increases.  Rents are still increasing but much more modestly than in years past.
New product, which takes a minimum of 18 months to come on line, is beginning to flood the market putting downward pressure on rents and the strong likelihood of higher vacancy rates.
Interest rates have risen significantly. Exactly one year ago today, the 10-year treasury was at 2.14%.  Today it is currently trading at 2.90%.
In spite of higher interest rates, capitalization rates have remained about the same.

Disconnect between interest rates and cap rates

There is an ever growing disconnect between interest rates rising and cap rates remaining the same.  If interest rate continue to rise, at some point there will be an adjustment in property values.  There has to be because interest rates and cap rates are connected at the hip.  If interest rates go up, cap rates will eventually follow.

Buyer’s decisions

Why you ask?  Because investors are seeking a specific return on their real estate investments.  And higher interest rates inevitably result in higher mortgage payments which reduces an investor’s cash-on-cash return.  If investors do the math and they’re not getting the return they want, they have one of three choices:

They can accept a lower desired return on their investment or
They need to negotiate a lower price to get to their desired return or
If they aren’t willing to accept a lower return or are unable to negotiate a lower price they need to walk away from doing the deal.

It’s as simple as that.

Seller’s decisions

What about sellers?  They too have decisions to make, don’t they?  Of course. Sellers decide what the asking price should be for their property.   How do they determine a property’s market value?  Many will use the time-tested approach of a property’s pro forma net operating income divided by what they believe is the current market cap rate for their property type.  And this is where the disconnect between reality and la-la land happens.

Most sellers ignore the impact that rising interest rates have on property values.  The reality of the situation is that the value of their property has slowly deteriorated right before their eyes as interest rates have slowly but steadily risen.  The cap rate their property had a year ago is not the cap rate it has today.  The second decision sellers make is whether to negotiate on a reasonable counter offer from the prospective buyer.  Do I really want to sell this property at a lower price than it was worth a year ago, or do I more or less stand firm with my asking price?  This is the dilemma that sellers are having at the moment.

Which choice is winning out?

So which choice is winning out?  Anectdotal evidence suggests that sellers are remaining firm on their asking prices and that buyers are choosing to walk away from the deals.  Why do I say that?  Because my phone has stopped ringing for acquisition financing.  And the phones of several of my commercial real estate peers have also been quiet of late.  I don’t have the latest sales figures but I’m guessing the number of real estate transactions has slowed in recent months.  We are no longer in a frothy real estate market.  The market cycle has moved on to the next phase.

Gradual decline or precipitous drop?

If we are now beginning a downward market cycle, as more and more evidence is indicating, does the cycle pattern ahead look like a gradual decline or a precipitous drop?  I don’t know what your crystal ball is forecasting but I’d be interested in your perspective.  I talk with numerous buyers, sellers, real estate brokers and lenders.  The majority believe we are approaching a gradual decline, not a cliff.  But remember, most of these CRE professionals have “glass half full” personalities and view the world through rose colored glasses.  So take their opinion with a grain of salt.  Where do you think the real estate market is headed?

Need financing? As I said, most of the financing I’m doing this year are refinances.  Many are investors planning to hold their properties for a little longer than originally expected.  Or they are taking out recently created equity for their next CRE purchase or resetting the clock on their fixed rate mortgages.  Email me today at doug@marshallcf.com to schedule a time to discuss your financing need.

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Three Life Lessons I Learned from Dad

Father’s Day was yesterday and even though my father passed away several years ago, I’m surprised how often I think about him. Something happens during the normal course of my day, and it triggers a flashback of him. It wasn’t a conscious decision to think about him, but rather a situation that somehow transported me forty years back in time, hearing my dad say or do something.

Dad, Good Role Model, Lousy Teacher

My father was a good role model in many ways. He also had his faults. But as time passes, the good memories of him are winning out and the not-so pleasant memories are fading. I hope that’s what happens with my two adult children when I’m dead and gone.

Although my dad was a good role model, he was a lousy teacher. I don’t ever recall him ever trying to teach me an important life lesson. He just lived what he believed. At the time, I didn’t understand the importance of or appreciate what I was witnessing. It was just my dad saying or doing what he always said or did. It was nothing special, or so it seemed. It was just vintage Dad. But the older I get, the more I appreciate the values he lived.

Here are some life lessons I learned from my father. You may find them valuable too.

Live Well within Your Means

Growing up, my family lived in a very middle class neighborhood. The neighbor on our left was a grocer, the neighbor on our right owned a gas station, and the neighbor across from us was a high school music teacher.

