Are You Playing the Real Estate Game Blind?

ARE YOU PLAYING THE REAL ESTATE GAME BLIND? A REMINDER TO ALL REAL ESTATE INVESTORS AND PROFESSIONALS TO CONTINUE TO GROW AND LEARN ALONG THE JOURNEY

BY JEREMY MOYER

CO-HOST OF THE NEW HIT PODCAST, "REAL ESTATE INVESTOR MBA"

Table of Contents 1

How much do you know?

8

#1: It is not all about the Asset

17

#2: Proper Reserve Management

20

#3: Working Together

26

#4: Business Plan for each Asset

32

#5: You Can Have it ALL!

35

Stay Connected

Copyright Š 2020 by Real Estate Investor MBA and Jeremy Moyer

01

Y O U A RE NOT A S S M A RT A S YOU THINK YO U ARE

That is some heavy stuff for the opening line of an eBook, but I believe in being direct and getting right to the point. The straight facts are, we do not know, what we do not know.

"Thank you Captain Obvious! Of course we do not know certain things if we never heard or experienced them before. But that's not our fault!"

When having similar discussions regarding this with other people, I receive either one of the following two categories of responses. Either (1) people accept this as fact or (2) they became upset and offended as though I have attacked their intellect in some way.

02

Allow me the permission to speak some truth here. If you are someone who easily gets offended by hearing things that either you do not agree with or have never heard of before, then this eBook is probably something that is not for you. Go ahead and delete this file from your computer, tablet, phone and we can still be friends.

However, if you want to broaden your mind and perspective, please continue to read on.

Let us reflect on this for a moment. You ultimately control what specific information you know, how wide your knowledge base spans or how deep in a particular topic you determine to master. You are also in control of your emotions (e.g. if you get upset or offended easily). I understand this is a tough 'truth' to confront. Blaming anyone other than yourself in most areas of life may feel aaa

03

good, although fleeting, however, will rarely better your long-term circumstances. Decide once and for all that you will change yourself first before attempting to change everything and everyone else around you.

Internal change precedes external results.

First, decide what it is you want to learn more about. By activating that thought, you just took your first step towards this achievement. Broaden your mind and search for what is out there; what you did not know even existed. This exercise alone will change your life. Don't be an ostrich with your head in the sand. Be the explorer who is always looking to improve themselves, their lives and broaden their knowledge and

04

and perspective. It would be safe to say that even highly intelligent individuals can be ignorant to a point within certain topics of knowledge. There is just way too much information out there for someone to be master of it all. Allow yourselves to broaden your knowledge base, understanding and perspective. Accept the fact that you do not know everything and adapt an attitude to be a life-long learner; a sponge, quenching your thirst for continued learning. One of my favorite quotes if from John Wooden. "It's what you learn after you know it all that counts."

One more quick point and then we will jump into why you downloaded this free eBook. Have you ever woken up from a dream (or a nightmare) where you were blind and could not see all of a sudden? How lost did you feel in the darkness, in that state of confusion? Did you feel helpless and all alone? I’m sure you felt better once you woke up and realized that it was not real, and you were indeed able to see. If this never happened to you, take a few moments before reading on and envision how you would feel if you did wake up in this state. What would you do? What would you be thinking?

05

Are you playing the real estate game blind?

What most of us do not realize, is that we are playing the real estate game blind (at least partially) and we are not even aware of it. I will be the first to confess that I personally do not know everything there is to know about every topic; even every real estate related topic that there is to know. I accepted this truth a while ago. In order to compensate for this fact, I strive to surround myself and seek out those who are smarter and more successful than I am; those who have done what I want to do. I have a passion for learning and over the years I have learned to purposely broaden my perspective and grow my current level of thinking. This hasThis

06

has been a ‘game changer' for me. The key is to actively seek others who know things that you do not. The topics below are not supposed to be an all-encompassing list of what most investors do not know. Remember what I mentioned just a few sentences ago. I still do not know about all of the topics and strategies that even exist within real estate, BECAUSE I’m still LEARNING, just like everyone else. If you think about it, that's why educational and how-to-books have serial editions.

