Would you lend to two recent college graduates who formed a partnership to invest in real estate, with little starting capital, and no business or real estate background? A decade ago I was one of those college kids, eager to get my real estate investing company off the ground, and as you can imagine, securing financing to purchase our first investment property was a major hurdle. The housing collapse was still fresh on the minds of lenders and defaults and foreclosures were happening at unprecedented rates. Banks around the world tightened lending requirements, making borrowing difficult even for some experienced investors…so what about us?

In our eyes we were low risk. We both had secure, well-paying jobs, a well-thought out business plan, very little debt and good credit scores. The bankers did not see it quite the same. They saw two unproven kids with brand new jobs that might not last, short credit histories and wide eyes. For some reason “trust us” just wasn’t cutting it.

How we saw ourselves (Picture – well established, well dressed business people)

How the bank saw us (Picture – kids running a lemonade stand)

We had to convince the banks we were different, not two people who would be in and out of the business in 6 months; we were there for the long haul and by lending to us now, they were setting themselves up for more business later. So, off we went to formulate a plan of attack, in search of how to most effectively state our case to the banks.

Here are eight steps to pitch your business to banks:

1) Local and community banks are where it is at! The success rate for others in our situation was much higher with smaller banks versus the giants, so this is where we focused our efforts.

2) Bring skin in the game.  The term “skin in the game” was coined by the Oracle of Omaha, Warren Buffet. He used it to describe insiders using their own money to buy stocks in companies they are running, thus gaining the confidence of outside investors. It makes sense that a lender expects the borrower to show a vote of confidence in their abilities and provide reserves in case of a bad deal.

3) Present a specific deal.  While presenting a business plan shows long-range planning and intent, it does not showcase your ability to find a good deal, estimate renovation costs or make a profit, but bringing a potential deal to serve as an example does. We found a property we were actually looking to buy and created a report, complete with comparable sales, estimated renovation costs and projected returns. Lenders are far more impressed with the details of a specific than a general plan.

4) Be prepared to provide a personal guarantee if you are purchasing with a business entity (LLC, Corp, etc.). It is better if you go ahead and accept it; if you want to borrow you will likely be personally guaranteeing the loan.

5) Bring a partner. If you are still unable to obtain financing due to lack of starting capital, less than stellar personal finances or inexperience, seek a partner. The bank will now consider two incomes, two personal guarantees, additional reserves and less risk, increasing your odds. I realize this is not as simple as it seems and is probably deserving of its own article.

6) Be confident.Having spent hundreds of hours learning about real estate investing, setting goals and planning our future we were confident that we would succeed, but convincing the banks was important. The best way to grow confidence in your presentation is through experience. After a few attempts you learn what questions will be asked and how to answer them, so you should be able to speak clearly and confidently, erasing any doubts about your inexperience.

7) Look the part. It might seem shallow but lenders will likely consider everything possible before lending to you, including how you look and act. Showing up in an Armani suit might be a little excessive but you should look professional; if you don’t take care of yourself why would you take care of a property?

8) Succeed! Your first several properties are critical to your ability to borrow in the future. If you execute your plan and obtain success, the bank will be asking you when you will be borrowing again.

Simple enough, right? While these worked for us they may not work for everyone. Every market and every lender is different, and every borrower faces different circumstances and various obstacles. For some to-be investors, financing through a traditional bank is simply not an option, but do not give up. If you find yourself unable to borrow through a bank, consider other options; look into private money (family, friends) and hard money lenders. Both options come with positives and negatives and require a rock solid understanding to avoid major miscues. If those options are not good ones, go back to the drawing board. Research real estate investment strategies that require less start-up capital, take time to focus on your personal finances (repair credit, pay off debts, increase income) and focus on your real estate education, so when you are able to acquire financing you are prepared to conquer your first deal.

There are a lot of mistakes that can be made in Real Estate. In fact, many savvy investors still make mistakes or have overcome huge mistakes in their investing careers. The keys are to recognize, avoid, learn and move forward from these potential pitfalls.

Here are 7 Key Mistakes Beginner Real Estate Investors Make.

1. Speculate – Most new investors follow the herd, listen to the media and buy with the hope the property will appreciate. This is as much of a gamble as hand picking stocks or going to the Casino. Buy below market properties that cash flow.

2. Buy at Market Value – Beginners almost always buy property straight off the MLS for market value. You can find deals in any market and there are always distressed properties. Cherry pick from distressed properties at 70% or less of market value.

3. Fall in love with a deal and get your emotions involved – Many beginners are guilty of this one. Their first few deals they spend minimal time finding a deal. As soon as a prospect is located, they fall in love and do anything to get that property. Emotions drive the decision, instead of making an informed business decision. Key is to get as many prospects that fit the criteria into the pipeline, filter out the duds and cherry pick only the best deals.

4. Put too much down or too much of your own money – Real estate is an OPM or Other People’s Money industry. You should minimize how much of your own money is in a deal. And always make sure you have plenty of reserves to handle any not so pleasant surprises.

5. Only have one exit strategy – To minimize risk, it is imperative to have multiple exit strategies. If you cannot flip a property you can quickly end up upside down, behind in payments and lose the property and your credit. Instead, buy below market properties that cash flow. That way you can sell retail, wholesale, lease option, seller finance, refinance, even rent and hold.

6. Buy in Warzones – It is wish to buy property at a deep discount. In today’s market you can find huge discounts in many areas with the glut of foreclosures. Do your due diligence. Buying a property for 20K worth 80K sounds like a slam dunk, but not if the property is vandalized multiple times during repairs, surrounded by 20 other foreclosed properties and there is next to zero interest from renters or buyers due to the location in or near a warzone. Make sure there is strong demand from renters and/or ownership in the area.