Although my mom drove new cars, I don’t recall Dad driving anything but used pickups. A vacation to us was visiting our relatives, certainly not going to a destination resort. We lived quite modestly.

It wasn’t until I was in college that it dawned on me that my parents were financially well off. Over the years there had been hints of my parents’ wealth, but I hadn’t been able to put the pieces together enough to realize that. This changed when Dad, who owned his own CPA practice, sold his business and retired at the age of fifty. He lived quite comfortably for the next thirty-plus years off the income generated from his investments. Living within his means paid off admirably for him.

Treat Everyone Equally

After retiring, my dad spent most of his days working on his tree farms. Having grown up in the rolling farmland of Iowa, he was in awe of the beauty of the forests in the Pacific Northwest. About ten years before he retired, he bought a parcel of logged over timberland and spent his weekends nursing the land back to health. He was comfortable working alongside loggers, foresters, and other blue-collar workers associated with the forest products industry. And they were equally accepting of him as one of their own.

I’m not sure why (it’s a question I wish I had asked him), but he was politically well connected in Oregon state politics. I remember back in the sixties that he was a pallbearer at a funeral where a fellow pallbearer was Mark Hatfield, the then governor of Oregon.

Dad never showed preferential treatment to his wealthy friends. Those in a lower socio-economic class were treated no differently than the rich and powerful. He treated everyone with the same friendly, Jimmy Stewart-like manner.

Put Together Win-Win Agreements

Dad didn’t believe in winning at all costs. He proposed agreements that were fair for both parties, not just for him. He had no problem leaving a little bit on the table if it meant getting the deal done sooner rather than later and with both parties satisfied.

Sometimes the person he was negotiating with would attempt to take advantage of his desire to strike a fair deal and would respond back with some unrealistic and unjustified counter offer. You see, not everyone plays by the same set of rules. But for the most part, people intuitively understood that he was proposing an agreement that was fair, and they respected him for that.

Sometimes life’s most important lessons are better absorbed, not through formal instruction, but by the consistent actions of a role model over a lifetime.

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CREPN Podcast Outline – Mastering the Art of Commercial Real Estate Investing

I recently had the privilege of being interviewed on the Commercial Real Estate Pro Network podcast.  The host, Darrin Gross, and I discussed my soon to be released book, Mastering the Art of Commercial Real Estate Investing: How to Successfully Build Wealth and Grow Passive Income from Your Rental Properties.   Shown below is an outline of what we discussed.

CREPN #146 – Mastering the Art of Commercial Real Estate Investing

What does it mean to master the art of commercial real estate investing?

Investing in CRE is more of an art than a science
It’s more than crunching the numbers
It’s a lot more subjective than objective

What are the key takeaways from the book?

Why buying commercial real estate is better than owning any other investment asset
What the six immutable laws of real estate investing are
What the habits of highly successful real estate investors are
Lessons I learned from investing in one of my “loser” properties
How you go about getting the best possible loan for your property
Take the quiz in the book to see how well you know the six types of real estate calculations that every CRE investor need to know

What are the six types of real estate calculations ever investor should know? Take the quiz to find out how knowledgeable real estate investor you are.

How do you value CRE?
How do you determine the loan amount based on the lender’s underwriting parameters?
How do calculate a property’s cash-on-cash return?
How does leverage impact a property’s cash-on-cash return?
How do the 3 most common amortization methods impact your investment?
What minimum financial requirements do lenders require from borrowers to be approved for a loan?

Why is owning CRE is better than owning any other type investment asset?

There are seven reasons outlined in the book. Here are two:
Real estate investors have considerable influence on the outcome of their investments. They can:

Make capital improvements to tired properties
Change the management for those poorly managed
They can re-tenant the property with better quality and higher paying tenants
With any other investment you are a passive investor with no ability to influence the return on your investment


If your investments are in anything other than CRE you have no way of knowing if you will run out of money during your retirement years. But not so with CRE.  By answering 3 basic questions, you can determine if you have enough to retire well.  It’s all about living off the cash flow from your real estate investments.

Why is using a mortgage broker the best way to get financing for your property?

He knows more lending sources than you do. He knows who has the most competitive rates and terms for your property type.
He has already established a good working relationship with his lending sources. You, on the other hand, have no relationship with these lenders.
Takes significantly less time on the part of the owner than shopping the mortgage market on their own.
He is your best advocate of things go wrong. The lender wants to keep the mortgage broker happy because he brings them business regularly.

Where can they go to learn more about the book?

Go to marshallcf.com
Click on Resources on the top navigation bar
On the drop down menu click on Book – Mastering the Art of Commercial Real Estate investing

 

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