There is always more information or a whole new set of topics that are brought to the light which are then added to the overall body of knowledge under those new updated editions.

The items below are written at a 10,000 foot level. The purpose of this e-Book is to shine a light on those potential blind spots of yours that you did not even know existed. Your task is to dive deeper into the topics that pique your interest. Seek those who have mastered those topics, pick their brains and study to deepen your knowledge base in them.

07

When I first heard about these topics (and I did not learn about all of them all at once), light bulbs came on, like shining a spotlight on an object in a dark room that I was not able to see before. Â

Usually in those moments, a flood of emotions would hit me at all once; feelings of being cheated, embarrassed, angry and shocked to name a few. Then those emotions would subside and I would attempt to rationally evaluate the situation and the information that I was consuming in that moment. Some of these are simple concepts, but at the time I just never knew them because I was never exposed to them before.

08

Number 1: It is not all about the ASSET Strength and overall soundness of the investment is not all about the specific asset. There is so much focus on the “asset type� and the investment strategy for that particular asset (such as, fix & flips, wholesaling, buy and hold,

residential,

commercial,

self-storage,

mobile

homes, large multifamily, vacation rentals, vacant land, private lending) and the list goes on. There are many asset sub-categories and also an abundance of books, training courses, coaching / mentoring programs, websites, articles, etc. on the ASSET TYPE / INVESTMENT STRATEGY alone. Yes, this is important, but it isn't the end all be all when evaluating the investment.

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I am almost certain that everyone reading this is aware of the other two main components that make up an investment within real estate. When you read these two, please keep an open mind and continue reading instead of saying, 'No Crap' and delete the eBook and never look at it again. The two additional components are: (1) Capital Type and (2) Deal Structure. Let’s dive into these and expand on the importance of learning and mastering these topics, and not just the asset type or investment strategy within a specific asset type.

Capital Type There are multiple types of capital that can be used to acquire, develop, maintain, manage and/or service a particular asset. Within the banking and investment world, typically this is referred to as the 'capital stack', when referencing the type of capital being utilized for a specific asset. Below is a simplified schematic of what a capital stack is and looks like. The stack can be quite more involved than this with several additional layers, or it can be more simple than this with only one or two layers. It depends how the financing is ultimately structured.

10

Operator / Developer ("Common Equity") Capital Investor ("Preferred Equity") Junior Mortgage Debt Senior Mortgage Debt

* As a disclaimer, this eBook is not intended to provide any legal and/or tax advise. Before engaging in any activity with regards to raising any capital, please speak to a qualified tax advisor, CPA and/or SEC attorney for specific advise.

The capital stack is exactly

Senior Debt it what

sounds like. As the

above picture depicts, it is a stack of the 'types of capital' that is initially used to acquire and manage an asset. If the particular asset is a longer play asset with development or a 'value add' component in the business plan, then the capital stack will also apply to the project development and ongoing debt service components. Below is a general list of the type of capital that can be utilized for real estate investments.

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There are pros and cons to using each type of capital.

There are RIGHT and WRONG times, situations and even asset types to utilize certain types of capital.

These are all equally important when evaluating and structuring a deal. The wrong type of capital could mess up the entire deal from the very beginning. This eBook will not get into the specifics of each capital type in regards to investment strategy because that would take an entire book to explain.

We plan to release a series of eBooks expanding upon these topics in more detail and to share more blind spots that we uncover during our investment journey.

Please subscribe to the Real Estate Investor MBA Podcast via iTunes, Spotify, Stitcher, Google Podcast, TuneIN and/or iHeart Radio as we plan to create an educational sub-series reviewing capital types and the right and wrong times, situations and asset types to utilize them.

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Below are a few examples of types of capital that are placed within the capital stack: Bank financing with longer term type loan structure (1st position, 2nd position) Bridge or shorter term financing loan structures (can

include

construction

and/or

mezzanine

financing) Line of credit (typically variable rates from a banking institution / credit facility) Private capital (can be structured as debt and/or equity financing) Operator's own capital (e.g. cash and/or leverage of personal collateral)

Deal Structure This component, within the overall business plan of the acquisition and management of a particular asset, is probably the one that is most often ignored, downplayed or overlooked or quite frankly, many do not even realize even exists. And this one element alone, if done incorrectly, could set you up for failure.