7. Do not consult an expert or build a team – Many people are do-it-yourselfers and cannot fathom the idea of another person giving them advice or handling tasks. Real estate can be very passive if you build a solid team and many experts are more than willing to give you advice that could significantly impact your success and experience as a beginner.

Many gurus make real estate investing sound so easy.

News flash, it is not.

Many beginners make one, even all of the above mistakes and have a miserable first time investing experience. Whether you are a beginner or an expert, it is always a great idea to get as many expert opinions as you can. They will make you aware of many potential mistakes and red flags. Play the numbers game and cherry pick from as many prospects that meet your criteria as possible. Also always do extremely thorough due diligence. And finally, happy and profitable investing!!

To put today’s investment rates into perspective,lets compare rates to what they used to be just a decade or two ago. Let’s see the difference interest rates make in terms of monthly payments.

The impact of interest rates on a $200,000 loan

The interest rates for investment property ranged from around 7.75% to 18% over the past 30 years. Let’s use a few rates to see the difference in monthly payments. Let’s assume you’re working with a Net Operating Income (NOI) of roughly $19,000 or so.

What the above numbers demonstrate is where one line — rates/payments — intersect with the line representing the investor’s comfort zone. We know the work we did with our own boots on the ground is reliable, in other words, the NOI is a real world number. However, it doesn’t factor in the #1 fact of life for real estate investors:  Murphy’s still alive, and he knows where all of us live. Oh, you haven’t heard of his Law? It says, more or less — If anything can go wrong, it will — and at the worst possible time.

Ever heard of O’Toole’s Corollary? Murphy was an optimist.

With those happy thoughts in mind, I always make it a point to tell investors that their spreadsheets, including mine, are fine as far as they go. The line items have all been vetted within an inch of their lives. They’re reliable — ’til they’re not. So what do we do? Well, keep on putting your boots on the ground to ensure the credibility of your bottom line. Nobody wins with a fictional NOI. Still, regardless of how hard you or I worked on a particular spreadsheet, the resulting cash flow should only be viewed as the ‘classroom’ number. When figuring annual cash flow, eschew all the hard work you spent in the field, and simply divide the Gross Scheduled Income (GSI) by 2.

In this example that’d reduce the NOI to, give or take, just under $16,000. NOW look at the interest rates above and ask yourself when you’d pass up the investment due to the cash flow — or dearth of same. Seems around 7% is the red line. Yet according to a well prepared, boots on the ground spreadsheet, 9% would be just about a break even on cash flow.

That is, as long as Murphy never showed up.

Now let’s take a look at today’s investor rates.

Single family is at — 4.625%
A 2-4 unit property is at — 4.5%

Let’s really bring home the impact interest rates have on real estate income properties. We’ll take the NOI we’ve been using, about $19,000, and apply it to a duplex loan of around $200,000 as we did for the higher rates, earlier.
$200,000 at 4.5% = $1,014/mo — $12,168/yr debt service. That’s a cash flow of just over $6,800. Don’t forget to factor in Murphy. Doing that results in a cash flow of a tad over $3,800. (Remember: The ‘Murphy Factor’ means you simply divide the GSI by 2 to get your NOI.

What do all these numbers mean to the real estate investor in today’s market?

It means that at today’s rate of 4.5%, the investor generates more cash flow using the Murphy Factor than those who paid 7% decades ago did without invoking Murphy.

And that’s what I’m talking about when referring to the impact of interest rates. Today’s interest rates will literally be the star of stories you’ll be telling your kids — and their kids. That’s how low they are.

Get off the fence. Time is not your friend. These rates won’t last forever. The stories you’ll tell 20 years from now will either be about the low rates you paid ‘back in the day’, or about all the shouldacouldawoulda happy endings you never experienced. Your choice.

Give me a call at 513-851-4021, and together we’ll figure out what’s up with your retirement Planning.

This will serve as a nudge for some, a reminder of the historic times we’re in as it relates to real estate investment. Over the past half a century this is the first time we have ever seen anything even approaching this convergence of positive ‘storms’. Take for example:

• Rising rents
• Rising demand for residential rental property
• Falling vacancy rates in the right regions
• Rent/Price ratios harkening back to the 1950s.
• The ability for ‘regular folk’ real estate investors to acquire property in blue chip locations.
• The lowest investor interest rates since Truman was in office.
• The ability to acquire property in faraway regions — safely.

This Perfect Storm has been raging for a couple years now. We have said it might have a 2-4 year life. I’m beginning to think four might be a bit much, but then again, my crystal ball is as reliable as yours, right? For all we know it could go on another several years. I don’t believe that, but it’s certainly possible.

The Take Away:  Regardless of the shelf-life of this Perfect Storm, when it’s over, it’s OVER. I suspect this incredibly beneficial window might be akin to Halley’s Comet, which only shows up every three generations or so.  We’ll see.  Bottom line?  If you have the ability to take advantage of it, what the heck could you possibly be waiting for? Years from now those who hesitated and lost will be telling epic stories of couldawouldashoulda. Those who take advantage will spin tales of the only positive Perfect Storm in over half a century — and how it helped produce their magnificently abundant retirement.

Are you waiting for the right time to call me? Stop. Waiting. Get a hold of me at 513-851-4021. This Perfect Storm will be a huge factor in turbo charging your ultimate retirement income results. If you’d rather write me, simply go up top and click on the “Agents” button to find my contact info. Have a spectacular weekend.