Just ask me how I know this. That's right! You guessed it

13

it. This is a mistake I made over and over again. When I began investing in real estate, for the longest time, I always wondered why I was not getting ahead within my real estate investing. I would say that I am rather proficient in mathematical concepts and numbers.

One of my favorite aspects of real estate investing is underwriting the deals and being creative with that 'capital stack' to maximize profits, returns and adjust for risk. I am a huge numbers guy and love excel spreadsheets. Yes, I know there are some of us out here and we do really exist. However, when structuring your deals, having the right balance of equity and debt financing is absolutely crucial. You absolutely can have too much of one and not enough of the other, and this answer depends on a multitude of factors, so providing broad-stroke guidelines is difficult to accomplish. The type and terms of the debt and equity, as mentioned in the Capital Type section above, is very important as well when evaluating and structuring a deal. Imagine the asset deal as a building (no pun intended). The foundation and overall frame of the building is your Deal Structure. aaaaa

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Constructing a weak or faulty deal structure, coupled with the wrong type of capital, can set you up for an absolute distaster.

When this truth was originally presented to me about combining the proper deal structure along with using the right type of capital for the specific asset that I was acquiring, those feelings of anger and embarrassment came flooding back into my mind. I remember sitting there right next to my wife (the memory of this is playing out so vividly in my mind right now as I'm writing this), and I looked at her and told her, "This is exactly why we are either standing still, if not slightly moving backwards on some of our real estate investments that we have made over the years." It was like a light switch was turned on in my mind and everything seemed to make sense. The simple mathematical concepts being explained to me seemed both so simple and so profound at the same time. I thought to myself, "Why have I never heard of this before?" These simple concepts could have be implemented during my due diligence for every asset purchased and it would have saved me tens of

15

of thousands of dollars (maybe a lot more), and a lot of sleepless nights if I simply knew these truths. Instead of being mad at the world and others for never knowing this, I decided that I could either do one of these three things: I could ignore this and continue operating as normal.

However, the definition of insanity is doing the same thing over and over again, expecting different results.

I could be angry at the world and quit real estate all together because it "didn't work for me".

Or, I could learn from this. This is the path I chose to take. I added this knowledge to my 'tool belt' for asset due diligence from that point forward.

There are very few things in life that are certain. The laws of mathematics are as close as it gets to certainty.

When you plug variables into a proven equation, it will spit out the correct or best answer available. Real estate investing is a game of spreads. Creating a positive spread, versus a negative spread, is imperative. Knowing what variable metics are needed and what equations to utilize are extremely important. There are many variables

16

variables within the actual asset type, capital type and deal structure that can positively or negatively affect your spread(s) and ultimately the entire outcome of your investment. Expanding your knowledge is key.

17

Number 2: Proper Reserve Management Most of us seem to love the concept of an insurance blanket of some sort. For example, what happens if a large unknown expense comes up and there isn’t enough capital in the bank account to cover it? What happens if there is an interruption in the income source from a particular asset? What do you do? Do you have this asset leveraged to the max? Can the asset appropriately carry that debt burden? Is there enough operating capital at the end of the month, after paying the debt financing obligations, to also pay the operating expenses (e.g. taxes, insurance, utilities, property management)?

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You have likely heard of the word 'reserves', and you might or might not have set capital aside for this sole purpose. Setting aside reserves can sometimes be thought of as an after thought since most investors I know try to be creative and have as little of their own capital in the deal.

It seems that I developed a habit of learning lessons the hard way. However, I accept these hard knocks as lessons learned, which equates as a win for everyone that I share this message with. Structuring proper reserve accounts up front is an absolutely necessity. The key is to create and set up a reserve account for EACH asset that you own/manage. That’s right!

Set up

reserves for each asset, especially if any private capital investment (debt and/or equity) is involved in the capital stack to finance an asset. If everything goes right within the business plan for that particular asset, then the reserves most likely will not be touched. However, if something unexpected happens during the business plan and all of the capital is depleted within the operating account, the reserve account (for that specific asset) can be accessed to continue operating business these

19

activities to re-stabilize that asset. After stabilization has occurred, the reserve account can be re-built from excess free cash flow and/or additional capital raise. aaaa

If you appropriately plan and cover your downside, the upside will be taken care of, by executing your business plan.

Covering your downside in order to be able to sleep at night is one of the most important concepts that I have learned throughout my entire investing career. This is accomplished by planning and executing a proper risk management plan within your business plan for every individual asset.

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Number 3: Working Together #TeamWorkMakesTheDreamwork I am an avid reader and one of my favorite business and leadership genre authors is John Maxwell. I own a lot of his books, most have been read several times, and the pages are folded, highlighted and underlined. One of his quotes is "the teamwork makes the dream work".

So much of our culture is built around the notion of winning and doing whatever you can to one-up our competition. Now, don't get me wrong. There is nothing wrong about having a 'winning in business and in life' mentality and there is nothing wrong with trying to aaaaa

21

outmaneuver the competition. That is what makes the free marketplace one of the best designed system structures in the history of the world.

Have you ever heard a saying something along these lines?

It is better to have a small piece of a large pie, versus a large piece of a small pie.

The first time I heard this statement, I kind of tossed it aside, since, let's be honest...I wanted it all! I wanted to dominate my space and my market. Again, there is nothing wrong with this level of ambition; the tenacity of mastering and cornering a market. But the more I matured and reflected upon this concept, the more it made sense to me. I believe there is a lot of untapped opportunity wrapped up in this one concept alone. This is another concept I am working on; how to best capitalize

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capitalize and monetize off a small slice of pie.

I am rather confident that most of those reading this eBook have heard of the concept, that it is beneficial to know your strengths and your weaknesses with regards to your own abilities and your personality type. Are you an extrovert or introvert? Specifically to real estate, what tasks are you good at and really enjoy? The truth is, no one is great at all of the key tasks that drive operational success. The key is finding like-minded people who share an akin vision, business ethics and similar goals.

These

like-minded

individuals

will

have

different

strengths and weaknesses than yours which will contribute to a competent team. What if you had four or five partners who were absolute rock stars in two specialty areas of real estate (such as raising capital, finding deals, marketing, underwriting, due diligence, vendor management, etc)? What if every one of these key tasks were managed by those on your team who were highly competent and they thoroughly enjoyed their area of expertise? Your team; your company would probably be very successful. T

23

The stark opposite scenario of this, is the investor who is either trying to do it all themselves, or they have another partner who might have the exact same skill set or has a different skill set, but there are areas of key business tasks that are lacking amongst both partners. What do you think the result of this would be? Probably not very effective, right? The surprising fact of the matter is, a lot of us are either here or were here before we saw the light. It is better to have a small piece of a large pie, versus a large piece of a small pie.

How do you think I came to the above realization? You guessed it! I lived in this world and scenario above for the LONGEST TIME! Do you remember the opening line of this eBook? "You are not as smart as you think you are?" When I wrote that, I was actually talking about myself. Whenever I get a chance, I try to remember to tell myself this in order to bring myself back to reality and have a perspective that I really do not know it all and I still have a lot to learn. Just don't tell my wife.

I

repeatedly ran into what seemed like a hard wall and kept wondering what I was doing wrong and how I could 'outmaneuver' and 'out-hustle' the competition. I had the

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the fire and the drive. I took bold action, but I was still missing something. As I mentioned at the beginning of this chapter, I was an avid reader and that John Maxwell quote finally hit me. "Teamwork makes the dream work."

What if you are used to closing on three rental properties a year or doing three to four flips a year by yourself? With a fully functioning competent team covering all necessary key business responsibilities, you could potentially achieve so much more (e.g., acquiring 100+ doors per year and/or 20+ flips per year). How does that sound? We as human beings tend to procrastinate things that we either do not enjoy or things that we are not very good at. I am 100% guilty of this. I restructure my thoughts on a daily basis to eradicate that negative thought pattern of mine. But if we have team members (partners) who collectively enjoy all of the necessary business tasks involved in crushing the real estate game, then the sky is the limit because procrastination can be eradicated from your company’s culture. If all team members enjoy what they do and they are only working on tasks that they are good at, the the

25

likelihood that they are procrastinating on any tasks are very low and everything is running at high potential.

Most likely, “taking bold, massive action� will be the new company motto and your company will take the marketplace by storm.

MASSIVE ACTION

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Number 4: Business Plan for each Asset I am rather confident that most of you have heard of companies having a business plan. Now if any of you actually have business plans for your company, that might be another story. You might have one that is in your head and not written down, or you might have one written down, but it hasn’t been updated or even reviewed lately.

What if I told you that it is absolutely necessary to have a business plan written out for every asset that you acquire? When I first heard this one, I felt like I was sucker punched in the gut since I obviously did not do this. My first thought was, "Like.....who does this? I have the

27

never heard of this before." Then the answer came to me right away. "Very successful people do this; that is who."

Hmmmm......if successful real estate investors are doing this, then maybe I need to just start doing this. Again, I needed to check my pride, humble myself and alter my actions.

So what does this exactly entail? Let's use the following example. Let's say we are looking to purchase a 8-unit apartment building. It is a valueadd, B-class property.

What does your business plan need to include? It will need to explain all of the details surrounding the property. What is the investment classification and why you are buying the property? Are you looking to primarily create a cash flow spread? Are you looking for appreciation growth as well? How does this asset affect your overall portfolio when evaluating it from several

perspectives

(e.g.

asset

type,

debt

management, cash reserve management, time commitment)? For example, it might look like a great deal when only reviewing the numbers, but what if the

28

the investment is very time intensive? Would this one investment put all of your current investments in your portfolio at risk of failure due to the time commitment alone? Is this one great deal worth putting your entire portfolio at risk? Or is it an asset type that once you get it up and running, can you essentially stick it away in a filing cabinet and check on it periodically throughout the year? What data do you have to support if the current rents are below market? Are you able to update the units to capture higher market rent? What is the historical appreciation growth within this asset class within your market?

What do the demographics of the

area look like? Are people migrating to or from your market?

What

industries

sectors

and

major

employers provide the majority of jobs for the residents in your market? Are the jobs concentrated by only a few employers or industries or is there a broad diversity? What is the age demographic of your tenants (e.g. older, younger)? Depending on the asset that you are considering to acquire, most of this data should go into your specific asset business

29

business plan, which is essentially a mini-feasibility study on the viability of any prospective asset and how it will perform on an asset level and the impact on your overall portfolio.

All of the financial due diligence and underwriting, along with proforma projections should be included in your business plan. In addition to the asset specific

business

plan,

a

specific

project

management plan should be included to describe what will be done to the asset in order to achieve the desired goal from the acquisition of the asset to maximize profit, return on investment, or whatever the desired metric is for that particular asset. What does your deal structure look like? What type of capital do you have in your capital stack? What does your exit strategy look like? The answers to all of these questions interact with and affect one another. The right combination of these answers (just like variables in a mathematical equation), depending the type of asset, can either result in a winning formula, or it could result in a stagnant or even losing formula.

30

So, what does all of this look like? Well, if you had 20 assets held within your portfolio, your company would be managing 20 separate business plans all within your overall company business plan, which essentially acts as a “holding company�. Certain assets might be only cash flow

plays

(e.g.

private

lending,

rentals

in

non

appreciating markets), some other assets might be growth assets with no cash flow (e.g. flipping through forced appreciation, rentals in appreciating markets where there is no cash flow, land where you are speculating buying ahead of development), and some assets can achieve both cash flow and appreciation growth (e.g. apartment building in an appreciating market, NNN medical office building). A well diversified portfolio is important and your portfolio metrics is one factor that will assist with determining this specific allocation mix.

31

The ultimate keys are to: Know exactly what outcome you want to achieve.

When you break it down, not many people flip homes because they love the activity of actually flipping homes, or for those who become a landlord, because they love all that is involved in the landlord business. Actually, there are a lot of headaches here; so why do we all do this to ourselves? The truth is, we do it to receive the desired outcome that these asset classes can provide us, if they are done correctly.

Assemble a team of people who have different skill sets so the company as a whole is competent and strong.

Manage the portfolio through diversification, proper planning approach.

and

a

measured

risk

management

32

Number 5: You Can Have It ALL!!

Have you ever heard of controlling or building vertical lines of business? The main concept is once you have a customer, you build as many services that complement each other, but remain as separate services. So instead of making only 1 sale with that customer, you can provide a full package of services that help the client and you end up making 3 to 4 sales within one interaction. In real estate it is very common that Realtors/Brokers or Mortgage Brokers also have ownership in a title company and maybe even a property management company, construction company, etc., where they can serve their client more than one way. It is actually really smart

33

smart since usually one of the most difficult and costly variables, is the acquisition of the client in the first place.

What if I told you that you could do something similar on the real estate investment side? And I’m not talking about getting your agent’s license to resell your own properties or setting up a property management company, which you can totally do and also keep more of the money that flows from Point A to Point B. It is possible to keep the majority of the profit in the deal through controlling BOTH sides of the equation (the lending side and the operator side). This is possible through two key concepts. I originally learned about these after hearing several successful real estate investors

talk

about

them

and

how

they

were

implementing them and making money on both sides of the real estate equation. So I decided to investigate more thoroughly. My conclusion was that these concepts made sense and I wanted to share them here.

Yield on investment increases when you introduce the right kind and right amount of leverage. But when introducing leverage, you are giving away some of your m

34

money to a 3rd party lender. With the proper implementation of these two concepts, you can make money through lending the money to yourself (as a Banker) and you can also pay off the loan faster thus creating greater amounts of equity (as an Operator).

There are a ton of great resources on these 2 concepts: (1) Infinite Banking and (2) Velocity Banking. I will not go into the details on either of the concepts, since there are far better resources and authorities on these topics out there that you can purchase and reference. If you want any recommendations, please reach out to us at jeremy@realestateinvestormba.com and let us know and we can send you a few resources to check out.

Remember, it is extremely important to either continue to sharpen the ax and/or add tools to your tool belt.

Never stop the desire in continuing to learn. The more we learn, the more we realize that there is more out there that we do not know. Surround yourself with other big thinkers and soak up everything that they say and reflect upon it later.

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STAY CONNECTED Thank you for downloading this free e-Book. I hope that you enjoyed it and were able to take a few nuggets away to further either explore and learn or to implement into your businesses. Please be sure to subscribe and listen to our podcasts episodes and stay connected and follow us through through social media platforms. We have a lot of great content initiatives planned over the upcoming year, which we will announce through social media and also other media outlets.t aaaaa

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To listen to all past and future episodes, be sure to check us out on the following podcast platforms:a

iTunes

Spotify

Stitcher

Google

TuneIN

iHeart Radio

Be sure to follow us on social media so you are notified right away once we post or share any valuable content, which includes announcements to Educational Webinars that we hold from time to time.

Facebook

LinkedIn

Instagram

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Go visit our website at www.RealEstateInvestorMBA.com, where you can find everything we have to offer, including potential opportunities to work together.

The eBook, Are you Playing the Real Estate Game Blind was inspired from real life learning lessons from the author, throughout his journey in real estate investing. There will be a series of eBooks released by the Real Estate Investor MBA podcast. We truly want to give back to a community which has given us so much opportunity, and to act as a resource to those striving to fulfill their dreams and goals within the industry. Our mission with Real Estate Investor MBA is to strive to provide valuable information from various experts within the business, government and real estate communities, covering real-time market and economic information as well as curriculum level materials within various real estate investing niches. We aim to be relevant, straightforward

and

forthcoming

with

actionable

information for our community.

EBOOK #1 IN A NEW EDUCATIONAL AWARENESS SERIES